introduction dear readers and authors, a positive change has been made. the “copernican journal of finance & accounting” is just changing its frequency from biannual to quarterly. the reason for this change is very simple. we would like to meet the growing expectations of scientific circles. the demand for inspiring scientific articles is really remarkable. from now, we will offer valuable elaborations more often to all of you. also, the growing international scope of scientific co-operation by means of our journal is respectable. we are still open for scientists from all countries and universities who meet the quality requirements of our journal. in modern economy and economics there are a lot of challenges, and subjects for our articles, with absolute certainty, will never run out. we invite you to read and write. editor in chief professor leszek dziawgo introduction in modern economy there are a lot of real problems of global or local dimension which should be solved based on modern economics. there are among others: poverty, unemployment, social responsibility, international trade, monetary policy, capital market, banking or political risk, etc. certainly, high quality scientific support is highly needed. there is no doubt that international scientific cooperation increases positive scientific impact on economy. making this cooperation much more efficient is a constant challenge for every one of us – scientists. the copernican journal of finance & accounting is becoming an important forum for such international cooperation for both theoreticians as well as practitioners. the journal is widely open for inspiring articles and it is already recognized worldwide. up today we have published a large number of scientific elaborations. this is our contribution to make our world better. on behalf of the editorial board we encourage you to present results of your scientific research and considerations using the cjfa journal. yours sincerely editor in chief professor leszek dziawgo introduction dear readers and authors, i hereby present the next issue of the scientific quarterly copernican journal of finance & accounting, discussing the current and important problems of economy and finance. scientists from various academic centres have prepared the articles that make up this publication. in the current issue you can read an article about the effect of corporate social environmental disclosure on the market in nigeria. one of the articles is devoted to the effects of macroprudential policy instruments and micro-prudential capital regulations on the procyclicality of loanloss provisions. you will be able to find an article about the effectiveness of the government’s propaganda in poland in shaping the knowledge and attitudes of the interviewees. in the journal, an article relating to the important problem about the progress of the polish economy’s innovativeness in the years 20102016 against the backdrop of other eu member states is presented. considering both, the topicality of the subjects discussed in the articles, as well as the interesting research results of scientists, i hope that this publication will be appreciated. as always, i would like to give special thanks to the authors, reviewers, members of the scientific council and the editorial team for supporting the development of copernican journal of finance & accounting. yours sincerely, executive editor, dorota krupa, ph.d. introduction each edition of “copernican journal of finance & accounting” is our common success and confirms the role and position of the journal in the establishing of a worldwide scientific co-operation network. i would like to pay special thanks to authors, reviewers and members of the scientific council and the editorial team. cjfa offers an excellent possibility for scientists to publish their articles. this is a perfect forum to present and exchange ideas, research results and conclusions. up to day, many authors have presented their inspiring elaborations concerning important themes in the area of international and local finance & accounting. as you know, a growing number of problems and challenges of modern world, has also an economic and financial dimension. this requires strong scientific support from us – scientists. we face the public expectations. an effective way to be more helpful to the society and economy is advanced science based also on the international scientific co-operation. also in this edition we continue our mission to strengthen scientific collaboration between scientists across the countries and universities. editor in chief professor leszek dziawgo copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 6 issue 3 2017 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2017 copyright by uniwersytet mikołaja kopernika toruń 2017 icv 2016: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 julija bojarenko variability of accounting policies – advantages and disadvantages ............................. 9 maria magdalena golec locality and the transfer of funds in the cooperative banking sector in poland .......... 21 anna kobylińska, maciej balcerowski pension valorization method – selected issues .................................................................. 35 joanna małecka, teresa łuczka, jarmila šebestová, roman šperka economic activity and social determinants versus entrepreneurship in smes – selected aspects ................................................................................................................... 47 marta meisner financial consequences of cyber attacks leading to data breaches in healthcare sector ...................................................................................................................................... 63 kamil nowak low cost retirement solutions based on robo-advisors and exchange traded funds ... 75 milena peršić, lahorka halmi non-financial information and integrated reporting in the hospitality industry: case study of croatia ..................................................................................................................... 95 for authors ........................................................................................................................... 111 cjfa_2_2017_druk.pdf introduction dear readers and authors, it is with great pleasure we present the next issue of the scientific quarterly copernican journal of finance & accounting. the challenges of the modern world are visible in economics and finance. the mission of the journal remains to serve for the development of the science of finance as a forum of presentations and analyses of scientific papers in the scope of finance and accounting in the international dimension. being a scientist requires the curiosity to ask questions, to observe changes in the present world and to research them. through interactions between researchers across different geographical regions, as a scientific journal, we want to play an important role in academic deliberations and create a place for the exchange of scientific views. we hope that the papers contained in our journal will be of value and also interesting for you. i would like to give a special thank you to the authors, reviewers, scientific council and the editorial team for their contribution in the development of the journal and for their involvement in the creation of the next edition of the quarterly. i invite you to read and i encourage you to publish the results of your research in our copernican journal of finance & accounting. executive editor, dorota krupa, ph.d. copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 6 issue 4 2017 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2017 copyright by uniwersytet mikołaja kopernika toruń 2017 icv 2016: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 andrzej buszko the level of shadow economy in warmińsko-mazurski and kujawsko-pomorski regions ................................................................................................................................... 9 marta jakubowska the role of cashless transactions in the process of limiting the scale of the shadow economy ............................................................................................................................. 23 piotr jaworski, kamil liberadzki, marcin liberadzki contagion and divergence on sovereign bond markets ............................................. 39 anna laskowska the green bond as a prospective instrument of the global debt market .................. 69 tigor sitorus, denny the influence of asset and profitability toward share value: mediation effect of liquid asset ....................................................................................... 85 for authors ......................................................................................................................... 105 cjfa_1(2)_2013_przed_drukiem2_9_09_13.pdf at the nicolaus copernicus university in torun an initiative to publish a scientific magazine copernican journal of finance & accounting was taken. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. the journal is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. in this way a passion for scientific work finds new possibilities of cooperation. the members of such defined scientific society will be creators and audience of contents published in the cjf&a. in maintaining high quality of the journal will help us a team of acknowledged scientists joining the programme council and the reviewers team. we are deeply grateful to them for their engagement in such an important initiative. we are convinced that copernican spirit of science will accompany us in the noble work to expand science. we remember that our great patron, nicolaus copernicus, not only was an astronomer of worldwide renown, who changed science, but also an economist who formulated a law known as a copernicusgresham law. this obliges all of us. editor in chief professor leszek dziawgo copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 7 issue 1 2018 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2018 copyright by uniwersytet mikołaja kopernika toruń 2018 icv 2016: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 magdalena kogut-jaworska principles of support for the common good services co-financed from public financial means ......................................................................... 9 lyudmila mihaylova, emil papazov using accounting information for strategic decision-making in a multi-segmented company ............................................................................................................................. 21 tomasz murawski csr in american banking sector ..................................................................................... 35 jarosław pawłowski individual investors on the financial market in poland .................................................. 51 anna serwatka accelerators for startups in europe ................................................................................. 67 for authors ........................................................................................................................... 83 copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 6 issue 1 2017 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: secretary: dr damian walczak scientific council prof. luis otero gonzález, universidade de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 i dystrybuowane w wersji icv 2015: 101.52 address of the publisher , phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office phone: + 48 56 611 46 34 (mgr agnieszka ), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents leszek dziawgo introduction ........................................................................................................................... 7 zbigniew drewniak an analysis of brokerage recommendations for the biggest companies of wig20 ..... 9 danuta dziawgo, isidro féria, sandra saúde higher education funding: comparative analysis of portugal and poland public systems .................................................................................................................................... 33 socially responsible investment in asia .............................................................................. 55 eka lekashvili, veko dodashvili legal regulation of tourism business in georgia ............................................................... 67 jan pys robustness of the bank resolution framework in the european union ........................... 77 jurijs spiridonovs, olga bogdanova eu energy union: adjustment to the new development cycle ....................................... 89 for authors ........................................................................................................................... 103 for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 29 may 2013 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors196 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 197 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the journal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions#authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors198 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl cjfa_2_2017_druk.pdf copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 6 issue 2 2017 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 i dystrybuowane w wersji icv 2015: 101.52 address of the publisher , phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office phone: + 48 56 611 46 34 (mgr agnieszka ), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 david eden, paul huffman, john holman heavy-tailed distributions and the canadian stock market returns ................................. 9 investment platforms evolutions – etf funds ...................................................................... 23 convergence of health expenditure in eu 12 and v4 states .......................................... 33 the role of the amount of money in risktaking ................................................................ 45 the role of instant payment systems in the polish economy ............................................ 59 á ....................... 71 for authors ............................................................................................................................. 87 for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors128 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 129 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the jour nal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions #authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors130 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. the detailed ethical principles are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https:// publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl introduction dear readers and authors, we are happy to present to you the next issue of the scientific quarterly copernican journal of finance & accounting. articles contained in the journal are the result of scientific collaborations between scientists across countries and universities. in the current issue we present articles prepared by scientists from latvia, czech republic, croatia and poland. the problems and challenges of our dynamically changing world are visible in the area of finance and economics. accounting policy, cooperative banks, pension valorisation, retirement solutions, determinants of entrepreneurship, financial consequences of the illegal use of personal and confidential information, non-financial information in integrated reporting, these are just some of the matters covered in this issue. we would like to give special thanks to the authors, reviewers, members of the scientific council and the editorial team. your contribution is especially valuable for the development of the journal. we hope that the papers contained in our journal will be of interest to you. invariably we encourage you to read and publish the results of your research in our copernican journal of finance & accounting. executive editor, dorota krupa, ph.d. introduction dear readers and authors, it is a truism to say that the new year gives new possibilities. however, in a dynamically developing environment, there are changes that create problems but also create opportunities. contemporary finance and the economy are undoubtedly areas full of challenges. we are happy to present to you the first issue of 2018 of the scientific quarterly, copernican journal of finance & accounting, in which scientists from different universities present themes related to the various challenges of contemporary finances. you can find articles about public finance and self-government units, and about the role of corporate accounting in strategic decision-making. the banking sector and their corporate social responsibility as well as individual investors on the financial market are the matters covered in this issue too. as always we would like to give special thanks to the authors, reviewers, members of the scientific council and the editorial team for their especially valuable contribution to the development of the journal. invariably we encourage you to read, present and exchange ideas and the results and conclusions of your research in our copernican journal of finance & accounting. yours sincerely, executive editor, dorota krupa, ph.d. copernican journal of finance & accountingcopernican journal of finance & accounting copernican journal of finance & accounting copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 5 issue 1 2016 biannual finance & accounting 2012 volume 1 copernican journal of biannual issue 1 uniwersytet mikołaja kopernika w toruniu nicolaus copernicus university editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz secretary: dr damian walczak scientific council prof. dr. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. dr. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. dr. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. dr hab. stanisław owsiak, uniwersytet ekonomiczny w krakowie, cracow university of economics, poland prof. dr hab. wiesława przybylska-kapuścińska, uniwersytet ekonomiczny w poznaniu, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. dr. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. dr hab. małgorzata zaleska, szkoła główna handlowa w warszawie, warsaw school of economics, poland prof. dr. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. dr. christiane goodfellow, jade university wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. dr. catherine deffains-crapsky, université d’angers, france prof. dr hab. jerzy gierusz, uniwersytet gdański, gdansk university, poland prof. dr. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. miloš král doc. ing., tomas bata university in zlín, czech republic prof. dr. natalia konovalova, riseba university, riga, latvia prof. emil papazov, university of national and world economy, sofia, bulgaria prof. dr. ángel peiró signes, universidad politécnica de valencia, spain prof. dr. adalmiro pereira, politécnico do porto, portugal prof. dr hab. bogusław pietrzak, szkoła główna handlowa w warszawie, warsaw school of economics, poland prof. dr hab. waldemar tarczyński, uniwersytet szczeciński, szczecin university, poland prof. titular gerard olivar tost, national university of colombia, colombia prof. siniša zarić, ph.d., university of belgrade, serbia prof. dr hab. jan turyna, uniwersytet warszawski, warsaw university, poland prof. dr hab. maciej wiatr, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr hab. andrzej cwynar, prof. wsei, wyższa szkoła ekonomii i innowacji, university of economics and innovation, poland dr hab. zbigniew krysiak, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr hab. joanna wielgórska-leszczyńska, prof. sgh, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr tomáš heryán, silesian university, school of business administration, czech republic dr wojciech piotrowicz, university of oxford, great britain prof. dr. maria del val segarra oña, universidad politécnica de valencia, spain prof. dr. lyudmila mihaylova, university of ruse, bulgaria prof. dr. domagoja buljan barbača, university of split, croatia c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2016 copyright by uniwersytet mikołaja kopernika toruń 2016 icv 2014: 94.90 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk, printed in 300 copies editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents leszek dziawgo introduction ........................................................................................................................... 7 mustafa akan a dynamic model of a nonlife insurance company .......................................................... 9 piotr bolibok an empirical evaluation of selected accounting-based value drivers in the polish banking sector ....................................................................................................................... 25 joão paulo braga, luís m. pereira gomes the impact of the preliminary announcement on the abnormal returns of the companies involved in takeover bids in the portuguese stock market between 2000 and 2014 ........................................................................................................................ 39 namık kemal erdoğan, serpil altınırmak, çağlar karamaşa comparison of multi criteria decision making (mcdm) methods with respect to performance of food firms listed in bist ......................................................................... 67 günter hofbauer, monika klimontowicz, aleksandra nocoń basel iii equity requirements and a contemporary rating approach .......................... 91 natalia konovalova, snezhana dalecka analysis and evaluation of capital adequacy in latvian banking system .................. 107 angelika kuligowska scope and assessment of the insurance for members of voluntary fire brigades provided by local government ......................................................................................... 125 aušrinė lakštutienė, aida barkauskaitė evaluation of relationship between banks lending activities and the economies in baltic countries ................................................................................................................ 141 iwona maciejczyk-bujnowicz capital flows in european union on the basis of international investment position – selected aspects ................................................................................................................ 157 emil papazov, lyudmila mihaylova accountancy-based sources of information for planning purposes in smes ............... 173 bożena ryszawska sustainability transition needs sustainable finance ......................................................... 185 for authors ......................................................................................................................... 195 cjfa_2_2017_druk.pdf e65 -1 date of submission: december 11, 2016; date of acceptance: january 17, 2017. * land, phone: +48 792 791 956; orcid id: http://orcid.org/0000-0002-8444-0702. & accounting, 6(2), 23–31. http://dx.doi.org/10.12775/cjfa.2017.008 * nicolaus copernicus university in torun investment platforms evolutions – etf funds keywords: investment platforms, etfs, etf platform, insurance investment platforms. j e l classification: d14, g23, g29. abstract: investment platforms, despite the short length of service on the polish market, subject to continuous development. the nucleus of the creation of this product were the umbrella investment funds. they allowed free passage between funds without additional costs and too complicated formalities. this form, however, proved insufficient for the participants, because such diversification is just a hoax. of course, one of the factors that contributed positively to the development of platforms were changes in the pension system. platform initiated a kind of a new chapter in the operation of investment funds allow participants to freely switch between funds of different companies, often with different investment profile and risk, without at the same time leaving the product as a whole. unfortunately, among the platform they appeared non-creditable charge liquidation, which largely borne by the participants. the main factor that forced changes in poland, became the lawsuits, mainly on the insurance of investment platform based on insurance capital funds. the first adverse judgment in this case concerned the aegon insurance group, while another case is in progress. a string of these events resulted in a new direction of development platforms, namely, basing their actions on the fun-souls etf. this link aims to reduce the fees incurred by the participants, but mainly to increase the rates of return obtained. in this connection, it is worth a closer look at this solution. the purpose of this article is to present the first etf investment platform in poland. 24 investment platform is an innovative solution bringing together many types of investment funds or insurance capital funds in one place. this solution is available on the polish market relatively soon, they undergo continuous development and improvement. platform investment as strictly relating to their name, as a financial product, solution investments are not covered by the regulations. however, individual components of the platform, depending on the type of investment funds and manage the asset management company or insurance capital funds and their management insurance companies already have such regulations are covered. the owner or manager of an investment platform acts as a broker by providing the ability to switch between shared funds, conversion of units, purchase order / sales, collection of fees and commissions for participation. financial market undergoes permanent changes and evolutions and there would still be the case of investment platforms, which evolved from solutions umbrella funds by unfavorable combination of insurance products, the insurance capital funds when etfs. the purpose of this article is to present the first etf investment platform in poland. for the purposes of article analyzed the returns of ten available funds for the etf platform since the beginning of the two deadlines, as between the two periods, the value of shares and payments resulting with participation. of course, solutions of this type exist in other countries. platforms like fidelity, schwab and td ameritrade offers respectively 70, 214 and 101 etfs with no commission fee. at the same time these platforms also offer other etfs with charges. foreign experiences are longer and richer than national, as the us market, or even british resolve is greater, and the free market works there much longer, making financial education and awareness of saving for the future is on a completely different level. changes in investment platforms and the rise of poland's first etf platform, shows that western experiences are replicated on the domestic financial market (friesen, 2015). investment platforms are undoubtedly a financial service under the law applicable in the territory of the polish republic, thus a financial product, which can be considered as the basis for the creation of personal financial plan (usta investment platforms evolutions – etf funds 25 personal finance through the accumulation and multiplication of the collected capital. the design of these products allows simultaneous investment objective of future pension at the meeting of the other intermediate goals e.g. early mortgage payments, adjusting the fees resulting from the study, an unexpected expense. nevertheless, the theme of saving for retirement purposes does not have to be the only and fundamental for the investment platform, the target may also be a long-term two-track apply to both retirement and transfers to the next generation (walczak & krupa, 2013). the construction investment platforms can be compared to open-architecture product, because the platform offering investment funds not only its own brand but also other investment companies (dziawgo, 2005). this concept is related to the continuous necessity of offering customers the best solutions available at that time on the market, which clearly forms part of the action platform. investment platforms represent a kind of response to the results of studies on delaying retirement and lengthening of life and the need to save for retirement (chen & paul lau, 2014). construction investment platforms and their character as products supplementary pension schemes fits perfectly into the modern concept of retirement financial market. because the current dis-bonds are insufficient, and the mandatory pension system gradually loses efficiency (buszko, krupa & walczak, 2016) . the concept of investment platforms was proposed and enacted in 1984 by chuck schwab, who called them supermarket funds (mutual fund supermarket). world and domestic experience in the business of these products are a little more than a quarter century (robertson, 2006; mobius, 2007; benz, 2005). however, such a short history has shown that the platform follow the world trends and requirements of the participants. the largest polish platform has more than 250 investment funds. today's platform, as mentioned above, are no longer based only on investment funds, but also of insurance capital funds, funds or exchange traded funds (etf). the popularity of platforms meant that their conduct does not deal only investment fund company, but also insurance companies, banks, limited liability company. platforms can be strictly investment, insurance or a combination of both qualities. it not without significance is the type of insurance and the fees associated with participation. some of these products is sometimes combined with life insurance, as this treatment is to release a participant from capital gains tax 26 it can be made the distribution of investment platforms due to their nature insurance investment platform (iip) – etf investment platform (etf ip) investment banking platform (ibp) internet investment platform (ip). definitely a broader division is to separate these products into investment, investment and insurance, and insurance, but in this division it would be difficult to locate the individual platform. investment platform could also be other divisions due to: the type and frequency of the deposited funds (one-time, regular, mixed), the size of the platform (small, large, medium), reversed construction (type rentier), costs of participation (cheap, expensive) additional benefits (health brokerage house ownership model portfolios, access to the account via the internet). the last one might seem trivial, but the market was a platform of concordia, which did not provide such access. these divisions represent the most important features, but you can create others that shows width issues. of particular interest, and at the same time surprising is described below in a kind of paradox segregation investment platforms, which is contrary to the definition and concept platforms, but worthy of ref lection. although the platforms are products of long-term it may also be considered to divide them into short, medium and long-term. categorization of this type is calculated by dividing the frequency of the deposited funds. platform-off and mixed refer to the online platform, in which the participant is not associated with the owner, no additional agreement (e.g. insurance) or in danger of liquidation costs; as was the case in previous agreements platforms; or fee for early resignation – which is currently used. so despite the longer-term this type of financial products, may be considered too short and medium-term investment, as a participant after, or not a particular rate of return may move into other products on the market or to meet established financial goal while not exposing themselves to bear additional charges. the first etf investment platform was established on 22 september 2011. this platform is part of the aegon insurance company, and is managed by the brokerage house alfa and first quotation, moreover, also the first of the insurance capital fund etf started its activity. the first etf appeared on the stock ex investment platforms evolutions – etf funds 27 change in 2010. then came the etf platform, which, according to information aforementioned by the author in april of 2014 year would be based on the 10 etf, of which at that time was only five listed funds. at the moment the participant has the opportunity to benefit fully from all 10 funds. manager's failure to comply with the promise. despite the fact that a year ago did not offer a platform to its full potential participants, because there was too short in the market / information on the above platforms are ongoing, as etf-10 was established on 01.04.2016. the main objective of participation in the product aegon alfa etf is to transfer the customer over time the most aggressive etf 1 through successive funds, so that it has completed an investment in the etf 10, which is considered the safest among all funds1. the participant has the opportunity to participate in a regular product, as well as one-off. one of the main advantages of such funds is to replicate the situation in the market, following stock index. another advantage is much lower than the fee for the use of specific funds that are part of the etf. participant platform, unfortunately, is subject to risks, arising only need to reinvest in other etfs throughout the duration of the agreement min. 15 years without the possibility of transition in other funds that are not etfami. thus, there is high liquidity that allows switching between all 10 of the funds, but without the possibility of early payment of the total cost and without leaving the solution. unfortunately, also in the case of this financial product the customer is not sure to obtain a certain profit. a small change in costs in favor of or against a participant is no difference for the customer, since the very accession and post will be in it for a contractually defined period will cause the participant is not consumed at the same time, these measures completely consume. summing up construction of the policy is the biggest complaint towards etf platform. management fees are as follows (the fees for…): 2.52% etf 1 etf 2 2.05%, 1.58% etf 3, 2.44% etf 4, 1.79% etf 7. the amount of the management fee is reduced with decreasing risk. etf fund 1 is the most risky, and the etf least 10. the participant has the opportunity to read the data on the total return for the fund, height standard deviation, coefficient of variation, as well as information showing the value of the units and to compare changes in the above data for the designated benchmark, wig 20 and bond spot. 1 28 below, a comparison of all available within the platform etfs. the comparison was made in two periods from the start of operation of the fund to 6 february 2016 year and since the beginning of the fund until december 7 2016 year and in the period between february to december 2016 years. table 1. placed the data on the rate of returns since the inception of the fund for the last year of activity and the value of investment fund units as of 06.02.2016. table 1. rates of return of all funds in the etf platform since the beginning of the data as of 06.02.2016 fund name the total rate of return (of the day) rate of return 12 months the value of units alfa etf 1 6.40 % (22.09.2011) 11.92 % 10.64 pln alfa etf 2 1.90 % (16.01.2012) 12.16 % 10.19 pln alfa etf 3 -4.90 % (14.02.2014) 10.62 % 9.51 pln alfa etf 4 -8.00 % (16.01.2013) 10.68 % 9.20 pln alfa etf 5 0 % (30.12.2015) * 10.00 pln alfa etf 6 -7.79 % (9.02.2015) * 9.23 pln alfa etf 7 -0.60 % (20.01.2014) 7.45 % 9.94 pln alfa etf 8 0.40 % (30.12.2015) * 10.04 pln alfa etf 9 3.90 % (9.02.2015) * 9.61 pln alfa etf 10 0.30 % (30.12.2015) * 10.03 pln * too short duration of action fund s o u r c e : own study based on data from: www.dmalfa.pl/pl/strategie/aegon/ (accessed: 02.07.2016). of all the funds in the period, half of them exist for less than 12 months. only four funds generated profits, five suffered a loss, and one from 10 january 2016 did not change its value. in the annual comparison it can be noted that all funds were loss of –7.45% to –12.16%. the value of units in each fund varies from 9.23 to 10.64 pln, the output value amounted to 10 pln. noteworthy is the fact that funds charge a management fee regardless of whether profits will work out or not. considering its size to 1 etf of 2.52% per year and comparing it with the 6.40% rate of return since inception (over 4 years), it is apparent that the par investment platforms evolutions – etf funds 29 ticipant suffered a loss. that fund is the most aggressive of all, so it should get much higher results. for other funds, the investor's loss is obvious and unfortunately testifies against management. the following table compares all the funds in the period from 06.02.2016 to 10.12.2016 and placed information on the total rate of return from the beginning, and for the last 12 months. only three funds operate for less than a year. most of the funds for as much as 7 achieved positive returns since the inception of the fund, all of which operate for longer than 12 months is the period of the last year received a positive rate of return. in the analyzed period, all the funds achieved positive returns. it may be noted that for the second test the results of the funds are better than in the previous period. table 2. rates of return of all funds in the etf platform since the beginning of the data as of 12.07.2016 fund name the total rate of return (of the day) rate of return 12 months rate return between 6.02.2016 and 7.12.2016 the value of units alfa etf 1 14.20 % (22.09.2011) 2.51 % 7.33 % 11.42 pln alfa etf 2 9.30 % (16.01.2012) 2.63 % 7.26 % 10.93 pln alfa etf 3 1.60 % (14.02.2014) 2.52 % 6.83 % 10.16 pln alfa etf 4 -2.10 % (16.01.2013) 2.30 % 6.41 % 9.79 pln alfa etf 5 3.20 % (30.12.2015) * 3.20 % 10.32 pln alfa etf 6 -3.80 % (9.02.2015) 1.37 % 4.33 % 9.63 pln alfa etf 7 3.60 % (20.01.2014) 1.57 % 4.23 % 10.36 pln alfa etf 8 3.10 % (30.12.2015) * 2.69 % 10.31 pln alfa etf 9 1.40 % (9.02.2015) 1.23% 2.60 % 9.86 pln alfa etf 10 2.00 % (30.12.2015) * 1.69 % 10.20 pln * too short duration of action fund s o u r c e : own study based on data from www.dmalfa.pl/pl/strategie/aegon/ (accessed: 10.12.2016). according to the accepted assumption and policies of the fund brokerage alfa etf 1 is the most aggressive fund and with the increase in the number next to the name of the fund risk level drops and the etf 10 is the safest. it may be noted that in accordance with the above, the highest rate of return should 30 get the most risky fund etf 1 and etf 2, the lowest while the etf 10 and exactly in reality have a rate of return above funds in the period considered. to sum up, in the light of the events that took place in the market investment platforms in recent years is a etf investment platform is an amazingly innovative approach addressed to the individual customer. it is the solution offered by the brokerage house, while offering asset management services for small regular or one-off investors. the investment strategy is based on reducing the risk of investors by shifting along with the expiry of the time from much more aggressive funds to safe ones. however, despite a great idea, specialists and financial advisors data clearly showed that in the first period considered, the most aggressive fund since its inception not even reached double-digit rate of return, the remaining funds achieved worse results, and yet receive any of the participants at the management fee. only in the second period, you will see improvement in the state of affairs, both between the two periods, and for the last year and from the beginning. these results, unfortunately, leave a bad taste in the first period, losses were so high. in addition, a participant is forced to bind to a platform on the 15-year period. the analysis shows that the participant obtains a loss in the first years of the investment, which are the most important in long-term investment for capital building and in this period, the participant should generate, as the most profitable as it is possible. we would expect the vast changes aimed to charge a fee for managing the resources entrusted to them only at the moment of obtaining a positive rate of return, which would cover these costs. any investment platform actions should aim to develop a higher rate of return than realizable at the same time on government bonds, bank deposits or savings accounts, which only hoarding value of money in the time. competitiveness investment platforms depends not only on the innovative design, but above all from getting above-average rates of return. etf platform requires a re-analysis at a time when the whole solution will work on the market longer period of time, which will allow for a more in-depth study and changes in the numbers of participants. investment platforms evolutions – etf funds 31 bankier.pl/wiadomosc/aegon-przegral-w-sadzie-zaplaci-23-mln-zl-kary-za-polisyz-ufk-7290912.html (accessed: 10.12.2016). benz, c. (2005). morningstar guide to mutual funds: five-star strategies for success, wiley, hoboken, 262–265. chen, y., & paul lau, s.h. (2014). mortality decline, retirement age, and aggregate savings. macroeconomic dynamics, vol. 31, 1–22. https://doi.org/10.1017/ s136510051400056x. dom maklerski alfa (2016), wyniki funduszy etf, www.dmalfa.pl/pl/strategie/aegon/ (accessed: 10.12.2016). friesen, g. (2015). comparing commission-free etf platforms: which one is best?, http://www.forbes.com/sites/garthfriesen/2015/11/09/comparing-commissionfree-etf-platforms-which-one-is-best/#38cead433a2f (accessed: 15.01.2017). skiej. mobius, m. (2007). mutual funds: an introduction to the core concepts. singapore: wiley, 173. robertson, r. a. (2006). fund governance: legal duties of investment company directors. new york: alm, §7.06, 7–34. the fees for the management of the funds etf alfa, http://www.analizy.pl/ (accessed: 07.01.2015). 10.12.2016). introduction dear readers and authors, we present to you the last issue of 2017 of the scientific quarterly copernican journal of finance & accounting. at the beginning we would like to give special thanks to everyone, who has contributed to the continuous development of the journal. we hope that this issue, in which we present articles from various areas of finance, will be an interesting for you. scientists recognise the challenges facing contemporary finance and the economy by developing and the deepening research in this area. among the matters covered in this issue are the shadow economy, cashless transactions, sovereign bond market, green bonds, and the relationship between asset and profitability with share value. we are open to all scientists from all countries and universities who conduct research in the area of interest of our journal. we encourage you to exchange and publish the results of your research in our copernican journal of finance & accounting. executive editor, dorota krupa, ph.d. cjfa_2_2017_druk.pdf e65 -1 date of submission: july, 25, 2017; date of acceptance: october, 27, 2017. * contact information: nagy.viktor@kgk.uni-obuda.hu, obuda university, kelephone: +36-1-6665212. nagy, v. (2017). the role of the amount of money in risk-taking. copernican journal of finance & accounting, 6(2), 45–58. http://dx.doi.org/10.12775/cjfa.2017.010 * obuda university the role of the amount keywords: risk-taking, certainty, amount of money, personal decisions. j e l classification: d81, g32. abstract: decisions based on the expected value have two components: the probability and the value or utility that is often expressed in money. regarding the first element, it can be pointed out that many decisions contain risk concerning the outcomes of the available options, i.e. concerning the probability of the occurrence of an event. uncertainty refers, in most cases, to this part, but having said that, the second part, the amount of money, still matters in a decision-making situation. since the research of the effect of the amount can be considered neglected compared to that of probabilities, i focused on the second component: on the role of the amount of money. the aim was to explore to what extent a 300 times difference in the amount affects the choice. expected value is often used in probability theory to determine the optimal choice. the formula used for this is the following: n i ii xpxe 1 (1) viktor nagy46 where: i : the probability of the i-th event occurring; i : the positive or negative outcome of the i-th event; it can be expressed in money or in utility and is required to be measured on ratio scale. e.g.: suppose we have a box with well-mixed yellow, red, and blue cards. based on the card drawn out of the box, it is decided whether the player wins or not (or loses) as listed below: table 1. example of a probabilistic game yellow red blue number of cards 10 25 15 wins/losses 100 0 -10 s o u r c e : own study. what is the average amount that can be won? it is the expected value, the sum product of the probabilities and values: 1710 251510 15 0 251510 25 100 251510 10 xe (2) the conclusions are very clear: playing this game many times, the mean of the winnings will be 17. sometimes one wins (yellow card) sometimes one simply doesn’t (red one), sometimes one loses (blues), but in the long term one definitely gains money. therefore, if one can take part in this gamble for free and for unlimited times, one ought to do so. but it also means that a casino will never offer such a game unless the participation fee is higher than 17. accurate probabilities and accurate outcomes result in well-founded decisions and one follows this well-understood interest. if only one opportunity is given to take part in the game, the expected value is not a datum that one can rely on. however, on the other hand, there are games where in cases of great expected value, one is not willing to pay either except for a small stake. a widely-known example is the saint petersburg paradox that i played with international students for years. the game is something like this: the role of the amount of money in risk-taking 47 eur 1 can be won and the game ends, if a f lipped (of course fair) coin comes up heads. if it’s tails, the winnings are doubled, and the coin is f lipped again. in general, the winnings increase by doubling, till f lipping results in heads. the question was: how much they were willing to pay to enter the game? the expected value here: 1 2 1 2 1 2 1 2 1 4 8 1 2 4 1 1 2 1 k xe (3) students tended not to pay more than two, three, or four euros for the opportunity to take part in the game despite the infinite amount of expected value. that is to say, based on the mathematical calculations all the money is worth it. they didn’t even calculate the expected value although it was the topic right before. in the beginning researches on risky decisions focused on the expected value i.e. utility. theory of games and economic behavior (by von neumann & morgenstern, 1953) is one of the basic and widely known book that played an important role that time. merely the fact itself, that it was reprinted and reedited many times in the second half of the 40s and in the first half of the 50s, could show its fundamental significance. researches from that era was concentrating on the mathematical approaches. later the center of interest changed so that the theories can better describe the real life choices. although allais (1953) also dealt with problems in which assumptions of utility theories can be questioned, in developing such new theories kahneman and tversky (1979) had a pioneering role. since then, of course, these theories have more developed, successor theories. from that time new paradoxes are discussed (birnbaum, 2008) too, but these usually are on violating other expectations of normative theories, or deal with some criticism. in my research i accepted that respondents do not behave based on logical rules and in a consistent way, my aim was not to set up new paradoxes and prove that decisions can be inconsistent in several cases, but i wanted to do some examination to observe the effect of a 300 times difference in the amount to the choice in risky situations. in a decision situation usually the following matrix is used as a general model: viktor nagy48 table 2. general payoff matrix actions states of nature s1 s2 s3 s4 action 1 p11 p12 p13 p14 action 2 p21 p22 p23 p24 action 3 p31 p32 p33 p34 action 4 p41 p42 p43 p44 action 5 p51 p52 p53 p54 s o u r c e : own study. where: i : actions or alternatives or options to be selected by the decision-maker; j : states of nature or number of events, on which one has no influence at all; ij : the payoff one can get by choosing the i-th action in case of the j-th event occurring. the payoffs surely affect which option is chosen; the main goal is to observe and describe the effect of it. since more is always better, there would be no sense to the experiment if only the payoff differed in the choices. therefore probabilities have to change as well. examining the effect of the probabilities on the choices can be another aim. in the decision there is (luce, raiffa, 1957, p. 13): certainty, when the only existing event occurs by choosing an alternative; risk, when lots of outcomes exist for each alternative and there are probabilities that can be ordered to those. now in the cards example, we had exact probabilities that could be calculated from the numbers of the cards (a priori probabilities). sometimes these are only estimated based on the frequencies in the past or based on the previous experiments (posteriori probabilities). in the first case one can rely on them with total peace of mind while in the second case the reliability of probabilities can be questioned; uncertainty, when lots of outcomes exist for each alternative and there are no probabilities at all that can be ordered to those. at all means, that no conjectures, no ideas, neither mathematical suppositions, nor obse the role of the amount of money in risk-taking 49 rvations in the past. obviously one won’t face such a situation unless dealing with marginal mathematical problems. some (eg. hansson, 2005, pp. 26–28.) based on the reliabilities of probabilities split up the second case into risk (complete probabilistic knowledge) and uncertainty (partial probabilistic knowledge). here risk is used in a narrower sense compared to the previous classification. the last case is called ignorance instead of uncertainty (because this is already occupied). kahneman and tversky (1979, p. 265) handled risk as a variable and they showed that people overweight outcomes that are considered certain, relative to outcomes which are merely probable (certainty effect). perhaps it is not surprising, that outside the scientific community risk is not something that has strict definitions. however, on the other hand, it must have a meaning. in a survey (kolnhofer-derecskei & nagy, 2016, pp. 161–172.) the term risk was examined. respondents were asked to define what risk means to them. they mentioned many examples. the method of content analysis enabled to draw general conclusions from the answers. the most frequently occurring words were displayed in a word cloud. figure 1. cloud diagram of automatic coding s o u r c e : kolnhofer-derecskei, nagy, 2016, p. 166. since the font sizes represent how frequently terms occur they concluded from the word cloud that risk was composed mainly of negative content. viktor nagy50 in my paper i use the term risk in a broader sense since it suits the respondents’ perception. i decided to observe the behavioural pattern by using probabilistic games: these have the two important components mentioned above: payoffs or winnings (concentrating on money) and the probability. examining real life from that point of view i set up the following matrix with the most characteristic gambles in it: figure 2. probabilities and payoffs s o u r c e : own study. probabilistic games can be used to study preferences. in a research (kolnhofer-derecskei & nagy, 2017) it was shown that the final benefit of a risky decision will be the biggest inf luence on respondents. of course, it is necessary not to omit personality. to exclude the effect of final benefits, in my research the winnings were equal. consider the following experiment: suppose, you have a box with 100 balls in it. 25 out of 100 are red, 25 green, the remaining 50 are blue and yellow in an unknown proportion including the opportunity that all of them are either blue or yellow. one ball is drawn out of the box randomly (the balls are of course the role of the amount of money in risk-taking 51 well mixed) and based on the colour of it the following gains can be realised in hungarian forint: table 3. payoff table in the research options red green blue yellow alternative 1 1000 1000 1000 0 alternative 2 1000 0 1000 1000 s o u r c e : own study. which option would you choose? tick the box. alternative 1 alternative 2 what if the winnings are in euro? alternative 1 alternative 2 the above described case will be referred as case x, while the following the case y. now, the box and the conditions are the same, but the options have altered. winnings interpreted in hungarian forint. table 4. payoff table in the research options red green blue yellow alternative 3 0 0 1000 1000 alternative 4 1000 0 1000 0 s o u r c e : own study. which option would you choose? tick the box. alternative 3 alternative 4 what if the winnings are in euro? alternative 3 alternative 4 these questions provide the possibility to examine the following: since with minor f luctuation 1 euro equals 300 forints, it can be checked whether the 300 times amount has inf luence on the risk-taking in both viktor nagy52 cases. i suspected that such a huge difference would have the decision-makers prefer the certain options. in both cases (x and y), between the options there is one where exact probabilities can be used for calculating the expected value, while regarding the other option, only “from-up to” possibilities can be calculated to be both higher and lower than the other option. choosing the certain alternative i suppose that the decision-maker is pessimistic, and preferring the risky alternative i suppose indicates optimistic behaviour. it is widely believed that hungarians are pessimistic. i do not share this statement so my second aim is to confute the negative voices. consistency can be checked: distortions in preferences (reversing preferences) can be observed; if based on the data displayed in the first table, the certain alternative is preferred, and at the same time the risky one is preferred in the second table – and vice versa. both stable and reversing preferences were expected by me; the real question is their proportion. in these games it can be observed that the winnings are always 1000. the aim was to make the decisions easier by making the tables as transparent as possible. it is clear: the outcomes are either huf1000/eur1000 or nothing. so one might calculate the expected values but it does not make sense here; the real key point is the probabilities to win, that’s why the focus should be based on them. in alternative 1 the worst case is when all of the unknown balls are yellow. here the probability to win equals 0.5; the best case is when all of them are blue: 1 is the probability. in alternative 2 we have a sure probability of 0.75. in alternative 3 the probability is 0.5 while in alternative 4 it varies on a wide scale: if all the unknown balls are yellow it is only 0.25; the best case occurs when all of them are blue: 0.75. in both case x and case y the certain probability is situated right in the middle of the scale on which the unknown probability varies. it seems that with equal chance the unknown probability can be greater or less than the known one. if the decision was between a certain 0.75 and an unknown 0.3–0.8, who would risk the unknown? probably no one. that’s why in my examples the known probability is on the half way point of the unknown scale, and that’s why i suppose that if someone preferred the sure probability to the unknown one, they expect the unknown probability to be higher than the known one. that can be an optimistic approach. in the other hand, if the sure probability is preferred to the unknown one, i suppose the latter one is expected to be lower than the previous one; that is a pessimistic approach. the role of the amount of money in risk-taking 53 figure 3. probabilities that can be ordered to alternatives alternative 1 (optimistic) alternative 2 (pessimistic) alternative 3 (pessimistic) alternative 4 (optimistic) s o u r c e : own study. these above mentioned questions were asked of hungarian respondents (n=89) who were studying the business development course at master’s level. table 5. distribution table question 1 question 2 question 3 question 4 frequencies relative frequencies 1 1 3 3 18 20.22 % 1 1 3 4 2 2.25 % 1 1 4 3 1 1.12 % 1 1 4 4 27 30.34 % 1 2 3 3 0 0.00 % 1 2 3 4 1 1.12 % 1 2 4 3 2 2.25 % 1 2 4 4 0 0.00 % 2 1 3 3 1 1.12 % 2 1 3 4 2 2.25 % viktor nagy54 question 1 question 2 question 3 question 4 frequencies relative frequencies 2 1 4 3 1 1.12 % 2 1 4 4 0 0.00 % 2 2 3 3 20 22.47 % 2 2 3 4 1 1.12 % 2 2 4 3 1 1.12 % 2 2 4 4 12 13.48 % total 89 100.00 % s o u r c e : own study. in figure 4 it is more obvious that some of the possible outcomes are extremely popular and some of them are extremely unpopular. figure 4. frequencies s o u r c e : own study. here yule’s q, which is a specific of goodman and kruskal’s gamma to 2x2 matrices, can be used as a measure of association between two questions, because both variables (questions) are measured at the nominal level. the values should express the same tendency that is displayed in figure 4. table 5. distribution table the role of the amount of money in risk-taking 55 table 6. yule’s q values question 1 question 2 question 3 question 4 question 1 1 0.9854 -0.4201 -0.3731 question 2 1 -0.2981 -0.4161 question 3 1 0.9613 question 4 1 s o u r c e : own study. in both cases (x and y) very high values can be observed (0.9854 and 0.9613) i.e. there is very strong relationship between the questions. in case x 57.30% took the risk, 42.70% avoided it, while in case y that was 49.44% and 50.56% when it was about huf. when the currency changed to eur, in case x 58.43% took the risk, 41.51% avoided it, while in case y that was 50.56% and 49.44%. table 7. relative frequencies options distribution (huf) distribution (eur) alternative 1 (optimistic) 57.30% 58.43% alternative 2 (pessimistic) 42.70% 41.51% alternative 3 (pessimistic) 49.44% 50.56% alternative 4 (optimistic) 50.56% 49.44% s o u r c e : own study. these are averages; i.e. on the one hand we know neither whether the same people are standing behind the 57.30% and the 58.43%, nor do we know, on the other hand, whether the same people created the 57.30% and the 49.44%. the effect of changing the currency from huf to eur: those who changed alternative 1 to alternative 2 or inversely, have the same cardinality (more precisely only a one-person difference could be observed): the 57.30% has changed to 58.43%. interestingly, the same can be stated regarding alternative 3 and alternative 4. those who changed alternative 3 to alternative 4 or viktor nagy56 inversely, have the same cardinality with a one-person difference: the 49.44% has changed to 50.56%. in case x, the difference in currency, i mean the 300 times difference in the amount of money, this did not inf luence the risk-taking in 92.13%. 53.93% took the risk and 38.20% avoided it. in 7.87% the preference was reversed: three persons changed their minds from the option of unknown probability to the certain one, while four persons moved in the opposite direction. in case y the difference did not inf luence the risk-taking in 87.64%. 43.82% took the risk and 43.82% avoided it. in the remaining 12.36% the preference reserved: six persons changed from the sure-probability alternative to the risky one, while the opposite change could be observed in 5 cases. in case x with lower probabilities compared to those in case x, the respondents tended more to change preferences. this is indicated by increasing the changers’ number from seven to eleven. taking a closer look behind the numbers, the following question can be asked: what changes are caused if the respondents are faced with lower probabilities? the effects, when the winnings were in huf, are the following: 33.71% opted to take part in the risky situations (optimistic approach) in spite of the decreased probabilities and 26.97% did not alter their pessimistic approach. on the whole, 60.67% made consistent decisions. 23.60% out of the remaining 39.33% changed from optimist to pessimist and 15.73% from pessimist to optimist. the difference is huge: the optimist tends to be pessimist by 1.5 times chance more than pessimists tend to change to optimists. the effects, when the winnings were in eur, were the following: 34.83% did not change, they were stable optimistic, and 25.84% proved pessimistic by always preferring the fixed probabilities instead of the risky situations with the unknown probabilities. a total of 60.67% follow a stable behavioural pattern. the remaining 39.33% can be split into two groups: 23.60% who became pessimistic from optimistic, and 15.73% who became optimistic from pessimistic. same differences as above. if one compares the proportions referring huf and that of eur, only tiny differences can be observed. we can notice that regardless of the currency, people follow their behavioural patterns (they have either stable or reversible preferences but in that they are consistent) in a given situation. the decreasing probabilities affect them in the same way: as they acted for falling probabilities in the case of huf, they followed the same action in case of eur. regardless of the differences in both amounts and probabilities, 30.34% of the respondents are optimists. so 30 persons out of 100 are hopeful and expect the role of the amount of money in risk-taking 57 the best that can happen. against them are the 22.47% who are pessimists in all circumstances. admitting the fact that the experiment was not a representative one, still the following conclusions can be drawn. firstly, despite this, it is very clear that the first superstition has failed: the willingness to risk-taking is typically not inf luenced by the 300 times difference in amount since approx. 90% of respondents did not alter from their original choice. so taking the risk or avoiding it does not depend on the amount itself. secondly, in case x, using huf there is a 14.60 percentage point difference in favour of the optimists; using eur it is 16.92 percentage points. almost identical values. in case y the proportion of optimists and pessimists is almost fifty-fifty. so if there is any trait in the hungarian nation, it is rather that of a positive attitude; on average, actually rather optimistic. the fact, that 30 persons out of 100 are always optimistic and only 22 are pessimistic, confirms this. thirdly, independent from the level of probabilities to win, exactly 60.67% made consistent decisions in both cases interpreting it within the frame of the currencies. the decisions of the remaining 40% cannot be forecasted based on their previous choice. that can be a tough challenge for sales departments in the market. the aim, to point out that people make inconsistent choices, can be considered to be reached because of this 40%. this paper was supported by the únkp-17-4/iii. new national excellence program of the ministry of human capacities. allais, m. (1953). le comportement de l'homme rationnel devant le risque: critique des postulats et axiomes de l'ecole americaine, econometrica, 21(4). (oct., 1953), pp. 503–546. birnbaum, m. h. (2008). new paradoxes of risky decision making. psychological review, 115(2), april 2008, 463–501. http://dx.doi.org/10.1037/0033-295x.115.2.463. hansson, s. o. (2005). decision theory a brief introduction. department of philosophy and the history of technology, royal institute of technology (kth) stockholm, viktor nagy58 http://web.science.unsw.edu.au/~stevensherwood/120b/hansson_05.pdf (accessed: 27.05.2017). kolnhofer-derecskei, a., & nagy, v. (2016). under risk. in: reicher regina zsuzsanna (ed.) fikusz 2016 – symposium for young researchers: celebration of hungarian science 2016: budapest, 25th november 2016: proceedings of fikusz 2016. kahneman, d., & tversky, a. (1979). prospect theory: an analysis of decision under risk. econometrica, 47(2), pp. 263–292. kolnhofer-derecskei, a., & nagy, v. (2017): comparing risk definitions given by hungarian and belgian bachelor students. in: thinking together (under publishing) 14 pages. luce, r duncan & raiffa, h. (1957): games and decisions, john wiley and sons, inc. neumann, von j., & morgenstern, o. (1953), theory of games and economic behavior, princeton university press, fifth printing (third edition). cjfa_1(2)_2013_przed_drukiem2_9_09_13.pdf copernican journal of finance & accounting kacji, (double-blind review process rzucenia, dla autorów192 copernican journal of finance & accounting finanse i jest przewidziane jako profeplinie finanse. w copernican journal of finance & accounting szeniowego. dla autorów 193 kresy, schematy i rysunki. copernican journal of finance & accounting copernican journal of finance & accounting go. ghostwriting i guest authorship definicje ghostwriting i guest authorship z ghostwriting z guest authorship (honorary authorship ghostwriting i guest authorship w przypadku finansowego wsparcia prac nad przygotowaniem publika dla autorów194 adres redakcji www.cjfa.umk.pl copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 3 date of submission: september 12, 2017; date of acceptance: december 26, 2017. * contact information: bojarenko@inbox.lv, baltic international academy, college of accountancy and finance, lecturer, lomonosova 4-222, riga lv-1003, latvia, phone: 37 126 759 426; orcid id: https://orcid.org/0000-0003-1300-7909. bojarenko, j. (2017). variability of accounting policies – advantages and disadvantages. copernican journal of finance & accounting, 6(3), 9–19. http://dx.doi.org/10.12775/cjfa.2017.013 julija bojarenko* baltic international academy variability of accounting policies – advantages and disadvantages keywords: accounting policy, fixed assets, materiality criteria. j e l classification: m41. abstract: there are several provisions of accounting policy, which are not regulated by the legislation of the republic of latvia. as a result, companies are free to develop and adopt recognition criteria and the methods of evaluation and accounting for items of their financial statements. this article deals with the choice of recognition criteria and the methods of evaluation of and accounting for fixed assets. the aim of the article is to develop recommendations on how to resolve the issue of accounting policy variabilities for the companies of the republic of latvia. the objects of the study are recognition criteria and the methods of evaluation and accounting of fixed assets. the recommendations on the solution of the issues related to variability of fixed asset accounting policy are based on the determination of materiality criteria.  introduction accounting policy is the key document, which regulates a company’s accountancy. for the users of the company’s financial statements, it ensures that business information is truthful, complete and comparable. preparation of finanjulija bojarenko10 cial statements is regulated by the government. however, companies are free to choose recognition criteria as well as the methods of assessment and indication of items of the financial statements. the problem lies in determining the best option for recognition criteria and assessment and accountancy methods. thus, it is essential to develop methodological approaches to the formation of companies’ accounting policies in latvia. the aim of this article is to develop problem-solving suggestions related to the variability of fixed assets’ accounting policy. to reach this aim the author analyses positive and negative aspects of variability of accounting policies at micro-level. the objects of this research are recognition criteria and methods applied for the evaluation and accounting of fixed assets. the research methodology and the course of the research process methodologically, the research is based on the application of scientific knowledge as well as on the basics of accounting theory and economic study. information background of the research is based on the laws and regulatory enactments of the republic of latvia applicable to accounting, as well as international financial accounting standards, studies of latvian and foreign scientists, materials published in periodicals, scientific publications, in the internet and legal reference systems. the accounting requirements in the republic of latvia are regulated by the national legislation and by the regulations of the cabinet of ministers. the law on accounting is the fundamental law in accounting. to meet all the requirements of this law, the cabinet of ministers has issued rule no 585 “regulation regarding the conduct and organisation of accounting”, which lists the documents that should be created and approved by each company. according to the previously mentioned rule, accounting policy is one of the required documents, along with the book of accounts, inventory guidelines and other documents. however, the rule also specifies the entities unaffected by the requirement to work out and adopt an accounting policy. accounting policy is a set of principles, methods, and regulations for accounting for the relevant economic transactions, facts, and events as well as assessment and indication of items of the financial statement. latvian legislation deals with this concept of “accounting policy” in the law on annual financial statements and consolidated financial statements, as well as in the rules variability of accounting policies – advantages and disadvantages 11 of the cabinet of ministers no 585 “regulation regarding the conduct and organisation of accounting”. accounting policy is an essential element, regulating the company’s accounting to ensure truthfulness, completeness and comparability of business information. besides, it is a major impact factor inf luencing key business figures and pricing policy of a company. when developing their own accounting policy, each company has a range of options in choosing recognition criteria and methods of assessment and indication of items of the financial statement. for latvian companies, the core of the problem is that the legislation does not regulate the content of several significant provisions of accounting policy. below are just a few important issues, which, in accordance with the current legislation, are open to multiple-option solution: ■ the unit of measure for recognition of non-material investments and fixed assets; ■ methods of calculating depreciation on a certain category of fixed assets; ■ materiality criterion of asset disposal value; ■ methods of fixed assets accounting (cost model, revaluation model, etc.); ■ evaluation of fixed assets according either to total cost or to direct production cost; ■ criteria of recognizing bad debts; ■ methods of assessment of bad debtors; ■ criteria of estimating materiality of the prior period errors, etc. all the issues listed above should be dealt with by each company and finalized in its accounting policy. this is where the problem arises, which the author has chosen as the subject matter of this study, namely, how to assess the outcome of freedom in the choice of recognition criteria and evaluation and accounting methods, which have a significant effect on the company’s operating figures. the aim of this article is to develop recommendations to solve the problems related to variability of accounting policy at the companies of the republic of latvia. the object of this study are recognition criteria as well as the methods of fixed assets evaluation and accounting. international expertise in the formation of accounting policy is ref lected in the studies of eldon s. hendriksen, michael f. van breda, belverd e. needles, marian powers, susan v. crosson (principles of accounting 12th edition, 2013) and many others. julija bojarenko12 many works written by scientists and experts deal with the development of accounting policies. various aspects related to the formation of accounting policy have been covered in the works by: ■ latvian authors: aivars ludborzhs (accounting for fixed assets, 2006), inguna leibus (financial accounting, 2016), etc.; ■ russian authors: n. p. kondrakov (accounting, 2013), a. d. sheremet (analysis and diagnostics of financial and economic activity of the enterprise: textbook, 2009), etc. all the authors emphasize the importance of making the right choice when adopting the accounting policy. however, so far, its impact on the company’s financial indicators or business solutions has not been analysed in detail. many methodological issues have not been solved yet. this prevents the creation of a systemic integrated approach to the formation of the accounting policy that would meet the demands of market economy. the association of accountants of the republic of latvia has worked in collaboration with the ministry of finance to create the set of guidelines for the management of accounting organisation documents, namely – “guidelines on the preparation of accounting organisation documents”. accounting policy is among the documents described in the guidelines. the guidelines were developed to help companies produce adequate accounting documents and facilitate effective accounting and preparation of proper financial statements. this study is intended for micro-companies and small companies. it is advisory rather than mandatory, since it is not a regulatory enactment. the study recommends some of the indicators of the variability of accounting policy. however, the methods of selecting such indicators are not dealt with (the guidelines on the preparation of accountancy documents, 2016). selecting fixed assets cost criterion according to the legislation of the republic of latvia, each company is free to choose and specify its fixed assets cost criterion in its accounting policy (cabinet of ministers of the republic of latvia). legislation does not provide any restrictions regarding the lowest or the highest value of this criterion. as a result, there are significant differences in companies’ operating figures. the choice of asset cost criterion impacts book value of fixed assets as well as cost value, which means that it affects the profit of the company. the choice variability of accounting policies – advantages and disadvantages 13 of fixed assets cost criterion should meet certain qualitative characteristics of financial statements, such as reliability, carefulness, relevancy etc. the “guidelines on the preparation of accountancy documents” drawn up by the association of accountants of the republic of latvia suggest that the amount of 200 euro should be adopted as fixed assets cost criterion for microcompanies and small companies. however, criteria for micro-companies and small companies differ greatly, which can be seen in table 1 representing the criteria of all the categories of companies in latvia. table 1. categories of companies according to the law on the annual financial statements and consolidated financial statements criteria limit values micro-company small company medium-sized company large company balance sheet total, euro 350 000 4 000 000 20 000 000 20 000 000 net turnover, euro 700 000 8 000 000 40 000 000 40 000 000 average number of employees during the financial year 10 50 250 250 conditions at which criteria are exceeded or not exceeded at least two out of three criteria are not exceeded on the balance sheet exceeds two out of three mediumsized companies’ thresholds s o u r c e : own study based on: the law on the annual financial statements and consolidated financial statements. accordingly, to ensure comparability of financial information, it is necessary to justify the choice of accounting policy. the methodological choice of asset value criterion could be based on materiality criterion. either annual average net book value of assets or gross assets could be used as the reference index for materiality criterion. selecting the method of depreciation for the certain category of fixed assets according to local legislation, there are three methods of calculating depreciation of fixed assets, namely: ■ straight line method; ■ degression (accelerated) method; julija bojarenko14 ■ methods depending on how heavily the asset is used (cabinet of ministers of the republic of latvia). the choice of any of the above-mentioned methods is bound to affect the book value of assets and cost value, which, in its turn, will affect the profit. a different method of calculating depreciation can be applied for each category of fixed assets. a category of fixed assets is a group of similar assets which are used by the company for similar purposes. such categories are determined by companies at their own discretion. however, local legislation does not provide any recommendations regarding the application of one or the other method for certain categories of fixed assets. therefore, accounting policy of each company should prove the choice of the method of calculating depreciation on certain categories of fixed assets. the methods applied for calculating depreciation on a certain category of assets should be based on the expected economic benefit resulting from the use of such assets during their service life. straight line method corresponds with a forecast of a steady incoming of economic benefit or steady usefulness of the item in question. degression (accelerated) method is in line with a forecast of a more intensive incoming of economic benefit during the first years of use and a less intensive one in subsequent years. however, methods refering to the intensity of use of a depreciable asset, are applicable in the cases where the incoming economic benefit is directly dependent on the intensity of wear and tear of the mentioned fixed asset in the company’s economic activities. local companies tend to use straight line method for all categories of fixed assets, irrespective of distribution of the economic benefit during the wear and tear of this or that category of depreciable assets. the straight-line method is more often used because of its simplicity. however, this approach fails to provide adequate information about a company’s financial status. accounting policy should give reasons for the choice of the method applied for calculating depreciation, which should be based on the expected incoming economic benefit because of fixed asset utilization. selecting the criterion for disposal value materiality according to the legislation of the republic of latvia, salvage value is an estimated amount that is expected to be received upon the sale of a fixed asset at the end of the recovery period, disposal charges deducted. therefore, if the sal variability of accounting policies – advantages and disadvantages 15 vage value of a fixed asset is insignificant, it is not recognized when the asset’s loss of value is recorded (cabinet of ministers of the republic of latvia). salvage value of a fixed asset affects calculation of depreciation, since it is involved in the calculation of depreciated value, which impacts net book value of assets as well as cost value. consequently, profit is affected. there are no guidelines in the regulatory enactments of the republic of latvia on how to determine materiality of salvage value of a fixed asset. therefore, each company should determine materiality criteria at its own discretion and to ref lect it in its accounting policy. purchase costs or production costs of a specific fixed asset item could be used as a reference index to determine the criterion of salvage value materiality. the method of selecting the criterion of salvage value materiality could be based on the proportion of salvage value in the total purchase costs or production costs of this item of fixed assets. evaluation of fixed assets according either to total cost, including both direct and indirect costs, or to direct production cost only approach to the evaluation of all the balance sheet items as well as profit and loss calculation is regulated by the law on annual financial statements and consolidated financial statements. according this law, evaluation should be based on either purchase costs or production costs. according to the national legislation: ■ purchase costs comprise direct costs (purchasing price of goods or services) and additional (indirect) costs, related to the purchase; ■ production costs comprise direct costs (costs related to the purchase of raw materials, basic materials and ancillaries, as well as other direct costs related to the production of the relevant item), and possible overhead/indirect costs, related to producing of the item (the law on the annual financial statements and consolidated financial statements, 2015). thus, in accordance with the legislation of the republic of latvia, it is up to the company to decide whether indirect costs should be included in the total cost of its fixed assets. if indirect costs are included, fully or partly, in the production costs, this will result in the increase of fixed asset initial book value. it is only when dejulija bojarenko16 preciation is calculated or the asset is written off, indirect costs will be shown in profit or loss statement and will result in a lower profit. if, on the other hand, indirect costs are not included in the production costs, profit decrease will occur immediately, because they will be shown in profit or loss calculation of the year when they were incurred. the method for the choice of asset evaluation according either to the total cost, including both direct and indirect costs, or to direct costs only, should be based on revenue and expenditure reconciliation by financial reference periods (the law on the annual financial statements and consolidated financial statements, 2015). all the costs, both direct and indirect, are related to the production of the fixed asset, which means that they will contribute to obtaining an economic benefit due to the use of the fixed asset. however, if indirect costs are insignificant and cannot be divided among the assets that have been created, because such division would be too costly, it does not seem appropriate to increase asset value by their amount. it would be worthwhile to use direct costs as the reference index for determining the materiality of indirect costs. methods determining indirect costs should be based on the proportion of indirect costs in the amount of total direct costs. methods of accounting for fixed assets – cost model or revaluation model there are provisions in the legislation of latvia allowing companies to apply revaluation model in the accounting for fixed assets if the true value of a fixed asset is significantly higher than its initial book value or its assessed value in the financial statement of the previous year, and if such increased value is expected to be long-lasting (). revaluation model can only be applied within the framework of the whole fixed asset group to which the asset in question belongs, in line with the accounting policy adopted by the company. a fixed asset group is a group of fixed assets of a similar nature and used by the company for similar purposes (cabinet of ministers of the republic of latvia). the frequency of revaluation depends on the changes in the true value of fixed assets that are subject to revaluation: ■ if the true value of the revaluated fixed asset differs significantly from its net book value, it should be revaluated further; variability of accounting policies – advantages and disadvantages 17 ■ in the case of minor changes in the true value of a fixed asset, it can be revaluated once every three or every five years. what are the criteria that would help us determine whether the difference between the true value and the net book value of a revaluated fixed asset is material or immaterial? unfortunately, regulatory enactments of the republic of latvia do not provide an answer to this question. therefore, the criterion for determining the materiality of the change in the true value, with the view of further revaluation of a fixed asset, should be developed in the accounting policy of each company. the choice of revaluation method and subsequent regular revaluation should be based on the criterion of materiality, i.e. how much the true value of a fixed asset exceeds its initial book value or its assessed value shown in the previous year’s financial statement. methodologically, the criterion for the materiality of the change in fixed asset true value could be based on the proportion of the change in the fixed asset true value in the total amount of its initial book value or its net book value at the end of the previous year. the outcome of the research process and conclusions variability of accounting policy affects the key financial figures, such as total assets and the amount of profit. when a company is developing its own accounting policy, it should ensure that it meets all the principles related to the drawing and disclosure of financial statements, namely, it should adhere to the proper characteristics of financial statements as well as the main conventions thereof (ias 1 presentation of financial statements, 1975). methodologically, the choice of criteria for materiality as well as the methods of accounting for and evaluation of fixed assets should be based on the truthfulness of financial information. when creating its accounting policy, each company should justify the choice of each particular option, since it affects: ■ financial figures of the company’s operation; ■ financial status of the company; ■ decisions made by the users of financial statements. for example, the choice of an indicator of fixed asset accounting policy variability represented in this article could be based on the following indicators: julija bojarenko18 ■ the criterion for fixed asset value can be chosen according either to the average annual net book value (e.g. from 0.5 to 1%) or to gross assets (from 0.1 to 0.5%); ■ the method for depreciation may be based on the expected incoming of economic benefit because of the use of a fixed asset throughout the entire recovery period. the straight line method is more appropriate for a constant incoming economic benefit; a more intensive incoming of economic benefits during the first years of use and a less intensive one in the subsequent years suggests the application of a degressive (accelerated) method. if the incoming of economic benefits depends directly on how intensively the asset goes through wear and tear, the methods relying on the intensity of asset utilization should be applied; ■ materiality of fixed asset salvage value could be based either on its purchase value or on the production cost of the fixed asset, e.g. in an amount of 10% to 20%; ■ revaluation model for the assessment of fixed assets could be chosen according to the materiality of the change of fixed asset’s real value as compared to its initial book value or its previous year’s net book value, e.g. in an amount of 20% to 30%. a systematic and comprehensive approach to the formation and disclosure of fixed asset accounting policy will ensure the truthfulness of financial information. on the one hand, the variability in fixed asset evaluation and accounting, as in the financial statements which are produced by companies in latvia is incomparable. this may distort the results of the comparison of companies in terms of their efficiency and stability. on the other hand, a relative freedom in the choice of evaluation and accounting methods enable companies to adapt to specific market conditions, globally, nationally or in a micro environment. accounting policy is a factor, which enhances companies’ effectiveness and financial stability indicators. the author of this article considers that in the context of the legislative freedom that companies in latvia enjoy it is expedient to use the criteria of materiality in the choice of important issues in the process of formation of accounting policy. this will ensure the quality of financial information and its comparability. variability of accounting policies – advantages and disadvantages 19  references hendriksen, e. s., & breda, m. f. (2000). accounting theory (5th edition). mcgraw-hill education. ias 1 presentation of financial statements, http://www.ifrs.org/issued-standards/listof-standards/ias-1-presentation-of-financial-statements/ (accessed: 07.07.2017). kondrakov, n. p., & kondrakov, i. n. (2013). accounting in charts and tables. moscow: prospect. kondrakov, n. p. (2013). accounting: textbook. moscow: scientific publishing center infr a-m. leibus, i., petersone, i., & jesemchik, a. (2016). financial accounting. riga: business information service. ludborzhs, a. (2006). accounting for fixed assets. riga: business information service. needles, b. e., powers, m., & crosson, s. v. (2013). principles of accounting, (12th edition). cengage learning. sheremet, a. d. (2009). analysis and diagnostics of financial and economic activity of the enterprise: textbook. moscow: scientific publishing center infr a-m. the guidelines on the preparation of accountancy documents, http://www.fm.gov.lv/ lv/sadalas/gramatvedibas_un_revizijas_politika/gramatvedibas_politika/gramatvedibas_organizacijas_dokumentu_rokasgramata_mikrosabiedribam_un_mazam_ sabiedribam_ _ _/ (accessed: 28.07.2017). the law on accounting, https://likumi.lv/doc.php?id=66460 (accessed: 01.08.2017). the law on the annual financial statements and consolidated financial statements, https://likumi.lv/ta/id/277779-gada-parskatu-un-konsolideto-gada-parskatu-likums (accessed: 21.07.2017). the rules of the cabinet of ministers no 585 “regulation regarding the conduct and organisation of accounting”, https://likumi.lv/doc.php?id=80418 (accessed: 01.08.2017). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 5.12.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: janusz.kunkowski@umk.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34. janusz kunkowski* uniwersytet mikołaja kopernika w toruniu rozwój płatności zbliżeniowych w polsce i na świecie słowa kluczowe: nfc, płatności zbliżeniowe, płatności mobilne, rfid. klasyfikacja jel: j33, g19. abstrakt: celem pracy jest ocena czynników sprzyjających wprowadzaniu przez instytucje uczestniczące w obrocie bezgotówkowym płatności zbliżeniowych na rynek oraz barier rozwoju tej innowacji. w artykule przedstawiono kierunki rozwoju innowacyjnych metod płatności oraz oceniono szanse zaistnienia w świadomości klientów metod najbardziej popularnych. opisano również sposób funkcjonowania płatności zbliżeniowych oferowanych przez największe organizacje płatnicze. sukces na rynku płatności odniosą te podmioty, które będą potrafiły przekonać swoich klientów do aktywnego korzystania z technologii zbliżeniowej. the development of contactless payment market in poland and in the world keywords: contactless, mobile payment, nfc, rfid. jel classification: j33, g19. abstract: the aim of the article is to assess factors that stimulate cashless payment organizations to introduction of contactless payment onto market, as well as the barrier for the development of this innovation. the paper presents the development directions of innovative payment methods. the article describes the evolution and functioning of contactless technology offered by the major payment organizations. translated by janusz kunkowski http://dx.doi.org/10.12775/cjfa.2013.008 janusz kunkowski108  wstęp w ciągu ostatnich lat rynek płatności przeszedł gwałtowne zmiany. nie objęły one wszystkich krajów, jednak szybki rozwój nowych technologii dotknął również rynku płatności, który przez wiele lat pozostawał oporny na jakiekolwiek nowinki. płatności detaliczne są wciąż zdominowane przez gotówkę, ale znaczny wzrost wykorzystania internetu oraz liczby telefonów komórkowych stwarza zupełnie nowe podejście do usług płatniczych. wiele podmiotów uczestniczących w obsłudze gotówki dąży do redukcji kosztów działalności przez zachęcanie sprzedawców i konsumentów do stosowania instrumentów elektronicznych zamiast drogiego w zarządzaniu pieniądza gotówkowego. główną barierą we wprowadzaniu nowych, elektronicznych instrumentów płatniczych zastępujących gotówkę, zwłaszcza przy transakcjach niskokwotowych, były dotychczas koszty obsługi, znaczące w stosunku do niewielkiej wartości pojedynczej transakcji. kolejne bariery to: ograniczona akceptacja płatności niskokwotowych przez sprzedawców, długi czas trwania transakcji oraz uciążliwe dla klientów korzystanie z instrumentów elektronicznych. innowacje technologiczne wkraczające w nasze życie dają możliwość powstania nowych metod płatności, modeli rozliczeniowych oraz rozwoju metod dotychczas stosowanych. sukces danej innowacji płatniczej zależy od zrozumienia faktu, że technologia nie jest najważniejszym składnikiem w świecie płatności, istotne jest stworzenie odpowiedniego modelu biznesowego, który będzie w stanie efektywnie funkcjonować. celem pracy jest ocena czynników sprzyjających wprowadzaniu przez instytucje uczestniczące w obrocie bezgotówkowym płatności zbliżeniowych. w artykule poruszono problemy popularyzacji oraz bariery rozwoju płatności zbliżeniowych w polsce i na świecie. przedstawiono kierunki rozwoju innowacyjnych metod płatności oraz oceniono szanse zaistnienia w świadomości klientów metod najbardziej popularnych. w pracy opisano również sposób funkcjonowania płatności zbliżeniowych oferowanych przez największe organizacje płatnicze. 1. pierwsze wdrożenia kart zbliżeniowych głównym celem rozwoju płatności elektronicznych jest dążenie do zastępowania gotówki. największy problem dla obrotu bezgotówkowego stanowią transakcje o niewielkiej wartości, gdyż czas płatności kartą jest długi, a opłata   rozwój płatności zbliżeniowych w polsce i na świecie 109 interchange wysoka. możliwość ograniczenia obrotu gotówkowego dostrzeżono w zastosowaniu szybko rozwijającej się technologii rfid (radio frequency identification). technologia rfid nie jest nowa, jej początki sięgają bowiem ii wojny światowej (hancke 2008). umożliwia ona zdalny odczyt układów scalonych za pomocą fal radiowych. system składa się z tagów oraz czytnika. do komunikacji nie jest wymagany bezpośredni kontakt między tagiem a czytnikiem, dzięki czemu czas płatności jest szybki, a dodatkowo konsument nie musi podawać karty sprzedawcy, wystarczy, że zbliży ją do czytnika na odpowiednią odległość (rfid journal 2011). niezależenie od formy, jaką może przybrać nowy instrument zbliżeniowy, dostrzeżono, że jest on w stanie dostarczyć wiele korzyści zarówno sprzedawcom, jak i konsumentom. ze względu na bardzo szybki czas działania karty zbliżeniowe zaczęto stosować w komunikacji miejskiej. pierwszym dużym wdrożeniem kart zbliżeniowych było wprowadzenie w 1997 roku systemu octopus w hongkongu, obsługującego opłaty w komunikacji miejskiej. natomiast pierwszą międzynarodową organizacją płatniczą, która zdecydowała się na wdrożenie technologii zbliżeniowej, był mastercard. pilotażowy program mastercard paypass bankowych kart płatniczych wyposażonych w technologię zbliżeniową został zrealizowany w grudniu 2002 roku w stanach zjednoczonych. korzyści płynące z nowej metody zostały szybko zauważone, dzięki czemu w krótkim czasie nastąpiło rozpowszechnienie kart zbliżeniowych na głównych rynkach światowych (polasik, kunkowski 2009). rynek płatności zbliżeniowych w europie rozwija się odmiennie od rynku w usa. w europie następuje migracja z kart chipowych działających zgodnie ze standardem emv, w stanach zjednoczonych zaś – bezpośrednie przejście z technologii paska magnetycznego do technologii kart zbliżeniowych. należy tutaj podkreślić, że ewolucja elektronicznych instrumentów płatniczych nie eliminowała poprzednich; przykładowo poprzednia technologia (pasek magnetyczny) nie była usuwana z samych kart oraz z infrastruktury terminali pos, natomiast nowo wydawane karty zbliżeniowe są wyposażane jednocześnie w trzy technologie płatności – pasek magnetyczny, mikroprocesor do płatności stykowych oraz mikroprocesor do płatności zbliżeniowych. na rynku w usa karty są wyposażone tylko w dwie technologie. radiowa technologia zbliżeniowa daje możliwość odejścia od tradycyjnej formy karty i umieszczenia karty płatniczej w dowolnym niewielkim przedmiocie. karty mogą być umieszczane w alternatywnych urządzeniach, np. w breloczkach do kluczy, zegarkach, obudowie telefonu. jest to możliwe, pojanusz kunkowski110 nieważ karty zbliżeniowe nie muszą być fizycznie wkładane ani przeciągane w terminalu. w przypadku alternatywnych form karty nie jest możliwe dokonywanie transakcji w technologii stykowej. gracze rynkowi dostrzegli, że nowa atrakcyjna forma kart zbliżeniowych może stać się dodatkowym czynnikiem sprzyjającym ich popularyzacji, zwłaszcza wśród ludzi młodych, a w konsekwencji spowodować zastąpienie przez tego typu płatności pewną część obrotu gotówkowego (polasik, kunkowski 2011). płatności kartami zbliżeniowymi odnoszą największy sukces w miejscach, gdzie liczy się szybkość i konieczność obsługi dużej liczby klientów. pozwalają one na skracanie kolejek w salach koncertowych, na stadionach, w kasach biletowych, dużych centrach handlowych, barach szybkiej obsługi i innych miejscach imprez masowych, w których dominuje obrót gotówkowy, a istnieje potrzeba szybkiej realizacji transakcji. szczególnie duże możliwości zastosowania zbliżeniowych kart płatniczych, uzupełnionych o specjalne aplikacje biletowe, występują w transporcie publicznym. 2. porozumienie w sprawie standardów na rynku płatności znalazło zastosowanie kilka standardów komunikacji zbliżeniowej oraz niezależnych technologii. wiele z tych rozwiązań odgrywa jedynie lokalną rolę i jest wykorzystywanych w ograniczonym zakresie, np. tylko do komunikacji publicznej. natomiast główny nurt rozwoju systemów płatności zbliżeniowych o charakterze uniwersalnym wyznaczają największe organizacje kartowe, tj. american express, mastercard i visa, które rozpoczęły wdrażanie tej technologii na masową skalę w wydawanych przez siebie kartach. dzięki porozumieniu oraz unifikacji standardów płatności zbliżeniowych organizacje te nie musiały walczyć ze sobą i tracić ogromnych pieniędzy na promocje własnych rozwiązań. dodatkowo, decydując się na współpracę w zakresie technologii zbliżeniowej, mogły szybciej osiągnąć efekt skali i przyspieszyć rozwój tego młodego rynku. w 2005 roku mastercard international i visa international zawarły porozumienie w celu wspólnego stosowania protokołu komunikacji dla płatności zbliżeniowych opierających się na technologii rfid. porozumienie to otworzyło rynek na jeden wspólny standard dla wszystkich podmiotów uczestniczących w obsłudze płatności zbliżeniowych. wspólna specyfikacja protokołu została wcześniej przetestowana przez mastercard w ramach licznych pilotaży. protokół jest oparty na specyfikacji mastercard paypass iso/iec 14443 implementation specification. w 2007 roku mastercard przekazał paypass   rozwój płatności zbliżeniowych w polsce i na świecie 111 iso/iec 14443 implementation specification v1.1 organizacji emvco, zarządzającej standardem emv i należącej łącznie do jcb, mastercard worldwide i visa international (polasik, wisniewski, lightfoot 2012). mimo współpracy organizacje zdecydowały się na rozwój w różnych kierunkach. różnica uwidacznia się w czasie trwania transakcji oraz sposobie jej realizacji. zbliżeniowe karty visa paywave działają w trybie off line, natomiast karty mastercard paypass w trybie online. sytuacja ta sprawia, że dla transakcji powyżej limitu zbliżeniowego wynoszącego w polsce 50 pln karta z technologią mastercard paypass pozwoli nam dokonać transakcji zbliżeniowej, jednak z użyciem kodu pin. dzięki temu klient zawsze realizuje transakcję zbliżeniową bez względu na kwotę transakcji, co zwiększa jego zaufanie do technologii zbliżeniowej i usprawnia proces obsługi w sklepie. zastosowanie nietypowej formy karty zbliżeniowej, np. breloka, powoduje, że nie może ona jednocześnie być wyposażona w tradycyjny pasek magnetyczny ani stykowy mikroprocesor emv. płatność w tym przypadku odbywa się z wykorzystaniem technologii przekazywania danych paska magnetycznego lub emv contactless online. wadą pracy w trybie online jest wydłużenie czasu trwania transakcji. zgodnie z wymogami organizacji visa transakcje zbliżeniowe odbywają się w trybie off line. dzięki temu czas dokonania płatności jest krótszy niż w przypadku mastercard paypass, jednak nie ma możliwości przekroczenia limitu 50 pln. w przypadku transakcji powyżej limitu użytkownik musi dokonać płatności stykowej z użyciem kodu pin. praca w trybie off line uniemożliwia również wykorzystanie technologii zbliżeniowej w postaci różnego rodzaju gadżetów. przedstawiciele visa tłumaczą zastosowanie technologii zbliżeniowej w trybie off line chęcią osiągnięcia maksymalnego czasu transakcji oraz bezpieczeństwa (polasik, kunkowski 2011). konsumenci decydują się na korzystanie z tego instrumentu płatniczego, który jest wygodny i szybki, dlatego tak chętnie wybierają gotówkę. z badania przeprowadzonego na rynku polskim (polasik, górka i in. 2012) wynika, że tradycyjne karty płatnicze wyposażone w pasek magnetyczny lub mikroprocesor emv są wolniejsze od gotówki, średnia różnica czasu między kartami i gotówką wyniosła około 20 sekund. akceptanci muszą ponosić dodatkowe koszty obsługi kart płatniczych, natomiast kolejka w sklepie, w związku z dłuższym czasem obsługi płatności, wydłuża się. sugeruje to, że zarówno z punku widzenia akceptantów, jak i konsumentów korzystanie z kart jest nieefektywne kosztowo, jednak płatności zbliżeniowe dzięki innowacyjnej technologii znacząco redukują czas dokonania płatności. po raz pierwszy w historii instrument elekjanusz kunkowski112 troniczny jest na tyle efektywny, wygodny i szybki, że jest w stanie skutecznie rywalizować z gotówką. 3. zastosowanie technologii nfc w płatnościach mobilnych płatności mobilne są uważane za najbardziej rewolucyjne oraz przyszłościowe płatności detaliczne, jednak przez wiele lat ich stosowanie było na tyle uciążliwe i niewygodne, że nie były w stanie zdobyć zbyt dużej liczby odbiorców. zbliżeniowe płatności mobilne należą do najczęściej dyskutowanych rewolucji płatniczych. naturalnym rozwojem płatności zbliżeniowych staje się przejście z płatności kartami zbliżeniowymi do płatności za pomocą telefonu komórkowego z wykorzystaniem tej samej infrastruktury akceptacji. rozwój technologii bliskiego zasięgu nfc (near field communication) sprawia, że płatność telefonem komórkowym staje się niezwykle łatwa i wygodna. w tej technologii tradycyjna forma karty płatniczej staje się niepotrzebna, a jednocześnie otwierają się szerokie możliwości integracji systemu płatności z innymi usługami i funkcjonalnościami dostępnymi w telefonie komórkowym. firmy tworzące infrastrukturę do płatności zbliżeniowych dążą do osiągnięcia efektu synergii, który występuje między kartami zbliżeniowymi i płatnościami mobilnymi nfc. ich celem jest wykorzystanie tej samej infrastruktury terminali płatniczych. w związku z tym większość instytucji przyjęła dwuetapową strategię rozwoju technologii zbliżeniowej. w pierwszym etapie zazwyczaj wdrażane są karty zbliżeniowe, a w drugim planowane są systemy płatności mobilnej oparte na technologii nfc. początkowy rozwój płatności mobilnych z wykorzystaniem technologii nfc nie mógł przebiegać zbyt szybko ze względu na małą liczbę telefonów komórkowych z funkcją nfc, która jednak w ostatnim czasie bardzo wzrosła. 4. rynek płatności zbliżeniowych na świecie w 2011 roku liczba wszystkich kart płatniczych w unii europejskiej wyniosła 727 mln (podobnie jak w 2010 roku) i nieznacznie wzrosła w porównaniu do 2009 roku (725,2 mln kart płatniczych). stanowiło to około 1,44 karty płatniczej przypadającej na mieszkańca ue. liczba transakcji kartami płatniczymi wzrosła o 8,7% do 37,2 mld, natomiast wartość obrotów wyniosła 1,9 biliona euro. pozwala to oszacować średnią wartość pojedynczej transakcji na 52 euro (europejski bank centralny 2012).   rozwój płatności zbliżeniowych w polsce i na świecie 113 w tabeli 1 przedstawiono dane dotyczące liczby zbliżeniowych kart płatniczych na świecie. karty organizacji american express, mastercard oraz visa funkcjonują w oparciu o ten sam standard i w większości krajów są ze sobą kompatybilne. nieco inaczej wygląda sytuacja w przypadku kart zbliżeniowych działających w technologii felica (felicity card). technologia ta jest wykorzystywana głównie w krajach azjatyckich, została stworzona przez firmę sony. po raz pierwszy zastosowano ją w 1997 roku w kartach octopus w hongkongu. felica jest wykorzystywana przede wszystkim w transporcie publicznym i w systemach płatności, niestety w większości systemy stosujące technologię felica nie są ze sobą kompatybilne (crotch-harvey 2010). tabela 1. zbliżeniowe karty płatnicze na świecie (dane w milionach, stan na koniec 2009 roku) kraj american express mastercard visa felica razem usa 10 63 17 – 90 wielka brytania – 2,5 7 – 9,5 japonia – – – 100 100 korea południowa – 0,3 0,5 – 0,8 tajwan – 3 1,4 – 4,4 malezja – 0,1 0,5 – 0,6 turcja – 0,8 – – 0,8 polska – 0,2 0,12 – 0,32 hongkong – – – 20 20 razem 10 69,9 26,5 120 226,4 ź r ó d ł o : opracowanie własne na podstawie crotch-harvey 2010. pod względem liczby wyemitowanych zbliżeniowych kart płatniczych światowym liderem jest japonia, w której znajduje się około 100 mln kart zbliżeniowych działających w technologii felica. tuż za japonią znalazły się stany zjednoczone, gdzie zdecydowana większość kart funkcjonuje w standardzie iso 14443 a/b. warto zwrócić uwagę, że większość kart zbliżeniowych mastercard paypass została wydana na rynku amerykańskim. w europie pierwsze janusz kunkowski114 karty mastercard paypass pojawiły się dopiero w połowie 2006 roku w wielkiej brytanii – zostały wydane przez royal bank of scotland. należy podkreślić, że rynek płatności zbliżeniowych zmienia się bardzo dynamicznie, a doniesienia organizacji kartowych o rozpoczęciu współpracy z nowymi wydawcami kart sprawiają, iż liczba kart zbliżeniowych na świecie rośnie z roku na rok w bardzo szybkim tempie. tabela 2. liczba zbliżeniowych terminali płatniczych na świecie (dane w tysiącach, stan na koniec 2009 roku) kraj american express, mastercard, visa felica usa 500 – wielka brytania 20 – turcja 12 – japonia – 405 korea południowa 5 – tajwan 11 – malezja 6 – singapur 1,1 – francja 1 – austria 2,5 – polska 10 – hongkong – 20 razem 568,6 425 ź r ó d ł o : opracowanie własne na podstawie crotch-harvey 2010. jeżeli chodzi o zasięg akceptacji, czyli liczbę zbliżeniowych terminali płatniczych w punktach handlowych, to niewątpliwymi liderami są stany zjednoczone i japonia. co ciekawe, rynek amerykański stanowi niejako jedną całość i karty trzech głównych organizacji są akceptowane we wszystkich terminalach. natomiast na rynku japońskim działa kilka niekompatybilnych systemów płatności zbliżeniowych. powoduje to, że realny zasięg płatności jest tam niższy, niż wynikałoby to z ogólnej liczby terminali. w pozostałych krajach świata sieć akceptacji kart zbliżeniowych jest wciąż niewielka, jednak należy pamiętać, że organizacjom płatniczym zależy na szybkim rozwoju sieci akceptacji. je  rozwój płatności zbliżeniowych w polsce i na świecie 115 śli infrastruktura terminali zbliżeniowych będzie dobrze rozwinięta, wówczas rynek stanie się bardzo interesujący dla rozwoju płatności mobilnych w technologii nfc. 5. płatności mobilne w polsce pierwszej w polsce transakcji zbliżeniowej visa paywave telefonem komórkowym dokonano w czerwcu 2009 roku. była to płatność zrealizowana telefonem z zainstalowaną na karcie aplikacją visa paywave, który normalnie był wykorzystywany w londynie (visa 2010). w kwietniu 2010 roku organizacja visa, bank zachodni wbk oraz operator telefonii komórkowej plus rozpoczęły pilotażowe wdrożenie płatności mobilnych z zastosowaniem technologii nfc. aplikacja płatnicza visa paywave została umieszczona bezpośrednio na karcie sim abonentów sieci plus, którzy za pomocą telefonu samsung avila wyposażonego w technologię nfc mogli dokonywać płatności zbliżeniowych w punktach, gdzie są akceptowane karty visa paywave. w początkowym etapie wdrożenia wzięło udział 500 wybranych klientów banku zachodniego wbk korzystających z sieci plus i używających kart zbliżeniowych visa paywave wydanych przez bz wbk. co ciekawe, we wspólnym wdrożeniu płatności zbliżeniowych zostało wykorzystane rozwiązanie ota (over the air), czyli zarządzanie kartą sim na odległość, które pozwala na zdalną zmianę parametrów aplikacji płatniczej visa paywave na karcie sim. oznacza to dość sporą wygodę dla klienta, gdyż nie musi on stawiać się w oddziale banku lub w salonie operatora sieci komórkowej w celu uruchomienia aplikacji płatniczej (visa 2010). w maju 2010 roku polska telefonia cyfrowa (ptc) przy współpracy z inteligo, pko bp i mastercard rozpoczęła pilotaż płatności zbliżeniowych nfc. program trwał 4 miesiące i objął 100 uczestników, którzy otrzymali telefony samsung avila gt s5230n wyposażony w technologię nfc. na potrzeby testu firma giesecke & devrient przygotowała specjalne karty sim, działające w zgodności z technologią nfc, przystosowane do współpracy ze wszystkim terminalami mastercard paypass. dzięki temu osoby biorące udział w pilotażu mogły dokonywać transakcji zbliżeniowych wszędzie tam, gdzie były obsługiwane karty paypass. podobnie jak przy kartach zbliżeniowych paypass, transakcje do 50 pln były obsługiwane bez wprowadzania kodu pin, natomiast większe transakcje wymagały podania kodu pin (inteligo 2010). janusz kunkowski116 od 2010 roku technologia nfc była pilotażowo wdrażana przez wiele banków i instytucji finansowych w powiązaniu z operatorami telefonii komórkowych, jednak jak dotychczas trudno mówić o powszechnym użytkowaniu nfc. na przestrzeni ostatnich kilku lat najwięksi światowi producenci telefonów komórkowych zaczęli wyposażać swoje najpopularniejsze modele w moduł nfc. dzięki rosnącej liczbie telefonów komórkowych popularyzacja płatności mobilnych staje się coraz bardziej możliwa. w listopadzie 2012 roku ruszyła usługa komercyjna o nazwie orange cash, w którą zaangażowały się operator telefonii komórkowej orange, organizacja mastercard oraz mbank. usługa jest skierowana do klientów sieci orange, którzy posiadają telefon z modułem nfc. stanowi ona połączenie karty sim orange oraz karty przedpłaconej mbanku, dzięki której można płacić zbliżeniowo za pomocą telefonu komórkowego. klient korzystający z tej usługi może dokonywać płatności zbliżeniowych w terminalach płatniczych paypass oraz płatności zdalnych mastercard mobile, istnieje również możliwość wykorzystania karty mbank mastercard orange cash do płatności w internecie. klient otrzymuje kartę sim mbank mastercard orange cash wraz z numerem rachunku. usługa orange cash działa podobnie jak karta przedpłacona, czyli jest anonimowa, a w celu skorzystania z karty użytkownik musi ją wcześniej zasilić (orange 2012). warto podkreślić, że korzystanie z telefonu komórkowego daje nam znacznie więcej możliwości oraz większe poczucie bezpieczeństwa niż w przypadku korzystania z karty zbliżeniowej. pozwala użytkownikowi na zdefiniowanie różnych trybów działania aplikacji. płatność zbliżeniowa za pomocą karty visa paywave może odbyć się tylko do kwoty 50 pln, powyżej tej kwoty transakcje są dokonywane w sposób standardowy. natomiast przy płatności za pomocą telefonu komórkowego z systemem visa paywave użytkownik ma możliwość przekroczenia limitu 50 pln, wówczas transakcja zbliżeniowa musi być potwierdzona kodem pin, który jest wpisywany za pomocą klawiatury telefonu komórkowego.  zakończenie na rynku płatności zbliżeniowych obserwujemy gwałtownie zachodzące zmiany. wydaje się, że głównym czynnikiem, który ukształtuje przyszły rozwój rynku płatności zbliżeniowych, jest efekt synergii, występujący między kartami zbliżeniowymi i płatnościami mobilnymi nfc. wynika on z możliwości   rozwój płatności zbliżeniowych w polsce i na świecie 117 wykorzystania tej samej infrastruktury terminali płatniczych, gdyż obie technologie są do siebie bardzo podobne. wczesne zaangażowanie wydawców i agentów rozliczeniowych w rozwój infrastruktury oraz technologii zbliżeniowej pozwala na zajęcie silnej pozycji tych podmiotów na rynku kart zbliżeniowych i płatności mobilnych. wydaje się, że rozwój płatności mobilnych nie będzie oznaczać wycofania z rynku kart zbliżeniowych. przyzwyczajenia klientów i powszechność akceptacji stykowych technologii płatniczych sprawiają, że karty zbliżeniowe będą bardzo długo funkcjonowały na rynku równolegle z technologią nfc. w związku z tym należy sądzić, że sukces odniosą te podmioty, które będą potrafiły przekonać swoich klientów do aktywnego korzystania z technologii zbliżeniowej. w polsce obserwujemy niezwykle dynamiczny rozwój rynku płatności zbliżeniowych. jest to niewątpliwie zasługa nowej jakości, którą wnoszą one na rynek, ponadto pozwalają odnieść korzyści wszystkim uczestnikom rynku. szybki czas realizacji transakcji, wysoka wydajność oraz chęć korzystania przez nowe grupy społeczne sprawiają, że dynamicznie rośnie sieć akceptacji i wydawców. barierą rozwoju rynku płatności elektronicznych może być silne przekonanie akceptantów, że gotówka jest najtańszą i najszybszą metodą płatności. dopóki banki i organizacje płatnicze nie zmienią wysokości i struktury opłat, sprzedawcy będą odmawiać akceptacji elektronicznych instrumentów płatniczych w transakcjach o niskiej wartości. dlatego sukces polskiego systemu płatności zależy w dużej mierze od stworzenia skutecznego modelu rozliczeniowego do obsługi mikropłatności, który zmierzałby do redukcji opłaty interchange. należy również zauważyć, że rynek płatności mobilnych jest na tyle interesujący, iż podmioty, które wcześniej nie uczestniczyły w obsłudze płatności, zaczynają się w nim pojawiać. światowi giganci z różnych branż chcą brać udział w budowie tego nowego, perspektywicznego rynku. takie firmy, jak apple, nokia czy samsung, wyposażają swoje telefony w moduły nfc, natomiast google przy współpracy z citigroup i visa rozwija usługę google wallet, która pozwala płacić telefonem komórkowym z systemem operacyjnym android. rynek płatności mobilnych może być następną wielką falą w biznesie technologicznym.  literatura crotch-harvey t. (2010), contactless cards and terminals by country and scheme as at end 2009, fenbrook consulting, raport. europejski bank centralny (2012), press and information division, http://www.ecb.int/ press/pr/date/2012/html/pr120910.en.html (dostęp: 13.11.2012). janusz kunkowski118 hancke g. (2008), rfid and contactless technology, [w:] smart cards, tokens, and security applications, k. e. mayes, k. markantonakis (red.), springer, new york, http:// dx.doi.org/10.1007/978-0-387-72198-9_13. inteligo (2010), era, inteligo i mastercard: pierwsza w polsce komórka, którą zapłacisz, http://inteligo.pl/aktualnosci/era-inteligo-i-mastercard-pierwsza-w-polscekomorka-ktora-zaplacisz (dostęp: 10.11.2012). orange (2012), orange cash, http://www.orange.pl/kid,4000377334,id,4002836765,title,orange-cash,article.html (dostęp: 18.11.2012). polasik m., górka j., wilczewski g., kunkowski j., przenajkowska k., tetkowska n. (2012), chronometric analysis of a payment process for cash, cards and mobile devices, proceedings of the 14th international conference on enterprise information systems, vol. 2, scitepress, wrocław. polasik m., kunkowski j. (2009), zastosowania technologii rfid w systemach płatności, [w:] e-gospodarka – e-społeczeństwo w europie środkowej i wschodniej, t. 2, s. partycki (red.), wydawnictwo kul, lublin 2009. polasik m., kunkowski j. (2011), application of contactless technology in the payment cards market, prace naukowe uniwersytetu ekonomicznego we wrocławiu, nr 205, [w:] advanced information technologies for management – aitm’2011, j. korczak, h. dudycz, m. dyczkowski (red.), wrocław 2011. polasik m., wisniewski t. p., lightfoot t. p. (2012), modeling customers’ intentions to use contactless cards, international journal of banking, accounting and finance, vol. 4, no. 3. rfid journal (2011), the history of rfid technology, http://www.rfidjournal.com (dostęp: 2.11.2012). visa (2010), visa mobile: pierwsze w polsce wdrożenie mobilnych płatności zbliżeniowych, http://www.visa.pl/visa_w_polsce/aktualnosci/aktualnosci/articles/2010/visa_ mobile_pierwsze_w_polsce.aspx (dostęp: 30.10.2012). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 2 date of submission: may 14, 2018; date of acceptance: june 5, 2018. * contact information: amw@doktorant.umk.pl, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagrina 13a, 87-100 toruń, poland, phone: 693 411 309; orcid id: https://orcid.org/0000-0002-0512-4550. wiśniewska, a. (2018). the initial coin offering – challenges and opportunities. copernican journal of finance & accounting, 7(2), 99–110. http://dx.doi.org/10.12775/cjfa.2018.011 anna wiśniewska* nicolaus copernicus university in toruń the initial coin offering – challenges and opportunities keywords: cryptocurrencies, tokens, initial coin offering, corporate finance. j e l classification: g15, g19, g30. abstract: the research objective of the article: the aim of the paper is to present the challenges and opportunities of initial coin offering (ico) procedure (sometimes appearing in literature and official documents as the initial token offering (ito)) from the point of view of a company as well as verify the hypothesis about ico as a cheap form of capital rising that is often presented in websites dedicated to ico. there are enumerated the differences and similarities to the initial public offering and possible advantages over other methods of capital rising. the paper points out the most important barriers to the use of ico. the research method applied: as there is shortage of available research papers and literature related to the topic that are focused on financial aspects such as comparison between ico and other methods of capital rising, there was conducted the analysis of reliable internet sources and a case study method of ethereum – the first company that applied the initial coin offering procedure. the mentioned research method has its limits, as it is necessary to verify received information. that is the reason why only professional websites dedicated to the topic were used. the outcome of the research (considerations, analyses), main conclusion(s): the initial coin offering procedure is recognised as a very controversial topic. it is clearly visible that ico has many advantages over traditional forms of rising capital for the company, but, so far, ambiguous legal status, cost level and high risk of scams and other possible abuses make it difficult to become widely applied by newly created companies. anna wiśniewska100  introduction the cryptocurrency market has been developing rapidly since its beginning in 2009, when satoshi nakamoto launched the bitcoin system, previously described in the paper named: “bitcoin: a peer-to-peer electronic cash system” that was published online in 2008 and since then, has been sometimes called “the manifesto” by the bitcoin community. although cryptocurrencies were primarily expected to become a form of money, and further to be an official currency of the internet, the initial coin offering popularity in 2017 seems to deny that view. the lack of fulfilling money functions, such as being an unit of account, a medium of exchange, a store of value and a standard of deferred payment, as well as the predominant role of speculative motive of keeping money and, above all, not being widely accepted as a form of payment, are the key arguments that do not allow to consider cryptocurrencies to be money in general. however, some of them, like bitcoin or litecoin, are sometimes used as a form of payment. entrepreneurs, per definition, could be characterized as innovators. it is not surprising that some of them noticed possible applications of cryptocurrencies and the blockchain technology. the initial coin offering is one of that applications. it allows companies, mostly start-ups, to finance their projects. the procedure can be defined as the method of raising capital by an organisation or individual by the emission of cryptocurrency or token (esma, 2017, p. 2). the aim of the paper is to present the initial coin offering (ico) procedure as well as its challenges and opportunities from the point of view of a company and also governmental authorities. the research methodology and the course of the research process to reach the aim of the study there was applied the analysis of existing literature and research papers connected with cryptocurrency market. most of research papers related to the topic are concentrated to legal aspects of ico. because of a shortage of that kind of sources about the initial coin offering that focus on financial aspects, there were used information published by reliable websites that specialize in ico and cryptocurrencies. the method that was used has its limits among which the most important one is the necessity to verify information and a fact that it can have a subjective character, as websites the initial coin offering – challenges and opportunities 101 are conducted by cryptocurrencies’ proponents. that is the reason why official statements published by the national bank of poland and european securities and markets authority were also included in the research process. to complement the desk research method the single case study of the ethereum project was employed. ethereum was the first organization that applied the initial coin offering procedure to raise capital. its experiences within successful ico procedure help to understand the challenges that companies which want to apply the procedure must face. main difficulties connected with using the case study method are those related to making generalisation and verifying information from the official website. the outcome of the research process the idea of the official currency of the internet is almost as old as the internet itself, but the decline of trust in banking system after the subprime crisis is the main reason for the rapid emergence of alternative currency market (chrabonszczewska, 2014, p. 51). popularity of bitcoin among internet users as well as the development of the initial coin offering indicated the necessity of classification and defining bitcoin and similar digital assets functioning on the internet. successful, open-source bitcoin encourages people with certain it skills to create their own currencies and tokens that may be used to finance illegal activities and launder money because their users can remain largely anonymous (christopher, 2014, p. 10). that is the reason why organizations such as the financial action task force (fatf) and the european central bank (ecb) attempted to define virtual currencies for legislation purposes. their classification is very similar. the ecb in its report “virtual currency schemes” suggested that virtual currency is a response to virtual community needs for its own “money”, or rather a currency that may have similar functions, allowing the members to exchange goods and services easily (european central bank, 2012, p. 5). the fatf defines virtual currency as “a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/ or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction.” (fatf, 2014, p. 4). virtual currency and e-money (which is a digital version of a fiat currency) are digital currencies (fatf, 2014, p. 4). however, some academics claim that the term “virtual currency” should be replaced by “digital currency” because the word “virtual” has a negative connotation (lee, 2015, p. 6). among open virtual currencies (which will be anna wiśniewska102 defined in the next paragraph) there are some “math-based, decentralized and protected by cryptography” that are called cryptocurrencies (fatf, 2014, p. 5). virtual currency schemes can be closed or have either bidirectional or unidirectional f low. closed virtual currency schemes imply that such currencies can be earned by conducting some activities within a community or a game and be spent only on these goods and services that are offered in the game (the community). it implicates that this kind of virtual currencies “has almost no link to the real economy” (european central bank, 2012, p. 13). the fatf distinguishes open and closed virtual currency schemes (fatf, 2014, p. 4). the open one has almost the same definition as the ecb’s virtual currency scheme with bidirectional f low, which states that a virtual currency is convertible in both ways, unlike the unidirectional f low in which the fiat money can be converted into a virtual currency, but the virtual currency cannot be converted back into the fiat money (european central bank, 2012, pp. 13–15). some academics claim that definitions provided by the fatf and the ecb are incomplete because of the dynamic development of the cryptocurrency market. they highlight two main features of virtual currencies: digital form and no governmental control (bala, kopyściański & srokosz, 2016, pp. 52–53). in addition to being uncontrolled by monetary authorities it can be said that virtual currencies are not backed by any asset (franco, 2015, p. 3), so they have value only because their users agree that they have value (ali, barrdear, clews & southgate, 2014, p. 278) and are created by individuals and organizations, but not central banks (white, 2015, p. 383). the concern over a possible risk of the rising popularity of virtual currencies forced central banks to send a warning to citizens and companies. the national bank of poland in its official statement informs that virtual currencies are not money, currency or e-money, as they are not widely accepted as a form of payment (nbp, 2017). despite such warnings and speculations on cryptocurrencies, some researchers consider virtual currencies as money existing online (pacy, 2014, p. 122; sauer, 2016, p. 118) or even a form of e-money (ryfa, 2014, p. 141). the author of the idea, satoshi nakamoto, created the bitcoin network for transferring electronic cash (nakamoto, 2008, p. 1). bitcoin operates as a medium of exchange in traditional shops and e-commerce, but yet, the medium of exchange is not money, although, as some academics claim, it may become one (davidson & block, 2015, p. 312). bitcoin and other virtual currencies are sometimes considered to be alternative money systems (sobiecki, 2016, p. 151), which seems to correspond with satoshi nakamoto’s idea. being a response to ineffective and costly traditional the initial coin offering – challenges and opportunities 103 transfer systems, bitcoin seemed to be a great solution for those who wanted to transfer their money freely. unfortunately, the bitcoin system has its limits and because of them on the 1st august 2017 some of the unhappy users decided to start a hard fork. since then bitcoin has been divided into bitcoin and bitcoin cash (kwiatek, 2017). the initial coin offering as a form of capital rising the classification mentioned above may seem insufficient. further analysis conducted by the european central bank and published in 2015 demonstrates that apart from using word “currency” in the term “virtual currency” those assets cannot be considered nor money, nor currency in terms of economic science and law, but only a digital representation of value that is not issued by any central bank or any financial institution, but, over some conditions, can be used as an alternative form of payment (european central bank, 2015, p. 4). this definition seems to correspond more strictly with cryptocurrencies and tokens issued within the ico procedure. the similarity between the term the initial coin offering and the initial public offering is not accidental. both methods are following the scheme of issuing some asset that can be treated as an investment, selling it and raising capital from the investors that have decided to purchase it. however, the differences are clearly visible. first of all, ipo is regulated in details by the law whereas ico remains, so far, unregulated or regulated in an insufficient way. while ipo involves stocks or bonds, an issued token or cryptocurrency may have some features of stocks, bonds, vouchers or have no additional attributes at all (bazan, 2018). it means, that their character can be purely speculative. that implicates another significant difference between ipo and ico that are areas and the level of risk. within icos, as some researchers claim, over 80% are a form of fraud. so called “scam” is a situation in which the capital is raised without an intention to accomplish the announced project (dowlat, 2018). investors and companies that decided to finance their activity by the ico procedure must also deal with a legal risk, as starting ico procedure may cause the need for individual law interpretations. further differences between ico and ipo are presented in table 1. anna wiśniewska104 table 1. the main differences between the initial public offering and the initial coin offering ipo ico legal status detailed regulation no regulation or insufficient one securities type stocks and bonds tokens that may have features of particular types of securities or being vouchers or having no additional attributes at all risk level moderate high (for the company and investors) accessibility for large enterprises for investors may be used by almost any company anyone who have internet access can become an investor costs high moderate or low s o u r c e : own study. the icos tokens can be divided into few groups (www1): ■ currency tokens that can be used as a form of payment (called sometimes “coins”), ■ utility tokens that allow holders to access products or services within a particular platform or network, ■ securities tokens which work as utility tokens, but additionally promise some investments returns (can be similar to bonds), ■ asset tokens that are a digital representation of an asset, ■ equity tokens that work like stocks and give their holders an ownership share in the issuer's capital, ■ reward tokens that function like loyalty points, ■ dividend tokens that allow the holder to receive a dividend on any company’s token, but without being an owner of the company. taking into consideration the fact that so many types of icos tokens appeared on the market so far, it is possible to claim that without the proper regulation there is a possibility of further evolution of their features. tokens can represent almost anything that may have value for investors, legal as well as illegal ones. after the explanation of tokens and virtual currencies it is important to introduce the ico financing model. the first three steps can be followed simultaneously or in sequence. a company may use the services offered by enterpris the initial coin offering – challenges and opportunities 105 es that specialize in the initial coin offering or adopt the procedure itself. the model includes the following stages (bazan, 2018; momoh, 2016): ■ whitepaper publication. a whitepaper should contain detailed information about the project to be carried out and the issue of tokens (amount of tokens, form of payment, additional features, time framework etc.), ■ token or cryptocurrency creation. it can be developed by using existing platforms, dedicated to such activities or by a company itself, ■ ico promotion. the most important and challenging part. it is clear that a well-promoted token can encourage more people to invest than a badly-promoted one. it should be emphasised that some of the social networks have forbidden ico advertising, or are about to do it, in order to protect users from scams, ■ introduction of tokens for sale on a virtual currency exchange, ■ project implementation and providing additional services to the investors. the case study of ethereum project to present how the initial coin offering may help to rise funds needed to set up a start-up it was decided to introduce the case study of the first company that used that method – ethereum. the author of the project is vitalik buterin, who after working as a member of the bitcoin community and being fascinated by the blockchain technology decided to found ethereum. the ethereum white paper was published in 2013 and contains the technical details of the platform. in 2014 gavin wood, who became a co-founder of the project, published the yellow paper that includes technical specification for the ethereum virtual machine (www2). the idea of ethereum project is to “allow anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules of ownership, transaction formats and state transition functions” (buterin, 2013, p. 13). currently, the platform allows its users, among others, to create their own cryptocurrency or token that can be used within the initial coin offering procedure. it can be said that ethereum made its idea to raise capital one of their products. to make the implementation of the project possible, ethereum creators decided to launch a presale of the token called ether. an ether served as a form of payment for the ethereum virtual machine’s work. the more simple and effective code is, the smaller amount of ether is needed. it is rightful to claim that anna wiśniewska106 the ether was a utility token. the official announcement was published on the ethereum blog on 22nd of july 2014. the following rules about the presale were set (buterin, 2014): ■ there is no possibility for using or transferring the ether until the launch of the genesis block that is planned to happen in winter 2014–2015, ■ the sale starts on 22nd of july 2014 and will last 42 days, till 2nd of september 2014, ■ the start price for an ether is set of 2000 eth for 1 btc, but after 14 days the price changes to the level of 1337 eth for 1 btc, ■ there is no guarantee of the value of ether as it is not a security but a product, ■ purchase is available through the official ethereum website or by using a python tool. the ethereum project’s ico procedure was successful but the company had to face many legal challenges in switzerland and the united states to start the presale. the organisation received 31,591 btc (around $18,439,086) in exchange for about 60,102,216 ether that stated 83.47% of the offered supply (www2; www3). however, ethereum needed to pay the debt resulting from the necessity to hire legal advisors, which suggests that the cost of the ico procedure can be in some cases significant. it makes the opinion that ico is a cheap form of a capital rising not completely true. legal costs are the main barrier to the use of ico. ethereum decided to sell their tokens in exchange for bitcoins. however, it is possible for a company to receive traditional currency. that model of financing within ico is less risky for an organisation, because of the level of volatility of an exchange rate. on the other hand, the use of cryptocurrencies allows investors to remain almost anonymously and may bring a company additional profits connected with the changes in cryptocurrencies’ prices. disadvantages and advantages of using ico procedure the conducted analysis and the case study allows to enumerate the disadvantages and advantages of the application of the initial coin offering procedure to raise capital. as it was presented in the case study the most challenging part of launching ico is taking a legal advice as, depending on the country, the ico can be banned, regulated or partly regulated by law. however, popularity of ico generated an increased interest in regulation of the process, so there is the initial coin offering – challenges and opportunities 107 a possibility that soon it will be easier for the organisations to follow the rules. another disadvantage is the risk resulting from an insufficient demand for offered tokens. it can stem mainly from distrust, poor promotion or uninteresting project. as it is visible in the case study, even successful ethereum could not sell all of the issued tokens. application of ico requires certain it skills that can also be a challenge for the company’s authorities. there is a possibility for using specially designed ico platforms that facilitate launching a token, such as the above-mentioned ethereum platform. however, some it knowledge is still needed. launching a sale on a cryptocurrency exchange can be burdened with a risk of a fraud. that is why the careful choice of it is a must. despite the importance of foregoing challenges, the ico procedure can bring some opportunities to the company. first of all, a successful ico allows to raise funds needed to accomplish the project. it might be a chance for these companies that cannot use the traditional methods of fundraising, such as loans or ipo. in some parts ico is similar to crowdfunding. almost anyone who has an internet access can become an investor. ico empowers the organisation to reach investors that live all around the world and that is the main advantage it has over traditional finance methods. the organisation that launched an ico procedure can gain image benefits, as it can be perceived as innovative. the status of the level of costs remains unclear. the necessity to engage legal advisors may be costly, however, it depends on the level of ico regulation in the particular country. ico can be much cheaper than ipo, but more expensive and demanding than a loan. however, if an organisation decides to follow an ico procedure by itself, it can reduce the costs of it significantly.  conclusions ico has been present in economy since 2014 but in 2017 it became popular among organisations with bad and good will. that is the reason for the authorities to undertake actions which will help honest companies to use ico and protect potential investors from frauds and scams. the ico will not become widely used in an economy until proper regulations are introduced. the case study of the ethereum project pointed out the most important problems for a company interested in launching ico. depending on the level of legal regulation in the particular country and the company’s will to obey the law, the cost of ico may differ significantly. anna wiśniewska108 the initial coin offering is challenging for the company not only because of technical and legal reasons, but also because of its controversial character. it has many advantages over traditional forms of capital raising, like the level of accessibility, but the unclear legal status makes it difficult for start-ups to use the procedure. however, it should be noticed that for the company which offers products and services connected with blockchain technology, the use of the initial coin offering is a reasonable choice that allows to get publicity among people interested in cryptocurrency and blockchain and further, to reach potential partners and clients. the differentiation of tokens and their similarity to well-known securities implies that the entrepreneurs noticed the necessity to provide additional features to attract potential investors. that suggests that investors are looking for a token that has some value by itself and is more than a purely speculative good. it is what distinguishes ico market from cryptocurrency market.  references ali, r., barrdear, j., clews, r., & southgate, j. 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(2015). the market for cryptocurrencies. cato j., 35, 383–402. http://dx.doi. org/10.2139/ssrn.2538290. (www1) dividend tokens, explained, http://cointelegraph.com/explained/dividendtokens-explained (accessed 17.04.2018). anna wiśniewska110 (www2) history of ethereum — ethereum homestead 0.1 documentation, http://www. ethdocs.org/en/latest/introduction/history-of-ethereum.html (accessed 13.05.2018). (www3) overview: ethereum’s initial public sale, http://keepingstock.net/overviewethereum-s-initial-public-sale-563c05e95501 (accessed 13.05.2018). for authors the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conflict of interest; a conflict of interest is defined here as any direct personal relationship holding 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zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 608 335 541. michał polasik* uniwersytet mikołaja kopernika w toruniu wykorzystanie elektronicznych kanałów dystrybucji usług bankowych w polsce słowa kluczowe: bankowość elektroniczna, bankowość mobilna, internet. klasyfikacja jel: g21. abstrakt: celem pracy jest przedstawienie polskiego rynku bankowości detalicznej pod względem wykorzystania poszczególnych zdalnych elektronicznych kanałów dystrybucji oraz określenie perspektyw ich rozwoju. przeprowadzono analizę na podstawie danych statystycznych, a także dokonano oceny potencjału zastosowania wybranych innowacji i rozwiązań technologicznych. bankowość internetowa jest od kilku lat dominującym elektronicznym kanałem dystrybucji usług bankowych, a jej pozycja nadal systematycznie wzrasta. rozwiązania oparte na systemach home/pc banking są stopniowo wypierane z rynku polskiego. perspektywicznym i dynamicznie rozwijającym się kanałem jest bankowość mobilna, z której może już skorzystać zdecydowana większość posiadaczy kont bankowych w polsce. ważnym wyzwaniem dla banków jest skłonienie klientów do wykorzystania bankowości mobilnej nie tylko do celów informacyjnych, ale także do realizacji transakcji płatniczych i zakupu usług. the use of electronic distribution channels of banking services in poland keywords: electronic banking, internet, mobile banking. jel classification: g21. abstract:the aim of this article is to present the polish retail banking market in terms of the use of particular remote electronic distribution channels and to determine the prospects for their development. the analysis of statistical data was carried out as well http://dx.doi.org/10.12775/cjfa.2013.010 michał polasik140 as assessment of the potential of use for selected innovations and technological solutions. internet banking is a dominant distribution channel for electronic banking services for few years now and its position is still steadily increasing. solutions based on home/pc banking systems are being systematically driven out of the polish market. dynamically develops the channel of mobile banking, which already is available for the vast majority of bank account owners in poland. an important challenge for banks is to encourage customers to use mobile banking not only for information but also for the payment transactions and purchase of services. translated by ewa starogarska  wstęp ze względu na niematerialny charakter większości usług bankowych zastosowanie elektronicznych kanałów komunikacji do ich dystrybucji przynosi bardzo znaczące korzyści, zarówno bankom, jak i ich klientom. wykorzystanie tych kanałów do obsługi klientów wzrastało stopniowo od lat 60. xx wieku, jednak dopiero od połowy lat 90. xx wieku, głównie dzięki zastosowaniu internetu, nastąpiło wyraźne przyspieszenie rozwoju bankowości elektronicznej i przeniesienie obsługi większości standardowych operacji do kanałów zdalnych. rezultatem tego procesu była redukcja przeciętnego kosztu transakcji i radykalne skrócenie czasu realizacji wielu operacji, a także wzrost liczby transakcji dokonywanych przez klientów. kanały elektroniczne pozwoliły również na przezwyciężanie wielu przestrzennych, czasowych i organizacyjnych ograniczeń w działalności bankowej. obecnie rozwój społeczeństwa informacyjnego i jego szeroko rozumianej infrastruktury, jak też zmiana zachowań i oczekiwań klientów coraz bardziej aktywnych w internecie przyczyniają się do głębokich zmian w otoczeniu banków. na skutek tych zjawisk sektor finansowy stoi obecnie przed zasadniczymi dylematami co do kierunków dalszego rozwoju. celem pracy jest przedstawienie polskiego rynku bankowości detalicznej pod względem wykorzystania poszczególnych zdalnych elektronicznych kanałów dystrybucji oraz określenie perspektyw ich rozwoju. przeprowadzono analizy na podstawie danych statystycznych, obejmujących liczbę klientów, liczbę i wartość zrealizowanych transakcji, a także dokonano oceny potencjału zastosowania wybranych innowacji i rozwiązań technologicznych.   wykorzystanie elektronicznych kanałów dystrybucji usług… 141 1. struktura wykorzystania zdalnych elektronicznych kanałów dystrybucji banki prowadzące w polsce obsługę klientów detalicznych oferują im standardowo cztery podstawowe kanały komunikacji, do których należą: bankowość internetowa, telefoniczna (zazwyczaj call center i ivr ), bankowość terminalowa (głównie w zakresie bankomatów) oraz bankowość mobilna (rozpowszechnienie w ofercie dopiero od 2011 roku) (polasik 2007: 21). ponadto w ramach bankowości korporacyjnej systemy home/pc banking (korzeń 2007: 37) pozostają ważnym kanałem dystrybucji w ofercie większości banków. jednakże praktyczne wykorzystanie powyższych kanałów przez klientów jest silnie zróżnicowane. pod względem liczby zlecanych przelewów w grudniu 2011 roku zdecydowanie dominował kanał internetowy (89,1% udziału – wykres 1), przy czym większość przelewów (68,8% transakcji) była zlecana przez klientów detalicznych, a 19,5% transakcji w ramach korporacyjnych systemów bankowości internetowej. pod względem wolumenu udział kanału internetowego był także bardzo wysoki (80,3%), przy czym 57,3% transakcji obejmowała bankowość korporacyjna. wciąż jednak udział systemów typu home/pc banking był znaczący i wynosił 19,2% łącznego wolumenu. klienci korporacyjni zlecili zatem (dwoma kanałami) aż 76,5% łącznej wartości przelewów. wykres 1. struktura wykorzystania elektronicznych kanałów komunikacji do realizacji transakcji przelewów w grudniu 2011 roku banking (korzeń 2007: 37) pozostają ważnym kanałem dystrybucji w ofercie większości banków. jednakże praktyczne wykorzystanie powyższych kanałów przez klientów jest silnie zróżnicowane. pod względem liczby zlecanych przelewów w grudniu 2011 roku zdecydowanie dominował kanał internetowy (89,1% udziału – wykres 1), przy czym większość przelewów (68,8% transakcji) była zlecana przez klientów detalicznych, a 19,5% transakcji w ramach korporacyjnych systemów bankowości internetowej. pod względem wolumenu udział kanału internetowego był także bardzo wysoki (80,3%), przy czym 57,3% transakcji obejmowała bankowość korporacyjna. wciąż jednak udział systemów typu home/pc banking był znaczący i wynosił 19,2% łącznego wolumenu. klienci korporacyjni zlecili zatem (dwoma kanałami) aż 76,5% łącznej wartości przelewów. wykres 1. struktura wykorzystania elektronicznych kanałów komunikacji do realizacji transakcji przelewów w grudniu 2011 roku źródło: zbp 2012. na wykresach 2 i 3 przedstawiono rozwój bankowości elektronicznej w polsce, z uwzględnieniem relatywnej zmiany znaczenia poszczególnych kanałów dystrybucji usług bankowych na przestrzeni ostatnich czterech lat. pod względem liczby przelewów największy wzrost w omawianym okresie nastąpił w ramach detalicznej bankowości internetowej – o ponad 21 mln transakcji miesięcznie (porównywane dane grudzień– grudzień), co daje ponad 50% przyrostu. z kolei najszybciej wzrastała liczba transakcji w korporacyjnej bankowości internetowej – o ponad 70% w ciągu czterech lat. natomiast home/pc banking odnotowywał systematyczny spadek transakcyjności (o około 20% w tym okresie). wzrostowi rynku bankowości elektronicznej w polsce (łączny przyrost liczby przelewów o 40% w latach 2008–2011) towarzyszy zatem stopniowa migracja ź r ó d ł o : zbp 2012. na wykresach 2 i 3 przedstawiono rozwój bankowości elektronicznej w polsce, z uwzględnieniem relatywnej zmiany znaczenia poszczególnych kanałów dystrybucji usług bankowych na przestrzeni ostatnich czterech lat. pod michał polasik142 względem liczby przelewów największy wzrost w omawianym okresie nastąpił w ramach detalicznej bankowości internetowej – o ponad 21 mln transakcji miesięcznie (porównywane dane grudzień–grudzień), co daje ponad 50% przyrostu. z kolei najszybciej wzrastała liczba transakcji w korporacyjnej bankowości internetowej – o ponad 70% w ciągu czterech lat. natomiast home/pc banking odnotowywał systematyczny spadek transakcyjności (o około 20% w tym okresie). wzrostowi rynku bankowości elektronicznej w polsce (łączny przyrost liczby przelewów o 40% w latach 2008–2011) towarzyszy zatem stopniowa migracja przedsiębiorstw z systemów typu home/pc banking do korporacyjnej bankowości internetowej. wykres 2. liczba przelewów zleconych poszczególnymi kanałami bankowości elektronicznej w grudniu danego roku (w tys.) 42 136 49 627 59 123 63 229 11 320 11 769 16 916 18 852 11 870 11 235 10 316 9 540 335 314 276 343 0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 000 100 000 2008 2009 2010 2011 pozostałe kanały* home banking/pc banking bankowość internetowa korporacyjna bankowość internetowa detaliczna * pozostałe kanały obejmują: kanał mobilny i telefoniczny (ivr i call center). ź r ó d ł o : zbp 2012. pod względem wielkości wolumenu przelewów dynamika wzrostu rynku była nieco niższa, wynosiła bowiem około 27% latach 2008–2011. w przypadku wolumenu przelewów jeszcze bardziej wyraźny jest spadek znaczenia kanału home/pc banking (o około 25%) i zastępowanie go przez systemy korporacyjne oparte na bankowości internetowej. po raz pierwszy wolumen przelewów zrealizowanych przez korporacyjne systemy bankowości internetowej przewyższył wolumen przelewów zleconych przez systemy home/pc   wykorzystanie elektronicznych kanałów dystrybucji usług… 143 banking już w 2008 roku. od tego momentu internet jako kanał dystrybucji zdecydowanie zdominował polski rynek bankowości elektronicznej. detaliczna bankowość internetowa pod względem wolumenu przelewów rozwija się relatywnie najwolniej (przyrost 45% w ciągu czterech lat), co wynika z faktu, że wraz z jej popularyzacją klienci dokonują coraz częściej za jej pomocą także drobnych płatności. wykres 3. wielkość wolumenu przelewów zleconych poszczególnymi kanałami bankowości elektronicznej w grudniu danego roku (w mln pln) 92 833,9 104 012,1 123 822,4 134 571,1 211 773,0 231 155,0 279 784,8 334 999,0 150 651,8 157 566,8 118 868,1 112 451,5 3 354,2 2 207,9 2 045,0 2 317,4 0 100 000 200 000 300 000 400 000 500 000 600 000 700 000 2008 2009 2010 2011 pozostałe kanały* home banking/pc banking bankowość internetowa korporacyjna bankowość internetowa detaliczna * pozostałe kanały obejmują: kanał mobilny i telefoniczny (ivr i call center). ź r ó d ł o : zbp 2012. należy zaznaczyć, że wykorzystanie pozostałych kanałów bankowości elektronicznej, zarówno innowacyjnej bankowości mobilnej, jak i od dawna oferowanej bankowości telefonicznej przez ivr oraz call center, przez cały czas pozostaje marginalne. bankowość telefoniczna zachowuje głównie funkcję informacyjną oraz wspomagającą wobec kanału internetowego. przyczyną jej ograniczonego zastosowania jest brak możliwości wzrokowej weryfikacji dokonywanych operacji. stanowi to dla wielu osób poważną niedogodność i barierę w realizacji skomplikowanych operacji finansowych tym kanałem komunikacji. natomiast niewielkie znaczenie bankowości mobilnej wynika z jednej strony z jej ograniczonej do 2010 roku dostępności w ofercie polskich banków oraz niewielkiego transakcyjnego wykorzystania tego kanału przez klientów. ten rezultat jest znaczący, zwłaszcza w kontekście stosunkowo dużego potencjalnego michał polasik144 zainteresowania klientów bankowością mobilną, co znalazło odzwierciedlenie w liczbie uaktywnionych usług mobilnych, która w 2011 roku przekroczyła 6 mln, czyli osiągnęła prawie 3/5 liczby aktywnych kont internetowych klientów detalicznych (wykres 4). jednocześnie jednak liczba klientów posiadających zainstalowane aplikacje bankowości mobilnej, a więc tych najbardziej aktywnych, nie przekroczyła w 2011 roku jeszcze 100 tys. użytkowników (zbp 2012). 2. rozwój bankowości internetowej w latach 2000–2004 bankowość internetowa w polsce znajdowała się we wstępnej fazie rozwoju, osiągając niespełna 2 mln aktywnych rachunków z dostępem przez internet. jednakże w latach 2005–2010 nastąpił jej niezwykle dynamiczny rozwój, podczas którego liczba takich rachunków klientów indywidualnych osiągnęła poziom ponad 9 mln. badania ankietowe wykazują, że z bankowości internetowej korzysta już 1/4 polskiego społeczeństwa w wieku powyżej 15 lat, stanowiąca około połowy wszystkich użytkowników internetu. w roku 2011 przyrost aktywnych klientów wyniósł kolejne 900 tys., a ich łączna liczba przekroczyła 10 mln. wykres 4. liczba rachunków bankowych klientów indywidualnych w polsce z aktywnym dostępem internetowym oraz aktywnymi usługami mobilnymi w latach 2000–2011 [mln] 0,04 0,3 0,6 1,1 1,8 3,1 4,3 4,9 6,4 7,4 9,2 10,1 1,5 1,9 2,4 2,9 3,8 4,6 5,3 6,1 0 2 4 6 8 10 12 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 bankowość internetowa bankowość mobilna ź r ó d ł o : opracowanie własne na podstawie: zbp 2012 i polasik 2007.   wykorzystanie elektronicznych kanałów dystrybucji usług… 145 sukces polskiej bankowości internetowej jest dobrze widoczny w przypadku porównania poziomu jej rozwoju z wybranymi krajami unii europejskiej. wykres 5 przedstawia wzrost odsetka osób korzystających z bankowości internetowej w latach 2006–2011 w zestawieniu z przyrostem dostępu do internetu dla wybranych krajów unii europejskiej. analiza wykresu ujawnia występujący w europie znaczący podział na kraje północy i południa. szwecja, finlandia oraz holandia od lat należą do czołówki gospodarki elektronicznej, gdzie prawie wszyscy obywatele zarówno korzystają z internetu, jak i mają dostęp do bankowości internetowej. z kolei w krajach europy południowej, takich jak włochy, grecja czy rumunia, wykorzystanie bankowości internetowej pozostaje na niskim poziomie, co jest związane z czynnikami gospodarczymi (poziom pkb, ograniczony dostęp do internetu), ale przede wszystkim kulturowymi. wykres 5. odsetek osób korzystających z bankowości internetowej oraz poziom dostępu do internetu dla wybranych krajów unii europejskiej w latach 2006–2011 czechy niemcy grecja francja włochy holandia austria polska rumunia finlandia szwecja 0 10 20 30 40 50 60 70 80 90 0 10 20 30 40 50 60 70 80 90 100 pr oc en t o só b ko rz ys ta ją cy ch z b an ko w oś ci i nt er ne to w ej procent godpodarstw domowych posiadających dostęp do internetu 2006 2011 ź r ó d ł o : opracowanie własne na podstawie eurostat 2012. krajem, który osiągnął największy postęp w latach 2006–2011, zarówno w obszarze popularyzacji bankowości internetowej, jak i dostępności samego internetu, jest niewątpliwie francja. na tym tle polska wydaje się podążać ścieżką rozwoju zbliżoną do niemiec czy austrii, z pewną korektą w dół wskaźnika bankowości internetowej w stosunku do odsetka użytkowników internetu, która jest spowodowana występującym w polsce problemem wykluczenia finansowego (około 30% mieszkańców polski w wieku 15+ nie posiada konta michał polasik146 bankowego – polasik i in. 2012). minimalnie niższą dynamikę rozwoju uzyskał czeski rynek bankowości internetowej. warto zauważyć, że polska znacząco wyprzedziła włochy w przypadku obu rozważanych wskaźników, mimo że pkb per capita gospodarki włoskiej jest znacząco wyższe. głównymi barierami rozwoju bankowości internetowej w polsce są: wciąż ograniczony dostęp do internetu (w 2012 roku korzystało z niego zaledwie 55% społeczeństwa polskiego) oraz utrwalone nawyki i obawy klientów. jednakże kwestie te będą stopniowo tracić na znaczeniu. natomiast obawy klientów o bezpieczeństwo transakcji mogą stanowić znaczącą przeszkodę w rozwoju bankowości internetowej, ponieważ osoby przejawiające takie obawy generalnie rezygnują z realizacji operacji bankowych w internecie (polasik, wiśniewski 2009: 32–52). w związku z tym jednym z najważniejszych czynników stymulujących rozwój bankowości internetowej w polsce powinny być działania banków na rzecz zapewnienia klientom bezpieczeństwa operacji. 3. bankowość mobilna na rynku polskim bankowość mobilna wydaje się obecnie stanowić najbardziej perspektywiczny kierunek innowacji w bankowości detalicznej. wprawdzie pierwsze próby wykorzystania w bankowości mobilnej tekstowej komunikacji, w oparciu o technologię wiadomości sms oraz protokoły wap, nie powiodły się, jednak nowe rozwiązania sprawiły, że od 2006 roku bankowość mobilna szybko zyskuje popularność w krajach najbardziej zaawansowanych technologicznie. w stanach zjednoczonych korzysta z niej już około 20% gospodarstw domowych posiadających rachunek bankowy (juniper research 2010). należy podkreślić, że ten dynamiczny rozwój odbywa się równolegle z zastosowaniem dwóch konkurencyjnych rozwiązań – serwisów www „light” i aplikacji bankowych – i kwestia wyraźnej dominacji którejś z tych strategii wciąż pozostaje otwarta. pierwszy kierunek rozwoju polega na budowie specjalnej, uproszczonej wersji stron www serwisu transakcyjnego banku, czyli „light” (inaczej nazywanej wersją „lajt” lub „lekką”, „mobile web”). jest to zatem mobilna odmiana bankowości internetowej i ma większość jej cech. jest to rozwiązanie najprostsze i najtańsze do wdrożenia przez bank. jednakże ergonomia korzystania z serwisu przez przeglądarkę w telefonie jest często niezadowalająca i pojawiają się pewne wątpliwości co do poziomu bezpieczeństwa tego rozwiązania (szwajkowska i in. 2010). alternatywną strategią jest oparcie bankowości mobilnej na dedykowanych aplikacjach bankowych zainstalowanych na urzą  wykorzystanie elektronicznych kanałów dystrybucji usług… 147 dzeniu mobilnym. zazwyczaj są to natywne aplikacje dla systemu operacyjnego smartfonu, np. android, ios czy windows mobile/phone. komunikacja między aplikacją a serwerem banku ogranicza się tylko do przesyłania istotnych danych, co zasadniczo redukuje ich transfer, przyspiesza działanie i ogranicza koszty korzystania z systemu. zaletą tego rozwiązania jest również wygoda i intuicyjność stosowania przez użytkownika, a także możliwości wyposażenia aplikacji w dodatkowe funkcjonalności, takie jak lokalizacja oddziałów i bankomatów z użyciem nadajnika gps. główną wadą tej strategii jest jednak fakt, że bank staje się odpowiedzialny za stworzenie aplikacji oraz dostarczenie jej klientowi i zabezpieczenie aktualizacji oprogramowania. może to zwiększać koszty ponoszone przez bank i generować ryzyko w obszarze it (tiwari 2010). udostępnianie na szeroką skalę usług bankowości mobilnej rozpoczęło się w polsce w roku 2010 i do czerwca 2012 roku aplikacje bankowości mobilnej oferowało już 11 banków, a mobilną bankowość internetową w wersji „light” – 15 banków. jeden lub oba kanały bankowości mobilnej udostępniało łącznie 17 banków. ze względu na fakt, że do tego grona należały banki prowadzące największe liczby ror, potencjalny dostęp do bankowości mobilnej miało aż 78% wszystkich polskich posiadaczy kont bankowych. liczba klientów z aktywowaną usługą bankowości mobilnej w polsce, według danych zbp, osiągnęła na koniec 2011 roku 6,1 mln osób (wykres 4). jednak należy zauważyć, że liczba aktywnych użytkowników posiadających zainstalowaną aplikację mobilną i dokonujących logowania przynajmniej raz w miesiącu wynosiła zaledwie 94 tys. pozostali użytkownicy korzystali z mobilnej wersji serwisu internetowego banku. obecna tendencja do rozszerzania przez kolejne banki oferty bankowości mobilnej i ich działalność marketingowa dają podstawy, żeby przewidywać, że ten dynamiczny wzrost utrzyma się. jednakże ze względu na fakt wyłącznie informacyjnego korzystania z kanału mobilnego przez większość klientów ważnym miernikiem jego rozwoju będzie liczba zrealizowanych z jego użyciem przelewów. dalsza popularyzacja tego kanału dostępu będzie zależała w dużej mierze od szybkości rozpowszechnienia smartfonów i mobilnego internetu wśród klientów. w polsce na koniec 2011 roku smartfony stanowiły już około 40% wszystkich telefonów komórkowych (szpunar 2011). badania przeprowadzane w korei południowej wykazały, że na skłonność do korzystania z bankowości mobilnej mają wpływ trzy zasadnicze czynniki: postrzegana łatwość jego użycia, postrzegane przez klienta korzyści ze stosowania tego rozwiązania oraz subiektywna ocena poziomu bezpieczeństwa systemu (gu i in. 2009). kluczem do sukcesu jest zatem stworzenie systemu bankomichał polasik148 wości mobilnej, który będzie miał prosty w obsłudze interfejs, ale jednocześnie będzie oferował zaawansowane rozwiązania technologiczne, które pozwolą na zapewnienie klientowi wartości dodanej i wysokiego poziomu bezpieczeństwa. praktyczne połączenie tych przeciwstawnych cech w ramach jednego systemu jest głównym wyzwaniem stojącym przed sektorem bankowym. 4. wykorzystanie usług bankowych w handlu elektronicznym bankowość internetowa stanowi jeden z filarów szeroko rozumianego e-biznesu. jednak w przypadku większości banków nie występuje integracja między usługami typowo bankowymi a handlem elektronicznym, mimo że wykorzystują one te same kanały komunikacji. na wykresie 6 zestawiono odsetek mieszkańców dokonujących zakupów w internecie oraz korzystających z usług bankowości internetowej w wybranych krajach unii europejskiej w 2011 roku. analiza danych sugeruje silną korelację aktywności zakupowej internautów i korzystania przez nich z usług bankowości internetowej. polacy wyróżniają się znacznie większą skłonnością do dokonywania zakupów w sieci niż mieszkańcy krajów europy południowej oraz postsocjalistycznych krajów europy środkowej. natomiast w stosunku do krajów europy północnej, francji, niemiec czy wielkiej brytanii istnieje ogromna luka w wykorzystaniu zakupów elektronicznych. wydaje się, że w interesie polskiego sektora bankowego jest podążanie w kierunku „holenderskiej ścieżki” rozwoju e-biznesu, w której sektor bankowy odgrywa kluczową rolę także w handlu elektronicznym, a nie w kierunku modelu brytyjskiego, w którym mimo znakomitego rozwoju e-handlu, banki mają drugorzędne znaczenie, ograniczone głównie do wydawnictwa kart płatniczych. przykład rynku holenderskiego jest szczególnie istotny, gdyż dominującą rolę w płatnościach za zakupy internetowe odgrywa tam bankowy system ideal, funkcjonujący podobnie jak e-przelewy w polsce. promowanie tego modelu płatności internetowych, zamiast wykorzystania kart płatniczych, w dłuższej perspektywie będzie stymulowało wzrost aktywnej liczby użytkowników bankowości internetowej, wzrost ubankowienia polskiego społeczeństwa, a także możliwość sprzedaży dodatkowych usług bankowych.   wykorzystanie elektronicznych kanałów dystrybucji usług… 149 wykres 6. dokonywanie zakupów internetowych i korzystanie z bankowości internetowej w wybranych krajach unii europejskiej w 2011 roku czechy niemcy grecja hiszpania francja włochy węgry holandia austria polska portugalia rumunia finlandia szwecja wielka brytania* 0 10 20 30 40 50 60 70 80 90 0 10 20 30 40 50 60 70 pr o ce n t o só b k o rz ys ta ją cy ch z b an ko w o śc i in te rn et o w ej procent osób dokonujących zakupów w internecie powierzchnia kół jest proporcjonalna do liczby użytkowników bankowości internetowej. * dla wielkiej brytanii dane za 2010 rok. ź r ó d ł o : opracowanie własne na podstawie eurostat 2012. nie jest jeszcze przesądzone, w którym kierunku będzie rozwijał się polski rynek płatności internetowych. w 2010 roku największy odsetek liczby zamówień był rozliczany przez dwie najpowszechniej dostępne metody płatności, czyli przez przelew bankowy oraz płatność za pobraniem (szerzej w: polasik, kunkowski 2011). dzięki szerokiej akceptowalności oraz prostocie i dobrej znajomości tych metod przez klientów przelew bankowy był stosowany aż w 38,9% transakcji, a płatność za pobraniem w 37,2% transakcji. nieco inna sytuacja występowała w przypadku kart płatniczych oraz e-przelewów. mimo ich powszechnej akceptowalności przez sklepy internetowe (odpowiednio 55% dla kart oraz 51,2% dla e-przelewów) metody te nie miały znaczącego udziału w procentowej liczbie transakcji zakupów w sklepach internetowych w polsce (zaledwie 7,8% dla kart i 2,9% dla e-przelewów). jednak w latach 2011–2012 obserwowany jest wzrost udziału e-przelewów do poziomu ponad 10% transakcji w sklepach internetowych, głównie kosztem przesyłek pobraniowych (polasik, kunkowski 2011). michał polasik150 na szczególną uwagę zasługuje fakt, że e-przelewy, poza bezpośrednią funkcją płatniczą, stanowią czynnik edukacyjny, gdyż wymuszają na kliencie częste logowanie się do internetowego systemu transakcyjnego banku. w związku z tym kształtują u klienta nawyk korzystania z bankowości internetowej. biorąc pod uwagę rozpowszechnienie e-przelewów w ofercie polskich banków oraz stopniowo rosnące ich wykorzystanie, a także wysoki poziom bezpieczeństwa, można uznać, że będą one stanowiły ważną usługę na polskim rynku bankowości elektronicznej.  zakończenie bankowość internetowa jest od kilku lat dominującym elektronicznym kanałem dystrybucji usług bankowych, a jej znaczenie nadal systematycznie wzrasta. rozwiązania oparte na systemach home/pc banking są coraz szybciej wypierane przez korporacyjną bankowość internetową. w perspektywie najbliższych lat pozycja kanału internetowego pozostanie niezagrożona, ponieważ bankowość mobilna, mimo dynamicznego rozwoju w ostatnich dwóch latach, ma wciąż niewielki udział w wolumenie transakcji. należy jednak oczekiwać, że w kolejnych latach będzie następowało pewne spowolnienie przyrostu liczby klientów bankowości internetowej. wynika to z faktu, że najbardziej atrakcyjne segmenty potencjalnych klientów zostały już zagospodarowane, a dalszy rozwój bankowości internetowej będzie ograniczony powolnymi zmianami demograficznymi. jednakże wykorzystanie usług bankowości internetowej do realizacji transakcji powinno nadal szybko wzrastać, m.in. z uwagi na rosnące znaczenie handlu elektronicznego w gospodarce. trzeba podkreślić, że popularyzacja usług bankowości elektronicznej korzystnie wpływa na gospodarkę. wynika to przede wszystkim z bezpośrednich korzyści finansowych, jakie oferuje ona klientom, zarówno detalicznym, jak i korporacyjnym. niższe ceny usług w ramach bankowości elektronicznej w stosunku do usług świadczonych tradycyjnymi kanałami dystrybucji, w tym w szczególności dla transakcji płatniczych, są rezultatem automatyzacji procesów ich świadczenia i samoobsługi klientów. ponadto następuje wzrost wydajności usług płatniczych, mierzony szybkością i bezpieczeństwem rozliczeń pieniężnych, co niewątpliwie przyczynia się do poprawy funkcjonowania całego systemu gospodarczego. polski rynek bankowości internetowej wydaje się podążać ścieżką rozwoju zbliżoną do rynku niemieckiego. jednakże znaczącym ograniczeniem postępu w tej dziedzinie jest problem wykluczenia finansowego i niski poziom   wykorzystanie elektronicznych kanałów dystrybucji usług… 151 ubankowienia społeczeństwa. w rezultacie część potencjału wynikającego z popularyzacji dostępu do internetu pozostaje niewykorzystana. wydaje się, że korzystne dla banków będzie promowanie stosowania usług e-przelewów w płatnościach w internecie ze względu na pozytywne skutki w zakresie wzrostu transakcyjności i aktywności klientów, a także sprzedaży krzyżowej innych usług bankowych. w tym zakresie rynek polski może upodobnić się do „modelu holenderskiego”. taki scenariusz powinien przyczynić się do wzrostu zainteresowania klientów również innymi usługami bankowymi i przyspieszyć procesy ubankowienia oraz edukacji finansowej polskiego społeczeństwa. szybka popularyzacja smartfonów na polskim rynku oraz powszechne wprowadzenie bankowości mobilnej do oferty najważniejszych banków detalicznych sprawiają, że należy oczekiwać dalszego dynamicznego przyrostu liczby klientów korzystających z tego kanału. obecnie już ponad 78% wszystkich polskich posiadaczy kont bankowych ma dostęp do bankowości mobilnej w swoim banku. poważnym wyzwaniem dla banków jest skłonienie klientów do wykorzystania bankowości mobilnej nie tylko do celów informacyjnych, ale także do realizacji transakcji płatniczych i zakupu usług.  literatura eurostat (2012), komisja europejska, http://epp.eurostat.ec.europa.eu (dostęp: czerwiec 2012). gu j.-c., lee s.-c., suh y.-h. 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(2009), empirical analysis of internet banking adoption in poland, international journal of bank marketing, vol. 27, no. 1, s. 32–52, http://dx.doi. org/10.1108/02652320910928227. szpunar w. (2011), pyramid research: polski rynek smartfonów rośnie najszybciej w regionie, computerworld. michał polasik152 szwajkowska g., kwaśniewski p., leżoń k., woźniczka f. (2010), usługi bankowości elektronicznej dla klientów detalicznych. charakterystyka i zagrożenia, urząd komisji nadzoru finansowego, warszawa. tiwari a. (2010), security of mobile banking application, mobile banking technology, sep 5, serwis suite101.com, http://www.suite101.com/ (dostęp: lipiec 2011). zbp (2012), bankowość internetowa i płatności bezgotówkowe, związek banków polskich, raporty rady bankowości elektronicznej z lat 2006–2012, http://www.zbp. pl (dostęp: czerwiec 2012). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 7 issue 2 2018 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers rof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2018 copyright by uniwersytet mikołaja kopernika toruń 2018 icv 2016: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 francesca bartolacci, michela soverchia, ermanno zigiotti managing solid urban waste in italy: an economic, financial, and environmental performance analysis .......................................................................................................... 9 piotr bolibok the macroeconomic drivers of household debt-to-income ratio: an evidence from the oecd countries .................................................................................................. 29 mohammad shahidul islam dividend practices in listed banks of bangladesh ......................................................... 43 maciej pawłowski financing the solar energy market through the use of securitization – the case of the united states ........................................................................................... 63 hernán darío toro-zapata, gerard olivar-tost mathematical model for the evolutionary dynamics of innovation in city public transport systems ................................................................................................................ 77 anna wiśniewska the initial coin offering – challenges and opportunities ............................................... 99 justyna zabawa the significance of the gri (global reporting initiative) standard in reporting of environmental information. the analysis of polish banking sector in the face of regulatory changes ..................................................................................................... 111 for authors ......................................................................................................................... 127 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 25.03.2013; data zaakceptowania: 24.04.2013. * dane kontaktowe: paaweel@mat.umk.pl, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 501 559 564. paweł jankowski* uniwersytet mikołaja kopernika w toruniu ochrona środowiska w wycenie przedsiębiorstwa na przykładzie wykorzystania opcji rzeczywistych słowa kluczowe: ets, eu ets, ochrona środowiska, opcje rzeczywiste, wartość przedsiębiorstwa. klasyfikacja jel: g23, q51, q52. abstrakt: celem artykułu jest przedstawienie możliwości wykorzystania narzędzi ochrony środowiska do zarządzania i wyceny przedsiębiorstwa. w artykule zaprezentowano istotę opcji rzeczywistych oraz ich podstawową klasyfikację. sposób wykorzystania prostych opcji rzeczywistych zaprezentowano na przykładzie przedsiębiorstwa produkującego energię elektryczną i cieplną w kogeneracji. możliwość wykorzystania opcji opóźnienia przedstawiono na przykładzie elektrowni atomowej. został również zaprezentowany sposób wykorzystania złożonych opcji rzeczywistych na przykładzie zbywalnych jednostek do emisji gazów cieplarnianych przy finansowaniu restrukturyzacji przedsiębiorstwa. the impact of the greenhouse gas emission allowances trading system on the enterprise value keywords: ets, eu ets, enterprise value, environmental protection, real options. jel classification: g23, q51, q52. abstract: the purpose of the paper is to present the possibilities to use environmental protection tools to manage and evaluate an enterprise. the paper presents the essence of real options and their basic classification. the way of using simple real options has been presented on the example of an enterprise which produces electricity and heating in co-generation. the potential to use the retard option has been presented on the http://dx.doi.org/10.12775/cjfa.2013.006 paweł jankowski80 example of a nuclear energy plant. the manner to use complicated real options has been also shown on the example of transferable units for the greenhouse gas emission while financing an enterprise restructuring. translated by paweł jankowski  wstęp prawidłowa wycena wartości przedsiębiorstwa jest jednym z podstawowych elementów podejmowania decyzji inwestycyjnych. procesy globalizacyjne doprowadziły do szybkiego przepływu kapitału zarówno między poszczególnymi kontynentami, krajami, giełdami, jak i przedsiębiorstwami, w ten sposób przyczyniły się one do precyzyjniejszej wyceny wartości przedsiębiorstw. jeden z elementów prawidłowej wyceny stanowi uwzględnienie zmieniających się przepisów prawnych, których wpływ na wartość przedsiębiorstwa jest trudny do określenia. ochrona środowiska stała się realnym kosztem wraz z podpisaniem protokołu z kioto. w niniejszym artykule, przy wykorzystaniu studiów literaturowych i własnej wiedzy zawodowej autora, podjęto próbę zbadania wpływu obowiązujących przepisów ochrony środowiska na wartość przedsiębiorstwa. przedstawiono możliwości wykorzystania narzędzi ochrony środowiska do zarządzania i wyceny przedsiębiorstwa. zagadnienie to zostało scharakteryzowane w oparciu o rachunek opcji realnych oraz na przykładzie kapitału ochrony środowiska w postaci bezpłatnie przyznawanych zbywalnych jednostek uprawnień do emisji gazów cieplarnianych. zbywalne jednostki zostały wykorzystane w charakterze opcji rzeczywistych w przedsiębiorstwach obligatoryjnie uczestniczących w systemie handlu uprawnieniami do emisji gazów cieplarnianych. 1. rynkowe mechanizmy w ochronie środowiska postępująca globalizacja doprowadziła do otwarcia poszczególnych gospodarek narodowych. między krajami wytworzyły się nowe silniejsze powiązania systemów gospodarczych. w państwach, w których bezpośrednie koszty produkcji, takie jak energia elektryczna czy praca ludzka, są niższe i mocniej eksploatowane, zasoby naturalne zużywają się szybciej. w przypadku dóbr naturalnych nie istnieje prawo własności do fundamentalnych zasobów środowiska, takich jak powietrze czy woda. brak prawa własności do określonych zasobów środowiska generuje problem podmiotu odpowiedzialnego za jego degradację.   ochrona środowiska w wycenie przedsiębiorstwa… 81 koszty związane z użytkowaniem środowiska mają charakter odrębnych od przedsiębiorstwa, bardzo często publicznych, dlatego też większość dóbr i zasobów środowiska naturalnego należy traktować jako dobro publiczne (żylicz 2004: 179–180). na podstawie teorii ekonomicznych, m.in. teorii dóbr publicznych czy teorii efektów zewnętrznych, można stwierdzić, że istnieją wystarczające przesłanki do ingerencji państwa w ochronę środowiska. taka ingerencja następuje przez zastosowanie odpowiedniej polityki prośrodowiskowej. w literaturze są wyszczególniane narzędzia ochrony środowiska, które mają na celu wywarcie bezpośredniego lub pośredniego wpływu na zachowanie poszczególnych użytkowników środowiska. ze względu na charakter instrumentów prośrodowiskowych można wyróżnić następujące trzy grupy: instrumenty zdecentralizowane, instrumenty bezpośredniego kierowania i kontroli oraz instrumenty ekonomiczne (field 1994: 207–210; verbruggen 1994: 55). w ramach pierwszej grupy – instrumentów zdecentralizowanych, wyróżnia się ogólne przepisy prawa, takie jak np. odpowiedzialność cywilna, odpowiedzialność karna, prawo własności. do drugiej grupy – instrumentów bezpośredniego kierowania i kontroli, należą narzędzia o charakterze prawno-administracyjnym. dzięki nim można bezpośrednio wpływać na zachowanie podmiotów gospodarczych. w tej grupie instrumentów są stosowane m.in. normy emisyjne, normy imisyjne, normy technologiczne, normy produktowe, normy postępowania (śleszyński 2000: 190– –191). w ramach trzeciej grupy – instrumentów ekonomicznych, zgodnie z klasyfikacją przedstawioną przez oecd, wyróżnia się następujące narzędzia ekonomiczne: opłaty emisyjne, produktowe, użytkowników, administracyjne, systemy depozytowe, ubezpieczenia ekologiczne, subwencje i pozwolenia na korzystanie ze środowiska (śleszyński 2000: 207). ze względu na wywieranie pośredniego wpływu na podmioty gospodarcze narzędzia ekonomiczne są łagodniejszą formą oddziaływania niż regulacje prawno-administracyjne (śleszyński 2000: 217–226). do głównych zalet tej grupy instrumentów ekonomicznych można zaliczyć zarówno efektywność kosztową, jak i pobudzanie postępu technicznego oraz technologicznego. podmioty gospodarcze w ekonomicznie optymalny sposób dostosowują swoją działalność do nowych norm (managing the environment. the role of economic instruments 1994). jednym z rynkowych rozwiązań w ochronie środowiska są zbywalne pozwolenia na korzystanie ze środowiska. jest to narzędzie polityki ochrony środowiska, którego podstawową koncepcję stanowi połączenie cech zarówpaweł jankowski82 no regulacji bezpośredniej, jak i pośredniej. w tym przypadku regulacja bezpośrednia (administracyjna) wyprzedza regulację pośrednią (ekonomiczną). wiąże się to z tym, że w pierwszej kolejności określany jest dopuszczalny zakres ingerencji w środowisko. ten cel osiąga się przez wyznaczenie górnego pułapu dopuszczalnej wielkości emisji szkodliwych gazów cieplarnianych. w taki sposób jest również określana ilość zbywalnych uprawnień do emisji gazów cieplarnianych, która stanowi sumę wyznaczonego wcześniej pułapu. w efekcie dopuszczalna wielkość emisji została zestandaryzowana i podzielona na poszczególnych uczestników środowiska. w związku z tym dopuszczalna możliwa ingerencja w środowisko zaczęła być postrzegana jako przedmiot obrotu rynkowego w postaci zbywalnych uprawnień na okaziciela. dzięki temu rozwiązaniu został osiągnięty zakładany poziom emisji gazów cieplarnianych przy zachowaniu trwałego i stabilnego rozwoju gospodarczego (śleszyński 2000: 226–234). zastosowanie odpowiednich prośrodowiskowych instrumentów ochrony środowiska, które mają na celu przeciwdziałać negatywnym efektom zewnętrznym działalności produkcyjnej i konsumpcji, warunkuje możliwość oraz efektywne zarządzanie środowiskiem i jego naturalnymi zasobami. dzięki temu możliwa jest skuteczna ochrona środowiska naturalnego w skali międzynarodowej. system zbywalnych pozwoleń na emisję gazów cieplarnianych pozwala na stworzenie wielu różnych giełdowych instrumentów finansowych opartych na cenie zbywalnych jednostek. w ten sposób zarządzający przedsiębiorstwami mają bezpośrednią możliwość zarządzania wartością firmy i jej wpływem na środowisko. 2. charakterystyka opcji rzeczywistych na tle ochrony środowiska decyzje inwestycyjne bardzo często mają charakter nieodwracalny. w warunkach niepewności rezygnacja czy porzucenie projektu inwestycyjnego może wiązać się z wyższymi kosztami niż jego uruchomienie. nowo napływające informacje podczas realizacji projektu mogą redukować to ryzyko. tradycyjne techniki analityczne nie wyceniają jednak wartości elastyczności decyzyjnej. opcje rzeczywiste są wynikiem kompleksowej analizy przedsiębiorstwa (howell 2001). w takiej analizie uwzględnia się zarówno strukturę aktywów, jak i pasywów, ale także możliwość szybkiej zmiany decyzji ze względu na pojawiające się nowe informacje. wartość elastyczności decyzyjnej może zostać wyceniona za pomocą analizy opcji realnych. o opcjach rzeczywistych   ochrona środowiska w wycenie przedsiębiorstwa… 83 mówi się wtedy, gdy decydent ma prawo podjąć decyzję w różnych momentach w przyszłości (howell 2001). można hipotetycznie wyobrazić sobie projekt inwestycyjny składający się z dwóch etapów. inwestor, podejmując decyzję o pierwszym etapie, może zrezygnować z drugiego lub odwlekać go w czasie. możliwość porzucenia projektu przy drugim etapie jest swoistego rodzaju opcją. opcje rzeczywiste są podobne do popularnych opcji finansowych. nabycie opcji wiąże się z kosztem, który później może być zrewaluowany przez decydenta. w sytuacji skrajnej niepewności możliwe jest budowanie racjonalnych strategii inwestycyjnych za pomocą narzędzia, jakie stanowi opcja realna. opcja realna, zwana również opcją rzeczywistą, to pewna możliwość działania, którą może nabyć lub wytworzyć osoba fizyczna bądź firma (houston, brigham 2005: 117). dzięki temu dysponent opcji realnej ma prawo do podjęcia określonej decyzji w zakresie zarządzania zasobami przedsiębiorstwa. prawo to pozwala dostosować podjętą wcześniej decyzję do nowo pojawiających się informacji, które mogą istotnie wpłynąć na przepływy pieniężne inwestycji. opcje rzeczywiste powinny być postrzegane jako inwestycje w aktywa trwałe – realne, które umożliwiają zarządzającemu przedsiębiorstwem elastyczne podejmowanie decyzji w zakresie ich wykorzystania (mizerka 2005). w sytuacji, gdy rynkowe ceny surowców są nieprzewidywalne, każda podjęta przez zarządzającego przedsiębiorstwem decyzja jest obarczona ryzykiem. w celu wyeliminowania negatywnych skutków podejmowanych decyzji zarządzający powinni realizować projekty wieloetapowe. każdy etap inwestycji powinien być traktowany jako odrębna opcja, np. kontynuacji inwestycji bądź jej zaniechania (janney, dess 2004: 60–75). wczesne wyjście z projektu, jego zaniechanie prowadzi do minimalizacji strat związanych z błędnie podjętą decyzją inwestycyjną. dobrym przykładem opcji rzeczywistej są przyznane nieodpłatnie uprawnienia do emisji gazów cieplarnianych. uprawnienia te są codziennie wyceniane na giełdzie przez rynek. odpowiednio wysoka cena uprawnień może doprowadzić do sytuacji, w której bardziej opłacalne będzie ich sprzedanie na giełdzie niż zużywanie przy produkcji. posiadanie opcji realnej umożliwia zatem elastyczne zarządzanie wynikami ekonomicznymi przedsiębiorstwa w warunkach zwiększonej niepewności. opcje realne nie są przedmiotem obrotu giełdowego, dlatego nie można ich nabyć na giełdzie. aby nabyć opcje realne, należy zakupić odpowiednie aktywa lub zespół aktywów. ich właściwa analiza może zapewnić menadżerowi możliwość elastycznego zarządzania nimi. opcje rzeczywiste są generowane przez paweł jankowski84 wiedzę i umiejętności menadżerskie osób zarządzających danymi aktywami. istnienie opcji realnych zależy również od uwarunkowań mikroi makroekonomicznych. nabycie opcji realnych wraz z zespołem aktywów może ulec zmianie ze względu na zmianę warunków prawnych, politycznych czy rynkowych. tym samym oznacza to, że możliwość wykorzystania opcji realnych jest zmienna. opcje realne związane z aktywami przedsiębiorstw zobligowanych do wypełniania obowiązków prośrodowiskowych mogą ulec zmianie, jeśli zmienią się restrykcje narzucane przez unię europejską w zakresie ochrony środowiska. w takim przypadku opcja realna wygaśnie. innym istotnym zagadnieniem jest wycena opcji realnych. nabywca za opcje finansową płaci określoną przez uczestników obrotu giełdowego cenę. opcja realna zależy od wiedzy zarządzających, toteż z jej uwzględnieniem dane przedsiębiorstwo zostanie wycenione. decydent, który podejmie odpowiednią decyzję w warunkach niepewności przy niskiej wartości opcji realnej i podniesie jej wartość, pokazując innym inwestorom możliwość alternatywnego wykorzystania danego projektu, będzie mógł odsprzedać ten projekt z dużo wyższą wartością opcji realnej (rogowski 2008). opcje realne w swojej istocie są bardzo podobne do opcji finansowych. kontrakt opcyjny jest umową między nabywcą a sprzedawcą. nabywca opcji ma prawo do kupna lub sprzedaży instrumentu bazowego (inaczej mówiąc – aktywa bazowego), na który opcja została wystawiona (fabozzi 2000: 626). wystawca natomiast ma obowiązek sprzedać lub kupić instrument bazowy, będący podstawą kontraktu. opcje finansowe, które istnieją w obrocie giełdowym, są zestandaryzowane ze względu na podstawowe warunki kontraktu, takie jak cena, czas wykonania, cena wykonania. główną zaletę kontraktu opcyjnego stanowi zatem niesymetryczny zakres praw i obowiązków wystawcy i nabywcy opcji (gajdka, walińska 2000: 355). podstawą kontraktu opcyjnego może być dowolny czynnik, który da się wyrazić liczbowo. wycena giełdowych kontraktów opcyjnych może zależeć od cen towarów, np. pszenicy, cebulek tulipanów, ropy naftowej, srebra, złota, miedzi itp., jak i instrumentów finansowych, np. cen akcji, kursów walut, indeksów giełdowych, stóp procentowych. cena opcji finansowych może być uzależniona od różnych wskaźników czy mierników, np. temperatury, wielkości produkcji, siły wiatru, wielkości opadów (hull 1998: 199). rozliczenie kontraktu opcyjnego może być również skonstruowane na bazie różnych kombinowanych wskaźników, takich jak np. wielkość zużycia paliwa w połączeniu z temperaturą czy wielkość produkcji w połączeniu z indeksem giełdowym. ideę opcji   ochrona środowiska w wycenie przedsiębiorstwa… 85 rzeczywistej można zobrazować za pomocą przedsiębiorstwa produkującego ciepło i energię elektryczną. ryzyka w takim przedsiębiorstwie mogą być analizowane ze względu na zależność między ceną energii elektrycznej i cieplnej, jak i ze względu na cenę surowców wykorzystywanych do jej produkcji. ceny energii elektrycznej i cieplnej mogą być względem siebie niezależne. przy założeniu, że rozwiązania techniczne w elektrociepłowni pozwalają na produkcję energii elektrycznej niezależnie od produkcji energii cieplnej, może okazać się, że produkcja energii elektrycznej przy jej niskich cenach będzie nieopłacalna. w przypadku braku zapotrzebowania na energię cieplną przychody ze sprzedaży energii elektrycznej przewyższą koszty jej produkcji. paradoksalnie, korzystne regulacje prawne mogą przyczynić się do zwiększenia przychodów ze sprzedaży, np. ze względu na sposób, w jaki energia jest produkowana. produkcja energii elektrycznej ze względu na korzyści płynące z kolorowych certyfikatów może okazać się mniej opłacalna niż produkcja w kogeneracji i braku przychodów z energii cieplnej. w tym przypadku na skutek elastyczności aktywów produkcyjnych przedsiębiorstwo produkujące energię jest posiadaczem opcji rzeczywistej. w literaturze występuje wiele rodzajów klasyfikacji opcji realnych w zależności od możliwości, jakie one oferują. opcje realne można podzielić na opcje proste i złożone, opcje wbudowane w projekty i opcje kreowane przez projekty, opcje wyłączne (propriety options) i opcje powszechne (shared options) (jajuga, jajuga 2008: 367). do podstawowych opcji realnych, które mogą być wbudowane w projekty wymagające ponoszenia kosztów kapitałowych, można zaliczyć trzy opcje, takie jak: opcja porzucenia projektu, opcja opóźnienia projektu, opcja rozszerzenia projektu (damodaran 2007: 599). opcja opóźnienia jest bardzo często stosowana przez spółki giełdowe. daje ona możliwość czekania na odpowiednią koniunkturę giełdową i dopiero w takich warunkach pozwala przeprowadzić nową emisję akcji. dobrym przykładem wykorzystania opcji opóźnienia projektu jest projekt budowy elektrowni atomowej w polsce. proces doboru jednej z pięciu lokalizacji odpowiedniej dla tej inwestycji będzie trwał tak długo, jak długo koszty związane z produkcją energii ze źródeł konwencjonalnych będą niższe niż koszty energii atomowej. na te koszty maj wpływ nie tylko cena paliw typu węgiel, ale także instrumentów ochrony środowiska czy umów, do których polska zobowiązuje się wobec innych krajów. opcja rozszerzenia projektu jest najczęściej stosowana przez przedsiębiorstwa, które chcą w przyszłości rozpocząć inne nowe projekty lub wejść paweł jankowski86 na nowe rynki. jest wykorzystywana w przypadku przedsiębiorstw realizujących np. duży projekt inwestycyjny, zakładający budowę zespołu budynków mieszkalno-usługowych, składający się z kilku etapów – wielu budynków wielorodzinnych. przedsiębiorstwa mogą uzależnić realizację poszczególnych etapów projektu, jak i budowy poszczególnych budynków od różnych czynników, np. od popytu na nieruchomości. opcje realne są klasyfikowane w zależności od możliwości, jakie oferują. najbardziej typowym podziałem opcji realnych, choć niewyczerpującym wszystkich możliwości, jest podział zaproponowany przez copelanda i keenana. został on zobrazowany na schemacie 1. schemat 1. podział opcji realnych podstawowym podziałem opcji realnych zaproponowanym przez copelanda i keenana jest wyodrębnienie opcji inwestowania, opcji opóźnienia oraz opcji zmniejszających skalę. opcje inwestowania dzieli się na opcje zwiększające skalę, opcje przełączające na nowe produkty i opcje rozszerzające zakres wpływów. opcje zmniejszające skalę inwestycji dzieli się na opcje zmniejszające skalę działalności, opcje powrotu do poprzednich technologii oraz opcje zmniejszające zakres wpływów. w ramach zarządzania opcjami wyróżnia się dwa podejścia: bierne i aktywne. inwestor, planując inwestycję, może podjąć decyzję o rozpoczęciu inwestycji lub wstrzymać się od jej podjęcia, tym samym wykorzystując opcję opóźnienia (szablewski, tuzimek 2004: 233–234). opcje opóźnienia są wykorzystywane przy projektach o wyższym ryzyku i relatywnie niskiej stopie zwrotu. odsunięcie decyzji inwestycyjnej w czasie, do momentu uchwalenia nowych ustaw czy porozumień międzynarodowych, jest stosowane w przypadku projektów bardziej ryzykownych. 3. wykorzystanie opcji rzeczywistych w przedsiębiorstwie – przykład ciepłowni przedsiębiorstwa z sektora energetycznego, chemicznego czy cementowego, które posiadają bezpłatnie przyznane jednostki uprawniające do emisji gazów cieplarnianych, mogą skorzystać z opcji przełączenia lub zmniejszenia skali produkcji. limity uprawnień do emisji zostały przyznane na podstawie wyliczeń i kalkulacji historycznych, dlatego szczególnie dużo zyskały przedsiębiorstwa, które odnotowały spadek popytu na swoje produkty. dzięki przyznanym limitom uprawnień i możliwości ich sprzedania na rynku giełdowym przedsiębiorstwa te mogły zaprzestać produkcji. przychody były osiągane ze sprzedanych praw do emisji. przychody z niewykorzystanych praw do emisji mogły zostać wykorzystane do przystosowania przedsiębiorstwa do zmieniających się warunków rynkowych. taka restrukturyzacja to zastosowanie dwóch opcji rzeczywistych. w pierwszej fazie – opcja zastąpienia przychodów operacyjnych z produktu podstawowego przychodem ze zbywalnych jednostek. w następnej fazie – opcja zmiany produktu, wykorzystywanego paliwa lub działalności na taką, która lepiej spełniała wymogi klientów. w powyższym przykładzie została zaprezentowana idea wykorzystania opcji złożonych (ang. compound options). należy pamiętać, że typowe projekty to zbiór wielu opcji, bardzo często wzajemnie od siebie zależnych. zakończenie narzędzia ochrony środowiska odgrywają coraz większą rolę w zarządzaniu przedsiębiorstwem. w 2005 roku zbywalne jednostki zostały zestandaryzowane i wprowadzone do obiegu giełdowego oraz inwestuj/ wzrastaj zwiększaj skalę pionierskie przedsiębiorstwa w danej gałęzi rynku, zwiększenie zaangażowania przez sekwencje inwestycyjne przełącz się na nowy produkt działanie ma na celu uzyskanie przewagi na rynku przez wdrożenie najnowocześniejszych produktów rozszerz zakres wpływów przez wybór miejsca ulokowania aktywów, miejsca produkcji wybiera się rynek zbytu opóźniaj/ ucz się opóźnij realizację działanie ma na celu zebranie informacji na temat wdrażanej technologii lub nowego rynku zmniejszaj skalę inwestycji/ malej zmniejsz skalę ograniczenie skali działaności w wypadku, gdy w przyszłości nastąpi zmiana szacunków przyszłych korzyści wróć do poprzednich technologii prawo do rezygnacji z nowoczesnych rozwiązań, gdy koszty nowej technologii okażą się niewspółmiernie wysokie zmniejsz zakres wpływów możliwość wycofania się z nasyconych lub nierentownych rynków zbytu schemat 1. podział opcji realnych ź r ó d ł o : copeland, keenan 1998: 48. podstawowym podziałem opcji realnych zaproponowanym przez copelanda i keenana jest wyodrębnienie opcji inwestowania, opcji opóźnienia oraz opcji zmniejszających skalę. opcje inwestowania dzieli się na opcje zwiększające skalę, opcje przełączające na nowe produkty i opcje rozszerzające zakres wpływów. opcje zmniejszające skalę inwestycji dzieli się na opcje zmniejsza  ochrona środowiska w wycenie przedsiębiorstwa… 87 jące skalę działalności, opcje powrotu do poprzednich technologii oraz opcje zmniejszające zakres wpływów. w ramach zarządzania opcjami wyróżnia się dwa podejścia: bierne i aktywne. inwestor, planując inwestycję, może podjąć decyzję o rozpoczęciu inwestycji lub wstrzymać się od jej podjęcia, tym samym wykorzystując opcję opóźnienia (szablewski, tuzimek 2004: 233–234). opcje opóźnienia są wykorzystywane przy projektach o wyższym ryzyku i relatywnie niskiej stopie zwrotu. odsunięcie decyzji inwestycyjnej w czasie, do momentu uchwalenia nowych ustaw czy porozumień międzynarodowych, jest stosowane w przypadku projektów bardziej ryzykownych. 3. wykorzystanie opcji rzeczywistych w przedsiębiorstwie – przykład ciepłowni przedsiębiorstwa z sektora energetycznego, chemicznego czy cementowego, które posiadają bezpłatnie przyznane jednostki uprawniające do emisji gazów cieplarnianych, mogą skorzystać z opcji przełączenia lub zmniejszenia skali produkcji. limity uprawnień do emisji zostały przyznane na podstawie wyliczeń i kalkulacji historycznych, dlatego szczególnie dużo zyskały przedsiębiorstwa, które odnotowały spadek popytu na swoje produkty. dzięki przyznanym limitom uprawnień i możliwości ich sprzedania na rynku giełdowym przedsiębiorstwa te mogły zaprzestać produkcji. przychody były osiągane ze sprzedanych praw do emisji. przychody z niewykorzystanych praw do emisji mogły zostać wykorzystane do przystosowania przedsiębiorstwa do zmieniających się warunków rynkowych. taka restrukturyzacja to zastosowanie dwóch opcji rzeczywistych. w pierwszej fazie – opcja zastąpienia przychodów operacyjnych z produktu podstawowego przychodem ze zbywalnych jednostek. w następnej fazie – opcja zmiany produktu, wykorzystywanego paliwa lub działalności na taką, która lepiej spełniała wymogi klientów. w powyższym przykładzie została zaprezentowana idea wykorzystania opcji złożonych (ang. compound options). należy pamiętać, że typowe projekty to zbiór wielu opcji, bardzo często wzajemnie od siebie zależnych.  zakończenie narzędzia ochrony środowiska odgrywają coraz większą rolę w zarządzaniu przedsiębiorstwem. w 2005 roku zbywalne jednostki zostały zestandaryzopaweł jankowski88 wane i wprowadzone do obiegu giełdowego oraz stały się znaczącym elementem zarówno kosztowym, jak i przychodowym w finansach przedsiębiorstw. niezbędne jest zatem uwzględnienie czynników ochrony środowiska w zarządzaniu przedsiębiorstwem. kluczem może być wykorzystanie opcji rzeczywistych do wyceny czy planowania projektów inwestycyjnych w celu zdobycia trwałej przewagi konkurencyjnej na arenie międzynarodowej. wartość opcji rzeczywistej jest rezultatem możliwości kreowania dodatkowych zysków ekonomicznych w sytuacji, gdy przedsiębiorstwo musi efektywnie dostosowywać się do nieoczekiwanych zmian w swoim otoczeniu. w związku z tym ma ono możliwość zwiększania wartości dodanej w wyniku zarówno identyfikacji, zarządzania, jak i wykonywania opcji rzeczywistej związanej z jego działaniem. pozwala to na odpowiednie podejmowanie decyzji i wykorzystywanie pojawiających się szans, aby ograniczać wpływ ryzyka finansowego na wyniki ekonomiczne przedsiębiorstwa. w artykule zostały przedstawione możliwe zastosowania opcji rzeczywistych w przedsiębiorstwach szczególnie intensywnie wykorzystujących środowisko naturalne. instrumenty ochrony środowiska stają się istotnym elementem rozwoju rynków finansowych. należy zaznaczyć, że niniejszy artykuł ma charakter wprowadzający do szerokiej dyskusji na temat wpływu przepisów ochrony środowiska oraz urynkowienia regulacji prośrodowiskowych na wartość przedsiębiorstwa.  literatura copeland t. e., keenan p. t. (1998), how much is exibility worth?, mckinsey quartely, no. 2. damodaran a. (2007), finanse korporacyjne. teoria i praktyka, wydawnictwo helion, gliwice. fabozzi f. j. (2000), rynki obligacji. analiza i strategie, wig-press, warszawa. field b. (1994), environmental economics. an introduction, mcgraw-hill, new york. gajdka j., walińska e. (2000), zarządzanie finansami. teoria i praktyka, t. 2, fundacja rozwoju rachunkowości w polsce, warszawa. houston j. f., brigham e. f. (2005), podstawy zarządzania finansami, wyd. 2, pwe, warszawa. howell s. (2001), real options. evaluating corporate investment opportunities in a dynamic world, pearson education limited. hull j. (1998), kontrakty terminowe i opcje, wydawnictwo finansowe wig-press, warszawa. jajuga k., jajuga t. (2008), inwestycje: instrumenty finansowe, aktywa niefinansowe, ryzyko finansowe, inżynieria finansowa, pwn, warszawa.   ochrona środowiska w wycenie przedsiębiorstwa… 89 janney j., dess g. (2004), can real-options analysis improve decision-making? promises and pitfalls, the academy of management executive, vol. 18, no. 4, 60–75, doi: http:// dx.doi.org/10.5465/ame.2004.15268687. managing the environment. the role of economic instruments, oecd, paris 1994. mizerka j. (2005), opcje rzeczywiste w finansowej ocenie efektywności inwestycji, prace habilitacyjne 20, wydawnictwo akademii ekonomicznej w poznaniu, poznań. rogowski w. (2008), opcje realne w ocenie przedsięwzięć inwestycyjnych, [w:] opcje realne w przedsięwzięciach inwestycyjnych, red. w. rogowski, oficyna wydawnicza sgh, warszawa. szablewski a., tuzimek r. (2004), wycena i zarządzanie wartością firmy, wydawnictwo poltext, warszawa. śleszyński j. (2000), ekonomiczne problemy ochrony środowiska, aries, warszawa. teach e. (2003), will real options take root?, cfo, july. verbruggen h. (1994), the trade effects of economic instruments, environmental policies and industrial competitiveness, oecd, paris. żylicz t. (2004), ekonomia środowiska i zasobów naturalnych, pwe, warszawa. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 3 date of submission: december 27, 2017; date of acceptance: december 30, 2017. * contact information: anna.kobylinska@student.uw.edu.pl, warsaw university, krakowskie przedmieście 26/28, 00-927 warsaw, poland, phone: +48 22 55 20 000; orcid id: https://orcid.org/0000-0003-4501-8768. ** contact information: maciek.balcerowski@gmail.com, instytut emerytalny sp. z o.o., solec 38 lok. 204, 00-394 warsaw, poland; orcid id: https://orcid.org/00000001-6282-3238. kobylińska, a., & balcerowski, m. (2017). pension valorization method – selected issues. copernican journal of finance & accounting, 6(3), 35–46. http://dx.doi.org/10.12775/cjfa.2017.015 anna kobylińska* warsaw university maciej balcerowski** instytut emerytalny pension valorization method – selected issues keywords: social security system, pension, fixed valorization, types of valorization, valorization. j e l classification: k30. abstract: the aim of this article is to present basic terms and issues connected with pension valorization. within the framework of this paper were presented methods of valorization and development of valorization in time. particular attention has been paid to the issue of jurisdiction of the polish constitutional tribunal k 9/12 mentioned fixed valorization from 2012. historical analyze is a measure to determine minimal standards of valorization according to polish constitution.  introduction pension benefits are paid in long-term perspective. the assumption is that the fixed pension benefits are to cover the pensioners’ economic needs. however, it should be noted that in the functioning market economy the economic value of anna kobylińska, maciej balcerowski36 established benefits will decrease. this results primarily from the progressive inf lation. the decrease of the economic value over time poses one of the threats occurring in case of failure to introduce the benefit instrument valorization. it is also important to determine the risk of formation of the so-called old portfolios and lack of beneficiaries’ participation in the increase of the social wealth. the threats mentioned above allow to take a stand on the essential meaning of legal regulations related to pension benefit valorization . the importance of valorization can be demonstrated by the fact that it is regulated both by national law and by acts of international law. methodology of the article the main issue of the article is to present legal aspects of valorization. as a part of the article it authors mentioned about economic aspects of the applied methods of valorization. primary scientific method used by the authors of the article is formal-dogmatic analyze of the legal acts and historical analyze of pre-existing legal acts. authors also applied methods of economic law analysis. concept of valorization the valorization concept comes in two basic meanings. firstly, it appears on the basis of art. 358 [1] of the civil code in the context of an exception to the principle of nominalism in force in the polish civil law. secondly, it appears on the basis of the act on pensions and annuities in the content of art. 89, as a system rule in which pension benefits are subject to regular valorization. the doctrine has repeatedly examined the admissibility of the use of the civil law valorization institution of social security benefits. it should be noted, however, that the final position was taken in the context of which those regulations do not apply (i.a. antonów, 2014, p. 495–496; zieliński, 1994, p. 200). in view of the uniform position of the doctrine in this regard, these views will be analyzed more broadly. when analyzing the valorization institution defined in the act on pensions and annuities, it is necessary to focus on its function of updating the amount of pension benefits in accordance with the provisions of the relation to changes in the level of living costs or salaries (gudowska & ślebzak, 2013, p. 591). this problem should also be linked to the concept of substitution rate. by that, the relationship between income earned by the beneficiary before retirement and pension valorization method – selected issues 37 the amount of the pension should be understood. valorization is to allow maintaining at least the original replacement rate in terms of acquiring power of the benefits. apart from maintaining the economic value of the benefits granted, valorization may also be an instrument of social policy of the state in enabling the beneficiaries to participate in the gdp growth (antonów, 2003, p. 141). the characteristic feature of valorization is its systemic character distinguishing it from the ad hoc valorization (gudowska & ślebzak, 2013, p. 591–592). types of valorization there are three main types of valorization distinguished in the doctrine of social insurance law: price valorization, pay valorization and mixed valorization (jędrasik-jankowska, 2016, p. 166). the first of above mentioned valorization s assumes an increase of the pension benefit amount based on the current inf lation ratio, i.e. the money purchasing power decrease value index. in case of price valorization, the existing pension value is increased by the inf lation rate. this can be expressed with the following formula: in the gdp growth (antonów, 2003, p. 141). the characteristic feature of valorization is its systemic character distinguishing it from the ad hoc valorization (gudowska & ślebzak, 2013, p. 591-592). types of valorization there are three main types of valorization distinguished in the doctrine of social insurance law: price valorization, pay valorization and mixed valorization (jędrasik-jankowska, 2016, p. 166). the first of above mentioned valorization s assumes an increase of the pension benefit amount based on the current inflation ratio, i.e. the money purchasing power decrease value index. in case of price valorization, the existing pension value is increased by the inflation rate. this can be expressed with the following formula: (1) where: ez – pension benefit upon valorization, e – pension benefit prior to valorization, wi inflation ratio expressed in percentage value. for example, assuming that the inflation ratio is 3%, whereas the amount of pension prior to valorization was pln 1000, the pension subject to valorization by the inflation ratio will be pln 1030. in the market economy one can also see the phenomenon of deflation, i.e. increase of the money value. in such a case, within the framework of price valorization, the amount of the benefit is not changed. pay valorization , as an index of increase of pension benefits, applies the gdp (gross domestic product) growth ratio. the pension value in such a case is increased by the amount of the gdp growth expressed in percentage value. this can be expressed with the following formula: (2) where: (1) where: ez – pension benefit upon valorization, e – pension benefit prior to valorization, wi – inf lation ratio expressed in percentage value. for example, assuming that the inf lation ratio is 3%, whereas the amount of pension prior to valorization was pln 1000, the pension subject to valorization by the inf lation ratio will be pln 1030. in the market economy one can also see the phenomenon of def lation, i.e. increase of the money value. in such a case, within the framework of price valorization, the amount of the benefit is not changed. pay valorization, as an index of increase of pension benefits, applies the gdp (gross domestic product) growth ratio. the pension value in such a case is inanna kobylińska, maciej balcerowski38 creased by the amount of the gdp growth expressed in percentage value. this can be expressed with the following formula: in the gdp growth (antonów, 2003, p. 141). the characteristic feature of valorization is its systemic character distinguishing it from the ad hoc valorization (gudowska & ślebzak, 2013, p. 591-592). types of valorization there are three main types of valorization distinguished in the doctrine of social insurance law: price valorization, pay valorization and mixed valorization (jędrasik-jankowska, 2016, p. 166). the first of above mentioned valorization s assumes an increase of the pension benefit amount based on the current inflation ratio, i.e. the money purchasing power decrease value index. in case of price valorization, the existing pension value is increased by the inflation rate. this can be expressed with the following formula: (1) where: ez – pension benefit upon valorization, e – pension benefit prior to valorization, wi inflation ratio expressed in percentage value. for example, assuming that the inflation ratio is 3%, whereas the amount of pension prior to valorization was pln 1000, the pension subject to valorization by the inflation ratio will be pln 1030. in the market economy one can also see the phenomenon of deflation, i.e. increase of the money value. in such a case, within the framework of price valorization, the amount of the benefit is not changed. pay valorization , as an index of increase of pension benefits, applies the gdp (gross domestic product) growth ratio. the pension value in such a case is increased by the amount of the gdp growth expressed in percentage value. this can be expressed with the following formula: (2) where: (2) where: ez – pension benefit upon valorization, e – pension benefit prior to valorization, wpkb – gdp growth ratio expressed in percentage value. for example, assuming a 4% gdp growth, with the amount of pension prior to valorization of pln 1000, such a pension would be pln 1040 upon wage valorization. in case of gdp value decrease, wage valorization is not applied. the last type of valorization is the so-called mixed valorization, sometimes also referred to as price-wage valorization. it assumes the use of both the inf lation ratio and the gdp growth ratio. they can be taken into consideration to different extents. this can be expressed with the following formula: ez – pension benefit upon valorization, e – pension benefit prior to valorization, wpkb gdp growth ratio expressed in percentage value. for example, assuming a 4% gdp growth, with the amount of pension prior to valorization of pln 1000, such a pension would be pln 1040 upon wage valorization. in case of gdp value decrease, wage valorization is not applied. the last type of valorization is the so-called mixed valorization, sometimes also referred to as price-wage valorization. it assumes the use of both the inflation ratio and the gdp growth ratio. they can be taken into consideration to different extents. this can be expressed with the following formula: (3) where: ez – pension benefit upon valorization, e – pension benefit prior to valorization, wi inflation ratio expressed in percentage value, wpkb gdp growth ratio expressed in percentage value, w1, w2 inflation ratio consideration index or gdp growth ratio expressed in percentage value. for example, assuming the inflation level of 3%, gdp growth of 4% , where the amount of pension prior to valorization was pln 1000, and where w1 and w2 indices are 80% and 20%, respectively, the amount of pension will be pln 1038. the third type currently adopted in the system is the price-wage (mixed) valorization, introduced by the act on pensions and disability pensions (apdp). it assumes establishment of the pension amount by multiplication of the benefit amount and its assessment base by the so-called valorization ratio, i.e. the goods price index in the previous calendar year increased by at least 20% of the average wage increase. until 2015, this increase was the subject of negotiations of the trilateral commission for social and economic issues [trójstronna komisja do spraw społeczno-gospodarczych]; in 2015, under the act of 24 july 2015 on the council of social dialogue [rada dialogu społecznego] and other social (3) where: ez – pension benefit upon valorization, e – pension benefit prior to valorization, wi – inf lation ratio expressed in percentage value, wpkb – gdp growth ratio expressed in percentage value, w1, w2 – inf lation ratio consideration index or gdp growth ratio expressed in percentage value. for example, assuming the inf lation level of 3%, gdp growth of 4% , where the amount of pension prior to valorization was pln 1000, and where w1 and w2 indices are 80% and 20%, respectively, the amount of pension will be pln 1038. the third type currently adopted in the system is the price-wage (mixed) valorization, introduced by the act on pensions and disability pensions (apdp). it assumes establishment of the pension amount by multiplication of the benefit amount and its assessment base by the so-called valorization ratio, i.e. the pension valorization method – selected issues 39 goods price index in the previous calendar year increased by at least 20% of the average wage increase. until 2015, this increase was the subject of negotiations of the trilateral commission for social and economic issues [trójstronna komisja do spraw społeczno-gospodarczych]; in 2015, under the act of 24 july 2015 on the council of social dialogue [rada dialogu społecznego] and other social dialogue institutions it was, however, transformed in the council of social dialogue. if the council does not adopt a resolution regarding the above subject in a reasonable time, the increase shall be determined by way of a decree of the council of ministers. in relation to received pensions and disability pensions, the valorization is carried out ex officio (antonów, 2009, p. 497). according to art. 88 of apdp, the pensions and disability pensions are subject to annual valorization as of 1 march. however, the price-wage valorization mechanism, with assumption of change of the annual benefit amount, was not the only solution functioning in the social insurance system over the years. historical development of the valorization institution in poland the valorization institution understood as a system solution was introduced in the polish legal system by way of the act of 14 december 1982 on pension benefits for employees and their families (journal of laws 1982 no 50 item 267). the above-mentioned act entered into force on 1986. prior to introduction of the act on pension benefits for employees and their families, ad hoc re-valorization activities were carried out. it resulted from the assumption that the problem of price amount change is insignificant in a socialist economy. however, it turned out that introducing such a long vacatio legis forced the introduction of an additional re-valorization of the benefits even before the act entered into force. the act of 1982 introduced temporary valorization based on the wage index. the introduced valorization system can be evaluated positively from the point of view of protecting the economic interests of the beneficiaries of the pension system. this may be proven by the fact that while in 1989–1996 the real remuneration value decreased by 26% in case of pensions, it was only 6% (antonów, 2003, p. 149). the consequence of the existing valorization system was a significant encumbrance of public finances. in consequence, it was necessary to revise the applicable valorization system. this change was introduced by the act of 29 september 1995. the act asanna kobylińska, maciej balcerowski40 sumed resigning from the wage valorization model and replacing it with price valorization. this solution was to allow to balance the situation of public finances, simultaneously maintaining the real economic value of paid pensions. however, the consequence of the introduced valorization model was the farreaching limitation of pensioner participation in the gdp growth. as a result, the current act of 17 december 1998 was passed on pensions and annuities from the social insurance fund (journal of laws 162, item 1118). the act assumes establishing a mixed valorization of pension benefits scheme. the current standard of valorization of pension and annuities benefits has been shaped by the act amending the act on pensions and annuities of the social insurance fund dated 7 september 2007. (journal of laws no. 191 item 1368). according to the mentioned act, the annual valorization model was adopted, and as the index of valorization , the average annual price index of consumer goods and services increased in the preceding calendar year by at least 20% of the real increase of the average remuneration in the preceding calendar year. by setting the minimum valorization standard, the legislator allowed the possibility of raising the level of participation of beneficiaries in the gdp growth by introducing negotiations within the council for social dialogue. subsequent amendments to article 89 of the act on pensions and annuities has not made any significant changes to the current valorization model. “fixed” valorization it is worth to shed some light on so-called fixed valorization introduced in the act dated 13 january 2012 amending the act on disability and retirement pensions from the social insurance fund (journal of laws of 2012, item 118) (hereinafter referred to as “ueir”). the said valorization is based on the idea of oneoff increase of the retirement benefits by the uniform amount of pln 71 and the valorization of the benefit assessment basis by the valorization index corresponding to the percentage increase of the disability or retirement pension. in this case, the legislator has withdrawn from the application of the valorization model stipulated in the article 89 of ueir. this solution raised a lot of doubts as due to the majority of the legal doctrine valorization minimum standard is determined by the price valorization allowing the economic value of the benefit to be maintained (szpor, 2013, p. 155). if the said minimum standard is not provided, the risk of the devaluation of the paid benefits and – in consequence – the loss of their economic value would occur (jędrasik-jankowska & jankowska, pension valorization method – selected issues 41 2011, p. 188). the introduction of the valorization of the disability and retirement pensions by the uniform amount resulted in the following phenomenon: in relation to some benefits not only was the benefit replacement rate maintained but it also increased at the same time. nevertheless, the adopted valorization model assumed that in case of the persons who receive the highest benefits the level of the price valorization has not been reached. hence, it should be assumed that in such a case the benefit replacement rate has been decreased. in conclusion, the adopted valorization model gave a certain preference to those having lower pension benefits at the expense of people receiving higher benefits (gudowska & ślebzak, 2013, p. 597). the valorization model introduced in the act of 2012 was widely discussed by the constitutional court. not meeting the standards of the price valorization in relation to the part of the beneficiaries was one of the main problems indicated in the application raising the issue of the constitutionality of the act of 2012. moreover, it was argued that ueir did not bear in mind the existence of the principle of benefits equivalence applicable within the retirement pension system. despite the allegations raised, in case no. k 9/12 dated 19 december 2012, the constitutional court decided on the constitutionality of the act in question1. the constitutional court’s decision was supported by three principal theses which will be brief ly described below. firstly, it was assumed that the introduced fixed valorization was pursuing the objective of the social solidarity, i.e. increase of the retirement benefits of the persons receiving the lowest benefits. the constitutional court also questioned the violation of the principle of benefits equivalence in relation to the selected social groups, such as soldiers or public officers. secondly, it was underlined that the purpose of the right to oldage security, as well as to benefits valorization, is to ensure the minimum of the subsistence level. therefore, a possible breach of the right to oldage security may occur if the valorization below the level of the price valorization leads to reduction of economic value of the pension as a result of the fixed valorization. furthermore, the constitutional court stressed that the ueir was of the episodic nature. hence, it was not the ueir’s intention to introduce totally different valorization system which would turn out to be less favorable for part of the insured persons. 1 it should be noted that six dissenting opinions have been communicated in relation to the judgment no. k 9/12 dated 19 december 2012. anna kobylińska, maciej balcerowski42 undoubtedly, the abovementioned judgment of the constitutional court constitutes an exemption to the existing jurisprudence which underlines the importance of the valorization in the process of the maintenance of the paid retirement benefits economic value (for instance see the ruling of the constitutional court dated 20 december 1999, no. k 4/99, otk 1999, no. 7, item 65 and the ruling of the constitutional court dated 15 october 1997, otk 1997, no. 3–4, item 39). additionally, some doubts may arise over the arguments indicated in the ruling’s justification. it seems that the constitutional court depreciates the principle of the benefits equivalence in terms of the retirement benefits giving priority to the principle of social solidarism. the constitutional court rightly points out that the amount of the retirement benefits received by the soldiers or public officers does not depend on the amount of the premium deducted. this results from the fact that the retirement benefits in the given case are paid under the social provision system which does not require the premium payment. however, it should be noted that the amount of the received retirement benefit usually depends on the period of service of the soldier or public officer or on the specific service conditions. taking the above into account, it seems that the equivalence of the retirement benefits should also apply to other factors. such a conclusion seems to be rational due to the fact that the equivalence of the retirement benefits in relation to the retirement benefits paid under the defined benefits scheme has not been argued by the legal doctrine. the amount of the benefit under the defined benefits scheme depended, among others, on the insurance period (jędrasik-jankowska, 2016, p. 148). the constitutional court’s arguments regarding the problem of ensuring the minimum of the subsistence level may be questionable in terms of realization of the main scope of the valorization which is the maintenance of the economic value of the paid benefits. although, the constitutional court rightly indicates that the fixed valorization does not cause the decrease of the benefits’ amount below of the subsistence level, it does lead to decrease of the replacement rate in case of the beneficiaries receiving the highest benefits. furthermore, decrease of the replacement rate problem is strictly connected with the third argument presented in the constitutional court’s ruling, i.e. the episodic nature of the analyzed act. ueir does not introduce the new valorization model. it was agreed that the legal consequences resulting from the act were limited in time up to one calendar year. however, it should be noted that, in fact, the introduced fixed valorization resulted in the change of the benefits’ and replacement rate’s value. therefore, although the fix valorization mech pension valorization method – selected issues 43 anism was used only once and in relation to the specific time period its consequences (e.g. change of the replacement rate) are of lasting nature. what is more, the following valorization s performed due to the article 89 of ueir did not restore the consequences resulted from the fixed valorization. economical results of ‘fixed’ valoryzation as we could see ‘fixed’ valorization was based on the idea of one-off increase of the retirement benefits by the uniform amount of 71 pln. it means that index of valorization was different for pensioners depends from amount of pension. below we will try to present economical results of ‘fixed’ valorization on the example of two pensions – where one is 1000 pln and second is 3000 pln in the period of five years. according to the polish social insurance institution index of valorization were: table 1. rate of valorization 2012–2016 year index of valorization rate of inflation gdp growth 2012 104.68% 3.7% 1.9% 2013 104.54% 0.9% 1.6% 2014 102.06% 0% 3.4% 2015 105.37% -0.9% 3.6% 2016 106.37% -0.6% 2.7% s o u r c e : polish social insurance institution, central statistical office, polish market. index of valorization for 2012 is a average value for a whole group of pensioners. index of valorization for retiree with benefit 1000 pln would be in 2012 on the level of 107.1 % and for retiree with benefit 3000 pln on the level of 102.37%. if legislator would not decide for ‘fixed’ valorization in 2012 the first benefit in 2016 would be on amount of 1251.81 pln and the second one in amount of 3755.43 pln. adoption of ‘fixed’ valorization results that first benefit in 2016 would be on amount of 1280.75 pln and the second one on amount of 3672.43 pln. it shows us that in the long term ‘fixed’ valorization is resulting in higher benefits for retiree with smaller pensions and lower benefits for retiree with higher pensions. anna kobylińska, maciej balcerowski44  conclusions the pension is kind of benefit which is paid in a long term. it results in susceptibility for inf lation and the issue of the “old wallets”. by the concept of the old wallets we understand pensions which were granted prior and they are lower than pensions which are granted nowadays. enrichment of the society also is the starting point of the discussion about participation of the retirement in gdp increase by increasing their pensions. constitutional basis of social insurance system is article 67.1 of constitution of the republic of the poland. according to this regulation a citizen shall have the right to social security whenever incapacitated for work by reason of sickness or invalidism as well as having attained retirement age. the scope and forms of social security shall be specified by statute. the doctrine of the social insurance point out that valorization as a measure which guarantee the economic value of the pension is an important part of the right to social security (banaszak, 2012, s. 407; gudowska & ślebzak, 2013, s. 591). without such guarantee granted benefits would depreciate and have only symbolic significance. it would be most important during the period of high inf lation. despite that right to valorization of the pension is the part of the right to social security the constitution is not providing us clear guidelines which method of valorization should be picked by legislator (safjan & bosek, 2016, p. 1519; for instance see the ruling of the constitutional court dated 8 of may 2000r. sk 22/99, otk 2000 nr 4 poz. 107). it seems that according to current legislation the legislator has to choose which method of valorization would be applied. the legislator does not have complete freedom in that matter. he is obliged to respect minimal standards of valorization which are defined in jurisdiction of constitutional tribunal and the established view of the doctrine. the issue of the valorization is important task to deal by state social policy and policy itself. mentioned legislator right to create rules of the valorization might result in creation ‘special acts’ which could be used as a way to achieve political goals. it can cause serious danger for stability of pension system. b. banaszak said that social insurance and especially pension insurance should be free from legislator actions motivated by political reasons (banaszak, 2012, p. 406). right to social security and right to valorization could be limited by other constitutional rights or rules. the main importance have social solidarity rule and sustainability of public finances. legislator is also obliged to take into con pension valorization method – selected issues 45 sideration rule of equivalence of the benefits of the insured and pension benefits. the term of insured benefits should be understand widely not only as paid contributions. binding valorization model have to meet indicated above rules and rights which can also be contradictory. we should agree with prevailing view of the doctrine which says that minimal standard of the valorization create the pay valorization (szpor, 2013, p. 155; jończyk, 2006, p. 152). mentioned method provide to preserve economical value of the pension and its equivalence to insured benefits. increasing replacement rate by pay valorization is strictly connected with social solidarity rule which give to pensioners right to participate in gdp increase. increasing of the pension due to pay valorization demand from the legislator to respect rule of sustainability of public finances. if legislator choose too ‘expensive’ method of valorization the state would not be able to fulfill its obligations.  references act amending the act on pensions and annuities of the social insurance fund dated 7 september 2007. (journal of laws no. 191 item 1368). act of 14 december 1982 on pension benefits for employees and their families (journal of laws 1982 no 50 item 267). act of 17 december 1998 on pensions and annuities from the social insurance fund (journal of laws 162, item 1118). act of 23 april 1964 civil code (journal of laws 2017 item 459). act of 24 july 2015 on the council of social dialogue (journal of laws 2015 item 1240). antonów, k. (2003). prawo do emerytury. (right to pension.) cracow: wolters kluwer. antonów, k. (ed.) (2009). ustawa o emeryturach i rentach z funduszu ubezpieczeń społecznych. (pension from social security fund act. commentary.) warsaw: oficyna wydawnictwo. antonów, k. (ed.) (2014). emerytury i renty z fus. emerytury pomostowe. okresowe emerytury kapitałowe. komentarz. (pension from social security fund. ‘bridgining’ pension. periodic capital pensions. commentary.) warsaw: wolters kluwer. banaszak, b. (2012). konstytucja rzeczpospolitej polskiej. komentarz. (constitution of the republic of poland. commentary.) warsaw: c.h. beck. central statistical office, http://stat.gov.pl/obszary-tematyczne/ceny-handel/wskazniki-cen/wskazniki-cen-towarow-i-uslug-konsumpcyjnych-pot-inf lacja-/rocznewskazniki-cen-towarow-i-uslug-konsumpcyjnych-w-latach-1950–2014/ (accessed: 28.01.2018). anna kobylińska, maciej balcerowski46 gudowska, b., & ślebzak, k. (eds.) (2013). emerytury i renty z funduszu ubezpieczeń społecznych. emerytury pomostowe. komentarz. (pension from social security fund. ‘bridging’ pensions. commentary. commentary.) warszawa: c.h. beck. jędrasik-jankowska, i. (2016). pojęcia i konstrukcje prawne ubezpieczenia społecznego. (terms and legal institutions of social insurance.) warsaw: wolters kluwer. jędrasik-jankowska, i., & jankowska, k. (2011). prawo do emerytury. komentarz do ustaw z orzecznictwem. (right to pension. acts commentary with judicature.) warszawa: lexisnexis. jończyk, j. (2006). prawo zabezpieczenia społecznego. (right to social security.) cracow: zakamycze. polish market, http://www.polishmarket.com/poland_basic_data.shtml (accessed: 28.01.2018). polish social insurance institution, http://www.zus.pl/wskazniki-waloryzacji-rocznej (accessed: 28.01.2018). safjan, m., & bosek, l. (eds.) (2016). konstytucja rp. tom i. komentarz. art. 1–86. (constitution of the republic of poland. volume 1. commentary. article 1–86.) warsaw: c.h. beck. szpor, g. (ed.) (2013). system ubezpieczeń społecznych. zagadnienia podstawowe. (system of social insurance. basic issues.) warsaw: lexisnexis. zieliński, t. (1994). ubezpieczenia społeczne pracowników. zarys systemu prawnego – część ogólna. (employee’s social insurance. basics of legal frame – general part.) warsaw–cracow: wydawnictwo naukowe pwn. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: january 9, 2017; date of acceptance: january 30, 2017. * contact information: jkomoro@sgh.waw.pl, warsaw school of economics, al. niepodległości 162, 02-554 warszawa, poland. komorowski, j. (2016). business model and its dilemmas of choice. copernican journal of finance & accounting, 5(2), 109–123. http://dx.doi.org/10.12775/cjfa.2016.018 jan komorowski warsaw school of economics business model and its dilemmas of choice keywords: business model, strategy of enterprise, “upside – down” business orientation, “bottomup” business orientation, monetarism, monetaristic thinking. j e l classification: l22, m10. abstract: consideration of the article is focused on the phenomenon of diversity of enterprises management operating in similar conditions under the choice of business model. the article is an attempt to demonstrate the impact of business model for perception of reality, adaptation to changes and implementation of a strategy. there are presented arguments showing that the orientation of the business model to the capital market has a direct impact on the operational activity and strategic options of the company. in the longer term it affects the nature of business and opportunities of its development. this means that during the financial crisis and market distortions, the business model of the stock company may disturb operations and opportunities for its growth. this phenomenon is associated with “monetarist thinking” and acceptance of the processes of the “financialisation” of economy, which ignores real dimension of business. business management focused on capital market may transmit negative signals not noticing the serious threats, the imbalance of economic structures, the collapse of economic equilibrium, lack of respect for the principles of the free market and the dominance of monopolistic structures, which falsify assumptions of market efficiency. in this connection, the question arises to what extent the enterprises performing the business model of the stock exchange operator are exposed to specific risks due to lack of stability of the financial markets. jan komorowski110  introduction in recent years business model has become an inspiration of management, business development and corporate strategy. this concept explains why similar companies operating in the same conditions and accepting the same rules of game may differ in performance and thus achieve different results. their mode of action and choice making generally ref lect perception of the reality and the implemented business model. it follows that one can determine the long-term success factors and business doomed to fail. the article draws attention to the risks arising from the use of stencil strategy and the consequences of the choice of business model oriented to the capital market. assuming that the business model has a direct impact on the operational sphere of the company, the purpose of the article is to present the results of applying such models in conditions of crisis and instability in financial markets. it follows that in the recession the business model may limit the development opportunities for the company. business model concept and its functions business model category has been recently discovered and introduced to the theory of business management. it is believed that the concept arose during the development of applications. while describing the decision-making process, the great diversity of the operation of businesses in similar conditions has been noticed (norris & west, 2001, p. 179). the business model is a general rule of decision chain. it is assumed that this rule optimizes the achievement of the company’s objectives. this assumption is a critical element of this instrument. the optimization process is here expressed by a specific approach to management by its executive bodies. this means that decisions arising from the business model are repeatable, ref lecting the goals, objectives and preferences of decision-makers. applying the business model is therefore the opposite of one-shot decisions, which express the changing preferences and objectives (bogetoft & pruzan, 1997, pp. 236–237). in the literature you can find many definitions of this category. company’s business model is referred to (romanowska & wachowiak, 2006, p. 243): ■ a general description of the enterprise, ■ mode of action ensuring income generation to the company, ■ product creation architecture, business model and its dilemmas of choice 111 ■ the structure of transactions directing, ■ the use of business opportunities focused on achieving the goals, ■ the value chain organisation. generally speaking, the business model determines the procedure used to decision making in a changing business environment. this instrument along with company goals and budgeting mechanism determines the action program. it follows that a strong factor in shaping the business model is to focus on the objectives and key areas as a source of benefits for the company and at the same time ignoring factors deemed as less important. as a result, business model category reduces a complex reality and is based on the fundamental factors that generate results (komorowski, 2015b, pp. 81–96). it follows that the form of business model focuses on the functions considered by management as the most important is insufficient. business model expresses the conviction of decision makers that accepted way of business management is effective and leads the shortest way to objectives achievement. thus, the business model can be described as a scheme of prospective thinking managers, which strengthen the determination to realization of the implemented strategy. it also shows an image of competence and management skills. it follows the division of business models made by b. nogalski into three main groups of companies (nogalski, 2009, pp. 5–8): ■ passive enterprises that decision makers do not react to changes, even if they perceive them, so they do not take the adjustment and restructuring projects, ■ reactive enterprises whose decision makers react to changes with delay often forced, showing the greatest reactivity to changes in legislation and much less when it comes to market changes, ■ proactive enterprises, providing for the future and trying to overtake programmed trends, corresponding to the strategic reorientation of business open to the external environment, determining the content of the strategy, systematically subordinated to the logic of business operations. the choice of business model ref lects indirectly the existing financialand regulatory system, in which managers learn to react to different market signals in terms of core business. the behavior of entrepreneurs are in fact a consequence of the regulations, economic policy and general practice. it engineers when creating applications have the ability to reproduce quite faithfully the decision making process, the link between operational and corporate level and jan komorowski112 decision assignment to the individual. in this way, the business model controls the streams of information, its processing and collection in the database. besides the business model remains the question of relations with the environment. this means that the factor of relationship with the environment as a fundamental attribute of the strategy is the subject of a competition model, and internal relationships are subject to management models. this is how the analytic formula of the enterprise is being formed. internal and external orientation in the business model of the company the business model essentially takes the internal or external orientation, which means treating a particular set of factors as a key in the decision-making process. internal orientation occurs in complex corporate group structures. a classic example of the exterior orientation is to comply the management to signals coming from the market, and the inner orientation is expressed by the company focus on improving core business. in this context, the business model expresses the degree of the company reactivity to external and internal factors. today’s businesses dependent from environment, realize mostly the external orientation, adapted to receive signals from the capital market, as well as, labor and supply side. among the important factors justifying the external orientation of the company changes in supply and demand, the behavior of competition, technological progress, preferences and tastes of buyers, investors’ expectations, as well as the globalization processes, and institutional conditions, regulatory and social shaping the business environment should be included. this orientation provides a faster response to changes in the area of demand, buyers’ preferences, distribution channels, financing and billing. for example, in the past, when the market was characterized by a deficit of many raw materials and shortage of goods on the market, then, the business model of companies was characteried by overstuffing in supply department, and sales were made without the support of marketing. currently, excess supply of goods forced to be more active in the market. the new threats arising from dependence on external factors, imitation, susceptibility to speculation, etc are frequently seen. this can lead to lost opportunities, waste, unused internal potential, and sometimes giving up their own path of development and individual aspirations. business model and its dilemmas of choice 113 it seems that emphasizing the external orientation underestimates the opportunities that result from the internal orientation of the company. internal orientation is the prerogative of the market leaders and companies with a competitive advantage, which create new products and services. it focuses on the internal development. this orientation is combined with organizational or technological progress, improving management efficiency, attractiveness, modernity of produced goods and services, and company’s internal culture. assuming that the source of innovation is human capital, the relationship of employees, their attitudes and competencies, participation in decision-making processes are stimulated. undoubtedly, internal orientation initiates and enhances the development processes in the enterprise, which in practice is ref lected in the resignation leveraging position of the company by expenditure on advertising and promotion, and shifts resources to the accumulation of internal investment, research and development. there is no doubt that the japanese, chinese and korean companies realize this kind of orientation, so they achieve amazing effects displacing western products from the market. therefore exists a need for compromise in forming the company’s orientation, as sidedness of external orientation leads to imbalance and addiction and, consequently, to the loss of industry in the west. the main types of business models of enterprises the business model is not just a theoretical concept, but it is expressed through the accepted priorities, allocation of resources and responsiveness to external factors. its design combines with the objectives and budgeting system and is mapped in the it application supporting the maintenance of accounting records. all this affects the f low of information, judgment, decision making, the importance of deviations from the budget plan and priorities for updating tasks. from this point of view, there are two basic types of business models of key importance for the company1: 1. bottom-up model, which ref lects the traditional approach to business management. this model exists in two forms: 1 through the architecture of the budgeting we understand the configuration of the budgets covering the business activity of the company. it expresses the structure of partial budgets and the way of subordination to main budget. jan komorowski114 − customer and its needs oriented, − product and its quality, modernity and attractiveness orientation. 2. upside-down model, which existsts in two forms as well: – capital market oriented, – enterprise development oriented. table 1. bottom – up models characteristics business model form customer oriented models product oriented models success factors budgeting sales budget, marketing budget, distrubution budget. r&d budget, investment budget, technical and organizational progress budget, product budget. key decisions areas promotional activities, advertising activities, loyalty systems, investment in distribution network, mass production, after-sales service, pr policy. product marketing research , investment focused on the development,investment in quality, technology and innovation, motivation systems,working conditions, training, integration. industries preffering this model household appliances, clothing, drugs, cosmetics, luxury consumer products, electronic gadgets. electronic products, computer applications, printers, telecommunications equipment, computer equipment. well known examples louis vuitton, coca-cola, pierre cardin, versace, unilever, heineken. samsung, lg, panasonic, sharp, motorola, ibm, siemens, siemens – bosh, sony. s o u r c e : own elaboration. recognizing the business model of the company is not easy when everyone declare their concern about the product and the customer and good relations with investors, and access to financial reports is limited. therefore, the type of business model can be inferred from the behavior of products on the market and the capital market by assessing the set priorities and direction of the surplus allocation. for example, coca-cola is known from the fact that over the decades has a very narrow range of beverages, the company louis vuitton grows through mergers and acquisitions, which means that the success of these companies is not due to spending on research and development of the product, but it is the result of successful marketing and capital operations. you can also specify a group of companies that owe their success mainly to the scale of investment in research, technological and product development. it is characteristic that in a bottom-up model operational budgets play major role. their aggregate determines the summary budget at the corporate level. this means that the objectives of the company are focused on market expan business model and its dilemmas of choice 115 sion, the structure and volume of sales, competition etc. the strategy of their implementation ref lect the budgets of sales and operating expenses of marketing, promotion, advertising, etc., which constitute leverage business performance, which can be expressed synthetically through the following equation: i c = g, so: income – cost = gain. in this equation, the financial result is a variable dependent on the revenues and expenses. in the bottom up model, the implementation of operational budgets is the basis for reporting and assessing current results used for programming the future tasks of the company . in this way, operational efficiency determines the valuation of the company. the listed companies and large corporations are dominated by the other types of business models called upside – down. in this category of models the companies are oriented to the capital market. their activity is driven by capital raising (leverage), and the objectives are focused on increasing the value, which is considered to be a major factor in building positions in the stock market. table 2. upside-down business models characteristics business model form capital market oriented models enterprise development oriented models success factors budgeting capital budgets,budget for debt service,dividend budgeting. investment budget, technical and organizational progress budget, product budget. key decisions areas capital value increasing, financial leverage management, shaping the capital profitability, financing structure, financial risk control, management of debt levels, shaping the image of the company. capital value increasing , r&d, market expansion, internal accumulation, investments focused on growth, investment in advanced technologies and innovation, working conditions improvement, training activities and integration. industries preffering this model household appliances, financial sector enterprises, banks, insurance companies, investment funds, pension funds. petrochemical industry, metallurgical, automotive, machine tool, robotic, energy, telecommunications,construction, aerospace, space industry. well known examples hsbc, ubs, citi bank, pko bp, pir, pzu, warta. microsoft, samsung, lg, sony, panasonic, sharp, motorola, ibm. s o u r c e : own elaboration. the upside-down model is dominated by corporate budgeting, because the aim of this type of business model is meeting the capital market expectations. jan komorowski116 this does not mean that the signals from the market are completely ignored, but the main determinant of the financial proportions are companies trading on the stock exchange. the structure of the model is relatively stable in the following cases: ■ high dependence on access to capital (banks), ■ wide hierarchical organizational structures, ■ significant dispersion of subordinated units, ■ centralization of decision by the general contractor, ■ high share of public funding. in this type of model corporate relationship are the basis for the task determining on the operating level, which can be synthetically represented by the formula: g + c = i, so: gain + costs = income. this means that the value of profit is determined in advance, which is due to the planned rate of return on equity, stock prices, dividends and other expectations related to the distribution of profits. a comparison of these tables shows that the business models of large business organizations, groups of companies and multinational corporations have a more complex structure comprising mixed properties, which means that large companies oriented to the capital market should also strive for good relations with customers and improve product quality. there is no doubt, however, that in every model, a key differentiator may be defined, that is, the direction of operational budgeting and governance. business models dilemmas of capital market oriented enterprises business models oriented to the capital market are the most popular among international corporations, investment funds and banks. they are also emulated by smaller companies. orientation to the capital market involves the dominance of the financial sector, so-called. financialisation and monetarist way of thinking, or valuation according to financial categories that permeates the modern economy. it creates the market trends, patterns of behavior and market signals that determine the activity in the operational sphere. participants assume market efficiency and its excellent f lexibility, although the reality is far from the ideal model and perfect competition. business model and its dilemmas of choice 117 driving element here is the supply of financial capital. access to cheap capital is treated as a source of value creation, and the purpose and key success factor is the multiplication on the capital market. the pursuit of a listed company to a strong position in the marketplace is to ensure the interest of investors and access to cheaper sources of capital. position on the stock market is the measure of success and the basis for valuation. the growth rate of value has become the target of financial corporations and the basis of projections of financial statements and designation of tasks at the operational level. following the subordination of the company to price on the stock exchange by reversing the traditional sequence of financial result dependence from the sale of products. in this approach, the level of profit as an independent variable, and cost limit, which should not be exceeded are defined a priori. corporate results are so planned, to technical analysis led investors to the desired conclusions. the company aimed to meet investors’ expectations should achieve the operational results associated with a particular position in the marketplace. overall balance of the company is here defined as an expression of the compatibility of operations with the expected market capitalization. hence the stock exchange is the most important determinant of the company’s objectives and strategies. focus on capital market mobilizes the potential of the company and runs the inventiveness of managers in the field of creative accounting. the expected value of the ratios (price / earnings, price / book value, price / cash f low, the dividend / earnings ratio, dividend / price etc.) determines the value of variables to allow projection of business performance at the corporate level, and these are the basis for the designation of operational tasks. the strategy of increasing the shares value seems to be a necessity in this system. increasing the value of the company on the stock exchange is done through the implementation of predetermined financial surplus, which determines the desired increase in the value of shares on the stock exchange. company’s profit resulting from the valuation of the stock level is determinant necessary to obtain revenues. if the operating activity is insufficient to achieve the prognosed value of shares, which is interpreted as an increase in risk for investors, then there is a risk of downgrade of the company and, therefore, increase of the cost of capital. persistent deterioration in trading is a clear signal to investors and analysts to revise projections of annual results, which then in certain circumstances can cause an outf low of capital, a further decline in the value of and shrinkage of the company. that’s why most companies seeking for a reliable image on the jan komorowski118 stock market and tries to stabilize the stock price. it is expected that the projected financial performance of the company should be ref lected in the stock prices. in this way, the position of the company on the stock market, and hence required rate of return is the starting point to determine the tasks. solutions that do not meet this criteria are rejected. this does not apply to companies with high concentration of ownership. their dominant owners often artificially maintain discounted share prices and buy them from the market in order to increase control over the company. in the investment funds, holdings and financial corporations business model focused on stock prices is expressed in frequent restructuring and ownership changes. object of operations is of secondary importance here, because what matters is profitability of invested capital. assessment of the company balance is reduced to the system of following equations: 1. operational balance requirements, in which the amount of the total operating margin provides coverage of fixed costs and the achievement of planned ebit, 2. capital market balance requirements, where the level of return on equity reaches rrr (required rate of return), expected by the capital market, which is considered satisfying by investors, determined on the basis of capm model variables, 3. long-term equilibrium requirements, in which the capitalization of net cash f lows in subsequent years according to npv method, provides a rate of return similar to the return on investment on the capital market, 4. big holdings seem most interested in business acquisitions and takeovers. based on the above equations with greater accuracy it comes to the harmonization of operating results at the corporate level. the subordination of the tasks to the company’s future performance is ultimately imperative to current activities. depending on the scale o deviations of current trading performance and the planned profit, the operating budgets are being controlled, additional capital are being involved, investments reduced and reserves launched. it is worth noting that the business model of a listed company receiving orientation to the capital market involve certain dangers. short-term investments in the stock market bringing results outside its core business. the tendency to speculation results from inf low of capital into the economy due to increased issues of treasury bonds and the mechanism of money creation by banks. monetarist policy of stimulating economic prosperity by increasing the money sup business model and its dilemmas of choice 119 ply increases capitalization of stock exchanges and spreads to all countries in the form of exports of relatively cheap credit. difficulties in balancing operations with the requirements of corporate balance are causing increased interest in financial assets trading. since then dilemmas of capital profitability and risks specific to the industry are driven by speculative trading strategies. this mechanism makes the interest of financial operations bringing strong returns gradually displaces the real sector of the economy, strengthening the financial activity of the corporation. in this way, it expresses one of the basic strategy of listed companies within the monetarist thinking, based on the assumption that capital market operations are directly the source of value creation. here we have confirmation of slogan saying that “money makes money” on the stock market, despite the fact that products of famous brands are gradually disappearing from the market. the consequence of this phenomenon is the impact of the business model for corporate goals in which profit is put above the product development. related to this is a serious threat to enterprise strategies. there has infected this kind of thinking of commercialized entities in the sphere of social services, such as utility companies, publishing, media, private universities, health care facilities and hospitals, etc. many of them after commercialization is the subject of acquisitions by global corporations. rightly, therefore are postulated the concepts of sustainable development, rebuild trust and act in accordance with the best standards of csr, not only in the financial sector (pettersen-sobczyk, 2014, p. 264). on the other hand, in consequence of this business model, low profitability is a signal for restructuring, split or merge with other entities, led by criteria of capital profitability and maintenance of position on the stock market by the parent company. this happens when the margins rise but neither customers nor employees do not notice the benefits of these operations, and a growing part of the workforce is employed on junk contracts. when dealing with corporations oriented on capital return and long-term growth in shareholder value, this strategy may result in significant shrinkage of the core business and the size of the companies. presented symptoms are accompanied by a loss of competitiveness and market share, reduced scale of operations and shrinking employment. consequently certain industries disappear in western countries. this phenomenon is quite common evidenced by the situation seen in many branches. the car manufacturers, producers of household appliances, clothing and electronics that through restructuring, following the increase in the rejan komorowski120 turn on equity, offshoring and outsourcing, got rid of many factories, scattered production and finally lost control over the production of components. some of them took the form of groups of companies controlling subsidiaries, although they lost dominant position in the industry, other do not exist (lamm, 2013; ślusarczyk, 2015)2. risks arising from the business orientation to the capital market the issues of the business model are considered assuming the existence of general economic equilibrium. meanwhile, the situation on the markets in the post-crisis period is far from stabilizing. we are dealing with speculative capital f lows destabilizing valuations mechanism, resulting in disruption of internal balance and operations. first of all, the basis for valuation of the companies are not directly the actual results which ref lect market activity, but the results expected in the future. they are estimated by the predictions based on historical data believed to be reliable, although it need not be so. the probability of the difference between the valuation of the company’s value and its actual results, is an expression of investors of investment risks, and f luctuations in current trading against the long-term trend – the source of market risk. this means that the case where both risk factors are of significant value, in spite of a satisfactory profitability projections, the investor may incur a loss, the real source lies in the potential drop of expressing the underperformance of the operational area. ultimately the position of the company on the stock exchange can be created artificially by controlled capital f lows. the upside – down structure, from the position of the stock market and long-term results, to the current operational tasks, is basically the opposite to orientation towards the investors’ expectations, competiveness or attractiveness of the products for customers. the subordination of the stock market often causes detachment from the real economy. under the conditions of an open economy, the gaps fill quickly, more attractive, cheaper, on a higher technical level products appear, which better meet customer expectations. the result is that western companies are not able to compete, and even produce effectively many elementary products. 2 eu share of global production of passenger cars in this period fell from 51% to 20%. business model and its dilemmas of choice 121 keeping the assumption that the capital market is efficient, which means that the valuation of financial instruments on the stock exchange in a satisfactory manner ref lects the value of listed instruments, in practice raises more and more objections. it follows that there is no justification for a straight projections of stock market on the sphere of operations. on the background of oversupply of capital cancerous bubble develops enlarging the market value of companies. this phenomenon is simultaneously a major factor of excessive growth of the market value of the most attractive companies causing the effect of financial pyramid. it is clear that stock prices most valued brands do not have a confirmation in the real economy. their stock market value is significantly overvalued in relation to its profits, the turnover and the amount of the dividend. the reason for overvaluation is stronger magnetising of instruments of the most attractive issuers. an example of this phenomenon are the company from the list of the most valued brands: apple, microsoft, google, coca-cola, mcdonald’s, etc. (www.forbes.pl). main destabilizing factor in the overvaluation is the phenomenon of capital over-supply in the global economy. it occurs most sharply in the markets of countries using the policy of quantitative easing to increase the f low of capital into the market. as a result of the high rate of indebtedness of many countries high money supply growth remains, resulting in a weaker reaction of stock markets to deterioration in operating performance of companies. one can observe an increase in stock exchange indices with simultaneously declining operating activity (solarz, 2014, pp. 440–441). a f lood of financial capital disorganizes markets of goods and services essential for the economy. drastic and multidirectional price spikes in oil, coal, gold, copper, coffee, fish, etc. cause the loss of production and the collapse of investment expenditures and long-term development. under the inf luence of monetarist thinking we do not see the fundamental issues. the phenomenon of quick profits leading to the financialisation of the economy is assumed to be positive ignoring the accumulation of serious threats, increase debt, the asymmetry of economic structure, deepening collapse of economic balance and domination of monopolistic structures falsifying assumptions of market efficiency. phenomenon on the local capital markets, such as the polish market, are also the example of interference. the relative shortage of liquid assets and much higher interest rates make the companies undervalued in relation to their results. when the exchange rates are shaped by speculative f lows, then waves of jan komorowski122 recession in the west affect the reduction of the polish zloty rate. it results that high activity of the operating companies is accompanied by a decrease in their market value during periods of speculative capital outf lows from the stock market (komorowski, 2015a, pp. 1–8). such a phenomenon observed on the polish stock exchange makes that upside – down model, lowers the prices of export products, manufacturing costs and salaries, while overstates the cost of imports. this is against the action of the market in other countries, when the structural surplus of capital means a tendency to lower interest rates and revaluation of securities, and ultimately, to an increase in production prices. finally it is expressed by enormous high level of purchasing power parity of local currency to the eu euro.  conclusion it is impossible to determine a priori the universal business model, which would guarantee the stability and balance of the company in the long term. the issue of business model choice requires more attention under turbulent environment and the recession. consequently, it is critical to analyze the impact of events on the capital market activity of an operating company. it should also recognize limitations of each business model, appreciating the qualities of human intelligence, especially when the fashion for certain types of business models does not correspond to the interests of the company or enter into conf lict with stakeholders. it is worth to seek a more effective model solutions, better utilizing the potential of the company and deals posed by the changing circumstances. criticism of the business model stems from the fact that every form of model is a simplification of reality that is an expression of reductionism in the logics. this means that based on the model constituting a virtual ref lection of reality cannot accurately answer questions about why corporate behavior in specific circumstances may differ, resulting in the course of development of each enterprise has inherently unique character. the business model institutionalizes the optimization process through a characteristic way of thinking corresponding to the realized economic doctrine and the functioning of the financial system. model oriented to the capital market can be called a derivative of monetarist thinking. finally, beyond the question of model selection and orientation of the business, also managers determine whether they can build positive relationships, business model and its dilemmas of choice 123 run the value chain and effectively achieve the objectives of the company. the answer to these questions requires an individual approach to the company and increase of its potential and usage of variability of individual conditions and specific time under which decisions are made.  references afuah, a., tucci, c.l. (2003). biznes internetowy – strategie i modele. kraków: oficyna ekonomiczna. komorowski, j. (2014). looking for the fundamentals of post – crisis economics. business & economics research journal, 13(3), 671–678. doi: http://dx.doi.org/10.19030/ iber.v13i3.8603. komorowski, j. (2015b). zagrożenia realizacji modelu biznesowego przedsiębiorstwa nastawionego na rynek kapitałowy. in kwartalnik kolegium ekonomiczno-społecznego studia i prace: no. 3 (pp. 81–96). szkoła główna handlowa. komorowski, j. (2015a). monetarism and the battle with the global economic crisis. international journal of business administration, 6(6), 1–8. doi: http://dx.doi. org/10.5430/ijba.v6n6p36. lamm, j. (2013). china to overtake europe in auto production. financial times, january 2. najwyżej wyceniane firmy świata 2015, www.forbes.pl (accessed: 18.06.2015). nogalski, b. (2009). modele strategiczne jako narzędzia reorientacji strategicznej przedsiębiorstw. master of business administration, 2(97), 5–8. norris, m., west, s. (2001). e-biznes. warszawa: wydawnictwa komunikacji i łączności. pettersen-sobczyk, m. (2014). rola modeli biznesowych w budowaniu przewag konkurencyjnych banków w polsce. in j. czekaja, e. miklaszewskiej, w. sułkowskiej (ed.), rynek finansowy jako mechanizm alokacji zasobów w gospodarce. kraków: wydawnictwo uniwersytetu ekonomicznego w krakowie, 264. romanowska, m., wachowiak, p. (2006). koncepcje i narzędzia zarządzania strategicznego. warszawa: oficyna wydawnicza sgh. solarz, j.k. (2014). przerost sektora finansowego w świetle zachowań ludzkich. in j. czekaja, e. miklaszewskiej, w. sułkowskiej (ed.), rynek finansowy jako mechanizm alokacji zasobów w gospodarce. kraków: wydawnictwo uniwersytetu ekonomicznego w krakowie, 440–441. ślusarczyk, p., http://autokult.pl/7122,chiny-wyprzedza-europe-pod-wzgledem-pro dukcji-samochodow (accessed: 04.05.2015). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 1 date of submission: may 15, 2017; date of acceptance: june 6, 2017. * contact information: jan.pys.edu@gmail.com, cracow university of economics, jan pys* cracow university of economics robustness of the bank resolution framework in the european union keywords: bank, financial crises, resolution, liquidation, financial aspects of economic integration. j e l classification: abstract: the purpose of this article is to identify the key elements of resolution framework under the single resolution mechanism (srm) and to assess the robustness of nancial crisis exposed number of weaknesses in the banking sector. it also showed the unpreparedness of the european governments in dealing with failing banks and the possible negative consequences it can have on the wider economy. as result, in order to save the economy from even deeper crisis, governments in many european countries had no other choice than to bail-out the “too-big-to-fail” banks using taxpayers’ money. of a formalized resolution framework which would allow for efficient resolution of troubled banks with no or limited use of public funds. the resolution proceedings are complex procedures, which need to balance the interest of the different bank stakeholders such as: shareholders, debt holders, regulatory and supervisory authorities, governments and many others. in the eu, the srm was put in place together with bank recovery and resolution directive (brrd) to address the issues identified during the crisis. this article is an attempt to demonstrate that the new european resolution framework contains provisions and tools that may limit the use of public funds in resolution of failing banks. the outcome provides a framework for further research focused on better jan pys understanding of the trade-offs in resolution framework and measuring the efficiency of bank resolution in the eu. which included: low loss absorption capacity of capital instruments, inadequate risk management practices regarding liquidity and funding, the “too-little-tolate” recognition of credit losses, too much complexity. these were only few of the problems related to banks that required post-crisis attention from the regulators. the crisis has also shown how the wider economy was exposed to the banking crisis due to the high interconnectedness of institutions and existence of banks which outgrown the economy of the host country effectively becoming “too big too fail”. in the midst of the crisis, the governments of many european countries realised that the failure of the country’s banking sector would have catastrophic consequences to their economy and had no other choice than to bail-out these failing banks. report of world bank group (2016) indicates that at the time of the crisis, there was no bank specific resolution framework non-binding memoranda of understanding (mou) on cross-border cooperation. these two agreements covered basic principles of cross-border communication, exchange of information and contingency plans. however, these mous were inadequate to deal with a complex cross-border banking system of the eu and did not provide a robust enough framework or sufficient tools and powers to deal with the issue of failing banks. the crisis has proven that the actual resolution actions were limited to bail-outs of these banks and providing them with guarantees and loans from governments of the host member states. these rescue actions were not coordinated and the involvement of eu institutions was very limited. the cooperation between member states has proven to be a very difficult task in the time of crisis. this was especially visible in the case of banks, which had a pan-european character. case of fortis group. fortis has been active in the benelux countries and up robustness of the bank resolution framework in the european union until the crisis had a complex bi-national holding structure, with ownership measures taken by the governments of belgium, netherlands and luxemburg, markets and depositors continued to withdraw their funds causing further liquidity problems. following the ruling of belgian court, which resulted in requirement to submit the sale of the business agreed between the three states for shareholders’ approval, the resolution was delayed resulting in failure the burden-sharing agreement reached between the three governments. the fortis case is a good example of conflict of interests between the governments of different member states. classes, herring and schoenmaker (2010) describe resolution conflict of interests as the “financial trilemma” where there are three simultaneous policy objectives: maintaining global financial stability, fostering cross-border financial integration and preserving national resolution authority. achievement of any two of these objectives is feasible, however achieving all three can prove to be difficult. experience of the last crisis in europe based on the example of fortis bank showed that the national authorities centre their efforts on preserving the national interests, which meant that the resolution of a cross-border bank was not coordinated and could not have been effective. kudrna (2012) compares this situation as analogous to a ”prisoner’s dilemma”, when multilateral resolution of a banking group as a whole is likely to be the least costly overall, but unilateral resolution may allow some member states to avoid resolution costs at the expense of others. the financial crisis has revealed number of issues related to resolution of financial institutions. in response to the crisis, the two main international bodies promoting global financial stability, the bank for international settlements (bis) and the financial stability board (fsb) developed new regulatory policy proposals for globally active banks. both bis (2010) and fsb (2011) published international standards and recommendations, which outlined the changes needed to improve resolution of financial institutions and cross-border cooperation. one of the areas of focus in these proposals is the role of resolution authority in the resolution framework and the powers it requires in order to be able to execute effective resolution. the overarching objectives set for the authority is to preserve stability of financial system, protect insured depositors and avoid unnecessary destruction of value. cross-border cooperation of authorities on crisis management is fundamental for effective resolution of internationally active banks. the two proposals define in more detail the broad jan pys range of resolution tools that should be given to the resolution authority in order to enable execution of the assigned task. kudrna (2012) defines three basic components required for effective crossborder bank resolution regime: regulations that reinforce the communication and co-operation between all national resolution authorities involved; governance agreements that enable decision-making and implementation of the selected resolution strategy in all relevant jurisdictions; and financing arrangements including fiscal backing. the bank resolution is a complex and multi stage process. dewatripont and freixas (2011) differentiate three stages where bank resolution requires a policy: stage 1, before the crisis takes place, the design of the regulatory rules related to the resolution regime; stage 2, at the time when bank is in distress but the liquidation can be avoided by means of resolution tools which allow for conbankruptcy has become inevitable and the resolution focuses on allocation of losses based on proceeds from assets. resolution framework, in order to be effective, must correctly address the challenges from design to execution stage. the article aims to describe and evaluate the european regulatory response to lution of failing banks. the article is based on comprehensive analysis of european regulatory framework related to the bank resolution and selected literature covering bank resolution in the eu. following the financial crisis, eu has changed the way the banks are supervised and resolved in europe by creation of banking union. banking union is currently built on two pillars i.e. the single supervisory mechanism (ssm) and the single resolution mechanism (srm) with the third pillar in form of the european deposit insurance scheme (edis) to be implemented. srm is the response of the eu to the problems with resolution of failing banks experienced during the previous financial crisis. from legal perspective, srm is based on the bank recovery and resolution directive (brrd) and single resolution robustness of the bank resolution framework in the european union mechanism regulation (srmr)1 n effective resolution regime should minimise the costs of the resolution of a failing institution borne by the taxpayers. it should ensure that systemic institutions can be resolved without jeopardising financial stability”. one of the other key objectives of resolution is to ensure continuation of the critical functions of institutions. the critical functions are defined as: “activities, services or operations the discontinuance of which is likely in one or more member states, to lead to the disruption of services that are essential to the real economy or to disrupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group”. in order to enable effective resolution, the european commission needed to develop a comprehensive framework, which combines multiple elements required to address and overcome the issues identified during the crisis. one of the key elements of resolution framework under srm is the resolution authority which is a public body entrusted with administrative powers to manage resolution activities. the brrd directive foresees a separate governance body specially focused on resolution as the crisis has proven that the supervisory authority may not be effective for dealing with failing banks. in order to facilitate an effective resolution process, the authority in charge of such process should be assigned with clear responsibilities and powers. in the banking union, the role of resolution authority was assigned to the single resolution board (srb), which was created in 2015 and became operational under srmr in 2016. srb is responsible for preparation of resolution plans for euro zone significant and crossborder institutions, which are under supervision of ecb. srb is also in charge of adoption of resolution schemes, preparation of resolution plans for institutions in scope. resolution plans are formal documents where resolution strategy, actions and tools are pre-determined for banking union parent or group entities in participating member states. it is the srb that is responsible for triggering of resolution plans2 for a failing bank. in addition, srb owns and decides on usage of the single resolution fund (srf), which is financed by the banking industry. the purpose of srf is not to absorb losses of investors by providing new capital to failing banks but instead to provide short to medium term financial aid in 1 law, however srmr as european regulation is directly binding in all member states. 2 is considered failing or likely to fail (foltf) and has a non-voting representation in srb board. jan pys form of loans or guarantees. such a financial assistance will preserve the value and allow to maintain the critical functions of banks undergoing the resolution process. srf became operational at the beginning of 2016 and will be gradually built up based on contributions from banks via national compartments unminimum requirement for own funds and eligible liabilities (mrel) which aims to increase bail-inability of liabilities and therefore increase loss absorption by investors and therefore limit the need for bail-outs funded by taxpayers. next to creation of one central resolution authority for banking union (i.e. srb), brrd requires each member state to designate the national resolution authorities indicating that such a role can be assigned to national central banks, competent ministries or other public administrative authorities or authorities entrusted with public administrative powers. in some countries, such as in the netherlands, the role of resolution authority was assigned by exception to the authorities responsible for banking supervision that is to de nederlandsche bank . however, in such cases, the directive requires special arrangements to ensure independence and to avoid possible conflict of interests between these two functions i.e. supervision and resolution. another issue identified during the crisis was the weakness or even complete lack of the cross-border cooperation of authorities involved in the resolution process. srb is the central resolution authority in the banking union, however all member states, whether participating or non-participating in the banking union, must have their own resolution authority. under brrd, the cooperation of these different resolution authorities in preparation and execution of resolution plans and strategies for cross-border banks is organised in form of resolution colleges. srm not only enhances the co-operation between member states but also contains provisions, which ensure a level playing field and prevent discrimination on grounds of nationality or place of business. creating a structured and cooperative resolution authorities is only one of the elements needed to build an effective and comprehensive framework for bank member states may exceptionally provide for the resolution authority to be the competent authorities for supervision for the purposes robustness of the bank resolution framework in the european union resolution in the eu. the next element needed is a set of resolution tools and powers, which will provide the resolution authorities with essential instruments to resolve the troubled banks. these tools should enable resolution authorities not only to react in timely manner but also achieve other objectives of resolution framework such as efficiency, ensuring continuation of critical functions, protection of depositors, no creditor worse-off, minimise disruption to financial system, cost optimisation and foremost limitation of public support in form of bank bail-out. the main tools available to resolution authorities under brrd include: sale of business tool, bridge institution tool, asset separation tool and bail-in tool. sale of business tool gives resolution authorities the power to sell the bank, or part of the bank, to a buyer or group of buyers in a relatively swift process. this tool is put in place to enable resolution authority to take timely action in order to protect the value and therefore minimalize the losses. there are number of requirements that must be met by the resolution authority when using this tool. for example, the price for the business sold must be fair and should reflect valuation of assets and liabilities. the sale process should be open, transparent and non-discriminatory. bridge institution tool aims at creating a temporary structure where the key and critical functions of the failing bank are transferred in order preserve this part of the business until a structural solution is found. the bridge bank is wholly or partially owned by one or more public authorities, which may include the resolution authority and can be in place for a maximal period of two years. asset separation tool aims to separate problem assets from the bank in order to preserve the remaining healthier part of the balance sheet and allow maintenance of the key functions. the problem assets, when transferred into a separate vehicle can be wind-down with objective of maximisation of recovery value. the asset separation tool is therefore only a first step in resolution proceedings, as subsequently the sale of the business tool could be used. bail-in tool underlines one of the key principles and reasons for the resolution framework i.e. the use of public funds should be limited to minimum. during the crisis banks were bailout by the governments, which means that the taxpayers money was used to safe banks from bankruptcy therefore absorbing bank losses. bail-in tool aims at loss absorption by the bank investors and creditors instead of the taxpayers. this tool allows the resolution authorities to convert banks liabilities into loss absorbing common equity instruments or even completely write-off such eligible liabilities. bail-in can be explained jan pys as the statutory imposition of losses on bank’s liabilities even if in the legal terms of these liabilities there are no provisions allowing for absorption of such losses outside of an insolvency procedure. brrd explains that the bail-in tool achieves objective of effective resolution by ensuring that shareholders and creditors of the failing institution suffer appropriate losses and bear an appropriate part of the costs arising from the failure of the institution. financing of resolution is an integral part of resolution planning. the key principle of brrd is to limit the use of taxpayer’s funds in bail-outs of failing institutions. based on this perspective, the first source of funds used is resolution of banks should be the shareholders and creditors of the bank. even though the bail-out of failing banks was widely criticised during the last crisis, the new resolution framework does not prohibit public support. the use of public funds is possible, but in contrary to the last financial crisis, it should only be a last resort and not first choice. there are number of conditions that must be met before resolution authority in cooperation with a member state can use government financial stabilisation tool to help the failing bank. the tool can only be used in case of a systemic crisis and when the other resolution tools were already used to the maximum possible extent. this means that employment of public support, ensuring the minimum private loss absorption. the hierarchy of loss bearing should start with the shareholders, incurring the losses first as in normal insolvency proceedings. the next group, which should suffer losses, are creditors based on their claim class and taking into account the overarching principle ‘no creditor worse off than under normal insolvency proceedings’. in addition, brrd confirms that the insured deposits are outside of bail-in scope. the interconnectedness of european institutions and cross-border nature of banking in the eu are sources of challenges for the resolution process. these difficulties were experienced during the last crisis when governments were unable to follow one coherent strategy to resolve the failing banks. one of the objectives of srm was to address the issues of cross-border resolution amongst others thru establishment of the srb and resolution colleges. the objective of srb and resolution colleges is to enable resolution authorities to create a coherent and coordinated resolution strategy for cross-border institutions. with robustness of the bank resolution framework in the european union out doubt srm increased coordination and cooperation and should contribute to an improvement in resolution of cross-border banks. however, number of challenges still remains, starting with the choice of resolution strategy. there are two possible resolution strategies that can be used in case of cross-border ny allowing for more efficient resolution of the entire group. gordon and ringe inable debt is positioned at the holding company level, which makes it easily border institutions putting one resolution authority in charge of the resoluing level, it allows for less disruption and destruction at the level of operating subsidiaries limiting the risk of damaging runs that can result in fire sale liquipreferred by the host authorities of material subsidiaries of eu parent due to the fear of lost control and conflict of interest from local and group perspective. this means that reaching an agreement by resolution colleges regarding the appropriate strategy may prove difficult in practice. in addition, in order to be structure towards a holding company structure where bail-inable total loss absorption capital (tlac) and mrel instruments can be issued. an ongoing challenge during resolution process relates to the trade-off that must be made by the resolution authority. dewatripont et al. (2011) view resoolution related decisions must balance not only different policy objectives but also interests of various stakeholders. ing banks such as absence of resolution strategies and plans, lack of designated authorities capable of dealing with failing banks, absence of cross-border coordination. in recent years, in response to the identified problems and following recommendations from global regulatory bodies, the eu has undertaken number of initiatives aimed at creation of a comprehensive resolution framework which would limit the use of public funds in saving failing banks. the new jan pys laws under srm provide the eu and member states with a strong foundation which is designed to achieve an effective resolution. the framework is built on designated resolution authorities that received the mandate and tools to create and execute resolution strategy and plans. in addition, a number of provisions on cross-border cooperation mechanisms and resolution colleges were put in place. this should enable a coordinated and efficient resolution of crossborder institutions in the eu. resolution tools and powers given to the resolution authorities allow for proper funding of resolution and should in theory result in no or minimum use of taxpayers funds. all these elements were designed to create a comprehensive and robust resolution framework which should address the issues faced by eu authorities during the recent financial crisis. a number of challenges remain, as member states are busy implementing the new resolution framework. the provisions on cross border cooperation are in place, however the agreements on resolution strategies and plans need still to be reached and implemented by different authorities. in order to achieve an effective outcome, the resolution authorities will have to act in efficient, decisive and timely manner. there were not many cases of failing banks after brrd was implementation in europe, therefore it is challenging to analyse the efficiency of the eu resolution framework but it offers an interesting research opportunity. bank resolution and bail-in in the eu: selected case studies pre and post brrd (2016), world bank group, finsac, november. claessens, s., herring, r., schoenmaker, d., (2010), a safer world financial system: imdewatripont, m., & freixas x., (2011). bank resolution: a framework for the assessment for the recovery and resolution of credit institutions and investment firms and robustness of the bank resolution framework in the european union gordon, j., & ringe, w., (2015). bank resolution in the european banking unkey attributes of effective resolution regimes for financial institutions (2011), financial stability board, october. kudrna, z., (2012). cross-border resolution of failed banks in the european union afmemorandum of understanding on co-operation between the banking supervision, central banks and finance ministries of the european union in financial crisis situations, april 2005. banking supervision and central banks of the european union in crisis managetal loss-absorbing capacity (tlac) term sheet (2015), financial stability board, november. establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a single resolution mechreport and recommendations of the cross-border bank resolution group (2010), bank for international settlements, march. understanding bank recovery and resolution in the eu: a guidebook to the brrd (2016), world bank group, finsac, november. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: december 19, 2016; date of acceptance: january 19, 2017. * contact information: dzieciol.paw@gmail.com, department of insurance, poznań university of economics, niepodległości 10, 60-967 poznań, poland, phone: +48 530 843 602. ** more formal than an insurer, particularly used by european insurance and occupational pensions authority (eiopa), financial conduct authority (fca) and european parliament, for example in the following acts: – directive 2009/138/ec of the european parliament and of the council of 25/11/2009 on the taking-up and pursuit of the business of insurance and reinsurance (solvency ii), and – commission delegated regulation (eu) 2015/35 of 10/10/2014 supplementing directive 2009/138/ec. dzięcioł, p. (2016). a risk management system in insurance undertaking. copernican journal of finance & accounting, 5(2), 73–83. http://dx.doi.org/10.12775/cjfa.2016.016 paweł dzięcioł* poznań university of economics a risk management system in insurance undertaking** keywords: risk management, insurance undertaking, solvency ii, commission delegated regulation. jel classification: g20, g22, g28, g32. abstract: the purpose of this article is to identify and to define a role of risk management in insurance undertakings, particularly in the light of new regulations. therefore, an obligatory of implementing a risk management system in insurance undertaking can have a negative impact on effectiveness or efficacy entity is the hypothesis of this publication. to prove or refute a hypothesis, a qualitative method and empirical research were applied. finally, the hypothesis was proved.  introduction the conception of enterprise risk management (erm) focuses on entities, and these makes dependent on its own shape. according to the ‘centric entipaweł dzięcioł74 tative’ idea, each company defines own – different – risks, manages in others way, therefore every risk management process looks unique (michalak, 2009, pp. 481–492). a lots of authors underline, that erm will growth in importance, in spite of imperfections and entrance obstacles. however, enterprise risk management conception would be a way to assure an effectiveness of internal and external company resources (sasin, 2011, pp. 98–99). nevertheless, a comparison erm with risk management system in insurance undertakings seems exceptionally interesting. a risk management system is definitely obligatory in poland for insurance undertakings because of the new insurance and reinsurance activity act from 11th september 2015 (below: act). the legislator proclaimed a form of risk management system for insurance undertakings in chapter 3. moreover, the act came into force on 1st january 2016 and chapter 3 does not include vacatio legis. so, in every insurance undertaking should run a risk management system from beginning 2016. the definition of management system was deemed as ‘a system included a risk management function, a compliance function, an internal audit function, and an actuarial function’ according to the article 3 (1) point (47) of act. however, a proportionality of management system in dependence on character, range and complexity of insurer’s activity was contained in article 45 (2) (ustawa o działalności ubezpieczeniowej, 2015). research methodology the verification of hypothesis is done in two steps. firstly, in aim to clarify legal state author analyzes risk management demands of acts for insurers and legislator’s risk management system. secondly, a state of risk management in insurance undertakings has been analyzed according to empirical research. it has to underline, that gaining information about internal process and effectiveness of insurers is almost impossible. however, insurance undertakings have to fulfill bion questionnaire (research and supervisory assessment) for polish financial supervision authority office (uknf) as well as polish insurance association (piu) published it in 2013. so the second step closes to analyze of empirical research. in cooperation of audit and internal control commission members in polish insurance association (piu), kpmg employees and representative of polish financial supervision authority office (uknf), the brochure was published in 2013. it includes collective answers for questions from bion questionnaire a risk management system in insurance undertaking 75 (research and supervisory assessment) in accordance with a state in 2012. the actual state analysis in insurance undertakings is consisted of three parts: internal audit function, compliance function and risk management function, and the last one was divided into 3 elements (antczak et al., 2013, p. 21): ■ existing of risk management function; ■ risk management strategy and system; ■ effectiveness and risk management review. all of insurance undertakings (59 in poland in 2012) furnished for bion questions, without foreign branches, so all statistic population was researched – it is definitely rare phenomenon. in effect, the source material we should assess positively. the course of the research process apart from duty of running risk management system in insurer, therefore the legislator requires rules of risk management, internal control and audit, as well as outsourcing in black and white, referred to article 46 (1) of act. nevertheless the duty of rules above is limited to selected areas. according to article 57 (2) of act, risk management system includes at the minimum (ustawa o działalności ubezpieczeniowej, 2015): ■ underwriting and reserving; ■ asset-liability management; ■ investment risk management; ■ liquidity risk management; ■ concentration risk management; ■ operational risk management; ■ reinsurance and other risk mitigation techniques. moreover, in article 57 (1) of act it was indicated that: “risk management system includes risks which insurer has to accommodate in calculating of solvency capital requirement and these which are partially allowing for or which are excluding”. we can observe, that risk management system in insurer, according to the act, serves as menial for insurer solvency. the subject matter of solvency is presented in detail in the commission delegated regulation (eu) 2015/35 of 10 october 2014 supplementing directive 2009/138/ec of the european parliament and of the council on the taking-up and pursuit of the business of insurance and reinsurance (solvency ii). additionally, to constitute new act on business of insurance was demanding by obligatory of implementpaweł dzięcioł76 ing directive 2009/138/we of 25/11/2009 to domestic order, which is presented in reason for the project of act on business of insurance (uzasadnienie projektu ustawy, 2015). and this is the reason why interpretation of new act cannot be left aside commission delegated regulation 2015/35 of 10/10/2014. a risk management in insurance undertaking is still growing in value, especially by the new act. firstly, executive officer responsible for risk management has to know polish language currently, apart from a chief executive officer who had to (ustawa o działalności ubezpieczeniowej, 2015, art. 50, ust. 4). secondly, both of them are obligated to get professional experience necessitate to manage insurance undertaking (ustawa o działalności ubezpieczeniowej, 2015, art. 50, ust. 6). moreover, an appointing to a board has to have supervisory office assent, referred to article 51 (1) (ustawa o działalności ubezpieczniowej, 2015). insurance undertakings have to implement effective risk management system. interestingly enough, the range of system should guarantee that economic performance. the system should include a strategy, processes and reporting procedures necessary to risk identify, estimate and monitoring, as well as risk treatment and risk reporting (ustawa o działalności ubezpieczeniowej, 2015, art. 56, ust. 1). here, legislator’s risk management system looks similarly to erm, by risk management process (malinowska, 2011, p. 64). also, we can observe deming cycle – pdca1, in this system, which also appear in erm. so this fulfill principle rule of risk management process – it should be continuous and cyclic (hadyniak, 2010, p. 32). furthermore, the legislator demands, that insurance takings assure of effectiveness and proper risk management system integrated with organizational structure and decision-making process, including executive persons (ustawa o działalności ubezpieczeniowej, 2015, art. 56, ust. 2). in addition, insurers are obliged to make risk management function in facilitating way for implementing system (ustawa o działalności ubezpieczeniowej, 2015, art. 60). whereas, insurance undertakings comply with internal model, according to article 62, have to encompass following tasks in risk management function (ustawa o działalności ubezpieczeniowej, 2015): ■ to prepare and implement internal model; ■ to verify and validate internal model; ■ to prepare internal model documentation and following changes documentation; ■ to analyze internal model working and to prepare reports; 1 plan – do – check – act. a risk management system in insurance undertaking 77 ■ to inform a board of internal model working, to indicate areas to improve and to inform a board currently about foregoing cases. apart from that, insurers have to ensure risk and solvency assessment. referred to article 63 insurance undertaking assesses risk and solvency including (ustawa o działalności ubezpieczeniowej, 2015): ■ general needs in scope of solvency to allow for specific risk profile, risk tolerance limit approved and activity strategy; ■ current compliance with solvency capital requirement and minimum capital requirement as well as requirements of technical provisions for solvency; ■ deviation degree of solvency capital requirement guidelines by standard formula or full and partial internal model used, for risk profile insurance undertaking. on the other hands, referred to article 63 (2) a risk and solvency assessment for mutual undertakings, has extended by current compliance with solvency technical provisions demands and with preparing forecast of gross premium written for five following years (ustawa o działalności ubezpieczeniowej, 2015). insurance and reinsurance undertakings are obliged to carry out own risk and solvency assessment annually or after crucial changes appearance with no delay. furthermore, they have to inform supervisory office about effects of assessment referred to article 63. to sum up, previous insurance and reinsurance act took into consideration only insurance risk (ustawa o działalności ubezpieczeniowej, 2003). while new act distinguishes a few kind of risk at least. for example insurance risk, concentration risk, operation risk, solvency risk and investment risk. definition of management system and its working demand is the next news in act of 2015. in comparison to preceding and actual act, the old one brought up only “activity plan”. however, the new one issues definitely the more demanding challenge. to institute management function is a principal task for insurance undertakings. the legislator demands also that this function should be realized on adequate organizational level – a board. additionally, insurance undertakings are obligated to ensure not only to the function, but also effectiveness of risk management system. for this reason a system range and own risk and solvency assessment was defined. furthermore, they were burdened with the responsibility to report effects of own risk and solvency assessment, to supervisory office. we should underline that risk management system by the legislator is defipaweł dzięcioł78 nitely different from best practices and standards, and it is referred to solvency ii and commission delegated regulation of 10/10/2014. the aim of risk management from the act is solvency support to insurance undertaking, which obviously differs from enterprise risk management (erm) goals. in addition, erm standards (e.g. iso 31000) base on voluntary character (iso 31000 is not even certify), but in the act of 11/09/2015 we meet with (bounden) duty. a basic ratio for insurance and reinsurance undertakings are solvency capital requirement (below: scr) according to commission delegated regulation of 10/10/2014. even though, scr is not traditional risk ratio and it is not inform about risk level, still scr allows for right risk module (type). now then, to assess minimal capital requirement for right module is the main goal. and we can to simplify that it is minimal capital security level for risk taking. in article 37 (1) there is a risk margin (rm) formula for portfolio of insurance and reinsurance obligations (commission delegated regulation of 10/10/2014). according to above, risk margin for insurance undertaking is a product of cost-of-capital rate and quotient of solvency capital requirement and basic risk-free rate sum. in article 39 the cost-of-capital rate amount up to 6% was established. in addition, risk margin allocation runs directly with right business line – group of risk. the formula of basic solvency capital requirement (scr basic) was defined in article 87. scr basic is a root of sum of correlation rate (corr) and scr for module (i) and (j) product, and scr intangibles for intangible asset risk. the value of corr is being set by table of risk modules correlation matrix (directive of 25/11/2009). it is not the first time of implementing mathematic methods to risk management. according to history, in 1900 the formula of ‘stochastic process distribution function’ was proposed by l. bacheliera (dionne, 2013, p. 6). in 1973 first credit risk model was created – black and scholes (breccia, 2012, p. 4). and in 80s of xx century value at risk term was appeared, which is based on gauss integer factorization (dionne, 2013, p. 6). in addition, the solvency capital requirement is dependent to right on a risk module. actuarial risk module is particularly extended, which consists of a lot of undermodules, e.g. hurricane risk undermodule, f lood risk undermodule or civil liability risk undermodule. there is no question, that duty of to possess right own capital for insurance undertaking is a main message of solvency ii. and their level is made dependent on business lines and modules. unfortunately, to fulfill the duty is a success a risk management system in insurance undertaking 79 itself, since the european parliament and the council have established about one hundred formulas for solvency capital requirement according to 74 pages of directive in 117 articles (from 87 to 204). probably, an increase of centralization and bureaucracy in insurance undertakings could be a dominant result. if these increase causes security increase, probably there will be more supporters. however, solvency capital requirements are not guarantors of solvency according to banks history in 21st century, whom similarly solvency modules was proposed in basel ii and basel iii. nevertheless, we should underline that an idea of own capital role increase, not only in insurance undertakings, is worthy of our support. but it should be proposed in easier form. the outcome of the research the analyze of empirical research concerns to six fact-collecting questions and one subjective question about an adequacy of risk management system to insurers activity. on the graph 1 we can see collective answers for risk management function in insurance undertakings. in 2012, in 52 out of 59 insurers a station or unit responsible for irks management was functioning. however, risk committee existed in 39 entities. we need to mark, that it had been the state before commission delegated regulation of 10/10/2014 and insurance and reinsurance activity act of 11/09/2015 came into force. nevertheless, the research was done after 3 years since the pass of solvency ii of 25/11/2009, which risk management function was mentioned. paweł dzięcioł80 graph 1. existing of risk management function in insurance undertakings in 2012 s o u r c e : own study based on: antczak et al., 2013, p. 23. then, the state analysis of risk management strategy and system was done based on three criteria (graph 2). the first criterion is having risk management strategy, which has been having around 66% of insurance undertakings (39 of 59). the second criterion is written rules of risk management system, which is declared by almost 80% of insurers (47 of 57). the third criterion includes opinion about adequacy of risk management system to character, range and complexity their activity. as far as 55 insurance undertakings (93%) indicated system adequacy, but 4 entities (7%) pointed that absence. unfortunately, there was no information about character of adequacy absence – positive or negative. discussing risk management system includes first of all risk identification, risk estimation, monitoring and risk treatment. a risk management system in insurance undertaking 81 graph 2. risk management strategy and system in insurance undertakings in 2012 s o u r c e : own study based on: antczak et al., 2013, p. 23. the last one of the research consists of effectiveness risk management reviewed by insurance undertakings (graph 3). firstly, it was indicated that over 86% of insurers were doing periodical effectiveness risk management review. furthermore, as far as 96% of insurance undertakings confirmed that they have informed their supervisory board about the most important types of risks and control mechanisms approved. the state analysis of risk managment in insurance undertakings concerns the time before commission delegated regulation of 10/10/2014 and insurance and reinsurance activity act of 11/09/2015 came into force. even though, we need to observe a few things. only in 66% of insurers a risk management strategy functions. it is worth comparing to 88% of insurance undertakings which have separated station or unit. it follows that in as far as 22% of insurers function risk management unit without strategy. moreover, only 47 entities have written rules of risk management, and 51 insurance undertakings do periodical effectiveness risk management review. so, almost 8% (4 of 51) entities do review without rules in black and white. finally, 57 insurers informed their supervisory board about e.g. control mechanisms, but only 51 of them check efpaweł dzięcioł82 fectiveness of risk management system. thus, over 10% of insurance undertakings accepted a system, but do not check its efficacy. graph 3. effectiveness risk management review in insurance undertakings in 2012 s o u r c e : own study based on: antczak et al., 2013, p. 24. the conclusions from the research the foregoing state analysis of risk management in insurers shows that demands of solvency ii increase bureaucracy, despite that analysis focus on formal (e.g. strategy, rules or units). to confirm it, we saw that entities create station, but do not have strategy, they inform supervisory board about effects, but then not all of them check that effectiveness. even if a risk assessment is done, some insurance undertakings do it based on established rules. we probably can summarize, that the obligatory risk management system for insurers is not match to enterprise risk management conception (erm). definitely, it is not necessary condition, nevertheless searching effectiveness or efficacy of obligatory risk management system is futile. the essence of that is to fulfill duty. to sum up, in consideration of the above the hypothesis was proved. even though the hypothesis which was put forward in the article is ordinary for many people, it does not be obvious for everybody. for example, the legislator imple a risk management system in insurance undertaking 83 ments the duty of risk management system for insurance undertaking, with an idea of risk management system effectiveness as well as expects economic performance (ustawa o działalności ubezpieczeniowej, 2015, art. 56, ust. 1). however, the conclusion from the research indicates a backfire.  references antczak, j., jenerał, k., kornacka, e., lenard, j., popadyniec, r., rajca, b., sambora, b., stasiak, w., szambelan-bakuła, e., tomaszkiewicz, a., wawrzeniecka, a., wiącek, t., chądzyński, a., kowalski, r. (2013). audyt – compliance – zarządzanie ryzykiem – aktuariat. modele współpracy w zakładach ubezpieczeń. warsaw: polish insurance association. breccia, a. (2012). default risk in merton’s model, http://www.bbk.ac.uk (accessed: 19.01.2017). commission delegated regulation (eu) 2015/35 of 10/10/2014 supplementing directive 2009/138/ec of the european parliament and of the council on the taking-up and pursuit of the business of insurance and reinsurance (solvency ii), journal of laws from 2015 l. 12. dionne, g. (2013). risk management: history, definition and critique, cirrelt, https:// www.cirrelt.ca/ (accessed: 19.01.2016). directive 2009/138/ec of the european parliament and of the council of 25/11/2009 on the taking-up and pursuit of the business of insurance and reinsurance (solvency ii), journal of laws from 2009 l. 335 hadyniak, b. (2010). zarządzanie ryzykiem w przedsiębiorstwie. in b. hadyniak, j. monkiewicz (ed.), ubezpieczenia w zarządzaniu ryzykiem przedsiębiorstwa. warsaw: poltext. malinowska, u. (2011). charakterystyka kluczowych koncepcji zarządzania ryzykiem w przedsiębiorstwie. in s. kasiewicz (ed.), zarządzanie zintegrowanym ryzykiem przedsiębiorstwa w polsce. warsaw: wolters kluwer. michalak, j. (2009). ryzyko społeczne a ochrona ubezpieczeniowa – kilka propozycji nieortodoksyjnych. in j. handschke (ed.), studia ubezpieczeniowe. poznań: poznań university of economics. sasin, r. (2011). ewolucja koncepcji erm. in s. kasiewicz (ed.), zarządzanie zintegrowanym ryzykiem przedsiębiorstwa – kierunki i narzędzia. warsaw: wolters kluwer. ustawa z dnia 11 września 2015 r. o działalności ubezpieczeniowej i reasekuracyjnej, dz.u. [journal of laws] 2015 poz. 1844. ustawa z dnia 22 maja 2003 r. o działalności ubezpieczniowej, dz.u. [journal of laws] 2003 nr 124 poz. 1151. uzasadnienie projektu ustawy o działalności ubezpieczeniowej z dnia 28 kwietnia 2015 r., https://legislacja.rcl.gov.pl/ (accessed: 10.12.2016). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 7 issue 3 2018 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2018 copyright by uniwersytet mikołaja kopernika toruń 2018 icv 2017: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 okwy peter okpala, oluwamayowa olalekan iredele corporate social and environmental disclosures and market value of listed firms in nigeria ................................................................................................................................ 9 małgorzata olszak, sylwia roszkowska, iwona kowalska the joint effect of borrower targeted macroprudential instruments and capital regulations on procyclicality of loan-loss provisions ....................................................... 29 dariusz piotrowski propaganda of success in the area of the state’s social and economic policy ....... 55 wiesława ziółkowska innovativeness of the polish economy in the context of sustainable development ..................................................................................................................... 71 for authors ........................................................................................................................... 89 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 3 date of submission: december 15, 2017; date of acceptance: december 30, 2017. * contact information: marta.a.meisner@gmail.com, ul. krasińskiego 25/8, 87-100 toruń, poland, phone: +48 660 773 077; orcid id: https://orcid.org./0000-0002-41453482. meisner, m. (2017). financial consequences of cyber attacks leading to data breaches in healthcare sector. copernican journal of finance & accounting, 6(3), 63–73. http://dx.doi.org/10.12775/ cjfa.2017.017 marta meisner* nicolaus copernicus university in torun financial consequences of cyber attacks leading to data breaches in healthcare sector keywords: cybersecurity, data breach, healthcare. j e l classification: g32. abstract: healthcare sector is identified as particularly vulnerable to digital data breaches and damages caused by illegal use of personal and confidential information. facing such dangerous threat medical entities need to estimate financial consequences of potential cyber attack leading to a breach of patients’ data. the paper’s aim is to provide an overview of the consequences of digital data breach in healthcare sector and their financial impact – comparing polish and global perspective. the research method used was analysis and comparison of international literature, reports, case studies, statistics concerning data breaches in healthcare sector as well as new legal regulations applicable in european union. the results of the research show that estimations of total digital data breach costs vary widely among various reports and analysis. the main reasons are application of different methods of estimation and lack of complete and reliable databases due to insufficient disclosure of cyber incidents. in addition, the most important conclusion of the paper is that there is an urgent need to conduct research concerning probable data breach costs in polish healthcare sector, since studies pursued by renowned organisations have not covered poland so far. marta meisner64  introduction healthcare industry has moved beyond the stage where all patients personal data were stored within paper-based systems, which – although reduced the exposure of data – did not bring enough effectiveness for communication, transfer of documentation and general workf low (health care industry cybersecurity task force, 2017, p. 10). to overstep these limitations healthcare sector enters the phase of electronic healthcare records being the main source of information. in poland these changes are introduced mainly following legal acts and recommendations of european union organs. it is not questioned that digitalization of documents and deeper digital connectivity is essential in order to deliver effective and safe medical services, however it has to be balanced with the need to provide proper protection of it systems (health care industry cybersecurity task force, 2017, p. 9). healthcare sector is one of the most frequently attacked – in 2016 it was ranked on the 9th place on the list of most targeted industries and on the 5th place in number of data breaches (securityscorecard, 2016, p. 5). medical entities have, thus, urgent need to effectively estimate costs they would have to bear in case of potential materialisation of digital data breach. unfortunately, in this case financial management is a challenge since there are limited sources of data, cyber incidents – even if discovered – are rarely reported and results of researches conducted vary widely. research methodology for the purposes of this article critical analysis of international literature, reports, case studies and statistical data concerning data breaches in healthcare sector has been conducted. additionally, the research involved study of law regulations and institutional recommendations of european union and polish organs regarding cybersecurity and digital health data. healthcare sector vulnerabilities to cyber threats leading to data breach reports and analysis indicate that within healthcare sector data breaches are, beyond ransomware, the greatest threat, which (apart from names, birth dates, financial consequences of cyber attacks leading… 65 contacts) involve the most sensitive personal data – medical information (securityscorecard, 2016, p. 2; romanosky, 2016, p. 122; lloyd’s, 2017, p. 15). as healthcare information cannot be altered after data theft, its permanence is ref lected in the black market price – higher in comparison with e.g. credit card data or social security number (luna, rhine, myhra, sullivan & kruse, 2015, p. 6; fuentes, 2017, pp. 10–12; mansfield-devine, 2017, p. 15). cyber crimes on personal data may result in severe financial losses for their victims (accenture, 2015; mansfield-devine, 2017, p. 15). according to analysis digital personal information of more than 25 million people will be stolen from their healthcare providers between 2015 and 2019, leading to more than 6 million identity thefts and almost usd 56 billion out-of-pocket costs payed by the victims (accenture, 2015). digital data breaches are caused mainly by: malicious or criminal attack, glitch of it system or human error (ponemon institute, 2017, p. 7). the majority of data breaches is caused by malicious actions (romanosky, 2016, p. 122; ponemon institute, 2016, pp. 1, 6) of either internal (e.g. employees abusing their access) or external character (outside agents using stolen login details or computing devices, social engineering or hacking: exploiting weak credentials, using malware or presence of system vulnerabilities) (luna et al., 2015, p. 4). external incidents dominate (ponemon institute, 2016, p. 2) and as many as 45% of analysed healthcare organisations points cyber attackers as the source of digital data breach incidents that worries them most (ponemon institute, 2016, p. 3). cybersecurity is even more endangered every year with the internet of things (iot) spreading in medical industry. common use of optimised and automated it processes and interconnected systems, particularly based on iot, creates smart hospitals (enisa, 2016, p. 9). the digitisation in healthcare sector is generally promoted in european union, mainly through the concept of ehealth. in addition, in poland on 20 july 2017 the act on information system in the healthcare sector from 2011 has been amended so that as from 1 january 2019 healthcare entities are obliged to prepare certain medical documentation in electronic form. it all results in expansion of health information attack risk (enisa, 2015, p. 26; health care industry cybersecurity task force, 2017, p. 17). in order to regulate, harmonise and update standards of data protection two new pieces of legislation will soon apply to eu member states: the european general data protection regulation (gdpr) and the network & information marta meisner66 security (nis) directive. the gdpr (enforceable from 25 may 2018), directly binding and applicable in all eu member states, is intended to strengthen protection of personal data i.a. by providing tools such as: an obligation to notify about security breaches (articles 32–34); fines (article 83); individuals’ right to claim compensation for both financial loss and non-material damages (article 82). in 2018 also nis directive, focusing on essential services operators including healthcare providers, will be incorporated to national legislations (deadline: 9 may 2018). in november 2017 polish ministry of digitisation published a draft of national cybersecurity system act, which incorporates nis directive regulations and provides i.a. a requirement to report all significant cyber incidents (article 12) and sanctions (article 57). fortunately, the need to invest in cybersecurity seem to be understood by the majority of healthcare providers as 69% of them believe healthcare sector is at greater risk of data breach than other industries and 67% states that recent massive data breaches affected their security practices (ponemon institute, 2016, p. 3). financial impact of digital data breach for healthcare providers due to insufficient amount of quality data and a huge number of factors that has to be taken into account, estimating data breach costs is an ongoing struggle. while determining the cost of data breach the ponemon institute suggests relying on the number of individual records compromised (in 2017 an average global cost of a record was usd 141) (ponemon institute, 2017, p. 1). alternatively, sasha romanosky from rand corporation suggests basing on correlation between data breach costs and annual revenue of attacked organization and proves that recent data breaches have cost companies 0.4% of their annual revenue (romanosky, 2016, p. 122). bearing in mind various methods of estimating the costs and incomplete sources of data researchers rely on, differences in results should not surprise. the ponemon institute researches shows that the mean total cost of data breach is decreasing: being usd 4 million in 2016 and usd 3.6 million in 2017 (ponemon institute, 2017, p. 1); in the 2016 rand study the mean total cost is estimated at usd 6 million (romanosky, 2016, p. 129); in the netdiligence 2016 analysis the mean total cost is usd 0.67 million, but almost usd 6 million for large companies (netdiligence, 2016, p. 2). costs resulting from data breach are usually borne in two phases: immediate (first hours, days or weeks of data breach response) and delayed (costs be financial consequences of cyber attacks leading… 67 ing long-lasting business consequences of a cyber attack) (deloitte, 2016, p. 2; lloyd’s, 2017, p. 22). certain expenses are almost unavoidable, direct and fairly easy to quantify, while other remain intangible, largely dependent on the sector and region of operating as well as nature of the attack, and may be spread over many years following data breach (deloitte, 2016, p. 4). below, main costs that healthcare entity would have to incur in case of cyber data breach are presented and brief ly described. forensic investigation. immediately after a data breach is discovered or even suspected the main task is to determine what has actually happened. professional third-party services are usually essential to help a healthcare organization conduct an accurate investigation. such assistance is most often timeconsuming, costly and charged on hourly basis (according to zurich insurance company fees vary between usd 100 and usd 1,000 per hour) (zurich insurance company, 2014, p. 7). in its report deloitte estimated that six weeks of engaging a team of five experts would cost approximately usd 600,000 (deloitte, 2016, p. 20). breach notification. when it is known whose data has been breached, healthcare entity should notify those individuals. in european union the gdpr will unify among eu members states the notification requirement as article 34(1) obliges the controller of data (e.g. healthcare entity) to communicate without undue delay affected individuals about personal data breach whenever the breach is likely to result in a high risk to their rights and freedoms. notifying the victims also helps preserve good reputation among individuals and avoid customer churn. notifying one victim may cost between usd 5 to usd 50 per notice (zurich insurance company, 2014, p. 7). post-breach patient protection. additional services, such as credit monitoring and identity theft protection may help keeping patients safe from potential unauthorised use of stolen data. according to the research conducted in the u.s. by the ponemon institute the majority of respondents stated that medical data breach victims should be protected for at least 2–3 years, however 64% of healthcare entities do not offer any post-breach protection services (ponemon institute, 2016, p. 6). such additional protection is not yet a common practice, but is a good tool to reduce the probability of being sued or at least to limit the damages. researches show that typical costs are usd 10–30 per victim, however only 9% of affected individuals in fact registers for offered identity theft protection services (deloitte, 2016, p. 20). marta meisner68 attorney fees and litigation expenses. with the development of data protection legislation and social awareness – the affected individuals tend to bring claims more often seeking compensation for both financial losses and emotional distress resulting from data breach (lloyd’s, 2017, p. 28). sometimes the costs of legal claims against healthcare provider may be recovered through litigation against an attacker; however it is most often both uncertain and longlasting process. as netdiligence report presents in 2016 the average cost for legal defence was usd 130,000 (the median was usd 16,000) and the average legal settlement cost – usd 815,000 (the median was usd 250,000) (netdiligence, 2016, p. 3). regulatory compliance. if a healthcare entity fails to fulfil legal requirements (concerning application of preventive measures or post-incident conduct), it exposes itself to risk of potential regulatory fines. in eu member states gdpr introduces sanctions up to eur 20 million or 4% of the annual worldwide turnover (whichever is higher) in case of infringement of indicated provisions. the ability to impose penalties is also provided by nis directive and in poland the draft of national cybersecurity system act in case of non-compliance with certain provisions gives authorities right to impose fines up to pln 200,000 (article 57). with ever-growing scrutiny of authorities in the field of personal data protection, more severe regulatory penalties may be expected in the following years (deloitte, 2016, p. 21). cybersecurity improvements. to prevent similar cyber incidents in the future, actions aimed at increasing security should be undertaken. most often these are technical improvements to the it infrastructure, controls system, capabilities of monitoring and other processes (deloitte, 2016, p. 21). also cybersecurity training for personnel should be provided, especially when the cause of a vulnerability enabling data breach was human error. the expenses for cybersecurity improvements are impossible to predict generally, since the standard of protection varies widely and the scope of improvement depends on individual cyber risk management strategy. loss of reputation and patients churn. in the aftermath of a data breach mitigation of potential damage to the healthcare entity reputation is crucial. a massive personal data breach may trigger not only aversion of victims, but generally – the public, which may require involving professional help of public relation experts (zurich insurance company, 2014, p. 7). deloitte estimates the cost of a 4-week pr campaign following a cyber attack at usd 400,000 on average, while extended 1-year campaign at usd 1 million (deloitte, 2016, financial consequences of cyber attacks leading… 69 p. 21). if pr actions are ineffective, medical entity may experience decline of brand value and patients churn leading to a revenue loss. according to analysis from 2015 in 5 following years healthcare providers may lose as much as usd 305 billion in cumulative lifetime patient revenue due to patients churn resulting from medical identity theft (accenture, 2015). while it may be hard to imagine massive patients churn from public hospitals in poland, especially where there is no alternative available locally (e.g. one cancer treatment centre in region), negative consequences of a data breach may be very severe for private medical entities. other potential costs. the deloitte analysis shows that it is not uncommon for insurers to increase, even double, premium in case of purchasing or renewing cyber risk insurance after a cyber incident. sometimes policyholder may even be denied an insurance offer until certain conditions, such as technical improvements or introducing cyber incident response plan, are met. also banks may perceive medical entities that recently experienced cyber attack as high-risk borrowers, which can lead to increase of interest rates for borrowed capital while raising debt or renegotiating the terms of the existing one (deloitte, 2016, p. 22). while abovementioned renowned researches have not covered polish healthcare market so far, one may try to make a general estimation of potential costs that cyber data breach in polish hospital would entail. in 2016 in poland there were 186,607 beds in 957 hospitals, which means that in average one hospital had about 195 beds (gus, 2017, p. 81). according to polish central statistical office in 2016 bed occupancy ratio was 66% (gus, 2017, p. 92) and the number of patients using one hospital bed was in average 45.3 (gus, 2017, p. 89). in consequence, the average number of patients, whose data a hospital collected, was almost 6,000 per year. while patients medical records are stored in healthcare entities for many years, a data breach resulting in theft of personal records of e.g. 3,000 people is highly probable. the costs of such breach may be estimated properly only by calculation prepared for a specific entity. nevertheless, in order to show potential financial consequences of a rather small data breach, hypothetical costs estimation basing on the results of aforementioned renowned researches are shown in the table below. marta meisner70 table 1. hypothetical financial cost of cyber data breach in polish hospital type of costs potential scenario estimated costs estimated costs in pln* forensic investigation 3 weeks of engaging 3 experts (each working 8h/day). rates: usd 200 per hour. 200 usd x 8h x 3 experts x 21 days = 100,800 usd 348,223.68 pln breach notification notification of 3,000 patients. cost of notification: usd 10 per victim. 3,000 patients x 10 usd = 30,000 usd 103,638 pln post-breach patient protection post breach protection cost at the level of usd 15 per victim. only 9% of victims – 270 patients – registered for such services. 270 victims x 15 usd = 4,050 usd 13,991.13 pln attorney fees and litigation expenses costs of legal defence (usd 16,000) and cost of settlement in a class action civil lawsuit (usd 250,000). 16,000 usd + 250,000 usd = 266,000 usd 918,923.60 pln regulatory compliance the attacked hospital, i.e. the controller processing personal data, failed to notify about data breach as required in article 33 of gdpr. fine: eur 2,000,000 according to article 83 of gdpr. the data breach also showed that the hospital (being essential services operator) had not remedied non-compliance found during former audit. fine: pln 50,000 according to article 57 of national cybersecurity system act (currently in draft version). 2,000,000 eur + 50,000 pln 8,341,400 pln + 50,000 pln = 8,391,400 pln cybersecurity improvements cyber attackers gained access to patients data using presence of hospital system vulnerabilities. cost of cybersecurity improvements: pln 1,000,000. 1,000,000 pln 1,000,000 pln loss of reputation and patients churn the attacked hospital was public healthcare provider and, despite loss of reputation, patients churn was almost unnoticeable. – – other potential costs the hospital was refused to obtain insurance against cyber incidents, unless further cybersecurity improvements are made. cost: pln 300,000. 300,000 pln 300,000 pln total: 11,076,176.40 pln *  1 usd = 3,4546 pln; 1 eur = 4,1707 pln (nbp, 2018). s o u r c e : own study. as the costs of data breach differ among countries (ponemon institute, 2017, p. 5), financial consequences of such incident in poland would be most probably much lower than e.g. in the u.s. (due to i.a. it experts and lawyers rates or awarded legal compensation for damages). in addition, potential regulatory financial consequences of cyber attacks leading… 71 fines imposed under gdpr or nis directive regulations are becoming very important while estimating data breach costs. taking into account the aforementioned factors, the total cost of a data breach affecting only 3,000 people at the level of pln 11 million is not an impossible scenario.  conclusions while global digitisation of medical data and spreading application of iot are obviously a tremendous achievement for healthcare sector treatment capabilities and operational effectiveness, they also open more possibilities to the attackers. cyber data breach has become one of the most serious risks for healthcare sector with financial consequences that may exceed the capabilities of unprepared medical entities. in order to properly manage financial risk related to data breach caused by cyber attack, healthcare providers have to be aware of potential costs they would have to incur in case of a successful cyber attack. unfortunately, researchers still struggle with accurate data breach costs estimations, as many data breaches are not reported or their details are not available. researches are, thus, conducted basing on partial data, surveys pursued among medical entities, patients or insurers and with use of diverse methods of costs estimations. this is why results of various organisations’ studies concerning data breach threat and its financial impact on healthcare sector differ so much. while there already are numerous researches conducted globally, the analysis of digital data security and financial scale of breaches in healthcare sector in poland is a great scientific challenge. hopefully future international researches will take also polish market into account. also, legal requirements to report major cyber incidents may help create reliable database for further studies. proper perspective – both local and international – is needed, since otherwise preventive measures and data breach response plans prepared by healthcare providers may turn out to be completely inadequate.  references accenture (2015). insight driven health. digital health, https://www.accenture.com/ _acnmedia/pdf-54/accenture-health-cybersecurity-300-billion-at-risk.pdf (accessed: 05.12.2017). act on information system in the healthcare sector of 28th april 2011, dz.u. 2011 nr 113 poz. 657 z późn. zm. marta meisner72 deloitte (2016). beneath the surface of a cyberattack, a deeper look at business impacts, http://www2.deloitte.com/content/dam/deloitte/us/documents/risk/usrisk-beneath-the-surface-of-a-cyber-attack.pdf (accessed: 24.10.2017). directive 2016/1148 of the european parliament and of the council of 6 july 2016 concerning measures for a high common level of security of network and information systems across the union. enisa (2015). security and resilience in ehealth. security challenges and risks, https://www.enisa.europa.eu/publications/security-and-resilience-in-ehealth-infrastructures-and-services (accessed: 06.11.2017). enisa (2016). smart hospitals. security and resilience for smart health service and infrastructures, http://www.enisa.europa.eu/publications/cyber-security-andresilience-for-smart-hospitals (accessed: 06.11.2017). fuentes, m. r. (2017). cybercrime and other threats faced by the healthcare industry, http://documents.trendmicro.com/assets/wp/wp-cybercrime-and-other-threatsfaced-by-the-healthcare-industry.pdf (accessed: 06.11.2017). gus (2017), health and health care in 2016, http://stat.gov.pl/download/gfx/portalinformacyjny/pl/defaultaktualnosci/5513/1/7/1/zdrowie_i_ochrona_zdrowia_w_2016.pdf (accessed: 17.01.2018). health care industry cybersecurity task force (2017). report on improving cybersecurity in the health care industry, http://www.phe.gov/preparedness/planning/ cybertf/documents/report2017.pdf (accessed: 06.11.2017). lloyd’s (2017). closing the gap. insuring your business against evolving cyber threats, http://www.lloyds.com/lloyds/about-us/what-do-we-insure/what-lloyds-insures/ cyber/cyber-risk-insight/closing-the-gap (accessed: 24.10.2017). luna, r., rhine, e., myhra, m., sullivan, r. & kruse, c. s. (2016). cyber threats to health information systems: a systematic review. technology and health care, 24(1), 1–9. http://doi.org/10.3233/thc-151102. mansfield-devine, s. (2017). leaks and ransoms – the key threats to healthcare organisations, network security, 2017(6), 14–19. http://doi.org/10.1016/s13534858(17)30062-4. national cybersecurity system act (draft), http://www.gov.pl/documents/31305/0/pro jekt+ustawy+z+za%c5%82%c4%85cznikiem+-+do+uzgodnie%c5%84+%281%29. odt/d330ca24-b76f-f772-5e42-317dbb798cbd (accessed: 28.11.2017). nbp (2018). table no. 001/a/nbp/2018 from 2018-01-02, http://www.nbp.pl/home. aspx?navid=archa&c=/ascx/tabarch.ascx&n=a001z180102 (accessed: 02.01.2018). netdiligence (2016). 2016 cyber claims study, http://netdiligence.com/wp-content/uploads/2016/10/p02_netdiligence-2016-cyber-claims-study-online.pdf (accessed: 06.11.2017). ponemon institute (2016). sixth annual benchmark study on privacy & security of healthcare data, http://www.ponemon.org/local/upload/file/sixth%20annual%20patient%20privacy%20%26%20data%20security%20report%20final%206.pdf (accessed: 06.11.2017). ponemon institute (2017). 2017 cost of data breach study. global overview, http:// www.ibm.com/security/data-breach (accessed: 06.11.2017). financial consequences of cyber attacks leading… 73 regulation 2016/679 of the european parliament and of the council of 27 april 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing directive 95/46/ec (general data protection regulation). romanosky, s. (2016). examining the costs and causes of cyber incidents, journal of cybersecurity, 2(2), 121–135. http://doi.org/10.1093/cybsec/tyw001. securityscorecard (2016). 2016 annual healthcare industry cybersecurity report, http://cdn2.hubspot.net/hubfs/533449/securityscorecard_2016_healthcare_report_final.pdf (accessed: 15.11.2017). zurich insurance company (2014). the good, the bad and the careless. an overview of corporate cyber risk, https://www.zurich.com/en/knowledge/articles/2014/12/ the-good-the-bad-and-the-careless-an-overview-of-corporate-cyber-risk (accessed: 14.11.2017). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 2 date of submission: august 7, 2018; date of acceptance: september 25, 2018. * contact information: shahidulislam28@yahoo.com, department of business administration, bgmea university of fashion and technology (buft), 105 uttara model town, sector 7, dhaka-1230, bangladesh, phone: 88 01758075844; orcid id: https:// orcid.org/0000-0002-5362-8622. ** the article was based on a doctoral dissertation titled “dividend practices in corporate sector of bangladesh: a study of the companies listed with dhaka stock exchange” prepared by mohammad shahidul islam, under the supervision of: professor dr. m. farid ahmed (department of finance, university of dhaka) and professor dr. h.m. mosarof hossain (department of finance, university of dhaka). shahidul islam, m. (2018). dividend practices in listed banks of bangladesh. copernican journal of finance & accounting, 7(2), 43–61. http://dx.doi.org/10.12775/cjfa.2018.008 mohammad shahidul islam* bgmea university of fashion and technology dividend practices in listed banks of bangladesh** keywords: dividend, eps, signaling theory, mm model. j e l classification: g35. abstract: corporate dividend behaviour is looked upon in many ways by the experts in the area of financial literature. to examine the dividend practices in banking sector in bangladesh, it is taken secondary data and the views of dividend policy makers’ covering the divergent aspects of dividend practices. the parametric test, non-parametric test and percentile are used for inferring the result. in the banking sector, the maximum payouts are in large size firm, earlier listed bank, low leveraged firm, high risk’s firm, medium pe ratio’s firm. the survey results reveal that the banks prefer both cash & stock dividend most but majority shareholders prefer stock. the most of the companies follow stable payout with increasing trend in dividend payment but no satisfactory research is done to justify the investors’ preference. the decision maker, investors and other stakeholders should follow these findings for taking decision. mohammad shahidul islam44  introduction the financial decision is rotated around the dividend decision. so, to identify the dividend practices in the corporate sector in bangladesh is vital objective of the study. the dividend pattern of listed companies and the management’ practices of dividend policy are described for revealing the present scenario of dividend in the capital market of bangladesh. this study shows the pattern of dividend payout with the different characteristics (category of company, age of the company, size, leverage, risk, pe etc). the dividend practices of the management are depicted with the questionnaire survey. the corporations earn profits but they do not distribute all of it. the part of profit is ploughed back or held back as retained earnings. the part of the profit is distributed to the shareholders as dividend. the ratio of the actual distribution or dividend and the total distributable profits is called dividend payout ratio. how much of its profits should a corporation distribute? there are several considerations that are applied in answering this question. hence, the companies have to frame work on a definitive policy of dividend payout ratio. of course, no corporate management can afford to a fixed dividend payout ratio year after year. however, management has to decide its policy on its broad. the dividend policy is the policy used by a company to decide how much it will pay out to shareholders. from the share valuation model, the value of a share depends very much on the amount of dividend distributed to shareholders. the dividends are usually distributed in the form of cash or share. when a company distributes a cash dividend, it must have sufficient cash to do so. this creates a cash f low issue. this is a concern to the management as insufficient cash may mean the company is unable to distribute a dividend. i have shown the details about the dividend scenarios in bangladesh based on the secondary data (market data and company data) and survey from management. previous studies out of the plethora of literatures available for the present area of study, the following literatures are reviewed having primary focus on finding out patterns in and issues inf luencing dividend payment. dividend practices in listed banks of bangladesh 45 lintner (1956) interviewed managers from 28 selected companies. he found a number of important stylized facts underlying the decision to pay dividends, which can be summarized as follows: a) firms have long-term target ratios of dividend payout; b) managers focus more on dividend changes than on absolute levels; c) dividend changes follow shifts in long run, sustainable levels of earnings rather than short-run changes in earnings; d) managers are reluctant to make dividend changes that might have to be reversed. prior to miller and modigliani (1961), there was a lack of the literature of a complete and reliable theoretical model of the effect of a firm's dividend policy on the current price of its shares. mm (1961) are the first to challenge the belief that a higher dividend payout translates into higher firm value. they concluded that only investment policy rather than dividend policy determines firm value in an ideal economy. dividend policy merely establishes a tradeoff between dividends at one date and dividends at another date because both the corporations and the individual investors can create any cash inf low stream by making homemade dividends. it means that any desired stream of payments can be replicated by appropriate purchases and sales of equity. thus, investors will not pay a premium for any particular dividend policy. the net payout can be considered as the difference between the wealth generated from preceding investment and the amount of capital required by the future opportunity of growth, and is simply a residual. investors prefer cash in the hand rather than a future promise of capital gains due to lower risk (gordon, 1962, 1963; walter, 1963). the corporate finance literature offers a variety of explanations for dividends and the puzzle that they present. in essence, three fundamental positions can be found in the literature with respect to dividends. the first of these, the so-called ‘bird-inthe hand’ hypothesis (gordon & shapiro, 1956) posits that dividends can increase firm value by reducing the risk perceived by investor in corporate cash f lows. it holds that, other things equal, if two firms, a and b, are identical in all respects save that firm a pays a dividend with expectations of future dividend growth, then a will have a higher share price. signaling models were first developed in the late 1970s and early 1980s. akerlof (1970) explained the cost of asymmetry information by applying the market for used car as a pooling equilibrium in the absence of signaling activities. next, using a scenario in the employment market, spence (1973, 1974) carries mohammad shahidul islam46 out a formal partial equilibrium analysis of market signaling. spence’s (1974) signaling model has been extensively used by some researchers to study financial models of signaling. managers give investors what they currently want. that is, they cater to investor demand by paying dividends when investors put a stock price premium on payers, and by not paying when investors prefer non payers (baker & wurgler, 2004a, 2004b). compared with the traditional rationality assumptions, behavioral corporate finance is potentially more realistic, in that it emphasizes that both investor and managerial behaviors are less than fully rational. in practice, corporate payout policy can be inf luenced by the irrational actions of managers and/or investors (barberis & thaler, 2003; baker, saadi, dutta & gandhi, 2007). dividends help to reduce the agency costs associated with the separation of ownership and control (jensen & meckling, 1976; rozeff, 1982; easterbrook, 1984; jensen, 1986). miller and modigliani (1961) proposed that, in frictionless environment, the choice between cash distribution and retention will not affect substantially the firm value, and only investment decisions matter. however, in the real world the conf licts of interests among managers, shareholders and debt holders may hurt the firm value. dividend policy will be relevant if it affects substantially these conf licts of interest. traditional residual theory of dividends suggests that dividends distributed are the residual funds after making investment decisions dividend policy tends to follow a firm’s life cycle that a firm begins paying dividends when its growth rate and profitability are expected to decline in the future (mueller, 1972; fama & french, 2001; deangelo, deangelo & stulz, 2006). firms have their own life cycle. premised on knight (1921) and schumpeter (1934), mueller (1972) proposed a formal life cycle theory. the start-up stage can be difficult for a fresh firm because of the existing market threshold. the limited initial resources must be invested into product development, marketing and organization. after the startup stage, the firm will reach a high-growth stage during which it expands customers and exploits the market potential. firms will eventually reach a point at which they progress from a high growth period to a so called ‘maturity period’. with increasing market competition, profitable investment opportunities become absent and the growth rate declines. dhameja (1978) showed that there is no statistically significant relationship between dividend payout and industry classification, size. the growth is found to be significantly and inversely related to dividend payout. as regards dividend practices in listed banks of bangladesh 47 dividend rates controlling for bonus and rights issues, it is related directly and significantly to industry classification and growth, and mildly related to size. bhat and pandey (1994) showed that payment of dividend depends largely upon current and expected earnings as well as on the pattern of past dividends, and liquidity is not a matter of consideration in dividend policy. collins, saxena and wansley (1996) studied the role of insiders in determination of dividend policy of a firm. study results indicate that payout ratio is negatively related to firm’s past and future expected growth rate of earnings, its level of systematic risk and its insider holdings. they also found that regulatory status plays more important role in the determination of strength of association between insider holding and payout ratio in the case of utilities than in the case of financial firms. gupta (1999) showed that regular dividend payments have been the feature in almost all the selected companies though there have been a gradual decline in the proportion of dividend payments to the available earnings for distribution. he also found that dividend rates are more inf lated in comparison to the real effective rates of dividend as represented by dividend yield. in the matter of stability in dividend payments, he found high stability in terms of dividend yields but not so much in terms of dividend rates and dividend payouts. la porta, lopez-de-silanes, shliefer and vishny (2000) hold that firms in countries with better investor protection make higher dividend payouts than do the firms in countries with lower investor protection. moreover, in countries with more legal protection, high growth firms have lower payout ratios. this finding supports the outcome agency model where investors use their legal power to force dividends when growth prospects are low. thus, their findings indicate that without enforcement of management there is not a strong incentive to ‘convey its quality’ through payout policy. there is also no evidence that in countries with low investor protection, management will voluntarily commit itself to payout higher dividends and to be monitored more frequently by the market. again, gugler (2003) observed that state-controlled firms are characterized by dividend smoothening, very high payout and strong reluctance to cut dividends while family-controlled firms are not subject to dividend smoothening, have a low payout and are least reluctant to cut dividends. according to him, this finding applies more to firms having good growth prospects (positive r&d spending). but, in case of firms with low investment opportunities (no r&d spending), target payout ratio tends to be much higher irrespective of who controls the corporation (state control or family control). mohammad shahidul islam48 deangelo, deangelo and skinner (2004) observed that during the period of their study (1978–2000) nominal dividends paid by the companies in us increased manifold, even real dividends doubled during this period. this aggregate dividend increase is even in the face of radical decline in the number of dividend-payers. they found that both dividend and earnings concentration have increased substantially from the already high level. brav, graham, harvey and michaely (2005) observed that dividend level is a priority at par with the investment decisions, and increase in dividend is considered only after investment and liquidity needs are met. they opined that managers express strong desire to avoid dividend cuts except in extraordinary circumstances. they also pointed out that sustainable increase in earnings and demand by institutional investors are the two root causes for the non-payers to initiate dividend payment. they found little support for signaling theories. they also found no evidence that managers use payout policy to attract particular investment clientele. their survey also suggests that taxes are not the first-order important factor in the determination of payout policy but they are important at the margin of some firms (a very small proportion of dividend initiating firms). oza (2005) identified ‘current year’s earnings’, ‘patterns of past dividends’, ‘availability of cash’ and ‘expected future earnings’ as major determinants of dividend policy. while, factors like ‘capital expenditure requirements’, ‘impact on share prices’, ‘achieving target payouts’, ‘restrictions imposed by lenders’, ‘bonus issue by the companies’ and ‘industry practices’ are found to have less significant role in the matter of deciding on dividend payments. huda and farah (2011) explored the determinants of the dividend policy of firms in the banking industry of bangladesh. dividend decision of a bank basically depends on its size, profitability, liquidity and retained earnings. the study is an attempt to find out the key dividend determinant variables and their impact over cash, stock and total payout ratio. statistical techniques of simple and multiple regressions have been used to explore the relationships between variables. the investigation results show the predictor variables have a significant relationship with stock payout and an apparent relationship with cash payout. amongst all the independent variables, net income turns out to be most inf luential indicator in elucidating dividend payouts. zaman (2013) studied to determine factors that have statistically significant impacts on the dividend policy of banks with multiple regression analysis and it is seen that bank profitability, growth, and size are not significant in ex dividend practices in listed banks of bangladesh 49 plaining bank dividend policy in 2006. however, their role in explaining dividend strengthens with time till 2010. ahmed and mukit (2014) identified the impact of various factors determining the firm’s dividend paying behavior in the capital market of bangladesh. they found that in bangladesh profitability, corporate tax and market to book value ratios are the significant determinants of dividend payout ratio and operating cash f low per share, current ratio and debt to equity ratio are the insignificant determinants of dividend payout ratio. research methodology 1. sample i have taken banks from financial sectors, which are enlisted before 2010 in dse as population. from the population (30), it is taken 22 companies as sample through sample size determination techniques. n (n = ---------------------- 1+n(e)2 n = sample size, n = population size, e = level of precision) the study period is 20 years from 1994 to 2013. this research is an analytical research based on secondary data. the secondary data is taken from following sources: published annual reports of sample banks, monthly review of dhaka stock exchange and website of dse. the stratified random sampling procedure is followed for data collection. 2. primary data: survey instruments the present research is based on an empirical study of 22 listed banks from the dse with the objective of identifying the dividend policies practices. the data has been collected through the primary mode using a structured questionnaire mohammad shahidul islam50 containing 8 statements based on 5 point likert scale where strongly agree=2, agree=1, indifferent=0, disagree=-1, strongly disagree=-2. the respondents are asked to indicate the level of agreement on issues for their firm’s dividend policy. there are 8 multiple choice questions are also given to respondents. the questionnaire has been prepared after reviewing the prior studies on dividend practices by decision maker. the survey follows the literature of baker and powell (2000), brav et al. (2005), edelman (1983) etc. i mailed the survey instruments to the chief financial officer (cfo) and managing director, chairman, board of directors of each firm in september 2013. the mailing included a cover letter and a stamped return envelope. the cover letter assured recipients that their answers would be confidential and released only in summary form. but i did not find satisfactory response. so, later, i went personally to the respondents of each firm and finally collected 108 questionnaires as a sample. parametric and on parametric test i have used one-sample t-test to determine whether the mean response for each of the 8 factors involving dividend policy differs significantly from 0 (indifferent). this study follows the test of baker and powell (2000), brav et al. (2005), etc. the non -parametric test (chi-square test) is also done which is similar testing tools of edelman and farrelly (1983). 3. secondary data: the study is based on secondary data obtained from published annual reports of sample firms, monthly review of dhaka stock exchange and website of dse. it is taken 22 banks from banking sectors as sample. the sample period is 20 years from 1994 to 2013 for study. the data are analyzed with descriptive way of dividend practices in bangladesh. dividend practices in listed banks of bangladesh 51 analysis and interpretations: banking sector 1. dividend performance: an analytical study on banking sector 1.1. sectoral performance of dividend and dividend related issues table 1. dividend performance sectors dpr dps eps dy mps bank 18.52919 23.87359 81.49525 1.889658 1221.601 s o u r c e : author’s calculation. from the table 1, it is observed that the dpr, dps, eps, dy, mps are 18.52, 23.87, 81.49, 1.88, 1221 respectively. the dpr is lower than other manufacturing sector but dps is more than other sector. it indicates that the banking sector provide more stock dividend than the manufacturing sectors. the eps and mps are much higher than some manufacturing sectors. 1.2. dividend payment of different categories table 2. dividend performance of different categories category dpr dps eps dy mps a 18.52919 23.87359 81.49525 1.889658 1221.601 s o u r c e : author’s calculation. it is observed from the table 2 that the most of the banks pay the dividend regularly. so, the sample belongs to a category only. mohammad shahidul islam52 1.3. dividend nature of different size of the banks table 3. dividend performance of different size of the banks size dpr dps eps dy mps large size 27.4462 21.7159 31.2467 1.97577 2120.39 medium size 11.96 26.84 117.6 1.801 567.8 small size 14.52721 17.24615 109.1067 1.990385 773.1755 s o u r c e : author’s calculation. in the table 3, the dpr of large size, medium size and small size are the 27.44, 11.96, and 14.52 percent respectively which indicates that large banks provide more dividends. the mps of large banks is more than the medium and small banks. but the dps and eps of medium size banks have more than the other two groups. 1.4. dividend payment nature of different age of the banks table 4. dividend performance of different age of the banks year dpr dps eps dy mps 1980–1990 14.25475 23.29433 39.07967 4.363083 497.5725 1990–2000 21.64 22.25 35.64 2.911 378.3 2000–2005 17.84 27.38 132.2 1.781 644 2005–2010 20.9 18.28 25.11 0.511 2924 s o u r c e : author’s calculation. it is observed from the table 4 that the dpr of the later listed companies is more than the earlier listed companies (i.e. 2005–10: 20.9%, 2000–05: 17.84%, 1990–00: 21.64%, 1980–90: 14.25%). dividend practices in listed banks of bangladesh 53 1.5. dividend and leverage table 5. leverage and dividend performance leverage dpr dps eps dy mps high leveraged firm 11.04 23.7 127.4 1.431 456.8 medium leveraged firm 18.1 21.96 31.4 1.71 2955 low leveraged firm 28.52335 25.73311 65.42094 2.633198 718.8738 s o u r c e : author’s calculation. in the table 5, the dpr, dps, eps, dy, mps of low leveraged firm are 28.52 percent, 25.73, 65.42, 2.63, 718.87 respectively and these are higher than the high and medium leveraged firm. it indicates that the low leveraged bank performed better in dividend and dividend related issues. 1.6. dividend and risk table 6. risk and dividend performance of different banks risk dpr dps eps dy mps high risk firm 23.68 23.45 50.7 1.38 709.1 medium risk firm 16.53 25.01 132.3 2.546 448.2 low risk firm 7.380725 21.85682 31.66715 1.618924 446.5665 s o u r c e : author’s calculation. the dpr of high risky firms is more than the medium and low risky firms but the dps, eps, dy of medium risky firms are 25.01, 132.3, and 2.54 respectively which are more than the other two groups (table 6). mohammad shahidul islam54 1.7. dividend and ownership table 7. ownership and dividend performance of different banks majority shareholdings dpr dps eps dy mps sponsor (50% and above) 26.63 23.78 55.39 2.161 772.6 individual (40% and above) 12.93 23.23 34.03 1.704 415.2 s o u r c e : author’s calculation. it is seen from the table 7 that those banks’ majority shareholders who are sponsors have higher dpr (26.63%), dps (23.78), eps (55.39), dy (2.16), and mps (772.6). 1.8. dividend and pe table 8. pe and dividend performance of different banks class dpr dps eps dy mps 20+ 4.123 19.02 26.44 1.294 444.1 15–20 26.82 25.23 67.5 1.169 3371 10–15 16.21 23.3 110.5 2.04 410.8 5–10 28.02254 30.25 46.78536 4.118571 398.1518 s o u r c e : author’s calculation. in the table 8, the class of pe ratio between ‘5–10’ is the best class in respect of dividend related variables (dpr: 28.02, dps: 30.25, dy: 4.11). the extremely higher class (20+) indicates the worst position of dividend related performance (dpr: 4.12, dps: 19.02, dy: 1.29). dividend practices in listed banks of bangladesh 55 1.9. dividend and its payment trend table 9. dividend and its payment trend pattern dpr dps eps dy mps regular 18.52919 23.87359 81.49525 1.889658 1221.601 s o u r c e : author’s calculation. it is found that the majority banks pay the dividend regularly. the dpr of banking sector is lower comparison to other sectors. 2. dividend practices: survey on banking sector table 10. survey results of dividend practices shareholders’ preference for forms of dividend issues percentage of preference cash dividend 45.45 stock dividend 54.55 right issue 0.00 stock repurchase 0.00 companies’ preference for forms of dividend cash dividend 5.52 stock dividend 22.73 cash and stock 67.21 stock repurchase 0.00 no preference 4.54 reason for companies’ preference in choosing form of dividend easy to implement 4.54 more flexible 9.09 maintaining consistency 45.50 majority shareholders’ expectation 27.30 other 13.60 mohammad shahidul islam56 dividend payment patterns regular 81.8 irregular 13.6 no dividend payment 4.55 dividend payment policies stable payout ratio 54.5 constant dps 18.18 regular plus extra dividend 4.55 residual dividend policy 22.7 dividend payment trend increasing trend 50.00 decreasing trend 13.6 unchanged 36.4 manager’s target for dividend decision amount of dividend 13.6 growth in dividend 22.73 dividend yield 22.73 dividend payout ratio 22.73 no target at all 18.2 research for dividend preference yes 22.73 no 77.3 s o u r c e : author’s calculation. from the above table 10, the managers think that the maximum shareholders prefer stock dividend (54.55%). the 45.45 percent shareholders expect cash dividend. the companies prefer ‘cash and stock’ dividend to distribute among the shareholders. the 67.20 percent companies prefer to pay both ‘cash and stock’ dividend but 5.52 percent companies prefer only cash dividend. the 22.73 percent companies prefer stock dividend. the companies prefer earlier form of dividend payment because of majority shareholders’ expectation (27.3%). other reasons for choosing the form of dividend is maintain consistency (45.5%). the maximum companies pay the dividend regularly (81.8%) and 13.6% company pay the dividend irregularly. but only 4.55 percent companies did not pay the dividend at all. the 54.50 percent companies take the stable dividend payout policy. the companies’ other policies are constant dividend per share table 10. survey results of dividend practices dividend practices in listed banks of bangladesh 57 (18.18%), regular plus extra dividend (4.55%), and residual dividend policy (22.7%). the dividend increasing trend, decreasing trend, unchanged trend are 50%, 13.6%, 36.4% companies respectively. the most of the companies target the growth in dividend (22.73%) and dividend payout ratio (22.73%) and remarkable number of companies has no target at all (18.2%). only 22.73% companies’ conduct research on the dividend preference of the shareholders and 77.3 percent companies don’t conduct any research on shareholders’ preference. 3. company’s views about the dividend policies of banking sector table 11. company’s view on the dividend policies n um be r statements level of agreement (%) mean rank t-test sig. (2-tailed) chi square value asymp. sig. strongly agree agree indifferent disagree strongly disagree 1 we try to avoid reducing dividends per share, because there are negative consequences of reducing dividends 31.82 31.82 13.64 9.09 13.64 .590 5 1.97 .061 5.27 .26 2 rather than reducing dividends, we raise new funds to undertake a profitable project 4.54 31.82 22.73 22.73 18.18 -.181 7 -.69 .492 4.36 .35 3 we make dividend decisions after taking investment plans 22.73 36.36 18.18 18.18 4.54 .545 6 2.16 .042 5.72 .22 4 we develop dividend policy for maximizing the company’s market value 54.55 36.36 9.09 0 0 1.45 1 10.16 .000 8.35 .032 5 we change dividends based on sustainable shift in earnings 45.45 31.82 18.18 4.54 0 1.18 4 6.11 .000 8.18 .042 6 we try to maintain a smooth dividend stream from year to year 54.55 31.82 13.64 0 0 1.40 2 9.00 .000 7.23 .05 mohammad shahidul islam58 n um be r statements level of agreement (%) mean rank t-test sig. (2-tailed) chi square value asymp. sig. strongly agree agree indifferent disagree strongly disagree 7 we pay dividends for showing better performance compare to competitors 9.09 2273 9.09 40.91 18.18 -.363 8 -1.319 .201 6.54 .11 8 we make dividend policy based on majority shareholders’ expectation 45.55 36.36 13.64 0 4.54 1.18 3 5.508 .000 9.63 .022 s o u r c e : author’s calculation. from the table 11, the statements 4, 5, 6, 8 are significant in both t test and chi square test. the statement 4 (‘we develop dividend policy for maximizing the company’s market value) has highest mean value (1.45) and got 87.27 percent opinion of respondents at ‘agree and strongly agree’ level. this statement is statistically significant with t test and chi-square test. it indicates that the companies set dividend policy with aims to maximize the market value of share. the 86.37 percent companies have ‘agree and strongly agree’ opinion on the statement 6 (‘we try to maintain a smooth dividend stream from year to year’) which is statistically significant with t test and chi-square test. so, the companies maintain the consistency in paying the dividend. the 81.91 percent companies have ‘agree and strongly agree’ have opinion on the statement 8 (‘we make dividend policy based on majority shareholders’ expectation’) which is statistically significant with t test and chi-square test. so, the companies take their dividend decision by considering the majority shareholders’ expectation. the statements 1, 2, 7 are not significant in both ttest and chi square test and statement 3 is insignificant in chi square test. the statement 7 (‘we pay dividends for showing better performance compare to competitors’) is not statistically significant which indicates that the companies do not pay dividend for showing better performance compares to competitors. table 11. company’s view on the dividend policies dividend practices in listed banks of bangladesh 59 recommendations the study has found the corporate dividend policy practices related findings such as regulatory problems, policy related problems, application of model related issues etc. accordingly, the study suggested the following measures: ■ the companies should follow continuous dividend policy practices with a view to boosting investor morale as well as keeping stock market as safe harbor for investment and financing sector. ■ the main determinants of dividend decisions are earnings and liquidity. so, company has to consider significant earnings and liquidity position for paying smooth dividend. ■ the dividend announcement has the signaling effect on the market price of share. the corporate dividend decision and investors’ investing decision should consider this finding. ■ the corporate firms should follow non identical dividend policies depending on own characteristics, financing, and investing opportunities and expectation of market participants. ■ the companies should make corporate dividend policies and undertake corporate dividend decision in line with the objective of maximizing share holders’ wealth. ■ the earlier reactions of dividend announcements indicate the leakage of information in the market. so, there should be taken the regulatory measures for preventing it.  conclusion this study depicts the picture of dividend performance in the capital market of bangladesh. in the banking sector, the maximum payouts are in large size firm, earlier listed bank, low leveraged firm, high risk’s firm, medium pe ratio’s firm. the survey results reveal that the banks prefer both cash & stock dividend most but majority shareholders prefer stock. the most of the companies follow stable payout with increasing trend in dividend payment but no satisfactory research is done to justify the investors’ preference. the decision maker, investors and other stakeholders should follow these findings for taking decision. the future researchers can cover the other financial sector for their study. mohammad shahidul islam60  references akerlof g.a. 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(1963). dividend policy: its inf luence on the value of the enterprise. journal of finance, 18(2), 270–291. zaman, s. (2013). determinants of dividend policy of a private commercial bank in bangladesh: which is the strongest, profitability, growth or size? in m.h. bhuiyan (ed.). proceedings of 9th asian business research conference. dhaka: biam foundation. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 1 date of submission: may 16, 2018; date of acceptance: june 6, 2018. * contact information: magdalenakogutjaworska@gmail.com, faculty of management and economics of services, university of szczecin, cukrowa 8, szczecin, poland, phone: 504 193 110; orcid id: http://orcid.org/0000-0001-8812-374x. kogut-jaworska, m. (2018). principles of support for the common good services co-financed from public financial means. copernican journal of finance & accounting, 7(1), 9–19. http://dx.doi. org/10.12775/cjfa.2018.001 magdalena kogut-jaworska* university of szczecin principles of support for the common good services co-financed from public financial means keywords: public finance, self-government units, common good services, local finance. j e l classification: f42, f63, h41, h87. abstract: territorial self-governments of all levels (commune, county or region) perform services for the common good which, for obvious reasons, are conditioned by the financial system of the self-government units. the constitution of the republic of poland states that common good services which cover the needs of the community are performed by self-government units as their own tasks. however, the level of diversification of the common good services assigned to self-government units, it changes over time. in addition, the self-government itself most often deals with the realization of the tasks given (within its own organizational structure or through the system of self – governmental financial agencies, own communal partnerships and those in which it has a stake). the self – government can also place orders with other business entities which have adequate means to meet the requirements. such state of affairs creates a need to make analyses of the implementation systems of the duties assigned to the territorial self-government units in poland. the analyses will indicate which tasks are the most expensive ones, and will show opportunities for their implementation by the subjects which are adequately prepared (within the procedure of ordering and subsidizing of the tasks). in the above mentioned context, the goal of this paper refers to basic questions related to the obligation of supplying common good services by the territorial magdalena kogut-jaworska10 self-government units in poland. another particular objective of the paper is to analyse the rules of support for common good ventures, when the aid is given from public financial resources.  introduction territorial self-government units perform own tasks in order to meet the needs of the local community. in particular, they implement tasks referring to the common good, which are aimed at the current and continuous meeting the needs of the population by supplying availability of the common services (wollmann, 2014, pp. 50–60). those services, which in the past where rendered by the state or territorial self-government structures, now are becoming more and more privatized. it means that activities of public agencies are becoming narrower over time and that state agencies are acting according to free market rules and undergo stricter controlling procedures at public aid distribution. the scope of tasks ascribed to the territorial self-government in poland has been undergoing many transformations. generally speaking, each such change broadened that scope. the 1990 act on municipalities gave if large responsibilities in urban planning, infrastructure development including local roads, bridges and public transport, utilities (water and sewage supply and waste management, and since 2013 energy), municipal housing, social services (including family benefits since 2004), primary education, environmental protection, basic healthcare, recreation and culture. counties are responsible for local issues not ascribed to municipalities and have a more limited role and inf luence (kańduła, 2017, pp. 804–810). their responsibilities include secondary education, public health services (main hospitals), social welfare (beyond municipal territorial boundaries), economic activity and job creation (employment offices). regions are responsible for issues of regional importance (determined by the law), playing a relatively limited role in providing public services (godfrey, 2001, p. 504, 505). their main responsibilities are regional economic development, regional roads and public transport (including railways since 2009), higher education, health (regional hospitals), social welfare, labour market and environmental protection (since 2009), etc. (www1). however, the topic of this paper does not cover all range of solutions applied within the system of task implementation by territorial self-government units and is limited to a partial description which deals with relatively small, but principles of support for the common good services… 11 practically very important solutions, i.e. those ones that concern common good and are covered by financial compensation. realisation of common good tasks and services – the core issues and methodological assumption the problems of realisation and financing of territorial self-government activities is an issue frequently described in the literature related to the subject (stiglitz & rosengard, 2015, p. 960; birkland, 2016; west, berman, bowman & van wert, 2015; ross, 2014; tsekosand & triantafyllopoulou, 2016). the issue is also referred to in the polish literature (jastrzębska, 2012, p. 284; patrzałek, 2010, p. 315; swianiewicz, 2011, p. 358; brzozowska, gorzałczyńska-koczkodaj, kogut-jaworska & zioło, 2013, p. 285; maśloch & sierak, 2013; sierak & górniak, 2013, p. 150). the dominating view stresses that the measure of activity at the task realisation is the level of expenditures. other measures of the self-governmental activity are also referred to, in particular, those related to the basic budget measures such as: own income, operational surplus, current expenditures and expenditures on property. the following part of this paper introduces the analysis of financial conditions existing within the framework created for the common good activity of the territorial self – government in poland, as well as it describes the main principles for the realization of the ventures connected with the activity mentioned above. the analysis is based on the current legal order, i.e., the rules of the european and polish law. the focus is concentrated on solution applied within the system of realization and financing of the tasks for the territorial self-government units, and in particular the way of financing through compensations, with a relation to the rules of public aid. the author applies methodological tools of theoretical analysis in particular: a selection of theoretical and descriptive material on the subject, as well as detailed comments and comparison of the present laws and regulations. usefulness of the concepts and applicability of legal regulations were considered to understand fully the procedures to be applied for financing the common good tasks. the empiric data shown in the paper is based on material from secondary sources, namely public organizations such as: the organization for economic co-operation and development (the oecd) and the office of competition and consumer protection (the uokik). a survey of empiric research indicates clearly certain specifics of self-governmental expenditure and its inf luence on social and economic development. magdalena kogut-jaworska12 in poland, the specifics shows that the main goal of the expenditure is education, as self-government units are responsible for both capital and current expenditure including staff remuneration. education is followed by healthcare and transport (weighing similarly in self-government units expenditure), and then by social welfare. in addition, self-government units are responsible for the large majority of overall public spending in the areas of environmental protection, housing and community amenities and as well as recreation and culture (over 75% of public spending) (figure 1). figure 1. self-government expenditure by function (in %) figure 1. self-government expenditure by function (in %) source: own research based on: www1. the territorial self-government, acting within its constitutional powers, provides the society with services of a particular character, namely those which can not be delivered or secured by market forces (marcou, 2016, pp. 13-20). public services, which in the legal framework on public aid have a leading role, are described by the polish legislation as own tasks, services for the common welfare or services provided for the common economic interest. in the european regulations, there appear various closely related definitions which are often applied interchangeably, i.e.: public services, services for public good, services provided for the common welfare, services for the general economic welfare, or services of non-economic character provided for the common good (differences and similarities in definitions describing these notions are presented more broadly in the book by (ząbkowicz, 2016, p. 105). leaving the above differences aside, it needs to be said that the core meaning of “services of common welfare” was first mentioned clearly at an institutional level of the european community in the document on these services presented in cannes (france) in 1995 (services of general interest in europe). then, the issue was given a rank of an important subject for resolutions of the treaty of amsterdam in 1997, where, under a narrowed term: “services provided in general economic interest”, the services were included into values of crucial importance for supporting the social and territorial cohesion of the whole european union (ząbkowicz, 2016, pp. 106, 107). public aid and protection for common good services 0 5 10 15 20 25 30 general public services defence security and public order economic affairs environmental protection housing and community amenities health recreation, culture and region education social protection s o u r c e : own research based on: www1. the territorial self-government, acting within its constitutional powers, provides the society with services of a particular character, namely those which can not be delivered or secured by market forces (marcou, 2016, pp. 13–20). public services, which in the legal framework on public aid have a leading role, are described by the polish legislation as own tasks, services for the common welfare or services provided for the common economic interest. in the european regulations, there appear various closely related definitions which are often applied interchangeably, i.e.: public services, services for public good, services provided for the common welfare, services for the general economic welfare, or services of non-economic character provided for the common good (differences and similarities in definitions describing these notions are presented more broadly in the book by (ząbkowicz, 2016, p. 105). leaving the above differences principles of support for the common good services… 13 aside, it needs to be said that the core meaning of “services of common welfare” was first mentioned clearly at an institutional level of the european community in the document on these services presented in cannes (france) in 1995 (services of general interest in europe). then, the issue was given a rank of an important subject for resolutions of the treaty of amsterdam in 1997, where, under a narrowed term: “services provided in general economic interest”, the services were included into values of crucial importance for supporting the social and territorial cohesion of the whole european union (ząbkowicz, 2016, pp. 106, 107). public aid and protection for common good services the services of general interest have particular importance among other common services, provided for the general public and receive special protection and support. the regulations allow there for greater public aid for service providers, enhancing their profitability (parliamentary act of 27/08/2009 on public finance). on the other hand, the services provided without interventionism have other prices or quality levels or are not offered at all. all. the services need to be provided in accordance with the required rules and conditions, particularly in cases when the providers receive, a compensation, i.e., a financial support given by local or state administration, which covers the whole or a part of particular cost elements – according to the liabilities taken by the providers. moreover, it is assumed that in some cases, the services can be provided only when the administration organs offer compensation to the provider. territorial self – government units in poland bear the broadest scope of responsibility for availability of general interest services for the local community. in particular, the communes are burdened with the duty to maintain services necessary to meet the needs of the public in a uninterrupted way (nik, 2015). the fulfilment of the tasks can be performed through providing services of common availability, in most cases based on the concept of services of general economic interest. in order to achieve that goal, the communes were ascribed competence to set up organizational entities, such as self-governmental budgetary units or business partnerships, and to make deals with other subjects. as the presented data show, the dynamics of support for such activities given by the communal agencies has been incremental year after year. services of general economic interest must be based on principles and conditions that enable complete realization of the goals to be achieved. some of magdalena kogut-jaworska14 the services can be rendered by public enterprises, but other services by the private ones, even without substantial financial support from agencies of the member states (yurchenko & lethbridge, 2014; kuhlmann & fedele, 2010, pp. 49–69). some other services can be rendered only when given financial aid by the agency responsible. when specific european union regulations are lacking, the member states are free to establish the ways of organization and financing of the services in question. the particular principles according to which the financing for the general interest services can be provided are set by the decision of the commission of 20/12/2011on the application of article 106, section 2 of the treaty on the european union functions which specifies the position of the states regarding compensation for providing services of general interest. the compensation is allotted to companies obliged to render services of general economic interest (official journal of the eu l7 of 11/01/2012), later called the european commission decision 2012/21/ue, mentioned also in the official communique of the commission – the principles of the european union concerning state aid in the form of compensation for rendering services of general interest (official journal of the eu c 8 of 11/01/2012), also known as the framework rules of the european commission 2012/c8 /03. the formula of covering the costs of the service rendered needs to be assessed in accordance with the legal framework and the rules referring to public aid. public aid is defined as benefits which are accorded to enterprises directly or indirectly, from the state resources or the resources of the territorial selfgovernment units. the aid for the companies features better conditions than those offered by the financial markets (economic advantage). besides, the support has a selective character (it privileges a certain company or companies, or production of specific goods). it threatens to distort or distorts competition and inf luences trade between the eu member states. the public aid, including the one from the territorial self-government units, can take various forms e.g.: subsidies, tax exemptions or reductions or any other (compare: table 1). public aid, as an activity which distorts competition, is disallowed in the common market. however, the eu legislators have established exemptions from the rule. principles of support for the common good services… 15 table 1. the amount and forms of support compensating realization of general interest services agencies allotting support amount of aid subsidies amount of aid mln pln national council for radio and tv broadcasting 750 mayors of towns and district 97.7 compensation 54.7 subsidies 40 preferential loans 2.8 leasing of state or self-governmental property (including associations of self-governments) to enterprises at preferential rates, i.e. lower than the market ones. 0.1 exemptions from taxes or fees 0.04 tax authorities 10.5 subsidies 10.5 minister of administration and digitalization 0.2 subsidies 0.2 total 858.4 s o u r c e : uokik, 2016. financing of common good services in the context of public aid financing of services rendered for general economic interest takes usually a form of compensation paid by a public subject. the compensation cover costs which the provider of services would not have paid if it hadn’t been burdened with obligations to perform particular tasks. such situations happen in case of contracts signed by communes with municipal or private companies which provide certain services, e.g.: waste management and utilization or public transport. according to the adopted doctrine, public aid which can support services provided in the general economic interest is based on four assumptions (european commission, 2003): ■ firstly, the benefiting enterprice must be really burdened with obligations aimed at rendering public services and the obligations should be clearly defined. ■ secondly, the parameters which are the basis for calculating the compensation must be stated in advance in a fair and objective way, so that the compensation does not create an additional economic benefit, which magdalena kogut-jaworska16 in turn, may create a privileged position of the beneficiary towards its competition. member states which compensate losses incurred by a company without prior setting parameters of such compensation, in particular when the services rendered to the public were not financially or economically rational, can be blamed for financial interventionism that is included into ineligible state aid according to article 107, section 1, of the treaty. ■ thirdly, the compensation can not exceed the necessary amount which covers, totally or partially, the costs incurred in order to meet obligations aimed at providing services of general interest (also known as public services), after having taken into consideration the relevant turnover and reasonable profit. ■ fourthly, in cases when the choice of the enterprise responsible for rendering services of general interest was not made according the procedure of public contracting, the level of the necessary compensation should be established after analysing a cost which an average enterprise, adequately equipped and well-managed, would incur in order to meet expectations of the public. the above financial analysis should also take into consideration the turnover and a reasonable margin of profit. it needs to be stressed that all the above requirements must be fulfilled. non – compliance with only one of the assumptions indicates that the compensation will be treated as state aid. the omission of the fourth criterion is the most common reason why the support provided was defined as state aid. the performed analysis of the literature and legal regulations enables to dedunce some important conclusions, particularly it indicates that: ■ public aid poses a major threat for the performance of the free market, since, by definition, such support means benefits for entrepreneurs whose activities are supported by public aid, which distorts the free market, ■ there are different sorts of public aid so the differentiation which particular sort of aid distorts the free market and which does not is very difficult, ■ the legal regulations implemented by the european commission (in the form of executive or orders) make a necessary element for rationalization of the public aid system. however, in practice, it is difficult to differentiate lawful and unlawful forms of public aid. a large variety of meanings and definitions of the notion: “public aid” arouses many doubts. principles of support for the common good services… 17 ■ european regulations where these problems are seen and analyzed, broaden the scope of exemptions from such aid. the reason is a considerable cost of planning and implementation of the projects at the self-government level, which concern common good tasks and services.  conclusions the references concerning the financing of common good services should not be considered without references to the european union legislature, especially in the field of public aid and norms concerning the common market. undoubtedly, the communal services in their broad meaning and the financing realized by territorial self-government units together with the dependent economic entities (communal partnership) and with external entities should be within the eu legal framework, including regulations on public aid and public supply contracts. apart from the above, it needs to be stressed that the eu guidelines, should be taken into consideration only with regard to the specifics of a particular member state and only with reference to its economic problems and regional conditions, including interventionism in those fields which feature considerable disproportions in economic development, or where appear specific conditions in which some services can not be rendered in a proper way by the market. regulations concerning protection of free competition resulting from the eu laws, dealing with interventionism in particular sectors, should be considered with respect to the guidelines for internal market policies and after analysis of abilities to meet the needs of the population in the scope outlined in the social contract.  references birkland, t.a. (2016). an introduction to the policy process theories, concepts, and models of public policy making. 4th edition. new york: routledge. brzozowska, k., gorzałczyńska-koczkodaj, m., kogut-jaworska, m., & zioło, m. (2013). gospodarka finansowa w jednostkach samorządu terytorialnego. (financial management in territorial self-government units.) warszawa: cedewu. european commission (2003). sprawa c-280/00 altmark trans gmbh i regierungspräsidium magdeburg przeciwko nahverkehrsgesellschaft altmark gmbh [2003] rec. i-7747 (case c-280/00 altmark trans gmbh and regierungsprasidium magdeburg against nahverkehrsgesellschaft altmark gmbh.) za: komunikat komisji w sprawie magdalena kogut-jaworska18 stosowania reguł unii europejskiej w dziedzinie pomocy państwa w odniesieniu do rekompensaty z tytułu usług świadczonych w ogólnym interesie gospodarczym (2012/c 8/02). godfrey, m. (2001). what works: evidence-based policy and practice in public services. health & social care in the community, 9(6), 504–505. http://dx.doi.org/10.1046/ j.0966-0410.2001.10281.x. jastrzębska, m. (2012). finanse jednostek samorządu terytorialnego. (finances of territorial self-government units.) warszawa: wolters kluwer. kańduła, s. (2017). the efficiency of fiscal equalization. the case study of municipalities in poland. lex localis – journal of local self-government, 15(4), 803–825. http:// dx.doi.org/10.4335/15.4.803-825(2017). kuhlmann, s., & fedele, p. (2010). new public management in continental europe. in h. wollmann, g. marcou (eds.). the provision of public services in europe. between state, local government and market. cheltenham: edward elgar publishing. http:// dx.doi.org/10.4337/9781849807227. marcou, g. (2016). the impact of eu law on local public service provision: competition and public service. in h. wollmann, i. koprić, g. marcou (eds.). public and social services in europe. from public and municipal to private sector provision. basingstoke: palgrave macmillan. http://dx.doi.org/10.1057/978-1-137-57499-2_2. maśloch, g., & sierak, j. (eds.) (2013). gospodarka i finanse samorządu terytorialnego. (economy and finance of the territorial self-government). warszawa: szkoła główna handlowa – oficyna wydawnicza. nik (2015). realizacja zadań publicznych przez spółki tworzone przez jednostki samorządu terytorialnego. informacja o wynikach kontroli nik. (supreme chamber of control realization of public tasks by territorial self-government partnerships. information on the outcome of the nik control.) kgp-4101-002-00/2014. nr ewid. 13/2014/p/14/019/kgp, nik. official journal of the eu c 8 of 11/01/2012. official journal of the eu l7 of 11/01/2012. patrzałek, l. (2010). finanse samorządu terytorialnego. (finances of the territorial self-government.) wrocław: wydawnictwo uniwersytetu ekonomicznego we wrocławiu. ross, a.d. (2014). local disaster, resilience administrative and political perspectives (routledge research in public administration and public policy). 1st edition. new york: routledge. services of general interest in europe, 96/c 281/03, european commission, oj c 281, 26.09.1996. sierak, j., & górniak, r. (2011). ocena efektywności i finansowanie projektów inwestycyjnych jednostek samorządu terytorialnego współfinansowanych funduszami unii europejskiej. (efficiency assessment and financing of investment projects in the territorial self-government units, co-financed by the european union funds.) warszawa: szkoła główna handlowa – oficyna wydawnicza. stiglitz, j.e., & rosengard, j.k. (2015). economics of the public sector (fourth edition). new york: w. w. norton & company. principles of support for the common good services… 19 swianiewicz, p. (2011). finanse samorządowe: koncepcje, realizacja, polityki lokalne. (self-governmental finances: concepts, realisation, local policies.) warszawa: municipium. tsekosand, t.n., & triantafyllopoulou, a. (2016). from municipal socialism to the sovereign debt crisis: local services in greece 1980–2015. in h. wollmann, i. koprić, g. marcou (eds.). public and social services in europe. from public and municipal to private sector provision. basingstoke: palgrave macmillan. http://dx.doi. org/10.1057/978-1-137-57499-2_10. uokik (2016). raport o pomocy publicznej w polsce udzielonej przedsiębiorcom w 2015 roku. (report on public aid for entrepreneurs in poland in 2015.) warszawa. http:// uokik.gov.pl (accessed: 20.04.2018). ustawa z 27 sierpnia 2009 r. o finansach publicznych (dz. u. 2017, poz. 2077). (parliamentary act of 27/08/2009 on public finance. journal of laws: of the republic of poland, 2017, item 2077). west, j., berman, e.m., bowman, j.s., & van wert, m.r. (2015). human resource management in public service: paradoxes, processes, and problems. fifth edition. thousand oaks: sage publications. wollmann, h. (2014). public services in european countries: between public/municipal and private sector provision – and reverse? in c.n. silva, j. bucek (eds.). fiscal austerity and innovation in local governance in europe. new york: routledge. yurchenko, y., & lethbridge, j. (2014). shared services – setting unrealistic expectations, working paper, http://www.psiru.org/publications4658.html?page=2 (accessed: 25.03.2018). ząbkowicz, j. (2016). usługi użyteczności publicznej jako instrument inwestowania w długoterminowe zdolności rozwojowe i globalną konkurencyjność unii europejskiej. ekonomia xx wieku. (services of common good as an instrument of investment in longterm development opportunities and in global competitiveness of the european union. economics of the xxi century.) wrocław: wydawnictwo uniwersytetu ekonomicznego we wrocławiu. http://dx.doi.org/10.15611/e21.2016.2.08. (www1) oecd, http://www.oecd.org (accessed: 20.04.2018). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 4 date of submission: april 12, 2018; date of acceptance: may 12, 2018. * contact information: buszko@uwm.edu.pl, finance and banking department, faculty of economy, university of warmia and mazury in olsztyn, michała oczapowskiego 2, 10-900 olsztyn, poland, phone: +48 89 523 39 63; orcid id: https://orcid.org/00000003-0600-4646. buszko, a. (2017). the level of shadow economy in warmińsko-mazurski and kujawsko-pomorski regions. copernican journal of finance & accounting, 6(4), 9–21. http://dx.doi.org/10.12775/ cjfa.2017.020 andrzej buszko* university of warmia and mazury in olsztyn the level of shadow economy in warmińsko-mazurski and kujawsko-pomorski regions keywords: shadow economy, level, region, roots, effects, differentiation. j e l classification: d78, h11, h2, k42. abstract: this paper offers the appraisal of the shadow economy in two regions in poland: kujawsko-pomorskie and warmińsko-mazurskie. the mimic approach was applied. in the begging of analyzed period the higher level of shadow economy was perceived in kujawsko-pomorski region. than the situation was changed. the slowly increased of shadow economy was observed in warmińsko-mazurski region but in kujawsko-pomorski region gradually the level of shadow economy declined.  introduction shadow economy is an important but underestimated economics category. the shadow economy exists in any country and just varies from its level and category. according to schneider, the ‘shadow economy’, defined as currently unregistered economic activities that contribute to the officially calculated (or observed) gross national product (gnp), amounted to 16% of the official output andrzej buszko10 in organization for economic cooperation and development (oecd) countries, 39% in developing countries and up to 40% in transition countries (schneider, 2005, p. 2). in spite of that definition based on literature review one can find other descriptions like: parallel, illegal, unreported, grey zone, underground, unrecorded, and so on. there are around 20 different definitions on the shadow economy (buszko, 2016, p. 2). each single designation ref lects to different economic category. that why the results of the shadow measurement are quite often varies. this is because researches, academics refer to different classifications. there is an important distinguish between shadow economy and black economy (aldridge & decary-hetu, 2015, p. 11). the black economy covers the illegal activity which is against criminal code and can arise very often no economic effects :like murdering. but shadow economy is always connected with economic effects and violates mostly civil code – related to business operation mostly. even though there is a constant challenge with lowering the size of shadow economy, unfortunately the result of it its relatively small one. probably the reason is that shadow economy and official one are bouncy connected, and each other can not persist without other part. interesting remark is provided by chen – there are at least three schools of thought on link between shadow and formal economies: dualism, structuralism, and legalism. the “dualists” argue that shadow activities have few linkages to the official economy but, rather, operate as a separate sector. this approach is based on the neoclassical hypothesis that rigidities in the official sector, introduced through legislation or negotiation, segment the market. the dualist hypothesis asserts that these two sectors are subsidiaries through common factors that lead to the f low of workers and activities from formal to the shadow economy. the “structuralists” consider the shadow and formal sectors as intrinsically linked. formal enterprises promote informal production and employment relationships with subordinated economic units and workers to reduce their input costs (chen, 2007, p. 4; salatin & jahani, 2016, p. 7). the roost of the shadow economy are generally recognized: 1) the high level of taxation and all other social burdens, 2) the complicated and contradicted law system, especially tighten with business environment, 3) the high level of corruption, 4) the high level of organized crime, 5) the low quality of institutional organizations (laruelle, 2008, p. 8).   the level of shadow economy in warmińsko-mazurski… 11 buszko draws attention to cultural implications. the category of culture, particularly some dimensions of it like power distance, uncertainty avoidance, and individualism vs. collectivism have strong impact on the shadow economy level (buszko, 2018, p. 1). the effects of the shadow economy are incomprehensible. some researches states that shadow economy affects legal economy in depraved way, but some notice positive results. schneider based upon his research states that 66% of earnings in the shadow economy is quickly spent in formal sector. secondly the government is not so obliged to assure higher social support for unemployment and underprivileged people (schneider, 2010, p. 15). companies operating in the shadow economy inf luence on the legal ones, so legal firms should put more effort on competitiveness and innovation. additionally to that the cost of entry to the shadow economy are quite low ones, so entrepreneurs without sufficient capital can start business activity (buszko, 2017a, p. 3). after some time they may move to legal performance. but more researches are agree that shadow economy causes the problems for all economy. according to the fraser institute studies, a growing shadow economy is the sign that the democracy works bad, citizens condemning governments policies through an economic behavior, protesting to the law and regulations, and additionally inf luenced the usual consumption spending, and mainly those for long term purpose (florea & schiop, 2008, p. 12). more dangerous results of shadow economy are pointed out by mara. the shadow economy has a strong social impact and because of that it is closely linked to a number of phenomena such as corruption, crimes of various types, drugs, mafia type organizations, labor exploitation through a stock black money laundering, human rights violations environmental pollution, etc. politically, the shadow economy is seen as having negative effects because it emits false signals and induces decision makers as inadequate macroeconomic strategy. as a consequence, any macroeconomic policy on the tax system, unemployment, inf lation, savings, social security, productivity and competitiveness is weak (mara, 2012, p. 21). methods applied to shadow economy measurements can be divided into two main categories. direct and indirect ones. direct methods include first of all surveys, straight interviews, questionnaires. such an approach has generally more weak points. in this way just the opinion on the shadow economy is achieved, not accurate data. but from the other hand this methodology is widely used in social science, including economics. general problem is devoted to the credibility of obtained answers. answers providers are sometimes not interested to contribute true information. they could be scared since they might be charged with the andrzej buszko12 action in the shadow economy frames. discrepancy between national expenditure and income statistics is the basement for indirect methods. those methods are connected with money supply approach, resource estimation and labor force evaluation (buszko, 2017b, p. 4). literature review there are quite lot of studies devoted to the level of shadow economy on country level. such researchers were and still have been carrying out in many countries. academics, politics, legislators supposed to know not only the level of the shadow economy, but what is more important the effects, implications for stabilization policy, effectiveness of allocation, tax evasion, entrepreneurship, innovation, as well (adam & ginsburgh, 1985, p. 11; christopoulos, 2003, p. 7; dell’anno, 2003, p. 6). some investigators tried to identify the patterns of shadow economy among countries in regional surround. dell’anno and his team made a such research on the shadow economy among france, spain and greece. the unemployment rate, the fiscal burden and self-employment are the main causes of the shadow economy in those countries and confirm that an inverse relationship exists between the official gdp growth rate and an unofficial economy (dell’anno, gómez-antonio & pardo, 2007, p. 15). however, there is much less research on regional shadow economy estimations. interesting investigation was carried out by bilonizhko in 26 ukrainian and 79 russian regions affected by the shadow economy. she not only assessed the level of shadow economy in the regions but pointed out the main roots of it. she found that tax pressure had a significant positive effect on the shadow economy. agricultural and industrial specializations both had significant positive impacts on the hidden sector almost equal in size. unemployment had a significant negative effect on the shadow economy, which may be explained by the fact that today’s shadow economy was mostly maid up of the officially employed economic agents, who used different schemes to avoid taxation. based on bilonizhko finding no substantial deviation of the shadow economy size across regions, and she came to the conclusion that policy targeted at reducing the hidden economy size may suffice at the country’s level without going deeply into region’s specifics (bilonizhko, 2006, p. 32). komarova considers the regional differences of shadow economy on the number of large companies. this is because large enterprise can have better unofficial relationships with authorities than small ones, therefore large enterprises may be more involved into the shadow econ  the level of shadow economy in warmińsko-mazurski… 13 omy activity (komarova, 2003, p. 25). in contradiction to komarova nikolayenko, lissovolic and macfarquar came to another conclusion. they state that the number of small and medium firms is crucial for shadow economy development. such companies are more eager to operate illegally and such activity is difficult to be traced out, so regions with the higher number of sme will face higher level of shadow economy (nikolayenko, lissovolic & macfarquar, 1997, p. 18). wiseman examined regional shadow economic activity in 50 us states. results suggest that tax and social welfare burdens, labor market regulations, and intensity of regulation enforcement are important determinants of the underground economy. among the states, delaware, on average, maintains the smallest shadow economy at 7.28% of gdp; oregon, on average, has the second smallest shadow economy at 7.41% of gdp; followed by colorado, averaging 7.52% of gdp, rounding out the three smallest shadow economies in the us. west virginia and mississippi, on average, have the largest shadow economies in the us as a percent of gdp (9.32 and 9.54%, respectively (wiseman, 2013, p. 19). vorobyev estimated the size of unofficial (informal) sector in 67 regions of russian federation using electricity consumption method. he proved that 10 regions with informal economy share above 60%: ingushetia, moscow, dagestan, kalmykia, altay republic, krasnodar region, kabardino balkaria, kaliningrad, astrakhan, and saint-petersburg. southern small regions are likely to have high informal economy share because they have a large share of small business and low government control over economic activity (vorobyev, 2015, p. 14). tafenau, herwartz and schneider made an interesting research on the level of shadow economy in the regions of european union. for this purpose the multiple-indicators multiple-causes approach combined with elements of spatial econometrics was implemented. the analysis show that the shadow economy is most extensive in eastern and southern europe, confirming results from previous literature. within countries, the poorest regions tend to exhibit the highest shadow economy quotas. the smallest extent of shadow activities is obtained for the netherlands and the united kingdom, while in poland the shadow economy is most extensive (tafenau, herwartz & schneider, 2010, p. 7). this research is partly consistent with the study of putniņš and sauka. they measured the level of the shadow economy using the direct approach – interviewing managers of companies from lithuania, latvia and estonia. the highest level of shadow economy was noticed in latvia (ca. 30% gdp) , the smallest one in lithuania nearly 17.2% gdp (putniņš & sauka, 2015, p. 19). krakowski analyses the determinants of the size of the informal economy using cross andrzej buszko14 country regressions. two sets of global data using indirect estimation techniques and the perception of business leaders for 109 countries as well as a regional set for latin america based on direct data were applied to estimate the size of the informal economies. indirect estimation techniques arrive at higher estimates of the size of the informal economy than the perceptions of business leaders because they include not only the (fundamentally legal) activities of the informal sector. the size of shadow economy was dependent on the level of development. well developed countries faced lower level of shadow economy than poorer ones (krakowski, 2005, p. 32). thießen examined 38 oecd countries and came exactly to the same conclusions (thießen, 2010, pp. 7–9). similar remarks were provided by elgin and öztunali. they estimated the size of the shadow economy in a 161-country panel data framework. even though they developed two-sector dynamic general equilibrium model, the high level of shadow economy was noticed in less developed regions in the world (elgin & öztunali, 2015, p. 9). opposite statement provided cassel and cichy. based on their investigations the level of shadow economy does not ref lect the level of development. even in scandinavia, denmark or west part of germany the level of shadow economy can be surprisingly very high one (cassel & cichy, 1986, p. 9). in poland the shadow economy has been explored by central statistical office (gus), ministry of finance and institute for market economy research (instytut badań nad gospodarką rynkową) mainly. based on their estimations the level of shadow economy has been slowly but constantly decreasing and right now its level constitutes ca. 20% of gdp (fudowicz, łapiński, peterlik & wyżnikiewicz, 2016, p. 14). methodological approach the goal of the study was to identify the level of the shadow economy in kujawsko-pomorskie and warmińsko-mazurskie regions. those regions were chosen because they were regarded to be not best developed and they are closely located. even though kujawsko-pomorski region is situated in the west part of poland, which it is recognized as better developed as the east part where warmińsko-mazurski region is placed. the shadow economy was measured in 2006, 2011 and 2016. the interval of years was foreseen since the change of shadow economy level is better demonstrated. in order to measure the level of shadow economy the mimic (multiple indicators multiple causes) approach was used. the measurement was related to percentage of regional gdp   the level of shadow economy in warmińsko-mazurski… 15 in warmińsko-mazurski and kujawsko-pomorski region. the mimic approach is generally widely used in sociology and psychology researches but it proved to be very successful in economics explores as well. it is very comprehensive and since the shadow economy affects different activity simultaneously. since mimic model foreseen numerous determinants it is very suitable in this case. mimic method was first presented by zellner (1970, p. 18) than developed by joreskog and goldberger (1975, pp. 8–10). the general idea of research is presented in the graph 1. graph 1. mimic model of estimation the level of shadow economy in warmińsko-mazurskie and kujawsko-pomorskie regions graph 1. mimic model of estimation the level of shadow economy in warmińskomazurskie and kujawsko-pomorskie regions causes indicators *criminality level was calculated by number of criminal acts per 10 000 inhabitants. source: own proposition based upon: tedds, 1998, p. 3. the mimic approach calculates the hidden variable/shadow economy level/ based on observed and measured indicators. the level of shadow economy is linearly explained by known x causes. the mimic model consists of two parts: s = þ x +é (1) z = đ s + ë (2) in the further step by substituting the first equation into the second one the reduced equation form is obtained. z = φ ( þ x +é ) + µ = ľ x +v (3) in this way mimic model becomes a multi regression function. structural parameters are appraised with commanding restraints on coefficient matrix ľ and the covariance the level of shadow economy in the region gdp per capita employment y1 y2 unemployment rate criminality level * number of vat payers the share of agriculture, industry and construction in gdp (%) x1 x2 x3 x4 *criminality level was calculated by number of criminal acts per 10 000 inhabitants. s o u r c e : own proposition based upon: tedds, 1998, p. 3. the mimic approach calculates the hidden variable/shadow economy level/ based on observed and measured indicators. the level of shadow economy is linearly explained by known x causes. the mimic model consists of two parts: s = þ x +é (1) z = đ s + ë (2) in the further step by substituting the first equation into the second one the reduced equation form is obtained. z = φ ( þ x +é ) + µ = ľ x +v (3) andrzej buszko16 in this way mimic model becomes a multi regression function. structural parameters are appraised with commanding restraints on coefficient matrix ľ and the covariance matrix of the error v term. all data used in equitation were appraised by likehood procedure, taking this reduced form into consideration and not imposing any restrictions on var-cov matrix. in the third step by the normalization of the reduced equation (3) the matrix ľ performed like: cjfa 2017 wzór nr 4. strona 16 �′ � φ � � � �φ1φ2� � ��1 � �2 � �� � �4 � � (4) the level of shadow economy in two taken into account regions was measured for 2006, 2011 and 2016, respectively. this was done in this way, since some changes of the shadow economy level can be recognized. all data come out from statistical regional yearbook. statistica software was applied for calculation. findings according to the methodological assumption the graph 2 presents the level of shadow economy in warmińsko-mazurski and kujawsko-pomorski regions. graph 2. the level of shadow economy in warmińsko-mazurski and kujawsko-pomorski regions in 2006, 2011 and 2016 (% gdp) matrix of the error v term. all data used in equitation were appraised by likehood procedure, taking this reduced form into consideration and not imposing any restrictions on var-cov matrix. in the third step by the normalization of the reduced equation (3) the matrix ľ performed like: φ1 l’ = φ x þ = φ 2 x [þ1 + þ2 + þ3+ þ4….] (4) the level of shadow economy in two taken into account regions was measured for 2006, 2011 and 2016, respectively. this was done in this way, since some changes of the shadow economy level can be recognized. all data come out from statistical regional yearbook. statistica software was applied for calculation. findings according to the methodological assumption the graph 2 presents the level of shadow economy in warmińsko-mazurski and kujawsko-pomorski regions. graph 2. the level of shadow economy in warmińsko-mazurski and kujawsko-pomorski regions in 2006, 2011 and 2016 (% gdp) source: own calculation. 0 5 10 15 20 25 30 35 2006 2011 2016 kujawsko-pom. warmińsko-maz. s o u r c e : own calculation.   the level of shadow economy in warmińsko-mazurski… 17 in 2006 the level of shadow economy in kujawsko-pomorski and warmińskomazurski region was quite similar. in kujawsko-pomorskie was 26% of regional gdp but in warmińsko-mazurski 25% regional gdp. in 2011 the situation was modified. in kujawsko-pomorski region the level of shadow economy decreased by 2% of gdp but in warmińsko-mazurski region the level of shadow economy expanded till 27% of gdp. such a trend was in force later on. in 2016 the level of shadow economy in kujawsko-pomorski region was 23% of gdp and in warmińsko-mazurski region 28% of gdp. such differentiation supposed to be explained by characteristics of local economics situations. even though those two regions are regarded not to be the leading of economic development in poland, there is no significant similarity between them. individuals in warmińsko-mazurski region were mostly employed in industry 23% (of all working force), agriculture, forestry and fishing 16.5%, transportation and storage 14.2%, education 9.4%, public administration 6.1% and construction 5.5%. the province was inhabited by 1.4 million people, gdp per capita was on the level 30745pln, unemployment rate 14.2%, the number of crime acts per 10,000 inhabitants was 272, the average monthly salary was 3224 pln. in 2016 the spending on research and development was 126.2 mln pln. the share of companies that introduced innovation was 22.1%. the revenues of total companies activity was 45682.1 million pln, and financial result on economic activity 2017.8 million pln. the rate of financial liquidity was 30.2. (statistical yearbook of warmia and mazury, 2017, pp. 250–290). in kujawsko-pomorski region workers were involved by 23.7% in industry, 16.9% in trade and storage, 14.9% in agriculture, forestry and fishing, 8% in education and 5.9% in construction. gdp per capita was on the level of 36766 pln. the unemployment rate was 10.1%. the average salary was higher than in warmińsko-mazurski region 3655 pln. the level of commercial crimes in kujawsko-pomorski region has been declining. in 2016 it was 1402 such acts, but in 2006–2924. quite high sum of money was spent on research and development – in 2016 – 289.9 million pln. the effect of it was the relatively high share –34.4% of all companies which introduced innovation. revenues of total companies activity has been growing up and in 2016 constitutes 116323.5 million pln. the financial result on economic activity was positive and created the amount of 5828.2 million pln. all assets of companies in 2016 was 40272.6 million pln. interesting situation is related to the structure of entities of local economy. majority of entities – 72.6% constitutes of natural person conducting economic activity, 8.6% commercial companies, 6.9% civil companies and 11.9% others (statistical yearandrzej buszko18 book of kujawsko-pomorski region, 2017, pp. 180–256). according to the theoretical assumption natural persons conducting economy are eager to bearing illegal behavior. taking kujawsko-pomorski region into account it should be announcement that this type of entities is not so much affected by the shadow economy. the level of it has been decreasing. the considerable difference between two researched regions in the respects of the shadow economy level and development, except economics situation is the location. warmińsko-mazurski region is situated north west of poland and has the border with russia–kaliningrad district. because of price difference in russia and poland of very popular products – like cigarettes, fuel, spirits – those stocks are smuggled to poland constantly. apart of that quite often stolen goods from poland are bootlegging to russia. this situation with economics background make utterly impact of shadow economy development in warmińsko-mazurski region. since the general economic situation in warmińsko-mazurski region (even comparing it to kujawski-pomorski region) is not satisfying, that why the shadow economy is desirable option for people to increase their income and improve standard of economic situation. seems in kujawsko-pomorski region (even though the shadow economy is on high level) inhabitants follow more legal way to enhance their financial status.  conclusions albeit the level of shadow economy in kujawsko-pomorski region in the beginning of analyzed period was higher than in mazursko-warmiński region in following years its level declined. contradictory situation was observed in mazursko-warmiński region. after 2006 the level of shadow economy increased, reaching in 2016 – 28% of regional gdp. such process should be connected with general economic situation in the regions. kujawsko-pomorski region proved to be more effective one and its overall economic conditions are better. this makes less space for the shadow economy development. additionally to that the location of warmińsko-mazurski region, bordering with kaliningrad district creates impact for shadow economy activity. furthermore the general conclusion related to poland may be raised – the less developed regions supposed to be categorized by higher level of the shadow economy. this research provides impulse for another set of studies. further studies should be focused on selected economic data characterizing overall situation in the respect of effectiveness shadow economy performance.   the level of shadow economy in warmińsko-mazurski… 19  references adam, m., & ginsburgh, c.v. 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(the shadow economy in polish economy in 2016.) warszawa: instytut badań nad gospodarką rynkową (institute for market economy research. warsaw). andrzej buszko20 joreskog, k., & goldberger, a. (1975). estimation of a model with multiple indicators and multiple causes of a single latent variable. journal of the american statistical association, 70(351), 631–639. komarova, t. (2003). hidden economy in russian counted? kyiv: institute for economic research and policy consulting. krakowski, m. (2005). determinants of the informal economy: the importance of regional factors, working paper, https://www.econstor.eu/bitstream/10419/19285/1/313. pdf (accessed: 30.05.2018). laruelle, m. (2008). the concept of ethnogenesis in central asia: political context and institutional mediators (1940-50). kritika: explorations in russian and eurasian history, 9(1), 169–188. http://dx.doi.org/10.1353/kri.2008.0005. mara, e. 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(2010). the influence of public institutions on the shadow economy: an empirical investigation for oecd countries. review of law and economics, 6(3), 441– –468. http://dx.doi.org/10.2202/1555-5879.1542. tafenau, e., herwartz, h., & schneider, f. (2010). regional estimates of the shadow economy in europe. international economic journal, 24(4), 629–636. http://dx.doi. org/10.1080/10168737.2010.526010. tedds, l. (1998). measuring the size of the hidden economy in canada: a latentvariable/ mimic model approach. victoria: department of economics, university of victoria. thießen, u. (2015). the shadow economy in international comparison: options for economic policy derived from an oecd panel analysis. international economic journal, 24(4), 481–509. http://dx.doi.org/10.1080/10168737.2010.525986. urząd statystyczny w bydgoszczy (statistical office bydgoszcz) (2017). rocznik statystyczny województwa kujawsko-pomorskiego. (statistical yearbook of kujawsko-pomorski region.) urząd statystyczny w olsztynie (statistical office olsztyn) (2017). rocznik statystyczny województwa warmińsko-mazurskiego. (statistical yearbook of warmia and mazury region.). wiseman, t. (2013). u.s. shadow economies: a state-level study. constitutional political economy, 24(4), 310–335. http://dx.doi.org/10.2139/ssrn.2208637.   the level of shadow economy in warmińsko-mazurski… 21 vorobyev, p. (2015). estimating informal share in russian regions. economics education research consortium working paper, e15(02). zellner, a. (1970). estimation of regression relationships containing unobservable variables. international economic review, 11(3), 441–454. cjfa_2_2017_druk.pdf e65 -1 date of submission: july 24, 2017; date of acceptance: october 5, 2017. * contact information: skoda@dti.sk, dti university, sladkovicova 533/20, 018 41 dubnica nad vahom slovakia, phone: 00 421 908 906 399. škoda, m., lengyelfalusy, t., & gabrhelová, g. (2017). creative accounting practicies in slovakia after passing financial crisis. copernican journal of finance & accounting, 6(2), 71–86. http:// dx.doi.org/10.12775/cjfa.2017.012 miroslav škoda* dti university, slovakia keywords: accounting ethics, creative accounting, earnings management, gaap, ifrs, financial reporting. j e l classification: g12, m41, m 48. abstract: fraud in economics and accounting is the practice which is adopted within the framework of accounting system or in other words taking undue advantage of loopholes of accounting system is creative accounting. in highly competitive market, it becomes very important and necessary for every business to find new and innovative ways of running the business. and one of the new ways is creative accounting. creative accounting is an art of manipulating the books of accounts in a manner that desired results can be drawn. aggressive accounting, cooking the books and massaging the numbers are few common terms used in context of creative accounting. creative accounting in present uncertain environment is facilitating management to accomplish personal goals as big, well established firms followed. miroslav škoda, tomáš lengyelfalusy, gabriela gabrhelová72 traditional accounting was limited to recording, classifying and summarizing the monetary results and communicating the same to investors. but modern accounting demands higher level of transparency with accurate reporting of financial position of the firm. the change has been seen in modern accounting system after a change in financial market caused by financial crisis in 2008– –2009. companies are also taking active part in obtaining funds through market. as the contribution of public funds increased in the corporate sector, the demand of transparency also increased and thus the way of managing books has also changed. companies are trying to find out methods whereby they can provide full transparency and simultaneously accomplish their personal goals. at first, some definition of creative accounting is provided after introduction of theme of paper. after that, different motivations for its uses and several creating accounting techniques are have sought to identify its existence, nature and incidences. subject of fraud accounting is normally portrayed maligned and negative act. as soon as these words “fraud or creative accounting” are mentioned, the image that emerges in one’s mind is that of manipulation, dishonesty and deception. according to agency theory ‘the firm is a legal fiction which serves as a focus for a complex process in which the conf licting objectives of individuals are brought into equilibrium within a framework of contractual relations.’ within the agency framework, it is both logical and inescapable that management behaviour will be self-serving. agency can, therefore, provide a solid framework for the understanding of creative accounting behaviour. however, it may provide an incomplete theoretical basis for explaining or predicting management behaviour; the ethical dimension of human behaviour may provide an important element missing from legalistic and adversarial agency relationships. the informational perspective is a key element underpinning the study of the creative accounting phenomenon. a conf lict is created by the information asymmetry that exists in complex corporate structures between a privileged management and a more remote body of stakeholders. managers may choose to exploit their privileged position for private gain, by managing financial reporting disclosures in their own favour. the informational perspective assumes that accounting disclosures have an information content that possesses value to stakeholders in providing useful signals. creative accounting practicies in slovakia… 73 it may be difficult or impossible for individual stakeholders to discern the fact and the effect of accounting manipulation, because of an insufficient personal skill set, indifference or an unwillingness to engage in detailed analysis. from a market efficiency perspective such failures in understanding may not matter. breton and taff ler (2001) point out in the conclusion to their study establishing that analysts’ perception of creative accounting devices is somewhat deficient, only a small number of effective accounting experts may be required ‘for the market as a whole appropriately to process window dressed numbers’. on the other hand, healy and wahlen (1999) cite studies that find that creative accounting prior to equity issues does affect share prices, suggesting that investors do not necessarily see through creative accounting. creative accounting is referred to also as income smoothing, earnings management, earnings smoothing, financial engineering and cosmetic accounting. the preferred term in the usa, and consequently in most of the literature on the subject is ‘earnings management’, but in europe the preferred term is ‘creative accounting’ or ‘fraud accounting’ and so this is the term that will be used in this paper. it should be recognized that some accounting manipulation involves primarily balance sheet rather than earnings management. various research studies have examined the issue of management motivation towards creative accounting behaviour. half a century ago, hepworth (1953) identified several motivations including the existence of tax levies based on income, confidence by shareholders and workers in management that is able to report stable earnings and psychological expectations relating to increases or decreases in anticipated income. tax is mentioned as a significant motivator also by niskanen and keloharju (2000) in a finnish context and in japan by herrmann and inoue (1996). in countries with highly conservative accounting systems the 'income smoothing' effect can be particularly pronounced because of the high level of provisions that accumulate. another bias that sometimes arises is called 'big bath' accounting, where a company making a bad loss seeks to maximise the reported loss in that year so that future years will appear better. beidleman (1973) observes the positive effects of income smoothing on expectations, securities valuation and some element of risk reduction for analysts. other motivations for creative accounting discussed by healy and wahlen (1999) include those provided when significant capital market transactions miroslav škoda, tomáš lengyelfalusy, gabriela gabrhelová74 are anticipated, and when there is a gap between the actual performance of the firm and analysts’ expectations. a variant on income smoothing is to manipulate profit to tie in to forecasts. fox (1997) reports on how accounting policies in some companies are designed, within the normal accounting rules, to match reported earnings to profit forecasts. when these companies sell products, large part of the profit is deferred to future years to cover potential upgrade and customer support costs. this perfectly respectable, and highly conservative, accounting policy means that future earnings are easy to predict. healy (1985) examines managers’ earnings manipulations motives where executive compensation is linked to income measurement. trueman and titman (1988) discuss managers’ motivations to reduce the perception of variability in underlying economic earnings of the firm. kamin and ronen (1978) observe a difference in motivation between managers in owner – controlled and management – controlled firms. owners who wish to retain control of a sizeable stake and who are therefore not interested in immediate exit strategies are less likely to be motivated to manage earnings. fraud accounting may help maintain or boost the share price both by reducing the apparent levels of borrowing, so making the company appear subject to less risk, and by creating the appearance of a good profit trend. this helps the company to raise capital from new share issues, offer their own shares in takeover bids, and resist takeover by other companies. if the directors engage in 'insider dealing' in their company's shares they can use creative accounting to delay the release of information for the market, thereby enhancing their opportunity to benefit from inside knowledge. it should be noted that, in an efficient market, analysts will not be fooled by cosmetic accounting charges. indeed, the alert analyst will see income – boosting accounting changes as a possible indicator of weakness. dharan and lev (1993) report on a study showing poor share price performance in the years following income increasing accounting changes. another set of reasons for creative accounting, which applies to all companies, arises because companies are subject to various forms of contractual rights, obligations and constraints based on the amounts reported in the accounts. creative accounting practicies in slovakia… 75 this study identifies and explains the most common accounting practice situations that generate an artificial growth of the accounting result and that lie at the threshold between creative accounting and accounting fraud. some of these situations have also been promoted by large multinational companies in slovakia, which, for some of them, have led to bankruptcy. what were the consequences of using creative accounting by companies in slovakia? can these manipulations be identified? if yes, what are the main elements that lead to the elements that have undergone changes? to answer these questions, a regulatory study was conducted through the study of specialized literature. starting from the above mentioned data, we initiated a market research based on survey, for finding out the opinion of individuals directly involved. detecting creative accounting practices in slovakia and their impact on the quality of information presented in financial statements in the management of financial accounting activity in companies. 200 questionnaires were given to be filled by employees of companies from 13 fields of activity, the results being processed with the spss program. of these, 194 were answered, more exactly 23 partially and 171 completely, eventually becoming the centre of our research. in this way, we can highlight the similarities and differences between the perception of entrepreneurs and accountants concerning then on-standard practices and how they see the limits of accounting and the way they use the inf luences of the activity in the business. also, the study results can shape the way of regarding the possibilities of detection and mitigation of accounting misleading data tools in a company's activity. the research method used is based on information from secondary sources, namely documentation. we have chosen this method since it provides certain advantages in the research process – it is efficient in obtaining information, it allows the confrontation of the information it provides thus enhancing the level of reliability, requires a smaller information collection effort, the information obtained is more objective and, in certain cases, unique, providing information that is not available in other situations. the main secondary sources used were external sources such as official documents, magazines and specialized publications, statistic counts, the memiroslav škoda, tomáš lengyelfalusy, gabriela gabrhelová76 dia, the internet, the documents of various companies analysed and specialized literature. the research instrument used in the study was the identification and the actual analysis of the data obtained after documenting and grouping them according to their importance and their relevance for the theme of the paper. the main results of this research are discussed in upcoming text. burgstahler and eames (1998) conclude that firms manage earnings to meet financial analysts’ forecasts. the managers are motivated for fixing financial statements for either managing position or profits. following are important concerns for managers: to meet internal targets: the managers want to cook the books for meeting internal targets set by higher management with respect to sales, profitability and share prices, to meet external expectations: company has to face many expectations from its stakeholders. the employees and customers want long term survival of the company for their interests. suppliers want assurance about the payment and long term relationships with the company. company also wants to meat analyst’s forecasts and dividend pay-out pattern, to provide income smoothing: companies want to show steady income stream to impress the investors and to keep the share prices stable. advocates of this approach favour it on account of measure against the 'short-termism' of evaluating an investment on the basis of the immediate yields. it also avoids raising expectations too high to be met by the management, to make window dressing for obtaining a bank loan: window dressing can be done before acquisition or before taking a bank loan. sweeney (1994) reports the tendency of companies nearing violation of debt covenants is twice or thrice to make income increasing accounting policy changes than other companies, taxation: fraud creative accounting may also be a result of desire for some tax benefit especially when taxable income is measured through accounting numbers, creative accounting practicies in slovakia… 77 change in management: there is another important tendency of new managers to show losses due to poor management of old management by some provisions. fox (1997) found this tendency in us bank managers. the potential for fraud accounting is found in six principal areas: regulatory f lexibility, a dearth of regulation, a scope for managerial judgment in respect of assumptions about the future, the timing of some transactions, use of artificial transactions and finally the reclassification and presentation of financial numbers. taking each of the six areas in turn: regulatory f lexibility. accounting regulation often permits a choice of policy; for example, in respect of asset valuation (ifrs permit a choice between carrying non-current assets at either revaluated amounts or depreciated historical cost). business entities may, quite validly, change their accounting policies. as schipper (1989) points out, such changes may be relatively easy to identify in the year of change, but are much less readily discernible thereafter. dearth of regulation. some areas are simply not fully regulated. for example, there are (as yet) very few mandatory requirements in respect of accounting for stock options. management has considerable scope for estimation in discretionary areas. mc nichols and wilson (1988), for example, examine the discretionary and nondiscretionary elements of the bad debts provision. genuine transactions can also be timed so as to give the desired impression in the accounts. as an example, suppose a business has an investment at historic cost which can easily be sold for a higher sales price, being the current value. the managers of the business are free to choose in which year they sell the investment and so increase the profit in the accounts. artificial transactions can be entered into both to manipulate balance sheet amounts and to move profits between accounting periods. this is achieved by entering into two or more related transactions with an obliging third party, normally a bank. the sale price under such a 'sale and leaseback' can be pitched above or below the current value of the asset, because the difference can be compensated for by increased or reduced rentals. reclassification and presentation of financial numbers are relatively underexplored in the literature. miroslav škoda, tomáš lengyelfalusy, gabriela gabrhelová78 many size companies are indulged in creative accounting practices and investors have to carefully examine the books of accounts, its profits and cash f lows. question is raised on many giant firms which were directly or indirectly related with other foreign companies. slovakia is still developing economy where corporate sector is contributing a major part in national income, and it is spreading its wings all over world where they get lots of opportunities to go for creative accounting as all countries have different accounting system which creates ambiguity in investor’s mind. and thus number of accounting scandals is increasing in slovakia. as skoda and hrazdilova bockova (2014) discuss in their study, creative accounting is prevailing in almost all the companies in slovakia, the reason might be the increasing level of competition and dearth of sustaining in the market. loopholes or weaknesses in slovak accounting standards are facilitating the corporate sector to indulge in creative accounting practices. they find that where the relevant accounting standards are permissive managers will exploit the potential use of creative accounting. such behaviours are curtailed once the provisions of accounting standards are tightened. but the loopholes are so common and prevailing in accounting standards in such a manner that even if certain loopholes are eliminated, the practice of creative accounting is likely to exist. nobel research report highlighted the common manipulations in accounting records in slovakia: revenue manipulation: recording revenues ahead of time and booking fictitious sales, expense manipulation, cash manipulation, invisible restatement of prior period accounts. most of the companies in slovakia are taking undue advantage of weaknesses of accounting principles. like as mentioned by iceberg research report companies tend to show revenue which is not earned. this is also considered as aggressive accounting technique whereby revenue is shown in the books of accounts before the project is completed in effect of which revenue increases. cash manipulation is one of the common practices followed by most of the companies. it may be noted that in 1999, a year when the economy was in a relatively buoyant condition, the reported earnings of 9 firms were less than adjusted earnings. however, in 2000 and 2001 when slovak economy was affected by creative accounting practicies in slovakia… 79 an economic downturn, the position has been reversed. a clear majority of the companies under scrutiny in both years showed reported earnings higher than adjusted earnings. the results of the study over a three year time period suggest that the direction of creative accounting could be related to general economic conditions. this possibility was f lagged by merchant (1990). however, there are some unusual features of slovak accounting environment that merit special attention. first, audit report qualifications are common, even in respect of major listed companies; find that between in the years 1996–2000 the number of qualified audit opinions in the financial statements of listed slovak companies fell but the number was still high in 2000 when 92 companies had audit qualifications. second, a feature which is likely to elicit some surprise outside slovakia, an element of creative accounting may be carried out with the collusion of the regulatory authorities. supervising agencies may permit individual companies to adopt an accounting policy which contravenes current accounting regulation. such authorisations are provided as a result of effective lobbying by either a company or representative companies within an industrial sector. successful lobbying of this type demonstrates the power of inf luence that the business sector may have over government or its agencies. the practice of charging expenses to reserves rather than to the income statement may also be permitted. all of the creative accounting behaviours identified in this study was identified through careful analysis of the financial statements. some of the manifestations were easier to identify than others, but all should be observable by a reasonably well – informed user of the financial statements. the question may be asked: if the creative accounting behaviour is so obvious, can it properly be classified as creative accounting at all? however, the extent to which users of the statements actually do observe such relatively clear examples of creative accounting is uncertain. it has been observed that analysts’ reports in slovakia usually fail to mention the existence of audit report qualifications, special authorisations or other manifestations of creative accounting practices. even quite clear signalling can be misinterpreted or ignored even by relatively sophisticated users (breton & taff ler, 1995). furthermore, dechow and skinner (2000) argue that even if financial statements provide sufficient information to permit users to adjust for creative accounting, there would still be cause for concern over the value of the information content because of ‘the possibility that certain investors rely completely on earnings numbers reported on the face of the income statement because their ability to process more sophisticatmiroslav škoda, tomáš lengyelfalusy, gabriela gabrhelová80 ed information is limited’. the results of these researches show that some elements of overt creative accounting practices are common. companies desire to show the report with the profit grow steadily. this report is done by having stipulation for liabilities and opposing assets value during good years so that the reported profit can be improved in bad years. the purpose of this method is to evaluate the sources generate in following years and prevent unachievable expectations. however, the investors have the right to be informed on the violation of trading provisions and the effects of income smoothing in profit trend. revsine (1991) considers the main function of accounting is to supervise the contracts between managers and groups who provide the finance so that the market mechanisms function efficiently and able to pinpoint the possibilities in creative accounting. the text about the ethics of bias in the accounting policy regarding on creative accounting is evaluate at both ‘macro’ level of accounting regulator and ‘micro’ level in the management of individual. ruland (1984) differentiated the deontological view and teleological view which deontological view is where the moral rules apply actual actions whereas teleological view is action should be evaluated on the moral worth of outcome. however, revsine (1991) tends to perceive deontological view in public sector and teleological view in private sector. ruland (1984) also talk about difference between ‘positive’ responsibility and ‘negative’ responsibility. ‘positive’ responsibility is the responsibility to exhibit unbiased account while ‘negative’ responsibility is the managers’ responsibility for the state of affairs which they fail to avoid. ruland thinks that ‘duty to refrain’ that involves preventing the bias inherent in creative accounting is more critical because of the three issues which are relentlessness, certainty of outcome and responsibility. creative accounting seems morally doubtful for those professional accountants. according to price waterhouse senior partner’s observation (conner, 1986), fraudulent reporting normally occurs among those above management level in which effective internal control are designed. financial statement are commonly used to generate the delusion that company is in better condition than it actually is by misapplication of the accounting principles to cover the economic realities. creative accounting practicies in slovakia… 81 fischer and rosenzweig (1995) and merchant and rockness (1994) discovered that accountants are favourable in violating the accounting rules while students are favourable in manipulating the transactions. the reasons are accountants may obtain rule-based approach to ethics and think that the violating of accounting rules is under their job scope which ethical judgment demanded. merchant and rockness (1994) also discovered that motivation of management impact the accountants’ attitudes to creative accounting. this motivation was to advance the company. accountants and managers who protest the creative accounting might face the risk of ruining their reputation. schilit (1997) reports case where the accountant’s employer, food wholesaler who capitalizes the slotting expense and amortize it for ten years. the accountant noticed that the employer was against the accounting treatment. therefore, he notified the auditors to force the company expense but amortize the slotting. the company unable to pursue the auditors approves the capitalization of slotting costs. later, the accountant was set off for the reason contrast with the employer judgment. to avoid having the same fate with that accountant, there are some suggestions such as verify the acceptability of the accounting method and do not interrupt something which is legal to avoid offense. in addition, the accountant should present legal method to attain favourable outcome to the management and mistreatment should report to the appropriate supervisor. the principal investor in the company tried, unsuccessfully, to put pressure on the auditor to support the capitalization of the slotting costs. it seems clear that in general creative accounting is seen as a deceitful and undesirable practice. in this section we analyse some measures which can help to reduce the scope for creative accounting practices, identifying, where applicable, recent developments in ifrs. ifrs became the basic accounting law for all european listed companies from 2005. accounting regulators who wish to curb creative accounting have to tackle each of these approaches in a different way: auditor can play an important role in prevention and detection of creative accounting practices. if company’s auditor is well establish entity and has good track record then its auditing process may be trusted. but that auditor should not be the only auditor of the company, there should be more than one auditor and that also should be rotated periodically. so miroslav škoda, tomáš lengyelfalusy, gabriela gabrhelová82 that familiarity between company and auditor does not lead to decrease in objectivity, proper system should be introduce to educate investors about the financial terms and its probable impact on financial position through providing booklet of methods adopted by the proposed company for various items in different situations and expected changes in special circumstances, existence of artificial entities should be carefully checked by its actual presence and actual business transacted through it, companies which are allowed to enter into slovak market via mergers and acquisitions or any other mode should be clearly examined; their financial statements should be checked through two or more independent auditors under the supervision of government for preventing fraudulent activities to come into slovak market, close examination of those transactions which are changed in special circumstances and reason behind it. and transactions with related parties should also be examined thoroughly, laws and regulations laid down by government should be strictly followed by imposing heavy penalties in case of non-application of such rules, introduction of gifts and rewards for employees for their participation in engagement and motivate them to disclose any manipulations going on in the company records by anyone can also work in eliminating or reduction in creative accounting practices, slovak law system has a major problem of slow trail and delay in investigation which reduced the materiality of the case and hence motivates others to follow the same practices. through fast trial and quick investigation can reduce the number of accounting fraudulent practices. scope for choice of accounting methods can be reduced by reducing the number of permitted accounting methods or by specifying circumstances in which each method should be used. requiring consistency of use of methods also helps here, since a company choosing a method which produces the desired picture in one year will then be forced to use the same method in future circumstances where the result may be less favourable. abuse of judgement can be curbed in two ways. one is to draft rules that minimise the use of judgement. at one time, for example, company accountants tended to use the 'extraordinary item' part of the profit and loss account for items they wished to avoid including in operating profit. again, the present creative accounting practicies in slovakia… 83 rules of the ifrs have definitely abolished the category of 'extraordinary item' few years ago. auditors also have a part to play in identifying dishonest estimates. the other is to prescribe 'consistency' so that if a company chooses an accounting policy that suits it in one year it must continue to apply it in subsequent years when it may not suit so well. artificial transactions can be tackled by invoking the concept of 'substance over form', whereby the economic substance rather than the legal form of transactions determines their accounting substance. thus linked transactions would be accounted for as one whole. the timing of genuine transactions is clearly a matter for the discretion of management. however, the scope to use this can be limited by requiring regular revaluations of items in the accounts so that gains or losses on value changes are identified in the accounts each year as they occur, rather than only appearing in total in the year that a disposal occurs. it is interesting to observe that the international accounting standards board is still, after the times of financial crisis tending to move towards valuation at fair value rather than based upon historical cost in several recent accounting standards and discussion papers. but apart from changes in accounting regulation, ethical standards and governance codes must be properly enforced in the corporate world. regulation without thorough enforcement techniques is likely to be ineffective in preventing individuals from employing misleading reporting practices. the challenge of enforcing ifrs within a range of differing accounting cultural contexts is likely to be especially problematic. slovak economy is not behind the other developed countries; in fact accounting fraud is prevalent more in developed countries. and in slovakia such unethical practices are spreading its wings on fast pace just due to loopholes and weaknesses in accounting principles and standards. through the study we found that companies are forced and under pressure of performing well and this becomes the major motivator of creative accounting, to be competitive and be in the race of competition, companies are trying to do anything whether it is unethical. and thus creative accounting becomes convenient way of sustainability. secondly, we also found that this problem may exist due to lack of awareness and information level of investors. government need to take quick action in awareness of the investors. creative accounting practices are detected and miroslav škoda, tomáš lengyelfalusy, gabriela gabrhelová84 prevented by various agencies in the country. other countries should also take an adequate step in introduction of such law so that big accounting scandals can be eliminated from the economy. creative accounting results in reducing the tax liability of financial entities and, consequently, budgetary revenues. for this reason, creative accounting is closely related to tax evasion. tax evasion occurs not only in slovakia, but also in the countries of the european union. in slovakia, the total amount of tax evasion in 2011 was 2.773 billion eur. according to statistical data of the european union, the largest tax fraud in 2012 were in the value added tax in the amount of 117 billion eur. the slovak republic is fighting tax evasion by taking appropriate measures to reduce tax evasion. the fight against tax evasion is also performed by 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(2001). accounting information and analyst stock recommendation decisions: a content analysis approach. accounting and business research. 31(2), 91–101. http://dx.doi.org/10.1080/00014788.2001.9729604 (accessed: 27.05.2017). trueman, b., & titman, s. (1988). the explanation for accounting income smoothing. journal of accounting research, 26(3), 127–139, https://www.jstor.org/ stable/2491184?seq=1#page_scan_tab_contents (accessed: 01.06.2017). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: february 11, 2016; date of acceptance: may 11, 2016. * contact information: piotr.bolibok@kul.pl, department of banking and finance, the john paul ii catholic university of lublin, al. racławickie 14, 20-950 lublin, poland, phone: +48814453433. bolibok p. (2016). an empirical evaluation of selected accounting-based value drivers in the polish banking sector. copernican journal of finance & accounting, 5(1), 25–37. http://dx.doi. org/10.12775/cjfa.2016.002 piotr bolibok* the john paul ii catholic university of lublin an empirical evaluation of selected accounting-based value drivers in the polish banking sector keywords: banks, financial reporting, market value. j e l classification: g21, g32, m41. abstract: the paper aims at empirical evaluation of selected accounting-based value drivers in the polish banking sector. using the analyses of correlation and regression, the study investigates the associations between banks’ charter values, proxied by tobin’s q, and a set of explanatory variables including size, operating efficiency, profitability, net cash f low generation capacity, leverage, asset liquidity, and risk management efficiency, each proxied by a measure based on the data available in the annual financial reports of banks. the examined sample covered all domestically-based banks listed on the warsaw stock exchange over the period 1997–2014. the empirical evidence indicates a statistically significant positive impact of operating efficiency, profitability and risk management efficiency on charter values. in turn, the inf luence of size and leverage, although also positive, appears to be so weak, that it becomes irrelevant when combined with other explanatory variables. additionally, no statistically significant impact was found for net cash f low generation capacity nor asset liquidity. the above findings suggest that equity investors in the polish banking sector perceive performance and risk management efficiency as the key value drivers, practically neglecting the issues related to banks’ financial stability like the liquidity of assets or degree of leverage, thus presumably relying on the too-big-to-fail principle. piotr bolibok26  introduction financial reports are one of the key sources of information used by investors in the developed capital markets. given the time-consuming nature of recording the events in the accounting ledgers and of reporting process itself, financial statements are able to present only a historical view of the company. despite this fact, the informational content of the reports is a foundation of all rational investment decisions based on corporate fundamental analysis and various security valuation techniques. the impact of the announced accounting information on the decisions made by the investors and the market value of listed companies has been intensively examined in the relevant literature. the vast majority of studies in this area focuses, however, on non-financial enterprises while banks and other financial intermediaries are typically excluded from the examined samples. meanwhile, an ever increasing role of banks in the modern economies fully justifies turning some of the research attention to the value relevance of their accounting information. although there is a considerable amount of international literature exploring this issue, the empirical evidence in the specific context of the polish banking sector remains quite modest. given the above, the present study aims at empirical evaluation of the key accounting-based value drivers of the listed banks in poland, including size, operating efficiency, profitability, net cash f low generation capacity, leverage, asset liquidity, and risk management efficiency. the remainder of the paper is composed of four sections. the first one provides a review of the relevant international and domestic literature on the accounting-based value drivers in the banking sector. the second brief ly characterises the details of the methodological framework of the paper, including development of the research hypothesis and data selection procedures. the results of conducted empirical analyses are presented and discussed in the third section. the paper is closed with concluding remarks and suggestions on directions of future research. the literature review given the specificity of banking operations the market value of banks should ref lect all major aspects of their business performance, including in particular capital adequacy and leverage, profitability, liquidity of assets, quality of an empirical evaluation of selected accounting-based… 27 risk management, and financial stability. analyses of each of these areas for the purposes of security valuation are based primarily on the informational content of financial reports, thus creating direct links between various accounting data and banks’ market value that have been explored in the relevant international literature for the last several decades. the results of the studies investigating the impact of banks’ equity capital on market value are ambiguous. according to miller (1995) this capital should be value irrelevant due to the modigliani-miller leverage indifference theorem (1958). in turn, the arguments based on the agency models suggest that debt might be preferred by the equity investors as a source of funds due to the fact that it puts hard constraints on banks’ management (see e.g. hart and moore 1995) while equity provides a protective cushion against erroneous business decisions. another reason for a negative relationship between equity capital and value is the fact that holding equity due to regulatory capital requirements imposes a value-relevant cost on banks (see e.g. allen, carletti, marquez 2011). contrary to these viewpoints, however, mehran and thakor (2011) found that in the context of acquisitions bank value is positively correlated with bank capital. several studies investigated the value relevance of book values of equity and earnings in the banking sector. both international (e.g. abuzayed, molyneux, al-fayoumi 2009; agostino, drago, silipo 2011; anandarajan, francis, hasan, john 2011) and domestic (bolibok 2014) evidence indicates that book values and earnings are significantly, and positively, related to banks’ market values. another strand of literature examines the impact of various bank-specific accounting items on banks’ charter values, i.e. the present value of future rents or the value of bank’s ability to continue its operations (usually proxied by tobin’s q). the findings of de nicoló (2000) indicate that although size of banks is generally negatively inf luencing their charter values, in the case of small banks this relationship becomes inversed. in turn, gosh (2009) demonstrates that bank value is determined not only by the size but also by operating efficiency as he finds significant negative association between banks’ charter values and both natural logarithm of total assets and c/i ratio. fortin, goldberd and roth (2011) come to similar conclusions, finding a negative relationship between banks’ price-to-book ratios (another proxy of banks’ charter value) and size. their results indicate a positive impact of roe on charter values, however, it was statistically significant only in the period preceding the global ecopiotr bolibok28 nomic crisis. in turn, equity capitalization (equity to total assets) seems to be negatively related to p/bv in both the pre-crisis and crisis periods. the results of a study by jordan, rice, sanchez and wort (2011) suggest that market-to-book ratios of banks are positively associated with x-efficiency (lower relative costs), net interest margins, non-interest income, and capital ratios while controlling for size and other bank attributes. also shamsuddin and xiang (2012) demonstrate that technical, cost and profit efficiency have a positive effect on bank stock returns, which suggests that banks efficiency is directly aligned with their value to the shareholders. chiou, porter and sopranzetti (2014) decompose banks’ roa into five channels: interest income asset turnover, non-interest income asset turnover, interest contribution margin, non-interest contribution margin, and loan loss contribution and analyse their individual impacts on the relationship of market-to-book value, controlling for the impact of bank’s size and leverage. their results suggest that both interest and non-interest margins exert positive impact on banks’ market values, while the inf luence of loan and lease losses is negative. interestingly, according to chiou et al. (2014) the value relevance of loan losses is much higher for larger banks, that seem to be punished more severely by the capital markets for the impairment of assets. similarly, the impact of size on banks’ market value appears to be statistically significant (negative) also for larger banks only. another set of studies examines the effect of impairment provisions on the market value of banks. surprisingly, the results of these investigations are mixed as well. although it would seem that such provisions should be valued negatively by the capital markets, some studies provide evidence of their positive impact. for instance wahlen (1994) suggests that impairment provisions are in fact composed of discretionary and non-discretionary components. the discretionary component is subject to bank managers’ manipulation and dependent on their motivation, whereas the non-discretionary one is an outcome of events related to default risk, lying beyond management’s control. according to wahlen (1994) bank managers use the discretionary component to convey positive signals about the future cash f low prospects which results in its positive relationship with the market value. even though some studies provide support the signalling hypothesis (e.g. beaver, engel 1996), its foundations seem to be undermined by the findings of ahmed, takeda and thomas (1999) as well as lim, walker and lee (2013). furthermore, the results of the study conducted in an empirical evaluation of selected accounting-based… 29 the context of the polish banking sector by bolibok (2015) indicate a negative impact of impairment provisions on the market value of banks. the international evidence on the value of banks’ cash f lows is also ambiguous. the results of most studies suggest that specificity of banking operations is not fully captured by a standard cash f low statement framework which limits its informativeness for the equity investors (see e.g. ryan, tucker, zarowin 2006; gao 2015) according to dimitropoulos, asteriou and koumanakos (2010) cash f lows are outperformed by earnings in explaining variation in stock returns. although, when earnings contain a high share of transitory components, cash f lows tend to be more closely related to banks’ market value. wang (2014) provides an evidence of a positive impact of operational diversification, capital adequacy ratio, and loan-to-capital ratio on banks’ value. moreover, unlike gosh (2009), fortin et al. (2011), and chiou et al. (2014), he finds a positive association between banks’ size and value. according to wang (2014) the riskiness of banks’ operations, (measured by the relations of derivative trading and non-performing loans to total assets) has negative impact on value. the research methodology and the course of the research process following the research framework commonly adopted in the relevant literature the present study attempts to evaluate empirically the impact of selected accounting-based value drivers on the charter value of listed banks in the polish banking sector. given the results of the prior studies, the following hypothesis was formulated: hypothesis 1.: charter value of banks in the polish banking sector is determined by their size, operating efficiency, profitability, net cash f low generation capacity, leverage, asset liquidity, and risk management efficiency. danbank charter value is typically proxied by tobin’s q (relation of market value of bank’s assets to their book value): in explaining variation in stock returns. although, when earnings contain a high share of transitory components, cash flows tend to be more closely related to banks’ market value. wang (2014) provides an evidence of a positive impact of operational diversification, capital adequacy ratio, and loan-to-capital ratio on banks’ value. moreover, unlike gosh (2009), fortin et al. (2011), and chiou et al. (2014), he finds a positive association between banks’ size and value. according to wang (2014) the riskiness of banks’ operations, (measured by the relations of derivative trading and non-performing loans to total assets) has negative impact on value. the research methodology and the course of the research process following the research framework commonly adopted in the relevant literature the present study attempts to evaluate empirically the impact of selected accounting-based value drivers on the charter value of listed banks in the polish banking sector. given the results of the prior studies, the following hypothesis was formulated: hypothesis 1.: charter value of banks in the polish banking sector is determined by their size, operating efficiency, profitability, net cash flow generation capacity, leverage, asset liquidity, and risk management efficiency. bank charter value is typically proxied by tobin’s q (relation of market value of bank’s assets to their book value): (1) where:* − mve – market value of equity, − bvl – book value of liabilities (book value of assets – book value of equity), − bva – book value of assets. the selected bank value drivers might also be proxied by specific accounting variables available in the banks’ financial reports (table 1.). table 1. accounting-based proxies for the selected bank value drivers value driver accounting proxy size natural logarithm of total assets operating efficiency c/i ratio profitability roe cash flow generation capacity net cash flows to total assets leverage equity to total assets liquidity liquid assets to total assets risk management efficiency net impairment provisions to total assets source: own study. (1) where:* − mve – market value of equity, piotr bolibok30 − bvl – book value of liabilities (book value of assets – book value of equity), − bva – book value of assets. the selected bank value drivers might also be proxied by specific accounting variables available in the banks’ financial reports (table 1.). table 1. accounting-based proxies for the selected bank value drivers value driver accounting proxy size natural logarithm of total assets operating efficiency c/i ratio profitability roe cash flow generation capacity net cash flows to total assets leverage equity to total assets liquidity liquid assets to total assets risk management efficiency net impairment provisions to total assets s o u r c e : own study. in order to test the formulated hypothesis the analyses of correlation and multiple regression were employed. in the first stage of the research the pearson linear correlation coefficients between the examined variables were estimated and tested for the statistical significance, whereas in the second stage the following linear regression model was estimated: in order to test the formulated hypothesis the analyses of correlation and multiple regression were employed. in the first stage of the research the pearson linear correlation coefficients between the examined variables were estimated and tested for the statistical significance, whereas in the second stage the following linear regression model was estimated: ����������� � �� � �� ln������ � �� � �� �� � ������� � �� ��� ��� �� � �� � ��� �� � �� �� ��� �� � �� �� ��� �� � �� (2) where: − tobin’s qit – tobin’s q of bank i at the end of year t, as given by the formula (1), − ln(ta) – natural logarithm of total assets of bank i at the end of year t, − c/iit – operating expenses to interest, fee and provision income of bank i in the year t, − roeit – return on equity of bank i in the year t, − ncf/tait – net cash flow to total assets of bank i in the year t, − e/tait – equity to total assets of bank i at the end of year t, − la/tait – liquid (current) assets to total assets of bank i at the end of year t, − ip/tait – net impairment provisions to total assets of bank i in the year t, − α0 – intercept, − α1, α2, … α7 – regression coefficients, − εt – error term. the estimate of the coefficient for c/i ratio is expected to be negative while the one for roe should be positive. as for the other explanatory variables, the mixed results of the prior studies make it much harder to predict the expected outcomes. given the relatively small size of the banks examined in the present study and following the findings of de nicoló (2000), one can expect a positive impact of size on the charter values. additionally, the fact that banks operate in a strictly regulated and supervised market setting, might lead the equity investors to focus mostly on banks’ performance, relying on the too-big-to-fail principle, which might result in presumably negative associations between banks’ charter values and both e/ta and la/ta ratios. finally, the ability to generate cash inflows should positively affect banks’ charter values, while higher impairment provisions are likely to cause an exactly opposite effect. therefore, the estimates of the coefficients α4 and α7 are expected to be positive and negative, respectively. the data used in the analysis covered all domestically-based commercial banks listed on the warsaw stock exchange over the period 1997-2014. given the mergers and in order to test the formulated hypothesis the analyses of correlation and multiple regression were employed. in the first stage of the research the pearson linear correlation coefficients between the examined variables were estimated and tested for the statistical significance, whereas in the second stage the following linear regression model was estimated: ����������� � �� � �� ln������ � �� � �� �� � ������� � �� ��� ��� �� � �� � ��� �� � �� �� ��� �� � �� �� ��� �� � �� (2) where: − tobin’s qit – tobin’s q of bank i at the end of year t, as given by the formula (1), − ln(ta) – natural logarithm of total assets of bank i at the end of year t, − c/iit – operating expenses to interest, fee and provision income of bank i in the year t, − roeit – return on equity of bank i in the year t, − ncf/tait – net cash flow to total assets of bank i in the year t, − e/tait – equity to total assets of bank i at the end of year t, − la/tait – liquid (current) assets to total assets of bank i at the end of year t, − ip/tait – net impairment provisions to total assets of bank i in the year t, − α0 – intercept, − α1, α2, … α7 – regression coefficients, − εt – error term. the estimate of the coefficient for c/i ratio is expected to be negative while the one for roe should be positive. as for the other explanatory variables, the mixed results of the prior studies make it much harder to predict the expected outcomes. given the relatively small size of the banks examined in the present study and following the findings of de nicoló (2000), one can expect a positive impact of size on the charter values. additionally, the fact that banks operate in a strictly regulated and supervised market setting, might lead the equity investors to focus mostly on banks’ performance, relying on the too-big-to-fail principle, which might result in presumably negative associations between banks’ charter values and both e/ta and la/ta ratios. finally, the ability to generate cash inflows should positively affect banks’ charter values, while higher impairment provisions are likely to cause an exactly opposite effect. therefore, the estimates of the coefficients α4 and α7 are expected to be positive and negative, respectively. the data used in the analysis covered all domestically-based commercial banks listed on the warsaw stock exchange over the period 1997-2014. given the mergers and (2) where: − tobin’s qit – tobin’s q of bank i at the end of year t, as given by the formula (1), − ln(ta) – natural logarithm of total assets of bank i at the end of year t, − c/iit – operating expenses to interest, fee and provision income of bank i in the year t, − roeit – return on equity of bank i in the year t, an empirical evaluation of selected accounting-based… 31 − ncf/tait – net cash f low to total assets of bank i in the year t, − e/tait – equity to total assets of bank i at the end of year t, − la/tait – liquid (current) assets to total assets of bank i at the end of year t, − ip/tait – net impairment provisions to total assets of bank i in the year t, − α0 – intercept, − α1, α 2, … α7 – regression coefficients, − εt – error term. the estimate of the coefficient for c/i ratio is expected to be negative while the one for roe should be positive. as for the other explanatory variables, the mixed results of the prior studies make it much harder to predict the expected outcomes. given the relatively small size of the banks examined in the present study and following the findings of de nicoló (2000), one can expect a positive impact of size on the charter values. additionally, the fact that banks operate in a strictly regulated and supervised market setting, might lead the equity investors to focus mostly on banks’ performance, relying on the too-big-to-fail principle, which might result in presumably negative associations between banks’ charter values and both e/ta and la/ta ratios. finally, the ability to generate cash inf lows should positively affect banks’ charter values, while higher impairment provisions are likely to cause an exactly opposite effect. therefore, the estimates of the coefficients α4 and α7 are expected to be positive and negative, respectively. the data used in the analysis covered all domestically-based commercial banks listed on the warsaw stock exchange over the period 1997-2014. given the mergers and acquisitions within the sector, the final sample comprised of 18 banks. the data on annual financial statements and historical stock prices were collected from the notoria serwis sa database provided by isi emerging markets (http://site.securities.com… 2015) and the brokerage house of bank ochrony srodowiska sa (http://bossa.pl… 2015), respectively. given the fact that the study focuses on the bank-specific accounting variables the data from banks’ separate financial statements were used. the combined data yielded the final pooled sample of 221 bank-year observations. the outcome of the research process table 2. presents the estimated values of the pearson linear correlation coefficients between the examined variables in the pooled sample. piotr bolibok32 table 2. correlation matrix of the examined variables (pooled sample) variable tobin’s q ln (ta) c/i roe ncf/ta e/ta la/ta ip/ta tobin’s q 1.000 0.180** -0.407** 0.211** -0.087 -0.256** 0.098 -0.436** ln(ta) 1.000 -0.247** -0.011 -0.018 -0.289** -0.365** -0.180** c/i 1.000 -0.183** -0.003 0.687** -0.120 0.357** roe 1.000 -0.074 -0.210** 0.085 -0.068 ncf/ta 1.000 -0.063 0.066 0.049 e/ta 1.000 -0.008 0.207** la/ta 1.000 -0.035 ip/ta 1.000 ** – correlation significant at the 0.01 level (2-tailed) s o u r c e : own study. consistent with expectations, the conducted analysis revealed statistically significant, semi-strong, negative correlations between banks’ charter values and both c/i and ip/ta ratios. a weaker, yet also statistically significant negative association, was found for e/ta ratio. as expected, estimated correlation coefficient between tobin’s q and both roe and size turned out to be positive and significant, although quite low. correlation coefficients of the remaining variables (ncf/ta and la/ta) with charter values, however, were estimated to be not significantly different than zero. moreover, for each of these variables the sign of the coefficient turned out to be exactly opposite to the predicted one. the above findings indicate that bank charter value in the polish banking sector is driven by the operating efficiency, efficiency of risk management, leverage, profitability, and size, which partially supports the key hypothesis of the present study. the correlations between the explanatory variables remained generally quite weak or statistically insignificant, except the positive associations between c/i and e/ta as well as c/i and ip/ta and a negative one between ln(ta) and la/ta, which suggest that less operationally efficient banks were typically operating under lower leverage and suffering from relatively higher impairment losses while larger banks tended to keep lower shares of liquid assets, as being able to run a borrowed-liquidity-type strategy. an empirical evaluation of selected accounting-based… 33 in the second stage of the research the tobins’ q of the banks was linearly regressed against the selected accounting-based variables (table 3.). table 3. estimations of the regression model (pooled sample) variable/statistic regression coefficient t-statistic p-value collinearity statistics value std. error tolerance vif intercept 0.809 0.173 4.680 0.000 ln (ta) 0.014 0.009 1.539 0.125 0.753 1.329 c/i -0.057 0.018 -3.142 0.002 0.462 2.164 roe 0.074 0.031 2.352 0.020 0.936 1.068 ncf/ta -0.217 0.200 -1.083 0.280 0.976 1.024 e/ta 0.192 0.332 0.579 0.563 0.496 2.017 la/ta 0.085 0.064 1.326 0.186 0.811 1.233 ip/ta -2.128 0.418 -5.091 0.000 0.856 1.169 r2 29.6% adj. r2 27.2% f-statistic 12.767 0.000 n 221 s o u r c e : own study. the estimated regression turned out to be statistically significant at the 1% level. additionally, the values of variance inf lation factors (vif) do not suggest any serious problems with multicollinearity. the changes in the explanatory variables were, however, able to explain only about 30% of variation in banks’ tobin’s q. the signs of the estimated regression coefficients were generally consistent with expectations, except the ones for ncf/ta, e/ta and la/ta which, however, turned out to be statistically insignificant. the change in the sign of the regression coefficient for e/ta, compared to the corresponding correlation coefficient, is likely to be resultant from the interactions with other explanatory variables, in particular the aforementioned relatively strong positive correlation with c/i ratio. piotr bolibok34 consistent with expectations, c/i and ip/ta ratios exerted statistically significant negative inf luence on the charter values of the examined banks. interestingly, the changes in the latter ratio caused the highest responsiveness of tobin’s q. also the impact of roe was positive and statistically significant, as presumed. moreover, despite the aforementioned low correlation, the responsiveness of bank charter values to changes in roe became in fact even stronger than that of c/i ratio, when combined with other explanatory variables. in turn, the regression coefficient for the size proxy (ln(ta)), although positive, turned out to be statistically insignificant. the results of the conducted analyses demonstrate that charter values of the examined banks were most sensitive to the changes in the relative scale of asset impairment. the efficiency of risk management appears therefore to be of crucial importance for equity investors in the polish banking sector. as impairment provisions exerted strictly negative impact on charter values, it seems unlikely that they might be used for signaling purposes, which is in line with the findings of ahmed et al. (1999), lim et al. (2013), and bolibok (2015). operating efficiency, proxied by c/i ratio, seems to be an another important determinant of charter value in the investigated sample. the market clearly rewarded more cost-efficient banks, which is consistent with the findings of gosh (2009), jordan et al. (2011), as well as shamsuddin and xiang (2012). the outcomes of both stages of the research process have also confirmed a statistically significant, positive impact of banks’ profitability (measured with roe) on their charter values. even though a relatively low correlation of the aforementioned variables was quite surprising, the results of the regression analysis suggest that, when combined with other explanatory variables, roe becomes even more value-relevant than c/i ratio. it is likely, however, that the value relevance of roe might be in fact different in the periods preceding and succeeding the last global economic crisis, as suggested by fortin et al. (2011), in particular due to considerably increased volatility of banks’ net earnings resulting from significant f luctuations in impairment provisions after the beginning of the crisis. the results of the investigation of the impact of banks’ leverage on their charter values are ambiguous. on the one hand, a negative correlation between bank charter values and e/ta ratio indicates that the market rewards banks that take on higher leverage to improve their returns on equity, thus supporting the standpoints of hart and moore (1995) or allen et al. (2011). on the oth an empirical evaluation of selected accounting-based… 35 er hand, however, the extent of leverage becomes value-irrelevant when combined with other explanatory variables in the multiple regression model. the findings regarding the impact of leverage on banks’ charter values become particularly interesting in juxtaposition with an apparent value irrelevance of the liquidity of banks’ assets (la/ta ratio) which suggests that the equity investors in the polish banking sector might not be particularly concerned about the issues related to banks’ stability or solvency, assuming that regulatory supervision, deposit guarantees and other safety net solutions should enable the management of banks to concentrate their efforts on the maximization of profitability, even at the expense of higher risk exposure. the examination of the impact of banks’ size on their charter values produced mixed results as well. even though the banks listed on the warsaw stock exchange significantly differ among each other in size, in the international context they might be considered relatively small. in this light, an apparent positive correlation of banks’ size on their charter values is consistent with the arguments of de nicoló (2000) and wang (2014). it seems that larger banks might be perceived by the investors as being more capable of exploiting the benefits arising from economies of scale and operational diversification. moreover, given the aforementioned empirical evidence concerning the inf luence of leverage and asset liquidity, larger banks might be also regarded as being less exposed to the actual bankruptcy risk, following the “too-big-to-fail” principle. similarly as in the case of leverage, the explanatory power of banks’ size appears to be pre-emptied by the informational content of other predictors in the regression. finally, a negligible correlation between bank charter values and cash f low generation capacity (ncf/ta ratio) seems to be in line with the findings of ryan et al. (2006) and gao (2015) suggesting that a standard cash f low statement is of limited informativeness for the equity investors in the banking sector.  conclusions the results of the conducted research partially support the hypothesis of the present study. on the one hand, the empirical evidence indicates that the charter values of the banks listed on the warsaw stock exchange are driven by operating efficiency, profitability and the efficiency of risk management. on the other hand, however, the evidence on the impact of banks’ size and leverage is ambiguous, as even though they exhibit weak, yet statistically significant, correlations with banks’ charter values, their explanatory power appears to be piotr bolibok36 pre-emptied by the informational content of other predictors in the multiple regression model. finally, the findings indicate that both cash f low generation capacity and the share of liquid assets appear to be of limited informativeness for equity investors, as they do not exert any statistically significant inf luence on banks’ charter values. the findings of the study suggest that equity investors in the polish banking sector perceive performance and risk management efficiency as the key value drivers, practically neglecting the issues related to banks’ financial stability like the liquidity of assets and degree of leverage, thus presumably relying on the too-big-to-fail principle. given a relatively long time span covered by the present study, the further research in this field might try to investigate whether the aforementioned investors’ attitude changes with the course of the business cycle and the overall level of risk aversion in the capital markets.  references abuzayed, b., molyneux, p., & al-fayoumi, n. 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(2014). financial innovation, basel accord iii, and bank value. emerging markets finance & trade, 50 (2), 23-42. http://dx.doi.org/10.2753/ree1540496x5002s202. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: aleksandra.banaszkiewicz@umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 47 65. aleksandra banaszkiewicz* uniwersytet mikołaja kopernika w toruniu techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym słowa kluczowe: księgowość podwójna, techniki prowadzenia ksiąg rachunkowych, zasada podwójnego zapisu. klasyfikacja jel: g39, m41. abstrakt: badacze historii rachunkowości są zgodni co do tego, że system rachunkowości podwójnej nie jest wynalazkiem jednego człowieka czy też dziełem przypadku. prawdopodobnie jest on wynikiem prób i doświadczeń podejmowanych przez wielu kupców i bankierów w różnych miastach włoskich. na przestrzeni lat system księgowości podlegał doskonaleniu. najstarszą techniką prowadzenia księgowości jest metoda włoska, nazywana inaczej wenecką. do końca xviii wieku w ramach księgowości podwójnej powstało kilka sposobów dokonywania zapisów w księgach handlowych. najczęściej stosowane to: metoda włoska, francuska i niemiecka. w xix i xx wieku rozwinęły się kolejne metody księgowości, takie jak np. metoda amerykańska. bookkeeping techniques in historical perspective keywords: bookkeeping techniques, double accounting, the principle of double-entry. jel classification: g39, m41. abstract: accounting history researchers agree on the fact that a double accounting system is not an invention of one man, or by chance. this is probably the result of tests and experiments carried out by a number of merchants and bankers in various italian cities. http://dx.doi.org/10.12775/cjfa.2013.002 aleksandra banaszkiewicz22 over the years, the accounting system was improved. the oldest technique is the method of italian bookkeeping, otherwise known as venetian accounting. by the end of the eighteenth century as part of a double accounting was created a few ways to make entries in the books trade. the most commonly used is the method: italian, french and german. nineteenth and early twentieth century brought new accounting methods, such as the american method. translated by aleksandra banaszkiewicz  wstęp rachunkowość jako dyscyplina naukowa ma długą i bogatą przeszłość, jednak jej historia nie jest powszechnie znana. jak pisze andrzej kardasz (2002: 159): „nie ma wielu dostępnych źródeł, z których zainteresowani mogą zaczerpnąć stosowną wiedzę. nie prowadzi się systematycznych studiów nad ewolucją poglądów o rachunkowości i w rachunkowości”. już z przedstawionego cytatu można wysnuć wniosek, że dzieje rachunkowości jako obszar badawczy są niedoceniane i spychane na margines w badaniach naukowych. a przecież historia stanowi próbę wyjaśnienia teraźniejszości przez odwołanie się do przeszłych wydarzeń. tym samym pełne zrozumienie rachunkowości jest możliwe tylko przez poznanie jej historii. jak pisze witold byszewski (1912: 11–12): „kto zna tylko współczesny stan jakiejś sprawy naukowej, zna tylko obraz bez głębi, bez zasadniczych podstaw, dopiero historyczne poznanie nauki, poznanie dróg rozwoju, które ją do dzisiejszego stanu doprowadziły, pozwala się należycie orientować, pozwala pojąć rzeczywisty organizm wiedzy”. ciągłość historyczna, jak i korzystanie z wielowiekowych doświadczeń ma zatem duże znaczenie dla rozwoju i praktyki rachunkowości. celem artykułu jest przedstawienie podstawowych technik prowadzenia ksiąg rachunkowych stosowanych na przestrzeni wieków do momentu ich zastąpienia programami komputerowymi. 1. geneza rachunkowości podwójnej korzeni rachunkowości jako systemu informacji ekonomicznej należy szukać w czasach średniowiecza. przyjmuje się, że w okresie od xii do xiv wieku ukształtowały się zasady współczesnej rachunkowości opartej na podwójnym zapisie w zamkniętym zespole kont. jej narodziny wiążą się z kolei z zastosowaniem ewidencji należności i zobowiązań. jak wiadomo, użyczanie własnych pieniędzy lub też rzeczy na zasadzie pożyczki powoduje, że osoba pożyczają  techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 23 ca staje się dłużnikiem i spoczywa na niej obowiązek zwrotu długu, natomiast osoba udzielająca pożyczki, czyli wierzyciel, ma prawo domagać się zwrotu pożyczonej sumy pieniężnej. aby fakt udzielenia pożyczki nie uległ zapomnieniu oraz w celach kontrolnych, zaczęto zapisywać wszelkiego rodzaju operacje kredytowe (kawa 1987a: 8). pierwszym zachowanym dokumentem, w którym posłużono się wspomnianą wcześniej ewidencją, jest księga handlowa nieznanego bankiera f lorenckiego prowadzona w bolonii w 1211 roku podczas odbywających się targów. księga ta zawierała wpisy dotyczące poszczególnych dłużników. była w niej podawana kwota udzielonej pożyczki, a pod nią kwota jej spłaty. w momencie uiszczenia długu oba zapisy przekreślano pionową kreską. oprócz sumy długu, włoscy kupcy wpisywali do księgi również inne dane dotyczące dłużnika, przede wszystkim jego imię i nazwisko, a także podstawę i datę zadłużenia, wysokość oprocentowania, warunki spłaty kredytu. w miarę upływu czasu informacje na temat długu i jego spłaty zaczęto zapisywać nie jedna pod drugą, ale obok siebie. w pierwszej kolejności rejestrowano powstanie należności, a obok spłatę należności. następnym krokiem stało się rejestrowanie własnych długów, przy czym dostrzeżono, że zapis w przypadku zobowiązań powinien mieć odwrotną kolejność: najpierw rejestracja spłaty zobowiązania, a potem – obok – rejestracja zaciągnięcia pożyczki. w ten oto sposób powstała reguła ewidencyjna zdarzeń gospodarczych o charakterze roszczeniowym, czyli należności i zobowiązań (peche 1988: 20–21). po lewej stronie konta, posługując się zwrotem debet dare (w dosłownym tłumaczeniu „winien dać”), zapisywano własne świadczenia majątkowe na rzecz osób trzecich, czyli udzielone pożyczki i zwrócone własne długi, a po prawej stronie, wraz ze zwrotem debet habere (w dosłownym tłumaczeniu „winien mieć”), księgowano otrzymane świadczenia obce, czyli zwrot udzielonych pożyczek i otrzymane od innego podmiotu pożyczki. zwroty debet dare i debet habere zostały zapożyczone z notarialnych dokumentów długów. zapisy na kontach były ukierunkowane na przyszłe zdarzenia, w tym przypadku na zwrot długów i wierzytelności, czyli miały charakter prospektywny, co nadawało im jednocześnie wymiar praktyczny (kawa 1987a: 13). w ten oto sposób doszło do ukształtowania konta dwustronnego. w historii takie konto można odnaleźć już w 1288 roku. w teorii rachunkowości działająca tak ewidencja należności i zobowiązań nosi nazwę księgowości pojedynczej. pojedynczość tych ewidencji wynika z braku istnienia powiązań między nimi, a także z innymi zapisami dotyczącymi np. towarów. aleksandra banaszkiewicz24 w tym samym czasie dokonał się poważny postęp cywilizacyjny. jednym z jego przejawów był fakt, że coraz więcej osób opanowywało umiejętność czytania, pisania i liczenia, a jednocześnie papier stał się towarem ogólnodostępnym. w kontekście rachunkowości należy zwrócić przede wszystkim uwagę na rozpowszechnienie się we włoszech, począwszy od pierwszej połowy xii wieku, cyfr arabskich oraz dziesiętnego układu pozycyjnego. natomiast z technicznego punktu widzenia prowadzenie ewidencji gospodarczej stało się łatwiejsze dzięki wprowadzeniu do użytku takich narzędzi, jak: gęsie pióro, inkaust czy liczydło (skrzywan 1971: 28). jednocześnie doszło do ożywienia handlu w basenie morza śródziemnego, w krajach bliskiego wschodu oraz europy zachodniej. centrum życia gospodarczego stały się głównie miasta portowe włoch, takie jak wenecja i genua, a także mediolan, siena i florencja. w miastach tych miały swoje siedziby największe firmy kupieckie i bankierskie, które prowadziły handel towarowy i operacje bankowe m.in. z hiszpanią, francją, belgią, holandią i anglią. to właśnie na potrzeby działalności handlowej komuny genueńskiej w 1340 roku zastosowano zestaw dwustronnych kont (scheffs 1939: 37). konta dłużników i wierzycieli występujące w ewidencji należności i zobowiązań powiązano wtedy z kontem kasy i kontami rzeczowymi, np. z kontem, na którym wykazywano stan towarów (peche 1988: 23). zwiększenie liczby kont i ich wzajemne powiązanie spowodowało, że określone zdarzenie gospodarcze było księgowane jednocześnie dwa razy, np. spłata wierzytelności przez kupca była rejestrowana na koncie dłużników jako spłata (likwidacja) zobowiązania oraz na koncie kasy jako rozchód gotówki. w konsekwencji doprowadziło to do powstania zasady podwójnego zapisu, zgodnie z którą określone zdarzenie gospodarcze wywołuje dodatnie i ujemne, a także równoczesne zmiany w stanie majątkowym danego podmiotu gospodarczego (gmytrasiewicz 1978: 35). na przełomie xiv i xv wieku pojawiło się konto kapitału, które służyło do rejestracji zmian w majątku własnym zachodzących na skutek ponoszenia strat lub uzyskiwania zysków podczas prowadzenia działalności gospodarczej (wojciechowski 1964: 186). kolejnym etapem było wprowadzenie konta zysków i strat, którego zadaniem była rejestracja wpływu prowadzonej działalności na majątek własny. w ostatnim etapie kształtowania się systemu księgowości podwójnej nastąpiło wprowadzenie do księgi głównej konta o nazwie „bilans”. znalazło ono zastosowanie w momencie zamykania ksiąg handlowych do ostatecznego przeniesienia zapisów z wszystkich kont księgi głównej (peche 1988: 24).   techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 25 prozaicznym powodem, dla którego wymyślono system księgowości podwójnej, był fakt, że twórcy rachunkowości nie znali liczb ujemnych. dlatego też nie mogli zapisywać w jednej rubryce, nazwanej np. „gotówka”, wpłat i wypłat, czyli zwiększeń (liczba dodatnia) i zmniejszeń (liczba ujemna). rozwiązaniem stało się więc zastosowanie konta w kształcie litery t, na którym to zapisywano zwiększenia po jednej, a zmniejszenia po drugiej stronie (hendriksen, van breda 2002: 63). pełny system podwójnej księgowości, obejmujący również sporządzanie bilansu oraz rachunku zysków i strat, a także charakteryzujący się wysokim stopniem dokładności, został skonstruowany przez firmy handlowe i bankowe toskanii oraz północnych włoch na przestrzeni xiv i xv wieku (skrzywan 1971: 29). badacz rachunkowości a. littleton wyróżnił siedem czynników, które przyczyniły się do powstania systemu podwójnej księgowości: własność prywatna, kapitał, handel, idea kredytowania, pismo, pieniądz i arytmetyka. jego zdaniem czynniki te wystąpiły jednocześnie po raz pierwszy w średniowieczu, dając możliwość stworzenia systemu ewidencji zdarzeń gospodarczych (alexander 2012). 2. techniki prowadzenia ksiąg rachunkowych system księgowości podwójnej stopniowo przyjmował się na terenie włoch, po czym zaczęto go również wprowadzać w całej europie. przyczyniły się do tego opracowania naukowe na temat rachunkowości. jako pierwszy zasady księgowości opisał w 1458 roku benedetto cotrugli w książce zatytułowanej o handlu i kupcu doskonałym (łuczaj 2003: 405). praca cotrugliego ukazała się drukiem dopiero w 1573 roku, dlatego też za pierwszego autora podręcznika rachunkowości przyjęto uważać luca pacioliego, którego książka pod tytułem zasady arytmetyki, geometrii, proporcji i proporcjonalności ukazała się w 1494 roku. znajduje się w niej między innymi traktat o księgowości podwójnej. praca pacioliego powstała na podstawie obserwacji systemu księgowości stosowanego w wenecji i jak sam autor wyjaśnia – nie można go utożsamiać z wynalazcą rachunkowości (kawa 1994: 73). 2.1. metoda włoska i jej odmiany istota metody włoskiej sprowadzała się do zasady, zgodnie z którą zapisy księgowe były dokonywane w dwóch księgach, a mianowicie w dzienniku i w księdze głównej. dziennik miał postać oprawionej księgi, z ponumerowanymi stroaleksandra banaszkiewicz26 nicami, przy czym każda stronica była w odpowiedni sposób porubrykowana. zadanie księgowego wyposażonego w dziennik polegało na dokonywaniu chronologicznych zapisów w postaci tzw. sentencji, stanowiącej zwięzły opis zdarzenia wszystkich operacji gospodarczych. z dziennika zapisy przenoszono codziennie, pozycja po pozycji, do księgi głównej, w której znajdowały się konta majątkowe, kapitałowe i wynikowe. metoda ta sprawdzała się tylko w przypadku małych przedsiębiorstw, utrzymujących kontakty handlowe z niewielką grupą dostawców i odbiorców (niemski 1947: 157). rysunek 1 prezentuje schemat graficzny metody włoskiej. rysunek 1. schemat graficzny metody włoskiej rysunek 1. schemat graficzny metody włoskiej księga inwentarzowa i bilansowa dziennik księga główna źródło: niemski 1947: 157. w większych przedsiębiorstwach jeden księgowy nie był w stanie w ciągu jednego dnia przenieść z dziennika do księgi głównej wszystkich operacji księgowych. zatrudnienie większej liczby pracowników w dużych firmach było więc jednoznaczne z podziałem dziennika. kryterium podziału stanowił rodzaj transakcji gotówkowych, które dzielono na transakcje kasowe i transakcje kredytowe. transakcje kasowe odnotowywano w dzienniku kasowym, a transakcje bezgotówkowe (kredytowe) w dzienniku o nazwie „memoriał” albo „primanota”. na ogół dziennik kasowy był prowadzony w formie dwustronnej: lewa strona służyła do księgowania przychodów, a prawa – rozchodów gotówki, przy czym każdy zapis opatrywano również odpowiednią sentencją. konto „kasa” zawarte w księdze głównej różniło się od pozycji w dzienniku kasowym tym, że przyjmowało obroty kasowe w sumach zbiorczych. taka metoda księgowania wykształciła się w końcu xvii wieku i przyjęła nazwę nowej metody włoskiej (wojciechowski 1964: 70). rysunek 2 prezentuje schemat graficzny nowej metody włoskiej. rysunek 2. schemat graficzny nowej metody włoskiej księga inwentarzowa i bilansowa dziennik kasowy memoriał księga główna ź r ó d ł o : niemski 1947: 157. w większych przedsiębiorstwach jeden księgowy nie był w stanie w ciągu jednego dnia przenieść z dziennika do księgi głównej wszystkich operacji księgowych. zatrudnienie większej liczby pracowników w dużych firmach było więc jednoznaczne z podziałem dziennika. kryterium podziału stanowił rodzaj transakcji gotówkowych, które dzielono na transakcje kasowe i transakcje kredytowe. transakcje kasowe odnotowywano w dzienniku kasowym, a transakcje bezgotówkowe (kredytowe) w dzienniku o nazwie „memoriał” albo „primanota”. na ogół dziennik kasowy był prowadzony w formie dwustronnej: lewa strona służyła do księgowania przychodów, a prawa – rozchodów gotówki, przy czym każdy zapis opatrywano również odpowiednią sentencją. konto „kasa” zawarte w księdze głównej różniło się od pozycji w dzienniku kasowym tym, że przyjmowało obroty kasowe w sumach zbiorczych. taka metoda księgowania wykształciła się   techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 27 w końcu xvii wieku i przyjęła nazwę nowej metody włoskiej (wojciechowski 1964: 70). rysunek 2 prezentuje schemat graficzny nowej metody włoskiej. rysunek 2. schemat graficzny nowej metody włoskiej rysunek 2. schemat graficzny nowej metody włoskiej księga inwentarzowa i bilansowa dziennik kasowy memoriał księga główna źródło: niemski 1947: 159. kolejna modyfikacja metody włoskiej polegała na zwiększeniu liczby dzienników. w zależności od skali działalności przedsiębiorstwa, memoriał mógł funkcjonować jako jeden dziennik albo mógł zostać dodatkowo podzielony na kilka memoriałów, takich jak np. dziennik zakupu, dziennik sprzedaży, dziennik bankowy. rozbicie dziennika na kilka memoriałów spowodowało, że przenoszenie zapisów do księgi głównej było znacznie utrudnione. z tej też przyczyny wprowadzono dziennik zbiorczy, nazywany inaczej zbiornikiem, który służył jako ogniwo pomocnicze przy przenoszeniu zapisów z dzienników szczegółowych do księgi głównej. zbiornik zmniejszał liczbę przenoszonych pozycji, co miało istotny wpływ na zwiększenie przejrzystości księgi głównej, przy czym należy zauważyć, że zapisy były w nim dokonywane okresowo, np. w odstępach tygodniowych. metoda włoska w formie wielodziennikowej jest również nazywana metodą francuską, ponieważ za jej autora uważa się francuza de la porte, który opisał ją w 1712 roku (niemski 1947: 161). na rysunku 3 przedstawiono schemat graficzny metody włoskiej wielodziennikowej (metody francuskiej). inną odmianą metody włoskiej jest metoda niemiecka. korzysta ona z podziału dziennika na dwa rodzaje, tak jak to funkcjonuje w nowej metodzie włoskiej, a jednocześnie wprowadza do zapisów księgowych – tak jak w metodzie włoskiej wielodziennikowej (francuskiej) – zbiornik. podstawowa różnica między metodą francuską a niemiecką sprowadzała się do tego, że większa liczba dzienników stosowana w metodzie francuskiej pozwalała na ich klasyfikację właśnie na poziomie dzienników. w metodzie ź r ó d ł o : niemski 1947: 159. kolejna modyfikacja metody włoskiej polegała na zwiększeniu liczby dzienników. w zależności od skali działalności przedsiębiorstwa, memoriał mógł funkcjonować jako jeden dziennik albo mógł zostać dodatkowo podzielony na kilka memoriałów, takich jak np. dziennik zakupu, dziennik sprzedaży, dziennik bankowy. rozbicie dziennika na kilka memoriałów spowodowało, że przenoszenie zapisów do księgi głównej było znacznie utrudnione. z tej też przyczyny wprowadzono dziennik zbiorczy, nazywany inaczej zbiornikiem, który służył jako ogniwo pomocnicze przy przenoszeniu zapisów z dzienników szczegółowych do księgi głównej. zbiornik zmniejszał liczbę przenoszonych pozycji, co miało istotny wpływ na zwiększenie przejrzystości księgi głównej, przy czym należy zauważyć, że zapisy były w nim dokonywane okresowo, np. w odstępach tygodniowych. metoda włoska w formie wielodziennikowej jest również nazywana metodą francuską, ponieważ za jej autora uważa się francuza de la porte, który opisał ją w 1712 roku (niemski 1947: 161). na rysunku 3 przedstawiono schemat graficzny metody włoskiej wielodziennikowej (metody francuskiej). inną odmianą metody włoskiej jest metoda niemiecka. korzysta ona z podziału dziennika na dwa rodzaje, tak jak to funkcjonuje w nowej metodzie włoskiej, a jednocześnie wprowadza do zapisów księgowych – tak jak w metodzie włoskiej wielodziennikowej (francuskiej) – zbiornik. podstawowa różnica między metodą francuską a niemiecką sprowadzała się do tego, że większa liczba aleksandra banaszkiewicz28 rysunek 3. schemat graficzny metody włoskiej wielodziennikowej (francuskiej) niemieckiej operacje gospodarcze były grupowane dopiero w zbiorniku (wojciechowski 1964: 74). przypuszcza się, że autorem metody niemieckiej jest helwig, który opisał ją w 1774 roku. wzorował się on na pracy włoskiego księgowego harattiego, który z kolei jako pierwszy zaproponował wprowadzenie kont syntetycznych (scheffs 1939: 185). rysunek 4 przedstawia schemat graficzny metody niemieckiej. rysunek 3. schemat graficzny metody włoskiej wielodziennikowej (francuskiej) księga inwentarzowa i bilansowa dziennik i dziennik ii dziennik iii dziennik iv zbiornik księga główna źródło: niemski 1947: 164. 2.2. metoda amerykańska (tabelaryczna) autorem metody amerykańskiej (tabelarycznej) jest francuz, e. degrange, który opracował ją na przełomie xviii i xix wieku (peche 1988: 225). podstawową cechą odróżniającą metodę włoską od amerykańskiej (tabelarycznej) jest dokonywanie zapisów księgowych tylko w jednej księdze, powstałej z połączenia dziennika i księgi głównej. taka księga nosi zatem nazwę „dziennik-główna”. ponieważ obowiązywała jedna księga, metoda ta pozwalała na zaoszczędzenie czasu, eliminowała bowiem proces przenoszenia zapisów z dziennika do księgi głównej. dodatkowo, proces księgowania był uproszczony, ponieważ zapisywanie zdarzeń księgowych w postaci sentencji stało się zbyteczne. rysunek 5 prezentuje schemat układu księgi „dziennik-główna”. ź r ó d ł o : niemski 1947: 164. dzienników stosowana w metodzie francuskiej pozwalała na ich klasyfikację właśnie na poziomie dzienników. w metodzie niemieckiej operacje gospodarcze były grupowane dopiero w zbiorniku (wojciechowski 1964: 74). przypuszcza się, że autorem metody niemieckiej jest helwig, który opisał ją w 1774 roku. wzorował się on na pracy włoskiego księgowego harattiego, który z kolei jako pierwszy zaproponował wprowadzenie kont syntetycznych (scheffs 1939: 185). rysunek 4 przedstawia schemat graficzny metody niemieckiej. rysunek 4. schemat graficzny metody niemieckiej rysunek 4. schemat graficzny metody niemieckiej księga inwentarzowa i bilansowa dziennik kasowy memoriał zbiornik księga główna źródło: niemski 1947: 163. rysunek 5. schemat układu księgi „dziennik-główna” treść suma konto 1 konto 2 konto 3 itd. itd. itd. konto n-3 konto n-2 konto n-1 konto n źródło: peche 1988: 226. główne zalety metody amerykańskiej były następujące (matuszewicz, matuszewicz 2001: 409):  przejrzystość zapisów w księdze „dziennik-główna”,  łatwość dokonywania i uzgadniania zapisów,  łatwość wyszukiwania błędów księgowych. system ten miał również wady, takie jak (matuszewicz, matuszewicz 2001: 409):  brak możliwości wprowadzenia podziału pracy, ponieważ księga „dziennik-główna” była przystosowana do prowadzenia tylko przez jedną osobę,  duża możliwość popełniania błędów księgowych podczas przenoszenia obrotów kont z jednej strony księgi na następną. ź r ó d ł o : niemski 1947: 163.   techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 29 2.2. metoda amerykańska (tabelaryczna) autorem metody amerykańskiej (tabelarycznej) jest francuz, e. degrange, który opracował ją na przełomie xviii i xix wieku (peche 1988: 225). podstawową cechą odróżniającą metodę włoską od amerykańskiej (tabelarycznej) jest dokonywanie zapisów księgowych tylko w jednej księdze, powstałej z połączenia dziennika i księgi głównej. taka księga nosi zatem nazwę „dziennik-główna”. ponieważ obowiązywała jedna księga, metoda ta pozwalała na zaoszczędzenie czasu, eliminowała bowiem proces przenoszenia zapisów z dziennika do księgi głównej. dodatkowo, proces księgowania był uproszczony, ponieważ zapisywanie zdarzeń księgowych w postaci sentencji stało się zbyteczne. rysunek 5 prezentuje schemat układu księgi „dziennik-główna”. rysunek 5. schemat układu księgi „dziennik-główna” rysunek 4. schemat graficzny metody niemieckiej księga inwentarzowa i bilansowa dziennik kasowy memoriał zbiornik księga główna źródło: niemski 1947: 163. rysunek 5. schemat układu księgi „dziennik-główna” treść suma konto 1 konto 2 konto 3 itd. itd. itd. konto n-3 konto n-2 konto n-1 konto n źródło: peche 1988: 226. główne zalety metody amerykańskiej były następujące (matuszewicz, matuszewicz 2001: 409):  przejrzystość zapisów w księdze „dziennik-główna”,  łatwość dokonywania i uzgadniania zapisów,  łatwość wyszukiwania błędów księgowych. system ten miał również wady, takie jak (matuszewicz, matuszewicz 2001: 409):  brak możliwości wprowadzenia podziału pracy, ponieważ księga „dziennik-główna” była przystosowana do prowadzenia tylko przez jedną osobę,  duża możliwość popełniania błędów księgowych podczas przenoszenia obrotów kont z jednej strony księgi na następną. ź r ó d ł o : peche 1988: 226. główne zalety metody amerykańskiej były następujące (matuszewicz, matuszewicz 2001: 409): ■ przejrzystość zapisów w księdze „dziennik-główna”, ■ łatwość dokonywania i uzgadniania zapisów, ■ łatwość wyszukiwania błędów księgowych. system ten miał również wady, takie jak (matuszewicz, matuszewicz 2001: 409): ■ brak możliwości wprowadzenia podziału pracy, ponieważ księga „dziennik-główna” była przystosowana do prowadzenia tylko przez jedną osobę, ■ duża możliwość popełniania błędów księgowych podczas przenoszenia obrotów kont z jednej strony księgi na następną. najbardziej istotnym mankamentem omawianej metody był jednak fakt, że wprowadzenie do księgi „dziennik-główna” zbyt dużej liczby kont powodowało, iż stawała się ona nieporęczna (doraczyński, nowicki, wróblewski 1958: 42). z tej też przyczyny metoda amerykańska dopuszczała oddzielenie aleksandra banaszkiewicz30 dziennika od księgi głównej. dziennik amerykański służył do bieżącego księgowania w układzie chronologicznym operacji gospodarczych, które następnie były przenoszone do księgi głównej w sumach zbiorczych. w przypadku większych przedsiębiorstw możliwe było zastosowanie tzw. rozwiniętej metody amerykańskiej. polegała ona na dalszym podziale dziennika amerykańskiego na szereg dzienników szczegółowych. taki podział mógł np. obejmować: dziennik kasowy, dziennik zakupu towarów, dziennik sprzedaży towarów oraz memoriał. podobnie jak w wielodziennikowej metodzie włoskiej, zapisy z amerykańskich dzienników szczegółowych były przenoszone w sumach ogólnych, najpierw do dziennika zbiorczego, a następnie do księgi głównej (niemski 1947: 170). rysunek 6 prezentuje schemat graficzny systemu ksiąg według rozwiniętej metody amerykańskiej. rysunek 6. schemat graficzny systemu ksiąg według rozwiniętej metody amerykańskiej najbardziej istotnym mankamentem omawianej metody był jednak fakt, że wprowadzenie do księgi „dziennik-główna” zbyt dużej liczby kont powodowało, iż stawała się ona nieporęczna (doraczyński, nowicki, wróblewski 1958: 42). z tej też przyczyny metoda amerykańska dopuszczała oddzielenie dziennika od księgi głównej. dziennik amerykański służył do bieżącego księgowania w układzie chronologicznym operacji gospodarczych, które następnie były przenoszone do księgi głównej w sumach zbiorczych. w przypadku większych przedsiębiorstw możliwe było zastosowanie tzw. rozwiniętej metody amerykańskiej. polegała ona na dalszym podziale dziennika amerykańskiego na szereg dzienników szczegółowych. taki podział mógł np. obejmować: dziennik kasowy, dziennik zakupu towarów, dziennik sprzedaży towarów oraz memoriał. podobnie jak w wielodziennikowej metodzie włoskiej, zapisy z amerykańskich dzienników szczegółowych były przenoszone w sumach ogólnych, najpierw do dziennika zbiorczego, a następnie do księgi głównej (niemski 1947: 170). rysunek 6 prezentuje schemat graficzny systemu ksiąg według rozwiniętej metody amerykańskiej. rysunek 6. schemat graficzny systemu ksiąg według rozwiniętej metody amerykańskiej dziennik kasowy dziennik zakupu dziennik sprzedaży memoriał zbiornik księga inwentarzowa i bilansowa księga główna księga inwentarzowa i bilansowa źródło: niemski 1947: 171. 2.3. metoda szachownicy metoda szachownicy została opracowana w końcu xix wieku i polegała na prowadzeniu księgi głównej w formie luźnych arkuszy. każdy arkusz miał liniaturę podobną do szachownicy. w pierwszej kolumnie wypisano konta, które obciążano, a w pierwszym wierszu – konta uznawane. sumy operacji były natomiast odzwierciedlane w przekroju korespondujących kont (gleich 1952: 173). metoda ta wymagała prowadzenia dzienników oraz ksiąg szczegółowych. jej istotną wadą był fakt, że na jednym arkuszu mogła zmieścić się ograniczona liczba kont. a z uwagi na to, że liczba kont, jakimi ź r ó d ł o : niemski 1947: 171. 2.3. metoda szachownicy metoda szachownicy została opracowana w końcu xix wieku i polegała na prowadzeniu księgi głównej w formie luźnych arkuszy. każdy arkusz miał liniaturę podobną do szachownicy. w pierwszej kolumnie wypisano konta, które obciążano, a w pierwszym wierszu – konta uznawane. sumy operacji były natomiast odzwierciedlane w przekroju korespondujących kont (gleich 1952: 173). metoda ta wymagała prowadzenia dzienników oraz ksiąg szczegółowych. jej istotną wadą był fakt, że na jednym arkuszu mogła zmieścić się ograniczona liczba kont. a z uwagi na to, że liczba kont, jakimi posługuje się przedsiębiorstwo, może być znaczna, a każde konto może korespondować z dowolnym   techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 31 innym kontem, zapisy księgowe dokonywane tą metodą były mało czytelne i z tego też powodu nie znalazła ona szerszego zastosowania w praktyce gospodarczej (niemski 1947: 174). rysunek 7 prezentuje fragment szachownicy stosowanej w omawianej metodzie. rysunek 7. przykład szachownicy posługuje się przedsiębiorstwo, może być znaczna, a każde konto może korespondować z dowolnym innym kontem, zapisy księgowe dokonywane tą metodą były mało czytelne i z tego też powodu nie znalazła ona szerszego zastosowania w praktyce gospodarczej (niemski 1947: 174). rysunek 7 prezentuje fragment szachownicy stosowanej w omawianej metodzie. rysunek 7. przykład szachownicy ma winien kasa bank odbiorcy dostawcy towary razem kasa bank odbiorcy dostawcy towary razem źródło: niemski 1947: 172. 2.4. metoda przebitkowa jak sugeruje sama nazwa metody powstałej na początku xx stulecia, jej zastosowanie od strony technicznej wymagało użycia kalki, która pozwalała na dokonywanie zapisów księgowych w obu księgach jednocześnie, to znaczy w dzienniku i w księdze głównej. posługiwanie się kalką było możliwe pod warunkiem, że księgi rachunkowe prowadzono na luźnych kartach. każda karta miała taki sam układ rubryk. za pomocą kalki i odpowiedniego przyrządu służącego do przytrzymywania kart dziennika i kart księgi głównej dokonywało się zapisu najpierw na koncie, które się obciążało (i jednocześnie w dzienniku), a w drugiej kolejności na koncie, które się uznawało (również jednocześnie w dzienniku). przyjęło się, że karty dziennika spina się razem, tworząc księgę zawierającą zapisy w układzie chronologicznym. natomiast karty księgi głównej były przechowywane w specjalnie do tego celu zbudowanych skrzynkach, nazywanych kartotekami lub ź r ó d ł o : niemski 1947: 172. 2.4. metoda przebitkowa jak sugeruje sama nazwa metody powstałej na początku xx stulecia, jej zastosowanie od strony technicznej wymagało użycia kalki, która pozwalała na dokonywanie zapisów księgowych w obu księgach jednocześnie, to znaczy w dzienniku i w księdze głównej. posługiwanie się kalką było możliwe pod warunkiem, że księgi rachunkowe prowadzono na luźnych kartach. każda karta miała taki sam układ rubryk. za pomocą kalki i odpowiedniego przyrządu służącego do przytrzymywania kart dziennika i kart księgi głównej dokonywało się zapisu najpierw na koncie, które się obciążało (i jednocześnie w dzienniku), a w drugiej kolejności na koncie, które się uznawało (również jednocześnie w dzienniku). przyjęło się, że karty dziennika spina się razem, tworząc księgę zawierającą zapisy w układzie chronologicznym. natomiast karty księgi głównej były przechowywane w specjalnie do tego celu zbudowanych skrzynkach, nazywanych kartotekami lub kontotekami (niemski 1947: 175). zapisy księgowe początkowo były dokonywane ręcznie, po czym zastąpiła je maszyna księgująca (doraczyński, górski 1956: 137). aleksandra banaszkiewicz32 najważniejsze zalety metody przebitkowej były następujące (matuszewicz, matuszewicz 2001: 416; doraczyński, nowicki, wróblewski 1958: 44): ■ redukcja pracochłonności procesu ewidencji księgowej na skutek stosowania kalki, ■ redukcja błędów księgowych wynikająca z eliminacji procesu przenoszenia zapisów z dziennika do księgi głównej, ■ możliwość stosowania dowolnej liczby kont i w dowolnym ich układzie, ■ łatwy dostęp do dowolnego konta potrzebnego do ewidencji księgowej, ■ możliwość podziału pracy między dowolną liczbę księgowych, ■ możliwość mechanizacji pracy księgowych. metoda przebitkowa miała również wady, takie jak (matuszewicz, matuszewicz 2001: 416–417): ■ utrudniona kontrola w zakresie przebiegu całości oddzielnych transakcji, ■ utrudnienia w sporządzaniu sprawozdań powstających na podstawie pozycji wynikających tylko z niektórych zapisów księgowych. rysunek 8 przedstawia przykład karty dziennika, a rysunek 9 przykład karty księgi głównej. 2.5. metoda rejestrowa metoda rejestrowa została opracowana w polsce po ii wojnie światowej na podstawie rozwiązań radzieckich. jej istota opierała się na założeniu, że operacje gospodarcze są ewidencjonowane na rejestrach, czyli podstawowych narzędziach tej techniki księgowości. można je określić jako wyspecjalizowane dzienniki, do których nanosiło się zapisy w sposób chronologiczny i na podstawie zestawień okresowych dokumentów źródłowych. rejestry dzieliło się na proste, czyli zestawienia jednego rodzaju dokumentów, i złożone – służące do ujmowania więcej niż jednego rodzaju dokumentów źródłowych (peche 1988: 227).   techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 33 rysunek 8. przykład karty dziennika (metoda przebitkowa) miesiąc ……………………………. 194…. r. strona ………. data pozycja i strona dziennika treść symbol konta przeciwstawnego winien ma o symbol konta, na którym dokonuje się zapisu ź r ó d ł o : doraczyński, nowicki, wróblewski 1958: 45. rysunek 9. przykład karty księgi głównej (metoda przebitkowa) symbol ……………………………. konto …………………………… strona …… data pozycja i strona dziennika treść symbol konta przeciwstawnego winien ma ź r ó d ł o : doraczyński, nowicki, wróblewski 1958: 45. metoda ta miała następujące zalety (gierusz 1997: 145): ■ ujmowanie wiążących się operacji w przekroju kont syntetycznych w jednym rejestrze, co ułatwiało orientację w przebiegu pewnych procesów, ■ możliwość wprowadzenia podziału pracy, ■ włączenie ewidencji analitycznej do rejestrów, ■ ograniczenie zapisów na kontach syntetycznych lub nawet rezygnacja z ich prowadzenia. do wad tej metody można z kolei zaliczyć (gierusz 1997: 145–146): aleksandra banaszkiewicz34 ■ małą elastyczność ewidencji księgowej (trudności w księgowaniu operacji nietypowych), ■ skomplikowaną i niedogodną formę niektórych rejestrów, ■ brak systematycznych zapisów na niektórych kontach. rysunek 10 prezentuje schemat graficzny metody rejestrowej. rysunek 10. schemat metody rejestrowej wnego na którym dokonuje się zapisu źródło: doraczyński, nowicki, wróblewski 1958: 45. rysunek 9. przykład karty księgi głównej (metoda przebitkowa) symbol……………………………. konto…………………………… strona…… data pozycja i strona dziennika treść symbol konta przeciwstawnego wini en ma źródło: doraczyński, nowicki, wróblewski 1958: 45. rysunek 10. schemat metody rejestrowej księgowanie bieżące księgowanie okresowe syntetyka dane zbiorcze (okresowe) rejestry i urządzenia analityczne rejestr rejestr kartoteka dowody źródłowe typowe (masowe) dowody źródłowe sporadyczne ź r ó d ł o : peche 1988: 227. 2.6. analiza porównawcza prezentowanych metod na podstawie zaprezentowanego materiału można wysnuć wniosek, że rozwój technik księgowania wynikał bezpośrednio z rozwoju przedsiębiorstw pod względem ich wielkości, jak i złożoności powiązań z kontrahentami. potrzeba rejestracji coraz to większej liczby operacji gospodarczych wymusiła zastąpienie jednego księgowego grupą osób, które wyspecjalizowały się w ewidencji określonych zdarzeń. na przestrzeni czasu dokładny i pracochłonny zapis zgodnie z metodą włoską został uproszczony w celu zwiększenia efektywności pracy. wprowadzane zmiany miały również na celu podniesienie przejrzystości zapisów, co osiągnięto dzięki zastosowaniu zbiornika w metodzie francuskiej. zapisy dokonywane codziennie zastąpiono wpisami dokonywanymi okresowo. pojawianie się metod zawierających w nazwie przymiotniki „włoska”, „fran  techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 35 cuska” czy „niemiecka” świadczy o zbiorowym wysiłku rozsianych po europie księgowych pracujących nad doskonaleniem technik rachunkowych. wysiłki te dotarły też za ocean, gdzie narodziła się metoda amerykańska. praca nad jej stworzeniem była ukierunkowana na oszczędność czasu i zwiększenie dokładności zapisu. jednakże pomysł połączenia dziennika z księgą główną okazał się nie najlepszy, dlatego w rozwiniętej metodzie amerykańskiej powrócono do wyodrębnienia z księgi głównej dziennika, a nawet jego podziału. małą przydatność praktyczną miała z kolei następna metoda, czyli metoda szachownicy, której istotnym mankamentem był brak czytelności wynikający z prezentacji zbyt dużej liczby kont na jednym arkuszu. zwiększenie stopnia dokładności zapisów, przy jednoczesnym zmniejszeniu możliwości popełniania błędów, osiągnięto dzięki zastosowaniu kalki. żmudną pracę księgowych ułatwiła w końcu maszyna księgująca, co niewątpliwie stanowiło punkt zwrotny w technice księgowości. polskim akcentem w doskonaleniu procesu księgowania było opracowanie tzw. metody rejestrowej. niestety, jej szersze zastosowanie okazało się niemożliwe z powodu skomplikowanej formy rejestrów. tabela 1 prezentuje charakterystykę porównywanych metod, a tabela 2 – relatywne porównanie wybranych cech opisywanych technik księgowych. tabela 1. charakterystyka porównywanych metod nazwa metody cecha charakterystyczna zapisy metoda włoska dwie księgi – dziennik i księga główna zapisy codziennie i chronologicznie nowa metoda włoska dziennik w dwóch częściach zapisy zbiorcze metoda francuska zbiornik oraz dziennik podzielony na wiele części zapisy w odstępach okresowych metoda amerykańska scalenie dziennika i księgi głównej brak konieczności przenoszenia zapisów między księgami metoda szachownicy księga główna w postaci luźnych arkuszy brak czytelności zapisów z powodu zbyt dużej liczby kont metoda przebitkowa stosowanie kalki jednoczesny zapis w księdze głównej i dzienniku metoda rejestrowa dziennik w postaci rejestrów zapisy na podstawie zestawień okresowych ź r ó d ł o : opracowanie własne. aleksandra banaszkiewicz36 tabela 2. relatywne porównanie wybranych cech opisywanych technik księgowości nazwa metody podział pracy pracochłonność przejrzystość metoda włoska brak wysoka wysoka nowa metoda włoska możliwy średnia wysoka metoda francuska możliwy średnia wysoka metoda amerykańska brak niska niska metoda szachownicy brak niska niska metoda przebitkowa możliwy niska wysoka metoda rejestrowa możliwy niska niska ź r ó d ł o : opracowanie własne.  zakończenie badacze historii rachunkowości są zgodni co do tego, że system rachunkowości podwójnej nie jest wynalazkiem jednego człowieka czy też dziełem przypadku. prawdopodobnie jest on wynikiem prób i doświadczeń podejmowanych przez wielu kupców i bankierów w różnych miastach włoskich. wspólną dla nich inspiracją była sama natura zdarzeń księgowych, czyli wymiana towarowo-pieniężna zachodząca między dwiema osobami, jak również obserwacja operacji bankowych. w czasach średniowiecza znano bowiem tzw. operacje żyrowe, które polegały na regulowaniu wzajemnych rozrachunków klientów danego banku nie za pomocą gotówki, ale bezgotówkowo, przez przeniesienie zapisów w księgach bankowych z rachunku dłużnika na rachunek wierzyciela. na podobnych zasadach funkcjonowały operacje zwane skontrem, sprowadzające się do uregulowania zapłaty za pomocą przelewu wierzytelności. prawidłowe zapisanie w księgach bankowych zapłaty w postaci żyra lub skontra wymagało dokonania zapisu na dwóch różnych kontach depozytowych, w tej samej kwocie i po przeciwnych stronach. z czasem taki sposób zapisu zaczął być używany także w przypadku innych operacji, co dało początek księgowości podwójnej (kawa 1987b: 20). na przestrzeni wieków szukano również jak najlepszego pod względem technicznym zapisu zdarzeń gospodarczych w księgach handlowych.   techniki prowadzenia ksiąg rachunkowych w ujęciu historycznym 37  literatura alexander j. r. (2012), history of accounting, http://www.acaus.org/ (dostęp: 13.10.2012). byszewski w. (1912), krótki rys rachunkowości (buchalterji), gebethner i wolff, warszawa. doraczyński j., górski j. (1956), organizacja rachunkowości w przemyśle, studium zaoczne rachunkowości, warszawa. doraczyński j., nowicki a., wróblewski j. (1958), schematy do podstaw rachunkowości, polskie wydawnictwa gospodarcze, warszawa. gierusz b. (1997), podręcznik samodzielnej nauki księgowania, oddk, gdańsk. gleich e. i. (1952), podstawy księgowości, polskie wydawnictwa gospodarcze, warszawa. gmytrasiewicz m. (1978), zasada podwójnego zapisu, zeszyty teoretyczne rady naukowej, t. 2, warszawa. hendriksen e. a., van breda m. f. (2002), teoria rachunkowości, pwn, warszawa. kardasz a. (2002), twórcy rachunkowości w polsce, zeszyty teoretyczne rachunkowości, t. 11 (67), stowarzyszenie księgowych w polsce, rada naukowa, warszawa. kawa m. (1987a), pochodzenie i funkcja semantyczna terminów „winien – ma” w księgowości podwójnej, zeszyty teoretyczne rady naukowej, t. 12, warszawa. kawa m. (1987b), geneza podwójnego zapisu księgowego, zeszyty teoretyczne rady naukowej, t. 13, warszawa. kawa m. (1994), autodynamizm rachunkowości, zeszyty teoretyczne rady naukowej, t. 28, warszawa. łuczaj j. (2003), ewolucja rachunkowości w polsce w warunkach globalizacji, [w:] historia, współczesność i perspektywy rachunkowości w polsce, s. sojak (red.), toruń. matuszewicz j., matuszewicz p. (2001), rachunkowość od podstaw, finans-servis, warszawa. niemski k. (1947), teoria i technika księgowości przedsiębiorstw, książka, warszawa. peche t. (1988), teoretyczne podstawy rachunkowości, pwe, warszawa. scheffs m. (1939), z historii rachunkowości (luca pacioli), księgarnia wł. wilak, poznań. skrzywan s. (1971), teoretyczne podstawy rachunkowości, pwe, warszawa. wojciechowski e. (1964), zarys rozwoju rachunkowości w dawnej polsce, pwn, warszawa. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: february 7, 2016; date of acceptance: may 8, 2016. * contact information: epapazov@gmail.com, faculty of business and management, university of ruse, 8 studentska str., ruse-7017, bulgaria, phone: +359879005316. ** contact information: lmihaylova777@gmail.com, faculty of business and management, university of ruse, 8 studentska str., ruse-7017, bulgaria, phone: +359879005325. papazov e., mihaylova l. (2016). accountancy-based sources of information for planning purposes in smes. copernican journal of finance & accounting, 5(1), 173–183. http://dx.doi.org/10.12775/ cjfa.2016.010 emil papazov* university of national and world economy, sofia & university of ruse, bulgaria lyudmila mihaylova** university of ruse, bulgaria accountancy-based sources of information for planning purposes in smes keywords: smes, business planning, accountancy-based sources of information. j e l classification: m21, m40. abstract: the present paper’s research objective is to reveal the specifics and capabilities of the accountancy to serve as an information base for planning of the business of smes. in this regard, a research method (a survey) focusing on study of documentation in a number of bulgarian smes has been carried out. based on the results gained after the implementation of the research method, main sources of information for planning purposes in smes have been synthesized and evaluated. the main conclusions are that due to relatively high level of quality, actuality and availability, the accountancy-based data can constitute a major source of information for planning purposes in smes. emil papazov, lyudmila mihaylova174  introduction planning is a complex process directed to preparing of managerial decisions for different types of organization. notwithstanding the attempts to understate the role of plans for developing of complex systems, the dissemination of planning activities has recently grown up. at the same time, the methodology of planning has not altered in pace with the changes in the economic environment. planning approaches, methods and techniques has not ref lected the inf luence of certain realities typical for the modern business such as the increasing role and importance of small and medium-sized enterprises (smes) for the economic development. to the range of similar discrepancies can be added also those associated with the necessary information for practical application of appropriate planning tools (papazov, mihaylova 2014; papazov, mihaylova 2010; simeonov, lambovska 2012; germanos, pliota, germanou 2013). the accumulation and the usage of information stemming from different sources and the application of f lexible planning methods, developed and / or adapted to the requirements and specifics of the smes are problems that are not solved yet fully. the mechanical transfer of approaches, methods and techniques from large companies to small and medium-sized enterprises cannot be recommended, as their application for planning purposes in smes does not render the expected results (papazov 2014). a second major reason is the lack of connection or synchronization between planning and accountability in smes. having in mind the outlined range of issues, the emphasis of the present paper is put on the capabilities of company’s accountancy to provide information needed for the business planning in smes. the purpose is, based on the results of a study in a number of bulgarian smes, to synthesize the main sources of accountancy information that can be used for planning activity and to evaluate them in view of their actuality, quality and accessibility. research premises and the focus of the research process corporate planning requires basic information sources. they are diverse by nature and by relevance with a company. in a paper written in compliance with quantitative limitations it is difficult to analyze all possible information sources. however, having in mind the research purpose, an attempt has been made to synthesize main information sources and to present some of their characteristics. accountancy-based sources of information… 175 a main difficulty comes out from the fact that some of the information needed for managerial decision making in smes is acquired through informal channels. managers do often consultations with the company’s personnel, talk with colleagues, customers and suppliers, and inform themselves from newspapers or specialized editions. such sources of information are very useful, but they cannot always be used directly in the process of decision making, because they allow no proper integration with the overall planning construct. contemporary managers are experiencing a serious need to find formal ways to collect and process managerial information for planning purposes. the reason is that the amount of data increases in parallel with the size of the enterprise and the information f lows become infinite and uncontrollable, if are not properly canalized. it is best to organize these f lows in a system often called strategic enterprise information system (seip). in the practice of company management a strategic enterprise information system is perceived not only as a formalized structure to provide strategic planning horizon. it serves as a starting point for implementation of other planned activities possessing tactical and operational characteristics. additionally, seip is expected to dispose information about the past, present and future, albeit with a certain degree of conditionality. thus, it should cover all processes in an organization, including events running beyond it, but connected with its activities. the most important thing is to provide information for making decisions to the right person, at the right time and the right place. the providing of timely, accurate and detailed information for planning purposes, corresponding to the specifics of the smes, can be performed only by well-organized economic reporting in its diversity as operational, statistical and accounting. as a rule, for making rational strategic, tactical, and operational decisions the management needs a sufficient amount of reporting information with a respective quality. for the different types of managerial decisions the necessity of such information is not in equal proportions. practically, it is difficult to accurately measure the amount of the reporting information needed for planning purposes in a sme. the often emerging imbalances appear in form of shortage or surplus of information. it is necessary to look for an optimal ratio between the maximum and the minimum of the reporting information volume needed, which will greatly improve the process of the corporate planning. the qualitative aspect of the reporting information is connected with its usefulness, i. e. with the possibility to contribute to the working out of a paremil papazov, lyudmila mihaylova176 ticular managerial decision. thus, according to the needs in making management decisions, accountancy information can be detailed to varying degrees. for example, strategic decisions are slightly differentiated and are based on generalized information about markets, products, resources and technologies, while operating decisions are highly differentiated and are based on detailed information with precise parameters for revenues, fixed costs, variable costs, etc. (papazov, mihaylova 2010; peršić, bakija, vlašić 2015; ciemleja, lāce 2009; kocmanová, simberova 2014; raulinajtys-grzybek, świderska 2014; dziawgo 2014). the first attempt to synthesize main sources of information for corporate planning purposes in bulgarian smes has been made in a study published in 2002 by a team of researchers in the field of entrepreneurship (todorov, kolarov, ruychev 2002). however, the outcome of this study concentrates only on external (from the company’s point of view) sources. three indicators have been used for evaluation of the different sources, i. e. accessibility, quality and actuality1. also, for each of these indicators a three-tier grading scale2 has been applied. the synthesis of the main external sources for information provision of company planning together with their evaluation is presented in table 1. table 1. main (external) sources for information provision of company planning source official statistics information about …. demographic data, macroeconomic data, industry data, regional data, data on income, data on prices, data on consumption, etc. examples “statistical yearbook”, yearbook „population”, yearbook „social and economic development”, yearbook „employment and unemployment”. accessibility – 3 quality – 2 actuality – 2 1  the essence of the indicators defined by the above-metioned study are as follows: – accessibility – determined by the time and resources required for the use of the source. – quality – determined by the authenticity of the information and its applicability to the specific needs of the entrepreneur. – actuality – determined by usability at present. 2  three-tier grading scale has the following levels: – 1 – low; – 2 – satisfactory; – 3 – good. accountancy-based sources of information… 177 source newspapers information about …. trends in the economy and industry, information for competitors, social trends, changes in consumer preferences and habits, etc. as an example newspapers “kapital” and “dnevnik”; the official gazette accessibility – 3 quality – 1 actuality – 2 source magazines information about …. specialized sector information, trends in the economy and industry, information for competitors, social trends, changes in consumer preferences and habits, etc. examples the magazines “manager”, “economic thought”, “economic alternatives”, “izvestiya”, “business management” and other specialized publications. accessibility – 3 quality – 2 actuality – 2 source electronic media information about …. trends in the economy and industry, information for competitors, expert opinions, etc. examples tv channels, radio accessibility – 3 quality – 1 actuality – 3 source internet information about …. any type of information examples websites of competitors, specialized economic information portals accessibility – 3 quality – 1 actuality – 2 source competitors information about …. price data, information on products and technologies, information on competitor’s strategies, information on the quality of competing products. examples providing “false” offers, “mystery shoppers”, purchase of samples from competitors, visit to seminars, fairs, exhibitions, etc. accessibility – 1 quality – 3 actuality – 3 source branch organizations information about …. information on patents, licenses, “know-how”, duties, fees, taxes, information on manufacturers of equipment and materials, information on external markets, etc. examples bcci, bia, the association of dairy processors in bulgaria, the association of meat processors in bulgaria, federation of bakers and confectioners in bulgaria, regional winery chamber and others. accessibility – 2 quality – 2 actuality – 2 emil papazov, lyudmila mihaylova178 source public administration information about …. macroeconomic data, data on government projects and programs, incl. public procurement, economic and social trends, etc. examples ministry of economy, bsmepa, website of the council of ministers, bulgarian national bank, etc. accessibility – 2 quality – 3 actuality – 2 source branch experts information about …. price data, information on products, technology, strategies of enterprises, information on the quality of products produced by various manufacturers. examples consultants, project partners and others. accessibility – 2 quality – 3 actuality – 3 source observation information about …. consumer data, information on competitors, information on demand for certain groups of products, details of certain economic activities and more. examples business survey in industry, construction, trade and services; business survey on investment activity in industry; consumers and others. accessibility – 1 quality – 3 actuality – 3 source own questionnaire survey information about …. data on consumer demand and customer preferences, propensity to buy new products, etc. examples business surveys of industry, construction, trade and services; investment activity in the industry, the users, etc. accessibility – 1 quality – 3 actuality – 3 source specialized software information about …. data for competitors, data for suppliers, etc. example the “compass” program. accessibility – 2 quality – 2 actuality – 2 s o u r c e : study based on todorov, et al., (2002), rykovodstvo za startirane na sobstven biznes v sferata na uslugite, sofia, 108-110. the above-presented table shows that the internal sources (including the enterprise accountancy with its diversity and importance for the company’s planning) have been excluded from the scope of the study. for this reason, based on the results of an additional survey conducted among a representative sample of smes in bulgaria in 2015, an analysis and a synthesis of basic inter accountancy-based sources of information… 179 nal sources of information for corporate planning, related to the accountancy system of the enterprise, have been made. то ensure continuity with the previously cited study, the new one uses the same indicators of accessibility, quality and actuality. the assessment of these indicators is made analogically with the same three-tier scale. research methodology a survey has been carried out on the basis of a pre-established organizational plan, which specifies the units, the time and the place of observation, the method of recording and reporting of data, the forms of organization, the opportunities for mistakes, etc. the sample consists of smes from different sectors located in the region of ruse, north-eastern bulgaria. in view of the specific research, the units of observation are 49 smes and the period of observation is from january to october 2015. the investigated companies should have had at least three years of business experience to guarantee that they have already passed the initial stage of survival. the outcome of the research process and proposals the results based on the undertaken survey are summarized in table 2. along with the characteristics of the accountancy-based internal information sources for information provision of company planning, their degree of accessibility, quality and actuality has also been evaluated. table 2. main accountancy-based sources for information provision of company planning source synthetic and analytical accounts information about financial resources the information shows all receipts and payments. the cash flow for a certain period serves to the liquidity planning of the enterprise and fixes the terms of payment by counterparties. financial resources include cash and cash equivalents. examples accounts “cash in bgn”, “cash in foreign currency”, “current accounts in bgn”, “current accounts in foreign currency”, “letters of credit in national and foreign currency”, “deposits”, “cheques”, “cash and cash equivalents”, “financial current assets”, “treasury bonds”, “government securities”, “precious metals and stones”. accessibility – 3 quality – 3 actuality – 3 emil papazov, lyudmila mihaylova180 source synthetic and analytical accounts information about receivables the information about receivables is very important for making decisions for deferred revenues and for maintaining good relationships with customers. the analysis of this information is indicative of the enterprise liquidity and its policy on collection of receivables from customers. receivables from customers on the instalment plan are a way to increase sales, but in fact they “block” receipt of funds. as a result, a need for additional cash resources may arise, the risk of uncollectible receivables increase and additional costs on receivable’s collection grow, etc. liquidity of a sme depends on the nature, grade and allocation of the receivables, the term of their collection, etc. examples accounts: “receivables from customers”, “receivables from suppliers for advances”, “receivables on trade credits”, “receivables on sales under certain conditions”, “receivables on sales with related parties”, “receivables from participating interests”, “receivables on complaints”, “receivables on shortages and deficiencies”, “receivables on litigation”, “receivables on sentence”, etc. accessibility – 3 quality – 2 actuality – 2 source synthetic and analytical accounts information about inventories and valuables (current assets) the information is important for planning of inventories for a certain period of time and as well as controlling of their consumption and storage. thanks to this detailed information, the planning of any current asset needed is possible and correct. the essential point in planning is that the volume of materials has to be based on the planned product mix, sales and production. the volume of current assets should allow the achieving of enterprise’s goals, continuity of sales and effective use of working capital. the planning of inventories and valuables requires the use of natural and value indicators. examples accounts: “basic materials”, “additional materials”, “fuel”, “semi-manufactured articles”, “spare parts”, “stationery”, “production”, “goods”, “small productive animals”, “swarm of bees”, “young animals”, “animals for fattening”, etc. accessibility – 3 quality – 2 actuality – 3 source synthetic and analytical accounts information about fixed assets the information shows the original cost of each fixed asset, the accumulated depreciation and its net book value. because of the ongoing depreciation, the net book value of a fixed asset is always declining. depending on the organization of the accounting, additional information necessary for planning (such as the status of each asset, its technological level, etc.) can also be displayed. the information about fixed assets is connected with: assessing of the extent of use of available assets; determination of the need for additional investment (by types) in order to achieve strategic objectives; evaluating of the investment and depreciation policies and their planned changes; determination of financial resources to ensure the planned investments, etc. examples accounts: “land”, “forests”, “perennial plants – fruit-bearing”, “perennial plants – non fruit-bearing”, “draught animals”, “buildings and structures”, “machinery and equipment”, “transport vehicles”, “office furnishing”, “equipment”, “computer equipment”, “other tangible fixed assets”, “r&d products”, “intellectual property rights”, “software”, “industrial property rights”, etc. accessibility – 3 quality – 3 actuality – 3 source synthetic and analytical accounts information about liabilities the information for liabilities shows their type and characteristics; who is the supplier; what is the deferral in payment, etc. the analysis of this information is an indicator for liquidity and indebtedness of the enterprise, as well as for its net working capital. accountancy-based sources of information… 181 examples accounts: “customers on advance payment”, “liabilities to suppliers”, “liabilities to suppliers on trade credits”, “liabilities to suppliers under certain conditions”, “liabilities to suppliers with related parties”, “liabilities to the staff”, “liabilities for unused annual leave”, “liabilities to participating interests”, “liabilities to the municipality”, “liabilities for income tax”, “vat liabilities”, “liabilities for taxes on income of individuals”, “liabilities to ministries”, “liabilities for excise”, “liabilities to customs”, “liabilities to nssi”, “liabilities under the voluntary social insurance”, “liabilities for health insurance”, “liabilities for one-time aid and family allowance”, “liabilities to international financial institutions”, “liabilities to creditors”. accessibility – 3 quality – 3 actuality – 3 source synthetic and analytical accounts information about expenditure the information about expenditures is directly related to decision-making in smes. planned amount of costs has to be determined on the base of respective statements on individual items of expenditure – this is a planning requirement. in the coming periods, thus determine more precisely the expenditures changes, disclose and indicate possibilities and ways for their reduction and achieving relative savings for the enterprise. an important indicator for the smes is the cost effectiveness. it gives the opportunity to compare companies on sector and sub-sector level and to plan strategic moves. examples accounts: “material expenditure”, “external service expenditure”, “depreciation”, “salaries”, “social costs”, “taxes and similar payments”, “expenditure for provisions”, “expenditure from the revaluation of assets”, “other expenditure”, “operating costs”, “costs for supporting activities”, “costs for acquisition of fixed assets”, “administrative costs”, “cost of sales”, “liquidation costs of fixed assets”, “interest”, “operations with financial assets and instruments”, “expenses on foreign currency transactions”, “impairment expenses”, “non-financial expenses for future periods”, “financial expenses for future periods”, “extraordinary expenses”. accessibility – 3 quality – 3 actuality – 3 source synthetic and analytical accounts information about revenue it is important for the information for revenues of smes to be structured by products (services) and business activities. essential is that the net sales revenue have to be in accordance with the chosen business strategy. for a sme, an important indicator is the effectiveness of revenue, which is an alternative indicator of the cost effectiveness. the index is also suitable for comparisons on sectoral and sub-sector level and for planning of future strategic moves. examples accounts: “revenues from sales of products”, “revenues from sales of goods”, “revenues from sales of services”, “financing”, “revenues from sales of fixed assets”, “revenues from sales of materials”, “other revenues”, “interest income”, “income from participating interests”, “income from operations with financial assets and instruments”, “income on foreign currency transactions”, “income from revaluation of financial assets and instruments”, “income from impairment losses reversed”, “extraordinary”. accessibility – 3 quality – 3 actuality – 3 s o u r c e : own study, 2015. on the basis of the synthesis of the accountancy-based sources, a generalization concerning the role of accountancy-based information in the planning process of smes can be outlined: ■ accountancy-based sources can contribute essentially to the assessment of a situation when reliable internal and external data is needed. emil papazov, lyudmila mihaylova182 ■ accountancy-based sources possess a high level of f lexibility needed for different financial analyses. ■ accountancy-based sources ensure a quick reaction to timely plan income, expenses, investments and funding. ■ accountancy-based sources guarantee a non-error work and does not require frequent adjustments in the estimates of income and expenditure and the formed financial result. ■ accountancy-based sources constitute an irreplaceable instrument for preparing of good plans and their successive implementation. there is also a room for concrete proposals concerning the adapting of information for planning purposes in smes. as examples the following two can be resumed: ■ stemming from the movements in the accounts ref lecting receivables, a scheme for cash inf lows by months can be set up. ■ based on movements in the accounts ref lecting liabilities to suppliers, a scheme for the cash outf lows by months can be formed. the conclusions from the research a rapidly changing environment makes it difficult to determine, which sources support mostly planning activities in smes. a systematization of the main information sources contributes essentially to the good quality of plans and affects the efficient running of the whole planning process. accountancy represents a system for measuring the activity of an enterprise with view of providing a variety of information. some authors (drury 2005; bramford and bruton 2006; pyka 2015) define accountancy primarily as a means for internal (with the management) and external (with the stakeholders) communication of an enterprise. from the systematization of the sources of accountancy information and their evaluation, offered in this study, it becomes clear that due to their relatively high level of quality, actuality and availability, the accountancy-based data can constitute a major source of information for planning purposes in smes. accountancy-based sources of information… 183  references bramford, c., & bruton, g. (2006). a framework for success: small business management. united states of america: thomson south-western. ciemleja, g., & lāce, n. (2009). sme performance management using life cycle stage concept. in: мировая экономика и бизнес-администрирование: 5-я международная научно-практическая конференция, belarus, minsk, 28-30 may, 2009. minsk: bntu, 119-127. drury, c. (2005). management and cost accounting. 6th ed. london: thomson southwestern. dziawgo, l. (2014). greening financial market. copernican journal of finance & accounting 3 (2), 9-23. http://dx.doi.org/10.12775/cjfa.2014.014. germanos, g, pliota, t., & germanou, e. (2013). a qualitative approach of strategy formulation of greek small-medium (sme) companies in times of crisis from an accounting perspective. in: proceedings of the 3rd international conference: quantitative and qualitative methodologies in the economic & administrative sciences, greece, athens, 23-24 may, 2013, 192-202. kocmanová, a., & simberova, i. (2014). determination of environmental, social and corporate governance indicators: framework in the measurement of sustainable performance. journal of business economics and management 15 (5). papazov, e. (2014). a “reverse” approach to coordination of strategic and tactical financial decisions for small business growth. procedia social and behavioural sciences, 156, 161–165. papazov, e., & mihaylova, l. (2010). information provision for strategic planning in bulgarian smes. review of international comparative management, 11 (4), 575-581. papazov, e., & mihaylova, l. (2014). linking accounting information with business planning in bulgarian smes. paper presented at the 8th international management conference: management challenges for sustainable development. bucharest, romania, 321-327. peršić, m., bakija, k., & vlašić, d. (2015). framework for improving quality and comparability of non-financial reporting system. copernican journal of finance & accounting 4 (2), 109-127. http://dx.doi.org/10.12775/cjfa.2015.019. pyka, i. (2015). balance sheet policy of central banks in the conditions of the exit strategy of central banks. journal of economics and management – university of economics in katowice 21 (3), 110-127. raulinajtys-grzybek, m., & świderska, g. (2014). object-based costing as an important tool for the economic analysis of sustainable development. copernican journal of finance & accounting 3 (1), 135-144. simeonov, o., & lambovska, m. (2012). a suggestion about potentialities for the swot analysis’s development concerning threats. ekonomika a management / e+m economics & management, (2), 94-103. todorov, k., kolarov, k., & ruychev, s. (2002). rykovodstvo za startirane na sobstven biznes v sferata na uslugite, sofia, bulgaria, 108-110 (in bulgarian). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: november 27, 2016; date of acceptance: january 15, 2017. * contact information: murawski.tomasz@gmail.com, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: +48 889 307 510. murawski, t. (2016). corporate social responsibility in japanese banking sector. copernican journal of finance & accounting, 5(2), 149–161. http://dx.doi.org/10.12775/cjfa.2016.020 tomasz murawski* nicolaus copernicus university corporate social responsibility in japanese banking sector keywords: corporate social responsibility, bank, banking sector, reporting. j e l classification: g21, m14, g15. abstract: the concept of csr is developed in the theory of economics and management from the 50s of the last century. in practice, the banking industry uses it for many years. the evolution of the banking sector caused the emergence of new services and products that are integrated with the philosophy of csr. in japan, each of the bank you can see the relationship between business, society and the environment. this activity follows the tradition and adopted a philosophy that is both fostered and developed. article will present examples of major japanese banks on this plane.  introduction over the recent years corporate social responsibility (csr) has become a new concept for the banking sector. community particularly gives the pressure to rebuild areas in which banks operate. the objective of this paper is to show how banking sector in japan identify csr. this term is in asia wide recognized and for many years enterprises implemented in own activity the best practices in this area. the last crises temporarily upset the market, but csr and reporttomasz murawski150 ing about the responsibility becomes the standard practice. however present time banks recognize the importance of assuring non-financial information in reporting. all of the world’s largest banks and over 80% of smaller banks are reporting on corporate responsibility. (kpmg 2016) this trend has also been touched japan. article included the positive examples, however the author, in aim of objective look on data it will bring up also negative aspects of this activity. this article presents a view about relationship between corporate social responsibility principles and application by the largest banks in japan. the research methodology and the course of the research process in this article the author attempts to describe experience of the japanese banks in csr and with all aspects relating to it. this study will first present the wide concept and data of corporate responsibility activity on financial market in japan. the theoretical analysis is based on then currently sustainability reports, global reports of international organizations, which take care subject-matter of social responsibility, sustainable development or ethics. additionally, were analyzed products of banks in the context of coherence with the spirit of csr. next it will present the comparison of the japanese and world main growth indicators and the numbers of csr reports. this analysis will allow to verify the hypothesis of no long-term impact of the crisis on activity in the area of csr reporting. csr in japan there are however differing views on how csr is viewed by several countries and/or companies. although the functioning of the term csr for many years, in various parts of the world there are a variety of its origin. in japan social responsibility is strongly associated with the concept of sanpo yoshi. (takahashi, 2009) this philosophy literally means “three-way satisfaction”. this satisfaction refers to the three dimensions: sellers, buyers and society. nowadays any japanese company positioned its csr policy to these three areas. this approach is consistent with the classical model of csr, which involves four impact areas: market, environment, employee, company (murawski, 2009). however, differences resulting from the approach not to affect the perception of a similar impact corporate social responsibility activities. corporate social responsibility in japanese banking sector 151 scheme 1. types of areas in sanpo yoshi and classical model o csr source: own work based on: takahashi, 2009, pp. 107-118. the all philosophy sanpo yoshi is closed in one message, that merchant from 18. century jihei nakamura, has got describe in own essay to his grandchild (japan’s policy for csr, 2012, p. 1) “when you go abroad to do business, it is most important to always keep in mind:  to make sure that the garments you are selling satisfy all customers in that country;  think and act customers first;  never aim for a short term high profit;  be humble that you are dependent on god’s blessing;  do business with a caring mind for the people in the region;  never lose faith in god in order not to have a malicious mind. by so doing, you are in line with reason and will be able to keep a healthy body and mind.” these words are the essence of the japanese approach to csr. many years have passed since the inception of these words. a lot has changed in that time. the change also underwent approach to corporate social responsibility. various crises caused temporary disturbances on the market. currently, the concept of csr has strong support of government. key players to promote csr in japan are (japan’s policy for csr, 2012, pp. 5-14):  the ministry of economy, trade and industry – he is as csr leader and is responsible for internal control, compliance with regulations and risk management, improvement of corporate competitiveness, human resources and corporate brands, and mostly for the promotion of csr,  the cabinet office created report by the study group on social responsibility for a safe and comfortable. sustainable future,  the ministry of the environment and ministry of health, labor and welfare – they are responsible for all cases in labor and environment areas. these public authorities are the sanpo yoshi sellers buyers society (local community) s o u r c e : own work based on: takahashi, 2009, pp. 107–118. the all philosophy sanpo yoshi is closed in one message, that merchant from 18. century jihei nakamura, has got describe in own essay to his grandchild (japan’s policy for csr, 2012, p. 1): “when you go abroad to do business, it is most important to always keep in mind: ■ to make sure that the garments you are selling satisfy all customers in that country; ■ think and act customers first; ■ never aim for a short term high profit; ■ be humble that you are dependent on god’s blessing; ■ do business with a caring mind for the people in the region; ■ never lose faith in god in order not to have a malicious mind. by so doing, you are in line with reason and will be able to keep a healthy body and mind.” these words are the essence of the japanese approach to csr. many years have passed since the inception of these words. a lot has changed in that time. the change also underwent approach to corporate social responsibility. various crises caused temporary disturbances on the market. currently, the concept of csr has strong support of government. key players to promote csr in japan are (japan’s policy for csr, 2012, pp. 5–14): ■ the ministry of economy, trade and industry – he is as csr leader and is responsible for internal control, compliance with regulations and risk management, improvement of corporate competitiveness, human resources and corporate brands, and mostly for the promotion of csr. ■ the cabinet office created report by the study group on social responsibility for a safe and comfortable. sustainable future. ■ the ministry of the environment and ministry of health, labor and welfare – they are responsible for all cases in labor and environment areas. tomasz murawski152 these public authorities are the authors of environmental report guideline and interim report by the study group on the way of csr in labor. a lot of work that has gone into education about csr, were squandered, because some slogans were devalued. the meaning of social responsibility concept is still not well understood by the corporate management. they try to implement a lot of initiatives under then csr banner and part of these activities is only pr strategies. responsible business leaders support long-term projects about sustainability (ushijima, 2016). figure 1. number of reports of companies from asia region and only from japan submitted to gri 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 japan 8 24 21 19 23 32 96 134 183 208 245 332 324 354 375 365 asia 9 28 34 29 44 65 152 244 395 516 666 964 1191 1375 1500 1669 % japan/asia 89% 86% 62% 66% 52% 49% 63% 55% 46% 40% 37% 34% 27% 26% 25% 22% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 200 400 600 800 1000 1200 1400 1600 1800 japan asia % japan/asia s o u r c e : own work based on: gri research data, 2016. one of the levels of engagement in csr is reporting and measuring of engagement. companies build shareholder value in long-term perspective by engaging with stakeholders and by taking the impact of business on the society and environment. japan since the beginning of the publication of the report kpmg1 was the leader, not only in asia area, but also worldwide (kpmg, 2015). 1 “the kpmg survey of corporate responsibility reporting” is published since 1993. till 2015 was nine edition of the report. corporate social responsibility in japanese banking sector 153 the analysis of reports (e.g. global reporting initiative (gri)) allow for a conclusion that the trend of the share of published reports is satisfactory. although the number of reports does not grow significantly, but it should be noted, that japan started as the leader and the for several years remaining asian countries have begun to develop in this area. recent data indicate that 22% of reports in 2015 from the asian region was published by japanese companies (gri research data, 2016). banking sector in japan japanese banking system has a specific structure. on the top of the system is a bank of japan (boj) as a central bank, which was founded in 1882. the bank operates under the “bank of japan act” and it has placed two tasks: to achieve price stability and guarantee the stability of the financial system (boj annual review, 2016). scheme 2. banking system in japan japan started as the leader and the for several years remaining asian countries have begun to develop in this area. recent data indicate that 22% of reports in 2015 from the asian region was published by japanese companies (gri research data, 2016). banking sector in japan japanese banking system has a specific structure. on the top of the system is a bank of japan (boj) as a central bank, which was founded in 1882. the bank operates under the “bank of japan act” and it has placed two tasks: to achieve price stability and guarantee the stability of the financial system (boj annual review, 2016). scheme 2. banking system in japan source: own work based on: financial services agency, 2016. the banking system, except central bank, included also citi banks, regional banks, trust banks, foreign banks, bank holding companies and shinkin banks. the citi banks are group of 4 megabanks: mizuho bank,ltd., sumitomo mitsui banking corporation, the bank of tokyo-mitsubishi ufj,ltd. and resona bank, ltd.. their task is to finance large companies and activity on the international financial market. regional banks is a group of more than 100 institutions across the country. their target group is small and mediumsized enterprises and individual customers. as the name implies focus their business on local markets. the next member of japanese banking system is trust banks. trust bank is an institution which offer a wide investment and banking services to corporate and individual customers. currently there are 16 banks with the above profile. in japan also they have branches foreign banks. according to data for october 2016 there were a total of 53 banks from 25 countries. another participant is the bank holding companies, or 20 companies that have in its portfolio one or more banks. the last but not least group are shinkin bank of japan (boj) citi banks regional banks trust banks foreign banks bank holding companies shinkin central bank shinkin banks s o u r c e : own work based on: financial services agency, 2016. the banking system, except central bank, included also citi banks, regional banks, trust banks, foreign banks, bank holding companies and shinkin banks. the citi banks are group of 4 megabanks: mizuho bank,ltd., sumitomo mitsui banking corporation, the bank of tokyo-mitsubishi ufj,ltd. and resona bank, ltd.. their task is to finance large companies and activity on the international financial market. regional banks is a group of more than 100 institutions across the country. their target group is small and medium-sized enterprises and individual customers. as the name implies focus their business on local markets. the next member of japanese banking system is trust banks. trust bank is an institution which offer a wide investment and banking services to corporate and individual customers. currently there are 16 banks with the above profile. in japan also they have branches foreign banks. according tomasz murawski154 to data for october 2016 there were a total of 53 banks from 25 countries. another participant is the bank holding companies, or 20 companies that have in its portfolio one or more banks. the last but not least group are shinkin banks. they are cooperative regional institutions that offer products to small and medium enterprises and local community and they’ve got own central bank – shinkin central bank. (financial services agency, 2016). table 1. top 10 banks in japan rank company total assets on 30.06.2016 in us$b 1 mitsubishi ufj financial group 2 901 340 2 japan post bank 2 022 020 3 mizuho financial group 1 923 720 4 sumitomo mitsui financial group 1 764 690 5 norinchukin bank 999 623 6 sumitomo mitsui trust holdings 580 308 7 resona holdings 451 283 8 concordia financial group 177 295 9 fukuoka financial group 172 537 10 chiba bank 134 658 s o u r c e : banks in japan, 2016. in the history of the japanese banks listed are manifold turbulence. there were periods of prosperity, but also a time a speculative bubble, as in the 90s of the twentieth century. after years of crises and restructuring of the banking sector once again has created large organizations at various levels. an interesting phenomenon that takes place since 1990, is the system of m&a in the banking. the crisis has contributed to the formation of large universal banks, and the government rescue program supported m&a in banking sector (miklaszewska, 2012). social responsibility of japanese banks mitsubishi ufj financial group (mufg) is the largest banking group in japan. the history of the group dates back to 1880 and over the years was associated corporate social responsibility in japanese banking sector 155 with mergers and acquisitions, not only in the banking market. size does not bother them to put not only the financial targets but also csr goals. in the business plan for the years 2016–2017 entered into a vision, which is also a medium-long term target “be the world’s most trusted group”. this corporate vision and principles of ethics and conduct make up the perception of csr in the company. before they can be discussed further actions and initiatives in this field, should indicate a very strong relationship management, organization structure and the structure of csr. mitsubishi ufj financial group has established the corporate social responsibility committee. the main task is to promote group-wide csr activities (mufg, 2016a). mufg operates in many areas of corporate social responsibility. first of example is customers’ area. mufg implements a quality management and monitoring customer feedback. bank wants to know the customer feedback at every stage of the operation of the product or service. at the same time as creating new services to be the most customer-oriented and responsive to his suggestions. by making branches barrier-free, the mufg group is opening to elderly and the disabled (mufg, 2016a). another area is community. mufg is the initiator of global volunteer month, and is engaged in csr activities in every part of the world. additionally, leads educational activities in the field of finance and ecology through cooperation with schools, universities and foundations. simultaneously mufg is engaged in social contribution activities through collaboration with the organization for industrial, spiritual and cultural advancement-international (oisca). the training concern ae. about sustainable organic farming techniques (mufg, 2016a). the next area is human resource strategy. the strategy describes a lot of possibilities for activities that are aimed at good employee. one example is the widely understood work life balance, which manifests itself in two approaches: child care and medical care. another example is the hiring of people with disabilities or caring for equality in filling management positions (mufg, 2016a). the last but not least initiative is responsible finance. in this area, mufg group offers a wide range of support. one of the activities are project finance that focus on renewable energy sources and new know-how. bank of tokyomitsubishi ufj arranged 35 billion yen in project financing for solar power generation project in miyazaki prefecture. the power plant will have a total generation capacity of 96.2 mw, which helps to provide power to 30 000 japanese households a year. engaging in green-activities mufg was ranked no. 2 in the tomasz murawski156 global project finance lead arranger table for renewable energy. mufg actively promotes public-private financial partnerships that leverage subsidies and other national government support programs. bank of tokyo-mitsubishi ufj offers subsidized loans, which can be used for different purposes: promotion of upgrading facilities to improve energy efficiency, for the purchase of energyefficient ships (to the use of high-efficiency diesel engines) or for another green projects, an example reducing co2. in 2015, there were 21 such projects, which together contributed to a reduction of 250,000 tons of co2, and the economic dimension of these actions has been calculated at 5.5 billion yen. the next type of responsible financial engagement is esg investment (investment management that focuses on the environment, society, and governance) and green bonds. mitsubishi ufj trust and banking began offering customers investing in companies with clear social responsibility policies and programs and strong corporate governance systems. this strategy allows to increase returns over the mediumto long-term. the whole operation contributes to reducing the risk (mufg, 2016a). the last idea, which launched on september 2016 is mufg grenn bond initative. mufg’s green bond will be used to finance projects focused on the generation of renewable energy, specifically solar and wind energy (mufg, 2016b). this initiative confirms that in today’s financial world increasingly recognized the creation of green products and services (dziawgo, 2014). to be objective it should be noted that within the group there is also not glorious information. the bank of tokyo-mitsubishi ufj in 2013 and 2014 take a role in routing payments for iranian customers through the new york branch. it was in violation of united states sanctions. first settlement was reached for $250 million and second form $315 million. in the matter involved it was also one of the audit firm pricewaterhousecoopers (protess, silver-greenberg, 2014). sumitomo mitsui financial group (smfg) is an example of a company that the main objective of the company is committed to the good, the good of the country and welfare of the region. the vision of the company is included in the sentence: “becoming the highly trusted global financial group which leads japan and asia, and grow along with clients” (smfg, 2015, p. 6). the csr strategy group entered into new priorities, which is to be areas of action for the next 10 years. the new themes: environment, next generation and community, are the three pillars of socially responsible activity of the company and at the same time they are related to the gri reporting (smfg, 2015). corporate social responsibility in japanese banking sector 157 first is the approximate topics in the field of environment. the main goal is to promote of environmental management integrated with business. in sumitomo mitsui financial group is an environmental management system (ems). smfg has developed the organizational structure to promote ems, because the major companies of group operating system based on iso 14001 certification. another factor is to reduce the impact of group’s activities on the environment. in this area, there have been many initiatives that can be classified as working of eco-office. one of the head buildings – smbc east tower – underwent the following improvements: utilization and preservation of nature, implementation of highly efficient systems, reduction of adverse environmental effects and creation of a sustainable building. these solutions expected to reduce approximately 35% of co2 emission. another improvement is the use of solar panels in the it centers. solar will become independent at peak power shortages of conventional energy suppliers. an important process from the point of view of the department of credit is the management of environmental risks. at the time of analysis, the bank will determine the how big the impact on the environment will have the loan requested and the result this survey will have an impact on credit decisions. the last part of environmental activity is promotion of environmental businesses. in this area can be divided into several streams. the first is to develop financial solutions to support green investments. the bank has in the product offer several types of eco-loans. the result of the investment is supporting clients’ activities of esg dimensions. another example may be the first in japan mobile hydrogen station. this innovative idea is a sample of an initiative using renewable energy. another example is the introduction of a credit card with the socially contributing “chikyuni yasashii card”. it consists in the fact that with each transaction the bank will provide part of the funds for environmental organizations with their own funds (smfg, 2015, pp. 16–20). the second pillar is the next generation. it is based on the broader hr strategy. one of the components is support for next generation asset inheritance and business succession. it manifests itself ensuring nursing and medical care or financial support for health care facilities. another area where he developed the strategy of csr in terms of generational aspect is contribution as a financial institution to emerging countries and contribution to raising the level of financial literacy. these two purposes, although they are different in the core are convergent approach. in both cases, you have to go outside the company to the people. it does not matter whether it is a school, in order to improve the knowltomasz murawski158 edge, or any other country that by branches can know the true face of csr. the group also draws attention to the work life balance (smfg, 2015, pp. 22–26). the last pillar is community. in 2014, smfg main activities in this area were related to the removal of the effects of the great east japan earthquake. for this purpose was established special “great east japan earthquake support fund”. donations to this fund was set at 400 yen from each employee’s monthly salary. in addition, since may 2012 more than 700 employees smfg took part in regular voluntary action in areas affected by the earthquake. an interesting initiative of the discussed area is the cooperation with non-government organizations (ngo) and non-profit organizations (npo). sbmc created a fund where employees can transfer part of their salary. then money are transferred from smbc volunteer fund to more than 30 organizations for their statutory objectives. another form of assistance is channeling funds through sumitomo mitsui card to unicef, unesco, the world wildlife fund japan and the world food program. the total amount of donations in 2014 amounted to almost 8 million yen (smfg, 2015, pp. 27–30). the confirmation of a practical approach to csr in the field of finance at sumitomo mitsui financial group is the practice of socially responsible investment (sri). it manifests itself not only in the possession in portfolio relevant products, but also participation in the sri indices (ftse4good global index, ftse4good global 100 index, esi excellence global) (smfg, 2015, p. 35). the comparison of crisis and turbulence impact on japanese and worldwide sustainability reporting the last 15 years in economy has been marked by the crisis, which began in 2008. these developments have had an impact on every level of activities of enterprises. economic growth is one of the indicators that will be used in the analysis. japan comparison on the background the whole world will illustrate the impact of the crisis on the analyzed market. the additional indicator, which will serve as a reference is a stock market index for the tokyo stock exchange – nikkei225. analysis of these quotations will enable the observation of market sentiment. you may have noticed two periods collapse of 2000–2002/1h2003 and 2007/2008–2009. corporate social responsibility in japanese banking sector 159 figure 2. gdp growth (annual %) 2000–2015 and nikkei225 2000–2015 unesco, the world wildlife fund japan and the world food program. the total amount of donations in 2014 amounted to almost 8 million yen (smfg, 2015, pp. 27-30). the confirmation of a practical approach to csr in the field of finance at sumitomo mitsui financial group is the practice of socially responsible investment (sri). it manifests itself not only in the possession in portfolio relevant products, but also participation in the sri indices (ftse4good global index, ftse4good global 100 index, esi excellence global) (smfg, 2015, p. 35). the comparison of crisis and turbulence impact on japanese and worldwide sustainability reporting the last 15 years in economy has been marked by the crisis, which began in 2008. these developments have had an impact on every level of activities of enterprises. economic growth is one of the indicators that will be used in the analysis. japan comparison on the background the whole world will illustrate the impact of the crisis on the analyzed market. the additional indicator, which will serve as a reference is a stock market index for the tokyo stock exchange – nikkei225. analysis of these quotations will enable the observation of market sentiment. you may have noticed two periods collapse of 20002002/1h2003 and 2007/2008-2009. figure 2. gdp growth (annual %) 2000-2015 and nikkei225 2000-2015 source: own work based on: world bank open data, 2016. -8,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0 0 5000 10000 15000 20000 25000 g d p gr ow th (a nn ua l % ) nikkei225 gdp japan gdp world s o u r c e : own work based on: world bank open data, 2016. figure 3. number of sustainability reports submitted to gri figure 3. number of sustainability reports submitted to gri source: own work based on: world bank open data, 2016. however, the comparison of gdp growth, nikkei225 (figure 3) and number of sustainability reports (figure 3) during the same period enables evolve the thesis that turbulences on the market do not have signs of coincidences. csr reporting is a means for organizations to show their commitment to transparency, sustainability and their progress towards goals. the reporting process is one of most important elements in enterprise. it serves both decision makers as well as current and potential shareholders. csr reporting helping to monitor companies’ contributions to sustainable development. conclusions the social responsibility of financial institutions is one of the most important issues in the modern economy. build trust between financial markets and societies is a critical for a sustainable development. csr initiatives are natural activities that society expects of them. banks in japan are highly active in the field of social business. banks offering many products and services, e.g. eco loans or green bonds, contribute to increasing the use of renewable energy. in addition, they do not close on the environment and cooperate with local organizations. much attention is also devoted to employees and their needs. the bank, which implements the strategies of csr at the operational level builds relationships be8 24 21 19 23 32 96 134 183 208 245 332 324 354 375 365 48 131 161 182 314 436 677 983 1487 1955 2601 3889 4588 5155 5672 5953 13% 4% 10% 5% 4% 3% 1% 4% 5% 7% 5% 6% 4% 4% 5% 4% 13% 8% 7% 8% 13% 15% 14% 14% 13% 12% 13% 12% 12% 13% 12% 13% 0% 5% 10% 15% 20% 25% 0 1000 2000 3000 4000 5000 6000 7000 japan all reports world all reports japan share financial sector/all (%) s o u r c e : own work based on: world bank open data, 2016. tomasz murawski160 however, the comparison of gdp growth, nikkei225 (figure 3) and number of sustainability reports (figure 3) during the same period enables evolve the thesis that turbulences on the market do not have signs of coincidences. csr reporting is a means for organizations to show their commitment to transparency, sustainability and their progress towards goals. the reporting process is one of most important elements in enterprise. it serves both decision makers as well as current and potential shareholders. csr reporting helping to monitor companies’ contributions to sustainable development.  conclusions the social responsibility of financial institutions is one of the most important issues in the modern economy. build trust between financial markets and societies is a critical for a sustainable development. csr initiatives are natural activities that society expects of them. banks in japan are highly active in the field of social business. banks offering many products and services, e.g. eco loans or green bonds, contribute to increasing the use of renewable energy. in addition, they do not close on the environment and cooperate with local organizations. much attention is also devoted to employees and their needs. the bank, which implements the strategies of csr at the operational level builds relationships between the company, society and the environment. however, pointing to the positive development of banking activities should be indicated on a continuous evolution that is taking place in the banking sector. a sector that is becoming more green and responsible. previous analysis shows that not exists a long-term impact of the turbulences on market on activity in csr reporting. reporting trends are one of main discussed topics. contemporary legislation and business practice make the annual cr reports a good practice and, increasingly duty. however, current trends show that decisions makers want to have this knowledge in real time.  references banks in japan (2016), banks around the world. banks in japan, http://www.relbanks. com/asia/japan (accessed: 25.11.2016). boj annual review (2016), bank of japan annual review 2016 year ended march 31, 2016. our policy and operations, http://www.boj.or.jp/en/about/activities/act/ data/ar2016.pdf (accessed: 25.11.2016). corporate social responsibility in japanese banking sector 161 dziawgo, l. (2014). greening financial market. copernican journal of finance & accounting, 3(2), 9–23. http://dx.doi.org/10.12775/cjfa.2014.014. financial services agency (2016), the list of licensed financial institutions, http:// www.fsa.go.jp/en/ (accessed: 25.11.2016). gri research data (2016), http://database.globalreporting.org/search (accessed: 25.11.2016). https://stooq.com/q/?s=%5enkx (accessed: 14.01.2017). japan’s policy for csr (2012), ministry of economy, trade and industry, april 17th 2012, www.oecd.org/investment/mne/csrpolicyinjapan.pdf (accessed: 24.11.2016). kpmg (2015), the kpmg survey of corporate responsibility reporting 2015, https:// www.kpmg.com/cn/en/issuesandinsights/articlespublications/documents/kpmg-survey-of-corporate-responsibility-reporting-2015-o-201511.pdf (accessed: 25.11.2016). kpmg (2016), corporate responsibility reporting in the banking sector. key findings from the kpmg survey of corporate responsibility reporting 2015, july 2016, https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2016/08/corporate-responsibility-banking-sector.pdf (accessed: 25.11.2016). miklaszewska, e. (2012). restrukturyzacja pokryzysowa banków. lekcja z doświadczeń japońskich. zeszyty naukowe polskie towarzystwo ekonomiczne, 13, 149–159. mufg (2016a), mitsubishi ufj financial group, inc., mufg report 2016. integrated report, http://www.mufg.jp/english/ir2016/pdf/all.pdf (accessed: 26.11.2016). mufg (2016b), mitsubishi ufj financial group green bond, framework overview and second opinion by sustainalytics, september 1st, 2016, http://www.mufg.jp/english/ csr/juten/sustainability/greenbond/pdf/sustainalytics’_opinion_en.pdf (accessed: 26.11.2016). murawski, t. (2009). społeczna odpowiedzialność biznesu – znaczenie i funkcje dla bankowości. in l. pawłowicz, m. czerwińska (ed.), społeczno-ekonomiczne wymiary globalnego kryzysu finansowego: (pp. 139–147). sopot: prace i materiały wydziału zarządzania uniwersytetu gdańskiego. protess b., silver-greenberg, j. (2014). bank of tokyo fined for ‘misleading’ new york regulator on iran, new york times dealbook, november 18. 2014, http://dealbook.nytimes.com/2014/11/18/lawsky-fines-bank-of-tokyo-mitsubishi-ufj-another-315-million/?_r=1 (accessed: 26.11.2016). smfg (2015), sumito mitsui finanacial group, csr report 2015, http://www.smfg.co.jp/ english/responsibility/report/pdf/2015/smfg_csr15e_all.pdf (accessed: 26.11.2016). takahashi, t. (2009). csr that incorporates local and traditional knowledge: the sampo-yoshi way. international corporate responsibility series, 4, 107–118. trading economics (2016), japan. economic forecasts. 2016–2020 outlook, http:// www.tradingeconomics.com/japan/forecast (accessed: 25.11.2016). ushijima, k. (2016), japanese corporate management and csr, http://www.tokyofoundation.org/en/articles/2016/corporate-management-and-csr (accessed: 24.11.2016). world bank open data (2016), http://data.worldbank.org/indicator/ (accessed: 14.01. 2017). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 15.12.2012; data zaakceptowania: 24.04.2013. * dane kontaktowe: maciek.balcerowski@gmail.com, ul. broniewskiego 101/121, 01- 877 warszawa, tel. 509 957 898. http://dx.doi.org/10.12775/cjfa.2013.001 2013, volume 2, issue 1 maciej balcerowski* uniwersytet warszawski swoboda wyboru pełnomocnika w ubezpieczeniu ochrony prawnej słowa kluczowe: działalność ubezpieczeniowa, regulacje unijne, ubezpieczenia gospodarcze, ubezpieczenia ochrony prawnej, swoboda wyboru pełnomocnika. klasyfikacja jel: g22, k39. abstrakt: swoboda wyboru pełnomocnika stanowi podstawę rozwoju ubezpieczeń ochrony prawnej. została ona wprowadzona na gruncie regulacji europejskich w dyrektywie 87/344/ewg. autor wskazuje praktyczne zagadnienia związane z użytymi w dyrektywie pojęciami: „pełnomocnik” oraz „etap przedsądowy”. artykuł dotyczy także problemów prawnych i ekonomicznych związanych z próbami ograniczenia tej zasady przez wprowadzanie instytucji asysty prawnej oraz reprezentowanie ubezpieczonego bezpośrednio przez sam zakład ubezpieczeń. freedom of choice of a lawyer keywords: european regulations, freedom of choice of lawyer, insurance, insurance activity, legal exepenses insurance. jel classification: g22, k39. abstract: the freedom to choose lawyer is a base of development of the legal expenses insurance market. it appeared on the basis of eu regulations in the 87/344/directive regulations connected with principle of the freedom of choice of lawyer on the basis of polish insurance activity act. author present practical issues connected with the terms used in the directive “lawyer” and “prejudical stage”. article also refers law and economaciej balcerowski10 mic issues connected with the attempt to limit the rule of freedom to choose lawyer by introducing legal assistance and representation of the insured by the insurer. translated by maciej balcerowski  wstęp przez ubezpieczenia ochrony prawnej należy rozumieć taką umowę ubezpieczenia, w której zakład ubezpieczeń w ramach prowadzonej przez siebie działalności gospodarczej zobowiązuje się do pokrycia kosztów toczącego się sporu, natomiast ubezpieczający zobowiązuje się do zapłacenia składki ubezpieczeniowej. w praktyce ogólne warunki ubezpieczenia precyzyjnie wskazują zarówno katalog kosztów, które ubezpieczyciel refunduje, jak i ich wysokość oraz zakres spraw, za które odpowiada. tak rozumiane ubezpieczenie ochrony prawnej powstało w 1897 roku we francji w ofercie towarzystwa ubezpieczeń sou medical (janyga, dittmajer 2005: 70). następnie ubezpieczenie to rozwijało się we francji oraz szwajcarii jako ubezpieczenie skierowane do posiadaczy pojazdów mechanicznych (vassel, mierzejewski 2005: 34). co ciekawe, mimo „romańskiego” rodowodu tego produktu ubezpieczeniowego, w szerokich kręgach uważa się, że jego ojczyzną są niemcy. ten pogląd jest o tyle uzasadniony, że jakkolwiek pierwsze ubezpieczenia powstały poza obrębem germańskiej kultury prawnej, to właśnie w jej ramach została sformułowana zasada podstawowa na gruncie nowoczesnego ubezpieczenia ochrony prawnej, a mianowicie prawo wolnego wyboru pełnomocnika. powszechnie przyjmuje się, że to właśnie ten czynnik miał zasadnicze znaczenie dla niezwykle dynamicznego rozwoju tego ubezpieczenia w niemczech oraz austrii w przeciwieństwie do wielkiej brytanii czy samej francji. ta opinia była do tego stopnia mocno zakorzeniona, że znalazła wyraz w brzmieniu dyrektywy rady z dnia 22 czerwca 1987 roku w sprawie koordynacji przepisów ustawowych, wykonawczych i administracyjnych odnoszących się do ubezpieczenia ochrony prawnej (dalej: dyrektywa op). zgodnie z art. 4 dyrektywy op państwa mają obowiązek zagwarantować swobodny wybór pełnomocnika w ramach toczącego się postępowania sądowego lub przed organem administracji. 1. zasada swobodnego wyboru pełnomocnika – znaczenie dla rynku u źródeł zasady swobodnego wyboru pełnomocnika leży potencjalny konf likt interesów mogący powstać między ubezpieczonym a ubezpieczycielem, który   swoboda wyboru pełnomocnika w ubezpieczeniu ochrony prawnej 11 polega na tym, że ubezpieczyciel będzie z zasady dążył do możliwie niskokosztowej likwidacji szkody, z kolei celem ubezpieczonego będzie możliwie szybkie i korzystne rozstrzygnięcie sprawy sądowej. należy przy tym wskazać, że ubezpieczony w większości przypadków będzie traktował wysokość wygenerowanych kosztów jako kwestię drugorzędną z uwagi na fakt, że i tak ciężar ich pokrycia zostaje przeniesiony na ubezpieczyciela (janyga 2011: 16). źródła znaczenia zasady swobody wyboru pełnomocnika dla rozwoju rynku ubezpieczeń ochrony prawnej należy upatrywać w konieczności zachowania zaufania między ubezpieczonym a jego pełnomocnikiem. w sytuacji, kiedy to ubezpieczyciel „zatrudnia” pełnomocnika, jest on w pewnej mierze zdeterminowany interesem podmiotu zatrudniającego. w takim przypadku dąży on do możliwie szybkiego, a co ważniejsze – niskokosztowego rozwiązania sporu. ubezpieczony zaś może mieć wątpliwości, w czyim interesie rzeczywiście działa pełnomocnik – jego czy też zakładu ubezpieczeń. zasada swobody wyboru pełnomocnika pozwala na ograniczenie tego typu patologicznych sytuacji przez umożliwienie wyboru pełnomocnika „z rynku”. nawet gdy ubezpieczony wybiera pełnomocnika polecanego przez ubezpieczyciela, co zdarza się w około 90% przypadków, de facto to ubezpieczony umocowuje swojego pełnomocnika. polski rynek ubezpieczeń ochrony prawnej jest rynkiem relatywnie młodym, cechującym się zarówno ogromnym tempem rozwoju, jak i potencjałem na dalsze lata. pierwsze twierdzenie może zostać zobrazowane przez wskazanie, że w roku 2000 przypis składki w ramach ubezpieczeń grupy 17 działu ii (ubezpieczenia ochrony prawnej) wynosił jedynie 0,3 mln zł rocznie, natomiast w roku 2010 już 239,85 mln zł rocznie (knf). oznacza to, że rynek zwiększył się prawie 800-krotnie. odnosząc się do drugiego stwierdzenia, należy wskazać, że w roku 2010 przypis składki z tytułu ubezpieczenia ochrony prawnej na jednego mieszkańca polski wynosił 1,6 euro, natomiast w krajach, których rynki uznaje się za rozwinięte, taki przypis wynosił średnio 47 euro (austria) czy 39 euro (niemcy) (budzisiak 2011: 8). rynek ten staje się atrakcyjny nie tylko dla samych ubezpieczonych, oferując nawet przeciętnie sytuowanym obywatelom produkt pozwalający na pokrycie relatywnie wysokich kosztów związanych z korzystaniem z usług zawodów prawniczych i dochodzeniem roszczeń przed wymiarem sprawiedliwości, ale także dla ubezpieczycieli, gdyż od początku prowadzenia statystyk dla tego ubezpieczenia możemy odnotować nadwyżkę przypisu składki nad wypłatami (knf). ponadto wielu praktyków rynku ubezpieczeń (szywalski 2011: 12) uważa, że przyszłością produktów ochrony prawnej jest przyjęcie modelu tzw. komplementarności świadczonych maciej balcerowski12 usług ubezpieczeniowych. w ramach tego modelu dochodzi do „łączenia” ubezpieczeń odpowiedzialności cywilnej z ubezpieczeniami ochrony prawnej. jakkolwiek zgodnie z art. 3 dyrektywy op, a co za tym idzie – także z art. 14 ust. 1 ustawy o działalności ubezpieczeniowej (dalej: udu), ubezpieczenie odpowiedzialności cywilnej nie powinno być łączone z innymi ubezpieczeniami, praktyka wskazuje na obustronne korzyści (janyga 2011: 16). z jednej strony, ubezpieczony może skorzystać z faktu, że w przypadku łącznej sprzedaży produktów ubezpieczyciele co do zasady obniżają koszty ubezpieczenia dołączanego. z drugiej strony, dochodzi do rozłożenia ciężaru ryzyka przez ubezpieczyciela między dwa produkty ubezpieczeniowe. wydaje się, że sprzedaż dwóch produktów ubezpieczeniowych – ubezpieczenia odpowiedzialności cywilnej i ubezpieczenia ochrony prawnej – jest uzasadnione tym, że de facto wielokrotnie istnieje wspólnota interesów między ubezpieczonym i ubezpieczycielem. w przypadku pozytywnego rozstrzygnięcia sporu, w ramach którego ubezpieczyciel ponosi ryzyko wyniku procesu (w razie uzyskania pozytywnego wyroku, zgodnie z art. 98 § 1 kodeksu postępowania cywilnego – dalej: kpc, koszty sądowe są zasądzane na rzecz strony wygrywającej), nie zachodzi ryzyko z tytułu odpowiedzialności cywilnej, co zwalnia ubezpieczyciela z obowiązku wypłaty odszkodowania z tego ubezpieczenia. można jednak wskazać niepokojącą tendencję do „przerzucania” na ubezpieczonego części kosztów takiej obrony. z reguły ogólne warunki ubezpieczenia przewidują bądź to jedynie częściową refundację kosztów, bądź pokrywają te koszty w ramach zryczałtowanych stawek, które w pewnych okolicznościach mogą nie wystarczyć na pokrycie kosztów rzeczywistej ochrony interesów, wobec czego brakującą kwotę uiszcza ubezpieczony. ubezpieczyciel może także w takiej sytuacji zrezygnować z własnego udziału w takim postępowaniu za pomocą interwencji ubocznej. 2. problem asysty prawnej przechodząc jednak do zasadniczego problemu artykułu – a więc swobody wyboru pełnomocnika – można rozpocząć od rozważenia problematyki tzw. przedprocesowej pomocy prawnej świadczonej przez ubezpieczyciela. taka asysta prawna mieści się w ramach uprawnień zakładu ubezpieczeń w tym ściśle oznaczonym stadium sprawy. w literaturze przedmiotu wielokrotnie wskazuje się, że zasygnalizowana w poprzednim akapicie pomoc prawna stanowi bądź to uzupełnienie produktu, bądź jest nakierowana na realne obniżenie kosztów świadczonej ochrony   swoboda wyboru pełnomocnika w ubezpieczeniu ochrony prawnej 13 ubezpieczeniowej (m.in. szywalski 2011: 12). zazwyczaj ubezpieczyciele dodają do produktu bazowego – umowy ubezpieczenia ochrony prawnej – produkt określany informacją prawną albo assistance’em prawnym. literatura prawnicza w przeważającej większości stoi na stanowisku, że takie działanie jest co do zasady niezgodne z prawem (m.in. janyga 2010). różnice sprowadzają się w praktyce do wskazania źródła tej niezgodności. w ramach usługi assistance prawnego firmy zewnętrzne dokonują wstępnej weryfikacji konieczności udzielenia pomocy prawnej przez radcę prawnego lub adwokata. w przypadku stwierdzenia braku takiej konieczności oferują one sporządzenie opinii lub też wzorów pism dla klientów. pozwala to na istotne obniżenie kosztów ochrony ubezpieczeniowej. szacuje się, że nawet 95% spraw zgłaszanych przez klientów jest likwidowanych za pomocą tej usługi. wymierny efekt takiego działania stanowi wysoka rentowność ubezpieczeń ochrony prawnej. na 239,85 mln pobranej składki ubezpieczeniowej w 2010 roku przypadło jedynie 7,32 mln wypłat odszkodowań (knf). towarzystwa ubezpieczeniowe mogą także dokonać transferu ryzyka wysokiej szkodowości w ramach usług assistance prawnego na podmioty zewnętrzne przez opłacenie zryczałtowanego wynagrodzenia. zazwyczaj jego wysokość jest uzależniona od liczby sprzedanych polis. usługa assistance prawnego może okazać się atrakcyjna nie tylko dla ubezpieczycieli, ale również samych ubezpieczonych. wynika to z faktu, że ubezpieczyciele, dążąc do zachowania klienta, oferują assistance prawny jako produkt komplementarny, z którego ubezpieczony może skorzystać także w przypadku negatywnego stanowiska w sprawie wypłaty odszkodowania z tytułu ubezpieczenia ochrony prawnej. w takim przypadku ubezpieczony może otrzymać przygotowany dla niego wzór pisma przedsądowego lub procesowego, co ułatwia mu prowadzenie sporu. ułatwiony dostęp do porad prawnych w ramach assistance prawnego pozwala też na uniknięcie ewentualnych następstw działań ubezpieczonych przez możliwie szybkie uzyskanie przez nich informacji na temat ewentualnych konsekwencji. przy korzystaniu z tego typu usług należy jednak pamiętać, że nie są one zazwyczaj świadczone przez radców prawnych oraz adwokatów, w związku z czym poziom takich porad należy uznać za zróżnicowany. dopuszczalność świadczenia usług asysty prawnej bywa niekiedy podawana w wątpliwość. najczęściej jako podstawę krytyki wskazuje się w tym przypadku naruszenie art. 3 udu. zgodnie z art. 3 ust. 2 udu ubezpieczyciel nie może wykonywać działalności innej niż działalność ubezpieczeniowa oraz bezpośrednio z nią związanej. pojęcie działalności ubezpieczeniowej zostało maciej balcerowski14 zdefiniowane w art. 3 ust. 1 udu i jest rozumiane jako wykonywanie czynności ubezpieczeniowych związanych z oferowaniem i udzielaniem ochrony na wypadek ryzyka wystąpienia skutków zdarzeń losowych. taki zarzut wydaje się na pierwszy rzut oka uzasadniony. wątpliwości mogą pojawić się, kiedy brzmienie art. 3 ust. 1 udu zestawimy z art. 805 § 2 pkt 1 ustawy kodeks cywilny (dalej: kc) definiującym świadczenie zakładu ubezpieczeń w ramach ubezpieczenia majątkowego. zgodnie ze wskazanym wyżej przepisem świadczenie ubezpieczyciela polega w szczególności na zapłacie określonego odszkodowania za szkodę powstałą wskutek przewidzianego w umowie wypadku. użyte sformułowanie „w szczególności” wskazuje, że świadczenie polegające na zapłacie odszkodowania jest wprawdzie świadczeniem zasadniczym, ale jak trafnie zauważa szmak (2012: 78–79), nie jest świadczeniem wyłącznym. także na gruncie innych ubezpieczeń pojawiają się takie świadczenia dodatkowe, niebudzące już tak licznych kontrowersji w doktrynie prawa ubezpieczeń, jak wspomniana wyżej informacja prawna. przykładem takiego świadczenia może być chociażby szeroko rozpowszechniona usługa assistance samochodowego czy też zapewnienie samochodu zastępczego w ramach ubezpieczenia autocasco. należy więc przyjąć, że również w przypadku asysty prawnej bezzasadne będzie powoływanie się na naruszenie w tym punkcie art. 3 udu. ten zarzut będzie tym bardziej pozbawiony podstaw, że istniejąca już praktyka rynkowa wskazuje, że co do zasady zakłady ubezpieczeń dokonują outsourcingu usług asysty prawnej, którą zajmują się wyspecjalizowane podmioty. drugim formułowanym przez krytyków zastrzeżeniem jest naruszenie ustawy prawo o adwokaturze oraz ustawy o radcach prawnych. wydaje się jednak, że także ten zarzut nie znajduje oparcia w istniejącym stanie prawnym. wprawdzie niewątpliwie obie ustawy regulują zawody zaufania publicznego, których przedstawiciele mają pewne specjalne uprawnienia w ramach świadczenia usług prawnych, jednak żaden z ich przepisów nie wprowadza monopolu na świadczenie przez te dwie grupy szeroko rozumianych usług prawniczych. przepisów zastrzegających konkretne dziedziny dla poszczególnych zawodów prawniczych możemy poszukiwać na gruncie przepisów formalnoprawnych, jednak i w tym przypadku znajdziemy tylko jeden przepis: art. 82 ustawy kodeks postępowania karnego (dalej: kpk) monopolizujący pozycję adwokatów jako obrońców na gruncie postępowania karnego. takich przepisów brakuje natomiast w kpc, w kodeksie postępowania administracyjnego (dalej: kpa) czy w ustawie prawo o postępowaniu przed sądami administracyjnymi. co więcej, nie rozwijając w tym miejscu problematyki dopuszczalnej reprezentacji, moż  swoboda wyboru pełnomocnika w ubezpieczeniu ochrony prawnej 15 na tytułem przykładu wskazać art. 33 § 1 kpa, który expressis verbis stanowi, że pełnomocnikiem strony może być osoba fizyczna mająca zdolność do czynności prawnych. tym bardziej w ramach szeroko rozumianego postępowania przedsądowego nie występują przepisy zakazujące świadczenia szeroko pojętych usług prawnych (np. pisania wzorów umów, regulaminów itd.) osobom nieprzynależącym do samorządów radcowskiego czy adwokackiego. kierując się przyjętą na gruncie prawa polskiego oraz europejskiego zasadą in dubio pro liberte, należy przyjąć, że podejmowanie takiej działalności jest co do zasady dopuszczalne, skoro nie istnieje żaden przepis zakazujący jej prowadzenia. 3. reprezentowanie przez zakład ubezpieczeń za oddzielny problem należy uznać kwestię reprezentowania ubezpieczonego przez zakład ubezpieczeń. nie negując tezy, zgodnie z którą przez sam fakt korzystania z usług czy też zatrudniania profesjonalnych pełnomocników zakład ubezpieczeń jako taki nie nabywa uprawnień do reprezentowania ubezpieczonego, można jednak wskazać sytuację, w której w ramach procesu cywilnego, na podstawie unormowań kodeksowych, zakład ubezpieczeń stanie się pełnoprawnym pełnomocnikiem ubezpieczonego. taka sytuacja może mieć miejsce w przypadku, gdy zakład ubezpieczeń przystąpi do procesu jako interwenient uboczny z mocy art. 76 kpc. działanie interwenienta ubocznego możemy uznać za analogiczne do działania pełnomocnika, gdyż po pierwsze, zgodnie z art. 79 kpc, interwenientowi przysługują wszelkie uprawnienia dopuszczalne ze względu na stan sprawy, o ile nie są sprzeczne z działaniami i oświadczeniami strony, do której przystąpił. należy jednocześnie założyć, że interwencja uboczna będzie możliwa zawsze wtedy, kiedy wynik sprawy będzie wpływał, nawet potencjalnie, na odpowiedzialność ubezpieczyciela. wydaje się więc, że taka regulacja stanowi skuteczne obejście przepisu art. 3 udu, gdyż zakład ubezpieczeniowy, chroniąc swoją sferę interesów prawnych, chroni jednocześnie interes klienta. podsumowując niniejszą część, można powiedzieć, że zasadne wydaje się stwierdzenie, iż mimo szerokiej i wielokierunkowej krytyki świadczenia przez zakład ubezpieczeniowy usług prawnych, bez względu na pobudki, jakie mogą kierować takimi działaniami, bezpodstawne jest wskazywanie bezprawności takich działań – zarówno w oparciu o przepisy ustawy o działalności ubezpieczeniowej, jak i ustaw regulujących zawody adwokata czy też radcy prawnego. maciej balcerowski16 4. etap przedsądowy ustawodawca krajowy, w ślad za ustawodawcą unijnym, uznaje za minimalny standard swobody wyboru pełnomocnika etap sądowy lub etap postępowania przed organem administracji, dając jednocześnie stronom umowy ubezpieczenia swobodę uregulowania tej kwestii na etapie przedsądowym. określenie końca etapu przedsądowego ma niezwykle istotne znaczenie dla praktyki ubezpieczeniowej zakładów oferujących ubezpieczenia ochrony prawnej. wyznacznikiem w tej sprawie będą jednak nie przepisy prawa materialnego, a prawa procesowego. z uwagi na ograniczenia wynikające z przyjętej formy artykułu nie będę poruszał problematyki odnoszącej się do postępowania karnego oraz postępowania cywilnego, a skupię się na zagadnieniach związanych z postępowaniem administracyjnym. rozpoczynając rozważania od problematyki postępowania administracyjnego, należy wskazać, że takie postępowanie – zgodnie z art. 61 § 1 kpa – jest wszczynane na wniosek lub z urzędu. w związku z tym momentem warunkującym obowiązek zapewnienia swobody wyboru pełnomocnika będzie bądź to wydanie postanowienia przez organ administracji, bądź to złożenie stosownego wniosku. na gruncie literalnej wykładni art. 14 ust. 2 udu zakład ubezpieczeń może ograniczyć prawo wyboru pełnomocnika nawet na etapie tworzenia inicjującego postępowanie wniosku. wydaje się jednak, że na aprobatę zasługuje pogląd janygi (2010: 124), który wskazuje, że zasadę swobody wyboru pełnomocnika należałoby rozciągnąć także na etap bezpośrednio poprzedzający postępowanie przed organem administracji, a więc na sporządzenie wniosku. trzeba również podkreślić, że literalna wykładnia art. 14 ust. 2 udu pozwala na przyjęcie tezy, zgodnie z którą nie znajduje on zastosowania na etapie między wydaniem decyzji ostatecznej przez organ administracji a wniesieniem skargi do sądu administracyjnego, gdyż nie mamy wtedy do czynienia ani z postępowaniem sądowym (jeszcze niewszczętym), ani z postępowaniem administracyjnym (już zakończonym). rozwiązaniem tego problemu byłoby przyjęcie zasady, według której w przypadku zajścia w ramach jednego zdarzenia ubezpieczeniowego przesłanki warunkującej powstanie obowiązku respektowania przez ubezpieczyciela zasady swobodnego wyboru pełnomocnika, to trwałby on aż do końca sporu. przyjęcie przeciwnego założenia mogłoby doprowadzić do kuriozalnych sytuacji, w których ubezpieczony miałby prawo do wyboru własnego pełnomocnika w ramach prowadzonego postępowania administracyjnego,   swoboda wyboru pełnomocnika w ubezpieczeniu ochrony prawnej 17 przy czym straciłby je na okres, w którym może złożyć odwołanie do sądu administracyjnego, a odzyskałby je w momencie złożenia takiego odwołania. 5. pełnomocnik w rozumieniu art. 4 dyrektywy op ustawa o działalności ubezpieczeniowej, w ślad za dyrektywą op, nie stanowi o pełnej dowolności wyboru pełnomocnika w tym znaczeniu, że może nim być na mocy polskiej ustawy radca prawny lub adwokat. zestawienie brzmienia art. 14 ust. 2 udu z brzmieniem art. 4 dyrektywy op pozwala na stwierdzenie, że stanowi on niepełną lub wadliwą implementację przepisu dyrektywy ze względu na zapewnienie swobody wyboru pełnomocnika w zakresie węższym, niż zostało to przewidziane w dyrektywie. zgodnie z brzmieniem art. 14 ust. 2 udu ubezpieczony ma prawo swobodnego wyboru adwokata lub radcy prawnego. jasno wynika stąd, że swoboda wyboru pełnomocnika innego niż radca prawny czy adwokat nie jest na gruncie tego przepisu dopuszczalna, nawet w sytuacji, kiedy dopuszczają ją przepisy proceduralne. odmiennie kwestia ta została uregulowana w dyrektywie op, według której prawo wyboru pełnomocnika dotyczy pełnomocnika będącego prawnikiem lub innej osoby uprawnionej do reprezentowania strony. przy czym termin „prawnik” jest rozumiany zgodnie z art. 1 ust. 2 dyrektywy 77/249/ewg z dnia 22 marca 1977 roku, mającej na celu ułatwienie skutecznego korzystania przez prawników ze swobody świadczenia usług, a więc w polsce jako adwokat i radca prawny. wynika stąd jednoznaczny wniosek, że dokonana implementacja jest niepełna i nie realizuje właściwie założeń dyrektywy. istotne jest też pytanie, jakie podmioty mogą być uprawnione do reprezentowania w rozumieniu art. 4 dyrektywy op. odpowiedzi na nie należy poszukiwać wśród regulacji formalnoprawnych, a więc kpk, kpc, ustawy prawo o postępowaniu przed sądami administracyjnymi oraz kpa. wydaje się, że najwięcej wątpliwości dotyczących poprawności implementacji dyrektywy op pojawia się na gruncie postępowania cywilnego oraz administracyjnego. zgodnie z art. 87 § 1 kpc podmiotami uprawnionymi do reprezentowania strony są adwokat lub radca prawny, a w sprawach własności przemysłowej także rzecznik patentowy, a ponadto osoba sprawująca zarząd nad majątkiem lub interesami strony, osoba pozostająca ze stroną w stałym stosunku zlecenia, jeżeli przedmiot sprawy wchodzi w zakres tego zlecenia, współuczestnik sporu, jak również rodzice, małżonek, rodzeństwo lub zstępni strony oraz osoby pozostające ze stroną w stosunku przysposobienia. tytułem przymaciej balcerowski18 kładu można także wskazać regulacje szczególne, np. art. 87 § 5 kpc, zgodnie z którym w sprawach związanych z ochroną praw konsumentów pełnomocnikiem może być przedstawiciel organizacji, do której zadań statutowych należy ochrona konsumentów. jeszcze szerzej ujęty został katalog podmiotów uprawnionych do reprezentowania na gruncie postępowania administracyjnego – art. 33 § 1 kpa wskazuje, że uprawnionym do reprezentowania jest osoba fizyczna posiadająca zdolność do czynności prawnych. należy jednak podkreślić, że zgodnie z orzeczeniem trybunału sprawiedliwości unii europejskiej c-293/10 z dnia 26 maja 2011roku dopuszczono zawężenie pojęcia pełnomocnika jedynie do pełnomocników profesjonalnych. wydaje się jednak, że to nie kwestia nieprofesjonalnych pełnomocników stanowi zasadniczy problem. wątpliwości budzi zwłaszcza pominięcie profesjonalnych pełnomocników, wymienionych w art. 87 § 1 kpc, którymi są rzecznicy patentowi. można wskazać, że wprawdzie są oni uprawnieni jedynie do reprezentowania w sprawach z zakresu praw własności przemysłowej, lecz są niewątpliwie profesjonalnymi pełnomocnikami, których należy umiejscowić w zakresie zastosowania art. 4 dyrektywy op. kolejnym ważnym zagadnieniem jest kwestia milczenia ustawy w sprawie prawników zagranicznych świadczących usługi prawnicze na terytorium rzeczypospolitej polskiej na podstawie przepisów ustawy o świadczeniu przez prawników zagranicznych pomocy prawnej w rzeczypospolitej polskiej (dalej: uśp). w niniejszej publikacji zrezygnuję ze szczegółowego opisu sytuacji prawników z krajów unii europejskiej, którzy wpisali się na listy adwokatów lub radców prawnych w polsce, gdyż na mocy art. 14 uśp zastosowanie mają względem nich przepisy dotyczące odpowiednio adwokatów lub radców prawnych, z tym jednak zastrzeżeniem, że zgodnie z art. 8 uśp taki prawnik używa tytułu zawodowego uzyskanego w państwie macierzystym, wyrażonego w języku urzędowym tego państwa. także w odniesieniu do prawników z unii europejskiej świadczących transgraniczne usługi prawnicze zastosowanie znajduje norma art. 14 ust. 2 udu, gdyż – zgodnie z art. 36 ust. 1 uśp – świadcząc usługi polegające na reprezentowaniu klienta w postępowaniu przed sądami i innymi organami władzy publicznej, prawnik z unii europejskiej podlega tym samym warunkom wykonywania zawodu, jakie stosuje się do adwokata lub radcy prawnego, z wyjątkiem warunków dotyczących miejsca zamieszkania i wpisu na listę adwokatów lub radców prawnych. problemem może być jednak prowadzenie stałej praktyki przez prawników spoza unii europejskiej. uśp nie zawiera przepisu, zgodnie z którym stosuje się do nich bezpośrednio przepisy o adwokaturze lub radcach prawnych. co wię  swoboda wyboru pełnomocnika w ubezpieczeniu ochrony prawnej 19 cej, zgodnie z art. 18 uśp, ich uprawnienia ograniczają się do wydawania opinii i udzielania porad dotyczących prawa państwa macierzystego lub prawa międzynarodowego. art. 14 ust. 2 udu przewiduje prawo do swobody wyboru pełnomocnika, a więc osoby uprawnionej do reprezentowania ubezpieczonego. z uwagi na to, że prawnik spoza unii europejskiej prowadzący stałą praktykę nie ma takiego uprawnienia, uzasadnione wydaje się zanegowanie prawa swobodnego wyboru pełnomocnika w przypadku tych prawników. praktyczne rozstrzygnięcie omawianych powyżej wątpliwości będzie miało, w mojej opinii, doniosłe znaczenie dla prowadzonej przez zakłady ubezpieczeń działalności w zakresie ubezpieczeń ochrony prawnej. istotne rozszerzenie katalogu pełnomocników, wobec których znajdzie zastosowanie zasada swobody wyboru pełnomocnika, może wpłynąć na wysokość składki ubezpieczeniowej. to z kolei może mieć teoretycznie wpływ na popularność tego produktu. należy wskazać, że ubezpieczenia ochrony prawnej nie są jeszcze zbyt popularne wśród polaków. po części wynika to z pewnej awersji do przedłużających się procesów sądowych oraz z przekonania, że w razie konieczności wystąpienia na drogę sądową to sąd udzieli porad dotyczących podjęcia działań koniecznych do pozytywnego rozstrzygnięcia sprawy. wydaje się jednak, że takie zachowania powoli odchodzą w przeszłość, ustępując miejsca wyższemu poziomowi kultury prawnej. przyjęcie takiego założenia pozwala uznać, że nawet wzrost wysokości składek ubezpieczeniowych spowodowany właściwym wdrożeniem postanowień dyrektywy op nie powinien istotnie wpłynąć na rozwój tego typu ubezpieczeń. tę tezę można oprzeć na obserwacji, zgodnie z którą nawet podniesione składki ubezpieczeniowe pozostawałyby w znaczącej dysproporcji, na korzyść ubezpieczenia, do ewentualnego finansowania pełnomocników bezpośrednio przez samego zainteresowanego.  zakończenie mimo dynamicznego rozwoju rynku ubezpieczeń ochrony prawnej brakuje szerszego zainteresowania praktyków związanymi z nim problemami prawnymi. jednocześnie zakłady ubezpieczeń nie znajdują zbyt licznych wskazówek ustawodawcy krajowego dotyczących kształtowania relatywnie nowego produktu na polskim rynku. sama regulacja art. 14 udu dokonuje niepełnej implementacji przepisów dyrektywy op. wydaje się, że wraz z dalszym rozwojem rynku konieczne będzie podjęcie szerszej dyskusji na temat rozbudowy regulacji dotyczących tego produktu ubezpieczeniowego w oparciu o wzorce kramaciej balcerowski20 jów mających bogate doświadczenie w tym zakresie, a więc przede wszystkim austrii i niemiec. w literaturze wskazuje się, że to właśnie zasadzie swobody wyboru pełnomocnika należy przypisywać ogromny sukces ubezpieczeń op w austrii i w niemczech (vassel, mierzejewski 2005: 34). w związku z tym wydaje się, że rozszerzenie katalogu pełnomocników m.in. o rzeczników patentowych będzie skutkowało umocnieniem się pozycji rynkowej ubezpieczeń ochrony prawnej. mimo dotychczasowego dynamicznego wzrostu nie mają one istotnego udziału w rynku ubezpieczeń.  literatura budzisiak s. 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(2011), polisa lego, miesięcznik ubezpieczeniowy, nr 12. ustawa z dnia 23 kwietnia 1964 r. kodeks cywilny, dz.u. z 1964 r., nr 16, poz. 93. ustawa z dnia 14 czerwca 1960 r. kodeks postępowania administracyjnego, dz.u. z 2000 r., nr 98, poz. 1071. ustawa z dnia 17 listopada 1964. kodeks postępowania cywilnego, dz.u. z 1964 r., nr 43, poz. 296. ustawa z dnia 6 czerwca 1997 r. kodeks postępowania karnego, dz.u. z 1997 r., nr 89, poz. 555. ustawa z dnia 22 maja 2003 r. o działalności ubezpieczeniowej, dz.u. z 2010 r., nr 11, poz. 66. ustawa z dnia 5 lipca 2002 r. o świadczeniu przez prawników zagranicznych pomocy prawnej w rzeczypospolitej polskiej, dz.u. z 2002 r., nr 126, poz. 1069. ustawa z dnia 30 sierpnia 2002 r. prawo o postępowaniu przed sądami administracyjnymi, dz.u. z 2012 r., nr 270. vassel j., mierzejewski p. (2005), ubezpieczenie ochrony prawnej w europie i polsce, prawo asekuracyjne, nr 1. cjfa_2_2017_druk.pdf e65 -1 date of submission: august 29, 2017; date of acceptance: october 23, 2017. * contact information: deden0817@gmail.com, financial markets department, bank of canada, 234 wellington street, ottawa, ontario, canada, phone: 1 613 783 5643. ** contact information: department of economics, university of manitoba, winnipeg, manitoba, canada. *** contact information: department of economics, illinois state university, normal, il, united states. eden, d., huffman, p., & holman, j. (2017). heavy-tailed distributions and the canadian stock market returns. copernican journal of finance & accounting, 6(2), 9–21. http://dx.doi.org/10.12775/ cjfa.2017.007 david eden* bank of canada paul huffman** university of manitoba john holman*** illinois state university heavy-tailed distributions and the canadian stock market returns keywords: value at risk, gsptse, skewed t distribution. j e l classification: c46, c58, g10. abstract: many of financial engineering theories are based on so-called “complete markets” and on the use of the black-scholes formula. the formula relies on the assumption that asset prices follow a log-normal distribution, or in other words, the daily f luctuations in prices viewed as percentage changes follow a gaussian distribution. on the contrary, studies of actual asset prices show that they do not follow a log-normal distribution. in this paper, we investigate several widely-used heavy-tailed distributions. our results indicate that the skewed t distribution has the best empirical performance david eden, paul huffman, john holman10 in fitting the canadian stock market returns. we claim the results are valuable for market participants and the financial industry. according to imf (2014), canada has a well-developed financial system, with assets totalling about 500 percent of gdp, and dominated by a variety of industry participants. the equities market is mature, with a total market capitalization of nearly canadian $2.1 trillion (115 percent of gdp) at end of 2012. toronto stock exchange (tsx) is one of the world's largest stock exchanges. it is composite index (gsptse) is the benchmark canadian index, representing roughly 70% of the total market capitalization on the tsx with about 250 companies included in it. the tsx is made up of over 1,500 companies in total. guo (2017a) introduced several different types of heavy-tailed distribution and show the skewed t distribution generates the best goodness of fit and risk measurements. following guo (2017a), we are also interested in the empirical performance of various types of heavy-tailed distributions in fitting the canadian stock market returns. lots of financial models are based on the assumption that asset prices follow a log-normal distribution, or in other words, the daily f luctuations in prices viewed as percentage changes follow a normal distribution. therefore, our results have rich implications for the financial models and the financial industry in canada, as these models have been widely used in practices. in probability theory, heavy-tailed distributions are probability distributions whose tails are not exponentially bounded, and they have heavier tails than the exponential distribution as defined in asmussen (2003). in finance, as cont (2001) pointed out, it a stylized fact that the distribution of asset returns display a power-law or pareto-like tail, with a tail index which is finite, higher than two and less than five for most data sets studied. in particular this excludes stable laws with infinite variance and the normal distribution. however, cont also mentioned that the precise form of the tails is difficult to determine. a recent survey can also be found in ibragimov (2009). heavy-tailed distributions and the canadian stock… 11 since precision form of the tails is the key for financial risk management, there are increasing interests in development of heavy-tailed distributions for asset returns in the recent decades. for instance, glasserman, et al. (2002) developed multivariate t distribution for computing portfolio value-at-risk (var) when underlying risk factors follow heavy-tailed distributions. bradley and taqqu (2003) reviewed recent development on how the heavy-tailed distributions affect several aspects of financial portfolio theory and risk management. using foreign exchange rate returns as an example, mittnik and paolella (2003) demonstrated that garch models with stable paretian innovations perform better in predicting the downside risk of financial assets that use of normal or student’s t garch models. ahn, kim and ramaswami (2012) studied the class of log phase-type (logph) distributions as a parametric alternative in fitting heavy tailed data, and demonstrated its superior performance in insurance risk management. guo (2017a) investigated five widely-used statistical distributions in fitting sp 500 index returns: normal, student’s t, skewed t, normal inverse gaussian (nig), and generalized hyperbolic (gh) distributions. guo demonstrated the skewed t distribution introduced in hansen (1994) has the best goodness of fit and generates suitable stress test scenarios. there are some researchers investigating the canadian stock market in a multivariate framework. for instance, theodossiou and lee (1993) provides additional insight into the nature and degree of interdependence of stock markets of the united states, japan, the united kingdom, canada, and germany, and it reports the extent to which volatility in these markets inf luences expected returns. the analysis uses the multivariate garch-m model. although they are considered weak, statistically significant mean spillovers radiate from stock markets of the u.s. to the u.k., canada, and germany, and then from the stock markets of japan to germany. no relation is found between conditional market volatility and expected returns. strong time-varying conditional volatility exists in the return series of all markets. the own-volatility spillovers in the u.k. and canadian markets are insignificant, supporting the view that conditional volatility of returns in these markets is “imported” from abroad, specifically from the u.s. significant volatility spillovers radiate from the u.s. stock market to all four stock markets, from the u.k. stock market to the canadian stock market, and from the german stock market to the japanese stock market. their results are robust and no changes occur in the correlation structure of returns over time. karolyi (2012) examines the short-run dynamics of returns and volatility for stocks traded on the new york and toronto stock exchanges. david eden, paul huffman, john holman12 the main finding is that inferences about the magnitude and persistence of return innovations that originate in either market and that transmit to the other market depend importantly on how the cross-market dynamics in volatility are modeled. moreover, much weaker cross-market dynamics in returns and volatility prevail during later subperiods and especially for canadian stocks with shares dually listed in new york. some other research could be found in park and switzer (1995), ramchand and susmel (1998), sadorsky (1999), and so on. in this paper, we follow guo’s approach, but focus on the canadian stock market returns. the remainder of the paper is organized as follows. firstly, we introduce the heavy-tailed distributions in guo (2017a). secondly, we discuss the data. then, the estimation results are presented. finally, we conclude. following guo (2017a), we are interested the four following types of heavytailed distribution in addition to the normal distribution: (i) the student’s t distribution; (ii) the skewed t distribution; (iii) the normal inverse gaussian distribution (nig); and (iv) the generalized hyperbolic distribution (gh). all the distributions have been standardized to ensure mean and standard deviation equal to zero and one respectively. their probability density functions are given as follows. (i) student’s t distribution: 1 2 2 1/ 2 1 ( ) 2( | ) 1 ( 2) ( )[( 2) ] 2 t t e f e (1) where v indicates degrees of freedom and et is daily equity market index return. (ii) skewed t distribution: ( 1)/ 2 2 ( 1)/ 2 2 1 1 / 2 1 ( | , ) 1 1 / 2 1 t t t t t be a bc e a b f e be a bc e a b (2) heavy-tailed distributions and the canadian stock… 13 where et is the standardized log return, and the constants a, b and c are given by 2 4 1 a c 2 2 21 3b a c 1 ( ) 2 ( 2) ( ) 2 the density function has a mode of , a mean of zero, and a unit variance. the density function is skewed to the right when t distribution specializes to the standard student’s t distribution by setting the parameter (iii) normal inverse gaussian distribution (nig): 2 2 1 2 2 2 2 ( ( ) ) ( | , , , ) exp( ( )) ( ) t t t t k e f e e e (3) where k ( ) (is the modified bessel function of the third kind and index and . the nig distribution is specified as in prause (1999). the nig distribution is normalized by setting 2 2 and 3 2 2 2 which implies 1) (iv) generalized hyperbolic distribution: 1 1 2 2 2 2 , , | , , ; , , , , 2 , , p t t p p e m p b gg f e p b g q p b g d p b g b g d p b g k g (4) where n pn n p k g r g k g 1 2 2 2 1 2 1 , , 0d p b g r b r r and 1, , , ,m p b g b d p b g r ,p b are g parameters. the generalized hyperbolic distribution is a standardized version of prause (1999). david eden, paul huffman, john holman14 we fit the heavy tailed distributions with the normalized equity market index returns of canada. we choose the gsptse index as it is the benchmark canadian index, representing roughly 70% of the total market capitalization on the toronto stock exchange with about 250 companies included in it. we collected the standardized gsptse daily dividend-adjusted close returns from yahoo finance for the period from july 2, 1979 to july 14, 2017, covering all the available data in yahoo finance. there are in total 9682 observations. figure 1 illustrates the dynamics of gsptse returns. the figure exhibits significant volatility clustering, and the two biggest groups of spikes were observed during the periods of the black monday stock crash and the recent financial crisis. figure 1. gsptse returns s o u r c e : authors’ analysis. table 1 exhibits basic statistics of the gsptse returns. the results show the gsptse daily returns are leptokurtotic and negatively skewed. the extreme downside move is slightly less than the extreme upside move, which is at odds with most of major stock market indexes over the world. heavy-tailed distributions and the canadian stock… 15 table 1. descriptive statistics min max mean std skewness kurtosis -11.13% 9.82% 0.03% 0.96% -0.64 12.35 s o u r c e : authors’ analysis. figure 2 is the histogram of the raw data. we fit the returns by the gaussian distribution, and the figure clearly rejects the null hypothesis of the gaussian distribution. also, figure 2 confirms the negative skewness and heavy kurtosis as shown in table 1. figure 2. gsptse returns s o u r c e : authors’ analysis. david eden, paul huffman, john holman16 parameters estimation the raw return series is fitted by the maximum likelihood estimation (mle) method and the estimation results of the key parameters are given in table 2. the series is normalized to allow zero mean and unit standard deviation. all the parameters are significantly different from zero at 10% significance level. table 2. estimated values of key parameters normal student's t skewed t nig generalized hyperbolic symmetric y y n n n fat-tailed n y y y y estimated parameters nu=4.72 nu=4.73; beta=-0.027 alpha=1.35; beta=-0.032 p=-1.323; b=-.042; g=0.127 s o u r c e : authors’ analysis. goodness of fit following huber-carol, et al. (2002) and taeger and kuhnt (2014), we compare the four heavy-tailed distributions and the benchmark normal distribution in fitting the gsptse daily returns through four different criteria: (i) kolmogorov-smirnov statistic; (ii) cramer-von mises criterion; (iii) anderson-darling test; and (iv) akaike information criterion (aic). (i) kolmogorov-smirnov statistic is defined as the maximum deviation between empirical cdf (cumulative distribution function) fn and tested cdf : sup | ( ) ( ) |n n x d f x f x , (5) where [ , ] 1 1 ( ) ( ) n n x i i f x i x n . heavy-tailed distributions and the canadian stock… 17 (b) cramer-von mises criterion is defined as the average squared deviation between empirical cdf and tested cdf: 2 2 1 1 2 1 [ ( ) ( )] ( ) ( ) 12 2 n n n i i i t n f x f x df x f x n n , (6) (c) anderson-darling test is defined as the weighted-average squared deviation between empirical cdf and tested cdf: 2 ( ( ) ( )) ( ) ( )(1 ( )) nf x f xa n df x f x f x , and the formula for the test statistic to assess if data comes from a tested distribution is given by: 2 1 2 1 ln( ( )) ln(1 ( )) n i i i i a n f x f x n . (7) (d) akaike information criterion (aic) is defined as: 2 2 ln( )aic k l , (8) where l is the maximum value of the likelihood function for the model, and k is the number of estimated parameters in the model. the comparison results are showed in table 3, indicating the skewed t distribution has the best goodness of fit compared with other selected types of distribution, followed by the generalized hyperbolic distribution, and the student’s t distribution. table 3. comparison of selected types of distribution normal student's t skewed t nig generalized hyperbolic k-s test 0.039 0.030 0.028 0.031 0.029 cv-m test 0.056 0.048 0.044 0.049 0.047 a-d test 1.97 1.62 1.49 1.58 1.52 aic 32555 31158 30643 31431 30946 s o u r c e : authors’ analysis. david eden, paul huffman, john holman18 stress test scenarios to analyze how these distributions perform in financial risk management, we take advantage of the concept of value at risk (var) to calculate stress test scenarios. here, var is defined as: for a given position, time horizon, and probability p, the p var is defined as a threshold loss value, such that the probability that the loss on the position over the given time horizon exceeds this value is p. with the estimated parameters in section 4.1, we calculate vars for different confidence levels: ( ) inf{ : ( ) 1 }t tvar e e p e e , (9) is the confidence level. we select the following levels for downside moves: {99.99%, 99.95%, 99.9%, 99.5%, 99%}, and for upside moves: {0.01%, 0.05%, 0.1%, 0.5%, 1%}. from equation (9), the stress test scenarios based on the var levels are given as in table 4. table 4 indicates that the skewed t distribution has the closest vars to the nonparametric historical vars compared with other types of distributions. table 4. scenarios for gsptse shocks left tail confidence 99.99% 99.95% 99.90% 99.50% 99.00% empirical -12.17% -11.00% -8.47% -6.25% -4.92% normal -6.52% -5.65% -5.20% -4.47% -4.02% t -11.60% -10.25% -9.25% -7.32% -5.97% skewed t -12.02% -11.07% -8.10% -6.40% -5.15% nig -10.15% -9.30% -7.92% -7.15% -5.90% gh -11.65% -10.45% -8.77% -6.80% -5.40% right tail confidence 0.01% 0.05% 0.10% 0.50% 1.00% empirical 10.10% 7.85% 7.05% 5.35% 4.35% normal 6.52% 5.65% 5.20% 4.47% 4.02% t 11.60% 10.25% 9.25% 7.32% 5.97% skewed t 10.52% 8.20% 7.35% 5.50% 4.50% heavy-tailed distributions and the canadian stock… 19 right tail nig 11.17% 9.85% 8.17% 7.00% 5.90% gh 12.05% 10.07% 8.47% 6.90% 5.27% s o u r c e : authors’ analysis. financial market participants are always interested in the tail parts of the statistical distributions, since precision of the tails are crucial for financial risk management. thus, statistical distributions which can capture the tail parts of the empirical distribution would be particular interesting for the market participants. in this paper, we focus on the gsptse index, the most important risk factor in the equity market in canada, and develop a methodology to construct its stress test scenarios. by comparing empirical performance of different statistical distributions, our results show the skewed t distribution could generate the most suitable risk management scenarios for gsptse index. there are two directions for further research. first, one may jointly consider the risk factor of stock market returns with other risk factors, such as unemployment and interest rates, and investigate how to extend the skewed t distribution to the tail-dependence framework. second, one may introduce the heavy-tailed distributions to the generalized autoregressive conditional heteroskedasticity (garch) framework as in guo (2017b, 2017c) and study their implications in financial risk management, and the extension would be similar as the studies in day and diamond (2017), maree (2017) and maree, carr and howard (2017). finally, one might consider a portfolio with multiple assets and consider risk management of heavy tails across assets in a multivariate garch framework as in karolyi (2012) and guo (2017d). as in guo (2017d), to capture the tail risks across assets, one has to rely on the copula approach. however, the skewed t distribution with copula still project better risk measures, at least for the case of two assets. as pointed out in cont (2001), there are several other stylized facts observed in the financial markets: such as the correlation of volume and volatility. it is interesting to investigate if the heavy tails are also observed in the volume series and also if the skewed t distribution has a similar superior performance in fitting the volume growth. all these are left for future research. table 4. scenarios for gsptse shocks david eden, paul huffman, john holman20 ahn, s., kim, joseph h.t., & ramaswami. v. (2012). a new class of models for heavy tailed distributions in finance and insurance risk. insurance: mathematics and economics, 51(1), 43–52. http://dx.doi.org/10.1016/j.msmatheco.2012.02.002. asmussen, s. (2003). stead-state properties of gi/g/1. applied probability and queues – stochastic modelling and applied probability, vol. 51, 266–301. bradley, b. o., & taqqu, m. s. (2003). financial risk and heavy tails. handbook of heavy tailed distributions in finance, chapter 2, vol. 1, 35–103. http://dx.doi.org/10.1016/ b978-044450896-6.50004-2. cont, r. (2001). empirical properties of asset returns: stylized facts and statistical issues. quantitative finance, vol. 1, 223–236. day, m., & diamond, m. (2017), garch model, heavy tails and the chinese stock market returns, working paper. glasserman, p., heidelberger, p., & shahabuddin, p. (2002). portfolio value-at-risk with heavytailed risk factors. mathematical finance, 12(3), 239–269. http://dx.doi.org/10.1111 /1467-9965.00141. guo, zi-yi (2017a). heavy-tailed distribution and risk management of equity market tail events. journal of risk & control, vol. 4, 31–41. http://dx.doi.org/10.2139/ssrn.301379. guo, zi-yi (2017b), a stochastic factor model for risk management of commodity derivatives, proceedings of the 7th economic and finance conference, 26–42. guo, zi-yi (2017c), models with short-term variations and long-term dynamics in risk management of commodity derivatives, mimeo. guo, zi-yi (2017d). how information is transmitted across the nations? an empirical investigation of the us and chinese commodity markets. global journal of management and business research, 17(2), 1–11. hansen, b. (1994). autoregressive conditional density estimation. international economic review, vol. 35, 705–730. http://dx.doi.org/10.2307/2527081. huber-carol, c., balakrishnan, n., nikulin, m., & mesbah, m. (2002). goodness-of-fit tests and model validity, springer. ibragimov, r. (2009). heavy-tailed densities. the new palgrave dictionary of economics online. imf (2014). canada financial sector stability assessment. international monetary fund country report no. 14/29. karolyi, g. a. (1995). a multivariate garch model of international transmissions of stock returns and volatility: the case of the united states and canada. journal of business & economic statistics, 13(1), 11–25. http://dx.doi.org/10.2307/1392517. maree, a. (2017), regulatory requirements, risk management and the equity market in new zealand, working paper. maree, a., carr, g., & howard, j. (2017). a new class of heavy-tailed distribution in garch models for the silver returns, journal of progressive research in social sciences, 5(2), 364–368. heavy-tailed distributions and the canadian stock… 21 mittnik, s., & paolella, m. s. (2003). prediction of financial downside-risk with heavytailed conditional distributions. handbook of heavy tailed distributions in finance, chapter 9, vol. 1, 385–404. park, t. h., & switzer, l. n. (1995). bivariate garch estimation of the optimal hedge ratios for stock index futures: a note. the journal of futures markets, vol. 15, 61–67. http://dx.doi.org/10.1002/fut.3990150106. prause, k. (1999). the generalized hyperbolic model: estimation, financial derivatives, and risk measures. ph.d. dissertation. ramchand, l., & susmel, r. (1998). volatility and cross correlation across major stock markets. journal of empirical finance, 5(4), 397–416. http://dx.doi.org/10.1016/ s0927-5398(98)0003-6. sadorsky, p. (1999). oil price shocks and stock market activity. energy economics, 21(5), 449–469. http://dx.doi.org/10.1016/s0140-9883(99)00020-1. taeger, d. & kuhnt, s. (2014). goodness-of-fit tests. statistical hypothesis testing with sas and r, wiley online library. theodossiou, p., & unro, l. (1993). mean and volatility spillovers across major national stock markets: further empirical evidence. the journal of financial research, 16(4), 337–350. http://dx.doi.org/10.1111/j.1475-6803.1993.tb00152.x. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: january 9, 2017; date of acceptance: january 26, 2017. * contact information: radek.ciukaj@interia.pl, nieciecza 45, 33-240 żabno, poland, phone: +48 784 680 685. ciukaj, r. (2016). managing financial stability by the european central bank in the period 2008– 2012. copernican journal of finance & accounting, 5(2), 57–72. http://dx.doi.org/10.12775/ cjfa.2016.015 radosław ciukaj* cracow university of economics managing financial stability by the european central bank in the period 2008–2012 keywords: unconventional monetary policy, quantitative easing, european central bank. j e l classification: e52, e58. abstract: in reaction to the global financial crisis and ineffectiveness of traditional monetary policy, european central bank undertook a number of unconventional measures to preserve financial stability in the eu. the paper presents a non-standard tools used by the ecb in the 2008–2012 period, as a response to shocks in the financial system and evaluates their effectiveness.  introduction despite its importance and numerous discussions in the financial literature, the concept of financial stability has many definitions and manifestations. moreover, the terms “ financial stability” and “the stability of the financial system” are often used interchangeably in the financial literature. for the purpose of this article, the definition of financial stability used most frequently by the european central bank’s (ecb) has been adopted, where financial stability is defined as: “a situation where the financial system is able to withstand ecoradosław ciukaj58 nomic shocks without the occurrence of significant disturbances in the financial intermediation process and the overall availability of financial services” (ebc, 2016b). the traditional approach of the central banks to achieve financial stability by maintaining low inf lation and by providing a lender of last resort function, is obsolete in the light of the 2007–2009 crisis. therefore, the aim of this paper is to analyze and to assess the anti-crisis tools, used by central banks during the last financial crisis to ensure the stability of the financial system, especially analyzing the unconventional measures used by the european central bank in the years 2008–2012. the first part of the article presents the tasks of the central bank in the financial safety net and traditional tools used by central banks to ensure financial stability, while the second part portrays the unconventional monetary policy instruments, which were used by ecb. the research methodology and the course of the research process the preparation of the article included a thorough analysis of domestic and foreign literature regarding monetary policy, unconventional monetary policy tools and actions of the european central bank during the recent financial crisis. the information were also taken from official documents, published by selected international organizations and statistical data. the activities of central banks to ensure financial stability axel a. weber draws attention to the fact that, the role of central banks, as an entity acting for financial stability, should not lead to the conclusion that central banks have to take rapid action in the face of financial turmoil. the main entities, that should be responsible for financial stability, are primarily market participants and central banks play secondary role (bis, 2008, p. 1). among the bodies of safety net, central banks have the longest history of activity for financial stability. currently, as the functions of the central bank in the safety could be mentioned: 1) function as the lender of last resort, 2) function of taking care of the security of the payment system, 3) function of macro-prudential supervision, 4) function of an information policy of the central bank. managing financial stability by the european central bank… 59 the central bank, as a body in the safety net, is the lender of last resort. emergency money supply conducted by central bank, in case of disorders associated with the lack of possibility to raise funds on the financial market, can be done in two ways, depending on the nature of the crisis: 1) through bilateral operations with a single bank if the only one institution, that is systemically important, has a trouble, 2) through open market operations, when the crisis is connected with increased demand for funds in the whole banking system (szczepańska, 2007, p. 61). the financial crisis 2007–2008 has confirmed the importance of the function of the central bank as a lender of last resort. many banks launched this way of help for commercial banks in order to prevent the loss of their liquidity and thus avoid major turbulence in the financial system. the payment system is a set of instruments, regulations, procedures, banking and inter-operating systems, which enable financial institutions for mutual presentation and exchange of data and documents related to the transfer of funds. it is also considered as a one of the most important elements of not only the infrastructure of financial markets, but also the entire economy. in the last decades turnovers in payment systems have significantly increased, what is more in some countries it exceeds the country’s gdp. therefore, the security of the payment system is essential for preserving the stability of the financial system. the tasks which are performed by central banks in connection to payment systems, are focused on two areas: 1) operational area, 2) regulatory and supervisory area. the functions of the central bank in the operational area rely on the creation and operation of payment systems. the central bank as the operator and owner of the system has the opportunity to inf luence during the design and implementation of the system. in most countries, central banks own or run at least one payment system (especially high-value systems, which are used to implement monetary policy instruments). the functions of the central bank in the regulatory and supervisory area focus mainly on the reduction of risk and the appropriate management of this risk by payment systems. at the same time the central banks must heed the efficiency of the payment system, because it is not advisable to create a completely secure system that on the other side would be too costly for users. oversight of payment systems refers to a transfer of funds, and not to individual participants. radosław ciukaj60 globalization, bigger and bigger rate of assets of the financial sector in relation to country’s gdp and the growing relations of the financial system to the real economy have created the need to monitor the condition of the whole financial sector, instead of a single institution. these activities are called macroprudential analysis and naturally become the domain of central banks, because they have already been leading analysis for monetary policy purposes, have skilled staff, adequate knowledge and tools. differences between macro and micro-prudential analysis presents table 1. table 1. differences between micro and macro-prudential approach to supervision specification method of analysis micro-prudential macro-prudential direct purpose limit risks to a single financial institution limit risks to the entire financial system final purpose protection of depositors and investors avoiding macroeconomic costs of the crisis (fall in gdp) relationships and linkages between financial institutions irrelevant relevant the perspective of risk’s assessment to financial stability from the point of view on the risk for a single institution: bottom-up approach from the point of view on the risk for the instability of the entire system: top-down approach subject of analysis single institution – singular data the whole financial systemaggregated data time perspective of analysis approach based on the past approach oriented for the future s o u r c e : szczepańska, 2007, p. 61. the central bank also uses information policy as a tool to support the stability of the financial system. along with the increase in complexity of new financial instruments, information policy can be used as an element of public education. imitating reports about inf lation, central banks have begun to publish the so-called. reports on financial stability (from year to year the number of published reports increases). reports about the stability of the financial system is one of the few central bank’s ways to communicate with the environment. other measures include: 1) speeches of representatives of the central bank, 2) press publication of the central bank, managing financial stability by the european central bank… 61 3) information published on the website of the central bank (szczepańska, 2007, p. 71). in a country where the central bank communicates with the environment, it is easier to manage inf lation expectations, and thus maintains the planned level of inf lation, which is important factor for stability of the financial system (capiga, 2010, p. 71). stabilizing actions of the european central bank during the first phase of the financial crisis despite the first signs of the upcoming crisis in 2008, the european central bank raised interest rates by 25 basis points. this step was explained by the president of the ecb as the necessity of taking care of the central bank’s primary objective, which is to maintain price stability (ecb, 2008). the first time, when interest rates of the main refinancing operations were reduced about 325 basis points, was at the end of 2008. at that time, this reduction was historically the lowest. in 2011, ecb raised again interest rates, because authorities of european central bank wanted to anchor inf lations expectations at the level consistent with its mail goal (ecb, 2011a), but then they again returned to reductions of interest rates to achieve bottom-most level of rates: 0,3 (rate of credit at the end of day), 0,05 (main refinancing operation rate) and minus 0,3 (deposit rate at the end of day) (ecb, 2016a). chart 1 shows the f luctuations of ecb’s interest rates between 2008 and 2015. it is advisable to notice the fact, that initially ecb narrowed the spread between lending and deposit rates. this action was supposed to limit the variability of short-term rates, so between october 2008 and january 2009 the corridor was narrowed by 100 basis point. when financial markets calmed down slightly, ecb has attempted to extend the corridor to a limit of 200 basis points (bogołębska, 2012, p. 56). despite the reduction of interest rated by european central bank to historically lowest level, effectiveness of this tool was insufficient. ecb encountered three limitations on conducting traditional monetary policy: 1) it reached lower boundaries of the main interest rate, which caused it impossible to further cuts, 2) increased demand for financial reserves, which restricted redistribution of liquidity between financial institutions and reduced ecb’s control over rates on money market, radosław ciukaj62 3) disturbance in functioning of transmission mechanism of monetary policy, what resulted in lower reactions of most segments of economy for monetary impulses, than it was expected (janus, 2013, p. 1). chart 1. fluctuations of ecb’s interest rated between 2008 and 2015 despite the first signs of the upcoming crisis in 2008, the european central bank raised interest rates by 25 basis points. this step was explained by the president of the ecb as the necessity of taking care of the central bank’s primary objective, which is to maintain price stability (ecb, 2008). the first time, when interest rates of the main refinancing operations were reduced about 325 basis points, was at the end of 2008. at that time, this reduction was historically the lowest. in 2011, ecb raised again interest rates, because authorities of european central bank wanted to anchor inflations expectations at the level consistent with its mail goal (ecb, 2011a), but then they again returned to reductions of interest rates to achieve bottom-most level of rates: 0,3 (rate of credit at the end of day), 0,05 (main refinancing operation rate) and minus 0,3 (deposit rate at the end of day) (ecb, 2016a). chart 1 shows the fluctuations of ecb’s interest rates between 2008 and 2015. chart 1. fluctuations of ecb's interest rated between 2008 and 2015 source: based on: https://www.ecb.europa.eu/stats/monetary/rates/html/index.en.html. it is advisable to notice the fact, that initially ecb narrowed the spread between lending and deposit rates. this action was supposed to limit the variability of short-term rates, so between october 2008 and january 2009 the corridor was narrowed by 100 basis point. when financial markets calmed down slightly, ecb has attempted to extend the corridor to a limit of 200 basis points (bogołębska, 2012, p. 56). despite the reduction of interest rated by european central bank to historically lowest level, effectiveness of this tool was insufficient. ecb encountered three limitations on conducting traditional monetary policy: s o u r c e : based on: https://www.ecb.europa.eu/stats/monetary/rates/html/index.en.html. in the face of inefficiency of monetary policy traditional instruments, european central bank had to reach for unconventional instruments. their aim was to restore correct monetary policy transmission and to provide incentives to stimulate economy (żywiecka, 2014, p. 73). these include: 1) forward guidance, 2) quantitative easing, 3) qualitative easing (bernanke, reinhart & sack, 2004, p. 3). the first of these methods involves the use of communication policy for shaping public expectations about future course of interest rates. in other words, central bank communicates to the market about planned interest rates policy in a time horizon, longer than till next meeting of decision-making body. the main goal of this tool, during the last crisis, was to build society and institutions expectations about ecb’ interest rate policy and thus affect the growth of investment and consumption and stimulate economic situation (nbp, 2013, p. 40). according to ecb, it can be distinguished 4 types of forward guidance: managing financial stability by the european central bank… 63 1) clean quality forward guidance – in this approach central bank indicates direction of future monetary policy, but does not specify limits or conditions, that must be met in order to change policy, 2) qualitative forward guidance – the possibility of changes in indicated direction of monetary policy, depends on the size of the descriptively expressed economic indicators, 3) based on the calendar forward guidancecentral bank indicates date, since when specified monetary policy will be lead, 4) based on the results forward guidance – central bank determines the change of monetary policy of achieving numerical economic measures (issing, 2014, p. 4). central bank must be sure about the present and the future economic situation, if it wants to apply forward guidance. the effectiveness of this tool depends on understanding of central bank’s intentions, and if central bank has a public trust. quantitative easing is characterized by enlargement of monetary base above the level needed to achieve zero interest rates. as an example, we can indicate the purchase of bond by central bank with the help of newly issued funds. such tool has effect of reducing long-term profitability of debt securities, and thus lower long-term interest rates (pronobis, 2014, p. 17). quantitative easing affects the market by omitting interest rate channel, but the tool has impact on market interest rates by “pumping” additional cash into market (pr zybylska-kapuścińska, 2012, p. 63). qualitative easing is also aimed at lowering long-term interest rates. however, in this case, central bank does not issue additional cash, named “great power money”, and increase its balance sheet. central bank exchanges simply owned assets into cash. as example might be sale of securities with shorter maturity date and buying of securities with longer maturity date. in other words, replacing more liquid securities for less liquid or buyinh more risky assets and selling less risky assets in the same time. changes in demand for assets give rise to changes in their values, and thus changes in profitability. qualitative easing changes profile and type of risk in the central bank’s portfolio. figure 1 shows the comparison between quantitative easing and qualitative easing. radosław ciukaj64 figure 1. comparison between quantitative easing and qualitative easing qualitative easing liabilities assets before after before after assets liabilities figure 1. comparison between quantitative easing and qualitative easing source: lenza, pill, & reichlin, 2010, p. 10. division of unconventional monetary policy tool can take place also according to other criteria, which are presented in table 2. table 2. division of unconventional monetary policy tools instrument characteristics of instrument direct quantitative easing central banks increase their balance sheet sums by buying all sorts of assets from any market participants, but in practice they buy long-term government securities from commercials banks. the purpose od these instrument is to provide additional cash to private sector, however, decision, whether these fund will be used for credit activity or remain as a liquidity buffer, belongs „conventional” assets banknotes reserves „conventional” assets „unconventional” assets banknotes reserves quantitative easing s o u r c e : lenza, pill, & reichlin, 2010, p. 10. division of unconventional monetary policy tool can take place also according to other criteria, which are presented in table 2. managing financial stability by the european central bank… 65 table 2. division of unconventional monetary policy tools instrument characteristics of instrument direct quantitative easing central banks increase their balance sheet sums by buying all sorts of assets from any market participants, but in practice they buy long-term government securities from commercials banks. the purpose of these instrument is to provide additional cash to private sector, however, decision, whether these fund will be used for credit activity or remain as a liquidity buffer, belongs to commercial banks. direct credit easing central banks recognize shortages of liquidity in specific market sectors and reduce them by buying commercial papers, corporate bonds and assetbacked securities. indirect quantitative /credit easing central bank provides loans to commercial banks for longer periods and at non-standard conditions. these loans are usually secured by a wide range of collaterals. s o u r c e : based on: szunke, 2013, p. 3. unconventional monetary policy provides liquidity to the banking sector. it is used in order to exert inf luence on security prices and market conditions by selling central bank’s assets or buying new ones. therefore, it is also called “balance sheet policy”. the ways, that european central bank used to provide additional liquidity to the banking sector, were: modifications in terms of maturity of open market operations, unconventional long-term operations, extensions of securities, which were accepted as collateral, swap lines with other central banks and purchase of securitized papers or accept them as collateral (przybylskakapuścińska, 2012, p. 64). given the tensions on the money market in the first half of 2008, european central bank decided to increase liquidity, allowing banks to earlier fulfill their obligations about reserve requirement, what banks preferred, because of uncertainty and decreasing turnover on the market. ecb reduced liquidity at the end of reserve maintenance period, which is the reason why total level of liquidity within planned period remained unchanged (żywiecka, 2014, p. 154). another step designed to increase access to central bank’s liquidity was introduction of additional long-term refinancing operations – 6 months instead of 3 months – and later with even longer maturity terms. with this step, average maturity of refinancing period increased, which led to greater access to long-term money. the aim was to encourage banks to give more loans to economy (żywiecka, 2014, p. 155). radosław ciukaj66 the third method, which was used by ecb as the answer for turmoil in financial market, was provision of liquidity in foreign currencies to banks. reduced availability of unsecured loans has forced from banks to use secured financing, among others in the form of currency swaps. however, the acquisition of other currencies (especially dollars) also became difficult. ecb reacted quickly to this situation and concluded swap line with federal reserve system in 2007. thanks to this action commercial bank were supplied with dollar funding (żywiecka, 2014, p. 154). later, ecb also concluded swap lines with other central banks (for example wit central bank of: denmark, latvia, hungary, poland and sweden), giving to those countries access to liquidity in euro. activities associated with quantitative easing were important tools, used by european central bank as solution for crisis turmoil. an example of this type of action was announced on 7. may, 2009 – covered bond purchase programme (cbpp). the program was carried out in three stages: between july 2009 and june 2010 (cbpp1), second between november 2011 and october 2012 (cbpp2) and third since october 2014 (palace du luxembourg, 2012a). european central bank pledged the purchase of covered bonds, which were issued in the euro area. in the first edition, it was allocated 60 billion euro for this purpose, while the requirement of issue amount was 500 million euro. bonds had to have ranking at minimum aa level and maturity date should have been between 3 and 10 years (żywiecka, 2014, p. 162). in the second edition, it was allocated 40 billion euro for this purpose and the minimum amount of issue was 300 million euro, while maturity date was changed for 10,5 years. rating assigned to assets was downgraded to bbblevel (ecb, 2011b). in 2014, ecb announced third edition of cbpp program, but a lot of characteristics were modified. this time the program did not have specific ending date (expected period is two years), maturity date, minimum issue amount and size of planned purchase amount. minimum rating was set at bbblevel (ecb, 2014). details and comparison of cbpp programs are presented in table 3. table 3. covered bond purchase programs stage of program cbpp1 cbpp2 cbpp3 start date july 2009 november 2011 october 2014 end date june 2010 october 2012 – duration 12 months 12 months minimum 2 years managing financial stability by the european central bank… 67 stage of program cbpp1 cbpp2 cbpp3 maturity of bonds 3–10 years <=10,5 years no limit minimum rating aa bbbbbbminimum quantity of emission 500 million euro 300 million euro no limit amount of purchase 60 billion euro 40 billion euro no limit s o u r c e : based on: żywiecka, 2014, p. 162, 167. market segment of covered bonds is valuable source of long-term capital for banks, which is used to finance fixed rate mortgages. therefore, ecb’s decision to buy bonds was dictated by a great need to provide liquidity to commercial banks in euro area (żywiecka, 2014, p. 161). stabilizing actions of the european central bank during the second phase of the financial crisis the next phase of the crisis was associated with alarming fiscal situation and worse ratings of some countries from euro area. this situation was caused by: high public costs (incurred in order to rescue financial institutions), structural differences between countries the north and the south of europe and growth in unfavorable relation of public debt to gdp of some countries. this was ref lected in large difference between interest rated on treasury bonds od such countries as greece, italy and spain, which stood on the edge of bankruptcy and german interest rates of government bonds. help for endangered countries was assured by european central bank. it introduced another unconventional program – securities market programme (smp) (żywiecka, 2014, p. 163). it has been implemented in may 2010 and had also two stages: between may and july 2010 and between august 2011 and january 2012. european central bank used this program to: 1) purchase debt securities, issued by government or public entities on the secondary market, 2) purchase debt securities, issued by private companied in the primary or the secondary market (palace du luxembourg, 2012b). table 3. covered bond purchase programs radosław ciukaj68 ecb’s main goal of this program was to maintain liquidity in the european debt security market, thus ensuring appropriate conditions for effective monetary policy (żywiecka, 2014, p. 166). long term refinancing operations (ltro) should also have helped in strengthening the liquidity position of commercial banks. these are instruments, whose task is to provide additional funds to commercial banks for longer period than in the basic open market operations. until the outbreak of the crisis, they had three month maturity period, later it was extended to six months and at the end to one year maturity period. in 2011, a spectacular step of ecb was the announcement the longest two refinancing operations, with maturity period of three years. there was also possibility of earlier repayment. in december 2011, rcb made its first bid for loans with value of 489,2 billion euro. 523 institutions responded to this offer. the second stage took place in february 2012. ecb offered 529,5 billion euro amount of money and 800 institutions answered to this offer (ecb, 2012). details of ltros have been presented in table 4. table 4. details of ltro programs stage of program ltro1 ltro2 start date december 2011 february 2012 value of granted loans 489,2 billion euro 529,5 billion euro number of partners 523 800 s o u r c e : based on: http://www.ecb.europa.eu/pub/pdf/other/mb201201_focus04.en.pdf. in the second half of september 2012, financial markets were still characterized by various level of liquidity and profitability of bonds. investors also showed aversion to own government bonds of some european countries in its portfolios. there were concerns about resignation of some countries from participating in euro area. therefore, ecb announced further program to buy government bonds. its name is outright monetary transactions (omt). overriding aim was to assure the proper functioning of monetary policy transmission mechanism and to maintain uniformity of monetary policy. according to this program, undertaken actions consisted of unlimited buying of government bonds on the secondary market with maturity periods from 1 to 3 years. however, the bonds of country could be treated as a subject of transactions, if country: managing financial stability by the european central bank… 69 1) declared willingness to implement structural reforms and deficit reductions, 2) participates in one of recue programs in euro area: european financial stability facility or european stability mechanism. omt, differently from the previous bond purchase programs, contained built-in mechanism to encourage countries to implementation of necessary reforms.  conclusions radical steps were the answer of european central bank to shocks in the financial system, which were formed as a result of crisis 2007–2009. main goal was to restore the balance in the financial system. these actions were difficult because of poor condition of the european economy, occurrence of debt crisis or possibility of disintegration of the euro area. initial lowering of interest rates to historically low levels, did not brought the expected results. limitations encountered by european central bank set him a new challenge, which was the use of unconventional monetary policy tools. they were complementary to the traditional interest rate policy. by using them, president of ecb had in mind five principles: 1) designing and implementing of unconventional instruments was supposed to serve a fundamental objective of ecb, 2) the purpose of these tools was removal of major obstacles, that interfere with proper transmission of monetary policy impulses, 3) unconventional programs were carried out with the tools, that were at the disposal of ecb, 4) unconventional instruments were implemented for certain period of time, 5) by using unconventional tools, whole institutional environment hat to strive to reactivate private markets (żywiecka, 2014, p. 173). although the main task of ecb is to maintain price stability, it undertook a series of actions, that should have restored financial stability in europe. immediately after ecb has modified the maturity of open market operations and expanded the list of accepted collaterals, next step was establishment of swap lines with other central banks, whose task was to provide liquidity to commercial banks in foreign currencies. scale and number of involved countries indicate the significance of anti-crisis tool. radosław ciukaj70 purchase of debt securities (cbpp programs) was crucial for stabilizing actions in europe. it improved banks’ financing conditions and lending possibility by revitalizing debt security market. program securities market programme implemented buying government and private securities. thanks to it, possibility of collapse of government bond market was abandoned in some euro area countries. it also contributed to improvement of monetary policy transmission mechanism. unfortunately, the funds, raised by banks from this program, have been deposited in the accounts of ecb and therefore not spurred the real economy. with ltro operations, main goals have been reached: it restored liquidity in banking sector and interest rates have been lowered. banks, which were benefiting from preferential credits, invested this capital in bonds of european countries and thus contributed to lower their profitability. despite the lack of full implementation of omt program, ecb’s message about readiness to intervene, positively inf luenced interest rates of government bonds of countries facing debt crisis. on conclusion, the actions undertaken by ecb as the unconventional monetary policy, can be evaluated as: 1) providing liquidity in the form of extended loan supply, 2) taking the form of direct purchase operations of government and private securities on the secondary market by ecb, 3) shaping long-term expectations through appropriate information policy (żywiecka, 2014, p. 200). above mentioned activities were aimed at supporting the european banking sector. therefore, buying assets programs were conducted on smaller scale and some of them contained assumption of sterilization transactions – it was afeature different from the traditional quantitative easing programs. although the article focused on the positive effects of ecb’s unconventional policy, it is worth to notice that there has been a vivid discussion whether the scale, time and manner of changes in the monetary policy were effective in achieving the intended purposes. it has been argued that they could lead to lower effectiveness of the tools, including: 1) anchoring in the euro zone pessimistic expectations about the prospects for economic growth, as a result of sluggish, late and too weak anti-crisis measures used by ecb, 2) ecb has never defined desirable level of key real medium-term indicators, such as desired level of unemployment and economic growth, which would have helped to change the expectations, managing financial stability by the european central bank… 71 3) the inflation target was treated as the master parameter of ecb’s monetary policy, which could mean too narrow margin for growth in nominal incomes, discouraging business entities to plan larger scale of production, 4) implemented programs of security purchases exerted only temporary effects on ecb’s balance sheet and monetary base in the euro zone, 5) too early termination of quantitative easing programs could have negative impact on functioning of important sectors in the economic market, 6) there is potential risk of financial loss by the ecb, related to purchase of securities with poor quality. however, given the fact, that the unconventional tools were used for the first time on such a big scale, it is difficult to predict their negative long-term effects (bednarczyk, 2015, p. 97). therefore, the overall assessment of steps undertaken by the european central bank in years 2008–2012 should be positive. these actions have substantially increased liquidity in banking sector and contributed to avoidance of insolvency of euro area countries. despite the fact that the unconventional monetary policy tools have often only mitigate the negative consequences, rather than removing the source of crisis, it should be stated that the european central bank has significantly contributed to maintaining stability in european financial system.  references bednarczyk, j.l. 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(2014). niestandardowe działania banków centralnych w warunkach globalnego kryzysu finansowego. warszawa: cedewu. http://www.ecb.europa.eu/mopo/pdf/150202_faq_cbpp3.pdf (2014) (accessed: 15.10. 2016). http://www.ecb.europa.eu/pub/pdf/other/mb201201_focus04.en.pdf (2012) (accessed: 16.10.2016). https://placeduluxembourg.wordpress.com/2012/02/22/ecb-market-intervention-covered-bond-purchasing-programme-cbpp/ (2012a) (accessed: 12.10.2016). https://placeduluxembourg.wordpress.com/2012/03/02/ecb-market-intervention-thesecurities-market-programme-smp/(2012b) (accessed: 12.10.2016). https://www.ecb.europa.eu/ecb/tasks/stability/html/index.pl.html (2016b) (accessed: 20.09.2016). https://www.ecb.europa.eu/press/pr/date/2011/html/pr111103_1.en.html. (2011b) (accessed: 14.10.2016). https://www.ecb.europa.eu/press/pressconf/2008/html/is080703.en.html (2008) (accessed: 05.10.2016). https://www.ecb.europa.eu/press/pressconf/2011/html/is110407.en.html (2011a) (accessed: 05.10.2016). www.bis.org/review/r080610a.pdf (2008) (accessed: 26.09.2016). www.ecb.europa.eu/stats/monetary/rates/html/index.en.html (2016a) (accessed: 28.09. 2016). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 3 date of submission: november 13, 2018; date of acceptance: december 14, 2018. * contact information: wieslawajoanna@poczta.onet.pl, wsb university in poznań, powstańców wielkopolskich 5, 61-874 poznań, poland, phone: +48 61 655 33 33; orcid id: https://orcid.org/0000-0002-3185-6544. ziółkowska, w. (2018). innovativeness of the polish economy in the context of sustainable development. copernican journal of finance & accounting, 7(3), 71–88. http://dx.doi.org/10.12775/ cjfa.2018.016 wiesława ziółkowska* wsb university in poznań innovativeness of the polish economy in the context of sustainable development keywords: innovations, summary innovation index, global innovation index, r&d expenditure, pearson’s and spearman’s correlation coefficients. j e l classification: h, o. abstract: this paper attempts to evaluate the progress of polish economy’s innovativeness in the years 2010–2016 against the backdrop of other eu member states. while this analysis is not exhaustive, it allows to draw the opinion that the pace of the convergence process is not fast enough. poland, despite the growth of the summary innovation index, in 2016 was ranked only as number twenty-five among so called moderate innovators. on the other hand, lithuania, latvia, malta next to the netherlands and the uk formed a group whose level of innovativeness increased the fastest. improvement of the innovativeness of the economy requires an increase in investments, effective partnership between enterprises and academic centers, a high level of education, and scientific research. it also turns out that r&d expenditure is too low as well. while this figure measured as spending in euro per capita improved in poland from eur 68.60 in 2010 to eur 108.30 in 2016, which represents over a 50% growth, it was still 5.5 times lower than the average for the european union, which stood at eur 592.30. total r&d outlays in 2016 in all sectors made up a mere 0.97% of the gdp, while the eu average was 2.03% of the gdp. the return rate on the outlays measured as an improvement of the summary innovation index, on the assumption that in 2010 the ue=100, is relatively low. the wiesława ziółkowska72 growth of the summary innovation index in 2016, measured against the eu average in 2010 treated as 100, was the same as the average for the eu and equaled 2 points.  introduction the purpose of this paper is to analyze the progress of polish economy’s innovativeness as a sine qua non for its sustainable development against the backdrop of other eu member states in the years 2010–2016. sustainable development is understood as the use of solutions based on institutional arrangements as well as ethic-and-moral governance leading to a balance among the economic, social, and ecological spheres. the definition of innovativeness was presented for the first time by joseph schumpeter in 1912 (schumpeter, 1960, pp. 103–104). he introduced a differentiation between an invention and innovation. in his opinion, an invention is a creation of knowledge, while an innovation is the implementation of an invention into production. an innovation can be understood broadly and narrowly. in its narrow aspect, an innovation is treated as something new, marketed for the first time, and usually is technical in nature. in its broader aspect, results of innovations are an important element of social reality, organizational structures, and marketing solutions, not only economic practice. innovations understood in such a way bring benefits to the general public, not only to employers and producers, but also consumers and employees. eu member states have different levels of wealth expressed in gdp measured as purchasing power parity per capita. in the years in question, the countries with the highest average income ranging from pps 53,300 to 36,000 per capita were ireland, the netherlands, austria, denmark, sweden, and germany1. in the second group of countries with the lowest per capita income from pps 19,700 to 14,200 were: greece, hungary, latvia, croatia, romania, and bulgaria. poland, with per capita income at pps 19,900 was ranked number 7 in it. among the solutions driving sustainable development of paramount importance is the improvement of eu economies in terms of innovativeness and competitiveness, as this is the only way that offers a chance to reduce differences in the level of wealth of societies and their quality of life. building a new “order” is not easy. it must be recognized that neither globalization, nor the evolution of industrial capitalism into a financial one, and 1 luxembourg was not included to its specificity. innovativeness of the polish economy… 73 the associated atomization of money from the real zone, are not processes regulated easily. but although sustainable development on a global and regional scale may seem too difficult for some theorists and practitioners, it should not be abandoned but should be treated as a benchmark for alternative solutions moving towards its direction. the research methodology and the course of the research process the theoretical part uses book publications, papers and reports, while the statistical part uses data from eurostat, the world bank and polish central statistical office (gus). different research methods were applied: qualitative and statistical analysis, and graphical presentation of data. innovativeness and the economic growth in comparison with other central and eastern european countries, polish economy is characterized by relatively good macroeconomic foundations, including slow, albeit stable growth and low scale of external imbalance. polish public debt compared to gdp, despite going up by 3 percentage points in 2016 vs. 2015, with a decline of average share of debt in the eu over the same period by 1.3 percentage points, was lower than the average for the eu by 29.1 percentage points. the government budget balance, after the procedure of excessive deficit was imposed twice on poland since 2015, does not exceed -3% of gdp. the key driver of economic growth in 2016–2017 was internal consumption fueled by the implementation of the “500+ program”. in the longer term, once this factor has waned, the economic growth will decline from respectively 3.8% and 4.6% in 2016 and 2017, to 2.9%, i.e. below the long-term average. the rate of growth of gross fixed capital formation is also too slow, coupled by a negative contribution of net exports to growth. the impact of external economic situation on economic growth in poland is also unclear. in 2017 imports increased by 12.3%, while exports by 10.2%, in comparison with the previous year. faster import growth resulted mainly from higher consumption, increase of oil prices, and appreciation of the polish zloty. what raises the most concern is gross fixed capital formation which in 2015 was still 0.6 percentage points higher than in eu 28, while in 2016 it went down by 1.7 percentage points to 18.1% gdp, at the eu average at 19.8% gdp. the rate of growth in corporate investment, despite closing the output gap and growing demand, may change wiesława ziółkowska74 very slowly due to uncertainty about tax increases and growing political risk (inf lation report – march 2017). however, this relatively favorable picture of the polish economy should not be too reassuring. in 2015 and 2016 gdp per capita was pps 68 on the assumption that the average gross domestic product of the eu = 100, while in 2005 it represented only half of it. the progress we have made in the past quarter of a century is visible but has been achieved mainly thanks to the implementation of technologies and simple economic and organizational patterns from developed countries. the pace of change in the level of innovativeness and competitiveness of the polish economy, although visible, is very slow. meanwhile, studies indicate the existence of a strong positive relationship between the gross domestic product and the summary innovation index. this is illustrated by the following correlation scatter plot. figure 1. average gdp in pps’000 per capita and average summary innovation index in 2010–2016 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.0 20.0 40.0 60.0 80.0 a ve ra ge s ii average gdp in pps’000 per capita s o u r c e : own compilation on the basis of the european innovation union scoreboard, 2017. the importance of this relationship is confirmed by the spearman’s rank correlation coefficient, whose score of 0.90 falls at the turn of the fourth and fifth range of the five-point scale. however, the simple reserves of economic growth have been exhausted and, moreover, soon we will be able to benefit less and less from such significant eu funds. it is therefore necessary to change the main function of eu funds from “pro-demand to pro-supply”, which can only be innovativeness of the polish economy… 75 created by increasing innovativeness and competitiveness of the polish economy. figure 2 presents changes in the rate of growth of gdp, public debt burden, investments, and deficit as a share of gdp in poland against average eu figures in 2010–2016. figure 2. gdp growth, public debt, deficit and fixed assets as a share of gdp in poland and ue-28* 10.0 5.0 0.0 5.0 10.0 15.0 20.0 25.0 0 10 20 30 40 50 60 70 80 90 100 2010 2011 2012 2013 2014 2015 2016 debt as a percentage of gdp eu 28 debt as a percentage of gdp poland gdp growth eu 28 gdp growth poland deficit eu 28 deficit poland gross fixed assets as a percentage of gdp eu 28 gross fixed assets as a percentage of gdp poland * left scale applies to debt as a share of gdp, right scale – other measures. s o u r c e : eurostat, 2017. key measures of economic development current economy is characterized by a departure from industrialism towards an economy based on the human potential, and a high technological level. the position of every country in the world illustrating the scale of its economic, technological and cultural development can be determined using various inwiesława ziółkowska76 dicators. in practice there are over 50 such indicators, the most popular of which are: the human development index (hdi), networked readiness index (nri), social progress index (spi), and the digital economy and society index (desi). the human development index (hdi) describes the level of a country by evaluating it using partial indicators, and three key ones, namely long and healthy life, education, and decent standard of living. in this comparison norway ranks highest, while out of countries which joined the eu after 2004: the czech republic, estonia, slovakia, and poland (number 36 in the general ranking). the index has many different modifications. in poland, the most popular indicators are the poverty indicator, social exclusion, and social marginalization. the next indicator, nri, was created for the needs of the world economic forum. the key purpose of the nri is to measure trends of countries to use innovative information and telecommunication technologies. it uses 68 pieces of data grouped in ten categories. the development of poland measured with that indicator in 2015 ranked it as number 50, with singapore being number one. the global social progress index (spi) was created on the basis of analyzing individual indicators obtained from 133 countries which relate to the main aspects of the functioning of society, namely: ■ fundamental human needs, e.g. safe shelter and access to water, ■ health care, ■ social advancement opportunities, and personal freedoms. in the 2017 ranking denmark scored number one, while poland was ranked 32. what was scored high was, inter alia, citizens’ personal safety, while low scores were given for the level of availability of affordable housing. as in the case of other central european countries, poland received a relatively low score for tolerance of immigrants, and recognition of minority rights. the indicator which evaluates the economy and society from the point of view of digitization is desi. its calculation is based on over 30 coefficients grouped into five categories: human capital, communications, internet usage, digital technology integration, and digital public services. in 2017 the value of desi for poland was 0.43, which ranked it as 23, while the average for the eu was 0.52, and denmark at the top of the ranking and scoring 0.71. in each of the indicators listed above, innovativeness plays and important role, and in it broadly understood human capital. however, there is no generally applicable measure of innovativeness. the author, as in the “frascati manual” (oecd, 2002), assumes that research and development (r&d) consists of innovativeness of the polish economy… 77 systematically conducted creative work undertaken to increase knowledge and find new applications for it2. this creative work ref lects different levels of knowledge gained not only during a formal tuition process, but also stemming from experience. the divisions of innovations and drivers standing behind them have been discussed at length in literature and studies, not only foreign, but also polish ones (balcerowicz & wziątek-kubiak, 2009; kozioł, 2007; francik & pocztowski, 1991; poznańska, 1998). the complexity of the issue makes its examination a difficult process. the measurement of innovativeness of different economies requires interdisciplinary knowledge and experience. in europe, the predominant indicator used to measure the potential of innovativeness of economies is the summary innovation index (sii) published in the european innovation scoreboard (eis). since the methodology of computing the sii measure has evolved over the years, data preceding 2010 can be compared only to a limited extent with data from years 2010–2016. the european innovation scoreboard is an annual report evaluating innovation achievements of eu member states on the basis of the sii. the sii is calculated as a weighted arithmetic mean of 29 individual indicators for 28 eu states and turkey, iceland, norway, switzerland, usa, and japan. the sii ranges from 0 to 1, which higher scores indicating a higher level of innovativeness for a given country. the sii takes into account individual indicators covering both spending on innovations and their outcomes3. the former are described by measures showing funding, education, corporate investment, and infrastructure in which they operate. the latter, on the other hand, relate mainly to economic outcomes of enterprises implementing innovations (wołodkiewiczdonimirski, 2011, pp. 9–33). innovativeness is also measured by the global innovation index (gii) developed in 2007 (the global innovation index 2014: the human factor in innovation). at present is measures innovativeness of 127 economies in the world using 81 indicators. the measures comprised in this indicator can be divided into two main groups: ■ factors creating innovativeness (innovation input) covering institutions, human potential, ict and infrastructure, market sophistication, business sophistication; 2 “frascati manual” is the first methodological manual with guidelines for statistical research in science and technology (oecd, 2002). 3 the number of indicators in individual reports varied from 22 to 30. wiesława ziółkowska78 ■ innovation activities’ outcomes (innovation output), covering knowledge and technology outputs, and creative outputs. for years, top positions among global innovators measured using the gii have been held by switzerland, sweden, the netherlands, usa, united kingdom, and denmark. in 2017 the highest score was 67.69 for switzerland, which was over 4 times higher than the lowest index given to yemen (15.64). poland, scoring 41.99 was ranked 38, one place up on the previous year, and ranked 25 among european countries. the gii methodology also enables the identification of strong and weak eu member states, including also poland with respect to individual innovation indicators. poland’s innovation creation strength lies predominantly in the number of students. on the other hand, polish economy’s weaknesses, in terms of innovativeness, cover: negligible electronic access to public services, very low quality of public infrastructure (ict and infrastructure), ineffective law, and high regulatory burden (institutions), as well as low inclination for cooperation within clusters (sophistication of business environment/ innovation ecosystem). innovativeness of the polish economy taking the sii as the main measure of innovation and competitiveness, eu countries were divided into four groups4. countries by group and differences among them in 2016 are presented in figure 3. 4  taking the sii as a criterion – as per the innovation union scoreboard – the countries were divided into four groups: − innovation leaders, covering countries with a score over 120% of the average indicator for the ue, − innovation followers, with countries whose sii ranges from 90% to 120% of the eu average, − moderate innovators, applying to countries whose score ranges from 50% to 90% of the eu average, − and modest innovators, whose summary innovation index is under 50% of the eu average. innovativeness of the polish economy… 79 figure 3. sii in eu countries in 2016 vs. ue 2010 -10.0 10.0 30.0 50.0 70.0 90.0 110.0 130.0 150.0 ro bg hr pl lv hu el sk cy it mt es lt ee pt cz si eu28 fr ie be lu at de uk nl fi dk se moderate innovatorsmodest innovators innovation followers innovation leaders s o u r c e : european innovation scoreboard 2017. poland found itself in the third group, with its indicator in 2016 vs. ue 2010=100 at 54.8. the sii shows f luctuations, rather than a growing trend. for example, after an insignificant upturn in 2010–2011 there was a marked decline in 2012–2014, followed by an increase to 0.270 only in 2016. how innovation measured by the cumulative sii was changing in different eu economies is illustrated by the total change of the index by year, as presented in table 1. a negative cumulative sii change appeared in as many as 13 countries and most probably was due to the economic downturn in 2008–2013. the difference between the highest and lowest index change was over 35 points. the economies of sweden, denmark, finland, and the netherlands enjoy the highest sii. these countries are also leaders in r&d spending and high gdp per capita growth. on the other hand, the fastest growing innovators comprised lithuania, malta, the united kingdom, and the netherlands. moreover, the difference between the highest and lowest sii, which in 2010 was 0.461 point, in 2016 increased to 0.541 point. this means, that instead of speeding up the convergence process of eu economies they started to differentiate. wiesława ziółkowska80 table 1. cumulative change of the summary innovation index in the eu in the years 2010–2016 co un tr y r om an ia cy pr us fi nl an d g er m an y cz ec h r ep ub lic es to ni a h un ga ry d en m ar k po rt ug al sp ai n cr oa ti a it al y sl ov en ia b ul ga ri a g re ec e cumulative change 2010–2016 -14.1 -12.7 -5.2 -3.7 -3.5 -3.5 -3.5 -2.8 -2.4 -1.8 -1.4 -0.3 -0.2 0.1 0.7 co un tr y b el gi um lu xe m bo ur g eu 28 po la nd sw ed en fr an ce ir el an d sl ov ak ia la tv ia a us tr ia th e n et he rla nd s u ni te d ki ng do m m al ta li th ua ni a cumulative change 2010-2016 1.3 1.4 2.0 2.0 2.3 2.8 3.5 8.0 8.5 9.0 10.4 11.7 12.1 21.1 s o u r c e : own calculation on the basis of the european innovation union scoreboard, 2017. an economy’s ability to absorb innovations depends on many factors. the key innovation drivers consist of financial outlays on research and development, and on human capital. the most important measure of r&d expenditure is gerd (gross domestic expenditure on r&d)5. according to the frascati manual gerd covers internal outlays on research and development on the territory of a country taking place in a specific year. in order to determine the strength and direction of the correlation between r&d expenditure and gdp growth the author decided to apply statistical analysis. the following results were obtained with the use of pearson’s coefficient: ■ no relationship or very poor correlation appeared in 6 countries: estonia, italy, portugal, cyprus, czech republic and spain; ■ in three countries the correlation was moderate: in greece and slovenia negative, and in latvia positive; 5 r&d expenditure is also measured using gbaord (government budget appropriations or outlays for research and development). however, gbaord data apply to the year for which budget appropriations were planned, while gerd records the year in which they were actually spent. innovativeness of the polish economy… 81 ■ in the 18 other countries it was strong or very strong, including in one case – finland – negative. in poland a very strong positive correlation took place, which means that the higher the spending of all sectors on r&d, the higher the gdp per capita growth. pearson’s linear correlation was also used to study the correlation between gdp per capita growth and the number of scientific researchers employed in r&d, with the following results: ■ no relationship or very poor correlation appeared in 7 countries: italy, portugal, estonia, czech republic, slovakia, slovenia, and romania; ■ in two countries the correlation was moderate: croatia and malta; ■ in the 18 other countries it was strong or very strong, including in three cases negative: finland, greece, and cyprus. in poland a very strong positive correlation took place, which means that the more scientific employees were employed in the r&d sector, the higher the gdp per capita. according to european commission’s europe 2020 strategy, one of the main targets of the community is to invest 3% of gdp in research and development by the year 2020. it is also highlighted that one-third of r&d expenditure is to be financed from public funds of member states, while two-thirds from private sources. the forecast for poland, based on different variants of allocating structural funds in the years 2013–2020, determined the target value of gerd in relation to gdp for poland at 1.7%, assuming at the same time that the government and private sectors will have equal shares in the financing. public funds in a direct way determine the innovativeness of economies by financing research and development activities, but also indirectly, by outlays on education, health, infrastructure, and security. the need of state’s engagement in the creation of conditions for the development of r&d activities in the modern world – in particular in economies with a low level of development – is indisputable. from the perspective of sources of funds, they are divided into five sectors: funds of government entities (from the state budget and local government budgets), higher education, enterprises, private non-commercial institutions, and the foreign sector. the participation of these sectors differs by country significantly. r&d is financed under statutory activity, and through grants, contracts, and subsidies. wiesława ziółkowska82 table 2. r&d expenditure and summary innovation indexes in eu countries country average gerd as a percentage of gdp in 2010–2016 sii 2017 sii 2016 vs. ue2010=100all sectors enterprise sector government sector eu28 2.00 1.27 0.24 0.503 102.000 belgium 2.31 1.60 0.20 0.597 120.900 bulgaria 0.69 0.44 0.19 0.234 47.500 czech republic 1.74 0.97 0.33 0.416 84.400 denmark 2.94 1.91 0.07 0.675 136.700 germany 2.85 1.93 0.41 0.609 123.400 estonia 1.71 0.90 0.17 0.393 79.800 ireland 1.45 1.02 0.07 0.571 115.700 greece 0.80 0.29 0.21 0.337 68.200 spain 1.27 0.67 0.24 0.386 78.300 france 2.23 1.43 0.29 0.539 109.200 croatia 0.79 0.37 0.20 0.270 54.700 italy 1.28 0.72 0.18 0.371 75.100 cyprus 0.47 0.10 0.07 0.369 74.800 latvia 0.62 0.18 0.16 0.287 58.100 lithuania 0.92 0.27 0.18 0.391 79.400 luxembourg 1.33 0.76 0.36 0.599 121.400 hungary 1.27 0.87 0.19 0.332 67.400 malta 0.71 0.41 0.06 0.378 76.500 the netherlands 1.93 1.07 0.23 0.639 129.500 austria 2.92 2.06 0.14 0.599 121.500 poland 0.88 0.38 0.21 0.270 54.800 portugal 1.36 0.64 0.09 0.409 83.000 romania 0.45 0.19 0.18 0.167 33.800 slovenia 2.31 1.73 0.32 0.482 97.800 slovakia 0.82 0.32 0.21 0.345 70.000 finland 3.27 2.24 0.28 0.646 130.900 innovativeness of the polish economy… 83 country average gerd as a percentage of gdp in 2010–2016 sii 2017 sii 2016 vs. ue2010=100all sectors enterprise sector government sector sweden 3.25 2.23 0.13 0.708 143.600 united kingdom 1.66 1.07 0.13 0.618 125.300 s o u r c e : own calculation on the basis of the european innovation union scoreboard, 2017. table 2 presents the intensity of r&d in 2010–2016, i.e. the average share of internal gdp spending in poland, average in the eu, by member state in total, and the share in them of the two main sectors, as well as changes of the innovation index in 2016 vs. 2010, treated as 100, and value of sii in 2017. in 2010 the highest share of gerd in gdp in finland was over 8 times higher than the lowest one in romania. in 2016 the same relation was lower and was under 6-fold. in 2010, in poland, r&d expenditure was over 5 times lower than in finland. in 2016 this relation did not exceed the factor of 3. however, this improvement was caused by a decline in spending in finland by 0.98 percentage point of gdp, coupled by an increase in poland by 0.25 percentage point. poland recorded also an improvement compared to average spending in the eu in the first and last years of the period. while in 2010 the spending was over 2.7 times lower, in 2016 the share of expenditure according to gerd as a percentage of gdp was 2.1 times lower than the eu average. r&d expenditure in poland has been increasing over the recent years. moreover, no decline in expenditure as a share in gdp was reported in the years of the last crisis. despite this spending the level of r&d expenditure as a percentage of gdp still remains relatively low. in 2015 in poland it made up 1.00%, while in 2016 0.97% of gross domestic product. the average for total european union was 2.00% of gross domestic product. however, european innovation leaders allocated significantly more on r&d: 3.27% of gdp in finland, 3.25% of gdp in sweden, 2.94% of gdp in denmark, 2.85% of gdp in germany, and 2.92% of gdp in austria. gerd’s response to the crisis differed country by country, and in nine countries its average change was negative. however, it impacted to a larger extent the funding of r&d in highly developed countries. in 2016, similarly to poland, gerd did not exceed the level of 1% in cyprus, malta, romania, bulgaria, latvia, slovakia, lithuania, and croatia. the 3% table 2. r&d expenditure… wiesława ziółkowska84 threshold specified for this indicator was achieved only by sweden, and austria. an analysis of the sources of funding r&d activities shows that in countries with a higher share of gerd in gdp the level of government spending is lower. a much more diversified picture of research and development spending in different countries we receive when we measure the spending per capita. in finland, country with the highest r&d expenditure in the european union in 2010, the average gerd per capita was 46 times higher than in romania, country with the lowest expenditure. in 2016 this relation reduced to 26 times. one must note, however, that since 2011 the first place measured by r&d expenditure in euro per capita has been taken by sweden, and when this country and romania are compared the relation is reduced to 37 times. in poland in 2010 the value of internal expenditure on r&d per capita was eur 68.6, vs. the average for ue-28 at eur 490.9. correspondingly, in 2016 gerd per capita in poland was eur 108.3, while the eu average was eur 592.3. consequently, while the difference between poland’s the share of r&d expenditure as a percentage of gdp and the average for the eu was not so striking, as the expenditure in poland in 2016 was 2.3 times lower than in eu, the value of this expenditure measured in euro per capita in the last of the studied years was nearly 5.5 times lower than the eu average. in accordance with the strategy adopted by the eu, the share of private funding in financing r&d should rise, while the share of public funding should decline. in the years 2010–2016 the average total eu gerd as a percentage of gdp increased by 0.10 percentage point, with an increase of enterprise funding by 0.13 percentage point, and decrease of the share of government funds by 0.02 percentage point. in poland, while the share of expenditure of all sectors changed by 0.25 percentage point, respectively, the expenditure of enterprises went up by 0.44 percentage point of gdp, while the government sector declined by 0.24 percentage point of gdp. figure 4 presents changes in shares of key financing sources. innovativeness of the polish economy… 85 figure 4. gerd changes as a percentage of gdp in the years 2010–2016 percentage point, with an increase of enterprise funding by 0.13 percentage point, and decrease of the share of government funds by 0.02 percentage point. in poland, while the share of expenditure of all sectors changed by 0.25 percentage point, respectively, the expenditure of enterprises went up by 0.44 percentage point of gdp, while the government sector declined by 0.24 percentage point of gdp. graph 4 presents changes in shares of key financing sources. graph 4. gerd changes as a percentage of gdp in the years 2010–2016. source: own calculation on the basis of eurostat, 2017. the next thing that was studied was the relation between average r&d expenditure and average gdp in pps’000 per capita. graph 5. relation between average gdp in pps’000 per capita and average gerd expenditure as a percentage of gdp in the years 2010–2016 in eu eu 28 be lg iu m bu lg ar ia cz ec h re pu bl ic d en m ar k g er m an y es to ni a ir el an d g re ec e sp ai n fr an ce cr oa tia it al y cy pr us la tv ia li th ua ni a lu xe m bo ur g h un ga ry m al ta n et he rl an ds a us tr ia po la nd po rt ug al ro m an ia sl ov en ia sl ov ak ia fi nl an d sw ed en u ni te d ki ng do m -1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 government sector enterprise sector s o u r c e : own calculation on the basis of eurostat, 2017. the next thing that was studied was the relation between average r&d expenditure and average gdp in pps’000 per capita. the figure shows a positive relation between the analyzed variables, whose strength calculated using the spearman’s rank correlation coefficient turned to be very high. for the countries of all eu it was 0.91, while for central and eastern europe it was 0.60. this weaker relationship between the studied variables for countries which joined the eu in 2004 and later is caused by the fact that the effectiveness of r&d expenditure depends on the achieved level of development measured as gdp per capita. this is confirmed by empirical data from countries with the highest innovativeness potential, like denmark, sweden, finland, or germany. this higher gerd “rate of return” measured by gdp per capita, given a higher level of the development of a country is naturally the result of different economy structures, development strategies, and many other interrelated factors. one of the reasons is believed to be a higher share of private funds in r&d expenditure in countries with a higher gdp per capita, where allocation can be more efficient due to stronger motivation and more effective instruments to measure and control them. one cannot ignore wiesława ziółkowska86 this argumentation, nor can it be overestimated. the result of the study based on spearman’s coefficient, in which the variable is total gerd expenditure, is very close to the strength of the studied relationship only for public spending. thus, the explanation of this difference based on the assumption that public policy in highly developed economies is usually more innovation focused could be more significant. furthermore, with a higher level of economic development r&d expenditure is naturally to a higher extent aimed at more profitable enterprises. figure 5. relation between average gdp in pps’000 per capita and average gerd expenditure as a percentage of gdp in the years 2010–2016 in eu 0.10 0.60 1.10 1.60 2.10 2.60 3.10 3.60 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 a ve ra ge g er d a s a pe rc en ta ge o f g d p average gdp in pps’000 per capita s o u r c e : own calculation on the basis of eurostat, 2017.  conclusions the conducted study is far from being complete, however, it allows for the following conclusions: 1. the study based on spearman’s coefficient showed the existence of a strong correlation between the average sii and gdp in pps’000 per capita, and between gerd spending and gdp in pps’000 per capita. 2. in 2016 poland belonged to the group of, so called, moderate innovators, holding the 25th place. 3. in terms of accumulated sii growth in 2010–2016 poland was ranked number 11. innovativeness of the polish economy… 87 4. research and development expenditure, while on the rise, is still too low. measured in euro per capita, in 2016 in poland it was 5.5 lower than eu average, while gdp per capita was 2.6 times lower. 5. in accordance with the presented assumptions, in poland spending of the enterprise sector was growing faster, although still r&d expenditure is mainly funded by the government sector. 6. a lower return rate on such r&d expenditure is the result of a combination of different factors ranging from historical, through political, to psychological. however, a special role in this process is played by the structure of the economy, the adopted model of its development, and the broadly understood quality of human potential.  references balcerowicz, e., & wziątek-kubiak a. (2009). determinanty rozwoju innowacyjności firm w kontekście poziomu wykształcenia pracowników. (company innovativeness development drivers in the context of employee’s level of education. warszawa: case. european innovation scoreboard 2017. http://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards/files/ius-2017en.pdf (accessed: 03.03.2018). eurostat, http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=1&lang uage=en&pcode=tec00127 (accessed: 14.02.2018). eurostat, http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=1&la nguage=en&pcode=tec00011 (accessed: 16.02.2018). eurostat, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nama_10_pc&lang=en (accessed: 01.03.2018). eurostat, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=rd_e_gerdtot&lang=en (accessed: 03.03.2018). eurostat, http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=1&lang uage=en&pcode=tec00001 (accessed: 02.03.2018). francik, a., & pocztowski, a. (1991). procesy innowacyjne. (innovative processes.) kraków: akademia ekonomiczna w krakowie. inf lation report – march 2017. national bank of poland. kozioł, k. (2007). innowacyjność polskich przedsiębiorstw przemysłowych na tle doświadczeń unii europejskiej. szczecin: wydawnictwo uniwersytetu szczecińskiego. oecd (2002). frascati manual. proposed standard practice for surveys on research and experimental development, http://www.nauka.gov.pl/g2/oryginal/2013_05/0 8935db1c9f7adf15c087d07720a984f.pdf (accessed: 11.11.2014). poznańska, k. (1998). uwarunkowania innowacyjności małych i średnich przedsiębiorstw. (innovativeness determinants of small and medium enterprises.) warszawa: dom wydawniczy abc. wiesława ziółkowska88 schumpeter, j.a. (1960). teoria rozwoju gospodarczego. (theory of economic development.) warszawa: pwn. the global innovation index 2014: the human factor in innovation. http://www. globalinnovationindex.org/userfiles/file/reportpdf/gii-2014-v5.pdf (accessed: 20.11.2014). wołodkiewicz-donimirski, z. (2011). innowacyjność polskiej gospodarki na tle międzynarodowym. (innovativeness of polish economy against the international backdrop.) studia biura analiz sejmowych, (studies of bureau of research chancellery of the sejm) 1(25), 9–34. introduction dear readers and authors, we present to you the first issue of 2019 of the scientific quarterly copernican journal of finance & accounting. at the beginning i would like to give special thanks to the authors, reviewers, members of the scientific council, the editorial team and to everyone, who has contributed to the continuous development of the journal. scientists from various universities present themes related to the different challenges of contemporary finances. in the current issue you can read articles about the scope of mobile banking applications use among retail bank customers in poland, and about the effect of social capital on operational performance in commercial banks in erbil, the city in iraq. one of the articles is devoted to the effect of mandatory dividend policy on agency costs of listed companies in china. you will be able to find an article about traditional fiscal devices in poland and the concept of their modernization. the subject of another article concerns the impact of economic aspects on the decision-making process on modernization of heating sources used by households in poland. the copernican journal of finance & accounting is open to all scientists from all countries and universities who conduct research in the area of interest of our journal. as always i encourage you to read and publish in our journal. yours sincerely, executive editor, dorota krupa, ph.d. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: november 3, 2015; date of acceptance: february 29, 2016. * contact information: natalija.konovalova@riseba.lv, riseba university, meza street 3, riga, lv-1048, latvia, phone:+37129215208. ** contact information: snezanaosmolovska@inbox.lv, riseba university, meza street 3, riga, lv-1048, latvia, phone:+37129895698. konovalova n., & dalecka s. (2016). analysis and evaluation of capital adequacy in latvian banking system. copernican journal of finance & accounting, 5(1), 107–123. http://dx.doi.org/10.12775/ cjfa.2016.006 natalia konovalova* riseba university snezhana dalecka** riseba university analysis and evaluation of capital adequacy in latvian banking system keywords: capital adequacy, risk adjusted assets, credit risk, market risk, operational risk, buffer capital. jel classification: g21, g32. abstract: regulation of banking activity under economic insecurity conditions is one of key problems in our times and is acquiring a particular importance both for banks themselves and their shareholders and also for customers and depositors. instability of economic situation gives birth to increasing risks faced by world banking system. and therefore in order to ensure reliable operation of commercial banks and prevent their vulnerability to economic insecurity, the supervisory bodies are continuously improving the methods of and approaches towards the management of bank risks accenting a paramount importance of own capital adequacy. a problem of how much capital latvian commercial banks need to cover their risks remains one of most important in regulation and assessment of banking activity. meanwhile, the principal direction to improve the capital adequacy ratio is the growth in its f lexibility when determining the natalia konovalova, snezhana dalecka108 value of risks inherent to various bank organisations. in the present research authors carry out the analysis of risks inherent in activity of latvian commercial banks, indentifies the risk pattern within own capital of banks, discovers factors having impact upon the risk pattern as well as estimates the amount of capital necessary to cover risks in various groups of commercial banks. hypothesis – stability of a banking system depends on the level of sufficiency of a bank capital. the aim of the research: evaluation of capital adequacy of latvian commercial banks and correspondence of capital adequacy calculations to basel committee on banking supervision rules based on analysis of financials statements, identification of capital adequacy problems and developing recommendations on improving bank capital adequacy according to the effective and the planned basel committee on banking supervision requirements. research methodology and introduction into theoretical framework of bank capital evaluation the study is methodologically basing on the observation and collection of financial information about activity of commercial banks, the analysis and synthesis of acquired data, the method of comparison between economic groupings, the ratio method as well as the method of graphic display of statistic information. the study employs the official statistical data of the association of latvian commercial banks, the commercial banks supervisory body (financial and capital market commission) as well as annual financial reporting of latvian commercial banks. the stability of a bank depends on a bank’s capital, its quality and size. a bank’s capital is a mandatory and integral part of its financial resources, and its development in the form of core capital is a required step even before establishing a commercial bank (saksonova 2006). practically every stage of a bank’s business is directly or indirectly linked to the capital at the bank’s disposal and its value. a bank’s capital serves as one of determinants in the evaluation process of its stability. the adequacy of the bank’s own funds provides for its financial stability and neutralises different risks inherent to a commercial bank’s course of business (greuning and brajovic bratanovic 2009). the size of a bank’s capital is crucial not only for the safety of its customers, but also for the bank’s own stability, avoiding the impact of short-term financial problems (saksonova 2006). the capital also serves as an indicator of the bank’s credit solvency, since the total amount of its assets may not exceed a certain capital adequacy limit, which means that the maximum amount of the bank’s assets depends on the size of its capital. the size of capital greatly determines the analysis and evaluation of capital adequacy… 109 bank’s competitiveness. since shareholders of a bank always seek to increase the profitability of their investments, the bank’s endeavours to increase the profit ref lect on prices of products and services it provides. on the other hand, a bank must attract a certain amount of customer deposits to be able to ensure full-scale lending operations, which is only possible, if the bank has gained public trust and that is possible with sufficient capital reserve. in case of sudden capital adequacy problems a bank may loose its competitiveness (greuning, brajovic bratanovic 2009). the american scientist chorafas (2004), in his turn, believes that the main function of a commercial bank’s capital is generation of bank’s income and profit respectively, and provide for a possibility to cover unexpected operating losses of a commercial bank. american scientists schooner and taylor (2009) in their book „global bank regulation: principles and policies” offer an identical definition, but in addition to that they stress the possibility to use capital of a commercial bank to cover possible losses caused by credit risk. american economists greuning and brajovic bratanovic (2009) hold a view that capital adequacy level must be consistent with the risk level of the bank’s operations. latvian economist kudinska (2005) holds a view that capital adequacy ref lects resources of a bank’s capital required as protection against credit risk and similar risks related to a bank’s assets’ portfolio and off-balance sheet items. in the financial and capital market commission’s regulations capital adequacy is defined as the amount of provisions to cover a bank’s operating losses. they also elaborate that a capital requirement is an estimate of probable losses based on information available at the moment such estimate is made. the amount of a capital requirement depends on the amount of a bank’s assets and their structure, as well as risks assumed by the bank. almost all unmanaged risks cause losses, which, in their turn, cause volatility of capital adequacy. thus to determine the amount of capital needed to cover risks a bank identifies risks included in the capital adequacy evaluation. a bank must evaluate all risks inherent to its business, including risks, for which minimum regulatory capital requirements are set, and the risks, for which no such minimum requirements exist (fcmc, 2014). in 2010 basel committee announced the third basel accord under the title “a global regulatory framework for more resilient banks and banking systems”. the aim of introducing basel iii requirements is strengthening of financial system and avoidance of financial practice leading to new global crises. the natalia konovalova, snezhana dalecka110 new regulations require increase of size of capital of banks, improving its quality and reducing interest in using financial instruments with high leverage. from the legal point of view basel iii standards are just recommendations for reforming banking regulation. but considering the fact that these rules were developed by central banks and financial market regulators of the strongest economies in the world, they actually serve as commercial practice regulation guidelines. basel iii does not supersede basel ii, but rather supplements it. the reform envisions considerable reviewing and improving of the existing, and introducing several new requirements. the document will have impact on changes in capital requirements. the changes are aimed at increasing capital quality of banks, coherence and transparency of capital basis, and strengthening of capital cover ratios for risks. basel iii rules are scheduled for implementation starting from 2013. the implementation process of standards began already in 01 january 2011. the observation stage lasted until the end of 2012. during that stage the new rules did not come into effect yet. they gradually started to come into effect from 01 january 2013 till 01 january 2019. the implementation was divided into several stages, with the deadline in 2019 (table 1). fulfilment of the requirement most likely will create a need for additional capital and correspondingly ref lect on financially weak latvian commercial banks. therefore estimates should be made in a timely manner to evaluate impact of these changes on bank capital requirements taking into consideration long-term strategy. table 1. implementation schedule of basel iii rules names of indicates 2011 2012 2013 2014 2015 2016 2017 2018 2019 minimum common equity capital ratio (cet 1 / rwa) supervisory monitoring supervisory monitoring 3,5% 4,0% 4,5% 4,5% 4,5% 4,5% 4,5% capital conservation buffer supervisory monitoring supervisory monitoring 0,625% 1,25% 1,875% 2,50% minimum common equity capital ratio plus capital conservation buffer supervisory monitoring supervisory monitoring 3,5% 4,0% 4,5% 5,125% 5,75% 6,375% 7,0% analysis and evaluation of capital adequacy… 111 names of indicates 2011 2012 2013 2014 2015 2016 2017 2018 2019 minimum tier 1 capital ratio (t1c/rwa) supervisory monitoring supervisory monitoring 4,5% 5,5% 6,0% 6,0% 6,0% 6,0% 6,0% minimum total capital ratio (tc/rwa) supervisory monitoring supervisory monitoring 8,0% 8,0% 8,0% 8,0% 8,0% 8,0% 8,0% minimum total capital plus capital conservation buffer supervisory monitoring supervisory monitoring 8,0% 8,0% 8,0% 8,625% 9,25% 9,875% 10,5% s o u r c e : basel committee on banking supervision, june 2011. analysis of factors influencing capital adequacy in different groups of latvian commercial banks before performing analysis of latvian banking sector’s capital adequacy level, evaluation of capital adequacy of latvian banks in comparison to other european countries should be made. in 2013 capital adequacy of latvian banking sector at the level of consolidation groups of banks exceeded the average level in eez member states (car – 15%). in 2013 in eez states the aforementioned ratio reached only 15.0%, whereas in latvia it amounted to 18.94% (figure 1). figure 1. capital adequacy ratios of latvian commercial banks analysis of factors influencing capital adequacy in different groups of latvian commercial banks before performing analysis of latvian banking sector's capital adequacy level, evaluation of capital adequacy of latvian banks in comparison to other european countries should be made. in 2013 capital adequacy of latvian banking sector at the level of consolidation groups of banks exceeded the average level in eez member states (car – 15 %). in 2013 in eez states the aforementioned ratio reached only 15.0 %, whereas in latvia it amounted to 18.94 % (figure 1). figure 1. capital adequacy ratios of latvian commercial banks 15.25% 17.60% 17.32% 18.94% 0.00% 5.00% 10.00% 15.00% 20.00% 2012 2013 tier 1 capital adequacy ratio capital adequacy ratio source: created by authors based on fcmc data, 2013 / 2014 at the beginning of 2014 the number of banks in the country shrank to 17 (in addition 9 branches of foreign banks operate in latvia), because as ge money bank, as unicredit bank and as mortgage and land bank of latvia changed their business strategy and decided to stop providing services on latvian market. as a comparison, at the end of 2013 20 banks and 9 branches of foreign banks operated on latvian market. according to 2012 statistics the number of commercial banks in latvia for the most part shows a growth tendency and since 2001 has increased by 11.11 %. the data of 2013 does not indicate such positive tendency any more, since the number of banks during the year shrank by 15 % (or by three banks). interest of foreign investors in latvian market in the long term remains at the same level, illustrated by the increased concentration of investments of nonresident shareholders in equity capital of banks registered in latvia (figure 2). s o u r c e : created by authors based on fcmc data, 2013 / 2014. natalia konovalova, snezhana dalecka112 at the beginning of 2014 the number of banks in the country shrank to 17 (in addition 9 branches of foreign banks operate in latvia), because as ge money bank, as unicredit bank and as mortgage and land bank of latvia changed their business strategy and decided to stop providing services on latvian market. as a comparison, at the end of 2013 20 banks and 9 branches of foreign banks operated on latvian market. according to 2012 statistics the number of commercial banks in latvia for the most part shows a growth tendency and since 2001 has increased by 11.11%. the data of 2013 does not indicate such positive tendency any more, since the number of banks during the year shrank by 15% (or by three banks). interest of foreign investors in latvian market in the long term remains at the same level, illustrated by the increased concentration of investments of non-resident shareholders in equity capital of banks registered in latvia (figure 2). during the period of time from 2001 to 2013 concentration of foreign capital in latvian banking sector on the average exceeded 56.69%, and in 2013 reached 58.83%. the majority of banks registered in latvia have foreign (east and european) capital. in 2013 investments of investors from east in latvian banks’ capital reached 41.18% of the market (2012 – 30%). most of these shareholders are from ukraine and russia. banks with qualifying holdings of european shareholders, in their turn, have 17.65% of latvian banking market. compared to 2012 their specific weight has dropped by 7.35%, because as unicredit bank (withdrawal of licence at the beginning of 2014) and as norvik bank left the east capital group of banks. at the end of 2013 norvik bank strategic investor changed and a resident of russia became the main shareholder of the bank (holding in equity capital – 51%). as a result norvik bank is now in the east capital group of banks, which increased their specific weight to 41.18% of the market in 2013 (figure 2). the most significant risk for banks still is credit risk, and at the end of 2013 credit risk capital requirement amounted to 89.24% of the total amount of capital requirements of latvian banks (at the end of 2012 – 89.6%). market and operational risks make up a small part of capital requirement of banks (10.76% in 2013, 10.4% in 2012) and have no material impact on capital adequacy ratios. just like in 2012 in 2013 capitalization of latvian banking sector using breakdown in groups stayed high. each group of banks optimized costs of attracted resources and partially repaid subordinated investments, thereby reducing by 119 846 thousand eur (in 2012 – 123 364 thousand eur) tier 2 capital of latvian banking sector and ensuring a rather small specific weight of it analysis and evaluation of capital adequacy… 113 in equity capital 15.22% (in 2012 – 13.89%). evaluating equity capital distribution with the aim to determine the specific weight of foreign capital on latvian market one should note that during the analysed period (2001 – 2013) equity capital in the banking sector amounted to 1 622 018 thousand eur. the group of banks with european capital holds on the average 54.25% of latvian banking sector capital, the group of banks with latvian capital – 27.75% and others (groups of banks with east and latvian state shareholders) – 18.0%. the capital structure of latvian banks in each period is dominated by tier 1 capital and at the end of 2013 constituted 85.53% (in 2012 87.15%) of the total amount of capital in groups of banks. comparing the present value of capital to the data of 2001 the total equity capital of banks at the end of 2001 amounted only to figure 2. the structure of latvian banking sector based on the number of banks broken down in groups of banks by capital ownership, 2001–2014 during the period of time from 2001 to 2013 concentration of foreign capital in latvian banking sector on the average exceeded 56.69 %, and in 2013 reached 58.83 %. the majority of banks registered in latvia have foreign (east and european) capital. in 2013 investments of investors from east in latvian banks' capital reached 41.18 % of the market (2012 30 %). most of these shareholders are from ukraine and russia. banks with qualifying holdings of european shareholders, in their turn, have 17.65 % of latvian banking market. compared to 2012 their specific weight has dropped by 7.35 %, because as unicredit bank (withdrawal of licence at the beginning of 2014) and as norvik bank left the east capital group of banks. at the end of 2013 norvik bank strategic investor changed and a resident of russia became the main shareholder of the bank (holding in equity capital 51%). as a result norvik bank is now in the east capital group of banks, which increased their specific weight to 41.18 % of the market in 2013 (figure 2). figure 2. the structure of latvian banking sector based on the number of banks broken down in groups of banks by capital ownership, 2001 – 2014 source: created by authors based on consolidated annual reports of latvian banks, 2001 – 2014 s o u r c e : created by authors based on consolidated annual reports of latvian banks, 2001–2014. natalia konovalova, snezhana dalecka114 432 054 thousand eur, which is 83.82% less than in 2013 (in 2013 – 2 668 435 thousand eur). the specific weight of foreign capital in the equity capital of latvian banks was already considerable at the time – 61.48%. groups of banks with european (56.36%) and east (5.12%) capital made up the indicated percentage share. the state of latvia, in its turn, in 2001 was the sole shareholder of as mortgage and land bank of latvia, and the bank’s equity capital accounted only for 4.17% of the total capital of latvian banks (figure 3). figure 3. car breakdown in groups of banks, 2001–2013 figure 3. car breakdown in groups of banks, 2001 – 2013 0 5 10 15 20 25 30 35 40 45 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 latvian private capital european capital latvian state capital easten capital source: created by authors based on consolidated annual reports of latvian banks, 2001 – 2013 the greatest risk of latvian banking sector is credit risk caused mainly by credit portfolio size increase. the group of banks with east capital was able to achieve the highest capital adequacy ratio (on the average during the period 23.91 %), because the specific weight of loans on balance sheets of the group's banks during the analysed period (2001 – 2013) was small compared to all other groups of banks. accordingly components of the total amount of credit risk had little impact on amounts of risk-weighted assets in the aforementioned group. in the last quarter of 2013 the capital requirement for credit risk in the banking sector amounted to 1 041 715 thousand eur or 89.24 %, with dispersion using breakdown in groups of banks from 52.27 % (the group of banks with european capital) to 10.02 % in the group of banks with east capital (figure 4). figure 4. breakdown of distribution of mandatory capital requirements for risks in groups of banks, 31.12.2013 s o u r c e : created by authors based on consolidated annual reports of latvian banks, 2001–2013. the greatest risk of latvian banking sector is credit risk caused mainly by credit portfolio size increase. the group of banks with east capital was able to achieve the highest capital adequacy ratio (on the average during the period 23.91%), because the specific weight of loans on balance sheets of the group’s banks during the analysed period (2001–2013) was small compared to all other groups of banks. accordingly components of the total amount of credit risk had little impact on amounts of risk-weighted assets in the aforementioned group. in the last quarter of 2013 the capital requirement for credit risk in the banking sector amounted to 1 041 715 thousand eur or 89.24%, with dispersion using breakdown in groups of banks from 52.27% (the group of banks with european capital) to 10.02% in the group of banks with east capital (figure 4). analysis and evaluation of capital adequacy… 115 figure 4. breakdown of distribution of mandatory capital requirements for risks in groups of banks, 31.12.2013 25,96 53,41 29,97 23,59 44,46 11,74 5,61 14,36 52,27 10,02 11,21 17,39 0 10 20 30 40 50 60 credit risk market risk operational risk latvian capital european capital latvian state capital easten capital source: created by authors based on fcmc data, 2014 in 2013 only the group of banks with european capital attained the greatest share of credit risk 52.27 % of the market. banks of this group are more focused on providing services to local customers and especially lending, thus a significant part of their credit portfolios constitute loans to residents. that explains the great specific weight of credit risk in these banks. although during the last years the quality of bank credit portfolio continued to improve, credit risk is still considerable. that is related to echoes of events of 2008, when their borrowers fell victims to sudden insolvency. but considering the fact that the aforementioned banks were leaders in lending, especially mortgage lending; banks in the group of banks owned by european shareholders have suffered the most significant decrease of credit portfolio and the greatest losses. in addition banks focused on nonresident business do not engage to such extent in lending activities, the specific weight of their credit portfolio in their assets is roughly half as big as that of universal banks (full service banks). impact of basel iii requirements on capital adequacy of latvian banking sector examination of impact of introducing basel iii requirements on capital adequacy ratios of latvian banks, first of all, includes evaluation of increase in risk-weighted assets of banks. it would not be possible to calculate the total amount of risk-weighted assets of each bank by means of the direct method of basel iii, since financial statements do not contain s o u r c e : created by authors based on fcmc data, 2014. in 2013 only the group of banks with european capital attained the greatest share of credit risk 52.27% of the market. banks of this group are more focused on providing services to local customers and especially lending, thus asignificant part of their credit portfolios constitute loans to residents. that explains the great specific weight of credit risk in these banks. although during the last years the quality of bank credit portfolio continued to improve, credit risk is still considerable. that is related to echoes of events of 2008, when their borrowers fell victims to sudden insolvency. but considering the fact that the aforementioned banks were leaders in lending, especially mortgage lending; banks in the group of banks owned by european shareholders have suffered the most significant decrease of credit portfolio and the greatest losses. in addition banks focused on non-resident business do not engage to such extent in lending activities, the specific weight of their credit portfolio in their assets is roughly half as big as that of universal banks (full service banks). impact of basel iii requirements on capital adequacy of latvian banking sector examination of impact of introducing basel iii requirements on capital adequacy ratios of latvian banks, first of all, includes evaluation of increase in risknatalia konovalova, snezhana dalecka116 weighted assets of banks. it would not be possible to calculate the total amount of risk-weighted assets of each bank by means of the direct method of basel iii, since financial statements do not contain sufficient data required for calculations. therefore analysis was performed by means of the indirect method using quantitative change ratios published in the basel research. changes in risk-weighted assets affect also capital adequacy of each group of banks. figure 5 shows breakdown of changes in tier 1 capital adequacy in groups of latvian banks after introduction of basel iii requirements. a new regulatory requirement of 6% is also introduced for this ratio. figure 5. breakdown of tier 1 capital adequacy changes in groups of banks sufficient data required for calculations. therefore analysis was performed by means of the indirect method using quantitative change ratios published in the basel research. changes in risk-weighted assets affect also capital adequacy of each group of banks. figure 5 shows breakdown of changes in tier 1 capital adequacy in groups of latvian banks after introduction of basel iii requirements. a new regulatory requirement of 6 % is also introduced for this ratio. figure 5. breakdown of tier 1 capital adequacy changes in groups of banks source: created by authors based on consolidated annual reports of latvian banks, 2013 evaluation of tier 1 capital adequacy changes shows that latvian banks in general will be able to ensure sufficient capital adequacy. each group of banks will satisfy basel iii requirements though the result will be greatly dispersed among groups of banks. the group of banks with european capital will be ahead of other groups of banks, since their tier 1 capital adequacy will drop by 0.77 %, thus ensuring the highest result 19.14 %. the result of the group of banks with latvian state capital may be worse. capital adequacy ratio of this group of banks will decrease only a little, by 0.32 %, but adequacy of tier 1 capital will be at critical level 8.06 %. groups of banks with east and latvian capital will loose on the average 1.13 %. thus each group of banks will be able to ensure tier 1 capital ratio of 6 %, maintaining also a considerable reserve on the average over 7.87 %, and ensure compliance with the common equity adequacy standard in the mount of 7 % (including 2,5 % buffer). examination of changes in total capital adequacy helps to evaluate fully changes in capital adequacy ratios after introducing basel iii in the banking sector (figure 6). total capital adequacy shows similar tendencies to tier 1 capital adequacy ratios. the group of banks with european capital will be able to ensure the highest capital adequacy level s o u r c e : created by authors based on consolidated annual reports of latvian banks, 2013. evaluation of tier 1 capital adequacy changes shows that latvian banks in general will be able to ensure sufficient capital adequacy. each group of banks will satisfy basel iii requirements though the result will be greatly dispersed among groups of banks. the group of banks with european capital will be ahead of other groups of banks, since their tier 1 capital adequacy will drop by 0.77%, thus ensuring the highest result 19.14%. the result of the group of banks with latvian state capital may be worse. capital adequacy ratio of this group of banks will decrease only a little, by 0.32%, but adequacy of tier 1 capital will be at critical level 8.06%. groups of banks with east and latvian capital will loose on the average 1.13%. thus each group of banks will be able to ensure tier 1 capital ratio of 6%, maintaining also a considerable reserve on the analysis and evaluation of capital adequacy… 117 average over 7.87%, and ensure compliance with the common equity adequacy standard in the mount of 7% (including 2,5% buffer). examination of changes in total capital adequacy helps to evaluate fully changes in capital adequacy ratios after introducing basel iii in the banking sector (figure 6). total capital adequacy shows similar tendencies to tier 1 capital adequacy ratios. the group of banks with european capital will be able to ensure the highest capital adequacy level (19.14%) with reduction ratio 0.77%. the situation of the group of banks with latvian state capital will be critical as their capital adequacy after introduction of basel iii will decrease by 0.40%, thus the group’s capital adequacy will be at 9.89% (the standard is 10.50%). capital adequacy of groups of banks with latvian and east capital will decrease by 1.40% on the average, and their capital adequacy ratio will exceed 17%. figure 6. breakdown of total capital adequacy changes in groups of banks (19.14 %) with reduction ratio 0.77 %. the situation of the group of banks with latvian state capital will be critical as their capital adequacy after introduction of basel iii will decrease by 0.40 %, thus the group's capital adequacy will be at 9.89 % (the standard is 10.50 %). capital adequacy of groups of banks with latvian and east capital will decrease by 1.40 % on the average, and their capital adequacy ratio will exceed 17 %. figure 6. breakdown of total capital adequacy changes in groups of banks source: created by authors based on consolidated annual reports of latvian banks, 2013 in 2019 according to new regulations equity capital adequacy ratio of every bank must be at least 10.50 %. respectively, after applying the new regulatory standards to the current indices of financial activities (2013) latvian banks will be able to satisfy this ratio as well. changes of each ratio in each group of banks are dispersed differently, but it is clear that as a result of introducing the new basel iii requirements capital adequacy of banks will drop (table 2). table 2. breakdown of changes in tier 1 capital and equity capital adequacy ratios of latvian banks in groups of banks grouping of latvian banks by the capital's origin country changes in tier 1 capital adequacy after introducing basel iii changes in equity capital adequacy after introducing basel iii latvian banks with european shareholders' investments in their capital -0,77% -0,77% latvian banks with latvian shareholders' investments in their capital -0,52% -0.67% latvian banks with state shareholders' investments in their capital -0,32% -0,40% s o u r c e : created by authors based on consolidated annual reports of latvian banks, 2013. in 2019 according to new regulations equity capital adequacy ratio of every bank must be at least 10.50%. respectively, after applying the new regulatory standards to the current indices of financial activities (2013) latvian banks will be able to satisfy this ratio as well. changes of each ratio in each group of banks are dispersed differently, but it is clear that as a result of introducing the new basel iii requirements capital adequacy of banks will drop (table 2). natalia konovalova, snezhana dalecka118 table 2. breakdown of changes in tier 1 capital and equity capital adequacy ratios of latvian banks in groups of banks grouping of latvian banks by the capital’s origin country changes in tier 1 capital adequacy after introducing basel iii changes in equity capital adequacy after introducing basel iii latvian banks with european shareholders’ investments in their capital -0,77% -0,77% latvian banks with latvian shareholders’ investments in their capital -0,52% -0.67% latvian banks with state shareholders’ investments in their capital -0,32% -0,40% latvian banks with east shareholders’ investments in their capital -0,61% -0,73% s o u r c e : created by authors based on consolidated annual reports of latvian banks, 2013. regardless of the conclusion made as a result of the performed analysis that each group of banks already is in a position to satisfy basel iii requirements for capital adequacy, results of the analysis show that two latvian commercial banks presently will not be able to ensure the required capital adequacy indices (table 3). evaluation results of the commercial bank x (state capital) indicate that the bank’s equity capital adequacy would not exceed 9.89%, respectively 0.61% under the new capital adequacy standard (10.5%). upon evaluation of the commercial bank y from the east group one must conclude that this bank fails to satisfy basel iii capital adequacy regulations as well. tier 1 capital adequacy ratio does not reach the standard by 0.71%, the total capital adequacy ratio, in its turn, is 2.79% lower than the standard (10.50%). table 3. conformity of capital adequacy ratios of the commercial bank x (latvian state capital) and the commercial bank y (eastern capital) to basel iii requirements name of the bank commercial bank x (latvian state capital) commercial bank y (eastern capital) reported period (year) 2013 basel iii requirements 2013 basel iii requirements tier 1 capital (000 eur) 94920 23527 equity capital (000 eur) 116492 34273 risk-weighted assets (000 eur) 1177580 444562 analysis and evaluation of capital adequacy… 119 name of the bank commercial bank x (latvian state capital) commercial bank y (eastern capital) tier 1 capital against risk-weighted assets, standard (%) 6,00% 6,00% tier 1 capital against risk-weighted assets, actual (%) 8,06% 5,29% reserve (%) 2,06% -0,71% equity capital against risk-weighted assets, actual (%) 9,89% 7,71% equity capital against risk-weighted assets, standard (%) (the so-called buffer) 10,50% 10,50% reserve (%) -0,61% -2,79% s o u r c e : created by authors based on consolidated annual reports of latvian banks, 2013. final remarks and conclusions results of the research allow the authors to make the following conclusions: 1. basel iii rules envision setting stricter requirements for the size of common equity and gradual increase of requirements for minimum capital adequacy ratios and risk evaluation until 2019. badly prepared commercial banks will not be able to comply with the new basel iii requirements, and that could lead to reduction of the number of banks. 2. the average capital adequacy ratio of latvian commercial banks satisfies basel committee’s requirements (at the end of 2013 equity capital adequacy amounted to 16.70% (2012 – 18.16%)). 3. in 2013 tier 2 capital of latvian banking sector did not exceed 15.22% (2012 – 13.89%) share of the total equity capital. but from 2001 to 2009 the amount of subordinated debt was on rapid increase and in 2009 had reached 21.78% (subordinated capital during the period of time from 2001 to 2009 grew by 566 million eur). the present low specific weight of subordinated capital in latvian commercial banks is tied to repayment tendencies of subordinated obligations. 4. from the point of view of grouping of commercial banks by the ownership of their capital, the lowest equity capital adequacy at the end of 2013 had banks founded with state capital – 10.29% (2012 – 12.92%), natalia konovalova, snezhana dalecka120 but the highest banks with european (19.90%) and east (19.08%) capital (2012 – 17.53% and 26.57%, respectively). 5. the analysis of the impact of basel iii requirements on capital adequacy ratios of latvian commercial banks showed that banks already maintain them at the level of new standards taking into consideration the additional mandatory capital reserve (10.5%). the group of banks with latvian state capital was only partially able to satisfy the new basel iii standards and ensure equity capital adequacy only at 9.89%. 6. groups of banks with east and european capital have the highest equity capital adequacy results according to basel iii requirements (18.34% and 19.14%). 7. the analysis of impact of introducing basel iii requirements on latvian banking sector demonstrates that on the average tier 1 capital adequacy ratio will decrease by 0.32% (group of banks with state capital) to 0.77% (group of banks with european capital), the equity capital adequacy ratio in its turn will decrease by 0,40% (group of banks with state capital) to 0.77% (group of banks with european capital). 8. one should also note that based on data of 2013 the ability of two latvian commercial banks (state capital and east capital) to comply with the new basel iii requirements is under doubt. this can be explained by insufficiency of own funds in the capital of commercial banks to cover the increased volume of risk-generating assets. based on the research and the conclusions made, the authors have developed the following proposals. for latvian commercial banks: 1. banks should calculate each month tier 1 capital and equity capital adequacy ratios to ensure thorough control of their capital adequacy levels according to the present (basel ii) and future (basel iii) regulatory requirements. that will help the banks to identify in a timely manner factors affecting their capital adequacy and prevent their negative impact. 2. commercial banks should ensure constant supervision of the volume of risk-generating assets and tighten the control of introduced capital ratios and their adequacy changes based on basel iii requirements. the supervision will help to quickly identify factors and circumstances having negative impact on changes of capital adequacy ratios. analysis and evaluation of capital adequacy… 121 3. banks should ensure evaluation of their capital adequacy by means of stress situation modelling according to their internal procedures and procedures of supervisory institutions (fcmc and basel committee) to identify weaknesses in the bank’s capital and assets’ structure. 4. at least once a year review their capital and risk management policies. 5. with the increase of profit of commercial banks use the possibility to increase the equity capital from internal sources of the commercial bank, for example, by means of capitalisation. 6. to reduce the credit risk, which has the greatest impact on capital adequacy ratios, the quality of credit portfolio management should be improved by strengthening the credit monitoring and introducing stricter evaluation requirements of borrowers’ creditworthiness. to this aim in a timely manner and on a regular basis review and update internal methodologies of the bank for evaluation of borrowers’ creditworthiness, use loan interest rate reviewing method, sale of property taken over by the bank to increase the money f low and partially reduce riskgenerating assets. 7. commercial banks operating actively on the non-residents market, especially in countries with high country risk, should perform detailed analysis of such regions and increase the capital reserve, if necessary, depending on the country risk level of placement country of assets. it is a required step, since according to basel requirements assets located in high risk regions are applied higher ratios used to determine the amount of risk-weighted assets. 8. to achieve consistency between a bank’s risks and capital required to cover them, commercial banks as they accumulate historical data must develop and approve risk evaluation methods based on internal ratings of the commercial bank. additionally for the commercial bank y from the group of banks with east capital: 9. based on results of the study indicating that the bank y could be unable to satisfy the new capital adequacy requirements (basel iii) the author would recommend for the bank to perform on a constant basis analysis of the balance between capital and risks. as the balance approaches the minimum critical mark the bank should use certain sources to increase the capital and implement policies aimed at reducing the amount of risknatalia konovalova, snezhana dalecka122 -generating assets to achieve compliance with capital adequacy standards. additionally for the commercial bank x from the group of banks with state capital: 10. to achieve the minimum capital adequacy level, including the mandatory capital reserve (10.50%), bank x must increase its equity capital by at least 7,1 million eur. the increase can be attained using the following methods: – attracting a new strategic investor (shareholder), selling the bank; – attracting subordinated capital resources; – partially (to an insignificant extent) by capitalizing the profit to increase the capital under the condition that its stable growth will be maintained.  references barclays capital (2010). basel iii final document – what’s new. basel committee on banking supervision, (2004), international convergence of capital measurement and capital standards: a revised framework. switzerland: basel commitee on banking supervision. https://www.bis.org/publ/bcbs128.pdf (accessed: 10.03.2016). basel commitee on banking supervision, (2010). basel iii: a global regulatory framework for more resilient banks and banking systems, switzerland: basel commitee on banking supervision. https://www.bis.org/publ/bcbs189_dec2010.pdf (accessed: 12.02.2016). basel commitee on banking supervision, (2010). results of the comprehensive quantitative impact study, switzerland: basel commitee on banking supervision. https:// www.bis.org/publ/bcbs186.pdf, (accessed: 12.02.2016). basel commitee on banking supervision, (2013). about basel. http://www.bis.org/ bcbs/about.htm (accessed: 8.01.2016). bank for international settlements, committee on payment and settlement systems, (2003). a glossary of terms used in payments and settlement systems. switzerland: bank for international settlements. https://www.bis.org/publ/cpss00b.pdf (accessed: 8.01.2016). cornford, a., (2010). revising basel 2: the impact of the financial crisis and implications for developing countries. in: g-24 discussion paper series, united nations conference on tr ade and development. new york and geneva, june 2010. european parliament and council directive 2002/87/ek dated by 20.07.2011. ferguson, r.w., (2003). capital standards for banks: the evolving basel accord, federal reserve bulletin. www.federalreserve.gov/pubs/bulletin/2003/0903lead.pdf (accessed: 12.02.2016). analysis and evaluation of capital adequacy… 123 financial commission of market and capital (fcmc). legislations documents, statistics of the credit institutions, annual reports. http://www.f ktk.lv (accessed: 12.02.2016). greuning, h., & brajovic bratanovic, s., (2009). analyzing banking risk: a framework for assessing corporate governance and risk management. washington: world bank. kudinska. m., & konovalova. n., (2012). the analysis of bank capital adequacy: the case of latvia, journal of business management, no. 6. balthazar l., (2006). from basel 1 to basel 3. great britain: palgr ave macmillan. www.palgraveconnect.com/doifinder/10.../978023050117. moody’s analytics, (2011. – 2012.). from basel ii to basel iii. pwc, (2011). risk & capital management under basel iii, www.pwc.com/gx /en/banking.../basel-iii-programme.pdf (accessed: 07.01.2016). rose, s.p., (2002). commercial bank management. mcgraw-hill higher education. saksonova, s., (2006). banku darbība. riga: latvian association of commercial banks counseling and training center. schooner, h.m., & taylor, m., (2009). regulation of global banking: principles and policies. chicago: academic press. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: january 4, 2017; date of acceptance: january 27, 2017. * dane kontaktowe: zimnicki@umk.pl, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: 56 611 4779. zimnicki, t. (2016). responsibility accounting inspiration for segment reporting. copernican journal of finance & accounting, 5(2), 219–232. http://dx.doi.org/10.12775/cjfa.2016.024 tomasz zimnicki* nicolaus copernicus university in toruń responsibility accounting inspiration for segment reporting keywords: decentralization, responsibility accounting, responsibility centres, multi-block income statement, segment reporting. j e l classification: m410. abstract: the 50s and 60s of the twentieth century was a period of significant diversification of the economic activities. as a result of that, big companies called conglomerates appeared. the biggest problem with them was efficient management. the system of central management did not work properly. in response to this the concept of decentralization was created. it assumed the transfer of decision-making powers to lower level of the organizational structure and increase the independence of separated areas of the company. the implementation of the decentralization concept also required modification of an existing information system in the company. in response to this responsibility accounting was established. the heart of it were separate areas of the company called responsibility centres. this modificated information system provided top management regular internal reports about economic situation in each of separated centres using multi-block income statement. the emergence of large companies resulted in problems not only with efficient management but also the assessment of the economic situation by external users, in particular, the company investors. they also noticed the value of the responsibility accounting. however, the fact that the investors began to demand the disclosure of such information as a part of financial statements, was the first step towards the creation of segments reporting. tomasz zimnicki220  introduction management is a key area of each company. managers are expected to plan, organize, motivate and control the resources of the company, both tangible and intangible, in such a way that the objectives of the organization are achieved in an efficient manner (boddy, 2008, p. 10; lewis, goodman, fandt, michlitsch, 2007, p. 5). the four basic management functions are directly related to the necessity of making decisions and the decisions need adequate information to be justified. accounting is responsible for providing information, management accounting in particular, which should be understood as a system of collection, classification, aggregation, analysis and presentation of financial and non-financial information that supports managers in decision-making and control (sojak, 2015, p. 36). it should be added that the development of accounting has always been associated with the increased demand for its results for economic calculation conducted by the management. the more difficult the management conditions were, the more interest was in accounting (siwoń, 1977, p. 42). in this context it should be noticed that management accounting is not an independent entity, but it is an information system that adapts to the needs of the internal business unit and management system. research methodology and research process the article is theoretical. its aim is to pay attention to the genesis of the segment reporting, which according to the author should not be seen as a something new created by financial reporting. segment reporting origins should be seen in responsibility accounting, which was a response of the internal accounting system for the needs of the management decentralization concept. information available in the responsibility accounting were the first step towards the creation of the segment reporting. the research method used in the article was based on the literature analysis in the field of management decentralization, responsibility accounting and segment reporting. also description and comparison method were used. responsibility accounting inspiration for segment reporting 221 the concept of decentralization the progressive economic development is directly linked with the development of the companies. their development can be carried out in various ways. the main include specialization and diversification. the first requires the company to focus on one area and reach maximum efficiency. the second involves widening the scope of its operations and may take the form of (nowosielski, 2001, p. 12): ■ territorial diversification – expansion of existing operations to new markets, ■ horizontal diversification – expansion of existing operations by the input unit in the new field of activity, ■ vertical diversification – expansion of existing operations through the acquisition of new skills and strengthening the competitiveness of the existing area under the backward or forward integration. the 50s and 60s of the twentieth century was a period of significant diversification of the companies economic activities. as a result of that large and international companies were created, which were offering different types of products (choi, 2003, pp. 22–1). the motive which guided these organisations in expanding their business was to reduce business risks by stabilizing the size of their revenue. the consequence of this growth was the rise of the so-called conglomerates (prodhan, 1986, p. 40). they should be understood as companies offering products which do not have common features. it means that they are not produced from the same materials, using the same equipment or using the same technology. in addition, they do not sell them using the same distribution channels, or to the same customers. the only common feature is that it is sold by the same company (cramer, 1968, p. 17). the first problem with these big companies were difficulties with the proper management. the system known as the central management has become less and less effective. there appeared more and more decision-making problems that had to be solved at the same time. communication path has been extended, leading to the risk of deformation of the information and distancing the top management from the source of the problem, reducing understanding. as a result, large international conglomerates have begun to have more serious problems, and sometimes even brushed against bankruptcy. the above situations occurred within the expanding organisations. to survive and function in a competitive way, they had to move away from a central tomasz zimnicki222 management system. this was the starting point for the development of the concept of decentralization. the essence of it should be defined as the transfer of decision-making powers to lower levels of organizational structure and to increase the independence of separate areas of the company (nowak, 2009, p. 192). the result of this should be improvement of resource efficiency (juralewicz, 2008, p. 123). the implementation of the management decentralization concept requires a change of organizational structure and information system in the company. an appropriate organizational structure allows for efficient distribution of tasks, delegation of authority and responsibility to managers of individual areas. the design of the structure requires the identification of individual work positions and grouped in a logical way. responsibility accounting the implementation of an appropriate organizational structure in not enough for the management system based on the decentralization concept to function properly. there is also the need of an appropriate information system. company’s management requires current and reliable information about economic situation in each of separate areas of company’s activity. in addition, the appropriate f low of information between different levels of management and separate areas of the company are necessary for efficient functioning of it (jackson, sawyers, jenkins, 2009, p. 407). for this purpose in management accounting the notion of responsibility accounting was created. the responsibility accounting should be understood as a retrospective and prospective information system which serves its users for planning, identification, measurement, analysis and evaluation the activity of those who were responsible for the different areas of the company (sojak, 2001, p. 21). the essence of it comes down to the preparation of the budgets for the areas, gather information about the results of the activities that took place there and to prepare reports summarizing their performance, which is the basis for the assessment of those responsible for managing those areas (smith, keith, stephens, 1986, p. 953). therefore, the purpose of the responsibility accounting should be defined as the measurement of the plans in the form of the budgets and the results in the form of performance of the budgets for each of the separate areas (bhimani, horngren, datar, foster, 1999, p. 487). responsibility accounting inspiration for segment reporting 223 the responsibility accounting fulfils its role when it provides proper information about the manager of a given area, the information about the activities the manager can control that allow the assessment of the manager’s effectiveness. responsibility centres the heart of the information system based on the responsibility accounting concept are internally separated company’s areas called responsibility centres. at the head of a single centre there is a manager who takes full responsibility for the efficiency of the activities that took place there. the manager has the right to decide how to use their resources to carry out the tasks. depending on the range of decision and responsibilities of the manager there are four responsibility centres. they were presented and synthetically characterized in figure 1. figure 1. types and characteristics of responsibility centres the responsibility accounting fulfils its role when it provides proper information about the manager of a given area, the information about the activities the manager can control that allow the assessment of the manager’s effectiveness. responsibility centres the heart of the information system based on the responsibility accounting concept are internally separated company’s areas called responsibility centres. at the head of a single centre there is a manager who takes full responsibility for the efficiency of the activities that took place there. the manager has the right to decide how to use their resources to carry out the tasks. depending on the range of decision and responsibilities of the manager there are four responsibility centres. they were presented and synthetically characterized in figure 1. figure 1. types and characteristics of responsibility centres source: own study based on: sojak, 2015, pp. 537–538. the implementation of responsibility centres depends on the size of the company. it is not about the level of revenues or assets value. the size should be considered from the standpoint of the functioning management system which will allow or not to separate different centres. besides the size of the company the types of centres are affected by the following factors: the scope and specificity of the company’s activity, the complexity of the economic process, and the ability to define the scope of the authority and responsibility (nowak, 2000, p. 25). the separation within the company responsibility centres serves to increase the efficiency of its operations. it is not enough only to entrust the responsibility to the managers of these areas. it is necessary to define the principles for the evaluation of their work and its systematic conduct. appropriate economic parameters are applied here known as indicators. it should be emphasized that the measuring effectiveness ought to operate as an “invisible hand”. it means that the indicators are designed in such a way that the manager directing them will take decisions within own area which will be in line with the expectation of the company’s top management (jaruga, kabalski, szychta, 2010, p. 420). this measurement should assess the manager in a fair way. it means that the indicators include only those areas which are in control of the evaluated manager (demski, sappington, 1989, p. 40). the subject of the evaluation should be both current and long-term tasks. quantitative and qualitative indicators are used in assessing it. first of them should be understood as a number of quantifiable characteristic features of different economic events. there are financial and non-financial indicators. the second type, qualitative indicators, are used for immeasurable characteristics or difficult to measure (nowosielski, 2000, p. 379). specification of the indicators used to evaluate the responsibility centres is shown in figure 2. types of responsibility centres characteristics responsibility centres cost centres revenue centres profit centres investment centres the manager of this centre is responsible for the costs and has a right to make decisions affecting their level. the manager of this centre is responsible for the revenues and has a right to make decisions affecting their level. the manager of this centre is responsible for the costs and revenues, as a result of that is responsible for the profit or loss and has a right to make decisions affecting their level. the manager of this centre is responsible for the profit or loss and the assets wich were used, and has a right to make decisions affecting their level. s o u r c e : own study based on: sojak, 2015, pp. 537–538. the implementation of responsibility centres depends on the size of the company. it is not about the level of revenues or assets value. the size should be considered from the standpoint of the functioning management system which will allow or not to separate different centres. besides the size of the company the types of centres are affected by the following factors: the scope and specitomasz zimnicki224 ficity of the company’s activity, the complexity of the economic process, and the ability to define the scope of the authority and responsibility (nowak, 2000, p. 25). the separation within the company responsibility centres serves to increase the efficiency of its operations. it is not enough only to entrust the responsibility to the managers of these areas. it is necessary to define the principles for the evaluation of their work and its systematic conduct. appropriate economic parameters are applied here known as indicators. it should be emphasized that the measuring effectiveness ought to operate as an “invisible hand”. it means that the indicators are designed in such a way that the manager directing them will take decisions within own area which will be in line with the expectation of the company’s top management (jaruga, kabalski, szychta, 2010, p. 420). this measurement should assess the manager in a fair way. it means that the indicators include only those areas which are in control of the evaluated manager (demski, sappington, 1989, p. 40). the subject of the evaluation should be both current and long-term tasks. quantitative and qualitative indicators are used in assessing it. first of them should be understood as a number of quantifiable characteristic features of different economic events. there are financial and non-financial indicators. the second type, qualitative indicators, are used for immeasurable characteristics or difficult to measure (nowosielski, 2000, p. 379). specification of the indicators used to evaluate the responsibility centres is shown in figure 2. out of all above, the most common are financial indicators. it is a result of two aspects. firstly, these are quantitative indicators that allow quick and easy quantification of economic events and their evaluation. second, information about them is systematically provided by an accounting system. this results in significantly lower expenditure of obtaining them than it is in relation to other indicators. responsibility accounting inspiration for segment reporting 225 figure 2. evaluation indicators of the responsibility centres figure 2. evaluation indicators of the responsibility centres source: own study based on: makowska, 2005a, pp. 288–293; makowska, 2005b, pp. 253–259; makowska, 2003, pp. 182–183, 185–188; sojak, 2000, pp. 398–400; nowosielski, 2000, pp. 381–382. out of all above, the most common are financial indicators. it is a result of two aspects. firstly, these are quantitative indicators that allow quick and easy quantification of economic events and their evaluation. second, information about them is systematically provided by an accounting system. this results in significantly lower expenditure of obtaining them than it is in relation to other indicators. internal reporting senior management of the company receive information about the economic situation in each of the given areas as a part of internal reporting. the scope of the information depends on: the type of business, organizational structure, separated responsibility centres, specificity of economic processes taking place in the company, information needs of different management levels, capabilities and costeffectiveness of obtaining data (sawicki, 2000, pp. 194–195). invention that accompanies the creation of an internal reports system is not subject to any restrictions. there is a variety of customized solutions. they are determined only by the desire to obtain specialized information. considering the aspect of internal reporting the multi-block income statement is worth noting. its essence is based on the concept of account variable costs and margin to cover fixed costs and profit. it presents in a multi-stage, multi-block and multi-level variable costs, fixed costs and operating result of complex economic processes taking place in the company. it is used mainly in the planning and internal reports in the responsibility accounting. the multi-block income statement is adapted to evaluate the managers of the responsibility centres, its essence is presented in figure 3. analysis of deviations of the actual and planned costs. analysis of deviations of the actual and planned revenues. operational profit margin 2nd or 3rd degree return on sales operational profit margin 2nd or 3rd degree return on sales return on assets return on investment turnover ratio of capital residual income quantitative indicators the examples of non-financial indicators are: the increase of productivity, capacity utilization, manufacturing defects ratio, participation in the local market, market expansion, the number of new products/clients, the ratio of the contracts carried out in relation to the number of reported, the ratio of contracts carried out in relation to the number of customers, absenteeism and staff turnover. qualitative indicators the examples of qualitative indicators are: leadership (manager’s personal involvement in the process of continuous improvement) human resources management (using human potential for continuous improvement of work) processes (process management affecting growth effects of work) customer satisfaction (meeting the needs and expectations of internal and external customers) employee satisfaction (employee attitude to their manager, working conditions, wages, social security, etc.) responsibility centres cost centres revenue centres profit centres investment centres nonfinancial financial internal and external s o u r c e : own study based on: makowska, 2005a, pp. 288–293; makowska, 2005b, pp. 253–259; makowska, 2003, pp. 182–183, 185–188; sojak, 2000, pp. 398–400; nowosielski, 2000, pp. 381– 382. internal reporting senior management of the company receive information about the economic situation in each of the given areas as a part of internal reporting. the scope of the information depends on: the type of business, organizational structure, separated responsibility centres, specificity of economic processes taking place in the company, information needs of different management levels, capabilities and cost-effectiveness of obtaining data (sawicki, 2000, pp. 194–195). invention that accompanies the creation of an internal reports system is not tomasz zimnicki226 subject to any restrictions. there is a variety of customized solutions. they are determined only by the desire to obtain specialized information. considering the aspect of internal reporting the multi-block income statement is worth noting. its essence is based on the concept of account variable costs and margin to cover fixed costs and profit. it presents in a multi-stage, multi-block and multi-level variable costs, fixed costs and operating result of complex economic processes taking place in the company. it is used mainly in the planning and internal reports in the responsibility accounting. the multiblock income statement is adapted to evaluate the managers of the responsibility centres, its essence is presented in figure 3. figure 3. multi-block income statement for the decentralized company figure 3. multi-block income statement for the decentralized company source: own study based on: jarugowa, 1997, pp. 27–28. the multi-block income statement measures the operating effectiveness in each of the individual areas by indentifying the different levels of gross margin. the scheme presents the following three types:  gross margin i – is the difference between revenues of the profit centre and its variable costs, it is called “input” because it should cover all other fixed costs in the company,  gross margin ii – is a basic criterion in assessing the profit centres effectiveness, it includes revenues reduced by variable and individual fixed costs, there is no distortion by arbitrary assigning the investment centre fixed costs or the company fixed costs,  gross margin iii – is a basic criterion in assessing the investment centres effectiveness, it includes gross margin ii reduced by investment centre fixed costs, there is no distortion by arbitrary assigning the company fixed costs. the presented considerations on the multi-block income statement can be concluded that the managers of profit and investment centres are only assessment subjects. such a conclusion is inappropriate. the assessment applies to all managers of the responsibility centres. in practice, the multi-block income statement is much more developed. it should also contain the values established in the budget at any level beyond presented information, deviations between the values achieved and planned and the responsibility centre manager comments about the resulting deviations. this includes managers of costs and revenues centres. segment reporting over time, the value of information about responsibility centres has also been recognised by financial statement external users, the investors in particular. they began to demand their disclosure as a part of financial reporting (external reporting). in their opinion, the conglomerates financial statement contained only aggregated data. the particular areas of the company can operate in different economic conditions. probably this can result in different levels of rates and associated levels of risk. these areas sales revenues variable costs gross margin i profit centre fixe costs gross margin ii sum of gross margin ii investement centre fixed costs gross margin iii sum of gross margin iii company fixed costs operating profit investement centre a investement centre b profit centre a1 profit centre a2 profit centre b1 profit centre b2 s o u r c e : own study based on: jarugowa, 1997, pp. 27–28. the multi-block income statement measures the operating effectiveness in each of the individual areas by indentifying the different levels of gross margin. the scheme presents the following three types: responsibility accounting inspiration for segment reporting 227 ■ gross margin i – is the difference between revenues of the profit centre and its variable costs, it is called “input” because it should cover all other fixed costs in the company, ■ gross margin ii – is a basic criterion in assessing the profit centres effectiveness, it includes revenues reduced by variable and individual fixed costs, there is no distortion by arbitrary assigning the investment centre fixed costs or the company fixed costs, ■ gross margin iii – is a basic criterion in assessing the investment centres effectiveness, it includes gross margin ii reduced by investment centre fixed costs, there is no distortion by arbitrary assigning the company fixed costs. the presented considerations on the multi-block income statement can be concluded that the managers of profit and investment centres are only assessment subjects. such a conclusion is inappropriate. the assessment applies to all managers of the responsibility centres. in practice, the multi-block income statement is much more developed. it should also contain the values established in the budget at any level beyond presented information, deviations between the values achieved and planned and the responsibility centre manager comments about the resulting deviations. this includes managers of costs and revenues centres. segment reporting over time, the value of information about responsibility centres has also been recognised by financial statement external users, the investors in particular. they began to demand their disclosure as a part of financial reporting (external reporting). in their opinion, the conglomerates financial statement contained only aggregated data. the particular areas of the company can operate in different economic conditions. probably this can result in different levels of rates and associated levels of risk. these areas can affect the economic situation of the company in a different way. it means that the investors making decisions based on aggregated data contained in a financial statement of a diversified company are at greater risk, than in the case of the financial statement of the company which operates only in one area. the first legal regulation which obligated companies to disclose information about segments (separate areas of the company activity), appeared in the united states on july 14, 1969. it was the securities exchange act of 1934 retomasz zimnicki228 lease no. 8650 published by the securities and exchange commission (sec). the companies were obliged to disclose revenues and results received in particular segments. those regulations applied only to companies which placed new securities to public trading (skousen, 1970, p. 39). due to the fact that the information was non-cyclical and did not apply to all companies its value was significantly reduced. the consequence of this was the publication by sec on october 21, 1970 the new legal regulation contained in securities exchange act of 1934 release no. 9000. according to it, the information about segments should be published as a part of annual report which was required by sec from all companies whose securities were in public trading. the change of regulations obligated companies to disclose information about revenues and results for each segments which provided at least 10% of consolidated revenues or results of the company as a whole. the importance of segment reporting was also recognized by the two largest in the world organizations improving accounting rules – financial accounting standards board (fasb) and international accounting standards board (iasb). fasb first started work and in year 1976 published the first accounting standard dedicated to segment reporting. it was the statement of financial accounting standards no 14 financial reporting for segments of a business enterprise (sfas14). in this standard besides the revenues and results the companies were obligated to disclose the value of assets involved in each of presented segments. sfas14 was the basis of segment reporting for the companies obligated by the united states generally accepted accounting principles for over twenty years. after this period, in year 1997, fasb issued a new standard: the statement of financial accounting standard no 131 disclosures about segments of an enterprise and related information (sfas131). this standard has applied to the present day. the second organization, iasb, issued the first standard dedicated to segments reporting in year 1981. it was the international accounting standard no 14 reporting financial information by segment (ias14). this standard was the basis of the segment reporting for the companies obligated by international financial reporting standards for more than fifteen years. in 1997 ias14 was revised and changed its name to international accounting standard no 14 segment reporting (ias14r). the revised standard was in force till year 2009. then ias14r was replaced by the new standard: the international financial reporting standard no 8 operating segments (ifrs8). the new standard has applied to the present day. the synthetic presentation of the above events is shown in figure 4. responsibility accounting inspiration for segment reporting 229 figure 4. key events on segment reporting can affect the economic situation of the company in a different way. it means that the investors making decisions based on aggregated data contained in a financial statement of a diversified company are at greater risk, than in the case of the financial statement of the company which operates only in one area. the first legal regulation which obligated companies to disclose information about segments (separate areas of the company activity), appeared in the united states on july 14, 1969. it was the securities exchange act of 1934 release no. 8650 published by the securities and exchange commission (sec). the companies were obliged to disclose revenues and results received in particular segments. those regulations applied only to companies which placed new securities to public trading (skousen, 1970, p. 39). due to the fact that the information was non-cyclical and did not apply to all companies its value was significantly reduced. the consequence of this was the publication by sec on october 21, 1970 the new legal regulation contained in securities exchange act of 1934 release no. 9000. according to it, the information about segments should be published as a part of annual report which was required by sec from all companies whose securities were in public trading. the change of regulations obligated companies to disclose information about revenues and results for each segments which provided at least 10% of consolidated revenues or results of the company as a whole. the importance of segment reporting was also recognized by the two largest in the world organizations improving accounting rules – financial accounting standards board (fasb) and international accounting standards board (iasb). fasb first started work and in year 1976 published the first accounting standard dedicated to segment reporting. it was the statement of financial accounting standards no 14 financial reporting for segments of a business enterprise (sfas14). in this standard besides the revenues and results the companies were obligated to disclose the value of assets involved in each of presented segments. sfas14 was the basis of segment reporting for the companies obligated by the united states generally accepted accounting principles for over twenty years. after this period, in year 1997, fasb issued a new standard: the statement of financial accounting standard no 131 disclosures about segments of an enterprise and related information (sfas131). this standard has applied to the present day. the second organization, iasb, issued the first standard dedicated to segments reporting in year 1981. it was the international accounting standard no 14 reporting financial information by segment (ias14). this standard was the basis of the segment reporting for the companies obligated by international financial reporting standards for more than fifteen years. in 1997 ias14 was revised and changed its name to international accounting standard no 14 segment reporting (ias14r). the revised standard was in force till year 2009. then ias14r was replaced by the new standard: the international financial reporting standard no 8 operating segments (ifrs8). the new standard has applied to the present day. the synthetic presentation of the above events is shown in figure 4. figure 4. key events on segment reporting source: zimnicki, 2011, p. 168. the implementation of segment reporting as a part of financial statement was possible thanks to the concept of decentralization. it forced the reconstruction of the internal accounting system. as a result, responsibility accounting was established whose task was to identify, collect, process and transfer financial information about the economic situation in each of responsibility centres. the possession of such information by the company gave the reason to the external users of financial statement to 1965 1966 1969 1970 1976 1981 1997 2009 sec fasb iasb ifrs8 ias14r ias14 sfas131 sfas14 securities exchange act of 1934 release no. 8650 sec change of position j. dirlam proposal rejection by sec securities exchange act of 1934 release no. 9000 s o u r c e : zimnicki, 2011, p. 168. the implementation of segment reporting as a part of financial statement was possible thanks to the concept of decentralization. it forced the reconstruction of the internal accounting system. as a result, responsibility accounting was established whose task was to identify, collect, process and transfer financial information about the economic situation in each of responsibility centres. the possession of such information by the company gave the reason to the external users of financial statement to apply for its disclosure. legal regulation in this area obligated some companies to disclose information about the economic situation of responsibility centres. but the information has been limited to the profit and investment centres and to the basic economic values such as revenues, costs, results and assets. the relation between responsibility centres and segments is presented in figure 5. tomasz zimnicki230 figure 5. relation between responsibility centres and segments apply for its disclosure. legal regulation in this area obligated some companies to disclose information about the economic situation of responsibility centres. but the information has been limited to the profit and investment centres and to the basic economic values such as revenues, costs, results and assets. the relation between responsibility centres and segments is presented in figure 5. figure 5. relation between responsibility centres and segments source: own study based on: sojak, 2007, p. 35. the scheme shows that segment reporting is based on two types of responsibility centres: profit and investment centres. cost and revenue centres are not the object of its interest. this approach is a result of these two following reasons:  the fear of competition by disclosing too detailed information,  difference between the aim of responsibility accounting (current management) and the aim of segment reporting (identification of general differences in economic situation of separate segments). summary to summarize the above considerations it must be concluded that with the development of the company it is necessary to implement management system based on decentralization. but decentralization without adequate information system is not enough. the management system will be effective if it has information about scheduled tasks in the form of the budget, their results through the presentation of incurred costs, received revenues, involved assets and liabilities, and the analysis of the deviations and their causes in each of separated activity areas. possession of such information by the top management of the company allows to evaluate the managers of these areas. the management is not the only party interested in maintaining the company in a good condition. the company investors are a lot more interested in this area. they have invested their own capital to the company and want at least that the capital will not be reduced. in contrast to the management they responsibility centres cost centres revenue centres profit centres investment centres segments reporting responsibility accounting concept of decentralization segment revenues segment costs segment results segment assets s o u r c e : own study based on: sojak, 2007, p. 35. the scheme shows that segment reporting is based on two types of responsibility centres: profit and investment centres. cost and revenue centres are not the object of its interest. this approach is a result of these two following reasons: ■ the fear of competition by disclosing too detailed information, ■ difference between the aim of responsibility accounting (current management) and the aim of segment reporting (identification of general differences in economic situation of separate segments).  summary to summarize the above considerations it must be concluded that with the development of the company it is necessary to implement management system based on decentralization. but decentralization without adequate information responsibility accounting inspiration for segment reporting 231 system is not enough. the management system will be effective if it has information about scheduled tasks in the form of the budget, their results through the presentation of incurred costs, received revenues, involved assets and liabilities, and the analysis of the deviations and their causes in each of separated activity areas. possession of such information by the top management of the company allows to evaluate the managers of these areas. the management is not the only party interested in maintaining the company in a good condition. the company investors are a lot more interested in this area. they have invested their own capital to the company and want at least that the capital will not be reduced. in contrast to the management they do not have internal data allowing for an assessment of the company economic situation. the emergence of large companies resulted in the problems not only with efficient management but also with the assessment of the economic situation by external users, in particular the investors. they also noticed the value of the responsibility accounting. however, the fact that they began to demand the disclosure of such information as a part of financial statements, was the first step towards the creation of segment reporting.  references bhimani, a., horngren, ch.t., datar, s.m., foster, g. 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(2008). ośrodki odpowiedzialności jako forma decentralizacji zarządzania w przedsiębiorstwie transportu samochodowego. in e. nowak, rachunkowość zarządcza w warunkach globalizacji. prace naukowe uniwersytetu ekonomicznego, wrocław. tomasz zimnicki232 makowska, e. (2003). pomiar i ocena działalności ośrodków odpowiedzialności w przedsiębiorstwach zdecentralizowanych. aunc ekonomia, xxxiii, toruń. makowska, e. (2005a). mierniki finansowe stosowane do pomiaru działalności ośrodków odpowiedzialności w wielonarodowych przedsiębiorstwach zdecentralizowanych (w świetle badań ankietowych). in e. nowak (ed.), rachunkowość a controlling. prace naukowe akademii ekonomicznej, 1085, wrocław. makowska, e. (2005b). mierniki niefinansowe wykorzystywane do pomiaru działalności ośrodków odpowiedzialności w przedsiębiorstwach krajowych (w świetle badań ankietowych). in a. kardasz (ed.) standardy edukacyjne rachunkowości – praktyka i stan badań. prace naukowe akademii ekonomicznej, 1079, wrocław. nowak, e. (2000). zasady wyodrębniania ośrodków odpowiedzialności w przedsiębiorstwie. controlling i rachunkowość zarządcza, 6. nowak, e. (2009). zaawansowana rachunkowość zarządcza. pwe, warszawa. nowosielski, s. (2000). mierniki oceny pracy ośrodków odpowiedzialności. prace naukowe akademii ekonomicznej, 868, wrocław. nowosielski, s. (2001). centra kosztów i centra zysku w przedsiębiorstwie. wydawnictwo akademii ekonomicznej, wrocław. prodhan, b. (1986). multinational accounting. segment disclosure and risk. croom helm, australia. sawicki, k. (2000). krótkookresowe sprawozdania finansowe na potrzeby controllingu. in e. nowak (ed.) rachunkowość a controlling. sprawozdawczość i ocena ośrodków odpowiedzialności. wydawnictwo akademii ekonomicznej, wrocław. siwoń, b. (1997). informacyjna funkcja rachunkowości. warszawa: pwe. skousen, k.f. (1970). standards for reporting by lines of business. journal of accountancy, 129(2). smith, j.l., keith, r.m., stephens, w.l. (1986). accounting principles. usa, new york: mcgraw-hill. sojak, s. (2000). pomiar i ocena efektywności działania w przedsiębiorstwach krajowych i wielonarodowych. in e. nowak (ed.) rachunkowość a controlling. sprawozdawczość i ocena ośrodków odpowiedzialności. wrocław: wydawnictwo akademii ekonomicznej. sojak, s. (2001). ceny transferowe. teoria i praktyka. warszawa: wydawnictwo naukowe pwn. sojak, s. (2007). segmenty działalności gospodarczej jednostek według rachunkowości zarządczej, marketing i międzynarodowych standardów rachunkowości. in s. sojak, m. jankowska, msr 14 sprawozdawczość segmentów działalności. warszawa: difin. sojak, s. (2015). rachunkowość zarządcza i rachunek kosztów: tom i. toruń: tnoik. zimnicki, t. (2011). ocena zasadności wprowadzenia informacji o segmentach działalności do sprawozdawczości finansowej. acta universitatis nicolai copernici zarządzanie, xxxviii(404), toruń. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 5.12.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: winnicka_edyta@umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 47 79. edyta winnicka* uniwersytet mikołaja kopernika w toruniu zmiany w msr 1 a praktyka wybranych spółek notowanych na gpw w warszawie słowa kluczowe: międzynarodowe standardy rachunkowości, sprawozdawczość finansowa, zysk całkowity. klasyfikacja jel: g39, d29. abstrakt: artykuł przedstawia wpływ nowych zasad prezentacji sprawozdań finansowych na użyteczność informacji. w tym celu poddano badaniu sprawozdania finansowe za 2009 i 2011 rok wybranych spółek notowanych na giełdzie papierów wartościowych w warszawie. wyniki badań wykazały, że zmiany w międzynarodowym standardzie rachunkowości 1 (wprowadzenie zysku całościowego) nie wpłynęły na wzrost przydatności informacji. sprawozdania spółek są nieprzejrzyste i nieporównywalne, co oznacza wzrost kosztów przetwarzania informacji przez ich odbiorców. ponadto analiza koncepcji zysku całościowego wykazała, że wynik całościowy nie jest dobrym miernikiem do oceny inwestycji. changes in ias 1 and the practices of selected companies listed on the warsaw stock exchange keywords: comprehensive income, financial reporting, international accounting standards. jel classification: g39, d29. abstract: the article shows the impact of new rules of presenting financial statements on the usefulness of information. for that purpose financial statements for 2009 and http://dx.doi.org/10.12775/cjfa.2013.012 edyta winnicka170 2011 of selected companies listed on warsaw stock exchange were examined. the results showed that the changes implemented in international accounting standard 1 (the introduction of comprehensive income) did not have an inf luence on the usefulness of information. as the reports of the companies are unclear, it is impossible to compare them, which results in an increase in the costs of information processing of their recipients. the analysis of comprehensive income concept showed that comprehensive income is not a good measure for the evaluation of investment. translated by edyta winnicka  wstęp sprawozdanie finansowe jest głównym źródłem informacji o sytuacji przedsiębiorstwa. powinno zatem przedstawiać dane w taki sposób, aby były one przydatne różnym grupom interesariuszy. próbę zmiany formy prezentacji sprawozdania finansowego na taką, która sprosta wymogom informacyjnym ich odbiorców, podjęły: rada międzynarodowych standardów rachunkowości (international accounting standards board – iasb) oraz amerykańska rada standardów rachunkowości finansowej (financial accounting standards board – fasb). współpraca iasb i fasb, dotycząca zmiany zasad prezentacji sprawozdań finansowych, sprowadza się do nowelizacji msr 1 prezentacja sprawozdań finansowych. istotną zmianą w msr 1, dokonaną we wrześniu 2007 roku, a obowiązującą od 1 stycznia 2009 roku, było wprowadzenie koncepcji wyniku całościowego. aktualizacja niniejszego standardu obejmowała również zmiany dotychczasowych nazw składowych sprawozdania finansowego na: sprawozdanie z sytuacji finansowej (bilans), sprawozdanie z całkowitych dochodów (rachunek zysków i strat), sprawozdanie ze zmian w kapitale własnym (zestawienie zmian w kapitale własnym), sprawozdanie z przepływów pieniężnych (rachunek przepływów pieniężnych). stosowanie powyższych tytułów nie ma charakteru obligatoryjnego – zgodnie z msr 1 jednostka może posługiwać się innymi nazwami sprawozdań niż te zastosowane w standardzie (międzynarodowe standardy 2011: b823). wynik całościowy (prezentowany w nowym składniku sprawozdania finansowego – sprawozdaniu z całkowitych dochodów) to tradycyjny wynik finansowy netto za okres uzupełniony o przychody i koszty kapitałowe, ujmowane dotychczas w zestawieniu zmian w kapitale własnym. wszystkie pozycje ,,omijające” rachunek wyników składają się na inne całkowite dochody. są to m.in.: zmiany w nadwyżce z przeszacowania, zyski i straty wynikające z przeliczenia pozycji sprawozdania finansowego jednostki działającej za granicą, zyski i straty z tytułu przeszacowania składników aktywów finansowych do  zmiany w msr 1 a praktyka wybranych spółek notowanych… 171 stępnych do sprzedaży (msr 1, par. 7). w związku z powyższym sprawozdanie ze zmian w kapitale własnym zostało ograniczone do prezentacji kwot wynikających z transakcji z właścicielami jednostki. msr 1 pozostawia jednostkom możliwość wyboru formy prezentacji sprawozdania z całości zysków i strat. standard wyróżnia dwa dopuszczalne warianty: ■ pojedyncze sprawozdanie z całkowitych dochodów, ■ oddzielny rachunek zysków i strat oraz sprawozdanie z całościowego wyniku (msr 1, par. 81). w pierwszej opcji należy zastąpić dotychczasowy rachunek zysków i strat sprawozdaniem uwzględniającym dodatkowo pozostałe składniki innych całkowitych dochodów. drugi wariant dopuszcza osobną prezentację rachunku zysków i strat oraz nowego sprawozdania z całkowitych dochodów. sprawozdanie to rozpoczyna się od zysku/straty netto, następnie przedstawia poszczególne składniki pozostałych całkowitych dochodów i zamyka sprawozdanie pozycją ,,całkowite dochody ogółem”. kolejną nowelizację msr 1, obowiązującą od 1 lipca 2012 roku, wprowadzono w czerwcu 2011 roku. wówczas opublikowano zmiany dotyczące prezentacji i klasyfikacji pozycji innych całkowitych dochodów w sprawozdaniu z całościowego wyniku. dokonano podziału omawianych pozycji na te, które w kolejnych okresach zostaną przeniesione do rachunku zysków i strat, oraz te, których nie można do niego przenieść (exposure draft 2010). dlaczego w msr 1 pojawiają się kolejne zmiany? zdaniem pomysłodawców podział pozostałych całkowitych dochodów na powyższe kategorie zwiększy przejrzystość i przydatność sprawozdań finansowych. nowa forma prezentacji ma ułatwić prognozowanie przyszłych przepływów gotówkowych. wdrażane w msr 1 zmiany mają spowodować wzrost użyteczności informacji zawartych w sprawozdaniach finansowych, co z kolei powinno przełożyć się na zmniejszenie kosztów analizowania danych przez odbiorców. czy zatem nowa forma sprawozdań finansowych jednostek korzystnie wpłynęła na prezentowane raporty? celem artykułu jest odpowiedź na pytania: ■ jak wprowadzenie kategorii zysku całościowego wpłynęło na przejrzystość sprawozdania z całkowitego dochodu; ■ jak menadżerowie, odpowiedzialni za sporządzanie raportów, odnoszą się do wprowadzanych zmian (zastosowanie zaktualizowanego w 2011 roku msr 1)? edyta winnicka172 opracowanie przedstawia wyniki analizy sprawozdań finansowych wybranych spółek notowanych na gpw w warszawie. badanie zostało podzielone na dwie części. w pierwszej dokonano analizy sprawozdania z całkowitych dochodów – określono jego strukturę i preferowaną formę prezentacji. ponadto zbadano relacje poszczególnych pozycji wyniku całościowego z pozycjami kapitału własnego, ujawnianymi w bilansie. analizą objęto sprawozdania finansowe wybranych spółek wig20 sporządzone za 2011 rok (badania własne) oraz za 2009 rok (badania przeprowadzone przez ewę walińską i bogusławę bek-gaik). badania walińskiej i bek-gaik były inspiracją do badań własnych – w celu ich porównywalności zastosowano taką samą metodykę badań. wyniki badań zostały porównane w celu określenia kierunków zmian praktyki polskich spółek – czy dążą one do zwiększania transparentności sprawozdań finansowych, czy też nic się nie zmieniło w tym zakresie. druga część badań również dotyczyła sprawozdania z całkowitych dochodów, przy czym skupiono się na analizie pozycji innych całkowitych dochodów w celu określenia, które z wybranych spółek wdrożyły znowelizowany w czerwcu 2011 roku msr 1. nowa forma sprawozdania finansowego jest przedmiotem badań wielu autorów. przykładem są prace jerzego gierusza (2007, 2010), w których został przedstawiony nowy układ rachunku wyników, oraz prace ewy walińskiej (2009) odnoszące się do zmian sposobu prezentacji bilansu. ponadto problemy związane z wynikiem całościowym, analizowane z perspektywy teoretycznej, odnajdziemy w pracach anny szychty (2010). 1. zastosowanie znowelizowanego w 2007 roku msr 1 podstawą przeprowadzenia tej części badań były analizy sprawozdań finansowych za 2009 rok przeprowadzone przez walińską i bek-gaik (walińska, bek-gaik 2011). analizie poddano informacje publikowane w sprawozdaniach finansowych spółek wchodzących w skład indeksu wig20 z 2011 roku (z wyłączeniem instytucji finansowych) oraz spółek mieszczących się w tym indeksie w ostatnich pięciu latach. wyniki badania zostały porównane z wynikami badań przeprowadzonych przez walińską i bek-gaik na sprawozdaniach finansowych spółek sporządzonych za 2009 rok. wyboru spółek dokonano ze względu na ich wielkość, jak i fakt, że prawdopodobieństwo występowania przychodów/ kosztów uznawanych bezpośrednio w kapitale własnym w ich sprawozdaniach jest wyższe niż w innych spółkach (walińska, bek-gaik 2011).   zmiany w msr 1 a praktyka wybranych spółek notowanych… 173 w celu uzyskania porównywalności wyników zbadano sprawozdania finansowe tych spółek dla obu okresów badawczych (tabela 1)1. analiza porównawcza sprawozdań finansowych za 2009 i 2011 rok umożliwi udzielenie odpowiedzi na pytanie, czy sposób prezentacji wyniku całościowego i kapitału własnego spółek zmienił się oraz jaki ma to wpływ na przejrzystość sprawozdania finansowego. tabela 1. wykaz spółek z wig20 wybranych do analizy porównawczej sprawozdań finansowych za 2009 i 2011 rok lp. spółka branża 1 asseco informatyczna 2 bioton farmaceutyczna 3 cez energetyczna 4 cyfrowy polsat mediowa 5 gtc deweloperska 6 kghm surowcowa 7 lotos paliwowa 8 pbg budowlana 9 pge energetyczna 10 pgnig paliwowa 11 pkn orlen paliwowa 12 polimexms budowlana 13 tp sa telekomunikacyjna 14 tvn mediowa 15 agora mediowa 16 cersanit materiały budowlane 17 kęty aluminiowa 18 netia telekomunikacyjna 19 mol paliwowa ź r ó d ł o : opracowanie własne na podstawie: roczniki gpw; walińska, bek-gaik 2011: 332. 1 spółki wyłączone z badania: boryszew, orbis, jsw, bogdanka, kernel, tauronpe. edyta winnicka174 1.1. preferowana forma prezentacji sprawozdania z całkowitych dochodów analizę rozpoczęto od zbadania sprawozdania z całkowitych dochodów wybranych spółek w celu ustalenia formy prezentacji wyniku całościowego (tabela 2). w 2009 roku jedynie trzy spośród dziewiętnastu spółek sporządziły sprawozdanie z całkowitych dochodów w formie jednoczłonowej (lotos, pge, pkn orlen), pozostałe spółki przyjęły formę tradycyjną – oddzielnie sporządziły rachunek zysków i strat oraz sprawozdanie z całkowitych dochodów (walińska, bek-gaik 2011). tabela 2. forma sprawozdania z całkowitych dochodów badanych spółek lp. nazwa spółki jedno sprawozdanie dwa sprawozdania 2009 r. 2011 r. 2009 r. 2011 r. 1 asseco poland x x 2 bioton x x 3 cez x x 4 cyfrowy polsat x x 5 gtc x x 6 kghm x x 7 lotos x x 8 pbg x x 9 pge x x 10 pgnig x x 11 pkn orlen x x 12 polimexms x x 13 tp sa x x 14 tvn x x 15 agora x x 16 cersanit x x   zmiany w msr 1 a praktyka wybranych spółek notowanych… 175 lp. nazwa spółki jedno sprawozdanie dwa sprawozdania 2009 r. 2011 r. 2009 r. 2011 r. 17 kęty x x 18 netia x x 19 mol x x ź r ó d ł o : badania własne; walińska, bek-gaik 2011: 332. analiza sprawozdań finansowych za 2011 rok wykazała, że poza kghm, żadna ze spółek nie zdecydowała się na zmianę formy prezentacji sprawozdania z całkowitych dochodów. może to wynikać z przekonania, iż przedstawienie wyniku finansowego oraz całkowitych dochodów ogółem w jednym sprawozdaniu spowoduje nadmierną koncentrację uwagi użytkowników sprawozdań na końcowej pozycji tego sprawozdania, to jest całkowitym dochodzie ogółem (międzynarodowe standardy 2011; msr 1: b833). 1.2. analiza pozycji sprawozdania z całkowitych dochodów następnie przeanalizowano pozycje ujawniane przez spółki w sprawozdaniu z całkowitych dochodów (tabela 3). strukturę sprawozdania z całkowitych dochodów prezentuje wykres 1. pozycjami najczęściej pojawiającymi się w sprawozdaniach z całkowitych dochodów badanych spółek w 2009 roku były: różnice kursowe z przeliczenia jednostek zależnych (wykazane przez 78,95% badanych spółek), zabezpieczenia przepływów pieniężnych (68,42%), podatek odroczony dotyczący pozostałych całkowitych dochodów (68,42%) oraz zysk/strata netto z tytułu aktywów finansowych dostępnych do sprzedaży (42,11%). t ab el a 3. s kł ad ni ki s pr aw oz da ni a z ca łk ow it yc h do ch od ów b ad an yc h sp ół ek lp . sp ó łk i po zy cj e asseco bioton cez cyfrowy polsat gtc kghm lotos pbg pge pgnig pkn orlen polimexms tp sa tvn agora cersanit kęty netia mol 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 1 a kt yw a fi na ns ow e do st ęp ne d o sp rz ed aż y x x x x x x x x x x x x x x x x 2 za be zp ie cz en ia p rz ep ły w ów p ie ni ęż ny ch x x x x x x x x x x x x x x x x x x x x x x x x x x x x 3 ko sz ty z a ro k ob ro to w y ro zp oz na ne b ez po śr ed ni o w k ap it al e w ła sn ym x x 4 ró żn ic e ku rs ow e z pr ze lic ze ni a je dn os te k za le żn yc h x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x 5 zm ia na w ar to śc i g od zi w ej p ap ie ró w w ar to śc io w yc h do st ęp ny ch d o sp rz ed aż y uj ęt a w k ap it al e w ła sn ym x x 6 u dz ia ł w z m ia na ch k ap it ał ów w ła sn yc h je dn ost ek s to w ar zy sz on yc h x x 7 sk ut ki a kt ua liz ac ji w yc en y ak ty w ów t rw ał yc h x x 8 w yc en a in st ru m en tó w fi na ns ow yc h x x x 9 po da te k od ro cz on y do ty cz ąc y in ny ch c ał ko w ity ch d oc ho dó w x x x x x x x x x x x x x x x x x x 10 w yc en a ni er uc ho m oś ci d o w ar to śc i g od zi w ej n a m om en t p rz ek la sy fi ko w an ia x lp . sp ó łk i po zy cj e asseco bioton cez cyfrowy polsat gtc kghm lotos pbg pge pgnig pkn orlen polimexms tp sa tvn agora cersanit kęty netia mol 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 11 st ra ty a kt ua ri al ne d ot yc zą ce ś w ia dc ze ń pr ac ow ni cz yc h po o kr es ie z at ru dn ie ni a x 12 pr ze sz ac ow an ie a kt yw ów je dn os te k st ow ar zy sz on yc h x x x 13 po zo st ał e ca łk ow it e do ch od y x x x x x x x x ź r ó d ło : b ad an ia w ła sn e; w al iń sk a, b ek -g ai k 20 11 : 3 33 . wykres 1. ujawnienia pozycji w sprawozdaniach z całkowitych dochodów badanych spółek ź r ó d ł o : opracowanie własne.   zmiany w msr 1 a praktyka wybranych spółek notowanych… 179 w 2011 roku pozycje dotyczące różnic kursowych, jak i zabezpieczeń aktywów pieniężnych zostały wykazane przez większą liczbę spółek (odpowiednio: 84,21% i 78,95%). w sprawozdaniach z całkowitych dochodów wzrosła również liczba ujawnień pozycji ,,pozostałe całkowite dochody’’ – z 15,79% w 2009 do 26,32% w 2011 roku. inaczej było w przypadku pozycji dotyczącej podatku odroczonego związanego z innymi całkowitymi dochodami, która została ujawniona jedynie przez 26,32% spółek (spadek o około 42 punkty procentowe w porównaniu z rokiem 2009). 1.3. analiza pozycji sprawozdania z sytuacji finansowej w kolejnym etapie zaprezentowano pozycje kapitału własnego ujęte w sprawozdaniu z sytuacji finansowej, które wiążą się z elementami wyniku całościowego (tabela 4). najczęściej wykazywanymi pozycjami w kategorii kapitał własny, zarówno w roku 2009, jak i 2011, były: zyski zatrzymane, różnice kursowe z przeliczenia jednostek podporządkowanych oraz kapitał rezerwowy (wykres 2). wykres 2. ujawnienia pozycji w sprawozdaniach z sytuacji finansowej badanych spółek 36,84% 21,05% 21,05% 21,05% 73,68% 10,53% 94,74% 78,95% 26,32% 26,32% 26,32% 68,42% 10,53% 94,74% 0, 00 % 10 ,0 0% 20 ,0 0% 30 ,0 0% 40 ,0 0% 50 ,0 0% 60 ,0 0% 70 ,0 0% 80 ,0 0% 90 ,0 0% 10 0, 00 % kapitał rezerwowy kapitał z aktualizacji wyceny kapitał z wyceny transakcji zabezpieczających pozostałe kapitały różnice kursowe z przeliczenia jednostek podporządkowanych inne całkowite skumulowane całkowite dochody zyski zatrzymane 2011 2009 ź r ó d ł o : opracowanie własne. t ab el a 4 . p oz yc je k ap it ał u w ła sn eg o w b ila ns ie b ad an yc h sp ół ek lp . sp ó łk i po zy cj e asseco bioton cez cyfrowy polsat gtc kghm lotos pbg pge pgnig pkn orlen polimexms tp sa tvn agora cersanit kęty netia mol 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 2009 2011 1 ka pi ta ł r ez er w ow y (+ p oz os ta łe k ap it ał y re ze rw ow e) x x x x x x x x x x x x x x x x x x x x x x 2 ka pi ta ł z a kt ua liz ac ji w yc en y x x x x x x x x x 3 ka pi ta ł z w yc en y tr an sa kc ji za be zp ie cz aj ąc yc h x x x x x x x x x 4 po zo st ał e ka pi ta ły x x x x x x x x x 5 ró żn ic e ku rs ow e z pr ze lic ze ni a je dn os te k po dp or zą dk ow an yc h x x x x x x x x x x x x x x x x x x x x x x x x x x x 6 in ne c ał ko w it e sk um ul ow an e do ch od y x x x x 7 zy sk i z at rz ym an e x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x ź r ó d ło : b ad an ia w ła sn e; w al iń sk a, b ek -g ai k 20 11 : 3 35 .   zmiany w msr 1 a praktyka wybranych spółek notowanych… 181 w 2009 roku przyjęto cztery rozwiązania dotyczące struktury tej części kapitału własnego, w której były uznane przychody/koszty kapitałowe: ■ rozwiązanie i – ujawniono 1 zbiorczą pozycję kapitału własnego – 1 spółka, ■ rozwiązanie ii – ujawniono 2 pozycje kapitału własnego – 7 spółek, ■ rozwiązanie iii – ujawniono 3 pozycje kapitału własnego – 6 spółek, ■ rozwiązanie iv – ujawniono 4 pozycje kapitału własnego – 5 spółek (walińska, bek-gaik 2011: 334). w 2011 roku żadna spółka nie ujawniła jednej zbiorczej pozycji kapitału własnego, drugie rozwiązanie zastosowało 5 spółek, trzecie rozwiązanie – 7 spółek, czwarte rozwiązanie – 3 spółki. ponadto bioton, pbg, polimexms oraz cersanit ujawniły nie 4, a 5 pozycji składających się na kapitał własny i odnoszących się do kosztów oraz przychodów kapitałowych. z powyższego wynika, że badane spółki rozbudowały strukturę kapitału własnego w porównaniu z 2009 rokiem. jednak aby zbadać, czy prezentowane sprawozdania finansowe cechuje przejrzystość, należy sprawdzić powiązania między pozycjami sprawozdania z sytuacji finansowej i pozycjami pozostałych całkowitych dochodów. 1.4. relacje między pozycjami sprawozdania z całkowitych dochodów i pozycjami sprawozdania z sytuacji finansowej w celu określenia relacji między składowymi innych całkowitych dochodów a elementami kapitału własnego ujawnionymi w bilansie przyjęto sprawozdania finansowe spółek, dla których udział pozostałych całkowitych dochodów w zysku netto przekroczył 5%. aby zwiększyć próbę analizy porównawczej, uwzględniono także sprawozdania finansowe spółek, dla których współczynnik istotności2 przekroczył 5% w 2009 roku oraz 3% w 2011 roku (tabela 5). tabela 5. udział innych całkowitych dochodów w zysku netto badanych spółek lp. spółka współczynnik istotności 2009 r. 2011 r. 1 asseco 7,13% 58,18% 2 współczynnik istotności jest równy sumie innych całkowitych dochodów podzielonych przez zysk/stratę netto okresu sprawozdawczego (wartość bezwzględna). edyta winnicka182 lp. spółka współczynnik istotności 2009 r. 2011 r. 2 bioton 1,34% 83,36% 3 cez 1,64% 20,87% 4 cyfrowy polsat 0,00% 6,00% 5 gtc 21,20% 32,36% 6 kghm* 16,58% 3,28% 7 lotos 1,81% 57,24% 8 pbg 43,25% 10,92% 9 pge 0,94% 0,11% 10 pgnig 1,14% 3,94% 11 pkn orlen 6,83% 33,45% 12 polimexms 27,60% 5,68% 13 tp sa 3,28% 0,10% 14 tvn 0,32% 0,06% 15 agora 1,19% 0,04% 16 cersanit * 474,40% 3,84% 17 kęty 20,56% 1,25% 18 netia 1,86% 0,68% 19 mol 2,43% 65,29% * dodatkowe spółki objęte badaniem, ze względu na współczynnik istotności przekraczający w 2011 roku 3%. ź r ó d ł o : badania własne; walińska, bek-gaik 2011: 336. tabela 6 przedstawia pozycje pozostałych całkowitych dochodów oraz odpowiadające im pozycje kapitału własnego z bilansu, których zmiana stanu powinna odzwierciedlać przychody/koszty kapitałowe ujawnione w sprawozdaniu z całkowitych dochodów (walińska, bek-gaik 2011: 337). z tabeli wynika, że w 2009 roku spółki przyjęły różne podejścia dotyczące badanego zagadnienia. w pierwszym podejściu, mimo szczegółowej prezentacji przychodów i kosztów kapitałowych w sprawozdaniu z całkowitych dochodów, nie ujawniono odpowiadających im pozycji kapitału własnego (asseco, kghm). drugie podejście polegało na tym, że nie ujawniono szczegółowych ka  zmiany w msr 1 a praktyka wybranych spółek notowanych… 183 tegorii w sprawozdaniu z całkowitych dochodów lub w kapitale własnym (polimexms, cersanit). w trzecim podejściu, zaobserwowanym w spółkach: gtc, pkn orlen i pbg, dokonano wyodrębnienia szczegółowych kategorii kosztów/ przychodów kapitałowych korespondujących z odpowiednimi kategoriami kapitału własnego w bilansie (walińska, bek-gaik 2011: 338). tabela 6. relacja między pozycjami innych całkowitych dochodów i pozycjami kapitału własnego w badanych spółkach lp. sprawozdanie z całkowitych dochodów/ sprawozdanie z sytuacji finansowej pozycja sprawozdania z całkowitych dochodów/pozycja kapitału własnego w sprawozdaniu z sytuacji finansowej spółki a ss ec o ce rs ani t g tc kg h m pb g pk n o rl en po lim ex m s 20 09 20 11 20 09 20 11 20 09 20 11 20 09 20 11 20 09 20 11 20 09 20 11 20 09 20 11 1 sprawozdanie z całkowitych dochodów aktywa finansowe dostępne do sprzedaży x x x x x x sprawozdanie z sytuacji finansowej kapitał z aktualizacji wyceny aktywów finansowych x x x x 2 sprawozdanie z całkowitych dochodów zabezpieczenia przepływów pieniężnych x x x x x x x x x x x x x x sprawozdanie z sytuacji finansowej kapitał z rachunkowości zabezpieczeń x x x x x x 3 sprawozdanie z całkowitych dochodów różnice kursowe z przeliczenia jednostek zależnych x x x x x x x x x x x x x sprawozdanie z sytuacji finansowej różnice kursowe z przeliczenia jednostek zależnych x x x x x x x x x x x x 4 sprawozdanie z całkowitych dochodów pozostałe całkowite dochody x x 4a sprawozdanie z sytuacji finansowej pozostałe kapitały własne x x x x 4b inne skumulowane całkowite dochody x x 4c niepodzielony zysk oraz kapitały rezerwowe x x x x x x x x x x 5 sprawozdanie z całkowitych dochodów podatek dochodowy związany z innym całkowitym dochodem x x x x x x x x x x x x ź r ó d ł o : badania własne; walińska, bek-gaik 2011: 337. edyta winnicka184 generalnie rozwiązania przyjęte przez polskie spółki w 2009 roku były praktykowane również w roku 2011. niektóre spółki ujawniły dodatkowe pozycje. przykładowo w spółkach cersanit i polimexms w bilansie zostały wykazane pozycje ,,pozostałe kapitały własne”, jednak nie odniesiono ich do pozycji „pozostałe całkowite dochody”. na uwagę zasługuje spółka pbg, która jako jedyna ujawniła dodatkowe pozycje w sprawozdaniu z sytuacji finansowej i sprawozdaniu z całkowitych dochodów, dotyczące tej samej kategorii. 2. stosowanie znowelizowanego w czerwcu 2011 roku msr 1 druga część badania obejmuje analizę sprawozdania z całkowitych dochodów, a jej celem jest określenie, które z omawianych spółek wdrożyły wprowadzone w czerwcu 2011 roku zmiany dotyczące prezentacji pozycji innych całkowitych dochodów (tabela 7). czytelnik sprawozdania finansowego ma prawo oczekiwać, że zostanie poinformowany o wpływie zastosowania w przyszłości nowego standardu, jego zmiany lub interpretacji, które zostały już wydane przez radę msr, a które nie weszły jeszcze w życie i nie zostały zastosowane przez spółkę (szmigielski 2007: 37). tabela 7. zastosowanie uaktualnionej wersji msr 1 oraz ujawnienia informacji o wpływie wdrożenia standardu na sprawozdania finansowe w badanych spółkach lp. spółka zastosowanie zaktualizowanej wersji msr 1 ujawnianie informacji o wpływie zastosowania nowej wersji standardu na sprawozdanie finansowe 1 asseco – – 2 bioton – brak istotnego wpływu 3 cez – wpływ wyłącznie na wykazanie pozycji w wykazach finansowych; na sytuację finansową spółki ani na jej wyniki gospodarcze nie ma wpływu 4 cyfrowy polsat – – 5 gtc – – 6 kghm – brak istotnego wpływu 7 lotos – w trakcie analizy 8 pbg – w trakcie analizy 9 pge – brak istotnego wpływu   zmiany w msr 1 a praktyka wybranych spółek notowanych… 185 lp. spółka zastosowanie zaktualizowanej wersji msr 1 ujawnianie informacji o wpływie zastosowania nowej wersji standardu na sprawozdanie finansowe 10 pgnig – brak istotnego wpływu 11 pkn orlen – wzrost liczby wymaganych ujawnień 12 polimexms – w trakcie analizy 13 tp sa – w trakcie analizy 14 tvn – brak istotnego wpływu 15 agora – brak istotnego wpływu 16 cersanit – brak istotnego wpływu 17 kęty – w trakcie analizy 18 netia – w trakcie analizy 19 mol – – ź r ó d ł o : badania własne. z tabeli 7 wynika, że żadna omawiana spółka nie zdecydowała się na wcześniejsze zastosowanie uaktualnionego msr 1. ponadto w spółkach: asseco, cyfrowy polsat, gtc oraz mol nie zamieszczono szacunków wpływu wykorzystania nowej wersji standardu na sprawozdanie finansowe. spółki, które przeprowadziły taką analizę, wskazały, iż przyjęcie znowelizowanej wersji nie wpływa istotnie na sprawozdanie (z wyjątkiem spółek pkn orlen oraz cez). pkn orlen jako jedyna spółka zamieściła informację o wzroście liczby wymaganych ujawnień, wynikających z podziału pozycji innych całkowitych dochodów na dwie grupy. według szacunków spółki cez ,,nowelizacja ma wpływ wyłącznie na wykazanie pozycji w wykazach finansowych, na sytuację finansową spółki ani na jej wyniki gospodarcze nie ma wpływu”. pozostałe badane spółki były w trakcie analizy wpływu standardu na sprawozdania finansowe. 3. podsumowanie wyników badań wyniki pierwszej części badania wskazują, że większość spółek nadal sporządza sprawozdanie z całkowitego dochodu w formie dwóch osobnych sprawozdań – dotychczasowego rachunku zysków i strat oraz sprawozdania z innych całkowitych dochodów. może to wynikać z przywiązania spółek do tradycyjnej formy prezentowania rachunku wyników czy też znajomości wad prezentowaedyta winnicka186 nia sprawozdania w postaci jednoczłonowej. spółki wykazują różne pozycje innych całkowitych dochodów. co więcej, struktura bilansu w kategorii ,,kapitał własny” oraz struktura pozostałych całkowitych dochodów we wszystkich analizowanych spółkach – zarówno w 2009, jak i 2011 roku – była bardzo zróżnicowana. dowodzi to braku porównywalności sprawozdań poszczególnych podmiotów. w 2009 roku spółki prezentowały pozycje pozostałych całkowitych dochodów, nie odnosząc ich do pozycji przedstawianych w kapitale własnym (walińska, bek-gaik 2011). ta sytuacja nie uległa zmianie w roku 2011. oznacza to, że spółki przedstawiają swoje raporty finansowe w sposób nieprzejrzysty i nie podejmują żadnych kroków w kierunku zwiększenia przydatności ujawnianych informacji dla ich czytelników. wyniki drugiej części badania wskazują na niechęć spółek do zastosowania opublikowanego w 2011 roku msr 1, dotyczącego prezentacji pozostałych całkowitych dochodów. mogło to wynikać z faktu, że wdrożenie zmian dotyczących prezentacji tych pozycji wiąże się ze wzrostem kosztów. należałoby usprawnić systemy raportowania tak, aby można było wyodrębnić informacje niezbędne do przedstawienia pozycji pozostałych całkowitych dochodów w wymaganej formie. ponadto spółki nie wykazały zainteresowania znowelizowanym standardem, co wynikało z braku oszacowania wpływu nowej wersji msr 1 na sprawozdania finansowe. analiza sprawozdań finansowych wybranych spółek giełdowych dowiodła, że nowy model sprawozdania finansowego dostarcza informacji trudno porównywalnych i nieprzejrzystych, co może sprawiać problemy w podejmowaniu przez interesariuszy trafnych decyzji ekonomicznych. należy zastanowić się, jakie inne konsekwencje dla rynku kapitałowego niesie ze sobą nowa forma prezentacji sprawozdań finansowych. rachunek zysków i strat jest postrzegany jako najistotniejsza składowa sprawozdania finansowego, a wynik finansowy netto stanowi kluczowy miernik opisujący zyskowność przedsiębiorstwa. zysk netto jest komponentem wielu wskaźników giełdowych i często decyduje o wyborze konkretnej spółki przez inwestora. w nowym modelu sprawozdania finansowego (obowiązującym od stycznia 2009 roku) wynik finansowy obejmuje dodatkowo przychody i koszty kapitałowe, ujmowane dotychczas w zestawieniu zmian w kapitale własnym. wprowadzenie kategorii wyniku całkowitego wiąże się zatem z szerszym zastosowaniem wartości godziwej jako podstawy wyceny aktywów i zobowiązań. korzyścią płynącą z zastosowania wartości godziwej jest niewątpliwie możliwość określenia przyszłych zysków ekonomicznych wyni  zmiany w msr 1 a praktyka wybranych spółek notowanych… 187 kających z posiadania danych składników majątkowych. nie należy jednak zapominać o ryzyku, jakie się z tym wiąże. dane historyczne charakteryzuje wysoki poziom wiarygodności (dokumentacja operacji gospodarczych), podczas gdy wartość godziwa jest zmienna w czasie i zależy od uwarunkowań rynkowych – stąd też jej rzetelne ustalenie nie jest łatwym zadaniem. inwestorzy dostarczają kapitał niezbędny dla funkcjonowania przedsiębiorstwa, dlatego oczekują od emitentów papierów wartościowych informacji przydatnych w procesie podejmowania racjonalnych decyzji inwestycyjnych. przydatność informacji wzrasta, jeśli na ich podstawie możliwe jest sporządzenie prognozy przyszłych przepływów pieniężnych, a także ustalenie kosztu kapitału. prezentowane informacje są również wykorzystywane do oceny pracy zarządu oraz identyfikacji ryzyka towarzyszącego działalności podmiotu. uwzględnienie w wyniku finansowym pozycji innych całkowitych dochodów, które: ■ stanowią w większości zyski i straty niezrealizowane, niezależne od działań zarządu jednostki, ■ mają charakter przejściowy (chambers i in. 2007: 557–593), utrudnia przewidywanie przyszłej wielkości wyniku finansowego i ocenę poziomu ryzyka inwestycji. ponadto, ze względu na brak sprawowania kontroli nad tymi składnikami przez właścicieli jednostki, kategoria wyniku całościowego nie stanowi najlepszej podstawy do oceny procesu zarządzania jednostką. za koncepcją wyniku całkowitego przemawia łatwość identyfikacji przez użytkowników sprawozdań transakcji kształtujących wynik finansowy. wynik całkowity obejmuje wszystkie źródła tworzenia wartości w jednostce, co obliguje zarząd do uwzględnienia w swojej działalności wszystkich czynników, które wpływają na tworzenie wartości w firmie (chambers i in. 2007: 561).  zakończenie sprawozdanie finansowe, podstawowe źródło informacji o dokonaniach i sytuacji finansowej jednostki, podlega nieustannym modyfikacjom. opracowując nowe zasady prezentacji sprawozdań, iasb i fasb skupiają się na potrzebach głównych odbiorców informacji sprawozdawczych – inwestorów. nie należy jednak zapominać o drugiej stronie, a więc o sporządzających sprawozdania finansowe, od których zależy przydatność przekazywanych informacji. jedna z ważniejszych zmian w msr 1 dotyczyła wprowadzenia kategorii wyniku całościowego. projektodawcy wykazali szereg zalet nowej formy prezenedyta winnicka188 tacji wyniku, m.in. przejrzystość i porównywalność informacji. jednak wśród analizowanych sprawozdań finansowych spółek nie znajdziemy sprawozdania modelowego. wynika to z możliwości stosowania różnego nazewnictwa określonych pozycji (na potrzeby badania nazewnictwo zostało ujednolicone), braku ich powiązania z pozycjami wykazywanymi w pozostałych częściach raportu, jak też dopuszczenia przez standard różnych form prezentacji innych całkowitych dochodów. należy zwrócić uwagę na fakt, że większość badanych spółek sporządza sprawozdanie z całkowitego dochodu w formie dwóch osobnych sprawozdań (oddzielnie rachunek wyników i sprawozdanie z całkowitych dochodów). ,,przemieszczenie” kosztów i przychodów kapitałowych z zestawienia zmian w kapitale własnym do rachunku zysków i strat wpłynęło na proces decyzyjny uczestników rynku kapitałowego. koncentracja uwagi inwestorów na wyniku całościowym może doprowadzić do podjęcia błędnych decyzji, dotyczących m.in.: utrzymania lub zbycia inwestycji, oceny sposobu zarządzania spółką przez jej kierownictwo, oceny przyszłej pozycji jednostki na rynku. uzupełnienie wyniku finansowego netto o inne całkowite dochody negatywnie wpłynęło na ocenę zdolności spółki do budowania wartości. niższa wartość predykcyjna jest skutkiem zatarcia granicy między kosztami i przychodami wynikającymi z transakcji powtarzalnych, dotyczących podstawowej działalności jednostki, a kosztami i przychodami niezrealizowanymi i wynikającymi z transakcji o charakterze niepowtarzalnym. analizę źródeł wyniku finansowego oraz prognozowanie jego przyszłej wielkości ułatwiłaby odrębna prezentacja pozycji innych całkowitych dochodów, mogących wpłynąć na wynik finansowy w przyszłych okresach, jednak żadna z badanych spółek nie zdecydowała się na wcześniejsze zastosowanie uaktualnionego w czerwcu 2011 roku msr 1 (z takim sposobem prezentacji pozycji wiąże się wzrost kosztów dla jednostek). aby efekty pożądane przez projektodawców nowych zasad prezentacji sprawozdań mogły zostać osiągnięte, spółki powinny dążyć do podnoszenia jakości omawianych raportów, przekazując zrozumiałe, przejrzyste i wyczerpujące informacje użytkownikom. ujawnianie takich informacji o emitentach papierów wartościowych wpłynie na wzrost zaufania inwestorów, a tym samym doprowadzi do rozwoju rynków kapitałowych.  literatura chambers d., linsmeier t., shakespeare c., sougiannis t. (2007), an evaluation of sfas no. 130 comprehensive income disclosure, review of accounting studies, vol. 12.   zmiany w msr 1 a praktyka wybranych spółek notowanych… 189 exposure draft: presentation of items of other comprehensive income (2010), http:// www.efrag.org (dostęp: 19.05.2012). gierusz j. (2007), propozycja zmian w układzie i treści rachunku zysków i strat, [w:] rachunkowość wczoraj, dziś, jutro, t. cebrowska, a. kowalik, r. stępień (red.), skwp, warszawa. gierusz j. (2010), koszty i przychody w świetle nadrzędnych zasad rachunkowości – pojęcia, klasyfikacja, zakres ujawnień, oddk, gdańsk. międzynarodowe standardy sprawozdawczości finansowej (2011), część b, ifrs foundation, skwp, warszawa. msr 1: międzynarodowy standard rachunkowości 1 prezentacja sprawozdań finansowych, [w:] rozporządzenie komisji (we) nr 1274/2008 z dnia 17 grudnia 2008 r. zmieniające (we) nr 1126/2008 przyjmujące określone międzynarodowe standardy rachunkowości zgodnie z rozporządzeniem (we) nr 1606/2002 parlamentu europejskiego i rady w odniesieniu do międzynarodowego standardu rachunkowości (msr) 1, dziennik urzędowy unii europejskiej l 339/3, z dnia 18.12.2008 r. roczniki gpw, http://www.gpw.pl (dostęp: 17.05.2012). szmigielski m. (2007), jakość sprawozdań finansowych, rachunkowość, nr 1. szychta a. (2010), pomiar i prezentowanie wyniku całościowego spółki kapitałowej w sprawozdaniu finansowym, zeszyty teoretyczne rachunkowości, t. 59 (115). walińska e. (2009), bilans jako fundament sprawozdawczości finansowej w kontekście zmian współczesnej rachunkowości, wolters kluwer polska, warszawa. walińska e., bek-gaik b. (2011), sprawozdanie z całkowitych dochodów w praktyce wybranych spółek notowanych na gpw w warszawie, zeszyty teoretyczne rachunkowości, t. 62 (118). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 zbigniew drewniak* wyższa szkoła bankowa w toruniu private equity czy venture capital – rozważania teoretyczne o właściwym stosowaniu terminologii słowa kluczowe: kapitał podwyższonego ryzyka, private equity, venture capital. klasyfikacja jel: g24. abstrakt: kapitał podwyższonego ryzyka jest wciąż uznawany za nowoczesne źródło finansowania. problemem, jaki zauważa się w studiowaniu literatury przedmiotu czy informacji rynkowych, jest częste traktowanie pojęć private equity i venture capital zamiennie, bywa, że są one również mylone. w artykule wskazano na najczęściej spotykane rozbieżności w rozumieniu tych pojęć. ponadto odniesiono się do różnego rozumienia rynku kapitału podwyższonego ryzyka, co jest szczególnie istotne w aspekcie odczytywania danych statystycznych. private equity and venture capital – theoretical considerations keywords: private equity, venture capital. jel classification: g24. abstract: private equity and venture capital are still recognized as a modern source of companies funding. studying the literature and some market information we can notice that the terms private equity and venture capital are often treated as synonyms or even confused. the article pointed out the discrepancies referring to the understanding of concepts – private equity and venture capital. it also refers to pe/vc market that can be understand differently what can inf luence how the statistics data are read. translated by zbigniew drewniak data wpłynięcia: 19.03.2013; data zaakceptowania: 24.04.2013. * dane kontaktowe: zbigniew_drewniak@wp.pl. http://dx.doi.org/10.12775/cjfa.2013.004 zbigniew drewniak52  wstęp private equity/venture capital (pe/vc) jest uważane za nowoczesną formę finansowania przedsiębiorstw, relatywnie słabiej rozpoznaną i mniej powszechną niż tradycyjne źródła finansowania. częstym problemem, który pojawia się wśród osób zainteresowanych tą tematyką, w tym również wśród praktyków i podmiotów bezpośrednio związanych z rynkiem inwestycji private equity/ venture capital, jest niewłaściwe rozumienie tych pojęć. powszechnie, szczególnie w europie, są one traktowane zamiennie, a wręcz mylone (kornasiewicz 2004: 17–25). celem artykułu będzie zwrócenie uwagi na te rozbieżności, nie tylko jeżeli chodzi o definicje podstawowych pojęć, ale także prezentację danych statystycznych i inne aktualnie występujące kontrowersje wokół nazewnictwa stosowanego w odniesieniu do tego rynku. jest to szczególnie istotne w aspekcie rzetelnej analizy inwestycji private equity/venture capital. 1. private equity, venture capital a kapitał podwyższonego ryzyka zgodnie z terminologią stosowaną przez europejskie stowarzyszenie private equity/venture capital (evca – european private equity & venture capital association), private equity dotyczy średniobądź długoterminowego kapitału dostarczanego przedsiębiorstwom nienotowanym na rynku kapitałowym, a służącego osiąganiu zysków przez wzrost wartości spółki. dalej evca wskazuje cele, którym może służyć kapitał private equity. możemy wymienić tutaj: rozwój nowych produktów i technologii, powiększenie kapitału obrotowego, finansowanie przejęć, poprawę bilansu spółki, a także rozwiązanie problemów właścicielskich i menadżerskich. z kolei venture capital jest ściśle związany z finansowaniem wczesnych faz rozwoju oraz ekspansji i uznawany za część składową private equity. charakterystyczne jest również wysokie ryzyko tego typu transakcji, którego rekompensatę stanowi ponadprzeciętna oczekiwana stopa zwrotu z zainwestowanego kapitału. rynek inwestycji venture capital zaczął rozwijać się w stanach zjednoczonych po ii wojnie światowej. za moment kluczowy uznaje się utworzenie przez georges’a doriota american research and development corporation (ardc). ponieważ twórca pojęcia venture capital nie jest znany, warto przytoczyć kryteria, jakimi kierowali się prekursorzy tego rodzaju inwestycji. zgodnie z założeniami doriota, inwestycje przeprowadzane przez ardc były związane m.in. z: private equity czy venture capital… 53 ■ nową technologią, nowymi koncepcjami marketingowymi czy nowymi możliwościami zastosowania produktu bądź usługi, ■ znaczącym, choć niekoniecznie większościowym, udziałem inwestorów w spółce, ■ wysokimi kwalifikacjami i umiejętnościami pracowników zatrudnionych w spółce, ■ produktami lub procesami, które przeszły przynajmniej etap projektowania i są chronione patentami, znakami handlowymi itd.; ■ przedsiębiorstwami, które w przeciągu kilku lat będą w stanie wejść na giełdę lub które będzie można sprzedać, realizując strategię wyjścia ze spółki, ■ przedsięwzięciami, w których oprócz środków finansowych, inwestor może wnieść dodatkowy wkład w postaci np. wiedzy czy doświadczenia (bartlett 1999: 3). venture capital jest zatem pojęciem węższym niż private equity i dotyczy przedsiębiorstw na wczesnych etapach rozwoju bądź dopiero rozpoczynających działalność na rynku. w tym pojęciu mieszczą się również inwestycje w pomysł („pod zasiew” – seed), a więc w samą koncepcję biznesową w celu zbadania możliwości jej komercjalizacji. możemy także spotkać określenie venture capital jako pola doświadczalnego dla całego sektora private equity, gdyż to właśnie inwestycje venture capital wspierają nowo powstające przedsiębiorstwa, w tym te innowacyjne (sieradzan, sobańska 2004: 13–14; hass, laffer, pryor 2009: 293). jedną z pierwszych definicji pojęcia venture capital w literaturze polskiej wprowadził w swojej pracy jerzy węcławski. definiuje on venture capital „jako kapitał własny wnoszony na ograniczony okres przez inwestorów zewnętrznych do małych i średnich przedsiębiorstw dysponujących innowacyjnym produktem, metodą produkcji bądź usługą, które nie zostały jeszcze zweryfikowane przez rynek, a więc stwarzają wysokie ryzyko niepowodzenia inwestycji, ale jednocześnie w przypadku sukcesu przedsięwzięcia, wspomaganego w zarządzaniu przez inwestorów, zapewniają znaczący przyrost wartości zainwestowanego kapitału, który jest realizowany przez sprzedaż udziałów” (węcławski 1997: 17). podobnie piotr tamowicz traktuje venture capital jako formę finansowania polegającą na wsparciu kapitałowym powstającej lub już istniejącej spółki przez objęcie nowej emisji akcji lub udziałów. kapitał nie jest wnoszony do spółki w formie kredytu, ale w formie właścicielskiej (kapitał akcyjny, udziazbigniew drewniak54 łowy). inwestor oferujący venture capital staje się tym samym współwłaścicielem spółki, którą finansuje. horyzont inwestycyjny może wynosić od jednego roku – przy finansowaniu bardzo specyficznych faz rozwoju (np. przygotowanie do wejścia na giełdę), do kilku lat – przy finansowaniu dynamicznego rozwoju. po upływie tego okresu fundusz venture capital wycofuje zaangażowany kapitał, sprzedając posiadane akcje lub udziały. tamowicz podkreśla również niepubliczny charakter finansowanej spółki i uznaje venture capital jako tzw. element niepublicznego czy też prywatnego rynku kapitałowego (tamowicz 2004: 7–8). warto także przytoczyć poglądy teoretyków amerykańskich i angielskich. ken i wright (1998: 521) definiują venture capital jako długoterminową inwestycję w niepubliczne spółki, charakteryzujące się wysokim ryzykiem. podkreślają również rolę profesjonalnych inwestorów, którzy oczekują wysokiego zwrotu z inwestycji w postaci zysku kapitałowego i dywidendy. z kolei gompers i lerner (2006: 17) za venture capital uważają zgromadzony kapitał zarządzany niezależnie i związany z kapitałowym bądź kapitałowo-hybrydowym finansowaniem niepublicznych, perspektywicznych przedsiębiorstw. podsumowując, cechami charakterystycznymi inwestycji venture capital odróżniającymi je od tradycyjnych form finansowania są (gladstone, gladstone 2002: 5–7): ■ wczesne fazy rozwoju przedsiębiorstwa, w tym jego powstanie, ■ wysokie ryzyko, ■ wsparcie menadżerskie, ■ niepubliczny charakter finansowanych przedsiębiorstw. w stanach zjednoczonych istnieje wyraźny podział na inwestycje typu venture capital i private equity. venture capital koncentruje się na inwestycjach w nowo powstałe podmioty o dużym potencjale wzrostu i związanym z tym wysokim ryzykiem. podkreśla się również wysokie kompetencje menadżerów zarządzających funduszami podwyższonego ryzyka (nvca yearbook 2010). private equity to inwestycje specjalnie do tego wyspecjalizowanych podmiotów w spółki niepubliczne w celu zwiększenia ich wartości i osiągnięcia ponadprzeciętnych zysków. nie ma tutaj znaczenia faza rozwoju przedsiębiorstwa. obok kapitału pieniężnego inwestor wnosi do spółki kapitał menadżerski, który może być istotnym czynnikiem wzrostu wartości spółki (panfil 2005: 19). mimo że venture capital jest uznawane za segment rynku private equity, to tak naprawdę rynki te funkcjonują odrębnie. przejawia się to w wysokim wolumenie transakcji przeprowadzanych na tych rynkach oraz prowa private equity czy venture capital… 55 dzeniu przez specjalistyczne instytucje odrębnych statystyk odnoszących się do tych rynków. brytyjskie stowarzyszenie private equity/venture capital (bvca – the british private equity and venture capital association) zauważa istniejące rozbieżności, jeśli chodzi o rozumienie pojęć private equity i venture capital. niekiedy europejskie pojmowanie private equity jest wzorowane na amerykańskim i odnosi się wyłącznie do inwestycji w wykupy menadżerskie. częściej spotyka się jednak uogólnione rozumienie tego pojęcia i traktowanie jako private equity również inwestycji typu venture capital. nierzadko sam termin venture capital jest uznawany za synonim private equity. w konsekwencji bvca w swoich publikacjach traktuje private equity ogólnie, jako ogół inwestycji na rynku podwyższonego ryzyka, a venture capital jako kapitał finansujący wczesne fazy rozwoju przedsięwzięcia oraz ekspansję (bvca 2010: 6). schemat 1 prezentuje różnice w rozumieniu pojęć venture capital i private equity w stanach zjednoczonych i w europie. schemat 1. rozumienie pojęć venture capital i private equity w tradycji amerykańskiej i europejskiej zwiększenia ich wartości i osiągnięcia ponadprzeciętnych zysków. nie ma tutaj znaczenia faza rozwoju przedsiębiorstwa. obok kapitału pieniężnego inwestor wnosi do spółki kapitał menadżerski, który może być istotnym czynnikiem wzrostu wartości spółki (panfil 2005: 19). mimo że venture capital jest uznawane za segment rynku private equity, to tak naprawdę rynki te funkcjonują odrębnie. przejawia się to w wysokim wolumenie transakcji przeprowadzanych na tych rynkach oraz prowadzeniu przez specjalistyczne instytucje odrębnych statystyk odnoszących się do tych rynków. brytyjskie stowarzyszenie private equity/venture capital (bvca – the british private equity and venture capital association) zauważa istniejące rozbieżności, jeśli chodzi o rozumienie pojęć private equity i venture capital. niekiedy europejskie pojmowanie private equity jest wzorowane na amerykańskim i odnosi się wyłącznie do inwestycji w wykupy menadżerskie. częściej spotyka się jednak uogólnione rozumienie tego pojęcia i traktowanie jako private equity również inwestycji typu venture capital. nierzadko sam termin venture capital jest uznawany za synonim private equity. w konsekwencji bvca w swoich publikacjach traktuje private equity ogólnie, jako ogół inwestycji na rynku podwyższonego ryzyka, a venture capital jako kapitał finansujący wczesne fazy rozwoju przedsięwzięcia oraz ekspansję (bvca 2010: 6). schemat 1 prezentuje różnice w rozumieniu pojęć venture capital i private equity w stanach zjednoczonych i w europie. schemat 1. rozumienie pojęć venture capital i private equity w tradycji amerykańskiej i europejskiej źródło: opracowanie własne. w polskiej literaturze przedmiotu funkcjonuje pojęcie kapitału podwyższonego ryzyka, które wydaje się najlepszą propozycją terminologii stosowanej szczególnie w odniesieniu do polskiego rynku private equity/venture capital. michał wrzesiński (2008: 23–26) definiuje kapitał podwyższonego ryzyka jako typowo średniolub długoterminowe zaangażowanie kapitału zarządzanego przez profesjonalnych pośredników finansowych szczególnie w znaczne pakiety akcji bądź pakiety udziałów przedsiębiorstw nienotowanych publicznie, które przechodzą radykalne zmiany, w celu uzyskania ponadprzeciętnej stopy zwrotu, przede wszystkim przez osiągnięcie zysku kapitałowego. zgodnie z tą terminologią, odpowiednikiem kapitału private equity jest tzw. kapitał prywatny, wykorzystywany do finansowania przedsiębiorstw znajdujących się we wstępnej fazie rozwoju, przedsiębiorstw prywatnych o średniej wielkości, przedsiębiorstw będących w trudnej sytuacji zasiew (seed) start (strat-up) ekspansja wykupy menadżerskie sytuacje specjalne venture capital venture capital private equity private equity stany zjednoczone europa ź r ó d ł o : opracowanie własne. zbigniew drewniak56 w polskiej literaturze przedmiotu funkcjonuje pojęcie kapitału podwyższonego ryzyka, które wydaje się najlepszą propozycją terminologii stosowanej szczególnie w odniesieniu do polskiego rynku private equity/venture capital. michał wrzesiński (2008: 23–26) definiuje kapitał podwyższonego ryzyka jako typowo średniolub długoterminowe zaangażowanie kapitału zarządzanego przez profesjonalnych pośredników finansowych szczególnie w znaczne pakiety akcji bądź pakiety udziałów przedsiębiorstw nienotowanych publicznie, które przechodzą radykalne zmiany, w celu uzyskania ponadprzeciętnej stopy zwrotu, przede wszystkim przez osiągnięcie zysku kapitałowego. zgodnie z tą terminologią, odpowiednikiem kapitału private equity jest tzw. kapitał prywatny, wykorzystywany do finansowania przedsiębiorstw znajdujących się we wstępnej fazie rozwoju, przedsiębiorstw prywatnych o średniej wielkości, przedsiębiorstw będących w trudnej sytuacji finansowej oraz finansowania transakcji wykupów menadżerskich (prowse 1998: 5). jak już wcześniej wyjaśniono, w tradycji amerykańskiej kapitał prywatny służy finansowaniu późniejszych faz rozwoju przedsiębiorstwa, ekspansji czy wykupów menadżerskich. w ujęciu europejskim pod pojęciem kapitału prywatnego kryją się również inwestycje typu venture capital, a więc te skierowane do przedsiębiorstw we wczesnych fazach rozwoju, często działających w sektorach tzw. nowych technologii. z kolei venture capital jest określany jako tzw. kapitał wysokiego ryzyka. to właśnie kapitał wysokiego ryzyka (venture capital), jak i kapitał prywatny (private equity) stanowią składowe kapitału podwyższonego ryzyka. dodatkowo, wrzesiński wyróżnia jeszcze tzw. kapitał nieformalny, przez który należy rozumieć przede wszystkim inwestycje realizowane przy udziale aniołów biznesu – business angels. aniołowie biznesu to bogate osoby prywatne, które dysponują wiedzą i doświadczeniem oraz odniosły sukces w biznesie. inwestorzy nieformalni są zainteresowani inwestycjami w małe i średnie przedsiębiorstwa na wczesnych etapach rozwoju (por. mikołajczyk, krawczyk 2007; brzozowska 2008). 2. private czy public equity? wśród praktyków biznesu pojawiają się propozycje zmiany stosowanej terminologii, gdyż termin private equity nie do końca odzwierciedla charakter tego rodzaju finansowania. termin private jest zasadny w odniesieniu do przedsiębiorstw, które korzystają z tego rodzaju finansowania. jak wynika z definicji, private equity czy venture capital… 57 są to przedsiębiorstwa prywatne, a więc nienotowane na giełdzie papierów wartościowych. z punktu widzenia organizacji zrzeszających inwestorów kluczowym wyzwaniem w ostatnim czasie stała się odpowiednia komunikacja z otoczeniem, głównie inwestorami i przedsiębiorcami, jak również osobami zainteresowanymi tą tematyką. w tym aspekcie używanie pojęcia private equity może sugerować, że jest to kapitał trudno dostępny i zarezerwowany dla wąskiego grona odbiorców. ponadto tego rodzaju sformułowanie może sprawiać wrażenie niechęci dzielenia się informacjami o rynku i przeprowadzonych transakcjach. misją organizacji zrzeszających inwestorów staje się lepsza komunikacja, informowanie i wyjaśnianie otoczeniu, w jaki sposób działa mechanizm finansowania przedsiębiorstwa kapitałem podwyższonego ryzyka. stawia się zatem na bardziej otwartą komunikację, polegającą na upublicznianiu wiedzy i informacji. dowodem na podejmowanie tego typu działań może być ułatwienie dostępu do danych statystycznych, prowadzenie akcji edukacyjnej oraz informowanie o przeprowadzonych transakcjach z uwzględnieniem korzyści wynikających dla biorców kapitału, a więc finansowanych przedsiębiorstw. problemem europejskiego rynku było jego znaczne rozproszenie. obecnie w ramach unii europejskiej istnieje 27 odrębnych rynków, co istotnie przeszkadza w rozwoju zjawiska, jakim są inwestycje kapitału podwyższonego ryzyka. problem niejednorodności dotyczy głównie trudności w pozyskiwaniu kapitału przez fundusze oraz w przeprowadzaniu inwestycji. największe organizacje zrzeszające inwestorów pe/vc zgłosiły swoje propozycje w sprawie wdrożenia regulacji zmierzających do utworzenia jednolitego rynku europejskiego kapitału podwyższonego ryzyka. w lipcu 2013 roku wejdzie w życie dyrektywa unii europejskiej (the alternative investment fund managers directive – aifmd), która wymusi na poszczególnych państwach wprowadzenie szeregu reform. tego rodzaju inicjatywa jest przykładem, że inwestycje kapitału podwyższonego ryzyka stają się coraz bardziej powszechne i zwracają coraz większą uwagę władz publicznych. główne reformy będą związane z następującymi kwestiami: ■ współpraca funduszy z niezależnymi rzeczoznawcami i depozytariuszami, ■ upublicznianie informacji o spółkach portfelowych, głównie w formie sprawozdań finansowych, ■ nałożenie limitów dźwigni stosowanej przez fundusze w procesie inwestycyjnym. zbigniew drewniak58 okazuje się jednak, że dyrektywa aifmd nie do końca odpowiada specyfice działalności funduszy podwyższonego ryzyka. problemem są wymogi kapitałowe stawiane funduszom objętym tą dyrektywą, które określono na 500 mln euro. pozostają one w sprzeczności ze specyfiką działalności szczególnie funduszy venture capital o znacznie mniejszych kapitałach. niemniej jednak prowadzone są zaawansowane prace nad odpowiednimi regulacjami dotyczącymi również funduszy venture capital (the european venture capital funds regulation – evcfr), które przyczynią się do rozwoju rynku kapitału podwyższonego ryzyka w europie, przede wszystkim w aspekcie swobody i łatwości pozyskania kapitału przez fundusze. takie inicjatywy potwierdzają coraz bardziej „publiczny” charakter tego rodzaju finansowania, przynajmniej w wymiarze informacyjnym. okres ostatniego kryzysu finansowego stał się okazją do precedensów widocznych na rynkach kapitału podwyższonego ryzyka. fundusze w obliczu dużej przeceny spółek notowanych publicznie przeprowadziły wiele inwestycji, które wydają się sprzeczne z definicjami private equity/venture capital dotyczącymi niepublicznego charakteru finansowanych spółek. wcale nierzadkie były i wciąż są popularne tzw. transakcje buy back. polegają one na inwestycji w spółki notowane publicznie z zamiarem ich restrukturyzacji i zwiększenia ich wartości. niemniej jednak ważnym elementem tego typu transakcji jest „odpublicznienie” spółki, a więc wycofanie jej z obrotu giełdowego, dzięki czemu można łatwiej przeprowadzić jej restrukturyzację poza reżimem giełdowych regulacji. z drugiej strony, w tego typu transakcjach na samym początku zakłada się, że sposobem dezinwestycji będzie ponowne wprowadzenie spółki na giełdę. 3. rynek inwestycji kapitału podwyższonego ryzyka ważną kwestią wymagającą wyjaśnienia jest określenie rynku inwestycji kapitału podwyższonego ryzyka. okazuje się, że w ramach prowadzonych statystyk istnieją dwa podejścia do tego problemu. w pierwszym podejściu (tzw. industry statistics) rynek inwestycji kapitału podwyższonego ryzyka w danym państwie określa się z punktu widzenia działających tam funduszy podwyższonego ryzyka. w drugim podejściu (tzw. market statistics) rynek inwestycji kapitału podwyższonego ryzyka określa się z punktu widzenia finansowanych przedsiębiorstw działających w obrębie danego państwa (schemat 2). fundusze nie zawsze inwestują cały kapitał w państwie, w którym znajduje się ich private equity czy venture capital… 59 siedziba lub oddział. na przykład w przypadku regionu europy środkowo-wschodniej wiele funduszy ma swoje siedziby w polsce, skąd prowadzi politykę inwestycyjną również w innych państwach regionu. takie rozróżnienie jest zatem niezwykle istotne, zważywszy na fakt, że siedziba funduszu nie zawsze pokrywa się z siedzibą spółki. schemat 2. statystyczne ujęcie rynku kapitału podwyższonego ryzyka w polsce w publikacjach evca przeprowadziły wiele inwestycji, które wydają się sprzeczne z definicjami private equity/venture capital dotyczącymi niepublicznego charakteru finansowanych spółek. wcale nierzadkie były i wciąż są popularne tzw. transakcje buy back. polegają one na inwestycji w spółki notowane publicznie z zamiarem ich restrukturyzacji i zwiększenia ich wartości. niemniej jednak ważnym elementem tego typu transakcji jest „odpublicznienie” spółki, a więc wycofanie jej z obrotu giełdowego, dzięki czemu można łatwiej przeprowadzić jej restrukturyzację poza reżimem giełdowych regulacji. z drugiej strony, w tego typu transakcjach na samym początku zakłada się, że sposobem dezinwestycji będzie ponowne wprowadzenie spółki na giełdę. 3. rynek inwestycji kapitału podwyższonego ryzyka ważną kwestią wymagającą wyjaśnienia jest określenie rynku inwestycji kapitału podwyższonego ryzyka. okazuje się, że w ramach prowadzonych statystyk istnieją dwa podejścia do tego problemu. w pierwszym podejściu (tzw. industry statistics) rynek inwestycji kapitału podwyższonego ryzyka w danym państwie określa się z punktu widzenia działających tam funduszy podwyższonego ryzyka. w drugim podejściu (tzw. market statistics) rynek inwestycji kapitału podwyższonego ryzyka określa się z punktu widzenia finansowanych przedsiębiorstw działających w obrębie danego państwa (schemat 2). fundusze nie zawsze inwestują cały kapitał w państwie, w którym znajduje się ich siedziba lub oddział. na przykład w przypadku regionu europy środkowo-wschodniej wiele funduszy ma swoje siedziby w polsce, skąd prowadzi politykę inwestycyjną również w innych państwach regionu. takie rozróżnienie jest zatem niezwykle istotne, zważywszy na fakt, że siedziba funduszu nie zawsze pokrywa się z siedzibą spółki. schemat 2. statystyczne ujęcie rynku kapitału podwyższonego ryzyka w polsce w publikacjach evca źródło: opracowanie własne. w zależności od tego, jak rozumiemy pojęcie rynku inwestycji kapitału podwyższonego ryzyka, otrzymujemy różne dane dotyczące kapitału pozyskiwanego przez fundusze czy przeprowadzanych inwestycji. na wykresie 1 i 2 przedstawiono rozbieżności, jakie istnieją zależnie od zastosowanego podejścia w odniesieniu do inwestycji przeprowadzonych w polsce. w podejściu industry statistics b. rynek jako sektor grupujący przedsiębiorstwa z siedzibą w polsce korzystające z finansowania kapitałem podwyższonego ryzyka (market statistics) a. rynek jako sektor grupujący fundusze kapitału podwyższonego ryzyka z siedzibą w polsce (industry statistics) pl pl fundusz podwyższonego ryzyka przedsiębiorstwo ź r ó d ł o : opracowanie własne. w zależności od tego, jak rozumiemy pojęcie rynku inwestycji kapitału podwyższonego ryzyka, otrzymujemy różne dane dotyczące kapitału pozyskiwanego przez fundusze czy przeprowadzanych inwestycji. na wykresie 1 i 2 przedstawiono rozbieżności, jakie istnieją zależnie od zastosowanego podejścia w odniesieniu do inwestycji przeprowadzonych w polsce. w podejściu industry statistics przez wartość inwestycji na polskim rynku rozumie się inwestycje przeprowadzone przez fundusze podwyższonego ryzyka mające tutaj swoją siedzibę. w podejściu market statistics, zorientowanym na biorców kapitału, zwraca się uwagę na inwestycje przeprowadzone w przedsiębiorstwach działających w polsce. wydaje się zatem, że podejście market statistics lepiej zbigniew drewniak60 odzwierciedla stan rynku kapitału podwyższonego ryzyka w danym państwie, odnosząc się do środków pozyskanych przez działające w jego granicach przedsiębiorstwa. wykres 1. wartość inwestycji kapitału podwyższonego ryzyka w polsce w ujęciu market statistics oraz industry statistics (mln euro) przez wartość inwestycji na polskim rynku rozumie się inwestycje przeprowadzone przez fundusze podwyższonego ryzyka mające tutaj swoją siedzibę. w podejściu market statistics, zorientowanym na biorców kapitału, zwraca się uwagę na inwestycje przeprowadzone w przedsiębiorstwach działających w polsce. wydaje się zatem, że podejście market statistics lepiej odzwierciedla stan rynku kapitału podwyższonego ryzyka w danym państwie, odnosząc się do środków pozyskanych przez działające w jego granicach przedsiębiorstwa. wykres 1. wartość inwestycji kapitału podwyższonego ryzyka w polsce w ujęciu market statistics oraz industry statistics (mln euro) źródło: evca yearbook (2007, 2008, 2009, 2010, 2011, 2012) oraz materiały pozyskane od evca w formie elektronicznej. wykres 2. liczba przedsiębiorstw finansowanych kapitałem podwyższonego ryzyka w ujęciu market statistics oraz industry statistics (mln euro) źródło: evca yearbook (2007, 2008, 2009, 2010, 2011, 2012) oraz materiały pozyskane od evca w formie elektronicznej. 747 633 267 657 681 571 725 480 504 689 0 100 200 300 400 500 600 700 800 2007 2008 2009 2010 2011 market statistics industry statistics 57 71 25 45 57 50 76 29 52 63 0 10 20 30 40 50 60 70 80 2007 2008 2009 2010 2011 market statistics industry statistics ź r ó d ł o : evca yearbook (2007, 2008, 2009, 2010, 2011, 2012) oraz materiały pozyskane od evca w formie elektronicznej. warto również zwrócić uwagę na rozmiary rynku private equity oraz uznawanego w europie za jego segment rynku venture capital. okazuje się, że rynek venture capital ma relatywnie mniejsze znaczenie w europie niż np. w stanach zjednoczonych. w europie, w latach 2007–2011, inwestycje venture capital stanowiły co do wartości zaledwie 10,14% inwestycji private equity ogółem. rynek polski jest jeszcze bardziej zmarginalizowany i wartość inwestycji venture capital stanowiła w latach 2007–2011 jedynie 4,46% inwestycji private equity ogółem. nieco inaczej wygląda sytuacja, jeżeli porównamy liczbę przedsiębiorstw korzystających z finansowania typu venture capital. w europie, w latach 2007–2011, finansowanie venture capital dotyczyło 63,97% przedsiębiorstw finansowanych kapitałem private equity ogółem. w analogicznym okresie w polsce odsetek tych przedsiębiorstw wynosił 45,49%. tak wysoki odsetek przedsiębiorstw korzystających z finansowania kapitałem venture private equity czy venture capital… 61 capital w porównaniu do wartości środków przeznaczanych na finansowanie tych przedsiębiorstw wynika przede wszystkim z mniejszego zapotrzebowania kapitałowego tych przedsiębiorstw, co jest uzasadnione na wczesnych etapach rozwoju. dodatkowo należy podkreślić, że inwestycje venture capital zarówno w europie, jak i w polsce są związane z tzw. późnymi fazami venture, czyli finansowaniem przedsiębiorstw we wczesnej fazie rozwoju, ale gdy oferowany produkt czy usługa zostały już wprowadzone na rynek. finansowanie przedsiębiorstw w fazie zasiewu (seed) czy startu rynkowego (start-up) jest rzadkością. wspieranie przedsiębiorstw właśnie w najwcześniejszych fazach rozwoju, a więc zasiewu i startu rynkowego, jest najbardziej pożądane w perspektywie ograniczania zjawiska luki kapitałowej. wykres 2. liczba przedsiębiorstw finansowanych kapitałem podwyższonego ryzyka w ujęciu market statistics oraz industry statistics (mln euro) przez wartość inwestycji na polskim rynku rozumie się inwestycje przeprowadzone przez fundusze podwyższonego ryzyka mające tutaj swoją siedzibę. w podejściu market statistics, zorientowanym na biorców kapitału, zwraca się uwagę na inwestycje przeprowadzone w przedsiębiorstwach działających w polsce. wydaje się zatem, że podejście market statistics lepiej odzwierciedla stan rynku kapitału podwyższonego ryzyka w danym państwie, odnosząc się do środków pozyskanych przez działające w jego granicach przedsiębiorstwa. wykres 1. wartość inwestycji kapitału podwyższonego ryzyka w polsce w ujęciu market statistics oraz industry statistics (mln euro) źródło: evca yearbook (2007, 2008, 2009, 2010, 2011, 2012) oraz materiały pozyskane od evca w formie elektronicznej. wykres 2. liczba przedsiębiorstw finansowanych kapitałem podwyższonego ryzyka w ujęciu market statistics oraz industry statistics (mln euro) źródło: evca yearbook (2007, 2008, 2009, 2010, 2011, 2012) oraz materiały pozyskane od evca w formie elektronicznej. 747 633 267 657 681 571 725 480 504 689 0 100 200 300 400 500 600 700 800 2007 2008 2009 2010 2011 market statistics industry statistics 57 71 25 45 57 50 76 29 52 63 0 10 20 30 40 50 60 70 80 2007 2008 2009 2010 2011 market statistics industry statistics ź r ó d ł o : evca yearbook (2007, 2008, 2009, 2010, 2011, 2012) oraz materiały pozyskane od evca w formie elektronicznej. jak wynika z niektórych definicji i częstego rozumienia zjawiska inwestycji pe/vc, inwestycje private equity, a przede wszystkim venture capital powinny być związane z finansowaniem innowacyjnych przedsiębiorstw. okazuje się, że wcale tak nie jest. w europie, w latach 2007–2011, zaledwie 9,44% środków było przeznaczonych na finansowanie przedsięwzięć w tzw. sektozbigniew drewniak62 rach wysokich technologii (high-tech), co odpowiadało 24,59% finansowanych przedsiębiorstw. w przypadku rynku polskiego zaledwie 1,08% inwestycji co do wartości dotyczyło sektorów wysokich technologii, co odpowiadało 9,41% przedsiębiorstw. fundusze pe/vc wciąż chętniej inwestują w przedsiębiorstwa działające w sektorach o stabilnym wzroście, np. w sektorze dóbr konsumpcyjnych. inwestycje venture capital dotyczą najczęściej wykorzystania już istniejących rozwiązań technologicznych i ich dalszej komercjalizacji w nowych zastosowaniach (fraser-sampson 2007: 116–117).  zakończenie wprowadzenie nowych dyrektyw unijnych do prawodawstwa państw członkowskich powinno przyczynić się do rozwoju rynku kapitału podwyższonego ryzyka w europie. pozwoli to funduszom łatwiej pozyskiwać środki na inwestycje w poszczególnych państwach, a jednocześnie spowoduje większą transparentność przeprowadzanych transakcji. samo uwzględnienie tego rodzaju inwestycji w osobnych dyrektywach świadczy o poważnym podejściu do tej problematyki. w obliczu niewielkiej wartości inwestycji venture capital w europie, a przede wszystkim w polsce, powinno zwracać się uwagę na terminologię i znaczenie pojęć dotyczących tego rynku. zasadne wydaje się używanie pojęcia kapitału podwyższonego ryzyka, które jako polski odpowiednik terminów venture capital i private equity stanowi swego rodzaju kompromis w stosowanej powszechnie terminologii.  literatura directive 2011/61/eu of the european parliament and of the council of 8 june 2011 on alternative investment fund managers and amending directives 2003/41/ec and 2009/65/ec and regulations (ec) no. 1060/2009 and (eu) no. 1095/2010, brussels. bartlett j. w. (1999), fundamentals of venture capital, madison books, lanham. brzozowska k. (2008), business angels na rynku kapitałowym. motywacje – inwestowanie – efekty, cedewu, warszawa. evca, http://www.evca.eu (dostęp: 17.03.2013). evca yearbook (2007, 2008, 2009, 2010, 2011, 2012), evca, zaventem, belgia. fraser-sampson g. (2007), private equity as an asset class, john wiley & sons, chichester. gladstone d., gladstone l. (2002), venture capital handbook. an entrepreneur’s guide to raising venture capital, prentice hall, new jersey. private equity czy venture capital… 63 gompers p., lerner j. (2006), the venture capital cycle, the mit press, cambridge massachusetts. a guide to private equity (2010), bvca, london. hass w. j., laffer a. b., pryor s. g. (2009), the private equity edge: how private equity players and the world’s top companies build value and wealth, mcgraw-hill, new york. ken r., wright m. (1998), venture capital and private equity: a review and synthesis, journal of business finance and accounting, june/july, vol. 25, issue 5/6. kornasiewicz a. (2004), venture capital w krajach rozwiniętych i w polsce, cedewu, warszawa. mikołajczyk b., krawczyk m. (2007), aniołowie biznesu w sektorze msp, difin, warszawa. nvca yearbook (2010), thomson reuters, arlington. panfil m. (2005), fundusze private equity. wpływ na wartość spółki, difin, warszawa. prowse s. d. (1998), the economics of private equity, economic review, 3rd quarter. sieradzan p., sobańska k. (2004), inwestycje private equity/venture capital, key text, warszawa. tamowicz p. (2004), venture capital – kapitał na start, parp, gdańsk. węcławski j. (1997), venture capital. nowy instrument finansowania przedsiębiorstw, pwn, warszawa. wrzesiński m. (2008), kapitał podwyższonego ryzyka. proces inwestycyjny i efektywność, sgh, warszawa. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: december 1, 2016; date of acceptance: january 31, 2017. * contact information: mustafaakan1917@gmail.com, faculty of economics and administrative sciences, dogus university, acibadem, kadikoy, 34722 istanbul, turkey, phone: +00905333119405. akan, m. (2016). sustainability, consumption, and technology. copernican journal of finance & accounting, 5(2), 9–25. http://dx.doi.org/10.12775/cjfa.2016.012 mustafa akan* dogus university sustainability, consumption, and technology keywords: sustainability, technology, consumption, optimal control theory, economic development, natural resources. j e l classification: o1, o2, o3. abstract: sustainability of current economic system is analyzed in the face of growing population, accelerating exploitation of limited natural resources, and advances in technology. a cobb-douglas type of production function is assumed. optimal control theory is employed to model the problem. it is proved that long term sustainability is possible, with or without population growth, only under certain conditions related to production and utility functions of the society.  introduction it is true that the earth has limited resources, and it supports an increasing population who is consuming these resources at an increasing rate. furthermore, the prevailing economic system (globalized capitalism) is encouraging more consumption. the recent economic crisis which slowed down the growth rate of many nations (especially developed ones) has led all the leaders of these nations to take extraordinary measures to return their economies to reasonable growth rates. however, despite all these measures, the economies of these mustafa akan10 nations are not growing at desired levels even in the united states where these measures have made a significant impact on unemployment. the world economic crisis which started as a financial crisis in the usa in 2008 has spread over to europe and the rest of the world. governments have taken actions to stabilize the financial sector by principally increasing money supply and other measures such as taking over some of the financial institutions affected by the crisis (skidelsky, 2009). the crisis is continuing in europe with more significant impact on the economies of greece, italy, portugal, and spain. the financial crisis has affected the real sector also in almost all major economies of the world. a recent study by oecd study (economic outlook, 2016) estimates that the us will grow only by 2.1%, euro area oecd countries are expected to grow by 1.8%, the total of oecd countries will grow by 2.0% and china by 6.1% in 2017. the same study estimates that unemployment rate in the usa will be 4.6 while consumer price index will be 1.9% in 2017. oecd countries will have unemployment rates of 6.1% in 2017. consumer price index for this group is forecasted to be 1.9% in 2017.the unemployment rate for the total of oecd will remain around 6.1%. it looks as if the economies of the usa and europe will grow at a slow pace with low inf lation, low interest rates, and high unemployment rates for some time even if the ongoing financial crisis is contained without major interruption. additional problems such as migration and the exit of uk from the european union have introduced additional problems. thus, it is important for all countries to increase their growth rates to reasonable levels to lower their unemployment rates, or, at least, keep them at their current levels even in the face of important problems in the financial sectors of many of these nations like the usa and significant number of european nations. monetary policies seem to be ineffective in large economies like the usa and europe. very low levels of interest rates do not seem to induce growth enough to make significant reductions in unemployment levels. the governments of the usa and european union are in search of rules and regulations to put in place to assure the business world’s and the customers’ confidence for the proper functioning of the markets. the search, therefore, will be for policies to induce growth even under these conditions for both governments and individual firms as the efforts on the part sustainability, consumption, and technology 11 of the governments to stabilize the economic system continue to sustain the current system. however, almost insatiable desire for growth (more consumption) and the increasing population are already straining the resources of the world including energy, clean air, and water. climate change and related catastrophic events are almost everyday occurrences. the world’s population has increased from 3 billion to 6.9 billion between 1960 and 2012 (world bank, 2012) and it is expected to reach over 9 billion by 2050 (meadows, 2004, p. 28). the energy consumption by time and by type of fuel is given in table 1 below. table 1. energy consumption by type, time, and estimates for the future (quadrillionbtu) region/country 2005 2006 2007 2008 2010 2015 2020 2025 2030 2035 total oecd liquids 100,4 99,6 99,3 96,5 91,6 94,1 95,6 96,7 97,9 99,7 natural gas 53,6 54,1 55,7 56,3 56,5 59,2 61,4 63,6 67,1 70,6 coal 46,7 46,8 47,8 46,8 43,5 42,6 43,1 44,6 45,3 46,7 nuclear 23,3 23,4 22,6 22,6 22,7 25,2 26,7 27,8 29,1 29,8 other 20 20,4 20,7 22,1 23,7 29,3 33,6 37,1 39,4 41,4 total 243,9 244,3 246,1 244,3 238 250,4 260,6 269,8 278,7 288,2 total non oecd liquids 70,4 72,1 73,4 76,4 81,6 93,1 100,1 110,3 118,7 125,5 natural gas 51,5 53,4 55,2 58 60,1 68,1 76,6 85,9 95,2 104,1 coal 75,6 80,4 85,6 92,2 105,9 114,7 121,4 135,1 149,4 162,5 nuclear 4,2 4,4 4,5 4,6 5 7,9 12,2 15,8 18,3 21,4 other 25,5 26,8 27,8 29,2 31,5 39,3 48,6 54,6 61,2 68,1 total 227,2 237,1 246,5 260,4 284,1 323,1 358,9 401,7 442,8 481,6 total world liquids 170,8 171,7 172,7 173 173,2 187,2 195,8 207 216,6 225,2 natural gas 105 107,5 110,9 114,3 116,7 127,3 138 149,4 162,3 174,7 coal 122,3 127,2 133,3 139 149,4 157,3 164,6 179,7 194,7 209,1 mustafa akan12 region/country 2005 2006 2007 2008 2010 2015 2020 2025 2030 2035 nuclear 27,5 27,8 27,1 27,2 27,6 33,2 38,9 43,7 47,4 51,2 other 45,4 47,1 48,5 51,3 55,2 68,5 82,2 91,7 100,6 109,5 total 471 481,3 492,5 504,8 522,1 573,5 619,5 671,5 721,6 769,7 s o u r c e : international energy outlook, 2011. however, the reserves of energy sources (oil, natural gas) and the number of years they will support consumption by humans are 65, and 50–75 years respectively (meadows, 2004). renewable energy, even though it receives considerable attention, constitutes only 10% of the total energy requirement as of 2013. consumption of five important metals is increasing at an increasing rate (meadows, 2004, p. 101). consumption of steel exhibits the same behavior (meadows, 2004, p. 101). estimates of life expectancy of identified reserves of major metals are presented in meadows (2004, p. 105).they range from 20 years for zinc to 81 years for aluminum. the problem of climate change, now visible to residents of the earth, is summed up by 6 nobel laureates (meadows, 2004, pp. 115–117) as “the balance of evidence suggests a discernible human inf luence on global climate. as economists, we believe that global climate change carries with it significant environmental, economic, social, and geopolitical risks, and that preventive steps are justified”. meadows et al. (2004, p. 115) showed that carbon dioxide, methane, nitrous oxide, and chlorof luorocarbons emissions have increased very sharply in past few decades. rising temperature of the earth and the economic losses from weather related disasters are shown to be drastic in meadows (2004, pp. 116–117). fresh water problem is already an important problem. a un report (1997) states: “…current pathways for fresh water use are often not sustainable… water degradation are weakening one of the resource base on which human society is built”. forests, lungs of the earth, are, like water, is already a problem also especially in the light of air pollution problem. world commission on forests and sustainable development in their report (1999) comes to the conclusion that: “…a trend toward a massive loss of forested areas… and all is threatened”. table 1. energy consumption by type, time, and estimates for the future… sustainability, consumption, and technology 13 decrease in the amount of cultivable land, clean air (air pollution), extinction of some members of fauna and f lora are other important losses that human consumption is causing. all these problems on which some data are provided clearly raise the question of sustainability of the current economic system based on increasing consumption. sustainability is defined as: “a sustainable society is one that meets the needs of the present without compromising the ability of future generations to meet their own needs” in meadows et al. (2004, p. 254). it is defined as the ability of, at least, maintaining the current level of well-being for future periods or future generations in stiglitz et al. (2010, p. 97). arrow et al. (2004, p. 150) defined sustainability as the ability to maintain a non-decreasing social welfare through time. pezzey and toman (2002, p. 24) has reviewed the journal articles on sustainability and concluded that: “the dearth of empirical work on what sustainability might mean for environmental and economic valuations, and the continued lack of concrete understanding of what sustainability policies might entail in practice, indicate the scale of continual intellectual challenges in the field”. chichilnisky (1997) developed axioms that capture the idea of sustainability and characterize the welfare criteria that they imply. chichilnisky et al. (1995) introduced a growth model with environmental assets as source of utility and an input to consumption and production. they developed a golden rule as a generalization of neoclassical growth theory. marsiglio (2011) studied the relationship between population growth and economic growth through the study of fertility choices and concluded that a sustainable path can be found if stationary fertility rate is higher than the mortality rate. azamamahou et al. (2014), boucekkini et al. (2014) and constant et al. (2014) have all studied the relationship between growth, population and pollution. tim jackson (2009) has proposed steps for transition to a sustainable economy. lester brown (2009) has also outlined the actions to take to make a transition to sustainable economy. as reasonable as these steps (actions) might be, their implementation is difficult due to the strength of current consumption culture, strength of parties(firms and consumers who are raised within the consumption culture) to oppose such changes, and different political considerations by different nations, etc. technology or technological development stands as one area where significant gains can be obtained for transition to sustainable economies. mustafa akan14 technology is defined as: “society’s pool of knowledge regarding the industrial arts” in mansfield (1971, p. 9). mansfield adds: “technology consists of knowledge used by industry regarding the principles of physical and social phenomena… knowledge regarding the application of these principles to production… and knowledge regarding the day to day operations of production…”. in the same study, mansfield also states that 90% of increase in output per capita in the usa is attributable to technological change. oliner (2002) showed that labor productivity in the usa after 1995 was largely due to advances in it technology. gordon (2002) also showed that technological acceleration, particularly in information technology, was responsible for the american miracle of 1995-2000. jorgenson et al. (2008) also concludes that: “the usa should be well positioned to innovate and benefit as improved technologies emerge”. mckinsey & company (2009) has shown that 80% of growth in the usa between 2000 and 2008 was due to productivity increase. mckinsey & company (2013) has shown that the productivity growth during 1995-2000 occurred in retail, wholesale, semiconductor, computer manufacturing, telecommunications, securities, and banking sectors and most of this growth was due to technological advances. sachs and mcarthur (2002) also conclude that technological advances are almost certainly the driver of long term economic growth. porter, sachs, and mcarthur (2002) showed that there was a very strong correlation between growth competitiveness index (gci) and technology index rank. nelson (1996) in a book of collected papers on growth and technology reaches the same conclusion that technological advance is the key driving force in economic growth. all these selected studies clearly show that the advances in technology have a determining impact on growth. research methodology and research process in this study, we will build on definitions introduced by arrow et al. (2004) to develop a mathematical model taking into consideration the interrelation between natural resources, technology (defined as the productive base), and consumption. productive base is defined in arrow et al. (2004, p. 149) as: “society’s capital assets and institutions at a given time. the capital assets include manufactured capital, human capital and natural capital. the productive capital also includes the knowledge base and society’s institutions…” which will be named as technology base, or just technology throughout this paper. sustainability, consumption, and technology 15 we will assume that the manufactured capital, as its name applies, is an output itself since any such capital is manufactured by use of technology, labor, and natural capital i.e. manufactured capital is a function of natural capital, labor and technology. we will also assume that labor (population) grows at a certain rate hence it is assumed to be an exogenous variable. natural capital is actually the limited resources of the earth which declines by the rate of their usage (extraction rate). these assumptions change the definition of productive base to ‘technology base’. another definition by arrow et al. is the ‘genuine investment’ which refers to the change in the productive base which, in this paper, implies change in the technology base and the change in the natural resource base. the objective of the society is given as the present value of the utility of consumption discounted by a given social discount factor (social welfare function as defined by arrow et al.). then, the questions to be answered are: ■ how much should consume over an infinite horizon? ■ what should be the extraction rate of natural resources? in order to maximize the social welfare function given that the reserves of natural capital is fixed or can be increased only by technology. a mathematical model is presented in the next section. the model will be solved in the third section followed by the conclusions and suggestions for further research. the model and its solution the objective of the society is to maximize the sum of its discounted utility over an infinite horizon where the utility of consuming an amount c(t) at time t is represented by u(c(t)). the discount factor is represented by e tρ− where the letter ρ is the social discount factor. the productive base is split into two because of the differences in their dynamics. the natural resource base r(t) decreases by the extraction rate z(t), increases by the new discoveries of reserves and renewable sources made possible by technology base, t(t). mathematically (skipping the variable t in the related variables): 'r z t µη= − + (1) 0(0)r r= mustafa akan16 which denotes the starting reserve level of natural resources. the parameters μ and η represent the positive impact of technology on natural resource base. the labor, as the other resource base, behaves differently than natural resource base. it is assumed to increase at a constant exponential rate g. i.e.: ( ) (0) gtl t l e= . (2) the manufactured capital is a product of technology, natural resources, and labor i.e. an intermediary product where: k(t) = f(t(t),z(t),l(t)). the production function of the society which can be generally written as a function of manufactured capital k, labor l, resource extraction z and the technology base t as: y = f(k(t),l(t),z(t),t(t)) which can be rewritten as: y = f(t(t),z(t),l(t)). given above definitions and dynamics of natural resources and labor, the other most important productive base component is technology. the dynamics related to technology is given as: 0 0 0' ( ) gt gt gtt t z l l ce kt t z l e l ce ktα γ β α γ β= − − = − − (3) 0(0)t t= which denotes the level of technology at t=0. the first term on the right hand side of this equality shows the total production of the society as a combination labor, technology, and natural resources (a cobb douglas type of production function is assumed). the total production is allocated to consumption (the second term on the right hand side of the equation) and improving the level of technology as a productive base (t’), and technological obsolescence represented by kt term where k represents the exponential rate of obsolescence rate of technology. then, the model in an optimal control theoretic format is: sustainability, consumption, and technology 17 0 0 ( )t gtmax e e l u c dtρ ∞ −∫ . subject to constraints in equations (1)–(3). where the utility function is assumed to have the functional form of: ( )u c cθ= with 1θ < . the hamiltonian of the system is: 0 1 2 0 0( ) ( ) ( ( ) ) t gt gt gth e e l u c z t t z l e l ce ktρ µ α γ βλ η λ−= + − + + − − . the necessary conditions are: 1 0 (4)2 1 0 1 2 0 th e cc g th t z l ez ρ θθ λ βγ βαλ λ γ − −= − = −= − + = (5) ' 0 (6)1 1 1' ( )2 2 1 2 0 g tk t t z l e λ βµ γαλ λ λ ηµ λ α = − −= − + (7) (4) 1 0 (4)2 1 0 1 2 0 th e cc g th t z l ez ρ θθ λ βγ βαλ λ γ − −= − = −= − + = (5) ' 0 (6)1 1 1' ( )2 2 1 2 0 g tk t t z l e λ βµ γαλ λ λ ηµ λ α = − −= − + (7) (5) 1 0 (4)2 1 0 1 2 0 th e cc g th t z l ez ρ θθ λ βγ βαλ λ γ − −= − = −= − + = (5) ' 0 (6)1 1 1' ( )2 2 1 2 0 g tk t t z l e λ βµ γαλ λ λ ηµ λ α = − −= − + (7) (6) 1 0 (4)2 1 0 1 2 0 th e cc g th t z l ez ρ θθ λ βγ βαλ λ γ − −= − = −= − + = (5) ' 0 (6)1 1 1' ( )2 2 1 2 0 g tk t t z l e λ βµ γαλ λ λ ηµ λ α = − −= − + (7) (7) in addition to constraints in equations (1)–(3). observing that 1λ = constant from equation (6), and using the value of 2λ from equation (4) in equation (5), we can solve z in terms of c and t. substituting this value of z in equations (1) and (3), we get: /(1 ) (1 ) /( 1) 0 2 ( 1) 1 (1 )/( 1) (1 )/( 1) ' ( ) ( 1) ' ( ) [ ( ) ( ) ] gtt t c d t l ce kt c c c k a t t b t c t α γ θ γ γ θ θ µ θ γ α γ γθ θ θ ρ − − − − − − − − − − − = − − − = + − + where d(t), a(t), and b(t) are known functions of time where: d= / ( 1) / ( 1)1 0 0 1( / )(1 / ) ( / )(1 / ) if g and are zero g t t g tl e l eβ ρ γ γ β γ γλ γ θ λ γ θ ρ− − −= d(t)= / ( 1) 1 0(1 / ) ( / ) te lγ γ ρθ λ γ− if ρ is not zero. a= 1ληµ =constant mustafa akan18 b= /( 1) 1/( 1) / 1 1/ 1 1/11 0 0 1 0( / ) (1 / ) ( / ) (1 / ) if g and are zero. g t g tl e l e lβ γ γ γ β γ γ γ γλ γ θ λ γ θ β− − − − −= b(t)= / 1 1/ 1 1/11 0( / ) (1 / ) l γ γ γ γλ γ θ− − − /(1 )g te β γ− if g is not zero. the system differential equation system above is a nonlinear, first order, nonhomogeneous, system of differential equations the solution of which is difficult. phase diagrammatic analysis will be employed to study the behavior of this system for g=ρ=0 and for g, ρ ≠ 0. case a: g=ρ=0 this case makes the system easier to analyze since it becomes a homogeneous system. this assumption makes d(t), a(t), and b(t) all constants as shown above. then the system becomes: /(1 ) (1 ) /( 1) 0 2 ( 1) 1 (1 )/( 1) (1 )/( 1) ' ( 1) ' [ ] t t c d l c kt c c c k at bc t α γ θ γ γ θ θ µ θ γ α γ γθ θ θ − − − − − − − − − − − = − − − = − + . leaving c’ alone, 1 2 (( 2 ) 1)/( 1) (1 )/( 1)' / ( 1) [ / ( 1) / ( 1)]c ck at c bc tµ θ θ γ γ α γ γθ θ θ θ θ− − − − − − − −= − − − + − which is a nonlinear homogeneous system of differential equations. letting: / (1 ) 0 (1 ) / ( 1) 0 m 1 0 n 2 0 ((2 ) 1) / ( 1) 0 q (1 ) / ( 1) 0 s l p α γ θ γ γ µ θ θ γ γ α γ γ = − < = − − < = − < = − > = − − − < = − − − < in addition, for simplification, let: a = k/(θ-1) < 0 b = a/θ(θ-1) < 0 . sustainability, consumption, and technology 19 d = b/ θ(θ-1) < 0 d = / ( 1) 1 0( / 2)(1 / ) l γ γλ θ − > 0 . the system becomes: 0' (8) ' (9) s l p qm n t dt c l c kt c ac bt c dc t = − − = − − (8) (9) this system does not have a closed form solution. phase diagrammatic analysis will be used to characterize the optimal solution. the loci of points where t’=0 and c’=0 are: 0 11 0 (10) =0 and c=0 (11) s l p qm n dt c l c kt a bt c dc t−− − − = − − (10) (11) from equations (8) and (9). however, these loci may or may not intersect depending on the parameters. they may intersect at one or more points also. five possible forms of the phase diagrams are shown in the appendix. stability analysis will be considered before the analysis of these phase diagrams. linearizing the system (equations 8 and 9) using taylors expansion: 1 1 0 1 11 1 ' ( )( ) ( )(t t ) (12) ' ( )( ) ( )(t t ) (13) s l s l s s p q p qm n m n s s t ldt c l c c dst c k c a nbt c dpc t c c bmt c dc qt − − − −− − = − − + − − = − − − + − − − (12) (13) for simplicity, we will rewrite these equations as: 1 2 3 4 ' ( ) ( ) (14) c'=c ( ) ( ) s s s s t c c c c t t c c c t t = − + − − + − (15) (14) (15) where the capital cs represents the terms multiplying (c-cs) and (t-ts) where c1, c2, c4 are all negative. the sign of c3 is ambiguous. for this system to have a saddle point at the intersections of the loci, it is necessary to have: 1 4 3 2 3 2 1 40 or c 0c c c c c c c− < > > . (16) however, because of the signs of these constants, it is necessary to have . mustafa akan20 c3 < 0 for equation (16) to hold. (17) using equations (10) and (11), we find, if equation (17) holds: 3 4 1 2 / / 0 along c'=0 locus at the equilibrium point, dt/dc=-c /c <0 along t'=0 locus. dt dc c c= − < (18) these results imply that the stability of equilibrium is possible only on the declining portions of the loci. however, equation (16) must still be satisfied. from the analysis of the phase diagrams in appendix we can deduce the following: ■ phase diagram i: no equilibrium exists. ■ phase diagram ii: there is unstable equilibrium since the first condition in equation (18) is not met. ■ phase diagram iii: the equilibrium is not stable since at that point we have; 3 4 1 2/ / along c'=0 >dt/dc=-c / along t'=0dt dc c c c= − which implies that 1 4 3 2 0 c c c c− > which is contrary to inequality (16), necessary condition for a saddle point. ■ phase diagram iv: the equilibrium point 2 is a saddle point just as in previous case since at the point we have; 1 4 3 2 0 c c c c− < which is the inequality (16), the necessary condition for a saddle point. the other equilibrium points are not saddle points. ■ phase diagram v: equilibrium point 1 is stable due to analysis for phase diagram iv. first requirement in equation (18) is not met for equilibrium point 2. in all of the phase diagrams where there is a saddle point equilibrium the starting level of technology (t(0)=t0) defines the optimal behavior of the system. it will be optimal to start in quadrant v (quadrants are indicated only on phase diagram v) with a low level of consumption if t(0) is smaller than the desired s-s level of technology (ts), gradually increasing the consumption until the desired level of technology is reached. this implies that the current generations have to forego large consumptions levels to invest in technology so that sustainability, consumption, and technology 21 future generations can produce and consume. the optimal path defined as such may not exist if the consumption level implied by this solution is below the minimum consumption level of humans to continue to exist. figure 1. phase diagram v source: developed by the author. in all of the phase diagrams where there is a saddle point equilibrium the starting level of technology (t(0)=t0) defines the optimal behavior of the system. it will be optimal to start in quadrant v (quadrants are indicated only on phase diagram v) with a low level of consumption if t(0) is smaller than the desired s-s level of technology (ts), gradually increasing the consumption until the desired level of technology is reached. this implies that the current generations have to forego large consumptions levels to invest in technology so that future generations can produce and consume. the optimal path defined as such may not exist if the consumption level implied by this solution is below the minimum consumption level of humans to continue to exist. it will be optimal to start in quadrant ii with a high level of consumption and gradually decrease it to the desired long term level (cs) if the starting level of technology is higher than the required level in the long run. starting in other quadrants will not have convergent solutions. case b: g and ρ are not zero the system in equations (8) and (9) now becomes / ( 1) 1 0 / 1 1/ 1 1/1 / (1 ) 1 1 0 ' (1 / ) ( / ) ' ( / ) (1 / ) / ( 1) c t s l gt m n g t p q t e t c l e c kt c ac bt c l e t                               the loci associated with this system are not stationary. both locus moves leftwards and downwards(towards the origin) as t increases implying that the equilibrium points, if any exists and if stable, results in a lower consumption and lower technology levels than in stationary case(ρ and g are both zero).these consumption levels may not be sufficient for survival. s o u r c e : developed by the author. it will be optimal to start in quadrant ii with a high level of consumption and gradually decrease it to the desired long term level (cs) if the starting level of technology is higher than the required level in the long run. starting in other quadrants will not have convergent solutions. case b: g and ρ are not zero the system in equations (8) and (9) now becomes / ( 1) 1 0 / 1 1/ 1 1/1 / (1 ) 1 1 0 ' (1 / ) ( / ) ' ( / ) (1 / ) / ( 1) c t s l gt m n g t p q t e t c l e c kt c ac bt c l e t γ γ ρ γ γ γ γ β γ θ λ γ λ γ θ θ θ − − − − − − = − − = − − − the loci associated with this system are not stationary. both locus moves leftwards and downwards(towards the origin) as t increases implying that the equilibrium points, if any exists and if stable, results in a lower consumption and lower technology levels than in stationary case(ρ and g are both zero). these consumption levels may not be sufficient for survival. mustafa akan22 implications and suggestions for further research ■ the current system (consumption based economy) may not sustainable if population keeps growing even if there is a long run stable equilibrium. ■ the only possible path to sustainable equilibrium is to consume less and to invest more in technology even if population remains stable. transfer of technology from richer nations (high consumption) to poorer nations (low consumption) becomes a critical policy question. ■ the efforts for effective use of technologies such as solar, wind, hydro energy, shale gas, energy conservation, recycling, etc. must be increased to improve the natural resource base. investment in these areas must be encouraged. education in basic sciences must be intensified to improve the technology base. ■ the model is based on a cobb-douglas type of production function. the model can also be solved using ces type of production model and a different type of utility function. ■ the model can be solved by putting a lower and an upper limit to consumption. ■ the model may be revised to include pollution. appendix: various forms of t’=0 and c’=0 loci phase diagram i phase diagram ii phase diagram iii phase diagram iv phase diagram v mustafa akan24  references arrow, k., dasgupta, p., goulder, l., daily, g., ehrlich, p., heal, g., levin, s., maler, k.g., schneider, s., starrett, d., & walker, b. 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(1979). decision systems for the inventory management and production planning. new york: john wiley sons inc. pezzey, c.v., & toman, m.a. (2002). the economics of sustainability: a review of journal articles. resources for the future, january. sachs, j.d., & mcarthur, j. m. (2002). technological advancement and long-term economic growth in asia. speech by j.d. sachs at hong kong university, may. skidelsky, r. (2009). keynes: the return of the master. publicaffairs. stiglitz, j.e., sen, s., fitoussi, j.p. (2010). mismeasuring our lives the new press. un comprehensive assessment of the fresh water resources (1997). world bank (2012). world bank data, http://databank.worldbank.org (accessed: 03.01.2015). world commission on forests and sustainable development (1999). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 1 * ** lekashvili, e., & dodashvili, v. (2017). legal regulation of tourism business in georgia, 6(1), eka lekashvili* ivane javakhishvili tbilisi state university veko dodashvili** ivane javakhishvili tbilisi state university legal regulation of tourism business in georgia keywords: georgia economy, legal regulation, tourism business. j e l classification: a1, k2, l51. abstract: research objective: georgia, as a country favorable for tourism, can offer the various types of tourism products and therefore, is presented as an attractive country for travelers. the research aims: to analyze tourism business legal framework in georgia, the basic laws and regulations, evaluate the tourism industry in the context of current legal environment and offer the recommendations for stimulating and supporting legal reforms. the theoretical and methodological basis of the study: we will discuss tourism business in georgia in the regulatory legislative framework, including the law of georgia code (regulates the activities of the tourism industry), the law of the free tourist zone development and several other government orders and the commands of the ministry of economy and sustainable development. the research results will summarize georgia’s tourism industry regulatory legal framework for its positive and negative sides, the issues, which remain beyond the legal regulation and offer various recommendations, which, with its practical meaning, eka lekashvili, veko dodashvili will be essential for tourism policy makers, local and international tourism agents. in addition, it is important to analyze the national legislation and to fill the eu-georgia association agreement within the framework of the harmonization of the laws effective. tourism is one of the major and fastest-growing fields of modern global economy. it is a leading and profitable service sector. in terms of economic development and revenue mobilization, development of the tourism industry is immensely important for georgia as a country with diverse tourism resources. georgia, as a country beneficial for tourism development, can offer a big variety of products to consumers, which makes it attractive to tourists. it is notewormy of georgia. the highest worldwide: the gross number of international travelers increased obtained in the first three quarters of 2015, the value created in the tourism intries affects the growth of their expenditures in georgia (national statistics office of georgia, 2016). data of the national tourism administration shows the dynamic growth of the country’s international tourism receipts, which has indicator of foreign card operations and international travelers in 2010 was 1. these positive tendencies underline the growing influence of the tourism sector for the country with poor financial revenues. 1 legal regulation of tourism business in georgia figure 1. international tourism receipts (thousands of usd) tourism is one of the fastest-growing industries in georgia, the local development of which has largely been supported by the government of georgia for the last few decades. this is manifested through the improvement of the business environment as well as through the increased number of visits, establishment of a favorable environment for foreign and domestic investments and various other indicators; however, there is still a lot to do to eradicate flaws in this area. we deem challenges concerning problems related to infrastructure has adopted a few laws in the last few years and the government issued various orders, several issues in the tourism business require a more concrete legal regulation. the study aims to analyze and systematize the legal framework of georgia, major laws and normative documents in order to regulate the tourism business, to assess the legal environment for the development of the tourism industry and to detect problems that hinder the formation of a stimulating, favorable legal environment for the development of this field. eka lekashvili, veko dodashvili the theoretical and methodological basis of studying the problem includes the legal framework regulating the tourism business in georgia including the of georgia tax code of georgia (september 17, 2010. regulating the activity of a tourism enterprise); the law of georgia on supporting the development of free tourism zones (october 26, 2010) and a few resolutions of the government and orders of the minister of economy and sustainable development of georgia. it is noteworthy that as georgia has been a member of the world tourism bill of rights and tourist code2 by which the country, as a member state, took on responsibilities to fulfill it. apart from engagement with multilateral organizations specializing in tourism, bilateral international governmental and nongovernmental agreements, that help promote stronger cooperation in the field of tourism, are also noteworthy. by now, georgia has signed bilateral agreements on cooperation opment stimulating policy, which is defined as a legal document and regulates economic activities in this field. creating the perfect legal environment is the main condition for developing not only the local sector but for foreign business industries and investors. therefore, the issue of this article is relevant not only in scientific but for practical terms. the goal of the research was to systemize the legal regulation of georgian tourism industry, which will give a hand to researchers and practitioners to understand the framework of tourism policy in georgia. at the same time, particular aspects of legal regulation of georgian done by above mentioned economists are done with respect to various tourist’s products and its separate aspects of legal restrictive barriers. the systemati2 (accessed: 21.06.2016). legal regulation of tourism business in georgia zation of tourism legal regulation provides us with the ability to understand the legal environment, to identify the shortcomings and the possibility of its perfection. under the law of georgia on tourism and resorts, the term “tourism” is defined as “free, voluntary, temporary movement of people from their place of residence law, it is defined as “services rendered by an entity engaged in tourism activity including accommodations, catering, tour operations, transportation, excursions, recovery, rehabilitation, advertising, informational, cultural, sports, domestic, entertainment, etc. services for satisfying tourist requirements”. as for the characteristics of the regulation of tourism activity, it is, above all, important to consider the aspects of tourist services determined under the civil code of georgia. in particular, the relationship between a tourist service provider and consumer is regulated under a document (“tourism contract”) signed by and between a traveler (tourist) and a travel organizer (travel agency). importantly, a tourism service package consisting of not less than two components of tourism service (food, overnight accommodation, transport services, etc.) shall not include false, inadequate and misleading information. in addition, prior to signing an agreement related to this package, the tourist shall, in a written form or in a form acceptable to him, be provided with detailed information about the package price, payment methods and schedule; destination and goals, available means of transportation and their description; type, location and category of accommodation, quality and classification and other basic characteristics of service; food; passport and visa; issues related to excursions. it is important that a tourist service provider is obliged to provide this information. apart from these issues, chapter eleven of the civil code of georgia, determines the rules for changing and calculating the initial price as well as the obligations of a travel agency. for instance, within twenty days prior to the departure, the package price shall not be subject to increase; however, if a travel agency, due to reasons beyond its control, has to make significant changes to the basic terms of the agreement before the departure, it shall immediately notify the tourist of this so that the tourist can make a decision whether to terminate the contract or to accept it with changed terms. under the same chapeka lekashvili, veko dodashvili ter, prior to the beginning of the travel, the tourist may demand substitution of a third person to travel in his place. the travel agency may refuse to substitute the third person if the latter does not qualify for the travel, taking into account the necessary conditions thereof. this chapter also includes the right of a tourist to demand compensation of necessary expenses occurred due to the shortcomings of the travel or to demand reduction of the price or termination of the contract, if the travel agency fails to eliminate the shortcomings within a reasonable period of time fixed by the tourist. the limitation period for claims by the tourist is six months. this period begins to run from the date at which the travel should have ended under the contract. as for repudiation of the contract before the beginning of the travel, if the tourist makes such a decision, the travel agency shall be deprived of its right to receive the agreed compensation. another important issue in the tourism business is related to the regulation of the economic activity of a tourism enterprise regulated by the law of georgia tax code of georgia. under article 26of the law of georgia tax code of georgia, a tourism enterprise is a legal entity that builds a hotel, supplies hoback the assets), and on the basis of a commutative contract (including on the enterprise shall be assigned to a person by the revenue service. the procedure for according the status of a tourist enterprise to a person as well as the procedure for its operation and cancellation shall be determined under the resolution of the government of georgia . if an enterprise specializes in tourism and operates in georgia, it pays the profit tax; the enterprise shall incur an obligation of a tax agent towards employees and shall withhold paid salaries at source and pay the income tax to the budget; bringing of tourists to tourist sites in the territory of georgia in an organised manner and delivery of tourist service packages to them in the territory of georgia by tour operators shall be exempt from vat with the right of legal regulation of tourism business in georgia of georgia); the company shall pay the property tax (local tax) if it has fixed assets. also, if the company owns a parcel of land, it shall pay the tax on the use of resorts and the resort tax, but it is exempt from the hotel tax. it is also important that a company does not need to get a license to provide tourist service. the issue of tax privileges, which concerns not only tour operators but also tourist agencies and high-mountain areas, is also important. regarding the latter, legislative changes came into force on january 1, 2016. georgia, profits earned by a tourist enterprise from a gratuitous supply of 2 of the tax code of georgia, remuneration paid by a tourist enterprise to a natural person under a relevant case, the income received by a natural person, which is taxed at source, shall not be included in the gross income of the receiving person and shall not be subject to subsequent taxation. investors, investing money in the tourism business, enjoy significant benefits. accessibility of private property through privatization, purchase of privatized property through direct buying, significant discounts on privatized property and favorable conditions for privatization in tbilisi and regional centers in a hotel. apart from this, free tourist zones have been created in kobuleti, anaklia and ganmukhuri in order to encourage the hotel business. the law of georgia on supporting the development of free tourism zones, the purpose of which is to develop tourism and promote entrepreneurship in georgia by determining the conditions, as well as tax and other privileges, for the construction and operation of hotels in free tourism zones, should also be noted. this law defines the rights and obligations and preferential treatment of investors, activities to be implemented by the state as well as the procedure and responsibilities for transferring parcels of land into the ownership of investors. moreover, investors that invest over 1 million gel in building a hotel, will enjoy the following privileges: free parcel of land for the nominal price of gel 1; free hotel design; free casino license for the construction of a hotel with over 100 rooms; exemption from profit and property tax for 15 years; exemption ity networks and proper external infrastructure; and awarding the status of eka lekashvili, veko dodashvili a facility of particular importance provided by the legislation of georgia to the hotel and getting a construction permit under a simplified procedure. the issues of standardization, certification and licensing of service in the of georgia on tourism and resorts, in order to register a licensed entity specializing in tourism and resorts, state registry exercised by the local management body of the field was introduced. this is where one of the problems is detected. moreover, hotels rate themselves with “stars” without meeting international requirements, which is an instance of deceiving customers. despite the absence of regulations, hotels have access to the ratings provided by unbiased every three years. any hotel, hostel or family hotel can become featured in the guidebook. representatives of the company assess service quality themselves and eventually publish it in the upcoming issue of the guidebook. adjara and tbilisi dominate the hotel market in georgia. according to the database of the national tourism administration of georgia, the total number important segment of the hospitality industry. along with low prices, a tourist has a wider choice and a closer contact with the locals. also, this kind of hotels are a very good source of employment. however, there are international instructions for family hotels as well pertaining to what rooms for holiday2, and a double room sized 12 m2 should have a window and an independent entrance, there should not be personal belongings of the host there, etc.), what kind of service they should be offered, etc. sometimes, this information does not reach hotel owners. thus, even basic rules are violated. many are not aware of these standards and cannot meet them either, which largely affects service quality and visitor satisfaction. in georgia”. in line with the new component, an entrepreneur willing to build a new hotel or to expand one already available in the region, in case of getting a bank loan approval, shall benefit from the state co-financing scheme and contribution to mortgage assurance. also, if an entrepreneur decides to bring an legal regulation of tourism business in georgia international operator in georgia, the state is ready to co-operate in terms of the costs related to brand operation during the first two years. accounting problems related to tourism revenue are one of the most important problems not only in terms of legislative regulation but also in terms of studying financial and economic processes. for instance, accounting incomes generated from accommodations let to tourists by private persons is unregulated, which harms the national budget. the information about tourism statistics is insufficient. this problem can be eradicated by implementation of the tourism satellite account developed by the world tourism organization. ism in order to improve the business and investment environment and to integrate into the international tourism market effectively. in particular, it considers supporting the implementation of legal norms in terms of imposing privileges and developing other forms of economic cooperation between the state and private companies in relation to natural and cultural heritage monuments and state-owned parcels of land; it is planned to update the legislative package related to the tourism sector; to continue works in order to eradicate investment barriers and to ensure the enhancement of investors’ trust in the field of tourism; to impose privileges on developing transportation sector and building new accommodation, convention centers, concert halls and other public buildings; to reduce visa requirements (report, 2015, p. 22), etc. moreover, it is important to analyze and complete the national legislative base within the framework of the eu-georgia association agreement for efcooperate in the field of tourism, with the aim of strengthening the development of a competitive and sustainable tourism industry as a generator of economic growth and empowerment, employment and international exchange” (dcfta, 116). thus, studying the legal framework regulating the tourism business clarifies that a number of issues are left without legal regulation. in particular, regulations on standardization, certification and licensing of tourist objects that do not meet international standards; in order to enhance investors’ trust in the eka lekashvili, veko dodashvili field of tourism, it is necessary to reduce legal barriers and to ensure a better protection of property rights. moreover, is important to analyze and complete the national legal framework within the framework of the eu-georgia association agreement for effective harmonization of laws as well as to provide trainings and consultations on legal issues in order to increase legal awareness and use it in practice effectively. economic impact of travel and tourism 2015, annual update, wttc. lekashvili, e. (2015), entrepreneurial way of thinking and its development challenglekashvili, e. (2015), tbilisi as an agent of tourism market tbilisi, first international tourism administration of georgia. (accessed: 22.02.2015). cording the status of a tourist enterprise to a person as well as the procedure for its operation and cancellation. the deep and comprehensive free trade area agreement signed between the eu and the law of georgia on supporting the development of free tourist zones (october 26, 2010). the law of georgia tax code of georgia (september 17, 2010). the ministry of economy and sustainable development of georgia, the national tourism administration of georgia, report 2015 (2016). tional tourism administration of georgia (georgian edition). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: october 14, 2015; date of acceptance: february 8, 2016. * contact information: ausrine.lakstutiene@ktu.edu, kaunas university of technology, k. donelaičio g. 20, 44239 kaunas, lithuania, phone: +37068791517. ** contact information: aida.barkauskaite@ktu.edu, kaunas university of technology, k. donelaičio g. 20, 44239 kaunas, lithuania, phone: +37065470957. lakštutienė a., & barkauskaitė a. (2016). evaluation of relationship between banks lending activities and the economies in baltic countries. copernican journal of finance & accounting, 5(1), 141– 156. http://dx.doi.org/10.12775/cjfa.2016.008 aušrınė lakštutıenė* kaunas university of technology aıda barkauskaıtė** kaunas university of technology evaluation of relationship between banks lending activities and the economies in baltic countries keywords: banks, credit, households, lending activities, non-financial corporations, granger causality. j e l classification: e51, f43. abstract: banks are financial institutions that are part of each country financial system. one of the banks’ core businesses is lending activity, which includes the lending activity to households, non-financial corporations and other financial institutions. before the financial crisis until 2007 year in all the baltic countries amounts of loans have a tendency to increase and its impact to economy become even more important. the analysis of scientific literature showed that there are different opinions concerning the relationship between banks’ lending activities (credits) and the economies. some researchers argue that lending activities have a positive impact on country economic growth, others state that its impact is opposite – economies have a positive impact on lending activities, while the others claim that there is no relationship between mentioned variables. the performed research showed that there are strong and medium aušrinė lakštutienė, aida barkauskaitė142 strengths positive linear relationships between lending activities and gdp in all the baltic countries. granger causality test showed that with one period lag, gdp affects household loans variations in latvia and with two periods of lags, gdp has an impact on the volume of loans to non-financial corporations. while in lithuania and estonia the relationship, assessing one and two number of lags, between lending activities and economies was not found.  introduction banks are an important part of each country’s financial system. during few years bank services are used by almost every person, their scales of operations are highly increasing and expanding. lending activity is one of the most important features that distinguish commercial banks from other financial and nonfinancial organizations. commercial banks’ lending activity helps to improve efficiency and rational distribution of resources between the various entities. due to increased banks’ lending activities volumes more attention is paid to their impact on the national economies. lending activities can be defined as the variation in the volume of loans and usually the main sectors which are classified in lending are non-financial corporations and households sectors. gross domestic product (gdp) is related to the country’s economic activity, the country’s gross domestic product is an indicator that reveals the country’s economic situation and its trends. in scientific literature there are plenty of studies that analyses the relationship between lending and economic activities. it was investigated by such authors as: yakubu and affoi (2014), mamman and hashim (2014), ugoani (2013), murty, sailaja and demissie (2012), were, nzomoi and rutto (2012), korkmaz (2015) and the others. their studies have shown that the relationship between credit and economic activities exists in different countries. however, despite the conducted studies related to lending activities and economic relations, to find studies that carry out these dependencies assessment in the baltic countries is difficult. in 2005-2006 years lending volumes significantly increased in all three baltic countries, so their importance to the economy, their economic growth has become very important. the aim of this article is to evaluate the relationship between banks’ lending activities and economies in the baltic countries. the object of the article is banks’ lending activity. article describes the theoretical aspect concerning the relationship between lending activities and economies. the analysis of loans volumes and economic changes in the baltic countries is performed. determination of relationship between loans volumes and the baltic countries economies is conducted. evaluation of relationship between banks lending… 143 literature review banks are an important part of each financial system, affecting the entire country’s economic situation. commercial banks perform resources accumulation and redistribution functions between businesses, households, public institutions and other financial institutions. one of the most important activities of commercial banks is lending, this activity can be considered as active business basis, because it helps commercial banks to earn their main income. the growth of volumes of bank operations and volumes of loans and their quantities, lending activities inf luence to the entire country’s economic situation is increasing. bank lending activities impact on the country’s economic growth is widely considered in the scientific literature. yakubu and affoi (2014), mamman and hashim (2014), onuorah and ozurumba (2013) examined the impact of commercial banks credit to nigerian economic growth. all these studies revealed that banks credit had a significant positive impact on nigeria’s economic growth. ugoani (2013) states that between bank credit and economic growth is a significant connection and bank loans inf luence also social infrastructure. banks credit contributes to the development of trade and industry and leads the country’s economic growth of welfare. lakstutiene, krusinskas and platenkoviene (2011), analyzing the economic cycle and the credit scale interaction in lithuania, found that household loans correspond to the changes in gdp with 1 period (quarter) lag and that changes in total loans amount and loans to non-financial corporations react with gdp at the same time. the examination of changes in industrial production, as an indicator of the economic cycle, correlation analysis showed that the relationship between the volumes of credit is stronger than in the case of gdp. murty, sailaja and demissia (2012) study showed that bank lending has a significant positive impact on real gdp growth per worker. this effect occurs within internal capital accumulation and efficient allocation of resources in the country. study also revealed that domestic capital can be used as a tool to increase the productivity per employee and thus promoting economic growth in the long term. consequently the authors emphasize that the follow-up studies should include and perform granger causality test between financial indicators and economic growth. according to oluitan (2012), there is a link between economic growth and financial development variables, so the country needs to ensure that the financial system mediate between supply and demand issues related to export finance. ramanauskas (2005) empirical studies have also shown that aušrinė lakštutienė, aida barkauskaitė144 the banks’ total credit growth has a positive impact on economic growth in the country. gozgor (2015) examined the causal relationship between economic growth and domestic credit in the context of economic globalization. he examined 58 developed and developing countries data from 1970 to 2010 years. studies have shown that high positive causal relationship is not just between economic globalization and economic growth, but domestic credit affects economic growth in seven developing countries. it was also found that not only economic globalization has a positive one direction causal link between domestic credits, but economic growth has a positive effect on domestic credit in 5 developed and 10 developing countries. according to iqbal, ahmad and hussain (2012) research, savings and private sector credit have a significant impact on economic growth in pakistan. the authors argue that the credit distribution in different private sectors also has a significant impact on economic growth. korkmaz (2015) exploring the relationship between banks and credit growth, has found that domestic credits developed by banking sector have an impact on economic growth in 10 european union countries. were, nzomoi and rutto (2012) use sectorial indicators, examined the link between access to credit and sectorial economic performance (gdp) in kenya. the empirical results show that credit has a positive impact on the sector gdp. however, this level of exposure is lower when the other factors (such as labor or past economic performance) in sectors are controlled. however in the scientific literature it can be found opposite statements. krishnankutty (2011) examined the bank credits impact to economic growth in northeastern india in different segments: rural, suburban and urban. the study showed that overall banking credits do not have impact to the economic growth in northeastern india, but the results showed that there is a visible potential growth in the future. leitão (2012) analyzed the link between economic growth and bank lending in all european union countries (eu-27) from 1990 to 2010 years period. econometric studies have shown that the banks’ lending activities do not promote the country’s economic growth and credit growth may lead to weakness in the banking system, contributing to the financial crisis induction. takáts and upper (2013) suggest that bank lending to the private sector and economic growth basically are uncorrelated factors. this result is adequate for most developed economies recovering from the financial crisis. cetin (2016) studies have shown that private sector credit has a negative and significant impact on economic growth in 14 of the islamic conference mem evaluation of relationship between banks lending… 145 bers over the analysis period of 1990-2009 years. it was also established that domestic credit to the private sector also has a negative impact on turkey’s economic growth. koivu (2002) found that the volume of bank credit allocated to the private sector also does not contribute to economic growth in transition economies. many authors’ studies have confirmed the link between credit and economic activity around the world; in most cases it was found that lending activities have a positive impact on economic growth of the countries. however, there are studies claiming that the banks’ lending activities do not promote the country’s economic growth and that following factors are basically uncorrelated indicators. due to the different results of the author, it is important to determine the connection between lending activities and economies in the baltic countries. the research methodology and the course of the research process data for the research about the volumes of lending in the baltic countries were used from the bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014). data of gdp volumes were used from eurostat database (2015). all the analyzed data are quarterly. the study examines the relationship between banks’ lending activities (non-financial institutions and households loans amounts) and gdp volumes, but does not examine impact of other factors to gdp volumes. the analyzed period covers 2005–2013 years, because not all data for 2014 year can be found. in order to determine the relationship between lending activities and economies, the correlation coefficients are calculated and their significance is tested. one of the correlation coefficient is a pearson correlation coefficient which evaluates strength of the linear relationship and is calculated by the following formula (boguslauskas et al. 2009):     lending activities do not promote the country's economic growth and that following factors are basically uncorrelated indicators. due to the different results of the author, it is important to determine the connection between lending activities and economies in the baltic countries. the research methodology and the course of the research process data for the research about the volumes of lending in the baltic countries were used from the bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014). data of gdp volumes were used from eurostat database (2015). all the analyzed data are quarterly. the study examines the relationship between banks’ lending activities (non-financial institutions and households loans amounts) and gdp volumes, but does not examine impact of other factors to gdp volumes. the analyzed period covers 2005-2013 years, because not all data for 2014 year can be found. in order to determine the relationship between lending activities and economies, the correlation coefficients are calculated and their significance is tested. one of the correlation coefficient is a pearson correlation coefficient which evaluates strength of the linear relationship and is calculated by the following formula (boguslauskas et al. 2009): ��� � ������ � �̅ �� ��  ��            where: ����� ‐ the average of two variables multiplication;  �̅, �� ‐ respective variable average;  sx, sy  ‐ respective variable standard deviation.                                                      however, in the scientific literature it can be found that the lending activities and economies do not change at the same time and the backwardness between these indicators exists (lakstutiene, krusinskas & platenkoviene 2011; murty, sailaja & demissie 2012). therefore, in order to determine whether there is a lag in the baltic countries between these variables, granger causality test will be used for the study. the granger causality test shows how much of the current � can be explained by past values of � and then to see whether adding lagged values of � can improve the explanation. it is said that � is granger-caused by � if � helps to predict �, or equivalently if the coefficients on the lagged �’s are statistically significant. this test indicates which variable is determined by another variable and indicates whether the backwardness exists in the variables. in this test the eviews program performs bivariate regressions analysis: where:     lending activities do not promote the country's economic growth and that following factors are basically uncorrelated indicators. due to the different results of the author, it is important to determine the connection between lending activities and economies in the baltic countries. the research methodology and the course of the research process data for the research about the volumes of lending in the baltic countries were used from the bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014). data of gdp volumes were used from eurostat database (2015). all the analyzed data are quarterly. the study examines the relationship between banks’ lending activities (non-financial institutions and households loans amounts) and gdp volumes, but does not examine impact of other factors to gdp volumes. the analyzed period covers 2005-2013 years, because not all data for 2014 year can be found. in order to determine the relationship between lending activities and economies, the correlation coefficients are calculated and their significance is tested. one of the correlation coefficient is a pearson correlation coefficient which evaluates strength of the linear relationship and is calculated by the following formula (boguslauskas et al. 2009): ��� � ������ � �̅ �� ��  ��            where: ����� ‐ the average of two variables multiplication;  �̅, �� ‐ respective variable average;  sx, sy  ‐ respective variable standard deviation.                                                      however, in the scientific literature it can be found that the lending activities and economies do not change at the same time and the backwardness between these indicators exists (lakstutiene, krusinskas & platenkoviene 2011; murty, sailaja & demissie 2012). therefore, in order to determine whether there is a lag in the baltic countries between these variables, granger causality test will be used for the study. the granger causality test shows how much of the current � can be explained by past values of � and then to see whether adding lagged values of � can improve the explanation. it is said that � is granger-caused by � if � helps to predict �, or equivalently if the coefficients on the lagged �’s are statistically significant. this test indicates which variable is determined by another variable and indicates whether the backwardness exists in the variables. in this test the eviews program performs bivariate regressions analysis: – the average of two variables multiplication;     lending activities do not promote the country's economic growth and that following factors are basically uncorrelated indicators. due to the different results of the author, it is important to determine the connection between lending activities and economies in the baltic countries. the research methodology and the course of the research process data for the research about the volumes of lending in the baltic countries were used from the bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014). data of gdp volumes were used from eurostat database (2015). all the analyzed data are quarterly. the study examines the relationship between banks’ lending activities (non-financial institutions and households loans amounts) and gdp volumes, but does not examine impact of other factors to gdp volumes. the analyzed period covers 2005-2013 years, because not all data for 2014 year can be found. in order to determine the relationship between lending activities and economies, the correlation coefficients are calculated and their significance is tested. one of the correlation coefficient is a pearson correlation coefficient which evaluates strength of the linear relationship and is calculated by the following formula (boguslauskas et al. 2009): ��� � ������ � �̅ �� ��  ��            where: ����� ‐ the average of two variables multiplication;  �̅, �� ‐ respective variable average;  sx, sy  ‐ respective variable standard deviation.                                                      however, in the scientific literature it can be found that the lending activities and economies do not change at the same time and the backwardness between these indicators exists (lakstutiene, krusinskas & platenkoviene 2011; murty, sailaja & demissie 2012). therefore, in order to determine whether there is a lag in the baltic countries between these variables, granger causality test will be used for the study. the granger causality test shows how much of the current � can be explained by past values of � and then to see whether adding lagged values of � can improve the explanation. it is said that � is granger-caused by � if � helps to predict �, or equivalently if the coefficients on the lagged �’s are statistically significant. this test indicates which variable is determined by another variable and indicates whether the backwardness exists in the variables. in this test the eviews program performs bivariate regressions analysis: – respective variable average; sx, sy – respective variable standard deviation. however, in the scientific literature it can be found that the lending activities and economies do not change at the same time and the backwardness beaušrinė lakštutienė, aida barkauskaitė146 tween these indicators exists (lakstutiene, krusinskas & platenkoviene 2011; murty, sailaja & demissie 2012). therefore, in order to determine whether there is a lag in the baltic countries between these variables, granger causality test will be used for the study. the granger causality test shows how much of the current can be explained by past values of and then to see whether adding lagged values of x can improve the explanation. it is said that is granger-caused by x if x helps to predict y, or equivalently if the coefficients on the lagged’s are statistically significant. this test indicates which variable is determined by another variable and indicates whether the backwardness exists in the variables. in this test the eviews program performs bivariate regressions analysis:       calculated and found statistical significance f wald statistics is a general hypothesis of:   the first regressions the null hypothesis is that x does not granger cause y variation and the second regression, the y does not granger cause x variation. however, granger causality test is one of the time-series models, and data used in it should be stationary. stationary can be checked by a number of criteria, but in this case the selected criterion is augmented dickey-fuller test. when calculating this criterion eviews program performs adf test and submits its results. the analysis used 0.05 confidence level. the research methods are: systematic literature analysis, logical comparative and generalization analysis, correlation analysis and granger causality method. banks’ lending activities and the economies relationship evaluation in baltic countries changes in the country’s gdp are a very important indicator that reveals the country's economic situation and its trends (jasiene & capskas 2008). the variation of nominal gdp percent change in the baltic countries during the 2005-2013 years is presented in figure 1. in the analyzed gdp the seasonal influence is eliminated and it is estimated by number of working days, the gdp is at current prices. figure 1. gdp percentage change in the baltic countries for 2005-2013 years, percentage source: created by authors on the base of eurostat database (2015) data. analyzing the gdp indicator changes in the baltic countries it is seen that the entire analyzed period it had a tendency to grow, with the exception of a crisis in 2008-2009, ‐12% ‐7% ‐2% 3% 8% 13% 20 05 q 1 20 05 q 3 20 06 q 1 20 06 q 3 20 07 q 1 20 07 q 3 20 08 q 1 20 08 q 3 20 09 q 1 20 09 q 3 20 10 q 1 20 10 q 3 20 11 q 1 20 11 q 3 20 12 q 1 20 12 q 3 20 13 q 1 20 13 q 3pe rc en ta ge latvia lithuania estonia calculated and found statistical significance f wald statistics is a general hypothesis of:       calculated and found statistical significance f wald statistics is a general hypothesis of:   the first regressions the null hypothesis is that x does not granger cause y variation and the second regression, the y does not granger cause x variation. however, granger causality test is one of the time-series models, and data used in it should be stationary. stationary can be checked by a number of criteria, but in this case the selected criterion is augmented dickey-fuller test. when calculating this criterion eviews program performs adf test and submits its results. the analysis used 0.05 confidence level. the research methods are: systematic literature analysis, logical comparative and generalization analysis, correlation analysis and granger causality method. banks’ lending activities and the economies relationship evaluation in baltic countries changes in the country’s gdp are a very important indicator that reveals the country's economic situation and its trends (jasiene & capskas 2008). the variation of nominal gdp percent change in the baltic countries during the 2005-2013 years is presented in figure 1. in the analyzed gdp the seasonal influence is eliminated and it is estimated by number of working days, the gdp is at current prices. figure 1. gdp percentage change in the baltic countries for 2005-2013 years, percentage source: created by authors on the base of eurostat database (2015) data. analyzing the gdp indicator changes in the baltic countries it is seen that the entire analyzed period it had a tendency to grow, with the exception of a crisis in 2008-2009, ‐12% ‐7% ‐2% 3% 8% 13% 20 05 q 1 20 05 q 3 20 06 q 1 20 06 q 3 20 07 q 1 20 07 q 3 20 08 q 1 20 08 q 3 20 09 q 1 20 09 q 3 20 10 q 1 20 10 q 3 20 11 q 1 20 11 q 3 20 12 q 1 20 12 q 3 20 13 q 1 20 13 q 3pe rc en ta ge latvia lithuania estonia the first regressions the null hypothesis is that x does not granger cause y variation and the second regression, the y does not granger cause x variation. however, granger causality test is one of the time-series models, and data used in it should be stationary. stationary can be checked by a number of criteria, but in this case the selected criterion is augmented dickey-fuller test. when calculating this criterion eviews program performs adf test and submits its results. the analysis used 0.05 confidence level. the research methods are: systematic literature analysis, logical comparative and generalization analysis, correlation analysis and granger causality method. banks’ lending activities and the economies relationship evaluation in baltic countries changes in the country’s gdp are a very important indicator that reveals the country’s economic situation and its trends (jasiene & capskas 2008). the variation of nominal gdp percent change in the baltic countries during the 2005– evaluation of relationship between banks lending… 147 –2013 years is presented in figure 1. in the analyzed gdp the seasonal inf luence is eliminated and it is estimated by number of working days, the gdp is at current prices. figure 1. gdp percentage change in the baltic countries for 2005-2013 years, percentage       calculated and found statistical significance f wald statistics is a general hypothesis of:   the first regressions the null hypothesis is that x does not granger cause y variation and the second regression, the y does not granger cause x variation. however, granger causality test is one of the time-series models, and data used in it should be stationary. stationary can be checked by a number of criteria, but in this case the selected criterion is augmented dickey-fuller test. when calculating this criterion eviews program performs adf test and submits its results. the analysis used 0.05 confidence level. the research methods are: systematic literature analysis, logical comparative and generalization analysis, correlation analysis and granger causality method. banks’ lending activities and the economies relationship evaluation in baltic countries changes in the country’s gdp are a very important indicator that reveals the country's economic situation and its trends (jasiene & capskas 2008). the variation of nominal gdp percent change in the baltic countries during the 2005-2013 years is presented in figure 1. in the analyzed gdp the seasonal influence is eliminated and it is estimated by number of working days, the gdp is at current prices. figure 1. gdp percentage change in the baltic countries for 2005-2013 years, percentage source: created by authors on the base of eurostat database (2015) data. analyzing the gdp indicator changes in the baltic countries it is seen that the entire analyzed period it had a tendency to grow, with the exception of a crisis in 2008-2009, ‐12% ‐7% ‐2% 3% 8% 13% 20 05 q 1 20 05 q 3 20 06 q 1 20 06 q 3 20 07 q 1 20 07 q 3 20 08 q 1 20 08 q 3 20 09 q 1 20 09 q 3 20 10 q 1 20 10 q 3 20 11 q 1 20 11 q 3 20 12 q 1 20 12 q 3 20 13 q 1 20 13 q 3pe rc en ta ge latvia lithuania estonia s o u r c e : created by authors on the base of eurostat database (2015) data. analyzing the gdp indicator changes in the baltic countries it is seen that the entire analyzed period it had a tendency to grow, with the exception of a crisis in 2008–2009, when the index decline was recorded in the baltic countries. mostly economic crisis has affected latvian gdp volume, compared 2008 year to 2010 year, gdp in latvia fell by 23.55 percent, when in lithuania 14.22 percent and in estonia 15.02 percent. however, since 2010 until the end of 2013 gdp volumes have a tendency to grow in all baltic countries. after the economic crisis lithuania managed to recover firstly, comparing the volume of gdp in the first quarter of 2010 with the fourth quarter of 2009, gdp volume has increased by 5.17 per cent., when in latvia respectively only 0.98 percent. comparing absolute gdp amounts during 2005–2013 years the largest gdp volumes were in lithuania, latvia by the volume of the gdp was the second of the baltic countries, and lowest gdp throughout the analyzed period was established in estonia. in order to determine the volume of lending activities in the baltic countries there will be examined loans stocks volumes in euros, distinguishing households and non-financial corporations. the loan amount covers loans granted to residents and non-residents, including loans granted in various currencies – the total amount of loans granted to households and non-financial corporations. aušrinė lakštutienė, aida barkauskaitė148 non-financial corporations are private and public entities whose main activity is not financial intermediation activities but the production of goods and non-financial services in order to earn a profit. household sector includes individuals or groups of individuals (methodological notes 2014). figure 2 illustrates non-financial corporate loan volume changes in the baltic countries. figure 2. the total amount of loans to non-financial corporations changes in baltic countries for 2005–2013, percentage     when the index decline was recorded in the baltic countries. mostly economic crisis has affected latvian gdp volume, compared 2008 year to 2010 year, gdp in latvia fell by 23.55 percent, when in lithuania 14.22 percent and in estonia 15.02 percent. however, since 2010 until the end of 2013 gdp volumes have a tendency to grow in all baltic countries. after the economic crisis lithuania managed to recover firstly, comparing the volume of gdp in the first quarter of 2010 with the fourth quarter of 2009, gdp volume has increased by 5.17 per cent., when in latvia respectively only 0.98 percent. comparing absolute gdp amounts during 2005-2013 years the largest gdp volumes were in lithuania, latvia by the volume of the gdp was the second of the baltic countries, and lowest gdp throughout the analyzed period was established in estonia. in order to determine the volume of lending activities in the baltic countries there will be examined loans stocks volumes in euros, distinguishing households and non-financial corporations. the loan amount covers loans granted to residents and non-residents, including loans granted in various currencies the total amount of loans granted to households and non-financial corporations. non-financial corporations are private and public entities whose main activity is not financial intermediation activities but the production of goods and non-financial services in order to earn a profit. household sector includes individuals or groups of individuals (methodological notes, 2014). figure 2 illustrates non-financial corporate loan volume changes in the baltic countries. figure 2. the total amount of loans to non-financial corporations changes in baltic countries for 2005-2013, percentage source: created by authors on the base of bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014) data. according to the overall amount of loans to non-financial corporations, the most part in analyzed 2005-2013 years period, the amount of loans granted in latvia were the biggest ‐7% 3% 13% 20 05 q 1 20 05 q 3 20 06 q 1 20 06 q 3 20 07 q 1 20 07 q 3 20 08 q 1 20 08 q 3 20 09 q 1 20 09 q 3 20 10 q 1 20 10 q 3 20 11 q 1 20 11 q 3 20 12 q 1 20 12 q 3 20 13 q 1 20 13 q 3 pe rc en ta ge latvia lithuania estonia s o u r c e : created by authors on the base of bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014) data. according to the overall amount of loans to non-financial corporations, the most part in analyzed 2005–2013 years period, the amount of loans granted in latvia were the biggest and the smallest volume of the respective loans from the baltic countries were in estonia. the largest non-financial corporate loan volume growth was recorded in 2005–2006 years in all the baltic countries, when the average loan volume changes over the quarter was 12.59 percent in estonia, in latvia 10,36 percent., while in lithuania 9.99 percent. however, there were such cases, when during 2005–2006 years; in one quarter volume of loans to non-financial corporations in estonia grew by 15.72 percent, in latvia 12.75 percent and in lithuania – 12.91 percent. these drastic loan growths were determined by situation of economic improvement in the baltic countries, which encouraged non-financial corporations to expand their business by incurring liabilities to banks. in 2009 the economic crisis affected the baltic countries economies, the total amount of non-financial corporations loans began to decline. the largest decreases of loans amount in the baltic countries were recorded in 2010–2012, when within one quarter volume of loans in estonia declined by -3.47 percent, in latvia decreased by -5.13 percent and in lithuania fell -5.92 percent. evaluating overall loan volume change over the period evaluation of relationship between banks lending… 149 of 2010 first quarter to 2012 second quarter, loan volumes had decreased very significantly, in latvia -20.94 percent, in lithuania fell -15.60 percent and in estonia the volume of loans to non-financial corporations decreased by -14.10. these loans changes were involved with corporations financial position deterioration associated to economic crisis, which did not encourage firms to take on new liabilities to banks. also, almost all banks have tightened terms of loans and credit lines to enterprises, tighten requirements for collateral. the changes of household loans in the baltic countries during the period of 2005-2013 years are presented in figure 3. figure 3. the total amount of loans to households changes in baltic countries for 2005–2013, percentage     and the smallest volume of the respective loans from the baltic countries were in estonia. the largest non-financial corporate loan volume growth was recorded in 2005-2006 years in all the baltic countries, when the average loan volume changes over the quarter was 12.59 percent in estonia , in latvia 10,36 percent., while in lithuania 9.99 percent. however, there were such cases, when during 2005-2006 years; in one quarter volume of loans to non-financial corporations in estonia grew by 15.72 percent, in latvia 12.75 percent and in lithuania – 12.91 percent. these drastic loan growths were determined by situation of economic improvement in the baltic countries, which encouraged nonfinancial corporations to expand their business by incurring liabilities to banks. in 2009 the economic crisis affected the baltic countries economies, the total amount of non-financial corporations loans began to decline. the largest decreases of loans amount in the baltic countries were recorded in 2010-2012, when within one quarter volume of loans in estonia declined by -3.47 percent, in latvia decreased by -5.13 percent and in lithuania fell -5.92 percent. evaluating overall loan volume change over the period of 2010 first quarter to 2012 second quarter, loan volumes had decreased very significantly, in latvia -20.94 percent, in lithuania fell -15.60 percent and in estonia the volume of loans to nonfinancial corporations decreased by -14.10. these loans changes were involved with corporations financial position deterioration associated to economic crisis, which did not encourage firms to take on new liabilities to banks. also, almost all banks have tightened terms of loans and credit lines to enterprises, tighten requirements for collateral. the changes of household loans in the baltic countries during the period of 2005-2013 years are presented in figure 3. figure 3. the total amount of loans to households changes in baltic countries for 20052013, percentage source: created by authors on the base of bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014) data. ‐10% ‐5% 0% 5% 10% 15% 20% 20 05 q 1 20 05 q 3 20 06 q 1 20 06 q 3 20 07 q 1 20 07 q 3 20 08 q 1 20 08 q 3 20 09 q 1 20 09 q 3 20 10 q 1 20 10 q 3 20 11 q 1 20 11 q 3 20 12 q 1 20 12 q 3 20 13 q 1 20 13 q 3 pe rc en ta ge latvia lithuania estonia s o u r c e : created by authors on the base of bank of lithuania (2014), the bank of latvia (2015) and the bank of estonia (2014) data. examining the total amount of household loans it can be seen that most of the analyzed period, largest amount of loans was in latvia, but in recent 2011– –2013 years mostly loans to household were given in lithuania. the biggest growth in household loans in the baltic countries was recorded before a crisis in 2005–2006, when volume of loans in a quarter grew at an average of 15.76 percent in latvia, 15.90 percent in lithuania and 13.62 percent in estonia. the significant growth in loans to household continued in lithuania in 2007 (every quarter grew at average 12.5 percent.), but in latvia and estonia, the loan growth in 2007 year was slower. these changes can be explained by economic growth in countries, preferential bank loan terms, which led that almost every household was able to get a loan from the bank. however economic crisis started in 2009 affected the volumes of loans not only to non-financial corporations, aušrinė lakštutienė, aida barkauskaitė150 but also to household. during the period of 2009–2012 years, volume of loans granted to household in a quarter have average decreased by -1.94 percent in latvia, by -1.03 percent in lithuania and by -0.69 percent in estonia. it may be associated to the economic crisis, the household labor loss, inability to meet its debt liabilities, as well as the rise in interest rates (compared to their pre-crisis level). after all these household and non-financial corporations inabilities to repay the loans, banks have also tighten risk assessment of the borrower’s financial condition requirements. to sum up, the economic crisis has affected both non-financial corporations and household volumes of loans, the downturn of lending volume started in all the baltic countries. although since 2010 the economic growth was recorded in all the baltic countries, both non-financial corporations’ and households’ amounts of stock loans had a tendency to decline. in order to determine whether the banks credit activities and economies are linked with linear relationship and what exactly the strength of their relationship is, the correlation analysis was used. table 1 shows the calculated linear correlation coefficients between the baltic countries gdp and non-financial corporations and households lending volumes. table 1. the linear correlation between lending activities and economies (gdp) in baltic countries country non-financial corporations households tcritical correlation coefficient tobserved correlation coefficient tobserved lithuania (gdp) 0.6368 4.8162 0.7492 6.5957 2.029latvia (gdp) 0.6237 4.6524 0.6609 5.1346 estonia (gdp) 0.6394 4.8487 0.7068 5.8259 s o u r c e : created by authors. calculated correlation coefficients showed that in all three baltic countries between economies and non-financial corporations lending activities medium positive strength dependencies exist, because all correlation coefficients were greater than 0.5. among households lending activities and economies in lithuania and estonia strong positive dependencies exist (correlation coefficients are higher than 0.7) and in latvia respectively medium strength pos evaluation of relationship between banks lending… 151 itive relationship. all correlation coefficients are significant, because their tobserved> tcritical, their calculated t-test values are greater than determined t- crit ical value. thus, the obtained results show that the lending and economic activities in all the baltic countries have linear medium and strong positive relationships. however, in scientific literature it is argued that between lending activities and economies the lag exist, these indicators do not change at the same time. also the correlation coefficient does not indicate which variable is independent and which depends on the other change. therefore, in order to evaluate these aspects and according to other researches granger causality test was selected. granger method assumes linear time-series model and in order to adapt this method the data must be stationary. the stationary of data was checked by augmented dickey-fuller test. the test showed that absolute gdp and loan amounts sizes data are not stationary. therefore, the data of gdp volumes and the amounts of loans were calculated as the 1st order differences. with new data the augmented dickey-fuller stationary test was performed, but the parts of the data were still not stationary, so the data were transformed as 2nd order differences. summarized stationary test results with the 2nd order differences data are presented in table 2. table 2. stationary test results by augmented dickey-fuller test with 2nd order differences data gdp non-financial corporations households null hypothesis: x has a unit root t-statistic p-value t-statistic p-value t-statistic p-value lithuania -7.9613 0.0000 -4.5047 0.0011 -5.1349 0.0002 latvia -5.4198 0.0001 -5.4764 0.0001 -4.0887 0.0032 estonia -5.7469 0.0000 -9.0637 0.0000 -5.3088 0.0001 s o u r c e : created by authors. as all the calculated p-values are less than 0.05, the null hypothesis should be rejected, which means that all data are stationary and granger causality test could be performed. performing the granger causality test in all the cases, x is identified as appropriate country gdp, and y is households’ or non-financial corporations’ loans. there was used 2nd order differences data of gdp and loan volume, separately assessing the relationship between non-financial corporaaušrinė lakštutienė, aida barkauskaitė152 tions and gdp, and between households and gdp indicators. obtained results using the granger method in the baltic countries, where delays (lags) number is 1 (in this case a quarter) are presented in table 3. table 3. granger causality test results between lending activities and economies in baltic countries, when the number of lags is 1 number of lags 1 non-financial corporations households null hypothesis observations f-statistic p-value f-statistic p-value li th ua ni a x does not granger cause y 34 1.5564 0.2215 3.9824 0.0548 y does not granger cause x 1.5730 0.2192 0.0924 0.7632 x does not granger cause y 2.8806 0.0997 5.4447 0.0263 la tv ia y does not granger cause x 0.0053 0.9425 0.4966 0.4863 x does not granger cause y 0.8940 0.3517 3.5883 0.0675 es to ni a y does not granger cause x 0.0319 0.8595 1.5624 0.2207 s o u r c e : created by authors. calculated p-values in lithuania of both non-financial corporations and households were higher than 0.05, so all the null hypothesis should be adopted, which means that at one period lag lending activities and economy in lithuania does not affect each other. the same situation is in estonia, the p-values are higher than 0.05, which means that between lending activities and economy the relationship evaluating one period of lag does not exist. identified pvalue between non-financial corporations’ loans and gdp showed that in latvia dependence between these indicators does not exist. but the relationship between the economy and household credit activity in latvia was confirmed, as the estimated p-value was 0.026 <0.05, this means that the null hypothesis should be rejected. therefore the gdp affects household loans volume in latvia with one period lag, which means that the gdp changes affects the volume of household loans the next quarter in latvia. the obtained results when number of lag from 1 period is change to 2 periods (in this case half-year) are presented in table 4. in estonia and lithuania cases when the number of lags is 2, estimated p-values were higher than 0.05, evaluation of relationship between banks lending… 153 which means that in all cases the relationships between lending activities and economies with two periods of lags does not exist. in latvia when the number of lags is two, there was found that between gdp and loans to non-financial corporations the relationship exists, because the estimated p-value 0.015<0.05, so the null hypothesis is rejected. this means that gdp with two periods of lags, inf luence the volume of loans to non-financial corporations in latvia. with a lag of two periods the relationship between gdp and household loans in latvia was not found, because the estimated p-value was greater than 0.05. table 4. granger causality test results between lending activities and economies in baltic countries, when the number of lags is 2 number of lags 2 non-financial corporations households null hypothesis observations f-statistic p-value f-statistic p-value li th ua ni a x does not granger cause y 33 2.5447 0.0965 1.9647 0.1591 y does not granger cause x 1.1001 0.3468 0.4164 0.6634 x does not granger cause y 4.9292 0.0147 2.4598 0.1037 la tv ia y does not granger cause x 0.2087 0.8129 0.6555 0.5270 x does not granger cause y 0.4958 0.6143 1.4545 0.2506 es to ni a y does not granger cause x 0.2106 0.8114 1.4665 0.2479 s o u r c e : created by authors. final remarks and conclusions theoretical bank lending activities and economies relationship analysis has shown that many authors’ studies have confirmed the relationship between lending activities and economies in the various countries of the world. the majority of scientific studies have shown that lending activities have a positive impact on economic growth, but some authors have found the opposite connection – that economic growth has a positive impact on domestic credits. however, there are studies which found out that the lending activities of the banks do not contribute to the country’s economic growth. aušrinė lakštutienė, aida barkauskaitė154 lending activities (non-financial corporations and households volume of loans) and the economies (gross domestic product) trends during the 2005– –2013 years were similar in all three baltic countries. the largest growth of loans amount was identified in the pre-crisis period of 2005–2006 years. the economic crisis has affected both households and non-financial corporation loan volumes; they started to decline in all the baltic countries. however in 2010–2012 years the gross domestic product volume tended to rise in all the baltic countries, but households and non-financial corporations’ volumes of loans had a tendency to decline. this can be attributed to conditions tightening which were adopted, banks have tightened lending conditions for businesses, tightened risk and the borrower’s financial condition assessment requirements, so to both households and non-financial corporations it was more difficult to get a loan. correlation analysis showed that the credit activities and economies in all the baltic countries have moderate or strong positive linear relationships, but stronger dependence in all countries was identified among household loans and gdp, than the volume of loans to non-financial corporations and gdp. granger causality test showed that with one period lag the relationship between household lending activities and gdp is only in latvia – gdp affects household loans variation in latvia. with two periods of lags, gdp has an impact on the volume of loans to non-financial corporations, but only in latvia. the relationship between credit activities and economies, with one period and two periods of lags, was not found in lithuania and estonia. these results indicate that in order to predict the latvian households and non-financial corporate lending volumes, it is possible to use the data of gdp.  references bank of estonia (2015). bank of estonia statistics. http://statistika.eestipank. ee/?lng=en#listmenu/1172/treemenu/finantssektor/147/650 (accessed: 02.05. 2015). bank of latvia (2015). bank of latvia statistics archive, https://www.bank.lv/en/statistics/monetary-statistics/mfi-balance-sheet-and-monetary-statistics/7333-tmp (accessed: 02.05.2015). bank of lithuania (2014). bank of lithuania statistics. http://www.lb.lt/stat_pub/statbrowser.aspx?group=7279 (accessed: 02.05.2015). boguslauskas, v., bliekiene, r., grondskis, g., & maksvytis, l. (2009). econometrics. regression models, kaunas: technologija. evaluation of relationship between banks lending… 155 cetin, h. (2016). the relationship between turkey’s financial indicators and economic growth rates. journal of economics, business and management, vol. 4, no. 1, pp. 36- 39. eurostat (2015). eurostat database. http://ec.europa.eu/eurostat/data/database, (accessed: 29.04.2015). gozgor, g. (2015). causal relation between economic growth and domestic credit in the economic globalization: evidence from the hatemi-j’s test. the journal of international trade & economic development, vol. 24, no. 3, pp. 395-408. iqbal, m.z., ahmad, n., & hussain, z. (2012). impact of savings and credit on economic growth in pakistan, pakistan journal of social sciences (pjss), vol. 32, no. 1, pp. 39- 48. jasiene, m., & capskas, g. (2008). investigation of dynamics and its factors of interest rates in lithuania in 1994-2006, business: theory and practise, 9(1), pp. 33-44. koivu, t. (2002). do efficient banking sectors accelerate economic growth in transition countries?, bofit discussion papers, bank of finland, institute for economies in transition, no. 14, pp. 1-24. korkmaz, s. (2015). impact of bank credits on economic growth and inf lation. journal of applied finance & banking, vol. 5, no. 1, pp. 57-69. krishnankutty, r. (2011). role of banks credit in economic growth: a study with special reference to north east india. the economic research guardian, vol. 1(2), pp. 60-71. lakstutiene a., krusinskas, r., & platenkoviene, j. (2011). economic cycle and credit volume interaction: case of lithuania, engineering economics, no. 22(5), pp. 468-476. leitão, n.c. (2012). bank credit and economic growth: a dynamic panel data analysis, the economic researrch guarrdian, vol. 2(2), pp. 256-267. mamman, a., & hashim, y.a. (2014). impact of bank lending on economic growth in nigeria. research journal of finance and accounting, vol. 5, no. 18, pp. 174-182. methodological notes (2014). definitions of non-financial corporations and households, https://www.lb.lt/notes (accessed: 22.04.2015). murty, k.s., sailaja, k., & demissie, w.m. (2012). the long-run impact of bank credit on economic growth in ethiopia: evidence from the johansen’s multivariate cointegration approach, european journal of business and management, vol. 4, no. 14, pp. 20- 33. oluitan, r.o. (2012). bank credit and economic growth: evidence from nigeria. international business and management, vol. 5, no. 2, pp. 102-110. onuorah, a. chi-chi & ozurumba, b.a. (2013). bank credits: an aid to economic growth in nigeria, information and knowledge management, vol.3, no.3, pp. 41-50. ramanauskas, t. (2005). assessment of bank credit growth from macroeconomic perspective, pinigų studijos 2005/3, pp. 78-97. takáts, e., & upper, c. (2013). credit and growth after financial crises, bis working papers, bank for international settlements, monetary and economic department, no. 416, pp. 1-24. ugoani, j.n.n. (2013). power of bank credit on economic growth: a nigerian perspective. international journal of financial economics, vol. 1, no. 3, pp. 93-102. aušrinė lakštutienė, aida barkauskaitė156 were, m., nzomoi, j., & rutto, n. (2012). assessing the impact of private sector credit on economic performance: evidence from sectoral panel data for kenya. international journal of economics and finance, vol. 4, no. 3, pp. 182-190. yakubu, z., & affoi, a.y. (2014). an analysis of commercial banks’ credit on economic growth in nigeria. current research journal of economic theory, no. 6(2), pp. 11-15. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 1 date of submission: february 15, 2018; date of acceptance: may 11, 2018. * contact information: jpawlowski@umk.pl, department of finance management, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone number: +48 511 749 195; orcid id: http://orcid.org/0000-0002-5021-8871. pawłowski, j. (2018). individual investors on the financial market in poland. copernican journal of finance & accounting, 7(1), 51–66. http://dx.doi.org/10.12775/cjfa.2018.004 jarosław pawłowski* nicolaus copernicus university in toruń individual investors on the financial market in poland keywords: investments, financial instruments, individual investors. j e l classification: g11. abstract: the inf luence of individual investors on the functioning of the financial market makes them a very important group of its participants. the observed growth of the financial market in poland generates more investment opportunities. considering the changes that occur in this field, the issue of financial investments made by individual investors in poland is quite interesting and important. the research objective of the paper is the analysis of investments of individual investors in poland in terms of their subjects. the research method applied: descriptive, comparative, review of subject literature and analysis of third party research results which were carried out by the individual investors association in poland and narodowy bank polski. moreover, analysis of selected findings of author’s individual survey amongst private investors were the main part of this article. the conducted analysis has allowed to formulate a number of conclusions. one of the major conclusions indicated that stocks were the main subject of investments made by individual investors in the recent years. furthermore, increased importance of bonds has been determined, but the interest in bank deposits was lower. nevertheless, bank deposits have remained the main financial assets of households in poland. jarosław pawłowski52  introduction financial markets have been growing intensively in the recent years, both in terms of the increase in the value of concluded transactions and the occurrence of new financial instruments. as a result of the transformations, in particular facilitating the access to the markets, as well as extending the portfolio of the available instruments, a significant growth in investment opportunities can be observed. it concerns not only investments based on the financial market, but also investments in real property and alternative investments (pełka & mikita, 2009, pp. 15–20). in the current economic situation, individual investors have an important role in the functioning of financial markets. they not only provide capital in significant amounts, but also improve the trading liquidity on those markets (kaniel, saar & titman, 2008, pp. 23–24). in addition, the importance of their investments in the social aspect of economy cannot be underestimated (dziawgo, 2004, p. 10). thus, despite the dominant position of institutional investors (fich, harford & tran, 2015, p. 22), the importance of individual investors is an interesting issue, both from the practical and the theoretical point of view. the research methodology and the course of the research process in connection with the validity and significance of the questions outlined above, the subject of this paper is the issue of financial investments made by individual investors in poland. the major goal of this paper is to analyse the investments of individual investors in poland in terms of their subject. in this regard, the following methods of analysis have been assumed: descriptive, comparative, review of subject literature, analysis of third party research results and analysis of selected results of the individual survey. the essential part of this study shall be the presentation and description of the selected results of a survey conducted by the author in a group of individual investors in poland. individual investors on the financial market in poland 53 individual investors as participants of financial markets the common definition of the financial market refers to all transactions consisted in exchanging (dziawgo, 2007, p. 12): a) money for a financial instrument, b) a financial instrument for money, c) a financial instrument for a financial instrument. the dynamic growth of financial markets observed in the recent years is determined by a number of processes concerning the economy and the society. these include (matysek-jędrych, 2008, p. 35): a) financial liberalisation, b) financial deregulation, c) international integration, d) financial globalisation, e) technological progress. as a result of the ongoing transformations, the contemporary financial market has become very extensive, both in terms of the volume of transactions and the number of participants, and also in terms of complexity and size of the catalogue of traded financial instruments. there are many various classifications of financial instruments. one of the most commonly used is the distinction of financial instruments based on their specific nature in relation to the structure of the financial market (dębski, 2007, p. 21). it is presented in diagram 1. a wide selection of available instruments provides investors with better capabilities in creating the investment portfolio that better meets their expectations. the major participants of the financial market are investors. it is a group of entities controlling surplus capital that may be allocated in order to increase its value. that method of categorisation of investors makes this group a varied community. in this respect, many methods of classification are used (banaszczak-soroka, 2016, pp. 13–18). the basic distinction is made between individual (private) investors and institutional (professional) investors. individual investors are entities who make investment decisions personally, without the participation professional agents. moreover, they act on their own account and do not deal with such activity professionally. despite the fact that the subject literature does not provide a clear explanation of this term, it usually refers to natural persons investing their savings in various assets (dziawgo, 2004, p. 46). [54] d ia gr am 1 . t he s tr uc tu re o f t he fi na nc ia l m ar ke t d ue to th e sp ec if ic n at ur e of th e fi na nc ia l i ns tr um en t d ia gr am 1 . t he st ru ctu re of th e f in an cia l m ar ke t d ue to th e s pe cif ic na tu re of th e f in an cia l in str um en t so ur ce : o wn st ud y b as ed on : d ęb sk i, 2 00 7, p. 21 ; d zia wg o, 20 07 , p . 1 6; ja ju ga , ja jug a, 20 06 , p p. 30 –3 6; ja ju ga , 2 00 7, p. 14 9; m ro cz ko ws ka , m ro cz ko ws ki, 2 00 5, pp . 7 3, 15 7. m on ey m ar ke t ca pi ta l m ar ke t d er iv at iv es m ar ke t d ep os it – c re di t m ar ke t d ep os it s/ lo an s in te rb an k bi lls bi lls o f e xc ha ng e d ep os it ce rt ifi ca te s cu rr en cy m ar ke t fi n a n ci a l m a rk et ch ec ks ba nk er s’ a cc ep ta nc e sh or tte rm b an k de po si ts /l oa ns /c re di ts in ve st m en t c er ti fica te s st oc ks bo nd s d ep os it or y re ce ip ts ri gh ts is su e ri gh ts to s ha re s u ni ts in in ve st m en t fu nd s bi lls o f e xc ha ng e st oc k ce rt ifi ca te s fo rw ar ds sw ap s o pt io ns fu tu re s ba nk d ep os it s ba nk lo an s ba nk c re di ts u sd g bp ch f jp y o th er eu r m or tg ag e bo nd s s o u r c e : o w n st ud y ba se d on : d ęb sk i, 20 07 , p . 2 1; d zi aw go , 2 00 7, p . 1 6; ja ju ga & ja ju ga , 2 00 6, p p. 3 0– 36 ; j aj ug a, 2 00 7, p . 1 49 ; m ro cz ko w sk a & m ro czk ow sk i, 20 05 , p p. 7 3, 1 57 . individual investors on the financial market in poland 55 the specific nature of the term “individual investors” causes a great diversification of entities to which it refers. these differences concern, among others, the attitude towards risk, investment goals, wealth, scale of fulfilled undertakings, knowledge and experience, education, market situation assessment capability, assumed time limit of investment. the listed factors inf luence market behaviour of individual investors, determining the selection of investment strategy and the structure of the investment portfolio (cichorska, 2015, p. 19). the outcome of the research process and conclusions this part of the paper shall present the analysis of selected results of the thirdparty research as well as the author’s survey concerning the examined issue. investments of individual investors in poland – analysis of third-party research results the evolution of the financial market, observed in poland since the 1990s, confirms the significant role that individual investors have in its development. for that reason, in the recent years investment decisions of that group of participants have been the subject of numerous analyses. this part of the paper will explain certain outcomes of third-party research concerning the structure of the investments made by individual investors in poland. an interesting and important study encompassing all issues described herein is the annual national study of activity of individual investors in poland. it is performed by the individual investors association (stowarzyszenie inwestorów indywidualnych, sii). due to its regular character and the size of the analysed group, it is a valuable analytical and reference material. diagrams 2, 3, 4, and 5 present the results of the research obtained in 2010, 2012, 2014 and 2016 respectively. [56] diagram 2. the structure of individual investors’ financial investments in poland in 2010 the outcome of the research process and conclusions this part of the paper shall present the analysis of selected results of the third-party research as well as the author’s survey concerning the examined issue. investments of individual investors in poland – analysis of third-party research results the evolution of the financial market, observed in poland since the 1990s, confirms the significant role that individual investors have in its development. for that reason, in the recent years investment decisions of that group of participants have been the subject of numerous analyses. this part of the paper will explain certain outcomes of third-party research concerning the structure of the investments made by individual investors in poland. an interesting and important study encompassing all issues described herein is the annual national study of activity of individual investors in poland. it is performed by the individual investors association (stowarzyszenie inwestorów indywidualnych, sii). due to its regular character and the size of the analysed group, it is a valuable analytical and reference material. diagrams 2, 3, 4, and 5 present the results of the research obtained in 2010, 2012, 2014 and 2016 respectively. diagram 2. the structure of individual investors' financial investments in poland in 2010 * in the analysed question respondents (n=3024) could choose more than one answer. source: obi, 2010. diagram 3. the structure of individual investors' financial investments in poland in 2012 * in the analysed question respondents (n=6009) could choose more than one answer. source: obi, 2012. diagram 4. the structure of individual investors' financial investments in poland in 2014 89.0% 37.6% 31.5% 16.6% 13.0% 12.9% 9.1% 0% 20% 40% 60% 80% 100% stocks wse bank deposits units in investments funds derivatives stocks newconnect currency bonds 85.0% 36.3% 28.4% 17.9% 15.6% 13.2% 8.9% 7.3% 7.9% 4.5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% stocks wse bank deposits units in investments funds stocks newconnect currency derivatives investments policies real estate bonds structured products * in the analysed question respondents (n=3024) could choose more than one answer. s o u r c e : obi, 2010. diagram 3. the structure of individual investors’ financial investments in poland in 2012 the outcome of the research process and conclusions this part of the paper shall present the analysis of selected results of the third-party research as well as the author’s survey concerning the examined issue. investments of individual investors in poland – analysis of third-party research results the evolution of the financial market, observed in poland since the 1990s, confirms the significant role that individual investors have in its development. for that reason, in the recent years investment decisions of that group of participants have been the subject of numerous analyses. this part of the paper will explain certain outcomes of third-party research concerning the structure of the investments made by individual investors in poland. an interesting and important study encompassing all issues described herein is the annual national study of activity of individual investors in poland. it is performed by the individual investors association (stowarzyszenie inwestorów indywidualnych, sii). due to its regular character and the size of the analysed group, it is a valuable analytical and reference material. diagrams 2, 3, 4, and 5 present the results of the research obtained in 2010, 2012, 2014 and 2016 respectively. diagram 2. the structure of individual investors' financial investments in poland in 2010 * in the analysed question respondents (n=3024) could choose more than one answer. source: obi, 2010. diagram 3. the structure of individual investors' financial investments in poland in 2012 * in the analysed question respondents (n=6009) could choose more than one answer. source: obi, 2012. diagram 4. the structure of individual investors' financial investments in poland in 2014 89.0% 37.6% 31.5% 16.6% 13.0% 12.9% 9.1% 0% 20% 40% 60% 80% 100% stocks wse bank deposits units in investments funds derivatives stocks newconnect currency bonds 85.0% 36.3% 28.4% 17.9% 15.6% 13.2% 8.9% 7.3% 7.9% 4.5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% stocks wse bank deposits units in investments funds stocks newconnect currency derivatives investments policies real estate bonds structured products * in the analysed question respondents (n=6009) could choose more than one answer. s o u r c e : obi, 2012. individual investors on the financial market in poland 57 diagram 4. the structure of individual investors’ financial investments in poland in 2014 diagram 4. the structure of individual investors' financial investments in poland in 2014 * in the analysed question respondents (n=7032) could choose more than one answer. source: obi, 2014. diagram 5. the structure of individual investors' financial investments in poland in 2016 * in the analysed question respondents (n=5012) could choose more than one answer. source: obi, 2016. the results of analyses performed by the sii from 2010 to 2016 allow to formulate a number of conclusions concerning the structure of financial investments made by individual investors in poland during that period. 1. the major subject of investments in the analysed period were stocks. the majority of the respondents declared commitment in this type of investments. in 2010, approx. 89.0% of the surveyed reported investments made in stocks listed on the warsaw stock exchange. in the following years, the interest in that type of shares slightly decreased. in 2016, the percentage of respondents who invested in those stocks was approx. 80.6%. additionally, several percent of the surveyed were interested in shares traded on the newconnect market. they were gaining in popularity during the analysed period. 2. bank deposits were the next most popular subject of investments in 2010 among individual investors (37.6%). in the analysed period, their share in the investors’ portfolios was gradually decreasing. in 2016 it was only approx. 28.6%. one of the causes of such decrease was considerable reduction of interest rates of that type of instruments. 3. a noticeable increase in individual investors’ interest in bonds occurred in the analysed period. in 2010, approx. 9.1% of the surveyed reported investments in this type of assets. in 2016 this percentage was higher, reaching approx. 11.9%. it can be reasonably concluded that the growth of the stock market of bonds in poland, and also relatively low interest rates of bank deposits, were the major causes of the observed situation. 84.5% 30.3% 29.5% 16.0% 12.2% 11.7% 11.4% 8.5% 7.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% stocks wse bank deposits units in investments funds stocks newconnect derivatives currency bonds investments policies real estate 80.6% 28.6% 28.3% 19.0% 11.9% 11.8% 9.5% 8.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% stocks wse bank deposits units in investments funds stocks newconnect bonds currency derivatives real estate * in the analysed question respondents (n=7032) could choose more than one answer. s o u r c e : obi, 2014. diagram 5. the structure of individual investors’ financial investments in poland in 2016 diagram 4. the structure of individual investors' financial investments in poland in 2014 * in the analysed question respondents (n=7032) could choose more than one answer. source: obi, 2014. diagram 5. the structure of individual investors' financial investments in poland in 2016 * in the analysed question respondents (n=5012) could choose more than one answer. source: obi, 2016. the results of analyses performed by the sii from 2010 to 2016 allow to formulate a number of conclusions concerning the structure of financial investments made by individual investors in poland during that period. 1. the major subject of investments in the analysed period were stocks. the majority of the respondents declared commitment in this type of investments. in 2010, approx. 89.0% of the surveyed reported investments made in stocks listed on the warsaw stock exchange. in the following years, the interest in that type of shares slightly decreased. in 2016, the percentage of respondents who invested in those stocks was approx. 80.6%. additionally, several percent of the surveyed were interested in shares traded on the newconnect market. they were gaining in popularity during the analysed period. 2. bank deposits were the next most popular subject of investments in 2010 among individual investors (37.6%). in the analysed period, their share in the investors’ portfolios was gradually decreasing. in 2016 it was only approx. 28.6%. one of the causes of such decrease was considerable reduction of interest rates of that type of instruments. 3. a noticeable increase in individual investors’ interest in bonds occurred in the analysed period. in 2010, approx. 9.1% of the surveyed reported investments in this type of assets. in 2016 this percentage was higher, reaching approx. 11.9%. it can be reasonably concluded that the growth of the stock market of bonds in poland, and also relatively low interest rates of bank deposits, were the major causes of the observed situation. 84.5% 30.3% 29.5% 16.0% 12.2% 11.7% 11.4% 8.5% 7.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% stocks wse bank deposits units in investments funds stocks newconnect derivatives currency bonds investments policies real estate 80.6% 28.6% 28.3% 19.0% 11.9% 11.8% 9.5% 8.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% stocks wse bank deposits units in investments funds stocks newconnect bonds currency derivatives real estate * in the analysed question respondents (n=5012) could choose more than one answer. s o u r c e : obi, 2016. the results of analyses performed by the sii from 2010 to 2016 allow to formulate a number of conclusions concerning the structure of financial investments made by individual investors in poland during that period. 1. the major subject of investments in the analysed period were stocks. the majority of the respondents declared commitment in this type of investments. jarosław pawłowski58 in 2010, approx. 89.0% of the surveyed reported investments made in stocks listed on the warsaw stock exchange. in the following years, the interest in that type of shares slightly decreased. in 2016, the percentage of respondents who invested in those stocks was approx. 80.6%. additionally, several percent of the surveyed were interested in shares traded on the newconnect market. they were gaining in popularity during the analysed period. 2. bank deposits were the next most popular subject of investments in 2010 among individual investors (37.6%). in the analysed period, their share in the investors’ portfolios was gradually decreasing. in 2016 it was only approx. 28.6%. one of the causes of such decrease was considerable reduction of interest rates of that type of instruments. 3. a noticeable increase in individual investors’ interest in bonds occurred in the analysed period. in 2010, approx. 9.1% of the surveyed reported investments in this type of assets. in 2016 this percentage was higher, reaching approx. 11.9%. it can be reasonably concluded that the growth of the stock market of bonds in poland, and also relatively low interest rates of bank deposits, were the major causes of the observed situation. 4. in the analysed period, individual investors’ interest of derivatives decreased significantly. the percentage of respondents who declared using these instruments dropped from 16.6% in 2010 to 9.5% in 2016. 5. the percentage of the surveyed investors who participated in investment funds was almost the same during the analysed period. nearly 30% of respondents declared involvement in this type of assets. 6. currencies were the subject of investments of a relatively constant number of respondents in the whole analysed period. the percentage varied from 12% to 15%. research concerning the value and structure of households’ financial assets in poland which is annually performed by narodowy bank polski were used in order to complete the image of an individual investors in poland. according to nbp classification category of households includes individual farmers, individual entrepreneurs and other natural persons. in this way concept of individual investor is often equated with notion household in literature (bielawska & kordela, 2014, p. 28). table 1 and 2 presents detailed data about value and structure of savings of this group of investors in 2010–2016. [59] table 1. the value of households’ selected financial assets in poland in 2010–2016 no. financial assets* 2010 2012 2014 2016 1 bank deposits 413.1 504.2 592.4 713.9 2 credit union deposits 13.2 15.7 12.7 10.9 3 units in investment funds 73.8 72.5 103.2 124.3 4 units in unit-linked insurance funds 74.1 77.9 82.7 83.5 5 treasury securities 10.1 8.5 9.3 11.8 6 non-treasury securities 2.4 1.8 1.3 2.3 7 stocks wse (includes nc) 51.1 37.2 40.5 43.6 8 total 637.8 717.8 842.1 990.3 * in the analysed issue financial assets not contain cash. s o u r c e : rozwój systemu finansowego w polsce w 2016 r., raport nbp, p. 26; rozwój systemu finansowego w polsce w 2013 r, raport nbp, p. 36. table 2. the structure of households’ selected financial assets in poland in 2010–2016 no. financial assets* 2010 2012 2014 2016 1 bank deposits 64.8% 70.2% 70.3% 72.1% 2 credit union deposits 2.1% 2.2% 1.5% 1.1% 3 units in investment funds 11.6% 10.1% 12.3% 12.6% 4 units in unit-linked insurance funds 11.6% 10.9% 9.8% 8.4% 5 treasury securities 1.6% 1.2% 1.1% 1.2% 6 non-treasury securities 0.4% 0.3% 0.2% 0.2% 7 stocks wse (includes nc) 8.0% 5.2% 4.8% 4.4% 8 total 100.0% 100.0% 100.0% 100.0% * in the analysed issue financial assets not contain cash. s o u r c e : rozwój systemu finansowego w polsce w 2016 r., nbp, p. 26; rozwój systemu finansowego w polsce w 2013 r, nbp, p. 36. jarosław pawłowski60 the results research conducted by the nbp in 2010 – 2016 allow to formulate a number of conclusions concerning the structure of financial assets of households in poland in that period. 1. the major subject of savings in the analysed period were bank deposits. in 2010, bank deposits made up about 64.8% of total value of households’ financial assets (without cash) in poland. in the following years, the interest in that type of financial instruments increased. in 2016, it was approx. 72.1%. 2. units in investment funds were the next most popular subject of investments in 2010 among households (11.6%). in the analysed time, their share in the investors’ portfolios slightly increased. in 2016 it was approx. 12.6%. 3. in 2010 value of units in unit-linked insurance funds was similar to worth of units in investment funds. their share was 12.6% then. in the following years it decreased and was equal 8.4% in 2016. 4. moreover, stocks listed on wse (includes newconnect) were the significant type of financial assets of households in poland in the analysed period. in 2010 their share in the total value of them amounted about 8.0%. in the following years, the interest in that type of financial instruments decreased. in 2016, it was equal approx. 4.4%. investments of individual investors in poland – analysis of author’s research results for the purposes of this study, the outcomes of the individual survey conducted in the group of individual investors in poland in 2015 have also been used. it was performed at the author’s request by the individual investors association (sii) among the group of 408 individual investors in poland. the research tool used for the purposes of the survey was an on-line questionnaire published on the sii website. the surveyed group was targeted. the analysis of the surveyed group of individual investors started with determining their gender. the obtained results are presented in diagram 6. individual investors on the financial market in poland 61 diagram 6. division of the surveyed group of individual investors in terms of gender (%) cash) in poland. in the following years, the interest in that type of financial instruments increased. in 2016, it was approx. 72.1%. 2. units in investment funds were the next most popular subject of investments in 2010 among households (11.6%). in the analysed time, their share in the investors’ portfolios slightly increased. in 2016 it was approx. 12.6%. 3. in 2010 value of units in unit-linked insurance funds was similar to worth of units in investment funds. their share was 12.6% then. in the following years it decreased and was equal 8.4% in 2016. 4. moreover, stocks listed on wse (includes newconnect) were the significant type of financial assets of households in poland in the analysed period. in 2010 their share in the total value of them amounted about 8.0%. in the following years, the interest in that type of financial instruments decreased. in 2016, it was equal approx. 4.4%. investments of individual investors in poland analysis of author’s research results for the purposes of this study, the outcomes of the individual survey conducted in the group of individual investors in poland in 2015 have also been used. it was performed at the author’s request by the individual investors association (sii) among the group of 408 individual investors in poland. the research tool used for the purposes of the survey was an on-line questionnaire published on the sii website. the surveyed group was targeted. the analysis of the surveyed group of individual investors started with determining their gender. the obtained results are presented in diagram 6. diagram 6. division of the surveyed group of individual investors in terms of gender (%) source: individual study the majority of the surveyed were men (91.2%). women were a relatively small group of respondents (8.8%). thus, the prevalence of men in the surveyed group is apparent. men 91.2% women 8.8% s o u r c e : individual study. the majority of the surveyed were men (91.2%). women were a relatively small group of respondents (8.8%). thus, the prevalence of men in the surveyed group is apparent. considering the age of the respondents in the surveyed group, there is a noticeable diversification. in this regard, the following age categories have been distinguished: a) under 30, b) at least 30, but less than 40, c) at least 40, but less than 50, d) over 50. the obtained results are presented in diagram 7. diagram 7. division of the surveyed group of individual investors in terms of age (%) a) under 30, b) at least 30, but less than 40, c) at least 40, but less than 50, d) over 50. the obtained results are presented in diagram 7. diagram 7. division of the surveyed group of individual investors in terms of age (%) source: individual study the largest group were the youngest investors, under 30 years of age. their portion in the analysed group was approx. 32.8%. the second largest age group, reaching approx. 28.4%, were respondents from 30 to 40. persons over 50 and aged 40 to 50 were the smallest groups, with the percentage of 20.4% and 18.4%, respectively. the analysed group of individual investors is also diversified in terms of investment experience. the review of the subject literature allows to assume that the experience of beginning investors does not exceed 3 years. however, persons with at least 10 years of experience in investing have considerable knowledge and skills (dziawgo, 2016). based on these guidelines, the analysed group has been divided into three categories presented in diagram 8. diagram 8. division of the surveyed group of individual investors in terms of investment experience (%) under 30 32.8% 30–40 28.4% 40–50 18.4% over 50 20.4% s o u r c e : individual study. jarosław pawłowski62 the largest group were the youngest investors, under 30 years of age. their portion in the analysed group was approx. 32.8%. the second largest age group, reaching approx. 28.4%, were respondents from 30 to 40. persons over 50 and aged 40 to 50 were the smallest groups, with the percentage of 20.4% and 18.4%, respectively. the analysed group of individual investors is also diversified in terms of investment experience. the review of the subject literature allows to assume that the experience of beginning investors does not exceed 3 years. however, persons with at least 10 years of experience in investing have considerable knowledge and skills (dziawgo, 2016, pp. 108–109). based on these guidelines, the analysed group has been divided into three categories presented in diagram 8. diagram 8. division of the surveyed group of individual investors in terms of investment experience (%) source: individual study the largest group among the surveyed individual investors had from 3 to 10 years of experience in investing. the percentage of this group reached approx. 48.8. the portion of respondents with experience exceeding 10 years nearly reached 26.2%. the investors with the smallest experience, not exceeding 3 years, were approx. 25% of the entire group. the data concerning the subjects of investments made by individual investors are presented in diagram 9. diagram 9. subjects of investments made by individual investors – results of individual research * in the analysed question respondents (n=408) could choose more than one answer. the total amount of indications in the analysed field was 953. source: individual study. the major subjects of investments in the surveyed group of investors were stocks and shares (94.4%). it implies that most investors in the analysed group were active on the stock market. the other most popular subjects were: bank deposits (47.1%), currencies 25.0% 48.8% 26.2% up to 3 years from 3 to 10 years over 10 years 94,9% 47,1% 25,0% 24,8% 18,9% 15,9% 13,5% 7,1% 4,2% 0% 20% 40% 60% 80% 100% stocks bank deposits currency units in investment funds bonds real estate derivatives investment certificates other s o u r c e : individual study. the largest group among the surveyed individual investors had from 3 to 10 years of experience in investing. the percentage of this group reached approx. 48.8. the portion of respondents with experience exceeding 10 years nearly reached 26.2%. the investors with the smallest experience, not exceeding 3 years, were approx. 25% of the entire group. the data concerning the subjects of investments made by individual investors are presented in diagram 9. individual investors on the financial market in poland 63 diagram 9. subjects of investments made by individual investors – results of individual research source: individual study the largest group were the youngest investors, under 30 years of age. their portion in the analysed group was approx. 32.8%. the second largest age group, reaching approx. 28.4%, were respondents from 30 to 40. persons over 50 and aged 40 to 50 were the smallest groups, with the percentage of 20.4% and 18.4%, respectively. the analysed group of individual investors is also diversified in terms of investment experience. the review of the subject literature allows to assume that the experience of beginning investors does not exceed 3 years. however, persons with at least 10 years of experience in investing have considerable knowledge and skills (dziawgo, 2016). based on these guidelines, the analysed group has been divided into three categories presented in diagram 8. diagram 8. division of the surveyed group of individual investors in terms of investment experience (%) source: individual study the largest group among the surveyed individual investors had from 3 to 10 years of experience in investing. the percentage of this group reached approx. 48.8. the portion of respondents with experience exceeding 10 years nearly reached 26.2%. the investors with the smallest experience, not exceeding 3 years, were approx. 25% of the entire group. the data concerning the subjects of investments made by individual investors are presented in diagram 9. diagram 9. subjects of investments made by individual investors – results of individual research * in the analysed question respondents (n=408) could choose more than one answer. the total amount of indications in the analysed field was 953. source: individual study. 25,0% 48,8% 26,2% up to 3 years from 3 to 10 years over 10 years 94.9% 47.1% 25.0% 24.8% 18.9% 15.9% 13.5% 7.1% 4.2% 0% 20% 40% 60% 80% 100% stocks bank deposits currency units in investment funds bonds real estate derivatives investment certificates other * in the analysed question respondents (n=408) could choose more than one answer. the total amount of indications in the analysed field was 953. s o u r c e : individual study. the major subjects of investments in the surveyed group of investors were stocks and shares (94.4%). it implies that most investors in the analysed group were active on the stock market. the other most popular subjects were: bank deposits (47.1%), currencies (25.0%), units in investment funds (24.8%) and bonds (18.9%). part of the surveyed (4.2%) indicated different means of funds allocation, other than the ones specified in the survey question, including gold, silver, coins, social lending, savings accounts. the further analysis concerned the investments made by the surveyed investors in comparison with their investment experience. relevant data are presented in diagram 10. the obtained results indicate that investors having the greatest investment experience, i.e. exceeding 10 years, were more active in the field of investments. their investment portfolios, encompassing a greater variety of financial instruments, were more diversified. the causes of this situation include relatively larger value of capital held by the investors. this could be confirmed by a relatively large scale of involvement on the real estate market. additionally, greater experience of investors is ref lected in increased tendency to take risks, which might be linked to the relatively higher usage of derivatives. jarosław pawłowski64 diagram 10. subjects of investments made by individual investors compared with their investment experience – results of individual research the major subjects of investments in the surveyed group of investors were stocks and shares (94.4%). it implies that most investors in the analysed group were active on the stock market. the other most popular subjects were: bank deposits (47.1%), currencies (25.0%), units in investment funds (24.8%) and bonds (18.9%). part of the surveyed (4.2%) indicated different means of funds allocation, other than the ones specified in the survey question, including gold, silver, coins, social lending, savings accounts. the further analysis concerned the investments made by the surveyed investors in comparison with their investment experience. relevant data are presented in diagram 10. diagram 10. subjects of investments made by individual investors compared with their investment experience – results of individual research * in the analysed question respondents (n=408) could choose more than one answer. the total amount of indications in the analysed field was 953. source: individual study the obtained results indicate that investors having the greatest investment experience, i.e. exceeding 10 years, were more active in the field of investments. their investment portfolios, encompassing a greater variety of financial instruments, were more diversified. the causes of this situation include relatively larger value of capital held by the investors. this could be confirmed by a relatively large scale of involvement on the real estate market. additionally, greater experience of investors is reflected in increased tendency to take risks, which might be linked to the relatively higher usage of derivatives. conclusions the establishment and growth of the warsaw stock exchange (gpw), as well as the related newconnect market and catalyst bond market, significantly extended the investment offer available to investors in poland. the extensive portfolio of available financial instruments generates better possibilities to adjust the investment strategy to the expectations of individual investors. nevertheless, bank deposits have remained the main financial assets of households in poland in analysed time. however, active individual investors often invested their funds in other financial instruments. considering the analysis of the subjects of investments made by this particular group of private investors, it can be noticed that stocks were the substantial asset of investments made in the recent years. the study conducted by the sii indicated a gradual decrease in the number of investments in stocks listed on the main market of the warsaw stock exchange. at the same time, the interest in stocks traded on the newconnect market increased. the outcomes of the individual research have confirmed that stocks were the major subject of investments of individual investors. 88.3% 40.2% 25.5% 17.6% 15.7% 11.8% 7.8% 3.9% 96.5% 47.7% 25.1% 28.1% 18.1% 13.6% 15.6% 8.0% 98.1% 52.3% 24.3% 25.2% 23.4% 15.0% 24.3% 8.4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% stocks bank deposits currency units in investment funds bonds derivatives real estate investment certificates over 10 years from 3 to 10 years up to 3 years * in the analysed question respondents (n=408) could choose more than one answer. the total amount of indications in the analysed field was 953. s o u r c e : individual study.  conclusions the establishment and growth of the warsaw stock exchange (gpw), as well as the related newconnect market and catalyst bond market, significantly extended the investment offer available to investors in poland. the extensive portfolio of available financial instruments generates better possibilities to adjust the investment strategy to the expectations of individual investors. nevertheless, bank deposits have remained the main financial assets of households in poland in analysed time. however, active individual investors often invested their funds in other financial instruments. considering the analysis of the subjects of investments made by this particular group of private investors, it can be noticed that stocks were the substantial asset of investments made in the recent years. the study conducted by the sii indicated a gradual decrease in the number of investments in stocks listed on the main market of the warsaw stock exchange. at the same time, the interest in stocks traded on the newconnect market increased. the outcomes of the individual research have confirmed that stocks were the major subject of investments of individual investors. individual investors on the financial market in poland 65 bank deposits were the second most popular subject of investments among the surveyed investors according to obi and author’s research. however, the interest in these assets among the participants of the survey gradually decreased in the analysed period. an interesting observation was the growing popularity of bonds among individual investors. despite the cases of bankruptcy of bonds issuers in poland, it has been noticed that the percentage of persons investing in this type of financial instruments increased. relatively higher bonds interest rates in comparison with bank deposits caused that these instruments constitute an attractive alternative of bank deposits in current market conditions. comparing the results of the research conducted by the author with the outcomes obtained by the sii, considerable similarities can be noticed. relatively more individual investors participating in the author’s research invested in certain financial instruments, among others derivatives and currencies. it might be concluded that the observed differences are related with the specific character of the surveyed group. targeted selection of the analysed group and the issues covered by the author’s study could have encouraged investors who were more active on the financial market to participate in the survey.  references banaszczak-soroka, u. (2016). inwestor na rynku papierów wartościowych. (investor on the securities market.) in u. banaszczak-soroka (ed.). rynek papierów wartościowych. inwestorzy, instrumenty finansowe i metody ich wyceny. (securities market. investors, financial instruments and valuation methods.) warszawa: wydawnictwo c.h. beck. bielawska, a., & kordela, d. (2014). kierunki lokowania nadwyżek finansowych przez inwestorów indywidualnych w polsce w latach 2008–2012. (directions of financial surplus investments made by private investors in poland in the years 2008–2012.) annales universitatis mariae curie-skłodowska, sectio h – oeconomia, 48(3), 27–35. cichorska, j. (2015). inwestor indywidualny. mechanizmy podejmowania decyzji inwestycyjnych. (individual investor. ways of making investment decisions.) in j. cichorska (ed.). zarządzanie portfelem inwestycyjnym. inwestor indywidualny na rynku finansowym. (portfolio management. individual investor on the financial market.) katowice: wydawnictwo uniwersytetu ekonomicznego w katowicach. dębski, w. (2007). rynek finansowy i jego mechanizmy. podstawy teorii i praktyki. (the financial market and its mechanisms. basics of theory and practice.) warszawa: wydawnictwo naukowe pwn. dziawgo, d. (2004). stowarzyszenia indywidualnych inwestorów i kluby inwestycyjne na rynku papierów wartościowych. (associations of individual investors and investjarosław pawłowski66 ment clubs on the securities market.) toruń: wydawnictwo uniwersytetu mikołaja kopernika. dziawgo, d. (2007). rynek finansowy. istota – instrumenty – funkcjonowanie. (the financial market. essence – instruments – functioning.) warszawa: wydawnictwo stowarzyszenia księgowych w polsce. dziawgo, d. (2016). znaczenie raportowania pozafinansowego w opinii indywidualnych inwestorów. (non-financial reporting importance from individual investors’ perspective.) prace naukowe uniwersytetu ekonomicznego we wrocławiu, 436, 105– –114. http://dx.doi.org/10.15611/pn.2016.436.11. fich, e.m., harford, j., & tran, a.l. (2015). motivated monitors: the importance of institutional investors’ portfolio weights. journal of financial economics, 118(1), 21–48. http://dx.doi.org/10.1016/j.jfineco.2015.06.014. jajuga, k., & jajuga, t. (2006). inwestycje. (investments.) warszawa: wydawnictwo naukowe pwn. jajuga, k. (2007). elementy nauki o finansach. (elements of finance science.) warszawa: pwe. kaniel, r., saar, g., & titman, s. (2008). individual investor trading and stock returns. the journal of finance, 63(1), 273–310. http://dx.doi.org/10.1111/j.15406261.2008.01316.x. matysek-jędrych, a. (2008). współczesne przeobrażenia systemu finansowego i ich konsekwencje. (the contemporary transformation of the financial system and its consequences.) bank i kredyt, 1, 34–60. mikita, m., & pełka, w. (2009). rynki inwestycji alternatywnych. (alternative investment markets.) warszawa: poltext. mroczkowska, r., & mroczkowski, r. (2005). weksel w praktyce. (bill in practice.) gdańsk: wydawnictwo oddk. ogólnopolskie badanie inwestorów – obi 2010, (nationwide investor research 2010) http://www.sii.org.pl/3124/edukacja-i-analizy/badania-i-rankingi/ogolnopolskiebadanie-inwestorow-obi-2010.html (accessed: 20.01.2018). ogólnopolskie badanie inwestorów – obi 2012, (nationwide investor research 2012) http://www.sii.org.pl/4380/edukacja-i-analizy/badania-i-rankingi/ogolnopolskie-badanie-inwestorow-obi-2012.html (accessed: 20.01.2018). ogólnopolskie badanie inwestorów – obi 2014, (nationwide investor research 2014) http://www.sii.org.pl/7586/edukacja-i-analizy/badania-i-rankingi/ogolnopolskie-badanie-inwestorow-obi-2014.html (accessed: 20.01.2018). ogólnopolskie badanie inwestorów – obi 2016, (nationwide investor research 2016) http://www.sii.org.pl/10487/edukacja-i-analizy/badania-i-rankingi/ogolnopolskiebadanie-inwestorow-obi-2016.html (accessed: 20.01.2018). rozwój systemu finansowego w polsce w 2013 r. (the development of financial system in poland in 2013), nbp. rozwój systemu finansowego w polsce w 2016 r. (the development of financial system in poland in 2016), nbp. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 4 date of submission: april 16, 2018; date of acceptance: may 10, 2018. * contact information: sitorus_tigor@yahoo.com, universitas bunda mulia, jakarta, taman century i l/6 bekasi, indonesia, phone: 6281514054090; orcid id: https://orcid.org/0000-0001-7477-9537. ** contact information: dnymoe@gmail.com, universitas bunda mulia, jakarta, indonesia. sitorus, t., & denny (2017). the inf luence of asset and profitability toward share value: mediation effect of liquid asset. copernican journal of finance & accounting, 6(4), 85–103. http://dx.doi. org/10.12775/cjfa.2017.024 tigor sitorus* universitas bunda mulia, jakarta denny** universitas bunda mulia, jakarta the influence of asset and profitability toward share value: mediation effect of liquid asset keywords: asset, profitability, liquid asset, value of share. j e l classification: g32. abstract: the purpose of this research is to extend the relationship between asset and profitability with share value and this study also aims to find out the factors that inf luence of the value of share and propose the liquid asset as the intervening variable for filling the gap of prior research within the mining sector listed on the indonesian stock exchange from the period of 2010 to 2014. this research used quantitative approach with a descriptive method by using secondary data in the form of financial report of the mining sector. the population in this study is all mining sector companies listed on the indonesian stock exchange. the sample was taken using purposive sampling method and obtained 20 companies that met the criteria of sampling, while the observational data that could be collected was 100 within 2010–2014 (5 years) . this research used the data analysis method of structural equation modelling path. the results of this stutigor sitorus, denny86 dy prove that all hypotheses are accepted, so it can be concluded that the result evidently shows that the liquid asset is able to mediate the inf luence of asset and profitability toward value of share.  introduction the mining sector is one of the pillars of a country’s economic growth because up to now this sector has become a mainstay of a country with abundant natural resources and the world market demand for mining is still very high. the rich natural resources potential will encourage more companies to explore mining resources but mining companies desperately need large capital to engage in exploration and exploitation activities. to get a lot of capital, mining companies must sell their shares in the stock market, such as the indonesia stock exchange (idx). the mining sector on the indonesia stock exchange is one of the most reliable sectors because indonesia is a country rich in natural resources. based on data from the indonesia stock exchange as of january 2015, mining sectors consist of coal mining sub-sectors which are 22 companies that include crude oil sub-sector and natural gas 9 companies, metal and mineral mining sub-sector 8 companies and stone mining sub-sector 4 companies (www1). mining companies enter the capital market to absorb funds in the form of investments from investors and to strengthen their financial position, and therefore the capital market has also a major role for the economy of a country because the capital market serves two functions at once, which are economic and financial. the capital market is said to have a market economy function because it provides a facility that brings together two parties with the interests of funding and a need of funds. below, the authors present the average stock price in the mining sub-sectors listed on the indonesia stock exchange (idx) for the period of 2010 to 2014 which can be seen in the following figure. from the graph above we can see that in the average share value from 2010 to 2014, coal had the largest share value compared to oil & gas, metals & minerals, and stone & land meanwhile based on the survey of lq45 in 2015, the mining sectors were only held by 5 companies among the top 45 positions or shares with the highest intensity of transactions in indonesia.   the influence of asset and profitability toward share value… 87 figure 1. stock price curve of mining sectors figure 1. stock price curve of mining sectors idr (indonesian rupiah) source: own study based on: www1. from the graph above we can see that in the average share value from 2010 to 2014, coal had the largest share value compared to oil & gas, metals & minerals, and stone & land meanwhile based on the survey of lq45 in 2015, the mining sectors were only held by 5 companies among the top 45 positions or shares with the highest intensity of transactions in indonesia. empirically, some experts have stated that the value of stock is influenced by many factors. according to alwi (2003, p. 87), there are two factors that could affect the stock price, namely internal and external factors. the internal factors in this case is when a change or turmoil that occurs in the internal part of the company will impact the movement of stock price of the related company. alwi also suggested that (2003, p. 87) in addition to the internal factors, external factors also have influence on the development of stock price of a company. the factors that become the trigger of the movement of stock prices are asset development and profitability as they affect the value of the company's stock. kieso, weygandt and warfield (2011) stated that asset is a source of income for the company's business and asset is a possible future economic gain that can be obtained as a result of past transactions or events. from these definitions of asset, we can see that there is a relationship between asset and the value of the related competitiveness of the share. if an investor intends to invest in a company, the investor will search a company whose assets have high value, so that the investor can get benefits or advantages over the investment made in the company. asset is a possible economic advantage that may be presented by the company and for investor it is a source of funds and thus there should be a win-win solution for both parties. large-scale companies like mining companies in general will certainly attract investors if they have liquid asset for the short term and sufficient advantage for the long term. regarding with profitability of a company, according to elmi and muturi (2016), a company must have definite profit because profitability is a significant factor in determining dividend payout, and poor performance of profitability will definitely affect payout negatively. such condition will certainly distract the potential investor to invest. damyanti and achyani (2006) stated that a company will continue to improve their value if they can grow their assets and it can be obtained by increasing their profitability. increasing profitability will affect the adequacy of liquid asset. liquid asset is also a measure that indicates whether a company can pay dividend as a liability to investor or not. if a company has large net cash, it will become a good sign for investor to get future cash so that the investor has a sense of security in investing in that company. this is inseparable from the roles of asset and profitability that sustain the activities of a company so that it is suspected that 500 1 000 1 500 2 000 2 500 3 000 coal mine oil&gas metal& mineral mining stone&land serie1 idr (indonesian rupiah) s o u r c e : own study based on: www1. empirically, some experts have stated that the value of stock is inf luenced by many factors. according to alwi (2003, p. 87), there are two factors that could affect the stock price, namely internal and external factors. the internal factors in this case is when a change or turmoil that occurs in the internal part of the company will impact the movement of stock price of the related company. alwi also suggested that (2003, p. 87) in addition to the internal factors, external factors also have inf luence on the development of stock price of a company. the factors that become the trigger of the movement of stock prices are asset development and profitability as they affect the value of the company’s stock. kieso, weygandt and warfield (2011) stated that asset is a source of income for the company’s business and asset is a possible future economic gain that can be obtained as a result of past transactions or events. from these definitions of asset, we can see that there is a relationship between asset and the value of the related competitiveness of the share. if an investor intends to invest in a company, the investor will search a company whose assets have high value, so that the investor can get benefits or advantages over the investment made in the company. asset is a possible economic advantage that may be presented tigor sitorus, denny88 by the company and for investor it is a source of funds and thus there should be a win-win solution for both parties. large-scale companies like mining companies in general will certainly attract investors if they have liquid asset for the short term and sufficient advantage for the long term. regarding with profitability of a company, according to elmi and muturi (2016), a company must have definite profit because profitability is a significant factor in determining dividend payout, and poor performance of profitability will definitely affect payout negatively. such condition will certainly distract the potential investor to invest. damyanti and achyani (2006) stated that a company will continue to improve their value if they can grow their assets and it can be obtained by increasing their profitability. increasing profitability will affect the adequacy of liquid asset. liquid asset is also a measure that indicates whether a company can pay dividend as a liability to investor or not. if a company has large net cash, it will become a good sign for investor to get future cash so that the investor has a sense of security in investing in that company. this is inseparable from the roles of asset and profitability that sustain the activities of a company so that it is suspected that liquid asset has an inf luence in bridging the asset and profitability in affecting the value of the stock that leads to the interests in buying or selling shares of the related company. this research tries to develop the inf luence of asset which is represented by total assets and profitability that is represented by net profit margin to share value that is represented by stock closing price through filling up the variabel liquid asset as mediating variable. liquidity is very important for the firm as an assurance that the firm is able to pay the dividend. for example, in 1997– 1998, a number of companies in asia faced a liquidity crisis and bankruptcy (yoo & kim, 2015). this research is different from the research conducted by ghauri (2014) that found out that asset has a significant inf luence on share value and by f.n. al-shubiri (2010, p. 137) who showed a significantly positive relationship between net asset value and stock price. in another research sitorus (2016) examined the inf luence of mediation that is done by the company on the inf luence of profitability on the value of stock. in this study, researchers try to propose variable of liquid asset as filler of research gap in relation between asset and profitability to value of share.   the influence of asset and profitability toward share value… 89 based on the phenomenon and research gap mentioned above, the purposes of this research and also the hypotheses that will be proved in the discussion of this study are: (1). does asset have a positive inf luence on the liquid asset? (2) does profitability have a positive inf luence on the liquid asset? (3) does asset have a positive inf luence on value of share? (4) does profitability have a positive inf luence on value of share? and (5) does the liquid asset have a positive inf luence on value of share. review of literature 1. asset according to warren, reeve and fess (2005), assets are resources owned by business or business entities. these resources can be physical or economic. assets are divided into two parts: current assets and non-current assets (kieso, weygandt & warfield, 2011). according to dyckman, davis and dukes (2001), current assets include cash and other assets that are estimated to be realized to be cash or sold or used during one normal operating cycle of the company or within one year from the balance sheet date (one of the longer ones). included in current assets are cash, temporary investment, notes receivable, accruals receivable, inventory, and prepaid expense. 2. profitability profitability is the ability of gaining profits by the company within a certain period. the basis of profitability assessment is the financial statements consisting of the balance sheet and corporate income statements. based on these two financial statements, the results of the analysis of a number of ratios will be determined and the ratio is then used to assess certain aspects of the company’s operations. profitability is the company’s ability to generate profits and measure the level of operational efficiency in using its asset. profitability is a description of the performance of the company’s management. profitability measurement can use several indicators such as operating profit, net profit, investment return/asset return and owner’s equity return, and return on profit or return on investment that has been invested in a company (hermuningsih, 2013, p. 131). tigor sitorus, denny90 samy ben naceur (2003) stated that variations in the determination of a company’s profitability become very important to be controlled by the management because they are inf luenced by the external factors that may affect the company’s financial performance. thus, the determinants inf luencing profitability can be identified to formulate policies to improve the profitability of a company. according to ulupui (2008) profitability can be assessed using several performace measure but still in the relevant dimension such as return on investment (roi) and return on asset (roa), which are related to profit and investment and asset used to produce them. the profitability ratio itself consists of two types, the ratio showing profitability in relation to sales (gross profit margin and net profit margin), and profitability in relation to investments ie return on asset (roa) and return on equity (roe). furthermore researcher said that profitability will affect company ability to pay dividend to shareholder, this will have positive impact to company value which is indicated by high stock value (elmi & muturi, 2016). 3. liquid asset stice, stice and skousen (2009) stated that profit is a return on investment for the owners. it measures the value that an entity can still afford to possess the same wealth as its original position. they further said that cash is the most liquid current asset and consists of parts that act as a means of exchange and provides a basis for accounting calculation. meanwhile, according to suwardjono (2008, p. 464) profit is interpreted as a reward for the company’s efforts in producing goods and services. furthermore, chariri and ghozali (2007) stated that the report of net income can be used as an indicator of the company’s funds efficiency that are embodied in the rate of return, company’s performance, as well as control of the allocation of company’s economic resources, and it is also related to the basis of compensation and the distribution of bonuses in a company. on the other hand, cash also serves as a means of motivation management in controlling the company, and most importantly as the basis of dividend distribution to the investors who invest their shares in related company. cash and cash equivalents in the form of investments are considered very liquid and short term and can be immediately used as cash in certain amount without facing the risk of significant value changes (mulya, 2010). having the same idea, stice, stice and skousen (2009) also said that cash equivalents are very liquid short-term investments that can be exchanged for cash.   the influence of asset and profitability toward share value… 91 4. share value according to brigham and houston (2010), the ratio of market value is a set of ratios that relate the firm’s stock price to its earnings, cash f low and book value per share. meanwhile, stock prices are maximizing shareholder value translated to maximize the firm’s stock price. the stock price at one particular time depends heavily on the cash f low expected to be received in the future by the “average” investor if the investor buys the stock. when a company issues one type of stock, it is called a common stock. if there are two kinds of shares issued , one is the common stock and the other is the preferred stock (baridwan, 2004) with the following descriptions: (1). ordinary shares (common stock) are the most heavily traded securities in the capital market. the holders of these securities have voting rights in the shareholders general meeting (agm) and obtain dividends from the company as well as the possibility of gains on the increase of the capital (value) of such securities or capital gains. ordinary shares carry the greatest risk because ordinary shareholders receive dividends after the dividends of preferred stock are paid. (2). preferred stock or preferred shares are often also referred to as privileged shares because preferred stock gets priority rights in the dividend distribution before dividend of common stock. if the company is liquidated, preferred shareholder also gets priority of claim on company asset after obligation to bondholder and other creditors are met before any claim by ordinary shareholders. the research methodology and the course of the research process 1. research design this study used a type of causative descriptive research. according sugiyono (2011), descriptive method is a method used to describe or analyze a research result but not to make a wider result. descriptive research method is a method used in a research with the aim to create a description and a systematic picture of meaning and nature, and the inf luence between the phenomena investigated. causative research is a research used to determine the inf luence of one variable with other variables and how one variable affects other variables so this type of research aims to analyze the cause of inf luence between independent variable and dependent variable (sugiyono, 2011). the data used in this study tigor sitorus, denny92 are secondary quantitative data from the financial statements of companies engaging in the field of mining listed on the indonesia stock exchange (idx). meanwhile, the secondary data are obtained from other parties in the form of data that have been published to the public and quantitative data are the data in the form of numbers. thus, the researchers can conclude that the type of research used in this study is descriptive causative research using secondary quantitative data. objects studied in this study are companies that engaged in the mining industry listed on the indonesia stock exchange (bei) within a period from 2010 to 2014. 2. research variable according kerlinger (1973, in sugiyono, 2011), variable is the construct or the nature to be studied. the research variables used in this research are as follows: 1) the independent variables which are: asset value (x1) which is indicated by the ratio of current asset and fixed asset, (kieso et al., 2011), warren et al. (2005), and profitability (x2) which is indicated by net income, roa, roe, (ulupui, 2008). 2) the dependent variables which are: the value of stock (y2) represented by share price at the time of closing of transactions till end of year, brigham and houston (2010). 3) mediation variables which are: liquid asset (y1) that is represented by ratio of net cash f low, stice, stice and skousen (2009). 3. population and sample population is a collection of objects that become the center of attention from which the necessary information will be obtained. this object is called the unit of analysis. this unit of analysis has similar behavior or characteristics to be studied. the population in this study is based on the data from 43 mining sector companies listed on the indonesia stock exchange (idx) for a span of 5 years resulting in 215 observational data. sample is an example or subset of a population that is considered as the representative of the population so that any information generated from this sample may be considered representative of the entire population. after the test of   the influence of asset and profitability toward share value… 93 outlier and data reduction, the researcher took 20 samples out of 43 companies for the span of 5 years that produced 100 observation data. 4. data source data collection method in this research is non-behavioral observation method where data collecting is done by observing, recording, and studying the descriptions of journals, books and documents. in this study, reseachers observed, recorded, and studied the documents in the form of financial statements of companies engaging in mining sector from the period 2010 to 2014 that were listed on the indonesia stock exchange (idx). the financial statements that were studied such as current assets, fixed assets, roa, roe, net income, and net cash (www1). as for share value data, researchers used stock report value data sourced from yahoo finance (www2). 5. data analysis technique to analyze the inf luence between variables, this study used testing model of structural equation modeling (sem). the testing of the inf luence between variables in this study used research hypotheses produced by the sem model of path analysis, and the processing of data used software amos 21. sem is a multivariate statistical analysis tool that combines factor analysis with analysis path. the seam model is considered appropriate to examine the complex inf luence of variables. basically sem is a confirmatory statistical methodology such as hypothesis testing on multivariate analysis using structural theory. the sem equation model is a model for analyzing the forces and causalities between variables described in the sem model, where each dependent variable is uniquely determined by a set of independent/exogenous variables (riduwan & kuncoro, 2012). results and conslusion the objective of the study was to find out whether profitability inf luences the liquid asset and impacts the share value of mining companies in indonesia. the objective was tested through six (6) composite measures on a scaled ratio. the results findings are presented in table 1 (model testing) and table 2 (hypotheses testing) as bellow. tigor sitorus, denny94 1. model testing for testing the feasibility of full model, it can be seen in the table 1 bellow: table 1. goodness of fit model no goodness of fit index cut of value result remarks 1 df > 0 8 good fit 2 chi square < α, df 29.015 good fit 3 probability > 0.05 0.085 good fit 4 cmin/df < 2 1.627 good fit 5 gfi ≥ 0.90 0.950 good fit 6 agfi ≥ 0.90 0.902 good fit 7 cfi ≥ 0.90 0.984 good fit 8 tli ≥ 0.90 0.957 good fit 9 ifi ≥ 0.90 0.984 good fit 10 rmsea ≤ 0.08 0.02 good fit 11 nfi ≤ 0.9 0.978 good fit 12 hoelter ≤ 2.00 36 good fit s o u r c e : result of amos ver 21. according to b.m. byrne (2010) the goodness of fit test model can be continued although there are some models or criteria that have not reached the cut of value, so on that basis, this research can be continued to the next test. it is also supported by jackson de carvalho and chima (2014) who also said similar thing for the research they did in calculating or determining the fit model in a study of structural equation model. from the goodness of fit test model (table 1), it can be seen that the model is fit to model the data because there are already 12 (twelve) criteria are met. thus, the fundamental hypothesis of sem analysis in this study is accepted which means there is no significant difference between the covariance matrix of the specified model. this shows that the two structural equations produced by the fit model in this research can be used to explain the relationship and inf luence between exogenous and endogenous variables. while the magni  the influence of asset and profitability toward share value… 95 tude of inf luence of each independent variable on the dependent variable will be tested statistically so it can be known which independent variables are inf luential and which independent variable gives the most dominant inf luence to dependent variable. 2. hypotheses testing bellow is the table of model testing hypotheses; table 2. hypotheses testing estimate s.e. c.r. p label asset ---> liquid asset 0.401 0.021 3.888 *** h1 accepted profit ---> liquid asset 0.760 0.012 6.999 *** h2 accepted asset ---> value of shares 0.120 0.023 2.002 *** h3 accepted liquid asset ---> value of shares 0.780 0.380 4.502 *** h4 accepted profit ---> value of shares 0.261 0.174 3.214 *** h5 accepted s o u r c e : result of amos ver 21. according to supranto and limakrisna (2013), the structural equations generated by fit models formed from the amos 21 output are as follows: liquid asset = 0.401 asset + 0.760 profitability (1) value of share = 0.120 asset + 0.261profitability + 0.780 liquid asset (2) based on table 2, it can be seen that the four variables treated using amos 21 can be analyzed to know about the inf luence of each variable. at the stage of research analysis, hypothesis research testing was carried out. the test was conducted for 5 (five) hypotheses submitted. hypotheses testing was done by using t-value and significance level of 0.05. the t-value in the amos 21 program is the critical ratio (c.r.) in regression weight: (group number 1 – default model) of the fit model. if the critical ratio value is (c.r.) > 1.967 or (-cr < -1.1967) or probability value is < 0.05 then the research hypothesis is accepted (haryono & wardoyo, 2012, p. 315), as described below. tigor sitorus, denny96 3. discussion the inf luence of asset on share value (hypotheses 1/h1) based on table 2, it can be said that, in the test, the inf luence between asset variable to share value is known to have p-value 0.000 (***) which is < 0.05 so that it can be concluded that h1 is accepted. it means that asset has significantly positive inf luence on value of stock with a beta coefficient of 0.120. when beta coefficient has a positive sign, asset variable is in the direction of the variable level of share value. this also means that if each asset variable experiences an increase of one unit, it will increase the share value by 0.120. the results of this study indicate that the asset has a positive and significant inf luence on the value of share. this explains that asset has a role in inf luencing the increase or decrease of share value. asset as one of the important factors driving the value of stock can be the determinant for investor to invest in a company. a company with large asset is considered capable of providing benefits in the future in the form of return dividend to investor. this result is supported by the research conducted by ghauri (2014) which indicated that asset has a significant inf luence on share value. another statement by f.n. al-shubiri (2010, p. 137) also said that there is a significantly positive relationship between net asset value and stock price. the inf luence of asset on liquid asset (hypotheses 2/h2) table 2 shows that the inf luence between asset variable to liquid asset variable has p-value of 0.000 (***) which is < 0.05 so that it can be concluded that h2 is accepted. it means that asset has a significantly positive inf luence on liquid asset with a beta coefficient of 0.401 because when beta coefficient has a positive sign meaning, asset variable is in the direction of variable level of liquid asset. this also means that if each asset variable experiences an increase of one unit, it will increase the liquid asset by 0.401. this result is supported by the theory from soelaiman (2007) which said that assets both current and fixed are the company’s properties, such as cash, inventory, fixed asset and others, that play a role in the company’s operations. gill and mathur (2011) stated that corporate liquidity holding is inf luenced by the liquidity ratio and firm size.   the influence of asset and profitability toward share value… 97 the results of this study indicate that asset has positive and significant inf luence to liquid asset. this is supported by the increase of liquid asset in every increase of the asset of a company, as proposed by munawir (2004) who said that the liquid asset of a company is inseparable from the inf luence of asset owned by a company. it can be said all activities that a company runs are from its liquid asset that is illustrated in the company’s asset. the research results also conclude that each asset increase by one unit results in the liquid asset increase as much as 0.401. the inf luence of profitability on share value (hypotheses 3/h3) table 2 shows that the inf luence between profit to value of stock has p-value of 0.000 (***) which is < 0.05 so that it can be concluded that h3 is accepted. it means that profit has a significantly negative inf luence to share value with a beta coefficient of 0.261 because when the beta coefficient has a positive sign, it indicates that profit variable is in linear direction with the level of variable share value. such result means that if each profit variable has an increase by one unit, it will increase the value of share by 0.261. the results of this study indicate that profitability has a positive and significant inf luence on share value. this makes the companies especially the mining sector companies that serve as the object of this research should increase their investments both short and long terms. the results of this study are in line with previous research by zulia hanum (2009) which showed that profitability has a significant inf luence on the movement of share value. this evidence is also supported by yang, lee, gu and lee (2010) and sitorus (2016) who shared the same idea. the inf luence of profitability on liquid asset (hypotheses 4/h4) from table 2, it can be seen that the inf luence between profit variable and liquid asset has a p-value of 0.000 (***) which is < 0.05 so that it can be concluded that h4 is accepted. it means that profit has a significantly negative inf luence on the liquid asset with a beta coefficient of 0.760 because when the beta coefficient has a negative sign, it indicates that variable of profit is in the opposite direction with variable level of liquid asset. this also means that if profit variable experiences an increase by one unit, it will increase the liquid asset as much as 0.760. this is in accordance with the theory by agus sartono (2010) who said tigor sitorus, denny98 that profitability is the ability of the company in obtaining profit in relation to sales and this is not apart from the revenue obtained in the form of liquid asset itself. kasmir (2012) also said that profitability is used to measure the efficiency of the use of corporate asset in the search of profits that culminate in liquid asset that can be used by the company. the results of this study indicate that profitability has negative and significant inf luence. from such results, it can be concluded that not all companies with high profitability will always have high liquid asset. therefore, high levels of profitability and liquid asset are necessary to be considered because investor who intends to invest in a company will demand dividend in the form of cash or liquid asset. the inf luence of liquid asset on share value (hypotheses 5/h5) based on table 2, it can be said that, in the test, the inf luence between liquid asset to value of share shows to have p-value of 0.000 (***) which is < 0.05 so that it can be concluded that h5 is accepted. it means that liquid asset has a significantly positive inf luence on value of stock with a beta coefficient of 0.780 because when beta coefficient that has a positive sign, it indicates that the variable of liquid asset is in the direction of the variable level of share value. this also means that if the liquid asset variable has an increase of one unit then it will increase the share value by 0.780. the results of this study indicate that liquid asset as an intervening variable has a positive and significant inf luence on the value of share. it has been proven that liquid asset has stronger inf luence than the direct impact of profitability on share value, thereby proving that liquid asset has an important role in a company in managing the amount of asset and profitability targeted by the management in order to achieve the financial objectives of the company. these results are supported by previous research by utomo (2011) which suggested that cash f low and earnings affect the stock return of a company. this is consistent with the statement of yocelyn and christiawan (2012) saying that cash f low and earnings have a significant inf luence on the value of a company’s stock. inf luence analysis is intended to see how strong the inf luence of a variable with other variables either directly or indirectly. the results of the calculation of direct and indirect inf luence by amos 21 are as bellow:   the influence of asset and profitability toward share value… 99 direct inf luence table 3. direct inf luence profitability asset liquid asset liquid asset 0.760 0.401 1.000 share value 0.261 0.120 0.780 s o u r c e : result of amos ver 21. based on table 3, it can be seen that the largest direct inf luence is between asset to liquid asset which is 0.401.the direct inf luence of asset on the value of share is 0.120, the direct inf luence of profitability on the share value is 0.261 and the direct inf luence of profitability on the liquid asset is 0.760, while the direct inf luence of liquid asset on the value of share is 0.780. such results are the results of research conducted directly to the value of stock as a dependent variable that is directly inf luenced by the asset and profitability variable as independent variable in this study. indirect inf luence table 4. indirect inf luence profitability asset liquid asset liquid asset 0.000 0.0 0.000 share value 0.592 0.312 0.000 s o u r c e : result of amos ver 21. based on table 4, it can be seen that the indirect inf luence of profitability on the value of share is 0.592, while the indirect inf luence of profitability variable on liquid asset is 0.0. indirect inf luence of asset on liquid asset is also 0.0 and indirect inf luence of asset on the value of share is 0.312. based on table 3 and table 4, it proves that the indirect inf luence of asset on share value which is 0.312 is stronger than their direct inf luence which is only 0.120 and the indirect intigor sitorus, denny100 f luence of profitability on share value which is 0.592 is stronger than their direct inf luence which is only 0.261. from this research, it can be seen that liquid asset as an intervening variable can mediate the asset and profitability toward share value. 4. conclusion and implication conclusion based on the results of the research and discussion, some conclusions can be derived and can be summarized as follows: 1). asset provides a significant positive inf luence on the value of share. when beta coefficient has a positive sign, it means that an increase in asset value will boost the value of share. these results prove that asset plays a role in inf luencing the increase of share value, where shareholders will view the high amount of asset owned by a company as a reference to see that the company has the ability to pay dividends to the investors. 2). the asset gives significant inf luence significantly on the liquid asset, and because when the beta coefficient is positive, an increase in asset value will increase the availability of liquid asset. 3). profitability gives a significantly positive inf luence on share value. therefore, the beta coefficient that has a positive mark means that the profit variable is in the same direction as the variable of share value. this also means that if the profit variable increases, it will increase the value of stock. 4). profitability gives a significantly positive inf luence on the liquid asset because when beta coefficient has a positive sign, the profitability variable is in the direction of the liquid asset variable. this also means that if the profitability variable increases, it will increase the availability of liquid asset. 5). the liquid asset gives a significant positive inf luence on the value of stock. when beta coefficient has a positive sign, the liquid asset variable is unidirectional to the variable of value of stock. this also means if the liquid asset variable increases, it will increase the value of stock. thus, it is clear that liquid asset plays a role as a mediator variable in this study because it has stronger inf luence than the direct inf luence of asset and profitability variables on share value. implications the results of this study can hopefully contribute to form an academic advice that can fill the gap in previous research about the relationship between asset   the influence of asset and profitability toward share value… 101 variable and share value conducted by ghauri (2014) and ruslinda (2013) and between profitability and share value conducted by sitorus (2016) and yang et. al (2010), as well as show that liquid asset can act as a mediating variable. therefore, it is advisable for further research to use liquid asset as the mediating variable because according to what is proposed in this research liquid asset can increase the inf luence of asset and profitability on share value. this research also gives practical implication that mining companies in their practices to maintain their liquidity level, especially liquid asset that is obtained from net cash f low, must keep their assets in a safe level as well as their profitability like roa and roe as well as net income that can maintain the availability of liquid asset as net cash f low. limitations of research some of the limitations of this study that should be noted for future research are that in this study, observations are still limited, i.e. from 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(2010). co-determination of capital structure and stock returns – a lisrel approach: an empirical test of taiwan stock market. the quarterly review of economics, 50(2), 222–233. http://dx.doi.org/10.1016/j. qref.2009.12.001. yocelyn, a., & christiawan, y.j. (2012). analisis pengaruh perubahan arus kas dan laba akuntansi terhadap return saham. jurnal akuntansi dan keuangan, 14(2), 81–90. http://dx.doi.org/10.9744/jak.14.2.81-90. yoo, s., & kim, j. (2015). the dynamic relationship between growth and profitability under long-term recession: the case of korean construction companies. sustainability, 7(12), 15982–15998. http://dx.doi.org/10.3390/su71215796. (www1) idx 2014 annual report, http://www.idx.co.id (accessed 20.01.2016). (www2) yahoo finance, http://finance.yahoo.com (accessed 20.01.2016). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 3 date of submission: august 11, 2017; date of acceptance: november 9, 2017. * contact information: milena.persic@fthm.hr, faculty of tourism and hospitality management, accounting department, university of rijeka, primorska 42, p.p. 51410 opatija, croatia, phone: +385 51 294 698; orcid id: http://orcid.org/0000-0002-6668-6856. ** contact information: lahorka.halmi@vuka.hr, business department, karlovac university of applied sciences, trg j. j. strossmayera 9, 47000 karlovac, croatia, phone: +385 47 843 546. peršić, m., & halmi, l. (2017). non-financial information and integrated reporting in the hospitality industry: case study of croatia. copernican journal of finance & accounting, 6(3), 95–109. http://dx.doi.org/10.12775/cjfa.2017.019 milena peršić* university of rijeka lahorka halmi** karlovac university of applied sciences non-financial information and integrated reporting in the hospitality industry: case study of croatia keywords: directive 2014/95/eu, non-financial information, sustainability, integrated reporting, hospitality industry, croatia. j e l classification: m41, m48, q56, d81. abstract: subsequent to the directive 2014/95/eu (eudnfi) and croatian accounting act (caa), available non-financial information disclosed by croatian hospitality companies in non-financial (sustainability) reports were analysed for their breadth and quality using the content analysis method the results of preliminary research of hospitality industry were used in order to explore the specifics of non-financial reporting in the hospitality industry, using case study method. results reveal the highest scores among the quality principles is timeliness, among areas are environment, labour practice, and community/society, and an overall score to be 7.67 (out of 30). the lowest scores of quality principles were reliability and comparability, whereas areas were product milena peršić, lahorka halmi96 and human rights. the results point to a need for establishing a framework for disclosing non-financial information in reports to make them useful to internal and external users. therefore, relevant opinions of experts, bodies and associations, such as csr europe, international integrated reporting council, gri’s corporate leadership group, will be considered in creating a model, with a particular emphasis on the globally accepted sustainability accounting standards.  introduction eu is moving towards greater transparency of companies’ data, as of 2016 all member states have transposed the provisions of directive 2014/95/eu for the disclosure of non-financial information (eudnfi, 2016) into their legislation. under the scope of the directive fall all those companies, which fall into the category of large undertakings with public interest, with either a balance sheet of total € 20 mil (or a net turnover of € 40 mil.), or if an average number of employees exceeds 500 during a financial year (csreu 2017, part ii; eudnfi, 2016, article 19a). strategic accounting (jones, atkinson, lorenz & harris, 2012; hoque, 2006) is oriented toward collecting and recording financial and non-financial information relevant for establishing reporting system (de villiers, rinaldi & unerman, 2014; eccles & spiesshofer, 2015; ey, 2014; gri, 2016; ifac, 2015; iirc, 2013; pwc, 2012, 2015) in accordance with the national legislative requirements (caa, 2016). the results of preliminary research carried out in 2016 on the sample of listed croatian companies registering 400 and more employees between 2014 and 2016 and publicly presenting non-financial reports, pointed to the conclusion that disclosed non-financial information are mainly “story-tellers”, past-oriented, qualitatively stated, generally not presenting a cause-effect relationships, thus indicating a need for significant improvements in sustainability reporting (peršić & halmi, 2016, pp. 181–200). literature review disclosed non-financial information was analysed for the gri principles defining report quality of publicly disclosed non-financial information, i.e. accuracy, balance, clarity, comparability, reliability and timeliness (gri, 2016, pp. 7–16), in order to enhance the relevance, consistency and comparability (eudnfi, 2014, recital 21) of these reports. research will focused on the minimum of elements to be disclosed, based on seven-steps recommended by csr europe (csreu, 2017, part ii), taking into account the research results of the gri’s corpo non-financial information and integrated reporting… 97 rate leadership group (clgir, 2016), elements of the sustainability accounting standards provided by the sustainability accounting standard board (sasb, 2017), proposal of the international integrated reporting council (iirc, 2013) and as well as guiding principles and major requirements of integrated reporting (ir framework, 2013, 5). as integrated reporting is a relatively new and comprehensive reporting framework, a suitable methodological framework will be used in the case study method, founding the research in the results of related researches (camodeca & almici, 2017, pp. 121–135; carels, morun & padia, 2013, pp. 947–961; dumitru, glavan, gorgan & dumitru, 2013, pp. 24–39; eccless & serafeim, 2014, pp. 1–15; gorgan, dumitru & gorgan, 2014, pp. 111–118). strategic focus implies consideration of the liaison between strategy and value creation, i.e. the organization’s capacity to harness its strategy in value creation over time (serafeim, 2016, p. 14). company’s overall strategy has to be visualized through strategic goals and specific strategic initiatives in order to provide comprehensive and useful information for stakeholders, regardless of them being or not in accordance with the principle of conciseness (eccles & serafeim, 2014, pp. 14–15). materiality is the most important part in selecting, connecting and assessing the relationships between information (mio, 2016, fig 1.1.). in integrated reporting system a great emphasis is on material issues, which are to be visible within a business model value chain framework (eccless & serafeim, 2014, pp. 15–16). material aspects and boundaries of company’s business operations has to be viewed in terms of long-term efficiency and socially responsible business, taking into account the key needs of internal stakeholders (top management, board of managers, vice presidents board), managed by business experience committee and supported by expertise provided by the national bodies (e.g. croatian business council for sustainable development – cbcsd and croatian institute for corporate social responsibility – idop). when determining company’s key material aspects and strategic goals, an emphasis ought to be on the application of sustainability principles, potential effects on the environment, and the cooperation with the local community, employees and society (hoque, 2017, pp. 241–248). the materiality matrix has to be defined at the level of all organisational units, taking into account environmental, social and material aspects, viewed through the importance of the identified key stakeholders and economic company’s operations effect (iirc, 2016, pp. 10–20). milena peršić, lahorka halmi98 qualitative characteristics of information (reliability, completeness, consistency, comparability, connectivity) are considered as a foundation for the assessing the effect of company’s ability to create value over time (ir, 2016, p. 20). in that context, integrated reporting is focused on demonstrating a compliance with legal and other requirements, particularly with the provision of gri g4 framework, where emphasis is on protection and rational use of resources, pollution prevention, reduction of waste and adequate waste management, improvement of energy efficiency, as well as on purchase of energy-saving products and services (gri g4, 2015). methodology and research process a content analysis was performed on sustainability reports published by three largest croatian hospitality companies, which are required to apply the framework of eudnfi and its other specific requirements. the focus is on assessing the achieved level of information quality disclosed in non-financial reports in accordance with the main objectives presented in the eudnfi, and brought into force through the new croatian legislative requirements (caa, 2016). only few companies in the hospitality industry fit into these criteria that disclose non-financial information (adris annual report 2015 & 2016; plava laguna annual report 2015 & 2016; valamar riviera integrated company annual report and corporate social responsibility 2015 & 2016.), which could be further analysed. croatian hospitality company “valamar riviera” has been publishing integrated reports since 2015 (valamar, 2015, 2016) and these will be analysed for the assessment of the quality of non-financial information, using case study method. a special emphasis will be on the specifics of hospitality industry activities and their impact on the achieved performance and further development, adhering to the needs of long-term profitability, social justice and environmental protection (eudnfi, recital 3), in a way to achieve the aspiration of comparability and consistency of non-financial information (eudnfi, recital 15). regarding the specifics of the selected croatian company’s business model in hospitality industry, characteristic of capitals on the input and output sides, as well as the outcomes will be analysed as a basis for upgrading the existing integrated reporting (ir) framework. non-financial information and integrated reporting… 99 research results the quality of the identified indicator(s) was analysed as defined by the gri standards’ reporting principles (gri, 2016, pp. 7–16), with a special emphasis on the environmental and social indicators, the latter being further subgrouped into human rights, labour practice, community/society and product. the analysis was grounded in a simple recording of the presence of an indicator(s) in the reports, regardless of them being disclosed as quantitative or qualitative indicators, or if there was just one or several of the indicators from the (sub-) groups disclosed. the score of 0.00 points to “no data”, referring to the original sources not providing reliable evidence to support assumptions or complex calculations (gri, 2016, p. 15). as presented in the table 1, quality assessment was conducted for 6 quality principles (accuracy, balance, clarity, comparability, reliability and timeliness) ranging from 0–5, and 5 areas/categories (environment, human rights, labour practice, community/society and product), ranging from 0 – 6, with an emphasis on the overall score which could range from 0–30 (5 areas/categories multiplied by 6 quality principles). the results of the analysis show that the highest quality principles’ score is linked with the principles of timeliness (3), followed by accuracy (2.33) and clarity (2) (out of possible 5). areas/categories of environment, labour practice and community/society are equally positioned (2 out of 6), while human rights (1) and product responsibility (0.67) are positioned considerably lower. generally, both areas/categories and quality principles scores fall into the lower section of the respective scales, whereas the overall score compared to its possible maximum is extremely low. namely, the overall quality score is 7.67 (out of 30), which is mostly affected by low rating of quality principles of comparability and reliability (0 out of 5), as well as the balance (0.33 out of 5). milena peršić, lahorka halmi100 table 1. results of the content analysis of croatian hospitality industry annual reports areas / / categories principles environment human rights labour practice community / /society product average score – principles (range 1–5) accuracy 1 1 2 2 1 2.33 balance 1 0 0 0 0 0.33 clarity 1 1 2 2 0 2.00 comparability 0 0 0 0 0 0.00 reliability 0 0 0 0 0 0.00 timeliness 3 1 2 2 1 3.00 average score – areas /categories (range 1–6) 2.00 1.00 2.00 2.00 0.67 7.67 s o u r c e : authors processing. the research results indicate that a minor number of companies in croatian hospitality industry disclose non-financial information in annual reports, and that the quality of those information is not satisfactory according to the national accounting regulation (caa, 2016, art. 21a) which is grounded in the eudnfi requirements. discussion and limitation the outcome of the research will be demonstrated by assessing the achieved level of integrated reporting employed in croatian hospitality industry (valamar, 2016), following the framework of the 7 guiding principles (strategic focus; connectivity of information; stakeholder relationships; materiality; conciseness; reliability and completeness; consistency and comparability), as well as 8 integrated report content elements (organisational overview and external environment; governance; business model; risks and opportunities; strategy and resource allocation; performance; outlook; basis of presentation) (ir framework, 2013, p. 5) and the relevant interaction between presented financial and nonfinancial information. instead of complying with the ir framework (ir, 2013) by international integrated reporting council (iirc) in preparing non-financial information and integrated reporting… 101 their integrated report, valamar riviera applied the gri g4 (gri g4, 2015) reporting guidelines for sustainability reporting. for this purpose an integrated reporting model for the hospitality industry was created by employing the information disclosed in the valamar riviera integrated report. presence of guiding principles the analysed integrated report strategic focus is clearly pointed out in the chairman and ceo’s introductory messages (valamar, 2016, pp. 4–7). the company’s overall strategy until 2020 is laid out in the integrated report, so the company’s future orientation can be visualized through strategic goals and specific strategic initiatives (valamar, 2016, pp. 36–122). although it provides comprehensive and useful information for stakeholders, with 174 pages the report exceeds the recommended framework of 70 pages (eccles & serafeim, 2014, p. 14). this is not in accordance with the principle of conciseness and it would be more appropriate to disclose separately strategy from integrated report on the company’s web pages, whereas only relevant links ought to be indicated in the integrated report itself. stakeholder relationships have already been emphasized in the introduction of the report, where the stakeholders are invited to submit their comments and suggestions for the integrated report presented on the company’s website (www.valamar.riviera), and using the ability of communication through the e-mail address (integratedreport@valamar.com), following the premise that “continuous dialogue with stakeholders is an important part of our corporate social responsibility efforts integrated in valamar riviera’s business strategy” (valamar, 2016, pp. 11, 29), the main stakeholders are presented in the figure 1. the starting point and the purpose of company’s activities is based on the relationship with guests by using surveys or guest opinion research, by raising awareness on the environmental issues, by involvement in charity events and by preparing newsletters. as guest’s satisfaction is closely related to employee’s satisfaction, surveys on corporate culture and climate research are systematically implemented, using communication through monthly corporate magazine (printed and web editions), daily, weekly and monthly department meetings as well as workers’ meetings and annual party. milena peršić, lahorka halmi102 figure 1. valamar riviera key and related stakeholders source: valamar, 2016, p. 30. the starting point and the purpose of company’s activities is based on the relationship with guests by using surveys or guest opinion research, by raising awareness on the environmental issues, by involvement in charity events and by preparing newsletters. as guest’s satisfaction is closely related to employee’s satisfaction, surveys on corporate culture and climate research are systematically implemented, using communication through monthly corporate magazine (printed and web editions), daily, weekly and monthly department meetings as well as workers’ meetings and annual party. shareholders obtain information from financial reports, corporate web site and printed magazines, as well as the annual shareholder’s general meeting. special attention is given to the communication with the local community and destinations in which company is located, its participation in the tourist board’s activities, its collaboration in the organization of the destination events and investment projects, as well as to the active participation in charity activities. in addition to the distinguished relationships with the key company's stakeholders, the relationship with related stakeholders is also attended to. special emphasis is given on the communication with the suppliers, out of which 95% are from croatia with a significant emphasis on the long-term collaboration and partnership. s o u r c e : valamar, 2016, p. 30. shareholders obtain information from financial reports, corporate web site and printed magazines, as well as the annual shareholder’s general meeting. special attention is given to the communication with the local community and destinations in which company is located, its participation in the tourist board’s activities, its collaboration in the organization of the destination events and investment projects, as well as to the active participation in charity activities. in addition to the distinguished relationships with the key company’s stakeholders, the relationship with related stakeholders is also attended to. special emphasis is given on the communication with the suppliers, out of which 95% are from croatia with a significant emphasis on the long-term collaboration and partnership. signed collective agreement and collaboration with the “work council” on all key issues related to employees’ rights are the main link with the trade unions. of a particular importance are relationships with various professional associations which could promote company’s professional interests, such as croatian employers’ association (hup), croatian camping union (kuh), association of employers in croatian hospitality (upuh), croatian chamber of economy (hgk) and regional chambers in pula & dubrovnik, association of croatian non-financial information and integrated reporting… 103 travel agencies (uhpa), croatian meeting professionals association (hupkt), alumni of the faculty of tourism and hospitality management (alumni), croatian association of corporate treasurers (hukr), croatian association of financial analysts (hufa), croatian business council for sustainable development (hrpsor), american chamber of commerce in croatia, and others. collaboration on the development of investment projects, student scholarships and dialogue related to legislative initiatives are results of communication with the public administration bodies. transparent communication with all investors on the capital market (non-deal road shows, meetings and conferences, “investors’ day”, corporate web site, etc.), different kinds of collaboration with development and commercial banks/creditors and proactive communication with analysts constitute relations with the investment community. the company is also actively involved in the general public life through press releases, corporate website and company magazine. quality communication with stakeholders and appreciation of their proposals has definitely contributed to being recognized as the leading croatian hospitality company in social, human and environmental responsibility (valamar, 2016, pp. 5, 30–31, 85). main list of material aspects which are the subject of observation are economic effect, market presence, contribution to the community (economic, social, employment), increase in the local employment rate with the focus on permanent seasonal workforce, employee training and education, creating competitive working conditions, dialogue with the employee representatives, local community, energy (improving energy efficiency and using renewable energy sources, continued ghg reduction), water (using recycled water), wastewater and waste, ethical commitment and transparency and responsible development of tourism. subsequently identified kpis (measurable monitoring indicators for the upcoming periods) were identified in accordance with the company’s defined strategy, goals and objectives (valamar, 2016, pp. 29–30). the starting point is based in company’s policies which present the commitment to be the hospitality market leader in croatia in terms of service quality, guest and user satisfaction, caring for the interests of employees, company and local community, environmental protection and resource management by adopting a high level of service quality and adhering to the principles of sustainable development. the report provides information related to the achievement of general and specific goals related to quality, safety, environment and energy, employees’ training, labour law compliance and caring for employees, support milena peršić, lahorka halmi104 for the local community and interests and protection of children, which will be presented through the company’s business model and value chain. business model and its elements in the analysed integrated report company’s business model is based on the idea of simultaneous management of hospitality properties and destinations, ensuing the sustainability and social responsibility principles in creating new value, in long-term decision making and in daily practices. special emphasis is placed on appreciation guest experience management in development and maintenance of hospitality assets, continuous improvement of operating management (in hotels, campsites and resorts), producing high quality service, with aim of securing a high return on investment. a particular emphasis is put on co-operation with the destination management at the national (croatian national tourist board), regional (istria and kvarner tourist boards) and local (poreč, vrsar, funtana, tar vabriga, labin, raša, krk, baška and dubrovnik tourist board) level, aiming to become an active partner in the destination value chain by developing local economy through continually contributing to the increase for the destination image, achieving destinations’ sustainability development strategic goals, and thus becoming a leader of the development of tourism in croatia in the future. business model and its elements of integrated report prepared by employing the information disclosed in valamar riviera’s sustainability report are presented in figure 2. the company’s business model ought to be considered in interaction with types of resources and their allocation onto the inputs sides (financial, manufactured, human, intellectual, social capital and relationships), in accordance with the company’s specific business activities, organisational overview and governance, taking into account the requirements of external natural and business environment, ranging from the local community level (destination in which company operate) to the company’s position in the tourism market. the business model also includes the framework for finding new opportunities in relation to those which have already been realised and presented in a way to assess the achieved position in the national business environment. the following potential risks (valamar, 2016, pp. 147–153) presented the integrated report should also be considered as an important part of company’s development: financial risks (foreign exchange risk, interest rate risk, credit risk, price risk, liquidity risk, share-related risks), business risk (risks threatfi gu re 2 . b us in es s m od el a nd it s el em en ts p re se nt ed in th e in te gr at ed r ep or t o f c ro at ia n ho sp it al it y’ s co m pa ny s o u r c e : a ut ho rs p ro ce ss in g ba se d on t he : i r f ra m ew or k, 2 01 3, p . 1 3; e cc le s & s er af ei m , 2 01 4, p p. 1 3– 15 ; v al am ar , 2 01 6, p p. 1 –1 74 . milena peršić, lahorka halmi106 ening its competitiveness and future stability), operational risks (direct or indirect losses that arise form inadequate or wrong internal or external processes and information exchange), global risks (global financial crisis, terrorism threats, security and political instability) and compliance risks (changes in tax laws and other regulations as is a very serious threat). risks and opportunities are also presented in the strategic determinants, adhering to the vision, mission, goals and core value elements, all being focused on creating prerequisite for achieved higher level of future performance, by employing sustainability development principles. a conclusion can be made that just the overall quality score itself (7.67 out of 30) indicates a great potential yet to be fulfilled in defining specific indicators for the hospitality industry, thus improving comparability of company’s results by providing a quality of information that facilitate the comparison of sustainability information and results. limitation the main limitation of this and other researches on this topic in croatia is that there are not enough big companies as defined by eudnfi and caa, that do disclose sustainability reports. in addition to this, there is insufficient number of disclosed integrated reports within the hospitality industry for testing the proposed reporting model. conclusions and future research valamar riviera has been chosen for case study because it is the only and first hotel company to be disclosing sustainability reports in the hospitality industry in croatia, thus being an ideal choice for modelling the elements of integrated reports relevant for hospitality industry. in modelling the integrated report framework, a particular emphasis was put on applying sustainability principles in the company’s business activities, identified in the disclosed sustainability reports, prepared by using the gri g4 reporting guidelines framework (gri g4, 2015) instead of the ir framework (2013). there are many difficulties in recognising the elements relevant for disclosing capitals on the input and output side of integrated report, as defined by the strategic orientation and business model. an interdisciplinary team of experts is needed in order to ground the integrated report in realistic observations of the relationship between stakehold non-financial information and integrated reporting… 107 ers in creating added value as the most important relationship, with the aim of achieving sustainability development goals and to increase company’s image in its business environment. future research should focus on the quality of sustainable reporting and benchmarking, based on the provisions of the eudnfi and national accounting legislation as a source of information for external user. as the quality of externally presented non-financial information should be ensured through internal sources, special emphasis ought to be on researches oriented towards connecting the accounting tools and it possibilities with the needs of information users specific to the hospitality industry. information prepared within the framework of an internal accounting (responsibility accounting) is primarily oriented toward needs of internal user, yet they are also a very important input into the system of non-financial reporting prepared for external users, as well as for strategic decision making process, so that they can be connected with the information coming from external sources (strategic accounting).  references caa (2016). croatian accounting act, consolidated text – published in the official gazette (og) no 78/15, 134/15 and 120/16. camodeca, r., & almici, a. 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(2016) integrated reporting – statement on management accounting, ima – the association of accountants and financial professionals in business, the americas, asia/pacific, europe and middle east/africa, montvale, nj. valamar (2015). integrated company annual report and corporate social responsibility, valamar riviera, poreč, croatia, 1–58, http://valamar-riviera.com/en/investors/financial-news/integrated-company-annual-report-and-corporate-social-responsibility-2015/ (accessed: 24. 02. 2017). valamar (2016). integrated company annual report and corporate social responsibility, valamar riviera, poreč, croatia, 1-174, http://valamar-riviera.com/media/139229/ integrated-company-annual-report-and-corporate-social-responsibility-2016.pdf (accessed: 24. 02. 2017). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 2 date of submission: august 1, 2018; date of acceptance: september 21, 2018. * contact information: francesca.bartolacci@unimc.it, university of macerata, department of economics and law, via armaroli n. 43, 62100 macerata, italy, phone: +39 0733 2583242; orcid id: https://orcid.org/0000-0003-0773-5950. ** contact information: michela.soverchia@unimc.it, university of macerata, department of economics and law, via armaroli n. 43, 62100 macerata, italy, phone: +39 0733 2583231; orcid id: https://orcid.org/0000-0002-7558-3795. *** contact information: ermanno.zigiotti@unimc.it, university of macerata, department of economics and law, via armaroli n. 43, 62100 macerata, italy, phone: +39 0733 2583238; orcid id: https://orcid.org/0000-0002-3303-2725. bartolacci, f., soverchia, m., & zigiotti, e. (2018). managing solid urban waste in italy: an economic, financial, and environmental performance analysis. copernican journal of finance & accounting, 7(2), 9–28. http://dx.doi.org/10.12775/cjfa.2018.006 francesca bartolacci* university of macerata michela soverchia** university of macerata ermanno zigiotti*** university of macerata managing solid urban waste in italy: an economic, financial, and environmental performance analysis keywords: waste management, separate waste collection, performance analysis, italy. j e l classification: m21, q53, q56. abstract: the present article focuses on italian solid urban waste management companies in the aim of ascertaining whether the best practices in this field, and specifically regarding separated waste collection (paper, plastic, glass, organic compostable, and francesca bartolacci, michela soverchia, ermanno zigiotti10 non-recyclable waste), are sufficiently widespread as per european union directives relative to the circular economy. in addition to this analysis, the paper also evaluates the financial performance of a companies’ group which should operate economically to guarantee continuity of management and provision of services to the community at large. the analysis concerns companies operating in approximately 900 municipalities located throughout the italian territory. the results show a quite variegated situation, in which the northern regions appear to represent the macro-area where the most efficient firms operate, realizing the highest level of separated waste collection despite having the lowest unitary revenues, both per ton collected and per inhabitant served.  introduction the european commission (ec) has adopted an ambitious package for the circular economy which affects the entire lifecycle of products (european commission, 2015; european parliament, 2017). this encompasses the earliest phases of design, in which the necessary resources to be procured are identified, and continues through the transformation processes of the materials, and therefore, includes the waste that are potentially generated during the entire process of production, distribution, and consumption. an important part of the circular economy ‘circle’ regards waste management which should follow the ‘hierarchical principle’, that establishes an order of priority. preventing negative environmental impacts caused by waste represents the first step, followed by preparing materials to be re-used, recycling, energy recovery, and finally, disposal. the ec package considers landfill as the last step in solid urban waste (uw) disposal that must be limited both quantitatively and qualitatively (gharfalkar, court, campbell, ali & hillier, 2015, p. 305; tisserant, pauliuk, merciai, schmidt, fry, wood & tukker, 2017, p. 628; cossu & williams, 2015, p. 1; velenturf & purnell, 2017, p. 1). all of these conditions should serve as guidelines for the management choices made by waste management companies, which take the responsibility for providing the local public services from collection to disposal of uw. this becomes particularly significant when taking into consideration the critical conditions under which these companies operate. uw collection, treatment and disposal are usually very costly activities (koushki, al-duaij & al-ghimlas, 2004, p. 957; greco, allegrini, del lungo, gori savellini & gabellini, 2015, p. 364), because they usually require high investments in terms of plants and machineries, and huge operating costs for personnel, services, vehicles’ depreciation. moreover, among the various forms of waste collection, study findings confirm that separated waste collection (sc) represents the most expensive managing solid urban waste in italy… 11 option for waste management companies (koushki parviz, al-duaij & al-ghimlas, 2004, pp. 959–960). in light of these premises, this paper focuses on uw management companies which should match environmental and financial sustainability (bartolacci, paolini, quaranta & soverchia, 2018, p. 129; horváthová, 2012, p. 91; lohri, camenzind & zurbrügg, 2014, p. 542; nishitania, jannah, kaneko & hardinsyah, 2017, p. 10; qi, zeng, shi, meng, lin & yang, 2014, p. 349; song, zhao & zeng, 2017, p. 1051). in particular, the research objective consists of determining, through an exploratory analysis, whether the best practices for waste management – in terms of sc – are sufficiently widespread in italy to meet the conditions outlined in the ec circular economy package. in addition, the economic-financial performance of the companies’ group is evaluated to determine whether it is such as to guarantee the continuity of management and ensure the provision of the service to the community. to reach our research objective we have also focused on certain aspects that can affect company performance, such as geographical location and/or the availability of waste treatment and disposal plants; the latter could be indicative of a degree of diversification of waste management activities. the waste management sector in italy the services connected to waste management processes (collection, transportation, and treatment) are considered public utilities. in fact, italian legislation requires municipalities to carry them out, precisely because of their social, environmental and economic relevance (bognetti & robotti, 2003, p. 117). in particular, municipalities can manage these services either directly or outsource them to companies (often owned by the same municipalities); to date, this last option is the most common in italy (italian competition authority, 2016). occasionally, such of them are multi-utility companies, providing various services (i.e. electricity, water, pharmacies) in addition to waste collection, transportation and treatment. recent studies have highlighted that the italian waste management sector includes 463 companies, of which 71% are mono-utilities and the remainder are multi-utilities (utilitatis, 2016, p. 27). in this rather fragmented and lowcompetition sector (citroni, lippi & profeti, 2016, p. 2; italian competition authority, 2016), the providers are predominantly small and medium-sized companies (see table 1); they supply waste collection services to approximately francesca bartolacci, michela soverchia, ermanno zigiotti12 8,000 italian municipalities that are extremely diverse in terms of the geo-morphological characteristics, the population density, etc. table 1. italian companies that operate in the waste management sector in 2013 number of companies that provide uw management services total revenues (in euro) number of employees very large companies (revenues ≥ €100,000) 19 4,223,140 31,791 large companies (revenues between €50,000 and €100,000) 20 1,385,619 8,970 medium-sized companies (revenues between €10,000 and €50,000) 186 3,956,568 31,594 small companies (revenues < €10,000) 238 997,306 9,006 totale 463 10,562,633 81,361 s o u r c e : utilitatis, 2016. regardless of the private or public nature of the companies, they must strive for a satisfactory and lasting economic and financial sustainability, in order to be able to provide indispensable services over the long term. as well known, the economic and financial performance of companies must be monitored, even in cases of public entities, because an organization’s financial balance is a pre-requisite for its business viability (macpherson, 2001, p. 13; sargiacomo, 2013, pp. 20–21). this is why it is important to implement a corporate control system that is both integrated and multidimensional, and that takes into account the specificities of the performance of the companies in question. their multidimensionality must include the efficiency of the internal processes and the operational effectiveness, as well as the quality of the services provided because of the need to evaluate the social impacts and, more generally, the performance outcomes which, in this case, assume environmental significance (pollit & bouckaert, 2011, pp. 7–8). in other words, satisfactory economic and financial performance levels do not necessarily coincide with equally satisfactory levels of services provided and of outcomes, measured in terms of environmental protection and safeguarding, for example. managing solid urban waste in italy… 13 the research methodology and the course of the research process in order to achieve the objective outlined above, an empirical study referred to the four-year period 2012–2015 was conducted on a group of 52 italian medium-sized companies, constituting a fairly homogeneous group of firms that could be compared. they were mostly operating in the field of uw collection, transport, treatment and disposal in approximately 900 municipalities in italy. the pertinent financial information was obtained from financial statements, the waste collection data was taken from the ispra (higher institute for environmental prevention and research) database, and the information on population served and on territorial characteristics (extension and population density) was available from the istat (national statistics institute) database. the set of companies analyzed is fairly representative, considering the 900 municipalities served (about 10% of all italian municipalities) and the ten million or more citizens who are provided with these services over an area of over 30,000 sq. km. as regards the three geographical macro-areas, the highest percentages are found in the north, in terms of number of municipalities and territorial extension (65% and 47%, respectively, according to 2015 data), whereas the percentage of the population served is greatest in the south and on the islands (40%) because of greater population density in this macro-area1. as for the size of the 52 companies in the group, the average annual revenues, which appears in item a.1 of the income statement (conto economico, in italian), amounts to €23,610,009 in the north, 41,187,692 in the center, and 25,420,363 in the south and islands. when we take out the data for the two outlier municipalities (florence in the center and naples in the south), which are considerably larger than the other 50 companies in the group, the average annual revenues amounts to €28,814,176 in the central part and €17,467,114 in the southern part of the country. in the companies’ group, the average number 1 these observations obviously refer to the group of companies and, therefore, to the group of municipalities analyzed in this study; some of more densely populated municipalities in the north are served by listed companies and are, therefore, not part of this analysis, for the reasons concerning the size homogeneity, mentioned above. francesca bartolacci, michela soverchia, ermanno zigiotti14 of employees is 158 for the north, 259 for the center (166, adjusting for florence), and 337 for the south (252, adjusting for naples)2. in light of the above mentioned, the performance of the 52 companies was measured in each of the four years under analysis (2012–2015). the findings were reclassified by geographical macro-area and by the presence/absence of at least one waste treatment and disposal plant. in particular, according to the first classification, the group consists of 20 companies in the north, 11 in the center, and 21 in the south. as for the presence/absence of a plant, the classification consists respectively of 28 and 24 companies. empirical findings 1. economic and financial performance to investigate the economic and financial performance of the analyzed companies, specific indicators were calculated using their financial statements data; those are ratios used in literature and among practitioners as benchmarks to assess the following three areas of performance: (i) profitability; (ii) productivity-efficiency; (iii) financial-equity profile. to evaluate the profitability, the company’s roi and roe were utilized. the first indicator measures the return on investment, by relating operating income (or ebit earnings before interests and taxes) to the total assets. the second indicator measures the return on equity, by relating net income (the bottom line of the income statement) to the net equity. the literature often suggests using these ratios to assess the economic and financial performance in relation to environmental practices at the firm level (hart & ahuja, 1996, p. 30; judge & douglas, 1998, p. 241; khanna & damon, 1999, p. 1; rubio-romero, arjona-jiménez & lópez-arquillosa, 2013, p. 84). as concerns the roi, it is worth noting that in the calculation of the positive component of the indicator only the principal revenues indicated in a.1 of the income statement were taken into account, whereas “other revenues” listed in a.5, deriving for the most part from activities not directly related to the core business, were expunged. this method of calculation actually penalizes 2 these numbers are considerably higher than those for the entire country, as recorded by istat 2012 (published in italian competition authority, 2016, 80) which show an average annual revenues of € 5.3 mil and 48 employees. managing solid urban waste in italy… 15 the analysis because, by utilizing such restrictive parameters, it ignores some of the revenues which are nevertheless relevant, in a wide sense, to the ordinary management of the company. therefore, a rectified version of the return on investment (roi adjusted) was calculated that also included, among company revenues, those listed under item a.5 of the income statement. to measure productivity and efficiency, according to the literature, two indicators were calculated (listowski, ngo & guo, 2013, p. 67). the first one (revenues per employee) provides a dimensional measurement of the company as well as of the employees productivity, strictly referred to the revenues deriving from the core business, as the numerator represents only the revenues listed in a.1 of the income statement. the second one (production costs/production value) measures the core business efficiency, which will increase with the reduction of the costs’ impact on the production value. finally, in order to assess the financial-equity profile of the companies, two indicators were calculated. these are useful to establish the consistency of the company’s net equity and its financial stability (higgins, 2012, p. 8). the first indicator (net equity/total assets) shows the proportion of investments (or total assets) covered by the equity brought in by the shareholders; hence, the residual portion of the investments is financed by debts of varied nature (financial, commercial, etc.). it follows that, the higher is the incidence of net equity on total assets, the better capitalized and, therefore, more balanced the company will appear, in terms of its financial-equity profile. indirectly, this indicator provides information on the relationship between debts and net equity (debt/net equity); it is used as a benchmark for evaluate the degree of indebtedness of a company and, therefore, the risk to financers and the company’s creditworthiness. the second indicator (net debt of liquidity/ebitda) measures the company’s ability to repay its financial and operating debt, with the financial resources generated by the current management. the ratio expresses the number of years that the ordinary financial f low (i.e., ebitda earnings before interests, taxes, depreciation, and amortization) would take to repay the company’s entire debt, assuming the trend for the coming years is implicitly constant. the lower the quotient, the better the pay-back capability and, therefore, the financial profile of the company, will appear to creditors3. 3  the indicator could become negative, either because of the numerator (debts inferior to company liquidity) or the denominator (negative ebitda). because they are francesca bartolacci, michela soverchia, ermanno zigiotti16 1.1. profitability performance by calculating the profitability performance per geographical macro-area, the following results were obtained: table 2. annual profitability indicator averages per geographical macro-areas (in %) 2012 2013 2014 2015 roi roe roi adj. roi roe roi adj. roi roe roi adj. roi roe roi adj. north -0.21 3.86 3.19 -0.78 2.20 3.34 0.77 4.92 4.24 0.74 5.12 3.74 center -1.99 4.74 3.82 -1.80 3.21 2.36 -0.14 -2.89 3.27 -0.81 -1.65 4.31 south -5.88 3.09 1.22 -1.71 5.47 4.99 2.20 3.72 5.41 1.51 4.33 5.27 italy -2.69 3.90 2.74 -1.43 3.63 3.56 0.94 1.92 4.31 0.48 2.60 4.44 outliers roe: legnano (north); benevento, nuoro, and trani (south). s o u r c e : own study. overall, the roi values in the four-year period for all of the companies reveal an unsatisfactory performance in terms of profitability that is sometimes negative (see the entire four years in central italy). the situation looks decidedly different if attention is shifted to roi adjusted, which shows positive values for all of the geographical macro-areas and a national rising trend over the four-year period. this bears witness to what was mentioned above in terms of the weight of other revenues (extraneous to the core business) in guaranteeing balanced profitability. what is less easily interpreted is the roe trend, impacted by the company’s financial management (in many cases, interests play a significant role), as well as the extraordinary revenues/costs and taxes. the north shows a consistently positive and growing trend over the four-year period (excluding the one outlier from the average); the south is also generally positive in the entire timeframe, but with a decreasing trend (somewhat buffered by the three outliers taken out only rare cases, in table 6, para 4.1.3 the negative values were excluded from the calculation of the averages so as not to alter the overall trend. managing solid urban waste in italy… 17 of the average); and the center exhibits up and down trends, with positive figures in the first two years and negative ones in the last two4. by calculating the profitability performance based on whether or not there is a treatment and disposal plant, yields the following results. table 3. annual profitability indicator averages calculated with/without disposal plant (%) 2012 2013 2014 2015 roi roe roi adj. roi roe roi adj. roi roe roi adj. roi roe roi adj. w/ plant -2.70 -1.07 1.44 -0.92 5.82 2.46 -0.28 -5.61 2.49 -1.62 2.77 2.02 w/o plant -3.08 -1.75 3.79 -1.89 5.04 5.36 2.83 2.64 6.86 3.46 0.02 7.35 outliers roe: benevento, legnano, and nuoro (w/o plant); trani (w/ plant). s o u r c e : own study. the roi with a plant is always negative, with a four-year average of -1.38%; the roi without a plant is negative in the first two years and positive in the other two, with a four-year average of 0.33%. the adjusted roi shows constantly positive values for both categories. nevertheless, the best performance is from companies without a treatment and disposal plant (four-year average of 5.84% vs. 2.10%). as for the roe, excluding the four outliers previously mentioned, there is further confirmation that waste management companies without a plant perform better than the others (four-year average of 1.49% vs. 0.48%). 1.2. productivity-efficiency performance productivity-efficiency performance assessment, subdivided by geographical macro-area, yields the following results. 4 the roe must be interpreted in combination with the net equity (as the denominator of the quotient) because, given the same annual income, companies with less of its own equity will show a higher roe and rely more heavily on the financial lever. it follows that in such a case, there is increased risk for creditors who find themselves having to finance most of the assets and therefore they bear the (greater) risk of default. thus, the roe indicator must be read in combination with the one for net equity/total assets, as shown in table 6, para 4.1.3. francesca bartolacci, michela soverchia, ermanno zigiotti18 table 4. annual productivity-efficiency indicator averages per geographical macro-area 2012 2013 2014 2015 revenues per empl. prod. costs/prod. value revenues per empl. prod. costs/prod. value revenues per empl. prod. costs/prod. value revenues per empl. prod. costs/prod. value north € 289,009 96.48% € 266,785 97.20% € 292,711 96.09% € 326,546 96.69% center € 166,562 95.53% € 163,785 97.55% € 161,864 98.03% € 161,298 97.25% south € 90,429 99.99% € 91,166 96.34% € 79,210 97.44% € 78,324 97.62% italy € 182,000 97.33% € 173,912 97.03% € 177,928 97.19% € 188,723 97.19% s o u r c e : own study. the evidence shows that productivity is notably higher in the north than in the other two macro-areas and constantly above the national average; however, the data is partially inf luenced by the two previously cited outliers (florence in the center and naples in the south). nevertheless, if the outliers are eliminated from the revenues per employee indicator, the results for the center (minimum €149,283/maximum €154,511) and the south (minimum €74,901/maximum €87,703) worsen, confirming the well-entrenched low productivity of the center and the south. by contrast, the second indicator (production costs/production value) shows that the efficiency values of the three macro-areas are relatively close in range. in terms of the national averages, however, the north remains slightly above these performance figures. by reclassifying the productivity-efficiency performance based on whether or not there is a treatment and disposal plant yields the following results. table 5. annual productivity-efficiency indicator averages calculated with/without disposal plant 2012 2013 2014 2015 revenues per empl. prod. costs/prod. value revenues per empl. prod. costs/prod. value revenues per empl. prod. costs/prod. value revenues per empl. prod. costs/prod. value w/ plant € 225,995 98.75% € 213,304 97.43% € 231,450 98.39% € 252,350 98.64% w/o plant € 132,646 91.46% € 128,259 96.34% € 117,397 95.47% € 120,175 95.49% s o u r c e : own study. managing solid urban waste in italy… 19 the first indicator reveals a high productivity trend for companies with a treatment and disposal plant (a four-year average of €230,775) and it is significantly higher than the one for companies without such a plant (four-year average of €124,619). the second indicator for efficiency shows that it is generally higher in companies without a plant, although the difference is relatively modest, with the exception of the year 2012. 1.3. financial-equity profile the financial-equity indicators, subdivided by geographical area, are reported as follows: table 6. annual financial-equity indicator averages per geographical macro-area 2012 2013 2014 2015 net equity/ tot asset net debt / ebitda net equity/ tot asset net debt / ebitda net equity/ tot asset net debt / ebitda net equity/ tot asset net debt / ebitda north 25.79% 8.27 27.02% 8.55 30.65% 6.37 32.77% 6.49 center 23.61% 8.51 25.32% 5.79 25.16% 6.68 26.55% 6.10 south 9.86% 11.46 12.55% 7.62 13.11% 16.56 14.72% 14.15 italy 19.75% 9.41 21.63% 7.32 22.97% 9.87 24.68% 8.91 net debt/ebitda: negative values not included. s o u r c e : own study. the first indicator shows an improving trend over time for the three areas, revealing a common effort to strengthen companies’ financial-equity profile. conversely, the geographical factor shows a clear tendency for the best financial-equity conditions to be found in the north and in the center (with a growing negative disparity between the two areas, over time) and a marked financial-equity deficiency in the southern area. this latest performance, taken together with the roe profitability index for southern area companies (see table 2), shows that the good performance seen over the four-year period does not derive from satisfactory company profitability but from the low level of net equity which is put in relation to net income. in fact, the companies located in the south show profitability and equity profiles francesca bartolacci, michela soverchia, ermanno zigiotti20 that are much worse than those of competitors located in the other geographical macro-areas. the second indicator confirms this conclusion, as the pay-back period for southern area companies is considerably longer (except for the year 2013) than it is in the other companies in the central and northern areas. calculating the same indicators based on the presence/absence of a disposal plant in the same location yields the following outcomes. table 7. annual financial asset indicator averages calculated with/without disposal plant 2012 2013 2014 2015 net equity/ tot asset net debt / ebitda net equity/ tot asset net debt / ebitda net equity/ tot asset net debt / ebitda net equity/ tot asset net debt / ebitda w/ plant 18.57% 8.26 20.93% 6.62 20.76% 6.94 21.76% 6.65 w/o plant 19.28% 11.19 20.68% 8.71 24.32% 14.77 26.95% 12.82 net debt/ebitda: negative values not included. s o u r c e : own study. for the first indicator, companies without a disposal plant show a better equity over invested capital ratio, except for 2013 when the percentages were nearly identical. this finding was, in a way, expected because, with no change to equity, the presence or absence of one or more disposal plants, owned outright or through other legal terms, entails greater investment and therefore, to a predictable worsening of the indicator. this must be read together with the roi, which also mirrors the trend of being higher in those companies without disposal plants. if for no other reason, this is due to the fact that the latter companies highlight lower total assets than those that do have treatment and disposal plants. in fact, the four-year average amount of invested capital in the companies with a plant rises to €58,699,597 compared to €13,330,773 for those without. as for the second indicator, it shows a definite tendency in favor of companies with a treatment and disposal plant, which show much lower values in all four years compared to companies without such facilities. this finding stands out in contrast to the profitability indicators, analyzed in paragraph 1.1, that showed a higher capacity to generate income in companies without a disposal plant. managing solid urban waste in italy… 21 2. environmental performance in 2012–2015, in italy, uw amounted to over 29 million tons. the per capita values show a downward trend, albeit less significantly so in the last year. the center, with 543 kg per inhabitant, is the macro-area with the highest uw per capita values; nevertheless, it is also the area which saw the greatest reduction of this indicator over the four years (a decline of 6.60% for the center, 4.06% for the south, and 2.02% for the north). during each year of the observation period in italy, of the sc, between 12 and 14 million tons was destined for recycling. the sc values went from 39.98% to 47.49%, the per capita sc increased by 14.47%, with per capita uw falling by 3.63%. the nation-wide seven percentage point increase in sc shows that in recent years more advanced systems for the recycling of uw have been introduced, in a more or less widespread manner. the fact that many municipalities made sc mandatory most likely contributed favorably to the increase. nevertheless, the values highlights evident differences between the percentages in the north and those in the center, and ever more so in the south. the fact that sc is not a homogeneous practice throughout the italian territory is confirmed by the per capita sc values. after this brief description of the national trends, attention is turned to the findings from the 52 companies, in order to pursue the research objective: we take a look at how the data on the diffusion of best practices pertaining to urban waste management can be put in relation to those companies’ economic and financial performance. the companies that were monitored are quite representative of national statistics, as they collect 13.70% of the uw in italy and 13.43% of the sc (2015 data). moreover, the trend shown by some of the indicators is in line with the national trend. for example, in the 4-year period under analysis, the 52 companies saw a 4.38% reduction in per capita uw, along with increases of 9.12% in sc per capita and of 5.08% in sc% (see table 8). francesca bartolacci, michela soverchia, ermanno zigiotti22 table 8. waste production of the analyzed companies per capita uw per capita sc sc% 2012 516.88 199.08 40.04 2013 504.01 202.25 41.23 2014 509.67 214.97 43.17 2015 494.22 217.24 45.12 per capita uw and per capita sc shown in kg. s o u r c e : own study. the observed performance in terms of sc% is undoubtedly inf luenced by the type of collection adopted by the municipalities and by the waste management companies entrusted with providing the service. the sc systems differ from one municipality to another which can be a combination of: on-street containers, door-to-door, collection centers (usually for bulky items, weee, and/or other categories). in addition, there can be local variations in how waste must be separated; the most common guidelines concern packaging materials (glass, paper, plastic, aluminum), as well as bulky items and weee (symbola, 2015, pp. 2–3). table 9. waste production of the analyzed companies, by geographical macro-area 2012 2013 2014 2015 per capita uw per capita sc sc% per capita uw per capita sc sc% per capita uw per capita sc sc% per capita uw per capita sc sc% north 507.82 265.74 53.25 501.46 265.99 54.09 508.68 277.73 56.00 475.45 270.91 58.02 center 603.48 213.52 37.80 574.24 217.48 38.01 580.81 244.06 41.91 570.34 264.04 45.96 south 481.40 121.19 27.21 469.56 127.45 29.41 473.49 134.10 29.06 471.60 137.47 31.54 italy 516.88 199.08 40.04 504.01 202.25 41.23 209.67 214.97 43.17 494.22 217.24 45.12 per capita uw and per capita sc shown in kg. s o u r c e : own study. from observation of the macro-area specific values, the center emerges as the leader in uw per capita production and is the area with the best outcomes managing solid urban waste in italy… 23 in terms of increased sc% and per capita sc (see table 9). from year to year, the north leads, instead, in per capita uw and sc. table 10. waste production of the analyzed companies calculated with/without disposal plant 2012 2013 2014 2015 per capita uw per capita sc sc% per capita uw per capita sc sc% per capita uw per capita sc sc% per capita uw per capita sc sc% w/ plant 532.90 215.41 41.25 519.27 216.22 42.64 532.35 233.70 45.51 530.63 244.86 47.18 w/o plant 499.29 174.04 37.38 486.14 180.60 38.48 483.34 188.00 39.32 451.19 181.40 41.97 per capita uw and per capita sc shown in kg. s o u r c e : own study. the findings reported in table 10 are not as predictable. they show better performances in sc% and in per capita sc when the company has at least one disposal plant (waste-to-energy plant, composting, landfill, etc.). therefore, a greater diversification of activities in which waste collection is combined with waste treatment and disposal would seem to favor the recycling of the materials collected separately by the same companies. the dynamic management of a company in which various forms of waste treatment are undertaken appears to improve both the company’s productivity and its environmental performance.  discussion and conclusions in order to investigate the relationship between environmental performance and economic-financial performance, an analysis of the ratio of two indicators is proposed. the numerator is revenues (item a.1 in the income statement) and the denominator is first, the uw to calculate the unitary revenues per ton of all collected uw, and second, the population served to calculate the per capita revenues. the results obtained provide information on the company’s degree of efficiency and, indirectly, on the costs borne by the beneficiaries of the services provided. in fact, the revenues of the analyzed companies derive mostly from francesca bartolacci, michela soverchia, ermanno zigiotti24 the taxes levied on the citizens5, although there may be other sources of revenue from the sale of waste destined for recycling. an in-depth look at the data reported in table 11 reveals that the unitary revenues for uw and population served in the north are lower than those in the other two macro-areas. therefore, in the north the waste management companies operate most efficiently on average, as they can guarantee a service characterized by a higher sc level, despite lower unitary revenue. this may depend on several factors related to company choices, among which the logistic solutions, the organization of employees, the innovative level of plants and vehicles adopted in the company. table 11. combined environmental and financial performances, by geographical macro-areas 2012 2013 2014 2015 revenues/ uw revenues/ pop. revenues/ uw revenues/ pop. revenues/ uw revenues/ pop. revenues/ uw revenues/ pop. north 264.18 133.65 263.86 129.22 259.93 130.60 264.11 133.40 center 276.11 162.56 275.59 132.51 279.72 152.72 296.14 172.44 south 308.39 146.48 306.95 141.09 293.49 134.61 300.71 136.14 italy 290.41 148.79 290.51 143.33 284.33 142.00 292.03 144.71 s o u r c e : own study. this was followed by the calculation of the indicators in relation to the presence or absence of a treatment and disposal plant (landfill or other plants). the findings do not yield particularly significant differences on a time scale. rather, they show a (slightly) higher unitary revenues per ton of uw and per capita revenues in companies where there is at least one type of treatment and disposal plant (see table 12). although the difference in the two cases (w/ plant and w/o plant) is not so significant, it is observed in both indicators and hence consistent. as regards this last profile, it is worth recalling what has already been stated concerning the composition of the revenues, considering the fact that the 5 in italy, the solid uw tax serves to cover the entire cost of the waste management service, with no goal to incentivize – except through a mild price cap – any mechanisms to reduce such costs. managing solid urban waste in italy… 25 scarcity of accounting details does not allow verification of whether the per capita revenues translate ipso facto into a greater tax burden for users (who must pay higher taxes), or whether they are attributable (at least in part) to economic exploitation of the plants, in which case there should be a consequent reduction in the tax charged to the users. in fact, the income statement regulations, that even waste management companies under analysis must follow, does not call for a separation of each line item mentioned above and the companies do not always provide an explanatory note with specific details. findings from previous studies in literature highlight that the cost of doorto-door waste collection is the most expensive factor in sc (italian competition authority, 2016). however, it is also true that having a treatment and disposal plant and being able to recycle uw should lead to a costs’ reduction for the company as well as a possible increase in revenues and, in the best case, to a more convenient relationship between revenues and costs. table 12. combined environmental and financial performances, calculated with/without treatment facility 2012 2013 2014 2015 revenues/ uw revenues/ pop. revenues/ uw revenues/ pop. revenues/ uw revenues/ pop. revenues/ uw revenues/ pop. w/ plant 291.55 155.92 295.65 153.52 291.82 154.06 293.69 154.56 w/o plant 289.09 140.47 284.51 131.44 275.60 127.93 290.09 133.23 s o u r c e : own study. in conclusion, it emerges from the study that sc has increased gradually, across all of the macro-areas, both in percentages and in per capita values. nevertheless, the increase does not appear to be particularly significant, especially considering the ambitious objectives established by the circular economy package; in fact, according to the european parliament, at least 70% by weight of socalled uw should be recycled or prepared for re-use; i.e., checked, cleaned, or repaired. furthermore, the uneven diffusion of sc shown in the macro-areas of italy could further slow the progress toward an integrated and uniform recycling process within the country as a whole. the results prove how important is to monitor the economic and financial performance of companies mainly engaged in achieving those objectives. in fact, this kind of analysis, supporting the decision process of policy makers, francesca bartolacci, michela soverchia, ermanno zigiotti26 can help in making waste management more efficient and productive for those operators while realizing the european objectives. it is equally important to underscore that, beyond the real impact of sc on the production of uw and its future trends, the quality of the waste collected becomes a pivotal factor in reclaiming resources and enhancing the value of secondary raw materials. collection methods can impact on the amount of waste disposed and on the quantity that is actually recycled. this is a crucial aspect that has not been the object of analysis in the present work; it would require studying the various methods of waste collection (on-street, door-to-door, etc.) along with the various qualitative performances of sc and its costs. exploring these highly interesting themes would mean fine-tuning the analysis conducted in this study, a goal the authors of this article plan to pursue in the future.  references bartolacci, f., paolini, a., quaranta, a.g., & soverchia, m. 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(2017). solid waste and the circular economy – a global analysis of waste treatment and waste footprints. journal of industrial ecology, 21(3), 628–640. http://dx.doi.org/10.1111/ jiec.12562. utilitatis (2016). green book. rome. velenturf, a.p.m., & purnell, p. (2017). resource recovery from waste: restoring the balance between resource scarcity and waste overload. sustainability, 9(9), 1–17. http://dx.doi.org/10.3390/su9091603. introduction dear readers and authors, it is with great satisfaction we present to you the fourth issue of 2018 of the scientific quarterly copernican journal of finance & accounting. i would like to give thanks to the authors, reviewers, members of the scientific council and the editorial team for your special contribution to the development of the journal. copernican journal of finance & accounting as a place for the exchange of academic thought creates an opportunity for the presentation and discussion of the current and important problems of economy and finance. scientists from various academic centres from poland and abroad have prepared the articles that make up this publication. in the current issue you can read articles about the wealth management market in china, the social background of brexit, and about the 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are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https:// publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: december 28, 2016; date of acceptance: january 20, 2017. * contact information: milena.persic@fthm.hr, accounting department, faculty of tourism and hospitality management, university of rijeka, uniprimorska 42, p.p. 51410 opatija, croatia, phone: +385 51 294 698. ** contact information: lahorka.halmi@vuka.hr, business department, karlovac university of applied sciences, trg j. j. strossmayera 9, 47000 karlovac, croatia, phone: +385 47 843 546. peršić, m., & halami, l. (2016). disclosing non-financial information in companies’ reports in croatia. copernican journal of finance & accounting, 5(2), 181–200. http://dx.doi.org/10.12775/ cjfa.2016.022 milena peršić* university of rijeka lahorka halmi** karlovac university of applied sciences disclosing non-financial information in companies’ reports in croatia keywords: companies’ reports, disclosure of non-financial information, directive 2014/95/eu, gri, kpis, sustainability indicators. j e l classification: m14, q56. abstract: subsequent to the provision of the directive 2014/95/eu requiring disclosure of non-financial and diversity information of all eu member states companies with 500 and more employees, a research was conducted at the beginning of 2016 on a sample of sustainability reports disclosed by croatian companies in 2014 that had registered 400 and more employees in that same year, with an assumption of their growth by 2018 in terms of the number of their employees. this research was focused on the structure of the indicators identified in non-financial reports, viewed as content-oriented and entry-oriented measures (attributes). the indicators analyzed were extracted from the original research done on the quality of non-financial reports of the companies in croatia registering 400 and more employees. the method employed was a conmilena peršić, lahorka halmi182 tent analysis. the results show that many of the disclosed sustainability indicators are “story-tellers”, meaning that they are past-oriented and qualitatively stated, suggesting that activities concerning sustainability in company are present, but no cause-effect relationships are presented therein. the results point to a need for significant improvements in defining a minimum of requirements for the indicators disclosed in non-financial reports. since very few indicators ref lect all of the attributes assessed in this research, there is a need for finding ways to capture relevant data in accounting of enterprises, so as to establish a requirement for comparability of non-financial information disclosed in sustainability reports and thus bring about the requirements of the directive 2014/95/eu.  introduction with european commission’s (ec) issuing of the directive 2014/95/eu and requiring disclosure of non-financial and diversity information, there is a need to assess the preparedness of companies with 500 and more employees in the eu member states to successfully put this directive into practice. the research was conducted at the beginning of 2016 on the sample of sustainability reports disclosed by companies that in 2014 had registered 400 and more employees, with the assumption of their growth by 2018 in terms of the number of their employees. eventually all these companies will be obliged to disclose non-financial information in sustainability reports. since the ec has not yet published any guidelines on disclosing non-financial information, the quality of non-financial information disclosed in sustainability reports is assessed according to the gri g4 framework. the paper examines the structure of the indicators disclosed as non-financial information in sustainability reports of croatian companies. theoretical background today there are almost countless frameworks dealing with sustainability issues in companies, which can be grouped as either only to report on sustainability or to rate and rank the companies according to their sustainability result(s) (herriott, 2016, p. 25). according to the directive 2014/95eu, companies may rely on national or eu – based frameworks (e.g. emas, iso 14001, etc.) or any other recognized international frameworks (e.g. gri, un global compact, oecd guideline, iso 26000, ilo tripartite declaration) (ec 2014, para 9; gri 2014a; gri 2014b). there have been few attempts of classifying these re disclosing non-financial information in companies’ reports… 183 porting frameworks according to any similarity, but these classifications differed (choi, 2003; gisr, 2015; perrini, 2005, p. 611). herriott (2016, pp. 50–69) states that this number of sustainability frameworks is due to the: “philosophy, or philosophies, of sustainability [that] is (are) implied by the indicators in a standard” (2016, p. 51) or framework, thus ref lecting either a worldview or an ethical system (herriott, 2016, p. 50, 209), this being a root cause of so many frameworks. windolph (2011, p. 2) recognized the lack of standardization of measures and methodologies among rating frameworks (or systems), which are evident among any of the reporting frameworks as well. while dealing with the waste measurement, herriott (2016, pp. 149–168, 203–204) came to the conclusion that not even at the primary category (environmental and social) level of the frameworks are indicators consistently classified, suggesting that these indicators should be consistent in at least primary categories, thus making comparison of sustainability reports and results possible. herriott also recognized the need of scholarly research in the development of kpis as subcategories (herriott, 2016, p. 213). only measurable and verifiable sustainability activities ought to be disclosed in sustainability reports, for information that is not measurable and verifiable is not auditable or comparable and does not provide relevant and objective information to any of the stakeholders (brockett, rezaee, 2012, p. 45) interested in sustainability information for any given reason. in line with this statement and with the requirements of the directive 2014/95/eu, the focus of this research will be on the structure of the disclosed indicators (herriott, 2016, p. 99) as non-financial information disclosed in sustainability reports, that can be found under titles such as annual report, environmental report, social responsibility report, corporate responsibility report, integrated report, segment responsibility report, and alike. on an assessment scale of sustainability-dimension-inclusion, with an option of being included with a minimum reference (☻), included with some coverage (☻☻), and included with extensive coverage (☻☻☻), the gri guidelines have been assessed as a sustainability (reporting) framework that includes all three sustainability dimensions (economic, environmental, social) with extensive coverage (perrini, 2005, p. 614), as shown in table 1. along with extensive coverage of sustainability dimensions, the gri (g4) guidelines recognize a hierarchical order of data disclosed as categories, asmilena peršić, lahorka halmi184 pects and indicators (gri, 2014a, p. 9, 2014b, pp. 19–21), hence being a relevant starting point in implementing the provisions of eu the directive 2014/95/eu. for the purpose of this research, the term aspect was equaled to the term indicator, whereas indicator defined by the gri g4 was treated as an item or the smallest unit of information (herriott, 2016, p. 71) that could be reported under standard. although numerous companies in different countries present non-financial information, this area is still insufficiently imbedded in and coordinated through regulations, meaning that non-financial reports are still mostly voluntary based (ssei), so these starting points were also recognized in this research. research sample, framework, and methodology the eu directive 2014/95/eu on disclosing non-financial information is directed at large undertakings, groups and big companies of public interest registering 500 and more employees (ec, 2013, art. 2; ec, 2014). subsequently to the provisions of the directive 2014/95/eu, in 2016 a research was conducted on companies registering 400 and more employees in croatia, which will be required to disclose non-financial information in sustainability reports in 2018 and onwards. st an da rd n am e u n g lo ba l co m pa ct a m ne st y in t. g ui de lin . et i su lli va n pr in ci pl es o ec d gu id el in . w h o / u n ic ef br ea st m ilk ec cr / ic cr sa 80 00 is o 90 00 / is o 14 00 1 em a s eu e co la be l fs c d jg si ec pi et hi ca l in de ks eu ro ft se 4 g o o d g ri a a 10 00 s ec on om ic ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ so ci al ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ en vi ro nm en ta l ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ fi na nc ia l ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ec on om ic de ve lo pm en t ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ co ns um er a ff ai rs ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ hu m an ri gh ts ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ em pl oy ee re la ti on s ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ co m m un it y in ve st m en t ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ br ib er y an d co rr up ti on ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ bi o di ve rs it y ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ai r q ua lit y an d no is e po llu ti on ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ en er gy a nd w at er ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ m at er ia ls ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ra ti n g in d ic es a cc o u n ta bi li ty a n d r ep o rt in g fr a m ew o rk ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ ☻ a sp ir a ti o n a l pr in ci pl es a n d c o d es o f pr a ct ic es m a n a g em en t sy st em s a n d ce rt if ic a ti o n s ch em es a sp i ☻ cs r is su es d im en si on s t ab le 1 . s us ta in ab ili ty d im en si on s co ve re d in s us ta in ab ili ty fr am ew or ks s o u r c e : p er ri ni , 2 00 5, p . 6 14 . milena peršić, lahorka halmi186 the sample companies (with 400 and more employees) were retrieved from croatian company directory (ccd) website provided by croatian chamber of economy (croatian chamber of economy); their websites were searched for available reports disclosing non-financial information, commonly referred to as sustainability, social and/or environmental report, presented either in a form of stand-alone report or annual (financial) reports. if no such reports were found, further research was done by predefined key-word phrases via google search, and downloaded from the company websites. sustainability reports for the reporting year 2014 were collected in december 2015 and analyzed at the beginning of 2016. the list of the retrieved companies was divided into 2 major groups. the first group was composed of large, medium and small companies (caa, 2015), registering 500 and more employees (500+), and the second composed of companies registering between 400 and 500 employees in 2014. since many of the croatian companies were members of a business group appearing in both size-groups, the final number of reports available for research was 38, as shown in the table 2. table 2. croatian companies with 400 and more employees description big companies medium and small companies total number of employees in retrieved croatian companies 500 400–499 400–500 number of croatian companies retrieved 172 49 221 number of croatian companies reporting (merged with the group) 142 42 184 number of sustainability reports available for research 37 1 38 s o u r c e : results of empirical research. as shown in table 3, there were 221 companies retrieved from the croatian company directory in january 2016. there were 179 companies with 500 plus employees and 42 companies with 400–499 employees registered in 2014. after coding companies that were members of a group and counting the number of available sustainability reports, there were available only: ■ 19 sustainability reports disclosed by companies registering 500 plus employees, disclosing non-financial information in companies’ reports… 187 ■ 18 sustainability reports disclosed by companies that were not members of any group, ■ 1 sustainability report disclosed by a company with 400 to 499 employees, not member of any of the groups. these reports were analyzed according to the gri g4 standards’ methodological framework and guidelines, which were chosen as globally accepted reporting guidelines. except for being assessed as a framework including all three sustainability categories (environmental, social, economic) with extensive coverage (perrini, 2005, p. 614), these guidelines are of particular importance for disclosing non-financial information, because they present reporting principles (gri, 2014a, pp. 16–18) that are divided into two groups of tasks: first, principles related to the report content (stakeholder inclusiveness, sustainability context, materiality), and second, principles related to the quality of reports (balance, comparability, accuracy, timeliness, clarity, reliability). table 3. processing number of available sustainability reports total no. of companies 221 no. of reports members of group +500 19 +500 (all) 179 no. of reports not member of a group +500 18 group/& reports 19 no. of reports +500 37 +500 (not member of a group) 123 no. reports 400–499 1 +500 + groups 142 total no. of reports 38 +400–499 42 total no. of companies 184 s o u r c e : results of empirical research. the goal of the research was to identify the presence of categories and subcategories’ indicators (gri, 2014a; gri, 2014b) in the sustainability reports. an indicator found and disclosed in each of the sample’s reports was recorded and their frequency calculated (table 4). in this research the most frequent indicators in both environmental and social categories were analyzed from the aspect of their attributes that were measured as lead / lag indicators, process / outcome indicators, absolute / relative indicators, and quantity / quality indicators. this approach to the sustainability indicators emerged from the fact that the root cause of numerous sustainability (reporting) frameworks are and spring form varieties of worldviews and / or ethical systems that result in inmilena peršić, lahorka halmi188 consistency of classifying indicators even at the primary, category level (herriott, 2016, p. 99, 50, 203). indicators presented in table 4 were disclosed in accordance with the gri g4 guidelines and further analyzed, for they provide information on the status or (occurred) change concerning sustainability (i.e. an impact a company has on environment or society). based on previous researches (brockett, rezaee, 2012, p. 255; burns, 2000, p. 120; businessdictionary.com; center for instructional technolgy; cokins, 2009, p. 208; epstein, buhovac, 2014, pp. 123–130; gemi, 1998, p. 3; hair et al., 2009, p. 3; herriott, 2016, p. 76, 81, 82, 99; horvat, mijoč, 2012, p. 22, 26; kaplan, norton, 1996, p. 32; schaltegger, bennett, burritt, 2006, p. 91; šošić, 2006, p. 7), and for the purposes of this research, attributes were grouped as (a) content-oriented attributes, or (b) entry-oriented attributes. table 4. environmental and social indicators reported by croatian companies env indicators en sum percentage of reports with en indicators soc indicators soc sum percentage of reports with soc indicators energy 24 63,16% la – occupational health and safety 19 50,00% emissions 21 55,26% la – training and education 18 47,37% waste (and effluents) 20 52,63% la – employment 17 44,74% water 18 47,37% pr – product and service labeling 10 26,32% materials 15 39,47% hr – non-discrimination 9 23,68% biodiversity 10 26,32% la – diversity and equal opportunity 9 23,68% compliance – en 9 23,68% pr – customer health and safety 9 23,68% products and services – en 6 15,79% so – anti-corruption 9 23,68% transport 5 13,16% so – local communities 9 23,68% environmental grievance mechanisms 3 7,89% hr – freedom of association and collective bargaining 7 18,42% overall environment protection expenditure 3 7,89% hr – child labor 6 15,79% air pollution (and ghg emissions) 2 5,26% hr – forced or compulsory labor 6 15,79% supplier/vendor environmental assessment 2 5,26% la – equal remuneration for men and women 6 15,79% disclosing non-financial information in companies’ reports… 189 env indicators en sum percentage of reports with en indicators soc indicators soc sum percentage of reports with soc indicators forest area and its utilization 1 2,63% la – labor/management relations 6 15,79% ground-level ozone and air quality 1 2,63% pr – marketing communication 6 15,79% soil 1 2,63% so – public policy 6 15,79% z/kpi noise 1 2,63% so – anti-competitive behavior 5 13,16% hr – investment 4 10,53% hr – human rights grievance mechanisms 3 7,89% hr – indigenous rights 3 7,89% hr – security practices 3 7,89% la – supplier assessment for labor practices 3 7,89% pr – compliance 3 7,89% so – compliance 3 7,89% hr – assessment 2 5,26% hr – supplier human rights assessment 2 5,26% pr – customer privacy 2 5,26% so – grievance mechan. for impacts on society 2 5,26% pr / sasb – supply chain standards and selection 1 2,63% so – supplier assessment for impacts on society 1 2,63% z/ gri – fp – food processing sector disclosures 1 2,63% z/kpi animal husbandry 1 2,63% z/kpi sourcing aspects 1 2,63% z/kpi transportation, handling and slaughter 1 2,63% s o u r c e : results of empirical research. table 4. environmental and social indicators reported… milena peršić, lahorka halmi190 through “content-oriented attributes” it was determined if the content of a disclosed indicator, was a futureor past-oriented (lead and lag indicators). content-oriented measures are associated with the activity and recording of the process, or oriented towards presenting a final result. leading measures are performance drivers (kaplan, norton, 1996, p. 32) and in-process measures (gemi, 1998, p. 3), tailored to evaluate change during a period of time (cokins, 2009, p. 208), and can be applied in measuring results of environmental practices (schaltegger et al., 2006, p. 3). these measures refer to the future and show what the performance was at the time prior to the measurement (herriott, 2016, p. 76). lagging measures present a mix of outcomes (kaplan, norton, 1996, p. 32), offer end-of-process measures (gemi, 1998, p. 3), present results of implementation of practices and lead to improved performance (schaltegger et al., 2006, p. 91). lagging measures report after-the-fact information at the end of a time period (cokins 2009, p. 100, 208), which means that these are past-oriented measures (herriott, 2016, p. 76). process measures are sequences of independent and linked procedures, which at every stage, consume one or more resources in converting inputs into outputs (businessdictionary.com, l. process measure). process measures are a systematic series of actions designed with a goal as the end-point (epa, 2011). these measures show how the system operates (center for instructional technolgy), and refer to doing (herriott, 2016, p. 99). in contrast to these measures, outcome measures refer to achieving (herriott, 2016, p. 99) with determination and evaluation of the results of an activity, plan, process, or program and their comparison with the intended or projected results (businessdictionary.com, l. outcome measure) and are associated with final products or results (center for instructional technolgy). through entry-oriented attributes it was determined whether indicators were qualitatively or quantitatively recorded, where quantitatively recorded indicators could be disclosed as an absolute or a relative measure. absolute measures use numerical variations (hartman), report a total amount (e.g. pollutant emitted, water/materials used, etc.), and permit meaningful evaluation. these measures are employed in comparison between and within companies, but very often require a statement of the measure relative to the size and type of the company (herriott, 2016, p. 81). relative measures use statistical variations based on percentages to determine how far from reality a forecast is (hartman), and are normalized in relationship to the business activity. relative measures are normalized, i.e. are put in a correlation to the disclosing non-financial information in companies’ reports… 191 business activity, meaning that homogeneous products are normalized by total quantity of the products, whereas heterogeneous products are normalized by sales revenue and number of employees (herriott, 2016, p. 82, 99). quantitative (or metric) measures identify or describe subjects (or objects) not only on the possession of an attribute, but also by the amount or degree to which the subject may be characterized by the attribute (hair et al., 2009, p. 3). these measures are numerical (herriott, 2016, p. 99) and are measured on an interval or ratio scale (šošić, 2006, p. 7; horvat, mijoč, 2012, p. 22, 26; burns, 2000, p. 120). on the other hand, qualitative (or nonmetric) measures are categorical and ordinal-scales measures (šošić, 2006, p. 7; horvat, mijoč, 2012, p. 23; herriott, 2016, p. 99). in qualitative measures goals are often soft skilloriented and are measured by a different kind of observation without using any statistics or metrics to pull from. research framework and methodology since herriott (2016, p. 70) defined a measure as a specific way to quantify or evaluate an indicator, the goal was to measure the (quality of ) indicators, previously defined and elaborated as the content-oriented or entry-oriented attributes. the assessment was done by awarding: ■ (1) one point for the identified attribute to each of the indicators in individual sustainability reports, and ■ (0) zero points for not meeting the criteria. analyzed indicators were 10 most frequent environmental and social indicators disclosed in sustainability reports of croatian companies registering 400 and more employees in 2014 and the results are presented in tables 5 and 6. each cell in tables 5 and 6 represents a sum of the attributes of each of the sampled company. once all attributes were recorded, the average score (column: score) of the indicator was calculated by summing their attributes and dividing them by the number of only those sustainability reports disclosing analyzed indicator, thus capturing these data on an interval scaled and quantitatively measuring the quality of indicators disclosed. finally, the scale of indicators was calculated by also summing their attributes (column: scale), so it could be captured on an ordinal scale and then compared to a maximum number of possible attributes (column: max scale), which was calculated by multiplying the maximum number of attributes (8 attributes: lead attributes, lag attributes, milena peršić, lahorka halmi192 t ab le 5 . a na ly si s re su lt s of th e qu al it y of e nv ir on m en t i nd ic at or s (a ut ho rs ’ p ro ce ss in g) en sum percentage of reports with en indicators indicators sum lead sum lagg sum process sum outcome sum quantitative sum qualitative sum absolute sum relative score (=sum of attributes / number of reports) scale (sum of all attributes) max scale (number of attributes * number of reports) 24 63 ,1 6% en er gy 5 21 6 21 17 9 15 8 4, 43 10 2 18 4 21 55 ,2 6% em is si on s 5 19 5 19 18 8 15 9 4, 90 98 16 0 20 52 ,6 3% w as te (a nd e ff lu en ts ) 5 18 11 16 14 14 13 1 4, 84 92 15 2 18 47 ,3 7% w at er 4 15 8 15 10 10 10 4 4, 47 76 13 6 15 39 ,4 7% m at er ia ls 1 12 1 12 11 7 11 1 4, 00 56 11 2 10 26 ,3 2% bi od iv er si ty 1 6 3 4 1 9 1 0 2, 50 25 80 9 23 ,6 8% co m pl ia nc e – en 0 6 0 6 1 5 1 0 2, 11 19 72 6 15 ,7 9% pr od uc ts a nd s er vi ce s – en 0 2 1 2 0 2 2 0 1, 50 9 48 5 13 ,1 6% tr an sp or t 0 4 0 3 3 2 3 1 3, 20 16 40 3 7, 89 % en vi ro nm en ta l g ri ev an ce m ec ha ni sm s 1 4 1 4 1 4 1 0 4, 00 16 32 3 7, 89 % o ve ra ll en vi ro nm en t p ro te ct io n ex pe nd it ur e 0 2 0 2 2 1 2 0 3, 00 9 24 su m 22 10 9 36 10 4 78 71 74 24 s o u r c e : r es ul ts o f e m pi ri ca l r es ea rc h. disclosing non-financial information in companies’ reports… 193 t ab le 6 . a na ly si s re su lt s of th e qu al it y of s oc ia l i nd ic at or s (a ut ho rs ’ p ro ce ss in g) soc sum percentage of reports with soc indicators indicators sum lead sum lagg sum process sum outcome sum quantitative sum qualitative sum absolute sum relative score (=sum of attributes / number of reports) scale (sum of all attributes) max scale (number of attributes * number of reports) 19 50 ,0 0% la – o cc up at io na l h ea lt h an d sa fe ty 4 16 7 14 9 15 9 2 4, 28 77 14 4 18 47 ,3 7% la – t ra in in g an d ed uca ti on 5 14 9 11 8 16 9 2 3, 89 74 15 2 17 44 ,7 4% la – e m pl oy m en t 2 14 1 12 11 12 12 1 4, 06 65 12 8 10 26 ,3 2% pr – p ro du ct a nd s er vi ce la be lli ng 2 8 1 7 2 10 2 0 3, 20 32 80 9 23 ,6 8% h r – n on -d is cr im in at io n 4 7 4 6 5 7 3 0 4, 50 36 64 9 23 ,6 8% la – d iv er si ty a nd e qu al op po rt un it y 1 6 2 6 2 6 2 0 2, 78 25 72 9 23 ,6 8% pr – c us to m er h ea lt h an d sa fe ty 2 10 9 6 10 10 1 1 3, 11 28 72 9 23 ,6 8% so – a nt ico rr up ti on 3 5 4 2 0 8 2 0 2, 67 24 72 9 23 ,6 8% so – l oc al c om m un it ie s 1 2 2 1 1 2 1 0 5, 00 10 16 7 18 ,4 2% h r – fr ee do m o f a ss oci at io n an d co lle ct iv e ba rg ai ni ng 0 5 3 3 0 7 0 0 2, 57 18 56 su m 24 87 42 68 48 93 41 6 s o u r c e : r es ul ts o f e m pi ri ca l r es ea rc h. milena peršić, lahorka halmi194 process attributes, outcome attributes, absolute attributes, relative attributes, quantitative attributes, qualitative attributes) with the number of reports disclosing analyzed indicator (dependent on the number of reports in which each of the indicators was identified). research results when analyzing content-oriented attributes in the environment category, lag (109 out of total 131) and outcome (104 out of total 140) indicators seem to be prevalent, meaning that a significant number of the information disclosed in the analyzed sustainability reports is pastand outcome-oriented. figure 1. scaling environmental indicators (authors’ processing) research results when analyzing content-oriented attributes in the environment category, lag (109 out of total 131) and outcome (104 out of total 140) indicators seem to be prevalent, meaning that a significant number of the information disclosed in the analyzed sustainability reports is past and outcome-oriented. figure 1. scaling environmental indicators (authors’ processing) source: results of empirical research. energy emissions waste (and effluents) water materials biodiversity compliance en products and services en transport environmental grievance mechanisms overall environment protection expenditure 102 98 92 76 56 25 19 9 16 16 9 184 160 152 136 112 80 72 48 40 32 24 scale (sum of all attributes) max scale (number of attributes * number of reports) s o u r c e : results of empirical research. disclosing non-financial information in companies’ reports… 195 content-oriented attributes in social category, lag (87 out of 111) and outcome (68 out of total 110) indicators are also prevalent, also suggesting that indicators reporting on social issues are pastand outcome-oriented. figure 2. scaling social indicators (authors’ processing) content-oriented attributes in social category, lag (87 out of 111) and outcome (68 out of total 110) indicators are also prevalent, also suggesting that indicators reporting on social issues are pastand outcome-oriented. figure 2. scaling social indicators (authors’ processing) source: results of empirical research. substance of indicators as to the entry-oriented attributes, environmental indicators indicated that quantitative and qualitative indicators are almost equally present (quantitative: 78, qualitative: 71). quantitative indicators are mostly disclosed in absolute measures (74 out of total 98), as opposed to relative measures (24 out of total 98), where a relative measure was an indicator that was measured against certain business activity. information provided only in a form of proportion was treated as a qualitative indicator. in social category there are also more la occupational health and safety la training and education la employment pr product and service labeling hr non-discrimination la diversity and equal opportunity pr customer health and safety so anti-corruption so local communities hr freedom of association and collective bargaining 77 74 65 32 36 25 28 24 10 18 144 152 128 80 64 72 72 72 16 56 scale (sum of all attributes) max scale (number of attributes * number of reports) s o u r c e : results of empirical research. substance of indicators as to the entry-oriented attributes, environmental indicators indicated that quantitative and qualitative indicators are almost equally present (quantitative: 78, qualitative: 71). quantitative indicators are mostly disclosed in absolute measures (74 out of total 98), as opposed to relative measures (24 out of total 98), where a relative measure was an indicator that was measured against milena peršić, lahorka halmi196 certain business activity. information provided only in a form of proportion was treated as a qualitative indicator. in social category there are also more qualitative (93 out of total 141) than quantitative (48 out of total 141) indicators, as well as indicators expressed in absolute measures (41 out of total 47) as opposed to relative measures (6 out of total 47). here too information provided only in a form of proportion was treated as a qualitative indicator. scaling and scoring reported indicators although individualized by the number of reports disclosing each indicator, both scale for environmental indicators and scale for social indicators show that very few indicators reflect the all of the attributes assessed in the research (figure 1, figure 2) and that there is a need for finding ways to capture data in such a way that indicators (or aspects according to gri) disclosed would contain all eight attributes. since not all data can and should be quantified, it is expected that different items (indicators according to gri) would be recorded in such a way that the higher level of information (indicators according to this research; aspects according to gri) would reflect all of the attributes assessed in this research. figure 3. environmental indicators score results (authors’ processing) qualitative (93 out of total 141) than quantitative (48 out of total 141) indicators, as well as indicators expressed in absolute measures (41 out of total 47) as opposed to relative measures (6 out of total 47). here too information provided only in a form of proportion was treated as a qualitative indicator. scaling and scoring reported indicators although individualized by the number of reports disclosing each indicator, both scale for environmental indicators and scale for social indicators show that very few indicators reflect the all of the attributes assessed in the research (figure 1, figure 2) and that there is a need for finding ways to capture data in such a way that indicators (or aspects according to gri) disclosed would contain all eight attributes. since not all data can and should be quantified, it is expected that different items (indicators according to gri) would be recorded in such a way that the higher level of information (indicators according to this research; aspects according to gri) would reflect all of the attributes assessed in this research. figure 3. environmental indicators score results (authors’ processing) source: results of empirical research. environmental indicator with the highest score are items referring to the emissions (4,90), whereas the indicators with the lowest scores were items referring to products and 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 5 products and services en compliance en biodiversity overall environment protection expenditure transport materialsenvironmentalgrievance mechanisms energy water waste (and effluents) emissions score (=sum of attributes / number of reports) s o u r c e : results of empirical research. disclosing non-financial information in companies’ reports… 197 environmental indicator with the highest score are items referring to the emissions (4,90), whereas the indicators with the lowest scores were items referring to products and services indicating their environmental impacts (1,50). other indicators with high scores are waste and eff luents (4,84), water (4,47), energy (4,43), environmental grievance mechanisms (4,00) and materials (4,00). indicators with the lowest scores refer to transport (3,20), overall environment protection expenditure (3,00), biodiversity (2,50), environmental compliance (in terms of monetary value of significant fines, number of nonmonetary sanctions for non-compliance with environmental laws and regulations; 2,11), and products and services with environmental impacts (1,50). these results imply that environmental indicators recognized by social sciences as having an impact on an environment are not as sophisticated as indicators recognized and developed over the years by environmental sciences. figure 4. social indicators score results (authors’ processing) services indicating their environmental impacts (1,50). other indicators with high scores are waste and effluents (4,84), water (4,47), energy (4,43), environmental grievance mechanisms (4,00) and materials (4,00). indicators with the lowest scores refer to transport (3,20), overall environment protection expenditure (3,00), biodiversity (2,50), environmental compliance (in terms of monetary value of significant fines, number of non-monetary sanctions for noncompliance with environmental laws and regulations; 2,11), and products and services with environmental impacts (1,50). these results imply that environmental indicators recognized by social sciences as having an impact on an environment are not as sophisticated as indicators recognized and developed over the years by environmental sciences. figure 4. social indicators score results (authors’ processing) source: results of empirical research. social indicator with the highest scores are items referring to local communities (5,00), human rights non-discrimination (4,50), occupational health and safety (4,28), and employment (4,06). social indicators with the lowest scores are indicators referring to human resources freedom of association and collective bargaining (2,57), social anti-corruption (2,67), and labor diversity and equal opportunity (2,78). as already mentioned (herriott, 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 5 hr freedom of association and collective bargaining so anti-corruption la diversity and equal op portunity pr customer health and safety pr product and service labeling la training and education la emp loyment la occup ational health and safety hr nondiscrimination so local communities score (=sum of attributes / number of reports) s o u r c e : results of empirical research. social indicator with the highest scores are items referring to local communities (5,00), human rights non-discrimination (4,50), occupational health and safety (4,28), and employment (4,06). social indicators with the lowest milena peršić, lahorka halmi198 scores are indicators referring to human resources freedom of association and collective bargaining (2,57), social anti-corruption (2,67), and labor diversity and equal opportunity (2,78). as already mentioned (herriott, 2016, p. 52), sustainability standards and indicators found therein ref lect certain values and worldviews, which is particularly noticeable in social category.  conclusion, limitations and further research the research results show that many of the indicators disclosed are mere “story-tellers”, meaning that those indicators are mostly past-oriented and qualitatively stated, leaving the stakeholder (for whom these non-financial reports are made in the first place), in wonderment if the information presented is true and reliable. in this research indicators were captured on ordinal and interval scales, each scale appertaining to its individual category and are not comparable. due to the diversity of and voluntary approaches to the form of reporting on sustainability issues, the number of indicators analyzed for their quantitative attributes do not necessarily ref lect the sum of absolute and relative attributes, for the focus of the research was to simply identify any of the indicators (aspects according to gri) and how they were measured and reported. for that reason, authors suggest that the future researches first identify and segregate items as termed in this research (or indicators according to gri) as qualitative and quantitative, and then those quantitative items analyze as absolute or relative items (indicators according to gri). the criterion for the research was a mere mention of an indicator in the report regardless of the items reported therein and not the extent of the information presented, meaning that not specific items of an indicator were individually analyzed. for further research it is suggested to first, group presented information into indicators; second, to determine which items are to form an indicator and then; third, to analyze individual items of indicators. this will form a plateau for improving the quality of non-financial information in a way that it will make clearer what items should form an indicator, both in an environmental and social category, as well as point to the means that will enable comparability of non-financial reports. some of the frameworks used for creating sustainability reports require certain items to be disclosed as a proportion, which was recognized as qualitative data in this research. therefore, one of the suggestions for future research disclosing non-financial information in companies’ reports… 199 as to classifying indicators within a primary category would be to consider segregating quantitative indicators from qualitative indicators. another suggestion for further research would be developing an assessment matrix where items according to this research (or indicators according to gri g4) will be analyzed according to these attributes, thus providing a more comprehensive study on the structure of the indicators disclosed in the sustainability reports. since very few indicators ref lect all of the attributes assessed in this research, there is a need for finding ways to capture relevant data in accounting of enterprises so as to establish prerequisites for comparability of non-financial information disclosed in sustainability reports. apparently there is also a need for significant improvement in defining a minimum of requirements for the disclosed non-financial information in the sustainability reports, in order to comply with the requirements of the directive 2014/95/eu.  references burns, r. b. (2000.) introduction to research methods. london, uk: sage publications. brockett, a., & rezaee, z. (ed.) (2012). corporate sustainability: integrating performance and reporting. google books. hoboken, new jersey: john wiley & sons, inc., https://books.google.hr/books?id=mnee0xqrwkuc&printsec=frontcover &source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false. doi: http://dx.doi. org/10.1002/9781119202899 (accessed: 22. 07. 2016). businessdictionary.com. businessdictionary.com – online business dictionary, http:// www.businessdictionary.com/ (accessed: 16.10.2015). center for instructional technolgy. what is quality improvement? http://patientsafetyed.duhs.duke.edu/module_a/measurement/measurement.html (accessed: 28.11.2016). choi, f.d.s. (2003). international finance and accounting handbook. john wiley & sons, https://books.google.com/books?id=5z2pgmge8myc&pgis=1 (accessed: 16.10.2015). cokins, g. (2009). performance management. integrating strategy execution, methodologies, risk and analytics. new jersey: john wiley&sons, inc. croatian chamber of economy. croatian company directory, http://www1.biznet.hr/ hgkweb/do/language?lang=en_gb (accessed: 10. 12. 2015). ec. (2013). directive 2013/34/eu amending directive 2006/43/ec and repealing council directives 78/660/eec and 83/349/eec on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings. official journal of the european union, 2013(june), l 182/19-75. ec. directive 2014/95/eu, official journal of the european union 1–9 (2014). http:// eur-lex.europa.eu/legal-content/en/txt/pdf/?uri=celex:32014l0095&from= hr (accessed: 28.12.2016). milena peršić, lahorka halmi200 epa. (2011). sustainability assessment and management: process, tools, and indicators. national academy of sciences. doi: http://doi.org/10.17226/13152. epstein, m.j., & buhovac, a.r. 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(2009). multivariate data analysis. hartman, d. what is the difference between an absolute & a relative measure of forecasting error? the finance base, http://thefinancebase.com/difference-betweenabsolute-relative-measure-forecasting-error-2177.html (accessed: 01.12.2016). herriott, s.r. (2016). metrics for sustainable business, new york, us: routledge. horvat, j., & mijoč, j. (2012). osnove statistike, naklada ljevak, zagreb, croatia. kaplan, r.s., & norton, d. p. (1996). the balanced scorecard: translating strategy into action. harvard business school press. boston, massachusetts: harvard business school press. http://doi.org/10.1109/jproc.1997.628729. perrini, f. (2005). building a european portrait of corporate social responsibility reporting. european management journal, 23(6), 611–627. http://doi.org/10.1016/j. emj.2005.10.008. schaltegger, s., bennett, m., & burritt, r. (eds.) (2006). sustainability accounting and reporting – faq. delft: springer. http://doi.org/10.1007/978-1-4020-4974-3. sustainable stock exchange inititive. sustainability reporting policies, sustainable stock exchanges, http://www.sseinitiative.org/sustainabilityreporting/ (accessed: 01.01.2015). šošić, i. (2006). primijenjena statistika, školska knjiga, zagreb, croatia. windolph, s. e. (2011). assessing corporate sustainability through ratings: challenges and their causes. journal of environmental sustainability, 1(1), 61–80. http:// doi.org/10.14448/jes.01.0005. cjfa_6(2)_2016_druk.pdf copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 5 issue 2 2016 biannual editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: secretary: dr damian walczak scientific council prof. dr. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. dr. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. dr. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. mustafa akan, dogus university, istanbul, turkey prof. dr. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. dr. christiane goodfellow, jade university wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g list of reviewers prof. dr. catherine deffains-crapsky, université d’angers, france prof. dr. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. dr. natalia konovalova, riseba university, riga, latvia prof. emil papazov, university of national and world economy, sofia, bulgaria prof. dr. adalmiro pereira, politécnico do porto, portugal prof. dr hab. jan turyna, uniwersytet warszawski, warsaw university, poland dr tomáš heryán, silesian university, school of business administration, czech republic prof. dr. lyudmila mihaylova, university of ruse, bulgaria c o v e r d e s i g n : the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 i dystrybuowane w wersji icv 2015: 101.52 address of the publisher , phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office phone: + 48 56 611 46 34 (mgr agnieszka ), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents leszek dziawgo introduction ........................................................................................................................... 7 mustafa akan sustainability, consumption, and technology ..................................................................... 9 furkan baser, soner gokten, guray kucukkocaoglu, hasan ture under structural equation modelling .................................................................................. 27 in credit institutions ................................................................................................................ 45 in the period 2008–2012 ........................................................................................................ 57 a risk management system in insurance undertaking ...................................................... 73 under the normal assumption ............................................................................................. 85 business model and its dilemmas of choice .................................................................... 109 measuring competitiveness of banks in latvia ................................................................ 125 corporate social responsibility in japanese banking sector ........................................ 149 implementation of alternative index weighting to warsaw stock exchange ............. 163 ........................ 181 anna iwona piotrowska fields of potential use of cryptocurrencies in the payment services market in poland – results of an empirical study ........................................................................... 201 responsibility accounting inspiration for segment reporting ......................................... 219 for authors ........................................................................................................................... 233 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 3 date of submission: september 1, 2017; date of acceptance: november 7, 2017. * contact information: maria.golec@wsb.poznan.pl, wsb university in poznan, ul. powstańców wielkopolskich 5, 61-895 poznań, poland, phone: 65 655 33 21; orcid id: https://orcid.org/0000-0003-2474-3987. golec, m. m. (2017). locality and the transfer of funds in the cooperative banking sector in poland. copernican journal of finance & accounting, 6(3), 21–33. http://dx.doi.org/10.12775/ cjfa.2017.014 maria magdalena golec* wsb university in poznan locality and the transfer of funds in the cooperative banking sector in poland keywords: locality, net lenders, cooperative banks. j e l classification: g21, m21. abstract: one of the most important features of cooperative banks is locality which means concentrating financial activity on a specific area. the consequence of locating the banking activity locally is the use of funds raised from the local market for credit needs of the community. the barrier in this area may be an imbalance between the loans and deposits when the co-operative principle (the local money for local needs) is not met. the paper aims to examine the scope of the principle of locality by the cooperative banks in poland. the study uses quarterly financial data from the years 2009–2016 the selected group of 75 cooperative banks in poland. the differentiation of the group of banks is assessed by means of descriptive statistics measurement tools and also in research it is used the econometric regression model. most cooperative banks are net lenders for money market in poland. the average value of the loans to deposits ratio is 0.7, and the scope of imbalance deepens in recent years. the reasons for such a situation are the regulations of the cooperative banking sector but also the individual policies of the institutions. maria magdalena golec22  introduction the attribute of cooperative banks that is most frequently brought out in scientific works, book titles, bank documents or banking sector reports is locality. close relationship of credit unions with local communities may be a condition for credit cooperatives’ survival and development (siudek, 2011, p. 277). a certain phenomenon is of local character only if it exists in a specific area/ place (latin: lokalis, lokus – place/location). as early as the 19th century credits cooperatives’ membership was formally limited to those among whom there were mutual relationships – common bonds. in case there are not any social bonds among the members of a territorially limited area, the criterion that is often established for defining local communities is territory. locality understood in this way becomes the basis for introducing formal limitations for credit cooperatives’ activities (territory principle) (szambelańczyk, 2006, p. 108). barriers to the banks’ development in the area of banking activities are treated as a kind of prudential norm. it is so because knowing the clients, their economic standing and limitations of the local environment decreases the credit risk, and, most of all, makes it possible to assess an actual economic standing of a prospective client. according to the polish legal regulations the territory where a cooperative bank can perform its activities is dependent on the volume of its own funds. if the bank owns funds equal to or greater than eur 5m it can provide banking services all over the country. an affiliated cooperative bank with own funds greater than eur 1m (but less than eur 5m) may operate in the province (polish: województwo) where its headquarters are based. in case the bank has lower own funds, it can operate in the district (polish: powiat). the cooperative banks’ charters mention several districts rather than one for their operations (zalcewicz, 2010, pp. 181–182). in poland 75% of cooperative banks have own funds large enough to be able to operate in the province, 1/5 of the cooperative banks can operate all over the country (kozłowski, 2016, pp. 72–73). in practice, however, the banks themselves restrict the territory of their operations, as many as 42% of them have their branches only on the territory of one district (13% in one commune [polish: gmina] only) (kozłowski, 2016, pp. 72–74). the international cooperative principles adopted in 1995 and found in the statement on the co-operative identity obligate the cooperative banks to, among others, “care about local community”. principle 7, being a novelty in comparison to the previous codifications, stipulates that cooperatives work for the sustainable development of their communities. it is worth mentioning that locality and the transfer of funds in the cooperative… 23 locality can be interpreted in wider terms as the realization of essential needs of specific communities by means of the banks’ financial instruments, e.g. providing service for less aff luent clients or financing investments important for specific communities (alińska, 2008, p. 248; giagnocavo & gerez, 2012, p. 284; kata, 2011, p. 128; golec, 2010, p. 72; gostomski, 2010, p. 246). cooperative banks being legal entities whose purpose is to meet their members’ and clients’ financial needs perform these tasks by primarily providing access to financial resources in the form of loans. the positive impact of credit cooperatives activities on the economic growth of a local community occurs when the bank increases the scope of availability of the financial resources in the region. however, long-term exports of funds raised in the form of deposits, especially if the bank plays the role of the only financial institution in the region, may lead to its economic downgrading (szambelańczyk & ławrynowicz, 2003, p. 393). from the point of view of a single institution, the more needs the cooperative bank will satisfy, the greater the degree to which it will realize the principle of locality (kozłowski, 2016, p. 68; rzerzycka & golanowskawitkowska, 2015, p. 105). although many market institutions may support initiatives important for local communities (e.g. by financing different kinds of needs), it is the cooperatives that can combine the social dimension and the economic dimension. the cooperatives banks through activities in the economic area (lending activities) may satisfy the local community’s needs. that is why the subject matter of this paper is the amounts of deposits raised by the cooperative banks and provided in the form of loans on the local market. their offsetting or the prevalence of lending activities will signal the principle of locality at an appropriate level. the aim of this paper is to examine the scope of the principle of locality by the cooperative banks in poland, and to diagnose the causes of net transfers in the sector. the author used quarterly financial data for the years 2009–2016 encompassing a selected group of over 75 cooperative banks in poland. transfers of funds in the cooperative banking sector in literature and research cooperative banks like any other lending institutions are financial intermediaries that raise monetary funds from surplus spending units and satisfy the financial needs of deficit spending units (boscia & di salvio, 2009, p. 16; becchetti, ciciretti & paolantonio, 2016, p. 226). for the cooperative banks the demaria magdalena golec24 posits are a basic method of financing loan activities because the availability of other sources of financing their activities is limited (fonteyne, 2007, p. 11). the significance of deposit base results from the fact that there is no possibility for the cooperative banks to use directly monetary funds from the interbank market. affiliating banks make a secondary source of financing these institutions. affiliation with the cooperative structures and limited connections of the cooperative banks with the wholesale money market play also an essential role for these institutions’ investment policies. for example, the cooperative banks in poland having free funds are obliged by association agreements to deposit them in affiliating banks. on the other hand the intercooperative deposit market or deposits in commercial banks are of lesser importance (czopur, 2012, p. 162). the functioning of cooperative banks in a specific setting and regulatory limitations of the territorial activities cause traditional cooperative bank financial brokerage to be important for a specific community. this makes it possible for funds to f low within a specific area of activity. unlike international commercial banks that make spatial transformations of the raised funds (golec, 2016, p. 18), the cooperative banks can follow the historical cooperative principle “local money for local needs”, thus offsetting deposit streams and loan volume (szambelańczyk & ławrynowicz, 2003, p. 393; szambelańczyk, 2006, pp. 111–113). if, however, the cooperative bank does not offset the streams of funds, then we deal with its: surplus (when the volume of customers’ funds collected as deposits exceeds the value of amounts receivable of nonfinancial entities) or deficit (if the difference between deposits and loans is negative, the bank must borrow funds from other institutions, the institution is an “importer” of money capitals). in case of surplus of the cooperative bank, the “exports” of deposits lie in making deposits at an affiliating bank and through the affiliating bank in the wholesale money market. the optimal situation occurs when the cooperative bank offsets the streams of deposits and loans by only correcting surplus/deficit that result from temporary states. among cooperative banks there may appear institutions that are “typically loan-oriented” or “typically deposit-oriented” (siudek, 2011, p. 171). the scope of money transfers among polish cooperative banks was researched by szambelańczyk and ławrynowicz (2003). with the use of full quarterly financial data from 5 periods in the years 2000–2001 and with the use of two indicators, they established the differences between the values of clients’ deposits and loans. they also identified relationships between the di locality and the transfer of funds in the cooperative… 25 rection and scope of transfers and the profile of a bank’s activity. nearly half of the cooperative banks (49%) demonstrated a balanced account of transfers, 13% of them were diagnosed as deficit-like, and the remaining were of surplus character (szambelańczyk & ławrynowicz, 2003, pp. 400–402). the most deficit-like banks were based in small towns or villages. the surplus spending institutions were based in big agglomerations or close to them. in terms of the profile of activity the more surplus-like institutions were those of business character dealing mostly with businesses that provided lending services for farmers and households (szambelańczyk, 2006, pp. 118). the european cooperative banking sector’s data do not corroborate the phenomena observed in poland. according to the european association of cooperative banks (eacb) representing 27 groups of cooperative banks with almost 80 million of members, 210 million of clients and 4050 cooperative banks, the 2015 loan-deposit ratio stood at 1.12, in the previous year’s being pretty similar (groeneveld, 2017, p. 5). assumptions of the research the above-mentioned overview of the transfers of funds in the cooperative banking sector will be subjected to analysis with regard to the diversity of credit unions. the picture of the cooperative banking sector presented through value reports may be determined by merely a few very big market entities. that is why the author conducted a study of the scope of cooperative institutions’ transfers with the use of financial data from 75 cooperative banks in poland. the data used for the study encompassed the quarterly data for the period from december 2009 to march 2016. the data were provided by the audit association of cooperative banks in poznań, one of the three audit associations of cooperative banks in poland. the differentiation of groups of banks will be assessed by means of descriptive statistics measurement tools. the categories taken into consideration are as follows: sum of assets, employment, sum of deposits, capitals, capital adequacy ratio, roa. for the diagnostic purpose of the scope of transfers in the researched group of banks three ratios were used: ■ loan-to-deposit_1 (ltd) – ratio of gross loans of the nonfinancial sector to deposits of the nonfinancial sector; maria magdalena golec26 ■ loan-to-deposit_2 (ltd_2) – ratio of loans of the nonfinancial sector, government and self-government institutions’ sector to the total sum of deposits (all groups of entities, i.e. financial, nonfinancial and public sectors); ■ gap – difference between the value of deposits of the nonfinancial sector and loans for the nonfinancial sector. the first ratio (ltd) does not include the value of deposits and loans of the government and self-government institutions’ sector. it refers only to the key data relevant for the nonfinancial sector. the public sector rarely plays a significant role for a loan-deposit activity of the credit cooperative. additionally the cooperative banks are mostly depositors for communes (polish: gminy) and districts (polish: powiaty) rather than lending institutions. however, in case of the second ratio (ltd_2) this limitation was removed. the ltd_2 ratio ref lects the loan and deposit data for the public sector as well. moreover, the value of deposits raised form the financial sector was included. the ratio does not include the financial sector’s loans which were treated as secondary investments complimentary to the banks’ activities. the ratios ref lecting levels of surplus (both ltd and ltd_2) are relative measures that were not standardized. their values so much different from one will prove imbalance in net transfers. if the ltd ratio (and ltd_2) is in the range of: ■ (0–0,9> – then it proves the bank’s surplus orientation, ■ (0,9–1,1> – then the bank offsets the structure of financing, ■ more than 1,1 – then the bank is deficit-like. in the course of the study the author established a gap ref lecting in value terms the scope of imbalance in the researched group of entities. next the assessment of conditions for surplus was performed in the researched group of banks. the assessment was performed by means of mathematical models. the ltd ratio was adopted as an endogenous variable of the model. by contrast the exogenous variables were as follows: ■ variables describing the scope of the banks’ activities, i.e. value of assets (assets), number of employees (employment), total sum of deposits (deposit_sum), value of capitals according to balance sheet (capitals); ■ profitability measured by: net financial result (result) or returns on assets (roa); ■ safety of activity: capital adequacy ratio (car), share of loans with recognized value loss in the loan portfolio of the non –financial sector (qual_ port); locality and the transfer of funds in the cooperative… 27 ■ profile of activity; for the research purposes it was essential to identify if the bank’s profile of activity is of traditional character, i.e. based on deposit-loan operations. the variables adopted for that purpose are as follows: significance of loans in total assets (sig_loan), significane of deposits in total assets (sig_dep), significance of interest results from the bank’s activity (sig_int_res). the following hypotheses were formulated: 1) the greater the scope of the banks’ activities, the lesser the misfit gap in terms of transfers of funds. larger banks have more possibilities as it comes to granting loans (one should take into consideration limits regarding loan involvement). they also have a larger territory of activity, which may lead to more effective investing in a specific area. 2) there is a negative correlation between the ltd ratio and the safety of a bank’s activity. a deficit-like bank (with a low ltd ratio) limits its lending operations by not granting finances to the riskiest prospective clients, which increases its safety. 3) a traditional profile of a bank’s activity is related to locality principle. yet an increase in significance of a bank’s deposit activity in the structure of financing a bank leads to a greater misfit of the financing structure. and vice versa, an increase in significance of lending activities in the structure of assets may contribute to surplus limitations. the outcome of the research process in the course of the analysis of data encompassing 1950 observations for each variable, the author established basic descriptive features for the samplings of the groups of banks, both measures of central tendency and dispersion (table 1). table 1. variables describing the researched group of cooperative banks variable assets [thous. pln] employment deposits [thous. pln] capitals [thous. pln financial result [thous. pln] roa [%] capital adequacy ratio [%] mean 181 674.0 70.2 155 483.0 18 194.5 1 114.4 0.66 15.4 median 134 756.0 54.0 116 793.0 13 507.6 706.3 0.56 14.2 maria magdalena golec28 variable assets [thous. pln] employment deposits [thous. pln] capitals [thous. pln financial result [thous. pln] roa [%] capital adequacy ratio [%] standard deviation 162 323.0 49.8 140 148.0 13 461.0 1 241.2 0.46 4.7 coefficient of variation 0.9 0.7 0.9 0.7 1.1 0.69 0.3 skewness 2.4 2.2 2.4 1.9 2.8 1.31 1.6 kurtosis 6.5 6.2 6.3 4.5 10.3 2.26 3.8 percentile 5% 47 954.0 23.0 38 478.0 6 305.5 150.4 0.14 10.3 percentile 95% 561 195.0 169.5 489 349.0 47 649.1 3 670.5 1.53 24.4 range q3-q1 131 922.0 49.0 116 117.0 13 644.4 994.7 0.60 5.1 s o u r c e : own calculations. by looking at the arithmetic mean and median one can notice that the group of banks in the study is made up of cooperative institutions of average size with assets up to pln 200m and with several dozen employees. however, it is worth noticing that there is a significant variation of the banks under examination. the variation ratios for balance values and financial result values range from 70% to 110% (a lower value of the variation ratio applies only to the capital adequacy ratio). moreover, the skewness ratios indicate a right-tailed asymmetry of distribution, thus significant value dispersion above the mean and concentration of the small ones, the proof of which also lies in the means being higher than the medians. table 2. surplus characteristics in the researched group of cooperative banks variable ltd ltd_2 gap [thous. pln] mean 0.73 0.71 36 719.1 median 0.72 0.70 27 506.0 standard deviation 0.23 0.20 38 880.5 coefficient of variation 0.31 0.28 1.06 skewness 1.59 1.99 1.90 percentile 5% 0.43 0.47 -6 831.6 table 1. variables describing the researched group of cooperative banks locality and the transfer of funds in the cooperative… 29 variable ltd ltd_2 gap [thous. pln] percentile 95% 1.08 1.00 104 156.0 range q3-q1 0.27 0.23 41 485.8 s o u r c e : own calculations. both of the surplus ratios (ltd and ltd_2), illustrate surplus tendency of the researched banks. their means are quite approximate and stand at 0.7. a bit lower ltd_2 ratios are justified because of the very construction of the ratio. it is also worth emphasizing that there is much lower variation in the specified categories as compared to the balance characteristics. for the ltd ratio the values on the average deviate from the variable by 0.23, whereas the variation is average (around 30%). the skewness of dispersion is also lower, yet it is still there. in terms of the quarters of distribution, only 5% institutions have a 1.08 ltd ratio or higher. thus 95% institutions are surplus-like or offset the structure of raised or invested funds. in terms of mean absolute values of money transfers there is significant dispersion in the researched group of banks. for more than 5% institutions the gap ratio is negative. it is worth noticing, though, that the positive gap ratio for 0.95 percentile is as high as a dozen times or so. it also proves the advantage of the institution and values with positive features. an econometric regression model was applied to test the research hypotheses. in the first stage the method of least squares was used for the panel model. yet after the breusch-pagan test was applied it turned out that a more appropriate model to be used was generalized least squares. on the other hand the hausman test made it possible to find out that the most appropriate model for the research was a fixed effects model (dańska-borsiak, 2011, p. 44). the above-mentioned independent variables were compiled in data tables. the gretl statistical software package was used to test the models. not all of the variables were significant, hence eventually the panel model explaining the ltd ratio value emerged as follows (table 3). table 2. surplus characteristics in the researched group of cooperative banks maria magdalena golec30 table 3. model for variable y: ltd indepenedent variable coefficient stand. error t-student value p significance const 2.4516100 0.092907 26.3878 <0.0001 *** car -0.0032189 0.000744 -4.324 <0.0001 *** sig _loan 0.5382610 0.021188 25.4038 <0.0001 *** sig _dep -2.1100500 0.091802 -22.9847 <0.0001 *** sig _int_res -0.2572830 0.055387 -4.6452 <0.0001 *** assets -1.554e-09 3.517e-10 -4.4169 <0.0001 *** deposit_sum 1.514e-09 4.053e-10 3.7356 0.0002 *** qual_port -0.3098580 0.097057 -3.1925 0.0014 *** result 3.981e-09 1.858e-09 2.1423 0.0323 ** lsdv r2 = 0.93 s o u r c e : own calculations. in the course of the computation of the model the variables that were statistically insignificant were removed from the set of independent variables. ltd in the model signifies 9 exogenous variables, however it is worth mentioning that the impact of assets, sum of deposits and financial result is marginal due to a low coefficient value. share of deposits in the bank’s total assets is the most significant factor for explaining an ltd ratio level. an increase in this share makes the value of the coefficient go down. on the other hand, an increase in the significance of loans in total assets makes ltd go up, thus banks use the raised funds for lending. in terms of the research hypotheses. 1) one cannot confirm the hypothesis regarding the relationship between the scope of a bank’s activity and the level of financing misfit in the cooperative banks. although the sum of deposits and the value of assets were included in the model the direction of impact on the ratio value is reverse. 2) the hypothesis about negative correlation of surplus with the safety of a bank’s activity was confirmed. the lower the ltd ratio, the higher the safety of a bank’s activity (measured by capital adequacy ratio and quality of loan portfolio). locality and the transfer of funds in the cooperative… 31 3) the hypothesis about negative direction of the impact of share of deposits on the surplus ratio and positive impact of the share of loans in total asset was confirmed. additionally the following regularity was observed: the higher the significance of the result from interest, the lower the ltd ratio (higher surplus).  conclusions the principle of locality within the traditional function of cooperative banks in a specific setting is followed to the extent the bank offsets transfers of funds. nowadays in poland there is surplus, which leads to the conclusion that the principle of locality is realized only partially. the scope of the diagnosed misfit of streams of funds measured by the ltd ratio also demonstrates the scope of the utilization of funds beyond local environment, i.e. transferring surplus to other participants of the money market. the research revealed relative stability of the selected group of banks in terms of surplus, gradual deepening of the phenomenon and an increase in the number of banks with a significant misfit of financing structure. the diagnosed phenomenon should become a point of discussion for the cooperative environment. when it comes to decision-making what may be essential from a point of view of particular entities is the relationship between the structure of financing and the scope of activity. more significant lending activity should contribute to a decrease in non-offsetting of streams of funding. however it may occur at the expense of lower safety of the institution’s functioning. from the perspective of the cooperative principle (caring about the local environment) a growth in share of deposits in total liabilities does not lead to the realization of the key objective of the cooperative bank’s activity because the raised funds can be transferred to other environments.  references alińska, a. (2008). instytucje mikrofinansowe w lokalnym rozwoju społeczno - gospodarczym. (micro-financial institutions in local socio-economic development.). warszawa: wydawnictwo sgh, monografie i opracowania, nr 558, 248–256. becchetti, l., ciciretti, r. & paolantonio, a. (2016). the cooperative bank difference before and after financial crisis. journal of international money and finance, 69, 224– –246. http://doi.org/10.1016/j.jimonfin.2016.06.016. maria magdalena golec32 boscia, v., & di salvio, r. (2009). the theory and experience of cooperative banking, 9–39. in v. boscia, a. caretta, p. schwizer (eds.). cooperative banking: innovations and developments. london: palgrave macmillan. http://dx.doi.org/10.1057/9780230235786. czopur, s. (2012), kapitał finansowy banków spółdzielczych. (financial capital of cooperative banks.). warszawa: cedewu. dańska-borsiak, b. (2011). dynamiczne modele panelowe w badaniach ekonomicznych. (dynamic panel models in economic research.) łódź: wydawnictwo uniwersytetu łódzkiego, 39–72. fonteyne, w. (2007). cooperative banks in europe – policy issues. imf working paper, nr 157. giagnocavo, c., & gerez, s. (2012). cooperative bank strategies for social-economic problem solving: supporting social enterprise and local development. annals of public and cooperative economics, no 83:3, 281–315. http://dx.doi.org/10.1111/j.14678292.2012.00464.x. golec, m.m. (2010). społeczne uwarunkowania działalności banków spółdzielczych, 63–79 (social determinants of cooperative banks’ activity.). in m. stefański (ed.). banki spółdzielcze w polsce w warunkach kryzysu finansowego i gospodarczego. (cooperative banks in poland in the financial and economic crisis conditions.) włocławek: wyższa szkoła humanistyczno-ekonomiczna we włocławku. golec, m.m. (2016). instytucje i usługi bankowe. (institutions and banking services.) poznań: wydawnictwo wyższej szkoły bankowej w poznaniu, 11–70. gostomski, e. (2010). bankowość międzynarodowa, (international banking.) gdańsk, 245–256. groeneveld, h. (2017). snapshot of european co-operative banking 2017. brussels: eacb, tias. kata, r. (2011). endogeniczne i instytucjonalne czynniki kształtujące powiązania finansowe gospodarstw rolnych z bankami (endogenous and institutional factors determining financial relationship between agricultural holdings and banks.). prace naukowe wydziału ekonomii uniwersytetu rzeszowskiego, seria: monografie i opracowania, nr 14, rzeszów, 82–145. kozłowski, ł. (2016). banki spółdzielcze a deponenci. empiryczna analiza oddziaływań dyscyplinujących. (cooperative banks and depositors: an empirical analysis of disciplinary interactions.) warszawa: wydawnictwo poltext, 65–90. rzerzycka, a., & golanowska-witkowska, g. (2005). determinanty rozwoju banków spółdzielczych w polsce. (determinants of the development of cooperative banks in poland.). pieniądze i więź, nr 4, 105–112. siudek, t. (2011). bankowość spółdzielcza w polsce w wybranych krajach unii europejskiej – wymiar ekonomiczny, organizacyjny i społeczny. (cooperative banks in poland and selected european union countries-economic, organizational nad social perspectives.) warszawa: wydawnictwo sggw, 265–288. szambelańczyk, j., & ławrynowicz, m. (2003). transfer pieniądza na rynkach lokalnych w strukturze spółdzielczego sektora bankowego w polsce. (transfer of money on local markets in the structure of the cooperative banking sector in poland.) 389– –408. in j. stacharska-targosz (ed.). bankowość korporacyjna i inwestycyjna. (cor locality and the transfer of funds in the cooperative… 33 porate and investment banking.) poznań: wydawnictwo wyższej szkoły bankowej w poznaniu. szambelańczyk, j. (2006). banki spółdzielcze w polsce w procesach zmian systemowych. (cooperative banks in poland in the processes of systemic changes.) poznań: wydawnictwo akademii ekonomicznej w poznaniu, 111–129. zalcewicz, a. (2010). bank spółdzielczy. aspekty prawne tworzenia i funkcjonowania. (cooperative bank. legal aspects of creation and functioning.) warszawa: wolters kluwer, 163–209. cjfa_2_2017_druk.pdf e65 -1 date of submission: august 8, 2017; date of acceptance: september 18, 2017. * ** pernican journal of finance & accounting, 6(2), 33–43. http://dx.doi.org/10.12775/cjfa.2017.009 * ** in eu 12 and v4 states keywords: convergence, european union, v4 states, government expenditure, healthcare. j e l classification: f0, i1. abstract: the subject of this paper is an attempt to assess the level of convergence of government health spending in the european union countries. the ever-increasing level of life expectancy, demographic changes, including the aging of society in many european countries, and the development of medical technologies are a growing challenge for modern nations. the similarities in the changes taking place in the eu states lead to considering whether there are similar transformations in health spending? ensuring access to primary healthcare is one of the tasks of the welfare state and it can be assumed to be a public good. accepting these reasons, the authors set out to investigate the phenomenon of sigma and beta unconditional convergence for the level of government spending on health care in the eu countries. the answer to the question has been sought: does participation in the eu leads to convergence in government spending on he34 alth care? the study uses selected dispersion measures for sigma convergence calculations and econometric modelling for beta convergence. health care expenditure is one of the most important types of state expenditure. due to the prolongation of life expectancy, the aging process of european societies, the use of modern medical technologies, their importance is constantly growing. the similarity in these phenomena makes it possible to suppose that changes in health policy, especially in health care expenditure, will show some form of convergence in eu countries. previous research results show the disproportion in this spending in eu countries, and the presented results of research on convergence are not clear. due to the spatial and temporal extent of analyses, the presentations of many authors’ conclusions differ. the authors sought to answer the question whether the presence of states in the european union leads to convergence in government spending on health care. the discussed issue may be useful for further ref lections on the issue of integration in the european union. the dependent variable in the study was the level of government spending on health care to gdp, as a result of the disaggregation of total government spending on individual sub-spending. the analysis uses statistical and econometric methods. the method of convergence analysis is known and applied to a wide spectrum of research not only in economic sciences, especially with regard to changes in economic growth. initially, convergence analysis was mainly used to study the occurrence of real convergence between countries or regions. for this purpose, the main variable was real gdp per capita. such research has been conducted by many authors for different groups of states. over time, the idea of convergence began to be used to assess the transformations of other areas of refer only to gdp per capita analysis. an example of this is the use of convergence in the analysis of health care expenditure in the eu countries (hnatyszyn-dzikowska & wyszkowska, 2015, p. 127–135), in the analysis of govern convergence of health expenditure in eu 12 and v4 states 35 2016, pp. 247–255), when analysing expenditures on the agricultural sector often it is possible to find studies using this method in research on the size of state expenditure and their spatial convergence. such research are also occurring as regards the convergence of national health spending, although their numbers are relatively small. referring to this area of convergence assessment, on the one hand, in most countries the aging process of societies is observed, albeit with varying dynamics, which is linked to the growing demand for care for the elderly. the existence of a european model of the welfare state (though in various forms) leads to posing a hypothesis of convergence in the amount of health care expenditure. on the other hand, european societies differ in their social and family structures, as well as in the characteristics of welfare states. (zaidi et al., 2017, p. 139). it is also pointed out that unequal patterns of health care expenditure, which are a clear feature of late capitalist society (lau, fung & pugalis, 2014, p. 137). the measurement of convergence of health expenditures alone, as suggested by strzelecka (2011, p. 214), is justified by the provision of information on the degree and convergence of countries in the case of budget allocations to health care. due to the small number of studies conducted in this field, there are no clear results indicating the convergence (or lack thereof ) of health expenditure. additional diagnostic problems and the comparability of the results are based on the method adopted by the authors of various papers, the time range included in the econometric models and finally the selection of states. each of these factors can affect the final outcome of convergence indicators. long-term studies demonstrated the convergence of health expenditure (sigma and beta) for 1960–1995 for the eu15 countries (nixon, 1999, pp. 1–37; nixon, 2000, pp. 1–27). in the hitiris study (1997, pp. 1–6), however, the occurrence of such convergence for the period 1960–1991 for the eu12 countries was undermined. an analysis of the various eu member states in the period 1992–2004 confirmed the existence of convergence, although the tendency for convergence was not maintained throughout the analysed time range. the main period of convergence was 2002–2004 for sigma convergence in the eu 15. (kerem, püss, viies & maldre 2008, pp. 29–43). the studies on the convergence of health expenditures were also made for 19 oecd countries (1972–2006) where convergence was demonstrated, although differences in us and norway were indicated (panopoulou & pantelidis, 2012, pp. 3909–3920). relatively new research on the convergence of health expenditure were also 36 conducted, among the others, in africa (odhiambo, wambug & kiriti-ng'ang'a, 2015, pp. 185–205) or in china (zhang, zhang, wu, xia & lu, 2016, pp. 1–11). obviously, each country has the opportunity to develop its own health care management system, although similar historical conditions and health policy goals caused that these systems have some common features (kujawska, 2015, p. 113). despite those similarities, particular countries responded differently to external shocks, including the financial crisis that affected health care spending. these shocks were therefore asymmetrical. some countries also used the crisis to reduce their spending level, for example through its absolute reduction (cyprus, greece, ireland, lithuania, portugal, romania) or freezing salaries of healthcare workers (great britain, slovenia) or lowering salaries (e.g. denmark) (karanikolos, mladovsky et al., pp. 1323–1331). the adopted study interval took into account the period of crisis that could have had an impact on disparities in health care expenditure. in the analysed group of countries in the time period from 2004 to 2015, the expenditure on health care was clearly differentiated. relatively low values were observed in luxembourg, in poland and the czech republic, while the highest level of expenditure was observed in denmark. the aim of the study is to investigate the phenomenon of sigma and beta unconditional (absolute) convergence of the level of government spending on healthcare for the eu12 (old eu) and visegrad group (v4) countries. for this purpose, two analyses were conducted – sigma and beta convergence for 16 countries in the period 2002–2015. the research material came from the eurostat database. gretl 2016d program was used for the estimation of regression parameters. discussing the convergence considerations, a number of methods must be taken into account to confirm its existence. in the literature we can find differbeta analyses, which most often appear in classical literature (sala-i-martin, 1995, p. 3). considering the accepted purpose of the paper, the authors analysed the convergence of health expenditure using the sigma convergence analysis and the beat unconditional (absolute) convergence. for this purpose, eurostat convergence of health expenditure in eu 12 and v4 states 37 databases were used and decomposition of total government expenditure on individual sub-spending was made, on the basis of which both analyses were carried out. such an approach to obtaining particular state spending was also widely used in a number of studies, for example, selected components of govby initially disaggregating total government expenditure for government administration expenditure, education, health, agriculture, construction, public transport and communications, and government spending on social security. conducting the sigma convergence analysis, a standard deviation of the logarithm of natural government expenditures on health care was used. the analysed equation for each time unit tadopted the form (malaga, 2004, p. 57)1: (1) where: i – country index, he it – the level of government spending on health care in the country i and at time t, – the average level of government spending on health care in the considered group of countries. when there is a decrease in the dispersion of the examined feature over time, we refer to the occurrence of sigma convergence (table 1). it is also convenient to determine the rate of change of the sigma parameter under study or to make a visual analysis of the distribution of sigma convergence points in the 2014, p. 99): t 0 1t, (2) where: t– standard deviation of the natural logarithm of the examined feature between countries at time t. 1 ferent subject of the study. 38 1 signals sigma convergence occurrence (table 2). the second common measure of convergence is beta convergence. we can distinguish beta absolute (unconditional) convergence and beta conditional convergence. beta absolute convergence occurs when poorer economies develop faster than the richer ones (sala-i-martin, 1995, p. 3). in the case under consideration, countries with lower levels of health expenditures increase them faster than those with relatively high levels of health expenditure. then the different countries are striving for the same steady state of long-term equilibrium. we assume that all economies, at the same percentage, reduce the distance to long-term equilibrium and at the same time reach that state. in turn, the conditional convergence beta analyses the phenomenon when a country's economy converges to its own steady-state equilibrium (malaga, 2004, p. 66). the coeffiin the analysed group of states. for this purpose, an estimate of the regression 2: (3) where: he r – level of expenditure on health in the final period, he 0 – level of expenditure on health in the end period. 1 the formula: (4) the less developed economies (or the relative weakness of the surveyed feature) will develop rapidly enough to surpass the more developed economy 2 the ones accepted by the authors due to another subject of the study. convergence of health expenditure in eu 12 and v4 states 39 in the analysed time range for the 12 eu countries and the v4 group, there is a clear divergence of health care expenditure. in the period in study there was a continuous increase in the divergence of the examined feature (table 1). the same conclusions can be drawn by analysing a regression equation, in which 1 has a statistically significant higher value than zero. consequently, individual countries, although operating within one integration group, did not show one path of adjustment to public health spending. this process has been systematically increasing disproportion over time since 2005, due to the substantial enlargement of the eu by 10 new countries. this can be represented as a time-dependent regression function (table 2). table 1. measuring the sigma convergence of health care spending in the eu12 states and v4 group research period sigma convergence change rate 2002 0.568314 – 2003 0.580515 1.021469 2004 0.599286 1.032335 2005 0.51917 0.866315 2006 0.52827 1.017528 2007 0.622461 1.178301 2008 0.623386 1.001485 2009 0.662759 1.063161 2010 0.676734 1.021086 2011 0.70729 1.045153 2012 0.74164 1.048565 2013 0.752369 1.014466 2014 0.825579 1.097306 2015 0.807344 0.977913 s o u r c e : own study on eurostat data. 40 table 2. regression function for sigma analysis coefficient standard error t-student p value r2 const 0.4961 0.0223719 22.1751 <0.0001*** 0.849408 time 0.0216163 0.00262745 8.2271 <0.0001*** s o u r c e : own study based on eurostat data using gretl 2016d program. table 3. measurement of beta absolute convergence for health expenditure in eu12 states and v4 group research period estimated values r2 2002–2006 0.078036 -0.0369546 1.811 -1.526 0.0916* 0.1493 0.142587 0.040858 2002–2007 0.030116 -0.0124092 0.6959 -0.5101 0.4979 0.6179 0.018247 0.012895 2002–2008 0.054976 -0.0234355 1.2491 -0.9472 0.2321 0.3596 0.060225 0.025598 2002–2009 0.058022 -0.0198219 1.3361 -0.812 0.2028 0.4304 0.044973 0.021582 2002–2010 0.045125 -0.0151188 1.1424 -0.6809 0.2724 0.5071 0.032053 0.016251 2002–2011 0.029286 -0.00851732 0.7935 -0.4105 0.4408 0.6877 0.011892 0.008902 2002–2012 0.027027 -0.0080678 0.7178 -0.3812 0.4847 0.7088 0.010272 0.008448 2002–2013 0.031181 -0.0114644 0.8302 -0.543 0.4203 0.5957 0.020626 0.012334 2002–2014 0.019065 -0.00554119 0.4891 -0.2529 0.6324 0.8041 0.004546 0.005751 2002–2015 0.023336 -0.00909286 0.6334 -0.439 0.5367 0.6673 0.01358 0.009726 s o u r c e : own study based on eurostat data using gretl 2016d program. tive, which would indicate a convergence of health care expenditure. it should be noted, however, that none of the structural parameters of the model reached satisfactory statistical significance, and the coefficient r2 in each case is low. initial period and amounts to 14.93%, but for this period it is unsatisfactory (the variable can be considered significant if the index does not exceed 10% should be carefully evaluated, especially with such unambiguous divergence convergence of health expenditure in eu 12 and v4 states 41 of beta convergence. the analysis of public health expenditure has shown a varied course of these paths over time. due to the differences between the social and family structures as well as the specific characteristics of welfare states, convergence in the expenditure group under consideration cannot be stated. the conducted sigma convergence analysis negated the existence of health care spending f luctuations for eu12 and v4 countries. the assessment of this convergence is indicative of a reversal phenomenon – divergence. there was disagreement in the assessment between beta and sigma convergence (although in the first case the necessary significance was not achieved). it seems that in the case of this second convergence, weaknesses in this approach arose, indicating that the relationship between the rate of change in health care expenditure and its initial level does not imply a reduction in the dispersion structure and there may even the high variability between countries in the rate of change (effect of extreme magnitude). on the other hand, sigma divergence was identified, and therefore the increase in discrepancies over time. this may indicate the phenomenon of polarization of these expenses within the eu states. wsparcia sektora rolnego? zeszyty naukowe sggw w warszawie – problemy roldada, m.a. 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(2014). is healthcare expenditure across europe converging? findings from the application of a nonlinear panel unit root test. eurasian business review, 4(2). http://dx.doi.org/ 10.1007/s40821-014-0014-9. malaga, k. (2004), konwergencja gospodarcza w krajach oecd w latach 1960–1999. wo akademii ekonomicznej w poznaniu, zeszyt 41. nixon, j. (1999). convergence analysis of health care expenditure in the eu countries using two approaches. department of economics and related studies, university of york, heslington, discussion papers in economics, no 1999/03. nixon, j. (2000). convergence of health care spending and health outcomes in the european union, 1960–95. centre for health economics, discussion paper: the university of york, no. 183. odhiambo, s. a., wambugu a., & kiriti-ng’ang’a, t. (2015). convergence of health expenditure in sub-saharan africa: evidence from a dynamic panel. journal of economics and sustainable development, 6(6). panopoulou, e., & pantelidis, t. (2012). convergence in per capita health expenditures and health outcomes in the oecd countries. applied economics, volume 44. http:// dx.doi.org/10.1080/00036846.2011.583222. empirycznych. zeszyty naukowe sgh, nr 20. istycznych w latach 1990–2005. bank i kredyt, nr 8–9. sala-i-martin, x. (1996). the classical approach to convergence analysis. economic journal, 106(437). krajach w latach 1990–2008. acta universitatis nicolai copernici, ekonomia xlii – convergence of health expenditure in eu 12 and v4 states 43 wan, g. h. (2005). convergence in food consumption in rural china: evidence from household survey data. china economic review, 16(1). http://dx.doi.org/10.1016/j. chieco.2004.09.002. zaidi, a., gasior, k., zolyomi, e., schmidt, a., rodrigues, r., & marin, b. (2017). measuring active and healthy ageing in europe. journal of european social policy, 27(2). http://dx.doi.org/10.1177/0958928716676550. zhang, g., zhang, l., wu, s., xia, x., & lu, l. (2016). the convergence of chinese county government health expenditures: capitation and contribution. bmc health services research. http://dx.doi.org/10.1186/s12913-016-1635-8. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 3 date of submission: january 9, 2019; date of acceptance: february 8, 2019. * contact information: okwyokpalap@yahoo.com, department of accounting, university of lagos, akoka, nigeria 100213, phone: +234 8033060763; orcid id: https:// orcid.org/0000-0002-9943-6730. ** contact information: miredele@yahoo.com, department of accounting, university of lagos, akoka, nigeria 100213, phone: +234 8037076057; orcid id: https://orcid. org/0000-0002-1661-9460. okpala, o.p., & iredele, o.o. (2018). corporate social and environmental disclosures and market value of listed firms in nigeria. copernican journal of finance & accounting, 7(3), 9–28. http:// dx.doi.org/10.12775/cjfa.2018.013 okwy peter okpala* university of lagos oluwamayowa olalekan iredele** university of lagos corporate social and environmental disclosures and market value of listed firms in nigeria keywords: social and environmental disclosures, market value, nigeria. j e l classification: m40, q01, q2, q4, q25. abstract: this study examines the effect of corporate social environmental disclosure (csed) on the market value of eighty-four (84) listed firms in nigeria, which were purposively selected from the period 2011 to 2016. the aggregate of (csed) were regressed on market value (tobin’s q), while firm size, financial performance, board size, leverage, affiliation to foreign company and industry type were factored in as extraneous variables. data were obtained through content analysis of annual reports of sampled firms and were analysed through descriptive statistics and regression analysis. the result of the descriptive analysis showed that the mean score for the csed is above average and the standard deviation for almost all the variables is low which indicated that the deviation of the actual data from their mean is not significant. the ols result revealed that csed, firm size, financial performance, affiliation with foreign company okwy peter okpala, oluwamayowa olalekan iredele10 and industry type have significant effect on the market value of firms, while board size and leverage do not significantly inf luence the market value of firms. the study recommends that firms should disclose information on their environmental performance as a way of adding value.  introduction contemporary business organizations operate in a society that expects them not only to fulfil economic functions by producing goods and services, but also to take on social and environmental roles and responsibilities (panwar & hansen, 2009). this practice is not a recent phenomena, it first started to emerge as a substantial discipline in the early 1970s (gray & bebbington, 2001; owen, 2008). it has witnessed a remarkable growth more because of the increasing global profile of environmental issues. firms can no longer ignore the social problems of the society or the destructive impacts of their activities on the environment (akinlo & iredele, 2014). there is the demand to provide greater accountability of social and environmental information through various means of corporate communication aimed at informing a wide range of audiences. several global and national institutions like united nation’s protocols and agreements on environment, global reporting initiatives (gri) and national environmental standards and regulatory enforcement agency (nigeria) have been created with the objectives of enunciating varying norms of interaction with environment, proposing standards for engaging stakeholders and developing frameworks for reporting on socially and environmentally impactful activities of organisations. these institutions, in concert with several social and environmental advocacy groups provide moral and legal foundation for social and environmental disclosures (enahoro, 2009). within the past decade there has been a considerable increase in the number of companies that have responded to this challenge by presenting information on their social and environmental activities. in the kpmg’s international survey of corporate social responsibility (csr) reporting covering 34 countries, a notable increase was observed in the number of companies presenting csr reports from 50% in 2005, to 80% in 2008 and 95% in 2011 (kpmg, 2011). the survey shows that countries are getting better at reporting the environmental and social trends and risks affecting their businesses. emerging economies of india, indonesia, malaysia and south africa have the highest corporate responsibility (cr) reporting rates in the world (kpmg, 2015). unlike in the corporate social and environmental disclosures… 11 2011 survey, when only 20% of the companies included csr data in their annual report, almost 60% include csr data in annual financial reports by 2015. thus, including csr data in annual financial report is now a firmly established global trend. it is predicted that non-financial reporting will soon become a required business practice and companies will need to focus on how best to integrate their financial and non-financial information (kpmg, 2015). already integrated reports are required by regulation and/or law in south africa and india. although only 11% of companies surveyed by kpmg in 2015 have integrated reports, over 50% included csr information in annual report, with many moving toward convergence of csr and annual reports. despite the increasing level of interest in corporate social environmental disclosure [hereafter called csed], it is not yet clear whether the market assigns real value to it. establishing the inf luence of the csed on the market value of firm will provide further rational basis for disclosure or non-disclosure of this iinformation, besides responding to stakeholder pressure. the motivational basis for engaging in csed can be altruistic or economic (uwuigbe, uwuigbe & ajayi, 2011). scientific evidence and consumer reactions suggest that firms are likely to be rewarded for higher level csed. this reward is expected to manifest in the market value of the firm (akinlo & iredele, 2014). dasgupta, laplante and mamingi (1998) assert that capital markets respond to information on environmental performance and reacts negatively to news of adverse environmental incidents and positively on such disclosures such as use of cleaner technologies. natali, lars, hasseli and henrik (2009); laabs (2012) and li, gong, zhang and koh (2017) affirmed that csed has value relevance as it is expected to affect future earnings of the firm. in the light of this on-going debate on the association between csed and market value of firms, this study attempts to extend academic literature on this debate within the context of developing country like nigeria. the objective of the study is to determine the effect of disclosure of social and environmental issues on the market value of listed firms in nigeria. the rest of this paper provides a brief review of literature and hypothesis development. this is followed by a discussion of the methodology and then the data analysis. the final section provides the discussion and conclusion of the study. okwy peter okpala, oluwamayowa olalekan iredele12 literature review and hypothesis development 1. social and environmental disclosure (sed) corporate social and environmental disclosure (csed), which is also known as corporate social responsibility reporting (csr) (deegan, 2007), entails the practice whereby firms willingly accommodate social and environmental issues in their business values and operations and report same (mohammed & abubakar, 2014). these csed are important tools for decision making (shil & paramanik, 2009). csed has been extensively addressed in literature especially in developed countries, in many of these countries, it is being widely accepted as one of the ways in which businesses can take responsibility for the effects for their social and environmental activity and account for it through the provision of information. researchers have used various means to measure the dimensions of csr. some have used content analysis of firms’ disclosure documents (abbott & monsen, 1979; webb, cohen, nath & wood, 2009), others have used experiments and case studies (o’dwyer, 2011). these methods, however, often suffer from lack of generalizability and are inf luenced by participant biases. in order to overcome this, csr are measured uniformly and consistently across a wide range of companies (malik, 2014). other studies therefore operationalizes csed through a number of measurable variables, which can be used in testing the csed/firm market value relationship. specifically, ngwakwe (2009) identified three broad classes of measurable variables; employee health and safety (ehs), waste management (wm) and community development (cd). other measurable variables under the scope of csed include employee welfare and social benefit (ewsb), and donation and charitable contributions (dcc). oba (2012), investigated whether three corporate social responsibility (crs) variables – community social responsibility (ccrs), human resource management (hrm) and charitable contribution (cc). in line with gri performance indicators, (akinlo & iredele, 2014) measured corporate environmental disclosure using environmental pollution and control policy (epc), energy policy (enp), impact on biodiversity (bio), waste management cost (wsm), award received for installing environmental management system (awr), environmental research and development cost (erd) and cost of compliance with environmental laws (cel). similarly, measurements of variables for the study were based on the global reporting initiative (gri corporate social and environmental disclosures… 13 3.1) framework. six variables, consistent with gri framework, are identified as a consistent measure of csed. these are: (i) environmental protection (ii) energy conservation (iii) community development (iv) employee welfare (v) product responsibility (vi) human rights and protection of stakeholders interest. 2. frameworks for corporate social and environmental disclosure among the list of framework for reporting social and environmental issues, the global reporting initiative (gri) guideline is the most definitive, widely-accepted and commonlyapplied framework for environmental reporting globally (hindley & buys, 2012). the global reporting initiative (gri) is a non-profit organisation that promotes economic, environmental and social sustainability and provides all companies and organisations with a comprehensive sustainability reporting framework that is widely used around the world. the first version of the guidelines, g1 was launched in year 2000. subsequently, others followed; g2 (2002); g3 (2006), with updated and complete version (g3.1) in 2011. the g4 was launched in 2013, though will soon be finally replaced by gris standards, this study is based on the g3.1 because it is the applicable guideline for the period being covered in this study. 3. csed and market value of firms current debate on how environmental disclosure impacts the market value of firms is basically divided into two schools namely; the cost concerned school and the value creation school. the cost-concerned school argues that environmental investments and high environmental disclosure represent only increased costs, resulting in decreased earnings and lower market value. consequently, the relationship between environmental disclosure and market value is expected to be negative (lars, henrik & siv, 2005). value creation school regards environmental efforts as a way of increasing competitive advantage and improve financial returns to the investors, the relationship between environmental disclosure and market value in this regard is expected to be positive (konar & cohen, 2001; akinlo & iredele, 2014). one particular development that helps csed’s inf luence on market value of a firm is the activities of the ethical investors. ethical investors are people who deliberately look for and use investment vehicles that ref lect their values okwy peter okpala, oluwamayowa olalekan iredele14 and concerns regarding conduct of business activities (williams, 1999). these investment vehicles (ethical investments) select companies for investments, based on consideration for social and environmental performance, besides economic performance. hence, they are also referred to as social responsibility investments. the investors are guided, not just by profit maximisation motive, but also by moral duty to maximise stakeholder’s welfare (etzioni, 1988). cassidy (2003) posits that substitution of long-term sustainability for short term volatility and risk is needed in contemporary business. economic, social and environmental performance are often linked with adequate disclosures. chami, cosimano and fullenkamp (2002) argue that ethical reputation is the valuable intangible asset which will affect market price of shares. with the steady increase in the number of ethical investors and volume of funds for ethical investments, demand for shares of companies with good quality csed would increase thus driving up their prices. 4. theoretical framework several theoretical perspectives have already established the notion that organizations need to engage in csr activities and report such activities. the theoretical perspectives upon which csr is based and which also provide the theoretical foundation for analyzing the issue of csed include such theories as the legitimacy theory, stakeholder theory and the resource based view theory. while legitimacy theory argues that organizations seek to ensure that they operate within the bounds and norms of society (gray, kouhy & lavers, 1995). it entails conformity of an organization with the value of the society within which it functions (deegan, 2002). the stakeholder theory asserts that corporation’s continued existence requires the support of the stakeholders and their approval must be sought and the activities of the corporation adjusted to gain that approval (chan, 1996). however, this study is hinged on the resource based theory. resource based theory presumes that firms are bundles of heterogeneous resources and capabilities which are imperfectly mobile across firms and for certain types of firms these capability or resource can lead to a sustained competitive advantage for the firm (barney, 1991; hart, 1995). the implication of this theory is that csed can be used as a strategic tool for corporate differentiation and also as a basis to develop predictive patterns of csr investment for specific firms. this theory suggests the use of csed as strategy for differentiation, beyond just looking for legitimacy or pleasing stakeholders. in other corporate social and environmental disclosures… 15 words, resource based view (rbv) can be used to explain why the extent and level of csed can inf luence the market value of the firm. 5. prior empirical studies the preponderance of the literature on csed examined the relationship between the phenomenon and financial performance, while some examined the inf luence of csed on market value of firm. rockness, schlachter and rockness (1986) conducted a research on hazardous waste disposal in the chemical industry (environmental performance) and the return on equity as a measure of financial performance. in their study they found positive relations; companies with higher financial performance are those who have smaller amounts of chemical waste disposal. wang, sewon and claiborne (2008), from chinese perspective indicated that firm performance, measured by return on equity, is positively related to voluntary disclosures. furthermore, hossain and hammani (2009) in a study using listed qatari companies found profit insignificant in explaining the degree of social and environmental disclosures. andrikopoulos & kriklani (2012) using reported practices of environment disclosure on the websites of companies listed in copenhagen (denmark) stock exchange found that profitability are significantly associated with the degree of environmental disclosure. this is contrary to the conclusions of akbas (2014) which asserts that profitability is negatively related quantitative information disclosure, based on analysis of data from turkey. several researchers other studies have associated social and environmental disclosures with the value of the firm. for instance, a study by konar and cohen (2001) related the market value of firms in the s&p 500 to objective measures of environmental performance. the study found that bad environmental performance is negatively correlated to the value of intangible assets of the firm. this implies that good environmental performance and reporting improve firm valuation. funk (2003) posits that companies that actively manage a wide range of sustainability indicators are better able to create long-term value for all stakeholders. further, lo and sheu (2007) examined whether corporate sustainability has an impact on market value, using large united states’ non-financial firms. using tobins q as proxy for firm value, they found a significant positive relation between corporate sustainability and the market value of the firm. using data collected in egypt, wahba (2008) corroborated the finding that social responsibility reporting exerts positive and significant imokwy peter okpala, oluwamayowa olalekan iredele16 pact on firm market value. furthermore, plumlee, brown, hayes and marshall (2010) investigate the relationship between the quality of a firm’s voluntary environmental disclosures and firm value by exploring the relationships between components of firm value and voluntary environmental disclosure quality. the study concludes that increased voluntary environmental disclosure quality is associated with firm value. further, the result from a study conducted by schadewitz and niskala (2010) found that communication of social and environmental performance is an important explanatory factor for firm’s value. specifically, the result indicates that gri responsibility reporting is part of a firm’s communication tools for the purpose of reducing information asymmetry between managers and investors, thus helping to produce a more precise market valuation of a firm. however, a study by carnevale, mazzuca and venturini (2011) which applied value-relevance analysis to a sample of one hundred and thirty (130) listed european banks, provided mixed result in the cross-country analysis: in some countries, social reports are value relevant while in others it negatively affects the stock price. in a recent study, qiu, shaukat and tharyan (2016) examined the link between firm’s social and environmental disclosures and its profitability and market value. the study did not find any relationship between environmental disclosure and profitability. interestingly, firms that make higher social disclosures have higher values. hence, the study suggests that it is the social disclosures that matter to the investors, not the environmental disclosures. limited number studies have been conducted in this regard in the nigerian perspective. adeyemi and ayanlola (2015) opine that voluntary csr disclosure in nigeria is haphazard and need to be regulated. oba, fodio and soje (2012) investigated the relationship between disclosure of environmental information and profitability measured by return on capital employed (roce). the results confirmed a positive relationship. this is corroborated by a study by duke and kankpang (2013) which also established a significant positive association between social responsibility and roce (as proxy for performance) of nigerian firms. uwuigwe, uwuigwe and ajayi (2011) investigated environmental visibility and corporate social disclosures among listed companies in nigeria. from the findings, they concluded that environmentally sensitive companies disclose more environmental information in their annual report. further, appah (2011) analysed data collected between 2005 and 2007 from annual reports of nigerian listed companies and found support for the assertion that environmentally sensitive disclose more social and environmental information corporate social and environmental disclosures… 17 than non-environmentally sensitive companies. not many studies in nigeria have examined the relationship between firm value and social and environmental disclosures. akinlo and iredele (2014) established significant positive relationship between corporate environmental disclosures and market value, measured by tobins q ratio. it appears that there is dearth of study on the inf luence of social and environmental disclosure on market value of nigerian listed firms. it is needful to investigate this relationship in a developing country like nigeria to provide empirical evidence on the need for firms to be environmentally responsible. it is on this basis that we we hypothesize that: h01: csed has no significant effect on the market value of firms in nigeria. the research methodology and the course of the research process 1. the sample and data the population for the study consist of 180 companies listed on the nigerian stock exchange as at 31st december 2016. adopting purposive sampling based on the impact of companies’ activities on the environment, data were gathered from a sample comprising 504 firm-year observations of 84 listed companies over the period 2011–2016. this was after due screening, to eliminate companies that have been delisted and those with incomplete annual reports for the sample period. data obtained were analysed using descriptive statistics and inferential statistics. 2. measurement of variables measurements of variables for the study were based on the global reporting initiative (gri) framework. six variables, consistent with gri framework, are identified as a consistent measure of sed. these are: (i) environmental protection (ii) energy conservation (iii) community development (iv) employee welfare (v) product responsibility (vi) human rights and protection of stakeholders interest. a kinder lydenberg domini (kld) social environmental performance rating system was used to measure the sed scores (rs). a score of ‘1’was assigned if item is reported and ‘0’ if it is not reported as follows: okwy peter okpala, oluwamayowa olalekan iredele18 where: rs = reporting score r 1 = a score of (1) if the item is reported and (0) if not reported. i = 1, 2…6. a firm could score a maximum of (6) points and a minimum of (0) under forty (40) sed parameters and checklists identified and divided into six main categories. measurement of market value and other variables are listed in appendix 1. 3. model specification the models for the study determine the relationship between csed and market value of the firm. a linear regressing model is used to express the effect of a dependent (explained) variable and several independent (explanatory) variables. the general form of panel regression equation as stated in field ( 2005) and asteriou and hall (2007) is: 2. measurement of variables measurements of variables for the study were based on the global reporting initiative (gri) framework. six variables, consistent with gri framework, are identified as a consistent measure of sed. these are: (i) environmental protection (ii) energy conservation (iii) community development (iv) employee welfare (v) product responsibility (vi) human rights and protection of stakeholders interest. a kinder lydenberg domini (kld) social environmental performance rating system was used to measure the sed scores (rs). a score of ‘1’was assigned if item is reported and ‘0’ if it is not reported as follows; 6 rs = ∑ r 1 i = 1 where: rs = reporting score r 1 = a score of (1) if the item is reported and (0) if not reported. i = 1, 2…6. a firm could score a maximum of (6) points and a minimum of (0) under forty (40) sed parameters and checklists identified and divided into six main categories. measurement of market value and other variables are listed in appendix 1. 3. model specification the models for the study determine the relationship between csed and market value of the firm. a linear regressing model is used to express the effect of a dependent (explained) variable and several independent (explanatory) variables. the general form of panel regression equation as stated in field ( 2005) and asteriou & hall (2007) is: yi,t= β0+ β1x1i,t+ β2 x2i,t + … + βk xki,t+ --------------------------------------------(1) where yi,t is the variable to be forecast and x1i,t,… xki,t are the k predictor variables. each of the predictor variables must be numerical. the coefficients β,…βk measures the effect of each predictor after taking account of the effect of all other predictors in the model. thus, the coefficients measure the marginal effects of the predictor variables. in order to predict the relationship between social and environmental disclosures and market value, csed is added as a predictor of market value to the predictors listed in equation 2: (1) where yi,t is the variable to be forecast and x1i,t,… xki,t are the k predictor variables. each of the predictor variables must be numerical. the coefficients β,…βk measures the effect of each predictor after taking account of the effect of all other predictors in the model. thus, the coefficients measure the marginal effects of the predictor variables. in order to predict the relationship between social and environmental disclosures and market value, csed is added as a predictor of market value to the predictors listed in equation 2: mv = + + siz + roe + bs + lev + affl. + ind + ……(2) where, mv is the market value, csed is the corporate social and environment disclosure, size represents firm size, roe represent firm’s financial performance, lev represent a firm’s leverage, affl represents affiliation to foreign company, ind represents industry. the inclusion of control variables is informed by earlier related studies (mathuva, barako & wachira, 2017; barth, cahan, chen & venter, 2016). further definitions of all the variables are presented in appendix 1. analysis and results table 1. descriptive statistics sed bs finper lev size affl ind mv mean 4.123016 10.75595 0.203343 2.575451 10.67471 0.511905 0.632937 4.273533 median 4.000000 9.000000 0.091476 1.496971 10.45970 1.000000 1.000000 0.362103 maximum 6.000000 23.00000 3.304091 75.71508 12.66076 1.000000 1.000000 125.2040 minimum 2.000000 5.000000 -0.384206 0.001835 9.090022 0.000000 0.000000 0.000698 std. dev. 0.983333 3.915860 0.341206 4.453170 0.977231 0.500355 0.482483 13.05492 skewness -0.109740 1.067821 4.216591 10.54315 0.502312 -0.047633 -0.551599 4.841383 kurtosis 2.572688 3.415750 28.05471 157.4260 2.140723 1.002269 1.304262 30.47467 jarque-bera 4.846104 99.41004 14676.00 510132.5 36.70018 84.00011 85.94408 17820.88 probability 0.088651 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 sum 2078.000 5421.000 102.4849 1298.027 5380.054 258.0000 319.0000 2153.860 sum sq. dev. 486.3730 7712.982 58.55998 9974.855 480.3549 125.9286 117.0933 85726.80 observations 504 504 504 504 504 504 504 504 source: author’s computation, using e-view 8, 2017. the result in table 1 shows the mean csed of 4.12, out of maximum 6. this signifies an above average level of disclosure. also, it shows that all the series display a high level of consistency being that their mean and median values are within the maximum and minimum values of the series. also the deviation of the actual data from their mean value are very low, this is indicated by the relatively low value of the standard deviations. 1. effect of sed on firms' market value the regression model in equation 2 was used to determine the effect of sed practices on firms' market value. sed, siz, finper, bs, lev, affl and ind are the independent variables, and mv is the dependent variable. prior to the regression estimation, a stationary test was conducted to ascertain the reliability of the data for running the ols. this was done using augmented dickey-fuller (adf) techniques for unit roots at 5% as shown in table 2. table 2. stationary test of variables in the firms variables statistic stationary probability remarks mv 357.312 1(0) 0.0000 stationary at levels sed 43.4485 1(2) 0.0000 stationary at second difference (2) corporate social and environmental disclosures… 19 where, mv is the market value, csed is the corporate social and environment disclosure, size represents firm size, roe represent firm’s financial performance, lev represent a firm’s leverage, aff l represents affiliation to foreign company, ind represents industry. the inclusion of control variables is informed by earlier related studies (mathuva, barako & wachira, 2017; barth, cahan, chen & venter, 2016). further definitions of all the variables are presented in appendix 1. analysis and results table 1. descriptive statistics sed bs finper lev size affl ind mv mean 4.123016 10.75595 0.203343 2.575451 10.67471 0.511905 0.632937 4.273533 median 4.000000 9.000000 0.091476 1.496971 10.45970 1.000000 1.000000 0.362103 maximum 6.000000 23.00000 3.304091 75.71508 12.66076 1.000000 1.000000 125.2040 minimum 2.000000 5.000000 -0.384206 0.001835 9.090022 0.000000 0.000000 0.000698 std. dev. 0.983333 3.915860 0.341206 4.453170 0.977231 0.500355 0.482483 13.05492 skewness -0.109740 1.067821 4.216591 10.54315 0.502312 -0.047633 -0.551599 4.841383 kurtosis 2.572688 3.415750 28.05471 157.4260 2.140723 1.002269 1.304262 30.47467 jarque-bera 4.846104 99.41004 14676.00 510132.5 36.70018 84.00011 85.94408 17820.88 probability 0.088651 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 sum 2078.000 5421.000 102.4849 1298.027 5380.054 258.0000 319.0000 2153.860 sum sq. dev. 486.3730 7712.982 58.55998 9974.855 480.3549 125.9286 117.0933 85726.80 observations 504 504 504 504 504 504 504 504 s o u r c e : author’s computation, using e-view 8, 2017. the result in table 1 shows the mean csed of 4.12, out of maximum 6. this signifies an above average level of disclosure. also, it shows that all the series display a high level of consistency being that their mean and median values are within the maximum and minimum values of the series. also the deviation of the actual data from their mean value are very low, this is indicated by the relatively low value of the standard deviations. okwy peter okpala, oluwamayowa olalekan iredele20 1. effect of sed on firms’ market value the regression model in equation 2 was used to determine the effect of sed practices on firms’ market value. sed, siz, finper, bs, lev, aff l and ind are the independent variables, and mv is the dependent variable. prior to the regression estimation, a stationary test was conducted to ascertain the reliability of the data for running the ols. this was done using augmented dickey-fuller (adf) techniques for unit roots at 5% as shown in table 2. table 2. stationary test of variables in the firms variables statistic stationary probability remarks mv 357.312 1(0) 0.0000 stationary at levels sed 43.4485 1(2) 0.0000 stationary at second difference size 510.196 1(1) 0.0000 stationary at first difference roe 359.915 1(0) 0.0000 stationary at levels bs 379.142 1(1) 0.0000 stationary at first difference lev 268.775 1(0) 0.0000 stationary at levels affl 83.7919 1(0) 0.0003 stationary at levels ind 33.5037 1(0) 0.0063 stationary at levels ** probabilities are computed assuming asymptotic normality. s o u r c e : authors’ computation (2017) with e-view 9.0. the result shows mv, finper, lev, affl, ind are stationery at level form while size and bs are integrated at order (1). sed is the only variable integrated at order (2). hence it may be concluded that there is no long run relationship among market value (mv), social and environmental disclosures (sed), size, financial performance (roe), board size (bs), leverage (lev), affiliation (aff l) and industry grouping (ind). the result of the ols to test the cause-effect relationship between market value (dependent variable) and the independent variables (sed, size, bs, roe, lev, affl, ind) is presented in table 3. corporate social and environmental disclosures… 21 table 3. regression result of mv and other variables variable estimated coeffficient standard error t-value sig constant term 25.71398 7.517940 3.420350 0.0007 d (sed) -1.685253 0.605650 -2.782553 0.0056 d log (siz) -0.776899 0.333598 -2.328846 0.0203 (affl) 3.884138 1.300466 2.986729 0.0030 d (bs) -0.079699 0.169114 -0.471271 0.6377 roe 5.468209 1.724659 3.170602 0.0016 lev -0.76335 0.133654 -0.571137 0.5682 ind 4.040236 1.268707 3.184530 0.0015 r2 0.091089 adjusted r2 0.078261 fstatistic 7.101111 prob (fstatistic) 0.00000 durbin watsin 0.24040 p r e d i c t o r : (constant), d (sed), d log (siz), aff l, d (bs), finper, lev, ind. d e p e n d e n t v a r i a b l e : mv. s o u r c e : authors’ computation (2017) with e-view 9.0. the result in table 3 is the regression results of sed, siz, affil, bs, roe, bs, lev and ind on mv. the table indicates that the regression model is significant (p ˂ 0.05, f = 7.10111) and has an adjusted r2 is 7.82%. the results particularly indicate that csed has a significant negative effect on market value (β = -1 .6852; t= -2.7825; p ˂ 0.05). thus, we reject the hypothesis of the study. we therefore conclude that csed has a significant effect on the market value of listed firms in nigeria. the direction of the relationship is negative, which implies that for each unit increase in sed practice, mv decreases by 1.6852. this is contrary to the result of previous studies in nigeria (see jaggi & freedman, 1992; walley & whitehead, 1994; lars, henrik & siv, 2005). the results of the explanatory variables show that aff l (β = 3.8841; t= 2.9867; p ˂ 0.10), roe (β = 5.4682; t= 3.1706; p ˂ 0.10) and ind (β = 4.0402; t= 3.1845; p ˂ 0.10) have a significant positive effect on the market value of listokwy peter okpala, oluwamayowa olalekan iredele22 ed firms. by implication, being a subsidiary of foreign parent company, significantly inf luences the market value in a positive way. similar result was found in hyang, wonsik and sang (2012). also, firms with better financial performance have higher market value. this is because profitability or financial performance is expected to impact on the value of shares as the benefits of profitability would be priced in by the market. the result supports the extant literature (baye, 2006; michaely & roberts, 2007; shin-ping & hui-ju, 2011) which found strong positive link between financial performance and market value of firms. similarly, the industry a firm belongs to reasonably affect its market value. size (β = -0 .7768; t= -2.3288; p ˃ 0.10), bs (β = -0.0796; t= -0.471271; p ˃ 0.10), and lev (β = -0.7633; t= -0.5711; p ˃ 0.10) have a non-significant negative effect on mv with the exception of size which have a significant effect. the result for size corroborates extant literature which found size to be negatively related to firm value (morck, shleifer & vashny, 1988; mcconnell & servaes, 1990). also, the result of this study supports the findings in kamangue & ngugi (2013) that higher expenses and poor communication in larger boards make smaller boards preferable for value creation. nevertheless, taufik, widyastuti and yam (2017) opines that corporate governance, which is better achieved with larger board, is important for improving firm value. modigliani and miller (1958) argue that leverage does not affect firm value which aligns with the result of this study.  discussion and conclusion unexpectedly, the result of this study shows a significant negative relationship between social and environmental disclosures and the market value of firms in nigeria. this does not support our a priori expectations of a positive relationship between social and environmental disclosures and market value. our prior expectation was based on the resource based view which sees capabilities such as reputation for environmental performance as valuable intangible assets and therefore value-relevant. the thinking behind this theory is that beyond being a legitimizing tool, csed can be used as strategy for differentiation which could lead to sustained competitive advantage. this result, instead, mildly supports another strand of extant literature such as walley and whitehead (1994), turnbull (1997), lars, henrik and siv (2005) and the ‘the cost concern’ school of thought, which see csed investments as representing increased corporate social and environmental disclosures… 23 costs and therefore will have negative inf luence on the market value of firms. the reason for this result may not be unconnected to the near absence of ethical investors in nigeria, compared to advanced economies. at the moment, capital market participants do not regard environmental performance as important, so far they can ascertain the financial viability of the company. the result also revealed a positive association between market value and affiliation status. this indicates that the country of origin of a firm has value creating effect. we also found that financial performance can be a major determinant of firm value. this is because financial performance increases the shareholders’ wealth and the value of the company’s assets. it has been argued that firm value must be the estimates of future profits. this is corroborated by baye (2006) who holds that maximizing profit is maximising firm value. it is therefore not expected that firms that report losses from one year to another be regarded by investors as firms with high value. from the result of this study, there is also claim that industry classification has a value-adding effect to the firm. we provide evidence that that firm value decreases with the size of the company. the possible explanation for this is that it is more likely that smaller firms focus on better environmental practices in order to gain reputations and add value, of which less attention is given to this by bigger firms which have more issues to contend with. some previous literatures corroborates this finding (morck, shleifer & vashny, 1988; mcconnell & servaes, 1990; smith & watts, 1992). lack of f lexibility, tardiness in decision making, lack of personal touch in customer service may be responsible for results in these studies. in conclusion, though the effect of csed and market value of firms in nigeria is not significant at the moment, managing the negative impacts of firms’ activities on the environmental is as important as managing the business itself. this will enable firms minimise their environmental costs and liabilities and increase the potential benefits to the firm. in view of these, it is recommended that firms implement environmental management initiatives, and all relevant stakeholders such as government and professional accounting bodies should be actively involved in promoting environmental related practices in order to bring to the fur the hidden potentials and benefits that accrue therefrom. future studies may inclusion more predictive variables which may likely make the model have higher predictive value and thus reveal more determinants of sed and market value. okwy peter okpala, oluwamayowa olalekan iredele24  references abbott, w., & monsen, r.j. 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(2008). does the market value corporate environmental responsibility? an empirical examination. corporate social responsibility and environmental management, 15(2), 89–99. walley, n., & whitehead, b (1994). it’s not easy to be green. harvard business review, 3, 46–52. wang, k., sewon, o., & claiborne, c. (2008). determinants and consequences of voluntary disclosure in an emerging market: evidence from china. journal of international account audit tax, 17(4), 14–30. webb, l.h., cohen, j.r., nath, l., & wood, d. (2009). the supply of corporate social responsibility disclosures among u.s. firms. journal of business ethics, 84, 497–527. williams, s. (1999). relationship between intellectual capital performance and reporting related. journal of intellectual capital, 2(3), 192–203. appendix 1. variable definitions variable measure definition sources tobin’s q firm value market value of equity plus book value of total liabilities divided by total assets. annual report csed corporate social environmental discosure a score of (1) if the item is reported and (0) if not reported annual reports size firm size natural log of total asset annual report roe financial performance income (after tax) before extraordinary item divided by total assets annual report bs board size number of persons on the board annual report lev leverage ����� ���� ����� ������ annual report affl affiliation foreign company (1), local (0) annual report ind industry environmental sensitive ind (1), non-sensitive industry (0) annual report annual report affl affiliation foreign company (1), local (0) annual report ind industry environmental sensitive ind (1), non-sensitive industry (0) annual report s o u r c e : annual reports of companies. cjfa_2_2017_druk.pdf for authors the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, the qualification criteria and a review form are available at the journal’s website, names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors88 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the 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‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors90 co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. editorial office copernican journal of finance & accounting fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl introduction dear readers and authors, it is with great satisfaction we present to you the second issue of 2018 of the scientific quarterly copernican journal of finance & accounting, which is a place for the presentation and exchange of academic thought. the ability to observe changes taking place in a dynamically changing economic environment, searching for research gaps, formulating research problems and conducting research are just some of the scientist’s skills. we want to support these kind of skills by presenting articles from various national and foreign research centres. in the current issue we present articles prepared by scientists from bangladesh, columbia, italy and poland. we would like to give special thanks to the authors, reviewers, members of the scientific council and the editorial team. your contribution is especially valuable for the constant development of the journal and thus the scientific disciplines that the cjf&a represents. we encourage all scientists from all countries and universities who conduct research in the area of interest of our journal to exchange and publish the results of your research in our copernican journal of finance & accounting. yours sincerely, executive editor, dorota krupa, ph.d. cjfa_2_2017_druk.pdf e65 -1 date of submission: january 3, 2017; date of acceptance: january 30, 2017. * contact information: dominik.sadlakowski@gmail.com, nicolaus copernicus university in torun, gagarina 13a, 87-100 torun, poland, phone: +48 507 331 498; orcid id: http://orcid.org/0000-0003-0036-1546. capacity. the opinions expressed in this article are the author’s own and do not ref lect the view of the narodowy bank polski of which the author is an employee. journal of finance & accounting, 6(2), 59–69. http://dx.doi.org/10.12775/cjfa.2017.011 * nicolaus copernicus university in torun the role of instant payment systems in the polish economy keywords: payment system, instant payments, instant payment systems, real-time gross settlement. j e l classification: e58, e42. abstract: instant payments are one of the most important current trends in modern banking. solutions of this type have been implemented form large-value to retail banking. the purpose of this article is to introduce broad spectrum of application of instant payment systems and to attempt to answer the question of whether the creation and further development of instant retail payment systems is important for the efficient functioning of the polish payment system. in the process of preparing this analysis, the following methods have been used: literature analysis, secondary data analysis and case study. the security of the payment system depends largely on providing a high efficiency of its individual components. in case of polish instant payment systems there is a high level of diversification as a result of the operation of three independent instant payment systems which ensures there high performance. 60 continued technological development determines implementing new solutions and functionalities in almost all areas of economic life, banking being one of them. the pursuit of competitiveness and the creation of stronger connections between market contributors has inf luenced the necessity to create systems to transfer money that would allow quick and relatively safe f low of resources between the sides of transaction. this need has impacted the development of instant payment conception. this model of settling accounts can be used not only large-value payments in central banks but also in corporate banking, and that makes it one of the fastest developing elements of payment infrastructure. the purpose of this article is to introduce broad spectrum of application of instant payment systems to attempt to answer the question of whether the creation and further development of instant retail payment systems is important for the efficient functioning of the polish payment system. the author of this paper presents the hypothesis that due to increasing demand for instant payment, it may be necessary to increase the capabilities of already functioning retail instant payment systems or even some changes in the way of their functioning. the subject of observations conducted by the author is the polish payment system in which there are 3 instant payment systems: large-value sorbnet2 and retail express elixir and blue cash. in the process of preparing this analysis, the following methods have been used: literature analysis, secondary data analysis and case study. polish payment systems and its selected elements have been chosen to be the case study. this research paper was created using literature on the subject, sector reports and statistical data from the analysis prepared by the narodowy bank polski and chosen system operators. the dynamic development of economic processes happening in the modern world outlines the necessity of constant improvement of bilateral connections between the market contributors. one of the key elements that outlines correct the role of instant payment systems in the polish economy 61 and uninterrupted money circulation in the economy is the payment system. it is the combination of connected units that allows quick and safe transfer of resources between the system contributors. in the literature, it is very commonly compared to the some kind of economy’s circulatory system which proficiency a set of payment instruments, intermediaries, rules, procedures, processes, and – most commonly – interbank systems of funds transfers used to assure money circulation in a particular country or area of common currency fore, it can be acknowledged that it is a particular kind of structure of tightly interconnected and mutually interacting elements. from the perspective of properly understanding the specificity of payment system, it is crucial to determine payment instruments, used for money transfer, current standards and regulations of the functionality of payment instruments, institutions managing accounts, i.e. central and commercial banks that mediate payments, subjects effecting setoff and settlement of payment orders, law regulations connected to transfer mechanisms and functioning of payment services’ market. now, it should be highlighted that potential disfunction of any of the mentioned elements can result in transferring created f luctuations to other parts of the structure. that in turn originates the domino effect which can cause danger to the functioning of the system as a whole or of its respective elements, e.g. interrelated institutions or specific markets. in extreme situations long-term system inefficiency can lead to damages in real economy (polityka …, 2015). in the case of markets with high degree of internationalisation, however, those damages can be transferred to related foreign subjects. what turned out to be crucial for the stability of payment system is the creation and development of settlement systems based on rtgs technology. the attempts to systematise the stages of implementing those kinds of solutions in banking have been made by, for example, m.l. bech, ch. preisig and k. soramäki in the article global trends in large-value payments (2008). in it, the authors stress that the development of modern information and telecommunication technology supported with structural changes in banks and related in62 stitutions and the simultaneous upgrade of the expertise of central banks have had the immeasurable inf luence on popularising the rtgs solutions. figure1. global payment system infrastructure s o u r c e : the author’s elaboration based on: swift response to payment system improvement – public consultation paper, 2013. popularising the rtgs technology was directly connected to activating the complementary hybrid, cross-border, and offshore systems and to launching institutions, i.e. continuous linked settlement bank. it has sparked the immeasurable structural changes in financial institutions. these changes have made it possible to limit the settlement risk, reduce the transaction time (settlements in immediate mode), and optimise the prerequisites of liquidity in financial institutions. that in effect has allowed to create entirely new payment models, ones that are not limited by factors such as territorial affiliation or settlement currency. over the years, the role of central banks has also drastically changed. now, they have oversight function over payment systems, in particular over its key elements which are large-value payment systems (bech, preisig, & soramäki, 2008). nowadays, numerous central banks coordinate the creation or development of the rtgs systems, often being the settlement agents at the same time and, via the banks, allowing the outside operators the settlement of performed transactions (instant payment system…, 2015). it is not different the role of instant payment systems in the polish economy 63 in the case of the polish payment system. the national bank of poland (nbp) was the initiator of the creation of the first in poland rtgs systems called sorb and sorbnet (now sorbnet2), which has obtained its full operational capaccal solutions has, without doubt, inf luenced the polish economy in the region. it was also crucial from the perspective of potential country participation in the target system. besides rtgs systems, operated by central banks, there are also alternative forms of providing instant payment services used in retail banking, i.e. deferred net settlement systems (dns) or deposit model systems (the so called hub’s approach). the first one can be described as a system which settles on sometimes during – the business day (glossary of terms related…, 2009). primarily, it had been used in central banking but, due to the changes of security norms, it has been replaced by the rtgs systems. the fundamental difference between these systems is the balance between the level of liquidity and the risk. generally, the dns systems require maintaining much lower liquidity level but they generate greater credit risk (wilson, 2004). despite the fact that now dns solutions are not so commonly used in central banking, they can be used in retail payments, for example in polish system blue cash. deposit systems assume the functioning of an independent mediating subject (the so called hub), in which the record of individual contributors’ orders, that predates the final settlement, is created. payments in these kind of systems are made using the resources banked on special accounts operated by central banks. now, it should be emphasised that all executed transactions must have full coverage in the value of the invested deposits. in case of no liquidity, transactions will be stopped till the money is replaced by the contributor. the net payment is conducted in the clearing cycles and the final clearing – during the clearing session. most systems have between 1 and 6 clearing cycles but there also are the solution’s allowing its initiation in the ad-hoc mode, british faster payments being the example (the global adoption…, 2015.). chart 2 illustrates the current condition of the polish payment system structure that contains its key elements, including 2 most important rtgs systems, operating large-value payments: sorbnet 2 and target2-nbp and retail instant payment systems: express elixir and blue cash. 64 figure 2. architecture of polish payment system s o u r c e : the author’s elaboration based on: nbp data. central place in the structure of payment system is held by sorbnet2, managed by the national bank of poland. there, the final settlement of most payment systems functioning in poland and securities’ settlement system is made. sorbnet 2 system belongs to the rtgs type systems, which means that money transfer between bank accounts is executed in the instant mode during the whole operating day. vital characteristic of the system is also the fact that payment orders executed in it are processed and registered individually, without the necessity of a setoff with other transactions (instant payments systems…, 2015). the main goal of the sorbnet2 system is the management of the current bank accounts (44 as of the first half of 2016) and of the accounts of three ancillary systems operated by: the national clearing house (kir), the central securities depository of poland (kdpw) and central securities depository of poland_ central counterparty (kdpw_ccp). this system operates interbank settlement, meaning operating the bank orders and the orders of other contributors of a particular system: operations on interbank, currency, monetary, and security market, and also purchase or sale of nbp’s currency and of customers’ the role of instant payment systems in the polish economy 65 orders and the exchange of payment orders made by kir (ocena funkcjonowania polskiego systemu…, 2016). figure 3. the value and volume of payments settled in the sorbnet 2 system in the years 2003–2015 s o u r c e : the author’s elaboration based on: nbp data. the value of transactions executed in the sorbnet 2 system, in the year 2015, was over 72 trillion pln, 40 times poland’s gdp at the time (1.79 trillion pln (gus)). over 60% of this value consisted of interbank transactions, with only 7% contribution in the volume of payments. this relation greatly results from the role held by the sorbnet2 system in managing nbp’s bank accounts. the remaining transaction value consists of customers’ orders, 38.4% of which were bank orders, 2.5% national clearing bank’s orders, 7.7% kdpw and kdpw_ccp orders and 51.4% were nbp’s orders (ocena funkcjonowania polskiego systemu…, 2016). instant payment standard are still some kind of novelty in the segment of retail payments. in the year 2015, about 50% of commerce banks in poland have offered services of this kind to their customers, 63% of which were the biggest subjects functioning on the market (polasik & piotrowski, 2016). apart from a system sorbnet2, there are two independent instant retail payment system: express elixir and blue cash. this state is a kind of rarity, because in most european countries most payment services are provided by single entities. such division definitely raises the level of competitiveness and quality of the services provided by individual systems. this kind of diversification also 66 has a positive impact on the security of the polish payment system. the creation of these systems has made it possible to pressure off sorbnet2 from low value retail payments. express elixir system has been launched in june 2012, its operator and owner is the national clearing house. an the end of the year 2016 there were 65 bank subject participating in the system. in contrast to the classic settlement systems, in the case of express elixir all resources necessary for executing the transaction are banked in the national bank of poland. this means that there are no intermediate subjects in the payment procedure, which in turn greatly raises the effectiveness and safety of the system. the deposits of the system contributors are assembled on the fiduciary account which is operated in the sorbnet2 system. contributions brought by particular banks are the coverage of transactions executed by their customers. the express elixir system, because of its retail specifics, has an upper limit of the transaction, which amounts to 100 000 pln (expresselixir.pl). figure 4. the daily volume of payments in the express elixir and blue cash systems in the following semesters from the year 2013 s o u r c e : author’s elaboration based on: nbp data. blue cash system is an alternative to the express elixir. in contrast to the express elixir he does not have one dedicated account common to all participants. the operations executed in it happen on the basis of resource transfer between bank accounts that participate in the system (bm.pl). in practice, this system is based on the transposition of interbank transfer to two interbank the role of instant payment systems in the polish economy 67 transfers, which are executed on the special intermediate accounts of the operator – blue media company (kunkowski, 2013). in the year 2016, there were 112 bank institutions participating in this system. blue cash system is not rtgs system in the full sense of the word. initially, in this system a maximum value of transaction was set only for 5 000 pln, but in short period of time it was decided to increase it to 20 000 pln (bm.pl). both systems described in the article function on the polish market relatively short. they offer their clients homogenous service of intermediate transfers in pln, without any time limitations. from the chart above one can observe that the number of orders executed in these systems shows a different trend. blue cash is, in contrast to express elixir, characterised by the dynamic growth of volume of executed payment orders. it can result from the fact that bluemedia company has more system contributors, many of which are represented by the co-operative banks (bm.pl). however, these transactions are much more divided than in the case of express elixir. in the first half of 2016, the value of transactions in the blue cash system was 2 185 bn pln, the agreed order amount f luctuates at about 1 245 pln. in the analogous period in the euro elixir noted transaction value were twice as big, it was estimated to be 4 439 bn pln, with the average order amount of 4 064 pln. despite the leading role of euro elixir, it is important to point out that in the system of retail payments it is blue cash system that is characterised by much faster development trend. it can be seen in both the growth of the executed orders, which in the turn of the years 2015 and 2016 was over 46% and in the dynamic growth of banks participating in this system (ocena funkcjonowania polskiego systemu…, 2016). the average value of such transactions in those systems is far from upper limits they offer, which confirms that these are concentrated on providing their services for individual clients. the polish payment system is lacks the alternatives to instant payment for customers whose transfers oscillate in the range above 100 thousand pln to 1 million pln. consequently all customers' orders of this type (classified as retail) must be settled in sorbnet2 which is a dedicated system for settlement of large-value payments. relatively low cost of transfer fees and their general availability may contribute to the excessive burden of this central system in the future. according to the author in order to avoid problems with the functional capacity of the sorbnet2 system, changes should be implemented in the already operated retail instant payments systems for example, by raising the upper limits of transactions. this kind of solution was implemented in the uk faster payments system. in this system instant 68 payment limits are determined on the basis of factors such as client classification and the manner of implementing a transaction, taking into account what bank mediates the translation. consequently, depending on the specifics of a particular transaction their upper limits range from 9 999 to even £ 250 000 (fasterpayments.org.uk). there is no question that a working payment system is vital for the functioning of the country’s economy. its effectiveness greatly results form the possibility of making large-value payments in the real time. in this article, it has been numerously highlighted that implementing the rtgs technology have the immeasurable impact on the improvement of security and speed of transaction in the macroeconomic scale. thanks to the sorbnet2 systems, the uninterrupted money circulation inside the country’s economy. technological solutions drawn from the rtgs technology work also in retail payments. poland, for some time now, is thought to be the forerunner of innovational solutions in payments technology. the fact is confirmed by the creation of two instant payment systems: express elixir and blue cash in relatively short time. the systems gain in the popularity among the customers, what is confirmed by the statistical data showing significant spike of transactions value and of volume of executed orders. despite the growing popularity of instant payment, only few banks offer their customers these kinds of solutions and that delays in some way the popularisation of this type of payments. one of the weakness of these systems may also be a relatively low limit of transactions, especially in the case of bluecash. according to the author, in response to growing market demand, these systems should be modified in such a way to fill this gap in a market. as a solution may serve here an example of the british faster payments, in which a separate branch of instant payments for business customers was created. bech, m.l., preisig, ch., & soramäki, k. (2008). global trends in large-value payments. http://dx.doi.org/10.2139/ssrn.1141387. blue media, https://bm.pl, (accessed: 28.12.2016). the role of instant payment systems in the polish economy 69 express elixir, https://www.expresselixir.pl (accessed: 20.12.2016). faster payments, http://www.fasterpayments.org.uk (accessed: 27.01.2017). glossary of terms related to payment, clearing and settlement systems (2009), european central bank. nictwo naukowe uniwersytetu warszawskiego. http://dx.doi.org/10.7172/97883-63962-30-2. gus, http://stat.gov.pl (accessed: 20.12.2016). instant payments systems – analysis of selected systems, role of the central bank and szawa: wydawnictwo cedewu. pernican journal of finance & accounting, 2(2), 75–89. http://dx.doi.org/10.12775/ cjfa.2013.017. narodowy bank polski, http://www.nbp.pl/home.aspx?f=/systemplatniczy/dane/ dane_statystyczne.html (accessed: 28.12.2016). polasik, m., & piotrowski, d. (2016). payment innovations in poland: a new approach of the banking sector to introducing payment solutions. ekonomia i prawo. economics and law, 15(1), 103–131. http://dx.doi.org/10.12775/ eip.2016.007. polityka sprawowania przez narodowy bank polski nadzoru systemowego w zakresie swift response to payment system improvement – public consultation paper (2013). the global adoption of real-time retail payments systems (rt-rps) (2015). wo kul. wilson, m. (2004). real-time gross settlement and hybrid payment systems: a comparison. bank of england working paper no. 252. http://dx.doi.org/10.2139/ssrn.724042. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: february 18, 2019; date of acceptance: march 29, 2019. * contact information: tomasz.dziawgo@gmail.com, warsaw school of economics, al. niepodległości 162, 02-554 warszawa, poland, phone: +48 668 145 140; orcid id: https://orcid.org/0000-0001-5910-8997. dziawgo, t. (2018). wealth management market in china. opportunities and challenges. copernican journal of finance & accounting, 7(4), 47–57. http://dx.doi.org/10.12775/cjfa.2018.019 tomasz dziawgo* warsaw school of economics wealth management market in china opportunities and challenges keywords: private banking, wealth management, ultra high-net worth individuals, high-net worth individuals. j e l classification: d31, g21, o16. abstract: as the key player in prospective asia-pacific market, china is becoming one of the most notable countries with regard to private banking services. in spite of being relatively young, chinese wealth management market has been developing rapidly with increasing number of aff luent clients and their value of total assets. currently undergoing through transition between early development and maturity, chinese wealth management market has several challenges to face in order to become a fully established one. the research objective of the article is to present the characteristics and potential of chinese wealth management market and to what extent does it correspond with global wealth management trends. the research method applied in the paper is an in-depth analysis of the case study regarding chinese wealth management market with its’ potential and challenges. in order to carry out the analysis, various reports on the issue in question published by leading consulting companies, banks and experts were analyzed and relevant statistical data in the given period of time was examined as well. the outcome of the article is to list key steps for chinese wealth management market to be taken, in order to elevate its’ status as one of the leading wealth management markets worldwide. tomasz dziawgo48  introduction in every business sector what matters is not only number of clients, but also their type. banking sector is no different – it has not only retail and corporate clients, but also wealthy individuals that may be offered additional and exclusive services (loury, 2008, pp. 25–26). these services are provided within private banking sector that treats each aff luent client with tailor-made approach (shen & cannella, 2003, pp. 2–4). it distinguishes itself from other banking divisions by for instance, offering exclusive investment advisory with special regard to client’s portfolio of assets and risk profile, unique services in wealth preservation, wealth inheritance, legal and tax consultations or planning strategic decisions for family business (hsiu, 2017, pp. 6–8). these wealthy clients that private banking services are dedicated for, are named high-net worth individuals (hnwi) and have assets with total value estimated at least 1 million usd (dziawgo, 2006, pp. 20–22). among hnwi we can also distinguish ultra high-net worth individuals (uhnwi) with total assets exceeding 50 million usd in value. targeting those people may significantly boost brand recognition of the bank, improve corporate image and provide long-term reliable clients, who along with their relatives have potential to cooperate with one bank even in future generations. number of hnwi and uhnwi has been constantly increasing worldwide, with asia-pacific region having the most notable growth (ey, 2014). only in 2017, the region was responsible for creating over 40% of the new hnwi wealth in the entire world. one of the key upcoming countries with regard to aff luent individuals and wealth management is china. while the population of hnwi within 2010–2017 was growing 8.8% year-on-year in the region, china was enjoying over 11.2% increase within the same period of time. the similar trend has been ongoing with the amount of wealth of those individuals. while asia-pacific region within 2010–2017 had a growth of 9.7%, china has been above the region average having 11.8% in the same period of time (capgemini, 2018). what is more, china’s hnwi population grew by 11.2% and hnwi’s wealth increased by 12.5% in 2017, compared to 9.1% and 9.8% respectively in 2016 therefore depicting upward trend for wealth management market development (capgemini, 2018). china therefore becomes significantly more important country in the region in wealth management, which can be shown in tables 1 and 2. wealth management market in china… 49 table 1. hnwi population in asia pacific region and china within 2010–2017 hnwi population (millions) asia–pacific region china china’s total share 2010 3.3 0.53 ~16% 2013 4.3 0.76 ~17.5% 2017 6.2 1.26 ~20% s o u r c e : capgemini asia–pacific wealth report, 2018. table 2. hnwi wealth in asia pacific region and china within 2010–2017 hnwi wealth (trillions usd) asia–pacific region china china’s total share 2010 10.8 2.66 ~25% 2013 14.2 3.77 ~26.5% 2017 21.6 6.46 ~30% s o u r c e : capgemini asia–pacific wealth report, 2018. considering 10 countries with the most hnwi individuals, china had the highest increase of such individuals from 2016 to 2017, accounting for 11%. the comparison between hnwi population and its’ 2016–2017 year increase, is presented in table 3. what is more, top 4 presented countries (usa, japan, germany, china) account for over 61% of hnwi population worldwide. table 3. largest hnwi population by country with 2016–2017 increase country hnwi population (million) 2016–2017 increase (%) usa 5.29 10 japan 3.16 9 germany 1.37 7 china 1.26 11 france 0.63 9 united kingdom 0.58 1 switzerland 0.39 7 tomasz dziawgo50 country hnwi population (million) 2016–2017 increase (%) canada 0.38 6 australia 0.28 9 italy 0.27 9 s o u r c e : capgemini asia–pacific wealth report, 2018. total number of millionaires in china is supposed to grow by 62% within 5 years (2018–2023), which is significantly faster than in most developed economies, such as: germany (41%), switzerland (36%) united kingdom (30%) or usa (18%), with the world’s average being 36% growth within this period of time (credit suisse, 2018, p. 41). from the beginning of xxi century, china’s total wealth skyrocketed from 3.7 trillion usd to 51.9 trillion usd, thus increasing 14 times in 18 years with an annual growth of 15%. with china’s hnwi population and hnwi wealth increasing, it only depicts how much potential lies in private banking in china that could benefit both parties. the research methodology and the course of the research process for the purpose of this paper, the case study of chinese wealth management market has been developed through critical analysis of literature, reports issued by leading financial institutions, statistical data concerning both wealth and population of analyzed hnwi (high net-worth individuals) and uhnwi (ultra high net-worth individuals). content analysis was aimed at identifying and describing ongoing trends both on the chinese wealth management market and worldwide to predict the direction in which the chinese market would follow. then, the main challenges for the chinese market were specified and possible solutions were given on the basis of western markets analysis. furthermore, literature used in this paper helped to understand fundamental concepts behind wealth management and private banking. lastly, statistical data played a key role to understand the fast growth and underlying potential of the chinese wealth management market and a key part in driving final conclusions. table 3. largest hnwi population… wealth management market in china… 51 chinese wealth management market characteristics and trends chinese wealth management market has been on the rise since 2007 when first commercial banks introduced initial private banking services. because of rapidly growing chinese economy and ongoing internationalization of chinese companies, within just a decade china has become one of the most important wealth management market in the world. it can be seen especially in recent years. for instance number of unhwi people increased from 110 thousand to approximately 300 thousand within 2011 and 2016. interestingly enough, a significant number of uhnwi clients (~25%) are not businessmen or investors, but rather professionals such as doctors and lawyers, who became aff luent not by making investments but through performing their profession for certain amount of time. in spite of that, business owners and representatives of finance industry have the strongest foothold among existing unhwi and hnwi people. these various sources of gaining wealth however, shapes chinese wealth management market to be more diversified (bcg, 2017). one of the most crucial trends on the chinese market is the rapidly increasing importance of the second generation. since it is relatively young, it has not yet experienced several issues of matured wealth management markets such as distributing wealth among family’s next generations. figure 1 proves that it becomes one of the most important priorities, as significantly more uhnwi and hnwi are more concerned about wealth preservation, inheritance of wealth and education of next generation rather than wealth creation itself. figure 1. priorities among uhnwi and hnwi within 2009–2017 instance number of unhwi people increased from 110 thousand to approximately 300 thousand within 2011 and 2016. interestingly enough, a significant number of uhnwi clients (~25%) are not businessmen or investors, but rather professionals such as doctors and lawyers, who became affluent not by making investments but through performing their profession for certain amount of time. in spite of that, business owners and representatives of finance industry have the strongest foothold among existing unhwi and hnwi people. these various sources of gaining wealth however, shapes chinese wealth management market to be more diversified (bcg, 2017). one of the most crucial trends on the chinese market is the rapidly increasing importance of the second generation. since it is relatively young, it has not yet experienced several issues of matured wealth management markets such as distributing wealth among family’s next generations. figure no 1 proves that it becomes one of the most important priorities, as significantly more uhnwi and hnwi are more concerned about wealth preservation, inheritance of wealth and education of next generation rather than wealth creation itself. figure 1. priorities among uhnwi and hnwi within 2009–2017 source: bain & company and china merchants bank china private wealth report. as increasingly new successors enter the unhwi and hnwi market, the demand for new wealth management services arises as well. first generation understands that inheritance is a key factor in setting up the optimal shareholder structure of family business among existing family members. topnotch quality of this service may become a decisive factor between choosing bank a or bank b as a future partner. wealth management has been undergoing through heavy digitalization trend worldwide. not only do the companies want to stay ahead from other market players through numerous innovations with the usage of blockchain, big data, social media or advanced analytics (ss&c, 2018). one of the most notable solutions however, is robo-advisory, in which the advanced program using machine learning and artificial intelligence propose tailor-made solutions for client considering the risk profile, preferable duration of investment or desired market (dziawgo, 2018, p. 77). robo-advisory is predicted to manage assets of total value 1 trillion usd worldwide until 2020 (forbes, 2018). 0% 20% 40% 60% 80% 100% 2009 2011 2013 2015 2017 wealth preservation creation of weath quality of life inheritance of wealth education of next generation career development other s o u r c e : bain & company and china merchants bank china private wealth report. tomasz dziawgo52 as increasingly new successors enter the unhwi and hnwi market, the demand for new wealth management services arises as well. first generation understands that inheritance is a key factor in setting up the optimal shareholder structure of family business among existing family members. top-notch quality of this service may become a decisive factor between choosing bank a or bank b as a future partner. wealth management has been undergoing through heavy digitalization trend worldwide. not only do the companies want to stay ahead from other market players through numerous innovations with the usage of blockchain, big data, social media or advanced analytics (ss&c, 2018). one of the most notable solutions however, is robo-advisory, in which the advanced program using machine learning and artificial intelligence propose tailor-made solutions for client considering the risk profile, preferable duration of investment or desired market (dziawgo, 2018, p. 77). robo-advisory is predicted to manage assets of total value 1 trillion usd worldwide until 2020 (forbes, 2018). although, chinese unhwi and hnwi appreciate the convenience and are certainly becoming increasingly more open to such solutions in less crucial areas like performance feedback, they would still rather have a direct meeting with a bank representative in most cases. services like conducting investment strategy, legal and tax advisory or even family business perspectives are rather to be discussed face-to-face (bain, 2017, p. 15). one of the most notable signs that china’s wealth management market is developing is increased number of overseas assets in portfolio of shares. figure 2 depicts share of overseas assets to overall assets of hnwi. hnwi invest increasingly more overseas with close to 30% of their total assets being outside of china, while in 2008 overseas assets constituted for less than 10% of total assets. the most important reasons for chinese hnwi to invest overseas are portfolio diversification and discovering new market opportunities abroad. it is also worth to note that less than 20% of hnwi invested overseas in 2011, while over 50% of hnwi invest outside of china as of 2017. this trend of increasing overseas share in overall assets depicts that chinese wealth management market is developing. wealth management market in china… 53 figure 2. share of hnwi overseas assets in relation to domestic assets although, chinese unhwi and hnwi appreciate the convenience and are certainly becoming increasingly more open to such solutions in less crucial areas like performance feedback, they would still rather have a direct meeting with a bank representative in most cases. services like conducting investment strategy, legal and tax advisory or even family business perspectives are rather to be discussed face-to-face (bain, 2017, p. 15). one of the most notable signs that china’s wealth management market is developing is increased number of overseas assets in portfolio of shares. figure 2 depicts share of overseas assets to overall assets of hnwi. figure 2. share of hnwi overseas assets in relation to domestic assets source: bain & company and china merchants bank china private wealth report. hnwi invest increasingly more overseas with close to 30% of their total assets being outside of china, while in 2008 overseas assets constituted for less than 10% of total assets. the most important reasons for chinese hnwi to invest overseas are portfolio diversification and discovering new market opportunities abroad. it is also worth to note that less than 20% of hnwi invested overseas in 2011, while over 50% of hnwi invest outside of china as of 2017. this trend of increasing overseas share in overall assets depicts that chinese wealth management market is developing. what makes chinese wealth management market even more interesting are important regulatory changes encouraging foreign market players to enter the chinese market. china allowed to increase the maximum stake of shares of foreign entity from 49% to 51%, which could be raised up even to 100% (deloitte, 2018). the first bank having the majority in stake of shares in china was ubs – it currently has 51% of shares in local securities operations (financial times, 2018). also, private fund management (pfm) license resulted in higher activity from foreign managers to establish 100% owned entity on the chinese territory. these changes would definitely result in opening up the domestic wealth management market (mckinsey, 2018). 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 2011 2013 2015 2017 overseas domestic s o u r c e : bain & company and china merchants bank china private wealth report. what makes chinese wealth management market even more interesting are important regulatory changes encouraging foreign market players to enter the chinese market. china allowed to increase the maximum stake of shares of foreign entity from 49% to 51%, which could be raised up even to 100% (deloitte, 2018). the first bank having the majority in stake of shares in china was ubs – it currently has 51% of shares in local securities operations (financial times, 2018). also, private fund management (pfm) license resulted in higher activity from foreign managers to establish 100% owned entity on the chinese territory. these changes would definitely result in opening up the domestic wealth management market (mckinsey, 2018). chinese wealth management market challenges although chinese wealth management market is developing rapidly, it has challenges that are needed to be faced. the most crucial one seems to be the uncertainty. the market, compared to its’ european and american counterparts is young and banks have a difficult task to develop their services at the same pace as the market growth. considering that market develops very quickly, this seems to be both a difficult task. however if bank is capable of meeting the clitomasz dziawgo54 ent’s needs and expectations through innovative and tailor-made approach in this uncharted territory, it can win a valuable client for generations to come. in order to gain a unhwi and hnwi clients trust, it is essential for bank to develop and maintain a long-term relationship. this may be a challenge on the chinese wealth management market, due to the fact that the majority of wealthy individuals are self-made businessmen with high degree of confidence both in their instinct and decision making. they may be of the opinion they do not need neither financial advisor nor his services, because they are fully capable of managing their fortune by themselves (capgemini, 2018). what is more, low-risk investable assets offering above-market returns are increasingly harder to spot. this might be an issue to overcome, due to highspeed wealth accumulation desire along with high return expectations from uhnwi and hnwi. shortage of these assets may serve as an opportunity for the bank, that could be able to find latest investment opportunities significantly faster than a wealthy person. also, the value of advice from the bank representative may increase with clients having more realistic approach to returnrates. furthermore, the role of exceptional customer experience (cx) is becoming increasingly more crucial. behind quality of financial advisory services, it is considered to be the most important factor for clients to choose a company. according to kpmg, the six key elements of cx strategy are: ■ personalization – providing tailor-made services for each client considering the risk profile, investment goals etc., ■ integrity – maintaining trust and reliability, ■ expectations – meeting and exceeding client’s expectations, ■ time and effort – providing client with relevant information as fast as possible with minimizing client’s effort to obtain them, ■ resolution – avoiding poor experience and resolving it quickly in case of happening, ■ empathy – understanding the client with special regard to his priorities and worries. with that being said, the key issue for wealth management companies in cx is how to track customer satisfaction on the regular basis. this is a key challenge, which causes companies to stay innovative and develop digital solutions. it is essential for chinese wealth management companies to consider customer experience in their strategy and develop a method to track the overall satisfaction of clients (kpmg, 2018, pp. 15–17). wealth management market in china… 55 lastly, considering both wealth inheritance on a large scale in china and heavy impact of new technologies in wealth management market worldwide, there are increased security concerns and fear of data leakages (bnp paribas, 2018). due to the fact that wealth management companies have huge quantities of sensitive data of wealthy individuals, the risk of data theft is increased and it can lead to both financial loss for the client and loss of trust for the company. latest innovative solutions and new digital services may not be fully prepared for cyber-attacks, therefore leaving them exposed as a potential target for an attack. according to capgemini, estimated losses from cyber crimes are expected to amount to 6 trillion usd worldwide, which should definitely be considered while establishing a developed chinese wealth management market. therefore necessary steps from wealth management companies for cybersecurity need to be taken, such as increasing it security expenditure or developing tailored safety procedures. the outcome of the research process and conclusions the most important conclusion for banks present in chinese wealth management market is to establish and sustain client loyalty. there is no doubt that unhwi and hnwi are unique type of clients and their retention may provide banks with reliable clients even for generations, which is hardly the case for retail clients (baker & chiu, 2017, pp. 410–412). knowing that banks should correspond to the most urgent needs on the market, they ought to switch their attention from wealth creation services to wealth inheritance and wealth preservation (jacobides & winter, 2012, pp. 5–6). these services, if carried out properly, can sustain wealthy clients with the second generation entering the unhwi and hnwi market (ey, 2018, p. 10). moreover, banks should definitely consider applying latest innovative solutions on the chinese wealth management market as well. there is little to no doubt that increasingly more aff luent clients would value convenience and comfort in private banking services. however, banks should implement new ideas with regard to chinese market specifics. it is unknown to what degree would several solutions appeal to chinese clients, considering the fact that they still consider face-to-face meetings as the main approach of performing private banking services (accenture, 2016, p. 4). with unhwi and hnwi client retention as a key, banks should carry out a long-term, possibly life-long strategy tailor-made for every individual client. tomasz dziawgo56 while doing so, it is of the utmost importance for the bank to ensure highest possible degree of customer experience. increasingly more clients are becoming convinced to use social media like wechat, mobile 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(2003). will succession planning increase shareholder wealth? evidence from investor reactions to relay ceo successions. strategic management journal, 24(2), 191–198. https://dx.doi.org/10.1002/smj.280. ss&c (2018). opportunities and challenges facing private banks in apac, http://www. ssctech.com/blog/opportunities-and-challenges-facing-private-banks-in-apac (accessed: 4.02.2019). for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors118 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 119 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the jour nal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions #authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors120 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. the detailed ethical principles are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https:// publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 29 may 2013 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors234 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within the specified time frame (sending a printed version of the article is not necesfor authors 235 sary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the jour nal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions #authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors236 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: april 3, 2019; date of acceptance: may 7, 2019. * contact information: jpawlowski@umk.pl, department of finance management, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 56 611 46 34; orcid id: https:// orcid.org/0000-0002-5021-8871. pawłowski, j. (2018). the usefulness of financial reporting for financial instruments in the decision-making processes of individual investors. copernican journal of finance & accounting, 7(4), 99–113. http://dx.doi.org/10.12775/cjfa.2018.023 jarosław pawłowski* nicolaus copernicus university in toruń the usefulness of financial reporting for financial instruments in the decision-making processes of individual investors keywords: financial reporting, individual investors, financial instruments. j e l classification: g11. abstract: this study focuses on the issue of usefulness of financial reporting for financial instruments in the decision-making processes of individual investors. dynamic development of financial instruments, identified difficulties in application and analysis of the rules of accounting for financial instruments, as well as the importance of individual investors on the financial market were the major reasons to deal with this issue. the main purpose of this study is an assessment of usefulness of reporting data concerning financial instruments in the decision-making processes of individual investors in poland. to achieve the specified goal, the following research methods have been used: descriptive, comparative, subject literature review, third party research analysis and analysis of selected results of individual research. a significant part of the study concerns the analysis of the results of a survey conducted in a group of 408 individual investors in poland. jarosław pawłowski100  introduction individual investors constitute the basic group of participants of contemporary financial markets (kaniel, saar & titman, 2008, pp. 23–24). they are important group for standards accounting setters (brazel, jones, thayer & warne, 2015, p. 1374). in their decision-making processes, they often use reporting data, therefore financial reporting is a major source of information. as a result of the rapid development of financial instruments, a growth in the value and volume of their trade is noticeable. an increasing number of entities is involved in transactions where subjects are financial instruments. nonetheless, growing complexity of current financial instruments, in particular derivatives, causes difficulties for business entities in preparing appropriate information, while investors face problems related with proper analysis of provided information. considering that, this study gives an insight into the issue of usefulness of financial reporting for financial instruments in the decision-making processes of individual investors. the main purpose of this study is an assessment of usefulness of reporting data concerning financial instruments in the decision-making processes of individual investors. to achieve the specified goal, the following research methods have been used: descriptive, comparative, subject literature review, third party research analysis and analysis of selected results of individual research. the research methodology and the course of the research process this paper aims at analysing the usefulness of financial reporting for financial instruments from the point of view of individual investors. the major purpose of the study is the assessment of usefulness of reporting data concerning financial instruments in the decision-making processes of individual investors in poland. to achieve the assumed goal, the following research methods have been used: descriptive, comparative, subject literature review, third party research analysis and analysis of selected results of individual research. the essential part of this study is the presentation and comments to the individual survey conducted in a group of individual investors in poland. the usefulness of financial reporting for financial… 101 financial statement vs. decision-making processes of investors a financial statement is usually considered the primary source of financial information used in economic analyses. in this regard, reporting data are the grounds for many business decisions, which is the reason why entities are widely interested in this type of data (sierpińska & jachna, 2004, pp. 47–48). the term of financial statement refers to a set of data concerning the property and financial position as well as financial results achieved in a specified period of activity of a given unit. proper data are prepared and presented according to particular accepted rules and formulas of description and presentation (krzywda, 2003, p. 37). the basic type of financial statement is a separate financial statement. however, due to the ongoing social and economic transformations, an increase in the scale and complexity of commercial, organisational and capital relations between business entities can be observed. as a result, capital groups emerge and develop, which entails the growth of importance of consolidated financial statements (ignatowski, 2012, p. 22). a number of various financial statements can be distinguished, considering e.g. different legal requirements, expectations of recipients, business specificity or purpose of information. thus, the current catalogue of financial statements contains a relatively wide selection of types. a number of classifications can be distinguished (wędzki, 2014, p. 17), some of which are presented in diagram 1. diagram 1. classification of financial statements based on selected criteria individual research. the essential part of this study is the presentation and comments to the individual survey conducted in a group of individual investors in poland. financial statement vs. decision-making processes of investors a financial statement is usually considered the primary source of financial information used in economic analyses. in this regard, reporting data are the grounds for many business decisions, which is the reason why entities are widely interested in this type of data (sierpińska, jachna, 2004, pp. 47–48). the term of financial statement refers to a set of data concerning the property and financial position as well as financial results achieved in a specified period of activity of a given unit. proper data are prepared and presented according to particular accepted rules and formulas of description and presentation (krzywda, 2003, p. 37). the basic type of financial statement is a separate financial statement. however, due to the ongoing social and economic transformations, an increase in the scale and complexity of commercial, organisational and capital relations between business entities can be observed. as a result, capital groups emerge and develop, which entails the growth of importance of consolidated financial statements (ignatowski, 2012, p. 22). a number of various financial statements can be distinguished, considering e.g. different legal requirements, expectations of recipients, business specificity or purpose of information. thus, the current catalogue of financial statements contains a relatively wide selection of types. a number of classifications can be distinguished (wędzki, 2014, p. 17), some of which are presented in diagram 1. diagram 1. classification of financial statements based on selected criteria source: individual work based on (kamiński, 2015, pp. 14–15). currently it is accepted that the major purpose of financial statements is to provide information concerning the property and financial position, financial results achieved and cash flows of a business unit, that are useful for a wide group of users in making their business decisions. a set of statement data is presented in an ordered manner, according to an agreed statement structure (świderska, 2010, p. 15). in the context of the polish legal regulations on accounting, financial statements comprise (accounting act, art. 45 paragraph 2):  balance sheet,  profit and loss account,  additional information. for business entities whose yearly financial statements are subject to mandatory review of a statutory auditor, it is necessary to provide two additional documents (pursuant to art. 45 paragraph 3 of the accounting act):  cash flow statement,  statement of changes in equity. financial statements type of recipient reporting period regularity degree of generalisation type of obligation internal external monthly quarterly half-yearly yearly interim current synthetic analytic obligatory optional separate s o u r c e : individual work based on: (kamiński, 2015, pp. 14–15). financial statements reporting period jarosław pawłowski102 currently it is accepted that the major purpose of financial statements is to provide information concerning the property and financial position, financial results achieved and cash f lows of a business unit, that are useful for a wide group of users in making their business decisions. a set of statement data is presented in an ordered manner, according to an agreed statement structure (świderska, 2010, p. 15). in the context of the polish legal regulations on accounting, financial statements comprise (accounting act, art. 45 paragraph 2): ■ balance sheet, ■ profit and loss account, ■ additional information. for business entities whose yearly financial statements are subject to mandatory review of a statutory auditor, it is necessary to provide two additional documents (pursuant to art. 45 paragraph 3 of the accounting act): ■ cash f low statement, ■ statement of changes in equity. however, according to the international accounting regulations, a complete set of financial statements comprises (ias 1, art. 10): ■ a statement of financial position as at the end of the period, ■ a statement of profit or loss and other comprehensive income for the period, ■ a statement of changes in equity for the period, ■ a statement of cash f lows for the period, ■ notes, comprising a summary of significant accounting policies and other explanatory information, ■ a statement of financial position with reference to the preceding comparative period1. it must be noted that ias 1 gives a proposed terminology regarding particular financial statement components, and entities may use other titles (ias  1, art. 10). financial statements, according to their purpose, are drawn up to meet the informative needs of a wide and diversified group of recipients (gos, 2006, p. 7). however, in the recent years the focus on investors has become more distinct in financial reporting. it is evidenced by the observed changes in the international accounting regulations, attempting to adjust the purpose and scope of 1 in certain situations, an entity shall attach the statement of financial position as at the beginning of the preceding period. the usefulness of financial reporting for financial… 103 disclosed information to the relevant expectations of investors (burlaud & colasse, 2011, p. 32). individual investors on financial markets investors are the major category of participants on the world financial markets. the essential goal of their activity is to achieve economic benefits. investors are often generally referred to as buyers of financial instruments, intending to resell them to gain profit. consequently, they constitute a community that is diversified in many aspects (cichorska, 2015, p. 15). in particular, they differ in terms of the volume of kept resources, investment goals and strategies, degree of knowledge in undertaking and management of investments, as well as the impact on the financial market (czyżycki, 2016, p. 14). in this regard, various methods of classification of investors are distinguished, based on different criteria. some of them are presented in table 1. table 1. selected classifications of investors on the financial market classification criterion type of investor subject of legal relationship natural person legal entity form of organisation individual institutional place of residence / registered office domestic foreign turnover wholesale retail knowledge of decision-making techniques amateur professional eagerness for risk conservative moderate aggressive attitude to investments investing on own account dealer s o u r c e : (cichorska, 2015, p. 16). jarosław pawłowski104 considering the goal of this study, further considerations will focus on the informative needs of individual investors. the major characteristics of this group of investors is making investment decisions personally. they also act on their own account and not professionally. mostly these are households and small entities having relatively small capitals. it is pointed out that their basic motive to undertake investments is to protect the held assets against the loss of value in time (czyżycki, 2016, p. 14). the investment activity of this group of investors is clearly diversified. a number of factors is identified that may promote the willingness to take decisions, or may restrict it. they include: availability of information on a given market, cost of acquisition of relevant information, properties, investment knowledge and experience, age, gender, personal attributes, socialisation behaviour, capitals owned, level of transaction costs (yang, 2013, pp. 303–304). the literature of the subject does not provide a uniform definition individual investor. they are usually defined as natural persons investing their savings in various assets (dziawgo, 2004). this explanation has been assumed for the purposes of this study and the described research. review of selected third-party research results in view of the rapid growth of financial markets, the problem of use and usefulness of financial reporting in the decision-making processes of individual investors is an interesting and important subject of study. it is confirmed by the recent attempts to analyse this subject. the issue of the using of financial reporting by individual investors in poland was the research subject of m. adamczyk. in 2011–2012, he carried out a survey on a group of 339 non-professional investors. he determined that approximately 75% of the respondents use financial reporting information in investment decisions. balance sheet and profit and loss account were the most frequently used components of the financial statements in this group of respondents (adamczyk, 2017, pp. 9–12). another studies in this field was the analysis of usefulness of data included in financial statements in the decision-making processes of individual investors, made by j. błażyńska. the survey was conducted in a group of 334 respondents in 2013. the usefulness of financial reporting for financial… 105 the analysis of the results indicates that most of the surveyed found useful information in financial statements (95%), but only a small group claimed that all information was useful (8%). over a half of survey participants came to a conclusion that most of the data were useful (59%). a large part of surveyed investors indicated that only certain information was useful (28%). the remaining group reported lack of usefulness of this type of data (5%) (błażyńska, 2015, pp. 219–221). other research in the described field was the survey conducted by d. dziawgo in 2009 and 2010 among 416 individual investors. it comprised an assessment of adaptation of the scope of information provided by companies to the informative needs of the investors. the results lead to a conclusion that only a small group of survey participants (18%) was satisfied with the scope of presented information. much more frequently the surveyed reported only sufficient adjustment of provided information to their needs (46%). relatively large percentage of investors indicated poor adjustment of this type of data (28%) (dziawgo, 2011, pp. 225–227). individual investors in poland – presentation of author’s research results in order to fulfil the goal of this study, selected outcomes of the author’s survey on usefulness of the reporting data concerning financial instruments in the opinion of individual investors will be used. the said survey was conducted at the author’s request in 2015 by the polish association of individual investors (stowarzyszenie inwestorów indywidualnych, sii). it encompassed a group of 408 individual investors from poland. the research tool was an online survey questionnaire published on the website of the association. the characteristic of the surveyed group of respondents started with determining their age. considering the age of the them, there is a noticeable differs. that’s why, the following age categories have been distinguished: a) under 30, b) at least 30, but less than 40, c) at least 40, but less than 50, d) over 50. the obtained results are presented in figure 1. jarosław pawłowski106 figure 1. division of the surveyed group of individual investors in terms of age (%) figure 1. s. 106 figure 2, s. 106 over 50 20% under 30 33% 30–40 29% 40–50 18% others 26% economic 47% technical 18% it 6% legal 3% s o u r c e : individual study. the youngest investors, under 30 years of age were the largest group of respondents. their participation in analysed group was approx. 33%. respondents from 30 to 40 were the second largest age group. their portion in this community reaching approx. 29%. investors over 50 and aged 40 to 50 were the next groups, with the percentage of 20% and 18%, respectively. the surveyed group of individual investors is also diversified in terms of kind of education. taking into account this characteristic the following categories have been distinguished: economic, technical, it, legal and others. the obtained results are presented in figure 2. figure 2. division of the surveyed group of individual investors in terms of type of education (%) figure 1. s. 106 figure 2, s. 106 over 50 20% under 30 33% 30–40 29% 40–50 18% others 26% economic 47% technical 18% it 6% legal 3% s o u r c e : individual study. the usefulness of financial reporting for financial… 107 the vast majority of respondents have an economic education (47%). the next the directions of education of the surveyed investors were: technical (18%), it (6%), legal (3%). moreover, others types of education were indicated relatively often (26%). the analysis started with a question concerning the usefulness of reporting data regarding financial instruments in the decision-making processes of individual investors. the outcomes are presented in figure 3. figure 3. percentage of replies to the question: “what is your opinion on the usefulness of financial reporting data regarding financial instruments in their current form in the context of investment decisions?” (%) – group of individual investors (n=408) figure 3. s. 107 sufficient 50,2% poor 13,0% no opinion 22,5% good 14,3% s o u r c e : individual study. the analysis of the results indicates that almost half of the surveyed claimed that the usefulness of the said information was only sufficient (50.2%). relatively small groups of respondents indicated that the usefulness of these data was good (14.3%) or poor (13.0%). quite frequently survey participants couldn’t provide a clear opinion on this issue (22.5%). the following stage of the research was an attempt to determine the reasons behind the poor opinion of individual investors on the reporting data regarding financial instruments. on the basis of their answers, a list of comments reported by the survey participants has been prepared. it is presented in figure 4. jarosław pawłowski108 figure 4. percentage of replies to the question: “what factors, in your opinion, decrease the usefulness of information regarding financial instruments presented in financial statements?” (%) – group of individual investors (n=404) source: individual study the analysis of the results indicates that almost half of the surveyed claimed that the usefulness of the said information was only sufficient (50.2%). relatively small groups of respondents indicated that the usefulness of these data was good (14.3%) or poor (13.0%). quite frequently survey participants couldn’t provide a clear opinion on this issue (22.5%). the following stage of the research was an attempt to determine the reasons behind the poor opinion of individual investors on the reporting data regarding financial instruments. on the basis of their answers, a list of comments reported by the survey participants has been prepared. it is presented in figure 4. figure 4. percentage of replies to the question: "what factors, in your opinion, decrease the usefulness of information regarding financial instruments presented in financial statements?" (%) – group of individual investors (n=404) * in the analysed question respondents could choose more than one answer. the total amount of indications in the analysed field was 782. source: individual study good 14.3% sufficient 50.2% poor 13.0% no opinion 22.5% 49.5% 39.1% 37.9% 27.5% 14.1% 13.4% 7.2% 5.0% 0% 10% 20% 30% 40% 50% 60% mała przejrzystość skomplikowane zasady… wąski zakres ujawnień niska szczegółowość brak porównywalności… niewystarczające uregulowania nie mam zastrzeżeń inneother no reservations insufficient regulations lack of international comparability low detail narrow scope of disclosed information complex accounting rules * in the analysed question respondents could choose more than one answer. the total amount of indications in the analysed field was 782. s o u r c e : individual study. the presented assessment of usefulness of reporting information regarding financial instruments, made by the surveyed investors, caused that a significant group contributed to determining the reasons of the described situation (n=404, 99.0%). the most frequently indicated negative factor was poor transparency of presentation (49.5%). other most frequent comments concerned: ■ complex accounting rules (39.1%), ■ narrow scope of disclosed information (37.9%), ■ low detail of the data (27.5%). survey participants quite frequently indicated the lack of international comparability of this type of information (14.1%) and also insufficient regulation of financial reporting for financial instruments (13.4%). additionally, it must be pointed out that a small group of respondents referred to causes other than those mentioned in the question (5.0%). these mainly included the concerns of the possibility of data manipulation by entities and delayed disclosure of relevant information. another question concerned the areas of accounting for financial instruments that in the opinion of the surveyed individual investors needed particular regulation. the answers given to this question are presented in figure 5. the usefulness of financial reporting for financial… 109 figure 5. percentage of replies to the question: "which areas of financial instruments accounting need particular regulations?" (%) – group of individual investors (n=388) the presented assessment of usefulness of reporting information regarding financial instruments, made by the surveyed investors, caused that a significant group contributed to determining the reasons of the described situation (n=404, 99.0%). the most frequently indicated negative factor was poor transparency of presentation (49.5%). other most frequent comments concerned:  complex accounting rules (39.1%),  narrow scope of disclosed information (37.9%),  low detail of the data (27.5%). survey participants quite frequently indicated the lack of international comparability of this type of information (14.1%) and also insufficient regulation of financial reporting for financial instruments (13.4%). additionally, it must be pointed out that a small group of respondents referred to causes other than those mentioned in the question (5.0%). these mainly included the concerns of the possibility of data manipulation by entities and delayed disclosure of relevant information. another question concerned the areas of accounting for financial instruments that in the opinion of the surveyed individual investors needed particular regulation. the answers given to this question are presented in figure 5. figure 5. percentage of replies to the question: "which areas of financial instruments accounting need particular regulations?" (%) – group of individual investors (n=388) * in the analysed question respondents could choose more than one answer. the total amount of indications in the analysed field was 769. source: individual study 50.5% 47.9% 34.5% 20.1% 15.5% 13.9% 10.3% 5.4% 0% 10% 20% 30% 40% 50% 60% ekspozycja na ryzyko związane z if informacje nt. zaangażowania w ip wycena ip ujęcie i rozliczenie złożonego if wbudowane ip ujęcie początkowe ip uregulowane wystarczająco inneother sufficient regulation initial inclusion of derivatives embedded derivatives inclusion and settlement of complex financial instruments pricing of derivatives information on involvement in * in the analysed question respondents could choose more than one answer. the total amount of indications in the analysed field was 769. s o u r c e : individual study. the analysis of the results leads to a conclusion that survey participants mainly identified problems concerning the exposure to the risk related with financial instruments (50.5%) and the presentation of information regarding the involvement in derivatives (47.9%). another area that required changes in the opinion of some respondents, was pricing of derivatives (34.5%). additionally, the answers quite often indicated the need to formulate particular rules regarding: ■ the inclusion and settlement of complex derivatives (20.1%), ■ embedded derivatives (15.5%), ■ initial inclusion of derivatives (13.9%). the respondents also mentioned other issues, not included in the answers (5.1%). these included: sensitivity of financial instruments pricing to the changes of market factors, pricing based on fair value, effect of government decisions. a small group of surveyed investors claimed that the valid regulations on financial instruments accounting were sufficient (10.3%). another area of analysis were the expectations of the investors regarding disclosure of additional information concerning financial instruments. many of the surveyed individual investors mentioned the necessity to provide such information. the outcomes are presented in figure 6. jarosław pawłowski110 figure 6. percentage of replies to the question: "what additional information concerning financial instruments should be disclosed by the companies?" (%) – group of individual investors (n=401) the analysis of the results leads to a conclusion that survey participants mainly identified problems concerning the exposure to the risk related with financial instruments (50.5%) and the presentation of information regarding the involvement in derivatives (47.9%). another area that required changes in the opinion of some respondents, was pricing of derivatives (34.5%). additionally, the answers quite often indicated the need to formulate particular rules regarding:  the inclusion and settlement of complex derivatives (20.1%),  embedded derivatives (15.5%),  initial inclusion of derivatives (13.9%). the respondents also mentioned other issues, not included in the answers (5.1%). these included: sensitivity of financial instruments pricing to the changes of market factors, pricing based on fair value, effect of government decisions. a small group of surveyed investors claimed that the valid regulations on financial instruments accounting were sufficient (10.3%). another area of analysis were the expectations of the investors regarding disclosure of additional information concerning financial instruments. many of the surveyed individual investors mentioned the necessity to provide such information. the outcomes are presented in figure 6. figure 6. percentage of replies to the question: "what additional information concerning financial instruments should be disclosed by the companies?" (%) – group of individual investors (n=401) 49.6% 43.9% 38.9% 35.9% 12.2% 2.2% 0% 10% 20% 30% 40% 50% 60% prognozy nt. wykorzystania instrumentów finansowych w dłuższym horyzoncie czasowym (2-3… zestawienia planów z wykonaniem dotyczących stosowania instrumentów finansowych niezrealizowanych zysków oraz strat z zawartych transakcji finansowych na poszczególne dni… wartości nominalnej zawartych transakcji terminowych w walucie kontraktu oraz krajowej nie oczekuję dodatkowych informacji inneother no additional information expected nominal value of derivatives in the contract and national currency the value of unrealised profit and loss from concluded financial transactions as of the particular financial statement date comparison of the planned and actual use of financial instruments forecasts regarding the use of financial instruments in a longer period (2 or 3 years) * in the analysed question respondents could choose more than one answer. the total amount of indications in the analysed field was 733. s o u r c e : individual study. the data presented in the diagram above indicate that the expectations concerning the disclosure of forecasts regarding the use of financial instruments in a longer period (2 or 3 years) were the most frequent response of the survey participants (49.6%). a relatively large group of respondents mentioned the need to provide comparisons of the planned and actual use of financial instruments (43.9%). another expectations of the surveyed investors concerned the disclosure of: a) the value of unrealised profit and loss from concluded financial transactions as of the particular financial statement date (38.9%), b) nominal value of derivatives in the contract and national currency (35.9%). the majority of the answers referred to the disclosure of these types of information. a few participants mentioned other expectations (2.2%). nonetheless, a group of respondents claimed that no additional reporting information regarding financial instruments were required (12.2%). the usefulness of financial reporting for financial… 111  conclusions the analysis of the results of the survey concerning the usefulness of reporting data regarding financial instruments in the decision-making processes of individual investors leads to a number of conclusions. in general, most of the survey participants claimed that the usefulness of the analysed information was merely sufficient (50.2%). quite often respondents could not provide a clear assessment (22.5%). a large group of the surveyed investors had reservations concerning the information presented in this scope. the major factors decreasing the usefulness of data concerning financial instruments included: ■ poor transparency of presentation (49.5%), ■ complex accounting rules (39.1%), ■ narrow scope of disclosed information (37.9%). it has also been determined that the surveyed investors emphasised the necessity to introduce changes in accounting for financial instruments. in particular, their comments concerned the following issues: ■ exposure to risk related with financial instruments (50.5%), ■ presentation of information regarding the involvement in derivatives (47.9%), ■ pricing of derivatives (34.5%). additionally, a number of the surveyed investors presented their expectations concerning the disclosure of additional information regarding financial instruments. most frequently they claimed that companies should provide: ■ forecasts on using financial instruments in a longer period (2 or 3 years) (49.6%), ■ comparisons of planned and actual use of financial instruments (43.9%), ■ the data concerning the value of unrealised profit and loss from concluded financial transactions as of the particular financial statement date (38.9%). that said, it can be noticed that financial reporting, being the primary source of information for investors, is also quite often used to provide data regarding financial instruments. the scale and complexity of rules concerning the accounting for financial instruments causes that reporting information presented in this scope is characterised by a highly complicated form. consequently, it is difficult to use for investors, which is evidenced by the outcomes of the conjarosław pawłowski112 ducted survey. these results confirm the necessity to introduce a number of modifications in this field, allowing to adjust the rules of financial reporting for financial instruments to the informative needs of individual investors.  references adamczyk m. 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(2006). sprawozdawczość finansowa przedsiębiorstw. (financial reporting of companies.) warszawa: polska akademia rachunkowości. ignatowski, r. (2012). konsolidacja sprawozdań finansowych. (consolidation of financial statements.) gdańsk: wydawnictwo oddk. kaniel, r., saar, g., & titman, s. (2008). individual investor trading and stock returns. the journal of finance, lxiii/1, 273–310. kamiński, r. (2015). sprawozdawczość finansowa przedsiębiorstwa w regulacjach polskich i międzynarodowych. (corporate financial reporting in polish and internation the usefulness of financial reporting for financial… 113 al regulations.) poznań: wydawnictwo naukowe uniwersytetu adama mickiewicza w poznaniu. krzywda, d. (2003). sprawozdanie finansowe jako produkt rachunkowości jednostki gospodarczej. (financial statement as an accounting product of an economic unit.) zeszyty naukowe wyższej szkoły ekonomicznej w bochni, 1/2003, 37–64. międzynarodowy standard rachunkowości 1 „prezentacja sprawozdań finansowych”. (international accounting standard 1 “presentation of financial statements”.) commission regulation (ec) no 1126/2008 of 3 november 2008 adopting certain international accounting standards in accordance with regulation (ec) no 1606/2002 of the european parliament and of the council (as amended: o.j. of eu 2017, no 291). sierpińska, m., & jachna, t. (2004). ocena przedsiębiorstwa według standardów światowych. (evaluation of the company according to global standards.) warszawa: wydawnictwo naukowe pwn. świderska, g. k. (ed.). (2010). wpływ zakresu ujawnianych informacji na poprawę ochrony inwestorów oraz pozycję konkurencyjną emitentów papierów wartościowych. (impact of the scope of disclosed information on the improvement of investor protection and the competitive position of issuers of securities.) warszawa: szkoła główna handlowa w warszawie – oficyna wydawnicza. ustawa z dnia 29 września 1994 r. o rachunkowości (dz. u. 2018 poz. 62 z późn. zm.). (the accounting act dated 29 september 1994 (as amended: j.l. of 2018, item 62)). wędzki, d. (2014). sprawozdanie finansowe przedsiębiorstwa według polskiego prawa bilansowego. (financial statements according to the polish balance sheet law.) warszawa: wolters kluwer. yang, a. s. (2013). decision making for individual investors: a measurement of latent difficulties. journal of financial services research, 44, 303–329. for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal 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anna.janska@interrisk.pl. anna jańska* interrisk towarzystwo ubezpieczeń spółka akcyjna vienna insurance group ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji kontraktowych słowa kluczowe: gwarancja, gwarancja kontraktowa, zarządzanie ryzykiem. klasyfikacja jel: d81, g32. abstrakt: w artykule omówiono problematykę oceny ryzyka w procesie udzielania gwarancji ubezpieczeniowych na przykładzie gwarancji kontraktowych, zabezpieczających wszystkie etapy procesu inwestycyjnego: od gwarancji zapłaty wadium, przez gwarancje należytego wykonania kontraktu, zwrotu zaliczki, aż po gwarancję właściwego usunięcia wad i usterek. szczególną uwagę zwrócono na wyjątkowy charakter gwarancji ubezpieczeniowych, które różnią się istotnie od pozostałych ubezpieczeń działu ii. specyficzne cechy gwarancji mają decydujący wpływ na kształt procesu oceny ryzyka. w artykule scharakteryzowano czynniki wpływające na poziom ryzyka związanego z działalnością gwarancyjną, przeanalizowano wymagania, jakim muszą sprostać klienci ubiegający się o gwarancje, oraz omówiono poszczególne etapy procesu oceny ryzyka. risk appraisal in the award of contract bonds keywords: contract bond, guarantee, risk management. jel classification: d81, g32. abstract: the article discusses the problem of risk appraisal illustrated with an example of the contract bonds at all steps of the investment process: bid bonds, performance bonds, advance payment bonds and maintenance bonds. particular attention was paid to the nature of the insurance guarantees, which differs significantly from other http://dx.doi.org/10.12775/cjfa.2013.007 anna jańska92 non-life insurance. furthermore, the risk assessment process is determined by specific characteristics of the guarantees. this paper includes the description of factors affecting the level of risk associated with the guarantee. it discusses the different stages of risk estimation and insurers’ requirements for the customers applying for guarantees. translated by anna jańska  wstęp ocena ryzyka w procesie udzielania gwarancji ubezpieczeniowych stanowi kluczowy czynnik decydujący o przyjęciu danego podmiotu do ochrony. głównym celem analizy jest więc odpowiedź na pytanie, czy dana gwarancja może być danej firmie udzielona. gwarancji powinno udzielać się zgodnie z zasadą „zerowego ryzyka”, czyli wtedy i tylko wtedy, gdy po przeprowadzonej ocenie ryzyka analityk jest przekonany, że nie nastąpi wypłata na żądanie beneficjenta. od sposobu, w jaki zostanie przeprowadzona ocena, zależy w dużej mierze wynik finansowy działalności gwarancyjnej ubezpieczyciela. w artykule omówiono problematykę oceny ryzyka w procesie udzielania gwarancji ubezpieczeniowych na przykładzie gwarancji kontraktowych, zabezpieczających wszystkie etapy procesu inwestycyjnego: od gwarancji zapłaty wadium, przez gwarancje należytego wykonania kontraktu, zwrotu zaliczki, aż po gwarancję właściwego usunięcia wad i usterek. zdefiniowano i sklasyfikowano gwarancje ubezpieczeniowe, a szczególną uwagę zwrócono na wyjątkowy charakter gwarancji ubezpieczeniowych, które różnią się istotnie od pozostałych ubezpieczeń działu ii. specyficzne cechy gwarancji mają decydujący wpływ na kształt procesu oceny ryzyka. w artykule scharakteryzowano czynniki wpływające na poziom ryzyka związanego z działalnością gwarancyjną, przeanalizowano wymagania, jakim muszą sprostać klienci ubiegający się o gwarancje, oraz omówiono poszczególne etapy procesu oceny ryzyka: z perspektywy ryzyka zobowiązanego oraz ryzyka danego kontraktu. 1. pojęcie i istota gwarancji ubezpieczeniowych podejmując próbę zdefiniowania pojęcia „gwarancja ubezpieczeniowa”, napotykamy problemy wynikające z samej istoty procesu gwarantowania. trudności definicyjne powoduje również fakt, że brakuje zarówno definicji ustawowej, jak i jednomyślności wśród teoretyków ubezpieczeń. ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji… 93 w świetle ustawy z dnia 22 maja 2003 roku o działalności ubezpieczeniowej (art. 3 ust. 3 pkt 1 ustawy) gwarancja jest jedną z czynności ubezpieczeniowych, nie jest jednak umową ubezpieczenia z punktu widzenia konstrukcji prawnej. w literaturze przedmiotu gwarancję ubezpieczeniową definiuje się jako świadczenie woli zakładu ubezpieczeń (gwaranta), który zobowiązuje się do udzielenia określonego świadczenia pieniężnego gwarantariuszowi (wierzycielowi, beneficjentowi gwarancji) w przypadku, gdy dłużnik (zobowiązany, zleceniodawca gwarancji) nie wywiąże się z przyjętego zobowiązania wobec beneficjenta gwarancji (holly 2004: 79). równie często spotykana definicja charakteryzuje gwarancję ubezpieczeniową jako jednostronne zobowiązanie zakładu ubezpieczeń (gwaranta) do wypłacenia świadczenia pieniężnego na rzecz podmiotu uprawnionego (beneficjenta) w sytuacji, gdy podmiot wnioskujący o wydanie gwarancji nie wywiązał się z ustalonego wobec beneficjenta obowiązku (michalik, seliga 2001: 291). specyficzny, wyrastający z praktyki, charakter tego rodzaju produktów ubezpieczeniowych potwierdził niejako sąd apelacyjny w poznaniu w orzeczeniu z dnia 11 stycznia 2006 roku (i aca 761/05), orzekając, że „gwarancje ubezpieczeniowa jest specyficzną, niestypizowaną, a ukształtowaną głównie przez praktykę, czynnością ubezpieczeniową, znajdującą oparcie prawne przede wszystkim w zasadzie swobody układania stosunków zobowiązaniowych” (kodeks cywilny, art. 353[1]). gwarancja jest umową nienazwaną, więc tyko jej treść decyduje o prawach i obowiązkach stron. nie przypomina klasycznie rozumianego ubezpieczenia, a charakterem zbliża się bardziej do papierów wartościowych, takich jak np. weksel. do pozostałych specyficznych cech gwarancji ubezpieczeniowych należy zaliczyć fakt, że wypłata z tytułu gwarancji zawsze skutkuje regresem i że do gwarancji nie mają zastosowania przepisy ubezpieczeniowe, a raczej normy kodeksowe oraz, pomocniczo, zawarte w art. 80–83 i 87 prawa bankowego (sikora 2012). co do samej konstrukcji prawnej, gwarancja bankowa nie różni się niczym (poza nazwą wynikającą z osoby gwaranta) od gwarancji ubezpieczeniowej (kukiełka, poniewierka 2003: 76). relacja gwarantowania ma charakter trójstronny i stanowi relację między gwarantem (ubezpieczycielem), zobowiązanym (wykonawcą) oraz beneficjentem gwarancji (inwestorem). między każdym z podmiotów następuje przepływ dokumentów oraz informacji, co zostało w pełni zobrazowane na schemacie 1. anna jańska94 schemat 1. trójstronny charakter relacji gwarantowania stać klienci ubiegający się o gwarancje, oraz omówiono poszczególne etapy procesu oceny ryzyka: z perspektywy ryzyka zobowiązanego oraz ryzyka danego kontraktu. 1. pojęcie i istota gwarancji ubezpieczeniowych podejmując próbę zdefiniowania pojęcia „gwarancja ubezpieczeniowa”, napotykamy problemy wynikające z samej istoty procesu gwarantowania. trudności definicyjne powoduje również fakt, że brakuje zarówno definicji ustawowej, jak i jednomyślności wśród teoretyków ubezpieczeń. w świetle ustawy z dnia 22 maja 2003 roku o działalności ubezpieczeniowej (art. 3 ust. 3 pkt 1 ustawy) gwarancja jest jedną z czynności ubezpieczeniowych, nie jest jednak umową ubezpieczenia z punktu widzenia konstrukcji prawnej. w literaturze przedmiotu gwarancję ubezpieczeniową definiuje się jako świadczenie woli zakładu ubezpieczeń (gwaranta), który zobowiązuje się do udzielenia określonego świadczenia pieniężnego gwarantariuszowi (wierzycielowi, beneficjentowi gwarancji) w przypadku, gdy dłużnik (zobowiązany, zleceniodawca gwarancji) nie wywiąże się z przyjętego zobowiązania wobec beneficjenta gwarancji (holly 2004: 79). równie często spotykana definicja charakteryzuje gwarancję ubezpieczeniową jako jednostronne zobowiązanie zakładu ubezpieczeń (gwaranta) do wypłacenia świadczenia pieniężnego na rzecz podmiotu uprawnionego (beneficjenta) w sytuacji, gdy podmiot wnioskujący o wydanie gwarancji nie wywiązał się z ustalonego wobec beneficjenta obowiązku (michalik, seliga 2001: 291). specyficzny, wyrastający z praktyki, charakter tego rodzaju produktów ubezpieczeniowych potwierdził niejako sąd apelacyjny w poznaniu w orzeczeniu z dnia 11 stycznia 2006 roku (i aca 761/05), orzekając, że „gwarancje ubezpieczeniowa jest specyficzną, niestypizowaną, a ukształtowaną głównie przez praktykę, czynnością ubezpieczeniową, znajdującą oparcie prawne przede wszystkim w zasadzie swobody układania stosunków zobowiązaniowych” (kodeks cywilny, art. 353[1]). gwarancja jest umową nienazwaną, więc tyko jej treść decyduje o prawach i obowiązkach stron. nie przypomina klasycznie rozumianego ubezpieczenia, a charakterem zbliża się bardziej do papierów wartościowych, takich jak np. weksel. do pozostałych specyficznych cech gwarancji ubezpieczeniowych należy zaliczyć fakt, że wypłata z tytułu gwarancji zawsze skutkuje regresem i że do gwarancji nie mają zastosowania przepisy ubezpieczeniowe, a raczej normy kodeksowe oraz, pomocniczo, zawarte w art. 80–83 i 87 prawa bankowego (sikora 2012). co do samej konstrukcji prawnej, gwarancja bankowa nie różni się niczym (poza nazwą wynikającą z osoby gwaranta) od gwarancji ubezpieczeniowej (kukiełka, poniewierka 2003: 76). relacja gwarantowania ma charakter trójstronny i stanowi relację między gwarantem (ubezpieczycielem), zobowiązanym (wykonawcą) oraz beneficjentem gwarancji (inwestorem). między każdym z podmiotów następuje przepływ dokumentów oraz informacji, co zostało w pełni zobrazowane na schemacie 1. schemat 1. trójstronny charakter relacji gwarantowania umowa podstawowa beneficjent zobowiązany gwarancja gwarant wniosek umowa o gwarancję składka zabezpieczenie źródło: opracowanie własne. ź r ó d ł o : opracowanie własne. gwarancje ubezpieczeniowe odgrywają na rynku istotną rolę i przynoszą stronom umowy liczne korzyści. jedną z podstawowych zalet stosowania gwarancji w obrocie gospodarczym jest poprawa płynności przedsiębiorstwa. staje się tak za sprawą dwojakich przyczyn: ■ firma uzyskująca gwarancję unika angażowania własnych środków finansowych w celu złożenia zabezpieczeń wymaganych przez kontrahentów, ■ jeśli wcześniejsze zabezpieczenia ustanowiono w gotówce (np. w formie jednorazowo wpłaconej kaucji lub systematycznych potrąceń z faktur), przedstawienie gwarancji stwarza możliwość odblokowania zabezpieczeń finansowych złożonych do wcześniej zawartych kontraktów. zwiększenie płynności przekłada się z kolei na poprawę konkurencyjności podmiotu zlecającego udzielenie gwarancji dzięki możliwości m.in. uczestniczenia w wielu przetargach jednocześnie bądź ulokowania środków finansowych w inny, alternatywny sposób (np. przeznaczenie ich na inwestycje). ponadto, wybierając gwarancję ubezpieczeniową, firma nie zmniejsza swojej zdolności kredytowej w banku jak w przypadku wykorzystaniu gwarancji bankowych (wszystkie produkty bankowe są sumowane w ramach przyznanych limitów). fakt uzyskania gwarancji przyczynia się również do pewnego rodzaju „efektu wizerunkowego” – dowodzi bowiem, że firma została przebadana i pozytywnie zaopiniowana przez analityków ubezpieczyciela, co jest swoistym potwierdzeniem wiarygodności wobec kontrahentów. 2. klasyfikacje i rodzaje gwarancji gwarancje ubezpieczeniowe ustawowo sklasyfikowano jako grupę 15. działu ii ubezpieczeń (tj. „pozostałe ubezpieczenia osobowe oraz ubezpieczenia ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji… 95 majątkowe”) z wyszczególnieniem gwarancji bezpośrednich oraz pośrednich, czyli regwarancji. w powszechnym nazewnictwie stosuje się często zamiennie pojęcie gwarancji ubezpieczeniowych oraz ubezpieczeń finansowych, co z punktu widzenia terminologii jest błędnym uproszczeniem, gdyż gwarancje stanowią jedynie jeden z rodzajów ubezpieczeń finansowych, obok różnego rodzaju ubezpieczeń kredytów. w literaturze przedmiotu możemy spotkać wiele klasyfikacji gwarancji. z uwagi na charakter zobowiązania wyróżnia się gwarancje warunkowe oraz bezwarunkowe (holly 2004: 88). różnica między nimi urzeczywistnia się w momencie zgłoszenia żądania zapłaty przez beneficjenta gwarancji – w przypadku gwarancji warunkowej ubezpieczyciel przed dokonaniem wypłaty bada, czy wymogi (warunki) wyszczególnione w treści gwarancji zostały spełnione. międzynarodowe stowarzyszenie ubezpieczenia kredytu (international credit insurance and surety association) wyróżnia główne typy gwarancji ubezpieczeniowych (holly 2004: 91): ■ gwarancje kontraktowe, ■ gwarancje zapłaty należności celno-podatkowych, ■ gwarancje od sprzeniewierzenia, ■ gwarancje koncesyjne, ■ gwarancje zapłaty czynszu, ■ gwarancje wykonania dostawy. na polskim rynku najpopularniejszy jest pierwszy rodzaj gwarancji, tj. gwarancje kontraktowe, obejmujące swoim zakresem gwarancje zapłaty wadium, należytego wykonania kontraktu, zwrotu zaliczki oraz właściwego usunięcia wad i usterek. zastosowanie gwarancji kontraktowych umożliwia zabezpieczenie pełnego procesu inwestycyjnego, co zobrazowano w tabeli 1. warto również zwrócić uwagę, że w praktyce na polskim rynku ryzyko prawidłowego wykonania dostawy nie jest zabezpieczane oddzielnym rodzajem gwarancji, ale stosuje się w tych przypadkach schematy typowe dla gwarancji należytego wykonania umowy – jako że warunki dokonania dostawy są określone w ramach umowy, którą dana gwarancja ma zabezpieczać. gwarancje koncesyjne stanowi przede wszystkim gwarancja dla organizatora turystyki i pośrednika turystycznego, której ramy są doprecyzowane ustawowo, zgodnie z rozporządzeniem ministra sportu i turystyki z dnia 21 kwietnia 2011 roku (dz.u. z 2011 r., nr 88, poz. 499). rozporządzenie wprowadza wzory formularzy umowy gwarancji bankowej, umowy gwarancji ubezpieczeniowej oraz umowy ubezpieczenia na rzecz klientów, które są wymagane anna jańska96 w polskim prawie od firm prowadzących przedsięwzięcia określane mianem „działalności wykonywanej przez organizatorów turystyki i pośredników turystycznych”. wśród gwarancji celno-podatkowych należy wymienić najpopularniejsze z nich, m.in. gwarancja zapłaty długu celnego, gwarancja procedury tranzytowej (wpt) oraz gwarancje dla przewoźników korzystających z systemu tir. z kolei gwarancje zapłaty czynszu, bardzo często pożądane przez klientów, są aktualnie marginalizowane przez ubezpieczycieli z uwagi na bardzo wysokie ryzyko i rosnącą szkodowość, jaka urzeczywistnia się za każdym razem w fazie kryzysu gospodarczego. tabela 1. rodzaje gwarancji stosowane w poszczególnych etapach procesu inwestycyjnego lp. etap realizacji inwestycji rodzaj stosowanej gwarancji proces inw estycyjny i przetarg gwarancja zapłaty wadium ii podpisanie umowy gwarancja należytego wykonania kontraktu iii wypłata zaliczki gwarancja zwrotu zaliczki iv zakończenie robót gwarancja właściwego usunięcia wad i usterek ź r ó d ł o : opracowanie własne. 3. gwarancje ubezpieczeniowe na polskim rynku rozwój gwarancji ubezpieczeniowych na polskim rynku, zobrazowany wartością i dynamiką składki przypisanej brutto, w odniesieniu do zmian pkb w latach przedstawiono w tabeli 2. lata 2000–2003 były dla ubezpieczeń grupy 15. okresem stagnacji. mimo rosnącego pkb, na rynku gwarancji następował systematyczny, choć nie gwałtowny spadek przypisu składki. dopiero rok 2003 okazał się przełomowy – od tego czasu przypis wzrastał dynamicznie w każdym roku, zwiększając ponadto udział składki z gwarancji w pkb. osłabienie wyników nastąpiło po siedmiu latach – w roku 2011. w wyniku kryzysu i na skutek licznych upadłości firm (głównie budowlanych, jak również turystycznych) ubezpieczyciele zaczęli ograniczać ryzyko i limitować wystawianie gwarancji, co znalazło odzwierciedlenie w niższym poziomie przypisu składki brutto i mniejszym udziale składki z gwarancji w pkb. ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji… 97 tabela 2. wartość i dynamika składki przypisanej brutto z tytułu gwarancji ubezpieczeniowych w odniesieniu do pkb w latach 2000–2011 lata wartość składki przypisanej brutto z tytułu gwarancji ubezpieczeniowych (w mln zł) dynamika rok do roku (w proc.) pkb polski (w mln zł) udział składki z gwarancji w pkb (w promilach) 2000 148,782 109,43 744 378 0,200 2001 136,476 91,73 779 564 0,175 2002 114,537 83,92 808 578 0,142 2003 112,704 98,40 843 156 0,134 2004 120,603 107,01 924 538 0,130 2005 136,116 112,87 983 392 0,138 2006 150,245 110,38 1 060 031 0,142 2007 187,017 137,40 1 176 737 0,159 2008 214,973 114,95 1 275 432 0,169 2009 277,301 129,40 1 343 657 0,206 2010 317,968 114,67 1 415 385 0,225 2011 302,842 95,24 1 524 679 0,199 ź r ó d ł o : opracowanie własne na podstawie: nowak 2011 oraz dane ze strony www.knf.gov.pl i www.stat.gov.pl. na lata 2012–2013 ubezpieczyciele również nie przewidują poprawy wyników z działalności gwarancyjnej. według wstępnych danych, w 2012 roku firmy ubezpieczeniowe w polsce poniosły na tej linii biznesowej straty (co w ostatnich latach w ogóle się nie zdarzało), wypłacając z tytułu gwarancji kwotę pięciokrotnie wyższą niż w 2011 roku, tj. 422,9 mln zł, z czego 63 mln zł w pierwszym, a blisko 360 mln zł w drugim półroczu (glapiak 2013). mimo że scenariusz pesymistyczny przewidywał stratę ponad dwukrotnie większą – szacowano bowiem, że kryzys może kosztować towarzystwa nawet 1 mld zł (gawrychowski 2012), to i tak w efekcie większość ubezpieczycieli znacząco ograniczyła udzielanie gwarancji, lub nawet zrezygnowała z tego zupełnie. spektakularne bankructwa oraz problemy finansowe firm budowlanych czy turystycznych spowodowały, że ubezpieczyciele kontynuują zaostrzoną politykę sprzedaży gwarancji i dokładniejsze badanie sytuacji finansowej firm również w roku 2013 (glapiak 2013), co znajdzie odzwierciedlenie w poziomie składki przypisanej brutto i udziale gwarancji w pkb. anna jańska98 4. ryzyko gwaranta gwarancje są dla firm ubezpieczeniowych specyficznym produktem m.in. ze względu na źródła ryzyka. w przypadku gwarancji ubezpieczeniowych mamy do czynienia z jednostkową oceną ryzyka (wierzbicka 2007: 115), gdyż nie jest możliwe statystyczne oszacowanie prawdopodobieństwa wystąpienia szkody. do elementów wpływających na poziom ryzyka związanego z działalnością gwarancyjną zalicza się (kukiełka, poniewierka 2003: 87–90): ■ znaczną f luktuację poziomów szkodowości: gwarancje ubezpieczeniowe charakteryzują się bardzo wysoką zależnością wyników technicznych od zmian koniunktury gospodarczej. w czasie wzrostu gospodarczego generują wysoki poziom przypisu składki przy niezwykle niskim poziomie szkodowości, w fazie kryzysu zaś można odnotować nawet kilkusetprocentowe wskaźniki szkodowości. na polskim rynku w 2012 roku oszacowano, że kryzys w samej branży budowlanej mógł kosztować firmy ubezpieczeniowe nawet 1 mld zł. ubezpieczyciele zabezpieczają bowiem kontrakty warte łącznie od 25 do 30 mld zł, co przekracza wartość całego rynku majątkowego. teoretyczne uruchomienie 10% udzielonych gwarancji mogłoby poważnie wpłynąć na wyniki finansowe towarzystw ubezpieczeniowych (www.money.pl); ■ brak (lub bardzo niewielki poziom) wpływu na zmiany poziomu ryzyka w okresie gwarantowania: nawet jeśli ubezpieczyciel jest informowany o negatywnych zjawiskach u zobowiązanego, ma niewielkie możliwości reakcji na zmiany w kształcie ryzyka i nie może w żaden sposób zmniejszyć swojej odpowiedzialności z tytuły udzielonych gwarancji; ■ długi okres gwarantowania: im dłuższy okres gwarancji, tym bardziej niepewna staje się prognoza dotycząca przyszłej sytuacji zobowiązanego. w przypadku wieloletnich terminów odpowiedzialności mogą zajść również istotne zmiany o charakterze makroekonomicznym (ryzyko polityczne itp.); ■ duża rygorystyczność zobowiązania gwaranta: większość funkcjonujących na rynku gwarancji ma charakter nieodwołalny i bezwarunkowy, w związku z czym w przypadku zaistnienia szkody możliwości wpływu gwaranta na zaistniałą sytuację są niewielkie. ubezpieczyciel nie ma bowiem wpływu na fakt niewykonania zobowiązania przez zleceniodawcę gwarancji; ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji… 99 ■ jednostkowe występowanie szkód i dominacja szkód w maksymalnej wysokości: relacja ilości szkód do ilości udzielonych gwarancji jest relatywnie niewielka w porównaniu do innych ubezpieczeń majątkowych. jednak te jednostkowe szkody są zwykle wezwaniami do maksymalnej sumy gwarancyjnej lub bardzo jej bliskiej, przy czym najwięcej wypłat odnotowuje się pod koniec okresu gwarantowania; ■ aspekty dodatkowe – inne niż wynik oceny ryzyka: często między stronami umowy o udzielenie gwarancji dochodzi do pewnego rodzaju szantażu. stali klienci, lokujący w danym towarzystwie cały portfel ubezpieczeń, grożą zakończeniem współpracy, jeśli nie uzyskają danej gwarancji. z kolei ubezpieczyciele, dążąc do zwiększania przypisu składki, mogą uzależniać wydanie gwarancji na daną inwestycję od zawarcia dodatkowych ubezpieczeń z nią związanych (cross-selling np. w ramach gwarancji i ubezpieczeń ryzyk budowy czy też odpowiedzialności cywilnej). tego rodzaju praktyki mogą znacznie pogorszyć wyniki działalności gwarancyjnej; decyzja o przyjęciu lub odrzuceniu ryzyka powinna być dokonywana w sposób obiektywny i niezależny; ■ inne: hazard motywacyjny, ryzyko nadużycia: w przypadku kontraktów zabezpieczonych gwarancjami (a nie np. gotówką) może dochodzić do nieetycznych zachowań zarówno ze strony zobowiązanego, jak i beneficjenta gwarancji. ze zjawiskiem hazardu motywacyjnego zetkniemy się w sytuacji, gdy beneficjent przestanie starannie dobierać kontrahentów, wychodząc z założenia, że ryzyko i tak jest zabezpieczone gwarancją. nie będzie wtedy również szedł na ustępstwa i kompromisy w sytuacjach spornych, np. nie wydłuży terminu wykonania zadania. zobowiązany z kolei może zacząć traktować gwarancję jaką formę nieoprocentowanego kredytu kupieckiego – w przypadku gwarancji handlowych. jednak tego rodzaju praktyki mogą szybko uniemożliwić uzyskanie kolejnych zabezpieczeń. ryzyko nadużycia występuje z kolei po stronie beneficjenta w sytuacjach sporu z zobowiązanym. w przypadku gwarancji bezwarunkowch beneficjenci grożą uruchomieniem gwarancji, jeśli zobowiązany nie spełni ich postulatów. 5. ocena ryzyka związanego z udzieleniem gwarancji proces oceny ryzyka związanego z udzieleniem gwarancji polega w głównej mierze na zbadaniu aktualnej zdolności klienta do regulowania zobowiązań anna jańska100 oraz prognozowaniu tej zdolności w obranym okresie gwarantowania. ocenie podlega również potencjał i przygotowanie zobowiązanego do zrealizowania zadania określonego w umowie podstawowej oraz wartość likwidacyjna przedsiębiorstwa z uwzględnieniem możliwości windykacyjnych. badaniu podlegają ponadto przyjmowane zabezpieczenia roszczeń zwrotnych (holly 2004: 95–97), przez co cały proces oceny ryzka może przypominać badanie zdolności kredytowej przedsiębiorstwa. gwarancji powinno udzielać się zgodnie z zasadą „zerowego ryzyka”, czyli wtedy i tylko wtedy, gdy po przeprowadzonej ocenie ryzyka analityk jest przekonany, że nie nastąpi wypłata na żądanie beneficjenta (kukiełka, poniewierka 2003: 183). źródłem informacji dla gwaranta są wniosek o udzielenie gwarancji oraz liczne, aktualne załączniki do wniosku: 1. dokumenty związane z rozpoczęciem działalności: – dokumenty rejestrowe: np. aktualny krs lub ceidg, – decyzja o nadaniu numeru nip, regon, – aktualny statut spółki lub aktualna umowa spółki; 2. zaświadczenia i opinie: – zaświadczenie o braku zaległości w zus, – zaświadczenie o braku zaległości w us, – opinie wszystkich banków, z jakimi zobowiązany współpracuje; 3. dokumenty finansowe (w zależności od formy prowadzenia księgowości, jeśli był obowiązek sporządzenia): – bilanse oraz rachunki zysków i strat, rachunek przepływów, sprawozdanie biegłego rewidenta, informacja dodatkowa do bilansu za ostatni rok obrachunkowy, zestawienie zmian w kapitale własnym, – deklaracje podatkowe osób fizycznych prowadzących działalność gospodarczą, – sprawozdanie o przychodach, kosztach i wyniku finansowym oraz o nakładach na środki trwałe, – f-01 lub deklaracje na miesięczną zaliczkę na podatek dochodowy od osób fizycznych, – oświadczenie majątkowe dla osób fizycznych, spółek cywilnych, spółek jawnych; 4. dokumenty dotyczące przedmiotu gwarancji: – specyfikacja istotnych warunków zamówienia – dla gwarancji zapłaty wadium, ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji… 101 – umowa – dla gwarancji należytego wykonania kontraktu, właściwego usunięcia wad i usterek, zwrotu zaliczki, – protokół odbioru stwierdzający bezusterkowy odbiór robót – dla gwarancji właściwego usunięcia wad lub usterek; 5. posiadane referencje; 6. inne dokumenty (np. dla gwarancji zabezpieczających kontrakty współfinansowane przez unię europejską będzie to dokumentacja projektowa, wnioski o finansowanie, harmonogramy itp.). ocena ryzyka na podstawie powyższej dokumentacji przebiega dwutorowo: z jednej strony badane jest ryzyko zobowiązanego, z drugiej zaś – treść umowy podstawowej. jednocześnie sprawdza się, czy dany zobowiązany jest w stanie podołać danemu kontraktowi: zarówno w sensie zdolności finansowych, jak i potencjału technicznego, intelektualnego oraz dotychczasowego doświadczenia w realizacji tego rodzaju zadań. schemat 2 przedstawia ocenę ryzyka dla ubezpieczeniowej gwarancji kontraktowej. schemat 2. ocena ryzyka dla ubezpieczeniowej gwarancji kontraktowej źródłem informacji dla gwaranta są wniosek o udzielenie gwarancji oraz liczne, aktualne załączniki do wniosku: 1. dokumenty związane z rozpoczęciem działalności: – dokumenty rejestrowe: np. aktualny krs lub ceidg, – decyzja o nadaniu numeru nip, regon, – aktualny statut spółki lub aktualna umowa spółki; 2. zaświadczenia i opinie: – zaświadczenie o braku zaległości w zus, – zaświadczenie o braku zaległości w us, – opinie wszystkich banków, z jakimi zobowiązany współpracuje; 3. dokumenty finansowe (w zależności od formy prowadzenia księgowości, jeśli był obowiązek sporządzenia): – bilanse oraz rachunki zysków i strat, rachunek przepływów, sprawozdanie biegłego rewidenta, informacja dodatkowa do bilansu za ostatni rok obrachunkowy, zestawienie zmian w kapitale własnym, – deklaracje podatkowe osób fizycznych prowadzących działalność gospodarczą, – sprawozdanie o przychodach, kosztach i wyniku finansowym oraz o nakładach na środki trwałe, – f-01 lub deklaracje na miesięczną zaliczkę na podatek dochodowy od osób fizycznych, – oświadczenie majątkowe dla osób fizycznych, spółek cywilnych, spółek jawnych; 4. dokumenty dotyczące przedmiotu gwarancji: – specyfikacja istotnych warunków zamówienia – dla gwarancji zapłaty wadium, – umowa – dla gwarancji należytego wykonania kontraktu, właściwego usunięcia wad i usterek, zwrotu zaliczki, – protokół odbioru stwierdzający bezusterkowy odbiór robót – dla gwarancji właściwego usunięcia wad lub usterek; 5. posiadane referencje; 6. inne dokumenty (np. dla gwarancji zabezpieczających kontrakty współfinansowane przez unię europejską będzie to dokumentacja projektowa, wnioski o finansowanie, harmonogramy itp.). ocena ryzyka na podstawie powyższej dokumentacji przebiega dwutorowo: z jednej strony badane jest ryzyko zobowiązanego, z drugiej zaś – treść umowy podstawowej. jednocześnie sprawdza się, czy dany zobowiązany jest w stanie podołać danemu kontraktowi: zarówno w sensie zdolności finansowych, jak i potencjału technicznego, intelektualnego oraz dotychczasowego doświadczenia w realizacji tego rodzaju zadań. schemat 2 przedstawia ocenę ryzyka dla ubezpieczeniowej gwarancji kontraktowej. schemat 2. ocena ryzyka dla ubezpieczeniowej gwarancji kontraktowej ryzyko gwarancji ryzyko zobowiązanego ryzyko kontraktu źródło: opracowanie własne. ocenę ryzyka zobowiązanego rozpoczyna weryfikacja formalna dokumentów oraz przegląd podstawowych danych w nich zawartych. sprawdzeniu podlega m.in. fakt, jak długo przedsiębiorstwo działa na rynku, czy nie jest w stanie upadłości, czy przedsiębiorca nie zawiesił na dany moment działalności gospodarczej. ocenia się ponadto, czy firma na bieżąco reguluje swoje zobowiązania wobec zakładu ubezpieczeń społecznych oraz urzędu skarbowego i jak przebiega współpraca z bankami. zaległości podatkowe, zaległości wobec zus czy też opóźnienia w spłacie kredytu są zwykle pierwszymi sygnałami, że firma ma problemy z płynnością i zachodzą w niej niekorzystne zjawiska. pierwsza faza oceny ryzyka jest standaryzowana i w każdej firmie ubezpieczeniowej wygląda bardzo podobnie. kolejna faza oceny ryzyka zobowiązanego polega na przeprowadzeniu analizy finansowej, która jest głównym etapem oceny i obejmuje (holly 2004: 97): analizę pionową i poziomą sprawozdań finansowych, analizę wskaźnikową oraz analizę porównawczą na podstawie przedłożonych przez zoź r ó d ł o : opracowanie własne. ocenę ryzyka zobowiązanego rozpoczyna weryfikacja formalna dokumentów oraz przegląd podstawowych danych w nich zawartych. sprawdzeniu podlega m.in. fakt, jak długo przedsiębiorstwo działa na rynku, czy nie jest w stanie upadłości, czy przedsiębiorca nie zawiesił na dany moment działalności gospodarczej. ocenia się ponadto, czy firma na bieżąco reguluje swoje zobowiązania wobec zakładu ubezpieczeń społecznych oraz urzędu skarbowego i jak przebiega współpraca z bankami. zaległości podatkowe, zaległości wobec zus czy też opóźnienia w spłacie kredytu są zwykle pierwszymi sygnałami, że firma ma problemy z płynnością i zachodzą w niej niekorzystne zjawiska. pierwsza faza oceny ryzyka jest standaryzowana i w każdej firmie ubezpieczeniowej wygląda bardzo podobnie. kolejna faza oceny ryzyka zobowiązanego polega na przeprowadzeniu analizy finansowej, która jest głównym etapem oceny i obejmuje (holly 2004: 97): analizę pionową i poziomą sprawozdań finansowych, analizę wskaźnikową anna jańska102 oraz analizę porównawczą na podstawie przedłożonych przez zobowiązanego sprawozdań finansowych oraz informacji uzupełniających (oświadczeń, wyjaśnień dodatkowych itp.). analizie podlegają ponadto zabezpieczenia roszczeń regresowych klienta – szacowana jest ich wartość aktualna i przyszła (w trakcie okresu gwarancyjnego), płynność, obciążenia na rzecz innych podmiotów. w przypadku stałych klientów, np. korzystających z gwarancji w ramach umów generalnych z limitem, niezbędne jest również sprawdzenie poziomu zaangażowania w czynne gwarancje oraz monitorowanie zabezpieczeń ustanowionych dla danego limitu. ryzyko kontraktu ocenia się na wstępie przez pryzmat polityki sprzedażowej gwaranta. tak jak w przypadku innych ubezpieczeń majątkowych, ubezpieczyciele opracowują „czarne listy” tematów zakazanych i z założenia nie obejmują ich ochroną. obostrzenia te mogą dotyczyć wybranych branż (np. budowa dróg), okresów odpowiedzialności (np. gwarancje kilkunastoczy kilkudziesięcioletnie), sum gwarancyjnych (z uwagi na kwestie reasekuracyjne), rodzajów umów czy też treści gwarancji. kluczowym elementem oceny ryzyka kontraktu jest zbadanie treści dokumentu źródłowego, z którego wynika potrzeba wystawienia gwarancji. są to: ■ specyfikacja istotnych warunków zamówienia – dla gwarancji zapłaty wadium, ■ umowa – dla gwarancji należytego wykonania kontraktu, właściwego usunięcia wad i usterek, zwrotu zaliczki, ■ protokół stwierdzający bezusterkowy odbiór robót – dla gwarancji właściwego usunięcia wad lub usterek. wynik analizy ma odpowiedzieć na dwa podstawowe pytania: na czym polega objęte gwarancją zobowiązanie i w jakich sytuacjach beneficjent skieruje żądanie zapłaty (kukiełka, poniewierka 2003: 185). treść umowy podstawowej lub siwz determinuje ponadto podstawowe parametry gwarancji: sumę gwarancyjną (np. 5% wartości wynagrodzenia), okres odpowiedzialności (np. 2 lata od daty podpisania umowy), kluczowe fragmenty treści gwarancji (np. „nieodwołalna”, „bezwarunkowa”, „płatna na pierwsze pisemne żądanie”, „płatna w terminie … dni od daty otrzymania żądania wypłaty”) bądź gotowy wzór wymaganego zabezpieczenia (stanowiący załącznik do umowy). niezwykle istotnym elementem oceny ryzyka jest zbadanie zdolności zobowiązanego do wykonania danego kontraktu. podstawą tej analizy jest zbadanie zgodności kontraktu z dotychczasowym profilem działalności zobowiązanego (kukiełka, poniewierka 2003: 189): ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji… 103 ■ w sensie przedmiotowym: „czy firma realizowała kontrakty o danym charakterze”, ■ w sensie ilościowym: „czy firma realizowała podobne kontrakty o zbliżonej wielkości/wartości”, ■ w sensie wynikowym: „jak oceniono realizację powyższych kontraktów”. badaniu podlegają na tym etapie składniki materialne (aktywa, leasing), niematerialne (załoga) oraz referencje zobowiązanego. po przeanalizowaniu wszystkich wyżej wymienionych czynników dochodzi do kluczowego momentu, tj. podjęcia przez gwaranta decyzji o przyjęciu lub odrzuceniu ryzyka. z uwagi na specyficzny charakter ubezpieczeń grupy 15., a szczególnie ich nieodwołalny i bezwarunkowy (w większości przypadków) charakter, ubezpieczyciel ma nikły wpływ na ograniczenie ryzyka po udzieleniu danej gwarancji. nie ma też możliwości modelowania ryzyka, jak przy innych ubezpieczeniach: przez kształtowanie ogólnych warunków ubezpieczenia, wprowadzenie franszyz czy dołączanie dodatkowych klauzul. w przypadku wystąpienia szkód i wypłat jedynym sposobem na ratowanie wyników działalności gwarancyjnej staje się maksymalnie sprawne i szybkie wszczęcie oraz przeprowadzenie procedur związanych z regresem. stąd istotne jest prawidłowe ustanowienie adekwatnych do danego ryzyka zabezpieczeń roszczeń zwrotnych oraz wyjątkowo wnikliwa ocena ryzyka przed udzieleniem danej gwarancji. firmy prowadzące działalność gwarancyjną obierają różnego rodzaju strategie związane z tą linią biznesową. niektóre, choć formalnie mają możliwość sprzedaży ubezpieczeń grupy 15., w praktyce tego w ogóle nie robią, np. na koniec 2009 roku dwudziestu sześciu z trzydziestu czterech ubezpieczycieli działających w dziale ii posiadało zezwolenie knf na działalność w ramach grupy 15., a dwudziestu trzech z nich tę działalność rzeczywiście prowadziło (nowak 2011: 101– 102). ponadto większość ubezpieczycieli specjalizuje się w wybranych rodzajach gwarancji – np. kontraktowych czy też turystycznych, i na ich podstawie rozbudowuje swój portfel oraz know-how. bez względu na skalę prowadzenia działalności gwarancyjnej ubezpieczyciele podchodzą niezwykle sumiennie do analizy ryzyka związanego z działalnością gwarancyjną – wszak jedna poważna szkoda jest w stanie zachwiać rocznym wynikiem finansowym całego towarzystwa ubezpieczeń. anna jańska104  zakończenie ocena ryzyka w procesie udzielania ubezpieczeniowych gwarancji kontraktowych różni się istotnie od analogicznych procesów opracowanych dla pozostałych ubezpieczeń majątkowych. procedury udzielania gwarancji determinuje specyficzny charakter tych produktów ubezpieczeniowych: nie jest możliwe statystyczne oszacowanie prawdopodobieństwa wystąpienia szkody, a każdorazowe udzielenie gwarancji (nawet dla stałego klienta) musi być poprzedzone precyzyjną analizą ryzyka. ocenie podlega ryzyko zobowiązanego, ryzyko kontraktu oraz relacja między potencjałem intelektualnym i materialnym wykonawcy a wymaganiami określonymi w umowie podstawowej. ubezpieczeniowe gwarancje kontraktowe mogą zabezpieczać wszystkie etapy procesu inwestycyjnego: od gwarancji zapłaty wadium, przez gwarancje należytego wykonania kontraktu, zwrotu zaliczki, aż po gwarancję właściwego usunięcia wad i usterek. umożliwia to zobowiązanym zachowanie wyższej płynności i podniesienie wiarygodności w oczach kontrahentów. ze względu na wysoką zależność wyników działalności gwarancyjnej od fazy cyklu koniunkturalnego ubezpieczyciele muszą nieustannie modyfikować i doskonalić procedury oceny ryzyka. gwaranci są zmuszeni zachowywać wysoką ostrożność nie tylko w fazie spowolnienia i recesji, ale także w czasie ożywienia i wzrostu, z uwagi na wieloletnie okresy odpowiedzialności z tytułu gwarancji.  literatura gawrychowski m. 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(2012), http:// www.money.pl/gospodarka/wiadomosci/artykul/towarzystwa;ubezpieczeniowe; zaostrza;zasady;udzielania;gwarancji,89,0,1134937.html (dostęp: 1.08.2012). ustawa z dnia 22 maja 2003 r. o działalności ubezpieczeniowej, dz.u. z 2003 r., nr 124, poz. 1151. ustawa z dnia 23 kwietnia 1964 r. kodeks cywilny, dz.u. z 1964 r., nr 16, poz. 93. ustawa z dnia 29 sierpnia 1997 r. prawo bankowe, dz.u. z 1997 r., nr 140, poz. 939. wierzbicka e. (2007), ubezpieczenia finansowe w działalności przedsiębiorstwa, rozprawy ubezpieczeniowe, z. 3. for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors90 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 91 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the jour nal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions #authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors92 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. the detailed ethical principles are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https:// publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors84 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 85 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the jour nal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions #authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors86 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. the detailed ethical principles are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https://publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: february 29, 2016; date of acceptance: may 10, 2016. * contact information: bozena.ryszawska@ue.wroc.pl., deparament of public and international finance, wroclaw university of economics, komandorska 118/120, 53- 345 wroclaw, poland, phone: +48713680646. ryszawska b. (2016). sustainability transition needs sustainable finance. copernican journal of finance & accounting, 5(1), 185–194. http://dx.doi.org/10.12775/cjfa.2016.011 bożena ryszawska* wroclaw university of economics sustainability transition needs sustainable finance keywords: sustainability transition, sustainable finance, climate finance, green finance. j e l classification: q01, q54, q56, g23. abstract: transition is a term used to describe conversion (evolution) from the existing model of economy and finance towards one based on increased social and environmental responsibility. the purpose of this study is to emphasise the role of sustainable finance in the sustainability transition process. the main thesis can be expressed as follows: the role of finance is changing from the dominant view rooted in neoclassical economic theory (to maximize profits, and shareholder wealth) towards one supporting sustainable development, green economy, low carbon economy also adaptation and mitigation of climate change. the article uses the multilevel perspective created by f.w. geels effective in the analysis of the sustainability transition. results of analysis: there is evidence that the old regime of finance destabilizes. finances are slowly responding to new demand in sustainable economy to align with it.  introduction sustainability transition in conventional reception is associated with the process of multi-level transformation of the economic and socio-technological system intended to increase its environmental sustainability and social fairness. bożena ryszawska186 this particular concept is typically evoked in the context of transition to green economy of low emission and resource efficiency, based on clean technologies and other solutions generally referred to as eco-innovation. sustainability transition inf luence profoundly financial sector. the present problems, both environmental (such as climatic changes, the loss of bio-diversity and depletion of natural resources) and social (mostly associated with steep inequalities in income distribution), present an enormous challenge to economic development. those problems can only be faced by means of deep structural changes to the adopted production and consumption patterns. changes of this scale can only be effected through concerted effort of various economic actors: companies, industry sectors, decision-makers, political powers, consumer groups, active civil societies, engineers, and scientists. in effect, the postulated transition should be interpreted as a complex and prolonged process involving a multitude of areas and actors (geels 2011). the purpose of this study is to emphasise the role of sustainable finance in the sustainability transition process. the main thesis can be expressed as follows: the role of finance is changing from the dominant view rooted in neoclassical economic theory (to maximize profits, and shareholder wealth) towards one supporting sustainable development, green economy, low carbon economy also adaptation and mitigation of climate change. we can call it a silent revolution in finance. the research methodology and the course of the research process the article uses the multilevel perspective created by f.w. geels effective in the analysis of the sustainability transition. the first section of this paper presents the most popular approaches to the sustainability transition at hand, as reported in professional literature. section two presents characteristics of the various actors involved in the anticipated transformation of the economy. the third section discusses the emerging financial initiatives supporting sustainability transition and autor`s view on sustainable financial system. interpretations of the sustainability transition concept the inf lux of crisis symptoms and problems in the economic, environmental, social and political spheres has gained pace with the outburst of the latest global financial crisis. the most profound effect was the acceleration of fundamen sustainability transition needs sustainable finance 187 tal systemic changes which – by their strongly voiced opposition to the existing system resulting in rapid generation of aggravated imbalance – naturally tends towards the sustainability transition (loorbach i lijnis huffenreuter 2013). the approach to understand sustainability transition is based on the assumption that the transformation is not a linear process but a joint effect of occurrences observed on three distinct levels: in niches – as areas associated with radical innovations; in the dominant economic, technological and social system (the existing patterns of production, consumption, management, and legislation – the socio-technical regime); in the external economic, social and technological environment (demographic trends, political ideologies, financial crises, social values, and macroeconomic principles – the socio-technical landscape). the sustainability transition is an end result of all interactions that occur between processes on each of the above levels. in this view, niches are the environment involved in the initiation of changes with potential to accelerate changes in the dominant system, while processes observed in the external surrounding exert pressure upon the system. destabilisation of the dominant system, in turn, forms windows of opportunity for further innovations generated at niche level (geels 2013). sustainable finance, green finance, climate finance support sustainability transition recent transformation of financial sectors is adopting itself to the new trend of greening finance. l. dziawgo confirms it: financial market has been involved in supporting proecological transformation of the society and economy and, at the same time, it has been evolving slightly towards “greening” financial market. (dziawgo 2014). the process is powerful and fast. driving force of change is a renewable energy sector. a number of green markets have emerged as a result of increased public and private investments. they include: carbon finance, green stimulus funds, microfinance, green bonds, international and national climate funds, green infrastructure, real estate funds, socially responsible equity funds. sustainability transition is a multilevel process which means reaching goals of sustainable development, transforming economy towards green, low carbon, resource efficient and to combat climate change. this process is supported by sustainable finance, green finance and climate finance (table 1). bożena ryszawska188 table 1. sustainability transformation and finance goals finance sustainable financial system sustainable development sustainable finance green economy, green growth, low carbon, resource efficient economy green finance adaptation and mitigation of climate change climate finance s o u r c e : author`s own elaboration. sustainable finance were defined as finance supporting sustainable development in three combined dimensions: economic, environmental and social. it were defined after the first earth summit in rio in 1992 by united nation environmental program. centre for responsible business says that: sustainable finance is the practice of creating economic and social value through financial models, products and markets that are sustainable over time (centre for responsible business 2016). simply sustainable finance can be referred as any of the financial institution’s practices supporting and facilitating sustainable development (unepfi 2015). the concept of green finance is not commonly defined. generally it supports green growth and transition to green economy and reduces negative environmental outcomes. green finance means investment in renewable energy, reduction of emission in industry, sustainable transport, recycling, organic agriculture, waste management, water management, eco-innovation, clean technology by public and private actors. climate finance is a new issue in an international debate. the aim of climate finance is to support adaptation to climate change and mitigation of climate change. it mean also financing a shift towards low emission and climateresilient development (figure 1). climate finance is a critical element of global climate policy. effective mitigation of climate change will depend on a complex mix of public funds, private investment through carbon markets, and sophisticated national and global regulation, forest and energy policy, international development funding, international trade law, and coordinated tax policy (stewart, kingsbury, rudyk 2009). sustainability transition needs sustainable finance 189 figure 1. aligning the financial system with sustainable development source: (unep, aligning the financial system with sustainable development. the coming financial climate, the inquiry`s 4th progress report, united nations environment programme, 2015b) p.1 climate finance was a ‘hot topic’ in international climate negotiations in paris in 2015. an historic agreement to combat climate change and unleash actions and investment towards a low carbon, resilient and sustainable future was agreed by 195 nations.(green climate found , 2016). the universal agreement’s main aim is to keep a global temperature rise this century well below 2 degrees celsius above pre-industrial levels. to reach these ambitious and important goals, appropriate financial flows will be put in place. without adequate financial resources and investments countries can`t sufficiently reduce ghg emissions and respond to a changing climate. to sum up all presented kinds of finance facilitate sustainability transition and create a sustainable financial system, which creates, values, and transacts financial assets, in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy (unep, 2015c). a sustainable financial system plays three key roles to enable this transition a low-carbon, climate resilient economy: (unep,2015b) first, it effectively recognizes the costs and risks of high-carbon and resource intensive assets; second, it allocates sufficient attractively priced capital to low-carbon, resource efficient assets; third, it ensures that financial institutions and consumers are resilient to climate shocks, including natural disasters. the outcome of the research process and conclusions climate finance reduce carbon emissions and supports climate  adaptation and transition to climate resilience green finance  reduces negative environmental outcomes,  environmentally regenerative sustainable finance  reduces negative and improves social,  environmental and economic outcomes sustainable financial system  financial system aligned to the long term  needs of a dynamic inclusive, sustainable  economy s o u r c e : unep, aligning the financial system with sustainable development. the coming financial climate, the inquiry`s 4th progress report, united nations environment programme, 2015b, p. 1. climate finance was a ‘hot topic’ in international climate negotiations in paris in 2015. an historic agreement to combat climate change and unleash actions and investment towards a low carbon, resilient and sustainable future was agreed by 195 nations. (green climate found 2016). the universal agreement’s main aim is to keep a global temperature rise this century well below 2 degrees celsius above pre-industrial levels. to reach these ambitious and important goals, appropriate financial f lows will be put in place. without adequate financial resources and investments countries can`t sufficiently reduce ghg emissions and respond to a changing climate. to sum up all presented kinds of finance facilitate sustainability transition and create a sustainable financial system, which creates, values, and transacts financial assets, in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy (unep 2015c). a sustainable financial system plays three key roles to enable this transition a low-carbożena ryszawska190 bon, climate resilient economy: (unep,2015b) first, it effectively recognizes the costs and risks of high-carbon and resource intensive assets; second, it allocates sufficient attractively priced capital to low-carbon, resource efficient assets; third, it ensures that financial institutions and consumers are resilient to climate shocks, including natural disasters. the outcome of the research process and conclusions transition towards sustainable financial system is a part of general concept of sustainability. changes on the landscape level are obvious, starting from global financial crisis (questioning existing economic model and emphasizing negative role of financial markets), environmental and social crisis (damage of ecosystems, social inequalities), climate change, low carbon, green transformation of economy. this processes inf luence economic, political, social aspects of our lives. simultaneously with new tendencies in landscape, the financial system is changing (on the periphery of economy, creating innovation`s niches). the old regime of finance destabilizes. finances are slowly responding to new demand in sustainable economy to align with it (figure 2). figure 2. sustainable transformation in finance – multilevel perspective transition towards sustainable financial system is a part of general concept of sustainability. changes on the landscape level are obvious, starting from global financial crisis (questioning existing economic model and emphasizing negative role of financial markets), environmental and social crisis (damage of ecosystems, social inequalities), climate change, low carbon, green transformation of economy. this processes influence economic, political, social aspects of our lives. simultaneously with new tendencies in landscape, the financial system is changing (on the periphery of economy, creating innovation`s niches). the old regime of finance destabilizes. finances are slowly responding to new demand in sustainable economy to align with it (figure 2). figure 2. sustainable transformation in finance – multilevel perspective. source: author`s own elaboration. authors of positive finance write: transforming the economic model is extremely costly. we have to re-envision the allocation of capital in order to support social and technological innovations, to design and build sustainable infrastructure, and to finance the energy transition. reinvented, finance could become a powerful lever for setting these transformations in motion. (guez i zaouati, 2015). recently many new sustainable the external economic, social and technological environment (climate change, low carbon economy, energy transition – the landscape. the dominant economic, technological and social system finance as a source of profit and as a tool to maximize shareholder value, financing brown economy the neo-classic regime of finance sustainable finance innovations in finance supporting sustainability transition, investment in green and low carbon economy niches s o u r c e : author`s own elaboration. sustainability transition needs sustainable finance 191 authors of positive finance write: transforming the economic model is extremely costly. we have to re-envision the allocation of capital in order to support social and technological innovations, to design and build sustainable infrastructure, and to finance the energy transition. reinvented, finance could become a powerful lever for setting these transformations in motion. (guez, zaouati 2015). recently many new sustainable initiatives emerged in finance: green climate found and national climate founds. established as the investment vehicle for climate finance (usd 100 billion per year by 2020, from a variety of sources) (green climate fund 2015b); new energy finance – bloomberg (financial markets); national public finance – fiscal policy for green economy, budget`s expenditures supporting green sectors, taxes, decreasing subsidies for harmful production, green public procurement, investment in green public infrastructure, researches and development expenditures for eco innovations and green technology; carbon finance – world bank. renewable energy sector is driving force of sustainable economy therefore renewable energy finance is a agent of change in sustainable financial system. common decision on the international level (cop paris 2015) to reach 2˚c goal to slow down climate change, projects that public and private investment in clean energy reach 329 bln $ in 2015, 500 bln $/year additionaly by 2020 and by 2030 additionally 1 trilion $ a year after 2020 (new energy finance 2016) (ceres 2015). sustainability transition in finance is seen as the result of existing regimes which open up as a consequence of external shocks (climate change, energy transition, low carbon economy) and simultaneously bottom up innovations and new financial initiatives like climate finance, green finance, carbon finance. it is a structural change in financial system on many levels: international, public, corporate and household finance (table 2). table 2. finance for sustainability – examples of actions levels finance for sustainability international and global finance un finance, oecd finance, international development funding, world bank`s finance general framework, guidelines, climate finance, carbon finance financial markets carbon markets, shares of green companies, green bonds, global financial investment, new energy finance bożena ryszawska192 levels finance for sustainability public finance european union`s finance europe 2020, new financial perspective 2014-20, structural funds for green economy and agriculture, encouraging member states to invest in green sectors, adaptation to climate change policy national public finance national fiscal policy for green economy, budget`s expenditures supporting green sectors, taxes, decreasing subsidies for harmful production, green public procurement, investment in green public infrastructure, researches and development expenditures for eco innovations and green technology local public finance financing local green growth, green public procurement, domestic low carbon economy and climate finance private finance corporate finance voluntary green purchasing, green products and services, corporate sustainability household finance buying green products and services, investing in green founds, renewable energy investment s o u r c e : author`s own elaboration. the consequences of sustainability transition in finance is a huge challenge for science to address all important issues, to help the audience to understand new process, to design survey, to create new models and tools to explain structure and function of sustainable finance system. role of science is not only describe and analyze transformation but also predict future trends which has meaning for business, governments, financial markets, university education and society. to conclude we can use words written by mike townsend, in his newest book the quiet revolution: we are in a new era. the systems, rules and behaviours that led to business success in the 21st century are no longer working. since the onset of the longest and deepest financial crisis in living memory, capitalism is still suffering a crisis of liquidity, reliability and confidence. there is a huge question mark over whether our economic system will allow us to make the necessary transition to a more sustainable world or whether we are locked into a fatal collision course (townsend 2016). sustainability transition needs sustainable finance 193 a quiet revolution in finance is already underway. the role of science, governments, business and consumers is get aware about it and use this transformation for better future of the planet  references centre for responsible business. (2016). centre for responsible business, http://responsiblebusiness.haas.berkeley.edu/programs/sustainablefinance.html (accessed: 02.10.2016). ceres. (2015). the role of the electric sector in achieving the clean trillion: mapping the gap, http://www.ceres.org/issues/clean-trillion (accessed: 02.10.2016). dziawgo, l. (2014). greening financial market. copernican journal of finance & accounting, 3(2). http://dx.doi.org/10.12775/cjfa.2014.014. farla, j., markard j., raven r., & coenen, l. (2012). sustainability transitions in the making: a closer look at actors, strategies and resources. technol. forecast. soc. change, 79(6). http://dx.doi.org/10.1016/j.techfore.2012.02.001. geels, f. (2011). the multi-level perspective on sustainability transitions: responses to sev-en criticisms. environmental innovation and societal transitions(1). http:// dx.doi.org/10.1016/j.eist.2011.02.002. geels, f. (2013). the impact of the financial–economic crisis on sustainability transitions: financial investment governance and public discourse. environmental innovation and societal transitions no 6, 67-95. http://dx.doi.org/10.1016/j. eist.2012.11.004. green climate found . (2016). green climate found: imate.fund/-/unfccc-paris-agreementon-climate-change?inheritredirect=true&redirect=%2fhome (accessed: 02.10.2016). green climate fund. (2015b). investment opportunities for the green climate fund. elements issue 02 | november 2015,(2). guez, h., & zaouati, p. (2015). positive finance. a toolkit for responsible transformation, london: greenleaf publishing. loorbach, d., & lijnis huffenreuter, r. (2013). exploring the economic crisis from a transition management perspective. environmental innovation and societal transitions no 6, 35-46. http://dx.doi.org/10.1016/j.eist.2013.01.003. mcintosh, m. (2013). the necessary transition. the journey towards the sustainable enterprise economy. london: greenleaf publishing. magnuszewski, p., sodomkova, k., slob, a., muro, m., sendzimir, j., & pahl-wost, c. (2010). report on conceptual framework for science-policy barriers and bridges. retrieved 05 15, 2013, from policy and science inteactions, http://www.psiconnect. eu/ (accessed: 15.05.2016). new energy finance. (2016). new energy finance, http://about.bnef.com/ (accessed: 02.10.2016). oecd. (2011). towards green growth. oecd. bożena ryszawska194 røpke, i. (2013). sustainability transitions in the perspective of ecological macroeconomics. the 10th biennial conference of the european society for ecological economics. lille, france: european society for ecological economics. stewart, r., kingsbury, b., & rudyk, b. (2009). climate finance: regulatory and funding strategies for climate change and global development, new york: nyu press. townsend, m. (2016). the quiet revolution: towards a sustainable economy. london: greenleaf publishing . unep. (2015). aligning the financial system with sustainable development. the coming financial climate, the inquiry`s 4th progress report. unep. unep. (2015b). aligning the financial system with sustainable development. the coming financial climate, the inquiry`s 4th progress report, united nations environment programme, unep, http://www.unep.org (accessed: 02.10.2016). unep. (2015c). the financial system we need, inquiry: design of a sustainable financial system. geneva. unepfi. (2015). state of green finance in the uae uae green agenda 2015-2030 ,the first national survey on contributions of financial institutions to green economy, unep, http://www.unepfi.org/ (accessed: 02.10.2016). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 7 issue 4 2018 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2018 copyright by uniwersytet mikołaja kopernika toruń 2018 icv 2017: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 ahmed l.m. ahmed the social background of brexit ......................................................................................... 9 małgorzata cilak financial stability of local government units legal and economic approach ......... 31 tomasz dziawgo wealth management market in china. opportunities and challenges ..................... 47 julia kwiatkowska cross-selling and up-selling in a bank ............................................................................. 59 anna laskowska stock market indices as a measurement tool for profitability of corporate social responsibility activities ....................................................................................................... 71 eka lekashvili, lela mamaladze crypto currency – a new challenge for the economy of georgia ............................ 87 jarosław pawłowski the usefulness of financial reporting for financial instruments in the decision-making processes of individual investors .............................................................................. 99 tetyana slyozko, lyudmila kurilo, oleksandra mazina the unique opportunities of accounting to promote transparency of economic processes .......................................................................................................................... 115 for authors ......................................................................................................................... 127 for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from 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scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 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higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a pufor authors114 blication; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 2 date of submission: june 12, 2018; date of acceptance: september 25, 2018. * contact information: justyna.zabawa@ue.wroc.pl, department of banking, faculty of management, computer sciences and finance, wroclaw university of economics, ul. komandorska 118/120, 53-345 wroclaw, poland, phone: 71 36 80 355; orcid id: https://orcid.org/0000-0001-5303-5029. research and publication were financed by national science centre, poland, project number 2016/23/d/hs4/02841, “green banking versus economic efficiency of polish banking sector in the context of implementation of the directive ue 2014/95/ue”. zabawa, j. (2018). the significance of the gri (global reporting initiative) standard in reporting of environmental information. the analysis of polish banking sector in the face of regulatory changes. copernican journal of finance & accounting, 7(2), 111–125. http://dx.doi.org/10.12775/ cjfa.2018.012 justyna zabawa* wroclaw university of economics the significance of the gri (global reporting initiative) standard in reporting of environmental information the analysis of polish banking sector in the face of regulatory changes keywords: directive 2014/95/ue, bank, non-financial reporting, environmental responsibility, green banking. j e l classification: g21, q50, q56. abstract: one of the most notable effects generated in response to the recent spate of regulatory changes in the banking sector is the mounting interest in those elements of sectoral policy that focus on disclosure of non-financial information – a trend observed not only in poland, but also in the eu financial sector as a whole. this phenomenon may also be related to the 2014/95/ue directive. the main objective of this paper is to verify the thesis that the gri standard can be seen as the dominant standard for reporting non-financial (including environmental) information in polish banking organisations under the pending legal standards and regulations. in addition, the author justyna zabawa112 intends to fill the apparent gap in professional literature, as the subject of reporting non-financial information (in particular – environmental information) in the banking sector seems under-represented in modern research. the paper examines 20 largest banks in poland. the basic method used in the process of writing was a critical analysis of financial and non-financial-reports of analyzed commercial banks, and literature concerning non-financial reporting in banking sector. the structure of the article consists of six parts: introduction; the research methodology and the course of the research process; reporting of the social and environmental responsibility – literature review; gri as a main standard in reporting of non-financial information; the situation of polish banking sector in 2016, main findings and results and the last part: conclusions.  introduction in accordance with the pending regulations contained in the accounting act, banks are obliged to prepare and publish their financial disclosures in the following reports: balance sheet, profit and loss account, statement of cash f lows, and notes to the financial statement. the next logical step in the evolution of information reporting in business entities is to include disclosure of information in the form of business and managerial reports (waliszewski, 2017, p. 60). this type of report contains a managerial review of information not included in the financial segment. nowadays, banking stakeholders are more inclined to demand information of non-financial character, such as reports of company environmental impact and social responsibility. this type of information may be included as part of a standard corporate social responsibility (csr) statement, produced regularly by most of the modern banking institutions. one of the most universally adopted standards in this context is the gri (global reporting initiative) standard. the main objective of this paper is to verify the thesis that the gri standard can be seen as the dominant standard for reporting non-financial (including environmental) information in polish banking organisations under the pending legal standards and regulations. in addition, the author intends to fill the apparent gap in professional literature, as the subject of reporting non-financial information (in particular – environmental information) in the banking sector seems under-represented in modern research. the paper consists of six following parts: introduction; the research methodology and the course of the research process; reporting of the social and environmental responsibility – literature review; gri as a main standard in reporting of non-financial information; the situation of polish banking sector in 2016, main findings and results and in the end of the paper: conclusions. the significance of the gri… 113 the research methodology and the course of the research process the paper presents results of examinations conducted on a sample of 20 largest banks in poland (in terms of asset size) running their operations as public companies and active on the financial market at the end of 2016. the sample represents more than 90% of total asset volume held by the polish banking sector, and – at the time of the study – with total employment of 123.06 thousand, which constitutes nearly 90% of all personnel employed in polish commercial banks (raport o sytuacji banków w 2016 r., 2017). it is the reason, why these banks have a huge inf luence on polis modern economy. and research in this paper focus on these main polish commercial banks, and their non-financial reporting especially. the main objective of this paper is to verify the thesis that the gri standard can be seen as the dominant standard for reporting non-financial (including environmental) information in polish banking organisations under the pending legal standards and regulations, with focus on the novelisation of domestic regulations are required by the implementation of the 2014/95/ue directive (directive 2014/95/eu). the author decided to place emphasis on the gri standard as the most dominant approach in reporting of non-financial (and environmental) information in modern business. sustainability reporting according to gri is carried out by organizations and companies of all sizes, types and sectors. of the world's largest 250 corporation, 93% report on their sustainability performance, 82% of them use gri's standards (www1). the basic method used in the process of writing was a critical analysis of financial and non-financial-reports of analyzed commercial banks, and literature concerning non-financial reporting in banking sector. in the article, analysis of literature and, analysis of non-financial and financial data of banks as well, induction method and comparison method have been used. the study ends with conclusions. reporting of the social and environmental responsibility – literature review the recent rise of stakeholder demand for non-financial reporting is one of the most pronounced consequences of the growing emphasis on social and ecological aspects of business operation as such (stępień, 2015, p. 19). professional justyna zabawa114 literature provides a broad overview of problems related to disclosure of social and environmental information by business organisations (krasodomska, 2017; gabrusewicz, 2010; samelak, 2013; mazurczak, 2012; fijałkowska, 2013; peršić & halmi, 2016; haller, van staden & landis, 2016; haller, link & gross, 2017). however, certain gaps can be identified in the evaluation of non-financial reporting by large financial institutions, particularly those in the banking segment of the economy. publications in this area are fairly scarce, with notable few exceptions (ryszawska & zabawa, 2018; zabawa, nosowski & łosiewicz, 2017; murawski, 2016; kundid novokmet & rogošić, 2016; waliszewski, 2017; dziawgo, 2010). this paper represents another attempt at filling this apparent gap in subject research. it must be noted at this point that, for a csr report to serve its designated role, it must fulfil the following requirements (roszkowska, 2011, p. 146): ■ reliability and credibility – meeting the formal requirements of reporting, presentation of reliable and verifiable data, independent auditing of reports, ■ cohesiveness and comparability of measurement – the reported elements of the csr policy should be presented in a form that allows for cross-examination and comparison against other actors, ■ utility – information presented in csr reports should be useful for target recipients. in this context, it may also be of some value to address some of the most important arguments against the present approach to reporting of non-financial information by modern organisations, including those operating in the sector of finance. the most often voiced argument relates to the lack of formal and cohesive regulations in this segment of reporting to serve as basis for the formulation of a generally accepted standard (stępień, 2015). other authors also emphasise the multitude of co-existent and often contradictory regulations as the main reason for the apparent disparity of forms, content, and quality of csr reports produced by business entities. additionally, some institutions are wasting time and money creating nonfinancial reports that are not effective (leinaweaver, 2015). other institutions that label themselves as gri reporters do not behave in a responsible way concerning sustainability question, e.g. human rights environmental protection and social equity as well. the significance of the gri… 115 the above problems may be alleviated through the implementation of gri recommendations, particularly those contained in the most recent edition of the gri standards, to serve as guidelines for reporting of non-financial information in the banking sector. it may also be useful to point out the pending legal requirements that impose the duty of reporting the environmental and social aspects of operation on certain large enterprises and groups, including those in the financial segment of the economy. these laws come into force for polish institutions on the 1st of january 2017 and include public interest institutions, commercial banks among them. according to the directive text, the public interest institutions must disclose, in their reports or separate documents, important information concerning: environmental matters, social and hr matters, respecting human rights, counteracting corruption and bribery as well. transposition of the regulations contained in the above directive to the polish legal system took the form of an amendment to the text of the accounting act: art. 49b and art. 54 pkt. 2b (consolidated statements) (ustawa z 29 września 1994 r. o rachunkowości, ze zm.). according to art. 49b of the accounting act, disclosure of non-financial information applies as obligatory to those entities that satisfy the following requirements: employ over 500 employees on average over one year period, the sum of their assets is over 85 million pln or the sum of their income from selling goods and products exceeds 170 million pln. gri as a main standard in reporting of non-financial information currently the most popular guideline standards for social and environmental reporting were established by the global reporting initiative. it is an international non-profit organization with their newest standard being gri standards. gri guidelines consists of general rules of communicating the inf luence of business activities, and detailed indicators concerning specific parts of reports. this an independent international institution, which was based in amsterdam, the netherlands. gri operates in a lot of countries in europe, and it has got also branches in united states, brazil, china, colombia, india, and south africa as well. currently report according to standard gri are prepared in more than 100 countries. the international organization advises governments, market regulator and stock exchanges in their policy development to help create a more conducive environment for sustainability reporting (www1). justyna zabawa116 the vision of this institution is: “a thriving global community that lifts humanity and enhances the resources on which all life depends”. and its mission is: “to empower decisions that create social, environmental and economic benefits for everyone”. it should be also noted, that gri has identified four focus areas for the next years (in order to deliver on its mission) (www2): ■ create standards and guidance to advance sustainable development: provide the market with leadership on consistent sustainability disclosures, including engaging with stakeholders on emerging sustainability issues, ■ harmonize the sustainability landscape: make gri the central hub for sustainability reporting frameworks and initiatives and select collaboration and partnership opportunities that serve gri's vision and mission, ■ lead efficient and effective sustainability reporting: improve the quality of disclosures made using the gri standards, reducing reporting burden and exploring reporting processes that aid decision making, ■ drive effective use of sustainability information to improve performance: work with policy makers, stock exchanges, regulators and investors to drive transparency and enable effective reporting. in the coming five years, gri has the ambition to contribute to, and inf luence corporate practice and public policy on the following themes6:human rights, climate change, good governance and anti-corruption, smes, trade facilitation and sustainability, capital markets/market regulators and gender equality as well. the gri standard ensures comparability of the reported data, both in subsequent years in a given company, in the industry, and in a given geographical area (zabawa, nosowski & łosiewicz, 2017). it clearly defines the course and the principles of the process of reporting non-financial data, as well as their significance. sustainability reporting according to gri is carried out by organizations and companies of all sizes, types and sectors. of the world's largest 250 corporation, 93% report on their sustainability performance, 82% of them use gri's standards (www1). many sectors (e.g. financial sector) have unique sector-specific sustainability impacts that are not included in the gri standards. for that reason, gri developed guidance to report on these sector-specific issues, aiming to increase the number and quality of reports and to improve sustainability performance in the sectors covered. developed for the g3 and g3.1 guidelines as sector supplements, the sector guidance was re-organized into g4 sector disclosures for use the significance of the gri… 117 with the g4 guidelines. with the transition of g4 to gri standards the g4 sector disclosures remain valid and are recommended for use when reporting with the gri standards. the latest gri standards, which replace gri g4 in may 2018, were published on october 19, 2016. to this time both versions are valid. the situation of polish banking sector in 2016 like in other countries of the region of the central and easter europe, also in poland the banking sector continued to play a major role in the financial system, although the polish financial system can be regarded as one of the least banking-oriented in cee (report nbp, 2017). the reason for that his is the situation of the sector of collective investment undertakings, i.e. pension and investment funds and insurance companies, which is larger compared with other countries of the region. in poland, at the end of 2016, 61 commercial banks, including 27 branches of credit institutions, 558 cooperative banks and 2 affiliating banks carried on operations on the domestic market (table 1). table 1. the number of financial institutions in poland, 2009–2016 2009 2010 2011 2012 2013 2014 2015 2016 commercial banks as joint stock companies (branches of credit institutions) 46 (18) 46 (21) 45 (21) 43 (25) 39 (28) 36 (28) 36 (27) 34 (27) affiliating banks 3 3 2 2 2 2 2 2 cooperative banks 576 576 574 572 571 565 560 558 s o u r c e : based on: report nbp, financial system in poland in 2016, warsaw 2017. following a spate of changes and transformations in the polish banking sector – joining of two commercial banks, joining of two credit cooperatives, transformation of a commercial bank into a filial credit unit, dissolution of one credit institution and bankruptcy of one credit cooperative – the number of formally registered banking institutions went from 626 at the end of 2015 down to 621 at the end of 2016. the decline was observed both in the commercial segment (down to 36) and in credit cooperatives segment (down to 558), with the number of filial units of credit institutions remaining unchanged. according to report nbp at the end of 2016, assets of institutions comprising the polish financial sector stood at pln 2.34 trillion, i.e. they were 5.9% justyna zabawa118 higher than in 2015. the asset growth was primarily caused by a rise in the value of assets of commercial banks and open pension funds. the assets of whole polish banking sector amounted 1,706.4 billion pln. the main part of this amount are assets of commercial banks: 1,548.2 billion pln, that constitutes 91% of all assets pf banking sector in poland. in 2016, banks continued their strategy of development and effectiveness improvement through optimisation of employment and sales networks. this process was further enhanced by the effects of recent mergers and acquisitions and by the ongoing improvement of electronic banking. in effect, despite a steep increase of employment in one of the filial units of a large credit institution (stimulated by organisational changes in the structure of their parent grouping), employment in the banking sector has dropped by 2.1 thousand (uknf report, 2017). the twenty largest banks in poland, according to the assets at 2016, are presented in tab. 2. table 2 shows assets and employment of the largest banks in poland. analysis of this financial data results from the article 49b of the accounting act. table 2. the assets and employment in the largest bank in poland, 2016 bank assets (in mln pln) employment 1 powszechna kasa oszczędności bank polski s.a. 271 987.00 29 400 2 bank polska kasa opieki s.a. 170 988.85 15 882 3 bank zachodni wbk s.a. 131 417.99 11 733 4 mbank s.a. 128 215.27 6 313 5 ing bank śląski s.a. 113 529.40 7 669 6 bank bgż bnp paribas s.a. 70 381.93 7 545 7 bank millennium s.a. 68 394.60 5 497 8 bank gospodarstwa krajowego 67 258.18 1 335 9 getin noble bank s.a. 66 878.36 4 916 10 alior bank s.a. 61 211.85 10 245 11 raiffeisen bank polska s.a. 53 266.72 4 453 12 bank handlowy w warszawie s.a. 45 091.65 3 872 13 deutsche bank polska s.a. 39 653.82 2 012 14 bank bph s.a. 31 207.54 180 the significance of the gri… 119 bank assets (in mln pln) employment 15 idea bank s.a. 21 222.98 2 319 16 bank ochrony środowiska s.a. 20 602.57 1 476 17 credit agricole bank polska s.a. 20 561.13 4 995 18 bank polskiej spółdzielczości s.a. 20 038.45 1 041 19 sgb-bank s.a. 17 384.13 666 20 santander consumer bank s.a. 17 382.30 1 457 total 1 436 674.68 123 006 s o u r c e s : based on the financial reports of banks. the presented in tab. 2 banks constitute 93% assets of all commercial banks in poland. it is the reason, why these banks have a huge inf luence on polis modern economy. and research in this paper focus on these main polish commercial banks, and their non-financial reporting especially. according to the knf report, total employment in the polish banking sector at the end of 2016 was at 168.8 thousand, with 137.4 thousand employed in commercial banking (raport o sytuacji banków w 2016 r., 2017). employment in the analysed sample of 20 largest banks was at 123.06 thousand, representing nearly 90% of total employment in polish commercial banking. each of the analysed financial institutions (with the exception of bph) reported their employment to be in excess of 500 persons, with balance sheet total of more than pln 85 million. disclosure of balance sheet total may formally be substituted by net receipts from sales. in accordance with regulations of art. 49b of the accounting act and based on the fact that all the banks under examination exceeded the formal thresholds of both employment and balance sheet total by a large margin, they were formally required to include non-financial information (including information on environmental impact) as part of their annual disclosure obligations. main findings and results on the international financial market, a lot has been already done for protection of natural environment (dziawgo, 2014). these achievements of commercial institutions, including banks, should be really appreciated. the study intable 2. the assets and employment in the largest bank in poland, 2016 justyna zabawa120 volved examinations of the non-financial segments of annual reports disclosed by all the 20 banking institutions presented in tab. 2 for the year 2016. analyses were conducted from the viewpoint of the identified reporting standards (if any) as used for disclosing this type of information and from the viewpoint of methods employed in the presentation of non-financial data. table 3. presentation of environmental aspects in banks bank presentation of enviromental aspects 1 pko bp s.a. descriptive and quantitative analysis 2 bank pekao s.a. descriptive and quantitative analysis 3 bank zachodni wbk s.a. gri g4 4 mbank s.a. gri g4 5 ing bank śląski s.a. gri g4 6 bank bgz bnp paribas s.a. gri standards 7 bank millenium s.a. gri standards 8 bgk gri to 2009, since 2010 fundacja bgk im. j.k. steczkowskiego, descriptive analysis 9 getin noble bank s.a. descriptive analysis 10 alior bank s.a. descriptive analysis 11 raiffeisen bank polska s.a. descriptive analysis 12 bank handlowy w warszawie sa descriptive analysis, fundacja kroenenberga is responsible for activity in csr 13 deutsche bank polska s.a. gri g4 14 bank bph s.a. gri g4 only for 2013 (latest report in 2013, since then only descriptive analysis) 15 idea bank s.a. gri g4 since 2017 (first report in 2017) 16 bank ochrony środowiska sa descriptive and quantitative analysis 17 credit agricole bank polska s.a. descriptive and quantitative analysis 18 bank polskiej spółdzielczości s.a. descriptive analysis 19 sgb-bank s.a. descriptive analysis 20 santander consumer bank s.a. – s o u r c e s : own work based on non-financial reports of banks. the significance of the gri… 121 information presented in tab. 3 was collated on the basis of analyses of nonfinancial reports of all banks included in the study. four of the examined banking entities were found to adopt the gri g4 standard in their approach to disclosing of environmental information for the year 2016. only two institutions were found to have adopted the most recent edition of the gri standard, namely: bank bgz bnp paribas s.a. and bank millenium s.a. two of the institutions under examination, namely – bank gospodarstwa krajowego and bank handlowy s.a. – were found to have delegated their social responsibility duties to separate trust organisations created for the purpose. the remaining organisations did not employ any of the standards for the reporting of non-financial information; data regarding this particular aspect of their operation were presented in the form of purely descriptive analyses (6 banks) or as combinations of descriptive and quantitative elements (4 banks).  conclusions all the banks under examination within the context of this study were found to satisfy the requirements of art. 49b of the accounting act in the practical realisation of their reporting duties, including those segments of operation related to the protection of natural environment. their financial effects at the end of 2016 – volume of employment and balance sheet total – were found to be in excess of the thresholds defined in the act, and by a large margin. the only exception to the above was the bank bph s.a., with employment at the end of 2016 reported at 180 persons. this observation may be related to the recent merger between selected units of bank bph s.a. with alior bank s.a., a move which took effect in the fourth quarter of 2016. in line with the rulings provided in the accounting act, analyses of selected financial indices related to obligatory disclosures of non-financial information should include data for the current reporting year and the previous year. based on observations of reported financial results, the banks under examination shall retain their obligations as defined in art. 49 b of the act, as their respective financial results for the year 2017 will remain above the formal threshold values. bearing in mind that the year 2017 marks the onset of the formal obligation for public interest undertakings to report non-financial information, the banks under examination will be required to disclose this type of information. justyna zabawa122 analyses of non-financial reports (particularly: the environmental aspects of operation) submitted by the banks under study for the year 2016 (cf. tab. 3) give rise to the following conclusions: ■ the gri standard was employed in only 6 of the institutions under study; of these, only 4 entities were found to have adopted the gri g4 standard, namely: bank zachodni wbk s.a., mbank s.a., ing bank śląski s.a., and deutsche bank polska s.a.; and only 2 of those were found to have adopted the most recent edition of gri standard (bank bgz bnp paribas s.a. and bank millenium s.a.). this conclusion should be viewed in the context of the fact that the recommendations of the gri standard were only published in october 2016. the gri standard will replace the present gri g4 standard effective in may 2018; until then, both editions may be used interchangeably by organisations for the realisation of their reporting obligations. it seems that this coincidence of terms has had a significant impact on the formal content of reports produced for the year 2016, ■ six banks, which used gri standard, constitute only 38% assets of all 20 institutions and only 33% number of employees of all 20 financial institutions, ■ two other banks – bank gospodarstwa krajowego and bank bph s.a. reported to have used the gri standard of reporting in their past disclosures, but have decided to revert to the descriptive analyses; in addition, analyses and disclosures of social aspects of operation on behalf of those two banks were delegated to the authority of dedicated trust organisations (fundacja bgk im. j.k. steczkowskiego on behalf of the bgk, and fundacja kronenberga on behalf of bank handlowy w warszawie), ■ it should be noted with due emphasis that bank ochrony środowiska, despite being designated as the leading supporter of activities related to the protection of natural environment, has never adopted any type of standard for reporting of their environmental impact, although this type of activities represents the core of their business model. data for 2016 were presented in the form of detailed analyses of both descriptive and quantitative character, and submitted as part of their „raport ekologiczny” (the environmental report), ■ the thesis suggesting a dominant role of the gri standards in the reporting of non-financial (and environmental) information in the polish banking sector for the year 2016 was disproved, as only 6 banks out of the sample under study were found to have employed the gri recommen the significance of the gri… 123 dations, and also the low level in assets and the number of employees in this six banks; it may be assumed that their number will grow as a result of the recent changes in legislation, two largest polish banks – pko bp s.a. and bank pekao s.a. – representing nearly 30% of commerce banking (in terms of combined assets held) did not use any of the available standards for the reporting of social and environmental aspects of their operation; ■ purely descriptive analyses of social and environmental aspects (i.e. those provided without any reporting standard) were observed in 6 banks; in addition, 4 banks have decided to present these aspects as combinations of descriptive and quantitative analyses (including boś s.a.), ■ two large associate banks, namely: bank polskiej spółdzielczości s.a. and sgb-bank s.a., did not use any of the available standards for the reporting of non-financial information, which may appear as striking, as pro-social and pro-environmental policies are at the core of polish credit cooperative segment, ■ follow-up studies in the context under examination should involve larger time horizon and include all banking institutions operating as public companies; the author also intends to examine the real involvement of polish commercial banks (operating as public companies) in pro-environmental activities as a function of (or in relation to) their reported financial result.  acknowledgments the research has been possible to conduct thanks to the financial support of the national science centre, poland, project number 2016/23/d/hs4/02841, “green banking versus economic efficiency of polish banking sector in the context of implementation of the directive ue 2014/95/ue”.  references dziawgo, l. 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(the role of institutions and the financial market in the light of the goals and principles of sustainable development.) wrocław: wydawnictwo ue we wrocławiu. gabrusewicz, t. (2010). rachunkowość odpowiedzialności społecznej w kształtowaniu zasad nadzoru korporacyjnego. (accounting for social responsibility in creating the principles of corporate governance.) warszawa: c.h. beck. haller, a., link, m., & gross, t., (2017). the term ‘non-financial information’ – a semantic analysis of a key feature of current and future corporate reporting. accounting in europe, 14(3), 407–429. http://dx.doi.org/10.1080/17449480.2017.1374548. haller, a., van staden, c., & landis, c. (2016). value added as part of sustainability reporting: reporting on distribuational fairness or obfuscation? journal of business ethics, 1–19. http://dx.doi.org/10.1007/s10551-016-3338-9. krasodomska, j. (ed.) (2017). społeczna odpowiedzialność biznesu w rachunkowości. teoria i praktyka. 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(2016). corporate social responsibility in japanese banking sector. copernican journal of finance & accounting, 5(2), 149–161. http://dx.doi.org/10.12775/ cjfa.2016.020. peršić, m., & halmi, l. (2016). disclosing non-financial information in companies’ reports in croatia. copernican journal of finance & accounting, 5(2), 181–200. http:// dx.doi.org/10.12775/cjfa.2016.022. raport o sytuacji banków w 2016 r. (report on the situation of the banks in 2016) (2017). urząd komisji nadzoru finansowego. warszawa. report nbp (2017). financial system in poland in 2016. warsaw. roszkowska, p. (2011). rewolucja w raportowaniu biznesowym. interesariusze, konkurencyjność, społeczna odpowiedzialność. (the revolution in business reporting. stakeholders, competitiveness, social responsibility.) warszawa: difin. the significance of the gri… 125 ryszawska, b., & zabawa, j. (2018). the environmental responsibility of the world’s largest banks. economics and business, 32, 51–64. http://dx.doi.org/10.2478/eb2018-0004. samelak, j. (2013). zintegrowane sprawozdanie przedsiębiorstwa społecznie odpowiedzialnego. (integrated report of a socially responsible company.) poznań: wydawnictwo ue w poznaniu. stępień, k. (2015). od społecznej odpowiedzialności przedsiębiorstw do sprawozdawczości zintegrowanej. (from corporate social responsibility to integrated reporting). in j. krasodomska (ed.). społeczna odpowiedzialność biznesu w rachunkowości. teoria i praktyka. (corporate social responsibility in accounting. theory and practice.) warszawa: difin. ustawa z 29 września 1994 r. o rachunkowości (accounting act of 09.09.1994), dz. u. 1994 nr 121 poz. 591 ze zm. waliszewski, k. (2017). raportowanie społeczne w instytucjach finansowych. (social reporting in the financial institutions.) in k. waliszewski (ed.). społeczna odpowiedzialność instytucji finansowych. perspektywa banków, pośredników i doradców finansowych. (social responsibility of the financial institutions. the perspective of banks, financial agents and financial advisers.) warszawa: cedewu. zabawa, j., nosowski, a., & łosiewicz, e. (2017). bankowe raportowanie niefinansowe według standardu gri realizacja wymogów formalnych i potencjał informacyjny. (banking non-financial reporting according to the gri standard – realization of formal requirements and information potential.). marketing i rynek, 11(cd), 733–744. (www1) global reporting initiative – gri at a glance, http://www.globalreporting. org/information/news-and-press-center/press-resources/pages/default.aspx (accessed: 26.02.2018). (www2) global reporting initiative – about gri,http://www.globalreporting.org/information/about-gri/pages/default.aspx (accessed: 15.05.2018). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 15.12.2012; data zaakceptowania: 24.04.2013. * dane kontaktowe: diana.r.bozek@gmail.com, katedra prawa ubezpieczeń, wydział prawa i administracji, uniwersytet warszawski, ul. oboźna 6/8, 00-332 warszawa, tel. 606 420 835. diana renata bożek* uniwersytet warszawski obowiązkowe zawodowe ubezpieczenia odpowiedzialności cywilnej słowa kluczowe: deregulacja, odpowiedzialność cywilna, ubezpieczenie odpowiedzialności cywilnej, ustawa o ubezpieczeniach obowiązkowych, zawody regulowane. klasyfikacja jel: g22, g32. abstrakt: od kilkunastu lat obowiązkowe ubezpieczenie odpowiedzialności cywilnej staje się w polsce coraz bardziej popularne. ustawodawca zobowiązuje coraz większą liczbę zawodów do posiadania takiego ubezpieczenia. autorka chce odpowiedzieć na pytanie, czy taka sytuacja jest koniecznością wynikającą z kształtu dzisiejszego świata, czy może nieprawidłowym działaniem ustawodawcy. artykuł przedstawia krótką historię ubezpieczeń odpowiedzialności cywilnej, filozoficzne podstawy regulacji oraz zmiany w koncepcji odpowiedzialności cywilnej spowodowane przez ubezpieczenia. autorka odnosi się także do wpływu deregulacji dostępu do zawodów na ubezpieczenia odpowiedzialności cywilnej. obligatory third party liability insurance for professionals keywords: civil liability, deregulation, liability insurance, obligatory insurance act, regulated professions. jel classification: g22, g32. abstract: for several years obligatory third party liability insurance are getting more and more popular in poland. polish legislator obliged many professional groups to have such insurance. author want to answer the question: if this situation is a necessity or an example of incorrect legislator’s activity? http://dx.doi.org/10.12775/cjfa.2013.003 mailto:diana.r.bozek@gmail.com diana renata bożek40 this article presents short history of third party liability insurance, philosophical basis of the regulation and shifts in the conception of civil liability caused by insurance. author refers also to an inf luence which deregulation of access to regulated professions exert on obligatory third party liability insurance. translated by diana renata bożek  wstęp w polsce od kilku lat można obserwować systematyczny rozwój rynku ubezpieczeniowego. wiąże się to z jednej strony ze wzrostem świadomości ubezpieczeniowej społeczeństwa1, z drugiej zaś – z rosnącą liczbą ubezpieczeń obowiązkowych. wśród ubezpieczeń obowiązkowych dominują ubezpieczenia odpowiedzialności cywilnej o charakterze „zawodowym”; tytułem przykładu można wymienić chociażby ubezpieczenia zarządców nieruchomości, brokerów, adwokatów, radców prawnych, architektów, syndyków, rzeczoznawców majątkowych. niniejszy artykuł stanowi próbę odpowiedzi na pytanie, czy liczba i kształt zawodowych ubezpieczeń obowiązkowych odpowiedzialności cywilnej są odzwierciedleniem aktualnej sytuacji gospodarczej, czy też przykładem nadregulacji ze strony ustawodawcy. wywód będzie prowadzony w oparciu o aktualny stan prawny, propozycje zmian legislacyjnych, stanowiska doktryny oraz orzecznictwo. pierwsza część tekstu stanowi wprowadzenie do problemu. druga przedstawia historię ubezpieczeń odpowiedzialności cywilnej, ze szczególnym uwzględnieniem ich obowiązkowego aspektu, jak też filozoficzne tradycje myślenia na temat ubezpieczeń obowiązkowych. trzecia część jest poświęcona przemianom koncepcji odpowiedzialności cywilnej na przestrzeni lat, czwarta zaś wpływowi deregulacji dostępu do zawodów na problematykę ubezpieczeń oc. część piąta zawiera wnioski. 1. historia i filozoficzne podstawy obowiązkowych ubezpieczeń odpowiedzialności cywilnej w doktrynie toczy się spór co do korzeni ubezpieczenia odpowiedzialności cywilnej. podczas gdy m. orlicki (2011: 35) – za a. manesem (manes 1930) – 1 główny urząd statystyczny (2010), polski rynek ubezpieczeniowy 2004–2010, http://www.stat.gov.pl/cps/rde/xbcr/gus/pgwf_polski_rynek_ubezpieczeniowy_2004 2010.pdf (dostęp: 12.01.2013).   obowiązkowe zawodowe ubezpieczenia odpowiedzialności… 41 widzi ich początki na przełomie xix i xx wieku, zdaniem e. kowalewskiego (1981: 14) tkwią one w starożytności i problematyce ubezpieczeń morskich. z perspektywy analizowanej problematyki utożsamianie starożytnej instytucji odpowiedzialności z tytułu awarii wspólnej z ubezpieczeniem odpowiedzialności cywilnej w dzisiejszym rozumieniu jest analogią zbyt odległą. za początki obowiązkowego ubezpieczenia oc zawodowego uznaje się więc ubezpieczenie obowiązkowe pośredników emigracyjnych (niemcy, 1837 rok) i obowiązkowe ubezpieczenie myśliwych (niemcy, 1934 rok). koncepcja ubezpieczenia odpowiedzialności cywilnej jest bowiem nieodłącznie związana z epoką industrializacji i społeczeństwem nowoczesnym. w dobie rozwoju technologicznego i multiplikacji ryzyka szkód, których może doznać jednostka, ustawodawca staje przed dylematem, w jaki sposób efektywnie zabezpieczyć roszczenia ewentualnych poszkodowanych. obowiązek ubezpieczenia odpowiedzialności cywilnej jest jednym z prostszych rozwiązań – w tym sensie, że po stronie ustawodawcy pojawia się konieczność wprowadzenia do systemu prawnego odpowiedniej normy ustawowej oraz stworzenia mechanizmu kontroli, ciężar finansowy i organizacyjny spoczywa zaś na podmiotach prywatnych. obserwując wzrastającą liczbę obowiązkowych ubezpieczeń odpowiedzialności cywilnej, można za k. malinowską (2010: 85) zadać sobie pytanie: „czy tędy droga?”. dogłębna analiza tej problematyki nie jest jednak możliwa bez uświadomienia sobie wartości, jakimi kieruje się ustawodawca przy wydawaniu nowych regulacji w zakresie ubezpieczeń obowiązkowych. orlicki (2011: 195) wyróżnia trzy podejścia do ubezpieczeń obowiązkowych: liberalne, paternalistyczne i komunitarystyczne. z uwagi na ograniczone ramy niniejszego artykułu pogłębiona analiza obejmie tylko dwa pierwsze rodzaje, ukazując przeciwstawne bieguny myślenia o problemie. dla liberałów jedynym w ogóle dopuszczalnym rodzajem ubezpieczenia obowiązkowego jest to, które chroni interes osób trzecich. w ich ocenie nie należy nakładać na jednostkę prawnego obowiązku ubezpieczenia własnego mienia (z punktu widzenia liberałów niezrozumiałe jest więc istnienie – na mocy ustawy o ubezpieczeniach obowiązkowych – ubezpieczenia budynków rolniczych). konsekwencję przyjęcia wcześniej wskazanej koncepcji stanowi konkluzja, że katalog ubezpieczeń obowiązkowych powinien być ściśle limitowany. według liberałów jednostki są bowiem na tyle zapobiegliwe, że zdają sobie sprawę z konsekwencji, jakie mogą wiązać się z ich działalnością, np. zawodową. odczuwając potrzebę dodatkowego zabezpieczenia swoich interesów majątkowych, diana renata bożek42 będą z własnej woli poszukiwać zabezpieczenia, np. w postaci ochrony ubezpieczeniowej. albowiem „w systemie gospodarki rynkowej, w którym panuje wolność gospodarcza […], obowiązek zawarcia jakiejkolwiek umowy jest czymś nadzwyczajnym, wyjątkowym i traktowany jest jako wyjątek od zasady dobrowolności, który uzasadnia się specjalnymi okolicznościami społecznymi i gospodarczymi” (kufel 1998: 160). dlatego też ubezpieczeniami obowiązkowymi powinny być jedynie te ubezpieczenia odpowiedzialności cywilnej, w których działalność ubezpieczonego wiąże się ze szczególnie wysokim ryzykiem wystąpienia szkody (kowalewski 2010: 130; orlicki 2011: 199). klasycznym przykładem są z jednej strony ubezpieczenia komunikacyjne, z drugiej zaś – związane z wykorzystaniem energii jądrowej. zwolennicy koncepcji paternalistycznej wychodzą z kolei od innej wizji jednostki w społeczeństwie. w ich ocenie człowiek jest istotą niezaradną, o którą państwo powinno zadbać, niezależnie od jej woli. zdaniem t. pietrzykowskiego (2005: 116) paternalizm polega bowiem na „narzucaniu innej osobie, niezależnie od jej woli, określonych zachowań ze względu na dobro jej samej”. zwolennicy tej koncepcji wskazują, że obowiązek ubezpieczenia wynika z solidarności społecznej, ochrony najcenniejszych wartości w obliczu braku świadomości niebezpieczeństwa po stronie osób prowadzących ryzykowną działalność. ryzykiem związanym z paternalistyczną postawą wobec społeczeństwa, na które wskazują liberałowie (np. friedman 2008), jest ciągłe rozszerzanie katalogu sytuacji „szczególnych”, w których jednostkę należy objąć ochroną. na płaszczyźnie ubezpieczeń gospodarczych powoduje to wzrost liczby ubezpieczeń obowiązkowych. jakie motywy towarzyszą wprowadzaniu nowych rodzajów obowiązkowych ubezpieczeń? najogólniej stwierdzając, można je podzielić na dwie grupy: motywy „altruistyczne” i „egoistyczne”. najmocniej eksponowanym motywem altruistycznym jest ochrona społecznie doniosłych wartości, których ochroną „zainteresowane jest całe społeczeństwo, zaś ingerencja państwa czyni tę ochronę skuteczniejszą” (wąsiewicz, nowakowski 1980: 95). takie działanie stanowi przejaw socjalizacji ryzyka, na co zwraca uwagę m.in. kowalewski (1981: 117). szkoda wyrządzona poszkodowanemu odrywa się od konkretnego sprawcy, staje się szkodą wyrządzoną przez grupę ryzyka – szczególnie wyraźnie widać to w przypadku obowiązkowego ubezpieczenia oc komunikacyjnego. motywy egoistyczne z kolei odnoszą się do jednostki, która zawiera umowę obowiązkowego ubezpieczenia odpowiedzialności cywilnej. z jej perspektywy (choć nie zawsze jest to perspektywa uświadomiona) celem zawarcia umowy   obowiązkowe zawodowe ubezpieczenia odpowiedzialności… 43 ubezpieczenia oc jest zdjęcie z siebie ciężaru odpowiedzialności majątkowej, przesunięcie na inny podmiot obowiązku zapłaty należnych poszkodowanym świadczeń. drugim z egoistycznych motywów wprowadzania ubezpieczeń obowiązkowych są interesy korporacyjne, wyrażające się w „utrwalaniu w świadomości osób, które korzystają z usług członków korporacji, pozytywnego wizerunku organizacji, zapewnieniu bezpieczeństwa obrotu” (kliszcz, piechula 2003: 56). niemożność uzyskania odszkodowania za szkodę wyrządzoną działaniem członka takiej korporacji wpływa bowiem negatywnie na opinię o całej grupie zawodowej. można odnieść wrażenie, że polski ustawodawca – przynajmniej w sferze deklaratywnej – wprowadzając nowe ubezpieczenia obowiązkowe, działa tylko z altruistycznych motywów. w uzasadnieniach do projektów ustaw jako cel zmiany eksponuje się ochronę społecznie doniosłych wartości: życia, zdrowia czy stanu majątkowego poszkodowanego. błędem jest jednak niedostrzeganie wagi motywów egoistycznych – aby dana grupa zawodowa miała poczucie, że ubezpieczenie odpowiedzialności cywilnej jest rzeczywistą potrzebą, a nie narzuconą przez prawo koniecznością, należy podkreślać zalety, które ubezpieczenie gwarantuje członkom grupy. 2. wpływ ubezpieczenia odpowiedzialności cywilnej na zmianę myślenia o odpowiedzialności cywilnej upowszechnienie ubezpieczeń obowiązkowych jako takich jest genetycznie związane ze zmianą myślenia o odpowiedzialności cywilnej. jak wskazuje kowalewski (1981: 13–14), aby konstrukcja oc stała się tak popularna jak w dzisiejszych czasach, pozycję pierwszoplanową musiała zająć funkcja kompensacyjna odpowiedzialności odszkodowawczej, a odpowiedzialność osobista, moralna, musiała przesunąć się na plan dalszy. ubezpieczenia oc prowadzą nas od represji w kierunku kompensacji, stanowią więc „przejaw ekonomizacji odpowiedzialności cywilnej” (warkałło, marek, mogilski 1983: 24). ubezpieczenie obowiązkowe jest w pewnym sensie odpowiedzią na postępującą zasadę obiektywizacji odpowiedzialności cywilnej (kowalewski 1981: 31). odejście od zasady winy jako koniecznego do wykazania elementu odpowiedzialności skutkowało poszerzeniem katalogu sytuacji, w których sprawcy przypisywano odpowiedzialność za szkodę. jednocześnie zaś konieczne stawało się, aby ta rozszerzona ochrona poszkodowanego miała wymiar realny, tj. aby istniał podmiot będący rzeczywiście w stanie pokryć roszczenie w pełnej wydiana renata bożek44 sokości. należało więc wprowadzić do relacji poszkodowany–sprawca trzeci podmiot, dysponujący istotnymi zasobami majątkowymi. rozwiązaniem tego problemu jest nałożenie na podmiot, z którego działalnością wiąże się wysokie ryzyko, obowiązku ubezpieczenia. zdaniem niektórych przedstawicieli doktryny stworzenie obecnego kształtu odpowiedzialności cywilnej byłoby niemożliwe, gdyby nie istnienie ubezpieczeń oc (kowalewski 1992). już na początku lat 90. kowalewski twierdził, że upowszechnienie ubezpieczeń odpowiedzialności cywilnej zaowocuje zmianą koncepcji odpowiedzialności odszkodowawczej, a mianowicie wyodrębnieniem w jej ramach odpowiedzialności cywilnej (rozumianej „tradycyjnie” jako odpowiedzialność indywidualnego sprawcy) i odpowiedzialności gwarancyjnej (ubezpieczeniowej) (kowalewski 1992: 196). dziś naukowy dyskurs na temat odpowiedzialności cywilnej jest niemożliwy bez odniesienia do tego rodzaju ubezpieczenia (por. krajewski 2011). przedstawiciele doktryny prawa ubezpieczeń nie są jednak zgodni co do oceny zawodowych obowiązkowych ubezpieczeń odpowiedzialności cywilnej. o ile potrzeba istnienia ubezpieczeń odpowiedzialności cywilnej o charakterze powszechnym (uregulowanych w całości w ustawie o ubezpieczeniach obowiązkowych) nie budzi co do zasady wątpliwości (reps 2010), o tyle już nałożenie obowiązku ubezpieczenia na poszczególne zawody nie jest oceniane jednoznacznie. podkreśla się, że obowiązkowy charakter ubezpieczenia odpowiedzialności cywilnej może dawać posiadającemu je podmiotowi złudzenie pełnej ochrony. tymczasem trzeba zwrócić uwagę, że odpowiedzialność ubezpieczyciela jest limitowana wysokością sumy gwarancyjnej, która może okazać się niewystarczająca do zaspokojenia roszczeń poszkodowanych2. ponadto część doktryny podnosi także zarzut antyprewencyjności ubezpieczenia odpowiedzialności cywilnej (z czym nie zgadza się np. kowalewski 1992), a więc większej skłonności osób ubezpieczonych do popełniania błędów. świadomość braku konieczności ponoszenia ciężaru majątkowego w konsekwencji wyrządzenia szkody osobie trzeciej skutkuje zmniejszeniem ostrożności ubezpieczonego. „zawodowe” ubezpieczenia oc są tworem drugiej połowy xx wieku, kiedy to doszło do intensywnego rozwoju sektora usług i ekspansji wolnych zawodów. jak stwierdza k. jannott (1964: 56), nie ma dziś zawodu, przy którym nie 2 łączna wysokość świadczeń przyznanych poszkodowanej pacjentce, której lekarz nie udzielił informacji o ryzyku związanym z zabiegiem, wyniosła 1,5 mln zł (odszkodowanie, zadośćuczynienie, skapitalizowana renta oraz odsetki). przyznano je wyrokiem sądu apelacyjnego w warszawie z dnia 11 marca 2008 r., i aca 846/2007.   obowiązkowe zawodowe ubezpieczenia odpowiedzialności… 45 zachodziłaby potrzeba ochrony ubezpieczeniowej w zakresie odpowiedzialności cywilnej i dla którego taka ochrona nie byłaby przewidziana. pogląd wyrażony przez jannotta znajduje odzwierciedlenie w nowo powstających polskich regulacjach prawnych. nie budzi bowiem wątpliwości, że istnieją zawody, dla których posiadanie polisy odpowiedzialności cywilnej jest niezbędne, i że nałożenie na podmioty takiego obowiązku leży w ogólnym interesie społecznym. takim zawodem jest z całą pewnością lekarz. jednakże można zastanawiać się, czy wszystkie podmioty objęte obowiązkiem ubezpieczenia odpowiedzialności cywilnej rzeczywiście mają tak duży potencjał wyrządzenia szkody, aby była konieczna ustawowa regulacja ich odpowiedzialności. należy bowiem mieć świadomość, że poza ubezpieczeniem odpowiedzialności cywilnej lekarza czy notariusza, obowiązek zawarcia ubezpieczenia odpowiedzialności cywilnej z minimalną sumą gwarancyjną 25 000 euro w odniesieniu do jednego zdarzenia został nałożony na osobę sporządzającą świadectwa charakterystyki energetycznej budynku bądź lokalu3. 3. wpływ deregulacji dostępu do zawodów na obowiązkowe ubezpieczenia oc pytanie, które w 2010 roku postawiła k. malinowska, a mianowicie, czy w przyszłości każda działalność zawodowa będzie objęta obowiązkiem ubezpieczenia odpowiedzialności cywilnej, z perspektywy prac legislacyjnych prowadzonych w minionym roku nie wydaje się bynajmniej chwytem retorycznym. deregulacja dostępu do zawodów jest jednym z f lagowych projektów ministerstwa sprawiedliwości4, zapowiedzianym przez premiera donalda tuska w exposé z dnia 18 listopada 2011 roku. w założeniu zmiana ma dotyczyć 230 zawodów w trzech transzach. „ułatwienia” w dostępie – jak wynika z projektu ustawy o zmianie ustaw regulujących wykonywanie niektórych zawodów – polegają na likwidacji bądź znacznym ograniczeniu wymogów dotyczących wykształcenia, doświadczenia czy posiadania dodatkowych certyfikatów bądź 3 zgodnie z art. 52 ust. 1 pkt 3 ustawy prawo budowlane osoba sporządzająca świadectwo charakterystyki energetycznej budynku, lokalu mieszkalnego lub części budynku stanowiącej samodzielną całość techniczno-użytkową obowiązana jest zawrzeć umowę ubezpieczenia odpowiedzialności cywilnej za szkody wyrządzone w związku ze sporządzaniem świadectwa charakterystyki energetycznej. 4 ministerstwo sprawiedliwości (2012), deregulacja dostępu do zawodów, http:// ms.gov.pl/pl/deregulacja-dostepu-do-zawodow/ (dostęp: 12.01.2013). diana renata bożek46 przebycia kursów. „ułatwianie dostępu” nie obejmuje jednak rezygnacji z wymogu posiadania ubezpieczenia odpowiedzialności cywilnej. w efekcie – waga obowiązkowego ubezpieczenia odpowiedzialności cywilnej znacząco wzrasta. szczególnie wyraźnie rysuje tę zmianę m. molęda (2012: 32–33) na przykładzie osoby prowadzącej usługowo księgi rachunkowe. obecnie ustawa o rachunkowości wymaga w art. 76b, poza niekaralnością i pełną zdolnością do czynności prawnych, także kilkuletniej praktyki i wykształcenia (wyższego bądź średniego, przy czym w ostatnim przypadku konieczne jest również posiadanie certyfikatu księgowego). likwidacja wzmiankowanego przepisu w efekcie deregulacji doprowadzi do sytuacji, w której prowadzić księgi rachunkowe będzie mógł niemal każdy, niekarany, posiadający pełną zdolność do czynności prawnych, po zawarciu umowy obowiązkowego ubezpieczenia oc. ryzyko, które przyjmuje na siebie ubezpieczyciel, staje się więc znacznie większe. w obecnym stanie prawnym, kiedy dostęp do zawodu jest obwarowany wymogami wykształcenia i doświadczenia gwarantującymi wysoką jakość świadczonych usług, ryzyko szkód, które mogą zostać wyrządzone osobom trzecim, nie jest tak wysokie. zakładając jednak, że nowelizacja ustawy o rachunkowości wejdzie w życie w takim kształcie, jaki jest obecnie planowany, klienci chcący zlecić prowadzenie ksiąg rachunkowych profesjonalnemu podmiotowi nie będą mieli gwarancji, że jest on odpowiednio do tego przygotowany. ryzyko wyrządzenia przez taką osobę szkody znacząco wzrasta, odpowiednio rośnie też ryzyko po stronie ubezpieczyciela. w portfelu zakładu ubezpieczeń pojawiają się bowiem podmioty, których brak doświadczenia może znacząco wpływać na wzrost poziomu szkodowości. w kontekście proponowanych zmian należy pamiętać, że zgodnie z art. 5 ust. 2 ustawy o ubezpieczeniach obowiązkowych zakład ubezpieczeń mający zezwolenie na wykonywanie działalności ubezpieczeniowej w grupach obejmujących ubezpieczenia obowiązkowe nie może odmówić zawarcia umowy ubezpieczenia obowiązkowego, jeżeli w ramach prowadzonej działalności ubezpieczeniowej zawiera takie umowy ubezpieczenia. tym samym w zakresie ubezpieczeń obowiązkowych nie ma możliwości selekcji klientów. zakład ubezpieczeń staje więc przed dylematem, czy oferować nadal dane ubezpieczenie obowiązkowe, którym będą zainteresowane także podmioty o wyższym profilu ryzyka, czy też w ogóle zrezygnować z oferowania takiego produktu. wybór pierwszego rozwiązania nie pozostanie bez wpływu na wysokość składek, gdyż zgodnie z art. 18 ustawy o działalności ubezpieczeniowej ustala ją zakład ubezpieczeń po dokonaniu oceny ryzyka ubezpieczeniowego. wysokość   obowiązkowe zawodowe ubezpieczenia odpowiedzialności… 47 ta powinna co najmniej zapewnić wykonanie wszystkich zobowiązań z umów ubezpieczenia i pokrycie kosztów prowadzenia działalności ubezpieczeniowej zakładu ubezpieczeń. wybór drugiego rozwiązania – rezygnacja z danego produktu z uwagi na zbyt duże ryzyko, które się z nim wiąże – spowoduje, że dane ubezpieczenie będzie oferował jeden bądź kilka największych podmiotów. może to przełożyć się na monopolizację rynku w zakresie danego ubezpieczenia, jak również doprowadzić do wzrostu wysokości składek. nie jest oczywiście przedmiotem tego artykułu ocenianie zasadności projektu deregulacji dostępu do zawodów. trudno jednak oprzeć się wrażeniu, że ustawodawca dąży do tego, aby zapewnić zarówno konsumentowi, jak i przedsiębiorcy szeroki dostęp do specjalistycznych usług świadczonych przez określone podmioty. deregulacja ma być receptą na obniżenie ceny tych usług. z drugiej strony, ryzyko związane ze świadczeniem usług przez jednostki do tego nieprzygotowane zostaje przeniesione na całą grupę zawodową (przez obowiązek opłacania składek na ubezpieczenie oc) i podmioty rynku ubezpieczeń (przez brak możliwości odmowy zawarcia umowy ubezpieczenia). wykorzystywanie instrumentu prywatnoprawnego, jakim jest niewątpliwie kontraktowa formuła umowy ubezpieczenia, do wykonywania zadań o charakterze publicznym powinno bowiem nosić znamiona wyjątkowości, co zostało omówione w rozdziałach poprzednich. tymczasem polski ustawodawca zdaje się realizować trend wręcz przeciwny.  zakończenie odpowiedź na postawione w pierwszej części artykułu pytanie nie jest oczywista, gdyż wiąże się nie tylko z oceną obowiązujących regulacji prawnych, ale również z przyjęciem liberalnego bądź paternalistycznego poglądu na miejsce jednostki w społeczeństwie. przytoczone powyżej przykłady potwierdzają przyjęcie przez polskiego ustawodawcę paternalistycznej wizji jednostki w społeczeństwie. motywy stojące za wprowadzeniem ubezpieczeń obowiązkowych, zwłaszcza zaś ochrona społecznie istotnych wartości i interesu poszkodowanego, nie usprawiedliwiają niedbałej legislacji w tym zakresie. z całą pewnością brakuje pogłębionej ref leksji, które zawody objęte obowiązkiem ubezpieczenia rzeczywiście takiej ochrony potrzebują. prowadzi to do niemal automatycznego obowiązku nakładania ubezpieczenia. istotne znaczenie miałyby więc szersze konsultacje zmian ustawodawczych – nie tylko z przedstawicielami poszczególnych zawodiana renata bożek48 dów, ale też z samorządem ubezpieczycieli. niestety, konsultacje z polską izbą ubezpieczeń odbywają się dopiero na etapie wydawania aktu wykonawczego, gdy sam obowiązek ubezpieczenia został już wprowadzony w regulacji ustawowej (malinowska 2010: 87). po drugie, nie bada się w zasadzie innych możliwości zabezpieczenia roszczeń osób poszkodowanych, sądząc, że to właśnie obowiązkowe ubezpieczenie odpowiedzialności cywilnej stanowi najlepsze rozwiązanie. tymczasem, z uwagi na fakt, że koszty realizacji zadań państwa ponoszą podmioty prywatne, rozwiązanie to budzi istotne wątpliwości. przyjmując założenie, że współczesna polska gospodarka jest oparta na zasadzie wolności gospodarczej, należy stwierdzić, że sposób unormowania obowiązkowych zawodowych ubezpieczeń odpowiedzialności cywilnej nosi znamiona nadregulacji. wywiera to negatywny wpływ na rynek ubezpieczeniowy i prowadzi do zbiurokratyzowania instytucji ubezpieczenia. de lege ferenda trzeba postulować gruntowny przegląd zawodów objętych obowiązkiem posiadania ubezpieczenia odpowiedzialności cywilnej i podjęcie przez ustawodawcę decyzji, w stosunku do których zawodów taki obowiązek nie znajduje racjonalnego uzasadnienia. z drugiej strony, konieczna jest odpowiednia kampania informacyjna, promująca ubezpieczenia dobrowolne jako lepiej dopasowane do potrzeb poszczególnych grup zawodowych.  literatura friedman m. (2008), kapitalizm i wolność, wydawnictwo helion, gliwice. jannott k. (1964), haftpf licht-versicherung, versicherungswirtschaftliches studienwerk, 1962–1964. kliszcz j., piechula b. (2003), ubezpieczenie odpowiedzialności cywilnej brokerów ubezpieczeniowych – oczekiwania a praktyka rynku ubezpieczeniowego, prawo asekuracyjne, nr 2. kowalewski e. (1981), ubezpieczenie odpowiedzialności cywilnej. funkcje i przemiany, zp umk, toruń. kowalewski e. (1992), prawo ubezpieczeń gospodarczych. ewolucja i kierunki przemian, branta, bydgoszcz. kowalewski e. (2010), dylematy prawa ubezpieczeń obowiązkowych a kodeks ubezpieczeń, studia iuridica toruniensia, nr 7. krajewski m. (2011), ubezpieczenie odpowiedzialności cywilnej według kodeksu cywilnego, wolters kluwer polska, warszawa. kufel j. (1998), ubezpieczenia obowiązkowe, [w:] ubezpieczenia gospodarcze, t. saganowski (red.), poltext, warszawa.   obowiązkowe zawodowe ubezpieczenia odpowiedzialności… 49 malinowska k. (2010), nowe rodzaje ubezpieczenia odpowiedzialności cywilnej – czy tędy droga?, prawo asekuracyjne, nr 1. molęda m. (2012), deregulacja zawodów, miesięcznik ubezpieczeniowy, nr 12. orlicki m. (2011), ubezpieczenia obowiązkowe, wolters kluwer polska, warszawa. pietrzykowski t. (2005), etyczne problemy prawa. zarys wykładu, naukowa oficyna wydawnicza, katowice. projekt ustawy o zmianie ustaw regulujących wykonywanie niektórych zawodów z dnia 21 września 2012 r. reps s. (2010), konstrukcja prawna ubezpieczeń obowiązkowych odpowiedzialności cywilnej (niepowszechnych), prawo asekuracyjne, nr 2. ustawa z dnia 22 maja 2003 r. o działalności ubezpieczeniowej, dz.u. z 2010 r., nr 11, poz. 66. ustawa z dnia 29 września 1994 r. o rachunkowości, dz.u. z 2009 r., nr 152, poz. 1223. ustawa z dnia 22 maja 2003 r. o ubezpieczeniach obowiązkowych, ubezpieczeniowym funduszu gwarancyjnym i polskim biurze ubezpieczycieli komunikacyjnych, dz.u. z 2003 r., nr 124, poz. 1152. ustawa z dnia 7 lipca 1994 r. prawo budowlane, dz.u. z 2010 r., nr 243, poz. 1623. warkałło w., marek w., mogilski w. (1983), prawo ubezpieczeniowe, pwn, warszawa. wąsiewicz a., nowakowski z. (1980), prawo ubezpieczeń gospodarczych, pwn, warszawa. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: april 9, 2019; date of acceptance: may 2, 2019. * contact information: anna.las@doktorant.umk.pl, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 56 611 46 34; orcid id: https://orcid.org/0000-0002-4103-4755. laskowska, a. (2018). stock market indices as a measurement tool for profitability of corporate social responsibility activities. copernican journal of finance & accounting, 7(4), 71–86. http:// dx.doi.org/10.12775/cjfa.2018.021 anna laskowska* nicolaus copernicus university in toruń stock market indices as a measurement tool for profitability of corporate social responsibility activities keywords: corporate social responsibility, socially responsible investing, socially responsible stock indices, sustainability stock market indices. j e l classification: g11, m14, o16. abstract: corporate social responsibility is gaining more importance in the functioning of businesses, therefore, tools are being developed to assess these activities, such as socially responsible stock indices. the research objective of the article is to characterise global and polish socially responsible indices, as well as to measure and evaluate their profitability compared to traditional stock indices. the research methods applied in the paper are: subject literature analysis, statistical data analysis, secondary research analysis and own research in the form of calculating return rates and sharpe ratios for respect index and wig. the outputs of the analyses of the effectiveness of polish and global indices will be compared to research hypotheses relating to socially responsible portfolios. the outcome of the article is to specify the key conclusions in the field of corporate social responsibility investment efficiency and stock market indices as a tool of measuring these activities. anna laskowska72  introduction corporate social responsibility is gaining more importance in the functioning of businesses. in present times, the financial sector requires that its participants not only take actions to maximise the profit, but they also consider social, ethical, environmental and social responsibility issues – in short: social responsibility. such measures adopted by market participants forced the creation of tools evaluating the actions with the stock market index as one of the instruments. it was designed to analyse the profitability of corporate social responsibility activities, thereby helping with making sustainable decisions. the aim of the article is to characterise global and polish socially responsible indices, as well as to measure and evaluate their profitability compared to traditional stock indices. the first part of the article contains a discussion over the concept of corporate social responsibility and the measurement of socially responsible strategies. the second part, except for the presentation of the functions of indices on the capital market, provides and overview of the origin and characteristics of socially responsible indices in poland and in the world, as well as analyses their profitability. the research methodology and the course of the research process the following research methods were applied when preparing the article: subject literature analysis, statistical data analysis, secondary analysis on the subject of selected researches relating to the profitability of global sustainability stock market indices and own research on the profitability of polish stock market indices in the form of calculating return rates and sharpe ratios for respect index and wig. the return rates were calculated for the following periods: 1 month, 3 months, 6 months, 1 year 5 years and 10 years (from the first day of the respect index quotation). sharpe ratio of respect index and wig was calculated for the period 2017–2018. the outputs of the analyses of the effectiveness of polish and global indices will be compared to research hypotheses relating to socially responsible portfolios, resulting in conclusions regarding the cost-efficiency of the csr/sri strategy. the profitability of socially responsible activities is also defined in the article by the expressions: effectiveness, viability. the content of the elaboration shows that the ‘profitability’, ‘effectiveness’ and ‘viability’ are treated in the paper as a measure of market profits earned on corporate social responsibility companies. stock market indices as a measurement tool… 73 the concept of corporate social responsibility corporate social responsibility (csr), often referred to as corporate social enterprise, is a multidimensional and universal term and therefore it seems impossible to formulate its unequivocal, perfect and indisputable definition. corporate social responsibility has long been an essential element of economic policy of the european community. in 2001 the european commission issued green paper: promoting a european framework for corporate social responsibility, the first eu document dedicated to the area of csr. the green paper defines corporate social responsibility as voluntary incorporation of social and ecological issues into economic activity and stakeholder relations (commission of the european communities, 2001). exactly 10 years later the european commission updated the notion of csr, issuing the communication the european commission’s strategy on csr 2011– 2014: achievements, shortcomings and future challenges. the commission formulates the idea of csr as “responsibility of enterprises for their impacts on society”. the renewed strategy expresses the european community concern about the concept of csr. the commission also noted that issuing a new definition and communication is related to the economic crisis how it affected the society, namely the loss of confidence in the business sector. by taking measures to promote csr the commission expects to shape responsible business attitudes and ensure economic growth in accordance with sustainable development principles (european commission, 2011). when defining corporate social responsibility, the subject literature is not homogenous either. table 1 presents a review of how the meaning of csr was changing in years 1963–2011. table 1. a review of selected definitions for corporate social responsibility author/source definition mcguire, 1963 the concept assumes that a company not only has economic or legal obligations but also other responsibilities towards society sethi, 1975 the obligation to introduce corporate behaviour, which befits existing social norms, values and environment expectations jones, 1980 a company’s voluntarily accepted obligation towards all its stakeholders – shareholders as well as other groups connected with the activity of the enterprise, namely clients, employees, suppliers and the entire local community anna laskowska74 author/source definition zbiegień-maciąg, 1996 the enterprise morality and accountability before the law and society for the actions taken, especially before owners, employees, clients, shareholders, banks, creditors, suppliers, local authorities, state administration, consumer or ecological movements rok, 2001 the philosophy of managing a service and production activity, aimed at building long-term and positive relations with all the parties involved grzybowski, 2004 an element of a company’s strategy (marketing management) fostering the fulfilment of economic aims, consisting in developing positive relations with groups which may affect the prosperity of the business chandler and werther, 2006 relations between corporations (or other large organizations) and the society (namely all stakeholder groups who maintain their interest in the activity of an institution) they cooperate with lawrence and weber, 2008 the obligation to take responsibility for every action with has an impact on the society (people or natural environment), which means confessing to negative accidents caused by the company and correcting the results of such actions łudzińska, 2009 the duty of men in charge to make decisions and take up activities, which contribute to concern for both vested interest (namely increasing the company’s profit) as well as the securing and multiplying of the social welfare bartkowiak, 2011 the influence of business decisions and all the company’s interaction with other market entities – inside and outside the organization s o u r c e : elaborated by the author based on the literature of the subject listed above and (łukasiewicz-kamińska, 2011). understanding of the motivation for running a company has changed over the years. it can be spotted that the theory implying the maximising of a company’s profit as the priority goal of its functioning is gradually being abandoned, in favour of corporate social responsibility strategies. for a long time the business communication with the environment has based on investor relations. they attached particular importance to current and potential investors of a company and the communication was financial and economic in nature (dziawgo, 2011, pp. 23–24). due to the capital involved, this group bears the highest risk and therefore they have the greatest information needs. since the revolution in communication technology, globalisation and popularisation of social responsibility, such communication is perceived as insufficient and the satisfaction of investors, although still important, should not be the only goal of a company. the new need for the communication with environment to embrace a wider public resulted in the stakeholder theory, namely groups the company table 1. a review of selected definitions… stock market indices as a measurement tool… 75 has impact on or towards which it has certain commitments affecting the business (roszkowska, 2011, pp. 48–51). the stakeholder theory introduces a wider perspective on the significance and role of a company in the environment. it also underlines the role and importance of other groups when the value of the company is being created. it is stakeholders whose expectations towards the company are much greater than just economic (table 2). they require that environmental, social and governance (esg) factors are included in the management process (paliwodamatiolańska, 2009, pp. 74–75). table 2. stakeholders’ expectations stakeholders expectations substantial shareholders and owners growth of the company’s value maximising the value of shares complete and reliable information competent authorities enhancing the company’s image employees satisfying salaries fulfilling the duties towards employees complete and reliable information job satisfaction, development opportunities contract contractors and suppliers financial credibility of the partner operational ethics culture and professionalism in actions cooperating quality of the communication process customers quality of the product or service clear, transparent and accessible information building customer relationship company’s image competition fair competition culture in business activities financial institutions credible financial results transparency, reliability and comprehensiveness of information competent authorities context government and social institutions compliance with legal norms of public-legal liabilities supporting charity institutions assisting the activities or political parties community prosocial activities patronage over cultural, scientific and sports events environmental protection company’s civil approach towards local environment s o u r c e : the author’s elaboration based on: (wawrzyniak, 1999, p. 215; paliwoda-matiolańska, 2009, p. 61; jamka, 2011, pp. 42–43). anna laskowska76 the table above presents the expectations a company willing to act in a socially responsible way should take into consideration in its current activities. extending the interest to a wider public does not mean that the investors are being overlooked, as they are still one of the essential groups of stakeholders. the approach that companies applying the csr strategy and communicating transparently are less risky and more attractive is gaining popularity. considering esg factors in the process of investment decisions is referred to as socially responsible investing (sri). this investment strategy aims as both maximising the profit and achieving social good. the idea of sri resulted in the emergence of socially responsible financial instruments (boatright, 2010, pp. 397–400). according to czerwonka (2013, pp. 21–23), there are four basic criteria, both in the concept of csr, as well as sri: ecological, social, religion-related, sustainability. this is one of the main connecting elements of the notions. what should be noted, is that there is a close relation between csr and sri ideas. the major similarity of the two concepts results from the fact, that sri is an investment counterpart of corporate social responsibility. measurement of corporate social responsibility strategies taking up corporate social responsibility activities by a company resulted in the need to create appropriate measuring instruments. however, it is difficult to determine the direct impact of socially responsible activities on financial results. although the costs related to the implementation of csr strategies can be calculated accurately, the benefits are extended over time and difficult to quantify, due to the number of stakeholders. lulewicz-sas (2013, pp. 248–249) points out that when analysing the effect of corporate social responsibility on the company’s value, one has to concentrate on the factors having positive indirect inf luence on the value, i.e. product quality, stakeholders relationship, the company’s reputation and trust. despite numerous methods of csr measurement, objective evaluation is impossible because of the lack of one specific tool that would allow to determine economic efficiency of sustainable activities (czopik, 2017, p. 241). according to wronka, seven categories of csr measuring instruments can be itemised (2011, p. 261): 1) benchmarking of achievements and rating tools, 2) content analysis of corporate publications, 3) certification and accreditation, stock market indices as a measurement tool… 77 4) reporting guidelines, 5) networks based on voluntary participation, 6) evaluation scales 7) creating sub-indices under balanced scorecard. the first instrument is utilized in this article: benchmarking of achievements and rating tools – stock market indices of socially responsible companies. socially responsible stock indices socially responsible stock market indices, also known as sustainability stock market indices, are extremely useful tools when making socially responsible investment decisions. the stock market indices play an important function on financial market and they key role is to organise the capital market by identifying companies meeting the relevant csr criteria and observing the efficiency of socially responsible investments. the fundamental objective of sustainability stock market indices is to guarantee financial advisors and investors a certain point of reference (benchmark) which allows to evaluate socially responsible portfolios. it may therefore be concluded that csr indices serve the role of a compass for investors who want to allocate funds according to sri principles. it should also be noted that certain indices list only some companies from the large group under analysis. as a result, companies included in csr indices disseminate the information immediately. therefore, sustainability stock market indices can be regarded as a promotion tool for the listed companies (dziawgo, 2010, p. 54). another advantage of csr indices is the development of capital market, as they form the basis for creating new instruments. for example, ishares msci kld 400 social etf and ftse4food ibex etf were formed basing on etf index funds (wolska & czerwonka, 2013, p. 15). there are also specialised csr indices, concentrating on one sri area only. in this respect, there is a large number of environmental stock indices on the capital market, such as nasdaq clean edge green energy index, cleantech index, next-generation energy index, ftse green revenues index and s&p global water index. just alike the idea of sri, also sustainability stock indices are gaining popularity on capital markets. it is worth mentioning that first csr indices appeared anna laskowska78 in the united states of america. the pioneer domini 400 social index1, concentrating on socially responsible companies, was created in 1990. in 1999 dow jones started publishing their dow jones sustainability index. both the success of first sustainability stock indices and growing popularity of csr and sri ideas resulted in their further creation among global stock exchanges (dziawgo, 2007, pp. 123–127). many opponents of csr are of the opinion that the application of any nonfinancial criteria for the selection of companies to the portfolio leads to a decrease in its effectiveness. such claims have their origin in modern portfolio theory, because the implementation of esg criteria often results in underweight or overweight of certain sectors in the portfolio, i.e. the problem of appropriate diversification (jedynak, 2012, p. 167). however, the theory of management gives a different view: the implementation of csr contributes to the increase of transparency, and this in turn contributes to a significant to reduce information asymmetry on the capital market. in addition, the company’s activities in line with csr are aimed at reducing the controversy and conf licts of individual interests stakeholder groups, which often causes crises in the enterprise and ref lects on its effectiveness (czerwińska, 2012, p. 133). one of the empirical methods enabling the verification of the statement saying that following the aspects of sri inf luences the effectiveness of investments is the comparison of the profitability of sri indices with the profitability of traditional indices the profitability assessment and measurement of socially responsible stock market indices are subject to numerous scientific publications. research examples referring to the relationship between the results of csr and traditional indices were presented in the table below. table 3. an overview of selected researches relating to the profitability of global sustainability stock market indices authorship, year of publication subject coverage geographical coverage time coverage assessment statman, 2000 domini social index vs. standard & poor’s 500 index usa 1990–1998 positive brammer, brooks and pavelin, 2006 ftse4good vs. ftse all-share index uk 1997–2002 negative 1 currently known as msci kld 400 social index. stock market indices as a measurement tool… 79 authorship, year of publication subject coverage geographical coverage time coverage assessment collison, cobb, power and stevenson, 2009 ftse4good uk and ftse4good europe vs. ftse100 uk, europe 1996–2005 neutral christofi, christofi and sisaye, 2012 dow jones sustainability index world vs. msci world index global reach 1999–2009 neutral brzeszczyński and mcintosh, 2014 ftse4good index vs. ftse100 uk 2000–2010 neutral sudha, 2015 s&p esg india index vs. standard and poor’s cnx nifty and standard and poor’s cnx india 2005–2012 positive/ neutral sikacz, 2016 dow jones sustainability world index, dow jones sustainability north america index, dow jones sustainability europe index, ftse4good global, msci kld 400 social, msci world esg, calvert social index and stoxx europe sustainability index in relation to the basic days (28th september, 2007; 1st january, 2010) global reach 2010–2016 positive brzeszczyński, ghimire, mcintosh and jamasb, 2016 ftse4good global 100 vs. standard and poor’s global 1200, msci world energy and ftse et50 index global reach 2005–2015 neutral s o u r c e : the author’s elaboration based on: literature of the subject listed above. it is worth explaining what exactly the evaluation notes granted stand for, i.e. assessment, and what thesis concerning the profitability of the portfolio they represent (statman & glushkov, 2009, pp. 34–35): a) positive assessment – the results of csr indices under analysis outperformed those achieved by traditional stock market indices, as defined by “doing good while doing well”, b) neutral assessment – there is a lack of statistical differences between csr and traditional indices, also referred to as “no effect”, c) positive/neutral assessment – the viability of csr indices is higher during the time of crisis, however no statistical differences between their return rates and market thresholds were observed during stable periods, table 3. an overview of selected researches… anna laskowska80 d) negative assessment – csr and sri pay the price in the form of worse investment results, when compared to traditional portfolios – “doing good but not well”. the results presented do not provide a clear answer on the issue of the profitability of csr indices. in the case of the research under analysis, neutral assessment stating that there are no significant differences between the viability of csr and non-csr indices dominates. however, numerous market analyses indicate the profitability of following the socially responsible benchmark. except for the viability, there are also other advantages for companies creating the indices: improvement of the reputation, promotion, access to the capital of investors who take esg factors into account when making business decisions. it is important to ensure that the reasons for different results in table 3 may, among others, be time range, sample size, current market conditions (market crisis or stability) and the diversity of analysed sectors. therefore, making clear conclusions with respect to the above is not possible. the profitability of respect index – the polish csr index speaking of the national market it should be mentioned that poland followed the global trend concerning sustainable development on november 19th, 2009 by creating respect index. it was the first socially responsible index in central-eastern europe and the name respect is an acronym representing fundamental elements of csr and sri, namely: responsibility, ecology, sustainability, participation, environment, community, transparency. the objective of respect index is to select companies managed in a socially responsible way and stress out their investment attractiveness in terms of the level of investors relations, information and corporation governance, as well as the quality of reporting. the first respect portfolio included sixteen companies listed on the warsaw stock exchange (wse). it is worth adding that the structure of the index is verified on a regular basis. twelve editions of the project have taken place so far. the last update of companies forming the index was conducted in december 2018 – respect index now includes thirty-one companies (www1). therefore, the profitability of socially responsible respect index in comparison to its traditional equivalent is worth considering, as well as which thesis concerning the forming of return rate is implemented in this case. the re stock market indices as a measurement tool… 81 search below presents the summary of respect index and the most knownest polish total return index – wig (warsaw stock exchange index2). return rates and the sharpe ratio were selected in order to analyse the indices. return rate, namely the measure used in all research presented in table 3, is a classic indicator of the instrument’s price f luctuations over time, providing information as to the effectiveness of the investment in comparison to others. the sharpe ratio was used for the purpose of including the investment risk in the analysis of the profitability of investing in companies included in wig and respect. the sharpe ratio enables selection of investments based on two criteria: profit and risk. the factor’s value provides information about the risk premium for each unit of risk taken and can be calculated by the following formula (scholz, 2007, p. 348): respect index and the most knownest polish total return index – wig (warsaw stock exchange index2). return rates and the sharpe ratio were selected in order to analyse the indices. return rate, namely the measure used in all research presented in table 3, is a classic indicator of the instrument’s price fluctuations over time, providing information as to the effectiveness of the investment in comparison to others. the sharpe ratio was used for the purpose of including the investment risk in the analysis of the profitability of investing in companies included in wig and respect. the sharpe ratio enables selection of investments based on two criteria: profit and risk. the factor’s value provides information about the risk premium for each unit of risk taken and can be calculated by the following formula (scholz, 2007, p. 348): �� = �� � �� �� where: �� – sharpe ratio, �� − return of portfolio, �� − risk-free rate, �� − standard deviation of the portfolio’s excess return. 2 respect index and wig were selected for the comparison due to the same methodology of the calculation of stock indices. they are total return indices which consider both the prices of shares included, as well as income from dividends and rights issues. where: sp − sharpe ratio, rp − return of portfolio, rf − risk-free rate, σp − standard deviation of the portfolio’s excess return. table 4. return rates of respect index and wig (state of the day: 27th march, 2019) stock market indices return rates in the following periods 1 month 3 months 6 months 1 year 5 years from the first day of the quotation of the respect index (19th november, 2009) respect index –2.11% 1,91% 2.96% 0.79% 12.57% 71.37% wig –0.2% 3,85% 0.93% 0.69% 11.98% 51.18% s o u r c e : the author’s elaboration based on: (www2). 2 respect index and wig were selected for the comparison due to the same methodology of the calculation of stock indices. they are total return indices which consider both the prices of shares included, as well as income from dividends and rights issues. anna laskowska82 figure 1. yields of respect index and wig respect index wig source: the author’s elaboration based on: (www2). table 4. return rates of respect index and wig (state of the day: 27th march, 2019) stock market indices return rates in the following periods 1 month 3 months 6 months 1 year 5 years from the first day of the quotation of the respect index (19th november, 2009) respect index -2.11% 1,91% 2.96% 0.79% 12.57% 71.37% wig -0.2% 3,85% 0.93% 0.69% 11.98% 51.18% source: the author’s elaboration based on: (www2). as can be seen in figure 1, yields of respect index is above wig. based on results from the table it can be concluded that in the mediumand long-term perspectives, socially responsible index performed better than wig. however, in a short-term horizon (maximum of three months) the profitability of respect index underperformed the benchmark. moreover, with reference to the first trading day, investing profitability in accordance with the csr index should be assessed very positively as the return rate achieved by respect was nearly 1.5 times higher than the benchmark. this argument is often presented by the wse to prove the relevance and cost-efficiency of respect project. table 5. sharpe ratio of respect index and wig in 2017-2018 s o u r c e : the author’s elaboration based on: (www2). as can be seen in figure 1, yields of respect index is above wig. based on results from the table it can be concluded that in the mediumand long-term perspectives, socially responsible index performed better than wig. however, in a short-term horizon (maximum of three months) the profitability of respect index underperformed the benchmark. moreover, with reference to the first trading day, investing profitability in accordance with the csr index should be assessed very positively as the return rate achieved by respect was nearly 1.5 times higher than the benchmark. this argument is often presented by the wse to prove the relevance and cost-efficiency of respect project. table 5 contains a summary of results achieved by indices in the past two complete years. the calculations adopted the two-year interest rate of dos0119 government bonds as the risk-free rate. the research was based on average monthly return of portfolio. comparing the results it should be noted, that the sharpe ratio for respect index amounts at the level higher than the research benchmark index. what should not be overlooked when seeing the negative rates, is that during the analysed period the market suffered from recession. the results should nevertheless be interpreted as a recommendation for investing in socially responsible companies, because investment strategies stock market indices as a measurement tool… 83 with higher sharpe ratio are simply more effective (haugen, 1997, pp. 380–382; jajuga, 2006, p. 256). table 5. sharpe ratio of respect index and wig in 2017–2018 stock market indices average return of portfolio risk-free rate standard deviation sharpe ratio respect index 1.6% 2.1% 4.65% –0.11 wig 0.54% 2.1% 4.09% –0.38 s o u r c e : the author’s own calculations based on: (www2; minister of development and finance, 2016). to sum up, analysing only selected periods makes it impossible to verify the socially responsible investments in poland with certainty. however, the results of research conducted present grounds to reject the “doing good but not well” thesis. due to generally higher profitability of respect index in a mediumand long-term perspective, even though the differences are sometimes minimal, this strategy can be evaluated positively and its monitoring can be continued.  conclusions implementing the concept of csr by companies brings quantifiable and nonquantifiable benefits. indisputably, the key nonquantifiable advantage (indirect financial factor) of considering esg aspects in the functioning of a company is building its reputation. csr activities are also attractive from the strictly financial perspective. therefore, the popularity of stock indices as rating tools used to measure the effectiveness of socially responsible strategies on international capital market increases. the results show that introducing the csr strategy on the financial market may bring investors profits outperforming the benchmark. according to scientists who study global stock market indices, there are usually no statistical differences in the viability between classical investing and sri. as a result, it can be concluded, that investors who follow their ethical values and invest their assets in socially responsible companies are not exposed to losses. bearing in mind other advantages of csr and sri, the above fact speaks in favour of choosing socially responsible strategies. anna laskowska84 moving to the national market, the comparative analysis of return rates of respect index and wig encourages to sri in mediumand long-term perspectives. additionally, evaluating the profitability of indices by the sharpe ratio it was concluded that the efficiency of respect index is higher 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(www2) stooq, http://stooq.pl/q/?s=respect&d=20190326&c=mx&t=l&a=ln&r=wig (accessed: 28.03.2019). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: january 24, 2017; date of acceptance: january 30, 2017. * contact information: furkan.baser@ankara.edu.tr, department of insurance and actuarial sciences, ankara university, ankara, turkey. ** contact information: correspondent author, sgokten@baskent.edu.tr, department of management, baskent university, baskent universitesi, baglica kampusu eskisehir yolu 20. km, iibf, isletme bolumu, 06810, ankara, turkey, phone: +9 (0312) 246 66 66 (1113). *** contact information: gurayk@baskent.edu.tr, department of management, baskent university, ankara, turkey. **** contact information: hasanture@gazi.edu.tr, department of econometrics, gazi university, ankara, turkey. baser, f., gokten, s., kucukkocaoglu, g. & ture, h. (2016). liquidity-profitability tradeoff existence in turkey: an empirical investigation under structural equation modeling. copernican journal of finance & accounting, 5(2), 27–44. http://dx.doi.org/10.12775/cjfa.2016.013 furkan baser* ankara university, turkey soner gokten** baskent university, turkey guray kucukkocaoglu*** baskent university, turkey hasan ture**** gazi university, turkey liquidity-profitability tradeoff existence in turkey: an empirical investigation under structural equation modeling keywords: liquidity-profitability tradeoff, structural equation modeling, working capital management. j e l classification: g30, m10. furkan baser, soner gokten, guray kucukkocaoglu, hasan ture28 abstract: firms in emerging markets could show a tendency to have high liquidity positions by ignoring the liquidity-profitability tradeoff in terms of working capital management due to gained experiences from stressed times. accordingly, this study empirically examines the validity of liquidity-profitability tradeoff in turkish market via structural equation modeling. the functions of liquidity and profitability as latent variables of the model are constituted from piotroski’s criterias of liquidity/solvency, operating efficiency and profitability. the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified and there is a moderate level of positive effect between liquidity and profitability in turkey. the findings indicate that (1) current ratio or its variants as single-handed variables are inadequate to explain liquidity-profitability relation and (2) leverage seems to be the most important indicator as taken into account on working capital management decisions. turkish firms apply prudent working capital management to overcome possible liquidity shocks.  introduction liquidity and profitability tradeoff is a crucial issue discussed in the literature under the management of current assets and current liabilities to obtain optimum profitability. thus, efficient liquidity management involves planning and controlling current assets and current liabilities to eliminate the risk of insolvency by not meeting the short-term obligations on time. besides, liquidity is one of the most important control variable that accounts for firm profitability as well (iatridis & kadorinis, 2009). solely, in the frame of working capital approach, cash management is a nonnegligible concept which directly affects the profitability of a firm especially in short term (schneider, 1988; johnson & aggarwal, 1988; unsworth, 2000; raspanti, 2000). in this regard, working capital management is considered as a useful tool in managing of funds to meet current operations. however, instead of using working capital as a measure of liquidity, accounting literature advocate the use of current and quick ratios to make temporal or cross sectional comparisons. nevertheless, the ultimate measure of the efficiency of liquidity planning and control is the effect it has on profit (eljelly, 2004). according to sanger (2001), working capital represents a safety cushion for providers of short-term funds of the company, and as such they view the availability of excessive levels of working capital and cash in a positive way. however, from an operating point of view, working capital has increasingly been looked at as a restraint on financial performance, as these assets do not contribute to profit. argued vividly by nicholas (1991), companies usually do not think about improving liquidity management before reaching to a crisis conditions or becoming on the verge of bankruptcy. thus, any increase in cash or cash-similar liquidity-profitability tradeoff existence in turkey… 29 positions creates a tradeoff on profitability by lying behind passive funds to generate profit. in this sense, liquidity ratios as a measure of company’s ability to pay debt obligations and its margin of safety play an important role on evaluating the financial decisions of tradeoff between liquidity and profitability (gitman, 1974; richard & laughlin, 1980; hawawini et al., 1986; kamath, 1989; gentry et al., 1990; boer, 1999; eljelly, 2004). liquidity ratios mostly represent the summarized indirect results of financial decisions related with the financial structure. from this point of view, as the market conditions restrict the capabilities of decision makers in terms of working capital management, they could not have the opportunity to determine the level of current assets according to liquidity-profitability tradeoff mechanism. the reality is that liquidity management focuses on profitability in good times but in troubled times systematic risk put pressure on profitability and firms need sufficient liquidity positions to survive (summers & wilson, 2000). in this sense, liquidity-profitability tradeoff issues may long be ignored on the formation of financial structure. that means liquidity-profitability tradeoff concept in financial management decisions could not be valid in some markets, especially for emerging ones, as prudent behaviors come from the past. this study concentrates on testing the existence of the validity of liquidityprofitability tradeoff in turkish market, which has many financial experiences on troubled times under liquidity shocks. to get a clear picture, we first need to go back to 1980s where turkey has first started to adopt the rules of free market economy, free competition, and a liberalized foreign trade practices by applying neo-liberal policies to integrate into international markets. throughout the years turkey has faced with several financial crises because of unsteady economic and political environment forces and became dependent to imf and its policies with standby agreements. structural reforms applied as part of standby agreements showed positive effects on turkish economy especially after 2002. inf lation and interest rates have fallen significantly and the currency stabilization program has been achieved. growth rate in 2004 was realized as 9.9 percent and interestingly, high growth rates were accompanied by a reduction in inf lation rates which were reduced to single-digit figures in 2004 after almost 30 years. in addition, a global financial shock of 2007, as an external factor, affected turkey like all other countries. right after the spread of us based financial crisis to all over the world, central banks started to install monetary policies to cultivate recovery and funds started to move to the emerging markets to obfurkan baser, soner gokten, guray kucukkocaoglu, hasan ture30 tain satisfactory returns based on an increase in global money supply. turkish market appeals foreign investment with nearly 70 billion usd capital inf lows per year between 2002 through 2013. by paying the last loan repayment in the amount of 422.1 million $ (the total amount of payment was 23.5 billion $ during 2002–2013) in 2013, turkey initialized its position against imf. also, in year 2013, turkey ranked as the sixth biggest economy in europe and the sixteenth in the world. with regards to this historical background, we expect that turkish firms could show a tendency to have high liquidity positions by ignoring the liquidity-profitability tradeoff in terms of working capital management. as they have become more prone to financial crises and learned from the past experiences, this paper selected year 2014 to test this alleging remarks as this year represent a boom phase in the turkish economy. as the acceptance of general rules or conclusions are challenging in financial researches and they are based on a lot factors that are not directly observable (titman & wessels, 1988; harris & raviv, 1991), expecting the invalidity of the negative relationship between liquidity and profitability cannot come as a surprise when the conditions of emerging markets are compared with emerged ones. financial structure decision-making is even more complicated when it is examined in developing countries where markets are characterized by controls and institutional constraints (boateng, 2004). therefore, most studies in the literature analyzing the financial structure topic in developed markets depict many institutional similarities and could be accepted as efficient. accordingly, relevant studies for emerging markets depict many institutional differences as well (schulman et al., 1996; wiwattanakantang, 1999; chen, 2004). under these conditions, as an emerging market economy, it is not contrary to expect positive relation between liquidity and profitability for turkish firms. from this point of view, this paper tests the validity of liquidity-profitability tradeoff for firms in turkish market by applying structural equation modeling (sem). in this sense, the functions of liquidity and profitability are constituted by using piotroski (2000) criterions1 and then sem is applied. 1 current ratio (cr), gross margin (margin), leverage (lev) and asset turnover (turn) which are the criterions of liquidity/solvency and operating efficiency, are used as the determinants of liquidity function. return on assets (roa), cash f low from operations (cfo) and accruals (ac) which are the criterions of profitability, are used as the determinants of profitability function. liquidity-profitability tradeoff existence in turkey… 31 the structure of the paper is as follows. in the next section, the dataset and functions are described and the methodology of sem is given in detailed. then, results are given and discussed respectively. research methodology data sample includes 187 active firms listed and traded on national market of istanbul stock exchange (bist-borsa istanbul). national market is the largest market of bist, where the equities of companies that satisfy the listing requirements (an average market capitalization of at least 12 million turkish liras of its free-f loat for the relevant period and, a free f loat rate of at least %25) of national market are traded. selected sample does not include financial service firms and the companies with lack of data. 2014 annual accounting numbers are used to calculate the determinants for each firm and annual financial statements of these years are obtained from public disclosure platform of bist (kap). functions with determinants the relationship between liquidity and profitability is investigated via using latent variables. that means functions of liquidity and profitability refer latent variables of structural equation modeling respectively. determinants of these functions are described in detail in this part of the paper. liquidity is defined as the function of cr2, margin3, lev4 and turn5 by: sample includes 187 active firms listed and traded on national market of istanbul stock exchange (bist-borsa istanbul). national market is the largest market of bist, where the equities of companies that satisfy the listing requirements (an average market capitalization of at least 12 million turkish liras of its free-float for the relevant period and, a free float rate of at least %25) of national market are traded. selected sample does not include financial service firms and the companies with lack of data. 2014 annual accounting numbers are used to calculate the determinants for each firm and annual financial statements of these years are obtained from public disclosure platform of bist (kap). functions with determinants the relationship between liquidity and profitability is investigated via using latent variables. that means functions of liquidity and profitability refer latent variables of structural equation modeling respectively. determinants of these functions are described in detail in this part of the paper. liquidity is defined as the function of cr2, margin3, lev4 and turn5 by liquidity� = �(cr�,margin�,lev�,turn�). (1) total amount of the current assets is the fundamental accounting measurement for liquidity position of the financial structure. in this sense, current ratio (cr) is generally accepted as the main indicator for liquidity assessment in the frame of working capital management: as is known, increase in cr means more liquidity. on the other hand, cr is the summarized indicator of the financial decisions which derive from other indicators that affect the financial structure of firms in terms of liquidity. for this reason, cr or its variants should not be thought as single-handed determinants to evaluate the level of current assets. margin is the one of the major determinants for current assets level in the frame of accounting practices: increase in margin causes an increase in cash or receivables accounts. which means high level of margin should positively affect the liquidity of a firm. 2 cr = current assets short term liabilities⁄ 3 margin = (total sales − cost of sales) total sales⁄ , we use ‘cost of goods sold’ for manufacturing or commercial firms and ‘cost of services sold’ for service firms. 4 lev = long term liabilities equities⁄ 5 turn = total sales total assets⁄ (1) total amount of the current assets is the fundamental accounting measurement for liquidity position of the financial structure. in this sense, current ra2  sample includes 187 active firms listed and traded on national market of istanbul stock exchange (bist-borsa istanbul). national market is the largest market of bist, where the equities of companies that satisfy the listing requirements (an average market capitalization of at least 12 million turkish liras of its free-float for the relevant period and, a free float rate of at least %25) of national market are traded. selected sample does not include financial service firms and the companies with lack of data. 2014 annual accounting numbers are used to calculate the determinants for each firm and annual financial statements of these years are obtained from public disclosure platform of bist (kap). functions with determinants the relationship between liquidity and profitability is investigated via using latent variables. that means functions of liquidity and profitability refer latent variables of structural equation modeling respectively. determinants of these functions are described in detail in this part of the paper. liquidity is defined as the function of cr2, margin3, lev4 and turn5 by liquidity� = �(cr�margin�,lev�,turn�). (1) total amount of the current assets is the fundamental accounting measurement for liquidity position of the financial structure. in this sense, current ratio (cr) is generally accepted as the main indicator for liquidity assessment in the frame of working capital management: as is known, increase in cr means more liquidity. on the other hand, cr is the summarized indicator of the financial decisions which derive from other indicators that affect the financial structure of firms in terms of liquidity. for this reason, cr or its variants should not be thought as single-handed determinants to evaluate the level of current assets. margin is the one of the major determinants for current assets level in the frame of accounting practices: increase in margin causes an increase in cash or receivables accounts. which means high level of margin should positively affect the liquidity of a firm. 2 cr = current assets short term liabilities⁄ 3 margin = (total sales − cost of sales) total sales⁄ , we use ‘cost of goods sold’ for manufacturing or commercial firms and ‘cost of services sold’ for service firms. 4 lev = long term liabilities equities⁄ 5 turn = total sales total assets⁄ . 3  sample includes 187 active firms listed and traded on national market of istanbul stock exchange (bist-borsa istanbul). national market is the largest market of bist, where the equities of companies that satisfy the listing requirements (an average market capitalization of at least 12 million turkish liras of its free-float for the relevant period and, a free float rate of at least %25) of national market are traded. selected sample does not include financial service firms and the companies with lack of data. 2014 annual accounting numbers are used to calculate the determinants for each firm and annual financial statements of these years are obtained from public disclosure platform of bist (kap). functions with determinants the relationship between liquidity and profitability is investigated via using latent variables. that means functions of liquidity and profitability refer latent variables of structural equation modeling respectively. determinants of these functions are described in detail in this part of the paper. liquidity is defined as the function of cr2, margin3, lev4 and turn5 by liquidity� = �(cr�margin�,lev�,turn�). (1) total amount of the current assets is the fundamental accounting measurement for liquidity position of the financial structure. in this sense, current ratio (cr) is generally accepted as the main indicator for liquidity assessment in the frame of working capital management: as is known, increase in cr means more liquidity. on the other hand, cr is the summarized indicator of the financial decisions which derive from other indicators that affect the financial structure of firms in terms of liquidity. for this reason, cr or its variants should not be thought as single-handed determinants to evaluate the level of current assets. margin is the one of the major determinants for current assets level in the frame of accounting practices: increase in margin causes an increase in cash or receivables accounts. which means high level of margin should positively affect the liquidity of a firm. 2 cr = current assets short term liabilities⁄ 3 margin = (total sales − cost of sales) total sales⁄ , we use ‘cost of goods sold’ for manufacturing or commercial firms and ‘cost of services sold’ for service firms. 4 lev = long term liabilities equities⁄ 5 turn = total sales total assets⁄ we use ‘cost of goods sold’ for manufacturing or commercial firms and ‘cost of services sold’ for service firms. 4  sample includes 187 active firms listed and traded on national market of istanbul stock exchange (bist-borsa istanbul). national market is the largest market of bist, where the equities of companies that satisfy the listing requirements (an average market capitalization of at least 12 million turkish liras of its free-float for the relevant period and, a free float rate of at least %25) of national market are traded. selected sample does not include financial service firms and the companies with lack of data. 2014 annual accounting numbers are used to calculate the determinants for each firm and annual financial statements of these years are obtained from public disclosure platform of bist (kap). functions with determinants the relationship between liquidity and profitability is investigated via using latent variables. that means functions of liquidity and profitability refer latent variables of structural equation modeling respectively. determinants of these functions are described in detail in this part of the paper. liquidity is defined as the function of cr2, margin3, lev4 and turn5 by liquidity� = �(cr�margin�,lev�,turn�). (1) total amount of the current assets is the fundamental accounting measurement for liquidity position of the financial structure. in this sense, current ratio (cr) is generally accepted as the main indicator for liquidity assessment in the frame of working capital management: as is known, increase in cr means more liquidity. on the other hand, cr is the summarized indicator of the financial decisions which derive from other indicators that affect the financial structure of firms in terms of liquidity. for this reason, cr or its variants should not be thought as single-handed determinants to evaluate the level of current assets. margin is the one of the major determinants for current assets level in the frame of accounting practices: increase in margin causes an increase in cash or receivables accounts. which means high level of margin should positively affect the liquidity of a firm. 2 cr = current assets short term liabilities⁄ 3 margin = (total sales − cost of sales) total sales⁄ , we use ‘cost of goods sold’ for manufacturing or commercial firms and ‘cost of services sold’ for service firms. 4 lev = long term liabilities equities⁄ 5 turn = total sales total assets⁄ . 5  sample includes 187 active firms listed and traded on national market of istanbul stock exchange (bist-borsa istanbul). national market is the largest market of bist, where the equities of companies that satisfy the listing requirements (an average market capitalization of at least 12 million turkish liras of its free-float for the relevant period and, a free float rate of at least %25) of national market are traded. selected sample does not include financial service firms and the companies with lack of data. 2014 annual accounting numbers are used to calculate the determinants for each firm and annual financial statements of these years are obtained from public disclosure platform of bist (kap). functions with determinants the relationship between liquidity and profitability is investigated via using latent variables. that means functions of liquidity and profitability refer latent variables of structural equation modeling respectively. determinants of these functions are described in detail in this part of the paper. liquidity is defined as the function of cr2, margin3, lev4 and turn5 by liquidity� = �(cr�margin�,lev�,turn�). (1) total amount of the current assets is the fundamental accounting measurement for liquidity position of the financial structure. in this sense, current ratio (cr) is generally accepted as the main indicator for liquidity assessment in the frame of working capital management: as is known, increase in cr means more liquidity. on the other hand, cr is the summarized indicator of the financial decisions which derive from other indicators that affect the financial structure of firms in terms of liquidity. for this reason, cr or its variants should not be thought as single-handed determinants to evaluate the level of current assets. margin is the one of the major determinants for current assets level in the frame of accounting practices: increase in margin causes an increase in cash or receivables accounts. which means high level of margin should positively affect the liquidity of a firm. 2 cr = current assets short term liabilities⁄ 3 margin = (total sales − cost of sales) total sales⁄ , we use ‘cost of goods sold’ for manufacturing or commercial firms and ‘cost of services sold’ for service firms. 4 lev = long term liabilities equities⁄ 5 turn = total sales total assets⁄ . furkan baser, soner gokten, guray kucukkocaoglu, hasan ture32 tio (cr) is generally accepted as the main indicator for liquidity assessment in the frame of working capital management: as is known, increase in cr means more liquidity. on the other hand, cr is the summarized indicator of the financial decisions which derive from other indicators that affect the financial structure of firms in terms of liquidity. for this reason, cr or its variants should not be thought as single-handed determinants to evaluate the level of current assets. margin is the one of the major determinants for current assets level in the frame of accounting practices: increase in margin causes an increase in cash or receivables accounts. which means high level of margin should positively affect the liquidity of a firm. in the literature, the relation between leverage (lev) and size (total assets) is discussed frequently. international evidence suggests that leverage is positively related to size (rajan & zingales, 1995; schulman et al., 1996; wiwattanakantang, 1999; booth et al., 2001; boateng, 2004; padron et al., 2005; gaud et al., 2005; sayılgan et.al., 2006). several reasons are depicted on the positive relation between leverage and size, such as cheaper access to outside financing, high level of collateral and etc. (strebulaev, 2007). in this sense, firms listed and traded on national market of istanbul stock exchange have more ability for long term debt financing due to their sizes. in general manner, long term financing especially for current assets increases liquidity in short term. therefore, it is expected that there is a positive relation between lev and liquidity as well. turnover (turn) is the indicator of firm sales generated relative to the value of its assets in terms of cash conversion cycles. therefore, turnover connects with the operating efficiency of a firm. any decrease in operational efficiency make firms depend on more current assets for sustainability. in order to make a decision on adding turn as an indicator into liquidity function, a correlation analysis was executed and the correlation coefficient between cr and turn for the data set was found as -0.207 which is statistically significant at 1% (see table 1). accordingly, this study states the expectation of negative relation between the turn and liquidity. liquidity-profitability tradeoff existence in turkey… 33 table 1. correlation matrix for cr, margin, lev, turn cr margin lev turn corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) cr 1 – margin 0.213** 0.003 1 – lev –0.080 0.278 0.187* 0.010 1 – turn –0.207** 0.005 –0.230** 0.002 –0.033 0.654 1 – * correlation is significant at the 0.05 level (2-tailed). ** correlation is significant at the 0.01 level (2-tailed). s o u r c e : developed by authors. profitability as the realized measurement of gained benefit from all business performance is defined as the function of roa6, cfo and ac7 by: in the literature, the relation between leverage (lev) and size (total assets) is discussed frequently. international evidence suggests that leverage is positively related to size (rajan & zingales, 1995; schulman et al., 1996; wiwattanakantang, 1999; booth et al., 2001; boateng, 2004; padron et al., 2005; gaud et al., 2005; sayılgan et.al., 2006). several reasons are depicted on the positive relation between leverage and size, such as cheaper access to outside financing, high level of collateral and etc. (strebulaev, 2007). in this sense, firms listed and traded on national market of istanbul stock exchange have more ability for long term debt financing due to their sizes. in general manner, long term financing especially for current assets increases liquidity in short term. therefore, it is expected that there is a positive relation between lev and liquidity as well. turnover (turn) is the indicator of firm sales generated relative to the value of its assets in terms of cash conversion cycles. therefore, turnover connects with the operating efficiency of a firm. any decrease in operational efficiency make firms depend on more current assets for sustainability. in order to make a decision on adding turn as an indicator into liquidity function, a correlation analysis was executed and the correlation coefficient between cr and turn for the data set was found as -0.207 which is statistically significant at 1% (see table 1). accordingly, this study states the expectation of negative relation between the turn and liquidity. table 1. correlation matrix for cr, margin, lev, turn cr margin lev turn corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) cr 1 margin 0.213** 0.003 1 lev -0.080 0.278 0.187* 0.010 1 turn -0.207** 0.005 -0.230** 0.002 -0.033 0.654 1 * correlation is significant at the 0.05 level (2-tailed). ** correlation is significant at the 0.01 level (2-tailed). source: developed by authors. profitability as the realized measurement of gained benefit from all business performance is defined as the function of roa6, cfo and ac7 by profitability� = ��roa�,cfo�,ac�� . (2) 6 roa = net income total assets⁄ 7 ac = �cfo total assets⁄ � − roa . (2) return on equity (roe) and return on assets (roa) are the most usual indicators used to measure the profitability of the firm in general terms. while roe is a measure of firm’s efficiency to generate profit from the invested capital, roa is generally used to compare companies by taking the all kinds of investments into account. in this sense, because of the availability of significant differences between the equity values of sample firms and the main concentration of this paper is on the validity of liquidity-profitability tradeoff, roa is preferred as determinant of profitability function. also, total investing amount of assets is the identifier of the total capacity of firm and the amount of assets represents the firm size. in the literature, there is a generalization on the existence of positive relation between size and profitability that derives from different ways; such as abilities of firms to generate discounts from suppliers, getting favorable credit terms and conditions, success in their receivables collection and etc. (eljelly, 2004). therefore, roa is the summarized indicator to clarify the profitability of a firm relative to its size. 6  in the literature, the relation between leverage (lev) and size (total assets) is discussed frequently. international evidence suggests that leverage is positively related to size (rajan & zingales, 1995; schulman et al., 1996; wiwattanakantang, 1999; booth et al., 2001; boateng, 2004; padron et al., 2005; gaud et al., 2005; sayılgan et.al., 2006). several reasons are depicted on the positive relation between leverage and size, such as cheaper access to outside financing, high level of collateral and etc. (strebulaev, 2007). in this sense, firms listed and traded on national market of istanbul stock exchange have more ability for long term debt financing due to their sizes. in general manner, long term financing especially for current assets increases liquidity in short term. therefore, it is expected that there is a positive relation between lev and liquidity as well. turnover (turn) is the indicator of firm sales generated relative to the value of its assets in terms of cash conversion cycles. therefore, turnover connects with the operating efficiency of a firm. any decrease in operational efficiency make firms depend on more current assets for sustainability. in order to make a decision on adding turn as an indicator into liquidity function, a correlation analysis was executed and the correlation coefficient between cr and turn for the data set was found as -0.207 which is statistically significant at 1% (see table 1). accordingly, this study states the expectation of negative relation between the turn and liquidity. table 1. correlation matrix for cr, margin, lev, turn cr margin lev turn corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) cr 1 margin 0.213** 0.003 1 lev -0.080 0.278 0.187* 0.010 1 turn -0.207** 0.005 -0.230** 0.002 -0.033 0.654 1 * correlation is significant at the 0.05 level (2-tailed). ** correlation is significant at the 0.01 level (2-tailed). source: developed by authors. profitability as the realized measurement of gained benefit from all business performance is defined as the function of roa6, cfo and ac7 by profitability� = ��roa�,cfo�,ac�� . (2) 6 roa = net income total assets⁄ 7 ac = �cfo total assets⁄ � − roa . 7  in the literature, the relation between leverage (lev) and size (total assets) is discussed frequently. international evidence suggests that leverage is positively related to size (rajan & zingales, 1995; schulman et al., 1996; wiwattanakantang, 1999; booth et al., 2001; boateng, 2004; padron et al., 2005; gaud et al., 2005; sayılgan et.al., 2006). several reasons are depicted on the positive relation between leverage and size, such as cheaper access to outside financing, high level of collateral and etc. (strebulaev, 2007). in this sense, firms listed and traded on national market of istanbul stock exchange have more ability for long term debt financing due to their sizes. in general manner, long term financing especially for current assets increases liquidity in short term. therefore, it is expected that there is a positive relation between lev and liquidity as well. turnover (turn) is the indicator of firm sales generated relative to the value of its assets in terms of cash conversion cycles. therefore, turnover connects with the operating efficiency of a firm. any decrease in operational efficiency make firms depend on more current assets for sustainability. in order to make a decision on adding turn as an indicator into liquidity function, a correlation analysis was executed and the correlation coefficient between cr and turn for the data set was found as -0.207 which is statistically significant at 1% (see table 1). accordingly, this study states the expectation of negative relation between the turn and liquidity. table 1. correlation matrix for cr, margin, lev, turn cr margin lev turn corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) cr 1 margin 0.213** 0.003 1 lev -0.080 0.278 0.187* 0.010 1 turn -0.207** 0.005 -0.230** 0.002 -0.033 0.654 1 * correlation is significant at the 0.05 level (2-tailed). ** correlation is significant at the 0.01 level (2-tailed). source: developed by authors. profitability as the realized measurement of gained benefit from all business performance is defined as the function of roa6, cfo and ac7 by profitability� = ��roa�,cfo�,ac�� . (2) 6 roa = net income total assets⁄ 7 ac = �cfo total assets⁄ � − roa . furkan baser, soner gokten, guray kucukkocaoglu, hasan ture34 on the other side, roa is calculated by accounting numbers based on accruals. therefore, taking only roa as an indicator to evaluate the profitability of a firm is inadequate. in terms of complete disclosure, cash f low from operations (cfo) should be taken into account (baumol, 1952; miller and orr, 1966). therefore, cfo is added into analysis as another determinant of profitability function and it is expected that increase in cfo means increase in profitability. non-debt tax shield includes methods generally derived from accounting techniques to create tax-shield advantages like debt financing. another alternative advantage comes from the depreciation as a means of reducing corporate taxes (rubio & sogorb-mira, 2012). thus, in terms of cash generation, tax deductions under depreciation expenses are the substitutes of tax benefits from debt financing (deangelo & masulis, 1980). in this case, it could be clearly expected that firms with high level of fixed assets gain more benefit from nondebt tax shield advantages derives from depreciation (titman & wessels, 1988; rajan & zingales, 1995; mackay & phillips, 2005; faulkender & petersen, 2006; wald & long, 2007; kale & shahrur, 2007) and the spread between cfo and net income should be higher for the firms that have bigger amount of tangible assets. validity of this expectation causes smaller accounting assessment of profitability in terms of roa due to high level of total assets for such firms (table 2). the correlation coefficient between accruals (ac) and roa for the turkish firms is –0.416 and statistically significant at 1% which supports our expectation about non-debt tax shield effect on profitability measurement derives by roa calculations. accordingly, this study states the expectation of negative relation between the ac and profitability. table 2. correlation matrix for roa, cfo, ac roa cfo ac corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) corr. coef. (r) sig. (p) roa 1 – cfo 0.096 0.192 1 – ac –0.416* 0.000 0.050 0.495 1 – * correlation is significant at the 0.01 level (2-tailed). s o u r c e : developed by authors. liquidity-profitability tradeoff existence in turkey… 35 structural equation modelling structural equation modeling (sem) is used to model causal relationship between latent variables and to disclose linear relationships between independent and dependent variables. (maccallum & austin, 2000; schumacker & lomax, 2004; garcia et al., 2013). sem refers not to a single statistical technique but to a family of related procedures such as causal modeling and covariance structure analysis. (kline, 2011). in social sciences, these causal models draw attention because of their ability to describe structural theory bearing on some phenomenon (koç et al., 2016). the specification of the structural model can be presented with graphical presentation, system of simultaneous equations or matrix expression. by graphical representation, causal relationship between observed variables and latent variables is introduced visually. based on the theoretical model developed in figure 1, we formulated the research hypothesis as follow: h1: the liquidity of firm has a direct positive effect on profitability (means, invalidity of liquidity-profitability tradeoff in turkish market). figure 1. model development liquidity profitability cr margin lev turn roa cfo ac s o u r c e : developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insigfurkan baser, soner gokten, guray kucukkocaoglu, hasan ture36 nificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as: source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac (3) where source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac is an endogenous latent variable (profitability of firm), source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac is an exogenous (predictor) latent variable (liquidity of firm), source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac regression coefficient relating endogenous variables to exogenous variables, and source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac is an error term. the critical parameter of the model in equation is source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac (4) source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac (5) source: developed by authors. assessing model’s fit in sem is the most controversial subject. the overall fit of the observed data to hypothesized model must be assessed before interpreting individual parameters (jöreskog et al., 1999). fit indices are used to control whether the covariance matrix derived from the proposed theoretical model is different from the covariance matrix derived from the sample (shook et al., 2004). a statistically insignificant difference reveals that the errors are insignificant and the model is supported. various fit indices have emerged to compare the fit of proposed model with competing or baseline models. in this study, a model containing two latent variables which were liquidity and profitability was considered. while the profitability of firms is an endogenous variable, liquidity of firms is an exogenous variable. generally, sem consists of two parts wherein the first part involves the structural model testing and the second part concerns the measurement model validation. based on the proposed model, the structural part can be written as (3) where is an endogenous latent variable (profitability of firm), is an exogenous (predictor) latent variable (liquidity of firm), regression coefficient relating endogenous variables to exogenous variables, and is an error term. the critical parameter of the model in equation is because it quantifies the hypothetical relationship between profitability and liquidity of firms. the observed variables are linked to latent variables by way of measurement equations for the exogenous and endogenous variables. equations of endogenous variable are defined as: (4) (5) (6) and equations of exogenous variable are defined as: liquidity profitability cr margin lev turn roa cfo ac (6) and equations of exogenous variable are defined as: (7) (8) (9) (10) where , are factor loadings, and , are error terms. the data was analyzed and interpreted within the scope of the research in line with the specified purposes by utilizing descriptive statistics and several statistical analyses. sem and other statistical analyses were performed using ibm amos (analysis of moment structures) and ibm spss (the statistical package for social sciences). statistical significance value is set as p < 0.05. empirical results in order to test the validity of liquidity-profitability tradeoff in turkish market, a structural equation model was employed, in which an exogenous latent factor (liquidity) and an endogenous latent factor (profitability) were considered. the scale for each factor was set by fixing the factor loading to one of its indicator variables and the maximum likelihood method was used to estimate the parameters of the model. the model that satisfies both goodness of fit measures and theoretical expectations was selected. the key fit statistics of the structural model summarized in table 3 shows a value of χ2 / df = 3.269, cfi of 0.760, gfi of 0.943, agfi of 0.907, nfi of 0.705, and rmsea of 0.079. the statistic of χ2 / df is within the acceptable limit (schumacker & lomax, 2004). gfi and agfi are all above 0.90, suggesting a good fit between the structural model and the data (jöreskog et al., 1999; byrne, 2010). rmsea is below the suggested threshold value of 0.08 (brwone & cudeck, 1993). therefore, the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified by sem, so consistence of the model to the data was acceptable. table 3. goodness of fit indices fit indices model value recommended value χ2 / df 3.269 1 to 5 the comparative fit index (cfi) 0.760 0 (no fit) – 1 (perfect fit) goodness of fit index (gfi) 0.943 0 (no fit) – 1 (perfect fit) adjusted goodness of fit index (agfi) 0.907 0 (no fit) – 1 (perfect fit) the normed fit index (nfi) 0.705 0 (no fit) – 1 (perfect fit) (7) (7) (8) (9) (10) where , are factor loadings, and , are error terms. the data was analyzed and interpreted within the scope of the research in line with the specified purposes by utilizing descriptive statistics and several statistical analyses. sem and other statistical analyses were performed using ibm amos (analysis of moment structures) and ibm spss (the statistical package for social sciences). statistical significance value is set as p < 0.05. empirical results in order to test the validity of liquidity-profitability tradeoff in turkish market, a structural equation model was employed, in which an exogenous latent factor (liquidity) and an endogenous latent factor (profitability) were considered. the scale for each factor was set by fixing the factor loading to one of its indicator variables and the maximum likelihood method was used to estimate the parameters of the model. the model that satisfies both goodness of fit measures and theoretical expectations was selected. the key fit statistics of the structural model summarized in table 3 shows a value of χ2 / df = 3.269, cfi of 0.760, gfi of 0.943, agfi of 0.907, nfi of 0.705, and rmsea of 0.079. the statistic of χ2 / df is within the acceptable limit (schumacker & lomax, 2004). gfi and agfi are all above 0.90, suggesting a good fit between the structural model and the data (jöreskog et al., 1999; byrne, 2010). rmsea is below the suggested threshold value of 0.08 (brwone & cudeck, 1993). therefore, the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified by sem, so consistence of the model to the data was acceptable. table 3. goodness of fit indices fit indices model value recommended value χ2 / df 3.269 1 to 5 the comparative fit index (cfi) 0.760 0 (no fit) – 1 (perfect fit) goodness of fit index (gfi) 0.943 0 (no fit) – 1 (perfect fit) adjusted goodness of fit index (agfi) 0.907 0 (no fit) – 1 (perfect fit) the normed fit index (nfi) 0.705 0 (no fit) – 1 (perfect fit) (8) (7) (8) (9) (10) where , are factor loadings, and , are error terms. the data was analyzed and interpreted within the scope of the research in line with the specified purposes by utilizing descriptive statistics and several statistical analyses. sem and other statistical analyses were performed using ibm amos (analysis of moment structures) and ibm spss (the statistical package for social sciences). statistical significance value is set as p < 0.05. empirical results in order to test the validity of liquidity-profitability tradeoff in turkish market, a structural equation model was employed, in which an exogenous latent factor (liquidity) and an endogenous latent factor (profitability) were considered. the scale for each factor was set by fixing the factor loading to one of its indicator variables and the maximum likelihood method was used to estimate the parameters of the model. the model that satisfies both goodness of fit measures and theoretical expectations was selected. the key fit statistics of the structural model summarized in table 3 shows a value of χ2 / df = 3.269, cfi of 0.760, gfi of 0.943, agfi of 0.907, nfi of 0.705, and rmsea of 0.079. the statistic of χ2 / df is within the acceptable limit (schumacker & lomax, 2004). gfi and agfi are all above 0.90, suggesting a good fit between the structural model and the data (jöreskog et al., 1999; byrne, 2010). rmsea is below the suggested threshold value of 0.08 (brwone & cudeck, 1993). therefore, the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified by sem, so consistence of the model to the data was acceptable. table 3. goodness of fit indices fit indices model value recommended value χ2 / df 3.269 1 to 5 the comparative fit index (cfi) 0.760 0 (no fit) – 1 (perfect fit) goodness of fit index (gfi) 0.943 0 (no fit) – 1 (perfect fit) adjusted goodness of fit index (agfi) 0.907 0 (no fit) – 1 (perfect fit) the normed fit index (nfi) 0.705 0 (no fit) – 1 (perfect fit) (9) (7) (8) (9) (10) where , are factor loadings, and , are error terms. the data was analyzed and interpreted within the scope of the research in line with the specified purposes by utilizing descriptive statistics and several statistical analyses. sem and other statistical analyses were performed using ibm amos (analysis of moment structures) and ibm spss (the statistical package for social sciences). statistical significance value is set as p < 0.05. empirical results in order to test the validity of liquidity-profitability tradeoff in turkish market, a structural equation model was employed, in which an exogenous latent factor (liquidity) and an endogenous latent factor (profitability) were considered. the scale for each factor was set by fixing the factor loading to one of its indicator variables and the maximum likelihood method was used to estimate the parameters of the model. the model that satisfies both goodness of fit measures and theoretical expectations was selected. the key fit statistics of the structural model summarized in table 3 shows a value of χ2 / df = 3.269, cfi of 0.760, gfi of 0.943, agfi of 0.907, nfi of 0.705, and rmsea of 0.079. the statistic of χ2 / df is within the acceptable limit (schumacker & lomax, 2004). gfi and agfi are all above 0.90, suggesting a good fit between the structural model and the data (jöreskog et al., 1999; byrne, 2010). rmsea is below the suggested threshold value of 0.08 (brwone & cudeck, 1993). therefore, the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified by sem, so consistence of the model to the data was acceptable. table 3. goodness of fit indices fit indices model value recommended value χ2 / df 3.269 1 to 5 the comparative fit index (cfi) 0.760 0 (no fit) – 1 (perfect fit) goodness of fit index (gfi) 0.943 0 (no fit) – 1 (perfect fit) adjusted goodness of fit index (agfi) 0.907 0 (no fit) – 1 (perfect fit) the normed fit index (nfi) 0.705 0 (no fit) – 1 (perfect fit) (10) where (7) (8) (9) (10) where , are factor loadings, and , are error terms. the data was analyzed and interpreted within the scope of the research in line with the specified purposes by utilizing descriptive statistics and several statistical analyses. sem and other statistical analyses were performed using ibm amos (analysis of moment structures) and ibm spss (the statistical package for social sciences). statistical significance value is set as p < 0.05. empirical results in order to test the validity of liquidity-profitability tradeoff in turkish market, a structural equation model was employed, in which an exogenous latent factor (liquidity) and an endogenous latent factor (profitability) were considered. the scale for each factor was set by fixing the factor loading to one of its indicator variables and the maximum likelihood method was used to estimate the parameters of the model. the model that satisfies both goodness of fit measures and theoretical expectations was selected. the key fit statistics of the structural model summarized in table 3 shows a value of χ2 / df = 3.269, cfi of 0.760, gfi of 0.943, agfi of 0.907, nfi of 0.705, and rmsea of 0.079. the statistic of χ2 / df is within the acceptable limit (schumacker & lomax, 2004). gfi and agfi are all above 0.90, suggesting a good fit between the structural model and the data (jöreskog et al., 1999; byrne, 2010). rmsea is below the suggested threshold value of 0.08 (brwone & cudeck, 1993). therefore, the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified by sem, so consistence of the model to the data was acceptable. table 3. goodness of fit indices fit indices model value recommended value χ2 / df 3.269 1 to 5 the comparative fit index (cfi) 0.760 0 (no fit) – 1 (perfect fit) goodness of fit index (gfi) 0.943 0 (no fit) – 1 (perfect fit) adjusted goodness of fit index (agfi) 0.907 0 (no fit) – 1 (perfect fit) the normed fit index (nfi) 0.705 0 (no fit) – 1 (perfect fit) are factor loadings, and (7) (8) (9) (10) where , are factor loadings, and , are error terms. the data was analyzed and interpreted within the scope of the research in line with the specified purposes by utilizing descriptive statistics and several statistical analyses. sem and other statistical analyses were performed using ibm amos (analysis of moment structures) and ibm spss (the statistical package for social sciences). statistical significance value is set as p < 0.05. empirical results in order to test the validity of liquidity-profitability tradeoff in turkish market, a structural equation model was employed, in which an exogenous latent factor (liquidity) and an endogenous latent factor (profitability) were considered. the scale for each factor was set by fixing the factor loading to one of its indicator variables and the maximum likelihood method was used to estimate the parameters of the model. the model that satisfies both goodness of fit measures and theoretical expectations was selected. the key fit statistics of the structural model summarized in table 3 shows a value of χ2 / df = 3.269, cfi of 0.760, gfi of 0.943, agfi of 0.907, nfi of 0.705, and rmsea of 0.079. the statistic of χ2 / df is within the acceptable limit (schumacker & lomax, 2004). gfi and agfi are all above 0.90, suggesting a good fit between the structural model and the data (jöreskog et al., 1999; byrne, 2010). rmsea is below the suggested threshold value of 0.08 (brwone & cudeck, 1993). therefore, the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified by sem, so consistence of the model to the data was acceptable. table 3. goodness of fit indices fit indices model value recommended value χ2 / df 3.269 1 to 5 the comparative fit index (cfi) 0.760 0 (no fit) – 1 (perfect fit) goodness of fit index (gfi) 0.943 0 (no fit) – 1 (perfect fit) adjusted goodness of fit index (agfi) 0.907 0 (no fit) – 1 (perfect fit) the normed fit index (nfi) 0.705 0 (no fit) – 1 (perfect fit) are error terms. liquidity-profitability tradeoff existence in turkey… 37 the data was analyzed and interpreted within the scope of the research in line with the specified purposes by utilizing descriptive statistics and several statistical analyses. sem and other statistical analyses were performed using ibm amos (analysis of moment structures) and ibm spss (the statistical package for social sciences). statistical significance value is set as p < 0.05. empirical results in order to test the validity of liquidity-profitability tradeoff in turkish market, a structural equation model was employed, in which an exogenous latent factor (liquidity) and an endogenous latent factor (profitability) were considered. the scale for each factor was set by fixing the factor loading to one of its indicator variables and the maximum likelihood method was used to estimate the parameters of the model. the model that satisfies both goodness of fit measures and theoretical expectations was selected. the key fit statistics of the structural model summarized in table 3 shows a value of χ2 / df = 3.269, cfi of 0.760, gfi of 0.943, agfi of 0.907, nfi of 0.705, and rmsea of 0.079. the statistic of χ2 / df is within the acceptable limit (schumacker & lomax, 2004). gfi and agfi are all above 0.90, suggesting a good fit between the structural model and the data (jöreskog et al., 1999; byrne, 2010). rmsea is below the suggested threshold value of 0.08 (brwone & cudeck, 1993). therefore, the hypothesized model for the inexistence of the validity of liquidity-profitability tradeoff was verified by sem, so consistence of the model to the data was acceptable. table 3. goodness of fit indices fit indices model value recommended value χ2 / df 3.269 1 to 5 the comparative fit index (cfi) 0.760 0 (no fit) – 1 (perfect fit) goodness of fit index (gfi) 0.943 0 (no fit) – 1 (perfect fit) adjusted goodness of fit index (agfi) 0.907 0 (no fit) – 1 (perfect fit) the normed fit index (nfi) 0.705 0 (no fit) – 1 (perfect fit) root mean sq. error of approx. (rmsea) 0.073 <0.05 (very good) – 0.1 (threshold) s o u r c e : developed by authors. furkan baser, soner gokten, guray kucukkocaoglu, hasan ture38 figure 2 presents details regarding the parameter estimates for the model. standardized coefficient estimates for the hypothesized model with corresponding t-value are presented in table 4. according to the statistical significance of the parameter estimates from sem, the hypothesis which expresses a positive relationship between liquidity and profitability was supported. from standardized coefficient estimate, it is concluded that liquidity-profitability tradeoff is not valid in turkish market. figure 2. structural model with standardized path coefficients liquidity profitability cr margin lev turn roa cfo ac liquidity profitability cr margin lev turn roa cfo ac 0.95 -0.24 0.19 0.24 0.97 0.08 -0.40 0.44 s o u r c e : developed by authors. table 4. standardized coefficient estimates of sem path standardized coefficient estimate t – value p profitability ← liquidity 0.435 2.350 0.019 turn ← liquidity –0.237 –1.969 0.049 margin ← liquidity 0.235 1.963 0.050 cr ← liquidity 0.190 – – lev ← liquidity 0.951 1.937 0.053 roa ← profitability 0.973 – – cfo ← profitability 0.085 1.117 0.264 ac ← profitability –0.399 –2.555 0.011 s o u r c e : developed by authors. 0.97 -0.40 liquidity-profitability tradeoff existence in turkey… 39 figure 2 presents details regarding the parameter estimates for the model. standardized coefficient estimates for the hypothesized model with corresponding t-value are presented in table 4. according to the statistical significance of the parameter estimates from sem, the hypothesis which expresses a positive relationship between liquidity and profitability was supported. from standardized coefficient estimate, it is concluded that liquidity-profitability tradeoff is not valid in turkish market. figure 2. structural model with standardized path coefficients liquidity profitability cr margin lev turn roa cfo ac liquidity profitability cr margin lev turn roa cfo ac 0.95 -0.24 0.19 0.24 0.97 0.08 -0.40 0.44 s o u r c e : developed by authors. table 4. standardized coefficient estimates of sem path standardized coefficient estimate t – value p profitability ← liquidity 0.435 2.350 0.019 turn ← liquidity –0.237 –1.969 0.049 margin ← liquidity 0.235 1.963 0.050 cr ← liquidity 0.190 – – lev ← liquidity 0.951 1.937 0.053 roa ← profitability 0.973 – – cfo ← profitability 0.085 1.117 0.264 ac ← profitability –0.399 –2.555 0.011 s o u r c e : developed by authors. 0.97 -0.40 discussion: a detailed look on determinants inexistence of the validity of liquidity-profitability tradeoff in turkish market is not surprising when the results of the determinants used in functions are analyzed. in other words, a clear understanding of this invalidity needs a detailed look on some determinants as well. firstly, all results are consistent with our expectation in terms of the directions of the effects under the comments that mentioned in section 2.2. cr, margin and lev have positive effect on liquidity, while turn is the only determinant that has negative effect. on the other side, profitability is affected positively by roa and cfo, while ac has negative affect on profitability. however, the results create need for making a discussion to explain this invalidity of liquidity-profitability tradeoff in turkish market. in this sense, remarkable information can be obtained when concentrated on the findings of liquidity function. there are meaningful differences between the effect sizes of determinants. while cr, margin and turn has relatively low effect size (standardized coefficients for cr, margin and turn are 0.19, 0.24, –0.24, respectively), lev has significantly high effect size (standardized coefficient for lev is 0.95) on liquidity. this differentiation of lev enables us to reveal two main inferences: (1) the inadequacy of cr or its variants to analyze the liquidity-profitability tradeoff and (2) the reality of applying prudent working capital management (p-wcm) by managers in turkish market as an emerging one. in the literature, generally, the researches on liquidity-profitability tradeoff are constructed on separate relationships between cr or its variants and profitability (eljelly, 2004). in this paper, a more comprehensive analysis is applied by employing sem to disclose the effects of all determinants on liquidity all together. as seen from our findings, cr has not much explanatory power on the liquidity in the frame of financial structure formation. the fundamental reason of that is cr or its variants are the indirect summarized results of other direct financial decisions that taken by managers strategically. the word of strategically means that the preferences of managers in financing of current assets. high level positive effect of lev on liquidity indicates that managers of turkish firms prefer long term liabilities rather than current ones to finance current assets. in the other words, they apply p-wcm to overcome possible liquidity shocks (uremandu, 2012; modi, 2012; akoto et al., 2013; zakaria & amin, 2013). this fact is coherent with our point of view, which asserts that furkan baser, soner gokten, guray kucukkocaoglu, hasan ture40 managers behave prudent in financial decisions in turkey because of their bad experiences come from troubled times. on the profitability side the result indicates a moderate level of positive effect between liquidity and profitability which is the other discussion issue that needs to be explained in addition to the invalidity of liquidity-profitability tradeoff. firstly, the significant effect of roa on profitability, (standardized coefficient for roa is 0.97), verifies our choice on using it as a determinant instead of roe. since roa includes the all short and long term financing alternatives especially for current assets, it completely ref lects the outcome of applying p-wcm in terms of profitability. as discussed in kling et al. (2014), cash holdings increase the ability of firms to cover possible operating loses emerged especially by liquidity shocks and to reach current liabilities in better conditions as an alternative of financing current assets, for example suppliers are more willing to provide trade credit to firms with higher liquidity positions. also, as discussed in jung and kim (2008) study, stockpiling of liquid assets provides incentives for firms to increase their leverage because cash holdings decrease potential financial distress costs and increase target debt-equity ratios. in this sense, firms in turkey decrease financial risks on cash conversion cycles by applying p-wcm and increase operating efficiency by gaining ability and f lexibility on managing current liabilities.  conclusion in this paper, the existence of the validity of liquidity-profitability tradeoff is analyzed for turkish market which has many financial experiences on troubled times that caused liquidity shocks. our main expectation is that turkish firms could show a tendency to have high liquidity position by ignoring the liquidityprofitability tradeoff in terms of working capital management due to gained experiences come from bad times. 2014 is the best fitted year to test this alleging remark as this year represents the best economic conditions that turkey has faced. the data of 187 firms listed and traded on national market of istanbul stock exchange (bist-borsa istanbul) are used. structural equation modelling is applied to provide a more comprehensive analysis and the functions of liquidity and profitability are constituted by using piotroski’s criterions of liquidity/solvency, operating efficiency and profitability to generate structural equation model of the study. the results of the hypothesized model indicate that the existence of liquidity-profitability tradeoff liquidity-profitability tradeoff existence in turkey… 41 is invalid in turkey and additionally there is a moderate level of positive effect between liquidity and profitability. high level positive effect of leverage on liquidity indicates that managers of turkish firms apply prudent working capital management to cover possible operating loses emerged especially by liquidity shocks and this behavior makes firm more capable in terms of increasing operating efficiency and managing current liabilities in turkey. in conclusion, leverage seems the most important indicator that taken into account on working capital management decisions in turkey in the frame of liquidity and profitability relation.  references akoto, r.k., awunyo-vitor, d., & angmor, p.l. 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(2013). working capital financing and management in malaysian construction companies. journal of current issues in finance, business and economics, 6(2/3), p. 287. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 1 date of submission: may 15, 2018; date of acceptance: june 3, 2018. * contact information: lmihaylova777@gmail.com, “angel kanchev” university of ruse, faculty of business and management, studentska str. 8, ruse-7017, bulgaria, phone: + 359 879 005 325; orcid id: https://orcid.org/0000-0001-8566-1761. ** contact information: epapazov@gmail.com, university of national and world economy, business faculty, studentski grad, sofia-1700, bulgaria, phone: + 359 879 005 316; orcid id: https://orcid.org/0000-0002-7940-0474. mihaylova, l., & papazov, e. (2018). using accounting information for strategic decision-making in a multi-segmented company. copernican journal of finance & accounting, 7(1), 21–33. http:// dx.doi.org/10.12775/cjfa.2018.002 lyudmila mihaylova* university of ruse “angel kanchev” emil papazov** university of national and world economy using accounting information for strategic decision-making in a multi-segmented company keywords: a multi-segmented company, strategic decisions, accounting information, operating segments. j e l classification: m21. abstract: the reason of being of corporate accounting is not only to record, interpret and present data about existing business processes, but also to provide information for supporting main decision-making activities of management. this article presents basic problems outlining the relationship between accounting and strategic management of companies. the main ideas are connected with the philosophy of presenting information in financial and management reports, on the one hand, and the levels of management activities and their relationship to the development strategy of the organization, on the other hand. the aim is to trace the relationship between the segmental accounting and the strategic management of diversified organizations and to highlight problem areas, deserving management attention. the research methods of analysis and lyudmila mihaylova, emil papazov22 synthesis have been used. the outcomes of the research show that choosing a proper cost structure and allocation basis at operating segment level will contribute to increasing the capabilities of managers to make better corporate strategic decisions.  introduction in a market environment, the progress of a business is dependent on continuous improvement of its long-term competitiveness based on attracting of suitable investors, ensuring of proper market positions, setting-up of optimal business portfolios and creating of conditions for rational use of resources. in this respect, the tasks of company’s accountancy consist not only of registration, interpretation and presentation of already undergoing business processes and phenomena, but also of information provision of the activities connected with taking managerial decisions of different nature – strategic, tactical and operational. strategic decisions are inherent to the senior management of a company and are related mainly to the development of new products, exploration of new markets or utilization of new technologies and resources. following its strategy, every business organization tries to find a position in the sector, in which it is active, and defend this position as long as possible (papazov & mihaylova, 2015; ciemleja & lace, 2011; mitev, 2016; arun, 2015). principally, each of the main components of a company’s strategy is a subject of attention by different stakeholders, and therefore, when making strategic decisions, there is a need to look for informational links between them. they also appear in the tracking of the information f low, as well as in the ways of its summarizing and presentation to the upper management. the accumulated experience shows that financial statements, having often a mandatory character, present, as a rule, mostly material and financial results of company’s development. the obtained information enables analysts to assess the enterprise’s long-term sustainability, liquidity and profitability. however, it is more difficult to evaluate all other strategic parameters in order to take appropriate management action, if required. the difficulty is compounded by the fact that companies – in order to keep or raise revenues and profits – are increasingly using diversification (multisegmentation) techniques as a strategic tool, i. e. entering other related or unrelated businesses, regardless of the size and nature of company’s activities so far. diversification is becoming a preferable strategy, especially in times of eco using accounting information for strategic… 23 nomic crises. (for further details, see papazov & mihaylova, 2011; trifonova & atanassov, 2016). the diversification of a company’s business requires undertaking of specific strategic actions, substantiated by sufficient volume and content of information. the ways this information is reported and presented to senior management depend usually on the planned objectives, the imposed internal organizational and management structure, and the offered variety of products and services. in this respect, the emphasis on management information is placed in relation to the products or services and is concentrated in the so-called “strategic business units”. in more recent times and mainly in the accounting literature, the term “strategic business unit” is substituted by the term “operating segment” developed for financial reporting purposes and endorsed by the international financial reporting standard 8 – operating segments (european commission, 2007; ifrs 8, 2017). the ifrs 8 defines the operating segment as “а component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity); whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and for which discrete financial information is available”. the purpose of the regulatory norm is to assure first and foremost publicity of information broken down by segments, when it comes to a company that has a complex (diversified) character and is traded (or is about to be listed) on the stock exchange (ernst & young, 2009). in this article, the focus will be placed on the relationship between the strategic decision-making and accounting reporting for managerial purposes at strategic business unit (or operating segment) level. this relationship is important because the taken strategic decisions will be based on reliable and timely reporting information, which will make them appear to the company’s stakeholders as reasonably justified. for the purposes of this investigation, the terms “strategic business unit” and “operating segment” will be used as equivalent and interchangeable, although they have in fact a complementary nature showing common characteristics, but also peculiarities that distinguish them from one another. lyudmila mihaylova, emil papazov24 methodology of research the results of the investigation will be presented after applying the analyticalsynthetic method by offering a cascading hypothetical case study. the compiled example will illustrate that reporting by strategic business units (operating segments) is a prerequisite not only for a proper analysis of corporate performance, but also for tracing of future strategic directions initiated by senior managers. research context: accounting information and strategic decision-making practitioner’s views on the relationship between strategic management and financial accounting have endured changes over time, but no consensus on this issue has been reached so far. there are many interpretations arising from the different management perspectives. however, the view about the need for mutual penetration between accounting information and strategic decision-making with a focus on costs and benefits of company’s activities seems to prevail (hart & roslender, 2003; simeonov & lambovska, 2012). analyzing sales revenues of individual products or product lines can be done on the basis of financial reporting, as well as on the basis of intercompany estimates made for management purposes. the strategic analysis could be organized also by business segments, created on cost-revenue base and consistent with the followed firm strategy. the revenue could be directly related to an operating segment or be part of the enterprise’s revenue that could be addressed to a relevant strategic business unit, if an appropriate allocation base is available, independent of fact where it comes from – external or internal customer sales. specific in this case is that from the point of view of financial reporting, the costs of the operating segment do not include general and administrative expenses, including costs of the central management and other costs arising at enterprise level and relating to its management as a whole (figure 1). in the management accounting, however, there are no such constraints, because cost allocation complies principally with the policy оf managers at different levels. using accounting information for strategic… 25 figure 1. segmented structure of a company figure 1. segmented structure of a company source: adapted from: papazov, 2012, p. 110. the financial reporting in diversified enterprises is tied to the accounting policies adopted by their management. in this regard, it is important to define the scope of the assets of the operating segments, i.e. those assets which have been engaged in the operational activities of the segment or can be attributed to it on a reasonable basis. in some cases, for strategic management purposes, revenues, expenses, or assets may be allocated to certain operating segments on a basis that is reasonably chosen by the entity’s management, but from the point of view of external users the financial statements could be considered subjective, controversial, or difficult to understand (the examples of complex engineering manufacturing, chemical or similar production). there are also opposite cases, when the entity’s management decides that for the purposes of management reporting it will not refer to revenues, expenses or assets for any of the segregated operating segments, although there is a reason for such an action due to existing financial reporting norms. to justify whether an income or expense is attributable to a relevant operating segment, managers need to assess whether associated risks and returns are product-dependent variables. for example, when advertising a product of a company, it is sometimes difficult to assess whether risks and benefits relate to that product only or would have an impact on the entity as a whole. accordingly, the question of revenue and expense allocation arises. the practical experience shows that the management reporting system usually provides good evidence of the prevailing sources of risks and expected returns that are also used for financial reporting purposes by operating segments. in 90% of the cases, a unit renders in its statements an account of information by operating segments in the same way, as it reports strategically important facts and circumstances to the senior management. the idea of such solutions is to increase the intelligibility of the received information and to respond to the expressed needs of investors, creditors and others for risk and return information related to company’s products (bojarenko, 2017; hofbauer, 2017, pp. 20– 31; šimberová, 2008). companies are also trying to utilize methods providing full transparency of the processes inside it. they also implement techniques giving opportunities for the company’s management to accomplish different goals simultaneously. (škoda, lengyelfalusy & gabrhelová, 2017; khocha, 2017; ruland, 1984; pepur, mihanović & pepur, 2013). for the purpose of financial reporting, an operating segment should be identified, if the predominant part of its revenue arises from sales to external customers. in this respect, ifrs 8 sets three important conditions: first, sales revenue as a whole (i.e. to both external and internal customers) are 10% or more of the total revenue of all sectors. second, the financial result (differentiated in profit or loss) of an emerging segment is 10% or more of the total financial result (differentiated in profit or loss) for the company as a whole. third, the segmental assets are 10% or more of the company’s total assets. at the discretion of company’s management, an operating segment eligible for reporting in the prior period, may continue to be reported in the current period, even though it does not meet the accounting standards, but continues to be of strategic importance for the company’s management. the senior management investment centre os 1 os 2 os 3 manufacturing marketing finance profit centre revenue/cost centre s o u r c e : adapted from: papazov, 2012, p. 110. the financial reporting in diversified enterprises is tied to the accounting policies adopted by their management. in this regard, it is important to define the scope of the assets of the operating segments, i.e. those assets which have been engaged in the operational activities of the segment or can be attributed to it on a reasonable basis. in some cases, for strategic management purposes, revenues, expenses, or assets may be allocated to certain operating segments on a basis that is reasonably chosen by the entity’s management, but from the point of view of external users the financial statements could be considered subjective, controversial, or difficult to understand (the examples of complex engineering manufacturing, chemical or similar production). there are also opposite cases, when the entity’s management decides that for the purposes of management reporting it will not refer to revenues, expenses or assets for any of the segregated operating segments, although there is a reason for such an action due to existing financial reporting norms. to justify whether an income or expense is attributable to a relevant operating segment, managers need to assess whether associated risks and returns are product-dependent variables. for example, when advertising a product of a company, it is sometimes difficult to assess whether risks and benefits relate to that product only or would have an impact on the entity as a whole. accordingly, the question of revenue and expense allocation arises. lyudmila mihaylova, emil papazov26 the practical experience shows that the management reporting system usually provides good evidence of the prevailing sources of risks and expected returns that are also used for financial reporting purposes by operating segments. in 90% of the cases, a unit renders in its statements an account of information by operating segments in the same way, as it reports strategically important facts and circumstances to the senior management. the idea of such solutions is to increase the intelligibility of the received information and to respond to the expressed needs of investors, creditors and others for risk and return information related to company’s products (bojarenko, 2017; hof bauer, 2017, pp. 20–31; šimberová, 2008). companies are also trying to utilize methods providing full transparency of the processes inside it. they also implement techniques giving opportunities for the company’s management to accomplish different goals simultaneously. (škoda, lengyelfalusy & gabrhelová, 2017; khocha, 2017; ruland, 1984; pepur, mihanović & pepur, 2013). for the purpose of financial reporting, an operating segment should be identified, if the predominant part of its revenue arises from sales to external customers. in this respect, ifrs 8 sets three important conditions: first, sales revenue as a whole (i.e. to both external and internal customers) are 10% or more of the total revenue of all sectors. second, the financial result (differentiated in profit or loss) of an emerging segment is 10% or more of the total financial result (differentiated in profit or loss) for the company as a whole. third, the segmental assets are 10% or more of the company’s total assets. at the discretion of company’s management, an operating segment eligible for reporting in the prior period, may continue to be reported in the current period, even though it does not meet the accounting standards, but continues to be of strategic importance for the company’s management. the decision is taken in line with the followed strategy and is a priority of the senior management. there is also an opposite variant: if the operating segment is identified as being subject to reporting in the current period because it meets required conditions, then the information for prior periods should be revised for comparative purposes, unless it is impracticable to do so. when such actions occur, strong relationships between financial and managerial accounting, on the one side, and strategic management, on the other, emerge. using accounting information for strategic… 27 strategizing in a multi-segmented company based on accounting information reporting by operating segments (strategic business units) and achieving comparability of results is a prerequisite for analyzing business performance indicators. on this basis, strategic management decisions can be made, for example in connection with a possible restructuring of the company’s product portfolio. when analyzing financial result of an operating segment (strategic business units), there are some issues that are essential from strategic point of view. if calculating the financial result of an operating segment (strategic business units), both variable and fixed costs (direct and indirect; distributed on a “reasonable” basis) should be taken into account. however, the formation of some of the fixed indirect costs (for example, rental costs of a production facility; costs pertaining to machinery and equipment used for manufacturing in all segments of the enterprise) appears perhaps a result of past decisions of the senior management and a consequence of earlier adopted accounting policy. it follows that the financial result generated by the operating segment (strategic business unit) will strongly be inf luenced by the already adopted methodology underlying cost allocation calculation. when defining it, account should be taken of the specific features of each activity, so that it can be applied systematically in the enterprise. as stated above, for the purpose of financial reporting, the operating segment costs do not include those made for overall purposes, as well as those used for the needs of company’s senior management. if we take in this respect the example of a leather manufacturer, things would look like this (table 1). table 1. financial results by operating segments (os) of a company (1) indicators os “men’s shoes” os “lady’s shoes” os “children’s shoes” os “leather accessories” total sales revenues 600 400 400 300 1700 variable costs 400 310 350 200 1260 fixed technological costs after distribution on the basis of variable costs 95 74 83 48 300 financial result 105 16 -33 52 140 s o u r c e : authors’ own analysis. lyudmila mihaylova, emil papazov28 the analytical calculations are made from the point of view of financial reporting. the preparation of the information is primarily intended for third parties. the data show that the enterprise as a whole has a profit of 140 units. if the reported 300 unit costs are allocated on a variable cost basis, the operating segment “children’s shoes” indicates a loss of 33 units. if we choose under the same circumstances another basis for the distribution of fixed costs, for instance the sales revenues, the results will be as follows (table 2). table 2. financial results by operating segments (os) of a company (2) indicators os “men’s shoes” os “lady’s shoes” os “children’s shoes” os “leather accessories” total sales revenues 600 400 400 300 1700 variable costs 400 310 350 200 1260 fixed technological costs after distribution on the basis of sales revenues 105 70 70 55 300 financial result 95 20 -20 45 140 s o u r c e : authors’ own analysis. in the second case the result is identical. it turns out that the operating segment “children’s shoes” is again losing, although the loss is less. if the question arises as to whether or not the total expenses of corporate governance should be allocated or not in pricing and determining the profits of individual strategic business units, then more problems arise. the above example can be complemented for management reporting and strategic analysis purposes. we choose the option with distribution of fixed costs on revenue basis. assuming that the general business costs are allocated on the same basis, the results will look like the following (table 3). table 3. financial results by operating segments (os) of a company (3) indicators os “men’s shoes” os “lady’s shoes” os “children’s shoes” os “leather accessories” total sales revenues 600 400 400 300 1700 variable costs 400 310 350 200 1260 using accounting information for strategic… 29 indicators os “men’s shoes” os “lady’s shoes” os “children’s shoes” os “leather accessories” total contribution 200 90 50 100 440 fixed technological costs after distribution on the basis of variable costs 105 70 70 55 300 financial result i 95 20 -20 45 140 sg&a expenses* after distribution on the basis of variable costs 35 23 23 19 100 financial result ii 60 -3 -43 26 40 * sg&a stands for selling, general and administrative (expenses). s o u r c e : authors’ own analysis. after the additional non-accounting calculations, a second strategic business unit is now at loss. in such situations, the firm’s management usually decides on a strategic plan to gradually phase out the business units and restructure its product portfolio. if such a solution is used, the indicators will look like this (see table 4). table 4. financial results by operating segments (os) of a company (4) indicators os “men’s shoes” os “leather accessories” total sales revenues 600 300 900 variable costs 400 200 600 contribution 200 100 300 fixed technological costs after distribution on the basis of variable costs 200 100 300 financial result i 0 0 0 sg&a expenses* after distribution on the basis of variable costs 67 33 100 financial result ii -67 -33 -100 *sg&a stands for selling, general and administrative (expenses). s o u r c e : authors’ own analysis. table 3. financial results by operating segments (os) of a company (3) lyudmila mihaylova, emil papazov30 the enterprise accounts for a loss of 100 units, and following the abovementioned logic, the management should decide to fully restructure the product portfolio of the enterprise or cease its business. this decision seems practically absurd (variant 3 in table 3 shows a positive financial result of 40 units for the company as a whole!), but is indicative for the overall cost analysis by operating segments, which should take into account that: ■ the total company’s costs affect the overall financial result but are not dependent on the segmental level management. the negative financial result of a strategic business unit obtained after the distribution of total firm expenses (for management reporting purposes), is not fair to be considered an important indicator justifying the cessation or restructuring of the diversified enterprise portfolio (yonkova, 2005). ■ when complying with the financial reporting requirements, specific indicators are not taken into account for the value of the overall business activities and its relationship to the entity’s functional (or strategic business) units. these costs, however, inevitably accompany the business and are related to the strategic management and authority of the top managers. this raises the need to integrate financial and management accounting information for the needs of strategic governance in diversified businesses. ■ when doing accounting for the needs of strategic management of diversified enterprises, the bases of distribution of the total company costs are often arbitrarily chosen and do not take into consideration the factors that cause them. they should stem from the peculiarities of the operating segment’s activities characterized by different opportunities for economic contribution across the enterprise as a whole. from a strategic point of view, the appropriate benchmark for assessing managerial actions concerning an operating segment (strategic business unit) is the indicator contribution. in addition, an analysis could be undertaken focusing on the costs inf luenced by managerial decisions and concerning the product portfolio, the organization of the manufacturing process and realization of the sales of the strategic business unit. the contribution indicator represents the difference between revenue and variable costs calculated by operating segments or for the company as a whole. the specific values for the example under consideration are shown in table 5. using accounting information for strategic… 31 table 5. financial results by operating segments (os) of a company (5) indicators os “men’s shoes” os “lady’s shoes” os “children’s shoes” os “leather accessories” total sales revenues 600 400 400 300 1700 variable costs 400 310 350 200 1260 contribution 200 90 50 100 440 fixed costs 140 93 93 74 400 financial result 60 -3 -43 26 40 s o u r c e : authors’ own analysis. if a multi-segmented company uses the contribution indicator for strategic decision-making, the segments reporting negative financial results could be left untouched at least as long as they cover some of the total fixed costs associated with company’s business. this, of course, will continue until the company as a whole is profitable.  conclusions the presented approaches for information provision and justification of strategic decisions in multi-segmented companies depend heavily on the way accounting activities are organized. choosing properly a cost allocation basis at the operating segment level will lead to increased capabilities of managers to plan, analyze and control the business development. the resulting reporting information may disclose risks and opportunities of individual business units belonging to a complex enterprise and present a true “picture” to the potential investors to facilitate their informed investment decisions. on the basis of the systematic information and under the collaboration with interested third parties, the ability of managers to plan and control business activities will increase while in the same time the chances of a company to develop effectively and competitively will enlarge. lyudmila mihaylova, emil papazov32  references arun, k. 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(2005). sectoral information in the system of financial reporting and managerial accounting. journal “economic alternatives”, 7(1), 94–110. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 2 date of submission: august 31, 2018; date of acceptance: october 3, 2018. * contact information: maciej.pawlowski@wzieu.pl, department of finance and banking, faculty of management and economics of services, the university of szczecin, cukrowa 8, 71-004 szczecin, poland, phone: +48 91 444 31 87; orcid id: https://orcid. org/0000-0002-1885-1722. pawłowski, m. (2018). financing the solar energy market through the use of securitization – the case of the united states. copernican journal of finance & accounting, 7(2), 63–76. http://dx.doi. org/10.12775/cjfa.2018.009 maciej pawłowski* the university of szczecin financing the solar energy market through the use of securitization – the case of the united states keywords: solar energy, finances, renewable energy sources, securitization, financial market. j e l classification: g1, g23, p28, q4. abstract: this article corresponds with the research on the implementation of general sustainable development ideas. moreover, it addresses the issue of using securitization in financing the solar energy market in the u.s. the aim of the research is to identify the essential characteristics of lease securitization of photovoltaic installations, as well as illustrate the current market development of these instruments. the paper discusses theoretical framework of securitization, identifies essential characteristics of the photovoltaic installation market in the context of its potential regarding the use of the securitization process, and presents the state of the securitization market in the discussed area. the characteristics presented in the article are based on the examples of the united states economy – the birthplace of lease securitization of photovoltaic installations, as well as the only state, where the analysed instrument finds practical application, so far. maciej pawłowski64  introduction there is no doubt that electrical energy is one of the most important factors behind the economic and civilization development of contemporary world economies. the dynamic processes of technical progress and increased innovation, which have been observed in the global economic system, as well as the growing world population directly translate into an increase in demand for electricity, and, consequently, lead to a greater scale of its production. at the same time, the necessity to implement a sustainable development concept is getting more and more prominent, which, in the context of the undertaken issue, can be understood as a certain compromise between maintaining the usefulness and quality of natural resources and satisfying the global economy's demand for electricity. as a consequence, the market of energy that comes from renewable energy sources is becoming increasingly important not only in the consciousness of modern societies, but also in the attitudes and actions of the broadly defined participants of economic life. the research methodology and the course of the research process this article falls into the mainstream part of the interest in instruments that support the implementation of sustainable development objectives, and aims at identification of essential characteristics of lease securitization of photovoltaic installations, as well as illustration of the current market development of these instruments. the paper discusses theoretical framework of securitization, identifies essential characteristics of the photovoltaic installation market in the context of its potential regarding the use of the securitization process, and presents the state of the securitization market in the discussed area. the characteristics presented in the article are based on the examples of the united states economy – the birthplace of lease securitization of photovoltaic installations, as well as the only state, where the analysed instrument finds practical application, so far1. 1 this study takes the form of a review article that summarizes the current state of knowledge and experience in the field of securitization of leasing photovoltaic installations as presented on the example of the u.s. economy. focusing considerations on the example of the u.s. is deliberate and justified by two different prerequisites. financing the solar energy market… 65 theoretical framework of securitization process securitization is defined as a process during which diversified pool of financial assets, together with cash f low they generated, are isolated from initiator’s balance (company, financial institution, government or local government unit), secured by means of internal and external methods, and made legally independent in the so-called special purpose vehicle (spv), which then refinances the purchased asset pool through the issuance of debt securities in domestic and (or) international capital markets (reksa, 2007, pp. 5–6). executing securitization transaction by the initiator, and thus financing business activity by means of this mechanism, is therefore conditioned by the category of assets in the initiator’s balance sheet. it is considered that anything that has value and generates regular financial f lows may be the subject of securitization (bartos, 2006, p. 286), whereas assets subject to this process should be characterized by the certainty of future issuances and their full predictability as to the date and size. in order to strengthen securitization process, mainly in the scope of management of claims of investors who acquire securitized asset-backed debt securities, it is required that (waszkiewicz, 2011, pp. 45–47): ■ the process of standardizing securitized assets in the scope of their type is carried out, choosing relatively similar assets without combining their different categories; ■ long-term assets, whose liquidation period is longer than 1 year, are subject to securitization; ■ there is substantial likelihood that selected assets are satisfied by the debtors; firstly, as it was already mentioned, the pioneering securitization transactions used in financing of the solar energy market have been carried out in the u.s., and therefore the empirical material will have relatively long history (compared to other countries, where the securitization mechanism is used in financing of the renewable energy market). secondly, focusing solely on the u.s. economy and omitting international comparisons stems from the fact that the securitization of leasing of photovoltaic installations is not practical in other economic systems. it is true that there exist press reports regarding the use of securitization in the financing of the chinese solar market, however, this model of integrated funding is based on bank loans financing photovoltaic installations and not, as in the case of the u.s. economy, direct lease of photovoltaic installations. the completely different nature of securitization models means that comparing figures without identifying different financing structures would be unjustified. maciej pawłowski66 ■ a bundle of securitized assets is diversified and big enough (both in terms of value and volume) to minimise risk associated with these assets2. in their essence, securitization transactions go well beyond financing of activities carried out by the initiator of such process. the literature on the subject indicates that decisions on the use of securitization may be justified because of: ■ need to change the company’s asset structure and diversified its sources of financing; ■ possibility to reduce the cost of capital financing the entity’s activity; ■ necessity to manage company’s risk; ■ seeking to obtain a higher position in ratings; ■ necessity to meet regulatory requirements (especially in the scope of capital adequacy); ■ managing tax liabilities3 (cf. fabozzi & kothari, 2008, p. 13 et seq.; kothari, 2006, p. 97 et seq.; davidson, sanders, wolff & ching, 2003, p. 15 et seq.). the multidimensional nature of benefits, which result from executing securitization transactions, is a derivative of this process foundation – isolation and transfer of assets to special purpose vehicle (spv). the preferences of initiator of securitization, which regard the expected benefits, are difficult to be assessed, as in principle, along with the transfer of assets, each of the above aspects occurs jointly, although to a different extent. it is thus concluded that the basic premise for securitization is a financial aspect expressed in converting low-level liquid assets into cash that supports the process initiator’s activities. asset securization and the financial crisis – to securitize or not? asset securization constitutes one of the most complicated funding techniques and an important part of the modern financial engineering instrumentarium 2 it is important to maintain the principle stating that a small number of debtors should not be responsible for the disproportionately high value of liabilities, while diversification of debtors should occur in the geographical scope and within the nature of their activity – for example, an originally obliged group should not consist only of entrepreneurs operating in the same area and bearing the same economic risk (raczkowska, 2001, p. 18). 3 the use of securitization in the process of tax optimization is described by (półtorak, 2017). financing the solar energy market… 67 (półtorak, 2017, p. 78). this particular type of innovation in the field of capital absorption was created in the american financial system in the 1970s (kothari, 2006, p. 112), in the period of increased demand for condominium units, the purchase of which was financed with a significant share of long-term mortgage loans. in order to face the growing demand for mortgage lending, it became necessary to refinance existing debt securities, thus encouraging financial institutions to look for ways to expand and diversify the sources of financing of rapidly progressing crediting lending (buchanan, 2017, pp. 12–13; półtorak, 2005, p. 123). on this basis, a financial concept based on portfolios of granted mortgage loans was created. the concept, by its very nature, focused on the issue of debt securities backed by a collection of bank liabilities, which constituted a source of ongoing servicing of issued securities, as well as their future purchase. this financial funding process carried out in 1970 by the government national mortgage association is considered the first securitization process in history (deku & kara, 2017, p. 59). the success of a mortgage portfolio-based transaction created the basis for expanding the portfolio of assets that were the subject of the securitization. the foundations of the analysed mechanism included, among others, leasing liabilities, receivables deriving from car loans, receivables from credit cards, student loans or proprietary copyrights. the progressing diversification of assets subject to securitization, the increasing diversification of instruments resulting from this process, as well as the high degree of complexity and the lack of transparency in transactions had led to a situation, where securitization started to be regarded the source of the financial crisis of the 21st century (buszko & krupa, 2016, p. 76; waszkiewicz, 2011, p. 13). however, this view was not justified in the statistics relating the insolvency risk diagnosed for the debt securities market. the estimates of the rating agency stadard & poor's indicate that the credit risk concerned only 7.7% of the value of securitization transactions conducted on the basis of the u.s. financial system, being a little over than the default rate of issuers of classical corporate bonds (6.34%) (blommestein, keshinler & lucas, 2011, p. 3). certainly, securitization is strongly related to the rationale of the recent financial crisis and has contributed to the escalation of the recession of financial markets. nevertheless, after some time and many thorough analyses and evaluations, securitization, as a funding method, has been recognized as a solution that enables effective risk management; ensures a direct access to the capital markets based on the assets of the entity initiating this process; is used to maciej pawłowski68 manage the structure of assets and sources of their financing, and thus allows collection of funds in a less costly manner than in the case of traditional debt instruments (bonds or short-term debt securities).the financial crisis only revealed the weaknesses of the current securitization model, which concern four main areas: (1) loans with increased credit risk (including subprime loans) should not be the subject of securitization; (2) bank loans granted with the intention of their further resale under the securitization process entail the risk of fraud (moral hazard); (3) a conf lict of interest, which is consistent with principal–agent problem, can be observed in the securitization structure4 (4) securitization market participants attach excessive importance to mathematical models and related ratings, regardless of the other elements that make up the complexity of the securitization mechanism (schwarcz, 2010, p. 595). in this regard, the correlation between securitization and the 21th century financial crisis should be perceived in terms of the weakness of financial architecture, especially norms and prudential regulations (mrzygłód, 2012, p. 31), which accompany the conducted transactions. graph 1. value of the securitization market in the united states, taking into account the value of new issues in 1985–2017 (in billion usd) source: own work based on: www2. awareness of the benefits brought by securitization and severe verification of the imperfections of the regulatory environment of this process is reflected in the activities aimed at improving the efficiency and security of transactions. the fundamental conclusion that arises from the recent financial crisis is not to stop applying securitization, but to strengthen the regulatory framework and the security of these transactions. consequently, securitization understood as a mechanism of capital absorption still has a practical application (graph 1), and, more importantly, it shows development trends, gradually including more and more categories of assets. one of them is solar energy (more precisely financial flows generated by photovoltaic installations) that is the subject of this study. leasing of photovoltaic installations – a new class of assets subject to securitization process the concept of using securitization in financing the solar energy market stems from the american economic system and politics regarding renewable energy sources. between 2005–2015, the american market of energy obtained from solar radiation had been growing extremely dynamically – solar energy production had increased more than fifty times, and the number of installed photovoltaic installations recorded a 77-fold increase (o’sullivan & warren, 2016, p. 4). the dynamics of these processes resulted in a situation where in 2015 the u.s. economy was responsible for 15% of global solar production, as compared to the 7% share achieved in 2011 (jacoby, 2013, pp. 205–206). the factors 0 80 160 240 320 400 480 560 640 720 800 0 200 400 600 800 1000 1200 1400 1600 1800 2000 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09 20 11 20 13 20 15 20 17 outstanding (left axis) new issuance (right axis) s o u r c e : own work based on: www2. 4 cf. (paligorova, 2009). financing the solar energy market… 69 awareness of the benefits brought by securitization and severe verification of the imperfections of the regulatory environment of this process is ref lected in the activities aimed at improving the efficiency and security of transactions. the fundamental conclusion that arises from the recent financial crisis is not to stop applying securitization, but to strengthen the regulatory framework and the security of these transactions. consequently, securitization understood as a mechanism of capital absorption still has a practical application (graph 1), and, more importantly, it shows development trends, gradually including more and more categories of assets. one of them is solar energy (more precisely – financial f lows generated by photovoltaic installations) that is the subject of this study. leasing of photovoltaic installations – a new class of assets subject to securitization process the concept of using securitization in financing the solar energy market stems from the american economic system and politics regarding renewable energy sources. between 2005–2015, the american market of energy obtained from solar radiation had been growing extremely dynamically – solar energy production had increased more than fifty times, and the number of installed photovoltaic installations recorded a 77-fold increase (o’sullivan & warren, 2016, p. 4). the dynamics of these processes resulted in a situation where in 2015 the u.s. economy was responsible for 15% of global solar production, as compared to the 7% share achieved in 2011 (jacoby, 2013, pp. 205–206). the factors stimulating the development of the american solar energy market include, first and foremost, federal tax preferences (cf. comello, reichelstein, 2015) and falling costs of photovoltaic installations. it is estimated that in 2010 the average cost of a single photovoltaic installation amounted to usd 7.24 per unit of energy produced (1 watt dc), whereas in 2017, the cost was usd 2.805 (fu, feldman, margolis, woodhouse & ardani, 2017, p. vi). a consequence of the development of the solar energy market is an increased demand among potential users for funding photovoltaic installations. 5 the indicated costs regard photovoltaic installations in residential property sector. the cost statistics for photovoltaic installations for other user categories is presented in: (fu, feldman, margolis, woodhouse & ardani, 2017, p. vi). it should be added that successive decrease in unit costs of systems used to acquire solar energy can be observed in every segment of customers who bought photovoltaic installations. maciej pawłowski70 under market economy conditions that are the subject of this article, two basic forms of ownership of solar systems have been developed, namely installations which constitute an object subject to ownership rights and installations which are objects of use (without transfer of ownership rights). therefore, in the statistics regarding the analysed market (e.g. studies periodically published by gtmresearch (www1) there can be observed a dichotomous and aggregated division of funding sources of photovoltaic installations into those that require a transfer of ownership rights of a given system to its user (own funds of users, credits and loans), and those which give only the right to use and derive benefits from the installation (leasing). the way in which data is presented does not diminish its cognitive value, as the leasing of solar installations is at the heart of the process of solar energy securitization. graph 2. the ownership structure of photovoltaic installations in the usa in 2010–2015 stimulating the development of the american solar energy market include, first and foremost, federal tax preferences (cf. comello, reichelstein, 2015) and falling costs of photovoltaic installations. it is estimated that in 2010 the average cost of a single photovoltaic installation amounted to usd 7.24 per unit of energy produced (1 watt dc), whereas in 2017, the cost was usd 2.805 (fu, feldman, margolis, woodhouse & ardani, 2017, p. vi). a consequence of the development of the solar energy market is an increased demand among potential users for funding photovoltaic installations. under market economy conditions that are the subject of this article, two basic forms of ownership of solar systems have been developed, namely installations which constitute an object subject to ownership rights and installations which are objects of use (without transfer of ownership rights). therefore, in the statistics regarding the analysed market (e.g. studies periodically published by gtmresearch (www1) there can be observed a dichotomous and aggregated division of funding sources of photovoltaic installations into those that require a transfer of ownership rights of a given system to its user (own funds of users, credits and loans), and those which give only the right to use and derive benefits from the installation (leasing). the way in which data is presented does not diminish its cognitive value, as the leasing of solar installations is at the heart of the process of solar energy securitization. graph 1. the ownership structure of photovoltaic installations in the usa in 2010–2015 source: own work based on: www1. 5 the indicated costs regard photovoltaic installations in residential property sector. the cost statistics for photovoltaic installations for other user categories is presented in: (fu, feldman, margolis, woodhouse & ardani, 2017, p. vi). it should be added that successive decrease in unit costs of systems used to acquire solar energy can be observed in every segment of customers who bought photovoltaic installations. 64% 44% 43% 43% 38% 35% 36% 56% 57% 57% 62% 75% 0% 20% 40% 60% 80% 100% 2010 2011 2012 2013 2014 2015 installations with the transfer of the ownership installations with the right of use s o u r c e : own work based on: www1. the ownership structure of photovoltaic installations (graph 2) illustrates this market potential as an area where securitization mechanism can be applied. from 2010 to 2015, there could be observed a successive increase in the importance of leasing in financing solutions for obtaining solar energy, which, together with high growth of the discussed market, justify the need of operators to seek sources of capital, while acting as financial intermediaries. marinating this development trend in the solar energy market requires an adequate financing the solar energy market… 71 capital basis that allows provision of both photovoltaic installations and funding in the form of a lease6. in 2013 alone, provision of solutions to the u.s economy, which was aimed at achieving 3.3 gw of solar energy, cost market operators usd 12 billion (alafita & pearce, 2014, p. 489). under the u.s. financial system conditions, the increasing capital needs of operators on the photovoltaic installation market are met under the securitization transactions. the activities of these entities (apart from providing solar energy systems) are based on concluding long-term leasing agreements, which generate financial assets as well as bring a steady and diversified cash f low. the characteristics of this part of the assets of entities that provide solar systems ref lect the desirable features of the collateral assets used in the securitization process. graph 3. value of the lease securitization market of photovoltaic installation in the u.s., taking into account the value of new issues in 2013–2017 (in billion usd) source: own work based on: www2. the potential of securitization in the financing of solar energy market was initially recognized in 2013, when, for the first time in history, instruments of this class were issued (graph 3). over the five-year period of operation, this market was gradually increasing its value, and experienced an impressive sales growth – 2014/2013 – 300%; 2015/2014 – 167%; 2016/2015 – 160%; 2017/2016 – 263%. the reasons why operators from the solar energy market are more and more interested in financing through securitization mechanism stem from the above-mentioned need to release capital frozen in financial assets (leasing agreements) in order to use it to finance subsequent photovoltaic installations. it is also worth mentioning that the market of solar energy securitization, despite high sales growth, is quite small when compared to the american market of financial instrument securitization. in 2013, solar energy securitization accounted for 0.01% of the total value of securitization transactions carried out in the u.s., and in 2017 – 0.14%. the past experiences regarding lease securitization of photovoltaic installations in the u.s. a short period of securitization market operation based on leasing of photovoltaic installations results in the lack of aggregate figures and in-depth analyses of this market. the published information is fragmentary and comes from information published as part of relations between investors. therefore, it presents selective statistics that characterize securitization programmes carried out by entities that use this mechanism to finance their business activities. one of the few works attempting to organize the current state of the lease secu2013 2014 2015 2016 2017 0 0,5 1 1,5 2 2,5 outstanding new issuance s o u r c e : own work based on: www2. 6 photovoltaic installation leasing in essence does not deviate from model objectives of this financing instrument. the user of the installations signs a new long-term agreement (usually for 20 years), based on which they acquire a right to obtain benefits from a system that converts solar radiation into electrical energy, and thus commit themselves to pay interim payments (rent) (jacoby, 2013, p. 213). maciej pawłowski72 the potential of securitization in the financing of solar energy market was initially recognized in 2013, when, for the first time in history, instruments of this class were issued (graph 3). over the five-year period of operation, this market was gradually increasing its value, and experienced an impressive sales growth – 2014/2013 – 300%; 2015/2014 – 167%; 2016/2015 – 160%; 2017/2016 – 263%. the reasons why operators from the solar energy market are more and more interested in financing through securitization mechanism stem from the above-mentioned need to release capital frozen in financial assets (leasing agreements) in order to use it to finance subsequent photovoltaic installations. it is also worth mentioning that the market of solar energy securitization, despite high sales growth, is quite small when compared to the american market of financial instrument securitization. in 2013, solar energy securitization accounted for 0.01% of the total value of securitization transactions carried out in the u.s., and in 2017 – 0.14%. the past experiences regarding lease securitization of photovoltaic installations in the u.s. a short period of securitization market operation based on leasing of photovoltaic installations results in the lack of aggregate figures and in-depth analyses of this market. the published information is fragmentary and comes from information published as part of relations between investors. therefore, it presents selective statistics that characterize securitization programmes carried out by entities that use this mechanism to finance their business activities. one of the few works attempting to organize the current state of the lease securitization market of photovoltaic systems is presented by o'sullivan and warren (2016). o’sullivan and warren evaluate the market based on the relation between two parameters: (1) power of photovoltaic systems, which are financed through leasing subject to securitization, and (2) total power of installed photovoltaic systems. the estimates show that from 5.6 gw of the total power of installed photovoltaic systems, the securitization process covered systems representing 0.438 gw of power (figures presented in the aggregated manner at the end of the first quarter of 2016). it therefore appears that the securitization process covered 7.8% of the provided photovoltaic systems, which are financed through leasing (o’sullivan & warren, 2016, p. 17). such a high share of securitization in financing of photovoltaic installations is justified by the structure of operators performing activities in the u.s. solar energy market. this financing the solar energy market… 73 market is oligopolistic and comprises three companies – solarcity, sunrun and vivint solar, which together have 73% share in the photovoltaic installation market (respectively: 40%, 18% and 15% share of the market; data referring to the end of 2016) (www1). this is important since the entity that is the most active in terms of performing securitization transactions concerning leasing of photovoltaic installations is solarcity. table 1. characteristics of selected securitization transactions for leasing photovoltaic installations in the usa in 2013–2016 initiator of securitization process solarcity sunrun series lmc series i lmc series ii lmc series iii lmc series iv lmc series v callisto closing date november 2013 april 2014 july 2014 august 2015 march 2016 august 2015 expected maturity (years) 13 8 8 6.5 6.5 9 yield 4.80% 4.59% 4.32% 4.42% 6.25% 4.50% value of issuances (in usd millions) 54.4 70.2 201.5 123.5 49.6 111 net present value of the contracted solar cash flows (in usd millions) 87.8 106.2 276 182 76.4 146.5 overcollateralization 38% 34% 27% 32% 35% 24% s o u r c e : own work based on: o’sullivan & warren, 2016, p. 16; www3. in 2013–2016, solarcity implemented 5 securitization processes based on the lease of photovoltaic installations. the first funding programme, which initiated new class of assets subject to securitization process, was conducted in 2013, and brought usd 54.4 million of debt capital bearing annually interest of 4.8%. liability servicing against investors was based on cash f lows generated by photovoltaic installations, which were provided and financed through leasing. moreover, in order to reduce the risk of harmful interference with liability servicing, overcollateralization of 38% issue value was adopted (table 1). subsequent securitization processes performed by solarcity in principle corresponded to the same structure. nevertheless, there can be observed a reduction in debt maturity date – the first securitization programme required instruments with maturity date up to 13 years, while in the case of other instruments, the maturity date was 8 and 6.5 years. maciej pawłowski74 in 2015, sunrun, the second largest operator on the u.s. solar energy market, made its debut on the lease securitization market of photovoltaic installation. the parameters of the securitization carried out by the company, in principle, do not differ from the standard adopted by solarcity. sunrun carried out a securitization program, under which instruments with a total value of usd 111 million and an interest rate of 4.5% were issued. furthermore, the same form of collateral in transaction (overcollateralization = 24%) was used, and the issued instruments were granted the characteristics of long-term debt securities with maturity date up to 9 years. it is worth mentioning that the last characteristic, i.e. long-term nature of instruments issued within the analysed securitization processes, justifies the trend of a significant increase in the value of the market in question (figure 3).  conclusion securitization of solar energy is a new and dynamically developing segment of the american financial market. the short history of securitization based on a new asset class makes it impossible to formulate unambiguous assessments regarding future development perspectives of this mechanism. nevertheless, previous experience leads to the conclusion that the securitization mechanism can play an important role in supporting the dynamically developing solar energy market. the realization of long-term financial assets (represented by concluding leasing agreements) provides an initiator of securitization with a chance to extend the scale of operations and diversify sources of financing, as well as allows lowering the cost of capital and transferring risk associated with securitized assets. in this respect, it should be noted that the potential prerequisite for the development of securitization market, which is based on a lease of photovoltaic installations, is its strong connotation with the concept of sustainable development. it is an important factor for both investors, especially those for whom the concept of socially responsible investment is dominant when undertaking activities, and issuers, who due to the risk of financing pro-ecological activities, may face difficulties in raising capital for the development of their operations (in this case, tailoring the offer of securitised financial instruments to investors implementing the concept of socially responsible investment may be a chance to gather hitherto unavailable funds). financing the solar energy market… 75 despite the undisputed advantages and potential benefits of lease securitization of photovoltaic installations, attention should be paid to the foundations for further development of the market for these transactions. based on the analyzed market history, it can be concluded that the performed transactions were occasional, and the value of the lease securitization market of photovoltaic installations was essentially built up by one issuer. therefore, this leads to the question about the basis for the sustainable development of the market of these transactions. particular attention should also be given to another problem regarding various risk categories connected to securitization transactions of photovoltaic installation lease. these include risk associated with varying weather conditions (determining the efficiency of solar energy systems), risk of changes in prices of electricity generated from traditional fossil fuels (shaping energy consumption patterns), and political risk (affecting the conditions and law regulating the solar energy market). although distinguishing these types of risks is of particular importance, it does not help in solving this problem.  references alafita, t., & pearce, j.m. 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(securitization risk and the financial crisis.) warszawa: oficyna wydawnicza szkoły głównej handlowej w warszawie. (www1) greentech media, http://www.greentechmedia.com (accessed: 30.05.2018). (www2) sifma, http://www.sifma.org (accessed: 30.05.2018). (www3) tesla: investors overview, http://ir.tesla.com (accessed: 2.06.2018). (www4) eur-lex, http://www.eur-lex.europa.eu (accessed: 27.09.2018). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 21.05.2013; data zaakceptowania: 18.06.2013. * dane kontaktowe: marcw@doktorant.umk.pl. marcelina więckowska* uniwersytet mikołaja kopernika w toruniu the role bonds in financing climate resilient economy keywords: climate bond, environmental finance, low-carbon economy. jel classification: q54. abstract: climate bonds are a new category of climate-related financial products in environmental finance. the validity of the emergence of climate bond market seems reasonable to attract private capital to finance climate-resilient economy and to make the recognition of green investment easier for potential investors. investments in low-carbon assets and technology to meet the kyoto protocol targets or investments to adopt to extreme weather conditions are just examples of sources of the capital needed. developing the potential of green bond market has not been fully exploited so far. in the future, the most important determinants to stimulate the growth of the market will be green standardizations that are currently under construction. positive outlook also results from existence of institutional investors represents tens of trillion usd and intends to incorporate climate change into investment strategies. not without significance is the fact that green sukuk will enlarge the spectrum of climate-related financial products. translated by marcelina więckowska rola obligacji w finansowaniu gospodarki odpornej na zmiany klimatyczne słowa kluczowe: finansowanie ochrony środowiska, gospodarka niskoemisyjna, obligacje klimatyczne. klasyfikacja jel: q54. http://dx.doi.org/10.12775/cjfa.2013.011 marcelina więckowska154 abstrakt: obligacje klimatyczne są nową kategorią instrumentów finansowych powiązanych z finansowaniem ochrony środowiska naturalnego. zasadność wyłonienia takiego segmentu rynku z jednej strony wynika z konieczności akceleracji inwestycji sektora prywatnego w celu finansowania gospodarki odpornej na zmiany klimatu, z drugiej strony daje możliwość szybszej identyfikacji zielonych inwestycji przez stronę popytową tego rynku. inwestycje w technologie niskoemisyjne w celu sprostania wytycznym ustanowionym w protokole z kioto czy inwestycje dostosowawcze będące konsekwencją nasilających się ekstremalnych zjawisk pogodowych są jedynie przykładami źródeł potrzeb kapitałowych. jak dotąd, potencjał rozwoju rynku zielonych obligacji nie został w pełni wykorzystany. w przyszłości najważniejszym bodźcem w rozwoju tego rynku będą obecnie tworzone zielone standardy emisji. szansą dla rozwoju rynku zielonych obligacji jest także potencjał inwestorów instytucjonalnych (niejednokrotnie zrzeszonych w organizacjach klimatycznych) reprezentujących dziesiątki bilionów dolarów i chcących uwzględniać kwestie klimatyczne w strategiach inwestycyjnych. nie bez znaczenia jest także poszerzenie spektrum instrumentów powiązanych z ochroną klimatu o zielone sukuk.  introduction preventing environmental degradation is not only intergenerational obligation but also a factor that impacts doing business and even affects the quality of human live. climate risk awareness and access to capital are fundamental issues to build low-carbon and climate resilient economy. financial market provides some solutions in this area through the offer of climate change-related financial products such as green or climate bond. the idea of using securities to finance environmental protection is not new (see dziawgo 1997), but only in recent times there started separation of climate or green bond category on global scale. standard definition of climate finance are currently under construction. “green bond” and “climate bond” are the most commonly used designations for bonds that finance environmental protections and climate resilient economy. the climate bond initiative (cbi 2011) working definitions focus on projects or assets that directly contribute to development of low carbon industries, technologies and practices to build low carbon economy. definition also includes bond issuances to finance essential adaptation to the consequences of climate change. for the time being, definitions of green bond and climate bond essentially do not differ and purposes of the issuances are consistent. in the future, however there are expected greater segmentations of green debt market. the purpose of this paper is to explain why emergence and extension of climate bond market is reasonable and systematize determinants of the mar the role bonds in financing climate resilient economy 155 ket development. paper also describes main features and specific categories of green bonds. 1. research methodology and research process the paper contains descriptive research studies. to achieve the objectives were analyzed reports and surveys conducted by financial and international research institutions. the analysis of green bond issuances allowed to systematizations this relatively new part of financial market. the observations process of financial market trends and logical connections cause and effect relationship, made it possible to conclude on the determinants of climate bond market development. 2. climate bond as a tool of ecological risk management ecological risk has many dimensions and affects to a certain extent all people, businesses and economies. the effects of climate change and extreme events in nature are particularly acute for developing countries (disasters pose risks for agriculture, food, and water supplies). green bond is a tool that engages capital to be invested into sustainable projects. the world bank (international bank for reconstruction and development) raises capital to help affected people to climate change. this securities help implementations of the banks’ statutory duties. the bank clearly defined ecological targets of bond issuance and coined a term of “green bond” (the world bank 2012). not only the word bank group, but also other multilateral development institutions helped to establish green bond market in 2007/2008 (but naturally single climate-theme bond issuance another issuers took place earlier). the european investment bank was precursor to financing tied to climate change solutions project. since 2007 the eib there have been launched climate awareness bonds to support lending renewable energy and energy efficiency. subsequently other multilateral development banks started to issue environmental bonds (the nordic investment bank) or clean energy bonds (the african investment bank and the asian investment bank) to highlight pro-environmental bond issuance targets. environmental issues are not completely inert for businesses. research shows that companies are aware of potential risk from future climate changes but do not recon that their businesses are vulnerable to them. however compamarcelina więckowska156 nies perceive more risks from extreme weather events which increase physical risks to business operations. they are more interested in current climate variability rather than in the future climate change despite that the level of their awareness in both aspects is high. in this case interaction is very simple: the more uncertainties around climate impacts the more companies’ investments are spent on adaptation (agrawala et al. 2011). however ecological risk management is not only voluntary process. countries must reach some environmental goals in the field of greenhouse gas emissions. requirements result from international provisions (initiated by the kyoto protocol). this resulted that increasing number of companies are subject to carbon market regulations. investment in low carbon technology as well as possibility implementations of carbon offset policies cause the increase of capital requirements (więckowska 2013). moreover worth noting that climate policy also affects return on investment in renewable energy sector. transformations to low carbon economy will require enormous investments. today in order to decarbonize the world’s energy system the amount of 1 trillion usd is invested annually. additional trillion per year is needed. the cumulative investment in green growth should reach the amount of 36–42 trillion usd between 2012 and 2030 (kaminker, stewart 2012: 7). bond market is becoming more and more attractive as a source of financing renewable energy project. however the business is still very risky and uncertain. interesting example of green debt is issuance of financing photovoltaic power project in california. topaz solar farm offered bond for 850 million usd. demand shows that this kind of investment may be very attractive to investors. the oversubscribed was more than 400 million usd. the securities obtain only bbb-rating, but it was the largest issuance for a renewable-energy project without a u.s. government guarantee. midamerican energy holdings co is planning more issuance of solar bonds (doom, buhayar 2012). 3. key characteristics of the climate bonds market chart 1 show the most important climate bond issuers. analysis of the bond supply allow describing first characteristic of the market. climate bonds financing green growth projects are generally related to: ■ renewable energy (e.g. breeze bond, solar bond or broader: clean energy bond), ch ar t 1 . m aj or g re en b on d is su er s si nc e 20 06 c ha rt 1 . m aj or g re en b on d is su er s si nc e 20 06 so ur ce : c ro ce e t a l. 20 11 : 3 9 (u pd at e ba se d on w eb si te s el ec te d in st itu tio ns ). 3, 5 0, 7 0, 3 0, 2 2, 2 0, 2 0, 7 0, 6 3, 2 2, 4 0, 4 0, 85 0 0, 51 1, 52 2, 53 3, 54 4, 5 2 3 4 5 6 7 8 billions usd s & p c re di t r at in g a nd ro m ed a so la r u sa – q ec b u sa – cr eb île d e fr an ce w or ld b an k eu ro pe an in ve st m en t b an k a si an d ev el op m en t b an k a fr ic an d ev el op m en t b an k in te rn at io na l fi na nc e co rp or at io n a lta w in d cr c br ee ze to pa z so la r fa rm bb b a a a a a a pr iv at e co m pa ni es n at io na l a nd lo ca l g ov er nm en ts m ul til at er al in st itu tio ns n or di c in ve st m en t b an k s o u r c e : c ro ce e t a l. 20 11 : 3 9 (u pd at e ba se d on w eb si te s el ec te d in st it ut io ns ). marcelina więckowska158 ■ energy efficiency projects (transport efficiency, building efficiency, industrial efficiency), ■ projects that reduce greenhouse gas emissions (e.g. low carbon technologies), ■ waste management, ■ project that help countries adapt to effects of climate change (e.g. f lood protections or reforestations). according to chart 1, all issuances of the multilateral development institutions have the highest credit quality. green bond with triple-a rating denote exposure to green investment without project risk. since 2008 the world bank has issued green bonds of total value of 3,5 billion usd through 55 transactions in 17 currencies. but latest issuance of the international finance corporations (ifc – total 2,2 billion usd) corresponding to the amount of 1 billion usd is the largest green bond issued to this date. the ifc is also a member of the world bank group however is focused exclusively on the private sector. most of green bonds have the plain vanilla profile but there are also structured or covered bonds which become more and more popular. europe 2020 project bond initiative carried by the european investment bank is an example. the idea of this new initiative is to attract private capital by providing credit enhancement to project companies and improve credit quality of the bonds. in this case the eib support investment involves inter alia transport and energy sector. however basic instruments of expansion to sustainable energy efficiency project applied by the eib are still in climate awareness bonds program. since 2007 the european investment bank through climate bond has raised over 1,7 billion eur (about 2,2 billion usd) equivalent. bonds supported by government incentives are another class of climate bonds. the bigger bond issuance was driven by us government programs qualified energy conservation bonds (qecb) and clean renewable energy bonds (creb). qecbs may be issued by state, local and tribal governments. examples of qualified energy project include: investment in public buildings, green communities, renewable energy production or even energy efficiency educational campaigns. crebs may be issued by public power utilities, electric cooperatives, government entities (states, cities) to finance renewable energy projects. qecbs and crebs were initially constructed as tax credit bonds. but in march 2010 rules were changed from tax credit bonds to direct subsidy bonds. green bonds can be also asset backed securities (abs). this type of debt is tied to specific green projects. for example crc breeze ii bonds based on secu the role bonds in financing climate resilient economy 159 ritization were issued by a hedge fund through a special purpose vehicle. this type of bonds is important innovation but very risky – returns depend largely on wind blows. in 2010 due to low wind levels over the past four years breeze bonds were downgraded (croce et al. 2011: 49). in 2008 financial market participations started to create more sophisticated green structured product. the first synthetic green bonds (called the environment optimizer/top green bond 1) were offered by société générale. this product was linked to the performance of the lyxor dynamic environment fund, which offered exposure to the sgi global environment index. investors in the worst case received nominal return of 0% (get back face value), but also maximum return was capped at 8% (croce et al. 2011: 48). global financial crisis interrupted development of trend of green structured finance. to sum up, the typical categories of climate bonds include (see also inderst et al. 2012: 28): ■ bonds issued by multilateral development institutions (ibrd, eib, ifc etc.), ■ corporate bonds (issued by a green company), ■ sovereign or municipal bonds (e.g. crebs, île de france), ■ asset backed (tied to specific green project). at this point, analysis should be completed about bond issuances by banks defined as ecological. this kind of bank works as typically commercial bank but specializes in financing pro-ecological economic undertakings. the eco-banks connect ecological and economic criteria in making investment decisions. there are not many institutions of this kind. the bank ochrony środowiska sa in poland and umweltbank ag in germany are examples (dziawgo 2003: 72–81). 4. the state of the climate bond market in 2012 first estimations about outstanding global climate-theme bond issuances were conducted for hsbc and the climate bond initiative (see robins, knight 2012). research disclosed size and structure of climate bond market. outstanding value of climate bond was estimated for 174 billion usd (from 207 issuers, comprising over 1000 bonds). 82% of total issuance constituted corporate issuers, 13% from development banks and financial institutions, 3% concerned project bonds and 2% municipal bonds. table 1 shows precise structure of the climate bond market by low-carbon sectors. according to presented data, dominate issuance (119 billion usd) constituted bond finance low-carbon transport (notably rail). moreover, the issuance marcelina więckowska160 of eurofima (which is rail financing institution) reached further 15 billion usd. geographically, largest source of outstanding bonds came from europe (67% of the global market). uk institutions have issued 23% climate bond, france 17% of the total. usa climate bond market constituted also 17%. in turn russia, canada and china all at 3% each. the amount of 175 billion concerns fully-aligned climate bond issuance. this means that issuers are 100% exposed to climate themes. authors of the study introduce additional classifications. if revenue exposure is more than 50% bonds are classified as strongly-aligned while those between 10–50% are weakly-aligned. hsbc and cbi estimated that further 210 billion usd are strongly-aligned. in addition, there have been identified 369 billion usd of conditionally-aligned bond. these issuances come from sectors or technologies that are important to the climate economy (including biofuels, hydro, waste and water), but issuers have not revealed information for classifications bond as climate-theme. this mean, that extra-financial disclosure and reporting referred to environmental effect still has not become common practice. table 1. the global climate-themed bond universe by theme 2012 specification size of issuance details bn usd % transport 120,6 68,6% 119 bn usd linked to low carbon transport modes, vehicles, technologies and fuels energy 29,4 12,7% 29 bn usd linked to low carbon energy: wind (38%), solar (28%), hydro (21%) finance 22,4 12,7% 7,2 bn usd from multilateral development banks, 15 bn usd from eurofima buildings and industry 1,5 0,9% energy efficiency of buildings and industry (including qecb) waste and pollution control 1,2 0,7% recycling services or recycled products agriculture and forestry 0,7 0,4% sustainable paper and wood manufacturers, forest management companies s o u r c e s : bloomberg, climate bond initiative, hsbc; robins, knight 2012. presented estimations show that climate bond segment is very small comparing to global bond market (21 trillion usd according to bis data). what is more, according to oecd survey the bonds are dominant assets class in portfolio of institutional investors in most countries (see kaminker, stewart the role bonds in financing climate resilient economy 161 2012: 34). climate bond market is young, but opportunities to develop the market are not fully exploited. 5. development of the climate bond market the determinants of development of climate bond market can be divided into following group: ■ climate bond supply factors (connected with issuers), ■ climate bond demand factors (connected with investors), ■ regulatory and institutional determinants of market development, ■ factors associated with risk of ecological investment, ■ factors related to the standardizations and functioning of the market. determinant of increasing climate bonds market brought about new multilateral development institutions which support sustainable development. the united kingdom formed the green investment bank in 2012 to speed up the transition to green economy. australia in turn established the clean energy finance corporation. these institutions are potential green bond issuers. another issue increasing climate bond market is perspective of some kind of industry, for example clean energy. finance renewable energy through green debt issuance becomes more important. an example of that is bond issuance by topaz solar farm (project midamerican energy holdings co controlled by berkshire hathaway). huge potential lies also in issuance of corporates and municipalities. raise capital by climate bond issuance to finance pro-ecological undertakings may entail positive effect is financial results (remain competitive, cost saving). from the institutional investor’s point of view, investment in green bond contribute to implementations of esg (environmental, social and governance) policy. especially some institutions (such as assets management company or ecological investment funds) are profiled in the ecological and ethical investments. the insurance industry has also created principles for sustainable insurance (unep fi 2012). interest of institutional investor exposed to green investment is noticeable. institutional investors from all continents have formed groups to represent their interests e.g. the institutional investors group on climate change or the investor network on climate risk (kaminker, stewart 2012: 19). furthermore, sovereign wealth funds and pensions funds from some countries (e.g. norway, sweden, new zealand) are obliged by low to ecological and ethical investments (richardson 2011). also for individual investors marcelina więckowska162 (which becomes more and more aware of ecological risk) green bonds are perfect way for social responsible investing. these are the steps leading in the right directions. predictable and stable regulations and policy support are key factors to rise climate bond market. the best proof of that is global investors statement on climate change (2011) supported by 285 investors that represent 20 trillion usd asset under management. in the statements investors postulate comprehensive and transparent policies with clear objective and targets to provide appropriate incentives to invest. an important example of regulatory incentives is feed-in tariffs. many climate bond issuers based business on this policy mechanism (e.g. andromeda solar, crc breeze finance). another instance of eligible regulatory policy are tax incentives (e.g. to create tax credit bonds) or credit enhancement tools (e.g. to create covered bonds). finally, corporates can adapt for government climate policy in the field of emission reduction and renewable energy. it requires capital for low-carbon investments. regulatory uncertainty and political unpredictably are not the only risks associated with green infrastructure. the risk profile mostly depends on constructions of climate bond. the risk associated with bond market include inter alia: price risk, interest rate risk, credit risk, currency risk. in this case worth nothing, that green bond market still is too small for institutional investor. scarcity and not very large issuance cause low liquidity and high transaction costs. in turn, risk resulting from the nature of project funding include high technological and operational risk. barriers to the development of climate bond markets are lack of quality data which makes it difficult to assess the risk green investment and correlation with investment from other sectors. lack of expertise and track records in new technologies also cause some problems. specific risks related to clean energy projects (particular concern for securitisation of clean energy assets such as onshore wind and solar plants) is volumetric risk. this kind of risk is tied to productions volatility and, in fact depends on weather conditions. (kaminker, stewart 2012: 31–44). and finally, it should be noted that, important issue is also investors’ confidence that their money in practice contributes to low-carbon economy. last group of factors of green bond market development are connected with standardizations and functioning of the market. it is worth recalling that the green bond concept was developed in 2007/2008. institutions cooperating with the world bank in this area is nordic bank seb (skandinaviska enskilda banken). seb started to create green bond market as a response to increased the role bonds in financing climate resilient economy 163 investor demand for climate-related fixed income product. this was the beginning of market sharing of climate bond categories. now the seb’s mission is “to make the green bond available across the credit and yield curves with various types of issuers (supranationals, corporates, governments) and risk class”. these are a promising forecast to develop green bond market. the climate bond initiative (cbi) is another important organization contributing to growing climate bond market. the organizations promoting investment that will contribute to build low-carbon economy. cbi is currently developing the climate bond international standards and certification scheme. the certification scheme allows investors to recognize low-carbon investments with confidence that their funds are being used to finance ecological undertakings. the certification scheme will include mechanisms for verification and monitoring of standard compliance. moreover, process of verifications “greenness” of the bond will be support appropriate standard in terms of accounting and reporting. the climate bond international standards is not financial but environmental standarization for bond’ issuer to encourage investors to increase their exposure to green projects. 6. green sukuk under the climate bond standard interesting part of the global financial market constitute islamic finance. in 2012 there arose the concept of eco-friendly islamic securities such as green sukuk. in order to implement the idea, the climate bonds initiative, the clean energy business council of the middle east and north africa and the gulf bond & sukuk association established green sukuk working group. experts will promote best practices of issuance of sukuks for financing climate resilient economy (kidney 2012). sukuks are shari`ah compliant investments to give right to receive a share of profits generated by an underlying asset base. this financial products are commonly known as islamic bonds and may have a form of interest-bearing investment certificates or fixed income securities (difc 2009). sukuks conform to islam’s prohibition of usury and raised money cannot be invested in alcohol, gambling, tobacco, weapons or pork (onislam & newspapers 2012). climate bond standards additionally will profile this instruments as environment friendly. green sukuk should be used to finance growing number of projects, for example renewable energy in the middle east. there is also urgent need to attract marcelina więckowska164 finance in developing muslim countries such as bangladesh and pakistan. on the other hand the climate bond standard will help investors identify shari’ah compliant low-carbon investment (kidney 2012). ethical nature of islamic finance and growing number of sri investor suggest using sukuk as a development tool. in this context, it is worth to mention that in 2005 the world bank issued first (so far the only one) sukuk (200 million usd) in malaysia market. similarly international finance corporations issued sukuk (500 million rm) in malaysia and in 2009 issued sukuk (100 million usd) that was listed on nasdaq dubai and the bahrain stock exchange (bennett, iqbal 2011). 7. green uridashi bonds as an example of retail market investors alongside with institutional investors the huge potential is involved in individual investors to finance low carbon economy. in the field of green bond issuance, the retail japanese market seems to be particularly attractive. chart 2 illustrates that individual investors decide about investment directions of the japanese funds. daiwa securities estimates that in 2009 total financial assets in the japanese household reached 15,5 billion usd (in comparison, in uk and germany about 6,7 billion usd and france 5,4 billion usd). chart 2. comparison the structure of savings by region in 2009 investors decide about investment directions of the japanese funds. daiwa securities estimates that in 2009 total financial assets in the japanese household reached 15,5 billion usd (in comparison, in uk and germany about 6,7 billion usd and france 5,4 billion usd). chart 2. comparison the structure of savings by region in 2009 source: daiwa securities 2010. eurobond issuance directed to retail japanese investors and denominated in foreign currency are called “uridashi”. so far, green bonds designed for the japanese investors have been issued mostly by the multilateral development institutions. first the world bank green uridashi bond was issued in 2010 (150 million nzd). in turn the european investment bank issued climate awareness bonds in japan denominated in australian dollars and south african rand (these two tranches was worth around 300 million eur equivalent). the nordic investment bank and the african development bank also recognized the potential of uridashi market. nikko asset management through smbc nikko world bank green bond fund (smbc is the japanese distributor) raised 624 million usd from the japanese market. this green credentials investment fund approximately 80 per cent invested in the world bank green bond (boyde 2012). disparity in global interest rates and substantial savings of japanese retail investors caused that uridashi bonds are an example of curious category in green bond market. conclusions engaging a private sector investment is necessary to climate-resilient future. huge capital of institutional investors connected with fixed income products preferences are promising (but insufficient) determinants of climate bond market development. 88% 27% 7% 4% 12% 73% 93% 96% 0% 50% 100% japan eu 13 us canada individual investors institutional investors s o u r c e : daiwa securities 2010. eurobond issuance directed to retail japanese investors and denominated in foreign currency are called “uridashi”. so far, green bonds designed for the role bonds in financing climate resilient economy 165 the japanese investors have been issued mostly by the multilateral development institutions. first the world bank green uridashi bond was issued in 2010 (150 million nzd). in turn the european investment bank issued climate awareness bonds in japan denominated in australian dollars and south african rand (these two tranches was worth around 300 million eur equivalent). the nordic investment bank and the african development bank also recognized the potential of uridashi market. nikko asset management through smbc nikko world bank green bond fund (smbc is the japanese distributor) raised 624 million usd from the japanese market. this green credentials investment fund approximately 80 per cent invested in the world bank green bond (boyde 2012). disparity in global interest rates and substantial savings of japanese retail investors caused that uridashi bonds are an example of curious category in green bond market.  conclusions engaging a private sector investment is necessary to climate-resilient future. huge capital of institutional investors connected with fixed income products preferences are promising (but insufficient) determinants of climate bond market development. growing interest of the climate and environmental issues cause that more and more institutions want to offer environment related financial products or recognize themselves as eco-friendly and socially responsible through investments by the esg rules. green bond is the way to green involvement for institutions which by the regulatory restrictions cannot have direct exposure to green investment. multilateral development institutions played a positive role in the establishment of green bond market. these institutions also contribute to create covered bond by providing credit enhancement to project companies. whereas the governments support the private sector in raising capital can use tax credit bonds or direct subsidy bonds. however optimal leverage mechanism to support green investment should be the subject of further research. at this moment climate bond market requires standards of verifying “greenness”. this conceptions are also of interest of representatives of islamic finance. standardizations and specifications may be crucial solutions to growing climate bond market and its selected segments. and finally, it should be kept in mind that eco-friendly securities though laudable purpose of issuance still remain financial instruments connected with multidimensional financial risk. marcelina 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(2012), bonds and climate change: the state of the market in 2012, hsbc global research. seb (skandinaviska enskilda banken) (2013), http://merchantbanking.sebgroup.com/ our-services/markets/fixed-income-and-dcm/green-bonds/ (access: 14.05.2013). unep fi (2012), principles for sustainable insurance, http://www.unepfi.org/psi/. więckowska m. (2013), zarządzanie ryzykiem ekologicznym determinowanym działalnością antropogeniczną w zakresie emisji dwutlenku węgla do atmosfery, “ekonomia i środowisko”, nr 1 (44). the world bank (2012), the world bank green bond. fact sheet, http://treasury.worldbank.org/cmd/pdf/worldbankgreenbondfactsheet.pdf. for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; 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higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a pucopernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 3 date of submission: august 20, 2017; date of acceptance: november 12, 2017. * contact information: joanna.malecka@put.poznan.pl, faculty of engineering management, poznan university of technology, strzelecka 11, 60-965 poznań, poland, phone: + 48 616 653 374; orcid id: http://orcid.org/0000-0002-5017-0417. ** contact information: teresa.luczka@put.poznan.pl, faculty of engineering management, poznan university of technology, strzelecka 11, 60-965 poznań, poland. *** contact information: sebestova@opf.slu.cz, school of business administration in karvina, silesian university in opava, univerzitní nám.1934/3, karviná, czech republic. **** contact information: sperka@opf.slu.cz, school of business administration in karvina, silesian university in opava, univerzitní nám.1934/3, karviná, czech republic. małecka, j., łuczka t., šebestová j., & šperka r. (2017). economic activity and social determinants versus entrepreneurship in smes – selected aspects. copernican journal of finance & accounting, 6(3), 47–61. http://dx.doi.org/10.12775/cjfa.2017.016 joanna małecka* poznan university of technology teresa łuczka** poznan university of technology jarmila šebestová*** silesian university in opava, school of business administration in karvina roman šperka**** silesian university in opava, school of business administration in karvina economic activity and social determinants versus entrepreneurship in smes – selected aspects keywords: economic activity, social determinants, entrepreneurship, sme. j e l classification: l11, l25, l26, f63. abstract: entrepreneurship is a vital element of development of today’s economies. its main objective is to undertake actions intended to ensure that economic resources of joanna małecka, teresa łuczka, jarmila šebestová, roman šperka48 individual companies are coordinated in a pragmatic and productive manner. entrepreneurship may be considered in two respects: (1) processes – activities aimed at forming and building a new company in certain conditions, with a view to generating profits, or (2) a set of traits and personalities – describing a particular human behaviour and action focused on innovation, ability to accept changes, spot opportunities, and take risks. regardless of the multitude of definitions in the related literature, there is no doubt that in most cases the combination of these two economic and social components determines possible business success. poles more and more frequently perceive the opportunities offered through the establishment of own business. up to 63% of the public at large holds this view, placing poland at the forefront among the european union countries in this regard. the article attempts to examine the socio-economic determinants of respondents which affect poles’ willingness to set up their own businesses.  introduction entrepreneurship is one of the manifold determinants of development of individual national economies worldwide. in the related literature, entrepreneurship is viewed as a process or a set of traits and personalities, depending on which aspect is being analysed (łuczka, 2002, pp. 29–49; delmar, 2006, pp. 62– 87; davidsonn et al., 2006, pp. 21–38; glinka & gudkova, 2011; nowak & praszkier, 2015; zięba, 2016; see also: naman & slevin, 1993, pp. 137–153; o’boyle et al., 2014, pp. 773–384). the analysis results presented in this article, concerning the issue being examined, are ref lected in the attitude (willingness to undertake activity) that supports commencement of entrepreneurial operations and creation of more jobs. in this regard, an attempt was also made to define respondents’ preferred development directions – entrepreneurial attitudes. this was done by referring to their experience and ability to draw meaningful conclusions, and translate and implement them in new companies, with account being taken of the location of company seats. due to the scope of the authors’ scientific interests, special attention was paid to future microand small entrepreneurs. the issue of economic activity is extensively discussed in the related literature in various aspects of company development, in particular that of sme growth (o’farrell & hitchens, 1988, pp. 1365–1383; bielawska, 1992, pp. 463– 468; łuczka, 2013; małecka, 2016a, pp. 91–122; wasilczuk, 2015, pp. 13– 25; see also: o’brien, 1984, pp. 25–62). the ongoing transformation of traditional economies into knowledge-based economies is one such research area (kuźniar, 2010, pp. 249–258). rail transport and telephone have made the world considerably smaller, but the invention, notably popularisation, of the computer, satellite communications, wireless phones and the internet has economic activity and social determinants… 49 inf luenced primarily the lifestyles of individual communities, cultural conditions and, consequently, existing organisations. entrepreneurship considered as the ability to survive and succeed in business also depends, to a large extent, on developed capabilities of continuous learning. a learning organisation, in turn, has competitive advantage based on knowledge, competences, capabilities, creativity, intelligence, imagination, motivation, (etc.), and a system of values of its team members. it is the knowledge about key processes, products or markets that may be the most constructive element of a company. therefore, strategic decisions may be said to include arrangements on how to use and share existing corporate knowledge, acquisition of new knowledge, and efforts to improve company competitiveness and innovative capacity (see also: naman & slevin, 1993, pp. 137–153; šebestová, 2016, pp. 177–189). the word literature on this topic, as well as the functioning of economies, is inf luenced by internationalisation, globalisation and innovation (see: mc dougall, 1989, pp. 387–400; hennart, 2014, pp. 117–135; wach, 2015, pp. 9–24; małecka, 2016b, pp. 117–129). today, when talking about entrepreneurship, the question of whether to undergo these processes does not arise. instead, what matters is how to achieve such a status most efficiently. the previous “whether” has been replaced by “how”. each of the issues examined against the social, psychological or economic backdrop will find its characteristics within the area studied. the reason is that both intensified competition and pace of progress more and more frequently bring to light the importance of change, which is implemented more efficiently in f lexible and agile enterprises developing at the rate decided on by their leaders (welch & welch, 2005). these features are particularly characteristic of smes, which are becoming ever more willing and bolder to resort to capital market solutions (łuczka, 2007; małecka, 2015, pp. 39–54; da gbadji, gailly, & schwienbacher, 2015, pp. 1213–1245). in this respect, the determinants of development may include: (1) companies’ ability to learn and (2) continuity of the learning process in terms of both individual companies and entire employee teams. the trend indicating a change in the perception of entrepreneurs in this regard has been visible for many years. nonetheless, it adds a specific perspective and specific aspects to the assessment of entrepreneurial attitudes in the case of former centrally managed economies such as poland, where the capital market has been in operation for only 27 years (gilson & black, 1998, pp. 243–277; gompers & lerner, 2001, pp. 145– 168; małecka, 2016b, pp. 117–129). what then becomes vital is allocation of the amounts for hiring highly qualified workers and paying their wages, joanna małecka, teresa łuczka, jarmila šebestová, roman šperka50 viewed by entrepreneurs as investment in their companies rather than costs (see: łuczka, 2013). but will a person who has gained experience in one company evaluate his or her competences and, as a future entrepreneur, offer an improved working environment to potential employees? or will such a person tend to disseminate negative experiences – experiences that should be eliminated in any company, regardless of its size, so that the strategy of constructive development goes hand in hand with social awareness and responsibility of collectivities such as enterprises? the notion of conscious, innovative and learning society that f lexibly adapts to changes relates equally to employees and employers. human capital cannot be reproduced as fast as any other capital, but negligence and mismanagement may very quickly lead to an outf low of the most valuable staff (okoń-horodyńska, 2009, p. 38). this is because what is becoming noticeable, in particular among small and medium-sized enterprises, is a change in attitudes of employees, who often begin to work for a company and leave it because they are dissatisfied with cooperation of the entrepreneur (owner/ceo) (preliminary finding from the authors’ own unpublished pilot research). an important element contributing to the advancement of efficient economic operations is research and development (r&d) activities that, if undertaken systematically, supports entrepreneurship and increases knowledge, including knowledge about the human being, culture and society. collections of knowledge resources so compiled allow for new challenges to be taken on, new applications to be designed and development to be continued along the lines of the progress of the world economy. the article attempts to examine the respondents’ socio-economic determinants inf luencing poles’ readiness to set up their businesses. entrepreneurs make up the bulk of the middle class; therefore, they generally must share its fundamental principles, including social attitudes such as trust and social activity for the regions in which they operate. research methodology and the research process the results presented are based on source data from annual reports and publications that have been made available by capital market institutions and on the authors’ own research on polish entrepreneurs. having examined the issue of entrepreneurship among 238 respondents, the authors outline economic activity, with a focus on social determinants, by means of analyses, figures and comparisons. economic activity and social determinants… 51 in order to calculate and present the findings in tables and figures, mathematical analysis tools were employed that allowed for determining: ■ the quantitative share, ■ the percentage value of shares to illustrate the examined structures in the studied aspects, ■ and outlining a trend analysis based on linear regression methods. the group administered questionnaire consisted of 44 questions on the perception of conditions for running own business activity among present and future entrepreneurs. the survey covered both men and women who had a common fundamental goal: to improve their skills to increase human capital in enterprises. the responses allowed an analysis of opportunities to access sources of financing of their own economic activity and indicated the social barriers most frequently encountered by respondents. socio-economic determinants of entrepreneurship the progressing globalisation is exerting growing inf luence on international activities of enterprises. social determinants underlying entrepreneurship, which is apparently regarded by respondents as a process directly connected with internationalisation of business operations, are playing an ever bigger role in choosing the type of economic activity or in deciding to switch to another type of business operations. in order to catch up with the rapidly changing market factors, entrepreneurs must also actively monitor the environment to maintain competitive advantage. in this perspective, the issue of innovation1 emerges. considered with reference to three cases: (1) successful implementation of innovation – successful activity, not necessarily in commercial terms, (2) innovation in the course of implementation, and (3) discontinued activity – withdrawal from innovation implementation, the question of innovation shows that social determinants may constitute a barrier to the development of company potential on a par with financial factors and legal regulations (oecd, 2008, pp. 31, 81). the study presents the concept of tpp innovation expanded to include marketing and organisational innovation (table 1). 1 oslo methodology defines an innovative company as one that introduced at least one product or process innovation (as implementation or improvement) within the period examined (mostly three years). table 1. selected factors hindering innovative entrepreneurship impact area type of innovation product process organisational marketing cost factors cost too high + + + + lack of internal financing + + + + lack of external financing (venture capital) + + + + lack of external financing (public source of financing) + + + + knowledge-related factors lack of skilled personnel in the enterprise + + + lack of skilled personnel in the labour market + + + lack of information on markets + + difficulties in finding marketing partners + staff’s resistance to change + + + + managerial staff’s resistance to change + + + + team incompatibility and lack of secondment possibilities (production considerations) + + market factors uncertain demand for innovative products / services + + widespread competition + + institutional factors lack of infrastructure + + + weak ownership rights + + legal standards, regulations, taxes + + + other factors no need to innovate due to earlier innovations + + + + no need due to lack of demand for innovation + + s o u r c e : own elaboration based on: oecd, p. 118. economic activity and social determinants… 53 oecd findings confirm the authors’ own research results revealing that despite considering the use of capital market and private equity solutions, entrepreneurs still perceive raising capital in this way as a significant barrier to development (małecka & łuczka, 2016a, pp. 93–110; małecka & łuczka, 2016b, pp. 418–431; see also: gregory et al., 2005, pp. 382–392). from the point of view of determinants of sme capital structure, a correlation between company size and capital structure should be stressed – the smaller the company, the greater the ownership share. accordingly, as the enterprise grows, access to sources of financing, in particular investment financing for innovation and development, gains importance. the reason is that smes still commonly face credit discrimination pointed out by j.k. galbraith, which can be replaced by capital market solutions (galbraith, 1957; galbraith, 1983, pp. 63–77; see also: beck et al., 2006, pp. 1–36; bielawska, 2011, pp. 264–272; łuczka, 2013; šebestová, šperka, & čemerková, 2016, pp. 65–74). socio-economic determinants of entrepreneurship in the light of empirical research smes are a source of structural changes in national economies and set the framework for socio-economic development, thus directly impacting on the world economy (bass, 2006, pp. 10–11), as well as on basic macroeconomic indicators (see: grzywacz, 2012; jaworski, 2011, pp. 161–176). the most important factors affecting economic activity are demand considerations. they both inf luence development and push or limit innovation of activities pursued by entrepreneurs. demand is a driver of improvement of existing and development of new products. it allows companies to modify and diversify their offer portfolios in order to boost sales and increase their market share. demand factors motivate entrepreneurs to refine production processes, enhance quality of services, reduce supply costs and, consequently, optimise prices. these are the factors that drive innovation implementation in enterprises. market factors condition the commercial success of individual products, technologies and services, setting the direction of changes in each area of the economy and life of individual populations. the reason is that the distance from academic, scientific and cultural centres has a significant impact on entrepreneurship, in particular on traits and personalities of entrepreneurs. they may also determine whether companies in certain sectors will be interested in the integration of innovation in their own development strategies. among other things, joanna małecka, teresa łuczka, jarmila šebestová, roman šperka54 entrepreneurship implies timely perception of development opportunities and chances, perception that may be a crucial reason behind companies’ decisions to refrain from engaging in a new innovative activity when they do not believe that the existing demand is sufficient to ensure satisfactory profitability of new products/ services. failure to take advantage of the market situation and introduce innovation by a company with considerable experience in switching between types of market activities is exemplified by nokia2, which, the world leader once, has disappeared from the market within a few years. it may therefore be safely hypothesized that entrepreneurship, considered in two aspects: (1) processes – activities aimed at forming and building a new company in certain conditions, with a view to generating profits, or (2) a set of traits and personalities – describing a particular human behaviour and action focused on innovation, ability to accept changes, spot opportunities and take risks, either drives company growth or, conversely, company growth is an effect of entrepreneurship of company managers (galbraith, 1957; see: davidsson et al., 2006, pp. 932–952) who, in turn, represent values and merits resulting from social factors and attitudes. the authors’ own research was aimed at examining the relationships among respondents, chief ly their entrepreneurial attitudes and prospects for 2 nokia was founded in 1865 by fredrik idestam. initially, it operated as a pulp mill in finland. in the late 19th century, nokia entered the rubber industry (rubber boots, car tires), which it abandoned for the sake of electrification of houses and factories (1912). at that time, finnish cable works was set up and production of cables for telegraphs and telephones commenced. the story of nokia corporation begins in 1967. it was formed as a result of merger of finnish rubber works with finnish cable works. in 1979, nokia went into a joint venture with television maker salora to create mobira oy, launched the world’s first mobile telephony network (nmt), and developed its first mobile phone. is in the 1980s, it became the global market leader with its most famous game – snake. in 1998, it was still the world mobile telephony leader. the crisis came in 2007 with the advent of iphone and android devices that were misjudged by nokia’s market research and qualified as non-competition. nokia mobile phones ceased to sell in 2009, and the corporation recorded a loss for the first time. demand shifted towards smartphones, and nokia was too far behind to catch up with competitors. on the verge of bankruptcy, it made a partnership with microsoft and launched windows phone (lumia) in 2011. however, profits could not improve its financial condition. the corporation was acquired by microsoft in april 2014 and repurchased by faxcom in may 2016. currently, it designs navigation maps (here) and develops other telecommunications technologies without much success. the world leader disappeared from the market because it had not innovated. economic activity and social determinants… 55 development of their own businesses. 50% of respondents prefer to work for their own company. urban areas are most frequently indicated as locations where a business can be developed, with only 8.5% of those surveyed opting for rural areas. detailed analysis of data has shown that most respondents started businesses of the same size as those where they gained their initial experience. only one seventh of micro-entrepreneurs wish to become small or medium-sized entrepreneurs. a fundamental division of small businesses was made by delineating two sets: (1) companies employing from 10 to 19, and (2) from 20 to 49 people (table 2). table 2. preferred target number of employees in respondents’ own enterprises current company size [%] preferred target number of employees in respondents’ own enterprises 0–9 10–19 20–49 50–249 0–9 24.5 67.35 14.29 14.29 4.08 10–19 8.5 47.06 17.65 29.41 5.88 20–49 10.5 57.14 14.29 19.05 9.52 50–249 20.5 56.10 14.63 12.20 17.07 250 and more 3.5 42.86 28.57 14.29 14.29 s o u r c e : own elaboration. in examining the perception and legitimacy of forms of employment, it was noted that most people who had ever worked under an employment contract would offer this form of employment to their potential new workers. what should be highlighted, however, is that one fifth of them would offer other legal forms (mandate or specific-task contract, self-employment) in order to avoid additional costs. these statistics look optimistic in the case of people who gained their experience under a legal relationship with the first employer other than an employment contract. one fourth of them prefer other forms of employment of future workers to an employment contract (table 3). joanna małecka, teresa łuczka, jarmila šebestová, roman šperka56 table 3. preferred forms of employment of workers in respondents’ enterprises current form of employment [%] preferred form of employment of workers employment contract other form of employment no contract no response employment contract 36.5 63.01 20.55 1.37 15.07 other form of employment 60.5 64.46 25.62 0.83 9.09 blank 3.0 0.00 0.00 0.00 100.00 s o u r c e : own elaboration. the analysis has revealed that the majority of future entrepreneurs focus on expansion to markets with greater geographic coverage than those where the entrepreneurs gained their first professional experience. 16.5% of them would like to raise their market share in their country, 7.5% within their region, and 2.0% wish to enhance cooperation with one of the neighbouring countries. it is worrying that despite the already gained experience in international trade, 8.5% of those surveyed would not consider trade with more than one foreign counterparty when starting their business (figure 1). despite their competences, respondents stated that their decision to refrain from international cooperation was primarily motivated by high costs of business operations arising from the need to cooperate with competent legal authorities that permit the signing of direct contracts as well as the need to make cash commitments in the initial period of cooperation. this form of financial settlements has a straight-through bearing on company financial liquidity and can be a significant barrier to company development in the initial period of activity, when additional external sources of financing are unavailable. thus, a social aspect appears that is associated with distrust as an often indicated factor directly determining company development. it was also found that 20.5% of respondents speak f luent english and can independently represent their companies abroad, while only 2.0 % speak german. economic activity and social determinants… 57 figure 1. current and target enterprise reach current enterprise reach target enterprise reach figure 1. current and target enterprise reach current enterprise reach target enterprise reach source: own elaboration. nearly 50% of those surveyed speak and write communicative english, but do not feel sufficiently capable of negotiating contracts and entering into professional discussions on behalf of their enterprises, whereas this proportion stands at 19.5% for german (table 4). the authors believe that knowledge of a foreign language is one of the essential factors in entrepreneurs refraining from foreign cooperation, which dramatically reduces the opportunities and prospects for success in the world of global competition. another social aspect, namely access to academic and research centres that provide opportunities for (1) learning languages and (2) increasing the prosperity of society allowing knowledge to be continued and expanded, appears to be a determinant of the development of economic activity. table 4. respondent population structure by foreign language competence language competence english german fluent, both oral and written e1 20.50% g1 2.00% communicative, both oral and written e2 45.50% g2 19.50% communicative, only oral e3 9.50% g3 5.50% knowledge of basic phrases e4 15.50% g4 41.50% source: own elaboration. conclusions only steady economic growth accompanied by the development of enterprises ensures prosperity of a society. the importance and scale of the issue of linking economic activity to social determinants are extensive subjects of statistical research on the nature and conlocal; 17.0% regional; 10.0% national; 16.5% international (1 country); 2.5% international (more than 1 country); 22.5% no response; 31.5% local; 16.5% regional; 17.5% national; 33.0% international (1 country); 4.5% international (more than 1 country); 14.0% no response; 14.5% figure 1. current and target enterprise reach current enterprise reach target enterprise reach source: own elaboration. nearly 50% of those surveyed speak and write communicative english, but do not feel sufficiently capable of negotiating contracts and entering into professional discussions on behalf of their enterprises, whereas this proportion stands at 19.5% for german (table 4). the authors believe that knowledge of a foreign language is one of the essential factors in entrepreneurs refraining from foreign cooperation, which dramatically reduces the opportunities and prospects for success in the world of global competition. another social aspect, namely access to academic and research centres that provide opportunities for (1) learning languages and (2) increasing the prosperity of society allowing knowledge to be continued and expanded, appears to be a determinant of the development of economic activity. table 4. respondent population structure by foreign language competence language competence english german fluent, both oral and written e1 20.50% g1 2.00% communicative, both oral and written e2 45.50% g2 19.50% communicative, only oral e3 9.50% g3 5.50% knowledge of basic phrases e4 15.50% g4 41.50% source: own elaboration. conclusions only steady economic growth accompanied by the development of enterprises ensures prosperity of a society. the importance and scale of the issue of linking economic activity to social determinants are extensive subjects of statistical research on the nature and conlocal; 17.0% regional; 10.0% national; 16.5% international (1 country); 2.5% international (more than 1 country); 22.5% no response; 31.5% local; 16.5% regional; 17.5% national; 33.0% international (1 country); 4.5% international (more than 1 country); 14.0% no response; 14.5% s o u r c e : own elaboration. nearly 50% of those surveyed speak and write communicative english, but do not feel sufficiently capable of negotiating contracts and entering into professional discussions on behalf of their enterprises, whereas this proportion stands at 19.5% for german (table 4). the authors believe that knowledge of a foreign language is one of the essential factors in entrepreneurs refraining from foreign cooperation, which dramatically reduces the opportunities and prospects for success in the world of global competition. another social aspect, namely access to academic and research centres that provide opportunities for (1) learning languages and (2) increasing the prosperity of society allowing knowledge to be continued and expanded, appears to be a determinant of the development of economic activity. table 4. respondent population structure by foreign language competence language competence english german fluent, both oral and written e1 20.50% g1 2.00% communicative, both oral and written e2 45.50% g2 19.50% communicative, only oral e3 9.50% g3 5.50% knowledge of basic phrases e4 15.50% g4 41.50% s o u r c e : own elaboration. joanna małecka, teresa łuczka, jarmila šebestová, roman šperka58  conclusions only steady economic growth accompanied by the development of enterprises ensures prosperity of a society. the importance and scale of the issue of linking economic activity to social determinants are extensive subjects of statistical research on the nature and consequences of entrepreneurship in various sectors of activity. this includes concepts, definitions and methodology followed in related literature, but also research of the organisation for economic cooperation and development, which brings together 35 highly developed and democratic countries. small and medium-sized enterprises are more specialised in their business. this means more efficient and effective operations, including the ability to smoothly and f lexibly adapt to changing market conditions and switch between types of economic activity. knowledge is exchanged more easily within such enterprises, resulting in commercialisation and marketing activities. a factor determining sme development both in terms of international economic activity and innovation is finance, since internal financial resources are usually limited and access to external sources of financing is definitely constrained, which is particularly true for funds for implementation of innovative projects, in comparison with large enterprises. smes continue to face a barrier called credit discrimination in both money and capital markets. in considering this issue, a vital role is played by infrastructure that supports: (1) establishing contacts with potential counterparties, (2) performing professional market analyses, (3) establishing cooperation with public research institutions. in the context of ever widespread globalisation, many factors that affect entrepreneurship are of national or regional character. the focus then is not only on institutional factors that can both facilitate and effectively discourage cooperation but also on the culture and values. on the other hand, there is an international aspect, as neither technology nor knowledge knows borders. the internet makes it possible to communicate and establish cooperation at every available level. this applies to the sphere of development as well as to opportunities to expand knowledge, follow competitors’ actions and conclude transactions. in this respect, globalisation is changing sectoral structures of national economies, forcing them to transform their institutional systems and develop new economic sectors, as confirmed by the authors’ own research based previous experience in sme observation. economic activity and social determinants… 59  references bass, h.h. 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(2016). przedsiębiorczość. (entrepreneurship.) warszawa: cedewu. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: may 14, 2016; date of acceptance: june 10, 2016. * contact information: mustafaakan1917@gmail.com, faculty of economics and administrative sciences, dogus university, kadiköy, istanbul, turkey, phone: +905333119405. akan m. (2016). a dynamic model of a nonlife insurance company. copernican journal of finance & accounting, 5(1), 9–24. http://dx.doi.org/10.12775/cjfa.2016.001 mustafa akan* dogus university a dynamic model of a nonlife insurance company keywords: nonlife insurance, optimal control theory, optimization. j e l classification: g22, c61. abstract: a dynamics model of a nonlife insurance company is developed. goodwill representing the awareness of the company by the public and the perceived quality of its services, and the technical capability representing the ability of the company to calculate the risk premium of the risks it considers to accept, are two state variables. the level of investment in advertising and quality improvement, and investments in technical capability are determined optimally to maximize the discounted profits of the company over an infinite horizon. the technical capability elasticity of number of customers and the claim ratio are shown to be determining parameters affecting the optimal paths of investments. the stability of equilibrium points are also shown to be dependent on these parameters.  introduction nonlife insurance sector is an important part of financial sector which fuels economic growth. it grew by 2.9% in 2014 when the advanced economies grew by less than this rate (sigma 2015). liberalization of the sector has resulted in intense price competition (borscherd, haueter 2012). therefore, the companies in that sector have to compete by investing in other factors such as quality mustafa akan10 of service, advertising, and technical capability to better evaluate risks to decrease the claims. nair and narasimhan (2006) have shown that quality is an important determinant of goodwill. another study has shown that perceived quality of the service provided and name familiarity are important factors which affect the choice company by the customers (arora and stoner 1996). hanson (2001) states that “quality is seen in the context of the essential transformation problem which may exists between the suppliers and the customers”. promotional activities, image of the company, customer convenience, and procedures are shown to be important factors that determine the company choice by life insurance customers (sunega, sharma 2008). the factors that determine customer choice are not same in all countries. computerization, online production of policies, connection to the banks, speed and efficiency of transactions, and clear communication with the customers are considered as important in a city in india (mathur, tripathi 2014). in another study by gangwar (2011) procedural efficiency, accessibility, advertising, redressal of complaints, and efficiency of claim settlement are shown to be important for life insurance customers. chowdhury, raahman, and afra (2007) have studied the same problem in pakistan and shown that foreign ownership, quality of service, reputation of the company, and quality of personnel are the most important factors determining customer choice of insurance company. yet in another similar study, akan (2013) has shown that the confidence in the company that it will pay claims, quality of claim service, and price are most important competition variables. price was not even mentioned in another study (i̇de 2012:56). other studies conducted in turkey have also similar conclusions (karaali ve özçelik 2008 and kaya et. all 2008). however, goodwill is built up slowly. it is built up by slowly offering a matrix of very good services (advertising for name familiarity, computerization, speed of policy production and distribution, claim payment procedures, good communication with the customers etc.) over time and it is costly to do so. hence, in optimal control theory terminology, goodwill is a state variable and it is denoted as g in this paper. pricing risks correctly (determining the risk premium) and underwriting these risks is a core function of an insurance company and this function is often called underwriting or technical department. a high technical capability will result in lower incurred claims. a high technical capability will also help increase the number of customers since the customers will be more aware of the risks that they face and hence they will insure them. however, underwrit a dynamic model of a nonlife insurance company 11 ing or technical capability, like goodwill, can only be built up in time by investing in it. thus it is also a state variable and it will be denoted as t in this paper. a nonlife insurance company tries to insure many homogenous risks by correctly calculating their risk premium (formation of underwriting portfolio) and price, collecting the premiums from the sellers of policies, paying commissions, claims, general expenses out of its financial portfolio, and optimally investing the remaining funds in financial portfolio. therefore there are two actual portfolios (underwriting and financial) and one important but immeasurable portfolio (goodwill) that it has to manage optimally. however how exactly goodwill affects the company is not clear. the effect of technical capability on the portfolio of the company is evident but the exact functional form is not known. the effect of financial portfolio is also evident and is not taken into account here since it is assumed to be optimally managed. the objective of this paper is to develop and solve a dynamic model of an insurance company to maximize its profits over an infinite horizon by optimally deciding on investments in goodwill and technical capability portfolio. the research methodology and the course of the research process model revenues of a nonlife insurance company are composed of premiums and financial income. expenses are composed of claims, commissions, and general expenses. financial income is neglected in this paper since the financial portfolio is assumed to be optimally managed. general expenses are also neglected since they are mostly of fixed character over significantly large time periods and output levels. commissions are disregarded since they are generally a fixed percentage of premiums. the instantaneous profit of the company at time t is expressed as: technical capability, like goodwill, can only be built up in time by investing in it. thus it is also a state variable and it will be denoted as t in this paper. a nonlife insurance company tries to insure many homogenous risks by correctly calculating their risk premium (formation of underwriting portfolio) and price, collecting the premiums from the sellers of policies, paying commissions, claims, general expenses out of its financial portfolio, and optimally investing the remaining funds in financial portfolio. therefore there are two actual portfolios (underwriting and financial) and one important but immeasurable portfolio (goodwill) that it has to manage optimally. however how exactly goodwill affects the company is not clear. the effect of technical capability on the portfolio of the company is evident but the exact functional form is not known. the effect of financial portfolio is also evident and is not taken into account here since it is assumed to be optimally managed. the objective of this paper is to develop and solve a dynamic model of an insurance company to maximize its profits over an infinite horizon by optimally deciding on investments in goodwill and technical capability portfolio. the research methodology and the course of the research process model revenues of a nonlife insurance company are composed of premiums and financial income. expenses are composed of claims, commissions, and general expenses. financial income is neglected in this paper since the financial portfolio is assumed to be optimally managed. general expenses are also neglected since they are mostly of fixed character over significantly large time periods and output levels. commissions are disregarded since they are generally a fixed percentage of premiums. the instantaneous profit of the company at time t is expressed as: (t)= where; p: price (premium) of the policy, a constant since the insurance sector is assumed to perfectly competitive. n(g(t),t(t)): number of policies sold at time t is assumed to be a function of goodwill g(t) and the level of technical capability t(t). it has the following characteristics.  ( ( ), ( ))(1 ( ( ))) ( ) ( ( ))pn g t t t h t t q t w a t   where; – p: price (premium) of the policy, a constant since the insurance sector is assumed to perfectly competitive. – n(g(t),t(t)): number of policies sold at time t is assumed to be a function of goodwill g(t) and the level of technical capability t(t). it has the following characteristics. mustafa akan12 h(t(t)): claim ratio (claims as a portion of premiums) as a function of technical capability of the firm with the following characteristics; a(t) is the investment in goodwill with w(a) as the cost of investing in goodwill, q(t) is the level of investment in technical capability. cost of investing in technical capability is assumed to be linear function of q(t) with a unit cost of 1. hence better the technical capabilities of an insurance company lower will be its loss ratio since risk premium (expected loss of the company for accepting a certain risk) is a large part of the premium paid by customers. however, improving technical capability is possible only by properly investing in it. employment of qualified technical underwriting personnel, education of such personnel, acquisition of hardware and software to analyze relevant data to measure risks are all important and are expensive. the issue of reinsurance is not included in the model since, in the long run, reinsurance is a partnership. mathematically dynamics of technical capability is expressed as: (1) here; t(t): denotes the technical capability at time t. δ: rate of obsolescence of technical capability (attrition of personnel, obsolescence of methodologies used to measure risks, etc.). equation (1) states that the technical capability increases by investment in it (q) and decreases exponentially at a rate δ due to obsolescence and depreciation of this capability (loss of experienced underwriters, obsolescence of both software and hardware used by underwriters, etc.). another important portfolio which affects the company is the goodwill portfolio. akan (2013), karaali and özçelik (2008) and kaya, akn and nalan (2008) have shown that confi0, n 0, n 0, 0, 0g t gt gg ttn n n     0, 0t tth h  / '( ) ( ) ( ) dt dt t t q t t t   – h(t(t)): claim ratio (claims as a portion of premiums) as a function of technical capability of the firm with the following characteristics; h(t(t)): claim ratio (claims as a portion of premiums) as a function of technical capability of the firm with the following characteristics; a(t) is the investment in goodwill with w(a) as the cost of investing in goodwill, q(t) is the level of investment in technical capability. cost of investing in technical capability is assumed to be linear function of q(t) with a unit cost of 1. hence better the technical capabilities of an insurance company lower will be its loss ratio since risk premium (expected loss of the company for accepting a certain risk) is a large part of the premium paid by customers. however, improving technical capability is possible only by properly investing in it. employment of qualified technical underwriting personnel, education of such personnel, acquisition of hardware and software to analyze relevant data to measure risks are all important and are expensive. the issue of reinsurance is not included in the model since, in the long run, reinsurance is a partnership. mathematically dynamics of technical capability is expressed as: (1) here; t(t): denotes the technical capability at time t. δ: rate of obsolescence of technical capability (attrition of personnel, obsolescence of methodologies used to measure risks, etc.). equation (1) states that the technical capability increases by investment in it (q) and decreases exponentially at a rate δ due to obsolescence and depreciation of this capability (loss of experienced underwriters, obsolescence of both software and hardware used by underwriters, etc.). another important portfolio which affects the company is the goodwill portfolio. akan (2013), karaali and özçelik (2008) and kaya, akn and nalan (2008) have shown that confi0, n 0, n 0, 0, 0g t gt gg ttn n n     0, 0t tth h  / '( ) ( ) ( ) dt dt t t q t t t   a(t) is the investment in goodwill with w(a) as the cost of investing in goodwill, q(t) is the level of investment in technical capability. cost of investing in technical capability is assumed to be linear function of q(t) with a unit cost of 1. hence better the technical capabilities of an insurance company lower will be its loss ratio since risk premium (expected loss of the company for accepting a certain risk) is a large part of the premium paid by customers. however, improving technical capability is possible only by properly investing in it. employment of qualified technical underwriting personnel, education of such personnel, acquisition of hardware and software to analyze relevant data to measure risks are all important and are expensive. the issue of reinsurance is not included in the model since, in the long run, reinsurance is a partnership. mathematically dynamics of technical capability is expressed as: h(t(t)): claim ratio (claims as a portion of premiums) as a function of technical capability of the firm with the following characteristics; a(t) is the investment in goodwill with w(a) as the cost of investing in goodwill, q(t) is the level of investment in technical capability. cost of investing in technical capability is assumed to be linear function of q(t) with a unit cost of 1. hence better the technical capabilities of an insurance company lower will be its loss ratio since risk premium (expected loss of the company for accepting a certain risk) is a large part of the premium paid by customers. however, improving technical capability is possible only by properly investing in it. employment of qualified technical underwriting personnel, education of such personnel, acquisition of hardware and software to analyze relevant data to measure risks are all important and are expensive. the issue of reinsurance is not included in the model since, in the long run, reinsurance is a partnership. mathematically dynamics of technical capability is expressed as: (1) here; t(t): denotes the technical capability at time t. δ: rate of obsolescence of technical capability (attrition of personnel, obsolescence of methodologies used to measure risks, etc.). equation (1) states that the technical capability increases by investment in it (q) and decreases exponentially at a rate δ due to obsolescence and depreciation of this capability (loss of experienced underwriters, obsolescence of both software and hardware used by underwriters, etc.). another important portfolio which affects the company is the goodwill portfolio. akan (2013), karaali and özçelik (2008) and kaya, akn and nalan (2008) have shown that confi0, n 0, n 0, 0, 0g t gt gg ttn n n     0, 0t tth h  / '( ) ( ) ( ) dt dt t t q t t t   (1) here; – t(t): denotes the technical capability at time t. – δ: rate of obsolescence of technical capability (attrition of personnel, obsolescence of methodologies used to measure risks, etc.). equation (1) states that the technical capability increases by investment in it (q) and decreases exponentially at a rate δ due to obsolescence and depreciation of this capability (loss of experienced underwriters, obsolescence of both software and hardware used by underwriters, etc.). another important portfolio which affects the company is the goodwill portfolio. akan (2013), karaali and özçelik (2008) and kaya, akın and nalan (2008) have shown that confidence in a company and the quality of service are very important factors in the choice of insurance company by the customers. hence the perception of customers about an insurance company is important. it is of paramount importance for company to have optimal product quality, a dynamic model of a nonlife insurance company 13 service quality, company awareness (all elements of goodwill) and to be able to keep these at optimal levels. however, the development of this portfolio is very difficult since the investments in all elements of goodwill are expensive (cost of investment in goodwill is assumed to be a convex function). the dynamics of this portfolio is expressed as: dence in a company and the quality of service are very important factors in the choice of insurance company by the customers. hence the perception of customers about an insurance company is important. it is of paramount importance for company to have optimal product quality, service quality, company awareness (all elements of goodwill) and to be able to keep these at optimal levels. however, the development of this portfolio is very difficult since the investments in all elements of goodwill are expensive (cost of investment in goodwill is assumed to be a convex function). the dynamics of this portfolio is expressed as: (2) here; a(t): the level of expenditures made to increase goodwill (advertising, timely claim payments, advisory functions, education of the personnel, computer hardware and software for faster issuance of policies ,etc.). η: the rate of decrease in the level of goodwill due to bad experience of customers with the company, advertising by competitors, better performance of other companies, etc. this rate is assumed to be constant. the objective of the firm is assumed to be to maximize the present value of the firm over an infinite horizon by optimally choosing the time path of its expenditures a(t) and q(t) and at the same time meet the constraints represented by equation(1) and (2). mathematically; the term e-rt in the integral represents the present value factor. the discount rate r is assumed to be constant since time-dependent discount rate would complicate the solution of the model even though it is more realistic. solution / '( ) ( ) ( ) dg dt g t a t g t   , 0 0 0 0 max [ ( ( ), ( ))(1 ( )) ( ) ( ( ))] '( ) ( ) ( ) t(0)=t '( ) ( ) ( ) g(0)=g rt a q e pn g t t t h t q t w a t dt t t q t t t g t a t g t              (2) here; – a(t): the level of expenditures made to increase goodwill (advertising, timely claim payments, advisory functions, education of the personnel, computer hardware and software for faster issuance of policies ,etc.). – η: the rate of decrease in the level of goodwill due to bad experience of customers with the company, advertising by competitors, better performance of other companies, etc. this rate is assumed to be constant. the objective of the firm is assumed to be to maximize the present value of the firm over an infinite horizon by optimally choosing the time path of its expenditures a(t) and q(t) and at the same time meet the constraints represented by equation(1) and (2). mathematically; dence in a company and the quality of service are very important factors in the choice of insurance company by the customers. hence the perception of customers about an insurance company is important. it is of paramount importance for company to have optimal product quality, service quality, company awareness (all elements of goodwill) and to be able to keep these at optimal levels. however, the development of this portfolio is very difficult since the investments in all elements of goodwill are expensive (cost of investment in goodwill is assumed to be a convex function). the dynamics of this portfolio is expressed as: (2) here; a(t): the level of expenditures made to increase goodwill (advertising, timely claim payments, advisory functions, education of the personnel, computer hardware and software for faster issuance of policies ,etc.). η: the rate of decrease in the level of goodwill due to bad experience of customers with the company, advertising by competitors, better performance of other companies, etc. this rate is assumed to be constant. the objective of the firm is assumed to be to maximize the present value of the firm over an infinite horizon by optimally choosing the time path of its expenditures a(t) and q(t) and at the same time meet the constraints represented by equation(1) and (2). mathematically; the term e-rt in the integral represents the present value factor. the discount rate r is assumed to be constant since time-dependent discount rate would complicate the solution of the model even though it is more realistic. solution / '( ) ( ) ( ) dg dt g t a t g t   , 0 0 0 0 max [ ( ( ), ( ))(1 ( )) ( ) ( ( ))] '( ) ( ) ( ) t(0)=t '( ) ( ) ( ) g(0)=g rt a q e pn g t t t h t q t w a t dt t t q t t t g t a t g t              the term e-rt in the integral represents the present value factor. the discount rate r is assumed to be constant since time-dependent discount rate would complicate the solution of the model even though it is more realistic. solution optimal control theory will be employed to solve this problem (kamien and schwartz 2012, l.s, pontrayagin 1962 among others). the current value hamiltonian is: optimal control theory will be employed to solve this problem (kamien and schwartz 2012, l.s, pontrayagin, 1962 among others). the current value hamiltonian is: the necessary conditions for optimality are: with equation (1) and equation (2). the hamiltonian is assumed to be jointly concave in the variables a, q, g and t. therefore, the necessary conditions are also sufficient for optimality. the solution is possible to determine the optimal solution even with unknown forms of functions n, h, and w. however, we will assume specific forms for these functions for better exposition of the solution as follows: the parameters are assumed to be between zero and one to assure the concavity of the hamiltonian. a and b are parameters of scale. the parameter k, 0 < k < 1, represents the lowest value of claim ratio than can be obtained since there will always be claims no matter what the level of technical capability is. the function is assumed to be convex, i.e. β>1. then the necessary conditions can be rewritten as: 1 2( , )(1 ( )) ( ) ( ) ( )h pn g t h t q w a q t a g           1 2 1 0 1 h 0 '( ) ' q a h w a             1 2 2 ( ) ( , )(1 ( )) ( , ) '( ) ' ( ) ( , ) (1-h(t)) t g r pn g t h t pn g t h t r pn g t             ( ) ( / ) ( ) ( , ) h t k b t w a ba n g t ag t         , ,   w( )a mustafa akan14 the necessary conditions for optimality are: optimal control theory will be employed to solve this problem (kamien and schwartz 2012, l.s, pontrayagin, 1962 among others). the current value hamiltonian is: the necessary conditions for optimality are: with equation (1) and equation (2). the hamiltonian is assumed to be jointly concave in the variables a, q, g and t. therefore, the necessary conditions are also sufficient for optimality. the solution is possible to determine the optimal solution even with unknown forms of functions n, h, and w. however, we will assume specific forms for these functions for better exposition of the solution as follows: the parameters are assumed to be between zero and one to assure the concavity of the hamiltonian. a and b are parameters of scale. the parameter k, 0 < k < 1, represents the lowest value of claim ratio than can be obtained since there will always be claims no matter what the level of technical capability is. the function is assumed to be convex, i.e. β>1. then the necessary conditions can be rewritten as: 1 2( , )(1 ( )) ( ) ( ) ( )h pn g t h t q w a q t a g           1 2 1 0 1 h 0 '( ) ' q a h w a             1 2 2 ( ) ( , )(1 ( )) ( , ) '( ) ' ( ) ( , ) (1-h(t)) t g r pn g t h t pn g t h t r pn g t             ( ) ( / ) ( ) ( , ) h t k b t w a ba n g t ag t         , ,   w( )a with equation (1) and equation (2). the hamiltonian is assumed to be jointly concave in the variables a, q, g and t. therefore, the necessary conditions are also sufficient for optimality. the solution is possible to determine the optimal solution even with unknown forms of functions n, h, and w. however, we will assume specific forms for these functions for better exposition of the solution as follows: optimal control theory will be employed to solve this problem (kamien and schwartz 2012, l.s, pontrayagin, 1962 among others). the current value hamiltonian is: the necessary conditions for optimality are: with equation (1) and equation (2). the hamiltonian is assumed to be jointly concave in the variables a, q, g and t. therefore, the necessary conditions are also sufficient for optimality. the solution is possible to determine the optimal solution even with unknown forms of functions n, h, and w. however, we will assume specific forms for these functions for better exposition of the solution as follows: the parameters are assumed to be between zero and one to assure the concavity of the hamiltonian. a and b are parameters of scale. the parameter k, 0 < k < 1, represents the lowest value of claim ratio than can be obtained since there will always be claims no matter what the level of technical capability is. the function is assumed to be convex, i.e. β>1. then the necessary conditions can be rewritten as: 1 2( , )(1 ( )) ( ) ( ) ( )h pn g t h t q w a q t a g           1 2 1 0 1 h 0 '( ) ' q a h w a             1 2 2 ( ) ( , )(1 ( )) ( , ) '( ) ' ( ) ( , ) (1-h(t)) t g r pn g t h t pn g t h t r pn g t             ( ) ( / ) ( ) ( , ) h t k b t w a ba n g t ag t         , ,   w( )a the parameters optimal control theory will be employed to solve this problem (kamien and schwartz 2012, l.s, pontrayagin, 1962 among others). the current value hamiltonian is: the necessary conditions for optimality are: with equation (1) and equation (2). the hamiltonian is assumed to be jointly concave in the variables a, q, g and t. therefore, the necessary conditions are also sufficient for optimality. the solution is possible to determine the optimal solution even with unknown forms of functions n, h, and w. however, we will assume specific forms for these functions for better exposition of the solution as follows: the parameters are assumed to be between zero and one to assure the concavity of the hamiltonian. a and b are parameters of scale. the parameter k, 0 < k < 1, represents the lowest value of claim ratio than can be obtained since there will always be claims no matter what the level of technical capability is. the function is assumed to be convex, i.e. β>1. then the necessary conditions can be rewritten as: 1 2( , )(1 ( )) ( ) ( ) ( )h pn g t h t q w a q t a g           1 2 1 0 1 h 0 '( ) ' q a h w a             1 2 2 ( ) ( , )(1 ( )) ( , ) '( ) ' ( ) ( , ) (1-h(t)) t g r pn g t h t pn g t h t r pn g t             ( ) ( / ) ( ) ( , ) h t k b t w a ba n g t ag t         , ,   w( )a are assumed to be between zero and one to assure the concavity of the hamiltonian. a and b are parameters of scale. the parameter k, 0 < k < 1, represents the lowest value of claim ratio than can be obtained since there will always be claims no matter what the level of technical capability is. the function is assumed to be convex, i.e. β>1. then the necessary conditions can be rewritten as: 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (3) 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (4) 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (5) 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (6) with equations (1) and (2). a dynamic model of a nonlife insurance company 15 from equation (3), 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (7) using this equation with equation (3) in equation (5), we have; 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (8) using equation (8); 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (9) then, using equation (9), we can express t as a function of g, as 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (10) using equations (4) and (9) in equation (6), we have 1 1 2 0 1 (3) h 0 q a h b a             1 1 1 1 2 2 (4) ' ( ) t ( (1 ) b( )/t ) (5) ' ( ) t (1-k-bt ) r pag k r pa g                            (6) with equations (1) and (2). from equation (3), 1' 0  (7) using this equation with equation (3) in equation (5), we have; (8) using equation (8); (9) then, using equation (9), we can express t as a function of g, as t = m(g) (10) using equations (4) and (9) in equation (6), we have 1 2 2 1 1 2 ' ''( ) ' '( )( ) (1 ) or, ' ( 1) ' ( ) ( ) (1 ( ) ) w a a w a r pag t k bt b a a b a r pag m g k bm g                                     (11) 1t ( (1 ) b( ) / )r pag k t          1 1/ (r ) t/ (pat ( (1 k) b( ) / t )) or g ((r ) t / ( (1 ) ( ))) g pa k t b                           (11) equations (11) and (2) represents a homogeneous, first order differential equation system in (g, a) space. it is not possible to solve the system since m(g) and (a) are not linear. phase diagrammatic analysis will be conducted to characterize the optimal solution (kaplan 1958). however before this analysis, equation (9) has to be analyzed. the parameters will be important since their relative size will affect the solution. there are two cases: a. if equations (11) and (2) represents a homogeneous, first order differential equation system in (g, a) space. it is not possible to solve the system since m(g) and (a) are not linear. phase diagrammatic analysis will be conducted to characterize the optimal solution (kaplan, 1958). however before this analysis, equation (9) has to be analyzed. the parameters will be important since their relative size will affect the solution. there are two cases: a. if (technical capability elasticity of claim ratio is greater than the technical capability elasticity of number of customers) in this case equation (9) is represented in figure 1 below. figure 1. graphic representation of equation (9) first the loci of points where both a’ = 0 and g’ = 0 needs to be determined (equations 2 and 11) in (g, a) space. a’=0 curve, using equation(11) can be written as: 1 ( 1)/1( ) a((r ) t / ( (1 k) t ( ))) ((1 ) )b a r p b k t bt                        (12) this relationship between a and t is represented in figure 2 below. figure 2. graphic representation of equation (12) w and     (technical capability elasticity of claim ratio is greater than the technical capability elasticity of number of customers) in this case equation (9) is represented in figure 1 below. mustafa akan16 figure 1. graphic representation of equation (9) equations (11) and (2) represents a homogeneous, first order differential equation system in (g, a) space. it is not possible to solve the system since m(g) and (a) are not linear. phase diagrammatic analysis will be conducted to characterize the optimal solution (kaplan, 1958). however before this analysis, equation (9) has to be analyzed. the parameters will be important since their relative size will affect the solution. there are two cases: a. if (technical capability elasticity of claim ratio is greater than the technical capability elasticity of number of customers) in this case equation (9) is represented in figure 1 below. figure 1. graphic representation of equation (9) first the loci of points where both a’ = 0 and g’ = 0 needs to be determined (equations 2 and 11) in (g, a) space. a’=0 curve, using equation(11) can be written as: 1 ( 1)/1( ) a((r ) t / ( (1 k) t ( ))) ((1 ) )b a r p b k t bt                        (12) this relationship between a and t is represented in figure 2 below. figure 2. graphic representation of equation (12) w and     s o u r c e : developed by the author. first the loci of points where both a’ = 0 and g’ = 0 needs to be determined (equations 2 and 11) in (g, a) space. a’=0 curve, using equation(11) can be written as: equations (11) and (2) represents a homogeneous, first order differential equation system in (g, a) space. it is not possible to solve the system since m(g) and (a) are not linear. phase diagrammatic analysis will be conducted to characterize the optimal solution (kaplan, 1958). however before this analysis, equation (9) has to be analyzed. the parameters will be important since their relative size will affect the solution. there are two cases: a. if (technical capability elasticity of claim ratio is greater than the technical capability elasticity of number of customers) in this case equation (9) is represented in figure 1 below. figure 1. graphic representation of equation (9) first the loci of points where both a’ = 0 and g’ = 0 needs to be determined (equations 2 and 11) in (g, a) space. a’=0 curve, using equation(11) can be written as: 1 ( 1)/1( ) a((r ) t / ( (1 k) t ( ))) ((1 ) )b a r p b k t bt                        (12) this relationship between a and t is represented in figure 2 below. figure 2. graphic representation of equation (12) w and     (12) this relationship between a and t is represented in figure 2 below. figure 2. graphic representation of equation (12) this curve, however, is in (t, a) space. we need to translate it to (g, a) space using equation (9) and figure (1). g*is the value of g in equation (9) when in equation (9). therefore, a’=0 locus can be represented in (g, a) space as in figure 3 using figures 1, 2, and equation (9). it can be shown that above the curve represented by equation (12) which is a’=0 locus, a’ > 0, and below it a’ < 0. this dynamic procedure is represented by the directional arrows in figure 1. notice that a < 0 in equation (9) when t < (b/(1-k))1/α which corresponds to g* in equation (9). so this section of this curve is omitted. notice also that a’>0 to the left of g* due to equation (11) because to the left of t* the last term in equation (11) is negative making a’>0. using equation (2), it is shown that above g’=0, g’>0, and below g’=0, g’<0. the intersection of these loci represents equilibrium point (gs,as). figure 3. phase diagram-equations (2) and (11) * 1/( / 1 )t b k   s o u r c e : developed by the author. this curve, however, is in (t, a) space. we need to translate it to (g, a) space using equation (9) and figure (1). g*is the value of g in equation (9) when this curve, however, is in (t, a) space. we need to translate it to (g, a) space using equation (9) and figure (1). g*is the value of g in equation (9) when in equation (9). therefore, a’=0 locus can be represented in (g, a) space as in figure 3 using figures 1, 2, and equation (9). it can be shown that above the curve represented by equation (12) which is a’=0 locus, a’ > 0, and below it a’ < 0. this dynamic procedure is represented by the directional arrows in figure 1. notice that a < 0 in equation (9) when t < (b/(1-k))1/α which corresponds to g* in equation (9). so this section of this curve is omitted. notice also that a’>0 to the left of g* due to equation (11) because to the left of t* the last term in equation (11) is negative making a’>0. using equation (2), it is shown that above g’=0, g’>0, and below g’=0, g’<0. the intersection of these loci represents equilibrium point (gs,as). figure 3. phase diagram-equations (2) and (11) * 1/( / 1 )t b k   in equation (9). therefore, a’=0 locus can be represented in (g, a) space as in figure 3 using figures 1, 2, and equation (9). it can be shown that above the curve represented by a dynamic model of a nonlife insurance company 17 equation (12) which is a’=0 locus, a’ > 0, and below it a’ < 0. this dynamic procedure is represented by the directional arrows in figure 1. notice that a < 0 in equation (9) when t < (b/(1-k))1/α which corresponds to g* in equation (9). so this section of this curve is omitted. notice also that a’>0 to the left of g* due to equation (11) because to the left of t* the last term in equation (11) is negative making a’>0. using equation (2), it is shown that above g’=0, g’>0, and below g’=0, g’<0. the intersection of these loci represents equilibrium point (gs,as). figure 3. phase diagram-equations (2) and (11) this curve, however, is in (t, a) space. we need to translate it to (g, a) space using equation (9) and figure (1). g*is the value of g in equation (9) when in equation (9). therefore, a’=0 locus can be represented in (g, a) space as in figure 3 using figures 1, 2, and equation (9). it can be shown that above the curve represented by equation (12) which is a’=0 locus, a’ > 0, and below it a’ < 0. this dynamic procedure is represented by the directional arrows in figure 1. notice that a < 0 in equation (9) when t < (b/(1-k))1/α which corresponds to g* in equation (9). so this section of this curve is omitted. notice also that a’>0 to the left of g* due to equation (11) because to the left of t* the last term in equation (11) is negative making a’>0. using equation (2), it is shown that above g’=0, g’>0, and below g’=0, g’<0. the intersection of these loci represents equilibrium point (gs,as). figure 3. phase diagram-equations (2) and (11) * 1/( / 1 )t b k   s o u r c e : developed by the author. it is possible to reach the equilibrium point (gs,as) from quadrants i and iii. new or companies with low goodwill must begin with increasing the level of technical capability to the level implied by equation (9) by a jump in that state variable and continue with very high levels of expenditures (advertising, expenditures to increase quality, and technical capability) at an increasing rate first to increase goodwill to g*, technical capability to t*=b/(1-k))1/α (where the claim ratio is one) implied by equation (9), then keep investing in goodwill and technical capability to further decrease the claim ratio to ts and increase g to gs which are the desired levels of goodwill and technical capability (quadrant i). this strategy is represented by the curve which starts in the first quadrant with arrows on it. for companies with high level of beginning goodwill, the optimal strategy will be to keep investing in both goodwill and quality as to bring the level of goodwill to the level desired level in the long term (quadrant iii). mustafa akan18 strategies starting in quadrants ii and iv will not lead to equilibrium. stability of the equilibrium point is studied in the appendix. it is shown that this equilibrium may or may not be stable. it is stable only if the relationship between goodwill g and the technical capability t is not very strong, i.e. m’(g) is small. b. if it is possible to reach the equilibrium point (gs,as) from quadrants i and iii. new or companies with low goodwill must begin with increasing the level of technical capability to the level implied by equation (9) by a jump in that state variable and continue with very high levels of expenditures (advertising, expenditures to increase quality, and technical capability) at an increasing rate first to increase goodwill to g*, technical capability to t*=b/(1-k))1/α (where the claim ratio is one) implied by equation (9), then keep investing in goodwill and technical capability to further decrease the claim ratio to ts and increase g to gs which are the desired levels of goodwill and technical capability (quadrant i). this strategy is represented by the curve which starts in the first quadrant with arrows on it. for companies with high level of beginning goodwill, the optimal strategy will be to keep investing in both goodwill and quality as to bring the level of goodwill to the level desired level in the long term (quadrant iii). strategies starting in quadrants ii and iv will not lead to equilibrium. stability of the equilibrium point is studied in the appendix. it is shown that this equilibrium may or may not be stable. it is stable only if the relationship between goodwill g and the technical capability t is not very strong, i.e. m’(g) is small. b. if (technical capability elasticity of claims ratio is less than the technical capability elasticity of number of claims) there will be no change in g’=0 loci (a= ). the loci a’=0, as was done before (using equations (9) and (11)) can be rewritten as: (13) however, this relationship is in (t, a) space. equation (9) will be employed to represent this relationship (a’=0 locus) in (g, a) space to carry out the phase plane analysis. figure 4. graphic representation of equation (9)   g 1 ( 1)/1( ) a((r ) t / ( (1 k) t ( ))) ((1 ) )b a r p b k t bt                        (technical capability elasticity of claims ratio is less than the technical capability elasticity of number of claims) there will be no change in g’=0 loci (a=). the loci a’=0, as was done before (using equations (9) and (11)) can be rewritten as: it is possible to reach the equilibrium point (gs,as) from quadrants i and iii. new or companies with low goodwill must begin with increasing the level of technical capability to the level implied by equation (9) by a jump in that state variable and continue with very high levels of expenditures (advertising, expenditures to increase quality, and technical capability) at an increasing rate first to increase goodwill to g*, technical capability to t*=b/(1-k))1/α (where the claim ratio is one) implied by equation (9), then keep investing in goodwill and technical capability to further decrease the claim ratio to ts and increase g to gs which are the desired levels of goodwill and technical capability (quadrant i). this strategy is represented by the curve which starts in the first quadrant with arrows on it. for companies with high level of beginning goodwill, the optimal strategy will be to keep investing in both goodwill and quality as to bring the level of goodwill to the level desired level in the long term (quadrant iii). strategies starting in quadrants ii and iv will not lead to equilibrium. stability of the equilibrium point is studied in the appendix. it is shown that this equilibrium may or may not be stable. it is stable only if the relationship between goodwill g and the technical capability t is not very strong, i.e. m’(g) is small. b. if (technical capability elasticity of claims ratio is less than the technical capability elasticity of number of claims) there will be no change in g’=0 loci (a= ). the loci a’=0, as was done before (using equations (9) and (11)) can be rewritten as: (13) however, this relationship is in (t, a) space. equation (9) will be employed to represent this relationship (a’=0 locus) in (g, a) space to carry out the phase plane analysis. figure 4. graphic representation of equation (9)   g 1 ( 1)/1( ) a((r ) t / ( (1 k) t ( ))) ((1 ) )b a r p b k t bt                        (13) however, this relationship is in (t, a) space. equation (9) will be employed to represent this relationship (a’=0 locus) in (g, a) space to carry out the phase plane analysis. figure 4. graphic representation of equation (9) t** is the value of t that makes the denominator in equation (9) zero. g becomes infinite at this value of t. this relationship and its graph will be employed to translate equation (13) in (g, a) space. t* is same as defined previously. notice that t* is greater than t**. the values of t less than t* will be disregarded since a<0 in that case due to equation (13). equation (13) is graphed is also in figure 5 for better exposition with the full knowledge that it is not a sinusoidal curve. figure 5. graphic representation of equation (13) using figures (4) and (5), a’=0 locus can be defined in (g, a) space. these loci, a’=0 and g’=0, are represented in figure (6). the part of the graph where a<0 should be omitted. figure 6. phase diagram-equations (2) and (11) s o u r c e : developed by the author. t** is the value of t that makes the denominator in equation (9) zero. g becomes infinite at this value of t. this relationship and its graph will be employed to translate equation (13) in (g, a) space. t* is same as defined previously. notice that t* is greater than t**. the values of t less than t* will be disregarded since a<0 in that case due to equation (13). equation (13) is graphed is also in figure 5 for better exposition with the full knowledge that it is not a sinusoidal curve. a dynamic model of a nonlife insurance company 19 figure 5. graphic representation of equation (13) t** is the value of t that makes the denominator in equation (9) zero. g becomes infinite at this value of t. this relationship and its graph will be employed to translate equation (13) in (g, a) space. t* is same as defined previously. notice that t* is greater than t**. the values of t less than t* will be disregarded since a<0 in that case due to equation (13). equation (13) is graphed is also in figure 5 for better exposition with the full knowledge that it is not a sinusoidal curve. figure 5. graphic representation of equation (13) using figures (4) and (5), a’=0 locus can be defined in (g, a) space. these loci, a’=0 and g’=0, are represented in figure (6). the part of the graph where a<0 should be omitted. figure 6. phase diagram-equations (2) and (11) s o u r c e : developed by the author. using figures (4) and (5), a’=0 locus can be defined in (g, a) space. these loci, a’=0 and g’=0, are represented in figure (6). the part of the graph where a<0 should be omitted. figure 6. phase diagram-equations (2) and (11) it can be easily shown that the directional arrows are as shown in figure (6). (gs,as) are the values of a and g at the equilibrium point. it is shown in the appendix that this equilibrium point is a saddle point. following conclusions can be drawn from the diagram above:  companies with low level of beginning goodwill (quadrant i) must begin with increasing the level of technical capability to the level implied by equation (9) by a jump in that state variable and continue with high levels of advertising expenditures to increase their goodwill and adjust technical capability t in accordance with equation (9) until equilibrium levels are reached. in practice, this strategy implies that the companies with low goodwill should first invest heavily in technical capability to improve claim ratio to improve profitability then invest heavily in advertising and quality to increase the number of customers.  for companies with very high levels of goodwill (quadrant iii) optimal behavior will be to gradually decrease the goodwill level to the level desired in the long run (gs), and adjusts technical capability level t in accordance with equation (9) to the long term technical capability (ts).  starting in other quadrants (ii and iv) will not lead to equilibrium points. the outcome of the research process and conclusions s o u r c e : developed by the author. mustafa akan20 it can be easily shown that the directional arrows are as shown in figure (6). (gs,as) are the values of a and g at the equilibrium point. it is shown in the appendix that this equilibrium point is a saddle point. following conclusions can be drawn from the diagram above: ■ companies with low level of beginning goodwill (quadrant i) must begin with increasing the level of technical capability to the level implied by equation (9) by a jump in that state variable and continue with high levels of advertising expenditures to increase their goodwill and adjust technical capability t in accordance with equation (9) until equilibrium levels are reached. in practice, this strategy implies that the companies with low goodwill should first invest heavily in technical capability to improve claim ratio to improve profitability then invest heavily in advertising and quality to increase the number of customers. ■ for companies with very high levels of goodwill (quadrant iii) optimal behavior will be to gradually decrease the goodwill level to the level desired in the long run (gs), and adjusts technical capability level t in accordance with equation (9) to the long term technical capability (ts). ■ starting in other quadrants (ii and iv) will not lead to equilibrium points. the outcome of the research process and conclusions findings when the impact of increasing the technical capability (t) on claim ratio is greater than its impact on number of customers findings when the impact of increasing the technical capability (t) on claim ratio is greater than its impact on number of customers (  ) or revenues, the optimal strategy is to first to decrease the claim ratio to one as quickly as possible (a jump),then to keep investing in it until the equilibrium level (ts) implied by equation (9) is reached. a similar strategy should be followed with respect to goodwill (g). goodwill should be aggressively increased first until the claim ratio becomes one and then to continue investing until the long term desired level (gs) is reached. however, if the impact of increasing technical capability on claim ratio is less than its impact on the number of customers (ε>α), the strategy should be to increase the goodwill to increase the number of customers, and technical capability in accordance with equation (9). in any case, the equilibrium level of goodwill (gs) and the technical capability level (ts) are greater in the first case than they are in the second case (figures 3 and 6). this implies high spending levels for a company in such an environment which in turn may require high capitalization at the beginning discouraging small companies to enter into this sector. it is clear that the parameters α and ε are very important in determining the optimal strategy for an insurance company. therefore an insurance company must make an analysis to determine these parameters before determining a general strategy. discussion the model developed above is a strategic planning model in terms of the state variables goodwill g(t) and technical capability t(t), control variables, advertising and quality improvement a(t) and technical investment q(t). it cannot be used for short term profit maximization. the parameters in the model are assumed to be simple to be able to carry out an indicative analysis. for example  =2 while  =0.5. the assumed forms of number of customers n(t) and the claim ratio h(t) are arbitrary but somehow reflective of their true forms. all cost items (rents, water, electricity, personnel, etc.) other than investments in goodwill and technical capability are assumed to be fixed and hence are not taken into account. the major strength of the model is that it is dynamic and its solution gives an insight about the optimal strategic performance to the management of nonlife insurance companies. the or revenues, the optimal strategy is to first to decrease the claim ratio to one as quickly as possible (a jump),then to keep investing in it until the equilibrium level (ts) implied by equation (9) is reached. a similar strategy should be followed with respect to goodwill (g). goodwill should be aggressively increased first until the claim ratio becomes one and then to continue investing until the long term desired level (gs) is reached. however, if the impact of increasing technical capability on claim ratio is less than its impact on the number of customers (ε > α), the strategy should be to increase the goodwill to increase the number of customers, and technical capability in accordance with equation (9). a dynamic model of a nonlife insurance company 21 in any case, the equilibrium level of goodwill (gs) and the technical capability level (ts) are greater in the first case than they are in the second case (figures 3 and 6). this implies high spending levels for a company in such an environment which in turn may require high capitalization at the beginning discouraging small companies to enter into this sector. it is clear that the parameters α and ε are very important in determining the optimal strategy for an insurance company. therefore an insurance company must make an analysis to determine these parameters before determining a general strategy. discussion the model developed above is a strategic planning model in terms of the state variables goodwill g(t) and technical capability t(t), control variables, advertising and quality improvement a(t) and technical investment q(t). it cannot be used for short term profit maximization. the parameters in the model are assumed to be simple to be able to carry out an indicative analysis. for example findings when the impact of increasing the technical capability (t) on claim ratio is greater than its impact on number of customers (  ) or revenues, the optimal strategy is to first to decrease the claim ratio to one as quickly as possible (a jump),then to keep investing in it until the equilibrium level (ts) implied by equation (9) is reached. a similar strategy should be followed with respect to goodwill (g). goodwill should be aggressively increased first until the claim ratio becomes one and then to continue investing until the long term desired level (gs) is reached. however, if the impact of increasing technical capability on claim ratio is less than its impact on the number of customers (ε>α), the strategy should be to increase the goodwill to increase the number of customers, and technical capability in accordance with equation (9). in any case, the equilibrium level of goodwill (gs) and the technical capability level (ts) are greater in the first case than they are in the second case (figures 3 and 6). this implies high spending levels for a company in such an environment which in turn may require high capitalization at the beginning discouraging small companies to enter into this sector. it is clear that the parameters α and ε are very important in determining the optimal strategy for an insurance company. therefore an insurance company must make an analysis to determine these parameters before determining a general strategy. discussion the model developed above is a strategic planning model in terms of the state variables goodwill g(t) and technical capability t(t), control variables, advertising and quality improvement a(t) and technical investment q(t). it cannot be used for short term profit maximization. the parameters in the model are assumed to be simple to be able to carry out an indicative analysis. for example  =2 while  =0.5. the assumed forms of number of customers n(t) and the claim ratio h(t) are arbitrary but somehow reflective of their true forms. all cost items (rents, water, electricity, personnel, etc.) other than investments in goodwill and technical capability are assumed to be fixed and hence are not taken into account. the major strength of the model is that it is dynamic and its solution gives an insight about the optimal strategic performance to the management of nonlife insurance companies. the while findings when the impact of increasing the technical capability (t) on claim ratio is greater than its impact on number of customers (  ) or revenues, the optimal strategy is to first to decrease the claim ratio to one as quickly as possible (a jump),then to keep investing in it until the equilibrium level (ts) implied by equation (9) is reached. a similar strategy should be followed with respect to goodwill (g). goodwill should be aggressively increased first until the claim ratio becomes one and then to continue investing until the long term desired level (gs) is reached. however, if the impact of increasing technical capability on claim ratio is less than its impact on the number of customers (ε>α), the strategy should be to increase the goodwill to increase the number of customers, and technical capability in accordance with equation (9). in any case, the equilibrium level of goodwill (gs) and the technical capability level (ts) are greater in the first case than they are in the second case (figures 3 and 6). this implies high spending levels for a company in such an environment which in turn may require high capitalization at the beginning discouraging small companies to enter into this sector. it is clear that the parameters α and ε are very important in determining the optimal strategy for an insurance company. therefore an insurance company must make an analysis to determine these parameters before determining a general strategy. discussion the model developed above is a strategic planning model in terms of the state variables goodwill g(t) and technical capability t(t), control variables, advertising and quality improvement a(t) and technical investment q(t). it cannot be used for short term profit maximization. the parameters in the model are assumed to be simple to be able to carry out an indicative analysis. for example  =2 while  =0.5. the assumed forms of number of customers n(t) and the claim ratio h(t) are arbitrary but somehow reflective of their true forms. all cost items (rents, water, electricity, personnel, etc.) other than investments in goodwill and technical capability are assumed to be fixed and hence are not taken into account. the major strength of the model is that it is dynamic and its solution gives an insight about the optimal strategic performance to the management of nonlife insurance companies. the the assumed forms of number of customers n(t) and the claim ratio h(t) are arbitrary but somehow ref lective of their true forms. all cost items (rents, water, electricity, personnel, etc.) other than investments in goodwill and technical capability are assumed to be fixed and hence are not taken into account. the major strength of the model is that it is dynamic and its solution gives an insight about the optimal strategic performance to the management of nonlife insurance companies. the major weakness of the model is the assumption made on the functional forms related to claim ratio, cost of advertising, and number of customers even though the author believes that these functions ref lect the reality. another weakness is the assumption that all factors affecting the company will remain the same during the life of the company even though this assumption is widely used in optimal control theory models. suggestions for further research all cost items related to volume of business can be added to the model as a fraction of total revenues as defined in the nonlife insurance sector (expense ratio). however, this will have no impact on the general solution. proportional insurance can easily be introduced into the model. however non-proportional reinsurance function will make the model very difficult. mustafa akan22 appendix: stability analysis of equilibrium points the taylor’s expansion of the nonlinear system represented by equations (2) and (11) around the equilibrium point (gs,as) is analyzed. the signs of the roots of the linear system determine the stability of the system. then the system of nonlinear differential equations rewritten below will be expanded around the equilibrium point. major weakness of the model is the assumption made on the functional forms related to claim ratio, cost of advertising, and number of customers even though the author believes that these functions reflect the reality. another weakness is the assumption that all factors affecting the company will remain the same during the life of the company even though this assumption is widely used in optimal control theory models. suggestions for further research all cost items related to volume of business can be added to the model as a fraction of total revenues as defined in the nonlife insurance sector (expense ratio). however, this will have no impact on the general solution. proportional insurance can easily be introduced into the model. however non-proportional reinsurance function will make the model very difficult. appendix: stability analysis of equilibrium points the taylor’s expansion of the nonlinear system represented by equations (2) and (11) around the equilibrium point (gs,as) is analyzed. the signs of the roots of the linear system determine the stability of the system. then the system of nonlinear differential equations rewritten below will be expanded around the equilibrium point. and rewriting this system and simplifying; where for later use and; 2 1 1( 1) ' ( ) ( ) (1 ( ) ) b a a b a r pag m g k bm g                 '( ) ( ) ( ) g t a t g t  1 2 2 1 2 1 2' c ( ) (1 ( ) ) a =ac -c n (g )a a a c g m g k bm g            '( ) ( ) ( ) g t a t g t  1(g) ( ) (1 ( ) )n g m g k bm g      and major weakness of the model is the assumption made on the functional forms related to claim ratio, cost of advertising, and number of customers even though the author believes that these functions reflect the reality. another weakness is the assumption that all factors affecting the company will remain the same during the life of the company even though this assumption is widely used in optimal control theory models. suggestions for further research all cost items related to volume of business can be added to the model as a fraction of total revenues as defined in the nonlife insurance sector (expense ratio). however, this will have no impact on the general solution. proportional insurance can easily be introduced into the model. however non-proportional reinsurance function will make the model very difficult. appendix: stability analysis of equilibrium points the taylor’s expansion of the nonlinear system represented by equations (2) and (11) around the equilibrium point (gs,as) is analyzed. the signs of the roots of the linear system determine the stability of the system. then the system of nonlinear differential equations rewritten below will be expanded around the equilibrium point. and rewriting this system and simplifying; where for later use and; 2 1 1( 1) ' ( ) ( ) (1 ( ) ) b a a b a r pag m g k bm g                 '( ) ( ) ( ) g t a t g t  1 2 2 1 2 1 2' c ( ) (1 ( ) ) a =ac -c n (g )a a a c g m g k bm g            '( ) ( ) ( ) g t a t g t  1(g) ( ) (1 ( ) )n g m g k bm g      rewriting this system and simplifying; major weakness of the model is the assumption made on the functional forms related to claim ratio, cost of advertising, and number of customers even though the author believes that these functions reflect the reality. another weakness is the assumption that all factors affecting the company will remain the same during the life of the company even though this assumption is widely used in optimal control theory models. suggestions for further research all cost items related to volume of business can be added to the model as a fraction of total revenues as defined in the nonlife insurance sector (expense ratio). however, this will have no impact on the general solution. proportional insurance can easily be introduced into the model. however non-proportional reinsurance function will make the model very difficult. appendix: stability analysis of equilibrium points the taylor’s expansion of the nonlinear system represented by equations (2) and (11) around the equilibrium point (gs,as) is analyzed. the signs of the roots of the linear system determine the stability of the system. then the system of nonlinear differential equations rewritten below will be expanded around the equilibrium point. and rewriting this system and simplifying; where for later use and; 2 1 1( 1) ' ( ) ( ) (1 ( ) ) b a a b a r pag m g k bm g                 '( ) ( ) ( ) g t a t g t  1 2 2 1 2 1 2' c ( ) (1 ( ) ) a =ac -c n (g )a a a c g m g k bm g            '( ) ( ) ( ) g t a t g t  1(g) ( ) (1 ( ) )n g m g k bm g      major weakness of the model is the assumption made on the functional forms related to claim ratio, cost of advertising, and number of customers even though the author believes that these functions reflect the reality. another weakness is the assumption that all factors affecting the company will remain the same during the life of the company even though this assumption is widely used in optimal control theory models. suggestions for further research all cost items related to volume of business can be added to the model as a fraction of total revenues as defined in the nonlife insurance sector (expense ratio). however, this will have no impact on the general solution. proportional insurance can easily be introduced into the model. however non-proportional reinsurance function will make the model very difficult. appendix: stability analysis of equilibrium points the taylor’s expansion of the nonlinear system represented by equations (2) and (11) around the equilibrium point (gs,as) is analyzed. the signs of the roots of the linear system determine the stability of the system. then the system of nonlinear differential equations rewritten below will be expanded around the equilibrium point. and rewriting this system and simplifying; where for later use and; 2 1 1( 1) ' ( ) ( ) (1 ( ) ) b a a b a r pag m g k bm g                 '( ) ( ) ( ) g t a t g t  1 2 2 1 2 1 2' c ( ) (1 ( ) ) a =ac -c n (g )a a a c g m g k bm g            '( ) ( ) ( ) g t a t g t  1(g) ( ) (1 ( ) )n g m g k bm g     where major weakness of the model is the assumption made on the functional forms related to claim ratio, cost of advertising, and number of customers even though the author believes that these functions reflect the reality. another weakness is the assumption that all factors affecting the company will remain the same during the life of the company even though this assumption is widely used in optimal control theory models. suggestions for further research all cost items related to volume of business can be added to the model as a fraction of total revenues as defined in the nonlife insurance sector (expense ratio). however, this will have no impact on the general solution. proportional insurance can easily be introduced into the model. however non-proportional reinsurance function will make the model very difficult. appendix: stability analysis of equilibrium points the taylor’s expansion of the nonlinear system represented by equations (2) and (11) around the equilibrium point (gs,as) is analyzed. the signs of the roots of the linear system determine the stability of the system. then the system of nonlinear differential equations rewritten below will be expanded around the equilibrium point. and rewriting this system and simplifying; where for later use and; 2 1 1( 1) ' ( ) ( ) (1 ( ) ) b a a b a r pag m g k bm g                 '( ) ( ) ( ) g t a t g t  1 2 2 1 2 1 2' c ( ) (1 ( ) ) a =ac -c n (g )a a a c g m g k bm g            '( ) ( ) ( ) g t a t g t  1(g) ( ) (1 ( ) )n g m g k bm g      for later use and; which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: rewriting and neglecting the constants, we have; the roots of this system are calculated as: it is clear that the stability depends on the term (d-η) and the term (e-dη).the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α<ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a 1 2 ( ) / ( 1) and / b ( 1) c r c pa           1 2 1 2' (c ( )(2 ) a )( ) ( (g) / dg)(g g ) ' ( ) ( ) s s s s a n g a a c a dn g a a g g               1 1 2 2 ' ' ; (c (g)(2 ) a ) and ( ) / evaluated at equilibrium point. a da eg g a g where d n e c a dn g dg               2 1 2, ((d ) (d ) 4(e ) ) / 2r r d        and which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: rewriting and neglecting the constants, we have; the roots of this system are calculated as: it is clear that the stability depends on the term (d-η) and the term (e-dη).the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α<ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a 1 2 ( ) / ( 1) and / b ( 1) c r c pa           1 2 1 2' (c ( )(2 ) a )( ) ( (g) / dg)(g g ) ' ( ) ( ) s s s s a n g a a c a dn g a a g g               1 1 2 2 ' ' ; (c (g)(2 ) a ) and ( ) / evaluated at equilibrium point. a da eg g a g where d n e c a dn g dg               2 1 2, ((d ) (d ) 4(e ) ) / 2r r d        which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: rewriting and neglecting the constants, we have; the roots of this system are calculated as: it is clear that the stability depends on the term (d-η) and the term (e-dη).the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α<ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a 1 2 ( ) / ( 1) and / b ( 1) c r c pa           1 2 1 2' (c ( )(2 ) a )( ) ( (g) / dg)(g g ) ' ( ) ( ) s s s s a n g a a c a dn g a a g g               1 1 2 2 ' ' ; (c (g)(2 ) a ) and ( ) / evaluated at equilibrium point. a da eg g a g where d n e c a dn g dg               2 1 2, ((d ) (d ) 4(e ) ) / 2r r d        rewriting and neglecting the constants, we have; which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: rewriting and neglecting the constants, we have; the roots of this system are calculated as: it is clear that the stability depends on the term (d-η) and the term (e-dη).the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α<ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a 1 2 ( ) / ( 1) and / b ( 1) c r c pa           1 2 1 2' (c ( )(2 ) a )( ) ( (g) / dg)(g g ) ' ( ) ( ) s s s s a n g a a c a dn g a a g g               1 1 2 2 ' ' ; (c (g)(2 ) a ) and ( ) / evaluated at equilibrium point. a da eg g a g where d n e c a dn g dg               2 1 2, ((d ) (d ) 4(e ) ) / 2r r d        where which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: rewriting and neglecting the constants, we have; the roots of this system are calculated as: it is clear that the stability depends on the term (d-η) and the term (e-dη).the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α<ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a 1 2 ( ) / ( 1) and / b ( 1) c r c pa           1 2 1 2' (c ( )(2 ) a )( ) ( (g) / dg)(g g ) ' ( ) ( ) s s s s a n g a a c a dn g a a g g               1 1 2 2 ' ' ; (c (g)(2 ) a ) and ( ) / evaluated at equilibrium point. a da eg g a g where d n e c a dn g dg               2 1 2, ((d ) (d ) 4(e ) ) / 2r r d        a dynamic model of a nonlife insurance company 23 and which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: rewriting and neglecting the constants, we have; the roots of this system are calculated as: it is clear that the stability depends on the term (d-η) and the term (e-dη).the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α<ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a 1 2 ( ) / ( 1) and / b ( 1) c r c pa           1 2 1 2' (c ( )(2 ) a )( ) ( (g) / dg)(g g ) ' ( ) ( ) s s s s a n g a a c a dn g a a g g               1 1 2 2 ' ' ; (c (g)(2 ) a ) and ( ) / evaluated at equilibrium point. a da eg g a g where d n e c a dn g dg               2 1 2, ((d ) (d ) 4(e ) ) / 2r r d        the roots of this system are calculated as: which are all positive constants since β is assumed to be greater than one. the taylor’s expansion of the system is written as: rewriting and neglecting the constants, we have; the roots of this system are calculated as: it is clear that the stability depends on the term (d-η) and the term (e-dη).the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α<ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a 1 2 ( ) / ( 1) and / b ( 1) c r c pa           1 2 1 2' (c ( )(2 ) a )( ) ( (g) / dg)(g g ) ' ( ) ( ) s s s s a n g a a c a dn g a a g g               1 1 2 2 ' ' ; (c (g)(2 ) a ) and ( ) / evaluated at equilibrium point. a da eg g a g where d n e c a dn g dg               2 1 2, ((d ) (d ) 4(e ) ) / 2r r d        it is clear that the stability depends on the term (d-η) and the term (e-dη). the term d is assumed to be positive. it can be shown that (the details are not included here) the term dn(g)/dg is negative if α < ε. this implies that the term e is negative making the term in the square root above is positive which in turn implies that one root is positive when the other is negative. thus the equilibrium point is a saddle point if α<ε i.e. when the impact of increase of technical capability on claim ratio is less than its impact on number of customers the equilibrium reached will be a saddle point. the stability analysis in the case of α>ε, we do not have a definite result on the sign of e thus the equilibrium can be of any type.  references akan, m. (2013). determinants of company choice of motor insurance customers in turkey. sigorta araştırmaları dergisi, no. 9, pp. 25-46. akan, m. (2007). changes in the market structure of nonlife insurance sector in turkey, sigorta araştırmaları dergisi, no. 3, pp. 1-14. arora, r., stoner, c. (1996). the effect of perceived service quality and name familiarity on the service selection decision. journal of marketing, vol. 10. issue 1. http:// olx.doi.org/10.1108/08876049610106699. borscheid, p., & hauter, n.v. (2012). world insurance: the evolution of a global risk network, oxford: oxford university press, 2012. chowdhury, t.a., & rahman, m.a. (2007). perceptions of the customers toward insurance companies in bangladesh-a study on serqual model. br ac university journal, vol. iv. no. 2, pp. 55-56. gangwar, d.s. (2012). factors affecting customer preferences for life insurers. an empirical study. the iup journal of risk and insurance, vol. viii, no. 2, pp. 34-49. hansen, t. (2011). quality in marketplace: a theoretical and empirical investigation.european management journal, vol. 19, no. 2. pp. 203-211. http://olx.doi. org/10.1016/s0263-237(00)00095-5. i̇de araştırma tanıtım ve danışmanlık hiz. ltd. srk. (2012). türkiye sigorta tutum ve davranış araştırması. mustafa akan24 kamien, i.m., & schwartz, n.l. (2012). dynamic optimization, dover. kaplan, w. (1958). ordinary differential equations, reading, mass. addison-wesley. karaali, ş., & özçelik, ö. (2008). factors inf luencing household insurance awareness and reasons for preference for an insurance company, bilgi university, graduation thesis, 2008. kaya, feridun ve faruk akın ve nalân ece (2010). sigorta ürünleri kapsamında bireylerin sigorta şirketi tercihlerini etkileyen faktörler. sigorta araştırmaları dergisi, no 8. pp. 20-29. mathur, d., & tripathi, a. (2014). factors inf luencing customers’ choice for insurance comnpanies-a study of ajmar city. iosr journal of business management, vol. 16, no. 2. pp. 35-43. nair, a., & narasimhan, r. (2006). dynamics of competetion with quality-and advertisisng based goodwill. european jornal of operational research 175, pp. 462-474. pontryagin, l.s., boltyanksi, v.g, gamkrelidze, r.v., & mischenko e.f. (1962). the mathematical theory of optimal processes, new york: wiley. sigorta denetleme kurulu 2013 faaliyet raporu. türkiye sigorta ve reasürans şirketleri birliği 2013 yılı faaliyet raporu. sunga, a., & sharma, k. (2015). factors inf luencing choice of a life insurance company. lbs journal of management and reserach, 2015. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: april 11, 2019; date of acceptance: april 29, 2019. * contact information: alm.ahmed@icloud.com, 5 rue du dr mazet, 301 residence cardinal stendhal, grenoble 28000, france, phone: +33651664618; orcid id: https:// orcid.org/0000-0002-5961-6251. ahmed, a.l.m. (2018). the social background of brexit. copernican journal of finance & accounting, 7(4), 9–29. http://dx.doi.org/10.12775/cjfa.2018.017 ahmed l.m. ahmed* cracow university of economics université de grenoble alpes in france the social background of brexit keywords: brexit, british identity, national identity, european union. j e l classification: f50, n44. abstract: the brexit referendum will remain as a milestone in contemporary european history. the british exit from the eu is not going only to shape future relations between the eu and the uk, but it will shape the relation between brussels and other member states as well. this study aims to investigate the main claims for the leave campaigns which affected the general opinion to vote for the exit. the two main points investigated in this paper are: first, the historical background regarding the uk and the eu, the reasons for the first refusal to the european integration projects during the 1950, and the changes in the british situation which pushed the uk to seek the membership for a decade before being able to join the eec in the 1970s; and second, national identity, which affected britain’s late entry to the eu, and shaped relations between london and brussels during the british membership. the paper concludes that, unfortunately, british citizens in general were not aware of the full facts regarding the above two points.  introduction on june 23rd, 2016, the british held their famous referendum to determine whether to stay or opt out from the european union. regardless of one’s agreeahmed l.m. ahmed10 ment or disagreement with the results of that referendum, it will remain a milestone in the history of europe for many years. the results of that referendum were like a bomb, which exploded with full force and violence and lead to a messy situation in the financial markets and the political scene, including the resignation of prime minister david cameron, the fall of the pound to its lowest level in more than 30 years against the dollar, and the loss of the aaa credit rating for the uk for the first time since 1978, to aa with negative outlook by moody’s, standard and poor’s, and fitch. it has also threatened the unity of the kingdom: scotland wants to organize a new referendum to stay or leave, and northern ireland may want to unify with ireland. in addition, populist parties in many countries are calling for a similar referendum over eu membership, especially in countries always considered pillars of the eu like germany and france. the uk always had a special position in the eu, with many opt outs from the eu agreements. even before the beginnings of the eu, uk was an outlier, refusing to join the european steel and coal community in 1952. after two refusals from the french president charles de gaulle, uk joined the eec in 1973 following that by a referendum of the membership with results of 67.23% for yes, and 32.77% for no. in spite of its joining, the uk always represented the apple of eris, often in discord with eu policies. brussels indulgently accepted and agreed to many exceptions for the uk, which encouraged the british to go ahead and ask for still more exceptions. did that treatment create a feeling of superiority, which led to the exit? they opted out of the schengen area agreement, although it now includes non-eu states such as norway and iceland (1996) and switzerland (2009), and also the economic monetary union (emu) which created the eurozone, while non-eu states such as kosovo and montenegro have unilaterally adopted the euro as official currency. after the shock of the referendum’s results, the main question all over europe was “why did they decide to leave?” this paper examines the causes and motives behind the leave decision, contributing to several important areas of current controversy, including the uk’s relations within the eu. this paper makes use of literature reviews, official documents, data and statistics compiled by official bodies such as the european union institutions and the british government, to determine the validity of the british or european position on the issues discussed and of the final decision made at that time. the purpose for this paper is not only to investigate and understand the causes and motives behind the decision of that divorce, and to examine their the social background of brexit 11 veracity but also to understand these motives in order to avoid repeating this problem with other member states of the eu, especially with clouds appearing on the horizon of relations between brussels and some member states such as hungary. this study will analyse and contribute to several important areas of current controversy, including the uk’s relations within the eu. the following section is for the methodology and data sources used for this paper. section 3 and 4 are an historical overview regarding the uk and the eu, the reasons for the first refusal to the european integration projects during the 1950, and the changes in the british situation which pushed the uk to seek the membership for a decade before being able to join the eec in the 1970s. section 5 argues that the primary reason behind the 1950’s refusal was the british pride of their national and cultural identity and discusses the populist movements rising in the uk and the issue of sovereignty. section 6 is for the cost of the brexit and the 7th and last section of the paper is dedicated to the conclusion. the research methodology and the course of the research process this paper makes use of literature reviews, official documents, data and statistics compiled by official bodies such as the european union institutions and the british government, to determine the validity of the british or european position on the issues discussed and of the final decision made at that time. i also use scientific articles and media sources discussing brexit and relations between the uk and europe. historical background after each of the two world wars, there were attempts at greater european integration. the initiative always came from france, in 1929 with briand’s plan – formed by the former french prime minister aristide briand – to create a federal union of europe “without affecting the sovereignty of any nation” (saint-john perse foundation, 1929). after the second world war, french foreign minister, robert schuman, expressed saying “europe will not be made all at once…. the coming together of the nations of europe requires the elimination of the age-old opposition of france and germany.” as a result, following the schuman plan, the treaty of paris was signed in 1951 founding the european coal and steal community (ecsc). ahmed l.m. ahmed12 the uk chose to be absent from the european scene at that time, refusing to participate in the european convergence projects. daddow (2004) states that the refusal for the european integration projects during the 1950s can be described according to three historical schools. “the missed opportunity” school argues that britain has moved away from europe in the post-war period because of its doubts in the schuman plan and the common market. “the revisionist” school believes that uk didn’t miss the “european bus” because it wanted to miss it, so much as it didn’t even recognize the existence of the bus to catch it. the third school can be called “post-revisionism”. in september 1946, during his speech in the university of zurich, winston churchill stated that what would make europe free and happy was to re-create the european family, stressing that “we must build a kind of united states of europe” (the churchill society, 1946). however, the uk considered itself a great power side by side with the united states and the soviet union, in particular after its participation in the potsdam conference in 1945 to discuss the rearrangement of europe in the post-war phase (the uk was the only european representative in the tehran, yalta, and potsdam conferences). thus churchill preferred a limited role for the uk, and he was pointing in his speech to the cooperation between france and germany as a way of rapprochement between them thinking that the future of the uk would consist of stronger links with the us and the commonwealth (jones, 2001). in october 1949, hector mcneil, the minister of state under foreign secretary ernest bevin, was convinced that the natural partners for the uk were the us and the commonwealth, not europe, considering that “anti-european feeling is a commonplace of british thought. everyone had relatives in the usa and canada. most have no one in europe, except the dead of the two wars” (becker &  knipping, 1986). anti-european feeling was re-described by another eurosceptic politician, harold macmillan, the former prime minister of the uk, when he was a foreign secretary in 1955. considering the plans by the ecsc for the common market to be in the interest of germany, he stated: “we did not mind other european powers federating if they wished, but in fact if they did so and really became strong it might be very embarrassing for us. europe would be handed over to the germans, a state of affairs which we had fought two wars to prevent” (el li son, 2000). when macmillan became the prime minister, in a meeting organized by the uk council of the european movement in july 9, 1957, he described the commonwealth as a living force which was understood and cher the social background of brexit 13 ished by the british, as they knew how it was formed, and the historical association and common interest that bind the uk and the commonwealth together. these statements by british officials suggest that the main reasons for not feeling european for the british, were: ■ greater concern for the us and the commonwealth not only for language reasons, but also as a ref lection of the memories of the british empire, especially during the 19th and early 20th centuries, when the british empire reached the largest territorial size in its history. ■ the belief that being european is not in the interest of the uk, given that other countries are leading the eu (germany and france specifically). such a situation cannot be accepted psychologically by the british who are used to being leaders, not led. ■ a sense of greater stability than most of europe, considering that the uk alone had not faced any political occupation for the last 950 years, and had kept the same borders longer than any other european country; conf licts between the three nations of great britain (england, wales and scotland) had been settled long ago, and the three nations merged under one crown. thus, it is understandable why during the 1950s, prime ministers during that era, clement attlee, winston churchill, and harold macmillan, were against participating in the european integration projects, refusing for example to join the treaty of rome (1957) which created the european economic community (eec), thinking that it did not add anything for them. the uk believed that they did not need europe as much as europe needed them; they had a better situation than any other european county after wwii, good trade links with the commonwealth and the rest of the world, and a different and special democratic and constitutional system. moreover, britain had the highest gdp per capita in europe (jones, 2001). these feelings were described by jean monnet, who wanted the uk in the eec from the beginning: “it must have been because it was the price of victory, the illusion that you could maintain what you had, without change” (may, 1999). however, porter (1983) argues that the british refusal to join the eec in the beginning was a confession of its failure to defend and determine its own interests. furthermore, as a reply on the eec, the uk tried in 1956 to establish a wide european free trade area but the project failed after two years of negotiations. however, it repeated the attempt again in 1960 and established the european free trade association (efta) with austria, denmark, portugal, ahmed l.m. ahmed14 sweden, and switzerland. the efta was considered not as strong as the eec because the uk was the only powerful country in it (steinnes, 1998). the lost sheep back to the fold by the early years of the 1970s the commonwealth became a non-realistic economic target option for the uk, due to several successive events during the 1960s such as international monetary relations changes, and the kennedy round which negatively affected trade preferences, as well as the growing role of the us and the weakness which affected the relations with the commonwealth (may, 2001). thus, it is understandable that the weakness which affected the relations with the commonwealth led to a weakening of the british loyalty to it, and of the refusals for integration with its european neighbours. urwin (1991) argues that the main reason for trying to join the eec was to enhance the british economy, in particular with development of the eec. the first attempt to join the eec was in 1961, when the british government, regardless of motivations, concluded that membership in the eec had become essential, and that europe was more attractive than before. the request was vetoed by the french president, charles de gaulle in 1963, saying that “england is not much anymore” (the guardian newspaper, 2012), and that “the uk has the commonwealth and france has the community” (milward, 2002) putting into consideration that the french gross national product was growing by 5.8% per year during the 1960s. the second attempt was in 1967, and again it was vetoed by the french president, considering that the uk was more interested in links and ties with the us and the commonwealth because “it is an island”, and accusing it of responding to the first refusal with a “hostile attitude as if she saw in it an economic and political threat” (de gaulle, 1967). shawcross (2002) argues that the two applications were “humiliatingly” rejected and that the uk was accepted only when de gaulle was gone. however, the second refusal showed the discord on enlargement between the member states as five of them plus the commission agreed on the british joining; however, they couldn’t persuade france, and the attempt was ended by imposing the french refusal (martin, 2013). the uk was only able to join the eec in 1973 after signing the treaty in january 1972, after the departure of de gaulle from power. a referendum was held in june 1975, as a part of the pledges by the labour party during the 1974 electoral campaign to give the british people the right to choose between staying or leaving the common market (the european com the social background of brexit 15 munity) (the labour party manifesto, 1974). the question of the referendum was “do you think the united kingdom should stay in the european community (the common market)?” the result was that 67.23% voted for yes, 32.77% voted for no, while 0.21% were invalid votes. in 2016, another referendum was held. the question for the new one was almost the same: “should the united kingdom remain a member of the european union or leave the european union?” however, the votes were not the same as they were 41 years earlier, 51.89% voted for leaving while 48.11% voted for remain, and 0.08% were invalid votes. what the british feel towards europe and how they see the eu after a decade of attempts to join the eec, the uk still had few ties with the other member states in the union. in 2011, during an interview with le monde newspaper, former french president nicolas sarkozy indicated that the eu wanted more solidarity between its member states, adding that the uk is “attached solely to the logic of the single market” (bbc, 2011). thus, it is understood that this selective policy of the uk towards the eu created a general impression that the uk is “step in, step out”, and that it seeks only its own interests. moreover, another impression throughout europe is that, within the european community the british are the least likely to identify personally as european, preferring their national identity to the european one. wall (2008) considered that the key problem for the estrangement between the british point of view and the european point of view concerning european integration is the late entry to the eec. however, he argues that the main reason for the differences between the two points of view is tied to historical and cultural considerations british nationalism and the sense of european identity one of the questions asked by the eurobarometer of people throughout the eu is whether they feel themselves to be their nationality only, european only, their nationality and european, or european and their nationality. answers to this question can be considered a good indicator of a people’s feelings and their priorities, collectively, and whether they consider themselves first and foremost in relation to their nationality, with or without being european, or as europeans preferring this to their nationality. when this question had been asked in 1996, the british answer was closely similar to those of several other eu nations and not as negative as many. figure 1 shows the difference between situation in ahmed l.m. ahmed16 1996 and 20161. aside from the uk, where the nationalistic feeling increased by 5%, only two countries have witnessed an increase: in greece, the percentage has risen slightly, from 53 to 55%, but in italy the increase is 17%, to 43% in total, but still far below the percentage in the uk even 20 years earlier. figure 1. do you see yourself as your nationality only? source: based on data from: (www1). − how much the british cared about the eu? not only did the british citizens not care about the eu, they also neglected to learn more about the eu or the relations between their country and the eu. one of the questions asked by the eurobarometer of people throughout the eu was “what does the eu mean to you?” figure 2 shows the answers of that question in the uk. among the top 5 answers, only the first was positive while the rest were negatives. however, answers from the rest of the eu were not less disappointing than the british ones. for example, in 2010, the austrians outnumbered all the eu seeing the eu as wasting money with 52%, and 50% seeing it as causing more crime. all these reasons led the british to dislike the eu, and they did not make any effort to know more about it or how it works. figure 3 shows the percentage of the british who understand how the eu works, compared with the average for eu citizens in general from 2005 to 2016. note that less than half the british know and understand the way the eu functions, while more than the half do not understand how it works. in fact, more than the half of all eu citizens do not understand how it works. figure 2. what does the eu mean to british? (top 5 answers) 64 % 57 % 56 % 56 % 53 % 50 % 47 % 43 % 42 % 38 % 38 % 36 % 30 % 26 % 20 % 37 % 62 % 36 % 40 % 55 % 40 % 43 % 27 % 41 % 29 % 28 % 27 % 32 % 43 % 14 % 0% 10% 20% 30% 40% 50% 60% 70% 1996 2016 s o u r c e : based on data from: (www1). how much the british cared about the eu? not only did the british citizens not care about the eu, they also neglected to learn more about the eu or the relations between their country and the eu. one of the questions asked by the eurobarometer of people throughout the eu was “what does the eu mean to you?” figure 2 shows the answers of that question in the uk. among the top 5 answers, only the first was positive while the rest were negatives. however, answers from the rest of the eu were not less disappointing than the british ones. for example, in 2010, the austrians outnumbered all the eu seeing the eu as wasting money with 52%, and 50% seeing it as causing more crime. 1 the figure contains only the 15 member states which existed in 1996 to be able to compare the situation between the two times. the social background of brexit 17 all these reasons led the british to dislike the eu, and they did not make any effort to know more about it or how it works. figure 3 shows the percentage of the british who understand how the eu works, compared with the average for eu citizens in general from 2005 to 2016. note that less than half the british know and understand the way the eu functions, while more than the half do not understand how it works. in fact, more than the half of all eu citizens do not understand how it works. figure 2. what does the eu mean to british? (top 5 answers) figure 2. s. 17 figure 6. s. 22 26 28 26 26 29 28 28 30 30 25 22 26 41 37 34 31 25 30 28 27 30 37 39 45 20 19 23 21 18 20 22 21 24 20 23 31 28 27 27 24 20 20 19 17 17 22 14 22 10 13 13 13 7 9 8 8 8 7 9 11 5 10 15 20 25 30 35 40 45 50 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 waste of money freedom to travel not enough control on the external borders loss of our cultural identity more crime 11 ,0 % 11 ,7 % 10 ,5 % 5, 7% 9, 8% 6, 3% 24 ,9 % 0, 0% 7, 1% 3, 9% 1, 7% 1, 9% 1, 3% 0, 4% 0 0 0 0 0 0 7, 1% 0, 0% 1 ,8 % 6, 6% 4, 5% 5, 0% 10 ,2 % 6, 2% 2, 1% 6, 6% 12 ,6 % 5, 1% 23 ,2 % 15 ,9 % 6, 8% 0 0 0 0 0 0 3, 5% 0 0 0 0 0 0 9, 4% 0 0 0 0 0 14 ,7 7% 14 ,6 7% 0 0 1, 0% 6, 7% 16 ,1 % 6, 6% 27 ,5 % 0% 5% 10% 15% 20% 25% 30% 1 9 8 4 1 9 8 9 1 9 9 4 1 9 9 9 2 0 0 4 2 0 0 9 2 0 1 4 front national (fr) die republikaner (de) alternative für deutschland (de) lega nord (it) vlaams belang (be) anexartitoi ellines (gr) chrisi avgi (gr) jobbik (hu) uk independence (uk) s o u r c e : based on data from: (www1). as evident in figure 2, one of the main fears of the british regarding the eu was the loss of cultural identity, which was considered a ref lection of the national identity. that harmonizes with (curtice, 2016), who found that many british showed concerns towards the cultural consequences, but were likely to believe that there are economical benefits from eu membership. he also believes that fear of a cultural threat is ref lected through the rising of euroscepticism in the uk. moreover, 47% of the british agreed that the eu is unahmed l.m. ahmed18 dermining the british cultural identity while 30% disagreed (natcen social research, 2016) . figure 3. do you understand how the eu works? (yes answers) source: based on data from: (www1). figure 3. do you understand how the eu works? (yes answers) source: based on data from: (www1). 26 28 26 26 29 28 28 30 30 25 22 26 41 37 34 31 25 30 28 27 30 37 39 45 20 19 23 21 18 20 22 21 24 20 23 31 28 27 27 24 20 20 19 17 17 22 14 22 10 13 13 13 7 9 8 8 8 7 9 11 5 10 15 20 25 30 35 40 45 50 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 waste of money freedom to travel not enough control on the external borders loss of our cultural identity more crime 38% 41% 35% 39% 37% 43% 38% 44% 46% 48% 50% 55% 43% 46% 34% 44% 44% 48% 45% 52% 51% 52% 54% 42% 30% 35% 40% 45% 50% 55% 60% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 uk eu s o u r c e : based on data from: (www1). generally speaking, nationality – considered as a question of loyalty and affiliation, and as a matter of identity, alongside gender, age, religion, etc. – can be regarded as a criterion for a sense of national identity. again, the original question posed by the eurobarometer was “do you see yourself as nationality only, nationality and european, european and nationality, european only?” figure 4 shows the percentage of british people who see themselves only british. usually around 60% or more feel only british; this dropped below 50% in 2005 and 2007, but only because the eurobarometer added another choice – “don’t know” – which affected the statistics for all member states in these two years. the social background of brexit 19 figure 4. british who feel only british from 1996 to 2016 as evident in figure 2, one of the main fears of the british regarding the eu was the loss of cultural identity, which was considered a reflection of the national identity. that harmonizes with (curtice, 2016), who found that many british showed concerns towards the cultural consequences, but were likely to believe that there are economical benefits from eu membership. he also believes that fear of a cultural threat is reflected through the rising of euroscepticism in the uk. moreover, 47% of the british agreed that the eu is undermining the british cultural identity while 30% disagreed (natcen social research, 2016) . generally speaking, nationality – considered as a question of loyalty and affiliation, and as a matter of identity, alongside gender, age, religion, etc. – can be regarded as a criterion for a sense of national identity. again, the original question posed by the eurobarometer was “do you see yourself as nationality only, nationality and european, european and nationality, european only?” figure 4 shows the percentage of british people who see themselves only british. usually around 60% or more feel only british; this dropped below 50% in 2005 and 2007, but only because the eurobarometer added another choice – “don’t know” – which affected the statistics for all member states in these two years. figure 4. british who feel only british from 1996 to 2016 source: from 1996 to 20162 based on: (www1). 2 data for 2008, 2009 and 2011 are not available. 57% 60% 60% 62% 67% 62% 71% 65% 62% 48% 66% 49% 70% 60% 60% 64% 64% 62% 40% 45% 50% 55% 60% 65% 70% 75% 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 do you see yourself as british only? s o u r c e : from 1996 to 20162 based on: (www1). why the question of identity is so vital for the british? britain faced a kind of cultural isolation because of its geographical nature, and its culture and traditions had been conserved especially well due to the country is not having faced any foreign invasion since 1066. moreover, the british are very proud of their historical heritage. the tudor era, the most taught period in british schools, is considered the beginning of modern england, with figures such as henry viii, elizabeth i, and shakespeare, the separation from rome and the beginning of the church of england, and the defeat of the spanish armada, beginning the sovereignty of the british naval f leet on the seas and oceans. the most well-known icons of british national identity are the monarchy and the royal family. however, storry and childs (1997) argue that the monarchs were usually non-english, citing examples of the houses of tudor and stuart (welsh and scots, and thus british but non-english) and the houses of orange and hanover (both continental). last and not least, evidence for conserving and cherishing cultural traditions compared with its neighbours, british ethnicity did not have a great change during the last nine centuries, despite the existence of many foreign communities in london and liverpool as well as the inf luences from the overseas colonies (storry & childs, 1997), and all that these communities were able to do. 2 data for 2008, 2009 and 2011 are not available. ahmed l.m. ahmed20 the populism and the anti-european feeling another reason that cannot be ignored, for the british not feeling european, is the rise of populist movements and cultural backlash against globalisation as a reaction to progressive cultural changes, especially among the elder and less educated portion of the population, who – far more than young and well-educated people – supported brexit because they were less likely to benefit from the eu economically and culturally. since the 1960s, voting for the populist parties in both national and european parliamentary elections rose from 5.1% to 13.2%, while the share of seats rose from 3.8% to 13.2% (inglehart & norris, 2016) as the main populist party in the uk, ukip (the uk independence party) took a nativist approach against immigrants, playing on xenophobic fears, in particular after the terrorist attacks in brussels and paris, and the increased f low of refugees in 2015. immigration has ranked as a top concern for uk citizens over the last ten years (figure 10 shows the evolution of the situation for uk and eu citizens during 2006–2016). ukip also promoted and appealed to nostalgia for the golden days of the english empire, before the eu, by using slogans such as “we want our country back” and “believe in britain.” inglehart and norris (2016) argue that the ukip leave campaign focused on the days when the majority of the society were white anglo-saxons, factories were providing well-paying jobs for the workers, and the parliament was sovereign. ukip won only one seat in 2015’s uk parliamentary elections, their first since the party was officially founded in 1993. however, from the outset, the party focused on the eu parliamentary elections, although nigel farage, the party’s leader, once said “i want to free this country from the european union” (bbc, 2013). starting with the 1999 european parliament election, ukip started to win seats, the number gradually rising with each election till 2014, when it won 24 – more seats than either labour or the conservatives, the two pillars of british political life3 (figure 5 shows the evolution of the seats won by the conservatives, labour, ukip, and liberal democrats since the first ep elections in 1979 until 2014). 3 janice atkinson was expelled from the party in march 2015, steven wolfe and diane james resigned from the party in october and november 2016 respectively, and roger helmer resigned from the european parliament in june 2017. thus, the party is now represented by 20 members. the social background of brexit 21 yet why would a eurosceptic party try so strongly to win seats in the european parliament? alan sked, the ukip founder who resigned the leadership in 1997, opposed the idea of entering the european parliament elections, wanting the party to concentrate on the uk parliament instead of having seats in the european parliament, describing it as a “gravy train”. as stated, ukip was unable to gain any seats in the british parliamentary elections until 2015, although this was supposed to be their main goal, while the pro-european party, the liberal democrats won only one ep seat in 2014, having won 12 and 11 seats in 2004 and 2009 respectively. this includes not only ukip, but also other eurosceptic parties all over europe, like the front national (national front) in france, freiheitliche partei österreichs (freedom party of austria), vlaams belang (flemish interest) in belgium, and so on. figure 5. main british parties in the european parliament (1979–2014) (number of seats)figure 5. main british parties in the european parliament (1979–2014) (number of seats) source: based on the european parliament elections results from 1979 to 2014 from: (www2). figure 6. votes percentage for the main populist parties in the eu for european parliament elections from (1984–2014) source: based on the european parliament elections results (1984–2014) from: (www2). 0 3 12 13 24 17 32 45 62 29 19 13 20 60 45 32 18 36 27 26 19 2 10 12 11 1 0 10 20 30 40 50 60 70 1979 1984 1989 1994 1999 2004 2009 2014 ukip labour conservative liberal democrate 11 % 12 % 11 % 06 % 10 % 06 % 25 % 00 % 07 % 04 % 02 % 02 % 01 % 00 % 00 % 0 0 0 0 0 07 % 00 % 0 2% 07 % 05 % 05 % 10 % 06 % 02 % 07 % 13 % 05 % 23 % 16 % 07 % 00 % 0 0 0 0 0 04 % 00 % 0 0 0 0 0 09 % 00 % 0 0 0 0 01 5% 01 5% 00 % 0 01 % 07 % 16 % 07 % 28 % 0% 5% 10% 15% 20% 25% 30% 1 9 8 4 1 9 8 9 1 9 9 4 1 9 9 9 2 0 0 4 2 0 0 9 2 0 1 4 front national (fr) die republikaner (de) alternative für deutschland (de) lega nord (it) vlaams belang (be) anexartitoi ellines (gr) chrisi avgi (gr) jobbik (hu) uk independence (uk) s o u r c e : based on the european parliament elections results from 1979 to 2014 from: (w w w2). the increasing support for these populist parties was a logical result of the oppositional view of “europeanness” (fligstein, polyakova & sandholtz, 2012). figure 6 shows the evolution of the vote’s percentage in the ep for the main populist parties during the elections from 1979 to 2014. however, ukip proved ahmed l.m. ahmed22 that it did not have to get a lot of seats in the british parliament in order to inf luence views in the street; even with only one seat the party was able to raise anti-european feeling among the british public, pushing the conservatives to go forward for the brexit referendum. figure 6. votes percentage for the main populist parties in the eu for european parliament elections from (1984–2014) figure 2. s. 17 figure 6. s. 22 26 28 26 26 29 28 28 30 30 25 22 26 41 37 34 31 25 30 28 27 30 37 39 45 20 19 23 21 18 20 22 21 24 20 23 31 28 27 27 24 20 20 19 17 17 22 14 22 10 13 13 13 7 9 8 8 8 7 9 11 5 10 15 20 25 30 35 40 45 50 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 waste of money freedom to travel not enough control on the external borders loss of our cultural identity more crime 11 ,0 % 11 ,7 % 10 ,5 % 5, 7% 9, 8% 6, 3% 24 ,9 % 0, 0% 7, 1% 3, 9% 1, 7% 1, 9% 1, 3% 0, 4% 0 0 0 0 0 0 7, 1% 0, 0% 1 ,8 % 6, 6% 4, 5% 5, 0% 10 ,2 % 6, 2% 2, 1% 6, 6% 12 ,6 % 5, 1% 23 ,2 % 15 ,9 % 6, 8% 0 0 0 0 0 0 3, 5% 0 0 0 0 0 0 9, 4% 0 0 0 0 0 14 ,7 7% 14 ,6 7% 0 0 1, 0% 6, 7% 16 ,1 % 6, 6% 27 ,5 % 0% 5% 10% 15% 20% 25% 30% 1 9 8 4 1 9 8 9 1 9 9 4 1 9 9 9 2 0 0 4 2 0 0 9 2 0 1 4 front national (fr) die republikaner (de) alternative für deutschland (de) lega nord (it) vlaams belang (be) anexartitoi ellines (gr) chrisi avgi (gr) jobbik (hu) uk independence (uk) s o u r c e : based on the european parliament elections results (1984–2014) from: (www2). sovereignty another important element that shaped the british feeling towards the eu is sovereignty. in her brexit speech to the conservative party, shortly after triggering article 50, which allows any member state to withdraw from the eu, theresa may pointed that leaving the eu with its supranational institutes would bring back sovereignty to the uk to be a full independent country. in 1972, the british parliament legislated the “european communities act 1972 chapter 68” the accession to the the social background of brexit 23 european communities4. the act gave primacy to the eu law over british law, which was considered by many to mean the diminishing of british parliament sovereignty. vaughne miller (2010) suggested that 6.8% primary legislations and 14.1% secondary legislations were driven by the eu obligations during the period 1997–2009. according to house of commons (2010), 186 acts of primary legislations out of 1302 (14.28%) acts issued during 1980– 2009 had eu origins. figure 7 shows the distribution of the 186 acts according to their eu influence. moreover, for the secondary legislations during (1997–2009), 1834 over 19897 legislations (9.22%) had been inf luenced by the european communities act 1972, while 997 legislations (5.01%) had been inf luenced by other eu laws, thus, the total secondary legislation during (1997–2009) are 2831 (14.2%) from the secondary legislations. figure 8 shows the evolution of the situation from (1997–2009). during the prime minister speech on 17 january 2017, about the 12 points plan for brexit, she declared that brexit means “control of our own laws”. however, according to the “white paper brexit” of february 2017, the sovereignty of the british parliament has remained intact during membership with eu, although the public have not always felt that (hm government, 2017). figure 7. british primary legislations which had eu origins, number of acts and percentage of the total acts (186) figure 7. s. 23 figure 8. s. 24 figure 10. s. 27 20 28 16 06 21 33 11 75 23 69 15 67 14 03 88 3 21 22 15 40 14 76 15 95 13 9 15 2 17 3 10 2 24 3 12 1 13 2 79 23 6 13 2 15 3 17 2 11 3 74 1 37 37 1 11 77 9 9 39 9 9 91 65 55 0 500 1000 1500 2000 2500 total secondary legislations european community act non-european community act2 55 29% 96 52% 17 9% 18 10% made passing reference to eu obligations implemented one or more eu laws but not as the main elements of the law implemented three or more eu measures implemented eu obligations as the main purpose of the act. s o u r c e : based on data from: (house of commons, 2010). 4 the communities mean the european economic community (eec), the european coal and steel community (ecsc), and the european atomic energy community (eaec). ahmed l.m. ahmed24 figure 8. british secondary legislations which had eu origins figure 7. s. 23 figure 8. s. 24 figure 10. s. 27 20 28 16 06 21 33 11 75 23 69 15 67 14 03 88 3 21 22 15 40 14 76 15 95 13 9 15 2 17 3 10 2 24 3 12 1 13 2 79 23 6 13 2 15 3 17 2 11 3 74 1 37 37 1 11 77 9 9 39 9 9 91 65 55 0 500 1000 1500 2000 2500 total secondary legislations european community act non-european community act2 55 29% 96 52% 17 9% 18 10% made passing reference to eu obligations implemented one or more eu laws but not as the main elements of the law implemented three or more eu measures implemented eu obligations as the main purpose of the act. s o u r c e : based on data from: (house of commons, 2010). brexit cost the results of the brexit referendum led to a messy situation in the financial markets, the fall of the pound to its lowest level against the dollar in more than 30 years, and the loss of the aaa credit rating for the uk for the first time since 1978, dropping to aa with negative outlook by moody’s, standard and poor’s, and fitch. one of the daily debates in the uk after the referendum was over the cost of brexit with the use of positive or negative economic data by the leave and remain proponents to support their points of view. according to the cer (centre for european reform), the british economy is “2.5% smaller than it would be if the uk had voted to remain in the european union” (springford, 2019). the same research found that the leave vote costs £500 m per week, which is £150 m more than what the leave campaign claimed that being a part of the eu cost the public purse each week. figure 1 compares uk data with that of a “doppelgänger uk” created using data from 22 countries with economic profile close to that of the uk. the social background of brexit 25 figure 9. the cost of brexit to 2018 q3 support their points of view. according to the cer (centre for european reform), the british economy is “2.5% smaller than it would be if the uk had voted to remain in the european union” (springford, 2019). the same research found that the leave vote costs £500 m per week, which is £150 m more than what the leave campaign claimed that being a part of the eu cost the public purse each week. figure 1 compares uk data with that of a “doppelgänger uk” created using data from 22 countries with economic profile close to that of the uk. figure 9. the cost of brexit to 2018 q3 source: cer (springford, 2019). future costs are also becoming evident. with brexit, london will lose its current position as the capital and main provider of banking services to the eu. winters (2018) finds that brexit will lead of british banks and financial firms to lose the “financial passport” allowing them to provide financial services to any other member state. sapir, schoenmaker and véron (2017) find that 17% of all uk banking assets (35% of london wholesale banking) will relocate within the eu after brexit. this movement will cost the uk about €1.8 trillion. schelkle (2018) finds that “some us banks may relocate to places like warsaw instead, because they do not trust that the euro area will survive”. another important cost of the brexit is the cost of trade with the rest of the world, as the uk will need to negotiate trade agreements with other countries; as part of the single market, the uk does not need any trade agreements. de mars, murray, and o’donoghue (2018) find that after brexit the uk and the eu might have trade agreements with the same third country with different tariffs on the same products. s o u r c e : cer (springford, 2019). future costs are also becoming evident. with brexit, london will lose its current position as the capital and main provider of banking services to the eu. winters (2018) finds that brexit will lead of british banks and financial firms to lose the “financial passport” allowing them to provide financial services to any other member state. sapir, schoenmaker and véron (2017) find that 17% of all uk banking assets (35% of london wholesale banking) will relocate within the eu after brexit. this movement will cost the uk about €1.8 trillion. schelkle (2018) finds that “some us banks may relocate to places like warsaw instead, because they do not trust that the euro area will survive”. another important cost of the brexit is the cost of trade with the rest of the world, as the uk will need to negotiate trade agreements with other countries; as part of the single market, the uk does not need any trade agreements. de mars, murray, o’donoghue and warwick (2018) find that after brexit the uk and the eu might have trade agreements with the same third country with different tariffs on the same products. ahmed l.m. ahmed26  conclusion the brexit referendum has stimulated debate across europe about the purpose of the eu and the appropriate place of the uk in europe. the relationship between the uk and europe has always been thorny. margaret thatcher famously stated that “during my lifetime most of the problems the world has faced have come, in one fashion or other, from mainland europe, and the solutions from outside it” (the economist, 2002). this quote emphasises the british feeling of superiority as a saviour to europe from the troubles and problems it gets involved in. the same method has always been used to impose opinion, based on british interests as a first priority to anything, even where negotiations concern the public interest of europe as a whole forgetting that in politics there is no free lunch. drake (2018) emphasizes that the british membership to the eu has become harder and harder. such an attitude will make the decision of divorce appear better for both parties, the eu and the uk. divorce is better than a bad marriage. geddes (2004) states that british relations with the eu were “conditional and differential,” which negatively affected both local british politics and the role played by the uk in the development of the eu, political and historical tensions had a further negative effect. geddes points out that, thanks to these issues of engagement, the uk was unable to prioritize some british preferences into the eu, most specifically free trade and participation in nato. however, the low rate of feeling european did not only affect the late decision to join the eec, but also caused unstable relations between the eec and the uk. jenkins (1983) criticizes britain’s problem as “a schizophrenia, inability to decide its place in the world”. appeals to “the empire” and “the golden age” or calls to “protect our heritage, protect our borders” – these more have been used by the populist parties in the uk, while similar messages have been used by the populist leaders elsewhere in europe and in the usa. the result of the vote has sparked a spark between the eurosceptics all over the eu, that made them achieve significant scores (e.g.: in france during the first round of the presidential elections, two eurosceptic candidates – mélenchon and le pen – won 40% of the votes). bickerton (2018) finds that brexit raised the issue of the ability of a state to represent the people will. the nostalgic feeling is most likely to affect in the older citizens who remember and compare the past and the present, and who respond to appeals to “traditional values.” thus the mainstream support for the populist calls to leave the eu came from the elder generation rather than the younger. the cam the social background of brexit 27 paign to leave europe has provoked – among several things – a crisis between the british sovereignty and the eu supranational governance. the campaign relied on what now appear to be misinformation and false nostalgia. staiger and martill (2018) conclude that “brexit is a classic wicked problem”. in the period following the referendum, new parliamentary elections were held. two votes of no confidence in may were triggered (one by her own party and one by mps). the parliament is f loundering, unable to decide whether to approve the may’s agreement with brussels, leave without a deal, or making changes in the deal between london and brussels. one fact is very clear now, the uk is undoubtedly in trouble. the brexit referendum has opened pandora’s box. figure 10. immigration as a main concern for british and eu citizens figure 1. s. 36 32% 32% 35% 25% 28% 24% 21% 32% 29% 36% 51% 14% 15% 11% 9% 9% 20% 8% 10% 21% 38% 48% 0% 10% 20% 30% 40% 50% 60% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 uk eu 1515 2140 2490 857 1542 1674 1358 2008 2245 1376 1293 668 319 1952 1267 1135 1451 800 563 1432 0 500 1000 1500 2000 2500 3000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 surplus deficit s o u r c e : based on reports (2006–2016): (www1).  acknowledgement i would like to thank the editor (mrs. agnieszka żołądkiewicz-kuzioła) and the two anonymous reviewers for the comments provided in relation to the earlier version of the paper. finally, i would like to express my deepest gratitude to prof. garrett epp for the proofreading and to prof. ewa miklaszewska for her comments on the first version of the paper. any remaining errors are solely the author’s responsibility. ahmed l.m. ahmed28  references bbc (2011). sarkozy: there are now clearly two europes, http://www.bbc.com/news/ world-europe-16138375 (accessed: 05.07.2017). bbc (2013). i am odd (for a politician): ukip leader nigel farage says, http://www.bbc. com/news/uk-politics-20931123 (accessed: 05.07.2017). becker, j., & knipping, f. 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(2018). what difference does brexit make? in j. drake-brockman, p. messerlin (eds.). potential benefits of an australia-eu free trade agreement, key issues and options. adelaide: university of adelaide press. (www1) eurobarometer reports, http://ec.europa.eu/commfrontoffice/publicopinion/ archives/eb_arch_en.htm (accessed: 01.08.2017). (www2) parliaments and governments database, http://www.parlgov.org (accessed: 25.08.2017). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: december 1, 2016; date of acceptance: january 13, 2017. * contact information: krasovskisd@riseba.lv, riseba university, meza street 3, riga, lv-1048, latvia, phone: +37126666614. krasovskis, d., limanskis, a., & pancenko, e. (2016). measuring competitiveness of banks in latvia. copernican journal of finance & accounting, 5(2), 125–147. http://dx.doi.org/10.12775/ cjfa.2016.019 deniss krasovskis* riseba university andrejs limanskis riseba university erika pancenko riseba university measuring competitiveness of banks in latvia keywords: banking sector, herfindahl-hirschman index, market concentration, lorenz curve, competitiveness, latvia. j e l classification: g21. abstract: analysis of competition in the banking industry allows to determine the obstacles to its effective functioning. the aim of this research is to analyse the competitiveness level in the modern banking sector of latvia. identification and analysis of the main characteristics of the competitive environment of the banking sector in latvia is done on the basis of indicators characterizing the concentration of the industry, the intensity of competition as well as financial indicators ref lecting the financial condition of banks and affecting their competitiveness. as a result, for the first time the level of competitiveness of the banking sector in latvia was evaluated and supported by comparative analysis of all the banks on the basis of their financial performance. it gives ground for recommendations to the stakeholders on measures to raise competitiveness. results and directions for further redeniss krasovskis, andrejs limanskis, erika pancenko126 search can attract attention of the research community in latvia, european union and globally.  introduction in international economic research, the bank is regarded as an integral part of the modern economy, which forms the basis of financial and credit mechanism, by which the market economy operates. competitiveness is the basis for the development of market relations, including those in the banking sector. the essential feature of an effective and successfully developing economy in the banking industry is the competition of banks. the relevance of the topic chosen is characterized by the fact that the banking sector has a direct impact on economic development, and the analysis of competition in the banking industry can determine the obstacles to its effective functioning. therefore, the analysis of competition in the banking industry is not only an interesting theoretical and practical problem, but also a necessity for successful economic development, effective implementation of the redistribution of financial bank resources and efficient operation of banks in the markets. analysis of competition in the banking industry is used to determine the obstacles to the development of competition, the formation of an effective banking system (кисилевич, 2012). the aim of this research is to analyse the competitiveness level in the modern banking sector of latvia. following tasks are to be solved in order to reach the aim of the research: 1. to review literature and determine the design of the research. 2. to analyse competitiveness level of the banking in latvia using specific industry indicators. 3. to investigate the competitiveness of banks on the basis of financial indicators. 4. to formulate conclusions. object of the research is the banking sector of latvia in 2003–2015. the subject of the research is a set of factors determining competitiveness of banks in modern latvia. the researchers used qualitative and quantitative methods of research. qualitative methods are represented by analysis of literature, personal observations, and results of interviewing experts in the field. quantitative meth measuring competitiveness of banks in latvia 127 ods are represented by plotting time series and calculating indicators of competitiveness in latvian banking sector on the basis of statistical and financial analysis. the information base for the analysis was created by study and selection of data of central statistical bureau of latvia, financial and capital market commission of latvia, association of commercial banks of latvia, as well as the data from financial statements of banks. results of previously held research in this area, information periodicals and online sources were used. competitive environment in banking sector: theoretical aspects banking competition – is the process of rivalry of commercial banks and other financial institutions, in which they seek to secure a strong position in the credit market and banking services. according to renowned researchers in the banking sphere khabarov and popov (2004) a number of specific features that distinguish banking competition from the competition in other sectors of the market include following: ■ banking competition differs by maturity of forms and high intensity. ■ commercial banks are challenged by other competitors. universal banks compete with specialized banks (savings, mortgage, investment banks serving small and medium-sized businesses, clearing, innovative banks) non-bank credit institutions, non-financial institutions (credit unions, pawnshops, leasing companies, clearinghouses, financial brokers, investment companies, pension funds, post office, trading houses). ■ competitive space is represented by numerous banking markets, on some of which banks act as sellers, on others – as buyers. ■ intra-industry competition is deeply specified which ref lects differentiation of banking products and services. ■ banking products and services may be interchangeable, but have no competitive “external” (non-bank) substitutes and therefore the inter-industry competition is carried out mainly through the f low of capital. ■ banking business lacks a number of barriers to entry, typical for many industries, which leads to a relatively greater intensity of competition in this area. ■ limitations of price competition make banks pay more attention to the quality management of the banking products and advertising services. deniss krasovskis, andrejs limanskis, erika pancenko128 the research team finds it necessary to draw attention to interference of the state in the banking business and crucial role of political parties both nationally and on international level. in world bank publications (world bank, 2016), as concerns measuring bank competition, the so-called structure-conduct-performance paradigm assumes that there is a stable, causal relationship between the structure of the banking industry, firm conduct, and performance. competitiveness can be regarded as the ability of business entities to carry out economically viable operations under lack of resources and the availability of similar business entities. competitive environment is defined as conditions for economic activities of homogeneous market players. from the point of view of corporate training expert, the concept of competitiveness is a methodological device, which consists in extending to different sets of objects (countries, industries, regions, resources, institutions, companies, products, employees) of competitive-rivalry approach, where all the elements of one set are compared to competing business entities on a single competitive field. hence competitive success is represented as an analogy of leadership, excellence, the prevalence, the benefits of one over the other objects, regardless of to which set of objects the concept is applied (каганов, 2012). research methodology methodology of the research of the competitive environment in the banking sector is based on market concentration indices, such as the concentration index, the herfindahl-hirschman index, the dispersion of market shares and the gini index. this set of variables is instrumental for general statistical description of the sector. the research team implemented publicly available data of the association of latvian commercial banks for the analysis, which include data on assets, liabilities and profit / loss of banks in the period from 2003 to 2015. concentration indices are based on a comparison of the size of the market and the size of the bank operating in this market. thus, the larger the banks, the higher the level of concentration. to determine market concentration following proven in other industries indices can be used as recommended by avdasheva with rozanova (1998): ■ concentration index, ■ herfindahl-hirschman index, measuring competitiveness of banks in latvia 129 ■ market shares dispersion, ■ gini index. concentration index or concentration ratio is measured as sum total of market shares of biggest banks present on the market: ck = σ yi, i =1, 2...k, where: (1) yi – market share (could be determined by various indicators), k – the number of banks, for which the ratio is calculated. for the same number of the largest banks, the greater the concentration of the index, the more the market is far from the ideal of perfect competition. however, the information provided by the concentration index is not sufficient for the characteristics of the market. concentration index indicator does not say what is the size of the banks, which were not included in the sample k, as well as the relative size of the banks in the sample, as indicated in the theory of industrial organization (авдашева и розанова, 1998). with this feature, the concentration index is associated with the possible inaccuracy of its use, so the authors used method of financial analysis for more accurate analysis of competitiveness. herfindahl-hirschman index is defined as the sum of the square of market shares of all the banks operating in the market (авдашева и розанова, 1998). when calculating the index the market shares of all the banks are ranked by shares from largest to smallest (grandars, 2016). hhi = s1 2 + s2 2+s3 2+...+...sn 2 , where: (2) hhi – herfindahl-hirschman index, s1 – the market share of the largest bank, s2 – the market share of the second largest bank, sn – the market share of the smallest bank. if just one company operates in the industry, then s1=100%, and hhi = 1. if there are 100 equal companies in the industry, then s = 1% and hhi = 0,01. the industry is considered as a highly monopolised, if herfindahl-hirschman index exceeds 1800 (grandars, 2016). deniss krasovskis, andrejs limanskis, erika pancenko130 dispersion is calculated as average square deviation of individual values of the market shares of the banks in the square from of arithmetic mean (балинова, 2004). yi — market share (could be determined by various indicators); k — the number of banks, for which the ratio is calculated. for the same number of the largest banks, the greater the concentration of the index, the more the market is far from the ideal of perfect competition. however, the information provided by the concentration index is not sufficient for the characteristics of the market. concentration index indicator does not say what is the size of the banks, which were not included in the sample k, as well as the relative size of the banks in the sample, as indicated in the theory of industrial organization (авдашева и розанова, 1998). with this feature, the concentration index is associated with the possible inaccuracy of its use, so the authors used method of financial analysis for more accurate analysis of competitiveness. herfindahl-hirschman index is defined as the sum of the square of market shares of all the banks operating in the market (авдашева и розанова, 1998). when calculating the index the market shares of all the banks are ranked by shares from largest to smallest (grandars, 2016). hhi = s12 + s22+s32+...+...sn2 , where (2) hhi — herfindahl-hirschman index; s1 — the market share of the largest bank; s2 — the market share of the second largest bank; sn — the market share of the smallest bank. if just one company operates in the industry, then s1=100%, and hhi = 1. if there are 100 equal companies in the industry, then s = 1% and hhi = 0,01. the industry is considered as a highly monopolised, if herfindahl-hirschman index exceeds 1800 (grandars, 2016). dispersion is calculated as average square deviation of individual values of the market shares of the banks in the square from of arithmetic mean (балинова, 2004). �� = ∑����̅) �� ∑� , where (3) x factor; n frequency (repetitiveness of factor x). the gini index is a ratio of a completely uniform distribution of market shares to the actual distribution of the shares between the participants (авдашева и розанова, 1998): g = d / n, where (4) g — gini coefficient; d — cumulative share of market (industry) size; : (3) x – factor, n – frequency (repetitiveness of factor x). the gini index is a ratio of a completely uniform distribution of market shares to the actual distribution of the shares between the participants (авдашева и розанова, 1998): g = d / n, where: (4) g – gini coefficient, d – cumulative share of market (industry) size, n – cumulative share of enterprises on the market (industry). the higher the gini index, the more unequal is the distribution of market shares between sellers and hence, ceteris paribus higher the concentration in the market (авдашева и розанова, 1998). literature review, unfortunately, didn’t ref lect attempts to apply the gini index for the banking sector concentration study in latvia. internationally gini index is considered to underestimate the role of big banks in the market (bikker & haaf, 2002). the maximum value of 1 indicates a situation of absolute inequality (one company accounts for the entire volume of the industry). the minimum value of the index of 0 means perfect equality: each enterprise produces (sells) an equal share in the industry (суслова, 2002). to deepen the analysis, comparative analysis of the competitiveness of latvian banks is to be carried out on the basis of publicly available financial statements and financial analysis indicators: return on equity ratio (roe), return on assets ratio (roa), total liquidity ratios, capital adequacy ratios and financial stability. the source of data for the analysis are the quarterly reports published by banks, publicly available data of association of commercial banks of latvia measuring competitiveness of banks in latvia 131 from 2012 to 2015 inclusive. for comparative analysis of the competitiveness of banks data for 2015 as the last year of financial reporting is to be used. return on equity (roe) is net profit compared with a net worth of the organization (audit-it (1), 2016). roe = net profit / average own capital (5) return on assets (roa) describes the ability of management to effectively use organization assets to generate earnings (audit-it (1), 2016). n — cumulative share of enterprises on the market (industry). the higher the gini index, the more unequal is the distribution of market shares between sellers and hence, ceteris paribus higher the concentration in the market (авдашева и розанова, 1998). literature review, unfortunately, didn’t reflect attempts to apply the gini index for the banking sector concentration study in latvia. internationally gini index is considered to underestimate the role of big banks in the market (bikker & haaf, 2002). the maximum value of 1 indicates a situation of absolute inequality (one company accounts for the entire volume of the industry). the minimum value of the index of 0 means perfect equality: each enterprise produces (sells) an equal share in the industry (суслова, 2002). to deepen the analysis, comparative analysis of the competitiveness of latvian banks is to be carried out on the basis of publicly available financial statements and financial analysis indicators: return on equity ratio (roe), return on assets ratio (roa), total liquidity ratios, capital adequacy ratios and financial stability. the source of data for the analysis are the quarterly reports published by banks, publicly available data of association of commercial banks of latvia from 2012 to 2015 inclusive. for comparative analysis of the competitiveness of banks data for 2015 as the last year of financial reporting is to be used. return on equity (roe) is net profit compared with a net worth of the organization (auditit (1), 2016). roe = net profit / average own capital (5) return on assets (roa) describes the ability of management to effectively use organization assets to generate earnings (audit-it (1), 2016.) the capital adequacy ratio shows the proportion between of bank's own capital and the liabilities. liabilities are risk-weighted by each bank. the minimum value is 0.1 (kudinska, 2008). capital adequacy ratio = own capital/total risk-weighted liabilities (7) (6) the capital adequacy ratio shows the proportion between of bank’s own capital and the liabilities. liabilities are risk-weighted by each bank. the minimum value is 0.1 (kudinska, 2008). capital adequacy ratio = own capital/total risk-weighted liabilities (7) general liquidity as ratio of liquid assets to paid raised funds, characterizes the balance of active and passive bank policy to achieve optimal liquidity. the minimum value is 0.95 (жарковская, 2010). general liquidity = liquid assets / pay-raised funds (8) according to basel iii terms, the general liquidity ratio for 2015 had to be above 70%. the aim for 2019 is 100% (basel committee on banking supervision, 2013). coefficient of autonomy (financial independence ratio) is the ratio of equity to total assets of the organization. ratio shows the degree of independency on the creditors. in world practice a 30–40% share of equity is considered to be minimally acceptable (audit-it (3), 2016). coefficient of autonomy = equity capital / assets (9) unfortunately, the visual presentation of results of research in the banking sector is usually simplistic and minimalistic. there is a need for more advanced deniss krasovskis, andrejs limanskis, erika pancenko132 visual presentation methods, such as 3-d bubble graphs, ref lecting the absolute values of indicators. authors consider it necessary to complicate the 3-d bubble graph by introducing absolute values of capital and reserves of banks, as well as assets. to generalize, the methodology of research is based the above disclosed set of indicators that are to be calculated making use of recent financial statements of banks in latvia. the research of the competitive environment in the banking sector of latvia in this research the banking industry has been limited to those registered in latvia. in 2015 there were 27 banks operating in latvia, 10 of which were branches of foreign banks (banku sektors skaitļos, 2016). the dynamics of the number of banks in the period from 2005 to 2015 can be seen in the graph below. figure 1. number of banks in latvia 2005–2015 s o u r c e : banku sektors skaitļos, 2016. the peak number of banks in latvia was reached in 2010 and 2011, when the sum of the number of banks and foreign branches was 31. in 2014 and 2015 the number of operating banks and branches fell to the level of 2008 and was equal to 27. ten largest players and their market shares in 2015 are presented in table 1. measuring competitiveness of banks in latvia 133 table 1. distribution of shares in the banking sector in latvia in 2015 № name of the bank assets, 000 eur share of total assets, % share of top 10 assets, % 1 swedbank 5 497 635 17,21 19,62 2 ablv bank 4 948 814 15,50 17,66 3 rietumu banka 3 871 508 12,12 13,82 4 seb banka 3 591 094 11,24 12,82 5 nordea bank ab latvijas filiāle 2 696 629 8,44 9,62 6 citadele banka 2 535 343 7,94 9,05 7 dnb banka 2 337 240 7,32 8,34 8 norvik banka 1 106 606 3,46 3,95 9 baltikums bank 765 489 2,40 2,73 10 reģionālā investīciju banka 671 161 2,10 2,40 s o u r c e : compiled by the authors. four banks singled out in 2015 as leaders of the big ten concentrating nearly two-thirds of the assets. to deepen the analysis, the authors calculated concentration indices for the period and plotted linear charts to trace the concentration indices (see fig. 2) figure 2. concentration indices (cr3, cr4, cr5) of latvian banking sector 2003–2015 s o u r c e : compiled by the authors. deniss krasovskis, andrejs limanskis, erika pancenko134 it can be concluded that the major share of the market, an average of 69.7% from 2003 to 2006, belonged to the five largest banks, the largest three controlled from 35% to 50% of the market in the analyzed period. this indicates a low level of concentration of the industry in the pre-crisis period. in turn, during the financial crisis of 2008–2010, one can observe a sharp decline of cr5 index to 46.9%, indicating a more uniform distribution of market shares between banks. in the period from 2010 to 2013 there was a steady increase in the index, and in 2014 a slight decline. from this it can be concluded that market shares and inf luence, respectively, is developing in a consistent and gradual way. in 2015 indices failed to reach pre-crisis indicators of 2007 year. throughout the period, on the basis of these indices it can be argued that the concentration is moderate. analyzing the gini index for the period of 2003–2015 one can judge upon the uniformity of banks market shares distribution in latvia (see. fig. 3). figure 3. gini index for latvian banking sector 2003–2015 s o u r c e : compiled by the authors. analyzing the period from 2003 to 2015, a slight increase in the gini index can be noted from 2003 to 2006, which may be associated with an increase in the number of market participants. subsequently there were small f luctuations from 0.5 to 0.57. from this, it is possible to conclude that the distribution of market shares of banks is relatively non-uniformed. measuring competitiveness of banks in latvia 135 authors reviewed the distribution using the lorenz curve (see. fig. 4). it is worth noting that the curve shows the distribution of market share and highlights the obvious participants, who have the lowest and the highest shares. figure 4. lorenz curve for latvian banking sector in 2015 s o u r c e : compiled by the authors. the curve demonstrates less polarized picture of the banking sector in latvia against traditional market economies, like the dutch one, where the pareto rule of 20/80 dominates (bikker & haaf, 2002). next step in the research was exploring the hhi (see. fig. 5). deniss krasovskis, andrejs limanskis, erika pancenko136 figure 5. herfindahl-hirschman index for latvian banking sector 2003–2015 s o u r c e : compiled by the authors. investigating the hhi and the dispersion of the market shares for latvian banking sector, the similarity with index of concentration should be noted, which again confirms the fact that throughout the analyzed period, there is a moderate level of market concentration in the latvian banking and, accordingly, a moderate level of competition in the industry. data on concentration of the market during the analyzed period are presented in table 2. table 2. market concentration latvian banking sector in the period since 2003 by 2015 year cr3, % cr4, % cr5, % hhi market type 2003 50.02 59.9 65.39 1,193 moderately concentrated market 2004 48.54 57.84 64.71 1,157 moderately concentrated market 2005 52.9 61.54 68.82 1,272 moderately concentrated market 2006 53.46 62.17 69.72 1,328 moderately concentrated market 2007 48.75 57.46 65.44 1,177 moderately concentrated market 2008 35.03 41.52 46.9 0,945 low concentrated market 2009 35.03 41.86 46.87 0,947 low concentrated market 2010 35.04 43.66 51.64 0,952 low concentrated market 2011 40.14 49.93 58.98 0,953 low concentrated market measuring competitiveness of banks in latvia 137 year cr3, % cr4, % cr5, % hhi market type 2012 43.64 53.88 63 1,101 moderately concentrated market 2013 45.49 55.97 65.25 1,161 moderately concentrated market 2014 44.23 53.18 61.69 1,126 moderately concentrated market 2015 45.53 54.21 62.53 1,133 moderately concentrated market s o u r c e : compiled by the authors. it can be concluded that during the crisis and post-crisis periods of 2008– –2011, the market of the banking sector was low concentrated, indicating a more uniform distribution of market shares between the participants. but then the market has become more concentrated. comparative assessment of the competitiveness of latvian banks the authors conduct a comparative assessment of competitiveness of the participants in the banking sector of latvia. picture 6 shows the distribution of clients between banks in 2015 year. figure 6. distribution of clients between latvian banks in 2015 s o u r c e : compiled by the authors. table 2. market concentration latvian banking sector… deniss krasovskis, andrejs limanskis, erika pancenko138 in evaluation of the client distribution, both individuals and legal entities were taken into account. this chart shows that majority of commercial banks in latvia belongs to small and medium-sized, so there is not so many large banks in the market like swedbank, seb banka, parex banka, dnb banka (4 biggest banks). the banks mentioned above have approximately ¾ of the total number of customers. however, total assets, gain/loss of banks, as well as return on assets for 2015 (see figure 7) indicate that the number of customers has no direct impact on the financial results of banks. leaders in terms of profit are swedbank, ablv banka, rietumu banka, and seb banka, as shown in the chart (see figure 7). figure 7. assets, roa and profits/losses of latvian banks in 2015 s o u r c e : compiled by the authors. one can observe in the figure different bubble (sphere) sizes, which correspond to the dimensions of the bank’s assets. analysing coefficient of return on assets (roa) and the size of the profits/losses of the banks, it might be concluded that the management of banks, rietumu banka, swedbank and ablv most effectively uses assets for generating profit. leaders in roa are ехроbank and measuring competitiveness of banks in latvia 139 swedbank in 3.10 percent and 2.53 percent respectively, indicating most efficient asset utilization policies, despite the size of the bank (in figure 7). the low position of seb banka, one of the big players in the market, makes a concern. comparing two large and almost identical banks by size of assets, rietumu banka and seb bank, one can see that their placement on the chart in terms of losses/gain and value of roa is significantly different. rietumu banka is about twice ahead of seb bank in size of profits and in the value of roa coefficient. from that, assumption can be made about the unused potential of seb bank and its ability to improve the position. also on the chart (see figure 7) roa of four banks is seeking zero, namely, dnb bank, norvik bank, meridian trade bank and baltic international bank. from this quartet, dnb bank, which is among of the 10 largest banks in latvia, has lowest profit and return on assets. it is fairly small for a bank of its size, especially when the inf luence of such bank is large enough. continuing a comparative analysis of the banks in terms of capital (on figure 8. size of the capital match the size of the bubble), return on equity (roe) and the capital adequacy ratio, one can determine how reliable and attractive bank is for investors. figure 8. capital and reserves, roe and capital adequacy of latvian banks in 2015 s o u r c e : compiled by the authors. deniss krasovskis, andrejs limanskis, erika pancenko140 two banks occupy the top positions on the graph, namely latvijas pasta banka and ablv. it is based on a high rate of roe, which serves as greatest attraction for investors. a large part of the banks is over the red line, which indicates the accepted standard on roe (10%–12%). again, a few big players like seb bank and dnb bank remained below the line along with smaller banks like norvik bank, meridian trade bank and baltic international bank. it is worth to mention that the same banks stood out with not the best indicators in the analysis of profit/loss and return on assets. analysing the capital adequacy ratio, the undoubted leader is swedbank, but in the second place there is expobank with the highest reliability rates in the market. this is a positive indicator, as swedbank is the overall leader by market share and its inf luence on the market is huge. the third place belonged to seb banka with 22% difference from the leaders. with a small difference in indicators rietumu banka and ablv follow suit. in general, the big banks are quite reliable with capital adequacy rates mainly focused in the range of 17% to 24% (except leader’s figure that is twice bigger). citadele bank is having nearly the lowest capital adequacy rate, which indicates low reliability comparing to other market players. given the recent changes in the composition of the owners and overall situation with citadele bank, but if the dynamics of this coefficient is positive that this indicator may be good for the bank itself. according to data for the 2012 to 2015 year citadele bank has positive dynamics, more detailed analysis in the context of one bank is not provided. from the analysis one can conclude that the most attractive banks for investors are banks with a good reliability (rietumu banka and ablv), although a high proportion of non-residents is increasing risk factor. in turn, the most reliable banks (swedbank and expobank) do not yield the same return on capital as leaders on these indicators. according to results of roe seb bank, dnb bank and citadele bank need to improve indicators or, at least, bringing them to the standard, thereby making them more attractive to investors and at the same time improving their own competitiveness. one of the most important indicators of efficiency of banks is liquidity. analysis of liquidity is presented on figure 9. measuring competitiveness of banks in latvia 141 figure 9. the liquidity ratio of latvian banks in 2015 s o u r c e : compiled by the authors. from analysis of liquidity ratio, it can be concluded that the majority of banks are able to repay their current (short-term) liabilities. according to the basel iii, standard value of this coefficient is 70% (in 2015) (bank for international settlements 2013). as one can see in the chart, some of the banks have not reached this level. a small inverse dependence is noticeable on the size of the bank (by number of customers, in terms of assets) to the overall liquidity – the bigger the bank, the less liquidity it has. top 5 worst on this indicator in 2015 are seb bank, dnb bank, swedbank, citadele banka and norvik banka. low level of liquidity can indicate a high financial risk, like whether bank steadily can pay current obligations, but also may be caused by irrational capital structure. the financial autonomy ration (see figure 10) is also one of the most important characteristics on sustainability of the bank financial condition. deniss krasovskis, andrejs limanskis, erika pancenko142 figure 10. the financial autonomy ratio of latvian banks in 2015 s o u r c e : compiled by the authors. the higher the value, the more likely the organization can pay off debts at the expense of own means, i.e. shows how the company is independent on the external sources of financing. the higher ratio of autonomy is demonstrated by swedbank with value of 19.1%. the worst indicator (4.8%) was shown by trasta komercbanka. analysing the graphs, one can see a large variation between big players of the market, i.e. the size of the bank does not directly affect the indicator of financial sustainability. competitiveness of banks can be inf luenced by structure of deposits. data for latvia in 2015 can be seen on figure 11. measuring competitiveness of banks in latvia 143 figure 11. distribution of term deposits and demand deposits of latvian banks in 2015 s o u r c e : compiled by the authors. analysing the graph, it can be concluded that compared with the distribution of demand deposits, distribution of term deposits is not strongly dependent on the volume of demand deposits. researches consider dominance of demand deposits over term deposits as a risk factor in banking sector of latvia. analysing the amount of deposits one can see the three largest banks by deposits: swedbank, ablv and rietumu banka. leader again is swedbank to the amount of deposits in 4 107 683 thousand euros (of which 3 479 003 are demand deposits and 628 680 term deposits). bank ablv bank is ahead of swedbank in terms of demand deposit volume, but is lagging behind in term deposits that may indicate unfavourable conditions for customers. the three largest banks (swedbank, ablv and rietumu banka) together have almost half (48%) of all deposits in the market. the difference between the third (rietumu bank) and the fourth participant of the market (seb bank) is 34%. considering the size of these banks in the market, this gap is large. it indicates a potential for seb bank in the area of deposits. as seb banka and citadele bank could attract more demand deposits, thus trying to improve their own position in the market and competitiveness. deniss krasovskis, andrejs limanskis, erika pancenko144 researchers interviewed three experts from the banking sector of latvia to identify the causes of the differences in the financial performance of banks. the first problem highlighted by interviewees was explanation of interaction between bank size (by customers) and financial indicators, such as roe, roa and liquidity ratio. according to expert opinion such factors as cost to income ratio (cir), bank business model, bank internal policy and macroeconomic factors, i.e. “left keys” legislation discussion were considered as major inf luences. the second question brought to light by interviewees was reasons for low roa level of seb bank. experts underlined credit portfolio decline due to “left keys” legislation discussion, as well as high administrative costs. as to the third problem raised by interviewees, difference between liquidity indicators of banks, four following factors were defined as explanations: different products & services structure, change of market positions of banks in crediting, long-term financial investment preferences and unexpected decline of ecb interest rates into negative area. the fourth problem indicated by interviewees regarded the difference between bank deposit. the following factors were of the greatest importance: the size of the bank and number of clients, resident and non-resident clients, legal entities and individuals, orientation on different geographic markets and new wave of economic instability and geopolitical risks.  conclusions based on the study, the following conclusions were drawn: 1. research has disclosed the moderate competition in the latvian banking sector, based on the analysis of the indices of concentration throughout the period 2003 to 2015 year. five largest banks had major market share by assets ranged from 46.9% to 69.7%. the banking sector of latvia in 2015 failed to reach the pre-crisis level of concentration indices. 2. during the financial crisis and post-crisis periods in 2008–2011 g. banking market was low concentrated with a more even distribution of market shares between the market players. 3. by the end of 2015, the number of operating banks and branches in latvia decreased to the level of 2008 year, i.e. 27. taking into account the introduction of criteria for basel iii, the trend towards fewer players in the market can remain. measuring competitiveness of banks in latvia 145 4. since 2003 to 2015 year gini index ranged from 0.41 to 0.57. index distribution is balanced throughout, that indicates the stability of the market situation and, in turn, reveals a possible oligopoly that is confirmed by the analysis of the lorenz curve. 5. analysis of the number of clients of the banks, individuals and entities, showed that swedbank has the largest percentage of clients among all market participants. five leaders (swedbank, seb banka, citadele banka, dnb banka and nordea bank ab l.f.) in total had 87% of clients. however, after comparing the number of clients and banks’ profit and loss indicators, it might be concluded that the number of customers had no direct effect on the final financial result of a commercial bank. 6. based on an analysis of the size and liquidity of banks, it can be noted that the leaders in market share and in the number of customers have low liquidity ratios comparing to small banks: seb banka 37.2%, dnb banka 45.2%, swedbank 54.2%, citadele banka 57.2%. the difference may be due to various management and marketing strategies, positioning on the market and selection of target segment. 7. large banks seb banka and dnb banka, as well as the norvik bank, meridian trade bank and baltic international bank have unsatisfactory values of roe at the end of 2015. the same banks stood out with not the best indicators in the analysis of profit/loss and return on assets. 8. despite the large market players, small banks (by market share), such as expobank, have good financial performance and found own niche. 9. according to the competitiveness analysis of the latvian banks in the end of 2015, the market leader is swedbank in terms of number of customers, market share, volume of assets, amount of deposits, by financial autonomy ratio, adequacy of capital and profit. 10. analysing and comparing the financial performance of banks, it may be concluded that the market share is not a major factor in the effective work of the organization. other important factors are difference in marketing strategies, the target consumer, image of banks, which all can inf luence the financial performance of banks. further study may be directed to identify the causes of the differences in the financial performance of banks and latvian banks’ future perspectives in the light of the risks associated with high proportion of non-resident customers. it is necessary to investigate the problem of enlarging capital adequacy radeniss krasovskis, andrejs limanskis, erika pancenko146 tios by increasing the proportion of equity or decreasing risk weighted assets and raising liquidity ratio, due 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(2002). анализ рынка потребительских товаров: учебное пособие. хабаров, в.и., попова, н.ю. (2004). банковский маркетинг. /московская финансово-промышленная академия. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 15.12.2012; data zaakceptowania: 24.0.4.2013. * dane kontaktowe: izabelalulek@gmail.com, ul. turka 61a, 20-258 lublin, tel. 506 165 061. izabela lulek* uniwersytet marii curie-skłodowskiej w lublinie rozwój rynku venture capital/private equity w polsce słowa kluczowe: akwizycja, dezinwestycje, inwestycje, kapitał wysokiego ryzyka, private equity, venture capital. klasyfikacja jel: g11, g24, g32. abstrakt: celem niniejszego artykułu jest przedstawienie, szczegółowa analiza empiryczna oraz ocena rozwoju rynku venture capital/private equity w polsce od początków jego powstania, z uwzględnieniem problematyki akwizycji kapitału, inwestycji oraz dezinwestycji. badania zostały przeprowadzone na podstawie danych empirycznych europejskiego stowarzyszenia inwestorów kapitałowych (european private equity and venture capital association), które prowadzi szeroką statystykę rynku kapitału wysokiego ryzyka w całej europie. wnioski, jakie płyną z części empirycznej artykułu, wskazują na dynamiczny rozwój rynku venture capital/private equity w polsce oraz na dalsze perspektywy jego rozwoju. wyniki przeprowadzonych badań świadczą o rosnącym zaufaniu inwestorów europejskich do polskiego rynku venture capital/private equity oraz o wysokiej atrakcyjności inwestycyjnej naszego kraju, szczególnie w europie środkowo-wschodniej. istotne wsparcie dla rozwoju rynku kapitału wysokiego ryzyka w polsce zapewnia dynamiczny rozwój i wysoka aktywność giełdy papierów wartościowych w warszawie. the development of polish venture capital and private equity market keywords: acquisition, disinvestment, high risk capital, investment, private equity, venture capital. jel classification: g11, g24, g32. http://dx.doi.org/10.12775/cjfa.2013.009 izabela lulek120 abstract: the aim of this article is to present, extensively analyse in an empirical way and assess the development of polish venture capital and private equity market from its beginning up to the present day, taking into account the issue of capital acquisition, investment and disinvestment. the research was conducted on the basis of the empirical data provided by the european private equity and venture capital association, the establishment engaged in gathering the statistics of the high risk capital market in europe. conclusions drawn from the empirical part of the article suggest the dynamic development of the venture capital and private equity market in poland and its possible further advancement. the results of the research indicate the growing trust of european investors in the polish venture capital and private equity market and the high investment attractiveness of our country, particularly in the east-central europe. the substantial support to the development of the polish high risk capital market is provided by the dynamic expansion and high activeness of warsaw stock exchange. translated by izabela lulek  wstęp kapitał wysokiego ryzyka stanowi nowoczesną, elastyczną i efektywną formę finansowania, ponadto wspiera rozwój nowoczesnych technologii, współpracy świata nauki i biznesu. pozwala gospodarce na osiągnięcie wysokiego poziomu innowacyjności, a także konkurencyjności. celem niniejszego artykułu jest przedstawienie, analiza empiryczna oraz ocena rozwoju rynku venture capital/private equity1 w polsce, z uwzględnieniem problematyki akwizycji kapitału, jego inwestowania oraz dezinwestycji przeprowadzonych przez fundusze vc/pe w polsce. przyjęta struktura opracowania została zdeterminowana cyklem inwestycyjnym funduszy kapitału wysokiego ryzyka. zainteresowanie tą tematyką wynika z faktu, że analiza rynku finansowego wskazuje na dynamiczny rozwój rynku vc/pe. badania empiryczne zostały przeprowadzone na podstawie danych statystycznych europejskiego stowarzyszenia inwestorów kapitałowych (european private equity and venture capital association), które prowadzi na szeroką skalę statystykę rynku kapitału wysokiego ryzyka w całej europie. jedna z pierwszych definicji venture capital w polsce, którą przedstawił j. węcławski (1997: 17), precyzuje venture capital jako „kapitał własny wnoszony na ograniczony okres przez inwestorów zewnętrznych do małych i średnich przedsiębiorstw dysponujących innowacyjnym produktem, metodą produkcji bądź usługą, które nie zostały jeszcze zweryfikowane przez rynek, a więc 1 w dalszej części artykułu zapis venture capital/private equity został zastąpiony zapisem skróconym vc/pe. rozwój rynku venture capital/private equity w polsce 121 stwarzają wysokie ryzyko niepowodzenia inwestycji, ale jednocześnie w przypadku sukcesu przedsięwzięcia, wspomaganego w zarządzaniu przez inwestorów, zapewniają znaczący przyrost wartości zainwestowanego kapitału, który jest realizowany przez sprzedaż udziałów”. w definicji tej finansowanie za pomocą venture capital zostało odniesione do małych i średnich, a także innowacyjnych przedsiębiorstw. jest również podkreślone wysokie ryzyko związane z inwestycją, ale przede wszystkim możliwość osiągnięcia wysokiej stopy zwrotu przez inwestora (świderska 2008: 41). zgodnie z evca, private equity jest kapitałem udziałowym, dostarczanym przedsiębiorstwom nienotowanym na giełdzie, który odnosi się głównie do wykupów menadżerskich lub nabycia udziałów w przedsiębiorstwie od innej instytucji oferującej venture capital lub od jego udziałowców bądź do zakupu akcji spółek notowanych na giełdzie w celu wycofania ich akcji z obrotu publicznego. z kolei venture capital jest elementem private equity, który odnosi się do finansowania rozpoczęcia działalności przedsiębiorstwa, wczesnego etapu jego rozwoju lub dalszej ekspansji (mikołajczyk, krawczyk 2007: 38). fundusze vc/pe są pośrednikami między inwestorami udostępniającymi swój kapitał a przedsiębiorstwami, w których kapitał ten jest inwestowany. fundusze we własnym imieniu inwestują środki kapitałodawców, zarządzają procesem inwestycyjnym ukierunkowanym na osiągnięcie wysokiej stopy zwrotu z zaangażowanego przez nich kapitału. fundusze nie inwestują zatem własnych środków i nie ponoszą ryzyka utraty wartości zainwestowanego kapitału, ale do ich obowiązków należą: wybór, selekcja, zarządzanie i realizacja inwestycji. inwestorzy natomiast udostępniają swój kapitał, ale mają ograniczony wpływ na działalność funduszu, aczkolwiek nie ponoszą odpowiedzialności za zobowiązania funduszu (inwestorzy w spółce komandytowej). w relacjach między inwestorami a funduszami często poruszany jest problem konf liktu agencyjnego, ponieważ inwestorzy nie mają pewności, czy fundusz umiejętnie inwestuje ich kapitał, nie mogą sprawować również bieżącej kontroli nad przebiegiem procesu inwestycyjnego. aczkolwiek doświadczenia ze współpracy kapitałodawców i funduszy vc/pe pokazują, że inwestowanie za ich pośrednictwem jest efektywne (gryko 2006: 309). wykorzystanie finansowania funduszy vc/pe przynosi wiele korzyści przedsiębiorstwom portfelowym. cele funduszy i spółek portfelowych są zbieżne, fundusze utożsamiają się z interesem spółki, myślą o niej w długoterminowej perspektywie, dzięki czemu ma ona szansę na rozwój oraz wzrost wartości. fundusze vc/pe mają bogate doświadczenie w pomnażaniu wartości spółek izabela lulek122 portfelowych, jak również we wprowadzaniu ich akcji do obrotu publicznego, utrzymują szerokie kontakty biznesowe, potrafią starannie kalkulować ryzyko, udostępniają know-how, kreują strategie przedsiębiorstwa, a także angażują kapitał w przedsięwzięcia, których sfinansowanie kredytem bankowym jest niemożliwe. ponadto są inwestorami elastycznymi, cierpliwymi i służą pomocą w prowadzeniu działalności oraz rozwiązywaniu problemów spółki portfelowej (sikorski 2008: 100). fundusze vc/pe dają możliwość pozyskania kapitału na każdym etapie funkcjonowania przedsiębiorstwa, ponadto skorzystanie z ich finansowania prowadzi do wzrostu kapitału własnego, a tym samym poprawy płynności spółki. zaangażowanie finansowe funduszu poprawia wizerunek spółki i zwiększa jej wiarygodność (włodarska-zoła 2005: 39). korzystanie z finansowania funduszy vc/pe ma również wady: wiąże się z utratą samodzielności przedsiębiorstwa, podziałem władzy, wprowadzeniem dodatkowych obowiązków, istnieje też ryzyko, że decyzje funduszu i zarządzających przedsiębiorstwem nie będą zgodne. ponadto jest stosunkowo drogą formą finansowania (golawska-witkowska i in. 2006: 241). 1. pozyskiwanie kapitału przez fundusze vc/pe na rynku vc/pe fundusze wysokiego ryzyka występują jako pośrednicy między inwestorami, którzy udostępniają swój kapitał, a spółkami portfelowymi, w których dokonuje się inwestycji kapitału o podwyższonym ryzyku. obecność funduszy w roli pośrednika ma swoje uzasadnienie w specyfice inwestycji typu vc/pe, charakteryzujących się wyższym od przeciętnego poziomem ryzyka, a także większym stopniem skomplikowania od inwestycji w akcje czy obligacje dokonywanych bezpośrednio przez inwestorów (tamowicz 1995: 5). fundusze vc/pe powstały, ponieważ tradycyjne instytucje finansowe nie były zainteresowane inwestowaniem w przedsiębiorstwa charakteryzujące się wysokim poziomem ryzyka oraz niską płynnością akcji, fundusze vc/pe wypełniły tę lukę (wrzesiński 2008: 84). kolejnym ważnym aspektem w działalności funduszy vc/pe jest konieczność dywersyfikacji wysokiego poziomu ryzyka. dywersyfikacja portfela inwestycyjnego pozwala funduszom na obniżenie wysokiego poziomu ryzyka. fundusze vc/pe najczęściej inwestują w kilkadziesiąt spółek portfelowych, znajdujących się w różnych fazach rozwoju, w zależności od wielkości funduszu oraz jego strategii inwestycyjnej (zasępa 2010: 22). fundusze vc/pe są bardzo zróżnicowane pod względem formy własności, realizowanej strategii inwestycyjnej oraz wielkości kapitału, którym dysponu rozwój rynku venture capital/private equity w polsce 123 ją, co jest konsekwencją rozwoju rynku vc/pe, rosnącej konkurencji między poszczególnymi funduszami, ich specjalizacji, a także wzrostu skali działania (przybylska-kapuścińska, mozalewski 2011: 46–48). fundusze vc/pe charakteryzują się określonym z góry cyklem inwestycyjnym, przy czym pierwszą jego fazą jest akwizycja kapitału, niezbędnego do dalszej działalności inwestycyjnej. inwestorzy, którzy udostępniają swój kapitał na rynku vc/pe, kierują się różnymi motywami, preferencjami, napotykając różnego rodzaju ograniczenia, ponadto różnią się między sobą formą prawną czy zakresem działania (zasępa 2010: 22). historycznie na rynku vc/ pe największymi inwestorami były osoby prywatne oraz stowarzyszenia i fundacje, które dysponowały dużą ilością środków finansowych i akceptowały wysoki poziom ryzyka. od momentu rozpowszechnienia spółki komandytowej jako formy prawnej wykorzystywanej przy tworzeniu struktur funduszy vc/ pe zaobserwowano wzrost znaczenia inwestorów instytucjonalnych. obecnie najwięcej kapitału na rynku vc/pe udostępniają właśnie inwestorzy instytucjonalni. traktują oni inwestycje na rynku kapitału wysokiego ryzyka jako inwestycje alternatywne, które powinny przynieść wysoką stopę zwrotu, a ich udział w całym portfelu inwestycyjnym jest niewielki, co pozwala na dywersyfikację jego ryzyka (wrzesiński 2008: 97–98). wśród inwestorów na rynku vc/pe można wyróżnić: banki, fundusze emerytalne, towarzystwa ubezpieczeniowe, przedsiębiorstwa, instytucje publiczne, instytuty naukowe, osoby prywatne oraz fundacje i stowarzyszenia. w 2003 roku polskie stowarzyszenie inwestorów kapitałowych zleciło badanie historyczne dotyczące sektora vc/pe w polsce, z którego wynika, że w okresie od 1990 do 1994 roku fundusze pozyskały 697 mln eur kapitału, w okresie 1995–1997 – 871 mln eur kapitału, natomiast w latach 1998–1999 – aż 1 mld 577 mln eur kapitału na inwestycje w polsce i w innych krajach europy środkowo-wschodniej. wykres 1 przedstawia, jak zmieniała się na przestrzeni czasu wartość kapitału pozyskanego przez fundusze vc/pe w polsce i w europie środkowo-wschodniej. z danych tam zamieszczonych wynika, że od 2000 roku fundusze w polsce pozyskały prawie 4 mld eur na inwestycje. kapitał pozyskany przez fundusze vc/pe w polsce stanowił stosunkowo dużą część kapitału pozyskanego w całym regionie europy środkowo-wschodniej. od 2009 roku zauważalny jest wpływ kryzysu finansowego na rynek kapitału wysokiego ryzyka, w efekcie którego nastąpił pewien spadek akwizycji kapitału przez fundusze vc/pe. izabela lulek124 wykres 1. akwizycja kapitału przez fundusze vc/pe w polsce i w europie środkowo-wschodniej2 w latach 2000–2011 w mln eur wych, znajdujących się w różnych fazach rozwoju, w zależności od wielkości funduszu oraz jego strategii inwestycyjnej (zasępa 2010: 22). fundusze vc/pe są bardzo zróżnicowane pod względem formy własności, realizowanej strategii inwestycyjnej oraz wielkości kapitału, którym dysponują, co jest konsekwencją rozwoju rynku vc/pe, rosnącej konkurencji między poszczególnymi funduszami, ich specjalizacji, a także wzrostu skali działania (przybylska-kapuścińska, mozalewski 2011: 46–48). fundusze vc/pe charakteryzują się określonym z góry cyklem inwestycyjnym, przy czym pierwszą jego fazą jest akwizycja kapitału, niezbędnego do dalszej działalności inwestycyjnej. inwestorzy, którzy udostępniają swój kapitał na rynku vc/pe, kierują się różnymi motywami, preferencjami, napotykając różnego rodzaju ograniczenia, ponadto różnią się między sobą formą prawną czy zakresem działania (zasępa 2010: 22). historycznie na rynku vc/pe największymi inwestorami były osoby prywatne oraz stowarzyszenia i fundacje, które dysponowały dużą ilością środków finansowych i akceptowały wysoki poziom ryzyka. od momentu rozpowszechnienia spółki komandytowej jako formy prawnej wykorzystywanej przy tworzeniu struktur funduszy vc/pe zaobserwowano wzrost znaczenia inwestorów instytucjonalnych. obecnie najwięcej kapitału na rynku vc/pe udostępniają właśnie inwestorzy instytucjonalni. traktują oni inwestycje na rynku kapitału wysokiego ryzyka jako inwestycje alternatywne, które powinny przynieść wysoką stopę zwrotu, a ich udział w całym portfelu inwestycyjnym jest niewielki, co pozwala na dywersyfikację jego ryzyka (wrzesiński 2008: 97–98). wśród inwestorów na rynku vc/pe można wyróżnić: banki, fundusze emerytalne, towarzystwa ubezpieczeniowe, przedsiębiorstwa, instytucje publiczne, instytuty naukowe, osoby prywatne oraz fundacje i stowarzyszenia. w 2003 roku polskie stowarzyszenie inwestorów kapitałowych zleciło badanie historyczne dotyczące sektora vc/pe w polsce, z którego wynika, że w okresie od 1990 do 1994 roku fundusze pozyskały 697 mln eur kapitału, w okresie 1995–1997 – 871 mln eur kapitału, natomiast w latach 1998– 1999 – aż 1 mld 577 mln eur kapitału na inwestycje w polsce i w innych krajach europy środkowowschodniej. wykres 1 przedstawia, jak zmieniała się na przestrzeni czasu wartość kapitału pozyskanego przez fundusze vc/pe w polsce i w europie środkowo-wschodniej. z danych tam zamieszczonych wynika, że od 2000 roku fundusze w polsce pozyskały prawie 4 mld eur na inwestycje. kapitał pozyskany przez fundusze vc/pe w polsce stanowił stosunkowo dużą część kapitału pozyskanego w całym regionie europy środkowo-wschodniej. od 2009 roku zauważalny jest wpływ kryzysu finansowego na rynek kapitału wysokiego ryzyka, w efekcie którego nastąpił pewien spadek akwizycji kapitału przez fundusze vc/pe. wykres 1. akwizycja kapitału przez fundusze vc/pe w polsce i w europie środkowo-wschodniej‡ w latach 2000–2011 w mln eur ‡ statystyki rynku vc/pe dla europy środkowo-wschodniej są prowadzone od 2003 roku. 363 176 119 26 304 59 936 571 741 135 115 443 312 496 1 293 2 254 3 983 2 489 400 634 941 0 500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 4 500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 polska europa środkowo-wschodnia ź r ó d ł o : opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. na wykresie 2 została przedstawiona graficzna prezentacja źródeł pochodzenia kapitału pozyskanego przez fundusze vc/pe. biorąc pod uwagę geograficzne pochodzenie kapitału vc/pe, należy stwierdzić, że niewielki jest udział kapitału krajowego, co dowodzi, że rynek vc/pe w polsce to rynek wciąż rozwijający się, a inwestorzy krajowi ciągle odczuwają awersję do wysokiego poziomu ryzyka związanego z inwestycjami tego typu. stosunkowo wysoki udział pozyskanego kapitału stanowi kapitał europejski, świadczy to o zaufaniu europejskich inwestorów do polskiego rynku vc/pe. bardzo niski udział kapitału pozaeuropejskiego w latach 2009–2010 analizy może być związany m.in. z wprowadzeniem w stanach zjednoczonych obostrzeń dotyczących inwestowania przez banki w fundusze private equity, 2  statystyki rynku vc/pe dla europy środkowo-wschodniej są prowadzone od 2003 roku. rozwój rynku venture capital/private equity w polsce 125 które zostały potraktowane na równi z funduszami hedgingowymi. trudniej dostępne zatem stały się środki tamtejszych inwestorów. wykres 2. źródła kapitału ze względu na pochodzenie geograficzne w polsce w latach 1998–2011 w % źródło: opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. na wykresie 2 została przedstawiona graficzna prezentacja źródeł pochodzenia kapitału pozyskanego przez fundusze vc/pe. wykres 2. źródła kapitału ze względu na pochodzenie geograficzne w polsce w latach 1998–2011 w % źródło: opracowanie własne na podstawie: central and eastern europe statistics 2004–2011. biorąc pod uwagę geograficzne pochodzenie kapitału vc/pe, należy stwierdzić, że niewielki jest udział kapitału krajowego, co dowodzi, że rynek vc/pe w polsce to rynek wciąż rozwijający się, a inwestorzy krajowi ciągle odczuwają awersję do wysokiego poziomu ryzyka związanego z inwestycjami tego typu. stosunkowo wysoki udział pozyskanego kapitału stanowi kapitał europejski, świadczy to o zaufaniu europejskich inwestorów do polskiego rynku vc/pe. bardzo niski udział kapitału pozaeuropejskiego w latach 2009–2010 analizy może być związany m.in. z wprowadzeniem w stanach zjednoczonych obostrzeń dotyczących inwestowania przez banki w fundusze private equity, które zostały potraktowane na równi z funduszami hedgingowymi. trudniej dostępne zatem stały się środki tamtejszych inwestorów. analizując źródła pochodzenia kapitału w polsce w latach 1999–2011, należy stwierdzić, że największymi dostarczycielami kapitału vc/pe były: fundusze funduszy (średnio 22%), banki (średnio 17%), fundusze emerytalne (średnio 12%), towarzystwa ubezpieczeniowe (średnio 10%) oraz agencje rządowe (średnio 10%). inwestorzy korporacyjni oraz indywidualni uzyskali taki sam udział w pozyskanym przez fundusze kapitale (średnio 6%). instytuty akademickie oraz rynek kapitałowy (z wyjątkiem 2011 roku) nie dostarczają funduszom vc/pe znaczącego kapitału w polsce. krajowy fundusz kapitałowy (kfk) jest polskim funduszem funduszy vc/pe. jego działalność polega na inwestowaniu w fundusze vc/pe, które zasilają kapitałowo małe i średnie, innowacyjne, prowadzące działalność naukowo-badawczą przedsiębiorstwa. kfk został utworzony w 2005 roku. funkcjonuje na podstawie ustawy o krajowym funduszu kapitałowym, a 100% jego akcji jest w posiadaniu banku gospodarstwa krajowego (ustawa o krajowym funduszu kapitałowym 2005, art. 3). zmiany wprowadzone w ustawie prawo bankowe, jak również nowe uregulowania dotyczące funduszy emerytalnych (ustawa o organizacji i funkcjonowaniu funduszy emerytalnych) pozwoliły na zwiększenia maksymalnego zaangażowania kapitałowego na niepublicznym rynku akcji, w przypadku 13% 20% 7% 6% 0% 20% 0% 6% 4% 0% 0% 13% 7% 8% 26% 12% 51% 79% 100% 75% 74% 13% 70% 60% 65% 79% 91% 60%61% 68% 42% 15% 0% 5% 26% 81% 26% 40% 35% 7% 2% 32% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 kapitał krajowy kapitał europejski kapitał pozaeuropejski ź r ó d ł o : opracowanie własne na podstawie: central and eastern europe statistics 2004–2011. analizując źródła pochodzenia kapitału w polsce w latach 1999–2011, należy stwierdzić, że największymi dostarczycielami kapitału vc/pe były: fundusze funduszy (średnio 22%), banki (średnio 17%), fundusze emerytalne (średnio 12%), towarzystwa ubezpieczeniowe (średnio 10%) oraz agencje rządowe (średnio 10%). inwestorzy korporacyjni oraz indywidualni uzyskali taki sam udział w pozyskanym przez fundusze kapitale (średnio 6%). instytuty akademickie oraz rynek kapitałowy (z wyjątkiem 2011 roku) nie dostarczają funduszom vc/pe znaczącego kapitału w polsce. krajowy fundusz kapitałowy (kfk) jest polskim funduszem funduszy vc/pe. jego działalność polega na inwestowaniu w fundusze vc/pe, które zasilają kapitałowo małe i średnie, innowacyjne, prowadzące działalność naukowo-badawczą przedsiębiorstwa. kfk został utworzony w 2005 roku. funkcjonuje na podstawie ustawy o krajowym funduszu kapitałowym, a 100% jego akcji jest w posiadaniu banku gospodarstwa krajowego (ustawa o krajowym funduszu kapitałowym 2005, art. 3). izabela lulek126 zmiany wprowadzone w ustawie prawo bankowe, jak również nowe uregulowania dotyczące funduszy emerytalnych (ustawa o organizacji i funkcjonowaniu funduszy emerytalnych) pozwoliły na zwiększenia maksymalnego zaangażowania kapitałowego na niepublicznym rynku akcji, w przypadku banków – do 40% kapitałów własnych, natomiast w przypadku funduszy emerytalnych – do 5% aktywów znajdujących się pod ich zarządzaniem (ustawa prawo bankowe 1997; ustawa o organizacji i funkcjonowaniu funduszy emerytalnych 1997). w krajach wysoko rozwiniętych otwarte fundusze emerytalne mają mandat zaufania dotyczący alokacji zarządzanego kapitału, wprowadzone w polsce ograniczenie zaangażowania w akcje spółek nienotowanych na publicznym rynku do 5% zarządzanych aktywów jest jednak dużo wyższe niż faktyczne zaangażowanie w krajach wysoko rozwiniętych. problemem, który odczuwają ofe w polsce, są regulacje dotyczące koncentracji kapitału, uniemożliwiające posiadanie więcej niż 10% kapitału jednego funduszu. w sytuacji braku zainteresowania innych inwestorów fundusz vc/pe musiałoby utworzyć 10 otwartych funduszy emerytalnych, każdy z zaangażowaniem kapitałowym wynoszącym 10%. ta regulacja znacznie utrudnia funkcjonowanie rynku kapitału wysokiego ryzyka w polsce. ponadto ofe są rozliczane z uzyskanej stopy zwrotu z portfela inwestycyjnego w krótkim czasie, co zmusza je do rezygnacji z inwestycji typu vc/pe, które przynoszą zyski w długim okresie. wprowadzenie zmian w ustawie pozwoliłoby z pewnością na zwiększenie zaangażowania kapitałowego ofe na polskim rynku vc/pe (wrzesiński 2008: 315–316). 2. inwestowanie kapitału przez fundusze vc/pe strategia inwestycyjna funduszy kapitału wysokiego ryzyka jest ukierunkowana na osiągnięcie wysokiej stopy zwrotu z inwestycji. na stopę zwrotu z portfela inwestycyjnego funduszu najczęściej wpływa klika inwestycji o wysokiej stopie zwrotu z zaangażowanego kapitału. fundusze vc/pe nie inwestują w przeciętne przedsiębiorstwa, ale takie, które mają potencjał osiągnięcia wysokiej dynamiki wzrostu wartości, mimo że inwestycje te są bardziej ryzykowne (wrzesiński 2008: 112). fundusze kierują się różnymi strategiami inwestycyjnymi. strategia specjalizacji jest strategią, która pozwala na osiągnięcie przewagi konkurencyjnej. znajomość konkretnego sektora gospodarki, konkretnej fazy rozwoju przedsiębiorstwa lub też określonego obszaru geograficznego umoż rozwój rynku venture capital/private equity w polsce 127 liwia bardziej precyzyjne selekcjonowanie, analizowanie, negocjowanie czy wreszcie monitorowanie inwestycji. strategia specjalizacji ma istotny wpływ na jakość i efektywność współpracy między spółką portfelową a funduszem vc/pe. fundusze kierujące się nią osiągają dużą przewagę przy pozyskiwaniu i wstępnej selekcji inwestycji (zasępa 2010: 21). fundusze vc/pe mogą przyjąć również strategię dywersyfikacji portfela przez inwestowanie w wiele spółek portfelowych, minimalizując przy tym całkowite ryzyko przez zredukowanie wpływu ryzyka specyficznego każdej ze spółek (sobańska, sieradzan 2004: 167). strategia dywersyfikacji portfela jest strategią kosztowną, ponieważ wymaga poniesienia wyższych kosztów analiz, inwestycji, monitoringu oraz wyjścia z inwestycji, co wynika z liczby spółek w portfelu (wrzesiński 2008: 113–114). fundusze vc/pe często kierują się strategią specjalizacji, inwestując w konkretne fazy rozwoju przedsiębiorstwa. inwestycje we wcześniejsze fazy cyklu życia przedsiębiorstwa niosą ze sobą większe ryzyko, ale i większy potencjał zysku. inwestorzy, których cechuje awersja do ryzyka, inwestują w późniejsze etapy rozwoju przedsiębiorstwa (sobańska, sieradzan 2004: 167). właściwa selekcja przedsiębiorstwa portfelowego to fundamentalny problem dla funduszu vc/pe. niewielka część przedsiębiorstw stanowi inwestycję o wymaganej, wysokiej stopie zwrotu i charakteryzuje się odpowiednim potencjałem wzrostu wartości (wrzesiński 2008: 114). fundusze najczęściej przyjmują postawę aktywnego inwestora, który szeroko monitoruje rynek przedsiębiorstw, aby dokonać właściwego wyboru spółki portfelowej. analizuje informacje prasowe, radiowe, telewizyjne, uczestniczy w konferencjach, targach, seminariach (tamowicz 1995: 51). inwestycje funduszy vc/pe rozwijały się bardzo dynamicznie, od kiedy pojawiły się na polskim rynku kapitałowym w 1990 roku. w latach 1990–1994 fundusze vc/pe zainwestowały w polsce i w europie środkowo-wschodniej 683 mln eur, z czego 82% stanowił kapitał zainwestowany w polsce, natomiast w okresie 1995–1997 fundusze te zainwestowały 427 mln eur, w tym 71% w polsce. na wykresie 3 została zaprezentowana wartość inwestycji funduszy vc/pe w polsce oraz, dla porównania, w europie środkowo-wschodniej. izabela lulek128 wykres 3. inwestycje funduszy vc/pe w polsce i w europie środkowo-wschodniej w latach 1998–2011 w mln eur źródło: opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. w okresie 1998–2011 fundusze vc/pe zainwestowały w polsce ponad 4 mld eur. w 2009 roku zauważalny był spadek inwestycji vc/pe, co można uznać za konsekwencję kryzysu finansowego. warto podkreślić, że w polsce od 2010 roku obserwuje się dodatnią dynamikę zmian wysokości inwestowanego kapitału, natomiast w całej europie środkowo-wschodniej nadal utrzymuje się ujemna dynamika. polska jest ważnym odbiorcą inwestycji kapitału wysokiego ryzyka w regionie europy środkowo-wschodniej. warto również zwrócić uwagę, że od 2008 roku inwestycje realizowane przez fundusze w polsce stanowią ponad 1% ogółu inwestycji realizowanych w całej europie i następuje korzystna tendencja wzrostowa. zgodnie z rankingiem najbardziej atrakcyjnych inwestycyjnie krajów dla funduszy vc/pe, opracowanym w 2011 roku, polska zajęła 36. miejsce w zestawieniu dla 80 krajów świata oraz 1. miejsce w europie środkowo-wschodniej (groh i in. 2011). wykres 4. inwestycje funduszy vc/pe z podziałem na fazy inwestycji w polsce w latach 1998– 2011w % źródło: opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. 10 2, 1 18 4, 0 20 1, 6 15 0, 5 11 7, 7 13 3, 2 13 4, 4 10 7, 8 30 3, 6 43 2, 0 63 5, 6 26 7, 0 65 7, 0 68 0, 644 8, 4 54 6, 50 50 8, 3 1 66 7, 0 2 21 6, 0 2 36 2, 0 2 44 7, 0 1 30 3, 0 1 24 4, 0 0,0 500,0 1000,0 1500,0 2000,0 2500,0 3000,0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 polska europa środkowo-wschodnia 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0% 100,0% 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 faza zasiewów faza startu venturepóźniejszy etap finansowanie wzrostu refinansowanie wykupy ź r ó d ł o : opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. w okresie 1998–2011 fundusze vc/pe zainwestowały w polsce ponad 4 mld eur. w 2009 roku zauważalny był spadek inwestycji vc/pe, co można uznać za konsekwencję kryzysu finansowego. warto podkreślić, że w polsce od 2010 roku obserwuje się dodatnią dynamikę zmian wysokości inwestowanego kapitału, natomiast w całej europie środkowo-wschodniej nadal utrzymuje się ujemna dynamika. polska jest ważnym odbiorcą inwestycji kapitału wysokiego ryzyka w regionie europy środkowo-wschodniej. warto również zwrócić uwagę, że od 2008 roku inwestycje realizowane przez fundusze w polsce stanowią ponad 1% ogółu inwestycji realizowanych w całej europie i następuje korzystna tendencja wzrostowa. zgodnie z rankingiem najbardziej atrakcyjnych inwestycyjnie krajów dla funduszy vc/pe, opracowanym w 2011 roku, polska zajęła 36. miejsce w zestawieniu dla 80 krajów świata oraz 1. miejsce w europie środkowo-wschodniej (groh i in. 2011). rozwój rynku venture capital/private equity w polsce 129 wykres 4. inwestycje funduszy vc/pe z podziałem na fazy inwestycji w polsce w latach 1998–2011w % źródło: opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. w okresie 1998–2011 fundusze vc/pe zainwestowały w polsce ponad 4 mld eur. w 2009 roku zauważalny był spadek inwestycji vc/pe, co można uznać za konsekwencję kryzysu finansowego. warto podkreślić, że w polsce od 2010 roku obserwuje się dodatnią dynamikę zmian wysokości inwestowanego kapitału, natomiast w całej europie środkowo-wschodniej nadal utrzymuje się ujemna dynamika. polska jest ważnym odbiorcą inwestycji kapitału wysokiego ryzyka w regionie europy środkowo-wschodniej. warto również zwrócić uwagę, że od 2008 roku inwestycje realizowane przez fundusze w polsce stanowią ponad 1% ogółu inwestycji realizowanych w całej europie i następuje korzystna tendencja wzrostowa. zgodnie z rankingiem najbardziej atrakcyjnych inwestycyjnie krajów dla funduszy vc/pe, opracowanym w 2011 roku, polska zajęła 36. miejsce w zestawieniu dla 80 krajów świata oraz 1. miejsce w europie środkowo-wschodniej (groh i in. 2011). wykres 4. inwestycje funduszy vc/pe z podziałem na fazy inwestycji w polsce w latach 1998– 2011w % źródło: opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. 10 2, 1 18 4, 0 20 1, 6 15 0, 5 11 7, 7 13 3, 2 13 4, 4 10 7, 8 30 3, 6 43 2, 0 63 5, 6 26 7, 0 65 7, 0 68 0, 644 8, 4 54 6, 50 50 8, 3 1 66 7, 0 2 21 6, 0 2 36 2, 0 2 44 7, 0 1 30 3, 0 1 24 4, 0 0,0 500,0 1000,0 1500,0 2000,0 2500,0 3000,0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 polska europa środkowo-wschodnia 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0% 100,0% 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 faza zasiewów faza startu venturepóźniejszy etap finansowanie wzrostu refinansowanie wykupy ź r ó d ł o : opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. analizując zmiany inwestycji z podziałem na fazy inwestycyjne w okresie 1998–2011, możemy zauważyć, że do 2004 roku zrealizowano dużo inwestycji venture capital3, czyli inwestycji we wczesnych fazach rozwoju przedsiębiorstwa, sięgających łącznie nawet 200 mln eur w 2000 roku. natomiast od 2005 roku dynamicznie zaczęła wzrastać wartość inwestycji w późniejszych etapach rozwoju przedsiębiorstwa, szczególnie wykupów, co świadczy o rozwoju rynku vc/pe. największe wartości wykupów – ponad 500 mln eur odnotowano w latach 2008 i 2010, kiedy realizowane przez fundusze inwestycje ogółem również osiągnęły rekordowe wartości. w początkowych latach analizy inwestycje venture capital sięgały nawet 99% ogółu inwestycji. od 2000 roku ich udział systematycznie malał, z 99% w 2000 do 0,6% w 2007 roku. tej tendencji towarzyszyła odwrotna tendencja – wzrost udziału inwestycji w późniejszych etapach rozwoju przedsiębiorstwa, w tym w szczególności wykupów, które w 2006 roku stanowiły prawie 98% ogółu inwestycji. do końca omawianego okresu udział wykupów w ogóle inwestycji utrzymywał się na bardzo wyso3 inwestycje venture capital obejmują inwestycje w fazy: zasiewów, startu oraz fazę venture – późniejszy etap. izabela lulek130 kim poziomie, sięgającym ponad 70%. natomiast ten niewielki spadek udziału wykupów nastąpił na rzecz zwiększenia udziału fazy finansowania wzrostu, która uzyskała udział w inwestycjach ogółem w 2007 i 2009 roku wynoszący 23%. warto również zwrócić uwagę na bardzo niski udział inwestycji w fazie zasiewów, a od 2004 roku także w fazie startu. niski poziom inwestycji we wczesnych fazach rozwoju przedsiębiorstwa może wynikać z wysokiego poziomu ryzyka tych inwestycji. wykres 5. inwestycje funduszy vc/pe według wybranych branż gospodarki w polsce w latach 2007–2011 w % analizując zmiany inwestycji z podziałem na fazy inwestycyjne w okresie 1998–2011, możemy zauważyć, że do 2004 roku zrealizowano dużo inwestycji venture capital§, czyli inwestycji we wczesnych fazach rozwoju przedsiębiorstwa, sięgających łącznie nawet 200 mln eur w 2000 roku. natomiast od 2005 roku dynamicznie zaczęła wzrastać wartość inwestycji w późniejszych etapach rozwoju przedsiębiorstwa, szczególnie wykupów, co świadczy o rozwoju rynku vc/pe. największe wartości wykupów – ponad 500 mln eur odnotowano w latach 2008 i 2010, kiedy realizowane przez fundusze inwestycje ogółem również osiągnęły rekordowe wartości. w początkowych latach analizy inwestycje venture capital sięgały nawet 99% ogółu inwestycji. od 2000 roku ich udział systematycznie malał, z 99% w 2000 do 0,6% w 2007 roku. tej tendencji towarzyszyła odwrotna tendencja – wzrost udziału inwestycji w późniejszych etapach rozwoju przedsiębiorstwa, w tym w szczególności wykupów, które w 2006 roku stanowiły prawie 98% ogółu inwestycji. do końca omawianego okresu udział wykupów w ogóle inwestycji utrzymywał się na bardzo wysokim poziomie, sięgającym ponad 70%. natomiast ten niewielki spadek udziału wykupów nastąpił na rzecz zwiększenia udziału fazy finansowania wzrostu, która uzyskała udział w inwestycjach ogółem w 2007 i 2009 roku wynoszący 23%. warto również zwrócić uwagę na bardzo niski udział inwestycji w fazie zasiewów, a od 2004 roku także w fazie startu. niski poziom inwestycji we wczesnych fazach rozwoju przedsiębiorstwa może wynikać z wysokiego poziomu ryzyka tych inwestycji. wykres 5. inwestycje funduszy vc/pe według wybranych branż gospodarki w polsce w latach 2007–2011 w % źródło: opracowanie własne na podstawie central and eastern europe statistics 2004–2011. w latach 2007–2011 w polsce inwestycje typu vc/pe miały największy udział w takich branżach, jak: dobra konsumpcyjne – produkcja i dystrybucja oraz w branży medycznej, farmaceutycznej i biotechnologii, i wyniósł średnio ponad 19%. kierując się średnim udziałem inwestycji w danej branży w ogóle zrealizowanych inwestycji, wysoki udział odnotowano również w branżach: produkcja dla biznesu, usługi finansowe, telekomunikacja i media oraz transport. analizując inwestycje funduszy vc/pe według wybranych branż gospodarki, możemy także zauważyć wzrost udziału branży usługi dla biznesu w latach 2007–2010, któremu towarzyszy spadek dla branży it. w roku 2011 ta negatywna tendencja odwróciła się. niekorzystna zmiana, jaka nastąpiła w § inwestycje venture capital obejmują inwestycje w fazy: zasiewów, startu oraz fazę venture – późniejszy etap. 0,0% 20,0% 40,0% 60,0% 80,0% 100,0% 2007 2008 2009 2010 2011 inne transport branża medyczna, farmaceutyczna, biotechnologia usługi finansowe dobra konsumpcyjne it telekomunikacja i media usługi dla biznesu produkcja dla biznesu ź r ó d ł o : opracowanie własne na podstawie central and eastern europe statistics 2004–2011. w latach 2007–2011 w polsce inwestycje typu vc/pe miały największy udział w takich branżach, jak: dobra konsumpcyjne – produkcja i dystrybucja oraz w branży medycznej, farmaceutycznej i biotechnologii, i wyniósł średnio ponad 19%. kierując się średnim udziałem inwestycji w danej branży w ogóle zrealizowanych inwestycji, wysoki udział odnotowano również w branżach: produkcja dla biznesu, usługi finansowe, telekomunikacja i media oraz transport. analizując inwestycje funduszy vc/pe według wybranych branż gospodarki, możemy także zauważyć wzrost udziału branży usługi dla biznesu w latach 2007–2010, któremu towarzyszy spadek dla branży it. w roku 2011 ta nega rozwój rynku venture capital/private equity w polsce 131 tywna tendencja odwróciła się. niekorzystna zmiana, jaka nastąpiła w latach 2007–2010, dotyczy inwestycji w wysokie technologie, które osiągnęły marginalny udział w ogóle inwestycji. w okresie 2000–2004 inwestycje w tej branży rozwijały się bardzo dynamicznie. wykres 6. inwestycje funduszy vc/pe jako % pkb w polsce, europie środkowo-wschodniej i w całej europie w latach 2003–2011 latach 2007–2010, dotyczy inwestycji w wysokie technologie, które osiągnęły marginalny udział w ogóle inwestycji. w okresie 2000–2004 inwestycje w tej branży rozwijały się bardzo dynamicznie. wykres 6. inwestycje funduszy vc/pe jako % pkb w polsce, europie środkowo-wschodniej i w całej europie w latach 2003–2011 źródło: opracowanie własne na podstawie central and eastern europe statistics 2004–2011. warto zauważyć, że mimo wysokiego udziału inwestycji typu vc/pe w polsce w ogóle zrealizowanych inwestycji w regionie europy środkowo-wschodniej, sięgającego nawet 51% w 2010 roku, inwestycje realizowane w polsce mają niższy udział w pkb w porównaniu do całej europy środkowowschodniej (z wyjątkiem 2010 i 2011 roku). z kolei inwestycje regionu europy środkowo-wschodniej kształtowały się w stosunku do pkb na niższym poziomie niż w całej europie. w 2010 roku polska zajęła 14. miejsce w europie i 2. miejsce w europie środkowo-wschodniej pod względem wartości wskaźnika udziału inwestycji vc/pe w pkb. 3. dezinwestycje przeprowadzone przez fundusz vc/pe przeprowadzenie wyjścia z inwestycji jest elementem każdej transakcji vc/pe, co wiąże się z cyklem inwestycyjnym kapitału wysokiego ryzyka. dezinwestycja pozwala funduszom vc/pe na zrealizowanie zysku z inwestycji, natomiast inwestorom udostępniającym środki – na odzyskanie zaangażowanego kapitału powiększonego o zysk kapitałowy (tamowicz 1995: 56). paradoksalnie wyjście z inwestycji jest najtrudniejszym i najważniejszym etapem cyklu inwestycyjnego funduszy vc/pe. rzeczywista sprzedaż akcji (udziałów) przedsiębiorstwa portfelowego będzie momentem jego weryfikacji rynkowej. ponadto wyjścia z inwestycji stanowią dla funduszy proces niepewny, niestabilny, trudny do przewidzenia (tamowicz 2004: 47). stopa zwrotu z inwestycji po zrealizowanym wyjściu będzie miała wpływ na dalsze możliwości pozyskiwania kapitału przez fundusz, a także na możliwości akwizycji kapitału na całym rynku vc/pe. od stopy zwrotu z inwestycji jest również uzależnione wynagrodzenie zarządzających funduszami (sobańska, sieradzan 2004: 113). fundusze vc/pe dysponują wieloma możliwościami przeprowadzenia dezinwestycji, z których można wyróżnić: sprzedaż akcji w obrocie publicznym, sprzedaż inwestorowi branżowemu lub strategicznemu, sprzedaż innemu funduszowi vc/pe lub inwestorowi finansowemu, wykup menadżerski przez zarządzających spółką (mbo), wykup przez menadżerów spoza spółki (mbi), wykup wspomagany, dokonywany przy udziale kapitału obcego (lbo), odkupienie udziałów (akcji) przez dotychczasowych właścicieli lub przez spółkę, likwidację. wybór odpowiedniego sposobu wyjścia z inwestycji jest również uzależniony od: sytuacji spółki portfelowej, sektora, w którym funkcjonuje, bieżącej sytuacji na rynku kapitałowym, a także od zainteresowania inwestorów (przybylska-kapuścińska, mozalewski 2011: 153). fundusze vc/pe w polsce mogą przeprowadzać dezinwestycje przez wprowadzenie spółki na giełdę papierów wartościowych (gpw) w warszawie. aby akcje spółki znalazły się w obrocie giełdowym gpw, spółka musi spełnić wiele warunków (regulamin gpw**). giełda papierów wartościowych w ** www.gpw.pl/regulacje_prawne. 0, 09 8% 0, 06 9% 0, 04 5% 0 ,1 18 % 0, 14 1% 0, 16 7% 0, 08 9% 0, 19 2% 0, 18 5% 0, 08 8% 0, 09 6% 0, 07 3% 0, 22 1% 0, 19 0% 0, 20 1% 0, 24 1% 0, 11 9% 0, 10 5% 0, 32 1% 0, 38 8% 0 ,5 52 % 0, 57 0% 0, 39 4% 0, 18 6% 0, 31 4% 0, 32 6% 0,000% 0,100% 0,200% 0,300% 0,400% 0,500% 0,600% 2003 2004 2005 2006 2007 2008 2009 2010 2011 polska europa środkowo-wschodnia europa ź r ó d ł o : opracowanie własne na podstawie central and eastern europe statistics 2004–2011. warto zauważyć, że mimo wysokiego udziału inwestycji typu vc/pe w polsce w ogóle zrealizowanych inwestycji w regionie europy środkowo-wschodniej, sięgającego nawet 51% w 2010 roku, inwestycje realizowane w polsce mają niższy udział w pkb w porównaniu do całej europy środkowo-wschodniej (z wyjątkiem 2010 i 2011 roku). z kolei inwestycje regionu europy środkowo-wschodniej kształtowały się w stosunku do pkb na niższym poziomie niż w całej europie. w 2010 roku polska zajęła 14. miejsce w europie i 2. miejsce w europie środkowo-wschodniej pod względem wartości wskaźnika udziału inwestycji vc/pe w pkb. 3. dezinwestycje przeprowadzone przez fundusz vc/pe przeprowadzenie wyjścia z inwestycji jest elementem każdej transakcji vc/pe, co wiąże się z cyklem inwestycyjnym kapitału wysokiego ryzyka. dezinwestycja pozwala funduszom vc/pe na zrealizowanie zysku z inwestycji, natomiast izabela lulek132 inwestorom udostępniającym środki – na odzyskanie zaangażowanego kapitału powiększonego o zysk kapitałowy (tamowicz 1995: 56). paradoksalnie wyjście z inwestycji jest najtrudniejszym i najważniejszym etapem cyklu inwestycyjnego funduszy vc/pe. rzeczywista sprzedaż akcji (udziałów) przedsiębiorstwa portfelowego będzie momentem jego weryfikacji rynkowej. ponadto wyjścia z inwestycji stanowią dla funduszy proces niepewny, niestabilny, trudny do przewidzenia (tamowicz 2004: 47). stopa zwrotu z inwestycji po zrealizowanym wyjściu będzie miała wpływ na dalsze możliwości pozyskiwania kapitału przez fundusz, a także na możliwości akwizycji kapitału na całym rynku vc/pe. od stopy zwrotu z inwestycji jest również uzależnione wynagrodzenie zarządzających funduszami (sobańska, sieradzan 2004: 113). fundusze vc/pe dysponują wieloma możliwościami przeprowadzenia dezinwestycji, z których można wyróżnić: sprzedaż akcji w obrocie publicznym, sprzedaż inwestorowi branżowemu lub strategicznemu, sprzedaż innemu funduszowi vc/pe lub inwestorowi finansowemu, wykup menadżerski przez zarządzających spółką (mbo), wykup przez menadżerów spoza spółki (mbi), wykup wspomagany, dokonywany przy udziale kapitału obcego (lbo), odkupienie udziałów (akcji) przez dotychczasowych właścicieli lub przez spółkę, likwidację. wybór odpowiedniego sposobu wyjścia z inwestycji jest również uzależniony od: sytuacji spółki portfelowej, sektora, w którym funkcjonuje, bieżącej sytuacji na rynku kapitałowym, a także od zainteresowania inwestorów (przybylska-kapuścińska, mozalewski 2011: 153). fundusze vc/pe w polsce mogą przeprowadzać dezinwestycje przez wprowadzenie spółki na giełdę papierów wartościowych (gpw) w warszawie. aby akcje spółki znalazły się w obrocie giełdowym gpw, spółka musi spełnić wiele warunków (regulamin gpw4). giełda papierów wartościowych w warszawie sa jest jedną z najszybciej rozwijających się giełd w europie, a także największą giełdą krajową w regionie europy środkowo-wschodniej. realizuje strategię rozwoju, która ma na celu wzmocnienie atrakcyjności i konkurencyjności polskiego rynku oraz uczynienie z warszawy centrum finansowego w regionie europy środkowo-wschodniej. obecnie gpw jest liczącym się europejskim rynkiem kapitałowym i liderem w europie środkowo-wschodniej. wykorzystuje potencjał rozwojowy polskiej gospodarki, jak również dynamizm polskiego rynku kapitałowego. 4 www.gpw.pl/regulacje_prawne. rozwój rynku venture capital/private equity w polsce 133 ostatni analizowany etap cyklu inwestycyjnego funduszy vc/pe stanowią wyjścia z inwestycji przeprowadzone w polsce. od 2000 do 2011 roku fundusze vc/pe przeprowadziły dezinwestycje o wartości ponad 1 mld eur według wartości początkowej inwestycji. analizując wykres 7, możemy zauważyć, że stosunkowo duża część dezinwestycji w europie środkowo-wschodniej została przeprowadzona w polsce z wyjątkiem 2011 roku. wykres 7. dezinwestycje przeprowadzone przez fundusze vc/pe w polsce i w europie środkowo-wschodniej w latach 1998–2011 w mln eur warszawie sa jest jedną z najszybciej rozwijających się giełd w europie, a także największą giełdą krajową w regionie europy środkowo-wschodniej. realizuje strategię rozwoju, która ma na celu wzmocnienie atrakcyjności i konkurencyjności polskiego rynku oraz uczynienie z warszawy centrum finansowego w regionie europy środkowo-wschodniej. obecnie gpw jest liczącym się europejskim rynkiem kapitałowym i liderem w europie środkowo-wschodniej. wykorzystuje potencjał rozwojowy polskiej gospodarki, jak również dynamizm polskiego rynku kapitałowego. ostatni analizowany etap cyklu inwestycyjnego funduszy vc/pe stanowią wyjścia z inwestycji przeprowadzone w polsce. od 2000 do 2011 roku fundusze vc/pe przeprowadziły dezinwestycje o wartości ponad 1 mld eur według wartości początkowej inwestycji. analizując wykres 7, możemy zauważyć, że stosunkowo duża część dezinwestycji w europie środkowo-wschodniej została przeprowadzona w polsce z wyjątkiem 2011 roku. wykres 7. dezinwestycje przeprowadzone przez fundusze vc/pe w polsce i w europie środkowowschodniej w latach 1998–2011 w mln eur źródło: opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. na rynku wyjść z inwestycji widoczne są jego załamania spowodowane kryzysem internetowym oraz kryzysem finansowym. najwyższą ujemną dynamikę zmian na rynku dezinwestycji zaobserwowano w 2000 roku (–72%), kolejną natomiast w 2009 roku (–55%) – obie zostały wywołane kryzysami w globalnej gospodarce. w 2009 roku wartość przeprowadzonych dezinwestycji wyniosła jedynie 31 mln eur. ujemna dynamika zmian, spowodowana obecnym kryzysem finansowym, trwała aż 3 lata na rynku dezinwestycji w polsce, ale już w 2010 roku wartość przeprowadzonych dezinwestycji wzrosła ponad 2,5-krotnie w stosunku do roku 2009. rynek dezinwestycji jest wrażliwy na zakłócenia występujące na rynkach finansowych, ponieważ istotną metodą wyjścia z inwestycji jest sprzedaż udziałów przez giełdę papierów wartościowych. skutki kryzysu finansowego są zauważalne na rynku dezinwestycji w polsce. biorąc pod uwagę średni procentowy udział poszczególnych rodzajów dezinwestycji vc/pe w ogóle przeprowadzonych wyjść z inwestycji w polsce w latach 1998–2011, można zauważyć, że największy udział miała sprzedaż inwestorowi strategicznemu – średnio 35%, na drugim miejscu znalazła się sprzedaż przez giełdę papierów wartościowych (ipo) – średnio 19%, na kolejnym miejscu znalazła się sprzedaż innemu funduszowi ze średnim udziałem wynoszącym 10%. w 2001 roku znowelizowana ustawa o funduszach inwestycyjnych umożliwiła tworzenie transparentnych struktur podatkowych, czyli form prawnych, które pozwalają na uniknięcie podwójnego opodatkowania zysku kapitałowego ze sprzedaży spółek portfelowych oraz zysku ze sprzedaży akcji funduszu vc/pe przez właścicieli spółki. brak uregulowań w zakresie podwójnego opodatkowania skutkował nieefektywnością podatkową polskich funduszy i przenoszeniem prowadzenia działalności do tzw. rajów podatkowych. nowelizacja ustawy o funduszach inwestycyjnych umożliwiła tworzenie specjalistycznych funduszy inwestycyjnych zamkniętych (sfiz), pozwalających na transparentność 52 ,2 14 9, 9 42 ,7 41 ,6 79 ,5 11 5, 1 88 ,7 1 15 ,5 14 0, 0 95 ,1 69 ,1 31 ,4 78 ,7 8 18 0, 423 5, 9 12 2, 6 42 1, 7 44 1, 7 45 2, 9 23 9, 2 13 1, 9 29 9, 53 13 82 ,5 0,0 200,0 400,0 600,0 800,0 1000,0 1200,0 1400,0 1600,0 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 polska europa środkowo-wschodnia ź r ó d ł o : opracowanie własne na podstawie: central and eastern europe statistics 2004–2011; evca yearbook 2012; rocznik/yearbook 2002–2005. na rynku wyjść z inwestycji widoczne są jego załamania spowodowane kryzysem internetowym oraz kryzysem finansowym. najwyższą ujemną dynamikę zmian na rynku dezinwestycji zaobserwowano w 2000 roku (–72%), kolejną natomiast w 2009 roku (–55%) – obie zostały wywołane kryzysami w globalnej gospodarce. w 2009 roku wartość przeprowadzonych dezinwestycji wyniosła jedynie 31 mln eur. ujemna dynamika zmian, spowodowana obecnym kryzysem finansowym, trwała aż 3 lata na rynku dezinwestycji w polsce, ale już w 2010 roku wartość przeprowadzonych dezinwestycji wzrosła ponad 2,5-krotnie w stosunku do roku 2009. izabela lulek134 rynek dezinwestycji jest wrażliwy na zakłócenia występujące na rynkach finansowych, ponieważ istotną metodą wyjścia z inwestycji jest sprzedaż udziałów przez giełdę papierów wartościowych. skutki kryzysu finansowego są zauważalne na rynku dezinwestycji w polsce. biorąc pod uwagę średni procentowy udział poszczególnych rodzajów dezinwestycji vc/pe w ogóle przeprowadzonych wyjść z inwestycji w polsce w latach 1998–2011, można zauważyć, że największy udział miała sprzedaż inwestorowi strategicznemu – średnio 35%, na drugim miejscu znalazła się sprzedaż przez giełdę papierów wartościowych (ipo) – średnio 19%, na kolejnym miejscu znalazła się sprzedaż innemu funduszowi ze średnim udziałem wynoszącym 10%. w 2001 roku znowelizowana ustawa o funduszach inwestycyjnych umożliwiła tworzenie transparentnych struktur podatkowych, czyli form prawnych, które pozwalają na uniknięcie podwójnego opodatkowania zysku kapitałowego ze sprzedaży spółek portfelowych oraz zysku ze sprzedaży akcji funduszu vc/pe przez właścicieli spółki. brak uregulowań w zakresie podwójnego opodatkowania skutkował nieefektywnością podatkową polskich funduszy i przenoszeniem prowadzenia działalności do tzw. rajów podatkowych. nowelizacja ustawy o funduszach inwestycyjnych umożliwiła tworzenie specjalistycznych funduszy inwestycyjnych zamkniętych (sfiz), pozwalających na transparentność podatkową, dzięki której eliminowany jest problem podwójnego opodatkowania. ponadto nowelizacja zliberalizowała proces tworzenia portfela inwestycyjnego przez sfiz, dając funduszom możliwość nabywania udziałów (akcji) przedsiębiorstw portfelowych nienotowanych na rynku publicznym.  zakończenie początki rozwoju rynku vc/pe sięgają 1990 roku i wiążą się z inicjatywami podjętymi głównie przez zagraniczne rządy. w połowie lat 90. nastąpił wzrost zainteresowania inwestorów ściśle komercyjnych, co wiązało się z coraz większą wiarygodnością polski na arenie międzynarodowej. w tym okresie kształtowały się duże, komercyjne fundusze vc/pe, a także bankowy segment rynku vc/pe. koniec lat 90. przyniósł duże zainteresowanie funduszy vc/pe inwestycjami w regionie europy środkowo-wschodniej. rynek kapitału wysokiego ryzyka w polsce rozwija się bardzo dynamicznie. fundusze vc/pe dysponują ogromnymi nadwyżkami kapitału pozyskanymi we wcześniejszych latach. stosunkowo wysoki udział tego kapitału pocho rozwój rynku venture capital/private equity w polsce 135 dzi od inwestorów europejskich, co świadczy o ich zaufaniu do polskiego rynku vc/pe. polska staje się ważnym odbiorcą inwestycji w regionie europy środkowo-wschodniej. można zaobserwować wzrost znaczenia inwestycji realizowanych w polsce wobec ogółu inwestycji przeprowadzonych przez europejskie fundusze vc/pe, co wskazuje na wysoką atrakcyjność inwestycyjną naszego kraju. efektywnemu przeprowadzaniu procesu dezinwestycji sprzyja ponadto dynamiczny rozwój i wysoka aktywność giełdy papierów wartościowych w warszawie. szansą dla dalszego rozwoju inwestycji vc/pe w polsce jest działalność krajowego funduszu kapitałowego, który udziela wsparcia finansowego funduszom vc/pe inwestującym w młodych, innowacyjnych, małych i średnich przedsiębiorstwach, ograniczając tym samym istniejącą lukę kapitałową. działalność inwestycyjna funduszy vc/pe ma duże znaczenie dla rozwoju polskiej gospodarki ze względu na wsparcie finansowania innowacji, co wpływa na wzrost gospodarczy, a także na elastyczność i efektywność gospodarki. dzięki wprowadzeniu na rynek innowacji fundusze przyczyniają się nie tylko do wzrostu, ale również do rozwoju gospodarczego. inwestowanie kapitału przez fundusze vc/pe pozwala też wypełnić lukę kapitałową w sektorze małych i średnich przedsiębiorstw, które chcą wprowadzić nowatorskie rozwiązania technologiczne czy organizacyjne. kapitał vc/pe jest często jedynym źródłem finansowania dla innowacyjnych przedsiębiorstw z uwagi na brak zainteresowania banków i niedostatek kapitału własnego. podkreśla się także znaczenie inwestycji typu vc/pe dla spadku bezrobocia oraz wzrostu kwalifikacji i motywacji menadżerów i pracowników przedsiębiorstw, które korzystają z finansowania funduszy. przedsiębiorstwa korzystające z finansowania funduszy są liderami pod względem ponoszonych wydatków na badania i rozwój. fundusze vc/pe mają zatem duży wpływ na przyspieszenie postępu technologicznego, można powiedzieć, że są jego katalizatorem. fundusze vc/pe mają wysoki wkład w rozwój gospodarek krajów rozwiniętych, a także ich rynków kapitałowych. pozwoliły na uzyskanie przewagi konkurencyjnej i na wzrost poziomu innowacyjności tych gospodarek. skutecznie pobudzają wzrost gospodarczy oraz rozwój eksportu. fundusze vc/ pe mają szerokie perspektywy rozwoju na polskim rynku kapitałowym. daje to szansę polskiej gospodarce na uzyskanie wielu korzyści, które już stały się udziałem gospodarek krajów rozwiniętych, a mianowicie wzrost przedsiębiorczości, efektywności alokacji zasobów, innowacyjności, a także wzrost gospodarczy. izabela lulek136  literatura central and eastern europe statistics (2004–2011), evca. evca yearbook (2012), evca. golawska-witkowska g., 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(2004), venture capital – kapitał na start, polska agencja rozwoju przedsiębiorczości, gdańsk. ustawa z dnia 4 marca 2005 r. o krajowym funduszu kapitałowym (dz.u. z 2005 r., nr 57, poz. 491 ze zm.). ustawa z dnia 28 sierpnia 1997 r. o organizacji i funkcjonowaniu funduszy emerytalnych (dz.u. z 2004 r., nr 159, poz. 1667 ze zm.). ustawa z dnia 16 listopada 2000 r. o zmianie ustawy o funduszach inwestycyjnych (dz.u. z 2000 r., nr 114, poz. 1192). ustawa z dnia 29 sierpnia 1997 r. prawo bankowe (dz.u. z 1997 r., nr 140, poz. 939 ze zm.). węcławski j. (1997), venture capital. nowy instrument finansowania przedsiębiorstw, pwn, warszawa. rozwój rynku venture capital/private equity w polsce 137 włodarska-zoła l. (2005), charakterystyka procesu realizacji inwestycji kapitałowych przez fundusze typu private equity i venture capital, [w:] finanse – wybrane zagadnienia, w. luciński (red.), wydawnictwo wyższej szkoły humanistyczno-ekonomicznej w łodzi, łódź. wrzesiński m. (2008), kapitał podwyższonego ryzyka. proces inwestycyjny i efektywność, oficyna wydawnicza sgh, warszawa. zasępa p. (2010), venture capital – sposoby dezinwestycji, wydawnictwo cedewu, warszawa. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402013, volume 2, issue 1 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: robhuski@uni.torun.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87- 100 toruń, tel. 56 611 48 95. robert huterski* uniwersytet mikołaja kopernika w toruniu stosunek międzynarodowego funduszu walutowego do koncepcji zrównoważonego rozwoju słowa kluczowe: międzynarodowy fundusz walutowy, wzrost gospodarczy, zrównoważony rozwój. klasyfikacja jel: f33, f63. abstrakt: z dokonanego przeglądu aktualnych publikacji mfw w zakresie stosunku tej instytucji do koncepcji zrównoważonego rozwoju wynika, że mfw bardzo często odwołuje się do tej koncepcji, nadając jej jednak własny wydźwięk, sprzeczny z istotą i celem oryginalnego ujęcia. z jednej strony, mfw gloryfikuje przyspieszanie wzrostu gospodarczego i popytowe stymulowanie koniunktury, z drugiej zaś – nie odnosi się do skutków wad współczesnego globalnego systemu pieniężnego dla zrównoważonego rozwoju, chociaż jest tego systemu aranżerem i strażnikiem, a może właśnie dlatego. attitude of the international monetary fund to a concept of sustainable development keywords: international monetary fund, sustainable development, economic growth. jel classification: f33, f63. abstract: review of the imf current publications from point of view of its attitude to idea of sustainable development shows that the imf refers very often to this concept, but gives it specific meaning that is in contradiction with the essence and objective of the idea. on one hand, the imf glorifies acceleration of economic growth. on the other, http://dx.doi.org/10.12775/cjfa.2013.005 robert huterski66 the imf do not ponder effects of weaknesses of contemporary global monetary system for sustainable development, although that institution arranges and protects it. translated by robert huterski  wstęp działalność gospodarcza człowieka wywiera coraz silniejszy negatywny wpływ na środowisko naturalne. zakres i formy tej działalności zależą w dużym stopniu od zasad jej finansowania. ponieważ współcześnie państwa coraz częściej stają się uzależnione od pomocy międzynarodowych instytucji finansowych, które udzielając jej, stawiają swoje warunki, stosunek tych instytucji do powiązań między środowiskiem naturalnym a gospodarką przenosi się na działania państw-pożyczkobiorców i ich podmiotów gospodarczych. celem niniejszego artykułu jest analiza i ocena stanowiska międzynarodowego funduszu walutowego, prezentowanego w jego publikacjach, wobec koncepcji zrównoważonego rozwoju dążącej do pogodzenia niezbędnej redukcji eksploatacji środowiska z potrzebami społecznymi i gospodarczymi. 1. istota koncepcji zrównoważonego rozwoju już w latach 70. xx wieku wyraźnie dostrzegano wzajemne powiązania między środowiskiem naturalnym a społeczeństwem i gospodarką w ujęciu międzygeneracyjnym. jest to dobrze widoczne w raportach rady zarządzającej programu środowiskowego onz (unep) z lat 1973–1976 (unep 1973–1976). w tym okresie dominowało jednak podejście ekorozwojowe, czyli aspekty społeczne i ekonomiczne były oceniane głównie z punktu widzenia środowiska, a pozostałe powiązania w tym trójkącie schodziły na dalszy plan. wynikało to z ówczesnej popularności koncepcji ekorozwoju, czyli rozwoju zgodnego z potencjałem środowiska wykorzystywanego w trakcie tego rozwoju w sposób odpowiedni i racjonalny (glossary of environment statistics 1997). ekorozwój w klasycznym ujęciu stawiał jednak ochronę środowiska naturalnego w uprzywilejowanej pozycji względem innych aspektów życia społecznego i gospodarczego. dopiero raport światowej komisji do spraw środowiska i rozwoju z 1987 roku, zwany raportem brundtland od nazwiska przewodniczącej komisji, rozpropagował pojęcie sustainable development, łączące w sobie aspekty środowiskowe, społeczne i ekonomiczne jako równoprawne i współzależne. angielskie słowo sustainable jest przeważnie tłumaczone na język polski jako „zrównowa  stosunek międzynarodowego funduszu walutowego… 67 żony”, choć w tym kontekście chodzi przede wszystkim o zdolność do kontynuacji, podtrzymywania, o trwałość jakiegoś stanu lub działania. zrównoważenie w dosłownym znaczeniu jest tylko ubocznym aspektem w niektórych sferach sustainable development. choć w roli polskiego odpowiednika trafniejsze byłoby używanie określenia trwały, ewentualnie trwały i zrównoważony, bądź nawet sustensywny rozwój, to jednak ze względu na jego popularność i obecność w krajowych regulacjach prawnych, od konstytucji rp poczynając, w niniejszym artykule jako odpowiednik terminu sustainable development będzie stosowany zwrot „zrównoważony rozwój”. sformułowano dotąd ponad 100 definicji zrównoważonego rozwoju, jednakże najistotniejszą rolę w praktyce odgrywa definicja ze wspomnianego raportu brundtland: zrównoważony rozwój to rozwój, który wychodzi naprzeciw potrzebom współczesnych pokoleń bez stwarzania zagrożenia dla zdolności do zaspokojenia ich przez przyszłe pokolenia (brundtland 1987: 41, poz. 1). w tym raporcie zawarto wiele założeń zrównoważonego rozwoju, mogących również stanowić punkt odniesienia dla oceny działalności międzynarodowego funduszu walutowego (mfw), a przede wszystkim: 1. zrównoważony rozwój jest daleki od wymogu zarzucenia wzrostu gospodarczego, a problemy biedy i niedorozwoju można rozwiązać przez nową erę wzrostu, w której kraje rozwijające się odegrają wiodącą rolę i zostaną dopuszczone do należnych im znaczących korzyści (brundtland 1987: 39, poz. 49). 2. nie istnieje jedna uniwersalna strategia zrównoważenia, ponieważ systemy gospodarcze i społeczne oraz warunki ekologiczne w poszczególnych krajach różnią się znacząco. każdy naród będzie musiał rozwiązywać problemy konsekwencji swoich konkretnych polityk. jednak, niezależnie od tych zróżnicowań, zrównoważony rozwój powinien być postrzegany jako cel globalny (brundtland 1987: 39, poz. 51). 3. żaden kraj nie może rozwijać się w izolacji od pozostałych. realizacja zrównoważonego rozwoju wymaga zatem nowej orientacji w relacjach międzynarodowych. długoterminowy zrównoważony wzrost będzie wymagał daleko idących zmian w przepływach produkcji, handlu, kapitału i technologii, które staną się bardziej sprawiedliwe i lepiej zsynchronizowane z wymogami środowiskowymi (brundtland 1987: 39, poz. 52). ostatnie dwa punkty wskazują na to, że już ćwierć wieku temu wyraźnie dostrzegano ograniczenia powszechności i jakości zrównoważonego rozwoju, wynikające z braku odpowiedniego globalnego ładu gospodarczego i finansowego. robert huterski68 jednakże zawarta w punkcie pierwszym akceptacja wzrostu gospodarczego jako narzędzia likwidacji biedy i niedorozwoju stała się przyczyną znaczącej krytyki zrównoważonego rozwoju w ujęciu raportu brundtland (kośmicki 2010: 114). krytyka ta wynika z faktu, że jest to sformułowanie skwapliwie wykorzystane przez wiele organizacji tzw. consensusu waszyngtońskiego, z mfw na czele (kośmicki 2010: 28), w sposób pomijający podkreślone silnie w tym raporcie środowiskowe wymogi wobec wzrostu gospodarczego akceptowalnego w świetle koncepcji zrównoważonego rozwoju. sprzeczność między gloryfikowaniem bezwarunkowego wzrostu gospodarczego i wiązaniem go z koncepcją zrównoważonego rozwoju odnosi się chociażby do rosnącej w skali globalnej eksploatacji zasobów naturalnych (zwłaszcza nieodnawialnych – kopalin) mających zaspokoić potrzeby tego wzrostu. postęp techniczny okazuje się niewystarczający, by temu przeciwdziałać, zwłaszcza przy szybko zwiększającej się liczbie ludności świata. w efekcie tej sytuacji, nawet przy zamrożeniu poziomu zużycia zasobów per capita, wolumen zużytych zasobów będzie rósł. niezależnie od różnic co do roli wzrostu gospodarczego, wszystkie ujęcia zrównoważonego rozwoju doceniają wpływ wzajemnych powiązań między wszystkimi poziomami zorganizowania społeczeństw (czyli lokalnym, regionalnym, państwowym i międzynarodowym) na możliwości utrzymania harmonii między ładami środowiskowym, społecznym i gospodarczym. w niniejszym artykule, zgodnie z jego tematem, wyeksponowano poziom międzynarodowy od strony światowego ładu finansowego. wsparciem w tym zakresie dla koncepcji zrównoważonego rozwoju jest koncepcja global governance, postulująca stworzenie reguł światowego kierowania (ale nie światowego rządu), porządkującego relacje międzynarodowe w sposób bardziej demokratyczny i wielostronnie korzystny niż obecnie (kośmicki 2005: 152). to zagadnienie zostanie rozwinięte w części czwartej poświęconej ocenie funkcjonowania mfw w świetle koncepcji zrównoważonego rozwoju. 2. statutowy cel działania mfw mfw został powołany w 1944 roku jako element wspierający system z bretton woods, którego istotą była światowa hegemonia dolara usa dzięki jego wymienialności na złoto w transakcjach między systemem rezerwy federalnej stanów zjednoczonych a innymi bankami centralnymi krajów członkowskich systemu oraz utrzymywanie stałych kursów walutowych między walutami   stosunek międzynarodowego funduszu walutowego… 69 należącymi do systemu, początkowo w bardzo wąskim paśmie wahań +–1%. z owej istoty systemu wynikała potrzeba powołania mfw jako instytucji stabilizującej swoimi pożyczkami rozliczenia między państwami członkowskimi, zwłaszcza w związku z saldami ich bilansów płatniczych. istotne jest to, że gdy w latach 1944–1971 funkcjonowała wymienialność dolara usa na złoto w ramach reżimu kursowego, wiodący cel działania mfw był klarowny – utrzymanie sprawnego działania całego systemu walutowego. wszelkie szczegółowe kompetencje mfw były temu celowi podporządkowane. wraz z zawieszeniem wymienialności w 1971 roku, a następnie ostatecznym rozwiązaniem systemu z bretton woods w 1973 roku mfw powinien był zostać zlikwidowany, ale przetrwał, przekształcając jedynie swoje priorytety i środki działalności (friedman 1998). o ile za czasów funkcjonowania systemu z bretton woods w działalności mfw dominowały funkcje regulacyjna oraz konsultacyjna, o tyle po jego rozpadzie zaczęły rozrastać się funkcja kredytowa i związana z nią funkcja kontrolna. po polsku przyjęło się nazywać tę instytucję międzynarodowym funduszem walutowym, jednakże w jego oficjalnej angielskojęzycznej nazwie, international monetary fund, jest użyte określenie monetarny czy też pieniężny, a nie walutowy. współcześnie, zgodnie z oryginalną nazwą, działalność mfw jest bardziej pieniężna w tym sensie, że udzielane przez mfw pożyczki w większości przypadków nie mają bezpośredniego związku ze sprawami walutowymi czy z bilansem płatniczym i łączą się z głęboką ingerencją w całe finanse i gospodarkę danego kraju-pożyczkobiorcy. obecne oficjalne cele działalności mfw nie odzwierciedlają zwrotu dokonanego w jego rzeczywistym funkcjonowaniu. ten katalog celów obejmuje (imf 2011: 2): 1. „promowanie międzynarodowej współpracy pieniężnej za pośrednictwem stałej instytucji, która stanowi aparat służący konsultacjom i współpracy w międzynarodowych kwestiach pieniężnych”. zgodnie z tym celem, mfw to przede wszystkim forum konsultacji i współpracy międzynarodowej, co nie uzasadnia jego dominującej w ostatnich dwóch dekadach roli prokuratora, sędziego i komornika oskarżającego, osądzającego i egzekwującego od różnych państw kształtowanie ich finansów i gospodarki według narzuconego przez mfw modelu. 2. „wspieranie ekspansji i zrównoważonego wzrostu handlu międzynarodowego oraz przyczynianie się w ten sposób do pobudzania i utrzymywania wysokich poziomów zatrudnienia i realnego dochodu oraz do robert huterski70 rozwijania zasobów produkcyjnych wszystkich członków jako zasadniczych celów polityki gospodarczej”. w ramach tego celu istotną rolę odgrywa przywiązanie do paradygmatu wzrostu gospodarczego (rozwijanie zasobów produkcyjnych), ale zarazem ma on sygnalizować pewną wrażliwość społeczną mfw (utrzymywanie wysokiego zatrudnienia i dochodu). jednocześnie jest to jedyny cel pozwalający powiązać jego działalność z koncepcją zrównoważonego rozwoju, choć w wariancie słabej trwałości ze względu na podkreślenie rozwoju zasobów produkcyjnych i brak odniesienia do środowiska naturalnego. pozostałe podane poniżej cele odzwierciedlają pierwotne zadania mfw z czasów funkcjonowania w ramach systemu z bretton woods i odnoszą się do kwestii walutowych, bilansów płatniczych oraz rozliczeń międzynarodowych: 3. „promowanie stabilności walutowej, utrzymywanie uporządkowanych relacji walutowych między członkami oraz unikanie konkurowania za pomocą deprecjacji walut”. 4. „pomoc w tworzeniu wielostronnego systemu płatności w odniesieniu do bieżących transakcji między członkami oraz w eliminowaniu ograniczeń walutowych, które utrudniają wzrost światowego handlu”. 5. „dawanie członkom poczucia bezpieczeństwa przez czasowe udostępnianie im podstawowych zasobów funduszu pod warunkiem odpowiednich zabezpieczeń i stworzenie im w ten sposób możliwości skorygowania niedostosowań w ich bilansach płatniczych bez uciekania się do metod szkodliwych dla krajowego lub międzynarodowego dobrobytu”. cel piąty jest jednak zarazem traktatową podstawą, chociaż bardzo wątłą, do rozbudowanej obecnie działalności pożyczkowej mfw, powiązanej z narzucaniem krajom-pożyczkobiorcom układanych przez niego programów restrukturyzacyjnych, które mają odgrywać rolę wspomnianych zabezpieczeń zwrotu udostępnionych przez mfw zasobów. warto zwrócić uwagę, że działalność pożyczkowa mfw jest wymieniona dopiero jako piąty i przedostatni cel. 6. „zgodnie z powyższym, skrócenie okresu i zmniejszenie poziomu nierównowagi w bilansach płatniczych członków. fundusz powinien kierować się we wszystkich swoich politykach i decyzjach celami sformułowanymi w niniejszym artykule”. to końcowe zdanie tym mocniej podkreśla rozbieżności między obecnym sformułowaniem katalogu celów działania mfw a jego praktyką.   stosunek międzynarodowego funduszu walutowego… 71 w tym miejscu wykazano jedynie rozbieżność między traktatowymi a faktycznymi celami i metodami działalności mfw oraz ukazano nikłe powiązanie tak ujętych celów z głównym nurtem koncepcji zrównoważonego rozwoju, do której mfw chętnie się odwołuje. odniesienia do zrównoważonego rozwoju w publikacjach dotyczących faktycznej działalności mfw zostaną przedstawione w części trzeciej, a ocenie wkładu mfw w zrównoważony rozwój będzie poświęcona część czwarta artykułu. 3. odniesienia do zrównoważonego rozwoju w publikacjach mfw specyfiką międzynarodowych instytucji finansowych, takich jak mfw czy bank światowy, jest z pozoru działalność mocno ograniczona do transakcji finansowych. jednakże, mimo pewnych różnic związanych ze szczegółowym charakterem działania, obie instytucje mają potencjalne możliwości silnego oddziaływania na wiele dziedzin życia w krajach korzystających z ich funduszy. co charakterystyczne, większe znaczenie i zarazem silniejsze skutki ma współpraca z tymi instytucjami dla krajów słabiej rozwiniętych, o mniejszej samodzielności finansowej i większych zagrożeniach dla ich zrównoważonego rozwoju. mfw ma świadomość zbieżności między charakterystyką dominującej grupy swoich klientów a problemami zharmonizowania ładów środowiskowego, społecznego i gospodarczego zgodnie z paradygmatem koncepcji zrównoważonego rozwoju. odwołania do koncepcji sustainable development można znaleźć w treści ponad 1200 pozycji znajdujących się w bazie publikacji mfw. z drugiej strony, tylko kilka z nich odwołuje się w tytule do tej koncepcji, choć nie wszystkie mają treść bezpośrednio jej poświęconą. ostatecznie, tylko dwie publikacje mfw można uznać za w dużej mierze poświęcone zrównoważonemu rozwojowi. pierwsza to 40-stronicowy zeszyt z 2002 roku, w którym omówiono fiskalne wymiary zrównoważonego rozwoju (gupta i in. 2002). drugą jest liczący prawie 300 stron raport z 2008 roku rozpatrujący wybrane aspekty zrównoważonego rozwoju na tle powiązań milenijnych celów rozwoju z problemami środowiska (the world bank), jednakże jest to publikacja wydana przez bank światowy, w której przygotowaniu pomagali pracownicy mfw. wśród publikacji mfw można znaleźć liczne odniesienia do związków między finansami i środowiskiem naturalnym, czego aktualnymi przykładami z 2012 roku mogą być: przewodnik dla decydentów, wskazujący, jak polityką firobert huterski72 skalną ograniczać zmiany klimatyczne (de mooij, parry, keen 2012), oraz artykuł o finansowaniu inwestycji w proekologiczne technologie (eyraud, clements 2012). również ład społeczny w kontekście finansowym znajduje odzwierciedlenie w opracowaniach mfw, jak choćby w serii raportów o strategii redukowania biedy w poszczególnych krajach, np. raporty opublikowane w 2012 roku dotyczące bangladeszu (imf 2012a), gwinei (imf 2012b) i laosu (imf 2012c). co ciekawe, niektóre raporty zostały przygotowane przez władze danego kraju pod kuratelą mfw i przy współpracy z innymi organizacjami międzynarodowymi (np. o bangladeszu i gwinei), a inne są raportami pracowników mfw (np. o laosie). w świetle dostępnych publikacji mfw można stwierdzić, że na poziomie werbalnym instytucja ta akceptuje koncepcję zrównoważonego rozwoju jako zestaw celów do osiągnięcia, jednakże pojawiają się wątpliwości co do szerszej akceptacji założeń tej koncepcji przez mfw. 4. ocena stosunku mfw do zrównoważonego rozwoju zasadniczym obszarem rozbieżności między głównym nurtem koncepcji zrównoważonego rozwoju a jej ujęciem w wersji mfw jest stosunek do standardowo ujmowanego wzrostu gospodarczego. w literaturze dotyczącej zrównoważonego rozwoju dominuje krytyka wzrostu gospodarczego jako polityczno-gospodarczego celu działania (rogall 2010: 28). zarazem pojawiają się propozycje akceptacji jedynie „zazielenionego” wzrostu gospodarczego, spełniającego ostre kryteria ekologiczne i społeczne, co wiąże się z zupełnie odmiennym od standardowego sposobem definiowania i kalkulowania wzrostu gospodarczego (borys 2007: 280). generalnie, wzrost gospodarczy na pewno nie jest traktowany w koncepcji zrównoważonego rozwoju jako podstawowe narzędzie osiągania jej celów. zakłada się w niej konieczność wzrostu produktywności zasobów większego niż wzrost pkb oraz, niejako w konsekwencji, wzrost jakości życia zamiast wzrostu dochodów w krajach przemysłowych [m945, 2.08], gdyż inaczej eksploatacja środowiska naturalnego przekroczy bezpieczne granice. dokładnie odwrotnie wzrost gospodarczy jest oceniany z perspektywy mfw. przykładowo, w opracowaniu o roli polityki fiskalnej w zrównoważonym rozwoju (gupta i in. 2002: 2) podkreśla się wyniki badań sugerujących, że klasyczny wzrost gospodarczy w przynajmniej 90% przypadków, gdy kraj osiągał wzrost co najmniej 2%, przynosił poprawę sytuacji najuboższych. ma to oznaczać, że inwestowanie w przyspieszanie standardowego wzrostu go  stosunek międzynarodowego funduszu walutowego… 73 spodarczego jest najlepszym sposobem rozwiązania podstawowych problemów w ramach społecznego ładu zrównoważonego rozwoju. brakuje przy tym odniesienia do problemu zmienności gospodarki rynkowej, która przez to nie wykazuje zdolności do utrzymania stałego i stabilnego wzrostu gospodarczego, co rzutuje również na niestabilność sytuacji najuboższych. w swych opracowaniach mfw nie rozpisuje się o (przynajmniej krótko i średnioterminowym) konf likcie między poziomem standardowego wzrostu gospodarczego a znacznymi nakładami proekologicznymi w połączeniu z ograniczeniami eksploatacji zasobów środowiska, które według koncepcji zrównoważonego rozwoju są tym bardziej konieczne, im bardziej spóźnione. mfw eksponuje związek między polityką fiskalną a zrównoważonym rozwojem (gupta i in. 2002: 3–5), ale podkreśla stanowczo, że odbywa się to przez służebną rolę polityki fiskalnej wobec wzrostu gospodarczego. oznacza to jednak intensyfikację eksploatacji środowiska i jego zasobów w połączeniu z ograniczeniem bezpośredniego społecznego wymiaru polityki fiskalnej. takie podejście stwarza istotne niebezpieczeństwo załamania się całego modelu, gdy wzrost gospodarczy napotka poważne bariery w danym kraju lub grupie krajów (choćby z powodu wahań cen surowców czy, jak obecnie, kryzysu finansowego). trudno uznać za zgodne z koncepcją zrównoważonego rozwoju wyraźne przedkładanie funkcji alokacyjnej finansów publicznych nie tylko nad funkcję redystrybucyjną, ale także nad powiązaną z nią w pewnym zakresie funkcję stabilizacyjną. stanowisko mfw w sprawie zrównoważonego rozwoju można również ocenić na podstawie przemówienia jego prezesa, christine lagarde, wygłoszonego w kontekście konferencji narodów zjednoczonych w sprawie zrównoważonego rozwoju (lagarde 2012), która odbyła się w dniach 20–22 czerwca 2012 roku w rio de janeiro – co ciekawe, nie w jej ramach, a na forum the center for global development w waszyngtonie. o ile akceptowalne z punktu widzenia głównego nurtu zrównoważonego rozwoju są spostrzeżenia o obecnym potrójnym światowym kryzysie – gospodarczym, środowiskowym i społecznym – a także o znaczeniu stabilności makroekonomicznej i finansowej, o tyle charakterystyczne dla instytucji „consensusu waszyngtońskiego” silne podkreślanie roli przyspieszenia wzrostu gospodarczego budzi zastrzeżenia. stwierdzenie, że wzrost gospodarczy potrzebuje stabilności, nie wymaga oceny z punktu widzenia zrównoważonego rozwoju, jednakże opinia, że tylko przy wzroście gospodarczym możliwa jest stabilność, koliduje z założeniami zrównoważonego rozwoju, zwłaszcza gdy w roli głównego motoru napędowerobert huterski74 go wyjścia ze wspomnianego potrójnego kryzysu jest prezentowane pobudzanie popytu. co ważne, zwiększeniu popytu ma być silnie podporządkowana dostosowawcza (accommodative) polityka pieniężna, użycie publicznych środków do bezpośredniego wsparcia banków oraz, gdy tylko fiskalnie możliwa, przyjazna wzrostowi („growth friendly”) polityka. jednocześnie, ma temu towarzyszyć wdrażanie średniookresowych planów redukcji długu publicznego, traktowanych jako instrument stabilizacji fiskalnej, w połączeniu z reformami w sektorach nierynkowych (czyli głównie w sektorze publicznym) oraz na rynku pracy w sposób zwiększający zatrudnienie wśród najmłodszych i najstarszych pracobiorców. powyższe i uzupełniające opinie mają stanowić argumenty za zwiększeniem zasobów finansowych mfw przeznaczonych na preferencyjne pożyczki, co prezes lagarde uważa za jeden ze swoich priorytetów. analiza przedstawionych założeń popytowej recepty mfw na wyjście z obecnego kryzysu i kontynuowanie zrównoważonego rozwoju budzi istotne wątpliwości. dla wielu krajów, nie tylko z unii europejskiej, założenia te oznaczałyby połączenie luźnej, proinf lacyjnej polityki pieniężnej (wysoka podaż pieniądza, niskie stopy procentowe) z wysokimi wydatkami publicznymi na wszelkie możliwe działania pobudzające popyt i wzrost gospodarczy, na redukcję zadłużenia publicznego (zwłaszcza wobec zagranicy), na dokapitalizowanie banków pieniędzmi podatników oraz na reformę sektora publicznego i rynku pracy. trudno w takiej sytuacji oczekiwać znaczących nakładów na ochronę środowiska i bieżące przeciwdziałanie ubóstwu, zarówno ze strony sektora publicznego, jak i prywatnego. najbardziej prawdopodobnym efektem takiego zestawu działań będzie konieczność skorzystania ze wsparcia finansowego z mfw, co, jak wskazano powyżej, władze tej instytucji przewidują. ponieważ mfw udziela pożyczek, stawiając krajom je zaciągającym warunek przestrzegania sformułowanych przez siebie zaleceń, tą drogą instytucja ta może wzmocnić swoją pozycję swoistego „rządu światowego”. jak wspomniano w części pierwszej, z koncepcją zrównoważonego rozwoju wiąże się idea światowego kierowania ( global governance), z założenia sprzeczna z pomysłem światowego rządu, zwłaszcza z mfw w tej roli. global governance ma nawiązywać do kantowskiej idei federacji światowej z koniecznym minimum centralnej władzy państwowej (kośmicki 2005: 152), czemu najlepiej z obecnie istniejących instytucji może służyć organizacja narodów zjednoczonych (kośmicki 2010: 16). oznacza to rearanżację światowego ukła  stosunek międzynarodowego funduszu walutowego… 75 du polityczno-gospodarczego w kierunku wielostronnej współpracy (multilateralizmu) w miejsce dotychczasowej dominacji polityczno-gospodarczej jednego kraju (unilateralizm usa), za której strażnika jest uważany właśnie mfw.  zakończenie zdaniem autora, o instrumentalnym podejściu mfw do koncepcji zrównoważonego rozwoju świadczą nie tylko poglądy zawarte w prezentowanych publikacjach, ale również kwestie, których się w nich nie porusza. mfw jako instytucja pieniężna o globalnym oddziaływaniu, nie tylko z nazwy, pomija sprawę systemowej reformy współczesnego światowego ładu pieniężnego, co świadczy o założeniu, że generalnie ład ten nie jest źródłem obecnych problemów globalnych. praktycznie ignorowane przez mfw sprawy, takie jak skutki funkcjonowania pieniądza fiducjarnego, czyli pozbawionego kotwicy wartości, oraz pełnienia przez fiducjarnego dolara funkcji waluty światowej, zwłaszcza w rozliczeniach surowcowych, a także destabilizująca gospodarki działalność wielkich banków i kapitału spekulacyjnego, niewątpliwie zasługują na wnikliwą analizę z punktu widzenia perspektyw zrównoważonego rozwoju, a nawet wręcz jej wymagają. każde z wymienionych zagadnień ma istotne, a przy tym złożone konsekwencje ekonomiczne zarówno dla poszczególnych gospodarek krajowych, jak i światowego ładu gospodarczego, przez co nie sposób przedstawić ich kompleksowo w tym artykule . warto jednak na koniec zasygnalizować narastający obecnie problem roli dolara jako waluty światowej w związku z rosnącym zagrożeniem tzw. wojnami walutowymi (precyzyjniej byłoby je nazwać walutowymi wojnami deprecjacyjnymi). stany zjednoczone intensywnie wykorzystują osłabianie kursu dolara wobec innych walut jako kluczowe narzędzie swej polityki antykryzysowej, zwiększając podaż dolara oraz utrzymując bardzo niskie stopy procentowe. prowokuje to wiele krajów, jak choćby japonię, koreę południową czy brazylię, do ratowania konkurencyjności cenowej ich eksportu i hamowania napływu zagranicznych kapitałów spekulacyjnych za pomocą osłabiania kursu swoich walut względem dolara. narastająca w efekcie globalna niestabilność kursowa stanowi zagrożenie dla ekonomicznego ładu w ramach zrównoważonego rozwoju, co siłą rzeczy wpływa również na ład społeczny. jeżeli międzynarodowy fundusz walutowy poważnie traktuje koncepcję zrównoważonego rozwoju, to w świetle przytoczonych wyżej jego statutorobert huterski76 wych celów działalności powinien odgrywać rolę wiodącego animatora działań odsuwających groźbę wojen walutowych, zamiast zbywać temat wypowiedziami swojej szefowej, jak miało to miejsce na szczycie g-20 w moskwie 16 lutego 2013 roku (imf 2013).  literatura borys t. (2007), w poszukiwaniu syntetycznego wskaźnika zrównoważonego rozwoju, [w:] obszary badań nad trwałym i zrównoważonym rozwojem, b. poskrobko (red.), wydawnictwo ekonomia i środowisko, białystok. brundtland g. h. (1987), report of the world commission on environment and development: our common future, united nations, new york. eyraud l., clements b. (2012), going green, finance & development, vol. 49, no. 2. friedman m. (1998), exchange rate regimes and east asia, project syndicate, 7.10.1998, http://www.project-syndicate.org/commentary/exchange-rate-regimes-and-east-asia (dostęp: 13.11.2012). glossary of environment statistics (1997), studies in methods, series f, no. 67, united nations, new york. gupta s., keen m., clements b., fletcher k., de mello l., mani m. (2002), fiscal dimensions of sustainable development, pamphlet series, no. 54, august 2002, international monetary fund, washington d.c. imf (2011), articles of agreement of the international monetary fund, international monetary fund, washington d.c. imf (2012a), bangladesh: poverty reduction strategy paper, imf country report no. 12/293, international monetary fund, washington d.c. imf (2012b), guinea: poverty reduction strategy paper, imf country report no. 12/296, international monetary fund, washington d.c. imf (2012c), lao: poverty reduction strategy paper, imf country report no. 12/286, international monetary fund, washington d.c. imf (2013), statement by imf managing director christine lagarde on g-20 ministerial meeting in moscow, press release no. 13/53, february 16, 2013. kośmicki e. (2005), dylematy zrównoważonego rozwoju w warunkach globalizacji gospodarki, [w:] zrównoważony rozwój. od utopii do praw człowieka, a. papuziński (red.), oficyna wydawnicza branta, bydgoszcz. kośmicki e. (2010), zrównoważony rozwój w warunkach globalizacji gospodarki, wydawnictwo ekonomia i środowisko, białystok–poznań. lagarde ch. (2012), back to rio – the road to a sustainable economic future, international monetary fund, washington dc, http://www.imf.org/external/np/speeches/2012/061212.htm (dostęp: 18.11.2012). de mooij r., parry i. w. h., keen m. (2012), fiscal policy to mitigate climate change, a guide for policymakers, pre-publication copy, international monetary fund, washington d.c.   stosunek międzynarodowego funduszu walutowego… 77 rogall h. (2010), ekonomia zrównoważonego rozwoju – potrzeba reformy tradycyjnej ekonomii, [w:] edukacja dla zrównoważonego rozwoju, t. 2: edukacja dla ładu ekonomicznego, b. poskrobko (red.), wydawnictwo ekonomia i środowisko, białystok– wrocław. unep (1973–1976), united nations environment programme, report of the governing council, united nations, new york. the world bank (2008), global monitoring report 2008: agenda for inclusive and sustainable development mdgs and the environment, the international bank for reconstruction and development/the world bank, washington d.c. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 3 date of submission: june 4, 2017; date of acceptance: september 10, 2017. * contact information: k.nowak@doktorant.umk.pl, nicolaus copernicus university in torun, gagarina 13a, 87-100 torun, poland, phone: +48 607 552 226; orcid id: https://orcid.org/0000-0002-8567-122x. nowak, k. (2017). low cost retirement solutions based on robo-advisors and exchange traded funds. copernican journal of finance & accounting, 6(3), 75–94. http://dx.doi.org/10.12775/ cjfa.2017.018 kamil nowak* nicolaus copernicus university in torun low cost retirement solutions based on robo-advisors and exchange traded funds keywords: robo advisors, etf, retirement. j e l classification: g11. abstract: this paper brief ly analyzes american retirement system and bares its shortcomings. the post crisis economic reality, low savings rates and misguided policy changes, requires searches for new retirement solutions. especially it’s worth to have a second look at costs of traditional retirement products. analysis of mutual funds expense ratios and financial advisors fees proofs their significant impact on future retirement. new products based on etfs and managed by robo advisors are the low cost alternative. the substance of this paper is cost comparison of traditional retirement products with innovative fintech solutions. in a result of this analysis robo advisors and etfs turned out to be definitely more cost effective, what makes investing more accessible and substantially increases future retirement.  introduction it would seem that nowadays we have a knowledge and technology to provide stable and long retirement income. utilizing years of researches combined with innovative financial instruments it should be simple to design effective retirekamil nowak76 ment system. despite those assumptions looking at many countries retirement systems, it’s still challenging. analyzing american retirement system is not hard to come to a conclusion, that crisis is the best word describing it. of course, most of the root causes of the problem lies in human nature. low saving rates makes people more tend to spend their earnings now than save for the future. average employees lack in financial knowledge, so shift from employer driven plans to employee’s responsibility might be confusing. they don’t know how much to save and how to invest. what is more, progress of medicine allows people to live longer. longevity of life not connected with longer working period contributes to crisis as well. on the other hand, majority of crisis causes lie in macroeconomic circumstances and policy errors. poor market returns in conjunction with high management fees obviously don’t encourage to investing. what is more, us tax regulations favors direct benefit plans which allows large percentage of income to be deferred. when direct contribution plans has tax deferral limits sets so low, that retiring on tax deferred balances is not an option (brinson & siegel, 2015, p. 6). shift from db to dc plans besides transferring investment risk from employer to employee, brought higher fees as well, because dc plans, unlike db, invest in mutual funds, where fees are higher. which type of plan is the most common nowadays? figure 1 shows that it will be iras, despite of the fact that those plans are not sponsored by employer. most of the iras assets have been rolled out from employer sponsored plans. in 2016 iras contribution hit 31% of all the retirement assets. based on that fact it can be said, that the return from iras have a substantial impact on their holders retirement. figure 1. us retirement assets 2q 2016 saving rates makes people more tend to spend their earnings now than save for the future. average employees lack in financial knowledge, so shift from employer driven plans to employee’s responsibility might be confusing. they don’t know how much to save and how to invest. what is more, progress of medicine allows people to live longer. longevity of life not connected with longer working period contributes to crisis as well. on the other hand, majority of crisis causes lie in macroeconomic circumstances and policy errors. poor market returns in conjunction with high management fees obviously don’t encourage to investing. what is more, us tax regulations favors direct benefit plans which allows large percentage of income to be deferred. when direct contribution plans has tax deferral limits sets so low, that retiring on tax deferred balances is not an option (brinson & siegel, 2015). shift from db to dc plans besides transferring investment risk from employer to employee, brought higher fees as well, because dc plans, unlike db, invest in mutual funds, where fees are higher. which type of plan is the most common nowadays? figure 1 shows that it will be iras, despite of the fact that those plans are not sponsored by employer. most of the iras assets have been rolled out from employer sponsored plans. in 2016 iras contribution hit 31% of all the retirement assets. based on that fact it can be said, that the return from iras have a substantial impact on their holders retirement. figure 1. us retirement assets 2q 2016 source: author’s own elaboration based on: http://us.pensiontracker.org/index.php. considering that iras holds a bulk of americans retirement savings it is worth to compare return rates between types of plans. figure 2 shows geometric return rates from db, dc and ira plans calculated over 12 years (2000-2012). during that time so popular iras produced substantially lower returns that db or dc. there are two reasons of lower returns: higher fees and assets allocation. comparing to 4% of the assets invested in money $5,2 $2,8 $7,5 $7,0 $2,0 us retirement assets 2q 2016 state db private db ira dc annuities s o u r c e : author’s own elaboration based on: http://us.pensiontracker.org/index.php. low cost retirement solutions based on robo-advisors… 77 considering that iras holds a bulk of americans retirement savings it is worth to compare return rates between types of plans. figure 2 shows geometric return rates from db, dc and ira plans calculated over 12 years (2000– –2012). during that time so popular iras produced substantially lower returns that db or dc. there are two reasons of lower returns: higher fees and assets allocation. comparing to 4% of the assets invested in money funds by dc average iras invest up to 11% in those in fact safe but low return funds (munnell et al., 2015, p. 6). figure 2. geometric rates of return by plan type (2000–2012) funds by dc average iras invest up to 11% in those in fact safe but low return funds (munnell et al., 2015). figure 2. geometric rates of return by plan type source: aubry, crawford, munnell, investment returns: defined benefit vs. defined contribution plans, center for retirement research boston college, 2015. for many years bonds were a key components of retirement portfolios. considering goal of bringing income that allows 4-5% annual withdrawals during retirement, the bond yields were a great and safe choice until 2000, when interest rates started falling. today 10 years us t-bond yield doesn’t exceed 2%. what is more dividend yields have fallen to as low as slightly more than 2% for s&p 500 index. considering above mentioned conditions, conservative retirement portfolio based on bonds and dividend stocks is a good and safe solution to preserve the value of capital, but at once is very risky in terms of income point of view. if the goal of 4-5% annual withdrawals of income during retirement has to be reached, we should look for other solutions than bond and dividend stocks. except allocation of assets, fees are other important factor that contributes to future retirement income. to understand how significant is an impact of fees on an individual retirement it’s worth to quote the example brought by ericskon and madland (ericson & madland, 2014), which demonstrates how small difference in fees results in significant difference in future retirement. figure 3 demonstrates how big can be a difference between funds with an expense ratio 0.25%, 1% and 1.3% in fees paid over a lifetime by 25 years old employee earning 30,502 usd (which is a 2014 median salary in the us for that age group) and an employee earning 75 000 usd. both individuals contribute 5% of their salary which is 2,2% 3,1% 4,7% 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0% 4,5% 5,0% ira dc db geometric rates of return by plan type (2000–2012) s o u r c e : aubry, crawford, munnell, investment returns: defined benefit vs. defined contribution plans, center for retirement research boston college, 2015, p. 6. for many years bonds were a key components of retirement portfolios. considering goal of bringing income that allows 4–5% annual withdrawals during retirement, the bond yields were a great and safe choice until 2000, when interest rates started falling. today 10 years us t-bond yield doesn’t exceed 2%. what is more dividend yields have fallen to as low as slightly more than 2% for s&p 500 index. considering above mentioned conditions, conservative retirement portfolio based on bonds and dividend stocks is a good and safe solution to preserve the value of capital, but at once is very risky in terms of income point of view. if the goal of 4–5% annual withdrawals of income during retirement has to be reached, we should look for other solutions than bond and dividend stocks. except allocation of assets, fees are other important factor that contributes to future retirement income. to understand how significant is an impact of fees on an individual retirement it’s worth to quote the example brought by erkamil nowak78 icskon and madland (ericson & madland, 2014, p. 1), which demonstrates how small difference in fees results in significant difference in future retirement. figure 3 demonstrates how big can be a difference between funds with an expense ratio 0.25%, 1% and 1.3% in fees paid over a lifetime by 25 years old employee earning 30,502 usd (which is a 2014 median salary in the us for that age group) and an employee earning 75 000 usd. both individuals contribute 5% of their salary which is matched by an equal employer contribution, which results in 10%. as it can be seen from the figure the difference can be as high as 124 000 usd for an employee with a median salary and as high as 300 000 usd for the employee earning 75 000 usd. if impact of the fees on future retirement is so substantial, it’s definitely worth to look for low cost retirement solutions. the main goal of this paper is to look for new low cost, performing well in a long run funds, that can be used as a core of retirement portfolios. figure 3. total fees paid over lifetime by average employees matched by an equal employer contribution, which results in 10%. as it can be seen from the figure the difference can be as high as 124 000 usd for an employee with a median salary and as high as 300 000 usd for the employee earning 75 000 usd. if impact of the fees on future retirement is so substantial, it’s definitely worth to look for low cost retirement solutions. the main goal of this paper is to look for new low cost, performing well in a long run funds, that can be used as a core of retirement portfolios. figure 3. total fees paid over lifetime by average employees source: author’s own elaboration based on: erickson, madland, fixing the drain on retirement savings, center of american progress, 2014. literature review exchange traded funds have rather a brief history. first significant studies can be dated on first decade of 21st century. etf’s definition, description and advantages were demonstrated by bernstein (bernstein, 2001) and gastineau (gastineau, 2001), who described their main types and investigated how the operate. one of the first comparisons of etfs and traditional mutual funds was provided by dellva (dellva, 2001). he presented cost benefits of etfs. tax advantages were studied by poterba nad shoven (shoven, 2002), who compared pre and after tax returns of popular index funds. kostovetsky broadly compared etfs and mutual funds by confronting their returns, transaction costs and expenses and tax efficiency (kostovetsky, 2003). since literature offers wide range of positions touching etf topic, selection of digital advisory studies is rather poor. roboadvisory is a recent phenomenon, that is why not many researches can be found. fein provided an analysis of robo-advisors fiduciary standars. advantages of digital advisory were discussed by dapp (dapp, 2016). impact of recent fintech innovations on asset management and banking business was examined by sironi (sironi, 2016). digital $42 309 $138 336 $166 420 $0 $50 000 $100 000 $150 000 $200 000 0,25% 1,00% 1,30% salary when worker starts saving at age 25: $30,502 $104 033 $343 147 $409 202 $0 $100 000 $200 000 $300 000 $400 000 $500 000 0,25% 1,00% 1,30% salary when worker starts saving at age 25: $75,000 matched by an equal employer contribution, which results in 10%. as it can be seen from the figure the difference can be as high as 124 000 usd for an employee with a median salary and as high as 300 000 usd for the employee earning 75 000 usd. if impact of the fees on future retirement is so substantial, it’s definitely worth to look for low cost retirement solutions. the main goal of this paper is to look for new low cost, performing well in a long run funds, that can be used as a core of retirement portfolios. figure 3. total fees paid over lifetime by average employees source: author’s own elaboration based on: erickson, madland, fixing the drain on retirement savings, center of american progress, 2014. literature review exchange traded funds have rather a brief history. first significant studies can be dated on first decade of 21st century. etf’s definition, description and advantages were demonstrated by bernstein (bernstein, 2001) and gastineau (gastineau, 2001), who described their main types and investigated how the operate. one of the first comparisons of etfs and traditional mutual funds was provided by dellva (dellva, 2001). he presented cost benefits of etfs. tax advantages were studied by poterba nad shoven (shoven, 2002), who compared pre and after tax returns of popular index funds. kostovetsky broadly compared etfs and mutual funds by confronting their returns, transaction costs and expenses and tax efficiency (kostovetsky, 2003). since literature offers wide range of positions touching etf topic, selection of digital advisory studies is rather poor. roboadvisory is a recent phenomenon, that is why not many researches can be found. fein provided an analysis of robo-advisors fiduciary standars. advantages of digital advisory were discussed by dapp (dapp, 2016). impact of recent fintech innovations on asset management and banking business was examined by sironi (sironi, 2016). digital $42 309 $138 336 $166 420 $0 $50 000 $100 000 $150 000 $200 000 0,25% 1,00% 1,30% salary when worker starts saving at age 25: $30,502 $104 033 $343 147 $409 202 $0 $100 000 $200 000 $300 000 $400 000 $500 000 0,25% 1,00% 1,30% salary when worker starts saving at age 25: $75,000 s o u r c e : author’s own elaboration based on: erickson, madland, fixing the drain on retirement savings, center of american progress, 2014, p. 3. literature review exchange traded funds have rather a brief history. first significant studies can be dated on first decade of 21st century. etf’s definition, description and advantages were demonstrated by bernstein (bernstein & phyllis, 2002, p. 39) and gastineau (gastineau, 2001), who described their main types and investigated how the operate. one of the first comparisons of etfs and traditional mutual funds was provided by dellva (dellva, 2001). he presented cost benefits of etfs. tax advantages were studied by poterba nad shoven (poterba & shoven, low cost retirement solutions based on robo-advisors… 79 2002), who compared pre and after tax returns of popular index funds. kostovetsky broadly compared etfs and mutual funds by confronting their returns, transaction costs and expenses and tax efficiency (kostovetsky, 2003). since literature offers wide range of positions touching etf topic, selection of digital advisory studies is rather poor. robo-advisory is a recent phenomenon, that is why not many researches can be found. fein provided an analysis of robo-advisors fiduciary standars. advantages of digital advisory were discussed by dapp (dapp, 2016). impact of recent fintech innovations on asset management and banking business was examined by sironi (sironi, 2016). digital advisory business overview can be found in numerous reports prepared by major consulting companies, like infosys, which predicts 120% annual asset growth, accenture sees a pressure put on traditional advisors to lower their fees a result of robo-advisory growing popularity. while finextra states that impact of robos on present wealth advisory will be disruptive, blackrock recognizes a gap in existing financial regulations that needs to be filled to cover digital advisory. in view of novelty of this phenomenon, there is still a space for comprehensive studies about robo-advisory. the research methodology and the course of the research process the paper contains empirical analysis and descriptive research studies carried out in several steps. first step looks into american retirement system and identifies its shortcomings. than taking a closer look at traditional products, their cost’s impact on future retirement is measured. thereafter advantages of etfs and robo advisors in terms of retirement are presented. finally, paper compares mutual funds’ and etfs return rates and expense ratios. morningstar database has been used to find funds annual return rates and expense ratios. 10 years period has been analyzed. to determine mutual funds’ etf alternatives author used etfdb.com mutual fund to etf converter tool (www.etfdb. com), which utilizes mutual funds benchmarks to find the most corresponding etfs linked to the same benchmark. the study ends with conclusions achieved by literature review and summary of provided analysis. kamil nowak80 etfs as low cost retirement solutions since first etfs were introduced in early nineties, their popularity grew rapidly. nowadays etfs became major part of asset management business and definitely the fastest growing segment of that business. they dominated indexbased investing. looking at the massive, over 2000% growth during the last 10 years, this is just a matter of time until etfs will overtake mutual fund industry. when it seems like exchange traded funds business is thriving, there is still a segment of the market which is still out of the reach of etfs – retirement fund business. according to ici investors holds only 0.02% of their 401k in exchange traded funds. accurate data for ira is not available, but according to ici 48% of assets is held in mutual funds, the rest in other investment vehicles including etfs. considering further research in this paper proving many etfs advantages over traditional investment funds, the question arises: what are the reasons of mutual funds dominancy in retirement segment of the market? the answer is very interesting and lies in one of etfs core advantages – intra daily trading. most defined contribution fund provider’s infrastructure isn’t ready for intraday trading. the update is of course possible, but requires substantial expenses, so for the most of the industry holding status quo isn’t only convenient but very profitable as well. market examples proves that adopting etfs to defined contribution fund business doesn’t have to be expensive. vanguard solved the problem of intraday trading by applying contributions into money market fund first and then allowing participants to convert the assets to chosen etf when feasible. that is an example of frugal solution, but the most desired one is to develop new platform supporting intra daily trading, e.g. charles schwab, to allow investors fully benefit from one of many etfs advantages. what are the other advantages? and where does that growing popularity come from? the answer is very simple and ‘exchange traded’ is the key reason to unique features that differs etfs from other investment vehicles: ■ accessibility – markets and asset classes reserved only for large institutional investors became easily accessible for individual investors. ■ transparency –etfs are obliged to display their portfolios on a daily basis. etfs investors unlike mutual funds clients do not have to wonder where their funds have been invested between reporting periods or if a portfolio manager has taken unnecessary risk. knowing the underlying assets investors may avoid doubling the exposures by holding those assets elsewhere. low cost retirement solutions based on robo-advisors… 81 ■ liquidity – ‘exchange traded’ is the key to etfs extraordinary liquidity. they can be traded multiple times, daily exactly as stocks with transparency and regulatory protection. also like stocks etfs can be held with a margin, shorted or optioned. the creation/redemption process allows investors to arbitrage between fund and its underlying securities. ■ tax efficiency – unlike mutual funds etfs do not expose their shareholders to capital gains distributions. the redemption in kind ability practically eliminates the need of capital gains distributions. ■ costs – last but not least, probably the biggest, advantage of etfs is their expense ratio. average mutual fund expense ratio is almost 150% higher than average etf’s expense ratio. the savings can be achieved because etfs are traded on the stock exchange and most of the costs like recordkeeping or sending the prospectus are borne by brokers. in summary etfs set up new investing standards (nowak, 2016, p. 166). with lower costs, liquidity, accessibility and tax efficiency this isn’t a surprise, that they are attracting investors money definitely faster than regular mutual funds (hill et al., 2015, p. 9). all etf’s unique features contributed to their growing popularity, but from the retirement point of view the most important is cost effectivity. according to morningstar, the average expense ratio for an index u.s. etf is 0.35% and 0.87% for actively managed etf, although many of the most popular index tracking etfs offer ratios below 0.1%. comparing to mutual funds, which average fee is 0.65% for a passive fund and 1.21% for an active fund. considering how even small differences in fees impact future retirement (see figure 3), that is definitely worth to take a closer look on fees and performance of etfs and traditional mutual funds. table 1 shows expense ratio and performance of 11 biggest mutual funds tracking s&p 500 index. while table 2. presents the same data for 3 major etfs, tracking s&p 500 as well. looking at aum, it’s obvious that traditional mutual funds still dominate the market. average index tracking mutual fund manages 27.08 billion dollars of assets. while average aum for etfs is not even 60 million. of course exchange traded funds are still growing segment of assets management business. where does this fast growth come from? table 1. mutual funds tracking s&p 500 expense ratio and performance fund ticker aum (millions usd) expense ratio (%) performance (%) +/s&p 500 (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr vanguard 500 index investor vfinx 306400 0.14 21.29 10.14 13.77 7.53 -0.69 -0.12 -0.23 -0.12 fidelity 500 index fund investor class fusex 116600 0.10 21.34 10.21 13.84 7.58 -0.64 -0.06 -0.16 -0.07 schwab s&p 500 index swppx 25800 0.09 21.34 10.18 13.83 7.61 -0.65 -0.09 -0.17 -0.04 blackrock s&p 500 index fund investor a wfspx 10100 0.36 21.02 9.90 13.50 7.27 -0.08 -0.42 -0.40 -0.38 usaa s&p 500 index fund member shares usspx 6200 0.25 21.14 10.01 13.64 7.40 -0.84 -0.25 -0.36 -0.25 principal largecap s&p 500 index fund class a plsax 5300 0.48 21.33 9.72 13.37 7.00 -0.58 -0.53 -0.61 -0.64 tiaa-cref s&p 500 index retire trspx 4100 0.30 21.06 9.95 13.58 7.33 -0.93 -0.31 -0.42 -0.32 mm s&p 500® index fund class a mmffx 3800 0.72 20.56 9.51 13.15 6.93 -0.89 -0.79 -0.79 -0.72 nationwide s&p 500 index fund class a grmax 2600 0.60 20.71 9.66 13.28 7.05 -0.74 -0.63 -0.66 -0.60 state farm s&p 500 index fund class a snpax 1400 0.68 20.62 9.51 13.10 6.87 -0.83 -0.79 -0.84 -0.78 mainstay s&p 500 index fund class a msxax 1300 0.60 20.75 9.66 13.27 7.06 -0.70 -0.63 -0.67 -0.59 invesco s&p 500 index fund class a spiax 1000 0.59 20.75 9.65 13.29 7.12 -0.70 -0.64 -0.65 -0.53 deutsche s&p 500 index fund class a sxpax 940 0.64 21.23 9.55 13.25 6.99 -0.77 -0.71 -0.74 -0.66 low cost retirement solutions based on robo-advisors… 83 fund ticker aum (millions usd) expense ratio (%) performance (%) +/s&p 500 (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr state street equity 500 index a sssvx 870 0.47 20.37 9.58 13.33 7.25 -1.08 -0.71 -0.61 -0.41 rydex s&p 500 fund class a rysox 280 1.55 19.4 8.47 12.08 6.17 -0.7 -0.64 -0.65 -0.53 qs s&p 500 index fund class a sbspx 250 0.59 20.79 9.67 13.3 7.08 -0.65 -0.62 -0.63 -0.57 victory s&p 500 index fund class a muxax 250 0.58 20.91 9.68 13.23 7.02 -0.54 -0.62 -0.71 -0.64 pnc s&p 500 index fund class a piiax 160 0.44 20.81 9.65 13.32 7.1 -0.63 -0.64 -0.62 -0.55 average 27075 0.51 20.86 9.71 13.34 7.13 -0.70 -0.51 -0.55 -0.47 median 2000 0.53 s o u r c e : author’s own elaboration based on: data source: morningstar 15.03.2017. there is as many answers as many unique features of etfs, but one of them is expense ratio. comparing average expense ratio of 0.51% for mutual funds and 0.06% for etfs, the choice of conscious investor is simple. especially considering that index tracking etfs perform slightly better than mutual funds. in one year period the investor can earn 0.40% more investing in etfs. comparing performance in terms of retirement – 10 year return rate differs by 0.45%. what is more, exchange traded funds more accurately track their underlying index. during last 5 years average difference between etfs performance and s&p 500 is only 0.01%. while mutual funds brought 0.55% less return than their underlying index. relating those findings to retirement considerations it’s hard not to come to conclusion, that index tracking etfs are better choice than traditional mutual funds because of their cost effectiveness, performance and accuracy. table 1. mutual funds tracking s&p 500 expense ratio and performance kamil nowak84 table 2. etfs tracking s&p 500 expense ratio and performance fund ticker aum (millions usd) expense ratio (%) performance (%) +/s&p 500 (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr s&p 500 index 21.00 10.28 13.97 7.66 – – – – spdr s&p 500 etf spy 210 0.09 21.35 10.17 13.84 7.56 0.35 -0.11 -0.13 -0.10 ishares core s&p 500 etf ivv 100 0.04 21.00 10.22 13.91 7.60 0.00 0.06 0.06 0.04 vanguard s&p 500 etf voo 60 0.05 21.44 10.25 13.93 – -0.44 0.03 0.04 – average 123.33 0.06 21.26 10.21 13.89 7.58 -0.03 -0.01 -0.01 -0.03 median 100 0.05 s o u r c e : author’s own elaboration based on: data source: morningstar 15.03.2017. what about other types of funds then? tables 3, 4, 5 and 6 present most popular mutual funds and their etf alternatives proposed by etfdb.com mutual fund to etf converter tool (www.etfdb.com), which utilizes mutual funds benchmarks to find the most corresponding etfs linked to the same benchmark. table 3. money market etfs and mutual funds expense ratio and performance comparison fund ticker aum (millions usd) expense ratio (%) performance (%) +/benchmark (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr fidelity cash reserves fdrxx 1360800 0.37 0.09 0.04 0.03 0.86 -0.29 -0.13 -0.1 0.23 jpmorgan u.s. government money market fund mjgxx 149400 0.17 0.02 0.01 0.01 0.6 -0.36 -0.16 -0.12 -0.03 gs financial square government fund fgtxx 92600 0.18 0.34 0.14 0.09 0.72 -0.04 -0.03 -0.04 0.09 vanguard federal money market fund vmfxx 71000 0.11 0.35 0.15 0.1 0.73 -0.03 -0.02 -0.03 0.1 low cost retirement solutions based on robo-advisors… 85 fund ticker aum (millions usd) expense ratio (%) performance (%) +/benchmark (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr wells fargo government money market fund wfgxx 62100 0.13 0.01 0.01 0.01 0.53 -0.37 -0.16 -0.12 -0.1 average 0.19 0.16 0.07 0.05 0.69 -0.22 -0.10 -0.08 0.06 median 0.17 ustreas treasury bill auction average 3 month 0.38 0.17 0.13 0.63 pimco enhanced short maturity active exchange-traded fund mint 6387 0.35 1.74 2.7 5.06 – 1.36 2.53 4.93 – ishares short treasury bond etf shv 4620 0.15 0.35 0.15 0.10 0.77 -0.03 -0.02 -0.03 0.14 guggenheim enhanced short duration etf gsy 999 0.3 2.06 3.76 6.16 1.68 3.59 6.03 -0.63 powershares treasury collateral portfolio cltl 370 0.08 – – – – – – – – spdr barclays 1-3 month t-bill etf bil 180 0.14 0.16 -0.04 -0.17 – -0.22 -0.21 -0.30 – average 0.20 1.08 1.64 2.79 0.77 0.70 1.47 2.66 -0.25 median 0.15 s o u r c e : author’s own elaboration based on: data source: morningstar 15.03.2017. as it can be seen in above table, money market funds and etfs fees are very similar and neither of them holds the advantage. when it comes to performance it’s hard to determine the winner as well. in short and medium term etfs brings returns better than the benchmark – 3 months t-bills average, but in the long term mutual funds beat the benchmark and etfs brought slightly lower return than 3 months t-bills. in terms of portfolio building, money market funds are rather used in short term, so considering comparable expense ratios, both mutual funds and etfs can be utilized. table 3. money market etfs and mutual funds expense ratio… kamil nowak86 table 4. msci us broad market index etfs and mutual fund expense ratio and performance comparison fund ticker aum (millions usd) expense ratio (%) performance (%) +/benchmark (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr vanguard total stock mkt idx inv vtsmx 541300 0.15 22.55 9.44 13.59 7.74 4.73 -0.07 0.32 0.21 fidelity total market index investor fstmx 40300 0.1 17.67 9.32 13.09 7.38 -0.15 -0.19 -0.18 -0.15 schwab total stock market index swtsx 5700 0.09 17.67 9.35 13.13 7.48 -0.15 -0.16 -0.14 -0.05 blackrock total stock market index inv a basmx 596 0.29 17.40 – – – -0.42 – – – wilshire 5000 index fund wfivx 184 0.67 17.05 9.03 12.62 6.77 -0.77 -0.48 -0.65 -0.76 average 0.26 18.468 9.285 13.11 7.34 0.64 -0.22 -0.16 -0.19 median 0.15 msci us broad market index 17.82 9.51 13.27 7.53 vanguard total stock market etf vti 76020 0.05 17.68 9.40 13.20 7.74 -0.14 -0.11 -0.07 0.21 ishares edge msci min vol usa etf usmv 12330 0.15 13.66 12.57 13.73 – -4.16 3.06 0.46 – schwab u.s. broad market etf schb 8510 0.03 20.70 10.29 13.37 – 2.88 0.78 0.10 – ishares core s&p total u.s. stock market etf itot 7860 0.03 17.59 9.83 13.25 7.33 -0.23 0.32 -0.02 -0.20 ishares russell 3000 etf iwv 7410 0.2 17.55 9.31 13.09 7.20 -0.27 -0.20 -0.18 -0.33 average 0.09 17.44 10.28 13.33 7.42 -0.38 0.77 0.06 -0.11 median 0.05 s o u r c e : author’s own elaboration based on: data source: morningstar 15.03.2017. similar conclusions can be drawn from analysis of etfs and mutual funds, which are tracking msci us broad market index regarding the performance trends. in a long term both stays slightly below benchmark level, but it can be low cost retirement solutions based on robo-advisors… 87 stated that both accurately tracks msci us broad market index. however, average expenses of etfs are significantly lower than their corresponding mutual funds, so in terms of cost effectiveness in this category etfs are dominating. table 5. barclays capital u.s. aggregate bond index etfs and mutual fund expense ratio and performance comparison fund ticker aum (millions usd) expense ratio (%) performance (%) +/benchmark (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr vanguard total bond market ii vtbix 120900 0.09 0.45 2.26 1.86 – -0.31 -0.44 -0.47 – american century diversified bond inv adfix 6500 0.6 0.88 2.51 2.2 4.43 0.12 -0.19 -0.13 0.18 loomis sayles investment grade bond a ligrx 6100 0.85 5.32 1.6 3.08 5.52 4.56 -1.1 0.75 1.27 russell inv strategic bond a rfdax 5000 0.96 1.32 2.55 2.59 4.25 0.56 -0.15 0.26 0 wells fargo core bond a mbfax 4900 0.78 0.73 2.41 2.37 4.6 -0.03 -0.29 0.04 0.35 average 0.66 1.74 2.27 2.42 4.70 0.98 -0.43 0.09 0.45 median 0.78 barclays capital u.s. aggregate bond index 0.76 2.7 2.33 4.25 ishares core u.s. aggregate bond etf agg 42260 0.05 0.21 2.16 1.97 3.93 -0.55 -0.54 -0.36 -0.32 vanguard total bond market etf bnd 32200 0.06 0.58 2.15 1.99 – -0.18 -0.55 -0.34 – schwab u.s. aggregate bond etf schz 3410 0.04 0.14 2.11 1.89 – -0.62 -0.59 -0.44 – average 0.05 0.31 2.14 1.95 3.93 -0.45 -0.56 -0.38 -0.32 median 0.05 s o u r c e : author’s own elaboration based on: data source: morningstar 15.03.2017. comparing funds linked to barclays capital u.s. aggregate bond index, etfs still have significantly lower fees. when it comes to performance and ackamil nowak88 curacy, mutual funds stay closer to the benchmark and even outperfome it in a long run. table 6. msci all country world ex-u.s. index etfs and mutual fund expense ratio and performance comparison fund ticker aum (millions usd) expense ratio (%) performance (%) +/benchmark (%) 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr vanguard total intl stock index inv vgtsx 251600 0.18 14.72 2.06 4.73 1.24 0.26 0.45 0.38 -0.08 harbor international investor hiinx 34500 1.14 8.36 -0.64 3.31 2.09 -6.1 -2.25 -1.04 0.77 oakmark international investor oakix 29500 1 22.68 3.07 8.83 4.55 8.22 1.46 4.48 3.23 fidelity international index investor fsiix 16300 0.2 12.32 1.29 5.75 1.04 -2.14 -0.32 1.4 -0.28 american funds intl gr and inc a igaax 11200 0.91 12.36 -0.47 4.85 – -2.1 -2.08 0.5 – average 0.69 14.09 1.06 5.49 2.23 -0.37 -0.55 1.14 0.91 median 0.91 msci all country world ex-u.s. index 14.46 1.61 4.35 1.32 ishares msci acwi ex u.s. etf acwx 2070 0.33 12.27 1.14 3.59 – -2.19 -0.47 -0.76 – spdr msci acwi ex-us etf cwi 1210 0.3 12.77 1.77 4.07 1.83 -1.69 0.16 -0.28 0.51 average 0.56 12.52 1.46 3.83 1.58 -1.94 -0.16 -0.52 0.51 median 0.32 s o u r c e : author’s own elaboration based on: data source: morningstar 15.03.2017. going back to equity funds, but outside the u.s market this time, once more it can be noticed that expenses of etfs are lower than mutual funds. average etfs fees are 0.13% lower than mutual funds. to sum up above analysis, us market and international equity etfs expense ratio is usually significantly lower than their corresponding mutual funds. bond etfs fees are hard to beat as well. while in case of money market, both types of investment vehicles low cost retirement solutions based on robo-advisors… 89 are competitive in terms of expense ratio. based on figure 3, which shows how a small difference in fees can impact future retirement, choosing etfs instead of traditional mutual funds to compose long term retirement portfolio, can bring significant savings. going further, retirement portfolio based on etfs will result in higher retirement than portfolio based on mutual funds. rise of robo-advisors technology has a huge impact on all the industries including finance. implementation of fintech solutions resulted in rise of robo-advisors, which is a common term for digital investment advisory. in other words, it’s automated investment advisory and portfolio management service with minimal, or no human intervention. robo-advisors provide internet services using algorithmic portfolio strategies. based on online questionnaire filled out by an investor, the algorithm assesses customer’s risk tolerance and gathers information to understand client’s needs and investment preferences. knowing user’s investment goals and risk profile, assets allocation can be made and portfolio recommendation are presented. after the investment is placed, digital advisors offer portfolio management as well. customer receives frequently updates, alerts and market research. to adjust to investment goals and client’s preferences, algorithm provides periodically portfolio review and rebalancing when needed. robo-advisory is a fast growing segment of assets management business. regarding to statista.com (www.statista.com) business of robos will grow from 500 bn us dollars in 2016 to 2.2 trillion us dollars in 2020. booming popularity comes from four major benefits of digital advice: ■ efficient investment management – robo advisory platforms are based on algorithms that provide automated portfolio rebalancing. no customer action is required. what is more, automation eliminates common human investment decision’s biases. ■ transparency and accessibility – digital advisory platforms are transparent and user friendly. internet platforms or even mobile applications allows to track the investments 24/7. even not very sophisticated investors are able to analyze the return and compare it vs benchmark. ■ diversification – system captures the customers’ investment objectives, time horizon and attitude to risk. based on investors’ preferences algorithm adheres to modern portfolio theory which manages risk exposure through portfolio diversification, investing in low costs etfs. kamil nowak90 ■ lower fees and lower minimum investment requirements than traditional asset managers attract investors, who don’t qualify to be served by traditional institutions (france-massey, 2016, p. 29). robos’ fees are significantly lower than traditional asset managers. typically, all the expenses are not higher than 1% of aum, but same advisors offer fees as low as zero. how is it possible to charge customers with so low fees and still keep the business profitable? of course thanks to technology, which not only empowers portfolio allocations and investment management, but impacts record keeping, compliance reviews and periodical rebalancing. processes, which in case of traditional asset management company represent significant share of operation costs, can be fully automated and fewer personnel is required. thanks to significant cost reduction digital advisors can operate at much lower costs and those savings can be passed on to the investors (xia, 2016). another advantage of robo advisors, which attracts customers is transparency of the fees. investors have to pay only one annual management fee and etf fees on the assets they hold. table 7 compares 10 top us robo advisors. breaking the list by assets, it is obvious that, 2 firms are dominating the market, both owned by traditional asset managers – vanguard and schwab. what is more, the sixth biggest firm future advisors belongs to blackrock. all of the robos offers mostly etfs of well known providers. most of the portfolios are rebalanced automatically on contribution, withdrawal, dividends and whenever allocations drift from their target. setting up the account is easy. all of the platforms allows to open the account online. minimum balance required to open the account can be as low as $0 for some advisors. what makes investing even more accessible for beginner investors. ‘fees’ is of course the most interesting column. they vary from 0.1% to 0.5%. it can be noticed that higher fees are usually correlated with high human interference, so savvy investors should choose rather fully automated platforms. tax-loss harvesting may be as important as the fees, because when provided on daily basis, it can boost annual return by even 2%. on the other hand, table 8 presents average financial advisor fees. of course they are much higher than robos’. fa’s fees can decline below 1% only for larger than 1 million usd. table 7. top us robo advisors characteristics firm aum (millions usd) human touch portfolio rebalancing tax-loss harvesting fees account minimum vanguard personal advisor services 47,000 high vanguard mutual funds, etfs quarterly on case by case basis 0,30% for portfolios below $5m, above $5m fees drop by tier, lowest fee 0,05% for portfolios larger than $25m $50,000 schwab intelligent portfolios 12,300 low schwab and third party etfs automatic, daily for accounts of $50,000 or more 0,1% under $100m no charge above $100m $5,000 betterment 6,700 low vanguard and ishares etfs automatic, whenever allocations drift 3% from the target daily on all accounts 0,15-0,35% …. $0 wealthfront 4,348 low vanguard, schwab, ishares and spdr etfs automatic, whenever allocations drift from the target daily on all accounts no charge for first $10,000 above $10,000 flat 0,25% $500 personal capital 2,835 high etfs and for portfolios above $100,000 individual stocks on all accounts on all accounts 0,49-0,89% $25,000 future advisor 969 medium ishares, vanguard and spdr etfs 4-6 times annually on all accounts 0,50% $10,000 rebalance ira 403 high vanguard, ishares and spdr etfs automatic on all accounts 0,50% $100,000 acorns 257 low vanguard and ishares etfs automatic, whenever allocations drift 5% from the target no $1 monthly below $5,000 above $5,000 flat 0,25% no fees for college students $0 etrade adaptive portfolio 180 low vanguard, ishares and spdr etfs, active mutual funds automatic, daily no 0,30% $10,000 sigfig 114 low vanguard, ishares and schwab etfs automatic, daily on all accounts no charge below $10,000 above $10,000 flat 0,25% $2,000 s o u r c e : author’s own elaboration based on: data source: www.etf.com (accessed:15.03.2017). kamil nowak92 table 8. average financial advisor fees investment amounts average advisor fees (%) $50,000 1.18% $100,000 1.12% $150,000 1.09% $250,000 1.07% $500,000 1.05% $1,000,000 1.02% $1,500,000 0.94% $2,000,000 0.91% $2,500,000 0.88% $5,000,000 0.84% $7,500,000 0.77% $10,000,000 0.69% $20,000,000 0.65% $30,000,000 0.59% s o u r c e : average financial advisor fees & costs 2017 report, www.advisoryhq.com (accessed: 15.03.2017). the outcome of the research process and conclusions considering american retirement system challenges: low savings rates, shifting contribution responsibility from employer to employee, low ira return rates, new solutions are more than desired. what is more, high management and fund fees are banes for investors. if changing retirement policies and regulations might not be an option, the cure for the system should be find in low cost retirement solutions. this paper proofs that replacing traditional mutual funds with etfs can bring significant savings in fees, without impacting the performance. choosing equity s&p500 etfs over mutual funds saves 0.45% in fees annually. what is more, if traditional fa will be replaced by robo advisor, additional savings can be made. taking in consideration $100,000 portfolio, shift to digital advice saves 0.87% in fees. combining robo advisors savings with those brought by etfs, potentially 1.32% annually can be saved, what brings $1,320, that can remain on the account. considering usually more than low cost retirement solutions based on robo-advisors… 93 30 years investment horizon and instant growth of the portfolio, savings can be tremendous. etfs are on the market for more than 20 years right now. further steady growth of this segment probably will result in displacing mutual funds. the future of robo advisors looks bright as well. digital advice will become a new standard for mass aff luent customers. not only american retirement system needs new solutions. polish retirement system has own challenges as well. poles social awareness of retirement issues and trust to government institutions is very low. one of the youngest in europe retirement age connected with demographical challenges and lately disassembly of ofe brought a gap in polish retirement system which hasn’t been filled yet. return rates of retirement solutions offered by mutual funds are mostly eaten up by fees. what is more, currently on gpw only 3 etfs are listed and no digital advisory platform is available in poland. considering above arguments, there is definitely a niche for innovative low cost retirement solutions and further research on that topic.  references aubry, j., crawford, c., & munnell, a. (2015). investment returns: defined benefit vs. defined contribution plans, center for retirement research boston college. average financial advisor fees & costs 2017 report, http://www.advisoryhq.com (accessed: 15.03.2017). bernstein, j., & phyllis, a. (2002). primer on exchange-traded funds, journal of accountancy, vol. 193, 38–41. brinson, g., & siegel, l. (2015). after 70 years of fruitful research, why is there still a retirement crisis? cfa institute. dapp, f. (2016). fintech – traditionelle banken als digitale plattformen und teil eines finanz-ökosystems, springer. dellva, w. (2001). exchange-traded funds not for everyone, journal of financial planning, vol. 14, 110–124. erickson, j., & madland, d. (2014). fixing the drain on retirement savings, center of american progress. france-massey, t. (2016). the impact of robo advisors on institutional investment banking, thinking ahead, 27–31. gastineau, l. gary (2001). exchange-traded funds: an introduction, journal of portfolio management, vol. 27. hill, j., nadig, d., & hougan, m. (2015). a comprehensive guide to exchange-traded funds (etfs), cfa institute. kostovetsky, l. (2003). index mutual funds and exchange traded funds, journal of portfolio management, vol. 29, 80–92. http://doi.org/10.3905/jpm.2003.319897. kamil nowak94 nowak, k. (2016). implementation of alternative index weighting to warsaw stock exchange, copernican journal of finance and accounting, vol 5, no 2, 166–179. http:// dx.doi.org/10.12775/cjfa.2016.021. poterba, m., & shoven j. (2002). exchange traded funds: a new investment option for taxable investors, american economic review, vol. 92, 422–427. http://doi. org/10.3386/w8781. robo-advisor automation to enhance financial advisory, http://www.infosys.com (accessed: 12.03.2017). sironi, p. (2016). fintech innovation: from robo-advisors to goal-based investing and gamification, 2016. xia, y. (2016). debunking the myths behind the robo advisors, thinking ahead, 55–57. http://www.etf.com (accessed: 15.03.2017). http://www.etfdb.com (accessed: 15.03.2017). http://www.statista.com (accessed: 15.03.2017). http://us.pensiontracker.org (accessed: 15.03.2017). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: may 12, 2016; date of acceptance: june 11, 2016 * contact information: kuligowska.angelika@gmail.com, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: +48796420683. kuligowska a. (2016). scope and assessment of the insurance for members of voluntary fire brigades provided by local government. copernican journal of finance & accounting, 5(1), 125–139. http://dx.doi.org/10.12775/cjfa.2016.007 angelika kuligowska* nicolaus copernicus university scope and assessment of the insurance for members of voluntary fire brigades provided by local government keywords: voluntary fire brigade (vfb), accident insurance of voluntary fire brigades, insurance, local government insurance. j e l classification: g22, e69. abstract: you can get help in immediate vicinity from the emergency services during a fire, f lood or other emergency assistance. lifeguards can be divided into those who perform their duties professionally and those who are volunteers. keep in mind that emergency services, such as nurses, fire brigade or mountain rescuers put their lives and health for the salvage of one’s wealth or life. both residents and the authorities should be depend that in their area will be volunteer fire brigade, because they are often the first help. quick response to the threat may lessen the damage. the aim of the article is to check whether municipalities in poland provide adequate protection for firefighters, in particular by insurance. the question of whether local authorities provide sufficient protection for volunteer firefighters. as a consequence, it examines the legal basis to impose compulsory insurance firefighters. in the article analyzed the risks faced by different types of firefighter. it turns out that only a part of taking an active in rescue operations. the information collected compared with the insurance contracts concluded by the municipaliangelika kuligowska126 ty. the study served insurance documents municipalities in the kujawsko-pomorskie districts aleksandrowski, inowrocławski and radziejowski.  introduction voluntary fire brigades (vfb) in poland are among the oldest and the most societally meritorious organizations. voluntary fire brigades are uniformed units with specialised equipment. their willingness for self less help and dedication in the face of danger, earn them recognition and respect in the society. voluntary fire brigades play one of the most important roles in the protection of life, health, property and environment. apart of their rescue operations voluntary fire brigades take active part in the life of the local community, they lead educational and cultural activities for the inhabitants. appropriate equipment and tools are important not only to ensure the f low of actions, but also for the safety of the individuals fighting fires. the risk of negative events during rescue operations or exercise is one of the major dangers in the work of the members of voluntary fire brigade. the transfer of economic effects on the insurance companies is among the most common methods of risk transfer. it seems justified to conduct examinations, that would allow to find the answer for the question about the shape of insurance protection of the vfbs in poland. at present there are several possibilities of insuring vfbs, however only one of them is local government’ obligatory insurance. in relation to that, other questions become important, like, if the scope of the insurance protection is sufficient and what part of local government’s budget is spent on this protection. conducting the assessment of the present state of insurance is also motivated by the fact, that there are works on a change of the act on the fire protection of 24 august 1991 (act of 1991) (hereafter fire protection act), in order to expand the rights of members of voluntary fire brigades by the entitlement to incapacity benefit and rehabilitation benefit (creation of the committee of initiative 2015). research methodology damage caused by fire or f lood are the financial consequences not only for residents but also for the municipalities. the damage will be greater, the greater the financial loss. public authorities should depend on how the best protection scope and assessment of the insurance for members… 127 from the fire department. the aim of the article is to check whether municipalities in poland provide adequate protection for fire, in particular by insurance. because of the envisioned length of this article, only chosen publications from the vast literature are discussed, those that are related to the insurance of members of voluntary fire brigade. in consequence, it was hypothesised that local government in poland, while insuring vfbs, restrict the scope of insurance to the obligatory accident insurance. in the commune residents have their houses and other property. but keep in mind that local authorities are also the owners of such buildings, schools, swimming pools, playgrounds. if local authorities provide good working conditions for firefighters, provide better protection for residents and property. at the time of a rapid response to the threat, they do not spend money later to rebuild the damaged property. literature analysis and empirical examinations were conducted. national literature, applicable law and general terms and conditions of vfbs insurance were analysed, as well as available source materials on the functioning of vfbs in eu countries. the practical part of the article showcases the results of the analysis of the documents from tender procedures for insurance of vfbs members: specifications of the important terms of order of analysed local government and the notice about the result of the procedure. to verify the presented hypothesis, the local government of three poviats of the kujawsko-pomorskie voivodship were examined: aleksandrowski, inowrocławski and radziejowski, in respect of the scope of the insurance protection provided to the members of vfbs by the local government. the local government are serviced by insurance brokers: eurobrokers sp. z o.o., inter-broker sp. z o.o. and maximus broker sp. z o.o. it is important because of the insurance programme the local government were a part of – in case of the same broker, the terms of insurance might be similar. 19 out of 25 local government are serviced by an insurance broker. most of them, as many as 11, is serviced by maximus. the legal offices of the brokers are in torun, where maximus and inter-broker are from and bydgoszcz – the seat of eurobrokers. local government are serviced by the local broker. out of the mentioned local government, for the examination were chosen only those, which choose the insurer in an unlimited tender procedure based on act of 29 january 2004 – public procurement law (act of 2004). municipal local government, that do not have their own voluntary fire brigades, could not be analysed. the only exception is the municipal local government of radzieangelika kuligowska128 jow, which has a municipal voluntary fire brigade. together, out of 25 local government from three poviats, 17 were subject to a detailed analysis. voluntary fire brigades in the world fire brigades in poland works as two separate organizations – national fire brigade and voluntary fire brigade. according to article 28, paragraph 1 of the act on fire protection, a member of voluntary fire brigade, who took part in a rescue operation or firefighting training organised by the national fire brigade or local government, receives a cash equivalent. the member of voluntary fire brigade is not entitled to the equivalent for the time off work, for which they retained the right to remuneration. the amount of remuneration is established by the local government’s counsel with a resolution, and it may not exceed 1/175 of average wage1 for every hour of participation in a rescue operation or firefighting training. if the remuneration is sufficient and adequate to the firemen work and its dangers, remains a disputable matter. it is reasonable to compare the rights (privileges) of members of the voluntary fire brigades and their equivalents in other european union countries. in england (similarly as in great britain as a whole) each country (voivodship) has its own fire brigades. each of them has their own individual rules, structure, equipment and independence from other fire brigades. there is no division into two organisations, as it is in poland (nfb and vfb), but there is a division into voluntary and professional firemen. it should be added, that both groups receive identical set of trainings and equipment (munir 2012). in france, there are no voluntary fire brigades as a separate association. voluntary firemen are contracted in the framework of the firefighting – rescue service. the contract is concluded for five years and it may be renewed many times. voluntary firemen consist 79% of the firefighting – rescue service personnel. the employers are obliged under the law to exempt the employees from work for the time of their participation in operations and trainings as members of voluntary fire brigades. voluntary firemen are entitled to i.a. insurance during their tasks, medical care, same as for professional firemen, equivalent for 1  applies to the wage announced by the president of central statistical office of poland in the official journal of the republic of poland (“monitor polski”), according to article 20 point 2 of the act of 17 december 1998 on old-age pensions and pensions from social insurance fund, before the day of the equivalent expiry. scope and assessment of the insurance for members… 129 the hours of participation in operation, honorary retirement benefit, honorary benefit for a spouse of a fireman that died in action. the amount of the equivalent depends on the rank and for a simple fireman it is 7,45 € (french firefighter 2015). in germany voluntary fire brigades work as local associations with a status of a public benefit organization under the civil code. national (land) acts on fire protection grant these voluntary fire brigades associations the right to perform the tasks of fire brigades in places, where they are registered and have their headquarters. voluntary fire brigades are financed by local governments and the main core of fire protection in germany. professional fire brigades function only in big cities. in all, fire brigades in germany consist of over a million of firemen, out of which 890 000 belong to voluntary fire brigades. voluntary firemen are entitled, i.a. to insurance during their tasks and periodic health examinations. other rights depend on the decision of individual local governments. in most lands and local government units voluntary firemen perform their task without payment (without equivalent). in the past few years some local governments introduced hour or month based equivalents. in the district aletenburger land (thuringia) uniformed voluntary firemen are entitled to free bus rides (helbig, leuze 2012). vfb in poland voluntary fire brigades play one of the most important roles in protecting local communities from the dangers of fire. in the beginning they played a key role by fighting natural disasters, mainly fire, f loods. moreover, they often performed other functions. many times, being the only social organization at place, they lead political, social and cultural activities. organisation of vfb has evolved for ages until nowadays rescue operations. since ancient times people have fought a battle against fires, however it was not organised, which made its effectiveness not always sufficient. first organization in the form of voluntary fire brigades already arose in middle ages, unfortunately they worked only in bigger cities. rescue functions were then appointed to city councils and artisan and merchant organizations. only in 19 century establishment of trained and equipped organizations for putting out fires has begun (szaf lik 1985) nowadays, volunteers self lessly serve to protect life, health, property, environment, tradition and national culture. apart from rescue operations, they angelika kuligowska130 lead cultural and educational activities for the local community, and pla yactive part in the life of the inhabitants. vfb act in education and prevention, moreover they initiate and take part in humanitarian actions (e.g. honorary blood donation, aid for the disabled, demonstration lessons for pupils). voluntary fire brigades closely cooperate with organizational units of national fire brigades and other entities and institutions to ensure the safety of citizens in the region they operate in (towns and local government) or helping neighbour regions on the basis of operational circuits or mutual aid agreements. in poland there are almost 16 thousand vfb units, and in kujawsko-pomorskie voivodship, there are 1347 units. distribution of units is uneven, the most, 189, are in bydgoski poviat, 107 and 109 are in włocławski and inowrocławski poviats. the fewest, 40, are in wąbrzeski poviat. in the ranks of vfb in kujawsko-pomorskie voivodship there are currently almost 45 699 thousand members, out of which 26 208 are active members, 2 415 are honorary members and 8 104 are supporting members. these units took part in 38% of firefighting operations and 37% of actions to removing the effects of local dangers in 2014 (regional branch 2015). legal basis of vfb operation in poland it is very important to know how difficult it can be to work as a firefighter. in poland there are some kind of fire-fighters and a large part of them are not directly involved in the rescue operation. an attempt was made to determine which type of firefighter exposed to health risks. and the same determination, firefighters who need the most support from the local authority. voluntary fire brigades function as associations under the act of 7 april 1989 – law on associations and the act of 24 august 1991 on fire protection, and also under the act of 24 april 2003 – law on public benefit activity and volunteerism. besides, the detailed tasks and organisation of vfb are described in their own statutes, adopted by the general assembly of vfb members, agreed with poviat commander. legal definition describes fire protection as implementation of projects envisaged by law, whose goal is protection of values deemed the most important by humans: human life and health, property and environment from fires, natural disasters or other local danger. the protection is accomplished in three ways: scope and assessment of the insurance for members… 131 ■ preventing the start, spreading of fire and natural disasters (prevention) and other local danger, ■ providing men and means for fighting these dangers, ■ conducting rescue operations. to define the legitimacy of the insurance of vfb members, it is necessary to define the risks they run. to this end it is worth analysing the scope of duties of each type of members. vfb units consist of active members, supporting members, honorary members and youth firefighting teams (yft). according to their types, the members have different rights and obligations. table 1. rights and obligations of members of voluntary fire brigades in poland type of member who may become rights and obligations membership fee active / simple a person who took the appropriate oath – active part in vfb operations (mainly in rescue operations during fires, ecological dangers related with environment protection and other disasters and dangers), – may use devices and equipment, that are the property of vfb, – use uniform, insignia and badges pays honorary member of vfb exceptionally meritorious for fire protection. the title of honorary member is awarded by the general assembly. – may choose and be chosen for the authorities of vfb, – may take part in the general assembly with a right to vote, – may put forward proposals and motions to vfb authorities, – may use devices and equipment, that are the property of vfb and use uniform and badges, doesn’t pay supporting natural or legal person, who supports the development of vfb actions, financially or in other way. (in case of legal person its representative), – may take part in the general assembly of members of vfb and be chosen for vfb authorities, – may use devices and equipment, that are the property of vfb, pays a self declared amount youth firefighting team a person who reached 12 years of age, acquired the agreement of legal guardians and took the oath. – members of yft in the age of 16-18 may be chosen for vfb authorities; – don’t take part in rescue operations of vfb doesn’t pay s o u r c e : own elaboration on the basis of the statutes of voluntary fire brigade. angelika kuligowska132 as the above table shows only some of the firefighters involved in the rescue operations. the rest of them is representational and managerial functions. this means that only part of the firefighters may suffer serious damage in the course of action and they should be especially protected. insurance of members of vfb units of voluntary fire brigades can use forms of aid foreseen by law, i.a. from the funds forwarded by the minister of the interior and administration, from financial resources mentioned in the state budget, from the funds from national fund of environmental protection and water management, from the funds forwarded by insurance companies. furthermore national fire brigade is obliged to transfer for free to the voluntary fire brigades, redundant equipment and devices in running condition (act of 1991). the biggest source of funding for vfb however are units of local government, which makes them the most important from the point of view of fire brigades. local government where the vfb has its headquarters is particularly important, as it acts for their benefit. according to article 32 paragraphs 2–3of act on fire protection, the costs of equipping, training and ensuring fighting readiness of vfb and the costs of periodical health examinations are born by local government. furthermore local government also cover the cost of the firemen insurance. the insurance of vfb can apply to civil liability insurance for the damage caused by them, but the essential one is the accident insurance of the members of voluntary fire brigades. among the examined local government, the most advantageous offers for vfb member insurance were proposed by six insurance companies, out of which the most frequently – 7 times, it was towarzystwo ubezpieczeń wzajemnych „tuw”. the remaining insurance companies are: uniqa tu s.a., stu ergo hestia s.a., concordia tuw, polskie towarzystwo motorowe tuw and interrisk s.a. vienna insurance group. civil liability insurance civil liability insurance for damage caused by the units of vfb mainly concerns the damage caused by vfb in relation to the conducted rescue – firefighting operations and owned property, as well as damage caused in the course of train scope and assessment of the insurance for members… 133 ing activities – to the members of vfb and yft. the insurance applies to the claims of persons, who because of their participation in rescue operations or training suffered damage to life, health or property. from the examined local government as many as nine has in the extent of cover of their civil liability insurance an extension for the damage caused by vfb teams in relation to their statutory tasks (rescue operations, firefighting, training, shows, etc.). in the preparation of the extent of insurance cover maximus broker took part in case of eight local government. the only exception is local government koneck (serviced by inter-broker sp. z o.o.), in whose case the extent of cover was reduced to the damage caused by vfb units in the course of rescue – firefighting operations. besides, two of the examined local government do not have the extension for the damage caused by the actions of the vfb units. the illustration 1 below shows the limits of the extension of civil liability insurance of particular local government for the actions of vfb. illustration 1. civil liability insurance according to amounts of cover (in pln). times, it was towarzystwo ubezpieczeń wzajemnych „tuw”. the remaining insurance companies are: uniqa tu s.a., stu ergo hestia s.a., concordia tuw, polskie towarzystwo motorowe tuw and interrisk s.a. vienna insurance group. civil liability insurance civil liability insurance for damage caused by the units of vfb mainly concerns the damage caused by vfb in relation to the conducted rescue firefighting operations and owned property, as well as damage caused in the course of training activities – to the members of vfb and yft. the insurance applies to the claims of persons, who because of their participation in rescue operations or training suffered damage to life, health or property. from the examined local government as many as nine has in the extent of cover of their civil liability insurance an extension for the damage caused by vfb teams in relation to their statutory tasks (rescue operations, firefighting, training, shows, etc.). in the preparation of the extent of insurance cover maximus broker took part in case of eight local government. the only exception is local government koneck (serviced by inter-broker sp. z o.o.), in whose case the extent of cover was reduced to the damage caused by vfb units in the course of rescue – firefighting operations. besides, two of the examined local government do not have the extension for the damage caused by the actions of the vfb units. the illustration 1 below shows the limits of the extension of civil liability insurance of particular local government for the actions of vfb. illustration 1. civil liability insurance according to amounts of cover (in zloty). source: own elaboration on the basis of specifications of the important terms of order in the tender procedure for the insurance of the examined local government. the most common limit is the setting of the amount of cover to 100 000 zloty. exceptionally, in one local government this amount is equal to the amount of cover of the civil liability insurance of the whole local government. liability insurance is voluntary insurance, but you can see that a large part of the local authority buys this insurance. we do not know the s o u r c e : own elaboration on the basis of specifications of the important terms of order in the tender procedure for the insurance of the examined local government. the most common limit is the setting of the amount of cover to 100 000 zloty. exceptionally, in one local government this amount is equal to the amount of cover of the civil liability insurance of the whole local government. liability insurance is voluntary insurance, but you can see that a large part of the local authority buys this insurance. we do not know the reasons why they make such decisions. a study shows, in any of the surveyed municipalities has not been paid compensation from the insurance. angelika kuligowska134 accident insurance of the members of vfb the amendment of the fire act protection of according to article 32 ensures the compensation for the members of vfb, who in relation to their participation in rescue operations or training suffered damage on health or property. the insurance of vfb members under the article 32 is a legal obligation of a local government. apart from the compensation from the insurance company for the vfb and yft insurance, a member of voluntary fire brigade is entitled to a second compensation if they suffered long term health impairment or died in the course of a rescue operation or training. the compensation is also awarded to the family members in case of death of the vfb member. the compensation is independent from the fact, of this person’s use of social insurance. in case of several compensations (e.g. on the basis of social insurance and employment) the beneficiary can acquire only one of their choice. in case of a member of voluntary fire brigade, the compensations may have a form of: ■ one time compensation in the event of permanent or long lasting damage to health. the compensation is paid out by the local government, and its amount depends on the percentage of damage to health of the injured, established on the basis of the act of 30 october 2002 on social insurance in respect of accidents at work and occupational diseases (journal of laws of 2002 no 199, text 1673 as amended). now it amounts to 730 zł per 1% of damage to health (disability pensions and old age pensions). ■ pension in respect of complete or partial incapacity for work of the vfb member. the pension is payable by the social insurance institution from the social insurance fund according to the rules, procedures and amounts specified in § the act of 30 october 2002 on social insurance in respect of accidents at work and occupational diseases (journal of laws of 2002 no 199, text 1674 as amended). the pension amounts to 120% of the lowest relevant pension specified in the act on pension benefits from the social insurance fund. ■ onetime compensation in the event of damage to the property of a vfb member participating in a rescue operation or training. the compensation for a member of vfb being a part of national recue – firefighting system (nrfs) is paid by the relevant voivodship commander of the national fire brigade, and for members of other vfb by the local government. the value of damaged property is established according to the scope and assessment of the insurance for members… 135 purchase price in time of calculation of compensation, taking into account the level of wear. if the member of voluntary fire brigade died as a result of damage to health incurred during a rescue operation or training, the members of their family are entitled to a benefit in the form of: onetime compensation, family pension and also a compensation for a damage to property. table 2 shows two possible variants of accident insurance for the members of voluntary fire brigades in poland. these variants were specified the innominate variant2 is obligatory for every local government having vfb on its territory. table 2. accident insurance of members of vfb innominate variant nominate variant legal basis: act of 24 august 1991 on fire security article 32 paragraph 3 point 2 of the act article 26 paragraph 1 point 1 and paragraph 2 point 1. beneficiary named fvb units firemen stated by name and surname insurance cover accidents resulting in damage to body or health, causing lasting damage to health or death of the insured. accidents resulting in damage to body or health, causing lasting or permanent damage to health or death of the insured. insurance amount individually defined, due to 100% damage to health ranges from 1 000 zł to 100 000 zł / 1 person set for every insured person in the amount of the average monthly wage* compensation according to the arrangements. 100% for death and permanent damage to health. the compensation is set according to the regulations of the act of 30 october 2002 on social insurance in respect of accidents at work and occupational diseases * applies to the average wage in national economy in the preceding year, announced in official journal of the polish republic “monitor polski” by the president of central statistical office of poland, used from the second quarter of each year, for one year. s o u r c e : own elaboration on the basis of fire protection act and available general terms and conditions of accident insurance for members of voluntary fire brigades of pzu sa, gt&c of accident insurance of compensa tu s.a. vig and gt&c of accident insurance of towarzystwo ubezpieczeń wzajemnych „tuw”. 2  according to the act, the insurance may be „either nominate or collective innominate”. the innominate form is understood as a one, where in the application and in the insurance policy there is only a name of vfb (in case of the insurance of a single person). angelika kuligowska136 the act defines two types of insurance for volunteer firefighters. those who take part in rescue operations should have two insurance. it remains to see if the local authorities who are obliged to conclude insurance contracts do it. illustration 2 shows the scope of accident insurance in the examined local government. all local government insure the members of fvb in the so called nominate variant. the insured members take active part in rescue operations, that is why there is greater risk of damage than in case of honorary or supporting members. however, it should be considered, that during training, meetings, competitions and other fvb activities, there is also a possibility of damage, e.g. a person can fall down and get hurt during a solemn speech. therefore the statutory obligation of local government forces them to insure all vfb members illustration 2. share of vfb members insured in a nominate variant in the number of the insured illustration 2 shows the scope of accident insurance in the examined local government. all local government insure the members of fvb in the so called nominate variant. the insured members take active part in rescue operations, that is why there is greater risk of damage than in case of honorary or supporting members. however, it should be considered, that during training, meetings, competitions and other fvb activities, there is also a possibility of damage, e.g. a person can fall down and get hurt during a solemn speech. therefore the statutory obligation of local government forces them to insure all vfb members. illustration 2. share of vfb members insured in a nominate variant in the number of the insured. source: own elaboration on the basis of a performed examination. the information shown on the illustration 3 picture the scope in which the examined local government insure the vfb units. local government that after preliminary analysis were further analysed are marked with grey. in case of nine out of fourteen local government, they have the full scope of insurance: civil liability insurance and accident insurance in two variants and it is 65% of all examined local government. twelve local government have the accident insurance of vfb members in the obligatory scope and thirteen in the additional scope. s o u r c e : own elaboration on the basis of a performed examination. the information shown on the illustration 3 picture the scope in which the examined local government insure the vfb units. local government that after preliminary analysis were further analysed are marked with grey. in case of nine out of fourteen local government, they have the full scope of insurance: civil liability insurance and accident insurance in two variants and it is 65% of all examined local government. twelve local government have the accident scope and assessment of the insurance for members… 137 insurance of vfb members in the obligatory scope and thirteen in the additional scope. illustration 3. the scope of vfb units insurance provided by local governmentillustration 3. the scope of vfb units insurance provided by local government source: own elaboration on the basis of a performed examination. should also check whether there so far the damage covered by insurance in the surveyed municipalities. if damage occurred whether it was compensation payments and how much. table 3. compensations from accident insurance of vfb year number of accidents amount paid number of denials reserves 2010 2 1 300,00 zł non non 2013 2 4 111,32 zł non non source: own elaboration. table 3 shows the list of compensations, that were paid in recent years to the local government. in all examined local government only in case of two there were compensations paid due to accident insurance. as we see the number of claims is not high, but the amount of compensation is not too large. unfortunately, we do not know the reason of damage, the only thing known is that the damages are the result of an accident. besides, these are all claims reported to insurers, as there were no refusals. conclusions there are no reasons to acknowledge the hypothesis stated in the beginning of this article, that the local government only insure the voluntary fire brigades in the obligatory scope. please note that the firefighters are volunteers and receive no payment for exercise, and for taking part in rescue symbolic amount. in the case of injury, they can get the equivalent of insurance. it is important that local authorities seek to ensure the best conditions of insurance for them. by paying the insurance premium, they will not have to pay compensation. good conditions for firefighters translate into good protect wealth of the municipality. authorities and residents will spend less money for the reconstruction the s o u r c e : own elaboration on the basis of a performed examination. should also check whether there so far the damage covered by insurance in the surveyed municipalities. if damage occurred whether it was compensation payments and how much. table 3. compensations from accident insurance of vfb year number of accidents amount paid number of denials reserves 2010 2 1 300,00 zł non non 2013 2 4 111,32 zł non non s o u r c e : own elaboration. table 3 shows the list of compensations, that were paid in recent years to the local government. in all examined local government only in case of two there were compensations paid due to accident insurance. as we see the number of claims is not high, but the amount of compensation is not too large. unfortunately, we do not know the reason of damage, the only thing known is that angelika kuligowska138 the damages are the result of an accident. besides, these are all claims reported to insurers, as there were no refusals.  conclusions there are no reasons to acknowledge the hypothesis stated in the beginning of this article, that the local government only insure the voluntary fire brigades in the obligatory scope. please note that the firefighters are volunteers and receive no payment for exercise, and for taking part in rescue symbolic amount. in the case of injury, they can get the equivalent of insurance. it is important that local authorities seek to ensure the best conditions of insurance for them. by paying the insurance premium, they will not have to pay compensation. good conditions for firefighters translate into good protect wealth of the municipality. authorities and residents will spend less money for the reconstruction the property. eventually, more money will be in your budget. the performed examination allows also for further, interesting conclusions: ■ 19 out of 25 examined local government is served by an insurance broker, out of which as many as 11 by maximus, ■ all local government having vfb in their area, insure them, ■ the insurer that was chosen the most often was towarzystwo ubezpieczeń wzajemnych „tuw”, ■ the most common insurance amount in case of civil liability insurance for vfb units activities is 100 000 zloty, ■ in all the examined local government only in two cases there were compensations paid from the accident insurance, ■ all local government insure the members of vfb in the so called nominate variant, ■ in case of nine out of fourteen local government they have the full scope of the insurance: civil liability insurance and accident insurance in two variants, ■ 12 municipalities have the accident insurance for vfb members in the obligatory scope and 13 in the additional scope. detailed analysis of the insurance documents of the vfb units allows for a positive rating of the scope of insurance protection provided by local government. local government insure the liability for damage caused by the members of vfb during rescue operations or training. furthermore they provide a wide scope of accident insurance for the members of vfb. scope and assessment of the insurance for members… 139  references act of 24 april 2003 on public benefit and volunteer work, journal of laws of 2014, text 1118. act of 24 august 1991 r. on fire protection, dz. u. z 2009 r. poz. 1380 as amended. act of 29 january 2004 – public procurement law, journal of laws of 2013, text 907 as amended. act of 29 january 2004 – public procurement law, journal of laws text 177 as amended. act of 30 october 2002 on social insurance in respect of accidents at work and occupational diseases, journal of laws of 2002 text 1674 as amended. act of 7 april 1989 – the associations act, journal of laws of 2001 r. text 855 as amended. brice, a. (2015). french firefighter mortality: analysis over a 30-year period, american journal of industrial medicine, volume 58, issue 4, april 2015. draft of act of 2014 on changing the fire protection act, http://twojruch.eu/wp-content/uploads/2014/10/projekt-ustawy-osp.pdf (accessed: 10.01.2015). general terms and conditions of accident insurance for members of voluntary fire brigades of pzu sa. general terms and conditions of accident insurance for members of voluntary fire brigades of compensa tu s.a. vig. general terms and conditions of accident insurance for members of voluntary fire brigades of towarzystwo ubezpieczeń wzajemnych „tuw”. helbig, m., & leuze, k. (2012). ich will feuerwehrmann werden!, kzfss kölner zeitschrift für soziologie und sozialpsychologie, volume 64, issue 1. kurzępa, b. (2010). ustawa o ochronie przeciwpożarowej z komentarzem. tarbonus, krakow-tarnobrzeg. regional branch of the volunteer brigades poland kujawsko-pomorskie, http://www. zosprp.torun.pl/strona.php/1_oddzial.html (accessed: 25.02.2015). munir, f., clemes, s., houdmont, j., & randall, r. (2012). overweight and obesity in uk firefighters, occupational medicine volume 62, issue 5. powołanie komitetu inicjatywy ustawodawczej „ustawy o zmianie ustawy z dnia 24 sierpnia 1991 r. o ochronie przeciwpożarowej”. http://www.zosprp.opole.pl/aktualnosci/2014/25/zmieniamy_usta we.pdf, (accessed: 26.04.2015). specifications of the important terms of order of local government: aleksandrow kujawski, aleksandrow kujawski local government miejska, bądkowo, bytoń, dobre, miasto inowrocław, janikowo, koneck, kruszwica, nieszawa, osięciny, pakość, piotrkow kujawski, raciązek, radziejow, radziejow miasto, rojewo, waganiec, zakrzewo. strażacy ochotnicy walczą o zmianę ustawy o ochronie przeciwpożarowej, http://pisz. wm.pl/223796, strazacy-ochotnicy-walcza-o-zmiane-ustawy-o-ochronie-przeciwpozarowej.html#axzz3byho2m qf (accessed: 26.04.2015). szaf lik, j. r. (1985). dzieje ochotniczych straży pożarnych. ludowa spółdzielnia wydawnicza, warszawa. zosp r.p. – number of vfb in poland, http://www.kppspblonie.pl/tematy_szkolenie_ osp_ starnowski_2008.pdf (accessed: 15.01.2015). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 1 * contact information: correspondent author, jurijs.spiridonovs@riseba.lv, rise** contact information: riga technical university, kalnciema street 6, riga, lv-1007, latvia. spiridonovs, j., & bogdanova, o. (2017). eu energy union: adjustment to the new development cjfa.2017.006 jurijs spiridonovs* riseba university of business, arts and technology olga bogdanova** riga technical university eu energy union: adjustment to the new development cycle keywords: energy union, energy security, solidarity, internal market, moderation of demand, decarbonisation. j e l classification: f5, o1, o2. abstract: on the recent eu european energy policy following the launch of the concept of the energy union in february 2015. the authors analyse the issue of interdependency of the dimensions of the eu energy union: energy security, solidarity, trust, internal market, moderation of demand, decarbonisation, research, innovation and competitiveness. the various professionals and scientists in order to propose new methodology in evaluation the status of implementation of the energy policy. for the study the authors have used generally accepted quantitative and qualitative methods of economic science, inter alia comparative analysis, parameter estimation, grouping, economically mathemajurijs spiridonovs, olga bogdanova tical modelling, synthesis, inductive, deductive, logically constructive and expert evaluation methods. gy is thorough planning for implementation of each of the defined instruments. taking into account that fact that usually competences for practical transposition of different actions (mostly in form of legal acts) falls under responsibility of different institutions constant cross-checking to avoid decrease of potential synergies between the benefits provided by the five dimensions. energy policy is relatively new, however energy is one of the fundamental sectors of economy having significant impact on the development of any country. the authors propose original methodology in measuring the correlation of different dimension of energy policy. energy is one of the fundamental sectors of economy having significant impact on the development of a country. within the last decades a range of new challenges appeared in europe, such as security of supply of energy sources, climate change, lack of competition between energy companies, affordable energy prices, and other. the existing legal framework of the european union (eu) does not perfectly fit to the challenges of the current situation; and there is a clear need for retailoring the energy policy (european commission, 2015; focken, 2015). the new eu energy policy started by the riga process at the beginning of 2015 and found its first highlights in the communication of the european commission devoted to energy union. the resilient energy union aims to give the eu consumers secure, sustainable, competitive and affordable energy, defining the five main action directions (dimensions) (european commission, 2015). the concept proved to be exciting subject for studies, including numerous debates on the origin and the impact of the concept, as for example reflected in the recent works by austvik (2016), glachant (2016) and feder (2016). the aim of the paper is to analyse the possible impact of the new eu energy union strategy on the existing energy sector. in order to achieve the aim, the paper investigates the five dimensions and their implementing instruments. as a result, the correlation among the dimensions has been estimated, therewith demonstrating the possible synergy effect from implementation of the defined instruments. eu energy union: adjustment to the new development cycle for the study the authors have used generally accepted quantitative and qualitative methods of economic science, inter alia comparative analysis, parameter estimation, grouping, economically mathematical modelling, synthesis, inductive, deductive, logically constructive and expert evaluation methods. on 25th of february, 2015 the european commission came up with a proposal of a strategy of eu energy union, bringing forward the five action directions (dimensions): energy security, solidarity, trust; internal market; moderation of demand; decarbonisation; research, innovation, competitiveness. the fundamental difference from the previous eu goals in energy sector and the strength tributing to the same single target. the idea of the energy union policy is that the five dimensions are strongly interconnected, being indispensable parts of a one puzzle to provide consumers secure, sustainable, competitive and affordable energy. according to the commission, each of the “pieces” aims not to just solve a one particular problem, but ensures a synergy effect with all the other elements of the eu energy union strategy (european commission, 2015). however, it should be noted that still in many aspects the economic result is not that clear, e.g.: more comprehensive assessments of economic costs and benefits are required (schmid & knopf, 2015). the european commission in its communication identified the concrete 15 actions to practically implement each of the defined dimensions. the concept of the eu energy union should not be surprising as the european union has a “continent scale” power target model; while the usa and canada have no such model (glachant, 2016). thus the desire to have a continent-wide solution for the energy policy may have not only political, but also economic ground. transitional period. the eu energy policy 2020 determines the objective to remoreover, the european council has set an objective to ensure that by 2015 none of the eu countries is isolated from the european gas and electricity netjurijs spiridonovs, olga bogdanova also doubted, some see that the integrating renewable energy supply from electricity into the market ultimately means to move away from the unresponsive standard feed-in tariffs (paying subsidy for any unit of power generated by the ket price but require generators to take responsibility for selling and balancing their power (e.g. newbery, 2016). however it is still discussible if all of the policy incentives are defined in the way that the action proposed technically means the same for all. the concept of the energy union is also considered to be politically influenced. as rightly mentioned, analysts should not encroach on the role of policymakers by being asked to resolve questions that involve tradeoffs among fundamental values (feder, 2016). in some of the studies the issue of the eu and the according regulation has been strictly linked to the political issues, e.g.: compliance to the eu regulatory framework is the best way for ukraine, moldova and georgia to regain energy autonomy, and thus to minimize russia’s political leverage (dusciac et al., 2016). the link between the policy makers and the investment decisions has been also noted by many, e.g: “focusing events have a tremendous potential to the discursive context around specific market decisions. such events can change the political climate and development priorities by concentrating the attention of the broad public and many stakeholders, which as a result can influence the market actor’s long-term decisions and investments” (ellenbeck et al., 2015). the uncertainty caused by the lengthy political debate reflects in the slow development of is only a small amount of time available between the investment decision and the possible price shock representing the policy uncertainty of specific climate change policy events. the reason is that the value of waiting for resolution of the debate itself leads us to the necessity to evaluate what is really the most important aspect of the eu energy union for a country and how to measure the effect of one policy decision on the development of the entire concept. as mentioned before the idea of the eu energy union policy is that the five dimensions are strongly interconnected. the concept itself is known and widely applied in numerous economic process (e.g. figure 1). eu energy union: adjustment to the new development cycle figure 1. interaction of economic development factors building the correlation matrix for the eu energy union concept the authors suppose that concerning energy security, solidarity and trust, diversification of supply correlates with all the rest dimensions, facilitating market processes, potentially eliminating energy consumption by modelling an appropriate energy mix and using more environment-friendly energy sources. diversification of such energy sources as gas, oil, uranium is an important precondition for the development of the member states and the entire eu. southern gas corridor, gas hubs in northern europe followed by central and eastern europe and mediterranean are important projects to spread the risk of potential supply disruptions. the liquefied natural gas market has also a considerable potential for further development (european commission, 2016). security of supply (sos) measures are an important tool to prepare and effectively deal with emergency situations. the instrument proposes to use, for example, capacity mechanisms as security, possibility to merge separate transactions in to collective agreements, transparency of commercial contracts, etc., therewith effecting market processes by lowering flexibility, but eliminating high-price risks for a particular region and risk of supply disruption (european commission, 2016; jirusek et al., 2015). jurijs spiridonovs, olga bogdanova moreover, the eu member states speaking one voice in the dialogue with the rd countries could provide new opportunities for more active participation in the global energy market processes (european commission, 2016). regarding the internal energy market, infrastructure is a cornerstone facilitating all the rest dimensions of the energy union. as energy interconnection projects are often not commercially justified, the eu financial support plays an important role in their realization (european commission, 2016; official jourthe legal acts should be adjusted to practically ensure the sixth freedom of the eu: free flow of energy in the single eu market. there is still a range of rd energy package. in addition, the electricity market should be redesigned to become available to the market players from all the parts of the energy union without barriers. consumers should have all the tools to manage their consumption and bills for electricity. state aid policy should be cleverly managed avoiding over-subsidising of certain branches of energy sector making economy rely on fair competition and free market principles. implementation of network codes plays an important role in tailoring the single market (european commission, 2015). moderation of energy demand has a considerable impact on all the other dimensions by decreasing energy consumption. the national policies should be tailored to implement the energy efficiency targets. ecodesign and energy labelling make everyday usage appliances more energy efficient by putting new production requirements to manufactures and educating consumers by labelling on appliances on energy consumption classes. energy efficiency has a great potential also in other connected sectors of economy, such as building and transport, so the energy efficiency targets should be allocated respectively. moreover, taking into account that the eu is energy importer, energy efficiency decreases energy consumption per produced unit and thus eliminates energy rd countries (european commission, 2016; szulecki et al., 2016). ambitious climate policy and decarbonisation of economy is an integral part of energy union. under this direction, first of all, emissions trading schemes lowances appeared, questioning the functioning of carbon market. res are developing fast and technological progress is the main precondition for that. it is important to ensure that the res support schemes are based on market princieu energy union: adjustment to the new development cycle ples and green energy is competitive in comparison to the one produced from fossil fuels (european commission, 2016; szulecki et al., 2016). a vital element for all the described above dimensions and their instruments are modern technologies. due to this, to ensure progress in development of energy union making energy green, affordable, market-based, efficient and secure research and development is particularly highlighted in the newly developed policy. the strategic energy technology plan covers projects aiming at developing low-carbon technologies and making them competitive (european commission, 2016). despite the fact that there is theoretical proof of interconnections between the eu energy union dimensions, the practical correlations are yet to be determined. table 1 summarizes the data on two dimensions: energy security and renewable energy, assuming that the renewable energy sources are domestically used, thus eliminating energy dependency form other countries. table 1. correlation of the energy union dimensions top 10 european countries with lowest energy dependency top 10 european countries with highest share of renewable energy sources in the final consumption norway iceland estonia norway denmark latvia iceland sweden romania montenegro bosnia and herzegovina austria kosovo (under united nations security council resolution 1244/99) finland serbia albania poland denmark montenegro bosnia and herzegovina jurijs spiridonovs, olga bogdanova table 1 demonstrates that there is no evident correlation between the dimensions: there are five of top 10 european countries with lowest energy dependency in the list of top 10 european countries with highest share of renewable energy sources in the final consumption, namely norway, denmark, iceland, bosnia and herzegovina and montenegro. that may mean that the leadership in one of the dimensions does not obligatory mean the leadership in the other due to a weak correlation between the dimensions in a given country. in practice the described situation may lead to the following: the active political actions in the field of one dimension may not result in the desired progress in the other dimension. due to this the correlations between the dimensions should be analysed case by case for the countries to get the best advice for the policy makers in certain situation, which actions may ensure the faster implementation of the entire concept of the eu energy union in the particular country. the current paper reflects the showcase of latvia performed by the authors aiming to estimate the strength of interlinkage between the dimensions and their instruments. within the study the correlation matrix between the energy union related eu legal initiatives and the communications was developed (table 2). the authors have characterises the correlation among the 15 actions of the eu energy union strategy for latvia in order to develop the general methodology for such evaluation. the opinion expressed by the authors (subjective, only for the purpose of developing the general method), as well as analysis of the energy union related communications from the european commission and the eu legal acts proposals, the following characteristics of the five dimensions of the energy union were formulated. the correlation estimations of the energy experts are summarised and reflected in table 2. table 2. correlation matrix of energy union’s dimensions and their instruments nr dimensions and instruments security & solidarity internal market moderation of demand decarbo-nization r&i 1 2 3 4 5 6 7 8 i security & solidarity 1. diversification of supply 1 1 1 1 4 2. security of supply regulation 1 0 0 0 1 3. global markets 0 0 1 1 2 4. transparency 1 0 0 0 1 ii internal energy market 5. infrastructure 1 1 1 1 4 6. 3rd package, new electricity market design, state aid 1 1 1 0 3 7. building regional markets 1 1 1 1 4 8. consumer involvement 0 1 1 1 3 iii moderation of demand 9. energy efficiency in national policies 1 1 1 1 4 10. ecodesign, energy labelling 1 1 1 1 4 11. synergies between energy efficiency, resource efficiency, circular economy 1 1 1 1 4 12. building sector 0 1 1 1 3 13. transport sector 0 1 1 1 3 iv decarbonization 14. ets reform 0 0 1 1 2 15. technically advanced res, biofuels, market-based schemes 0 1 1 1 3 v r & i 1 1 1 1 4 s o u r c e : own study. jurijs spiridonovs, olga bogdanova in case the correlation between a certain instrument of a one dimension and another dimension could be identified, the matrix displays the value “1”. in case no correlation between an instrument of a one dimension and another dimension could be identified, the matrix demonstrates the value “0”. the column in order to estimate the level of correlation among the dimensions, taking into account the instruments they cover, the authors propose to use the following formula to calculate the correlation index. (1) where: with a help of formula 1 the values of correlation index for each dimension mated. table 3. correlation index and rank of the dimensions of the energy union nr. dimensions correlation rank 1. security & solidarity 0.5 5 2. internal energy market 0.88 3 3. moderation of demand 0.9 2 4. decarbonization 0.63 4 5. r & i 1 1 s o u r c e : own study. es from 0.5 to 1, meaning that all of them are significantly mutually correlated. the highest value of index belongs to research and development and moderaeu energy union: adjustment to the new development cycle tion of demand, following by internal energy market, decarbonisation and security & solidarity. eu energy union is a strong tool with a high potential to change the situation in the energy sector of the entire european union and each its member state. it is a complex solution acting in 5 different directions, which are considerably mutually correlated. the actions determined to reach the targets of a one dimension of the eu energy union strategy have also strong facilitating power for other dimensions. however, in practice active political initiatives in the field of one dimension may not result in the desired progress in the other dimension. due to this the correlations between the dimensions should be analysed case by case for the countries to identify which actions may lead to the faster implementation of the entire concept of the energy union in the particular country. the next step for successful realization of the eu energy union strategy is thorough planning for implementation of each of the defined instruments. taking into account that fact that usually competences for practical transposition of different actions (mostly in form of legal acts) falls under responsibility of an excellent coordination and constant cross-checking to avoid decrease of potential synergies between the benefits provided by the five dimensions. european commission (2015), eu energy in figures. statistical pocket book 2015. luxjurijs spiridonovs, olga bogdanova 1 tion-plan (accessed: 15.12.2016). european commission (2015). commission staff working document. country factsheet latvia. accompanying the document communication from the commission to the the committee of the regions and the european investment bank: state of the eneuropean commission (2015). commission staff working document. european union liament, the council, the european economic and social committee, the committee of the regions and the european investment bank: a framework strategy for a resilient (accessed: 15.12.2016). european commission (2016). commission staff working document. review of available information. accompanying the document communication from the commiscommittee and the committee of the regions on an eu strategy for heating and pdf (accessed: 15.12.2016). and of the council on establishing an information exchange mechanism with regard to intergovernmental agreements and non-binding instruments between member states and third countries in the field of energy and repealing decision no and of the council concerning measures to safeguard the security of gas supply and focken, h. (2015). between national interests and the greater good: struggling to1 of the eu council, co-prepared by the authors. eu energy union: adjustment to the new development cycle jirusek, m., vlcek, t., & kodouskova, h. (2015). energy security in central and eastern europe and the operations of russian state-owned energy enterprises. brno: 2015. schmid, e., & knopf, b. (2015). quantifying the long-term economic benefits of europetext of european union co-funding: summary of doctoral thesis sumbitted for the szulecki, k., fischer, s., gullberg, a.t., & sartor, o. (2016). shaping the ‘energy union’: between national positions and governance innovation in eu energy and climate 10. tuvikene, l., bogdanova, o., & skribans, v. (2015). regional cooperation optimization model: addressing energy challenges in the baltic sea region, eastern european copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 3 date of submission: december 18, 2018; date of acceptance: february 14, 2019. * contact information: molszak@wz.uw.edu.pl, faculty of management, university of warsaw, szturmowa 1/3, 02-678 warszawa, poland, phone +48 22 553 41 50; orcid id: https://orcid.org/0000-0001-8920-5309. ** contact information: sylwiaroszkowska@gmail.com, department of macroeconomics, faculty of economics and sociology, university of łódź, polskiej organizacji wojskowej 3/5, 90-255 łódź, poland; orcid id: https://orcid.org/0000-0002-60438210. *** contact information: ikowalska@wz.uw.edu.pl, faculty of management, university of warsaw, szturmowa 1/3, 02-678 warszawa, poland; orcid id: https://orcid. org/0000-0002-1208-2790. olszak, m., roszkowska, s., & kowalska, i. (2018). the joint effect of borrower targeted macroprudential instruments and capital regulations on procyclicality of loan-loss provisions. copernican journal of finance & accounting, 7(3), 29–53. http://dx.doi.org/10.12775/cjfa.2018.014 małgorzata olszak* university of warsaw sylwia roszkowska** university of łódź iwona kowalska*** university of warsaw the joint effect of borrower targeted macroprudential instruments and capital regulations on procyclicality of loan-loss provisions keywords: macroprudential policy, loan-loss provisions, business cycle, procyclicality, capital regulations. j e l classification: e32, g21, g28, g32. małgorzata olszak, sylwia roszkowska, iwona kowalska30 abstract: we analyze the effects of macroprudential policy and micro-prudential capital regulations on the procyclicality of loan-loss provisions, using individual bank information from over 65 countries. in this study we test whether the interaction between borrower targeted macroprudential policy instruments and restrictive micro-prudential capital regulations tends to adjust the countercyclical effect of borrower targeted instruments and capital regulations. to this end we apply the two-step gmm estimator with robust standards errors. our analysis implies that merging restrictive borrower targeted instruments and capital regulations tends to weaken the countercyclical effect of borrower targeted macroprudential policy instruments and restrictive capital adequacy regulations. this effect depends on size, and is stronger in large banks.  introduction economic and finance theories offer several explanations for procyclicality in banking, and procyclicality of loan-loss provisions (for a well-grounded review refer to borio, furfine & lowe, 2001). general idea behind those explanations is the phenomenon of excessive risk-taking in economic upturns, followed with excessive risk-avoidance during downturns (see e.g. borio & zhu, 2012), which can be termed as inadequate risk-taking behaviour during business cycle or inappropriate responses by banks to changes in risk over time (borio et al., 2001). considering the background assumptions behind the decision-making process of economic agents, there are two theoretical streams, which offer such justifications. the first one covers the market failures theories of classical economics (see bank of england, 2009), which state that incentive problems (e.g. moral hazard as a side effect of deposit-insurance), information frictions (e.g. adverse selection, risk-illusion) as well as co-ordination or “free-rider problems. all these failures result in inadequate risk-taking behaviour of banks during the economic cycle. the other set of explanations embraces cognitive biases (see kahnemann & tversky, 1974), deeply rooted in behavioural finance (barberis & thaler, 2003). several cognitive biases are of importance to procyclicality in banking, e.g. biases due to retrievability of instances, anchoring, excessive optimism (barberis & thaler, 2003), wishfull-thinking, and conservatism (baker & wugler, 2012, p. 287). these biases result in disasters myopia – the tendency to underestimate the likelihood of high-loss low-probability events (slovic, fischhoff & lichtenstein, 1977). in banking, disaster myopia is exhibited in keeping too little capital for loan-losses, and thus may bring about increased insolvency risk (herring, 1999). the joint effect of borrower targeted macroprudential… 31 previous evidence on loan-loss provisions and their sensitivity to the business cycle shows that loan-loss provisions tend to be procyclical, because they increase in economic downturns and decrease in economic upturns (laeven & majnoni, 2003; bikker & metzemakers, 2005; skała, 2015; olszak, pipień, kowalska & roszkowska, 2017; olszak, kowalska & roszkowska, 2018, skała & weil, 2018; godlewski, skała & weill, 2018). this procyclicality is however diversified (bikker & metzemakers, 2005). some studies focus on several countries around world (laeven & majnoni, 2003; bikker & metzemakers, 2005), whereas others consider gretar number of countries (such as european union see e.g. olszak et al., 2017; or over 60 countries around the world, see e.g. olszak et al., 2018), and find empirical evidence of diversity in procyclicality of loan-loss provisions (henceforth llp). these differences may be explained to some extent by regulatory, supervisory as well as investor protection and financial sector structure and development (see olszak et al., 2017), as well as macroprudential policy (see olszak et al., 2018). in this paper we ask about another factor in this diversity, that is the role of joint impact of macroprudential policy instruments and capital adequacy standards restrictiveness. as for macroprudential policy and its effects on procyclicality of banking activity, the evidence is increasing, but is still very fragmented (see claessens, ghosh & mihet, 2014; olszak et al., 2018). some recent cross-country studies show that macroprudential instruments are effective in reducing the procyclicality of credit growth and leverage (i.e. the sensitivity of credit and leverage to the business cycle; see lim et al., 2011), as well as being effective in taming credit growth, leverage and/or asset growth (claessens et al., 2014; cerutti, claessens & laeven, 2015; alper, binici, demiralp, kara & ozlu, 2014; vandenbussche, vogel & detragiache, 2015). olszak et al. (2018) show that macroprudential policy instruments are effective in reducing procyclicality of llp. the previous literature stresses the empirical significance of bank size for risk-taking and thus the resilience of the banking sector. due to the fact that large banks receive implicit or explicit government protection, they invest in more risky assets (de haan & poghosyan, 2012; freixas, loranth & morrison, 2007). large banks could also be more vulnerable to general market movements than smaller ones, meaning that the link between bank size and systemic risk may be positive (anderson & fraser, 2000; haq & heaney, 2012). thus in our study we also look at the joint impact of borrower restrictions and capital regulations on procyclicality of llp in banks which differ in size. małgorzata olszak, sylwia roszkowska, iwona kowalska32 generally in our study we are interested in whether the interaction between borrower targeted macroprudential policy instruments and restrictive micro-prudential capital regulations tends to adjust the countercyclical effect of borrower targeted instruments and capital regulations, if we take them into account separately. we focus only on one micro-prudential instrument, i.e. capital standards, due to the fact that this instrument has been found effective in taming procyclicality of llp in the eu. other instruments, such as e.g. activity restrictions, were not reducing procyclicality of llp (see olszak et al., 2017). we analyze the effects of macroprudential policy instruments and microprudential capital regulations on the procyclicality of loan-loss provisions, using individual bank information from over 65 countries. to conduct our analysis we apply the 2-step robust gmm estimator (blundell & bond, 2008). the rest of the paper is organized as follows. section 2 describes the data set applied and the methodology used to test our hypotheses. section 3 includes analysis of our empirical results. section 5 presents conclusions. the research methodology and the course of the research process we use pooled cross-section and time series data of individual banks’ balancesheet items and profit and loss accounts from over 65 eu countries and country-specific macroeconomic indicators for these countries, over a period from 2000 to 2011. however, due to data shortages, we include only 65 countries in the analysis of the interactions between macroprudential policy, capital regulations and business cycle. the balance-sheet and profit-and-loss account data are taken from unconsolidated and consolidated financials available in the bankscope database, whereas the macroeconomic data were accessed from the world bank and the imf web pages. we shall run separate regression in consolidated data, because consolidation is a proxy for bank size and thus risk-taking, which potentially maybe increased in banks consolidating financial statements (see freixas et al., 2007). the baseline descriptive statistics and correlations of the bank-level data applied in our study are included in tables a1 and a2 in the appendix. as can be seen from the tables median llp is diversified across countries. the same is found for the business cycle, proxied with real gpd growth (gdpg). correlation matrices in panel b in table a2 suggest that llp is procyclical, because it is negatively associated with gdpg in both unconsolidated and consolidated data. the joint effect of borrower targeted macroprudential… 33 as we are interested in the impact of macroprudential policy on the link between loan-loss provisions and the business cycle, we include indices designed by the imf and presented in claessens et al. (2014) and included in the paper by cerutti et al. (2015). our study focuses on the period of 2000–2011, because we do not want our results to be affected by post-crisis regulatory changes, whose effective implementation started around 2012. therefore in constructing aggregated macroprudential policy instruments, we only look at those instruments which were applied across countries in the period of 2000–2011. obviously instruments which affect the capacity of borrowers to take a loan (i.e. loan-to-value caps and debt-to-income ratio) were very frequent tools applied by regulators in the period behind the crisis (see cerutti et al., 2015). borrower values range between 0 and 2, with higher values suggesting grater application of macroprudential policy instruments which restrict access to credit of borrowers, in particular real-estate lending. this index covers two instruments: loan-to-value cap ratios (ltv_cap) and debt-to-income ratios (dti). the values of this index per each country applied in our study are presented in table a1 in the appendix. to conduct our analysis we need one measure of borrower per each country, thus using the dataset presented in cerutti et al. (2015), we compute average measure of this index for the period of 2000– –2011. we also test the impact of one individual micro-prudential policy instrument i.e. capital regulations restrictiveness index (denoted as capreg). this index has been constructed by barth, caprio and levine (2013) and its values applied in our study are included in table a1 in the appendix. the variables chosen as possibly explanatory of llp are variables traditionally used for testing the earnings-management and capital-management hypotheses (liu & ryan, 2006; fonseca & gonzalez, 2008) modified by the inclusion of business-cycle and other dummy variables (as in laeven & majnoni, 2003; bikker & metzemakers, 2005). we also include the first and second lag of the dependent variable in order to capture adjustment costs that constrain the complete adjustment of llp to an equilibrium level (see laeven & majnoni, 2003; bikker & metzemakers, 2005; and fonseca & gonzález, 2008; olszak et al., 2018). the basic model reads as: (1) 2012. therefore in constructing aggregated macroprudential policy instruments, we only look at those instruments which were applied across countries in the period of 2000-2011. obviously instruments which affect the capacity of borrowers to take a loan (i.e. loan-tovalue caps and debt-to-income ratio) were very frequent tools applied by regulators in the period behind the crisis (see cerutti et al., 2015). borrower values range between 0 and 2, with higher values suggesting grater application of macroprudential policy instruments which restrict access to credit of borrowers, in particular real-estate lending. this index covers two instruments: loan-to-value cap ratios (ltv_cap) and debt-toincome ratios (dti). the values of this index per each country applied in our study are presented in table a1 in the appendix. to conduct our analysis we need one measure of borrower per each country, thus using the dataset presented in cerutti et al. (2015), we compute average measure of this index for the period of 2000-2011. we also test the impact of one individual micro-prudential policy instrument i.e. capital regulations restrictiveness index (denoted as capreg). this index has been constructed by barth, caprio and levine (2013) and its values applied in our study are included in table a1 in the appendix. the variables chosen as possibly explanatory of llp are variables traditionally used for testing the earnings-management and capital-management hypotheses (liu & ryan, 2006; fonseca & gonzalez, 2008) modified by the inclusion of business-cycle and other dummy variables (as in laeven & majnoni, 2003; bikker & metzemakers, 2005). we also include the first and second lag of the dependent variable in order to capture adjustment costs that constrain the complete adjustment of llp to an equilibrium level (see laeven & majnoni, 2003; bikker & metzemakers, 2005 and fonseca and gonzález, 2008; olszak et al, 2018). the basic model reads as: llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ��������� � �� � ���� (eq. 1) the dependent variable is the loan loss provision (llp) of a bank divided by this bank’s average total assets (ta). the subindices i, j, t refer to the bank, the country and the year respectively. the explanatory variables have been subdivided into: (1) bank-specific variables, namely:  earnings before llp and taxes (profitbpt), 2012. therefore in constructing aggregated macroprudential policy instruments, we only look at those instruments which were applied across countries in the period of 2000-2011. obviously instruments which affect the capacity of borrowers to take a loan (i.e. loan-tovalue caps and debt-to-income ratio) were very frequent tools applied by regulators in the period behind the crisis (see cerutti et al., 2015). borrower values range between 0 and 2, with higher values suggesting grater application of macroprudential policy instruments which restrict access to credit of borrowers, in particular real-estate lending. this index covers two instruments: loan-to-value cap ratios (ltv_cap) and debt-toincome ratios (dti). the values of this index per each country applied in our study are presented in table a1 in the appendix. to conduct our analysis we need one measure of borrower per each country, thus using the dataset presented in cerutti et al. (2015), we compute average measure of this index for the period of 2000-2011. we also test the impact of one individual micro-prudential policy instrument i.e. capital regulations restrictiveness index (denoted as capreg). this index has been constructed by barth, caprio and levine (2013) and its values applied in our study are included in table a1 in the appendix. the variables chosen as possibly explanatory of llp are variables traditionally used for testing the earnings-management and capital-management hypotheses (liu & ryan, 2006; fonseca & gonzalez, 2008) modified by the inclusion of business-cycle and other dummy variables (as in laeven & majnoni, 2003; bikker & metzemakers, 2005). we also include the first and second lag of the dependent variable in order to capture adjustment costs that constrain the complete adjustment of llp to an equilibrium level (see laeven & majnoni, 2003; bikker & metzemakers, 2005 and fonseca and gonzález, 2008; olszak et al, 2018). the basic model reads as: llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ��������� � �� � ���� (eq. 1) the dependent variable is the loan loss provision (llp) of a bank divided by this bank’s average total assets (ta). the subindices i, j, t refer to the bank, the country and the year respectively. the explanatory variables have been subdivided into: (1) bank-specific variables, namely:  earnings before llp and taxes (profitbpt), 2012. therefore in constructing aggregated macroprudential policy instruments, we only look at those instruments which were applied across countries in the period of 2000-2011. obviously instruments which affect the capacity of borrowers to take a loan (i.e. loan-tovalue caps and debt-to-income ratio) were very frequent tools applied by regulators in the period behind the crisis (see cerutti et al., 2015). borrower values range between 0 and 2, with higher values suggesting grater application of macroprudential policy instruments which restrict access to credit of borrowers, in particular real-estate lending. this index covers two instruments: loan-to-value cap ratios (ltv_cap) and debt-toincome ratios (dti). the values of this index per each country applied in our study are presented in table a1 in the appendix. to conduct our analysis we need one measure of borrower per each country, thus using the dataset presented in cerutti et al. (2015), we compute average measure of this index for the period of 2000-2011. we also test the impact of one individual micro-prudential policy instrument i.e. capital regulations restrictiveness index (denoted as capreg). this index has been constructed by barth, caprio and levine (2013) and its values applied in our study are included in table a1 in the appendix. the variables chosen as possibly explanatory of llp are variables traditionally used for testing the earnings-management and capital-management hypotheses (liu & ryan, 2006; fonseca & gonzalez, 2008) modified by the inclusion of business-cycle and other dummy variables (as in laeven & majnoni, 2003; bikker & metzemakers, 2005). we also include the first and second lag of the dependent variable in order to capture adjustment costs that constrain the complete adjustment of llp to an equilibrium level (see laeven & majnoni, 2003; bikker & metzemakers, 2005 and fonseca and gonzález, 2008; olszak et al, 2018). the basic model reads as: llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ��������� � �� � ���� (eq. 1) the dependent variable is the loan loss provision (llp) of a bank divided by this bank’s average total assets (ta). the subindices i, j, t refer to the bank, the country and the year respectively. the explanatory variables have been subdivided into: (1) bank-specific variables, namely:  earnings before llp and taxes (profitbpt), małgorzata olszak, sylwia roszkowska, iwona kowalska34 the dependent variable is the loan loss provision (llp) of a bank divided by this bank’s average total assets (ta). the subindices i, j, t refer to the bank, the country and the year – respectively. the explanatory variables have been subdivided into: (1) bank-specific variables, namely: ■ earnings before llp and taxes (profitbpt), ■ loans-growth rate (∆l), ■ capital ratio measured as the share of capital in total assets (capr); (2) macroeconomic variables like: ■ real growth of gross domestic product per capita (gdpg), ■ unemployment rate (unempl); (3) other elements, ie.: ■ ϑi,t are unobservable bank-specific effects that are not constant over time but vary across banks; ■ ɛt is a white-noise error term. our dependent variable is the total net loan-loss provision, covering netspecific provisions and general provisions (as reported in the bureau van dijk bankscope database). we control for individual bank conditions by including bank-specific variables. all bank-specific variables (llp, profitbpt and capr) are normalized by the bank total assets (average assets in the case of llp and profitbpt) to mitigate potential estimation problems with heteroscedasticity. equation (1) involves bank-specific variables that may be endogenous. therefore, we apply an approach that involves instrumental variables, i.e the generalised method of moments (gmm) developed by blundell and bond (1998) with robust standard errors and windmeijer’s (2005) correction. as the consistency of the gmm estimator depends on the validity of the instruments, we consider two specification tests. the first is hansen’s j statistic for overidentifying restrictions, which tests the overall validity of the instruments tests (see roodman, 2009). the second is the test verifying the hypothesis of absence of second-order serial correlation in the first difference residuals (m2). such an approach gives us estimates of standard errors robust with respect to heteroscedasticity and autocorrelation in the dataset. the relation between llp and current-period earnings realizations (profitbtp) is applied to track the discretionary income smoothing by banks (liu & ryan, 2006; fonseca & gonzález, 2008; bouvatier & lepetit, 2008; bushman & williams, 2012; ozili & outa, 2018; ozili & thankom, 2018). the higher the positive coefficient on profit the more discretionary income smoothing there the joint effect of borrower targeted macroprudential… 35 build up during economic booms. other studies document a negative coefficient on ∆loans (laeven & majnoni, 2003) which implies the rejection of the hypothesis of prudent loan-loss provisioning behavior. capital ratio (capr) is used to control for the possibility that banks may engage in capital management through loan-loss provisions. as previous evidence documents, the relationship between capr and lpp may be both negative (bikker & metzemakers, 2005) and positive (bouvatier & lepetit, 2008). the relation between llp and gdpg is our measure of procyclicality of llp, and as such is the most interesting in our study. following previous empirical research we expect that gdp is negatively related to llp (laeven & majnoni, 2003; bikker & metzemakers, 2005; bouvatier & lepetit, 2008; fonseca & gonzález, 2008, olszak et al., 2017, 2018). the stronger the negative coefficient of gdp, the more procyclicality there is. positive relationship between llp and gdp would suggest countercyclical provisions. we ask if both borrower targeted instruments and capital regulations reduce procyclicality of llp or even if they render them countercyclical. we aim to find out what is their joint effect on procyclicality of llp. we include unempl as additional an exogenous macroeconomic control variable and expect the respective regression coefficient to be positive, suggesting that llp increase as more employees get made redundant (i.e. which happens in economic downswings) (see bikker & metzemakers, 2005; olszak et al., 2017; 2018). such a relationship is consistent with the procyclicality of llp. to analyze the differences in sensitivity of llp to gdpg across countries and the role of macroprudential policy instruments as well as capital regulations restrictiveness in this sensitivity, we estimate a regression, incorporating an interaction term between macroprudential policy assessed at a country level (and capital regulations) and the gdpg variable. this regression reads as follows llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ������������ ������� � ��������� � ��� ������� � ������� � ��� ������� � ��������� � ������� � �� � ���� (eq. 2) following previous research, we expect that regression coefficient on product term between gdpg and borrower, will be positive, thus implying countercyclical impact of macroprudential policy on the sensitivity of llp to gdpg (see olszak et al., 2018). olszak et al. (2017) show that capreg reduces procyclicality of llp in the eu. so build up during economic booms. other studies document a negative coefficient on ∆loans (laeven & majnoni, 2003) which implies the rejection of the hypothesis of prudent loan-loss provisioning behavior. capital ratio (capr) is used to control for the possibility that banks may engage in capital management through loan-loss provisions. as previous evidence documents, the relationship between capr and lpp may be both negative (bikker & metzemakers, 2005) and positive (bouvatier & lepetit, 2008). the relation between llp and gdpg is our measure of procyclicality of llp, and as such is the most interesting in our study. following previous empirical research we expect that gdp is negatively related to llp (laeven & majnoni, 2003; bikker & metzemakers, 2005; bouvatier & lepetit, 2008; fonseca & gonzález, 2008, olszak et al., 2017, 2018). the stronger the negative coefficient of gdp, the more procyclicality there is. positive relationship between llp and gdp would suggest countercyclical provisions. we ask if both borrower targeted instruments and capital regulations reduce procyclicality of llp or even if they render them countercyclical. we aim to find out what is their joint effect on procyclicality of llp. we include unempl as additional an exogenous macroeconomic control variable and expect the respective regression coefficient to be positive, suggesting that llp increase as more employees get made redundant (i.e. which happens in economic downswings) (see bikker & metzemakers, 2005; olszak et al., 2017; 2018). such a relationship is consistent with the procyclicality of llp. to analyze the differences in sensitivity of llp to gdpg across countries and the role of macroprudential policy instruments as well as capital regulations restrictiveness in this sensitivity, we estimate a regression, incorporating an interaction term between macroprudential policy assessed at a country level (and capital regulations) and the gdpg variable. this regression reads as follows llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ������������ ������� � ��������� � ��� ������� � ������� � ��� ������� � ��������� � ������� � �� � ���� (eq. 2) following previous research, we expect that regression coefficient on product term between gdpg and borrower, will be positive, thus implying countercyclical impact of macroprudential policy on the sensitivity of llp to gdpg (see olszak et al., 2018). olszak et al. (2017) show that capreg reduces procyclicality of llp in the eu. so build up during economic booms. other studies document a negative coefficient on ∆loans (laeven & majnoni, 2003) which implies the rejection of the hypothesis of prudent loan-loss provisioning behavior. capital ratio (capr) is used to control for the possibility that banks may engage in capital management through loan-loss provisions. as previous evidence documents, the relationship between capr and lpp may be both negative (bikker & metzemakers, 2005) and positive (bouvatier & lepetit, 2008). the relation between llp and gdpg is our measure of procyclicality of llp, and as such is the most interesting in our study. following previous empirical research we expect that gdp is negatively related to llp (laeven & majnoni, 2003; bikker & metzemakers, 2005; bouvatier & lepetit, 2008; fonseca & gonzález, 2008, olszak et al., 2017, 2018). the stronger the negative coefficient of gdp, the more procyclicality there is. positive relationship between llp and gdp would suggest countercyclical provisions. we ask if both borrower targeted instruments and capital regulations reduce procyclicality of llp or even if they render them countercyclical. we aim to find out what is their joint effect on procyclicality of llp. we include unempl as additional an exogenous macroeconomic control variable and expect the respective regression coefficient to be positive, suggesting that llp increase as more employees get made redundant (i.e. which happens in economic downswings) (see bikker & metzemakers, 2005; olszak et al., 2017; 2018). such a relationship is consistent with the procyclicality of llp. to analyze the differences in sensitivity of llp to gdpg across countries and the role of macroprudential policy instruments as well as capital regulations restrictiveness in this sensitivity, we estimate a regression, incorporating an interaction term between macroprudential policy assessed at a country level (and capital regulations) and the gdpg variable. this regression reads as follows llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ������������ ������� � ��������� � ��� ������� � ������� � ��� ������� � ��������� � ������� � �� � ���� (eq. 2) following previous research, we expect that regression coefficient on product term between gdpg and borrower, will be positive, thus implying countercyclical impact of macroprudential policy on the sensitivity of llp to gdpg (see olszak et al., 2018). olszak et al. (2017) show that capreg reduces procyclicality of llp in the eu. so build up during economic booms. other studies document a negative coefficient on ∆loans (laeven & majnoni, 2003) which implies the rejection of the hypothesis of prudent loan-loss provisioning behavior. capital ratio (capr) is used to control for the possibility that banks may engage in capital management through loan-loss provisions. as previous evidence documents, the relationship between capr and lpp may be both negative (bikker & metzemakers, 2005) and positive (bouvatier & lepetit, 2008). the relation between llp and gdpg is our measure of procyclicality of llp, and as such is the most interesting in our study. following previous empirical research we expect that gdp is negatively related to llp (laeven & majnoni, 2003; bikker & metzemakers, 2005; bouvatier & lepetit, 2008; fonseca & gonzález, 2008, olszak et al., 2017, 2018). the stronger the negative coefficient of gdp, the more procyclicality there is. positive relationship between llp and gdp would suggest countercyclical provisions. we ask if both borrower targeted instruments and capital regulations reduce procyclicality of llp or even if they render them countercyclical. we aim to find out what is their joint effect on procyclicality of llp. we include unempl as additional an exogenous macroeconomic control variable and expect the respective regression coefficient to be positive, suggesting that llp increase as more employees get made redundant (i.e. which happens in economic downswings) (see bikker & metzemakers, 2005; olszak et al., 2017; 2018). such a relationship is consistent with the procyclicality of llp. to analyze the differences in sensitivity of llp to gdpg across countries and the role of macroprudential policy instruments as well as capital regulations restrictiveness in this sensitivity, we estimate a regression, incorporating an interaction term between macroprudential policy assessed at a country level (and capital regulations) and the gdpg variable. this regression reads as follows llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ������������ ������� � ��������� � ��� ������� � ������� � ��� ������� � ��������� � ������� � �� � ���� (eq. 2) following previous research, we expect that regression coefficient on product term between gdpg and borrower, will be positive, thus implying countercyclical impact of macroprudential policy on the sensitivity of llp to gdpg (see olszak et al., 2018). olszak et al. (2017) show that capreg reduces procyclicality of llp in the eu. so build up during economic booms. other studies document a negative coefficient on ∆loans (laeven & majnoni, 2003) which implies the rejection of the hypothesis of prudent loan-loss provisioning behavior. capital ratio (capr) is used to control for the possibility that banks may engage in capital management through loan-loss provisions. as previous evidence documents, the relationship between capr and lpp may be both negative (bikker & metzemakers, 2005) and positive (bouvatier & lepetit, 2008). the relation between llp and gdpg is our measure of procyclicality of llp, and as such is the most interesting in our study. following previous empirical research we expect that gdp is negatively related to llp (laeven & majnoni, 2003; bikker & metzemakers, 2005; bouvatier & lepetit, 2008; fonseca & gonzález, 2008, olszak et al., 2017, 2018). the stronger the negative coefficient of gdp, the more procyclicality there is. positive relationship between llp and gdp would suggest countercyclical provisions. we ask if both borrower targeted instruments and capital regulations reduce procyclicality of llp or even if they render them countercyclical. we aim to find out what is their joint effect on procyclicality of llp. we include unempl as additional an exogenous macroeconomic control variable and expect the respective regression coefficient to be positive, suggesting that llp increase as more employees get made redundant (i.e. which happens in economic downswings) (see bikker & metzemakers, 2005; olszak et al., 2017; 2018). such a relationship is consistent with the procyclicality of llp. to analyze the differences in sensitivity of llp to gdpg across countries and the role of macroprudential policy instruments as well as capital regulations restrictiveness in this sensitivity, we estimate a regression, incorporating an interaction term between macroprudential policy assessed at a country level (and capital regulations) and the gdpg variable. this regression reads as follows llp��� � �� � ��llp����� � �� llp����� � �� ������������ � ��� ����� � ��� ��������� � �� ���������� ������� � �� ������������ ������� � ��������� � ��� ������� � ������� � ��� ������� � ��������� � ������� � �� � ���� (eq. 2) following previous research, we expect that regression coefficient on product term between gdpg and borrower, will be positive, thus implying countercyclical impact of macroprudential policy on the sensitivity of llp to gdpg (see olszak et al., 2018). olszak et al. (2017) show that capreg reduces procyclicality of llp in the eu. so is. the association between llp and ∆l is included to test the application of llp to cover expected loss on loans (laeven & majnoni, 2003; bikker & metzemakers, 2005; fonseca & gonzález, 2008, olszak et al., 2018). some papers find positive inf luence of real loan growth on llp (bikker & metzemakers, 2005; fonseca & gonzález, 2008) implying that banks set aside provisions to cover risks which build up during economic booms. other studies document a negative coefficient on ∆loans (laeven & majnoni, 2003) which implies the rejection of the hypothesis of prudent loan-loss provisioning behavior. capital ratio (capr) is used to control for the possibility that banks may engage in capital management through loan-loss provisions. as previous evidence documents, the relationship between capr and lpp may be both negative (bikker & metzemakers, 2005) and positive (bouvatier & lepetit, 2008). the relation between llp and gdpg is our measure of procyclicality of llp, and as such is the most interesting in our study. following previous empirical research we expect that gdp is negatively related to llp (laeven & majnoni, 2003; bikker & metzemakers, 2005; bouvatier & lepetit, 2008; fonseca & gonzález, 2008, olszak et al., 2017, 2018). the stronger the negative coefficient of gdp, the more procyclicality there is. positive relationship between llp and gdp would suggest countercyclical provisions. we ask if both borrower targeted instruments and capital regulations reduce procyclicality of llp or even if they render them countercyclical. we aim to find out what is their joint effect on procyclicality of llp. we include unempl as additional an exogenous macroeconomic control variable and expect the respective regression coefficient to be positive, suggesting that llp increase as more employees get made redundant (i.e. which happens in economic downswings) (see bikker & metzemakers, 2005; olszak et al., 2017; 2018). such a relationship is consistent with the procyclicality of llp. to analyze the differences in sensitivity of llp to gdpg across countries and the role of macroprudential policy instruments as well as capital regulations restrictiveness in this sensitivity, we estimate a regression, incorporating an interaction term between macroprudential policy assessed at a country level (and capital regulations) and the gdpg variable. this regression reads as follows: (2) małgorzata olszak, sylwia roszkowska, iwona kowalska36 following previous research, we expect that regression coefficient on product term between gdpg and borrower, will be positive, thus implying countercyclical impact of macroprudential policy on the sensitivity of llp to gdpg (see olszak et al., 2018). olszak et al. (2017) show that capreg reduces procyclicality of llp in the eu. so potentially, we also envisage that the regression coefficient on interaction term between gdpg and capreg will be positive, showing that this micro-prudential policy instrument may be effective in taming procyclicality of llp. as for the joint effect of borrower and capreg on sensitivity of llp there is no previous evidence. generally, positive coefficient on the triple interaction of borrower, capreg and gdpg would imply that in countries with stronger borrower targeted macroprudential instruments as well as with more restrictive capital regulation, the effectiveness of both policy measures in reducing procyclicality of llp is increased. in contrast, a negative link between llp and the triple interaction term, potentially suggests decreased effectiveness of borrower and of capreg in taming procyclicality of llp. estimation results in table 1, we first present the effect of gdpg on llp without inclusion of borrower targeted index and capital regulations restrictiveness index. looking at baseline specifications (see columns 1 and 3) we find that llp is procyclical because the regression coefficient on gdpg is negative and statistically significant at 1%. in particular, looking at columns 1 and 3, we find that regression coefficients range between _-0.06 and _0.071. other estimations (i.e. in columns 2 and 4) give coefficients ranging between _-0.111 and _0.114. this procyclicality view is further supported with the regression coefficients of unempl, because the link between llp and unemployment rate is positive and statistically significant in three regressions (i.e. 1, 3 and 4) out of four in table 1. such results are consistent with previous empirical evidence (see laeven & majnoni, 2003; bikker & metzemakers, 2005; bouvatier & lepetit, 2008; olszak et al., 2017; 2018). the coefficients on bank-specific variables are largely as expected when significant. specifically, in all specifications the coefficient on profitbpt is positive and statistically significant at 1%. this supports the view that in a cross- country context banks tend to engage in discretionary income smoothing (bushman & williams, 2012). the negative coefficients on loans growth imply that banks do not apply a prudent approach to management of expected the joint effect of borrower targeted macroprudential… 37 loan-losses (see column 1). generally, changes in total loans outstanding or in loan growth rate are related to changes in expected loan-losses. banks which provision more when loan growth is stronger should be less prone to macroeconomic conditions (laeven & majnoni, 2003; bikker & metzemakers, 2005; fonseca & gonzález, 2008). in our sample we find support for the view that banks set aside provisions to cover expected losses only for consolidated data (see column 4). the coefficient of capital ratio in both negative and positive (and statistically significant only in unconsolidated data) thus showing that the link between capital ratio and llp may be ambiguous (see columns 1 and 2 in table 1). the positive and statistically significant coefficient of the previous year’s capital ratio (capr) (see regression 1 in table 1), implies that banks in our sample could have applied capital management with (consistent with explanation and findings of liu & ryan, 2006; bouvatier & lepetit, 2008). some authors, however, argue that if capital variation is more related to retained earnings than to loan loss reserves, than the capital management hypothesis is verified if the link between llp and capr is negative (bikker & metzemakers, 2005). in our study we do find support for this view only in the regression including macroprudential policy index and capital regulation index. in regressions 2 and 4, in which we include borrower and capreg, the coefficient on gdpg informs about the sensitivity of llp to business cycle in countries which do not apply both macroprudential policy and in which capital regulations are not restrictive. consistent with previous evidence (see olszak et al., 2018), we find the borrower reduces procyclicality of llp, because the coefficient on interaction term between borrower and gdpg is positive and significant at 1% in both consolidated and unconsolidated data. increased restrictiveness of micro-prudential capital adequacy regulations also reduces the procyclicality of llp, and this reduction is statistically significant, but only in unconsolidated data. comparing the effects of borrower and capreg we find that macroprudential policy instruments tend to decrease procyclicality of llp to a greater extent. in the case of borrower in the unconsolidated data we find that the negative coefficient on gdpg of -0.11 is reduced to -0.008 (=-0.114+0.106) (see column 2 in table 1). as for the effect of restrictive capital regulations we find that procyclicality of llp is declined only slightly by 0.008 and overall equals -0.106 (=-0.114+0.008) (see column 2 in table 1). looking now at the joint effect of both borrower and capreg on the cyclicality of llp, we find that the regression coefficient on triple interaction term of capreg * borrower * gdpg is negative (ranging between -0.013 małgorzata olszak, sylwia roszkowska, iwona kowalska38 and -0.012, in columns 2 and 4, respectively) and statistically significant. such a result implies that merging restrictive borrower targeted instruments and capital regulations tends to weaken the countercyclical effect of borrower and capreg, applied separately. in particular, looking first at unconsolidated data, the overall reduction in procyclicality due to borrower equal to -0.008 (see previous paragraph) is weakened by -0.013 up to -0.021 (=-0.008-0.013). such a result implies that more restrictive capital standards reduce countercyclical effects of borrower-targeted macroprudential policy. as for the capreg, the slight reduction in procyclicality of llp due to capreg (see regression coefficient on double interaction term between capreg* gdpg), is wiped out in countries which also apply borrower-targeted macroprudential policy instruments. comparing coefficients on double interaction of capreg*gdpg and on triple interaction of capreg*borrower*gdpg, which equal, respectively, 0.008 and -0.013, we find that procyclicality of llp is slightly increased (i.e. the link between llp and gdpg is more negative) by -0.005 (=0.008-0.013). the implications for the consolidated data, are the same as for unconsolidated data. table 1. baseline results for the full sample in uncosolidated and consolidated data unconsolidated consolidated (1) (2) (3) (4) llp(-1) 0.640*** (11.53) 0.534*** (8.05) 0.432*** (5.72) 0.354*** (4.32) llp(-2) 0.136*** (3.17) 0.134** (2.51) 0.141* (1.94) 0.176** (2.18) profitbpt 0.069** (2.48) 0.133*** (2.83) 0.145*** (3.38) 0.168*** (3.81) ∆l -0.008*** (-7.69) -0.002 (-1.57) 0.001 (1.47) 0.001* (1.96) capr 0.012** (2.25) -0.020*** (-3.88) 0.001 (0.17) 0.003 (0.45) size 0.043*** (9.23) -0.077*** (-3.42) -0.011 (-0.28) -0.028 (-0.51) gdpg -0.060*** (-16.11) -0.114*** (-6.01) -0.071*** (-10.71) -0.111*** (-4.68) unempl 0.017*** (4.17) -0.001 (-0.17) 0.008** (2.32) 0.009** (2.1) borrower -0.311* (-1.91) -0.291*** (-2.76) the joint effect of borrower targeted macroprudential… 39 unconsolidated consolidated (1) (2) (3) (4) borrower* gdpg 0.106*** (4.95) 0.094*** (3.95) capreg -0.048*** (-4.18) -0.014 (-0.85) capreg * gdpg 0.008*** (2.96) 0.005 (1.23) borrower* capreg 0.048** (2.25) 0.037* (1.86) capreg * borrower * gdpg -0.013*** (-3.80) -0.012*** (-2.66) constant -0.657*** (-8.43) 1.755*** (3.85) 0.204 (0.61) 0.365 (0.81) p-hansen 0.00 0.000 0.99 1.00 m2 -1.64 -1.089 -1.64 -1.36 p-val 0.10 0.276 0.10 0.17 # obs 7427 12522 7427 6033 n o t e s t o t a b l e 1 . this table presents the coefficient estimates of llp on bank – specific determinants, macroeconomic variables and macroprudential policy instruments. separately for unconsolidated and consolidated data. the bank-specific determinants include: profitbpt – profit before provisions and taxes over average assets; ∆l – loans growth; capr – equity capital divided by total assets; size – logarithm of total assets; macroeconomic variables include: gdpg – real gdp growth per capita; unempl – annual unemployment rate; borrower borrower restrictions; capreg – index measuring restrictiveness of capital regulations; reported regressions are estimated with the dynamic two-step system-gmm estimator as proposed by blundell-bond (1998) with windmeijer’s (2005) finite-sample correction for the period of 2000–2011 for panel data with lagged dependent variable (up to two lags of dependent variable are included. t-statistics are given in parentheses. ***, ** or * next to coefficients indicate that coefficients are significantly different from zero at the 1%, 5%, or 10% levels, respectively. # – denotes the number of. s o u r c e : authors’ calculations. considering the fact that procyclicality of llp depends on bank size, we include additional tests of our results presented in table 1. in particular, in table 2, we run regressions modelled with equation (eq. 2) in three subsamples of banks, which differ in size. in this table we present effects of double interactions (i.e. borrower*gdpd and capreg*gdpg) as well as triple interactions between borrower, capreg and gdp per capita in in large banks (specifications 1 and 4), medium banks (specifications 2 and 5) and small banks (specitable 1. baseline results for the full sample… małgorzata olszak, sylwia roszkowska, iwona kowalska40 fications 3 and 6). estimated positive and significant coefficients of double interactions on borrower*gdpg and stronger in the subsample of large banks (the coefficient +0.148 and 0.15 in unconsolidated and consolidated data, respectively) suggest that large banks benefit the most from increased resilience resulting from macroprudential approach. such a result is consistent with previous evidence (see olszak et al., 2018). from regression 1 (large banks), for instance, we infer that the impact of gdpg on loan-loss provision in countries applying more borrower targeted instruments is -0.01 (-0.158+0.148). in the medium banks’ regression, the overall effect of gdpg on loan-loss provisions in countries applying macroprudential instruments reducing demand for lending and increasing banking sector resilience (e.g. by improving the quality of loans through lower pd and lgd ratios) (i.e. in which borrower is higher), is relatively less attenuated than in the large banks and equals -0.007 (-0.056+0.049). table 2. the effect of restrictiveness of capital regulations and borrower targeted macroprudential policy instruments on the procyclicality of loan loss provisions – the role of bank size unconsolidated consolidated large medium small large medium small (1) (2) (3) (4) (5) (6) llp(-1) 0.467*** (4.65) 0.391*** (7.31) 0.419*** (3.90) 0.403*** (9.11) 0.215** (2.17) 0.468*** (5.48) llp(-2) 0.186*** (3.36) 0.069** (2.24) 0.250*** (3.41) 0.038 (1.11) 0.414*** (3.19) 0.067 (0.91) profitbpt 0.098** (2.32) 0.164*** (4.46) 0.146* (1.82) 0.156*** (3.32) 0.271*** (4.84) 0.055** (2.11) ∆l -0.002** (-2.07) -0.003* (-1.78) -0.000 (-0.07) 0.001 (1.07) 0.002* (1.81) 0.001 (1.51) capr 0.006 (0.67) -0.021*** (-3.30) -0.020* (-1.85) 0.014 (1.16) -0.016 (-1.27) 0.005 (0.77) size -0.042* (-1.72) -0.072*** (-3.74) -0.190*** (-3.15) -0.109* (-1.73) 0.066 (0.84) -0.058 (-0.68) gdpg -0.158*** (-5.69) -0.056* (-1.93) -0.181*** (-2.63) -0.177*** (-4.34) -0.072*** (-2.64) -0.061 (-1.46) unempl 0.002 (0.35) -0.002 (-0.33) 0.010 (0.64) 0.000 (0.00) 0.016* (1.79) -0.001 (-0.11) borrower -0.348*** (-2.68) -0.115 (-0.60) -1.597*** (-2.58) -0.422*** (-3.02) -0.058 (-0.44) -0.074 (-0.25) the joint effect of borrower targeted macroprudential… 41 unconsolidated consolidated large medium small large medium small (1) (2) (3) (4) (5) (6) borrower* gdpg 0.148*** (6.01) 0.049* (1.69) 0.241** (2.19) 0.15*** (4.09) 0.045* (1.69) 0.044 (0.83) capreg -0.034** (-2.05) -0.029 (-1.45) -0.137*** (-2.95) -0.025 (-1.11) 0.019 (0.82) -0.022 (-0.64) capreg * gdpg 0.013*** (2.96) -0.001 (-0.14) 0.011 (1.12) 0.012* (1.94) -0.002 (-0.44) 0.003 (0.44) borrower* capreg 0.034* (1.84) 0.027 (0.92) 0.288*** (2.67) 0.038 (1.64) -0.013 (-0.53) 0.045 (0.95) capreg * borrower * gdpg -0.017*** (-4.17) -0.006 (-1.09) -0.035 (-1.59) -0.017*** (-2.94) -0.002 (-0.49) -0.015 (-1.44) constant 1.057** (2.09) 1.592*** (4.21) 3.781*** (3.51) 1.174** (2) -0.57 (-0.9) 0.734 (1.16) p-hansen 1.000 0.902 1.000 1.00 1.00 1.00 m2 -1.799 -0.593 -1.319 -1.40 -2.63 0.77 p-val 0.072 0.553 0.187 0.16 0.01 0.44 obs 4869 5714 1939 2411 2213 1409 n o t e s t o t a b l e 2 . variables description as in the table 1. large is a dummy variable equal to 1 if a bank belongs to the 30% corresponding to the largest banks; medium is a dummy variable equal to 1 if a bank belongs to the next 40% of banks; small is a dummy variable equal to 1 if a bank belongs to the last 30% of banks with the smallest assets. all regressions include country and year dummies and interactions between country and year dummies. s o u r c e : authors’ calculations. as for the small banks sample we do not find a consistent effect of borrower on the link between gdpg and llp, because the impact is significant in unconsolidated data, and not significant in consolidated data. as for restrictive capital regulations, our results support the view that it is only large banks that exhibit reduced procyclicality due to the application of more restrictive capital adequacy regulations. the regression coefficient on the interaction term between capreg and gdpg is positive and statistically significant (at 1%) only in the sample of large bank and equals 0.017 in both unconsolidated and consolidated data. thus we find support for the view that restrictive capital regulations were effective in diminishing procyclicality of llp mostly in large banks. table 2. the effect of restrictiveness… małgorzata olszak, sylwia roszkowska, iwona kowalska42 looking now at the joint effect of both borrower and capreg on the cyclicality of llp in banks differing in size, we obtain result similar to the one obtained for the full sample, and statistically significant only in the large banks subsample. the regression coefficient on triple interaction term of capreg * borrower * gdpg is negative (equals about –0.017, in columns 1 and 4). such a result implies that merging restrictive borrower targeted instruments and capital regulations tends to weaken the countercyclical effect of borrower and capreg, applied separately.  conclusions we analyze the effects of macroprudential policy instruments and micro-prudential capital regulations on the procyclicality of loan-loss provisions, using individual bank information from over 65 countries. in this study we test whether the interaction between borrower targeted macroprudential policy instruments and restrictive micro-prudential capital regulations tends to adjust the countercyclical effect of borrower targeted instruments and capital regulations. to this end we apply the two-step gmm estimator with robust standards errors. our analysis implies that merging restrictive borrower targeted instruments and capital regulations tends to weaken the countercyclical effect of borrower targeted macroprudential policy instruments and restrictive capital adequacy regulations. this effect depends on size, and is stronger in large banks. our results are of importance for regulatory policy decision-makers. first, we show that borrower targeted macroprudential policy instruments are more effective in reducing procylicality of loan-loss provisions than micro-prudential capital adequacy standards. thus regulatory policy aimed at taming procyclicality of the financial sector should essentially be more concentrated on implementation of macroprudential policy instruments. second, more restrictive capital standards tend to weaken countercyclical effects of macroprudential policy, however this reduction is relatively mild. therefore, our results imply that the loss of efficacy of macroprudential policy due to restrictive capital standards is not very high. consequently, our results are in favour of the use of more restrictive capital adequacy regulations, as an additional instrument, along with borrower targeted macroprudential tools. the joint effect of borrower targeted macroprudential… 43  acknowledgments we gratefully acknowledge the financial support provided by the polish national scientific centre (ncn), no. of decision dec-2012/05/d/hs4/01356. this paper’s findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of institutions to which the authors are affiliated.  references alper, k., binici, m., demiralp, s., kara, h., & ozlu, p. 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[46] a pp en di x t ab le a 1 . d es cr ip ti ve s ta ti st ic s by c ou nt ry a nd d es cr ip ti ve s ta ti st ic s in th e fu ll sa m pl e (p an el b ) in u nc on so lid at ed a nd c on so lid at ed d at a co un tr y na m e u nc on so lid at ed co ns ol id at ed m ac ro pr ud en ti al in de x ca pi ta l re gu la ti on in de x median llp median profitbpt median ∆l median capr median size # obs # banks median llp median profitbpt median ∆l median capr median size # observ # banks borrower capreg a rg en ti na 0. 67 2. 48 0. 77 12 .1 2 12 .5 1 59 7 56 0. 67 3. 04 17 .2 8 10 .7 3 6. 46 13 7 14 0 6 a us tr al ia 0. 14 1. 25 4. 43 6. 11 15 .9 9 19 5 20 0. 17 1. 51 8. 84 5. 99 7. 32 14 0 14 0 9 a us tr ia 0. 28 1. 20 2. 01 8. 75 12 .9 9 52 0 57 0. 43 1. 12 4. 27 6. 87 6. 79 13 7 15 0 4 be lg iu m 0. 04 0. 57 1. 91 5. 38 14 .5 6 23 3 25 0. 06 0. 80 4. 34 4. 87 6. 88 95 10 0 8 bo liv ia 1. 01 2. 17 -0 .9 8 9. 32 12 .9 7 11 6 10 0 0 n. a. n. a. br az il 0. 86 3. 60 2. 61 14 .5 9 13 .5 5 80 2 82 0 0 0 5 bu lg ar ia 0. 37 1. 82 3. 44 12 .0 4 12 .4 4 19 2 19 0. 66 2. 88 24 .0 0 12 .8 4 6. 06 39 4 0. 5 9 ca na da 0. 14 0. 79 3. 80 11 .4 1 13 .1 0 10 5 11 0. 19 1. 27 5. 62 6. 06 6. 81 22 6 23 0. 5 6 ch ile 0. 54 2. 01 2. 66 9. 90 14 .2 9 18 1 21 0. 66 2. 36 13 .0 0 8. 19 6. 73 11 5 12 2 6 ch in a 0. 35 1. 39 6. 42 5. 11 15 .6 2 41 6 53 0. 35 1. 63 15 .6 6 5. 22 8. 10 12 6 13 1. 3 n. a. co lo m bi a 1. 19 3. 38 1. 02 11 .5 5 14 .3 8 18 9 17 1. 69 4. 65 13 .1 5 10 .2 3 6. 94 31 4 2 7 cr oa ti a 0. 50 1. 67 4. 41 12 .6 9 12 .4 4 29 5 29 0. 38 2. 15 13 .4 0 9. 54 6. 76 54 5 0 8 [47] co un tr y na m e u nc on so lid at ed co ns ol id at ed m ac ro pr ud en ti al in de x ca pi ta l re gu la ti on in de x median llp median profitbpt median ∆l median capr median size # obs # banks median llp median profitbpt median ∆l median capr median size # observ # banks borrower capreg cy pr us 0. 31 1. 44 4. 47 7. 16 13 .0 3 46 7 0. 53 1. 20 9. 73 6. 94 6. 58 39 4 0. 7 9 cz ec h re p. 0. 17 1. 14 8. 46 7. 66 14 .6 3 10 0 13 0. 20 1. 88 6. 53 8. 05 7. 15 64 6 0 n. a. d en m ar k 0. 39 1. 94 3. 97 11 .2 0 13 .3 2 51 0 45 0. 39 1. 38 6. 89 6. 73 6. 71 15 6 15 n. a. n. a. ec ua do r 0. 55 1. 95 1. 50 10 .2 3 11 .6 0 23 9 27 0. 47 2. 61 5. 85 8. 47 6. 33 22 2 0. 8 9 eg yp t 0. 77 1. 64 -0 .3 7 8. 67 14 .3 5 22 0 22 0 0 n. a. 10 el s al va do r 0. 98 1. 51 0. 95 10 .8 4 12 .8 9 95 10 1. 18 2. 38 3. 30 10 .8 4 6. 32 36 4 0 7 es to ni a 0. 25 1. 48 4. 66 10 .8 3 12 .7 5 51 6 0. 39 1. 91 24 .3 4 8. 56 6. 29 38 4 0 8 fi nl an d 0. 01 0. 80 5. 94 5. 32 16 .3 7 56 5 0. 04 0. 94 10 .0 4 5. 40 7. 44 38 4 0 6 fr an ce 0. 21 1. 23 2. 59 6. 78 14 .0 8 10 15 10 1 0. 18 0. 92 4. 89 5. 55 7. 04 35 3 36 0 8 g er m an y 0. 28 1. 05 2. 25 7. 04 13 .5 2 11 73 11 3 0. 20 0. 55 -0 .1 7 4. 73 6. 63 17 5 20 0 8 g ha na 0. 95 4. 32 1. 04 10 .8 6 11 .9 2 13 9 16 1. 72 6. 48 14 .6 7 11 .2 6 5. 63 40 4 0 7 g re ec e 0. 48 1. 06 5. 10 7. 69 15 .4 8 13 7 15 0. 63 1. 47 15 .4 8 7. 13 7. 03 13 1 13 n. a. 7 h on g ko ng 0. 23 1. 39 1. 48 10 .8 2 15 .7 0 50 7 0. 13 1. 53 6. 91 9. 92 7. 02 21 7 21 2 6 h un ga ry 0. 62 1. 51 1. 36 9. 73 13 .1 4 74 10 0. 56 2. 25 14 .0 9 8. 21 6. 82 87 9 0. 2 4 t ab le a 1 . d es cr ip ti ve s ta ti st ic s… [48] t ab le a 1 . d es cr ip ti ve s ta ti st ic s… co un tr y na m e u nc on so lid at ed co ns ol id at ed m ac ro pr ud en ti al in de x ca pi ta l re gu la ti on in de x median llp median profitbpt median ∆l median capr median size # obs # banks median llp median profitbpt median ∆l median capr median size # observ # banks borrower capreg ic el an d 0. 38 1. 77 -0 .9 2 6. 24 15 .1 8 5 1 0. 42 2. 16 32 .3 2 6. 57 6. 67 21 3 0 6 in di a 0. 42 1. 93 2. 56 5. 68 15 .4 6 64 1 54 0. 41 2. 35 17 .1 5 6. 21 7. 22 83 11 0 9 in do ne si a 0. 34 2. 28 1. 64 10 .6 5 13 .4 7 39 5 41 0. 56 2. 69 15 .2 1 9. 26 6. 71 13 3 13 0 10 ir el an d 0. 02 0. 52 3. 07 4. 75 16 .6 8 13 2 0. 13 1. 00 12 .7 7 5. 11 7. 58 76 8 0 8 is ra el 0. 36 0. 91 1. 45 6. 10 16 .3 0 10 1 9 0. 38 1. 17 2. 98 5. 61 7. 07 11 0 10 0. 1 8 it al y 0. 31 1. 28 4. 97 8. 23 14 .6 9 79 7 80 0. 34 1. 24 8. 39 7. 32 7. 07 16 7 19 0 6 ja m ai ca 0. 22 2. 60 0. 11 11 .7 8 13 .3 6 59 6 0. 16 3. 06 10 .5 6 11 .5 5 5. 98 45 5 0 10 ja pa n 0. 31 0. 58 7. 88 4. 76 16 .8 1 14 82 12 0 0. 30 0. 62 0. 94 4. 94 7. 33 12 40 11 1 0 n. a. jo rd an 0. 27 1. 91 1. 42 9. 84 15 .7 8 24 2 0. 42 2. 45 6. 22 12 .7 8 6. 16 88 9 0 9 ka za hk st an 0. 48 2. 44 2. 31 13 .9 4 12 .3 0 84 9 2. 23 4. 39 52 .4 5 10 .4 6 6. 32 72 7 0 n. a. ke ny a 0. 72 3. 24 0. 65 14 .4 7 11 .4 8 21 9 28 0. 63 3. 88 7. 81 12 .1 0 5. 77 92 9 0 8 la tv ia 0. 29 1. 57 5. 09 9. 26 12 .6 8 22 0 20 0. 42 1. 97 21 .6 1 8. 32 5. 97 98 13 0. 4 9 li th ua ni a 0. 35 1. 12 6. 45 9. 26 13 .3 7 11 2 10 0. 43 1. 54 26 .4 5 9. 94 6. 09 71 7 0 7 lu xe m bo ur g 0. 03 0. 78 1. 00 4. 47 14 .8 5 58 0 62 0. 02 0. 91 3. 11 5. 29 7. 48 59 6 n. a. 7 [49] t ab le a 1 . d es cr ip ti ve s ta ti st ic s… co un tr y na m e u nc on so lid at ed co ns ol id at ed m ac ro pr ud en ti al in de x ca pi ta l re gu la ti on in de x median llp median profitbpt median ∆l median capr median size # obs # banks median llp median profitbpt median ∆l median capr median size # observ # banks borrower capreg m al ay si a 0. 32 1. 89 2. 54 8. 87 15 .5 5 26 8 24 0. 42 2. 02 6. 50 7. 74 7. 02 18 5 17 1 4 m al ta 0. 09 1. 59 3. 14 7. 63 14 .4 0 27 3 0. 09 1. 48 5. 91 6. 86 6. 25 22 2 0 7 m ex ic o 0. 65 1. 19 0. 53 11 .5 6 13 .3 9 16 9 22 1. 01 2. 56 12 .5 1 10 .7 2 6. 71 15 7 16 0 3 m or oc co 0. 50 2. 09 4. 59 8. 24 15 .3 3 78 7 0. 45 2. 42 12 .9 6 9. 12 6. 90 66 8 0 8 n et he rl an ds 0. 06 1. 12 4. 32 8. 24 14 .6 7 59 10 0. 14 0. 73 6. 22 6. 56 7. 05 13 3 14 0 8 n ew z ea la nd 0. 08 1. 25 2. 43 4. 72 15 .9 1 79 8 0. 10 1. 62 7. 82 5. 85 7. 38 47 5 0 2 n ig er ia 0. 71 3. 83 1. 37 12 .8 5 13 .8 2 18 9 19 0. 77 4. 08 21 .1 7 11 .6 7 6. 40 86 10 n. a. 6 n or w ay 0. 11 0. 86 3. 56 6. 63 14 .8 1 10 0 11 0. 06 0. 86 9. 80 6. 53 7. 00 42 5 0. 2 7 pa ki st an 0. 47 1. 68 0. 67 7. 68 14 .0 8 19 4 18 0. 60 2. 47 3. 97 7. 89 6. 49 80 11 1. 5 8 pa na m a 0. 41 1. 62 2. 40 10 .0 5 12 .4 5 18 5 31 0. 47 1. 98 10 .8 7 10 .8 2 5. 87 12 5 16 n. a. 6 pe ru 1. 06 2. 95 3. 04 9. 99 13 .7 5 99 11 0. 81 3. 47 10 .0 3 9. 49 6. 93 37 4 0 8 ph ili pp in es 0. 52 1. 80 0. 97 12 .1 3 14 .0 0 21 9 23 0. 41 1. 96 2. 18 11 .2 2 6. 55 12 3 13 0 8 po la nd 0. 31 1. 35 4. 20 10 .1 3 13 .7 7 30 8 34 0. 47 1. 78 6. 26 9. 35 7. 07 91 9 0. 1 8 po rt ug al 0. 35 1. 13 4. 71 6. 76 14 .9 8 12 7 14 0. 31 1. 21 8. 85 7. 47 6. 75 85 9 0 4 [50] t ab le a 1 . d es cr ip ti ve s ta ti st ic s… co un tr y na m e u nc on so lid at ed co ns ol id at ed m ac ro pr ud en ti al in de x ca pi ta l re gu la ti on in de x median llp median profitbpt median ∆l median capr median size # obs # banks median llp median profitbpt median ∆l median capr median size # observ # banks borrower capreg ro m an ia 0. 58 1. 76 1. 19 13 .6 6 12 .7 3 17 7 19 0. 92 3. 09 27 .1 0 11 .5 8 6. 21 57 7 1 8 ru ss ia n fe de ra ti on 0. 33 2. 47 1. 12 15 .4 2 11 .1 0 29 97 55 7 1. 06 3. 54 24 .4 1 13 .5 2 6. 12 45 5 54 0 7 si ng ap or e 0. 08 1. 43 1. 98 11 .9 0 15 .1 0 66 7 0. 14 1. 70 4. 51 11 .7 2 7. 68 48 5 1 8 sl ov ak r ep . 0. 44 1. 20 2. 82 8. 29 13 .7 3 89 9 0. 24 1. 43 8. 34 8. 43 6. 56 59 6 1 6 sl ov en ia 0. 61 1. 44 2. 23 8. 82 14 .3 5 12 2 12 0. 71 1. 90 11 .9 6 8. 70 6. 37 86 8 0 7 so ut h a fr ic a 0. 61 2. 35 1. 96 8. 50 12 .4 4 15 6 14 0. 81 2. 23 6. 12 7. 00 7. 31 58 7 0 5 so ut h ko re a 0. 62 1. 47 2. 39 5. 29 16 .9 5 16 2 15 0. 65 1. 75 8. 03 5. 45 7. 70 13 5 13 1. 4 9 sp ai n 0. 27 0. 97 4. 20 6. 39 14 .6 9 36 1 37 0. 32 1. 20 7. 95 6. 40 7. 01 19 0 20 1 8 sr i l an ka 0. 54 2. 02 0. 35 7. 33 13 .3 8 13 5 12 0. 58 2. 47 5. 41 6. 63 6. 11 85 8 0 5 sw ed en 0. 10 1. 57 6. 63 10 .6 1 13 .4 8 16 0 16 0. 06 0. 70 11 .0 7 4. 27 7. 12 50 5 0. 1 n. a. sw it ze rl an d 0. 11 1. 05 5. 45 11 .5 8 12 .6 3 10 55 11 4 0. 11 1. 24 2. 25 15 .4 9 5. 94 12 8 15 0 7 ta iw an 0. 59 0. 99 2. 50 6. 49 16 .0 3 39 9 35 0 0 n. a. 7 th ai la nd 0. 59 1. 33 2. 37 8. 75 15 .6 6 19 3 18 0. 68 1. 66 3. 63 8. 72 7. 12 11 8 11 0. 7 9 tu ni si a 0. 94 1. 94 1. 49 8. 88 14 .1 5 15 3 15 1. 18 2. 05 5. 86 9. 79 6. 42 56 8 0 n. a. [51] t ab le a 1 . d es cr ip ti ve s ta ti st ic s… co un tr y na m e u nc on so lid at ed co ns ol id at ed m ac ro pr ud en ti al in de x ca pi ta l re gu la ti on in de x median llp median profitbpt median ∆l median capr median size # obs # banks median llp median profitbpt median ∆l median capr median size # observ # banks borrower capreg tu rk ey 0. 85 3. 02 0. 17 11 .9 9 15 .1 0 72 8 0. 60 3. 07 15 .9 4 11 .4 4 6. 73 20 6 21 0. 4 10 u ga nd a 0. 42 4. 44 1. 91 14 .5 7 11 .3 6 10 1 11 0. 21 5. 99 23 .3 1 12 .0 3 5. 11 26 3 0 9 u kr ai ne 1. 08 2. 70 2. 69 12 .6 6 12 .5 5 23 8 25 1. 99 3. 56 35 .6 4 10 .5 5 6. 07 11 4 12 0 9 u ni te d ki ng do m 0. 08 0. 91 2. 91 8. 95 14 .4 0 45 2 60 0. 29 1. 25 9. 64 6. 44 7. 22 33 0 36 0 3 u ni te d st at es 0. 19 1. 46 1. 07 9. 75 11 .6 0 66 77 0 65 20 0. 23 1. 60 6. 39 9. 48 6. 33 54 4 56 0 8 u ru gu ay 0. 51 1. 35 -0 .0 1 8. 61 12 .7 5 17 7 18 0 0 n. a. 8 ve ne zu el a 0. 58 3. 85 0. 32 11 .1 8 13 .5 9 23 8 26 0. 87 5. 50 27 .0 6 10 .8 8 6. 63 50 5 n. a. 9 zi m ba bw e 1. 09 10 .7 8 -1 .4 8 10 .3 2 12 .6 9 36 5 0 0 n. a. 9 t h is t a b le p r e s e n ts t h e s u m m a r y d e s c r ip ti v e s ta ti s ti c s o f v a r ia b le s i n c lu d e d i n t h e s tu d y : l lp – lo an lo ss p ro vi si on s ov er a ve ra ge to ta l a ss et s; p r o fi t b p t – pr of it b ef or e pr ov is io ns a nd ta xe s ov er a ve ra ge a ss et s; ∆ l – lo an s gr ow th ; c a pr – e qu it y ca pi ta l d iv id ed by to ta l a ss et s; s iz e – lo ga ri th m o f t ot al a ss et s; g d pg – r ea l g d p gr ow th p er c ap it a; u ne m pl – a nn ua l u ne m pl oy m en t r at e; o bs – d en ot es o bs er va ti on s; tst at is ti cs a re g iv en in p ar en th es es . * ** , * * or * n ex t t o co ef fi ci en ts in di ca te t ha t c oe ff ic ie nt s ar e si gn if ic an tl y di ff er en t f ro m z er o at t he 1 % , 5 % , o r 10 % le ve ls , r es pe ct iv el y. # – d en ot es t he n um be r of . s o u r c e : a ut ho rs ’ c al cu la ti on s. [52] table a2. descriptive statistics and correlations in the full sample (panel b) in unconsolidated and consolidated data llp profitbpt ∆l capr size gdpg unempl descriptive statistics unconsolidated mean 0.496 1.585 3.353 11.115 12.265 1.542 6.593 median 0.214 1.457 1.233 9.750 11.908 1.681 5.900 sd 1.247 3.545 13.232 5.685 1.872 2.819 2.473 min -18.902 -254.546 -49.857 0.005 3.745 -17.952 0.700 max 49.670 315.416 199.473 50.000 21.855 30.344 27.200 # obs 82356 93731 91789 93121 94388 109968 109968 consolidated mean 0.730 2.029 13.822 9.297 6.802 2.481 7.363 median 0.377 1.555 6.479 7.814 6.803 2.180 6.750 sd 1.298 2.368 35.711 5.911 0.920 3.689 3.648 min -9.634 -9.068 -53.133 0.078 3.892 -16.589 0.700 max 19.654 40.153 884.389 49.468 9.486 30.344 27.200 # obs 9454 9668 8951 9968 10080 11892 11892 correlations unconsolidated llp 1 profitbpt 0.177*** 1 ∆l -0.045*** -0.030*** 1 capr 0.087*** 0.157*** 0.113*** 1 size 0.008*** -0.020*** 0.052*** -0.324*** 1 gdpg -0.081*** 0.018*** 0.000 0.041*** -0.007*** 1 unempl 0.126*** -0.002 -0.013*** 0.000 0.121*** -0.087*** 1 consolidated llp 1 profitbpt 0.339*** 1 ∆l -0.004 0.172*** 1 [53] llp profitbpt ∆l capr size gdpg unempl descriptive statistics unconsolidated capr 0.170*** 0.421*** 0.096*** 1 size -0.150*** -0.253*** -0.134*** -0.528*** 1 gdpg -0.133*** 0.142*** 0.253*** 0.108*** -0.133*** 1 unempl 0.140*** 0.135*** 0.034*** 0.175*** -0.217*** -0.040*** 1 t h i s t a b l e p r e s e n t s t h e s u m m a r y d e s c r i p t i v e s t a t i s t i c s o f v a r i a b l e s i n c l u d e d i n t h e s t u d y : llp – loan loss provisions over average total assets; profitbpt – profit before provisions and taxes over average assets; ∆l – loans growth; capr – equity capital divided by total assets; size – logarithm of total assets; gdpg – real gdp growth per capita; unempl – annual unemployment rate; obs – denotes observations; # – denotes the number of. s o u r c e : authors’ calculations. table a2. descriptive statistics… copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: august 31, 2016; date of acceptance: january 3, 2017. * contact information: k.nowak@doktorant.umk.pl, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: +48 607 552 226. nowak, k. (2016). implementation of alternative index weighting to warsaw stock exchange. copernican journal of finance & accounting, 5(2), 163–179. http://dx.doi.org/10.12775/ cjfa.2016.021 kamil nowak* nicolaus copernicus university implementation of alternative index weighting to warsaw stock exchange keywords: smart beta, alternative indexing, quantitative weighting, etf. j e l classification: g11. abstract: exchange traded funds are the fastest growing segment of investment management business. over last eleven years etf’s aum grew over 2,000% this paper explores growing popularity of this investment vehicle and getting to the genesis of index tracking funds and to the roots of indexing, bares shortcomings of most common weighting scheme – capitalization weighting. those f laws caused the rise of quantitative investing. the author reviews the literature in search of the most relevant smart beta definition and the reasons why this new investment concept is blooming nowadays. the substance of this paper is presentation of most popular alternative weighting schemes and exploration of their pros and cons by implementing those solutions to polish index wig20. the impact of alternative weighting on performance of the index and its features has been synthesized and evaluated. in the result of this analyses and comparison cap-weighted wig20 turned out to be the less effective weighting scheme.  introduction exchange traded funds, smart beta strategies, alternative weighting schemes are lately very hot topic among the economists, investors and asset managers. growing popularity of those new investment vehicles goes along with growing kamil nowak164 number of publications praising or pointing the f laws of new solutions. this paper tries to get to the roots of this growing popularity and find the genesis of alternative indexing. the literature presents many weighting schemes but which of them are worth implementation? reviewing the publication of experts like arnott, malkiel or edhec-risk institute, four major alternative schemes has been chosen to present, implement and evaluate. whether smart beta is a revolutionary new concept or just a new wine in old bottles, we can observe those strategies booming right now. almost every major asset management company launched their own smart beta etfs. is it just the marketing gimmick or those alternatives have more to offer to the investors than just a hype? the purpose of this study is an attempt to answer those questions by implementing new weighting schemes to polish index wig20 and comparison with traditional cap-weighted approach. the research methodology and the course of the research process the paper contains empirical analysis and descriptive research studies carried out in several steps. first step looks into growing popularity of etfs and genesis of indexing. than reviewing the literature defines smart beta and describes quantitative investing. finally, paper focuses on implementation of alternative weighting schemes to wig20 index. given the results of the prior studies, the following hypothesis was formulated: hypothesis 1.: implementation of alternative weighting schemes to warsaw stock exchange may improve index’s performance. gpw database has been used to find the monthly mean return rates of wig 20 components. 43 months period (since january of 2013) has been analyzed. author calculated covariance matrix, sharpe ratio, correlation matrix and standard deviation of the portfolios using microsoft excel sheet. than depending on the weighting scheme the allocations has been optimized using solver function. created indices has been simply evaluated, by short term performance comparison and described, by emphasizing their specific features. the study ends with conclusions achieved by literature review and analysis of created portfolios. implementation of alternative index weighting… 165 growing popularity of etf’s exchange traded funds have been introduced 26 years ago. in that time etfs evolved from rather niche investment vehicles to the fastest growing segment of investment management business. nowadays they are highly appreciated by financial advisors, investment managers and asset owners. etfs became even core holdings for some open ended investment funds. their advantages and simplicity made them a powerful tool for almost every portfolio management strategy. as can be seen on figure 1 etf’s aum grew rapidly over the last eleven years. from only 416 us$ bn to nearly 3,000 us$ bn. figure 1. global etf growth 2005–2016 every portfolio management strategy. as can be seen on figure 1 etf’s aum grew rapidly over the last eleven years. from only 416 us$ bn to nearly 3,000 us$ bn. figure 1. global etf growth 2005-2016 source: http://www.etfgi.com/. figure 2 shows how etf business expanded over the past years. aum grew over 2,000% mutual fund growth comparing to etf’s is dramatically lower. 120% aum increase over thirteen years can be explained only by much older and stable industry. however, etfs are becoming serious competitors in such a saturated market. figure 1. etf vs mutual fund growth (percentage in assets since 2001) source: http://etfdb.com. where does that growing popularity come from? etf’s features, significantly different than earlier investment products provides broad range of advantages over other investment vehicles: 0 500 1000 1500 2000 2500 3000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 416 580 807 716 1041 1313 1355 1754 2254 2649 2874 2996assets (us$ bn) 0% 23% 82% 175% 263% 410% 633% 540% 836% 1095%1163% 1511% 1918% 2279% 0% -8% 6% 16% 27% 49% 72% 38% 59% 70% 67% 87% 115% 127% -500% 0% 500% 1000% 1500% 2000% 2500% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 etfs mutual funds s o u r c e : http://www.etfgi.com/. figure 2 shows how etf business expanded over the past years. aum grew over 2,000% mutual fund growth comparing to etf’s is dramatically lower. 120% aum increase over thirteen years can be explained only by much older and stable industry. however, etfs are becoming serious competitors in such a saturated market. kamil nowak166 figure 2. etf vs mutual fund growth (percentage in assets since 2001) every portfolio management strategy. as can be seen on figure 1 etf’s aum grew rapidly over the last eleven years. from only 416 us$ bn to nearly 3,000 us$ bn. figure 1. global etf growth 2005-2016 source: http://www.etfgi.com/. figure 2 shows how etf business expanded over the past years. aum grew over 2,000% mutual fund growth comparing to etf’s is dramatically lower. 120% aum increase over thirteen years can be explained only by much older and stable industry. however, etfs are becoming serious competitors in such a saturated market. figure 1. etf vs mutual fund growth (percentage in assets since 2001) source: http://etfdb.com. where does that growing popularity come from? etf’s features, significantly different than earlier investment products provides broad range of advantages over other investment vehicles: 0 500 1000 1500 2000 2500 3000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 416 580 807 716 1041 1313 1355 1754 2254 2649 2874 2996assets (us$ bn) 0% 23% 82% 175% 263% 410% 633% 540% 836% 1095%1163% 1511% 1918% 2279% 0% -8% 6% 16% 27% 49% 72% 38% 59% 70% 67% 87% 115% 127% -500% 0% 500% 1000% 1500% 2000% 2500% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 etfs mutual funds s o u r c e : http://etfdb.com. where does that growing popularity come from? etf’s features, significantly different than earlier investment products provides broad range of advantages over other investment vehicles: ■ accessibility – etfs finally brought democracy to investment management business. markets and asset classes reserved only for large institutional investors became easily accessible for individual investors. a sophisticated portfolio can be composed with just an access to a brokerage account. ■ transparency – the most of etfs are obliged to display their portfolios on a daily basis. etfs investors unlike mutual funds clients do not have to wonder where their funds have been invested between reporting periods or if a portfolio manager has taken unnecessary risk. knowing the underlying assets investors may avoid doubling the exposures by holding those assets elsewhere. ■ liquidity – ‘exchange traded’ is the key to etfs extraordinary liquidity. they can be traded multiple times, daily exactly as stocks with transparency and regulatory protection. also like stocks etfs can be held with a margin, shorted or optioned. the creation/redemption process allows investors to arbitrage between fund and its underlying securities. ■ tax efficiency – unlike mutual funds etfs do not expose their shareholders to capital gains distributions. the redemption in kind ability practically eliminates the need of capital gains distributions. ■ costs – last but not least, probably the biggest, advantage of etfs is their expense ratio. average mutual fund expense ratio is almost 150% higher than average etf’s expense ratio. the savings can be achieved be implementation of alternative index weighting… 167 cause etfs are traded on the stock exchange and most of the costs like recordkeeping or sending the prospectus are borne by brokers. in summary etfs set up new investing standards. with lower costs, liquidity, accessibility and tax efficiency they are attracting investors money definitely faster than regular mutual funds. new markets and asset classes became more accessible for smaller investors. in the other hand, big institutional investors received a powerful, liquid tool to be used in their short and long term strategies. what is more, etfs brought a revolution to classic distribution system accelerating transition to fee based relation between investor and advisor (hill et al., 2015). genesis of index tracking funds index tracking etfs are considered a passively managed investment vehicles. hearing such statement question arises: what does passive management mean? index tracking etfs are mirroring the chosen index by holding assets in exact proportion as an underlying index does. going further: why does the index hold more certain assets than the other? to answer that we have to go back to the 1950s when modern portfolio theory was introduced by h. markowitz and to 1960s when w. sharpe enriched markowitz’s theory by implementing capm model. according to markowitz an investor can construct an effective portfolio that can maximize the returns bearing given level of risk and otherwise certain return can be achieved by bearing minimum risk. according to mpt when assets in the portfolio are positively correlated with each other, the portfolio’s variance increases and decreases when assets are negatively correlated. in other words, investor can reduce risk exposure by portfolio diversification, considering also correlation across the assets (markowitz, 1952). mpt was a sole basis to w. sharpe capm theory which distinguished systematic from specific risk. the systematic risk is a risk of the market and is borne by all the market investors. while the specific risk inhere only a specific security or a group of securities. according to sharpe, while systematic risk is unavoidable, specific risk can be reduced by proper diversification. the only portfolio free of specific risk is market portfolio, which is a portfolio consisting of a weighted sum of every asset, weighted in proportion to its total presence in the market. capm theory also introduced beta – a measure that indicates asset’s volatility comparing to the market (sharpe, 1966). capm model is a single factor model where the only factor inf luencing asset return is its correlation with market kamil nowak168 return. beta factor can be applied not only to the assets but also to the portfolio. if beta=1, a risk of the portfolio is equal a risk of market portfolio. higher beta portfolios potentially bring higher returns than the market, but risk exposure is also higher than the market risk. in other words, according to the capm theory investing in other than market portfolio would expose investor to unrewarded risk (jajuga, 2004). in early 1970s b. malkiel in his recognized book ‘a  random walk down wall street’ (malkiel, 2011) also claimed that, buying the market is better that picking individual stocks. circle of capm theory enthusiasts grew rapidly in the 1970s and the first cap-weighted index mutual fund was introduced in 1975 by vanguard group (hill et al., 2015). shortcomings of cap-weighted indexing 40 years after introduction of cap-weighted indexing, it is no longer clear that this is the only one legitimate choice of portfolio creation. cap–weighting would be great solution for efficient markets. obviously markets are inefficient, so holding a portfolio of stocks weighted proportionally to their capitalization will end with overweighting the overpriced stocks and underweighting the underpriced stocks (arnott et al., 2010). literature describes two potential draw backs concerning cap-weighted indices: tilt to potential unrewarded risk factors and potential lack of diversification. market indices tend to tilt their exposure towards stocks with the largest capitalization and growth stocks (autier et al., 2016). regarding to fama and french exact opposite portfolio is more eager to outperforme the market. portfolio tilted more towards small capitalization and value stocks (fama & french, 1993). to minimize the risk investors are looking for well diversified portfolios. what is interesting, cap-weighted indices, which are considered as diversified, are indeed concentrated on the largest companies and most of their holdings are stocks with a largest capitalization. above mentioned shortcomings are obviously the reason why alternative weighing schemes were developed. quantitative investing – the rise of smart beta since 1923 when standard & poor’s introduced firs cap-weighted index, those indices have dominated the equity market. indices became an integral part of long term investing strategies and are commonly used by individual as well as institutional investors. choosing a right index became a crucial part of invest implementation of alternative index weighting… 169 ment process. in view of shortcomings of cap-weighted indices and growing need for investment vehicles to be more f lexible and ref lects current investor point of view, alternative weighting schemes have been constructed. nowadays, investors have a wide range of many different schemes to choose from. each of them has different objectives, but all have two advantages in common: transparency and attractive risk/reward ratio (amenc et al., 2010). constructing an index require two fundamental questions to be answered: which stocks should be included? and which weighting scheme should be used? when number and kind of stocks is defined, there is a time to decide which scheme will be suitable for chosen stocks. unlike capm, which both those question would answer with market capitalization, alternative methodologies consider: ■ different allocation techniques, ■ additional risk premium, ■ exposure to undervaluated assets, ■ use of other than buy and hold strategies (amenc et al., 2008). the strategy that differs from the traditional market capitalization index weighting is smart beta. what exactly is smart beta? recently the literature defines it various. definitely, two of them are worth to quote. first one, used by blackrock: “smart beta seeks to improve returns, reduce risks and enhance diversification for investors by delivering exposure to systematic investment factors. by combining characteristics of both passive and active investing, smart beta strategies allow investors to retain many benefits of passive strategies while seeking improved returns or reduced risk. smart beta is not simply a fund or strategy—it’s a different way of thinking about investing beyond traditional active and passive management” (shores, 2015). second definition, more reserved about the new weighting methodology by malkiel: “what most people who use the term have in mind is that it may be possible to gain excess (greater than market) returns by using a variety of relatively passive investment strategies that involve no more risk than would be assumed by investing in a low-cost total stock market index fund” (malkiel, 2015). smart beta definitely revolutionized asset management business. over last couple years smart beta etfs experienced an epic rise in aum and investor’s attention. nowadays smart beta is booming, but the whole concept isn’t new. fama, french and also carhart examined certain factor’s impact on portfolio return. themes like value and quality have been used by active managers for many years. if smart beta is not entirely new concept, why the sudden rise? for the last decade investors appreciated transparency, simplicity and low fees of passively managed stratkamil nowak170 egies. the progress of technology made fundamental data available and accurate. thanks to more accessible information and adoption of innovations, the historical data can be systematized, analyzed and many relations may be redefined. what is more, disregarding all the advantages of passive strategies, investors always have been looking to outperforme the market. recently with a support of technology and quantitative methods it might become possible. those trends mostly inf luenced such a rapid emerge of smart beta strategies (shores, 2015). implementation of alternative weighting schemes to polish wig20 index alternative index weighting is a highly emotional topic lately. considering how interesting and controversial the subject is, it’s definitely worth to present alternative solutions. in this section the author chose four most popular alternative weighting schemes, gave detailed description, emphasized their advantages and f laws. the best way to demonstrate the changes in the weights brought by each scheme it’s to use an as example already existing index. to simplify and bring out distinctive features of each indexing methodology, the author chose, as an example, polish equity index wig20, which is calculated by gpw since 1994. it’s based on the values of 20 most liquid companies with the biggest capitalization. equal weighting the equal weigh approach is one of the first alternative schemes. it is simply based on equal distribution of weights among the assets. it doesn’t use any information disclosed publicly or privately to prefer one company over the others. equal weighting is founded over assumption that, it is impossible to predict risk and return of the assets, so holding an equal amount of each security in the portfolio brigs the lowest risk. this scheme definitely is avoiding one of the biggest shortcomings of cap-weighted indices – overweighting overpriced companies and underweighting undervalued. underweighting or overweighting assets is no longer systematic, it became random. what is more, equal weights gave rise to immunity to estimation error and provide automatic diversification. unlike market capitalization, this approach tilts more towards small cap, because it holds small companies on the same scale as the largest. it may be an advantage, implementation of alternative index weighting… 171 figure 3. wig20. cap vs. equal weighting figure 2. wig20. cap vs. equal weighting source: author’s elaboration. table 1 compares annual return from cap-weighted and equal weighted wig20 portfolio. the rebalancing of the portfolio has been eliminated to avoid unnecessary calculations. that is the reason why return rates haven’t been compared in the longer term than a year. in a longer run exclusion of the rebalancing process is not an option, because without frequent rebalancing of the portfolio weights would become far from equal. concluding this comparison, equal weighted portfolio is definitely more diversified than cap-weighted. the risk is distributed equally among the component stocks. comparing annual return rates, it’s difficult not to perceive that diversification of the portfolio can significantly decrease the risk. going further, possible losses caused by major assets devaluation can be reduced. in this particular case by almost 5%. table 1. annual return rate: cap vs. equal weighted portfolio annual return annual return difference over 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%5% 5% 5% 5% 5% 5% 5% 5% 5% 5% cps opl mbk acp ena bzw pzu lts alr kgh pgn pge peo pkn pko eur eng tpe ccc lpp 3,12% 2,04% 2,77% 2,48% 1,46% 5,70% 9,93% 1,50% 1,67% 6,58% 5,80% 6,15% 12,02% 12,19% 14,37% 2,50% 1,19% 1,99% 2,89% 3,68% cps opl mbk acp ena bzw pzu lts alr kgh pgn pge peo pkn pko eur eng tpe ccc lpp s o u r c e : author’s elaboration. but on the other hand transaction costs are much higher, because ew portfolio needs to be rebalanced very often. of course lower liquidity of smallest companies should be taken into consideration, which may make frequent rebalancing quite challenging. what might be frustrating for some investors is a necessity to sell well performing assets and buy underperforming, during rebalancing process (arnott et al., 2010). figure 3 shows cap-weighted index wig20, where almost 50% of index capitalization is concentrated in four major assets: pzu, pko, peo, pkn. what is more, three out of four companies represents financial sector. going further, the return and the risk of the portfolio depends on performance of those four companies. holding an index portfolio like wig20 investor’s profit or loss depends mostly on condition and trends of only one sector. kamil nowak172 in the light of above considerations, the question arises: is the performance of those four stocks worth taking such a substantial risk? in this particular case, considering quite a short term, twelve months average return rate of wig20 components, the answer is no, because only one of those four companies – pko brought a slight return. on the other hand, underweighted stocks like eur or cps brought a significant return. as can be seen on figure below, equal weighting index eliminates the problem of underweighting undervalued stocks. the weights are distributed equally among the assets, so is the risk. table 1 compares annual return from cap-weighted and equal weighted wig20 portfolio. the rebalancing of the portfolio has been eliminated to avoid unnecessary calculations. that is the reason why return rates haven’t been compared in the longer term than a year. in a longer run exclusion of the rebalancing process is not an option, because without frequent rebalancing of the portfolio weights would become far from equal. concluding this comparison, equal weighted portfolio is definitely more diversified than cap-weighted. the risk is distributed equally among the component stocks. comparing annual return rates, it’s difficult not to perceive that diversification of the portfolio can significantly decrease the risk. going further, possible losses caused by major assets devaluation can be reduced. in this particular case by almost 5%. table 1. annual return rate: cap vs. equal weighted portfolio annual return annual return difference over cap-weighting cap-weighted wig20 -16,88% – equal weighted wig20 -12, 21% -4,67% s o u r c e : author’s elaboration. weighting for maximum sharpe ratio according to modern portfolio theory efficiently allocated portfolio, called also the tangency portfolio, is the one with the highest reward/risk ratio. in other words, investors should look for a portfolio with a highest sharpe ratio, which is defined as: implementation of alternative index weighting… 173 cap-weighting cap-weighted wig20 -16,88% equal weighted wig20 -12, 21% -4,67% source: author’s elaboration. weighting for maximum sharpe ratio according to modern portfolio theory efficiently allocated portfolio, called also the tangency portfolio, is the one with the highest reward/risk ratio. in other words, investors should look for a portfolio with a highest sharpe ratio, which is defined as: ��� = �� ������ �� ∑���������� ,where  -vector of expected return in excess of risk free rate, ��risk free rate,  the covariance matrix for returns of these elements. amenc, goltz and martellini in the result of the estimation of risk and expected return, proposed the weights optimization formula: w∗ = argmax� �� ������ �� ∑���������� ,where w* efficient weights. the goal of this approach is to generate the highest return from a unit of risk and increase return/risk efficiency. going further, it can be hypothesized, that msr portfolios will bring a constant return with a stable level of risk. of course, max sharpie ratio index needs to be rebalanced in frequent intervals. the question: is how frequent? there are approaches, which recommend quarterly rebalancing. however, managing transaction costs, it is reasonable to rebalance whenever it’s needed, disregarding time periods. amenc recommends to rebalance the weights whenever they will exceed certain, previously set proportions. the researches proves that efficient indexation brings significantly lower tracking error than cap-weighted indices (amenc et al., 2010). on the other hand, msr portfolio is based on the assumption, that the return is proportional to risk, what may cause exclusion of low– risk stocks. generally speaking, efficient indexation brings lower volatility and higher returns that cap-weighted indices. going back to polish market, figure 4 compares capweighted wig20 to msr weighted index based on wig20 components. it was created by maximizing sharpie ratio calculated on the ground of monthly return rates of wig20 companies (data range: 01.2013-07.2016). as the figure shows, only four assets has been chosen to the index. qualifying any other wig20 companies would result in lower sharpie ratio. to increase diversification, adding some constrains, like minimum weights, can be considered, but it will not increase the efficacy. to construct effective index an investor , where: µ – vector of expected return in excess of risk free rate, r0 – risk free rate, ∑ – the covariance matrix for returns of these elements. amenc, goltz and martellini in the result of the estimation of risk and expected return, proposed the weights optimization formula: cap-weighting cap-weighted wig20 -16,88% equal weighted wig20 -12, 21% -4,67% source: author’s elaboration. weighting for maximum sharpe ratio according to modern portfolio theory efficiently allocated portfolio, called also the tangency portfolio, is the one with the highest reward/risk ratio. in other words, investors should look for a portfolio with a highest sharpe ratio, which is defined as: ��� = �� ������ �� ∑���������� ,where  -vector of expected return in excess of risk free rate, ��risk free rate,  the covariance matrix for returns of these elements. amenc, goltz and martellini in the result of the estimation of risk and expected return, proposed the weights optimization formula: w∗ = argmax� �� ������ �� ∑���������� ,where w* efficient weights. the goal of this approach is to generate the highest return from a unit of risk and increase return/risk efficiency. going further, it can be hypothesized, that msr portfolios will bring a constant return with a stable level of risk. of course, max sharpie ratio index needs to be rebalanced in frequent intervals. the question: is how frequent? there are approaches, which recommend quarterly rebalancing. however, managing transaction costs, it is reasonable to rebalance whenever it’s needed, disregarding time periods. amenc recommends to rebalance the weights whenever they will exceed certain, previously set proportions. the researches proves that efficient indexation brings significantly lower tracking error than cap-weighted indices (amenc et al., 2010). on the other hand, msr portfolio is based on the assumption, that the return is proportional to risk, what may cause exclusion of low– risk stocks. generally speaking, efficient indexation brings lower volatility and higher returns that cap-weighted indices. going back to polish market, figure 4 compares capweighted wig20 to msr weighted index based on wig20 components. it was created by maximizing sharpie ratio calculated on the ground of monthly return rates of wig20 companies (data range: 01.2013-07.2016). as the figure shows, only four assets has been chosen to the index. qualifying any other wig20 companies would result in lower sharpie ratio. to increase diversification, adding some constrains, like minimum weights, can be considered, but it will not increase the efficacy. to construct effective index an investor , where w* – efficient weights. the goal of this approach is to generate the highest return from a unit of risk and increase return/risk efficiency. going further, it can be hypothesized, that msr portfolios will bring a constant return with a stable level of risk. of course, max sharpie ratio index needs to be rebalanced in frequent intervals. the question: is how frequent? there are approaches, which recommend quarterly rebalancing. however, managing transaction costs, it is reasonable to rebalance whenever it’s needed, disregarding time periods. amenc recommends to rebalance the weights whenever they will exceed certain, previously set proportions. the researches proves that efficient indexation brings significantly lower tracking error than cap-weighted indices (amenc et al., 2010). on the other hand, msr portfolio is based on the assumption, that the return is proportional to risk, what may cause exclusion of low–risk stocks. generally speaking, efficient indexation brings lower volatility and higher returns that cap-weighted indices. going back to polish market, figure 4 compares cap-weighted wig20 to msr weighted index based on wig20 components. it was created by maximizing sharpie ratio calculated on the ground of monthly return rates of wig20 companies (data range: 01.2013–07.2016). as the figure shows, only four assets has been chosen to the index. qualifying any other wig20 companies would result in lower sharpie ratio. to increase diversification, adding some constrains, like minimum weights, can be considered, but it will not increase the efficacy. to construct effective index an investor should reach beyond wig20 and add companies from outside of the largest twenty. of course, index consisting of only four stocks is not representative and diversified enough. however, it may be a good example, how far from being effective cap-weighted wig20 is. sharpie ratio for created portfolio equals 0.35 comparing to – 0.06 for cap-weighted. equating annual return rates in table 2 it is easy to see, how msr weighting kamil nowak174 improved the return rate. considering above mentioned arguments and calculations it is obvious that in wig20 case reaching out for alternative weighting scheme was definitely beneficiary. figure 4. wig20. cap vs. msr weighting should reach beyond wig20 and add companies from outside of the largest twenty. of course, index consisting of only four stocks is not representative and diversified enough. however, it may be a good example, how far from being effective cap-weighted wig20 is. sharpie ratio for created portfolio equals 0.35 comparing to – 0.06 for cap-weighted. equating annual return rates in table 3 it is easy to see, how msr weighting improved the return rate. considering above mentioned arguments and calculations it is obvious that in wig20 case reaching out for alternative weighting scheme was definitely beneficiary. figure 3. wig20. cap vs. msr weighting source: author’s elaboration. table 2. annual return rate: cap vs. msr portfolio annual return annual return difference over cap-weighting cap-weighted wig20 -16,88% msr-weighted wig20 +3,15% 13.73% 3,12% 2,04% 2,77% 2,48% 1,46% 5,70% 9,93% 1,50% 1,67%6,58% 5,80% 6,15% 12,02% 12,19% 14,37% 2,50% 1,19% 1,99% 2,89% 3,68% cps opl mbk acp ena bzw pzu lts alr kgh pgn pge peo pkn pko eur eng tpe ccc lpp 41,36% 28,53% 14,40% 15,71% ccc cps eur pkn s o u r c e : author’s elaboration. implementation of alternative index weighting… 175 table 2. annual return rate: cap vs. msr portfolio annual return annual return difference over cap-weighting cap-weighted wig20 -16,88% – msr-weighted wig20 +3,15% 13,73% s o u r c e : author’s elaboration. global minimum variance this approach has been introduced in the early 1990s. global minimum variance is designed to reduce portfolio risk and focuses on defining weights that will bring lowest possible portfolio volatility. the goal of gmv is to create high return and adjusting risk at a same time (arnott et al., 2010). researches of ang (ang et al., 2006) proves that comparing to the market low-volatility assets bring greater returns and high-volatility stocks usually bring lower returns than the market. the same regularity on european and japanese markets has been identified by blitz and van vliet (blitz & van vilet, 2007). construction of gmv index is quite simple. to find the right weights, only the estimation of volatilities and correlation of component assets is needed: source: author’s elaboration. global minimum variance this approach has been introduced in the early 1990s. global minimum variance is designed to reduce portfolio risk and focuses on defining weights that will bring lowest possible portfolio volatility. the goal of gmv is to create high return and adjusting risk at a same time (arnott et al., 2010). researches of ang (ang et al., 2006) proves that comparing to the market low-volatility assets bring greater returns and high-volatility stocks usually bring lower returns than the market. the same regularity on european and japanese markets has been identified by blitz and van vliet (blitz & van vilet, 2007). construction of gmv index is quite simple. to find the right weights, only the estimation of volatilities and correlation of component assets is needed: w��� = � ��� ������ ,where: 1vector of ones, ∑ covariance matrix. studying stock selection, it can be observed that gmv favors low beta stocks. that is the reason why low volatility indexes has the lowest beta of all alternative indices. of course low volatile assets are an advantage, but focus on least volatile stocks regardless of other factors may bring high concentration in utility sector, which is known of its low volatility (amenc et al., 2013). at this moment the question arises: if the investors are moving away from cap-weighted indices, because of their high concentration in the largest stocks, is choosing heavily concentrated, but in least volatile stocks a good solution? to diversify the gmv portfolios, improvements like constraining the weights or modifying model’s assumption has been proposed. the best known improved gmv approaches are maximum decorrelation, which assumes that volatility is the same across the stocks or diversified minimum variance, where has been assumed that there is no correlation between stocks. figure 5 shows implementation of gmv weighting to wig20 by minimizing index’s variance based on 43 months data. portfolio is quite diversified. contains 10 companies. other 10 have been eliminated due to negative mean return rates. over 45% of portfolio is concentrated in 2 companies: acp (it) and cps (media). both have positive mean return rate and one of the lowest standard deviation. looking on table 4, which compares annual return rates between cap and gmv weighted portfolio, it can be easily noticed how the return rate improved when the weighting scheme has changed. , where: 1– vector of ones, ∑ – covariance matrix. studying stock selection, it can be observed that gmv favors low beta stocks. that is the reason why low volatility indexes has the lowest beta of all alternative indices. of course low volatile assets are an advantage, but focus on least volatile stocks regardless of other factors may bring high concentration in utility sector, which is known of its low volatility (amenc et al., 2013). at this moment the question arises: if the investors are moving away from cap-weighted indices, because of their high concentration in the largest stocks, is choosing heavily concentrated, but in least volatile stocks a good solution? to diversify the gmv portfolios, improvements like constraining the weights or modifying model’s assumption has been proposed. the best known improved gmv approaches are maximum decorrelation, which assumes that volatility is the same across the stocks or diversified minimum variance, where has been assumed that there is no correlation between stocks. figure 5 shows implementation of gmv weighting to wig20 by minimizing index’s variance based on kamil nowak176 43 months data. portfolio is quite diversified. contains 10 companies. other 10 have been eliminated due to negative mean return rates. over 45% of portfolio is concentrated in 2 companies: acp (it) and cps (media). both have positive mean return rate and one of the lowest standard deviation. looking on table 3, which compares annual return rates between cap and gmv weighted portfolio, it can be easily noticed how the return rate improved when the weighting scheme has changed. figure 5. wig20. cap vs. gmv weighting table 3. annual return rate: cap vs. gmv portfolio annual return annual return difference over cap-weighting cap-weighted wig20 -16,88% gmv-weighted wig20 +5,28% 22.16% source: author’s elaboration figure 4. wig20. cap vs. gmv weighting source: author’s elaboration. the outcome of the research process and conclusions the rapid growth of smart beta strategies along with democratization of investing brought by etfs is often perceived as a threat by active asset managers. cost effective and approachable funds, traded via stock exchange with ability to outperform traditionally weighted indices and sometimes even actively managed funds, revolutionized asset management business. transparency of etfs with new, quantitative approach to stocks selec3,12% 2,04% 2,77% 2,48% 1,46% 5,70% 9,93% 1,50% 1,67%6,58% 5,80% 6,15% 12,02% 12,19% 14,37% 2,50% 1,19% 1,99% 2,89% 3,68% cps opl mbk acp ena bzw pzu lts alr kgh pgn pge peo pkn pko eur eng tpe ccc lpp 2,50% 22,89% 23,96% 9,01% 12,73% 0,14% 11,02% 8,84% 2,58% 6,32% alr acp cps eur lts lpp mbk peo pkn pko s o u r c e : author’s elaboration. implementation of alternative index weighting… 177 table 3. annual return rate: cap vs. gmv portfolio annual return annual return difference over cap-weighting cap-weighted wig20 -16,88% gmv-weighted wig20 +5,28% 22,16% s o u r c e : author’s elaboration. the outcome of the research process and conclusions the rapid growth of smart beta strategies along with democratization of investing brought by etfs is often perceived as a threat by active asset managers. cost effective and approachable funds, traded via stock exchange with ability to outperform traditionally weighted indices and sometimes even actively managed funds, revolutionized asset management business. transparency of etfs with new, quantitative approach to stocks selection is far from classical asset management. stocks are not selected by interviewing the management or studying prospectus. historical data is analyzed to redefine relations between component asset and simple questions are being asked. fundamental approach wants to know: how big is the company? and how is it doing so far? to answer that analysis of major accounting measures needs to be done. why any asset should be favored among the others? that is the question asked by equally weighted portfolio, which distributes weights equally among all the component stocks. minimum variance portfolio is the answer for the question: how to minimize the risk and generate highest possible return? how to optimize risk/reward ratio? that defines maximum sharpie ratio scheme (arnott et al., 2010). all the four described schemes have different risk/return ratio and different features, like minimum variance favors low beta stocks or fundamental weighting focuses on highest value exposure. graphical analysis allowed to compare impact of different schemes on wig20 index. the results of conducted research support the hypothesis. all the four described schemes outperformed wig20 index. analysis of empirical data in this paper definitely proved that cap-weighted wig20 is far from being effective. exposure to different factors showed how traditional indices can be simply improved and how to eliminate common problems of cap-weighted indices. each one of four presented alternatives provided a different solution. however, present research proves that implementation of alternative weighting schemes improves the performance of kamil nowak178 an index. drawing the conclusions from this analysis and reaching outside of wig20, alternative weighting schemes can be a great stock selection tool and with a sufficient data and resources interesting index can be created. different investors may choose the alternative with features they value the most or combine the schemes to access exposure to the desired factors in the right proportions. smart beta strategies might be also beneficial to active managers, who can use different, alternative approaches as building blocks to actively allocate risk and get desired factor tilts. alternatives are still a hot topic and considering the eternal battle between passive and active investing, the truth may lie in the middle. for over fifty years we all have been looking for alphas. now may be the time to stop chasing alphas and focus on improving the betas.  references amenc, n., goltz, f., le sourd, v. 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(2015). smart beta: defining the opportunity and solutions. blackrock. www.etfgi.com (accessed: 24.07.2016). www.etfdb.com (accessed: 24.07.2016). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 8 issue 2 2019 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik-dejewska scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2019 copyright by uniwersytet mikołaja kopernika toruń 2019 icv 2017: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents tajudeen adejare adegbite an evaluation of the effect of taxation policy on inflation in nigeria .......................... 7 mike onder kaymaz, ilker yilmaz, ozgur kaymaz the impact of intangible factors on profitability: evidence from corporations traded at muscat securities market in oman ..................................................................... 25 syed alamdar ali shah integration of financial risks with non financial risks: an exploratory study from pakistani context ...................................................................................................................... 49 tigor sitorus, kendo yuganda investor’s stock selection decision: influence of profitability, company size, and raroc ................................................................................................................................ 67 tekilu tadesse, tesfaye melaku analysis of the relative impact of monetary and fiscal policies on economic growth in ethiopia, using ardl approach to co-integration: which policy is more potent? ............................................................................................................................... 87 for authors ......................................................................................................................... 117 dla autorów proces recenzowania wszystkie nadsyłane artykuły są opiniowane przez radę programową oraz zostają przekazane do anonimowej oceny przez dwóch niezależnych recenzentów. redakcja pisma zachowuje zasadę podwójnej anonimowości w procesie recenzowania. na podstawie uzyskanych ocen redakcja podejmuje decyzję o odrzuceniu, przyjęciu albo odesłaniu publikacji do autora w celu naniesienia poprawek. po otrzymaniu uwag recenzentów autor jest zobowiązany ustosunkować się do nich we wskazanym przez redakcję terminie. niedotrzymanie tego terminu zostanie uznane za rezygnację z publikacji pracy. procedura recenzowania artykułów zgłaszanych do czasopisma „copernican journal of finance & accounting” jest zgodna z wytycznymi ministerstwa nauki i szkolnictwa wyższego. cele pisma, jego adresaci i zasady współpracy z autorami „copernican journal of finance & accounting” jest czasopismem naukowym, które powstało z inicjatywy działalności katedry zarządzania finansami i katedry rachunkowości wydziału nauk ekonomicznych i zarządzania umk w toruniu. pismo ma służyć rozwojowi dyscypliny nauki „finanse” i jest przewidziane jako profesjonalne forum prezentacji i analiz opracowań naukowych z zakresu finansów i rachunkowości w wymiarze międzynarodowym. pismo jest przeznaczone dla środowiska zarówno teoretyków, jak i tych praktyków, którzy podjęli wyzwanie zdobywania stopni naukowych w dyscyplinie „finanse”. w „copernican journal of finance & accounting” są publikowane artykuły w języku polskim oraz w języku angielskim. artykuły nadsyłane do czasodla autorów188 pisma powinny być oryginalnymi, niepublikowanymi pracami i nie mogą być również przedmiotem postępowania kwalifikującego je do publikacji w innym czasopiśmie lub wydawnictwie. warunkiem przyjęcia tekstu do procesu wydawniczego oraz przekazania tekstu do recenzji jest bezwzględne przestrzeganie wymogów edytorskich zamieszczonych w pliku dostępnym na naszej stronie internetowej oraz przesłanie wypełnionego i czytelnie podpisanego formularza zgłoszeniowego. autor nadsyłający tekst otrzymuje drogą elektroniczną informację potwierdzającą jego przyjęcie oraz przekazanie do recenzji. w celu zapewnienia rzetelności naukowej redakcja „copernican journal of finance & accounting” jest zainteresowana publikowaniem opracowań przygotowanych z poszanowaniem norm etycznych obowiązujących w nauce. zgodnie z zaleceniami ministerstwa nauki i szkolnictwa wyższego wszelkie przypadki nierzetelności naukowej oraz nieuczciwości (ghostwriting i guest authorship) wykryte przez redakcję będą dokumentowane i demaskowane włącznie z powiadomieniem odpowiednich podmiotów (instytucji zatrudniających autorów). warunkiem przyjęcia artykułu do publikacji jest wypełnienie przez autorów w formularzu zgłoszenia artykułu deklaracji dotyczącej zjawiska ghostwriting oraz guest authorship. po uzyskaniu potwierdzenia przyjęcia przesłanego tekstu do druku należy przesłać na adres e-mail: cjfa@umk.pl wydrukowaną i podpisaną umowę z autorem dzieła zbiorowego. autorzy artykułów publikowanych w czasopiśmie „copernican journal of finance & accounting” nie otrzymują wynagrodzenia autorskiego. date of submission: july 5, 2019; date of acceptance: july 25, 2019. * contact information: adetajud@yahoo.com, al-hikmah university, ilorin, kwara state, nigeria, phone: +2348035793148; orcid id: https://orcid.org/0000-0001-74560172. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 2 adegbite, t.a. (2019). an evaluation of the effect of taxation policy on inf lation in nigeria. copernican journal of finance & accounting, 8(2), 7–23. http://dx.doi.org/10.12775/cjfa.2019.006 tajudeen adejare adegbite* al-hikmah university an evaluation of the effect of taxation policy on inflation in nigeria keywords: taxation, inf lation in nigeria, petroleum profit tax (ppt), value added tax (vat), corporate income tax, custom and excise duties, co-integration. j e l classification: o23, e31, c1. abstract: taxation is one of the instruments of fiscal policy employed by developing countries to fight inf lation. taxation as a field of study has grown with many contributions from different fields. the gap within the literature regarding different contexts has inspired researchers to look for further explanations about taxation and its effects on inf lation. therefore, this paper aims to provide insight into the effects of taxation policy on inf lation in nigeria. to achieve this, a quantitative research is carried out. empirical test indicates that taxation had negative significant effect on inf lation both in the short run and in the long run. all the components of taxation did not granger-cause inf lation in nigeria. additionally, according to the results, taxation is an effective hedge against inf lation in the country.  introduction maintenance of price stability continues to be dominant objective of fiscal policy for most countries in the world today especially developing country like tajudeen adejare adegbite8 nigeria. this perhaps showed the prominence given to price stability in conduct of fiscal policy with the disposition and mindset of promoting sustainable growth and development as well as strengthening the purchasing power of the domestic currency amongst others. nigeria government employs taxation targeting framework in the conduct of its fiscal policy. this is based on the assumption of a stable and predictable relationship between taxation and inf lation. taxation as a fiscal tool available to the government can be used to fight inf lation and its undesirable trends (caesar, 2013). taxes have an important place in their programs and they are a powerful tool for achieving main goals in the economy. according to caesar (2013), an increase in the rate of taxes during inf lationary period can reduce expenditure from the private sector thereby reducing pressure on the market and curtailing inf lation. in keynesian economics framework, taxes are determinants of aggregate demand. so, increases in taxes lead to lesser demand (as consumers will have less money to spend) and, hence, their impact tend to be def lationary. similarly, it can be argued that tax cuts lead to more consumers spending and their impact tend to be inf lationary. but aggregate supply remains completely unaffected by changes in taxes. on the other hand, those who discarded the above framework believe that from a supply side perspective, increases in taxes tend to increase the production cost and the burden is passed on from the producers to the consumers in the form of indirect taxes. so, the prices of goods and services will rise leading to inf lation. with this divergent outlooks, this study examined the effect of taxation on inf lation in nigeria. based on the objective of the study, the following hypotheses were tested: ho1: taxation has no significant effect on inf lation in nigeria. ho2: taxation has no long run effect on inf lation in nigeria. ho3: taxation has no causality with inf lation in nigeria. literature review and theoretical frame work concept of inf lation and taxation inf lation has been defined as a persistence rise in the general price level of broad spectrum of goods and services in a country over a long period of time. it has been widely described as an economic situation when the increase in money supply is faster than the new production of goods and services in the same an evolution of the effect of taxation policy… 9 economy (piana, 2001). according to ojo (2000), inf lation as general and persistent increase in the prices of goods and services in an economy. inf lation rate is measured as the percentage change in the price index (consumer price index, wholesale price index, producer price index etc). there are three major types of inf lation according to neo-keynesians. the first is the demand-pull inf lation, which occurs when aggregate demand is in excess of available supply (capacity). this phenomenon is also known as the phillips curve inf lation. the output gap can result from an increase in government purchases, increase in foreign price level, or increase in money supply. the second is known as cost-push inf lation, which is referred to inf lation which occurs in the event of a sudden decrease in aggregate supply, owing to an increase in the price/cost of the commodity/production where there are no suitable alternatives (thomas, 2006). this type of inf lation is becoming more common today than before, as evident in the rising price of housing, energy and food. it is often ref lected in price/wage spirals in firms, whereby workers try to keep up their wages with the change in the price level and employers pass on the burden of higher costs to consumers through increase in prices. the third type, referred to, as structural inf lation, which is built-in inf lation, usually induced by changes in monetary policy. taxation is a system by which government imposed a compulsory levy on individuals, companies, goods and services to raise revenue for its operations, to control inf lation, and to promote social equity through the redistribution of income effect of taxation. in addition, bhartia (2009) defined tax as a compulsory levy payable by an economic unit to the government without any corresponding entitlement to receive a definite and direct benefit from the government. note, the word direct here does not mean a price paid by the tax payer for any definite service rendered or a commodity supplied by the government. rather it means that the benefits received by tax payers from the government are not related to or based upon the tax paid by the tax payers. this in effect implies that tax is a generalized exaction, which may be levied on one or more criteria upon individuals, groups, or the legal entities. adegbite and usman (2017) opined that government employs taxation to steer the economy in a desired direction. if the government wishes to stimulate the economy, government implement it by cutting taxes. a tax cut enhances the disposable income of the individual. this simple policy prescription of reducing taxes will increase spending, making production to go up and creating employment which will invariably leads to increment in tax revenue. if the tajudeen adejare adegbite10 government wishes to restrain the economy, it could do so by increasing taxes. by so doing disposable income will fall leading to a fall in spending and production. in this case, a tax increase will shift the consumption function down by the amount of the tax and reduce the level of income by a multiplier effect. a tax cut, on the other hand, raises consumption and exerts a multiplier effect on the level of income (iniodu, 1996). during a recession (when the economy is def lationary) government can stimulate aggregate demand by cutting taxes, which should bring about more jobs and reduce unemployment rate and def lationary gap in the economy. if the economy is inf lationary, to dampen the inf lationary pressure, the policy prescription is to contract the economy indirectly by raising taxes to discourage consumption. underpinning theory the expediency theory this theory asserts that every tax proposal must pass the test of practicability. it must be the only consideration weighing with the authorities in choosing a tax proposal. economic and social objectives of the state as also the effects of a tax system should be treated as irrelevant. this proposition has a truth in it, since it is useless to have a tax which cannot be levied and collected efficiently. there are pressures from economic, social and political groups. every group tries to protect and promote its own interests and authorities are often forced to reshape tax structure to accommodate these pressures. in addition, the administrative set up may not be efficient to collect the tax at a reasonable cost of collection. taxation provides a powerful set of policy tools to the authorities and should be effectively used for remedying economic and social ills of the society such as income inequalities, regional disparities, unemployment, cyclical f luctuations, inf lation and so on. review of empirical studies on the relationship between fiscal policy and inflation in nigeria anyanwu (1997) investigated the effect of taxes on inf lation and unemployment rates in nigeria between 1981 and 1996. using data on taxes, inf lation and unemployment rates during the period of study, the results of his log-linear regression reveal a positive relationship between taxes and inf lation rate, an evolution of the effect of taxation policy… 11 but with insignificant coefficient. based on this result, he concluded that taxes fuelled nigeria’s inf lation rather that reducing it. on the unemployment rate, his findings reveal that different taxes affect nigeria’s unemployment for the different period between 1981–1996. he concluded that taxes vary negatively with unemployment, and with the coefficient of unemployment being insignificant. however, the scope of this study is from 1981 to 1996 but it was not extended to 2017. atan (2013) examined the attempts by successive nigerian governments to use taxation to inf luence macroeconomic aggregates, especially inf lation and unemployment, and covers the period 1970 to 2008. it is largely a secondary data study, focusing on the extent to which these variables responded to changes in government’s tax measures. data on these variables for the thirty-nine year period were analysed using both descriptive and inferential statistical techniques. the ordinary least square (ols) method was used for the estimations. the analysis shows that the historical trends in inf lation and unemployment showed no significant response to tax policy between the period 1970 and 2008. periods of lower taxes recorded lower inf lation rate in some years and higher inf lation rates in some years. unemployment rates increased steadily in some years whether taxes were raised or lowered. government in some years lowered taxes amidst high inf lation rates in the economy. taxes have a negative effect on the inf lation rate in line with the theory, but with insignificant coefficient. in the case of unemployment rate, the regression results show a negative relationship between tax policy and unemployment, but with insignificant coefficient, which is contrary to the theory. the analysis shows that tax policy was not effective in controlling inf lation, and tackling unemployment problems in the economy during the period of study largely because of inconsistency in the use of tax measures. it is recommended that government apply tax measures much more carefully than was observed over the period studied. however, this study was confined to 2008, it was not expanded to 2017. also, the study employed only ordinary least square (ols) method for the estimations. perhaps, the results was spurious because of the failure to carry out further tests. olaoye (2016) examined the determinants of vat, interest rate, inf lation and inf luence on revenue generation in nigeria. secondary data were gathered from cbn statistics bulletins that cutacross 1990 and 2012. this period was selected in order to capture the inf lation, interest rate, prior, during and post implementation of vat. data were analyzed with the use of descriptive analysis and johansen co-integration test. the descriptive statistics gave a clear picture tajudeen adejare adegbite12 of the distribution and range of all the series, there exist no significant relationship between vat and int. however, there is significant positive relationship between vat & inf both on the short and long run, while interest rate exert negative inf luence on inf lation both on the short and long run. there is strong and positive relationship between vat and revenue generation in nigeria. it was recommended that government should provide effective anti-inf lationary policy to cushion the inf lationary tendencies of value added tax in the country and regulate the rise in the level of interest rate in order not provoke price instability and at the same time maintain the current level of improvement in the revenue generation in the country. this study used only a single component of taxation (vat) to generalize the effect of taxation on inf lation rate with restricted scope of 2012. akhor, atu and ekundayo (2016) examined the impact of indirect tax revenue on economic growth in nigeria. the study used value added tax revenue and custom and excise duty revenue as independent variables and economic growth was proxy with real gross domestic product as the dependent variable. the study employ secondary data collected from central bank of nigeria statistical bulletin for the period covering 1993 to 2013 for the empirical analysis using the convenient sampling techniques. the data were analyzed using descriptive statistics, correlation, unit root test, cointegration test and error correction model regression. the result revealed that value added tax had a negative and significant impact on real gross domestic product. in the same vein, past custom and excise duty had a negative and weakly significant impact on real gross domestic product. the error correction model (ecm (-1)) coefficient had a correct negative and statistically significant sign. this shows that shortrun deviation can be quickly corrected. the durbin-watson positive value indicates the absence of autocorrelation in the model. the study recommended that tax administrative loopholes should be plugged for tax revenue to contribute immensely to the development of the economy since past value added tax and custom and excise duty had a significant impact on economic growth. however, this study was restricted to the effect of indirect taxes on revenue generation but the scope was not stretched to inf lation. from the review of previous works, the gaps identified are scope, methodology and conceptual gap. this is because all the studies seen and reviewed are conducted in nigeria with different scope, methodology and concepts, and the findings may not be generalized in wider perspectives. thus, this study is an evolution of the effect of taxation policy… 13 unique and intends to contribute to knowledge by investigating the effect of taxation on inf lation in nigeria. the research methodology and the course of the research process secondary data were used in this study. the relevant data for the study were obtained from central bank of nigeria (cbn) statistical bulletins and federal inland revenue services bulletin from 1970 to 2017. regression analysis technique was used to measure the effects of independent variables on dependent variable while units root test, johansen co-integration, vector error-correction model, and granger causality tests were employed to determine the long run relationship and causality links among the variables. model specification nigeria’s inf lation rate has been increasing persistently for years now, and even exceeded 16 percent in 2017, and a real significant decrease is nowhere in sight. the bigger problem is its unsteadiness, however, an inf lation rate that is active in nigeria is usually a sign of a struggling economy, causing prices to f luctuate, and unemployment and poverty to increase. the formulation of the model was based on theory that taxation is an effective hedge against inf lation, that is taxation and inf lation are inversely related. inf lation (infl) was employed as the explained variable while the explanatory variables are petroleum profit tax (ppt), value added tax (vat), corporate income tax (corpt), and custom and excise duties (cusexc). this can be specifically stated as: struggling economy, causing prices to fluctuate, and unemployment and poverty to increase. the formulation of the model was based on theory that taxation is an effective hedge against inflation, that is taxation and inflation are inversely related. inflation (infl) was employed as the explained variable while the explanatory variables are petroleum profit tax (ppt), value added tax (vat), corporate income tax (corpt), and custom and excise duties (cusexc). this can be specifically stated as; � = � (�1��2��3��4�μ) the independent variable m1 � �4 the dependent variable � a regression model relates � to a function of � and μ error term is denoted as μ. ����� � � ��� �� + ��1��� � ��� + ��2��� � ��� + ��3����� � ��� + ��4������ � ��� + μ3 (1) transforming equation (1) to the natural logarithm it changed to �������� � � ��� �� + ��1������ � ��� + ��2������ � ��� + ��3�������� � ��� + ��4��������� � ��� + μ4 (2) basic vecm is ��� �� ������ + ∑ ������ +∈������� (3) where y is a (k x 1) vector of i(1) variables, and  are (kx r) parameter matrices with rank r < k, 1,.,.., p-1 are (k x k) matrices of parameters, and t is a (k x1) vector of normally distributed errors that is serially uncorrelated but has contemporaneous covariance matrix. results and discussion table 1. the effect of taxation on inflation rate in nigeria dependent variable independent variables coefficient standard error t p>/t/ (95% conf. interval) logppt -.2007604 .1912754 -4.28 0.005 -.6084542 .2069334 the independent variable m1 – m4 the dependent variable y a regression model relates y to a function m of and µ error term is denoted as µ. struggling economy, causing prices to fluctuate, and unemployment and poverty to increase. the formulation of the model was based on theory that taxation is an effective hedge against inflation, that is taxation and inflation are inversely related. inflation (infl) was employed as the explained variable while the explanatory variables are petroleum profit tax (ppt), value added tax (vat), corporate income tax (corpt), and custom and excise duties (cusexc). this can be specifically stated as; � = � (�1��2��3��4�μ) the independent variable m1 � �4 the dependent variable � a regression model relates � to a function of � and μ error term is denoted as μ. ����� � � ��� �� + ��1��� � ��� + ��2��� � ��� + ��3����� � ��� + ��4������ � ��� + μ3 (1) transforming equation (1) to the natural logarithm it changed to �������� � � ��� �� + ��1������ � ��� + ��2������ � ��� + ��3�������� � ��� + ��4��������� � ��� + μ4 (2) basic vecm is ��� �� ������ + ∑ ������ +∈������� (3) where y is a (k x 1) vector of i(1) variables, and  are (kx r) parameter matrices with rank r < k, 1,.,.., p-1 are (k x k) matrices of parameters, and t is a (k x1) vector of normally distributed errors that is serially uncorrelated but has contemporaneous covariance matrix. results and discussion table 1. the effect of taxation on inflation rate in nigeria dependent variable independent variables coefficient standard error t p>/t/ (95% conf. interval) logppt -.2007604 .1912754 -4.28 0.005 -.6084542 .2069334 (1) tajudeen adejare adegbite14 transforming equation (1) to the natural logarithm it changed to struggling economy, causing prices to fluctuate, and unemployment and poverty to increase. the formulation of the model was based on theory that taxation is an effective hedge against inflation, that is taxation and inflation are inversely related. inflation (infl) was employed as the explained variable while the explanatory variables are petroleum profit tax (ppt), value added tax (vat), corporate income tax (corpt), and custom and excise duties (cusexc). this can be specifically stated as; � = � (�1��2��3��4�μ) the independent variable m1 � �4 the dependent variable � a regression model relates � to a function of � and μ error term is denoted as μ. ����� � � ��� �� + ��1��� � ��� + ��2��� � ��� + ��3����� � ��� + ��4������ � ��� + μ3 (1) transforming equation (1) to the natural logarithm it changed to �������� � � ��� �� + ��1������ � ��� + ��2������ � ��� + ��3�������� � ��� + ��4��������� � ��� + μ4 (2) basic vecm is ��� �� ������ + ∑ ������ +∈������� (3) where y is a (k x 1) vector of i(1) variables, and  are (kx r) parameter matrices with rank r < k, 1,.,.., p-1 are (k x k) matrices of parameters, and t is a (k x1) vector of normally distributed errors that is serially uncorrelated but has contemporaneous covariance matrix. results and discussion table 1. the effect of taxation on inflation rate in nigeria dependent variable independent variables coefficient standard error t p>/t/ (95% conf. interval) logppt -.2007604 .1912754 -4.28 0.005 -.6084542 .2069334 (2) basic vecm is struggling economy, causing prices to fluctuate, and unemployment and poverty to increase. the formulation of the model was based on theory that taxation is an effective hedge against inflation, that is taxation and inflation are inversely related. inflation (infl) was employed as the explained variable while the explanatory variables are petroleum profit tax (ppt), value added tax (vat), corporate income tax (corpt), and custom and excise duties (cusexc). this can be specifically stated as; � = � (�1��2��3��4�μ) the independent variable m1 � �4 the dependent variable � a regression model relates � to a function of � and μ error term is denoted as μ. ����� � � ��� �� + ��1��� � ��� + ��2��� � ��� + ��3����� � ��� + ��4������ � ��� + μ3 (1) transforming equation (1) to the natural logarithm it changed to �������� � � ��� �� + ��1������ � ��� + ��2������ � ��� + ��3�������� � ��� + ��4��������� � ��� + μ4 (2) basic vecm is ��� �� ������ + ∑ ������ +∈������� (3) where y is a (k x 1) vector of i(1) variables, and  are (kx r) parameter matrices with rank r < k, 1,.,.., p-1 are (k x k) matrices of parameters, and t is a (k x1) vector of normally distributed errors that is serially uncorrelated but has contemporaneous covariance matrix. results and discussion table 1. the effect of taxation on inflation rate in nigeria dependent variable independent variables coefficient standard error t p>/t/ (95% conf. interval) logppt -.2007604 .1912754 -4.28 0.005 -.6084542 .2069334 (3) where y is a (k x 1) vector of i(1) variables, α and β are (kx r) parameter matrices with rank r < k, γ1,.,.., γp-1 are (k x k) matrices of parameters, and εt is a (k x1) vector of normally distributed errors that is serially uncorrelated but has contemporaneous covariance matrix. results and discussion table 1. the effect of taxation on inf lation rate in nigeria dependent variable independent variables coefficient standard error t p>/t/ (95% conf. interval) loginfl logppt -.2007604 .1912754 -4.28 0.005 -.6084542  .2069334 logvat -.0947098 .5096113 -3.19 0.013 -1.180921   .9915011 logcorpt -.3071204 .1554908 -2.98 0.016 -.6385412  .0243004 logcusexc .5022426 .6038969 -3.59 0.008 -.7849331 1.789418 constant 4.18516 2.212975 8.89 0.000 -.5316856 8.902005 r-squared = 0.3665 adj r-squared = 0.2975 prob > f = 0.1222 root mse = .58681 f( 4, 15) = 2.17 s o u r c e : author’s computation (2018). the table 1 shows the effect of taxation on inf lation rate in nigeria. 1% increase in the petroleum profit tax (ppt) reduces inf lation rate (infl) by 0.2%. this suggests a negative significant effect the rate of ppt on infl. the outcome is significant (β=-.2007604, t = -4.28, p>|t| =0.005). one percent increase in val an evolution of the effect of taxation policy… 15 ue added tax (vat) also reduces infl by 0.09 %.this means vat imparted infl negatively and significantly (β=-.0947098, t = -3.19, p>|t| =0.013). that is if vat increases infl reduces. more so, 1% increase in the corporate income tax (corpt) reduces infl by 0.3%. this suggests a negative significant effect corpt on infl (β=-.3071204, t = -2.98, p>|t| =0.016). contrarily, 1% increase in custom and excise duty (cusexc) increases infl by 0.5%. this reveals a positive significant effect of cusexc on infl (β=.5022426, t = -3.59, p>|t| =0.008). this is suggesting that if cusexc in nigeria increases, infl also increase. the r2 coefficient (0.3665) which is the coefficient of determination indicates that the explanatory variables accounted for 36.7% of the variation in the inf luence of taxation on inf lation rate in nigeria for the period under study. given the adjusted r2 of 29.75% which significant, it predicts the independence variables incorporated into this model have been able to determine variation of taxation on inf lation rate to 29.75%. it is also indicates that taxation accounted for 29.75% of the variation in the inf luence on inf lation rate in the short-run. this hypothesis is to test whether or not there is significant effect of taxation on inf lation rate in nigeria. from the decision rule above, because the p-value for the alternative hypothesis equals 0.0000 which is less than 0.05, therefore the null hypothesis is rejected while the alternative hypothesis is upheld. therefore taxation has significant effect on inf lation rate in nigeria. taxation is effective hedge against inf lation. table 2. unit root test variables adf stat 1% critical value 5% critical value 10% critical value order of integration remark infl 3.306 -3.628 -2.950 -2.608 i(0) stationary ppt 3.892 *** -3.655 -2.961 -2.613 i(1) stationary vat 4.703*** 3.750 3.000 -2.630 i(1) stationary corpt 3.520*** -3.655 -2.961 -2.613 i(1) stationary cusexc 2.681 3.750 3.000 -2.630 i(1) stationary (*), (**) and (***) means stationary at 1%, 5% and 10% respectively. s o u r c e : author’s computation (2018). it has been a common practice, in applied econometric analysis, to test the order of integration of time series. the study applies adf unit root test, at level and at the first difference of the time series with assumption of no drift and tajudeen adejare adegbite16 tend, to have the information about the order of a time series. adf test results reported in the table 2 are evident that we are unable to reject the null hypothesis for the presence of a unit root at level of each of the time series. all of the time series are stationary at their first difference. since each of the time series is stationary at its first difference so the variables are cointegrated. there exists an equilibrium or long run relationship between the time series if all the variables are integrated of the same order, engle and granger (1987). the study applies johansen cointegration technique. johansen (1991) introduced, in the multivariate cointegration test, the two likelihood ratio tests (maximumeigen value and trace tests) to find out the number of cointegrating vectors. all the variables are stationary at first level which exhibited that there is long run relationship between taxation and inf lation in nigeria. table 3. selection-order criteria lag ll lr df p fpe aic hqic sbic 0 -2407.75 1.7e+46 120.638 120.714 120.849 1 -2312.99 189.52 25 0.000 5.2e+44 117.149 117.607 118.416 2 -2239.1 147.78 25 0.000 4.8e+43 114.705 115.545 117.027 3 -2130.14 217.92 25 0.000 8.6e+41 110.507 111.728 113.885 4 -1888.59 483.1* 25 0.000 2.4e+37* 99.6795* 101.282* 104.113* endogenous: infl, pp, vat, cit, cusexc. exogenous: _cons. s o u r c e : author’s computation (2018). the hannan–quinn information criterion (hqic) method, schwarz bayesian information criterion (sbic) method, and sequential likelihood-ratio (lr) test all chose four lags, as indicated by the “*” in the output. both the sbic and the hqic estimators suggest that there are four cointegrating equations in the balanced-growth data. having determined that there is a cointegrating equation among the infl, ppt, vat, corpt and cusexc series, the parameters of a bivariate cointegrating vecm for these four series by using vector error-correction model were estimated table 3. lags four was used for this bivariate model because the hannan–quinn information criterion (hqic)method, schwarz bayesian information criterion (sbic) method, and sequential likelihood-ratio (lr) test all chose four lags, as indicated by the “*” in the output. an evolution of the effect of taxation policy… 17 table 4. vector autoregression equation parms rmse r sq chi2 p>chi2 infl 21 16.3943 0.4947 39.16547 0.0064 ppt 21 45422 0.9994 68778.43 0.0000 vat 21 42103.2 0.9997 130225.6 0.0000 corpt 21 53761.7 0.9996 110487.3 0.0000 cusexc 21 28131.5 0.9997 128997.3 0.0000 log likelihood = -1888.591 det(sigma_ml) = 7.04e+34 aic = 99.67953 hqic = 101.2825 sbic = 104.1128 s o u r c e : author’s computation (2018). in order to confirm the output result of selection-order criteria in selecting the appropriate lag, vector autoregression was also tested. lags four was also chosen for this model because the hannan–quinn information criterion (hqic) method, schwarz bayesian information criterion (sbic) method, and sequential likelihood-ratio (lr) test all confirmed four lags as indicated by in the table 4 above. table 5. vector error-correction model equation parms rmse r sq chi2 p>chi2 d_ infl 7 15.9068 0.0048 .1688344 1.0000 d_ ppt 7 457863 0.3381 17.87596 0.0125 d_ vat 7 587331 0.7180 89.09794 0.0000 d_ corpt 7 673077 0.7466 103.1216 0.0000 d_ cusexc 7 399804 0.7072 84.53813 0.0000 log likelihood = -2387.262 det(sigma_ml) = 1.61e+43 aic = 115.5363 hqic = 116.1277 sbic = 117.1498 s o u r c e : author’s computation (2018). tajudeen adejare adegbite18 table 6. johansen normalization restriction imposed beta coefficient std error z p>|z| [95% conf. interval] _ce1 infl 1 . . . . ppt -.000014 .0000262 -5.53 0.000 -.0000654 .0000374 vat -.0005395 .0001129 -4.78 0.000 -.0007607 -.0003182 corpt -.0003488 .0000466 7.49 0.000 .0002575 .0004401 cusexc -.0005504 .0002383 -2.31 0.021 -.0010174 -.0000833 -cons -9.071605 . . . . s o u r c e : author’s computation (2018). table 5 and table 6 contained information about the sample, the fit of each equation, and overall model fit statistics. the first estimation table contains the estimates of the short-run parameters, along with their standard errors, z statistics, and confidence intervals. the three coefficients on l. ce1 are the parameters in the adjustment matrix for this model. the second estimation table contains the estimated parameters of the cointegrating vector for this model, along with their standard errors, z statistics, and confidence intervals. according to johansen normalization restriction imposed table, one percent increase in ppt reduces infl by 0.00014% in the long run, this shows that there is a negative effect of ppt on infl. also, one percent increase in vat reduces infl by -.0005395% in the long run, this also shows a negative effect of vat on infl in the long run. in the same vein, one percent increase in corpt, reduces infl by -.0003488% in the long run, this also shows that there is a negative significant effect of ppt on infl in the long run. more so, one percent increase in cusexc, reduces infl by .0005504% in the long run, this also shows a negative effect of cusexc on infl. in the long run. coefficient is statistically significant confirmed by p>|z| which is 0.000. overall, the output indicates that the model fits well. the coefficient on infl in the cointegrating equation is statistically significant. an evolution of the effect of taxation policy… 19 table 7. johansen tests for co-integration rank eigen value parm ll trace statistic 5% critical value 1% critical eigen value 0 80 -2147.0927 517.0043 68.52 76.07 1 0.99649 89 -2034.0335 290.8860 47.21 54.46 0.99649 2 0.98459 96 -1950.5767 123.9723 29.68 35.65 0.98459 3 0.86830 101 -1910.0323 42.8836 15.41 20.04 0.86830 4 0.65732 104 -1888.6129 0.0448*1*5 3.76 6.65 0.65732 5 0.00112 105 -1888.5905 0.00112 s o u r c e : author’s computation (2018). table 7 produced information about the sample, the trend specification, and the number of lags included in the model. the main table contains a separate row for each possible value of r, the number of cointegrating equations. when r = 3, all three variables in this model are stationary. in this study, because the trace statistic at r = 0 of 517.0043 exceeds its critical value of 68.52, the null hypothesis of no cointegrating equations are rejected. similarly, because the trace statistic at r = 1 of 290.8860 exceeds its critical value of 47.21, the null hypothesis that there is one or fewer cointegrating equation is also rejected. in the same vein, because the trace statistic at r = 2 of 123.9723 exceeds its critical value of 29.68, the null hypothesis that there is two or fewer cointegrating equation is also rejected. the trace statistic at r = 3 of42.8836 exceeds its critical value of 15.41, the null hypothesis that there is three or fewer cointegrating equation is also rejected. in contrast, because the trace statistic at r = 4 of 0.0448*1*5 is less than its critical value of 3.76, the null hypothesis that there are four or fewer cointegrating equations cannot be rejected. because johansen’s method for estimating r is to accept as the first r for which the null hypothesis is not rejected, we accept r = 4 as our estimate of the number of cointegrating equations between these five variables. the “*” by the trace statistic at r = 4 indicates that this is the value of r selected by johansen’s multiple-trace test procedure. the eigenvalue shown in the last line of output computes the trace statistic in the preceding line. tajudeen adejare adegbite20 table 8. granger causality wald tests – causality between taxation and inf lation rate equation excluded chi2 df prob> chi2 decision infl ppt 4.8788 4 0.300 ppt does not granger – cause infl infl vat 4.9351 4 0.294 vat does not granger – cause infl infl corpt 3.4087 4 0.492 corpt does not granger – cause infl infl cusexc 4.7069 4 0.319 cusexc does not granger – cause infl infl all 8.6517 16 8.6517 all jointly do not granger cause infl ppt infl 5.362 4 0.252 infl does not granger – cause ppt ppt vat 1350.4 4 0.000 vat granger – cause ppt ppt corpt 154.48 4 0.000 corpt granger – cause ppt ppt cusexc 294.45 4 0.000 cusexc granger – cause ppt ppt all 7565 10 0.000 all jointly granger cause ppt vat infl 8.2207 4 0.184 infl does not granger – cause vat vat ppt 267.66 4 0.000 ppt granger – cause vat vat corpt 223.09 4 0.000 corpt granger – cause vat vat cusexc 1310.5 4 0.000 cusexc granger – cause vat vat all 14808 10 0.000 all jointly granger cause vat corpt infl 21.041 4 0.342 infl does not granger – cause corpt corpt ppt 246.22 4 0.000 ppt granger – cause corpt corpt vat 1649.4 4 0.000 vat granger – cause corpt corpt cusexc 937.34 4 0.000 cusexc granger – cause corpt corpt all 38403 16 0.000 all jointly granger cause corpt cusexc infl 9.3531 4 0.253 infl does not granger – cause cusexc cusexc ppt 257.94 4 0.000 ppt granger – cause cusexc cusexc vat 3414.7 4 0.000 vat granger – cause cusexc cusexc corpt 137.42 4 0.000 corpt granger – cause cusexc cusexc all 37508 16 0.000 all jointly granger cause cusexc s o u r c e : author’s computation (2018). an evolution of the effect of taxation policy… 21 the results of the five tests for the first equation is shown in the table 8. the first is a wald test that the coefficients on the four lags of ppt that appear in the equation for infl are jointly zero. the null hypothesis that ppt does not granger-cause infl cannot be rejected because prob> chi2 is 0.300 which is greater than 0.05, therefore ppt does not granger-cause infl. also, the null hypothesis that the coefficients on the four lags of vat in the equation for infl are jointly zero cannot be rejected because prob> chi2 is 0.294 which is greater than 0.05. so the hypothesis that vat does not granger cause infl cannot be rejected, therefore vat does not granger-cause infl. the null hypothesis is that corpt does not granger-cause infl cannot be rejected because prob> chi2 is 0.492, which is greater than 0.05 therefore corpt does not granger-cause infl. more so, the null hypothesis that the coefficients on the four lags of cusexc in the equation for infl are jointly zero cannot be rejected because prob> chi2 is 0.319, which is greater than 0.05. therefore cusexc does not granger-cause infl. the fifth null hypothesis is that the coefficients on the four lags of all the other endogenous variables are jointly zero. this null hypothesis cannot be rejected in the sense that prob> chi2 is 8.6517which is greater than 0.05, that is that ppt, vat, corpt and cusexc, jointly, does not granger-cause infl. therefore the null hypothesis is accepted, alternative hypothesis is rejected that is there is no causality between taxation and inf lation rate. table 9. direction of causality between taxation and inf lation rate equation excluded chi2 df prob> chi2 decision infl ppt 4.8788 4 0.300 ppt does not grangercause infl ppt infl 5.362 4 0.252 infl does not grangercause ppt infl vat 4.9351 4 0.294 vat does not granger cause infl vat infl 8.2207 4 0.084 infl does not grangercause vat infl corpt 3.4087 4 0.492 corpt does not grangercause infl corpt infl 21.041 4 0.342 infl does not grangercause corpt infl cusexc 4.7069 4 0.319 cusexc does not granger – cause infl cusexc infl 9.3531 4 0.253 infl does not grangercause cusexc s o u r c e : author’s computation (2018). tajudeen adejare adegbite22 table 9 showed the results of the causality analysis among petroleum profit tax (ppt), value added tax (vat) corporate income tax (corpt), custom and excise duties (cusexc) and inf lation rate (infl). the results showed that there was no causality between petroleum profit tax (ppt) and inf lation rate (infl). also, the findings revealed that the causality did not run from value added tax (vat) to inf lation rate (infl) and vice visa. that is value added tax did not granger cause inf lation rate (infl), and inf lation rate did not granger cause value added tax. furthermore corporate income tax (corpt) with the chi-square statistic (3.4087) and the probability value (0.492), being statistically insignificant, did not granger cause infl. in the same vein, infl did not granger cause corpt. more so, it was revealed that custom and excise duties (cusexc) with the chi-square statistic 4.7069 and the probability value 0.319, being statistically insignificant, did not granger cause infl. also, infl did not granger caused cusexc. therefore the null hypothesis is accepted, alternative hypothesis is rejected, that is there is no causality between taxation and inf lation rate in nigeria.  summary and conclusion this study examined the effects of taxation on inf lation in nigeria. it also looked at the direction of causality between taxation and inf lation employing the method of johansen co-integration and the granger causality tests using data spanning the period 1970-2017. results showed that ppt has negative significant effect on infl in nigeria. vat, and corpt also had negative significant effect on infl. but cusexc has the positive insignificant effect on infl both in the short run and in the long run. all the components of taxation had no causality link with inf lation in nigeria because ppt, vat, corpt and cusexc, jointly, did not granger-cause infl. conclusively, taxation had negative significant effect on inf lation in nigeria both in the short run and in the long run. taxation is an effective hedge on inf lation. that is taxation had been employed by the government to subside inf lation in the country. there is no causality relationship between taxation and inf lation that is taxation did not granger cause inf lation in nigeria and vice visa. it is recommended that taxation should be moderate so that the disposable income of both the individual and corporate organization left after tax fulfillment will breed saving so as to create more investments which will invariably generate more employment opportunities and curb inf lation in the country. government should devise another means of fighting inf la an evolution of the effect of taxation policy… 23 tion apart from involvement of taxation so that it will not provoke price instability and standard of living encroachment.  references adegbite, t.a., & usman, o.a. (2017). empirical analysis of the effect of taxation on investment in nigeria. international journal in commerce, it & social sciences, 4(8), 1-11. akhor, s.o., atu e.c., & ekundayo, o.u. (2016). the impact of indirect tax revenue on economic growth: the nigeria experience. igbinedion university journal of accounting, 2(08), 62-87. anyanwu, j.c. (1997). nigerian public finance. onitsha: joanne educational publishers. atan, j.a. (2013). tax policy, inf lation and unemployment in nigeria (1970–2008). european journal of business and management, 5(15), 114-129 bhartia, h.l. (2009). public finance. 13th edn. new delhi: vikas publishing house pvt ltd. engle, r.f., & granger, c.w.j. (1987). co-integration and error correction: representation, estimation, and testing. econometrica, 5(5), 251-276. iniodu, p.u. (1996). fundamentals of macroeconomics. uyo: centre for development studies, university of uyo. johansen, s. (1991). estimation and hypothesis testing of cointegration vectors in gaussian vector autoregressive models. econometrica, 5(9), 1551-1580. ojo, m.o. (2000). the role of the autonomy of the central bank of nigeria (cbn) in promoting macroeconomic stability. central bank of nigeria economic and financial review, 38(1). olaoye, c.o. (2016). determinants of value added tax, interest rate, inf lation and inf luence on revenue generation in nigeria. international journal of economics, commerce and management, 4(10), 322-338. piana, v. (2001). inf lation economics. web institute. thomas, p. (2006). does the us have a handle on inf lation? street insight. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402017, volume 6, issue 4 date of submission: march 13, 2018; date of acceptance: april 10, 2018. * contact information: marta.jakubowska.umk@gmail.com, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 56 611 46 34; orcid id: https://orcid.org/0000-0001-9067-4524. this work is supported by the polish national science center poland under grant no. 2017/26/e/ hs4/00858. jakubowska, m. (2017). the role of cashless transactions in the process of limiting the scale of the shadow economy. copernican journal of finance & accounting, 6(4), 23–37. http://dx.doi. org/10.12775/cjfa.2017.021 marta jakubowska* nicolaus copernicus university in toruń the role of cashless transactions in the process of limiting the scale of the shadow economy keywords: cashless transactions, shadow economy, payment cards. j e l classification: e42, g21, o33. abstract: this article presents the existing state of cashless transactions in poland, taking into consideration the network of card acceptance among enterprises. even though in recent years cashless transactions has been dynamically developing and using bank accounts and cashless payment instruments to carry out daily transactions is becoming more popular, the distance between the level of development of cashless transactions in poland and that in other eu countries is still significant (nbp, 2013). according to the author, the possibility of two-way operations occurring between the cashless transactions and the shadow economy is both a very important and as of yet unverified research area. the literature describes the positive inf luence of the cashless transactions on the reduction of the shadow economy; the author, however, has attempted to determine whether the shadow economy can also inf luence the development of the cashless transactions. therefore, the purpose of this article is to prove that limiting the use of cash money in the economy can indeed contribute to the reduction of the shadow economy. two research methods are used in this article: literature study and statistical analysis. the study of literature concerning this subject has been carried out on the basis of domestic and foreign scientific journals and the quantified descripmarta jakubowska24 tion and the analysis of the shadow economy and cashless transactions have been based on extensive statistical data. according to a study, a tool that provides a possibility of the reduction of the shadow economy in the area of unregistered transactions shall be the launched program wsparcia obrotu bezgotówkowego.  introduction according to f. schneider, the development of cashless transactions through a greater use of electronic payments creates the potential to reduce the functioning costs of the payment system and to limit the scale of transactions made in the shadow economy with the use of cash money (schneider, 2011). however, cashless transactions still faces many difficulties it should be stressed that particularly strong dominance of cash payments can take place in transactions happening in physical points of sale (polasik, 2013, pp. 79–102). therefore, any actions, direct and indirect, performed by central bank, commercial banks and card manufacturers – currently under program wsparcia obrotu bezgotówkowego (the programme for support of cashless transactions) – that promote the development of e-payment in economy are necessary (borcuch, 2012, p. 68), what will be discussed later in the article. the research methodology and the course of the research process polish and foreign literature, statistical data from the european central bank and narodowy bank polski and estimated from institute for market economics have been used in this article. based on the aforementioned sources, industryspecific analyses, data and analysed statistical tools, the growth of the shadow economy both in the eu and in poland and the number of payment card transactions per capita have been presented. moreover, the statistical analysis and literature study have been carried out. furthermore, in this article, an attempt to verify the following hypothesis has been made (h1): in the countries that have highly advanced cashless transactions, the scale of the shadow economy phenomenon is smaller. the article also uses the result of expert research of expected effects of program wsparcia obrotu bezgotówkowego implementation. the expert survey was implemented in 2017 by author on a group of 12 experts from poland.   the role of cashless transactions in the process… 25 cashless transactions every use of cash on any level of clearing the accounts signifies cash accounting. it is historically considerably older payment method that cashless transactions and has been in existence since the invention of cash money. cashless transactions, however, has only been around since the emergence of banks and bank accounts. traditionally, the main types of cashless payments under the payment system are made via banks, between bank accounts of debtor and creditor. according to international statistics, such as the data from the european central bank presented on the figure (figure 1), cashless transactions includes three types of clearings: ■ bank transfer order; ■ payment order; ■ clearance cheque; ■ payment card. the figure below shows the number of cashless transactions involving payment instruments per capita in poland, on the background of the average value of this ratio in the european union in the years 2001–2015. even though in the recent years (figure 1), cashless transactions in our country has been dynamically developing, the number of cashless transactions per capita in poland is still less than a half of european union’s average. it is a result of a fact that our country has been through political transformation and at the beginning of the 90s the consumers were almost always only using cash. therefore, it was necessary to build whole new modern payment system from the ground up and to change the existing consumers’ habits (schuh & stavins, 2013, pp. 246–272; salmony, 2011, pp. 246–272). actually, only one generation of poles is able to use cashless payment instruments though all his life. in the year 2011, the number of transactions was still at a very low level (16 transactions per year per capita) compared to the average of the country of european union of the day (134 transactions). gradually the situation began improving, concerning both the number of bank accounts and payment card issued and the dynamic increase of the number of bank transfer and card transactions. marta jakubowska26 figure 1. the number of cashless transactions involving payment instruments per capita in the years 2001–2015 the shadow economy both in the eu and in poland and the number of payment card transactions per capita have been presented. moreover, the statistical analysis and literature study have been carried out. furthermore, in this article, an attempt to verify the following hypothesis has been made (h1): in the countries that have highly advanced cashless transactions, the scale of the shadow economy phenomenon is smaller. the article also uses the result of expert research of expected effects of program wsparcia obrotu bezgotówkowego implementation. the expert survey was implemented in 2017 by author on a group of 12 experts from poland. cashless transactions every use of cash on any level of clearing the accounts signifies cash accounting. it is historically considerably older payment method that cashless transactions and has been in existence since the invention of cash money. cashless transactions, however, has only been around since the emergence of banks and bank accounts. traditionally, the main types of cashless payments under the payment system are made via banks, between bank accounts of debtor and creditor. according to international statistics, such as the data from the european central bank presented on the figure (figure 1), cashless transactions includes three types of clearings:  bank transfer order;  payment order;  clearance cheque;  payment card. the figure below shows the number of cashless transactions involving payment instruments per capita in poland, on the background of the average value of this ratio in the european union in the years 2001–2015. even though in the recent years (figure 1), cashless transactions in our country has been dynamically developing, the number of cashless transactions per capita in poland is still less than a half of european union’s average. it is a result of a fact that our country has been through political transformation and at the beginning of the 90s the consumers were almost always only using cash. therefore, it was necessary to build whole new modern payment system from the ground up and to change the existing consumers’ habits (schuh & stavins, 2013, pp. 246–272; salmony, 2011, pp. 246– 272). actually, only one generation of poles is able to use cashless payment instruments though all his life. in the year 2011, the number of transactions was still at a very low level (16 transactions per year per capita) compared to the average of the country of european union of the day (134 transactions). gradually the situation began improving, concerning both the number of bank accounts and payment card issued and the dynamic increase of the number of bank transfer and card transactions. figure 1. the number of cashless transactions involving payment instruments per capita in the years 2001–2015 source: developed personally based on: ecb, 2016. the infrastructure of payment cards acceptance a payment system of a given country is: “a collection of mechanisms through which various forms of money are transferred between parties that fulfil they mutual obligations or act as mediators for a third party’s payment services” (nbp, 2006, p. 5; own translation). however, according to the payment services act, a specific payment system is: “a system of funds transfer based on formal and normalised regu16 17 20 25 27 32 39 45 54 61 69 77 86 101 127134 141 152 143 149 158 152 158 164 173 181 188 197 202 220 0 50 100 150 200 250 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 poland eu s o u r c e : developed personally based on: ecb, 2016. the infrastructure of payment cards acceptance a payment system of a given country is: “a collection of mechanisms through which various forms of money are transferred between parties that fulfil they mutual obligations or act as mediators for a third party’s payment services” (nbp, 2006, p. 5; own translation). however, according to the payment services act, a specific payment system is: “a system of funds transfer based on formal and normalised regulations and shared rules on processing, billing or clearing payment transactions (…)” (ustawa o usługach płatniczych 2011; own translation). as a result, under the payment system infrastructure, the following elements can be distinguished (narodowy bank polski, związek banków polskich & koalicja na rzecz obrotu bezgotówkowego i mikropłatności, 2009; own translation): ■ intermediary institutions in making clearing (providing payment services), ■ payment systems, ■ authorisation and clearing systems that process transactions executed by electronic payment instruments, ■ service points that accept transactions made via payment cards, ■ atms1. 1 cash transactions are not analyzed in this article.   the role of cashless transactions in the process… 27 payment cards are issued under the payment system and create a market of payment cards, which is a so-called two-way market (rochet & tirole, 2003, pp. 990–1029; rochet & tirole, 2008, pp. 1333–1347). within this market we can distinguish its following participants (maciejewski, 2013, pp. 58–78): ■ merchants – retailers accepting payment for goods or services via payment cards, ■ consumers – customers who pay by card for goods or services at servicing points, ■ card issuers – subjects (most often banks) that issue payment cards to consumers, ■ clearing agents – manage clearing between card issuers and merchants. clearing agents are banks or non-banking subjects that make deals with merchants on charging the fees for card usage. ■ card association – institutions that bring together payment card issuers within their own payment system. they provide their members with a logo (trademark) and a payment system. the basic source of association’s income are fees from card transactions (interchange fees) collected by clearing agents. eft-pos terminal is a device used for operations with cashless payments that is installed in sales and service points and is essential for contacting bank server (via certificate authority) in the moment of paying for goods or services with a payment card (świecka, 2011, p. 29). figure 2. the number of merchants and eft-pos terminal in poland (in thousands) lations and shared rules on processing, billing or clearing payment transactions (…)” (ustawa o usługach płatniczych 2011; own translation). as a result, under the payment system infrastructure, the following elements can be distinguished (narodowy bank polski, związek banków polskich & koalicja na rzecz obrotu bezgotówkowego i mikropłatności, 2009; own translation):  intermediary institutions in making clearing (providing payment services),  payment systems,  authorisation and clearing systems that process transactions executed by electronic payment instruments,  service points that accept transactions made via payment cards,  atms1. payment cards are issued under the payment system and create a market of payment cards, which is a so-called two-way market (rochet & tirole, 2003, pp. 990–1029; rochet & tirole, 2008, pp. 1333– 1347). within this market we can distinguish its following participants (maciejewski, 2013, pp. 58– 78):  merchants – retailers accepting payment for goods or services via payment cards,  consumers – customers who pay by card for goods or services at servicing points,  card issuers – subjects (most often banks) that issue payment cards to consumers,  clearing agents – manage clearing between card issuers and merchants. clearing agents are banks or non-banking subjects that make deals with merchants on charging the fees for card usage.  card association – institutions that bring together payment card issuers within their own payment system. they provide their members with a logo (trademark) and a payment system. the basic source of association’s income are fees from card transactions (interchange fees) collected by clearing agents. eft-pos terminal is a device used for operations with cashless payments that is installed in sales and service points and is essential for contacting bank server (via certificate authority) in the moment of paying for goods or services with a payment card (świecka, 2011, p. 29). figure 2. the number of merchants and eft-pos terminal in poland (in thousands) source: developed personally based on: nbp, 2017. from 2003 until the beginning of 2017 (figure 2), the number of payment cards merchants increased almost four times – from 60 thousand to 237 thousand. a significant leap in payment cards acceptance took place at the turn of 2014 and 2015, due to the reduction of interchange payment in poland (nbp, 2015; jonker, 2011). therefore, the number of terminals in poland was, relatively, dynamically increasing in the aforementioned period (figure 3) – from 84 thousand to 563 thousand in 1 cash transactions are not analyzed in this article. 60 69 76 78 80 82 93 104 114 130 140 163 197 225 237 84 104 129 141 171 198 216 247 266 290 326 398 465 536 563 0 100 200 300 400 500 600 merchants the number of eft-pos terminal s o u r c e : developed personally based on: nbp, 2017. marta jakubowska28 from 2003 until the beginning of 2017 (figure 2), the number of payment cards merchants increased almost four times – from 60 thousand to 237 thousand. a significant leap in payment cards acceptance took place at the turn of 2014 and 2015, due to the reduction of interchange payment in poland (nbp, 2015; jonker, 2011). therefore, the number of terminals in poland was, relatively, dynamically increasing in the aforementioned period (figure 3) – from 84 thousand to 563 thousand in the first quarter of 2017. it proves that poles have more opportunities for cashless payments). moreover, as the result of the actions taken under the name of cashless transactions and the appointment of program wsparcia obrotu bezgotówkowego, the number of eft-pos terminals should significantly increase in the coming years, by another 600 thousand devices (polityka insight, 2017, p. 9). this programme is further discussed in the later part of the article. figure 3. the reach of payment cards acceptability in poland in relative terms in 2012 the first quarter of 2017. it proves that poles have more opportunities for cashless payments). moreover, as the result of the actions taken under the name of cashless transactions and the appointment of program wsparcia obrotu bezgotówkowego, the number of eft-pos terminals should significantly increase in the coming years, by another 600 thousand devices (polityka insight, 2017, p. 9). this programme is further discussed in the later part of the article. figure 3. the reach of payment cards acceptability in poland in relative terms in 2012 source: developed personally based on: polasik, 2015. m. polasik’s research estimates the number of active subjects providing goods and services to individual customers in poland in december 2012 to 899 thousand. this number is viewed as a reference point for the conclusions and statistics presented in the article. on the basis of the aforementioned research, it can be stated that the general reach of payment cards acceptability in poland in 2012 (figure 3) was about 15% (merchants), so it was very limited. taking into consideration another indicator, concerned with the number of all points of sale where customers were serviced, the reach of payment cards acceptability was estimated to be around 29%. this results explicitly indicate that trade and services sector in 2012, in most cases, did not accept payment cards and that the dominant payment instrument was cash money (polasik, 2015, p. 42). assuming, that number of active subjects providing goods and services has not changed since 2012 (899 thousand entities) and referring it to the number of merchants – basing on the source from nbp in 2017 (figure 2), i.e. 237 thousand. – we can estimate the acceptance range of cards by merchants at approximately ¼ of all entities. thus, the payment card market in poland has changed positively over the years 2013–2017, but still, around ¾ of entities do not accept payment cards. payment instruments used in poland in physical points of sale from this article’s point of view, the most important area of retail payments are payments in physical points of sale, which in the year 2011 accounted for 76% of the number of all transactions made by consumers (polasik, 2013, pp. 79–102). it results from the fact that physical sales channels (shops, service points, workshops, etc.) are the most susceptible to the shadow economy problem, as transactions carried out there can be anonymous. however, in the case of e-commerce or invoices, there is some kind of transaction registration, the so-called “electronic trace” (e.g. by issuing an invoice or placing an order online, via an e-retailer or auction platform). which is why in this article the author is concentrating on the infrastructure of cashless payments in physical points of sale, as a key element for the subject matter – fighting with the shadow economy. in reality, so far only payment cards are being used on a larger scale in physical payment, what is analysed below. the value and number of payment card transactions over the years 1999–2016 (figure 4) both the value and the number of payment card transactions were gradually increasing. as for the value of payment card transactions, the most significant change can be seen in 2015. compared to the previous year, that value has increased by some 75 billion zl and the number of transaction by over 0.5 billion. having analysed the number of transactions, it can be 15% 22% 22% 8% 0% 5% 10% 15% 20% 25% 30% 35% merchants point of sale sales positions cash registers/sales desks terminal shared by two or more sales desks s o u r c e : developed personally based on: polasik, 2015. m. polasik’s research estimates the number of active subjects providing goods and services to individual customers in poland in december 2012 to 899 thousand. this number is viewed as a reference point for the conclusions and statistics presented in the article. on the basis of the aforementioned research, it can be stated that the general reach of payment cards acceptability in poland in 2012 (figure 3) was about 15% (merchants), so it was very limited. taking into consideration another indicator, concerned with the number of all points of sale where customers were serviced, the reach of payment cards acceptabil  the role of cashless transactions in the process… 29 ity was estimated to be around 29%. this results explicitly indicate that trade and services sector in 2012, in most cases, did not accept payment cards and that the dominant payment instrument was cash money (polasik, 2015, p. 42). assuming, that number of active subjects providing goods and services has not changed since 2012 (899 thousand entities) and referring it to the number of merchants – basing on the source from nbp in 2017 (figure 2), i.e. 237 thousand. – we can estimate the acceptance range of cards by merchants at approximately ¼ of all entities. thus, the payment card market in poland has changed positively over the years 2013–2017, but still, around ¾ of entities do not accept payment cards. payment instruments used in poland in physical points of sale from this article’s point of view, the most important area of retail payments are payments in physical points of sale, which in the year 2011 accounted for 76% of the number of all transactions made by consumers (polasik, 2013, pp. 79– 102). it results from the fact that physical sales channels (shops, service points, workshops, etc.) are the most susceptible to the shadow economy problem, as transactions carried out there can be anonymous. however, in the case of e-commerce or invoices, there is some kind of transaction registration, the so-called “electronic trace” (e.g. by issuing an invoice or placing an order online, via an e-retailer or auction platform). which is why in this article the author is concentrating on the infrastructure of cashless payments in physical points of sale, as a key element for the subject matter – fighting with the shadow economy. in reality, so far only payment cards are being used on a larger scale in physical payment, what is analysed below. the value and number of payment card transactions over the years 1999–2016 (figure 4) both the value and the number of payment card transactions were gradually increasing. as for the value of payment card transactions, the most significant change can be seen in 2015. compared to the previous year, that value has increased by some 75 billion pln and the number of transaction by over 0.5 billion. having analysed the number of transactions, it can be stated that the biggest increase the number of payment card transactions happened at the turn of 2014 and 2015, which can be related to the intermarta jakubowska30 change reduction for bank operations, in order to motivate poles to use payment cards more often (nbp, 2015). figure 4. the value and number of payment card transactions in poland in the years 1999–2016 stated that the biggest increase the number of payment card transactions happened at the turn of 2014 and 2015, which can be related to the interchange reduction for bank operations, in order to motivate poles to use payment cards more often (nbp, 2015). figure 4. the value and number of payment card transactions in poland in the years 1999–2016 source: developed personally based on: nbp, 2017. considering the fact that contactless payments are becoming more popular, the tendency illustrated in the figure above (figure 4) should be maintained in the coming years (borcuch, 2011). while analysing another table (figure 5), one must remember about the dominant role of payment card in cashless transactions. in the first quarter of 2017, 83% of payment card transactions are cashless transactions. the remaining part are cash transactions, i.e. cash withdrawal from atms, and also, on a smaller scale, cash back operations in payment terminals. cash transactions are becoming less present in all transactions in general (figure 5). figure 5. the number of cashless transactions in the number of all card transactions in poland in the years 2004–2017 source: developed personally based on: nbp, 2017. the influence of cashless payments on the size of the shadow economy in chosen european union countries prof. friedrich schneider’s literature overview (schneider, 2013, pp. 1–24) has pointed to a negative correlation between the shadow economy and the number of cashless transactions, particularly those involving payment cards (schneider, 2011). furthermore, the research on the situation in greece 0 500 1000 1500 2000 2500 3000 3500 4000 4500 0 100 200 300 400 500 600 700 th e nu m be r o f t ra ns ac tio ns in m ln th e va lu e of tr an sa ct io ns in m ld z ł value number 32% 36% 41% 45% 49% 53% 57% 60% 63% 66% 75% 79% 82% 83% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 q1 s o u r c e : developed personally based on: nbp, 2017. considering the fact that contactless payments are becoming more popular, the tendency illustrated in the figure above (figure 4) should be maintained in the coming years (borcuch, 2011). while analysing another table (figure 5), one must remember about the dominant role of payment card in cashless transactions. in the first quarter of 2017, 83% of payment card transactions are cashless transactions. the remaining part are cash transactions, i.e. cash withdrawal from atms, and also, on a smaller scale, cash back operations in payment terminals. cash transactions are becoming less present in all transactions in general (figure 5).   the role of cashless transactions in the process… 31 figure 5. the number of cashless transactions in the number of all card transactions in poland in the years 2004–2017 stated that the biggest increase the number of payment card transactions happened at the turn of 2014 and 2015, which can be related to the interchange reduction for bank operations, in order to motivate poles to use payment cards more often (nbp, 2015). figure 4. the value and number of payment card transactions in poland in the years 1999–2016 source: developed personally based on: nbp, 2017. considering the fact that contactless payments are becoming more popular, the tendency illustrated in the figure above (figure 4) should be maintained in the coming years (borcuch, 2011). while analysing another table (figure 5), one must remember about the dominant role of payment card in cashless transactions. in the first quarter of 2017, 83% of payment card transactions are cashless transactions. the remaining part are cash transactions, i.e. cash withdrawal from atms, and also, on a smaller scale, cash back operations in payment terminals. cash transactions are becoming less present in all transactions in general (figure 5). figure 5. the number of cashless transactions in the number of all card transactions in poland in the years 2004–2017 source: developed personally based on: nbp, 2017. the influence of cashless payments on the size of the shadow economy in chosen european union countries prof. friedrich schneider’s literature overview (schneider, 2013, pp. 1–24) has pointed to a negative correlation between the shadow economy and the number of cashless transactions, particularly those involving payment cards (schneider, 2011). furthermore, the research on the situation in greece 0 500 1000 1500 2000 2500 3000 3500 4000 4500 0 100 200 300 400 500 600 700 th e nu m be r o f t ra ns ac tio ns in m ln th e va lu e of tr an sa ct io ns in m ld z ł value number 32% 36% 41% 45% 49% 53% 57% 60% 63% 66% 75% 79% 82% 83% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 q1 s o u r c e : developed personally based on: nbp, 2017. the influence of cashless payments on the size of the shadow economy in chosen european union countries prof. friedrich schneider’s literature overview (schneider, 2013, pp. 1–24) has pointed to a negative correlation between the shadow economy and the number of cashless transactions, particularly those involving payment cards (schneider, 2011). furthermore, the research on the situation in greece has shown that in the time of a financial crisis, when the access to the cash was hampered, which in turn popularised the use of payment cards, increase vat tax revenue was observed (hondroyiannis & papaoikonomou, 2017, pp. 17–20). the author has conducted her own research on the relationship between cashless transactions and the size of the shadow economy. in many countries, cashless transactions is dynamically developing, thus offering perspective to create cashless society. the visit of payment market where all invoices and debts are paid using cashless payment instruments is slowly becoming more real. the main barrier stopping the creation of such society is society’s preference to remain anonymous in transactions. this preference collides with public institutions’ operations for using cashless transactions, which aims to gain larger control over economic operators and natural persons. it is driven by the necessity to limit the shadow economy, but it can also be met with resistance from the society (polasik & maciejewski, 2009, pp. 501–506). over the last few years in poland, changing approach to cashless marta jakubowska32 transactions could be observed, which is illustrated by the figures in the previous subchapters on the number of cards issued, the number of merchants and terminals and atms. consumers’ preferences are becoming more favourable for the usage of payment cards and the number of transactions made with them is increasing (nbp, 2016, p. 26). not without significance, in this case, is also the fact that in the recent years a radical increase of the number of payment terminals could be observed, which also inf luenced the development of cashless transactions in poland. it all suggests the following correlation – the bigger the cashless transactions, the smaller the shadow economy. figure 6. a compilation of the shadow economy (% pkb) and the number of cashless transactions made with payment cards per capita in the eu countries in 2015 has shown that in the time of a financial crisis, when the access to the cash was hampered, which in turn popularised the use of payment cards, increase vat tax revenue was observed (hondroyiannis & papaoikonomou, 2017, pp. 17–20). the author has conducted her own research on the relationship between cashless transactions and the size of the shadow economy. in many countries, cashless transactions is dynamically developing, thus offering perspective to create cashless society. the visit of payment market where all invoices and debts are paid using cashless payment instruments is slowly becoming more real. the main barrier stopping the creation of such society is society’s preference to remain anonymous in transactions. this preference collides with public institutions’ operations for using cashless transactions, which aims to gain larger control over economic operators and natural persons. it is driven by the necessity to limit the shadow economy, but it can also be met with resistance from the society (polasik & maciejewski, 2009, pp. 501–506). over the last few years in poland, changing approach to cashless transactions could be observed, which is illustrated by the figures in the previous subchapters on the number of cards issued, the number of merchants and terminals and atms. consumers’ preferences are becoming more favourable for the usage of payment cards and the number of transactions made with them is increasing (nbp, 2016, p. 26). not without significance, in this case, is also the fact that in the recent years a radical increase of the number of payment terminals could be observed, which also influenced the development of cashless transactions in poland. it all suggests the following correlation – the bigger the cashless transactions, the smaller the shadow economy. figure 6. a compilation of the shadow economy (% pkb) and the number of cashless transactions made with payment cards per capita in the eu countries in 2015 source: developed personally based on: fundowicz, łapiński, peterlik & wyżnikiewicz, 2016; ecb, 2016. in the figure (figure 6) above once can notice the aforementioned relationship concerning the number of cashless transactions made with payment cards per capita and the level of the shadow economy in 20152. in the european countries, where the number of transactions per capita is the largest, the 2 upon completion of this paper, the european central bank’s statistical data on cashless transactions made with payment cards per capita for the year 2016 were not available. 0 5 10 15 20 25 30 35 0 50 100 150 200 250 300 350 sw ed en d en m ar k fi nl an di a u k n et he rl an ds es to ni a lu xe m bo ur g fr an ce be lg iu m po rt ug al la tv ia ir el an d sl ov en ia a us tr ia sp ai n li th ua ni a cr oa tia sl ov ak ia po la nd cy pr us cz ec h re pu bl ic m al ta g er m an y h un ga ry it al y ro m an ia bu lg ar ia g re ec e shadow economy (% pkb) the number of transactions the number of transactions shadow economy s o u r c e : developed personally based on: fundowicz, łapiński, peterlik & wyżnikiewicz, 2016; ecb, 2016. in the figure (figure 6) above once can notice the aforementioned relationship concerning the number of cashless transactions made with payment cards   the role of cashless transactions in the process… 33 per capita and the level of the shadow economy in 20152. in the european countries, where the number of transactions per capita is the largest, the shadow economy assumes relatively lower percentage of the gross national product (gnp). the person’s correlation coefficient, which was calculated by the author on the basis of the data above (figure 6), is –0.57. the above correlation dependence of the empirical data was verified by the t-student significance test for the pearson’s correlation coefficient, which was used to verify the following hypotheses: h0: no correlation between the number of cashless transactions made with payment cards per capita in the eu and the size of the shadow economy, h1: there is a correlation between the number of cashless transactions made with payment cards per capita in the eu and the size of the shadow economy. |t| = 3.57, tα,s= 0.49, where α = 0.05, s = 26. since |t| ≥ tα,s, we reject the null hypothesis about the irrelevance of pearson’s correlation coefficient, at the significance level of 0.05. we can assume that the correlation coefficient is statistically significant. the above studies indicate that there is a dependency between the number of cashless transactions made with payment cards per capita in the eu. it is a negative correlation of a relatively large force, which confirms the hypothesis accepted in the article that: in the countries that have highly advanced cashless transactions, the scale of the shadow economy phenomenon is smaller. current actions for the development of cashless transactions in poland – program wsparcia obrotu bezgotówkowego according to the data from the ministry of development, the level of cashless transactions is one of the important indicators of the country’s economic growth and access to digital payment is of a great importance for the entrepreneurs. which is why, on june 12, 2017, an appropriate agreement has been signed between the polish bank association (zbp), the ministry of finance and development and the biggest payment card providers. under this agreement, 2 upon completion of this paper, the european central bank’s statistical data on cashless transactions made with payment cards per capita for the year 2016 were not available. marta jakubowska34 the foundation “polska bezgotówkowa” (cashless poland) has been appointed, in accordance with the government project “od papierowej do cyfrowej polski” (from paper to digital poland). the foundation “polska bezgotówkowa” shall lead the programme of the development of payment card acceptability in poland. the programme’s goal is to support entrepreneurs in launching eftpos terminals and to cover transaction fees, particularly in small and medium companies (money, 2017). initially, the number of eft-pos terminals is to be increased by some 600 thousand devices in three years. program wsparcia obrotu bezgotówkowego is being created as the initiative of financial market’s subjects participating in domestic card payment market, i.e. banks – card providers, clearing agents, leaders in the polish payment organisations market – and also zbp and the minister of development and finance. the programme’s goal is to popularise cashless payments and make them as available as cash payments through supporting the development of acceptance network in poland (związek banków polskich, 2017). the implementation of the programme would be a revolutionary change in poland. the following (figure 7) are the results of expert research conducted by the author in 2017 on a group of 12 experts: presidents of leading companies dealing with electronic payment settlement (visa, mastercard), representatives of commercial banks (pekao sa), employees of leading on the polish acquirers? (first data, polskie e-płatności) and clearing house (kir). the representative of the ministry of finance also took the f loor. figure 7. assessment of potential effects of the program wsparcia obrotu bezgotówkowego figure 7. assessment of potential effects of the program wsparcia obrotu bezgotówkowego source: own study 2017; n=12. in the case of a question regarding the potential effects of pwob (figure 7), the vast majority of experts predicted the success of the cashless payment support program, which assumes an increase in the number of terminals by approximately 600,000 devices. however, taking into account the profitability of the supported companies after one year from the implementation of the programme, the experts' opinions differ. some experts have significant concerns about the financial viability of the programme for acquirers. moreover the expert study confirms that the program will probably limit scale of shadow economy (figure 7). the expert study conducted by the author of this article confirms that the program may contribute to limiting the scale of the shadow economy in the scope of unregistered transactions. conclusion taking into consideration the research above, increasing cashless transactions should significantly level out the shadow economy. unfortunately, it is not happening mainly because only legal transactions are replaced by card transactions, the same is not with illegal ones. we are dealing with two-way relationship. on the one hand, cashless transactions can reduce the shadow economy, on the other hand, the shadow economy can block this accounting. in the environment with the large congregation of the shadow economy, no one wants to register payments. therefore, a solution that would force payments registration seems necessary, particularly in industries subjected to the shadow economy. this solution could also contribute to the increase of accounting and the reduction of the scale of unregistered transactions. a promising solution, which is well-functioning in other countries is online fiscal system. the question whether such a system would work in poland still remains open. currently, due to the fact that there is abundance of payment cards in poland and the market is dynamically developing, the main direction of increase of many circulations through the development of cashless transactions is through the development of card acceptance network. thus, a tool that provides a possibility of the reduction of the shadow economy in the area of unregistered transactions shall be the launched program wsparcia obrotu bezgotówkowego. due to the fact that this programme is the first attempt in the world to introduce full acceptance of cards in the economy, the results are very popular among international experts. undoubtedly, it is an area for future studies. references borcuch, a. (2011). bankowość elektroniczna w polsce. (electronic banking in poland.) warszawa: cedewu. borcuch, a. (2012). wpływ rynku płatności elektronicznych na ograniczanie szarej strefy. (the impact of the electronic payment market on reducing the shadow economy.) finanse, (finance.) 1(5), 68–80. ecb (2016). statistical data warehouse, http://sdw.ecb.europa.eu/reports.do?node=1000005713 (accessed: 11.07.2017). 1 7 5 7 2 3 2 2 4 3 pwob will achieve the assumed goal of increasing the number of eft-pos terminals by approximately 600 000 devices most entities that obtain eft-pos terminals under the pwob will become profitable for acquires after 1 year of "promotion" the pwob will significantly reduce the shadow economy and increase tax revenues for the state budget definitely yes rather yes i do not know /it's hard to say propably not definitely not s o u r c e : own research, 2017; n=12.   the role of cashless transactions in the process… 35 in the case of a question regarding the potential effects of pwob (figure 7), the vast majority of experts predicted the success of the cashless payment support program, which assumes an increase in the number of terminals by approximately 600,000 devices. however, taking into account the profitability of the supported companies after one year from the implementation of the programme, the experts’ opinions differ. some experts have significant concerns about the financial viability of the programme for acquirers. moreover the expert study confirms that the program will probably limit scale of shadow economy (figure 7). the expert study conducted by the author of this article confirms that the program may contribute to limiting the scale of the shadow economy in the scope of unregistered transactions.  conclusion taking into consideration the research above, increasing cashless transactions should significantly level out the shadow economy. unfortunately, it is not happening mainly because only legal transactions are replaced by card transactions, the same is not with illegal ones. we are dealing with two-way relationship. on the one hand, cashless transactions can reduce the shadow economy, on the other hand, the shadow economy can block this accounting. in the environment with the large congregation of the shadow economy, no one wants to register payments. therefore, a solution that would force payments registration seems necessary, particularly in industries subjected to the shadow economy. this solution could also contribute to the increase of accounting and the reduction of the scale of unregistered transactions. a promising solution, which is well-functioning in other countries is online fiscal system. the question whether such a system would work in poland still remains open. currently, due to the fact that there is abundance of payment cards in poland and the market is dynamically developing, the main direction of increase of many circulations through the development of cashless transactions is through the development of card acceptance network. thus, a tool that provides a possibility of the reduction of the shadow economy in the area of unregistered transactions shall be the launched program wsparcia obrotu bezgotówkowego. due to the fact that this programme is the first attempt in the world to introduce full acceptance of cards in the economy, the results are very popular among international experts. undoubtedly, it is an area for future studies. marta jakubowska36  references borcuch, a. (2011). bankowość elektroniczna w polsce. (electronic banking in poland.) warszawa: cedewu. borcuch, a. (2012). wpływ rynku płatności elektronicznych na ograniczanie szarej strefy. (the impact of the electronic payment market on reducing the shadow economy.) finanse, (finance.) 1(5), 68–80. ecb (2016). statistical data warehouse, http://sdw.ecb.europa.eu/reports. do?node=1000005713 (accessed: 11.07.2017). fundowicz, j., łapiński k., peterlik m., & wyżnikiewicz, b. (2016). szara strefa w polskiej gospodarce w 2016 roku. (the gray zone in polish economy in 2016.) warszawa: ibngr. hondroyiannis, g., & papaoikonomou, d. (2017). the effect of card payments on vat revenue: new evidence from greece. economics letters, 157, 17–20. http://dx.doi. org/10.1016/j.econlet.2017.05.009. jonker, n. (2011). card acceptance and surcharging: the role of costs and competition. review of network economics, 10(2). http://dx.doi.org/10.2202/1446-9022.1249. maciejewski, k. (2013). uczestnicy obrotu bezgotówkowego na rynku polskim. (participants of cashless transactions on the polish market.) in h. żukowska, m. żukowski (eds.). obrót bezgotówkowy w polsce. (cashless transactions in poland.) lublin: wydawnictwo kul. money (2017). mr: pwob przyspieszy wzrost liczby terminali, (pwob will accelerate the increase in the number of terminals.) http://www.money.pl/gielda/wiadomosci/artykul/mr-program-wsparcia-obrotu-bezgotowkowego,115,0,2332531.html (accessed: 11.07.2017). nbp (2006). strategia rozwoju systemu płatniczego i obrotu bezgotówkowego w polsce. (strategy for the development of the payment system and cashless transactions in poland.) warszawa: departament systemu płatniczego. nbp (2013). diagnoza stanu rozwoju obrotu bezgotówkowego w polsce. (diagnosis of the development of cashless transactions in poland.) warszawa: departament systemu płatniczego. nbp (2015). analiza skutków obniżenia opłaty interchange w polsce. 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(e-economy, e-society in central and eastern europe. volume 2.) lublin: wydawnictwo kul. polityka insight (2017). raport finansowy. (financial report.) warszawa. rochet, j.-c., & tirole, j. (2003). platform competition in two-sided markets. journal of the european economic association, 1(4), 990–1029. http://dx.doi.org/ 10.1162/154247603322493212. rochet, j.-c., & tirole, j. (2008). tying in two-sided markets and the honor all cards rule. international journal of industrial organization, 26(6), 1333–1347. http:// dx.doi.org/10.1016/j.ijindorg.2008.01.002. salmony, m. (2011). why is use of cash persisting? critical success factors for overcoming. journal of payments strategy & systems, 5(3), 246–272. schneider, f. (2011). the shadow economy in europe, 2011: using electronic payment systems to combat the shadow economy. linz: a.t. kearney. schneider, f. (2013). the shadow economy in europe, 2013. linz: a.t. kearney. schuh, s., & stavins, j. (2013). how consumers pay: adoption and use of payments. accounting and finance research, 2(2), 1–21. http://dx.doi.org/10.5430/afr.v2n2p1. świecka, b. (2011). bankowość elektroniczna. (electronic banking.) warszawa: cedewu. ustawa o usługach płatniczych z dnia 19 sierpnia 2011r. (the law of payment services, august 19, 2011). związek banków polskich (2017). zbp na rzecz programu wsparcia obrotu bezgotówkowego, (zbp for the pwob.) http://zbp.pl/wydarzenia/archiwum/wydarzenia/2017/ czerwiec/zbp-na-rzecz-programu-wsparcia-obrotu-bezgotowkowego (accessed: 12.07.2017). date of submission: may 27, 2019; date of acceptance: june 1, 2019. * contact information: mikolaj.borowski.beszta@gmail.com, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 698 700 010; orcid id: https://orcid.org/00000001-6590-4279. ** contact information: anna.kiermas@gmail.com, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 533 643 552; orcid id: https://orcid.org/0000-0002-6876-9866. this work was supported by the national science centre, poland under grant no. 2017/26/e/hs4/00858. borowski-beszta, m., & kiermas, a. (2019). the usage of mobile banking applications in poland: empirical results. copernican journal of finance & accounting, 8(1), 9–25. http://dx.doi. org/10.12775/cjfa.2019.001 mikołaj borowski-beszta* nicolaus copernicus university in toruń anna kiermas** nicolaus copernicus university in toruń the usage of mobile banking applications in poland: empirical results keywords: mobile banking, mobile applications, payment services. j e l classification: d12, e42, o33. abstract: the purpose of this article is to determine the scope of mobile banking applications use among retail bank customers in poland. a brief review of different approaches to the mobile banking definition is presented, and the definition that corresponds to the current state of the mobile banking market has been pointed out. the paper also presents the evolution and development of mobile banking channel in poland in the years 2000–2018. the number of active mobile banking users in the years 2014–2018 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 1 cjf&a co pe r n ic a n j o ur na l of finance & a c c o u n tin g mikołaj borowski-beszta, anna kiermas10 has dynamically increased from 3.5 in 2014, to over 11.2 million in 2018, which is much faster than the development of online banking. the quantitative study is based on a survey performed in 2018 with the use of the cawi method, carried on a representative sample of 1012 polish internet users. the obtained results allow to explore the customers’ usage of mobile banking applications. it turned out, that these applications are already a popular communication channel among polish internet users – over half of respondents already have a mobile banking application installed on their device and ¾ of them use it on a day-to-day basis. the most common functions are checking the account balance or initiating a bank transfer. furthermore, nine of ten users are satisfied with the use of their application. the results also suggest, that due to growing needs of mobile banking applications users, as well as the increasing usefulness and ergonomics of applications, the upward trend of mobile banking applications usage in poland is not likely to slow down in the next few years.  introduction mobility is currently an extremely valued and sought-after feature in many areas of the economy and private life. it is associated with: convenience, quickness, and above all the ability to perform specific activities anywhere and at any time (sobiesiak & zagrodniczek, 2018, p. 66). in banking, mobility manifests itself through innovative channels of communication between the bank and its clients. when the first mobile banking solutions have been introduced in poland at the beginning of the 21st century, there was a shortage of adequately advanced technology that would be sufficiently effective and accessible to the majority of the population (polasik, 2013, pp. 146–148). this stems from the fact that mobile banking was and still is closely related to the development and access to new technologies, i.e. hardware and system solutions that create opportunities for the development of a mobile channel of interaction with the bank (kuchciak, 2012, pp. 477–478). internet banking in poland is functioning since the end of the nineties, (wojtacka-pawlak, 2015, p. 156), however, during the next 10 years, its popularization on mobile devices was constricted because it required a user-friendly interface. after many unsuccessful attempts, the breakthrough moment for mobile banking in poland came in 2009, along with the popularization of mobile application technologies and its implementation in the area of banking item. together with growing interest in using mobile banking services among consumers, more and more banks began to offer mobile applications developed especially for this purpose (bolibok & matras-bolibok, 2014, pp. 9–10). currently, smartphones and other mobile devices are characterized by high availability on the market, and their popularization along with expansion of the mobile internet is generating huge potential for the the usage of mobile banking applications in poland… 11 development of mobile banking. it is therefore reasonable to examine the present role of this communication channel in the provision of banking services in poland. the research methodology and the course of the research process the purpose of this article is to determine the scope of use of mobile applications by retail banking customers in poland. this paper addresses the following research questions: ■ how popular are mobile banking applications and how often they are used by customers? ■ which banking services are performed by mobile banking applications? ■ how internet users perceive mobile banking applications and what is the level of their satisfaction? the theoretical part of this article is based on polish and foreign subject literature as well as numerous professional expert studies, including reports from the polish bank association and the industry portal prnews.pl. the empirical part of this paper, including the analysis of the use and perception of mobile banking applications, is based on the results of own survey study, which questionnaire was elaborated with the use of the technology acceptance model research framework (davis, 1989). the survey was carried out by cawi (computer assisted web interview) method in december 2018 on a sample of 1012 polish internet users. the selection of the sample and the process of collecting the responses were conducted within a dedicated system by the ircenter agency. there was a random selection of respondents and the study is representative on a national scale in terms of gender, age, and place of residence. mobile banking mobile banking, gaining very fast popularity on the polish payment services market, has been characterized by many specialists who in their definitions chose different approaches to the issue. according to k. zarańska and m. zborowski (2018, p. 18), “mobile banking, abbreviated as m-banking, could be defined as the use of banking services with the aid of mobile devices, i.e. smartphones or tablets”. i. kuchciak (2012, p. 470) notes further that “mobile banking is currently the most modern approach to the provision of banking services, integrating the bank with telecommunications services.” in addition, mikołaj borowski-beszta, anna kiermas12 mobile banking is “one such convergence service that brings together hitherto unconnected industries – banking and mobile operators – to offer value added services to their respective customers” (lee, harindranath, oh & kim, 2015, p. 552), moreover “the application itself can completely replace banking operations performed using a classic browser” (zakonnik & dembowski, 2018, p. 109). from the bank’s perspective, through the introduction of mobile banking services, banks want to provide the client with a better and more effective communication channel (alalwan, dwivedi, rana & williams, 2016, p. 118). for banks the additional advantage of mobile banking is the ability of sending personalized product offers or conducting other promotional campaigns that strengthen the client’s affiliation to a given bank (bolibok & matras-bolibok, 2014, p. 16). for the purpose of this publication, the authors adopted the definition of mobile banking, given by a. a. shaikh and h. karjaluoto (2015, p. 130): “a product or service offered by a bank or a microfinance institute (bank-led model) or mno (non-bank-led model) for conducting financial and non-financial transactions using a mobile device, namely a mobile phone, smartphone, or tablet.” mobile banking has many features among which there could be distinguished both positive and negative ones. the table 1 lists the particular advantages and weaknesses of mobile banking, developed on the basis of the available literature on the subject. in addition, the advantages and weaknesses are selected according to the benefits of customers and banks. mobile banking is characterized by high comfort of use, what is more, the number of functionalities available for the customer is constantly increasing. the security level of mobile banking applications and it systems is also rising, so the risk of potential fraud is being reduced. in the above table, the number of advantages significantly exceeds the number of weaknesses, so it can be concluded that mobile banking is a beneficial communication channel for both customers and banks. the application of innovative solutions has contributed to the expansion of the mobile banking channel, which is currently considered the most important channel of accessing banking services, and the constantly growing interest in mobile banking offers determines the increase in the pace of development of the analyzed method of banking and perpetually widening range of banking services provided by the mobile channel (bolibok & matras-bolibok, 2014, p. 8; krzysztoszek, 2017, pp. 6–7). the usage of mobile banking applications in poland… 13 table 1. the mobile banking main advantages and weaknesses from the customer and the bank perspective advantages weaknesses for customer for bank for customer for bank – absence of costs related to the use of mobile banking applications; – ability to manage a bank account anywhere and at any time; – using the application is comfortable and intuitive for the user. – increasing the efficiency of system by transferring only relevant data between the bank and the application; – additional functions of application, e.g. branches and atms localization via gps transmitter, reloading a phone-card, qr code scanner, and many others; – quick contact with the customer through application notifications. – the risk of a potential cyber-attack. – challenges related to the creation of ideal applications; – high costs of application design, – necessity of providing users with the appropriate level of security. s o u r c e : own study based on: (polasik, 2013; bolibok & matras-bolibok, 2014). the beginnings of mobile banking in poland mobile banking entered the polish payment services market in 2000, when the bank zachodni wbk launched the sms information service. this service offered information about the balance and the last five transactions carried out on the customer’s account, provided that its owner mobile phone operated in the plus gsm network. the bz wbk was also the first bank in poland to launch a mobile site operating in the wap (wireless application protocol) protocol. shortly after, the same solution was offered by mbank. at that time there were high expectations of wap technology, as well as very enthusiastic opinions of experts who claimed that this technology is able to become the main channel of communication between the customer and the bank. wap, however, did not arouse much interest among customers, and among main reasons were high rates of accessing the internet via mobile phone. in 2002, the raiffeisen bank and the inteligo offered a similar solution, developed in the newer wap 2.0 protocol (bolibok & matras-bolibok, 2014, pp. 9–10; www1). moreover, the inteligo, as the first institution in poland, launched the “i pay with sms” service in the sim toolkit (stk) system, which allowed to perform particular banking operations, such as making transfers, managing deposits, paying off debts or searching for nearby atms (sobiesiak & zagrodniczek, 2018, p. 67; www5). with time, more mikołaj borowski-beszta, anna kiermas14 and more banks launched sms services. in 2005, the bank millenium launched sms notifications, and a year later, the mbank, the multi bank, the citi handlowy, and the ing bank śląski introduced, used until today, the one-time sms passwords sent for the purpose of one-time authorization of an online transaction, e.g. a bank transfer (hassa, 2013). unfortunately, for the next three years, the development of mobile banking slowed down because wap solutions, sim toolkit and sms banking did not become popular, and the primary reason for this was a failure in meeting customers’ expectations (www1). only in 2008, when the inteligo introduced the first version of light website – adapted especially for mobile devices (bolibok & matras-bolibok, 2014, p. 13), the mobile banking market has been stimulated (hassa, 2013, p. 42). soon thereafter, various banks introduced mobile applications in their offer, thus making a new attempt to develop a mobile communication channel between the customer and the bank in terms of available functionalities, as well as their suitability and ease of use (sobiesiak & zagrodniczek, 2018, p. 67) the development of mobile banking in poland one of the key elements that contributed to the dynamic development of mobile banking in poland is development of mobile banking applications that have quickly gained recognition among individual customers. the first mobile application was launched in 2009, and it swiftly obtained the status of the most advanced mobile banking solution (bolibok & matras-bolibok, 2014, pp. 9–10). at the same time, along with mobile applications, so-called light versions of websites emerged, however, the ergonomics of using that website via the mobile device browser was unsatisfactory, moreover, in comparison to mobile websites, mobile applications were characterized by a higher level of security (polasik, 2013, pp. 146–147; kuchciak, 2012 p. 472; kaczmarek, 2018, p. 147). the available back then generations of mobile phones did not meet the technical requirements, which was somehow constraining the development of mobile banking applications (bolibok & matras-bolibok, 2014, pp. 9–10). but when the availability of smartphones increased on the market and the vendors of mobile networks significantly reduced the costs of internet data transfer, mobile devices became tools for the consumption of goods and services (kaczmarek, 2018, p. 146). the smartphones have become bearers of new functionalities – from now on these devices could be used not only for making calls, sending the usage of mobile banking applications in poland… 15 messages or using the internet, but also for financial purposes (świecka, 2015, pp. 32–33). hence, the interest in the mobile channel increased among banks and in subsequent years, banks began to implement their own mobile applications (świecka, 2015, pp. 32–33, kaczmarek, 2018, p. 146). until 2010, only the raiffeisen bank offered this kind of application, whereas in 2012 the number of banks offering mobile applications increased to 12 (hassa, 2013, pp. 42–43). mobile banking also positively inf luenced the development of mobile payments technologies – one of them, nfc (near field communication), is based on a developed version of rfid technology and since its first use in mobile devices, it still appears as the most likely line of development of contactless retail payments (polasik, wisniewski & lightfoot, 2012, p. 212). nfc payments enable making payments on a eft-pos terminal, with the use of a mobile device (polasik & kumkowska, 2015, p. 103). since 2012, the possibility of integrating a payment card with a smartphone and making payments using a mobile phone equipped with a special sim card containing an nfc module, became another feature of mobile banking in poland (świecka, 2015, p. 34; wolna, 2015, p. 163). less than two years later, the use of an nfc-based payment solution has been somewhat simplified – the bank pekao in cooperation with the mastercard introduced the hce (host card emulation) solution. it is based on a mobile banking application linked to a personal banking account and offers its customers the possibility of contactless payments without employing a special sim card (polasik & kumkowska 2015, p. 107; www2). at that time, the research conducted by m. polasik, j. górka, g. wilczewski, j. kunkowski, k. przenajkowska and n. tetkowska (2013, pp. 317–318) has proven, that the contactless payments, including mobile payments are quick, convenient, attractive for customers, and the development of contactless mobile payments including nfc, should be expected. together with the increasing number of institutions offering the most upto-date solutions in mobile banking applications and the growing popularity of smartphones, the number of active mobile banking users has been also systematically raising. the figure 1 presents the aforementioned tendency, comparing it at the same time to the number of active users of online banking. the purpose of both channels comparison is to show a decreasing difference between the number of users occurring among mobile and online banking. mikołaj borowski-beszta, anna kiermas16 figure 1. the number of active users of online and mobile banking in 2014–2018 (in millions) using a mobile phone equipped with a special sim card containing an nfc module, became another feature of mobile banking in poland (świecka, 2015, p. 34; wolna, 2015, p. 163). less than two years later, the use of an nfc-based payment solution has been somewhat simplified – the bank pekao in cooperation with the mastercard introduced the hce (host card emulation) solution. it is based on a mobile banking application linked to a personal banking account and offers its customers the possibility of contactless payments without employing a special sim card (polasik & kumkowska 2015, p. 107; www2). at that time, the research conducted by m. polasik, j. górka, g. wilczewski, j. kunkowski, k. przenajkowska and n. tetkowska (2013, pp. 317-318) has proven, that the contactless payments, including mobile payments are quick, convenient, attractive for customers, and the development of contactless mobile payments including nfc, should be expected. together with the increasing number of institutions offering the most up-to-date solutions in mobile banking applications and the growing popularity of smartphones, the number of active mobile banking users has been also systematically raising. the chart 1 presents the aforementioned tendency, comparing it at the same time to the number of active users of online banking. the purpose of both channels comparison is to show a decreasing difference between the number of users occurring among mobile and online banking. chart 1. the number of active users of online and mobile banking in 2014-2018 (in millions) source: own study based on: quarterly reports of the polish bank association and the prnews.pl (www4). when analyzing the number of active users of mobile and online banking in the years 2014-2018, one can notice a significant decrease of difference occurring between the 3.5 5.7 7.7 8.9 11.2 13.1 14.5 15.4 15.9 17.2 0 2 4 6 8 10 12 14 16 18 20 2014 2015 2016 2017 2018 mobile banking online banking s o u r c e : own study based on: quarterly reports of the polish bank association and the prnews. pl (www4). when analyzing the number of active users of mobile and online banking in the years 2014–2018, one can notice a significant decrease of difference occurring between the numbers of users of these two channels. over the course of five years, the number of online banking users has increased only by 31%, when the number of mobile banking users – by as much as 220%. both channels maintain an upward trend, which at the same time indicates their continuous development. but, mobile banking develops noticeably faster, which is evidenced by the very dynamic –in comparison to online banking –augmentation of its active users. the pace of mobile banking development may result from the availability on the market of increasingly advanced mobile technology that has been successfully adopted into the widespread use. it could also mean that banks are effectively acquiring new clients or reaching new target groups. in the years 2014–2017, the number of online banking users grew, but slower – the amount of new users was respectively 1.4 million, 0.9 million and 0.5 million in 2017. the reason of this slowdown could be the growing interest in mobile banking, because the number of active users increased on average by 2 million in a given period 2014–2017. in 2018, the number of mobile banking users increased by 2.3 million, thus achieving the highest growth in the entire analyzed period 2014–2018. in turn, the number of online banking users increased in 2018 only by 1.3 million. the usage of mobile banking applications in poland… 17 the figure 2 presents the number of active mobile banking users in total and the extracted from it number of active users of mobile banking applications. figure 2. the comparison of the number of active mobile banking application users and the number of mobile banking users in total (in millions) source: own study based on: quarterly reports of the prnews.pl (www4). in 2016, the share of application users in mobile banking users in total was just over 40%, then it increased to about 63% in 2017, and in 2018 the upward trend continued, as already three out of four mobile banking users actively employed bank applications. the growing popularity of mobile banking applications proves its success on the polish payment services market, since from 2017 it has become the main tool used to carry out individual operations through a mobile channel of communication with the bank. this is related to the increasing quality of the applications offered, which contributes further to the frequency of their usage. the survey results –the use of mobile banking applications among polish internet users the results of the conducted survey allowed for a more detailed understanding of the popularity of mobile banking applications among internet users and ranges of services used, along with their preferences regarding mobile banking applications. the results of this survey indicate that these applications are already well received by polish internet users, as every second respondent makes a use of a bank application installed on his or her smartphone (chart 3). chart 3.the popularity of banking mobile applications among polish internet users 3.1 5.6 8.5 7.7 8.9 11.2 0 2 4 6 8 10 12 2016 2017 2018 number of active mobile banking application users number of active mobile banking users in total s o u r c e : own study based on: quarterly reports of the prnews.pl (www4). in 2016, the share of application users in mobile banking users in total was just over 40%, then it increased to about 63% in 2017, and in 2018 the upward trend continued, as already three out of four mobile banking users actively employed bank applications. the growing popularity of mobile banking applications proves its success on the polish payment services market, since from 2017 it has become the main tool used to carry out individual operations through a mobile channel of communication with the bank. this is related to the increasing quality of the applications offered, which contributes further to the frequency of their usage. the survey results – the use of mobile banking applications among polish internet users the results of the conducted survey allowed for a more detailed understanding of the popularity of mobile banking applications among internet users and ranges of services used, along with their preferences regarding mobile banking applications. the results of this survey indicate that these applicamikołaj borowski-beszta, anna kiermas18 tions are already well received by polish internet users, as every second respondent makes a use of a bank application installed on his or her smartphone (figure 3). figure 3. the popularity of banking mobile applications among polish internet users source: own study: polish internet users, 2018, n=1012. the popularity of the mobile communication channel with the bank is certainly also influenced by the fact that smartphones, due to the number of their functionalities, become a new “digital wallet” for many consumers and nowadays it is easier to forget about a traditional wallet than a personal mobile device. currently, the realization of payments via the mobile application becomes easier, and the software also gains on intuitiveness and quickness of operation. these features are certainly the main determinants influencing the regularity and frequency of reaching for the mobile instrument of contact with the bank. within the research framework respondents were also asked how often they use the mobile application of their bank. it turned out that almost 1/3 of the mobile banking application owners use it on daily basis (chart 3), and almost half of them use it several times a week. therefore, it can be stated that three out of four respondents who have this application use mobile banking intensively. in the next question, the respondents commented on the selected functionalities of the mobile banking application. according to the chart 4, 91% of them utilize the possibility of checking the account balance. a slightly smaller percentage of respondents (86%) make transfers to another bank account. also the possibility of tracking transaction history proves to be useful, because this functionality is used by 8 out of 10 respondents. chart 4. the usage of selected functionalities of mobile banking application source: own study: mobile banking applications users (among polish internet users), 2018, n=510. it is worth noting that every second owner of a mobile banking application uses mobile payments – 57% of respondents use contactless payments, while 48% use the blik code for transactions. high 50.4% 49.6% possession of the application i have a mobile banking application i don't have a mobile banking application 2% 22% 48% 28% 0% 20% 40% 60% frequency of the use of the application every day few times a week few times a month less than few times a month 91% 86% 77% 57% 48% 41% 21% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% checking the account balance transfers to a bank account transaction history contactless payments blik code payments reloading a phone -card transfers to a telephone number other s o u r c e : own study: polish internet users, 2018, n=1012. the popularity of the mobile communication channel with the bank is certainly also inf luenced by the fact that smartphones, due to the number of their functionalities, become a new “digital wallet” for many consumers and nowadays it is easier to forget about a traditional wallet than a personal mobile device. currently, the realization of payments via the mobile application becomes easier, and the software also gains on intuitiveness and quickness of operation. these features are certainly the main determinants inf luencing the regularity and frequency of reaching for the mobile instrument of contact with the bank. within the research framework respondents were also asked how often they use the mobile application of their bank. it turned out that almost 1/3 of the mobile banking application owners use it on daily basis (figure 3), and almost half of them use it several times a week. therefore, it can be stated that the usage of mobile banking applications in poland… 19 three out of four respondents who have this application use mobile banking intensively. in the next question, the respondents commented on the selected functionalities of the mobile banking application. according to the figure 4, 91% of them utilize the possibility of checking the account balance. a slightly smaller percentage of respondents (86%) make transfers to another bank account. also the possibility of tracking transaction history proves to be useful, because this functionality is used by 8 out of 10 respondents. figure 4. the usage of selected functionalities of mobile banking application source: own study: polish internet users, 2018, n=1012. the popularity of the mobile communication channel with the bank is certainly also influenced by the fact that smartphones, due to the number of their functionalities, become a new “digital wallet” for many consumers and nowadays it is easier to forget about a traditional wallet than a personal mobile device. currently, the realization of payments via the mobile application becomes easier, and the software also gains on intuitiveness and quickness of operation. these features are certainly the main determinants influencing the regularity and frequency of reaching for the mobile instrument of contact with the bank. within the research framework respondents were also asked how often they use the mobile application of their bank. it turned out that almost 1/3 of the mobile banking application owners use it on daily basis (chart 3), and almost half of them use it several times a week. therefore, it can be stated that three out of four respondents who have this application use mobile banking intensively. in the next question, the respondents commented on the selected functionalities of the mobile banking application. according to the chart 4, 91% of them utilize the possibility of checking the account balance. a slightly smaller percentage of respondents (86%) make transfers to another bank account. also the possibility of tracking transaction history proves to be useful, because this functionality is used by 8 out of 10 respondents. chart 4. the usage of selected functionalities of mobile banking application source: own study: mobile banking applications users (among polish internet users), 2018, n=510. it is worth noting that every second owner of a mobile banking application uses mobile payments – 57% of respondents use contactless payments, while 48% use the blik code for transactions. high 50.4% 49.6% possession of the application i have a mobile banking application i don't have a mobile banking application 2% 22% 48% 28% 0% 20% 40% 60% frequency of the use of the application every day few times a week few times a month less than few times a month 91% 86% 77% 57% 48% 41% 21% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% checking the account balance transfers to a bank account transaction history contactless payments blik code payments reloading a phone -card transfers to a telephone number other s o u r c e : own study: mobile banking applications users (among polish internet users), 2018, n=510. it is worth noting that every second owner of a mobile banking application uses mobile payments – 57% of respondents use contactless payments, while 48% use the blik code for transactions. high percentages of particular functionalities usage suggest that the feature convincing bank clients is the fact that the mobile application is a comprehensive instrument that offers access to many services. in the final part of this survey, the respondents were asked to describe their sensations related to the use of mobile banking applications. in the questionnaire developed, two groups of questions were distinguished: the first, focused mikołaj borowski-beszta, anna kiermas20 on the evaluation of the use of this application, the second on general satisfaction with this application. through these questions, the authors wanted to examine the respondents’ attitude towards mobile banking applications on daily basis. figure 5. the perception of mobile banking applications by polish internet users* in the final part of this survey, the respondents were asked to describe their sensations related to the use of mobile banking applications. in the questionnaire developed, two groups of questions were distinguished: the first, focused on the evaluation of the use of this application, the second on general satisfaction with this application. through these questions, the authors wanted to examine the respondents’ attitude towards mobile banking applications on daily basis. chart 5. the perception of mobile banking applications by polish internet users source: own study: mobile banking applications users (among polish internet users), 2018, n=510. *the results of application use evaluation present the sum of answers “i definitely agree” and “i rather agree”. it turned out that 92% of respondents opted for the convenience of owned by them mobile banking application, which is probably their main, comfortable communication channel with the bank, and according to 91% of respondents, these applications are also quick in action, i.e. they do not go down, and transactions can be carried out without unnecessary delays. the security level is not perceived so well, but still very good– 84% of respondents consider mobile banking as safe, which is certainly influenced by the continuous development of these applications and methods of client authentication. the last question of this survey was related to assessing the overall satisfaction with using the mobile banking application. similarly to the evaluation of particular features of the application listed above, the prevailing level of satisfaction is very high – nearly nine out of ten respondents are satisfied with their mobile banking application (chart 5). however, there 92% 91% 84% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% convenient quick safe evaluation of the use of the application 38% 49% 5% 5% 4% satisfaction with the application very satisfied rather satisfaied neither satisfied nor dissatisfied rather dissatisfied very dissatisfied s o u r c e : own study: mobile banking applications users (among polish internet users), 2018, n=510. *the results of application use evaluation present the sum of answers “i definitely agree” and “i rather agree”. it turned out that 92% of respondents opted for the convenience of owned by them mobile banking application, which is probably their main, comfortable communication channel with the bank, and according to 91% of respondents, these applications are also quick in action, i.e. they do not go down, and transactions can be carried out without unnecessary delays. the security level is not perceived so well, but still very good– 84% of respondents consider mobile banking as safe, which is certainly inf luenced by the continuous development of these applications and methods of client authentication. the last question of this survey was related to assessing the overall satisfaction with using the mobile banking application. similarly to the evaluation of particular features of the application listed above, the prevailing level of satisfaction is very high – nearly nine out of ten respondents are satisfied with their mobile banking application (figure 5). however, there were negative answers as well, 9% of respondents are dissatisfied with the application they own. * the usage of mobile banking applications in poland… 21  conclusions the popularity of mobile banking in poland is constantly growing year by year. the number of active mobile banking users in the years 2014–2018 increased by over 220%, and mobile banking is already a standard channel of access to banking products offered by banks. with maintaining the current upward trend in the amount of mobile banking users, the equalization of numbers of people using the mobile and online channels can occur even faster than in the next five years. the current share of active mobile banking applications users among the mobile banking users in total is the highest since introduction of these applications in 2009 to the polish banking market and reaches 76%. moreover, this share attests that mobile applications are the main channel of customer contact with the bank in the area of mobile banking. during survey conducted for this study, it was established that mobile banking application is already a popular instrument among polish internet users, which is indicated by the fact that over half of respondents (50.4%) have a mobile application installed on their device. additionally, more than 76% of them make a use of this application at least several times a week, which indicates a high frequency of using it. the results indicate that bank customers which are using mobile banking applications apply it very often to control their personal finances (91% uses it to check the account balance) and to make bank transfers (86%). an important functionality for the respondents was also access to transaction history (77%). moreover, through this application, individual customers are willingly reaching for modern payment methods, i.e. hce contactless payments (57%) and payments using the blik code (48%). polish internet users perceive mobile banking applications as a comprehensive instrument, characterized by high convenience and quickness in action. the users of banking applications also consider them to be secure. this high level of perceived safeness (84%) can be inf luenced by the continuous development of applications, providing updates of system and security, as well as the possibility of using biometric methods of transaction authorization and logging in selected applications. furthermore, one can expect that the dynamic acceleration in development of biometrics in banking is approaching, due to legal and technical requirements included in the european payment services directive 2 (steennot, 2018), which is going to have a positive impact on security level in mikołaj borowski-beszta, anna kiermas22 the future, and that will contribute to the perception of the mobile banking applications security. the level of satisfaction among mobile banking applications users is high – around 87% of respondents is content with his or her mobile application. however, there were negative opinions – banking applications differ in terms of their functionalities, interface transparency and other features, so according to respondents, one of them may be better, while the other one – worse. in this case, it can be concluded that relatively small amount of negative responses regarding satisfaction in reference to mobile banking applications is not an undesirable phenomenon – respondents who are not satisfied, through in-depth research can provide valuable guidance that will enable further development of mobile banking applications in poland. to sum up, nowadays the mobile banking applications are comprehensive, more and more popular instrument used for virtual contact with the bank. they are a key element in the development of mobile banking, because handling the banking interface in application on a small device is here much simpler and more convenient in comparison to so called light version of bank websites. moreover, these applications are also characterized by a high level of ergonomics, as they offer many functionalities in one place. another thing in favor of mobile banking applications is the ability to download them from mobile stores, i.e. google play or appstore, which provide free access to a given application for all owners of mobile devices (kaczmarek, 2018, p. 147). in connection with the results of the conducted survey, it can be considered that after several years of presence of banking applications on the polish payment services market, they have been refined both technically and visually, and customers are satisfied with them, which contributes to high frequency of using them. an example of its success is the iko mobile banking application, which in february 2019 won the ranking of one hundred best banking mobile applications, beating the solutions of bank giants such as the jp morgan chase, the bank of america or the barclays (www3). therefore, it can be predicted that due to the growing needs of customers and the fact that the mobile banking application is now becoming a kind of showcase for the bank, the upward trend in the mobile banking area is likely to continue in the near future, and polish customers are going to gain access to increasingly improved mobile banking applications. the usage of mobile banking applications in poland… 23  references alalwan, a.a., dwivedi, y.k., rana, n.p., & williams, m.d. 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(www1) historia bankowości mobilnej w polsce, (history of mobile banking in poland.) https://www.bankier.pl/wiadomosc/historia-bankowosci-mobilnej-w-polsce-7284816.html (accessed: 19.05.2019). (www2) jak powstał y płatności hce. oto krótka historia w ynalazku, który ma szansę odesłać plastikową kartę do lamusa, (how hce payments were developed. a brief history of the invention, which has a chance to send the plastic card to the past.) https://www.cashless.pl/4194-jak-powstaly-platnosci-hce-oto-krotkahistoria-w ynalazku-ktory-ma-szanse-odeslac-plastikowa-karte-do-lamusa (accessed: 19.05.2019). (www3) iko najlepszą mobilną aplikacją na świecie. sukces pko banku polskiego, (iko is the best mobile application in the world. the success of pko bank polski.) https:// www.money.pl/gospodarka/iko-najlepsza-mobilna-aplikacja-na-swiecie-sukcespko-banku-polskiego-6348711245523073a.html (accessed: 21.05.2019). the usage of mobile banking applications in poland… 25 (www4) mobile banking reports, https://prnews.pl/raporty/bankowosc-mobilna (accessed: 20.05.2019). (www5) sim toolkit, czyli bank w komórce, (sim toolkit, in other words a bank in a cellphone.) https://prnews.pl/sim-toolkit-czyli-bank-w-komorce-71805 (accessed: 20.05.2019). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: december 14, 2016; date of acceptance: january 23, 2017. * contact information: anna.piotrowska@wsb.torun.pl, wsb university in toruń, młodzieżowa 31a, 87-100 toruń, poland, phone: +48 56 660 92 17. piotrowska, a. (2016). fields of potential use of cryptocurrencies in the payment services market in poland – results of an empirical study, 5(2), 201–217. http://dx.doi.org/10.12775/ cjfa.2016.023 anna iwona piotrowska* wsb university in toruń fields of potential use of cryptocurrencies in the payment services market in poland – results of an empirical study keywords: smart cryptocurrency, bitcoin, digital payments, financial innovation. j e l classification: g20, e42, o31. abstract: the payment services market in poland is particularly open to new payment solutions. the most important financial innovations of the recent years include cryptocurrencies. bitcoin is the most well-known of them and its applications cover payments and investments. the article aims to determine the potential for using cryptocurrencies in individual segments of the payment services market in poland. the paper considers the following research hypothesis: representatives of the financial sector see a potential for a widespread use of cryptocurrencies in the payment services sector in poland. the aim of the paper was achieved and the hypothesis verified on the basis of selected results of a survey among representatives of institutions operating in the financial market in poland. the study, primarily carried out by the author, presents the opinions of experts representing the broadly understood community of professionals from the payment services market in poland. their views concern the directions in which innovations in the payment services sector may develop and the prospects for the use of cryptocurrencies in that area. anna iwona piotrowska202  introduction for over 10 years, the financial sector in poland has been witnessing the introduction and testing of many innovative payment solutions (polasik & piotrowski, 2016; świecka, 2015; harasim & klimontowicz, 2013). poland was the pioneer with regards to the widespread use of contactless card payments. it was also the polish market where the first nfc1 mobile payments in europe were implemented (polasik, 2014). the dynamic increase in the turnover of electronic commerce, coupled with a growing number of users of modern telecommunication devices, such as smartphones and tablets, results in a substantial potential for development of the mobile payments market in poland. it also gives an opportunity to increase the share of mobile payments in the retail payments sector. this gives rise to strong competition between the participants of that market. banks are no longer the only institutions active in the payments market: new market players emerge, such as mobile operators and virtual payment services. although currently the share of non-banks in the payments market in poland and globally is minute, it is poised for rapid growth (world payments report, 2013, p. 15). only in the recent years have the statistical data of international financial institutions started including cryptocurrency transactions among payments carried out outside the banking system (world payments report, 2015). according to the international research agency capgemini and the royal bank of scotland, they are one of the four main categories of hidden payments2. the share of unreported transactions in the total number of cashless transactions may reach around 10%, and the share of cryptocurrency transactions was estimated at 0.01%. therefore, payments with cryptocurrencies are currently only a small portion of cashless transactions. however, their existence should not be ignored or disregarded because their share is expected to rise, primarily due to the growing number of merchants accepting retail payments made using cryptocurrencies (mainly bitcoin) and a strong interest of the media (world payments report, 2015, p. 16–17). while the emergence of a completely new technological solution in the form of cryptocurrencies in the payment services market characterised by fervent 1 nfc – near field communication. 2 the authors of the report understand hidden cashless transactions as transactions carried out by non-banking institutions which are not required to report payment transactions. fields of potential use of cryptocurrencies… 203 competition may be considered a huge challenge faced by the whole sector, it may also be perceived as an element of competitive advantage. the several years in which bitcoin and other cryptocurrencies have been used have proven that this kind of payment system and tender operate smoothly. therefore, individual participants of the financial market, and banks in particular, may be interested in using cryptocurrencies in the business they conduct. in light of the above, it seemed very interesting to learn the opinion of experts from the polish payments market regarding the prospects for the use of cryptocurrencies in individual segments of the payment services market in poland. the paper considers the following research hypothesis: representatives of the financial sector see a potential for a widespread use of cryptocurrencies in the payment services sector in poland. theoretical framework and literature review bitcoin is the leading and the longest-functioning cryptocurrency. the idea behind it was presented in 2008 in the paper bitcoin: a peer-to-peer electronic cash system written by an anonymous author (or group of authors) under the pseudonym satoshi nakamoto (nakamoto, 2008)3. the notion of bitcoin may refer to the unit of value, but also to the it system which is the framework for effecting payments using the bitcoin cryptocurrency (badev & chen, 2014, p. 2). a. sieroń defines bitcoin as a means of exchange, and at the same time: “the open-source software and the peer-to-peer (p2p) network which it forms” (sieroń, 2013, p. 32). in turn, l.p. nian and d.l.k. chuen describe bitcoin as: „a decentralized network and a digital currency that uses a peer-to-peer system to verify and process transactions” (nian & chuen, 2015, p. 14). e. grover deems bitcoin to be: “a decentralized digital currency and payment system” (grover, 2014, p. 39). j. brito and a. castillo expand this approach by defining bitcoin as: “the world’s first completely decentralized digital currency (…) and 3 it should be noted that despite many attempts, the identity of the bitocin’s creator was not established. the following cryptologists are named among the potential authors of the concept of bitcoin: w. dai, n. szabo, h. finney. it is also sometimes claimed that persons behind the creator of the said cryptocurrency may be related to the four technological companies: samsung, toshiba, nakamichi, motorola. see more: coindesk, who is satoshi nakamoto, http://www.coindesk.com/information/who-is-satoshi-nakamoto/ (accessed: 26.08.2016); nian, l.p., chuen, d.l.k. (2015). introduction to bitcoin. in l.k. chuen (ed.), handbook of digital currency. bitcoin, innovation, financial instruments, and big data, p. 11, delsevier. anna iwona piotrowska204 world’s first completely decentralized digital-payments system” (brito & castillo, 2016, pp. 1, 5). although works on the creation of digital, and more precisely – “cryptologic” money characterised by anonymity and decentralisation had been performed among different groups of researchers, and cryptologists in particular, for over thirty years (franco, 2015, p. 161; barber, boyen, shi, uzun, 2012, p. 39; moore, 2013, p. 147), the announcement of the nakamoto manifesto initiated a period of wider interest in the issue of cryptocurrencies. the study of available literature indicates that authors of different publications focused primarily on the idea behind the inception of bitcoin and matters of definition (selgin, 2015; yermack, 2013; european central bank, 2012; international monetary fund, 2016), the technical aspects of the bitcoin system (courtois, grajek, naik, 2014; vasek, thornton, moore, 2014; ober, katzenbeisser, hamacher, 2013), the analysis of the investment behaviour of cryptocurrency users (baek & elbeck, 2015) and the identification of factors determining the bitcoin exchange rate (kristoufek, 2015; li & wang, 2016; polasik, piotrowska, wiśniewski, kotkowski, lightfoot, 2015). the author observed that the potential use of bitcoin in payments, which was at the foundation of the bitcoin idea, has not been sufficiently examined in research and literature on the subject. having that in mind, she decided that the paper would specify the potential use of cryptocurrencies in the polish payment services sector. research methodology and course of the research process the research hypothesis was verified on the basis of selected results of the survey among representatives of financial institutions operating in poland. it was carried out in cooperation with the polish bank association between june and december 2014 as part of a research project of the warsaw institute of banking and alterum grant no. wib/2014/01, „rozwój przez innowacje czy efekt skali? badanie uczestników polskiego systemu płatniczego” 4. it covered a number of cognitive goals concerning the broadly understood issue of develop4 the author would like to thank michał polasik ph.d. and natalia kumkowska who also served as investigators. moreover, special thanks are addressed to lech kurkliński, ph.d., the director of alterum, director paweł widawski, ph.d. and radosław kotkowski from the polish bank association for their support in carrying out this research project. fields of potential use of cryptocurrencies… 205 ment and innovation in the payment services market. one of the aims was to determine how the bitcoin cryptocurrency could function in the financial system. the study intended to discover the scale of interest in the potential use of cryptocurrencies, including bitcoin, in the financial sector and to specify the prospects for the development of the cryptocurrencies market. the author was among the investigators of the project, and her duties included developing the questionnaire and analysing the obtained results. she was also responsible for analysing the results of the study related to cryptocurrencies and the biometric technology (selected questions in individual parts of the survey)5. the study, which generated the original source material, was addressed to high-level managers employed in commercial banks, cooperative banks operating in poland and their associations, banking sector institutions (the national bank of poland, the polish bank association), the national clearing house (kir), card associations, domestic payment institutions and it companies functioning in the area of payment services, as well as acquirers. the polish bank association had a key role in the implementation of the study. it selected 470 experts dealing with innovation in the financial market within the surveyed institutions, and distributed the questionnaire through its associated entities, i.e.: the council of bank cards issuers, the electronic banking council, the clearing agents committee and sepa poland. the questions regarded opinions and forecasts of experts participating in the survey, and not the position of the parent institution. the study generated responses from 70 experts, who presented the opinions of the broadly understood community of professionals from the payment services market in poland. information regarding the respondents is presented below. 5 results of the study were published in the form of a report: polasik, m., piotrowska, a.i., kumkowska, n. (2015). rozwój przez innowacje czy efekt skali? badanie uczestników polskiego system płatniczego, research report, alterum centre for research and analysis of financial system, warsaw institute of banking, warsaw. anna iwona piotrowska206 figure 1. positions held by the respondents the study, which generated the original source material, was addressed to high-level managers employed in commercial banks, cooperative banks operating in poland and their associations, banking sector institutions (the national bank of poland, the polish bank association), the national clearing house (kir), card associations, domestic payment institutions and it companies functioning in the area of payment services, as well as acquirers. the polish bank association had a key role in the implementation of the study. it selected 470 experts dealing with innovation in the financial market within the surveyed institutions, and distributed the questionnaire through its associated entities, i.e.: the council of bank cards issuers, the electronic banking council, the clearing agents committee and sepa poland. the questions regarded opinions and forecasts of experts participating in the survey, and not the position of the parent institution. the study generated responses from 70 experts, who presented the opinions of the broadly understood community of professionals from the payment services market in poland. information regarding the respondents is presented below. figure 1. positions held by the respondents source: survey of representatives of institutions operating in the payment services market in poland, n=70. the research sample in terms of the positions held by the respondents is presented in figure 1, which shows that most of them boast high competence with respect to the subject matter and decision-making. according to the author, it may be treated as one of the factors supporting the high cognitive value of the survey. figure 2. type of institution employing the experts 29% 19% 16% 9% 9% 7% 7% 6% department director project manager specialist managing director division/office director management board member expert other s o u r c e : survey of representatives of institutions operating in the payment services market in poland, n=70. the research sample in terms of the positions held by the respondents is presented in figure 1, which shows that most of them boast high competence with respect to the subject matter and decision-making. according to the author, it may be treated as one of the factors supporting the high cognitive value of the survey. figure 2. type of institution employing the experts source: survey of representatives of institutions operating in the payment services market in poland, n=70. figure 2 presents the type of institutions which employ experts participating in the survey. the respondents worked in most types of financial institutions functioning in poland, which make up the infrastructure of the payment services market. the most numerous group included the employees of commercial banks (almost 40%). it should be noted that responses were given by employees of the five largest banks in poland in 2014 in terms of assets managed (50 największych banków w polsce, 2015). other groups with a high share included experts from institutions processing and settling payment transactions (23%), as well as it companies providing solutions for the payments sector (17%). additionally, the questionnaire also involved the representatives of leading banking institutions and card associations, as well as the employees of cooperative banks. such high range of the questionnaire survey allowed its authors to obtain expert opinions regarding diverse aspects of the functioning and development of the cryptocurrencies market. this fact should undoubtedly be treated as an advantage of the survey. moreover, the study of literature regarding cryptocurrencies has shown that research in that field has not yet been carried out in poland. outcome of the research process the experts participating in the survey were asked to indicate the most important challenges facing the polish payments sector by the years 2015 and 2020. cryptocurrencies, including bitcoin, were presented as one of the many potential issues to be addressed by market participants. the broad range of possible answers allowed the researchers to determine the materiality of cryptocurrencies vis-à-vis other market changes, whether occurring or anticipated. figure 3 presents all answers given to that question for the two analysed 39% 23% 17% 9% 9% 4% commercial bank acquirer/payment institution/clearing house it company banking institution card association cooperative bank s o u r c e : survey of representatives of institutions operating in the payment services market in poland, n=70. fields of potential use of cryptocurrencies… 207 figure 2 presents the type of institutions which employ experts participating in the survey. the respondents worked in most types of financial institutions functioning in poland, which make up the infrastructure of the payment services market. the most numerous group included the employees of commercial banks (almost 40%). it should be noted that responses were given by employees of the five largest banks in poland in 2014 in terms of assets managed (50 największych banków w polsce, 2015). other groups with a high share included experts from institutions processing and settling payment transactions (23%), as well as it companies providing solutions for the payments sector (17%). additionally, the questionnaire also involved the representatives of leading banking institutions and card associations, as well as the employees of cooperative banks. such high range of the questionnaire survey allowed its authors to obtain expert opinions regarding diverse aspects of the functioning and development of the cryptocurrencies market. this fact should undoubtedly be treated as an advantage of the survey. moreover, the study of literature regarding cryptocurrencies has shown that research in that field has not yet been carried out in poland. outcome of the research process the experts participating in the survey were asked to indicate the most important challenges facing the polish payments sector by the years 2015 and 2020. cryptocurrencies, including bitcoin, were presented as one of the many potential issues to be addressed by market participants. the broad range of possible answers allowed the researchers to determine the materiality of cryptocurrencies vis-à-vis other market changes, whether occurring or anticipated. figure 3 presents all answers given to that question for the two analysed time frames. only selected responses are subject to a more in-depth analysis further in the paper. anna iwona piotrowska208 figure 3. the biggest challenges in the polish payments market by the years 2015 and 2020 time frames. only selected responses are subject to a more in-depth analysis further in the paper. figure 3. the biggest challenges in the polish payments market by the years 2015 and 2020 source: survey of representatives of institutions operating in the payment services market in poland, a maximum of 5 answers, n=67-68. in the opinion of the respondents, in the 2015 time frame cryptocurrencies did not form a significant challenge for the payments market in poland (figure 3). they claimed that regulatory issues were the most important short-term challenge in poland. as many as 76% of the respondents pointed to the need to adjust to the interchange fee reduction. this indicates that the role of the regulatory factor in the payment services market is pivotal. statutory changes may either stimulate or hamper the development of the given payment instrument or service, which has already been signalled by certain researchers (harasim, 76% 54% 44% 41% 34% 34% 29% 26% 25% 25% 24% 18% 10% 9% 9% 1% adapting to the interchange fee reduction implementation of mobile technologies increase in efficiency: cost and operating optimisation increase in competition: acquisition and sale marketing payment innovations development of the epi acceptance network development of e-commerce payments interpretation of the psd ii revision development of m-commerce payments integration of m-banking with payment services growth of non-banking competition increase in the banking penetration rate change in the structure of card use interpretation of the pad directive migration to sepa instruments development of cryptocurrencies (e.g. bitcoin) 9% 34% 37% 36% 52% 27% 16% 24% 46% 31% 55% 25% 16% 13% 6% 30% s o u r c e : survey of representatives of institutions operating in the payment services market in poland, a maximum of 5 answers, n=67–68. in the opinion of the respondents, in the 2015 time frame cryptocurrencies did not form a significant challenge for the payments market in poland (figure 3). they claimed that regulatory issues were the most important shortterm challenge in poland. as many as 76% of the respondents pointed to the need to adjust to the interchange fee reduction. this indicates that the role of the regulatory factor in the payment services market is pivotal. statutory changes may either stimulate or hamper the development of the given payment instrument or service, which has already been signalled by certain researchers (harasim, 2013). therefore, it may be assumed that a broader use of cryptocurrencies in the payments market will be largely dependent on the legislation. the second most important challenge (more than 50% of indications) was the implementation of mobile technologies (figure 3). it is worth noting that fields of potential use of cryptocurrencies… 209 this factor should be considered as beneficial for the potential for using cryptocurrencies in the payments area. this is due to the fact that mobile technology is the natural environment for bitcoin and other cryptocurrencies. the experts also pointed to the detailed issues related to the development of mobile technologies, such as the introduction of m-commerce payments6 (25%) and the integration of mobile banking with payment services (25%). it should be mentioned that the increase in the number of banking mobile applications currently observed in the polish market (the public relations office of the ministry of treasury, 2014), as well as in the number of people making payments from a mobile application (mikowska, 2015), together with a change in habits regarding the payment methods used, may also indirectly impact the development of payment applications of bitcoin. in the case of the long-term perspective, the significance of individual challenges facing the participants of the polish payments market changed substantially (figure 3). it should be emphasised that as many as 30% of the experts indicated cryptocurrencies is one of the biggest challenges in the polish payments market in the 2020 time horizon. likewise, the development of cryptocurrencies was the factor which gained most prominence in the 2020 perspective from among the challenges indicated in the question. this means that despite the currently niche nature of that solution, the payments community anticipates that it may grow dynamically by the year 2020 and create significant challenges for current market participants. moreover, while in the short-term few experts saw the risk that non-banking competition would gain a share in the market, in the 2020 time horizon this process became the most prominent for the current participants of the payments market. one of the answers of the financial sector to that challenge would be a more intensified introduction of payment innovations (over 50% of indications). it may turn out that cryptocurrencies or the underlying technologies will become one of such innovations used by banks. the survey also provided an overview of the respondents’ forecasts regarding the development of four market segments with the potential for payment applications of bitcoin and other cryptocurrencies, i.e. transactions in points of sale (pos), e-commerce, m-commerce and person-to-person (p2p) settlements. the respondents rated the popularity of different types of innovative payment methods on a scale from 1 to 5 (1 was marginal use and 5 widespread use) for two time horizons, the years 2015 and 2020. 6 transactions in mobile commerce are defined as transactions starting and ending on a mobile device. anna iwona piotrowska210 figures 4 and 5 present indications of the respondents referring to cryptocurrencies as compared to the most probable payment solutions in the analysed market segments. such juxtaposition is aimed to learn which solutions the market will turn to and which technologies will be the potential competitors of cryptocurrencies. figure 4. forecast popularity of selected payment methods in individual market segments by 2015* types of innovative payment methods on a scale from 1 to 5 (1 was marginal use and 5 widespread use) for two time horizons, the years 2015 and 2020. figures 4 and 5 present indications of the respondents referring to cryptocurrencies as compared to the most probable payment solutions in the analysed market segments. such juxtaposition is aimed to learn which solutions the market will turn to and which technologies will be the potential competitors of cryptocurrencies. figure 4. forecast popularity of selected payment methods in individual market segments by 2015* points of sale (n=66) mobile payments in bank applications nfc mobile phone payments (telecom operator not involved) mobile payments based on cryptocurrencies (e.g. bitcoin) e-commerce (n=67) online transfers (pay-by-link) one-off bank transfers ordered by the customer cryptocurrencies payments m-commerce (n=66–67) one-off bank transfers ordered by the customer payment cards registered in the “store” of the telephone’s operating system provider cryptocurrencies payments person-to-person payments (n=65) instant payments on the internet bank mobile settlements money orders in cryptocurrencies * due to rounding, the aggregate result of the answers does not always add up to 100%. 3% 3% 20% 35% 39% 2% 8% 12% 24% 55% 3%3% 11% 83% 40% 31% 22% 4%1% 25% 19% 19% 22% 13% 1%1% 9% 88% 15% 25% 19% 40% 5% 8% 14% 33% 41% 3% 5% 92% 6% 8% 17% 31% 38% 3% 2% 12% 34% 49% 2% 2% 8% 89% 5 widespread use 4 3 2 1 marginal use * due to rounding, the aggregate result of the answers does not always add up to 100%. s o u r c e : survey of representatives of institutions operating in the payment services market in poland. fields of potential use of cryptocurrencies… 211 in the opinion of the responding experts, by the year 2015 cryptocurrencies, including bitcoin, would not be used in any of the analysed market segments (figure 4). what is more, the experts believed that none of the inoperative payment methods indicated in the questions would gain popularity within the abovementioned time frame. this may have resulted from the fact that gaining widespread popularity by a given payment service, instrument or method is a time-consuming process which calls for the involvement of many market participants, whereas the cryptocurrencies market, although experiencing dynamic growth, is still in the early stages of development. in the case of transactions in points of sale, the vast majority of experts believed that none of the proposed innovations would be used on a broader scale (figure 4). it is worth indicating that transactions in this field, due to strong domination of cash and traditional payment cards, are undoubtedly a difficult area for implementing innovation, especially such as cryptocurrencies. the belief of 6% of experts regarding the moderate scope of bitcoin may result from the fact that bitcoin has been known to be accepted in individual points of sale in poland. however, despite the fact that such pos truly exist, only several of them carry out cryptocurrency transactions on a fairly regular basis7. e-commerce cryptocurrency use obtained a slightly lower number of indications as compared to transactions carried out in points of sale, which may be somewhat surprising. the field of m-commerce, where a broader range of bitcoin use could be expected, would also have no use for this cryptocurrency in the 2015 perspective. the mobile commerce segment in poland is currently at an initial stage of development, and this was probably ref lected in the very negative outlook on the use of all of the payment methods by 2015 (figure 4). person-to-person payments were the last of the analysed fields where cryptocurrencies could be used. in poland, they are dominated by cash and traditional wire transfers. therefore, in the 2015 time horizon the experts rated the chances that any of the innovative methods would gain popularity as marginal or slim (figure 4). the experts forecast that by the year 2020 (figure 5) certain types of innovative payment methods would be very popular; however, they were very conservative when it came to cryptocurrencies. 7 information obtained from a leading intermediary to cryptocurrency transactions in poland (11.07.2016). anna iwona piotrowska212 although in their opinion cryptocurrencies would not play a significant role in the area of pos payments, their projections were more optimistic than those regarding the year 2015: there could be an increase in the use of cryptocurrencies. this may be related to the forecast development of app-based mobile payments or a possible development of a network of merchants accepting cryptocurrencies. figure 5. forecast popularity of selected payment methods in individual market segments by 2020* although in their opinion cryptocurrencies would not play a significant role in the area of pos payments, their projections were more optimistic than those regarding the year 2015: there could be an increase in the use of cryptocurrencies. this may be related to the forecast development of app-based mobile payments or a possible development of a network of merchants accepting cryptocurrencies. figure 5. forecast popularity of selected payment methods in individual market segments by 2020* physical points of sale (n=64) nfc mobile phone payments (telecom operator not involved) mobile payments in bank applications mobile payments based on cryptocurrencies (e.g. bitcoin) e-commerce (n=65–66) cards in virtual wallet/cloud of card associations online transfers (pay-by-link) cryptocurrencies payments m-commerce (n=66–67) cards in virtual wallet/cloud of card associations cards in virtual wallet/cloud of internet aggregators cryptocurrencies payments person-to-person payments (n=64) transfers to a telephone number via mobile banking bank mobile settlements money orders in cryptocurrencies * due to rounding, the aggregate result of the answers does not always add up to 100%. source: survey of representatives of institutions operating in the payment services market in poland. 13% 47% 22% 11% 8% 8% 28% 23% 17% 23% 2%6% 14% 31% 47% 21% 32% 27% 15% 5% 17% 25% 26% 23% 9% 3% 9% 11% 22% 55% 16% 34% 31% 14% 5% 6% 31% 34% 15% 14% 2% 6% 13% 27% 53% 22% 9% 42% 19% 8% 16% 16% 30% 19% 20% 2% 19% 22% 58% 5 widespread use 4 3 2 1 marginal use * due to rounding, the aggregate result of the answers does not always add up to 100%. s o u r c e : survey of representatives of institutions operating in the payment services market in poland. fields of potential use of cryptocurrencies… 213 in the 2020 time horizon, the experts anticipated a substantial change in the popularity of payment methods in electronic commerce as compared to the expectations voiced for the year 2015 (figure 5). the respondents expected that the leading role would be played by the following technologies: solutions based on cloud computing and payment cards placed in virtual wallets of card associations8 (53% rated 5 or 4) or internet aggregators9 (42%). this process would give rise to a very significant increase in the role of payment cards in ecommerce payments at the expense of bank transfers. interestingly, payments using bitcoin and other cryptocurrencies would not go into widespread use despite the fact that online transactions are the most suitable field in which they may be used. however, it should be noted that the field of e-commerce obtained the highest percentage of positive ratings in terms of the use of cryptocurrencies (12% rated 5 or 4) from among all of the analysed market segments. the study also covered the potential use of cryptocurrencies in mobile commerce transactions. according to the experts, m-commerce payments using cryptocurrencies would not have developed also by the year 2020 (figure 5). however, it should be noted that 8% of ratings (5 or 4) suggested their widespread use in this payments area in the longer term (there were no such ratings in the 2015 perspective). on the other hand, solutions based on payment cards would be fairly popular. the respondents claimed that in the 2020 time horizon, the segment of person-to-person payments (figure 5) would be led by transfers to a telephone number via mobile banking, while cryptocurrencies would be used only marginally (only 2% with a 4 rating). the last field where cryptocurrencies may be used that was analysed in the paper involves prepaid instruments. currently, virtually all available bitcoin uses are associated with the need to credit a prepaid instrument with the cryptocurrency. the instruments most often take the form of an electronic purse based on a mobile application. it was thus interesting to learn how the respondents would answer the question regarding the types of prepaid instruments which would be prevailing in 2020. they could also indicate whether the technology used to construct cryptocurrencies would be used to develop a given type of instruments (figure 6). the answers of the experts suggest that none of the anticipated directions of development in the area of prepaid instruments 8 e.g. within masterpass and v.me by visa. 9 aggregators best-known in poland: paypal, payu. anna iwona piotrowska214 will be based on the principles underlying the bitcoin system and systems created for other cryptocurrencies. only 26% of the respondents indicated that the currently-popular prepaid cards in the traditional, plastic form would retain their position. in light of the above, the attempts to introduce prepaid cards credited with bitcoins should be seen as bearing little sense10. the respondents were of the opinion that the dominant role in the field of prepaid instruments will be played by electronic purses associated with a mobile application. this response was indicated by almost half of the surveyed experts. an additional 18% pointed to virtual purses, such as paypal, which sums up to 64% of the experts who found that the most prospective solution would be based on a mobile or virtual purse. in the context of the answers given by the respondents, the prevalent method of storing files with bitcoin value, namely an electronic purse associated with a mobile application, seems to be the right solution. the plans of paypal, a global leader in the payments industry, should also be mentioned. they concern extending the functionalities of the services provided by adding an option of charging the virtual wallet with bitcoins. figure 6. dominant market solution for prepaid instruments in poland in the year 2020 in the 2020 time horizon, the experts anticipated a substantial change in the popularity of payment methods in electronic commerce as compared to the expectations voiced for the year 2015 (figure 5). the respondents expected that the leading role would be played by the following technologies: solutions based on cloud computing and payment cards placed in virtual wallets of card associations8 (53% rated 5 or 4) or internet aggregators9 (42%). this process would give rise to a very significant increase in the role of payment cards in e-commerce payments at the expense of bank transfers. interestingly, payments using bitcoin and other cryptocurrencies would not go into widespread use despite the fact that online transactions are the most suitable field in which they may be used. however, it should be noted that the field of e-commerce obtained the highest percentage of positive ratings in terms of the use of cryptocurrencies (12% rated 5 or 4) from among all of the analysed market segments. the study also covered the potential use of cryptocurrencies in mobile commerce transactions. according to the experts, m-commerce payments using cryptocurrencies would not have developed also by the year 2020 (figure 5). however, it should be noted that 8% of ratings (5 or 4) suggested their widespread use in this payments area in the longer term (there were no such ratings in the 2015 perspective). on the other hand, solutions based on payment cards would be fairly popular. the respondents claimed that in the 2020 time horizon, the segment of person-to-person payments (figure 5) would be led by transfers to a telephone number via mobile banking, while cryptocurrencies would be used only marginally (only 2% with a 4 rating). figure 6. dominant market solution for prepaid instruments in poland in the year 2020 8 e.g. within masterpass and v.me by visa. 9 aggregators best-known in poland: paypal, payu. 46% 26% 18% 6% 3% 0% electronic purse for a mobile application payment cards in the traditional form virtual purse (e.g. paypal) digital cash on a mobile device or another physical medium (e.g. billon) other solutions based on cryptocurrencies s o u r c e : survey of representatives of institutions operating in the payment services market in poland, single choice, n=65. 10 one such attempt to extend the functionalities of bitcoin the polish market was made by bitbay, a platform for trading cryptocurrencies. in may 2016, it allowed for linking the account within its exchange with a prepaid card. registered users may order a dedicated prepaid card and credit it directly with funds stored at bitbay, https:// bitbay.net/cards/index (accessed: 26.07.2016). fields of potential use of cryptocurrencies… 215 however, it should be stressed that all of the experts participating in the survey believed that the very technology used to create bitcoin and other cryptocurrencies would not be used at all in the construction of prepaid instruments.  conclusions the results of the survey questionnaire among the representatives of financial institutions operating in poland indicate that the payment services market will face a number of changes by the year 2020. the responses anticipate the development of non-banking competition and the marketing of many payment innovations. the author believes that cryptocurrencies, and bitcoin in particular, have revolutionised the functioning of modern payment systems. internet users are able to make payment transfers using the bitcoin cryptocurrency, which offer high levels of security and anonymity and boast low transaction costs. these features may have led the experts to perceive cryptocurrencies as a significant challenge to be faced by the whole sector by the year 2020. however, at the same time the experts are of the opinion that this innovation will not gain prominence in any of the analysed segments of the payment services market in poland. therefore, it is justified to conclude that the research hypothesis presented in the paper has been disproved. it does not, however, mean that the cryptocurrency project is a failure. the author is of the opinion that there is a good chance that business and public administration11 may use the blockchain which is the technological solution underlying the bitcoin system.  references badev, a. & chen, m. 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(2013). is bitcoin a real currency? an economic appraisal. nber working paper series, no. 19747. 50 największych banków w polsce 2015 (2015). miesięcznik finansowy bank, http:// www.alebank.pl//images/stories/pdf/bank/2015/2015.06/bank.2015.06.034041.pdf (accessed:14.06.2016). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 8 issue 1 2019 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2019 copyright by uniwersytet mikołaja kopernika toruń 2019 icv 2017: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents dorota krupa introduction ........................................................................................................................... 7 mikołaj borowski-beszta, anna kiermas the usage of mobile banking applications in poland: empirical results ........................ 9 maciej chodziński the tendency of households to invest in an ecological modernization of the utilized heating sources .......................................................................................... 27 qin hailin, zhang jingxu can mandatory dividend policy reduce the agency cost of listed companies? – model analysis and empirical test in china ................................................................. 59 ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu the effect of social capital on operational performance: research in banking sector in erbil .................................................................................................................... 103 marta jakubowska traditional fiscal devices in poland and the concept of their modernization ......... 125 for authors ......................................................................................................................... 139 copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 8 issue 3 2019 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik-dejewska scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2019 copyright by uniwersytet mikołaja kopernika toruń 2019 icv 2018: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents atm adnan, nisar ahmed the transformation of the corporate governance model: a literature review ........... 7 rojana khunkaew, yang qingxiang the characteristics of top management and firm’s earnings management: the evidence from thailand ............................................................................................. 49 kamaldeen ibraheem nageri evaluating volatility persistence of stock return in the pre and post 2008–2009 financial meltdown ........................................................................................................... 75 lukman adebayo oke, daud omotosho saheed, yusuf olamilekan quadri an empirical analysis of corporate capital structure and financial performance of listed conglomerates in nigeria .................................................................................. 95 for authors ......................................................................................................................... 115 copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 8 issue 4 2019 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr damian walczak, mgr anna olewnik-dejewska scientific council prof. luis otero gonzález, universidad de santiago de compostela, spain prof. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. małgorzata zaleska, warsaw school of economics, poland prof. monika marcinkowska, university of lodz, poland prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. maciej wiatr, warsaw school of economics, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland prof. siniša zarić, university of belgrade, serbia dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2019 copyright by uniwersytet mikołaja kopernika toruń 2019 icv 2018: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl table of contents tajudeen adejare adegbite, mustapha bojuwon, adenike foluke adegbite the impact of ict on taxation: evidence from oyo state .............................................. 7 ansita aggarwal, satya ranjan acharya choosing equity as a source of finance: perception of sme promoters ..................... 27 ansita aggarwal, satya ranjan acharya impact on capital structure decision making: indian medium-sized food industry analysis ................................................................................................................................. 47 hope osayantin aifuwa, musa saidu, osaruese cynthia enehizena, albert osazevbaru accounting information and lending decision: does sustainability disclosure matter? ................................................................................................................................ 61 mustafa akan optimal control theoretic approach to investment in doctors .................................... 91 dinabandhu bag information content of stocks in call auction of shorter duration in emerging market ................................................................................................................................ 113 jay desai, rajesh desai capital structure as determinant of financial performance: review of literature .... 133 mandeep kaur, kapil gupta estimating hedging effectiveness using variance reduction and risk-return approaches: evidence from national stock exchange of india .......................................... 149 table of contents6 astrida miceikienė, daiva rimkuvienė, kristina gesevičienė assessment of the environmental pollution determinants in the economy sectors of lithuania ........................................................................................................................ 171 muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa determinants of the profitability of commercial banks in ethiopia ............................ 185 for authors ......................................................................................................................... 203 date of submission: april 25, 2019; date of acceptance: june 1, 2019. * contact information: ahmed_xamena@yahoo.com, ministry of finance, erbil, iraq, phone: 00964 750 4649002, assistant manager, cfu international company: vice manager; orcid id: https://orcid.org/0000-0002-4252-318x. ** contact information: correspondent author, sule.tuzlukaya@atilim.edu.tr, atılım university, faculty of management, department of management, incek, ankara, turkey, phone: +90 312 5868612; orcid id: https://orcid.org/0000-0001-8244-6396. *** contact information: erdemk@baskent.edu.tr, baskent university, baglica kampusu eskisehir yolu 20. km, faculty of commercial sciences, baglica, ankara, turkey, phone: +90 312 2466666; orcid id: https://orcid.org/0000-0002-6781-9753. this study is a part of the first author’s unpublished master thesis. hamad, a.a., tuzlukaya, s., & kırkbeşoğlu, e. (2019). the effect of social capital on operational performance: research in banking sector in erbil. copernican journal of finance & accounting, 8(1), 103–124. http://dx.doi.org/10.12775/cjfa.2019.004 ahmed abdulqader hamad* ministry of finance in erbil, cfu international company şule tuzlukaya** atılım university erdem kirkbeşoğlu*** başkent university the effect of social capital on operational performance: research in banking sector in erbil keywords: social capital, dimensions of social capital, operational performance development, erbil. j e l classification: g21, 01, a1, c0. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 1 cjf&a co pe r n ic a n j o ur na l of finance & a c c o u n tin g ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu104 abstract: social capital as a field of study has grown with many contributions from different fields. yet, the gap within the literature regarding different contexts has inspired researchers to look for further explanations about social capital and its dimensions. therefore, this paper aims to provide insight into the impact of social capital as a specific factor to develop commercial banks’ operational performance in erbil city, iraq. to achieve this, a quantitative research is carried out, findings pointing to positive significant relationships between the dimensions of social capital as relational, structural and cognitive capital and operational performance development. additionally, according to results, social capital plays a vital role in commercial banks’ stability and development of operational performance.  introduction there is an extensive and vigorous body of research regarding social capital (lee, 2009; carolis. litzky & eddleston, 2009; parker, halgin & borgatti, 2016; portes, 1998; andrews, 2010; li, lin & arya, 2008; light & dana, 2013; manning, 2010). social capital is a vital asset of organizations, used to generate value for them by means of an accumulation of relational capital, structural capital and cognitive capital (burt, 1997; burt, 2004; putnam, 1995; bourdieu, 1985; portes, 1998). as a field of study, social capital has received attention from different disciplines such as management, political sciences and sociology and thanks to analyses at different levels (adler & kwon, 2002). according to gupta, raman and shang (2018, p. 102), “economists have long recognized that a key component of social capital is essential to economic success in society”. similarly, lin (1999) refers to social capital’s vital role by stating the importance of reaching and mobilizing specific resources. other researchers within the field, such as inkpen and tsang (2005, p. 151) state that social capital is “the aggregate of resources embedded within, available through and derived from the network of relationships possessed by an individual or organization”. according to lee (2017, p. 39) “it is inherently fuzzy, multifaceted, difficult to operationalize and suffers from measurement challenges”. the common point of all studies as gargiulo and benassi (2000) claim is that social capital can be recognized as the overall tangible and intangible resources that might be gained through social exchanges. investments and accumulations in this way can be based on various actors’ interests or benefits and materialized as a result of different motivations. studies both on social capital and its dimensions are abundant in the literature (portes, 1998; putnam, 1995; seibert, kraimer & liden, 2001; packalen, 2007). however, those investigating the relationship between social capital the effect of social capital on operational performance… 105 and performance within different contexts are rather few. in light of this gap, the present paper, by considering the above-mentioned background and growing attention of social capital, aims to shed light on the effect of the proper investment and practice of social capital in controlling the operational performance of commercial banks. in detail, the purpose of this study is to investigate the effect of social capital on the operational performance development of commercial banks in erbil. as stated before, social capital is an imperceptible asset of the organizations and, is used to generate a value for organizations through establishing relational, structural and cognitive capital. social capital, which represents the knowledge and creativity of the bank’s staff, to provide high value and competitive advantage, as social capital is one of the most vital pillars of superiority for banks in a world of intense competition. at the organizational unit of analyses, the existence of social capital is paramount in terms of survival; it provides many advantages, particularly performance-based. in general, the term performance is the transformation of inputs into ready products or services. furthermore, it is explained as one of the functions of any organization. recently, researchers have come up with high performance in terms of relation and through knowledge-sharing (clark, 1991). according to sanders (2008), operational performance makes a strategic contribution to organizations by providing long-term benefits to stakeholders such as entering a new market, innovating products, and competing in different environments. social capital has been described as an important resource that can create value for organizations through established linkages, which, in terms, also provide competitive advantage (cary, 2011; koka, 2008; maurer, bartsch & ebers, 2011). many scholars have pointed out that social capital allows for changes in operational performance by facilitating competitive advantage and sustainability (kale, singh & perlmutter, 2000; doz, 1996). from the perspective of management, organizational performance is highly related to profitability (koufopoulos, zoumbos, argyropoulou & motwani, 2008). in this study, a quantitative research is carried out to collect the necessary data. the research sample comprises from commercial banks all operating in erbil, and the data is collected using a questionnaire. accordingly, the study investigates the relationship between social capital dimensions and operational performance development. the structure of the paper is as follows: the upcoming section presents the background related to social capital theory, focusing on the historical background and evolution of the concept. in the third section, the dimensions of ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu106 social capital and operational performance concepts are introduced and explained. the research methodology, analysis, and findings are discussed in the fourth section. finally, the conclusion sums up the main findings. an important contribution of this study is that it provides a comprehensive explanation as to the dimensions of social capital and their relationship with operational performance, in particular within commercial banks. literature review 1. social capital bourdieu (1985) classifies capital as material and physical. in this respect, despite its constant and numerous appearances in the literature, the term ‘social capital’ remains a vague concept in theoretical terms. one of the broadest and most commonly accepted definitions of social capital was introduced by coleman (1990), through the comparison of physical and social capital as: “if physical capital is wholly tangible, being embodied in observable material form, and human capital is less tangible, being embodied in the skills and knowledge acquired by an individual, social capital is less intangible yet, for it exists in the relations among persons” (coleman, 1990, pp. 100–101). in the literature, there are different approaches to social capital most of which mainly focus on the strong social capital of actors and their privileges. social capital can appear at all levels of the organization and make a relation between individuals, groups, and society (svendsen, 2006). according to coleman (1990), social capital is considered as in the form of factors such as obligation, expectation, channel sources and effective outcomes. further, it may be considered as a kind of a tool that allows the organization to generate profits from different activities (hughes, 2011). according to silkoset (2013), social capital is also an indicator for individuals as it is a useful source for improving individual relations. apart from this, it allows the organizational members to share information through established relationships with other organizations – a process which can be referred to as creativity (reagans & zuckerman, 2001; maurer et al., 2011). it has been described as an important resource in the organization that can add value and innovation into the firms’ activities. scholars point out that social capital makes changes in the operational performance of firms (burt, 2010). nahapiet and ghoshal (1998) investigated social capital and proposed three dimensions, namely relational (trust, obligation, and identifica the effect of social capital on operational performance… 107 tion), structural (density, configuration, and information-sharing) and cognitive (mission and vision, general language, sharing codes, and understanding). 1.1 dimensions of social capital social capital occurs at many different levels and perceived differently within an organization due to different factors. as a whole, however, it is considered as a reliable tool to establish trust in network relationships. according to study by nahaphiet and ghoshal (1998), social capital has three dimensions in terms of the level of individuals and groups in an organization and their links to social networks; these are relational, structural, and cognitive. in business and management literature, there are many empirical studies in terms of these dimensions (brett, shapiro & lytle, 1998; gargiulo & benassi, 2000; hatzakis, lycett, macredie & martin, 2005; tsai & ghoshal, 1998). lee (2009, p. 254) underlines the importance of these aspects by stating “structural, relational and cognitive dimensions combine to minimize inefficiencies in the exchange of information, knowledge, and resources”. the first dimension, which is relational, relates to trust, expectations, and duties, to shows the quality of employees and builds a suitable environment to establish relationships. structural, the second dimension refers to the form of the organizational, the intensity of relations among employees. the last dimension, cognitive, is based on the general language, understanding, knowledge, mission, vision, goal and value of the organization (nahapiet & ghoshal, 1998). these three dimensions are necessary for developing social capital and accessing vital resources (adler & kwon, 2002; totterman & sten, 2005). relational capital in what follows, we will look at each dimension in detail. this aspect of social capital is mainly based on trust and considers strong ties. it can be described as the exchanges between actors that establish an organizational system. according to nahapiet and ghoshal (1998), the history of interaction among actors is an element that is shaped as a result of personal relationships. additionally, granovetter (1992) suggests that this dimension may be considered as an improved version of the relationship among people established via historical events. in short, it refers to normative conditions that guide individual actors’ relations (lee, 2009). other researchers showed that trust maintains lengthy ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu108 relationships between stakeholders and organizations (helper, 1991). in other words, it makes the firm and those dealing with the work together for longer periods of time. in this way, operations among organizations based on trust can achieve advantages with no regret for possible consequences (parkhe, 1993; ferris, javakhadze & rajkovic, 2017). structural capital structural dimension refers to the linkage between the actors or units in the organization, focusing on the actor’s connection with the others from different ranks of the organization to measure the strength of the ties between the actors. in short, it ref lects on “the presence or absence of network ties” (nahapiet & ghoshal, 1998, p. 244). structural capital is explained as a network configuration and/or information sharing to show density, connectivity, and hierarchy between the actors and organizations (nahapiet & ghoshal, 1998; lee, 2009). researchers argue that spreading the information of organizational target through social capital may inspire appropriate practices among organizations, explain the accumulation of tacit knowledge (bessant, 2003), and may provide stability to individuals and groups (inkpen & tsang, 2005). in turn, stability is the significant principle for an organization to maintain high performance. cognitive capital the third dimension, cognitive capital, according to nahapiet and ghoshal (1998), ref lects the already shared mission and vision of the organization by its members. the fundamental elements of cognitive capital, as described by inkpen and tsang (2005), are goal and culture. accordingly, the members of the organization develop a common understanding in terms of these goals and, as such try to achieve mutual outcomes. also, it serves as a channel for sharing and transmitting information and values (tsai & ghoshal, 1998). fukuyama (1997) points out to the importance of sharing informal values and/or norms that allow cooperation among members. overall, it is the dimension that represents the ability to communicate as well as accuracy in perception (inkpen &tsang, 2005; adler & kwon, 2002). the effect of social capital on operational performance… 109 2. organizational operational performance organizational performance is one of the key concepts in business and management literature. organizations put all their efforts into reaching a high level of business performance. operational performance is mainly related to competitive advantage and can be defined in terms of cost, quality, delivery, f lexibility and innovation (cousins, 2006; lawson, 2008; ward, 1998). additionally, as sanders (2008) suggests, performance provides significant benefits to both suppliers and buyers, by attaching value in terms of fitting their outcomes in terms of adapting organizational goals with the demand of customers. according to cary (2011), social capital affects positively the operational performance in terms of controlling costs and facilitating innovation. as kleinbaum and tushman (2004) and lee (2009) suggest, there is a growing and interesting body of research that focuses on the relationship between social capital and firm performance. burt (2000) is considered one of the earliest contributors regarding the relationship between social capital and performance. however, other very important studies also exist in the literature (lee, 2004). in erbil, the status of the banking sector is in the process of development for now. for this reason, the study of this nature and with these goals can be particularly important for this region, which has remained out of focus in the literature. social capital becomes an important asset for organizations such as banks in an era of globalization. accordingly, the need for commercial banks to operate in erbil using such resources and abiding by such values is the challenge this region will have to face to be successful in the international markets. 3. relating social capital to operational performance some researchers suggest that trust is the main factor to increase the relationship between employees and connect an organization with others (helper, 1991; sako & helper, 1998). in the social capital literature, it is argued that cooperation among organizations can also reduce the incidents of opportunism (parkhe, 1993). when trust is achieved, employees and partners can share experience and knowledge, provide a system for sharing information, and last but not least, improve organizational performance (doz, 1996). kale et al. (2000) argue that relational capital eliminates certain risks organization face when making investments in order to achieve operational advantages. furthermore, it keeps costs low since there is no further requirement for monitoring due to ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu110 the established trust among members (kale et al., 2000). as a result, it can be concluded that cooperation within the organization and/or other organizations definitely improves performance and provides stability. therefore, the first hypothesis of this study is as follows: h1: there is a positive relationship between the relational capital and the operational performance of commercial banks operating in erbil city. structural capital is defined as a kind of direct involvement, mainly that employees in the organization can be considered as the prime factor for developing operational performance. employees are very crucial in this sense since they transfer and exchange tacit knowledge related to the organization. therefore, structural capital is important not only in terms of collecting and spreading information, proliferation of implicit understanding related to the subject inside the organization itself (lawson, 2008; moran, 2005). sharing information and knowledge among employees reinforces better outcomes and reduced costs. according to lawson (2008) building up structural capital may also help to achieve high performance. such capital, once established, helps to gain various benefits and competitive advantages (lawson, 2008). based on this, the second hypothesis can be proposed: h2: there is a positive relationship between the structural capital and the operational performance of commercial banks operating in erbil city. as a third dimension, cognitive capital, is also closely related to operational performance. nahapiet and ghoshal (1998) argue that cognitive capital appears in the general language, representation, and interpretations. once an organization is involved in various tasks, it may concentrate on necessary activities and share a general language, which is generated from a cognitive background to improve its operational performance (handfield & nichols, 1999). furthermore, when goals and visions are shared among employees, better outcomes and improvements and are expected, thus it leads to achieving bigger development in terms of organizational performance (krause, handfield & tyler, 2007). also, the creation of good internal values through cognitive capital allows for improving innovation and generating new services and/or ideas. following this reasoning, a third hypothesis is proposed: h3: there is a positive relationship between the cognitive capital and the operational performance of commercial banks operating in erbil city. the effect of social capital on operational performance… 111 the research methodology and the course of the research process 1. research design the primary aim of this study is to investigate the effect of social capital and its dimensions on organizations’ operational performance. in this study, a quantitative research approach is carried out and the survey design is applied for data collection. 2. sample the survey is distributed through the bank senior managers, middle managers and administrative staff who are mainly responsible for the performance and related services offered by the establishment. thirty-six different banks operate in erbil, out of which 24 banks accepted to participate in the present study. of the total 140 employees that received the questionnaire, 111 respondents returned the questionnaires. the survey adapted in this research is based on convenience sampling, indicating a response rate of %79. 3. methods of data collection for the purpose of the study, a survey was implemented for data collection which included dimensions of social capital and operational performance. the survey consists of 25 items to be scored on a 1–5 likert scale. the first section with five questions as to gender, age, academic degree, position in the bank, and overall job experience; the second section is related to the scale for social capital (tantardini & kroll, 2015); finally, the third section contained items of operational performance (krause et al., 2007). as two different scales were implemented for this study, necessary information regarding to scales are as follows; social capital scale contained 16 items. the items for each dimension of the social capital is composed of 5 items for relational, 5 items for structural and 6 items for cognitive capital, respectively. besides, operational performance items are contained 9 items. the survey that is designed for data collection the respondents are informed about the purpose of the study. additionally, within the consent form also, the respondents are reminded in terms of the importance of the truthfulness of ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu112 the answers. finally, the consent form is also considered and informed the respondents that any personal information provided will remain secret. accordingly, in the data collection step the necessary checks have been completed. after the data collection, before the data analysis step, essentially the researchers checked the data set also for the potential errors. so within this stage, the data is first checked in terms of outliers, minimum and maximum values, and also valid and missing cases. reliability and validity as shown in table 1, the survey questionnaire reliability was tested to ensure the quality of the collected data. for the purpose of this study, cronbach’s alpha was administrated to test the stability of the scale by determining how accurate the items are measured yielding 0.881, 0.806 and 0.782 for the social dimensions, respectively. the operational performance development was 0.712, which shows a degree of internal stability in the total set of objects of the survey. therefore, the survey contains extremely reliable items. table 1. reliability statistics variables cronbach’s alpha no. of items n % relational capital 0.881 5 111 100.0 structural capital 0.806 5 111 100.0 cognitive capital 0.782 6 111 100.0 operational performance development 0.712 9 111 100.0 s o u r c e : developed by authors. construct validity according to results of construct validity as shown in table 2, concerning the significance in relationships among variables, researchers conventionally test these relationships through correlation matrix and consider those producing a p-value below 0.05 to be significant. the effect of social capital on operational performance… 113 table 2. correlation matrix between items and factors factors relational capital structural capital cognitive capital operational performance x1 1.000** . x2 .759** .000 x3 .466** .000 x4 .481** .000 x5 .420** .000 x6 1.000 . x7 .366** .000 x8 .374** .000 x9 .412** .000 x10 .447** .000 x11 1.000** . x12 .219* .021 x13 .251** .008 x14 .240* .011 x15 .423** .000 x16 .253** .007 y1 1.000** . y2 .179 .061 y3 .823** .000 ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu114 factors relational capital structural capital cognitive capital operational performance y4 .267** .005 y5 .310** .001 y6 .151 .115 y7 .353** .000 y8 .268** .005 y9 .281** .003 **correlation is significant at the 0.01 level (2-tailed). *correlation is significant at the 0.05 level (2-tailed). c. listwise n = 111. s o u r c e : developed by authors. as seen in table 2, all the relational capital items as the first social capital’s dimension were correlated and significant (p<0.01); so x1 strongly correlated with itself, and for the other two social capital dimensions (structural and cognitive), almost all items positively correlated with each other (p<0.01 and p<0.05). x6, x11 as the first items of the two components, strongly and positively correlated to themselves. additionally, most operational performance items were significant (p<0.01), except y2 and y6 (p>0.05). however, y1 strongly correlated to itself. hence, this means there is a high level correlation among questionnaire items and factors. 4. data analysis and results spss 24 package proram was used to analyze the data in this study. parametric statistical analysis was used to examine the proposed study hypotheses. descriptive statistics were used to quantitatively define the significant features of the variables using mean and, standard deviations and to find out the rate of the importance of the variables. in table 3, respondents’ characteristic is given. table 2. correlation matrix… the effect of social capital on operational performance… 115 table 3. descriptive statistics of the respondents valid demographics frequency percentage gender male 54 48.6% female 57 51.4% total 111 100.0% age groups 25–35 36 32.4% 36–45 47 42.3% 46–55 20 18.0% 56 and above 8 7.2% total 111 100.0% academic degree bachelor 95 85.6% master degree 15 13.5% ph.d. 1 0.9% total 111 100.0% position in the bank senior manager 9 8.1% middle manager 49 44.1% administrative staff 53 47.7% total 111 100.0% overall job experience 1–5 34 30.6% 6–10 33 29.7% 11–15 32 28.8% 16–20 12 10.8% total 111 100.0% s o u r c e : developed by authors. in the sample, it is observed that 51.4% of the total respondents were female, while 48.6% were male. majority of the participants were aged 36–45. 85.6% of the respondents were bachelor degree holders. besides, most of the respondents are at middle management level. most of them have worked for about 1–5 years in the bank. ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu116 descriptive statistics of the study variables the descriptive statistics of the variables are given in table 4. according to results appear for descriptive statistics mean and standard deviation related to the independent variable and social capital scores 4.222 and 0.5156, respectively. this mean that 84.4% of the entire respondents stated that social capital is significant as an independent variable with only 15.6% specifying that this variable is not important. table 4. descriptive statistics of the variables and dimensions variables and dimensions items n the rate of the agreement mean std. deviation agree disagree social capital 16 111 4.2224 .51564 84.4% 15.6% relational capital 5 111 4.2865 .62121 85.7% 14.3% structural capital 5 111 4.2036 .56824 84% 16% cognitive capital 6 111 4.1847 .54093 83.6% 16.4% operational performance 9 111 3.9069 .47391 78.1% 21.9% s o u r c e : developed by authors. from the same table, it can be seen that the mean scores of the relational, structural and cognitive capitals are 4.286, 4.203 and 4.184 respectively, and that standard deviation scores are 0.6212, 0.568, and 0.540 respectively. although 85.7%, 84%, and 83.6%, respectively of the total responses indicated that commercial banks’ relational, structural and cognitive capitals are important. only, 14.3%, 16% and 16.4% specified that these dimensions are not important. as seen in the above table, the mean and standard deviation scores for operational performance development were 3.906 and 0.473, respectively, and 78.1% of the all responses stated that operational performance development was important, and 21.9% of the did not agree with this. consequently, the results indicate that all the dimensions of social capital impact operational performance development of these commercial banks. hence, the variables relational and structural capitals, respectively, are the most important features affecting operational performance development with the effect of social capital on operational performance… 117 85.7% and 84% agreement. this is while cognitive capital scored the lowest important inf luence with a rate of 83.6%. correlation matrix of variables as revealed in table 5, the correlation matrix tests clarify that all study variables correlated with one another where (p<0.05). however, the social capital significantly correlated with the operational performance (r= 0.491; p< 0.05). relational, structural, and cognitive capitals positively correlated with operational performance. furthermore, relational capital, structural capital, and cognitive capital, through r=0.595, 0.590 and 0.394 respectively, have strong positive correlations with operational performance, where a p-value of 0.000, 0.000 and 0.000 respectively, is that less than 0.05. therefore, the hypotheses h1, h2, and h3 are accepted. table 5. correlation matrix between variables social capital relational capital structural capital cognitive capital operational performance co rr el at io n social capital correlation coefficient .828** .853** .879** .491** sig. (2-tailed) .000 .000 .000 .000 relational capital correlation coefficient .595** .590** .394** sig. (2-tailed) .000 .000 .000 structural capital correlation coefficient .633** .430** sig. (2-tailed) .000 .000 cognitive capital correlation coefficient .442** sig. (2-tailed) .000 operational performance correlation coefficient .491** .000 sig. (2-tailed) ** correlation is significant at 0.01 (2-tailed). s o u r c e : developed by authors. ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu118 regression analysis of the variables as shown in table 6 (a, b), this study tested a multiple linear regression analysis to examine the effect of the social capital dimensions on operational performance development. the three dimensions of the social capital represent r square. accordingly, this explains the relational, structural and cognitive capitals for 22.8% of the operational performance development of commercial banks in erbil, as shown in the table 6 (a). table 6 a. model summaryb model r r square adjusted r square std. error of the estimate 1 .478a .228 .221 .41819 a. predictors: (constant), social capital. b. dependent variable: operational performance. s o u r c e : developed by authors. from table 6 (b), we can see that the significance is p< 0.05. thus, the impact of social capital is significant on the operational performance development of the commercial banks in erbil. at the 0.05, the calculated f was 36.268, and df 1, 109 highlighting that the entire model is significant at p< 0.05. table 6 b. f test significant of the regressiona model sum of squares df mean square f sig. 1 regression 5.643 1 5.643 36.268 .000b residual 19.062 109 .175 total 24.705 110 a. dependent variable: operational performance. b. predictors: (constant), social capital. s o u r c e : developed by authors. the effect of social capital on operational performance… 119 table 6 c. regression analysis coefficientsa model unstandardized coefficients standardized coefficients t sig. collinearity statistics b s. error beta tolerance vif 1 (constant) social capital 2.585 .439 .289 .077 .478 8.930 5.680 .000 .000 1.000 1.000 relational capital .308 .067 .404 4.615 .000 1.000 1.000 structural capital .347 .073 .416 4.778 .000 1.000 1.000 cognitive capital .406 .074 .464 5.464 .000 1.000 1.000 a. dependent variable: operational performance. s o u r c e : developed by authors. as the results presented in table 6 (c) illustrate, statistically there is a significant impact from the social capital and its dimensions as relational, structural, and cognitive capitals on operational performance development of the commercial banks in erbil, as defined over an extent of 0.478, 0.404, 0.416 and 0.464, respectively, and as revealed with a p-value of 0.000, 0.000 and 0.000, respectively. besides, the t-test = (5.680; p<0.05) for social capital, which means significant and supporting results, with t equalling 4.615, 4.778 and 5.464, for dimensions as relational, structural, and cognitive capitals, respectively, and p<0.05 for all three dimensions. then, hypotheses h1, h2 & h3 are proved. however, table 6 (c) also displays multicollinearity statistics, which can be seen from the correlation matrix among independent variables on the value of variance inf lation factor (vif). therefore, if the vif value is less than 5 and the tolerance value is above 0.1, it means that there is no multicollinearity among independent variables. from table 4 (c), the tolerance values and vif values for each variable were: 1.000 and 1.000 for social capital, 1.000 and 1.000 for relational capital, and finally the same values 1.000 and 1.000 for structural, and cognitive capitals variables. it means that vif<5 and tolerance value>0.1, hence the absence of multicollinearity. ahmed abdulqader hamad, şule tuzlukaya, erdem kırkbeşoğlu120  conclusion, limitations and recommendations the purpose of this study is to investigate the effect of social capital dimensions on the operational performance development of the commercial banks in erbil. the results support the main hypotheses and the objective of the study. accordingly, the study tested the relationships between social capital dimensions include: (relational capital, structural capital, and cognitive capital) and operational performance development by taking opinions from nominated commercial banks operating in erbil, the study also verified the impact of social capital on the operational performance development by using (cost performance, quality performance, delivery performance, f lexibility performance and innovation performance) based operational performance measures. supposing that the effect of social capital is an important step before commercial bank’s management, it has been an appreciated determination to produce an outline in order to make commercial banks in erbil conscious of the significance of dealing social capital and investing it in operational performance development. the study found positive significant relationships between relational, structural, and cognitive capitals with operational performance development. the relational capital and structural capital have more active roles in developing operational performance. additionally, the regression analysis test results show that, statistically, all social capital dimensions have an effect on operational performance. further conclusions in terms of practical implications can be considers as follow; first, it is necessary for commercial banks in erbil, to develop and invest the relational capital and structural capital based on their significant effect on operational performance, yet, more improve and practice of cognitive capital. second, since social capital does stimulus operational performance of commercial banks in erbil, bank’s managers require to attention on other boundaries that they intensification their operational performance than social capital dimensions. last but not lease, the recommendation related commercial banks necessity to develop training programs for their managers, as well as for administrative staff, directing at refining their social capital performs in the positive of the solid role of this variable and its dimensions on banks operational performance development. it is hoped that the understanding gained from this study, can shed light on these elements of social capital in region of iraq, erbil, which has not been addressed within literature so far. in this way, this is an attempt to further the effect of social capital on operational performance… 121 strengthen activities of various enterprises in this country, and hence be a contribution to the literature on this subject. as to the limitations, one of the fundamental setbacks was the fact that, of this study the results are based only 25 existed for social capital and operational performance development. as a result, future works should contain more indicators to examine the significance of social capital in these establishments. the study is based on convenience sampling and, hence, its results cannot be generalized. therefore, secondly, the study can be applied with a larger population. additionally, the present study took into consideration all three dimensions of social capital. in this respect, future works can focus on only one aspect and, hence, achieve more specific results.  references andrews, r. 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(1998). social capital and value creation: the role of inter-firm networks. the academy of management journal, 41(4), 464–476. ward, p.m. (1998). competitive priorities in operations management. decision sciences, 29(4), 1035–1046. copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 9 issue 2 2020 quarterly address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2018: 100.00 editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2020 copyright by uniwersytet mikołaja kopernika toruń 2020 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents hedi baazaoui for a new method of calculating the disclosure index ................................................... 9 ishfaq hamid, pabitra kumar jena linear and non-linear granger causality between foreign direct investment and economic growth: evidence from india ................................................................. 25 mubaraq sanni, lukman adebayo oke, idayat titilayo alayande bank credit accessibility and performance of smes in kwara state, nigeria: a pls-sem analysis .............................................................................................................. 45 sintayehu tulu wondimu, mathewos woldemariam birru determinants of informal economy estimation in ethiopia: multiple-indicators, multiple-causes (mimic) approach ................................................................................ 65 for authors ........................................................................................................................... 87 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: january 10, 2016; date of acceptance: may 11, 2016. * contact information: iwonabujnowicz@uni.lodz.pl, department of international economic relations, faculty of economics and sociology, university of lodz, ul. pow 3/5 90-255 łódź, poland, phone: +48503454990. ** paper financed under the research grant of the national science centre no.: umo- 2013/09/b/hs4/01329 “impact of capital imports upon economic growth”. maciejczyk-bujnowicz i. (2016). capital flows in european union on the basis of international investment position – selected aspects. copernican journal of finance & accounting, 5(1), 157– 172. http://dx.doi.org/10.12775/cjfa.2016.009 iwona maciejczyk-bujnowicz* university of lodz capital flows in european union on the basis of international investment position – selected aspects** keywords: international investment position, capital f lows, financial crisis, euro area, foreign direct investment, financial integration. jel classification: f5, f3, f36. abstract: the paper aims at assessing the changes in f lows of selected forms of capital under deepening financial integration in the european union. eu member states are divided into two groups: members of the euro area and those outside of it. the analysis coincides with the establishing of the eu monetary union and covers the turn and early 21st century. research method applied in this particular study includes the overview of theoretical concepts, literature review and a comparative statistical analysis based on statistical data. analyses of selected data revealed significant differences between developed and developing countries when it comes to various forms of net capital and its relation to the gdp based on the international investment position. moreover, we evaluated the international investment position of poland against the backdrop of selected countries of central and eastern europe and the eurozone members. iwona maciejczyk-bujnowicz158  introduction the paper tries to evaluate the changes in capital f lows under the deepening financial and trade integration in the eu. we analysed net international investment position of the eu countries. the countries were divided into two groups: members of the eurozone and member states outside of it. the analysis coincides with the establishing of the monetary union in the eu and covers the period 1998-2011, and 2003-13 for poland. moreover, we conducted comparative analysis of selected iip values for poland against the backdrop of countries of central and eastern europe and the members of the euro area. we need to stress that the stream of payments resulting from increased trade among countries caused, inter alia, by increased gdp was largely directed not only to the real sector but increasingly to the financial sector. the two sectors: financial and real one started to go apart. this specific asymmetry of trade f lows and the f lows of payments dictated changes in the balance of payments of individual economies. national financial systems became resistant to the controls and operations of monetary and fiscal authorities. free inf low and outf low of capital, in particular loans, intensified financial intermediation. increases in the volume of transborder financial f lows, combined with limited autonomy of domestic macroeconomic policy and monetary authorities of a deficit country getting quickly indebted abroad, revealed the inability to effectively counteract overappreciation of the domestic currency and significant reduction of domestic interest rates (najlepszy, sobański 2010). besides, according to j. bilski too deep reduction of interest rates may largely reduce the inf low of portfolio capital and initiate depreciation, which may threaten the financing of current account deficit from foreign sources (bilski 2006). croosborder capital f lows broke up when the crisis began in 2008, which was also ref lected in global trade turnover (sula, willet 2009). developed members of the eurozone, especially those, which made their growth dependent upon the inf low of foreign capital, suffered the most from the lack of capital. in some countries, specifically in peripheral ones, credit boom in the market of consumer and mortgage loans caused, inter alia, by low interest rates, contributed to the speculative bubble in the real estate market. as a result of rapid increase in the risk of investing in foreign financial markets, capital, in particular portfolio capital, was f lowing out of individual countries. from the viewpoint of the stability, the system is the most sensitive to developments in global markets. the latest crisis of 2008-11 capital flows in european union on the the basis… 159 revealed weaknesses of progressing financial integration of the banking system not only in the united states but also in the eu. literature provides arguments that lay grounds for the stability of external balance of a country. many studies on the instability of external balance demonstrate that global capital f lows may be the critical variable that destabilizes external balance of a particular country. capital f lows offer possibilities and ways of balancing international trade turnover of states. moreover, capital f lows are inf luenced by balance of payment forecasts and thresholds specifying safe level of future macroeconomic equilibrium. too quick and too wide, in relation to the expected, inf low of capital may deteriorate the net investment position1 of a country and the terms of foreign debt servicing (najlepszy, sobański 2010). research methodology and process research classical economy2 is considered the first strand in the theory of economics, which looks at processes that take place among economies in a comprehensive way. from theoretical point of view, an ideal situation is the one when the balance of payment is zero. in modern times it is hard to find an example of economy where domestic savings equal pending investment projects. that is the case of the so called “closed economy”. in open economies freely moving capital enables to finance investment when there is not enough capital in the home market. as a result, we have surpluses or shortages in the balance of payments. moreover, under the absence of external balance it is hard to arrive at internal balance, both in the real and in the financial sectors. the model of general economic stability is-lm supplements keynes’s theory (hicks 1937). it describes the behaviour of the real and financial sectors in the internal market, for which it was vastly criticised. the is-lm-bp model expanded by mundellfleming shows the balance achieved simultaneously in internal and external 1 international investment position (iip) is a statistical statement compiled at the end of a given period, which outlines foreign assets and liabilities of residents vis-a-vis non-residents. the difference between foreign assets and liabilities is the net international investment position, which informs whether a country is a net creditor or net debtor vis-a-vis other countries. 2 the strand is represented by: smith, a 1776, an inquiry into the nature and causes of the wealth of nations, marks the beginning of classical economics, ricardo, d 1817, on the principles of political economy and taxation, mill, js 1865, principles of political economics. iwona maciejczyk-bujnowicz160 markets. in this approach when there is disequilibrium in the balance of payment, restrictions may be imposed upon such capital f lows, which threaten the stability of the balance of payments (mundell 1968). pursuant to the assumptions of the is-lm-bp model, taking account of the assumptions of the keynes’s theory, the degree of liberalisation of capital f lows (complete, partial or no liberalisation) with f loating exchange rate enable effective monetary policy. on the other hand, if we adopt a fixed exchange rate regime, monetary policy is ineffective. if, however, for the fixed exchange rate model we pursue an expansive fiscal policy, its effectiveness will be the highest under partial liberalisation of capital f lows. the dichotomy of using many solutions was applied in the idea of „impossible trinity”. it means it is impossible to have all three of the following at the same time: stabilisation of the exchange rate, independent monetary policy, and full liberalisation of capital f lows. monetarism emerged after world war ii. the main representative of the monetarist theory is friedman (1957), who spoke in favour of economic liberalism. he criticised theoretical assumptions of the far-reaching keynes interventionism. after the collapse of the bretton woods system the volume of international f lows increased. individual countries started eliminating barriers to it. additionally, in 1990 lucas (lucas 1990) published an article, in which he highlighted certain relationship that was termed the lucas paradox in literature. he noticed that capital, contrary to theoretical assumptions, f lows from poor to rich countries, not the reverse. thus, he challenged conclusions of the neoclassical theory, according to which we expect capital to f low to poor countries from rich countries better equipped in capital. since the 1970s and 1980s in developed countries we have observed increasing share of liabilities in gdp (total liabilities/gdp). as of the beginning of the 1990s until early 21st century the share of equity capital in gdp dynamically increased (eqi=(fdi+portfolio equity)/gdp). between the 1970s and 2004 the eqi ratio increased by ca. 40 p.p. (from ca. 5% of gdp to ca. 45% gdp) in developed countries while in developing countries the increase reached ca. 20 p.p. (from ca. 10% gdp to ca. 30% gdp). interestingly, between the 1970s and mid1980s developing economies covered by the study reported decreased (by ca. 50%) share of equity in total capital structure (equity/total liabilities) from ca. 35% to ca. 16 – 18% on average. in rich countries the drop was slightly more moderate (ca. 10 p.p.) and represented ca. 25% of liabilities. since the 1990s both groups of countries demonstrated high rate of growth of equity in capital structure. in rich countries the increase of equity in liabilities reached on av capital flows in european union on the the basis… 161 erage ca. 40% in 2000 while later on its proportion decreased to ca. 30%, contrary to the rest of countries, where its share increased to ca. 50% in total liabilities. lane and milesi-ferretti (2000) reviewed literature concerning the essence and structure of external investment position of countries. based on that they selected potential determinants of the financial structure of the balance of payments in developed and developing countries. special attention was paid to the relation between debt structure and equity (fdi + portfolio capital). the analysis of results obtained from the regression function allowed to formulate interesting conclusions. one of them says that relatively bigger countries with a developed financial market and open to trade have externally diversified financial structure (external diversification). the group of developing countries is dominated by diversified structure of liabilities. both developed and developing countries from the group of high gdp per capita enjoy higher levels of assets and liabilities and usually are bigger creditors than smaller countries. according to the authors (lane & milesi-ferretti 2000) openness to trade favours capital f lows of all types, however, equity f lows, in particular fdi, slightly dominate debt. summing up, we may say that the size of the country, economic development and the development of capital market encourage the inf low of equity capital. other researchers (faria et al. 2006), as a result of horizontal and time-based analysis of economies, selected factors decisive for the structure of liabilities of iip in high-income and other countries. rich countries have a much higher share of liabilities in the gdp (in 2004 they exceeded 140% share of liabilities in the gdp) compared to other countries, for which analysed ratio reached ca. 60% gdp over the same period. moreover, the increased share of equity in total liabilities of the balance of payments positively correlates with the quality of institutional changes in researched countries. it was also observed that bigger countries have relatively smaller share of foreign liabilities and higher share of portfolio capital in total liabilities. horizontal analysis for 2004 revealed positive correlation between equity and bigger openness to trade. lane and milesi-ferretti (2006), based on data originating from 145 countries from the period 1970-2004 conducted a synthetic analysis of data and results of calculations. their attention was paid to the structure of assets and liabilities of the iip and to the attempt to identify trends in external financial structure of these countries. that results obtained for developed and developing countries are close. there was a 7-fold increase in the ratio representing the level of international financial integration, from ca. 45% gdp in 1970 to over 300% gdp in 2004. in developing countries the 1990s were the years iwona maciejczyk-bujnowicz162 of strong integration in equity capital both in relation to gdp and to trade. obtained results also demonstrated that at the turn of the centuries there were substantial changes in external investment position of analysed countries. developed countries reported increases in both assets and liabilities in relation to gdp, in particular when it comes to net debtors (e.g., united states, australia, spain) and creditors (japan, switzerland). in summary, under progressing financial globalisation we observed significant changes in the structure of the balance of payments and international investment positions of analysed countries. asian and middle east countries recorded dynamic increase in financial surpluses. the rest of developing countries experienced considerable increase in the share of equity to total liabilities and strong accumulation of foreign exchange reserves. at the turn of the 20th and 21st centuries significant changes took place in external investment position in the global economy. developing countries in asia and in the middle east improved their external investment positions, while european developing countries experienced changes in capital structure. countries regarded as developed strengthened their external investment position to gdp due to relatively higher share of liabilities in the iip structure (australia, spain, united states) and relatively higher share of assets in iip structure (japan, switzerland). when it comes to financial integration of developing countries, we may say that its scale is smaller than in developed countries. that is especially true of low level of financial integration with respect to debt. further liberalisation of capital f lows in these countries and further advances in the development of national financial markets may impact progress in further international financial integration. lane and milesi-ferretti (2006) conducted the analysis of statistical external capital structure of iip liabilities in developed and developing countries. the study analysed and compared the share of equity capital in total liabilities (fdi+portfolio equity/tl). in the 1980s and 1990s both groups of countries exhibited clear increase of equity capital in total liabilities. over the period 2000-02 its share dropped in favour of debt. in 2004 in developed countries equity reached 36% of total liabilities. in developing countries its share was ca. 50% of total assets and ca. 75% accounted for foreign direct investment. besides, in developing economies dynamic accumulation of official reserves was observed. the ratio indicating the share of official reserves in total liabilities (debt) increased from 29% in 1998 to 64% in 2004. changes in the structure of external investment position of countries improved, also the investment position of developing countries, due to the in capital flows in european union on the the basis… 163 crease in the share of equity and foreign exchange reserves in total liabilities. lane and milesi-ferretti (2001) based on horizontal and time studies on the sample of 67 countries over the period 1970-1998 realised that gdp per capita, public debt and demographic variables have the biggest impact upon the directions in international trade in assets. prices of assets traded worldwide are determined by foreign net investment position, which, in turn, exerts significant impact upon the performance of long-term real exchange rate. gruić (2013) made an attempt to identify the determinants of the iip of selected countries in the light of progressing financial globalisation. quarterly data cover the period from the 4th quarter of 1997 until the 2nd quarter of 2004. analyses were conducted for eu member states, which do not belong to the euro area: the czech republic, hungary, poland, slovakia, slovenia, bulgaria, croatia, and romania. in conclusion gruić (2013) states that assets and liabilities depend on both domestic and foreign factors, which include: openness to trade, size of the country, capital market development, and degree of financial liberalisation. on top of that, deeper integration measured with the equity (eqi ) over the studied period can be explained by relatively high share of state-owned enterprises privatised step by step, which encouraged foreign investors to invest in equity within the framework of both fdi and portfolio capital. catao and milesi-ferretti (2013) attempted to identify the determinants of financial crises paying special attention to the role of foreign liabilities and their structure. the period of the study covers the years 1970-2011 and the study concerns 70 countries including 41 developing ones. the authors who used shin’s model (shin 2012) noticed that the risk of crisis in a given economy rapidly increases when net foreign liabilities exceed 50% of gdp (nfl/gdp) oscillating between 50-60% gdp and when the nfl/gdp ratio increases by 20 p.p. above the historic average level for a given country. as a result of the study they noticed that the likelihood of financial crisis increases when the debt to equity ratio in external liabilities of the country relatively increases. the scenario is especially realistic in countries where the share of net debt in liabilities exceeds ca. 35% gdp. the risk of crisis is lower when the share of net fdi in the capital structure (fdi/ tl) increases. the observation is in line with the results of studies conducted by hausmann and fernandez-arias (2001), and borensztein, de gregorio & lee (1998), which demonstrated positive impact of relatively increasing share of fdi in iip liabilities of a given country. the higher it is, the more stable and safe the country in the eyes of potential investors. the case of foreign exchange reserves is similar. if their share in foreign assets is relatively high, their imporiwona maciejczyk-bujnowicz164 tance as a preventive measure protecting against the risk of crisis is higher. when it comes to the impact of portfolio equity upon the risk of crisis, results of studies are inconclusive. current account deficit oscillating around 4% of gdp is the variable playing the major role in the prediction of crisis in most studied specifications. in general terms, as demonstrated by the decomposition of external net investment position of analysed countries into net equity and net debt, net debt liabilities is the most relevant determinant of net external investment position, which importantly affects the risk of crisis. obstfeld and taylor (2002) and milessi-ferretti (2003) constructed a simple measure used to estimate the degree of international investment integration of a given country (ifi=(fa+fl)/gdp). results obtained from calculations enabled to initially assess the degree of integration. generally speaking, the higher the ratio, the deeper international financial integration of a given country. eqi ratio (eqi=(eqa+eql)/gdp) helps evaluate financial integration against equity of a given country with the rest of the world. like the previous ratio, the higher it is, the deeper financial integration measured with the equity to gdp ratio. by analogy, comparisons were made using the trade integration ratio (total exports and imports/gdp). below we present statistical analysis of data and try to assess the relationships between international financial integration and financial openness of poland and selected central and east european countries (ceecs). among the ceecs we focused on: bulgaria, croatia, the czech republic, lithuania, poland, romania, and hungary. besides, we analysed poland’s integration with two groups of countries: members of the euro area (ea) and eu member states outside of the eurozone (nea). euro area consists of 18 economies. the united kingdom, denmark and sweden were not included in the analysis. below, we can see the average for the above mentioned countries for the period from 2004 till 2011. ox axis gives average openness to trade over the period 2004-2011 while oy axis represents average financial integration. we may note that the euro area countries compared to non-euro countries remain at opposite extremes. while in the single currency countries (ea) financial integration was on average 3.23 over the years 2004-11, in ceecs (nea) the ratio amounted to 1.86. hungary was the only exception, as their financial integration was on average 3.80 with openness to trade ratio of 1.55. the degree of financial integration of the rest of eu member states outside of the euro area ranged between 1.0 and 2.0. interestingly, the openness ratio for croatia was 0.88, for poland 0.82, and for romania 0.76. capital flows in european union on the the basis… 165 figure 1. international financial integration and trade integration of the eu gdp ratio. by analogy, comparisons were made using the trade integration ratio (total exports and imports/gdp). below we present statistical analysis of data and try to assess the relationships between international financial integration and financial openness of poland and selected central and east european countries (ceecs). among the ceecs we focused on: bulgaria, croatia, the czech republic, lithuania, poland, romania, and hungary. besides, we analysed poland’s integration with two groups of countries: members of the euro area (ea) and eu member states outside of the eurozone (nea). euro area consists of 18 economies. the united kingdom, denmark and sweden were not included in the analysis. below, we can see the average for the above mentioned countries for the period from 2004 till 2011. ox axis gives average openness to trade over the period 20042011 while oy axis represents average financial integration. figure 1. international financial integration and trade integration of the eu source: author’s estimates based on eurostat and imf data. we may note that the euro area countries compared to non-euro countries remain at opposite extremes. while in the single currency countries (ea) financial integration was on average 3.23 over the years 2004-11, in ceecs (nea) the ratio amounted to 1.86. hungary was the only exception, as their financial integration was on average 3.80 with openness to trade ratio of 1.55. the degree of financial integration of the rest of eu member states outside of the euro area ranged between 1.0 and 2.0. interestingly, the openness ratio for croatia was 0.88, for poland 0.82, and for romania 0.76. many interesting conclusions can be drawn from the analysis of iip structure of the eurozone countries and the ceecs outside of the euro area. changes that took place over recent 14 years concern individual components of iip liabilities. table 1. net iip to gdp (%) of the euro area countries (ea) and ceecs (nea) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 net foreign assets/gdp ea: 0,79; 3,23 bul :1,23; 1,99 cze: 1,28; 1,60 cro: 0,88; 1,80 lit: 1,27; 1,39 hun: 1,55; 3,80 pol: 0,82; 1,26 rom: 0,76; 1,14 nea: 2,23; 1,86 0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50 4,00 0,00 0,50 1,00 1,50 2,00 2,50 fi na nc ia l i nt eg ra ti on trade integration s o u r c e : author’s estimates based on eurostat and imf data. many interesting conclusions can be drawn from the analysis of iip structure of the eurozone countries and the ceecs outside of the euro area. changes that took place over recent 14 years concern individual components of iip liabilities. table 1. net iip to gdp (%) of the euro area countries (ea) and ceecs (nea) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 net foreign assets/gdp nea -0,28 -0,33 -0,34 -0,31 -0,36 -0,41 -0,48 -0,46 -0,61 -0,71 -0,64 -0,82 -0,78 -0,67 ea -0,10 -0,07 -0,08 -0,07 -0,12 -0,13 -0,13 -0,10 -0,14 -0,17 -0,18 -0,21 -0,18 -0,18 foreign direct investments net/gdp nea -0,17 -0,21 -0,25 -0,27 -0,31 -0,33 -0,38 -0,34 -0,42 -0,45 -0,36 -0,47 -0,46 -0,38 ea 0,01 0,05 0,05 0,06 0,03 0,01 0,01 0,04 0,06 0,07 0,07 0,10 0,11 0,12 portfolio investments net/gdp nea -0,11 -0,12 -0,11 -0,11 -0,11 -0,13 -0,17 -0,16 -0,17 -0,15 -0,10 -0,15 -0,17 -0,16 ea -0,10 -0,13 -0,12 -0,12 -0,14 -0,14 -0,14 -0,14 -0,20 -0,23 -0,22 -0,29 -0,28 -0,28 other investments net/gdp nea -0,14 -0,14 -0,14 -0,09 -0,13 -0,17 -0,15 -0,13 -0,16 -0,21 -0,24 -0,33 -0,31 -0,28 ea 0,00 -0,02 -0,06 -0,05 -0,04 -0,03 -0,02 -0,02 -0,02 -0,02 -0,05 -0,04 -0,04 -0,03 s o u r c e : author’s estimates based on imf data. iwona maciejczyk-bujnowicz166 based on statistical data for net foreign assets of selected ceecs (nea) and eurozone members we may conclude that between 1998 and 2011 negative iip to gdp balance more than doubled. in 1998 nfa amounted to -0.28 gdp while in 2011 -0.67 gdp reaching its maximum of -0.82 gdp in 2009. by analogy, in the euro area countries in 2009 nfa/gdp was almost 4 times lower and accounted for -0.21 gdp. it is worth stressing that fdis account for the biggest share of negative nfa balance in developing countries. in developed countries the fdi/gdp balance showed positive values in each year covered by the study and amounted from 0.01 gdp in 1998 to 0.12 gdp in 2011. balance totals of net portfolio capital to gdp in both groups of countries were close since 1998 (nea: -0.11 gdp; ea: -0.10 gdp) until 2006 (ea: -0.17 gdp; ea: -0.2 gdp). since 2007 we have observed the divergence of the trajectories for both groups of countries and the dispersion of net balance of pi/gdp across the countries of the euro area (ea: -0.23 gdp) and the ceecs (nea; -0.15 gdp), which was increasing year to year to reach respectively: ea: -0.28 gdp; nea: -0.16 gdp in 2011. figure 2. equity in iip liabilities (eqi/tl) in the euro area and in the ceecs between 1998-2011 source: author’s estimates based on nbp and imf data. the analysis of data describing the relation of total fdi and short-term capital to tl shows that the changes in their percentage share in the countries of single currency are relatively uniform, with the exception of 2008 when it dropped by 7 p.p. compared to 2007. in selected ceecs countries over the decade from 1998 to 2007 this category of capital increased by 20 p.p., which may evidence positive perception of political and economic perspectives of this group of countries. since 2004 the difference to the countries from the eurozone has been ca. 10 p.p. on average. poland does not differ significantly from the average for the ceecs. the collapse in 2008 in this group of countries was 4 p.p.. we should stress that the fdi represents the biggest share of this financial position in total liabilities with the average share in the ceecs of 47.0% compared to 21.0% in the eurozone over the period 2004–2011. when analysing data concerning the share of fdi in the capital structure (fdi/eqi) we may note that between 2004 and 2011 the ratio was almost 90% in the group of selected ceecs while in the eurozone economies it was ca. 52% of total equity (eqi/tl). it is illustrated in the figure below. figure 3. share of fdi in equity in the euro area countries and in ceecs in the years 1998-2011 source: author’s estimates based on nbp and imf data. 0,30 0,35 0,40 0,45 0,50 0,55 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 eqi/tl nea eqi/tl ea eqi/tl poland 0,15 0,20 0,25 0,30 0,35 0,40 0,45 0,50 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 fdi/tl poland fdi/tl nea fdi/tl ea s o u r c e : author’s estimates based on nbp and imf data. the analysis of data describing the relation of total fdi and short-term capital to tl shows that the changes in their percentage share in the countries of single currency are relatively uniform, with the exception of 2008 when it dropped by 7 p.p. compared to 2007. in selected ceecs countries over the decade from 1998 to 2007 this category of capital increased by 20 p.p., which may evidence positive perception of political and economic perspectives of this group of countries. since 2004 the difference to the countries from the euro capital flows in european union on the the basis… 167 zone has been ca. 10 p.p. on average. poland does not differ significantly from the average for the ceecs. the collapse in 2008 in this group of countries was 4 p.p. we should stress that the fdi represents the biggest share of this financial position in total liabilities with the average share in the ceecs of 47.0% compared to 21.0% in the eurozone over the period 2004–2011. when analysing data concerning the share of fdi in the capital structure (fdi/eqi ) we may note that between 2004 and 2011 the ratio was almost 90% in the group of selected ceecs while in the eurozone economies it was ca. 52% of total equity (eqi/tl). it is illustrated in the figure below. figure 3. share of fdi in equity in the euro area countries and in ceecs in the years 1998-2011 source: author’s estimates based on nbp and imf data. the analysis of data describing the relation of total fdi and short-term capital to tl shows that the changes in their percentage share in the countries of single currency are relatively uniform, with the exception of 2008 when it dropped by 7 p.p. compared to 2007. in selected ceecs countries over the decade from 1998 to 2007 this category of capital increased by 20 p.p., which may evidence positive perception of political and economic perspectives of this group of countries. since 2004 the difference to the countries from the eurozone has been ca. 10 p.p. on average. poland does not differ significantly from the average for the ceecs. the collapse in 2008 in this group of countries was 4 p.p.. we should stress that the fdi represents the biggest share of this financial position in total liabilities with the average share in the ceecs of 47.0% compared to 21.0% in the eurozone over the period 2004–2011. when analysing data concerning the share of fdi in the capital structure (fdi/eqi) we may note that between 2004 and 2011 the ratio was almost 90% in the group of selected ceecs while in the eurozone economies it was ca. 52% of total equity (eqi/tl). it is illustrated in the figure below. figure 3. share of fdi in equity in the euro area countries and in ceecs in the years 1998-2011 source: author’s estimates based on nbp and imf data. 0,30 0,35 0,40 0,45 0,50 0,55 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 eqi/tl nea eqi/tl ea eqi/tl poland 0,15 0,20 0,25 0,30 0,35 0,40 0,45 0,50 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 fdi/tl poland fdi/tl nea fdi/tl ea s o u r c e : author’s estimates based on nbp and imf data. the analysis of the structure of iip liabilities in countries included in the study can be supplemented with the identification of debt to total liabilities ratio (debt/tl). as we can see from the below presented data, average share of debt in total liabilities in the ceecs systematically decreases from 68% in 1998 to 46% in 2007 to stabilise finally in the following years around 49%. we need to stress that in the times of crisis of 2007-10 financial markets reported shift from equity investment towards less risky debt securities. summing up, over the period 1998-2011 both the euro area countries and the countries which are not its members recorded significant changes in iip structure. characteristically, the turning point for the present iip structure in analysed countries was 2000. while in the case of equity until 2011 we could clearly see its systematically increasing share in the countries from outside of the euro area, the pattern for debt was reverse. as of 2008 the share of debt in liabilities dynamically decreased from 61.0% in countries – members of the iwona maciejczyk-bujnowicz168 monetary union and approached the share of debt in countries from outside of the eurozone in 2011 reaching 50.0%. figure 4. share of debt capital in liabilities in euro area countries and in the ceecs in the years 1998-2011 (%) the analysis of the structure of iip liabilities in countries included in the study can be supplemented with the identification of debt to total liabilities ratio (debt/tl). as we can see from the below presented data, average share of debt in total liabilities in the ceecs systematically decreases from 68% in 1998 to 46% in 2007 to stabilise finally in the following years around 49%. we need to stress that in the times of crisis of 2007-10 financial markets reported shift from equity investment towards less risky debt securities. figure 4. share of debt capital in liabilities in euro area countries and in the ceecs in the years 1998-2011 (%) source: author’s estimates based on nbp and imf data. summing up, over the period 1998-2011 both the euro area countries and the countries which are not its members recorded significant changes in iip structure. characteristically, the turning point for the present iip structure in analysed countries was 2000. while in the case of equity until 2011 we could clearly see its systematically increasing share in the countries from outside of the euro area, the pattern for debt was reverse. as of 2008 the share of debt in liabilities dynamically decreased from 61.0% in countries members of the monetary union and approached the share of debt in countries from outside of the eurozone in 2011 reaching 50.0%. the analysis of poland’s net international investment position and its net components in relation to gdp produces interesting observations. every year poland’s net iip to gdp decreases. in 2003 iip balance was -41.7% gdp, while in 2013 it reached -69.3% gdp. it means the balance of poland’s financial debt to foreign countries was annually on average -54.7% in the period covered by the study. total liabilities exceeded gdp in 2010 reaching 104.5% gdp while in 2013 liabilities represented 109.7% gdp. that may confirm that poland is perceived as a financially and economically stable country, more and more attractive to foreign investors wishing to invest their long-term capital as net 0,45 0,50 0,55 0,60 0,65 0,70 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 debt/tl nea debt/tl ea poland s o u r c e : author’s estimates based on nbp and imf data. the analysis of poland’s net international investment position and its net components in relation to gdp produces interesting observations. every year poland’s net iip to gdp decreases. in 2003 iip balance was -41.7% gdp, while in 2013 it reached -69.3% gdp. it means the balance of poland’s financial debt to foreign countries was annually on average -54.7% in the period covered by the study. total liabilities exceeded gdp in 2010 reaching 104.5% gdp while in 2013 liabilities represented 109.7% gdp. that may confirm that poland is perceived as a financially and economically stable country, more and more attractive to foreign investors wishing to invest their long-term capital as net fdis (-36.9% gdp in 2013 compared to -27.0% gdp in 2004) and net portfolio capital (respectively: -29.1% gdp and -16,1% gdp). data presented in figure 6 inform us that in poland net balance of shortterm capital may be on the negative side in 2007-10. portfolio capital was inf lowing into poland during the latest financial crisis. it means investors decided that financial market in poland was stable and relatively profitable. in 2008 portfolio capital rapidly f lew out of poland. over the same period the share of other net foreign investment in gdp increased by 8.3 p.p. compared to 2007. the above observations are complemented with the analysis of decomposed poland’s iip liability positions both in terms of their structure and dynamics over the period 2003-13. the structure of liabilities of poland’s iip showed rela capital flows in european union on the the basis… 169 tively stable share of its individual components over the period covered by the study. foreign direct inward investment represented the biggest share and on average accounted for 42.3%. another significant financial item were portfolio investments (pi), which represented on average ca. 26.7% in the analysed period. since 2003 we can observe their systematic increase with the exception of 2008 (20.5%) when they rapidly shifted away from poland to reach 29.3% in total liabilities at the end of 2013. attention should also be paid to the analysis of data concerning other foreign investments. their average annual share in iip liabilities was 30.3% (it was the highest in 2003 – 39.3% and the lowest in 2006 – 25.7%). other foreign investments (oi) include granted commercial loans, financial borrowings, cash in current accounts and deposits made in poland and not included in other categories. the moment poland joined the european union, the share of oi was relatively high (over 30%). then its share decreased in favour of portfolio investments and fdi. the figure below presents the dynamics of poland’s iip liabilities where we can see that other investments (oi) rapidly increased to 35% in 2008 and in the following years on average amounted to ca. 29.5%. the analysis of poland’s iip is complemented with the structure of gross assets. figure 5. international components of poland’s net iip to gdp over the years 2003-13 (%) fdis (-36.9% gdp in 2013 compared to -27.0% gdp in 2004) and net portfolio capital (respectively: -29.1% gdp and -16,1% gdp). figure 5. international components of poland’s net iip to gdp over the years 2003-13 (%) source: author’s estimates based on nbp data. data presented in figure 6 inform us that in poland net balance of short-term capital may be on the negative side in 2007-10. portfolio capital was inflowing into poland during the latest financial crisis. it means investors decided that financial market in poland was stable and relatively profitable. in 2008 portfolio capital rapidly flew out of poland. over the same period the share of other net foreign investment in gdp increased by 8.3 p.p. compared to 2007. the above observations are complemented with the analysis of decomposed poland’s iip liability positions both in terms of their structure and dynamics over the period 2003-13. the structure of liabilities of poland’s iip showed relatively stable share of its individual components over the period covered by the study. foreign direct inward investment represented the biggest share and on average accounted for 42.3%. another significant financial item were portfolio investments (pi), which represented on average ca. 26.7% in the analysed period. since 2003 we can observe their systematic increase with the exception of 2008 (20.5%) when they rapidly shifted away from poland to reach 29.3% in total liabilities at the end of 2013. attention should also be paid to the analysis of data concerning other foreign investments. their average annual share in iip liabilities was 30.3% (it was the highest in 2003 – 39.3% and the lowest in 2006 – 25.7%). other foreign investments (oi) include granted commercial loans, financial borrowings, cash in current accounts and deposits made in poland and not included in other categories. the moment poland joined the european union, the share of oi was relatively high (over 30%). then its share decreased in favour of portfolio investments and fdi. the figure below presents the dynamics of poland’s iip liabilities where we can see -70,0% -60,0% -50,0% -40,0% -30,0% -20,0% -10,0% 0,0% 10,0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 iip/gdp fdi net/gdp portfolio equity net/gdp other investments net/gdp s o u r c e : author’s estimates based on nbp data. iwona maciejczyk-bujnowicz170 figure 6. structure of poland’s iip assets in the years 2003-13 (%) that other investments (oi) rapidly increased to 35% in 2008 and in the following years on average amounted to ca. 29.5%. the analysis of poland’s iip is complemented with the structure of gross assets. figure 6. structure of poland’s iip assets in the years 2003-13 (%) source: author’s estimates based on nbp data. the most significant change in the structure of assets of poland’s international investment position that took place over the period of eleven years between 2003 and 2013 was the increase in the share of polish outward foreign direct investment by ca. 20 p.p. (from 3.7% in 2003 to 25.2% of assets in 2013). the share of other foreign investments almost halved from 30.9% in 2003 to 16.4% in 2013. looking at the importance of individual categories in the structure of financial assets of poland’s iip we can see that portfolio investments outside of the country represented on average 8.6% annually with the exception of step-wise increases before the crisis, i.e. in 2006-07 when they reached 11.7% and 14%, respectively. the results and conclusions of the research process the paper is an overview of basic concepts of economic theories addressing international capital movements. at present, as a result of dynamic changes in the global economy we witness important changes in international capital flows. by taking various forms, these flows reflect the structure of international investment position of individual countries. by analysing the ratios calculated based on collected statistical data we may conclude that there are substantial differences in capital flows and in the structure of iip between developed and developing countries. the analysis of financial and trade integration of eurozone countries compared to the eu member states from outside of the single currency area demonstrated that the two groups are at opposite extremes. over the period 2004-11, financial integration in countries using the single currency (ea) was on 3,7% 4,2% 6,8% 12,2% 13,6% 17,6% 18,8% 23,8% 26,7% 26,1% 25,2% 7,1% 8,4% 9,5% 11,7% 14,0% 7,7% 9,0% 7,9% 5,4% 6,0% 7,5%30,9% 40,9% 36,9% 34,5% 29,7% 27,5% 20,6% 15,8% 15,6% 15,6% 16,4% 58,4% 46,1% 46,2% 41,1% 41,9% 45,4% 51,0% 50,1% 49,4% 49,5% 48,5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 polish fdi polish portfolio investments financial derivatives s o u r c e : author’s estimates based on nbp data. the most significant change in the structure of assets of poland’s international investment position that took place over the period of eleven years between 2003 and 2013 was the increase in the share of polish outward foreign direct investment by ca. 20 p.p. (from 3.7% in 2003 to 25.2% of assets in 2013). the share of other foreign investments almost halved from 30.9% in 2003 to 16.4% in 2013. looking at the importance of individual categories in the structure of financial assets of poland’s iip we can see that portfolio investments outside of the country represented on average 8.6% annually with the exception of step-wise increases before the crisis, i.e. in 2006-07 when they reached 11.7% and 14%, respectively. the results and conclusions of the research process the paper is an overview of basic concepts of economic theories addressing international capital movements. at present, as a result of dynamic changes in the global economy we witness important changes in international capital f lows. by taking various forms, these f lows ref lect the structure of international investment position of individual countries. by analysing the ratios calculated based on collected statistical data we may conclude that there are substantial differences in capital f lows and in the structure of iip between developed and developing countries. the analysis of financial and trade integration of eurozone countries compared to the eu member states from outside of the single currency area demonstrated that the two groups are at opposite extremes. capital flows in european union on the the basis… 171 over the period 2004-11, financial integration in countries using the single currency (ea) was on average twice higher compared to the ceecs (nea). moreover, in the period 1998-2011, both eurozone members and countries outside of the single currency area reported considerable changes in the structure of iip. portfolio investments of countries-members of the monetary union targeting countries from outside of the area were increasing in importance. the crisis which began in 2008 changed the trends in equity – debt relationship. while in the countries outside of the eurozone the share of debt increased, it decreased for monetary union members. fdis represent a substantial proportion of equity. in general terms, the value of iip assets and liabilities increases. negative balance of financial f lows of international investment position to gdp deepened in analysed countries, in particular in the ceecs, which are eu member states outside of the euro area. increasing openness to trade, financial development, financial and trade integration are ref lected in capital movements among countries. we need to stress that between 2000 and 2011 poland got strongly integrated with international market in terms of both financial integration and international integration with respect to equity eqi.  references bilski, j. 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(1871). the theory of political economy, macmillan and co., london. keynes, j.m. (1936). the general theory of employment, interest and money, macmillan cambridge university press, cambridge. iwona maciejczyk-bujnowicz172 lane, p.r., & milesi-ferretti, g.m. (2000). external capital structure: theory and evidence, imf working paper, wp/00/152. lane, p.r., & milesi-ferretti, g.m. (2001). the external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries. http://www. imf.org/external/pubs/cat/longres.cfm?sk&sk=3258.0 (accessed: 10.11.2011). lane, p.r., & milesi-ferretti, g.m. (2003). international financial integration, imf staff papers, vol. 50 special issue, pp. 82-113, washington. lane, p.r., & milesi-ferretti, g.m. (2006). the external wealth of nations mark ii: revised and extended estimates of foreign assets and liabilities, 1970-2004, imf working paper, wp/06/69. http://www.imf.org/external/pubs/ft/wp/2006/data/ wp0669.zip (accessed: 10.11.2011). lucas, r. (1990). why doesn’t capital flow from rich to poor countries. american economic review, no. 80. mundell, r.a. (1968). international economics, the macmillan company, new york. najlepszy, e., & sobański, k. (2010). niestabilność równowagi zewnętrznej krajów rozwijających się, pwe, warsaw. obstfeld, m., & taylor, a. (2002). globalization and capital markets, nber working papers 8846. shin, h.s. (2012). global banking glut and loan risk premium. imf economic review, 60, pp. 155-192. sula, o., & willet, t.d. (2009). the reversibility of different types of capital f lows to emerging markets, emerging market review, 10. www.imf.org (accessed: 14.05.2014, 18.05.2014). www. nbp.pl (accessed: 18.05.2014). www.stat.gov.pl (accessed: 24.04.2014). for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the 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1 date of submission: may 22, 2016; date of acceptance: june 11, 2016. * contact information: nkerdoga@anadolu.edu.tr, anadolu university, faculty of business, department of business administration, eskişehir/turkey, phone: +902223350580 (2543). ** contact information: saltinirmak@anadolu.edu.tr, anadolu university, eskişehir vocational high school, department of finance, eskişehir/turkey, phone: +902223350580 (3138). *** contact information: ckaramasa@anadolu.edu.tr, anadolu university, faculty of business, department of business administration, eskişehir/turkey, phone: +902223350580 (2554). erdoğan n. k., altınırmak s., & karamaşa ç. (2016). comparison of multi criteria decision making (mcdm) methods with respect to performance of food firms listed in bist. copernican journal of finance & accounting, 5(1), 67–90. http://dx.doi.org/10.12775/cjfa.2016.004 namık kemal erdoğan* anadolu university serpil altinirmak** anadolu university çağlar karamaşa*** anadolu university comparison of multi criteria decision making (mcdm) methods with respect to performance of food firms listed in bist keywords: performance analysis, fuzzy ranking, topsis, vikor, electre. j e l classification: c44, d81, l25. abstract: analyzing firms’ performance appropriately is core topic for decision makers working in financial sector under the conditions of imprecise and incomplete innamık kemal erdoğan, serpil altınırmak, çağlar karamaşa68 formation. purpose of this study is to assess firms’ performance by taking financial ratios and financial experts’ into the account. therefore firstly weights of criteria and sub criteria related to financial ratios are obtained by using one of the fuzzy ranking methods namely buckley’s column geometric mean method. following to this firms’ final rankings are determined by means of topsis, vikor and electre methods. also ranking performance of these three methods is interpreted. according to this purpose financial ratios of twenty one food firms listed in bist for four years period (2011–2014) are acquired and analyzed via these methods.  introduction performance can be defined as efficiency in production or effectiveness in service. it is important to determine performance for firms’ future condition. for that reason firms’ performance should be measured. neely et al. (1995) described the performance measurement as determination process of an activity’s efficiency and effectiveness quantity (yüreğir, nakıboğlu 2007). business executives view past decisions’ results and make future investment decisions via financial performance measurement (uyguntürk, korkmaz 2012). financial analysis which can be made by business executives, investors or credit firms is based on establishing relationships between items appeared in financial tables and commenting on this matter. financial ratios show relationships between financial table items mathematically (i̇ç, tekin,pamukoğlu,yıldırım 2015). firms’ strengths and weaknesses in terms of liquidity, growth and profitability can be revealed by financial ratios. firms’ year based changes and sector based performance comparisons are made with the aim of financial ratios (uyguntürk, korkmaz 2012). financial ratios are chosen according to financial sector applications and finance literature. basically financial ratios are classified into four group namely liquidity, financial structure, operating and profitability ratios. firms’ ability to pay short-term debts are determined via liquidity ratios. currency ratio, acid test ratio and cash ratio are included in first group. financial structure ratios are used for determining the firm’s outsourcing level. leverage ratio denoted as total debts/total assets is considered in second group and it is possible to detect the percentage of assets subsidized by debts in case of assets selling (dumanoğlu 2010). operating ratios are used for exhibiting the efficient usage level of firms’ assets. asset turnover ratio denoted as net sales/total assets is considered in third group. profitability ratios are used for measuring the earning power of firms’ after activities fulfilled. ratios namely comparison of multi criteria decision making… 69 net profit/total assets, net profit/capital and net profit/net sales are included in last group. financial ratios used in this study are showed in table 1. table 1. financial ratios financial ratio groups ratios explanation liquidity ratios currency ratio current assets/short term debts acid test ratio (currents assetsstocks)/short term debts cash ratio (liquid assets + securities)/ short term debts financial structure ratios leverage ratio total debts/total assets operating ratios asset turnover ratio net sales/ total assets profitability ratios net profit/total assets net profit/total assets net profit/capital net profit/capital net profit/net sales net profit/net sales s o u r c e : tayyar, akcanlı, genç, eram 2014. purpose of this study is to assess the properties of different multi criteria decision making (mcdm) methods and compare the results of them in terms of food firms’ performance assessment by taking financial ratios and financial experts’ view into the account. for this reason firstly local and global weights of criteria and subcriteria related to financial ratios are obtained by using one of the fuzzy ranking methods namely buckley’s column geometric mean method. following to this firms’ final rankings are determined by means of topsis, vikor and electre methods. data sets for this study are financial ratios of twenty one food firms listed in bist. literature review first financial analysis studies assessed via objective methods were made by altman (1968). altman acquired a discriminant function namely ʺz score model” by using financial ratios. difficulties encountered in data entering and acquiring caused the method based on past years data to be developed. usage of mcdm methods in measuring firms’ financial performance is started to become widespread since 1980s (i̇ç et al. 2015). namık kemal erdoğan, serpil altınırmak, çağlar karamaşa70 feng and wang (2000) examined the performance of five airlines operated in taiwan by means of topsis and concluded the importance of financial indicators on the determination of airlines’ performance. yurdakul and i̇ç (2003) examined the five large scale automobile firm in terms of financial structures and condition in the sector. performance values for each year are compared with securities’ year-end closing prices and results are found as consistent out of 2001. mahmoodzadeh, shahrabi, pariazar and zaeri (2007) determined the preference ranking of different projects by the means of fuzzy ahp, topsis and traditional project evaluation methods such as net present value, rate of return, benefit-cost analysis and payback period. wu, tzeng and chen (2009) proposed a fuzzy mcdm approach in order to evaluate banking performances based on balanced scorecard (bsc). for this purpose twenty three performance evaluation indexes were selected for banking performance of bsc by taking into the expert questionnaires. after that fahp was employed to obtain relative weights of performance evaluation indexes and three mcdm methods (saw, topsis and vikor) were used to rank banking performances. bülbül and köse (2011) evaluated the financial performance of food sector on the basis of company and sector via topsis and electre methods and found consistent results. research methodology ahp, developed by saaty (1980), is a decision making mechanism composed of overall goal, criteria and sub criteria (if there are any), and alternatives. ahp methodology can be used for making decisions where choice, prioritization and forecasting are needed. ahp is based on structuring problem and eliciting properties through pairwise comparisons in decision making process (ishizaka, nemery 2013). by using ahp we can decouple problem into sub problems by evaluating subjectively manner that is transformed into numerical values and ranked on a numerical scale (bhushan, rai 2004). despite these specifications, ahp can not ref lect human thinking style in inaccurate and subjective environment due to unbalanced scale of judgments, inability to adequately handle inherent uncertainty and imprecise pair-wise comparisons. for that reason fuzzy analytic hierarchy process (fahp) extension of traditional ahp was developed to solve hierarchical fuzzy problems in interval judgment matrix (kahraman, cebeci, ulukan 2003). comparison of multi criteria decision making… 71 zadeh (1965) firstly proposed a mathematical theory namely fuzzy set in order to overcome vaguness and imprecise condition of human cognitive processes (jie, meng, cheong 2006). apart from classical set theory based on binary logic fuzzy set describe actual objects similar to human language (huang, ho 2013). a fuzzy set which is extension of crisp one allow partial belonging of element by membership function. membership values of objects in a fuzzy set range from 0 (nonmembership) to 1 (complete membership). values between these boundaries are called intermediate membership degrees and show degree to which an element belongs to a set (ertuğrul, karakaşoğlu 2009). triangular and trapezoidal fuzzy numbers are mostly used in application fields. triangular fuzzy numbers are used in this study due to computational easiness and representation usefulness. membership of triangular fuzzy number is defined by three real numbers expressed as (l,m,u) indicating smallest possible value, the most promising value and the largest possible value respectively (deng 1999). fuzzy set theory allow respondents to explain semantic judgments subjectively (huang, ho 2013). for this reason saaty’s 9 point scale is transformed into the fuzzy ratio scale in terms of triangular fuzzy numbers. ranking fuzzy numbers in imprecise and vagueness environment is one of the essential problems in fuzzy optimization and fuzzy decision making. fuzzy values are ranked according to the different specifications of fuzzy sets namely centre of attraction, area under the membership degree function and some intersection points (chen, hwang, hwang 1992). various fuzzy ranking methods can be used according to the complexity, sensitivity, easily interpretability of existing problem and type of fuzzy numbers (kaptanoğlu, özok 2006). buckley (1985) developed a model to state decision maker’s evaluation on alternatives with respect to each criterion by using triangular fuzzy numbers. steps of buckley’s column geometric mean method are given as follows: 1. establishing hierarchical structure and comparing criteria or alternatives via fuzzy scale for constructing pair-wise comparison matrix shown as below: degrees and show degree to which an element belongs to a set (ertuğrul, karakaşoğlu 2009,704). triangular and trapezoidal fuzzy numbers are mostly used in application fields. triangular fuzzy numbers are used in this study due to computational easiness and representation usefulness. membership of triangular fuzzy number is defined by three real numbers expressed as (l,m,u) indicating smallest possible value, the most promising value and the largest possible value respectively (deng 1999). fuzzy set theory allow respondents to explain semantic judgments subjectively (huang, ho 2013,985). for this reason saaty’s 9 point scale is transformed into the fuzzy ratio scale in terms of triangular fuzzy numbers. ranking fuzzy numbers in imprecise and vagueness environment is one of the essential problems in fuzzy optimization and fuzzy decision making. fuzzy values are ranked according to the different specifications of fuzzy sets namely centre of attraction, area under the membership degree function and some intersection points (chen, hwang, hwang 1992). various fuzzy ranking methods can be used according to the complexity, sensitivity, easily interpretability of existing problem and type of fuzzy numbers (kaptanoğlu, özok 2006,198). buckley (1985) developed a model to state decision maker’s evaluation on alternatives with respect to each criterion by using triangular fuzzy numbers. steps of buckley’s column geometric mean method are given as follows: 1establishing hierarchical structure and comparing criteria or alternatives via fuzzy scale for constructing pair-wise comparison matrix shown as below:               = k mn k 2m k 1m k n2 k 22 k 21 k n1 k 12 k 11 k a~a~a~ a~a~a~ a~a~a~ a ~     (1) 2-preferences of all decision makers are averaged according to eq. (2) and new pairwise comparison matrix is obtained as eq. (3): k a a~ k 1k k ij ij  == (2) (1) namık kemal erdoğan, serpil altınırmak, çağlar karamaşa72 2. preferences of all decision makers are averaged according to eq. (2) and new pairwise comparison matrix is obtained as eq. (3): (2) degrees and show degree to which an element belongs to a set (ertuğrul, karakaşoğlu 2009,704). triangular and trapezoidal fuzzy numbers are mostly used in application fields. triangular fuzzy numbers are used in this study due to computational easiness and representation usefulness. membership of triangular fuzzy number is defined by three real numbers expressed as (l,m,u) indicating smallest possible value, the most promising value and the largest possible value respectively (deng 1999). fuzzy set theory allow respondents to explain semantic judgments subjectively (huang, ho 2013,985). for this reason saaty’s 9 point scale is transformed into the fuzzy ratio scale in terms of triangular fuzzy numbers. ranking fuzzy numbers in imprecise and vagueness environment is one of the essential problems in fuzzy optimization and fuzzy decision making. fuzzy values are ranked according to the different specifications of fuzzy sets namely centre of attraction, area under the membership degree function and some intersection points (chen, hwang, hwang 1992). various fuzzy ranking methods can be used according to the complexity, sensitivity, easily interpretability of existing problem and type of fuzzy numbers (kaptanoğlu, özok 2006,198). buckley (1985) developed a model to state decision maker’s evaluation on alternatives with respect to each criterion by using triangular fuzzy numbers. steps of buckley’s column geometric mean method are given as follows: 1establishing hierarchical structure and comparing criteria or alternatives via fuzzy scale for constructing pair-wise comparison matrix shown as below:               = k mn k 2m k 1m k n2 k 22 k 21 k n1 k 12 k 11 k a~a~a~ a~a~a~ a~a~a~ a ~     (1) 2-preferences of all decision makers are averaged according to eq. (2) and new pairwise comparison matrix is obtained as eq. (3): k a a~ k 1k k ij ij  == (2)               = mn2m1m n22221 n11211 a~a~a~ a~a~a~ a~a~a~ a ~     (3) 3-geometric mean of each criterion is calculated according to eq. (4): n/1 n 1j iji a ~z~       = ∏ = , i=1,2,…,m (4) 4-the fuzzy weights )w~( i of each criterion are obtained by finding vector summation of each iz~ , acquiring (-1) power of summation vector and replacing in an increasing order, and finally multiplying iz~ with reverse vector according to eq. (5): )u,m,l()z~z~z~(z~w~ iii 1 n21ii =⊕⊕⊕⊗= − (5) 5-fuzzy weights composed of fuzzy triangular numbers are transformed into crisp one by using center of area defuzzification techniques shown in eq. (6): 3 uml s iiii ++ = (6) 6-after obtaining crisp weights normalization process is implemented such as eq. (7):  = = m 1i i i i s s t (7) hwang and yoon (1981) assert topsis for analyzing mcdm problems. basis of this technique is to choose alternative having the shortest euclidean distance from positive ideal solution (pis) which maximizes benefit and minimizes cost, and the farthest distance from negative ideal solution (nis) which maximizes cost and minimizes benefit (behzadian, otaghsara,yazdani,ignatius 2012). topsis assumes that each criterion has monotonically increasing or decreasing utility (pohekar, ramachandran 2004,372). this technique aims to maximize or minimize each criterion and pairwise comparisons are abstained. in addition to that it does not include complex algorithms and mathematical models, easy to use, requires less input parameters and produces easily understandable outputs. on the (3) 3. geometric mean of each criterion is calculated according to eq. (4):               = mn2m1m n22221 n11211 a~a~a~ a~a~a~ a~a~a~ a ~     (3) 3-geometric mean of each criterion is calculated according to eq. (4): n/1 n 1j iji a ~z~       = ∏ = , i=1,2,…,m (4) 4-the fuzzy weights )w~( i of each criterion are obtained by finding vector summation of each iz~ , acquiring (-1) power of summation vector and replacing in an increasing order, and finally multiplying iz~ with reverse vector according to eq. (5): )u,m,l()z~z~z~(z~w~ iii 1 n21ii =⊕⊕⊕⊗= − (5) 5-fuzzy weights composed of fuzzy triangular numbers are transformed into crisp one by using center of area defuzzification techniques shown in eq. (6): 3 uml s iiii ++ = (6) 6-after obtaining crisp weights normalization process is implemented such as eq. (7):  = = m 1i i i i s s t (7) hwang and yoon (1981) assert topsis for analyzing mcdm problems. basis of this technique is to choose alternative having the shortest euclidean distance from positive ideal solution (pis) which maximizes benefit and minimizes cost, and the farthest distance from negative ideal solution (nis) which maximizes cost and minimizes benefit (behzadian, otaghsara,yazdani,ignatius 2012). topsis assumes that each criterion has monotonically increasing or decreasing utility (pohekar, ramachandran 2004,372). this technique aims to maximize or minimize each criterion and pairwise comparisons are abstained. in addition to that it does not include complex algorithms and mathematical models, easy to use, requires less input parameters and produces easily understandable outputs. on the (4) 4. the fuzzy weights of each criterion are obtained by finding vector summation of each , acquiring (-1) power of summation vector and replacing in an increasing order, and finally multiplying with reverse vector according to eq. (5):               = mn2m1m n22221 n11211 a~a~a~ a~a~a~ a~a~a~ a ~     (3) 3-geometric mean of each criterion is calculated according to eq. (4): n/1 n 1j iji a ~z~       = ∏ = , i=1,2,…,m (4) 4-the fuzzy weights )w~( i of each criterion are obtained by finding vector summation of each iz~ , acquiring (-1) power of summation vector and replacing in an increasing order, and finally multiplying iz~ with reverse vector according to eq. (5): )u,m,l()z~z~z~(z~w~ iii 1 n21ii =⊕⊕⊕⊗= − (5) 5-fuzzy weights composed of fuzzy triangular numbers are transformed into crisp one by using center of area defuzzification techniques shown in eq. (6): 3 uml s iiii ++ = (6) 6-after obtaining crisp weights normalization process is implemented such as eq. (7):  = = m 1i i i i s s t (7) hwang and yoon (1981) assert topsis for analyzing mcdm problems. basis of this technique is to choose alternative having the shortest euclidean distance from positive ideal solution (pis) which maximizes benefit and minimizes cost, and the farthest distance from negative ideal solution (nis) which maximizes cost and minimizes benefit (behzadian, otaghsara,yazdani,ignatius 2012). topsis assumes that each criterion has monotonically increasing or decreasing utility (pohekar, ramachandran 2004,372). this technique aims to maximize or minimize each criterion and pairwise comparisons are abstained. in addition to that it does not include complex algorithms and mathematical models, easy to use, requires less input parameters and produces easily understandable outputs. on the (5) 5. fuzzy weights composed of fuzzy triangular numbers are transformed into crisp one by using center of area defuzzification techniques shown in eq. (6):               = mn2m1m n22221 n11211 a~a~a~ a~a~a~ a~a~a~ a ~     (3) 3-geometric mean of each criterion is calculated according to eq. (4): n/1 n 1j iji a ~z~       = ∏ = , i=1,2,…,m (4) 4-the fuzzy weights )w~( i of each criterion are obtained by finding vector summation of each iz~ , acquiring (-1) power of summation vector and replacing in an increasing order, and finally multiplying iz~ with reverse vector according to eq. (5): )u,m,l()z~z~z~(z~w~ iii 1 n21ii =⊕⊕⊕⊗= − (5) 5-fuzzy weights composed of fuzzy triangular numbers are transformed into crisp one by using center of area defuzzification techniques shown in eq. (6): 3 uml s iiii ++ = (6) 6-after obtaining crisp weights normalization process is implemented such as eq. (7):  = = m 1i i i i s s t (7) hwang and yoon (1981) assert topsis for analyzing mcdm problems. basis of this technique is to choose alternative having the shortest euclidean distance from positive ideal solution (pis) which maximizes benefit and minimizes cost, and the farthest distance from negative ideal solution (nis) which maximizes cost and minimizes benefit (behzadian, otaghsara,yazdani,ignatius 2012). topsis assumes that each criterion has monotonically increasing or decreasing utility (pohekar, ramachandran 2004,372). this technique aims to maximize or minimize each criterion and pairwise comparisons are abstained. in addition to that it does not include complex algorithms and mathematical models, easy to use, requires less input parameters and produces easily understandable outputs. on the (6) 6. after obtaining crisp weights normalization process is implemented such as eq. (7): comparison of multi criteria decision making… 73               = mn2m1m n22221 n11211 a~a~a~ a~a~a~ a~a~a~ a ~     (3) 3-geometric mean of each criterion is calculated according to eq. (4): n/1 n 1j iji a ~z~       = ∏ = , i=1,2,…,m (4) 4-the fuzzy weights )w~( i of each criterion are obtained by finding vector summation of each iz~ , acquiring (-1) power of summation vector and replacing in an increasing order, and finally multiplying iz~ with reverse vector according to eq. (5): )u,m,l()z~z~z~(z~w~ iii 1 n21ii =⊕⊕⊕⊗= − (5) 5-fuzzy weights composed of fuzzy triangular numbers are transformed into crisp one by using center of area defuzzification techniques shown in eq. (6): 3 uml s iiii ++ = (6) 6-after obtaining crisp weights normalization process is implemented such as eq. (7):  = = m 1i i i i s s t (7) hwang and yoon (1981) assert topsis for analyzing mcdm problems. basis of this technique is to choose alternative having the shortest euclidean distance from positive ideal solution (pis) which maximizes benefit and minimizes cost, and the farthest distance from negative ideal solution (nis) which maximizes cost and minimizes benefit (behzadian, otaghsara,yazdani,ignatius 2012). topsis assumes that each criterion has monotonically increasing or decreasing utility (pohekar, ramachandran 2004,372). this technique aims to maximize or minimize each criterion and pairwise comparisons are abstained. in addition to that it does not include complex algorithms and mathematical models, easy to use, requires less input parameters and produces easily understandable outputs. on the (7) hwang and yoon (1981) assert topsis for analyzing mcdm problems. basis of this technique is to choose alternative having the shortest euclidean distance from positive ideal solution (pis) which maximizes benefit and minimizes cost, and the farthest distance from negative ideal solution (nis) which maximizes cost and minimizes benefit (behzadian, otaghsara,yazdani,ignatius 2012). topsis assumes that each criterion has monotonically increasing or decreasing utility (pohekar, ramachandran 2004). this technique aims to maximize or minimize each criterion and pairwise comparisons are abstained. in addition to that it does not include complex algorithms and mathematical models, easy to use, requires less input parameters and produces easily understandable outputs. on the other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013). structure of topsis are revealed as follows (tsaur 2011): 1. forming decision matrix other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013,62). structure of topsis are revealed as follows (tsaur 2011): 1forming decision matrix ( )nxmij )x(x = for ranking the alternatives.                     = nmnj2n1n imij2i1i m2j22221 m1j11211 xxxx xxxx xxxx xxxx x       (8) 2normalizing decision matrix by  = = m 1i 2 ij ij ij w w r n,,2,1i = m,,2,1j = (9) 3weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. jijij w.rv = n,,2,1i = m,,2,1j = (10) 4determining positive and negative ideal solution as follows : { } ( ) ( ){ }cij i bij i * m * 2 * 1 * jvmin,jvmaxv,,v,vapis ωω ∈∈===  (11) { } ( ) ( ){ }cij i bij i m21 jvmax,jvminv,,v,vanis ωω ∈∈=== −−−−  (12) 5calculating euclidean distance of alternatives from positive and negative ideal solution as follows:  = −= m 1j 2* jij * i )vv(d n,,2,1i = (13) for ranking the alternatives. other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013,62). structure of topsis are revealed as follows (tsaur 2011): 1forming decision matrix ( )nxmij )x(x = for ranking the alternatives.                     = nmnj2n1n imij2i1i m2j22221 m1j11211 xxxx xxxx xxxx xxxx x       (8) 2normalizing decision matrix by  = = m 1i 2 ij ij ij w w r n,,2,1i = m,,2,1j = (9) 3weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. jijij w.rv = n,,2,1i = m,,2,1j = (10) 4determining positive and negative ideal solution as follows : { } ( ) ( ){ }cij i bij i * m * 2 * 1 * jvmin,jvmaxv,,v,vapis ωω ∈∈===  (11) { } ( ) ( ){ }cij i bij i m21 jvmax,jvminv,,v,vanis ωω ∈∈=== −−−−  (12) 5calculating euclidean distance of alternatives from positive and negative ideal solution as follows:  = −= m 1j 2* jij * i )vv(d n,,2,1i = (13) (8) 2. normalizing decision matrix by other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013,62). structure of topsis are revealed as follows (tsaur 2011): 1forming decision matrix ( )nxmij )x(x = for ranking the alternatives.                     = nmnj2n1n imij2i1i m2j22221 m1j11211 xxxx xxxx xxxx xxxx x       (8) 2normalizing decision matrix by  = = m 1i 2 ij ij ij w w r n,,2,1i = m,,2,1j = (9) 3weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. jijij w.rv = n,,2,1i = m,,2,1j = (10) 4determining positive and negative ideal solution as follows : { } ( ) ( ){ }cij i bij i * m * 2 * 1 * jvmin,jvmaxv,,v,vapis ωω ∈∈===  (11) { } ( ) ( ){ }cij i bij i m21 jvmax,jvminv,,v,vanis ωω ∈∈=== −−−−  (12) 5calculating euclidean distance of alternatives from positive and negative ideal solution as follows:  = −= m 1j 2* jij * i )vv(d n,,2,1i = (13) (9) 3. weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. namık kemal erdoğan, serpil altınırmak, çağlar karamaşa74 other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013,62). structure of topsis are revealed as follows (tsaur 2011): 1forming decision matrix ( )nxmij )x(x = for ranking the alternatives.                     = nmnj2n1n imij2i1i m2j22221 m1j11211 xxxx xxxx xxxx xxxx x       (8) 2normalizing decision matrix by  = = m 1i 2 ij ij ij w w r n,,2,1i = m,,2,1j = (9) 3weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. jijij w.rv = n,,2,1i = m,,2,1j = (10) 4determining positive and negative ideal solution as follows : { } ( ) ( ){ }cij i bij i * m * 2 * 1 * jvmin,jvmaxv,,v,vapis ωω ∈∈===  (11) { } ( ) ( ){ }cij i bij i m21 jvmax,jvminv,,v,vanis ωω ∈∈=== −−−−  (12) 5calculating euclidean distance of alternatives from positive and negative ideal solution as follows:  = −= m 1j 2* jij * i )vv(d n,,2,1i = (13) (10) 4. determining positive and negative ideal solution as follows : other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013,62). structure of topsis are revealed as follows (tsaur 2011): 1forming decision matrix ( )nxmij )x(x = for ranking the alternatives.                     = nmnj2n1n imij2i1i m2j22221 m1j11211 xxxx xxxx xxxx xxxx x       (8) 2normalizing decision matrix by  = = m 1i 2 ij ij ij w w r n,,2,1i = m,,2,1j = (9) 3weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. jijij w.rv = n,,2,1i = m,,2,1j = (10) 4determining positive and negative ideal solution as follows : { } ( ) ( ){ }cij i bij i * m * 2 * 1 * jvmin,jvmaxv,,v,vapis ωω ∈∈===  (11) { } ( ) ( ){ }cij i bij i m21 jvmax,jvminv,,v,vanis ωω ∈∈=== −−−−  (12) 5calculating euclidean distance of alternatives from positive and negative ideal solution as follows:  = −= m 1j 2* jij * i )vv(d n,,2,1i = (13) (11) other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013,62). structure of topsis are revealed as follows (tsaur 2011): 1forming decision matrix ( )nxmij )x(x = for ranking the alternatives.                     = nmnj2n1n imij2i1i m2j22221 m1j11211 xxxx xxxx xxxx xxxx x       (8) 2normalizing decision matrix by  = = m 1i 2 ij ij ij w w r n,,2,1i = m,,2,1j = (9) 3weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. jijij w.rv = n,,2,1i = m,,2,1j = (10) 4determining positive and negative ideal solution as follows : { } ( ) ( ){ }cij i bij i * m * 2 * 1 * jvmin,jvmaxv,,v,vapis ωω ∈∈===  (11) { } ( ) ( ){ }cijibijim21 jvmax,jvminv,,v,vanis ωω ∈∈=== −−−−  (12) 5calculating euclidean distance of alternatives from positive and negative ideal solution as follows:  = −= m 1j 2* jij * i )vv(d n,,2,1i = (13) (12) 5. calculating euclidean distance of alternatives from positive and negative ideal solution as follows: other hand it is difficult to weight attributes and keep consistent judgments in case of additional attributes (velasquez, hester 2013,62). structure of topsis are revealed as follows (tsaur 2011): 1forming decision matrix ( )nxmij )x(x = for ranking the alternatives.                     = nmnj2n1n imij2i1i m2j22221 m1j11211 xxxx xxxx xxxx xxxx x       (8) 2normalizing decision matrix by  = = m 1i 2 ij ij ij w w r n,,2,1i = m,,2,1j = (9) 3weighting normalized decision matrix by multiplying normalized decision matrix and its’ weights. jijij w.rv = n,,2,1i = m,,2,1j = (10) 4determining positive and negative ideal solution as follows : { } ( ) ( ){ }cij i bij i * m * 2 * 1 * jvmin,jvmaxv,,v,vapis ωω ∈∈===  (11) { } ( ) ( ){ }cij i bij i m21 jvmax,jvminv,,v,vanis ωω ∈∈=== −−−−  (12) 5calculating euclidean distance of alternatives from positive and negative ideal solution as follows:  = −= m 1j 2* jij * i )vv(d n,,2,1i = (13) (13)  = −− −= m 1j 2 jiji )vv(d n,,2,1i = (14) 6calculating relative closeness ( irc ) of each alternative to ideal solution as below: * ii i i dd d rc + = − − n,,2,1i = [ ]1,0rci ∈ (15) 7ranking alternatives according to their irc values in descending order from 1 to 0 and choosing the highest one. vikor developed by opricovic (1998), is a mcdm based on creating compromised solution by taking alternatives and criteria into the consideration. method is oriented for selecting and ranking alternatives in case of conflicting criteria (büyüközkan, ruan 2008). compromised solution is the closest to ideal one. in other words vikor based on measure of closeness to ideal solution is multi criteria decision ranking index (opricovic, tzeng 2004). in order to obtain solution, closest to ideal one, multi criteria ranking index is generated for alternatives and then compared between the values of closeness to ideal solution (opricovic, tzeng 2007). decision making process of vikor starts with problem definition. by this way aim of problem, alternatives, criteria and sub criteria (if needed) that will be evaluated are determined. alternatives are selected, ranked and compared by utilizing cost or benefit based criteria. in evaluation process all alternatives get related criteria scores. vikor method can be used for solving mcdm problems if following conditions are satisfied: a) compromised solution should be accepted in order to overcome conflict. b) decision maker is willing to accept the closest solution to ideal one. c) a linear relationship between benefit and each criteria function for decision maker. d) alternatives should be evaluated in terms of each criteria. e) preferences of decision makers’ are expressed by weights. f) decision makers are responsible for approving the final solution (ertuğrul, karakaşoğlu 2008). steps of vikor method can be summarized as below: a) best ( *af ) and the worst ( − af ) values for each evaluation criteria are identified. if evaluation criteria (b=1,2,…,n) is based on benefit ; aba * b xmaxf = abab xminf = − (16) (14) 6. calculating relative closeness ( rci ) of each alternative to ideal solution as below:  = −− −= m 1j 2 jiji )vv(d n,,2,1i = (14) 6calculating relative closeness ( irc ) of each alternative to ideal solution as below: * ii i i dd d rc + = − − n,,2,1i = [ ]1,0rci ∈ (15) 7ranking alternatives according to their irc values in descending order from 1 to 0 and choosing the highest one. vikor developed by opricovic (1998), is a mcdm based on creating compromised solution by taking alternatives and criteria into the consideration. method is oriented for selecting and ranking alternatives in case of conflicting criteria (büyüközkan, ruan 2008). compromised solution is the closest to ideal one. in other words vikor based on measure of closeness to ideal solution is multi criteria decision ranking index (opricovic, tzeng 2004). in order to obtain solution, closest to ideal one, multi criteria ranking index is generated for alternatives and then compared between the values of closeness to ideal solution (opricovic, tzeng 2007). decision making process of vikor starts with problem definition. by this way aim of problem, alternatives, criteria and sub criteria (if needed) that will be evaluated are determined. alternatives are selected, ranked and compared by utilizing cost or benefit based criteria. in evaluation process all alternatives get related criteria scores. vikor method can be used for solving mcdm problems if following conditions are satisfied: a) compromised solution should be accepted in order to overcome conflict. b) decision maker is willing to accept the closest solution to ideal one. c) a linear relationship between benefit and each criteria function for decision maker. d) alternatives should be evaluated in terms of each criteria. e) preferences of decision makers’ are expressed by weights. f) decision makers are responsible for approving the final solution (ertuğrul, karakaşoğlu 2008). steps of vikor method can be summarized as below: a) best ( *af ) and the worst ( − af ) values for each evaluation criteria are identified. if evaluation criteria (b=1,2,…,n) is based on benefit ; aba * b xmaxf = abab xminf = − (16) (15) 7. ranking alternatives according to their rci values in descending order from 1 to 0 and choosing the highest one. vikor developed by opricovic (1998), is a mcdm based on creating compromised solution by taking alternatives and criteria into the consideration. method is oriented for selecting and ranking alternatives in case of conf licting criteria (büyüközkan, ruan 2008). compromised solution is the closest to ideal one. in other words vikor based on measure of closeness to ideal solution is multi criteria decision ranking index (opricovic, tzeng 2004). in order to obtain solution, closest to ideal one, multi criteria ranking index is generated for alternatives and then compared between the values of closeness to ideal so comparison of multi criteria decision making… 75 lution (opricovic, tzeng 2007). decision making process of vikor starts with problem definition. by this way aim of problem, alternatives, criteria and sub criteria (if needed) that will be evaluated are determined. alternatives are selected, ranked and compared by utilizing cost or benefit based criteria. in evaluation process all alternatives get related criteria scores. vikor method can be used for solving mcdm problems if following conditions are satisfied: a) compromised solution should be accepted in order to overcome conf lict. b) decision maker is willing to accept the closest solution to ideal one. c) a linear relationship between benefit and each criteria function for decision maker. d) alternatives should be evaluated in terms of each criteria. e) preferences of decision makers’ are expressed by weights. f ) decision makers are responsible for approving the final solution (ertuğrul, karakaşoğlu 2008). steps of vikor method can be summarized as below: a) best  = −− −= m 1j 2 jiji )vv(d n,,2,1i = (14) 6calculating relative closeness ( irc ) of each alternative to ideal solution as below: * ii i i dd d rc + = − − n,,2,1i = [ ]1,0rci ∈ (15) 7ranking alternatives according to their irc values in descending order from 1 to 0 and choosing the highest one. vikor developed by opricovic (1998), is a mcdm based on creating compromised solution by taking alternatives and criteria into the consideration. method is oriented for selecting and ranking alternatives in case of conflicting criteria (büyüközkan, ruan 2008). compromised solution is the closest to ideal one. in other words vikor based on measure of closeness to ideal solution is multi criteria decision ranking index (opricovic, tzeng 2004). in order to obtain solution, closest to ideal one, multi criteria ranking index is generated for alternatives and then compared between the values of closeness to ideal solution (opricovic, tzeng 2007). decision making process of vikor starts with problem definition. by this way aim of problem, alternatives, criteria and sub criteria (if needed) that will be evaluated are determined. alternatives are selected, ranked and compared by utilizing cost or benefit based criteria. in evaluation process all alternatives get related criteria scores. vikor method can be used for solving mcdm problems if following conditions are satisfied: a) compromised solution should be accepted in order to overcome conflict. b) decision maker is willing to accept the closest solution to ideal one. c) a linear relationship between benefit and each criteria function for decision maker. d) alternatives should be evaluated in terms of each criteria. e) preferences of decision makers’ are expressed by weights. f) decision makers are responsible for approving the final solution (ertuğrul, karakaşoğlu 2008). steps of vikor method can be summarized as below: a) best ( *af ) and the worst ( − af ) values for each evaluation criteria are identified. if evaluation criteria (b=1,2,…,n) is based on benefit ; aba * b xmaxf = abab xminf = − (16) and the worst  = −− −= m 1j 2 jiji )vv(d n,,2,1i = (14) 6calculating relative closeness ( irc ) of each alternative to ideal solution as below: * ii i i dd d rc + = − − n,,2,1i = [ ]1,0rci ∈ (15) 7ranking alternatives according to their irc values in descending order from 1 to 0 and choosing the highest one. vikor developed by opricovic (1998), is a mcdm based on creating compromised solution by taking alternatives and criteria into the consideration. method is oriented for selecting and ranking alternatives in case of conflicting criteria (büyüközkan, ruan 2008). compromised solution is the closest to ideal one. in other words vikor based on measure of closeness to ideal solution is multi criteria decision ranking index (opricovic, tzeng 2004). in order to obtain solution, closest to ideal one, multi criteria ranking index is generated for alternatives and then compared between the values of closeness to ideal solution (opricovic, tzeng 2007). decision making process of vikor starts with problem definition. by this way aim of problem, alternatives, criteria and sub criteria (if needed) that will be evaluated are determined. alternatives are selected, ranked and compared by utilizing cost or benefit based criteria. in evaluation process all alternatives get related criteria scores. vikor method can be used for solving mcdm problems if following conditions are satisfied: a) compromised solution should be accepted in order to overcome conflict. b) decision maker is willing to accept the closest solution to ideal one. c) a linear relationship between benefit and each criteria function for decision maker. d) alternatives should be evaluated in terms of each criteria. e) preferences of decision makers’ are expressed by weights. f) decision makers are responsible for approving the final solution (ertuğrul, karakaşoğlu 2008). steps of vikor method can be summarized as below: a) best ( *af ) and the worst ( − af ) values for each evaluation criteria are identified. if evaluation criteria (b=1,2,…,n) is based on benefit ; aba * b xmaxf = abab xminf = − (16) values for each evaluation criteria are identified. if evaluation criteria (b=1,2,…,n) is based on benefit;  = −− −= m 1j 2 jiji )vv(d n,,2,1i = (14) 6calculating relative closeness ( irc ) of each alternative to ideal solution as below: * ii i i dd d rc + = − − n,,2,1i = [ ]1,0rci ∈ (15) 7ranking alternatives according to their irc values in descending order from 1 to 0 and choosing the highest one. vikor developed by opricovic (1998), is a mcdm based on creating compromised solution by taking alternatives and criteria into the consideration. method is oriented for selecting and ranking alternatives in case of conflicting criteria (büyüközkan, ruan 2008). compromised solution is the closest to ideal one. in other words vikor based on measure of closeness to ideal solution is multi criteria decision ranking index (opricovic, tzeng 2004). in order to obtain solution, closest to ideal one, multi criteria ranking index is generated for alternatives and then compared between the values of closeness to ideal solution (opricovic, tzeng 2007). decision making process of vikor starts with problem definition. by this way aim of problem, alternatives, criteria and sub criteria (if needed) that will be evaluated are determined. alternatives are selected, ranked and compared by utilizing cost or benefit based criteria. in evaluation process all alternatives get related criteria scores. vikor method can be used for solving mcdm problems if following conditions are satisfied: a) compromised solution should be accepted in order to overcome conflict. b) decision maker is willing to accept the closest solution to ideal one. c) a linear relationship between benefit and each criteria function for decision maker. d) alternatives should be evaluated in terms of each criteria. e) preferences of decision makers’ are expressed by weights. f) decision makers are responsible for approving the final solution (ertuğrul, karakaşoğlu 2008). steps of vikor method can be summarized as below: a) best ( *af ) and the worst ( − af ) values for each evaluation criteria are identified. if evaluation criteria (b=1,2,…,n) is based on benefit ; aba * b xmaxf = abab xminf = − (16) (16) if evaluation criteria (b=1,2,…,n) is based on cost; if evaluation criteria (b=1,2,…,n) is based on cost; aba * b xminf = abab xmaxf = − (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements ( klx ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 xxxx xxxx xxxx xxxx x       (18) after normalization process normalization matrix (s) consisted of elements ( kls ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 ssss ssss ssss ssss s       −− − = b * b ab * b ab ff xf s (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights ( bw ) and normalized decision matrix elements ( abs ).                     = klkb2k1k alab2a1a l2b22221 l1b11211 tttt tttt tttt tttt t       babab w.st = (20)     if evaluation criteria (b=1,2,…,n) is based on cost; aba * b xminf = abab xmaxf = − (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements ( klx ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 xxxx xxxx xxxx xxxx x       (18) after normalization process normalization matrix (s) consisted of elements ( kls ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 ssss ssss ssss ssss s       −− − = b * b ab * b ab ff xf s (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights ( bw ) and normalized decision matrix elements ( abs ).                     = klkb2k1k alab2a1a l2b22221 l1b11211 tttt tttt tttt tttt t       babab w.st = (20) (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements (xkl) is seen as below; if evaluation criteria (b=1,2,…,n) is based on cost; aba * b xminf = abab xmaxf = − (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements ( klx ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 xxxx xxxx xxxx xxxx x       (18) after normalization process normalization matrix (s) consisted of elements ( kls ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 ssss ssss ssss ssss s       −− − = b * b ab * b ab ff xf s (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights ( bw ) and normalized decision matrix elements ( abs ).                     = klkb2k1k alab2a1a l2b22221 l1b11211 tttt tttt tttt tttt t       babab w.st = (20) (18) namık kemal erdoğan, serpil altınırmak, çağlar karamaşa76 after normalization process normalization matrix (s) consisted of elements (skl) is seen as below; if evaluation criteria (b=1,2,…,n) is based on cost; aba * b xminf = abab xmaxf = − (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements ( klx ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 xxxx xxxx xxxx xxxx x       (18) after normalization process normalization matrix (s) consisted of elements ( kls ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 ssss ssss ssss ssss s       −− − = b * b ab * b ab ff xf s (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights ( bw ) and normalized decision matrix elements ( abs ).                     = klkb2k1k alab2a1a l2b22221 l1b11211 tttt tttt tttt tttt t       babab w.st = (20) if evaluation criteria (b=1,2,…,n) is based on cost; aba * b xminf = abab xmaxf = − (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements ( klx ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 xxxx xxxx xxxx xxxx x       (18) after normalization process normalization matrix (s) consisted of elements ( kls ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 ssss ssss ssss ssss s       −− − = b * b ab * b ab ff xf s (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights ( bw ) and normalized decision matrix elements ( abs ).                     = klkb2k1k alab2a1a l2b22221 l1b11211 tttt tttt tttt tttt t       babab w.st = (20) (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights (wb) and normalized decision matrix elements (sab). if evaluation criteria (b=1,2,…,n) is based on cost; aba * b xminf = abab xmaxf = − (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements ( klx ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 xxxx xxxx xxxx xxxx x       (18) after normalization process normalization matrix (s) consisted of elements ( kls ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 ssss ssss ssss ssss s       −− − = b * b ab * b ab ff xf s (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights ( bw ) and normalized decision matrix elements ( abs ).                     = klkb2k1k alab2a1a l2b22221 l1b11211 tttt tttt tttt tttt t       babab w.st = (20) if evaluation criteria (b=1,2,…,n) is based on cost; aba * b xminf = abab xmaxf = − (17) b) in order to make comparisons normalization process is used and by this way normalization matrix is obtained. in normalization process decision matrix (x) composed of k criteria and l alternatives transformed into normalization matrix (s) with same dimensions. before normalization decision matrix (x) consisted of elements ( klx ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 xxxx xxxx xxxx xxxx x       (18) after normalization process normalization matrix (s) consisted of elements ( kls ) is seen as below;                     = klkb2k1k alab2a1a l2b22221 l1b11211 ssss ssss ssss ssss s       −− − = b * b ab * b ab ff xf s (19) c) weighted normalized decision matrix (t) is obtained by multiplying criteria weights ( bw ) and normalized decision matrix elements ( abs ).                     = klkb2k1k alab2a1a l2b22221 l1b11211 tttt tttt tttt tttt t       babab w.st = (20) (20) d) values of sa (mean group score) and ra (worst group score) are calculated for each alternative. d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) (21) e) value of qa is calculated for each alternative. values of d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) are used to acquire the value of qa. additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). comparison of multi criteria decision making… 77 d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) (22) d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) f ) values of sa, ra and qa are ranked from lower to higher and alternative having minimum qa value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to qa values first (q(c1)) and second alternative (q(c2)) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) d) values of as (mean group score) and ar (worst group score) are calculated for each alternative.  = −− − = l 1b b * b ab * b ba ff xf ws       − − = − b * b ab * b bba ff xf wmaxr (21) e) value of aq is calculated for each alternative. values of −− r,r,s,s ** are used to acquire the value of aq . additionally y parameter showing maximum group benefit states the weight of alternative providing maximum group benefit. on the contrary (1-y) parameter refers to weight of minimum regret. compromise is reached by majority (y>0.5), consensus (y=0.5) or veto (y<0.5) (opricovic, tzeng 2007). generally y=0.5 is used (lixin, ying, zhiguang 2008). aa * smins = aa smaxs = − * * a * * a a rr rr )y1( ss ss yq − − −+ − − = −− (22) aa * rminr = aa rmaxr = − f) values of as , ar and aq are ranked from lower to higher and alternative having minimum aq value is controlled by two conditions whether ranking is accurate. these conditions are named acceptable advantage and acceptable stability. acceptable advantage condition: according to aq values first (q( 1c )) and second alternative (q( 2c )) satisfied significant difference. calculated threshold value (dq) depend on alternative number. if the number of alternative is lower than 4 the value of dq equals to 0.25 (chen, wang 2009). dq)c(q)c(q 21 ≥− 1k 1 dq − = (23) (23) acceptable stability condition: according to qa values first alternative (q(c1)) should get the best score at least one for values of s and r. unless these two conditions are not satisfied compromised solution set is formed by two ways: 1. if second condition is not satisfied first and second alternatives are accepted as compromised solution. 2. if first condition is not satisfied c1, c2, …, ck alternatives are contained in compromised solution set according to q (ck) – q (c1) ≥ dq (opricovic, tzeng 2004). electre, which was asserted by roy (1965), is based on outranking relations between alternatives in terms of criteria by using satisfaction and dissatisfaction measures namely concordance and discordance indexes. decision makers can select the best alternative via incorporating and weighting criteria in this method (sevkli 2010). in order to solve decision problems more than namık kemal erdoğan, serpil altınırmak, çağlar karamaşa78 two criteria electre methods can be preferred to other ones if at least one of these conditions is satisfied: a) performances of criteria are expressed stated in different units and decision maker does not want to use complex and difficult common scale. b) the problem does not tolerate a compensation effect. c) if there is requirement to use indifference and preference thresholds such that sum of small differences is decisive apart from insignificant small differences. d) if alternatives are weak interval or any order scale in which it is difficult to compare differences (ishizaka, nemery 2013). electre allows decision makers to avoid compensation and between criteria and any normalization process that can distort original data, also uncertain conditions are being considered. on the other hand these methods require difficult technical parameters which are not easily understandable (ishizaka, nemery 2013). different versions of electre (ii, iii, iv etc.) can be used according to the decision problem type. steps of electre can be summarized as follows (yoon, hwang 1995): 1. forming decision matrix acceptable stability condition: according to aq values first alternative (q( 1c )) should get the best score at least one for values of s and r. unless these two conditions are not satisfied compromised solution set is formed by two ways: 1-if second condition is not satisfied first and second alternatives are accepted as compromised solution. 2if first condition is not satisfied k21 c,,c,c  alternatives are contained in compromised solution set according to dq)c(q)c(q 1k ≥− (opricovic, tzeng 2004). electre, which was asserted by roy (1965), is based on outranking relations between alternatives in terms of criteria by using satisfaction and dissatisfaction measures namely concordance and discordance indexes. decision makers can select the best alternative via incorporating and weighting criteria in this method (sevkli 2010,3396). in order to solve decision problems more than two criteria electre methods can be preferred to other ones if at least one of these conditions is satisfied: a) performances of criteria are expressed stated in different units and decision maker does not want to use complex and difficult common scale. b) the problem does not tolerate a compensation effect. c) if there is requirement to use indifference and preference thresholds such that sum of small differences is decisive apart from insignificant small differences. d) if alternatives are weak interval or any order scale in which it is difficult to compare differences (ishizaka, nemery 2013, 181). electre allows decision makers to avoid compensation and between criteria and any normalization process that can distort original data, also uncertain conditions are being considered. on the other hand these methods require difficult technical parameters which are not easily understandable (ishizaka, nemery 2013,180-182). different versions of electre (ii, iii, iv etc.) can be used according to the decision problem type. steps of electre can be summarized as follows (yoon, hwang 1995): 1forming decision matrix ( )mxnij)a(a = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria. for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 aaaa aaaa aaaa aaaa a       (24) 2forming normalized decision matrix ( )mxnij)x(x = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 xxxx xxxx xxxx xxxx x       (25)  = = m 1i 2 ij ij ij a a x for maximization objective (26)  =         = m 1i 2 ij ij ij a 1 a 1 x for minimization objective (27) 3calculating weighted normalized decision matrix ( )mxnij)v(v = via multiplying weight of criterion ( jw ) by elements of normalized decision matrix ( ijx ). ijjij x.wv = (28) 4determining concordance and discordance sets for each pair of alternatives pa and qa (p,q = 1,2, …, m and qp ≠ ) in case of searched alternatives not being the best one for (24) 2. forming normalized decision matrix                     = mnmj2m1m inij2i1i n2j22221 n1j11211 aaaa aaaa aaaa aaaa a       (24) 2forming normalized decision matrix ( )mxnij)x(x = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 xxxx xxxx xxxx xxxx x       (25)  = = m 1i 2 ij ij ij a a x for maximization objective (26)  =         = m 1i 2 ij ij ij a 1 a 1 x for minimization objective (27) 3calculating weighted normalized decision matrix ( )mxnij)v(v = via multiplying weight of criterion ( jw ) by elements of normalized decision matrix ( ijx ). ijjij x.wv = (28) 4determining concordance and discordance sets for each pair of alternatives pa and qa (p,q = 1,2, …, m and qp ≠ ) in case of searched alternatives not being the best one for for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 aaaa aaaa aaaa aaaa a       (24) 2forming normalized decision matrix ( )mxnij)x(x = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 xxxx xxxx xxxx xxxx x       (25)  = = m 1i 2 ij ij ij a a x for maximization objective (26)  =         = m 1i 2 ij ij ij a 1 a 1 x for minimization objective (27) 3calculating weighted normalized decision matrix ( )mxnij)v(v = via multiplying weight of criterion ( jw ) by elements of normalized decision matrix ( ijx ). ijjij x.wv = (28) 4determining concordance and discordance sets for each pair of alternatives pa and qa (p,q = 1,2, …, m and qp ≠ ) in case of searched alternatives not being the best one for (25) comparison of multi criteria decision making… 79                     = mnmj2m1m inij2i1i n2j22221 n1j11211 aaaa aaaa aaaa aaaa a       (24) 2forming normalized decision matrix ( )mxnij)x(x = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 xxxx xxxx xxxx xxxx x       (25)  = = m 1i 2 ij ij ij a a x for maximization objective (26)  =         = m 1i 2 ij ij ij a 1 a 1 x for minimization objective (27) 3calculating weighted normalized decision matrix ( )mxnij)v(v = via multiplying weight of criterion ( jw ) by elements of normalized decision matrix ( ijx ). ijjij x.wv = (28) 4determining concordance and discordance sets for each pair of alternatives pa and qa (p,q = 1,2, …, m and qp ≠ ) in case of searched alternatives not being the best one for for maximization objective (26)                     = mnmj2m1m inij2i1i n2j22221 n1j11211 aaaa aaaa aaaa aaaa a       (24) 2forming normalized decision matrix ( )mxnij)x(x = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 xxxx xxxx xxxx xxxx x       (25)  = = m 1i 2 ij ij ij a a x for maximization objective (26)  =         = m 1i 2 ij ij ij a 1 a 1 x for minimization objective (27) 3calculating weighted normalized decision matrix ( )mxnij)v(v = via multiplying weight of criterion ( jw ) by elements of normalized decision matrix ( ijx ). ijjij x.wv = (28) 4determining concordance and discordance sets for each pair of alternatives pa and qa (p,q = 1,2, …, m and qp ≠ ) in case of searched alternatives not being the best one for for minimization objective (27) 3. calculating weighted normalized decision matrix                     = mnmj2m1m inij2i1i n2j22221 n1j11211 aaaa aaaa aaaa aaaa a       (24) 2forming normalized decision matrix ( )mxnij)x(x = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 xxxx xxxx xxxx xxxx x       (25)  = = m 1i 2 ij ij ij a a x for maximization objective (26)  =         = m 1i 2 ij ij ij a 1 a 1 x for minimization objective (27) 3calculating weighted normalized decision matrix ( )mxnij)v(v = via multiplying weight of criterion ( jw ) by elements of normalized decision matrix ( ijx ). ijjij x.wv = (28) 4determining concordance and discordance sets for each pair of alternatives pa and qa (p,q = 1,2, …, m and qp ≠ ) in case of searched alternatives not being the best one for via multiplying weight of criterion (wj) by elements of normalized decision matrix (xij).                     = mnmj2m1m inij2i1i n2j22221 n1j11211 aaaa aaaa aaaa aaaa a       (24) 2forming normalized decision matrix ( )mxnij)x(x = for m (i=1,2, …, m) alternatives and n (j=1,2, …,n) criteria.                     = mnmj2m1m inij2i1i n2j22221 n1j11211 xxxx xxxx xxxx xxxx x       (25)  = = m 1i 2 ij ij ij a a x for maximization objective (26)  =         = m 1i 2 ij ij ij a 1 a 1 x for minimization objective (27) 3calculating weighted normalized decision matrix ( )mxnij)v(v = via multiplying weight of criterion ( jw ) by elements of normalized decision matrix ( ijx ). ijjij x.wv = (28) 4determining concordance and discordance sets for each pair of alternatives pa and qa (p,q = 1,2, …, m and qp ≠ ) in case of searched alternatives not being the best one for (28) 4. determining concordance and discordance sets for each pair of alternatives ap and ap (p,q = 1,2, …, m and p ≠ q) in case of searched alternatives not being the best one for all criteria. if alternative ap is preferred to alternative aq for all criteria concordance set (c(p,q)) , collection of criteria where ap is better than or equal to aq, is formed as below: all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. (29) on the other hand if alternative ap is worse than aq for all criteria discordance set (d(p,q)), collection ap of criteria for which is worse than aq, is formed as below: all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. (30) according to the above formulations vpj is defined as the weighted normalized rating of alternative ap with regard to jth criterion and vqj is defined as the weighted normalized rating of alternative aq with respect to jth criterion. 5. calculating the concordance (cp,q) and discordance (dp,q) indexes shown as follows: all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. (31) namık kemal erdoğan, serpil altınırmak, çağlar karamaşa80 according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by j*. all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by j+ 6. relationships between alternatives are outranked by computing the averages of cpg and dpg that is represented by all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. and all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. respectively. according to this method alternative of ap outrank the alternative of aq if and only all criteria. if alternative pa is preferred to alternative qa for all criteria concordance set (c(p,q)) , collection of criteria where pa is better than or equal to qa , is formed as below: c(p,q) = { }qjpj vvj ≥ (29) on the other hand if alternative pa is worse than qa for all criteria discordance set (d(p,q)), collection of criteria for which pa is worse than qa , is formed as below: d(p,q) = { }qjpj vvj < (30) according to the above formulations pjv is defined as the weighted normalized rating of alternative pa with regard to jth criterion and qjv is defined as the weighted normalized rating of alternative qa with respect to jth criterion. 5 calculating the concordance ( pqc ) and discordance ( pqd ) indexes shown as follows: = * * j jpq wc (31) according to eq. (31) criteria involved in concordance set (c(p,q)) are represented by *j .   − − = +++ qjpjj qjpjj pq vv vv d (32) according to eq. (32) criteria involved in discordance set (d(p,q)) are represented by +j 6-relationships between alternatives are outranked by computing the averages of pqc and pqd that is represented by c and d respectively. according to this method alternative of pa outrank the alternative of qa if and only ccpq ≥ and ddpq ≤ conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. conditions are satisfied. by the way it should be control whether alternatives selected via this method comprise kernel. 7. net concordance (cp) and discordance (dp) indexes, that are shown as below, are calculated. the ultimate ranking is obtained according to ordering cp values from higher to lower and dp values from lower to higher. 7-net concordance ( pc ) and discordance ( pd ) indexes, that are shown as below, are calculated. the ultimate ranking is obtained according to ordering pc values from higher to lower and pd values from lower to higher.   = = −= m 1k m 1k kppkp ccc pk ≠ (33)   = = −= m 1k m 1k kppkp ddd pk ≠ (34) results of research purpose of this study is to assess the properties of different mcdm methods and compare the results of them in terms of evaluating the performance of 21 food firms listed in bist by the help of financial ratios composing 5 year data set. for this purpose firstly financial ratios of each food firm listed in bist are calculated. eight financial ratios namely currency, acid test, cash, leverage, asset turnover, net profit/total assets, net profit/capital and net profit/net sales are considered. then a survey evaluating the financial ratios was designed and applied for determining the weights of criteria and sub criteria. survey was based on saaty’s 9 point scale in order to weigh criteria and sub-criteria by pairwise comparisons in multilevel hierarchical structures. while defining the criteria and sub criteria, first of all, researchers made a depth literature review in order to develop the draft of the scale. 21 food companies listed in bist are taken into the consideration as alternatives. content validity is ensured by consulting to the experts’ opinion (especially academicians’ from finance field). after these procedures have been completed, data collection process started. participants were selected from financial experts operated in universities, public and private sector. participants were asked to compare four main criteria with respect to goal and all sub criteria within each main criteria on a pair-wise basis to determine their relative importance. as a result, 18 complete surveys were collected and analyzed. weights of the criteria and sub criteria were acquired from the survey by using buckley’s column geometric mean approach, one of the fuzzy ranking methods. according to the results of buckley’s column geometric mean approach weights of ratios are given in table 2. for all comparisons including criteria and sub criteria consistency ratios are under the 0.1 threshold level so comparisons made were consistent. (33) 7-net concordance ( pc ) and discordance ( pd ) indexes, that are shown as below, are calculated. the ultimate ranking is obtained according to ordering pc values from higher to lower and pd values from lower to higher.   = = −= m 1k m 1k kppkp ccc pk ≠ (33)   = = −= m 1k m 1k kppkp ddd pk ≠ (34) results of research purpose of this study is to assess the properties of different mcdm methods and compare the results of them in terms of evaluating the performance of 21 food firms listed in bist by the help of financial ratios composing 5 year data set. for this purpose firstly financial ratios of each food firm listed in bist are calculated. eight financial ratios namely currency, acid test, cash, leverage, asset turnover, net profit/total assets, net profit/capital and net profit/net sales are considered. then a survey evaluating the financial ratios was designed and applied for determining the weights of criteria and sub criteria. survey was based on saaty’s 9 point scale in order to weigh criteria and sub-criteria by pairwise comparisons in multilevel hierarchical structures. while defining the criteria and sub criteria, first of all, researchers made a depth literature review in order to develop the draft of the scale. 21 food companies listed in bist are taken into the consideration as alternatives. content validity is ensured by consulting to the experts’ opinion (especially academicians’ from finance field). after these procedures have been completed, data collection process started. participants were selected from financial experts operated in universities, public and private sector. participants were asked to compare four main criteria with respect to goal and all sub criteria within each main criteria on a pair-wise basis to determine their relative importance. as a result, 18 complete surveys were collected and analyzed. weights of the criteria and sub criteria were acquired from the survey by using buckley’s column geometric mean approach, one of the fuzzy ranking methods. according to the results of buckley’s column geometric mean approach weights of ratios are given in table 2. for all comparisons including criteria and sub criteria consistency ratios are under the 0.1 threshold level so comparisons made were consistent. (34) results of research purpose of this study is to assess the properties of different mcdm methods and compare the results of them in terms of evaluating the performance of 21 food firms listed in bist by the help of financial ratios composing 5 year data set. for this purpose firstly financial ratios of each food firm listed in bist are calculated. eight financial ratios namely currency, acid test, cash, leverage, asset turnover, net profit/total assets, net profit/capital and net profit/net sales are considered. then a survey evaluating the financial ratios was designed and applied for determining the weights of criteria and sub criteria. survey was based comparison of multi criteria decision making… 81 on saaty’s 9 point scale in order to weigh criteria and sub-criteria by pairwise comparisons in multilevel hierarchical structures. while defining the criteria and sub criteria, first of all, researchers made a depth literature review in order to develop the draft of the scale. 21 food companies listed in bist are taken into the consideration as alternatives. content validity is ensured by consulting to the experts’ opinion (especially academicians’ from finance field). after these procedures have been completed, data collection process started. participants were selected from financial experts operated in universities, public and private sector. participants were asked to compare four main criteria with respect to goal and all sub criteria within each main criteria on a pair-wise basis to determine their relative importance. as a result, 18 complete surveys were collected and analyzed. weights of the criteria and sub criteria were acquired from the survey by using buckley’s column geometric mean approach, one of the fuzzy ranking methods. according to the results of buckley’s column geometric mean approach weights of ratios are given in table 2. for all comparisons including criteria and sub criteria consistency ratios are under the 0.1 threshold level so comparisons made were consistent. after the weights of criteria and sub criteria are determined, criteria related values of 21 food firms listed in bist within the period of 2011–2014 are obtained from firms’ websites. for ranking firms via topsis, vikor and electre methodology excel 2013 software is used. table 2. weights of ratios ratios weights currency ratio 0.215436 acid test ratio 0.178542 cash ratio 0.077954 leverage ratio 0.270593 asset turnover ratio 0.136721 net profit / total assets 0.059624 net profit / capital 0.04073 net profit / net sales 0.020401 s o u r c e : own study. namık kemal erdoğan, serpil altınırmak, çağlar karamaşa82 according to the importance level of financial ratios leverage ratio was found as the most important criteria having the value of 0.270593. on the other hand ratio of net profit/net sales was obtained as the least important one having the value of 0.020401. values of each alternative and their rankings within the period of 2011–2014 are obtained via topsis methodology and shown in table 3. table 3. rci values and rankings of food firms according to descending order firms 2011 2012 2013 2014 rci rank rci rank rci rank rci rank kervt 0.50989 16 0.507408 18 0.379014 19 0.440693 18 oylum 0.534831 12 0.559625 7 0.452843 14 0.501208 14 etilr 0.605787 4 0.610882 4 0.541313 2 0.5427 8 tactr 0.537611 10 0.519595 15 0.447172 15 0.501864 13 tatgd 0.550522 7 0.545988 11 0.474083 9 0.565973 5 tkuru 0.491717 20 0.818974 1 0.70315 1 0.623132 3 tukas 0.502964 18 0.662827 2 0.416609 18 0.500321 15 ulker 0.538916 9 0.621493 3 0.514934 4 0.729944 1 vangd 0.54707 8 0.534708 12 0.493462 5 0.563026 6 yaprk 0.61134 3 0.577484 5 0.493337 6 0.536027 9 dardl 0.13309 21 0.164859 21 0.299255 20 0.23304 21 avod 0.576703 6 0.497203 19 0.470988 11 0.527845 10 pengd 0.5056 17 0.525511 14 0.456942 12 0.506234 12 mrtgg 0.49905 19 0.568888 6 0.45329 13 0.394608 20 mango 0.53469 13 0.518172 16 0.42858 17 0.412764 19 merko 0.576858 5 0.558215 8 0.444587 16 0.55126 7 alyag 0.520311 15 0.546026 10 0.484433 7 0.521477 11 artog 0.613169 2 0.466867 20 0.515367 3 0.595072 4 frigo 0.521809 14 0.516894 17 0.47542 8 0.488383 16 krsan 0.816341 1 0.525812 13 0.473192 10 0.465774 17 kent 0.536358 11 0.555004 9 0.241906 21 0.623391 2 s o u r c e : own study. comparison of multi criteria decision making… 83 according to the firms’ ranking related to rci values krsan, artog and yaprk place top three position for 2011 respectively. on the contrary dardl, tkuru and mrtgg place the last three position for 2011 respectively. while tkuru, tukas and ulker perform as the top three food firms, dardl, ar tog and avod place the last three position for 2012. top three food firms in the context of financial performance are ranked as tkuru, etilr and artog in 2013. this condition is valid for kent, dardl and kervt as the last three food firms for 2013. lastly while ulker, kent and tkuru perform as the top three food firms, dardl, mrtgg and mango place the last three position for 2014. some inconsistent outputs can be seen after applying the topsis method. firstly while tkuru places the 20th position in 2011 , it places the top three position in the range of 2012–2014. similarly artog places the top four position apart from the year of 2012. other food firms suffered from the inconsistent results can be stated as krsan, tukas, merko and kent respectively. by applying vikor methodology in order to obtain values of each alternative consensus condition is considered and thus parameter (q) showing maximum group benefit is used as 0.5. ranking of food firms in ascending order after acquiring values within the period of 2011–2014 are shown in table 4. table 4. qa values (q=0.5) and rankings of food firms according to ascending order firms 2011 2012 2013 2014 qa rank qa rank qa rank qa rank kervt 0.531843 17 0.465892 14 0.71143 20 0.56407 17 oylum 0.522189 14 0.418068 10 0.607527 17 0.513941 16 etilr 0.294855 2 0.220251 3 0.267991 2 0.353355 7 tactr 0.489162 12 0.566464 20 0.671333 18 0.501523 15 tatgd 0.392574 6 0.417605 9 0.458707 7 0.293031 5 tkuru 0.629968 20 0 1 0 1 0.134067 2 tukas 0.613671 19 0.242336 4 0.547523 13 0.46239 12 ulker 0.460664 8 0.192898 2 0.427773 5 0 1 vangd 0.468493 10 0.51642 17 0.468869 9 0.29777 6 yaprk 0.332044 4 0.400186 8 0.442589 6 0.424966 10 dardl 1 21 1 21 1 21 1 21 avod 0.331932 3 0.529098 19 0.485923 11 0.415338 9 namık kemal erdoğan, serpil altınırmak, çağlar karamaşa84 firms 2011 2012 2013 2014 qa rank qa rank qa rank qa rank pengd 0.556397 18 0.491269 15 0.505888 12 0.456352 11 mrtgg 0.384604 5 0.396928 7 0.581811 15 0.656866 19 mango 0.464058 9 0.464351 13 0.582109 16 0.644862 18 merko 0.442859 7 0.463016 12 0.576545 14 0.359542 8 alyag 0.508062 13 0.429859 11 0.484551 10 0.480045 13 artog 0.529193 15 0.31 5 0.339673 3 0.228217 4 frigo 0.5304 16 0.509877 16 0.419432 4 0.490496 14 krsan 0 1 0.519108 18 0.461385 8 0.664285 20 kent 0.481138 11 0.382463 6 0.693706 19 0.192878 3 s o u r c e : own study. acceptable advantage and acceptable stability conditions are satisfied for four years period (2011–2014). according to the acceptable advantage condition difference between first and second alternative having qa values are greater than or equal the threshold value (dq = 0.05 for k=21). however according to qa values first alternative get the best score for values of both sa and ra, thus acceptable stability condition is satisfied. in terms of firms’ ranking related to qa values krsan, etilr and avod place the top three position for 2011 respectively. on the contrary dardl, tkuru and tukas place the last three position for 2011 respectively. while tkuru, ulker and etilr perform as the top three food firms , dardl, tactr and avod place the last three position for 2012. top three food firms in the context of financial performance are ranked as tkuru, etilr and artog in 2013. this condition is valid for dardl , kervt and kent as the last three food firms for 2013. lastly while ulker, tkuru and kent perform as the top three food firms, dardl, krsan and mrtgg place the last three position for 2014. avod, tkuru, tukas, artog, krsan and kent are suffered from inconsistent results in the range of 2011–2014 after applying the vikor method. cp values of each alternative and their rankings within the range of 2011–2014 are obtained via electre methodology and shown in table 5. comparison of multi criteria decision making… 85 table 5. values and rankings of food firms according to descending order firms 2011 2012 2013 2014 rank rank rank rank kervt -5.05132 16 -3.74191 14 -9.79619 19 -8.49069 18 oylum 4.066299 6 2.892397 9 -6.53089 17 -3.76751 15 etilr 9.312276 3 8.829443 3 12.0526 2 6.23837 6 tactr 2.833143 10 -9.21342 20 -7.81541 18 -0.47822 12 tatgd 3.612507 8 -1.30122 12 4.990307 8 5.991833 7 tkuru -11.9987 20 11.41063 2 8.840116 3 5.630924 8 tukas -9.52866 18 0.739631 11 -5.77915 16 -2.30874 14 ulker 3.275375 9 15.25167 1 6.124375 5 6.323224 5 vangd 1.500985 11 -3.46261 13 5.315509 7 8.387681 3 yaprk 9.50529 2 6.377541 4 8.801153 4 6.575883 4 dardl -12.0556 21 -12.3511 21 -10.2635 20 -11.9765 19 avod 10.02192 1 -7.41517 18 0.272479 11 4.912043 9 pengd -9.87913 19 -7.25223 17 -2.96534 12 -0.74082 13 mrtgg -1.17844 14 4.135935 7 -3.23204 13 -15.571 21 mango 4.783295 5 -5.55873 16 -11.3389 21 -15.2416 20 merko 4.983163 4 4.181412 6 -5.49547 15 3.600398 10 alyag -5.26583 17 2.052266 10 5.73018 6 1.877797 11 artog -0.05753 13 4.457873 5 12.18496 1 8.963694 2 frigo -3.20064 15 -8.07618 19 1.343427 10 -4.0936 16 krsan 3.704686 7 -5.045 15 1.376178 9 -8.17546 17 kent 0.616886 12 3.088766 8 -3.81432 14 12.34223 1 s o u r c e : own study. in terms of firms’ ranking related to cp values avod, yaprk and etilr place the top three position for 2011 respectively. on the contrary dardl, tk uru and pengd place the last three position for 2011 respectively. while ulker, tkuru and etilr perform as the top three food firms, dardl, tactr and frigo place the last three position for 2012. top three food firms in the context of financial performance are ranked as artog, etilr and tkuru in 2013. this namık kemal erdoğan, serpil altınırmak, çağlar karamaşa86 condition is valid for mango, dardl and kervt as the last three food firms for 2013. lastly while kent, artog and vangd perform as the top three food firms, mrtgg, mango and dardl place the last three position for 2014. avod, tkuru, mrtgg, artog, krsan and kent are suffered from inconsistent results within the context of values. values of each alternative and their rankings within the range of 2011–2014 are obtained via electre methodology and shown in table 6. table 6. values and rankings of food firms according to ascending order firms 2011 2012 2013 2014 rank rank rank rank kervt 5.360736 15 3.98808 13 15.28188 21 11.06791 19 oylum 2.567986 13 1.38132 11 9.524144 18 5.549148 15 etilr -12.0205 3 -8.84642 3 -16.2675 1 -6.17664 7 tactr 3.148746 14 12.90877 21 10.95399 19 4.896926 13 tatgd -0.87463 12 0.46839 10 -3.09132 8 -5.6017 8 tkuru 17.76129 21 -15.8779 2 -15.5655 2 -9.97883 5 tukas 13.7527 20 -8.21683 4 8.663544 17 5.547872 14 ulker -5.87499 7 -16.9419 1 -8.48023 5 -13.2718 1 vangd -12.8804 2 5.598404 14 -4.95088 6 -12.71178 3 yaprk -10.4432 4 -6.00319 7 -10.6987 4 -5.24372 9 dardl 13.05345 19 8.289244 16 -4.05861 7 8.470648 17 avod -7.35979 6 6.77209 15 -1.01224 9 -3.01106 10 pengd 13.0032 18 8.32757 17 6.5413 15 4.39811 12 mrtgg -2.4648 9 -5.44243 8 4.342252 14 17.82071 20 mango -4.91216 8 10.00535 19 15.138124 20 18.450842 21 merko -9.02815 5 -7.44385 6 7.129846 16 -8.13742 6 alyag -1.88785 10 2.200656 12 2.620903 12 -1.81698 11 artog 9.226474 17 -7.88178 5 -11.91262 3 -12.18899 4 frigo 7.19831 16 9.184832 18 -0.426548 10 5.773014 16 krsan -16.0763 1 12.14587 20 0.744134 11 9.126434 18 kent -1.25014 11 -4.61621 9 3.064286 13 -12.96266 2 s o u r c e : own study. comparison of multi criteria decision making… 87 in terms of firms’ ranking related to dp values krsan, vangd and etilr place the top three position for 2011 respectively. on the contrary tkuru, tu kas and dardl place the last three position for 2011 respectively. while ulker, tkuru and etilr perform as the top three food firms tactr, krsan and mango place the last three position for 2012. top three food firms in the context of financial performance are ranked as etilr, tkuru and artog in 2013. this condition is valid for kervt, mango and tactr as the last three food firms for 2013. lastly while ulker, kent and vangd perform as the top three food firms, mango, mrtgg and kervt place the last three position for 2014. tukas, tkuru, merko, artog, krsan, dardl, vangd and kent are suffered from inconsistent results within the context of dp values. according to the results of three methods while yaprk and etilr place the top five position, pengd, tukas, tkuru and dardl perform as the last five food firms in 2011. however, krsan perform the best financial performance and places the top position in 2011 with regard to rci, qa, and dp values. that is true for avod in the context of cp values. apart from that while artog places the top five position according to the values, it places the last five one considering dp values. tkuru, ulker and etilr place in the top five position for all ranking methods in 2012. but all ranking methods are not agree with firms placing in the last five position for 2012. while tkuru, ulker, artog and etilr perform as the top five food firms in 2013, this condition is valid for kervt placing as the last five food firms according to all ranking methods with regard to rci, qa, cp and dp values. lastly common firms placing in the top five position for all ranking methods are stated as ulker, kent and artog in 2014. mrtgg, mango, kervt, dardl and krsan are common firms placing in the last five position with respect to rci, qa, cp and dp values in 2014. recommendations and future research in this study performances of twenty one food firms listed in bist are analyzed in the context of different financial ratios and ranked via different mcdm methods namely topsis, vikor and electre within the period of 2011–2014. for this purpose weights of financial ratios are obtained by using buckley’s column geometric mean approach, one of the fuzzy ranking methods. there is not enough study based on comparing the performances of food firms listed in bist via fuzzy ranking integrated mcdm methods. ultimately all of mcdm namık kemal erdoğan, serpil altınırmak, çağlar karamaşa88 methods which are based on weighted financial ratios give the similar ranking results by years. for further researches it is recommended to integrate the different weights and ranking approaches with respect to measuring performances of food firms listed in bist. additionally all of three methods can be used for ranking firms in other sectors according to financial performances.  references altman, e.i. 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(2013). an analysis of multi-criteria decision making methods, international journal of operations research, 10(2), 56-66. namık kemal erdoğan, serpil altınırmak, çağlar karamaşa90 wu, h.y., tzeng, g.h., & chen, y.h. (2009). a fuzzy mcdm approach for evaluating banking performance based on balanced scorecard, expert systems with applications, 36(6), 10135-10147. http://dx.doi.org/10.1016/j.eswa.2009.01.005. yoon, k.p., & hwang, c.l. (1995). multiple attribute decision making: an introduction, sage university paper. yurdakul, m., & i̇ç, y.t. (2003). türk otomotiv firmalarının performans ölçümü ve analizine yönelik topsis yöntemini kullanan bir ölçek çalışma, gazi üniversitesi mühendislik mimarlık fakültesi dergisi, 18(1), 1-18. yüreğir, o.h., & nakıboğlu, g. (2007). performans ölçümü ve ölçüm sistemleri: genel bir bakış, ç.ü. sosyal bilimler enstitüsü dergisi, 16(2), 545-562. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 2 date of submission: may 25, 2018; date of acceptance: june 29, 2018. * contact information: piotr.bolibok@kul.pl, department of banking and finance, the john paul ii catholic university of lublin, al. racławickie 14, 20-950 lublin, poland, phone: +48 81 445 34 33; orcid id: https://orcid.org/0000-0002-5649-181x. bolibok, p. (2018). the macroeconomic drivers of household debt-to-income ratio: an evidence from the oecd countries. copernican journal of finance & accounting, 7(2), 29–41. http://dx.doi. org/10.12775/cjfa.2018.007 piotr bolibok* the john paul ii catholic university of lublin the macroeconomic drivers of household debt-to-income ratio: an evidence from the oecd countries keywords: household indebtedness, determinants of indebtedness, debt-to-income ratio, oecd countries. j e l classification: d15, e19, e21, g21, r20. abstract: the paper aims at empirical investigation of the key macroeconomic drivers of household debt-to-income ratio in the oecd countries using a panel data regression analysis to control for the time-invariant country-specific effects. the examined sample covers 31 countries over the period 1996–2015, yielding an unbalanced panel of 439 country-year observations. the results of the fixed-effect panel regression analysis indicate that the household debt-to-income ratio is positively related to the average annual wages, the share of population aged 25–39, the share of population with tertiary education attainment, and the magnitude of the wage-productivity gap. the interest rate and the unemployment rate seem to affect the ratio negatively, although the latter relationship turns out to be statistically insignificant. contrary to the evidence in the relevant literature, however, after controlling for the country-specific effects, the rate of economic growth and income inequality have been found to affect the debt-to-income ratio negatively. these unexpected results might ref lect the likely distortions caused by the recent global financial crisis that has significantly hampered the economic growth and increased the unemployment rate in many developed countries, while the piotr bolibok30 overall household indebtedness has remained elevated. it is also plausible that a positive impact of income inequality on household indebtedness might be largely limited geographically as it reverses when a larger set of countries is examined.  introduction the last couple of decades have witnesses an unprecedented surge in household debt almost all over the world. a key role in this process has been played by housing loans that constitute a vast majority of the outstanding household debt (finocchiaro, nilsson, nyberg & soultaneva, 2011, p. 7). even though directly after the recent global financial crisis some developed countries experienced a modest de-leveraging, their societies still remain heavily indebted. in turn, in the majority of emerging economies household indebtedness continues to grow, however at a reduced pace. overall, for more than a decade average and median values of the debt-to-income (henceforth: dti) ratio in the oecd countries have been exceeding 100% (figure 1). figure 1. average and median dti ratio in the oecd countries over the period 1996–2015 introduction the last couple of decades have witnesses an unprecedented surge in household debt almost all over the world. a key role in this process has been played by housing loans that constitute a vast majority of the outstanding household debt (finocchiaro, nilsson, nyberg & soultaneva, 2011, p. 7). even though directly after the recent global financial crisis some developed countries experienced a modest de-leveraging, their societies still remain heavily indebted. in turn, in the majority of emerging economies household indebtedness continues to grow, however at a reduced pace. overall, for more than a decade average and median values of the debt-to-income (henceforth: dti) ratio in the oecd countries have been exceeding 100% (figure 1). figure 1. average and median dti ratio in the oecd countries over the period 1996–2015 source: own elaboration based on oecd (2018) and united nations (2017). the relevant literature identifies many factors that might have contributed to the significant growth of household indebtedness. apart from the consequences of the wide-spread ‘easy-money’ policy in the period preceding the crisis, i.e. historically low levels of interest rates and an increased availability of credit (taylor, 2009, pp. 1–4; justiniano, primiceri & tambalotti, 2015, pp. 4–5), the empirical evidence suggests that household indebtedness is dependent on an overall macroeconomic stability (bloxham & kent, 2009, p. 329). additionally, many studies relate it to the conditions in the housing market, and in particular to the residential property prices (moore & stockhammer, 2018, p. 23), or to the impact of 0 20 40 60 80 100 120 140 160 mean median population-weighted average s o u r c e : own elaboration based on oecd (2018) and united nations (2017). the relevant literature identifies many factors that might have contributed to the significant growth of household indebtedness. apart from the consequences of the wide-spread ‘easy-money’ policy in the period preceding the crisis, i.e. historically low levels of interest rates and an increased availability of the macroeconomic drivers of household debt-to-income ratio… 31 credit (taylor, 2009, pp. 1–4; justiniano, primiceri & tambalotti, 2015, pp. 4–5), the empirical evidence suggests that household indebtedness is dependent on an overall macroeconomic stability (bloxham & kent, 2009, p. 329). additionally, many studies relate it to the conditions in the housing market, and in particular to the residential property prices (moore & stockhammer, 2018, p. 23), or to the impact of demographic factors, including the structure of age and educational attainment (magri, 2007, pp. 410–413). moreover, the studies focusing on the u.s. economy attribute the increase in household debt to stagnant real wages and cutbacks in the welfare state that motivated individuals to simulate their social class by using debt (barba & pivetti, 2009, pp. 121–122; leicht, 2012, pp. 204–206). finally, the growth of household borrowing would not be possible without a simultaneous improvement in loan production technology, including in particular various risk management innovations and reductions in distribution costs, nor without a substantial development of financial services marketing and the technology of persuasion (zinman, 2014, pp. 7–8). empirical evidence on the determinants of household indebtedness is based mostly on the analyses of individual countries or relatively narrow panels, which sometimes leads to ambiguous results. by contrast, wide cross-sectional studies seem quite scarce. given the above, the paper aims at empirical investigation of the key macroeconomic drivers of household indebtedness in the oecd countries over the period 1996–2015, controlling for time-invariant country-specific effects, in search of a more general pattern of this phenomenon. the remainder of the paper is composed of four sections. the next section provides a review of the relevant literature on the key drivers of household indebtedness. the methodological framework of the study and data selection procedures are described in the third section. fourth section presents and discusses the key findings. the paper is closed with conclusions and suggestions on the directions of future research. the literature review under the modigliani and brumberg (1954, pp. 388–436) life cycle model of consumption household indebtedness depends on the age structure of the population, the stock of savings, and transitory income shocks. the highest indebtedness is expected for young households, with no or low savings, incomes below the level required to ensure an optimal life-time consumption, and therefore using debt for consumption smoothing. consistent with this model, piotr bolibok32 thaicharoen, ariyapruchya, chuched (2004, pp. 9–10) demonstrate that dti ratio in thailand steadily increases until the middle-aged cohorts, beyond which it starts to decline. additionally, they find that indebtedness is positively related to educational attainment, household size, and housing tenure, while being negatively associated with interest rates. some further evidence supporting the model can be found in magri (2007, p. 401) who argues that the demand for bank loans in italy is determined by the age of household head (reaching its peak at around the age of 30) while the size of a loan determined by household’s net wealth and income profile. in turn, a comparative study of the uk, germany and the u.s. by brown and taylor (2008, pp. 633–640) demonstrates that indebtedness is driven mostly by income and the household size, while the impact of household head age differs across countries. jacobsen (2004, pp. 108–109) finds the household debt in norway to be positively related to house prices, the real value of housing stock, the number of house sales, the total wage income in the economy, and the share of university students in the population (as persons with higher education typically take out higher residential loans), whereas bank lending rate and the rate of unemployment affect it negatively. dynan and kohn (2007, pp. 30–32) attribute the growth of household dti ratio in the u.s. to the combination of growing house prices, declining long-term interest rates, increases in expected incomes, better educational attainment, changes in the age structure of the population, and financial innovation that has enhanced the availability of housing finance and lowered its costs. in turn, turinetti and zhuang (2011, pp. 89–91) argue that the u.s. household debt is negatively related to the unemployment rate, interest rate, disposable personal income per capita, the share of retiring population, and educational attainment, while being positively related to housing prices, the share of working-age population, and consumer confidence. the evidence from emerging economies seems quite similar. a study on the household residential debt in poland by bolibok (2015, pp. 604–606) also reports its negative association with market interest rates, relative prices of dwellings, and unemployment rate, as well as a positive impact of population growth (in particular in the cohort of 24–34 years old), and the number of new builds of residential buildings. many studies attribute a significant increase in household indebtedness prior to the recent global financial crisis to an overall reduction in macroeconomic volatility. for instance, bloxham and kent (2009, pp. 329–330) identify falling the macroeconomic drivers of household debt-to-income ratio… 33 unemployment, inf lation, and interest rates as the key macroeconomic drivers of household dti ratio in australia. they also argue that indebtedness is driven by the ageing of the population and the changes in taxes and subsidies determining the attractiveness of residential loans. these findings are partially supported by the results of meng, hoang, and siriwanda (2011, pp. 16–18), who report a positive impact of gdp growth, housing prices, and the number of new dwellings on the stock of australian household debt. simultaneously, they find a negative relation of debt with interest rates, unemployment rate, and inf lation. using a panel of 36 oecd countries over the period 1995–2009 rubaszek and serwa (2014, pp. 583–585) demonstrate that the ratio of household debt to gdp is driven by the lending-deposit interest rate spread and both uncertainty and persistence of individual incomes. additionally, they report a positive impact of gpd per capita, disposable income per capita, and housing prices on household indebtedness, while failing to find a statistically significant inf luence of unemployment and income inequality. numerous studies provide evidence on the interdependence between the house prices and household residential debt resulting from the collateral and wealth effects, under which growing housing prices reduce credit constraints and facilitate mortgage equity withdrawals (see: godley & lavoie, 2007, pp. 40– 42). this two-way interaction seems to exist in diverse economies, for instance finland (oikarinen, 2009, pp. 751–755), spain (gimeno & martinez-carrascal, 2010, pp. 1851–1854), or norway (anundsen & jansen, 2013, pp. 197– 209). according to turk (2015, pp. 28–29) household debt drives housing prices in the short-run, however, in the long run this relationship reverses and the housing prices become the key driver of the household debt. these findings are in line with those of moore and stockhammer (2018, pp. 1–38) who examine a panel of 13 oecd countries over the period 1993–2011, and demonstrate that real residential house prices is the most robust macroeconomic determinant of household debt. several studies investigating the household indebtedness in the u.s. suggest that the reasons for its dynamic growth prior to the recent global financial crisis lie in the widening gap between the real rates of growth of productivity and wages, as well as in the considerable retrenchments in the welfare state (barba & pivetti, 2009, p. 114; stockhammer, 2015, p. 935). the combination of these phenomena created both opportunities and incentives for many american households to use debt as a substitute for insufficient wages, and thus to ‘simulate’ their social class (leicht, 2012, pp. 204–206). increasing income inequality, and in particular the growth of top incomes, drives relatively poorpiotr bolibok34 er households to accumulate debt in order to keep consumption at par with their richer peers (frank, levine & dijk, 2014, p. 63). some further evidence on the impact of income inequality on the household indebtedness in an international context of the most advanced oecd economies is offered by klein (2015, pp. 405–410) and malinen (2016, pp. 317–323). the review of the relevant literature on the macroeconomic determinants of household indebtedness indicates that the vast majority of prior research is based on the evidence from individual countries, which sometimes leads to ambiguous conclusions, while the available cross-sectional studies are largely limited to the most developed economies. in particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been logtransformed, yielding the following regression model: the macroeconomic drivers of household debt-to-income ratio… 35 particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, where: ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – natural log of the total household debt to net disposable income, ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – natural log of the average annual wage (constant ppp), ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – natural log of the rate of growth in real gdp per person (constant ppp), ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – short-term interest rate, ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – natural log of the unemployment rate, ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – housing rent price index, ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – natural log of the share of population aged 25–39, ‒ particular, the evidence based on both broader international data and a wide set of examined explanatory variables remains rather modest. the present study attempts therefore to contribute to the existing literature by filling this gap. the research methodology and the course of the research process the empirical evidence in the relevant literature allows to formulate the following set of research hypotheses: h1: the household dti ratio in the oecd countries in the long run is positively related to average wages, the rate of economic growth, the share of young and middle-aged population cohorts, the share of population with tertiary education attainment, housing prices, wage-productivity gap, and income inequality. h2: the household dti ratio in the oecd countries in the long run is negatively related to interest rate and unemployment rate. given a significant cross-sectional heterogeneity in the examined sample and the results of the hausman specification test, the investigation has been based on a fixed-effect panel data regression analysis. the choice of the explanatory variables employed in the model is largely determined by the availability of data and the pursuance of obtaining a possibly most complete dataset. the variables exhibiting a significant skewness of the distribution have been log-transformed, yielding the following regression model: �� ����� � �� + �� � ������ + �� � �������� + �� � ���� + �� � �� ���� + �� � ������������ + �� � ����� +�� � ������ +�� � ������� + �� � ����� + �� + ��� where: ‒ �� ����� – natural log of the total household debt to net disposable income, ‒ ������ – natural log of the average annual wage (constant ppp), ‒ �� ������ – natural log of the rate of growth in real gdp per person (constant ppp), ‒ ���� – short-term interest rate, ‒ �� ���� – natural log of the unemployment rate, ‒ ������ – housing rent price index, ‒ ������������ – natural log of the share of population aged 25–39, ‒ ����� – the share of population aged 25–64 with tertiary education attainment, – the share of population aged 25–64 with tertiary education attainment, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – natural log of the gini coefficient for net disposable income, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – regression coefficients, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – intercept, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – unknown intercept for each country, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – country, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – year, ‒ ‒ �� ����� – wage-productivity gap measured as the natural log of the relation of gdp per person employed to average annual wage, ‒ �� ��� – natural log of the gini coefficient for net disposable income, ‒ ���������� – regression coefficients, ‒ �� – intercept, ‒ �� – unknown intercept for each country, ‒ � – country, ‒ � – year, ‒ ��� – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. – error term. as regards the expected signs of the regression coefficients, both higher average wages and faster gdp growth should generally fuel borrowing, as they improve households’ creditworthiness and boost their optimism about the future income prospects, allowing them to take on larger loans. the estimates of the coefficients β1 and β2 are, therefore, expected to be positive. however, it is possible that they become negative if household incomes should grow faster than the stock of debt. the interest rate is expected to be inversely related to the dti ratio resulting in a negative estimate of the coefficient β3. although the prevalence of mortgage debt suggests using a long-term interest rate as an explanatory variable, given a strong positive correlation between long and short-term interest rates, and a much higher number of available observations for the latter one, it has been employed in the model. (1) piotr bolibok36 the estimate of the coefficient β4 is expected to be negative since growing unemployment makes households’ future incomes less predictable thus discouraging them from taking on additional debt. according to the available evidence, the highest household indebtedness is expected for the middle-aged cohorts and for the persons with higher education attainment, which suggests positive estimates of the coefficients β5 and β6. given that the growth of housing prices fuels household borrowing, while their decrease discourages it, the estimated value of the coefficient β7 is expected to be positive. again, in order to use a possibly most complete time series, the housing rental price index has been employed in the model as an explanatory variable. finally, both wider wage-productivity gaps and more unequal distribution of incomes might encourage poorer households to fuel consumption with debt in order to reduce the distance from their richer peers, which allows to expect positive estimates of the coefficients β8 and β9. the research has been designed to examine all oecd member countries over the period 1996–2015. the data employed in the analysis have been extracted from the oecd.stat database (oecd, 2018) and the world population prospects database by the united nations (2017). due to incompleteness of data, 4 countries (israel, mexico, new zealand, and turkey) have been dropped from the sample, yielding the final unbalanced panel of 31 countries and 439 country-year observations.  results the results of the estimation of the constructed regression model are reported in table 1. table 1. estimations of the fixed-effect panel regression model model: the research has been designed to examine all oecd member countries over the period 1996-2015. the data employed in the analysis have been extracted from the oecd.stat database (oecd, 2018) and the world population prospects database by the united nations (2017). due to incompleteness of data, 4 countries (israel, mexico, new zealand, and turkey) have been dropped from the sample, yielding the final unbalanced panel of 31 countries and 439 country-year observations. results the results of the estimation of the constructed regression model are reported in table 1 table 1. estimations of the fixed-effect panel regression model model: ������� � �� + �� � ������ + �� � �������� + �� � ���� + �� � ������ + �� � ������������ + �� � �����+�� � ������+�� � ������� + �� � ����� + �� + ��� estimate value std. error t p-value 95% conf. interval β0 -11.453 1.990 -5.76 0.000 -15.366 -7.541 β1 1.384 0.172 8.04 0.000 1.046 1.723 β2 -1.678 0.286 -5.87 0.000 -2.240 -1.116 β3 -0.019 0.005 -4.16 0.000 -0.028 -0.010 β4 -0.013 0.034 -0.40 0.691 -0.079 0.053 β5 0.450 0.183 2.46 0.014 0.090 0.811 β6 0.014 0.003 3.79 0.000 0.007 0.021 β7 0.002 0.001 2.35 0.019 0.000 0.004 β8 1.066 0.251 4.25 0.000 0.573 1.558 β9 -0.872 0.225 -3.87 0.000 -15.366 -7.541 r2: within 0.661 between 0.462 overall 0.477 f(9, 399) 86.52 0.000 rho 0.892 n 439 number of groups 31 observations per group min 7 max 20 average 14.2 source: own elaboration. the estimated model is statistically significant at all conventional levels. the variance of the explanatory variables has been able to explain over 66% of variation in the houseestimate value std. error t p-value 95% conf. interval β0 -11.453 1.990 -5.76 0.000 -15.366 -7.541 β1 1.384 0.172 8.04 0.000 1.046 1.723 β2 -1.678 0.286 -5.87 0.000 -2.240 -1.116 the macroeconomic drivers of household debt-to-income ratio… 37 model: the research has been designed to examine all oecd member countries over the period 1996-2015. the data employed in the analysis have been extracted from the oecd.stat database (oecd, 2018) and the world population prospects database by the united nations (2017). due to incompleteness of data, 4 countries (israel, mexico, new zealand, and turkey) have been dropped from the sample, yielding the final unbalanced panel of 31 countries and 439 country-year observations. results the results of the estimation of the constructed regression model are reported in table 1 table 1. estimations of the fixed-effect panel regression model model: ������� � �� + �� � ������ + �� � �������� + �� � ���� + �� � ������ + �� � ������������ + �� � �����+�� � ������+�� � ������� + �� � ����� + �� + ��� estimate value std. error t p-value 95% conf. interval β0 -11.453 1.990 -5.76 0.000 -15.366 -7.541 β1 1.384 0.172 8.04 0.000 1.046 1.723 β2 -1.678 0.286 -5.87 0.000 -2.240 -1.116 β3 -0.019 0.005 -4.16 0.000 -0.028 -0.010 β4 -0.013 0.034 -0.40 0.691 -0.079 0.053 β5 0.450 0.183 2.46 0.014 0.090 0.811 β6 0.014 0.003 3.79 0.000 0.007 0.021 β7 0.002 0.001 2.35 0.019 0.000 0.004 β8 1.066 0.251 4.25 0.000 0.573 1.558 β9 -0.872 0.225 -3.87 0.000 -15.366 -7.541 r2: within 0.661 between 0.462 overall 0.477 f(9, 399) 86.52 0.000 rho 0.892 n 439 number of groups 31 observations per group min 7 max 20 average 14.2 source: own elaboration. the estimated model is statistically significant at all conventional levels. the variance of the explanatory variables has been able to explain over 66% of variation in the houseestimate value std. error t p-value 95% conf. interval β3 -0.019 0.005 -4.16 0.000 -0.028 -0.010 β4 -0.013 0.034 -0.40 0.691 -0.079 0.053 β5 0.450 0.183 2.46 0.014 0.090 0.811 β6 0.014 0.003 3.79 0.000 0.007 0.021 β7 0.002 0.001 2.35 0.019 0.000 0.004 β8 1.066 0.251 4.25 0.000 0.573 1.558 β9 -0.872 0.225 -3.87 0.000 -15.366 -7.541 r2: – within – between – overall 0.661 0.462 0.477 f(9, 399) 86.52 0.000 rho 0.892 n 439 number of groups 31 observations per group – min – max – average 7 20 14.2 s o u r c e : own elaboration. the estimated model is statistically significant at all conventional levels. the variance of the explanatory variables has been able to explain over 66% of variation in the household dti ratio within the analysed countries. the estimated value of the parameter rho indicates a strong heterogeneity in the examined sample, as over 89% of the variance in dti has been attributable to the differences across countries. the majority of the estimated regression coefficients have the expected signs and are statistically significant at the 0.05 level. the results of the estimation indicate that after controlling for the time-invariant country-specific factors, the household dti ratio in the oecd countries is positively related to the table 1. estimations of the fixed-effect panel regression model piotr bolibok38 average annual wages, the share of population aged 25–39, the share of population with tertiary education attainment, and the magnitude of the wage-productivity gap, while being negatively associated with the interest rate. the regression coefficient for the unemployment rate (β5), although negative as expected, is statistically insignificant, which seems consistent with the findings of rubaszek and serwa (2014, p. 584). contrary to ex-ante expectations, however, the estimated coefficients β2 and β9 have turned out to be negative. it appears therefore, that after controlling for the country-specific effects, the rate of economic growth and income inequality inf luence the household dti ratio negatively. the statistical insignificance of the relationship between household indebtedness and unemployment, as well as the unexpected negative impact of economic growth might be partially explained by the likely distortions caused by the recent global financial crisis, in the aftermath of which many developed countries have suffered a rising unemployment combined with a negative or stagnant growth while households have struggled to deleverage, and the overall dti ratio has remained elevated. in turn, the negative estimate of the coefficient β9 suggests that a positive relationship between income inequality and household debt might in fact be largely limited geographically, as it actually becomes reversed in a broader panel of countries.  conclusions the results of the research largely support both hypotheses of the present study. some of the findings, however, have turned out to be surprising. consistent with the conclusions of the prior investigations, the household dti ratio in the oecd countries appears to be positively related to the average annual wages, the share of population aged 25–39, the share of population with tertiary education attainment, and the magnitude of the wage-productivity gap. in turn, the interest rates and the unemployment rate seem to affect the ratio negatively, although the latter relationship is statistically insignificant. therefore, the long-run cross-sectional evidence confirms the impact of the majority of macroeconomic household debt drivers identified in the relevant literature. unexpectedly, after controlling for the country-specific effects, the rate of economic growth and income inequality have been found to affect the dti ratio negatively. one of the possible explanations of the former relationship is the impact of the recent global financial crisis that has significantly hampered the the macroeconomic drivers of household debt-to-income ratio… 39 economic growth while the household indebtedness has not adjusted accordingly. the cross-sectional evidence suggests that the responsiveness of household debt to the course of the business cycle is largely asymmetric. an intensified borrowing during the times of expansion leads to accumulation of debt which in turn becomes difficult to reduce when the economy turns down and households struggle to delever. moreover, it is also likely that in some countries a faster economic growth might in fact decrease the demand for borrowing, as households find it easier to cover their expenses with incomes, instead of using debt. the negative relationship between income inequality and indebtedness suggests that a positive association between these variables reported by some prior studies might in fact be a country-specific phenomenon, likely driven by cultural factors. it seems in the cross-section an overall increase in household dti ratio in the long run occurs along with a simultaneous reduction in income inequality. it is also possible that the relationship between income inequality and household indebtedness is non-linear, being negative when the distribution of incomes is more equal, but turning into positive when the gap between poorer and richer households begins to widen beyond a certain threshold. finally, the results of the study suggest that some of the linkages between the household dti ratio and its determinants in the examined countries could likely become distorted by the impact of the recent global financial crisis. therefore, the future research might attempt to explore these distortions in detail.  references anundsen, a.k., & jansen, e.s. 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(2015). rising inequality as a cause of the present crisis. cambridge journal of economics, 39(3), 935–958. http://dx.doi.org/10.1093/cje/bet052. the macroeconomic drivers of household debt-to-income ratio… 41 taylor, j.b. (2009). the financial crisis and the policy responses: an empirical analysis of what went wrong. nber working paper, 14631. http://dx.doi.org/10.3386/ w14631. thaicharoen, v., ariyapruchya, k., & chuched, t. (2004). rising thai household debt: assessing the risks and policy implications. working papers from monetary policy group, 2004-01. turinetti, e., & zhuang, h. (2011). exploring determinants of u.s. household debt. journal of applied business research, 27(6), 85–91. http://dx.doi.org/10.19030/jabr. v27i6.6468. turk, r. a. (2015). housing price and household debt interactions in sweden. imf working paper, 15/276. http://dx.doi.org/10.5089/9781513586205.001. united nations (2017). world population prospects, http://esa.un.org/unpd/wpp (accessed: 20.04.2018). zinman, j. (2014). household debt: facts, puzzles, theories, and policies. nber working paper, 20496. http://dx.doi.org/10.3386/w20496. copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: marlenac@econ.uni.torun.pl, goldmann@econ.umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 49 04. marlena ciechan-kujawa, katarzyna goldmann* uniwersytet mikołaja kopernika w toruniu zarządzanie kosztami przedsięwzięć e-biznesowych słowa kluczowe: e-przedsięwzięcie, internet, koszty przedsięwzięcia, model biznesowy, zarządzanie projektem. abstrakt: model biznesowy oparty na szeroko rozumianych rozwiązaniach teleinformatycznych staje się coraz bardziej popularny. przedsięwzięcia realizowane w ramach tego modelu mają służyć poprawie efektywności, szybkości i innowacyjności. mają stanowić również nowy sposób tworzenia wartości w organizacji. specyfika umiejscowienia ich i funkcjonowania w internecie powoduje konieczność odmiennego podejścia do zarządzania niektórymi aspektami przedsięwzięć e-biznesowych w porównaniu do tradycyjnych. celem artykułu jest wskazanie tych różnic. szczególną uwagę zwrócono na aspekty finansowe, w tym koszty ponoszone na poszczególnych etapach planowania przedsięwzięć, ich realizacji, wdrożenia i zarządzania w cyklu życia. cost management of e-business projects keywords: business model, the cost of the project, e-business, internet, project management. abstract: business model based on wide-ranging ict solutions is becoming more and more popular. projects implemented under this model to improve the efficiency, speed and innovation. they have also a new way of creating value in the organization. the specifics of the location of their and the functioning of the internet necessitates a different approach to the management of certain aspects of e-business projects compared to the traditional. the purpose of the article is an indication of these differences. pardoi: 10.12775/cjfa.2012.003 http://dx.doi.org/10.12775/cjfa.2012.003 marlena ciechan-kujawa, katarzyna goldmann40 ticular attention was paid to the financial aspects, including the costs incurred on the various stages of the planning of projects, their implementation, deployment and management throughout the life cycle. translated by marlena ciechan-kujawa & katarzyna goldmann  wstęp biznes elektroniczny jest modelem prowadzenia biznesu opierającym się na szeroko rozumianych rozwiązaniach teleinformatycznych, w szczególności aplikacjach internetowych1. to pojęcie obejmuje m.in. wymianę informacji między producentami, dystrybutorami i odbiorcami produktów i usług, zawieranie kontraktów, przesyłanie dokumentów, prowadzenie telekonferencji, pozyskiwanie nowych kontaktów. biznes elektroniczny jest wykorzystywany przez coraz więcej podmiotów na rynku w ramach relacji2: ■ b2b (business-to-business) – dotyczącej realizacji procesów biznesowych między dwiema firmami; ■ b2c (business-to-consumer lub business-to-client) – obejmującej transakcje między przedsiębiorstwami a konsumentami; ■ intra-business (intranet) – związany z realizacją wewnętrznych procesów biznesowych przedsiębiorstwa z wykorzystaniem drogi elektronicznej. realizowane w tym zakresie przedsięwzięcia mają służyć poprawie efektywności, szybkości i innowacyjności oraz stanowić nowy sposób tworzenia wartości w organizacji. 1 pojęcie biznesu elektronicznego zostało wprowadzone w 1995 r. przez ibm. obecnie jest ono pojęciem bardzo szerokim, a ciągły rozwój tego obszaru powoduje, że zmiany i nowe sposoby ujęcia poszczególnych zagadnień skutkują rozbieżnościami w definiowaniu pojęć z nim związanych, tj. handel elektroniczny (e-commerce), elektroniczne przedsiębiorstwa (e-enterprise), elektroniczna gospodarka (e-economy), elektroniczne społeczeństwo (e-society) czy też e-banking czy e-learning. 2 oprócz wymienionych możemy obecnie spotkać także relacje typu c2c (consumer-to-consumer) – określa typ zależności biznesowych zachodzących między końcowymi konsumentami dobra czy usługi; b2p (business-to-public) – obejmuje relacje między przedsiębiorstwem a jego makrootoczeniem, głównie społecznym; g2c (government-to-citizen) – komunikacja instytucji publicznych z obywatelami; g2b (government-to-business) – dotyczy relacji między instytucjami publicznymi a biznesem; a2b (application-to-business) – relacja określająca rodzaj prowadzenia działalności biznesowej polegająca na wynajmowaniu programów czy usług komputerowych firmom za pośrednictwem internetu. http://pl.wikipedia.org/wiki/intranet   zarządzanie kosztami przedsięwzięć e-biznesowych 41 celem artykułu jest analiza tychże przedsięwzięć pod kątem specyfiki zlokalizowania i funkcjonowania ich w sieci w kontekście różnic i podobieństw w odniesieniu do zarządzania projektami realizowanymi w tradycyjnych modelach biznesowych. 1. specyfika przedsięwzięć realizowanych w sieci zmiany potrzeb i oczekiwań klientów oraz rozwój technologii powoduje, że modele e-biznesowe zwiększają swoją heterogeniczność. ewoluują zarówno w zakresie ilościowym, jak i jakościowym, co poprawia ich dostępność i atrakcyjność. w praktyce modele biznesowe oparte na e-biznesie koncentrują się na wykorzystywaniu m.in. następujących rozwiązań3: ■ elektroniczna witryna i sklep internetowy (e-shop) – najprostszy z modeli służący do promowania firmy, jej towarów czy usług, czasem połączony ze sklepem internetowym; ■ elektroniczne zaopatrzenie (e-procurement) – elektroniczne składanie ofert i zaopatrywanie w towary i usługi; ■ elektroniczne centrum handlowe (e-mall) – odmiana sklepów internetowych, w najprostszej formie składająca się z wielu elektronicznych sklepów prowadzonych przez niezależne podmioty; ■ aukcja elektroniczna (e-auction) – w podstawowym zakresie oferuje elektroniczne mechanizmy prowadzenia licytacji; ■ wirtualna społeczność (virtual community) – zjawisko internetowe wykorzystywane przez niektóre firmy w swojej działalności opierające się na grupie podmiotów skupionych wokół określonego tematu czy sektora rynku, komunikującej się za pośrednictwem usług dostępnych w sieci, tworzących portale tematyczne, listy dyskusyjne; ■ platforma współpracy (collaboration platform) – dostarcza narzędzia i środowisko informatyczne umożliwiające współpracę między firmami; taka platforma najczęściej jest prowadzona przez niezależną firmę, która wynajmuje ją innym podmiotom gospodarczym; ■ integrator i dostawca usług łańcucha wartości (value-chain integrator) – model biznesowy koncentrujący się na integracji całego łańcucha wartości w pierwszym wypadku oraz dostarczaniu specyficznych usług z łańcucha wartości (np. elektroniczne płatności) w przypadku drugim; 3 szczegółowe klasyfikacje modeli biznesowych opisanych w polskiej i obcej literaturze przedmiotu podaje (nojszewski, 2006; nojszewski, 2007). http://pl.wikipedia.org/wiki/sklep_internetowy http://pl.wikipedia.org/wiki/e-procurement http://pl.wikipedia.org/wiki/aukcja_elektroniczna http://www.e-mentor.edu.pl/czasopismo/spis-tresci/numer/17 marlena ciechan-kujawa, katarzyna goldmann or 42 ■ pośrednictwo informacji (information brokerage) – oferujące usługę wyszukiwania i dostarczania firmom pożądanych przez nie informacji; ■ usługi zaufania (trust services) – model biznesowy dostarczający specyficznych informacji, gwarantujących zaufanie w procesach biznesowych między stronami sieci, najczęściej w postaci wydawania lub potwierdzania certyfikatów autentyczności. początkowo stosowane modele, takie jak e-sklepy czy e-zamówienia, były odzwierciedleniem tradycyjnego sposobu prowadzenia działalności gospodarczej i wykazywały niewiele innowacyjności w stosunku do pierwowzorów, poza nowym kanałem komunikacji (internetem). najczęściej zawierały jedynie statyczne dokumenty obejmujące elektroniczne katalogi produktów, materiały reklamowe bądź sposoby dostarczania towarów i usług. bardziej innowacyjne modele, takie jak elektroniczne rynki czy integratorzy łańcucha wartości, łączą ze sobą sprzedawców i klientów, umożliwiając obniżenie kosztów oraz udoskonalając przepływ informacji między podmiotami na rynku. modele ewoluują w kierunku wirtualnych rynków czy sieci powiązań, w których producenci i konsumenci poszukują i łączą się dynamicznie, często w krótkotrwałych związkach, na czas realizacji transakcji biznesowej bądź dla osiągnięcia innych zamierzonych celów biznesowych. przedsięwzięcia realizowane w takim środowisku różnią się od tradycyjnych zarówno na płaszczyźnie strategicznej, jak i operacyjnej. ta odmienność jest szczególnie widoczna w ocenie ryzyka, sferze organizacyjnej, narzędziowej i relacjach z klientami. można wskazać pięć podstawowych wymiarów tych różnic (doligalski 2006a, 2006b): ■ wirtualizacja produktu; ■ indywidualizacja kompozycji wartości; ■ usieciowienie; ■ marketing wartości; ■ zrozumienie i wykorzystanie cyklu życia klienta. tymoteusz doligalski twierdzi, że przedsięwzięcia e-biznesowe charakteryzują się o wiele większym nasileniem wskazanych powyżej cech niż przedsięwzięcia tradycyjne, przy czym naturalnie cechy te występują również, choć o wiele rzadziej, w przedsięwzięciach tradycyjnych. charakterystykę tych cech i przykłady ich zastosowania w tradycyjnych i e -biznesowych przedsięwzięciach zaprezentowano w tabeli 1. należy podkreślić, że przedsięwzięcia e-biznesowe nie są jednorodne. istnieją przedsięwzięcia o niskim, lub wręcz zerowym nasileniu wybranej cechy.   zarządzanie kosztami przedsięwzięć e-biznesowych 43 uwzględnienie tych cech w zarządzaniu projektem e-biznesowym może jednak zapewnić spójność z modelem biznesowym oraz umożliwić bardziej efektywne wykorzystanie możliwości oferowanych przez internet i technologie teleinformatyczne. tabela 1. cechy przedsięwzięć tradycyjnych i e-biznesowych kryterium wykorzystanie w przedsięwzięciach  tradycyjnych wykorzystanie w przedsięwzięciach  e-biznesowe wirtualizacja produktu (ucyfrowienie) digitalizacja oraz wzbogacanie produktu w informacje cyfrowe mapy dostępne na nośnikach cd sklepy internetowe, bilety linii lotniczych, mp3 indywidualizacja kompozycji wartości oferowanie klientom wartości dostosowanych do ich potrzeb w zakresie: produktu, ceny, komunikacji z klientem sektor usług masowa kastomizacja – przeglądarki internetowe usieciowienie (network effect) kreacja wartości dla klienta na podstawie wartości dostarczanych przez innych użytkowników giełdy, bazary, antykwariaty aukcje, komunikatory internetowe marketing doświadczeń dostarczenie klientowi zdarzeń wywołujących u niego pożądane przeżycia, doświadczenia i emocje i budowanie na tej podstawie relacji z klientem – budowa satysfakcji, promocja produktu/usługi, budowa lojalności, sprzedaż produktu podstawowego renomowane hotele serwisy produktowe, sklepy internetowy cykl życia klienta modyfikacja oferowanej klientowi kompozycji wartości adekwatnie do etapu jego relacji z firmą branża bankowa elektroniczny biuletyn, sprzedaż dodatkowa i łączona (up-selling, jak i cross-selling) – serwisy internetowe ź r ó d ł o: opracowanie własne na podstawie: doligalski 2006a, 2006b. 2. zarządzanie projektem e-biznesowym zarządzanie projektem jest działaniem zmierzającym do zapewnienia efektywnego osiągnięcia wyznaczonych celów głównych i pośrednich projektu w sposób zapewniający neutralizację wpływu istniejących ograniczeń i wykorzystanie szans oraz budowanie motywacji zespołu projektowego i właściwą komunikację między uczestnikami projektu. ze względu na zakres uprawnień, odpowiedzialności i poziom wymaganych kompetencji istotną rolę w projekcie odgrywają: marlena ciechan-kujawa, katarzyna goldmann or 44 ■ kierownik projektu, do zadań którego należy koordynacja działań, motywacja zespołu projektowego, komunikacja ze sponsorem projektu i uczestnikami projektu w celu jasnego precyzowania kierunku kolejnych zmian i nowo pojawiających się zagrożeń; ■ sponsor projektu, który powołuje projekt do życia i jest jednocześnie osobą najbardziej uprawnioną do podejmowania kluczowych decyzji, w tym dotyczących redefiniowania zakresu, budżetu lub czasu realizacji projektu. w metodykach zarządzania projektami4 podkreśla się, że każdy projekt jest zorientowany na stworzenie unikatowego produktu, usługi bądź innego konkretnego rezultatu. odbywa się to zazwyczaj w czterech zasadniczych fazach, takich jak: ■ planowanie: inicjacja, opracowanie założeń i celów oraz wskaźników wykonania dla czasu, kosztów, korzyści, jakości, zakresu, ryzyk; ■ realizacja: delegowanie zadań, przegląd statusu działań, weryfikacja, walidacja, monitoring i nadzór, zarządzanie zmianą w projekcie; ■ zakończenie i wdrożenie produktu (wyniku projektu): migracja, integracja technologiczna i biznesowa z działalnością operacyjną; ■ zarządzanie w cyklu życia: ocena rentowności, analiza wartości, identyfikacja potrzeb zmian, modyfikacji i doskonalenia produktu. schemat 1. kluczowe aspekty zarządzania przedsięwzięciami poziom strategii cele ryzyko poziom relacji zarządzanie relacjami z interesariuszami oczekiwania klientów relacje z dostawcami kooperanci zarządzanie relacjami w zespole projektowym poziom organizacji technolologia i standardy jakości procedury narzę-dzia metody zasoby ludzkie kompetencje zakres z/u/o czas poziom finansowy budżet ocena efekty wności biznes plan ź r ó d ł o: opracowanie własne. 4 na przykład prince, pmbok.   zarządzanie kosztami przedsięwzięć e-biznesowych 45 kluczowym elementem jest przygotowanie uzasadnienia biznesowego zawierającego: cele, korzyści z realizacji projektu, koszty oraz ocenę ryzyk związanych z osiągnięciem korzyści. ten dokument ma charakter projektowy – służy do potwierdzenia zasadności biznesowej projektu i opracowania dokumentu o perspektywie organizacyjnej – biznesplanu, który określa znacznie więcej szczegółów, opisując organizację po zakończe niu realizacji projektu5. poszczególne fazy, chociaż można je wyodrębnić, są powiązane aspektami o charakterze strategicznym, relacyjnym, organizacyjnym i finansowym, które przedstawiono na schemacie 1. przedmiotem niniejszego opracowania będą te ostatnie, ze szczególnym uwzględnieniem aspektów kosztowych. zostaną one przedstawione na przykładzie serwisu zakupów grupowych i scharakteryzowane w przekroju poszczególnych faz zarządzania projektem e-biznesowym. 3. zarządzanie kosztami przedsięwzięć e-biznesowych na przykładzie serwisu zakupów grupowych 3.1. założenia koncepcyjne przedsięwzięcia serwis zakupów grupowych wpisuje się w trend social commerce, który jest naturalną ewolucją od e-commerce. produkty oferowane przez ten serwis będą dostępne tylko w opcji grupowych zakupów. użytkownik będzie mógł dołączyć do zakupu produktu, a po osiągnięciu wymaganej liczby kupujących, określonej przez serwis, transakcja będzie realizowana. największą korzyścią dla potencjalnego kupującego będzie niższa od rynkowej cena produktu. po zakupie produktu użytkownik będzie mógł napisać opinię na jego temat w serwisie oraz polecić ten produkt swoim znajomym. zasada działania serwisu będzie podobna do funkcjonowania serwisów aukcyjnych. ze względu na szybko zmieniające się ceny, produkty po danej cenie będą oferowane na określony czas np. 3–7 dni. użytkownicy będą mogli dołączyć do zakupu po uprzednim zarejestrowaniu się w serwisie. dołączenie do zakupu będzie równoznaczne z deklaracją zakupu w cenie dostępnej po zgro5 w szczególności: plan organizacji i zarządzania, kwestie związane z klientem i rynkiem, technologię wdrożonego rozwiązania, budżet projektu wraz z analizą wpływu przedsięwzięcia na sytuację finansowo-ekonomiczną firmy oraz oceną efektywności działań, a także plany alternatywne i zapasowe określające scenariusze postępowania w sytuacjach awaryjnych, nagłych zdarzeń, w tym alternatywnego wykorzystania produktów przedsięwzięcia. szerzej na ten temat (ciechan-kujawa 2007). marlena ciechan-kujawa, katarzyna goldmann or 46 madzeniu wymaganej liczby kupujących. w przypadku zakończenia się oferty i braku wystarczającej liczby kupujących oferta zostanie anulowana lub wystawiona na nowo z aktualną ceną, a każda osoba biorąca udział w poprzedniej transakcji dostanie zaproszenie do przystąpienia do nowej. każdy użytkownik otrzyma konto użytkownika, gdzie będzie mógł np. obserwować transakcje, dodawać do ulubionych czy też rejestrować historię zakupów. serwis początkowo będzie sprzedawał produkty ze sklepów internetowych, które są powiązane programem partnerskim z porównywarką cenową – serwisem już działającym w ramach tego samego przedsiębiorstwa. dzięki tej strategii serwis zakupów grupowych będzie mógł wystawiać do sprzedaży 200–300 tys. produktów w pierwszym miesiącu funkcjonowania. w następnych miesiącach będzie budowana baza produktów pochodząca od producentów, hurtowników czy bezpośrednich importerów. pozwoli to na uzyskanie najniższych cen, co przełoży się na atrakcyjność oferty. w przedsięwzięciach e-biznesowych najważniejszy jest czas wprowadzenia produktu na rynek (time to market). w przypadku dobrego pomysłu i szybkiego jego wdrożenia można zbudować konkurencyjną przewagę. konkurencja, wprowadzając podobne przedsięwzięcie na rynek wirtualny nawet z kilkutygodniowym wyprzedzeniem, może spowodować, że nie osiągniemy już zamierzonego celu. często takie projekty przestają być opłacalne. dlatego też serwis zakupów grupowych zostanie wprowadzony do sieci w wersji beta6 po czterech miesiącach od rozpoczęcia jego realizacji i w ciągu następnych czterech miesięcy jak najszybciej będą dodawane nowe funkcjonalności, by po ośmiu miesiącach osiągnąć pełną wersję serwisu. 3.2. kalkulacja kosztów wykonania, wprowadzenia i utrzymania serwisu z punktu widzenia przedsięwzięcia e-biznesowego należy rozpatrywać koszty w dwóch kategoriach: ■ koszty pieniężne – faktycznie poniesione; ■ koszty utraconych możliwości – wyboru innego rozwiązania. możemy je przyporządkować do poszczególnych etapów zarządzania przedsięwzięciem: ■ planowania i wykonania; ■ wdrożenia; 6 wersja testowa z ograniczoną funkcjonalnością oraz wydajnością.   zarządzanie kosztami przedsięwzięć e-biznesowych 47 ■ utrzymania, zarządzania i rozwoju przedsięwzięcia. na etapie planowania pojawiają się w szczególności koszty utraconych możliwości. według sławomira sojaka (2012: 412) koszty utraconych możliwości przy podejmowaniu decyzji nie mogą być ignorowane, ponieważ pominięcie ich może doprowadzić do błędnych wniosków. w projekcie e-biznesowym skutkuje to nieużytecznością zaprojektowanych funkcjonalności. natomiast koszty pieniężne dotyczą inicjacji projektu. w rozpatrywanym projekcie uruchomienia serwisu zakupów grupowych zostały podjęte następujące działania generujące koszty o charakterze pieniężnym: ■ została wynajęta powierzchnia biurowa oraz podpisane umowy dotyczące mediów i usług telekomunikacyjnych; ■ rozpoczęła się rekrutacja zespołu biznesowego i technicznego: zatrudniono czterech programistów, wśród których wybrano lidera, grafika oraz product managera, który będzie prowadził nadzór biznesowy projektu oraz będzie pełnił funkcję analityka biznesowego; ■ został zakupiony sprzęt techniczny, oprogramowanie, meble i materiały; ■ przyłączono dedykowane łącze internetowe; ■ wydzierżawiono serwery i zapewniono hosting. koszty przedsięwzięcia e-biznesowego powinny być powiększone o rezerwy7 na pokrycie kosztów zaistnienia ryzyk projektu zgodnie z ich szansą zaistnienia. w projekcie wykonania serwisu zakupów grupowych założono miesięczną rezerwę dla pierwszych ośmiu miesięcy w kwocie 5 tys. zł. kalkulację wyżej wymienionych kosztów oraz założoną rezerwę przedstawiono w tabeli 2. tabela 2. koszty serwisu zakupów grupowych w pierwszym miesiącu realizacji projektu koszty* 1 miesiąc 1. powierzchnia biurowa, media, telefony 6000 2. wynagrodzenia wraz z narzutami 49 200 3. sprzęt techniczny, oprogramowanie, meble i materiały biurowe 30 000 4. łącze internetowe 1000 7 rezerwy nie powinny być przeznaczone na realizację projektu, jeżeli ryzyka nie spełniły się. nadwyżki mogą być wykorzystane w dalszym jego rozwoju. zwykle planuje się rezerwy na nieplanowane przedłużenie się projektu, poprawienie błędów i zmiany w projekcie oraz zmiany w zakresie rozwiązań technologicznych. http://biznet.gotdns.org/index.php?title=ryzyko_projektu http://biznet.gotdns.org/index.php?title=ryzyko_projektu marlena ciechan-kujawa, katarzyna goldmann or 48 koszty* 1 miesiąc 5. dzierżawa serwerów i hosting 2000 6. usługi księgowe 1000 7. rezerwa 5000 razem 94 200 * przyjęte koszty odwzorowują poziom cenowy obowiązujący w miastach o liczbie mieszkańców w przedziale 250– –350 tys. ź r ó d ł o: opracowanie własne. w fazie realizacji projektu zostały podjęte następne działania, które skutkują ponoszeniem kolejnych kosztów pieniężnych. w drugim miesiącu zatrudniono kierownika operacyjnego i specjalistę sem seo, natomiast w czwartym miesiącu zatrudniono pracownika operacyjnego i specjalistę w zakresie marketingu i pr. w związku z zatrudnieniem pojawiły się koszty dotyczące zakupu sprzętu technicznego, oprogramowania, mebli i materiałów. w czasie realizacji projektu, zgodnie z zaproponowanym przez zespół it rozwiązaniem technologicznym, począwszy od drugiego miesiąca, będą kupowane wartości niematerialne i prawne, tj. licencje, bazy danych oraz prawa autorskie. od czwartego miesiąca pojawią się koszty reklamy on-line. kalkulacja kosztów serwisu, będąca konsekwencją powyższych założeń dla drugiego, trzeciego i czwartego miesiąca realizacji projektu, została przedstawiona w tabeli 3. tabela 3. koszty serwisu zakupów grupowych w drugim, trzecim i czwartym miesiącu realizacji projektu koszty 2 miesiąc 3 miesiąc 4 miesiąc 1. powierzchnia biurowa, media, telefony 6000 6000 6000 2. wynagrodzenia wraz z narzutami 63 600 63 600 72 000 3. sprzęt techniczny, oprogramowanie, meble i materiały biurowe 10 600 800 11 000 4. łącze internetowe 1000 1000 1000 5. dzierżawa serwerów i hosting 2000 2000 2000 6. usługi księgowe 1000 1000 1000 7. licencje, bazy danych i prawa autorskie 2000 2000 2000   zarządzanie kosztami przedsięwzięć e-biznesowych 49 koszty 2 miesiąc 3 miesiąc 4 miesiąc 8. reklama – – 10 000 9. rezerwa 5000 5000 5000 razem 91 200 91 200 110 000 ź r ó d ł o: opracowanie własne. po zakończeniu prac programistycznych nastąpi testowanie projektu w zakresie wydajnościowym, jakościowym i funkcjonalnym. będzie to proces weryfikacji i sprawdzenia, czy przedsięwzięcie spełnia nasze wymagania i oczekiwania. działania związane z wykonaniem i wprowadzeniem serwisu zakupów grupowych do sieci w wersji beta po czterech miesiącach wyniosą 386 600 zł. od piątego miesiąca wzrosną koszty wynikające z planowanego zwiększenia nakładów na infrastrukturę techniczną – dzierżawa serwerów i hosting, oraz zwiększenia zatrudnienia – zatrudnienie pracowników operacyjnych w szóstym, siódmym i ósmym miesiącu. zwiększeniu ulegną również koszty reklamy on-line, które od ósmego miesiąca podwoją swoją wartość. kalkulacja tej fazy projektu jest przedstawiona w tabeli 4. tabela 4. koszty serwisu zakupów grupowych w piątym, szóstym, siódmym i ósmym miesiącu koszty 5 miesiąc 6 miesiąc 7 miesiąc 8 miesiąc 1. powierzchnia biurowa, media, telefony 6000 6000 6000 6000 2. wynagrodzenia wraz z narzutami 72 000 75 600 79 200 83 800 3. sprzęt techniczny, oprogramowanie, meble i materiały biurowe 1000 6100 6200 6300 4. łącze internetowe 1000 1000 1000 1000 5. dzierżawa serwerów i hosting 5000 5000 5000 5000 6. usługi księgowe 1000 1000 1000 1000 7. licencje, bazy danych i prawa autorskie 2000 2000 2000 2000 8. reklama 10 000 10 000 10 000 20 000 9. rezerwa 5000 5000 5000 5000 razem 103 000 111 700 115 400 129 100 ź r ó d ł o: opracowanie własne. marlena ciechan-kujawa, katarzyna goldmann or 50 wykonanie i wprowadzenie serwisu zakupów grupowych do sieci w pełnej wersji po ośmiu miesiącach wyniesie 845 800 zł. przychody serwisu, stanowiące prowizję za sprzedane produkty na poziomie 1–5%, powinny pojawić się już w piątym miesiącu w momencie uruchomienia wersji beta. dodatkowym źródłem przychodu będzie sprzedaż powierzchni reklamowej, która zostanie uruchomiona na poziomie 50 tys. unikalnych użytkowników serwisu miesięcznie. przedsięwzięcia e-biznesowe charakteryzuje ciągła zmiana i rozwój. projekty powinny być w taki sposób rozwijane, aby koszty utrzymania, modernizacji i rozszerzania były zminimalizowane. dlatego też oprogramowanie powinno być tak wysokiej jakości, aby w sposób przewidywalny można było utrzymywać je, modernizować i rozbudowywać bez większych nakładów czy ryzyka. analiza przedstawionego przedsięwzięcia e-biznesowego pozwala stwierdzić, że część kategorii kosztów wymienionych w poszczególnych etapach, tj. np.: opłaty za wynajem i utrzymanie powierzchni biurowej, dostawę mediów, usługi it czy usługi księgowe, występuje niezależnie od tego, czy planowane i realizowane przedsięwzięcie ma charakter tradycyjny, czy e-biznesowy. zasadniczą różnicę można jednak zaobserwować w poziomie i charakterze kosztów związanych z produkcją oprogramowania. te koszty mają odzwierciedlenie m.in. w kosztach wynagrodzeń, licencji, baz danych i praw autorskich. w tego typu przedsięwzięciach koszt zatrudnienia wysokiej klasy specjalistów do stworzenia zaawansowanego oprogramowania jest konsekwencją próby zapewnienia jak najlepszego efektu w obszarze wirtualizacji produktu, indywidualizacji kompozycji wartości oraz usieciowienia. tylko takie podejście umożliwia w projektach e-biznesowych uzyskanie korzyści wynikających z interakcji i komunikacji między przyszłymi użytkownikami serwisu. inaczej niż w klasycznych usługach, klient e-biznesowych przedsięwzięć często staje się stopniowo ich bezpośrednim uczestnikiem. w związku z powyższym stworzenie jak najlepszej przestrzeni dla użytkownika w zakresie edukacji, estetyki, rozrywki oraz aktywnego uczestnictwa determinuje jego faktyczne zaangażowanie w korzystanie z usługi. ze względu na specyfikę produktu w projektach e-biznesowych, częściej niż w tradycyjnych, budowanie relacji z potencjalnym klientem jest uwzględniane już na poziomie założeń koncepcyjnych i znajduje odzwierciedlenie w funkcjonalności oprogramowania. ponadto, koszty utrzymania, modernizacji i rozszerzenia funkcjonalności oprogramowania są istotnym elementem również   zarządzanie kosztami przedsięwzięć e-biznesowych 51 w późniejszych etapach realizacji projektów e-biznesowych. są one konsekwencją ciągłej konieczności potwierdzania adekwatności rozwiązań oferowanych przez produkt z potrzebami i oczekiwaniami użytkownika. podsumowując, można stwierdzić, że w porównaniu do przedsięwzięcia tradycyjnego, przedsięwzięcie e-biznesowe zazwyczaj charakteryzuje się niższymi kosztami operacyjnymi, pozyskania nowych klientów, zarządzania relacjami z użytkownikami i kosztami promocji oraz reklamy, ale wymaga wyższych środków związanych z wykonaniem i utrzymaniem adekwatności dedykowanych rozwiązań teleinformatycznych.  zakończenie zarządzanie przedsięwzięciem e-biznesowym ma zapewnić równowagę projektu przez zarządzanie zarówno na etapie przygotowania, wdrażania, jak i wprowadzania zmian: celami, wymaganiami funkcjonalnymi, czasem, kosztami, jakością, ryzykiem, relacjami. finansowe aspekty przedsięwzięcia e- biznesowego mające odzwierciedlenie w rachunku ekonomicznym są jednym z głównych ograniczeń projektowych. powinny one być planowane i kontrolowane na równi z zakresem i czasem realizacji projektu. kluczowe koszty i korzyści są określane już na etapie uzasadnienia biznesowego i wynikają z ustalonych celów i zidentyfikowanych ryzyk związanych z ich osiągnięciem. należy podkreślić, że wszystkie wymienione aspekty są ściśle ze sobą powiązane. ustalenie zakresu projektu i harmonogramu wpływa na jego koszty, ustalenie ram budżetu natomiast determinuje zakres i czas projektu. przedsięwzięcie e-biznesowe charakteryzuje wysoki stopień innowacyjności i w związku z tym jest ono narażone na wysokie ryzyko, wyższe niż w przypadku projektów tradycyjnych. w działalności internetowej, częściej niż w innych, poniesione koszty mogą nigdy się nie zwrócić. dlatego też w takim projekcie należy szczególnie zwracać uwagę na koszty alternatywne, jakimi są koszty utraconych możliwości.  literatura ciechan-kujawa m. (2007), biznesplan – standardy i praktyka, tnoik, toruń. doligalski t. (2006a), czym się różni przedsięwzięcie e-biznesowe od tradycyjnego w zakresie relacji z klientami? (cz. 1), e-mentor, nr 3 (15). doligalski t. (2006b), czym się różni przedsięwzięcie e-biznesowe od tradycyjnego w zakresie relacji z klientami? (cz. 2), e-mentor, nr 4 (16). marlena ciechan-kujawa, katarzyna goldmann52 nojszewski d. (2006), przegląd modeli e-biznesowych (cz. 1), e-mentor, nr 5 (17). nojszewski d. (2007), przegląd modeli e-biznesowych (cz. 2), e-mentor, nr 2 (19). sojak s. (2012), rachunkowość zarządcza i rachunek kosztów, tnoik, toruń. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: april 22, 2016; date of acceptance: may 17, 2016. * contact information: joaobraga_1991@hotmail.com, rua nova do regado 218, 1ºesq, 4250-335 – porto, portugal, phone: +351913031128. ** contact information: pgomes@iscap.ipp.pt, polytechnic of porto, portugal | school of accounting and administration of porto, cecej – centro de estudos em ciências empresariais e jurídicas, portugal, rua jaime lopes amorim, s/n, 4465-004 s. mamede de infesta – portugal, phone: +351914048638. braga j. p., & gomes l. m. p. (2016). the impact of the preliminary announcement on the abnormal returns of the companies involved in takeover bids in the portuguese stock market between 2000 and 2014. copernican journal of finance & accounting, 5(1), 39–65. http://dx.doi. org/10.12775/cjfa.2016.003 joão paulo braga* iscap – instituto superior de contabilidade e administração do porto luís m. pereira gomes** iscap – instituto superior de contabilidade e administração do porto the impact of the preliminary announcement on the abnormal returns of the companies involved in takeover bids in the portuguese stock market etween 2000 and 2014 keywords: takeover bid, abnormal returns, hostile takeover, price reaction, bid premium. j e l classification: g10, g14, g30, g34. abstract: the comprehension of terms such as takeover bids is essential to understand the functioning of business combinations. this paper aims to analyze the impact of the preliminary announcement on the abnormal returns of the companies involved in takeover bids in the portuguese stock market. this study used the methodologies of ball and brown (1968) and beaver (1968). 100 operations were identified between joão paulo braga, luís m. pereira gomes40 2000 and 2014. the results of the 12 analyzed bids confirm that the target companies show positive abnormal returns, whilst the acquiring companies show negative abnormal returns and inferior in amplitude. they also confirm that, globally, the companies react strongly to the announcement and that they acquire higher abnormal earnings in the periods closest to the preliminary announcement.  introduction the international scientific community has given relevant importance to the business combinations occurred in the globalized market. mergers and acquisitions (m&a) are more and more a path to external growth used by the companies to satisfy their strategic objectives. in this context, takeover bids are identified as a frequent instrument which was used several times in the last two decades, but isn’t usually studied in portugal. frequently several significant changes are identified on the stock prices of the companies involved in takeover bids that, in most cases, last several weeks. this subject is studied in the area of event studies. the main objective of this paper focuses on the analysis of the impact of preliminary announcements of the takeover bids on the stock prices of the companies involved (acquiring and target) in the portuguese stock market. more precisely, the objective is to identify who gains and loses with the bid’s announcement, through the calculation of the abnormal returns, using the methodologies of ball and brown (1968) and beaver (1968). during the empirical research, 12 takeover bids, registered on comissão do mercado de valores mobiliários (cmvm), were considered during the years between 2000 and 2014. the final objective requires a quantitative approach using the deductive method. the paper is divided into five different chapters. on the second chapter, a literature review is presented about the various forms involving takeover bids and over the arguments connected to each type of takeover bid. additionally, themes that involve these operations, such as corporate governance – explained by the agency theory – and bid premium. the next chapter, a literature review about event studies is presented, focusing more on the subject at hand and taking into account the adopted methodologies. the fourth chapter presents the empirical research, using hypothesis considering the final objective of this study, specifying the models of ball & brown and beaver, the final results and statistical tests, as well as its discussion. in the last chapter, the conclusions are specified. the impact of the preliminary announcement… 41 the research methodology and the course of the research process during the research the following analyzes are used: analytical, graphical, statistical and empirical research method. the theoretical and methodological basis for this research comes from specialized scientific literature, textbooks, regulations, published annual reports and quotation bulletins of supervisory authorities and mass communication media. literature review on business acquisitions m&a represent a substantial part of the business operations performed by companies acting in evolved capital markets, transforming big corporations or major companies that are important to the world development. one of the ways so that the companies may grow is via decision-making regarding the merger or control, merging and acquiring other companies. “in acquisitions, the total capital of a smaller company becomes propriety, totally or partially, of a bigger company in size” 1. a vertical acquisition occurs when a company gains the propriety over another company working in the same industry, but in different production stages (weston, mitchell & mulherin 2004). this type of acquisition is done in order to obtain the total control of the production chain, strengthening the position of the company in the market. the horizontal acquisition occurs when both companies work, produce and compete in the same industry. the merger of both companies may result in a new company more capable to face the market (weston et al. 2004; gaughan 2005). with this operation the business capacity of the acquiring company increases, but its business structure and modus operandi remains the same. the table2 below shows some advantages / disadvantages of both horizontal and vertical integrations as a vehicle to business growth. some disadvantages of the vertical integration occur with new company’s inefficiencies (after 1 “manual de fusões e aquisições de empresas no sector das tic”, http://www. anetie.pt/userfiles/9/file/documentos/coopera%c3%a7%c3%a3o%20competitiva/ manual%20de%20fus%c3%b5es%20e%20aq%20%20de%20empresas%20no%20 sector%20das%20tic%281%29.pdf, anetie, p.6. 2 “strategic management insight, “horizontal integration & vertical integration”, http://www.strategicmanagementinsight.com/topics/horizontal-integration.html and http://www.strategicmanagementinsight.com/topics/vertical-integration.html. joão paulo braga, luís m. pereira gomes42 acquisition). on the other hand, the number of advantages and disadvantages are less in the horizontal integration, because it reduces competition and the complexity of the company’s “logistics” after the operation. table 1. horizontal integration vs vertical integration horizontal integration vertical integration advantages – lower costs – greater differentiation – greater market share – reduced competition – access to new markets – lower costs – better supply, + resources – better coordination – better distribution – greater market share – more skills – easier investment opportunities disadvantages – destroyed value – legal consequences – reduced flexibility – more costs, if inefficient – smaller competition, less quality – reduced competition – legal problems (monopoly) – competitive disadvantage s o u r c e : elaboration of the author. the conglomerated acquisition occurs when a company acquires another one, which operates and is in a completely different industry, providing conditions to diversify the risk and market exposure, as well as to build entirely independent business groups from one another (herger & mccorriston 2013). hostile takeover this operation occurs when the decision of the acquiring company goes against the will and desire of the target company’s management (johansson & torstensson 2008). it can also be considered as hostile when the bid is disclosed without report to the board of directors of the target company and is directly disclosed to the shareholders. usually, the hostile bids want to gain the shareholder power of the target company and, most of the times, a friendly bid may become hostile (zarin & yang 2007). it can also occur the opposite situation, taking into account the negotiation process, in which a hostile bid may become a friendly one (schwert 2000) usually, a friendly bid is preferred by the acquiring company, because it results in a much inferior cost, globally. moreover, the acquiring company will also face a weaker opposition in the negotiation process, but also a weaker opposition by the market, facing also less legal problems. the impact of the preliminary announcement… 43 considering that hostile takeovers are, sometimes, true dilemmas for the companies, because they can have positive and negative effects, the impact of these business operations become quite difficult to calculate. zarin and yang (2007) point that an undervalued company, due to management inefficiencies or low stock value, may be the target of hostile takeovers. these bids usually involve the management’s substitution and the implementation of strategies that may value the company, benefiting the company’s shareholders. on the other hand, the use of a defense strategy against that bid may provoke damaging effects to the target company and its shareholders, ref lecting that action on the company’s stock value. table 2. arguments for and against hostile takeovers arguments authors for against steinbächer (2007) – synergies effect – undervalued target company – market share – bid’s impact on the target company’s management – possibility of occurring a management entrenchment* situation. demidova (2007) – market development via companies control carvalho (2012) – creation of negative externalities – deterioration of the other interests of stakeholders – loss of welfare. jensen e ruback (1983) – reduction of agency costs – creation of economies of scale – greater efficiency martynova and renneboog (2006) – cost-reduction – exploitation of new markets depamphilis (2010, 2011) – surprise-effect – increase of acquisition costs – creation of an “auction” environment – board of directors’ structure – integration process gaspar and matos (2005) – low degree of compromise by an investor *  the protection of the manager’s own interest is the most evident characteristic of this theory. this situation might occur when the management of the target company tries to turn its own company into a less attractive acquisition for the acquiring company, by the use of a poison pill, for example, or by preventing the bid to be disclosed to the stockholders by simply rejecting that same bid (smadja 2008). on the other hand, shareholder interest theory has the objective of increasing the stockholders’ wealth during the acquisition process, something possible by the retraction on defense’ costs and by reaffirming that the management won’t disable any of the defense strategies used, while the bid doesn’t comply with the shareholder interest (gaughan 2007). s o u r c e : elaboration of the author. joão paulo braga, luís m. pereira gomes44 corporate governance and agency theory a relevant theme in the acquisition business operation is the definition of corporate governance. but before exploiting that definition, there is a necessity to explain what it is agency theory, two very connected themes that have been studied by the academic community. it is essential to comprehend the relationships between shareholders and managers in order to understand the group of laws, regulations, structures and corporate bodies that incorporate the notion of corporate governance (neves 2006). gaughan (2007) states corporate governance to be a complex notion which has been ostracized due to a group of “corporate misconducts” that have lead companies to change their regulations and business structures. in this domain, the sarbanes-oxley law defined several significant reductions on the creation of opportunities for the occurrence of conf licting interests and allowed for a significant reduction of agency problems. an agency relationship might be defined as a contract in which one or more persons (principal) undertake a third-party (agent) to execute some authority task, in this context the task is to manage a company. taking into consideration that both – principal and agent – want to maximize utility, it is possible to assume that the agent not always works in favor of the principal, creating agency problems (jensen & meckling 1976; eisenhardt 1989). agency theory tries to solve two problems, known as agency problem and risk-sharing problem. the agency problem is related to the conf lict of interests between agent and principal, as well as to the difficulty that the principal has in monitoring the agent. the risk-sharing problem appears when the agent and principal have different attitudes toward risk (eisenhardt 1989). bid premium bid premium corresponds to the difference between the value offered by the acquiring company for the acquisition of the target company and the real value of the target company in the market. usually, premiums are quite high because the acquiring company wants to obtain a positive answer from the target company for its acquisition (schoenberg 2003). the notion of premium is often related with the decision assuring the shareholder interest, considering that empirical evidence has shown that a positive correlation between an increase in shareholders’ wealth and an increase on the impact of the preliminary announcement… 45 the premium of the acquiring company exists (schoenberg & thornton 2006; johansson & torstensson 2008). schwert (1996) concluded that competition increases the bid premium, significantly, confirming the papers written by bradley, desai and kim (1988), by comment and schwert (1995) and by sacchetto and dimopoulos (2008). the figure below shows the four phases of the acquisition process identified by schwert (1996). figure 1. phases of the acquisition process “corporate misconducts” that have lead companies to change their regulations and business structures. in this domain, the sarbanes-oxley law defined several significant reductions on the creation of opportunities for the occurrence of conflicting interests and allowed for a significant reduction of agency problems. an agency relationship might be defined as a contract in which one or more persons (principal) undertake a third-party (agent) to execute some authority task, in this context the task is to manage a company. taking into consideration that both – principal and agent – want to maximize utility, it is possible to assume that the agent not always works in favor of the principal, creating agency problems (jensen & meckling, 1976; eisenhardt, 1989). agency theory tries to solve two problems, known as agency problem and risk-sharing problem. the agency problem is related to the conflict of interests between agent and principal, as well as to the difficulty that the principal has in monitoring the agent. the risk-sharing problem appears when the agent and principal have different attitudes toward risk (eisenhardt, 1989). bid premium bid premium corresponds to the difference between the value offered by the acquiring company for the acquisition of the target company and the real value of the target company in the market. usually, premiums are quite high because the acquiring company wants to obtain a positive answer from the target company for its acquisition (schoenberg, 2003). the notion of premium is often related with the decision assuring the shareholder interest, considering that empirical evidence has shown that a positive correlation between an increase in shareholders’ wealth and an increase on the premium of the acquiring company exists (schoenberg & thornton, 2006; johansson & torstensson, 2008). schwert (1996) concluded that competition increases the bid premium, significantly, confirming the papers written by bradley, desai and kim (1988), by comment and schwert (1995) and by sacchetto and dimopoulos (2008). the figure below shows the four phases of the acquisition process identified by schwert (1996). figure 1. phases of the acquisition process s o u r c e : g. william schwert (1996, p.3), “markup pricing in mergers and acquisitions”. national bureau of economic research. a tough negotiation at the target company’s end may motivate a bid premium increase, but it may also determine a reduction on the success probability of the acquisition. thus, it becomes necessary to investigate if the net effects of the defense strategies have repercussions on the shareholders’ wealth. another way to increase the bid premium is described by schwert (2000) and it consists in initiate a process of “auction”, with several bidders (multiple-bidder auction). franks and mayer (1996) also studied this matter and they have concluded that the bid premium is higher in a hostile bid than in a friendly bid. as mentioned above, competition represents an argument against a hostile takeover, due to the increase on costs it provokes to the acquiring company. that was also concluded by sacchetto and dimopoulos (2008) in a study about the impact of competition on the bid premium. both authors studied bids on the american market between 1988 and 2006. against that conclusion, fishman (1985) stated that the bid premium initially offered by the first acquiring company (preemptive bid) ref lects the necessary value to avert a second acquiring company. the studies of eckbo (2008) and aktas et al. (2009) are consistent with the conclusions presented by fishman (1985), showing that the bid premium may be used to avert competition. complementary, chen and cornu joão paulo braga, luís m. pereira gomes46 (2002) affirm that the processes of hostile bids promote even more competition between acquiring companies and consequent higher premiums paid to the target companies. empirical research on event studies as mentioned above, the objective of this paper is to analyze the behavior of the stock prices of the companies involved in takeover bids, considering the preliminary announcement of each bid. the study of the abnormal returns has been studied on the course of finance in the subject of event studies. beaver (1968) studied the impact of information over the volume and companies’ stock prices. that information may refer to the disclosure of a preliminary announcement of a takeover bid. beaver (1968) defines information as a change on the expectations over the result of an event, in a way that the information has an impact on investors, if it provokes a change on the investors’ expectations and their behaviors. still, he concludes that investors accept information as a significant variable, reason enough to justify that information has a strong impact on the changes of volume and stock prices. he identified a change on stock prices during the week’s announcement 67% higher than the average of stock prices in the period when the announcement didn’t occur. moreover, that abnormal activity lasted until the periods after the announcement with replicas, obtaining a 10% to 15% change, in the two weeks after the announcement. ball and brown (1968) used the linear regression model and the naive model, predicting that earnings per share of the current year won’t be different from the earnings per share of the previous year, in order to identify good or bad announcements in terms of earnings per share. they divided the sample into two parts: moments in which residual earnings were positive (the observed earnings were higher than the predicted ones) and in instants in which residual earnings were negative (the predicted earnings were higher than the observed ones). the results showed that, although the larger part of the price changes occurred before the announcement, 10% to 15% of the price changes occurred on the month’s announcement. bradley et al. (1988) showed evidence on the earnings of target companies involved in takeover bids. in a study on 236 bids occurred in the united states over a 21 year-period, they verified that the share value of these companies increased 35%, in average. a short time later, eckbo & langhor (1989) studied 90 takeover bids in france and also concluded the impact of the preliminary announcement… 47 that the share value of the target companies increased 16.5%, in average. even in those cases when the bid failed, the stock prices tend to maintain a high value, due to the possibility of occurrence of a new bid, of occurring changes in the management policies and the chance of the bid to be indicative of information3 (bradley et al. 1988). jensen and ruback (1983) show that the target companies earn positive abnormal returns on the month’s bid announcement both in successful bids and unsuccessful bids. in the case of unsuccessful bids, companies which haven’t received additional bids, in the two years following, lost the returns previously earned; companies which have received additional bids earned even higher returns than the ones earned before. dodd and ruback (1977) and aff leck-graves et al. (1988) concluded the same. the target companies earned positive and significant abnormal returns, mainly on the month of the bid. moreover, the target company’s returns occur independently of the success of the bid (dodd &  ruback 1977). regarding the takeover bids’ impact over the returns of the acquiring companies, the empirical evidence isn’t unanimous. aff leck-graves et al. (1988) didn’t find positive abnormal returns for these companies. jensen and ruback (1983) found evidence that the acquiring companies don’t lose. dodd and ruback (1977) concluded that, in the twelve months before the bid, the shareholders of the acquiring companies earned positive and significant abnormal returns. asquith and kim (1982) affirm that the acquiring companies earned negative and insignificant abnormal returns during the announcement period, in conglomerated bids. agrawal et al. (1992) analyzed the abnormal performance of the stocks, mainly in mergers. they concluded that the acquiring companies had an underperformance after the merger, losing almost 10% of the wealth, in the bid’s subsequent five years. objectives and hypothesis the purpose of the empirical research is to understand and prove the impact of the preliminary announcement on the abnormal returns of the companies’ 3 the takeover bids are indicative of information when there is asymmetry of information between the management of target companies and its shareholders, leading to an undervaluation of these companies. the acquiring company, with more information, tries to benefit with bid (bradley et al. 1988). joão paulo braga, luís m. pereira gomes48 stocks involved in takeover bids, in the portuguese stock market between 2000 and 2014. there is the intent to analyze the price reaction to the disclosure of intent to buy and the behavior of abnormal returns in the period after the bid, in order to identify those companies which gain and those which lose with this strategy of growth. to develop the empirical research, taking into account the final objective of this paper, a number of working hypothesis were included. the five working hypotheses are: h1: the preliminary announcement of the takeover bid has a negative impact on the average abnormal returns of the acquiring companies h2: the preliminary announcement of the takeover bid has a positive impact on the average abnormal returns of the target companies h3: the positive impact of the preliminary announcement of the takeover bid on the average abnormal returns of the target companies is higher, in amplitude, than the negative impact on the average abnormal returns of the acquiring companies h4: the average abnormal returns of the companies involved (acquiring and target) react strongly to the disclosure of the preliminary announcement of the takeover bid h5: the reaction of the average abnormal returns of the target companies to the disclosure of the preliminary announcement of the takeover bid is higher than the reaction of the average abnormal returns of the acquiring companies sample and data the survey of takeover bids was conducted from the information available in the annual reports and quotation bulletins of cmvm, as well as in other mass communication media, such as newspapers. the sample initially identified for the empirical research was constituted by 100 takeover bids occurred4 in portugal between 2000 and 2014. however, the quantitative analysis can only contemplate the bids of both (acquiring and target) companies, when both companies share prices are available. there were some limitations regarding these 4 the list of both (acquiring and target) companies involved in takeover bids between 2000 and 2014 may be disclosed by the authors upon request. the impact of the preliminary announcement… 49 100 takeover bids: 16 bids were offered by international groups, 16 bids were offered by a bidder holding more than half of the capital of the target company, 53 bids hadn’t the share price information of both companies, and 3 had one individual as a bidder. taking into account these limitations, only 12 bids were studied and only those were included in the empirical research. the data were studied using the stock prices of the companies involved and of the portuguese stock exchange (psi-20 index), calculating the first napier’s logarithmic difference of the prices, with the perspective to rectify the occurrence of “shocks” or abnormal phenomena that, most of the times, characterize time series. in practical terms, the nominal returns of stock were calculated, continuously compounded, in which and express the closing price of stock in consecutive weeks and expresses the dividends of stock in the week: the survey of takeover bids was conducted from the information available in the annual reports and quotation bulletins of cmvm, as well as in other mass communication media, such as newspapers. the sample initially identified for the empirical research was constituted by 100 takeover bids occurred7 in portugal between 2000 and 2014. however, the quantitative analysis can only contemplate the bids of both (acquiring and target) companies, when both companies share prices are available. there were some limitations regarding these 100 takeover bids: 16 bids were offered by international groups, 16 bids were offered by a bidder holding more than half of the capital of the target company, 53 bids hadn’t the share price information of both companies, and 3 had one individual as a bidder. taking into account these limitations, only 12 bids were studied and only those were included in the empirical research. the data were studied using the stock prices of the companies involved and of the portuguese stock exchange (psi-20 index), calculating the first napier’s logarithmic difference of the prices, with the perspective to rectify the occurrence of “shocks” or abnormal phenomena that, most of the times, characterize time series. in practical terms, the nominal returns of stock were calculated, continuously compounded, in which and express the closing price of stock in consecutive weeks and expresses the dividends of stock in the week : [1] and the nominal returns of index , continuously compounded, in which and express the closing values of the index in consecutive weeks: [2] the date of preliminary announcement of the takeover bid corresponds to the week 0. around the date of announcement, the study considers a period of 38 weeks with observations of thursday’s closing prices, since the week -19 until week +18. during some time series, dividends were distributed or there were social capital increases that had consequences in terms of the anticipated discount of stock prices. these circumstances 7 the list of both (acquiring and target) companies involved in takeover bids between 2000 and 2014 may be disclosed by the authors upon request. [1] and the nominal returns of index , continuously compounded, in which and express the closing values of the index in consecutive weeks: the survey of takeover bids was conducted from the information available in the annual reports and quotation bulletins of cmvm, as well as in other mass communication media, such as newspapers. the sample initially identified for the empirical research was constituted by 100 takeover bids occurred7 in portugal between 2000 and 2014. however, the quantitative analysis can only contemplate the bids of both (acquiring and target) companies, when both companies share prices are available. there were some limitations regarding these 100 takeover bids: 16 bids were offered by international groups, 16 bids were offered by a bidder holding more than half of the capital of the target company, 53 bids hadn’t the share price information of both companies, and 3 had one individual as a bidder. taking into account these limitations, only 12 bids were studied and only those were included in the empirical research. the data were studied using the stock prices of the companies involved and of the portuguese stock exchange (psi-20 index), calculating the first napier’s logarithmic difference of the prices, with the perspective to rectify the occurrence of “shocks” or abnormal phenomena that, most of the times, characterize time series. in practical terms, the nominal returns of stock were calculated, continuously compounded, in which and express the closing price of stock in consecutive weeks and expresses the dividends of stock in the week : [1] and the nominal returns of index , continuously compounded, in which and express the closing values of the index in consecutive weeks: [2] the date of preliminary announcement of the takeover bid corresponds to the week 0. around the date of announcement, the study considers a period of 38 weeks with observations of thursday’s closing prices, since the week -19 until week +18. during some time series, dividends were distributed or there were social capital increases that had consequences in terms of the anticipated discount of stock prices. these circumstances 7 the list of both (acquiring and target) companies involved in takeover bids between 2000 and 2014 may be disclosed by the authors upon request. [2] the date of preliminary announcement of the takeover bid corresponds to the week 0. around the date of announcement, the study considers a period of 38 weeks with observations of thursday’s closing prices, since the week -19 until week +18. during some time series, dividends were distributed or there were social capital increases that had consequences in terms of the anticipated discount of stock prices. these circumstances were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined joão paulo braga, luís m. pereira gomes50 by sharpe-lintner (sharpe 1964; lintner 1965) in capital asset pricing model context: were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] [3] were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] is the return of an asset with no risk in the t period, were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] is the return of the market index in the t period and were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] is the sensitivity of the stock return i in relation to the return of the market index m, which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] [4] where were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] is the estimate of the residual term for each stock i in the t period, which ref lects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] [5] considering were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] [6] were purged from the object of the empirical research, which has the intent to analyze the impact of other events, through the correction of the respective stock prices. models after calculated the logarithmic returns of each company stock price involved in takeover bid, we determine the emerging abnormal returns of the preliminary announcement of the bid. at a first stage we used the model determined by sharpe-lintner (sharpe, 1964; lintner, 1965) in capital asset pricing model context: [3] is the return of an asset with no risk in the period, is the return of the market index in the period and is the sensitivity of the stock return in relation to the return of the market index , which may be estimated through the implementation of the ordinary least squares – ols method. by substituting the expected returns by the observed returns in the equation [3], it results: [4] where is the estimate of the residual term for each stock in the period, which reflects the abnormal effect of the disclosure of the announcement on the stock’s return. model #1 – ball & brown: reformulating the equation [4], it can be obtained another equivalent equation: [5] considering estimated from the ols method with the regression’s independent term, ball and brown (1968) deduce the abnormal return for each stock and in each period: [6] [7] finally, the average abnormal return (aar) and cumulative average abnormal return (caar) are determined by the following: [7] finally, the average abnormal return (aar) and cumulative average abnormal return (caar) are determined by the following: ���� � 1 � ����� �� ��� [8] ������ �� � � ���� �� ���� [9] where ���� represents the average abnormal return in relation to all stocks in � period, � is the number of companies in analysis, �� is the number of weeks in relation to the period studied and ������ �� represents the cumulative average abnormal return between week �� and week ��. model #2 – beaver: besides the calculation of the abnormal return, it was also determined the price reaction of stock in relation to relevant information, as it happens with the preliminary announcement of the takeover bid. beaver (1968) examines the estimate volatility of the residual term ���� constituent of a market model regression: � �� � ���� ��������� [10] where � represents the price reaction of stock and ��������� represents the variance of the residual term in the period furthest to the preliminary announcement (between week –18 and week –6). the usage of these methodologies assume the assumption of the prerequisites of the financial assets valuation models, such as the capital asset pricing model (capm), namely the random walk hypothesis with i.i.d. increments of the stock returns, which is the basis of the efficient market hypothesis (emh), in its weak form. regarding the advantages of the methodologies studied, it’s emphasized the possibility to analyze the phenomenon of the impact of takeover bids on the abnormal returns of the involved [8] the impact of the preliminary announcement… 51 [7] finally, the average abnormal return (aar) and cumulative average abnormal return (caar) are determined by the following: ���� � 1 � ����� �� ��� [8] ������ �� � � ���� �� ���� [9] where ���� represents the average abnormal return in relation to all stocks in � period, � is the number of companies in analysis, �� is the number of weeks in relation to the period studied and ������ �� represents the cumulative average abnormal return between week �� and week ��. model #2 – beaver: besides the calculation of the abnormal return, it was also determined the price reaction of stock in relation to relevant information, as it happens with the preliminary announcement of the takeover bid. beaver (1968) examines the estimate volatility of the residual term ���� constituent of a market model regression: � �� � ���� ��������� [10] where � represents the price reaction of stock and ��������� represents the variance of the residual term in the period furthest to the preliminary announcement (between week –18 and week –6). the usage of these methodologies assume the assumption of the prerequisites of the financial assets valuation models, such as the capital asset pricing model (capm), namely the random walk hypothesis with i.i.d. increments of the stock returns, which is the basis of the efficient market hypothesis (emh), in its weak form. regarding the advantages of the methodologies studied, it’s emphasized the possibility to analyze the phenomenon of the impact of takeover bids on the abnormal returns of the involved [9] where aart represents the average abnormal return in relation to all stocks in t period, n is the number of companies in analysis, nt is the number of weeks in relation to the period studied and [7] finally, the average abnormal return (aar) and cumulative average abnormal return (caar) are determined by the following: ���� � 1 � ����� �� ��� [8] ������ �� � � ���� �� ���� [9] where ���� represents the average abnormal return in relation to all stocks in � period, � is the number of companies in analysis, �� is the number of weeks in relation to the period studied and ������ �� represents the cumulative average abnormal return between week �� and week ��. model #2 – beaver: besides the calculation of the abnormal return, it was also determined the price reaction of stock in relation to relevant information, as it happens with the preliminary announcement of the takeover bid. beaver (1968) examines the estimate volatility of the residual term ���� constituent of a market model regression: � �� � ���� ��������� [10] where � represents the price reaction of stock and ��������� represents the variance of the residual term in the period furthest to the preliminary announcement (between week –18 and week –6). the usage of these methodologies assume the assumption of the prerequisites of the financial assets valuation models, such as the capital asset pricing model (capm), namely the random walk hypothesis with i.i.d. increments of the stock returns, which is the basis of the efficient market hypothesis (emh), in its weak form. regarding the advantages of the methodologies studied, it’s emphasized the possibility to analyze the phenomenon of the impact of takeover bids on the abnormal returns of the involved represents the cumulative average abnormal return between week t1 and week t2. model #2 – beaver: besides the calculation of the abnormal return, it was also determined the price reaction of stock in relation to relevant information, as it happens with the preliminary announcement of the takeover bid. beaver (1968) examines the estimate volatility of the residual term [7] finally, the average abnormal return (aar) and cumulative average abnormal return (caar) are determined by the following: ���� � 1 � ����� �� ��� [8] ������ �� � � ���� �� ���� [9] where ���� represents the average abnormal return in relation to all stocks in � period, � is the number of companies in analysis, �� is the number of weeks in relation to the period studied and ������ �� represents the cumulative average abnormal return between week �� and week ��. model #2 – beaver: besides the calculation of the abnormal return, it was also determined the price reaction of stock in relation to relevant information, as it happens with the preliminary announcement of the takeover bid. beaver (1968) examines the estimate volatility of the residual term ���� constituent of a market model regression: � �� � ���� ��������� [10] where � represents the price reaction of stock and ��������� represents the variance of the residual term in the period furthest to the preliminary announcement (between week –18 and week –6). the usage of these methodologies assume the assumption of the prerequisites of the financial assets valuation models, such as the capital asset pricing model (capm), namely the random walk hypothesis with i.i.d. increments of the stock returns, which is the basis of the efficient market hypothesis (emh), in its weak form. regarding the advantages of the methodologies studied, it’s emphasized the possibility to analyze the phenomenon of the impact of takeover bids on the abnormal returns of the involved constituent of a market model regression: [7] finally, the average abnormal return (aar) and cumulative average abnormal return (caar) are determined by the following: ���� � 1 � ����� �� ��� [8] ������ �� � � ���� �� ���� [9] where ���� represents the average abnormal return in relation to all stocks in � period, � is the number of companies in analysis, �� is the number of weeks in relation to the period studied and ������ �� represents the cumulative average abnormal return between week �� and week ��. model #2 – beaver: besides the calculation of the abnormal return, it was also determined the price reaction of stock in relation to relevant information, as it happens with the preliminary announcement of the takeover bid. beaver (1968) examines the estimate volatility of the residual term ���� constituent of a market model regression: � �� � ���� ��������� [10] where � represents the price reaction of stock and ��������� represents the variance of the residual term in the period furthest to the preliminary announcement (between week –18 and week –6). the usage of these methodologies assume the assumption of the prerequisites of the financial assets valuation models, such as the capital asset pricing model (capm), namely the random walk hypothesis with i.i.d. increments of the stock returns, which is the basis of the efficient market hypothesis (emh), in its weak form. regarding the advantages of the methodologies studied, it’s emphasized the possibility to analyze the phenomenon of the impact of takeover bids on the abnormal returns of the involved [10] where r represents the price reaction of stock and [7] finally, the average abnormal return (aar) and cumulative average abnormal return (caar) are determined by the following: ���� � 1 � ����� �� ��� [8] ������ �� � � ���� �� ���� [9] where ���� represents the average abnormal return in relation to all stocks in � period, � is the number of companies in analysis, �� is the number of weeks in relation to the period studied and ������ �� represents the cumulative average abnormal return between week �� and week ��. model #2 – beaver: besides the calculation of the abnormal return, it was also determined the price reaction of stock in relation to relevant information, as it happens with the preliminary announcement of the takeover bid. beaver (1968) examines the estimate volatility of the residual term ���� constituent of a market model regression: � �� � ���� ��������� [10] where � represents the price reaction of stock and ��������� represents the variance of the residual term in the period furthest to the preliminary announcement (between week –18 and week –6). the usage of these methodologies assume the assumption of the prerequisites of the financial assets valuation models, such as the capital asset pricing model (capm), namely the random walk hypothesis with i.i.d. increments of the stock returns, which is the basis of the efficient market hypothesis (emh), in its weak form. regarding the advantages of the methodologies studied, it’s emphasized the possibility to analyze the phenomenon of the impact of takeover bids on the abnormal returns of the involved represents the variance of the residual term in the period furthest to the preliminary announcement (between week -18 and week -6). the usage of these methodologies assume the assumption of the prerequisites of the financial assets valuation models, such as the capital asset pricing model (capm), namely the random walk hypothesis with i.i.d. increments of the stock returns, which is the basis of the efficient market hypothesis (emh), in its weak form. regarding the advantages of the methodologies studied, it’s emphasized the possibility to analyze the phenomenon of the impact of takeover bids on the abnormal returns of the involved companies. regarding the disadvantages, we emphasize the small scope of the time period closer to the preliminary announcement date and further to the preliminary announcement date, which may cause problems on the estimation of the value of beta by the ordinary least-squares method (ols). joão paulo braga, luís m. pereira gomes52 the outcome of the research process model #1 – ball & brown: taking into consideration the ball and brown (1968) model, graph 1 represents the caar’s close to the date of the preliminary announcement of the takeover bid for acquiring companies: graph 1. cumulative average (log) abnormal returns (ball & brown) – acquiring companies companies. regarding the disadvantages, we emphasize the small scope of the time period closer to the preliminary announcement date and further to the preliminary announcement date, which may cause problems on the estimation of the value of beta by the ordinary least-squares method (ols). the outcome of the research process model #1 – ball & brown: taking into consideration the ball and brown (1968) model, graph 1 represents the caar’s close to the date of the preliminary announcement of the takeover bid for acquiring companies: graph 1. cumulative average (log) abnormal returns (ball & brown) – acquiring companies source: elaboration of the author. the graph shows that acquiring companies cumulate negative average abnormal returns close to the date of the preliminary announcement (between weeks -5 e +5), especially from week +2 onwards. the abnormal losses in this group of companies occurred earlier (week -5) than the abnormal earnings (week -2). moreover, the positive caar’s stagnate at 2.96% from week +2, while the negative caar’s increase until -6.03% at the week’s end (week +5). the data behavior of graph 1 confirms the working hypotheses h1 mentioned before. it is confirmed that in the period close to the preliminary announcement of the takeover bid the acquiring companies have a negative average abnormal return, which isn’t compensated by the reduced cumulative abnormal earnings, in the same period. -0,0700 -0,0600 -0,0500 -0,0400 -0,0300 -0,0200 -0,0100 0,0000 0,0100 0,0200 0,0300 0,0400 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) caar + caar s o u r c e : elaboration of the author. the graph shows that acquiring companies cumulate negative average abnormal returns close to the date of the preliminary announcement (between weeks -5 e +5), especially from week +2 onwards. the abnormal losses in this group of companies occurred earlier (week -5) than the abnormal earnings (week -2). moreover, the positive caar’s stagnate at 2.96% from week +2, while the negative caar’s increase until -6.03% at the week’s end (week +5). the data behavior of graph 1 confirms the working hypotheses h1 mentioned before. it is confirmed that in the period close to the preliminary announcement of the takeover bid the acquiring companies have a negative average abnormal return, which isn’t compensated by the reduced cumulative abnormal earnings, in the same period. continuing with the ball and brown (1968) model, graph 2 represents the caar’s close to the date of the preliminary announcement of the takeover bid for target companies: the impact of the preliminary announcement… 53 graph 2. cumulative average (log) abnormal returns (ball & brown) – target companies continuing with the ball and brown (1968) model, graph 2 represents the caar’s close to the date of the preliminary announcement of the takeover bid for target companies: graph 2. cumulative average (log) abnormal returns (ball & brown) – target companies source: elaboration of the author. the graph shows that target companies cumulate positive average abnormal returns close to the date of the preliminary announcement (between weeks -5 e +5), especially from week 0 and reinforced in week +2. the positive caar’s stagnate at 15.16% from week +2, while the negative caar’s increase until -5.47% at the week’s end +5. the data behavior of graph 2 confirms the working hypotheses h2 mentioned before. it is confirmed that in the period close to the preliminary announcement of the takeover bid target companies have a positive average abnormal return, much higher than the cumulative abnormal losses, in the same period. additionally, it is still noticeable that the impact of the preliminary announcement of the takeover bid is much higher in the target companies than in the acquiring companies, confirming the working hypothesis h3 mentioned before. the relevant effect of the disclosure of the preliminary announcement on the stock prices of the companies involved in takeover bids, mainly on the target companies, occurs corroborating the results presented by ball and brown (1968) and is owed, mainly, to the target companies’ performance such as ptmultimédia.com, companhia de seguros império, banco mello and banco bpi. graphs 3 and 4 represent the calculated caar’s using the ball and brown (1968) model, for companies involved in the takeover bid during the period close to the preliminary announcement and during a larger period, respectively: -0,1000 -0,0500 0,0000 0,0500 0,1000 0,1500 0,2000 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) caar + caar s o u r c e : elaboration of the author. the graph shows that target companies cumulate positive average abnormal returns close to the date of the preliminary announcement (between weeks -5 e +5), especially from week 0 and reinforced in week +2. the positive caar’s stagnate at 15.16% from week +2, while the negative caar’s increase until -5.47% at the week’s end +5. the data behavior of graph 2 confirms the working hypotheses h2 mentioned before. it is confirmed that in the period close to the preliminary announcement of the takeover bid target companies have a positive average abnormal return, much higher than the cumulative abnormal losses, in the same period. additionally, it is still noticeable that the impact of the preliminary announcement of the takeover bid is much higher in the target companies than in the acquiring companies, confirming the working hypothesis h3 mentioned before. the relevant effect of the disclosure of the preliminary announcement on the stock prices of the companies involved in takeover bids, mainly on the target companies, occurs corroborating the results presented by ball and brown (1968) and is owed, mainly, to the target companies’ performance such as pt multimédia.com, companhia de seguros império, banco mello and banco bpi. graphs 3 and 4 represent the calculated caar’s using the ball and brown (1968) model, for companies involved in the takeover bid during the period close to the preliminary announcement and during a larger period, respectively: joão paulo braga, luís m. pereira gomes54 graph 3. cumulated average (log) abnormal returns (ball & brown) – companies involved graph 3. cumulated average (log) abnormal returns (ball & brown) – companies involved source: elaboration of the author. graph 3 shows the consolidated effect of the previously shown graphs 1 and 2, denoting a strong influence of the companies involved and greater amplitude of the target companies’ obtained earnings. in relation to the 12 bids studied, the aar’s cumulated earnings of +8.60% and losses of -5.29% close to the period of the preliminary announcement. graph 4. cumulated average (log) abnormal returns (ball & brown) – companies involved source: elaboration of the author. graph 4 confirms the strong behavior changes of the stock prices of the companies involved in takeover bids. in the previous phase of the preliminary announcement, the tendency is to grow until the first “peak” (week -8), from that point on until the -0,0600 -0,0400 -0,0200 0,0000 0,0200 0,0400 0,0600 0,0800 0,1000 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) caar + caar 0,0000 0,0200 0,0400 0,0600 0,0800 0,1000 0,1200 0,1400 weeks s o u r c e : elaboration of the author. graph 3 shows the consolidated effect of the previously shown graphs 1 and 2, denoting a strong inf luence of the companies involved and greater amplitude of the target companies’ obtained earnings. in relation to the 12 bids studied, the aar’s cumulated earnings of +8.60% and losses of -5.29% close to the period of the preliminary announcement. graph 4. cumulated average (log) abnormal returns (ball & brown) – companies involved graph 3. cumulated average (log) abnormal returns (ball & brown) – companies involved source: elaboration of the author. graph 3 shows the consolidated effect of the previously shown graphs 1 and 2, denoting a strong influence of the companies involved and greater amplitude of the target companies’ obtained earnings. in relation to the 12 bids studied, the aar’s cumulated earnings of +8.60% and losses of -5.29% close to the period of the preliminary announcement. graph 4. cumulated average (log) abnormal returns (ball & brown) – companies involved source: elaboration of the author. graph 4 confirms the strong behavior changes of the stock prices of the companies involved in takeover bids. in the previous phase of the preliminary announcement, the tendency is to grow until the first “peak” (week -8), from that point on until the -0,0600 -0,0400 -0,0200 0,0000 0,0200 0,0400 0,0600 0,0800 0,1000 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) caar + caar 0,0000 0,0200 0,0400 0,0600 0,0800 0,1000 0,1200 0,1400 weeks s o u r c e : elaboration of the author. graph 4 confirms the strong behavior changes of the stock prices of the companies involved in takeover bids. in the previous phase of the preliminary the impact of the preliminary announcement… 55 announcement, the tendency is to grow until the first “peak” (week -8), from that point on until the preliminary announcement (week 0) the tendency is to diminish. at that moment, the aar’s invert substantially the tendency, growing until the week +2, cumulating abnormal earnings of 11.93%. after this, they diminish until week +7, oscillating in value from +6.59% to +9.39%. this performance also verifies that the preliminary announcement of the takeover bid has a great impact on the stock prices of the companies involved and corroborates the conclusions of ball and brown (1968). model #2 – beaver: using the beaver (1968) model, graph 5 shows the reaction of the average abnormal returns in the period close to the preliminary announcement of the takeover bid for acquiring companies: graph 5. reaction of the average abnormal (log) returns (beaver) – acquiring companies preliminary announcement (week 0) the tendency is to diminish. at that moment, the aar’s invert substantially the tendency, growing until the week +2, cumulating abnormal earnings of 11.93%. after this, they diminish until week +7, oscillating in value from +6.59% to +9.39%. this performance also verifies that the preliminary announcement of the takeover bid has a great impact on the stock prices of the companies involved and corroborates the conclusions of ball and brown (1968). model #2 – beaver: using the beaver (1968) model, graph 5 shows the reaction of the average abnormal returns in the period close to the preliminary announcement of the takeover bid for acquiring companies: graph 5. reaction of the average abnormal (log) returns (beaver) – acquiring companies source: elaboration of the author. the graph shows the reaction of the average abnormal returns of the acquiring companies, characterized by an isolated “peak” in week +2 after the disclosure of the takeover bid. this evidence shows an existence of abnormal activity in the period close to the preliminary announcement date and confirms the working hypothesis h4 mentioned before. the behavior is due to the performance of companies such as cofina sgps, sa, banco bcp, ptmultimédia sgps, sa, sonaecom sgps, sa and sonae sgps, sa. later, in week +2 there was a new replica, but of inferior intensity. 0,0000 0,5000 1,0000 1,5000 2,0000 2,5000 3,0000 3,5000 4,0000 4,5000 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) s o u r c e : elaboration of the author. the graph shows the reaction of the average abnormal returns of the acquiring companies, characterized by an isolated “peak” in week +2 after the disclosure of the takeover bid. this evidence shows an existence of abnormal activity in the period close to the preliminary announcement date and confirms the working hypothesis h4 mentioned before. the behavior is due to the performance of companies such as cofina sgps, sa, banco bcp, ptmultimédia sgps, sa, sonaecom sgps, sa and sonae sgps, sa. later, in week +2 there was a new replica, but of inferior intensity. joão paulo braga, luís m. pereira gomes56 continuing with the beaver (1968) model, graph 6 represents the reaction of average abnormal returns in the period close to the preliminary announcement for target companies: graph 6. reaction of the average abnormal (log) returns (beaver) – target companies continuing with the beaver (1968) model, graph 6 represents the reaction of average abnormal returns in the period close to the preliminary announcement for target companies: graph 6. reaction of the average abnormal (log) returns (beaver) – target companies source: elaboration of the author. the graph shows a strong reaction of the average abnormal returns of the target companies, characterized by an isolated high “peak” in the preliminary announcement date (week 0). the behavior of the data of graph 6 also confirms the working hypothesis h4 mentioned before. additionally, it can also be concluded that the reaction of the abnormal returns to the preliminary announcement of the takeover bid is much higher in target companies than in acquiring companies, confirming the working hypothesis h5 mentioned before. later, in week +2 there was a new replica, but of inferior intensity. the relevant effect of the disclosure of the preliminary announcement on the stock prices of the companies involved in takeover bids, mainly on target companies, corroborates the results shown by beaver (1968). graphs 7 and 8 represent the reaction of the average abnormal returns, calculated with the beaver (1968) model, for the companies involved in takeover bids during the period close to the preliminary announcement date and during a larger period, respectively: 0,0000 10,0000 20,0000 30,0000 40,0000 50,0000 60,0000 70,0000 80,0000 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) s o u r c e : elaboration of the author. the graph shows a strong reaction of the average abnormal returns of the target companies, characterized by an isolated high “peak” in the preliminary announcement date (week 0). the behavior of the data of graph 6 also confirms the working hypothesis h4 mentioned before. additionally, it can also be concluded that the reaction of the abnormal returns to the preliminary announcement of the takeover bid is much higher in target companies than in acquiring companies, confirming the working hypothesis h5 mentioned before. later, in week +2 there was a new replica, but of inferior intensity. the relevant effect of the disclosure of the preliminary announcement on the stock prices of the companies involved in takeover bids, mainly on target companies, corroborates the results shown by beaver (1968). graphs 7 and 8 represent the reaction of the average abnormal returns, calculated with the beaver (1968) model, for the companies involved in takeover bids during the period close to the preliminary announcement date and during a larger period, respectively: the impact of the preliminary announcement… 57 graph 7. reaction of the average abnormal (log) returns (beaver) – companies involved graph 7. reaction of the average abnormal (log) returns (beaver) – companies involved source: elaboration of the author. graph 8. reaction of the average abnormal (log) returns (beaver) – companies involved source: elaboration of the author. graphs 7 and 8 show the consolidated effect of the graphs presented before, such as graphs 5 and 6, confirming the strong impact of the announcement. facts such as “peaks” in the weeks 0 and +2, integrated in a larger period, further to the preliminary announcement date, considering the entire period in study (between weeks -18 and +18). the results for acquiring and target companies confirm the working hypothesis h4 mentioned before. descriptive statistic analysis: 0,0000 5,0000 10,0000 15,0000 20,0000 25,0000 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) 0,0000 5,0000 10,0000 15,0000 20,0000 25,0000 weeks s o u r c e : elaboration of the author. graph 8. reaction of the average abnormal (log) returns (beaver) – companies involved graph 7. reaction of the average abnormal (log) returns (beaver) – companies involved source: elaboration of the author. graph 8. reaction of the average abnormal (log) returns (beaver) – companies involved source: elaboration of the author. graphs 7 and 8 show the consolidated effect of the graphs presented before, such as graphs 5 and 6, confirming the strong impact of the announcement. facts such as “peaks” in the weeks 0 and +2, integrated in a larger period, further to the preliminary announcement date, considering the entire period in study (between weeks -18 and +18). the results for acquiring and target companies confirm the working hypothesis h4 mentioned before. descriptive statistic analysis: 0,0000 5,0000 10,0000 15,0000 20,0000 25,0000 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 weeks (announcement period) 0,0000 5,0000 10,0000 15,0000 20,0000 25,0000 weeks s o u r c e : elaboration of the author. graphs 7 and 8 show the consolidated effect of the graphs presented before, such as graphs 5 and 6, confirming the strong impact of the announcement. facts such as “peaks” in the weeks 0 and +2, integrated in a larger period, further to the preliminary announcement date, considering the entire period in study (between weeks -18 and +18). the results for acquiring and target companies confirm the working hypothesis h4 mentioned before. joão paulo braga, luís m. pereira gomes58 descriptive statistic analysis: the following tables show some descriptive statistics to analyze the behavior of the stock returns of companies involved in takeover bids and of the returns of the market index (psi-20), both in the period further to the preliminary announcement date (weeks -18 to -6 and weeks +6 to +18), as well as in the period close to the preliminary announcement date (weeks -5 to +5). the returns are calculated in logarithmic measures (log) and compared with returns calculated in classical measures (clss). table 3 shows the statistics of mean, standard deviation, skewness, kurtosis and the returns normality test (jarque-bera) for acquiring and target companies, as well as for the market index, in the period further to the preliminary announcement date: table 3. statistics of the returns of the companies involved and of the market index period further to the preliminary announcement (weeks -18 to -6 and weeks +6 to +18) acquiring target market index clss log clss log clss log y(1) y(1) y(1) y(1) y(1) y(1) -0,0014 -0,0023 0,0035 0,0029 -0,0001 -0,0004 y(2) y(2) y(2) y(2) y(2) y(2) 0,0135 0,0132 0,0103 0,0100 0,0080 0,0081 y(3) y(3) y(3) y(3) y(3) y(3) 0,3197 0,1407 0,8593 0,7493 -0,4504 -0,4973 asymmetric dist to the right asymmetric dist to the right asymmetric dist to the right asymmetric dist to the right asymmetric dist to the left asymmetric dist to the left y(4) y(4) y(4) y(4) y(4) y(4) -0,2532 -0,5868 0,2345 0,0687 -0,1620 -0,1074 platykurtic dist. platykurtic dist. leptokurtic dist. leptokurtic dist. platykurtic dist. platykurtic dist. returns normality test (jarque-bera) (chi-square test) 11,9078 14,0232 11,4851 11,7414 11,7100 11,5320 s o u r c e : elaboration of the author. the impact of the preliminary announcement… 59 the results show the homogeneity between the calculated returns via the logarithmic and classical measures, since the empirical research used the first procedure as it happens with most of the investigative works in the area of finance. as expected for a time series with a small dimension (26 observations), the means and variances of the returns are reduced for acquiring companies, for target companies and for the market index. moreover, the skewness and kurtosis coefficients aren’t null, reveling that the data don’t have a normal distribution during the period further to the preliminary announcement date (weeks -18 to -6 and weeks +6 to +18). complementary, the null hypothesis of the returns normal distribution is rejected by the jarque-bera test at a significance level of 5% (with 2 degrees of freedom) with the critical value from the chisquare distribution equal to 5,991. table 4 presents the statistic of the average of the simple returns of the companies involved in takeover bids and of the market index, in relation to the period close to the preliminary announcement: table 4. average returns of the companies involved and of the market index period close to the preliminary announcement (weeks -5 to +5) acquiring target market index clss log clss log clss log y(1) y(1) y(1) y(1) y(1) y(1) 0,0013 0,0006 0,0137 0,0110 0,0044 0,0041 s o u r c e : elaboration of the author. the results show that, despite the small dimension of the time series (12 observations), the average return of the target companies’ stock is higher than the average return of the acquiring companies’ stock, both in the period further to the preliminary announcement and close to the preliminary announcement. tables 5 and 6 present the statistic of the average abnormal returns, calculated with the ball and brown (1968) model, for companies involved in takeover bids, in relation to the period further to the preliminary announcement and close to the preliminary announcement, respectively: joão paulo braga, luís m. pereira gomes60 table 5. average abnormal returns (ball & brown) – companies involved period further to the preliminary announcement (weeks -18 to -6 and weeks +6 to +18) acquiring target clss log clss log y(1) y(1) y(1) y(1) -0,0003 -0,0010 0,0048 0,0049 s o u r c e : elaboration of the author. table 6. average abnormal returns (ball & brown) – companies involved period close to the preliminary announcement (weeks -5 to +5) acquiring target clss log clss log y(1) y(1) y(1) y(1) -0,0023 -0,0028 0,0111 0,0088 s o u r c e : elaboration of the author. the results shown in tables 5 and 6 clarify that, in average, the acquiring companies obtained negative average abnormal returns and that target companies obtained positive average abnormal returns, in the both periods of time. the result comparison also suggests that the average abnormal returns of the acquiring companies diminish (from -0.10% to -0.28%), in the period close to the preliminary announcement, while the average abnormal returns of the target companies increase (from 0.49% to 0.88%). this performance corroborates with the evidence reported by ball and brown (1968) and also confirms the working hypothesis h1, h2 and h3 mentioned before. table 7 shows the statistic of the hypothesis test to the statistical irrelevance of the difference of the average abnormal returns of the companies involved in takeover bids, comparing both periods of time: the impact of the preliminary announcement… 61 table 7. hypothesis test to the statistical irrelevance of the difference of the average abnormal returns period further to the preliminary announcement (weeks -18 to -6 and weeks +6 to +18) versus period close to the preliminary announcement (weeks -5 to +5) acquiring target clss log clss log (t-student test) 0,5065 0,4989 -0,6196 -0,4158 s o u r c e : elaboration of the author. the results show that the null hypothesis of the statistical irrelevance of the difference of the average abnormal returns, in both periods of time, isn’t rejected by the bilateral test, with a 5% significance level with no critical value (the degrees of freedom tend to the infinite, where 1,96 is our reference value, considering the 5% significance level). that means that the change of the average abnormal returns, in the period close to the preliminary announcement, both in acquiring and target companies, isn’t statistically significant. despite the existence of a small number of observations, these results don’t confirm any of the hypotheses mentioned above. final remarks and conclusions this paper accounts for the business combinations resulting from m&a processes and has as main focus takeover bids. business combinations constitute strategies frequently followed by companies in order to grow and self-internationalization. the fact that the number of takeover bids performed in portugal isn’t too high, comparatively to other countries, justifies the necessity to deepen the knowledge of the effects on the companies involved. that was this paper’s motivation. the paper’s main objective is to study the impact of the preliminary announcement of the takeover bids on the stock prices of the companies involved, in order to identify the gainers and losers in this operation. the empirical research was focused on the event studies, using the calculation of the cumulative average abnormal returns – based on ball and brown (1968) methodology – and calculation of price reaction – based on beaver (1968) methodology. the joão paulo braga, luís m. pereira gomes62 survey of the number of takeover bids was conducted taking into consideration the information available in annual reports and quotation bulletins of cmvm, resulting in a sample of 12 bids performed in portugal between 2000 and 2014. the results confirm the hypotheses formulated. in the period close to the preliminary announcement of the takeover bids (weeks -5 to +5) seems to exist a wealth transfer from the shareholders of the acquiring companies, which cumulate average abnormal losses (-6.03%) superior to the average abnormal earnings (2.96%), to the shareholders of target companies, which cumulate average abnormal earnings (-15.16%) superior to the average abnormal losses (-5.47%). taking into account the companies, globally, the impact of the preliminary announcement determined an accumulation of average abnormal earnings of 8.60% and average abnormal losses of -5.29%. for this performance, it contributed basically the reaction that stock prices had immediately after the disclosure of the preliminary announcement of the takeover bids. the acquiring companies had a “peak” of 4,27 at week +2, while target companies had a “peak” of 67,96 at week 0 and a replica of 35,83 at week +2. despite the obvious visual information available, the null hypothesis of the irrelevance of the difference of the average abnormal returns of the companies involved in takeover bids, in the period further to the preliminary announcement (weeks -18 to -6 and weeks +6 to +18) and in the period close to the preliminary announcement (weeks -5 to 5) wasn’t rejected, due to the small number of observations. this paper had two fundamental limitations. the first one, due to the necessity in excluding the great number of companies which didn’t have their stocks quoted in the portuguese stock exchange (psi-20) during the period in study, although they were involved in takeover bids. the second one was due to the lack of information existing regarding the year before 2000 consequence of the changes implemented by the regulatory entity in relation to referentiation and to the content of annual reports. in terms of future proposals, we recommend a larger period of study, the use of alternative methodologies for the calculation of abnormal returns, the creation of a repository of information between universities and companies and the widening of the scope of study to the iberian market, in order to compare these results. the impact of the preliminary announcement… 63  references aff leck-graves, j.f., flack, t.p. & jacobson, a.j. 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orcid id: https://orcid.org/0000-00021606-3714. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 2 shah, s.a.a. (2019). integration of financial risks with non-financial risks: an exploratory study from pakistani context. copernican journal of finance & accounting, 8(2), 49–65. http://dx.doi. org/10.12775/cjfa.2019.008 syed alamdar ali shah* universitas airlangga integration of financial risks with non-financial risks: an exploratory study from pakistani context keywords: financial risks, nonfinancial risk, integration, thematic analysis. j e l classification: g210, f33. abstract: this research seeks to put forward a framework, from the perspective of practitioners and policymakers in pakistan, about financial and non-financial risks integration and their impact on the performance of financial institutions. we define total bank risk in terms of earnings volatility, which can be broken down into five major classes namey: market, credit, asset/liability, operational, and business. out of these market, credit and asset liability risks are financial risks whereas operational and business risks are non-financial. based on the thematic analysis of unstructured interviews of experts from the banking industry we position five sources of bank risks. we observe that the impact of financial risks decrease and non-financial risks increase, along a spectrum from market risk to credit risk, asset/liability risk, operational risk, and business risk. the framework from this study could also be used to quantify total bank risks and contribution from each. syed alamdar ali shah50  introduction financial risk is the subject of majority of researches (abdullah & said, 2019). however, it is important to understand the extent of impact of financial and non-financial risks on earning volatility of a financial institution (abdullah & said, 2019). in this regard an important issue is the knowledge of risk dynamics by the risk managers (tsintsadze, glonti, oniani & ghoghoberidze, 2019). a knowledge that depicts thorough understanding of prioritizing risks within a framework (asl & nikouei, 2017). the practice of risk managers in financial industry is governed by basel accord which has promulgated risk based capital requirements (bcbs, 2001; mburu, 2017). risk is the potential for deviation from expected results, and that practitioners are particularly concerned with adverse deviation. within this context, we define financial and non-financial risks in terms that are closely related to the distinction made by knight (1921) and used by tsintsadze et al. (2019) between risk and uncertainty. in general returns increase with the increase in risks. however, in the case of financial institutions this relationship is severely affected by the actions of various economic agents. this leads to various risk regulations a financial institution has to comply with. regulations, which are particularly directed towards reducing the adverse consequences of risk taking. the risk return relationship within the context of a banking company is therefore not so straight forward, rather it has to be within a regulatory regime. quality of management is directly related with the expertise of risk managers. current researches suggest that the focus of risk managers is also tilted towards managing financial risks although it has been established that the gravity and impact of non-financial risks is unknown, profound and a leading cause of financial setbacks. risk management is therefore need to be extended to develop a risk culture encompassing personnel, managers executives and organization working in line with the objectives of each other. based on this background our research questions are hereunder: 1. whether the risks increase or decrease as both the ability to measure and disaggregate risk increase or decrease? 2. whether recognizable and enigmatic risks increase or decrease as the ability to measure and disaggregate risk increase or decrease? integration of financial risks with non-financial risks… 51 given the interviews of experts, the rank order of these risks has based on two main characteristics: quantification, which ref lects their ability to be measured, and granularity, which ref lects their ability to be disaggregated. according to the ordering, market risk is the easiest risk to quantify and disaggregate, followed by credit risk, asset/liability risk, operational risk, and business risk. it follows that practitioners and policymakers “know” the most about market risk and the least about business risk. the boundary between what they know and don’t know determines the portion of bankrisk that currently is (or at least can be) managed. the portion of risk that exists is managed, the portion of risk that is recognizable is managed and the portion of risk that is enigmatic is largely unmanageable. review of literature among practitioners, risk in banking is typically defined in terms of earnings volatility (rajan, 2005; becker & buchkremer, 2018). earnings volatility creates the potential for loss. losses, in turn, need to be funded, and it is thepotential for loss that imposes a need for banks to hold capital (hargarter & van vuuren, 2017). capital provides the balance sheetcushion that absorbs (downside) earnings volatility and prevents a firm from becoming insolvent (berger, herring & szegö, 1995; bouchet, fishkin & goguel, 2018). the link between earnings volatility and capital is central to the way risk is measured in banking. increasingly, risk is measured in terms of value-at-risk (var) or, equivalently, economic capital – the amount of capital needed to protect against earnings volatility at a prescribed confidence interval (bovenberg & nijman, 2017). the reason for measuring risk at a stated confidence interval is that volatility, by itself, is insufficient to describe the whole distribution of earnings (butler & o’brien, 2019). two distributions with dramatically different shapes and differing amounts of downside risk can have the same volatility (galli, 2019). var scales the volatility to a specified confidence interval so as to create a common currency for risk that allows different risk factors to be directly compared. it has been established over the period of time that stylized earnings (or loss) distributions for different bank risks have very different shapes, but, assuming a common time horizon, can each be measured in equivalent terms at the same confidence interval. moreover, the standalone amounts for these risks can be aggregated (although, because of diversification effects, syed alamdar ali shah52 not by simple addition) to create a single loss distribution for the bank overall (kuritzkes, schuermann & weiner, 2003; rosenberg & schuermann, 2006; tsintsadze et al., 2019). the confidence interval for economic capital is usually set equivalent to the default rate associated with a bank’s target debt rating or solvency standard. assume, for example, that a bank’s target debt rating is a-, and that the annual default rate for arated bonds is 0.1% or 10 basis points (bp). in this case, the bank would set the ruler for economic capital to be the amount of annual earnings volatility at the 99.9% confidence level, on the theory that this would determine the amount of capital the bank needs to remain solvent in all but 10 bp of possible loss scenarios – equivalent to the default risk of an arated bond. while there is an internal logic for measuring risk at the same confidence interval as the bank’s solvency standard, doing so implies an ability to quantify extreme events far out in the tail. to the extent that knowledge means being able to measure risks in terms of economic capital, then the threshold for a is set very high. taxonomy of bank risks as risk management techniques have progressed, economic capital models have been extended to new classes of risk, providing greater resolution on the composition of total earnings volatility (allen, boudoukh & saunders, 2004; bui, 2019). these developments are ref lected in the evolution of bank capital regulation under the basel framework. in 1988, when the original basel capital accord (basel i) was adopted, bank risk management was overwhelmingly focused on credit risk (bcbs, 1988). basel i based regulatory capital requirements solely on the size of a bank’s credit assets, with varying risk weights intended to ref lect (crude) differences in the levels of credit risk (tsintsadze, et el., 2019). in 1996, the market risk amendment to basel i (bcbs, 1996) subjected the price risk of trading positions to an explicit capital charge, and helped institutionalize value at-risk measures for market risk within trading books. more recently, basel ii has singled out “operational risk” – defined to include losses from internal failures and external events – as a specific category of nonfinancial risk and is imposing a new capital charge to cover losses associated with operational risk. current practice among leading financial institutions is to break down earnings volatility into five main sources of risk as depicted in figure hereunder: integration of financial risks with non-financial risks… 53 figure 1. taxonomy of bank risks risk financial risk market risk credit risk a/l risk non-financial risk operational risk business risk = earnings volatility s o u r c e : kuritzkes & schuermann (2010). this figure explains: i. market risk, or the earnings impact associated with adverse price movements in the bank’s principal trading positions (musyoki & komo, 2017); ii. credit risk, or the potential for losses due to the failure to pay of credit counterparties (van zijl, wöstmann & maroun, 2017); iii. structural asset/liability risk, or the earnings impact from shifts in interest rates on the bank’s asset and liability positions (cichulska & wisniewski, 2017); iv. operational risk, or (bcbs, 2005) “the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events”; and v. business risk, or the potential for losses from residual sources of non-financial earnings volatility. the first three categories are sources of financial risk that are a direct result of a bank’s role as financial intermediary or investor (cichulska & wisniewski, 2017). since the assumption and transfer of financial risk are, in many respects, the defining features of a financial institution, these risks can be expected to predominate in banking (costa-climent & martínez-climent, 2018). the latter two categories refer to risks that are non-financial in nature, and common to all firms. business risk, in particular, is a broad catch-all that includes all sources of non-financial risk not directly attributable to internal failsyed alamdar ali shah54 ures or external events (hargovan, 2019). this category covers a host of sins, ranging from a drop in demand, a cost spike, technological obsolescence, regulatory change, price wars, and failed strategies, and can be expected to be the dominant risk faced by non-financial firms. framework of our study: given the taxonomy of bank risk, we further categorize financial and non-financial risks into the following three categories; existing, recognizable and enigmatic risks, for taking the views of our practitioners where: a risk is “existing” (a) if it can be identified and quantified. for a practitioner, risk quantification has developed a specific meaning: the ability to estimate downside tail risks or extreme loss events at high confidence levels associated with a bank’s solvency standard. this concept is what underlies economic capital, the common denominator for risk measurement that has emerged within the banking industry. an economic capital approach to risk quantification is the basis on which capital requirements for credit, market, and operational risks are set under basel ii. all such risks are called financial risks. a risk is “recognizable” (b) if it belongs to a set of risks that can be identified but not meaningfully quantified at present. an example of an unknown risk might be the impact of reputation risk following the criminal indictment of a bank’s ceo for fraud. while the general class of reputation risks can be identified, the consequences are likely to be too diffuse and fact-specific to be meaningfully quantified. over time, it may be possible for reputation risks to be linked to causal factors and estimated discretely, in which case reputation risks will become more “existent” but that is not the case given prevailing information and technology. for this reason, basel ii specifically excludes reputation risks from the category of “operational risks” for which banks must hold capital (bcbs, 2005). a risk is “enigmatic” ( c ) if the existence of the risk or set of risks is not predictable, let alone quantifiable. for instance, the risks that a terrorist attack might have on the businesses. based on these concepts, this paper proposes a framework for positioning different sources of risks of financial institutions in the a, b, c space from the point of view of risk managers and practitioners. consistent with how risk is defined by practitioners, risk has been defined as deviation from expected earnings – or, equivalently, earnings volatility – and disaggregate risk into five main categories. the first three categories include market risk from trading integration of financial risks with non-financial risks… 55 activities, structural interest rate risk from asset/liability management, and credit risk, which together constitute the main sources of financial risk. the remaining two categories refer to sources of non-financial risk, and include operational risk and “business risk” – this last category being a catch-all for residual non-financial earnings volatility. we posit that these three types of risks vary according to two main factors. the first factor is quantification: we endeavor to explore dimensions between the above risk categories, as the ability to quantify risk increases. this relationship is axiomatic – it follows directly from our definition of a, b, and c – but it is important to recognize that the ability to quantify risk differs systematically by risk class. the research methodology and the course of the research process research is primarily conducted under three major approaches i.e., qualitative, quantitative and mixed methods, though further variants are also possible by applying more than one method of a single approach in a particular research (blaikie & priest, 2019). based on the nature of our research that is more of interpretive in nature because we are to understand the reasons of underlying motivations, reasons and opinions about integration of financial risks with non-financial risks, an interpretive approach (creswell, 2003; bryman & bell, 2008) was adopted to capture the factors that inf luence financial and non- financial risks in pakistani banking sector. the adoption of a qualitative research design allowed the researchers to explore and critically analyse the phenomenon of financial and nonfinancial risks in terms of their integrating affect on the volatility of their earnings. in addition, a qualitative research design helped the researchers investigate the meanings of participants’ experiences in order to gain an in-depth understanding of how the risk manager and practitioners contextualize their experiences to gauge the integrated and individual impact of financial and non-financial risks of portfolio of the respective returns of their institutions. face-to-face qualitative interviews were conducted to gain rich data by means of participants‟ narratives through which to explore the phenomenon (weiss, 1995; sahiti, 2017). the interviews sought to analyse the factors that underpin risk managers’ and practitioners’ experiences in pakistani financial sector about financial and non-financial risks and have a unique inf luence. participants for the study were selected using purposeful sampling (marshall, syed alamdar ali shah56 1996). due to the data on risk professionals in pakistan not being fully documented or reliable, purposeful sampling was supplemented with snowball sampling (patton, 1990; misund, 2017), in which respondents were asked to suggest and help to make contact with other risk professionals who fulfilled the following criteria used in the original purposeful sampling: risk managers who have atleast 5 years of working experience in risk management division of financial institutions making policies about financial and non-financial risks. risk practitioners who have atleast 5 years of working experience in financial institutions implementing policies about financial and non-financial risks. while not ideal, in the absence of a reliable/official register of risk professionals fitting the required profile, this combined approach was necessary in order to augment the sample size. drawing on relevant literatures, an interview guide was developed that addressed the perception of both types risk professionals. the interviews covered the perception of risk professionals about financial risks that include market, credit and asset liability risk; and non-financial risks that included operational and business risks. we tried our level best to keep a balance upon addressing both types of risks during our interviews. however, due to most of the experience of risk professionals was in the area of financial risks therefore the discussion of financial risks during most of the interviews was very dominant. the interviews began with a brief introduction to the study. they were conducted in urdu. participants were assured about data confidentiality and personal anonymity. all interviews were recorded with the consent of the participant, transcribed and sent for member checking (guba & lincoln, 1989) to enhance the credibility and quality of the data. at the end of each interview, the participants were given a demographic survey to complete as a source of background information. thematic analysis (stirling & attride, 2001) was undertaken to identify the emerging themes and organize data for qualitative analysis. analysis of findings and discussions of interview themes the rationale for the current positioning of bank risks in the views of interview participants within the framework is as follows: integration of financial risks with non-financial risks… 57 market risk discussing about the market risk from the category of financial risks during the interviews most of the risk professionals were of the opinion that market risk is the most “existent” of the all risks, our knowledge is far from perfect. illiquid instruments, which “trade by appointment,” may have daily vars calculated for them, but the underlying volatilities may not be very meaningful. according to a risk manager mr. s: “more liquid instruments, such as currencies with managed exchange rates, are subject to regime change, as evidenced by the break-up of the european exchange rate mechanism in september 1992.” even the best models sometimes fail to capture complex correlations – witness the collapse of ltcm in the fall of 1998 (jorion, 2000; kumor & poniatowska, 2017). for this reason, we regard a portion of the space in market risk as “recognizable” and “enigmatic”. credit risk discussing about the credit risk from the category of financial risks most of the risk professionals were of the view that the transaction-level attributes of credit risk indicate that credit risk measurement is highly granular, in principle down to the level of individual loans. this is the level at which credit risk is priced and managed, and a wide range of quantitative applications – including pricing tools, raroc (risk adjusted return on capital) measures, and hedging models –support decision-making at this level. as with market risk, the state of knowledge within credit risk varies by asset class. more is known about relatively liquid credit classes, including (in the u.s.) corporate bonds, mortgages, credit cards, other consumer receivables, and loans to publicly-rated, large corporate, and less is known about illiquid credit classes, such as loans to small businesses, commercial real estate, and middle-market companies (treacy & carey, 2000). as according to a risk practitioner mr.q: “even in the more liquid asset classes, credit risk quantification can only go so far. default is a rare event, and sparse data sets – unlike the ultra-high frequency observations in market risk – limit the accuracy of measurement at both the transaction (pd, lgd, ead) and portfolio (ul, economic capital) levels. moreover, since credit default rates vary over the business cycle, the calibration and validation of credit risk measures pose unique challenges.” syed alamdar ali shah58 the research in credit risk measurement also suggests that credit risk is subject to more “recognizable” than market risk. structural shifts in default risk, recovery levels, utilization rates, and credit correlations can all have a major impact on credit quantification. credit risk is also subject to “enigmatic” unknowable regime change – e.g., a change in bankruptcy laws in the u.s. for example, gross and souleles (2002), in looking at the impact of bankruptcy regulation on consumer debt in the u.s., find that as bankruptcy costs decline, default likelihoods increase, often substantially. structural asset/liability risk discussing about the structural asset/liability risk from the category of financial risks, most of the risk professionals were of the view that this is related to market risk, although the measurement problem is far more challenging. while the dominant risk factor in asset/liability risk is movements in interest rates – and there is a long tradition among both financial economists and practitioners in modeling interest rate paths – this is not where the principal difficulty lies. the challenge comes from the need to characterize indeterminate cash f lows on both the asset and liability side; from the valuation of embedded options and hedges in a bank’s investment portfolio; from the long holding period assumed for a bank’s structural balance sheet; and, perhaps most importantly, from the lack of convergence on a measurement standard (bessis, 1998; saunders, 2000). unlike market or credit risk, there is no standardized approach for asset/ liability risk measurement. in fact, practitioners do not even agree on whether the appropriate measure is an earnings approach based on net interest revenue volatility, or a value approach based on changes in the economic value of equity (eve) [defined as the present value of assets minus liabilities (koch & macdonald, 2000). as pointed out one of the participant mr. a: “the measurement debate is partly driven by the arcane accounting treatment of interest earnings from a bank’s investment portfolio, with some assets (but not necessarily corresponding liabilities) receiving mark-to-market treatment, while other assets (those deemed to be “available for sale” or “held to maturity”) are recognized on an accruals basis.” lack of consensus on how to measure asset/liability risk was reported to be a major reason why interest rate risk outside the trading book was not sub integration of financial risks with non-financial risks… 59 jected to an explicit (pillar 1) capital charge under basel ii but is covered under pillar 2 instead (bcbs, 2005). given the lack of standardization, it is not surprising that there is a wide range of sophistication in asset/liability risk measurement. simplistic approaches include calculating the impact of fixed rate shocks – such as a 100 or 200 bp parallel shift in yield curves – on the bank’s eve and net interest revenues. basel ii suggests such a simple 200 bp parallel shift test as a means of identifying banks that are outliers in terms of asset/liability risk. more sophisticated approaches subject the balance sheet to full simulation of interest rate movements, and calibrate outcomes based on probabilistically-weighted scenarios (including tail-risk scenarios) (bessis, 1998). operational risk discussing about operational risks from the category of non-financial risks the risk professionals were of the view that the operational risk is the newest risk class to emerge as a discrete category. prior to the early consultative papers for basel ii, there was no agreement on what the definition of operational risk was, let alone how to measure it. basel ii established a standardized definition and classification scheme for operational risk – subdividing internal and external events into seven recognized categories, limiting operational risks to the “direct” consequences of operational losses, and excluding indirect consequences such as reputation effects from the definition. going forward, basel ii requires that banks seeking to adopt the advanced measurement approach for operational risk (the only option available for u.s. banks) develop internal economic capital models to estimate a bank’s exposure to operational losses at the 99.9% level over a one-year horizon (bcbs, 2005). prior to the basel ii pronouncements, operational risk was often included together with other nonfinancial risks as “operating risk,” and measured in economic capital frameworks, if at all, through analogs and benchmarks such as revenue and expense ratios (uyemura & van deventer, 1992, netter & poulson, 2003; valipour & vahed, 2017). basel ii has catalyzed a major industry effort to model and measure operational risks. the challenge in operational risk measurement, however, is that operational losses appear to be extremely fat-tailed (de fontnouvelle, jordan & rosengren, 2006; rosenberg & schuermann, 2006; peršić, janković & krivačić, 2017). the losses that are most relevant for measuring economic syed alamdar ali shah60 capital are, by definition, low frequency, high severity events that are difficult to observe within any one firm. according to one of our participant mr. g: “consistent with the immature state of operational risk measurement, the world of the unknown in operational risk is commensurately larger than for market, credit, or a/l risks. arguably, operational risk contains risks that are recognized today that were previously unknowable. an example was the world trade center attack on 9/11/2001, the direct consequences of which are an “external event” included within the basel ii definition of operational loss.” similarly kuritzkes and scott (2005) note the general category of legal risk as being subject to ex post judicial and regulatory interpretations, some of which may not be foreseeable ex ante. examples of such risks could include the vulnerability of swiss banks to holocaust claims in the mid-1990s, four or five decades after the accounts of holocaust victims were mishandled, as well as more recent rulings and regulatory decisions in the aftermath of the enron and worldcom scandals holding banks to be vicariously liable for customer fraud. valipour and vahed (2017) show how this type of ex ante legal risk inf luences management behavior and earnings forecasts. business risk discussing about business risks from the category of non-financial risks the risk professionals were of the view that business risk is the last frontier of risk classification and measurement. as with operational risk before basel ii, there is no standard definition of business risk, which is sometimes also referred to as strategic” risk (slywotzky & drzik, 2005; rusanov, natocheeva, belyanchikova & bektenova, 2017). within the taxonomy above, business risk is best understood by reference to what it is not: it is residual earnings volatility that is not caused by any of the other defined categories, including market, credit, a/l, or operational risks. according to one of our risk professional mr. m: “many banks do not include an explicit measure of business risk within their economic capital frameworks. for those banks that do, business risk is measured through one of a few alternative approaches: the simplest approach is to infer business risk capital requirements from the capitalization levels of non-financial firms that are engaged in similar activities (e.g. processing, consulting, it services). another approach is to strip out financial and operational risks integration of financial risks with non-financial risks… 61 from publicly-reported data on bank earnings and construct a proxy measure of business risk volatility for a sample of peer banks. a third approach is to develop an explicit model of residual revenue volatility and cost rigidity at the business line level.” in terms of granularity, business risk is easiest to observe at the bankwide level. of all the risk types, it is the one we are the least able to break down to lower levels of aggregation. this is not to say that business risk is not “managed” but simply that it is hard to manage in a granular fashion. banks, like the basel ii regulators, have tended to ignore the impact of business risk, or seem to think of it as indistinguishable from “strategy.”  conclusion referring to the discussion above our positioning of bank risks in the a, b, c space can be summarized in a few propositions. our knowledge of bank risk increases as our ability to quantify risk increases. our knowledge of bank risk increases as our ability to disaggregate risk to more granular levels increases. our knowledge of bank risks shifts over time, as new risks become discretely classified and subject to measurement with increasing granularity. based on these propositions, the evidence from market practice suggests that: 4) our current knowledge of market risk > credit risk > structural asset/liability risk > operational risk > business risk. although we know more about the ordering of risks than the contours of the a, b, and c typing analysis within the risk space, we reason that: the “existent” (a) type falls off between financial and non-financial risks, as market, credit, and structural asset/liability risks are much easier to quantify and disaggregate than operational or business risk; and the “recognizable” (b) type rises steeply for operational and business risk, given the diffuse nature of these risks and the lack of historical the second factor is granularity: a increases, and b and c decrease, as the ability to measure risk at lower levels of aggregation increases. the granularity dimension ref lects systematic differences in the ability to measure and manage risks at multiple levels in the organization. the more granular the understanding of risk, the better one is able to identify it, measure it, and control it. in market risk, for example, the marginal impact of individual trades on a bank’s overall market position can be measured, possibly even in real-time, with a fairly high degree of accuracy. risk managers can therefore manage the risks of individual trades, as well as the cumulative risk in a bank’s trading businesses, through dynamic syed alamdar ali shah62 var limits. in business risk, by contrast, some risks, such as reputation risks, may only manifest themselves at the firm-wide level, and may not be capable of being disaggregated to lower levels. the inability to disaggregate such risks makes them more difficult to control at the source. based on these factors, a framework for positioning the sources of risk in banking. can be established where five main sources of bank risks can be ordered in terms of their ability to be quantified and disaggregated. the risks can be ranked in this framework from the most quantifiable and granular, and hence most “existent,” to the least. such framework also has a time dimension to it. such ordering of risks ref lects existing state of contemporary practice. over time, the boundaries of the “existent” can be expected to be pushed out, as risks are more finely classified, additional data is collected, and new models are developed.  references abdullah, w.n., & said, r. 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(1995). learning from strangers: the art and method of qualitative interview studies. new york: free press. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: february 26, 2019; date of acceptance: april 14, 2019. * contact information: t.slyozko@ukr.net, science and research institute of social and economic development, golosіїvskiy, 98/2, оf. 55, kyiv, 03040, ukraine, phone: +38 050 275 17 29; orcid id: https://orcid.org/0000-0002-1256-0692. ** contact information: lyudmila.kurylo@gmail.com, national university of kyivmohyla academy, faculty of economic sciences, department of marketing and business management, skovorody, 2, kyiv, 04070, ukraine, phone: +38 066 758 16 87; orcid id: https://orcid.org/0000-0002-1254-8271. *** contact information: oleksandra.mazina@gmail.com, university of the state fiscal service of ukraine, faculty of economic, the department of accounting, universytetska, 31, irpin, kyivska obl, 08200, kyiv, ukraine, phone: +38 095 275 18 27; orcid id: https://orcid.org/0000-0003-1191-3940. slyozko, t., kurilo, l., & mazina, o. (2018). the unique opportunities of accounting to promote transparency of economic processes. copernican journal of finance & accounting, 7(4), 115–125. http://dx.doi.org/10.12775/cjfa.2018.024 tetyana slyozko* science and research institute of social and economic development lyudmila kurilo** national university of kyiv-mohyla academy oleksandra mazina*** university of the state fiscal service of ukraine the unique opportunities of accounting to promote transparency of economic processes keywords: rules of the game, institutions, accounting, information, transparent economic processes. j e l classification: d80, m41. tetyana slyozko, lyudmila kurilo, oleksandra mazina116 abstract: the article is devoted an important role the institute of accounting in the modern economy. this role is supported by unique institutional and informational opportunities determined by its specific characteristics. on the one hand, accounting is the legislative and normative institution through which the controlling and regulating institutions inf luence the economic processes occurring at each enterprise. on the other hand, the accounting system creates an information database on the actual economic activity of each enterprise required by users. such a database is formed due to the fact that accounting is an exclusive registrar of business activities: documentation, inventory, assessment, calculation, accounts, double-entry bookkeeping, balance, reporting. these methods have such a mathematical feature that has made it possible to fully them with the latest information technologies. all of these factors allow accounting to provide transparent accounting information to any users and institutions.  introduction there is such a sad fact that different types of managers (analysts, economists, financiers, etc.) are often skeptical of both accountants and accounting from which they take information to calculate certain indicators. and how wrong they are because accounting plays an important and irreplaceable role in the functioning of the economy. this is due to the fact that most of the data describing the current economic activity of enterprises are formed in the accounting system. at the same time, this information allows institutions to regulate economy by setting rules on the specific formats enterprises must provide them information. the rules are formalized in different types of reporting. moreover, this information is accumulated with the help of rules (techniques and procedures) inherent to accounting only. these rules are now also incorporated into modern digital industry allowing to obtain clear and complete information about the activities of the enterprise any time. this means that accounting, has incorporated the rules for regulation of economy and the rules for creation of information and thus now has such special institutional and informational possibilities as to be an indispensable tool for economy. this paper thus strives to elicit and to argument on this role. the research methodology and the course of the research process the research in theoretical part based on use book publications, papers and reports at scientific conferences, and in practical part of the article the laws of ukraine, regulations, instruction are used. different research methods were applied: analysis of scientific literature, analysis of laws and regulations con the unique opportunities of accounting to promote… 117 cerning accounting, made a graphical representation of the data in the form of pictures. the aim of the article is to prove that institutional and informational opportunities of accounting make it an important tool for achieving transparency of economic processes. research context: accounting as an information system and as an institution of the state. theoretical framework and their implementation in practice analysis of recent publications shows that some authors research the institutional approach to the development of economy and accounting: burns and scapens (2000), dacin, goodstein and scott (2002), campbell and klaes (2005), haidai (2006), robalo (2014). others authors are exploring study the question about the role accounting information has in economy, for example, papers: by brandas, megan and didraga (2015), marius, denisa and florina (2012), trigo, belfo and estebanez (2016), chapman and kihn (2009), papazov and mihaylova (2015); some authors see a close relationship between the information which accounting provides and requirements as to its institutions and individual users, for instance navarro-garcіa and madrid-guijarro (2016); banociova and pavlikova (2014). however, none of them defines the special role of accounting which combines in itself institutional and informational capacities, takes a pivotal position in economy and can ensure transparency of its data. because this area of research has not as yet formed, we will try to lay its first foundation and thus the research. to develop, modern economy requires such an openness of data, which would allow users to know the results of activity of enterprises and based on which various economic processes can be simulated. it should help analyze which management decisions to take and how these solutions would help to improve. it should also establish transparent communication between the participants to attract investors. it should be noted, that accounting system contain huge amounts of extremely important data not only for managers to make appropriate management decisions, but also to be used for regulation of activity of enterprises by various state and non-state institutions, which set the socalled “rules of the game” or institutes. the notion of the “institute” is defined as limitations (the rules of the) formed by people that contribute to the formation of relationships between individuals. most of these rules are implemented tetyana slyozko, lyudmila kurilo, oleksandra mazina118 in the economic life of enterprises through accounting, its institutional and informational opportunities which make it a central regulator of economy. institutional opportunities of accounting the highest institution, which coordinating the activity of economy, is the state. it creates universal principles of conduct for most subjects and implements them through state institutions: the supreme council, the cabinet of ministers, the national bank of ukraine, ministries and departments, oversight bodies, the police, etc. societal institutions in addition to state define this order. to mention a few, they are joint stock companies, political parties, nonprofit organizations, educational institutions, etc. all these institutions regulate economy by means of the capacities accounting as an institute provide. these capacities are embodied in its regulatory framework and are split into several levels (figure 1). figure 1. model of institutional or regulatory-legal support (regulation) of accounting and reporting institutions: the supreme council, the cabinet of ministers, the national bank of ukraine, ministries and departments, oversight bodies, the police, etc. societal institutions in addition to state define this order. to mention a few, they are joint stock companies, political parties, non-profit organizations, educational institutions, etc. all these institutions regulate economy by means of the capacities accounting as an institute provide. these capacities are embodied in its regulatory framework and are split into several levels (figure 1). figure 1. model of institutional or regulatory-legal support (regulation) of accounting and reporting source: own elaboration of author. as can be seen from fig. 1, at the first level (і) there are legislative acts (laws), adopted by the supreme council. at the second (іі) level there are normative acts, for example the resolution of the cabinet of ministers, the national bank, the tax department, etc. the third level (ііі) is the level of enterprises, where the regulating function is carried out through orders of company management. at the legislative level there are directly related to accounting laws: the law of ukraine no. 996-xiv (1999) “on accounting and financial reporting in ukraine” and the tax code of ukraine (2010). these regulations defined in the customs code, the budget and the civil code of the country. cash flows are controlled by the national bank. its rules and principles are implemented through accounting. however, in addition to cash, enterprises have a variety of other assets. possession and movement of these are also regulated by standardized rules, or in other words institutes, which are defined by different ministries and departments. all of these rules are implemented into the economic life also by means of accounting through the appropriate instructions. alongside the governmental, there are a number of non-governmental institutions, which also set their requirements to information created in accounting system. s o u r c e : own elaboration of author. as can be seen from fig. 1, at the first level (і) there are legislative acts (laws), adopted by the supreme council. at the second (іі) level there are normative acts, for example the resolution of the cabinet of ministers, the national bank, the tax department, etc. the third level (ііі) is the level of enterprises, where the regulating function is carried out through orders of company management. at the legislative level there are directly related to accounting laws: the law of ukraine no. 996-xiv (1999) “on accounting and financial report the unique opportunities of accounting to promote… 119 ing in ukraine” and the tax code of ukraine (2010). these regulations defined in the customs code, the budget and the civil code of the country. cash f lows are controlled by the national bank. its rules and principles are implemented through accounting. however, in addition to cash, enterprises have a variety of other assets. possession and movement of these are also regulated by standardized rules, or in other words institutes, which are defined by different ministries and departments. all of these rules are implemented into the economic life also by means of accounting through the appropriate instructions. alongside the governmental, there are a number of non-governmental institutions, which also set their requirements to information created in accounting system. these are the international accounting standards committee (iasc), the international federation of accountants (ifac), the international organization of securities commissions (iosco), the world federation of exchanges (wfe). iasc implements international standards of accounting and reporting (further on isar) through the interaction with the international federation of accountants (ifac). the purpose of ifac is to provide uniformity of isar financial reporting which would allow all the isar users to access information about the financial shape of potential partners in order to select the best. so, isar became a platform for the reduction of accounting differences, of significant deviations in the quantity and quality of information in financial reports as well as for transparency of information internationally. all this indicates that institutional capacities of accounting are formed by means of its information capacities. informational opportunities of the accounting it is through the informational capabilities of accounting that correct application by the entrepreneurs of the “rules of the game” can be checked, which are set by the institutions as a requirement for accounting. based on these rules, it must provide accounting information compliance with the requirements, which established by institutions (financial, taxation) – in a various types of reports. this is due to the fact that only in the system of accounting is registered and accumulates all the information about the assets and liabilities of the enterprise, business transactions with them every day in the mode of its continuous display in the calendar sequence with the help of special methods. there are eight or alternatively four binaries: tetyana slyozko, lyudmila kurilo, oleksandra mazina120 ■ (1–2) documentation and inventory, ■ (3–4) evaluation and calculation, ■ (5–6) accounts and double entry, ■ (7–8), balance summarizing and reporting. all of these methods connect into a single information system of accounting all assets, liabilities of an enterprise, their movement and balances on a certain date. moreover, without this information existence of a company or enterprise is impossible. thus, accounting will always have the important place of a registrar of transactions and objects at an enterprise. for this accounting has not only special methods, but also a set of special procedures. these are the procedures with the use of which a consistent display of objects and business processes «from of a balance sheet and to a balance sheet» is affected. in general, it is this sequence that is called an accounting procedure or an accounting process. it is a sequential execution of the following procedures: (a) opening of accounts on the ledgers, automatically or manually; (b) registration of transactions or business operations in them using the double entry method; (c) posting of these operations is done on synthetic and analytical accounts between which (d) double-entry control is carried out. based on the above, we come up to approach the summing up, that is, drafting of a trial balance sheet. before this or parallel is carried out closing of individual accounts. thus, accounting procedures end in drafting of a balance sheet and reporting. to launch the process of collection, registration and organization of information, all of these procedures should be organized. in this set of specific methods and procedures should be distinguished by special methods, on which are based the modern accounting system – these are accounts and double entry on them. these methods historically first appeared in 1494 when they were published in a treatise of italian monk and mathematician luke pachioli. and these are the very methods, invented five hundred years ago, turned out to be so mathematical as to be easily computerized with the help of the newest information technologies, which help modern programs: “sap”, “1с: enterprise”; “focus-accountancy”, “intelligence service”, “sail – enterprise”, “best report plus”, “info-accountant”, “it-enterprise” etc. their technological capabilities allow accounting services of a company to work in the web client mode with the information base on the internet from any place, with cloud-based technologies (higgins & smith, 2015) which consolidate all the necessary information about counterparts, such as bank accounts, registration codes, etc., as well as the employees of the enterprise, for exam the unique opportunities of accounting to promote… 121 ple their position, salary, passport data. the program can automatically create various forms of tax and accounting reports for users and institutions. some of these institutions, such as tax authorities where companies are registered, can themselves control these operations. they can independently access computer networks of the enterprises to generate tax reports with the use of standard algorithmic procedures and simultaneously carry out operational control over the economic activity of enterprises. in addition, equipping the localities where business transactions run directly allows to log these operations in the process of their implementation. if also in this case the legislative institutions introduce rules for all the legal and natural entities to conduct payments in non-cash, this will establish an even better framework and thus give more possibilities to ensure transparency of economic processes. moreover, that almost all participants of the economy receive wages, pensions and social allowances on the card. and when cards become the only medium for reimbursement, including in the retail trade, public catering establishments and services, then the reduction of cash payments will make information transparent both for the managerial personnel and the correspondent regulatory institutions. in this case not only the state in the person of tax authorities will be able to periodically get reports of companies and thus control their activities but these reports can be used by any other not only external but also internal recipients. and this is of utmost importance for any manager of the company with an integrated database to be able to quickly filter out the necessary information for management reporting so that to timely make a management decision. however, a counterargument or question arises here: how to deal with the issue of commercial secret of management accounting then? it should be noted that the idea of eliminating commercial secrets is not new at all. even the former apologists of this doctrine have long been championing the change. they scream: “managers, i beseech you to adopt the philosophy of complete openness – to disclose to the market information about all the parameters and criteria which you use internally” (eccles, herz, keegan & phillips, 2002). obviously, such changes are related to the revolution in corporate reporting called value reporting. in essence, it is approximation to the new philosophy of result assessment which is based on integration of the main non-financial parameters with financial. current financial reporting, for example, no longer satisfies the needs of transnational corporations and thus they require to disclose internal information publicly which destroys the long-established tetyana slyozko, lyudmila kurilo, oleksandra mazina122 rule of commercial secret of managerial accounting. in particular, experts suggest to use the model of value reporting, the key idea of which is to achieve greater transparency by reporting on internal performance. and, even more so, placing information on the internet leads to its openness and accessibility, that is to the loss of trade secret. this approach was researched by golov (2007), he singled out 12 models construction of information. in almost each of the models it comes not to delimitation of the boundaries between administrative and financial information but on the contrary to them combination, unification of internal and external reporting. construction of the model of generation of transparent accounting information liquidation of commercial secrets is a new practice, but for accounting it does not make any difficulty. this is due to its of informational capabilities, because all of its methods and procedures are organized in such a way as to always provide transparent information about economic activities of an enterprise. and if here would added institutional capabilities of accounting and its full computerization, the model would allow generation of transparent information for users and institutions as shown in figure 2. this model adds important factors needed to fight shadow economy as it: (a) allows central state institutions to autonomously control business operations of enterprises which were registered with tax authorities, by accessing their computer networks; (b) gives the possibility to objectively estimate the existing financial risks of reporting entities on using ifac institute; (c) allows to compare the results of activity of enterprises not just in one area but even in economies of different countries, while providing data for an adequate assessment of its potential and for making of appropriate management decisions; (d) promotes modelling various economic processes as experts can easily overview accounting data to take appropriate management decisions and to improve them; (e) allows to better attract investors as the model shows integrated main non-financial and financial parameters, helps to make communication between the participants transparent; (f ) requires the users of the model to acquire fundamental knowledge not only about the algorithms of using it through the internet, but also knowledge of accounting, which should have all the specialists in the fields of economy, that somehow will be forced to use information of accounting. all this demonstrates the extremely important role of account the unique opportunities of accounting to promote… 123 ing as a tool indispensable for the economy to function in the contemporary environment. figure 2. a model of generation of transparent accounting information accounting and its full computerization, the model would allow generation of transparent information for users and institutions as shown in figure 2. figure 2. a model of generation of transparent accounting information source: own elaboration of authors. this model adds important factors needed to fight shadow economy as it: (a) allows central state institutions to autonomously control business operations of enterprises which were registered with tax authorities, by accessing their computer networks; (b) gives the possibility to objectively estimate the existing financial risks of reporting entities on using ifac institute; (c) allows to compare the results of activity of enterprises not just in one area but even in economies of different countries, while providing data for an adequate assessment of its potential and for making of appropriate management decisions; (d) promotes modelling various economic processes as experts can easily overview accounting data to take appropriate management decisions and to improve them; (e) allows to better attract investors as the model shows integrated main non-financial and financial parameters, helps to make communication between the participants transparent; (f) requires the users of the model to acquire fundamental knowledge not only about the algorithms of using it through the internet, but also knowledge of accounting, which should have all the specialists s o u r c e : own elaboration of authors.  conclusions the research undertaken allowed to demonstrate, firstly, that only accounting has the unique specifics of combining institutional and informational capacities so that to be an important instrument for regulation of activities both of each individual enterprise and economy in general. it may even be an instrument of regulation of global economy. secondly, based on the mentioned examples it was delineated how the institutional capacities of accounting are realized through legislative and normative acts as entities have to carry out their economic activities within the institutional framework. thirdly, informational capacities of accounting were singled out. these capacities make accounting the only registrar of business activities through the tetyana slyozko, lyudmila kurilo, oleksandra mazina124 use its techniques and procedures for continuous monitoring, estimation and registration of data about a certain entity in order to for internal and external users to obtain required information. fourth, a model was built in which institutional and informational capacities of accounting due to their computerization and information technologies allow to generate and provide transparent information in order to meet information requirements of institutions and individual users. obviously, there are other aspects which help to prepare transparent information for the economy by means of institutional and informational capacities of accounting. their identification and justification are only on the initial path of study, and therefore they need further deep research.  references banociova, a., & pavlikova, l. (2014). accounting plan – information base for management. journal procedia economics and finance, 15, 312–317. http://dx.doi. org/10.1016/s2212-5671(14)00513-9. brandas, c., megan, o., & didraga, o. (2015). global perspectives on accounting information systems: mobile and cloud approach. journal procedia economics and finance, 20, 88–93. http://dx.doi.org/10.1016/s2212-5671(15)00051-9. burns, j., & scapens, r.w. (2000). conceptualizing management accounting change: an institutional framework. journal management accounting research, 11(1), 3–25. http:// dx.doi.org/10.1006/mare.1999.0119. campbell, d., & klaes, m. (2005). the principle of institutional direction: coase’s regulatory critique of intervention. cambridge journal of economics, 29(2), 263–288. http://dx.doi.org/10.1093/cje/bei027. chapman, c.s., & kihn, l.a. (2009). information system integration – enabling control and performance. journal accounting, organizations and society, 34(2), 151–169. http://dx.doi.org/10.1016/j.aos.2008.07.003. dacin, m.t., goodstein, j., & scott, w.r. (2002). institutional theory and institutional change: introduction to the special research forum. journal academy of management, 45(1), 45–57. eccles, r.j., herz, r.h., keegan, e.m., & phillips d.m. (2002). the revolution in corporate reporting: how to talk with the capital market on the language value, rather than profit. moscow: olimp-business. golov, s.f. (2007). accounting in ukraine: an analysis of the status and prospects of development. kyiv: center of educational literature. haidai, t.v. (2006). the institution as an instrument for institutional economic analysis. journal economic theory, 2, 53–54. higgins, j.h., & smith b.l. (2015). 10 steps to a digital practice in the cloud: new levels of cpa firm workf low efficiency, 2nd edition. durham: american institute of certified public accountants, inc. http://dx.doi.org/10.1002/9781119449317. the unique opportunities of accounting to promote… 125 marius, c.d., denisa, c.m., & florina, b. (r.) i. (2012). managerial accounting – a source of information for an efficient management in sme. journal procedia – social and behavioral sciences, 62(24), 521–525. http://dx.doi.org/10.1016/j.sbspro.2012.09.085. navarro-garcía, j.c., & madrid-guijarro, a. (2016). real economic activity and accounting information in spanish construction and real estate firms. journal revista de contabilidad, 19(1), 21–30. http://dx.doi.org/10.1016/j.rcsar.2014.10.002. papazov, e., & mihaylova, l. (2015). organization of management accounting information in the context of corporate strategy. journal procedia – social and behavioral sciences, 213, 309–313. https//dx.doi.org/10.1016/j.sbspro.2015.11.543. robalo, r. (2014). explanations for the gap between management accounting rules and routines: an institutional approach. journal revista de contabilidad, 17(1), 88–97. http://dx.doi.org/10.1016/j.rcsar.2014.03.002. the verkhovna rada of ukraine (2010). the tax code of ukraine. no. № 2755-vi. available at: http://taxlink.ua/ua/. trigo, a., belfo, f., & estébanez, r.p. (2016). accounting information systems: evolving towards a business process oriented accounting. procedia computer science, 100, 987–994. http://dx.doi.org/10.1016/j.procs.2016.09.264. copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: s.hyzyk@eib.org. ** the opinions and views expressed in this article are those of the author not his employer. sebastian hyżyk* european investment bank, luxembourg selected aspects of due diligence of sovereigns** key words: due diligence, public debt, sovereign credit rating. abstract: the purpose of this paper is to present and analyse the prevailing credit rating methodologies, as an element of due diligence process of countries, in the light of the attributes of the sovereigns and associated risks. the concept of sovereignty introduces many variables to the due diligence analysis and in particular to credit risk analysis. the multidimensional character of a sovereign and its complex decision-making process require special attention from the creditors. the prevailing methodologies stress the fact that both quantitative and qualitative elements need to be taken into consideration. debt affordability, referring to debt size and financial ability to repay it, remains an important factor in a quantitative analysis, but not a decisive one. qualitative elements such as the assessment of the institutional capacity become essential, since in the case of the sovereigns, the ability to repay does not necessarily imply the willingness to repay. due diligence of ifis goes beyond traditional credit risk assessment in the domains, where states ‘surrender’ their sovereignty to the regulation of international law, particularly in the sphere of human rights and environment. translated by sebastian hyżyk wybrane aspekty oceny wiarygodności kredytowej państw słowa kluczowe: credit rating, dług publiczny, due diligence, ocena wiarygodności kredytowej. abstrakt: celem niniejszego artykułu jest prezentacja i analiza głównych metod oceny zdolności kredytowej jako elementów due diligence państw, w świetle cech wyróżniadoi: 10.12775/cjfa.2012.005 http://dx.doi.org/10.12775/cjfa.2012.005 sebastian hyżyk66 jących państwa jako pożyczkobiorców i związanych z tym ryzyk. wielowymiarowość koncepcji suwerenności państw oraz złożony proces decyzyjny wymagają wzmożonej uwagi ze strony pożyczkodawców. główne metody podkreślają znaczenie zarówno ilościowej, jak i jakościowej oceny zdolności kredytowej. zdolność do obsługi długu wyznaczana zarówno przez jego wielość, jak i dostępność środków finansowych pozostaje ważnym czynnikiem w ilościowej ocenie, ale nie decydującym. ilościowe aspekty, takie jak ocena zdolności instytucjonalnej, stają się kluczowe w przypadku państw, gdyż ich zdolność do spłaty długu nie musi automatycznie oznaczać skłonności do spłaty długu. proces due diligence prowadzony przez międzynarodowe instytucje finansowe wybiega poza ramy tradycyjnej oceny wiarygodności kredytowej w obszarach, w których suwerenność państw jest ograniczona prawem międzynarodowym, a w szczególności w sferach praw człowieka i ochrony środowiska.  introduction governments’ debt plays a pervasive role in the financial markets. globally, it represents over 45% of the stock of issued bonds (march 2012). sovereigns’ debt instruments are used in collateralising financial operations conducted by central banks. the financial crisis and the recession that followed have worsened the condition of public finance in advanced economies and have increased the investors’ concern about sovereign risk. this concern translates into higher funding cost for governments and adversely impacts banks and financial markets. furthermore, sovereigns’ creditworthiness impacts credit ratings of nonsovereigns and ultimately also supranationals controlled by sovereigns. therefore, a proper assessment of the sovereigns’ creditworthiness is a systemic important issue. the purpose of this paper is to present and analyse the prevailing credit rating methodologies, as an element of due diligence process, in the light of the attributes of the sovereigns and associated risks.1 those risks are often encapsulated by the term of a country risk. it includes risks related to lending to sovereigns (sovereign risks), which will be addressed by this paper, and risks related to investing or doing business in a country. 1 after knight’s influential contribution (knight 1920) risk is commonly referred to as measurable uncertainty over future realisation of expected outcome. it is often reduced to analysis of a negative outcome, which for lenders to sovereigns entails losses incurred due to default of borrower. selected aspects of due diligence of sovereigns 67 1. sovereigns’ borrowing most of the governments of the advanced economies persistently run a deficit and consequently need to finance it mainly through the debt markets or loans from international financial institutions (ifis). over the last decade, gross general government debt of the oecd countries (measured in relation to gdp) has increased from 70% to 97% – figure 1 (oecd 2011). figure 1. general government debt as a percentage of gdp 0 50 100 150 200 250 france germany greece italy japan poland united kingdom united states oecd s ou r c e o f d a t a : oecd 2011. around 75% of this debt is primarily held in marketable bonds, a further 16% in money market instruments, whilst 9% are non-marketable instruments like saving bonds or loans (oecd 2010). governments’ net issues of international debt securities in 2011 reached usd 174bn, increasing the total outstanding international debt at the end of the year to usd 2,534bn (bis 2012). domestic issues further raised the stock of domestic government debt by usd 2,540bn to usd 42,109bn in 2011, an increase of over 20% since 2009 (bis 2012). sebastian hyżyk or 68 in the medium to long run, the governments’ borrowing in advanced economies is expected to rise as fiscal deficits will remain high, due to the effects of the ageing population and subsequent increase in healthcare and pension costs. the financial crisis and the recession that followed have worsened the condition of public finance in advanced economies and have increased the investors’ concern about sovereign risk. this concern translates into higher funding cost for governments and adversely impacts banks and financial markets. 2. financial and legal risks in lending to sovereigns the financial markets are well accustomed to the risk of sovereign default. recent history recalls the latin american case in the 1980s and the russian case in 1998. reinhart and rogoff collected over 250 sovereign external defaults over the period of 1800–2008 (reinhart, rogoff 2009). nonetheless, markets are not always properly valuing that risk and when they are, it is with delay. defaults have often occurred, in a periods of reduced economic resilience when the governments were confronted with external shocks and rapid shift in market perception. lenders are predominantly occupied with credit risk, which involves the risk that the governments will stop servicing debt or force creditors to accept a variation in bond terms that results in the loss of value. however, in the case of governments, one has to consider the consequences of the concept of sovereignty, which is referred to as an ability of states to legislate without legal limitation other than that set by themselves and the reach of international law. it relates to a “government decision-making power”, exercised over its territory and citizens (jackson 2003). the concept of sovereignty entails the possibility for the government to refrain from servicing the debt, even if it has sufficient resources. the government may decide that the economic, political or social costs of repaying the debt may outweigh the consequences of default. in fact, reinhart and rogoff concluded that most of the defaults in the period of 1970–2008 occurred at levels of external debt to gdp below 60%, which could have been in most cases sustained (reinhart, rogoff 2009). sovereigns’ creditors are also exposed to legal risks i.e. the risk that inadequate legal rules in the relevant jurisdiction do not allow interests in securities to be acquired, enforced and transferred (transfer risk). this risk also arises when the law of one constituency does not recognise interests in assets created under the law of another constituency. selected aspects of due diligence of sovereigns 69 the current eurozone debt crisis encompasses another aspect of the legal risk. the monetary union may break up2 in the absence of legal rules governing such a process. there is an uncertainty when and how such rules will eventually be adopted, and more importantly in what currency the debt will be serviced. the country leaving the eurozone may, by law and in line with the concept of sovereignty, redenominate its debt into another currency worth less than the euro. 3. credit risk assessment the multidimensional concept of a sovereign and its complex decision-making process require special attention from the creditors and pose a challenge in the assessment of the probability of default. to this end, the investors or lenders may rely on the ratings provided by the credit rating agencies or develop their own proprietary methodologies. publicly available methodologies of the credit rating agencies also provide a benchmark for in-house models. hereafter, the core elements of two such methodologies applied by the dominant credit rating agencies will be presented.3 moody’s approach examines two factors: a country’s economic resilience and financial strength (figure 2). the former is further analysing the economic resilience of the sovereign in terms of ability to absorb shocks and its institutional capacity and governance framework. the latter focuses on the financial strength of the sovereign and its susceptibility to event risk (moody’s 2008). in order to determine the capacity to timely raise funds in the local currency, moody’s analyses the financial resources of the sovereign and the ability to monetise them. in general, a governments’ spectrum of tools comprises increasing revenues through taxation and/or reducing expenditures through cuts, assets privatisation, and obtaining financing from the central bank. all of these approaches, however, entail risks of rising political or social discontent. 2 among the current challenges faced by the major european economies is the loss of their competitiveness. in the past, currency devaluation was a short-term option to inject dynamism into the economy. within the eurozone that option is not available. hence, the possibility of a return to local currency and its subsequent devaluation is sometimes discussed among policy options. 3 the credit risk ratings market is an oligopolistic one, dominated by moody’s and standard and poor’s, which together have 88% of all outstanding governments’ ratings (us securities and exchange commission 2012). sebastian hyżyk or 70 figure 2. basic factors influencing credit rating of sovereign in moody’s model economic strength institutional capacity financial strength event risk economic resilience local currency sovereign credit rating financial robustness s ou r c e : based on moody’s (2008). the economic resilience is analysed by looking at gdp per capita (multiyear average in ppp terms), scale and diversification of the economy (measured by long-term volatility of output) and long-term structural factors (such as investments in human capital, innovations or integration into economic or trade zones). given the abovementioned attributes of sovereigns, the framework looks both at the ability to repay and the willingness to repay. the latter is analysed with the aid of the assessment of governance framework or institutional strength. institutions are considered in a sense of institutional economy i.e. as a set of formal rules or informal conventions like property rights, contracts enforcement, government policy, predictability and transparency. immature or unpredictable institutions increase the risk that sudden shocks will result in default. the metrics that supplement the qualitative judgement include the world bank rule of law, and the government effectiveness index (worldwide governance indicators). the rule of law indicator attempts to capture the quality of contract enforcement, property rights, effectiveness of the police, and the courts, as well as the occurrence of crime and violence.4 the government effectiveness index attempts to assess the quality of public services, the quality of the civil service and its independence from political pressures, the quality of 4 the indicator ranges from -2.5 (weakest) to 2.5 (strongest). as for 2011, finland scores 1.96, germany 1.62, while poland 0.73, greece 0.57, italy 0.41 and bulgaria -0.09. selected aspects of due diligence of sovereigns 71 policy formulation and implementation.5 these indicators aggregate data from various public and private datasets and surveys (kaufmann et al. 2010). the rating methodology is based on the assumption that strong institutional capacity of the public authorities will enable them to formulate and implement sound policies (effectiveness), which will be further respected by the citizens (rule of law), thus increasing resilience to economic shocks and reducing risk of default. this is further complemented by the examination of the financial strength of a country. this will attempt to determine if the debt level is affordable for a sovereign, given the resources that could be mobilised through its balancesheet. the analysis is twofold. it assesses the debt intensity (interest payments/revenues metrics), debt structure, its repayment profile and dynamics. in particular, the impact of an ageing population on the future liabilities to the national pension schemes is taken into account. a stress test of the debt affordability in response to the interest rate and exchange rate shocks enhances the picture. furthermore, the moody’s model examines the potential of a government to generate resources in terms of access to markets, privatisation or fiscal adjustments. the depth of the financial market is approximated by the relation of aggregated bank’s balance sheets and marketable financial instruments to gdp. the sovereign’s flexibility in fiscal adjustment is measured by debt/revenue ratio. however, it should be noted that this flexibility may be hampered practically by institutional constraints and public acceptance of taxation. the last factor taken into consideration is the country’s susceptibility to event risk, which helps to make a distinction between sovereigns that may be affected by a sudden economic, financial or political shock and do not have the capacity to withstand it. a combination of those two elements, a country’s economic resilience and financial strength, mapped on relative ordinal scales, leads to the proposal of a credit rating range in local currency. in order to translate it to a rating range in foreign currency, it requires additional assessment of the ability of a government to conduct the exchange operation. it relates to the resilience to a currency crisis and the condition of the balance of payments of a country. sovereigns with a limited access to international markets, low foreign reserves (driven by deficit in current account) will therefore be more susceptible to default. in some cases there might be a difference between local and foreign currency ratings. 5 the government effectiveness index ranges from -2.5 (weakest) to 2.5 (strongest). finland currently scores 2.25, germany 1.5, while poland 0.68, greece 0.48, italy 0.45 and bulgaria 0.01. sebastian hyżyk or 72 it should be noted that there is certain room for overruling this “mechanical” proposal generated by the scorecard as long as other elements not captured by the framework exist and can influence the ability or willingness to repay the debt by the sovereign. standard and poor’s method builds on five factors, which attempt to capture the same characteristics of sovereigns as moody’s, and assigns to them: a political, economic, external, fiscal and monetary score (standard and poor’s 2011). the rating process first assigns scores for each of these factors and then combines these political and economic factors into one common “political and economic profile” and the remaining ones into a “flexibility and performance profile” (figure 3). a relative assessment of these profiles together with adjustments due to exceptional factors determines the indicative credit rating level. figure 3. basic factors influencing a sovereign credit rating in standard and poor’s model political score economic score external score fiscal score political and economic profile foreign currency sovereign credit rating flexibility and performance profile monetary score s ou r c e : based on standard and poor’s (2011). the political score assesses the governance framework, its stability, effectiveness, and predictability of a policy-making process of a sovereign. it also looks at the transparency, accountability of institutions and reliability of statistical information provided by the government. initial score could be adjusted downward in the presence of a poor track record of debt servicing or high security risks. if a sovereign receives institutional support from an external organisation (e.g. imf) it could lead to an improvement in the score. the assessment is supported by the various external sources like the world bank’s “doing selected aspects of due diligence of sovereigns 73 business” reports, worldwide governance indicators, un human development indicators, and transparency international’s “corruption perception index”. the economic score is based on the examination of income level (gdp per capita), which could be further adjusted due to growth prospects (gdp growth trend metrics) and economic diversity and volatility. the economic concentration and high volatility lead to downward adjustment. as far as the external score is concerned, it attempts to assess a country’s ability to generate the foreign currency necessary to meet its debt obligation to non-residents (as the standard and poor’s methodology is primarily oriented on the foreign currency rating). it favours sovereigns with reserve currency and looks at external liquidity (measured by an average of the current year and forecast of two to three years of gross external financing needs to cover current account payments and maturing debt) and external indebtedness (measured as a stock of foreign and local currency debt to non-residents reduced by liquid external assets). the fiscal score is an average score of the fiscal performance and flexibility factor, and the debt burden factor. the assessment of the former is primarily based on the change in general government (i.e. including central, regional and local tiers of the administration and social security) debt stock as a percentage of gdp. the initial score is adjusted by considerations of fiscal flexibility of the government and impact of the demographic situation and overall level of development (human development index). the debt burden is assessed by the combination of general government debt level (as a percentage of gdp) and cost of debt (measured as general government interest expenditures as a percentage of general government revenues). the initial score could be adjusted by presence of significant contingent liabilities (e.g. related to the financial sector in the case of a financial crisis). further factors pushing down ratings would be a considerable exposure to exchange rate risk, a dominant share of the debt held by non-residents, and a large share of government debt on the resident banking sector balance sheet. the analysis is complemented by the monetary score which examines the potential role of monetary policy in addressing the economic shocks, which will be different in a spectrum of regimes from free floating to currency board. it also verifies the credibility of a monetary policy through inflation trends and a degree of central bank independence. finally, it looks at the depth and development of a financial system (measured by the maturity of debt issued by the government in a local currency in meaningful amounts and traded on secondsebastian hyżyk or 74 ary markets) and capital markets (measured by market capitalisation in relation to gdp). in the case of standard and poor’s methodology, adjustments play an important role. factors such as the risk of debt rescheduling, security risk (war), severe natural disasters could lead to a decrease in the rating. similarly, a very high political risk is effectively capping the rating at speculative-grade levels. on the other hand, exceptionally large liquid assets owned by the country could support a higher rating. the standard and poor’s model is providing the indicative level of credit rating in foreign currency as a starting point. in order to provide a rating in the local currency, a credit analyst may increase it by up to two notches, given the powers that the sovereign may execute to raise funds in the local currency. it should, however, be noted that when a country has ceded its monetary policy to an economic organisation (as is the case of the eurozone) or is using the currency of another country, upward adjustment will not be possible. in methodological terms, credit ratings represent an example of a multicriteria analysis, which weights different factors believed or proven to have an impact on the rating opinion. both moody’s and standard and poor’s attempt to analyse similar factors related to institutional capacity, resilience to external shocks, economic and financial strength of sovereigns. therefore, in the long term the ratings for a given sovereign should converge. the less mechanical (or transparent) elements of the methodology are linked to the adjustments.6 in comparison, the rating models accepted by the ecb ought to be primarily ‘mechanical’ to reduce discretion in assessment. 4. controversies over credit ratings in general, the ratings of sovereigns proved to be consistent as far as they provide opinions on the reliability of the borrower. since 1975, an average of 1% of the investment-grade sovereigns have defaulted on their foreign-currency debt, while in the class of speculative-grade, this reached 30% (standard and poor’s 2012). nevertheless, the available sample is still limited and skewed towards the investment-grade sovereigns, where credible default scenarios are 6 the european central bank relies on the eurosystem credit assessment framework (ecaf) in order to determine high credit standard of the eligible assets acceptable for collateralising the monetary policy and payment system operations (ecb 2006). selected aspects of due diligence of sovereigns 75 normally difficult to identify. in contrast, the speculative-grade strand is associated with clearer default scenarios and the probability of default metrics become more telling. the accuracy and soundness of the rating methodologies is sometimes disputed, in particular with relation to the failure of rating agencies in predicting market crises. it appears, however, that much of the controversy stems from the use of the actual ratings and wider effects they trigger in the markets, rather than their methodological strength. the main point of criticism from the sovereigns is therefore the timing of credit rating announcements.7 this is believed to cause market disruptions and accelerate a “cliff effect”, where a downgrade under certain thresholds leads to a series of cascading actions. this is related to the issue of overreliance on the external ratings, enforced by the references to them in legislation and contractual clauses. within the eu, a set of legislative measures has been adopted to reduce it. to this end, for instance, financial institutions will have to strengthen their internal rating capacity. 5. example of the decomposition of credit ratings decomposition of ratings of selected eu countries will illustrate the moody’s methodology (table 1). germany is currently among few economies enjoying aaa rating, however, with a negative outlook. the solid fundamentals of german economy are given by its diversified and advanced structure and stable, mature institutions. unlike italy and france, it has not experienced a sharp rise in unit labour cost in the last decade, which supported its competitiveness and world demand for its goods. it is also enjoying investors’ confidence leading to highly affordable borrowing costs. hence, germany notes the highest scores in all partial ratings. the factors indicating negative outlook are related to the eurozone crisis and exposure of german banking sector to the distressed eu economies. it should be noted that germany also faces challenge of ageing population and related rising costs of healthcare system. 7 the recent amendment of the regulation (ec) no 1060/2009 on credit rating agencies allows publishing of unsolicited rating only three times a year at predefined calendar. sebastian hyżyk or 76 table 1. decomposition of credit ratings of selected countries (as of 20.02.2013) country bond rating economic strength institutional strength financial strength event risk germany aaa very high very high very high very low poland a2 high high moderate moderate italy baa2 high/moderate high/moderate low high greece c moderate low very low very high s ou r c e : based on moody’s credit analyses for respective countries. on the other side, the rating of greece reflects the fact that moody’s considers the bond buyback programme executed in december 2012, in which private-sector bondholders incurred a loss of over 60% in net present value terms, as a default. undiversified greek economy is one of the smallest in europe. despite its gdp per capita levels (higher than in poland) there is not sufficient economic strength to absorb shocks. gdp in nominal terms is contracting the fourth consecutive year. greek institutions suffer from ineffectiveness (although worldwide governance indicators place them on a higher level than italian) and implementation of reforms remains uncertain in the absence of the support from the citizens. problems with official statistical data negatively impacted track record of greek authorities. the country remains highly susceptible to event risk, including political risk and further deterioration of greek banking sector (financial risk). debt burden at 164% of gdp is not sustainable. currently greece does not have access to long-term financial markets due to prohibitive interest rates and relies on the assistance package from the troika. italian economy is large and diversified with a strong manufacturing base of its sme sector. nevertheless, economic strength is judged by moody’s analytics between high and moderate amid structural challenges, low productivity and inflexible labour market. italian institutions are adhered to the acquis communautaire, but at the same time exhibit weaknesses, in particular in the southern regions. the international monetary fund (imf) estimates the effect of potential structural reforms in energy, transport, professional services, judicial system and public services at 5.7% of gdp in five years’ time. however, financial strength remains low due to uncertainty of structural reforms, which may be impeded by the financial crisis, and high stock of public debt, which may become unaffordable. as the eurozone crisis continues to threaten the economies with high debt, italy’s susceptibility to event risk remains high. selected aspects of due diligence of sovereigns 77 against the backdrop of distressed european economies, poland has presented robust growth. it used to be driven by eu-supported investments and domestic demand, factors which influence has recently weakened, leading to a slowdown. stable, democratic institutional environment is supported by implementation of eu standards. hence, the economic resilience is judged high. strong demand for polish debt and credible liability management pushed the funding cost down increasing debt affordability. poland’s external finances are still weaker in comparison to other ‘a’ peers, and would benefit from reduction in external deficit. whilst political factors in the event risk are judged low, economic and financial ones still represent moderate threat to poland’s creditworthiness. the ability to withstand external shock is hampered by relatively low foreign-exchange reserves in relation to debt maturing in one year. mitigating factor is provided by flexible credit line of usd 33.8bn from the imf. as far as the financial factors are considered by moody’s, foreign currency loans in the banking sector pose constraint on rating. nevertheless, outlook for poland’s rating has recently been confirmed as stable. 6. loans from ifis raising funds through non-marketable credit instruments involves liaising with ifis. their due diligence process goes beyond credit rating methodologies as often they do not have a mandate to finance sovereigns’ budgetary operational expenditures and can only provide a project-linked financing. apart from the credit rating of the borrower, in project-linked financing, ifis will also focus their due diligence on the soundness of the project itself. the appraisal will entail sectorial characteristics of the project and its technical, financial and economic feasibility. the project features that are subject to due diligence will be different for a wastewater treatment plant as they are for motorways, but in essence the ifis will try to confirm the ‘business case’ for the project i.e. appropriate market demand from the project’s output, tariff policy, and conduct a cost benefit analysis in order to justify the soundness of the project with a generally accepted economic rate of return or multi criteria analysis. another important aspect of a project due diligence will focus on the institutional capacity of a project sponsor/promoter and the procurement procedures applied. this is to ensure that the project will be delivered in a cost-effective way. with a growing impact of voluntary corporate responsibility initiatives, increasing ngos and other stakeholder involvement, also in the financial sector sebastian hyżyk or 78 (e.g. the equator principles 2006), the lenders, including ifis, have become increasingly sensitive to non-financial aspects of the credit operations. these aspects often concern the domains, where states ‘surrender’ their sovereignty to the regulation of international law, particularly in the sphere of human rights and environment. therefore, the credit decision of ifis is preceded by an appropriate environmental and social assessment. such an assessment would typically analyse the sovereign’s policies and standards in relation to labour and working conditions (e.g. benchmarking with the international labour organisation core labour standards), environmental protection and biodiversity conservation, resource efficiency, pollution prevention, access to information on environmental matters (aarhus convention), land acquisition and involuntary resettlement, indigenous people, protection of human rights and community health, safety and security, status of minorities, and protection of cultural heritage.  conclusions the concept of sovereignty introduces many variables to the due diligence analysis and in particular to credit risk analysis. the multidimensional character of a sovereign and its complex decision-making process require special attention from the creditors and pose a challenge in the assessment of the probability of default. therefore, the prevailing methodologies stress the fact that both quantitative and qualitative elements need to be taken into consideration. debt affordability, referring to debt size and financial ability to repay it, remains an important factor in a quantitative analysis, but not a decisive one. qualitative elements such as the assessment of the institutional capacity become essential, since in the case of the sovereigns, the ability to repay does not necessarily imply the willingness to repay. due diligence of ifis goes beyond traditional credit risk assessment in the domains, where states ‘surrender’ their sovereignty to the regulation of international law, particularly in the sphere of human rights and environment.  bibliography basel committee on banking supervision (2004), international convergence of capital measurement and capital standards. a revised framework, bis, basel. bis (2012), bis quarterly review, september 2012. selected aspects of due diligence of sovereigns 79 eaton j., gersovitz m., stiglitz j. e. (1986), the pure theory of country risk, nber, cambridge. ecb (2006), acceptance criteria for third-party rating tools within the eurosystem credit assessment framework. ecb, frankfurt. the equator principles (2006), a financial industry benchmark for determining, assessing and managing social and environmental risk in project financing, http://www.equator-principles.com (retrieved 15.11.2012). jackson j. h. (2003), sovereignty-modern: new approach to an outdated concept, the american journal of international law, vol. 97. kaufmann d., kraay a., mastruzzi m. (2010), the worldwide governance indicators. methodology and analytical issues, world bank, washington. knight f. h (1921, 2000), risk, uncertainty and profit, library of economics and liberty, http://www.econlib.org (retrieved 20.02.2013). moody’s (2008), sovereign bond ratings. rating methodology, http://www.moodys.com (retrieved 15.11.2012). oecd (2010), central government debt: statistical yearbook 2010, oecd publishing, paris. oecd (2011), government debt, [in:] oecd factbook 2011–2012: economic, environmental and social statistics, oecd publishing, paris. reinhart c. m, rogoff k. s. (2009), this time is different. eight centuries of financial folly, princeton university press, princeton. standard and poor’s (2011), sovereign government rating methodology and assumptions, http://www.standardandpoors.com (retrieved 15.11.2012). standard and poor’s (2012), sovereign defaults and rating transition data, 2011 update, http://www.standardandpoors.com (retrieved 15.11.2012). stiglitz j. e. (2000), economics of the public sector (third edition), w. w. norton, london. us securities and exchange commission (2012), annual report on nationally recognised statistical ratings organisations, sec, washington. date of submission: march 8, 2019; date of acceptance: april 14, 2019. * contact information: 267037@doktorant.umk.pl, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 508 870 649; orcid id: https://orcid.org/0000-0001-72457833. chodziński, m. (2019). the tendency of households to invest in an ecological modernization of the utilized heating sources. copernican journal of finance & accounting, 8(1), 27–58. http://dx.doi. org/10.12775/cjfa.2019.002 maciej chodziński* nicolaus copernicus university in toruń the tendency of households to invest in an ecological modernization of the utilized heating sources keywords: investments, corporate social responsibility, smog, heating, ecology, household finances. j e l classification: q57. abstract: the aim of the article is to determine the impact of economic aspects on the decision-making process on modernization of heating sources used by households in the largest cities of the kuyavian-pomeranian voivodeship. excessive use of obsolete and worn out heating sources contributes significantly to intensive air pollution, especially during the winter season. the article uses a questionnaire survey carried out in the form of an online survey, addressed to the residents of bydgoszcz, toruń and the surrounding area. the survey was conducted using the google form, which was sent to random users of social networks. the form was also published on groups associating residents of bydgoszcz and toruń, as well as student groups of these cities. as a result of the survey we managed to obtain 153 correctly filled questionnaires. the analysis was based mainly on the analysis of the frequency of responses given and the analysis of correlations. because of this analysis, it can be concluded that the decisions related to the choice of the type of a new heating source and its level of environmental performance are mainly related to economic aspects, not over-care for the natural environcopernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 1 cjf&a co pe r n ic a n j o ur na l of finance & a c c o u n tin g maciej chodziński28 ment. a large proportion of respondents believe that they are willing to allocate an additional sum of money to the planned purchase only due to ecological values, however a large part of them declares sums that are really too small to translate into a more environmentally friendly product. it means that for the surveyed the main group of factors affecting the selection of the heating source are economic factors, and the added value which is less emission of harmful pollutants often goes to the background (although it is not completely insignificant). it results from the fact that ongoing subsidy programs are the most effective form of improving the situation, however, the level of funding should bring the price of ecological furnaces closer to their traditional, cheaper counterparts.  introduction it is spoken a lot of about a green development with the respect to the popularity and the common fashion for ecology, however, it is often associated with superficial actions entailing noticeable changes. the superficiality is attributed to a large number of introduced solutions, for instance to the reports of social responsibility for business. however, a little attention is paid to the decision taken by ordinary people. all fundamental changes shouldn’t have roots in the actions of big firms, corporations, enterprisers or countries but in the behaviour of ordinary people because these are people who create and manage all economic structures existing in economy, so that in people lies the biggest power determining all changes (www1). an excellent experimental area in recognizing people’s attitude to problems and ecological challenges of the contemporary times can be the most popular for a few years – the problem of polluted air in poland, increasing in the winter time. this phenomenon concerns mostly the municipal and suburban areas and its source is fuel used for heating households and buildings. taking into consideration the above circumstances, the tendency to invest in modernization of utilized heating sources has become the basis to write the below article. the research methodology and the course of the research process in this article there have been used the research methods including: the critical analysis of literature, the analysis of market data, as well as the survey research, completed in the form of the internet questionnaire made up with the use of google application form consisting of 14 questions. this form was directed to the groups consociating on the social networks the dwellers of the biggest the tendency of households to invest… 29 cities of kujawsko-pomorskie voivodeship which are bydgoszcz and torun and also their neighborhoods. the surveyed respondents replied in the period of 8–20th december 2018. in such a way, a gathered research data was afterwards submitted to a statistical analysis with the use of spss statistics and microsoft excel programmes. the problem of air pollution in poland the problem of air pollution has been in the last years one of the most popular issues, arising in different kinds of media in poland, especially in the autumnwinter time. a gradually decreasing air temperature made a large number of dwellers heat their houses more intensively. an increased exploitation of furnaces is associated with an increased emission of combustion products into the atmosphere, which collects contamination mainly in the form of dust suspended pm 2.5 and pm 10, and also toxic gases such as nitric oxide, sulphur dioxide, hydrogen chloride or hydrogen f luoride (www2). one of the most harmful combustion products is benzoapyrene – polycyclic aromatic hydrocarbon which affects particularly badly a human body, for example, by: adrenalopathy, lymphatic disorder, respiratory diseases and also the increase of cardiovascular diseases. in poland the benzoapyrene concentration is one of the highest in europe, which is presented on the visual map on the scheme 1. one of the main causes of the bad air condition in poland is the emission of the harmful substances arisen as the result of households heating with lowquality fuel (or even toxic waste which should be utilized in specialized companies). additionally, low-quality fuel is often associated with highly ineffective furnaces which while working achieve low efficiency in transformation of incinerated fuel into thermal energy, which additionally increases the use of utilized feedstock and the level of emitted pollutants (www2). however, this problem doesn’t only concern poland, it is also widely noticed in other countries such as china which have considerable difficulties in an effective fight with so called smog. in such a case, the effect of a gradual improvement is achieved mainly by the severe restriction of chinese government dealing with the reduction of the amount of carbon incinerated by the industry (www3). maciej chodziński30 scheme 1. the benzoapyrene concentration in selected countries in 2014 scheme 1. the benzoapyrene concentration in selected countries in 2014 source: (www6). figure 1. a frequency of given replies on a question 1 source: own elaboration. 0.14% 0.38% 0.48% in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) s o u r c e : (www6). in poland, the main reason for the formation of smog is the so-called low emission. it is the emission of combustion products into the atmosphere from chimney outlets located up to 40 meters above ground level. such a low height means that the products of combustion along with contaminants stay close to the ground, where they are inhaled by respiratory systems of humans and animals. for this reason, the basic ad hoc preventive measure that protects the health of urban residents is personal air filters in the form of dust masks or gas masks with more advanced, multi-stage pollution filtration systems (mikłaszewski, 2017, pp. 6, 20). one of the cities struggling with the largest air pollution in poland is kraków. in this case, the conducted research shows that the main part of low emission pollution is generated both in the scale of the małopolskie voivodship, as well as on the national scale through the generation of heat in individual or local boiler houses in the winter season. in order to minimize low emissions and an excessive amount of harmful substances, the małopolskie voivodeship focus the tendency of households to invest… 31 es on comprehensive modernization of households, including not only replacement of obsolete sources of heat, but also thermo-modernization of buildings. smaller heat losses mean less heating needs and what is associated with this is a smaller amount of burnt coal and other fuels used in heating. krakow’s problems associated with an extremely high amount of pollution affect not only the health and physical condition of the residents. material property is also threatened, especially historical properties, which are subject to faster degradation as a result of exposure to long-term pollution. bricks and concrete walls crumble faster, and metal elements are subject to accelerated corrosion, which adversely affects the image of the city both for residents and tourists visiting the former capital of poland (kaczmarczyk, 2015, pp. 28–38). taking into account the structure of pollution sources from low emissions, it can be clearly stated that households are the biggest culprit. in order to reduce the pollution, they generate the city of krakow develops alternative heating sources, actively developing the gas network, in addition to the aforementioned thermo-modernization. other activities focus on other sources of pollution such as private transport or industry. the activities undertaken focus on reducing excessive traffic where it is unnecessary, and replacing the solutions used with more ecological ones (kaczmarczyk, 2015, pp. 38–49). an alternative to energy for smaller towns located near large agricultural areas may be, in addition to the previously mentioned sources – biomass heating plants. this fuel is relatively easy to process and use, and its main source may be a shrub willow, collected cyclically once a year (budzynski & bielski, 2006). another alternative method of heating may be heat pumps, the use of which for economic reasons becomes more and more profitable. however, the wider application depends to a large extent on the location of a given building and geological conditions (in the case of pumps drawing energy from the ground). the heating power derives from a constant temperature that remains at a certain level below the ground. in the opinion of many, this is a source with high development potential in the future, similar to other renewable energy sources with a low degree of environmental nuisance (lesniak, janczar-smuga, podgorski & klinkowski, 2012). in addition, new innovative solutions are constantly emerging that allow for obtaining thermal energy, among others using magnetic fields of permanent magnets, however, such solutions are not yet advanced enough to be able to maciej chodziński32 estimate their rational and economically efficient use on a wide scale (nowak & kowalczyk, 2015). a representative of germany, which is geographically closer to poland, has been creating the plans of a gradual withdrawal of the conventional sources of energy by renewable energy sources since the nineteens of the previous century. initially, this concept established the introduction of the minimal rates on wind power, solar energy and the one received from the small generators gaining water-dwelling energy. gradually, this law had been undergoing modification till 2016 year when there was introduced an act about the renewable energy sources (eeg) which became an example to follow for other countries. such an act guarantees the priority of the f low of energy from the renewable energy sources and also determines for it a minimal market price. consequently, the system, which was the guarantor of a high security level of investments into renewable energy sources, was created. at the same time, it confined redundant bureaucracy (morris & pehnt, 2017, pp. 30–31). in poland the actions undertaken against the air contamination concentrate mainly on supporting the modernization used by households (considered as the main cause of the problem) the heating devices, as well as the controls of fuel incinerated in them. the expression of the combat with contamination on the local level is, among others, the program of premiums to the modernization of the utilized heating sources, recognized as non-ecological. in accordance with the information of the bydgoszcz city council in 2018 as part of the program “ekopiec 2018” it is possible to receive a bailout of the conducted modernization up to 4000 zl. the program covers heating sources powered with solid fuel. the beneficiaries of this support are “owners, co-owners of the properties, representing a single-family residential building or a dwelling, used entirely for one’s own housing needs or the users of perpetual real estates on which there is situated a single-family residential building, used entirely for one’s own housing estates” (www4). a little more complex system of premiums has been implemented in toruń. in this case, the main condition to receive them is to own an old type of a furnace for solid fuel. the amount of money possible to gain in the form of reimbursement is established as a percentage which value cannot exceed 70%. however, most variants f luctuate between 40–60% of expenditure incurred by an owner of a real estate. in addition, there appear the numerous limitations of maximum amounts which are likely to be gained depending on a concrete the tendency of households to invest… 33 case (the detailed regulations are not presented here in view of editorial constraints) (www5). the tendency of domestic households to invest in the modernization of utilized heating sources – the survey results considering the described actions, undertaken on the local level and aiming at the improvement of the air quality, it is worth thinking what it is the tendency of dwellers to carry out the modernization of heating sources? how strongly do local inhabitants appreciate economy, and how – ecology? for this purpose, a result survey has been conducted, in which 153 respondents participated. the survey consisted of 13 or 14 questions (the number of questions depended on the kind of reply a person gave). all questions were a single choice and replies were given in the internet application form by means of a computer or a phone. the first question concerned a kind of building in which a person lives and there were 3 answers to choose. the surveyed responses have been presented on the 1 figure. figure 1. a frequency of given replies on a question 1 the tendency of domestic households to invest in the modernization of utilized heating sources – the survey results considering the described actions, undertaken on the local level and aiming at the improvement of the air quality, it is worth thinking what it is the tendency of dwellers to carry out the modernization of heating sources? how strongly do local inhabitants appreciate economy, and how ecology? for this purpose, a result survey has been conducted, in which 153 respondents participated. the survey consisted of 13 or 14 questions (the number of questions depended on the kind of reply a person gave). all questions were a single choice and replies were given in the internet application form by means of a computer or a phone. the first question concerned a kind of building in which a person lives and there were 3 answers to choose. the surveyed responses have been presented on the 1 figure. figure 1. a frequency of given replies on a question 1 source: own elaboration. 13.73% 37.91% 48.37% in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) s o u r c e : own elaboration. maciej chodziński34 figure 2. the frequency of responses given on a question 2 figure 2. the frequency of responses given on a question 2 source: own elaboration. in the analysed group nearly 38% of respondents live in blocks of flats or highrise buildings, so these are buildings which from the point of view of the mentioned problem are less important because probably most of them are heated by the heat from a municipal electrical power and heating plant. as a result, they do not have influence on the utilized heating source. the other group, however, consist of the dwellers of tenement houses and single-family houses which responses will probably be the main subject of analysis. the further question (no. 2) concerned the currently used basic heating source in the winter time. in this case there has occurred a remarkable differentiation presented on the figure 2. figure 3. frequency of responses on question 2 for the dwellers of block of flats and high rise buildings 1.96% 35.95% 13.73% 4.58% 8.50% 8.50% 12.42% 14.38% what is the main source of heating in your home in the winter season? geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace s o u r c e : own elaboration. in the analysed group nearly 38% of respondents live in blocks of f lats or highrise buildings, so these are buildings which from the point of view of the mentioned problem are less important because probably most of them are heated by the heat from a municipal electrical power and heating plant. as a result, they do not have inf luence on the utilized heating source. the other group, however, consist of the dwellers of tenement houses and single-family houses which responses will probably be the main subject of analysis. the further question (no. 2) concerned the currently used basic heating source in the winter time. in this case there has occurred a remarkable differentiation presented on the figure 2. the tendency of households to invest… 35 figure 3. frequency of responses on question 2 for the dwellers of block of f lats and high rise buildings source: own elaboration. in this point, it is worth combining heating source with a place of living. the data structure concerning of the utilized heating source have been presented on the figure 3-5. concluding from the presented data, in accordance with the suspects, the dwellers of block of flats and high rise blocks only in a small degree (about 10%) used their own heating sources on which modernization they could have an influence. in case of a single-family house there appears a remarkably bigger differentiation. it is important to mention that over ¼ houses is still heated by non-ecological coal boilers. in addition, as a consequence of heating fireplaces with wood, there appear about 38% harmful and ineffective heating sources. the percentage can be even higher because a part of furnaces can be outdated and do not fulfil emission standards. figure 4. the frequency of answers on question 2 for the dwellers of single-family houses 89.66% 1.72% 5.17% 3.45% what is the main source of heating in your home in the winter season? in what type of building do you live?: a block of flats or a skyscraper central heating from a combined heat and power plant electric heating furnace for heating oil furnace powered by natural gas or lpg s o u r c e : own elaboration. in this point, it is worth combining heating source with a place of living. the data structure concerning of the utilized heating source have been presented on the figure 3–5. concluding from the presented data, in accordance with the suspects, the dwellers of block of f lats and high rise blocks only in a small degree (about 10%) used their own heating sources on which modernization they could have an inf luence. in case of a single-family house there appears a remarkably bigger differentiation. it is important to mention that over ¼ houses is still heated by non-ecological coal boilers. in addition, as a consequence of heating fireplaces with wood, there appear about 38% harmful and ineffective heating sources. the percentage can be even higher because a part of furnaces can be outdated and do not fulfil emission standards. maciej chodziński36 figure 4. the frequency of answers on question 2 for the dwellers of single-family houses figure 4. the frequency of answers on question 2 for the dwellers of single-family houses source: own elaboration. figure 5. the frequency of answers on a question 2 for the dwellers of tenement houses source: an own elaboration. figure 6. frequencies of answers to question 3 depending on the place of residence 4.05% 2.70% 25.68% 2.70% 12.16% 9.46% 14.86% 28.38% what is the main source of heating in your home in the winter season? in what type of building do you live?: single family house (detached or terraced) geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace 4.76% 9.52% 19.05% 19.05% 14.29% 28.57% 4.76% what is the main source of heating in your home in the winter season? in what type of building do you live?: tenement house central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace s o u r c e : own elaboration. figure 5. the frequency of answers on a question 2 for the dwellers of tenement houses figure 4. the frequency of answers on question 2 for the dwellers of single-family houses source: own elaboration. figure 5. the frequency of answers on a question 2 for the dwellers of tenement houses source: an own elaboration. figure 6. frequencies of answers to question 3 depending on the place of residence 4.05% 2.70% 25.68% 2.70% 12.16% 9.46% 14.86% 28.38% what is the main source of heating in your home in the winter season? in what type of building do you live?: single family house (detached or terraced) geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace 4.76% 9.52% 19.05% 19.05% 14.29% 28.57% 4.76% what is the main source of heating in your home in the winter season? in what type of building do you live?: tenement house central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace s o u r c e : own elaboration. the tendency of households to invest… 37 figure 6. frequencies of answers to question 3 depending on the place of residence source: own elaboration. question 3 concerned the subjective assessment of the respondent, about how much importance he attached to the expenditure for heating (on a scale of 1 to 5). when analyzing the answers, it is worth looking at the obtained data depending on how the respondent answered in question 1 and 2. the relevant relationships are presented in figure 6 and 7. first of all, you can notice a clear left side skew of the presented distribution, which takes place regardless of the type of place of residence. it is worth noting that much more expenditures are sought for by residents of houses and tenement houses, that is, buildings in which they themselves decide about the source of heat. these conclusions are also confirmed by the analysis of responses to the available heat sources. people using heating from combined heat and power plants (the most popular in blocks and high-rise buildings) showed some tendency to lower interest in their expenses than other respondents. persons who indicated the greatest interest in the expenses incurred are mainly people using central heating. in the second place, there are people using coal boilers and natural gas furnaces (5.88% of all respondents). the remaining types of furnaces are used by a much smaller number of respondents who chose the answer with a weight of 5. figure 7. frequencies of answers to question 3 depending on the heating source 1.96% 9.15% 2.61%1.96% 2.61% 13.07% 9.80% 10.46% 0.65% 9.15% 20.26% 18.30% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 1 2 3 4 5 on a scale of 1 to 5, how much attention do you pay for expenses incurred on heating? in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) s o u r c e : own elaboration. question 3 concerned the subjective assessment of the respondent, about how much importance he attached to the expenditure for heating (on a scale of 1 to 5). when analyzing the answers, it is worth looking at the obtained data depending on how the respondent answered in question 1 and 2. the relevant relationships are presented in figure 6 and 7. first of all, you can notice a clear left side skew of the presented distribution, which takes place regardless of the type of place of residence. it is worth noting that much more expenditures are sought for by residents of houses and tenement houses, that is, buildings in which they themselves decide about the source of heat. these conclusions are also confirmed by the analysis of responses to the available heat sources. people using heating from combined heat and power plants (the most popular in blocks and high-rise buildings) showed some tendency to lower interest in their expenses than other respondents. persons who indicated the greatest interest in the expenses incurred are mainly people using central heating. in the second place, there are people using coal boilers and natural gas furnaces (5.88% of all respondents). the remaining types of furnaces are used by a much smaller number of respondents who chose the answer with a weight of 5. maciej chodziński38 figure 7. frequencies of answers to question 3 depending on the heating source source: own elaboration. figure 8. frequencies of answers to question 4 depending on the place of residence source: own elaboration. table 1. descriptive statistics of the answers from questions 3 and 4 question. 3 question. 4 n significant observations 153 153 data shortages 0 0 average 3.95 3.67 median 4.00 4.00 dominant 4 4 standard deviation .930 .924 skewness -.739 -.368 standard error of skewness .196 .196 kurtosis .476 .027 0.65% 1.31% 1.96% 1.31% 13.07% 11.11% 8.50% 3.27% 4.58% 5.88% 1.31% 2.61% 0.65% 6.54% 1.31% 0.65% 3.92% 1.31% 1.31% 3.92% 5.88% 0.65% 3.92% 5.88% 3.92% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 1 2 3 4 5 on a scale of 1 to 5, how much attention do you pay for expenses incurred on heating? what is the main source of heating in your home in the winter season? geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace 0.65% 1.96% 5.88% 5.23% 0.65% 3.92% 15.03% 14.38% 3.92%1.31% 1.31% 17.65% 17.65% 10.46% 0.00% 5.00% 10.00% 15.00% 20.00% 1 2 3 4 5 on a scale of 1 to 5, how do you assess your current heating expenses for your place of residence? in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) s o u r c e : own elaboration. figure 8. frequencies of answers to question 4 depending on the place of residence source: own elaboration. figure 8. frequencies of answers to question 4 depending on the place of residence source: own elaboration. table 1. descriptive statistics of the answers from questions 3 and 4 question. 3 question. 4 n significant observations 153 153 data shortages 0 0 average 3.95 3.67 median 4.00 4.00 dominant 4 4 standard deviation .930 .924 skewness -.739 -.368 standard error of skewness .196 .196 kurtosis .476 .027 0.65% 1.31% 1.96% 1.31% 13.07% 11.11% 8.50% 3.27% 4.58% 5.88% 1.31% 2.61% 0.65% 6.54% 1.31% 0.65% 3.92% 1.31% 1.31% 3.92% 5.88% 0.65% 3.92% 5.88% 3.92% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 1 2 3 4 5 on a scale of 1 to 5, how much attention do you pay for expenses incurred on heating? what is the main source of heating in your home in the winter season? geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace 0.65% 1.96% 5.88% 5.23% 0.65% 3.92% 15.03% 14.38% 3.92%1.31% 1.31% 17.65% 17.65% 10.46% 0.00% 5.00% 10.00% 15.00% 20.00% 1 2 3 4 5 on a scale of 1 to 5, how do you assess your current heating expenses for your place of residence? in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) s o u r c e : own elaboration. the tendency of households to invest… 39 table 1. descriptive statistics of the answers from questions 3 and 4 question. 3 question. 4 n significant observations 153 153 data shortages 0 0 average 3.95 3.67 median 4.00 4.00 dominant 4 4 standard deviation .930 .924 skewness -.739 -.368 standard error of skewness .196 .196 kurtosis .476 .027 standard kurtosis error .390 .390 s o u r c e : own elaboration. question 4 concerned the assessment on a scale of 1 to 5 of the subjective feeling of the burden of expenses currently incurred. in this case, the distribution of responses is similar to the distribution from question 3 discussed above. with the difference that the observed left skewness of the distribution shows a slightly lower strength. graphic observations confirm the calculated values of skewness and kurtosis, whose values for questions 3 and 4 are presented in table 1. in relation to the heat sources owned, the answers were more diversified than in the previous question. most often, at moderate or high level, people with central heating set their expenses, similarly as in question 3, such large amounts result from the structure of the surveyed group, about 36% of respondents lived in blocks and had this type of heating. among the rest of the respondents at a very high level, most often the owners of coal boilers positioned their expenses (less than 4% of the total answer, which is about 24% of all those who considered their expenses very high), and the owners of oil furnaces ranked third. fuel. in case of a high level of expenditure (again excluding people with central heating), the most numerous groups were people who heated with natural gas (5.88% of total waste), as well as wood burning stoves and eco-pea kiln stoves. among the heating sources considered to be non-organic in a moderate way, coal boiler owners most often assessed their expensmaciej chodziński40 es. interestingly, almost half of them (about 47%) consider their expenses to be moderate or low. the owners of fireplaces on wood most definitely estimate their expenses, in their case the high level was most often chosen (about 40%), the remaining people considered spending as moderate (about 30%) or very high (about 15.5%). quite a similar distribution of responses as in case of wood-burning fireplace owners occurred among people using gas heating (except that the division between moderate and high expenditures spread evenly), as well as electric heating. in case of heating oil, the responses from moderate to very high levels were on the same level. the dominant feature of people using eco-pea kiln furnaces was moderate (45.48%), at the high level, 31.85% of respondents defined their expenditures, and very high – around 18%. what is interesting, however, is the fact that only single people chose the answer from the range of expenses from very low to low. this may result from the treatment of expenses as a “necessary evil”, then people who perceive their expenses may have a tendency not to recognize them as low, regardless of the amount they would be. figure 9. frequencies of answers to question 4 depending on the heating source figure 9. frequencies of answers to question 4 depending on the heating source source: own elaboration. according to the data presented in figure 10, among the respondents 41.18% consider changing the current heating system in their place of residence. this group consists primarily of residents of single-family homes (55.56%). a smaller proportion are the residents of blocks (23.80%) and tenement houses (20.64%). in case of those unwilling to change, the majority are people living in blocks of flats / skyscrapers (which is understandable due to the possibility of introducing modifications). analyzing the responses by place of residence, it can be seen that 61.91% of tenement dwellers are considering changing the heating source, 47.3% of single-family dwellers and 25.86% of people living in blocks of flats / skyscrapers. figure 10. frequencies of answers to question 5 depending on the place of residence 0.65% 0.65% 0.65% 3.27% 13.73% 13.73% 4.58% 1.31% 5.23% 3.27% 3.92% 1.31% 2.61% 0.65% 4.58% 2.61% 3.27% 1.31% 2.61% 5.88% 0.65% 6.54% 4.58% 2.61% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 1 2 3 4 5 on a scale of 1 to 5, how do you assess your current heating expenses for your place of residence? what is the main source of heating in your home in the winter season? geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace s o u r c e : own elaboration. the tendency of households to invest… 41 according to the data presented in figure 10, among the respondents 41.18% consider changing the current heating system in their place of residence. this group consists primarily of residents of single-family homes (55.56%). a smaller proportion are the residents of blocks (23.80%) and tenement houses (20.64%). in case of those unwilling to change, the majority are people living in blocks of f lats / skyscrapers (which is understandable due to the possibility of introducing modifications). analyzing the responses by place of residence, it can be seen that 61.91% of tenement dwellers are considering changing the heating source, 47.3% of single-family dwellers and 25.86% of people living in blocks of f lats / skyscrapers. figure 10. frequencies of answers to question 5 depending on the place of residence source: own elaboration. the most numerous group considering changing the current source of heating are owners of wood-burning fireplaces 76.94% of them declare the will to change. the second place is occupied by people with fuel oil furnaces 61.53%, and third persons with coal boilers 52.37%. it is worth noting in this place that only about half of the non-organic, but relatively cheap owners in the purchase of coal-fired boilers declare their willingness to replace them and replace them with an alternative source of heat (figure 11). figure 11. frequencies of answers to question 5 depending on the heating source 5.23% 8.50% 28.10% 9.80% 25.49% 22.88% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% no yes do you consider changing the current method of heating? in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) s o u r c e : own elaboration. the most numerous group considering changing the current source of heating are owners of wood-burning fireplaces – 76.94% of them declare the will to change. the second place is occupied by people with fuel oil furnaces – 61.53%, and third persons with coal boilers – 52.37%. it is worth noting in this place that only about half of the non-organic, but relatively cheap owners in the purchase of coal-fired boilers declare their willingness to replace them and replace them with an alternative source of heat (figure 11). maciej chodziński42 figure 11. frequencies of answers to question 5 depending on the heating source source: own elaboration. figure 12. frequencies of answers to question 6 depending on the place of residence source: own elaboration. from among respondents, the vast majority (about 67.98%) expressed their readiness to allocate a larger sum of money to a source of heat, which would differ only in additional 3.27% 10.46% 12.42% 25.49% 16.34% 32.03% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% no yes would you be willing to spend more money exchanging the heating source only because it is less harmful to the environment? in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) 1.31% 0.65% 25.49% 10.46% 6.54% 7.19% 2.61% 1.96%1.96% 6.54% 3.27% 5.23% 7.84% 4.58% 9.80% 4.58% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% no yes do you consider changing the current method of heating? what is the main source of heating in your home in the winter season? geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace s o u r c e : own elaboration. figure 12. frequencies of answers to question 6 depending on the place of residence source: own elaboration. figure 12. frequencies of answers to question 6 depending on the place of residence source: own elaboration. from among respondents, the vast majority (about 67.98%) expressed their readiness to allocate a larger sum of money to a source of heat, which would differ only in additional 3.27% 10.46% 12.42% 25.49% 16.34% 32.03% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% no yes would you be willing to spend more money exchanging the heating source only because it is less harmful to the environment? in what type of building do you live? tenement house a block of flats or a skyscraper single-family house (detached or terraced) 1.31% 0.65% 25.49% 10.46% 6.54% 7.19% 2.61% 1.96%1.96% 6.54% 3.27% 5.23% 7.84% 4.58% 9.80% 4.58% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% no yes do you consider changing the current method of heating? what is the main source of heating in your home in the winter season? geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace s o u r c e : own elaboration. the tendency of households to invest… 43 from among respondents, the vast majority (about 67.98%) expressed their readiness to allocate a larger sum of money to a source of heat, which would differ only in additional ecological benefits. similar proportions occurred irrespective of the person’s place of residence. inhabitants of single-family homes responded affirmatively in 66.21% of cases, residents of apartment buildings in 76.18% (in this case, however, it is a relatively small sample, compared to the total number of respondents), and residents of blocks and high-rise buildings in 67.24%. it is also worth noting that the structure of persons who answered in the affirmative as well as negative, because of their place of residence, does not differ significantly from the structure of all surveyed people presented more quickly on figure 1. in case of a negative response, it amounts to 38.78% – residents of blocks, 51.01% – dwellers of houses, 10.21% – dwellers of tenement houses, and for the affirmative answer it was 37.50%, 47.12% and 15.39%, respectively. deviations from the general structure do not reach more than around 5%. it can therefore be suspected that the place of residence does not significantly affect the individual’s approach to the problems of air pollution associated with the combustion of fuels for the purpose of heating homes. figure 13. frequencies of answers to question 6 depending on the heating source ecological benefits. similar proportions occurred irrespective of the person's place of residence. inhabitants of single-family homes responded affirmatively in 66.21% of cases, residents of apartment buildings in 76.18% (in this case, however, it is a relatively small sample, compared to the total number of respondents), and residents of blocks and high-rise buildings in 67.24%. it is also worth noting that the structure of persons who answered in the affirmative as well as negative, because of their place of residence, does not differ significantly from the structure of all surveyed people presented more quickly on figure 1. in case of a negative response, it amounts to 38.78% residents of blocks, 51.01% dwellers of houses, 10.21% dwellers of tenement houses, and for the affirmative answer it was 37.50%, 47.12% and 15.39%, respectively. deviations from the general structure do not reach more than around 5%. it can therefore be suspected that the place of residence does not significantly affect the individual's approach to the problems of air pollution associated with the combustion of fuels for the purpose of heating homes. figure 13. frequencies of answers to question 6 depending on the heating source source: own elaboration. the respondents who answered question 6 in question 6 were representing users of all types of heating sources. from the point of view of the analysis of the next question, it is worth emphasizing that about 5% of people using coal-fired boilers or wood-burning 1.96% 12.42% 23.53% 4.58% 9.15% 4.58% 0.65% 7.84% 8.50% 6.54% 5.88% 7.84% 6.54% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% no yes would you be willing to spend more money exchangging the heating source only because it is less harmful to the environment? what is the main source of heating in your home in the winter season? geothermal heating central heating from a combined heat and power plant coal boiler electric heating fireplace on wood furnace for heating oil furnace powered by natural gas or lpg the eco-pea furnace s o u r c e : own elaboration. maciej chodziński44 the respondents who answered question 6 in question 6 were representing users of all types of heating sources. from the point of view of the analysis of the next question, it is worth emphasizing that about 5% of people using coalfired boilers or wood-burning fireplaces were negative. a negative answer was also given by over half of the owners of eco-pea coal furnaces and gas-fired furnaces. this group is made up of people who are mainly driven by economic considerations, but they have already modernized. from the point of view of reducing pollution in the future, the most important group is about 5%, still having obsolete heating sources, and categorically refusing to allocate any additional funds solely for ecology. people who declared willingness to allocate more funds for additional ecological qualities of the purchased furnace were asked a question, consisting in determining in the range how much money they are willing to earmark for such a purpose. the answers received for this question are presented in figure 14. figure 14. frequencies of answers to question 7 depending on the place of residence fireplaces were negative. a negative answer was also given by over half of the owners of eco-pea coal furnaces and gas-fired furnaces. this group is made up of people who are mainly driven by economic considerations, but they have already modernized. from the point of view of reducing pollution in the future, the most important group is about 5%, still having obsolete heating sources, and categorically refusing to allocate any additional funds solely for ecology. people who declared willingness to allocate more funds for additional ecological qualities of the purchased furnace were asked a question, consisting in determining in the range how much money they are willing to earmark for such a purpose. the answers received for this question are presented in figure 14. figure 14. frequencies of answers to question 7 depending on the place of residence source: own elaboration. figure 15. frequencies of answers to question 7 depending on the heating source 3.27% 1.31% 3.92% 12.42% 7.19% 1.96% 3.27% 9.15% 3.27% 0.65% 16.34% 3.92% 3.92% 2.61% 4.58% 11.11% 2.61% 0.65% 2.61% 0.00% 5.00% 10.00% 15.00% 20.00% not answered on this question below 1000 pln more from 1001 to 2000 pln more from 2001 to 3000 pln more from 3001 to 4000 pln more from 4001 to 5000 pln more from 5001 to 6000 pln more from 6001 to 7000 pln more over 7000 pln more w he n bu yi ng a n ew h ea tin g so ur ce , h ow m uc h w ou ld yo u be re ad y to p ay e xt ra fo r its e co lo gi ca l v al ue s (e g le ss a ir p ol lu tio n w ith s ol id p ar tic le s) , r el at iv e to a co m pa ra bl e, b ut le ss e co lo gi ca l e qu iv al en t w ith a si m ila r he at in g po w er (e g ch ea p co al b oi l) in what type of building do you live? single-family house (detached or terraced) a block of flats or a skyscraper tenement house s o u r c e : own elaboration. the tendency of households to invest… 45 figure 15. frequencies of answers to question 7 depending on the heating source 12.42% 4.58% 1.96% 3.27% 9.15% 3.92% 4.58% 1.96% 3.27% 1.96% 1.31% 1.31% 0.65% 0.65% 0.65% 0.65% 0.65% 1.96% 2.61% 1.96% 2.61% 4.58% 6.54% 1.31% 0.65% 2.61% 1.31% 7.84% 0.65% 1.31% 2.61% 0.65% 0.65% 0.00% 5.00% 10.00% 15.00% not answered on this question below 1000 pln more from 1001 to 2000 pln more from 2001 to 3000 pln more from 3001 to 4000 pln more from 4001 to 5000 pln more from 5001 to 6000 pln more from 6001 to 7000 pln more over 7000 pln more w he n bu yi ng a n ew h ea tin g so ur ce , h ow m uc h w ou ld y ou b e re ad y to p ay e xt ra fo r i ts e co lo gi ca l v al ue s (e g le ss a ir p ol lu tio n w ith s ol id pa rt ic le s) , r el at iv e to a c om pa ra bl e, b ut le ss e co lo gi ca l e qu iv al en t w ith a s im ila r h ea tin g po w er (e g ch ea p co al b oi l what is the main source of heating in your home in the winter season? the eco-pea furnace furnace powered by natural gas or lpg furnace for heating oil fireplace on wood electric heating coal boiler central heating from a combined heat and power plant geothermal heating figure 15. frequencies of answers to question 7 depending on the heating source source: own elaboration. figure 16. frequency of answers to question 9 source: own elaboration. 0.65% 37.25% 9.80% 0.65% 2.61% 4.58% 10.46% 11.76% 16.99% 5.23% 0.00% 10.00% 20.00% 30.00% 40.00% 16-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 over 60 how old are you? s o u r c e : own elaboration. the first set of bars, from the bottom of the figure, without a description, presents the distribution of places of residence of people who negatively answered the previous question and therefore did not give any answer in question 7. the percentage division is in this case the same as the one discussed at figure 12. in case people willing to spend additional funds, constituting a group of 104 respondents, the most common answer is between 4 and 5 thousand. golden. the range between 3 and 4 thousand turned out to be slightly less popular. golden. with the increase in the amount above 5,000 the number of people ready to incur such significant expenses is drastically decreasing. in the analyzed research sample, about 12.5% of respondents declared their readiness to use less than pln 1,000, which in practice means that they are not able to implement ecological investments in their homes in practice, because it is too small to allow the purchase of really friendlier ones. solution environment. analysing the figure, it can also be seen that there are clearly more people able to spend in single-family houses, which may be due to the higher level of aff luence of such people or greater awareness resulting from the need to heat their own home. for none of the presented response intervals, the ratio simimaciej chodziński46 lar to the initial structure of the place of residence of the general respondents is not kept. responses to the question asked by respondents may also be presented depending on the heating source they have in accordance with figure 15. as in case of the division into the place of residence, the lowest category presents the structure of heating sources for people who do not wish to spend an additional sum of money on the increased ecological values of the heating source. this group was discussed in the analysis of figure 13, so this section will not be discussed in more detail. looking at the incidence rates of individual heating sources for specific response intervals, it is difficult to notice any clear trend. one can risk a statement that people using central heating dominate in lower ranges, while higher compartments are the domain of other heating sources. in addition, it can also be noted that the lower the range, the more predominant the less ecological solutions, such as coal boilers. such a distribution of responses may be related to the economic situation of the given groups of respondents. because of their funds, they may be more reluctant to incur unnecessary additional expenses. however, these dependencies should be verified in detail in the further part of the analysis. 154 people participated in the survey, of which 39.22% were male and 60.78% were women. the age of the respondents was varied, and the largest group were people aged 21–25, the next age groups show a sharp decline, up to the age range of people aged 31–35. then the numbers gradually increase, reaching the local maximum for the age of 56–60 years. these dependencies are depicted in figure 16. figure 16. frequency of answers to question 9 12.42% 4.58% 1.96% 3.27% 9.15% 3.92% 4.58% 1.96% 3.27% 1.96% 1.31% 1.31% 0.65% 0.65% 0.65% 0.65% 0.65% 1.96% 2.61% 1.96% 2.61% 4.58% 6.54% 1.31% 0.65% 2.61% 1.31% 7.84% 0.65% 1.31% 2.61% 0.65% 0.65% 0.00% 5.00% 10.00% 15.00% not answered on this question below 1000 pln more from 1001 to 2000 pln more from 2001 to 3000 pln more from 3001 to 4000 pln more from 4001 to 5000 pln more from 5001 to 6000 pln more from 6001 to 7000 pln more over 7000 pln more w he n bu yi ng a n ew h ea tin g so ur ce , h ow m uc h w ou ld y ou b e re ad y to p ay e xt ra fo r i ts e co lo gi ca l v al ue s (e g le ss a ir p ol lu tio n w ith s ol id pa rt ic le s) , r el at iv e to a c om pa ra bl e, b ut le ss e co lo gi ca l e qu iv al en t w ith a s im ila r h ea tin g po w er (e g ch ea p co al b oi l what is the main source of heating in your home in the winter season? the eco-pea furnace furnace powered by natural gas or lpg furnace for heating oil fireplace on wood electric heating coal boiler central heating from a combined heat and power plant geothermal heating figure 15. frequencies of answers to question 7 depending on the heating source source: own elaboration. figure 16. frequency of answers to question 9 source: own elaboration. 0.65% 37.25% 9.80% 0.65% 2.61% 4.58% 10.46% 11.76% 16.99% 5.23% 0.00% 10.00% 20.00% 30.00% 40.00% 16-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 over 60 how old are you? s o u r c e : own elaboration. the tendency of households to invest… 47 the education of the surveyed people ranged from the upper to the medium one to the professional one. people with higher education accounted for 60.13%, and 35.95% had secondary education, and 3.92% had vocational education. figure 17. frequency of answers to question 11 figure 17. frequency of answers to question 11 source: own elaboration. figure 18. frequencies of answers to question 12 source: own elaboration. 7.19% 32.68% 30.07% 21.57% 5.88% 1.31% 0.65% 0.65% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 1 2 3 4 5 6 7 20 number of people co-creating the household 1.96% 30.07% 10.46% 18.95% 13.07% 18.95% 6.54% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% below 500 pln over 3000 pln from 1001 to 1500 pln from 1501 to 2000 pln from 2001 to 2500 pln from 2501 to 3000 pln from 501 to 1000 pln average income per person in a household s o u r c e : own elaboration. in case of the number of people co-creating households, respondents dominate twoand three-person households, as shown in figure 17. slightly fewer were households made up of 4 people. the remaining variants are characterized by marginal numbers. however, there is a clear right-side obliquity present in this question. the income of the respondents was on average relatively high, moreover, the largest group constituting over 30% of respondents were people earning an average of over pln 3,000 per head in a household. the second most popular income ranges from 1501 to 2000 pln and from 2501 to 3000 pln. this distribution is shown in figure 18. maciej chodziński48 figure 18. frequencies of answers to question 12 figure 17. frequency of answers to question 11 source: own elaboration. figure 18. frequencies of answers to question 12 source: own elaboration. 7.19% 32.68% 30.07% 21.57% 5.88% 1.31% 0.65% 0.65% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 1 2 3 4 5 6 7 20 number of people co-creating the household 1.96% 30.07% 10.46% 18.95% 13.07% 18.95% 6.54% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% below 500 pln over 3000 pln from 1001 to 1500 pln from 1501 to 2000 pln from 2001 to 2500 pln from 2501 to 3000 pln from 501 to 1000 pln average income per person in a household s o u r c e : own elaboration. the survey was addressed mainly to the residents of the two largest cities of the kuyavian-pomeranian voivodeship – bydgoszcz and toruń, and their neighborhoods, and therefore, according to conjecture, the largest proportion of respondents are people residing in the countryside and in a city of 200,000 to 500,000. residents. the remaining types of towns constitute a much smaller percentage, which is shown in figure 19. the tendency of households to invest… 49 figure 19. frequencies of answers to question 13 figure 19. frequencies of answers to question 13 source: own elaboration. 11.76% 36.60% 1.31%2.61% 5.88% 1.96% 39.87% place of residence town from 100 to 200 thousand residents town from 200 to 500 thousand residents town from 50 to 100 thousand residents city over 500,000 residents town from 10 to 50 thousand residents town up to 10,000 residents village s o u r c e : own elaboration. the results obtained from the questionnaire in case of questions from 3 to 13 can be analyzed using the correlation analysis between individual answers, giving the appropriate rank given by the respondents to the answers. the information thus processed was then used to calculate the spearman rank correlation coefficient. the results of the calculations are summarized in table 2. maciej chodziński50 t ab le 2 . s pe ar m an ’s c or re la ti on c oe ff ic ie nt s be tw ee n re sp on se s to in di vi du al q ue st io ns co rr el at io ns b et w ee n th e qu es ti on s q . 3 q . 4 q . 5 q . 6 q . 7 q . 9 q . 1 0 q . 1 1 q . 1 2 q . 1 3 sp ea rm an ’s rh o q . 3 co rr el at io n co ef fi ci en t 1. 00 0 .3 62 ** .2 23 ** .0 80 -. 03 5 .2 12 ** -. 00 9 .0 03 .1 06 -. 16 6* si gn if ic an ce (t w osi de d) . .0 00 .0 06 .3 23 .7 26 .0 09 .9 16 .9 75 .1 90 .0 40 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 4 co rr el at io n co ef fi ci en t .3 62 ** 1. 00 0 .5 35 ** .1 62 * .3 20 ** .3 42 ** -. 20 6* -.1 18 .2 84 ** -. 06 0 si gn if ic an ce (t w osi de d) ,0 00 . .0 00 .0 45 .0 01 .0 00 .0 11 .1 45 .0 00 .4 60 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 5 co rr el at io n co ef fi ci en t .2 23 ** .5 35 ** 1. 00 0 .4 60 ** .4 31 ** .4 63 ** -. 28 2* * -. 09 4 .4 70 ** -. 06 7 si gn if ic an ce (t w osi de d) .0 06 .0 00 . .0 00 .0 00 .0 00 .0 00 .2 49 .0 00 .4 11 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 6 co rr el at io n co ef fi ci en t .0 80 .1 62 * .4 60 ** 1. 00 0 . .2 71 ** -. 19 9* -. 06 5 .3 93 ** .0 22 si gn if ic an ce (t w osi de d) .3 23 .0 45 .0 00 . . .0 01 .0 14 .4 27 .0 00 .7 83 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 7 co rr el at io n co ef fi ci en t -. 03 5 .3 20 ** .4 31 ** . 1. 00 0 .3 67 ** -.1 84 .0 36 .4 78 ** -.1 12 si gn if ic an ce (t w osi de d) .7 26 ,0 01 .0 00 . . .0 00 .0 61 .7 15 .0 00 .2 58 n 10 4 10 4 10 4 10 4 10 4 10 4 10 4 10 4 10 4 10 4 the tendency of households to invest… 51 co rr el at io ns b et w ee n th e qu es ti on s q . 3 q . 4 q . 5 q . 6 q . 7 q . 9 q . 1 0 q . 1 1 q . 1 2 q . 1 3 q . 9 co rr el at io n co ef fi ci en t .2 12 ** .3 42 ** .4 63 ** .2 71 ** .3 67 ** 1. 00 0 -. 36 4* * -. 29 8* * .6 42 ** .1 30 si gn if ic an ce (t w osi de d) .0 09 .0 00 .0 00 .0 01 .0 00 . .0 00 .0 00 .0 00 .1 09 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 1 0 co rr el at io n co ef fi ci en t -. 00 9 -. 20 6* -. 28 2* * -. 19 9* -.1 84 -. 36 4* * 1. 00 0 .1 60 * -. 16 0* -.1 22 si gn if ic an ce (t w osi de d) .9 16 .0 11 .0 00 .0 14 .0 61 .0 00 . .0 48 .0 48 .1 33 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 1 1 co rr el at io n co ef fi ci en t .0 03 -.1 18 -. 09 4 -. 06 5 .0 36 -. 29 8* * .1 60 * 1. 00 0 -. 28 1* * -. 36 3* * si gn if ic an ce (t w osi de d) .9 75 .1 45 .2 49 .4 27 .7 15 .0 00 .0 48 . .0 00 .0 00 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 1 2 co rr el at io n co ef fi ci en t .1 06 .2 84 ** .4 70 ** .3 93 ** .4 78 ** .6 42 ** -. 16 0* -. 28 1* * 1. 00 0 .0 77 si gn if ic an ce (t w osi de d) .1 90 .0 00 .0 00 .0 00 .0 00 .0 00 .0 48 .0 00 . .3 46 n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 q . 1 3 co rr el at io n co ef fi ci en t -. 16 6* -. 06 0 -. 06 7 .0 22 -.1 12 .1 30 -.1 22 -. 36 3* * .0 77 1. 00 0 si gn if ic an ce (t w osi de d) .0 40 .4 60 .4 11 .7 83 .2 58 .1 09 .1 33 .0 00 .3 46 . n 15 3 15 3 15 3 15 3 10 4 15 3 15 3 15 3 15 3 15 3 *. c or re la ti on s ig ni fic an t a t 0 .0 5 (t w osi de d) .). ** . c or re la ti on s ig ni fic an t a t 0 .0 1 (t w osi de d) . s o u r c e : o w n el ab or at io n. t ab le 2 . s pe ar m an ’s c or re la ti on c oe ff ic ie nt s… maciej chodziński52 according to the obtained results of spearman’s correlation coefficients, a significant correlation at the 1% significance level can be observed between the weight that the surveyed person attaches to heating expenses and the level at which he assesses the amount of expenditure incurred. it can therefore be noted that people who declare that they pay more attention to the heating costs they incur more often regard their expenses as higher. an important correlation can also be noticed between the importance attached to expenditure (question 3) and the sense of the amount of costs generated by the heating system used (question 4) and the declared willingness to readiness to change the current heating system (question 5). this correlation is economically justified, because in a situation when a given person thinks that he or she incurs excessive costs and pays considerable attention to them, sooner or later he / she will start looking for solutions that would enable them to lower them. in case of the question about the readiness of the respondent to incur higher expenses by the respondent for a new source of heating due to its ecological values (question 6), the answers provided (similarly as in the other cases discussed so far) show a significant correlation at the level of 1% of significance with the fact whether the person is considering or not considering changing the heat source. it is also worth noting that at a significance level equal to 5%, the correlation between the answers given to the said question 6 and the respondent’s level of heating spending is also significant. similar behaviour of indicators was observed for question pairs 4 and 7 and 5 and 7. in this case, however, the calculated values for both pairs are significant at the 1% significance level. it can therefore be stated that the respondents, convinced of incurring too high heating costs, as well as declaring their willingness to replace the current heating system, more often declared higher amounts that they are willing to invest in modernizing furnaces. in the sample examined, age played a very important factor showing links with almost all issues raised in the questionnaire. correlation coefficients are relevant to all questions except question 13 on the size of the town where the respondent lives. in other cases, it can be concluded that there are positive relationships between age and perception of expenditure, sense of their significance in the budget, readiness to change the heating system, the sum the respondent is willing to allocate for this purpose, and average income per member of the household. these dependencies may be justified, as with age people generally increase their earnings, possessions, and pay more attention the tendency of households to invest… 53 to expenses incurred. however, negative correlations can be noticed between the age of the respondent and education and the number of people co-creating the household. the reason for the occurrence of the first is probably the lower popularity of studying in the last century, when secondary or technical education was higher than higher. the number of people co-creating the household along with the respondent’s age may decrease due to the gradual removal of the raised children after they reach a mature age. the education of the surveyed persons (question 10) shows a negative correlation to the declared willingness to change the heating method (question 5), the desire to add extra money in exchange for increased ecological values (question 6), as well as the feeling of being burdened with heating expenses (question 4). nevertheless, it should be noted that the observed relationships are much weaker than those discussed earlier, because their significance reaches only 5% (except for question 5, for which the significance is 1%). in addition, the education of respondents shows a weak positive correlation (0.160), significant at 5% with the number of people forming a household. the average income per capita in the respondents’ households is characterized by a significant correlation with almost all other responses provided in the questionnaire (except for question 3 about how much attention the respondent draws on expenses for heating and question 13 about the place of residence of the examined person). other areas related to the feeling of spending, willingness to modernize, readiness to devote additional funds to this purpose, as well as the age of the respondent, show a significant 1% positive correlation ranging from 0.284 to even 0.642. in case of the level of education and the number of household members, a negative correlation of -0.160 (for the level of significance of 5%) and -0.281 (for the significance level of 1%) can be observed. it can be concluded on this basis that a very strong relationship with the decisions made regarding heating expenses and the problem of ecology of the heat sources used has the level of a person’s income. this means that for respondents in this type of election over ecology, above all the economic aspect is what matters, and ecology is not necessarily treated as a superior value. the size of the place of residence does not show too many correlation links with other questions raised in the survey. a weak negative correlation was obtained for question 3 and stronger (on the significance level of 1%) – for the question regarding the number of household members. maciej chodziński54 chi-square tests can not be used for the obtained data, because for individual pairs of questions, the number of expected cells is less than 5 in over 20% of them, which excludes the possibility of reliable results for this test. combining the response intervals for most questions is not possible due to their nature, and as a result of the study, no more completed questionnaire forms were obtained. for this reason, correlation analysis has been limited only to spearman’s correlation coefficient. for example, in tables 3 and 4, the results of the chi-square test for exemplary two pairs of questions were included. table 3. chi-square test results for questions 7 and 12 chi-square test value df asymptotic significance (two-sided) pearson’s chi-square 89.730a 42 .000 likelihood ratio 91.906 42 .000 linear dependence test 20.624 1 .000 n number of significant observations 104 a. 91.1% of cells (51) have expected numbers less than 5. the minimum expected number is .02. s o u r c e : own elaboration. table 4. chi-square test results for questions 4 and 12 chi-square test value df asymptotic significance (two-sided) pearson’s chi-square 13.682a 8 .090 likelihood ratio 15.427 8 .051 line relationship test 6.739 1 .009 n number of significant observations 153 a. 53.3% of cells (8) have expected numbers less than 5. the minimum expected number is .12. s o u r c e : own elaboration. on the other hand, the collected results can also be analysed by cronbach’s alpha test, the results of which are presented in table 5. the tendency of households to invest… 55 table 5. cronbach’s alpha test reliability statistics cronbach’s alpha number of positions .614 5 the average of the scale after removing the item scale variance after removing the item correlation of positions total cronbach’s alpha after removing the item on a scale of 1 to 5, how much attention do you pay for heating expenses? 13.58 13.101 .194 .629 on a scale of 1 to 5, how do you assess your current heating expenses for your place of residence? 13.82 11.277 .446 .536 do you consider changing the current method of heating? 17.02 12.602 .626 .549 when buying a new heating source, how much would you be ready to pay extra for its ecological values (eg less air pollution with solid particles), relative to a comparable, but less ecological equivalent with a similar heating power (eg cheap coal boiler)? 13.91 7.653 .413 .568 average income per person in a household 12.02 8.213 .484 .492 s o u r c e : own elaboration. the cronbach’s alpha factor for the presented pool of questions, assessing the perception of the necessity to incur financial expenses for environmental protection, is at the level of 0.614, which indicates a moderate reliability of the conducted test. it is worth noting, however, that in this case the obtained results may be characterized by a relatively high error as a result of a significant reduction of the sample range, reaching only 68% of the sample, which is presented in table 6. an additional effect on the cronbach’s alpha test result is certainly a relatively small amount questions examining a particular behaviour or characteristic. the presented question in table 5 relate to the tendency to bear outlays on ecology and the awareness of the respondents about the necessity of incurring such expenses in the interest of the natural environment in a relatively broad sense. maciej chodziński56 table 6. information about the analysed data n % observations significant 104 68.0 excludeda 49 32.0 total 153 100.0 a. removal of observations due to all variables in the analysis. s o u r c e : own elaboration.  conclusion the decision, making process to modernize the heating source used in the household is a complex process. similarly, as in case of all investment decisions, its result is inf luenced by many factors, both economic and moral, and the sense of responsibility for the surrounding nature is also important. among the participants of the study, slightly less than half expressed in the present conditions the desire to modernize the heat source being used, and in the negative group the majority did not use outdated and the most environmentally harmful coal boilers or wood-burning fireplaces or fuel oil stoves. based on the results of the study, it can be noted that ecology for about 2/3 of respondents is not indifferent, because more or less such a percentage declares readiness to incur additional expenses only to increase ecological values of the investment object. problems begin when estimating how high these people value the value of ecological solutions. it turns out that a large part of the respondents (about 18% of those who declare the will to incur additional expenditure on ecology) are ready to allocate modest amounts (up to a thousand zlotys) that can not really translate into a real increase in the environmental parameters of the purchased device, even taking into account current levels of funding on the part of local governments. this group of theoretically questionnaires is ready to allocate some funds for ecology, but it requires almost equalling the costs of purchasing greener solutions with the purchase costs of alternative, cheapest available forms of heating on the market. in assessing the value of a heating source for a potential buyer, economic advantages play a key role in a large group of respondents. correlation analysis of the received responses showed very important links between the level of average earnings, the sense of the burden of heating expenses for the place of residence, and the amount the person is willing to spend on additional ecologi the tendency of households to invest… 57 cal qualities of the modernized heating source. the significance of economic aspects is also confirmed by the lack of correlation between the level of declared additional expenses for ecological benefits and the level of education of the surveyed person. among the potential non-financial factors, only age showed some correlation with declared additional expenses. however, it may be due to the fact that people over the years receive higher income (which is confirmed by a very strong correlation at the level of 0.642 between age and average income per capita in a household), and increased income is already an economic factor. due to the dominance of economic factors, in order to guarantee the improvement of the quality of air in cities being the subject of the study, currently adopted programs co-financing the modernization of obsolete heating sources can be considered as an appropriate and effective action. nevertheless, in order to ensure complete elimination of harmful furnaces, due to the declared amounts by some of the respondents, one should strive to reduce the price of ecological solutions or introduce regulations that would further reduce the price difference between ecological and traditional – more harmful solutions.  references budzynski, w., & bielski, s. (2006). agricultural raw materials of agricultural origin, part ii. biomass as solid fuel. acta scientiarum polonorum. agricultura, 3(2), 15–26. kaczmarczyk, m. (ed.) (2015). low emission – from the reasons for occurrence to the elimination methods. krakow: globenergia. lesniak, w., janczar-smuga, m., podgorski, w., & klinkowski, m. (2012). heat pumps – an ecological source renewable energy. acta scientiarum polonorum. agricultura, 3(6), 78–89. mikłaszewski, a. (2017). low emission and its impact on health. wrocław: lower silesian ecological club. morris, c., & pehnt, m. (2017). german energy transformation – the future based on renewable energy sources. berlin: heinrich böll stiftung. nowak, t., & kowalczyk, j. (2015). magnetic fields of permanent magnets as an effective source of organic thermal energy production. electronics: constructions, technologies, applications, 56(9), 100–101. (www1) greenpeace: facebook, http://www.facebook.com/greenpeacepl/videos/1948557418785597 (accessed: 27.01.2019). (www2) misja – emisja, http://misja-emisja.pl/knowledgebase/wdychamy-gdy-spalamy-wegiel-biomase (accessed: 27.01.2019). (www3) business insider polska, http://businessinsider.com.pl/rozwoj-osobisty/zdrowie/jak-chiny-walcza-ze-smogiem/k2r1bz1 (accessed: 28.01.2019). maciej chodziński58 (www4) miasto bydgoszcz, http://www.bydgoszcz.pl/rozwoj/srodowisko/powietrze/ dotacja-na-wymiane-ogrzewania-program-ekopiec-2018 (accessed: 29.01.2019). (www5) miasto toruń, http://www.torun.pl/pl/dotacje-na-wymiane-piecow (accessed: 29.01.2019). (www6) ekologia, http://www.ekologia.pl/srodowisko/ochrona-srodowiska/smogczy-rzeczywiscie-jest-taki-grozny,22433.html (accessed: 27.01.2019). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 2 issue 2 2013 biannual finance & accounting 2012 volume 1 copernican journal of biannual issue 1 uniwersytet mikołaja kopernika w toruniu redaktor naczelny: prof. dr hab. leszek dziawgo redaktor prowadzący: dr dorota krupa z-cy redaktora prowadzącego: dr ewa chojnacka, mgr agnieszka żołądkiewicz rada naukowa: prof. dr. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. dr. juan-antonio mondéjar-jiménez, universidad de castilla – la mancha, spain prof. dr hab. stanisław owsiak, uniwersytet ekonomiczny w krakowie, cracow university of economics, poland prof. dr hab. wiesława przybylska-kapuścińska, uniwersytet ekonomiczny w poznaniu, poznan university of economics, poland prof. dr. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. dr hab. małgorzata zaleska, szkoła główna handlowa w warszawie, warsaw school of economics, poland r e d a k t o r s t a t y s t y c z n y : dr hab. piotr fiszeder, prof. umk r e d a k t o r j ę z y k a p o l s k i e g o : dr dominika wojtasińska r e d a k t o r j ę z y k a a n g i e l s k i e g o : dr hab. richard nicholls, mgr hazel pearson redaktorzy tematyczni: r a c h u n k o w o ś ć : prof. dr hab. sławomir sojak f i n a n s e : prof. dr hab. danuta dziawgo f i n a n s e b e h a w i o r a l n e i i n ż y n i e r i a f i n a n s o w a : prof. dr hab. józef stawicki recenzenci: prof. dr. catherine deffains-crapsky, université d’angers, france prof. dr hab. jerzy gierusz, uniwersytet gdański, gdansk university, poland prof. dr. adalmiro pereira, politécnico do porto, portugal prof. dr hab. bogusław pietrzak, szkoła główna handlowa w warszawie, warsaw school of economics, poland prof. dr hab. waldemar tarczyński, uniwersytet szczeciński, szczecin university, poland prof. dr hab. jan turyna, uniwersytet warszawski, warsaw university, poland prof. dr hab. maciej wiatr, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr hab. andrzej cwynar, prof. wsei, wyższa szkoła ekonomii i innowacji, university of economics and innovation, poland pr o j e k t o k ł a d k i : miłosława cichosz d e k l a r a c j a w e r s j i p i e r w o t n e j : wersją pierwotną czasopisma jest wersja elektroniczna e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2013 copyright by uniwersytet mikołaja kopernika toruń 2013 adres redakcji ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34 (osoba do kontaktu mgr agnieszka żołądkiewicz), fax 56 654 24 93, cjfa@umk.pl, www.cjfa.umk.pl adres wydawcy uniwersytet mikołaja kopernika w toruniu, ul. gagarina 11, 87-100 toruń, tel. centr. +48 56 611 40 10, kontakt@umk.pl, www.umk.pl druk: drukarnia wn umk nakład: 300 egzemplarzy icv 2012: 4.41 spis treści introduction ........................................................................................................................... 7 a r t y k u ł y stanisław adamiak, ewa chojnacka, damian walczak social security in poland – cultural, historical and economical issues ......................... 11 michał buszko walutowe kredyty mieszkaniowe we franku szwajcarskim – zagrożenie czy źródło korzyści kredytobiorców? .................................................................................................. 27 robert huterski iluzja pieniądza – istota, koszty społeczno-gospodarcze i sposoby ich redukcji w świetle koncepcji zrównoważonego rozwoju ............................................................. 45 michał kisiel modele systemów płatności mobilnych a źródła pieniądza oraz mechanizmy rozrachunku transakcji ....................................................................................................... 61 janusz kunkowski rola i zadania integratorów płatności w polskim e-handlu .......................................... 75 remigiusz lewandowski polska wytwórnia papierów wartościowych sa w systemie bezpieczeństwa ekonomicznego i publicznego ................................................................................................ 91 krzysztof maciejewski znaczenie opłaty interchange dla rozwoju rynku kart płatniczych w polsce .......... 111 elena merino, montserrat manzaneque, alba maria priego “board independence” and compensation structure of directors ........................... 125 jarosław pawłowski derivatives as security against market risk on the example of the selected companies ..................................................................................................................................... 153 sławomir sojak księgowość w mezopotamii w trzecim i drugim tysiącleciu przed chrystusem ....... 167 małgorzata solarz the importance of shadow banking sector entities for population affected by credit exclusion ................................................................................................................. 189 jolanta wiśniewska klasyfikacja usług wykonywanych przez biegłych rewidentów ................................ 203 v a r i a piotr bolibok recenzja książki bankowość, pod red. nauk. m. zaleskiej, wydawnictwo c. h. beck, warszawa 2013 ................................................................... 217 dla autorów ...................................................................................................................... 227 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: november 21, 2016; date of acceptance: january 30, 2017. * contact information: christiane.goodfellow@jade-hs.de, jade university, friedrich-paffrath-str. 101, d-26389 wilhelmshaven, germany, phone: +49 441 95726272. goodfellow, ch., & salm, ch. (2016). risky risk measures: a note on underestimating financial risk under the normal assumption. copernican journal of finance & accounting, 5(2), 85–108. http://dx.doi.org/10.12775/cjfa.2016.017 christiane goodfellow* jade university christian salm risky risk measures: a note on underestimating financial risk under the normal assumption keywords: risk measurement, risk management, downside risk, value at risk, copula. j e l classification: c02, c18, g11, g28. abstract: this note compares three different risk measures based on the same stock return data: (1) the portfolio variance as in markowitz (1952), (2) the value at risk based on the historical return distribution, and (3) the value at risk based on a t copula. unless return series follow a normal distribution, normal-based risk measures underestimate risk, particularly so during periods of market stress, when accurate risk measurement is essential. based on these insights, we recommend that supervisors discontinue to accept normal-based value at risk estimations. we are happy to share our commented r-code with practitioners who wish to implement our methodology. risk measurement is the foundation of risk management and hence of vital importance in any financial institution. supervisory capital requirements according to basel iii or solvency ii are also derived from risk measures. investors are interested in ratings which are based on risk assessments. this note is therefore relevant to practitioners and supervisors alike. christiane goodfellow, christian salm86  introduction risk measurement has come a long way since markowitz (1952) where the risk associated with holding a stock or a portfolio is captured by its return variance, and the covariation between the instruments inside the portfolio is measured with the covariance. the focus on just mean and variance of a portfolio assumes that returns follow a normal distribution, and the covariance only covers pairwise linear dependencies between the constituents of the portfolio. furthermore, investors’ prime interest is in the downside risk, rather than general variation. hence, risk measurement should focus on the left tail of the return distribution, and it should not rely on the returns being normally distributed. the value at risk is a risk measure that addresses these issues; it is a quantile of the multivariate statistical distribution of the portfolio value (or the portfolio return). more recently, copulas have been applied to risk measurement. despite these improvements in risk measurement accuracy, both basel iii and solvency ii still rely on correlation coefficients to estimate interdependencies of different risks. we calculate portfolio risk with (1) the portfolio variance as in markowitz (1952), (2) the value at risk based on the historical return distribution, and (3) the value at risk based on copulas. we compare the estimation results of (2) and (3) to the value at risk based on the assumption that the returns follow a normal distribution. furthermore, we present a simple step-by-step procedure to derive an accurate risk measure with copulas. measuring risk reliably is relevant for practitioners in risk management and for supervisors alike. both banks and insurance companies have an interest in not overestimating risks that could lead to capital requirements, and in not underestimating risks which might jeopardise the existence of the business. likewise, investors and rating agencies are interested in risk assessments. according to portfolio selection theory established by markowitz (1952), the investor aims for a portfolio with maximum expected return and minimum risk, measured by the expected portfolio variance. this expected variance is minimised primarily by combining securities with low covariances among themselves. this leads to a well-diversified portfolio, where diversification refers to choosing securities whose gains will offset others’ losses. specifically, a well-diversified portfolio contains securities from companies of different, and dissimilar, industries, and investment decisions are not made by looking risky risk measures… 87 at a particular security in isolation, but rather by evaluating expected return and variance of the overall portfolio when this particular security is added to it. the investor seeks to minimise the expected portfolio variance σp. she can achieve this by choosing securities with low variances cus on just mean and variance of a portfolio assumes that returns follow a normal distribution, and the covariance only covers pairwise linear dependencies between the constituents of the portfolio. furthermore, investors' prime interest is in the downside risk, rather than general variation. hence, risk measurement should focus on the left tail of the return distribution, and it should not rely on the returns being normally distributed. the value at risk is a risk measure that addresses these issues; it is a quantile of the multivariate statistical distribution of the portfolio value (or the portfolio return). more recently, copulas have been applied to risk measurement. despite these improvements in risk measurement accuracy, both basel iii and solvency ii still rely on correlation coefficients to estimate interdependencies of different risks. we calculate portfolio risk with (1) the portfolio variance as in markowitz (1952), (2) the value at risk based on the historical return distribution, and (3) the value at risk based on copulas. we compare the estimation results of (2) and (3) to the value at risk based on the assumption that the returns follow a normal distribution. furthermore, we present a simple step-by-step procedure to derive an accurate risk measure with copulas. measuring risk reliably is relevant for practitioners in risk management and for supervisors alike. both banks and insurance companies have an interest in not overestimating risks that could lead to capital requirements, and in not underestimating risks which might jeopardise the existence of the business. likewise, investors and rating agencies are interested in risk assessments. according to portfolio selection theory established by markowitz (1952), the investor aims for a portfolio with maximum expected return and minimum risk, measured by the expected portfolio variance. this expected variance is minimised primarily by combining securities with low covariances among themselves. this leads to a well-diversified portfolio, where diversification refers to choosing securities whose gains will offset others' losses. specifically, a well-diversified portfolio contains securities from companies of different, and dissimilar, industries, and investment decisions are not made by looking at a particular security in isolation, but rather by evaluating expected return and variance of the overall portfolio when this particular security is added to it. the investor seeks to minimise the expected portfolio variance ��. she can achieve this by choosing securities with low variances ��2, usually resulting in a low portfolio return which she is trying to maximise at the same time, and/or she can combine securities such that ��� becomes minimal, which, by definition, is -1. the securities are then perfectly neg usually resulting in a low portfolio return which she is trying to maximise at the same time, and/ or  she can combine securities such that ρi j becomes minimal, which, by definition, is -1. the securities are then perfectly negatively correlated, i.e. when the return of security i increases, the return of security j decreases by the same amount. in such an extreme scenario, there is a set of weights (i.e. percentages of assets) that will completely eliminate expected portfolio risk, i.e. atively correlated, i.e. when the return of security i increases, the return of security j decreases by the same amount. in such an extreme scenario, there is a set of weights (i.e. percentages of assets) that will completely eliminate expected portfolio risk, i.e. ��2,. sadly, in the real world, securities do not move in perfect lockstep, so that we do not actually observe perfectly negatively correlated return series. still, a portfolio should be constructed from securities with dissimilar characteristics. the returns of these different securities will react differently to market movements, so that the gain in one security can (partially) compensate the loss in another, and thus the risk to the investor is substantially smaller than if she was holding just one security and be fully exposed to its fluctuations. portfolio selection is particularly relevant if you believe in actively managed funds. there is, however, empirical evidence suggesting that passive investment strategies outperform actively managed investments net of costs and fees and after controlling for risk (e.g. malkiel, 2003). the investment advice would then be to buy an index and hold it. still, institutional investors are widely trusted with active fund management, turning portfolio selection into a topic that is not just of academic interest, but also highly relevant to practitioners. more recently, a number of deficiencies in traditional risk measures have been addressed:  the portfolio value or the portfolio return are no longer assumed to follow a normal distribution.  risk measures have been extended to also include non-linear dependencies.  it has been recognised that return series exhibit different covariation patterns across the observations, e.g. extreme observations are more strongly dependent than less extreme observations. this risk of joint extreme values is called 'tail dependence'.  tail dependence can be symmetric (i.e. similar in both tails of the distribution) or asymmetric (e.g. far stronger in the lower tail of the distribution than in the upper).  downside risk has been separated from upside risk (campbell et al., 2001; benson et al., 2008). these weaknesses in traditional risk measures will systematically bias the risk estimates and can lead to wrong decisions in risk management, in wrongly calculating supervisory capital requirements, in inaccurate risk assessments by rating agencies, etc. we present a simple and statistically correct methodology to derive comprehensive and accurate risk measures. section 2 introduces the three risk measures we apply in this note, before . sadly, in the real world, securities do not move in perfect lockstep, so that we do not actually observe perfectly negatively correlated return series. still, a portfolio should be constructed from securities with dissimilar characteristics. the returns of these different securities will react differently to market movements, so that the gain in one security can (partially) compensate the loss in another, and thus the risk to the investor is substantially smaller than if she was holding just one security and be fully exposed to its f luctuations. portfolio selection is particularly relevant if you believe in actively managed funds. there is, however, empirical evidence suggesting that passive investment strategies outperform actively managed investments net of costs and fees and after controlling for risk (e.g. malkiel, 2003). the investment advice would then be to buy an index and hold it. still, institutional investors are widely trusted with active fund management, turning portfolio selection into a topic that is not just of academic interest, but also highly relevant to practitioners. more recently, a number of deficiencies in traditional risk measures have been addressed: ■ the portfolio value or the portfolio return are no longer assumed to follow a normal distribution. ■ risk measures have been extended to also include non-linear dependencies. ■ it has been recognised that return series exhibit different covariation patterns across the observations, e.g. extreme observations are more strongly dependent than less extreme observations. this risk of joint extreme values is called ‘tail dependence’. ■ tail dependence can be symmetric (i.e. similar in both tails of the distribution) or asymmetric (e.g. far stronger in the lower tail of the distribution than in the upper). christiane goodfellow, christian salm88 ■ downside risk has been separated from upside risk (campbell et al., 2001; benson et al., 2008). these weaknesses in traditional risk measures will systematically bias the risk estimates and can lead to wrong decisions in risk management, in wrongly calculating supervisory capital requirements, in inaccurate risk assessments by rating agencies, etc. we present a simple and statistically correct methodology to derive comprehensive and accurate risk measures. section 2 introduces the three risk measures we apply in this note, before section 3 presents the dataset and the empirical results, i.e. the extent to which the risk measures differ. section 4 summarises our results and concludes. methodology we present, and compare, three different risk metrics based on the same stock return data, thereby showing to what extent the empirical results differ across the different risk measures. from these differences, we derive recommendations for practitioners and supervisory authorities on how to correctly capture risk in order to accurately calculate, for example, capital requirements. furthermore, we present a step-by-step procedure to calculate a comprehensive risk measure based on copulas. our analysis is based on continuously compounded returns in percent: section 3 presents the dataset and the empirical results, i.e. the extent to which the risk measures differ. section 4 summarises our results and concludes. methodology we present, and compare, three different risk metrics based on the same stock return data, thereby showing to what extent the empirical results differ across the different risk measures. from these differences, we derive recommendations for practitioners and supervisory authorities on how to correctly capture risk in order to accurately calculate, for example, capital requirements. furthermore, we present a step-by-step procedure to calculate a comprehensive risk measure based on copulas. our analysis is based on continuously compounded returns in percent: �� = 100 × �� �����1 = 100 × ����� � �����1�, where �� is the price of a stock or a portfolio in period t. we apply three different risk measures: first, the portfolio variance based on markowitz (1952). second, the conventionally calculated value at risk (var). third, the var based on copulas. the following subsections explain these three approaches. according to the basel iii framework, and more specifically, according to the crr, a stressed value at risk (svar) has to be calculated in addition to the conventional var, because the latter is procyclical. the svar should, in principle, be calculated with a 99% confidence level. in practice, however, this can be achieved by calculating the risk measures for a period of financial stress, e.g. july 2007 to december 2009. we follow this approach and use these stressed results as a robustness check. portfolio variance in the markowitz (1952) world, the expected variance of the portfolio return (in short: portfolio variance) is the weighted sum of the expected variances of the securities in the portfolio plus the weighted sum of the expected covariances between all the possible pairs of the securities in the portfolio. the weights are the percentages of an investor's assets allocated to each security, and the covariances term has to be included twice because the covariance between stock i and stock j is the same as the covariance between stock j and stock i ��2 = � ��2��2 + 2�� � ����������� where pt is the price of a stock or a portfolio in period t. we apply three different risk measures. first, the portfolio variance based on markowitz (1952). second, the conventionally calculated value at risk (var). third, the var based on copulas. the following subsections explain these three approaches. according to the basel iii framework, and more specifically, according to the crr, a stressed value at risk (svar) has to be calculated in addition to the conventional var, because the latter is procyclical. the svar should, in principle, be calculated with a 99% confidence level. in practice, however, this can be achieved by calculating the risk measures for a period of financial stress, e.g. july 2007 to december 2009. we follow this approach and use these stressed results as a robustness check. risky risk measures… 89 portfolio variance in the markowitz (1952) world, the expected variance of the portfolio return (in short: portfolio variance) is the weighted sum of the expected variances of the securities in the portfolio plus the weighted sum of the expected covariances between all the possible pairs of the securities in the portfolio. the weights are the percentages of an investor’s assets allocated to each security, and the covariances term has to be included twice because the covariance between stock i and stock j is the same as the covariance between stock j and stock i: section 3 presents the dataset and the empirical results, i.e. the extent to which the risk measures differ. section 4 summarises our results and concludes. methodology we present, and compare, three different risk metrics based on the same stock return data, thereby showing to what extent the empirical results differ across the different risk measures. from these differences, we derive recommendations for practitioners and supervisory authorities on how to correctly capture risk in order to accurately calculate, for example, capital requirements. furthermore, we present a step-by-step procedure to calculate a comprehensive risk measure based on copulas. our analysis is based on continuously compounded returns in percent: �� = 100 × �� �����1 = 100 × ����� � �����1�, where �� is the price of a stock or a portfolio in period t. we apply three different risk measures: first, the portfolio variance based on markowitz (1952). second, the conventionally calculated value at risk (var). third, the var based on copulas. the following subsections explain these three approaches. according to the basel iii framework, and more specifically, according to the crr, a stressed value at risk (svar) has to be calculated in addition to the conventional var, because the latter is procyclical. the svar should, in principle, be calculated with a 99% confidence level. in practice, however, this can be achieved by calculating the risk measures for a period of financial stress, e.g. july 2007 to december 2009. we follow this approach and use these stressed results as a robustness check. portfolio variance in the markowitz (1952) world, the expected variance of the portfolio return (in short: portfolio variance) is the weighted sum of the expected variances of the securities in the portfolio plus the weighted sum of the expected covariances between all the possible pairs of the securities in the portfolio. the weights are the percentages of an investor's assets allocated to each security, and the covariances term has to be included twice because the covariance between stock i and stock j is the same as the covariance between stock j and stock i ��2 = � ��2��2 + 2�� � ����������� where σij is the covariance between securities i and j. a standardised measure of the covariance σij is the correlation coefficient ρij, with where ��� is the covariance between securities i and j. a standardised measure of the covariance ��� is the correlation coefficient ���, with ��� = ��� ����� and therefore �1 ≤���� ≤ +1. the expected portfolio variance then becomes ��2 = � ��2��2 + 2�� � ��������������� the covariances and hence correlation coefficients only cover linear dependencies between return series. as a result, the portfolio risk estimate is systematically biased. moreover, returns often exhibit positive left-tail dependence, which means that one return will more likely perform poorly when another already is performing badly. this phenomenon is neither covered by the covariance nor by the implicit normal assumption. despite these insights, both basel iii and solvency ii rely on correlation coefficients to estimate interdependencies of different risks. furthermore, investors (or, more generally, stakeholders) are concerned about downside risk, whereas they usually quite enjoy the results of upside risk. portfolio risk treats both risk directions equally, whereas the value at risk is only concerned with the lower tail of the distribution. value at risk based on historical return distribution the value at risk (var) is defined as the minimum portfolio value (or maximum loss) over a given holding period and with a given level of statistical significance (i.e. probability). it can be derived based on the historical distribution of the portfolio value (or the portfolio return), in which case it captures the covariation of different portfolio components, including non-linear interdependencies. alternatively, it can be assumed that the portfolio value follows a multivariate normal distribution with only linear dependencies among the underlying risk factors. this latter version is the original jp morgan approach. however, given that return series generally violate the normal assumption and exhibit non-linear dependencies, we favour the historical distribution approach, even though it requires a larger dataset and implicitly assumes that the past is an adequate predictor of the future. the historical distribution-based var has three major advantages over the portfolio risk measure in the markowitz (1952) world: 1) the var covers all dependencies among the portfolio components, including nonlinear covariation. 2) the portfolio value (or return) does not have to follow a normal distribution, which is implicitly assumed in the mean-variance-universe of markowitz (1952). empirically, and therefore where ��� is the covariance between securities i and j. a standardised measure of the covariance ��� is the correlation coefficient ���, with ��� = ��� ����� and therefore �1 ≤���� ≤ +1. the expected portfolio variance then becomes ��2 = � ��2��2 + 2�� � ��������������� the covariances and hence correlation coefficients only cover linear dependencies between return series. as a result, the portfolio risk estimate is systematically biased. moreover, returns often exhibit positive left-tail dependence, which means that one return will more likely perform poorly when another already is performing badly. this phenomenon is neither covered by the covariance nor by the implicit normal assumption. despite these insights, both basel iii and solvency ii rely on correlation coefficients to estimate interdependencies of different risks. furthermore, investors (or, more generally, stakeholders) are concerned about downside risk, whereas they usually quite enjoy the results of upside risk. portfolio risk treats both risk directions equally, whereas the value at risk is only concerned with the lower tail of the distribution. value at risk based on historical return distribution the value at risk (var) is defined as the minimum portfolio value (or maximum loss) over a given holding period and with a given level of statistical significance (i.e. probability). it can be derived based on the historical distribution of the portfolio value (or the portfolio return), in which case it captures the covariation of different portfolio components, including non-linear interdependencies. alternatively, it can be assumed that the portfolio value follows a multivariate normal distribution with only linear dependencies among the underlying risk factors. this latter version is the original jp morgan approach. however, given that return series generally violate the normal assumption and exhibit non-linear dependencies, we favour the historical distribution approach, even though it requires a larger dataset and implicitly assumes that the past is an adequate predictor of the future. the historical distribution-based var has three major advantages over the portfolio risk measure in the markowitz (1952) world: 1) the var covers all dependencies among the portfolio components, including nonlinear covariation. 2) the portfolio value (or return) does not have to follow a normal distribution, which is implicitly assumed in the mean-variance-universe of markowitz (1952). empirically, . the expected portfolio variance then becomes: where ��� is the covariance between securities i and j. a standardised measure of the covariance ��� is the correlation coefficient ���, with ��� = ��� ����� and therefore �1 ≤���� ≤ +1. the expected portfolio variance then becomes ��2 = � ��2��2 + 2�� � ��������������� the covariances and hence correlation coefficients only cover linear dependencies between return series. as a result, the portfolio risk estimate is systematically biased. moreover, returns often exhibit positive left-tail dependence, which means that one return will more likely perform poorly when another already is performing badly. this phenomenon is neither covered by the covariance nor by the implicit normal assumption. despite these insights, both basel iii and solvency ii rely on correlation coefficients to estimate interdependencies of different risks. furthermore, investors (or, more generally, stakeholders) are concerned about downside risk, whereas they usually quite enjoy the results of upside risk. portfolio risk treats both risk directions equally, whereas the value at risk is only concerned with the lower tail of the distribution. value at risk based on historical return distribution the value at risk (var) is defined as the minimum portfolio value (or maximum loss) over a given holding period and with a given level of statistical significance (i.e. probability). it can be derived based on the historical distribution of the portfolio value (or the portfolio return), in which case it captures the covariation of different portfolio components, including non-linear interdependencies. alternatively, it can be assumed that the portfolio value follows a multivariate normal distribution with only linear dependencies among the underlying risk factors. this latter version is the original jp morgan approach. however, given that return series generally violate the normal assumption and exhibit non-linear dependencies, we favour the historical distribution approach, even though it requires a larger dataset and implicitly assumes that the past is an adequate predictor of the future. the historical distribution-based var has three major advantages over the portfolio risk measure in the markowitz (1952) world: 1) the var covers all dependencies among the portfolio components, including nonlinear covariation. 2) the portfolio value (or return) does not have to follow a normal distribution, which is implicitly assumed in the mean-variance-universe of markowitz (1952). empirically, . the covariances and hence correlation coefficients only cover linear dependencies between return series. as a result, the portfolio risk estimate is systematically biased. moreover, returns often exhibit positive left-tail dependence, which means that one return will more likely perform poorly when another already is performing badly. this phenomenon is neither covered by the covariance nor by the implicit normal assumption. despite these insights, both basel iii and solvency ii rely on correlation coefficients to estimate interdependencies of different risks. furthermore, investors (or, more generally, stakeholders) are concerned about downside risk, whereas they usually quite enjoy the results of upside risk. portfolio risk treats both risk directions equally, whereas the value at risk is only concerned with the lower tail of the distribution. value at risk based on historical return distribution the value at risk (var) is defined as the minimum portfolio value (or maximum loss) over a given holding period and with a given level of statistical significance (i.e. probability). it can be derived based on the historical distribution of the portfolio value (or the portfolio return), in which case it captures the covariation of different portfolio components, including non-linear interchristiane goodfellow, christian salm90 dependencies. alternatively, it can be assumed that the portfolio value follows a multivariate normal distribution with only linear dependencies among the underlying risk factors. this latter version is the original jp morgan approach. however, given that return series generally violate the normal assumption and exhibit non-linear dependencies, we favour the historical distribution approach, even though it requires a larger dataset and implicitly assumes that the past is an adequate predictor of the future. the historical distribution-based var has three major advantages over the portfolio risk measure in the markowitz (1952) world: 1) the var covers all dependencies among the portfolio components, including non-linear covariation. 2) the portfolio value (or return) does not have to follow a normal distribution, which is implicitly assumed in the mean-variance-universe of markowitz (1952). empirically, return distributions have fatter tails than the normal distribution (e.g. mandelbrot, 1963; fama, 1965; peters, 1996), which is often addressed by using the student’s t distribution. 3) it evidently only captures downside risk, which is what investors wish to be compensated for, rather than including upside risk in the risk measure assuming equal investor aversion. given that the var is intuitive to understand, it has been popular especially among practitioners. but there are also downsides to the var. first, it is just one figure, usually a loss that will only be exceeded with a very small probability over a certain period, which does not provide information on the shape of the distribution in the tail, i.e. if the low-probability scenario materialises and the loss happens to be larger, how quickly does it become how large? one solution to this problem is to rely on a supplement to the var which provides information on the tail. one of these supplements is the expected shortfall, which is the expected loss given that this loss is larger than a certain benchmark (rachev et al., 2010). another, rather similar, supplement to the var are lower partial moments (lpm). these are characteristics of specifically the tail to the left of the var. lpm 1 is the average across all negative deviations from the pre-defined var, while lpm 2 is the variance of the negative deviations from the pre-defined var. lpm 2 thus places a heavier weight on larger deviations than on smaller ones, ref lecting that investors perceive high losses on rare occasions as worse than smaller losses more often. risky risk measures… 91 related to this lack of information about the tail is the fact that one can construct two normal distributions with different parameter values but the same α quantile and hence the same var, but differently fat tails. furthermore, the  var is based on a statistical distribution. this can either be assumed (e.g. normal, which we know is wrong), or estimated from historical data (which requires a large dataset and assumes that the past can predict the future), or obtained through a monte carlo simulation (requiring substantial calculations). if the return data are assumed to follow a normal distribution while in fact they are student’s t distributed, for example, the normal-based var will underestimate the potential loss in portfolio value substantially. there is thus a certain modelling risk associated with this risk metric. finally, for completeness, a few closely related risk metrics should be mentioned that also focus specifically on downside risk. none of these are calculated in this paper as we focus on the copula methodology. the conditional value at risk (cvar), also called mean shortfall or expected tail loss, is calculated as the average loss, conditional on the losses being at least as large as the losses under a normal distribution var would be (xiong et al., 2014; rockafellar & uryasev, 2000). this average is probability-weighted. a close relative to the cvar is the excess conditional value at risk (ecvar), which is the cvar in excess of the implied normal distribution cvar. another tail risk measure is coskewness. skewness in general captures how asymmetric the data are, while co-skewness addresses the question ‘if a particular financial asset is added to the portfolio, how does this change the portfolio’s skewness?’. the decision on whether to purchase a particular financial asset should hinge on how this marginal instrument affects the statistical distribution of the portfolio value (and its central moments), rather than on a stand-alone evaluation of that particular instrument’s features (this is the markowitz, 1952 idea). xiong et al. (2014) apply both the ecvar and the co-skewness with similar empirical results. value at risk based on copulas the var is a quantile of the statistical distribution of the portfolio value or the portfolio return. copulas (or ‘copulae’) are an alternative way to present a multivariate model, which in turn can be used to derive a value at risk. copulas are particularly useful in modelling tail dependencies. tail dependence means that dependencies in the data vary across the observations, e.g. extremely low values tend to be realised jointly more often than other values. christiane goodfellow, christian salm92 if this is equally true for both tails of the distribution, the tail dependence is symmetric, and the student’s t distribution is, in general, a reasonable choice of marginal distribution. if, on the other hand, this dependence is stronger in the lower tail of the distribution (or vice versa), which is common in financial data, the tail dependence is asymmetric, and so an extreme value copula should be used (gumbel is an example, although this only works for positive correlations). our analysis is centred around the current supervisory requirement: risk measures based on the normal assumption. we therefore do not endlessly refine our copula calculation, but rather argue that a t copula risk calculation will be more accurate than any conventional, normal distribution based measure that supervisors will accept. let x and y be two random variables, e.g. the values of two stocks or their returns, with the joint continuous probability density function f(x,y ) and the joint cumulative distribution function (cdf) f(x,y ). the marginal probability density functions are f(x ) and f(y ), respectively. likewise, the individual cumulative distribution functions are f (x ) and f(y ). according to sklar (1959), there is a function: ��,���(�),�(�)� � �(�,�) with ��,�:[0,1] × [0,1] → [0,1]. in other words, the joint cumulative distribution function can be split into (i) the marginal cumulative distribution functions representing the univariate features, and (ii) the copula c capturing the joint characteristics of the joint cumulative distribution function. thus, the copula only contains information on the dependencies between x and y. the marginal distributions do not have to be identical. the copula is the joint cumulative distribution function with the individual quantile functions �(�,�) � ��,�(����(�),����(�)) as marginal cumulative distribution functions, we choose student's t distribution as well as the normal distribution. we expect that the normal distributions will underestimate risk, unless the return series are normally distributed. we include the normal based risk measures in our analysis, however, to show exactly by how much it underestimates risk compared to the t distributed marginal functions. for the normal distribution, the corresponding copula is the gaussian copula: �(�,���) � ������(�),���(�)� � � ���(�) �� � 1��(1 � ��) ���(�) �� ������(� � � ���� � ��) �(1 � ��) ����� with � being the cumulative distribution function of the univariate standard normal distribution and �� the cumulative distribution function of the joint, bivariate standard normal distribution with parameter � (�1 � � � 1). the gaussian copula is completely specified by the correlation matrix, which confirms the argument that the covariance or correlation matrix is a comprehensive enough risk metric only if the returns follow a normal distribution. for the student's t distribution, the corresponding copula is the t copula: �(�,���,�) � � ����(�) �� � 1 ���1 � �� ����(�) �� ��1 � (� � � ���� � ��) �(1 � ��) � �(���) � ���� with �� being the univariate cumulative distribution function of the student's t distribution with � � 0 degrees of freedom and (�1 � � � 1). the number of degrees of freedom controls the probability of joint movements. for �� → ��, the t copula approaches the gaussian copula. both copulas only model symmetric tail dependence, as they are both symmetric distributions. since the bivariate cumulative distribution function �(�,�) is estimated with ��,���(�),�(�)� � �(�,�) with ��,�:[0,1] × [0,1] → [0,1]. in other words, the joint cumulative distribution function can be split into (i) the marginal cumulative distribution functions representing the univariate features, and (ii) the copula c capturing the joint characteristics of the joint cumulative distribution function. thus, the copula only contains information on the dependencies between x and y. the marginal distributions do not have to be identical. the copula is the joint cumulative distribution function with the individual quantile functions �(�,�) � ��,�(����(�),����(�)) as marginal cumulative distribution functions, we choose student's t distribution as well as the normal distribution. we expect that the normal distributions will underestimate risk, unless the return series are normally distributed. we include the normal based risk measures in our analysis, however, to show exactly by how much it underestimates risk compared to the t distributed marginal functions. for the normal distribution, the corresponding copula is the gaussian copula: �(�,���) � ������(�),���(�)� � � ���(�) �� � 1��(1 � ��) ���(�) �� ������(� � � ���� � ��) �(1 � ��) ����� with � being the cumulative distribution function of the univariate standard normal distribution and �� the cumulative distribution function of the joint, bivariate standard normal distribution with parameter � (�1 � � � 1). the gaussian copula is completely specified by the correlation matrix, which confirms the argument that the covariance or correlation matrix is a comprehensive enough risk metric only if the returns follow a normal distribution. for the student's t distribution, the corresponding copula is the t copula: �(�,���,�) � � ����(�) �� � 1 ���1 � �� ����(�) �� ��1 � (� � � ���� � ��) �(1 � ��) � �(���) � ���� with �� being the univariate cumulative distribution function of the student's t distribution with � � 0 degrees of freedom and (�1 � � � 1). the number of degrees of freedom controls the probability of joint movements. for �� → ��, the t copula approaches the gaussian copula. both copulas only model symmetric tail dependence, as they are both symmetric distributions. since the bivariate cumulative distribution function �(�,�) is estimated in other words, the joint cumulative distribution function can be split into (i) the marginal cumulative distribution functions representing the univariate features, and (ii) the copula c capturing the joint characteristics of the joint cumulative distribution function. thus, the copula only contains information on the dependencies between x and y. the marginal distributions do not have to be identical. the copula is the joint cumulative distribution function with the individual quantile functions ��,���(�),�(�)� � �(�,�) with ��,�:[0,1] × [0,1] → [0,1]. in other words, the joint cumulative distribution function can be split into (i) the marginal cumulative distribution functions representing the univariate features, and (ii) the copula c capturing the joint characteristics of the joint cumulative distribution function. thus, the copula only contains information on the dependencies between x and y. the marginal distributions do not have to be identical. the copula is the joint cumulative distribution function with the individual quantile functions �(�,�) � ��,�(����(�),����(�)) as marginal cumulative distribution functions, we choose student's t distribution as well as the normal distribution. we expect that the normal distributions will underestimate risk, unless the return series are normally distributed. we include the normal based risk measures in our analysis, however, to show exactly by how much it underestimates risk compared to the t distributed marginal functions. for the normal distribution, the corresponding copula is the gaussian copula: �(�,���) � ������(�),���(�)� � � ���(�) �� � 1��(1 � ��) ���(�) �� ������(� � � ���� � ��) �(1 � ��) ����� with � being the cumulative distribution function of the univariate standard normal distribution and �� the cumulative distribution function of the joint, bivariate standard normal distribution with parameter � (�1 � � � 1). the gaussian copula is completely specified by the correlation matrix, which confirms the argument that the covariance or correlation matrix is a comprehensive enough risk metric only if the returns follow a normal distribution. for the student's t distribution, the corresponding copula is the t copula: �(�,���,�) � � ����(�) �� � 1 ���1 � �� ����(�) �� ��1 � (� � � ���� � ��) �(1 � ��) � �(���) � ���� with �� being the univariate cumulative distribution function of the student's t distribution with � � 0 degrees of freedom and (�1 � � � 1). the number of degrees of freedom controls the probability of joint movements. for �� → ��, the t copula approaches the gaussian copula. both copulas only model symmetric tail dependence, as they are both symmetric distributions. since the bivariate cumulative distribution function �(�,�) is estimated . as marginal cumulative distribution functions, we choose student’s t distribution as well as the normal distribution. we expect that the normal distributions will underestimate risk, unless the return series are normally distributed. we include the normal based risk measures in our analysis, however, to show exactly by how much it underestimates risk compared to the t distributed marginal functions. risky risk measures… 93 for the normal distribution, the corresponding copula is the gaussian copula: ��,���(�),�(�)� � �(�,�) with ��,�:[0,1] × [0,1] → [0,1]. in other words, the joint cumulative distribution function can be split into (i) the marginal cumulative distribution functions representing the univariate features, and (ii) the copula c capturing the joint characteristics of the joint cumulative distribution function. thus, the copula only contains information on the dependencies between x and y. the marginal distributions do not have to be identical. the copula is the joint cumulative distribution function with the individual quantile functions �(�,�) � ��,�(����(�),����(�)) as marginal cumulative distribution functions, we choose student's t distribution as well as the normal distribution. we expect that the normal distributions will underestimate risk, unless the return series are normally distributed. we include the normal based risk measures in our analysis, however, to show exactly by how much it underestimates risk compared to the t distributed marginal functions. for the normal distribution, the corresponding copula is the gaussian copula: �(�,���) � ������(�),���(�)� � � ���(�) �� � 1��(1 � ��) ���(�) �� ������(� � � ���� � ��) �(1 � ��) ����� with � being the cumulative distribution function of the univariate standard normal distribution and �� the cumulative distribution function of the joint, bivariate standard normal distribution with parameter � (�1 � � � 1). the gaussian copula is completely specified by the correlation matrix, which confirms the argument that the covariance or correlation matrix is a comprehensive enough risk metric only if the returns follow a normal distribution. for the student's t distribution, the corresponding copula is the t copula: �(�,���,�) � � ����(�) �� � 1 ���1 � �� ����(�) �� ��1 � (� � � ���� � ��) �(1 � ��) � �(���) � ���� with �� being the univariate cumulative distribution function of the student's t distribution with � � 0 degrees of freedom and (�1 � � � 1). the number of degrees of freedom controls the probability of joint movements. for �� → ��, the t copula approaches the gaussian copula. both copulas only model symmetric tail dependence, as they are both symmetric distributions. since the bivariate cumulative distribution function �(�,�) is estimated with φ being the cumulative distribution function of the univariate standard normal distribution and φρ the cumulative distribution function of the joint, bivariate standard normal distribution with parameter ��,���(�),�(�)� � �(�,�) with ��,�:[0,1] × [0,1] → [0,1]. in other words, the joint cumulative distribution function can be split into (i) the marginal cumulative distribution functions representing the univariate features, and (ii) the copula c capturing the joint characteristics of the joint cumulative distribution function. thus, the copula only contains information on the dependencies between x and y. the marginal distributions do not have to be identical. the copula is the joint cumulative distribution function with the individual quantile functions �(�,�) � ��,�(����(�),����(�)) as marginal cumulative distribution functions, we choose student's t distribution as well as the normal distribution. we expect that the normal distributions will underestimate risk, unless the return series are normally distributed. we include the normal based risk measures in our analysis, however, to show exactly by how much it underestimates risk compared to the t distributed marginal functions. for the normal distribution, the corresponding copula is the gaussian copula: �(�,���) � ������(�),���(�)� � � ���(�) �� � 1��(1 � ��) ���(�) �� ������(� � � ���� � ��) �(1 � ��) ����� with � being the cumulative distribution function of the univariate standard normal distribution and �� the cumulative distribution function of the joint, bivariate standard normal distribution with parameter � (�1 � � � 1). the gaussian copula is completely specified by the correlation matrix, which confirms the argument that the covariance or correlation matrix is a comprehensive enough risk metric only if the returns follow a normal distribution. for the student's t distribution, the corresponding copula is the t copula: �(�,���,�) � � ����(�) �� � 1 ���1 � �� ����(�) �� ��1 � (� � � ���� � ��) �(1 � ��) � �(���) � ���� with �� being the univariate cumulative distribution function of the student's t distribution with � � 0 degrees of freedom and (�1 � � � 1). the number of degrees of freedom controls the probability of joint movements. for �� → ��, the t copula approaches the gaussian copula. both copulas only model symmetric tail dependence, as they are both symmetric distributions. since the bivariate cumulative distribution function �(�,�) is estimated . the gaussian copula is completely specified by the correlation matrix, which confirms the argument that the covariance or correlation matrix is a comprehensive enough risk metric only if the returns follow a normal distribution. for the student’s t distribution, the corresponding copula is the t copula: ��,���(�),�(�)� � �(�,�) with ��,�:[0,1] × [0,1] → [0,1]. in other words, the joint cumulative distribution function can be split into (i) the marginal cumulative distribution functions representing the univariate features, and (ii) the copula c capturing the joint characteristics of the joint cumulative distribution function. thus, the copula only contains information on the dependencies between x and y. the marginal distributions do not have to be identical. the copula is the joint cumulative distribution function with the individual quantile functions �(�,�) � ��,�(����(�),����(�)) as marginal cumulative distribution functions, we choose student's t distribution as well as the normal distribution. we expect that the normal distributions will underestimate risk, unless the return series are normally distributed. we include the normal based risk measures in our analysis, however, to show exactly by how much it underestimates risk compared to the t distributed marginal functions. for the normal distribution, the corresponding copula is the gaussian copula: �(�,���) � ������(�),���(�)� � � ���(�) �� � 1��(1 � ��) ���(�) �� ������(� � � ���� � ��) �(1 � ��) ����� with � being the cumulative distribution function of the univariate standard normal distribution and �� the cumulative distribution function of the joint, bivariate standard normal distribution with parameter � (�1 � � � 1). the gaussian copula is completely specified by the correlation matrix, which confirms the argument that the covariance or correlation matrix is a comprehensive enough risk metric only if the returns follow a normal distribution. for the student's t distribution, the corresponding copula is the t copula: �(�,���,�) � � ����(�) �� � 1 ���1 � �� ����(�) �� ��1 � (� � � ���� � ��) �(1 � ��) � �(���) � ���� with �� being the univariate cumulative distribution function of the student's t distribution with � � 0 degrees of freedom and (�1 � � � 1). the number of degrees of freedom controls the probability of joint movements. for �� → ��, the t copula approaches the gaussian copula. both copulas only model symmetric tail dependence, as they are both symmetric distributions. since the bivariate cumulative distribution function �(�,�) is estimated with fν being the univariate cumulative distribution function of the student’s t distribution with ν > 0 degrees of freedom and (–1 < ρ < 1) . the number of degrees of freedom controls the probability of joint movements. for ν → ∞, the t copula approaches the gaussian copula. both copulas only model symmetric tail dependence, as they are both symmetric distributions. since the bivariate cumulative distribution function is estimated: ��(�,�) = 1�� (�� � �,�� � �) � �=1 we also estimate the copula with (��1,��1),�,(���,���) ��(�,�) = 1�� (��� � �,��� � �) � �=1 with (�,�) ∈ [0,1]. both this function and its contour lines can be visualised in a graph, and the shape of these isolines shows the relationship between x and y. perfectly circular lines are evidence in favour of independence, whereas an l shape or ellipses suggest dependencies. the stronger the dependence between two return series, the higher the portfolio risk, under otherwise equal circumstances. copulas are an abstract concept in that they do not directly convey the var. instead, here is a step-by-step procedure to estimate the t copula and then the var based on this: 1) for the univariate margins, estimate the kernel density. in addition, fit a normal distribution and a t distribution. 2) plot the marginal distributions from step (1). compare, for each series, the kernel density, the fitted normal distribution, and the fitted t distribution. for the following steps, assume the t distribution achieves a good fit to the empirical kernel function. 3) based on t distributions, generate 1-dimensional marginal distributions over a uniform [0,1] interval. 4) estimate the t copula with maximum likelihood based on the transformed data from step (3). 5) use the value of the maximised loglikelihood function and the akaike information criterion (aic) to evaluate the goodness of fit of this copula compared to, for example, the gaussian copula. the higher the maximised loglikelihood function or the aic, the better the fit. 6) combine the best-fitting copula with the estimated marginal distributions from step (3) and generate artificial stock return data (simulation). 7) determine the lowest percentile in this artificial distribution. this is the 99% copulabased var. we use both the t copula and the gaussian copula in order to measure the error of applying the normal distribution to a non-normally distributed return series. financial data often exhibit tail dependence: both variables tend to assume very low values or very high values at the same time. more formally, lower (upper) tail dependence refers to the probability that one portfolio component assumes very small (high) values we also estimate the copula with ��(�,�) = 1�� (�� � �,�� � �) � �=1 we also estimate the copula with (��1,��1),�,(���,���) ��(�,�) = 1�� (��� � �,��� � �) � �=1 with (�,�) ∈ [0,1]. both this function and its contour lines can be visualised in a graph, and the shape of these isolines shows the relationship between x and y. perfectly circular lines are evidence in favour of independence, whereas an l shape or ellipses suggest dependencies. the stronger the dependence between two return series, the higher the portfolio risk, under otherwise equal circumstances. copulas are an abstract concept in that they do not directly convey the var. instead, here is a step-by-step procedure to estimate the t copula and then the var based on this: 1) for the univariate margins, estimate the kernel density. in addition, fit a normal distribution and a t distribution. 2) plot the marginal distributions from step (1). compare, for each series, the kernel density, the fitted normal distribution, and the fitted t distribution. for the following steps, assume the t distribution achieves a good fit to the empirical kernel function. 3) based on t distributions, generate 1-dimensional marginal distributions over a uniform [0,1] interval. 4) estimate the t copula with maximum likelihood based on the transformed data from step (3). 5) use the value of the maximised loglikelihood function and the akaike information criterion (aic) to evaluate the goodness of fit of this copula compared to, for example, the gaussian copula. the higher the maximised loglikelihood function or the aic, the better the fit. 6) combine the best-fitting copula with the estimated marginal distributions from step (3) and generate artificial stock return data (simulation). 7) determine the lowest percentile in this artificial distribution. this is the 99% copulabased var. we use both the t copula and the gaussian copula in order to measure the error of applying the normal distribution to a non-normally distributed return series. financial data often exhibit tail dependence: both variables tend to assume very low values or very high values at the same time. more formally, lower (upper) tail dependence refers to the probability that one portfolio component assumes very small (high) values : ��(�,�) = 1�� (�� � �,�� � �) � �=1 we also estimate the copula with (��1,��1),�,(���,���) ��(�,�) = 1�� (��� � �,��� � �) � �=1 with (�,�) ∈ [0,1]. both this function and its contour lines can be visualised in a graph, and the shape of these isolines shows the relationship between x and y. perfectly circular lines are evidence in favour of independence, whereas an l shape or ellipses suggest dependencies. the stronger the dependence between two return series, the higher the portfolio risk, under otherwise equal circumstances. copulas are an abstract concept in that they do not directly convey the var. instead, here is a step-by-step procedure to estimate the t copula and then the var based on this: 1) for the univariate margins, estimate the kernel density. in addition, fit a normal distribution and a t distribution. 2) plot the marginal distributions from step (1). compare, for each series, the kernel density, the fitted normal distribution, and the fitted t distribution. for the following steps, assume the t distribution achieves a good fit to the empirical kernel function. 3) based on t distributions, generate 1-dimensional marginal distributions over a uniform [0,1] interval. 4) estimate the t copula with maximum likelihood based on the transformed data from step (3). 5) use the value of the maximised loglikelihood function and the akaike information criterion (aic) to evaluate the goodness of fit of this copula compared to, for example, the gaussian copula. the higher the maximised loglikelihood function or the aic, the better the fit. 6) combine the best-fitting copula with the estimated marginal distributions from step (3) and generate artificial stock return data (simulation). 7) determine the lowest percentile in this artificial distribution. this is the 99% copulabased var. we use both the t copula and the gaussian copula in order to measure the error of applying the normal distribution to a non-normally distributed return series. financial data often exhibit tail dependence: both variables tend to assume very low values or very high values at the same time. more formally, lower (upper) tail dependence refers to the probability that one portfolio component assumes very small (high) values with ��(�,�) = 1�� (�� � �,�� � �) � �=1 we also estimate the copula with (��1,��1),�,(���,���) ��(�,�) = 1�� (��� � �,��� � �) � �=1 with (�,�) ∈ [0,1]. both this function and its contour lines can be visualised in a graph, and the shape of these isolines shows the relationship between x and y. perfectly circular lines are evidence in favour of independence, whereas an l shape or ellipses suggest dependencies. the stronger the dependence between two return series, the higher the portfolio risk, under otherwise equal circumstances. copulas are an abstract concept in that they do not directly convey the var. instead, here is a step-by-step procedure to estimate the t copula and then the var based on this: 1) for the univariate margins, estimate the kernel density. in addition, fit a normal distribution and a t distribution. 2) plot the marginal distributions from step (1). compare, for each series, the kernel density, the fitted normal distribution, and the fitted t distribution. for the following steps, assume the t distribution achieves a good fit to the empirical kernel function. 3) based on t distributions, generate 1-dimensional marginal distributions over a uniform [0,1] interval. 4) estimate the t copula with maximum likelihood based on the transformed data from step (3). 5) use the value of the maximised loglikelihood function and the akaike information criterion (aic) to evaluate the goodness of fit of this copula compared to, for example, the gaussian copula. the higher the maximised loglikelihood function or the aic, the better the fit. 6) combine the best-fitting copula with the estimated marginal distributions from step (3) and generate artificial stock return data (simulation). 7) determine the lowest percentile in this artificial distribution. this is the 99% copulabased var. we use both the t copula and the gaussian copula in order to measure the error of applying the normal distribution to a non-normally distributed return series. financial data often exhibit tail dependence: both variables tend to assume very low values or very high values at the same time. more formally, lower (upper) tail dependence refers to the probability that one portfolio component assumes very small (high) values . both this function and its contour lines can be visualised in a graph, and the shape of these isolines shows the relationship between x and y. perfectly circular lines are evidence in favour of independence, whereas an l shape or ellipses suggest dependencies. the stronger the dependence between two return series, the higher the portfolio risk, under otherwise equal circumstances. christiane goodfellow, christian salm94 copulas are an abstract concept in that they do not directly convey the var. instead, here is a step-by-step procedure to estimate the t copula and then the var based on this: 1) for the univariate margins, estimate the kernel density. in addition, fit a normal distribution and a t distribution. 2) plot the marginal distributions from step (1). compare, for each series, the kernel density, the fitted normal distribution, and the fitted t distribution. for the following steps, assume the t distribution achieves a good fit to the empirical kernel function. 3) based on t distributions, generate 1-dimensional marginal distributions over a uniform interval. 4) estimate the t copula with maximum likelihood based on the transformed data from step (3). 5) use the value of the maximised loglikelihood function and the akaike information criterion (aic) to evaluate the goodness of fit of this copula compared to, for example, the gaussian copula. the higher the maximised loglikelihood function or the aic, the better the fit. 6) combine the best-fitting copula with the estimated marginal distributions from step (3) and generate artificial stock return data (simulation). 7) determine the lowest percentile in this artificial distribution. this is the 99% copula-based var. we use both the t copula and the gaussian copula in order to measure the error of applying the normal distribution to a non-normally distributed return series. financial data often exhibit tail dependence: both variables tend to assume very low values or very high values at the same time. more formally, lower (upper) tail dependence refers to the probability that one portfolio component assumes very small (high) values given that the other component is already very low (high). jointly normally distributed random variables will only have tail dependence when they are perfectly correlated (rachev et al., 2010). since tail dependence is a common phenomenon in stock returns, and since the correlation between stock returns is usually found to be less than 1, the gaussian copula with normal marginal distributions is a somewhat risky choice as it will not capture joint movements in extreme values. this further adds to the argument that risk measures based on the unrealistic assumption that returns follow a normal distribution are likely to underestimate portfolio risk. risky risk measures… 95 we are now acquainted with three risk measures: the markowitz (1952) portfolio variance, the value at risk based on the historical return distribution, and the value at risk based on gaussian and t copulas. we will now apply these risk measures to the same dataset and compare the results. we expect that the portfolio variance will underestimate risk as it ignores nonlinear dependencies. likewise, the normal assumption leads to underestimating risk with the value at risk and the gaussian copula approaches. as a result, we expect the t copula based var to be the most accurate risk measure among the three investigated here. data and empirical results we use daily stock price data from yahoo finance from 30 december 2010 to 12 september 2016 in order to calculate continuously compounded returns, resulting in 1,484 return observations for the 4 german stocks daimler, bmw, basf, and sap from 01 january 2011 to 12 september 2016. all 4 stocks are included in the dax index, which is the bluechip index of the 30 largest german companies traded at deutsche börse in frankfurt. the q-q-plots of the return data for all 4 stocks are shown in figure 1. they indicate that (i) the return distributions are asymmetric in that the left tail is fatter than the right tail and that (ii) the normal assumption along the diagonal line is violated at the 95% confidence level in the left tail. this confirms that risk measures based on the normal assumption will underestimate the risk a financial institution faces. while the normal assumption cannot be rejected in the upper tail of the daimler return distribution, it is violated just like at the bottom end of the distribution for bmw, basf, and sap. christiane goodfellow, christian salm96 figure 1. q-q-plots for continuous daily returns of daimler, bmw, basf and sap from 1 january 2011 to 12 september 2016 s o u r c e : developed by author. the descriptive statistics for the 4 return series are given in table 1. risky risk measures… 97 table 1. descriptive statistics for return series of daimler, bmw, basf, and sap from 1 january 2011 to 12 september 2016 daimler bmw basf sap number of observations 1484 1484 1484 1484 median 0,01728 0,00000 0,03981 0,06012 mean 0,03105 0,02979 0,02648 0,05506 variance 3,49495 3,50909 2,65169 1,84047 standard deviation 1,86948 1,87326 1,62840 1,35664 skewness -0,22993 -0,16826 -0,16072 -0,33708 kurtosis 1,50169 1,55853 1,31826 2,41099 correlation coefficient 0,84 0,64 figures reported in this table are based on source: developed by author. the descriptive statistics for the 4 return series are given in table 1. table 1. descriptive statistics for return series of daimler, bmw, basf, and sap from 1 january 2011 to 12 september 2016 daimler bmw basf sap number of observations 1484 1484 1484 1484 median 0,01728 0,00000 0,03981 0,06012 mean 0,03105 0,02979 0,02648 0,05506 variance 3,49495 3,50909 2,65169 1,84047 standard deviation 1,86948 1,87326 1,62840 1,35664 skewness -0,22993 -0,16826 -0,16072 -0,33708 kurtosis 1,50169 1,55853 1,31826 2,41099 correlation coefficient 0,84 0,64 figures reported in this table are based on . in the markowitz (1952) world, this table gives sufficient risk measures in that it lists standard deviations as well as correlation coefficients. the latter are needed to calculate the return covariances inside a portfolio. . in the markowitz (1952) world, this table gives sufficient risk measures in that it lists standard deviations as well as correlation coefficients. the latter are needed to calculate the return covariances inside a portfolio. s o u r c e : developed by author. table 1 shows that daimler and bmw are riskier individual investments than basf and sap in the 2011 to 2016 period. despite having the lowest standard deviation among the 4 stocks, sap also scores the highest mean and median return. combining basf and sap into a portfolio should be more riskreducing than combining daimler and bmw, as the correlation coefficient between the former is lower than for the latter. in other words, basf and sap absorb, respectively, more of each other’s losses than is the case for daimler and bmw. this is not surprising as 2 automobile stocks will move more closely together than a better diversified portfolio of basf and sap. it should be noted that the markowitz (1952) risk measures can be calculated purely based on the data in table 1. as these do not directly compare to the risk measures we derive from the estimated copulas, we do not report the markowitz (1952) risk measures here. christiane goodfellow, christian salm98 table 2. conventional conventional value at risk for return series of daimler, bmw, basf, and sap as well as for a portfolio of daimler and bmw and a portfolio of basf and sap var historical distribution var normal distribution difference daimler 5,2391 4,3180 0,9211 bmw 4,9841 4,3281 0,6560 basf 4,5047 3,7617 0,7430 sap 3,7791 3,1010 0,6781 daimler bmw 4,8897 4,1612 0,7285 basf sap 3,6310 3,1059 0,5251 figures reported in this table are based on source: developed by author. table 1 shows that daimler and bmw are riskier individual investments than basf and sap in the 2011 to 2016 period. despite having the lowest standard deviation among the 4 stocks, sap also scores the highest mean and median return. combining basf and sap into a portfolio should be more risk-reducing than combining daimler and bmw, as the correlation coefficient between the former is lower than for the latter. in other words, basf and sap absorb, respectively, more of each other's losses than is the case for daimler and bmw. this is not surprising as 2 automobile stocks will move more closely together than a better diversified portfolio of basf and sap. it should be noted that the markowitz (1952) risk measures can be calculated purely based on the data in table 1. as these do not directly compare to the risk measures we derive from the estimated copulas, we do not report the markowitz (1952) risk measures here. table 2. conventional conventional value at risk for return series of daimler, bmw, basf, and sap as well as for a portfolio of daimler and bmw and a portfolio of basf and sap var historical distribution var normal distribution difference daimler 5,2391 4,3180 0,9211 bmw 4,9841 4,3281 0,6560 basf 4,5047 3,7617 0,7430 sap 3,7791 3,1010 0,6781 daimler bmw 4,8897 4,1612 0,7285 basf sap 3,6310 3,1059 0,5251 figures reported in this table are based on . sampling period is 1 january 2011 to 12 september 2016, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. source: developed by author. table 2 reports the value at risk figures for all 4 stocks and for 2 portfolios which are constructed from 50% daimler and 50% bmw in the first instance and 50% basf and 50% sap in the second instance, in order to validate the assumption that diversification is more beneficial in the second case. in fact, the value at risk for daimler and bmw is higher than for basf and sap, suggesting that the expected loss is higher for the riskier portfolio. this is true for the var based on the empirical and the normal distributions of the returns. . sampling period is 1 january 2011 to 12 september 2016, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. s o u r c e : developed by author. table 2 reports the value at risk figures for all 4 stocks and for 2 portfolios which are constructed from 50% daimler and 50% bmw in the first instance and 50% basf and 50% sap in the second instance, in order to validate the assumption that diversification is more beneficial in the second case. in fact, the value at risk for daimler and bmw is higher than for basf and sap, suggesting that the expected loss is higher for the riskier portfolio. this is true for the var based on the empirical and the normal distributions of the returns. indeed, the normal assumption underestimates the risk (see column ‘difference’ in table 2). not surprisingly, this holds true for individual stocks and for portfolios. measured in euros, for example, and based on a 1 million euro portfolio in daimler stocks, the maximum expected loss amounts to 52,391 euros empirically or 43,180 euros based on the normal assumption, i.e. a difference in risk measure of 9,211 euros or 18% of the empirical approach (or 21% under the normal assumption, which is evidently wrong). the normal assumption therefore produces an economically significant underestimate of risk. it should thus be avoided in practice, even though the original riskmetrics methodology developed by jp morgan relied on the normal assumption. since portfolio theory is also based on the normal assumption, its estimation results based on the figures in table 1 should be taken with a large grain of salt. these estimation results are not reported here because they cannot be directly compared to the var estimations based on copulas. risky risk measures… 99 interestingly, the return series whose bottom tail deviates the most from the normal assumption, is sap (see figure 1). despite this observation, the difference between the empirical var and the normal var for sap amounts to 0.6781 or 18% of the empirical approach, just like for daimler. by contrast, bmw produces a difference between the empirical and the normal vars of only 13% of the empirical value, while basf produces 16.5% even though its bottom tail appears to be much closer to the normal assumption than that of bmw or indeed sap. in order to determine whether the pairwise dependencies between the return series are strong enough to require a copula capturing this covariation at all, we plot the empirical copula cumulative density functions and the copula densities for the two portfolios of daimler and bmw (figure 2) and basf and sap (figure 3). both estimations are non-parametric, i.e. neither assumes that the returns follow a normal or a t distribution. the contour lines indicate that the stocks are strongly dependent in that the isolines for the cumulative density functions are l shaped and the isolines for the copula densities are ellipses rather than circles. we conclude from this that it is worth proceeding with the copula estimation as there are substantial dependencies between the stock returns under investigation here. christiane goodfellow, christian salm100 figure 2. empirical (non-parametric) copula cdf and copula density for daimler and bmw returns from 1 january 2011 to 12 september 2016 s o u r c e : developed by author. risky risk measures… 101 figure 3. empirical (non-parametric) copula cdf and copula density for basf and sap returns from 1 january 2011 to 12 september 2016 s o u r c e : developed by author. in light of these conclusions, we need to determine the suitable marginal distribution for each of the 4 stock returns. figures 4 and 5 present the kernel density, which is effectively the empirical frequency distribution, in comparison to the fitted normal and t distributions. not surprisingly, the t distribution is the best fit for the tails of the distributions. we therefore expect that the var based on the gaussian copula will underestimate the risk, just like the normal assumption for the conventional var calculation. christiane goodfellow, christian salm102 figure 4. fitted mariginal distributions functions for daimler and bmw returns from 1 january 2011 to 12 september 2016 s o u r c e : developed by author. figure 5. fitted mariginal distributions functions for basf and sap returns from 1 january 2011 to 12 september 2016 s o u r c e : developed by author. finally, table 3 reports copula-based var figures. risky risk measures… 103 table 3. copula-based value at risk for return series of daimler, bmw, basf, and sap as well as for a portfolio of daimler and bmw and a portfolio of basf and sap t-copula var gaussian copula var difference daimler bmw 3,7277 3,2986 0,4291 basf sap 3,6121 2,4119 1,2002 figures reported in this table are based on daimler bmw 3,7277 3,2986 0,4291 basf sap 3,6121 2,4119 1,2002 figures reported in this table are based on . sampling period is 1 january 2011 to 12 september 2016, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. source: developed by author. similarly to the conventional var estimates reported in table 2, we find that the normal assumption leads to underestimating risk (see column 'difference' in table 3). we only report the results for the two portfolios as a copula does not make sense for individual return series. for the automobile portfolio, we underestimate risk with the gaussian approach by 4,291 euros or 11.5% of the t distribution var if 1 million euros are invested into this portfolio. by contrast, for the better diversified portfolio of basf and sap, we underestimate risk by 12,002 euros or 33% of the t distribution var for a 1-million euro portfolio. with these results, we confirm our conjecture and our earlier conclusion that the normal assumption substantially underestimates risk and should therefore be avoided in practice. while the empirical distribution is certainly the best fit, the t distribution works reasonably well for the 4 return series investigated here (see figures 4 and 5). as a robustness check, we calculate the same indicators for the stress period of 02 july 2007 to 31 december 2009. during this time, the global financial crisis had its heaviest impact on financial markets. therefore, the var calculated for this period is interpreted as the stressed var in the basel iii framework. tables 4 to 6 summarise the results. table 4. descriptive statistics for stressed return series of daimler, bmw, basf, and sap from 02 july 2007 to 31 december 2009 daimler bmw basf sap number of observations 635 634 637 635 median 0,00000 -0,03806 0,00000 0,00000 mean -0,07830 -0,04896 -0,00651 -0,01690 variance 10,52665 8,09299 7,27877 4,61677 standard deviation 3,24448 2,84482 2,69792 2,14867 skewness 0,47567 0,31012 0,18209 -0,38797 kurtosis 5,53263 3,47062 6,70795 13,16942 correlation coefficient 0,75 0,47 figures reported in this table are based . in the markowitz (1952) world, this table gives sufficient risk measures in that it lists standard deviations as well as correlation coefficients. the latter are . sampling period is 1 january 2011 to 12 september 2016, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. s o u r c e : developed by author. similarly to the conventional var estimates reported in table 2, we find that the normal assumption leads to underestimating risk (see column ‘difference’ in table 3). we only report the results for the two portfolios as a copula does not make sense for individual return series. for the automobile portfolio, we underestimate risk with the gaussian approach by 4,291 euros or 11.5% of the t distribution var if 1 million euros are invested into this portfolio. by contrast, for the better diversified portfolio of basf and sap, we underestimate risk by 12,002 euros or 33% of the t distribution var for a 1-million euro portfolio. with these results, we confirm our conjecture and our earlier conclusion that the normal assumption substantially underestimates risk and should therefore be avoided in practice. while the empirical distribution is certainly the best fit, the t distribution works reasonably well for the 4 return series investigated here (see figures 4 and 5). as a robustness check, we calculate the same indicators for the stress period of 02 july 2007 to 31 december 2009. during this time, the global financial crisis had its heaviest impact on financial markets. therefore, the var calculated for this period is interpreted as the stressed var in the basel iii framework. tables 4 to 6 summarise the results. table 4. descriptive statistics for stressed return series of daimler, bmw, basf, and sap from 02 july 2007 to 31 december 2009 daimler bmw basf sap number of observations 635 634 637 635 median 0,00000 -0,03806 0,00000 0,00000 mean -0,07830 -0,04896 -0,00651 -0,01690 christiane goodfellow, christian salm104 daimler bmw basf sap variance 10,52665 8,09299 7,27877 4,61677 standard deviation 3,24448 2,84482 2,69792 2,14867 skewness 0,47567 0,31012 0,18209 -0,38797 kurtosis 5,53263 3,47062 6,70795 13,16942 correlation coefficient 0,75 0,47 figures reported in this table are based daimler bmw 3,7277 3,2986 0,4291 basf sap 3,6121 2,4119 1,2002 figures reported in this table are based on . sampling period is 1 january 2011 to 12 september 2016, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. source: developed by author. similarly to the conventional var estimates reported in table 2, we find that the normal assumption leads to underestimating risk (see column 'difference' in table 3). we only report the results for the two portfolios as a copula does not make sense for individual return series. for the automobile portfolio, we underestimate risk with the gaussian approach by 4,291 euros or 11.5% of the t distribution var if 1 million euros are invested into this portfolio. by contrast, for the better diversified portfolio of basf and sap, we underestimate risk by 12,002 euros or 33% of the t distribution var for a 1-million euro portfolio. with these results, we confirm our conjecture and our earlier conclusion that the normal assumption substantially underestimates risk and should therefore be avoided in practice. while the empirical distribution is certainly the best fit, the t distribution works reasonably well for the 4 return series investigated here (see figures 4 and 5). as a robustness check, we calculate the same indicators for the stress period of 02 july 2007 to 31 december 2009. during this time, the global financial crisis had its heaviest impact on financial markets. therefore, the var calculated for this period is interpreted as the stressed var in the basel iii framework. tables 4 to 6 summarise the results. table 4. descriptive statistics for stressed return series of daimler, bmw, basf, and sap from 02 july 2007 to 31 december 2009 daimler bmw basf sap number of observations 635 634 637 635 median 0,00000 -0,03806 0,00000 0,00000 mean -0,07830 -0,04896 -0,00651 -0,01690 variance 10,52665 8,09299 7,27877 4,61677 standard deviation 3,24448 2,84482 2,69792 2,14867 skewness 0,47567 0,31012 0,18209 -0,38797 kurtosis 5,53263 3,47062 6,70795 13,16942 correlation coefficient 0,75 0,47 figures reported in this table are based . in the markowitz (1952) world, this table gives sufficient risk measures in that it lists standard deviations as well as correlation coefficients. the latter are . in the markowitz (1952) world, this table gives sufficient risk measures in that it lists standard deviations as well as correlation coefficients. the latter are needed to calculate the return covariances inside a portfolio. this table compares directly to table 1, where the non-stressed results are summarised. s o u r c e : developed by author. comparing tables 1 and 4, it becomes apparent that the mean and median returns were lower during the period of stress than across the later 5-year period from 2011 to 2016. if we were to measure risk with the standard deviation of the returns, the stress period would indeed be much riskier than the 2011 to 2016 period. moreover, while the return data for the 5-year period are negatively skewed, the stressed return data are positively skewed (except for sap), i.e. low observations occur with higher relative frequency than higher observations do during the stress period. this is plausible for a period of stress. the return series are leptokurtic both during the 2011 to 2016 period and under stress (the kurtosis is positive in both cases); however, during the stress period, the distributions are much thinner with heavier tails than under the normal assumption, implying that extreme values are more likely to occur than during the 2011 to 2016 period. finally, the return series become less correlated. this might be surprising at first sight; however, this only captures linear dependencies while a larger fraction of the overall co-movement may well be nonlinear during a period of stress. table 4. descriptive statistics for stressed return series of daimler… risky risk measures… 105 table 5. conventional stressed value at risk for return series of daimler, bmw, basf, and sap as well as for a portfolio of daimler and bmw and a portfolio of basf and sap var historical distribution var normal distribution difference daimler 9,3845 7,6323 1,7522 bmw 7,8666 6,6670 1,1996 basf 8,9205 6,2979 2,6226 sap 5,6164 5,0180 0,5984 daimler bmw 8,4465 6,7732 1,6733 basf sap 7,2886 4,9716 2,3170 figures reported in this table are based on daimler bmw 3,7277 3,2986 0,4291 basf sap 3,6121 2,4119 1,2002 figures reported in this table are based on . sampling period is 1 january 2011 to 12 september 2016, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. source: developed by author. similarly to the conventional var estimates reported in table 2, we find that the normal assumption leads to underestimating risk (see column 'difference' in table 3). we only report the results for the two portfolios as a copula does not make sense for individual return series. for the automobile portfolio, we underestimate risk with the gaussian approach by 4,291 euros or 11.5% of the t distribution var if 1 million euros are invested into this portfolio. by contrast, for the better diversified portfolio of basf and sap, we underestimate risk by 12,002 euros or 33% of the t distribution var for a 1-million euro portfolio. with these results, we confirm our conjecture and our earlier conclusion that the normal assumption substantially underestimates risk and should therefore be avoided in practice. while the empirical distribution is certainly the best fit, the t distribution works reasonably well for the 4 return series investigated here (see figures 4 and 5). as a robustness check, we calculate the same indicators for the stress period of 02 july 2007 to 31 december 2009. during this time, the global financial crisis had its heaviest impact on financial markets. therefore, the var calculated for this period is interpreted as the stressed var in the basel iii framework. tables 4 to 6 summarise the results. table 4. descriptive statistics for stressed return series of daimler, bmw, basf, and sap from 02 july 2007 to 31 december 2009 daimler bmw basf sap number of observations 635 634 637 635 median 0,00000 -0,03806 0,00000 0,00000 mean -0,07830 -0,04896 -0,00651 -0,01690 variance 10,52665 8,09299 7,27877 4,61677 standard deviation 3,24448 2,84482 2,69792 2,14867 skewness 0,47567 0,31012 0,18209 -0,38797 kurtosis 5,53263 3,47062 6,70795 13,16942 correlation coefficient 0,75 0,47 figures reported in this table are based . in the markowitz (1952) world, this table gives sufficient risk measures in that it lists standard deviations as well as correlation coefficients. the latter are . sampling period is 02 july 2007 to 31 december 2009, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. this table compares directly to table 2, where the non-stressed results are summarised. s o u r c e : developed by author. the conventional var figures are compared across tables 2 and 5. this comparison confirms our suspicion regarding linear and non-linear dependencies: the difference in var between the empirical and the normal distributions becomes much larger in times of trouble (except for sap which appears to function almost like an insurance policy). furthermore, since the var measures an expected loss, we expect this to be higher in absolute terms during a period of stress compared to an ordinary state of the market. indeed, for the stressed period of 2007 to 2009, we observe a var of 93,845 euros for a 1 million euro portfolio of daimler stocks compared to 52,391 euros in an ordinary state. moreover, under ordinary circumstances, recall that the difference in var between the empirical and the normal distributions for the same daimler portfolio amounts to 9,211 euros. by contrast, the difference between empirical and normal-based vars amounts to 17,522 euros in the stressed period, which is just under double the amount across the 5-year non-stressed period. we conclude that the error in using the normal distribution to capture risk in financial markets becomes more severe as the markets experience a crisis. during such times, however, risk measures need to be extra-reliable and extra-prudent. this is a strong argument against the gaussian copula to measure the dependence of return series. christiane goodfellow, christian salm106 table 6. stressed copula-based value at risk for return series of daimler, bmw, basf, and sap as well as for a portfolio of daimler and bmw and a portfolio of basf and sap t-copula var gaussian copula var difference daimler bmw 8,3938 4,5709 3,8229 basf sap 6,8408 2,6784 4,1624 figures reported in this table are based on daimler bmw 3,7277 3,2986 0,4291 basf sap 3,6121 2,4119 1,2002 figures reported in this table are based on . sampling period is 1 january 2011 to 12 september 2016, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. source: developed by author. similarly to the conventional var estimates reported in table 2, we find that the normal assumption leads to underestimating risk (see column 'difference' in table 3). we only report the results for the two portfolios as a copula does not make sense for individual return series. for the automobile portfolio, we underestimate risk with the gaussian approach by 4,291 euros or 11.5% of the t distribution var if 1 million euros are invested into this portfolio. by contrast, for the better diversified portfolio of basf and sap, we underestimate risk by 12,002 euros or 33% of the t distribution var for a 1-million euro portfolio. with these results, we confirm our conjecture and our earlier conclusion that the normal assumption substantially underestimates risk and should therefore be avoided in practice. while the empirical distribution is certainly the best fit, the t distribution works reasonably well for the 4 return series investigated here (see figures 4 and 5). as a robustness check, we calculate the same indicators for the stress period of 02 july 2007 to 31 december 2009. during this time, the global financial crisis had its heaviest impact on financial markets. therefore, the var calculated for this period is interpreted as the stressed var in the basel iii framework. tables 4 to 6 summarise the results. table 4. descriptive statistics for stressed return series of daimler, bmw, basf, and sap from 02 july 2007 to 31 december 2009 daimler bmw basf sap number of observations 635 634 637 635 median 0,00000 -0,03806 0,00000 0,00000 mean -0,07830 -0,04896 -0,00651 -0,01690 variance 10,52665 8,09299 7,27877 4,61677 standard deviation 3,24448 2,84482 2,69792 2,14867 skewness 0,47567 0,31012 0,18209 -0,38797 kurtosis 5,53263 3,47062 6,70795 13,16942 correlation coefficient 0,75 0,47 figures reported in this table are based . in the markowitz (1952) world, this table gives sufficient risk measures in that it lists standard deviations as well as correlation coefficients. the latter are . sampling period is 02 july 2007 to 31 december 2009, var holding period 1 day, 99% confidence level, portfolio weights 50%, difference in absolute values. this table compares directly to table 3, where the non-stressed results are summarised. s o u r c e : developed by author. the copula-based var figures are reported in tables 3 and 6. during the stress period of 2007 to 2009, we observe much higher potential losses than during the 2011–2016 period. for example, a 1-million euro daimler-bmw portfolio loses with 99% no more than 37,277 euros across 1 day, whereas the same portfolio loses 83,938 euros under stress but with otherwise equal parameters. furthermore, the difference between normal and t distribution assumptions is much larger during the stress period than under ordinary circumstances. for a 1-million euro daimler-bmw portfolio, this difference in estimation approach amounts to 4,291 euros under ordinary circumstances compared to 38,229 euros during the stress period. this confirms our earlier finding that the mistake in underestimating risk using the normal assumption is substantially bigger during a stress period compared to ordinary market circumstances. since accurate risk measurement is particularly important during periods of market turbulence, both supervisors and practitioners should avoid using the normal distribution as its tails are too thin. in summary, we investigate continuous stock returns from 2011 to 2016, and during the stress period of 2007 to 2009. the return series deviate from the normal distribution in both periods, but more severely so during the period of the financial crisis. this results in substantial errors in measuring risk based on the normal assumption, and these errors are even larger during a period of market stress. in fact, this error is risky in that the normal assumption underestimates risk. based on this insight, we strongly recommend that financial institutions and supervisors adopt a non-normal approach to capture the risk an institution faces. in order to facilitate the implementation of such an approach in practice, we are very happy to share our commented code that calculates risky risk measures… 107 non-normal risk measures with the open source software r. this code is available from the authors on request. summary and conclusions the goal of this paper is to compare risk measures that rely on the normal assumption with those that do not, based on daily stock return data from 2011 to 2016. in fact, the normal assumption substantially underestimates the risk an institution faces. during times of stressed markets from 2007 to 2009, this underestimation becomes even more severe. according to basel iii, however, a risk measure needs to adequately capture the risk facing an institution. it therefore appears that risk measures based on the normal assumption should not be used. despite this insight, regulators still accept normal-based risk measures such as the value at risk based on the assumption that the return distribution is normal. in order to help implement non-normal risk measures in practice, we propose a simple methodology to comprehensively capture risk with a var based on the historical, empirical distribution or a var based on the t copula, and we are happy to share our code to produce accurate risk measures. it is disadvantageous for a financial institution to overestimate risk because this may lead to equity requirements that are too high. it is, however, equally disadvantageous to underestimate risk since the institution has a vital interest in continuing to stay in business. this might be jeopardised if risks are systematically and substantially underestimated, resulting in too high an exposure. this concern is shared by supervisors. at the same time, it is still common practice to calculate the value at risk based on a normal distribution assumption. in this paper, we have shown to what extent this method underestimates risk, especially so during times of stress, when risk exposure is particularly risky! in light of these findings, we stronlgy recommend that regulatory requirements are revised to exclude normal-assumption based risk measures. 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(2014). volatility versus tail risk: which one is compensated in equity funds? journal of portfolio management, 40(2), 112–121. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: march 7, 2019; date of acceptance: april 26, 2019. * contact information: 502989@doktorant.umk.pl, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 56 611 46 34; orcid id: https://orcid.org/0000-0003-1791-7512. kwiatkowska, j. (2018). cross-selling and up-selling in a bank. copernican journal of finance & accounting 7(4), 59–70. http://dx.doi.org/10.12775/cjfa.2018.020 julia kwiatkowska* nicolaus copernicus university in toruń cross-selling and up-selling in a bank keywords: cross selling, up selling, unethical sale. j e l classification: g21, g40, k4. abstract: increasing competition on the banking market, as well as the desire to achieve maximum profits, means that banks are increasingly looking for methods that will allow them to increase sales. one of them turned out to be sales techniques such as cross selling and up selling, which undoubtedly increase the bank’s profit. in addition, cross-selling contributes to building a larger product portfolio of the client, which binds it more strongly to the bank and minimizes the risk of the customer moving to a competitive entity. however, the use of these sales techniques also entails risks. one of them is the loss of a good image. the aim of the article is to present the results of an own study on the use of cross-selling and up-selling by banks and inf luence on their image. additionally, the article presents the essence and way of functioning of cross-selling and up-selling, which are used by financial institutions in the pursuit of profit maximization. the results of the study confirmed that the results of the application of these sales techniques turns out to have a negative impact on the customer’s perception of the bank. both cross-selling and up-selling contribute to the dissatisfaction of customers, which often leads to the loss of their part in favor of a competitive bank. in addition, the negative perception of the bank undermines its image, which is an important element in such a strong competition. julia kwiatkowska60  introduction the goal of financial institutions is to achieve the greatest financial performance. banks and loan companies, insurance companies and financial intermediaries are focused on generating profit. there are many banks on the polish financial market, which results in strong competition between them. the situation is also not facilitated by the fact that they deal with the distribution of the same products that differ only by individual parameters. in connection with the above, financial institutions are looking for solutions that will enable them to achieve their intended results and maintain a competitive position on the market. in addition to traditional activities, which include training of employees, improving products, taking care of the image and a wide range of advertising, there are variety of modern sales techniques. these techniques include cross selling and up selling, which allow them to maximize profit from one customer. historically, financial institutions were focused on acquiring new clients. currently, it is more important for them to keep existing customers and enrich their with new products. the aim of this action is not only to provide a strong relationship that will bind the client to the institution, but also to maximize profit. it results mainly from increased sales of products and low costs of acquiring new customers. the research methodology and the course of the research process the aim of the article is to present the results of the own study on the use of cross-selling and up-selling by banks and inf luence on their image. it is worth stressing that this is the first study on the use of cross-selling and up-selling by banks. the question of how the use of these techniques affects the bank’s perception and what customers think about them has never been discussed before. this is a high value of the study, and the results allow us to draw conclusions regarding certain trends and opinions among bank clients. this study was conducted in april 2018 using an online questionnaire. it was addressed to people who were or are currently customers of at least one bank. the questionnaire consisted of a statement allowing to determine gender, age, education and place of residence of respondents, as well as 24 closed questions. the main objective of the study was to investigate whether the use of cross-selling and up-selling inf luences the perception of bank by its customers. addition cross-selling and up-selling in a bank 61 ally, the article presents the result of the cronbach’s alpha coefficient, which is a test verifying the reliability of used questionnaires, and more specifically its consistency. the results of pearson’s linear correlation coefficient were also presented to diversify the research. the relationship between gender and propensity to use the products offered in the discussed sales techniques was examined. additionally, the article presents the essence and way of functioning of cross-selling and up-selling, which are used by financial institutions in the pursuit of profit maximization. achieving this goal required the analysis of national and foreign source literature, which includes books, articles, reports and studies, as well as an analysis of legal regulations, among which legal acts are distinguished. strategy and sales technique in domestic and foreign literature cross selling and up selling are defined in various ways. in one case, they are called sales strategies used to increase income (johnson & friend, 2014). in the second one, they are presented as sales techniques that allow you to increase sales and income generated by the customer (kubiak & weichbroth, 2010). there are many definitions of strategies in the literature, but all emphasize the features that the strategy has a long time horizon and are based on the future. to talk about strategy, it is also important to remember that the actions taken by the company must be matched to its objectives (supernat, 2000, pp. 13–14). in addition, the entity must indicate the methods for their implementation (kaleta, 2013, p. 41). by definition, which can be found in dictionaries, it follows that the technique is a procedure that brings the company closer to the goal. it also indicates the accompanying elements, that is the way in which activities are carried out, the interdependence and the rational selection of resources and means of action (mikołajczyk, 1997, pp. 7–38). for the purpose of the article, it was assumed that cross selling and up selling are sales techniques. financial institutions use cross selling and up selling to maximize the profit that is the goal of their business. it can therefore be said that these are activities that contribute to the goal. in addition, these techniques are subject to a sales strategy, which in the case of financial institutions can be based, for example, on long-term revenue growth. julia kwiatkowska62 cross selling financial institutions, in order to maximize profit, use cross-selling techniques. cross selling is otherwise called bundling. cross selling is about offering customers additional products or services to the basic product they purchase. it is worth emphasizing that the products or services offered in this way are complementary goods. this means that they supplement each other. an example can be a laptop bought in the store and a bag that was offered as part of cross-selling. in financial institutions, such an example can be insurance, offered with a loan (próchnicki, 2014). the basic principle of cross-selling is the fact that an additional product or service is offered only when the customer has already purchased the basic product, but the purchase transaction has not yet been completed. that means it is not risky to offer complement goods because it is offered only when the basic product is purchased. therefore, financial institutions are willing to use this technique to maximize profit (baumgarten, widz, białokozowicz & dietl, 2006). cross selling allows to increase sales per one customer and strengthen his or her bond. cross selling is referred as the technique of maximizing profit generated by one customer. the use of this technique also reduces need to acquire new customers, and reduces the costs associated with it. financial institutions are willing to use cross-selling due to the possibility of building a strong relationship with the customer, which will reduce the risk related to the loss of the customer in favor of the competitive entity (szczepaniec, 2003). the purposes of using cross-selling are (paradecki, 2008, p. 343): ■ increasing turnover while fixed costs are constant, ■ increasing customer loyalty, ■ reducing the clients' f luctuation, ■ building a relationship with the client, ■ optimal use of distribution channels, ■ reducing uncertainty and risk. up selling another technique that maximizes profit is up selling. up selling, also known as an additional sale, increases value of the product or service being sold. it consists in offering a product or service of the same nature, but with higher quality or greater functionality. the result is that the price of this product or ser cross-selling and up-selling in a bank 63 vice is much higher and allows company to earn more per each transaction. it should be emphasized that products and services sold as part of up-selling are substitute goods, which means that they substitute each other and meet the same needs. an example might be selling a laptop with better parameters than the one that the customer originally chose. in the case of financial institutions, among the up-selling examples, one can distinguish opening of a more expensive bank account with greater functionality and credit cards with a higher limit, the use of which accrues numerous discounts and benefits. however, the most popular up selling is used for the sale of savings products, because currently offered deposits and savings accounts are low-income products. therefore, it is more convenient to buy structured deposits or investment funds (próchnicki, 2014). one of the principles of up-selling is the fact that it is used when the customer has not yet purchased the basic product and the purchase transaction has not ended. it means that the technique consists in proposing a product equipped with additional functions or higher quality than basic product that the customer was interested in. financial institutions are less likely to use upselling because up selling is more risky than cross selling. an attempt to sell a more expensive product may discourage the customer enough that he or her will completely abandon this purchase. it is important that the sales process with this technique is carried out slowly and customer's reaction is observed (próchnicki, 2014). guidelines on cross-selling practices in 2016, the european securities and markets authority, esma, issued guidelines on cross-selling practices. the main purpose of the document is to protect investors in eu countries. the guidelines are designed to develop a coherent and effective approach to the supervision of companies and to understand expectations in the field of standards and organizational solutions among institutions that use cross-selling. the guidelines relate to the mifid ii directive (markets in financial instruments directive), and therefore apply to offering investment products in combination with another product or service. however, the possibility of using this document when offering other products is not excluded, unless there are separate regulations that say differently. julia kwiatkowska64 table 1. esma guidelines on cross-selling practices guideline 1 the guideline obliges to inform customers about the prices of sold packages and the individual prices of products making up the package. moreover, institutions that use cross-selling should prepare summaries and summaries of all known and significant costs related to the purchase of products both in the form of a package and separately. guideline 2 the guideline obliges financial institutions to provide timely information about price and costs so that the customer can make a decision about buying in a conscious manner. guideline 3 the guideline obliges financial institutions to provide transparent and precise information, as well as to use a simple language that will be understandable for each client. additionally, it obliges to display information about prices and costs of products included in the package. guideline 4 the guideline obliges institutions to provide information on prices and costs in such a way as not to mislead customers and to hide real costs. in addition, information provided to customers is to give the opportunity to compare costs with alternative products. guideline 5 the guideline obliges institutions to provide information on non-price components and risks that are associated with products purchased both in a package and separately. guideline 6 the guideline obliges to display information on non-price elements and risk in a manner no less visible than information on prices and costs, as well as to use a simple language that is understandable to clients. guideline 7 the guideline requires informing customers about the possibility of purchasing selected products separately, not only in the form of a package. with this information, the customer is to decide consciously whether he will purchase the products in the package or separately and whether it is necessary to purchase one of the component products. in addition, the directive obliges institutions not to create an artificial impression that the purchase of a package is mandatory, if in fact it is possible to purchase individual products separately. guideline 8 the guideline obliges institutions to train employees who will use cross-selling to familiarize them with the risks and the nature of bundling. guideline 9 the guideline obliges to introduce the remuneration models in the form of incentives or rewards received for responsible, fair treatment of clients. guideline 10 the guideline obliges to inform about withdrawal periods when purchasing products separately or in a package. in addition, it is proposed that these periods should be the same for bundling and for selling products separately. s o u r c e : own study based on: european securities and markets authority, 2016. the outcome of the research process and conclusions 150 respondents took part in the survey. the whole group consisted of ex or current clients of at least one bank. the answers were obtained through the use of an online questionnaire. in order to reliably and reliably obtain information on the impact of cross-selling and up-selling on the perception of the bank by its clients, short definitions explaining the nature of the operation of both techniques are included in the questionnaire. additionally, in order to verify the cross-selling and up-selling in a bank 65 correctness of the questionnaire, the cronbach’s alpha coefficient was used. it is a test examining the reliability of used questionnaires, specifically the internal coherence of the tool. in the study used, the cronbach’s alpha coefficient was approximately 0.78. this means that the questionnaire used in the study is highly consistent and reliable. all respondents declared that they were or are currently clients of the bank. in addition, they were in the age range between 18 and 60 years, which means that the study has reached younger and older customers. over half of them live in a city of 200,000 to 500,000 inhabitants, and the most frequently indicated education is higher education. the characteristics of the respondents are presented in table 2. table 2. the characteristics of the respondents gender woman man 74.7% 25.3% n=150 age up to 20 years (inclusive) over 20 years to 30 years over 30 years to 40 years over 40 years to 50 years over 50 years to 60 years over 60 years 4.7% 70% 10.7% 11.3% 3.3% 0% n=150 place of residence village a city of up to 200,000 residents a city of over 200,000 residents up to 500,000 residents city over 500,000 residents 30.9% 26.8% 32.2% 10.1% n=149 education basic education vocational education secondary education higher education 0.7% 2.7% 28.7% 68% n=150 s o u r c e : author’s own survey. it is worth noting that the research was carried out on a targeted sample. this means that a non-random sampling of respondents to social research was made. this is due to the fact that the purpose of the study was not to examine the structures but to identify general trends in banking. the results of the survey were to show a certain tendency regarding the perception of cross-selling and up-selling in banks and help determine what customers think about them. to achieve the goal of the article, the answers to selected questions from the survey sheet were analyzed. these questions checked the level of customer knowledge on cross-selling and up-selling as well as the level of satisfaction julia kwiatkowska66 with the products purchased in this way. answers to these questions are presented in tables 3 and 4. table 3. answers to selected questions – cross selling have you ever heard the concept of „cross selling”? yes no 48% 52% n=148 do you know what means and how does crossselling work? yes no 85% 15% n=80 have you been offered products in this way? yes no 65.1% 34.9% n=149 have you ever used a product offered as part of cross-selling? yes no 40.4% 59.6% n=109 are you satisfied with the product purchased as part of „cross-selling”? yes no 49% 51% n=49 if you are not satisfied: why? unattractive interest rate the product turned out to be different than offered the product turned out to be unnecessary the product turned out to be expensive 1 5 15 10 n=23 (multiple choice) has the use of „cross-selling” had a positive or negative impact on your perception of a bank that tried to sell its products in this way? positive negative it had no effect 16.3% 34.6% 49% n=104 has the use of „cross-selling” ever maked changed the bank that you used? yes no 11.5% 88.5% n=104 do you think that cross-selling may infringe consumer rights? yes no 48.6% 51.5% n=144 s o u r c e : author’s own survey. table 4. answers to selected questions – up selling have you ever heard the concept of „up selling”? yes no 37.2% 62.8% n=148 do you know what means and how does upselling work? yes no 78.5% 21.5% n=65 have you been offered products in this way? yes no 37.4% 62.6% n=147 have you ever used a product offered as part of up-selling? yes no 23.2% 76.7% n=73 are you satisfied with the product purchased as part of „up-selling”? yes no 47.6% 52.4% n=21 cross-selling and up-selling in a bank 67 if you are not satisfied: why? the product turned out to be different than offered the product turned out to be unnecessary the product turned out to be expensive 2 3 4 n=9 (multiple choice) has the use of „up-selling” had a positive or negative impact on your perception of a bank that tried to sell its products in this way? positive negative it had no effect 13.4% 29.9% 56.7% n=67 has the use of „up-selling” ever maked changed the bank that you used? yes no 8.7% 91.3% n=69 do you think that up-selling may infringe consumer rights? yes no 46.5% 53.5% n=144 s o u r c e : author’s own survey. the purpose of the survey, which was carried out on bank customers, was to check whether the use of cross-selling or up-selling inf luences the perception of the bank by its clients. for this purpose, it was necessary to determine whether customers are satisfied with the products purchased in this way and how it affected the perception of the bank. the results obtained indicate that in the case of cross-selling, 51% of the bank’s customers surveyed, who benefited from the cross-selling purchase, are not satisfied with the product purchased in this way. the main reason is that this product turns out to be unnecessary to customers. showing benefits, especially financial ones, resulting from the use of cross-selling means that customers buy this product, but eventually it turns out to be unnecessary. the second reason why customers are not satisfied with products purchased as part of cross-selling is their price. often, it turns out that a product purchased separately is not more expensive than a cross-selling one or the difference is small that it leads to dissatisfaction of customers. another reason reported by 5 clients out of 23 who have used cross-selling and are not happy about it is the product’s non-compliance with the offer. customers complain that the bank’s offer presented by its employees is sometimes inconsistent with the actual state, for example, fees are hidden. this is a negative news, especially as the reasons for dissatisfaction described by customers may be the result of misselling and unethical sales. half of the bank’s customers, who answered the question about the impact of cross-selling on their perception of the bank, believes that cross-selling did not have any impact on their perception of the institution. however, every third table 4. answers to selected… julia kwiatkowska68 responding person believes that offering a cross-selling product had a negative impact on the perception of the bank. this is a large percentage of clients, the more that nearly 12% of people who answered the question about satisfaction with a cross-selling product admits that as a result of dissatisfaction changed their original bank. this means that the use of cross-selling can cause not only customer dissatisfaction, which affects the negative perception of the institution, but also cause the loss of the client in favor of another, competitive bank. there are also people who positive perception of the bank, but this group represents only 16% of those who answered the question about satisfaction with the cross-selling product. in the case of customers who bought products offered as part of up-selling, more than half of them, as much as 52%, are not satisfied with this purchase. the main reason is price. it turns out that customer dissatisfaction is mainly due to the high price of the product, as well as the costs generated by its use or possession. in addition, the additional benefits indicated by the bank’s employees, which the customer will gain when purchasing a given product, as well as a wider scope of its functions, are finally unnecessary. customers do not notice that a product bought as part of up-selling meets more of their needs or does not use its additional functions. in addition, in the case of up-selling, you can sometimes notice the incompatibility of the product with the offer presented by a bank employee, which also contributes to his dissatisfaction. this is a negative news due to the fact that the reasons presented by customers may be the result of misseling and unethical sales. for more than half of the customers who answered the question about satisfaction with the product purchased under up-selling, its sales had no impact on their perception of the bank. however, almost 30% of them admit that offering the product in this way had a negative impact on the perception of the institution. additionally, 9% of the 69 customers admit to changing the bank, which was inf luenced by the use of up-selling. only 13% of the 67 respondents agree to the positive impact of this technique on bank perception. this means that up-selling, like cross-selling, can also cause dissatisfaction among some customers and contribute to the change of their bank, but to a lesser extent than in the case of bundling. in addition, in order to draw additional conclusions from the study, the pearson’s linear correlation coefficient was used between two questions contained in the questionnaire and the gender of respondents. this coefficient determines the level of linear dependence between random variables. in this case, the gen cross-selling and up-selling in a bank 69 der of respondents and their willingness to take advantage of products offered as part of cross-selling and up-selling were taken into account. the pearson coefficient in both cases came out negative. the correlation between the gender of respondents and the tendency to use products offered as part of cross-selling is weak and amounted to approximately -0.3. correlation between the gender of respondents and the tendency to take advantage of products offered as part of up-selling is weak and amounted to approximately -0.19. this means there is no dependency between selected random variables. none of the sexes is more likely to use the products offered under the above sales techniques. cross selling and up selling in the opinion of customers can often violate the law. there is a suspicion that the use of these techniques may violate consumer rights. cross selling and up selling is associated with selling products that are actually unnecessary to customers. in addition, in the case of bundling, the price of the products is the same as when purchased separately. in the case of up-selling, products with a higher price are sometimes not equipped with additional, higher functionality. this raises doubts as to the integrity of these practices. a positive aspect is the fact that the problem of the integrity of crossselling has been noticed. in 2016, guidelines on good practices for tying were established at the european union level. perhaps over the years, both bundled and additional sales will be regulated, thanks to which banks will start to be perceived in a more positive way.  references baumgarten, j., widz, a., białokozowicz, p., & dietl, m. (2006). łączenie ofert w sektorze bankowym. (combining offers in the banking sector.) gazeta bankowa, 17. european securities and markets authority (2016). wytyczne dotyczące praktyk sprzedaży krzyżowej. (guidelines on cross-selling practices.) esma/2016/574 pl. johnson, j.s., & friend, s. (2014). contingent cross-selling and up-selling relationships with performance and job satisfaction: an moa-theoretic examination. journal of personal selling & sales management, 35(1), 51-71. https://dx.doi.org/10.1080/0 8853134.2014.940962. kaleta, a. (2013). realizacja strategii. (implementation of the strategy.) warszawa: polskie wydawnictwo ekonomiczne. kubiak, b.f., & weichbroth, p. (2010). crossand up-selling techniques in e-commerce activities. gdańsk: journal of internet banking and commerce. mikołajczyk, z. (1997). techniki organizatorskie w rozwiązywaniu problemów zarządzania. (organizational techniques in solving management problems.) warszawa: wydawnictwo naukowe pwn. julia kwiatkowska70 paradecki, r. (2008). wpływ współzależności produktów bankowych na wynik ze sprzedaży i cykl życia. (inf luence of the interdependence of banking products on the result on sales and life cycle.) prace naukowe uniwersytetu ekonomicznego we wrocławiu, (research papers of wrocław university of economics.) 14, 340–348. próchnicki, w. (2014). cross selling i up selling – strategie sprzedaży. (cross selling i up selling – sales strategies.) poznań: szef sprzedaży 14/2014. supernat, j. (2000). techniki decyzyjne i organizatorskie: wydanie i. (decision making and organizational techniques: edition i.) wrocław: lord kass. szczepaniec, m. (2003). sprzedaż krzyżowa produktów bankowych. (cross-selling of banking products.) bank i kredyt, (bank and credit.) 3, 95–101. date of submission: january 11, 2020; date of acceptance: february 24, 2020. * contact information: astrida.miceikiene@vdu.lt, vytautas magnus university, faculty of bioeconomy development, universiteto str.10-428, akademija, kaunas distr. lt 53361, lithuania, phone: +37065680908; orcid id: https://orcid.org/0000-0003-1432-7971. ** contact information: daiva.rimkuviene@vdu.lt, vytautas magnus university, faculty of bioeconomy development, universiteto str.10-428, akademija, kaunas distr. lt 53361, lithuania, phone: +37061422787; orcid id: https://orcid.org/0000-0003-3145-3697. *** contact information: kristina.geseviciene@vdu.lt, vytautas magnus university, faculty of bioeconomy development, universiteto str.10-428, akademija, kaunas distr. lt 53361, lithuania, phone: +37068552727; orcid id: https://orcid.org/0000-0002-1547-858x. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 miceikienė, a., rimkuvienė, d., & gesevičienė, k. (2019). assessment of the environmental pollution determinants in the economy sectors of lithuania. copernican journal of finance & accounting, 8(4), 171–184. http://dx.doi.org/10.12775/cjfa.2019.023 astrida miceikienė* vytautas magnus university daiva rimkuvienė** vytautas magnus university kristina gesevičienė*** vytautas magnus university assessment of the environmental pollution determinants in the economy sectors of lithuania keywords: environmental pollution, sectors of economic activity, ghg. j e l classification: q52, q56. abstract: the research provides substantiation for the problem of environmental pollution in lithuania on the basis of the increase in the greenhouse gas (ghg) emissions in the country’s individual economy sectors. the research aims at assessing the ghg emissions of individual sectors of economic activities with reference to the key econoastrida miceikienė, daiva rimkuvienė, kristina gesevičienė172 mic indicators of the respective sectors. the performed analysis of the ghg emissions and their determinants in lithuania has not shown any common trends in ghg emissions and determining factors among the economic activities. the environmental taxes do not perform the goals set for these taxes, while investments into environmental protection have generated a positive effect only in the economic activities of water supply; sewerage, waste management and remediation. the relationship between gdp and ghg emissions is significant for certain economic activities only.  introduction in light of the globally increasing environmental pollution and rapid increase in the use of natural resources, environmental protection has been given increasingly greater consideration. the problems of pollution, use of natural resources and climate change are one of the key problems in many developed and developing countries, as their solution determines not only the health of the population, but also economic growth of the entire country. the environmental taxes have been introduced to promote development of the national economy and protect the environment, as such taxes are imposed on the negative environmental impact and, at the same time, promote investments into new environmentally friendly technologies (the 2030 climate and energy framework, 2014). global warming is referred to as one of the major consequences of the reckless exploitation of the environment. the battle against global warming and environmental damage have become a universally recognized issue. climate change puts the key elements of human life, such as access to water, food production, health, and use of land and environment, at risk globally (stern & taylor, 2007; edenhofer, 2015; kovats, menne, mcmichael, corvalan & bertollini, 2000). the kyoto protocol was signed to mitigate global warming, committing the countries to reduce the emissions into the atmosphere. in 2015, the paris agreement was signed, whereby the developed countries committed to undertaking expedient and effective measures for the shift to low-carbon technologies, and the developing countries committed, to the best of their abilities, to contribute to reduction of the atmospheric pollution (the paris agreement, 2015). however, even after two years from the paris agreement, the carbon dioxide emissions continue to rise, fossil fuel continues to be the major type of energy used, and the growing demand continues affecting the natural resources, acute ecosystem degradation accelerates, intensity of water stress increases, assessment of the environmental pollution determinants… 173 and air and water pollution continues to increasingly exert the health impacts (oecd, 2017). although lithuania has reduced the environmental pollution indicators, including the ghg emissions as one of the key indicators, since the restoration of its independence, the problem is particularly relevant at present due to the climate change consequences related to the effect of environmental pollution on these consequences. researchers have been analysing the causes, scopes and trends of environmental pollution as a climate change determinant. however, there are very few studies on environmental pollution dedicated to changes in the economic indicators and environmental pollution in individual sectors of economic activity, and they have not been substantiated with empirical data and are focused on identification of prospective common trends. in their research assessing the link between the economic indicators and variation of environmental pollution, the researchers propose taking the ghg amount as the indicator offering the best description of the phenomenon, as this is one of the key pollution indicators globally. the ghg amount includes co2, sulphur oxide (so2), methane (nh4), nitrogen oxide (n2o) and other components according to the base referred to in the kyoto protocol (morley, 2012; im & cho, 2010; jackson, 2009 and others). the research aim is to assess the ghg emissions by individual sectors of economic activity in lithuania and their variations compared to variations in the key economic indicators of the sectors. research objectives: 1. to provide theoretical substantiation of the relevance of the problem of environmental pollution. 2. to identify the economic determinants of the ghg emissions. 3. to identify the link between the ghg emissions by the individual sectors of economic activity and key economic indicators of these sectors. to substantiate the research problem, general scientific research methods, such as literature analysis and synthesis, have been used. the empirical study was conducted by using the statistical information and correlation analysis method. the method of graphic imaging was used to visualize the research results. astrida miceikienė, daiva rimkuvienė, kristina gesevičienė174 research results and discussions at present, the major share of the global population lives in the countries using more resources than can be provided by the ecosystem present on the territories of the countries. efforts to reduce environmental pollution are cost-intensive. the financial resources and investments allocated to these efforts are the main prerequisites enabling long-term changes. in the majority of industrial countries, about 1.5-2% of the gdp are spent on reduction of pollution and preservation of the nature. the more the nation spends on preservation of the environment and reduction of pollution, the lower the damage (patterson iii, 2000). primary greenhouse gases, carbon dioxide (co2), methane (ch4) and nitrogen oxide (n2o), are emitted into the atmosphere as a result of various human activities, e.g., power supply, industry, transport, commercial and residential buildings. moreover, agricultural and forest management activities may have considerable effect on the ghg emissions. in the recent decade, the pace of growth of the ghg emissions has increased. the anthropogenic ghg emissions have increased by 90 % compared to the period 1970 to 2010. in the last decade of the period, the ghg emissions hit the highest mark in human history. co2 emissions from fossil fuel and industrial processes accounted for about 78 % of the total ghg emissions in the recent decades (oecd, 2017). agriculture, deforestation and land use change are other causes of the ghg emissions. their share in the global ghg emissions reached 24 % in 2010 (oecd, 2010). it is sought to contain the increasing environmental pollution by various agreements, international documents which are mandatory to lithuania as well. in december 2012, the kyoto protocol countries adopted an amendment to the kyoto protocol at the climate change conference in doha. under the doha amendment to the kyoto protocol, the countries committed to reduce the ghg emissions to 80 % of what they were in the base year (mostly 1990) from 1 january 2013 to 31 december 2020. this goal is sought by implementation of the adopted legal acts under the eu’s 2020 climate change and energy package. with the view towards the paris agreement, the european council adopted the decision in relation to the eu’s 2030 climate and energy policy framework in 2014. the framework provides for the mandatory target of the eu to cut the ghg emissions inside of the eu by at least 40 % from the 1990 levels by 2030 assessment of the environmental pollution determinants… 175 (the eu’s 2030 climate and energy policy framework, 2014). implementation of the target has been planned eu-wide in the economically most efficient way. the common mandatory target defined in the eu’s 2030 climate and energy policy framework will also create conditions for implementation of the paris agreement. in december 2015, the unfccc countries agreed on the legally binding climate change agreement which determines the ghg emission reduction commitments from 2021. the countries have agreed to pursue joint efforts to keep the average global temperature rise well below 2°c above pre-industrial levels and limit the further global warming to 1.5°c (the paris agreement, 2015). it was planned that the paris agreement would enter into force as soon as ratified by at least 55 countries, covering at least 55 % of the global ghg emissions. the threshold was reached on 5 october 2016, and the paris agreement entered into force in 2016. during the independence period, lithuania decoupled between economic growth and growth of environmental pollution. nonetheless, the level of ghg emissions continues to be fairly high in lithuania (figure 1). this supports the relevance of the present research. figure 1. lithuania’s gdp and ghg emissions index 1990-2015 the common mandatory target defined in the eu’s 2030 climate and energy policy framework will also create conditions for implementation of the paris agreement. in december 2015, the unfccc countries agreed on the legally binding climate change agreement which determines the ghg emission reduction commitments from 2021. the countries have agreed to pursue joint efforts to keep the average global temperature rise well below 2°c above pre-industrial levels and limit the further global warming to 1.5°c (the paris agreement, 2015). it was planned that the paris agreement would enter into force as soon as ratified by at least 55 countries, covering at least 55 % of the global ghg emissions. the threshold was reached on 5 october 2016, and the paris agreement entered into force in 2016. during the independence period, lithuania decoupled between economic growth and growth of environmental pollution. nonetheless, the level of ghg emissions continues to be fairly high in lithuania (figure 1). this supports the relevance of the present research. figure 1. lithuania’s gdp and ghg emissions index 1990-2015 source: information by the ministry of environment of the republic of lithuania: policies & measures and projections of greenhouse gas emissions in lithuania. to assess the effect of the determinants on variation in the ghg emissions, the present research builds on the links proposed by the intergovernmental panel on climate change and researchers (edenhofer, 2015; miceikienė, a., & čiulevičienė, v. 2016; miceikienė, čiulevičienė, rauluškevičienė, & štreimikienė, 2018; anthony, misselbrook, chadwick, gdp index ghg emissions index in de x (1 99 0 = 10 0) s o u r c e : information by the ministry of environment of the republic of lithuania: policies & measures and projections of greenhouse gas emissions in lithuania. astrida miceikienė, daiva rimkuvienė, kristina gesevičienė176 to assess the effect of the determinants on variation in the ghg emissions, the present research builds on the links proposed by the intergovernmental panel on climate change and researchers (edenhofer, 2015; miceikienė & čiulevičienė, 2016; miceikienė, čiulevičienė, rauluškevičienė, & štreimikienė, 2018; anthony, misselbrook, chadwick, moorby, crompton, topp & williams, 2018 and others), interlinking the ghg emissions, direct factors, main factors and policies as well as measures. production and consumption growth per capita are one of the key factors promoting growing global ghg emissions. average global economic growth expressed in gdp per capita increased by 100% in the period 1970 to 2010 (ar5 synthesis report, ipcc, 2014). despite the decreasing energy intensity in the developed and large developing countries largely stimulated by changes in technology, economic structures, combination of diverse energy sources, global energy consumption per capita in the period 1970 to 2010 still increased by 130 % as a result of the population growth. population growth promotes increase in the ghg emissions worldwide. global population growth was 87 % in the period 1970 to 2010. ageing, household size and other demographic changes have indirect effect on the amount of emissions, but this effect is lower than the direct effect caused by the change in the population size (oecd, 2017). technological innovations and their dissemination promote general economic growth, but also determine economic intensity of production and carbon intensity of energy. choices for the infrastructure have a long-term effect on emissions, as the infrastructure and technologies chosen by the industrial countries after the world war ii continue to inf luence present global ghg amounts. robotization transforms human work, new-generation technological innovations are implemented, the number of people occupied in individual sectors of economic activity is decreasing. however, there is the question whether decrease of environmental pollution in the robotization process can be associated with the changes in the number of employed populations. according to b. morley (2012), investments into environmental protection are also a very important indicator and should be included into the assessment of environmental pollution. on one hand, the variable of investments into environmental pollution would be expected to have a negative connection, as the increasing investments would facilitate access to more advanced, energy-saving production technologies. on the other hand, with the emissions into the atmosphere increasing, investments into environmental protection should be in assessment of the environmental pollution determinants… 177 creased up to a certain breakeven point representing the level, from which the amount of pollutants starts decreasing. environmental taxes are considered to be one of the available ways to address the ghg issue (miceikienė et al., 2018; cherry, kallbekken & kroll, 2012; čiulevičienė & kožuch, 2015; ekins & speck, 2011; wu & tal, 2018). the principles of economics also suggest that reducing the amount of emissions to the degree that the marginal utility of reduction is equal to the marginal costs is the most economically efficient way to reduce the ghg emissions (gillingham & stock, 2018). the research methodology and the course of the research process when considering the processes taking place in the surrounding environment, it is important to realize the cause-and-effect relationships between the state of the environment and the processes inf luencing it, have reliable indicators available, and know how apply the environmental measures. in order to analyse environmental pollution and processes related to the phenomenon and happening around us, it is necessary to understand the cause and effect relationships between the environmental condition and processes acting on it, have reliable indicators, and know how to apply environmental measures. the research methodology builds on the cause-and-effect relationship, where the country’s economic indicators determining the changes in the environmental pollution are the cause, and the ghg emission is the effect. the research deals with the case of lithuania. research period: 2008–2016. the present research analyses the link between the ghg emission and gdp, employment rate, investments, environmental taxes in individual sectors of economic activity. independent variables were selected on the basis of scientific literature (čiulevičienė & kożuch, 2015; miceikienė et al., 2018; wu & tal, 2018). the research data were taken from the database of statistics lithuania. to assess the link between the ghg emission and other variables, the paircorrelation method has been employed. in view of the nature of the data used in the study, the pair correlations were subject to assessment based on the spearman’s rank correlation coefficient. the spearman’s correlation coefficient shows the strength of the monotonic relationship, whether linear or not, between the observed variables. in contrast to the pearson correlation coeffiastrida miceikienė, daiva rimkuvienė, kristina gesevičienė178 cient, the spearman’s correlation coefficient is recommended for interval variables, for which the assumption of normality is not satisfied. the data were analysed using statistical package r version 3.4.0 (r core team, 2017). research results carbon dioxide is the main ghg in lithuania. in 2017, the actual co2 emissions, excluding the contribution of the land use, purpose change, and forestry sector (lupcf), was lower compared to 1990 by 63.3 %. compared to 2014, the co2 emissions increased by 2.1 %, including the lupcf, and by 17.5 % excluding the lupcf. energy sector was the major source of the co2 emissions and accounts for about 79.3 % share in the total co2 emissions. compared to 2014, the co2 emissions by the energy sector increased slightly (by 0.004 %) in 2015, the co2 emissions by the energy companies reduced by 0.8 %, while the co2 emissions by transport increased by 5.5 %. methane was the second ghg by its magnitude, accounting for the 16.8 % share in the country’s total ghg emissions (excluding the lupcf). the major sources of methane emissions were the agricultural sector, accounting for the 56 % share in 2015; waste sector – 29 %, and volatile emissions from petroleum and natural gas activity – 9 %. the ch4 emissions in agriculture were generated by fermentation in the intestine of livestock and manure management, accounting for the 48 % and 8 % shares respectively in the country’s total ch4 emissions (excluding the lupcf). nitrogen suboxide accounted for the 15.4 % share in the country’s total ghg emissions (excluding the lupcf). agriculture was the main source of n2o, accounting for the 85 % share in the total n2o emissions in 2015. compared to 2014, n2o by the agricultural sector increased by 2.4 %. the second major source of n2o is nitric acid production. it accounted for the 8 % share in the total n2o emissions (lietuvos šiltnamio efektą sukeliančių dujų tendencijos europos sąjungos (eu-27) kontekste, 2011). in 2015, the share of f luorinated gases in the country’s total ghg emissions was 2.4 %. within the 1993 –2015 period, the f luorinated gas emissions increased considerably. the main driver of this upward trend was the replacement of the ozone depleting substances (ods) with f luorinated gases in many areas of application. assessment of the environmental pollution determinants… 179 in the period analysed, the largest ghg emissions were generated by transportation and storage activities (h), the smallest – mining and quarrying (b). the highest gdp and employment rates were generated in the financial and insurance economic activity (k) branch, the lowest – in the mining and quarrying (b) branch. the largest amounts of environmental taxes are paid by wholesale and retail trade businesses and repair of motor vehicles and motorcycles businesses (g), the smallest – by mining and quarrying businesses (b). it can be noticed that the agriculture, forestry and fishing businesses (a), transportation and storage businesses (h) and manufacturing (c) generated the highest ghg emissions in the period analysed. moreover, the data analysis has shown that, in the period 2008-2016, generation of the ghg emissions increased in agriculture, forestry and fishing and, in particular, in transportation and storage businesses. minor downward trends can be noticed in other branches (figure 2). analysis of the strength of the relationship between the variables by branches (table 1), in the case of agriculture, forestry and fishing (a), has suggested positive and medium relationship between the ghg and gdp as well as taxes. in the case of water supply; sewerage, waste management and remediation activities (e), statistically significant and strong negative relationship has been registered between the ghg emissions and gdp, and negative relationship between the ghg emissions and investments. in the case of activities of wholesale and retail trade and repair of motor vehicles and motorcycles (g), medium positive relationship between the ghg and employment rates has been registered. in the case of construction (f), there is a negative relationship of medium strength between the ghg emissions and environmental taxes. in the case of transportation and storage activity (h), there is a strong positive relationship between the ghg emissions and gdp, employment rate and investments. figure 2. ghg emissions in economic activities (kt c02 eq) figure 2. ghg emissions in economic activities a – agriculture, forestry and fishing, b – mining and quarrying, c – manufacturing, d – electricity, gas, steam and air conditioning supply, e – water supply; sewerage, waste management and remediation activities, f – construction, g – wholesale and retail trade; repair of motor vehicles and motorcycles, h – transportation and storage, k – financial and insurance activity. source: made by the authors, information by statistics lithuania: official statistics portal. analysis of the strength of the relationship between the variables by branches (table 1), in the case of agriculture, forestry and fishing (a), has suggested positive and medium relationship between the ghg and gdp as well as taxes. in the case of water supply; sewerage, waste management and remediation activities (e), statistically significant and strong negative relationship has been registered between the ghg emissions and gdp, and negative relationship between the ghg emissions and investments. in the case of activities of wholesale and retail trade and repair of motor vehicles and motorcycles (g), medium positive relationship between the ghg and employment rates has been registered. in the case of construction (f), there is a negative relationship of medium strength between the 0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000 10000000 2008 2009 2010 2011 2012 2013 2014 2015 2016 a c h e 0 50000 100000 150000 200000 250000 300000 350000 2008 2009 2010 2011 2012 2013 2014 2015 2016 b f g k a – agriculture, forestry and fishing, b – mining and quarrying, c – manufacturing, d – electricity, gas, steam and air conditioning supply, e – water supply; sewerage, waste management and remediation activities, f – construction, g – wholesale and retail trade; repair of motor vehicles and motorcycles, h – transportation and storage, k – financial and insurance activity. s o u r c e : made by the authors, information by statistics lithuania: official statistics portal. assessment of the environmental pollution determinants… 181 table 1. the spearman’s correlation coefficients of the ghg emissions and other variables economic activity correlation coefficient and p –value gdp employment rate investments environmental taxes a 0.6883 (0.0424) 0.3000 (0.4328) 0.1333 (0.7324) 0.6833 (0.0424) b 0.0500 (0.8984) 0.2167 (0.5755) -0.1833 (0.6368) -0.4770 (0.1942) c 0.1333 (0.7324) 0.2333 (0.5457) 0.3667 (0.3317) 0.3000 (0.4328) e -0.9000 (0.0009) -0.5167 (0.1544) -0.6000 (0.0876) -0.4000 (0.2861) f -0.1667 (0.6682) 0.3500 (0.3558) 0.0167 (0.9661) -0.7667 (0.0159) g 0.0667 (0.8647) 0.7000 (0.0358) --0.3500 (0.3558) h 0.8833 (0.0016) 0.8833 (0.0016) 0.8000 (0.0096) -0.4500 (0.2242) k -0.5167 (0.1544) -0.4667 (0.2054) ---0.2000 (0.6059) a – agriculture, forestry and fishing, b – mining and quarrying, c – manufacturing, d – electricity, gas, steam and air conditioning supply, e – water supply; sewerage, waste management and remediation activities, f – construction, g – wholesale and retail trade; repair of motor vehicles and motorcycles, h – transportation and storage, k – financial and insurance activity. s o u r c e : made by the authors, information by statistics lithuania: official statistics portal. the presented results suggest that, in the cases of b, c and k, the correlation coefficients are statistically insignificant. the correlation analysis has suggested the conclusion that no common trends among all the economic activities have been found for the ghg emissions and their determinants in lithuania. the environmental taxes do not perform the goals set for these taxes, and positive effect of the investments into environmental protection was generated only in the water supply; sewerage, waste management and remediation activities. whereas no statistically significant relationship has been found in certain cases, the research needs to be continued, and other determinants of the increasing ghg emissions need to be explored. astrida miceikienė, daiva rimkuvienė, kristina gesevičienė182  conclusions and recommendations 1. environmental pollution measured as the ghg emissions has increased by 90 % in the recent decade compared to the period 1970 to 2010 and was the largest in the human history. in lithuania, the ghg emissions decreased compared to the beginning of the independence, but the problem of pollution volumes remains relevant. the largest polluters are the transportation, manufacturing and agricultural sectors. 2. the researchers analysing the causes of the increase in the ghg emissions point at the following main economic indicators: gdp, employment rates, investments, and environmental taxes. the present research has analysed the effect of these factors on the ghg emissions in individual sectors of economic activity. 3. the main ghg in lithuania are carbon dioxide accounting for about 64% share in the total ghg emissions. methane is the second ghg by magnitude, accounting for % of the country’s total ghg emissions. nitrogen suboxide accounts for 15 % of the country’s total ghg emissions. in the period analysed, the highest level of the ghg emissions was generated by the transportation and storage businesses, the lowest – mining and quarrying activities. 4. comparison of the ghg emissions of the main economic activities in lithuania to the economic indicators of the respective activities has shown no common trends among the activities for the ghg emissions and their determinants. the existing environmental taxes do not perform the goals set or these taxes, and positive effect of the investments into environmental protection was generated only in the water supply; sewerage, waste management and remediation activities. in the majority of economic activities, no significant relationship between the covered indicators has been found; therefore, further research is needed to identify the factors which determine the increase in the ghg emissions. assessment of the environmental pollution determinants… 183  references anthony, s., misselbrook, t., chadwick, d., moorby, j., crompton, l., topp, k., & williams, a. 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(2018). from pollution charge to environmental protection tax: a comparative analysis of the potential and limitations of china’s new environmental policy initiative. journal of comparative policy analysis: research and practice, 20(2), 223-236. http://dx.doi.org/10.1080/13876988.2017.1361597. for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other 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accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 2 date of submission: december 27, 2016; date of acceptance: january 17, 2017. * contact information: bodamichal@hotmail.com, cracow university of economics, rakowicka 20c/182, 31-510 kraków, poland, phone: +48887622580. boda, m. (2016). the impact of the 2007–2009 financial crisis on risk management in credit institutions. copernican journal of finance & accounting, 5(2), 45–56. http://dx.doi.org/10.12775/ cjfa.2016.014 michał boda* cracow university of economics the impact of the 2007–2009 financial crisis on risk management in credit institutions keywords: risk, risk management, r apm models, hurdle rate. j e l classification: g19, g21, g32. abstract: risk and risk management are a key aspect of the financial management of the bank. in the banking business since the mid-70s of the twentieth century, the risk continues to increase. the result of that excessive growth was the financial crisis in the years 2007–2009. due to underestimation, lack of adequate and updated risk models, many financial institutions were on edge of bankruptcy due to insufficient funds needed to cover the losses. the financial crisis has highlighted many of the weaknesses of a regulatory nature in the functioning of the global financial system, especially the banking system. in order to reduce occurrence of future similar negative phenomena, the basel committee on banking supervision has decided to reform the banking system. as a result, basel iii was created. crr regulation and directive crd put particular emphasis on height of own funds and risk-weighted assets. all these have showed many weaknesses of the banking system, from which health and status is determined the whole economy. this paper will focus on the impact of the 2007–2009 financial crisis on risk management effectiveness in credit institutions. there will be presented the possibility of an integrated risk measurement and management. the most known methods of integrated assessment are ror ac and r aroc models, which are both used for the evaluation of the entire bank, as well as business units, or individual transactions. ror ac michał boda46 and r aroc models are the basic concepts of measuring the effectiveness of risk. there will be also discussed hurdle rate and its potential impact on the economy.  introduction in times of globalization and dynamic development of technology and society, the financial markets and the entire economy, constantly evolve. but sometimes those changes instead of improving the overall situation, lead to a negative outcome, which ends with a financial crisis. a very good example of this situation is the recent financial crisis of 2007–2009, which was caused, among others, by uncontrolled expansion of financial innovations, badly conducted monetary policy, the collapse of ethical and accounting standards, erroneous deregulations, and finally, excessive use of leverage (płókarz, 2013, pp. 350– 359). all of the above factors have revealed a lot of weaknesses in the banking systems, which affected the health and overall conditions of the whole economy. financial problems of large financial institutions have caused collapses on the stock exchanges, recessions on the financial markets and declines in the real economy (płókarz, 2013, pp. 355–356). the financial crisis has highlighted a number of weaknesses of a regulatory nature in the functioning of the global financial system, especially the banking system. to reduce the risk of future similar negative events, a number of new regulations have been introduced, as such basel iii or dodd-frank act, which have shaped the new, post-crisis model of banking and financial markets (płókarz, 2013, pp. 350–359; komisja nadzoru finansowego, 2016a). according to the basel iii agreement, the most important changes that can be found in the crd iv / crr package, include (płókarz, 2013, p. 48; komisja nadzoru finansowego, 2016a): ■ changes to the crd iv: defining issues related to corporate governance and risk management and improving the monitoring of market and credit risk by the competent supervisory authorities, ■ changes in crr: higher capital requirements, limit of leverage, more restrictive liquidity requirements. the crd iv and crr regulation came into force on january 1st, 2014. the new law aims at strengthening regulation of the financial sector and create a more transparent and safer financial system (komisja nadzoru finansowego, 2016b). the impact of the 2007–2009 financial crisis… 47 the main objective of the changes that have been introduced to banks’ own funds by regulation crr is to improve the quality of own funds. the basel committee on banking supervision has determined that the tier i capital will be used to absorb current losses, and the purpose of tier ii capital will cater to creditors in case of bankruptcy or insolvency of the institution. furthermore, basel committee on banking supervision has decided to abolish capital tier iii, which was used to cover risk in the trading book. thus, the credit institution’s own funds consist of capital tier i and tier ii (koleśnik, 2014, p. 15). crd directive introduces many additional buffers, such as conservation, countercyclical, g-sii, o-sii, systemic risk, which will increase the cet 1 (koleśnik, 2014, p. 32). basel committee on banking supervision has also regulated the leverage ratio. since 2019, the maximum of leverage ratio will be 3% and liquidity of credit institutions in the form of liquidity coverage ratio (lcr, m2), relating to the short-term liquidity and net stable funding ratio (nsfr, m4) relating to long-term liquidity (basel committee on banking supervision, 2013, 2014). the overriding aim of the credit institution is to maximize its value while maintaining the desired relationship between the achieved financial results and risk exposures. involvement in the balance sheet and off-balance sheet operations creates the need to identify an acceptable level of risk. the consequence of bank risk exposures are reserves, write-off of impairment, and capital. risk management constitutes one of the basic elements of management of credit institutions, primarily in the context of the impact on the financial sector. it is a process in which in a methodical way, are solved occurring in the banking business issues with the risk in such a way that the activity as a whole and individual fields, bring sustainable avail. the risk management process consists of four successive stages (kochaniak, 2012, pp. 239–240): ■ identification – risks indication and its main sources, ■ measurement – use of models and systems which are a source of information about the scale of exposure of particular units and whole institutions, ■ monitoring and review – ensuring compatibility between established risk exposure and risk that occur in point of fact, ■ verification – ensuring efficient and safe operation of the credit institution and effective risk management. the risk management process subject to individual adaptation to needs of each institution. entities with complex asset structure and significantly involved in off-balance sheet operations will have more complicated organizamichał boda48 tional and procedural solutions. small banks, which business scope is rather limited, use a simpler method of risk management. the scale of risk exposure decides about importance of organizational and procedural solutions and a size of regulatory or internal capital (kochaniak, 2012, p. 241). in accordance with the literature, and administrative division of risks in banks business, it can be distinguish two pillars of the risk: ■ the first pillar – basic risks: credit risk, liquidity risk, operational risk, market risk, ■ the second pillar – risk types which are particularly relevant to banks due to their business profile and these that may arise as a result of changes in economic environment, e.g. risk of reputational, business, concentration, legal, strategic, etc. listed above risks do not exhaust entire gamut types of risks with which we can meet in the banking business, but these ones belong to the group of the most commonly encountered in credit institutions business. all considered as substantial risk types have to find coverage in the regulatory or internal capital of a credit institution. the effectiveness of risk management determines the position of banks in the sector, while all their weaknesses are the source of potential financial and economic crises. precisely defined and properly functioning internal organizational structure increases the safety of the entire bank. furthermore awareness of responsibility reduces the risk resulting from mistakes (kochaniak, 2012, pp. 243, 251–252). the research methodology and the course of the research process as a result of a combination of these two variables, i.e. own funds and risk, a return on equity models, but also taking into account the risk involved in the ordinary course of business, are obtained. these are so-called risk adjustment performance measures (rapm) models. thanks to these indicators, it is possible to observe the relationship between the risk incurred by a credit institution, and the obtained effects of business activity. in the literature, there is not one a commonly used algorithm for calculating such indicators, but the formula in the general form can be represented as follows (kałużny, 2012, p. 237): in accordance with the literature, and administrative division of risks in banks business, it can be distinguish two pillars of the risk:  the first pillar basic risks: credit risk, liquidity risk, operational risk, market risk,  the second pillar risk types which are particularly relevant to banks due to their business profile and these that may arise as a result of changes in economic environment, e.g. risk of reputational, business, concentration, legal, strategic, etc. listed above risks do not exhaust entire gamut types of risks with which we can meet in the banking business, but these ones belong to the group of the most commonly encountered in credit institutions business. all considered as substantial risk types have to find coverage in the regulatory or internal capital of a credit institution. the effectiveness of risk management determines the position of banks in the sector, while all their weaknesses are the source of potential financial and economic crises. precisely defined and properly functioning internal organizational structure increases the safety of the entire bank. furthermore awareness of responsibility reduces the risk resulting from mistakes (kochaniak, 2012, pp. 243, 251-252). the research methodology and the course of the research process as a result of a combination of these two variables, i.e. own funds and risk, a return on equity models, but also taking into account the risk involved in the ordinary course of business, are obtained. these are so-called risk adjustment performance measures (rapm) models. thanks to these indicators, it is possible to observe the relationship between the risk incurred by a credit institution, and the obtained effects of business activity. in the literature, there is not one a commonly used algorithm for calculating such indicators, but the formula in the general form can be represented as follows (kałużny, 2012, p. 237): ���� � ��������������������������� (1) the first indicator of this group is a risk adjusted return on capital (raroc) (kałużny 2012, p. 237): ����� ���������������������������� ∗ 100% (2) another indicator is a return on risk adjusted capital (rorac) (kałużny, 2012, p. 238): ����� � ������������������������ ∗ 100% (3) where nopat is net operating profit after tax. in turn, the denominator is the capital requirement for which is assumed regulatory or economic capital (kałużny, 2012, p. 238). . (1) the impact of the 2007–2009 financial crisis… 49 the first indicator of this group is a risk adjusted return on capital (raroc) (kałużny 2012, p. 237): in accordance with the literature, and administrative division of risks in banks business, it can be distinguish two pillars of the risk:  the first pillar basic risks: credit risk, liquidity risk, operational risk, market risk,  the second pillar risk types which are particularly relevant to banks due to their business profile and these that may arise as a result of changes in economic environment, e.g. risk of reputational, business, concentration, legal, strategic, etc. listed above risks do not exhaust entire gamut types of risks with which we can meet in the banking business, but these ones belong to the group of the most commonly encountered in credit institutions business. all considered as substantial risk types have to find coverage in the regulatory or internal capital of a credit institution. the effectiveness of risk management determines the position of banks in the sector, while all their weaknesses are the source of potential financial and economic crises. precisely defined and properly functioning internal organizational structure increases the safety of the entire bank. furthermore awareness of responsibility reduces the risk resulting from mistakes (kochaniak, 2012, pp. 243, 251-252). the research methodology and the course of the research process as a result of a combination of these two variables, i.e. own funds and risk, a return on equity models, but also taking into account the risk involved in the ordinary course of business, are obtained. these are so-called risk adjustment performance measures (rapm) models. thanks to these indicators, it is possible to observe the relationship between the risk incurred by a credit institution, and the obtained effects of business activity. in the literature, there is not one a commonly used algorithm for calculating such indicators, but the formula in the general form can be represented as follows (kałużny, 2012, p. 237): ���� � ��������������������������� (1) the first indicator of this group is a risk adjusted return on capital (raroc) (kałużny 2012, p. 237): ����� ���������������������������� ∗ 100% (2) another indicator is a return on risk adjusted capital (rorac) (kałużny, 2012, p. 238): ����� � ������������������������ ∗ 100% (3) where nopat is net operating profit after tax. in turn, the denominator is the capital requirement for which is assumed regulatory or economic capital (kałużny, 2012, p. 238). . (2) another indicator is a return on risk adjusted capital (rorac) (kałużny, 2012, p. 238): in accordance with the literature, and administrative division of risks in banks business, it can be distinguish two pillars of the risk:  the first pillar basic risks: credit risk, liquidity risk, operational risk, market risk,  the second pillar risk types which are particularly relevant to banks due to their business profile and these that may arise as a result of changes in economic environment, e.g. risk of reputational, business, concentration, legal, strategic, etc. listed above risks do not exhaust entire gamut types of risks with which we can meet in the banking business, but these ones belong to the group of the most commonly encountered in credit institutions business. all considered as substantial risk types have to find coverage in the regulatory or internal capital of a credit institution. the effectiveness of risk management determines the position of banks in the sector, while all their weaknesses are the source of potential financial and economic crises. precisely defined and properly functioning internal organizational structure increases the safety of the entire bank. furthermore awareness of responsibility reduces the risk resulting from mistakes (kochaniak, 2012, pp. 243, 251-252). the research methodology and the course of the research process as a result of a combination of these two variables, i.e. own funds and risk, a return on equity models, but also taking into account the risk involved in the ordinary course of business, are obtained. these are so-called risk adjustment performance measures (rapm) models. thanks to these indicators, it is possible to observe the relationship between the risk incurred by a credit institution, and the obtained effects of business activity. in the literature, there is not one a commonly used algorithm for calculating such indicators, but the formula in the general form can be represented as follows (kałużny, 2012, p. 237): ���� � ��������������������������� (1) the first indicator of this group is a risk adjusted return on capital (raroc) (kałużny 2012, p. 237): ����� ���������������������������� ∗ 100% (2) another indicator is a return on risk adjusted capital (rorac) (kałużny, 2012, p. 238): ����� � ������������������������ ∗ 100% (3) where nopat is net operating profit after tax. in turn, the denominator is the capital requirement for which is assumed regulatory or economic capital (kałużny, 2012, p. 238). (3) where nopat is net operating profit after tax. in turn, the denominator is the capital requirement for which is assumed regulatory or economic capital (kałużny, 2012, p. 238). a combination of raroc and rorac is a risk-adjusted return on risk adjusted capital (rarorac) (kałużny, 2012, p. 238): a combination of raroc and rorac is a risk-adjusted return on risk adjusted capital (rarorac) (kałużny, 2012, p. 238): ������� � ��������������������������������������� ∗ 100% (4) another approach to measuring the effectiveness and risks which occurs in the literature, are top-down and bottom-up models (iwanicz-drozdowska, 2012, pp. 247, 252). top-down models assume allocation of economic or regulatory capital. these models are also called earnings volatility models, because they use earnings at risk. 2 basic models can be extracted (iwanicz-drozdowska, 2012, p. 247): �������� � ������ �������������������∗���������������������������������� ∗ 100% (5) ���������� ��������������������������������������������������� ∗ 100% (6) in the bottom-up models for calculation of economic capital is used value at risk. these type of models are also known as asset volatility models. indicators have the following form (iwanicz-drozdowska, 2012, pp. 252-253): ����� � ���������������������� (7) ����� � ������������������������������������ (8) based on the above information it can be concluded that there is no single, universal formula for rorac or raroc. the outcome of the research process and conclusions rorac indicators are presented in table 1. in this case, rorac has been calculated as the ratio between the net profit and different heights of capital in the 9 largest credit institutions in poland in terms of assets on a consolidated basis. in all surveyed banks can be observed decreasing trend of rorac. this can be justified by the new regulations, i.e. basel iii, and the consequent need to increase the quantity and quality of own funds of credit institutions, and fuller risks coverage by the own funds. furthermore as a result of these calculations can be observed how competent supervisory authorities may affect the bank's profitability adjusted for risk. in order to fulfil these requirements and maintain profitability at current levels, credit institutions may undertake various activities, such as increase capital by issuing new shares, plough current profit back, or decrease interest rate on deposits. while on the assets side they can reduce credits and loans supply in order to reduce risk-weighted assets and accordingly capital requirement, as well as rise lending rates. ad. (4) another approach to measuring the effectiveness and risks which occurs in the literature, are top-down and bottom-up models (iwanicz-drozdowska, 2012, pp. 247, 252). top-down models assume allocation of economic or regulatory capital. these models are also called earnings volatility models, because they use earnings at risk. 2 basic models can be extracted (iwanicz-drozdowska, 2012, p. 247): a combination of raroc and rorac is a risk-adjusted return on risk adjusted capital (rarorac) (kałużny, 2012, p. 238): ������� � ��������������������������������������� ∗ 100% (4) another approach to measuring the effectiveness and risks which occurs in the literature, are top-down and bottom-up models (iwanicz-drozdowska, 2012, pp. 247, 252). top-down models assume allocation of economic or regulatory capital. these models are also called earnings volatility models, because they use earnings at risk. 2 basic models can be extracted (iwanicz-drozdowska, 2012, p. 247): �������� � ������ �������������������∗���������������������������������� ∗ 100% (5) ���������� ��������������������������������������������������� ∗ 100% (6) in the bottom-up models for calculation of economic capital is used value at risk. these type of models are also known as asset volatility models. indicators have the following form (iwanicz-drozdowska, 2012, pp. 252-253): ����� � ���������������������� (7) ����� � ������������������������������������ (8) based on the above information it can be concluded that there is no single, universal formula for rorac or raroc. the outcome of the research process and conclusions rorac indicators are presented in table 1. in this case, rorac has been calculated as the ratio between the net profit and different heights of capital in the 9 largest credit institutions in poland in terms of assets on a consolidated basis. in all surveyed banks can be observed decreasing trend of rorac. this can be justified by the new regulations, i.e. basel iii, and the consequent need to increase the quantity and quality of own funds of credit institutions, and fuller risks coverage by the own funds. furthermore as a result of these calculations can be observed how competent supervisory authorities may affect the bank's profitability adjusted for risk. in order to fulfil these requirements and maintain profitability at current levels, credit institutions may undertake various activities, such as increase capital by issuing new shares, plough current profit back, or decrease interest rate on deposits. while on the assets side they can reduce credits and loans supply in order to reduce risk-weighted assets and accordingly capital requirement, as well as rise lending rates. ad (5) (6) a combination of raroc and rorac is a risk-adjusted return on risk adjusted capital (rarorac) (kałużny, 2012, p. 238): ������� � ��������������������������������������� ∗ 100% (4) another approach to measuring the effectiveness and risks which occurs in the literature, are top-down and bottom-up models (iwanicz-drozdowska, 2012, pp. 247, 252). top-down models assume allocation of economic or regulatory capital. these models are also called earnings volatility models, because they use earnings at risk. 2 basic models can be extracted (iwanicz-drozdowska, 2012, p. 247): �������� � ������ �������������������∗���������������������������������� ∗ 100% (5) ���������� ��������������������������������������������������� ∗ 100% (6) in the bottom-up models for calculation of economic capital is used value at risk. these type of models are also known as asset volatility models. indicators have the following form (iwanicz-drozdowska, 2012, pp. 252-253): ����� � ���������������������� (7) ����� � ������������������������������������ (8) based on the above information it can be concluded that there is no single, universal formula for rorac or raroc. the outcome of the research process and conclusions rorac indicators are presented in table 1. in this case, rorac has been calculated as the ratio between the net profit and different heights of capital in the 9 largest credit institutions in poland in terms of assets on a consolidated basis. in all surveyed banks can be observed decreasing trend of rorac. this can be justified by the new regulations, i.e. basel iii, and the consequent need to increase the quantity and quality of own funds of credit institutions, and fuller risks coverage by the own funds. furthermore as a result of these calculations can be observed how competent supervisory authorities may affect the bank's profitability adjusted for risk. in order to fulfil these requirements and maintain profitability at current levels, credit institutions may undertake various activities, such as increase capital by issuing new shares, plough current profit back, or decrease interest rate on deposits. while on the assets side they can reduce credits and loans supply in order to reduce risk-weighted assets and accordingly capital requirement, as well as rise lending rates. ad. in the bottom-up models for calculation of economic capital is used value at risk. these type of models are also known as asset volatility models. indicators have the following form (iwanicz-drozdowska, 2012, pp. 252–253): a combination of raroc and rorac is a risk-adjusted return on risk adjusted capital (rarorac) (kałużny, 2012, p. 238): ������� � ��������������������������������������� ∗ 100% (4) another approach to measuring the effectiveness and risks which occurs in the literature, are top-down and bottom-up models (iwanicz-drozdowska, 2012, pp. 247, 252). top-down models assume allocation of economic or regulatory capital. these models are also called earnings volatility models, because they use earnings at risk. 2 basic models can be extracted (iwanicz-drozdowska, 2012, p. 247): �������� � ������ �������������������∗���������������������������������� ∗ 100% (5) ���������� ��������������������������������������������������� ∗ 100% (6) in the bottom-up models for calculation of economic capital is used value at risk. these type of models are also known as asset volatility models. indicators have the following form (iwanicz-drozdowska, 2012, pp. 252-253): ����� � ���������������������� (7) ����� � ������������������������������������ (8) based on the above information it can be concluded that there is no single, universal formula for rorac or raroc. the outcome of the research process and conclusions rorac indicators are presented in table 1. in this case, rorac has been calculated as the ratio between the net profit and different heights of capital in the 9 largest credit institutions in poland in terms of assets on a consolidated basis. in all surveyed banks can be observed decreasing trend of rorac. this can be justified by the new regulations, i.e. basel iii, and the consequent need to increase the quantity and quality of own funds of credit institutions, and fuller risks coverage by the own funds. furthermore as a result of these calculations can be observed how competent supervisory authorities may affect the bank's profitability adjusted for risk. in order to fulfil these requirements and maintain profitability at current levels, credit institutions may undertake various activities, such as increase capital by issuing new shares, plough current profit back, or decrease interest rate on deposits. while on the assets side they can reduce credits and loans supply in order to reduce risk-weighted assets and accordingly capital requirement, as well as rise lending rates. ad (7) michał boda50 a combination of raroc and rorac is a risk-adjusted return on risk adjusted capital (rarorac) (kałużny, 2012, p. 238): ������� � ��������������������������������������� ∗ 100% (4) another approach to measuring the effectiveness and risks which occurs in the literature, are top-down and bottom-up models (iwanicz-drozdowska, 2012, pp. 247, 252). top-down models assume allocation of economic or regulatory capital. these models are also called earnings volatility models, because they use earnings at risk. 2 basic models can be extracted (iwanicz-drozdowska, 2012, p. 247): �������� � ������ �������������������∗���������������������������������� ∗ 100% (5) ���������� ��������������������������������������������������� ∗ 100% (6) in the bottom-up models for calculation of economic capital is used value at risk. these type of models are also known as asset volatility models. indicators have the following form (iwanicz-drozdowska, 2012, pp. 252-253): ����� � ���������������������� (7) ����� � ������������������������������������ (8) based on the above information it can be concluded that there is no single, universal formula for rorac or raroc. the outcome of the research process and conclusions rorac indicators are presented in table 1. in this case, rorac has been calculated as the ratio between the net profit and different heights of capital in the 9 largest credit institutions in poland in terms of assets on a consolidated basis. in all surveyed banks can be observed decreasing trend of rorac. this can be justified by the new regulations, i.e. basel iii, and the consequent need to increase the quantity and quality of own funds of credit institutions, and fuller risks coverage by the own funds. furthermore as a result of these calculations can be observed how competent supervisory authorities may affect the bank's profitability adjusted for risk. in order to fulfil these requirements and maintain profitability at current levels, credit institutions may undertake various activities, such as increase capital by issuing new shares, plough current profit back, or decrease interest rate on deposits. while on the assets side they can reduce credits and loans supply in order to reduce risk-weighted assets and accordingly capital requirement, as well as rise lending rates. ad. (8) based on the above information it can be concluded that there is no single, universal formula for rorac or raroc. the outcome of the research process and conclusions ror ac indicators are presented in table 1. in this case, ror ac has been calculated as the ratio between the net profit and different heights of capital in the 9 largest credit institutions in poland in terms of assets on a consolidated basis. in all surveyed banks can be observed decreasing trend of ror ac. this can be justified by the new regulations, i.e. basel iii, and the consequent need to increase the quantity and quality of own funds of credit institutions, and fuller risks coverage by the own funds. furthermore as a result of these calculations can be observed how competent supervisory authorities may affect the bank’s profitability adjusted for risk. in order to fulfil these requirements and maintain profitability at current levels, credit institutions may undertake various activities, such as increase capital by issuing new shares, plough current profit back, or decrease interest rate on deposits. while on the assets side they can reduce credits and loans supply in order to reduce risk-weighted assets and accordingly capital requirement, as well as rise lending rates. additionally, it is expected employment downsizing. all these factors will affect the real economy. t ab le 1 . r o r a c in di ca to r fo r th e 9 la rg es t c re di t i ns ti tu ti on s in p ol an d in th e ye ar s 20 13 –2 01 5 pk o b an k po ls ki s .a . b an k pe ka o s. a . b an k za ch od ni w b k s. a . m b an k s. a . in g b an k śl ąs ki s .a . g et in n ob le b an k s. a . b an k m ill eni um s .a . b an ku g os po da rk i ży w no śc io w ej s. a . a lio r b an k s. a . b an ki ng se ct or ro r a c i = n et p ro fi t / m in im um c ap it al r eq ui re m en t ( 8% ) • 1 00 % 20 15 17 ,5 9% 25 ,0 5% 28 ,9 8% 23 ,4 4% 24 ,4 4% 1, 49 % 18 ,4 0% 0, 33 % 12 ,5 7% – 20 14 21 ,3 1% 29 ,3 7% 25 ,3 3% 24 ,1 9% 26 ,4 1% 8, 82 % 23 ,0 8% 6, 09 % 17 ,4 6% – 20 13 25 ,7 3% 32 ,2 9% 30 ,1 0% 25 ,6 9% 28 ,5 1% 10 ,6 1% 18 ,2 7% – 14 ,7 7% – ro r a c ii = n et p ro fi t / r ec om m en de d ca pi ta l r eq ui re m en t b y th e po lis h fi na nc ia l s up er vi si on c om m is si on • 1 00 % 20 15 11 ,0 3% 16 ,7 0% 18 ,2 3% 11 ,4 4% 16 ,3 0% 0, 85 % 9, 30 % 0, 21 % 8, 38 % – 20 14 14 ,2 1% 19 ,5 8% 16 ,8 9% 16 ,1 2% 17 ,6 0% 5, 88 % 15 ,3 9% 4, 06 % 11 ,6 4% – ro r a c iii = n et p ro fi t / t he a ct ua l a m ou nt o f o w n fu nd s • 10 0% 20 15 9, 63 % 11 ,3 5% 15 ,8 6% 10 ,8 7% 14 ,2 3% 0, 83 % 8, 80 % 0, 20 % 8, 02 % 7, 20 % 20 14 13 ,1 5% 13 ,5 8% 15 ,6 9% 13 ,2 0% 14 ,9 0% 5, 40 % 12 ,1 2% 3, 52 % 10 ,9 1% 10 ,9 3% 20 13 15 ,1 6% 14 ,0 9% 17 ,3 0% 10 ,6 1% 13 ,2 0% 6, 86 % 10 ,0 6% – 9, 75 % 10 ,4 1% s o u r c e : o w n st ud y. michał boda52 hurdle rate represents the minimum interest rate, which should be achieved by the entity, business line or individual operations in order to create economic profit. it should be noted that the hurdle rate is also sometimes called the minimum acceptable rate of return on a project (marr). to present how hurdle rate works, a 5 different cases are presented in table 2. in the first three cases, the dividend ratio is fixed at 30%, while the requirements in respect of rwa are at a different level in each case. depending on the risk taken by a bank and the method used for estimating rwa (standard method or internal ratings based approach), the hurdle rates (i.e. the minimum interest rate of the product) change their value. in two other cases, i.e. in the fourth and fifth, both dividend ratio and requirements in respect of rwas are subject to change according to the principle “lower risk, lower premium” and vice versa. in this scenario, it can be observed that the type of conducted business and risks taken by credit institutions in a significant extent affect the final minimum interest rate of a new product. table 2. hurdle rate – 5 cases case 1 case 2 case 3 case 4 case 5 new product [pln] 100 risk weighted assets [%] 35% 75% 100% 35% 100% capital requirement [%] 8% total capital requirement [pln] 2,80 6,00 8,00 2,80 8,00 average growth of rwas [%] 4,50% dividend ratio [%] 30% 10% 60% required roe including dividend [%] 6,43% 6,43% 6,43% 5,00% 11,25% profit to achieve roe [pln] 0,18 0,39 0,51 0,14 0,90 margin required [%] 0,22% 0,48% 0,63% 0,17% 1,10% risk cost margin [%] 0,55% cost margin [%] 1,00% hurdle rate (total margin required) [%] 1,77% 2,03% 2,18% 1,72% 2,66% s o u r c e : own study. the impact of the 2007–2009 financial crisis… 53 with a hypothetical credit of pln 300,000, diminishing instalments, repayment period of 30 years, the cumulative interest on credit at an interest rate of 1.72% (case 4) amount to pln 77,615, while at an interest rate of 2.66% (case 5) amount to pln 120,032. the difference between total interest in these cases amounts to pln 42,417 – on average, lower monthly instalments of around pln 118. for example, by depositing into a savings account every month pln 118, at an interest rate of 1.5% per annum, for 30 years, it is possible to achieve an amount of around pln 53,607. this simple example demonstrates how credit institutions activity, how height of rwa and potential margins, which inf luence on interest rates on credits, have a very large impact on the real economy and households. the financial crisis 2007–2009 has contributed to a thorough reconstruction of legal standards regulating financial institutions. the impact of new regulation on the economy is measured by the credit channel, which implies that banks will limit the scale of lending and will increase interest rates on loans. as a consequence this will reduce aggregate demand, employment and will limit the real growth rate of gdp (marcinkowska, 2013, pp. 119–145). to test those effects, various studies have been conducted by regulatory and market authorities, using various methods. however, these studies have important limitations. many assumptions have to be taken, e.g. potential reaction of banks and other market participants and the economic condition at the time of the implementation and application of new standards (bukowski et al., 2014, pp. 62–63). according to the macroeconomic assessment group growth of the capital adequacy ratio by 1 percentage point would lead to an average decline in gdp of 0.22% after 35 quarters since the implementation of the new regulatory system. this means reducing annual gdp growth rate by 0.03 pp. moreover, mag research shows that an increase in the car by 1 pp could lead to a decline in the effective demand for credits by 1.89%, and increase in credit margins by approx. 17 basis points (macroeconomic assessment group, 2010, pp. 2, 5). studies published by the oecd suggests the following negative effects (cournède & slovik, 2011, p. 2): ■ potential increase in credit margins: 15–50 bps, ■ medium-term impact on economic growth: –0.05 to –0.15 pp per year. research of institute of international finance shows (institute of international finance, 2011, p. 12): ■ an increase in the cost of credits by 281 bps over ten years, michał boda54 ■ an average annual decline in gdp: –0.2 pp for the years 2011 to 2020, ■ reduction of jobs by 7.5 million in five years. data analyzed by the international monetary fund suggests that large banks to be able to implement the new basel requirements, would have to increase the share of equity in total assets by 1.3 pp, which would cause the need to increase lending rates by 16 bps. the increase in lending rates would have decreased the rate of change of loans by 1.3% in the long term. the authors point out the fact that the response of banks to the new regulations will vary, depending on the relative economic development. the reason for these differences is the diversity of the cost of raising capital by banks and the price elasticity of demand for credit (cosimano & hakura, 2011, p. 1). experts from oxford economics pointed out that in a number of analytical reports regarding the potential impacts of basel iii on the economy, overly optimistic assumptions are adopted, such as the effect of the credit prices (increase by 0.9–1.3 pp). they have also pointed to the fact that banks may increasingly focus on limiting credit in order to reduce leverage, and the financial market will not offer analogical demand for corporate bonds (oxford economics, 2013, pp. 1–4). those findings cannot be directly compared because they have been achieved by using different research methods, using various variables and performed at different times. moreover, these studies have methodological limitations related among others to the adopted assumptions and simplifications. however, it can be concluded that the empirical studies show a negative (albeit slight) impact of new capital and liquidity regulations on economic growth (bukowski et al., 2014, p. 68). the financial crisis has revealed weakness in global regulation and bank risk management practices. as a result, regulators have taken steps to increase the stability of financial markets and to reduce the negative financial phenomena on the real economy. the main area of new regulations was to strengthen capital and liquidity in global banking. the impact on financial results and balance sheets of banks will depend on: ■ reallocation of capital between different business lines, ■ margin policy (transfer of additional costs to customers), ■ possible cost structure restructuring, ■ risk appetite. in general, there should be reduction in the risk level, but may also occur side effects, e.g. an increase in systemic risk in other, unregulated market seg the impact of the 2007–2009 financial crisis… 55 ments, such as shadow banking. medium-term costs of implementation of those new regulations, and new restrictions may contribute to reducing banks’ activity, and as a result to economic slowdown. the need to increase credit institutions’ capital increases credit crunch risk, which may consequently lead to a decline in investment and higher unemployment. credit institutions which wish to achieve high revenues, have to focus on effective risk management. the key role in decision-making process could be used rapm models and hurdle rate which will provide banks with information on how risk taken may impact on profitability (income) and, consequently, whether it is worthwhile to allocate capital in that particular project.  references basel committee on banking supervision (2013). basel iii: the liquidity coverage ratio and liquidity risk monitoring tools. basel. bank for international settlements, january, http://www.bis.org/publ/bcbs238.pdf (accessed: 31.03.2016). basel committee on banking supervision (2014). basel iii: the net stable funding ratio. basel. bank for international settlements, october, http://www.bis.org/bcbs/ publ/d295.pdf (accessed: 31.03.2016). bukowski, s., flejterski, s., marcinkowska, m., wdowiński, p., zygierewicz, m. (2014). wpływ regulacji sektora bankowego na wzrost gospodarczy – wnioski dla polski. nbp. warszawa. instytut ekonomiczny. materiały i studia, no. 305, https://www. nbp.pl/publikacje/materialy_i_studia/ms305.pdf (accessed: 05.05.2016). cosimano, t.f., hakura, d.s. (2011). bank behavior in response to basel iii: a cross-country analysis. international monetary fund working paper. wp/11/19, may, https:// www.imf.org/external/pubs/ft/wp/2011/wp11119.pdf (accessed: 11.05.2016). cournède, b., slovik, p. (2011). macroeconomic impact of basel iii. organisation for economic co-operation and development. economics department working papers no. 844. eco/wkp(2011)13, february, http://www.keepeek.com/digital-asset-management/oecd/economics/macroeconomic-impact-of-basel-iii_5kghwnhkkjs8-en#page1 (accessed: 12.05.2016). institute of international finance (2011). the cumulative impact on the global economy of changes in the financial regulatory framework, september, https://www.iif. com/file/7080/download?token=cwkxthf b (accessed: 12.05.2016). iwanicz-drozdowska, m. (2012). zarządzanie finansowe bankiem. warszawa: polskie wydawnictwo ekonomiczne, wyd. iii zmienione. kałużny, r. (2012). ocena i analiza sytuacji majątkowo-finansowej. in gospodarowicz a., nosowski a. (ed.) zarządzanie instytucjami kredytowymi (pp. 220–238). warszawa. wydawnictwo c.h. beck. kochaniak, k. (2012). rodzaje ryzyka bankowego i zarządzanie nim. in a. gospodarowicz, a. nosowski (ed.), zarządzanie instytucjami kredytowymi (pp. 239–252). warszawa: wydawnictwo c.h. beck. michał boda56 koleśnik, j. (2014), adekwatność kapitałowa banków, standardy regulacyjne. warszawa: wydawnictwo difin. komisja nadzoru finansowego (2016a). pakiet crd iv / crr – historia i założenia projektu, https://www.knf.gov.pl/crd/pakiet_crd4_historia.html (accessed: 05.01.2016). komisja nadzoru finansowego (2016b). finalny tekst tzw. pakietu crd iv / crr wraz ze zmianami, https://www.knf.gov.pl/finalny_tekst_pakietu.html (accessed: 17.02.2016). macroeconomic assessment group (2010). assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements – final report. basel. bank for international settlements, december, http://www.bis.org/publ/othp12.pdf (accessed: 11.05.2016). marcinkowska, m. (2013). regulation and self-regulation in banking: in search of optimum. bank i kredyt, 44(2), http://bankikredyt.nbp.pl/content/2013/02/ bik_02_2013_01_art.pdf (accessed: 12.05.2016). oxford economics (2013). analyzing the impact of bank capital and liquidity regulations on us economic growth. a report prepared for the clearing house association, april, https://www.theclearinghouse.org/~/media/files/association%20 documents/20130410%20oxford%20economics%20study%20impact%20of%20 bank%20capital%20and%20liquidity%20regulations%20on%20us%20economy. pdf (accessed: 12.05.2016). płókarz, r. (2013). globalne rynki finansowe, praktyka funkcjonowania. warszawa: wydawnictwo naukowe pwn. copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: darius@econ.uni.torun.pl, aniap@doktorant.umk.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34. dariusz piotrowski, anna piotrowska* uniwersytet mikołaja kopernika w toruniu ilościowe luzowanie polityki pieniężnej na przykładzie fed – istota, cele i skutki słowa kluczowe: ilościowe luzowanie, kryzys, polityka pieniężna. abstrakt: w reakcji na kryzys rezerwa federalna przeprowadziła operację ilościowego luzowania w celu wsparcia gospodarki narodowej. w pracy zbadano skuteczność ekspansywnej polityki pieniężnej realizowanej przez fed. stwierdzono niewielkie efekty gospodarcze takich działań oraz poważne zagrożenie inflacją. quantitative easing – idea, targets and results keywords: crisis, monetary policy, quantitative easing. abstract: in reaction for a crisis fed implemented quantitative easing to stimulate national economy. in this paper there were searched the efficiency of expansionary monetary policy used by central bank. it was stated slight economic results of those actions and seriously threat of inflation. translated by dariusz piotrowski  wstęp kryzys gospodarczy i finansowy, który odczuwają od kilku lat miliony osób, tysiące firm i dziesiątki krajów, jest zjawiskiem rzadko obserwowanym. z racji doi: 10.12775/cjfa.2012.009 http://dx.doi.org/10.12775/cjfa.2012.009 dariusz piotrowski, anna piotrowska124 skali i intensywności oddziaływania na różne aspekty życia ludności i funkcjonowania przedsiębiorstw oraz państw jest porównywany do okresu wielkiej depresji z lat 1929–1933. kryzys spowodował wzrost bezrobocia, spadek dynamiki pkb, a nawet wejście w fazę recesji wielu gospodarek. w wyniku kryzysu upadło wiele firm, w tym również banków. kryzys wpłynął nie tylko na notowania instrumentów finansowych i ceny surowców. wymusił także zmiany w sferze ekonomicznej, społecznej czy naukowej. podał w wątpliwość wiele głoszonych teorii oraz podważył słuszność głoszonych poglądów. narzucił konieczność rewizji dotychczasowych relacji między uczestnikami rynku finansowego w skali krajowej i międzynarodowej. cechą wspólną dwóch największych kryzysów gospodarczych w dziejach ludzkości jest fakt, że zostały one zapoczątkowane w stanach zjednoczonych i jednocześnie w największym stopniu dotknęły właśnie ten kraj. co je różni i na co zwrócono uwagę w dalszej części pracy, to przede wszystkim zachowanie regulatora rynku, a zarazem instytucji odpowiedzialnej za prowadzenie polityki pieniężnej, czyli systemu rezerwy federalnej stanów zjednoczonych (fed). w latach 30. ubiegłego wieku fed wykazywał dużą bierność. obecnie postawę fed można przedstawić jako bardzo aktywną. instytucja ta na bieżąco reaguje na zmieniającą się sytuację rynkową. stosuje na szeroką skalę różne instrumentarium. z tego względu działalność fed wyróżnia się na tle zachowań innych banków centralnych. przedstawienie i określenie skuteczności narzędzi wykorzystywanych przez fed, wspierających funkcjonowanie instytucji finansowych, jak i całej gospodarki amerykańskiej w okresie globalnego kryzysu gospodarczego, to cel niniejszej pracy. spośród szerokiego zestawu instrumentów stosowanych przez bank centralny szczególną uwagę poświęcono działaniom określonym mianem ilościowego luzowania (ang. quantitative easing). analiza polityki pieniężnej realizowanej przez fed została poprzedzona prezentacją teorii ekonomicznych poruszających kwestię skuteczności oddziaływania na gospodarkę przez narzędzia polityki pieniężnej. ukazano także otoczenie rynkowe, problemy i oczekiwania instytucji, którym fed musiał w pewien sposób sprostać. 1. skuteczność polityki pieniężnej w różnych nurtach teorii ekonomii polityka pieniężna to działalność banku centralnego polegająca na regulacji podaży pieniądza przez stosowanie wybranych instrumentów, której celem jest kształtowanie określonych parametrów makroekonomicznych (przy  ilościowe luzowanie polityki pieniężnej na przykładzie fed… 125 bylska-kapuścińska 2008: 14). w rzeczywistości bank centralny oddziałuje głównie na bazę monetarną obiegu pieniężnego. ilość gotówki w obiegu zależna bezpośrednio od planów emisyjnych banku centralnego jest stosunkowo niewielka w zestawieniu z drugim składnikiem bazy, czyli płynnymi rezerwami banków komercyjnych. kreacja pieniądza depozytowego jest rezultatem oddziaływania popytu i podaży na międzybankowym rynku pieniężnym. czynnikiem wpływającym z kolei na wspomniane wielkości są stopy procentowe ustalane przez bank centralny (sławiński 2011: 18–19). działania podejmowane przez bank centralny powinny zapewnić równowagę pieniężną niezbędną do osiągnięcia stabilnych warunków gospodarowania (gruszecki 2004: 123). współcześnie banki centralne, realizując politykę pieniężną, najczęściej mają na uwadze utrzymanie inflacji na niskim poziomie. w przeszłości funkcje banków centralnych i istota polityki pieniężnej były inne. poniżej zaprezentowano ewolucję teorii ekonomii dotyczących tego zakresu. uwarunkowania i skuteczność oddziaływania polityki pieniężnej na gospodarkę w różnych nurtach teorii ekonomii zaprezentowano także w formie tabelarycznej. przez lata kruszce były utożsamiane z pojęciem pieniądza. znaczenie kruszców dla bogactwa narodowego podkreślali już merkantyliści. uważali, że wzrost ilości pieniądza ułatwia i pobudza rozwój gospodarczy. szczytowym osiągnięciem praktyki w tym względzie było powstanie pod koniec xix w. systemu waluty złotej zapewniającej stabilność rozwoju gospodarek oraz wymiany międzynarodowej. ekonomiści klasyczni, a następnie neoklasyczni przyjęli natomiast założenie neutralności pieniądza w stosunku do procesów gospodarczych. tę myśl rozwinęli reprezentanci ilościowej teorii pieniądza. zakładali, że zmiany ilości pieniądza oddziałują jedynie na ogólny poziom cen, nie mając wpływu na zjawiska realne, takie jak wielkość dochodu narodowego czy zatrudnienie (sobol 2008: 16–17). t ab el a 1 . p ol it yk a pi en ię żn a w r óż ny ch s zk oł ac h ek on om ii – sk ut ec zn oś ć i u w ar un ko w an ia sz ko ły m ak ro ek on om ii po ds ta w ow e za ło że ni a sk ut ec zn oś ć po lit yk i p ie ni ęż ne j n eu tr al no ść pi en ią dz a o cz ek iw an ia r am y cz as ow e i p rz yc zy no w oś ć* sz ko ła ke yn es ow sk a ce lo w a ak ty w na i d ys kr ec jo na ln a po lit yk a st ab ili za cy jn a, k tó ra p rz ec iw dz ia ła k ró tk o ok re so w ym z ak łó ce ni om w g os po da rc e m oż e po śr ed ni o (p rz ez st op y pr oc en to w e) w pł yw ać n a po py t, c o pr ze kł ad a si ę na w zr os t pr od uk cj i, sk ut ec zn ie js za po lit yk a fi sk al na ni e je st n eu tr al ny „z w ie rz ęc e in st yn kt y” a da pt acy jn e kr ót ki o kr es , no rm al na p rz yc zy no w oś ć sz ko ła m on et ar ys ty cz na in te rw en cj a pa ńs tw a m oż e po gł ęb ić ni eró w no w ag ę, n ac is k na t w or ze ni e st ab iln yc h po ds ta w g os po da rk i w pł yw a w d łu gi m o kr es ie n a w ie lk oś ci n om in al ne , w k ró tk im j es t m oż liw y w pł yw n a zm ie nn e re al ne , po lit yk a fi sk al na ni es ku te cz ny m s ta bi liz at or em je st n eu tr al ny ad ap ta cy jn e kr ót ki i dł ug i o kr es , no rm al na p rz yc zy no w oś ć n ow a sz ko ła kl as yc zn a pr ow ad ze ni e po lit yk i s ta bi liz ac yj ne j n ie ce lo w e, c ał a po lit yk a (w t ym g łó w ni e pi en ię żn a) na st aw io na n a os ią gn ię ci e st ab iln ej , m oż liw ie n aj ni żs ze j st op y in fl ac ji, z na cz en ie w ia ry go dn oś ci ne ut ra ln a w k ró tk im i dł ug im o kr es ie , e w en tu al ne n ie oc ze ki w an e zm ia ny m og ą pr zy ni eś ć kr ót ko ok re so w e ef ek ty je st n eu tr al ny ra cj on al ne br ak r oz ró żn ie ni a ho ry zo nt ów , no rm al na p rz yc zy no w oś ć sz ko ła r ea ln eg o cy kl u ko ni un kt ur al ne go pr ow ad ze ni e po lit yk i s ta bi liz ac yj ne j n ie ce lo w e, w ah an ia p ro du kt u są p oż ąd an e i op ty m al ne , p re fe ro w an e re gu ły ni e w pł yw a na w ie lk oś ci r ea ln e, j ed yn ie j ej ok re so w e zm ia ny m og ą pr ow ad zi ć do n ie w ie lk ic h „e fe kt ów p ły nn oś ci ” je st n eu tr al ny ra cj on al ne br ak r oz ró żn ie ni a ho ry zo nt ów , h ipo te za o dw ro tn ej pr zy cz yn ow oś ci n ow a sz ko ła ke yn es ow sk a pr ow ad ze ni e po lit yk i st ab ili za cy jn ej uz asa dn io ne i st ni ej ąc ym i sz ty w no śc ia m i, tz w . zg ru bn e (p rz yb liż on e) do st ra ja ni e go sp o da rk i za sa dn ic zo sk ut ec zn a po lit yk a pi en ię żn a (n aw et pr ze w id zi an a ek sp an sj a w yw oł uj e re al ne e fe kt y w k ró tk im o kr es ie ), w pł yw a ró w ni eż n a po zi om b ez ro bo ci a ni e je st n eu tr al ny ra cj on al ne , ch oć n ie z aw sz e uw zg lę dn io ne w m od el ac h pr ze w aż ni e kr ót ki ok re s, n or m al na pr zy cz yn ow oś ć pr ób a no w ej ne ok la sy cz ne j sy nt ez y je st m ie js ce d la p ro w ad ze ni a po lit yk i s ta bi liz ac yj ne j na ki er ow an a na p rz ys zł oś ć, s to so w an ie t zw . at ak u w yp rz ed za ją ce go ni e je st n eu tr al ny ra cj on al ne pr ze w aż ni e kr ót ki ok re s, n or m al na pr zy cz yn ow oś ć * n or m al na p rz yc zy no w oś ć oz na cz a, ż e zm ia ny w il oś ci p ie ni ąd za s ą po w od em z m ia n w a kt yw no śc i g os po da rc ze j. pr zy cz yn ow oś ć od w ro tn a oz na cz a, ż e pi en ią dz ja ko p ro du kt je dn eg o z se kt or ów g os po da rk i z m ie ni a si ę po do bn ie ja k pr od uk ty in ny ch s ek to ró w p od w pł yw em w ah ań tr en du . ź r ó d ło : k ie dr ow sk a, m ar sz ał ek 2 00 3: 8 6.   ilościowe luzowanie polityki pieniężnej na przykładzie fed… 127 wielki kryzys gospodarczy z lat 1929–1933 wykazał słabości dotychczasowych teorii w interpretacji zjawisk gospodarczych i prognozowaniu przyszłych zachowań rynku. rozpoczął się kilkudziesięcioletni okres dominacji keynesizmu. keynes uważał, że gospodarka rynkowa nie jest zdolna do samoregulacji i wymaga interwencji ze strony państwa. w dążeniu do powrotu do stanu równowagi przy pełnym zatrudnieniu miały pomagać utrzymywane na niskim poziomie stopy procentowe. w tym czasie stabilizację inflacji oraz wymiany międzynarodowej osiągnięto przez stosowanie stałych kursów walutowych będących rezultatem porozumienia z bretton woods. pod koniec lat 60. xx w., kiedy inflacja utrzymywała się jeszcze na stabilnym poziomie, m. friedman krytycznie ocenił ekspansywną politykę pieniężną banków centralnych. uważał on, że zwiększanie podaży pieniądza prowadzi tylko do krótkookresowych wzrostów produkcji, może natomiast skutkować trwałą inflacją (friedman 1968). wskazał na kontrolę podaży pieniądza jako działanie stabilizujące inflację. jego zdaniem, podaż pieniądza powinna być dostosowana do popytu wynikającego z długoterminowego tempa rozwoju gospodarki. zalecenia friedmana zostały wdrożone przez banki centralne pod koniec lat 70., kiedy wiele gospodarek zmagało się ze zjawiskiem stagflacji. kłopoty z kontrolowaniem podaży pieniądza wynikające z postępu technologicznego wkraczającego do bankowości wymusiły w latach 80. i 90. kolejne zmiany w prowadzeniu polityki pieniężnej (mishkin 2002: 96, 682). w międzyczasie narodziła się nowa ekonomia klasyczna wprowadzająca do ekonomii hipotezę racjonalnych oczekiwań. jej zwolennicy wskazywali, że wpływ banku centralnego na sferę realną jest możliwy tylko w krótkim okresie, pod warunkiem zastosowania narzędzi polityki pieniężnej w sposób nieoczekiwany dla rynku. całkowity brak wpływu polityki pieniężnej na gospodarkę prezentowali natomiast przedstawiciele teorii realnego cyklu koniunkturalnego. obecnie dominującym nurtem myśli ekonomicznej w polityce pieniężnej jest nowa synteza neoklasyczna. w myśl tej teorii polityka pieniężna nie może przeciwdziałać powstawaniu zaburzeń w gospodarce, gdyż są one wywoływane realnymi szokami. może natomiast w obliczu lepkości cen i płac łagodzić skutki zaburzeń i pomagać gospodarce w powrocie do stanu równowagi (woodford 1999: 19). z kolei rozwiązaniem często stosowanym przez współczesne banki centralne jest strategia celu inflacyjnego. w jej ramach bank centralny zobowiązuje się do stabilizowania inflacji na wyznaczonym poziomie (sławiński 2006: 123–131). dariusz piotrowski, anna piotrowska128 2. cele, strategie i narzędzia realizacji polityki pieniężnej polityka fiskalna i pieniężna służą osiąganiu określonych celów gospodarczych. w historii przez dłuższy czas funkcjonował prymat polityki fiskalnej nad pieniężną. polityka pieniężna z kolei przybierała różne formy i realizowała odmienne zadania. były nimi wzrost zatrudnienia czy też lepsze wykorzystywanie zdolności produkcyjnych, prowadzące generalnie do silniejszego wzrostu gospodarczego. problemy gospodarek z wysokim poziomem inflacji skierowały działania banków centralnych w stronę dbałości o zachowanie stabilnego poziomu cen utożsamianego z niskim, akceptowalnym poziomem inflacji. kryzys finansowy ostatnich lat spowodował powrót do dyskusji o stabilności sektora finansowego traktowanej jako cel polityki pieniężnej, a jednocześnie jako swego rodzaju dobro publiczne (szczepańska 2008). regulacje obowiązujące w części państw dopuszczają realizowanie więcej niż jednego zadania w ramach polityki pieniężnej. praktyka wskazuje na małą skuteczność takich rozwiązań. często bowiem występuje konflikt między celami. osiągnięciu głównych celów służą strategie oparte na celach pośrednich. wśród nich można wyodrębnić strategie tradycyjne odnoszące się do kontroli stóp procentowych, kursu walutowego lub podaży pieniądza. strategie nowoczesne to z kolei wspomniana wcześniej strategia bezpośredniego celu inflacyjnego oraz strategie eklektyczne, odnoszące się do wiązki osiąganych celów (pyka 2010: 41–44). istnieje wiele klasyfikacji i sposobów realizacji polityki pieniężnej. z uwagi na rozważania prowadzone w dalszej części pracy należy wspomnieć o polityce ekspansywnej, wspomagającej aktywność gospodarczą, która łączy się z polityką taniego pieniądza, oraz o ich przeciwieństwie, czyli o polityce restrykcyjnej opartej na drogim pieniądzu. w realizacji założonej strategii bank centralny może opierać się na stałych regułach lub prowadzić politykę dyskrecjonalną. w pierwszym przypadku bank centralny wyznacza sobie cel i dąży do jego osiągnięcia niezależnie od rozwoju sytuacji rynkowej. taka strategia jest stosowana przy małej wiarygodności banku lub w warunkach wysokiej inflacji. z kolei strategia elastyczna polega na bieżącym reagowaniu za pomocą dostępnych narzędzi polityki pieniężnej na sygnały płynące z rynku (kaźmierczak 1998: 89–90). bank centralny w celu realizacji przyjętej strategii stosuje odpowiednie narzędzia polityki pieniężnej. instrumenty te można podzielić ze względu na sposób oddziaływania. wyróżnia się wówczas instrumenty oddziaływania bezpo  ilościowe luzowanie polityki pieniężnej na przykładzie fed… 129 średniego – inaczej administracyjne, pośredniego – utożsamiane z rynkowymi oraz informacyjno-perswazyjne. mając natomiast na uwadze obszar wpływu, wyodrębnia się instrumenty kontroli ogólnej oraz te, które są wykorzystywane w kontroli selektywnej. ze względu na typ dzielimy je na instrumenty kontroli ilościowej oraz jakościowej. instrumentami najpowszechniej wykorzystywanymi przez banki centralne są: stopy procentowe, rezerwy obowiązkowe, operacje otwartego rynku, operacje depozytowo-kredytowe oraz pułapy kredytowe (kaźmierczak 2008: 143–158). 3. działania systemu rezerwy federalnej w reakcji na kryzys bankowy kryzys to sytuacja, kiedy cała gospodarka lub główne jej elementy pozostają na poziomach znacznie poniżej optymalnych. w sektorze finansowym kryzys może przybierać formę bankowego, zadłużeniowego, rynku papierów wartościowych lub walutowego. kryzys bankowy przejawia się problemami finansowymi znacznej części sektora, skutkującymi ograniczeniem zdolności realizacji operacji bankowych lub upadłościami banków (iwanicz-drozdowska 2002: 35–36). zdaniem h. minsky’ego u podstaw kryzysów leżą zaburzenia w makrootoczeniu skutkujące silnym wzrostem wybranych obszarów gospodarki. ten wzrost jest finansowany przez ekspansję kredytową. w dalszej kolejności pojawiają się bąble spekulacyjne, przegrzanie koniunktury i załamanie, prowadzące nawet do paniki rynkowej (kindleberger 1999: 22–29). procykliczne zmiany pieniądza kredytowego, czyli wzrost ekspansji kredytowej w okresach pomyślnej koniunktury rynkowej i ograniczanie dostępu do finansowania w czasie spowolnienia gospodarczego, przyczyniają się do powstawania kryzysów, a wynikają ze zjawiska asymetrii informacji i akceleratora finansowego (sławiński 2011: 54–55). dwa największe kryzysy bankowe w dziejach ludzkości, czyli z lat 1929– –1933 oraz zapoczątkowany w 2007 r., w znacznej mierze dotyczyły stanów zjednoczonych oraz odpowiedzialnej za stabilność sektora finansowego tego kraju systemu rezerwy federalnej. doświadczenia zebrane przez fed w okresie wielkiego kryzysu wymagają przybliżenia, gdyż w znacznej mierze rzutowały na zachowania władz tej instytucji w trakcie trwającego nadal kryzysu. fed, czyli bank centralny usa, został powołany w 1913 r. w reakcji na panikę bankową z 1907 r. analizując w dalszej części pracy działania fed, należy mieć na uwadze, że w odróżnieniu od wielu banków centralnych, podstawowymi celem tej instytucji, obok utrzymania stabilnego poziomu cen, jest dbałość dariusz piotrowski, anna piotrowska130 o wzrost gospodarczy przez utrzymywanie wysokiego poziomu zatrudnienia i umiarkowanych długoterminowych stóp procentowych. w sytuacjach kryzysowych główne zadanie fed określono jako zapewnienie bankom dostępu do płynności finansowej gwarantującej zachowanie stabilności finansowej sektora (sławiński 2006: 139). wybuch wielkiego kryzysu należy wiązać z wieloma przyczynami. przyjmuje się, że jedną z nich była błędna polityka rezerwy federalnej. niewłaściwe decyzje tej instytucji oraz władz usa przyczyniły się także do pogłębienia oraz wydłużenia w czasie pozostawania amerykańskiej gospodarki w stanie kryzysu. dążenie do utrzymania cen na stabilnym poziomie, w sytuacji gdy gospodarka amerykańska w latach 20. ubiegłego wieku doświadczała znacznej poprawy produktywności, wymagało wzrostu ilości pieniądza w obiegu. zwolennikami takich działań byli przedstawiciele ilościowej teorii pieniądza. wzmożona ekspansja kredytowa finansująca rozwój gospodarki, zgodnie z szacunkami m. friedmana i a. j. schwarz, doprowadziła do wzrostu podaży pieniądza z 39 mld dolarów w styczniu 1921 r. do 57 mld dolarów w październiku 1929 r. działał swego rodzaju automatyzm. spadek ogólnego poziomu cen skutkował obniżaniem stopy dyskontowej przez bank centralny. wzrost ilości pieniądza faktycznie spowodował wzrost produkcji oraz względną stabilizację cen dóbr konsumpcyjnych. nie dostrzeżono jednak faktu, że nastąpiła niewłaściwa, skoncentrowana na wybranych sektorach alokacja środków powodująca nierównomierny wzrost cen. i tak, najsilniej wzrosła produkcja oraz płace w gałęziach dóbr kapitałowych, czyli w przemyśle chemicznym, hutniczym oraz stalowym (soto 2009: 366–368). na giełdzie natomiast nastąpił czterokrotny wzrost wartości indeksów. można przyjąć, że w tych dwóch segmentach rynku znalazła ujście wysoka inflacja powodowana ekspansją kredytową. czynnikiem bezpośrednio wywołującym wybuch kryzysu mogła być podwyżka stopy dyskontowej dokonana przez fed w 1929 r. wzrost oprocentowania kredytów w kolejnych latach był natomiast następstwem zmniejszającej się podaży pieniądza. monetaryści przyczynę tego zjawiska upatrywali w zbyt dużej liczbie upadłych banków. warto w tym miejscu wspomnieć, że w latach 1930–1933 odnotowano przeszło 9 tys. tego rodzaju przypadków. zdaniem friedmana i innych fed, wyznając zasadę samooczyszczania się rynku, nie realizował w sposób właściwy działań, do których został powołany. skutkowało to przeistoczeniem się recesji w długotrwały kryzys (iwanicz-drozdowska 2000: 28).   ilościowe luzowanie polityki pieniężnej na przykładzie fed… 131 analizując obecny kryzys bankowy, można zauważyć podobne błędy rezerwy federalnej do tych popełnionych w latach 20. ubiegłego wieku w okresie poprzedzającym kryzys. zupełnie inna jest natomiast reakcja banku centralnego na sytuację braku stabilności sektora bankowego w stanach zjednoczonych. wcześniej fed wykazywał się pasywnością, obecnie stosuje niekonwencjonalne rozwiązania. aktywne wspieranie banków przez fed w sytuacjach kryzysowych można było w pewnym sensie przewidzieć, gdyż taki pogląd formułował b. bernanke na wiele lat przed tym, jak został prezesem banku centralnego. nie powinny dziwić zatem kolejne programy pomocowe adresowane do banków, jak też fakt rozpoczęcia trzeciej już rundy ilościowego luzowania polityki pieniężnej (kozieł 2012: 12). początków obecnego kryzysu należy szukać w decyzjach fed skutkujących obniżeniem podstawowej stopy dla funduszy federalnych do poziomu około 1% obserwowanego w latach 2003 i 2004. zamiarem podjętych działań było stymulowanie wzrostu gospodarczego, rezultatem natomiast powstanie bańki spekulacyjnej na rynku nieruchomości. również indeksy giełdowe oraz ceny surowców zmierzały w kierunku historycznych maksimów. źle zarządzane banki udzielały kredytów subprime, a na rynku kapitałowym dużym zainteresowaniem inwestorów cieszyły się papiery wartościowe oparte na amerykańskim rynku hipotecznym, które jak się później okazało, zawierały w sobie znaczący element ryzyka. schładzanie koniunktury przyniosło wzrost stopy funduszy federalnych pod koniec 2006 r. do poziomu około 5,25%. to działanie faktycznie wyzwoliło kryzys. nastąpiło zatrzymanie, a następnie spadek cen nieruchomości. coraz więcej kredytobiorców miało problemy z obsługą swoich zobowiązań. pojawiły się oznaki słabnięcia koniunktury na rynku papierów wartościowych. banki zaczęły ponosić straty nie tylko na kredytach, ale również na instrumentach finansowych powstałych w wyniku sekurytyzacji kredytów hipotecznych. pierwszy program wdrożony przez rezerwę federalną był reakcją na przenoszenie napięć z rynku kredytów hipotecznych na pozostałe segmenty amerykańskiego rynku finansowego. w sierpniu 2007 r. wydłużono termin oraz zmniejszono koszt pozyskania kapitału, wykorzystując w tym celu discount window będący odpowiednikiem stosowanego przez nbp kredytu lombardowego. w grudniu natomiast wprowadzono term auction facility zapewniający bankom lepszy dostęp do krótkoterminowego kredytu przez rozszerzenie katalogu akceptowanych przez fed zabezpieczeń (monetary 2008). dariusz piotrowski, anna piotrowska132 kolejne działania były następstwem upadłości banku inwestycyjnego bear stearns w marcu 2008 r. wdrożono wówczas term securities lending facility. w ramach programu, który funkcjonował do początku lutego 2010 r., banki mogły wymieniać w banku centralnym określone aktywa na papiery skarbowe. te ostatnie zaś były akceptowane jako zabezpieczenie w pożyczkach na rynku międzybankowym. miało to doprowadzić do ożywienia handlu na wspomnianym rynku. obniżenie efektywnych stóp do poziomu około 2% w połowie 2008 r. tylko na chwilę rozładowało napięcia na rynku. upadek lehman brothers zachwiał rynkiem papierów dłużnych przedsiębiorstw. pojawiły się problemy z rolowaniem zapadających papierów komercyjnych. wsparcia tego segmentu rynku dokonano za pomocą commercial papers funding facility (domestic 2011). niemalże natychmiast w reakcji na upadłość tego banku zredukowano po raz kolejny koszty funduszy federalnych, tym razem do poziomu 0,1–0,2%. te działania okazały się jednak mało skuteczne, gdyż w ślad za obniżką podstawowej stopy przez fed nie poszły obniżki stóp rynkowych. w apogeum kryzysu odchylenie 3-miesięcznej stawki libor (usd) od stopy podstawowej fed sięgało od 1 do ponad 3 punktów procentowych, gdy wcześniej oscylowało w granicach 10 punktów bazowych (borowski 2010: 131). rzeczywistym problemem banków w tamtym okresie był nie tyle dostęp do taniego pieniądza, ile generalnie dostęp do zewnętrznego finansowania. wynikało to z niemalże całkowitego zamarcia transakcji na rynku międzybankowym. w obliczu ogromnych strat i bankructw wielu banków na rynku zapanował strach oraz nieufność do potencjalnych partnerów transakcji. w tej sytuacji interwencja banku centralnego skupiła się na dostarczeniu płynności bankom. odbywało się to na różne sposoby. często podejmowano się takich działań pierwszy raz w historii bankowości centralnej. fed pożyczał pieniądze instytucjom finansowym wymagającym nagłej pomocy. pożyczkami wsparto między innymi mające ogromne problemy aig oraz sfinansowano przejęcie bear stearns przez j. p. morgan. fed wydłużał także terminy spłat zobowiązań oraz ułatwiał pozyskanie pożyczek od siebie bądź innych banków. względne opanowanie sytuacji w sektorze finansowym pozwoliło bankowi centralnemu skupić się na wspomaganiu gospodarki. w wyniku załamania w latach 2008–2009 gospodarka amerykańska straciła około 9 mln miejsc pracy. konieczne więc było podjęcie nadzwyczajnych kroków w celu odbudowy zatrudnienia. mając to na uwadze, przeprowadzono trzy rundy luzowania ilo  ilościowe luzowanie polityki pieniężnej na przykładzie fed… 133 ściowego oraz operację wymiany papierów skarbowych o krótkich terminach zapadalności na dłuższe (operation twist). w sytuacji, kiedy pobudzanie gospodarki zagrożonej deflacją przez obniżanie stóp procentowych stało się niemożliwe, z racji ich poziomu w pobliżu zera, podjęto działania z zakresu ilościowego luzowania polityki pieniężnej. qe różni się od typowego dodruku pieniądza, zwanego monetyzacją długu w celu przeprowadzania operacji. w przypadku dodruku jest to sfinansowanie deficytu lub długu publicznego. celem luzowania ilościowego jest natomiast wsparcie rozwoju gospodarczego. w procesie tym bank centralny nabywa za dodrukowane pieniądze papiery skarbowe lub inne instrumenty finansowe. nie zachodzi sterylizacja rynku. w rezultacie następuje wzrost wartości bilansu banku centralnego oraz zwiększa się ilość pieniądza w obiegu. skutkiem może być obniżenie kosztu pieniądza i wzrost akcji kredytowej, ale również wzrost cen i inflacji. fed rozpoczął pierwszą rundę luzowania ilościowego 25 listopada 2008 r. przeznaczył na ten cel 600 mld dolarów. następnie, w marcu 2009 r., postanowiono rozszerzyć skalę dodruku do około 1,5 biliona dolarów. operację zakończono w marcu 2010 r. qe2 trwało natomiast w okresie od 3 listopada 2010 r. do końca czerwca 2011 r. skupiono z rynku instrumenty finansowe na kwotę 600 mld dolarów. w obu przypadkach fed nabywał papiery skarbowe oraz agencyjne mbsy (wróbel 2012: 14). trzecia runda luzowania ilościowego została ogłoszona 13 września 2012 r. zdecydowano przeznaczać na skup mbs około 40 mld dolarów w skali miesiąca. nie określono przy tym horyzontu czasowego operacji. wskazano jedynie, że będzie ona trwała tak długo, dopóki nie poprawi się sytuacja na amerykańskim rynku pracy, co oznacza spadek stopy bezrobocia poniżej 7% (siemionczyk 2012: 10). oprócz luzowania ilościowego fed zdecydował także o przebudowaniu swojego bilansu przez sprzedaż papierów skarbowych o terminie zapadalności do trzech lat i zakup z pozyskanych w ten sposób środków papierów skarbowych o terminie wykupu między sześć a trzydzieści lat. tego typu operacja, w odróżnieniu od qe, była już wcześniej przeprowadzana przez fed. w pierwszym okresie od września 2011 r. do czerwca 2012 r. dokonano zamiany na kwotę 400 mld dolarów. w drugim okresie od lipca do grudnia 2012 r. planowane jest przeprowadzenie transakcji o wartości 267 mld dolarów. zakup papierów długoterminowych ma, w zamyśle banku, prowadzić do wzrostu ich cen oraz obniżki rentowności. to z kolei ma przełożyć się na spadek kosztów długoterminowego finansowania firm i w konsekwencji pobudzić rozwój gospodarczy i wzrost zatrudnienia. dariusz piotrowski, anna piotrowska134 przedstawione powyżej programy wywarły ogromny wpływ na bilans fed. na początku 2007 r. bilans składał się z dwóch podstawowych pozycji: klasyczne papiery wartościowe w kwocie 772 mld dolarów oraz pożyczki dla instytucji finansowych w kwocie 88 mld dolarów. na koniec października 2012 r. obie pozycje miały wartości odpowiednio 360 oraz 232 mld dolarów, przy czym w połowie listopada 2008 r. pożyczki przekraczały kwotę 1,5 biliona dolarów. w bilansie pojawiły się też takie pozycje, jak: zakup długoterminowych papierów skarbowych – kwota 1,28 biliona dolarów, wsparcie płynnościowe dla podstawowych rynków finansowych – kwota 2,8 mld dolarów, przy czym najwyższą wartość: 431 mld dolarów odnotowano na przełomie 2008 i 2009 r., papiery agencyjne oparte na rynku hipotecznym oraz mbsy – kwota 934 mld dolarów. wynika z tego, że suma bilansowa fed wzrosła z około 860 mld dolarów do 2,8 biliona dolarów (credit 2012). ten fakt nie jest bez znaczenia dla przyszłości rynków finansowych. za kilka lat fed z pewnością będzie chciał odsprzedać część posiadanych obecnie instrumentów.  zakończenie działania podjęte przez fed w obliczu kryzysu bankowego i gospodarczego należy uznać za odważne, ale zarazem kontrowersyjne. ich pozytywne skutki przez powiązania własnościowe i biznesowe oraz mechanizmy psychologiczne przeniosły się z rynku amerykańskiego w inne regiony świata. zrealizowane programy pomocowe z pewnością wyhamowały negatywne tendencje dotyczące amerykańskiego, ale i światowego sektora finansowego. nie odnotowuje się już upadłości instytucji zagrażających stabilności sektora, spłacalność kredytów wzrosła. stopniowo ulega odbudowie amerykański rynek pracy. jednak nadal stopa bezrobocia wynosi około 8%. gospodarka wyszła z recesji, ale z drugiej strony dynamika pkb mimo tak ogromniej ilości wpompowanych pieniędzy rozwija się w tempie około 2%. dopiero od trzeciego kwartału 2011 r. zaczęła przyrastać wartość udzielonych kredytów w całym sektorze banków komercyjnych. mając na uwadze wcześniejsze załamanie rynku kredytowego, odczytana dynamika w ujęciu rocznym rzędu 4% nie jest wielkością satysfakcjonującą. wspomniane kontrowersje dotyczą małej skuteczności operacji zwiększania podaży pieniądza celem wywołania ekspansji kredytowej prowadzącej do wzrostu gospodarczego. niewielkie skutki przynoszą zapewnienia utrzymania niskiego kosztu pieniądza aż do połowy 2015 r. przedsiębiorstwa, z obawy o stabilność warunków gospodarczych, oraz zadłużone   ilościowe luzowanie polityki pieniężnej na przykładzie fed… 135 do granic możliwości gospodarstwa domowe nie są zainteresowane kolejnymi kredytami. banki natomiast znaczną część dodatkowych środków skierowały na rynek akcji oraz surowców, podnosząc wycenę wielu instrumentów do poziomów sprzed kryzysu. fed liczył na wystąpienie efektu majątkowego zwiększającego konsumpcję, ten jednak nie jest odczuwalny. dodruk pieniądza teoretycznie powinien spowodować osłabienie amerykańskiej waluty i wzrost konkurencyjności gospodarki, lecz tak się nie dzieje. wzrasta natomiast presja inflacyjna. wprawdzie inflacja w 2012 r. kształtuje się na bezpiecznym poziomie około 2%, to jednak wynik ten jest w znacznej mierze rezultatem rekordowo niskiej szybkości obiegu pieniądza (m2) w systemie finansowym (velocity 2012). podsumowując, należy zauważyć, że dotychczasowe efekty realizowanej polityki pieniężnej w zakresie dynamizowania wzrostu gospodarczego są niewielkie, natomiast zagrożenie inflacją ogromne. jak wspomniano, skutki działań fed wykroczyły poza obszar stanów zjednoczonych. na świecie jest odczuwany wzrost cen surowców. nastąpił napływ kapitałów na wybrane giełdy europejskie. wydaje się jednak, że strumień kapitału ominął polskę. potwierdzają to niskie poziomy warszawskich indeksów oraz względnie słaba pozycja złotówki. ta sytuacja może się jednak zmienić wraz z pojawieniem się pierwszych oznak ożywienia gospodarczego w polsce, co jest prognozowane na drugą połowę 2013 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(2012), po trzecie, wyluzuj, parkiet, nr 231. copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 9 issue 1 2020 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2020 copyright by uniwersytet mikołaja kopernika toruń 2020 icv 2018: 100.00 address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents hope osayantin aifuwa sustainability reporting and firm performance in developing climes: a review of literature ............................................................................................................ 9 s. s. m. sadrul huda, md. humayun kabir, nurun naher popy, sunny saha innovation in financial services: the case of bangladesh ............................................. 31 muhammed lawal subair, ramat titilayo salman, ayodeji fatai abolarin, abdulrasheed taiwo abdullahi, akeem sisofa othman board characteristics and the likelihood of financial statement fraud .................... 57 ghazi zouari, imen abdelmalek financial innovation, risk management, and bank performance ............................... 77 for authors ......................................................................................................................... 101 copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 05.12.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: a_zoladkiewicz@umk.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34. agnieszka żołądkiewicz* uniwersytet mikołaja kopernika w toruniu dofinansowanie rozwoju mikroprzedsiębiorczości na terenach wiejskich w ramach prow 2007–2013 – rezultaty słowa kluczowe: finanse, mikroprzedsiębiorstwo, prow 2007–2013. abstrakt: mikroprzedsiębiorstwa to istotny stymulator rozwoju gospodarczego. to z nimi wiążą się największe nadzieje na tworzenie nowych miejsc pracy, a tym samym na minimalizowanie bezrobocia i przyspieszanie wzrostu gospodarczego. po wstąpieniu polski do ue przedsiębiorstwa, szczególnie przedsiębiorstwa na obszarach wiejskich, uzyskały znaczący dostęp do środków publicznych. w dokumentach unijnych, a w szczególności w działaniu 312 „tworzenie i rozwój mikroprzedsiębiorstw” w ramach programu rozwoju obszarów wiejskich 2007–2013, skupia się uwagę na rozwoju małej przedsiębiorczości i podniesieniu wskaźnika zatrudnienia w szeroko rozumianej gospodarce wiejskiej. w artykule zaprezentowano podstawowe informacje związane z działaniem 312. przedstawiono wstępne rezultaty wynikające z realizacji działania „tworzenie i rozwój mikroprzedsiębiorstw”, przejawiające się głównie we wzroście zatrudnienia i poprawie kondycji finansowej przedsiębiorstw. funding the development of micro enterprises in rural areas from prow 2007–2013 – results keywords: finance, micro enterprises, prow 2007–2013. abstract: micro enterprises give hope to create new jobs, thereby minimizing unemployment and accelerating economic growth. after polish accession to the eu enterdoi: 10.12775/cjfa.2012.012 http://dx.doi.org/10.12775/cjfa.2012.012 agnieszka żołądkiewicz174 prises, especially enterprises in rural areas gained access to public funds – action 312 “creation and development of micro enterprises”. the article presents basic information about the action 312 “creation and development of micro enterprises”. particular attention was paid to the presentation of the initial results of the implementation of activities under the action 312, manifested mainly by an increase in employment and improving the financial health of companies. translated by agnieszka żołądkiewicz  wstęp mikroprzedsiębiorstwa to istotny stymulator rozwoju gospodarczego. to z nimi wiążą się największe nadzieje na tworzenie nowych miejsc pracy, a tym samym na minimalizowanie bezrobocia i przyspieszanie wzrostu gospodarczego. wszelkie działania skierowane w kierunku mikroprzedsiębiorstw bardzo szybko znajdują odzwierciedlenie w sytuacji na rynku pracy, co ma szczególne znaczenie na obszarach wiejskich charakteryzujących się zazwyczaj wyższym niż ośrodki miejskie poziomem bezrobocia (anuszkiewicz 2011). szacuje się, że w polsce oficjalnie bez pracy w sektorze rolnictwa jest niecałe 50 tys. osób, a nieoficjalnie, według ekspertów z instytutu ekonomiki rolnictwa i gospodarki żywnościowej, co najmniej 600 tys. tym samym takie dane wskazują na to, że bezrobocie na wsi jest jednym z najważniejszych problemów społecznych. ponadto zjawisko bezrobocia na wsi ma inny charakter niż w mieście, jest bowiem trwalsze, a rynek pracy na terenach wiejskich jest mniej elastyczny (sikorska 2012). w celu poprawy sytuacji na terenach wiejskich są podejmowane liczne działania zmierzające do wspierania rozwoju mikroprzedsiębiorczości na tych terenach. między innymi po wstąpieniu polski do ue przedsiębiorstwa, a szczególnie przedsiębiorstwa na obszarach wiejskich, uzyskały znaczący dostęp do środków publicznych. w dokumentach unijnych, przede wszystkim w działaniu 312 „tworzenie i rozwój mikroprzedsiębiorstw” i działaniu 311 „różnicowanie w kierunku działalności nierolniczej” w ramach osi 3 „jakość życia na obszarach wiejskich i różnicowanie gospodarki wiejskiej” programu rozwoju obszarów wiejskich 2007–2013, skupia się uwagę na rozwoju małej przedsiębiorczości i zwiększaniu wskaźnika zatrudnienia w szeroko rozumianej gospodarce wiejskiej (kropsz, kutkowska 2008: 89). celem artykułu jest wskazanie efektów realizacji jednego z działań wspierających rozwój mikroprzedsiębiorczości na terenach wiejskich w ramach pro  dofinansowanie rozwoju mikroprzedsiębiorczości… 175 gramu rozwoju obszarów wiejskich 2007–2013, którym jest działanie 312 „tworzenie i rozwój mikroprzedsiębiorstw”. 1. program rozwoju obszarów wiejskich 2007–2013 program rozwoju obszarów wiejskich1 na lata 2007–2013 (prow 2007–2013), realizowany w ramach ii filaru wspólnej polityki rolnej, jest największym programem pomocowym dla sektora rolno-spożywczego w historii polski. pomoc finansowa z programu jest kierowana do rolników, przedsiębiorców i lokalnych samorządów, a także do właścicieli lasów. środki finansowe są przeznaczane głównie na budowę nowoczesnego, konkurencyjnego sektora rolno-spożywczego i leśnictwa, na prowadzenie działalności rolniczej zgodnej z ochroną środowiska naturalnego, na rozwój kultury i zachowanie tradycji na wsi oraz na działania na rzecz podniesienia jakości życia mieszkańców wsi i ich aktywizacji gospodarczej. w tym też celu w ramach programu zostały uruchomione 232 działania przypisane do czterech strategicznych osi priorytetowych (prow 2007–2013 2012). oś 1 obejmuje działania mające na celu poprawę konkurencyjności sektora rolnego i leśnego. oś 2 służy poprawie środowiska naturalnego, z kolei oś 3 skupia się na jakości życia na obszarach wiejskich i różnicowaniu gospodarki. natomiast oś 4 leader realizuje cele osi 3 przez wdrażanie lokalnych strategii rozwoju (działanie 312 2011: 3). łączna kwota środków przeznaczonych na realizacje działań wynosi ponad 17,4 mld euro, z czego 13,4 mld euro to unijne środki z europejskiego funduszu rolnego na rzecz rozwoju obszarów wiejskich, a około 4 mld euro to środki z budżetu krajowego (prow 2007–2013 2012). podział budżetu z uwzględnieniem poszczególnych osi zaprezentowano w tabeli 1. 1 podstawą funkcjonowania prow 2007–2013 jest program operacyjny zatwierdzony decyzją komisji europejskiej oraz ustawa z dnia 7 marca 2007 r. o wspieraniu rozwoju obszarów wiejskich z udziałem środków europejskiego funduszu rolnego na rzecz rozwoju obszarów wiejskich (dz. u. nr 64, poz. 427 z późn. zm.) wraz z przepisami wykonawczymi. 2 piętnaście działań prow 2007–2013 wdraża agencja restrukturyzacji i modernizacji rolnictwa (arimr), sześć samorządy wojewódzkie, a po jednym agencja rynku rolnego (arr) i fundacja programów pomocy dla rolnictwa (fapa). agnieszka żołądkiewicz176 tabela 1. budżet prow 2007–2013 w polsce w podziale na osie na dzień 7.12.2012 r. nazwa działania limit środków dla działań na lata 2007–2013 (zł*) udział w całkowitym budżecie oś 1 poprawa konkurencyjności sektora rolnego i leśnego 30 475 476 152,60 42,77% oś 2 poprawa środowiska naturalnego i obszarów wiejskich 21 736 061 274,66 30,50% oś 3 jakość życia na obszarach wiejskich i różnicowanie gospodarki wiejskiej 14 697 201 661,89 20,63% – tworzenie i rozwój mikroprzedsiębiorstw 4 203 861 011,93 5,90% oś 4 leader 3 248 542 245,48 4,56% pomoc techniczna 1 097 951 240,36 1,54% razem 71 255 232 574,99 100,00% * szacunkowe limity finansowe w zł na podstawie wyliczeń arimr. ź r ó d ł o: opracowanie własne na podstawie: zbiorcze sprawozdanie bieżące 2012. do dnia 7 grudnia 2012 r. w ramach realizacji prow 2007–2013 beneficjenci złożyli już łącznie ponad 5,46 mln wniosków, w tym zawarto ponad 5 mln umów/decyzji. zrealizowane płatności osiągnęły już ponad 40,0 mld zł (wykres 1), co tym samym stawia polskę wśród krajów unii europejskiej wdrażających program na pozycji lidera. w niemczech, które znajdują się na drugiej pozycji, wypłacono o ok. 2,8 mld zł mniej, a we francji wypłaty były niższe o ok. 4 mld zł (zbiorcze sprawozdanie bieżące 2012; ponad 41 miliardów 2012). wykres 1. płatności zrealizowane z prow 2007–2013 w kolejnych latach (narastająco) 0,13 4,84 11,38 19,8 29,76 40,72 0 5 10 15 20 25 30 35 40 45 2007 2008 2009 2010 2011 07.12.2012 m ili ar dy z ł ź r ó d ł o: opracowanie własne na podstawie: zbiorcze sprawozdanie bieżące 2012; informacja na temat realizacji 2012: 3.   dofinansowanie rozwoju mikroprzedsiębiorczości… 177 2. działanie 312 „tworzenie i rozwój mikroprzedsiębiorstw” jednym z działań wdrażanych przez arimr, skierowanym do mikroprzedsiębiorców, jest działanie 312 „tworzenie i rozwój mikroprzedsiębiorstw”, realizowane w ramach osi 33. celem danego działania jest wzrost konkurencyjności gospodarczej obszarów wiejskich, rozwój przedsiębiorczości oraz rynku pracy, a co za tym idzie – wzrost zatrudnienia na tych obszarach (program rozwoju obszarów wiejskich na lata 2007–2013 2011: 2). wsparcie finansowe jest udzielane podmiotom z tytułu inwestycji związanych z tworzeniem lub rozwojem już istniejących mikroprzedsiębiorstw, działających m.in. w zakresie: usług dla gospodarstw rolnych lub leśnictwa, rzemiosła bądź rękodzielnictwa, usług turystycznych oraz związanych ze sportem, rekreacją i wypoczynkiem, wytwarzaniem produktów energetycznych z biomasy (działanie 312 2011: 3). beneficjentem pomocy działania 312 może być osoba fizyczna lub osoba prawna czy też jednostka organizacyjna nieposiadająca osobowości prawnej, która prowadzi bądź planuje podjąć działalność jako mikroprzedsiębiorstwo zatrudniające poniżej 10 osób i mające obrót nieprzekraczający równowartość w zł 2 mln euro. co ważne, wsparcie finansowe obejmuje wyłącznie mikroprzedsiębiorstwa wiejskie, których siedziba, oddział lub miejsce zamieszkania wnioskodawcy oraz w przypadku operacji związanych z nieruchomością – miejsce położenia nieruchomości znajdują się w miejscowości należącej do gminy wiejskiej albo gminy miejsko-wiejskiej, z wykluczeniem miast powyżej 5 tys. mieszkańców, gminy miejskiej z wyłączeniem miejscowości liczących powyżej 5 tys. mieszkańców (informacja na temat realizacji 2012: 61–62). pomoc przyznaje się i wypłaca do wysokości limitu, który w okresie realizacji programu wynosi maksymalnie 300 tys. zł na jednego beneficjenta, z tym że beneficjent może otrzymać maksymalnie 100 tys. zł w przypadku utworzenia jednego i mniej niż dwóch miejsc pracy, 200 tys. zł za utworzenie dwóch i mniej niż trzech miejsc pracy, a za utworzenie trzech lub więcej nowych miejsc pracy maksymalna kwota dofinansowania operacji wynosi 300 tys. zł4 (łapińska 2011: 12). 3 szerzej na temat innych działań prow 2007–2013 wspierających mikroprzedsiębiorczość na terenach wiejskich w pozycji: walczak, żołądkiewicz 2012. 4 w naborze 2009 r., aby otrzymać refundację w wysokości 100 tys. zł, należało utworzyć jedno lub dwa miejsca pracy, 200 tys. zł od dwóch do pięciu miejsc pracy, a 300 tys. zł za utworzenie co najmniej pięciu miejsc pracy. agnieszka żołądkiewicz178 około 20% budżetu (ponad 14 mld zł) zostało przeznaczone na działania realizowane w ramach osi 3, w tym działanie 312 „tworzenie i rozwój mikroprzedsiębiorstw” ma budżet w wysokości ponad 4 mld zł, tj. 5,9% całkowitej puli środków publicznych prow 2007–2013 (tabela 1). w celu zagwarantowania zrównoważonego dostępu do środków w skali kraju w ramach działania 312 budżet został podzielony między województwa (tabela 2). podział został dokonany na podstawie liczby ludności wiejskiej oraz ludności miast do 5 tys. mieszkańców (lr)5. tabela 2. podział środków na województwa w ramach działania 312 „tworzenie i rozwój mikroprzedsiębiorstw” województwo wysokość limitów środków w euro udział procentowy dolnośląskie 59 777 282 5,84% kujawsko-pomorskie 56 297 098 5,50% lubelskie 78 508 862 7,67% lubuskie 27 534 399 2,69% łódzkie 61 926 808 6,05% małopolskie 111 058 821 10,85% mazowieckie 124 365 407 12,15% opolskie 34 187 692 3,34% podkarpackie 84 343 289 8,24% podlaskie 34 494 767 3,37% pomorskie 49 541 446 4,84% śląskie 68 068 309 6,65% świętokrzyskie 48 108 429 4,70% warmińsko-mazurskie 40 840 986 3,99% wielkopolskie 104 507 886 10,21% 5 lr = lr1 + lr2+ … + lrk… + lr16. udział procentowy województwa k w puli środków przeznaczonych na działanie 312 jest określony udziałem województwa k w liczbie ludności wiejskiej i ludności miast do 5 tys. mieszkańców w kraju. ulrk = lrk/lr. kryteria dokonywania podziału zostały zatwierdzone przez komitet monitorujący.   dofinansowanie rozwoju mikroprzedsiębiorczości… 179 województwo wysokość limitów środków w euro udział procentowy zachodniopomorskie 40 022 119 3,91% razem 1 023 583 600 100% ź r ó d ł o: opracowanie własne na podstawie: rozporządzenie ministra rolnictwa i rozwoju wsi 2011: 9581. 3. wstępne efekty realizacji działania 312 działanie „tworzenie i rozwój mikroprzedsiębiorstw” zostało uruchomione 5 maja 2009 r. i w ramach tego działania zostały przeprowadzone już trzy6 nabory wniosków, z czego ostatni zakończył się 7 października 2011 r. łącznie w ramach trzech naborów złożono 31 252 wnioski o przyznanie pomocy na kwotę ponad 6 mld zł. można przy tym zauważyć, że liczba złożonych wniosków z roku na rok rosła (2009 r. – 4983, 2010 r. – 10 540, 2011 r. – 15 729). najwięcej wniosków złożono w województwie wielkopolskim (5789), mazowieckim (3332) i podkarpackim (2584). do 31 października 2012 r. zawarto 9365 umów na kwotę 1 683 505 519,79 mld zł, przy czym arimr wypłaciła na dany dzień dla beneficjentów kwotę w wysokości 693 998 014,49 zł. tabela 3. podstawowe informacje dotyczące działania 312 „tworzenie i rozwój mikroprzedsiębiorstw” województwo liczba złożonych wniosków wnioskowana kwota pomocy w zł liczba zawartych umów kwota zawartych umów zrealizowane płatności dolnośląskie 1 298 248 177 155,93 269 44 384 872,00 14 850 792,00 kujawsko-pomorskie 1 525 289 479 983,46 392 71 753 271,00 21 618 401,50 lubelskie 2 002 376 361 917,18 741 125 778 517,50 55 051 678,96 lubuskie 765 153 142 031,83 236 43 379 881,50 17 438 828,57 łódzkie 1 482 281 234 159,72 370 63 349 657,00 28 665 353,50 małopolskie 2 544 446 791 571,12 971 163 718 518,85 66 945 169,35 mazowieckie 3 332 688 603 164,53 946 173 013 717,50 67 274 831,79 opolskie 910 162 742 221,26 317 52 266 648,50 13 782 078,00 6 i nabór od 5 maja do 18 maja 2009 r., ii nabór od 28 czerwca do 9 lipca 2010 r., iii nabór od 26 września do 7 października 2011 r. agnieszka żołądkiewicz180 województwo liczba złożonych wniosków wnioskowana kwota pomocy w zł liczba zawartych umów kwota zawartych umów zrealizowane płatności podkarpackie 2 584 458 875 660,71 885 146 564 183,67 71 468 427,92 podlaskie 996 179 771 592,41 355 58 110 462,99 33 413 492,24 pomorskie 1 785 351 704 625,19 538 102 629 269,50 31 042 783,00 śląskie 2 118 391 904 107,46 733 134 671 657,04 68 544 055,50 świętokrzyskie 1 259 222 416 536,97 455 72 689 539,43 30 676 221,56 warmińsko-mazurskie 1 668 347 480 540,46 457 91 867 120,50 36 963 428,00 wielkopolskie 5 789 1 231 350 101,76 1 370 279 143 159,01 113 898 692,60 zachodniopomorskie 1 195 235 453 147,94 330 60 185 043,80 22 363 780,00 razem 31 252 6 065 488 517,93 9 365 1 683 505 519,79 693 998 014,49 ź r ó d ł o: opracowanie własne na podstawie: tworzenie i rozwój mikroprzedsiębiorstw 2012. głównym celem działania „tworzenie i rozwój mikroprzedsiębiorstw”, jak wcześniej wspomniano, jest wzrost konkurencyjności gospodarczej obszarów wiejskich, rozwój przedsiębiorczości oraz rynku pracy, a tym samym wzrost zatrudnienia. analizując dostępne dane, można stwierdzić, że widoczne są już znaczne efekty realizacji danego działania. to dzięki wsparciu w ramach działania 312 na wsiach i w małych miasteczkach coraz częściej powstają m.in. takie firmy, jak: przedszkola, salony fryzjerskie, restauracje, warsztaty samochodowe, agencje reklamowe, zakłady produkujące meble czy świadczące usługi budowlane, dające tym samym zatrudnienie ich mieszkańcom (dzięki wsparciu z arimr 2012). w skali kraju powstało prawie 15 tys. miejsc pracy i liczba ta ulegnie zwiększeniu ze względu na fakt, że wnioski z ostatniego naboru przeprowadzonego w 2011 r. wciąż są oceniane (białkowska 2012). z badania mikroprzedsiębiorczości na wsi przeprowadzonego przez pracowników wydziału analiz i strategii w departamencie programowania i sprawozdawczości arimr7 wynika, że prawie 90% pracowników dotowanych mikroprzedsiębiorstw stanowią osoby zatrudnione na stałe. natomiast 7 badanie zostało przeprowadzone w okresie grudzień 2011–styczeń 2012 r. wśród 750 beneficjentów prow 2007–2013, którzy skorzystali z działania „tworzenie i rozwój mikroprzedsiębiorstw”. podstawowym celem badania było wskazanie efektów realizacji danego działania z uwzględnieniem jego skutków ekonomicznych oraz wpływu na sytuację przedsiębiorczości na obszarach wiejskich.   dofinansowanie rozwoju mikroprzedsiębiorczości… 181 niewiele ponad 10% aktualnego zatrudnienia w tych firmach stanowią sezonowe miejsca pracy. w 60% przypadków dane zatrudnienie kształtuje się z reguły na poziomie od 3 do 10 pracowników (15 tys. nowych miejsc pracy 2012). wykres 2. liczba miejsc pracy utworzonych dzięki środkom z działania 312 „tworzenie i rozwój mikroprzedsiębiorstw” 345 532 1 032 317 592 1 468 1 389 285 1 407 530 860 1 372 659 767 2 852 462 0 500 1 000 1 500 2 000 2 500 3 000 ź r ó d ł o: opracowanie własne na podstawie: 15 tys. nowych miejsc pracy 2012. co ważne prawie 68% (wykres 3) badanych beneficjentów deklaruje możliwość utrzymania stanowisk pracy utworzonych w ramach danego działania po okresie wynikającym z umowy o przyznanie pomocy. kolejne 26% badanych zapowiada, że nie tylko utrzyma stanowiska pracy, ale również zatrudni kolejne osoby (wyniki badania mikroprzedsiębiorczości 2012: 15). na podstawie zebranych informacji w ramach badania arimr można stwierdzić, że środki otrzymane z działania 312 miały bardzo duży wpływ na rozwój wspieranych mikroprzedsiębiorstw. statystycznie dla czterech z pięciu firm, które otrzymały dofinansowanie, były to pierwsze doświadczenia związane ze staraniem się o pomoc finansową na rozwój przedsiębiorstwa. badani beneficjenci ocenili również, że bez dotacji z arimr w ogóle nie zrealizowaliby inwestycji (40,5%) lub zrealizowaliby ją w mniejszym zakresie czy też późniejszym czasie (50,3%) (15 tys. nowych miejsc pracy 2012). agnieszka żołądkiewicz182 wykres 3. ocena możliwości utrzymania stanowisk pracy utworzonych w ramach działania 312 „tworzenie i rozwój mikroprzedsiębiorstw” 67,7% 25,7% 5,7% 0,6% 0,3% utrzymam te stanowiska pracy utrzymam te stanowiska i zatrudnię jeszcze kolejne osoby nie utrzymam tych stanowisk pracy (mimo że chciałbym (abym)) nie utrzymam tych stanowisk pracy (bo nie muszę ich utrzymac) zlikwiduję utworzone stanowisko pracy i dodatkowo niektóre stanowiska istniejące przed realizacją operacji ź r ó d ł o: wyniki badania mikroprzedsiębiorczości 2012: 15. z punktu widzenia trwałości uzyskanych efektów strategiczne znaczenie ma kondycja finansowa dotowanych przez arimr firm i możliwość generowania przez nie zysków. większość firm, między innymi dzięki pomocy finansowej z arimr, znajduje się w dobrej sytuacji finansowej. badani beneficjenci działania 312 oceniają obecną kondycję finansową swoich firm bardzo dobrze (5,1%) i dobrze (58,3%). zgodnie z deklaracjami badanych beneficjentów, zysk w 2010 r. osiągnęło prawie 88% mikroprzedsiębiorstw. z kolei w kolejnym roku zysk zadeklarowało już ponad 93% mikroprzedsiębiorstw. ponadto spadła liczba firm, które poniosły straty i jednocześnie wzrosła liczba podmiotów, które uzyskały zysk roczny na poziomie wyższym niż 21 tys. zł. mimo pojawiających się barier dalsze inwestycje planuje aż 65% firm, które otrzymały wsparcie arimr, co może oznaczać dalszy wzrost miejsc pracy na obszarach wiejskich (wyniki badania mikroprzedsiębiorczości 2012: 15).   dofinansowanie rozwoju mikroprzedsiębiorczości… 183 wykres 4. poziom zysku osiągniętego przez badane mikroprzedsiębiorstwa w latach 2010–2011 wykres 4. poziom zysku osiągniętego przez badane mikroprzedsiębiorstwa w latach 2010–2011 67,7% 25,7% 5,7% 0,6% 0,3% utrzymam te stanowiska pracy utrzymam te stanowiska i zatrudnię jeszcze kolejne osoby nie utrzymam tych stanowisk pracy (mimo że chciałbym (abym)) nie utrzymam tych stanowisk pracy (bo nie muszę ich utrzymac) zlikwiduję utworzone stanowisko pracy i dodatkowo niektóre stanowiska istniejące przed realizacją operacji 12,3% 20,5% 22,4% 19,9% 18,0% 6,9%6,7% 19,4% 22,8% 20,4% 21,0% 9,7% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% poniosłem straty do 20 tys. zł 21–45 tys. zł 46–90 tys. zł 91–225 tys. zł powyżej 225 tys. zł 2010 2011 ź r ó d ło: opracowanie własne na podstawie: wyniki badania mikroprzedsiębiorczości 2012: 18–19.  zakończenie wieś obok swojej tradycyjnej roli, jaką jest wytwarzanie produktów żywnościowych, zaczyna być postrzegana jako przestrzeń działalności gospodarczej niezwiązanej z rolnictwem. impulsem do takich przemian terenów wiejskich stały się m.in. unijne programy realizowane przez arimr, a w szczególności działanie 312 „tworzenie i rozwój mikroprzedsiębiorstw”. dzięki działaniu 312 można zauważyć, że niekorzystna sytuacja polskiej wsi znacznie ulega poprawie. widoczne są już bowiem pierwsze rezultaty realizacji działania. to dzięki takiej pomocy następuje wzrost konkurencyjności gospodarczej przedsiębiorstw prowadzących działalność na obszarach wiejskich, a tym samym rozwój przedsiębiorczości. można dostrzec, że na terenach wiejskich przybywa coraz więcej osób zakładających mikroprzedsiębiorstwa, co ma pozytywny wpływ na rozwój rynku pracy, a w konsekwencji prowadzi do wzrostu zatrudnienia na tych obszarach. z punktu widzenia trwałości uzyskanych efektów, strategiczne znaczenie ma również kondycja finansowa przedsiębiorstw dofinansowanych przez arimr oraz możliwość generowania przez nie zysków. większość firm, które powstały między innymi dzięki pomocy finansowej z arimr, znajduje się w dobrej sytuacji finansowej. agnieszka żołądkiewicz184 inwestycje realizowane ze środków na „tworzenie i rozwój mikroprzedsiębiorstw” zmieniają polskie wsie, czyniąc z nich tym samym miejsca bardziej przyjazne i wygodne do życia.  literatura anuszkiewicz a. (2011), mikroprzedsiębiorstwa – realizacja działania w ramach prow, http://bip.bialystok.uw.gov.pl/show_item.aspx?id=21264 (dostęp 11.12.2012). białkowska j. (2012), nowe miejsca pracy dzięki unijnym dotacjom dla mikroprzedsiębiorców, gazeta podatkowa, nr 64. działanie 312 „tworzenie i rozwój mikroprzedsiębiorstw” – informacja o rezultatach wdrażania w latach 2007–2011 (2011), ministerstwo rolnictwa i rozwoju wsi. dzięki wsparciu z arimr finansowanemu z prow 2007–2013 na wsi powstaje około 34 tysięcy nowych miejsc pracy (2012), http://www.arimr.gov.pl/aktualnosci/artykuly/dzieki-wsparciu-z-arimr-finansowanemu-z-prow-2007-2013-na-wsi-powstajeokolo-34-tysiecy-nowych-mi.html (dostęp 12.12.2012). informacja na temat realizacji programu rozwoju obszarów wiejskich na lata 2007–2013 (2012), prowieści, listopad. informacja na temat realizacji prow 2007–2013 (2012), ministerstwo rolnictwa i rozwoju wsi. kropsz i., kutkowska b. (2008), stan przedsiębiorczości na obszarach wiejskich dolnego śląska, wieś i rolnictwo, nr 1. łapińska i. (2011), mikroprzedsiębiorstwo – szansą dla ludzi przedsiębiorczych, wiadomości rolnicze, październik. 15 tys. nowych miejsc pracy dla mieszkańców wsi (2012), http://www.eurofundsnews. pl/content/view/17780 (dostęp 14.12.2012). ponad 41 miliardów złotych wypłaciła arimr z prow 2007–13, polska jest liderem realizacji programu w unii europejskiej (2012), http://www.arimr.gov.pl/aktualnosci/ artykuly/ponad-215-miliarda-zlotych-wyplacila-arimr-z-prow-2007-13-polskajest-liderem-realizacji-progra.html (dostęp 31.12.2012). program rozwoju obszarów wiejskich na lata 2007–2013, działanie 312 „tworzenie i rozwój mikroprzedsiębiorstw”, poradnik dla beneficjentów (2011), arimr. prow 2007–2013, http://www.arimr.gov.pl/pomoc-unijna/prow-2007-2013-podstawowe-informacje.html (dostęp 5.12.2012). rozporządzenie ministra rolnictwa i rozwoju wsi z dnia 25 lipca 2011 r. zmieniające rozporządzenie w sprawie podziału środków programu rozwoju obszarów wiejskich na lata 2007–2013 (2011). sikorska m. (2012), ukryte bezrobocie na polskiej wsi, http://tvp.info/informacje/agro-info/ukryte-bezrobocie-na-polskiej-wsi/9460270 (dostęp 28.01.2013). tworzenie i rozwój mikroprzedsiębiorstw – stan na dzień 31.10.2012, http://www.arimr.gov. pl/pomoc-unijna/wdrazane-programy-i-dzialania-dane-liczbowe/program-rozwo ju-obszarow-wiejskich-2007-2013/tworzenie-i-rozwoj-mikroprzedsiebiorstw.html (dostęp 6.12.2012).   dofinansowanie rozwoju mikroprzedsiębiorczości… 185 walczak d., żołądkiewicz a. (2012), dotacje dla mikroprzedsiębiorstw na wsi w ramach 2007–2013, [w:] uwarunkowania rynkowe rozwoju mikro, małych i średnich przedsiębiorstw – mikrofirma 2012, zeszyty naukowe uniwersytetu szczecińskiego, szczecin, s. 267–275. wyniki badania mikroprzedsiębiorczości na wsi – efekty działania „tworzenie i rozwój mikroprzedsiębiorstw” (2012), arimr. zbiorcze sprawozdanie bieżące tygodniowe z realizacji prow na lata 2007–2013 (2012), http://www.minrol.gov.pl/pol/wsparcie-rolnictwa-i-rybolowstwa/prow-20072013/monitoring-i-sprawozdawczosc-prow-2007-2013/zbiorcze-sprawozdania-biezace-z-realizacji-prow-2007-2013/(archive)/1 (dostęp 7.12.2012). copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: piotr.kozak@uni.torun.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 47 79. piotr kozak* uniwersytet mikołaja kopernika w toruniu koszty działalności badawczo-rozwojowej w świetle przepisów ustawy o rachunkowości i międzynarodowego standardu rachunkowości nr 38 wartości niematerialne słowa kluczowe: badania i rozwój, innowacja, koszty działalności badawczo-rozwojowej, rachunek kosztów, rozliczenia międzyokresowe kosztów, wartości niematerialne i prawne. abstrakt: w artykule poddano krytycznej analizie sposób ewidencji i prezentacji informacji o kosztach działalności badawczo-rozwojowej, będących integralną częścią działalności innowacyjnej, wynikający ze stosowania do celów sprawozdawczych przepisów ustawy o rachunkowości i międzynarodowego standardu rachunkowości nr 38 wartości niematerialne. costs of research and development in the view of the accounting act and the international accounting standard № 38 “intangible assets” keywords: cost accounting, deferred costs, innovation, intangible assets, research and development, r&d costs. abstract: the article is a critical analysis of the evidence and the presentation of the costs information of research and development as an integral part of innovation, resulting from the application for the purposes of the reporting rules of the accounting act and international accounting standard 38 intangible assets. translated by piotr kozak doi: 10.12775/cjfa.2012.007 http://dx.doi.org/10.12775/cjfa.2012.007 piotr kozak96  wstęp jednym z celów zarządzania przedsiębiorstwem jest zdobycie przewagi konkurencyjnej. osiągnięcie tego celu umożliwiają między innymi innowacje. jednak aby przyniosły one zamierzone efekty, zarządzanie nimi musi opierać się na rzetelnych informacjach, w tym przede wszystkim na kosztach, które nierzadko stanowią jedno z głównych kryteriów selekcji projektów innowacyjnych. z tego powodu znaczenia nabiera sposób ewidencji kosztów projektów innowacyjnych w księgach rachunkowych przedsiębiorstw, które są głównym źródłem informacji o nich. celem artykułu jest omówienie sposobów ewidencji kosztów prac badawczych i rozwojowych w kontekście wpływu na wycenę tych kosztów do celów decyzyjnych. w artykule wykorzystano analizę krytyczną jako narzędzie oceny sposobu ewidencji i prezentacji do celów sprawozdawczych kosztów działalności innowacyjnej w zakresie prac badawczo-rozwojowych według ustawy o rachunkowości (1994) i międzynarodowego standardu rachunkowości nr 38 wartości niematerialne (rozporządzenie komisji 2008). 1. związek działalności badawczo-rozwojowej z działalnością innowacyjną innowacyjność jest rozumiana jako „rzecz nowo wprowadzona, nowość” (słownik wyrazów obcych 2012). przytoczone wyjaśnienie jest w swojej istocie bardzo ogólne i oznacza jedynie, że innowacją może być coś, czego jeszcze do tej pory nie było. idąc tym tokiem rozumowania, za innowację można uznać wynalazek w zakresie przedmiotów technicznych i w konsekwencji występowanie innowacji znacznie ograniczyć. inaczej pojęcie to zdefiniowano w podręczniku oslo (2005: 48)1, według którego innowacja „to wdrożenie nowego lub znacząco udoskonalonego produktu (wyrobu lub usługi) lub procesu, nowej metody 1 przygotowany wspólnie przez oecd i komisję europejską, jest wynikiem współpracy w ramach grupy roboczej oecd ekspertów krajowych ds. wskaźników naukowo-technicznych (oecd working party of national experts on science and technology indicators, nesti), grupy roboczej eurostatu ds. statystyki nauki, techniki i innowacji (wpsti) oraz innych ekspertów zewnętrznych. podręcznik oslo reguluje zasady gromadzenia i interpretacji danych z zakresu innowacji w celu zapewnienia międzynarodowej porównywalności danych.   koszty działalności badawczo-rozwojowej w świetle przepisów… 97 marketingowej lub nowej metody organizacyjnej w praktyce gospodarczej, organizacji miejsca pracy lub stosunkach z otoczeniem”. w stosunku do poprzedniej, definicja z podręcznika oslo wprowadza trzy istotne zmiany. po pierwsze, za innowację uznaje się przedmioty, wartości niematerialne czy procesy, które wdrożono, tzn. które wprowadzono w życie, zastosowano, zrealizowano. nie wystarczy wynaleźć czy opracować i opisać. należy jeszcze udowodnić przydatność przez wdrożenie. w przypadku nowego produktu wdrożeniem będzie jego wyprodukowanie, w tym także partii próbnej. po drugie, innowacją jest nowość, ale dla przedsiębiorstwa, które je wdraża. oznacza to, że nie musi być ona nowością w pełnym tego słowa znaczenia, czyli nie musi być wynalazkiem. to, co jest nowością dla jednego przedsiębiorstwa, nie musi być tym samym dla innego. po trzecie, za innowację uznaje się proces, którego efektem jest wdrożenie, a nie przedmiot wdrożenia. ten proces obejmuje szereg działań o charakterze technicznym, organizacyjnym, finansowym czy marketingowym. do działań, których celem jest wdrożenie innowacji, zalicza się także działalność badawczo-rozwojową, którą w podręczniku frascati (2002: 34)2 określa się jako „pracę twórczą podejmowaną w sposób systematyczny w celu zwiększenia zasobów wiedzy, w tym wiedzy o człowieku, kulturze i społeczeństwie, oraz wykorzystanie tych zasobów wiedzy do tworzenia nowych zastosowań”. podstawowym celem działalności badawczo-rozwojowej jest pozyskanie nowej wiedzy i doprowadzenie do sytuacji, w której będzie można ją wykorzystać do wdrażania innowacji. z powyższych rozważań wynika, że innowacja jest pierwszym zastosowaniem nowego pomysłu czy wynalazku, chociaż nie jest pierwszym etapem tego procesu. wyodrębnienie poszczególnych etapów dokonuje się ze względu na ich specyfikę, przedmiot, przebieg czy miejsce powstawania. w literaturze przedmiotu trudno doszukać się jednolitego ujęcia etapów procesu innowacji, co wynika z jednostkowego podejścia do tego tematu. przedstawione na schemacie 1 etapy procesu innowacji uwzględniają trzy podstawowe działania przy założeniu, że wdrożenie kończy proces innowacji i tym samym nie uwzględnia takich dodatkowych działań, jak upowszechnianie innowacji, jej doskonalenie 2 nazwa podręcznika pochodzi od włoskiej miejscowości frascati, w której w 1963 r. odbyło się spotkanie ekspertów specjalizujących się w zagadnieniach statystyki działalności badawczo-rozwojowej. organizatorem spotkania była oecd. podręcznik frascati jest standardem dla badań statystycznych sfery badawczo-rozwojowej w państwach członkowskich oecd i spoza tej organizacji. piotr kozak or 98 przez racjonalizację czy kontrolę procesu innowacji, które nie należą do opisywanego w tym artykule tematu. schemat 1. podstawowe etapy procesu innowacji prace badawcze prace rozwojowe wdrożenie (innowacja) ź r ó d ł o: opracowanie własne na podstawie: baruk 1992: 46–47. spośród trzech podstawowych etapów procesu innowacji do zakresu działalności badawczo-rozwojowej zalicza się dwa pierwsze, z tym że w przypadku prac badawczych dokonuje się ich dalszego podziału na prace podstawowe i stosowane (pomykalski 2001a: 95). badaniami podstawowymi określa się działania, których celem jest pozyskanie nowego, oryginalnego i niepowtarzalnego dla przedsiębiorstwa zasobu wiedzy. ich cechą jest to, że nie są one podejmowane w związku z realizacją jakiegokolwiek projektu, którego celem jest wdrożenie innowacji. do badań podstawowych zalicza się badania naukowe, skutkujące sformułowaniem nowych tez, koncepcji czy teorii naukowych. są one zwykle podejmowane w związku z realizacją zainteresowań pracowników instytucji naukowych. mogą być także inspirowane przez przemysł. w takim przypadku są one nazywane badaniami podstawowymi skierowanymi (czupiał 1994: 11). badaniami stosowanymi są działania podejmowane w celu zdobycia nowej wiedzy naukowej lub technicznej, niezbędnej do rozwiązania konkretnego problemu. tym różnią się od badań podstawowych, że mają cel praktyczny. są odpowiedzią na zapotrzebowanie rynkowe. podejmując tego typu badania, zakłada się możliwość powstania wynalazku lub innego wytworu myśli ludzkiej chronionego prawem (czupiał 1994: 11). prace rozwojowe polegają na praktycznym zastosowaniu wiedzy, w tym wynalazków, w celu eksperymentalnego wytworzenia nowego lub udoskonalonego produktu czy technologii, które ma miejsce przed rozpoczęciem produkcji seryjnej lub zastosowaniem (czupiał 1994: 12). prace rozwojowe są podejmowane w celu praktycznego wykorzystania wynalazku w praktyce. efektem prac rozwojowych jest skonstruowanie modelu lub prototypu, opracowanie   koszty działalności badawczo-rozwojowej w świetle przepisów… 99 dokumentacji technicznej, analiza rynku ze względu na wielkość popytu oraz ze względu na możliwości kooperantów, opracowanie planów finansowych ze względu na rentowność oraz możliwość pozyskania źródeł finansowania. prace rozwojowe są wspólnym wysiłkiem pracowników naukowych i pracowników przedsiębiorstwa, zamierzającego wdrożyć innowację, co wynika z konieczności przystosowania wynalazku do możliwości technicznych przedsiębiorstwa. każda z wyżej wymienionych aktywności, stanowiących istotę działalności badawczo-rozwojowej, generuje koszty, których ponoszenie jest szczególnie ryzykowne dla przedsiębiorstw ze względu na niepewność powodzenia wdrożenia efektów tych prac. przykładowe koszty działalności badawczo-rozwojowej zaprezentowano w tabeli 1. tabela 1. przykładowe koszty działalności badawczo-rozwojowej koszty prac badawczych (podstawowych i stosowanych) koszty prac rozwojowych – amortyzacja, – ekspertyzy, – naprawy, – usługi obce, – utrzymanie biur, – utrzymanie laboratoriów, – wynagrodzenia z narzutami, – zużycie materiałów, – zużycie narzędzi – granty i stypendia naukowe, – publikacje naukowe, – staże naukowe, – szkolenie kadr, – udział w konferencjach. – amortyzacja, – badania uzupełniające, – ekspertyzy, – eksperymentalne wytworzenie, – marketingowa analiza rynku, – ochrona patentowa, – opracowanie prototypu, – prace konstrukcyjne, – prace projektowe, – inne prawa ochronne, – przeszkolenie pracowników, – przygotowanie dokumentacji, – sprawdzenie prototypu, – ulepszenie prototypu. ź r ó d ł o: opracowanie własne na podstawie: cholewicka-goździk 1984: 90; podręcznik frascati 2002, rozdz. 6. analiza kosztów wymienionych w tabeli 1 potwierdza odmienność prac badawczych i rozwojowych. jeżeli pierwsze z nich skupiają się głównie na pracy naukowej, drugie są ukierunkowane na praktyczne jej wykorzystanie. nie piotr kozak or 100 zmienia tego fakt, że część kosztów jest wspólnych zarówno dla prac badawczych, jak i rozwojowych. w celu wdrożenia innowacji przedsiębiorstwa nie muszą przechodzić przez każdy z etapów procesu. część przedsiębiorstw, ze względu na stopień trudności, niepewności i wysokich kosztów zleca ich wykonanie lub nabywa od zewnętrznych podmiotów licencje, patenty bądź inne wytwory myśli ludzkiej strzeżone prawami ochronnymi. 2. koszty działalności badawczo-rozwojowej według ustawy o rachunkowości ustawa o rachunkowości traktuje koszty działalności badawczo-rozwojowej w sposób fragmentaryczny. przemilcza zupełnie kwestię kosztów działalności badawczej, o kosztach działalności rozwojowej wspomina zaś, bez podania definicji, w kontekście wyłącznie zakończonych prac. zgodnie z treścią art. 3 ust. 1 pkt 14 przedsiębiorstwa zaliczają koszty zakończonych prac rozwojowych do wartości niematerialnych i prawnych, jeżeli zostaną spełnione warunki, o których mowa w art. 33 ust. 2. z artykułu tego wynika, że „koszty zakończonych prac rozwojowych prowadzonych przez jednostkę na własne potrzeby, poniesione przed podjęciem produkcji lub zastosowaniem technologii, zalicza się do wartości niematerialnych i prawnych, jeżeli: 1. produkt lub technologia wytwarzania są ściśle ustalone, a dotyczące ich koszty prac rozwojowych wiarygodnie określone; 2. techniczna przydatność produktu lub technologii została stwierdzona i odpowiednio udokumentowana i na tej podstawie jednostka podjęła decyzję o wytwarzaniu tych produktów lub stosowaniu technologii; 3. koszty prac rozwojowych zostaną pokryte, według przewidywań, przychodami ze sprzedaży tych produktów lub zastosowania technologii”. jeżeli zostaną spełnione łącznie warunki określone w art. 33 ust. 2 ustawy, koszty zakończonych prac rozwojowych zostaną zaliczone do wartości niematerialnych i prawnych, a maksymalny okres ich amortyzowania, zgodnie z art. 33 ust. 3, wyniesie 5 lat. z kolei, jeżeli nie zostanie spełniony jeden z warunków art. 33 ust. 2 ustawy, koszty zakończonych prac rozwojowych zostaną wpisane w ciężar pozostałych kosztów operacyjnych. odnośnie do kosztów prac badawczych, o których ustawa o rachunkowości nie wspomina, z pomocą przychodzą przepisy art. 10 ust. 3 ustawy, z których   koszty działalności badawczo-rozwojowej w świetle przepisów… 101 wynika, że „w sprawach nieuregulowanych przepisami ustawy, przyjmując zasady (politykę) rachunkowości, jednostki mogą stosować krajowe standardy rachunkowości wydane przez komitet standardów rachunkowości. w przypadku braku odpowiedniego standardu krajowego jednostki, inne niż wymienione w art. 2 ust. 3, mogą stosować msr”. ponieważ żaden z krajowych standardów nie odnosi się do prac badawczo-rozwojowych, jedynym wyjściem pozostaje skorzystać z rozwiązań zawartych w międzynarodowym standardzie rachunkowości nr 38 wartości niematerialne. 3. koszty działalności badawczo-rozwojowej według międzynarodowego standardu rachunkowości nr 38 wartości niematerialne w międzynarodowym standardzie rachunkowości nr 38 wartości niematerialne – zgodnie z § 5 – koszty działalności badawczo-rozwojowej określa się ogólnie jako koszty działalności ukierunkowanej na rozwój wiedzy. główny cel tej działalności, polegający na pozyskaniu nowej wiedzy, tłumaczy kwalifikowanie efektów tych prac do wartości niematerialnych i prawnych, nawet jeżeli ta działalność kończy się wytworzeniem prototypu, mającego atrybuty aktywa materialnego. międzynarodowy standard rachunkowości nr 38 wartości niematerialne w odróżnieniu od ustawy o rachunkowości przytacza również definicje oddzielnie dla prac badawczych, jak i rozwojowych. prace badawcze – zgodnie z § 8 – definiuje się jako nowatorskie i zaplanowane poszukiwanie rozwiązań podjęte z zamiarem zdobycia i przyswojenia nowej wiedzy naukowej i technicznej. koszty prac badawczych – zgodnie z § 54 – podlegają w całości zaliczeniu do kosztów okresu, w jakim zostały one poniesione. nie są w związku z tym aktywowane w bilansie jako wartości niematerialne i prawne. uzasadnia się to tym, że na etapie prac badawczych przedsiębiorstwo nie jest w stanie określić prawdopodobieństwa oraz skali osiągniętych w przyszłości korzyści. w § 56 wymieniono prace badawcze, do których zaliczono: 1. działania zmierzające do zdobycia nowej wiedzy; 2. poszukiwanie, ocenę i końcową selekcję sposobu wykorzystania rezultatów prac badawczych lub wiedzy innego rodzaju; 3. poszukiwanie alternatywnych materiałów, urządzeń, produktów, procesów, systemów lub usług oraz piotr kozak or 102 4. formułowanie, projektowanie, ocenę i końcową selekcję nowych lub udoskonalonych materiałów, urządzeń, produktów, procesów, systemów lub usług. schemat 2. ewidencja kosztów prac badawczych na własne potrzeby rozliczenie koszt własny konta różne koszty „4” kosztów koszty „5” sprzedaży schemat 2. ewidencja kosztów prac badawczych na własne potrzeby (1) poniesienie kosztów rodzajowych w związku z pracami badawczymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) obciążenie kosztów bieżącego okresu. źródło: opracowanie własne. z kolei prace rozwojowe – zgodnie z § 8 – są definiowane jako „praktyczne zastosowanie odkryć badawczych lub też osiągnięć innej wiedzy w planowaniu lub projektowaniu produkcji nowych lub znacznie udoskonalonych materiałów, urządzeń, produktów, procesów technologicznych, systemów lub usług, które ma miejsce przed rozpoczęciem produkcji seryjnej lub zastosowaniem”. koszty prac rozwojowych – zgodnie z § 57 – ujmuje się w wartościach niematerialnych i prawnych, jeżeli przedsiębiorstwo udowodni: 1. możliwość, z technicznego punktu widzenia, ukończenia składnika wartości niematerialnych tak, aby nadawał się do użytkowania lub sprzedaży; 2. zamiar ukończenia składnika wartości niematerialnych oraz jego użytkowania lub sprzedaży; 3. zdolność do użytkowania lub sprzedaży składnika wartości niematerialnych; 4. sposób, w jaki składnik wartości niematerialnych będzie wytwarzał prawdopodobne przyszłe korzyści ekonomiczne; między innymi jednostka może udowodnić istnienie rynku na produkty powstające dzięki składnikowi wartości niematerialnych lub na sam składnik bądź – jeśli składnik ma być użytkowany przez jednostkę – użyteczność składnika wartości niematerialnych; 5. dostępność stosownych środków technicznych, finansowych i innych, które mają służyć ukończeniu prac rozwojowych oraz użytkowaniu lub sprzedaży składnika wartości niematerialnych; 6. możliwość wiarygodnego ustalenia nakładów poniesionych w czasie prac rozwojowych, które można przyporządkować temu składnikowi wartości niematerialnych. w paragrafie 59 wymieniono prace rozwojowe, do których zaliczono: (1) (2) (3) (1) poniesienie kosztów rodzajowych w związku z pracami badawczymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) obciążenie kosztów bieżącego okresu. ź r ó d ł o: opracowanie własne. z kolei prace rozwojowe – zgodnie z § 8 – są definiowane jako „praktyczne zastosowanie odkryć badawczych lub też osiągnięć innej wiedzy w planowaniu lub projektowaniu produkcji nowych lub znacznie udoskonalonych materiałów, urządzeń, produktów, procesów technologicznych, systemów lub usług, które ma miejsce przed rozpoczęciem produkcji seryjnej lub zastosowaniem”. koszty prac rozwojowych – zgodnie z § 57 – ujmuje się w wartościach niematerialnych i prawnych, jeżeli przedsiębiorstwo udowodni: 1. możliwość, z technicznego punktu widzenia, ukończenia składnika wartości niematerialnych tak, aby nadawał się do użytkowania lub sprzedaży; 2. zamiar ukończenia składnika wartości niematerialnych oraz jego użytkowania lub sprzedaży; 3. zdolność do użytkowania lub sprzedaży składnika wartości niematerialnych; 4. sposób, w jaki składnik wartości niematerialnych będzie wytwarzał prawdopodobne przyszłe korzyści ekonomiczne; między innymi jednostka może udowodnić istnienie rynku na produkty powstające dzięki składnikowi wartości niematerialnych lub na sam składnik bądź – jeśli składnik ma być użytkowany przez jednostkę – użyteczność składnika wartości niematerialnych; 103  koszty działalności badawczo-rozwojowej w świetle przepisów… 5. dostępność stosownych środków technicznych, finansowych i innych, które mają służyć ukończeniu prac rozwojowych oraz użytkowaniu lub sprzedaży składnika wartości niematerialnych; 6. możliwość wiarygodnego ustalenia nakładów poniesionych w czasie prac rozwojowych, które można przyporządkować temu składnikowi wartości niematerialnych. w paragrafie 59 wymieniono prace rozwojowe, do których zaliczono: 1. projektowanie, wykonanie i testowanie prototypów i modeli doświadczalnych (przed ich wdrożeniem do produkcji seryjnej lub użytkowania); 2. projektowanie narzędzi, przyrządów do obróbki, form i matryc z wykorzystaniem nowej technologii; 3. projektowanie, wykonanie i funkcjonowanie linii pilotażowej, której wielkość nie umożliwia prowadzenia ekonomicznie uzasadnionej produkcji przeznaczonej na sprzedaż; 4. projektowanie, wykonanie i testowanie wybranych rozwiązań w zakresie nowych lub udoskonalonych materiałów, urządzeń, produktów, procesów, systemów lub usług. schemat 3. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte i zakończone w bieżącym okresie) wartości rozliczenie koszty obrotów obroty niematerialne konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne i prawne 1. projektowanie, wykonanie i testowanie prototypów i modeli doświadczalnych (przed ich wdrożeniem do produkcji seryjnej lub użytkowania); 2. projektowanie narzędzi, przyrządów do obróbki, form i matryc z wykorzystaniem nowej technologii; 3. projektowanie, wykonanie i funkcjonowanie linii pilotażowej, której wielkość nie umożliwia prowadzenia ekonomicznie uzasadnionej produkcji przeznaczonej na sprzedaż; 4. projektowanie, wykonanie i testowanie wybranych rozwiązań w zakresie nowych lub udoskonalonych materiałów, urządzeń, produktów, procesów, systemów lub usług. schemat 3. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty wartości niematerialne konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne i prawne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. źródło: opracowanie własne. schemat 4. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty wartości niematerialne wewnętrzne i prawne (1) (2) (3) (4) (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. ź r ó d ł o: opracowanie własne. piotr kozak or 104 schemat 4. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów konta różne koszty „4” kosztów koszty „5” rmk czynne wewnętrznych 1. projektowanie, wykonanie i testowanie prototypów i modeli doświadczalnych (przed ich wdrożeniem do produkcji seryjnej lub użytkowania); 2. projektowanie narzędzi, przyrządów do obróbki, form i matryc z wykorzystaniem nowej technologii; 3. projektowanie, wykonanie i funkcjonowanie linii pilotażowej, której wielkość nie umożliwia prowadzenia ekonomicznie uzasadnionej produkcji przeznaczonej na sprzedaż; 4. projektowanie, wykonanie i testowanie wybranych rozwiązań w zakresie nowych lub udoskonalonych materiałów, urządzeń, produktów, procesów, systemów lub usług. schemat 3. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty wartości niematerialne konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne i prawne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. źródło: opracowanie własne. schemat 4. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty wartości niematerialne wewnętrzne i prawne (1) (2) (3) (4) obroty wartości niematerialne wewnętrzne i prawne 1. projektowanie, wykonanie i testowanie prototypów i modeli doświadczalnych (przed ich wdrożeniem do produkcji seryjnej lub użytkowania); 2. projektowanie narzędzi, przyrządów do obróbki, form i matryc z wykorzystaniem nowej technologii; 3. projektowanie, wykonanie i funkcjonowanie linii pilotażowej, której wielkość nie umożliwia prowadzenia ekonomicznie uzasadnionej produkcji przeznaczonej na sprzedaż; 4. projektowanie, wykonanie i testowanie wybranych rozwiązań w zakresie nowych lub udoskonalonych materiałów, urządzeń, produktów, procesów, systemów lub usług. schemat 3. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty wartości niematerialne konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne i prawne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. źródło: opracowanie własne. schemat 4. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty wartości niematerialne wewnętrzne i prawne (5) (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. ź r ó d ł o: opracowanie własne. schemat 5. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty pozostałe koszty konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne operacyjne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. źródło: opracowanie własne. schemat 5. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty pozostałe koszty konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne operacyjne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. źródło: opracowanie własne. schemat 6. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. (1) (2) (3) (4) (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. ź r ó d ł o: opracowanie własne. 105  koszty działalności badawczo-rozwojowej w świetle przepisów… schemat 6. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów konta różne koszty „4” kosztów koszty „5” rmk czynne wewnętrznych (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. źródło: opracowanie własne. schemat 5. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty pozostałe koszty konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne operacyjne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. źródło: opracowanie własne. schemat 6. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. (1) (2) (3) (4) obroty pozostałe koszty wewnętrzne operacyjne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych na wartości niematerialne i prawne. źródło: opracowanie własne. schemat 5. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte i zakończone w bieżącym okresie) rozliczenie koszty obrotów obroty pozostałe koszty konta różne koszty „4” kosztów koszty „5” wewnętrznych wewnętrzne operacyjne (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (4) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. źródło: opracowanie własne. schemat 6. ewidencja kosztów zakończonych prac rozwojowych na własne potrzeby bez efektu (rozpoczęte w poprzednim i zakończone w bieżącym okresie) rozliczenie koszty obrotów (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. (5) (1) poniesienie kosztów rodzajowych w związku z pracami rozwojowymi. (2) księgowanie kosztów prac rozwojowych ze względu na miejsce ich poniesienia. (3) przeniesienie kosztów prac rozwojowych na rozliczenia międzyokresowe kosztów czynne. (4) przeniesienie kosztów prac rozwojowych poza krąg kosztów. (5) rozliczenie zakończonych prac rozwojowych w ciężar pozostałych kosztów operacyjnych. ź r ó d ł o: opracowanie własne. warianty ewidencji kosztów prac rozwojowych ze względu na czas ich realizacji oraz efekt końcowy można przedstawić także na układzie współrzędnych, tak jak na schemacie 7. prezentacja kosztów prac rozwojowych na układzie współrzędnych, inaczej niż ewidencja na kontach, uwypukla ryzyko związane z realizacją tego typu przedsięwzięć. ponadto, usytuowanie punktów początkowych prac rozwojowych ponad osią czasu oznacza, że wszystkie one są realizowane w celu uzyskania zamierzonego efektu, którego celem jest przyrost stanu majątku lub inne korzyści. jedynie nieprzewidziane zdarzenia mogą doprowadzić do wpisania poniesionych nakładów w ciężar pozostałych kosztów operacyjnych. piotr kozak or 106 schemat 7. koszty prac rozwojowych ze względu na czas ich trwania i efekt źródło: opracowanie własne. warianty ewidencji kosztów prac rozwojowych ze względu na czas ich realizacji oraz efekt końcowy można przedstawić także na układzie współrzędnych, tak jak na schemacie 7. schemat 7. koszty prac rozwojowych ze względu na czas ich trwania i efekt efekt t –n t n czas gdzie: t n – rozpoczęcie prac rozwojowych w bieżącym okresie, t –n – rozpoczęcie prac rozwojowych w poprzednich okresach. źródło: opracowanie własne. prezentacja kosztów zamierzony efekt, jak: – wartości niematerialne niezamierzony efekt, jak: – pozostałe koszty gdzie: t n – rozpoczęcie prac rozwojowych w bieżącym okresie, t –n – rozpoczęcie prac rozwojowych w poprzednich okresach. ź r ó d ł o: opracowanie własne. w tabeli 2 zebrano wybrane regulacje dotyczące działalności badawczo-rozwojowej. tabela 2. wybrane regulacje w zakresie prac działalności badawczo-rozwojowej ustawa o rachunkowości krajowe standardy rachunkowości międzynarodowe standardy rachunkowości prace badawcze brak brak 1. prace badawcze definiuje się jako nowatorskie i zaplanowane poszukiwanie rozwiązań podjęte z zamiarem zdobycia i przyswojenia nowej wiedzy naukowej i technicznej (§ 8). 2. jednostka, która nie jest w stanie oddzielić etapu prac badawczych od etapu prac rozwojowych przedsięwzięcia prowadzącego do wytworzenia składnika wartości niematerialnych, traktuje nakłady na to przedsięwzięcie, jak gdyby zostały poniesione wyłącznie na etapie prac badawczych (§ 53). 3. nakłady poniesione na prace badawcze (lub na realizację etapu prac badawczych przedsięwzięcia prowadzonego we własnym zakresie) ujmuje się w kosztach w momencie ich poniesienia (§ 54). 107  koszty działalności badawczo-rozwojowej w świetle przepisów… ustawa o rachunkowości krajowe standardy rachunkowości międzynarodowe standardy rachunkowości prace rozwojowe 1. do wartości niematerialnych i prawnych zalicza się również nabytą wartość firmy oraz koszty zakończonych prac rozwojowych (art. 3 ust. 1). 2. koszty zakończonych prac rozwojowych prowadzonych przez jednostkę na własne potrzeby, poniesione przed podjęciem produkcji lub zastosowaniem technologii, zalicza się do wartości niematerialnych i prawnych, jeżeli: – produkt lub technologia wytwarzania są ściśle ustalone, a dotyczące ich koszty prac rozwojowych wiarygodnie określone; – techniczna przydatność produktu lub technologii została stwierdzona i odpowiednio udokumentowana i na tej podstawie jednostka podjęła decyzję o wytwarzaniu tych produktów lub stosowaniu technologii; – koszty prac rozwojowych zostaną pokryte, według przewidywań, przychodami ze sprzedaży tych produktów lub zastosowania technologii (art. 33 ust. 2). 3. okres dokonywania odpisów amortyzacyjnych od kosztów zakończonych prac rozwojowych nie może przekraczać 5 lat (art. 33 ust. 3). brak 1. prace rozwojowe są praktycznym zastosowaniem odkryć badawczych lub też osiągnięć innej wiedzy w planowaniu lub projektowaniu produkcji nowych lub znacznie udoskonalonych materiałów, urządzeń, produktów, procesów technologicznych, systemów lub usług, które ma miejsce przed rozpoczęciem produkcji seryjnej lub zastosowaniem (§ 8). 2. w niektórych przypadkach jednostka ponosi nakłady w celu osiągnięcia przyszłych korzyści ekonomicznych, ale nie nabywa ani nie tworzy żadnego składnika wartości niematerialnych lub innego składnika aktywów, który mógłby zostać ujęty. w takich przypadkach nakłady są ujmowane w ciężar rachunku zysków i strat w momencie ich poniesienia (§ 69). ź r ó d ł o: opracowanie własne. podsumowując, należy stwierdzić, że ocena systemu ewidencyjnego kosztów prac badawczo-rozwojowych, wynikającego ze stosowania przepisów ustawy o rachunkowości i międzynarodowego standardu rachunkowości nr 38 wartości niematerialne, jest jednoznacznie negatywna. sposób ujmowania kosztów w ewidencji nie pozwala na prawidłową wycenę potencjalnych wartości niematerialnych i prawnych z powodu księgowania kosztów prac badawczych bezpośrednio w koszty działalności bez względu na efekt. tymczasem prace te są podejmowane niejednokrotnie w związku z realizacją projektów innowacyjnych, których prace badawcze stanowią często pierwszy i niezwykle ważny etap. piotr kozak or 108 4. prezentacja i wycena kosztów działalności badawczo-rozwojowej na podstawie przepisów międzynarodowego standardu rachunkowości nr 38 wartości niematerialne koszty prac badawczych ujmuje się w kosztach okresu, w którym zostały poniesione, przez co kształtują one wynik ze sprzedaży lub z działalności operacyjnej. z kolei koszty prac rozwojowych wykazuje się w bilansie w wartościach niematerialnych i prawnych. ustawa o rachunkowości, w zakresie kosztów prac rozwojowych, stosuje podobne rozwiązania jak w msr nr 38, a o kosztach prac działalności badawczej nie wspomina. mając na uwadze treść art. 10 ustawy oraz brak krajowych standardów w tym zakresie, podmioty sporządzające sprawozdanie finansowe zgodnie z ustawą o rachunkowości i międzynarodowymi standardami rachunkowości będą podobnie ewidencjonować i prezentować koszty działalności badawczo-rozwojowej. powstaje w związku z tym pytanie, czy ta unifikacja w regulacjach krajowych i międzynarodowych oznacza, że przyjęte rozwiązania są najlepsze z możliwych? dokładniejsza analiza przytoczonych wyżej rozwiązań może jednak wzbudzać uzasadnione wątpliwości, które zostaną wyjaśnione na przykładzie patentu. patent jest prawem majątkowym i rezultatem prac rozwojowych. przedsiębiorstwo może wejść w posiadanie wiedzy usankcjonowanej patentem na dwa sposoby. może ją uzyskać, prowadząc prace badawcze i rozwojowe we własnym zakresie (lub tylko rozwojowe), albo kupić od innego podmiotu. w pierwszym przypadku powstaną koszty o wartości przypadającej na prace badawcze oraz wartość niematerialna i prawna w wartości odpowiadającej nakładom na prace rozwojowe. w drugim przypadku przedsiębiorstwo wykaże tylko wartość niematerialną i prawną. sposób pozyskania patentu nie determinuje sposobu jego wykorzystania, ale sposób jego wyceny – już tak. księgowanie kosztów prac badawczych w ciężar kosztów okresu nabiera szczególnego znaczenia w przypadku, gdy przedsiębiorstwo prowadzi tego typu prace sporadycznie. spowoduje to zniekształcenie wyniku finansowego w okresie trwania prac badawczych o koszty, które w przedsiębiorstwie występują okazjonalnie (wyjątkiem są ośrodki badawcze). rozwiązaniem, które nie wpływa na zniekształcenie wyniku finansowego, jest księgowanie kosztów prac badawczych, podobnie jak w praktyce gospodarczej z kosztami prac rozwojowych, na koncie rozliczeń międzyokresowych. taki sposób księgowania jest uzasadniony, ponieważ przedsiębiorstwa, podejmując prace badawcze, liczą na efekty w postaci nowych rozwiązań. zaliczanie kosztów tych prac w ciężar kosztów w trakcie ich prowadzenia wydaje się   koszty działalności badawczo-rozwojowej w świetle przepisów… 109 przedwczesne. w przypadku, gdy prace badawcze zakończą się bez efektu, obciążenie kosztów następowałoby w okresie, gdy przedsiębiorstwo ma o tym stuprocentową pewność. dzielenie prac na badawcze i rozwojowe w przypadku, gdy granica między nimi jest płynna, to działanie subiektywne. szczególnie, jeżeli koszty tych prac są wysokie, istnieje ryzyko manipulowania wynikiem finansowym. jeżeli koszty zaliczymy do prac badawczych, to nastąpi zmniejszenie wyniku finansowego, jeżeli zaliczymy do prac rozwojowych, mamy składnik aktywów, bez wpływu na wysokość wyniku finansowego w określonym przedziale czasu. odmienne, ze względu na sposób prezentacji, traktowanie kosztów prac badawczych i rozwojowych skutkuje wyceną wartości niematerialnych i prawnych lub innych aktywów w wartości niższej o wartość kosztów prac badawczych.  zakończenie jednym z celów zarządzania przedsiębiorstwem jest zdobycie przewagi konkurencyjnej, którą realizuje się między innymi przez innowacje. do sprawnego zarządzania innowacjami niezbędny jest dobrze funkcjonujący system ewidencyjny, generujący informacje o kosztach ich wprowadzania. system, który dostarczy kompleksowych danych do oceny poniesionych nakładów pod kątem efektywnego ich wykorzystania. niestety, obecnie stosowane systemy ewidencyjne, regulowane przepisami ustawy o rachunkowości, jak i międzynarodowego standardu rachunkowości nr 38 wartości niematerialne, służą jednak przede wszystkim celom sprawozdawczym, a nie decyzyjnym. bardzo dobrze widać to na przykładzie kosztów prac badawczo-rozwojowych, których sposób ewidencji i prezentacji nie ułatwia pozyskiwania użytecznych informacji o nich do celów decyzyjnych. odczuwa się to szczególnie w przypadku, gdy prace badawcze są prowadzone w długim okresie. z tego powodu wątpliwości budzi przede wszystkim bezpośrednie odnoszenie w koszty tych prac od momentu ich rozpoczęcia, aż do zakończenia, bez względu na efekt. skutkuje to tym, że wycena wartości niematerialnej i prawnej zrealizowanej w wyniku prac rozwojowych nie obejmuje kosztów uprzednio prowadzonych prac badawczych. inną kwestią pozostaje kwalifikacja kosztów do prac badawczych i rozwojowych, co przy wzajemnym przenikaniu się tych dwóch etapów procesu innowacyjnego może prowadzić do prób manipulowania wysokością wyniku finansowego. piotr kozak110  literatura baruk j. (1992), innowacje czynnikiem efektywnego rozwoju przedsiębiorstwa (aspekty ekonomiczno-organizacyjne), wydawnictwo uniwersytetu marii curie-skłodowskiej, lublin. cholewicka-goździk k. (1984), kompleksowa ocena jakości. metoda, przykłady, wydawnictwo naukowe pwn, warszawa. czupiał j. (red.) (1994), ekonomika innowacji, wydawnictwo akademii ekonomicznej im. oskara langego we wrocławiu, wrocław. międzynarodowy standard rachunkowości nr 38, wartości niematerialne, [w:] rozporządzenie komisji (we) nr 1126/2008 z dnia 3 listopada 2008 r. przyjmujące określone międzynarodowe standardy rachunkowości zgodnie z rozporządzeniem (we) nr 1606/2002 parlamentu europejskiego i rady, http://www.mf.gov.pl/ministerstwo-finansow/dzialalnosc/rachunkowosc/miedzynarodowe-standardy-rachunkowosci (dostęp 20.11.2012). podręcznik frascati. proponowane procedury standardowe dla badań statystycznych w zakresie działalności badawczo-rozwojowej (2002), oecd. podręcznik oslo. zasady gromadzenia i interpretacji danych dotyczących innowacji (2005), oecd, eurostat. pomykalski a. (2001a), innowacje, wydawnictwo politechniki łódzkiej, łódź 2001. pomykalski a. (2001b), zarządzanie innowacjami, wydawnictwo naukowe pwn, warszawa–łódź. słownik wyrazów obcych, http://www.swo.pwn.pl/haslo.php?id=11855 (dostęp 20.11. 2012). ustawa z dnia 29 września 1994 r. o rachunkowości (dz. u. 09.152.1223). date of submission: february 2, 2020; date of acceptance: march 3, 2020. * contact information: ansita04@ediindia.org, entrepreneurship development institute of india, p.o. bhat 382 428, dist. gandhinagar, gandhinagar, gujarat, india, phone: 8672810097; orcid id: https://orcid.org/0000-0002-2510-2025. ** contact information: satya@ediindia.org, entrepreneurship development institute of india, p.o. bhat 382 428, dist. gandhinagar, gandhinagar, gujarat, india, phone: 7600050606; orcid id: https://orcid.org/0000-0002-4334-2137. aggarwal, a., & acharya, s.r. (2019). choosing equity as a source of finance: perception of sme promoters. copernican journal of finance & accounting, 8(4), 27–46. http://dx.doi.org/10.12775/ cjfa.2019.016 ansita aggarwal* entrepreneurship development institute of india satya ranjan acharya** entrepreneurship development institute of india choosing equity as a source of finance: perception of sme promoters keywords: sme, finance, equity, perception, promoters. j e l classification: g100, g320, g410, l260. abstract: this paper tries to understand the perception of smes’ promoters in choosing equity as one of their sources of finance. to explore reasons the research has been done in five phases which included: a literature review, offer document objectives, ratio analysis, and in-depth interviews of five sme owners of gujarat. in the last phase, all the reasons have been simplified by including them in five broad themes. the study analyzed the five broad themes as bank loan barriers, financial factors, growth factors, economic factors, and other barriers. the research has been carried in gujarat so there is a need for further research all over india. this is going to help smes in understanding the pros and cons of selecting a particular avenue as a source of finance. smes are the engine of most of the developing nations. this makes it necessary to study them in detail so that the environment can be made friendly for them. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 ansita aggarwal, satya ranjan acharya28  introduction the mantle of sme’s (small and medium enterprises) in indian economic and social development has been universally acknowledged (annual report, 2017- 18; singh & kumar, 2017; yadav, 2012; jahanshahi, nawaser, sadeqkhaksar & kamalian, 2011; ghatak, 2010). smes are significant part of any developing economy and it needs to be examined as thoroughly as possible. the research on smes is substantial as they contribute 37% of gross domestic product (gdp) in india and constitute 40% of exports and 90% of an industrial ecosystem and finally represent about 45% of the manufacturing sector (baker, kumar & rao, 2017). beck et al. described, that the growth of sme will depend on various factors like access to finance, property right protection, provision of infrastructure, efficient regulation and taxation, and broader governance features such as corruption, macroeconomic and political stability. the small firms face almost twice or thrice the magnitude of obstacles on the basis of finance, legal and corruption in comparison to large firms (beck & demirguc-kunt, 2006). sme has also enacted a significant role in employment and industrializing the backward and rural areas of any country (sarkar, 2016; nikaido, pais & sarma, 2015; jahanshahi et al., 2011; ghatak, 2010; banerjee, 2006; beck & demirguckunt, 2006; cook, 2001). smes’ existence is being threatened as there is, up until now a large credit gap in india. this gap represents the result of lack of expertise on the bank side to evaluate smes and because of lack of creditworthiness among them (baker, kumar & rao, 2017). smes least preferred source from the outlook of owners was equity funding (baker, kumar & rao, 2017; sarkar, 2016). the primary reason behind less preference of equity finance was intricate listing procedures and their ineptitude in meeting compliance requirements (baker, kumar & rao, 2017). generally, this source of finance takes more time and cost in the initial stage of financing in comparison to other sources of finance (sarkar, 2016). it shows how finance has a substantial importance in the growth and development of smes. this specifies that equity is not that much a preferable source of finance for smes because of the intricate procedures and compliance requirements. this paper is trying to explore the reasons behind choosing equity as a source of finance by the promoters of smes. choosing equity as a source of finance… 29 literature review (phase-1) msme according to government of india (nic, 2018), msme have been defined according to the micro, small & medium enterprises development (msmed) act, 2006. msme has been classified into the following two categories manufacturing and service enterprises based on investment mentioned in table 1 and 2: table 1. manufacturing enterprises enterprises investment in plant & machinery micro enterprises does not exceed 25 lakh small enterprises more than 25 lakh but does not exceed 5 crore medium enterprises more than 5 crore but does not exceed 10 crore s o u r c e : nic, 2018. table 2. service enterprises enterprises investment in equipment micro enterprises does not exceed 10 lakh small enterprises more than 10 lakh but does not exceed 2 crore medium enterprises more than 2 crore but does not exceed 5 crore s o u r c e : nic, 2018. role of msme in indian economy msmes have not just opened door to promising avenues for the entrepreneurs but also for the lending institutions, the stock market, researchers, regulatory and policy makers, etc (annual report msme government, 2017-18; yadav, 2012). according to the annual report contribution done to gross value added (gva) and gdp in india for last 5 years is given in table 3 (annual report 2017- 18, 2018, p. 22). ansita aggarwal, satya ranjan acharya30 table 3. contribution of msme year growth in gva share of msme in gva share of msme in gdp 2011-12 31.86% 29.57% 2012-13 15.27% 32.36% 29.94% 2013-14 12.27% 32.26% 29.76% 2014-15 9.43% 31.86% 29.39% 2015-16 7.62% 31.60% 28.77% s o u r c e : annual report 2017-18,2018. importance of finance for sme the majority of sme’s have more constraints than large firms in procuring formal finance (maiti, 2018; baker, kumar & rao, 2017; jayadev, singh & kumar, 2017; ramcharran, 2017; rao, kumar, gaur & verma, 2017; singh & kumar, 2017; thampy, 2010; banerjee, 2006; beck & demirguc-kunt, 2006; cook, 2001). the importance of finance for sme has been rocketed as it helps in economic development and also in assuaging the poverty of any country. presently, majority of the countries are focusing on policy making related to finance of sme (kersten, harms, liket & maas, 2017; ramcharran, 2017; rao et al., 2017; thampy, 2010; beck & demirguc-kunt, 2006). according to the world business environment survey (wbes) conducted in 1999 and 2000 for over 10,000 firms in more than 80 countries small firms have listed financing as their major obstacle. these organizations have to manage finance for their need of fixed and working capital (baker, kumar & rao, 2017; jayadev, singh & kumar, 2017; rao et al., 2017; ramcharran, 2017; singh & kumar, 2017; sarkar, 2016; beck & demirguc-kunt,2006). bank loan in india, banks serve as the leading source of providing finance to any industry. it is even more crucial for smes as they don’t enjoy that much access to capital markets (thampy, 2010; cook, 2001). bank loan has been a notable source of finance for sme from the establishment of such kind of firms (maiti, 2018; ramcharran, 2017; nikaido, pais & sarma, 2015; thampy, 2010). from the be choosing equity as a source of finance… 31 ginning of nationalization of banks, it has been made compulsory for them to provide 40% of their credit to ‘priority’ sectors which include msme and agriculture (maiti, 2018; ramcharran, 2017; nikaido, pais & sarma, 2015; thampy, 2010). they were on top entitle to some privileges in the form of low-interest rates. the premier financial institution was set up in 1990 known as small industries development bank (sidb) for advancement and assistance of sme sector (maiti, 2018; ramcharran, 2017; nikaido, pais & sarma, 2015). the other institutes which provide the loans to msmes are commercial banks, non-banking finance companies (nbfcs) and some smaller banks such as regional rural banks and urban cooperative banks (rao et al., 2017). the establishment of microfinance institutions (mfis) helped in strengthening financial institutions specifically for smes (sarkar, 2016). the loan provided to the firms is on the basis of two kinds of information which is hard and soft information. the ‘hard’ information relates to quantitative data provided, and ‘soft’ information relates to the relationship based lending (thampy, 2010; berger & udell, 2006). most of the time loans have been provided to sme on the basis of soft information that is produced by personal or direct contact of officers (jayadev, singh & kumar, 2017; ramcharran, 2017; rao et al., 2017; berger & udell, 2006). this scenario is more formidable hurdle for new and financially distressed smes as they would not be able to provide relationship creditworthiness (rao et al., 2017). this, in turn, leads to high transaction costs and risk premiums (sarkar, 2016; nikaido, pais & sarma, 2015; chakraborty, 2010; allen, chakrabarti, de, qian & qian, 2006; beck & demirguc-kunt, 2006; cook, 2001). banks have also felt that smes are not appealing them much as they are contemplated as the high-risk borrower because of their inadequate assets, low capitalization and high mortality rates (thampy, 2010; raja & kumar, 2007; banerjee, 2006). the small firms have to rely more on informal lending such as moneylenders or family and friends than banks, equity, lease, etc (baker, kumar & rao, 2017; banerjee, 2006; beck & demirguc-kunt, 2006). to reduce the risk of collateral, many institutions have come up with asset-based lending and leasing (beck & demirguc-kunt, 2006). presently, the gap can be seen between the demand side and supply side of bank loans as it can be seen that there is an exceptionally high growth rate of smes in india (maiti, 2018). formal sources are barely able to serve less than 25% of total debt requirement in india (rao et al., 2017). from 2001 the number of sick units has increased which has also affected banks as there were a lot of outstanding loans (ramcharran, 2017; nikaido, pais & sarma, 2015). ansita aggarwal, satya ranjan acharya32 according to rao et al. (2017), there are four types of financing gaps present in smes. the firstmost gap is known as demand gap which arises because of more preference of smes towards the internal source of finance than external source (rao et al., 2017; chakraborty, 2010; allen et al., 2006). the reason behind this preference is cumbersome procedures, the requirement of collateral, high moratorium period, high-interest rates and nonfamiliarity with banks. the second type of gap is the knowledge gap which represents lack of knowledge and awareness about various financial products and services available in the market and various schemes launched by the government. the third type of gap is supply gap which contains problems like information asymmetry, lack of creditworthiness, bureaucratic environment, the absence of unique financial products especially targeting their sector, scarcity of external investors, preparation and presentation of financial statement and finally transitioning stage of capital markets. the last kind of gap is benevolence gap which is nothing but disinclination of financial institutions in providing loans to the sme sector (rao et al., 2017; bhattacharya & londhe, 2014). equity smes also have a life cycle like any other business and here the finance avenues are limited at the introduction or launch stage, but for the stages after that like growth, shake-out and maturity, the capital market as an avenue shows a promising future (maiti, 2018; sarkar, 2016). equity finance as a source would be preferable for the number of reasons. the primary reason is that it is a systematic, transparent, properly functioning and reliable form of finance. it helps in maintaining an efficient cash f low of a company. it will also positively affect the growth of the company as now it will be under the scrutinization of investors. this source also helps in raising finance both at the time of listing and also at later stages. it also helps in making credibility inthe market, which is good for their business (sarkar, 2016). after going through the literature review, we can come up with the following reasons for choosing equity as a source of finance which is mentioned in table 4. choosing equity as a source of finance… 33 table 4. reasons from literature review s.no. researchers reasons presented 1 rao et al., 2017 complicated procedures of the bank loan. requirement of collateral for a bank loan. high moratorium period for the repayment of bank loans. high cost for bank loans. unfamiliarity withbanks. lack of awareness about the other avenues offinance. lack ofcreditworthiness. bureaucratic environment. absence of any unique financial source for their industry. disinclination of financial institutions in providing a loan to sme. 2 ramcharran, 2017 requirement of collateral for a bank loan. 3 beck & demirguc-kunt, 2006 requirement of collateral for a bank loan. high cost for bank loans. 4 bhattacharya & londhe, 2014 requirement of collateral for a bank loan. 5 nikaido, pais & sarma, 2015 requirement of collateral for a bank loan. high cost for bank loans. 6 maiti, 2018 requirement of collateral for a bank loan. 7 berger & udell, 2006 requirement of collateral for a bank loan. 8 thampy, 2010 requirement of collateral for a bank loan. lack of awareness about the other avenues of finance. 9 banerjee, 2006 requirement of collateral for a bank loan. 10 raja & kumar, 2007 requirement of collateral for a bank loan. 11 baker, kumar & rao, 2017 high cost for bank loans. 12 sarkar, 2016 high cost for bank loans. systematic, transparent and reliable form of finance. getting credibility in the market. 13 cook, 2001 high cost for bank loans. 14 chakraborty, 2010 high cost for bank loans. 15 allen et al., 2006 high cost for bank loans. s o u r c e : own study. objective this study helps in filling the gap as researchers have studied about capital structure theories applicable to smes and also about their preferences in india. the research is still not significant on smes recent addition of equity market as ansita aggarwal, satya ranjan acharya34 source. the study needs to be done on the perception of the promoter of sme who chose to add equity in their capitalstructure. the research methodology and the course of the research process as the study was presented with the difficulty of surveying all indian smes owing to their vast number, it has focused on smes based in gujarat as this is also strategically important for study. gujarat comprises of the 5% share (33.16 lakh) of smes in india, which belongs from the list of 10 states with the highest distribution of smes (annual report 2017-18, 2018, p. 31). this is the region where sme stock market exchange as a source of finance has been most successful in india. the study is trying to acquire an understanding of sme’s promoter’s perception behind the selection of the equity market as a source of finance. the research has been done in five phases: 1st phase: in the first phase study, we try to get the reasons for preferring equity among all other avenues available to the organization by going through literature review. this is done to understand what kind of past research has been done in the said field. 2nd phase: in the second phase the offer document of 5 companies which are selected for an indepth interview would be studied in detail. this is done to understand their objective for going public mentioned according to their offer documents. 3rd phase: in the third phase, in-depth interviews would be analyzed to get a perception of promoters straight from their own mouth. this would help in getting a clear understanding of their perception. 4th phase: in the fourth phase, we try to analyze whether after opting for equity if smes are able to improve their capital structure or not. to analyze this we are using ratio analysis technique to get the idea whether going for equity has improved their profit making ability or not. 5th phase: in the last phase, a table would be prepared by combining all the reasons from the literature review, offer document and in-depth interviews which would then be combined to form broad themes to understand it easily. choosing equity as a source of finance… 35 discussion offer document (phase-2) an offer document is a document which is issued by every company to the public interested in initial public offering (ipo). it needs to accommodate the information related to the history of business, industry, financial performance and ownership details (bhabra & pettway, 2003). it doesn’t just disclose the company’s historical performance as an annual report, but it encapsulates the company’s perspective and anticipated financial prospects (nikolaj bukh, 2003). the offer document, which is issued by companies, plays a profoundly significant role in deciding whether to invest in a particular company or not. the information provided in the offer document has been more successful in anticipating the future of a company than subsequent equity offerings or acquisitions (bhabra & pettway, 2003). the offer document when gets approved by the sebi indeed becomes a binding document which can bind both issuer and underwriter. even with shortcomings like window dressing, this is a unique document which provides investors with the opportunity to get to know about the company’s past and projected future performance (bhabra & pettway, 2003). after going through the offer document of companies which they have issued, we can come up with the following reasons for choosing equity as a source of finance as mentioned in table 5. table 5. reasons from offer document s.no. company name reasons presented in offer document 1 2 3 4 5 nintech systems ltd (information technology-it) shubham polyspin ltd. (chemical) trident texofab ltd. (garment & textile) sprayking agro ltd. (engineering) yug décor ltd. (chemical) to complete the working capital (wc) needs of the company. to expand the business’s global presence to enhance their ability. to modernize the plants, machinery, buildings, and electrification. to complete the wc needs of the company. to increase brand visibility. to develop new products. to enhance the customer base. to complete the wc needs of the company. to expand the product range. to increase geographical presence. to enhance the utilization of existing production capacity. to repay the unsecured loan. to complete the wc needs of the company. to enhance companies corporate image and brand name. s o u r c e : own study. ansita aggarwal, satya ranjan acharya36 in-depth interviews (phase-3) the aggregate number of smes listed on bse till date is 277 (bse ltd., 2018). the 5 smes selected on the basis of the purposive sampling belong to 4 diverse industries which are information technology (it), chemical, garment & textile, and engineering. this helps in collecting the dynamism in the reason for the choice of equity as a source of finance. in-depth interviews help in understanding the most preferable source of finance which is banks according to nintec systems ltd and sprayking agro ltd. the reason which they have given for the same is that it is convenient and safe for them. they also feel that there is an ease in getting finance from banks and they can get many services other than just financing from there. according to the promoter of yug décor ltd, the most preferable source of finance for him are family and friends as it is convenient, safest and they can get finance from this source even overnight. the promoter of shubham polyspin ltd. feels that the need for collateral becomes an issue after a period of time as they won’t be able to give more of collateral to banks. he also thinks that banks are not able to give them financing as and when needed by them. the promoter of trident texo fab ltd thinks that procedures of bank loans are very complicated and it takes a lot of time to complete theforms. after taking interviews of the owners of the 5 sme’s the study revealed the following reasons to go for equity which is mentioned in table 6. table 6. reasons from in-depth interview s.no. company name reasons presented in interview 1 2 3 4 5 nintech systems ltd shubhampolyspin ltd. trident texofab ltd. sprayking agro ltd. yug décor ltd. to create the public presence. to get the hand for future growth and development. to avoid giving own capital as collateral to banks. to help in the modernization of the machinery. to collect the wc for the company. to get recognition in the capital market. to get the capital from the market as convinced byothers. to get recognition in the capital market. s o u r c e : own study. choosing equity as a source of finance… 37 ratio analysis (phase-4) the financial health of any company can be evaluated using the financial statements of any company (higgins, 2012). the promoter who would be interested in changing their capital structure would mostly do it for the increase in profit which he is expecting in the future. we are going to take some ratios before and after the choice of equity as follows: sprayking agro ltd. table 7. ratio analysis equity issue date: august 2016 relevant ratios 2015-16 2016-17 interest coverage 1.15 1.18 total debt to owners fund 1.2 0.66 earning retention ratio 100 100 earnings per share (eps) 0.23 0.26 number of shares 2284769 3172769 return on assets (%) (roa) 0.36 0.48 s o u r c e : own study. trident texofab ltd. table 8. ratio analysis equity issue date: september 2017 relevant ratios 2016-17 2017-18 interest coverage 1.85 2.35 total debt to owners fund 1.37 0.5 earning retention ratio 100 57.16 earnings per share (eps) 9.92 1.88 number of shares 331750 3995875 return on assets (%) (roa) 1.34 1.66 s o u r c e : own study. ansita aggarwal, satya ranjan acharya38 nintec systems ltd. table 9. ratio analysis equity issue date: march 2016 relevant ratios 2015-16 2016-17 interest coverage 0 0 total debt to owners fund 0 0 earning retention ratio 100 100 earnings per share (eps) 0.26 0.64 number of shares 5000000 6880000 return on assets (%) (roa) 2.39 5.52 s o u r c e : own study. yug décor ltd. table 10. ratio analysis equity issue date: may 2017 relevant ratios 2016-17 2017-18 interest coverage 2.17 3.51 total debt to owners fund 0.79 0.38 earning retention ratio 100 100 earnings per share (eps) 1.02 0.8 number of shares 3061766 3061766 return on assets (%) (roa) 3.13 2.63 s o u r c e : own study. choosing equity as a source of finance… 39 shubhampolyspin ltd. table 11. ratio analysis equity issue date: september 2018 relevant ratios 2016-17 2017-18 interest coverage 18.17 36.91 total debt to owners fund 1.37 1.19 earning retention ratio 100 100 earnings per share (eps) 44.17 188.47 number of shares 4010000 1500000 return on assets (%) (roa) 87.27 158.49 s o u r c e : own study. interest coverage ratio talks about how many times a company can pay its interest expenses from earnings. it can be seen from the above analysis that interest coverage ratio of all the companies is improving, except nintec systems ltd. this company is not showing interest coverage ratio because they have not taken any debt. total debt to owners fund shows how much the creditors have committed to the company versus what the shareholders have committed. it can be seen from the above analysis that total debt to owner’s fund is decreasing for all the above companies as they all have opted for the public issue of equity shares which has resulted in an increase in owner’s equity. the retention ratio refers to the percentage of net income that is retained to grow the business, rather than being paid out as dividends. it can be seen from the above analysis that except trident texofab ltd., all the companies are retaining percentage of their revenue for further growth of the company. eps is the portion of a company’s profit allocated to each share of common stock. it can be seen from the above analysis that except 2 companies which are trident texofab and yug décor ltd. all the companies’ eps are increasing. this shows that their profit have also increased with finance which they have acquired. now looking at texofab and yug, eps has decreased as they were not able to grow their revenue in the same ratio of their increment in finance. ansita aggarwal, satya ranjan acharya40 roa is an indicator of how profitable a company is relative to its total assets. it can be seen from the above analysis that return of assets of all the above companies are showing improvement that means the decision of going for the public issue has been beneficial for them. result and analysis (phase-5) after going through the literature review, offer document and interviews with promoters of smes, the following reasons can be extrapolated with broader themes as follows: 1. bank loan barriers a) complicated procedures. the cumbersome procedures of banks to get a loan became significant hurdle in going for bank loans. these kinds of procedures require a distinctive set of skills which is not always present in promoters of smes. b) requirement of collateral. the requirement of collateral arises due to lack of information provided by smes. as most smes don’t possess assets to be provided to banks so it is incredibly difficult for them to get financing forthem. c) high moratorium period forrepayment. the period between loan approval and receipts of finance by promoters has sometimes been excessively long that smes gets discouraged to go for bank loans. d) high cost. the cost associated with bank loan is sometimes more than the benefit received by that money. the exorbitant cost gets justified to the lack of symmetric information provided and lack of transparency by smes. e) unfamiliarity. the non-familiarity of banks to smes working also formulate the problem of taking finance. this leads to the need for hard information by banks, which become difficult for smes to provide as they predominantly rely on soft information or informal relationship they have with banks. choosing equity as a source of finance… 41 2. financial factors a) systematic, transparent and reliable. raising equity capital from the capital market is better in comparison to any other sources. the reason behind this is that the capital market is more organized, transparent, orderly functioning and reliable market than any of the abovementioned avenues. b) getting credibility. smes can benefit from the favorable effects market listing have on the quality of management and also from greater visibility in the market it sparks a trust among various stakeholders of a company. c) working capital needs. as mentioned in offer document of the companies nintec systems ltd., shubham polyspin ltd., trident texo fab ltd. and yug décor ltd. the requirement of capital from the market is for completing needs of working capital in their company. the promoter of shubham polyspin ltd also confirms the same in his interview. d) repay an unsecured loan. as mentioned in offer document of sprayking agro ltd. they lacked the capital to pay off the loan taken from an unsecured loan taken from jigneshbhai patel. the unsecured loan amounted to rs 119.48 lakh which they are interested in paying from 146.48 lakh received from ipo in the capital market. e) fixed capital needs. as mentioned in the offer document of shubham polyspin ltd. they are interested in modernizing their plants, machinery, buildings, and electrification. this was also backed by promoter of the company in their interview. 3. growth factors a) global presence. as mentioned in offer document of the nintecsystems ltd., shubham polyspin ltd., sprayking agro ltd., and yug décor ltd. they are interested in enhancing their global presence, brand visibility, geographical presence and brand name in the market. these all factors direct towards the one significant reason that is to able to get their company a global presence. b) new product development. ansita aggarwal, satya ranjan acharya42 as mentioned in the offer document of shubham polyspin ltd. and sprayking agro ltd., other substantial reason was to develop a new product for their company or expand their product range to entice more customers. c) customer base enhancement. as mentioned in the offer document of shubham polyspin ltd. they are interested in enhancing or escalating their customer base so as to increase their sales. it’s also clear from the sprayking agro ltd. that they are interested in increasing their customers as they have mentioned in their offer document that they want to enhance the utilization of existing production capacity. 4. economic factors a) bureaucratic environment. the bureaucratic environment has become a major hurdle in getting finance from different avenues. this kind of environment makes it difficult for companies to get finance easily. b) absence of unique financial avenue for the industry. in any country, it is important to provide unique financial avenues specifically targeting a particular industry. this helps with the expansion of industry, which is beneficial for the economy. here in india, these kinds of unique financial avenues are not present. c) intimidation from others. as explained by the promoter of sprayking agro ltd. he got inf luenced by some people and took a very important decision for getting finance from the capital market. he is not happy with the turnout of events as such he still would like to go back to the traditional way of getting the finance that is from the banks. 5. other barriers a) lack of awareness. smes are not that much aware of financial avenues available for them in the market. this leads to a non-informed decision making on their side that leads to a loss for them in the long-term. b) lack of credit worthiness. various avenues don’t find smes to be creditworthy to reimburse them back in time because of the issue of asymmetric information provided by them. c) disinclination towards smes. choosing equity as a source of finance… 43 the banks are not interested in giving finance to smes any more because the frequency of non-performing assets (npas) has increased significantly in the last few years. that’s why now unless banks acquire satisfactory information from smes they hesitate a lot in giving loans to those smes (thampy, 2010). in a similar way, other avenues are also not that much inclined towards smes as they think of them as befalling a possible defaulter in the future (rao et al., 2017). the various reasons which can be behind the perception of promoters in adding equity in their capital structure have been combined using the 5 broad themes which are mentioned in table 12. table 12. themes themes 1. 2. 3. 4. 5. bank loan barriers complicated procedures requirement of collateral high moratorium period high cost unfamiliarity financial factors systematic, transparent & reliable credibility working capital needs repay unsecured loan fixed capital needs growth factors global presence modernization newproduct development customer base enhancement economic factors bureaucratic environment absence of unique financial avenue for the industry intimidation from others other barriers lack of awareness lack of creditworthiness disinclination towardssmes s o u r c e : own study. future implications and limitations the research has only been carried out in the state of gujarat. the findings should be tested in all over india by measuring them quantitatively. these themes can also be taught to the students so that they can get a deep understanding of sme finance. the academicians can take a cue from these broad themes and try to research further the same. the entrepreneurs or sme promoters can also get help from this paper to understand their financial situation and then taking the decision of financing accordingly. this paper is able to come up with a framework that can be researched further by the academicians. ansita aggarwal, satya ranjan acharya44  conclusion this paper made an attempt to study the reasons behind the perception of smes’ promoters in choosing equity as one of the sources of finance for them. in the earlier literature, there have been studies which talked about various avenues available for smes and their pros and cons. as public equity has been a new addition to that avenue and it has been a beneficial avenue for the smes, there is a need to understand it in detail. this study has been done in five phases so as to include literature review, offer document objective, in-depth interviews of owners, ratio analysis and a compilation of four phases. the reasons which have been extrapolated have been given broad themes in which they should be included. on the basis of that, a table has been made which needs to be explored further. finally, there is a need of government of india as well as stakeholders of smes to understand different 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(2012). msme finance: viability study from bankers’ perspective. international journal of advanced research in management and social sciences, 1(1), 50-71. yug décor (2019). http://yugdecor.com (accessed: 03.05.2019). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 03.12.2013; data zaakceptowania: 17.12.2013. * dane kontaktowe: piotr.bolibok@kul.pl, katedra bankowości, wydział nauk społecznych, katolicki uniwersytet lubelski jana pawła ii w lublinie, al. racławickie 14, 00-950 lublin, tel. 81 445 34 33. doi: 10.12775/cjfa.2013.0252013, volume 2, issue 2 piotr bolibok* katolicki uniwersytet lubelski jana pawła ii w lublinie recenzja książki bankowość, pod red. nauk. m. zaleskiej, wydawnictwo c. h. beck, warszawa 2013 recenzowana książka jest efektem współpracy wybitnych współczesnych znawców problematyki bankowości z wiodących polskich ośrodków naukowych. jak stwierdza we wstępie m. zaleska, ideą publikacji było „przedstawienie indywidualnych poglądów jej współautorów” (s. 9), co stwarza czytelnikowi możliwość zapoznania się z różnorodnymi podejściami do problematyki współczesnej bankowości. dzięki takiemu podejściu podręcznik stanowi bez wątpienia wyróżniającą się pozycję wśród bogatej literatury przedmiotu. o jego wyjątkowych walorach świadczy przede wszystkim fakt, iż uzyskał on rekomendację komitetu nauk o finansach pan. książka koncentruje się na czterech kluczowych obszarach współczesnej bankowości, stanowiących podstawę wyróżnienia rozdziałów podręcznika: ■ stabilności i sieci bezpieczeństwa sektora bankowego, ■ produktach i usługach bankowych, ■ ryzyku bankowym, ■ zarządzaniu portfelem, metodach oceny i kontroli działalności banku. rozdział pierwszy przedstawia elementy składowe systemu bankowego, kładąc nacisk na sieć stabilności finansowej, podmioty konstytuujące sektor bankowy oraz wspierające jego funkcjonowanie. koncentrację na problematypiotr bolibok218 ce stabilności finansowej systemu bankowego należy uznać za trafny sposób podejścia do omawianych zagadnień, odzwierciedlający współczesne tendencje w sferze regulacyjnej, wywołane globalnym kryzysem finansowym i jego reperkusjami dla finansów publicznych wielu krajów na całym świecie. dowodem aktualności i wagi tej problematyki są wydarzenia z końca i. kwartału 2013 r., ukazujące jak poważne konsekwencje dla spadku globalnego zaufania społeczeństw wobec sektora bankowego może mieć zachwianie stabilności systemu bankowego nawet tak małej gospodarki jak cypr. w otwierającym publikację podrozdziale m. zaleska przedstawiła syntetyczną charakterystykę działalności instytucji konstytuujących sieć bezpieczeństwa finansowego w polsce, tj. ministerstwa finansów, narodowego banku polskiego, bankowego funduszu gwarancyjnego oraz komisji nadzoru finansowego. autorka ukazała różnorodność instrumentarium poszczególnych instytucji, podkreślając szczególnie wyposażenie wszystkich poza knf w instrumenty wsparcia o charakterze finansowym (s. 11–13). kolejny punkt, autorstwa s. owsiaka, omawia funkcje banku centralnego, ze szczególnym uwzględnieniem roli funkcji emisyjnej jako czynnika ograniczającego ryzyko inflacji we współczesnej gospodarce (s. 14). należyte miejsce poświęcone zostało również kwestii niezależności banku centralnego. co warte podkreślenia, dokonano tego w formie postawienia problemu skłaniającego czytelnika do refleksji – czy władza ekonomiczna banku centralnego nie jest zbyt duża oraz jaka jest odpowiedzialność jego kierownictwa? jak słusznie stwierdza s. owsiak, w okresie trwania kadencji powołanego kierownictwa wpływ władz państwowych na bank centralny jest praktycznie żaden, stąd rola kolegialnego podejmowania decyzji dotyczących polityki pieniężnej (s. 18). podobnie ujęty został problem właściwego określenia podstawowego celu banku centralnego (w tym nbp) i ewentualnych sprzeczności, jakie mogą pojawić się pomiędzy nim a celami rządu, zwłaszcza w krótkim okresie (s. 19, 27). ciekawym elementem tego punktu jest porównanie celów banków centralnych: fed, banku anglii i ebc (s. 22–23) oraz państw członkowskich ue spoza strefy euro (s. 24–25). kolejna część rozdziału poświęcona została omówieniu współczesnych modeli nadzoru finansowego. m. zaleska przedstawiła w niej przesłanki wprowadzenia modelu zintegrowanego, wynikające przede wszystkim z zacierania się różnic pomiędzy poszczególnymi elementami rynku finansowego, powstawania konglomeratów finansowych oraz optymalizacji procesów nadzorczych (s. 36–37). interesującym spostrzeżeniem autorki jest odnotowanie aktual  recenzja książki bankowość, pod red. nauk. m. zaleskiej 219 nych tendencji zmierzających do przywrócenia modelu nadzoru zróżnicowanego oraz wyodrębnienia nadzoru makroi mikroostrożnościowego, jako odpowiedzi na kryzys finansowy, zapoczątkowany w sektorze bankowym (s. 37). zapewnienie stabilności systemu finansowego wymaga właściwych rozwiązań w zakresie ochrony klientów sektora finansowego. mając to na uwadze, w publikacji przedstawiono funkcjonujący w polsce zróżnicowany model ochrony klientów instytucji finansowych, realizowany przez bankowy fundusz gwarancyjny, krajowy depozyt papierów wartościowych sa oraz ubezpieczeniowy fundusz gwarancyjny. na podkreślenie zasługuje fakt, iż oprócz omówienia powszechnie poruszanego w literaturze przedmiotu zagadnienia ochrony deponentów przez bfg, podniesiono także kwestię ochrony interesów kredytobiorcy, w szczególności w świetle przepisów ustawy o kredycie konsumenckim oraz rekomendacji t i s knf (s. 46–48). omawiając banki i inne instytucje kredytowe, m. zaleska zaakcentowała kluczową rolę ryzyka we współczesnej bankowości komercyjnej, trafnie charakteryzując bank jako instytucję „handlującą” ryzykiem (s. 49). walorem tego podrozdziału jest także ukazanie aktualnych tendencji w bankowości, będących następstwem kryzysu finansowego – zmniejszenia znaczenia banków specjalistycznych (zwłaszcza inwestycyjnych) oraz wzrostu udziału własności państwowej w sektorze bankowym po nacjonalizacji upadających banków prywatnych. autorka zwróciła również uwagę na wiele istotnych zagadnień dotyczących polskiego sektora bankowego: udział kapitału zagranicznego (s. 51), trudności w realnym wzroście funduszy własnych banków spółdzielczych (s. 52), działalność parabanków (s. 53), czy kontrolę własności banków w formie spółek akcyjnych (s. 55). zaakcentowała również problem braku możliwości oddziaływania krajowych władz nadzorczych na oddziały banków zagranicznych, który nabiera znaczenia zwłaszcza w przypadku oddziałów prowadzących działalność na znaczną skalę. zdaniem m. zaleskiej przemawia to za rozważeniem obowiązku przekształcania się dużych oddziałów instytucji kredytowych w banki działające na podstawie przepisów prawnych kraju goszczącego (s. 53). rozdział pierwszy zamyka dokonane przez m. żukowskiego omówienie roli i zakresu funkcjonowania instytucji tworzących infrastrukturę systemu bankowego – krajowej izby rozliczeniowej sa oraz ogniw systemu wymiany informacji gospodarczej. walorem tego podrozdziału jest przedstawienie nowoczesnych usług oferowanych przez kir sa oraz korzyści płynących z funkcjonowania bankowych systemów wymiany informacji (s. 62–63). opipiotr bolibok220 sując możliwości i rolę w ograniczaniu ryzyka bankowego baz danych biura informacji kredytowej sa, związku banków polskich, systemu analiz i monitorowania rynku obrotu nieruchomościami oraz biur informacji gospodarczej o nierzetelnych dłużnikach, podrozdział ten wpisuje się w myśl przewodnią całego rozdziału, dotyczącą rozwiązań służących wspieraniu stabilności systemu bankowego. rozdział drugi publikacji poświęcony został problematyce produktów i usług bankowych oraz kanałom ich dystrybucji. istotną zaletą podręcznika na tle innych pozycji literatury przedmiotu jest zastosowanie podejścia polegającego na przedstawieniu tego zagadnienia w przekroju rozwiązań stosowanych w obsłudze kluczowych segmentów klientów: klientów korporacyjnych, mikro-, małych i średnich przedsiębiorstw, private banking oraz klienta masowego. walorem tego podejścia jest ścisły związek z praktyką bankową, w której oferta produktów i kanałów dystrybucji opracowywana jest odrębnie dla każdego segmentu. rozdział otwiera omówienie specyfiki produktów i usług bankowych oraz różnorodnych klasyfikacji ich głównych grup – depozytów, kredytów i rozliczeń pieniężnych, autorstwa m. marcinkowskiej. na uwagę zasługuje tu fragment dotyczący ostatniej z tych grup, w którym autorka wskazuje na malejącą rolę banków jako pośredników w następstwie coraz większej efektywności rynków finansowych i rozwoju technologii telekomunikacyjnych oraz utratę przez nie klientów na rzecz innych instytucji (s. 83). w dalszej części rozdziału m. marcinkowska dokonuje szczegółowego omówienia celów, zasad, kryteriów i metod segmentacji klientów przez współczesne banki. szczególnie interesujący jest tu punkt poświęcony kapitałowi relacji z klientami i zarządzaniu tymi relacjami, w którym autorka akcentuje rolę tych czynników w generowaniu wartości banku (s. 87). następny podrozdział, autorstwa k. brzozowskiej, przedstawia szczegółową charakterystykę współczesnej oferty bankowej dla klientów korporacyjnych w przekroju produktów oraz kanałów dystrybucji. niewątpliwą zaletą jest silne osadzenie tego fragmentu w praktyce bankowej oraz prezentacja nowoczesnych rozwiązań w zakresie platform bankowości transakcyjnej (s. 106), biometrycznych technologii uwierzytelniania (s. 106), usług zarządzania płynnością (s. 112–113) i aktywami (s. 114). przedstawiono także tendencje polegające na wyodrębnianiu w strukturach organizacyjnych banków komercyjnych centrów korporacyjnych, dedykowanych kompleksowej obsłudze klientów instytucjonalnych (s. 111).   recenzja książki bankowość, pod red. nauk. m. zaleskiej 221 przedmiotem kolejnego podrozdziału publikacji, autorstwa s. flejterskiego, jest obsługa klientów z segmentu mikro-, małych i średnich przedsiębiorstw. zaletą zaproponowanego przez autora ujęcia tego zagadnienia jest omówienie współczesnych trendów w bankowości mmśp przez pryzmat oczekiwań i rosnących wymagań klientów oraz konkurencji ze strony podmiotów niebankowych. w podrozdziale ukazano też zmiany zachodzące w tym segmencie w konsekwencji negatywnych następstw globalnego kryzysu – konieczność usprawnienia procesów zarządzania ryzykiem bankowym (s. 128) oraz zwiększenia nacisku na ofertę usług kluczowych dla mmśp w okresie dekoniunktury (s. 132). dalsza część rozdziału, opracowana przez l. dziawgo, poświęcona została problematyce obsługi klienta segmentu private banking, nabierającej coraz większego znaczenia w światowej i polskiej praktyce bankowej. ukazana została w nim rola tego segmentu w wyznaczaniu standardów i kierunków rozwoju dla pozostałych obszarów bankowości, jak również jego makroekonomiczny wymiar, wynikający z konsekwencji zarządzania pokaźnymi aktywami finansowymi najbogatszych klientów. w podrozdziale przedstawiono systematykę klientów private banking, cele, główne kategorie oferowanych produktów i usług oraz tendencje zachodzące na światowym i polskim rynku w tym segmencie. autor słusznie podkreślił kluczową rolę kompetencji bankowych doradców klienta w odbudowaniu naruszonego przez globalny kryzys finansowy wizerunku private banking, zwłaszcza poprzez reorientację na działania w rzeczywistym interesie klienta, a nie tylko banku (s. 141). w tym kontekście na uwagę zasługuje koncepcja otwartej platformy produktowej, zakładająca możliwość oferowania klientom segmentu private banking przez doradców bankowych także usług podmiotów konkurencyjnych wobec banku (s. 142). rozdział drugi zamyka omówienie charakterystyki i klasyfikacji produktów depozytowych i kredytowych oraz kanałów dystrybucji usług bankowych dla klienta masowego dokonane przez d. dziawgo. na uwagę zasługuje tu analiza możliwości zaspokojenia potrzeb finansowych gospodarstw domowych odpowiednimi elementami oferty produktowej i usługowej banków (s. 151). scharakteryzowane zostały także kluczowe trendy w zakresie obsługi klientów segmentu – integracja finansowych i pozafinansowych usług dostępnych dla klienta w jednym banku, dystrybucja wielokanałowa, budowa niskokosztowej sieci placówek bankowych oraz standaryzacja i wzrost możliwości samoobsługi klientów (s. 161–162). autorka odniosła się też do kwestii wykluczenia finansowego, stanowiącej jedno z najistotniejszych zagadnień współczesnej bankowości detalicznej. walorem ujęcia zaprezentowanego w publikacji jest piotr bolibok222 ukazanie tego problemu zarówno w ujęciu wąskim, tj. braku dostępu do rachunku bankowego, jak i szerokim, rozumianym jako dostęp do oferty bankowej na gorszych warunkach (s. 160). trzeci rozdział poświęcony został omówieniu kluczowych rodzajów ryzyka w działalności banków uniwersalnych: ryzyka kredytowego, rynkowego, operacyjnego i płynności. położenie nacisku na te rodzaje ryzyka znajduje uzasadnienie zarówno w regulacjach basel ii i basel iii, jak i praktyce funkcjonowania współczesnych banków komercyjnych. w pierwszym podrozdziale m. wiatr, przedstawia ryzyko kredytowe jako najistotniejszy obszar ryzyka w działalności bankowej. jak słusznie konstatuje autor, wszystkie poważniejsze wstrząsy odnotowane w ostatnich latach w sektorach bankowych i ich reperkusje dla gospodarek narodowych miały swoje praprzyczyny w jakości systemów zarządzania ryzykiem kredytowym (s. 163). oprócz zaprezentowania pojęcia i systematyki tej kategorii ryzyka oraz zasad funkcjonowania systemu zarządzania nim, przedstawiono ogólną charakterystykę metod pomiaru ryzyka kredytowego, roli zabezpieczeń spłat kredytu, limitów kredytowych, rezerw celowych oraz monitoringu kredytowego. na uwagę zasługuje tu rzadko spotykana w teorii, ale istotna z punktu widzenia praktycznego, klasyfikacja ryzyka kredytowego z punktu widzenia „apetytu” banku na ryzyko, w której granicą akceptowalności dla nowych klientów jest kategoria ekspozycji „poniżej standardu” (s. 166). należy jednak zaznaczyć, że omawiając zagadnienie rezerw celowych, autor skoncentrował się niemal wyłącznie na regulacjach rozporządzenia ministra finansów z dnia 16 grudnia 2008 r. w sprawie zasad tworzenia rezerw na ryzyko związane z działalnością banków, wspominając jedynie o zasadach ujmowania i wyceny instrumentów finansowych zgodnie z msr 39, które mają kluczowe znaczenie dla największych funkcjonujących w polsce banków tworzących grupy kapitałowe. zgłębienie tego zagadnienia wymagać będzie zatem od czytelnika sięgnięcia po inne pozycje literatury przedmiotu. kolejne trzy podrozdziały publikacji, opracowane przez p. niedziółkę, dotyczą istoty, metod pomiaru i ograniczania ryzyka rynkowego, operacyjnego i płynności. podrozdział poświęcony ryzyku rynkowemu charakteryzuje wysoki poziom szczegółowości rozważań, zwłaszcza w kontekście prezentacji ilościowych metod jego pomiaru (s. 181–190). autor położył przy tym należyty nacisk na kwestie praktycznych problemów towarzyszących pomiarowi ryzyka (s. 182). dla omówienia metod ograniczania ryzyka rynkowego zastosował on klasyczny podział na techniki tradycyjne i innowacyjne oraz w syntetycz  recenzja książki bankowość, pod red. nauk. m. zaleskiej 223 ny sposób przedstawił istotę ich funkcjonowania w odniesieniu do poszczególnych komponentów – ryzyka stopy procentowej, walutowego, cen papierów wartościowych i cen towarów. część dotycząca ryzyka operacyjnego omawia najważniejsze źródła tego ryzyka oraz ich rozbudowaną typologię w oparciu o zapisy rekomendacji m (s. 194–198). scharakteryzowano w niej również główne podejścia i metody pomiaru ryzyka (s. 199–203) oraz zasygnalizowano wybrane rozwiązania instytucjonalne służące jego ograniczaniu, jak kontrola wewnętrzna, polityka zgodności i ubezpieczenia (s. 204). istotnym walorem podrozdziału dotyczącego ryzyka płynności jest oryginalne ujęcie zagadnienia, polegające na przedstawieniu trzech poziomów analizy – płynności portfela aktywów (poziom mikro), płynności banku (analiza struktury bilansu – poziom mezo) oraz wpływu otoczenia rynkowego na płynność banku (poziom makro). w tym kontekście na uwagę zasługuje przedstawiony przez autora schemat zarządzania płynnością banku przy użyciu instrumentów aktywów i pasywów w przekroju obszarów indywidualnej polityki banku oraz uwarunkowań rynkowych (s. 212). rozdział trzeci zamyka, dokonane przez j. koleśnika, omówienie filarów nowej umowy kapitałowej: wymogów kapitałowych (w tym kapitału regulacyjnego i współczynnika adekwatności kapitałowej), procesu analizy nadzorczej oraz dyscypliny rynkowej. największym walorem tej części publikacji jest jednak odrębny podrozdział poświęcony przedstawieniu kluczowych założeń basel iii, zorientowanej na reformę regulacji systemu bankowego w następstwie globalnego kryzysu finansowego (s. 221-224). ostatni rozdział publikacji poświęcony został zarządzaniu portfelem, metodom oceny i analizy ekonomiczno-finansowej banku oraz miejscu audytu wewnętrznego w funkcjonowaniu nowoczesnych banków. rozdział ten otwiera punkt traktujący o zarządzaniu pasywami banku, którego autorem jest r. mikołajczak. przedstawia on zagadnienia związane z optymalizacją struktury kapitałowej banku w podziale na działania w obszarze zarządzania kapitałem własnym (zorientowane głównie na spełnienie nadzorczych wymogów kapitałowych) oraz obcym. na uwagę zasługują tu rozważania dotyczące problemu konkurencji banków o środki pieniężne z innymi podmiotami (s. 231) oraz przewagi uzyskiwanej przez banki dzięki ustawowemu obowiązkowi rozliczania operacji gospodarczych za pośrednictwem rachunków bankowych (s. 232– 233). piotr bolibok224 omówienie kwestii związanych z zarządzaniem portfelem kredytowym dokonane zostało w odrębnym punkcie przez j. nowakowskiego. autor syntetycznie przedstawił zagadnienia błędów popełnianych przy podejmowaniu decyzji kredytowych (s. 237) oraz istotę wybranych metod i modeli zarządzania portfelem kredytowym (credit scoring, metod dyskryminacyjnych, metod optymalizacji oraz kupna-sprzedaży portfeli kredytowych – s. 238–244). w ostatnim punkcie podrozdziału, autorstwa k. jajugi, omówione zostało zagadnienie zarządzania portfelem inwestycyjnym banku. ukazano w nim przebieg tego procesu w ujęciu zarządzania aktywami i zobowiązaniami, zarządzania wyłącznie aktywami, jak również strategii aktywnych i pasywnych, opartych na zróżnicowanym podejściu do zagadnienia efektywności rynku kapitałowego. autor przedstawił teoretyczne fundamenty zarządzania portfelem inwestycyjnym – teorię portfela papierów wartościowych oraz teorię instrumentów pochodnych oraz ich implikacje dla procesu zarządzania portfelem banku (s. 249–252). walorem tego punktu publikacji jest zilustrowanie wybranych strategii zarządzania portfelem instrumentów dłużnych (dopasowania przepływów pieniężnych i immunizacji) oraz zarządzania portfelem akcji z zastosowaniem instrumentów pochodnych przykładami liczbowymi, które znacząco ułatwiają zrozumienie istoty omawianych zagadnień. dalsza część rozdziału, opracowana przez a. gospodarowicza, omawia metody oceny i analizy ekonomiczno-finansowej banku. walorem tej części jest to, iż oprócz ukazania celów analizy, źródeł informacji oraz charakterystyki i sposobu stosowania jej tradycyjnych metod i narzędzi (wstępna analiza sprawozdań finansowych, analiza wskaźnikowa, dekompozycja cole’a i system camels) przedstawiono w niej rzadko omawiane w polskiej literaturze przedmiotu metody alternatywne. zdecydowana większość podrozdziału dedykowana została metodzie dea (ang. data envelopment analysis), jako niezwykle wszechstronnemu praktycznemu narzędziu oceny efektywności działalności banku. autor ukazał syntetycznie istotę i główne założenia tej metody (s. 266–275) oraz sposób postępowania przy jej stosowaniu w kwestiach wyselekcjonowania cech banku opisujących nakłady i efekty oraz doboru modelu analitycznego (s. 275–277). interesującym podsumowaniem podjętych rozważań jest omówienie podstawowych zalet i wad metody dea na tle innej alternatywnej metody oceny efektywności banku – modelu stochastycznej granicy funkcji (sfa – ang. stochastic frontier analysis – s. 278–280). ostatni podrozdział książki, współautorstwa a. i a. janców, porusza zagadnienie miejsca audytu wewnętrznego we współczesnej bankowości komercyj  recenzja książki bankowość, pod red. nauk. m. zaleskiej 225 nej oraz jego rolę we wzmacnianiu stabilności systemu bankowego, stanowiąc tym samym logiczne zamknięcie rozważań prowadzonych w całej publikacji. jak wskazali autorzy, przełomowym wydarzeniem dla wprowadzenia audytu do praktyki bankowej były postanowienia nowej umowy kapitałowej, zaś konsekwencją ostatniego kryzysu finansowego powinno być dalsze wzmocnienie roli tego audytu (s. 280). odnotowane wówczas zachwianie stabilności systemów bankowych przełożyło się bowiem nie tylko na wzrost ryzyka w środowisku kontrolnym, ale również na wzrost świadomości kierownictw banków odnośnie do potrzeby uzyskiwania rzetelnej informacji o ekspozycji na ryzyko (s. 281). w podrozdziale zaprezentowano szczegółowo prawne i organizacyjne aspekty funkcjonowania audytu wewnętrznego, w szczególności w oparciu o przepisy prawa bankowego, rekomendacji h oraz rekomendacji dotyczących funkcjonowania komitetu audytu. istotnym walorem tego podrozdziału jest skoncentrowanie uwagi czytelnika na praktycznej stronie funkcjonowania audytu wewnętrznego w bankach. podsumowując, należy stwierdzić, że recenzowana publikacja stanowi nie tylko interesujący i wartościowy podręcznik akademicki dla studentów kierunków ekonomicznych, ale także bogate źródło wiedzy z zakresu podstaw współczesnej bankowości dla pozostałych grup czytelników. poza kompleksowym omówieniem kluczowych aspektów instytucjonalnych, prawnych i organizacyjnych systemu bankowego i funkcjonowania banków, wśród walorów podręcznika, wyróżniających go na tle innych pozycji literatury przedmiotu, wskazać należy skład zespołu autorskiego, wysoki poziom merytoryczny zawartości, w szczególności przedstawienie najnowszych tendencji w światowej i krajowej bankowości oraz położenie dużego nacisku na praktyczne aspekty omawianych zagadnień. odmienne podejścia zastosowane przez poszczególnych autorów sprawiły jednak, że opracowane przez nich elementy publikacji cechują się zróżnicowanym poziomem szczegółowości rozważań. część ma charakter ogólny, przeglądowy, skupiający się na istocie poruszanych zagadnień, podczas gdy inne wnikają dogłębnie w bardzo szczegółowe kwestie. korzyści, jakie mogą wynieść czytelnicy z lektury poszczególnych fragmentów są zatem zróżnicowane. ta uwaga nie przesłania oczywiście wskazanych powyżej walorów podręcznika, zatem z pełnym przekonaniem stwierdzam, że recenzowana publikacja może być rekomendowana wszystkim czytelnikom zainteresowanym problematyką współczesnej bankowości. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: february 13, 2019; date of acceptance: march 19, 2019. * contact information: eka.lekashvili@tsu.ge, ivane javakhishvili tbilisi state university, tbilisi, georgia, phone: +995599899809; orcid id: https://orcid.org/00000001-9781-7620. ** contact information: lela.mamaladze@gmail.com, ivane javakhishvili tbilisi state university, tbilisi, georgia, phone: +995595142001; orcid id: https://orcid.org/00000002-8037-3856. lekashvili, e., & mamaladze, l. (2018). crypto currency – a new challenge for the economy of georgia. copernican journal of finance & accounting, 7(4), 87–97. http://dx.doi.org/10.12775/ cjfa.2018.022 eka lekashvili* ivane javakhishvili tbilisi state university lela mamaladze** ivane javakhishvili tbilisi state university crypto currency – a new challenge for the economy of georgia keywords: cryptographic currency, electronic money, legal regulation, blocks chain, bitcoin. j e l classification: e00, e42, e52, e58, f10, g00. abstract: the popularity of electronic currencies on the world innovative technology market increases daily. the history of currency development and the need for additional monetary means has led to the creation of a crypto currency that has had a substantial impact on the financial world. the world’s largest companies have received crypto currency in the form of payment. at the same time, in a number of states the creation of regulatory legislative acts on virtual currency is underway. the paper aims to study a cryptographic currency and its positive and negative consequences, main trends of development in the world and particularly, in georgia. the paper is based on the qualieka lekashvili, lela mamaladze88 tative and quantitative methods of research. also, we have analyzed the content of the legal documents. we used the method of statistical analysis and the reviewed practical examples of other countries. in addition, we used questionnaires and interviews of civil society members in georgia for gathering information and to assess the tendency of public attitudes toward crypto currencies. georgia can be said to be an emerging space for the development of cryptographic currency market because there is no adequately developed regulatory framework, there is a huge risk for a sustainable and inclusive development of the economy, as well as the public and its welfare. the question of regulation of cryptographic currency is problematic for all countries, including georgia, because it is the case when the theoretical issue is not properly studied and consequently it is difficult to develop adequate policies. based on the research we can conclude that the establishment of crypto currency is a serious threat to the central banks to produce official macro-economic statistics, which creates problems for the correct implementation of monetary policy. at the present stage there is no joint approach to regulating virtual currencies. however, the central banks of the world continue to cooperate in formulating a common approach.  introduction the popularity of electronic currencies on the world innovative technology market increases daily. the traditional structure of public administration in the era of digital and technological development is not effective (lekashvili, 2018). the history of currency development and the need for additional monetary means has led to the creation of a crypto currency that has had a substantial impact on the financial world. through the cryptographic currency, products and services are more available. the world’s largest companies have received crypto currency in the form of payment. the number of block chain users is increasing (figure 1). at the same time, in a number of states the creation of regulatory legislative acts on virtual currency is underway. georgia is gradually involved in these processes. according to e-money1, the number of bitcoin consumers increased from 2016 to 2017 by 400% and from 2016 to 2017 by 130%. rapid growth rates of crypto currency consumers and the imperfection of studying the phenomenon makes the issue of research important. 1 georgian multicultural electronic wallet, which first introduced georgia in 2015 to buy, sell, send and sell virtual currencies of virtual currency. crypto currency… 89 figure 1. number of block chain wallet users worldwide from 1st quarter 2015 to 4th quarter 2018 figure 1. s. 89 figure 2. s. 94 figure 3. s. 94 0 5000000 10000000 15000000 20000000 25000000 30000000 35000000 40000000 q1 '16 q2 '16 q3 '16 q4 '16 q1 '17 q2 '17 q3 '17 q4 '17 q1 '18 q2 '18 q3 '18 q4 '18 q1 '19 45-65 18% over 65 6% 35-45 33% 18-35 43% student 26% retired 5% unemployed 4% employed 65% s o u r c e : (www1). the research methodology and the course of the research process the research aim is to study a cryptographic currency’s positive and negative consequences, main trends of its development on example of georgia. georgia, as a developing country with a soviet experience, faces great difficulties in solving financial problems. smaller countries, that have open and less diversified economies, tend to have a serious impact on interdependent and integrative processes (lekashvili & gaprindashvili, 2014). to achieve the above goals we have identified the following tasks: ■ to study the evolution, essence and regulation of cryptographic currency; ■ to analyze legislative bases of foreign experience; ■ to identify risks associated with cryptographic currencies for elaboration of effective regulatory methods; ■ to study the public attitude towards crypto currency in georgia and identification of currency policies challenges. in the research process we used interdisciplinary methods of research. the research is based on studying, research and analysis of scientific literature on eka lekashvili, lela mamaladze90 the topic of study. the paper includes the works of georgian and foreign scientists related to this topic and reports of international organizations. in the process of questioning, we had consultations with field experts in the questionnaire. also, in order to conduct research, we use the quantitative research method, determined method with combination of judgmental sampling and snowball sampling. during the interviews had been used electronic form with questionable survey tool. the survey was carried out in october 2018. first of all, we have selected interviewers, who own a crypto currency and then they connected in research other respondents. the questionnaire was sent to the targeted individuals who have crypto currency or possess certain knowledge about it. the questionnaire was consisted of 10 questions; each has an approximate answer and open responses, which gives the respondent an opportunity to express his opinion. the survey involved 90 respondents. their attitudes should be taken into consideration for the creation of effective mechanisms for regulating the cryptographic market for the government, as well as for people interested in the topic. it could be mentioned, that the scientific study complicates the lack of statistical data. besides, there are no clearly defined statistical indicators that would allow us to use the concrete method in the research. because a popularity of virtual currency is increasing, there are a lot of literature, research and special statements created on the issue in which the contradictory positions are presented. the evolution, classification and functionality of cryptographic currency some researchers think that we can review the existing literature on the virtual currency from the 19th century, giving the basis its anarchic structure, decentralized character and the lack of regulatory mechanism from the government (proudhon, 1890). according to friedrich von hayek (1976), the production of money, as a normal commercial product, should have been market-based and not by a state monopoly. later, the idea started in the 1990s when cryptography was used by david chaum in the system created by digicash for pay-settlement. after that, programmer wei dai wrote a cryptosocial program (www2). crypto currency… 91 in the early stages of bitcoin's creation in 2008, economist paul krugman and some researchers estimated the phenomenon of the virtual currency as an instrument of financial pyramid and speculation, and assessing it as a risky venture (www3). in 2009, satoshi nakamoto2 created the most common virtual currency – bitcoin. well-known american financier larry fink called bitcoin "money laundering index". in his opinion, the increase in bitcoin price shows how big is the world's demand for money laundering (www4). in 2013, chairman of the board of directors of google, eric emerson schmidt and jared cohen published the book "new digital era", where the risks are discussed that may be accompanied by the general availability of cyberworld (schmidt & cohen, 2013). with the spread of cryptocurrency, the contradiction of opinions around the issue increases. some scientists think that in case of virtual money we deal with financial pyramid. others – that the future of cryptocurrency depends on the regulators (kenneth rogoff, robert merton), because unreliable and of lack of security (www5). according to the classification of the european central bank, "virtual currency is the type of unregulated digital money, whose output and regular control is carried out by their creators and used by specific virtual community members" (european central bank, 2012). also, in case of decentralized system digital currency is created with a predefined algorithm, and there is no central institution that can inf luence money emissions (greenberg, 2011). the approaches are different from the states and what among the eu countries too. member states and legislators agree to take strict measures regarding bitcoin in order to eliminate money laundering and terrorism financing by the eu. the eu lawmakers supported the prohibition of anonymous transfers to be paid by advance payment cards. this decision of the european union is due to the rapid growth of the bitcoin course (www6). the ecb document examines the possibilities of virtual currency schemes to perform the following functions of the central bank: a) price stability; b) financial stability; c) the stability of the payment system (european central bank, 2012). the report says that the user must be fully informed about the risks associated with the virtual currency and the expected financial loss, as there is no specific legal protection that reimburses the loss of the consumer. 2 satoshi nakamoto is the name used by the unknown person or people who developed bitcoin. eka lekashvili, lela mamaladze92 the focus is on hacker threats and insurmountable transactions, which can not be canceled in case of error. the document refers to the rapid change in the value of the virtual currency and the risk of incorporation into illegal activities due to users' anonymity (european banking authority, 2014). the united states is considered to be one of the major markets for the distribution of cryptographic currency. in 2014, new york state financial services department has developed consumer protection, money laundering and safety rules for virtual currency businesses. new types of licenses (called "bitlicenses") will require individuals who perform such activities as virtual currency exchange and send / transfer to clients (ellis, 2013). based on the study of many cases (china, thailand, russia, bolivia and est.) and systematization of the research problem, we can assume that the issue of cryptocurrency is not theoretically considered and it is very difficult to create some regulations. so crypto currency is a high-risk investment, with high profits. cryptocurrency market is controlled by no one, and it is only a mechanism to regulate the market, respectively, characterized by strong price volatility and create favorable conditions for unsecure transactions. the legal status of bitcoin is substantially different in countries. some of them have allowed it to be used for trade and other purposes, while others have been banned. regulations and prohibitions that apply to bitcoin may be extended to other crypto currencies. cryptocurrency in georgia – new challenge for currency policy the development of the cryptocurrency market in georgia confirms the growth of the number of customers. in particular, the number of bitcoin consumers increased by 400% from 2015 to 2016, from 2016 to 2017 by 130% (www7). in june 2017, the first georgian cryptocurrency was created (golden fleece), which aims to build a cryptocurrency output database on the black sea coast of georgia. bitfury is one of the largest block chain companies offering a variety of services and also produces bitcoin. bitfury holding owns free economic zone in georgia. the company owns two blocks in gori and tbilisi. considering that georgia was one of the first states, the implementation of blockchain technology can be assessed as a challenge, since any innovative technology is required to assess the accompanying risk factors as well as the definition and establishment of relevant concepts at the legislative level. it should be note that the number of legal institutions around the world is limited to the definition of blockchain technology. crypto currency… 93 the virtual currency in georgia is growing in popularity. however, like many other states, it is not a legal means of payment in georgia. despite the position of the national bank, in october 2018, the cryptomotive atm operator krimmottom appeared on public places. georgia is one of the leading countries in the mining industry, including electricity consumption. in september 2018, a large scale digital summit was held in georgia, which was attended by block chain industry specialists and founders of the mining centers. the aim of the meeting was to share practical and theoretical experiences and ideas. the event was considered eco-mining – the most important challenge for the mainstreaming sector (www8). according to the latest (2018) research conducted by the georgian foundation for strategy and international studies, electricity consumption in georgia in 2017 is 7.7% compared to the previous year and 14.4% by 2015, which is related to the production of bitcoins. there are 1800 bitcoins available every day in the world, with a bigger share of one company registered in georgia – bitfury. in total, georgia comes to about 15% of world production of bitcoin, or about 270 daily, and up to 100,000 bitcoins a year. it should be taken into account that apart from bitfury, other companies are also able to find bitcoin in georgia, which is not accounted for. besides, there are no annual reports of georgian producers of bitcoin available in public space. the public opinion survey on cryptocurrencyis argued by the hypothesis that the action of the state should be acceptable to the public, including the regulation of the cryptographic market. the research aims to study the attitude of citizens towards the issue. the study covered almost every age category or social status (90 respondents), allowing the results to be made public on the whole community. the age groups of respondents were as follows: 18–35 – 43%, 35–45 – 33%, 45–65 – 18%, 65 above 6% (figure 2). as for social status, we received similar data: student – 26%, employed – 65%, unemployed – 4%, pensioner – 5% (figure 3). with the next question we tried to find out how many respondents were educated in the direction of economics or information technology, or whether their activities were related to any of the above-mentioned fields: economic education – 31%, information technology specialist – 19%, both – 12%, none – 28% (figure 4). 50% of respondents have full information about crypo currency, 36% have incomplete information and 14% do not have any information as regards the investor's attitude towards virtual currency, 22% think that it is risky and does not support 18% does not have a specific answer, 25% eka lekashvili, lela mamaladze94 thinks that in case of finding financial resources, he would try to gain profit via virtual currency, while the remaining 35% are members of society that own a currency or mainers (figure 5). figure 2. age figure 3. employment status figure 1. s. 89 figure 2. s. 94 figure 3. s. 94 0 5000000 10000000 15000000 20000000 25000000 30000000 35000000 40000000 q1 '16 q2 '16 q3 '16 q4 '16 q1 '17 q2 '17 q3 '17 q4 '17 q1 '18 q2 '18 q3 '18 q4 '18 q1 '19 45-65 18% over 65 6% 35-45 33% 18-35 43% student 26% retired 5% unemployed 4% employed 65% figure 1. s. 89 figure 2. s. 94 figure 3. s. 94 0 5000000 10000000 15000000 20000000 25000000 30000000 35000000 40000000 q1 '16 q2 '16 q3 '16 q4 '16 q1 '17 q2 '17 q3 '17 q4 '17 q1 '18 q2 '18 q3 '18 q4 '18 q1 '19 45-65 18% over 65 6% 35-45 33% 18-35 43% student 26% retired 5% unemployed 4% employed 65% s o u r c e : worked out by authors based on own research. figure 4. education figure 5. invest in crypto currenciesfigure 4. s. 94 figure 5. s. 94 figure 6. s. 95 figure 7. s. 95 both 12% economics 31%informational technologies 19% other 38% i don't know 18% yes 25% no 22% i have it 35% fewer protections 25% price change 30% targets for hackers 45% never 28% often 28% once a month 44% figure 4. s. 94 figure 5. s. 94 figure 6. s. 95 figure 7. s. 95 both 12% economics 31%informational technologies 19% other 38% i don't know 18% yes 25% no 22% i have it 35% fewer protections 25% price change 30% targets for hackers 45% never 28% often 28% once a month 44% s o u r c e : worked out by authors based on own research. the part of the interviewees, who are themselves virtual currency holders, have asked us to name what they have chosen to do. the data was distributed as follows: 65% – bitcoin, 13% – ripple, 12% – etherium, 10% – other. we crypto currency… 95 asked the same segment of the respondents to identify the disadvantages that we have received as a result of the cryptocurrency: frequent variability of the crypto currency course (30%), dangerous cyber attacks (45%), the risk of unprotected transactions (25%) (figure 6). in response to the same respondents we have determined the frequency of transactions: at least once a month – 28%, once in a few months – 44%, no transaction – 28% (figure 7). 60% of respondents think that it is profitable, 22% is lucrative, 18% find it hard to answer. finally, we asked respondents whether the government should consult with the public before forming the norms for virtual currency regulation. the majority of respondents (42%) agree that any public issue is necessary for legislators to communicate with citizens and to take into consideration their opinions, 38% thinks it is much more important to consult with people who are deeply aware of the issue, and 16% believe that crypto currency don’t need any regulation and control mechanisms. figure 6. risks figure 7. transaction per month figure 4. s. 94 figure 5. s. 94 figure 6. s. 95 figure 7. s. 95 both 12% economics 31%informational technologies 19% other 38% i don't know 18% yes 25% no 22% i have it 35% fewer protections 25% price change 30% targets for hackers 45% never 28% often 28% once a month 44% figure 4. s. 94 figure 5. s. 94 figure 6. s. 95 figure 7. s. 95 both 12% economics 31%informational technologies 19% other 38% i don't know 18% yes 25% no 22% i have it 35% fewer protections 25% price change 30% targets for hackers 45% never 28% often 28% once a month 44% s o u r c e : worked out by authors based on own research. based on the results of the research, it can be said that the public has a great interest in cryptocurrency. taking into consideration that the virtual currency in the georgian reality has been established in recent years, their awareness level is quite high in the above mentioned issue. however, the generalization of the results of the research will not be valid and can not give us a complete picture of the following reasons: on the one hand the small number of respondents were interviewed and on the other hand, the survey will be conducted in one eka lekashvili, lela mamaladze96 of the social networks, where the owners of the crypto currency and the interested persons are joined.  conclusions in conclusion, georgia is an emerging space for the development of cryptographic currency market because there is no adequately developed regulatory framework, there is a huge risk for a sustainable and inclusive development of the economy, as well as the public and its welfare. based on the research we can conclude that the establishment of crypto currency is a serious threat to the central banks to produce official macro-economic statistics, which creates problems for the correct implementation of monetary policy. at the present stage there is no joint approach to regulating virtual currencies. however, the central banks of the world continue to cooperate in formulating a common approach. based on the summarization of the issue, we can outline the following challenges with the cryptography industry in georgia: ■ state approach and legal regulation issues; ■ there are a number of uncertainties about terminological definitions and that is why it is necessary to share foreign experience and to improve the issue; ■ maintain stability of the financial system. the growing tendency of the development of the cryptocurrency system, which creates an alternative to the traditional financial and banking spheres, may be a causative factor for the chaos of the financial market; ■ high power consumption, in case of a similar pace, will have a serious impact on climate change; ■ difficulties in predicting the nominal value of crypto currency.  references ellis, s. (2013). a cryptography primer. chicago: cura corporation. european banking authority (2014). eba opinion on ‘virtual currencies’. http://eba. europa.eu/documents/10180/657547/eba-op-2014-08+opinion+on+virtual+cur rencies.pdf (accessed: 10.12.2018). european central bank (2012). virtual currency schemes. frankfurt am main: eurosystem, http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en. pdf (accessed: 10.12.2018). crypto currency… 97 greenberg, a. (2011). crypto currency, http://www.forbes.com/forbes/2011/0509/ technology-psilocybin-bitcoins-gavin-andresen-crypto-currency.html (accessed: 10.12.2018). hayek, f. (1976). denationalization of money: an analysis of the theory and practice of concurrent currencies. institute of economic affairs. lekashvili, e., & gaprindashvili, g. (2014). social integration in the context of regional economic integration (on the example of the south caucasian states). in a. biagini, g. motta (eds.). empires and nations from the 18th to the20th century. volume 2. cambridge: cambridge scholars publishing. lekashvili, e. (2018). e–governance and economics curricula modernization needs at tbilisi state university. iv international scientific and practical conference ,,strategic imperatives of modern managements (simm – 2018), 19-20 april 2018 and round table ,,digital economy: threats, opportunities and education’s calls”, kiev national economic university named after vadym hetman, singulatoryu kiev chapter, kiev. proudhon, p.-j. (1890). what is property? an inquiry into the principle of right and of government. humboldt publishing company. schmidt, e., & cohen, j. (2013). the new digital age: reshaping the future of people, nations and business. (www1) statista, http://www.statista.com/statistics/647374/worldwide-blockchainwallet-users (accessed: 10.12.2018). (www2) the guardian, http://www.theguardian.com/technology/2003/feb/25/comment.comment (accessed: 20.02.2018). (www3) business insider, http://www.businessinsider.com/paul-krugman-says-bitcoin-is-a-bubble-2017-12 (accessed: 20.02.2018). (www4) cnbc, http://www.cnbc.com/2017/10/13/blackrock-ceo-larry-fink-calls-bitcoin-an-index-of-money-laundering.html (accessed: 20.02.2018). (www5) pbs, http://www.pbs.org/newshour/economy/making-sense/why-a-nobellaureate-in-economics-thinks-bitcoin-is-toast (accessed: 10.12.2018). (www6) reuters, http//www.reuters.com/article/uk-eu-moneylaundering/eu-agreesclampdown-on-bitcoin-platforms-to-tackle-money-laundering-iduskbn1e928m (accessed: 10.12.2018). (www7) sazogadoeba, http://www.sazogadoeba.ge/index.php?post_id=2684 (accessed: 10.12.2018). (www8) cryptoworld, http://cryptoworld.ge/%e1%83%a1%e1%83%90%e1%83%9 b%e1%83%98%e1%83%a2%e1%83%98-bitmain (accessed: 10.12.2018). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 12, 2014; date of acceptance: march 23, 2014. * contact information: stasadam@o2.pl, faculty of history and cultural heritage of the church, pontifical gregorian university, piazza della pilotta 4, 00187 rome. ** contact information: dwalczak@umk.pl, department of finance management, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: 56 611 46 34. adamiak s., walczak d. (2014). catholic social teaching, sustainable development and social solidarism in the context of social security. copernican journal of finance & accounting, 3(1), 9–18. http://dx.doi.org/10.12775/cjfa.2014.001 stanisław adamiak* pontifical gregorian university damian walczak** nicolaus copernicus university catholic social teaching, sustainable development and social solidarism in the context of social security key word: social security, catholic social teaching, social solidarity, sustainable development. j e l classification: a12, a13, z12. abstract: nowadays, opposite to what could be observed at the end of the nineteenth century, people are more focused on creating larger societies rather than sets of alienated individuals. certainly, there are many factors that cause this kind of trend. the factors may include social determinants known as catholic social teaching, social solidarism and sustainable growth. each of the above factors refers to the three methods of social security, whose aim is to protect citizens against the threat of unsatisfied basic needs, socially recognized as valid. catholic social teaching, social solidarism and sustainable growth refer both to obliging the state to help people who are facing a situation of unsatisfied basic needs stanisław adamiak, damian walczak10 (do not allow the possibility of leaving the individual alone – the procurement method) and to indicating everyone the necessity of self-protection that reaches above the minimum guaranteed by the state (the insurance method). also, they indicate the possibility (necessity) of functioning in society a kind of support provided to persons in need from voluntary payments (institutions or individuals – the philanthropic method). k atolick a nauk a społeczna, rozwój zrównoważony oraz solidaryzm społeczny w kontekście zabezpieczenia społecznego słowa kluczowe: zabezpieczenie społeczne, katolicka nauka społeczna, solidaryzm społeczny, rozwój zrównoważony. klasyfikacja j e l: a12, a13, z12. abstrakt: obecnie, w przeciwieństwie do tego co miało miejsce jeszcze do końca xix wieku, ludzie w większym zakresie tworzą społeczeństwa, niż zbiory pojedynczych, wyalienowanych jednostek. zapewne jest wiele czynników powodujących tego rodzaju tendencje. czynnikami takimi mogą być uwarunkowania społeczne określane jako: katolicka nauka społeczna, solidaryzm społeczny lub wzrost zrównoważony. każdy z ww. czynników odwołuje się do trzech metod zabezpieczenia społecznego, którego celem jest zabezpieczenie obywateli przed groźbą niezaspokojenia podstawowych potrzeb, społecznie uznanych za ważne. katolicka nauka społeczna, solidaryzm społeczny oraz wzrost zrównoważony odwołują się zarówno do zobligowania państwa do pomocy osobom znajdującym się w sytuacji niezaspokojenia podstawowych potrzeb (nie dopuszczają możliwości pozostawienia jednostki samej sobie – metoda zabezpieczeniowa), jak i do wskazywania każdemu człowiekowi konieczności samodzielnego zabezpieczenia powyżej minimum gwarantowanego przez państwo (metoda ubezpieczeniowa), ale także wskazują na możliwość (konieczność) funkcjonowania w społeczeństwie wsparcia, ze strony instytucji charytatywnych (lub osób fizycznych), adresowanego do osób potrzebujących (metoda filantropijna). translated by damian walczak  introduction sustainable development, catholic social teaching and social solidarism1 relate to economics as a science dealing with research on the economic activity of people. they affect, however, a different sphere of human functioning. catholic social teaching seeks to answer the question about the meaning of this activity in the context of social order (klimczak 2012, 23), and sustainable deve1 what is meant here is ‘secular’ social solidarism, referred to also by non-believers, and not the one resulting from catholic social teaching. ‘secular’ solidarism, unlike catholic social teaching, concerns (on the part of beneficiaries) not only people but also other entities such as: regions, countries, etc. catholic social teaching, sustainable development… 11 lopment answers the question on how to manage resources so as not to limit the developmental opportunities for future generations (redclift 2009, 35–36; walczak 2013, 328–329, 335), whereas solidarism means the action of people within the community of interests with various social groups and strata (colcord 1928, 577–579). each of these spheres (social order, the development of future generations, the community of interests) is related to social security, which since the end of the nineteenth century, that is, from the beginning of its institutionalized forms, has raised a lot of controversy. on the one hand, there are the public's expectations for the systematic increase in public sector spending, including social security (wagner's law); on the other hand, financial problems of individual countries and the demographic decline limit these expenses (henrekson 1993, 406–408; bera, walczak 2012, 115–116; kawiński, stańko, rutecka 2012, 1–4). the research methodology and the course of the research process the work includes a critical analysis of literature in the area of catholic social teaching, social solidarism and sustainable development. in its second part, the relations holding between those areas of social security are scrutinized. the aim of the study is to analyze the relations between solidarism, sustainable development, and catholic social teaching in the context of social security. basic terminology – sustainable development, social solidarism, and catholic social teaching sustainable development is the development that meets the needs of the present generation and can be met without limiting the ability of future generations to meet their own needs (united nations 1987). the sustainable development strategy of the european union was approved in may 2001 by the european council in gothenburg, and then was renewed in june 2006. it defines the way in which the eu should meet effectively the challenges of this development. this document is distinctive among the fundamental principles of sustainable development in its approach to internal and intergenerational solidarism and it mentions the need for global solidarism (council 2006). among various aspects of sustainable development we can indicate the environmental, economic and social ones. sustainable development in the ecostanisław adamiak, damian walczak12 nomic (among other things, a balanced budget) and social (including equality of income, poverty reduction) aspects is based on social solidarism (kates, parris, leiserowitz 2005, 9–20). at the same time an increase in income inequality (the social aspect) hinders the growth of economic prosperity (the economic aspect) (talberth, cobb, slattery 2006, 8; dacheux, goujon 2011, 205–215). social security (implemented by the state or by an individual forethought) is responsible for both social and economic aspects of sustainable development, since it impacts the financial situation of the present and future generations. the treaty of lisbon (officially – treaty of lisbon amending the treaty on european union and the treaty establishing the european community, signed at lisbon, 13 december 2007) refers repeatedly to the idea of social solidarism. article i-2 (the union's values) mentioned that ‘these values are common to the member states in the society based on pluralism, non-discrimination, tolerance, justice, solidarism and equality between women and men’. however, article i-3 says that the union combats social exclusion and discrimination, and promotes social justice and security, equality between women and men, solidarism between generations and protection of the rights of the child’, and, in addition, it ‘supports the economic, social and territorial cohesion and solidarism among member states’. solidarism is thinking at the same time about the person and the community, which is created by a unit (group, society, country), and is combined with the mandatory actions of obligated entities, sometimes with altruism (nicolaidis, viehoff 2012, 28). van praag and konijn (1983, 54–56) have identified solidarism as the basis for the functioning of social insurances, which, in turn, form the foundation of an efficient social security system. caro (1931, 9–10) states that ‘the individual in a society that is based on the principles of solidarism serves the general good, but the state or society serve the good of units. in the activity of a socialized individual (...) the sake of public interest dominates, however, at the same time this individual is the goal in itself and has the right to care about his own good, without exceeding reasonable boundaries. in this way, solidarism represents the direction that in a higher synthesis combines the advantages of economic liberalism and socialism. caro (1931, 9) also stresses that ‘cooperation, not competition, (...) is the slogan of solidarism.’ social solidarism is stipulated by the constitution of the republic of poland, according to which all are obliged to ‘preserve the inherent human dignity, the right to liberty and obligation of solidarity with others’ (from the preamble), catholic social teaching, sustainable development… 13 and the social market economy is based on economic freedom, private ownership, and solidarism, dialogue and cooperation between social partners forms the basis of the political system (article 20). further, it can be indicated that the principle of solidarism is one of the fundamental freedoms and rights of every human being, which is not subject to limitation, is not listed within the range of permissible restrictions on the exercise of constitutional rights and freedoms in article 31, paragraph 3 (the constitution of the republic of poland). clearly, social security is part of the essence of social solidarism through intergenerational solidarism, or through the concern of the community for the individual’s interest. in relation to solidarism catholic social teaching is much alike. it objects statism and excessive concentration of responsibilities and resources in the hands of the state (which resulted from the logic of socialism) and it also opposes unlimited liberalism (adamiak, chojnacka, walczak 2013, 16). key elements of the catholic social teaching have been enunciated in the socalled social encyclicals of the popes. one of the most important of them was „populorum progressio” („on the development of the peoples”), issued by paul vi in 1967, where the necessity of the progress of the societies and the compatibility of such progress with the catholic doctrine was stressed. the importance of this document was underlined in 2009 by benedict xvi, who explained that „paul vi had an articulated vision of development. he understood the term to indicate the goal of rescuing peoples, first and foremost, from hunger, deprivation, endemic diseases and illiteracy” (benedict xvi 2009, 21). however, „the economic development that paul vi hoped to see was meant to produce real growth, of benefit to everyone and genuinely sustainable” (benedict xvi 2009, 21). benedict xvi showed the interest of the church in the sustainability of the economy particularly in the context of the fight with famine and providing food for entire population of the earth: “the problem of food insecurity needs to be addressed within a long-term perspective, eliminating the structural causes that give rise to it and promoting the agricultural development of poorer countries. this can be done by investing in rural infrastructures, irrigation systems, transport, organization of markets, and in the development and dissemination of agricultural technology that can make the best use of the human, natural and socio-economic resources that are more readily available at the local level, while guaranteeing their sustainability over the long term as well” (benedict xvi 2009, 27). the admonishments of the pope went also against the certain forms of globalization that tend to exploit the poorer counstanisław adamiak, damian walczak14 tries without giving them adequate perspectives of the sustainable growth: „what should be avoided is a speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the longterm sustainability of the enterprise, its benefit to the real economy and attention to the advancement, in suitable and appropriate ways, of further economic initiatives in countries in need of development” (benedict xvi 2009, 40). the call to the self-restraint in consumer habitudes has been henceforth repeatedly expressed by pope francis. in his apostolic letter „evangelii gaudium” (2013) he warned that „inordinate consumption” is a threat to the social fabric and eventually leads to the resource to violence; therefore „he conditions for a sustainable and peaceful development have not yet been adequately articulated and realized” (francis 2013, 59–60). the catholic social doctrine has always tried to find an equilibrium between the concern for the whole society, especially for the weakest and poorest, and the respect for the human liberty, including the right to the private property. the problem was reassumed in 1987 by john paul ii: „it is necessary to state once more the characteristic principle of christian social doctrine: the goods of this world are originally meant for all. the right to private property is valid and necessary, but it does not nullify the value of this principle. private property, in fact, is under a "social mortgage," which means that it has an intrinsically social function, based upon and justified precisely by the principle of the universal destination of good” (john paul ii 1987, 42). it is therefore clear that the creating sustainable forms of the development, which attempt to provide social security both for the poorest in the present and for the potential poor in the future, have a good theoretical basis, among others, in the catholic social teaching, for which the social solidarity (including the inter-generational solidarity) is one of the most important tenets. social security – relations that connect sustainable development, solidarism and catholic social teaching the element connecting the issues presented is social security, defined as ‘the totality of measures and public actions (institutions), with the help of whose society tries to protect its citizens against the threat of unsatisfied basic needs, socially recognized as important’ (piotrowski 1966, 29). man exposed to certa catholic social teaching, sustainable development… 15 in risks (needs)2 can count on solidarism with others within the same risk community. this community may be narrower (industry) or larger (nationwide) in nature. within social security the following three basic methods of protection can be distinguished: ■ the insurance method (benefits are financed by contributions from insured persons or by individual savings), ■ the procurement method (benefits are financed from the state budget – so by the community), ■ the philanthropic method (help comes from the voluntary payments made by institutions or individuals). both catholic social teaching, sustainable development, or solidarism within indicating the form of aid directed to specific people refer, directly or indirectly, to these methods of social security (table 1). table 1. methods of social security in the context of sustainable development, social solidarism and catholic social teaching specification catholic social teaching sustainable development social solidarism m et ho ds o f s oc ia l s ec ur it y the insurance method leaving the individual independent (if the individual needs above-standard levels of income from social security, he needs to provide it to and by himself) the economic aspect (a balanced budget – the need to reduce the spending on social security originating from the general budget – everyone has to think about himself) individual (as a member of the community) cannot limit himself to be protected only by the community – cannot live at the expense of others. he needs to do his best to provide himself individual security. the procurement method organized aid ought to take a limited form, but must guarantee a certain minimum level/relieving poverty the social aspect (the equality of income/relieving poverty) the natural community of interests that links all members (no one can be left alone). in poland solidarism constitutes a fundamental right and freedom of every person and is guaranteed by the constitution the philanthropic method christian charity/ relieving poverty the social aspect (the equality of income/ relieving poverty) altruism s o u r c e : elaborated by the author. 2 social security risks include sickness, unemployment, old age, accidents at work and occupational diseases, maternity, invalidity, death, poverty. stanisław adamiak, damian walczak16 social solidarism impacts sustainable growth both directly, through economic or social aspects, as well as indirectly through social security, which, in fact, is part of sustainable development. in this respect, solidarism should be considered in various dimensions, in the light of the intra and intergenerational, nationwide or intergroup solidarism. catholic social teaching, as part of the doctrine of the catholic church with about 1.2 billion followers around the world, has an impact on both the idea of social solidarism and the concept of sustainable development. at the same time ‘secular’ solidarism over the years has affected the catholic social doctrine, which could not be formed in isolation from the changing world (figure 1). figure 1. dependencies (impact) between catholic social teaching, social solidarism and sustainable development over the years has affected the catholic social doctrine, which could not be formed in isolation from the changing world (figure 1). figure 1. dependencies (impact) between catholic social teaching, social solidarism and sustainable development source: elaborated by the author. summary solidarism requires that we should look at the man (unit) communally, but should not forget his role to be fulfilled. similarly, catholic social teaching and sustainable development assume the functioning of various subjects only within good community. therefore, sustainable development, which should be treated interdisciplinary is necessarily associated with social security and thus also with a social solidarism. this solidarism impacts two of the three elements of sustainable development. at the same time we cannot forget catholic social teaching, which due to the secularization of europe is becoming less appreciated, but by its concern about both the unit and the common good affects the shape of social security. over many thousands of years the stronger (economically or physically) used to defeat/eliminate the weaker, nowadays, no matter what we call the reason for this decision – within catholic social teaching, social solidarism, and sustainable growth – the stronger helps the weaker. this aid may take the form of in-kind or material, refer to the present or the future. ‘the stronger’, which can be depending on the method of social security, individual people, regions, nations or institutions, are to offer real help and not, as demonstrated by the frequent experience – strive for the elimination or annihilation of another entity. bibliography adamiak s., chojnacka e., walczak d. (2013). social security in poland – cultural, historical and economical issues. copernican journal of finance & accounting, vol. 2, no. 2. http://dx.doi.org/10.12775/cjfa.2013.013. benedict xvi (2009), caritas in veritate. bera a., & walczak d. (2012). problematyka wieku emerytalnego w modernizacji polskiego systemu emerytalnego. wiadomości ubezpieczeniowe, nr 1. caro l. (1931), solidaryzm, z zasiłku funduszu kultury narodowej, lwów. colcord j. c. (1928). community of interest as a basis for family solidarity. social forces, vol. 6, no. 4. http://dx.doi.org/10.1093/sf/6.4.577. council of the european union (2006), review of the eu sustainable development strategy (eu sds) − renewed strategy, 10917/06, 26 june 2006. dacheux d., and goujon d. (2011). the solidarity economy: an alternative development strategy?. international social science journal. mar-jun2011, vol. 62, issue 203/204. http://dx.doi.org/10.1111/j.1468-2451.2011.01804.x. francis (2013), evangelii gaudium. henrekson m. (1993). wagner’s law: a spurious relationship?. public finance, vol. 48, no 2. john paul ii (1987), sollicitudo rei socialis. social security social solidarity social environment economic sustainable development catholic social teaching s o u r c e : elaborated by the author.  conclusions solidarism requires that we should look at the man (unit) communally, but should not forget his role to be fulfilled. similarly, catholic social teaching and sustainable development assume the functioning of various subjects only within good community. therefore, sustainable development, which should be treated interdisciplinary is necessarily associated with social security and thus also with a social solidarism. this solidarism impacts two of the three elements of sustainable development. at the same time we cannot forget catholic social teaching, which due catholic social teaching, sustainable development… 17 to the secularization of europe is becoming less appreciated, but by its concern about both the unit and the common good affects the shape of social security. over many thousands of years the stronger (economically or physically) used to defeat/eliminate the weaker, nowadays, no matter what we call the reason for this decision – within catholic social teaching, social solidarism, and sustainable growth – the stronger helps the weaker. this aid may take the form of in-kind or material, refer to the present or the future. ‘the stronger’, which can be depending on the method of social security, individual people, regions, nations or institutions, are to offer real help and not, as demonstrated by the frequent experience – strive for the elimination or annihilation of another entity.  references adamiak s., chojnacka e., walczak d. (2013). social security in poland – cultural, historical and economical issues. copernican journal of finance & accounting, vol. 2, no. 2. http://dx.doi.org/10.12775/cjfa.2013.013. benedict xvi (2009), caritas in veritate. bera a., walczak d. (2012). problematyka wieku emerytalnego w modernizacji polskiego systemu emerytalnego. wiadomości ubezpieczeniowe, nr 1. caro l. (1931), solidaryzm, z zasiłku funduszu kultury narodowej, lwów. colcord j. c. (1928). community of interest as a basis for family solidarity. social forces, vol. 6, no. 4. http://dx.doi.org/10.1093/sf/6.4.577. council of the european union (2006), review of the eu sustainable development strategy (eu sds) − renewed strategy, 10917/06, 26 june 2006. dacheux d., goujon d. (2011). the solidarity economy: an alternative development strategy?. international social science journal. mar-jun2011, vol. 62, issue 203/204. http://dx.doi.org/10.1111/j.1468-2451.2011.01804.x. francis (2013), evangelii gaudium. henrekson m. (1993). wagner’s law: a spurious relationship?. public finance, vol. 48, no 2. john paul ii (1987), sollicitudo rei socialis. kates r.w., parris t.m., leiserowitz a.a. (2005). what is sustainable development? goals, indicators, values, and practice. environment: science and policy for sustainable development, vol. 47, no. 3. kawiński m., stańko d., rutecka j. (2012). protection mechanisms in the old-age pension systems of the cee countries. journal of pension economics and finance, vol. 14, issue 4. http://dx.doi.org/10.1017/s147474721200008x. klimczak b. (2012). trudne związki katolickiej nauki społecznej i ekonomii. annales. etyka w życiu gospodarczym, vol. 15. stanisław adamiak, damian walczak18 nicolaïdis k., viehoff j. (2012), the choice for sustainable solidarity in post-crisis europe, [in:] g. bajnai et al. (ed.), solidarity: for sale? the social dimension of the new european economic governances, europe in dialogue 01. piotrowski j. (1966), zabezpieczenie społeczne. problematyka i metody, książka i wiedza, warszawa. redclift, m. r. (2009), rozwój zrównoważony (1987–2005) – oksymoron czasu dorastania, sustainable development (1987–2005) – an oxymoron comes of age, problemy ekorozwoju, vol. 4, no 1. http://dx.doi.org/10.1002/sd.281. talberth j., cobb c., slattery n., (2006), the genuine progress indicator 2006. a tool for sustainable development, oakland. the constitution of the republic of poland of april 2, 1997 (dz.u. 1997 nr 78 poz. 483). treaty of lisbon amending the treaty on european union and the treaty establishing the european community, signed at lisbon, 13 december 2007 (dz.u. 2009 nr 203 poz. 1569). united nations (1987), report of the world commission on environment and development, our common future. van praag b. m., konijn, p. a. (1983). viewpoint: solidarity and social security. challenge, vol. 26, no. 3. walczak d. (2013), środki z ue w gospodarstwach rolnych jako element strategii zrównoważonego rozwoju obszarów wiejskich w polsce, prace naukowe uniwersytetu ekonomicznego we wrocławiu, nr 297. date of submission: april 16, 2020; date of acceptance: june 12, 2020. * contact information: e-mail: dr.smubaraq@gmail.com, department of accounting and finance, kwara state university, malete, nigeria, phone: +2348030817202; orcid id: https://orcid.org/0000-0002-3609-3136. ** contact information: okelukman2003@yahoo.com, department of accounting and finance, kwara state university, malete, nigeria, phone: +2348034305255; orcid id: https://orcid.org/0000-0003-2019-989x. *** contact information: alayande.idayat@gmail.com, department of accounting and finance, kwara state university, malete, nigeria. phone: +234830806925; orcid id: https://orcid.org/0000-0001-7094-0573. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 2 sanni, m., oke, l.a., & alayande, i.t. (2020). bank credit accessibility and performance of smes in kwara state, nigeria: a pls-sem analysis. copernican journal of finance & accounting, 9(2), 45–64. http://dx.doi.org/10.12775/cjfa.2020.007 mubaraq sanni* kwara state university lukman adebayo oke** kwara state university idayat titilayo alayande*** kwara state university bank credit accessibility and performance of smes in kwara state, nigeria: a pls-sem analysis keywords: credit, performance, dmbs, smes, pls-sem. j e l classification: c29, e51, g21, l25. abstract: this study examines the effect deposit money banks credit accessibility on smes performance in kwara state, nigeria. the population of the study consists of three hundred and eighty-two (382) respondents and one hundred and ninety-eight (198) were randomly selected as the sample size of the study. data were drawn from the primary source to elicit responses from sme owners/managers. descriptive statismubaraq sanni, lukman adebayo oke, idayat titilayo alayande46 tics and partial least square structural equation model (pls-sem) estimation techniques were employed to analyse the data collected. the study revealed that deposit money banks credit accessibility has a positive significant effect on sme performance (t=10.795, β=0.043) at 5% significance level and credit related charges (interest) also has a positive significant effect on sme performance (t=10.690, β =0.458). this implies that provision of finance by deposit money banks at relatively low cost play an important role in boosting the performance of smes. the study therefore concluded that smes in kwara state are faced with the problem of access to finance as they are not fully benefiting from the credit facilities of the deposit money banks. the study therefore recommended that deposit money banks should put in place a more sme friendly credit administration system for smes to enable them access fund easily and affordably.  introduction the inaccessibility of credit by smes has been a major hindrance to the sector in contributing meaningfully to the growth of the nigerian economy. unwillingness of the deposit money banks (dmbs) to grant the much needed credit to the sector, likewise the attitude or the perception of the sme owners/managers about the banks’ credit facility has partly been responsible for this. globally, a lot has been said and written on the role of smes in the advancement of any economy. in the same token, government in nigeria has focused on smes by formulating policies aimed at enhancing the performance and growth of the sector (eniola & entebang, 2015; ibrahim, 2017). several studies have acknowledged smes to have immense potentials for job and wealth creation and poverty alleviation in the less developed economies (imafidon & itoya, 2014; owolabi & nasiru, 2017; bashir & ondigo, 2018; erdogan, 2019). however, this goal has not been achieved in nigeria. according to the united nations industrial development organization (unido, 2012) smes have significant roles to play in economic development of any nation as they form the backbone of the private sector. smes constitute over ninety percent (90%) of entrepreneurs of the world and account for between fifty to sixty percent (50-60%) of employment generation and poverty alleviation (ayuba & zubair, 2015). deposit money banks are known to provide channels for credit delivery through their various financial avenues. however, most of these services have not been performed to expectation due to the fact that they are characterized by cumbersome processes/stringent conditions that rarely favour the smes, which have contributed to the poor performance of the sector. the importance of fund/credit to a firm or business (smes inclusive) cannot be over bank credit accessibility and performance… 47 emphasized. the provision of funds to the smes and the industrial sector as a whole has been of great concern to policy makers in both the private and the public sectors (alese & alimi, 2014; ayuba & zubair, 2015; ubesie, onuaguluchi & mbah 2017). extant studies including firm–level data from the world bank enterprise survey over the years, reveal that financing inadequacy is a greater obstacle for smes than it is for large firms, particularly in the developing world, and that inaccessibility to finance constrains the growth of the smes sector more than that of large companies (schiffer & weder, 2001; beck, demirguc-kunt & martinez peria, 2008). consequently, inability of the smes to obtain the needed funds to pursue new businesses and finance expansion hampers their competitiveness thereby leading to their collapses in the countries world over (kauffmann, 2006; atieno, 2009). the problem of access to credit by smes is a major issue that should be resolved considering the role of smes in the development of any economy. previous studies have shown that nigerian government have intervened in the provision and accessibility of credit to the sector by putting in place policies towards the establishment of several financial institutions and credit schemes/ programmes aimed at enhancing their performance. despite all these, smes are still faced with numerous challenges of which access to credit constitute a major constrain. credit when granted are mostly on short term bases and usually too small (insufficient) to cover their working capital requirements talk more of expansion or diversification into new innovative areas. in addition, the cost incurred on bank credit poses an insurmountable barrier to smes to acquire credit from dmbs in terms of excessive interest rate and other charges attached to these facilities. considering the important role played by smes in the advancement of an economy, as supported by previous studies (dalhat & hassan, 2016; ubesie et al., 2017; owolabi & nasiru, 2017; bashir & ondigo, 2018) easy access to finance by smes is one of the strategies to be used in order to achieve the desired goals of job/wealth creation and the alleviation of poverty in an economy, a lasting solution need be provided to resolve these issues in order to enhance the performance of the sector which will also ref lect positively on nigeria economy. this study becomes imperative because banks in nigeria need to understand how to impact on smes performance through credit accessibility. hence, this study is undertaken to examine the effect of dmbs credit accessibility and credit related charges (interest) on smes performance in kwara state, nigeria. mubaraq sanni, lukman adebayo oke, idayat titilayo alayande48 in view of the study objectives, the following hypotheses stated in null forms were formulated and tested empirically in the study. ho1: access to dmbs credit has no significant effect on smes performance in kwara state. ho2: credit related charges of dmbs have no significant effect on smes performance in kwara state. literature review lending is one of the most important functions undertaken by dmbs in nigeria. banks play their intermediation role by sourcing funds through deposits from their numerous customers and such funds are given out as loan either on short, medium or long term basis to government, corporate bodies, institutions and individuals to enable them embark on viable investment ventures. based on the fact that their operations/ business are usually pivoted around the practice of lending hence the use of expertise and competent hands by the banks’ management team in carrying out their business (ayuba & zubair, 2015; ubesie et al., 2017). it is worthy to note that small and medium scale enterprises (smes) have no generally established definition. however, smes are businesses that are privately owned and managed with a small number of employees. kadiri (2012) asserted that the criterion for categorization of smes into small, medium or large scale varies from one country to another based on whether the country is developed or developing. small and medium enterprises development agency of nigeria (smedan) (2015) defines small enterprise as one which total assets (excluding land and building) is more than 10 million naira but less than 100 million naira with total workforce of more than 10 employees but less than 50. whereas a firm with total workforce of 50 and 199 employees with total assets (excluding land and building) of more than 100 million but not exceeding 1 billion is categorized as a medium enterprise. measuring business performance is an essential element in ensuring a firm’s growth and survival, likewise identifying its strengths and weakness (bandar, 2016). performance refers to ability of an organization to achieve high profit, quality product, large market share, good financial results and survival at bank credit accessibility and performance… 49 a pre-determined time (zhiri, 2017). apolot (2012) viewed performance in relation to sales growth, customer satisfaction and profitability. however, a large number of studies measure performance with efficiency and financial result. hence, sme performance can be measured using either financial or non-financial assets. smes in nigeria have not performed to expectation in terms of meaningful contribution to the nation’s gross domestic product (gdp). gbandi and amissah (2014) asserted that smes in nigeria have underperformed in spite of the fact that they constitute more than ninety percent of nigerian businesses, their contribution to gdp is below expectation contributing only about one percent to gdp. however, smes low performance in nigeria has be attributed amongst others to lack of access to the much needed fund, unfriendly business environment, lack of access to modern technology and poor management skills (akabueze, 2017). employing co-integration and error correction model techniques, imoughele and ismaila (2014) evaluated the impact of commercial bank credit on the growth of smes in nigeria from 1986 to 2012. the results of the study revealed that smes and selected macroeconomic variables have a long run relationship with smes output, time deposit and exchange rate have significant impact on smes output while commercial bank credit to smes, government expenditure and bank density has direct but insignificant impact on smes output and interest rate has adverse effect on smes output. analyzing data collected from primary data source through the use of questionnaire, oluitan (2014) evaluated the impact of commercial bank funding on small and medium scale enterprises in nigeria. the findings of the study revealed that commercial bank funding for smes is important to enhance their activities, but currently not improving their profitability. acknowledging the importance of easy credit access to boosting smes performance, ayuba and zubairu (2015) evaluated the impact of banking sector credit on the growth of smes in nigeria between 1985 and 2010. correlation matrix and error correction model were used to analyse data collected and the study revealed that banking sector credit has a significant impact on smes growth in nigeria with a positive impact on some major macro-economic variables. the study recommended that stringent conditions associated with credits process to smes should be relaxed. consequently, oke and aluko (2015) examined the impact of commercial banks on small and medium enterprises financing in nigeria between 2002 mubaraq sanni, lukman adebayo oke, idayat titilayo alayande50 and 2012. using panel data regression analysis, the results of the study revealed that commercial bank credit has significant impact on sme financing hence they are capable of making smes grow. in a study conducted by kavitha vani (2015), employing both descriptive and inferential statistical methods, findings revealed that there is high financial exclusion of the sme sector from formal financial sources, but this is due to the wrong perception of each sector on one another. similarly, li (2016) conducted a study on the sources of finance and the difficulties in raising finance for smes in china. the study revealed that personal finance; funds from families and friends along with credit from the financial industry are being widely used by smes in china now and the chances that the sector will access more funds from the banking system in the future. the study also revealed that venture capital financing is also available in china but due to the risk involved and the high rate of interest charged on the funds, smes in china has been discouraged from patronize venture capital financing. employing correlation and analysis of variance (anova), bandar (2016) examined financial access constraints and the impact on performance of smes in saudi arabia. the results revealed that some factors ranging from firm specific to macroeconomic impeded smes access to finance from the banks and prevent them from developing their businesses. the study recommended that in order to promote easy access to finance from banks to the sector there is need to establish a trusting relationship between the sector and the banks. employing multiple regression analysis and univariate analysis technique to analyse data collected from both secondary and primary sources, dalhat and hassan (2016) evaluated the role of money deposit banks in financing smes in nigeria. the study revealed that financial support, business environment and managerial skills have positive impact on the growth and survival of smes. ubesie et al. (2017) examined the effect of deposit money banks’ credit on smes growth in nigeria between 1986 and 2015. data from secondary source were analysed using ordinary least square (ols) regression method and the study revealed that deposit money banks’ credit has no significant effect on smes growth in nigeria, while interest rate has negative but significant effect on smes growth in nigeria. employing paired sample t-test and ratio analysis, ibrahim (2017) evaluated the role of commercial banks in financing smes in nigeria. findings of the study revealed that commercial banks loans with the equity scheme have not positively impacted on smes finance. in view of this, the study called for the bank credit accessibility and performance… 51 need for nigerian commercial banks to embrace risk-averse behaviour in respect of loans to smes; interest rate should be review for smes loans and cbn should increase smeeis contribution by commercial banks. aguwamba and ekienabor (2017) also examined the linkage between bank lending and growth of small scale enterprises in nigeria. the study employed ordinary least squares (ols) regression technique to analyse data collected from 1995 to 2012. the result revealed a positive impact of bank lending on small-scale enterprises growth. chepsang, iraya and okiro (2018) evaluated the effects of access to credit on financial performance of smes in nairobi county kenya from 2012 to 2016. the study revealed a strong and positive relationship between the access to credit and smes performance. adelekan, eze and majekodunmi (2019) also reported similar findings in nigerian context using correlation analysis. extant literature reviewed on the effect of deposit money banks credit access on smes performance revealed mixed findings. some evidences (dalhat & hassan, 2016; abosede, hassan & oko-oza, 2017; bashir & ondigo, 2018) revealed a positive relationship others such as oluitan (2014), imafidon and itoya (2014), ubesie et al. (2017), owolabi and nasiru (2017) revealed a negative relationship, hence the need for further research. in addition, most of the previous studies in this study area were conducted outside kwara domain of nigeria and majorly focused on microfinance banks. notable among these studies are owenvbiugie and igbinnedion (2015), abosede et al., (2017), zhiri (2017), akingunola, olowofela and yunusa (2018) and adeoti, gbadeyan and olawale (2015). this study extends the knowledge frontier by focusing on dmbs in kwara state, nigeria. methodologically, most of the literature reviewed used anova, chi square and ols regression analysis as well as simple percentage and trend analysis. this study used partial least square-structural equation model to analyse the effect of dmbs’ credit accessibility on smes’ performance. theoretical framework the connection that exists between finance and economic growth was first reported by schumpeter (1911) and this has been contented in both the developed and developing countries. he asserted that a well functioning financial sector is necessary to induce growth in the real sector which consequently mubaraq sanni, lukman adebayo oke, idayat titilayo alayande52 leads to economic growth. the finance led growth theory holds that activities of the financial institutions serve as a useful tool for increasing the productive capacity of the economy. the theory contends that nations with betterdeveloped financial system have the tendency to grow faster. the significance of credit institutions in creating development within the economy has been broadly discussed in various literatures. schumpeter (1911) also recognized banks’ role in encouraging technological development through their mediatory role such as supply of loans to the productive sector. he posits that efficient allocation of savings through recognition and funding of businessmen with the best chances of successfully applying innovative products and production processes are devices to attaining sustainable economic performance. several researchers thereafter (mckinnon, 1973; shaw, 1973; fry, 1988; king & levine, 1993) have upheld the above hypothesis about the significance of banks to the advancement of the economy. the research methodology and the course of the research process cross sectional survey design was adopted in the study. this design is usually adopted when there is no intent of controlling any of the study samples (asika, 2006). the population of the study comprises of all 382 smes registered with the kwara state chambers of commerce, industry, mines and agriculture (kwaccima). the nature of the study does not allow for inclusion of unregistered smes in the population. kwaccima members were chosen because they have duly registered their businesses and operate within the standard set by smedan for smes. and registration of business is also one of the prerequisite for obtaining credit from deposit money banks. a sample size of 198 smes was selected based on yamane (1967) using stratified sampling technique. (see appendix 1). the source of data collection for the study was obtained through questionnaire administered to the target respondents. the questionnaire was divided into two (2) parts, sections a and b. section a contains the social demographic information about the respondents, while section b focused on the research objectives and the hypotheses stated. the questionnaire of kavitha vani (2015) and bandar (2016) were adapted and modified to suit the objective of the study. bank credit accessibility and performance… 53 also, validity and reliability tests were conducted to substantiate the instruments used for data collection. descriptive and inferential statistics were used for data analysis. the descriptive statistics employed includes mean, frequency and standard deviation to explain the demographic data while partial least square-structural equation model (pls-sem) was used to achieve the research objectives stated as well as testing the hypotheses formulated. model specification the econometric model employed in this study to evaluate the effect of deposit money banks credit accessibility on smes performance in kwara state was adapted with modification from the previous empirical study of ubesie et al. (2017) as follows: smep=f(abc,crc ) (1) this can be specified in operational form as: sme(p)i = β0 +β1abci + β2crci + µi (2) where: sme(p)i = small and medium scale enterprises performance β0 = constant coefficient β1 β 2 = slope or regression parameters abc = access to bank credit crc = credit related charges µ = stochastic error term i = cross sectional (individual) mubaraq sanni, lukman adebayo oke, idayat titilayo alayande54 results and discussions demographic profile of respondents the demographic profiles of respondents were summarized in table 1: table 1. demographic profile of respondents variable frequency percentages gender male female 95 103 47.98 52.02 nature of business small enterprises medium enterprises 147 51 74.24 25.76 qualification ph.d. masters b.sc. h.n.d. others 6 21 39 58 74 3.03 10.61 19.69 29.29 37.37 position owner manager 144 54 72.73 27.27 years of existence 0-5 6-10 11-15 16 and above 11 82 61 44 5.6 41.4 30.8 22.2 s o u r c e : authors’ computation, 2019. regarding respondents’ gender, significant portion of the respondents were female numbering 103 (52.02%), while the male were 95 constituting (47.98%). this implies that more female gender owns/manages smes operations in kwara state. as for the nature of business, the small enterprises have a sampled populace of 147 (74.24%) while the medium enterprises have 51 (25.76%). this implies that there are more respondents from small businesses than the medium businesses in kwara state. regarding educational qualifications, 6 respondents (3.03%) are ph.d. holders, 21 respondents (10.61%) have m.sc., while 39 respondents (19.69%) are b.sc. holders. also, 58 respondents (29.29%) have hnd and majority of the respondents (74) representing 37.37% have other qualifications not included in the options. this is an indication that most of the smeowners/managers in the study area are literate and are able to comprehend the bank credit accessibility and performance… 55 instrument administered. the table also shows that most of the respondents are business owners representing 72.24% and they have requisite experience spanning 6 to 10 years on the average. normality test normality test was carried out on the basis of individual items measuring the constructs in the study. the study utilized skewness and kurtosis statistics to assess the normality. critical value of +2.58 (.01 sig level) and +1.96 (@ .05 sig level) are benchmark. the result of this test showed that all items are relatively normal as shown in figure1 below: figure 1. normal probability plot s o u r c e : authors’ computation, 2019. mubaraq sanni, lukman adebayo oke, idayat titilayo alayande56 table 2. construct reliability and validity access to credit interest rate smes performance a.c1 0.771864 a.c2 0.779573 a.c3 0.727216 a.c4 0.764385 c.r1 0.778904 c.r2 0.725679 c.r3 0.822812 c.r4 0.763748 smes1 0.755584 smes2 0.806723 smes3 0.782878 smes4 0.813255 s o u r c e : authors’ computation (2019) using smartpls2. table 2 depicts how well items measuring each of the study variables loaded to determine their retention or otherwise. on the table, items measuring access to credit, credit related charges (interest rate) and smes performance loaded well, as they loaded above 0.7 hence, all items were retained and used to measure the study variables. table 3. construct overview of the model ave composite reliability cronbachs alpha access to credit 0.579159 0.846176 0.758255 interest rate 0.598408 0.856080 0.775749 smes performance 0.623998 0.868986 0.799465 s o u r c e : authors’ computation (2019) using smartpls2. bank credit accessibility and performance… 57 likewise, as depicted by table 3, all construct met the minimum benchmark for both composite reliability and ave which is 0.7 and 0.5 respectively. the cronbachs alpha statistics for all the variables are above 0.7 indicating internal consistency among the statements measuring each of the constructs. table 4. fornell-larcker discriminant validity test access to credit interest rate smes performance access to credit 0.761025 interest rate 0.565012 0.773568 smes performance 0.689090 0.701083 0.789935 s o u r c e : authors computation (2019) using smartpls2. table 4 shows the discriminant validity result. the square root of ave in each latent variable was used to establish discriminant validity; if this value is larger than other correlation values among the latent variables then discriminant validity is well established (fornell & larcker, 1981). this number is larger than the correlation values in the column and row, thus result indicates that discriminant validity is well established. table 5. path coefficients and hypotheses testing hypotheses (adj.r2 0.618) b value standard error t statistics p value decision access to credit -> smes performance 0.430356 0.039866 10.795074 0.000*** rejected credit related charges (interest rate) -> smes performance 0.457927 0.042837 10.689924 0.000*** rejected value*** < 0.01, p value**< 0.05, p value*< 0.10. s o u r c e : authors computation (2019) using smartpls2. the result in table 5 shows the relationship between dmbs credit access and smes performance. the r2 value represents the proportion of variation in the dependent variable that can be explained by one or more predictor variables. mubaraq sanni, lukman adebayo oke, idayat titilayo alayande58 as indicated in figure 2, adjusted r square is 0.618, implying that 61.8% variance in smes performance is accounted for by access to dmbs credit and dmbs credit related charges, while 38.2% is accounted for by other variables that can equally inf luence smes performance that were not captured in this study. figure 2. construct reliability and validity s o u r c e : authors’ computation (2019) using smartpls2. as shown in table 5 above, access to credit has a positive significant effect on smes performance as indicated by (t = 10.795, p-value 0.000) at 0.05 level of significance with a beta value of 0.430, thereby providing a basis to reject the null hypothesis which stated that access to dmbs credit has no significant effect on smes performance in kwara state and accepting the alternative hypothesis. hence, a unit change in access to dmbs’ credit will lead to 0.430 unit change in smes performance. this result implies that access to credit play an important role in boosting the performance of smes in kwara state. bank credit accessibility and performance… 59 figure 3. model of deposit money banks’ credit accessibility and performance of smes bootstrapping s o u r c e : authors’ computation (2019). as revealed in table 5 above, it can be deduced that credit related charges of dmbs has a positive significant effect on smes performance in kwara state (t = 10.690, p-value 0.000) at 0.05 level of significance with a beta value of 0.458. thus, the null hypothesis which stated that credit related charges of dmbs’ have no significant effect on smes performance in kwara state is hereby rejected while the alternative hypothesis is accepted. this implies that a unit change in credit related charges of dmbs’ will lead to 0.458 unit increase in smes performance in kwara state. mubaraq sanni, lukman adebayo oke, idayat titilayo alayande60 discussion of findings from the empirical analysis and hypotheses tested about, the results revealed that the independent variable proxy with access to bank credit and credit related charges exact significant positive effect on smes performance. the study found that access to deposit money banks credit has a significant positive effect on smes performance in kwara state. this is in line with the prediction of the finance led growth theory that a well functional financial sector is necessary to induce growth in the real sector. this implies that the activities of the dmbs play an essential role in attaining sustainable performance of the sme sector. hence easy access to credit that can be used for expansion and diversification purposes will absolutely go a long way to enhance the performance of the sector. the result support the a-priori expectation and the findings of the study corroborates with the study of oluitan (2014), ayuba and zubairu (2015), dalhat and hassan (2016) and abosede et al. (2017) where they found significant positive relationship between access to credit and smes performance. however, imafidon and itoya (2014), ubesie et al. (2017), owolabi and nasiru (2017) and ibrahim (2017) reported negative significant relationship between access to credit and the performance of smes. this might be due to geographical, population and sample size or construct of the study peculiarities. the study also revealed that credit related charges have significant positive effect on smes performance in kwara state. the implication of this is that the charging of relatively prohibitive interest rate to smes by the dmbs, given the presence of information asymmetry, puts them on their toes to perform and repay both the principal sum and interest. the result is however in consistence with the study of anigbogu, okoli and nwakoby (2015) and tumwine, akinsimire, kamukama and mutaremwa (2015) who also reported similar findings but contrasts that of ubesie et al. (2017) that reported a negative significant effect of interest on smes performance.  conclusion and recommendations based on the result of the hypotheses tested above, the study concluded that dmbs credit accessibility have significant positive effect on smes performance in kwara state. this implies that difficulties in accessing finance are signifi bank credit accessibility and performance… 61 cantly related to the performance of smes. therefore, easy access to credit at relatively low cost would enhance the performance of the sector to contribute tremendously to the growth and development of the economy. based on the findings that dmbs credit accessibility has significant positive effect on smes performance, it is recommended that the monetary authorities should review policies that will improve credit access to the sector while the dmbs should put in place standardized credit administration system in order to ensure easy access to funds by the sector. also, in view of the findings that credit related charges (interest charges) spur smes to perform, it is recommended that dmbs should open more sme friendly financial windows at relatively lower interest for the generation of more economic activities and provide compensating incentives for the interest charges.  references abosede, a.j., hassan, b.a., & oko-oza, r.o. 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(2015). a borrowing cost model for effective performance of small and medium enterprises in uganda. world journal of entrepreneurship management and sustainable development, 11(2), 74-84. https://dx.doi.org/10.1108/wjemsd-03-2014-0009. ubesie, m.c., onuaguluchi, i.f., & mbah, a.m. (2017). effect of deposit money banks credit on small and medium scale enterprises growth in nigeria. internationmubaraq sanni, lukman adebayo oke, idayat titilayo alayande64 al journal of finance and accounting, 6(5), 117-132. https://dx.doi.org/10.5923/j. ijfa.20170605.01. yamane, t. (1967). statistics: an introductory analysis (2nd ed.). new york: harper and row. zhiri, d.d. (2017). impact of microfinance services on performance of small and medium scale enterprises (smes) in zaria metropolis. international journal of scientific research in social sciences and management studies, 2(1), 49-65. appendix 1 sample size and sampling technique s/n sector (stratum) population 1 manufacturing 27 27/382*198 = 14 2 wholesale and retail 89 89/382*198 = 46 3 accommodation and food 21 21/382*198 = 11 4 construction 35 35/382*198 = 18 5 water supply 56 56/382*198 = 29 6 waste management 8 8/382*198 = 4 7 transportation 11 11/382*198 = 6 8 information and communication 31 31/382*198 = 16 9 agriculture 48 48/382*198 = 25 10 education 33 33/382*198 = 17 11 entertainment 23 23/382*198 = 12 total 382 198 s o u r c e : authors’ compilations and computations (2019). date of submission: august 16, 2019; date of acceptance: october 19, 2019. * contact information: okelukman2003@yahoo.com, department of accounting and finance, kwara state university, malete, nigeria, phone: +2348034305255; orcid id: https://orcid.org/0000-0003-2019-989x. ** contact information: oshoprints@gmail.com department of accounting and finance, kwara state university, malete, nigeria, phone: +2347036215657; orcid id: https://orcid.org/0000-0003-1365-2860. *** contact information: quadyu@yahoo.com department of accounting and finance, kwara state university, malete, nigeria, phone: +2348065587154; orcid id: https:// orcid.org/0000-0002-3755-7924. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 3 oke, l.a., saheed, d.o., & quadri, y.o. (2019). an empirical analysis of corporate capital structure and financial performance of listed conglomerates in nigeria. copernican journal of finance & accounting, 8(3), 95–114. http://dx.doi.org/10.12775/cjfa.2019.014 lukman adebayo oke* kwara state university daud omotosho saheed** kwara state university yusuf olamilekan quadri*** kwara state university an empirical analysis of corporate capital structure and financial performance of listed conglomerates in nigeria keywords: corporate, capital structure, financial performance, conglomerates, roa, panel data. j e l classification: g30, g32, l22, l25, c23. abstract: the relationship between capital structure and firms’ financial performance has attracted the attention of many researchers both locally and globally. the paucity lukman a. oke, daud o. saheed, yusuf o. quadri96 of empirical evidence from nigeria in this regard, especially on nigerian conglomerate firms, portends the need for further research. against this backdrop, the study investigated the impact of capital structure on the financial performance of listed conglomerates in nigerian using descriptive statistics, pairwise correlation and panel data regression technique to analyze the secondary data extracted from the annual reports and accounts of the six (6) selected conglomerates for the period 2008 to 2017. the study found that financial leverage proxy by total debt ratio, long-term debt ratio and short-term debt ratio have significant impact on the selected firms’ financial performance proxy by return on assets, except debt to equity ratio that reveals an insignificant impact on return assets (roa). firm size and growth also reported a significant effect on the financial performance of the selected firms. the findings is in tandem with the proposition of the agency cost theory in the nigeria settings but with caution considering the facts that firms in nigeria were largely finance through short term debt obligation as against long term debt funding that was presumed in the agency cost theoretical proposition. it is therefore recommended that managers of companies should be guided when seeking credit advances from the financial market as it is important when considering the appropriate capital mix that optimize firm value.  introduction an energetic and developed private sector that can serve as engine of growth and development is extremely essential in any country (gwatidzo, 2009). as emerging countries endeavor to assemble their private sector, absence of sufficient capital as far as debt and equity may block the growth and survival of organizations particularly in africa. because of this constraint, firms endeavor to ensure they join accessible various kinds of debt and equity in an ideal way that can ensure the maximization of investors’ wealth or minimized the weighted cost of capital. this proposes that capital structure may inf luence firm value (performance). this is a finished takeoff from the modigliani and miller (1958; 1963) proposition that the diverse mix of obligation and value (capital structure) does not inf luence firm value. modigliani and miller (1958) posit in their first proposition that the capital structure of the firm is autonomous of the firm value. while the irrelevance capital structure hypothesis of modigliani and miller (1958) was accorded numerous criticisms because of its hopeful assumptions of no taxes, no transaction or issues costs, perfect market combined with the straightly related capital structure refinement (modigliani & miller, 1963), the agency cost theoretical model promoted by jensen and meckling (1976) expected that firms have ideal capital structure position they endeavor to accomplish. the optimal capital structure of the firm in the agency cost hypothetical model is the capital structure level that limits the organization cost and maximizes an empirical analysis of corporate capital structure… 97 the value of the firm. this infers capital structure choice of the firm as dynamic. the dynamic idea of capital structure recommends that capital structure of firms change crosswise over firms and time for example each firm in an industry for instance can change their capital structure after some time to guarantee the agency cost is minimized and value of the firm is maximized. more thus, capital structure is viewed as naturally dynamic instead of static. firms regularly don’t change immediate when settling on capital structure decision. there are transaction costs and adjustment procedures included when modifying capital structure towards the target level. along these lines, empirical analyses of capital structure must be treated as a dynamic wonder instead of static. the empirical proof on capital structure and firm performance especially in nigeria is insufficient (see adesola, 2009; onaolapo & kajola, 2010; akintoye, 2009, ebimobowei, okay & binaebi, 2013; adesina, nwidobie & adesina, 2015; yinusa, ismail, yulia & olawale, 2019). more also, the few available studies failed to beam search light on the dynamic relationship between capital structure and firm performance. most past investigations in the literature carried out static analyses of the effect of capital structure on firm performance inside the trade-off and pecking order hypothetical framework. findings from the previous studies have been mixed and inconclusive. there are two fundamental strands of findings in the empirical literatures. some study, for example, berger, mester (1997), john and senbet (1998), safieddine and titman (1999), harvey, lins and roper (2004), abor (2008), zeitun and tian (2007), majumdar and sen (2010), san and heng (2011), salim and yadav (2012) recorded positive relationship between leverage and firm performance. however, a few different studies report negative relationship. these studies include armen, gayane and hassan (2004), zeitun and tian (2007), king and santor (2008), ebaid (2009), asimakopoulos, samitas and papadogonas (2009), majumdar and sen (2010), salim and yadav (2012). due to these empirical inconsistencies, the present studies adds to the capital structure literature by giving evidence from a developing business sector setting (nigeria) and by inspecting the dynamic effect of capital structure on firm performance of listed conglomerates in nigeria. the significant contribution of this research work come from the utilization of panel data regression technique to analyse the relationship between capital structure and firm performance inside the agency cost theoretical model in an emerging nations describe with a few markets defects for example, information asymmetries, poor lenders and investors’ protection and poor contract requirements contrasted with those in the surviving literature. the emlukman a. oke, daud o. saheed, yusuf o. quadri98 pirical discoveries demonstrate that a moderate utilization of debt financing has a noteworthy beneficial outcome on firm performance, while inordinate utilization has a negative noteworthy impact on firm performance. literature review modigliani and miller (1958) research work on the irrelevance of capital structure on firm value (consequently performance) and its later refinement on the relevance of capital structure (see modigliani & miller, 1963) established the frameworks for other contrasting theoretical forecasts. the trade-off theory loosened up the perfect market assumptions of modigliani and miller (1958) and foresee that capital structure is relevance for firm performance for reasons, for example, tax deductibility of debt interest and agency costs (fosu, 2013). the agency cost theoretical model that is an augmentation of the dynamic trade-off theory by jensen and meckling (1976) proposes that there are two sorts of conf lict of interest at the firm level. one is the conf lict of interest among investors and managers and the other is the contention among managers and debtholders. they set that debt financing is utilized to determine the conf lict of interest among managers and investors to alleviate manager’s opportunistic conduct and other agency related issues. this tends to diminish the free cashf low that managers can use for advantages and perquisites by firm since it realizes debt responsibility that must be reimbursed to get together with debt commitments to counteract bankruptcy of the firm. going bankrupt might be in all respects exorbitant for the administrators particularly when they have managerial shareholding in the organization. to hinder this sort of occasion, managers regularly endeavor to guarantee they get together with the debt taxes of the organization. likewise, the managers would likewise work to maximize firm value through improve performance. on the order hand, is the conf lict between the investors and debt holders (see harris and raviv, 1991; manos, 2001). the contention that emerges between these parties is more often than not because of risk of default (margaritis & psillaki, 2010). the risk of default regularly prompts an underinvestment (myers, 1977). stulz (1990) sets that debt financing by the firm exacerbates the underinvestment issue of the firm. the conf lict between the debt holders and equity investors because of underinvestment is viewed as an tax of utilizing debt instead of advantage along these lines agency cost theory conjectures negative relationship between capital structure and firm performance. by and an empirical analysis of corporate capital structure… 99 large, the agency cost theory places monotonic relationship among leverage and firm performance. the irrelevance of capital structure to firm performance theoretical recommendation was first tried empirically in the pioneering and research work by modigliani and miller (1958) allude later as (m&m). they tried the relationship between capital structure and firm value under the perfect market assumptions in the united states petroleum, oil and power enterprises utilizing stage instrumental variable methodology. they observed value of firms not to be impact by their capital structure. after five years, modigliani and miller (1963) amended their past assumption of no taxes under the perfect market old style suspicion by joining corporate personal taxes into their model, on account of the tax deductibility of interest installment at the corporate level, capital structure was found to increasingly affect the estimation of firm. they noticed this is on the grounds that interest payment were deducted in touching base at the earning figure on which taxes is charged. they contended that these payments decrease the corporate tax liabilities. this corporate tax model declared that the estimation of firm will be at the highest with 100 percent utilization of leverage financing. neither of these forecasts ref lects reality of the world (ismail, 2006). once in a while would firms utilize 100 percent debt in their capital structure. after fourteen years, miller (1977) exhibited another model that fused personal income taxes to the existing corporate tax model. their investigation affirmed that the corporate tax break of debt might be offset by the tax inconvenience of interest payment at the individual level. miller (1977) conjectured that if individual tax rates on interest income are generally higher than the individual tax rates on equity, at that point the increases to corporate leverage can to a great extent be limited or even disposed of completely, subsequently returning to the irrelevance consequences of capital structure prior detailed in the mm (1958) work. since modigliani and miller have held this position, a few empirical investigations have been led in the capital structure literature both in the energed and emerging economies to test the validity of the recommendation of relevant or irrelevance of capital structure to firm financial performance. there is broad literature on the effect of capital structure on firm performance. the empirical findings of these investigations in the extant literature that have utilized datasets and tests of firms from emerged and emerging economies have listed mixed and inconclusive findings. for the purpose of this work, we center around the significant and relevant ones after the m&m empirlukman a. oke, daud o. saheed, yusuf o. quadri100 ical investigations that test the agency cost theory of capital structure. we additionally reviewed research work that found empirical backings for different theories of capital structure especially studies that utilized datasets and sample of firms from emerging economies. berger and bonaccorsi di patti (2006) analyzed the relevance of the agency cost theory in the united states banking industry the study revealed that higher leverage or a lower equity capital ratio is related with higher profit efficiency over nearly the whole range of the observed data of the study. additional proof on the effect of capital structure on firm performance by margaritis and psillaki (2007) departed to a great extent from past studies that have researched the relationship between capital structure and firm performance including the novel work of berger and bonacorssi di patti (2006). the study utilized the non-parametric efficiency measure that catch the companies’ best practice production outskirts utilizing data envelopment strategy (dea) and quantile regression technique to analyses the manner in which capital structure affect the performance crosswise over ranges of firms and contrasted the findings with ols. these findings bolster the agency cost hypothesis that higher leverage lead to upgrade performance estimated by efficiency. another fascinating and related investigation by margaritis and psillaki (2010) gives better understanding and empirical proof on how contending hypothesis may act at various fragments of the relevance data distribution and cautioning against the standard routine with regards to drawing derivations by capital structure considers that have used conditional mean (ols) estimate. the investigation found support for the expectation of the jensen and meckling (1976) agency cost hypothesis. higher leverage was found to prompt improved performance efficiency over the whole scope of the dataset. in opposition to berger and bonaccorsi di patti (2006) that utilized profit efficiency and margaritis and psillaki (2010) that measure efficiency utilizing x efficiency as measure of firm performance, yeh (2011) utilized the double of x-efficiency to proxies performance of banks in taiwan in the investigation of capital structure and firm performance of taiwanese firms. the stochastic frontier approach was utilized to decide cost efficiency as pointer of firm performance. the study contended that this technique is better than the information envelopment technique used by past studies to gauge profit efficiency since it considers maker explicit arbitrary stuns to create a moderately steady efficiency file for each firm. the investigation bolsters the agency cost theory of capital structure as the entries of other comparable studies that have utilized an empirical analysis of corporate capital structure… 101 efficiency as ratio of performance instead of financial performance (berger & bonaccorsi di patti, 2006; margaritis & psillaki, 2007, 2010). the findings of the study demonstrated that lessening managerial shareholdings will diminish agency cost and increase firm value. to represent the effect of ownership structure on firm performance and how it communicates with capital structure. king and santor (2008) inspect the relationship between possession structure, performance and capital structure. the assessed outcomes demonstrated that leverage is contrarily identified with performance of canadian firms. oppositely, positive relationship was accounted for among leverage and firm performance by kim, almas, dany (2005) for japanese huge business group. different studies in the extant literatures carried out from the viewpoint of emerging economies similarly revealed mixed findings. one of the remarkable studies was by abor (2008). the study analyzes the relationship between capital structure and profit of listed firms in ghana from 1998 to 2002. the findings of this study shows that significance positive relationship exist between short term debt ratio and profit for equity. comparative positive outcome was accounted for between total debt to total equity capital and return equity. the findings of this investigation bolster the tradeoff theory. notwithstanding, the findings similarly demonstrates that negative relationship exist between long term debt to total capital and the return on equity which supports the pecking order theory of capital structure. zeitun and tian (2007) revealed significant negative outcome between capital structure and performance of jordanian firms when accounting and markets measures were considered as proxies of performance. this finding is in congruence with the findings of abor (2008) for ghana and south africa. they however, revealed statically significant positive relationship between capital structure and selected firm financial performance when capital structure was estimated short-term debt to total assets and the market measure (tobin’s q) was used to proxy performance. bandyopadyay (2005) also reports positive relationship among leverage and deals performance of india firms. but, the investigation by onaolapo and kajola (2010) reported signicant negative relationship among performance and debt ratio which they battled upheld the agency cost theory of capital structure. fosu (2013) examine the impact of capital structure on firm performance with focus on the level of product strategy of south african firms. the findings uncover that financial leverage has a positive and huge impact on firm performance and product market strategy helps in improving the performance lukman a. oke, daud o. saheed, yusuf o. quadri102 impact of leverage of south african firms. later studies by oino and ukaegbu (2015) on nigeria firms showed that profitability is adversely related with leverage. however, a present report by bandyopadhyay and barua (2016) on capital structure and firm performance in india showed that macroeconomic cycle fundamentally impact capital structure selection of firms which thus leverage their performance. in morocco, amraoui, ye, shinta and hapzi (2017) studied the impact of capital structure of the 53 selected moroccan companies from 2014–2016 using panel data regression technique. the study revealed a significance negative relation between capital structure and the selected moroccan companies. recent evidence from nigeria, yinusa, ismail, yulia and olawale (2019) investigated the impact of capital structure on firm performance in nigeria as well as testing the possibility of non-monotonic relationship between capital structure and firm performance based on the prediction of the agency cost theory of capital structure. the study used 115 selected listed non-financial firms in nigeria. specifically, the paper employed the two step generalized method of moments (gmm) estimation method their findings shows that statistical significant relationship exist between capital structure and firm performance particularly when debt financing is moderately employed. scanty empirical evidence from nigeria in this regard, especially on nigerian conglomerate firms, portends the need for further research. the research methodology and the course of the research process 1. methodology the study covers a period ten years (2008 to 2017) for six (6) conglomerates listed on the nigerian stock exchange. the decision of the degree is based on information accessibility and to upgrade legitimacy. financial administrations and speculation firms were prohibited with regards to the style in past investigations and in light of the fact that these companies have diverse announcing necessities and are all the more vigorously directed. as a result, this study employs secondary data available in the annual reports of listed conglomerates in nigeria and the facts books published by the nigerian stock exchange (nse). as at the time of this study, only six conglomerates were listed on the f loor of the nigeria stock exchange and all of them were involved in the study. an empirical analysis of corporate capital structure… 103 panel data estimation technique was adopted as it takes care of heterogeneity associated with individual company by allowing for individual specific variables. in order to achieve the research objective, researcher adapted the model of onaolapo and kajola (2010) which was specified base on the agency theory adopted as theoretical frameworks by researcher. the model to be estimated becomes: ed listed non-financial firms in nigeria. specifically, the paper employed the two step generalized method of moments (gmm) estimation method their findings shows that statistical significant relationship exist between capital structure and firm performance particularly when debt financing is moderately employed. scanty empirical evidence from nigeria in this regard, especially on nigerian conglomerate firms, portends the need for further research. the research methodology and the course of the research process 1. methodology the study covers a period ten years (2008 to 2017) for six (6) conglomerates listed on the nigerian stock exchange. the decision of the degree is based on information accessibility and to upgrade legitimacy. financial administrations and speculation firms were prohibited with regards to the style in past investigations and in light of the fact that these companies have diverse announcing necessities and are all the more vigorously directed. as a result, this study employs secondary data available in the annual reports of listed conglomerates in nigeria and the facts books published by the nigerian stock exchange (nse). as at the time of this study, only six conglomerates were listed on the floor of the nigeria stock exchange and all of them were involved in the study. panel data estimation technique was adopted as it takes care of heterogeneity associated with individual company by allowing for individual specific variables. in order to achieve the research objective, researcher adapted the model of onaolapo and kajola (2010) which was specified base on the agency theory adopted as theoretical frameworks by researcher. the model to be estimated becomes: roai,t = β0 + β1 tdtai,t + β2 sdtai,t + β 3 ldtai,t + β4 deri,t + β1 grwopi,t + szei,t + μi,t …. (1) β0, β1, β2, β3 and β4 where: roai,t = return on assets of firm i in year t tdtai,t = total leverage of firm i in year t sdtai,t = short term leverage of firm i in year t ldtai,t = long term leverage for firm i in year t deri,t = debt to equity ratio for firm i in year t szei,t = size (natural log of total assets) of the firm i in year t ed listed non-financial firms in nigeria. specifically, the paper employed the two step generalized method of moments (gmm) estimation method their findings shows that statistical significant relationship exist between capital structure and firm performance particularly when debt financing is moderately employed. scanty empirical evidence from nigeria in this regard, especially on nigerian conglomerate firms, portends the need for further research. the research methodology and the course of the research process 1. methodology the study covers a period ten years (2008 to 2017) for six (6) conglomerates listed on the nigerian stock exchange. the decision of the degree is based on information accessibility and to upgrade legitimacy. financial administrations and speculation firms were prohibited with regards to the style in past investigations and in light of the fact that these companies have diverse announcing necessities and are all the more vigorously directed. as a result, this study employs secondary data available in the annual reports of listed conglomerates in nigeria and the facts books published by the nigerian stock exchange (nse). as at the time of this study, only six conglomerates were listed on the floor of the nigeria stock exchange and all of them were involved in the study. panel data estimation technique was adopted as it takes care of heterogeneity associated with individual company by allowing for individual specific variables. in order to achieve the research objective, researcher adapted the model of onaolapo and kajola (2010) which was specified base on the agency theory adopted as theoretical frameworks by researcher. the model to be estimated becomes: roai,t = β0 + β1 tdtai,t + β2 sdtai,t + β 3 ldtai,t + β4 deri,t + β1 grwopi,t + szei,t + μi,t …. (1) β0, β1, β2, β3 and β4 where: roai,t = return on assets of firm i in year t tdtai,t = total leverage of firm i in year t sdtai,t = short term leverage of firm i in year t ldtai,t = long term leverage for firm i in year t deri,t = debt to equity ratio for firm i in year t szei,t = size (natural log of total assets) of the firm i in year t parameters of estimation (1) where: roai,t = return on assets of firm i in year t tdtai,t = total leverage of firm i in year t sdtai,t = short term leverage of firm i in year t ldtai,t = long term leverage for firm i in year t deri,t = debt to equity ratio for firm i in year t szei,t = size (natural log of total assets) of the firm i in year t grwopi,t = growth opportunities of firm i in year t uit = the error term this can be expressed using mathematical notation as: β1, β2, β3 & β4 < 0 and β5, & β6 > 0 variables description table 1. variables measurement and a priori expectations variable determinants proxies measures notations expected sign dependent profitability return on assets profit after tax / total assets roa in d ep en d en t v a r ia b le s le v er a g e r at io s total leverage ratio (ratio of total debt to total assets) total debt/total assets tdta negative(-) short term leverage (ratio of short term debt to total asset) short term debt / total assets sdta negative(-) lukman a. oke, daud o. saheed, yusuf o. quadri104 variable determinants proxies measures notations expected sign dependent profitability return on assets profit after tax / total assets roa in d ep en d en t v a r ia b le s le v er a g e r at io s long term leverage (ratio of long term debt to total asset) long term debt / total assets ldta negative(-) debt to equity ratio total debt/total equity der negative(-) firm size log of total assets natural log of total assets sze positive(+) firms growth growth opportunity change in log of total assets grwop positive(+) s o u r c e : authors’ computation, 2019. 2. estimation and analyses the results of the estimated model and findings are discussed in the context of outcomes from previous studies and the predictions of the agency cost theory of capital structure. we started by providing the statistical properties of the variables included in our model. table 1 above defines the variables and their expected signs. table 2 below presents the descriptive statistics. table 2. descriptive statistics of the variables variable obs mean std. dev. min max roa 60 .018353 .0249304 -.016476 .15546 tdta 60 .6091837 .2000917 .121342 .967756 sdta 60 .1839378 .2116392 0 1.406169 ldta 60 .1928564 .2159786 .1033318 .8241141 der 60 .0106185 .0178668 -.020533 .1034181 grwop 60 .0319025 .0461828 -.0242415 .0879047 sze 60 1.024853 2.609783 .304372 3.286561 s o u r c e : authors’ computation, 2019. table 1. variables measurement… an empirical analysis of corporate capital structure… 105 the above table presents the descriptive statistics for the dependent variable (return on assets) and explanatory variables (total debt to total assets ratio, short term debt to total assets ratio, long term debt to total assets ratio, debt to equity ratio, growth opportunity and size of selected conglomerate firms). from the table, return on assets has minimum and maximum values of -0.016476 and 0.15546 respectively and the mean value of 0.018353 as well as the standard deviation value of 0.0249304. the standard deviation of 0.0249304 signifies that the data deviate from the mean value from both sides by 0.0249304 implying that there is a wide dispersion of the data from the mean because standard deviation is higher than the mean value. the table also shows that the mean of the total debt and total assets ratio (tdta) of the selected firms is 0.6091837 with standard deviation of 0.7000917, and minimum and maximum values of 0.121342 and 0.967756 respectively. this implies that the performance of the firms in terms of total debt to total assets ratio is on average 0.6091837, and the standard deviation value indicates that total debt to total assets ratio of the sampled firms deviates from the mean value from both sides by 0.7000917, implying that there is significant dispersion of the data from the mean because the standard deviation is higher. short term debt to total assets ratio (sdta) of the selected firms is 0.1839378 with standard deviation of 0.2116392. the minimum and maximum values are 0.0000 and 1.406169 respectively. this implies that short term debt to total assets ratio of the sampled firms is on average 0.1839378, and the standard deviation value indicates that the value deviates from the mean from both sides by 0.2116392, implying that there is significant dispersion of the data from the mean because the standard deviation is larger than the mean. furthermore, the table shows that the mean of the long term debt to total assets ratio (ldta) of the firms is 1.928564 with standard deviation of 2.159786. the minimum and maximum values are 1.033318 and 8.241141 respectively. this implies that long term leverage of the firms is on average 1.928564. the standard deviation indicates that the value of the firms long term debt to total assets ratio deviates from the mean value from both sides by 2.159786. this implies that there is significant dispersion of the data from the mean because the standard deviation is higher than the mean. debt to equity ratio (der) recorded a mean value of 0.0106185 with standard deviation of 0.0178668. the minimum and maximum values are -0.20533 and 0.1034181 respectively. the standard deviation indicates that the value of debt to equity ratio of the firms deviates from the mean value from both sides by 0.0178668. this further imlukman a. oke, daud o. saheed, yusuf o. quadri106 plies that there is widely dispersed data from the mean because the standard deviation is large. growth opportunity (grwop) of the selected firms reported a mean value of 0.319025 with standard deviation of .04618283. the minimum and maximum values are -0.0242415 and 0.0879047 respectively. this implies that growth opportunity of the sampled firms is on average 0.0319025, and the standard deviation value indicates that the value deviates from the mean from both sides by 0.0461828, implying that there is significant dispersion of the data from the mean because the standard deviation is larger than the mean. finally, the table portrays that the selected conglomerate firms size (sze)’ has a mean value of 1.024853 with standard deviation of 2.6097831. the minimum and maximum values are -0.8004 and 6.481673 respectively. the standard deviation indicates that the value of size of the firms deviates from the mean value from both sides by 2.6097831 implying that there is a significant dispersion of the data from the mean because the standard deviation is larger than the mean. pairwise correlation table 3 summarizes the results of correlation analyses among the variables. this exercise served two important purposes. first is to determine whether there are bivariate relationship between each pair of the dependent and independent variables. the second is to ensure that the correlations among the explanatory variables are not so high to the extent of posing multi-collinearity problems. table 3. pairwise correlation variables roa tdta sdta ldta der grwop size roa 1.0000 tdta -0.0360 1.0000 sdta 0.7793 0.0188 1.0000 ldta -0.1597 -0.7718 -0.0192 1.0000 der -0.1214 -0.1376 -0.0304 0.0432 1.0000 grwop -0.2885 0.2151 -0.1682 -0.2798 -0.0217 1.0000 size 0.4198 0.1972 0.2671 -0.2189 -0.0455 -0.0455 1.0000 s o u r c e : authors’ computation, 2019. an empirical analysis of corporate capital structure… 107 total debt to total assets ratio (tdta) representing capital structure negatively associated with return on assets with coefficient -0.036. another capital structure variable “short term debt to total asset ratio (sdta)” have a strong positive relationship with return on assets with coefficient 0.779 and significant at 5% level. long term debt to total assets (ldta) negatively correlated with return on assets with coefficient of -0.159 while debt to equity ratio (der) has a negative but weak correlation with return on assets with coefficient of -0.1214. furthermore, firm growth opportunity has negative but weak correlation with return on assets with -0.2885 coefficient. finally, size (sze) is positively correlated with return on assets with coefficient of 0.4198. also from the result in table 3 none of the independent variables have correlation coefficients above 0.7 with one another and this confirmed the problem of multi-colinearity among the variables adopted in the model is not severe (kenedy, 2008). regression analysis table 4. panel data regression results (random effect) pvol coef. std. err. z p>|z| [95% conf. interval] tdla -.0612608 .0152453 -4.02 0.000 -.0911411 -.0313805 sdta .0939753 .0096497 9.74 0.000 .0750622 .1128883 ldta -.1111136 .0277512 -4.00 0.000 -.165505 -.0567222 der -.2054922 .1076593 -1.91 0.056 -.4165004 .0055161 grwop -.1939592 .1373737 -1.41 0.158 -.4632067 .0752884 sze .0927878 .0114206 8.12 0.000 .0695525 .1160231 _cons .0619974 .0152083 4.08 0.000 .0321897 .0918052 r-sq: 0.7914 f-stat 130.97 (0.0000) obs 60 hausman test chi2(6) = 0.09 prob>chi2 = 0.9990 s o u r c e : authors’ computation, 2019. lukman a. oke, daud o. saheed, yusuf o. quadri108 the results of regression analysis as shown in table 4 depict the impact of corporate capital structure on the financial of performance nigerian listed conglomerates. we assume different constant for each company and performed both fixed and random effect regressions. comparison between fixed and random effect was done via the hausman test. the hausman test value of 0.999 (p>0.05) accepts the null hypothesis that difference in coefficients are not systematic, therefore we accept and interpret the random effect model. the random effect output also shows that the coefficient of determination (r-squared) has a value of 0.7914 which implies that explanatory variables (total debt to total assets ratio, short term debt to total assets ratio, long term debt to total assets ratio and debt to equity ratio) were able to explain 0.79% of the total variation in roa which is a portrayal that the explanatory variables constitute about 21% of the elements that predict the dependent variable (roa), implying that the stochastic (unobserved) features in the model constitute about 21% which also showcase a strong goodness of fit of the model. the f-statistics was significant at 1% evidenced by its probability of 0.0000 which implies that all independent variables were jointly significant in explaining return on assets. with respect to the coefficients, the constant (c) has a value of 0.0619974, whose implication is that if all the explanatory variables are held constant or pegged at zero (0), the explained variable – return on assets will surge by 0.0619974units. this shows that regardless of change on the explanatory variables, firms’ profitability will be elevated. a consideration of the magnitude of relationships, considering the t-statistic shows that only debt to equity ratio whose z-statistics is -1.84 relates insignificantly with return on assets given its 0.056 probability which is above the 0.0500 significant margin, while other explanatory variables show statistically significant at 1% level with the explained variable (return on assets). total debt to total assets ratio (tdta)” shows a negative coefficient of 0.0612608 in return on assets (roa), and significant at 1% level implying that where other predictor variables are held constant, a unit change in the total leverage will precipitate 0.61units decline of return on assets. this is in tandem with the work of abdul (2010), onaolapo and kajola (2010) and khalaf (2013) who found a significance negative relationship between long term debt to total assets ratio on the firm performance measured by return on assets (roa) of engineering firms in pakistani market listed on the karachi stock exchange (kse) during the period 2003–2009. this contrasts with the findings an empirical analysis of corporate capital structure… 109 of akinyomi (2013), who found a positive significant relationship between total debt to total assets ratio and nigerian manufacturing firm return on assets. perhaps the findings agreed with a-priori expectation which predicted a bidirectional relationship between total assets to total debt ratio and the profitability of selected firms. long-term debt to total assets ratio (ldta) shows a negative coefficient of 0.1111136 in roa and significant at 1%, implying that where other predictor variables are held constant, a unit change in the long-term debt to total assets ratio will precipitate a 0.11unit decline of return on assets. this study is in tandem with onaolapo and kajola (2010) who reported a negative relationship between long-term debt to total assets ratio and firm performance proxy. debt to equity ratio (der) shows an insignificant negative direction as it shows a coefficients of 0.2054922 indicating that where other variables are held at zero, a unit increase in debt to equity ratio (der) will result to 0.21units decline in firms performance, this is in contrary to the work of alshatti (2015) who found a positive relationship debt to equity ratio and bank profitability but it is consistent with the work of wiwattanakantang (1999), de miguel and pindado (2001), schargrodsky (2002), and zabri (2012) who reported negatives relationship between debt to equity ratio and firm profitability. growth opportunity (grow) has a negative coefficient of 0.1939592 in explaining roa reporting that a unit increase in growth opportunity will result to about 0.19 units decline in return on assets of selected conglomerate firms this in support of rajan and zingales (1995) but contrary to findings, of some studies (see fatouh, harris and scaramozzino, 2002; schargrodsky, 2002). on the other hand, the ratio of short-term debt to total assets (sdta) reveals a positive coefficient of 0.0939753, and significant at 1% implying a unit increase in short term to total assets ratio will result to about 0.093 rise in return on assets this is in tandem with the work of abdul (2010) but it disagreed with a priori expectation. firms’ size (siz) shows a positive coefficient of .0927878 in roa and significant at 1%, implying that where other predictor variables are held constant, a unit change in the firms’ size will bring about 0.093 units increase in return on assets. this is consistent to theoretical expectation, the finding is also in tandem with the studies of sheikh and wang (2010), khrawish and khraiwesh (2010), dawood, moustafa and el-hennawi (2011), akinlo (2011), levent and ersan (2012), kumar, dhanasekaran, sandhya and saravanan (2012), mahvish and qaisar (2012), maxwell and kehinde lukman a. oke, daud o. saheed, yusuf o. quadri110 (2012), tomak (2013), wahab and ramli (2014) and abdeljawad, mat-nor, ibrahim and abdul-rahim (2014) who reported a positive relationship.  conclusion and recommendations agency cost theorists have argued that capital structure can have both direct and inverse effect on firm performance. this depends on how debt is used to erase conf lict of interest among shareholders and managers then between debt holders and shareholders on the other hand. the study shows evidence that revealed capital structure (total leverage ratios and short term leverage) are directly associated to organization financial performance (return on assets).the evolvement being that the more short term leverage is adopted by conglomerate firms in nigeria the better the returns to be enjoyed by shareholders. the adoption of debt may encourage many shareholders to get more supervision and monitoring to ensure those they have employed to manage the company on daily strive to achieve better value to meet up with debt repayment liabilities and employ debt to finance positive net present value projects such that they can get robust earning on their equity. the practical evolvement of this in declining agency menace in a setting where the majority shareholders overwhelmed the minority shareholders is that larger use of both short term and long term debt obligations may mean better protection of financial interest of minority shareholders in nigeria firms. the findings still confirm the validity of the agency cost theory to explain relationship between capital structure and firm performance in the nigerian settings. it is against this backdrop that this study comes to conclusion that capital structure is importance for firm performance. also evolving from the study, it is recommended that managers of firms should be mindful when seeking credit advances from the money market. this is more important when considering the appropriate capital mix that optimize firm networth. a wrong combination may significantly give impetus for rising in 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(2007). capital structure and corporate: evidence from jordan. the australasian accounting business & finance journal, 1(4), 40–61. http://dx.doi. org/10.2139/ssrn.2496174. date of submission: january 1, 2020; date of acceptance: march 6, 2020. * contact information: ansita04@ediindia.org, p.o. bhat 382 428, dist. gandhinagar, gandhinagar, gujarat, india, phone: 8672810097; orcid id: https://orcid.org/00000002-2510-2025. ** contact information: satya@ediindia.org, p.o. bhat 382 428, dist. gandhinagar, gandhinagar, gujarat, india, phone: 7600050606; orcid id: https://orcid.org/00000002-4334-2137. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 aggarwal, a., & acharya, s.r. (2019). impact on capital structure decision making: indian medium-sized food industry analysis. copernican journal of finance & accounting, 8(4), 47–60. http://dx.doi.org/10.12775/cjfa.2019.017 ansita aggarwal* entrepreneurship development institute of india satya ranjan acharya** entrepreneurship development institute of india impact on capital structure decision making: indian medium-sized food industry analysis keywords: capital structure, food industry, medium firms, india. j e l classification: g10, g14, g19, g21. abstract: this paper seeks to investigate the relationship between equity and factors affecting them in indian medium-sized food industry. the analysis has been done on medium-sized firms of food industry taken from prowess software. the data of 5 years has been taken from 2013-2017 so as to get a clear view of analysis over the period of time. regression analysis is used in the estimation of functions related to equity with a measure of capital structure. the results reveal a significant positive relationship of tangible fixed assets and growth opportunities with equity, significant negative relationship of age, profitability, tax provision and total assets with equity. the research suggests that medium-sized food firms of food industry rely more on debt than equity. ansita aggarwal, satya ranjan acharya 48  introduction during the last 5 decades, the msme’s have succeeded in making a mark on the indian economy by being the highly dynamic sector. it has also helped in the socio-economic development of the country by promoting entrepreneurship and employment opportunities (annual report 2017-18, 2018, p. 01). the msme’s are able to achieve the stability in the last 5 years by contributing the same percentage that is 33% which is one-third of manufacturing gross value of output (gvo) in india (annual report 2017-18, 2018, p. 22). there can be seen a wide gap between the protections of msmes on papers and practice which is being carried on by the government. the reason behind this can be various like government corruption and slow and inefficient legal system. these justify less trust in the financial markets in india (allen, chakrabarti, de, qian & qian, 2006). the research to test firm characteristics’ effect on choosing equity as finance has been done in developed nations as well as some emerging nations. there is a research done in india by handoo & sharma (2014) but it was done on large enterprises. as there have been no research related to smes which has also started opting for equity market. till 2012 the small firms were not able to take advantage of equity firms as they were not allowed to enter the equity market. there is a need to understand the factors which affect smes decision of choosing equity in comparison to any other sources for finance. in this paper, we are trying to test how the firm characteristics affect small and medium enterprises (smes) decision of choosing equity to fulfill their financial needs. the smes data is extracted from prowess, which is a database that contains financial and economic information of around 50268 numbers of companies in india. here, we have taken the food industry for our research analysis as it is the 6th largest food and grocery market, with retail contributing 70% of the sales (brand india, 2017). moreover, as small and medium sized enterprises also behave in different manner so we have selected to study just about the medium sized firms. objective the main objective would be to test the effect of factors like tax rate, firm size, fixed assets, profitability, growth, and age of the firm helps in approaching the impact on capital structure decision making… 49 equity financing. to test this we are analyzing the impact of all these variables on equity which will help in understanding if there is a need for more capital they would go for equity or any other source of financing. as the major source of financing is debt and equity that’s why we have considered debt if these firms are not going for equity. it will help us in understanding the preference of owners of smes in opting for sources of financing for capital structure decision making. the research methodology and the course of the research process we have taken all the medium-sized firms which fall under the food industry over a five year period (2013-2017) from prowess software. to get the data from prowess we have taken the definition of medium-sized enterprises on the basis of assets. firstly we ran a query to get all the companies which fall in the food industry and having assets of 5 crores to 10 crores. this query has resulted in 141 medium sized companies in total. as we wanted to analyze the companies which have been incorporated after 2000, finally 31 companies were selected from the software which had all the data needed for our research. the data has been taken for 5 years from 2013 to 2017 so as to get a clear understanding of the decision making related to equity. to test the relation between six independent variables and one dependent variable, we have chosen regression analysis as our statistical tool and e-views software to test the same. literature review capital structure decision is the toughest decision which a firm needs to make in its life. myers observed two theories in detail which are: static trade-off theory where the firms will set a target debt-equity ratio and will work to achieve the same in that direction and pecking order theory where the firms prefer internal financing to external financing and debt to equity (myers, 1984). the small firms have it more difficult than large firms in making capital structure decision as they can’t take professional help for their day to day problems (cassar & holmes, 2003). almost all the theories which are applied to large firms also apply to small firms, other than those theories basis of which is a conf lict between manager and owner. this is because the owner and manager are the same in small firms. ansita aggarwal, satya ranjan acharya 50 indian food industry food industry is indispensable for the overall development of an economy as it provides a vital linkage and synergy between the agriculture and industry. it helps to diversify and commercialize farming; enhance the income of farmers; create markets for export of agro foods as well as generate greater employment opportunities. through the presence of such an industry, a wider range of food products could be sold and distributed to distantlocations. the indian food industry has unfolded itself as high-profit and high-growth sector. it is one of the largest industries in india, and is ranked 5th in terms of production, consumption, export and expected growth. the food industry, which is valued at us$ 39.71 billion, is expected to grow at a compounded annual growth rate (cagr) of 11 percent to us$65.4 billion by 2018. it contributes 14% to manufacturing gross domestic product (gdp), 13% to india’s export and 6% to total industrial investment. food and grocery account for around 31 percent of india’s consumption basket. government is also encouraging investments in this industry by approving proposals of joint ventures, foreign collaborations, industry licenses, and 100% export oriented units. the indian food retail market is expected to reach rs 61 lakh crore (us$ 894.98 billion) by 2020 (brand india, 2017). indian government has come up with different schemes so as to seize an opportunity presented by this industry. the schemes given by government are mega food parks, infrastructure for agro-processing clusters, operation greens, etc (ministry of food processing industries, 2019). capital structure capital structure of smes has been conventional till the time capital market came into play from 2012. earlier they have to rely on banks and own funds for their requirement (kulkarni & chirputkar, 2014). as observed by kulkarni (2014), the listing is going to be beneficial for them in raising funds, enabling expansion, growth and to shape the future of smes. in any country, there are two strong pillars for getting finance: banking and capital market. impact on capital structure decision making… 51 debt the size of the company collaborates in decision making of going for debt as information asymmetry plays an important role in determining the concentration of debt in a company (ghosh, 2007). the inclusion of debt in capital structure helps in strengthens the value of any firm (scott jr, 1977). the smes still were not able to adequately raise funds from banks for growth and expansion (kulkarni & chirputkar, 2014). moreover, it was also needed to increase the competition in financing for smes so that banks would not be able to create their monopoly. equity in india, smes were so far deprived of the benefits of direct access to public funding through capital markets till 2012. with the increase in the need for finance and the problems, they faced in getting finance from banks now the capital market is also coming into the limelight (maiti, 2018; sarkar, 2016). the main problem faced by smes in getting finance from banks is that it has become demanding. it commenced succeeding the bank’s deleveraging period, tightening lending criteria by banks as well as the introduction of more stringent capital requirements associated with basel iii (sarkar, 2016; chakraborty, 2010). the equity finance doesn’t only help smes but also helps in improving capital allocation, efficient risk distribution and at the macro level for better economic performance has been experienced in other developed countries (banerjee, 2006). the equity in india is mainly been branched to the founder’s family only (allen et al., 2006). stock market and macro-economic variables the stock market does get affected by a number of factors. this discussion has been important for a long period of time. as discussed in the theory of efficient market that various kinds of information help in turning a market efficient at different levels i.e. weak, semi-strong and strong. the stock market which is strongly efficient would also ref lect the changes in the macro environment (pandey, 2003; charkravarty, 2005). the macroeconomic factors which can affect the prices of the stock market are money supply, exchange rate, rate of inansita aggarwal, satya ranjan acharya 52 f lation and index of industrial production in india. there is no granger causality between the gold price and exchange rate with stock market prices, the unidirectional relationship between money supply, rate of inf lation and industrial production with stock prices. the money supply gets affected because of the changes in the stock market and not the other way around. similarly, the rate of inf lation and industrial production changes affects the stock market but not the other way around (charkravarty, 2005). there is a negative relationship between the inf lation rate and the prices of the stock (chatrath, ramchander & song, 1997). the macroeconomic factors like the exchange rate have a positive effect and oil prices have aninverse effect on the stock market in india (gay, 2016). the relationship among the exchange rate would differ according to the type of company whether it is a domestic or multinational company. the companies which deal in resources like gold, oil, gas, etc will have an inverse relationship with the exchange rate and companies which deals in industrial goods like building material; chemicals, etc will have a direct relationship with the exchange rate (abdalla & murinde, 1997). the gold prices and stock prices have the feedback causality between them that means, they both granger-causes each other. another interesting fact is that the gold prices of india get affected by many international factors (mishra, das & mishra, 2010). according to the random walk hypothesis of the stock market, the consecutive prices changes of individual securities are independent over time and price changes occur without any significant trends or patterns (pandey, 2003). there is a significant positive correlation between abnormal return and environmental score (gupta & goldar, 2004). stock market and micro economic variables market efficiency as a term in the stock market is related to the effect that information has on the prices of the stock prices. as discussed above, there are three types of market efficiency that is, weak, semi-strong and strong. the weak market efficiency means the prices of the stock can be predicted just using the past prevailing prices. the semi-strong market efficiency means that it also ref lects any publicly available information to the public with past trends. the strong market efficiency means that prices get affected by information whether it is made public or remained private (poshakwale, 1996). the institutional struc impact on capital structure decision making… 53 tures of the indian corporates or businesses are unique in comparison to other businesses in the world (chakraborty, 2010). there is very strong evidence which shows that the indian stock market is not able to predict itself for the future (chatrath, ramchander & song, 1997; poshakwale, 1996). the weekend effect can also be seen in bse as it has many high prices on friday than any other days of the week (poshakwale, 1996). the capital structure decision making of firms are affected by tax rates prevailing in the country (deangelo & masulis, 1980). the center of the study was tax in modigliani and miller study. firms which have high marginal tax rate would be using more leverage so as to shield themselves from high taxes (huang, 2006). if a firm chooses to go for more debt then it will have two effects: on one side it will enhance the tax savings till the time it survives and on another side, it reduces the probability of firms’ survival. these two contradicting effects show how it can have both the good and bad effect on the value of the firm (brennan & schwartz, 1978). leverage of the firms decreases with firms’ marginal tax rate (huang, 2006). the firms can enjoy tax savings by taking advantage of the incremental effect of a single debt issue (brennan & schwartz, 1978). tax rate has a negative effect on the leverage of indian firms (handoo & sharma, 2014). the tax and leverage are negatively related in manufacturing sector public sector undertakings (psus) in india (mishra, 2011). h1: tax rate prevailing in a country has no effect on the firms’ choice of equity financing. the large firms would be having more bargaining power among the stakeholders of the company as compared to the small firms. therefore large firms would be having a negative effect on the cost of debt and equity (huang, 2006). moreover, huang (2006) observed that small firms would also lack in providing information to stakeholders that result in an increase in the cost of debt as well as equity. the firm size has a positive effect on the leverage of chinese firms (huang, 2006). the firm size has a negative effect on the leverage of indian firms (handoo & sharma, 2014). firm size has a positive relationship with long-term leverage of a firm (cassar & holmes, 2003). h2: firm size has no effect on the firms’ choice of equity financing. according to agency cost theory, if a firm has high fixed assets then they would be able to provide it as collateral for the debt. this reduces the risk for firms to apply for debt (cassar & holmes, 2003). ansita aggarwal, satya ranjan acharya 54 the fixed assets owned by firms have a positive effect on the leverage of the chinese firms (huang, 2006). the asset tangibility has a positive effect on indian firms’ leverage decision making (handoo & sharma, 2014). the fixed assets have a direct effect on the leverage of a firm (cassar & holmes, 2003). h3: tangible fixed assets have no effect on the firms’ choice of equity financing. the firms’ growth opportunities have different viewpoints. at one end some researchers think that high growing firms’ manager and shareholders’ objectives will contradict each other as shareholders will still be interested in getting more returns. on the other end, some researchers think that if high growth firms will be having more debt then they won’t be able to grow further as their maximum income will be used in paying interest expenses (huang, 2006). the growth opportunities are positively related to short-term leverage (cassar & holmes, 2003). the firms’ growth opportunities have a negative effect on the chinese firm’s leverage (huang, 2006). the firms’ growth will have a positive effect on the indian firm’s leverage (handoo & sharma, 2014). the growth and leverage are positively related in manufacturing sector public sector undertakings (psus) in india (mishra, 2011). the growth opportunities and leverage are positively related (cassar & holmes, 2003). h4: growth opportunities have no effect on the firms’ choice of equity financing. age of the firms has no significant effect on capital structure decision making of indian firms (handoo & sharma, 2014). h5: age of the firm has no effect on the firms’ choice of equity financing. according to huang (2006), profitability is said to have different effects on the capital structure of a firm according to various theories. the tax-based models proposed that firms would go for more leverage as they would like to protect themselves from high taxes. contrarily, pecking order theory advocates that highly profitable firms would first use their retained earnings and if that is not enough then only they will go for debt. the firms which would be making more profit would like to invest its excess profit in their own growth so that reduces the debt and equity needs (cassar & holmes, 2003). as suggested by different empirical analysis profitability has disparity on its effects on firms’ leverage. the firms’ profitability has a negative effect on the chinese firm’s leverage (huang, 2006). there is a negative effect on indian firms’ leverage due to increase in profitability (handoo & sharma, 2014). the impact on capital structure decision making… 55 profitability and leverage are negatively related in manufacturing sector public sector undertakings (psus) in india (mishra, 2011). h6: profitability has no effect on the firms’ choice of equity financing. table 1 defines the independent variables which we have taken for our research. these all definitions have been selected after going through all the past researches and selecting the ones best for our research. it has been selected on the basis of the definition of msme which is constructed on the proportion of assets owned by them. table 1. independent variables and their definition independent variables definition tax rate prevailing tax provision/earnings before interest and tax (ebit) firm size natural logarithm of assets tangible fixed assets fixed assets/total assets growth opportunities percentage change in assets age of the firm number of years since the incorporation of the firms profitability ebit/total assets s o u r c e : own study. result regression analysis is used to investigate the relationship between independent variables (change in total assets, age, ebit/ total assets, fixed assets/ total assets, tax provision/ eat and percentage change in total assets) and dependent variable (equity). the regression analysis equation is provided in table 2. it shows that all the coefficients are significant at a level of 90 percent. ansita aggarwal, satya ranjan acharya 56 table 2. result of e-views firm size natural logarithm of assets tangible fixed assets fixed assets/total assets growth opportunities percentage change in assets age of the firm number of years since the incorporation of the firms profitability ebit/total assets source: own study. result regression analysis is used to investigate the relationship between independent variables (change in total assets, age, ebit/ total assets, fixed assets/ total assets, tax provision/ eat and percentage change in total assets) and dependent variable (equity). the regression analysis equation is provided in table 2. it shows that all the coefficients are significant at a level of 90 percent. table 2. result of e-views source: e-views software. it can be seen from the analysis that all these independent variables are able to predict 58.81% of the dependent variable i.e. equity. the overall significance of regression analysis is optimal at a significance level of 99%. this means that we are still not able to s o u r c e : e-views software. it can be seen from the analysis that all these independent variables are able to predict 58.81% of the dependent variable i.e. equity. the overall significance of regression analysis is optimal at a significance level of 99%. this means that we are still not able to capture all the relevant factors which can have an impact on financing decision making of medium sized enterprises. the results reveal a moderate positive relationship between fixed assets and percentage change in total assets with equity. this shows that growth opportunities and tangible fixed assets directly affect the decision of mediumsized firm in the food industry to go public for their financial needs. the positive relation of growth opportunities may be due to the reason that as they have growth opportunities they would also be able to convince their investors easily. this is in line with the already existing literature done by huang (2006). this result is refuting all other literature done by cassar and holmes (2003), handoo and sharma (2014) and mishra (2011). the positive relation with tan firm size natural logarithm of assets tangible fixed assets fixed assets/total assets growth opportunities percentage change in assets age of the firm number of years since the incorporation of the firms profitability ebit/total assets source: own study. result regression analysis is used to investigate the relationship between independent variables (change in total assets, age, ebit/ total assets, fixed assets/ total assets, tax provision/ eat and percentage change in total assets) and dependent variable (equity). the regression analysis equation is provided in table 2. it shows that all the coefficients are significant at a level of 90 percent. table 2. result of e-views source: e-views software. it can be seen from the analysis that all these independent variables are able to predict 58.81% of the dependent variable i.e. equity. the overall significance of regression analysis is optimal at a significance level of 99%. this means that we are still not able to impact on capital structure decision making… 57 gible fixed assets refute all the past researchers such as huang (2006), handoo and sharma (2014) and cassar and holmes (2003). this would be interesting to further explore the reason behind this. moreover, the result shows that firm size and profitability have a strong negative impact on decision making of equity from the market. this means that the larger the size and profitability less would be the chances of increase in finance taken from equity. this supports the findings of huang (2006) and cassar and holmes (2003) that larger the size of the firm less would be its dependency on equity and refuting the findings of handoo and sharma (2014). this shows that larger sized firms would be more interested in getting finance from debt. the negative impact of profitability is refuting the analysis done by huang (2006), handoo and sharma (2014) and mishra (2011). this shows that if the profitability of any firm would increase they would be more interested in going fordebt. finally, a negative weak impact can be seen on equity from tax provision and age of the firm. this describes that greater the tax provision and age of the firm, less likely the firm would be interested in going for equity. this has also in line with the past researchers brennan and schwartz (1978), handoo and sharma (2014) and mishra (2011). as all the researches are showing the very weak impact of tax provision and age on debt and equity. this means that capital structure decision making doesn’t get affected that much by tax provision and age. the table 3 displays whether or not the hypothesis has been accepted or rejected after doing the regression analysis. table 3. acceptance or rejection of hypothesis hypothesis accept or reject h1 reject (negative weak impact) h2 reject (negative strong impact) h3 reject (positive moderate impact) h4 reject (positive moderate impact) h5 reject (negative weak impact) h6 reject (negative strong impact) s o u r c e : own study. ansita aggarwal, satya ranjan acharya 58  conclusion the financing decision plays a pivotal role in the development of any business organization. this decision is crucial because of the effect it can have on various organizational decisions and maximize profitability which is the main objective of any business. this present study evaluated the relationship between varied independent variables present in any organization with the dependent variable equity. the results revealed a significantly positive relationship between tangible fixed assets and growth opportunities. additionally, it reported a significantly negative relationship of tax provision, firm size, age of the firm andprofitability. it shows that if the indian medium sized food firm has tangible fixed assets at its disposal or are more inclined to get more growth opportunities then they would opt for equity in place of debt. on the similar grounds, if these firms have more tax provision, large firm size, experienced and have more profit at their disposal then they would likely to opt for debt in place of equity. this research can become base for the further research in the area of financing choice of smes in india. the findings which we have got are very interesting. the findings of indian medium food sized industries are almost dissimilar with the research done in the past. this shows that there is still a lot remaining to understand in detail in sme sector of india. this can be done by comparing different industries in this sector to get a clear view of the picture. future research, limitation, and implication our study done on food industry smes has some limitations. in particular, one potential criticism is that the analysis is only done on one industry of sme, which cannot be said to be having a duplicating effect on other industries too. this opens the road for further researchers to conduct analysis on different industries and then compare the results of the same to understand the overall effect on smes on capital structure decision. they can further even compare it with the large companies to differentiate between smes and large sized companies. another limitation which has a significant effect was that it just contains the medium-sized companies only as it was getting difficult to obtain financial data of micro and small companies. this can also be researched further by targeting one city at a time to make data collection easy. moreover, the impact on capital structure decision making… 59 factors researched by us is able to predict only 58.81% so that also need to explored further to get more factors. this particular study will be helpful in making a significant addition to already established smes literature. this will also give a way to new researchers to study on this particular topic in detail so as to come up with a framework in the future. this study can also help the government in coming up with supportive policies for smes in a developing economy.  references abdalla, i. s., & murinde, v. 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(2003). capital structure and financing of smes: australian evidence. accounting & finance, 43(2), 123-147. http://dx.doi.org/10.1111/1467-629x. t01-1-00085. chakraborty, i. (2010). capital structure in an emerging stock market: the case of india. research in international business and finance, 24(3), 295-314. charkravarty, s. (2005). stock market and macroeconomic behavior in india. institute of economic growth, http://www.iegindia.org/dispap/dis106. pdf (accessed: 20.05.2011). chatrath, a., ramchander, s., & song, f. (1997). stock prices, inf lation and output: evidence from india. applied financial economics, 7(4), 439-445. http://dx.doi. org/10.1080/096031097333556. deangelo, h., & masulis, r.w. (1980). optimal capital structure under corporate and personal taxation. journal of financial economics, 8(1), 3-29. http://dx.doi. org/10.1016/0304-405x(80)90019-7. gay, r.d. (2016). effect of macroeconomic variables on stock market returns for four emerging economies: brazil, russia, india, and china. the international business & economics research journal, 15(3), 1-8. http://dx.doi.org/10.19030/iber.v7i3.3229. ansita aggarwal, satya ranjan acharya 60 ghosh, s. (2007). bank debt use and firm size: indian evidence. small business economics, 29(1-2),15-23. gupta, s., & goldar, b. (2005). do stock markets penalize environment-unfriendly behaviour? evidence from india. ecological economics, 52(1), 81-95. http://dx.doi. org/10.1016/j.ecolecon.2004.06.011. handoo, a., & sharma, k. (2014). a study on determinants of capital structure in india. iimb management review, 26(3), 170-182. http://dx.doi.org/10.1016/j.iimb.2014.07.009. huang, g. (2006). the determinants of capital structure: evidence from china. china economic review, 17(1), 14-36. kulkarni, p., & chirputkar, a.v. (2014). impact of sme listing on capital structure decisions. procedia economics and finance, 11,431-444. http://dx.doi.org/10.1016/ s2212-5671(14)00210-x. maiti, m. (2018). scope for alternative avenues to promote financial access to msmes in developing nation evidence from india. international journal of law and management, 60(5), 1210-1222. http://dx.doi.org/10.1108/ijlma-06-2017-0141. ministry of food processing industries (2019). ministry of food processing industries, mega food parks, national mission on food processing, http://www.mofpi.nic.in (accessed: 22.05.2019). mishra, c.s. (2011). determinants of capital structure–a study of manufacturing sector psus in india. in proceedings of 2011 international conference on financial management and economics, international proceedings of economics development and research, vol. 11, 247-252. mishra, p.k., das, j.r., & mishra, s.k. (2010). gold price volatility and stock market returns in india. american journal of scientific research, 9(9), 47-55. myers, s.c. (1984). the capital structure puzzle. the journal of finance, 39(3), 574-592. http://dx.doi.org/10.1111/j.1540-6261.1984.tb03646.x. pandey, a. (2003). efficiency of indian stock market. http://dx.doi.org/10.2139/ ssrn.474921. poshakwale, s. (1996). evidence on weak form efficiency and day of the week effect in the indian stock market. finance india, 10(3), 605-616. sarkar, a.n. (2016). financing mechanisms to support msme and startups: role of the capital market. international journal of advance research and innovation, 4(1), 244 –255. scott jr, j.h. (1977). bankruptcy, secured debt, and optimal capital structure. the journal of finance, 32(1), 1-19. http://dx.doi.org/10.1111/j.1540-6261.1977.tb03237.x. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 05.12.2013; data zaakceptowania: 19.12.2013. * dane kontaktowe: jarek86@doktorant.umk.pl, ul. broniewskiego 59b/27, 87-100 toruń, tel. 511 749 195. doi: 10.12775/cjfa.2013.0212013, volume 2, issue 2 jarosław pawłowski* uniwersytet mikołaja kopernika w toruniu derivatives as security against market risk on the example of the selected companies keywords: derivative, risk, hedging. j e l classification: g32. abstract: company operating in current economic conditions are exposed to a series of different kinds of risk. in order to secure against some of them, firms may apply hedging, i.e. use of derivative instruments. this paper focus on the problem of using derivatives for the needs of reducing market risk, based on the example of kghm polska miedź sa and pgnig sa. instrumenty pochodne jako zabezpieczenie przed ryzykiem rynkowym na przykładzie wybranych spółek słowa kluczowe: instrument pochodny, ryzyko, hedging. klasyfikacja j e l: g32. abstrakt: przedsiębiorstwa funkcjonujące w obecnych warunkach gospodarczych są narażone na szereg różnych rodzajów ryzyka. w celu zabezpieczenia się przed niektórymi z nich mogą stosować hedging, czyli wykorzystanie instrumentów pochodnych. w niniejszej pracy podjęto właśnie problematykę wykorzystania instrumentów pochodnych na potrzeby ograniczania ryzyka rynkowego na przykładzie kghm polska miedź sa oraz pgnig sa. translated by jarosław pawłowski jarosław pawłowski154  introduction risk is a basic economic phenomenon present in contemporary systems of market economy. it indispensably accompanies operation of the functioning entities. in current conditions of globalization, liberalization of capital flows and growing competition, its meaning is increasing. what is more, a catalogue of its identified types is expanding as well. in such realities, risk management in companies takes special meaning. for the purpose of securing against negative consequences of risk, derivative instruments are becoming applied more widely. regarding validity of this problem, and its meaning, aim of this article is to present the application of derivatives for the need of market risk management, based on the example of selected polish enterprises. 1. research methodology and the course of the research process choice of the subjects was dictated by their special exposure to a serious of its various kinds. for the purpose of realization of the agreed aim, there will be the following research methods used: descriptive, comparative, analysis of subject literature and case study. 2. notion and types of risk origin of the term ‘risk’ is ascribed to an italian word riscare, which means to dare, to venture. there are two approaches that aim at explaining this key notion presented in literature of the subject. in the first one, risk is treated as uncertainty towards a future event (drake, fabozzi 2010, 185). when it comes to this work, the second approach differentiating categories of risk and uncertainty will be applied. the notion of risk refers to a situation, when only its future result is unknown, but it is possible to identify this result’s alternatives, together with probability that they will appear. in turn, the term uncertainty determines a state, where there is no opportunity to conceptualize neither all variants of a given action nor the chances that it will take place (dziawgo 1997, 14; wachowiak 2006, 249). the accepted way of looking on the notion of risk determines a wide array of its all kinds. depending on the criteria that are followed, there is a series of derivatives as security against market risk on the example 155 classifications regarding separate types of risk. one of the basic division is that differentiating (dubisz, olejniczak 2003, 113): ■ semantic risk, caused by influence of powers that do not depend on a single entity, therefore it is not under this entity’s control. examples of this risk’s sources encompass changes of, among others, interest rate, currency, inflation, legal and tax regulations, political and economic situation (tarczyński 2003, 143–144). ■ specific risk, whose presence refers to individual decisions made by the entities. therefore, it is controlled by separate subjects. its causes lay in such fields as: company management, capital structure shaping, competition policy, availability of resources, liquidity, etc. companies that function in present market economic system, and operating an international business enterprise are exposed to a series of various types of risk. scope of their presence and power of influence are conditioned by a specificity of the operated business and its scale. scheme no 1 demonstrates the main kinds of risk that accompany operation of contemporary enterprises. scheme 1. types of risk in a company agement, capital structure shaping, competition policy, availability of resources, liquidity, etc. companies that function in present market economic system, and operating an international business enterprise are exposed to a series of various types of risk. scope of their presence and power of influence are conditioned by a specificity of the operated business and its scale. scheme no 1 demonstrates the main kinds of risk that accompany operation of contemporary enterprises. scheme 1. types of risk in a company source: tarczyński w. (2003), 149. specificity of risk makes it impossible to become eliminated in the course of the operated business (głuchowski et al. 2001, 11). however, there is a possibility to secure against some types of risk. for that purpose, it is necessary to start with its identification and measurement. afterwards, within the framework of financial control of risk, one may independently manage the risk or transfer it to another entity. basic methods of transferring risk embrace insurance and hedging. the essence of hedging includes use of derivative instruments in order to limiting a certain type of risk. it is achieved via a forward transaction referring to a given basic item, in a way that enables mutual compensation of their value. thanks to this procedure, decreases in value of the protected item are compensated business risk risk in a company operation risk credit risk market risk foreign exchange risk interest rates risk liquidity of financial instruments risk commodity price risk withdrawing capital risk risk of bankruptcy country risk business failure risk company liquidity risk concentration risk second party of transaction risk organizational risk risk of control system risk fraud risk catastrophic risk regulatory risk administrative risk risk of sales reputation risk product risk competition risk products quality risk risk of economic environment s ou r c e : tarczyński w. (2003), 149. jarosław pawłowski156 specificity of risk makes it impossible to become eliminated in the course of the operated business (głuchowski et al. 2001, 11). however, there is a possibility to secure against some types of risk. for that purpose, it is necessary to start with its identification and measurement. afterwards, within the framework of financial control of risk, one may independently manage the risk or transfer it to another entity. basic methods of transferring risk embrace insurance and hedging. the essence of hedging includes use of derivative instruments in order to limiting a certain type of risk. it is achieved via a forward transaction referring to a given basic item, in a way that enables mutual compensation of their value. thanks to this procedure, decreases in value of the protected item are compensated with profits from the derivatives and the other way round (dziawgo 2010, 54–60; mishkin 2004, 309; nowaczyk 2006, 229). 3. characteristic of derivatives derivative instrument is some kind of a financial instrument, which price depends on value of another asset, instrument or parameter, that it was issued for, and which is called an underlying instrument (hull 2009, 1; durbin 2011, 3). intensive development of derivative instruments market have led to a situation that currently there are plenty of their types. within their differentiated catalogue, there is a series of classifications conducted. the chosen ones are demonstrated on scheme 2. according to the theory developed by c. smithson, regarding financial construction block, forward contracts and option rights constitute two elementary categories of derivative instruments. this is cause by the character of rights encompassed in those instruments. on their basis, within various combinations, it is possible to construct other kind of derivatives (nieborak 2004, 73; levinson 2006; 199). derivatives as security against market risk on the example 157 scheme 2. different kinds of derivatives with profits from the derivatives and the other way round (dziawgo 2010, 54–60; mishkin 2004, 309; nowaczyk 2006, 229). characteristic of derivatives derivative instrument is some kind of a financial instrument, which price depends on value of another asset, instrument or parameter, that it was issued for, and which is called an underlying instrument (hull 2009, 1; durbin 2011, 3). intensive development of derivative instruments market have led to a situation that currently there are plenty of their types. within their differentiated catalogue, there is a series of classifications conducted. the chosen ones are demonstrated on scheme 2. scheme 2. different kinds of derivatives source: żebruń a. (2010), 22. according to the theory developed by c. smithson, regarding financial construction block, forward contracts and option rights constitute two elementary categories of derivative instruments. this is cause by the character of rights encompassed in those instruments. on their basis, within various combinations, it is possible to construct other kind of derivatives (nieborak 2004, 73; levinson 2006; 199). an essential division of derivative instruments is that differentiating their following groups (dziawgo 2004, 162; parameswaran 2011, 16; mastalerz 2006, 19): number of flows derivatives independence of presence contract symetricity base instrument commodities currency percentage index stock conditional unconditional independent attached one many level of standarization standarized not standarized execution of contracts real non-real s ou r c e : żebruń a. (2010), 22. an essential division of derivative instruments is that differentiating their following groups (dziawgo 2004, 162; parameswaran 2011, 16; mastalerz 2006, 19): ■ forward contracts, ■ futures contracts, ■ options, ■ swap transactions. forward contracts constitute agreements that determine emergence an obligation of one party to deliver, and of the second party to accept a given quantity of a base instrument, with an agreed price and at a specified date. their conditions are not standardized, but determined individually between the interested parties. that’s is why, forward contracts cannot be a subject of trade on the exchange market. their settlement takes place through a physical delivery of the contract’s subject or via a financial payment. hence, those are real transactions (dębski 2007, 318; dziawgo 2007, 164–165). futures contracts are to a high extent similar to forward transactions. differences first of all refer to a way of determining terms of the agreement, its form and date of settlement. futures contracts are standardized, which means that the bear specific terms, and their settlement takes place in a financial jarosław pawłowski158 form, which applies a non-real character to them. according to that, they compose a subject of trade within the market. their close-up may emerge in any day of its functioning, through opening a contradictory position and payment of the difference between the current and contractual price of execution (dziawgo 2007, 165–167). options constitutes another group of derivative instruments. this term is applied to determine agreements between two parties, which award one with a right to purchase (call option) or sell (put option) of an agreed quantity of the base instrument, at a specified price and at a future date. in turn, issuer of the option takes and obligation to execute it on its owner’s request. for taking in this responsibility, the issuer obtains an option premium (walmsley 1998, 137; veale 2001, 247). essence of swap transactions encompasses the parties becoming obliged to exchange future payments according to strictly determined terms. regarding subject of the swap, there are their two basic kinds (pastusiak 2010, 277–28 3; drake, fabozzi 2010, 378): ■ interest rate swap, exchange of payments with various interest rates, more precisely, of the arising interests. when subject of transactions is constituted by payments with changeable interest rate, then we have a basis swap. if the transaction regards flows with changeable and constant interest rate, then we have a cupon swap. ■ currency swap, exchange of payments expressed in various currencies, ■ commodity swap, exchange of payments, whose size is shaped according to the value of given commodities, which bear a physical form. it needs to be emphasized that in recent years, the sector of derivative instruments have developed intensively. it is made visible in both increase of volume of transactions with its part, as well as a catalogue of their kinds functioning within trade. in order to secure the enterprise against various types of risk, basis kinds of derivative instruments are often applied. however, regarding diverse needs in numerous entities, these are those complex strategies, constituting combinations of different derivatives that are applied. on one hand, their applications may arise from the need of lowering the costs of security. on the other, it may be cause by a strive to simultaneous security against various types of risks. derivatives as security against market risk on the example 159 scheme 3. a pyramid of innovations referring to basic derivatives  commodity swap, exchange of payments, whose size is shaped according to the value of given commodities, which bear a physical form. it needs to be emphasized that in recent years, the sector of derivative instruments have developed intensively. it is made visible in both increase of volume of transactions with its part, as well as a catalogue of their kinds functioning within trade. scheme 3. a pyramid of innovations referring to basic derivatives source: żebruń a. (2010), 22. in order to secure the enterprise against various types of risk, basis kinds of derivative instruments are often applied. however, regarding diverse needs in numerous entities, these are those complex strategies, constituting combinations of different derivatives that are applied. on one hand, their applications may arise from the need of lowering the costs of security. on the other, it may be cause by a strive to simultaneous security against various types of risks. hedging strategies on the example of kghm polska miedź sa and pgnig sa options for futures options for options options for swap options futures contracts swaps swaps of second generation strategies based on several options exotic options syntetic strategies complex strategies modification of parameters of basis instruments derivatives from derivatives s ou r c e : żebruń a. (2010), 22. 4. hedging strategies on the example of kghm polska miedź sa and pgnig sa practical presentation of the using derivatives for the need of securing against chosen types of risks, was drawn up based on the example of enterprises that operate in poland. the selection was conducted on the basis of a list encompassing 500 biggest polish companies from 2012, prepared by “polityka” weekly magazine. the initial analysis of reports from several biggest entities, according to the ranking through the prism of the included information regarding hedging, allowed to point kghm polska miedź sa and pgnig sa as interesting examples of the discussed problems (lista 500 polityki 2013). kghm sa first of all deals with exploring, proceeding and selling copper and silver. character of the operated business causes that activity of the company is exposed to the following types of market risk (financial statement of kghm sa for 2012, 84): ■ metal price risk, ■ foreign exchange risk, jarosław pawłowski160 ■ interest rate risk, ■ price risk connected with investments in debt securities and share units in open-end investment funds, ■ price risk connected with investments in shares of public companies. specificity of resources and metals markets, including copper and silver, causes that they are characterized with a high level of price changeability. this is a source for the meaning of price risk in the discussed case. according to the fact that contracts regarding sales of copper and silver are concluded with prices expressed in american dollars, so foreign exchange risk is also crucial. in turn, the present risk of interest rates refers first of all to evaluation of the taken credits, loans, and issued or obtained debt financial instruments. application of derivative instruments was planned for scope of the company’s process of financial risk management regarding price, exchange rate or interest rate risk. in 2012, we observed application of derivative instruments for the need of limiting price and exchange rate risk. in case of the interest rate risk it was agreed that it did not have significant influence on the results of the subject. in turn, tables 1, 2 and 3 illustrate planned hedging strategies for 2013 in kghm polska miedź sa. table 1. option strategies that refer to securing sales prices of copper, planned for 2013 by kghm polska miedź sa period instrument volume [tons] execution price of the option [usd/t] effective price of security [usd/t] sales of call options purchase of put options sales of put options 1st half 2013 mewa korytarz korytarz mewa mewa korytarz korytarz 19 500 10 500 10 500 6 000 15 000 3 000 9 000 9 500 12 000 11 500 10 200 10 300 9 200 9 300 7 200 8 500 8 200 7 700 7 800 7 200 7 300 4 700 – – 4 500 4 500 – – 6 817 8 040 7 867 7 368 7 432 6 880 6 960 2nd half 2013 korytarz korytarz mewa mewa korytarz 10 500 10 500 6 000 15 000 19 500 12 000 11 500 10 200 10 300 9 300 8 500 8 200 7 700 7 800 7 600 – – 4 500 4 500 – 8 040 7 867 7 368 7 432 7 310 suma 135 000 s ou r c e : financial statement of kghm polska miedź sa for 2012, 87. derivatives as security against market risk on the example 161 table 2. option strategies that refer to securing sales prices of silver, planned for 2013 by kghm polska miedź sa period instrument volume [mln ounces] execution price of the option [usd/t] effective price of security [usd/t] sales of call options purchase of put options sales of put options 1st half 2013 mewal 1,80 65,00 40,00 20,00 38,02 2nd half 2013 korytarz 1,80 65,00 40,00 20,00 38,02 suma 3,60 s ou r c e : financial statement of kghm polska miedź sa for 2012, 87. table 3. option strategies that refer to securing exchange rates, planned for 2013 by kghm polska miedź sa period instrument denomination [mln usd] execution price of the option [usd/pln] effective course of security [usd/pln] sales of call options purchase of put options sales of put options 1st half 2013 mewa korytarz 240 240 4,0000 4,2000 3,1500 3,2000 2,6000 – 3,1168 3,1350 2nd half 2013 mewa korytarz 240 240 4,0000 4,2000 3,1500 3,2000 2,6000 – 3,1270 3,1350 suma 960 s ou r c e : financial statement of kghm polska miedź sa for 2012, 88. security against both price and exchange rate risk in the examined company is based on two option strategies. one of them is a strategy determined as “mewa”. it secures against risk of price/exchange rate falling below a determined minimum level, and at the same time it allows to take advantage from the growth to the maximum value accepted in the strategy. what is more, in case when market rate exceeds a so called participation rate, then the company obtains a subsidy. construction of this strategy is based on (strategia mewa dla eksportera 2013): ■ purchasing put options with a price/exchange rate of execution that is equal to minimum value, ■ selling put options with a price/exchange rate of execution that is equal to maximum value, jarosław pawłowski162 ■ purchasing call options with a price/exchange rate of execution that is equal to participation value. this is a zero cost strategy. hence, realization levels are determined in a way enabling equalization of paid and obtained bonuses, at the same time maintaining the desired security parameters. all options included within this strategy needs to be characterized by identical denomination and expiration date (strategia mewa dla eksportera 2013). the second option strategy applied by kghm sa is strategy “korytarz”. it encompasses (strategia korytarz dla eksportera 2013): ■ purchasing put options with a price/exchange rate of execution that is equal to minimum value, ■ selling calll options with a price/exchange rate of execution that is equal to maximum value. this strategy allows to secure against risk of price/exchange rate decrease below the determined minimal value, and at the same time it provides an opportunity to make advantage from the increase to the agreed maximum value. by assumption, this is a zero cost strategy, which is why it requires proper selection of parameters (strategia korytarz dla eksportera 2013). a second example of an enterprise that applies derivatives for the purpose of securing against market risk is polskie górnictwo naftowe i gazownictwo sa. subject of operation of this company is searching and exploring ground gas and crude oil, as well as import, storage, sales and distribution of gas and liquid fuels. hence, the company is especially exposed to the following types of market risks: (financial statement of pgnig 2012, 72) ■ foreign exchange (currency) risk, ■ interest rate risk, ■ commodity price risk. exchange rate risk in case of pgnig sa refers mainly to long-standing obligations, which were made in foreign currencies (norwegian krone and euro). in order to secure against this kind of risk and connected with these obligations interest rate risk, the unit uses ccirs transactions (cross currency interest rate swap). moreover, forward contracts, options and option strategies are adjusted to the needs of security against changeability of currency exchange rates. character of business causes that the analysed company concludes futures contracts for gas deliveries. therefore, a significant role in its operation is played by price risk, caused by fluctuations in petroleum products on fuel markets. a role of security in this kind of risk is played by asian call options of european derivatives as security against market risk on the example 163 type, and risk reversal option strategies, which are based on purchasing both call and put options. this options are issued for the following indexes: gasoil 0,1% and fueloil 1% barges fob rotterdam (platt’s). table 4 presents chosen securities applied within the scope of market risk management strategy in pgnig sa. (financial statement of pgnig sa for 2012, 85–86). table 4. selected derivatives applied within the scope of hedging, in reference to market risk in pgnig sa securing instrument secured instrument face value in currency [mln] price of instrument realization risk ccirs1 loan loan eurobonds loan 5 244 nok 481 nok 500 eur 4 560 nok 0,5198 0,5684 4,1580 0,5147 currency and interest rate risk `forward payments for gas 27 eur 34 eur 150 usd 210 usd 4,1665 4,1739 3,3414 3,2690 currency risk call options payments for gas 290 usd 117 usd 390 usd 310 usd 3,4839 4,2670 3,3775 3,5328 currency risk put options payments for gas 20 usd 3,003 currency risk commodity call options payments for gas 0,503 hfo2 0,416 hfo 0,373 go3 0,338 go 791,65 732,38 1 097,37 1 014,05 price risk of gas commodity put options payments for gas 0,454 hfo 0,373 go 594,79 858,16 price risk of gas 1  cross currency interest rate swap. 2  heavy fuel oil. 3  gasoil. s ou r c e : financial statement of pgnig sa for 2012, 86–87.  conclusions the conducted analysis of financial statements of kghm and pgnig in the context of ways of securing against market risk, implies that derivative instruments are basic tools applied for this purpose. they are usually used with regard to a single type of risk. however, there are some instruments, which may at the same time constitute a security against more than one kind of risk. such jarosław pawłowski164 an instrument was cross currency interest rate swap, used by pgnig, which was a security against currency risk and interest rate risk. a dominating type of derivative instruments, used by the examined companies, are options and strategies based on options. in case of pgnig, some positions that are endangered with currency risk and interest rate risk are also secured through forward contracts and swaps. in case of kghm company, all hedging strategies are based on options. it seems that the observed popularity of options arises out of their specificity, which enables to create zero cost strategies providing an expected level of execution prices. experiences of the analysed companies prove that the derivatives may pose an effective security of results of operation against adverse influence of separate types of market risk. in kghm company, there are actions, predicted for future several years, directed at increasing the share of the secured positions. however, despite this, the essence of derivatives causes that they are highly dangerous tools of financial engineering. recent years have proved that if applied in a wrong way, they may cause significant financial loses, or even bankruptcies. therefore, it is necessary to apply them for the needs of security with conscious, responsibility and knowledge. companies should not engage those tools for speculative purposes.  bibliography dębski w. 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(2010), instrumenty pochodne zabezpieczające w rachunkowości, wyd. difin, warszawa. copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 3 issue 1 2014 biannual finance & accounting 2012 volume 1 copernican journal of biannual issue 1 uniwersytet mikołaja kopernika w toruniu nicolaus copernicus university editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz secretary: dr damian walczak scientific council prof. dr. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. dr. juan-antonio mondéjar-jiménez, universidad de castilla – la mancha, spain prof. dr hab. stanisław owsiak, uniwersytet ekonomiczny w krakowie, cracow university of economics, poland prof. dr hab. wiesława przybylska-kapuścińska, uniwersytet ekonomiczny w poznaniu, poznan university of economics, poland prof. dr. sandra isabel gonçalves da saúde, instituto politécnico de beja, portugal prof. dr hab. małgorzata zaleska, szkoła główna handlowa w warszawie, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk p o l i s h p r o o f r e a d e r : dr dominika wojtasińska e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. dr. catherine deffains-crapsky, université d’angers, france prof. dr hab. jerzy gierusz, uniwersytet gdański, gdansk university, poland prof. dr. adalmiro pereira, politécnico do porto, portugal prof. dr hab. bogusław pietrzak, szkoła główna handlowa w warszawie, warsaw school of economics, poland prof. dr hab. waldemar tarczyński, uniwersytet szczeciński, szczecin university, poland prof. titular gerard olivar tost, national university of colombia, colombia prof. dr hab. jan turyna, uniwersytet warszawski, warsaw university, poland prof. dr hab. maciej wiatr, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr hab. andrzej cwynar, prof. wsei, wyższa szkoła ekonomii i innowacji, university of economics and innovation, poland dr hab. joanna wielgórska-leszczyńska, prof. sgh, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr tomáš heryán, silesian university, school of business administration, czech republic dr wojciech piotrowicz, university of oxford, great britain c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2014 copyright by uniwersytet mikołaja kopernika toruń 2014 editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone +48 56 611 40 10, kontakt@umk.pl, www.umk.pl print: drukarnia wn umk printed in 300 copies icv 2012: 4.41 table of contents leszek dziawgo introduction ........................................................................................................................... 7 stanisław adamiak, damian walczak catholic social teaching, sustainable development and social solidarism in the context of social security .......................................................................................... 9 bartosz bartniczak state aid as a tool encouraging production of energy from renewable sources ..... 19 piotr bolibok the impact of ifrs on the value relevance of accounting data of banks listed on the warsaw stock exchange ....................................................................................... 33 michał buszko investments in stock of banks implementing high social responsibility standards listed on the warsaw stock exchange ............................................................................ 45 ewa dziawgo real options in the assessment of the company’s pro-ecological investments ........ 61 anna karmańska the imperative of sustainable growth and reporting integration. three eras in the corporate reporting development ........................................................................ 73 bożena kołosowska, grażyna voss authorised adviser – as a company of public trust in the newconnect otc (over-the-counter) exchange ........................................................................................ 83 tomasz kopyściański, tomasz rólczyński application of statistical methods in the diagnosis of environmental conditions of development of lower silesian voivodship in years 2006–2012 ............................... 97 robert kurek the efficiency of public insurance supervision vs. pareto efficiency ......................... 109 michał moszyński, marcelina więckowska evolution of ecological financial market from the perspective of institutional economics ................................................................................................ 121 monika raulinajtys-grzybek, gertruda krystyna świderska object-based costing as an important tool for the economic analysis of sustainable development ........................................................................................... 135 joanna szlęzak-matusewicz models of tax incentives for r&d activities of enterprises in european union countries ........................................................................................... 145 tomasz uryszek public finance crisis and sustainable development financing – evidence from eu economies ........................................................................................................................ 161 for authors ......................................................................................................................... 175 copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 9 issue 3 2020 quarterly address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2019: 100.00 editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2020 copyright by uniwersytet mikołaja kopernika toruń 2020 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents mostafa hussein abd-alla sentimental herding: the role of covid-19 crisis in the egyptian stock market ........... 9 anju bala, kapil gupta examining the long memory in stock returns and liquidity in india ............................... 25 hans patrick bidias-menik, simplice gaël tonmo interest rate predictability in some selected african countries .................................... 45 rajesh desai, jay desai moderating effect of firm size on capital structure determinants: evidence from indian food processing industry ........................................................................................ 61 md. humayun kabir, s. s. m. sadrul huda, omar faruq mobile financial services in the context of bangladesh ............................................... 83 amira neffati, wided khiari, azhaar lajmi corporate governance and post-merger performance: evidence from us banks ... 99 betgilu oshora, maria fekete-farkas, zoltan zeman role of microfinance institutions in financing micro and small enterprises in ethiopia .......................................................................................................................... 115 nadia nahar purkayastha, şule erdem tuzlukaya determination of the benefits and risks of peer-to-peer (p2p) lending: a social network theory approach ............................................................................................... 131 table of contents or 8 wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri board diligence and financial performance: evidence from nigerian deposit money banks ..................................................................................................................... 145 simarjeet singh, nidhi walia time-series and cross-sectional momentum in indian stock market .......................... 161 for authors ......................................................................................................................... 177 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 27, 2014; date of acceptance: march 21, 2014. * contact information: mrauli@sgh.waw.pl, warsaw school of economics, al. niepodległości 162, 02-554 warszawa, poland, phone: 601 644 325. raulinajtys-grzybek m., świderska g. k.. (2014). object-based costing as an important tool for the economic analysis of sustainable development. copernican journal of finance & accounting, 3(1), 135–144. http://dx.doi.org/10.12775/cjfa.2014.011 monika raulinajtys-grzybek*, gertruda krystyna świderska warsaw school of economics object-based costing as an important tool for the economic analysis of sustainable development keywords: object-based costing, accounting for sustainable development, healthcare. j e l classification: i15. abstract: the purpose of the article was to verify whether the object-based costing provides information about the costs and benefits that arise in the enterprise as a result of activities related to environmental and socio-economic factors. the constructive approach method was used for this purpose. the object-based costing model for healthcare providers has been designed and subjected to empirical verification. the critical analysis proved its usefulness for economic evaluation of sustainable development. the obtained results demonstrate its utility and applicability. obiektowy rachunek kosztów jako istotny element ekonomicznych aspektów zrównoważonego rozwoju słowa kluczowe: obiektowy rachunek kosztów, rachunkowość w teorii zrównoważonego rozwoju, opieka zdrowotna. klasyfikacja j e l: i15. abstrakt: celem artykułu była weryfikacja, czy obiektowy rachunek kosztów pozwala na dostarczenie informacji o kosztach i korzyściach jakie powstają w przedsiębiorstwie monika raulinajtys-grzybek, gertruda krystyna świderska136 w wyniku działań związanych z czynnikami ekologicznymi i społeczno-ekonomicznymi. w tym celu zastosowano metodę podejścia konstruktywnego. zaprojektowano i poddano empirycznej weryfikacji model obiektowego rachunku kosztów dla podmiotów leczniczych. w ramach analizy krytycznej oceniono jego użyteczność dla ekonomicznej oceny zrównoważonego rozwoju. otrzymane wyniki wskazują na użyteczność i możliwość wdrożenia tego rozwiązania. translated by monika raulinajtys-grzybek  introduction the problem of ensuring sustainable development can be considered from both macroand microeconomic perspective. at the macroeconomic level, it relates primarily to formulate policies to ensure inclusion of the principles of sustainable development and social justice in the socio-economic system (herath 2005, 1038). the consequence of the implementation of sustainable development rules at the macro level is the need to develop appropriate metrics and reporting methods at the micro level that will allow for verifying compliance with the operating rules. as indicated by research conducted by feltmate (1997, 12), the need to ensure compliance with regulations is the most common cause of implementing the sustainable development principles in enterprises. the need to act in accordance with the rules is not the only reason for businesses undertaking actions to implement the sustainable development principles. birkin and woodward (1997, 24) found that these companies can more effectively meet the consumer needs for sustainable activities and reap the profits from that and further sustainability challenges industry to reduce resource consumption and thereby lower costs. these causes make the aspects related to the measurement of costs and benefits of economic, social and environmental impact of corporate activities increasingly important for companies and affect the shape of the tools used in accounting. traditional accounting tools, governed by the relevant legislation, do not take into account all costs incurred in the manufacture of a product or providing a service. for example, the social costs and certain environmental costs are omitted. generally it can be assumed, that the traditional tools of accounting do not allow for presenting the effects of externalities arising as a result of the company’s activities (birkin 1997). object-based costing as an important tool… 137 the literature proposes an alternative approach to accounting. depending on the source, several terms are used to determine them: total cost accounting (carlsson 2010), accounting for externalities (ball, färe, grosskopf, zaim 2005), environmental accounting (although this term ignores the socio-economic aspects of sustainable development) (herath 2005) and accounting for sustainable development (feltmate 1997). all these terms describe accounting system that includes costs and benefits of internal and external effects of business activities related to environmental, economic and social factors. assumptions of sustainable development translate into a number of requirements relating to management accounting and cost accounting, such as (stappen 2008; birkin, woodward 1997a): ■ the possibility of a coherent analysis of information covering several periods, such as the design, implementation and withdrawal phases, ■ taking a starting point the social needs and the demand for company’s products and not maximization of its potential, ■ taking into account the quality costs and the costs of externalities, ■ the ability to analyse the cost of resources, including natural resources, ■ the ability to estimate the total cost of a specific target group – for example, a group of socially excluded. examples of tools that can support the implementation of some of these assumptions include e.g. life-cycle costing. maunders and burritt (1991) pointed out that from the point of view of efficiency of enterprise information system it is necessary to select such tools that will be providing information to all stakeholders. it is therefore important that the tools used for reporting information about the costs and benefits of externalities associated with environmental and socio-economic factors were also useful for other purposes, such as financial reporting and internal reports for management. in the area of costing systems activity-based costing seems to be such a tool. the research methodology and the course of the research process the results of the study were obtained in a research project using the constructive research approach (kasanen, lukka, siitonen 1993; labro, tuomela 2003). the research work included the creation of a cost model for healthcare providers corresponding to the needs of managers and owners, as well as the monika raulinajtys-grzybek, gertruda krystyna świderska138 needs of external reporting – including e.g. the need to regulate the healthcare system1. the concept of object-based costing has been proposed. its f lexibility and multidimensionality has previously been tested in several companies operating in other industries (świderska, pielaszek 2001; rybarczyk, borowski, świderska 2006). object-oriented paradigm is based on the adoption of the “object” as an autonomous unit, representing the item from the real world, which contains all the information necessary to comply with the assigned scope of functionality. object-oriented analysis and object-oriented programming use objects as essential elements of the decomposition of the problem (coad, yourdon 1990; coad, yourdon 1991; martin 1993; yourdon, argila 2000). the following postulated features of object-oriented cost accounting can be distinguished: ■ ref lection of the elements constituting the reality, which are subject to the management activities, and the relationships between these elements, ■ f lexibility allowing for multivariate analysis, ■ adaptability which means continuous improvements and modifications to answer changes in the environment and managers’ needs. the model developed in the department of managerial accounting of warsaw school of economics (świderska, rybarczyk, pielaszek 2002; świderska 2004; świderska, raulinajtys 2009) has been adapted to the specifics of healthcare during workshops on cost accounting and subjected to empirical verification during workshops on external reporting organized for representatives of healthcare providers. the concept of object-oriented approach was used in 39 hospitals to assign costs to the defined objects related to the selected health specialties – gynecology, urology and pulmonology. we used specially prepared spreadsheets for this purpose. the obtained results demonstrate the utility and applicability of this solution. the model was analysed for the ability to meet the demands arising from the assumptions of the sustainable development concept. the study hypothesis is: an object-based costing allows users to provide information about the costs 1 during a project “modern management in healthcare institutions – training in cost accounting and management information and tools of restructuring and consolidation of healthcare institutions” held by polish ministry of health and the warsaw school of economics. object-based costing as an important tool… 139 and benefits that arise in the enterprise as a result of the actions related to environmental and socio-economic factors.  the outcome of the research process and conclusions the costing systems which allows for the object-oriented approach is activity based costing. it is the best described costing tool which is based on the modelling of processes (activities) in the organization, assigning the resources consumed in these processes and defining parties for the processes are performed and resources consumed (such as products, customers, providers, etc.). procedures for assessing, grouping and transitioning costs relate directly to real concepts from the physical world in which the organization operates. potential opportunities and benefits resulting from the application of the object-oriented principles encouraged to explore new conceptual framework of cost accounting. an example of the application of the object-oriented principles is a modern cost accounting system for healthcare providers. scheme 1 shows a sample scheme of objects identified for the calculation of the cost of a single health service. scheme 1. object-based costing system for healthcare providers s o u r c e : own. monika raulinajtys-grzybek, gertruda krystyna świderska140 the basic idea of object-oriented costing system is the identification of mutually related objects. the model for healthcare providers identifies the following objects: ■ economic resources, such as medical equipment or doctors, ■ activities, which are primarily medical procedures and activities related to the patient’s stay in the ward and medical care provided there, ■ final objects, such as health services provided to patients, ■ ancillary objects, which include unused potential or readiness2 – being the part of it. the difference between object-based and classic approach lies primarily in the fact that resources and activities are treated as equival (in relation to the final objects) objects for which information is collected and processed. it is particularly important from the point of view of using this tool for providing information related to the issues of sustainable development. it is possible to extract an additional object on the resource level associated, for example, with natural resources and gather information about its costs. for example, the healthcare industry is consuming large amounts of water (faezipour, ferreira 2012). the creation of such an object and tracking its relations with other objects in the model will not only answer the question, what are the costs associated with water use, but also – in which activities it is most commonly consumed. object-oriented approach to activity based costing allows for creation of f lexible objects that are any combination of the cost of other objects, without the need to preserve the formal hierarchy of these objects. the basis of the relation between objects is perceived causal stream of costs, such as the fact that certain health service a specific set of medical procedures, hospitalization for the appropriate number of days and the use of particular medications. the basic procedure for cost assignment in this model is presented below: 1. costs are assigned to the resources according to the causal relationship. 2. resources can be added directly to the cost of a service (for example, drugs prescribed) or settled on the activities in which they were involved. 3. assigning resources to activities is carried out on the basis of a standard consumption of resources. 2 readiness means this part of the unused potential which maintenance is associated with the need to ensure the continued availability of some medical services. object-based costing as an important tool… 141 4. activities are assigned to a specific health service in the real amounts stemming from a medical documentation of a service. 5. this part of the involved resources, which was not settled on activities, is the cost of unused resources. 6. the readiness costs are distinguished from the pool of unused resources. the basic features of this approach include the ability to collect data about each of the defined objects and maintain information about relations between resources, activities and final objects. additionally, the use of standard values for assigning resource costs to activities causes that the model can successfully be used to calculate the planned costs of resources, activities and final objects as well as to estimate the demand for resources and activities reported by defined health services. two approaches to costing, referred to in the literature as push and pull are shown in scheme 2 (cokins 1996, 96–102; horvath&partners 2007, 128–130). scheme 2. scheme of calculation and planning costs in the activity-based costing system s o u r c e : own. the pull approach provides an extremely valuable information about, for example, what is the cost of realisation of the social needs resulting from the monika raulinajtys-grzybek, gertruda krystyna świderska142 assumptions of sustainable development. it does not take the total potential of the company as the starting point, only a single health service provided in a response to a specific social need. for example, if a strategy for sustainable development presupposes an access to preventive mammography for all women over 50 years of age, the knowledge of population size and costs and amounts of resources consumed in this procedure allows to estimate the financial impact of such a strategy. an important feature of object-oriented approach is to define a set of attributes for each object attributes are characteristics that describe an object. properly constructed dictionaries of attributes allow for limitation of the number of objects in the model while maintaining its high informative value. an exemplary attribute of the final object may be the main diagnosis, age and sex of the patient. determination of the attribute value for each of the health services will, for example, allow to obtain information about the costs of treating a specific disease among children or the elderly. this feature is particularly useful in determining the cost of providing medical care to groups covered by special protection under the strategy of minimizing social inequalities. attributes also allow for defining objects that go beyond the data from the accounting system. for example, the provider’s commitment to medical care bears certain costs, but also generates positive externalities associated with the provision of safety for the entire population and securing all other providers who make use of its readiness. if such information was considered valuable for reporting data on realisation of social needs, it would be possible to define such an object in the system. coherent dictionary of objects allows for the analysis of cross-sectional information regarding several periods. for example, analysis of project costs for the implementation of new methods for healthcare provision may include research, implementation, provision and ending phase of the project. the exemplary structure of objects included in this analysis is shown in scheme 3. flexible approach to defining objects means that it is possible to recognize a variety of aspects related to the business. for example, collecting information on the costs of activities related to accreditation, training or obtaining iso certification makes it possible to estimate the cost of the so-called high quality. on the other hand, analysis of the costs of medical complications or costs of these health care services which attributes indicate a failure of the therapeutic process (e.g. fatal patients) makes it possible to determine the cost of low quality. object-based costing as an important tool… 143 scheme 3. the life cycle of the project in object-based cost accounting s o u r c e : own. concluding, creation and implementation of assumptions of sustainable development requires access to cost information, which go far beyond reporting purposes and are complementary to the management needs. object-based costing allows the fulfillment of objectives related to sustainable development while being a useful tool for other information areas in the enterprise. the object-based costing system is characterized by high f lexibility and multidimensionality and allows for defining any number of freely associated objects, as well as the collection and analysis of information about them. treating resources and activities equally to final cost objects and maintaining information about relations between objects causes that it can be a valuable tool to provide data on the economic effects of actions relating to environmental and social factors.  references ball e., färe r., grosskopf s., zaim o. 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(2004), obiektowy rachunek kosztów działań – koncepcja i wykorzystanie, monografie i opracowania, 526, sgh, warszawa. świderska g.k., pielaszek m. (2001), wdrożenie koncepcji rachunku kosztów działań (activity based costing) w przedsiębiorstwie z branży farmaceutycznej, akademia ekonomiczna w krakowie zjazd katedr rachunkowości, kraków. świderska g.k., raulinajtys m. (2009). rachunek kosztów działań jako podstawa wyceny usług. zeszyty teoretyczne rachunkowości, 49(105), 255–267. świderska g.k., rybarczyk k., pielaszek m. (2002). obiektowy rachunek kosztów. zeszyty teoretyczne rachunkowości. 8(64), 223–228. yourdon e., argila c. (2000), analiza obiektowa i projektowanie: przykłady zastosowań, wydawnictwa naukowo-techniczne, warszawa. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 14.06.2013; data zaakceptowania: 23.12.2013. * dane kontaktowe: kmaciejewski@wp.pl. przedstawione w opracowaniu opinie i wnioski są dziełem autora i nie powinny być traktowane jako stanowisko narodowego banku polskiego. doi: 10.12775/cjfa.2013.0192013, volume 2, issue 2 krzysztof maciejewski* narodowy bank polski znaczenie opłaty interchange dla rozwoju rynku kart płatniczych w polsce słowa kluczowe: karty płatnicze, opłata interchange, organizacje płatnicze, banki wydawcy, akceptanci. klasyfikacja j e l: d23, g2, h7, l81. abstrakt: celem opracowania jest ukazanie znaczenia opłaty interchange dla rozwoju rynku kart płatniczych w polsce oraz jej wpływu na rozwój sieci akceptacji. do jego realizacji wykorzystano analizę opisową i porównawczą oraz szeroki materiał analityczno-badawczy, w tym badanie ankietowe przeprowadzone przez autora wśród siedmiu największych agentów rozliczeniowych, działających na rynku polskim. kluczowe znaczenie dla rozwoju sieci akceptacji kart płatniczych mają koszty akceptacji kart płatniczych, wśród których zasadniczą rolę odgrywa opłata interchange. wysoki poziom opłaty interchange w polsce, należący do jednego z najwyższych w ue, stanowi zasadniczą barierę rozwoju sieci akceptacji kart płatniczych i obrotu bezgotówkowego. w proces obniżenia opłat interchange w polsce zaangażował się bank centralny, przyjmując rolę katalizatora zmian. obniżenie stawek opłat interchange przez organizacje kart płatniczych od początku 2013 r. jest zjawiskiem pozytywnym na polskim rynku, które umożliwia już teraz uzyskiwanie zadowalających efektów, m.in. wdrożenie na rynku polskim nowych i tańszych systemów płatności mobilnych. impact of interchange fees rates on the polish payment cards market keywords: payment cards, interchange fee, payment card schemes, issuers, merchants. j e l classification: d23, g2, h7, l81. krzysztof maciejewski112 abstract: the aim of this paper is to indicate the importance of the interchange fee on the payment card market in poland and its impact on the development of the acceptance network. the paper uses a descriptive and comparative analysis, as well as results of analyses and research, including a survey conducted by the author among seven acquirers. of key importance for the development of payment card acceptance network are costs of payment card acceptance. one of the main components of merchant service charge is interchange fee. the level of interchange fees rates in poland, being one of the highest in the eu, is a major barrier to the development of payment card acceptance network and cashless transactions. the central bank was engaged in the process of interchange fees reduction in poland, assuming the role of a catalyst. the reduction of interchange fees (since 2013) in the polish market is a positive development which may result among others in implementation of costly efficient mobile payment systems. translated by krzysztof maciejewski  wstęp rynek kart płatniczych jest jednym z podstawowych filarów obrotu bezgotówkowego w polsce. od kilkunastu lat rynek ten charakteryzuje się systematycznym, ale umiarkowanym tempem rozwoju, co potwierdza większość wskaźników rozwoju rynku kart płatniczych, plasujących nasz kraj na jednym z ostatnich miejsc w unii europejskiej (porównanie 2012). na szczególną uwagę zasługuje niski poziom rozwoju sieci akceptacji kart płatniczych w polsce, tj. niski odsetek punktów handlowo-usługowych przyjmujących zapłatę za towary lub usługi przy użyciu kart płatniczych, co rodzi pytania o przyczyny tego zjawiska. rozwój rynku kart płatniczych, w tym sieci akceptacji, zależy od wielu czynników. jednym z nich są koszty akceptacji kart płatniczych, do których należy opłata interchange. 1. metodyka i przebieg procesu badawczego celem artykułu jest ukazanie znaczenia opłaty interchange dla rozwoju rynku kart płatniczych w polsce oraz jej wpływu na rozwój sieci akceptacji. do jego realizacji wykorzystano analizę opisową i porównawczą oraz szeroki materiał analityczno-badawczy. ważnym elementem opracowania jest badanie ankietowe agentów rozliczeniowych działających na rynku polskim, które w okresie lipiec–sierpień 2011 r. zostało przeprowadzone przez autora, w ramach wykonywania zadań pracownika departamentu systemu płatniczego w narodowym banku polskim. przygotowany przez autora kwestionariusz badania został przesłany w wersji papierowej i elektronicznej do prezesów siedmiu   znaczenie opłaty interchange dla rozwoju rynku kart płatniczych 113 największych agentów rozliczeniowych o łącznym udziale w rynku kart płatniczych pod względem liczby i wartości transakcji wynoszącym (w badanym okresie) 99%. kwestionariusz ten zawierał pytania dotyczące schematu opłat występujących w ramach czterostronnych systemów kart płatniczych oraz poziomu opłat interchange, opłat systemowych, opłat akceptanta i kosztów ponoszonych przez agentów rozliczeniowych z tytułu dostosowywania i utrzymywania infrastruktury płatniczej (np. standard emv, płatności zbliżeniowe). było to pierwsze na rynku polskim badanie dotyczące opłat interchange, którego wyniki zostały upublicznione. 2. modele funkcjonowania systemów kart płatniczych karty płatnicze są wydawane w ramach systemów kart płatniczych. systemy te tworzą rynek kart płatniczych i stanowią podstawowy filar rynku usług płatniczych w rozwiniętych gospodarkach. uczestnikami rynku kart płatniczych są zazwyczaj: ■ konsumenci – posiadacze kart dokonujący płatności kartami za towary lub usługi w określonych punktach handlowo-usługowych; ■ akceptanci – sprzedawcy przyjmujący zapłatę za towary lub usługi przy użyciu kart płatniczych; ■ agenci rozliczeniowi – centra rozliczeniowe (banki lub podmioty niebankowe), które mają podpisane umowy z akceptantami o przyjmowanie zapłaty przy użyciu kart płatniczych; agent rozliczeniowy prowadzi także rozliczenie transakcji pomiędzy wydawcami kart a akceptantami; ■ wydawcy kart płatniczych – podmioty (najczęściej banki) wydające posiadaczom karty płatnicze; ■ organizacje kart płatniczych – skupiające wokół siebie wydawców kart (np. jako członków lub klientów), wydających karty z logo organizacji, dostarczające infrastrukturę techniczną umożliwiającą błyskawiczną autoryzację transakcji, określające zasady przyjmowania i rozliczania kart, opracowujące i rozwijające standardy kart płatniczych oraz usługi i produkty z nimi związane, wdrażające i rozwijające technologie służące do wydawania kart płatniczych, reklamujące i promujące markę swoich produktów wśród posiadaczy kart i akceptantów. wyróżnia się dwa główne modele funkcjonowania systemów kart płatniczych: systemy trójstronne (zamknięte) i systemy czterostronne (otwarte) (kokkola 2010). zostały one zaprezentowane na schemacie nr 1. dodatkowo krzysztof maciejewski114 można wymienić modele dwustronne, które jednak odgrywają marginalną rolę na rynku usług płatniczych. schemat 1. modele funkcjonowania systemów kart płatniczych model czterostronny model trójstronny model czterostronny model trójstronny źródło: opracowanie własne na podstawie: kokkola 2010, 56. dwustronne systemy kart płatniczych stanowią najprostszą formę współpracy podmiotów tworzących system płatności. działanie takiego systemu polega na tym, że płatności dokonywane przez konsumentów akceptowane są jedynie przez wydawcę karty, którym jest np. sieć sprzedawców, takich jak sieć hipermarketów wraz z podmiotami zależnymi, przy czym sieć sprzedawców zajmuje się także przetwarzaniem i rozliczaniem transakcji (benefits 2008). trójstronny system kart płatniczych odnosi się do współzależności pomiędzy trzema grupami podmiotów: konsumentami (posiadaczami kart), akceptantami oraz instytucją centralną (bankiem lub organizacją płatniczą) pełniącą jednocześnie dwie funkcje: wydawcy i agenta rozliczeniowego. ten ostatni podmiot, oprócz technicznych aspektów związanych z wydawaniem kart i obsługą transakcji, określa również warunki wydawania i akceptacji kart. przykładami systemów trójstronnych są m.in. systemy organizowane w wielu krajach przez diners club i american express. najbardziej rozwinięte systemy kart płatniczych funkcjonują w ramach otwartego, czterostronnego modelu płatności, obejmującego cztery grupy podmiotów: konsumentów, akceptantów, wydawców kart płatniczych oraz centra rozliczeniowe. w przypadku tego modelu funkcje wydawnicza i rozliczeniowa mogą być wykonywane przez odrębne, niezależne od siebie podmioty (bank-wydawcę i agenta rozliczeniowego). formę czterostronnych systemów kart płatniczych przyjmują systemy prowadzone w szczególności przez organizacje visa i mastercard. model czterostronny odróżnia się od pozostałych modeli (dwui trójstronnych) rozdzieleniem funkcji wydawcy kart i agenta rozliczeniowego, a także wyklient / posiadacz karty sklep / akceptant bank wydawca karty agent rozliczeniowy organizacja płatnicza klient / posiadacz karty sklep / akceptant organizacja płatnicza / wydawca karty i agent rozliczeniowy ź r ó d ł o: opracowanie własne na podstawie: kokkola 2010, 56. dwustronne systemy kart płatniczych stanowią najprostszą formę współpracy podmiotów tworzących system płatności. działanie takiego systemu polega na tym, że płatności dokonywane przez konsumentów akceptowane są jedynie przez wydawcę karty, którym jest np. sieć sprzedawców, takich jak sieć hipermarketów wraz z podmiotami zależnymi, przy czym sieć sprzedawców zajmuje się także przetwarzaniem i rozliczaniem transakcji (benefits 2008). trójstronny system kart płatniczych odnosi się do współzależności pomiędzy trzema grupami podmiotów: konsumentami (posiadaczami kart), akceptantami oraz instytucją centralną (bankiem lub organizacją płatniczą) pełniącą jednocześnie dwie funkcje: wydawcy i agenta rozliczeniowego. ten ostatni podmiot, oprócz technicznych aspektów związanych z wydawaniem kart i obsługą transakcji, określa również warunki wydawania i akceptacji kart. przykładami systemów trójstronnych są m.in. systemy organizowane w wielu krajach przez diners club i american express. najbardziej rozwinięte systemy kart płatniczych funkcjonują w ramach otwartego, czterostronnego modelu płatności, obejmującego cztery grupy podmiotów: konsumentów, akceptantów, wydawców kart płatniczych oraz centra rozliczeniowe. w przypadku tego modelu funkcje wydawnicza i rozliczeniowa   znaczenie opłaty interchange dla rozwoju rynku kart płatniczych 115 mogą być wykonywane przez odrębne, niezależne od siebie podmioty (bank-wydawcę i agenta rozliczeniowego). formę czterostronnych systemów kart płatniczych przyjmują systemy prowadzone w szczególności przez organizacje visa i mastercard. model czterostronny odróżnia się od pozostałych modeli (dwui trójstronnych) rozdzieleniem funkcji wydawcy kart i agenta rozliczeniowego, a także występowaniem tzw. opłaty interchange (ang. interchange fee). 3. schemat opłat na rynku kart płatniczych w modelu biznesowym czterostronnego systemu kart płatniczych występuje szereg opłat. model ten został zaprezentowany na schemacie 2. schemat 2. model biznesowy czterostronnego systemu kart płatniczych stępowaniem tzw. opłaty interchange (ang. interchange fee). schemat opłat na rynku kart płatniczych w modelu biznesowym czterostronnego systemu kart płatniczych występuje szereg opłat. model ten został zaprezentowany na schemacie 2. schemat 2. model biznesowy czterostronnego systemu kart płatniczych opłaty w tradycyjnej transakcji płatniczej opłaty w ramach całego systemu źródło: opracowanie własne na podstawie: raport 2007. w jego ramach można wyróżnić opłatę interchange, opłatę akceptanta, opłaty systemowe oraz opłaty posiadacza karty. opłata akceptanta (ang. merchant service charge – msc) jest pobierana przez agenta rozliczeniowego od sprzedawcy za każdą zaakceptowaną transakcję bezgotówkową dokonaną kartą. nalicza się ją z reguły jako procentową prowizję od wartości transakcji1. w rezultacie akceptant nie otrzymuje od agenta rozliczeniowego kwoty równej cenie towaru/usługi lub też kwoty, jaką uzyskałby, przyjmując gotówkę, ponieważ jego należność jest pomniejszona o prowizję pobieraną przez agenta rozliczeniowego2. należy zaznaczyć, że 1 wysokość opłat akceptanta, w przeciwieństwie do opłat interchange, jest ustalana w drodze negocjacji (pomiędzy agentem rozliczeniowym a sprzedawcą). stąd też sprzedawcy działający nawet w tej samej branży mogą mieć różne stawki opłat akceptanta. 2 jednocześnie akceptant, przyjmując płatność kartą, nie ponosi kosztów obsługi gotówki. klient / posiadacz karty sklep / akceptant bank wydawca karty agent rozliczeniowy organizacja płatnicza opłaty systemowe opłaty systemowe opłata interchange opłata akceptanta klient / posiadacz karty sklep / akceptant bank wydawca karty agent rozliczeniowy organizacja płatnicza opłaty systemowe opłaty systemowe opłata interchange opłata akceptanta opłaty za terminal pos opłaty telekomunikacyjne surcharge nagrody opłaty za wydanie lub/i użytkowanie karty ź r ó d ł o: opracowanie własne na podstawie: raport 2007. w jego ramach można wyróżnić opłatę interchange, opłatę akceptanta, opłaty systemowe oraz opłaty posiadacza karty. opłata akceptanta (ang. merchant service charge – msc) jest pobierana przez agenta rozliczeniowego od sprzedawcy za każdą zaakceptowaną transakcję bezgotówkową dokonaną kartą. nalicza się ją z reguły jako procentową prowizję od wartości transakcji1. w rezultacie akceptant nie otrzymuje 1 wysokość opłat akceptanta, w przeciwieństwie do opłat interchange, jest ustalana w drodze negocjacji (pomiędzy agentem rozliczeniowym a sprzedawcą). stąd też krzysztof maciejewski116 od agenta rozliczeniowego kwoty równej cenie towaru/usługi lub też kwoty, jaką uzyskałby, przyjmując gotówkę, ponieważ jego należność jest pomniejszona o prowizję pobieraną przez agenta rozliczeniowego2. należy zaznaczyć, że opłata akceptanta jest zazwyczaj uwzględniana przez akceptantów przy ustalaniu ceny towaru lub usługi. zasadniczym elementem opłaty akceptanta jest opłata interchange, przekazywana przez agenta rozliczeniowego do banku wydawcy karty (rochet, tirole 2004, 7). pozostałą część opłaty akceptanta stanowią opłaty systemowe (zwane assessment fee3) oraz marża agenta rozliczeniowego. dodatkowo akceptanci obciążani są przez agentów rozliczeniowych opłatami za dzierżawę i obsługę serwisową terminali płatniczych pos, a także ponoszą oni koszty autoryzacyjnego połączenia telekomunikacyjnego z serwerem agenta. sprzedawcy, ponosząc koszty akceptacji kart na rzecz agentów rozliczeniowych, mogą podnieść ceny towarów i usług lub wprowadzić opłaty dodatkowe dla klientów dokonujących płatności przy użyciu kart (surcharge), jeśli zezwalają na to zasady organizacji lub przepisy prawne. z kolei posiadacze kart nie ponoszą, z wyjątkiem sytuacji pobierania przez akceptanta opłaty surcharge, żadnych kosztów za transakcje bezgotówkowe dokonane kartą. mogą być oni obciążani przez bank jedynie niewielkimi stałymi opłatami za wydanie lub posiadanie karty, choć są często zwalniani z tych opłat, a ponadto mogą być wynagradzani za częste korzystanie z kart do płatności. wydawcy kart płatniczych natomiast są z jednej strony beneficjentami opłaty interchange, a z drugiej są obciążani przez organizacje kart płatniczych opłatami systemowymi, tj. różnego rodzaju opłatami z tytułu uczestnictwa w danym systemie kart płatniczych. opłaty systemowe pobierane od agentów rozliczeniowych i wydawców kart płatniczych stanowią przychód organizacji płatniczych. na podstawie powyższej analizy przepływu opłat w systemie można stwierdzić, że głównymi beneficjentami systemu są: (1) banki wydawcy i (2) agenci rozliczeniowi, którzy wprawdzie ponoszą pewne koszty uczestnictwa w systemie, to jednak uzyskują wynagrodzenie za swoją działalność, a także w niesprzedawcy działający nawet w tej samej branży mogą mieć różne stawki opłat akceptanta. 2 jednocześnie akceptant, przyjmując płatność kartą, nie ponosi kosztów obsługi gotówki. 3 assessment fee jako składnik opłaty akceptanta (msc) jest opłatą pobieraną od akceptanta przez agenta rozliczeniowego i przekazywaną do organizacji płatniczej.   znaczenie opłaty interchange dla rozwoju rynku kart płatniczych 117 których przypadkach (3) posiadacze kart (zwalnianie z opłat, zwrot części wydanych środków). w rezultacie grupą najbardziej obciążoną finansowo w systemie czterostronnym są, w zależności od podejścia, sprzedawcy lub konsumenci. według jednego podejścia to właśnie akceptanci „utrzymują” cały system, ponosząc koszty akceptacji. według drugiego podejścia koszty akceptacji kart ponoszą wszyscy konsumenci (zarówno płacący kartami, jak i płacący gotówką), gdyż koszty te są wliczane przez akceptantów w cenę towaru lub usługi (sienkiewicz 2001, 8). na gruncie polskim dyskusji tej nie rozstrzyga jednoznacznie badanie akceptacji gotówki i kart płatniczych wśród polskich przedsiębiorców (górka 2012, 48–49), w ramach którego stwierdzono, że 41% akceptantów nie wlicza kosztów akceptacji kart płatniczych w cenę towarów lub usług. natomiast 27% firm deklarowało wliczanie w ceny kosztów akceptacji kart, a 21% wliczanie jedynie średniej wartości opłaty akceptanta. należy również zaznaczyć, że znaczące przychody z tytułu organizacji i zarządzania systemem czterostronnym uzyskują organizacje płatnicze, których jednak nie zalicza się do uczestników systemu czterostronnego. warto zauważyć, że w ramach trójstronnych systemów kart płatniczych opłata interchange nie występuje (nie jest ona widoczna), ponieważ funkcję wydawcy karty i agenta rozliczeniowego pełni jeden podmiot – instytucja centralna. jednak bardzo interesujący jest fakt, że opłaty akceptanta w systemach trójstronnych są z reguły wyższe niż w systemach czterostronnych, co może po części tłumaczyć ograniczoną skalę działalności systemów trójstronnych (competition 2006). 4. analiza rozwoju sieci akceptacji kart płatniczych w polsce analiza danych statystycznych wykazała, że dynamika wzrostu sieci akceptacji w polsce jest znacznie niższa niż dynamika liczby kart płatniczych oraz liczby i wartości transakcji dokonywanych przy użyciu kart. można ocenić, iż znacznie wolniej rozwijająca się sieć akceptacji kart płatniczych niż liczba kart płatniczych lub liczba transakcji stanowi coraz większą barierę dla dalszego szybszego wzrostu płatności kartowych. warto także zwrócić uwagę na poziom nasycenia sieci akceptacji. według szacunków nbp stopień nasycenia polskiego rynku punktami handlowo-usługowymi, które akceptują karty płatnicze, wynosił w 2011 r. jedynie około 19% (maciejewski 2012). potwierdziły to również wyniki badania polskich przedsiębiorców (górka 2012). wyniki innych badań (polasik, maciejewski 2009) wskazywały również na zasadnicze krzysztof maciejewski118 znaczenie poziomu opłat akceptanta jako czynnika decydującego o rozpoczęciu przez kierownictwo sklepu akceptacji kart płatniczych. 5. wyniki badania stawek opłat interchange na rynku polskim porównanie wysokości opłat interchange w systemach visa i mastercard, obowiązujących w krajach unii europejskiej, było, z uwagi na brak publicznie dostępnych danych, niemożliwe do 2010 r. dopiero we wskazanym roku komisja europejska zobligowała obie organizacje do publikowania na stronach internetowych wysokości stawek opłat interchange w krajach unii europejskiej. porównanie stawek opłat interchange w polsce i poszczególnych krajach unii europejskiej wykazało, że opłaty interchange w polsce są najwyższe lub jednymi z najwyższych w unii europejskiej. w 2011 r. opłaty interchange w polsce były ponad dwukrotnie wyższe niż średnio w krajach unii europejskiej, a ośmiokrotnie wyższe niż np. w finlandii. na wykresach nr 1 i 2 zaprezentowano stawki opłat interchange w krajach ue w 2011 r. dla najpowszechniejszych w polsce kart debetowych w systemach visa i mastercard. wyniki badania ankietowego przeprowadzonego przez autora wśród agentów rozliczeniowych umożliwiły ustalenie udziału opłaty interchange w opłacie akceptanta w przypadku transakcji przetwarzanych przez ww. podmioty w polsce w latach 2008–2010 w fizycznych punktach sprzedaży (bez uwzględnienia transakcji internetowych), co przedstawiono w tabeli 1. na podstawie zaprezentowanych danych można uznać, że na polskim rynku w ostatnich latach opłata interchange stanowi coraz większy udział w opłacie akceptanta. w latach 2008–2010 udział ten wzrósł o blisko 6 punktów procentowych, z 79 do 84,9% opłaty akceptanta. uwzględniając fakt, że na rynku polskim w ostatnich latach opłaty akceptanta utrzymywały się na stałym poziomie, należy stwierdzić, iż średni poziom opłat interchange wzrastał. zwiększający się udział opłaty interchange w opłacie akceptanta wskazuje na wzrost znaczenia tej opłaty na rynku polskim. oferta cenowa agentów rozliczeniowych dla akceptantów (msc) była w coraz większym stopniu uzależniona od poziomu opłaty interchange, ustalanej przez międzynarodowe organizacje kart płatniczych (poziomu najwyższego w ue). świadczy to także o intensywnej konkurencji wśród agentów rozliczeniowych, w ramach której podmioty te rywalizują między sobą o pozyskanie nowych lub utrzymanie swoich klientów, tj. akceptantów kart płatniczych. w ramach przeprowadzonego badania   znaczenie opłaty interchange dla rozwoju rynku kart płatniczych 119 zidentyfikowano także trzy grupy opłat ponoszonych przez agentów rozliczeniowych na rzecz organizacji płatniczych, czyli: − opłaty marketingowe, − opłaty processingowe (związane z przetwarzaniem transakcji), − opłaty licencyjne. wykres 1. stawki opłat interchange w ujęciu procentowym dla transakcji typu emv chip – karty debetowe visa wydawane dla klientów indywidualnych change w krajach unii europejskiej. porównanie stawek opłat interchange w polsce i poszczególnych krajach unii europejskiej wykazało, że opłaty interchange w polsce są najwyższe lub jednymi z najwyższych w unii europejskiej. w 2011 r. opłaty interchange w polsce były ponad dwukrotnie wyższe niż średnio w krajach unii europejskiej, a ośmiokrotnie wyższe niż np. w finlandii. na wykresach nr 1 i 2 zaprezentowano stawki opłat interchange w krajach ue w 2011 r. dla najpowszechniejszych w polsce kart debetowych w systemach visa i mastercard. wykres 1. stawki opłat interchange w ujęciu procentowym dla transakcji typu emv chip – karty debetowe visa wydawane dla klientów indywidualnych źródło: opracowanie własne na podstawie: visa europe (wrzesień 2011 r.). 1,60% 1,58% 1,50% 1,42% 1,10% 1,05% 1,00% 1,00% 1,00% 1,00% 0,90% 0,90% 0,72% 0,70% 0,66% 0,63% 0,55% 0,41% 0,40% 0,37% 0,30% 0,25% 0,25% 0,21% 0,21% 0,21% 0,21% 0,19% 0,00% 0,20% 0,40% 0,60% 0,80% 1,00% 1,20% 1,40% 1,60% 1,80% polska niemcy cypr hiszpania słowenia grecja austria czechy estonia rumunia litwa portugalia ue słowacja włochy francja łotwa irlandia bułgaria wielka brytania dania luksemburg holandia belgia węgry malta szwecja finlandia ź r ó d ł o: opracowanie własne na podstawie: visa europe (wrzesień 2011 r.). krzysztof maciejewski120 wykres 2. stawki opłat interchange dla kart debit mastercard – klienci indywidualni wykres 2. stawki opłat interchange dla kart debit mastercard – klienci indywidualni źródło: opracowanie własne na podstawie: „mastercard” (wrzesień 2011 r.). wyniki badania ankietowego przeprowadzonego przez autora wśród agentów rozliczeniowych umożliwiły ustalenie udziału opłaty interchange w opłacie akceptanta w przypadku transakcji przetwarzanych przez ww. podmioty w polsce w latach 2008–2010 w fizycznych punktach sprzedaży (bez uwzględnienia transakcji internetowych), co przedstawiono w tabeli 1. tabela 1. udział opłaty interchange w opłacie akceptanta w transakcjach terminalowych w polsce w latach 2008–2010 okres 2008 2009 2010 if/msc [%] 79,0 80,7 84,9 źródło: wyniki własnych badań ankietowych autora (2011), respondenci: agenci rozliczeniowi, n=7. na podstawie zaprezentowanych danych można uznać, że na polskim rynku w ostatnich latach opłata interchange stanowi coraz większy udział w opłacie akceptanta. w latach 2008–2010 udział ten wzrósł o blisko 6 punktów procentowych, z 79 do 84,9% opłaty akceptanta. uwzględniając fakt, że na rynku polskim w ostatnich latach opłaty akceptanta utrzymywały się na stałym poziomie, należy stwierdzić, iż średni poziom opłat interchange wzrastał. zwiększający się udział opłaty interchange w opłacie akceptanta wskazuje na wzrost znaczenia tej opłaty na rynku polskim. oferta cenowa agentów rozliczeniowych dla akceptantów (msc) była w coraz większym stopniu uzależniona od poziomu opłaty inter1,64% 1,16% 1,10% 1,05% 0,85% 0,77% 0,75% 0,60% 0,41% 0,37% 0,36% 0,23% 0,00% 0,20% 0,40% 0,60% 0,80% 1,00% 1,20% 1,40% 1,60% 1,80% polska węgry czechy estonia litwa ue grecja łotwa irlandia wielka brytania szwecja finlandia ź r ó d ł o: opracowanie własne na podstawie: „mastercard” (wrzesień 2011 r.). tabela 1. udział opłaty interchange w opłacie akceptanta w transakcjach terminalowych w polsce w latach 2008–2010 okres 2008 2009 2010 if/msc [%] 79,0 80,7 84,9 ź r ó d ł o: wyniki własnych badań ankietowych autora (2011), respondenci: agenci rozliczeniowi, n=7. według szacunków przeprowadzonych na podstawie ww. badania ankietowego poziom tych opłat kształtował się w przedziale od 0,08 do 0,16% wartości transakcji. należy zauważyć, że choć wysokość opłat dodatkowych (systemowych) w stosunku do wysokości opłat interchange była w 2011 r. od około 10do 20-krotnie niższa, to jednak powinna być monitorowana wysokość wszystkich wymienionych opłat. może bowiem dojść do sytuacji, w której obniżony zostanie poziom opłat interchange, ale wzrośnie jednocześnie poziom opłat dodatkowych, co w rezultacie nie wpłynie na obniżenie opłat ponoszonych przez agentów rozliczeniowych oraz opłat akceptantów.   znaczenie opłaty interchange dla rozwoju rynku kart płatniczych 121 6. działania banku centralnego i innych interesariuszy w zakresie opłaty interchange na rynku polskim narodowy bank polski, przyjmując rolę katalizatora zmian, podjął w ii połowie 2011 r. prace nad raportem dotyczącym opłaty interchange (maciejewski 2012), który zawierał m.in. przytoczone powyżej wyniki badań. raport ten był przyczynkiem do dyskusji z organizacjami płatniczymi i bankami-wydawcami kart nad ponownym przeanalizowaniem wysokości opłat interchange, obowiązujących na rynku polskim. w tym celu na podstawie przedłożonego raportu rada ds. systemu płatniczego, organ opiniodawczo-doradczy przy zarządzie nbp, powołała w dniu 3 października 2011 r. zespół roboczy ds. opłaty interchange (zrif), w skład którego weszli przedstawiciele wszystkich stron czterostronnego systemu kartowego oraz instytucji rządowych. wynikiem kilkumiesięcznych prac zespołu był program redukcji opłat kartowych w polsce, w ramach którego głównym proponowanym działaniem było stopniowe obniżenie stawek opłaty interchange w polsce, do poziomu średniego krajowych opłat interchange w unii europejskiej do 2017 r., tj. 0,7% wartości transakcji dla kart debetowych i 0,84% dla kart kredytowych i obciążeniowych. w świetlne stanowisk organizacji płatniczych zaprezentowanych w maju 2012 r. scenariusz o charakterze nieregulacyjnym w formie wielostronnych porozumień między głównymi stronami czteroi trójstronnych systemów kartowych okazał się niemożliwy do realizacji. zgodnie z zapisami programu prace w zakresie obniżki stawek interchange zostały przekazane do ministerstwa finansów i następnie polskim parlamentarzystom. już w okresie od czerwieca do października 2012 r. powstało kilka projektów ustaw, mających na celu regulacyjne rozwiązanie tego problemu. w okresie od kwietnia do maja 2013 r. podjęte zostały przez organizacje mastercard i visa kolejne decyzje, zainicjowane przez związek banków polskich, o obniżkach stawek opłat interchange w latach 2014–2017, w części zgodne z programem. działania te nie były jednak w stanie powstrzymać prac parlamentarnych w przedmiotowym zakresie. dnia 30 sierpnia 2013 r. sejm uchwalił ustawę o zmianie ustawy o usługach płatniczych (dz.u. z 30 października 2013 r., poz. 1271), wprowadzającą wysokość stawki opłaty interchange dla wszystkich rodzajów kart płatniczych (wydawanych dla klientów indywidualnych i biznesowych) na poziomie nieprzekraczającym 0,5% wartości jednostkowej transakcji od 2014 r. krzysztof maciejewski122 ostateczna treść regulacji opłat interchange w polsce oznacza zatem znacznie bardziej radykalne podejście do obniżki tych opłat (jednorazowa, kilkudziesięcioprocentowa obniżka) w porównaniu z programem redukcji opłat kartowych, w którym proponowano pięcioletnie, stopniowe obniżanie tej opłaty do poziomu 0,7 i 0,84% wartości transakcji, odpowiednio dla produktów debetowych i kredytowych, celem uniknięcia zachwiania na rynku kart płatniczych.  podsumowanie i wnioski poziom opłat interchange w polsce należy w ostatnich latach do najwyższych w unii europejskiej i stanowi znaczącą barierę rozwoju obrotu bezgotówkowego, gdyż dla wielu handlowców jest on wspólnie z pozostałymi elementami składowymi opłaty akceptanta zbyt wysoki, aby podjąć decyzję o rozpoczęciu akceptacji kart płatniczych. taki stan rzeczy będzie z kolei demotywująco wpływał na osoby rozważające otwarcie rachunku bankowego i posiadanie karty płatniczej, z uwagi na bardzo ograniczoną liczbę miejsc, w których będą mogły jej użyć. zagadnienie to było na tyle istotne dla polskiej gospodarki, że aktywnie zaangażował się w nie bank centralny, przyjmując rolę katalizatora zmian. w efekcie tych działań, mimo niepodpisania przez organizacje płatnicze porozumienia rynkowego, doszło (od dnia 1 stycznia 2013 r.) do pierwszych od wielu lat dobrowolnych obniżek opłat interchange przez obie największe organizacje kart płatniczych mastercard i visa. wprawdzie obniżki te zasadniczo nie zmieniły w 2013 r. pozycji polski na tle pozostałych krajów unii europejskiej w zakresie wysokości opłat interchange, to jednak znaczące obniżki w kolejnych latach są już przesądzone (w wariancie regulacyjnym). przesłanką do podjęcia takich działań przez ustawodawcę było przewidywanie, że tak znacząca obniżka opłat interchange wpłynie na dynamiczny wzrost sieci akceptacji kart płatniczych w polsce. mając na uwadze fakt, że opłaty interchange stanowią dla wydawców kart jedno z ich kluczowych źródeł przychodów, obniżenie tych opłat w zbyt gwałtowny sposób (tj. jednorazowy) do bardzo niskiego poziomu może niekorzystanie wpłynąć na sektor bankowy. może to oznaczać koniec ery bezpłatnych rachunków bankowych i kart płatniczych oraz konieczność nakładania przez banki opłat na klientów za te produkty i usługi, w celu zrekompensowania utraconych przychodów z tytułu opłat interchange, co jest już obserwowane. natomiast wdrożenie programu stopniowych obniżek tych opłat, wypracowanego pod auspicjami nbp, nie skutkowałoby niekorzystnymi dla klientów reakcjami   znaczenie opłaty interchange dla rozwoju rynku kart płatniczych 123 banków. program ten zawierał zapisy zobowiązujące banki do nieprzenoszenia automatycznie obniżek opłat interchange na klientów, w postaci wzrostu opłat za rachunki bankowe i karty. należałoby bowiem oczekiwać, iż przy stopniowym obniżeniu poziomu opłat interchange w polsce rynek kart płatniczych będzie rozwijał się szybciej niż w ostatnich latach i łączna wartość transakcji będzie wyższa od dotychczasowej, co pozytywnie wpłynie także na wielkość przychodów banków z tytułu opłat interchange (carbó i in. 2009, 4). z kolei regulacja zakładająca jednorazową, kilkudziesięcioprocentową (z poziomu 1,25 do 0,5% wartości transakcji) redukcję tej kluczowej dla rynku kart płatniczych opłaty zasadniczo uniemożliwi – z uwagi na brak okresu na dostosowanie się do nowych realiów rynkowych – zrekompensowanie przez banki poniesionych strat finansowych w porównaniu z latami ubiegłymi. wielu wydawców kart płatniczych doszło również do wniosku, że okres wysokich stawek opłat interchange nieuchronnie dobiega końca. tezę tę potwierdzają działania największych banków komercyjnych, wydających karty płatnicze polegające na wdrażaniu w ostatnich miesiącach systemów płatności mobilnych iko (przez pko bank polski) i peopay (przez bank pekao) oraz systemu płatności mobilnych ikasa w sieci handlowej biedronka. warto zwrócić uwagę na fakt, że w przypadku rozwiązań płatniczych iko oraz peopay zaangażowani są zarówno wydawca instrumentu płatniczego, jak i agent rozliczeniowy, co stwarza ogromną szansę rozwoju dla tych systemów. co więcej, według doniesień prasowych stawka opłaty akceptanta dla obu tych systemów została ustalona na poziomie około 0,7% wartości transakcji. oznacza to o ponad połowę niższy poziom kosztów akceptacji niż w przypadku kart płatniczych w 2013 r. (około 1,5%). natomiast w 2014 r., tj. po redukcji opłat interchange dla kart płatniczych, stawki opłat akceptanta w systemach iko i peopay będą nadal konkurencyjne wobec kart płatniczych (0,5% opłata interchange + opłaty systemowe + marża agenta rozliczeniowego). efekty obniżenia opłat interchange będą stanowić w najbliższych latach bardzo atrakcyjny obszar analiz i badań naukowych. szczególnie trudnym wyzwaniem wydaje się dokonanie pomiaru wpływu obniżenia opłat na rynek kart płatniczych, przy jednoczesnym oddzieleniu tego czynnika od innych czynników o charakterze ekonomicznym (np. kryzys gospodarczy, wzrost stawek podatkowych) i nieekonomicznym (działania edukacyjne skierowane do konsumentów i akceptantów, zmiana pokoleniowa). w opinii autora efekty obniżenia w polsce opłat interchange w systemach kart płatniczych należałoby, z uwakrzysztof maciejewski124 gi na wdrożenie nowych systemów płatności mobilnych, analizować w kategoriach całego systemu elektronicznych płatności detalicznych w polsce (tj. karty płatnicze, płatności mobilne, przelewy bankowe), a nie jedynie rynku kart płatniczych.  literatura benefits of open payment systems and the role of interchange (2008), “mastercard”, 2–4. carbó valverde s., chakravorti s., rodriguez fernandez f. (2009), the costs and benefits of interchange fee regulation: an empirical investigation, http://www.ecb.europa.eu/events/pdf/conferences/integr_innov/valverd_chakravorti_fernandez _fee_regulation_an_empirical_investigation.pdf?43617f508578fe663ab6d00d6 b1d6c3c. competition and efficient usage of payment cards (2006), organisation for economic co-operation and development, “competition committee”, 25. decyzja prezesa uokik (2006), www.uokik.gov.pl/download.php?plik=5664 (wersja rozszerzona) oraz www.uokik.gov.pl/download.php?plik=8253 (wersja skrócona). evans d., schmalensee r. (2005), the economics of interchange fees and their regulation: an overview, “mit sloan working paper”, 4548-05. górka j. (2012), badanie akceptacji gotówki i kart płatniczych wśród polskich przedsiębiorców, warszawa, 14, 48–49. kokkola t. (2010), the payment system, “european central bank”, 56. maciejewski k. (2012), analiza funkcjonowania opłaty interchange w transakcjach bezgotówkowych na rynku polskim, nbp, warszawa, 20–22. polasik m., maciejewski k. (2009), innowacyjne usługi płatnicze w polsce i na świecie, „materiały i studia”, nr 241, nbp, 124–125. porównanie wybranych elementów polskiego systemu płatniczego z systemami innych krajów unii europejskiej za 2011 rok (2012), nbp, dsp, warszawa. raport z badania sektora bankowości detalicznej (2007), „komisja europejska”, 117. rochet j. ch., tirole j. (2004), two-sided markets: an overview, https://www.frbatlanta. org/filelegacydocs/ep_rochetover.pdf. sienkiewicz s. (2001), credit cards and payment efficiency, discussion paper, payment card center, federal reserve bank of philadelphia, 8. ustawa z dnia 30 sierpnia 2013 r. o zmianie ustawy o usługach płatniczych, dz.u. z 30 października 2013 r., poz. 1271. introduction challenges ahead we are offering you the latest edition of copernican journal of finance & accounting. as you know, with each issue we are becoming more recognized in the world of science. this is our common success: scientific council, reviewers team and, of course, authors and readers. on behalf of editorial board i would like to thank all of you. however, a lot of work is still ahead of us. contemporary economy and economics face a lot of challenges and serious paradoxes, as well. we have achieved the highest level of development in the history of mankind. homo sapiens possesses a huge capital of science, business experience, technology and, of course, also huge financial capital. however, in spite of the above mentioned four capitals we deal with two kinds of problems: ■ permanent problems (e.g., unemployment, poverty and overstress) and ■ extraordinary problems (e.g., economic or financial crisis). the society expects from us – scientists, to research and solve problems to make our existence more bearable. as economy is for people then perhaps we need more social capital in economy? hence a few questions. is the social capital the fifth underrated capital? if yes, how to create and impose social capital in economy maintaining parallelly market mechanisms? moreover, there are a lot of important, inspiring and very promising terms: csr, sri, esg, cc, ir. there is a lot of hope. also, there are a lot of serious doubts. we would like to encourage you to meet the challenge. finance & accounting should contribute to the progress of economy & economics. the invitation to cooperate with our journal is still open for you. editor in chief professor leszek dziawgo copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: march 3, 2014; date of acceptance: march 23, 2014. * contact information: bozkolos@umk.pl, department of finance management, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: 56 611 48 99. ** contact information: gvoss@wp.pl, department of accounting, torun school of banking, młodzieżowa 31a, 87-100 toruń, poland, phone: 691 372 808. kołosowska b., voss g. (2014). real options in the assessment of the company’s pro-ecological investments. copernican journal of finance & accounting, 3(1), 83–95. http://dx.doi.org/10.12775/cjfa.2014.007 bożena kołosowska* nicolaus copernicus university grażyna voss** torun school of banking authorised adviser – as a company of public trust in the newconnect otc (over-the-counter) exchange keywords: auditing, ethical standards, abuse of. j e l classification: g180. abstract: the paper notices that authorised advisers play the role of internal auditors in the companies listed on the newconnect market. in principle, the issuers are small and medium enterprises who expect adequate support and help. the advisers who are responsible for proper introduction and servicing of the companies on the market must of course be subject to appropriate legal regulations. yet, as a rule, the over-the-counter market of small and medium enterprises’ stocks is subject to certain simplifications which cause that not all of the issues regarding the responsibility of authorised advisers have been regulated. the introduction of more detailed regulations contributes to increasing the transparency of the market and to assuring greater safety for its participants, and unethical behaviours eliminate the entities which should have not been present in the list of authorised advisers. bożena kołosowska, grażyna voss84 autoryzowany doradca – jako spółk a zaufania publicznego na alternatywnym rynku obrotu giełdowego newconnect słowa kluczowe: audyt, standardy etyczne, nadużycia. klasyfikacja j e l: g180. abstrakt: w artykule dostrzegamy, iż autoryzowani doradcy pełnią rolę audytorów wewnętrznych w spółkach notowanych na newconnect. z założenia emitentami są małe i średnie przedsiębiorstwa, które oczekują odpowiedniego wsparcia i pomocy. doradcy odpowiadając za prawidłowe wprowadzenie i obsługę spółek na rynku muszą oczywiście podlegać odpowiednim regulacjom prawnym. jednakże z założenia alternatywny system obrotu akcjami małych i średnich przedsiębiorstw podlega pewnym uproszczeniom, które powodują, iż nie wszystkie kwestie dotyczące odpowiedzialności autoryzowanych doradców zostały jeszcze uregulowane. wprowadzanie coraz bardziej szczegółowych przepisów przyczynia się do zwiększenia przejrzystości rynku oraz do zapewnienia większego bezpieczeństwa jego uczestnikom, a nieetyczne zachowania eliminują podmioty, które nie powinny pojawić się na liście autoryzowanych doradców. translated by bożena kołosowska, grażyna voss  introduction the profession of an auditor reaches back into the ancient history and its origin is estimated for approx. 3000 bc and relates to the civilizational development of mesopotamia. the need of introducing control became the answer to the growing need for such type of supervision in the mesopotamian mansions and estates. at that time, the internal control applied was based on marks, dots and dashes. as a result of development over thousands of years, two types of audit can be distinguished: the so-called business audit, i.e. external and internal (moeller 2011, 25). external auditor is a statutory auditor who in many countries obtains his authorisations issued by a national authority and is included in an appropriate professional registry. the external auditor carries out examinations of the financial reports presented by a business unit and expresses his/ her opinion together with publishing a report. an internal auditor is an employee of the company and he/she carries out independent examination in the scope of applying correct procedures, both in the area of finance and the operational activities of the enterprise. in its simplest form, the internal audit takes place when an employee reviews the carried out actions in order to find out whether these could be carried out “more effi authorised adviser – as a company of public trust… 85 ciently or better”. by engaging more people, or an external company, in these activities, the audit becomes broadened with the evaluation by given persons of certain tasks, taking into account the correctness and effectiveness of the performed tasks. in small enterprises the owner can carry out such a review of actions by himself, but when the business unit is complex and covers many areas of activities, it is worth to commission such reviews to specialised and adequately prepared employees. in modern understanding, the internal audit fulfils a role of evaluating the mechanisms of the management control and has an advisory function. the internal audit focuses on the shortcomings of the systems’ functioning and also on advising and supporting the management staff in the scope of operational control’s effectiveness and efficiency (winiarska 2013, 17). the research methodology and the course of the research process the aim of this paper is to present the role an authorised adviser fulfils in the process of introducing companies to the market in the over-the-counter (otc) exchange, fulfilling the companies’ information duties and advising them on the functioning of the instruments in this system. the paper also showcases the importance of ethical behaviour regarding the entities joined through this exchange – issuers, investors and the otc organiser, who is the warsaw stock exchange; and whether the regulations of “good practices of the authorised advisers in newconnect otc” constitute legal protection against the occurring improprieties. the basic methods used in the process of writing of this report were: analysis and critical assessment of legal acts, the literature, the available studies carried out also by other authors, and relating to the study area. the design of the series, postulates method was also used deduction. causes of internal audit’s development in the 20th century it should be noted that the development of internal audits in the ancient times was serving different objectives than the ones faced by internal auditors at the beginning of the 20th century. the perception of internal auditors changed significantly in 1934 when the securities and exchange commission (sec) was created in the united states (www.sec.gov). the effects of the great depression of 1930s caused that the actions carried out by the sec lead to the requirement bożena kołosowska, grażyna voss86 of financial reports being examined by independent external auditors. the requirements introduced by the sec also obliged the companies to appoint internal audit cells in which the applied procedures have significantly increased the trust of investors in the issuers emerging on the stock exchange. the tasks of internal auditors in the first half of the 20th century included, among others, to carry out examinations in order to identify errors in accounting (meigs 1960, 377). in 1942 the iia (institute of internal auditors) was established in new york, which supported internal auditors in their professional development and which in time became an international organisation. in the 1990s the companies working in the field of external audit (in the scope of financial reports) also begun to take on some of the duties of internal audits (regarding financial audit). in american companies this idea was very much supported by the management staff. initially the iia was against such solutions, but the problem of outsourcing came into existence after the bankruptcy of enron, where the whole internal audit department was moved to an auditing company a. andersen. the occurring conf lict of interest introduced changes and in the process of internal audit it was decided that the company of the statutory auditor cannot simultaneously offer internal audit services (sok). the solution which separates the internal audit and requires it not to be joined with the external audit is in place until today. in the polish economy the internal audit is of an optional character, but according to the public finance act the duty of audit occurs only in the units within the public finance sector (kołosowska b., bartoszewicz a. (2014) art. 272–  –296, chapter vi of the act from 27 august 2009 on public finance). in this paper we pay special attention to the authorised adviser, who plays a very important role in the whole process of introducing the company to the otc newconnect exchange, in the company fulfilling its information duties and in the whole process of its instruments’ functioning within the otc. the adviser is an investment company or another entity offering services related to economic trading, including financial advice, legal advice or financial audit. the adviser needs to be registered on the list kept by the organiser of the over-the-counter (otc) exchange, who is the warsaw stock exchange (http://www.ipo.pl). ethical norms in internal audit the rules of ethical behaviours have been subject of interest for centuries and reach back to the ancient times. the history knows many cases of falls states, authorised adviser – as a company of public trust… 87 financial crises and bankruptcy of stock companies caused by the lack of ethical behaviour in their management (sawicki 2013, 239). integrity and ethical values are defined by the top management. we can state, that the economic unit which prepared an ethical code and has all of its employees adhering to this code, has an adequate set of values. such code can be an important element of control. in case if the code is not adhered to or its rules are being broken as a result of a lack of knowledge or deliberate actions, the surrounding of such enterprise is in the danger of an increased level of risk as a result of the dishonesties taking place. it can also happen, that the employees are partially unaware that their behaviour is against the interests of their company. each profession requires the worker to adhere to the generally accepted professional standards, for internal auditors these are the international professional practices framework for internal auditors, issued by the institute of internal auditors, the so-called iia framework. furthermore, the institute has prepared the auditor’s ethical code, which aims at promoting ethical rules of conduct that include integrity, objectivity, confidentiality, professionalism (www.iia.org.pl). the role and tasks of internal audit the word “audit” comes from latin and means to listen to, to interrogate, to examine. in poland, audits were used in the 1990s in relation to verification of financial reports. within internal audit the literature most often distinguishes financial, operational and it audits. this classification can be broadened with financial, activity, system and compliance audits (winiarska 2005, 33). the units taking advantage of internal audits should begin its planning from the analysis of the unit’s needs, as this is the only way in which conducting the audit will lead to reaching the planned objectives. at present the internal audit can be distinguished by characteristic features which are presented in table 1. table1. characteristic features of internal audit audit criterion internal audit objective added value to the unit scope all of the unit’s activities period examined present state and future state bożena kołosowska, grażyna voss88 audit criterion internal audit frequency according to the schedule, throughout the year knowledge of the unit knows the unit (as an employee) examining entity auditor employed in the unit, contractor – external unit s o u r c e : authors’ own study based on: kiziukiewicz 2013, 16. it is assumed, that due to the internal audit, the head of the unit is able to verify whether the objectives of the entity are realised in the correct way, the rules and procedures resulting from different requirements of the law in force are implemented and obeyed, and the implemented management control system works in a relevant, effective and efficient way, allowing to evaluate the activities of the enterprise in an adequate way. a system created in such way allows guaranteeing, that the processes taking place in the entity are relevant and efficient and allowing the unit’s activities to be evaluated in an adequate way (bartoszewicz 2011, 14). joint-stock companies listed in newconnect as a part of the polish public secondary financial market one can distinguish a dealing market organised by both regulated and over-the-counter dealing system, with the latter consisting of the electronic platform for government bonds and securities and the newconnect organised by the warsaw stock exchange. the regulated market includes the stock market in the form of warsaw stock exchange, otc wholesale bonds market run by bondspot (previously ceto) and the commodity market of financial instruments (kudła 2011, 19). transaction taking place at this exchange are usually made electronically using various telecommunication means (jajuga 2006, 6). the essence of the otc stock exchange in poland is to allow capital support for the companies in the very early or late phases of their life cycles. the financing should be used most of all for innovative projects. the creators of the present regulations noticed the capital limitations existing in small and medium enterprises with great development and innovation potential. it was for them that a platform was created that allows trading stocks which is of supplementary character to the warsaw stock exchange. it can be an intermediary stage for those companies entering the main market, after their strengthening and reaching appropriate value. authorised adviser – as a company of public trust… 89 issuing of stocks by the newconnect market can be seen as a modern way of obtaining capital by small and medium enterprises. it is an alternative source of obtaining development funding, aside from bank loans, leasing, venture capital funds and business angels. what is very important from the point of view of the finances of the enterprise, apart from gaining access to capital, is that it allows the first market valuation of the company’s own capital. apart from allowing access to new capital resources, starting listing on the newconenct also allows to be featured in the media, daily reporting their current financial quotations. by applying good practices and absorbing modern ways of managing companies, the companies listed at the exchange gain experience in investor relations. reaching a broad spectrum of investors relates to an increase in the company’s credibility among its contractors and financial institutions. it also allows creating relevant tools for evaluating employees as a part of the already existing system of employee motivation1. such companies then gain various benefits resulting from being listed in the newconnect market, with significantly limited capital resources and lower formal requirements in relation to the companies listed at the warsaw stock exchange. the companies also benefit from lower reporting costs, lower audit costs, and less rigid requirements of introduction and listing at the over-the-counter (otc) exchange. the information materials on newconnect point out, that this market was planned for newly-established companies with capital not exceeding 20 million euro, with a very big development potential. it was assumed that the companies will be emitting between several hundred thousand to a dozen or so million zloty (www.newconnect.pl) the companies were to belong to resilient innovative sectors based on immaterial assets (e.g. it, electronic media, telecommunication, biotechnology, environmental protection, alternative energy, state-of-the-art scientific and technological thought) (banaszczak-soroka 2012, 86–87). the investors point out to the significantly greater risk of investing in stocks of companies that only start their business activities, implementing projects which may yield benefits only in the future. this also shows that the in1 the system of awarding bonuses to the key employees can be dependent on the increase of the stocks’ price, and the company can also intoroduce the possibility of awarding the employees with the company’s stocks depending on maintaining the adequately high level of the activities’ results (often reliant on the increase of the company’s value in the future, or maintaining the adequate levels of the eca, mva or roic indicators). bożena kołosowska, grażyna voss90 vestors can be the pioneers in financing innovative projects, branches or solutions which are deemed too risky by the traditional suppliers of capital, such as banks2. these points will be subject of evaluation included in chapter four of this paper. now we shall move on to the characteristics of bonds and searching for the answer to the question whether obtaining capital through emitting corporate bonds could become an attractive source of financing business activities of small and medium enterprises. before a company is permitted to trade, a contract is signed between an authorised adviser and the market animator or the market maker. the organiser of the over-the-counter exchange keeps separate lists of authorised advisers for the nc and catalyst markets, and individual advisers can be featured on both lists (www.newconnect.pl). their functions, tasks, possible penalties and exclusions were defined. among other tasks, the authorised adviser takes on converting the issuer into a public company, takes all due diligence in taking care of the reliability and completeness of information presented in the information document, which is created based on the requirements of the current law and the market’s best practices. the actions also include cooperation with companies listed on the market in the scope of their fulfilment of information duties, monitoring the correctness of securities’ sales, and offers advisory services regarding trading stock at the nc market (kołosowska 2013, 123). from the perspective of several years that the nc market has been functioning, it can be observed that there have been certain improprieties in that the authorised adviser has been remunerated by taking over stocks of the enterprise she/he has been servicing. this causes significant imbalance in the correctness of valuing the company – in case when the adviser is directly interested in leading the offer of stocks’ sales. in 2012 goadvisers – one of the highest-ranked advisory companies on this market, has been removed from the list of advisers. it was accused of making errors during the preparation of information documents for one of the companies introducing its stocks to the nc. the occurring conf lict is very often irreconcilable, because “the ethical duty of the adviser is also to absolutely inform of possible dependencies of his remu2 more on the functioning of the nc market: m. buszko (2010), newconnect – nowy rynek wspomagający rozwój małych i średnich przedsiębiorstw w polsce [in:] przedsiębiorstwa i instytucje w warunkach kryzysu finansowego., zeszyty naukowe nr 593. problemy zarządzania, finansów i marketingu, wyd. nauk. uniwersytetu szczecińskiego, szczecin, 21-32. authorised adviser – as a company of public trust… 91 neration on the value of the obtained capital, as pointed out by the practitioners” (http://grupatrinity.pl/pressroom/publikacje.html). according to the requirements of the over-the-counter exchange, the entities who can become authorised advisers are: “investment companies or other entities which are companies regulated by the trade law, as long as the entity or its legal predecessor have been offering services relating to economic trading on the financial market, including financial advising, legal advising or financial audit for at least 2 years, on the condition that it fulfils the requirements defined in the over-the-counter regulations, if in the assessment of the organiser of the over-the-counter exchange such entity provides a pledge of correct performance of the actions of an authorised adviser” (www.newconnect.pl). the “good practices of authorised advisers in newconnect” have been prepared and entered into force on 1st january 2009 in a form of recommendations. in relation to the authorised advisers a requirement was introduced to include information of applying the good practices in their annual report. it is assumed that this will increase the standards of behaviour among the authorised advisers in newconnect. this way will create adequate conditions supporting this market’s development and assure the security of functioning for the companies that are the issuers on the market. this will also increase the reliability of the published information, which is what the individual investors, who are the main investors in newconnect, pay special attention to. what is also emphasised when evaluating the work of the advisers is, that they are responsible that the issuers, which each of the advisers services, adhere to the information requirements; service the stocks introduced in the otc; carrying out advisory actions. in the year 2013 the period of signing the contracts with the advisers was extended to 3 years, as it was decided that the help to the issuers should be offered for a period longer than one year as it was defined in the previous regulations. companies listed in the nc require help not only with fulfilling their duties, but also because their actions should lead to an increase in their company’s stocks. therefore it is necessary to present their achievements in a reliable manner and also frequently. this causes the advisers to become speakers for their companies. special attention is paid to the quality of offered services and to blameless opinion. however, the assessments tend to differ – in the year 2014 the warsaw stock exchange has excluded out of the list of authorised advisers 4 entities servicing newconnect companies, 13 warning notices admonitions have been issued and one financial penalty was given in the amount of 20,000 pln. bożena kołosowska, grażyna voss92 table 2. list of sanctions issued by the organiser of otc for the authorised advisers in newconnect year total removal from the aa list warning notice financial penalty temporary suspension of the right to act as an authorised adviser. 2009 1 1 2010 1 1 2012 1 1 1 2013 18 4 13 1 s o u r c e :http://www.newconnect.pl/pub/dokumenty_do_pobrania/kary/newconnect_zestawienie_kar_ad_29112013.pdf (accessed: 14.12.2013.). when assessing the data included in table 2 it can be observed, that there has been a significant increase in the number and severity of the sanctions issued against authorised advisers in the last year. there are no more temporary suspensions in rights to act as an adviser, but there are removals from the list and warning notices. the following companies have been removed from the list of authorised advisers in the years 2013–2009 on the grounds of neglecting their activities relating to information documents and introducing stocks of chosen companies: capital city sp. z o.o., ipo s.a., capital kopernik s.a.. the company dom inwestycyjny taurus s.a. has been partially suspended in its actions in 2012 due to the lack of possibilities of further adequate performance of authorised adviser’s duties on the newconnect and catalyst markets, because of the company’s legal and financial situation. the company goadvisers s.a. has been removed from the list of authorised advisers for improper conduct of the authorised adviser’s duties, as the company: kancelaria ruciński i wspólnicy, klaudiusz wolny ekspert has been suspended (http://www.newconnect.pl). although these may seem like individual cases, with companies of public trust this should not happen at all. this undermines the sense of more liberal solutions relating to the otc market applied to small and medium companies which look for comprehensive help from an authorised adviser. the cases of negative effects of disdaining the rules of ethics indicate a need of a broad application of ethical standards in the economic life. there are, however, many causes holding back the process of disseminating the awareness of ethics and its application in practice. such causes can include (karmańska 2005, 139): authorised adviser – as a company of public trust… 93 ■ world-wide moral crisis, ■ people have pushed the ethics to the background of their value system, ■ ethics is becoming an uncomfortable limitation in many areas, ■ creation of standards of actions without adhering to the rules of ethics or with a serious breach of those rules in the name of particular commercial interests. despite many imperfections in the functioning of economic unit it has to be observed, that the auditor’s work results in recommendations which should become guidelines allowing the unit’s functioning to improve. the objective of such recommendations is to neutralise the possibilities of significant risks, to improve the management system, and to assure that the set objectives and tasks will be realised in a defined period of time in a way that is effective and coherent with ethical standards (sołtyk 2013, 276).  conclusions resulting from the research process analyzing the results of published studies on the causes of the collapse of listed companies it should be noted that the elimination of these units can be attributed to actions of certain persons, that stand in contradiction to business ethics. cases of negative effects of disregarding moral norms indicate the need for broad application of ethical standards in business life. among elements of strengthening and utilizing of ethical principles in business there are procedures used in internal audit, which can help reduce irregularities and can be a source for standards based on good business practices and in accordance with ethical standards. internal audit is an independent and objective tool used for evaluation of the unit’s management processes. it aims at bringing added value to the unit and improve its functioning. it also supports the unit in achieving its objectives and improving the efficiency of risk management, control system and management processes. unethical behavior of persons owning or managing business entities cannot be totally eliminated with certanity but, by the existence of authorized advisers, can be significantly reduced. unfortunately, it will also depend on the professional standards of good practices and personal responsibility of the people they employ. bożena kołosowska, grażyna voss94  references banaszczak-soroka u. (2012), rynki finansowe – organizacja, instytucje, uczestnicy, wydawnictwo c.h. beck, warszawa, 86–87. bartoszewicz a. (2011), praktyka funkcjonowania audytu wewnętrznego w polsce, cedewu, warszawa, 14. gabryel t., doradztwo ekonomiczne – dariusz zarzecki, http://grupatrinity.pl/pressroom/publikacje.html (accessed: 18.06.2013). gerakos j., lang m., maffett m. (2011), listing choices and self-regulation: the experience of the aim, the university of chicago booth scholl of business, working paper no. 11–04, chicago, http://ssrn.com/abstract=1739137 (accessed: 14.03.2012). http://dx.doi.org/10.2139/ssrn.1739137. jajuga k. (2006), rynek wtórny papierów wartościowych, knf, warszawa, 6. karmańska a. (2005). etyka w dydaktyce rachunkowości. zeszyty teoretyczne rachunkowości, 26 (82). kizukiewicz t. (2013), audyt wewnętrzny w strukturze kontroli zewnętrznej, difin, warszawa, 16. kołosowska b. (2013), finansowanie sektora małych i średnich przedsiębiorstw poprzez rynek kapitałowy w polsce, cedewu, warszawa, 123. kołosowska b., bartoszewicz a. (2014), art. 272–296 dział vi. audyt wewnętrzny oraz koordynacja audytu wewnętrznego w jednostkach sektora finansów publicznych, [in:] ustawa o finansach publicznych, p. smoleń (red.), ch beck, warszawa. kosiński k. (2013). odnowa newconnect od 1 czerwca. ebiuletyn newconnect, nr 9. kudła j. (2011), instrumenty finansowe i ich zastosowanie, wydawnictwo key text, warszawa, 19. meigs w. b. (1960). professional examinations: examination in auditing. accounting review, nr 2 (35), 377. moeller r. (2011), nowoczesny audyt wewnętrzny, oficyna wolters kluwer business, warszawa, 25. sawicki k. (2013), problem etycznego postępowania w zakresie kontroli zarządczej, [in: ] kontrola zarządcza oraz audyt wewnętrzny w teorii i praktyce, k. winiarska (ed.), wydawnictwo uniwersytetu szczecińskiego, szczecin, 239. sołtyk p. (2013), kontrola zarządcza i audyt w jednostkach samorządowych, c.h. beck, warszawa, 276. ustawa z dnia 27 sierpnia 2009 r. o finansach publicznych, dz. u. z 2009 r. nr 157, poz. 1240 i 1241, z późn. zm. winiarska k. (2005), teoretyczne i praktyczne aspekty audytu wewnętrznego, difin, warszawa, 33. winiarska k. (2013), kontrola zarządcza oraz audyt wewnętrzny w teorii i praktyce, uniwersytet szczeciński, szczecin, 17. www.ipo.pl/new_connect/artykuly/rola_odpowiedzialnosci_i_etyki_zawodowej_w_pra cy_autoryzowanego_doradcy_cz._1_592552.html (accessed: 20.01.2014). authorised adviser – as a company of public trust… 95 www.newconnect.pl/index.php?page=jak_zostac_autoryzowanym_doradca (accessed: 14.12.2013). www.newconnect.pl/pub/dokumenty_do_pobrania/gpw_przewodnik_nc.pdf (accessed: 20.12.2013). www.sec.gov (accessed: 10.01.2014). załącznik nr 5 do regulaminu alternatywnego systemu obrotu (według stanu prawnego na dzień 1czerwca 2013 r.) autoryzowany doradca w alternatywnym systemie obrotu, http://www.newconnect.pl/pub/regulacje_prawne/regulamin_aso_ utp_zal_3.pdf (accessed: 12.06.2013). date of submission: july 7, 2019; date of acceptance: august 8, 2019. * contact information: tekitade.tt@gmail.com, department of economics, jimma university, ethiopia, phone: +251983204432; orcid id: https://orcid.org/0000-00016029-9022. ** contact information: tesamelua@gmail.com, department of economics, jimma university, ethiopia, phone: +251910209644; orcid id: https://orcid.org/0000-00023686-974x. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 2 tadesse, t., & melaku, t. (2019). analysis of the relative impact of monetary and fiscal policies on economic growth in ethiopia, using ardl approach to co-integration: which policy is more potent? copernican journal of finance & accounting, 8(2), 87–115. http://dx.doi.org/10.12775/ cjfa.2019.010 tekilu tadesse* jimma university tesfaye melaku** jimma university analysis of the relative impact of monetary and fiscal policies on economic growth in ethiopia, using ardl approach to co-integration: which policy is more potent? keywords: monetary policy, fiscal policy, ardl, economic growth, ethiopia. j e l classification: eo1, e52, e62. abstract: empirical investigation on the comparative potency of monetary and fiscal policies is still dubious among two major schools of thought in economics so called classical and keynesian. hence, this paper investigates the relative effectiveness of monetary and fiscal policies in affecting economic growth by employing auto-regressive distributive lag model (ardl) for the time spanning from 1975 to 2017. the proxies used in this study for monetary and fiscal policy were broad money supply (m2) and governtekilu tadesse, tesfaye melaku88 ment consumption expenditure respectively while real gdp at constant prices in 2010 is used as proxy for economic growth in ethiopia. anderson and jordan (1968) “st. louis equation’’ has been used to estimate the comparative potency of monetary and fiscal policies. the empirical results indicate that both the monetary and fiscal policies have equal statistically significant and positive impact on economic growth in ethiopia with different significance level and magnitude. besides of equal effectiveness, the elasticity of real output with respect to fiscal policy variable is greater than the elasticity with respect to money supply which show fiscal policy is more effective than monetary policy in inf luencing real gdp in the long-run. however, in the short run, the fiscal policy is effective while that of the monetary policy proxy by money supply is ineffective in affecting output growth in ethiopia. therefore, to have continuous and sustainable economic growth, the coordination of monetary and fiscal policies are vital and the lack of this coordination leads to a sharp downturn of overall economic performance, even can hurt the economy.  introduction background of the study unquestionably, macroeconomic policies act a vital part in promoting and achieving maintainable and adequate economic environment which creates it conceivable for an economy to achieve a more rapidly, steady and persistent growth without aggravating inf lation. this essential role is undertaken by the two leading tools of macroeconomic policy so called monetary and fiscal policies in an economy. responding to the economic f luctuation is regarded as the main aim of using monetary and fiscal policy tools by policymaker. even though well-known formulation of monetary policy is towards controlling inf lation and fiscal policy designed to the issue of public finance, both policies can be employed to respond to economic activity (şen & kaya, 2015). however, the relative effectiveness of both monetary and fiscal policies has been left to argument between two schools of thought namely the keynesians and monetarists since 1960s. in this point of view, there is still on-going debate and argument among different scholars from both theoretical and empirical perspectives. according to keynesians argument, conducting fiscal policy as compared to monetary policy is strong and more effective in boosting economic activity through increasing aggregate demand, whereas the monetarists in contrast claiming that monetary policy is more powerful effect on macroeconomic variables. according to monetarists, monetary urge is the most imperative factor contributing for f luctuation in output, employment and prices. as analysis of the relative impact of monetary… 89 argued by milton friedman (1974) money stock is all that matters for variation in nominal income and for the short run deviations in real income as an overstatement and forwarded that pure fiscal policies namely increasing government expenditure or reduction in tax cannot effect real output. their justifiable empirical and theoretical based disagreement between two main extreme schools of thought has never come up with clear-cut conclusion and has been continued unending investigation among academic, economists and policymakers. the early seminal paper by andersen and jordon (1968) developed empirical policies debate on issue that which police is more powerful and effective in effecting output growth. in throughout literature review, still there is no credible evidence-based empiric has been found in relation to the relative effectiveness of monetary and fiscal policies on economic activity (özer & karagöl, 2018). moreover, more recent global recession occurrence since 2008 financial crisis have acknowledged a renewed debate about the relative effectiveness of monetary and fiscal policies on economic activity though there had been widely believed statement among different scholars that implementing fiscal policy is more complex process and controversy than applying monetary policy instrument which is easily managed and controlled by certain authorized body in behalf of government (sen & kaya, 2015). in contrast to aforementioned argument, as is mentioned by (guerguil, mandon & tapsoba, 2017) and (özer & karagöl, 2018), due to large and prolonged growth and employment costs of the crisis, monetary policy has limited effect when interest rates are wedged at the zero lower-bound, and the essential of increased public expenditure to tackle a “secular stagnation” in this economic phenomena, there is a tendency of agreement among economists and policy makers for the powerfulness of fiscal policy as a countercyclical macroeconomic policy tool. the aim of this paper is to examine the relative effectiveness of monetary and fiscal policies on output growth in ethiopia over the period of 1980 and 2016/17 by using ardl bounds test approach to co-integration “via the st. louis approach”. to the best of our knowledge, this study the first attempted to provide empirical evidence on comparative efficiency of monetary and fiscal policies on output growth in case of ethiopia which is long-lasting debate among academics and policy makers. moreover, the data used in this research are more updated and cover wider span of time providing more degrees of freedom and power that enables to obtain more efficient parameter estimates from model. tekilu tadesse, tesfaye melaku90 the research methodology and the course of the research process the article presents the following research problems: ■ does the monetary policy is relatively more effective than fiscal policy in changing real output of ethiopia? ■ is there exists a strong relation between fiscal and monetary policy variables and economic growth in ethiopia? ■ how can macroeconomic stability be achieved in ethiopia? the general objective of this study is to examine the relative effectiveness of monetary and fiscal policies in affecting economic growth in ethiopia using annual data from 1980 to 2017. specific objective: ■ to examine the short-run and long-run impact of monetary and fiscal policies on economic growth in ethiopia; ■ to investigate the relative effectiveness of monetary over fiscal policy on economic growth of the country. this study explores examine the relative effect of monetary and fiscal policies in affecting economic growth in ethiopia. to achieve this objective, time series data ranging from 1981/82 to 2016/17 are chosen. the whole period is chosen due to the availability of published data for all the variables involved in the model and to avoid using multiple data sources for the same variable. we believe that study is important because it attempts to fill the gap in the literature in which study can be taken as reference for those who will undertake a study on the area of relative effect of monetary and fiscal policies on economic growth. moreover, the result of this study is expected to provide relevant information for policy makers in formulation of macroeconomic policies issue and their intervention to achieve macroeconomic objectives for instance economic growth. monetary and fiscal policies in ethiopia the ultimate macroeconomic policy goal of any country in general is to have sustainable economic growth and development. policy measures are geared at achieving moderate inf lation rate, keeping unemployment rate low, balancing foreign trade, stabilizing exchange and interest rates, etc and in general attaining stable and well-functioning macro-economic environment. in this analysis of the relative impact of monetary… 91 process, monetary policy plays a central role. for instance, during economic recession where output falls with a fall in aggregate demand, monetary policy aims at increasing demand and hence production as well as employment will follow the same pattern of demand. in contrast, at the time of economic boom where demand exceeds production and treat to create inf lation, the monetary policy instruments are utilized that could offset the condition and achieve price stability by counter cyclical action upon money supply (johnston & sundararajan, 1999). monetary policy is commonly understood as, “the deliberate application of monetary variables by the government (central banks in most cases) to inf luence the general economic environment” (ayubu, 2013) whereas fiscal policy is one of major macroeconomic policies in which a government uses its spending and taxation powers to monitor and inf luence a nation’s economy. despite the difference in the way they are applied, monetary policies and fiscal are mainly targeted to reduce unemployment, enhance price and exchange rate stability, and attain maximum output. currently, the national bank of ethiopia (nbe) is the banker of the government responsible to set and regulate the overall monetary policy actions on behalf of the government (minyahil, wndaferahu & yilkal, 2016). ethiopian economy had passed through different regimes and, hence economic policies had formulated differently. as a result, national economic policies were set in line with the respective regime’s political ideology as policies are directed with the intention of achieving a wide range of macroeconomic objectives. according to alemayehu (2001), under the regime of command economy in ethiopia, the financial sector was governed by the then socialistic ideology; and as a result, interest rates were set at levels to discourage private ownership in the sector in particular and the economy in general. so as to control money supply, limited credits were channeled only at the will of the central government to the selected target sectors. as result, the lowest growth of real gdp was experienced along with the severe drought the country encountered during this regime. the derg regime is to blame, however, as its any macroeconomic policies couldn’t ensure creditable rate of growth even during periods of conducive environment and failed to transform the structure of the economy with formulative policies. this was basically emanated from different factors including improper monetary policy, fiscal prof ligacy, inadequate financial regulation, and exchange rate policies under command economy. unfortunately, whatever the underlying causes have been in this period, the economy’s volatekilu tadesse, tesfaye melaku92 tile structure has been a major obstacle and problem for sustainable economic growth in ethiopia. after the fall of derg regime 1991, new government adopted free market approach following structural adjustment program directed by world bank to developing countries in which ethiopia is one, monetary policy instruments were shifted to the market mechanism from direct government control. as result, economic reforms geared towards a free-market system and regional economic integration. government monopoly on key production and financial sectors has been eased by allowing private-sector operators and a semi-market-determined exchange rate system was adopted rehabilitate the structure of economy. even though not significant until 2000s, the shift of policy to one encouraging the participation of the private sector could have also partly helped the economy to revive in which financial regulation reform system particularly private participation on financial sector contributed a lot. from 2003 onwards, ethiopia came across with remarkable change in overall economic activities due to government attention towards the investment in infrastructure more than any other time (regime) ever in the history of the country. indeed, the leader has guaranteed that his government is determined to set ethiopia off serving the poster child of poverty. the substantial government expenditure on infrastructure could have been possibly crowding in private investment. however, following commodity price surges in 2007–2008 one of critical problem that ethiopia encountered was rising inf lation and falling international reserves. for instance, overall consumer price inf lation peaked at 64 percent in 2008 and international reserves fell to 1 month of imports at endoctober 2008. in response to this shock, central government in coordination with national bank of ethiopia adopted a policy package that include substantial fiscal and monetary adjustments, notably the elimination of fuel subsidies, as well as measures to protect vulnerable groups was front line measurement. government expenditure financing policy was well managed to support the monetary policy measures taken at the time. this contributed to lowering the inf lation, in addition to administrative measures taken to arrest the inf lationary situation. government has curtailed the domestic financing to the possible minimum, continued its effort in allocating more resources to productive (capital) expenditure, purchase and distribute imported basic food items (wheat, edible oil and sugar) at low prices to poor urban households from the budgetary sources. such measures brought positive results and inf lation has been stabilized and remained in a single digit in subsequent years (mofec, 2018). analysis of the relative impact of monetary… 93 moreover, fiscal policy continued to focus on increasing tax revenue by strengthening tax administration and enforcement, while covering a greater proportion of government expenditures from domestic resources. these government expenditures have largely been geared towards enhancing capital expenditure and pro-poor social spending programs and promoting safety nets. thus, domestic revenue recorded a 5.1 percent annual growth while general government expenditure showed a 7.6 percent increment resulting in a budget deficit equivalent to 3 percent of gdp, higher than 2.8 percent of gdp target set in the gtp ii plan (nbe, 2018). over all, the robust and sustained economic growth recorded over the last 15 years has led to improvements in income inequality and poverty reduction. accordingly, per capita income has continuously increased and reached usd 883 in 2017/18. poverty has declined to 22 percent from 38.7 percent in 2004/05. investment to gdp ratio has increased to 34.1 percent while that of domestic savings rose to 22.4 percent. despite the recent uptick, inf lation has been kept within single digit level in 2017/18 largely aided by tight monetary and prudent fiscal policy stance. yet, the annual average headline inf lation rose to 13.1 percent in 2017/18 from 7.2 percent a year earlier due to the rise in both food and non-food inf lation. similarly, annual headline inf lation went up to 14.7 percent from 8.8 percent owing to 6.7 percentage point and 4.9 percentage point increase in food inf lation and non-food inf lation respectively (ibid). emperical literature review in this section we focus on the empirical studies because recent literature comprises a lot of studies which have outlined the effects of monetary and fiscal policies on output growth and its investigation has been ongoing as well. particularly, in last two or three decades, a plenty of studies analyzing the relative effect of fiscal policy and monetary policy on real macroeconomic variables has widely increased throughout the world. this may be contributed towards increasing position of fiscal policy in fighting economic problem and stagnation which were manifested in a number of both developed and developing countries. as pointed out in (özer & karagöl, 2018), the relationship between fiscal and monetary policies and growth has conducted a lot of number of empirical investigation come up with mixed conclusion across different cross sectional, time series and panel data, such as, ols, panel data models, var model, vec tekilu tadesse, tesfaye melaku94 model and ardl model. the majority of the finding confirmed that fiscal and monetary policies are certainly affect growth. in the studies, the outcome the variation of outcome largely accounted by the estimation techniques employed and/or the types of variable used in model. study conducted by andersen and jordan (1968) takes different measures of monetary and fiscal policy measures effectiveness in the united states using quarterly data, and implied that monetary policy proxied by money supply has greater, faster and more predictable impact on economic performance than fiscal policy instruments proxied by government expenditure. they concluded that forwarded that to stabilize the economy it is better to use monetary policy. early study by owoye and olugbenga (1994) analyzed the comparative effect of monetary and fiscal policies on output growth in sample of ten african countries namely burundi, ethiopia, ghana, kenya, morocco, nigeria, sierra leone, south africa, tanzania and zambia−by using a trivariate vector autoregressive (var) model over the year from 1960 to 1990. they found that effect of monetary policy stronger than fiscal variables in 5 of 10 countries whereas fiscal policy is more significant than monetary policy for the rest five countries. regarding to their finding, the argument was that it is not allowed to provide conclusion of a particular macroeconomic policy stimulate economic growth. another later cross-country study by petrevski, bogoev and tevdovski (2015) investigated the relative importance of monetary and fiscal policies in increasing output in three south eastern europe economies: bulgaria, croatia, and macedonia by using the recursive vars to the quarterly data for 1999– 2011, their result confirmed that positive fiscal shocks encourage higher output growth in the all countries, inferred to the expansionary effects of fiscal consolidation. moreover, more recent period different study conducted in different countries study; one confirms fiscal policy tool others support monetary policy, for instance, study by jawaid, arif and naeemullah (2010) analyzed the relative outcome of the two powerful macroeconomic policy instrument on economic performance in pakistan during the period 1981-2009 come up with the existence a positive relationship between both policies and growth in long-run. conversely, their finding revealed that monetary policy is more potent effect than fiscal policy in accelerating growth. an additional topical country-specific study by havi and enu (2014) analyzed the relative importance of monetary and fiscal policy on growth in ghana by using estimation of ols techniques for the period1980-2012. their study analysis of the relative impact of monetary… 95 showed that although the effect of monetary policy is more powerful, both policies positively affect growth in the case of ghana. similar result was obtained by şen and kaya (2015) who confirmed that both monetary and fiscal policies are positive and significant effects on output performance in turkey. however, regarding to relative effectiveness, they found that the monetary policies has larger outcome in stimulating economic growth than monetary policies. based on the finding they suggested that both policies significantly affect growth in which they should be implemented mutually in an efficient way to accelerate growth. in more recently, bokreta and benanaya (2016) investigated the relative effectiveness of monetary and fiscal policy in case of algeria employing co-integration and vector error correction model, and found that there is strong positive statistically significant impact of government expenditures on output growth, whereas the effect of taxes is found to be negative sign in long run, inferring that fiscal policy has strong effect than monetary policy in promoting economic growth in algeria. the same conclusion has drawn by okorie, sylvester and simon-peter, (2017) used the auto regressive distributed lag (ardl) model to determine the relative importance of monetary and fiscal policies in nigeria using a quarterly time-series from 1981-2012. they confirmed that those both monetary and fiscal policies have significant positive impact national income. however, comparatively, this monetary policy outcome is stronger than income faster than fiscal policy in promoting economic growth in short run but, in the long-run fiscal policy dominates its effect that is total impact of fiscal policy is greater than that of monetary policy and concluded that they supports the use of both policies to achieve macroeconomic objectives primarily economic performance depends on the objective the authorities want to achieve. similarly, the study conducted by özer and karagöl (2018) who analyzed the relative growth effectiveness of fiscal and monetary policies in turkey over the period 1998 and 2016 by using the techniques of ardl bounds testing, structural granger causality tests and their result indicates that monetary policy variable is creating only short-run effects on growth; but, does not cause any granger causality on it, that is fiscal policy variable has a long-run significant effect and causing to growth. as result they concluded that the fiscal policy seems to be more effective than monetary policy during examination period, implying the rethinking the implementation of both policies to achieve past economic growth. tekilu tadesse, tesfaye melaku96 overall, in reviewing the related literature we can conclude that although there are the enormous studies examining the relative effectiveness of monetary and fiscal policies, the empirical findings of these studies are highly mixed. in other words, the empirical studies reveal inconclusive results with regard to the relative effectiveness of two potent macroeconomic policy tools. for instance, in some countries monetary policy is dominant to fiscal policy or vice versa, while in others the results is inconclusive. these results do not allow us to make a generalization with regard to the relative effectiveness of monetary and fiscal policies. the contradictory empirical results which emerged from the studies above may be attributed to a number of factors, depending on country-specific elements such as institutional, developmental, political and so on as well as methodological approaches, variables chosen, treatment, etc. (sen & kaya, 2015). data and model specification 1. data type and source regarding data type, the study used secondary time series data for about 35 years obtained from internal and external sources. the selection of this sample size is made based on the availability of data for each of the variable included in the model for the entire time horizon while its sufficiency is taken into consideration as well. the major sources of data for the problem under investigation were ministry of finance and economic cooperation (mofec), publications of national bank of ethiopia (nbe), central statistics authority (csa) of ethiopia, ministry of education and ethiopian revenue and customs authority (erca). in addition to these domestic sources, some variables for which there are no sufficient data from the domestic sources, are collected from external sources, especially from imf and wb databases. 2. data and methodology to analyze the relative effectiveness of monetary and fiscal policies on economic growth, we employed the equation proposed by andersen and jordan (1968) which is so called st. louis equation. the justification behind the use of this equation is that st. louis has received much consideration from the policy analysis of the relative impact of monetary… 97 maker’s researchers and academicians regardless of its drawback in relation to methodology and variables. its mathematical expression can be represented as: availability of data for each of the variable included in the model for the entire time horizon while its sufficiency is taken into consideration as well. the major sources of data for the problem under investigation were ministry of finance and economic cooperation (mofec), publications of national bank of ethiopia (nbe), central statistics authority (csa) of ethiopia, ministry of education and ethiopian revenue and customs authority (erca). in addition to these domestic sources, some variables for which there are no sufficient data from the domestic sources, are collected from external sources, especially from imf and wb databases. 2. model specification to analyze the relative effectiveness of monetary and fiscal policies on economic growth, we employed the equation proposed by andersen and jordan (1968) which is so called st. louis equation. the justification behind the use of this equation is that st. louis has received much consideration from the policy maker’s researchers and academicians regardless of its drawback in relation to methodology and variables. its mathematical expression can be represented as: � � �� � � �� (1) where: y stand for the economic growth measures for well being of society; f represents fiscal policy variables; m monetary policy variables, and w represents other control variables influencing economic performance. the from above equation, the explanatory variables used in the model comprises of government total final consumption as % of gdp proxy for fiscal policy, broad money supply as% of gdp proxy for monetary policy and other control variables are real interest rate, cpi inflation, nominal exchange rate and trade openness to address the problem of omitted variable biasedness from “st. louis equation” where as economic growth measured by real gdp. the equation could be rewritten in form of log-linear form to be employed in this study here as follows: ������ � �� � ������ � ������ � ������� � ������� � ������� � ������ � �� (2) where rgdp = real gross domestic product used to measure economic performance m2 = broad money supply as % of gdp (proxy for monetary policy) (1) where: y stand for the economic growth measures for well being of society; f represents fiscal policy variables; m monetary policy variables, and w represents other control variables inf luencing economic performance. the from above equation, the explanatory variables used in the model comprises of government total final consumption as % of gdp proxy for fiscal policy, broad money supply as % of gdp proxy for monetary policy and other control variables are real interest rate, cpi inf lation, nominal exchange rate and trade openness to address the problem of omitted variable biasedness from “st. louis equation” where as economic growth measured by real gdp. the equation could be rewritten in form of log-linear form to be employed in this study here as follows: availability of data for each of the variable included in the model for the entire time horizon while its sufficiency is taken into consideration as well. the major sources of data for the problem under investigation were ministry of finance and economic cooperation (mofec), publications of national bank of ethiopia (nbe), central statistics authority (csa) of ethiopia, ministry of education and ethiopian revenue and customs authority (erca). in addition to these domestic sources, some variables for which there are no sufficient data from the domestic sources, are collected from external sources, especially from imf and wb databases. 2. model specification to analyze the relative effectiveness of monetary and fiscal policies on economic growth, we employed the equation proposed by andersen and jordan (1968) which is so called st. louis equation. the justification behind the use of this equation is that st. louis has received much consideration from the policy maker’s researchers and academicians regardless of its drawback in relation to methodology and variables. its mathematical expression can be represented as: � � �� � � �� (1) where: y stand for the economic growth measures for well being of society; f represents fiscal policy variables; m monetary policy variables, and w represents other control variables influencing economic performance. the from above equation, the explanatory variables used in the model comprises of government total final consumption as % of gdp proxy for fiscal policy, broad money supply as% of gdp proxy for monetary policy and other control variables are real interest rate, cpi inflation, nominal exchange rate and trade openness to address the problem of omitted variable biasedness from “st. louis equation” where as economic growth measured by real gdp. the equation could be rewritten in form of log-linear form to be employed in this study here as follows: ������ � �� � ������ � ������ � ������� � ������� � ������� � ������ � �� (2) where rgdp = real gross domestic product used to measure economic performance m2 = broad money supply as % of gdp (proxy for monetary policy) availability of data for each of the variable included in the model for the entire time horizon while its sufficiency is taken into consideration as well. the major sources of data for the problem under investigation were ministry of finance and economic cooperation (mofec), publications of national bank of ethiopia (nbe), central statistics authority (csa) of ethiopia, ministry of education and ethiopian revenue and customs authority (erca). in addition to these domestic sources, some variables for which there are no sufficient data from the domestic sources, are collected from external sources, especially from imf and wb databases. 2. model specification to analyze the relative effectiveness of monetary and fiscal policies on economic growth, we employed the equation proposed by andersen and jordan (1968) which is so called st. louis equation. the justification behind the use of this equation is that st. louis has received much consideration from the policy maker’s researchers and academicians regardless of its drawback in relation to methodology and variables. its mathematical expression can be represented as: � � �� � � �� (1) where: y stand for the economic growth measures for well being of society; f represents fiscal policy variables; m monetary policy variables, and w represents other control variables influencing economic performance. the from above equation, the explanatory variables used in the model comprises of government total final consumption as % of gdp proxy for fiscal policy, broad money supply as% of gdp proxy for monetary policy and other control variables are real interest rate, cpi inflation, nominal exchange rate and trade openness to address the problem of omitted variable biasedness from “st. louis equation” where as economic growth measured by real gdp. the equation could be rewritten in form of log-linear form to be employed in this study here as follows: ������ � �� � ������ � ������ � ������� � ������� � ������� � ������ � �� (2) where rgdp = real gross domestic product used to measure economic performance m2 = broad money supply as % of gdp (proxy for monetary policy) (2) where: rgdp = real gross domestic product used to measure economic performance m2 = broad money supply as % of gdp (proxy for monetary policy) ge = government final consumption as % of gdp (proxy for fiscal policy) inr = real interest rate cpi = consumer price index used to measure inf lation ner = real effective exchange rate to = trade openness (export plus import as % of gdp) measures liberalization of trade. tekilu tadesse, tesfaye melaku98 3. estimation procedures 3.1. unit root test the necessary condition to be addressed for testing unit root test is to check whether the variables enter in the regression are not order two (i.e. i(2)) which is a precondition in employing ardl model. therefore, running any sort of regression analysis is impossible without testing for time series variables. so, the first step in this study is testing unit root before running regression analysis. the testing procedure for the adf unit root test is specified as follows: ge = government final consumption as % of gdp (proxy for fiscal policy) inr = real interest rate cpi = consumer price index used to measure inflation ner = real effective exchange rate to = trade openness (export plus import as % of gdp) measures liberalization of trade 3. estimation procedures 3.1. unit root test the necessary condition to be addressed for testing unit root test is to check whether the variables enter in the regression are not order two (i.e. i(2)) which is a precondition in employing ardl model. therefore, running any sort of regression analysis is impossible without testing for time series variables. so, the first step in this study is testing unit root before running regression analysis. the testing procedure for the adf unit root test is specified as follows: �� � � � �� � ����� � ������� � ��� � �� (3) where is �� a time series variables which are mentioned above in this model at time t, t is a time trend variable; δ denotes the first difference operator; is the error term; � is the optimal lag length of each variable chosen such that first-differenced terms make �� a white noise. thus, the adf test the null hypothesis of no unit root (stationary) which is expressed as follows ��� � � �� ��� � � � (4) regarding decision of unit root test, if the t value or t-statistic is more negative than the critical values, the null hypothesis (i.e. h0) is rejected and the conclusion is that the series is stationary. conversely, if the t-statistic is less negative than the critical values, the null hypothesis is accepted and the conclusion is that the series is non-stationary. failure to reject the null hypothesis of unit root test leads to take the test on the difference of the time series to come up out with stationary variable for analysis. 3.2. autoregressive distributed lag (ardl) bounds testing approach (3) where xt is a time series variables which are mentioned above in this model at time t, t is a time trend variable; δ denotes the first difference operator; ρ is the error term; is the optimal lag length of each variable chosen such that first-differenced terms make εt a white noise. thus, the adf test the null hypothesis of no unit root (stationary) which is expressed as follows: ge = government final consumption as % of gdp (proxy for fiscal policy) inr = real interest rate cpi = consumer price index used to measure inflation ner = real effective exchange rate to = trade openness (export plus import as % of gdp) measures liberalization of trade 3. estimation procedures 3.1. unit root test the necessary condition to be addressed for testing unit root test is to check whether the variables enter in the regression are not order two (i.e. i(2)) which is a precondition in employing ardl model. therefore, running any sort of regression analysis is impossible without testing for time series variables. so, the first step in this study is testing unit root before running regression analysis. the testing procedure for the adf unit root test is specified as follows: �� � � � �� � ����� � ������� � ��� � �� (3) where is �� a time series variables which are mentioned above in this model at time t, t is a time trend variable; δ denotes the first difference operator; is the error term; � is the optimal lag length of each variable chosen such that first-differenced terms make �� a white noise. thus, the adf test the null hypothesis of no unit root (stationary) which is expressed as follows ��� � � �� ��� � � � (4) regarding decision of unit root test, if the t value or t-statistic is more negative than the critical values, the null hypothesis (i.e. h0) is rejected and the conclusion is that the series is stationary. conversely, if the t-statistic is less negative than the critical values, the null hypothesis is accepted and the conclusion is that the series is non-stationary. failure to reject the null hypothesis of unit root test leads to take the test on the difference of the time series to come up out with stationary variable for analysis. 3.2. autoregressive distributed lag (ardl) bounds testing approach (4) regarding decision of unit root test, if the t value or t-statistic is more negative than the critical values, the null hypothesis (i.e. h0) is rejected and the conclusion is that the series is stationary. conversely, if the t-statistic is less negative than the critical values, the null hypothesis is accepted and the conclusion is that the series is non-stationary. failure to reject the null hypothesis of unit root test leads to take the test on the difference of the time series to come up out with stationary variable for analysis. 3.2. autoregressive distributed lag (ardl) bounds testing approach to determine the existence of long-run equilibrium relationships between variables, which is co-integration, we use the autoregressive distributed lag analysis of the relative impact of monetary… 99 (ardl) bounds testing approach developed by pesaran and shin (1998) and later expanded by pesaran, shin and smith (2001). one of the most important advantages of the ardl method is that the variables used in the analysis can have mix of different degrees of integration; that is, they can be a mix of i (0) or i (1). also, with the help of using this approach, one is allowed to estimate short-run, long-run effects simultaneously by forming an error correction model (ecm) derived from the ardl model without loss of long-term information. moreover, it provides efficient and unbiased estimator in small sample size and it has an opportunities to determine different lag length with their respective variables. so, an unrestricted error correction representation of the ardl framework of equation (2) can be written as: to determine the existence of long-run equilibrium relationships between variables, which is co-integration, we use the autoregressive distributed lag (ardl) bounds testing approach developed by pesaran and shin (1998) and later expanded by pesaran, shin and smith (2001). one of the most important advantages of the ardl method is that the variables used in the analysis can have mix of different degrees of integration; that is, they can be a mix of i (0) or i (1). also, with the help of using this approach, one is allowed to estimate short-run, long-run effects simultaneously by forming an error correction model (ecm) derived from the ardl model without loss of long-term information. moreover, it provides efficient and unbiased estimator in small sample size and it has an opportunities to determine different lag length with their respective variables. so, an unrestricted error correction representation of the ardl framework of equation (2) can be written as: �������� = �� � ����������� � ��������� � ��������� � ���������� � �������� � ���������� � ��������� � ������������� � ��� � ����������� � ��� � � ���������� � ��� � ������������� � ��� � � ����������� � ��� � � ����������� � ��� � ����������� � ��� � �� so as to test for presence of a long-run relationship among the variables of interest, meaning to test the co-integration existence, between economic performance and all explanatory variables, first estimation equation (2) by ordinary least squares (ols) was estimated and then undertake an f-test for overall significance of the coefficients of the lagged levels of the variable. thus, to test the null hypothesis of no cointegration relationship among the variables from equation (2) defined as: �� = �� = �� = �� = �� = �� = �� = �� = �� = 0 against the alternative hypothesis of the existence of co integrating relationship between the variables. �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ 0 so as to test for presence of a long-run relationship among the variables of interest, meaning to test the co-integration existence, between economic performance and all explanatory variables, first estimation equation (2) by ordinary least squares (ols) was estimated and then undertake an f-test for overall significance of the coefficients of the lagged levels of the variable. thus, to test the null hypothesis of no cointegration relationship among the variables from equation (2) defined as: to determine the existence of long-run equilibrium relationships between variables, which is co-integration, we use the autoregressive distributed lag (ardl) bounds testing approach developed by pesaran and shin (1998) and later expanded by pesaran, shin and smith (2001). one of the most important advantages of the ardl method is that the variables used in the analysis can have mix of different degrees of integration; that is, they can be a mix of i (0) or i (1). also, with the help of using this approach, one is allowed to estimate short-run, long-run effects simultaneously by forming an error correction model (ecm) derived from the ardl model without loss of long-term information. moreover, it provides efficient and unbiased estimator in small sample size and it has an opportunities to determine different lag length with their respective variables. so, an unrestricted error correction representation of the ardl framework of equation (2) can be written as: �������� = �� � ����������� � ��������� � ��������� � ���������� � �������� � ���������� � ��������� � ������������� � ��� � ����������� � ��� � � ���������� � ��� � ������������� � ��� � � ����������� � ��� � � ����������� � ��� � ����������� � ��� � �� so as to test for presence of a long-run relationship among the variables of interest, meaning to test the co-integration existence, between economic performance and all explanatory variables, first estimation equation (2) by ordinary least squares (ols) was estimated and then undertake an f-test for overall significance of the coefficients of the lagged levels of the variable. thus, to test the null hypothesis of no cointegration relationship among the variables from equation (2) defined as: �� = �� = �� = �� = �� = �� = �� = �� = �� = 0 against the alternative hypothesis of the existence of co integrating relationship between the variables. �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ 0 against the alternative hypothesis of the existence of co integrating relationship between the variables. to determine the existence of long-run equilibrium relationships between variables, which is co-integration, we use the autoregressive distributed lag (ardl) bounds testing approach developed by pesaran and shin (1998) and later expanded by pesaran, shin and smith (2001). one of the most important advantages of the ardl method is that the variables used in the analysis can have mix of different degrees of integration; that is, they can be a mix of i (0) or i (1). also, with the help of using this approach, one is allowed to estimate short-run, long-run effects simultaneously by forming an error correction model (ecm) derived from the ardl model without loss of long-term information. moreover, it provides efficient and unbiased estimator in small sample size and it has an opportunities to determine different lag length with their respective variables. so, an unrestricted error correction representation of the ardl framework of equation (2) can be written as: �������� = �� � ����������� � ��������� � ��������� � ���������� � �������� � ���������� � ��������� � ������������� � ��� � ����������� � ��� � � ���������� � ��� � ������������� � ��� � � ����������� � ��� � � ����������� � ��� � ����������� � ��� � �� so as to test for presence of a long-run relationship among the variables of interest, meaning to test the co-integration existence, between economic performance and all explanatory variables, first estimation equation (2) by ordinary least squares (ols) was estimated and then undertake an f-test for overall significance of the coefficients of the lagged levels of the variable. thus, to test the null hypothesis of no cointegration relationship among the variables from equation (2) defined as: �� = �� = �� = �� = �� = �� = �� = �� = �� = 0 against the alternative hypothesis of the existence of co integrating relationship between the variables. �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ �� ≠ 0 (5) tekilu tadesse, tesfaye melaku100 to determine the result of the test, the wald-test (f-statistic) was employed. as mentioned detail in özer and karagöl (2018), the asymptotic distribution of the f-test is non-standard under the null hypothesis of no co-integration among the variables, and rely on either variables incorporated in the ardl model are i(0) or i(1), the number of explanatory variables, whether the ardl model contains an intercept and/or a trend; and the sample size. pesaran and shin (1998) and pesaran, shin and smith (2001). (2001) have come up with two critical values. the lower critical bound assumes all the variables are i (0), and the upper bound assumes that all the variables are i (1). when the computed value of f- statistic is greater than the upper bound critical value, we reject the h0 and accept alternative hypothesis of co-integration. in this case, our conclusion will be the existence of co-integration of variables. if the sample value f-statistic is less than the lower bound critical value, we refuse to reject the h0 and conclude that there is no co-integration among the variables. finally, if the sample f-statistics value resulted between the lower and upper critical values, the outcome will be indecisive, and in this case one can test the statistical significance of speed of adjustment coefficient. significant speed of adjustment coefficient in dictates the existence of co-integration among the variables. ardl approach was employed to estimate the shortand long-run dynamic relationships. therefore, equation (2) can be rewritten as the error correction version of ardl model as follow: to determine the result of the test, the wald-test (f-statistic) was employed. as mentioned detail in özer and karagöl (2018), the asymptotic distribution of the f-test is non-standard under the null hypothesis of no co-integration among the variables, and rely on either variables incorporated in the ardl model are i(0) or i(1), the number of explanatory variables, whether the ardl model contains an intercept and/or a trend; and the sample size. pesaran and shin (1998) and pesaran, shin and smith (2001). (2001) have come up with two critical values. the lower critical bound assumes all the variables are i (0), and the upper bound assumes that all the variables are i (1). when the computed value of f-statistic is greater than the upper bound critical value, we reject the h0 and accept alternative hypothesis of co-integration. in this case, our conclusion will be the existence of co-integration of variables. if the sample value f-statistic is less than the lower bound critical value, we refuse to reject the h0 and conclude that there is no co-integration among the variables. finally, if the sample f-statistics value resulted between the lower and upper critical values, the outcome will be indecisive, and in this case one can test the statistical significance of speed of adjustment coefficient. significant speed of adjustment coefficient in dictates the existence of co-integration among the variables. ardl approach was employed to estimate the shortand long-run dynamic relationships. therefore, equation (2) can be rewritten as the error correction version of ardl model as follow: �������� � �� � ������������� � ��� � ����������� � ��� � � ���������� � ��� � ������������� � ��� � � ����������� � ��� � � ����������� � ��� � ����������� � ��� � ������� � �� where: ������is the error correction model term which has to be negative and statistically significant and represents the speed of adjustment to long -run equilibrium following a short run shock. 4. diagnostic tests where: ecmt–1 is the error correction model term which has to be negative and statistically significant and represents the speed of adjustment to long -run equilibrium following a short run shock. analysis of the relative impact of monetary… 101 4. diagnostic tests for the diagnostic checking, we tested the presence of serial correlation and heteroscedasticity in the errors and normality of errors as well. finally, by using cusum and cusumsq tests, we were checked the stability of parameters of the model. 5. variable description and expected sign table 1. variable description and expected sign data description unit of measurement expected sign rgdp real gross domestic product real gross domestic product in millions gexp government consumption expenditure %, as a share of gdp + m2 broad money supply %, as a share of gdp + inr nominal interest rate % cpi consumer price index % (1998=100) -/+ neer real effective exchange rate % + to trade openness (x + m)%, as a share of gdp + s o u r c e : author hypothesis. causality analysis after confirming the long-run relationship between real gdp and all explanatory variable by applying the ardl bounds test and combined cointegration techniques, the granger causality can be applied to investigate the direction of causality among the variables. the error correction model (ecm) based granger causality test is applied to investigate the direction of causality between the variables. tekilu tadesse, tesfaye melaku102 for the diagnostic checking, we tested the presence of serial correlation and heteroscedasticity in the errors and normality of errors as well. finally, by using cusum and cusumsq tests, we were checked the stability of parameters of the model. 5. variable description and expected sign table 1. variable description and expected sign data description unit of measurement expected sign rgdp real gross domestic product real gross domestic product in millions gexp government consumption expenditure %, as a share of gdp + m2 broad money supply %, as a share of gdp + inr nominal interest rate % cpi consumer price index % (1998=100) -/+ neer real effective exchange rate % + to trade openness (x + m)%, as a share of gdp + source: causality analysis after confirming the long-run relationship between real gdp and all explanatory variable by applying the ardl bounds test and combined cointegration techniques, the granger causality can be applied to investigate the direction of causality among the variables. the error correction model (ecm) based granger causality test is applied to investigate the direction of causality between the variables. analysis of the relative impact of monetary… 103 where; ectt−1presents the lagged error correction term and ∆ represents the first difference to examine the short-run dynamic. additionally, u1t, u2t represent the error terms and they should be white noise and serially uncorrelated. the ecm is an important model that distinguishes the shortand longrun granger causalities. the lag of the individual coefficients is utilized to test the significance of the short-run relationship. furthermore, the coefficient of ectt−1is statistically significant and indicates long-run causality. jointlylagged coefficients and the ect are used to verify joint causality between the variables. tekilu tadesse, tesfaye melaku104 empirical results before carrying out a formal analysis, we need to check the initial requirements of time series annual data for the period of 1975 to 2017. moreover, every time series data has trend and to find the pattern of trend we applied the unit root test. the results of augmented dickey fuller (adf) test are given below in table 2. based on the augmented dickey fuller (adf) test, we do not reject null hypothesis and all variables are non-stationary at level. but in case of first difference we reject null hypothesis and all variables are integrated at order 1, and order of integration is i (1). table 2. augmented dickey fuller (adf) results variable le vel 1st difference order of integr ation intercept intercept and trend intercept intercept and trend lnrgdp 4.107452 1.727892 -2.904909 -3.633029 i(1) (1.00000) (1.000000) (0.02837)** (0.0392)** lnm2 1.949882 -0.925755 -3.890230 -4.261654 i(1) (0.9998) (0.9433) (0.0049) (0.0090)* lngexp -2.888047 -2.625535 -7.656396 -7.761068 i(1) (0.0554)*** (0.2717) (0.0000)* (0.0000)* lnreer -1.520558 -1.941157 -5.269592 -5.205297 i(1) (0.5136) (0.6154) (0.0001)* (0.0007)* lncpi 0.443791 0.821348 -5.071211 -5.16035 i(1) (0.9826) (0.9553) (0.0002)* (0.0007)* lnto -1.038031 -1.922031 -5.905394 -5.821702 i(1) (0.7306) (0.6250) (0.0000) (0.0000) lnintr -1.909132 -2.485310 -6.778059 -6.692789 i(1) (0.3251) (0.3334) (0.0000)* (0.0000)* s o u r c e : authors computation (2019). analysis of the relative impact of monetary… 105 bound tests for cointegration as the results of all variables are integrated at first order integration, to undertake appropriate bound test, we first determine the best ardl model by using the akaike information criterion (aic). pesaran and shin (1998) and narayan (2004) recommended us to use maximum 2 lags for annual data series of small sample observation. as the resulted indicated blow in table 2 reveals that we reject null hypothesis of no cointegration against alternative hypothesis, since the computed value of f-statistics (6.83238) is greater than the upper level of bounds critical value of 4.43 and lower bounds value of 63.15 for k= 6. this conclusion indicates that there is a long-term equilibrium relationship among variables. having found a long run relationship by bound tests, we applied the ardl method to examine the long run and short run parameters. table 3. bound test for integration levels bounds critical values 10% level lower bound i(0) upper bound i(1) 2.12 3.23 5% level lower bound i(0) upper bound i(1) 2.45 3.61 2.5% level lower bound i(0) upper bound i(1) 2.75 3.99 1% level lower bound i(0) upper bound i(1) 3.15 4.43 f-statistics ardl(1,1,2,2,2,2,0) 6.832383* s o u r c e s : computed from eviews 9.5. n o t e : *, **, and *** represents significance at the 1%, 5%, and 10% levels, respectively. the akaike information criterion (aic) criterion is used to determine the optimal lag. the critical values are determined from pesaran, shin and smith (2001). diagnostic and model stability tests the ecm model checked all short run diagnostic tests such as absence of serial correlation, no conditional autoregressive serial correlation, no heteroscedasticity and correctly specified functional form and distributed error term. the tekilu tadesse, tesfaye melaku106 regression for the underlying ardl equation fits very well at r2= 0.975 and also one of the diagnostic tests checking which is presented in the following table. table 4. short-run ecm version of ardl (1,1,2,2,2,2,0) diagnostic tests tests lm-version f-version statistic p-value statistic p-value a:serial correlation: breusch-godfrey serial correlation lm test χ2 (2)= 10.554 0.1331 f(2, 29)= 1.70249 0.1910 heteroskedasticity: breusch-godfrey test χ2 (9)= 4.181 0.8991 f(9,31)= 0.67357 0.7262 normality: jarque-bera test χ2(2)= 0.32921 0.84822 not applicable functional form: ramsey reset test χ2(1)=.125801 0.9010 f(1, 22)= 0.01582 0.9010 s o u r c e : author’s computation of eview 9.5 result, 2019. the stability test the stability of the model is also verified with the help of the cumulative sum (cusum) and the cumulative sum of squares (cusumsq) tests of stability. the cusum and cusum of squares tests for the stability were introduced by brown, durbin, evans (1975) to check the stationarity of regression equations. the brown et al. (1975) method used the straight lines as limits. if cu sum crosses these linear limits at least once, then it is believed that the regression equation is unstable. accordingly, the cumulative sum (cusum) and cumulative sum of squares (cusumsq) plots from recursive estimation of the model also indicate stability of long run coefficients (figures 1 and 2) over the sample period because graphs of cumulative sum of squares (cusum) and (cusumsq) do not exceeds the critical boundaries of both the figures at 5% level of significance. figure 1. plot of cumulative sum of recursive residuals (i) source: author’s computation of eview 9.5 result, 2019. the stability test the stability of the model is also verified with the help of the cumulative sum (cusum) and the cumulative sum of squares (cusumsq) tests of stability. the cusum and cusum of squares tests for the stability were introduced by brown et al. (1975) to check the stationarity of regression equations. the brown et al. (1975) method used the straight lines as limits. if cusum crosses these linear limits at least once, then it is believed that the regression equation is unstable. accordingly, the cumulative sum (cusum) and cumulative sum of squares (cusumsq) plots from recursive estimation of the model also indicate stability of long run coefficients (figures 1 and 2) over the sample period because graphs of cumulative sum of squares (cusum) and (cusumsq) do not exceeds the critical boundaries of both the figures at 5% level of significance. figure 1. plot of cumulative sum of recursive residuals (i) -20 -15 -10 -5 0 5 10 15 20 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 cusum 5% significance source: figure 2. plot of cumulative sum of squares of recursive residuals (ii) -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 cusum of squares 5% significance source: estimated long-run coefficients using the ardl approach s o u r c e : author computation from eview. figure 2. plot of cumulative sum of squares of recursive residuals (ii) source: author’s computation of eview 9.5 result, 2019. the stability test the stability of the model is also verified with the help of the cumulative sum (cusum) and the cumulative sum of squares (cusumsq) tests of stability. the cusum and cusum of squares tests for the stability were introduced by brown et al. (1975) to check the stationarity of regression equations. the brown et al. (1975) method used the straight lines as limits. if cusum crosses these linear limits at least once, then it is believed that the regression equation is unstable. accordingly, the cumulative sum (cusum) and cumulative sum of squares (cusumsq) plots from recursive estimation of the model also indicate stability of long run coefficients (figures 1 and 2) over the sample period because graphs of cumulative sum of squares (cusum) and (cusumsq) do not exceeds the critical boundaries of both the figures at 5% level of significance. figure 1. plot of cumulative sum of recursive residuals (i) -20 -15 -10 -5 0 5 10 15 20 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 cusum 5% significance source: figure 2. plot of cumulative sum of squares of recursive residuals (ii) -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 cusum of squares 5% significance source: estimated long-run coefficients using the ardl approach s o u r c e : author computation from eview. tekilu tadesse, tesfaye melaku108 estimated long-run coefficients using the ardl approach table 5. autoregressive distributed lag (ardl) long-run results with the error correction term variable coefficient std. error t-statistic prob. lnm2 0.180907 0.075890 2.383822 0.0258** lngexp 0.439488 0.070273 6.254027 0.0000* lnreer -0.437287 0.169680 -2.577125 0.0168** lncpi 0.446836 0.116918 3.821805 0.0009* lnto 0.144639 0.057551 2.513251 0.0194** lnintr -0.385857 0.070647 -5.461757 0.0000* c 6.331939 0.663379 9.544973 0.0000* s o u r c e : computed from eviews 9.5. n o t e : the sign of “*” and “**” represents the level of significance at 1% and 5% respectively. from the result we reveal that the money supply and government consumption expenditure have significant and positive impact on economic growth in long run. in other words, this study obtains strong and positive relation between money supply and the real gdp indicating that monetary policy is effective in affecting real gdp in ethiopia. similarly, the association between real gdp and government consumption expenditure proxy for fiscal policy is statistically significant and positive implying that fiscal policy is also effective in changing real gdp in ethiopia. however, in terms of significant level and relative magnitude measured by elasticity of real gdp with respective of monetary and fiscal policy, it reveals that fiscal policy is comparatively more effective than monetary policy in the long run. the result is consistent with the findings of ali, irum and ali (2008), mohammad, wasti, lal and hussain (2009), and ozer and kargol (2018) in turkey. real effective exchange rate bears the negative and significant effects on the economic growth of ethiopia in long run. it means an increase in real effective exchange rate which is the depreciation of ethiopia currency against weighted trade partner’s currencies deteriorates economic growth through adversely affecting the international competitiveness. this finding is contrasting with the traditional approach to exchange rate. classical theory of the de analysis of the relative impact of monetary… 109 preciation has expansionary effects on economic growth through aggregate demand channel will not be applicable for ethiopian economy rather other determinants are matter to enhance international competitiveness. clearly speaking, the empirical results of this study imply that increase in real effective exchange rate so called depreciation hurts instead of promoting economic growth in the long run through increasing the cost of raw materials which are needed for further domestic production. this result against traditional view but, in line with modern macroeconomic view which states that depreciation of the domestic currency has a net effect of declining the economic growth. for the modern viewers, the effect of exchange rate on economic growth operate through the aggregate supply channel stating that developing countries such as ethiopia experienced with heavy dependency on foreign capital for investment and the very low elasticity demand for their exporting primary commodities is low. therefore, its negative impact through raising the costs of imported raw materials is overwhelming the positive effect it has on competitiveness through increasing exports. this result confirms the study of (baylie, 2011) in ethiopia and razzaque, bidisha and khondker (2017) in bangladesh. the relationship between real interest rate and economic growth is found to be negative and statistically significant at 1% level. the relationship between confirms economic theory of investment which state that for governments to encourage private investment, the real interest rate has to be reduced because increasing interest results crowding out effect of private investment spending thereby decreasing national income. from the result trade openness has found positive and significant impact on economic growth in ethiopia which indicates that international trade competitiveness through trade liberalization plays a significant role in the economic growth of ethiopia, confirming the trade-led growth hypothesis both in the long run. this finding consistent with asfaw (2014), zarra-nezhad, hosseinpour and arman (2014), brueckner and lederman (2015) and keho (2017); ogundari and awokuse (2018) and evans and kelikume (2018) but contradicts with vlastou (2010), polat, shahbaz, rehman and satti (2015), ulaşan (2015), were (2015), lawal, nwanji, asaleye and ahmed (2016) who reported a negative or insignificant impact of trade openness on economic growth. this unexpected and contradicting previous result might be explained omitted important explanatory variables as suggested by keho (2017). in contrast to the extensively accepted hypothesis that inf lation creates a danger to economic activities, the results revealed that inf lation has a positive and significant impact on the economic growth of ethiopia. this tekilu tadesse, tesfaye melaku110 outcome is similar with some empirical findings and the theoretical hypothesis of new-keynesian school of economics stating that inf lation per se is not something harmful for the economy of a nation in all situations. short-run ecm version of ardl model table 6. short-run error correction model (cointegrating form) variable coefficient std. error t-statistic prob. d(lnm2) 0.037176 0.039500 0.941173 0.3564 d(lngexp) 0.095571 0.031952 -2.991113 0.0065* d(lngexp(-1)) 0.059062 0.028779 2.052282 0.0517** d(lnreer) 0.070825 0.064106 1.104801 0.2807 d(lnreer(-1)) 0.153937 0.078435 1.962594 0.0619 d(lncpi) -0.298235 0.092050 -3.239915 0.0036* d(lncpi(-1)) -0.337009 0.119670 -2.816144 0.0098* d(lnto) 0.068490 0.026675 2.567553 0.0172 d(lnintr) 0.016047 0.034149 0.469907 0.6428 d(lnintr(-1)) 0.069023 0.029633 2.329265 0.0290* cointeq(-1) -0.473520 0.114239 -4.144991 0.0004* cointeq = lnrgdp (0.1809*lnm2 +0.4395*lngexp -0.4373*lnreer + 0.4468*lncpi + 0.1446*lnto -0.3859*lnintr + 6.3319 ) s o u r c e : computed from eviews 9.5. n o t e : the sign of “*” and “**” represents the level of significance at 1% and 5% respectively. the short-run coefficients estimates obtained from the ecm version of ardl model are given in table 6. the ecm coefficient shows how quickly/slowly variables return to equilibrium. the error correction term ectt-1, which measures the speed of adjustment to restore equilibrium in the dynamic model, appear with negative sign and is statistically significant at 1 percent level, indicating that long run equilibrium can be attained. our results are consistent with banerjee, dolado, galbraith and hendry (1998) who argue that a highly significant error correction term is further a proof of the existence of stable long analysis of the relative impact of monetary… 111 run relationship. the coefficient of ectt-1 is equal to -0.474, which implies that the deviation from the long-term equilibrium is corrected by 47.4 percent over each quarter of the year at 1 percent level of significance. the lag length of short run model is selected on the basis of akaike information criteria (aic). in short run dynamics, our results reveal that economic growth in the short-run analysis is positively affected by the government expenditure and trade openness while price level negatively affects economic growth. therefore, fiscal policy has powerful impact on economic growth than monetary policy in short run. overall justification, the outcome confirms the theory that for a small open economy including ethiopia having underdeveloped financial sector, fiscal policy is a more vital policy tool than monetary policy in accelerating economic growth, particularly in the short run. in the long-run, it is obvious that clear-cut and precise innovations in monetary policies as fiscal policies have equal significant effect on the economic growth over all the time horizons in ethiopia. this result is also consistent with the result of ozer and kargol (2018) in trukey and the study of jayaraman, cheeng and august (2012) in vanuatu. granger causality according (wooldridge, 2012) although cointegration indicates the presence of granger causality at least in one direction, it does not indicate the direction of causality between the variables. among the different approach the direction of causality can be captured through error correction model which derived from long run co integrating vectors. accordingly, the granger causality test was conducted under the error correction model. first, the variables were estimated at level without taking first difference in the unrestricted var framework. the lag length was selected using the akaike information criterion (aic) was used to select the lag length. the unrestricted var model was employed with two lag so as to avoid serial correlation. to investigate the direction of causality between the variable, we used two granger causality types basically: (1) short-run causality which can be captured by applying the wald test for all the lag independent variables using the joint f-test; (2) long-run causality–obtained by confirming the coefficient of the error correction term having negative sign), which implies convergence of the system back to the long-run equilibrium position. tekilu tadesse, tesfaye melaku112 table 7. short-run and long-run granger-causality tests dependent variable f-statistics (short-run) t-statistics (long-run) ∆lnrgdp ∆lnm2 ∆lngep ∆lnreer ∆lninr ∆lncpi ∆lnto ∆lnrgdp – 1.7811 3.364*** 6.1051*** 5.225*** 4.673** 5.381** -2.5423(-0.1968) ∆lnm2 3.864* – 1.348 1.909 3.981* 0.313 0.832 -2.2011(-0.0515) ∆lngep 4.119** 2.198 – 0.195 0.506 4.782** 1.504 -1.325(-0.1545) ∆lnreer 4.0475** 7.817*** 5.818** – 3.645* 10.454*** 1.270 -1.541(-0.1835) ∆lninr 1.3257 5.395** 1.039 5.703** – 4.194** 4.194** 0.1774(0..283) ∆lncpi 16.730*** 15.858 10.243 8.085 5.636 – 2.214 3.9175(0.1835) ∆lnto 1.581 1.2398 3.599* 1.038 0.225 5.417** – -0.4314(0.0498) n o t e : the sign of “*” ,“**” and “***” represents the level of significance at 10%, 5% and 1% respectively. s o u r c e : computed from eviews 9.5. all other control variables can also have causal effects, but for the purposes of this study, we are interested to examine the direction of causality between monetary policy, fiscal policy variables and economic growth in ethiopia. based on the findings in table 7, monetary measure rates do not “granger-cause” economic growth in the form of short run causality, but economic growth “granger-cause” the money supply. moreover, there is bi-directional causality between fiscal policy measure, real effective exchange rate, real interest rate, and economic growth. however, based on long-run causality, the coefficients of the lagged error correction terms are negative and significant, and this confirms that a long-run relationship exists between the variables which offer evidence for uni-directional causality between the variables. conclusion and policy recommendation this paper has investigated the comparative effectiveness of monetary and fiscal policies in affecting economic growth with particular reference to the case ethiopia both in long run and short run, a subject which has been left for a debate in both developed and developing countries, including ethiopia. the study examined with the help of ardl bounds testing approach to co-integration which has varieties advantage over other any method for small sample size. analysis of the relative impact of monetary… 113 the argument of relative effectiveness has been got due attention over the world after global financial crisis in 2008. accordingly, our results imply that there is a stable long run relationship among fiscal policy, monetary policy, control variables and economic growth, on which our analysis is based. based on our finding we additional inferred that in the short run the fiscal policy is relatively effective and that the monetary policy proxy by money supply is ineffective in affecting output growth in ethiopia where as in long-run both monetary and fiscal policies variables are equal effective in accelerating economic growth in ethiopia. the policy implications obtained from the analysis clearly suggest that monetary and fiscal policy plays a crucial role in inf luencing the level of economic activity in ethiopia. our result suggests the significance of incorporating both the monetary and fiscal policies in a single model when achieving macroeconomic objectives, thus both policies should be considered in tandem and not in isolation. however, the elasticity of output with respect to government expenditure is greater than elasticity of output with respect to money supply which is an indication of superior effectiveness of fiscal policy over monetary policies in ethiopia in both long run and short run dynamics. therefore, to have continuous and sustainable economic growth, the coordination of monetary and fiscal policies are vital and the lack of this coordination leads to a sharp downturn of overall economic performance, even can hurt the economy. thus, to promote maintain and strong economic growth, the national bank of ethiopia should give due attention on using appropriate monetary policy measures required to bring down the inf lation to targeted rate and favorable interest rate where as government should apply effective fiscal policy to accelerate economic development through boosting aggregate demand as well. this inference does not mean separate implementation of policies by different institution rather policy makers in ethiopia should be familiar with the fact that the accommodative monetary and fiscal policies simultaneously necessary not only for macroeconomic stabilization, but also to foster/boost overall economic growth in ethiopia.  references ali, s., irum, s., & ali, a. 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(2014). trade-growth nexus in developing and developed countries: an application of extreme bounds analysis. asian economic and financial review, 4(7,) 915-929. date of submission: april 7, 2020; date of acceptance: may 9, 2020. * contact information: hedi_baazaoui@yahoo.com, higher institute of computer sciences and management, university of kairouan, kairouan, tunisia, phone: 00 216 98 59 60 54; orcid id: https://orcid.org/0000-0001-6880-1822. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 2 baazaoui, h. (2020). for a new method of calculating the disclosure index. copernican journal of finance & accounting, 9(2), 9–24. http://dx.doi.org/10.12775/cjfa.2020.005 hedi baazaoui* university of kairouan for a new method of calculating the disclosure index keywords: disclosure index, disclosure, ias/ifrs information. j e l classification: m41. abstract: in this paper, we have proposed a new method for calculating the disclosure index, which consists of calculating the basic score by accounting standard or category of information and determining the overall disclosure index, which is the average of the elementary scores. through two french and canadian samples, we found significant differences between the mandatory, voluntary and total disclosure indices calculated using the proposed method and the current method.  introduction disclosure of information is perhaps the cornerstone of corporate financial reporting. it is thanks to the published information that the company can maintain business relations with its various partners. financial information is of interest to market participants (companies, investors, bankers, auditors, etc.), citizens, employees and the state, and it is therefore insufficient to see accounting standards regardless of the socio-economic context (palea, 2015). hedi baazaoui10 disclosure of information has been the subject of much research with the primary purpose of finding the determinants of this disclosure. in developed countries, research studies have tried to identify the explanatory variables of voluntary disclosure, and in developing countries, they have tried to identify the explanatory variables of mandatory disclosure since in the last type of countries the companies adopt an information retention policy and tend not to comply with the regulations governing the disclosure of information. whether mandatory disclosure or voluntary disclosure, disclosure studies calculated the disclosure index as the sum of published items divided by the total items that could be disclosed without distinction between categories of information for voluntary disclosure (general information, financial information, operational information, etc.) and between items within the accounting standard for mandatory disclosure and implicitly assumes that all categories of information for voluntary disclosure and all standards for disclosure mandatory disclosure are equally important. the interest of this research is to propose a new method of calculating the index of disclosure. it should be noted that disclosure studies suffer from a major limitation by adopting an overall score. they implicitly assume the superiority of certain standards or categories of information over others since the number of items in the standards varies considerably from one standard to another. in our study, we calculate the standard disclosure score by standard implicitly assuming that international standards have the same importance and the overall disclosure score is none other than the simple arithmetic mean of the individual disclosure scores. in what follows, we will present the literature dealing with the disclosure index, the methodology, the results and the conclusion. review of literature “the disclosure literature has shown that a high quality of public disclosure reduces the asymmetry of information and therefore increases the liquidity of equities” (alves, canadas & rodrigues, 2015, p. 67). for their part, avallone and quagli (2015) found that the manipulation of the results through the test of depreciation carried out on the goodwill should encourage the standardization bodies to demand more disclosure on how to determine the recoverable for a new method of calculating the disclosure index 11 amount in order to minimize the effect of managerial opportunism. in addition, “the quality of the disclosed accounting information is affected by the applicable accounting framework, the political and legal systems of the country and the attitudes and motivations of the managers in terms of financial communication” (păúcan, 2015, p. 586). customers want to know if the company is able to secure their supplies on a continuous basis so they need to have a clear idea of their financial health. suppliers need to know if the company is able to meet its financial commitments. they need to have an idea about the solvency and liquidity of the company with whom they have business relationships. the state needs financial information to properly develop economic aggregates and to have an idea about the creation and distribution of wealth to put in place fiscal, financial and legal regulations. holders of capital seek profitable investments. in order to make investment or credit decisions, these investors (investors and lenders) need financial information to evaluate, compare and predict the company’s profitability, solvency and financial position liquidity. thus, the absence of information on the operations carried out implies that the managers manage the affairs in their interests. this means a lack of compatibility of the owners’ objectives with those of the managers. managers act opportunistically, therefore, in the absence of a protection mechanism, potential shareholders buy the shares at a reduced price and the lenders, in the presence of a high risk, demand a high interest. companies that do not publish information are penalized by high capital costs. the company is in a better position to determine the nature of the information to be produced and to increase the trust of funders. imposing regulations may restrict the choice of accounting methods (for example, imposing a single depreciation method) and therefore the efficiency sought in negotiating contracts to reduce agency costs may not be achieved. the information must be produced to minimize the cost of capital and increase the value of the business. so provide the information until its marginal cost equals its additional benefit. environments differ from country to country and therefore disclosure and reporting standards and practices will necessarily diversify. measurement and disclosure practices are strongly inf luenced by environmental factors in the country. the inf luence of environmental factors on the quality and content of information disclosure has been defended by the theory of environmental determinism. hedi baazaoui12 the level of economic and social development of the country is a determining factor of the economic and social disclosure made by the firm. the study of xiao, gao, heravi and cheung (2005) showed that british firms disclose more economic and social information than hong kong firms, “because of the different pressures exerted and the increased demands for disclosure likely to expose the firm to the political costs and threats of legitimacy ”(xiao et al., 2005, p. 219). chan, hsieh, lee and yueh (2015) have shown that the adoption of international ias/ifrs standards has improved the comparability of financial statements rather than accounting quality. in addition, it has reduced the asymmetry of information for foreign banks, which are encouraged to make cross-border loans. however, barneto and ouvrard (2015) have shown the limits of ias/ ifrs standards by noting that the disclosure of segment information contained in the notes to the financial statements as provided by ias14 and ifrs8 does not improve understanding business plans prepared on the basis of the indicators for the statement of cash f lows provided for in ias7. the non-adoption of certain national standards ref lects according to ding, jeanjean and stolowy (2005) the state of the economy rather than the national culture. in fact, the adoption of the international benchmark is decreed by international institutions (the world bank, the international monetary fund, the international organization of securities commissions, the ifac, capital markets, international audit firms big4 and the iasb) (uyar & güngörmüs, 2013) rather than by national economic needs. similarly, nnadi and soobaroyen (2015) found that, despite the fact that a number of empirical studies have shown that the adoption of ias/ifrs standards promotes foreign direct investment in developing countries, the full adoption of ias/ifrs has a negative impact on net foreign direct investment in african countries. according to these authors, foreign investors seem to be affected by fundamental institutional structures such as the rule of law, the legal system and the level of corruption rather than by the adoption of ias/ifrs. eiler, miranda-lopez and tama-sweet (2015) found that the information content of published profits has increased in the new information environment (adoption of ias/ifrs and financial market reform). perera and chand (2015) argued that previous studies have revealed several functional complications towards convergence with international standards. in the same vein, “the difficulties of implementing an international standard due to the lack of widespread technical expertise in the accounting for a new method of calculating the disclosure index 13 environment are also a concern” (perera & chand, 2015, p. 173). the educational resource provides a beneficial learning opportunity in the field of international accounting (teuteberg, voll & zülch, 2016, p. 14). the case study helps students gain an idea of how international standards are applied by accountants in bankruptcy (churyk, yu, gross & stoettner, 2015) for example. chen, deng, gupta and sami (2015) showed that the application of ias/ifrs following the elimination of reconciliations imposed by the american securities and exchange committee in 2007 reduced the asymmetry of information on the financial market measured by the bid-ask spread. the economic consequences of applying ias/ifrs are significant. along these lines, baik, cho, choi and lee (2016) examined the determinants and economic consequences of taking interest payment into account in operating cash f lows. they showed that “distressed companies, companies with high interest payments, companies with majority stake in banks and listed companies tend to change interest payments from the operating state to the statement of financing f lows, thereby increasing the total amount of operating cash f lows” (baik et al., 2016, p. 1). pierk and weil (2016) have shown that companies early adopt new regulations that tend to improve the amount of revenue and financial performance. according to de simone (2016), tax incentives affect the choice of accounting framework in countries that allow but do not require the application of ias/ ifrs standards for individual accounts and cross-border investments through the transfer of income through the transfer price mechanism are motivated by tax reasons and not by the adoption or not of ias/ifrs standards. pressure groups in the standardization process have been identified by bamber and mcmeeking (2016). they have shown that the stakeholders (preparers, users and professional and regulatory bodies) have more inf luence than the accounting bodies on the process of standardization and amendments to international accounting standards and more precisely on discussions and debates taking place under the accounting standard relating to ifrs7 financial instruments from the exposure draft until its final approval. in addition, they found that the iasb reacted much less to proposals from the united kingdom than to comments from the united states. environmental factors are advanced in the literature as major determinants of information disclosure, regardless of its nature, quantity and quality. in this sense, joliet and muller (2016) have identified attractive areas of foreign direct investment which are peaceful asia and the united kingdom but not lathedi baazaoui14 in america, based on the informational content of the communication of profits and sector information and elshandidy, fraser and hussainey (2015) have shown that both mandatory and voluntary risk disclosure presents a high level for german firms compared to british and american firms. they also showed that disclosure varies according to the specific characteristics of the firm, the national characteristics of the country (legal system and cultural values) and the systematic risk. for their part, lin and nienhaus (2015) showed that german firms were able to reduce the systematic risk and the cost of capital after the change of the german or american accounting standards by the international ias/ifrs standards requiring more disclosure and wilford (2016) showed that foreign companies submitting ias/ifrs financial statements to the securities and exchange committee report fewer weaknesses in the internal control system when they come from countries with high regulations and report more weaknesses in the internal control system when they come from countries with weak internal control system regulations. ghio and verona (2015, p. 121) found that the political, cultural and economic dimensions are behind the choice of the process of convergence towards international ias/ifrs standards between a simple imitation (the case of russia and brazil) and the actual translation with certain modifications (the case of china and india) and cerbioni, fabrizi and parbonetti (2015, p. 174) have shown that the financial crisis has shown that the accounting rules have not kept pace complex developments in financial transactions such as securitization and have given managers a lot of leeway. the application of international standards in complex social contexts is facing resistance from their users in seeking to guarantee their interests, thus demanding on the part of the global preparer of these standards the iasb to be more vigilant in resolving this type of challenge (maroun & zijl, 2016). accounting tends towards the adoption of an integral value approach, this means that the measurement of the economic value of an accounting item can inf luence the perception of the cultural value of the item in question (ellwood & greenwood, 2016). measurement and disclosure practices are strongly inf luenced by environmental factors in the country. xiao, yang and chow (2004) have shown that country-specific country factors are determinants of the explanation of voluntary disclosure and the extent of disclosure in content and format. thus, audit quality, foreign equity participation, different classes of shares and regulations for a new method of calculating the disclosure index 15 are specific variables explaining voluntary disclosure as well as the extent of disclosure on the internet. studies have addressed the impact of the firm’s and society’s characteristics in general on disclosure. these characteristics include “size, listing status, performance, type of industry and nature of audit. the characteristics of the country are the size of the financial market, the degree of economic development, the type of the economy, the activity of the financial market, the dispersion of shares and the culture“ (street & bryant, 2009, p. 307). previous studies have shown the limitations of the firm’s characteristics in explaining the disclosure of information. they have incorporated cultural dimensions into their empirical validation model because they consider that the firm’s leaders are dominated by cultural values and norms. two firms with the same characteristics but belonging to two countries of different cultures do not disclose the same quantity or the same quality of information, which shows the importance of the effect of cultural dimensions on the disclosure of information. in addition, research recommends the consideration of economic factors that are external and exogenous to the firm. disclosure research can be divided into three categories. those interested in the effect of the cultural, economic, legal, tax and social dimensions (category 1), those interested in the effect of the characteristics of the firm (category 2) and those interested in the effect of governance mechanisms (category 3). disclosure of information is considered in terms of quality and quantity. two measurement methods are applied: content analysis and calculation of disclosure indices (joseph & taplin, 2011). according to these authors, the abundance of disclosure refers to the analysis of the content and volume of the disclosure and the occurrence of the disclosure refers to the disclosure index. the abundance of the disclosure takes into account the number of words, sentences, lines, pages, etc. and the occurrence of the disclosure takes into account the items disclosed to calculate the disclosure index or score. an abundant literature has dealt with the disclosure of information by companies and mainly voluntary disclosure. most disclosure work considers a particular determinant of disclosure (firm characteristics, governance mechanisms, etc.) or studies the impact of financial market disclosure on firm valuation or risk assessment or costing of capital. debates have focused on the content of the published information. some have argued that the disclosure of non-mandatory information may be against hedi baazaoui16 the interest of society (negative externality) and others find in this type of disclosure benefits for society (positive externality). according to verrecchia (1983, p. 191), disclosure is measured in terms of the nature of the information proprietary to the firm. firms operating in a fiercely competitive industry consider that public disclosure represents a potential cost since it can be exploited by competitors and firms operating in a low-cost sector do not bear the cost associated with public disclosure. this is why managers are in a better position to determine the nature and quality of the information to be disclosed. indeed, financial communication is a strategic and complex decision emanating from the people who constitute corporate governance (la bruslerie & gabteni, 2014). the research methodology and the course of the research process we will study the disclosure of mandatory and voluntary information since the adoption of ias/ ifrs does not necessarily ref lect their application and empirically assess the degree of application by category of country given the variability of application of the international standard. disclosure can be voluntary or mandatory. we have chosen to work on full disclosure which includes both voluntary and mandatory disclosure because any information can be useful to a particular user. it is therefore recommended to disclose as much information as possible. previous studies have used different categories of voluntary information to calculate the voluntary disclosure index. in this study, we rely on ias/ifrs standards to identify mandatory or voluntary disclosure items. our goal is to show the utility of applying the new method since it considers that all standards and all categories of information have the same importance. thus, the significance of the difference in the disclosure indices computed according to two methods must be tested. the first method is to calculate the score by accounting standard and to average the basic disclosure scores. the second method is to relate the sum of the items disclosed to the sum of items that may be disclosed. it should also be noted that disclosure studies suffer from a major limitation in adopting an overall score. they implicitly assume the superiority of certain standards over others since the number of items contained in the stand for a new method of calculating the disclosure index 17 ards varies considerably from one standard to another (ias1 (79 items), ias2 (8 items), ias23 (2 items), ifrs7 (115 items), etc.). in our study, we calculate the standard-by-standard disclosure score implicitly assuming that international standards are of equal importance and the overall disclosure score is none other than the simple arithmetic mean of the individual disclosure scores. the method of calculating the average of elementary indices gives the same importance to all standards and therefore it favors elementary disclosure by accounting standard. on the other hand, the method of calculating the disclosure index by the ratio between the disclosed items and the applicable items attaches importance to global disclosure and neglects the usefulness of basic disclosure attached to the accounting standard. the disclosure policy adopted by companies must be understood in depth and evaluated in detail if we want to objectively assess the degree of application of ias/ifrs standards. to test the significance of the difference in disclosure scores, we will compute the mandatory, voluntary, and total disclosure scores for both methods. table 1. calculation of index disclosure proposed method (method1) actual method (method2) elementary disclosure score proposed method (method1) actual method (method2) elementary disclosure score eds =  p i p i 1 where ii: item i that has 1 if it is disclosed, 0 otherwise, and p: the number of applicable items of the information category or of the standard. disclosure index di =  n ds n e 1 where eds: the elementary disclosure score and n: the number of the information categories or of the standards. di =  k i k i 1 where ii: item i that has 1 if it is disclosed, 0 otherwise, and k: the number of applicable items for all information categories or all standards. source: calculation of disclosure index: prepared in this paper. given the widespread adoption of international ias/ifrs standards, we have chosen to study disclosure of information (ias/ifrs). we have chosen to work on ias/ifrs international financial reporting standards. our database is imported from the study of baazaoui, sahnoun and zaraï (2015). we selected both french and canadian samples. the study period is limited to fiscal year 2013, the most recent fiscal year when data was collected. since the principle of permanence of the methods requires the application of the same methods of measurement and presentation over time, unless the change is made by a new standard or if there is a structural change in the operation, it is so it's useless to work on several exercises. in all cases, in the event of a change in accounting method, the company is required to disclose in the notes to the financial statements the nature, the reasons and the financial impact of this change. our study covered 35 french companies listed on cac40 and 36 canadian companies listed on ^ tx60. the samples in the study are as follows: table 2. samples of the study source: samples of the study: baazaoui et al. (2015). french sample canadian sample overall sample initial sample 40 60 100 financial institutions 4 10 14 subsidiary of foreign parent 1 1 3 companies presenting their financial statements according to us gaap or national gaap 13 13 total 35 36 71 where ii: item i that has 1 if it is disclosed, 0 otherwise, and p: the number of applicable items of the information category or of the standard. disclosure index where eds: the elementary disclosure score and n: the number of the information categories or of the standards. where ii: item i that has 1 if it is disclosed, 0 otherwise, and k: the number of applicable items for all information categories or all standards. s o u r c e : calculation of disclosure index: prepared in this paper. given the widespread adoption of international ias/ifrs standards, we have chosen to study disclosure of information (ias/ifrs). we have chosen to work on ias/ifrs international financial reporting standards. hedi baazaoui18 our database is imported from the study of baazaoui, sahnoun and zaraï (2015). we selected both french and canadian samples. the study period is limited to fiscal year 2013, the most recent fiscal year when data was collected. since the principle of permanence of the methods requires the application of the same methods of measurement and presentation over time, unless the change is made by a new standard or if there is a structural change in the operation, it is so it’s useless to work on several exercises. in all cases, in the event of a change in accounting method, the company is required to disclose in the notes to the financial statements the nature, the reasons and the financial impact of this change. our study covered 35 french companies listed on cac40 and 36 canadian companies listed on ^ tx60. the samples in the study are as follows: table 2. samples of the study french sample canadian sample overall sample initial sample 40 60 100 financial institutions 4 10 14 subsidiary of foreign parent 1 1 3 companies presenting their financial statements according to us gaap or national gaap 13 13 total 35 36 71 s o u r c e : samples of the study: baazaoui et al. (2015). results of research process for the first method, which consists in calculating the disclosure index based on the average of the elementary disclosure scores, the various disclosures are marked by the index 1: mandatory disclosue1, voluntary disclosure1, total disclosure1. for the second method, which consists in calculating the disclosure index based on the ratio between the items disclosed and the total items, the various disclosures are marked by the index 2: mandatory disclosure2, voluntary disclosure2, total disclosure2. the characteristics of the variables in the study are as follows: for a new method of calculating the disclosure index 19 table 3. variables characteristics variable minimum maximum mean standard deviation skewness kurtosis prob (jarque-bera) french sample mandatory disclosure1 0.54 0.79 0.65 0.06 0.49 2.63 0.45 mandatory disclosure2 0.64 0.90 0.73 0.06 1.11 3.91 0.02 voluntary disclosure1 0.11 0.67 0.39 0.19 -0.08 1.70 0.28 voluntary disclosure2 0.13 0.60 0.37 0.15 -0.01 2.09 0.55 total disclosure1 0.48 0.77 0.60 0.08 0.47 2.32 0.37 total disclosure2 0.62 0.89 0.71 0.06 1.10 3.95 0.02 canadian sample mandatory disclosure1 0.49 0.85 0.72 0.07 -0.44 4.07 0.23 mandatory disclosure2 0.69 0.90 0.81 0.05 -0.84 3.38 0.11 voluntary disclosure1 0.00 0.79 0.56 0.15 -1.74 6.98 0.00 voluntary disclosure2 0.00 0.80 0.50 0.13 -1.60 8.71 0.00 total disclosure1 0.39 0.84 0.69 0.08 -1.08 6.09 0.00 total disclosure2 0.68 0.89 0.80 0.05 -0.82 3.31 0.13 overall sample mandatory disclosure1 0.49 0.85 0.68 0.08 0.10 2.73 0.85 mandatory disclosure2 0.64 0.90 0.77 0.07 -0.04 1.8 0.12 voluntary disclosure1 0.0 0.79 0.48 0.19 -0.71 2.45 0.03 voluntary disclosure2 0.0 0.80 0.44 0.15 -0.64 3.12 0.09 total disclosure1 0.39 0.84 0.65 0.09 -0.19 2.73 0.72 total disclosure2 0.62 0.89 0.76 0.07 -0.03 1.8 0.12 s o u r c e : variables characteristics: the disclosure indices for the proposed method (method 1) are imported from baazaoui et al. (2015). it appears that the disclosure indices calculated according to the second method are higher than those calculated according to the first method and that disclosure indices of canadian firms are higher than those of french firms. the gap is important for mandatory disclosure and full disclosure. according to the french sample, it reaches 0.08 for mandatory disclosure and 0.11 for total dishedi baazaoui20 closure. according to the canadian sample, it reaches 0.09 for mandatory disclosure and 0.11 for total disclosure. according to the overall sample, it reaches 0.09 for mandatory disclosure and 0.11 for full disclosure. the voluntary disclosure index of the first method is higher than that of the second method. the difference between the voluntary disclosure indices is 0.02 for the french sample, 0.06 for the canadian sample and 0.04 for overall sample. to test the significance of the difference in disclosure indices, we use the parametric test difference of means for the variables that follow the normal law (voluntary disclosure (1.2) for canadian sample and mandatory disclosure (1.2) and total disclosure (1.2) for overall sample) and the non-parametric test difference in medians (wilcoxon test) for variables that do not follow the normal distribution. the results of the statistical tests are as follows: table 4. means (medians) equality paires mean (median) t-test (wilcoxon test) significance french sample mandatory disclosure2-mandatory disclosure1 (0.71 – 0.64) (4.5) 0.00 total disclosure2-total disclosure1 (0.70 – 0.59) (5.24) 0.00 voluntary disclosure1-voluntory disclosure2 0.39 – 0.37 0.52 0.60 canadian sample mandatory disclosure2-mandatory disclosure1 0.81 – 0.72 6.33 0.00 total disclosure2-total disclosure1 (0.81 – 0.69) (5.90) 0.00 voluntary disclosure1-voluntory disclosure2 (0.63 – 0.53) (2.83) 0.03 overall sample mandatory disclosure2-mandatory disclosure1 0.77 – 0.68 6.84 0.00 total disclosure2-total disclosure1 0.76 – 0.65 8.37 0.00 voluntary disclosure1-voluntory disclosure2 (0.50 – 0.47) (2.13) 0.03 s o u r c e : means (medians) equality: prepared in this paper. for a new method of calculating the disclosure index 21 the different differences are statistically significant except to voluntary disclosure for french sample. thus, the indices calculated according to the two methods are different and therefore the new method differs from the conventional method of calculating the disclosure index.  conclusion we have proposed a new method of calculating the disclosure index that consists of calculating the elementary disclosure index and averaging the elementary disclosure scores to determine the overall disclosure index. thus, for mandatory disclosure, a basic disclosure score is calculated per accounting standard and for voluntary disclosure and in this study, an elementary score is calculated per accounting standard and for studies that use voluntary categories of information (information general, financial information, social information, environmental information, operational and strategic information, etc.), we propose to calculate the score by category of information and average these scores to determine the overall disclosure index.  references alves, h.s., canadas, n., & rodrigues, a.m. (2015). voluntary disclosure, information asymmetry and the perception of governance quality: an analysis using a structural equation model. tékhne review of applied management studies, 13(1), 66-79. https://dx.doi.org/10.1016/j.tekhne.2015.10.001. avallone, f., & quagli, a. 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(2005). the impact of social and economic development on corporate social and environmental disclosure in hong kong and the united kingdom. advances in international accounting, 18, 219-243. https:// dx.doi.org/10.1016/s0897-3660(05)18011-8. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 4 date of submission: april 13, 2019; date of acceptance: may 4, 2019. * contact information: mcilak@umk.pl, institute of budgetary law and local government finances, faculty of law and administration, nicolaus copernicus university in toruń, bojarskiego 3, 87-100 toruń, poland, phone: +48 56 611 40 86; orcid id: https://orcid.org/0000-0003-1429-8429. cilak, m. (2018). financial stability of local government units – legal and economic approach. copernican journal of finance & accounting, 7(4), 31–45. http://dx.doi.org/10.12775/cjfa.2018.018 małgorzata cilak* nicolaus copernicus university in toruń financial stability of local government units – legal and economic approach keywords: local government units, the budget of the local government unit, expenditure of local government units. j e l classification: k39, h72, h74. abstract: the legislator introduced solutions conducive to the financial stability of local government units in the form of articles 242 and 243 of the public finance act of 2009. they force the reduction of deficit in the so-called current part of the local government budget and limit the amount of funds allocated for the repayment of financial liabilities. the aim of this article is to examine the impact of the obligation to comply with these regulations on the finances of local government units. the article will examine the content of both regulations and statistical data from the reports on budget execution by local government units, provided by the national council of regional chambers of audit. the summary will present a conclusion that articles 242 and 243 of the public finance act have a significant impact on the financial management of local governments, obliging them to maintain appropriate proportions between the amounts of income and current expenditure. however, the legal structure of both rules provides for certain exceptions to their absolute observance, which weakens their impact on the finances of local governments. małgorzata cilak32  introduction the budget of a local government unit (l.g.u.) is not only an instrument of the current management of its finances, but also of its development through planning and financing investments from public funds. these investments are for the benefit of the residents who, through taxes and other contributions to local government budgets, cover the costs of those bodies’ day-to-day operation and the costs of liabilities incurred for these investments. this is all linked to the issues of budget deficit and public debt. on the one hand, they are necessary to finance local government investments, but on the other, they are sometimes used to cover current expenses. there is also the problem of excessive debt of an l.g.u., beyond its financial capabilities. the problem is whether the amount of expenditures or expenses planned in the budget should be limited. the lack of limitations enables a f lexible response in situations requiring the involvement of public funds. on the other hand, it creates the risk of irresponsible budgetary policy, planning deficit when it could be avoided, and delaying its effects to subsequent years. the legislator has decided to introduce statutory restrictions on the planning of the budget deficit to cover current expenditure and on the amount of funds that local governments may plan to repay the debt already incurred in the form of articles 242 and 243 of the public finance act1. failure to comply with the above requirements leads to the impossibility of adopting the budget by the decision making body of the l.g.u. and its establishment by the council of the relevant regional chamber of audits. the reason for limiting the allowed amount of planned or executed expenditures or the amount of debt is the lack of bankruptcy capacity of local governments (see: babczuk & zioło, 2014, p. 18 et seq.; klupczyński, 2015b, pp. 108– –110). the purpose of these regulations is, therefore, to prevent a situation in which the local government assumes more liabilities than it is able to service in the budget year (klupczyński, 2015b, p. 106). they should refer to the factors determining the financial capabilities of local governments. otherwise, they may become an unnecessary barrier in the development of local governments or fail to prevent their insolvency (klupczyński, 2015b, p. 104). 1 act of 27 august 2009, journal of laws of 2017, item 2077, as amended, hereinafter also referred to as: p.f.a. financial stability of local government units… 33 the research methodology and the course of the research process the article aims to analyse how the rules set out in the articles 242 and 243 p.f.a. impact financial stability of l.g.u.s. in the first part we examine the legal structure of above mentioned rules. we will use formal-dogmatic method. the second part contains the financial analysis of all local government units in poland over the period 2008–2017. the analysis is based on data provided annually by the national council of regional chambers of audit. presented statistical data refer to budget balance and the debt of l.g.u.s. in the third part we will indicate the legal exceptions to the application of regulations under articles 242 and 243 of the p.f.a., that potentially may affect the financial stability of l.g.u.s. we will use formal-dogmatic method. presented conclusion proves that articles 242 and 243 of the public finance act have a significant impact on the financial management of local governments, resulting in reduction of their operating deficits and debt. construction of the rules under art. 242 and 243 of the p.f.a.construction of the rules under art. 242 and 243 of the p.f.a. the public finance act of 2009 introduced two rules: the rule concerning the operating deficit in article 242 and the rule concerning the amount of funds allocated for the repayment of liabilities in article 243. they replaced the previously binding articles 169 and 170 of the p.f.a. of 2005. the legislator, while creating the two examined rules, referred to the categories of current and property income and expenditure. according to article 235 of the p.f.a., the property income of the budget includes the following 1) subsidies and funds allocated for investments, 2) income from the sale of property, and 3) income from the transformation of the right of perpetual usufruct into ownership right. all other income is current income. the catalogue of property income includes investment funds and one-off funds, which should be used for investment purposes. the nature of property income is therefore similar to public income from loans and borrowings, issue of securities, and the privatisation of property. according to the legislator, revenues belong to the investment funds (borodo, 2007, pp. 15–16), as well as property income. małgorzata cilak34 the l.g.u. budget expenditure includes current and property expenses. property expenses include: 1) investments and investment purchases, 2) expenditure on the purchase or acquisition of shares, and 3) expenditure on contributions to commercial law companies (article 236 of the p.f.a.). property expenditure results in the acquisition (creation) of fixed assets (trykozko, 2007, p. 291). art. 242 of the p.f.a. first entered into force in the planning of the budgets for 20112. according to its paragraph 1, the decision-making body of an l.g.u. cannot adopt a budget in which the planned current expenses are higher than the planned current income increased by: the budgetary surplus from previous years, repayment of loans granted from the budget of l.g.u. in previous years, and unused funds coming from income and expenditure settlements resulting from special rules for the execution of local government budgets and settlements of funds from the eu budget. in the light of this provision, the operating deficit related to current expenditure is limited to the amount of current income. however, it is possible for current expenses to exceed current revenues by the amount of the budgetary surplus from previous years, repayments of loans granted from the budget of an l.g.u. in previous years and unused funds from income and expenditure settlements resulting from special rules of executing self-government budgets and settlements of funds from the eu budget. the introduced principle refers to the so-called golden rule of the balanced budget, which states that current expenditure should be covered by current income (owsiak, 2017, p. 74; kornberger-sokołowska, 2012, p. 199). this principle also applies to the implemented budget (article 242(2) of the p.f.a.). article 243 of the p.f.a. (which introduced the so-called individual indicator of liability servicing – ils) was applied for the first time in 2014. according to its paragraph 1, the decision-making body of an l.g.u. cannot adopt a budget whose implementation will, in a budget year or in any subsequent year, cause the ratio of expenditures on debt servicing to total budget income, to exceed the ratio of current income, less current expenditures, to total budget income calculated for the last seven budget years. the total amount of repayments and redemptions referred to in article 243(1) for a given financial year shall be supplemented by the amount of liabilities of the association co-founded by a given local government unit to be paid in the same financial year. the amount of 2 article 121(1) of the act of 27 august 2009. provisions introducing the public finance act, journal of laws no. 157, item 1241 as amended. financial stability of local government units… 35 funds allocated for the repayment of debt, together with the costs of its servicing, refers to the concept of the so-called operating surplus, i.e. the surplus of current income over current expenditure of the budget. this means that local governments that plan to incur liabilities, or already have incurred liabilities to be repaid, cannot be satisfied by the achievement of an operating balance, but must plan an operating surplus (salachna, 2011, pp. 525–528). the solutions adopted in articles 242 and 243 of the p.f.a. result in local governments being motivated to maximise current income and minimise current expenditure. this will allow them to achieve an operating balance or, even more beneficially, operating surpluses, which they will be able to use for their development. sometimes it is also important to achieve a surplus in the total budget (not only an operating surplus). it enables the property expenses to be covered in subsequent years, or the current expenses not covered by current revenues. influence of the regulations under article 242 and 243 of the p.f.a. on the finances of local governments in the light of the reports of the national council of regional chambers of audit in the light of data from the national council of regional chambers of audit (ncrca), the vast majority of l.g.u.s construct their budgets in compliance with both of the examined regulations. observance of these regulations is essential for the possibility of adopting the budget. the cases of failure to adopt a budget due to the lack of possibility to meet the requirements of articles 242 and 243 are few and far between. in 2017, ncrca determined budgets for 9 local governments (including 3 cases that can be considered to be directly related to the rule under article 243 of the p.f.a.; ncrca, 2018, p. 33). in 2016, there was a total of 9 determined l.g.u. budgets. (excluding municipal associations; ncrca, 2017, p. 33), and in 2015, there were 11 cases of determining l.g.u. budgets (including 2 directly related to the lack of possibility of complying with article 242–244 of the p.f.a.; ncrca, 2016, p. 36). in previous years, the replacement budget arrangements also covered individual cases. the data below demonstrates that in the years 2008–2017 in the majority of cases l.g.u.s had budgetary surpluses. the advantage of units with a budget deficit can be observed in 2011, 2014 and 2017. małgorzata cilak36 figure 1. number of local government units ending the budget year with a surplus and a deficit in 2008–2017 figure 1. s. 36 32% 32% 35% 25% 28% 24% 21% 32% 29% 36% 51% 14% 15% 11% 9% 9% 20% 8% 10% 21% 38% 48% 0% 10% 20% 30% 40% 50% 60% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 uk eu 1515 2140 2490 857 1542 1674 1358 2008 2245 1376 1293 668 319 1952 1267 1135 1451 800 563 1432 0 500 1000 1500 2000 2500 3000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 surplus deficit s o u r c e : author’s own elaboration based on: (ncrca, 2008–2017). the data presented in table 1 indicates the number of local government units with an operating surplus – planned in the budget and achieved at the end of the budget year, and unplanned, but nevertheless, achieved at the end of the budget year, as well as with an operating deficit – planned and achieved at the end of the budget year and unplanned but achieved at the end of the budget year. in view of the presented data, a large majority of local governments are planning operating surpluses in the budget. the number of local governments planning an operating deficit has clearly been falling from 2011 onwards (the entry into force of article 242 of the p.f.a.). operating surpluses were achieved at a level higher than assumed (in 2017 by 72.7%), while operating deficits were achieved at a level lower than assumed (in 2017 by 59.7%). most of the local governments that planned an operating balance achieved operating surpluses. the presented data indicates that the deficit in local governments is primarily of an investment nature. the operating deficit is rarely planned and achieved. it is worth paying attention to large discrepancies in planned and executed operating surpluses or deficits. they may indicate an unpredictable economic situation or a need to improve the planning accuracy by an l.g.u. financial stability of local government units… 37 table 1. the number of l.g.u.s with an operating surplus and operating deficit in 2009–2017 year 2009 2010 2011 2012 2013 2014 2015 2016 2017 the number of l.g.u.s with an operating surplus planned and achieved 2256 1759 2182 2450 2627 2600 2633 2708 2651 planned deficit, achieved surplus 329 576 432 243 138 150 125 84 140 the number of l.g.u.s with an operating deficit planned and achieved 217 461 136 77 26 40 29 9 14 planned surplus, achieved deficit 6 12 40 25 11 13 16 7 3 planned operating balance achieved operating surplus 0 1 13 14 5 4 4 0 0 achieved operating deficit 0 0 6 0 2 2 1 0 0 s o u r c e : author’s own elaboration based on: (ncrca, 2011–2017). the amount of current income in the structure of the total income of l.g.u. budgets exceeds the amount of current expenditure in the structure of the total expenditure of l.g.u. budgets. on the other hand, the amount of property income in the structure of the total income of l.g.u. budgets is lower than the amount of property expenditure in the structure of the total expenditure of l.g.u. budgets: in 2017 property income amounted to 6% of total income and property expenditure to 15.3% of total expenditures. in the previous years, the share of property income in total income amounted to: 6.1% in 2016, 11.5% in 2015 and 11.6% in 2014. in the same years, the share of property expenditure in total expenditure amounted to 12.5%, 19.6%, and 21%, respectively. observably, the share of property expenditure in local government budgets is higher than in the state budget (ziółkowska, 2012, pp. 265–267; see also jurewicz, 2017a, p. 112). thus, property income is not sufficient to cover property expenditure, and it is necessary to cover part of property expenditure with revenue. ncrca data indicate that the individual indicator of liability servicing (ils) introduced in article 243 of the p.f.a. reduced the ability of local governments to service them. in 2010 it would have been more advantageous than the earmałgorzata cilak38 lier limit for 721 l.g.u.s, in years 2011–2018 respectively for: 437, 227, 162, 135, 149, 173, 180 and 172 l.g.u.s (ncrca, 2012, p. 184; ncrca, 2014, p. 212; ncrca, 2016, p. 279; ncrca, 2018, p. 294). this means that so many local government bodies could have planned to pay their liabilities at a level higher than 15% of the budget’s planned income (as such a value was ‘granted’ by the limit under article 169 of the p.f.a. of 2005). according to the ils, most of the local governments are capable of servicing liabilities at the level of 6–9% of the planned budget income. there is also the phenomenon of negative repayment limits. it should be noted, however, that the number of l.g.u.s whose ils goes up, is systematically increasing3. since 2012 onwards, the debt of l.g.u.s has been decreasing in relation to their income. in years 2012–2014, the ratio of liabilities included in the state public debt to the income of l.g.u.s amounted to 38.2%, 37.7% and 37.1%, respectively. in years 2015–2017, this ratio decreased, amounting respectively to 36%, 32.3%, 30% of income, which was caused by the increase in the amount of income in the absence of an increase in the amount of debt (ncrca, 2015, p. 153; ncrca, 2018, p. 184). the presented data indicates a reduction in the use of repayable funds by the l.g.u. exceptions to the application of regulations under articles 242 and 243 of the p.f.a. the legislator provided for exceptions to the obligation of applying expenditure and debt regulations. they weaken the inf luence of the examined regulations on the financial discipline of local governments. in certain circumstances, an operating deficit may be planned in the l.g.u. budget. pursuant to art. 242(1) of the p.f.a., the amount of current expenditure should not exceed the amount of current income increased by the budget surplus from previous years, repayment of loans granted from the l.g.u. budget in previous years, and unused funds from income and expenditure settlements resulting from special rules of the execution of local government budgets and settlements of funds from the eu budget. in this way, it is possible to create an 3 in the light of the reports quoted above, the number of those l.g.u. increases, for example, whose indicator under article 243(1) is within 12–15% of the planned income: in 2015 it was 272 l.g.u., in 2016 – 303 l.g.u., in 2017. – 304 l.g.u., in 2018 – 320 l.g.u. financial stability of local government units… 39 operating deficit, provided, however, that its amount is limited to the amounts derived from the above-mentioned titles. however, in accordance with article 242(3) of the p.f.a. the incurred current expenditure may be higher than the executed current income increased by the budget surplus from previous years, the repayment of loans granted in previous years, and unused funds from income and expenditure settlements resulting from special rules of the execution of local government budgets and settlements of funds from the eu budget, only by the amount related to the execution of current expenditure with the participation of funds from the eu budget and non-reimbursable funds from the aid granted by the member states of the european free trade association (efta), if the funds have not been transferred in the given budget year. this is an opportunity to increase the operating deficit compared to the one planned in accordance with paragraph 1. local governments have avoided planning the operating deficit, but have made use of the possibility to accumulate spare funds from past and undisbursed loans and credits (trykozko, 2007, p. 305; babczuk & cyrankiewicz, 2016). the lack of precise regulations regarding the allocation of funds has opened up a possibility to l.g.u.s to create reserves, while at the same time planning to take out loans or credits (dziedziak, 2017). as a result of the amendment to the p.f.a., the legislator eliminated the possibility of using spare funds as a reference point for planning the operating deficit4. article 242(3) of the p.f.a. was amended accordingly. article 243(1) in its original wording assumed that income from the sale of property would be included in the operating surplus (a positive difference between income and current expenditure). this made it possible for l.g.u.s to achieve a positive value of the indicator, not through the predominance of current income over current expenses, but through the planning of income from the sale of property. it was therefore possible for an l.g.u. to plan funds to service its liabilities even with the planned operating deficit (of course, the income from the sale of the property had to be sufficiently high5). this was an unjustified solution. income from the sale of the property is not current income. its inclusion in the operating surplus led l.g.u.s to make irrational business deci4 act of 14 december 2018 amending the act on public finance and certain other acts, journal of laws of 2018, item 2500. 5 it is assumed that few local governments will be able to ‘improve’ their indicator under article 243(1) by planning income from this source (salachna, 2011, pp. 527– –528). małgorzata cilak40 sions in order to obtain a positive value of the indicator under article 243(1) of the p.f.a.6. the legislator amended article 243(1) in such a way as to exclude this income from the construction of the operating surplus7. this solution, however, right as it is in principle, will make it difficult for the least aff luent local governments to achieve a positive value of ils. the restrictions provided for in article 243(1) of the p.f.a. exclude funds which constitute the proceeds from the issue of revenue bonds even if the local government (issuer) does not exercise its right to limit its own liability for the obligations arising from such bonds. in the opinion of the representatives of the doctrine, this regulation may have increased the interest of local governments in issuing this type of bonds (klupczyński, 2015a, p. 84; ostałecka, 2013, p. 75). this regulation encourages local governments to make financial decisions which are not based on a general rationale, but according to the criterion of the possibility of raising funds without restrictions of the conditions under article 243(1) of the p.f.a. the expenses and expenditure related to financing tasks from eu funds (article 243(3)) were also excluded from the indicator under article 243(1) of the p.f.a. the legislator also excluded certain types of expenditure and liabilities from the construction of the rules in articles 242 and 243 of the p.f.a. in the years 2013–2015, the local governments which took over the repayment of the liabilities of the independent public health care institution (hereinafter also referred to as the ‘iphci’) transformed on the basis of the rules resulting from the healthcare institutions law, when calculating the ratio under article 242, did not include current expenses incurred to repay these liabilities in the amount in which they were not subject to financing from subsidies from the state budget (the act on amending certain acts in connection with the implementation of the budget act 2012, article 36(1)). this exclusion made it possible for the local governments that could benefit from it, to take over the obligations of health care institutions (rabiej, 2014, pp. 181–182). 6 the execution of income from the sale of the property is at a lower level compared to the plan, than the execution of current income. this demonstrates that in reality the sale of the property, the plans of which were used to plan operating surplus, did not always take place (ncrca, 2018, p. 171). 7 act of 14 december 2018 amending the act on public finance and certain other acts, journal of laws of 2018, item 2500. financial stability of local government units… 41 however, in the years 2014–2018, by determining the ratio of repayment of liabilities, l.g.u.s excluded current expenses incurred on the repayment of the liabilities assumed from the independent public health care institution transformed under the rules specified in the healthcare institutions act, in the amount in which they are not subject to financing by a subsidy from the state budget. in the years 2014–2018, l.g.u.s did not apply the ils to the repayment of liabilities (excluding interest) incurred by them for the repayment of the assumed liabilities of transformed independent public health care institutions (article 36(1) and (2) of the act on amending certain acts in connection with the implementation of the budget act). according to ncrca data, the liabilities of independent public health care institutions constitute 90% of the liabilities of organisational units having legal personality, supervised by l.g.u., (excluding commercial companies). if these entities were not able to cover the negative financial result, the need to pay their liabilities would be borne by the local government unit. in 2017, the debt of local government units having legal personality (mainly iphci) constituted 2% in relation to the income of l.g.u.8 the debt of iphci would potentially have the smallest impact on the debt ratio of municipalities. greater debt would be present in country districts (districts’ own debt – 22.2%, debt cumulated with the debt of district legal persons – 27.8% in relation to the income of districts), and the largest in voivodeships (voivodeships’ own debt – 41.2% of income, debt cumulated with the liabilities of voivodeship legal persons – 57.6% of the income of voivodeships) (krrio, 2018, p. 298). one of the reasons for the financial problems that local governments were faced with was their use of the so-called hidden forms of debt (see jastrzębska, 2017, p. 126; babczuk & gonet, 2013, p. 38). the use of these opportunities posed a threat to the financial stability of l.g.u.s. yet another way to maintain appropriate levels of ratios is to transfer debt to municipal companies with legal personality (langer, 2014, p. 80). the possibility of using the so-called hidden forms of debt has been limited by the legislator. they are now included in the obligations covered by the regulation under article 243(1) of the p.f.a. (ar8 own debt of l.g.u. amounted to 30.0% in relation to their income, and the debt cumulated with the debt of legal persons – 32% in relation to the income of l.g.u. (ncr ca, 2018, p. 298). małgorzata cilak42 ticle 72(1a))9. however, the possibility of ’transferring’ expenses or liabilities to municipal companies has not been limited.  conclusion the establishment of legal rules that limit the amount of public expenditure and debt seems justified after the legislator adopted the principle of a lack of bankruptcy capacity of local governments. this objective is currently implemented by two provisions: article 242 and 243 of the p.f.a. they force the local government budget to be balanced in the so-called current part, and also limit the amount of funds planned by local governments for the repayment of financial liabilities. at the same time, the rules do not limit the planning of income and property expenses, but affect only the so-called current part of the budget and the amount of payments of local government liabilities. the presented statistical data indicate that the examined regulations have an impact on the finances of local governments. this inf luence is generally positive: it increases discipline in terms of budget expenditure planning, especially current expenditure, and increases the financial security of l.g.u.s (jurewicz 2017b, p. 57). although the presented statistical data may be affected by various factors, not necessarily related to any of the rules, the convergence of the dates on which the regulations entered into force, and changes in statistical quantities, especially the amount of debt, are noticeable. despite the fact that many local governments, also before the analysed regulations entered into force, achieved total and operating budget surpluses and conducted a rational policy of incurring liabilities, the regulations under article 242 and 243 of the p.f.a. impose such an action on each l.g.u. that wants to maintain the possibility of adopting a budget. however, the problem for the stability of local government finances may be the exemptions from the obligation to apply the regulations of article 242 and 243 of the p.f.a. they enable a parallel existence of two types of current expenditures and expenses: those covered by the regulations and those excluded from this scope. as a result, the obligation to apply the regulations is limited and does not guarantee the full financial stability of local governments. 9 act of 14 december 2018 amending the act on public finance and certain other acts, journal of laws of 2018, item 2500. financial stability of local government units… 43 the limitation resulting from article 243(1) of the p.f.a. showed the actual ability of local governments to service debt, which in most cases is at a lower level than the 15% of the planned l.g.u. budget income resulting from the earlier regulation. therefore, the acquisition of revenues is limited. the possibility of financing investments from property income does not always help to solve this problem owing to a narrow catalogue of such income, in which two items are one-off income, and it is difficult to plan investments in the long term on such a basis. in this situation, further ‘sealing’ of the provisions of the p.f.a. will result in the inhibition of local government investments. however, this problem requires solutions, not only at the level of expenditure and debt regulations, but also at the level of the income system of local governments and their being burdened with the costs of implementing public duties. it is essential to develop the institutions of the current and property budget so that the regulations that govern its functioning are conducive to the rational financial management of local governments to the highest possible extent. it is also necessary to provide local governments with stable and efficient sources of income, which would meet their financial needs.  references act on amending certain acts in connection with the implementation of the budget act (2012). act of 7 december 2012 on amending certain acts in connection with the implementation of the budget act, journal of laws, item 1456, as amended. babczuk, a., & gonet, w. 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(hidden forms of debt in local government units – evaluation attempt.) prawo budżetowe państwa i samorządu, (budget law of the state and the selfgovernment.) 4(2), 75–86. https://dx.doi.org/10.12775/pbps.2014.038. ncrca (national council of regional chambers of audit) (2018). report on the activities of regional chambers of audit and budget execution by local government units in 2017. warsaw: national council of rca. ncrca (national council of regional chambers of audit) (2017). report on the activities of regional chambers of audit and budget execution by local government units in 2016. warsaw: national council of rca. financial stability of local government units… 45 ncrca (national council of regional chambers of audit) (2016). report on the activities of regional chambers of audit and budget execution by local government units in 2015. warsaw: national council of rca. ncrca (national council of regional chambers of audit) (2015). report on the activities of regional chambers of audit and budget execution by local government units in 2014. warsaw: national council of rca. ncrca (national council of regional chambers of audit) (2014). report on the activities of regional chambers of audit and budget execution by local government units in 2013. warsaw: national council of rca. ncrca (national council of regional chambers of audit) (2012). report on the activities of regional chambers of audit and budget execution by local government units in 2011. warsaw: national council of rca. ostałecka, a. (2013). współpraca jednostek samorządu terytorialnego z instytucjami finansowymi. (cooperation of local government units with financial institutions.) in a. babczuk (ed.). rozwój w warunkach kryzysu. wybrane zagadnienia zarządzania finansami jednostek samorządu terytorialnego. (development in crisis. selected issues of financial management of local government units.) warsaw: fundacja rozwoju demokracji lokalnej. owsiak, s. (2017). finanse publiczne. współczesne ujęcie. (public finances. a modern approach) warsaw: pwn. p.f.a. act of 27 august 2009, journal of laws of 2017, item 2077, as amended. p.f.a. of 2005. act of 30 june 2005 r., journal of laws of 2005, no. 249, item 2104 as amended. rabiej, u. (2014). efektywność ekonomiczna wybranych instytucji systemu finansowego samorządu terytorialnego. (economic efficiency of selected institutions of the financial system in local governments.) prawo budżetowe państwa i samorządu, (budget law of the state and the self-government.) 1(2), 173–194. https://dx.doi. org/10.12775/pbps.2014.010. salachna, j.m. (2011). nowe formy prawne ograniczania deficytu oraz zadłużenia samorządu terytorialnego – próba oceny. (new legal forms for the reduction of deficit and debt of local governments – evaluation attempt.) in j. szołno-koguc, a. pomorska (eds.). ekonomiczne i prawne uwarunkowania i bariery redukcji deficytu i długu publicznego. (economic and legal conditions and barriers for the reduction of deficit and public debt.) warsaw: lex a wolters kluwer business. trykozko, r. (2007). ustawa o finansach publicznych. komentarz dla jednostek samorządu terytorialnego. (public finances act. comment for local government units.) warsaw: taxpress. ziółkowska, w. (2012). finanse publiczne. teoria i zastosowanie. (public finances. theory and application.) poznań: wydawnictwo wyższej szkoły bankowej. date of submission: april 8, 2019; date of acceptance: may 21, 2019. * contact information: marta.jakubowska.umk@gmail.com, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 56 611 46 00; orcid id: https://orcid.org/00000001-9067-4524. this work is supported by the polish national science center poland under grant no. 2017/26/e/ hs4/00858. jakubowska, m. (2019). traditional fiscal devices in poland and the concept of their modernization. copernican journal of finance & accounting, 8(1), 125–138. http://dx.doi.org/10.12775/ cjfa.2019.005 marta jakubowska* nicolaus copernicus university in toruń traditional fiscal devices in poland and the concept of their modernization keywords: fiscal system, traditional fiscal devices, online fiscalisation. j e l classification: o23, o33, e42. abstract: in connection with the upcoming changes in the area of fiscal policy, this article presents the traditional fiscal devices in poland and the planned concept of their modernization. for this purpose, it describes traditional fiscal equipment operating on the polish market, which, notably, has not been characterised in detail in the literature so far. therefore, to the best of her knowledge, the author made the first systematic description and classification of devices used for transaction fiscalisation and also comprehensively presented the current structure of this market. an important objective of the work was to present an innovative concept of online fiscalisation. the author proposed her own definition of this concept. as the solution is highly advanced, it was presented on the basis of technical documentation, internal reports of polish and foreign companies-producers of cash registers, as well as reports of consulting companies, especially from countries where the online fiscal system is already operating. the article also uses a part of the author’s expert study on the expected effects of the introduction of “online cash registers”. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 1 cjf&a co pe r n ic a n j o ur na l of finance & a c c o u n tin g marta jakubowska126  introduction in poland, fiscal policy (i.e. the shaping of the amount and structure of public expenditure) faces many challenges related to the economic situation in the country and around the world, the geopolitical situation, demographic situation, the state of domestic public finances or eu funds that enable the state to undertake various investments. like many other european countries, poland is struggling with large-scale problems of the grey economy and the tax gap (tomkiewicz, 2006, p. 51). all of this is linked to the constant search for new sources of income or an increase in the efficiency of existing sources, which generates significant difficulties for businesses and citizens (proppe & darski, 2016). it also happens that fiscal policy not only does not stimulate economic growth, but even constitutes an obstacle to running and developing economic activity, which has a negative impact on the social and economic development of the country. therefore, taking into account the struggles of fiscal policy, including planned or already implemented reforms, it is necessary to take decisive steps that will significantly contribute to an increase in state budget revenue and in the collection of vat and improve control over taxpayers, and ultimately lead to the reduction of the tax gap and the grey economy. the “online cash registers” project is an opportunity for change in this area, as these devices should ultimately replace traditional fiscal devices. it can be expected that such a radical change will contribute to the reduction of vat fraud. therefore, the main purpose of this article is present of traditional fiscal devices in poland and concept of their modernization. on the other hand, the presentation of the modernization of the fiscal system, on the example of online fiscalization implemented in croatia, was adopted as a detailed purpose. the research methodology and the course of the research process the article makes use of polish literature, statistical data from the ministry of finance and the polish bank association. the abovementioned sources, industry analyses, technical documentation, internal reports of polish and foreign companies-producers of cash registers, as well as reports of consulting companies served as the basis for the presentation of fiscalisation methods, description and classification of devices used for fiscalisation of transactions, as well as a comprehensive presentation of the current structure of this market. more traditional fiscal devices in poland 127 over, the author carried out statistical analysis and literature research, and introduced her own definition of “online fiscalisation” for the purpose of the present paper. the article also uses some of the results of an expert study on the expected effects of the online fiscalisation project. the expert study was conducted in 2017 by the author on a group of 12 experts from poland. traditional fiscal devices an important tool of fiscal policy consists in the devices recording transactions, contributing to the state budget tax revenue. so-called fiscal devices are used to record information on retail sales; their mode of operation and technical requirements are specified in the ordinances of the minister of economy of 2013 (ordinance of the minister of economy). in terms of design, fiscal devices can be divided into the following types (tradiss, 2014): ■ fiscal printers, ■ cash registers, ■ computer cash registers, cash registers are stand-alone recording and printing devices with built-in simple software supporting sales transactions. fiscal printers need to be connected to a standard computer (workstation) with specialist sales software installed. computer cash registers, on the other hand, operate in a single casing which includes a computer with software, a printing mechanism, keyboard and monitor. structure of the fiscal devices market the introduction of fiscal devices to the polish economy was gradual. the first step towards full fiscalisation of the economy was to extend the obligation to use cash registers in the year 2004. in the following years, several further extensions were made to this obligation in order to cover a growing range of industries and professions subject to compulsory fiscalisation. the professions which only recently joined the group of those obliged to have a cash register include e.g. doctors and dentists who, as a result of the extension of this obligation from the year 2015, must keep records by means of cash register devices regardless of the generated turnover. the structure of the fiscal devices market in the year 2016 is presented in diagram 1. marta jakubowska128 diagram 1. structure of the fiscal devices market in poland in 2016 diagram 1. structure of the fiscal devices market in poland in 2016 source: own elaboration on the basis of: (związek banków polskich, 2016). according to data from the ministry of finance, approximately 2.1 million fiscal devices are registered in poland (diagram ). however, 70% of them are used in the course of trade (i.e. 1.5 million) and the remaining 0.6 million registered cash registers do not show any turnover in practice. in general, there are two main reasons for this situation. firstly, a portion of cash registers is maintained as spare devices which will be used if the primary cash register has a failure (in the case of entities with a large daily number of transactions, even a few hours' downtime may mean large losses). the second reason is the fact that cash registers are held by entities that do business for other companies and issue invoices, and maintain a cash register in the event of occasional cash transactions with natural persons. ultimately, the number of cash register devices is 1.2 million, and the rest of the devices in operation are horeca devices (“specialised cash registers”, touch terminals, e.g. in restaurants) with a central system (związek banków polskich, 2016). according to the opinion of the electronic market institute: “the fiscal devices market in poland is quite specific, as it depends on the adopted legal regulations and the legislator's ability to enforce them. the constantly proposed changes in the regulations concerning this group of devices as well as proposals (declarations) to subject new groups of users to the 2.1 million devices according to the ministry of finance 1.5 million used in the course of trade 0.3 million horeca with a central system 1.2 million cash register devices 0.6 million with paper copy 0.6 million with electronic copy 0.6 million show no turnover devices are formally registered s o u r c e : own elaboration on the basis of: (związek banków polskich, 2016). according to data from the ministry of finance, approximately 2.1 million fiscal devices are registered in poland (diagram 1). however, 70% of them are used in the course of trade (i.e. 1.5 million) and the remaining 0.6 million registered cash registers do not show any turnover in practice. in general, there are two main reasons for this situation. firstly, a portion of cash registers is maintained as spare devices which will be used if the primary cash register has a failure (in the case of entities with a large daily number of transactions, even a few hours' downtime may mean large losses). the second reason is the fact that cash registers are held by entities that do business for other companies and issue invoices, and maintain a cash register in the event of occasional cash transactions with natural persons. ultimately, the number of cash register devices is 1.2 million, and the rest of the devices in operation are horeca devices (“specialised cash registers”, touch terminals, e.g. in restaurants) with a central system (związek banków polskich, 2016). traditional fiscal devices in poland 129 according to the opinion of the electronic market institute: “the fiscal devices market in poland is quite specific, as it depends on the adopted legal regulations and the legislator's ability to enforce them. the constantly proposed changes in the regulations concerning this group of devices as well as proposals (declarations) to subject new groups of users to the obligation to register transactions with the use of cash register devices cause this market to be unstable and its development difficult to forecast” (infosfera, 2016). types and classification of fiscal devices cash register devices are an element of the national tax system. they appeared in poland together with the implementation of the of value added tax (vat). its official polish name is: goods and services tax. cash register devices were to be used to record turnover for the purposes of vat settlements in transactions with the final consumer. the use of such devices contributes to exercising consumer's rights to receive a document (receipt) containing basic information about the seller and the transaction, including information about the price structure and the amount of vat included in it (ministry of finance, 2017). some of the cash register devices used around the world do not have a fiscal memory or it is not a source of vat calculation, and data on turnover are recorded in an external secured memory. this takes place, for instance, in: sweden, serbia and several african countries (proppe & darski, 2016). generally speaking, cash registers can be divided into two groups: 1) erc (electronic cash registers), 2) pos cash registers, also known as computer cash registers (electronic point-of-sale). according to diagram 2, there are three types of erc: ■ portable (mobile) cash registers – of small size and small range of functionalities. these devices are intended primarily for those entrepreneurs who issue recurring receipts. mobile cash registers are very popular in small trade and crafts, parking lots, bazaars, door-to-door trade, as well as outdoor events, but also in the catering industry. usually, up to 3,000 plu codes can be programmed on mobile cash registers. marta jakubowska130 diagram 2. breakdown of electronic cash registers popular in small trade and crafts, parking lots, bazaars, door-to-door trade, as well as outdoor events, but also in the catering industry. usually, up to 3,000 plu codes can be programmed on mobile cash registers. diagram 2. breakdown of electronic cash registers source: own elaboration on the basis of: (fiskalne-kasy24, 2012).  single-station cash registers – they have a greater range of functionalities than mobile cash registers. one can connect e.g. a computer, scale and code reader to them, thus changing their configuration. most of these cash registers are small in size and work very well in small points of sale: local shops, kiosks, stalls, restaurants or service outlets. single-station cash registers are most often used in places where there is no need to cooperate with a warehousing program. many of them are also adapted to mobile work.  system cash registers – they are the equipment of large outlets with several cash desks. they can work independently as a single-station cash register or cooperate with other devices through e.g. integration with other cash registers, computer, payment terminal, scanner, chip card reader, pin pad, pstn or gsm modem and receipt printer. however, in the case of system cash registers, the basic device is a computer with an installed warehousing and invoicing software. therefore, thanks to the connection between the cash register and the computer, it is possible to control sales on an ongoing basis and have access to up-to-date information on stock levels. communication between the cash register and the computer can be carried out off-line or online (with a command issued by the computer). the first mode involves interrupting the cashier's work when the cash register uploads data to the server, while in online mode it is not necessary. sales information is displayed on the computer screen, which allows for actual verification of turnover, products sold, etc. (fiskalne-kasy24, 2012). turning to the second group of cash registers—pos devices—it should be noted that this is the most technologically advanced group of recording devices. undoubtedly, they can be called computers adapted to record turnover, as well as to perform many different functions related to the storage of goods and their sale. the simplest pos cash register configuration consists of a computer, a fiscal printer connected to it, a keyboard and a standard screen or touch screen. in the extended version it is possible to connect the pos cash register to all devices necessary in a shop, e.g. readers, payment terminals, electronic scales, etc. a characteristic feature of pos cash registers is their versatility. depending on the needs, one can change the software, extend the ram memory, install a more efficient processor, i.e. configure the device. the complexity of pos cash register configuration is shown in błąd! nie można odnaleźć źródła odwołania.. erc portable (mobile) cash registers single-station cash registers system cash registers s o u r c e : own elaboration on the basis of: (fiskalne-kasy24, 2012). ■ single-station cash registers – they have a greater range of functionalities than mobile cash registers. one can connect e.g. a computer, scale and code reader to them, thus changing their configuration. most of these cash registers are small in size and work very well in small points of sale: local shops, kiosks, stalls, restaurants or service outlets. single-station cash registers are most often used in places where there is no need to cooperate with a warehousing program. many of them are also adapted to mobile work. ■ system cash registers – they are the equipment of large outlets with several cash desks. they can work independently as a single-station cash register or cooperate with other devices through e.g. integration with other cash registers, computer, payment terminal, scanner, chip card reader, pin pad, pstn or gsm modem and receipt printer. however, in the case of system cash registers, the basic device is a computer with an installed warehousing and invoicing software. therefore, thanks to the connection between the cash register and the computer, it is possible to control sales on an ongoing basis and have access to up-to-date information on stock levels. communication between the cash register and the computer can be carried out off-line or online (with a command issued by the computer). the first mode involves interrupting the cashier's work when the cash register uploads data to the server, while in online mode it is not necessary. sales information is displayed on the computer screen, which allows for actual verification of turnover, products sold, etc. (fiskalne-kasy24, 2012). traditional fiscal devices in poland 131 turning to the second group of cash registers – pos devices – it should be noted that this is the most technologically advanced group of recording devices. undoubtedly, they can be called computers adapted to record turnover, as well as to perform many different functions related to the storage of goods and their sale. the simplest pos cash register configuration consists of a computer, a fiscal printer connected to it, a keyboard and a standard screen or touch screen. in the extended version it is possible to connect the pos cash register to all devices necessary in a shop, e.g. readers, payment terminals, electronic scales, etc. a characteristic feature of pos cash registers is their versatility. depending on the needs, one can change the software, extend the ram memory, install a more efficient processor, i.e. configure the device. the complexity of pos cash register configuration is shown in figure 1. figure 1. complexity of pos cash register configuration displayed on the computer screen, which allows for actual verification of turnover, products sold, etc. (fiskalne-kasy24, 2012). turning to the second group of cash registers—pos devices—it should be noted that this is the most technologically advanced group of recording devices. undoubtedly, they can be called computers adapted to record turnover, as well as to perform many different functions related to the storage of goods and their sale. the simplest pos cash register configuration consists of a computer, a fiscal printer connected to it, a keyboard and a standard screen or touch screen. in the extended version it is possible to connect the pos cash register to all devices necessary in a shop, e.g. readers, payment terminals, electronic scales, etc. a characteristic feature of pos cash registers is their versatility. depending on the needs, one can change the software, extend the ram memory, install a more efficient processor, i.e. configure the device. the complexity of pos cash register configuration is shown in błąd! nie można odnaleźć źródła odwołania.. figure 1. complexity of pos cash register configuration source: (forcom, 2015). it should be emphasized that erc and pos cash registers are characterized by a different range of possibilities, depending on their technical parameters. erc have very limited expansion and configuration possibilities in comparison to pos models and are characterized by limited memory and permanently installed software (which cannot be changed or modified). a typical erc has a ram capacity of 1 to 8 mb, so after several s o u r c e : (forcom, 2015). marta jakubowska132 it should be emphasized that erc and pos cash registers are characterized by a different range of possibilities, depending on their technical parameters. erc have very limited expansion and configuration possibilities in comparison to pos models and are characterized by limited memory and permanently installed software (which cannot be changed or modified). a typical erc has a ram capacity of 1 to 8 mb, so after several years of use (usually five years), it is full and practically needs to be replaced. the user then has to purchase a new device or install a new fiscal module. there is one more interesting difference – although it is possible to connect various peripheral devices, including a computer, to the erc cash register, it is not possible to sell from the computer program – the cash register requires direct operation of the cashier. thanks to the fact that pos cash registers are equipped with hard drives, they can record and remember virtually any number of transactions and related information for a very long time. for example, the cash register may store information about each receipt up to several years back (fiskalne-kasy24, 2012). figure 2. number of cash registers by industry in 2016 (in thousands) source: own elaboration based on data from: (ministry of finance, 2017). the number of cash registers used by a given company is a result of many factors. the number of cash registers depends on the business and its scale, turnover, as well as the number of employees. figure 2 presents the number of cash registers in poland in the year 2016, broken down by industry. the catering industry is the clear market leader (about 90,000 cash registers), followed by construction services and car repair. among the remaining industries, the lowest number of fiscal devices is recorded in tobacco trade (11,000 cash registers) and alcohol trade (9,000 cash registers). the concept of online fiscalisation within the government programme "from paper to digital poland" taking into account the scope of the grey market in poland, the persisting vat gap and the tools used to reduce them which did not bring the expected results, it seems necessary to search for new solutions in this respect. a qualitative change, a new approach to the fiscalisation of turnover, is becoming necessary. a solution that may significantly improve state tax revenue in poland is online fiscalisation, also known as the online cash register system. this system works well in other countries, so there is a chance that it may prove effective also in poland (proppe & darski, 2016). the concept of online fiscalisation the online fiscalisation model is a system of sending sales data from receipts to a central, non-erasable and non-volatile memory. such a system should be available online, be highly available and resistant to ddos (distributed denial of service) attacks. the main feature of such a mechanism is the central assignment of unique transaction/receipt numbers, with protection in the event of network disconnection (ministry of development, 2016, p. 1). the general scheme of this system assumes constant communication between the taxpayer and the tax authority. in europe, there are many solutions in the area of online fiscalisation, aimed, among other things, at reducing the grey market. the two best-known models are called the hungarian and the croatian model. their names come from the countries where the online cash register system has been implemented. of course, apart from these countries, innovative solutions of this type also exist e.g. in turkey, bulgaria, the czech republic and sweden (ogórek, 2016). for the purpose of the present paper, the author proposed her own definition of online fiscalisation as: "a solution under which information about a transaction subject to fiscalisation is recorded and transferred in a short time to the database systems of a given country’s tax administration, via the internet or another it system”. online fiscalisation project in poland from 1 may 2019, an ordinance introducing online cash registers will be in force in poland (infor, 2019). online cash registers will automatically transmit data on daily fiscal reports, fiscal receipts and invoices (including cancellations) (vat, 2017). 15.5 89.9 11.4 14.3 9.0 13.8 13.9 35.7 35.4 0 20 40 60 80 100 fuel industry catering tobacco trade sale of construction materials alcohol trade electronics trade car parts sales car repair construction services s o u r c e : own elaboration based on data from: (ministry of finance, 2017). the number of cash registers used by a given company is a result of many factors. the number of cash registers depends on the business and its scale, traditional fiscal devices in poland 133 turnover, as well as the number of employees. figure 2 presents the number of cash registers in poland in the year 2016, broken down by industry. the catering industry is the clear market leader (about 90,000 cash registers), followed by construction services and car repair. among the remaining industries, the lowest number of fiscal devices is recorded in tobacco trade (11,000 cash registers) and alcohol trade (9,000 cash registers). the concept of online fiscalisation within the government programme "from paper to digital poland" taking into account the scope of the grey market in poland, the persisting vat gap and the tools used to reduce them which did not bring the expected results, it seems necessary to search for new solutions in this respect. a qualitative change, a new approach to the fiscalisation of turnover, is becoming necessary. a solution that may significantly improve state tax revenue in poland is online fiscalisation, also known as the online cash register system. this system works well in other countries, so there is a chance that it may prove effective also in poland (proppe & darski, 2016). the concept of online fiscalisation the online fiscalisation model is a system of sending sales data from receipts to a central, non-erasable and non-volatile memory. such a system should be available online, be highly available and resistant to ddos (distributed denial of service) attacks. the main feature of such a mechanism is the central assignment of unique transaction/receipt numbers, with protection in the event of network disconnection (ministry of development, 2016, p. 1). the general scheme of this system assumes constant communication between the taxpayer and the tax authority. in europe, there are many solutions in the area of online fiscalisation, aimed, among other things, at reducing the grey market. the two best-known models are called the hungarian and the croatian model. their names come from the countries where the online cash register system has been implemented. of course, apart from these countries, innovative solutions of this type also exist e.g. in turkey, bulgaria, the czech republic and sweden (ogórek, 2016). marta jakubowska134 for the purpose of the present paper, the author proposed her own definition of online fiscalisation as: “a solution under which information about a transaction subject to fiscalisation is recorded and transferred in a short time to the database systems of a given country’s tax administration, via the internet or another it system”. online fiscalisation project in poland from 1 may 2019, an ordinance introducing online cash registers will be in force in poland (infor, 2019). online cash registers will automatically transmit data on daily fiscal reports, fiscal receipts and invoices (including cancellations) (vat, 2017). the replacement of cash registers is to be evolutionary, in accordance with the life cycle of this type of devices, where older cash registers which do not meet today's technological standards are replaced with more modern ones (tvn24bis, 2019). the act assumes that: ■ old cash registers can be used until 31 december 2019 by: entrepreneurs repairing motor vehicles and mopeds, including repairing, fitting, retreading and reconditioning tyres and replacing tyres or wheels for motor vehicles and mopeds; selling petrol, diesel or gas intended for the propulsion of vehicles. ■ until 30 june 2020 by: catering establishments (including those operating on a seasonal basis); entrepreneurs offering hotel services; selling coal, briquette and similar solid fuels produced from coal, coke and semi-coke for heating purposes. ■ until 31 december 2020 by: hairdressing, beauty, construction services, medical care services provided by doctors and dentists, legal services and services related to the operation of facilities for improving physical condition – only for admissions. after the entry into force of the new regulations, taxpayers will still be able to purchase cash registers of the “old” type (cash registers with a paper copy entry until 30 june 2019, and cash registers with electronic copy recording until 31 december 2022). traditional fiscal devices in poland 135 below are the results of a part of the expert study conducted by the author in 2017 on a group of 12 experts comprising: ceos of leading companies dealing with electronic payment settlement (visa, mastercard), representatives of commercial banks (pekao s.a.), employees of leading acquirers in the polish market (first data, polskie e-płatności) and the clearing house (kir). a representative of the ministry of finance also partook in the study. figure 3. assessment of the potential impact of the online fiscalisation system old cash registers can be used until 31 december 2019 by: entrepreneurs repairing motor vehicles and mopeds, including repairing, fitting, retreading and reconditioning tyres and replacing tyres or wheels for motor vehicles and mopeds; selling petrol, diesel or gas intended for the propulsion of vehicles. until 30 june 2020 by: catering establishments (including those operating on a seasonal basis); entrepreneurs offering hotel services; selling coal, briquette and similar solid fuels produced from coal, coke and semi-coke for heating purposes. until 31 december 2020 by: hairdressing, beauty, construction services, medical care services provided by doctors and dentists, legal services and services related to the operation of facilities for improving physical condition – only for admissions. after the entry into force of the new regulations, taxpayers will still be able to purchase cash registers of the “old” type (cash registers with a paper copy entry until 30 june 2019, and cash registers with electronic copy recording until 31 december 2022). below are the results of a part of the expert study conducted by the author in 2017 on a group of 12 experts comprising: ceos of leading companies dealing with electronic payment settlement (visa, mastercard), representatives of commercial banks (pekao s.a.), employees of leading acquirers in the polish market (first data, polskie e-płatności) and the clearing house (kir). a representative of the ministry of finance also partook in the study. figure 3. assessment of the potential impact of the online fiscalisation system source: own elaboration; n=12; responses presented according to the number of experts' indications. 1 2 8 5 2 1 1 3 2 1 7 2 5 4 3 online fiscalisation will be an efficient tool to fight the grey economy. online fiscalisation cannot be introduced in poland for political reasons. online fiscalisation will be an innovative revolution in polish pos. online fiscalisation will be a threat to privacy of polish citizens. definitely agree somewhat agree i don't know/hard to say somewhat disagree definitely disagree s o u r c e : own elaboration; n=12; responses presented according to the number of experts’ indications. the question addressed to experts (figure 3) concerned the online fiscalisation system which is planned to be implemented in poland in 2019. generally, according to the experts, online fiscalisation will be effective in the fight against the grey economy and in principle nobody considers it impossible to introduce for political reasons. this answer is pivotal because it indicates that this project is generally feasible. seven experts believe that this system will be an innovative revolution in polish points of sale, the role of modern infrastructure equipment in pos will increase – and it can be concluded that this will result in pos offering new services. however, when it comes to the issue of surveillance of citizens and threats to their privacy, only two experts see such a danger. marta jakubowska136 case study on the implementation of online fiscalization in croatia an example of the success of the online fiscalization model is the example of croatia, which confirms the success of actions aimed at fighting the shadow economy and reducing the tax gap. due to the prevailing share of cash payments in the country, controlling taxpayers was not the easiest task. cash, unlike card payments, does not leave a “trace” and the transaction is easier to hide. in croatia, it was difficult to prove that entrepreneurs report much lower turnover compared to those achieved by them in reality. therefore, from january 1, 2013, all taxpayers have been permanently connected online to the government’s fiscal system. this is due to the fact that it is not possible to print the receipt until the system has obtained all necessary transaction data from interested parties (the receipt must have a unique identification code, the so-called jir (proppe & darski, 2016)). unlike other models, such as the hungarian model, the croatian model is based on a software solution – that is, it does not require exchange of cash registers, but is based on the integration of applications installed on any mobile devices. implementation of the system in croatia took 8 months, and its implementation was planned in three stages: ■ from 1 january 2013 – the catering industry, hotel industry and large companies; ■ from april 1, 2013 – wholesale and retail sales, freelancers; ■ from july 1, 2013 – other taxpayers. the result of the introduction of the above solution turned out to be very positive: ■ online fiscalization has received public support; ■ industries that are exempt from fiscalization, want to be subject to the obligation of fiscalization on their own volition; ■ after a certain period of operation, the basic vat rate has been lowered. ■ further improvement of the functioning of this innovative solution is planned. the most important success of the model was the increase in tax revenues as well as the increase in disclosed revenues from taxpayers – in some branches of the economy revenues increased by over 40%. according to the data of the croatian ministry of finance, restaurants, lawyers and traders revealed about 18% more turnover after one year of operation than a year earlier (jakubows traditional fiscal devices in poland 137 ka, 2017). according to the croatian minister of finance, since 2013 sellers and traders have doubled the turnover revealed (uryniuk, 2016). despite the benefits of the online fiscalization system, attention should be paid to croatian problems with the use of appropriate vat rates by entrepreneurs. it was the main area in which irregularities in the functioning of the online cash register system were detected. the next one is the presence of too much cash in the register, in comparison with the number of registered transaction (fiscalization.hr, 2015).  conclusion the analysis of current fiscalisation methods in poland carried out in the present article has shown that traditional fiscal devices date back to the previous technological era. therefore, any action aimed at increasing the effectiveness of controls in the area of fiscalisation of retail transactions should involve the replacement of equipment. a real chance for change in this area is provided by the project of “online cash registers”, which, in accordance with the act, will come into force on 1 may 2019. the concept of online fiscalisation assumes the registration and transmission of data to the ict system run by the head of the central cash register repository of the national revenue administration in order to hinder vat fraud. the change is particularly important in industries that are exposed to the grey economy. according to the experts, online fiscalisation may effectively reduce the scale of unregistered transactions and the online cash register system itself may turn out to be a revolution in points of sale, thus creating the potential for the growth of innovation of traditional enterprises.  references fiscalization.hr (2015). fiscalization, http://www.fiscalization.hr (accessed: 5.05.2019). fiskalne-kasy24 (2012). rodzaje kas fiskalnych, (cash register – facts and myths. types of fiscal cash registers.) http://www.fiskalne-kasy24.pl (accessed: 16.12.2018). forcom (2015). kasy pos, (pos cash registers.) http://www.forcom.com.pl (accessed: 12.08.2018). infor (2019). ulga na zakup kasy fiskalnej online – zmiany od 1 maja 2019 r., (discount on the purchase of an online cash register – changes from 1 may 2019.) http://www. ksiegowosc.infor.pl/podatki/vat/kasy-fiskalne (accesed: 2.04.2019). marta jakubowska138 infosfera (2016). liczba kas fiskalnych wzrośnie, (number of cash registers will increase.) http://www.gpwinfostrefa.pl (accessed: 3.10.2017). jakubowska, m. (2017). koncepcje modernizacji systemu fiskalizacji na przykładzie wybranych państw. (concepts for modernization of the fiscalation system on the example of selected countries.) ekonomiczne problemy usług, (economic problems of services.) 131(1), 139–146. ministry of development (2016). zarys koncepcji semionline – model rozwojowy. (semionline concept outline – development model.) warsaw. ministry of finance (2017). kasy rejestrujące – prawa i obowiązki podatnika zobowiązanego do prowadzenia ewidencji za pomocą kasy rejestrującej, (cash register devices – rights and obligations of a taxpayer obliged to keep records by means of a cash register device.) http://www.mf.gov.pl/pl (accesed: 20.03.2018). ogórek, s. (2016). e-paragony już za rok. policzysz, ile wydajesz na jedzenie, a fiskus łatwiej złapie podatkowych oszustów. (e-recepits next year. you will be able to calculate how much you spend on food and the tax office will catch tax fraudsters more easily.) http://www.money.pl/gospodarka/wiadomosci/artykul/e-paragon-cyfryzacja-tadeusz-koscinski,55,0,2126903.html (accessed: 12.07.2018). ordinance of the minister of economy of 27 august 2013 on the criteria and technical conditions to be met by cash register devices (journal of laws 2013, item 1076). proppe, m., & darski, p. (2016). studium przypadku – system kas fiskalnych online w polsce. (case study – online cash register system in poland.) warsaw: kpmg. tomkiewicz, j. (2006). polityka fiskalna a inwestycje w gospodarce posocjalistycznej. (fiscal policy and investments in a post-socialist economy.) warsaw: wspiz. tradiss (2014). technika komputerowa: urządzenia fiskalne, (fiscal devices.) http:// www.tradiss.pl (accessed: 12.12.2017). tvn24bis (2019). kasy online – sejm przyjął ustawę, (online cash registers – the parliament adopted the law.) http://www.tvn24bis.pl (accessed: 30.03.2019). uryniuk, j. (2016). czy chorwaci przekonają polski rząd do swojego modelu fiskalizacji? będą próbować jutro w ministerstwie rozwoju, (will the croatians convince the polish government to its fiscal model? they will try tomorrow at the ministry of development.) http://www.cashless.pl (accessed: 8.05.2019). vat (2017). e-paragony i kasy on-line już w 2018 roku, (e-receipts and online cash registers already in 2018.) http://www.vat.pl (accessed: 10.08.2017). związek banków polskich (polish bank association) (2016). nowe wymagania techniczne dla kas fiskalnych. (new technical requirements for cash registers.) warsaw. date of submission: march 26, 2020; date of acceptance: may 17, 2020. * contact information: aifuwahopeosayantin@gmail.com, department of accounting, faculty of management sciences, university of benin, benin city, edo state, nigeria, phone: +2348113232082; orcid id: https://orcid.org/0000-0001-8908-6637. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 1 aifuwa, h.o. (2020). sustainability reporting and firm performance in developing climes: a review of literature. copernican journal of finance & accounting, 9(1), 9–29. http://dx.doi. org/10.12775/cjfa.2020.001 hope osayantin aifuwa* university of benin sustainability reporting and firm performance in developing climes: a review of literature keywords: gri, economic reporting, social reporting, environmental reporting, developing climes. j e l classification: m41, k32. abstract: the study basically examined the impact of sustainability reporting on firm performance in developing climes. a systematic content analysis approach was adopted in the study and it formed the basis for the researcher’s conclusion and recommendations. the findings of reviewed extant literature showed that there were inconclusive findings on the impact of sustainability reporting on firm performance. however, a large number of works submitted a positive relationship between sustainability reporting and firms’ performance. secondly, financial performance measures often used by researchers include the profitability measures (roa and roe) and market-base measure (eps and dps), and the fourth version of the global reporting initiative (gri) framework in calculating sustainability disclosure index via content analysis. thirdly, we also found that sustainability disclosure level was low in developing climes compared to other developed climes. we observed some methodological f laws in extant literature on the sector investigated and sample size employed. this study, therefore, recommended that further studies should be carried out on the impact of sustainability reporting on firms’ performance based on the suggested methodological improvement. hope osayantin aifuwa10  introduction no business can exist without interaction from its environment. this interaction with the environment is a vital strategy for survival and thus enables it to be self-sufficient and reliant and above all, be sustainable. in order to achieve maximum sustainability in business operations, an organization must minimize such negative impacts as its emissions, waste, social issue, and unfair treatment of business employees to the barest minimum. when this is achieved, then a company could be said to have performed well (joseph, 2016). firms’ performance, in the present dispensation, simply means how a firm effectively and efficiently harnesses its limited resources (land, labour and capital) at its disposal to create value. to create value simply means achieving sufficient profit and at the same time satisfying the need of diversified groups of stakeholders (burhan & ramanti, 2012). a firm’s ability to manage its financial and non-financial activities is very crucial to its survival (taouab & issor, 2019). when this is achieved at a significant level in a firm, it is said to be sustainable. the concept of sustainable development or sustainability gained prominence following the 1987 brundtland report on bridging the gap between environmental and human development concerns (bebbington & larrinaga, 2014; bebbington & unerman, 2017). the concept further gained more popularity following the united nation’s transformation agenda which should be achieved before the year 2030. the united nations (un) adopted the organization for economic and community development’s (oecd) millennium development goals (mdgs) developed in 1966 and modified it into seventeen sustainable development goals (sdgs) (bebbington & unerman, 2017). the main objective of the sdgs is to improve social, ecological and economic outcomes by governments and businesses across the globe (kim, 2016; un, 2016). thus, businesses can promote the un’s sustainable development agenda or goals through sustainability reporting. sustainability reporting is the process whereby companies disclose their economic, environmental and social impacts on society and environment as a result of their daily business activities (global reporting initiative [gri], 2019). business firms are not socially and environmentally responsible because their activities cause environmental degradation, climate change, pollution and even poverty in the environments and communities they operate in. sustainability reporting and firm performance… 11 scientists have also noted that the ecosystem has changed drastically as a result of firms’ activities (kusuma & koesrindartoto, 2014). firms’ irresponsible attitude is evident in its’ financial statements. that at the end of every financial year, firms report huge profits, and then claim to perform at the detriment of the environment and community where they operate in (johari & komathy, 2019). this irresponsible attitude exhibited by business firms can reduce their long-term value. along this line, researchers have empirically investigated the impact of sustainability reporting on firms’ performance, and have found an inconclusive result. the inconclusive findings could be as a result of methodology f laws such as the failure to incorporate non-financial dimensions in determining firms’ performance and also that no reliability and validity test was conducted on the index of sustainability employed (either dichotomous or polychotomous index) (see, adams, thornton & sepehri, 2012; aggarwal, 2013; asuquo, dada & onyeogaziri, 2018; beredugo & mefor, 2016; burhan & rahmanti, 2012; dhaliwal, li, tsang & yang, 2011; isa, 2014; nwobu, 2015; onyekwelu & ugwuanyi, 2014; venanzi, 2012). this identified gap therefore, provided the motivation for the study. the objective of this study was to review the literature on the impact of sustainability reporting on firms’ performance as there seemed to be inconclusive findings in literature on the nexus between sustainability reporting and firms’ performance incorporating. against the above backdrop, we raised the research question: what is the impact of sustainability reporting on firm performance in developing climes? the research methodology and the course of the research process a systematic content analysis approach was used to shortlist relevant publications from literature. this review focuses on major peer-reviewed journals indexed in quality and impact rankings on developing countries between the periods of 2014-2019 to know current state of research during their respective times of publication. in selecting articles that research the impact of sustainability practices on corporate firm performance, several keywords were used: corporate sustainability, social sustainability, environmental sustainability, firm performance, financial performance, and non-financial performance. hope osayantin aifuwa12 only peer-reviewed articles available with their full text in the english language were included in the research. rounds of article elimination took place to shortlist articles related to the subject of the impact of sustainability practices on corporate financial performance. starting with preprints resulted in further elimination of articles and the addition of new ones from various databases: ■ google scholar ■ researchgate ■ ssrn ■ semantic scholar this systematic approach shortlisted a total of fifty-four (54) articles publications for examination. most of the excluded literature focused corporate social responsibility disclosure and social performance. conceptual framework firm performance the concept of firms’ performance is generic. for a business firm, it is mostly about making profit. for a government organization or non-governmental organization (ngo), it is good governance and rendering of quality welfare services to the citizens or people. apart from being generic, the concept of firms’ performance is also dynamic. its definition changes from decade to decade as a result of the focus of firms in these periods, thus, this make it hard for the concept to be clearly defined (taouab & issor, 2019). in the 50’s, firms’ performance was considered as the equivalent of organizational efficiency (taouab & issor, 2019). it was seen as the degree to which an organization achieved its goals with minimum efforts from its workers and also with limited resources (georgopoulos & tannenbaum, 1957). in the 60’s and 70’s, firms’ performance was seen as the ability of an organization to exploit its environment using limited resources (katz & kahn, 1978; lupton, 1977; yuchtman & seashore, 1967). in the 80’s, firms’ performance was defined as the ability of an organization to create value for its clients (cherrington, 1989; robbins, 1987). it was also seen as profoundly dependent on employees’ performance quality in the 90’s (adam, 1994; harrison & freeman, 1999). sustainability reporting and firm performance… 13 in the first decade of the twenty-first century, the concept of firms’ performance was defined as the capability and ability of an organization to efficiently utilize its available resources to achieve its goals, and at the same time, adds value to its shareholders (lebans & euske, 2006). a significant change in the definition of the concept emerged in the second decade of the twenty-first century. where it was seen as the ability of an organization to achieve its set objectives and goal from limited resources at its disposal and, in the process, also satisfy the needs of its stakeholders (isaiah, selvam, vinayagamoorthi, kasilingam & mariappan, 2015; selvam, 2016; selvam, gayathri, vansanth, lingaraja & marxiaoli, 2016). flowing from the last definition, the make-up of firms’ performance financial and non-financial performances (or strategic or operational performance). theoretically, the definition of firms’ performance is hinged on the economic view of profit maximization of the organization and the stakeholders approach of satisfying the need of a group or individuals who are affected by the activities of the same organization. financial performance is a subjective measure of how a firm effectively and efficiently utilises its assets to generate resources (nnamani, onyekwelu & ugwu, 2017). the financial performance of an organization is classified in subsets of profitability performance (return on assets (roa), return on equity (roe), return on investment (roi), economic value added (eva), net income/revenue and earnings before interest, tax, depreciation and amortization margin (ebtida), market value performance (earnings per share (eps), change in stock price, dividend yield, stock price volatility, market value added (mva) and tobin q) while growth dimension of performance consists of market share growth, asset growth, net revenue growth, net income growth and number of employees growth (santos & brito, 2012). many researchers have often focused on the profitability measures of financial performance (e.g. roa and roe) as a proxy for firms’ performance (alshehhi, nobanee & khare, 2018), while totally ignoring the non-financial performance measures. non-financial performance measures include customer satisfaction (mix of products and services, number of complaints, repurchase rate, new customer retention, and general customer satisfaction) and environmental performance (number of projects to improve the environment, level of energy intensity, use of recyclable materials, volume of energy consumption, number of environmental lawsuit, recycling level and reuse of residual). social performance consists of the employment of minorities, a number of social and cultural projects, number of lawsuits filed by employees and cushope osayantin aifuwa14 tomers, and regulatory agencies. similarly, an employee’s performance consists of turnover, investment in employee development & training, wages & reward policy, career plans, organization climate, and general employee satisfaction. corporate governance performance is made up of board size, board independence, foreign directors and insider ownership (santos & brito, 2012; selvam et al., 2016). sustainability reporting the phrase, sustainability reporting, is a blend of two concepts: sustainability and reporting. whilst the former is meeting the needs of the present generation without compromising the ability of future generations to meet their own needs (brundtland, 1987), the latter simply means disclosing an organization’s information fully or partially to stakeholders who need it for different purposes. therefore, sustainability reporting [sr] (or disclosure or performance) is the integration of reporting and accounting for economic, environmental and social into corporate reporting (elkington, 2004). the global reporting initiative [gri] (2019) defines sustainability reports as those issued by firms about their economic, environmental and social impacts caused by their daily operation activities. hahn, preuss, pinkse and figge (2014) described sr as a set of a company’s activities that demonstrate the inclusion of social and environmental concerns in business operations and interactions with stakeholders. this report is therefore, aimed at achieving sustainable development goals (gunarsih & ismawati, 2018). the concept of sustainable reporting evolved in the 1980’s when the first environmental reports appeared. johari and komathy (2019) and joseph (2016) were of the opinion that sr evolved through the stages of employee reporting to social reporting to environmental reporting to triple bottom line reporting and finally, to sr. the reasons for sr are many, but the most striking ones are to measure and improve firms’ performance upcoming financial results and furnish stakeholders with the information of the organization’s going-concern status (johari &komathy, 2019). sr has had a significant acceptance rate globally, mostly from developed and a few developing countries like south africa (ofoegbu, odoemelam & okafor, 2018; aifuwa, saidu, enehizena & osazevbaru, 2019). however, the same cannot be said of least developed countries (ldc) like myanmar, bangladesh, cambodia, ethiopia (wokeck, 2019; aifuwa sustainability reporting and firm performance… 15 et al., 2019). johari and komathy (2019) observed that europe had the highest sustainability disclosure rate of about forty-nine percent (49%) followed by asia with fifteen percent (15%), north america fourteen percent (14%), latin america twelve percent (12%), oceania six percent (6%) and africa with the least rate of only four percent (4%). it is also noteworthy that ninety percent (90%) of the world’s largest companies report their sustainability practices, with most of them using the gri framework (klynveld peat marwick goerdeler [kpmg], 2017). the gri framework is perhaps one of the most popular frameworks for reporting economic, environmental and social issues of an organization (laskar, 2018). other developed frameworks include business in the community (bitc), dow jones sustainability index (djsi), business ethics 100, accountability (aa) rating (hopkins, 2005), international integrated reporting council (iirc), carbon disclosure project, sustainability accounting standard board (sasb) and global framework for climate risk disclosures (gfcrd) (siew, balatbat & carmichael, 2013; emeka-nwokeji & osisioma, 2019). global reporting initiative (gri) framework gri is the most widely recognised global framework for sr. it was founded in boston in 1997 and established as an international non-for-profit organization in amsterdam in 2002. the mission of the organization was to improve organizational contributions towards sustainable development by creating credible sr standard and practices (gri, 2019) and encouraging uniformity for all companies and organizations in disclosing economic, environmental and social issues regardless of size, sector and region (willis, campagnoni & gee, 2015). gri issued its first set of standards known as g1 in 2000. two years later, they issued the second set of standards – g2. in 2006, the gri issued its third set of standards – g3. the g3 main elements comprised reporting guidelines, sector supplements and indicator protocols as discussed in detail (g3, 2006). notably, clarifications were made on what to report and how to report economic, environmental and social issues (johari & komathy, 2019). five years later, the g3 was recalled and substituted with a new version of the standard called the g3.1. a couple of years later, the g4 version was introduced and the previous standards were recalled. the g4 concentrates more on and emphasizes materihope osayantin aifuwa16 ality and sustainability context. the g4 has two sections the general standard disclosures (gsd) and specific standard disclosures (ssd) (owolabi, taleatu, adetula & uwuigbe, 2016; willis et al., 2015). the gsd has seven subsections that include organizational profile, strategy and analysis, identified material aspects and boundaries, stakeholder engagement, report profile, governance and ethics, and integrity. the ssd has three subsections which include the disclosure on management approach, indicators (economic, environmental and social) and specific disclosure sectors (willis et al., 2015). figure 1. evolution of gri and sr standards issued figure 1. evolution of gri and sr standards issued source: johari and komathy (2019). in 2016, the gri g4 guidelines changed to gri sustainability reporting standard. that was the latest standard of sustainability issued by the gri and it was built upon the g4 guidelines, but it was slightly different in terms of clearer requirements, contents, flexibility and transparency (gri, 2019; willis et al., 2015). again, these latest standards are divided into two sections – the universal standards (us) and the topic specific standards (tss) (gri, 2019). the us has three subsections: the foundation (gri 101) which gives basic guidelines for any company that wants to report sustainability issues; the general disclosure (gri 102) which gives a brief description of the company; and the management approach (gri 103) which sets out the reporting requirements for organizations (willis et al., 2015). the topic specific standards (tss) also have three subsections. they include the economic dimensions also known as gri 200, environmental dimensions (gri 300) and social dimensions (gri 400). each of these dimensions also has subsections. s o u r c e : johari and komathy (2019). in 2016, the gri g4 guidelines changed to gri sustainability reporting standard. that was the latest standard of sustainability issued by the gri and it was built upon the g4 guidelines, but it was slightly different in terms of clearer requirements, contents, f lexibility and transparency (gri, 2019; willis et al., 2015). again, these latest standards are divided into two sections – the universal standards (us) and the topic specific standards (tss) (gri, 2019). the us has three subsections: the foundation (gri 101) which gives basic guidelines for any company that wants to report sustainability issues; the general disclosure (gri 102) which gives a brief description of the company; and the management approach (gri 103) which sets out the reporting requirements for organizations (willis et al., 2015). the topic specific standards (tss) also have three sustainability reporting and firm performance… 17 subsections. they include the economic dimensions also known as gri 200, environmental dimensions (gri 300) and social dimensions (gri 400). each of these dimensions also has subsections. figure 2. latest version of gri standards on srfigure 2. latest version of gri standards on sr source: johari and komathy (2019). sustainability reporting in nigeria in nigeria, sustainability reporting is not a listing requirement for firms from both the financial and non-financial sectors. this therefore, leads to the seemingly low compliance level and disclosure rate. sr is still voluntary among firms in nigeria, but it is mostly practised by foreign firms having business outfits in nigeria (asaolu, agboola, ayoola & salawu, 2011; emeka-nwokoji & osisioma, 2019). asaolu et al., (2011) observed that indigenous firms’ attempts to disclose sustainability issues tended to use different frameworks either developed by them or adapted from already existing frameworks. the action therefore, tried to simply truncate the comparability principles for defining the quality of that report (gri, 2015; nwobu, 2015). no wonder, kpmg’s (2011) survey on sustainability compliance revealed that nigeria companies were still far behind in disclosing sustainability issues. evidence from scholars substantiated the fact. isa’s (2014) study on sustainable reporting among food and beverage firms in nigeria found that firms exhibited some level of sustainability reporting although it was not significant because it only comprised approximately two percent of the total disclosures of the annual reports. owolabi et al. (2016) in assessing the sustainability reporting in industrial goods sector using lafarge africa plc as a case study, discovered that aggregate disclosure rate on sustainability issues was 30% which was quite low. also, haladu and salim (2017) found that the average environmental and social disclosure rate by firms in nigeria was 19.13%. in the s o u r c e : johari and komathy (2019). sustainability reporting in nigeria in nigeria, sustainability reporting is not a listing requirement for firms from both the financial and non-financial sectors. this therefore, leads to the seemingly low compliance level and disclosure rate. sr is still voluntary among firms in nigeria, but it is mostly practised by foreign firms having business outfits in nigeria (asaolu, agboola, ayoola & salawu, 2011; emeka-nwokoji & osisioma, 2019). asaolu et al. (2011) observed that indigenous firms’ attempts to disclose sustainability issues tended to use different frameworks either developed by them or adapted from already existing frameworks. the action therefore, tried to simply truncate the comparability principles for defining the quality of that report (gri, 2015; nwobu, 2015). no wonder, kpmg’s (2011) survey on sustainability compliance revealed that nigeria companies were still far behind in disclosing sustainability issues. hope osayantin aifuwa18 evidence from scholars substantiated the fact. isa’s (2014) study on sustainable reporting among food and beverage firms in nigeria found that firms exhibited some level of sustainability reporting although it was not significant because it only comprised approximately two percent of the total disclosures of the annual reports. owolabi et al. (2016) in assessing the sustainability reporting in industrial goods sector using lafarge africa plc as a case study, discovered that aggregate disclosure rate on sustainability issues was 30% which was quite low. also, haladu and salim (2017) found that the average environmental and social disclosure rate by firms in nigeria was 19.13%. in the banking sector, sustainability disclosure rate followed the same dismal feat of about 34.31% (uwuigbe, obarakpo, uwuigbe, ozordi, asiriuwa, eyitomi & taiwo, 2018), while in the oil and gas sector, it recorded a low rate also (asaolu et al., 2011). also, most companies in nigeria tend to disclose only qualitative issues on sustainability, and thus fail to inform the stakeholders of the quantitative or monetary implications of their activities on the environment (kwaghfa, 2015). this tends to undermine the materiality of sustainability reports’ content. the sustainability reports of firms in nigeria tend to lack balance as they only report their positive environmental and social contributions to the environment where they operate thereby totally ignoring their negative impact. this truncates the balance principles for defining sr quality (gri, 2015). another observation of sr in nigeria is that firms tend to choose what to disclose in the gri framework. this has led to reports being skewed towardsa particular direction of the gri framework. for example, the sustainability reports for firms in the financial sector tend be to skewed towards the social dimensions of sr only (nwobu, 2015; oyekwelu & ekwe, 2014; oyewo & badejor, 2014), while the non-financial sector firms tend to report more on environmental issues (nnamani et al., 2017; owolabi et al., 2016). this therefore, leads to nonuniformity in the report on economic, environmental and social issues (ayoola & olasanmi, 2013). issues on sustainability reporting the emergence of sustainability reporting in recent times has sparked arguments as to whether it affects firms’ performance. this argument sprang up as a result of some issues which surrounded sustainability reporting itself. mu sustainability reporting and firm performance… 19 ñoz, zhao and yang (2017) noted some areas where sr had issues which needed to be addressed swiftly and clearly to enable a wide acceptance rate and also high compliance. the areas included the definition of the concept, measurement and disclosure, motivation, enforcement and compliance, standardization, and the comparability & reliability of the report. the best definition of sustainability is the one given by gri (johari & komathi, 2019) and is far much better than what scholars have termed it to be. the definition encompasses three dimensions such as economic, environment and social impacts of a firm. prior to this time, it had been defined as either corporate social responsibility reporting (bayoud, kavanagh & slaughter, 2012; carroll, 1999; venazi, 2012; sadia, tariq & saba, 2015; statman & glushkov, 2019) environmental accounting or environmental reporting (kathyayini, tilt & lester, 2012; saha & akter, 2013) or corporate social environmental reporting (balabanis, philips & lyall, 1998; bowrin, 2013; ismail & ibrahim, 2010). these scholars viewed sustainability reporting as the mix of either one or two dimensions and totally ignored its economic aspects. besides the issue of inconsistent definition of the concept of sustainability is the concept of measurement. environmental issues like environmental degradation, water pollution and change in ecological structure cannot easily be and quantitatively measured as jones (2014) pointed out. these issues are caused by the activities of an organization. although scholars sciences have come up with indices to measure some of these environmental issues like the biological integrity index and the watershed index (miller, wardrop, mahoney & brooks, 2006), the indices have however, been criticised for lacking expert accuracy in measuring the impact of organizations’ activities on an environment. similarly, the social dimensions have measurement issues. humans (employees), are often regarded as assets in an organization, yet their value cannot be accurately ascertained. in a nutshell, the environmental and social dimensions of sustainability cannot be accurately measured in quantitative or monetary terms. another issue of sustainability reporting is the motive behind it. most international companies do not see the need to report environmental and social issues if not for the pressure put on them by stakeholders (hashmi, damanhouri & rana, 2015). the case of domestic companies is far worse as they do not see the need to disclose sustainability issues regardless of the pressure from stakeholders (muñoz, zhao & yang, 2017). there seems to be no motivation for reporting mostly environmental and social issues. contrary to this view, al-gahope osayantin aifuwa20 marh and al-dharnari (2016) asserted that large companies were highly motivated to report sustainability issues because they wanted to acquire more market shares than small firms. shamil, shaikh, ho and krishnan (2014) opined that newly listed firms were more likely to produce reports on environmental and social issues than older firms because newly listed firms wanted to stay competitive in the market. in another view, gulzar, cherian, sial, badulescu, thu, badulescu and khuong (2018) suggested that the main reason why firms reported environmental and social issues was principally to reduce their tax liability and subsequently avoid taxes. the enforcement of sr is another challenge. the nature of the report is very voluntary. it thus, makes it hard to sanction erring firms on environmental and social issues. the nigerian stock exchange (nse) has bought into the ideal of sr by adopting the gri framework however, the report is not made a listing requirement for firms (asaolu et al., 2011). even in the corporate governance code of nigeria (2018), sustainability reporting section seems scanty as compared to other sections of the code. the lack of strict enforcement makes the compliance rate of this report very low. the standards on sr across the globe are many. they are business in the community (bitc), dow jones sustainability index (djsi), business ethics 100, accountability (aa) rating (hopkins, 2005), international integrated reporting council (iirc), carbon disclosure project, sustainability accounting standard board (sasb) and global framework for climate risk disclosures (gfcrd) (emeka-nwokeji & osisioma, 2019). the issue of diverse standards on sr has slowed the reliability and comparability of sustainability reports. in some empirical studies, researchers have come up with four views on the impact of sr on firms’ performance. these views in literature are also called strands. the first strand in literature affirms that sr positively affects firms’ performance (amacha & dastane, 2017; beredugo & mefor, 2016; burhan & rahmanti, 2012; diantimala, 2018; ekweme, egbunike & onyali, 2016; kusuma & koesrindartoto, 2014; nwobu, 2015; onyekwelu & ugwuanyi, 2014). the second strand believes that additional costs will be incurred by firms in disclosing sustainability issues, and thus they do have a negative impact on firms’ performance (ching, gerab & toste, 2017; dhaliwal, li, tsang & yang, 2011; isa, 2014; utami, 2015). the third strand in literature states that there is no significant relationship between sustainability reporting and firms’ performance (adams et al., 2012; asuquo et al., 2018; ayoola & olasanmi, 2013; sustainability reporting and firm performance… 21 venanzi, 2012). the fourth strand in literature states that sr partially affects firms’ performance (mixed findings) (aggarwal, 2013). nevertheless, majority of these researchers support the first trend in literature (alshehhi et al., 2018). however, there still exists a condition of inconclusive findings on the nexus between sustainability reporting and firms’ performance. the reason for the inconclusive report may be as a result of a small sample size, inconsistency in sr index (dichotomous or polychromous index), absence of validity and reliability test on index employed, and region studied. this therefore, provides the need for further empirical studies to verify the above reasons. empirical review table 1. the nexus between sustainability reporting and firm performance s/n authors (country) title of work measures employed findings 3 emeka-nwokeji and osisioma (2019) / (nigeria) the impact of sustainability disclosures on market value of non-financial quoted firms in nigeria. sustainability accounting standard board’s (sasb) index; via content analysis and market value was measured by tobin’s q. sustainability disclosures had significant positive effects on firm value. 4 carp, păvăloaia, afrăsinei, and georgescu (2019)/ (romania) impact of sustainability reporting on firms’ growth in romania capital market. both the global reporting initiative’s framework and international integrated reporting council’s framework (iirc) via content analysis while firm’s growth was measured using price-to-book ratio, sales growth and cost of capital. low influence of sustainable reporting on a firm’s growth indicators. furthermore, they found out that sustainability reporting using both frameworks (gri & iirc) do not impact on firms’ growth. 5 johari and komathy (2019)/ (malaysia) the relationship between sustainability reporting and firm performance among public listed firms in malaysia. sustainability reporting was measured using weighted disclosure index (dichotomous index) based on the gri framework via content analysis, while firm performance was measured by profitability ratios (roa & roe), and equity valuation ratio (eps & dps). sustainability reporting had a positive relationship with firm performance when using roa and eps. while on roe and dps, there an insignificant negative relationship. hope osayantin aifuwa22 s/n authors (country) title of work measures employed findings 6 uwuigbeet et al., (2018)/ (nigeria) the bi-directional nexus between sustainability reporting and firm performance in quoted deposit money banks (dmb) in nigeria. sustainability reporting was measured using unweigted disclosure index based on the global reporting initiative’s (gri) framework (polychotomies scoring technique) via content analysis, while firm performance was measured by return on asset (roa), market price (mps), book value per share (bvps), earning per share (eps) and revenue of firms investigated. a bi-directional nexus between sustainability reporting and firm performance. furthermore, they found that mps had a significant negative relationship on sustainability reporting, while sustainability reporting had a significant positive influence on revenue generation. 7 alshehhi, nobanee and khare(2018) trend literature review on the impact of corporate sustainability on corporate financial performance. a total of 132 papers from top-tier journals were shortlisted based on content analysis from 2002-2017. 78% of publications report a positive relationship between corporate sustainability and financial performance (a proxy for firm performance). also, mixed findings on the nexus exist. 8 asuquo, dada, and onyeogaziri (2018)/ (nigeria) the effect of sustainability reporting on corporate performance of selected quoted brewery firms in nigeria. on gri framework via content analysis, while corporate performance was measured by return on asset (roa). the linear regression result revealed that economic performance disclosure (ecn), environmental performance disclosure (env) and social performance disclosure (soc) have no significant effect on corporate performance of brewery firms quoted firms in nigeria. 9 lasker (2018) (japan, south korea, indonesia, and india) impact of corporate sustainability reporting on firm performance in asia. gri framework via content analysis, while firm performance was measured by market to book ratio (mbr) (a market based measure). significant positive association between sustainability reporting and firm performance. 10 nnamani, onyekwelu, and ugwu (2017) (nigeria) effect of sustainability accounting on the financial performance of listed manufacturing firms in nigeria. ratio of total personnel cost to turnover (social sustainability) and a ratio of total equity to total asset (economic sustainability), while financial performance was measured by roa. sustainability has no significant relationship on financial performance of firms, as both dimensions were not statistically significant. table 1. the nexus… sustainability reporting and firm performance… 23 s/n authors (country) title of work measures employed findings 11 kwaghfan (2015)/ (nigeria) impact of sustainability reporting on corporate performance of selected quoted companies in nigeria. sustainability reporting was measured based on gri disclosure index (polychotomous index) via content analysis and corporate performance was measured using roa, roe, net profit margin and earnings per share. sustainability reporting has a positive on corporate performance of companies in nigeria. 12 ngatia (2014)/ (kenya) impact sustainability reporting on financial performance of selected companies listed at the nairobi securities exchange in kenya. a sample size was one hundred and ninety-seven (197) respondents were utilized. the primary research data was collected from the management staff working in listed companies in kenya via questionnaire. the result revealed that sustainability reporting positively and significantly affects financial performance. s o u r c e : author’s compilation, 2019.  findings in literature, conclusion and recommendations the study reviewed literature on the impact of sr on firms’ performance in developing climes. the unique motivation behind the study was rooted on the inconclusive findings on the nexus. the study relied on a systematic review of articles and found out that more studies have carried in developing countries than developed countries from the period of 2014 to 2019. most of the studies done in developing countries used the gri framework as index for sustainability reporting and return on assets was the major proxy for firm performance. we observed that environmental and social disclosures were low among firms in developing climes. specifically, in the nigeria, the rate of sustainability disclosure is low. this implies that developing nations (nigeria inclusive) would not be achieving sustainable development goals before the year 2030 as envisaged by the un. this is because of the voluntary nature of the report. however, if the report on sustainability issue is made mandatory, then it can be said that the nation is on the path of sustainable development. empirically literature revealed that sr positively affects firms’ performance. however, there still exist inconclusive findings in literature, 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(2014). real options in the assessment of the company’s pro-ecological investments. copernican journal of finance & accounting, 3(1), 61–71. http://dx.doi.org/10.12775/cjfa.2014.005 ewa dziawgo* nicolaus copernicus university real options in the assessment of the company’s pro-ecological investments keywords: real options, pro-ecological investments. j e l classification: q01, g11. abstract: the article presents the following issues related to real options: characteristics and classification of options, pricing models and analysis of the applicability of real options in the assessment of the company’s pro-ecological investments. the concept of real options analysis is an innovative mainstream methodology of creating a multi-stage decision-making model to facilitate the action related to the strategic implementation of investment activities. the real options analysis method is alternative and complement to traditional methods of evaluation of investment projects. the purpose of this article is to present the applicability of real options in the assessment of the company’s pro-ecological investments. opcje realne w ocenie proekologicznych inwestycji przedsiębiorstwa słowa kluczowe: opcje realne, proekologiczne inwestycje. klasyfikacja j e l: q01, g11. abstrakt: w artykule przedstawiono zagadnienia związane z opcjami realnymi: charakterystykę i podział opcji, modele wyceny oraz analizę możliwości zastosowania ewa dziawgo62 opcji realnych w ocenie proekologicznych inwestycji przedsiębiorstwa. koncepcja analizy opcji realnych jest innowacyjnym nurtem metodycznym, polegającym na stworzeniu wieloetapowego modelu decyzyjnego ułatwiającego podjęcie działań związanych ze strategicznym wdrażaniem działań inwestycyjnych. metoda analizy opcji realnych jest alternatywą i uzupełnieniem dla tradycyjnych metod oceny projektów inwestycyjnych. celem artykułu jest przedstawienie możliwości zastosowania opcji realnych w ocenie proekologicznych inwestycji przedsiębiorstwa. translated by ewa dziawgo  introduction environmental degradation, which arises out of unreasonable and improper management of renewable and non-renewable resources is a global problem of modern civilization. environmental degradation results in higher operating costs of society and constitutes a threat to the further existence of man. solving environmental problems requires international cooperation. the policy of the european union lays much emphasis on the issues related to the implementation of the main objective of balanced and sustainable development, which is striving to improve the quality of life for present and future generations by taking all measures affecting the economic and social development harmonized with the rational use, mobility and protection of the natural environment. the implementation of the concept of eco-development is facilitated by the already developed economic and legal instruments of the state’s environmental policy that forces the modern enterprise to adapt to environmental requirements. in the case of undertaking strategic investment activities, the company must also take into account the environmental aspect of its projects undertaken. the concept of real options analysis can be an alternative and complement to traditional methods of evaluation of investment projects implemented by the company. due to their f lexibility, options can facilitate the management company to take environmental decisions related to business activities. this article is also intended to present different types of real options, the use of which may significantly facilitate the pro-ecological management of the enterprise value. real options in the assessment of the company’s… 63 the research methodology and the course of the research process pro-ecological investments are characterized by high f lexibility. hence, in the case of pro-environmental projects there is a need to price this f lexibility, which significantly increases the economic value of the investment. the following were realized within the article: ■ analysis of the properties of real options in terms of their applicability in the evaluation of pro-environmental projects, ■ based on the identified f lexibility inherent in the pro-ecological projects particular categories of real options were assigned to selected pro-ecological investments, ■ for selected types of real options the valuation models were indicated. pro-ecological strategies in the company’s activity threats of environmental degradation, which arise out of business activities conducted are divided into global and local (piontek 2002; piontek, piontek, piontek 1997; nahotko 2002; płoska 2006; ryszko 2007). the main global threats include the following: the greenhouse effect, ozone depletion, desertification of land, uncontrolled deforestation, and water scarcity. in turn, local threats are pollution of the atmosphere, noise, increase in the size of the electromagnetic field, environmental disasters, pollution caused by solid and liquid waste, chemical pollution, changes in the landscape. the negative effects of economic processes on the environment and the increase in the awareness of the need to counter the devastation of the environment have contributed to the development of economic and legal instruments of the state’s environmental policy. these instruments contribute to the implementation of investment projects realised by companies that consider environmental elements. the following legal instruments deserve special attention: regulations that oblige entities to consider the requirements of environmental protection, emission norms, the accepted principles of eco-development as a criterion of land-use, provisions governing the rules of the obtainment of a license for a specific activity, the rules governing the conduct of environmental impact assessment, the official list of hazardous waste. in turn, the main economic instruments of the state’s environmental policy include ecological charges, environmental fines, product charges, subsidies, emissions trading. ewa dziawgo64 pro-ecological investment made by companies are investments in green technologies and in management, in which the rules are complied with environmental protection. taking into account the aspects of the idea of environmental protection is ref lected in numerous spheres of business. in particular, the pro-ecological activities of companies include the following: ■ developing and implementing designs of new products, which in comparison with conventional products have a favourable impact on the environment, ■ analysing the impact of the product and its manufacturing process on the environment, ■ modifications of an existing product, the result of which is the achievement of a higher quality of this product while minimizing the negative impact of the manufacturing process on the environment, ■ developing and introducing new technologies that reduce the consumption of raw materials and energy, and minimize the amount of waste, ■ consideration of recycled materials in the product and its packaging, ■ minimizing the size of the packaging, ■ conducting and sponsoring scientific research in the field of introducing new products and improving manufacturing processes taking into account environmental priorities, ■ ensuring safe transport and proper storage of hazardous substances, ■ sponsoring environmental programs and actions. in the process of adapting companies to the requirements of and regulations on environmental protection an increasing public awareness of environmental protection is essential. there is a favourable image of companies engaging in environmental protection and offering environmentally friendly products. enterprises involving in their processes economic ideas of eco-development reach a competitive advantage that comes from their standing out in the market environment. it is increasingly popular nowadays to analyse both good economic performance and undertaken pro-environmental activities while attracting investors. changes in production technologies, whose aim is to improve the environmental parameters of the functioning of the enterprise, contribute to the creation of a competitive advantage resulting from the cost advantage. introduction of environment-friendly technology upgrades and innovation in the production process can affect the reduction of costs mainly through a more rational use of raw materials, reducing energy consumption, using for production purposes recycled materials or materials utilized in a non-toxic and ener real options in the assessment of the company’s… 65 gy saving way, reducing the amount of water used in the production process, reducing carbon dioxide emissions and solid waste, applying reusable transport packaging, and through collecting used packaging. including the ecological modernization of production technology in economic processes requires a strategic investment decisions. in the case of environmental projects, applying an analysis of real options, which are characterized by their f lexibility, can be an alternative or complement to traditional methods of evaluation of investment projects. properties of the real options a real option is the right (but not the obligation) to perform certain actions with regard to the investment project in the case when new information (conditions) appears (amram, kulatilaka 1999; jajuga 2000; ziarkowski 2004; copeland, anticarov 2001). real options are characterized by f lexibility which means that in the event of favourable market conditions the company takes specified actions, and, if there is an unfavourable situation for the company, then the company may resign from undertaking those actions. real options have the following properties: ■ the option is exercised when it is favourable to the buyer, ■ increase of the risk associated with the project adds value to the option, ■ the payoff function is characterized by asymmetry, ■ there is a choice of alternatives, ■ the possible reaction of the decision-maker is activated when the parameters used in the measurement change. the concept of real options is worth implementing in the evaluation of investment projects, which are related to the concerns about the launch date of the investment, extending the scale of the project (e.g., the expansion of the company into new markets, the development of production lines in traditional industries by offering additional products), deferring investments till the moment of the occurrence of more favourable market conditions, cancelling the project, introducing new technology, acquiring new strategic competencies, developing or limiting infrastructure. the concept of real options pricing allows quantification of the f lexibility inherent in the investment project. the value of real options is dependent on the following factors: the current value of the benefits of the investment project, investment layouts, the expiry ewa dziawgo66 time of the investment project, the discount rate being the risk-free rate, volatility of cash f lows, the cash f lows lost. real options due to their standard nature can be divided into: ■ call options (the right to buy certain assets) and put options (the right to sell certain assets), ■ european options (which can be exercised only on their maturity date) and (american options) (which can be exercised at any time during the period of their validity). taking into account undertaking additional activity and outlays within real options the following can be distinguished: ■ internal options that arise from the nature of the project and do not require additional activity and outlays, ■ created options, where additional outlays are required. created options improve the company’s f lexibility and its ability to adapt to changing market conditions. real options in the company’s pro-ecological activity considering the specificity of real options, we can introduce the following classification of this type of options (amram, kulatilaka 1999; brach 2002; dziawgo 2009): ■ options for a phased implementation of the project, ■ diagnosis options, ■ growth options, ■ options for the f lexibility of production means, ■ options to expand, options to delay, ■ exit options. options for a phased implementation of the project are characterized by being linked to a multi-stage investment, wherein each stage is dependent on the previous step. this type of option allows one to avoid the need of incurring all of the expenditures of the project. implementation of ecological modernization and innovation can then be recognized for certain stages of the production process. diagnosis options are related to the possibility of a staged implementation of the investment. based on the data collected in earlier phases of the project, decisions are made regarding further action. examples of environmental projects considered within diagnosis options include: real options in the assessment of the company’s… 67 ■ analyses of the impact of the product on the environment, which take into account all stages of the product’s life cycle, ■ minimizing packaging and its toxicity for the environment, ■ responsible and safe transportation and storage of hazardous substances and waste, ■ reducing or eliminating the use and storage of hazardous substances and waste. growth options allow the extension of the company's activities on the market. a growth option is an option to buy and concerns investment projects whose initial outlay far exceed the benefits from the implementation of the project. the company uses its resources and makes investments, which in the future guarantees its expansion with new products and new technologies. within growth options we can consider the following environmental projects: ■ launching onto the market new pro-ecological products, ■ implementing in the manufacturing process new technologies that use recycled materials in products, ■ implementation of energy-saving technologies and technologies that reduce consumption of raw materials, ■ developing and introducing new technologies that minimize the amount of waste. options for the f lexibility of production means allow you to choose production methods and technologies depending on the type and price of raw materials, energy use, existing demand and statutory regulations. an option for the f lexibility of production means has a portfolio consisting of call and put options. this option is particularly attractive when economic conditions are changing the market, where there is a risk of adverse price movements. within an option for the f lexibility of production means the following pro-ecological measures can be considered: reducing pollution at the source of their creation (change of raw materials, energy, and machinery used in the production process), the use of recycled materials, reducing the consumption of raw materials and energy, the use of recycled materials. options to expand allow taking the company projects that rely on periodic reducing or stopping the action and re-running them, periodically increasing (a call option) or reducing (a put option) the scale of production. the option to expand impacts the improvement of the efficiency of activities conducted. in some cases it is possible to adjust the scale of operations to the current market conditions. within the option to expand can be considered environmentally ewa dziawgo68 friendly projects aimed at reducing the rate of exploitation of resources, taking into account the products made from recycled materials, reducing the consumption of raw materials and energy, keeping waste segregation and recycling. options to delay allow you to select the moment when the investment is to be commenced. if the company faces unfavourable market circumstances, this option allows avoiding unprofitable investments and losses. however, the investment may become profitable, if it is realised at a later date, under market conditions that are more favourable for the company. an option to delay is an american-style call option. an example of an option to delay is an investment made in the acquisition of land rich in natural resources. prior to the commencement of mining, it is often necessary to perform a series of additional examinations related to a better understanding of the content of the deposit, the results of which will affect taking professional decisions related to the involvement of the appropriate production capacity. under this option, you can analyse environmental projects aimed at reducing the amount of waste or increasing the level of recycling of waste generated. exit options allow you to withdraw from the project in the case when there are adverse market conditions for the company, or when adverse results of technical analysis are received. exit options are put options. the exit option often occurs along with the growth option. examples of environmental projects within exit options include the following: considering while buying the environmental attributes of the offered goods, conducting research and development activity in the area of sourcing recycled materials, conducting research in the area of attracting new sources of raw materials, participating in the transfer of techniques and environmental technologies. pricing model of the real options in pricing of real options the most frequently applied models include the black-scholes model (a continuous model) and the cox-ross-rubinstein option pricing model (a binomial model) (amram, kulatilaka 1999; brach 2002; copeland, anticarov 2001; trigeorgis 1999; dziawgo 2003). the black-scholes model assumes that the value of the underlying asset changes continuously. this model is used for european-style options. the value of a real call option derived from the application of the black-scholes model at the t moment is: (1) will affect taking professional decisions related to the involvement of the appropriate production capacity. under this option, you can analyse environmental projects aimed at reducing the amount of waste or increasing the level of recycling of waste generated. exit options allow you to withdraw from the project in the case when there are adverse market conditions for the company, or when adverse results of technical analysis are received. exit options are put options. the exit option often occurs along with the growth option. examples of environmental projects within exit options include the following: considering while buying the environmental attributes of the offered goods, conducting research and development activity in the area of sourcing recycled materials, conducting research in the area of attracting new sources of raw materials, participating in the transfer of techniques and environmental technologies. pricing model of the real options in pricing of real options the most frequently applied models include the black-scholes model (a continuous model) and the cox-ross-rubinstein option pricing model (a binomial model) (amram, kulatilaka 1999; brach 2002; copeland, anticarov 2001; trigeorgis 1999; dziawgo 2003). the black-scholes model assumes that the value of the underlying asset changes continuously. this model is used for european-style options. the value of a real call option derived from the application of the black-scholes model at the t moment is: )()()( 2 )( 1 dneidnvkrov ttr t  (1) where: )(krovt – the value of the call real option at the time t , v – the current value of the cash flows generated by the investment, r – risk-free interest rate, i – the current value of the expenditure related to the investment, t – time to the option expiration, ],0[ tt  , )(dn – cumulative probability function for a standard normal variable distribution,  – the coefficient of volatility of the cash flows generated by the investment,     d x dxedn 2 2 2 1 )(  ,   ttr i v d         2 ln 2 1 , ttdd  12 . the value of the put real option at the time t is: )()()( 12 )( dnvdneisrov ttrt   , (2) real options in the assessment of the company’s… 69 where: will affect taking professional decisions related to the involvement of the appropriate production capacity. under this option, you can analyse environmental projects aimed at reducing the amount of waste or increasing the level of recycling of waste generated. exit options allow you to withdraw from the project in the case when there are adverse market conditions for the company, or when adverse results of technical analysis are received. exit options are put options. the exit option often occurs along with the growth option. examples of environmental projects within exit options include the following: considering while buying the environmental attributes of the offered goods, conducting research and development activity in the area of sourcing recycled materials, conducting research in the area of attracting new sources of raw materials, participating in the transfer of techniques and environmental technologies. pricing model of the real options in pricing of real options the most frequently applied models include the black-scholes model (a continuous model) and the cox-ross-rubinstein option pricing model (a binomial model) (amram, kulatilaka 1999; brach 2002; copeland, anticarov 2001; trigeorgis 1999; dziawgo 2003). the black-scholes model assumes that the value of the underlying asset changes continuously. this model is used for european-style options. the value of a real call option derived from the application of the black-scholes model at the t moment is: )()()( 2 )( 1 dneidnvkrov ttr t  (1) where: )(krovt – the value of the call real option at the time t , v – the current value of the cash flows generated by the investment, r – risk-free interest rate, i – the current value of the expenditure related to the investment, t – time to the option expiration, ],0[ tt  , )(dn – cumulative probability function for a standard normal variable distribution,  – the coefficient of volatility of the cash flows generated by the investment,     d x dxedn 2 2 2 1 )(  ,   ttr i v d         2 ln 2 1 , ttdd  12 . the value of the put real option at the time t is: )()()( 12 )( dnvdneisrov ttrt   , (2) – the value of the call real option at the time, v – the current value of the cash f lows generated by the investment, r – risk-free interest rate, i – the current value of the expenditure related to the investment, t – time to the option expiration, will affect taking professional decisions related to the involvement of the appropriate production capacity. under this option, you can analyse environmental projects aimed at reducing the amount of waste or increasing the level of recycling of waste generated. exit options allow you to withdraw from the project in the case when there are adverse market conditions for the company, or when adverse results of technical analysis are received. exit options are put options. the exit option often occurs along with the growth option. examples of environmental projects within exit options include the following: considering while buying the environmental attributes of the offered goods, conducting research and development activity in the area of sourcing recycled materials, conducting research in the area of attracting new sources of raw materials, participating in the transfer of techniques and environmental technologies. pricing model of the real options in pricing of real options the most frequently applied models include the black-scholes model (a continuous model) and the cox-ross-rubinstein option pricing model (a binomial model) (amram, kulatilaka 1999; brach 2002; copeland, anticarov 2001; trigeorgis 1999; dziawgo 2003). the black-scholes model assumes that the value of the underlying asset changes continuously. this model is used for european-style options. the value of a real call option derived from the application of the black-scholes model at the t moment is: )()()( 2 )( 1 dneidnvkrov ttr t  (1) where: )(krovt – the value of the call real option at the time t , v – the current value of the cash flows generated by the investment, r – risk-free interest rate, i – the current value of the expenditure related to the investment, t – time to the option expiration, ],0[ tt  , )(dn – cumulative probability function for a standard normal variable distribution,  – the coefficient of volatility of the cash flows generated by the investment,     d x dxedn 2 2 2 1 )(  ,   ttr i v d         2 ln 2 1 , ttdd  12 . the value of the put real option at the time t is: )()()( 12 )( dnvdneisrov ttrt   , (2) , n(d) – cumulative probability function for a standard normal variable distribution, σ – the coefficient of volatility of the cash f lows generated by the investment, will affect taking professional decisions related to the involvement of the appropriate production capacity. under this option, you can analyse environmental projects aimed at reducing the amount of waste or increasing the level of recycling of waste generated. exit options allow you to withdraw from the project in the case when there are adverse market conditions for the company, or when adverse results of technical analysis are received. exit options are put options. the exit option often occurs along with the growth option. examples of environmental projects within exit options include the following: considering while buying the environmental attributes of the offered goods, conducting research and development activity in the area of sourcing recycled materials, conducting research in the area of attracting new sources of raw materials, participating in the transfer of techniques and environmental technologies. pricing model of the real options in pricing of real options the most frequently applied models include the black-scholes model (a continuous model) and the cox-ross-rubinstein option pricing model (a binomial model) (amram, kulatilaka 1999; brach 2002; copeland, anticarov 2001; trigeorgis 1999; dziawgo 2003). the black-scholes model assumes that the value of the underlying asset changes continuously. this model is used for european-style options. the value of a real call option derived from the application of the black-scholes model at the t moment is: )()()( 2 )( 1 dneidnvkrov ttr t  (1) where: )(krovt – the value of the call real option at the time t , v – the current value of the cash flows generated by the investment, r – risk-free interest rate, i – the current value of the expenditure related to the investment, t – time to the option expiration, ],0[ tt  , )(dn – cumulative probability function for a standard normal variable distribution,  – the coefficient of volatility of the cash flows generated by the investment,     d x dxedn 2 2 2 1 )(  ,   ttr i v d         2 ln 2 1 , ttdd  12 . the value of the put real option at the time t is: )()()( 12 )( dnvdneisrov ttrt   , (2) the value of the put real option at the time t is: will affect taking professional decisions related to the involvement of the appropriate production capacity. under this option, you can analyse environmental projects aimed at reducing the amount of waste or increasing the level of recycling of waste generated. exit options allow you to withdraw from the project in the case when there are adverse market conditions for the company, or when adverse results of technical analysis are received. exit options are put options. the exit option often occurs along with the growth option. examples of environmental projects within exit options include the following: considering while buying the environmental attributes of the offered goods, conducting research and development activity in the area of sourcing recycled materials, conducting research in the area of attracting new sources of raw materials, participating in the transfer of techniques and environmental technologies. pricing model of the real options in pricing of real options the most frequently applied models include the black-scholes model (a continuous model) and the cox-ross-rubinstein option pricing model (a binomial model) (amram, kulatilaka 1999; brach 2002; copeland, anticarov 2001; trigeorgis 1999; dziawgo 2003). the black-scholes model assumes that the value of the underlying asset changes continuously. this model is used for european-style options. the value of a real call option derived from the application of the black-scholes model at the t moment is: )()()( 2 )( 1 dneidnvkrov ttr t  (1) where: )(krovt – the value of the call real option at the time t , v – the current value of the cash flows generated by the investment, r – risk-free interest rate, i – the current value of the expenditure related to the investment, t – time to the option expiration, ],0[ tt  , )(dn – cumulative probability function for a standard normal variable distribution,  – the coefficient of volatility of the cash flows generated by the investment,     d x dxedn 2 2 2 1 )(  ,   ttr i v d         2 ln 2 1 , ttdd  12 . the value of the put real option at the time t is: )()()( 12 )( dnvdneisrov ttrt   , (2) (2) where: where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. – the value of the put real option at the time t, other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with moments of realization) is the following: where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. (3) where: where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. – the value of the call real option at the time t, u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. , where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form: ewa dziawgo70 where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. (4) where: where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. – the value of the put real option at the time t, where: )(srovt – the value of the put real option at the time t , other designations remain the same as in formula (1). it is assumed in the cox-ross-rubinstein that the value of the underlying asset changes in a discrete manner, i.e., changes in the value of the underlying asset are abrupt. this model is used in the evaluation of options of both european and american. using a binomial model, the value of a call real option (with n moments of realization) is the following:     kn n kk kn kn n kk knkn kt ppr i qqvkrov        )1()1()1()( 00 , (3) where: )(krovt – the value of the call real option at the time t , u – an increase factor in the value of the underlying asset, d – a fall factor of the underlying asset, urd 1 , p r u q   1 , du dr p    1 ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (1). a binomial pricing model of a put real option takes the following form:           n kk knkn k kn n kk kn knt qqvppr i srov 00 )1()1( )1( )( , (4) where: )(srovt – the value of the put real option at the time t ,  iduvnjk jnj  00 ;min , other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the blackscholes model. conclusions pro-ecological investments are often characterized by the following properties: – in the initial phase of their implementation, significant financial outlays are incurred, – in a longer time period they may affect the reduction of costs related to the functioning of the company. other designations remain the same as in formula (3). if the binomial model has an increasing number of the moments of realization, the result obtained from this model is close to the value of the real option derived from the black-scholes model.  conclusions pro-ecological investments are often characterized by the following properties: ■ in the initial phase of their implementation, significant financial outlays are incurred, ■ in a longer time period they may affect the reduction of costs related to the functioning of the company. traditional methods of the evaluation of investment projects (e.g., the net present value method) may understate the value of some of the analysed environmental investment projects, because these methods do not consider the possibility of active management of the project. the company which has real options can create favourable conditions for themselves, and thus affect the environment. real options analysis allows measurement of projects due to the selected direction, the moment of realization and type of investment. in the case of real options, there is a possibility of a controlled increase of its value. real options create a valuable picture of the generated f lexibility. therefore, the real options analysis method is particularly attractive in the evaluation of pro-ecological investment projects. however, in the case of real options, correct variable1 valuing2 and periodic verification is necessity. 1 which take a stand in model of pricing. 2 are calculated with the use of the advanced simulation methods. real options in the assessment of the company’s… 71  references amram m., kulatilaka n. (1999), real options, managing investments in an uncertain world, hbs press, boston. brach m. a. (2002), real options in practice, john wiley &sons, inc, new york, 105–130. copeland t., anticarov v. (2001), real options: a practitioner’s guide, texere, new york. dziawgo e. (2003), modele kontraktów opcyjnych, wydawnictwo naukowe uniwersytetu mikołaja kopernika, toruń, 97–100. dziawgo e. (2009), opcje rzeczowe w proekologicznych strategiach przedsiębiorstwa, [in:] funkcjonowanie przedsiębiorstw w warunkach zrównoważonego rozwoju i gospodarki opartej na wiedzy, e. sidorczuk-pietraszko (ed.), wydawnictwo wyższej szkoły ekonomicznej w białymstoku, białystok, 261–269. jajuga t. (2000). opcja rzeczowa – nowy instrument pochodny czy przełom w zarządzaniu finansami. rynek terminowy, 9 (3), 88–92. nahotko s. (2002), podstawy ekologicznego zarządzania przedsiębiorstwem, oficyna wydawnicza ośrodka postępu organizacyjnego, bydgoszcz, 81–88. piontek b. (2002), koncepcja rozwoju zrównoważonego i trwałego polski, wydawnictwo naukowe pwn, warszawa–kraków. piontek b., piontek f., piontek w. (1997), ekorozwój i narzędzia jego realizacji, wydawnictwo ekonomia i środowisko, białystok. płoska r. (2006), proekologiczne działania przedsiębiorstwa jako podstawa budowania przewagi konkurencyjnej, [in:] strategia lizbońska a zarządzanie wartością, l. pawłowicz (ed.), cedewu, warszawa, 127–137. ryszko a., (2007), proaktywność przedsiębiorstw w zarządzaniu środowiskiem, determinanty, mierniki i efekty, [in:] zrównoważony rozwój i ochrona środowiska w gospodarce, d. kiełczewski, b. dobrzańska (ed.), wydawnictwo wyższej szkoły ekonomicznej w białymstoku, białystok, 345–359. trigeorgis l. (1999), real options: a primer [in:] the new investment theory of real options and its implication for telecommunications economics, j. alleman, e. noam (ed.), kluwer academic publishers, boston, 3–34. ziarkowski r. (2004), opcje rzeczowe oraz ich zastosowanie w formułowaniu i ocenie projektów inwestycyjnych, wydawnictwo akademii ekonomicznej w katowicach, katowice. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 27, 2014; date of acceptance: march 23, 2014. * contact information: tomasz.uryszek@uni.lodz.pl, department of public finance, faculty of economics and sociology of the university of lodz, rewolucji 1905 r. 39, 90- 214 łódz, phone: 42 635 51 89. uryszek t. (2014). public finance crisis and sustainable development financing – evidence from eu economies. copernican journal of finance & accounting, 3(1), 161–173. http://dx.doi.org/10.12775/cjfa.2014.013 tomasz uryszek* university of lodz public finance crisis and sustainable development financing – evidence from eu economies key words: crisis, public expenditures, public revenues, sustainable development. j e l classification: h50, h20, h12, q01. abstract: the paper aims at identifying the impact of public finance crisis on the changes in both level and structure of public spendings on sustainable development in the eu countries. the research objective is accompanied by the following research hypothesis: general government expenditures financing sustainable social and economic development in the eu countries have been reduced due to increasing public finance imbalances. the paper is composed of two parts. the first one discusses the problems of increasing imbalances in the public finances. the second one outlines changes in the structure of public expenditure connected with sustainable development financing. the study covers all of the eu member states. the analyses are based on eurostat data. kryzys finansów publicznych a finansowanie zrównoważonego rozwoju – przykład krajów unii europejskiej słowa kluczowe: kryzys, wydatki publiczne, dochody publiczne, zrównoważony rozwój. klasyfikacja j e l: h50, h20, h12, q01. tomasz uryszek162 abstrakt: celem artykułu jest zbadanie wpływu kryzysu finansów publicznych na zmiany poziomu i struktury finansowania zadań wspierających zrównoważony rozwój ze źródeł publicznych w krajach ue. tak postawionemu celowi badawczemu towarzyszy następująca hipoteza badawcza: rosnąca nierównowaga sektora finansów publicznych w krajach ue spowodowała obniżenie wydatków publicznych na cele związane ze zrównoważonym rozwojem społecznym i gospodarczym. artykuł podzielono na dwie części. w pierwszej omówiono problematykę rosnącej nierównowagi sektora finansów publicznych. druga część prezentuje zmiany w strukturze wydatków publicznych związanych z finansowaniem zrównoważonego rozwoju. badaniem objęto wszystkie kraje ue. do analiz wykorzystano dane eurostatu. translated by tomasz uryszek  introduction public finance crisis is one of the major problems of contemporary economies all over the world, including the eu member states. it is related to the increasing public finance imbalance, excessive budget deficits, very high levels of public debt and reduced credibility of particular countries (bach 2012, 3–11; santacana, siles 2013, 27–41). in europe, the problems concern not only the eurozone countries or the member states of the so called “old” european union (costa fernandes, mota 2011, 1–36). more and more frequently they also emerge in the “new” eu member states (sabău-popa, mara 2012, 778–783). these problems must be ref lected in actual and planned amounts of public revenue and expenditure. the authorities face the dilemma whether they should increase budget revenue (by increasing taxes) or should they cut expenditure (głuchowski 1995). cuts may also hinder sustainable development financing in individual countries. the aim of the paper is to explore the impact of public finance crisis on the size and structure of public spendings on sustainable development in the eu countries. research objective is accompanied by the following research hypothesis: general government expenditures financing sustainable social and economic development in the eu countries have been reduced due to increasing public finance imbalances. sustainable development may be understood as „a complex and multidimensional issue, which combines efficiency, equity, and intergenerational equity based on economic, social, and environmental aspects” (ciegis, ramanauskiene, martinkus 2009, 28). the rio de janeiro declaration on environment and development (1992) described sustainable development as “long-term continuous development of the society aimed at satisfaction of humanity’s need at present and in the future via rational usage and replenishment of natural re public finance frisis and sustainable development financing… 163 sources, preserving the earth for future generations”. the paper, however, uses the definition of pearce, markandya and barbier (1989), according to which sustainable development “includes the creation of a social and economic system that guarantees support for the following aims: increase in the real income, the improvement of the level of education, and the improvement in the populations’ health and in the general quality of life”. the research methodology and the course of the research process the above presented hypothesis was tested based on eurostat data concerning the revenue and expenditure of all the ue member states. only croatia was exempted from the analysis as it joined the eu in 2013 and was not a eu member state in the period covered by the study. in order to make the results comparable among different eu countries (including unitary and federal states) the data for the total general government sector were used. the study covers the years between 2005–2012. for the needs of this paper, according to the literature review, the following areas were included into the categories of public expenditure supporting the process of sustainable development: environmental protection (hoang 2006, 67–73), recreation, culture and religion (gough, accordino 2013, 851– 887; farmer, chancellor, gooding, shubowitz, bryant 2011, 11–23; athichitskul 2011, 3–11), health and social protection (seke, petrovic, jeremic, vukmirovic, kilibarda, martic 2013, 1–7), and education (koehn 2012, 274–282; kościelniak 2014, 114–119). the amounts of the above mentioned categories of public expenditure (as percentages of gdp, nominal values and dynamics indices) were analyzed and compared with the changes in total public spendings. correlation indices for those variables were calculated. to check the effect of value of these expenditures into the volume of public debt, the coefficient of determination (r-squared) was calculated. public finance crisis in the eu countries increasing public finance imbalances in the eu member states are manifested in raising public finance deficit and debt. that is because expenditures exceed collected revenues. average revenue, expenditure and deficit of the general government sector and public debt for the eu member states are presented in table 1. tomasz uryszek164 table 1. average revenue, expenditure and deficit of the general government sector and public debt in the eu member stated (in % gdp) 2005 2006 2007 2008 2009 2010 2011 2012 expenditure 46.7 46.2 45.5 47.0 51.0 50.6 49.1 49.3 revenue 44.2 44.7 44.6 44.6 44.1 44.1 44.6 45.4 imbalace -2.5 -1.5 -0.9 -2.4 -6.9 -6.5 -4.5 -3.9 debt 62.7 61.5 58.9 62.2 74.5 80.0 82.4 85.2 s o u r c e : own calculations based on eurostat data. the roots of permanent public finance imbalances lie at politicians’ striving to meet increasing demand of the society for public goods without increasing the tax burden (which would be a not only politically unpopular move, but would have some negative consequences as well). public needs, however, can be unlimited (and increase continuously). they also differ among various groups of citizens and do not directly link to the revenue of the budget (de donder, le breton, peluso 2012, 462). thus, the catalogue of tasks of public authorities, definition of public needs and their scope should be defined. the latest economic crisis highlighted the problems of public finance sector in the eu countries. nevertheless, we may not conclude that the crisis itself was the source of them. in order to prove it, we may use the data describing the so called structural budget balance (see e.g.: sterks 1984, 183–203). public finances in the clear majority of the eu member states in the years 2005–2012 recorded structural deficits (with the exception of sweden, finland and luxembourg), meaning that even if we eliminate business cycle f luctuations, the budgets of the general government sector in most eu member states would end up with deficit. that reveals the need for in-depth reforms, which should have a positive impact on economic growth in the mediumand long-term (oecd 2012, 9). however the introduction of these reforms can be very difficult due to potential citizens’ opposition. the need to balance public finances must entail the decrease of some budgetary expenditure. that is why it must be considered whether expenditures connected with sustainable development financing in the eu countries should be subject to cuts. public finance frisis and sustainable development financing… 165 public expenditure in support of sustainable development against the expenditure of the general government sector public expenditures, including budgetary expenditure, are imminent need as they depend on the tasks assumed by the state. their size and structure result from the scope of state responsibilities. (kosikowski 2005, 107). the structure of public expenditures is closely related to the political doctrine pursued by a country and its social and economic policies (lubińska, franek 2005, 35). the scope of tasks of the public sector determine the demand of the central, state and local budget for financial resources (kleer 2005, 129). simultaneously, we should pay specific attention to the rationality and effective use of public expenditures (including budgetary expenditure) in strategic areas of public services, such as health or social welfare (piotrowska-marczak, kietlińska 2001, 281–293), superannuation scheme (adamiak, kołosowska 2005, 201–214) or health (fill 2005, 259–271; nojszewska 2005, 309–316). obviously, we should bear in mind that the expenditures of individual eu member states differ with respect to their size and forms (for more see e.g.: ferreiro, del valle, gomez 2012, 633–660). we cannot also forget about sustainable development supporting form public funds. amounts of public spending in support of sustainable development in the eu member states are included in table 2. table 2. sustainable development financing in the eu member states (in eur bn and in % gdp) year measure environment protection health recreation, culture and religion education social protection 2005 eur bn 84.7 743.4 120.7 577.2 2 018.8 % gdp 0.8 6.7 1.1 5.2 18.2 2006 eur bn 95.3 794.3 130.1 603.1 2 098.3 % gdp 0.8 6.8 1.1 5.1 17.9 2007 eur bn 100.4 832.9 138.4 629.5 2 180.6 % gdp 0.8 6.7 1.1 5.1 17.5 2008 eur bn 101.3 866.1 143.9 643.3 2 249.8 % gdp 0.8 6.9 1.2 5.1 18 tomasz uryszek166 year measure environment protection health recreation, culture and religion education social protection 2009 eur bn 108.6 890.9 141.2 652.1 2 349.7 % gdp 0.9 7.6 1.2 5.5 20 2010 eur bn 109.2 915.4 143.7 672.3 2 442.1 % gdp 0.9 7.4 1.2 5.5 19.9 2011 eur bn 108.7 926.7 139.1 674.5 2 480.6 % gdp 0.9 7.3 1.1 5.3 19.6 s o u r c e : own calculations based on eurostat data. in-depth analyses were conducted for single-based dynamics indices in all the eu member states. it was because the nominal values could not be used for international comparison. there were significant f luctuations in gdp values in individual countries caused by economic slowdown and the crisis hence values expressed in gdp % may also be distorted. as data are usually published in delay, the latest data available when the paper was completed dated back to 2011. data relating to changes in amounts spent as public finances in support of sustainable development are presented in table 3. table 3. total public spending in support of sustainable development area/country spending 2005 2006 2007 2008 2009 2010 2011 eu total (2005=100) 100.0 104.5 109.3 113.5 115.9 120.0 120.0 sus. dev.*) (2005=100) 100.0 105.0 109.5 113.0 116.9 120.8 122.1 sus. dev in total (in %)**) 68.5 68.8 68.6 68.2 69.0 68.9 69.7 eu-15 total (2005=100) 100.0 104.1 108.2 111.5 114.6 118.4 118.2 sus. dev.*) (2005=100) 100.0 104.6 108.7 111.2 115.7 119.3 120.5 sus. dev in total (in %) 68.8 69.1 69.1 68.6 69.4 69.3 70.1 eurozone total (2005=100) 100.0 103.6 108.0 113.4 119.6 122.4 122.2 sus. dev.*) (2005=100) 100.0 104.3 108.6 113.9 121.0 123.2 124.7 sus. dev in total (in %) 68.4 68.8 68.7 68.6 69.2 68.8 69.7 belgium total (2005=100) 100.0 98.2 102.9 109.6 116.2 118.8 125.2 sus. dev.*) (2005=100) 100.0 103.6 107.6 115.1 122.7 125.8 132.6 public finance frisis and sustainable development financing… 167 area/country spending 2005 2006 2007 2008 2009 2010 2011 bulgaria total (2005=100) 100.0 105.0 139.1 156.9 167.0 155.7 158.3 sus. dev.*) (2005=100) 100.0 109.0 126.6 151.6 167.6 168.7 174.0 czech republic total (2005=100) 100.0 105.0 112.2 118.2 125.3 124.0 123.4 sus. dev.*) (2005=100) 100.0 108.5 117.4 123.1 131.1 133.5 136.6 denmark total (2005=100) 100.0 103.2 105.6 110.7 118.6 124.6 126.8 sus. dev.*) (2005=100) 100.0 103.1 105.2 110.5 119.0 125.1 126.0 germany total (2005=100) 100.0 100.6 101.3 104.5 109.7 114.1 112.6 sus. dev.*) (2005=100) 100.0 100.9 101.4 103.6 110.1 111.9 112.6 estonia total (2005=100) 100.0 119.8 145.3 171.4 166.6 155.1 162.6 sus. dev.*) (2005=100) 100.0 116.8 139.7 169.6 171.3 158.8 162.3 ireland total (2005=100) 100.0 110.7 126.0 139.6 142.3 187.4 138.7 sus. dev.*) (2005=100) 100.0 109.9 124.3 136.2 141.4 135.1 133.3 greece total (2005=100) 100.0 109.7 123.1 137.0 144.8 132.8 125.4 sus. dev.*) (2005=100) 100.0 110.2 121.6 136.6 144.5 137.5 130.7 spain total (2005=100) 100.0 108.1 118.2 129.0 138.7 138.9 137.4 sus. dev.*) (2005=100) 100.0 108.9 118.4 130.1 141.8 143.4 141.6 france total (2005=100) 100.0 103.5 107.9 111.9 116.3 119.0 121.6 sus. dev.*) (2005=100) 100.0 105.8 109.7 114.2 119.1 122.6 126.1 italy total (2005=100) 100.0 105.1 107.6 111.2 114.5 113.6 114.5 sus. dev.*) (2005=100) 100.0 103.7 107.5 111.9 116.3 117.7 117.5 cyprus total (2005=100) 100.0 106.3 113.2 125.1 134.9 139.1 143.5 sus. dev.*) (2005=100) 100.0 106.0 111.1 125.7 135.0 144.8 150.7 latvia total (2005=100) 100.0 132.2 164.1 194.9 177.1 172.1 170.0 sus. dev.*) (2005=100) 100.0 129.5 160.4 193.2 183.2 168.5 176.4 lithuania total (2005=100) 100.0 115.7 142.8 173.3 167.2 161.7 165.3 sus. dev.*) (2005=100) 100.0 113.7 142.7 178.4 185.0 172.0 173.6 luxembourg total (2005=100) 100.0 104.1 108.1 116.3 127.9 136.0 142.2 sus. dev.*) (2005=100) 100.0 102.6 108.3 116.9 128.8 135.7 141.4 hungary total (2005=100) 100.0 112.0 114.8 118.5 119.5 120.1 125.4 sus. dev.*) (2005=100) 100.0 110.2 111.8 118.8 117.8 121.4 123.3 tomasz uryszek168 area/country spending 2005 2006 2007 2008 2009 2010 2011 malta total (2005=100) 100.0 104.4 108.3 119.4 117.8 123.2 127.9 sus. dev.*) (2005=100) 100.0 105.4 110.7 115.4 121.5 131.1 134.6 netherlands total (2005=100) 100.0 107.0 112.6 119.5 128.2 131.0 130.4 sus. dev.*) (2005=100) 100.0 108.7 114.2 120.5 129.3 133.1 135.5 austria total (2005=100) 100.0 103.8 108.6 113.8 118.6 122.8 123.9 sus. dev.*) (2005=100) 100.0 104.1 108.8 114.1 120.4 124.3 125.7 poland total (2005=100) 100.0 108.9 116.2 129.1 140.4 150.6 155.4 sus. dev.*) (2005=100) 100.0 108.1 113.1 126.0 136.9 146.3 149.9 portugal total (2005=100) 100.0 101.3 104.6 107.3 116.7 123.9 117.5 sus. dev.*) (2005=100) 100.0 102.6 105.3 109.1 119.0 121.3 118.1 romania total (2005=100) 100.0 126.2 163.9 208.3 212.2 216.4 225.8 sus. dev.*) (2005=100) 100.0 124.7 155.1 211.0 228.5 233.8 248.4 slovenia total (2005=100) 100.0 106.4 112.8 126.9 134.2 137.5 141.0 sus. dev.*) (2005=100) 100.0 105.4 110.6 124.2 132.8 136.4 138.7 slovakia total (2005=100) 100.0 107.2 112.2 124.6 139.2 140.6 140.8 sus. dev.*) (2005=100) 100.0 110.4 116.4 126.6 140.6 142.0 142.3 finland total (2005=100) 100.0 102.9 107.5 115.3 122.0 125.8 131.5 sus. dev.*) (2005=100) 100.0 103.2 108.1 114.8 122.9 127.3 132.8 sweden total (2005=100) 100.0 104.1 106.8 111.2 114.4 117.1 120.2 sus. dev.*) (2005=100) 100.0 103.8 106.1 110.0 114.7 116.9 119.2 united kingdom total (2005=100) 100.0 106.1 111.6 124.2 130.0 133.6 133.2 sus. dev.*) (2005=100) 100.0 105.8 112.0 119.5 129.4 134.5 136.0 *) – public spending on sustainable development **) – share of sustainable development-related spending in total spending s o u r c e : own calculations based on eurostat data. the analysis of data from table 3 lets us conclude that economic slowdown accompanied by the crisis of public finance in many eu countries have not resulted in the reduction of spending on sustainable development. on the contrary, such spending increased in the period 2005–2011. furthermore, in 19 out of 27 member states (including portugal, spain, italy and greece – i.e. highly public finance frisis and sustainable development financing… 169 indebted pigs countries) covered by the study, the rate of public expenditures connected with sustainable development financing was higher than the rate of increase in total public expenditures. those variables are, of course, strongly correlated. the values of correlation indices in most eu countries amounted more than 99%. the only exception was ireland, but the index was there also significant (76%). due to that phenomenon, the increase in sustainable development-related spendings inf luenced substantially the volume of public debt as well. it was proven by the values of r-squared index, which amounted to 70% in most eu countries. there were, however, a few exceptions: in 9 out of 27 countries the r-squared values were relatively low (less than 40%). it means, that the level of public debt in those countries was affected by spendings allocated for current budgetary needs and debt service rather than supporting sustainable development. in poland, spending relevant to sustainable development rose slower than the total general government expenditure. it can be explained by the need to diminish the public debt as it was close to the threshold of 60% of gdp laid down in the constitution of the republic of poland and the fiscal criterion of the maastricht treaty. the highest increase in spending was recorded in the area of environmental protection. for the eu it increased from eur 84.7 trl in 2005 to eur 108.7 trl in 2011, meaning that, despite the crisis, eu member states managed to allocate significant amounts in their budgets to finance this important issue. the highest spending in the eu was reported for social protection. in the period covered by the study it increased from eur 2018.7 trl to eur 2480.5 trl. the increase is understandable in the times of economic downturn and crisis. health related spendings also significantly increased, by more than 24%. financing of culture and education increased relatively little. clearly the increases in spending alone do not have to improve the perspectives of sustainable development, which predominantly depend on how effectively the resources are spent. however, the assessment of the effectiveness involves a very difficult and complex process. higher increase in sustainable development related spendings in the countries of the “new” eu (which joined the eu in 2004 or later) compared to the countries of the so called “fifteen” may result from the need to finance the needs which were met long ago in the “old” eu. moreover, these member states are relatively less indebted, which makes it easier for them to maintain high dynamics of public spending even in the times of crisis. besides, they strive to tomasz uryszek170 close the gap in economic development and in the standard of living that divides them from the “fifteen”.  summary and research conclusions economic crisis and increasing public finance imbalances in the eu member states did not led to the reduction of the general government spending in support of sustainable development. on the contrary, in the eu the spending increased on average more rapidly than the total public expenditure. that was true also for highly indebted countries. therefore empirical analyses show that the research hypothesis should be rejected. nevertheless, in 8 out of 27 countries (including poland), the increase of those spending was slower, than the raise to the whole general government expenditures. it can be acceptable in short term, especially during crisis, but poland as well as other countries cannot retreat form supporting sustainable development from public expenditures in the long run. these spendings can improve the quality of life in the future and increase the level of competitiveness of the economy. rationalization of public spending and a clear definition of priorities in the path of economic growth can be the chance for poland to develop sustainably and strengthen its position in europe. public spending should be used as an incentive for development rather than the main (or the only) source of its financing. in more general terms, increasing expenditures on sustainable development under growing imbalances of general government sector cannot be interpreted unequivocally. on one hand, it demonstrates that the authorities are aware of the indispensability of spending relating to the sustainable development of a country. that should be assessed as a positive sign. however, we should bear in mind that amounts spent on environmental protection, education, health, social security and culture represent in total ca. 68%–70% of all budgetary expenditure. therefore, their continuous increase may result in considerable increases in total public spending and may increase budget deficits and debts in the eu member states. on top of that, rating agencies may reduce the rating of countries running excessive debts (wiśniewski 2011, 129–152). that, in turn, will increase the risk premium expected by investors while purchasing the financial instruments (thus contributing to higher interests on t- bills and t-bonds) and will additionally increase budgetary expenditure in the future. such situation may cause painful cuts in the future budgets and result (in some countries has already resulted) in serious economic and social con public 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(2011). rating suwerena – istota i znaczenie. studia bas, 4 (28), 129–152. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240doi: 10.12775/cjfa.2013.0172013, volume 2, issue 2 data wpłynięcia: 24.05.2013; data zaakceptowania: 29.12.2013. * dane kontaktowe: janusz.kunkowski@umk.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34. janusz kunkowski* uniwersytet mikołaja kopernika w toruniu rola i zadania integratorów płatności w polskim e-handlu słowa kluczowe: integratorzy płatności, e-commerce, sklepy internetowe, metody płatności. klasyfikacja j e l: l81, l86, j33. abstrakt: w artykule przedstawiono znaczenie integratorów płatności przy obsłudze metod płatności, a także dokonano oceny czynników mających główny wpływ na podjęcie przez sklep internetowy współpracy z integratorem. wykorzystano w nim dane statystyczne oraz wyniki badań empirycznych przeprowadzonych przez autora. celem artykułu jest przedstawienie modelu funkcjonowania integratorów płatności w handlu internetowym oraz ich znaczenia dla rozwoju handlu internetowego w polsce. praca prezentuje również zmiany zachodzące na rynku e-płatności w polsce ze szczególnym uwzględnieniem rosnącej roli integratorów płatności. role and tasks of payment integrators in the polish e-commerce keywords: payment integrators, e-commerce, online stores, payment method. j e l classification: l81, l86, j33. abstract: the paper presents the role of payment integrators in the polish e-commerce and estimates the factors which have a major impact on cooperation between an online store and the integrator. author use the statistical data and results of the empirical research which have been conducted by him. the aim of this article is to show the model of payment integrators working and their significance for the development of e-comjanusz kunkowski76 merce in poland. it also describes the main changes on the e-payment market with particular emphasis on the growing role of payment integrators. translated by janusz kunkowski  wstęp mnogość internetowych metod płatności sprawia, iż uczestnicy e-handlu mają dużą swobodę przy wyborze sposobu dokonania zapłaty za towary i usługi nabywane w internecie. wdrożenie płatności internetowych nie wymaga poniesienia wysokich nakładów inwestycyjnych, gdyż nie ma potrzeby rozwoju kosztownej fizycznej infrastruktury akceptacji danej metody płatności (levitin 2007). dzięki ciągle rosnącej liczbie użytkowników handel internetowy w polsce rozwija się bardzo dynamicznie. wzrost liczby użytkowników stymuluje rozwój rynku e-commerce, który pociąga za sobą większe zapotrzebowanie na obsługę różnorodnych metod płatności. widać, iż handel internetowy stał się istotnym segmentem rynku detalicznego. w 2012 roku około 59% użytkowników internetu w unii europejskiej dokonało zakupów online. wciąż najbardziej rozwiniętym rynkiem e-handlu pozostaje wielka brytania (82%), a najsłabiej rumunia (11%). polska z wynikiem 47% plasuje się poniżej średniej unijnej, jednak wyprzedza takie kraje, jak włochy, hiszpania, grecja, węgry czy portugalia (eurostat 2012). specyfika transakcji internetowych różni się od płatności tradycyjnych dlatego rynek płatności internetowych wymaga znacznie szerszej oferty dla zaspokojenia potrzeb szybko rosnącego handlu. wdrożenie nowej metody płatności wiąże się z poniesieniem sporych nakładów inwestycyjnych przez sprzedawcę, dlatego w celu udostępnienia jak największej liczby metod większość sklepów internetowych decyduje się na współpracę z integratorami płatności internetowych. udostępniają oni kompleksowe, łatwe do integracji rozwiązania informatyczne oraz wygodny model rozliczeń oparty na prowizji. ponadto zapewniają duże bezpieczeństwo transakcji oraz transmisji danych. 1. metodyka badań i przebieg procesu badawczego celem pracy jest przedstawienie modelu funkcjonowania integratorów płatności w handlu internetowym oraz ich znaczenia dla rozwoju handlu internetowego w polsce. dodatkowym celem jest poznanie czynników sprzyjających współpracy sklepów internetowych z integratorami.   rola i zadania integratorów płatności w polskim e-handlu 77 2. pojęcie i funkcjonowanie integratorów płatności działalność integratorów płatności została uregulowana w ramach ustawy z dnia 19 sierpnia 2011 r. o usługach płatniczych. ustawa ta wdraża postanowienia dyrektywy 2007/64/we parlamentu europejskiego i rady z 13 listopada 2007 r. przed uchwaleniem ustawy, większość tego typu podmiotów funkcjonowała jako agenci rozliczeniowi. obecnie integratorzy płatności mogą działać na obszarze unii europejskiej jako instytucje płatnicze. jako pierwsza w polsce zezwolenie komisji nadzoru finansowego, podczas posiedzenia w dniu 27 listopada 2012 r., na prowadzenie działalności w charakterze instytucji płatniczej uzyskała firma payu (knf 2012). zgodnie z ustawą o usługach płatniczych, żeby świadczyć usługi płatnicze w charakterze krajowej instytucji płatniczej trzeba być osobą prawną i uzyskać zgodę komisji nadzoru finansowego na prowadzenie tego typu działalności. instytucje płatnicze muszą posiadać odpowiedni kapitał i objęte są stałym nadzorem komisji. głównym obszarem działania instytucji płatniczej jest świadczenie usług płatniczych, które rozumiane są jako: przyjmowanie wpłat i dokonywanie wypłat gotówki, wykonywanie transakcji płatniczych przy użyciu polecenia zapłaty, karty płatniczej oraz polecenia przelewu, wydawanie instrumentów płatniczych, transfer środków pieniężnych pomiędzy rachunkami bankowymi, świadczenie usługi przekazu pieniężnego. instytucja płatnicza może zawierać umowy z przedsiębiorcami o przyjmowanie zapłaty przy użyciu instrumentów płatniczych. w ramach wykonywania usług płatniczych instytucja płatnicza ma prawo udzielić kredytu płatniczego na okres do 12 miesięcy, służącemu wykonaniu transakcji płatniczej. nie może być on jednak udzielony ze środków pieniężnych przechowywanych przez instytucje w celu wykonania transakcji płatniczej. ponadto może ona prowadzić systemy płatności oraz świadczyć usługi dodatkowe, takie jak wymiana walut, przechowywanie i przetwarzanie danych. zgodnie z regulacjami wprowadzonymi przez ustawę instytucja płatnicza może wykonywać większość funkcji związanych z płatnościami, które wcześniej wykonywane były przez banki. krajowe instytucje płatnicze podlegają wpisowi do rejestru, który prowadzony jest przez knf. instytucje nie mogą prowadzić działalności polegającej na przyjmowaniu depozytów, ponadto środki pieniężne złożone na rachunku w instytucji nie mogą być oprocentowane. celem zmian w obszarze usług płatniczych jest zwiększenie konkurencyjności rynku płatniczego oraz bezpieczeństwa i ochrony środków pieniężjanusz kunkowski78 nych przetrzymywanych na rachunkach płatniczych instytucji. jeżeli instytucja płatnicza przyjmuje od klientów środki pieniężne służące do wykonania transakcji, wówczas jest ona zobowiązana do ich ochrony. ponadto musi przechowywać je osobno, oddzielając od środków z innego tytułu. jeśli po otrzymaniu środków transakcja nie jest wykonana do końca dnia roboczego, wówczas środki trafiają na wyodrębniony rachunek bankowy lub są inwestowane w bezpieczne aktywa płynne. dodatkowo środki te są wolne od zajęcia sądowego oraz nie wchodzą w skład masy upadłościowej. instytucje płatnicze są stale monitorowane przez komisję nadzoru finansowego, która w przypadku stwierdzenia istnienia nieprawidłowości może nałożyć karę pieniężną lub cofnąć licencję. warto podkreślić, iż instytucje płatnicze mogą świadczyć usługi za pośrednictwem agentów, na podstawie umowy pisemnej z innym przedsiębiorcą lub oddziałem. uzyskane zezwolenie pozwala na prowadzenie działalności na terenie całego europejskiego obszaru gospodarczego (ustawa o usługach płatniczych 2011). model współpracy sklepu internetowego z integratorem płatności jest stosunkowo prosty. w pierwszej kolejności podpisywana jest umowa ramowa. następnie sprzedawca integruje swoją witrynę z systemem informatycznym integratora. dzięki połączeniu systemów jeden dostawca usług płatniczych oferuje użytkownikom wybór spośród wielu metod płatności. klient sklepu internetowego po dokonaniu zakupu i wyborze metody płatności automatycznie przenoszony jest na witrynę integratora płatności. następnie niezbędne jest uzupełnienie danych do prawidłowego przeprowadzenia transakcji. po pozytywnym procesie autoryzacji i potwierdzeniu przeprowadzenia płatności następuje powrót na witrynę sprzedawcy, który otrzymuje od integratora informacje o dokonaniu płatności przez klienta. środki pieniężne trafiają na konto sklepu internetowego po kilku dniach. model rozliczeniowy z reguły opiera się na prowizji od transakcji. 3. metodyka badań i przebieg procesu badawczego praca oparta jest na wynikach badania ankietowego zrealizowanego w okresie od 8 do 16 maja 2012 r., na próbie celowej sklepów internetowych zarejestrowanych w katalogu portalu sklepy24.pl. kwestionariusz badania w ramach prezentowanych zagadnień został przygotowany przez autora pracy. badanie miało charakter anonimowy i zostało przeprowadzone we współpracy z portalem sklepy24.pl, który prowadzi jeden z największych w polsce katalogów   rola i zadania integratorów płatności w polskim e-handlu 79 firm handlu internetowego, obejmujący ponad 8 tysięcy podmiotów spośród około 12 tysięcy działających w polsce. w sumie uzyskano 607 kompletnych odpowiedzi od respondentów. sklepy internetowe biorące udział w badaniu prowadziły sprzedaż towarów i usług głównie w polsce (99,8% sklepów internetowych), natomiast sprzedaż internetową do unii europejskiej zadeklarowało 33,1% sklepów, a do pozostałych krajów europejskich 9,6%. branże, które były najliczniej reprezentowane w badaniu, to dom i ogród (28,2%), odzież (18,9%), dziecko (13,5%) oraz zdrowie i uroda (12,5%). najmniej respondentów miały auto i moto (5,1%) oraz delikatesy (4,4%). zdecydowana większość (73,4%) sklepów internetowych to firmy zatrudniające mniej niż 6 osób, natomiast w gronie mikroprzedsiębiorstw znalazło się aż 84,9% respondentów. ponadto aż 46% sklepów internetowych posiadało placówkę stacjonarną i prowadziło sprzedaż w sposób tradycyjny. uzyskane wyniki umożliwiły określenie zasięgu akceptowania metod płatności stosowanych w polskim e-handlu oraz analizę wpływu na rynek e-handlu takich innowacyjnych rozwiązań jak: integrator płatności internetowych, serwis płatności wirtualnych oraz e-przelew. 4. dostępność metod płatności w sklepach internetowych wyniki badania uwidoczniły występowanie znaczących dysproporcji w zasięgu akceptowania poszczególnych metod płatności przez sklepy internetowe. formami płatności zdecydowanie najczęściej udostępnianymi przez sklepy internetowe były: przelew bankowy (95,6%), płatność gotówką przy odbiorze towaru (90%) oraz integrator płatności internetowych (78,4%) (wykres 1). porównując wyniki badań z lat 2010 i 2012 widać, iż nieznacznie zmniejszyła się dostępność płatności za pobraniem (spadek z 92,5 do 90%) oraz płatności przy osobistym odbiorze towaru (spadek o 1 punkt procentowy). warto jednak podkreślić, iż znacząco zwiększył się zasięg akceptacji integratorów płatności z 46,3 do 78,4%, e-przelewów z 51,2 do 63,6% oraz kart płatniczych z 54,5 do 60%. janusz kunkowski80 wykres 1. metody płatności akceptowane przez sklepy internetowe w polsce py24.pl, który prowadzi jeden z największych w polsce katalogów firm handlu internetowego, obejmujący ponad 8 tysięcy podmiotów spośród około 12 tysięcy działających w polsce. w sumie uzyskano 607 kompletnych odpowiedzi od respondentów. sklepy internetowe biorące udział w badaniu prowadziły sprzedaż towarów i usług głównie w polsce (99,8% sklepów internetowych), natomiast sprzedaż internetową do unii europejskiej zadeklarowało 33,1% sklepów, a do pozostałych krajów europejskich 9,6%. branże, które były najliczniej reprezentowane w badaniu, to dom i ogród (28,2%), odzież (18,9%), dziecko (13,5%) oraz zdrowie i uroda (12,5%). najmniej respondentów miały auto i moto (5,1%) oraz delikatesy (4,4%). zdecydowana większość (73,4%) sklepów internetowych to firmy zatrudniające mniej niż 6 osób, natomiast w gronie mikroprzedsiębiorstw znalazło się aż 84,9% respondentów. ponadto aż 46% sklepów internetowych posiadało placówkę stacjonarną i prowadziło sprzedaż w sposób tradycyjny. uzyskane wyniki umożliwiły określenie zasięgu akceptowania metod płatności stosowanych w polskim e-handlu oraz analizę wpływu na rynek e-handlu takich innowacyjnych rozwiązań jak: integrator płatności internetowych, serwis płatności wirtualnych oraz e-przelew. dostępność metod płatności w sklepach internetowych wyniki badania uwidoczniły występowanie znaczących dysproporcji w zasięgu akceptowania poszczególnych metod płatności przez sklepy internetowe. formami płatności zdecydowanie najczęściej udostępnianymi przez sklepy internetowe były: przelew bankowy (95,6%), płatność gotówką przy odbiorze towaru (90%) oraz integrator płatności internetowych (78,4%) (wykres 1). porównując wyniki badań z lat 2010 i 2012 widać, iż nieznacznie zmniejszyła się dostępność płatności za pobraniem (spadek z 92,5 do 90%) oraz płatności przy osobistym odbiorze towaru (spadek o 1 punkt procentowy). warto jednak podkreślić, iż znacząco zwiększył się zasięg akceptacji integratorów płatności z 46,3 do 78,4%, e-przelewów z 51,2 do 63,6% oraz kart płatniczych z 54,5 do 60%. wykres 1. metody płatności akceptowane przez sklepy internetowe w polsce * udział pozostałych metod wynosił mniej niż 1%; ** zasięg akceptacji integratorów oznaczał posiadanie ramowej umowy na obsługę płatności z takim podmiotem. źródło: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=607; odpowiedzi wielokrotne. sklepy internetowe zainteresowane są współpracą z integratorami głównie ze względu na kompleksową obsługę płatności, łatwą integrację oraz wygodny model rozliczeń oparty przede wszystkim na prowizji. ponieważ na rynku pojawia się coraz więcej zróżnicowanych metod płatności, ich wdrażanie oraz podpisywanie umów z każdym dostawcą byłoby dla sklepów kłopotliwe i czasochłonne. dlatego większość e-sklepów decyduje się na współpracę z integratorem płatności w celu udostępnienia szerokiej gamy metod płatności, obejmujących zarówno bankowe instrumenty płatnicze, jak i nieban1,6% 1,8% 18,9% 19,9% 60,0% 63,6% 68,9% 78,4% 90,0% 95,6% 0% 20% 40% 60% 80% 100% inne* sieci płatności za rachunki kredyt ratalny / pożyczka serwis płatności wirtualnych karta płatnicza szybki e-przelew płatność przy odbiorze osobistym integrator płatności internetowych** płatność za pobraniem przelew bankowy * udział pozostałych metod wynosił mniej niż 1%; ** zasięg akceptacji integratorów oznaczał posiadanie ramowej umowy na obsługę płatności z takim podmiotem. ź r ó d ł o: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=607; odpowiedzi wielokrotne. sklepy internetowe zainteresowane są współpracą z integratorami głównie ze względu na kompleksową obsługę płatności, łatwą integrację oraz wygodny model rozliczeń oparty przede wszystkim na prowizji. ponieważ na rynku pojawia się coraz więcej zróżnicowanych metod płatności, ich wdrażanie oraz podpisywanie umów z każdym dostawcą byłoby dla sklepów kłopotliwe i czasochłonne. dlatego większość e-sklepów decyduje się na współpracę z integratorem płatności w celu udostępnienia szerokiej gamy metod płatności, obejmujących zarówno bankowe instrumenty płatnicze, jak i niebankowe systemy płatności, podpisując z reguły tylko jedną umowę. ponadto dzięki współpracy z integratorem sklep internetowy ma możliwość uproszczenia procesu obsługi płatności poprzez przesyłanie automatycznych powiadomień o statusie płatności. pozwala to na sprawne przeprowadzenie transakcji, gdyż sprzedawca nie musi samodzielnie sprawdzać operacji na rachunku bankowym, co przy dużej liczbie zamówień może być bardzo pracochłonne.   rola i zadania integratorów płatności w polskim e-handlu 81 wykres 2. metody płatności obsługiwane przez integratora płatności kowe systemy płatności, podpisując z reguły tylko jedną umowę. ponadto dzięki współpracy z integratorem sklep internetowy ma możliwość uproszczenia procesu obsługi płatności poprzez przesyłanie automatycznych powiadomień o statusie płatności. pozwala to na sprawne przeprowadzenie transakcji, gdyż sprzedawca nie musi samodzielnie sprawdzać operacji na rachunku bankowym, co przy dużej liczbie zamówień może być bardzo pracochłonne. wykres 2. metody płatności obsługiwane przez integratora płatności * udział pozostałych metod wynosił mniej niż 1%. źródło: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=476; odpowiedzi wielokrotne. obsługa kart płatniczych oraz e-przelewów przez sklep internetowy bez udziału integratorów płatności wymaga podpisania osobnej umowy z bankiem oraz integracji sklepu z systemem bankowym. jest to proces kosztowny, dlatego większość sklepów internetowych biorących udział w badaniu udostępniała obsługę e-przelewów (67,6%) oraz kart płatniczych (64,3%) poprzez integratora płatności (wykres 2). może to świadczyć o dobrej współpracy, z której zadowolone są sklepy internetowe, wygodzie oraz wysokiej jakości usług. akceptacja przelewów bankowych przez e-sklep nie wymaga ponoszenia wysokich kosztów oraz zmiany oprogramowania, dlatego często są one obsługiwane bez udziału integratorów. wykres 3. metody płatności akceptowane przez sklepy internetowe, które realizują powyżej 500 zamówień oraz poniżej 50 zamówień miesięcznie 1,9% 4,4% 11,8% 13,9% 21,8% 47,5% 64,3% 67,6% 0% 10% 20% 30% 40% 50% 60% 70% 80% sieci płatności za rachunki* kredyt ratalny / pożyczka serwis płatności wirtualnych płatność przy odbiorze osobistym płatność za pobraniem przelew bankowy karta płatnicza szybki e-przelew * udział pozostałych metod wynosił mniej niż 1%. ź r ó d ł o: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=476; odpowiedzi wielokrotne. obsługa kart płatniczych oraz e-przelewów przez sklep internetowy bez udziału integratorów płatności wymaga podpisania osobnej umowy z bankiem oraz integracji sklepu z systemem bankowym. jest to proces kosztowny, dlatego większość sklepów internetowych biorących udział w badaniu udostępniała obsługę e-przelewów (67,6%) oraz kart płatniczych (64,3%) poprzez integratora płatności (wykres 2). może to świadczyć o dobrej współpracy, z której zadowolone są sklepy internetowe, wygodzie oraz wysokiej jakości usług. akceptacja przelewów bankowych przez e-sklep nie wymaga ponoszenia wysokich kosztów oraz zmiany oprogramowania, dlatego często są one obsługiwane bez udziału integratorów. janusz kunkowski82 wykres 3. metody płatności akceptowane przez sklepy internetowe, które realizują powyżej 500 zamówień oraz poniżej 50 zamówień miesięcznie źródło: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=100 (powyżej 500 zamówień), n=198 (poniżej 50 zamówień); odpowiedzi wielokrotne. małe sklepy internetowe (realizujące poniżej 50 zamówień) unikają udostępniania metod płatności, które generują dodatkowe koszty obsługi. dlatego w celu minimalizacji kosztów częściej udostępniają one instrumenty płatnicze, które są popularne wśród klientów i nie wymagają dostosowywania systemów informatycznych. najpopularniejszymi metodami w małych sklepach są płatność gotówką za pobraniem oraz przelew bankowy (polasik, kunkowski, maciejewski 2012). należy jednak podkreślić, że duże sklepy znacznie częściej udostępniają płatność za pobraniem. może to wynikać z faktu, iż czas oczekiwania na pieniądze przy obsłudze tej metody wynosi z reguły kilka dni, co zmniejsza płynność finansową sklepu. dla dużych podmiotów jest to praktycznie nieodczuwalne, ale małe sklepy mogą mieć z tym problem. ponadto znacząca niedostępność płatności za pobraniem (około 14% mniej w małych sklepach) może wynikać z obawy przed pojedynczymi stratami wynikającymi z nieodebrania przesyłki przez klienta i narażaniem sklepu na koszty. przelew bankowy jest metodą płatności, która znacząco poprawia płynność sklepu i minimalizuje ryzyko nieotrzymania zapłaty, gdyż zamówienie jest realizowane dopiero po otrzymaniu płatności. dlatego małe sklepy tak chętnie udostępniają go swoim klientom. kolejne różnice w dostępności pojawiają się przy metodach płatności, które wymagają ponoszenia kosztów prowizyjnych. duże sklepy chętnie współpracują z integratorami płatności (88%), natomiast małe, ze względu na dodatkowe koszty, rzadziej decydują się na współpracę z nimi (67,7%). widać, iż sklepy realizujące więcej zamówień doceniają wygodę oraz bezpieczeństwo i są w stanie zaakceptować prowizję pobieraną przez integratorów. widoczny jest również fakt, iż wraz ze wzrostem liczby zamówień sklepy udostępniają swoim klientom coraz większy zakres akceptowanych instrumentów płatniczych, także tych mniej popularnych. rynek integratorów płatności w polsce wyniki przeprowadzonego badania wskazują, że najpopularniejszym integratorem płatności w polsce jest firma payu. prawie połowa (49,3%) e-sklepów współpracujących z integratorami wybrała payu (dawniej platnosci.pl), na kolejnych pozycjach znalazły się przelewy24 (17,6%), dotpay (14,3%), ecard (6,6%) oraz polcard (3,8%) (wykres 4). duże sklepy internetowe (realizujące powyżej 500 zamówień miesięcznie) bardzo często decydowały się na współpracę z więcej niż jednym integratorem płatności. należy podkreślić, iż payu jest częścią grupy allegro. sklepy internetowe dokonujące sprzedaży przez serwis aukcyjny allegro.pl, który jest niekwestionowanym liderem obrotów polskiego eź r ó d ł o: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=100 (powyżej 500 zamówień), n=198 (poniżej 50 zamówień); odpowiedzi wielokrotne. małe sklepy internetowe (realizujące poniżej 50 zamówień) unikają udostępniania metod płatności, które generują dodatkowe koszty obsługi. dlatego w celu minimalizacji kosztów częściej udostępniają one instrumenty płatnicze, które są popularne wśród klientów i nie wymagają dostosowywania systemów informatycznych. najpopularniejszymi metodami w małych sklepach są płatność gotówką za pobraniem oraz przelew bankowy (polasik, kunkowski, maciejewski 2012). należy jednak podkreślić, że duże sklepy znacznie częściej udostępniają płatność za pobraniem. może to wynikać z faktu, iż czas oczekiwania na pieniądze przy obsłudze tej metody wynosi z reguły kilka dni, co zmniejsza płynność finansową sklepu. dla dużych podmiotów jest to praktycznie nieodczuwalne, ale małe sklepy mogą mieć z tym problem. ponadto znacząca niedostępność płatności za pobraniem (około 14% mniej w małych sklepach) może wynikać z obawy przed   rola i zadania integratorów płatności w polskim e-handlu 83 pojedynczymi stratami wynikającymi z nieodebrania przesyłki przez klienta i narażaniem sklepu na koszty. przelew bankowy jest metodą płatności, która znacząco poprawia płynność sklepu i minimalizuje ryzyko nieotrzymania zapłaty, gdyż zamówienie jest realizowane dopiero po otrzymaniu płatności. dlatego małe sklepy tak chętnie udostępniają go swoim klientom. kolejne różnice w dostępności pojawiają się przy metodach płatności, które wymagają ponoszenia kosztów prowizyjnych. duże sklepy chętnie współpracują z integratorami płatności (88%), natomiast małe, ze względu na dodatkowe koszty, rzadziej decydują się na współpracę z nimi (67,7%). widać, iż sklepy realizujące więcej zamówień doceniają wygodę oraz bezpieczeństwo i są w stanie zaakceptować prowizję pobieraną przez integratorów. widoczny jest również fakt, iż wraz ze wzrostem liczby zamówień sklepy udostępniają swoim klientom coraz większy zakres akceptowanych instrumentów płatniczych, także tych mniej popularnych. 5. rynek integratorów płatności w polsce wyniki przeprowadzonego badania wskazują, że najpopularniejszym integratorem płatności w polsce jest firma payu. prawie połowa (49,3%) e-sklepów współpracujących z integratorami wybrała payu (dawniej platnosci.pl), na kolejnych pozycjach znalazły się przelewy24 (17,6%), dotpay (14,3%), ecard (6,6%) oraz polcard (3,8%) (wykres 4). duże sklepy internetowe (realizujące powyżej 500 zamówień miesięcznie) bardzo często decydowały się na współpracę z więcej niż jednym integratorem płatności. należy podkreślić, iż payu jest częścią grupy allegro. sklepy internetowe dokonujące sprzedaży przez serwis aukcyjny allegro.pl, który jest niekwestionowanym liderem obrotów polskiego e-handlu, do obsługi płatności mogą wykorzystywać payu. poza tym integrator oferowany jest również w innych popularnych serwisach grupy al legro, np. citeam, istore. janusz kunkowski84 wykres 4. zasięg obsługi integratorów płatności internetowych handlu, do obsługi płatności mogą wykorzystywać payu. poza tym integrator oferowany jest również w innych popularnych serwisach grupy allegro, np. citeam, istore. wykres 4. zasięg obsługi integratorów płatności internetowych źródło: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=607; odpowiedzi wielokrotne. ważnym aspektem związanym z dokonywaniem zakupów w internecie jest bezpieczeństwo transakcji. badania przeprowadzone w usa pokazały, że w przypadku aukcji internetowych ocena ryzyka zakupu wpływa w znacznym stopniu na wybór metody płatności (zhang 2006). w polskim e-handlu wiele osób decyduje się na płatność za pobraniem, ze względu na możliwość dokonania zapłaty dopiero w momencie otrzymania towaru, co podnosi poziom bezpieczeństwa dla kupującego. w ostatnim okresie obserwowany jest jednak spadek wykorzystania tej metody. może to wynikać z dużej popularności programów ochrony kupujących, oferowanych przez coraz więcej firm. w większości przypadków programy tego typu są dla klientów bezpłatne i w znaczący sposób wpływają na poprawę wiarygodności zakupów internetowych i poczucie bezpieczeństwa klientów. ochrona kupującego zapewniona przez payu działa we wszystkich sklepach internetowych współpracujących z integratorem. obejmuje ona osoby, które za towar zakupiony w internecie zapłacą za pomocą konta payu i daje możliwość uzyskania rekompensaty w wysokości do 10 tys. zł, jeśli klient nie dostanie zakupionego produktu albo otrzymany towar znacznie różni się od przedstawionego w ofercie (payu 2012). udział metod płatności w obrotach polskiego e-handlu największy udział w obrotach polskiego e-handlu wciąż mają przelew bankowy oraz płatność za pobraniem, które obsługują około 68% wartości sprzedaży realizowanej przez sklepy internetowe. lata 2011–2012 przyniosły zmiany w strukturze wykorzystywania metod płatności, gdyż odsetek wartości sprzedaży w e-sklepach, rozliczanych za pomocą płatności za pobraniem, znacząco się obniżył (spadek o 8,6 punktu procentowego w porównaniu z badaniem z 2010 r.) (polasik, kunkowski 2011). można stwierdzić, że jest to pierwsza oznaka redukcji wykorzystania gotówki w zakupach internetowych przez klientów e-sklepów w polsce. istotnie zwiększyła się wartość obrotów z wykorzystaniem e-przelewów, których udział na poziomie 11,5% wartości transakcji oznacza ponad dwukrotny wzrost w porównaniu z rokiem 2010. eprzelewy na świecie występują przeważnie pod nazwą płatność typu pay-by-link i największą popularnością cieszą się w holandii (lange 2012). umożliwiają one klientom banków wykonywanie szybkich płatności poprzez automatyczne generowanie przelewu po dokonaniu zakupu w internecie. płatność e-przelewem jest zbliżona do płatności zwykłym przelewem, jednak główna różnica polega na tym, że po zalogowaniu się do systemu bankowego klient otrzymuje wypełniony formularz przelewu, który może potwierdzić lub odrzucić, nie może natomiast dokonywać żadnych zmian. po zatwierdzeniu transakcji jest on z powrotem przekierowywany do serwisu sprzedawcy (kunkowski, polasik 2012). w tym miejscu należy wspomnieć, iż e-przelewy są jedną z najczęściej obsługiwanych metod płatności za pośrednictwem integratorów płatności. popularność e-przelewów sprawia, że na rynku płatności pojawia się coraz więcej nowych metod opartych na przelewach bankowych i innowacjach, których celem jest przyspieszenie rozliczenia transakcji. do najważniejszych rozwiązań, które pojawiły się 49,3% 17,6% 14,3% 7,9% 6,6% 3,8% 3,8% 21,6% 0% 10% 20% 30% 40% 50% 60% payu przelewy24 dotpay inny ecard polcard transferuj.pl z żadnym ź r ó d ł o: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=607; odpowiedzi wielokrotne. ważnym aspektem związanym z dokonywaniem zakupów w internecie jest bezpieczeństwo transakcji. badania przeprowadzone w usa pokazały, że w przypadku aukcji internetowych ocena ryzyka zakupu wpływa w znacznym stopniu na wybór metody płatności (zhang 2006). w polskim e-handlu wiele osób decyduje się na płatność za pobraniem, ze względu na możliwość dokonania zapłaty dopiero w momencie otrzymania towaru, co podnosi poziom bezpieczeństwa dla kupującego. w ostatnim okresie obserwowany jest jednak spadek wykorzystania tej metody. może to wynikać z dużej popularności programów ochrony kupujących, oferowanych przez coraz więcej firm. w większości przypadków programy tego typu są dla klientów bezpłatne i w znaczący sposób wpływają na poprawę wiarygodności zakupów internetowych i poczucie bezpieczeństwa klientów. ochrona kupującego zapewniona przez payu działa we wszystkich sklepach internetowych współpracujących z integratorem. obejmuje ona osoby, które za towar zakupiony w internecie zapłacą za pomocą konta payu i daje możliwość uzyskania rekompensaty w wysokości do 10 tys. zł, jeśli klient nie dostanie zakupionego produktu albo otrzymany towar znacznie różni się od przedstawionego w ofercie (payu 2012). 6. udział metod płatności w obrotach polskiego e-handlu największy udział w obrotach polskiego e-handlu wciąż mają przelew bankowy oraz płatność za pobraniem, które obsługują około 68% wartości sprzedaży realizowanej przez sklepy internetowe. lata 2011–2012 przyniosły zmia  rola i zadania integratorów płatności w polskim e-handlu 85 ny w strukturze wykorzystywania metod płatności, gdyż odsetek wartości sprzedaży w e-sklepach, rozliczanych za pomocą płatności za pobraniem, znacząco się obniżył (spadek o 8,6 punktu procentowego w porównaniu z badaniem z 2010 r.) (polasik, kunkowski 2011). można stwierdzić, że jest to pierwsza oznaka redukcji wykorzystania gotówki w zakupach internetowych przez klientów e-sklepów w polsce. istotnie zwiększyła się wartość obrotów z wykorzystaniem e-przelewów, których udział na poziomie 11,5% wartości transakcji oznacza ponad dwukrotny wzrost w porównaniu z rokiem 2010. e-przelewy na świecie występują przeważnie pod nazwą płatność typu pay-by-link i największą popularnością cieszą się w holandii (lange 2012). umożliwiają one klientom banków wykonywanie szybkich płatności poprzez automatyczne generowanie przelewu po dokonaniu zakupu w internecie. płatność e-przelewem jest zbliżona do płatności zwykłym przelewem, jednak główna różnica polega na tym, że po zalogowaniu się do systemu bankowego klient otrzymuje wypełniony formularz przelewu, który może potwierdzić lub odrzucić, nie może natomiast dokonywać żadnych zmian. po zatwierdzeniu transakcji jest on z powrotem przekierowywany do serwisu sprzedawcy (kunkowski, polasik 2012). w tym miejscu należy wspomnieć, iż e-przelewy są jedną z najczęściej obsługiwanych metod płatności za pośrednictwem integratorów płatności. popularność e-przelewów sprawia, że na rynku płatności pojawia się coraz więcej nowych metod opartych na przelewach bankowych i innowacjach, których celem jest przyspieszenie rozliczenia transakcji. do najważniejszych rozwiązań, które pojawiły się na rynku w ostatnim okresie, można zaliczyć usługę bluecash, e-pobranie (firmy blue media) oraz przelew natychmiastowy express elixir, stworzony przez krajową izbę rozliczeniową. bluecash to rozwiązanie służące do realizacji szybkich przekazów pieniężnych pomiędzy kontami w różnych bankach. główną funkcją systemu bluecash jest zamiana jednego przelewu międzybankowego na dwa przelewy wewnątrzbankowe. rozwiązanie takie jest możliwe dzięki wykorzystaniu kont bankowych blue media jako kont pośredniczących w transakcji, co pozwala na transfer środków w ciągu kilku minut. wadą systemu jest stosunkowo niski limit pojedynczej transakcji oraz ograniczone godziny realizacji szybkiego przelewu (bluecash 2012). w ostatnim czasie spółka blue media wprowadziła również usługę e-pobranie, która łączy w sobie możliwość dokonywania zakupów za pobraniem oraz szybkość przelewów online. wystarczy, że klient złoży zamówienie w sklepie i jako metodę płatności wybierze e-pobranie. następnie wpłaci środki pieniężne na janusz kunkowski86 podany rachunek bankowy, które będą oczekiwać na realizację zamówienia. po odbiorze przesyłki przez kupującego pieniądze przekazywane są do sklepu internetowego. dzięki tej usłudze zwiększa się poczucie bezpieczeństwa klienta, podobnie jak przy płatności za pobraniem, jednak koszt skorzystania z e- pobrania jest niższy niż w przypadku standardowej płatności za pobraniem. istnieje także możliwość skorzystania z 17-dniowego kredytu pozwalającego dokonać płatności za zamówiony towar dopiero po jego otrzymaniu (e-pobranie 2013). kolejną usługą opartą na przelewach bankowych jest express elixir. usługa umożliwia przekazywanie środków pomiędzy rachunkami klientów prowadzonymi w różnych bankach w trybie natychmiastowym, przez całą dobę, niezależnie od tego, czy przelewu dokonamy w dzień roboczy, czy w dzień wolny od pracy, natomiast obsługa pojedynczej transakcji jest krótsza niż 30 sekund. rozwiązanie to pozwala na wysyłanie i otrzymywanie pilnych płatności w czasie rzeczywistym. najważniejszą cechą usługi express elixir jest tzw. bezpośredniość zleceń, co oznacza, że do realizacji przelewów nie będą wykorzystywane żadne podmioty ani rachunki pośredniczące. usługa jest wykorzystana wszędzie tam, gdzie terminy realizacji przelewu mają istotne znaczenie. obecnie express elixir dostępny jest dla klientów siedmiu banków, jednak kir zapowiada, że docelowo będzie z niego korzystać większość banków w polsce (kir 2013). wykres 5. odsetek wartości sprzedaży obsługiwanych przez daną metodę płatności na rynku w ostatnim okresie, można zaliczyć usługę bluecash, e-pobranie (firmy blue media) oraz przelew natychmiastowy express elixir, stworzony przez krajową izbę rozliczeniową. bluecash to rozwiązanie służące do realizacji szybkich przekazów pieniężnych pomiędzy kontami w różnych bankach. główną funkcją systemu bluecash jest zamiana jednego przelewu międzybankowego na dwa przelewy wewnątrzbankowe. rozwiązanie takie jest możliwe dzięki wykorzystaniu kont bankowych blue media jako kont pośredniczących w transakcji, co pozwala na transfer środków w ciągu kilku minut. wadą systemu jest stosunkowo niski limit pojedynczej transakcji oraz ograniczone godziny realizacji szybkiego przelewu (bluecash 2012). w ostatnim czasie spółka blue media wprowadziła również usługę e-pobranie, która łączy w sobie możliwość dokonywania zakupów za pobraniem oraz szybkość przelewów online. wystarczy, że klient złoży zamówienie w sklepie i jako metodę płatności wybierze e-pobranie. następnie wpłaci środki pieniężne na podany rachunek bankowy, które będą oczekiwać na realizację zamówienia. po odbiorze przesyłki przez kupującego pieniądze przekazywane są do sklepu internetowego. dzięki tej usłudze zwiększa się poczucie bezpieczeństwa klienta, podobnie jak przy płatności za pobraniem, jednak koszt skorzystania z e-pobrania jest niższy niż w przypadku standardowej płatności za pobraniem. istnieje także możliwość skorzystania z 17-dniowego kredytu pozwalającego dokonać płatności za zamówiony towar dopiero po jego otrzymaniu (e-pobranie 2013). kolejną usługą opartą na przelewach bankowych jest express elixir. usługa umożliwia przekazywanie środków pomiędzy rachunkami klientów prowadzonymi w różnych bankach w trybie natychmiastowym, przez całą dobę, niezależnie od tego, czy przelewu dokonamy w dzień roboczy, czy w dzień wolny od pracy, natomiast obsługa pojedynczej transakcji jest krótsza niż 30 sekund. rozwiązanie to pozwala na wysyłanie i otrzymywanie pilnych płatności w czasie rzeczywistym. najważniejszą cechą usługi express elixir jest tzw. bezpośredniość zleceń, co oznacza, że do realizacji przelewów nie będą wykorzystywane żadne podmioty ani rachunki pośredniczące. usługa jest wykorzystana wszędzie tam, gdzie terminy realizacji przelewu mają istotne znaczenie. obecnie express elixir dostępny jest dla klientów siedmiu banków, jednak kir zapowiada, że docelowo będzie z niego korzystać większość banków w polsce (kir 2013). wykres 5. odsetek wartości sprzedaży obsługiwanych przez daną metodę płatności * udział integratorów płatności obejmuje tylko transakcje zrealizowane przy ich pomocy, których dany sklep internetowy nie potrafił przypisać do poszczególnych podstawowych metod płatności. źródło: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=607; odpowiedzi wielokrotne. wzrost udziału e-przelewów to niewątpliwie duży sukces sektora bankowego oraz integratorów płatności, gdyż ich przyrost następuje głównie kosztem płatności gotówką za pobraniem, w której obsłudze udział banków i integratorów jest minimalny. natomiast przy obsłudze e-przelewów integratorzy płatności i banki odgrywają kluczową rolę oraz uzyskują znaczące źródło dochodów prowizyjnych. dużą korzyścią dla banków z rosnącego znaczenia e-przelewów jest przyciąganie klientów do systemów bankowości internetowej, co powinno generować sprzedaż produktów i usług bankowych przez serwis. kolejną metodą płatności, również bardzo często obsługiwana za pośrednictwem integratorów płatności, jest karta płatnicza. karty płatnicze są najczęściej wykorzystywanym bezgotówkowym instrumentem płatniczym na świecie (world payments report 2012), jednak ich udział w wartości sprzedaży w polskim handlu internetowym jest stosunkowo niski (6,6%) i nie wykazuje, jak na razie, tendencji wzrostowej, pomimo wysokiej dostępności kart płatniczych w sklepach internetowych (oko38,6% 29,3% 6,7% 4,8% 6,6% 11,5% 2,5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% w ar to ść sp rz ed aż y przelew bankowy płatność za pobraniem odbiór osobisty integrator płatności* karta płatnicza e-przelew inne * udział integratorów płatności obejmuje tylko transakcje zrealizowane przy ich pomocy, których dany sklep internetowy nie potrafił przypisać do poszczególnych podstawowych metod płatności. ź r ó d ł o: opracowanie własne na podstawie (kunkowski, polasik 2012); próba n=607; odpowiedzi wielokrotne.   rola i zadania integratorów płatności w polskim e-handlu 87 wzrost udziału e-przelewów to niewątpliwie duży sukces sektora bankowego oraz integratorów płatności, gdyż ich przyrost następuje głównie kosztem płatności gotówką za pobraniem, w której obsłudze udział banków i integratorów jest minimalny. natomiast przy obsłudze e-przelewów integratorzy płatności i banki odgrywają kluczową rolę oraz uzyskują znaczące źródło dochodów prowizyjnych. dużą korzyścią dla banków z rosnącego znaczenia e -przelewów jest przyciąganie klientów do systemów bankowości internetowej, co powinno generować sprzedaż produktów i usług bankowych przez serwis. kolejną metodą płatności, również bardzo często obsługiwana za pośrednictwem integratorów płatności, jest karta płatnicza. karty płatnicze są najczęściej wykorzystywanym bezgotówkowym instrumentem płatniczym na świecie (world payments report 2012), jednak ich udział w wartości sprzedaży w polskim handlu internetowym jest stosunkowo niski (6,6%) i nie wykazuje, jak na razie, tendencji wzrostowej, pomimo wysokiej dostępności kart płatniczych w sklepach internetowych (około 60%). wydaje się, że dotychczasowa promocja wykorzystania kart płatniczych w e-handlu w polsce, ze strony organizacji płatniczych i banków, nie była wystarczająca.  wnioski na polskim rynku płatności internetowych w ostatnim okresie zaszły znaczące zmiany. integratorzy płatności, wprowadzając prosty model współpracy i rozliczeń, dali sklepom internetowym możliwość łatwego udostępniania wielu metod. dzięki temu sprzedawcy są w stanie zaakceptować niemal każdą formę zapłaty, jaką zażyczy sobie klient. warto zauważyć, że ostatnio coraz większą popularność zyskują instrumenty płatnicze oferowane przez instytucje pozabankowe. ponadto rezygnacja z metod płatności opartych na gotówce, w przypadku których zazwyczaj nie jest stosowany integrator, na rzecz e-przelewów powinna być jednym z głównych czynników ich rozwoju. przywiązanie klientów do wygody i szybkości realizacji transakcji oraz korzystania z bankowości internetowej mogą sprzyjać stopniowemu przejmowaniu przez integratorów płatności coraz większego udziału w obsłudze różnorodnych form płatności. barierą dla małych podmiotów, które dominują liczebnie w sieci, jest wdrożenie jednocześnie wielu metod płatności, co jest trudne i kosztowne. sprzedawcy używali najszerzej dostępnych dla konsumentów metod, rezultatem czego przez długi czas była dominacja płatności za pobraniem oraz przelewów. janusz kunkowski88 korzystne zmiany prawne przyczyniły się do wzrostu liczby integratorów w polsce, co z kolei wpłynęło na obniżkę opłat prowizyjnych, płaconych od transakcji przez e-sklepy. zmiany w strukturze wykorzystania płatności są częściowo skutkiem szerokiej dostępności usług przyczyniających się do zwiększenia bezpieczeństwa klientów. ich popularyzacja powinna stymulować rozwój rynku e-commerce w polsce. widać, iż znacznie zwiększa się dostępność kart płatniczych oraz e -przelewów, czyli metod najczęściej obsługiwanych przez sklepy internetowe za pośrednictwem integratorów płatności. jeśli opłaty za korzystanie z usług integratorów nie będą rosły, to współpraca pomiędzy nimi a sklepami internetowymi będzie się zwiększać. zagrożeniem dla rozwoju integratorów płatności mogą stać się przelewy ekspresowe, gdyż wiele wskazuje na to, iż w niedługim czasie płatności realizowane w czasie rzeczywistym staną się standardem rynkowym. jeżeli największe banki zdecydują się na obsługę przelewów w czasie rzeczywistym, a koszt realizacji takiej usługi będzie dla klienta stosunkowo niski, wówczas ta metoda płatności może zyskać duży udział w rynku. wydaje się, że jeśli opłaty za dokonanie przelewu natychmiastowego będą wysokie, to migracja będzie ograniczona. najprawdopodobniej wzrost udziału przelewów ekspresowych odbędzie się kosztem udziału e-przelewów, na czym mogą ucierpieć również integratorzy płatności. literatura blue media (2013), e-pobranie, http://e-pobranie.pl/jak_to_dziala-sklep (dostęp: 19.05. 2013). bluecash (2012), szybkie przelewy międzybankowe, https://bluecash.pl (dostęp: 10.01. 2013). eurostat (2012), ec.europa.eu/eurostat komisja nadzoru finansowego (2012), http://www.knf.gov.pl/o_nas/komunikaty/169_posiedzenie_knf.html (dostęp: 10.05.2013). krajowa izba rozliczeniowa (2013), express elixir, http://www.expresselixir.pl (dostęp: 18.05.2013). kunkowski j., polasik m. (2012), transakcje i płatności, [w:] e-handel polska 2012, p. jarosz, dotcom river, wrocław. kunkowski j., polasik m. (2012), polski rynek płatności internetowych : stan i uwarunkowania rozwoju, [w:] determinanty potencjału rozwoju organizacji, a. stabryła, k. woźniak (red.), mfiles.pl. kraków.   rola i zadania integratorów płatności w polskim e-handlu 89 lange j., longoni a., screpnic a. (2012), ecommerce europe online payments 2012 report, innopay bv, brussels. levitin a. j. (2007), payment wars: the merchant-bank struggle for control of payment systems, “stanford journal of law, business & finance”, vol 12: 2, 1–66, http:// dx.doi.org/10.2139/ssrn.903140. payu (2012), http://www.payu.pl/dla-kupujacych/bezpieczenstwo (dostęp: 15.05.2013). pci security standard council (2012), https://www.pcisecuritystandards.org (dostęp: 12.07.2012). polasik m., kunkowski j. (2011), płatności w polskim handlu internetowym, [w:] e-handel polska 2010, p. jarosz, dotcom river, wrocław. polasik m, kunkowski j., maciejewski k. (2012), efekt sieciowy na rynku usług płatniczych stosowanych w handlu internetowym, „zeszyty naukowe – ekonomiczne problemy usług”, nr 702, gospodarka elektroniczna. wyzwania rozwojowe, t. i, uniwersytet szczeciński, szczecin. ustawa z dnia 19 sierpnia 2011 r. o usługach płatniczych (tekst jedn. dz.u. nr 199, poz. 1175, z 2011 r.). world payments report (2012), capgemini & the royal bank of scotland & efma, 2012. zhang h., li h. (2006), factors affecting payment choices in online auctions: a study of ebay traders, „decision support systems”, 2006, 42 (2), november, 1076-1088, http://dx.doi.org/10.1016/j.dss.2005.09.003. date of submission: august 26, 2019; date of acceptance: september 5, 2019. * contact information: k.rojana27@gmail.com, huazhong university of science & technology, luoyu road 1037, wuhan, china, phone: 8615607195542; orcid id: https://orcid.org/0000-0002-9944-2014. ** contact information: yqx0102@126.com, huazhong university of science & technology, luoyu road 1037, wuhan, china, phone: 862787542754; orcid id: https://orcid.org/0000-0002-6227-5275. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 3 khunkaew, r., & qingxiang, y. (2019). the characteristics of top management and firm’s earnings management: the evidence from thailand. copernican journal of finance & accounting, 8(3), 49– 74. http://dx.doi.org/10.12775/cjfa.2019.012 rojana khunkaew* huazhong university of science & technology yang qingxiang** huazhong university of science & technology the characteristics of top management and firm’s earnings management: the evidence from thailand keywords: top management team (tmt), earnings management (em), accruals earnings management (aem), real activities earnings management (rem). j e l classification: g34, m12, m41. abstract: this study investigates the association between top management team (tmt) characteristics and earnings management (em) by examining 1,855 observations of thai-firm listed in period of 2013–2017. this study employs modified jones model (1991) and roychowdhury (2006) to measure accruals and real activities earnings management, respectively. the findings in this paper reveal tmt characteristics inf luence on both in aem and rem and firms with older, long tenure and possessing cpa certification of tmt lead to decrease in aem level. in contrast, tmt tenure has positive inf luence to rem level that implies long tenure of tmt tends to manage earnings throrojana khunkaew, yang qingxiang50 ugh operation activities instead of discretionary accruals. however, the percentage of female members and master’s degree education of tmt have no significant association with earnings management.  introduction prior studies provide two categories of earnings management – accruals management (aem) and real activities earnings management (rem). most of the past focused on earning management through accruals basis by using discretionary accruals, such as bad debt expense, depreciation and by selecting the accounting methods (deangelo, 1988; dechow, sloan & sweeney, 1995; healy, 1985; jones, 1991; rangan, 1998). after the passage of the sarbanes-oxley act (sox) in 2002, managers cannot rely on accruals management because it has limitation about the frequent changes in accounting policies. consequently, managers tend to use real activities manipulation simultaneously to get earnings target (cohen, dey & lys, 2008; cohen & zarowin, 2010; hasnah kamardin, 2018). the activities focus on the abnormal level of cash f low operation, discretionary expense, and production costs, so the activities might or might not be related to accruals (burgstahler & dichev, 1997; dechow, kothari & watts, 1998; gunny, 2010; roychowdhury, 2006). earnings management is widely practiced by public companies including in thailand. stock exchange of thailand (set) surveys financial statements in during 2003–2013 found many companies have refurbished accounts and managed financial statements. for example, singha paratech company has adjusted the revenue from sales, picnic corporation has created a fake income account and siemens electronics company use documents that do not match the fact of recording. the association of certified fraudsters examiner (acfe) in 2012 explored and found the accounting manipulations tend to be higher and higher. executive is a key person who has the power to make business decisions. the role of executives is very important to make the company successful and generate credibility for stakeholders. hambrick and mason (1984) presented the upper echelons theory, which explains the ref lection of the manager performance and how the individual top manager characteristics affect the selection of management strategies. according to the majority research in the prior, researchers have focused on the characteristics of one position that is the chief executive officer (ceo) (barker iii & mueller, 2002; kaplan, klebanov & sorensen, 2012; lovata, schoenecker & costigan, 2016; na & hong, 2017; santoso the characteristics of top management… 51 & fu, 2014; sooksanit, 2016; srinidhi, gul & tsui, 2011; wells, 2002). until recently, there have been studies on the characteristics of executives based on their responsibilities such as chief financial officer (cfo) (peni & vähämaa, 2010; sooksanit, 2016). consequently, this paper attempts to expand the scope of executive behavior by investigating top management team (tmt). thus, this study define tmt as the first of corporation’s top management who have a power to make decision in the business and playing important role about operating activities , which including chairman, chief executive officer (ceo), managing director (md), and chief financial officer (cfo), due to their power to make decision and responsibilities in the business. this paper aims to investigate the association between the characteristics of tmt in the demographic part with earnings management by focusing five characteristics including age, gender, education, accounting proficiency, and tenure. the samples are 1,855 observations from the stock exchange of thailand (set) during 2013–2017. the result presents by investigating the effect of tmt characteristics on earnings management both in term of accruals and real activities earnings management. this paper found age, pcpa and tenure are negatively related to aem level that can imply older tmt (average age of tmt over 58); tmt member with cpa certificate and tmt with average tenure over seven years would present more quality of earnings by decrease aem. while long tenure of tmt has negatively affected to aem, there is a positive relation to rem. the result indicates that tmt with long-term tenure tends to use rem instead of aem. in addition, the percentage of tmt members with masters’ degree have no significant association with both aem and rem. this study attempts to shed more light on the effect of tmt characteristics on earnings management behavior both on aem and rem approach. the finding in this paper will be able to identify the characteristics of tmt related to earnings management based on thai-firm listed, and consistent with the upper echelons theory, which reveals the inf luence of executive characteristics on business operation. considering the relevance of results, the regulator can use in issuing regulations to increase the reliability of executives and information disclosed in the financial statements. the paper organization is as of followings: the section 2 presents the research methodology and the course of the research process; section 3 displays the analysis and empirical result and section 4 is the conclusion of the paper. rojana khunkaew, yang qingxiang52 the research methodology and the course of the research process literature review and hypothesis development tmt characteristics and earnings management in earnings management area, a prior study has classified aem and rem and investigate the relationship with other factors such as earnings quality, audit quality, business strategy, the international financial reporting standard (ifrs), and the investor protection. apart from those factors, top management team (tmt) is the key people to perform the business and, according to their power and responsibilities to make the decision in the business, lead to the capability to manage earnings. since hambrick and mason (1984) reveal the upper echelons theory (uet) that explains the characteristics of executives such as age, education, functional track, experience, and financial position and their argument about characters regarding the operation and performance of firms. according to the upper echelons theory, santoso and fu (2014) focused the ceos characteristics as the tenure, age, gender, and founding family ceo, and found the positive association between tenure and discretionary accruals that can imply ceo who has longer tenure engagement more to manage discretionary accruals than short-term tenure. in part of age, gender and founding family, they found the older, female and founding family ceo reported low discretionary accruals. lovata et al. (2016) studied the association between ceo characteristics and real activity management of manufacturing firms in 2005–2010. the study focused several factors of ceo characteristics, and revealed different characteristics of managers who have engaged in different activities, older ceos are more engage in the production schedule and found the accelerate sale with ceos with less tenure and higher ownership. krishnan and parsons (2008) found firms with high female proportion in board director would have lower earnings management and report more earnings quality. while there are studies about the quality of earnings, ye, zhang and rezaee (2010) examined earnings quality with a large sample of chinese firms listed, by measuring qualities : earnings persistence, the accuracy of current earnings as indicators of future cash f lows, the association between earnings and stock returns and the absolute magnitude of discretionary accruals, result found earnings quality is not affected by boards’ gender. consistent with hili and affess (2012) the characteristics of top management… 53 studied the companies in french during 2007–2010, the result found no differences in earnings quality with executive’s gender. peni and vähämaa (2010) examined the association between the executive’s gender and earnings management through discretionary accruals. the result found no relationship with ceo’s gender and earnings management, while female cfos have more conservation and report more earnings quality. srinidhi et al. (2011) mentioned firms can reduce earnings management and present high quality of earnings by female participation. gavious, segev and yosef (2012) studied and found a negative association between female managers and earnings management that imply firms with female ceos engage in earnings management lower than those males. arun, almahrog and aribi (2015) investigated the female directors and earnings in uk found independent female directors have more caution to using accounting policies and prefer to manage earnings by income decreasing. in the comparison of earnings management in firms with low and high debt, the result found firms with low debt have a positive effect on female directors on earnings management. in addition, sun, liu and lan (2011) found evidence of female representation in the audit committee has no impact on earnings management. na and hong (2017) studied ceo gender and earnings management, by focusing on the ceo and earnings management over 14 years, the result shows male ceos engage more aggressively in earnings management both in discretionary accruals and real activities earnings management to report or achieve small earnings. in other characters that are job and non-job related, xiong (2016) studied the association between four factors of chairman characteristics and earnings management based on the chinese companies listed during 2005–2014. the study measured characteristics as age, gender, tenure and education, and earnings management as accruals-based and real earnings management by following mcnichols and roychowdhury. result reveals both approaches of earnings management decreases in firms with older, female, long-tenured and high education executives. li, tseng and chen (2016) investigated the association about tmts characteristics and corporate real earnings management by focusing three factors of characteristics that are education level, core functional expertise and accounting proficiency. the data were collected from taiwanese listed firms during 2006–2010. the empirical results reveal a negative association between two factors of characteristics (education and core function expertise) and real earnings management, in contrast, there is a positive association between accounting proficiency and manage earnings through real rojana khunkaew, yang qingxiang54 activities. that result can imply higher education and greater core functional area (measured by master’s degree and core functional area that is the area of management such as, operation, production, marketing, and finance) reduce the executive’s incentive to manage earnings. in accounting proficiency factors (measured by cpa certificates), executives who have accounting proficiency tend to engage more in manage earnings by operating activities. sooksanit (2016) studied the association between ceo, cfo characteristics and earnings management by using abnormal discretionary expenses as a proxy. the study collected data from firms listed from the stock exchange of thailand during 2011–2015. the result found ceo’s age has a positive association with abnormal discretionary expenses at the same time gender and tenure have no relationship. in another part, cfo’s higher age and male gender tend to have higher abnormal discretionary expenses, but cfo’s with longterm tenure have less level of abnormal discretionary expenses. apart from age and tenure, there were also prior studies on the impact of board effectiveness on earnings management base on four industries in thailand that are agro and food, resources, technology, and consumer products by using the proportion of expertise in finance and accounting, a number of meetings of the board, the proportion of the audit committee, and shareholder structure to measure board effectiveness. the result found a negative association between the proportion of directors who have financial/accounting expertise and earnings management, in contrast, other factors are positive that imply firms that have a high number of meeting, a high proportion of audit committee and the concentration of major shareholder would increase earnings by using discretionary accruals (ngamchom, 2015). in term of real activities earnings management approach, researchers found during 2004–2009 thai firms listed used real earnings management including sale acceleration, overproduction and discretionary expense to get better performance (wardani & kusuma, 2012). hypothesis development over the past, researchers have studied the characteristics of the top management team (tmt) and have the argument about the association between the organizational performance and tmt characteristics. hambrick and mason (1984) reveal the upper echelons theory that is the theory about the ref lection of the executive performance and the effect of the manager characteristics to make decision management strategy. based on the notion, they show two cat the characteristics of top management… 55 egories of characteristics: the psychological and demographic characteristics. they recommended using demographics to evaluate the cognitive base and values because psychological characteristic is difficult to observe. naranjo-gil, hartmann and maas (2008) study is useful to distinguish the tmt characteristics into two groups: a job (background, education, and tenure) and non – job (age and gender) related characteristics. santoso and fu (2014) studied indonesian firms in 2012 by investigating the association between ceos characteristics and earnings management. the result found a negative association between age and earnings management that implied older executive report more earnings quality by lower discretionary accruals. consistently, xiong (2016) found the negative association between age of chinese chairman and earnings management: older chairman are more aware of their management than younger and would have a low level of earnings management in both approaches; accruals and real earnings management. recently, qi, lin, tian and lewis (2018) examined the relationship between age of management team and em, the result found executive who nearly retirement would less engage in em, which ref lects older executive have more awareness of business ethics. thus, whether tmt are younger or older, they are still have an incentive to manage earnings to get their own benefit. however, they might be different in term of accepting risk, tihanyi, ellstrand, daily and dalton (2000) mentioned that younger managers might be able to accept more risk than older, older managers who are closely to retired would pay more attention to their financial security and reputations, so for old managers is difficult to accept more risk. according to the limitation of changing the accounting policies and risk of the investigation of auditors that might be the reason for tmt with older of age to use rem instead of aem, which lead to the hypothesis development in follow: h1a tmt age have a negative association with aem. h1b tmt age have a positive association with rem. prior research reveals firms that have more female directors would report high earnings quality (krishnan & parsons, 2008). recently, na and hong (2017) reveal the evidence of the association between ceo gender and earnings management that ref lects male ceos engage more aggressive in earnings management both in discretionary accruals and real activities earnings management to report or achieve small earnings but female ceos are likely not to engage. rojana khunkaew, yang qingxiang56 consistent with the result of previous research that found negative association between proportion of women ceo or cfo and accruals earnings management, the result explains female executives have more conservative and good participation lead to the reduction of earnings management and presenting high quality of earnings (gavious et al., 2012; peni & vähämaa, 2010; srinidhi et al., 2011). on the other hand, researchers have found no relationship between executive’s gender and earnings management (santoso & fu, 2014), but found the positive effect of female directors on earnings management in the uk low debt firms (arun et al., 2015). h2 the high percentage of female participation in tmt lead to a decreasing level of earnings management. the capability of executives is another factor that has found the correlation with earnings management; prior study measure the capability of executives as the education and accounting proficiency. xiong (2016) studied chairman education and earnings management, the result found a negative association between education and earnings management that implies high education of chairman can reduce accruals and real earnings management behavior. while, li, tseng and chen (2016) focused on the effect of top management team expertise on real earnings management by collecting data of 4,690 firms since 2006 to 2010 in taiwan and used three indicators to measure the tmt expertise of herrmann and datta (2005): the education level, core functional expertise and accounting proficiency. the result shows the negative association between rem and tmt master’s degrees and core functional expertise. in contrast, the accounting proficiency is positive with rem. ngamchom (2015) revealed the negative association between the proportion of directors who have financial or accounting expertise and accruals earnings management, by studying four sectors of firm listed in thailand that are agro and food, resources, technology, and consumer products from 2009–2013. hypothesis 4 and 5 are developed to investigate tmt capability by measuring as tmt education and cpa certification as follow: h3 the high percentage of tmt with master degree education lead to decreasing earnings management level. h4 tmt with possessing a cpa certificate have a negative inf luence on earnings management. the characteristics of top management… 57 prior research found ceos who have long-term in the position might have more opportunity to apply their experience in management accounting numbers. in earnings management area, there is the positive association between tenure and discretionary accruals that implies ceos’ tenure increase discretionary accruals (santoso & fu, 2014). while wells’ (2002) study the ceo changing and earnings management opportunistic did not found ceo use opportunities in both short-term and long-term tenure. ping (2007) studied the tmts heterogeneity and firm performance by collecting data of 365 firms from shanghai and shenzhen, revealed the tmts tenure diversity have an inverse relationship with firm performance. we suspect that tmt with long tenure would have more experience and better understanding about the operation activities and the weakness of company regulations that they can take an opportunistic to manage earnings through the rem approach rather than aem, which leads to the hypothesis development as follow: h5a long tenure of tmt has a negative inf luence with aem level. h5b long tenure of tmt has a positive inf luence with rem level. research methodology data sample the study collected data from the financial statement, annual report and annual registration statement (form 56-1) in period 2013–2017 from setsmart database, stock exchange of thailand (set). the total sample data of set is 2,830 observations, the study has selected the sample with the following processes : first, this study restricted to seven industries firm-listed on set excluding finance and insurance industries for 289 firms-year; second, eliminated the property fund and real estate investment trust of property & construction industry for 175 firms-year; third, excluded firms that have entered-exit of set during the sample years for 289 firms-year; and fourth, exclude firms that’s not available and missing financial information of tmt data in their financial report for 222 firms-year. therefore, the final sample is 1,855 firm-years. table 1 presents the distribution of the final sample in each industry in period 2013–2017. the top three industries are industry, services and property& construction represent a percentage of 22.70, 20.81 and 18.98 respectively. rojana khunkaew, yang qingxiang58 table 1. final sample by each industry and year no. industry year total % 2013 2014 2015 2016 2017 1 resources 33 32 31 30 31 157 8.46 2 property & construction 70 70 70 71 71 352 18.98 3 services 76 79 78 77 76 386 20.81 4 industrials 84 84 86 86 81 421 22.70 5 technology 32 32 32 32 32 160 8.63 6 agro & food industry 40 40 39 39 39 197 10.62 7 consumer products 37 37 36 36 36 182 9.81 total 372 374 372 371 366 1,855 100 n o t e s : industrial structure of the stock exchange of thailand are in appendix a. s o u r c e : author’s computation, 2018. variable definition and measurement dependent variables – earnings management accruals earnings management (aem) in prior research presented the models to capture, jones (1991) presented model to examine discretionary accruals that are the model to identify discretionary and non-discretionary accruals by comparing the actual accruals and the normal accruals level in each year. dechow et al. (1995) studied the detecting earnings management and presented modified jones (mj) most powerful test earning management compared to healy (1985), and standard jones model (sj). this study follows modified jones model to compute the total accruals (ta) in each firms-year by the estimation as: second, eliminated the property fund and real estate investment trust of property & construction industry for 175 firms-year; third, excluded firms that have entered-exit of set during the sample years for 289 firms-year; and fourth, exclude firms that’s not available and missing financial information of tmt data in their financial report for 222 firmsyear. therefore, the final sample is 1,855 firm-years. table 1 presents the distribution of the final sample in each industry in period 20132017. the top three industries are industry, services and property& construction represent a percentage of 22.70, 20.81 and 18.98 respectively. table 1. final sample by each industry and year no. industry year total % 2013 2014 2015 2016 2017 1 resources 33 32 31 30 31 157 8.46 2 property & construction 70 70 70 71 71 352 18.98 3 services 76 79 78 77 76 386 20.81 4 industrials 84 84 86 86 81 421 22.70 5 technology 32 32 32 32 32 160 8.63 6 agro & food industry 40 40 39 39 39 197 10.62 7 consumer products 37 37 36 36 36 182 9.81 total 372 374 372 371 366 1,855 100 notes: industrial structure of the stock exchange of thailand are in appendix a. source: author’s computation (2018). variable definition and measurement dependent variables – earnings management accruals earnings management (aem) in prior research presented the models to capture, jones (1991) presented model to examine discretionary accruals that are the model to identify discretionary and non-discretionary accruals by comparing the actual accruals and the normal accruals level in each year. dechow et al. (1995) studied the detecting earnings management and presented modified jones (mj) most powerful test earning management compared to healy (1985), and standard jones model (sj). this study follows modified jones model to compute the total accruals (ta) in each firms-year by the estimation as: ����� ������ � �� ������� � �� ����� ������ � �� ������ ������ � ��� (1) where ����� is the total actuals measured as ebxi – cfo where ebxi is earnings before extraordinary and cfo is the cash flows of operation in the statement of cash flow (1) where t ai,t is the total actuals measured as ebxi – cfo where ebxi is earnings before extraordinary and cfo is the cash f lows of operation in the statement of cash f low firm i in year t, at–1 is the total assets at the end of firm i year t-1, δst is the change of sale firm i in year t = st – st-1, ppe is the gross of property, plant and equipment firm i in year t. the characteristics of top management… 59 the equation above is used to estimate the non-discretionary accruals (nda) or the normal accruals (na) below: firm i in year t, ���� is the total assets at the end of firm i year t-1, ��� is the change of sale firm i in year t = st – st-1, ��� is the gross of property, plant and equipment firm i in year t. the equation above is used to estimate the non-discretionary accruals (nda) or the normal accruals (na) below: ������ = �� ������� � �� ������������ ������ � �� ������ ������ � ��� (2) where ������ is the normal accruals, ���� is the total assets at the end of firm i year t1, ��� is the change of sale firm i in year t = st – st-1, ���� = art – art-1 that is the change in accounts receivable in year t, ��� is the gross of property, plant and equipment firm i in year t. the proxy for estimates discretionary accruals (da) as: ����� = ����� ������ � ������ (3) where ����� is the discretionary accruals ����� is the total actuals measured as ebxi – cfo where ebxi is earnings before extraordinary and cfo is the cash flows of operation in the statement of cash flow firm i in year t, ���� is the total assets at the end of firm i year t-1, ������ is the normal accruals. real activities earnings management (rem) the prior literature on the measurement to capture real activities manipulation revealed model to capture by computing the normal and abnormal in three factors, including abnormal cash flow of operation, abnormal discretionary expense, and abnormal production cost or overproduction (roychowdhury, 2006). this study follows the prior research to estimate real activities manipulation by three estimations model: the estimation abnormal cash flow of operations (cfo), the estimation abnormal reduction of discretionary expenses, and the estimation overproduction to meet the low cost of goods sold and make earnings upward. the estimations are as follow: (2) where n d ai,t is the normal accruals, at–1 is the total assets at the end of firm i year t-1, is the change of sale firm i in year t = st – st-1, δ art = art – art-1 that is the change in accounts receivable in year t, ppe is the gross of property, plant and equipment firm i in year t. the proxy for estimates discretionary accruals (da) as: firm i in year t, ���� is the total assets at the end of firm i year t-1, ��� is the change of sale firm i in year t = st – st-1, ��� is the gross of property, plant and equipment firm i in year t. the equation above is used to estimate the non-discretionary accruals (nda) or the normal accruals (na) below: ������ = �� ������� � �� ������������ ������ � �� ������ ������ � ��� (2) where ������ is the normal accruals, ���� is the total assets at the end of firm i year t1, ��� is the change of sale firm i in year t = st – st-1, ���� = art – art-1 that is the change in accounts receivable in year t, ��� is the gross of property, plant and equipment firm i in year t. the proxy for estimates discretionary accruals (da) as: ����� = ����� ������ � ������ (3) where ����� is the discretionary accruals ����� is the total actuals measured as ebxi – cfo where ebxi is earnings before extraordinary and cfo is the cash flows of operation in the statement of cash flow firm i in year t, ���� is the total assets at the end of firm i year t-1, ������ is the normal accruals. real activities earnings management (rem) the prior literature on the measurement to capture real activities manipulation revealed model to capture by computing the normal and abnormal in three factors, including abnormal cash flow of operation, abnormal discretionary expense, and abnormal production cost or overproduction (roychowdhury, 2006). this study follows the prior research to estimate real activities manipulation by three estimations model: the estimation abnormal cash flow of operations (cfo), the estimation abnormal reduction of discretionary expenses, and the estimation overproduction to meet the low cost of goods sold and make earnings upward. the estimations are as follow: (3) where dai,t is the discretionary accruals tai,t is the total actuals measured as ebxi – cfo where ebxi is earnings before extraordinary and cfo is the cash f lows of operation in the statement of cash f low firm i in year t, at–1 is the total assets at the end of firm i year t-1, ndai,t is the normal accruals. real activities earnings management (rem) the prior literature on the measurement to capture real activities manipulation revealed model to capture by computing the normal and abnormal in three factors, including abnormal cash f low of operation, abnormal discretionary expense, and abnormal production cost or overproduction (roychowdhury, 2006). this study follows the prior research to estimate real activities manipulation by three estimations model: the estimation abnormal cash f low of operations (cfo), the estimation abnormal reduction of discretionary expenses, and the estimation overproduction to meet the low cost of goods sold and make earnings upward. the estimations are as follow: ������ ������� = �� � �� (� ������⁄ ) � ��(�� ������)⁄ � ��(��� ������⁄ ) � ��� (4) ������� ������� = �� � ��(� ������⁄ ) � ��(���� ������)⁄ � ��� (5) ������� ������� = �� � ��(� ������) � ��(�� ������) � ��(��� ������) � ��⁄⁄⁄ (������� ����) � ���⁄ (6) where ������ is the cash flows from operations, ������� is the total of selling and administration expense, ������� is the sum of cost of goods sold and change in inventory, ���� is the value of sales in period t, ����� is changing in sales year t, ����� is changing in sale at year t-1, ����= the total assets at the end of year t-1. and the abnormal cash flow operation (ab_cfo), abnormal discretionary expense (ab_disex) and abnormal production (ab_prod) compute as the actual value minus the normal value of variables. according to three models to capture rem that are abnormal production (ab_prod), abnormal cash flow operation (ab_cfo) and abnormal discretionary expense (ab_disx). this study follow prior study (cohen et al., 2008; cohen & zarowin, 2010; li et al., 2016; wu, gao & gu, 2015; zang, 2012) to proxy rem as mean of abnormal production minus mean of abnormal cash flow operation and mean of discretionary expense (remi,t = ab_prodi,t – ab_cfoi,t – ab_disexi,t), where ab_cfo and ab_dises are multiplied by minus 1. independent variables personal characteristics hambrick and mason (1984) reveal the upper echelons characteristic that is the theory about the reflection of the executive performance, this study follows prior research (hili & affess, 2012; krishnan & parsons, 2008; lovata et al., 2016; peni & vähämaa, 2010; santoso & fu, 2014; ye et al. (2010) focusing on the observable character including age, gender, education, accounting proficiency, and tenure. (1) age (age): measuring as the median age of top management team by taking the value of 1 if tmt tenure is over the median and taking value 0 for lower. (4) rojana khunkaew, yang qingxiang60 ������ ������� = �� � �� (� ������⁄ ) � ��(�� ������)⁄ � ��(��� ������⁄ ) � ��� (4) ������� ������� = �� � ��(� ������⁄ ) � ��(���� ������)⁄ � ��� (5) ������� ������� = �� � ��(� ������) � ��(�� ������) � ��(��� ������) � ��⁄⁄⁄ (������� ����) � ���⁄ (6) where ������ is the cash flows from operations, ������� is the total of selling and administration expense, ������� is the sum of cost of goods sold and change in inventory, ���� is the value of sales in period t, ����� is changing in sales year t, ����� is changing in sale at year t-1, ����= the total assets at the end of year t-1. and the abnormal cash flow operation (ab_cfo), abnormal discretionary expense (ab_disex) and abnormal production (ab_prod) compute as the actual value minus the normal value of variables. according to three models to capture rem that are abnormal production (ab_prod), abnormal cash flow operation (ab_cfo) and abnormal discretionary expense (ab_disx). this study follow prior study (cohen et al., 2008; cohen & zarowin, 2010; li et al., 2016; wu, gao & gu, 2015; zang, 2012) to proxy rem as mean of abnormal production minus mean of abnormal cash flow operation and mean of discretionary expense (remi,t = ab_prodi,t – ab_cfoi,t – ab_disexi,t), where ab_cfo and ab_dises are multiplied by minus 1. independent variables personal characteristics hambrick and mason (1984) reveal the upper echelons characteristic that is the theory about the reflection of the executive performance, this study follows prior research (hili & affess, 2012; krishnan & parsons, 2008; lovata et al., 2016; peni & vähämaa, 2010; santoso & fu, 2014; ye et al. (2010) focusing on the observable character including age, gender, education, accounting proficiency, and tenure. (1) age (age): measuring as the median age of top management team by taking the value of 1 if tmt tenure is over the median and taking value 0 for lower. (5) ������ ������� = �� � �� (� ������⁄ ) � ��(�� ������)⁄ � ��(��� ������⁄ ) � ��� (4) ������� ������� = �� � ��(� ������⁄ ) � ��(���� ������)⁄ � ��� (5) ������� ������� = �� � ��(� ������) � ��(�� ������) � ��(��� ������) � ��⁄⁄⁄ (������� ����) � ���⁄ (6) where ������ is the cash flows from operations, ������� is the total of selling and administration expense, ������� is the sum of cost of goods sold and change in inventory, ���� is the value of sales in period t, ����� is changing in sales year t, ����� is changing in sale at year t-1, ����= the total assets at the end of year t-1. and the abnormal cash flow operation (ab_cfo), abnormal discretionary expense (ab_disex) and abnormal production (ab_prod) compute as the actual value minus the normal value of variables. according to three models to capture rem that are abnormal production (ab_prod), abnormal cash flow operation (ab_cfo) and abnormal discretionary expense (ab_disx). this study follow prior study (cohen et al., 2008; cohen & zarowin, 2010; li et al., 2016; wu, gao & gu, 2015; zang, 2012) to proxy rem as mean of abnormal production minus mean of abnormal cash flow operation and mean of discretionary expense (remi,t = ab_prodi,t – ab_cfoi,t – ab_disexi,t), where ab_cfo and ab_dises are multiplied by minus 1. independent variables personal characteristics hambrick and mason (1984) reveal the upper echelons characteristic that is the theory about the reflection of the executive performance, this study follows prior research (hili & affess, 2012; krishnan & parsons, 2008; lovata et al., 2016; peni & vähämaa, 2010; santoso & fu, 2014; ye et al. (2010) focusing on the observable character including age, gender, education, accounting proficiency, and tenure. (1) age (age): measuring as the median age of top management team by taking the value of 1 if tmt tenure is over the median and taking value 0 for lower. ������ ������� = �� � �� (� ������⁄ ) � ��(�� ������)⁄ � ��(��� ������⁄ ) � ��� (4) ������� ������� = �� � ��(� ������⁄ ) � ��(���� ������)⁄ � ��� (5) ������� ������� = �� � ��(� ������) � ��(�� ������) � ��(��� ������) � ��⁄⁄⁄ (������� ����) � ���⁄ (6) where ������ is the cash flows from operations, ������� is the total of selling and administration expense, ������� is the sum of cost of goods sold and change in inventory, ���� is the value of sales in period t, ����� is changing in sales year t, ����� is changing in sale at year t-1, ����= the total assets at the end of year t-1. and the abnormal cash flow operation (ab_cfo), abnormal discretionary expense (ab_disex) and abnormal production (ab_prod) compute as the actual value minus the normal value of variables. according to three models to capture rem that are abnormal production (ab_prod), abnormal cash flow operation (ab_cfo) and abnormal discretionary expense (ab_disx). this study follow prior study (cohen et al., 2008; cohen & zarowin, 2010; li et al., 2016; wu, gao & gu, 2015; zang, 2012) to proxy rem as mean of abnormal production minus mean of abnormal cash flow operation and mean of discretionary expense (remi,t = ab_prodi,t – ab_cfoi,t – ab_disexi,t), where ab_cfo and ab_dises are multiplied by minus 1. independent variables personal characteristics hambrick and mason (1984) reveal the upper echelons characteristic that is the theory about the reflection of the executive performance, this study follows prior research (hili & affess, 2012; krishnan & parsons, 2008; lovata et al., 2016; peni & vähämaa, 2010; santoso & fu, 2014; ye et al. (2010) focusing on the observable character including age, gender, education, accounting proficiency, and tenure. (1) age (age): measuring as the median age of top management team by taking the value of 1 if tmt tenure is over the median and taking value 0 for lower. ������ ������� = �� � �� (� ������⁄ ) � ��(�� ������)⁄ � ��(��� ������⁄ ) � ��� (4) ������� ������� = �� � ��(� ������⁄ ) � ��(���� ������)⁄ � ��� (5) ������� ������� = �� � ��(� ������) � ��(�� ������) � ��(��� ������) � ��⁄⁄⁄ (������� ����) � ���⁄ (6) where ������ is the cash flows from operations, ������� is the total of selling and administration expense, ������� is the sum of cost of goods sold and change in inventory, ���� is the value of sales in period t, ����� is changing in sales year t, ����� is changing in sale at year t-1, ����= the total assets at the end of year t-1. and the abnormal cash flow operation (ab_cfo), abnormal discretionary expense (ab_disex) and abnormal production (ab_prod) compute as the actual value minus the normal value of variables. according to three models to capture rem that are abnormal production (ab_prod), abnormal cash flow operation (ab_cfo) and abnormal discretionary expense (ab_disx). this study follow prior study (cohen et al., 2008; cohen & zarowin, 2010; li et al., 2016; wu, gao & gu, 2015; zang, 2012) to proxy rem as mean of abnormal production minus mean of abnormal cash flow operation and mean of discretionary expense (remi,t = ab_prodi,t – ab_cfoi,t – ab_disexi,t), where ab_cfo and ab_dises are multiplied by minus 1. independent variables personal characteristics hambrick and mason (1984) reveal the upper echelons characteristic that is the theory about the reflection of the executive performance, this study follows prior research (hili & affess, 2012; krishnan & parsons, 2008; lovata et al., 2016; peni & vähämaa, 2010; santoso & fu, 2014; ye et al. (2010) focusing on the observable character including age, gender, education, accounting proficiency, and tenure. (1) age (age): measuring as the median age of top management team by taking the value of 1 if tmt tenure is over the median and taking value 0 for lower. (6) where cfoi,t is the cash f lows from operations, disxi,t is the total of selling and administration expense, prodi,t is the sum of cost of goods sold and change in inventory, si,t is the value of sales in period t, δst,1 is changing in sales year t, δst–1 is changing in sale at year t-1, at–1 = the total assets at the end of year t-1. and the abnormal cash f low operation (ab_cfo), abnormal discretionary expense (ab_disex) and abnormal production (ab_prod) compute as the actual value minus the normal value of variables. according to three models to capture rem that are abnormal production (ab_prod), abnormal cash f low operation (ab_cfo) and abnormal discretionary expense (ab_disx). this study follow prior study (cohen et al., 2008; cohen & zarowin, 2010; li et al., 2016; wu, gao & gu, 2015; zang, 2012) to proxy rem as mean of abnormal production minus mean of abnormal cash f low operation and mean of discretionary expense (remi,t = ab_prodi,t – ab_cfoi,t – ab_ disexi,t), where ab_cfo and ab_dises are multiplied by minus 1. independent variables – personal characteristics hambrick and mason (1984) reveal the upper echelons characteristic that is the theory about the ref lection of the executive performance, this study follows prior research (hili & affess, 2012; krishnan & parsons, 2008; lovata et al., 2016; peni & vähämaa, 2010; santoso & fu, 2014; ye et al. (2010) focusing on the observable character including age, gender, education, accounting proficiency, and tenure. (1) age (age): measuring as the median age of top management team by taking the value of 1 if tmt tenure is over the median and taking value 0 for lower. (2) gender (gen): to measure the variable of this study setting the dummy indicator of gender as 1 for female tmt, and 0 for male tmt. the characteristics of top management… 61 (3) education (pms): measuring as the percentage of tmt members possessing master’s degrees or over. (4) accounting proficiency (pcpa): to measure as firms with tmt members possessing a cpa certificate by setting the dummy indicator of accounting proficiency as 1 if firms with tmt is possessing a cpa certificate and 0 if firms that without. (5) tenure (tenure): the tenure in a company or the duration of executive position in the company, measured as the median tenure of top management team by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. control variables (1) firm size (size) is the natural log of total assets. (2) growth (growth) is measured as the percentage increase in sales. (3) return on assets (roa) is calculated as income before extraordinary items divided by lagged total assets. (4) leverage ratio (lev) is calculated as total liabilities divided by total assets. (5) industry group (indus), the dummies of seven industries of the sample. (6) year (year), the dummies of each year during 2013–2017. model specification to test hypotheses, this study develops models to investigate the association between tmt characteristics and earnings management (em), the regression models have been developed as follow. (2) gender (gen): to measure the variable of this study setting the dummy indicator of gender as 1 for female tmt, and 0 for male tmt. (3) education (pms): measuring as the percentage of tmt members possessing master's degrees or over. (4) accounting proficiency (pcpa): to measure as firms with tmt members possessing a cpa certificate by setting the dummy indicator of accounting proficiency as 1 if firms with tmt is possessing a cpa certificate and 0 if firms that without. (5) tenure (tenure): the tenure in a company or the duration of executive position in the company, measured as the median tenure of top management team by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. control variables (1) firm size (size) is the natural log of total assets. (2) growth (growth) is measured as the percentage increase in sales. (3) return on assets (roa) is calculated as income before extraordinary items divided by lagged total assets. (4) leverage ratio (lev) is calculated as total liabilities divided by total assets. (5) industry group (indus), the dummies of seven industries of the sample. (6) year (year), the dummies of each year during 2013-2017. model specification to test hypotheses, this study develops models to investigate the association between tmt characteristics and earnings management (em), the regression models have been developed as follow. �� � �� + �������� + �������� + �������� + ��������� + ����������� + ��������� + ����������� + �������� + �������� + +���������������� + ��������������� + ���� where em measurement as two approaches are accruals earnings management (aem) and real activities earnings management (rem); ������ denote the absolute discretionary accruals of firm i in year t measure by modified jones model (p. m. dechow et al., 1995); ������ denote sum of abnormal cash flow, abnormal discretionary expense and abnormal of firm i in year t by following roychodhury (2006). age denotes average age of tmt; (7) where em measurement as two approaches are accruals earnings management (aem) and real activities earnings management (rem); aemi,t denote the rojana khunkaew, yang qingxiang62 absolute discretionary accruals of firm i in year t measure by modified jones model (p. m. dechow et al., 1995); remi,t denote sum of abnormal cash f low, abnormal discretionary expense and abnormal of firm i in year t by following roychodhury (2006). age denotes average age of tmt; gen denotes the percentage of female participation in tmt; pms denotes the percentage of tmt possessing master degree; pcpa denotes firms with tmt possessing cpa certificate; tenure denotes as the median tenure of top management team by taking the value of 1 if tmt tenure is over the median and taking value 0 for lower. among control variables are size denotes log of assets at the year-end; growth denotes sale growth rate in the prior year; lev denotes the ratio of total liabilities to total assets; roa denotes the ratio of net income to total assets. finally, dummy_indus and dummy_year present dummy for each industry and each year. result descriptive statistics table 2 presents descriptive statistics of tmt characteristics and earnings management based on total sample of 1,855 firm-year observations. the average values of aem, rem, are -0.0075, and 0.0013. to measure tmt characteristics, the results provide average age of tmt is 58 years old, with the oldest tmt being 83.5 years old, while the youngest 35. the median of the age variable is 58 years old. gender of tmt reveals proportion of female as 16.56% (median is 25%), the percentage of tmt who has masters’ degree is 52.20%, the average of tmt who has cpa certificate is 0.05 which is considered a small percentage for tmt members with accounting expertise. on tmt tenure, results reveal that mean of tmt tenure is 9 years and median is 7 years. the averages of control variables, size, growth, lev, and roa are 8.4643, 142.7745, 0.4338 and 0.0491, respectively. table 2. full sample 1,855 observations during 2013–2017 variables mean std.dev. min median max aem -0.0075 0.1662 -1.0010 -0.0164 2.7590 rem 0.0013 0.1827 -2.2471 0.0012 4.8024 the characteristics of top management… 63 variables mean std.dev. min median max age 58.3191 6.9754 35 58 83.5 gen 16.5633 17.7323 0 25 100 pma 52.1967 26.5731 0 50 100 pcpa 0.0539 0.2258 0 0 1 tenure 9.2504 7.2882 1 7.3333 37 size 8.4643 1.4509 4.0741 8.2552 13.8390 growth 142.7745 3614.419 -100 1.2873 138115.2 lev 0.4338 1.5387 0.0007 0.3899 65.7995 roa 0.0491 0.1288 -2.4481 0.0498 1.6898 n o t e s : variable definitions are in appendix b. s o u r c e : author’s computation, 2018. correlation matrix table 3 presents the variables correlation among tmt characteristics and earnings management. the age is negatively correlated with aem (-0.060) and positively correlated with rem (0.063). tmt with masters’ degree is positively correlated with aem (0.048), tenure of tmt is negatively correlated with aem (-0.042) but positively correlated with rem (0.044). among control variables, there is a positive correlation between tenure and lev (0.039), and there are the negative correlation between roa and size (-0.068), and positive correlation between roa and lev (0.056). table 3. presents the variables correlation aem rem age gen pma pcpa tenure size growth lev rem -0.557*** 1 age -0.060*** 0.063*** 1 gen 0.013 0.003 -0.138*** 1 pma 0.048** -0.029 -0.151*** 0.107*** 1 pcpa -0.010 -0.013 -0.031 0.060*** -0.006 1 table 2. full sample… rojana khunkaew, yang qingxiang64 aem rem age gen pma pcpa tenure size growth lev tenure -0.042* 0.044* 0.264*** -0.118*** -0.018 -0.043* 1 size 0.063*** -0.029 0.008 -0.119*** 0.232*** 0.033 -0.001 1 growth 0.014 0.173*** 0.022 -0.011 0.005 -0.005 -0.037 0.007 1 lev -0.002 -0.001 0.021 -0.030 -0.009 -0.015 0.039* -0.020 0.001 1 roa 0.508*** 0.031 -0.015 0.016 -0.016 0.004 -0.014 -0.068*** 0.002 0.056*** n o t e s : variable definitions are in appendix b. ***,**, and * indicate significance at 1%, 5% and 10%, respectively. s o u r c e : author’s computation, 2018. the effect of tmt characteristics on earnings management based on thai firm-listed observations table 4 presents the regression result of tmt characteristics and earnings management both aem and rem by using 1,855 firm-years (all observations) in 2013–2017. the columns (1) to (5) show the effect of each variable on aem including are age, gen, pms, pcpa, and tenure. the result found age, pcpa and tenure negatively related to aem as the coefficient -0.0163, -0.0273, and -0.0179, respectively. column (6) investigates the effect of all tmt characteristics on aem; the result is consistent with each variable equation, tmt age, cpa possessing and tenure are still negatively related with aem (the coefficient -0.0132, -0.0296 and -0.149, respectively), which reveal aem will decrease 1.32% when the average age of tmt is over 58 year (the median) or it can be said that older tmt would report less level of aem compared to younger. consistent with the prior study, researcher provides older chairman and ceo are more ethical and have conservative behavior that lead to decrease discretionary accruals and report more quality of earnings (santoso & fu, 2014; xiong, 2016). table 3. presents… the characteristics of top management… 65 table 4. regression of tmt characteristics on accrual earnings management (aem) on all sample (1,855 firm-years) aem (1) (2) (3) (4) (5) (6) intercept -0.0734 -.0783 -0.0808* -0.0750 -0.0718 -0.0711 (-1.53) (-1.59) (-1.69) (-1.58) (-1.49) (-1.40) age -0.0163** -0.0132** (-2.38) (-1.99) gen 0.0000 -0.0000 (0.20) (-0.04) pms 0.0000 0.0000 (0.61) (0.30) pcpa -0.0273* -0.0296** (-1.84) (-1.99) tenure -0.0179** -.0149* (-2.27) (-1.93) size 0.0098** 0.0096** 0.0092** 0.0095** 0.0096** 0.0097** (2.32) (2.14) (2.15) (2.24) (2.25) (2.17) growth 6.03e-0 5.66e-0 5.67e-0 5.62e-0 5.02e-0 5.44e-0 (1.59) (1.44) (1.42) (1.42) (1.29) (1.43) lev -0.0118*** -0.0119*** -0.0119*** -0.0120*** -0.0118*** -0.0118*** (-7.94) (-7.76) (-7.87) (-7.87) (-7.72) (-7.70) roa 0.5368*** 0.5375*** 0.5376*** 0.5392*** 0.5385*** 0.5395*** (9.98) (9.85) (9.87) (9.82) (9.75) (9.76) observation 1,855 1,855 1,855 1,855 1,855 1,855 r2 0.1622 0.1592 0.1594 0.1604 0.1609 0.1646 n o t e s : this table presents the result of regressions tmt characteristics on accruals earnings management (aem) and based on 1,855 observations during 2013-2017. using the random effects and clustering by firm to analyze the data. refer to the appendix b for detailed variable definitions. ***,**, and * indicate significance at 1%, 5% and 10% and present t-statistics are in parentheses. s o u r c e : author’s computation, 2018. rojana khunkaew, yang qingxiang66 while in the factor of accounting proficiency, the study found firms that have tmt members with cpa certification would have lower aem level (with 2.96% decreasing). consistently, the evidence in 2015 reveals that the level of aem would decrease in firm with a higher proportion of directors who have financial or accounting expertise (ngamchom, 2015). the result about accounting proficiency can be explained by the limitation of accounting policies; aem is measured by discretionary accruals that executives can manage through the accounting policies selection, adjusting the recognition, increasing the assumed amount of transactions and including accelerating and/or delaying transactions. there is a limit to the frequency of changing accounting policies and there is a risk of being examined by the auditor (li et al., 2016; peasnell, pope & young, 2000; wasiuzzaman, sahafzadeh & rezaie nejad, 2015). consequently, tmt members with cpa certification have more knowledge of accounting principle. they realize more about the regulation than executives without accounting skill, and might consider to manage earnings through other methods to avoid the investigating from auditor. the prior research found tenure of chairman had a negative relationship with discretionary accruals (xiong, 2016), and the evidence revealed cfo tenure and aem are not related (sooksanit, 2016). while, it found that the increasing of ceo tenure leads to an increase in aem level (santoso & fu, 2014). according to the work of the executives, there must be cooperation and working as a team. this study measures tenure as the average tenure of tmt members and compare with the median, result supports the negative association by presenting the evidence if firms have the average of tmt tenure over 7 years (the median) aem level will decrease as 1.49%. on the effect of control variables on aem, the study shows size and roa are positively related, in contrast, lev or leverage of firm has a negative effect on aem. table 6 presents the association between tmt characteristics and rem. there is only one factor that has an effect to rem which is the tmt tenure, with significance at the 5% level. column (5) shows tenure factor is positively related to rem as the coefficient value 0.0174, which means 1.74% increase in rem occurs when the average of tmt tenure increases by 1 year. and in column (6) by running all factor of tmt characteristics in the equation, the results still have a positive association between tmt tenure and rem as the coefficient value 0.0158 (if the average of tmt tenure increase by 1 year rem level will increase at 1.58%). among of control variables, there is no significant relation the characteristics of top management… 67 ship with rem. according to the result, long tenure of tmt leads to increase earnings management by using operation activities instead of discretionary accruals, which is not consistent with prior research revealing chairman and ceo with long tenure that is less likely to manage earnings through operational activities, and present the relationship of sales accelerations with less tenure of ceos (lovata et al., 2016; xiong, 2016). table 5. regression of tmt characteristics on real activities earnings management (rem) on all sample (1,855 firm-years) rem (1) (2) (3) (4) (5) (6) intercept -0.0223 -0.0167 -0.0176 -0.0199 -0.0249 -0.0217 (-0.48) (-0.37) (-0.38) (-0.42) (-0.53) (-0.47) age 0.0091 0.0050 (1.02) (0.55) gen -0.0001 -0.0000 (-0.34) (-0.06) pms -0.0000 -0.0000 (-0.35) (-0.22) pcpa -0.0223 -0.0207 (-0.77) (-0.72) tenure 0.0174** 0.0158** (2.46) (2.44) size -0.0019 -0.0019 -0.0016 -0.0017 -0.0018 -0.0018 (-0.60) (-0.59) (-0.50) (-0.52) (-0.58) (-0.56) growth 7.89e-0 7.91e-0 7.91e-0 7.91e-0 7.97e-0 7.94e-0 (0.85) (0.85) (0.85) (0.85) (0.86) (0.86) lev -0.0001 -0.0001 -0.0001 -0.0001 -0.0002 -0.0003 (-0.18) (-0.16) (-0.14) (-0.18) (-0.24) (-0.31) roa -0.0239 -0.0238 -0.0241 -0.0231 -0.0249 -0.0236 (-0.61) (-0.61) (-0.61) (-0.59) (-0.63) (-0.60) observation 1,855 1,855 1,855 1,855 1,855 1,855 rojana khunkaew, yang qingxiang68 rem (1) (2) (3) (4) (5) (6) r2 0.0376 0.0358 0.0359 0.0358 0.0375 0.0381 n o t e s : this table presents the result of regressions tmt characteristics on real activities earnings management (rem) and based on 1,855 observations during 2013-2017. using the random effects and clustering by firm to analyze the data. refer to the appendix b for detailed variable definitions. ***,**, and * indicate significance at 1%, 5% and 10% and present t-statistics are in parentheses. s o u r c e : author’s computation, 2018. while prior research provided evidence about the inf luence of executives’ gender and education on earnings management that implied executives with female and high level of education would have more conservation and lead to decreasing of earnings management level (gavious et al., 2012; li et al., 2016; peni & vähämaa, 2010; srinidhi et al., 2011; xiong, 2016). however, the result from table (5) and (6) in this study found gender and education of tmt have no significant association with both aem and rem.  conclusion the paper investigates the association between tmt characteristics and earnings management in thailand based on 1,855 thai-firm listed observations in period 2013–2017. the majority in the literature has been focused on chief executives officer (ceo), however, due to performing the business, executives need to work as a team by applying their expertise and responsibilities to achieve the goal of business. therefore, this paper expands the scope of study by investigating the effect of tmt characteristics (including four positions, chairman, chief executives officer, managing director, and chief financial officer) on earnings management behavior both aem and rem. the results in this study reveal that tmt characteristics and earnings management are related which can explain in two parts. first, for the aggregate result of thai-firms listed having found the important factor related to both aem and rem is tunure, the results reveal tmt with long term of tenure (over 7 years) have negative association with aem. in contrast, it is positive with rem, which implies tmt with long tenure tends to replace aem by using rem approach. in addition, there are two other factors that have a negative relationtable 5. regression of tmt characteristics… the characteristics of top management… 69 ship with aem: age and cpa certification. the result reveal tmt with older of age, cpa certification and long tenure would have more knowledge and experience about the business administration including human resource, production, and finance and accounting. consequently, they are able to achieve their earnings target through the operation activities rather than relying on the accruals approach at the year end, due to the limitation of accounting principle and the risk of being audited by the auditor. the findings in this study have important implications for stakeholders, especially for the regulator to pay attention to regulate and monitor the executive operation in order to increase the reliability of information disclosed in the financial statements, which is the key instrument for investor or stakeholders in making a business decision. this study measured aem and rem by using the modified jones models (dechow et al., 1995) and the model from roychowdhury (2006). however, the result and conclusions might change when measuring aem and rem by other models or new factors created for earnings management.  references arun, t.g., almahrog, y.e., & aribi, z.a. 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(2010). does top executive gender diversity affect earnings quality? a large sample analysis of chinese listed firms. advances in accounting, 26(1), 47–54. http://dx.doi.org/10.1016/j.adiac.2010.02.008. zang, a.y. (2012). evidence on the trade-off between real activities manipulation and accrual-based earnings management. accounting review, 87(2), 675–703. http:// dx.doi.org/10.2308/accr-10196. appendix a industrial structure (8 industries) and the business category (28 sectors) of the stock exchange of thailand industry group name (8) sector name (28) sector index agro & food industry (agro) agribusiness food & beverage agr food consumer products (consump) fashion home & office products personal products & pharmaceuticals fashion home person financials (fincial) banking finance & securities insurance bank fin insur industrials (indus) automotive industrial materials & machinery packaging paper & printing materials petrochemicals & chemicals steel auto imm pkg paper petro steel property & construction (propcon) construction materials construction services property development property fund & reits conmat cons prop pf&reit resources (resourc) energy & utilities mining energ mine services (service) commerce health care services media & publishing professional services tourism & leisure transportation & logistics comm helth media prof tourism trans technology (tech) electronic components information & communication technology etron ict the characteristics of top management… 73 appendix b variable definitions and measurements variables definition/measurement aem the absolute value of discretionary accrual, measured by modified jones model. rem real earnings management, follow roychodhury (2006) calculated by equation rem = ab_prod – ab_cfo – ab_disex. ab_cfo the abnormal cash flows from operations that is measured as (−1)*the residual from following regression: appendix b variable definitions and measurements. variables definition/measurement aem the absolute value of discretionary accrual, measured by modified jones model. rem real earnings management, follow roychodhury (2006) calculated by equation rem = ab_prod – ab_cfo – ab_disex. ab_cfo the abnormal cash flows from operations that is measured as (−1)*the residual from following regression: ������ ������� ���� � �� �� ������⁄ ) � ����� ������)⁄ � ������ ������⁄ ) � ��� cfo is cash flows from operation; s is annual sales; a is total assets. ab_disx the abnormal level of discretionary expenditures that is measured as (−1)*the estimated residual from the following regression: ������� ������� ���� � ���� ������⁄ ) � ������� ������)⁄ � ��� disx is the sum of advertising, r&d, and selling, general, administrative expenditures; s is annual sales; a is total assets. ab_prod the abnormal production costs that is the estimated residual from the following regression: ������� ������� � �� � ���� ������) � ����� ������) � ������ ������) � ��⁄⁄⁄ �������� ����) � ���⁄ prod is the sum of cost of goods sold and the change in inventory; s is annual sales; a is total assets. age age of top management team at year of data collection, measured by comparing average age of top management team with the median by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. gen the percentage of tmt members that female (1 = male, 0 = female). pms the percentage of tmt members possessing master’s degrees. (1 = master degree and above, 0 = under master degree). pcpa firms with tmt members possessing a cpa certificate (1 = firms with tmt possessing a cpa, 0 = firms without). tenure the tenure of top management team at year of data collection, measured by comparing the average tenure of top management team with the median by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. size the log of total assets at year-end. growth the sale growth rate in prior year. lev the total liabilities (year-end) divided by total assets (year-end). roa net income/ total assets at year end. indus the dummies of each industry that including seven industries. year the dummies of each year during 2013-2017. cfo is cash flows from operation; s is annual sales; a is total assets. ab_disx the abnormal level of discretionary expenditures that is measured as (−1)*the estimated residual from the following regression: disx is the sum of advertising, r&d, and selling, general, administrative expenditures; s is annual sales; a is total assets. ab_prod the abnormal production costs that is the estimated residual from the following regression: appendix b variable definitions and measurements. variables definition/measurement aem the absolute value of discretionary accrual, measured by modified jones model. rem real earnings management, follow roychodhury (2006) calculated by equation rem = ab_prod – ab_cfo – ab_disex. ab_cfo the abnormal cash flows from operations that is measured as (−1)*the residual from following regression: ������ ������� ���� � �� �� ������⁄ ) � ����� ������)⁄ � ������ ������⁄ ) � ��� cfo is cash flows from operation; s is annual sales; a is total assets. ab_disx the abnormal level of discretionary expenditures that is measured as (−1)*the estimated residual from the following regression: ������� ������� ���� � ���� ������⁄ ) � ������� ������)⁄ � ��� disx is the sum of advertising, r&d, and selling, general, administrative expenditures; s is annual sales; a is total assets. ab_prod the abnormal production costs that is the estimated residual from the following regression: ������� ������� � �� � ���� ������) � ����� ������) � ������ ������) � ��⁄⁄⁄ �������� ����) � ���⁄ prod is the sum of cost of goods sold and the change in inventory; s is annual sales; a is total assets. age age of top management team at year of data collection, measured by comparing average age of top management team with the median by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. gen the percentage of tmt members that female (1 = male, 0 = female). pms the percentage of tmt members possessing master’s degrees. (1 = master degree and above, 0 = under master degree). pcpa firms with tmt members possessing a cpa certificate (1 = firms with tmt possessing a cpa, 0 = firms without). tenure the tenure of top management team at year of data collection, measured by comparing the average tenure of top management team with the median by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. size the log of total assets at year-end. growth the sale growth rate in prior year. lev the total liabilities (year-end) divided by total assets (year-end). roa net income/ total assets at year end. indus the dummies of each industry that including seven industries. year the dummies of each year during 2013-2017. prod is the sum of cost of goods sold and the change in inventory; s is annual sales; a is total assets. age age of top management team at year of data collection, measured by comparing average age of top management team with the median by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. gen the percentage of tmt members that female (1 = male, 0 = female). pms the percentage of tmt members possessing master’s degrees. (1 = master degree and above, 0 = under master degree). pcpa firms with tmt members possessing a cpa certificate (1 = firms with tmt possessing a cpa, 0 = firms without). tenure the tenure of top management team at year of data collection, measured by comparing the average tenure of top management team with the median by taking the value of 1 if tmt tenure is over the median and take value 0 for lower. size the log of total assets at year-end. growth the sale growth rate in prior year. lev the total liabilities (year-end) divided by total assets (year-end). rojana khunkaew, yang qingxiang74 variables definition/measurement roa net income/ total assets at year end. indus the dummies of each industry that including seven industries. year the dummies of each year during 2013–2017. appendix b variable… copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: march 3, 2014; date of acceptance: march 19, 2014. * contact information: piotr.bolibok@kul.pl, faculty of social sciences, department of banking, the john paul ii catholic university of lublin, al. racławickie 14, 20-950 lublin, poland, phone: 81 445 34 33. bolibok p. (2014). the impact of ifrs on the value relevance of accounting data of banks listed on the warsaw stock exchange. copernican journal of finance & accounting, 3(1), 33–43. http:// dx.doi.org/10.12775/cjfa.2014.003 piotr bolibok* the john paul ii catholic university of lublin the impact of ifrs on the value relevance of accounting data of banks listed on the warsaw stock exchange key words: banks, value relevance, accounting standards. j e l classification: c23, g14, g21, m41. abstract: the paper aims at investigating the impact of ifrs on the value relevance of fundamental accounting data announced by banks listed on the warsaw stock exchange over the period 1998–2012. given the specificity of banking sector, the analyses were based on the ohlson residual income valuation model. the empirical evidence indicates that observed increase in the value relevance of both book values of equity and residual incomes of banks after introduction of ifrs is statistically insignificant. the obtained results are, therefore, consistent with the findings of previous research conducted on non-financial enterprises in the context of polish capital market. wpływ mssf na znaczenie danych księgowych dla wartości rynkowej banków notowanych na warszawskiej giełdzie papierów wartościowych słowa kluczowe: banki, wartość rynkowa, standardy rachunkowości. klasyfikacja j e l: c23, g14, g21, m41. piotr bolibok34 abstrakt: celem artykułu jest ocena wpływu mssf na znaczenie fundamentalnych danych księgowych dla wartości rynkowej banków notowanych na warszawskiej giełdzie papierów wartościowych w okresie 1998–2012. mając na uwadze specyfikę sektora bankowego, analizy zostały oparte na ohlsona modelu zysków rezydualnych. wyniki empiryczne wskazują, że obserwowany po wprowadzeniu mssf wzrost znaczenia zarówno wartości księgowych kapitałów własnych, jak i rezydualnych wyników finansowych banków dla ich wyceny przez rynek kapitałowy jest nieistotny statystycznie. uzyskane rezultaty są zatem spójne z wynikami dotychczasowych badań dotyczących przedsiębiorstw niefinansowych notowanych na polskim rynku kapitałowym. translated by piotr bolibok  introduction since 2005 all publicly traded companies governed by the laws of member states of the european union are obliged to prepare their consolidated accounts in conformity with the international financial reporting standards (ifrs) (regulation (ec) no. 1606/2002). this requirement is aimed at improvement of efficiency and cost-effectiveness of the eu capital market, by facilitating the freedom of capital movement, and fostering competition for financial resources among companies. accession of poland to the eu in may, 2004 required, among other things, complying with legislation on accounting standards. the provisions of regulation no. 1606/2002 were, therefore, directly incorporated into the polish act on accounting (act on accounting 1994). ifrs are supposed to provide equity investors, with more useful information on the true financial position of companies, which in turn should lead to higher coherence between reported accounting data and market value of listed companies (escaffre, sefsaf 2011). a particularly interesting context for investigating these expectations is provided by the banking sector, due to a high homogeneity of business operations and liquidity of publicly traded shares. since the seminal study of ball and brown (1968), international literature on the value relevance of accounting data has become quite abundant. a recent line of research in this field is focused on the inf luence of ifrs adoption on value relevance of accounting information. the results of investigations conducted in various capital markets are mixed. some studies report increase of value relevance after adoption of ifrs (bartov, goldberg, kim 2005; barth, landsman, lang 2008; karampinis, hevas 2009), while others fail to find any statistically significant improvements (hung, subramanyam 2007; karampinis, hevas 2011; macias, muiño 2011), or even suggest its decline (khanagha 2011). the impact of ifrs on the value relevance of accounting data… 35 the impact of ifrs on the value relevance of accounting data of non-financial enterprises in the context of polish capital market was investigated by dobija and klimczak (2010) and klimczak (2011). their results also suggest no statistically significant improvement in the value relevance after the adoption of ifrs. the aforementioned studies on the impact of ifrs on the value relevance of accounting information either exclude banks from the examined samples or include them without any separate consideration, hence, the empirical evidence in the specific context of banking sector is rather scarce. escaffre and sefsaf (2011) conducted a comparative analysis of the value relevance of earnings and book values of equity across financial institutions, including banks, in the selected european markets and the us market over the period 2005–2008. their results suggest that earnings and equity had greater value relevance in the european markets with ifrs than in the american market with us gaap. interestingly, all the examined european markets, except the spanish one, exhibited a higher value relevance of book values than earnings, whereas in the us market, the results were exactly opposite. a study by anandarajan, francis, hasan and john (2011) conducted on banking institutions from 38 countries over the period 1993–2004 indicated that at the macro-level the value relevance of earnings and book values of equity is affected by disclosure requirements of a country’s standards boards (the greater disclosure required, the more significant value relevance). they also found that value relevance is higher when the local environment is more focused on the private sector and the legal environment is more friendly to shareholders. in contrast to findings of escaffre and sefsaf (2011), anandarajan et al. (2011) report a higher value relevance for british-american banks, which operate in regulatory regimes associated with greater levels of transparency. agostino, drago and silipo (2011) examined listed banks from 15 eu countries over the period 2000–2006, finding that the introduction of ifrs enhanced the information content of earnings and book value for more transparent banks, but the less transparent entities did not experience any significant increase in the value relevance. it appears that to date no studies have addressed the problem of impact of ifrs on the value relevance of banks’ accounting information in the context of polish banking sector. ambiguous results of international studies, and the evidence from the polish capital market for non-financial companies, have therefore led to formulation of the main hypothesis of the present study: piotr bolibok36 hypothesis 1. the value relevance of accounting information announced by banks listed on the wse did not improve after implementation of ifrs. the scope of this paper is to examine the impact of ifrs implementation on the value relevance of fundamental accounting information announced by banks in the context of emerging capital market of poland. the study seems to be the first attempt to address this issue and it seeks to fill this apparent gap. an additional contribution of the paper is enhancement of the existing, relatively scarce, international literature on the impact of ifrs on the value relevance of banks’ accounting information. the remainder of the paper is composed of two sections. section 2 describes the data sources, research methods, and the design of the research process. the main findings and conclusions of the study are presented in section 3. the research methodology and the course of the research process the research was based on the data of all domestically-based commercial banks listed on the wse over the period 1998–2012, which prepared the consolidated financial statements. due to mergers and acquisitions the final sample consisted of 17 banks. the data on consolidated annual financial statements was obtained from the notoria serwis sa database provided by isi emerging markets (http://site.securities.com 2013), whereas data on stock prices from the website of gazeta gieldy parkiet (http://www.parkiet.com 2013). the combined data on book values, net earnings, and stock prices yielded the final pooled sample of 174 bank-year observations. the data on the average yield of 52-week treasury bills (taken as a risk-free in calculation of residual incomes), was obtained from the website of the polish ministry of finance (http://www. mf.gov.pl 2013). the research framework of the study was based on the ohlson (1995) residual income model. the model is based on three main assumptions (ohslon 1995, 663–664). first, in accordance with neoclassical models of security valuation, the market value of a company is determined by the present value of expected dividends. second, the model assumes existence of the rules of clean surplus accounting, where all changes in the book value of equity are ref lected in earnings or transactions with the owners of a company. third, residual incomes (net earnings minus a charge for the use of capital) follow a stochastic process referred to as linear information dynamics, specifying that following period’s residual income is linearly dependent on residual income from previous the impact of ifrs on the value relevance of accounting data… 37 period with correction for the impact of non-accounting information. basing on these assumptions all value-relevant events should be captured by current or expected future earnings and book values. following the approach by bernard (1995), the ohlson model can be applied to empirical tests through a linear regression analysis with the ordinary least squares method. focusing only on banking industry, that exhibits a high degree of homogeneity in operations, reduces cross-sectional variation in factors that might affect estimates of models’ parameters (beaver, eger, ryan, wolfson 1989; beaver, mcanally, stinson 1997). main advantages of the ohlson (1995) model for examining the value relevance of accounting information are its strong embedment in the neoclassical theory of finance, simplicity, and the results of many empirical studies conducted in the developed capital markets, indicating its usefulness. although most of those studies exclude banks from the examined samples of companies, the model appears particularly appropriate for testing the value relevance in the context of banking sector (kohlbeck, warfield 2007, 24). it should be noticed, however, that the model has also some limitations resulting from simplifying assumption that the owners of companies expect a risk-free rate of return on invested capital. to investigate the relationship between fundamental accounting information announced by banks and their market value, the following multiple regression function was used: ing only on banking industry, that exhibits a high degree of homogeneity in operations, reduces cross-sectional variation in factors that might affect estimates of models’ parameters (beaver, eger, ryan, wolfson 1989; beaver, mcanally, stinson 1997). main advantages of the ohlson (1995) model for examining the value relevance of accounting information are its strong embedment in the neoclassical theory of finance, simplicity, and the results of many empirical studies conducted in the developed capital markets, indicating its usefulness. although most of those studies exclude banks from the examined samples of companies, the model appears particularly appropriate for testing the value relevance in the context of banking sector (kohlbeck, warfield 2007, 24). it should be noticed, however, that the model has also some limitations resulting from simplifying assumption that the owners of companies expect a risk-free rate of return on invested capital. to investigate the relationship between fundamental accounting information announced by banks and their market value, the following multiple regression function was used: ��� � �� � �� ∙ �� � �� ∙ ��� � �� (1) where: − tp~ – closing price of a bank’s share at the end of period t; − α0 – intercept; − α1, α2 – structural parameters; − bt – consolidated book value per share at the end of period t, − 11   tft a t brxx t consolidated residual income per share at the end of period t, where rft-1 is a risk-free rate at the end of period t-1; − εt – error term. the calculation of residual incomes was based on the original ohlson’s (1995) approach, which assumes that the owners of companies expect a risk-free rate of return on invested capital. the risk-free rate was taken as the average annual yield of the polish 52week treasury bills. the estimates of parameters α1 and α2 are expected to be positive. the presence of error term serves for capturing the influence of potential factors not included in the model. in order to investigate the impact of ifrs on value relevance of accounting information published by the banks, in accordance with the approach proposed by karğin (2013), the following regression was applied: ��� � �� � ��� ∙ �� � �� ∙ �� � �� ∙ ��� � �� ∙ ��� ∙ ��� � �� ∙ ��� ∙ ���� � �� (2) (1) where: ing only on banking industry, that exhibits a high degree of homogeneity in operations, reduces cross-sectional variation in factors that might affect estimates of models’ parameters (beaver, eger, ryan, wolfson 1989; beaver, mcanally, stinson 1997). main advantages of the ohlson (1995) model for examining the value relevance of accounting information are its strong embedment in the neoclassical theory of finance, simplicity, and the results of many empirical studies conducted in the developed capital markets, indicating its usefulness. although most of those studies exclude banks from the examined samples of companies, the model appears particularly appropriate for testing the value relevance in the context of banking sector (kohlbeck, warfield 2007, 24). it should be noticed, however, that the model has also some limitations resulting from simplifying assumption that the owners of companies expect a risk-free rate of return on invested capital. to investigate the relationship between fundamental accounting information announced by banks and their market value, the following multiple regression function was used: ��� � �� � �� ∙ �� � �� ∙ ��� � �� (1) where: − tp~ – closing price of a bank’s share at the end of period t; − α0 – intercept; − α1, α2 – structural parameters; − bt – consolidated book value per share at the end of period t, − 11   tft a t brxx t consolidated residual income per share at the end of period t, where rft-1 is a risk-free rate at the end of period t-1; − εt – error term. the calculation of residual incomes was based on the original ohlson’s (1995) approach, which assumes that the owners of companies expect a risk-free rate of return on invested capital. the risk-free rate was taken as the average annual yield of the polish 52week treasury bills. the estimates of parameters α1 and α2 are expected to be positive. the presence of error term serves for capturing the influence of potential factors not included in the model. in order to investigate the impact of ifrs on value relevance of accounting information published by the banks, in accordance with the approach proposed by karğin (2013), the following regression was applied: ��� � �� � ��� ∙ �� � �� ∙ �� � �� ∙ ��� � �� ∙ ��� ∙ ��� � �� ∙ ��� ∙ ���� � �� (2) – closing price of a bank’s share at the end of period t; α0 – intercept; α1, α2 – structural parameters; bt – consolidated book value per share at the end of period t, ing only on banking industry, that exhibits a high degree of homogeneity in operations, reduces cross-sectional variation in factors that might affect estimates of models’ parameters (beaver, eger, ryan, wolfson 1989; beaver, mcanally, stinson 1997). main advantages of the ohlson (1995) model for examining the value relevance of accounting information are its strong embedment in the neoclassical theory of finance, simplicity, and the results of many empirical studies conducted in the developed capital markets, indicating its usefulness. although most of those studies exclude banks from the examined samples of companies, the model appears particularly appropriate for testing the value relevance in the context of banking sector (kohlbeck, warfield 2007, 24). it should be noticed, however, that the model has also some limitations resulting from simplifying assumption that the owners of companies expect a risk-free rate of return on invested capital. to investigate the relationship between fundamental accounting information announced by banks and their market value, the following multiple regression function was used: ��� � �� � �� ∙ �� � �� ∙ ��� � �� (1) where: − tp~ – closing price of a bank’s share at the end of period t; − α0 – intercept; − α1, α2 – structural parameters; − bt – consolidated book value per share at the end of period t, − 11   tft a t brxx t consolidated residual income per share at the end of period t, where rft-1 is a risk-free rate at the end of period t-1; − εt – error term. the calculation of residual incomes was based on the original ohlson’s (1995) approach, which assumes that the owners of companies expect a risk-free rate of return on invested capital. the risk-free rate was taken as the average annual yield of the polish 52week treasury bills. the estimates of parameters α1 and α2 are expected to be positive. the presence of error term serves for capturing the influence of potential factors not included in the model. in order to investigate the impact of ifrs on value relevance of accounting information published by the banks, in accordance with the approach proposed by karğin (2013), the following regression was applied: ��� � �� � ��� ∙ �� � �� ∙ �� � �� ∙ ��� � �� ∙ ��� ∙ ��� � �� ∙ ��� ∙ ���� � �� (2) – consolidated residual income per share at the end of period t, where rft-1 is a risk-free rate at the end of period t-1; εt – error term. the calculation of residual incomes was based on the original ohlson’s (1995) approach, which assumes that the owners of companies expect a riskpiotr bolibok38 free rate of return on invested capital. the risk-free rate was taken as the average annual yield of the polish 52-week treasury bills. the estimates of parameters α1 and α2 are expected to be positive. the presence of error term serves for capturing the inf luence of potential factors not included in the model. in order to investigate the impact of ifrs on value relevance of accounting information published by the banks, in accordance with the approach proposed by karğin (2013), the following regression was applied: ing only on banking industry, that exhibits a high degree of homogeneity in operations, reduces cross-sectional variation in factors that might affect estimates of models’ parameters (beaver, eger, ryan, wolfson 1989; beaver, mcanally, stinson 1997). main advantages of the ohlson (1995) model for examining the value relevance of accounting information are its strong embedment in the neoclassical theory of finance, simplicity, and the results of many empirical studies conducted in the developed capital markets, indicating its usefulness. although most of those studies exclude banks from the examined samples of companies, the model appears particularly appropriate for testing the value relevance in the context of banking sector (kohlbeck, warfield 2007, 24). it should be noticed, however, that the model has also some limitations resulting from simplifying assumption that the owners of companies expect a risk-free rate of return on invested capital. to investigate the relationship between fundamental accounting information announced by banks and their market value, the following multiple regression function was used: ��� � �� � �� ∙ �� � �� ∙ ��� � �� (1) where: − tp~ – closing price of a bank’s share at the end of period t; − α0 – intercept; − α1, α2 – structural parameters; − bt – consolidated book value per share at the end of period t, − 11   tft a t brxx t consolidated residual income per share at the end of period t, where rft-1 is a risk-free rate at the end of period t-1; − εt – error term. the calculation of residual incomes was based on the original ohlson’s (1995) approach, which assumes that the owners of companies expect a risk-free rate of return on invested capital. the risk-free rate was taken as the average annual yield of the polish 52week treasury bills. the estimates of parameters α1 and α2 are expected to be positive. the presence of error term serves for capturing the influence of potential factors not included in the model. in order to investigate the impact of ifrs on value relevance of accounting information published by the banks, in accordance with the approach proposed by karğin (2013), the following regression was applied: ��� � �� � ��� ∙ �� � �� ∙ �� � �� ∙ ��� � �� ∙ ��� ∙ ��� � �� ∙ ��� ∙ ���� � �� (2) (2) where: d t is a dummy variable equal 0 for t = 1998, 1999, …., 2004 and 1 for t = 2005, 2006, ..., 2012. estimates of structural parameters α3 and α4 in equation (2) represent the differences in values of coefficients of consolidated book value of equity and residual income per share, respectively, before and after implementation of ifrs. the positive (negative) values of these parameters indicate increase (decrease) of the value relevance of corresponding accounting data after implementation of ifrs. to test the statistical significance of the differences in regression coefficients before and after the adoption of ifrs in poland the chow test for structural change was used. the chow test statistic is given by the following equation (dougherty 2001, 245–246): where: dt is a dummy variable equal 0 for t = 1998, 1999, …., 2004 and 1 for t = 2005, 2006, ..., 2012. estimates of structural parameters α3 and α4 in equation (2) represent the differences in values of coefficients of consolidated book value of equity and residual income per share, respectively, before and after implementation of ifrs. the positive (negative) values of these parameters indicate increase (decrease) of the value relevance of corresponding accounting data after implementation of ifrs. to test the statistical significance of the differences in regression coefficients before and after the adoption of ifrs in poland the chow test for structural change was used. the chow test statistic is given by the following equation (dougherty 2001, 245-246): ����� � ��� = ���������������������������/������ (3) where: − rssp – total sum of the squares of the residuals in the pooled regression, − rssa, rssb – residual sums of squares for the subsample regressions a and b, respectively, − n – number of observations in the pooled sample, − k – number of regression coefficients. the chow test statistic follows the f distribution with (k, n – 2k) degrees of freedom. the null hypothesis of the test is that the regression coefficients in the both subsamples are exactly the same. if the estimated value of the test statistic exceeds the corresponding critical value of the f distribution, then the null hypothesis is rejected indicating occurrence of the structural break in the regression parameters, i.e. a statistically significant difference between regression coefficients in each subsample. the outcome of the research process and conclusions the data in table 1 presents the results of estimation of the equation (1) for the years preceding (1998-2004) and succeeding (2005-2012) the introduction of ifrs in poland, as well as for the whole analysed period. table 1. estimations of residual income valuation model parameters for commercial banks listed on the wse before and after implementation of ifrs parameter model: ��� = �� � �� � �� � �� � ��� � �� period 1998-2004 2005-2012 1998-2012 estimate/ value std. error p-value estimate/ value std. error p-value estimate/ value std. error p-value (3) where: rssp – total sum of the squares of the residuals in the pooled regression, rssa, rssb – residual sums of squares for the subsample regressions a and b, respectively, n – number of observations in the pooled sample, k – number of regression coefficients. the chow test statistic follows the f distribution with (k, n – 2k) degrees of freedom. the null hypothesis of the test is that the regression coefficients the impact of ifrs on the value relevance of accounting data… 39 in the both subsamples are exactly the same. if the estimated value of the test statistic exceeds the corresponding critical value of the f distribution, then the null hypothesis is rejected indicating occurrence of the structural break in the regression parameters, i.e. a statistically significant difference between regression coefficients in each subsample.  the outcome of the research process and conclusions the data in table 1 presents the results of estimation of the equation (1) for the years preceding (1998–2004) and succeeding (2005–2012) the introduction of ifrs in poland, as well as for the whole analysed period. table 1. estimations of residual income valuation model parameters for commercial banks listed on the wse before and after implementation of ifrs parameter model: where: dt is a dummy variable equal 0 for t = 1998, 1999, …., 2004 and 1 for t = 2005, 2006, ..., 2012. estimates of structural parameters α3 and α4 in equation (2) represent the differences in values of coefficients of consolidated book value of equity and residual income per share, respectively, before and after implementation of ifrs. the positive (negative) values of these parameters indicate increase (decrease) of the value relevance of corresponding accounting data after implementation of ifrs. to test the statistical significance of the differences in regression coefficients before and after the adoption of ifrs in poland the chow test for structural change was used. the chow test statistic is given by the following equation (dougherty 2001, 245-246): ����� � ��� = ���������������������������/������ (3) where: − rssp – total sum of the squares of the residuals in the pooled regression, − rssa, rssb – residual sums of squares for the subsample regressions a and b, respectively, − n – number of observations in the pooled sample, − k – number of regression coefficients. the chow test statistic follows the f distribution with (k, n – 2k) degrees of freedom. the null hypothesis of the test is that the regression coefficients in the both subsamples are exactly the same. if the estimated value of the test statistic exceeds the corresponding critical value of the f distribution, then the null hypothesis is rejected indicating occurrence of the structural break in the regression parameters, i.e. a statistically significant difference between regression coefficients in each subsample. the outcome of the research process and conclusions the data in table 1 presents the results of estimation of the equation (1) for the years preceding (1998-2004) and succeeding (2005-2012) the introduction of ifrs in poland, as well as for the whole analysed period. table 1. estimations of residual income valuation model parameters for commercial banks listed on the wse before and after implementation of ifrs parameter model: ��� = �� � �� � �� � �� � ��� � �� period 1998-2004 2005-2012 1998-2012 estimate/ value std. error p-value estimate/ value std. error p-value estimate/ value std. error p-value period 1998–2004 2005–2012 1998–2012 estimate/ value std. error p-value estimate/ value std. error p-value estimate/ value std. error p-value α0 0.726 4.723 0.878 -0.401 9.816 0.968 -0.115 6.310 0.986 α1 1.646 0.054 0.000 1.663 0.144 0.000 1.724 0.072 0.000 α2 2.660 0.504 0.000 5.143 1.186 0.000 4.289 0.570 0.000 adj. r2 0.931 0.842 0.859 f-statistic 457.118 0.000 278.796 0.000 525.942 0.000 n 69 105 174 s o u r c e : own elaboration. consistent with expectations, the results of analysis show that all estimated regression coefficients were positive and statistically significant. in general, the responsiveness of banks’ market value to changes in residual income was higher than to variation in book values. over the whole analysed period an increase in the book value per share of 1 pln resulted in an average increase of the share price of 1.7 pln, whereas the same increase in residual income per share caused a 4.3 pln increase in the price. piotr bolibok40 in general, the comparison of the regression coefficients in each of the analysed subperiods suggests an increase in the value relevance of accounting information announced by banks listed on the wse after introduction of ifrs. however, the magnitude of this increase for book values of equity and residual incomes was quite different. the responsiveness of banks’ market value to changes in book value of their equity in both analysed subperiods was very similar. on average, an increase in book value per share of 1 pln resulted in an increase in the price of bank share of about 1.6–1.7 pln. conversely, the difference in the values of regression coefficients for residual income was much higher. before introduction of ifrs in poland 1 pln increase in residual income per share caused an average increase in the share price of 2.7 pln, while after their implementation the analogous increase exceeded 5.1 pln. the decrease in the value of adjusted regression coefficient of determination indicates, however, that the descriptive power of the whole model declined in the period succeeding the implementation of ifrs. these ambiguous results required further analytical investigation with the chow test for structural change (table 2). table 2. chow test for structural change in value relevance of banks’ consolidated accounting data after implementation of ifrs model: α0 0.726 4.723 0.878 -0.401 9.816 0.968 -0.115 6.310 0.986 α1 1.646 0.054 0.000 1.663 0.144 0.000 1.724 0.072 0.000 α2 2.660 0.504 0.000 5.143 1.186 0.000 4.289 0.570 0.000 adj. r2 0.931 0.842 0.859 f-statistic 457.118 0.000 278.796 0.000 525.942 0.000 n 69 105 174 source: own elaboration. consistent with expectations, the results of analysis show that all estimated regression coefficients were positive and statistically significant. in general, the responsiveness of banks’ market value to changes in residual income was higher than to variation in book values. over the whole analysed period an increase in the book value per share of 1 pln resulted in an average increase of the share price of 1.7 pln, whereas the same increase in residual income per share caused a 4.3 pln increase in the price. in general, the comparison of the regression coefficients in each of the analysed subperiods suggests an increase in the value relevance of accounting information announced by banks listed on the wse after introduction of ifrs. however, the magnitude of this increase for book values of equity and residual incomes was quite different. the responsiveness of banks’ market value to changes in book value of their equity in both analysed subperiods was very similar. on average, an increase in book value per share of 1 pln resulted in an increase in the price of bank share of about 1.6-1.7 pln. conversely, the difference in the values of regression coefficients for residual income was much higher. before introduction of ifrs in poland 1 pln increase in residual income per share caused an average increase in the share price of 2.7 pln, while after their implementation the analogous increase exceeded 5.1 pln. the decrease in the value of adjusted regression coefficient of determination indicates, however, that the descriptive power of the whole model declined in the period succeeding the implementation of ifrs. these ambiguous results required further analytical investigation with the chow test for structural change (table 2). table 2. chow test for structural change in value relevance of banks’ consolidated accounting data after implementation of ifrs model: ��� � �� � ��� ∙ �� � �� ∙ �� � �� ∙ ��� � �� ∙ ��� ∙ ��� � �� ∙ ��� ∙ ���� � �� parameter estimate/value std. error p-value α0 0.726 10.282 0.944 αd0 -1.127 13.020 0.931 α1 1.646 0.119 0.000 α2 2.660 1.097 0.016 α3 0.017 0.167 0.917 α4 2.483 1.461 0.091 adj. r2 0.859 parameter estimate/value std. error p-value α0 0.726 10.282 0.944 αd0 -1.127 13.020 0.931 α1 1.646 0.119 0.000 α2 2.660 1.097 0.016 α3 0.017 0.167 0.917 α4 2.483 1.461 0.091 adj. r2 0.859 f-statistic 211.269 0.000 chow test statistic 1.068 0.364 n1 (1998–2004) 69 the impact of ifrs on the value relevance of accounting data… 41 model: α0 0.726 4.723 0.878 -0.401 9.816 0.968 -0.115 6.310 0.986 α1 1.646 0.054 0.000 1.663 0.144 0.000 1.724 0.072 0.000 α2 2.660 0.504 0.000 5.143 1.186 0.000 4.289 0.570 0.000 adj. r2 0.931 0.842 0.859 f-statistic 457.118 0.000 278.796 0.000 525.942 0.000 n 69 105 174 source: own elaboration. consistent with expectations, the results of analysis show that all estimated regression coefficients were positive and statistically significant. in general, the responsiveness of banks’ market value to changes in residual income was higher than to variation in book values. over the whole analysed period an increase in the book value per share of 1 pln resulted in an average increase of the share price of 1.7 pln, whereas the same increase in residual income per share caused a 4.3 pln increase in the price. in general, the comparison of the regression coefficients in each of the analysed subperiods suggests an increase in the value relevance of accounting information announced by banks listed on the wse after introduction of ifrs. however, the magnitude of this increase for book values of equity and residual incomes was quite different. the responsiveness of banks’ market value to changes in book value of their equity in both analysed subperiods was very similar. on average, an increase in book value per share of 1 pln resulted in an increase in the price of bank share of about 1.6-1.7 pln. conversely, the difference in the values of regression coefficients for residual income was much higher. before introduction of ifrs in poland 1 pln increase in residual income per share caused an average increase in the share price of 2.7 pln, while after their implementation the analogous increase exceeded 5.1 pln. the decrease in the value of adjusted regression coefficient of determination indicates, however, that the descriptive power of the whole model declined in the period succeeding the implementation of ifrs. these ambiguous results required further analytical investigation with the chow test for structural change (table 2). table 2. chow test for structural change in value relevance of banks’ consolidated accounting data after implementation of ifrs model: ��� � �� � ��� ∙ �� � �� ∙ �� � �� ∙ ��� � �� ∙ ��� ∙ ��� � �� ∙ ��� ∙ ���� � �� parameter estimate/value std. error p-value α0 0.726 10.282 0.944 αd0 -1.127 13.020 0.931 α1 1.646 0.119 0.000 α2 2.660 1.097 0.016 α3 0.017 0.167 0.917 α4 2.483 1.461 0.091 adj. r2 0.859 parameter estimate/value std. error p-value n2 (2005–2012) 105 s o u r c e : own elaboration. the results of estimation of the equation (2) presented in the table 2 are consistent with the previous findings. positive values of regression coefficients estimates α3 and α4 indicate that both book values and residual incomes became more value relevant after the introduction of ifrs. each of these estimates, however, turned out to be insignificant at the 5% significance level. the p -value for the coefficient estimate α4 indicates that the increase in the value relevance of residual incomes would be significant at the 10% significance level. the estimated chow test statistic equalled 1.068 which turned out to be lower than the corresponding critical value of the f distribution (2.658). this indicates a failure to reject the null hypothesis of exactly no difference in regression coefficients between the analysed subperiods and suggests a lack of sufficient evidence on structural break in parameters of the model. in other words, the observed increase in the value relevance of banks’ accounting information after introduction of ifrs in poland was statistically insignificant, which supports the main hypothesis of the present study. the conducted analyses, based on the ohlson residual income model, support the key hypothesis developed in the present study, and indicate that the implementation of ifrs in poland did not have a statistically significant impact on the value relevance of fundamental accounting data announced by the banks listed on the warsaw stock exchange. the chow test for structural change revealed that an increase in the responsiveness of banks’ market value to variations in book values of equity and residual incomes after introduction of ifrs turned out to be statistically insignificant. the findings for the banking sector are, therefore, consistent with the results of previous studies conducted in the context of polish capital market on non-financial firms. it appears, that for equity investors, the quality of financial reporting under polish accounting standards was not inferior to potentially more informative ifrs. in the particular context of banking sector this observation might be attributable to the specificity of banking operations and their recognition in financial statements that result in coherence of capital market’s and accounting piotr bolibok42 perspectives even under less advanced standards. on the other hand, the results of the research suggest the necessity of further improvement of financial reporting quality in order to make it more useful for equity investors.  references act of 29 september 1994 on accounting. j. l. 2013, item 330, 613. agostino m., drago d., silipo d. b. 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(2011). value relevance of accounting information in the united arab emirates. international journal of economics and financial issues, 1 (2), 33–45. klimczak k. m. (2011). market reaction to mandatory ifrs adoption: evidence from poland. accounting and management information systems, 10 (2), 228–248. kohlbeck m., warfield t. d. (2007). unrecorded intangible assets: abnormal earnings and valuation. accounting horizons, 21 (1), 23–41. http://dx.doi.org/10.2308/ acch.2007.21.1.23. macías m., muiño f. (2011). examining dual accounting systems in europe. the international journal of accounting, 46 (1), 51–78. http://dx.doi.org/10.1016/j.intacc.2010.12.001. ohlson j. a. (1995). earnings, book values and dividends in equity valuation. contemporary accounting research, 11 (2), 661–687. http://dx.doi.org/10.1111/j.1911-3846.1995. tb00461.x. regulation (ec) no. 1606/2002 of the european parliament and of the council of 19 july 2002 on the application of the international accounting standards. official journal of the european communities. l 243, 19.07.2002. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402016, volume 5, issue 1 date of submission: may 18, 2016; date of acceptance: june 10, 2016. * contact information: guenter.hof bauer@thi.de, technische hochschule ingolstadt, business school, esplanade 10, d-85049 ingolstadt/germany, phone: +4984193483590. ** contact information: mklimontowicz@ue.katowice.pl, university of economics in katowice, faculty of finance and insurance, department of banking and financial market, ul. 1 maja 50, 40-287 katowice, poland, phone: +48321577421. *** contact information: aleksandra.nocon@ue.katowice.pl, university of economics in katowice, faculty of finance and insurance, department of banking and financial market, ul. 1 maja 50, 40-287 katowice, poland, phone: +48321577421. hof bauer g., klimontowicz m., & nocoń a. (2016). basel iii equity requirements and a contemporary rating approach. copernican journal of finance & accounting, 5(1), 91–105. http://dx.doi. org/10.12775/cjfa.2016.005 günter hofbauer* technische hochschule ingolstadt, germany monika klimontowicz** university of economics in katowice, poland aleksandra nocoń*** university of economics in katowice, poland basel iii equity requirements and a contemporary rating approach keywords: basel iii, equity regulation, rating classes, risk, sustainability. j e l classification: g30, m10. abstract: the new equity regulations of basel iii are more restrictive. therefore the research objective of this article is to show the impact of equity regulations and to provide a proposal for professional preparation for the rating procedure for credit seeking companies. the research method applied is to give an overview of the relevant equity günter hofbauer, monika klimontowicz, aleksandra nocoń92 regulations of basel iii. from this research, we can derive that risk is the most important issue to be considered. in consequence, the outcome is a proposal for a contemporary rating approach for companies, containing an appropriate way how to control risk and perform in an excellent way. we can conclude, that the new equity regulations will not only have an impact on banks, but also on credit taking companies. especially small and medium-sized companies will be affected. furthermore in future banks intend to get an exhaustive insight into companies. the risks identified in the business will serve as a measure to calculate a risk adequate interest rate, depending on the rating class. therefore it won’t be sufficient anymore to use only backward looking statements from the balance sheet or profit and loss statement. in this article we propose an evidence based approach for executing a professional and sustainable rating. supporting this, we provide six dimensions for a contemporary rating approach.  introduction the collapse of lehman brothers and the subsequent events on global financial markets has revealed that it is necessary to reform the financial system, especially banking sector. the first outline of the reforms was presented at a meeting of g20 leaders in april 2009 in london. in response to the global financial crisis, an important role was assigned to the basel committee on banking supervision, which within two years has developed a set of new rules regulating banking activity. these new rules and regulations will not only have an impact on banks but also on credit seeking companies, especially small and mediumsized companies. in this article, we provide an overview of the relevant equity regulations for banks. therefore, the banks have to be more careful to accept risk in their business. in order to avoid risk, the banks will have a closer look on the business of the credit-seeking companies and the risk involved in these companies. depending on the risk and the corresponding rating class the decision about the creditworthiness and the extent of the interest rate will be done. if credit seeking companies have excellent performance indicators, they will get credit under good conditions, otherwise, they won’t. research methodology the research methodology is twofold. first we do literature research, especially in the basel framework, paying particular attention to the equity requirements. second we do empirical research and present the impact of basel iii regulation on bank’s selected indicators as tier 1 ratios, the share of equity capital basel iii equity requirements and a contemporary… 93 in total assets, and the debt-to-equity ratio from poland and germany. these figures are displayed in comparison before basel iii and nowadays, during the implementation of basel iii. basel iii in the context of equity regulations and requirements in december 2010 the basel committee has published two documents, which significantly changed the rules of the banking institutions functioning after the financial crisis of 2007–2008: ■ basel iii: a global regulatory framework for more resilient banks and banking systems, ■ basel iii: international framework for liquidity risk measurement, standards and monitoring. these documents constitute a set of regulations known as basel iii, which complement the earlier recommendations of the basel committee – basel i and basel ii (the new basel capital accord). basel iii distinguishes two categories of capital in banks: tier i and tier ii. thereby, tier iii capital – introduced in the new basel capital accord, disappeared in basel iii (iwanicz-drozdowska 2012). since the beginning of the basel capital regulations, tier i capital had the task of absorbing losses incurred by a bank (bcbs, 1988). the higher the level of tier i capital in relation to the scale of its operations, the higher the ability to survive periods of instability. however, after the experience of the global financial crisis, the basel committee has proposed tightening the rules for qualifying specific positions as core capital, to fully meet the requirements associated with the ability to cover losses. the amount of the capital adequacy ratio was left at the current level of 8%. nevertheless, in basel iii there has been made the distinction of own funds in (iwanicz-drozdowska 2012, nocoń 2016): ■ tier i capital, described as going concern capital, ■ tier ii capital, described as gone concern capital. this distinction between going and gone concern capital results from a situation, in which the individual categories of capital may be used to cover losses. in the case of tier i capital it is always possible, in the case of tier ii capital only during bankruptcy or liquidation of a bank. according to basel iii, tier i capital consists of common equity tier i (cet1) and additional tier i capital. however, the main emphasis is on common equity tier i, which includes (basel iii 2010): günter hofbauer, monika klimontowicz, aleksandra nocoń94 ■ ordinary shares issued by a bank, ■ the issue premium arising from the issuance of instruments classified as common equity tier i, ■ retained profits and other accumulated profits and disclosed reserves. the above capital has to be considered as equity capital, according to national accounting standards. at the same time, it cannot be regarded as a liability for the purposes of determining the state of insolvency on the basis of balance sheet data, and must be specifically extracted in the balance sheet of banking institution. in turn, among the components of tier ii capital (supplementary funds) subordinated debt and reserves of general risk and surplus reserves for expected losses on the loan portfolio were qualified. these requirements are intended to prevent the assignment to own funds of such components, which are not adequately safe from the point of view of banks’ capital adequacy (kopiński 2008). a kind of ‘failure’ of hybrid instruments as a component of tier i, required a tightening of the equity criteria (iwanicz-drozdowska 2012). in the existing regulations the relation between core and supplementary capital may amount to a maximum of 50%. in turn, subordinated loans classified as tier ii capital could provide no more than 25% of core capital. this meant that the capital adequacy ratio calculated for tier i could not be less than 4%. basel iii has tightened existing recommendations, assigning a greater role of tier i capital. banks should therefore maintain capital adequacy ratios at the following levels (basel iii 2010): common equity tier i ratio (cet1) ≥ 4,5% tier i capital ratio ≥ 6% capital adequacy ratio (tier i + tier ii) ≥ 8% despite the fact that the basel committee maintained the current level of capital adequacy ratio at a level of 8%, but it also introduced two capital buffers: ■ capital conservation buffer – which has protective character, ■ countercyclical buffer – which has countercyclical character. their aim is to increase the security of banks and banking sector, increasing requirements for the level of adequacy ratio, taking into account common equity tier i. capital conservation buffer refers to the level of capital protection at the level of individual bank (microeconomic approach), while the countercy basel iii equity requirements and a contemporary… 95 clical buffer at the level of the banking sector of a country (macroeconomic approach). the protective buffer applies to all banks, regardless of jurisdiction, aiming to increase their resilience, expanding the capacity to absorb losses, as well as reducing the possibility of lowering the capital adequacy ratio below 8%. the buffer limits possibilities of disposal of generated capital by banks through restrictions of paid dividends, buying its own shares or paying bonuses. capital conservation buffer will appear in 2016 at a level of 0.625%, in the following year it will increase to 1.25%, after that to 1.875%, and from the beginning of 2019 it will amount to 2.5% (basel iii 2010). the countercyclical buffer is an essential macro-prudential tool of the whole package of regulation. it has been addicted on the development of lending in a country. its aim is to correct the growth rate of lending (cooling). it was added to the protective buffer. this buffer requires to maintain additional common equity tier i in the range of 0 to 2.5% of risk weighted assets, depending on the assessment of the financial safety net institutions about the possibility of generating excessive systemic risk. the level of the buffer will vary with the level of protection buffer – in 2016 it will be at a maximum level of 0.625%, gradually increasing the maximum value to 2.5%. to determine the appropriate level of the countercyclical buffer, supervisory authorities should monitor banks’ lending activities and other indicators related to systemic risk. this is to determine whether credit growth is not excessive and does not cause an increase of systemic risk (basel iii 2010). figure 1. changing equity structure from basel i and ii to basel iii the countercyclical buffer is an essential macro-prudential tool of the whole package of regulation. it has been addicted on the development of lending in a country. its aim is to correct the growth rate of lending (cooling). it was added to the protective buffer. this buffer requires to maintain additional common equity tier i in the range of 0 to 2.5% of risk weighted assets, depending on the assessment of the financial safety net institutions about the possibility of generating excessive systemic risk. the level of the buffer will vary with the level of protection buffer – in 2016 it will be at a maximum level of 0.625%, gradually increasing the maximum value to 2.5%. to determine the appropriate level of the countercyclical buffer, supervisory authorities should monitor banks’ lending activities and other indicators related to systemic risk. this is to determine whether credit growth is not excessive and does not cause an increase of systemic risk (basel iii, 2010, 57-60). figure 1. changing equity structure from basel i and ii to basel iii basel iii has caused a real increase in capital charges for banks (see figure 1). the level of capital adequacy ratio is still equal to 8%, however the sum of minimum tier i ratio, minimum tier ii ratio and capital conservation buffer was set at a level of 10.5%. moreover, taking into account countercyclical buffer, equity requirements for banks increased to 13%. the comparison of the basel iii impact on polish and german bank indicators the basel iii framework focuses on capital as a guarantee of bank’s safety and its ability to absorb any possible risk that might happen. the comparison between the level of bank’s core capital and total risk-weighted assets is measured by tier 1 capital ratio. this ratio shows the financial strength of a bank. during the last decade the level of this ratio s o u r c e : basel iii 2010. günter hofbauer, monika klimontowicz, aleksandra nocoń96 basel iii has caused a real increase in capital charges for banks (see figure 1). the level of capital adequacy ratio is still equal to 8%, however the sum of minimum tier i ratio, minimum tier ii ratio and capital conservation buffer was set at a level of 10.5%. moreover, taking into account countercyclical buffer, equity requirements for banks increased to 13%. the comparison of the basel iii impact on polish and german bank indicators the basel iii framework focuses on capital as a guarantee of bank’s safety and its ability to absorb any possible risk that might happen. the comparison between the level of bank’s core capital and total risk-weighted assets is measured by tier 1 capital ratio. this ratio shows the financial strength of a bank. during the last decade the level of this ratio has been systematically increasing in both german and polish banking market. the comparison between polish and german banks show that the capital base in poland was stronger before the basel accords implementation (see figure 2). today both countries fulfil the basel requirements but the share of equity capital in total assets is still at the higher level in poland (see figure 3). figure 2. tier 1 ratio in germany and poland (ebc, db research) has been systematically increasing in both german and polish banking market. the comparison between polish and german banks show that the capital base in poland was stronger before the basel accords implementation (see figure 2). today both countries fulfil the basel requirements but the share of equity capital in total assets is still at the higher level in poland (see figure 3). figure 2. tier 1 ratio in germany and poland (ebc, db research) figure 3. equity capital in % of total assets (capital & reserves/total assets*100) in germany and poland (ebc, db research) fulfilling basel iii requirements has already influenced banks’ market policy and has changed the way of financing banks’ operations. the analysis of debt-to-equity shows that during the last 10 years the share of debt defined as a specific subset of liabilities has changed. since 2008 the level of ratio is decreasing but still the outstanding debt is over 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 germany 7,57 7,51 7,48 7,69 8,23 9,26 10,63 11,41 11,72 13,80 15,19 poland 13,90 15,34 14,39 12,93 11,13 10,17 12,10 12,59 11,88 13,14 13,96 0,00 2,00 4,00 6,00 8,00 10,00 12,00 14,00 16,00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 germany 4,35 4,41 4,71 4,64 4,79 5,09 4,58 4,70 5,06 5,81 5,95 6,25 poland 15,27 14,66 13,21 12,12 12,00 14,00 14,41 14,28 15,23 15,21 14,99 14,83 0,00 2,00 4,00 6,00 8,00 10,00 12,00 14,00 16,00 s o u r c e : own work based on: ecb and db research data. basel iii equity requirements and a contemporary… 97 figure 3. equity capital in % of total assets (capital & reserves/total assets*100) in germany and poland (ebc, db research) has been systematically increasing in both german and polish banking market. the comparison between polish and german banks show that the capital base in poland was stronger before the basel accords implementation (see figure 2). today both countries fulfil the basel requirements but the share of equity capital in total assets is still at the higher level in poland (see figure 3). figure 2. tier 1 ratio in germany and poland (ebc, db research) figure 3. equity capital in % of total assets (capital & reserves/total assets*100) in germany and poland (ebc, db research) fulfilling basel iii requirements has already influenced banks’ market policy and has changed the way of financing banks’ operations. the analysis of debt-to-equity shows that during the last 10 years the share of debt defined as a specific subset of liabilities has changed. since 2008 the level of ratio is decreasing but still the outstanding debt is over 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 germany 7,57 7,51 7,48 7,69 8,23 9,26 10,63 11,41 11,72 13,80 15,19 poland 13,90 15,34 14,39 12,93 11,13 10,17 12,10 12,59 11,88 13,14 13,96 0,00 2,00 4,00 6,00 8,00 10,00 12,00 14,00 16,00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 germany 4,35 4,41 4,71 4,64 4,79 5,09 4,58 4,70 5,06 5,81 5,95 6,25 poland 15,27 14,66 13,21 12,12 12,00 14,00 14,41 14,28 15,23 15,21 14,99 14,83 0,00 2,00 4,00 6,00 8,00 10,00 12,00 14,00 16,00 s o u r c e : own work based on: ecb and db research data. fulfilling basel iii requirements has already inf luenced banks’ market policy and has changed the way of financing banks’ operations. the analysis of debt-to-equity shows that during the last 10 years the share of debt defined as a specific subset of liabilities has changed. since 2008 the level of ratio is decreasing but still the outstanding debt is over three times larger than equity (see figure 4). figure 4. debt-to-equity in germany and poland (ebc, db research)three times larger than equity (see figure 4). figure 4. debt-to-equity in germany and poland (ebc, db research) as for banks the own funds are preferable as a denominator to avoid stock market fluctuations meeting capital requirements will require changing the credit policy and bank’s rating approach. a contemporary rating approach from our research and analysis we can summarize that the equity regulations become more restrictive and in coincidence with that, banks will be more careful in assessing the creditworthiness. from empirical research we can see, that selected figures are changing over time and that there are differences between germany and poland. from figure 3 and 4 we can deduct that there is still a need for equity, in germany more than in poland. companies seeking for credits have to be well prepared for the assessment of banks and the rating process. in this chapter we make a proposal for a contemporary rating approach. the rating of a company depends very strongly on the future perspectives and the ability to generate profits. the basis of value creating operations is the successful management of the relationships to customers and suppliers. within the framework of value orientation and sustainability companies have to focus on the relationship management. this task is executed particularly in the marketing and sales department. the financial figures from the financial report and the balance sheet do not have a satisfactory indication, because these are backward oriented and fixed to the reporting date. hence it is insufficient to use only these figures for credit rating. in order to include also the potential 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 germany 6,1 6,2 5,5 5,2 5,3 7,6 6,5 6,1 6,4 5,7 4,9 4,5 poland 5,0 3,8 3,4 2,8 2,7 4,9 4,3 3,8 4,6 4,0 3,6 3,4 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 s o u r c e : own work based on: ecb and db research data. günter hofbauer, monika klimontowicz, aleksandra nocoń98 as for banks the own funds are preferable as a denominator to avoid stock market f luctuations meeting capital requirements will require changing the credit policy and bank’s rating approach. a contemporary rating approach from our research and analysis we can summarize that the equity regulations become more restrictive and in coincidence with that, banks will be more careful in assessing the creditworthiness. from empirical research we can see, that selected figures are changing over time and that there are differences between germany and poland. from figure 3 and 4 we can deduct that there is still a need for equity, in germany more than in poland. companies seeking for credits have to be well prepared for the assessment of banks and the rating process. in this chapter we make a proposal for a contemporary rating approach. the rating of a company depends very strongly on the future perspectives and the ability to generate profits. the basis of value creating operations is the successful management of the relationships to customers and suppliers. within the framework of value orientation and sustainability companies have to focus on the relationship management. this task is executed particularly in the marketing and sales department. the financial figures from the financial report and the balance sheet do not have a satisfactory indication, because these are backward oriented and fixed to the reporting date. hence it is insufficient to use only these figures for credit rating. in order to include also the potential of the future, the relationships to customers and suppliers as well have to be considered for the evaluation of the creditworthiness. the main variables of the relationship management will be shown in this article, to make them available for the credit check for the banks and for adequate preparation of the companies. questions about the company one of the most important challenges in managing successful companies is to reduce risk by creating sustainable and value oriented relationship management. in doing this the value of the company will increase and the credit rating will be inf luenced positively. a prior task for the management is to care about a transparent reporting of the business related situation and for an open and straightforward communication to the bank as a professional basis for the credit rating. in former times it might have been sufficient to show the balance basel iii equity requirements and a contemporary… 99 sheet and the profit and loss statement. but in times of financial crisis and basel iii this is not enough, because these records are backward oriented and fixed (sometimes estimated) with reference to a due date, mostly end of year. rather than that, it is important to demonstrate the preparedness for future challenges and indicate the sustainability and profitability of the business. table 1 shows specific questions about your company, which have to be answered in a credit rating. table 1. questions about your company of the future, the relationships to customers and suppliers as well have to be considered for the evaluation of the creditworthiness. the main variables of the relationship management will be shown in this article, to make them available for the credit check for the banks and for adequate preparation of the companies. questions about the company one of the most important challenges in managing successful companies is to reduce risk by creating sustainable and value oriented relationship management. in doing this the value of the company will increase and the credit rating will be influenced positively. a prior task for the management is to care about a transparent reporting of the business related situation and for an open and straightforward communication to the bank as a professional basis for the credit rating. in former times it might have been sufficient to show the balance sheet and the profit and loss statement. but in times of financial crisis and basel iii this is not enough, because these records are backward oriented and fixed (sometimes estimated) with reference to a due date, mostly end of year. rather than that, it is important to demonstrate the preparedness for future challenges and indicate the sustainability and profitability of the business. table 1 shows specific questions about your company, which have to be answered in a credit rating. table 1. questions about your company rating classes as an outcome of evaluation banks are obligated to observe bank lending basic rules. following the basel iii accord the banks have to prove even more strictly the creditworthiness of a company. because of s o u r c e : own work. rating classes as an outcome of evaluation banks are obligated to observe bank lending basic rules. following the basel iii accord the banks have to prove even more strictly the creditworthiness of a company. because of the financial crisis – the effects are still noticeable – the banks are particularly careful. subsequently it will be necessary for all companies to substantiate the creditworthiness not only by the means of financial rating but also by structural rating. here we see an imperative need for action, especially for small and medium sized companies, to be prepared for these new rules of rating and prerequisites for credit issueing. well managed companies will get better credit conditions and will be charged with less cost of credit capital. the most important günter hofbauer, monika klimontowicz, aleksandra nocoń100 issue in achieving profitability and sustainability is the overall principle of value creation. the relationships to customers as well as to suppliers have a distinguished significance, because those have an outstanding inf luence on the value creation. the better the companies are valuated with respect to profitability and sustainability, the better the rating and concurrently the better the credit conditions will be. table 2 (source: websites of companies) shows the various rating classes and their meanings. table 2. rating classes the financial crisis – the effects are still noticeable – the banks are particularly careful. subsequently it will be necessary for all companies to substantiate the creditworthiness not only by the means of financial rating but also by structural rating. here we see an imperative need for action, especially for small and medium sized companies, to be prepared for these new rules of rating and prerequisites for credit issueing. well managed companies will get better credit conditions and will be charged with less cost of credit capital. the most important issue in achieving profitability and sustainability is the overall principle of value creation. the relationships to customers as well as to suppliers have a distinguished significance, because those have an outstanding influence on the value creation. the better the companies are valuated with respect to profitability and sustainability, the better the rating and concurrently the better the credit conditions will be. table 2 (source: websites of companies) shows the various rating classes and their meanings. table 2. rating classes problem formulation a strong dependency of a company on customers and suppliers is a severe problem for the rating. deducted from these relationships we can identify essential factors influencing the creditworthiness. in order to calculate the contained business risk, the banks have to look on these relationships very closely. if a company has an unbalanced dependency, either on the customer or on the supplier side, this may imply a severe crisis. the company can face a loss of a key account customer or a drop out of an important supplier. in any s o u r c e : websites of companies. problem formulation a strong dependency of a company on customers and suppliers is a severe problem for the rating. deducted from these relationships we can identify essential factors inf luencing the creditworthiness. in order to calculate the contained business risk, the banks have to look on these relationships very closely. if a company has an unbalanced dependency, either on the customer or on the supplier side, this may imply a severe crisis. the company can face a loss of a key account customer or a drop out of an important supplier. in any comparable case there will be a crisis with an impact on the rating. this impact will be displayed by a continuous rating, if banks wait until this crisis will be visible on the financial statements, it will be too late. basel iii equity requirements and a contemporary… 101 the most important issues, which will give a comprehensive indication are (basis: own research): ■ excellence and ability of the management, process orientation, business model ■ potential markets, future prospects to create value, competitive position, ■ sales volume and earnings, profitability, strategic position ■ stable relationships, customer satisfaction ■ innovation, modern product portfolio, competitiveness ■ controlling, quality and availability of relevant information, taking this context into account, we strongly recommend to use those indicators and measures, which result directly from the business and which are appropriate to display the risk included in the business model and the impact on the success. subsequently we have to consider these variables of success. problem solving by evaluating with structural rating the awareness of the valuation and usefulness of the success factors of a company gives more significance to this issue in management. marketing and sales contribute dominantly to the success and can help to manage risk arising from dependencies. there are promising potentials in the area of markets. coming from these indicators, we defined six different areas (left side of table 3), which can contribute positively to the credit rating, if they are managed well. the outcome of the different dimensions are displayed on the right side of table 3. we can summarize, that all these issues are about the indicators, we pointed out in the problem formulation. the task for the companies is to disclose all these indicators in a comprehensible and documented way for the banks. the task for the banks is to evaluate and examine these indicators. this examination should not be a matter of trust and believe. in fact it should be a matter of business knowledge, market intelligence and management experience. günter hofbauer, monika klimontowicz, aleksandra nocoń102 table 3. system of rating dimensions (hof bauer, bergmann 2013, 340) the task for the companies is to disclose all these indicators in a comprehensible and documented way for the banks. the task for the banks is to evaluate and examine these indicators. this examination should not be a matter of trust and believe. in fact it should be a matter of business knowledge, market intelligence and management experience. for example the assessment of future prospects should include the whole business environment with short term expectations in business as well as long term perspectives within the relevant industry. the individual situation of the company is strongly related to the market position. for the execution of a professional rating all relevant indicators have to be scrutinized and subsequently evaluated due to the rating classes (table 2). table 4. indicators for future prospects these indicators for future prospects can also be influenced by the competitive position of a company. the consequent practice is to evaluate these issues as well. the indicators of success and future prospects could be: market position as market share, market position, price enforcement and cost of production, product quality and product portfolio, s o u r c e : hof bauer, bergmann 2013. for example the assessment of future prospects should include the whole business environment with short term expectations in business as well as long term perspectives within the relevant industry. the individual situation of the company is strongly related to the market position. for the execution of a professional rating all relevant indicators have to be scrutinized and subsequently evaluated due to the rating classes (table 2). table 4. indicators for future prospects the task for the companies is to disclose all these indicators in a comprehensible and documented way for the banks. the task for the banks is to evaluate and examine these indicators. this examination should not be a matter of trust and believe. in fact it should be a matter of business knowledge, market intelligence and management experience. for example the assessment of future prospects should include the whole business environment with short term expectations in business as well as long term perspectives within the relevant industry. the individual situation of the company is strongly related to the market position. for the execution of a professional rating all relevant indicators have to be scrutinized and subsequently evaluated due to the rating classes (table 2). table 4. indicators for future prospects these indicators for future prospects can also be influenced by the competitive position of a company. the consequent practice is to evaluate these issues as well. the indicators of success and future prospects could be: market position as market share, market position, price enforcement and cost of production, product quality and product portfolio, s o u r c e : own work. basel iii equity requirements and a contemporary… 103 these indicators for future prospects can also be inf luenced by the competitive position of a company. the consequent practice is to evaluate these issues as well. the indicators of success and future prospects could be: market position as market share, market position, price enforcement and cost of production, product quality and product portfolio, production sites and legal protection. the assessment is shown in table 5. table 5. indicators for competitive position production sites and legal protection. the assessment is shown in table 5. table 5. indicators for competitive position conclusion in this article we have analysed and outlined the basel iii equity regulations and measures. an important indicator is the risk taken by a bank as a creditor. the degree of risk influences the amount of equity. the higher the risk, the higher the equity, which has to be backed in a bank in order to protect the single bank as well as the whole banking sector from the next crisis. a well performing banking sector is an important prerequisite for an ongoing economy. economy has to be provided with money. in the part of the empirical research, we have analysed selected financial figures. these figures show, that there is a difference between germany and poland, that there is a difference in time and that there is still need for credit for companies. this supply of credit has to be fulfilled by banks in a responsible way, taking the risk positions of the debtors and their business into account. the more risk a bank is willing to accept, the more equity has to be backed. banks have to be careful in giving out loans and they have to obey security measures. in consequence, banks are not willing to give credits to companies with high risk positions. rather they prefer to give credits to companies with a low risk position, even with better conditions for the debtors. to assess and evaluate the risk position, the professionally executed rating procedure and the rating grade will gain more and more importance. particularly in the rating of the creditworthiness according to the new requirements, the assessment beyond the balance sheet will become more and more important. the basis for a good or even excellent rating grade are the potentials arising from excellent managing practices. these are the prerequisites for value creation and subsequently profitable and s o u r c e : own work.  conclusion in this article we have analysed and outlined the basel iii equity regulations and measures. an important indicator is the risk taken by a bank as a creditor. the degree of risk inf luences the amount of equity. the higher the risk, the higher the equity, which has to be backed in a bank in order to protect the single bank as well as the whole banking sector from the next crisis. a well performing banking sector is an important prerequisite for an ongoing economy. economy has to be provided with money. in the part of the empirical research, we have analysed selected financial figures. these figures show, that there is a difference between germany and poland, that there is a difference in time and that there is still need for credit for companies. this supply of credit has to be fulfilled by banks in a responsible way, taking the risk positions of the debtors günter hofbauer, monika klimontowicz, aleksandra nocoń104 and their business into account. the more risk a bank is willing to accept, the more equity has to be backed. banks have to be careful in giving out loans and they have to obey security measures. in consequence, banks are not willing to give credits to companies with high risk positions. rather they prefer to give credits to companies with a low risk position, even with better conditions for the debtors. to assess and evaluate the risk position, the professionally executed rating procedure and the rating grade will gain more and more importance. particularly in the rating of the creditworthiness according to the new requirements, the assessment beyond the balance sheet will become more and more important. the basis for a good or even excellent rating grade are the potentials arising from excellent managing practices. these are the prerequisites for value creation and subsequently profitable and sustainable outcomes. by managing the introduced rating dimensions, these potentials can be identified and deployed. risks and challenges should be evaluated as well. by the use of a professional preparation of the credit rating, companies will be able to: ■ identify levers and measures for a profitable adjustment of the business, ■ communicate a convincing business concept to the bank, ■ reduce the apparent risk and get better credit conditions. the perfect matching and combination of the factors of success leads to a perfect and satisfying result of the credit rating. in the future the presented rating dimensions will be even more important as they are actually considered. well performing companies will get better ratings and as a consequence better credit terms.  references basel committee on banking supervision (1988). international convergence of capital measurement and capital standards. july. basel iii (2010). a global regulatory framework for more resilient banks and banking systems. basel committee on banking supervision. december 2010 (modified version: june 2011). hof bauer, g. (2008). bankenkrise, finanzkrise, unternehmenskrise? durch strukturrating die zukunftsfähigkeit verbessern. in: going public, juni 2008, pp. 68-69. hof bauer, g. (2009). bankenfestes rating durch erfolgreiche kundenund lieferantenbeziehungen. so decken sie risiken auf und steigern den unternehmenswert, in: nwb betriebswirtschaftliche beratung, issn 1868-2979, heft 5, pp. 150-155, bochum. basel iii equity requirements and a contemporary… 105 hof bauer, g., & bergmann, s. (2008). bankenfestes rating im marketing und vertrieb. leitfaden zur systematischen ratingvorbereitung, in: bbb beraterbrief betriebswirtschaft, issn 1861-308x, heft 5, pp. 371-375, bochum. hof bauer, g., & bergmann s. (2008). optimales rating für kmu, so überzeugen sie ihre bank, erlangen 2008. hof bauer, g., & bergmann s. (2013). professionelles controlling in marketing und vertrieb, ein integrierter ansatz, mit kennzahlen und checklisten, erlangen 2013. hof bauer, g., & hellwig c. (2012). professionelles vertriebsmanagement, der prozessorientierte ansatz aus anbieterund beschaffersicht, 3. auf lage, erlangen 2012. hofmann, g. (editor) (2015). basel iii, risikomanagement und neue bankaufsicht. frankfurt school verlag, frankfurt. iwanicz-drozdowska, m. (2012). banking risk management. poltext, warsaw. kopiński, a. (2008). bank’s financial analysis. pwe, warsaw. meissner, g. (2014). correlation risk modelling and management: an applied guide including the basel iii correlation framework. wiley, weinheim. nocoń, a. (2016). the response system of modern central banks on banking system instability. difin, warsaw. sander, c.-d. (2014). mit kreditgebern auf augenhöhe verhandeln. betriebswirtschaftliche beratung kompakt, herne. trueck, s., & rachev, s. (2008). rating based modeling of credit risk: theory and application of migration matrices. academic press advanced finance, amsterdam. introduction at the nicholas copernicus university in toruń an initiative to publish a scientific magazine copernican journal of finance & accounting was taken. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. the journal is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. in this way a passion for scientific work finds new possibilities of cooperation. the members of such defined scientific society will be creators and audience of contents published in the cjf&a. in maintaining high quality of the journal will help us a team of acknowledged scientists joining the programme council and the reviewers team. we are deeply grateful to them for their engagement in such an important initiative. we are convinced that copernican spirit of science will accompany us in the noble work to expand science. we remember that our great patron, nicholas copernicus, not only was an astronomer of worldwide renown, who changed science, but also an economist who formulated a law known as a copernicus-gresham law. this obliges all of us. editor in chief professor leszek dziawgo date of submission: november 27, 2019; date of acceptance: january 10, 2020. * contact information: adetajud@yahoo.com, al-hikmah university, ilorin, kwara state, nigeria, phone: +2348035793148; orcid id: https://orcid.org/0000-0001-74560172. ** contact information: bojuwon2009@gmail.com, fountain university, oke osun, oshogbo, nigeria, +2348142080605; orcid id: https://orcid.org/0000-0002-1149-0207. *** contact information: adeadefollyme@yahoo.com, university of ilorin, ilorin, kwara state, nigeria, +2348062365731; orcid id: https://orcid.org/0000-0001-7168-2692. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 adegbite, t.a., bojuwon, m., & adegbite, a.f. (2019). the impact of ict on taxation: evidence from oyo state. copernican journal of finance & accounting, 8(4), 7–25. http://dx.doi.org/10.12775/ cjfa.2019.015 tajudeen adejare adegbite* al-hikmah university mustapha bojuwon** fountain university adenike foluke adegbite*** university of ilorin the impact of ict on taxation: evidence from oyo state keywords: ict, taxation, chi-square, manova, revenue. j e l classification: o390, h2, c120, c300. abstract: this study investigated the impact of ict on revenue generated from tax in oyo state. primary data were collected through administered questionnaire from staff of oyo state board of internal revenue service and other taxpayers. three hundred and fifty (350) questionnaires were distributed and administered among the staff of state board of internal revenue service and tax payers out of which 300 was returned. data were analyzed using descriptive statistics, chisquare, anova and multivariate analytajudeen adegbite, mustapha bojuwon, adenike adegbite8 sis of variance and covariance (manova) to test the hypothesis formulated. it is concluded that ict has positive significant and statistical impact on tax revenue generation in oyo state. ict is a highly effective tool which enhances taxation cash inf low in the state. it is suggested that government should lay much emphases on digital tax through good governance practices on ict with a comprehensive accounting platform which would improve the productivity of assigned tax authorities in more accurate, effective, and accountable manner.  introduction taxation is well-defined as the obligation forced by government on individuals and private organizations on their income, property, transactions, and commodities for the mindset of raising revenue to implement and actualize government expenditure. government expenditure like employment generation, economic growth, infrastructural facilities, development of neglected area, economic stability and price stability. tax revenue can only be achieved through tax authority, sbir and firs for the state (sg) and federal government (fg) respectively. these tax authorities have the imprimatur of federal government and state government respectively. tax authorities as the representative of government has adopted electronic tax filing (e-tax filing) through information and communication technologies (ict) with dispositions that it increases the absolute delivery of essential and public services, and fiscal profundity without incurring expensive overheads costs. again, governments and organizations worldwide are increasingly identifying the compulsion to facilitate access to community services through information exchange using ict. the role ict has been growing in the social and economic life in the 21st century. it is now a reality as demonstrated by developments from many countries that ict contributes immensely to the gdp of a country and that ict resulted to improvement to market competitiveness of a country’s products, output and services (uvaneswaran & mellese, 2016). ict can inf luence on governance positively and other facets of economy. it can meritoriously increase living standards, assist global economic integration, narrow the digital divide and expand management and biodiversity utilization. according to adamu (2001), ict has displayed important roles to national growth and development. ict effort can be perceived in many ways, including; reduced need for personnel, reduced costs of tax compliance, reduced collection and administrative the impact of ict on taxation: evidence from oyo state 9 costs; saved time for taxpayers because of transparency in assessment, fast processing; collection, and related processes; reduced costs of communication; and prompt contact with information that ultimately leads to improvement in revenue collections and efficiency, including blockage of revenue loss. the recent globalization of ict has prompted companies, individuals, business organizations, and government parastatals to change from the manual method of communication to automated means. tax administrators have taken the opportunities of the inception of ict to enhance tax administration. globally, tax authorities are employing e-tax administration systems to relate with taxpayers in compliance settings, administration, tax collection, with the disposition to enhance efficiency, and effectiveness in administration of tax (dowe, 2008). planning for tax revenue generation can greatly be implemented by a system that jointly attribute data management capabilities and spatial such as geographical information systems which is ict. harrison and nahashon (2015) discovered that level of tax compliance was not affected by online tax system while otieno, oginda, obura, aila, ojera and siringi (2013) stated that ict had strong and positive relationship with revenue collection, and relationship existed among ict, effectiveness and efficiency in revenue collection. for many years, tax administration has been experience failure because of lack of certainty, poor motivation and enthusiasm of tax personnel, equity, convenience in nigeria, and other factors are ineffective monitoring, improper planning, fraudulent practices, weak control, ill equipped and unqualified manpower and public dissuasion due to misappropriation of tax income by government (ogbonna & appah, 2012). recently, to circumvent tax elusion and avoidance, government compelled all the private organization include individual to have their company registered through firs website. emerging worldwide infrastructures such as factual accurate complete timely project (fact), integrated system of tax administration and taxpayer identification number (tin) promptly encourage qualified taxpayers to fulfill tax righteousness online anytime and anywhere. do these have effect on tax income in oyo state? with regards to the above, none of the studies had ever carried out investigation on the effects of ict on tax returns in oyo state. this study surveyed and examined the ict impact on tax returns in oyo state. tajudeen adegbite, mustapha bojuwon, adenike adegbite10 literature review perception and benefits of adopting information technology in tax administration ict is defined as computer based tools adopted to work by people with the communication and information processing requests of an organization. it incorporates the network, computer software and hardware, and numerous other devices (photography, video, camera, audio, etc) that translate information text, sound, images, and motion into digital form. according to mary and cox (2007) electronic and computerized devices associated with human interactive materials permit the user to use them for numerous delivery of service and in addition to private use. ict are devices, tools, and resources adopted to communicate, create, share manage, and circulate information. these include hardware such as modems, cell phones, computers, software like computer programs, applications in mobile phone, and networks such as internet, wireless communications. these are principally concerned with processing, purpose of collecting, storing and relevant information transmitting to aid operations of management in an organizations (adewoye & olaoye, 2014). this clearly suggests that ict encompasses the involvement of electronic tools and devices which need command and input to operate. this also fetches the advantages of delivery information through technological means. collins (2005) defined ict as equally a submission of applied science to commerce, technical method, industry, knowledge and skills. the major motives for nigeria to levy tax are to raise income disposition of financing infrastructure, education, social services such as defense, law and order, health, and second, to rise share of the national cake dispense to the poor; to boost investment; and to defend infant industries on local products via heavy taxes on needless imports. ict enhances performance in revenue generation and administrations by reducing processing times and human error, providing available accessible data for tax personnel, encouraging voluntary compliance which invariably minimizing tax elusion and avoidance, and aiding strong decision making. the nigeria tax administration has been computerized which also encompassed electronic processes and tailored made projects to focus specified areas in tax system like tin project is an automated tax identification to every taxable creature in nigeria. the impact of ict on taxation: evidence from oyo state 11 this project assisted the progress of tax database by connecting major stakeholders and all revenue authorities together in the country. joint tax board overseen the project but financed by the state and federal government of nigeria (fgn). the project –tinis a reliable and technological way that forcing every taxpayers in nigeria into tax net. the registration of tin captures all the assets, properties, biometric, and bio data, fingerprints details of the taxable persons to ensure maximum accuracy of uniqueness. precautionary measures such as contact management and disaster recovery centers are organized and make available to reduce project outright failure and interruption. it is made compulsory for any corporate entity, registered organizations, people and individual that intend to lunch vibrant operations like award of contract opening of bank account through tin which absolutely reduce the occurrence of tax evasion. ■ project fact is a unified electronic method of tax payment, tax registration, and accounting. ■ itas (integrated tax administration system) includes computerized finance and accounts functions with tax clearance, computerized reengineering system, management business process, systems development. dzidonu (2012) enumerated the imperative value of using ict to succeed as include: ■ there is an improvement in collection of tax amount by the authorities. administrative monitoring, effective, productive and efficient tax service delivery, decline cost of administration, transactional costs and operational of public, provision of accessed information are improved at a cheap cost. ■ efficient digital tax system would increase the efficiency of government-to-citizen (g2c) service. when the taxation activities are digitally born, it improves the chances of good governance as all the information regarding the tax compliances are obvious and accessible for the authorities. ■ henceforth the business principled practices on tax payment would proliferate as a result. it is explicated that tax digitalization would upsurge the accountability of both the tax payer and the government to be obliged to both pay the tax and to give an effective service. ■ nevertheless, this practice would pave way to upsurge the worth of the service exhibited by the authorities and likewise possibility of proclatajudeen adegbite, mustapha bojuwon, adenike adegbite12 iming fresh practice would increase (heeks, 2005). e-taxation is considered as the crucial tools in implementing e-government services. ■ importance of the it usage is immeasurable regarding to taxation, some of the imperative benefits are; accelerate a reduction in the managing the overhead expenditure of government parastatals saddle with tax administration, immediate computation and preparation of tax liability with e-tax calculator, abridged cost of registration of taxpayers and prompt generation of tin, reduced staff-taxpayers conspiracy in tax liability, reduced fraudulent activities of tax collectors as regards to non transfer of tax acknowledged from taxpayers and upsurge government revenue because of drastically decrease in corrupt practices and expenses such as overhead, transactional, and administrative. ■ the expected benefits of employing an ict system include enhancements in productivity, enormous accurateness in information and improvement in profit performance, and (adewoye, ademola, afolabi & oyeleye, 2013). productivity normally progressed in the state that espousing information technology (adewoye & olaoye, 2014). by benefit of adopting ict, tax revenue has recorded a stupendous achievements. ict has contributed to the progress in taxation by swifting administrative processes, persistent increase of revenue, taxpayers monitoring including penalties and interests. it also enhanced data security, transparency processes, and efficiency, relief of staff from fruitless work, and possibility of exchange of data and electronic transfer with government and e-government (nongovernmental institutions). ease communication with taxpayers, elevation of equity, preventive inf luence on corruption and bribery, and disablement of tax elusion and tax avoidance are visible and achieved with ict. abdallah (2004) signified that the stupendous amount of information can be stored in computer storage devices or published online and made reachable to anticipated users. ict offers different formats to the hardcopy of printouts of the information which indicates cheaper, faster, and easy information storage. hill (1999) proclaimed that ict increases the extent of information communication including volume of information to be transmitted, the frequency, and distance over which communication transpires. furthermore, ict are extremely beneficial. mugisha (2001) confirmed that, the adoption of ict augments timely entrance to precise and pertinent information, which is a requirement for good programming, planning, implementation including evaluation and monitoring which consolidated to the key factor in tax collection; suluo (2003) showed the impact of ict on taxation: evidence from oyo state 13 that, ict usage has headed to augmented stage of organizational development. crede and mansell (1998) divulged two facts, first; ict has the capability to upsurge productivity and establish additional cost effective output without change in inputs. secondly, according to crede and mansell (1998), development of ict applications usage for business modify the approaches to organizations function which ultimately expand services and products quality. this emphasized that new opportunities for tax revenue was blowout by the ict usage in sbir or firs such as new markets, new organization design, improved services, invented and innovated products are all emanated from ict as innovative sources of revenue. tax jurisdiction and administration in nigeria the important step is to make rule, policies, and regulations with the disposition to achieve desired objectives or goals, and it is imperative thing is to actualize these rules, policies, and regulations. the bodies or agents saddled with implementation of tax policy responsibility in nigeria is administrative organ. effectiveness, efficiency and transparency are the prerequisite in establishing a tax administration structure for desired output. kiabel and nwokah (2009) pined out that in section 100 of the personal income tax (pit) decree, 1993 and amended by decree no 18 provision decree 1998 the recognized tax authority in the country are local government (lg) revenue committee, sbir and firs together with jsrc and jtb with their responsibilities as directed and showed by constitutional provision. the federal constitution offered the firs exclusive authority to collect levies like corporate tax, pit, excise duties, capital gains tax, value added tax, petroleum profit tax, custom duties (export duties and import duties), stamp duties, which are remitted into the federation account (education tax is excepted) for sharing among fg, sg, and lg in agreed ratio as spell out in the constitution. states are endowed with the authority to accumulate wealth through pit (all taxable organization and individuals (individual or personnel in federal capital territory, armed forces personnel and state government lands owned in the urban areas are exempted), market levies and taxes where state finance is involved. others are entertainment tax, naming of street, pools betting, survey fees, and additional betting taxes. the constitution bequeathed the lg the right to collect motor park dues, license (trading) kiosk and shops rate, tenement rates, domestic animal license, property tax, fees on slaughter slab, liquor tajudeen adegbite, mustapha bojuwon, adenike adegbite14 license, motor park levies, market tax, cattle tax, road and merriment closure levy, license fees for television and radio, charges for wrong parking, signboard and establishment permit fees, vehicle, radio license fees, religious places, advertisement authorization fee and, disposal and sewage fees, street naming (state capita is excluded) public convenience (adeleke, 2011). tax administration was established to confirm and verify tax policies and laws compliance. tax administrators has recognized the administrative dimension of taxation for long in underdeveloped and developing countries precisely those engaging on tax policy (alm, 1999). theoretical review unified theory of technology acceptance (utat) is welldefined as technology model articulated by venkatesh which is embedded as user acceptance of information technology. it aimed to elucidate the intents of the user on the usage of a system, consequent usage attitude and revenue collection system. this theory is employed to classicalize acceptance and technology usage for revenue collection system in the county. the theory brought out effort expectancy; performance expectancy; facilitating conditions and social inf luence as the four constructed key. according to the theory, the direct determinants of usage behavior, attitude and intention are the first three while the fourth is the direct determinant of adopted behavior. this theory was postulated and established through a review and alliance of the constructed eight models that previous research had used to elucidate information on usage behavior (reasoned action theory, motivational model, technology acceptance model, planned behavior theory, a theory of combination of technology acceptance model and planned behavior, personal computer usage model, social cognitive and diffusion of innovative theory). considering the theory effectiveness on this research, taxation provides government with the funding compulsory needed to construct the infrastructure on which economic development and growth are depended; creates an enabling environment in which business is profitable and wealth is created; sharpen the procedure in which government activities are conducted, and plays a central and crucial tasks in mobilization of domestic resource as detailed in performance expectancy theory (venkatesh, morris, davis & davis, 2013). agreeing to this theory, taxation shapes the region environment and thus promotes the nation economy, enhance investment and international trade through ict. dou the impact of ict on taxation: evidence from oyo state 15 ble taxation avoidance, efficient tax administration, and consistency and certainty of tax treatment are all important consideration for business which are easily accessed through ict. empirical review olaoye and kehinde (2017) examined the impact of it on tax administration in south west in nigeria. it precisely inspected the effect of it on tax productivity and the relationship between it on tax planning and implementation. descriptive research was employed and questionnaire was used as instrument to generate data. pearson product moment correlation (ppmc) and multiple regression were adopted to analyse generated data through questionnaire. the results divulged that it through online tax registration, online tax remittance and online tax filing has inf luence on tax productivity. this study only examined inf luence of ict on tax administration in south west, the result and outcome in on south west not extended to oyo state. however, the study was piloted in southwest of nigeria and the findings cannot be generalized in wider perspectives. yuda (2013) examined the use of ict’s inf luence on modernized tax administration procedures and revenue collection in taxpayer department of revenue authority in tanzania. the ict was introduced in 2001 in the department for expediting maintenance and well-timed access to records. the study output, after descriptive research was employed, showed that ict had inf luence on modernized tax administration procedures and revenue collection in taxpayer department of revenue authority in tanzania. ict minimized operational costs; removed postal delay, plug loss in revenue and curbed cheating. the effect of ict on tax administration in nigeria was also analyzed by efunboade (2014). the study went into in-depth of the effectiveness of ict on tax administration. questionnaire and personal interview were engaged in the study and analyzed using descriptive analysis. discoveries of the research revealed the degree of utility of ict to a tax administration’s core tasks in nigeria but failed to comment on other key variables such as ict skills and infrastructures. the output showed that ict had encouraging impact on tax administration. but the study was piloted in nigeria without quantitative analysis and the range of the study is limited to 2013. the empirical investigation on ict inf luence on accounting practice (ap) was also discovered by nwanyanwu (2016). data were assembled from public and private sectors accountants through unstructured and structured questajudeen adegbite, mustapha bojuwon, adenike adegbite16 tionnaire. analyses were achieved by pearson’s product moment coefficient, descriptive statistics and multiple regression. verdicts indicated that positive statistical, strong, and significant relationship existed between ap and ict. power investment is a precondition for organizations to exploit value of ict. however, conducted study was on accounting practical but it was not conducted on taxation. from the appraisal and assessment of extant works, the gaps identified are scope, methodology and conceptual gap. the scope of studies reviewed were limited to 2015 not extended to the current year. also, no existing study has captured oyo state in the investigation of the inf luence of ict on tax return. this study is unique because it employed mannova to discover the ict inf luence on tax revenue in oyo state. the research methodology and the course of the research process primary data were collected through homogeneous and structured questionnaire that were administered to staff of oyo state board of internal revenue service (sbir) and other taxpayers through random sampling. three hundred and fifty (350) questionnaires were distributed among the respondents but 300 were returned. ten (10) questionnaires was distributed in each of the fifteen ministries and eighty (80) was distributed in sbir, while the remaining fifty (70) was distributed among taxpayers. the study employed five -point likert scale. 1= strongly disagree (sd), 2= disagree (d), 3= undecided (n), 4=  agree (a), and 5= strongly agree (sa). data collected were scrutinized and analyzed engaging chi-square, descriptive statistics, one way anova and manova to test the hypothesis formulated. chi square is an important non-parametric test and as such no rigid assumptions are necessary in respect of the type of population. it is used as a test of goodness of fit and as a test of independence. whereas anova test for difference among the means of the population by examine the amount of variation within each of the sample, relative to the amount of variation between the samples. manova is an extension of bivariate analysis of variance in which the ratio of among – group variance to within-group variance is calculated on a set of variable instead of single variable. the formulae for chi-square used is respect of the type of population. it is used as a test of goodness of fit and as a test of independence. whereas anova test for difference among the means of the population by examine the amount of variation within each of the sample, relative to the amount of variation between the samples. manova is an extension of bivariate analysis of variance in which the ratio of among – group variance to within-group variance is calculated on a set of variable instead of single variable. the formulae for chi-square used is where: i=1, oij = observed frequency of the cell in ith row and jth column, eij= expected frequency of the cell in ith row and jth column. the degree of freedom = (r-1)(k-1). where: r = no of rows, k =no of columns (oi ei), i = constant value. results and discussion table 1. distribution of responses on the effect of ict on tax returns in oyo state s/n question sa a n d sd total 1 ict usage has minimized errors in return processing and assessment. 71 (23.7%) 179 (59.7%) 09 (3.0%) 28 (9.3%) 13 (4.3%) 300 (100%) 2 taxpayer and tax consultants (firms) prepare tax return employing computer to submit via internet, and prompt computation and preparation of tax liability through etax calculator enhance tax productivity 102 (34.0%) 140 (46.7%) 12 (4.0%) 25 (8.3%) 21 (7.0%) 300 (100%) 3 ict minimize operational costs, tax compliance cost and maximize revenue collection 95 (31.7%) 121 (40.3%) 17 (5.7%) 25 (8.3%) 42 (14.0% ) 300 (100%) 4 ict provides access to similar bodies around the 130 (43.3%) 110 (36.7%) 00 (00%) 45 (15.0% 15 (5.0%) 300 (100%) eij eijoij )( 2 2   the impact of ict on taxation: evidence from oyo state 17 where: i = 1, oij = observed frequency of the cell in ith row and jth column, eij = expected frequency of the cell in ith row and jth column. the degree of freedom = (r-1)(k-1) where: r = number of rows, k = number of columns (oi ei), i = constant value. results and discussion table 1. distribution of responses on the effect of ict on tax returns in oyo state s/n question sa a n d sd total 1 ict usage has minimized errors in return processing and assessment 71 (23.7%) 179 (59.7%) 09 (3.0%) 28 (9.3%) 13 (4.3%) 300 (100%) 2 taxpayer and tax consultants (firms) prepare tax return employing computer to submit via internet, and prompt computation and preparation of tax liability through etax calculator enhance tax productivity 102 (34.0%) 140 (46.7%) 12 (4.0%) 25 (8.3%) 21 (7.0%) 300 (100%) 3 ict minimize operational costs, tax compliance cost and maximize revenue collection 95 (31.7%) 121 (40.3%) 17 (5.7%) 25 (8.3%) 42 (14.0%) 300 (100%) 4 ict provides access to similar bodies around the globe where lessons learned improve the tax establishment and tax administration in the state 130 (43.3%) 110 (36.7%) 00 (00%) 45 (15.0%) 15 (5.0%) 300 (100%) 5 ict maintains consistent record keeping; timely access of such records, fast processing of return which together cut down postal delays and costs; curb cheating including plugging revenue loss 89 (29.7%) 152 (50.7%) 10 (3.3%) 19 (6.3%) 30 (10.0%) 300 (100%) 6 a remarkable increased in taxation revenue could be attributed to increased efficiency and improved performance which was traced to the adoption of ict 121 (40.3%) 101 (33.7%) 09 (3.0%) 15 (5.0%) 54 (18.0%) 300 (100%) tajudeen adegbite, mustapha bojuwon, adenike adegbite18 s/n question sa a n d sd total 7 there is no hidden place for tax evaders with ict since every prospective taxpayers are apprehended by ict 159 (53.0%) 76 (25.3%) 03 (1.0%) 45 (15.0%) 17 (5.7%) 300 (100%) 8 ict accelerates a reduction in the managing the overhead expenditure of government parastatals saddle with tax administration 88 (29.3%) 125 (41.7%) 16 (5.3%) 35 (11.7%) 36 (12.0%) 300 (100%) 9 taxpayers’ responses is impressive because ict encourages tax compliance in the state. it also increases the good governance practices in tax collection 37 (12.3%) 194 (64.7%) 25 (8.3%) 18 (6.0%) 26 (8.7%) 300 (100%) 10 digital taxation is a highly and extremely effective device in implanting the government physical policies and it abridged cost of registering taxpayers with instantaneous generation of tin 49 (16.3%) 159 (53.0%) 23 (7.7%) 27 (9.0%) 42 (14.0%) 300 (100%) 11 ict contributes to fair, effective and efficient taxation and increase on revenue 140 (46.7%) 89 (29.7%) 10 (3.3%) 36 (12.0%) 25 (8.3%) 300 (100%) 12 it reduces staff-taxpayers collusion as regards tax liability, reduction in fraudulent activities of tax collectors in the aspect of non-remittance of tax received from tax payers and boost the revenue of government including reduction in expenses (administrative, overhead and transactional) and corrupt practices 121 (40.3%) 110 (36.7%) 09 (3.0%) 45 (15.0%) 15 (5.0%) 300 (100%) n o t e : the bracket figures indicate the percentage and figures not bracket indicate frequency. s o u r c e : authors’ field survey (2019). from table 1, 23.7% of the respondents agreed strongly that ict usage has minimized errors in return processing and in assessment of taxation in oyo state, 59.7% agree, 3.0% were not sure, 9.3% disagree, and 4.3% strongly disagree. this indicates that adoption of ict usage in tax collection has minimized errors in return processing and in assessment of taxation in oyo state. table 1. distribution… the impact of ict on taxation: evidence from oyo state 19 also, 34.0% of the respondents agreed strongly that taxpayer and tax consultants (firms) prepare tax return using computer to submit via internet, and instant computation of tax liability from online tax calculator enhance tax productivity, 46.7% agree, 4.0% were not sure, 8.3% disagree and 7.0% strongly disagree. this indicates that taxpayer and tax consultants (firms) prepare tax return using computer to submit via internet, and instant computation of tax liability from online tax calculator enhance tax productivity. however, 31.7% of the respondents agreed strongly that ict minimize operational costs, tax compliance cost and maximize revenue collection, 40.3% agree, 5.7% were not sure, 8.3% disagree and 14.1% strongly disagreed. this implies that ict minimize operational costs, tax compliance cost and maximize revenue collection. furthermore, 43.3% of the respondents agreed strongly that ict provides access to similar bodies around the globe where lessons learned improve the tax establishment and tax administration in the state, 36.7% agree, 0.0% not sure, 15.0% disagree and 5.0% strongly disagreed. this indicates that ict provides access to similar bodies around the globe where lessons learned improve the tax establishment and tax administration in the state. more so, 29.7% of the respondents agreed strongly that ict maintains consistent record keeping; timely access of such records, fast processing of return which together cut down postal delays and costs; curb cheating including plugging revenue loss, 50.7% agree, 3.3% were not sure, 6.3% disagreed and 10.0% strongly disagreed. this implies that ict maintains consistent record keeping; timely access of such records, fast processing of return which together cut down postal delays and costs; curb cheating including plugging revenue loss. moreover, 40.3% of the respondents agreed strongly that a remarkable increased in taxation revenue in the state could be attributed to increased efficiency and improved performance which was traced to the adoption of ict, 33.7% agree, 3.0% were not sure, 5.0% disagree, and 18.0% strongly disagree. this indicates that a remarkable increased in taxation revenue could be attributed to increased efficiency and improved performance which was traced to the adoption of ict. in addition, 53.0% of the respondents agreed strongly that there is no hidden place for tax evaders with ict since every prospective taxpayers are apprehended by ict, 25.3% agree, 1.0% were not sure, 15.0% disagree, and 5.7% strongly disagree. this signposted that there is no hidden place for tax evaders with ict since every prospective taxpayers are apprehended by ict. tajudeen adegbite, mustapha bojuwon, adenike adegbite20 results showed that 29.3% of the respondents agreed strongly that ict accelerates a reduction in the managing the overhead expenditure of government parastatals saddle with tax administration, 41.7% agree, 5.3% were not sure, 11.7% disagree, and 12.0% disagreed strongly. this indicates that ict accelerates a reduction in the managing the overhead expenditure of government parastatals saddle with tax administration. it is also deduced that 12.3% of the respondents agreed strongly that taxpayers’ responses is impressive because ict encourages tax compliance in the state and increases the good governance practices in tax collection, 64.7% agree, 8.3% were not sure, 6.0% disagree, and 8.7% strongly disagree. this indicates that taxpayers’ responses is impressive because ict encourages tax compliance in the state and increases the good governance practices in tax collection. in addition, 16.3% of the respondents agreed strongly that ict is a highly effective tool in tax collection which ultimately reduces cost of registering taxpayers and instantly generate tax identification number for easily monitoring, 53.0% agree, 7.7% were not sure, 9.0% disagree, and 14.0% strongly disagree. this indicates that ict is a highly effective tool in tax collection which ultimately reduces cost of registering taxpayers and instantly generate tax identification number for easily monitoring. outcome of the analysis reported that 46.7% of the respondents strongly agree that ict contributes to fair, effective and efficient taxation and increase on revenue, 29.7% agree, 3.3% were not sure, 12.0% disagree, and 8.3% strongly disagree. this indicates that ict contributes to fair, effective and efficient taxation and increase on revenue. lastly, 31.6% of the respondents agreed strongly that ict reduces staff-taxpayers collusion as regards tax liability, fraudulent activities of tax collectors in the aspect of non-remittance of tax received from taxpayers and boosts the revenue of government including reduction in expenses (administrative, overhead and transactional) and corrupt practices, 50.8% agree, 1.2% were not sure, 12.4% disagree, and 6.4% strongly disagree. this indicates that ict reduces staff-taxpayers collusion as regards tax liability, fraudulent activities of tax collectors in the aspect of non-remittance of tax received from taxpayers and boosts the revenue of government including reduction in expenses (administrative, overhead and transactional) and corrupt practices. the impact of ict on taxation: evidence from oyo state 21 table 2. analysis of the effect of ict on tax returns in oyo state s/n relationship pearson chi-square pr(value) remark 1 minimized errors 87.6278 0.000 significant 2 taxpayer and tax consultants 50.0702 0.000 significant 3 minimize operational costs, tax compliance cost and maximize revenue collection 44.8689 0.000 significant 4 tax regime and tax administration 48.4426 0.000 significant 5 consistent record keeping 67.8751 0.000 significant 6 increased efficiency and performance 185.7998 0.000 significant 7 tax evasion and avoidance 255.4883 0.000 significant 8 overhead cost 169.6422 0.000 significant 9 good governance practices 132.5268 0.000 significant 10 effective and efficient taxation 141.265 0.000 significant 11 instant generation of tax identification number 227.9942 0.000 significant 12 fraudulent activities 270.1246 0.000 significant mean 4.328125 4.234375 4.28125 4 4.203125 4.21875 4.09375 4.140625 standard deviation .4732424 .4269563 .8631568 .2519763 .4055053 .5764905 .2937848 .3503824 s o u r c e : authors’ computations (2019) and output of stata 12 based on questionnaire. from table 2, in testing hypothesis, the minimum chi – square calculated is 44.8689 (x2 – cal) is greater than chi – square tabulated 3.74 (x2 – tab) which make outcomes to be extremely significant with pr (value) equal to 0.000. collectively, the null hypothesis is rejected. therefore, ict has significant impact on tax returns in oyo state. tajudeen adegbite, mustapha bojuwon, adenike adegbite22 table 3. one-way anova on significant impact of ict on tax revenue in oyo state source sum of square df mean square f sig remarks between groups 63.6122879 4 15.903072 20.13 .0000 rejected within groups 233.054379 295 .99219621 total 296.666667 299 s o u r c e: authors’ computations (2019). from table 3, it can be deduced that ict has significant impact on tax revenue in oyo state. this ref lected in the results: f (299) = 28.05, p =.0000. that is, significance value (.0000) was found to be less that the alpha value (0.05). therefore, the hypothesis which stated that ict has no significant impact on tax revenue in oyo state was rejected. table 4. the effect of ict on tax returns in oyo state by manova source statistic df f(df1, df2) f prob>f ict w 0.1187 5 55.0 1318.2 14.01 0.0000 a p 1.3914 55.0 1440.0 10.10 0.0000 a r 3.8661 55.0 1412.0 19.85 0.0000 a l 2.9706 11.0 288.0 77.77 0.0000 u residual 294 number of obs = 300 total 299 dependent variable = tax returns. w = wilks’ lambda, p = pillai’s trace, r = roy’s largest root, l = lawleyhotelling trace, a = approximate, e = exact, u = upper bound on f. s o u r c e: authors’ computations (2019). to confirm the significant effect of ict on tax returns in oyo state by the outcome of chi-square and anova stated above, the multivariate analysis of variance and covariance (manova) was also employed. from table 4 above, according to wilks’ lambda (w) statistic, 1% increases in ict increases income tax by 0.11%. also, with reference to pillai’s trace statistic, 1% increase in ict increases income tax by 1.3%. more so, with the outcome of lawley-hotelling the impact of ict on taxation: evidence from oyo state 23 trace (l) and roy’s largest root (r) statistic, 1% increases in ict increases income tax by 3.8% and 2.9% respectively. the entire statistic outcomes suggest there is positive significant effect of ict on income tax. this also supported by f statistic and probability of f (prob>f) equal to 0.0000a. an increase in ict brings positive change to income tax in oyo state.  conclusion and recommendation this study investigated the impact of ict on revenue generated from tax in oyo state. primary data were collected through administered questionnaire from staff of oyo state board of internal revenue service and other taxpayers. three hundred and fifty (350) questionnaires were distributed and administered among the staff of state board of internal revenue service and tax payers out of which 300 was returned. data were analyzed using descriptive statistics, chisquare, anova and multivariate analysis of variance and covariance (manova) to test the hypothesis formulated. it is concluded that ict has positive significant and statistical impact on tax revenue generation in oyo state. involvement of ict in tax collection has improved the tax revenue generated in oyo state. increased revenue has proved that better administration was in place and this is only possible with the adoption of ict. according to this study, ict is a highly effective tool which enhances taxation cash inf low in the state. also, plugging of all revenue loss, and expansion in efficiency and performance of tax revenue collections are achieved. furthermore, the economic impact of implementing digital tax system is also considered favorable. it is worth to remember that, no matter the level of prosper the country is, if there is absence of good effective ict in country, the revenue realized from taxation will only disappear in greedy stomachs and will not ref lect in collections. it is suggested that government should lay much emphases on digital tax through good governance practices on ict with a comprehensive accounting platform which would improve the productivity of assigned tax authorities in more accurate, effective, and accountable manner. tajudeen adegbite, mustapha bojuwon, adenike adegbite24  references abdallah, o.i. 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(2008). technology acceptance model 3 and a research agenda on interventions. decision sciences, 39(2), 273-315. http://dx.doi.org/10.1111/ j.1540-5915.2008.00192.x. venkatesh, v., morris, m.g., davis, g.b., & davis, f.d. (2003). user acceptance of information technology: toward a unified view. mis quarterly, 27(3), 425-478. http:// dx.doi.org/10.2307/30036540. yuda, j.c. (2013). the impact of ict on taxation: the case of large taxpayer department of tanzania revenue authority. developing country studies, 3(2), 91-100. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 1 date of submission: april 12, 2020; date of acceptance: june 15, 2020. * contact information: eleyeledgovernor@gmail.com, department of accountancy, kwara state polytechnic, ilorin, kwara state, phone: +2348064181712; orcid id: https://orcid.org/0000-0002-3158-696x. ** contact information: titisalman4@gmail.com, accounting department, university of ilorin, ilorin, kwara state, phone: +2348102017220; orcid id: https://orcid. org/0000-0001-7786-4577. *** contact information: dejibolarin@gmail.com, department of accountancy, kwara state polytechnic, ilorin, kwara state, phone: +2348033786410; orcid id: https://orcid.org/0000-0003-1433-774x. **** contact information: abdulrasheed_t2000.com, department of accountancy, kwara state polytechnic, ilorin, kwara state, phone: +2348023949506; orcid id: https://orcid.org/0000-0002-6675-4425. ***** contact information: sholarakeem@gmail.com, department of accountancy, kwara state polytechnic, ilorin, kwara state, phone: +2348066812341; orcid id: https://orcid.org/0000-0001-7801-5163. subair, m.l., salman, r.t., abolarin, a.f., abdullahi, a.t., & othman, a.s. (2020). board characteristics and the likelihood of financial statement fraud. copernican journal of finance & accounting, 9(1), 57–76. http://dx.doi.org/10.12775/cjfa.2020.003 muhammed lawal subair* ramat titilayo salman** kwara state polytechnic university of ilorin ayodeji fatai abolarin*** abdulrasheed taiwo abdullahi**** kwara state polytechnic kwara state polytechnic akeem sisofa othman***** kwara state polytechnic board characteristics and the likelihood of financial statement fraud keywords: board independence, expertise, diligence, financial fraud, likelihood. j e l classification: g32, m12. m. subair, r. salman, a. abolarin, a. abdullahi, a. othman58 abstract: the study examines the effect of board characteristics on financial statement fraud likelihood of quoted manufacturing firms in nigeria. the scope of the study covers board attributes such as board independence, board expertise and board diligence; and the beneish m-score was used as the measure of fraud likelihood. this study utilized a quantitative research design. the sample covered 39 manufacturing companies in the nigerian stock exchange (nse) as at 2019. secondary data was utilized for this study and the data were extracted from the annual reports of corporate organizations for the period 2013-2019 financial years. the binary logit regression was employed as the method of data analysis in the study. the findings reveal that the odd ratio of board independence, board expertise and board diligence negatively and significantly reduce the log odds of financial statement fraud in manufacturing firms in nigeria. the study concludes that there is a need for boards to be more effective in their monitoring roles to reduce the occurrence of fraud.  introduction the complexity of financial statement fraud has gained prominence in recent times. most firm managers have found financial statement fraud as an enticing strategy to ensure the continued existence of their firms as well as their positions in management. managers deliberately misstate and misrepresent elements in the financial statement to give a misleading picture of the financial health of their firms. the aftermath of this practice has not only led to the collapse of major firms around the world but also a loss of investors’ wealth (bhavani & amponsah, 2017; tangod & kulkarni, 2015). hence, the need for detecting financial statement fraud has been rigorously exclaimed by stakeholders including professional and regulatory bodies. several authors (kozlov, hurtalo-guain & trakulhon, 2018; popoola, cheahmad & samsudin, 2014) acknowledged the quest for the detection of financial statement fraud following the release of the statement on auditing standard (sas) no. 99 “consideration of fraud in financial statement audit” by the american institute of certified public accountants (acipa, 2002) requiring auditors to obtain reasonable assurance that financial statements are free from material misstatement whether due to fraud or error. the institute of chartered accountant of nigeria followed suit by publishing the nigeria standards on auditing no. 5 to cater for the auditor’s responsibility to fraud (popoola et al., 2014). although these standards have placed the responsibility of fraud prevention and detection on management and those in charge of governance, auditors have been required to increase their detection rate by probing further into any irregularities or material misstatement that may signify fraud. board characteristics and the likelihood… 59 the board of an-organizations as the highest governing body is saddled with the responsibilities of exercising leadership, enterprise, integrity and judgments of its oversight and control so as achieve the company’s continued survival and prosperity. however, from the recent happenings in the corporate world this responsibilities is far from being achieved, as a result of the boards lack of independence, financial experts and also not being diligent in their day to monitoring and control function. these deficiencies pose a great threat on the survival of an organization, and thus leading to corporate fraud. corporate fraud has significant financial and non-financial impacts on businesses. the aftermaths of corporate fraud affect not only affect the companies and their shareholders, but also employment, social stability and the public at large. among those that suffer from corporate fraud are those that rely on published information to assess company performance and make investment decisions, such as stockholders and the general public. the serious consequences of corporate fraud have prompted strong control and monitoring mechanisms to be enacted, with the goal of overseeing corporate and management activities. this current study was motivated by a couple of gap found in literature. first, there exist inconsistent findings on the nexus between, board independence and the likelihood of financial statement fraud; board expertise and the likelihood of financial statement frauds. secondly, there is paucity in empirical literature on the nexus between board diligence and the likelihood of financial statement fraud in nigeria listed firm. this thus throws up a vista of opportunity for further research. against the above backdrops, the following research questions were raised. ■ what is the impact of board independence on the likelihood of financial statement fraud? ■ what is the inf luence of board expertise on the likelihood of financial statement fraud? ■ what is the effect of board diligence on the likelihood of financial statement fraud? the remainder of the paper is organised as follows: section two focuses on the literature review and hypotheses development. section three addresses the methodology with emphasis on theoretical framework and model specification. section four presents data analysis, interpretation and discussion of findings. section five concludes. m. subair, r. salman, a. abolarin, a. abdullahi, a. othman60 literature review financial statement fraud fraud is generally any act that applies deception as its principal technique. it manifests in different forms and magnitudes. albrecht, albrecht, albrecht and zimbelman (2012) identified fraud in three broad categories: asset misappropriation; corruption; and fraudulent statement. whereas asset misappropriation and corruption occur in greater frequency, fraudulent statement seldom occurs. according to gupta and gill (2012) and omoye and eragbhe (2014), financial statement fraud is an intentional misstatement of material facts in books of accounts by management with the aim of deceiving investors and creditors. this misstatement can occur through deliberate manipulation of any of the elements in a financial statement including income, expenses, assets, and liabilities. acfe (2011) defined financial statement fraud as a deliberate misrepresentation of the financial condition of an enterprise through intentional misstatement or omission of amounts or disclosures. albretch et al. (2012) sees financial statement fraud as a fraud committed by executives on behalf of an organization usually to make a reported financial statement look better than they actually are. from the above definitions, it can be deduced that financial statement fraud involves an intentional misstatement or misclassification of items in the financial statement in order to inf luence decision making of users. it is perpetrated by those in top management positions such as the chief executive officers (ceos) and chief financial officers (cfos) who have access and control over financial records of a firm (bishop, dezoort & hermanson, 2017). financial statement fraud usually starts with little adjustments to accounts but the need to maintain the deception often lead to escalated fraudulent practices. brennan and mcgrath (2007) and omoye and eragbhe (2014) submitted that financial statement fraud generally begins with violation of generally accepted accounting principles, especially in jurisdictions with lack of prescriptive accounting standards, and ambiguities which allow accountants to choose between accounting policies. the acfe (2011) identified five ways in which financial statement fraud is commonly perpetrated as improper recognition of revenue; improper treatment of expenses and cost; improper valuation of assets; improper recording of liabilities; and inadequate disclosures. practically, financial statement fraud is achieved by falsifying or overstating assets, sales board characteristics and the likelihood… 61 and profit, or understating liabilities, expenses or losses (dalnial, kamaluddin, sanusi & khairuddin, 2014) in order to show a favourable picture of the firm’s health. items such as sales, account receivables, inventories have been observed to be more susceptible to fraud (albretch et al., 2012; kozlov et al., 2018; tangod & kulkarni, 2015). the classification of a financial statement as being fraudulent depends on the motive behind the act (brennan & mcgrath, 2007). whereas most misstatement may occur as a result of an error lack of expertise and negligence (albrecht & hoopes, 2014), several other factors have been attributed to the motive behind financial statement fraud. hogan, rezaee, riley and velury (2008) noted that the pressure to meet analyst forecast, incentive structure, the need for external financing, and poor performance are motivating factors for financial statement fraud. the opportunity to engage in fraud also increases as firm control structure becomes weak coupled with an ineffective corporate governance system and a deteriorated audit function (aris, othman, arif, malek & omar, 2013; gupta & gill, 2012). omoye and eragbhe (2014) attributed financial statement fraud to the need to secure investor’s interest, financing needs, bonus salaries, and shareholders expectations. a firm’s manager who is unable to achieve a similar growth as recorded in the past or the desire to grow may be prone to financial statement fraud (tangod & kulkarni, 2015). these motives are surmised in the fraud triangle and fraud diamond theory where several authors have empirically tested their effect on financial statement fraud (see mahdi, qingfei, vahab & muhammad, 2019; supri, rura & pontoh, 2018). notwithstanding, lotfi and chadegani (2017) opined that the presence of these factors may not necessarily mean fraud exists but a drive to incite auditor’s sensitivity towards the possibility of fraud. the effect of manipulating financial statements is not borne by firms alone. it has a telling effect on stakeholders and the capital market of a given country. west and bhattacharya (2015) noted that when financial statements are manipulated, managers unjustifiably improve the public appearance of their firms, thus, creating an unrealistic picture of the firms status. this, in turn, hinders the effective assessment of the future value of the firm (bhavani & amponsah, 2017) and significantly affects investor's confidence (tangod & kulkarni, 2015). in the end, firms either end up bankrupt, insolvent or liquidated (unegbu & tasie, 2017). hence, it is pertinent that manipulations are identified early and further investigation should be carried out to detect the presence of fraud. m. subair, r. salman, a. abolarin, a. abdullahi, a. othman62 board characteristics board independence and the likelihood of financial statement fraud ilaboya and lodikero (2017) described independence as an abstract state of the human mind which lacks a precise definition and too complex to be reduced to a legal code. it is simply the ability of an individual to live his/her live without being inf luenced by other people in an action. board independence or independent directors are internal governance mechanism premeditated to reduce the agency cost arising from the conf lict of interest between the principal and the agent. in support of the above suggestion, scholars have submitted that there exist a significant and negative nexus between board independence and the likelihood of financial statement fraud. that is, as the proportion of nonexecutive directors increases, the likelihood of financial statement fraud decreases (ilaboya & lodikero, 2017; rezaee, crumbley & elmore, 2010; peasnell, pope & young, 2005; wang, 2006). this empirical evidence supports the assertion of (fama & jensen, 1983) that independent directors in the board help to strengthen the internal control mechanism of the board. in partial support of the above empirical findings, mahama (2015), eneh (2018), anichebe, agbomah and agbagbara (2019), and park and shin (2004) reported a positive relationship between board independence and the likelihood of financial statement fraud, that is, as the proportion of non-executive directors increases, so also the likelihood of financial statement fraud. this position however negates the assertion of (fama & jensen, 1983). while yang and buckland (2010) and agrawal and chadha (2015) found no evidence on the nexus between board independence and the likelihood of financial statement fraud. thus, as a result of this mixed findings we hypothesize that: ho1: board independence has no significant impact on the likelihood of financial statement fraud. board expertise and the likelihood of financial statement fraud onourah and imene (2016) asserted that when a board is comprised of experts, there is a high level of confidence in the financial statement, thus they have the likelihood of significantly reducing the likelihood of financial statement fraud board characteristics and the likelihood… 63 in an organization. hence, the expertise of the board members (educational and professional experience in area of finance, accounting and auditing) will positively affects the quality of financial reports (aifuwa & embele, 2019). empirical studies have substantiated this fact. klein (2002), carcello, hollingsworth, klein and neal (2006), abbott, parker and peters (2004) find a significant negative relationship between the presence of a member of board with financial expertise and the incidence of financial statement fraud. that is, the inclusion of a financial expert in the board reduces the likelihood of financial statement fraud in an organization. however, a recent empirical work by anichebe et al. (2019) submitted that the inclusions of a financial expert in the board will increase the likelihood of financial statement fraud in an organization. this finding follows the trivial strand in literature as envisaged by (aifuwa & embele, 2019), that directors who are expert experts may be inf luenced to carry out various forms of creative accounting intended to mislead users of financial reports. hence we hypothesizes that: ho2: board expertise has no significant impact on the likelihood of financial statement fraud. board diligence and financial statement fraud board diligence is a ref lection of the frequency of board meeting in carrying out their monitoring roles (baba & abdul-manaf, 2017). vafeas (1999) asserted that the frequency of board meeting is a significant proxy for measuring the effectiveness and intensity of board monitoring and discipline. the nigeria corporate governance code of 2018 sounded that board meetings is the principal vehicle for conducting the business of the board and successfully fulfilling the strategic objectives of the company. rodríguez-ariza, garcía-sánchez and frías-aceituno (2012) noted that regardless of the frequency of board meetings on corporate transparency, two opposing positions exist. the first argument advanced by scholars was that frequent board meeting may be a sign of weakness on the board, as it limits their performance (vafeas, 1999). the second argument was in support of frequent board meetings, they were of the view that it enables board members to carry out their board functions effectively and efficiently leading to disclosing more information to the stakeholders (lipton & lorsch, 1992). m. subair, r. salman, a. abolarin, a. abdullahi, a. othman64 leaning on the second argument, it is right to say that frequent board meetings will lead to improved financial reporting and also reduce the likelihood of financial statement fraud as board members will have the opportunity to discuss and resolve any financial reporting issue that may arise. thus, making the board more diligent to reducing the likelihood of financial statement fraud. however, empirical findings on the nexus between frequency of meeting in the board and the likelihood of financial statement fraud seem to be few. zainal, rahmadana and zain (2013) investigated the impact of internal mechanisms of corporate governance and the likelihood of financial statement fraud in indonesia public listed companies. they employed a sample forty-seven fraud firm and forty-seven non-fraud firm form 2007-2012. the result of the logit regression revealed that there is no significant impact of board diligence (meeting) on the likelihood of financial statement fraud, hence no relationship exists. therefore we hypothesize that: ho3: board diligence (meetings) has no significant impact on the likelihood of financial statement fraud. theoretical framework studies on the nexus between hoard characteristics and the likelihood of financial statement fraud have subjected to different theoretic ranging from the agency theory by jensen and meckling (1976), stakeholder’s theory by freeman (1984), new institutional theory and resource dependency theory by pfeffer and salancik (1978), fraud diamond theory, fraud triangle theory and managerial hegemony theory. this current study was hinged on the agency theory to explain the inf luence of board characteristics on the likelihood of financial statement fraud in listed firms in nigeria stock exchange. the agency theory explains the relationship between the principal (owners of the firm) and the agent (board of directors) (aifuwa, embele & saidu, 2018), in which the principal delegates work to the agent but not able to monitor the behaviour of the agent (hesselink, 2017). the theory is centred on the separation of ownership and control in the relationship between the principal and the agent. based on the fact that the principal cannot continually oversea the behaviour of agents as regards of information disclosure, there could exist an agency problem which could lead to information asymmetry and opportunistic board characteristics and the likelihood… 65 behaviour. in financial reporting issue, the principal provide decision making authority to the agents, this decision might negate the board’s stance on the report (hesselink, 2017). this clearly show that board will not be working in the interest of the principal, hence to remedy this situation, the principal will incur monitoring cost or bonding cost to establish incentives for agents in order to work in their best interest. therefore, a diverse board is needed. the research methodology and the course of the research process model specification our study adapted the model of anichebe et al. (2019) in explaining the determinants of financial statement fraud likelihood in listed firms in nigeria. their model was stated as: in functional form: fraud=f(boards,audcom,bodind, bodfe) (1) in econometric form: fraud= b0+b1boards+b2audcom+b3bodind+b4bodfe+b5fsize+b6roa+µ where: fraud = fraud likelihood; boards = board size; audcom = audit committee effectiveness; bodind = board independence; bodfe = board members financial expertise, fsize = firm size and roa= firm performance. β0is the constant, β1, β2, β3, β4, are the coefficient of the explanatory variables for the model. e is the error term that captures the stochastic variables in the model. i = is the collection of the firms. t is the time factor. two variables (board size, audit committee effectiveness) was removed and replaced with board diligence (boddg) from their model to suit our study. also, the relationship between the dependent and explanatory variables was controlled with auditor’s independence (aind) and firm size. therefore, our model is specified as: in functional form: fraud= f(bodind, bodfe, boddg) (2) m. subair, r. salman, a. abolarin, a. abdullahi, a. othman66 in econometric form: fraudit = β0 + β1bodindit + β2bodfeit + β3boddgit + β4audindit + β5fsizeit + eit. .(3) a priori expectations in line with extant literature to be β1,β2,β3,< 0 variable measurement table 1. measures of variables s/n variable type measurement supporting scholars 1. likelihood of financial statement fraud dependent using beneish m-score model. beneish m-score model that was developed by beneish (1999) to estimate the probability of financial statement manipulation. if the predictive m-score is greater than -2.22, the score of “1” was given if the companies had red flags indicating that there was a possibility of financial statement fraud and “0” if otherwise. anichebe et al. (2019), ilaboya & lodikero (2017) 2. board independence explanatory percentage of independent and non-executive directors divided by the actual executives on the board yearly aifuwa & embele (2019), saidu & aifuwa (2020) 3. board expertise explanatory use of dummy variable 1 for expert, otherwise 0 an expert in the board must have both educational and professional qualifications with 5 years’ experience in financial matters aifuwa & embele (2019), kankanamage (2015) 4. board diligence explanatory the total number of meeting held by the board of a company ofoegbu, odoemelam & okafor (2018) 5. auditors independence control the ratio of audit fee to the company’s revenue aifuwa & embele (2019) 6. firm size control the natural logarithm of the total assets of the selected companies saidu & aifuwa (2020) s o u r c e : authors’ compilation, 2019. board characteristics and the likelihood… 67 research methods the multi-method quantitative research design was adopted in the study. the design examines nexus between variables, which are measured numerically and analysed using a range of statistical and graphical techniques (saunders, lewis & thornhill, 2016). the population consisted of all listed firms in nigeria stock exchange (169 listed companies as at 31st may, 2018) while the target population was forty-three (43) manufacturing firms listed on the nigerian stock exchange. the manufacturing sector was studied due to emerging positive impact on the economy. the sample size was scientifically derived using the yamane’s (1967) sample size formula, which yielded thirty-nine (39) from the target populations. the stratified random sampling technique was employed in selecting companies under each sectors of the manufacturing industry (consumer goods, industrial goods and conglomerates sector) via lottery system, so as to ensure that all sampled listed manufacturing firms have equal chances of being selected (aifuwa, saidu, enehizena & osazevbaru, 2019). secondary data was hand-picked from the annual reports (2013-2019) of the sampled listed manufacturing firms so as to have enough periods to validate our generalization. the choice of the period i.e 2013-2019 is due to the availability of data in the data pool whereas as at the time of the studies, the data for the year 2020 is not yet published since it is practically by law that result of activities of the companies is submitted to the authority after the declaration of profit on preceding year basis. method of data analysis the study employed both descriptive and inferential statistics. the binary logistic regression was selected to test our hypotheses because our dependent variable was measured indichotomous scale (ilaboya & lodikero, 2017; wooldridge, 2013). the analysis was done using e-views 8. m. subair, r. salman, a. abolarin, a. abdullahi, a. othman68 data analysis, interpretation and discussion of findings our data was summarized using descriptive statistics and inference which was drawn from them using inferential statistic. univariate analysis table 2. descriptive statistics fraud bodind bodfe boddg audind fsze mean 0.785983 0.633897 0.670085 3.491453 0.007323 6.949884 maximum 1.000000 0.888900 1.000000 6.000000 0.164200 10.00530 minimum 0.000000 0.272700 0.000000 1.000000 0.000000 5.171500 std. dev. 0.492134 0.160355 0.170717 0.663205 0.019715 1.014100 obs 234 234 234 234 234 234 s o u r c e : authors’ computation, 2020. multivariate analyses this section presents the result of the of the hosmer-lemeshow test of goodness fit and binary logistic regression. our hypotheses were tested at 5% level of significance (that is, if p-value < 0.05 reject ho, else do otherwise) (aifuwa & okojie, 2015). board characteristics and the likelihood… 69 table 3. hosmer-lemeshow test of goodness of fit goodness-of-fit evaluation for binary specification andrews and hosmer-lemeshow tests equation: untitled date: 03/01/20 time: 14:48 grouping based upon predicted risk (randomize ties) quantile of risk dep=0 dep=1 total low high actual expect actual expect obs 1 0.1312 0.3691 17 16.3438 6 6.65621 23 2 0.3693 0.3868 12 14.2381 11 8.76192 23 3 0.3868 0.3965 18 14.5916 6 9.40840 24 4 0.3965 0.4035 12 13.7936 11 9.20643 23 5 0.4035 0.4108 14 14.2207 10 9.77929 24 6 0.4112 0.4191 16 13.4677 7 9.53227 23 7 0.4193 0.4281 14 13.2493 9 9.75072 23 8 0.4282 0.4365 14 13.6205 10 10.3795 24 9 0.4367 0.4493 10 12.8435 13 10.1565 23 10 0.4495 0.5654 12 12.6313 12 11.3687 24 total 139 139.000 95 95.0000 234 h-l statistic 6.4023 prob. chi-sq(8) 0.6023 andrews statistic 9.6757 prob. chi-sq(10) 0.4694 s o u r c e : authors’ computation, 2020. table 4 presents the result of the hosmer-lemeshow test and andrews statistics of goodness of fit. the difference between both statistics are not large, which means that our model is sufficiently fitted (hosmer & lemeshow, 1989; andrews, 1988a; 1988b). buttressing this fact, the chi-square estimation of the goodness of fit for both test reported, h-l(8) = 6.4023, p = 0.6023 & a(10) = 19.6757, p = 0.4694 show that there is no evidence of poor fit which means the regression model is correctly specified (saidu & aifuwa, 2020; greene, 2008). m. subair, r. salman, a. abolarin, a. abdullahi, a. othman70 table 4. results of the binary probit least square dependent variable: fraud method: ml binary logit (quadratic hill climbing) date: 03/01/20 time: 14:42 sample: 2014 2019 included observations: 234 convergence achieved after 5 iterations covariance matrix computed using second derivatives variable coefficient std. error z-statistic prob. c 2.962174 1.806257 1.639952 0.1010 bodind -4.416061 1.860170 -2.374009 0.0286 bodfe -8.490876 1.101560 -7.708046 0.0059 boddg -3.138242 1.203728 -2.607102 0.0174 audind 3.113012 6.693604 0.465073 0.6419 fsze 0.051082 0.133989 0.381242 0.7030 mcfadden r-squared 0.050655 mean dependent var 0.405983 s.d. dependent var 0.492134 s.e. of regression 0.494144 akaike info criterion 1.387616 sum squared resid 55.67255 schwarz criterion 1.476214 log likelihood -156.3510 hannan-quinn criter. 1.423338 deviance 312.7021 restr. deviance 316.0699 restr. log likelihood -158.0350 lr statistic 9.367850 avg. log likelihood -0.668167 prob(lr statistic) 0.021281 obs with dep=0 139 total obs 234 obs with dep=1 95 s o u r c e : authors’ computation, 2020. the result of binary logit least squares as presented in table 4 shows that there exist a significant and negative relationship between board independence and the likelihood of financial statements fraud, z(1, 233) = -2.37, β1 = -4.42, p = 0.028. this implies that a unit increase in the percentage of independent and non-executive directors in the board will reduce the likelihood of financial statement fraud by -4.42. the result failed to reject the null hypoth board characteristics and the likelihood… 71 esis that board independence has no significant impact on the likelihood financial statement fraud. this findings is in tandem with works of ilaboya and lodikero (2017), rezaee et al. (2010), peasnell et al. (2005), and wang (2006), that as the number of non-executive directors or independent directors increases so the likelihood of financial statement fraud decreases. this study is also in line with the agency theory, which emphasises the monitoring role of the board. however, our finding is in dissonance with work of mahama (2015), eneh (2018), anichebe et al. (2019), and park and shin (2004), that reported a positive relationship between board independence and the likelihood of financial statement fraud, that is, as the proportion of non-executive directors increases, so also the likelihood of financial statement fraud. likewise, submission of yang and buckland (2010) and agrawal and chadha (2015) found no evidence on the nexus between board independence and the likelihood of financial statement fraud. we found out that presence of experts in the board negatively and significantly has an impact on the likelihood of financial statements fraud, z(1, 233) = -7.71, β2 = -8.50, p = 0.06. this simply means board experts have the likelihood of reducing the log odds of financial statement fraud by -8.50. hence, we fail to reject the null hypothesis of that board expertise has no significant impact on the likelihood of financial statement fraud. our finding is not consistent with work of anichebe et al. (2019), they submitted that the inclusions of a financial expert in the board will increase the likelihood of financial statement fraud in an organization. board diligence was found to be significantly and negatively related to the likelihood of financial statements fraud, z(1, 223) = -2.61, β3 = -3.14, p = 0.02. this suggests that a unit increase in the number of meetings in the board, will decrease the likelihood of financial statements fraud. the study, therefore, rejects the null hypothesis board diligence (meetings) has no significant impact on the likelihood of financial statement fraud. our result supports the argument that frequent board meetings would enables board members to carry out their board functions effectively and efficiently leading to disclosing more information to the stakeholders (lipton & lorsch, 1992). this finding is in dissonance with work of zainal et al. (2013), who found no evidence on the nexus between board diligence and the likelihood of financial statement fraud. in addition to our explanatory variables, two control variable introduced; auditors independence and firm size. both of them provided no evidence on the relationship with audit quality, z(1, 233) = 0.47, β4 = 3.11, p = 0.64, and z(1, 233) m. subair, r. salman, a. abolarin, a. abdullahi, a. othman72 = 0.38, β5 = 0.05, p = 0.70 respectively. the mcfadden r-squared stood at 0.0506 suggesting that about 5.1% of the systematic variation in the dependent variable was explained by the independent variables. lr statistics value of 9.367 was statistically significant at 5% all slope coefficients except the constant are zero, this simply implies the joint significance of our model in the study.  conclusion, recommendations and suggestions for future research conclusions based on the findings of the study, we concluded that board characteristics have an impact on the likelihood of financial statement fraud in listed manufacturing companies in nigeria. thus, our study validates the agency theory on the monitoring functions of the board in reducing financial statements fraud. recommendations however, it is on the above conclusion with respect to the discussion of findings the following recommendations were made; ■ regulatory authorities of manufacturing firms should promote an independent board composition; ■ experts in the board should not only rely on the knowledge of finance and accounting alone, they should also be knowledgeable on forensic accounting; tax and computer technology as well; and ■ the number of board meeting should be looked at by regulatory authorities in order to achieve its aim. limitations and suggestion for further studies the current study is subject to some limitations. first our study is limited first by the micro-numericity of the research data that is the sample of this study may not be fully representative of the population of listed manufacturing firms; secondly, the study ignored unlisted manufacturing firms. thirdly, the study was carried out only with listed manufacturing companies in nigeria. thus, any generalization of the results of this study cannot be made with board characteristics and the likelihood… 73 out caution. these limitations identified did not, however, vitiate the generalisation of our research findings.  references abbott, l.j., parker, s., & peters, g.f. 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(2013). power and likelihood of financial statements fraud: evidence from indonesia. journal of advanced management science, 1(4), 410-415. https://dx.doi.org/10.12720/joams.1.4.410-415. wprowadzenie na uniwersytecie mikołaja kopernika w toruniu podjęto inicjatywę wydawania periodyku naukowego „copernican journal of finance & accounting”. pismo ma służyć rozwojowi dyscypliny nauki „finanse” i jest przewidziane jako profesjonalne forum prezentacji i analiz opracowań naukowych z zakresu finansów i rachunkowości w wymiarze międzynarodowym. pismo jest przeznaczone dla środowiska zarówno teoretyków, jak i tych praktyków, którzy podjęli wyzwanie zdobywania stopni naukowych w dyscyplinie „finanse”. pasja pracy naukowej znajduje zatem nową platformę współpracy. przedstawiciele tak szeroko zdefiniowanego środowiska naukowego będą twórcami i odbiorcami treści publikowanych w cjf&a. w utrzymaniu wysokiej jakości publikowanych opracowań wspierają nas uznane osoby w radzie naukowej i zespole recenzentów, którym dziękujemy za zaangażowanie w tak ważne dzieło. jesteśmy przekonani, że „kopernikański duch nauki” będzie nam towarzyszył w szerzeniu i pogłębianiu wiedzy. pamiętamy też, że nasz wielki patron – mikołaj kopernik był nie tylko światowej sławy astronomem, który dokonał przełomu w nauce, ale także ekonomistą, który sformułował prawo znane dzisiaj jako prawo kopernika-greshama. to zobowiązuje nas wszystkich. redaktor naczelny prof. dr hab. leszek dziawgo copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 27, 2014; date of acceptance: march 24, 2014. * contact information: rrkurek@poczta.onet.pl, wrocław university of economics, nowowiejska 3, 58-500 jelenia góra, poland, phone: 757 538 263. kurek r. (2014). the efficiency of public insurance supervision vs. pareto efficiency. copernican journal of finance & accounting, 3(1), 109–119. http://dx.doi.org/10.12775/cjfa.2014.009 robert kurek* wrocław university of economics the efficiency of public insurance supervision vs. pareto efficiency keywords: pareto optimality, supervision, insurance. j e l classification: g22, g28, d70. abstract: the objective of the paper is to research whether pareto optimality can determine the efficiency of activities carried out by public supervision authorities by analyzing literature references and applying the method of verbal description. having made certain assumptions, pareto criterion can determine the model reference point in which supervision authorities’ decisions are aimed at improving the situation of consumers without resulting in the simultaneous deterioration of insurance institutions situation. it also ensures proper functioning of the entire market. however, the public aspect of the problem determines the fact that supervision authorities should not search for the model pareto optimum, but rather focus their activities on obtaining one of many possible optimums responsible for different share of particular entities in the achieved results. translated by hanna fujak efektywność działań państwowego nadzoru ubezpieczeniowego a optimum pareto słowa kluczowe: optimum pareto, nadzór, ubezpieczenia. robert kurek110 klasyfikacja j e l: g22, g28, d70. abstrakt: cel artykułu to zbadanie za pomocą metody analizy piśmiennictwa i metody opisu słownego, czy paretowskie optimum może być wyznacznikiem efektywności działań prowadzonych przez organy państwowego nadzoru ubezpieczeniowego. przy dokonaniu pewnych założeń kryterium pareto może wyznaczać modelowy punkt odniesienia, w którym decyzje nadzoru służą poprawie sytuacji konsumentów bez jednoczesnego pogarszania sytuacji zakładów ubezpieczeń, przy jednoczesnym zagwarantowaniu właściwego funkcjonowania rynku, jako całości. uwzględnienie aspektu społecznego oznacza jednak, że organy nadzoru nie powinny poszukiwać modelowego optimum pareto, a aktywność organów nadzoru powinna skupić się na osiąganiu jednego z wielu możliwych optimów, oznaczających różny udział poszczególnych podmiotów w osiąganych efektach.  introduction efficiency can be referred to any domain of deliberate human activity. in case of public supervision over insurance institutions1 it is the legal regulations which determine the framework of supervision procedures and identify the possibilities for its effective and efficient operations. this, however, does not contradict searching for an optimal situation in pareto sense. according to it the activities performed by supervision authorities allow the situation improvement with reference to some entities without deteriorating it in case of others. the thesis stating that pareto efficiency can determine operations carried out by public insurance supervision authorities underlies this particular study and determines its goal. it was verified by means of analyzing literature references, legal regulations and applying the method of verbal description. the research methodology and the course of the research process the research is of descriptive and explanatory nature. owing to its subjective character the entire discussion referring to pareto optimality and efficiency of public insurance supervision will always remain within the research area at the level of normative economy. in the course of the research process the author collected, analyzed and interpreted information which, supported by the 1 the discussed problems are of universal nature and can be referred to any type of public supervision (over banking market, financial market), however, due to the author’s knowledge of insurance market the study refers to this particular market type. the efficiency of public insurance supervision… 111 author’s comments, were aimed at extending the knowledge and understanding the problems covered. the specific recognition of efficiency underlying the operations performed by public insurance supervision authorities public supervision is the function “aimed at compromising, in a supervisory manner, both private and public activities with the requirements of substantive law, following the interests of public order and public benefit” (staryszak 1931, 93). in its essence, almost every public supervision restricts certain subjective rights of the supervised entities (stankiewicz 2006, 204). a similar situation is true in case of supervising insurance institutions performance. their subjective rights are limited, however in return, a broader group of beneficiaries is offered the possibility to keep them. it takes the form of ensuring safe operations performed by insurance institutions manifested in protecting interests of the insured and the protection of insurance market. an efficient action is referred to as “...an effective, swift, important, actual manifestation of human activity” (kopaliński 1985, 111). if it is transferred into economic reality, it defines efficiency as the concept referring to “... the assessment of performance rationality in terms of solving the problem of limited resources allocation between their alternative usage types” (szewc-rogalska, 1–212). the assessment of supervision institutions efficiency is focused on the ability of adequate current and future evaluation of the supervised entities operations, based on the available information and making proper (correct) decisions on this basis. the decisions made by supervision authorities have impact on the insurance market participants. their efficiency should be assessed in the context of consistency between the anticipated results and the means at their disposal for the implementation of the defined goals. it means that the discussion regarding supervision efficiency should be referred to in praxeological terms, i.e. in terms of individual search for the best possible solution. the praxeological nature of attributes underlying both effective and efficient functioning should be considered, i.e. its beneficial, effective and economic nature (dębski 2006, 270–271), rather than in terms of value maximization. while discussing the efficiency of public supervision it is necessary to separate strategic efficiency – the selection of correct goals and operational efficiency – proper operations and a “well done job” (szewc-rogalska 2004). strarobert kurek112 tegic efficiency is disregarded in case of public supervision, since the set goals have already been imposed. it is the operational efficiency which is of prior significance. it is referred to as the level of implementing goals to be supervised. in the second case it is also possible that public institutions promote efficiency by adopting business methods (grandy 2009, 1115–1123). the crucial component of assessing efficiency is the problem of its measurement. the applied measures, most often, present the ratio of the obtained effects against the outlays incurred, or an anticipated relation. in other words they express the ratio of expected effects against the planned outlays. the majority of measures are based on return rate. however, in case of public supervision authorities this criterion does not present much significance2. the level of tasks implementation is of crucial significance. in case of public insurance supervision it is manifested in adequate care offered to consumers of insurance services and proper development of the supervised market. efficiency assessment, in this case, is performed from public perspective (financial system stability, customer protection) where mainly qualitative measures can be applied. quantitative measures are of supplementary nature though. the assumptions for pareto efficiency application in the operations performed by supervision authorities the concept of resources efficient allocation, in terms of pareto efficiency, is based on evaluative judgements. each entity best evaluates its own wealth, whereas public wealth is determined based on the wealth of individual entities (blaug 1994, 593). the choice of one out of many existing pareto optimality states is possible only following the usefulness category analyzed in an individual scale and by taking advantage of information available at a given point in time (cordato 2004, 3–36). pareto efficiency is mainly based on individual preferences and does not consider public interest. therefore the thesis adopted in the study is fundamentally wrong. supervision authorities take care of public interest and thus, theoretically, should not apply the pareto criterion in the course of their operations optimization. the efficiency assessment can, however, be performed with reference to the entire economy. in accordance with pare2 public institutions (supervision authorities) are not free from the obligation to analyse costs of their functioning and expenditure rationalization. it is especially visible in the areas covered by effective mechanisms controlling such institutions functioning. the efficiency of public insurance supervision… 113 to equilibrium theory the efficiency state3 is achieved in economy when certain goods change their position. it means that an increasing satisfaction of some of them does not, simultaneously, reduce the satisfaction of the other (pareto 1897; landreth, colander 1998) which, through its impact scale, is also translated into public context. the decisions and operations performed by supervision authorities, subject to efficiency and effectiveness assessment, have impact on three crucial areas: ■ insurance institutions – supervision authorities perform supervision over entities which determine the course of financial events occurring in economy and, hence, decide about the method for allocating goods in economy; ■ insurance market – the effectively functioning supervision authorities stimulate competition and enhance operational efficiency of the supervised entities; ■ clients – supervision authorities, even though do not have the competencies to exert direct impact on the consumers of insurance services by inf luencing the first two components have indirect impact on consumers and their choices. protecting the interests of insurance companies clients, as well as taking due care of the insurance market stable development, define the boundaries of operations performed by insurance authorities. their tasks implementation, within the three possible impact areas is translated into undertaking efforts to maintain public equilibrium. therefore, these areas indicate the possibility for taking advantage of pareto rule. this, however, requires introducing certain assumptions and taking the resulting limitations into consideration. restricting the equilibrium theory to economic efficiency, understood in pareto terms, requires meeting particular conditions. they are possible only in the circumstances of perfect competition: efficiency in exchange, i.e. a transaction (action) which improves the situation of both parties involved, is not possible, or technical efficiency, i.e. perfect allocation of production factors and manufacturing goods meeting individual needs (stiglitz 2004, 86). the following conditions refer to the absence of external effects at the market of externalities and assuming that all markets present total equilibrium and perfect competitiveness, transaction costs are negligible, and market participants have per3 in his equilibrium concept pareto himself did not use the word “efficiency”. the term “pareto optimality”, used nowadays interchangeably with the phrase “pareto efficiency”, was used in literature for the first time in 1950 (kozuń-cieslak 2013, 172). robert kurek114 fect information (greenwald, stiglitz 1986, 229–264). praxeological approach to efficiency, which applies to the operations of supervision authorities, from the perspectives of its properties, does ref lect economic efficiency. however, in case of the operations performed by supervision authorities pareto optimality has to be limited to efficiency in exchange only. therefore it refers to analyzing actions consisting in the division of goods between consumers and the allocation of “production factors” between insurance institutions. making decisions and performing operations results in achieving the state of equilibrium in pareto sense also following another limitation, i.e. the assumption of the absence of transactional costs. an attempt to transfer pareto optimality to the problems underlying the efficiency of supervision authorities operations does not cover certain problems. it does not ref lect the effect of regulations, referring to insurance institutions functioning and insurance market, on economic efficiency. the law determines the system of existing powers granted to supervision authorities. it also generates the related transactional costs, which occur whenever there is an interaction between parties (supervision authorities – insurance institutions). such transactional costs have negative inf luence on the efficiency of performed operations or even prevent achieving the state of equilibrium. theoretically, if legal regulations did not exist transactional costs would not occur (cooter, ulen 2000, 90). pareto efficiency assumes that effective decisions are made in the circumstances when any further improvement of the situation turns out impossible without deteriorating the situation presented by any of the entities involved. in practical terms, this principle is supposed to protect private property and classifies as ineffective (suboptimal) all possible operations. as a result any involved party is forced to make concessions. obviously, such situation does not promote equality between the entities affected by insurance supervision, however, it does not rule out the respect for individual independence. at the same time, improving the situation of insurance institutions clients, or the situation at the insurance market, is frequently associated with restricting the subjective rights of insurance institutions. therefore, it happens at their expense, which is against pareto rule. an attempt to apply pareto efficiency to the sphere of insurance supervision assumes the protection of privileged entities and does not mean promoting fair solutions. the efficiency of public insurance supervision… 115 pareto optimality vs. the efficiency of supervision institutions operations pareto efficiency is the minimal notion of efficiency and does not necessarily result in the socially optimal distribution of resources: it makes no statement about equality, or the overall social welfare (barr 2012, 46). pareto optimality, in its essence, does not define any type of public optimum. however, what is economically effective is also effective in public terms. following such approach there is an unlimited number of public optimums. it means that the processes of resources allocation are related to the issues of efficiency. if translated to supervision authorities operations they require activities adjusted to individual circumstances and situations presented by particular insurance institutions. in such perspective the operations performed by supervision authorities are convergent with the attempts at achieving equilibrium optimality not only in economic terms. a supervision authority performs supervision and in the situation of detecting abnormalities (a threat to public equilibrium point) undertakes actions. if accompanied by the application of available means and tools, it aims at encouraging the supervised entities to comply by regulations in force. they can be of general nature and cover all entities in the sector (e.g. verification of solvency standards). they can also present an individual dimension and take the form legally binding decisions (e.g. which require meeting the permissible risk standards). the means available to supervision authorities facilitate the comprehensive effect on the supervised entities. however, following their rigorous approach they frequently provide for the imposition of “additional duties resulting in an extensive increase of operating costs and thus can also have negative impact on the entire market efficiency” (posner 1977, 335). this persists in contradiction to the equilibrium theory. in practice it often happens that the decisions made by supervisory authorities improve the situation of some entities (clients) at the expense of the other (insurance institutions). such activities are reasonable when the benefits experienced by the first group are more extensive than the “loss” incurred by insurance institutions. moreover, there has to be at least a theoretical possibility for such loss compensation4 regarded as beneficial 4 it does not refer to the compensation principle in terms of kaldor-hicks efficiency criterion. according to it compensation is to occur “in a favourable manner” for the party suffering a loss (kaldor 1939, 549–552; hicks 1939, 696–712). robert kurek116 for the entire market. then the surplus of benefits over compensation costs improves the situation of all entities. it determines pareto efficiency and also represents the measure of social wealth growth resulting from this solution implementation. such situation, obviously, in its model presentation should determine the operations performed by supervision authorities. however, the protection of customer interests and insurance market, without taking into account the particular interests of insurance institutions would be contradictory to the function of safeguarding legal regulations. it would also result in higher transactional costs, thereby becoming more and more distant from the equilibrium point. therefore, theoretically pareto efficiency seems to be a good method for determining whether the conducted activities can be referred to as effective. in practice, however, undertaking decisions and operations of public effect, in the course of which at least one entity incurs losses, is almost impossible. as it has already been mentioned, supervision authorities’ operations can always be accompanied by actions restricting both independence and freedom of insurance institutions activities. the willingness to find pareto optimality is thus dependent on divergent interests presented by the parties involved. while trying to meet the interests of insurance institutions and desiring to achieve the equilibrium point, supervision institutions can try to meet their tasks. it can be accomplished by means of making such decisions and seeking solutions which will not restrict the rights of insurance institutions. it is possible if repressive interventions performed by supervision authorities are minimized. moreover, preventive measures, which consist in providing support (advice, consultancy, contacts in order to develop common standpoints), coordinating common activities and mitigating conf licts, should be intensified. such attitude constitutes the softest supervisory measure. by means of transactional costs reduction it allows for the simultaneous achievement of one of the possible – in a given situation – pareto optimums. pareto optimality can serve as efficiency determinant for the operations performed by public insurance supervision authorities. however, these activities cannot be limited to the model type of pareto optimality, with efficiency understood as an ongoing search for one of many optimums. it means different participation of particular entities in the achieved results, manifested by optimal functioning of economy and an attempt for public equilibrium accomplishment. the efficiency of public insurance supervision… 117  conclusions the problems of supervisions authorities’ operations efficiency should be presented in praxeological terms. they should come down to an individual investigation of best possible solutions rather than focus on value maximization in classical terms. the problem of profit, as the measure of efficiency, is also insignificant. it, however, dominates the level criterion of tasks implementation. additionally, the discussion referring to public supervision efficiency disregards the strategic efficiency by assigning significance to operational efficiency only. supervision authorities exert impact on the allocation of resources by insurance institutions through inf luencing their competitiveness and efficiency. indirectly they also inf luence correct choices made by consumers. due to the fact that they have impact on all insurance market components, pareto optimality can be the subject of ongoing discussions. however, if certain assumptions are considered, e.g. referring to the possibilities for protecting interests of privileged entities or the absence of externalities and transactional costs, they limit the focus to efficiency in exchange, in the conditions of full information available, or to analyzing efficiency mainly from the public perspective. pareto efficiency, in general terms, refers to short-term analyses. they are conducted from a static perspective and represent a purely theoretical model created to explain the rule underlying making choices in the situation isolated form its environment. the operations performed by supervised entities are dynamic rather than of heterogeneous nature. the insurance market is strictly connected with other economic components. supervision authorities, on the other hand, continue transforming their structures and employ personnel presenting diverse qualities. insurance institutions themselves keep offering new services which result from the occurring new needs. in such conditions the supervision authorities, aspiring to achieve an optimal situation in pareto sense, will probably never accomplish such objective. thus, by assumption, all operations performed by supervision institutions are not covered by the pareto efficiency criterion. however, since both decisions and operations are ineffective in pareto sense, it means that searching for a state in which the improvement of some participants’ situation, without deteriorating that of the others, is possible. from the perspective of supervision authorities it is by all means desirable. pareto optimality represents an indispensable condition. it is, however, not always sufficient for wealth maximization. therefore the discussed rule can derobert kurek118 termine the efficiency of supervisory operations, referring to insurance market and its components, only to a limited extent. investigating best individual solutions, making rational choices related to the application of available means, the selection of best possible operations in terms of the defined goal and conditions restricting it, allow identifying the efficiency of supervisory operations with the maximization of public wealth. it also imposes the achievement of preferred values and goals to the utmost. pareto efficiency criterion can become the reference point for an overall assessment of supervisory operations’ efficiency. however, it is feasible only in its model perspective, where the occurrence of numerous equilibrium points is possible. pareto area or surface determines these points where the supervision decisions aim at the improvement of only one group of entities (clients) without the simultaneous deterioration of other entities (insurance institutions) situation. they also guarantee proper functioning of the entire market. considering public aspects, in the operations performed by supervision authorities, results in the identification of different positions of insurance institutions and their clients. the operations of supervision authorities focus, however, on achieving one of many possible optimums referring to different participation of particular entities in the results achieved.  references barr n. (2012), the relevance of efficiency to different theories of society, economics of the welfare state, oxford university press. blaug m. (1994), teoria ekonomii: ujęcie retrospektywne, pwn, warszawa. cooter r., ulen t. (2000), law and economics, addison wesley longman, 3rd edition. cordato r. (2004), toward an austrian theory of environmental economics, quarterly journal of austrian economics, spring. http://dx.doi.org/10.1007/s12113-0041031-9. dębski d. (2006), ekonomika i organizacja przedsiębiorstw cz.2, wspip, warszawa. grandy c. (2009). the “efficient” public administrator: pareto and a well-rounded approach to public administration. public administration review, vol. 69, issue 6. http://dx.doi.org/10.1111/j.1540-6210.2009.02069.x. greenwald b., stiglitz j.e. (1986), externalities in economies with imperfect information and incomplete markets, quarterly journal of economics 101 (2), oxford. http://dx.doi.org/10.2307/1891114. hicks j. (1939). the foundations of welfare economics. the economic journal, vol. 49, no. 196. http://dx.doi.org/10.2307/2225023. the efficiency of public insurance supervision… 119 kaldor n. (1939), welfare propositions in economics and interpersonal comparisons of utility. the economic journal, vol. 49, no. 195. http://dx.doi.org/10.2307/2224835. kopaliński w. (1985), słownik wyrazów obcych, wiedza powszechna, warszawa. kozuń-cieślak g. (2013), efektywność – ewolucja koncepcji w retrospekcji teorii ekonomii, sipkzif, zn 128, ow sgh, warszawa. landreth h., colander d.c. (1998), historia myśli ekonomicznej, pwn, warszawa. pareto v. (1897), cours d’economie politique profese r l’univers, ite de lausanne, lausanne, f. rouge; paris, pichon. posner r.a. (1977), economic analysis of law, boston. stankiewicz r. (2006), nadzór administracyjnoprawny jako forma relacji określająca oddziaływanie państwa na procesy koncentracji przedsiębiorców, studia iuridica xlv/2006, wyd. uw, warszawa. staryszak j. (1931), prawo nadzoru nad administracją samorządową w polsce, warszawa. stiglitz j.e. (2004), ekonomia sektora publicznego, wn pwn, warszawa. szewc-rogalska a. (2004), efektywność restrukturyzacji własnościowej przedsiębiorstw w polsce – ujęcie sektorowe, wyd. ur, rzeszów. date of submission: july 7, 2019; date of acceptance: july 31, 2019. * contact information: okaymaz@clarion.edu, clarion university, department of accountancy, cobais (college of business administration and information sciences), 840 wood st. clarion pa, 16214, u.s., phone:+1 814 393 2628; orcid id: https://orcid. org/0000-0001-9875-537x. ** contact information: iyilmaz@du.edu.om, dhofar university, department of accounting, p.o box: 2509, salalah, oman, phone: +968 2323 7416; orcid id: https://orcid.org/0000-0001-8501-9664. *** contact information: okaymaz@thy.com, thy (turkish airlines inc.) eğitim başkanlığı (directorate of education), ataturk havalimanı b kapısı yanı, yeşilköybakırköy, istanbul, turkey, phone: +90 212 463 63 00; orcid id: https://orcid. org/0000-0003-1287-7873. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 2 kaymaz, m.o., yilmaz, i., & kaymaz, o. (2019). the impact of intangible factors on profitability: evidence from corporations traded at muscat securities market in oman. copernican journal of finance & accounting, 8(2), 25–47. http://dx.doi.org/10.12775/cjfa.2019.007 mike onder kaymaz* clarion university ilker yilmaz** dhofar university ozgur kaymaz*** turkish airlines the impact of intangible factors on profitability: evidence from corporations traded at muscat securities market in oman keywords: intangibles, financial performance, financial reporting, international accounting standards (iass), international financial reporting standards (ifrss), oman. j e l classification: g30, e22, m41. mike onder kaymaz, ilker yilmaz, ozgur kaymaz 26 abstract: the objective of this paper is to determine whether corporate financial performance may be inf luenced from intangible assets owned by a company and some special incurring expenditures benefiting the intangible value of the company even though such items could also be technically expensed contrary to getting capitalized. combining the intangibles reported on the corporate balance sheets with the expenditures such as r&d, staff and advertising expenses, a variable called calculated value of intangible factors (cvif) is specifically generated and is examined as to whether intangibles alone might potentially have a significant effect on corporate profitability ratios, and if so to what extent. the sample consists of non-financial public companies traded at muscat securities market in oman and the sampling period covers the time window from 2013 until 2017. two regressors are used to capture the effect of intangible factors; meaning cvif and cvif/total assets (cvifta) respectively, the latter of which is a relative measure. four (4) profitability measures, namely gross profit margin (gpm), ebit margin (ebitm), net profit margin (npm) and return on assets (roa) are developed as proxies to indicate for corporate financial performance. considering all the resulting eight (8) models each, panel data regression analyses are performed separately to specifically document the linkage between corporate intangibles and corporate financial performance. results provide a strong evidence by showing that intangibles do have a significant and a positive effect on corporate financial performance, except when roa is regressed by cvifta rather than cvif. this effect on and the linkage with financial performance is documented to be the most robust once gpm and npm are to indicate the performance in the forms of cvif and cvifta respectively.  introduction financial performance of companies has always been a main-stream topic in accounting and finance literature, having been an inspiration to world-wide scholars or practicing researchers. several factors have been analyzed whether they could affect or be getting affected by corporate financial performance. those factors have ranged from miscellaneous financial characteristics of companies to several non-financial features that encompass human resource management, reputation, corporate governance, board structure or size, corporate social responsibility, transparency, and many more. one of the highly salient factors which might potentially inf luence the financial performance is intangible assets owned by the companies, whether financial or non-financial, or whether public or private ones. more clearly, the weight of intangible assets to total assets and the growth in intangible assets could be the attributes that can affect or be related to corporate financial performance. this is especially the case for manufacturing companies that may tend to have a good deal of intangibles in their asset portfolios, which translates into a more intangible-stressed balance sheet composition and asset quality. an intangible asset is defined as an identifiable non-monetary asset without physical sub the impact of intangible factors on profitability… 27 stance. manufacturing companies have a special place in this because they usually need to have research & development (r&d) units in their organizations. such examples among the intangibles may be given in international accounting standard (ias) 38 as patented technology, computer software, databases and trade secrets, trademarks, internet domains, customer and supplier relationships and marketing rights. the point which makes intangible assets considerable is not just their monetary values, meaning not the amount reported on the balance sheets, but their unique characteristics that can provide companies with a competitive advantage or a meaningful edge otherwise. resource-based view (rbv) is a dominant approach to explain the differences of performance among competing firms, postulating that the determining factor in the performance of any organization is the resources it owns. as the resources supply companies with efficiency and effectiveness expected to buffer up, they become valuable and therefore valuable resources become a source of competitive advantage (barney, 1991) themselves. the role of intangible assets can be investigated in this context. main hypothesis of this paper may be posed such that intangibles (intangible factors) which are reported on corporate financial statements affect corporate financial performance positively. the paper makes a significant contribution to the existing body of literature by presenting a concrete empirical evidence on the relationship between intangibles and corporate financial performance. in this paper, the word “intangibles” are used in the meaning of “intangible factors” which include but are not limited to intangible assets. this paper has also important practical implications for managers who make investment decisions, suggesting that they should also take the impact of intangibles into consideration as regards the financial returns of the investments. the remainder of this paper is hence organized as follows. in the next section, section 2, prior related literature is reviewed. in the third section, data and methodology is presented. in the fourth section, results are provided and discussed. finally, in the fifth section being the last one, conclusions are drawn. prior related literature the impact of intangible factors, besides intangible assets, has been examined in many scholarly works hitherto. some of them focused on all intangible factors including intellectual capital, meaning all the probable attributes regardless of whether they may be reported on the corporate balance sheet or not. mike onder kaymaz, ilker yilmaz, ozgur kaymaz 28 despite being uncommon, some studies rather focused on the intangible assets on the balance sheet. interestingly, although some papers contain ‘intangible asset’ in their titles, deep down inside, they happen to be about intellectual capital. for this reason, it is necessary to make a distinction between intangible assets and any other attribute that may create a value difference between book value and market value of a company. intangible factors can be classified in different ways. one of these ways works through dividing them into two categories; (a) visible intangible assets that are legitimized in accounting standards and thus reported on the corporate financial statements, and (b) hidden intangible assets that might be unidentifiable and uncontrollable, therefore could not be reported in the corporate balance sheets (e.g. nevado and víctor (2002), ciprian, valentin, madalina and lucia, (2012) etc.). technically speaking, we are aware that intangibles-financial performance linkage can be of two-way. as presented by our hypothesis cited above already, since we argue that it is the intangible that may affect corporate financial performance rather than the other way around, we give our concentration specifically to the examinations doing so. accordingly; for instance, chiarello, pletsch, da silva and da silva (2014) explored the relationship among financial performance, intangible assets disclosure and value creation, using the data from brazilian and chilean information technology companies. they found a positive relationship in between and that chilean companies tend to disclose more intangible assets and thus sustain up to a greater value through better financial performance. gamayuni (2015) tested the relationship among intangible assets, financial policies, and financial performance with the firm value at public companies listed in indonesia. he found that although intangible assets have no effect on corporate financial policies (e.g. debt policy, dividend policy etc.), it has a significant effect on financial performance and firm value though. de luca, maia, da costa cardoso, de vasconcelos and cunha (2014) studied a sample of 137 brazilian companies for a four-year period from 2007 to 2010 in order to explore the relationship among investments in intangible assets, superior and sustained performance. they segregated assets following brooking’s classification (1996) and discovered a significant relationship between performance and mean investments in intellectual property and infrastructure assets. however, they did not obtain similar results for market assets, other intangibles or total intangible assets. the impact of intangible factors on profitability… 29 in a recent study, tahat, ahmed and alhadab (2018) investigated the impact of intangible assets on the current and future financial performance as well as market performance by using a sample of 150 non-financial firms listed at ftse (the financial times stock exchange). they pointed out the importance of r&d and goodwill regarding the enhancement of performance and the sustainability of earnings. they found a positively strong result, contending that intangibles assets play a key role in improving future financial performance and market performance. jaffe and chappell (2016) examined the interrelationships among firm characteristics, intangible investment and firm performance, employing both survey and administrative data belonging to approximately 13,000 firms for the period 2005–2013. they found that growth strategies and ‘soft’ performance objectives of a firm are associated with the investment in intangible assets, however productivity and profitability are not. tudor, dima, dima and ratiu (2014) used intangibles-to-total assets ratio as the variable which represents the level of intangible assets and examined the relationship of this ratio with several profitability measures. they used a sample of 562 large companies from london and frankfurt stock exchanges and documented a relatively steady relationship for the full sample. however, they captured some structural differences and scale effects when analyzed on market or sector basis. omil, lorenzo and liste (2011) categorized spanish firms into two groups as high-profitability firms (hpf) and non-high-profitability firms (n-hpf) for two different time periods and investigated the linkage between intangibles and profitability. in their study, a firm in their study is considered as hpf if its roa is higher than 25 % for three consecutive years while intangibles are measured on the basis of three attributes; human, structural, and relational factors. they documented that hpfs are more focused on the management of intangible factors than are n-hpfs. in some scholarly investigations about the intangibles-profitability relationship, some items which are expensed according to accounting standards or legislations are used as a proxy to indicate intangibles. for instance, r&d expenditures can be recognized in the income statement or can be capitalized as an intangible asset in the balance sheet. it is an alternative way to use all such expenses instead of only using intangible assets value from the balance sheet. li and wang (2014) for instance used three types of expenditures to represent intangible assets, namely r&d cost, employee benefit expense and sales training mike onder kaymaz, ilker yilmaz, ozgur kaymaz 30 cost. as the measure of performance (profitability), they used roa. they found a significant relationship for r&d and sales training, meaning that these expenditures contribute to corporate financial performance; however employee benefit expense was found to have no impact over profitability. some studies rather used information technology (it) investment as the proxy for intangibles and examined the linkage between the level of it investment and financial performance. among the others, beccalli (2007) used a sample of 737 european banks from 1993 through 2000 and looked at the investment in it under three subgroups; i.e., hardware, software and other it services. the scholar researched the effects on both accounting ratios as well as other cost and profit efficiency measures. they documented some light relationship between total it investment and performance, while describing the results of their study as a paradox. the main reason was that when it services are received from external providers such as consulting, training etc., there happens to be a positive effect on profitability; however when banks themselves acquire hardware and software, the effect on bank performance turns out to be negative. some examinations instead employed a different approach developed stewart (1995) called calculated intangible value (civ) to explore the effect of intangibles. even though it is a stepwise (seven-step) calculation, civ method basically follows that the value of intangibles can be determined as the difference between company value which is calculated by discounting future free cash f lows to the present and book value of tangible assets. volkov and garanina (2008) studied the role of intangibles in value creation and applied the civ method to russian companies for two different periods, 2001–2005 and 2001– –2006. according to results of the study, they concluded that the role intangibles play is not as significant as that of tangible assets for russian companies. a similar approach to civ is to use tobin’s q to measure the level of intangibility of a firm. villalonga (2004) used it to test the relationship between the intangibility of firm resources and the sustainability of its competitive advantage. by using the panel data encompassing 1641 us firms for the period ranging from 1981 to 1997, it was shown that the measures such as competitive advantage or value creation tend to be relevant in the context of firm performance since they are the underlying factors. the results also showed that the intangibility of firm resources is positively related to the sustainability of firmspecific earnings, which is consistent with the rbv approach. the next section presents data and methodology. the impact of intangible factors on profitability… 31 the research methodology and the course of the research process the sample used in this study consists of 54 non-financial sector companies, traded at muscat securities market in oman. while being the largest one, muscat is the oman’s capitol. the data were obtained from the website of the stock exchange and annual reports of companies and cover the financial statements of the companies from 2013 to the beginning of 2017. the financial statements used in this examination are prepared (reported) in concordance with international financial reporting standards (ifrss) set which is legally compulsory for oman-listed (public) companies. we employed consolidated financial statements, rather than solo ones, to make sure that the financial highlights of the sampled public firms could be captured in the best way possible. some companies were excluded from the sample owing to two major reasons; some of them were missing in the series in some years, and some of them did not report the details of the expenses in that it could not be possible to extract such items as r&d costs and advertising expenses. therefore, number of observations in this examination has been recorded at 216 in total. the next subsection presents the empirical variables. 1. empirical variables we follow the examinations cited in the previous section (e.g. stewart (1995), brooking (1996), beccalli (2007), volkov and garanina (2008), omil et al. (2011), chiarello et al. (2014), tudor et al. (2014), li and wang (2014), de luca et al. (2014), gamayuni (2015), jaffe and chappell (2016), etc.) to construct the variables to be embedded in to our empirical model. the details are given below. dependent (regressed) variables: definition the dependent variables employed in the study are profitability measures and four ratios may be defined as follows: i. gross profit margin (gpm) = gross profit (income or margin) / sales ii. ebit margin (ebitm) = earnings before interest and taxes / sales iii. net profit margin (npm) = net profit or income after tax [npat] / sales iv. return on assets (roa) = net profit after tax [npat] / total assets mike onder kaymaz, ilker yilmaz, ozgur kaymaz 32 for all the above-given dependent variables which are four (4) different proxies to capture different profit layers for non-financial companies (especially public ones), our model is built and tested. two sets of regressors are individually construed and specified. independent variables: regressors: definition balance sheets cannot ref lect the actual value of a company at all times and this is a fundamental reason underlying the differences between market and book values. accounting and financial reporting standard sets require some contingencies to recognize any item as an asset on the balance sheet – mandatory cases. in both international standards and most of the national accounting legislation, we see that some items cannot be recognized as an asset due to the fact that they do not meet all recognition criteria, even though they benefit the company. in addition, in discretionary cases, most companies might not be willing to measure the value of some economic resources and to recognize them on the balance sheet. for instance, in today’s technological environment, websites serve as an important channel to generate revenues for the companies; however it is very rare to see a website as an intangible asset on a balance sheet. therefore, when intangible value of a company is analyzed, it would be compulsory to take into account more factors along with classical balance sheets. as cited before, since public companies in oman have adopted and follow ifrss, we consider however ifrss define intangibles out there those companies have been implementing thus far. therefore, for the consistency purposes, the independent variables run in this examination attempted to generate an intangible value by incorporating three types of items in to the intangible assets and goodwill reported on the balance sheet. these items are expensed normally, but they actually add value to the company; namely staff expenses, r&d costs, and advertising expenses. goodwill deserves a special attention in this context. according to ifrs, only goodwill resulting from a business combination (e.g. acquisition) can be recognized as an asset and it represents the excess value over the aggregate (fair) value of net identifiable assets. this excess value may arise from such factors as name, reputation, image, brand value, location, customer portfolio and so on. in a typical acquisition transaction for instance, the additional purchase price acquirer may be willing or eager to pay the impact of intangible factors on profitability… 33 will therefore be the value of the goodwill itself. in parallel to the calculated intangible value (civ) variable developed by stewart (1995), we created a variable. this calculated (composite or aggregated) value is the first independent variable, it is dubbed calculated value of intangible factors (cvif) and it can be presented as follows: calculated value of intangible factors (cvif) (in $) = intangible assets + goodwill + staff (personnel) expense + r&d expense + advertising expense therefore, cvif is the variable generated to represent and capture the intangible factors benefiting the corporation. intangible assets, goodwill in particular, meet the recognition criteria of ifrs, however, since the expenses mentioned above do not meet the criteria they are rather expensed as period costs (unlike product costs). these expenses enhance the corporation both in short and long term, hence they do have an impact on the financial performance. as a result, following a holistic approach, the use of cvif has aimed to ref lect all intangible factors rather than to take into account intangible assets alone. the second independent variable is a ratio to capture the relative weight of the intangible value with respect to total assets. the purpose of this second variable is to measure the effect of intangibles taking the size effect into consideration and is given as calculated value of intangible factors / total assets (cvifta) (in %). these combine to suggest that one unique independent variable is exclusively used in the first and the second groups to solely examine any direct effect of intangibles on the corporate financial performance. the next subsection presents the empirical model. 2. empirical model panel data regression model that synchronously processes the time-series and the cross-sectional data in combination is selected to be constructed to estimate the effect of intangibles on the financial performance of the companies in the sample. for each dependent variable, two groups of regressions with each independent variable are run. cvif and cvifta, as was just implied before, are used as the exclusive independent variable in the first and the second group respectively to examine any direct effect of intangibles on the financial performike onder kaymaz, ilker yilmaz, ozgur kaymaz 34 mances of the companies. models that are of univariate setups for this reason are summarized in the following table, table 1. table 1. models: variables construction model dependent variable: y: profitability independent variable: x: intangibles 1 gross profit margin (gpm) calculated value of intangible factors (cvif) 2 ebit margin (ebitm) 3 net profit margin (npm) 4 return on assets (roa) 5 gross profit margin (gpm) calculated value of intangible factors / total assets (cvifta) 6 ebit margin (ebitm) 7 net profit margin (npm) 8 return on assets (roa) s o u r c e : authors’ collection. in all the presented models, we have incorporated two control variables; the first one is the industry dummy variable (i.e. inddm) which is designated as 1 for industrial companies and as 0 for service companies; the second one is debt/ equity ratio (i.e. der) which shows the financial leverage of sample companies. in order to test the significance of the models, panel data regressions are run. panel data is defined as a data set encompassing repeated cross sections over time. with a balanced panel, the same units are observed in each time period. with an unbalanced panel, some units do not appear in each time period, often due to attrition (e.g. wooldridge, 2002). the dataset used in the study is therefore a balanced panel and the software that is used is stata to perform the empirical analyses. it is important to also keep in mind that stata does a good job of smoothing the observations and thereby enhances the data quality as well as the relevance and significance of the statistical analyses. for each of the (univariate) models, panel regressions with fixed effects and panel regression with random effects are run to measure and understand the relationship between corporate intangibles and financial performance. the panel regression models are specified as: 1. yit = ψ0+ψixit +εit 2. yit = ψ0i+ψixit +εit the impact of intangible factors on profitability… 35 (1) and (2) statements above predict fixed and random-effects panel regression models respectively, wherein all the denoted terms have obvious meaning. in addition to these tests, pooled ols regressions are also performed. depending on the results, those regressions are compared to each other in order to determine which model may be the best fit and therefore should be eventually adapted. hausman test is thereby performed in order to decide between fixed and random effects. in the regression models, the assumption that the variance of the error term is constant is known as homoscedasticity. if the error terms do not have constant variance, they are said to be heteroscedastic. errors may increase as the value of an independent variable increases. therefore, in an effort to eliminate any chances of heteroscedasticity, breusch-pagan / cook-weisberg (estat hottest) test is also designed to detect any linear form of heteroscedasticity that might be extant in our models. in other words, the opted-for model is also tested for the sake of assurance of the elimination of any heteroscedasticity that might be involved. the next section provides the analysis results with details. analysis results 1. descriptive statistics we start with the presentation of the descriptive statistics. descriptive statistics for all the variables used in this investigation are summarized in the following table, table 2. as can be seen in the below-given table, table 2, cvif values of the sample companies range from 0.17 to 97.64 as for overall population. the numbers (mean, standard deviation, min and max) as for cvif’s raw down there are in millions of omr (omani riyal). omr is a fixed currency which is pegged to the usd at about 1 omr= 2.60 usd. the other measure of intangibles, cvifta, ranges from 0 to 63 percentages (%s) overall. it is important to remember that cvifta by definition takes into consideration the relative size of the company. it is also important to note that for financial performance ratios depicted below, there are wide gaps between the extreme points, suggesting that the values set between lower (minimum) and upper (maximum) bounds significantly vary. here, it is seen that cvif is the one with the higher deviation, documenting that the group cvif differences among the listed firms are higher than those in cvifta. mike onder kaymaz, ilker yilmaz, ozgur kaymaz 36 a similar situation exists also for the dependent variables that are regressed on cvif and cvifta each. it is seen that the gaps between the minima and maxima for them are wide such that the minima take negative values in all. it is also observed that npm is the one with the highest deviation, suggesting that the group differences among the traded firms are the highest out there. next subsection presents the empirical test results. table 2. descriptive statistics variable mean std. dev. min max observations firm overall 27.5 15.62199 1 54 n =216 between 15.73213 1 54 n =54 within 0 27.5 27.5 t =4 year overall 2014.5 1.120631 2013 2016 n =216 between 0 2014.5 2014.5 n =54 within 1.120631 2013 2016 t =4 gpm overall 25.56019 17.50578 -14 85 n =216 between 15.98045 -6.5 72.5 n =54 within 7.391935 -18.4398 76.81019 t =4 ebitm overall 9.060185 17.58173 -89 57 n =216 between 15.55301 -67.5 33 n =54 within 8.402173 -40.4398 58.56019 t =4 npm overall 7.037037 18.19784 -89 84 n =216 between 15.92623 -69 35.75 n =54 within 9.0031 -21.963 70.03704 t =4 roa overall 5.949074 9.404215 -43 63 n =216 between 7.491092 -17.5 19.5 n =54 within 5.753765 -24.3009 49.44907 t =4 cvif overall 7.21 13.97077 0.17 97.64 n =216 between 13.93604 0.1725 82.94 n =54 within 1.918112 -7.21 21.91 t =4 the impact of intangible factors on profitability… 37 variable mean std. dev. min max observations cvifta overall 14.98611 11.34101 0 63 n =216 between 10.7288 0 62.25 n =54 within 3.888115 0.236111 56.23611 t =4 inddm overall 0.685185 0.465520 0 1 n =216 between 0.468803 0 1 n =54 within 0 0.685185 0.685185 t =4 der overall 1.51458 3.26928 -6.36 23.71 n =216 between 3.031227 -4.935 14.89 n =54 within 1.275955 -5.1454 13.2420 t =4 s o u r c e : authors’ calculation based on the statistical analyses. 2. test results of the models the test results for the models may be summarized in the following table, table 3. table 3. test results panel a. independent variable (models 1 through 4): cvif model 1 model 2 model 3 model 4 dependent variable gpm ebitm npm roa intercept 21.520 7.270 5.894 6.981 (0.000) (0.004) (0.023) (0.000) coefficient 0.498 0.236 0.214 0.084 (0.000)*** (0.007)*** (0.018)** (0.071)* industry dummy (inddm) 1.632 -.496 0.0765 -1.376 (0.506) (0.851) (0.978) (0.328) leverage (der) -0.446 0.2823 -0.3004 -0.457 (0.193) (0.443) (0.433) (0.020)** f-test (*wald-chi2) 13.64 2.89 2.18 3.35 table 2. descriptive… mike onder kaymaz, ilker yilmaz, ozgur kaymaz 38 model 1 model 2 model 3 model 4 p-value for the model (0.0000)*** (0.0365)** (0.0913)* (0.020)** rho r2 0.1618 0.0393 0.0299 0.0453 observations 216 216 216 216 panel b. independent variable (models 5 through 8): cvifta model 5 model 6 model 7 model 8 dependent variable gpm ebitm npm roa intercept 24.363 1.799 -0.853 13.209 (0.000) (0.507) (0.769) (0.000) coefficient 0.221 0.463 0.514 -0.481 (0.039)** (0.006)*** (0.004)*** (0.000)*** industry dummy (inddm) -2.164 omitted omitted omitted (0.407) leverage (der) -0.423 0.208 0.116 -0.271 (0.255) (0.682) (0.769) (0.936) f-test (*wald-chi2) 2.15 3.92 4.17 9.48 p-value for the model (0.0953)* (0.0217)** (0.0171)** (0.000)*** rho 0.752 0.74 0.675 r2 0.0295 0.0468 0.0496 0.1059 observations 216 216 216 216 ***, **, *: significant at 1%, 5%, and 10% confidence levels respectively. s o u r c e : authors’ calculation based on the statistical analyses. significance levels are shown in parentheses. f-test is reported for the models which have produced significant results under pooled ols regression. waldchi2 is also reported for the models which fixed effects or random effects regressions produced significant results and they represent the overall significance of the model. therefore, the panel regression models may be specifically estimated, as given below. table 3. panel a. independent variable… the impact of intangible factors on profitability… 39 2.1. when cvif is the regressor model 1. the link age between gross profit margin and calculated value of intangible factors in this model that cvif might have a significant effect on gross profit margin of the companies is tested. pooled ols regression has produced significant results in that it was run with the robust option for standard errors. panel a in table 3 shows that the resulting regression equation for the model may be predicted as: gpm (y) = 21.520 + 0.498*cvif + 1.632*inddm -0.446*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a positive relationship between cvif (regressor) and gpm (dependent) and that every hundred-unit increase (decrease) in the cvif results in a 49-unit increase (decrease) in gpm base. results in this vein also indicate that (1) cvif (coefficient) significantly (1%) accounts for the changes in the level of gpm and (2) the model overall (p-value) is also significant at 1%, suggesting a very high degree of robustness. this model is the best fit among the models 1 through 4 where cvif is given to be the factor predicted to explain corporate financial performance. regarding the contribution of intangible factors, positive significant relationship between cvif and gpm can happen for at least two reasons. first, intangibles may increase sales while they may also have some cost reduction effects. both of these possible effects alone may help contribute improving gross profit margin. model 2. the link age between ebit margin and calculated value of intangible factors in this model, whether cvif might have a significant effect on ebit margin of the companies is tested. since both random effects and pooled ols regressions have produced significant results in this case, breusch and pagan lagrangian multiplier (bp lm) test was performed to pick the right fit between the two regressions. it has been revealed that pooled ols regression is a better alternative for this model and therefore is the better fit. panel a in table 3 shows that the regression equation may thus be predicted as: ebitm (y) = 7.270 + 0.236*cvif – 0.496*inddm + 0.282*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a positive relationship between cvif (regressor) and ebitm (dependent) and mike onder kaymaz, ilker yilmaz, ozgur kaymaz 40 that every hundred-unit increase (decrease) in the cvif results in a 23-unit increase (decrease) in ebitm base. results in this vein also indicate that (1) cvif (coefficient) significantly (1%) accounts for the changes in the level of ebitm and (2) the model overall (p-value) is also very robust with 1% significance level. in other words, this model is also a good fit to estimate the corporate financial performance. similar to the previous model, the extant positive relationship signifies the contribution of intangible factors to the operating performance of the company. however, compared to gross profit, the relationship is relatively weaker. this is probably because in the calculation of ebit, all operating expenses are cleared and not all those expenses have a direct relationship with intangibles. model 3. the link age between net profit margin and calculated value of intangible factors in this model, that cvif might have a significant effect on net profit margin of the companies is tested. fixed effects and random effects regressions yielded insignificant results at a first run. hausman test then has been performed to compare the fitness of fixed and random effects regressions. it has showed that random effects must be opted for. for this reason, random effects regression has been run again with a robust option controlling for standard errors, and the result has been found significant. in addition, pooled ols regression has also produced significant results, and therefore bp lm test was applied. test results have documented that ols regression is a better fit in this case, similar to model 2 above. panel a of table 3 shows that the regression equation may thus be built as: npm (y) = 5.894 + 0.214*cvif + 0.0765*inddm – 0.3004*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a positive relationship between cvif (regressor) and npm (dependent) and that every hundred-unit increase (decrease) in the cvif results in a 21-unit increase (decrease) in npm base. results in this vein also indicate that (1) cvif (coefficient) significantly (5%) accounts for the changes in the level of npm and (2) the model overall (p-value) is also robust with 5% significance level. in other words, this model is also a good fit to estimate the corporate financial performance. results in this model also show that, even though the regression results are significant, as we go down in the income statement, the level of relationship decreases. this is because net income or profit is calculated after adding and the impact of intangible factors on profitability… 41 deducting all non-operating items, interest expenses and taxes. therefore, reduction in the coefficient of regression analysis as well as the one in the entire model with a univariate setup is an expected result. model 4. the link age between return on assets and calculated value of intangible factors differently from the previous models in all of which sales revenue has been in the composition, the fourth model has instead employed a profitability measure based on total assets, which is roa, and tested whether cvif might have a significant effect on return on assets ratio of the companies. similar to the model 3, both fixed effects and random effects regressions produced insignificant results. hausman test was performed to compare the fitness of the fixed and random effects regressions. it showed that random effects must be chosen. random effects regression has been therefore run again with a robust option to control for standard errors, and the results have proved to be significant. in addition, similar to the previous model being model 3, bp lm test was conducted. test results showed that pooled ols regression produce significant results, suggesting that ols is a better fit compared to the random effects and therefore better be chosen. panel a of table 3 shows that the regression equation may be given as: roa (y) = 6.981 + 0.837*cvif – 1.376*inddm – 0.457*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a positive relationship between cvif (regressor) and roa (dependent) and that every hundred-unit increase (decrease) in the cvif results in a 8.3-unit increase (decrease) in roa base. results in this sphere also indicate that (1) cvif (coefficient) significantly (5%) accounts for the changes in the level of roa and (2) the model overall (p-value) is also significant at 5%, implying a high degree of robustness. in other words, this model is also a good fit. however, results here also document that this model is of the least explanatory power to estimate corporate financial performance among all the four (4) models which are displayed in panel a of table 3 and are regressed by cvif. this is probably because roa is measured as the division of net profit by total assets, leading the coefficient in roa model as well as the degree of fitness of the model itself to be the lowest. overall results in this category, as presented in panel a of table 3, document that model 1 is the best model where cvif is the contributing factor and gpm is the proxy to capture corporate financial performance. the next subsection dismike onder kaymaz, ilker yilmaz, ozgur kaymaz 42 cusses the results once cvifta is chosen to be the univariate factor estimating the corporate financial performance. 2.2. when cvifta is the regressor model 5. the link age between gross profit margin and calculated value of intangible factors / total assets model 5 is the first model in the second group in which cvif/total assets is used as an independent variable. this group of models takes size effect into consideration by computing the independent variable as a ratio of cvif and total assets. this model tests whether cvif/total assets ratio might have a significant effect on gross profit margin of the companies. fixed effects and random effects regressions had produced insignificant results at a first run and hausman test needed showed that random effects regression model must be chosen. random effects regression was run again with a robust option for standard errors, and the result has been this time significant. as pooled ols regression has produced significant results as well, bp lm test was performed. test results have suggested that ols is a better alternative. as given in panel b of table 3, the regression equation may thereby be presented as: gpm (y) = 24.363 + 0.221*cvifta – 2.164*inddm -0.423*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a positive relationship between cvifta (regressor) and gpm (dependent) and that every hundred-unit increase (decrease) in the cvifta results in a 22.1- unit increase (decrease) in gpm base. results in this vein also indicate that (1) cvif (coefficient) significantly (5%) accounts for the changes in the level of gpm and (2) the model overall (p-value) is also significant at 5%, documenting a high degree of robustness. in other words, this model is also a good fit. the result of this model is similar to that of model 1. it was ex ante predicted that cvifta must have more explanatory power. however, the coefficient in this model is lower compared to model 1 (being significant at 5% versus 1%). model 6. the link age between ebit margin and calculated value of intangible factors / total assets this model tests whether cvif/total assets ratio might have a significant effect on ebit margin of the companies. fixed effects and random effects regres the impact of intangible factors on profitability… 43 sions had produced significant results while pooled ols regression had produced insignificant results over here. in order to make a choice between fixed and random effects, hausman test was run and it has showed that fixed effects must be chosen. fixed effects regression has been run again with a robust option to gauge standard errors and the result has proven to be also significant. panel b of table 3 shows that the regression equation may be estimated as: ebitm (y) = 1.799 + 0.463*cvifta + 0.208*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a positive relationship between cvifta (regressor) and ebitm (dependent) and that every hundred-unit increase (decrease) in the cvifta results in a 46-unit increase (decrease) in ebitm base. results in this sphere also indicate that (1) cvif (coefficient) significantly (5%) accounts for the changes in the level of ebitm and (2) the model overall (p-value) is also significant at 5%, suggesting a high degree of robustness. in other words, this model is also a good fit. it was expected that as we go down through the income statement, the effect of intangibles on different profitability measures would shrink. contrary to that however, the coefficient in this model is higher than the previous one. this is probably because intangible factors may also affect operating expenses. model 7. the link age between net profit margin and calculated value of intangible factors / total assets this model tests whether cvif/total assets ratio might have a significant effect on net profit margin of the companies. similar to the previous model; both fixed effects and random effects regressions had yielded significant results. however pooled ols regression had generated insignificant results. hausman test showed that fixed effects regression model better be opted for. fixed effects regression has been run again with a robust option controlling for standard errors and the result has been also significant over here. panel b in table 3 documents that the regression equation may be constructed as: npm (y) = -0.853 + 0.514*cvifta + 0.116*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a positive relationship between cvifta (regressor) and npm (dependent) and that every hundred-unit increase (decrease) in the cvif results in a 51-unit increase (decrease) in npm base. results in this sphere also indicate that (1) cvif (coefficient) very significantly (1% being the highest) accounts for the changes in the mike onder kaymaz, ilker yilmaz, ozgur kaymaz 44 level of npm and (2) the model overall (p-value) is also very robust (highest indeed) with 1% significance level. model 8. the link age between return on assets and calculated value of intangible factors / total assets similar to model 4, this model uses the return on assets ratio as independent variable and it tests whether cvif/total assets ratio might have a significant effect on return on assets ratio of the companies. fixed effects and random effects regressions produced significant results, however pooled ols regression produced insignificant results. hausman test showed that fixed effects must be chosen. fixed effects regression was run again with a robust option for standard errors and the result was also significant. as presented in panel b of table 3, the regression equation may be provided as: roa (y) = 13.209 0.481*cvifta -0.271*der + ui where all the terms and the numbers have obvious meaning. this suggests that there is a negative relationship between cvifta (regressor) and roa (dependent) and that every hundred-unit increase (decrease) in the cvifta results in a 48-unit decrease (increase) in roa base. results in this group also indicate that (1) cvif (coefficient) significantly explains the changes in the level of roa and (2) the model overall (p-value) is also significant at 5%. the factor (cvifta) coefficient in this case is negative, implying a negative relationship between the relative level of intangibles and return on assets ratio. it is the only (univariate) model with a negative coefficient among all the eight (8) models. this may probably be attributable to the capitalization of expenses such as r&d costs into the assets instead of getting expensed. overall results in this group, as provided in panel b of table 3, document that model 7 is the best fit among all the four (4) models 5 through 8 where cvifta is given to be the sole contributing factor and npm is given to be the proxy to indicate corporate financial performance. the next section concludes this paper.  conclusion business environment is getting more and more competitive and many factors including globalization and technological developments affect companies. in order to survive, companies need to build a competitive advantage, improve the impact of intangible factors on profitability… 45 their resources and invest in intangibles. the aim of this article has been to determine whether intangibles have a significant effect on the financial performance of companies inter alia. in addition to intangible assets reported on corporate balance sheets, companies tend to have many intangible attributes which help them out to improve financial and organizational performance. some of those attributes may not get capitalized, in other words, not recognized as assets. instead they may be directly expensed, for example staff (personnel) expenses that need to get debited in the books. however, it should not be dismissed that such expenditures cannot be treated expenses alone since they add long-term value to the companies and therefore it does not make sense to limit them to one-time (or at least short-term) benefit. some other factors are difficult to measure also and they are not recognized as assets under routine business conditions. they can be recognized only in case of a business combination (such as m&a) as given in the case of “goodwill” being the term covering all such elements. for these reasons, this paper has built two sets of variables (factors or regressors) called “calculated value of intangible factors (cvif)” (given in nominal currency amounts) and “calculated value of intangible factors/total assets (cv ifta)” (given in relative [%] terms) designed them in a way to engulf the value of the expenditures which may be both recognized as an asset (capitalized) and an expense (expensed). therefore, it has covered the composite of intangible assets and goodwill, if any, and such expenses as r&d, staff and advertising cost items. in so doing, differences or any conf licts, sometimes major ones, in between rules-based accounting (such as gaaps) and principle-based accounting (such as ifrss), were also targeted to be eliminated or at least be kept at a minimum. to proxy to capture corporate financial performance, four dependent variables have been developed, including gross profit margin (gpm), ebit margin (ebitm), net profit margin (npm) and return on assets (roa). two independent variables are regressed with each of these profitability measures, so eight different models have been tested to determine whether intangibles may have a significant effect on financial performance of companies. listed companies traded in muscat securities market of oman were sampled in the empirical analyses with 216 observations. and panel data regression models were applied in these examinations to control both the time series and cross-sections simultaneously. mike onder kaymaz, ilker yilmaz, ozgur kaymaz 46 the results of regression analyses which were run in the models have produced significant results. the models have been divided into two groups over here; in the first group, the independent variable is cvif being calculate value of intangible factors. this group of models has yielded significant results under pooled ols regressions. the second group of models has employed cvifta being calculate value of intangible factors / total assets as the independent variable and therefore took relative size effect into consideration. these models have generated significant results under random or fixed effects regressions except model 5 where gpm is the preset indicator for corporate financial performance. regardless of ols or random or fixed regressions, all the models have revealed significant outcomes, if not very robust. the results show that intangibles do have a significantly positive impact on corporate financial performance, except when roa is regressed by cvifta. this effect on and the linkage with financial performance is documented to be the most robust once gpm and npm happen to become indicators to capture the performance in cvif and cvifta respectively. in conclusion; the results of the models have clearly documented that there is a positive linkage between corporate intangibles and financial performance since expenditures (investment in) made towards having intangibles do affect financial performance of companies positively. they suggest that in order to improve profitability ratios (meaning enhance financial performance), companies must invest more in intangible assets and in the venues that would likely deliver competitive advantage to them in the long term.  references beccalli, e. 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(2014). intangible assets and superior and sustained performance of inno the impact of intangible factors on profitability… 47 vative brazilian firms. brazilian administration review, 11, 407440. http://dx.doi. org/10.1590/1807-7692bar2014130012. gamayuni, r.r. (2015). the effect of intangible asset, financial performance and financial policies on the firm value. international journal of scientific & technology research, 4(1), 202-212. jaffe, a.b., & chappell, n. (2016). intangible investment and firm performance. motu working paper 16-14, motu economic and public policy research. li, h., & wang, w. (2014). impact of intangible assets on profitability of hong kong listed information technology companies. business and economic research, 4(2), 98- 113. http://dx.doi.org/10.5296/ber.v4i2.6009. nevado, domingo y lópez, & víctor, r. (2002). el capital intelectual. valoracion y evaluacion. madrid: pearson educacion. omil, j.c., lorenzo, p.c., & liste, a.v. (2011). the power of intangibles in highprofitability firms. total quality management, 22(1), 29-42. http://dx.doi.org/10.1080/14783 363.2010.529642. stewart, t. (1995). trying to grasp the intangible. fortune magazine, 52-69. tahat, y.a., ahmed, a.h., & alhadab, m.m. (2018). the impact of intangibles on firms’ financial and market performance: uk evidence. review of quantitative finance & accounting, 50(4), 1147-1168. ht tp://dx.doi.org/10.1007/s11156-017-0657-6. tudor, a.t., dima, s., dima, b., & ratiu, r.v. (2014). the linkage between intangibles and profitability. annales universitatis apulensis: series oeconomica, 16(1), 283-293. villalonga, b. (2004). intangible resources, tobin’s q, and sustainability of performance differences. journal of economic behavior and organization, 54(2), 205-231. http:// dx.doi.org/10.1016/j.jebo.2003.07.001. volkov, d., & garanina, t. (2008). value creation in russian companies: the role of intangible assets. the electronic journal of knowledge management, 6(1), 63-74. http:// dx.doi.org/10.1016/j.jebo.2003.07.001. wooldridge, j.m. (2002). introductory econometrics: a modern approach. 2nd edition. boston: thomson learning. acknowledgment research support from clarion university (pa, us) is much appreciated. date of submission: december 14, 2019; date of acceptance: january 15, 2020. * contact information: dinabandhu.bag@gmail.com, national institute of technology, rourkela, national institute of technology, sector 1, rourkela, odisha 769008, in dia, phone: 916612462803; orcid id: https://orcid.org/0000-0001-9736-1299. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 bag, d. (2019). information content of stocks in call auction of shorter duration in emerging market. copernican journal of finance & accounting, 8(4), 113–132. http://dx.doi.org/10.12775/ cjfa.2019.020 dinabandhu bag* national institute of technology, rourkela information content of stocks in call auction of shorter duration in emerging market keywords: auction, information, duration, volatility. j e l classification: g10, g14, d53, g14. abstract: pre-open auctions have been widely implemented across trading exchanges. pre-open auctions tend to reduce information asymmetry and trading risks. call auctions have been encouraged to enhance price discovery. this paper explores the shifts in information content of the pre-market auction session over time. we derive that the information content of the pre opening auction did improve little after a gap of two months. we conclude that the intraday 15 minutes realized volatility was inf luenced by information content in the pre-market. we demonstrate that volatility is the cause of order imbalance or a cause of poor information content. the investigation of the related volatility in the futures segment provides interesting insights on the unusual pre-market imbalances visualized on days close to expiry of futures.  introduction the design of market microstructure and testing of the efficient market hypothesis has drawn attention from empirical researchers in the literature. predinabandhu bag114 open auctions have been widely implemented across many trading exchanges. pre-open auctions tend to reduce information asymmetry and trading risks. an auction can calibrate the information changes and signal the participants by reducing price discrimination for market players. the motivation comes from the fact that the important aspect of the impact on volatility due to call auctions had not been conclusively established across many markets. this study covers the order generation process of the opening call auction at regional exchanges (e.g., nse, national stock exchange) in india. the objectives of this study include, examining the order generation as market depth, during auction and measuring the changes to information content of the call auction. we develop a measure of information content for the pre opening session using order imbalance at ticker level. our major findings are two fold; information content during pre opening has improved little during the sample period which portrays improvement in efficiency of markets and, there is visible rise in intraday 15 minutes volatility during the first hour of the normal market trading. we also find whether volatility could be a cause of order imbalance and poor information content. we explore the pattern of order f low, and deduce that the number of trades has risen. we find that, quantity traded in pre-opening remains a small portion of the total volume in normal trade (only 0.18%), limit orders comprise over 98% of all orders, the order cancellation rate is only 3% of the total orders, and proportion of buy orders is more than that of sell orders. the number of sell type modified orders is higher than buy type modified orders. further, we gather that the time interval of modification for sell type orders is lower than the interval of modification for buy type orders. observing the corresponding impact in the normal market, we find the first 15 minutes realized volatility has increased. testing for the realised volatility for the day, and auction indicators, we observe that both the opening order imbalance and pre-market traded volume, inf luence end of the day volatility significantly. the paper is divided into four different chapters. in the second chapter, a literature review is presented about the information models. the third chapter presents the empirical research, using hypotheses considering the final objective of this study, the final results and statistical tests, as well as its discussion. in the last chapter, the conclusions are specified. information content of stocks in call auction… 115 the research methodology and the research process the empirical issues concerning call auction in information and efficiency has drawn reasonable attention in literature. broadly, the empirical literature on call auctions, have dwelt upon stock performance within the split sample test windows, attempts to devise measures to compare the market level changes to abnormal or excess returns across fixed windows. literature review the literature on market microstructure forms the basis of efficiency testing which includes madhavan and panchapagesan (2000), who tested the variance ratio of normal price to opening price for us markets. earlier, madhavan (1992), amihud, mendelson, and lauterbach (1997) and kalay, wei, and wohl (2002) had shown that the normal markets could fail when information asymmetry was higher. the authors used a measure of is (information share) to provide relative information content of individual markets. an indicative measure of information share component was also discussed by booth, so and tse (1999), chu, hsieh and tse (1999) and baillie, booth, tse, and zabotina (2002), who detected the transitory components of volatility, as suggested in gonzalo and granger (1995). schwartz and wood (2001) comprehensively determined the impact of call auction in nasdaq and found is significant and effective. pagano and schwartz (2003) used short return intervals of 1–20 days for euro next paris to understand the changes to returns. kalay et al. (2002) examined. israel stock exchange and noted decline in traded volume for small stocks post the auction, compared to continuous trading. ellul, shin, and tonks (2005) explored call auction performance at london stock exchange and found that call markets were good for price discovery. chang, rhee, stone and tang (2008) tested the scenarios of opening and closing of the market in singapore stock exchange. hanousek and kopøiva (2011) covered the prague stock exchange, analyzing the behaviour of market makers and their ability to maintain private information on large orders, using the modified easley, kiefer, o’hara and paperman (1996) method. these suggested measures of is or information content (viz., madhavan, 1992, gonzalo & granger, 1995) cannot be directly related or easily applied to indian markets. this is because the nature of volume generation and distribution during pre open at nse (national stock exchange) is disdinabandhu bag116 crete and less ordered since the order entry duration of 8 minutes is too short for the total auction duration of 15 minutes only. there are few studies on the impact of call auction for indian markets, particularly, agrawalla and pandey (2013), acharya and gaikwad (2014) and camilleri (2015) respectively. acharya and gaikwad (2014), agrawalla et al. (2013) summarised the variation in returns for 56 tickers using 6 months data for the year 2010. agrawalla et al. (2013) tested the holding period return across intervals of 1-20 days, but could not establish any major effects of the opening auction on normal markets. acharya and gaikwad (2014) confined to call auctions to bse & nse and found no significant improvement in price discovery process. none of these authors (for example, acharya & gaikwad, 2014; agrawalla et al., 2013), did focus on the information content of indian markets exclusively. camilleri (2015) suggested that call auctions had a negative effect on vel (volatility, efficiency & liquidity) in nse. and therefore auctions could not be confirmed to reduce nse volatility. meanwhile, across the globe, the specific literature on (pin) probability of informed trading developed and this led to further work on gauging the ability of non-parametric indicators to foresee market events. informational probability measures developed by cao, ghysels and hatheway (2000) and tao (2011) such as the wqpc (weighted quoted price contribution) were applied to trace the changes to entropy. easley et al. (1996) designed (vpin) volume probability of information trade, with the sole aim to predict market crashes. later, few other works highlighted pin and its variations to many exchanges. easley, de prado and o’hara (2012) suggested variable probability of informed trading (vpin) that could detect order f low imbalance one hour prior to a f lash crash. octavian cosmin and mihai filip (2016) in their study of the pin, for the bucharest stock exchange, derived the set of macroeconomic drivers for the pin. cosmin and filip (2016) determined that the macro indicators of exchange rate, interest rate, oil price changes inf luenced the pin in hungary. zheng (2017), in a study of china, has found positive results where the vpin could successfully monitor the pin of the indices of ic 500, if 300 and ih 50, and it provided a test of early warning against the “circuit-breaker”. abad, massot and pascual (2018) have found the major limitations of vipn in the form of its poor signalling ability of abnormal illiquidity, or to foresee toxic outcomes. vpin based market decisions could not do better than the ordinary limit order transactions. to summarize, the imbalance in the market is denoted as the equivalence of probability of information trading (pin). thus, vpin method is to apprehend information content of stocks in call auction… 117 the source of volatility or the order f low process. this means the imbalance is a result of a disproportionate number of buy trades versus sell trades, where the sale trades are more in number. the root cause of rise or fall in vpin is the order f low pattern occurring during the auction. the order f low in an auction is composed by a sequence of limit orders and market orders that can be modified or cancelled. the arrival of newer information generates orders, signals other agents to update their orders and causes change in price. if an order f low process is completely random, an incremental buy order will move up average prices. hasbrouck (2002) had demonstrated that the volatility at market open is ordinarily driven by higher f low of public information. so long as the players perceive that the equilibrium price accurately ref lects the fair price, they react rationally. the attempts of bidder to modify orders, cancelling an order after entry, or, for example, large buy orders against small sell orders, etc., are the portrayal of irrational behaviour by members, which aggravates the order imbalance. hence, players may perceive the prices as unnatural because of imbalance in inventory and may overreact that causes volatility. order imbalance is a classic case of a surplus of buy orders than sell orders for any given security. there are many instances when the peak order imbalance has made exchange managers to suspend and halt trading. the smaller stocks or illiquid stocks may make imbalances to persist longer which could be due to inventory issues. most order imbalances are shortlived. limit orders can provide temporary protection against price changes from order imbalances in the pre-opening session. objectives and hypothesis the objectives of the study are to examine the order generation as market depth, during auction and measuring the changes to information content of the call auction, and arriving at the inf luence on the intraday volatility. we find whether volatility could be a cause of order imbalance and poor information content. we formulate the following hypothesis to explore the importance of order f low generation; hypothesis 1: information content of pre opening auction impacts the market. 1.1. the information content for each stock is impacted during auction. 1.2. information content is impacted by volatility in the futures segment market. dinabandhu bag118 hypothesis 2: intraday volatility of normal markets is higher 2.1. intraday volatility is higher in the opening hours. 2.2. auction volume impacts volatility. sample and data data the nse data includes daily traded data from pre-opening sessions. pre-opening data includes both limit price orders & market orders. it also includes normal trade data for the same days of pre-market auction samples of stocks. the data had been collected in 2013. table 1 describes the sample observation window. table 1. sampling design type number of stocks months pre-market 104 april to september normal trades 104 april to september n o t e : the sample included all 104 stocks traded on all days in the pre-market session. the normal trade data for the 104 stocks were collected for a 6 months period from april to september. s o u r c e : national stock exchange (2013). to calculate daily spin for each stock, the pre opening call auction data was collected for the period from april & may, and august & september for four months. the normal trading data includes trade data from the period april & may, and august & september for four months. the pre-opening data for june and july were not included in spin calculation because of noise in two months of trade data. we present this analysis as a split sample comparison between 2months which is separated by a gap of 2 months. model: pin earlier works of shannon (1948), who presented an entropy measure to summarize average information content associated with any random outcome. information content of stocks in call auction… 119 shannon (1948) showed that any definition of entropy could be expressed as: entropy= k x p(xi) log[p(xi)] eq. (1) where, k is a constant and xi is observed variate. the continuity assumption in shannon (1948) is moderated for auction markets, where, size of an order signals information to other market players, the volume synchronized probability of information (vpin) (easley, hvidkjaer & o’hara, 2002), which owes itself to basic pin (easley et al., 1996). probability informed trading (pin) is computed from the expected probability of information that could cause a change in quoted price. bayesian incidences or prior probabilities are used to arrive at the expected information content. both pin (easley et al., 1996) and vpin (easley et al., 2002) include information on volume, time, classified trades and trade intensity, which cannot be easily applied to regional exchanges (e.g., nse) because of its smaller scale and short duration interval in nature. to simplify the vpin to the setting of a regional exchange (e.g., nse), we proceed as follows. let’s denote a security’s current price as s0. the arrival and transmission of new information causes the price, s0 to be either sb (due to bad news) or sg (due to good news) with some probability (p ≥ 0). the probability (p ≥ 0) that the news is good news and a probability (1-p ≥ 0) that the news will be bad. the expected price in time t, of information (vpin) (easley, hvidkjaer, and o’hara, (2002), which owes itself to basic pin (easley et al., 1996). probability informed trading (pin) is computed from the expected probability of information that could cause a change in quoted price. bayesian incidences or prior probabilities are used to arrive at the expected information content. both pin (easley et al. 1996) and vpin (easley et al. 2002) include information on volume, time, classified trades and trade intensity, which cannot be easily applied to regional exchanges (e.g., nse) because of its smaller scale and short duration interval in nature. to simplify the vpin to the setting of a regional exchange (e.g., nse), we proceed as follows. let’s denote a security's current price as s0. the arrival and transmission of new information causes the price, s0 to be either sb (due to bad news) or sg (due to good news) with some probability (p ≥ 0). the probability (p ≥ 0) that the news is good news and a probability (1-p ≥ 0) that the news will be bad. the expected price in time t, 𝐸𝐸(𝑆𝑆� ) = 𝑝𝑝 𝑝 𝑆𝑆� + (1 − 𝑝𝑝) 𝑝 𝑆𝑆� eq. (2) a poisson distribution would simulate the arrival of more informed specialist traders at a known rate μ, and normal traders at known rate ε. the standard case of probability of arrival of information is (p = �� ), and probability of good or bad is (p = �� ) gives rise to eq. (3); 𝑃𝑃𝑃𝑃𝑃𝑃 = ���� eq. (4) volume flow mimics the arrival of information during the auction. the sample of volume is divided into volume buckets such that each bucket comprises equal volume. the volume is classified as buy, and sell. within a given volume bucket, the volume is the total of buy volume (vb traded against the ask), and sell volume (vs). all the buckets are of equal size, v = 𝑛𝑛 𝑝 (𝑛𝑛� + 𝑛𝑛� ) = 𝑛𝑛 𝑝 𝑛𝑛� eq. (5) where n is the number of buckets. vt is the total volume per bucket where all buckets will contain an equal amount of volume v. order imbalance exists with the excess of buy orders over the sell orders for each stock. we calculate order imbalance for each stock on day t, as ; eq. (2) a poisson distribution would simulate the arrival of more informed specialist traders at a known rate μ, and normal traders at known rate ε. the standard case of probability of arrival of information is of information (vpin) (easley, hvidkjaer, and o’hara, (2002), which owes itself to basic pin (easley et al., 1996). probability informed trading (pin) is computed from the expected probability of information that could cause a change in quoted price. bayesian incidences or prior probabilities are used to arrive at the expected information content. both pin (easley et al. 1996) and vpin (easley et al. 2002) include information on volume, time, classified trades and trade intensity, which cannot be easily applied to regional exchanges (e.g., nse) because of its smaller scale and short duration interval in nature. to simplify the vpin to the setting of a regional exchange (e.g., nse), we proceed as follows. let’s denote a security's current price as s0. the arrival and transmission of new information causes the price, s0 to be either sb (due to bad news) or sg (due to good news) with some probability (p ≥ 0). the probability (p ≥ 0) that the news is good news and a probability (1-p ≥ 0) that the news will be bad. the expected price in time t, 𝐸𝐸(𝑆𝑆� ) = 𝑝𝑝 𝑝 𝑆𝑆� + (1 − 𝑝𝑝) 𝑝 𝑆𝑆� eq. (2) a poisson distribution would simulate the arrival of more informed specialist traders at a known rate μ, and normal traders at known rate ε. the standard case of probability of arrival of information is (p = �� ), and probability of good or bad is (p = �� ) gives rise to eq. (3); 𝑃𝑃𝑃𝑃𝑃𝑃 = ���� eq. (4) volume flow mimics the arrival of information during the auction. the sample of volume is divided into volume buckets such that each bucket comprises equal volume. the volume is classified as buy, and sell. within a given volume bucket, the volume is the total of buy volume (vb traded against the ask), and sell volume (vs). all the buckets are of equal size, v = 𝑛𝑛 𝑝 (𝑛𝑛� + 𝑛𝑛� ) = 𝑛𝑛 𝑝 𝑛𝑛� eq. (5) where n is the number of buckets. vt is the total volume per bucket where all buckets will contain an equal amount of volume v. order imbalance exists with the excess of buy orders over the sell orders for each stock. we calculate order imbalance for each stock on day t, as ; and probability of good or bad is of information (vpin) (easley, hvidkjaer, and o’hara, (2002), which owes itself to basic pin (easley et al., 1996). probability informed trading (pin) is computed from the expected probability of information that could cause a change in quoted price. bayesian incidences or prior probabilities are used to arrive at the expected information content. both pin (easley et al. 1996) and vpin (easley et al. 2002) include information on volume, time, classified trades and trade intensity, which cannot be easily applied to regional exchanges (e.g., nse) because of its smaller scale and short duration interval in nature. to simplify the vpin to the setting of a regional exchange (e.g., nse), we proceed as follows. let’s denote a security's current price as s0. the arrival and transmission of new information causes the price, s0 to be either sb (due to bad news) or sg (due to good news) with some probability (p ≥ 0). the probability (p ≥ 0) that the news is good news and a probability (1-p ≥ 0) that the news will be bad. the expected price in time t, 𝐸𝐸(𝑆𝑆� ) = 𝑝𝑝 𝑝 𝑆𝑆� + (1 − 𝑝𝑝) 𝑝 𝑆𝑆� eq. (2) a poisson distribution would simulate the arrival of more informed specialist traders at a known rate μ, and normal traders at known rate ε. the standard case of probability of arrival of information is (p = �� ), and probability of good or bad is (p = �� ) gives rise to eq. (3); 𝑃𝑃𝑃𝑃𝑃𝑃 = ���� eq. (4) volume flow mimics the arrival of information during the auction. the sample of volume is divided into volume buckets such that each bucket comprises equal volume. the volume is classified as buy, and sell. within a given volume bucket, the volume is the total of buy volume (vb traded against the ask), and sell volume (vs). all the buckets are of equal size, v = 𝑛𝑛 𝑝 (𝑛𝑛� + 𝑛𝑛� ) = 𝑛𝑛 𝑝 𝑛𝑛� eq. (5) where n is the number of buckets. vt is the total volume per bucket where all buckets will contain an equal amount of volume v. order imbalance exists with the excess of buy orders over the sell orders for each stock. we calculate order imbalance for each stock on day t, as ; gives rise to eq. (3) of information (vpin) (easley, hvidkjaer, and o’hara, (2002), which owes itself to basic pin (easley et al., 1996). probability informed trading (pin) is computed from the expected probability of information that could cause a change in quoted price. bayesian incidences or prior probabilities are used to arrive at the expected information content. both pin (easley et al. 1996) and vpin (easley et al. 2002) include information on volume, time, classified trades and trade intensity, which cannot be easily applied to regional exchanges (e.g., nse) because of its smaller scale and short duration interval in nature. to simplify the vpin to the setting of a regional exchange (e.g., nse), we proceed as follows. let’s denote a security's current price as s0. the arrival and transmission of new information causes the price, s0 to be either sb (due to bad news) or sg (due to good news) with some probability (p ≥ 0). the probability (p ≥ 0) that the news is good news and a probability (1-p ≥ 0) that the news will be bad. the expected price in time t, 𝐸𝐸(𝑆𝑆� ) = 𝑝𝑝 𝑝 𝑆𝑆� + (1 − 𝑝𝑝) 𝑝 𝑆𝑆� eq. (2) a poisson distribution would simulate the arrival of more informed specialist traders at a known rate μ, and normal traders at known rate ε. the standard case of probability of arrival of information is (p = �� ), and probability of good or bad is (p = �� ) gives rise to eq. (3); 𝑃𝑃𝑃𝑃𝑃𝑃 = ���� eq. (4) volume flow mimics the arrival of information during the auction. the sample of volume is divided into volume buckets such that each bucket comprises equal volume. the volume is classified as buy, and sell. within a given volume bucket, the volume is the total of buy volume (vb traded against the ask), and sell volume (vs). all the buckets are of equal size, v = 𝑛𝑛 𝑝 (𝑛𝑛� + 𝑛𝑛� ) = 𝑛𝑛 𝑝 𝑛𝑛� eq. (5) where n is the number of buckets. vt is the total volume per bucket where all buckets will contain an equal amount of volume v. order imbalance exists with the excess of buy orders over the sell orders for each stock. we calculate order imbalance for each stock on day t, as ; eq.(4) volume f low mimics the arrival of information during the auction. the sample of volume is divided into volume buckets such that each bucket comprises dinabandhu bag120 equal volume. the volume is classified as buy, and sell. within a given volume bucket, the volume is the total of buy volume (vb traded against the ask), and sell volume (vs). all the buckets are of equal size, of information (vpin) (easley, hvidkjaer, and o’hara, (2002), which owes itself to basic pin (easley et al., 1996). probability informed trading (pin) is computed from the expected probability of information that could cause a change in quoted price. bayesian incidences or prior probabilities are used to arrive at the expected information content. both pin (easley et al. 1996) and vpin (easley et al. 2002) include information on volume, time, classified trades and trade intensity, which cannot be easily applied to regional exchanges (e.g., nse) because of its smaller scale and short duration interval in nature. to simplify the vpin to the setting of a regional exchange (e.g., nse), we proceed as follows. let’s denote a security's current price as s0. the arrival and transmission of new information causes the price, s0 to be either sb (due to bad news) or sg (due to good news) with some probability (p ≥ 0). the probability (p ≥ 0) that the news is good news and a probability (1-p ≥ 0) that the news will be bad. the expected price in time t, 𝐸𝐸(𝑆𝑆� ) = 𝑝𝑝 𝑝 𝑆𝑆� + (1 − 𝑝𝑝) 𝑝 𝑆𝑆� eq. (2) a poisson distribution would simulate the arrival of more informed specialist traders at a known rate μ, and normal traders at known rate ε. the standard case of probability of arrival of information is (p = �� ), and probability of good or bad is (p = �� ) gives rise to eq. (3); 𝑃𝑃𝑃𝑃𝑃𝑃 = ���� eq. (4) volume flow mimics the arrival of information during the auction. the sample of volume is divided into volume buckets such that each bucket comprises equal volume. the volume is classified as buy, and sell. within a given volume bucket, the volume is the total of buy volume (vb traded against the ask), and sell volume (vs). all the buckets are of equal size, v = 𝑛𝑛 𝑝 (𝑛𝑛� + 𝑛𝑛� ) = 𝑛𝑛 𝑝 𝑛𝑛� eq. (5) where n is the number of buckets. vt is the total volume per bucket where all buckets will contain an equal amount of volume v. order imbalance exists with the excess of buy orders over the sell orders for each stock. we calculate order imbalance for each stock on day t, as ; eq. (5) where n is the number of buckets. vt is the total volume per bucket where all buckets will contain an equal amount of volume v. order imbalance exists with the excess of buy orders over the sell orders for each stock. we calculate order imbalance for each stock on day t, as: order imbalance i,t = │vb -vs │ eq. (6) where vb is volume of buy orders and vs, volume of sell orders, for stock i and time t, therefore order imbalancei,t ≥ 0 for all i, t. the total order imbalance for each stock i trading day t equals sum total of (∑t ) order imbalancei,t during the day t. hence, we define a measure of information content for pre-opening session to be known as spin (simple probability information ratio) as given below: order imbalancei,t = │vb -vs │ eq. (6) where vb is volume of buy orders and vs, volume of sell orders, for stock i and time t, therefore order imbalancei,t ≥ 0 for all i, t. the total order imbalance for each stock i trading day t equals sum total of (∑t ) order imbalancei,t during the day t. hence, we define a measure of information content for pre-opening session to be known as spin (simple probability information ratio) as given below; 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆��� = │�����││�����│ eq. (7) where, spini,t follows a distribution that varies between (0,1). barclay and warner (1993), (also barclay and hendershott, 2008), have mentioned that the normalization of imbalance numbers can reduce the heteroscedasticity in observations. value of spin close to 0 represents higher information efficiency and 1 represents lowest information efficiency. we compute spini,t for each ticker day during the trading months of april, may, august and september. model: impact of imbalance the next objective of evaluating the effect of volatility by choosing a commonly denominated indicator of intraday volatility, known as realised volatility. rv, which is the daily (i.e., open-to-close) realized volatility; rv = log(pn / pn-1) eq. (7) a simple specification of the model for rvol is given below; rvolit= α + βm rvolit-m + βt-m rvoli,t-m + γit oii + μit volumei+ εt eq. (8) where, rvol is the intraday realized volatility (end of the day) which is the cumulative realized volatility incremented at one minute interval, during the day, oii are order imbalance of stock i, volumei is the pre-market traded volume for stock i. the specification in equation (8) is a test of the resilience of beginning intraday variability, on the end of the day variability. it is also a test of the impact of information content on volatility. for example, it takes into consideration the earliest (foremost) lag of rvol as a eq. (7) where, spini,t follows a distribution that varies between (0,1). barclay and warner (1993), (also barclay & hendershott, 2008), have mentioned that the normalization of imbalance numbers can reduce the heteroscedasticity in observations. value of spin close to 0 represents higher information efficiency and 1 represents lowest information efficiency. we compute spini,t for each ticker day during the trading months of april, may, august and september. information content of stocks in call auction… 121 model: impact of imbalance the next objective of evaluating the effect of volatility by choosing a commonly denominated indicator of intraday volatility, known as realised volatility. rv, which is the daily (i.e., open-to-close) realized volatility: rv = log(pn / pn-1) eq. (8) a simple specification of the model for rvol is given below: rvolit= α + βm rvolit-m + βt-m rvoli,t-m + γit oii + μit volumei+ εt eq. (9) where, rvol is the intraday realized volatility (end of the day) which is the cumulative realized volatility incremented at one minute interval, during the day, oii are order imbalance of stock i, volumei is the pre-market traded volume for stock i. the specification in equation (9) is a test of the resilience of beginning intraday variability, on the end of the day variability. it is also a test of the impact of information content on volatility. for example, it takes into consideration the earliest (foremost) lag of rvol as a regressand (lagged dependent variable) in the model. this specification of the model which includes the lags of rvol(t), is to ensure that persistence component is detected thoroughly. the model in equation (9) is tested with two major specifications of 1) pooled regression and 2) sur (seemingly unrelated regression), respectively. the sur specification ignores fixed effects across stocks. for the sake of generality and simplicity, we ignore the presence of simultaneous cross correlations (of rvol among stocks in our sample. results and conclusions of the research process model: pin figure 1(a) and 1(b) provide the variation in the most minimum spin values of few stocks for the period for april, may, and august and september, respectively. similarly, figure 2(a) and 2(b) provide the most maximum spin values of few stocks for april, may, and august and september, respectively. minimum imbaldinabandhu bag122 ance (spin=0) ref lects the absence of asymmetry and the maximum imbalance (spin=1) ref lects the presence of asymmetry. table 2 provides the descriptive statistics of spin (simple probability information and order imbalance). it picturise the sample mean, extreme days of spin and the deviation from the mean values. it also provides the names of tickers and the dates alongside when these stocks displayed extreme values (minimum or maximum) of spin during the period. as shown in table 2, the mean spin value of 0.45 for the market ref lects that the information content is somewhat better than 0.5, but it is still far away from attaining the value 0. we sorted the individual spin values of each stock by descending order to find the dates on which they displayed the minimum information, and the dates on which they displayed maximum information. the average spin of five (5) minimum information stocks has not increased in the later period. figure 1 (a). variation of minimum information stocks (spin) (april to may) figure 1 (a). variation of minimum information stocks (spin) (april to may) note: the stocks are illiquid and hence information content is lower. source: author’s compilation. figure 1 (b). variation of minimum information stocks (spin) (august to september) 0,00 0,40 0,80 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 torntphar smlisuzu arshiya sanghvifo chemfalka mean 0 0,4 0,8 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 torntphar smlisuzu arshiya sanghvifo chemfalka mean n o t e : the stocks are illiquid and hence information content is lower. s o u r c e : author’s compilation. figure 1 (b). variation of minimum information stocks (spin) (august to september) figure 1 (a). variation of minimum information stocks (spin) (april to may) note: the stocks are illiquid and hence information content is lower. source: author’s compilation. figure 1 (b). variation of minimum information stocks (spin) (august to september) 0,00 0,40 0,80 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 a pr -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 torntphar smlisuzu arshiya sanghvifo chemfalka mean 0 0,4 0,8 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 a ug -1 3 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 se p13 torntphar smlisuzu arshiya sanghvifo chemfalka mean n o t e : the stocks are illiquid and hence information content is lower. s o u r c e : author’s compilation. figure 2 (a). variation of maximum information stocks (spin) (april to may) note: the stocks are illiquid and hence information content is lower. source: author’s compilation. figure 2 (a). variation of maximum information stocks (spin) (april to may) note: the 4 stocks are nifty stocks and information content is higher. source: author’s compilation figure 2 (b). variation of maximum information stocks (spin) (august to september) 0 0,4 0,8 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 a pr il13 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 m ay -1 3 dpscltd rubymills gardensil vikasglob mean n o t e : the 4 stocks are nifty stocks and information content is higher. s o u r c e : author’s compilation dinabandhu bag124 figure 2 (b). variation of maximum information stocks (spin) (august to september) note: the 4 stocks are nifty stocks and information content is higher. source: author’s compilation 0,00 0,40 0,80 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 a ug us t13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 se pt em be r13 dpscltd rubymills gardensil vikasglob mean n o t e : the 4 stocks are nifty stocks and information content is higher. s o u r c e : author’s compilation the reasons for poor information share are due to poor liquidity of the stocks in the sample. table 2. descriptive statistics spin (simple probability information ratio) period spin 2013 number of observations nt (6218) n (stocks) 75 maximum minimum mean std 1 0 0.45 0.29 t (trade days) 82 extreme event daysmaximum spin date symbol spin mean std 10-may-13 arshiya 1 0.39 0.30 13-aug-13 sanghvifo 1 0.53 0.30 21-aug-13 chemfalka 1 0.57 0.29 21-aug-13 gardensil 1 0.57 0.29 24-sep-13 dpscltd 1 0.41 0.28 information content of stocks in call auction… 125 period spin 2013 number of observations nt (6218) n (stocks) 75 maximum minimum mean std 1 0 0.45 0.29 t (trade days) 82 25-sep-13 dpscltd 1 0.42 0.26 26-sep-13 dpscltd 1 0.45 0.29 27-sep-13 dpscltd 1 0.39 0.28 extreme event daysminimum spin date symbol spin mean std 2-apr-13 dpscltd 0 0.39 0.29 2-apr-13 suprajit 0 0.39 0.30 5-apr-13 haritasea 0 0.42 0.28 25-apr-13 moil 0 0.47 0.30 3-may-13 zodiaclot 0 0.44 0.28 14-may-13 tornt pharma 0 0.37 0.30 12-aug-13 rubymills 0 0.55 0.29 2-sep-13 smli suzuki 0 0.40 0.29 3-sep-13 vikas global 0 0.48 0.27 5-sep-13 vikasglobal 0 0.47 0.30 6-sep-13 vikasglobal 0 0.41 0.27 10-sep-13 vikas global 0 0.43 0.29 12-sep-13 vikas global 0 0.41 0.27 18-sep-13 vikas global 0 0.38 0.27 27-sep-13 vikas global 0 0.39 0.28 30-sep-13 vikas global 0 0.40 0.28 n o t e : sample mean of 0.45 is closer to 0 and is better than 1.0. no. of stocks which achieved full information share in the sample period were only 11. the reasons for poor information share are due to poor liquidity for those stocks. s o u r c e : author’s calculation. table 2. descriptive… dinabandhu bag126 table 3. volatility changes of normal trades minute no. observations average spread average realized variance 1 2625 0.168 0.0005 2 2625 0.248 0.0006 3 2625 0.308 0.0006 4 2625 0.359 0.0007 5 2625 0.403 0.0007 6 2625 0.447 0.0008 7 2625 0.489 0.0008 8 2625 0.525 0.0008 9 2625 0.56 0.0009 10 2625 0.594 0.0009 11 2625 0.626 0.0009 12 2625 0.659 0.0010 13 2625 0.69 0.0010 14 2625 0.721 0.0010 15 2625 0.751 0.00104 n o t e : we find rise in both spread and realized volatility, where 3 2625 0.308 0.0006 4 2625 0.359 0.0007 5 2625 0.403 0.0007 6 2625 0.447 0.0008 7 2625 0.489 0.0008 8 2625 0.525 0.0008 9 2625 0.56 0.0009 10 2625 0.594 0.0009 11 2625 0.626 0.0009 12 2625 0.659 0.0010 13 2625 0.69 0.0010 14 2625 0.721 0.0010 15 2625 0.751 0.00104 note: we find rise in both spread and realized volatility, where 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑆 𝑅�����_���������𝑅�����𝑅���������𝑅�����𝑅 � and, 𝑅𝑅𝑆𝑆𝑆𝑆𝑅𝑅𝑅𝑅𝑅𝑅𝑆𝑆𝑆𝑆 𝑅𝑅𝑆𝑆𝑆𝑆𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑆𝑆 𝑆 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑆𝑆𝑅 𝑅 𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑆𝑆𝑅𝑅]� . both spread and realized volatility increases from 1 minute to the 15th minute during the first hour of trading. source: author’s calculation. for the corresponding period in our sample, table 3 provides the volatility changes which shows that the variance of normal trades has increased in the first 15 minutes of trading. model: impact of imbalance table 4 shows the realised variance (rv) model estimates. the results reflect that the influence of pre-market indicators on the end of the day variance is significant. we also find that order imbalance, pre-market trading volume seem to impact the end of the day rvol significantly. table 4. impact of spin on realized volatility (rvol) dependent variable rvol estimation method (1) pooled regression (2) sur intercept 0.01( .2) 0.01( .2) rvol(23) 0.7 ( <.0001) 0.7 ( <.0001) rvol(22) 0.4 ( <.0001) 0.4 ( <.0001) order imbalance 8.61e-06 ( <.0001) 8.61e-06 ( <.0001) pre-market trade quantity 3.5e-06 ( <.0001) 3.5e-06 ( <.0001) nt (total observation) 3,381 3,381 n (stocks) 104 104 t (traded days) 48 48 and, 3 2625 0.308 0.0006 4 2625 0.359 0.0007 5 2625 0.403 0.0007 6 2625 0.447 0.0008 7 2625 0.489 0.0008 8 2625 0.525 0.0008 9 2625 0.56 0.0009 10 2625 0.594 0.0009 11 2625 0.626 0.0009 12 2625 0.659 0.0010 13 2625 0.69 0.0010 14 2625 0.721 0.0010 15 2625 0.751 0.00104 note: we find rise in both spread and realized volatility, where 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑆 𝑅�����_���������𝑅�����𝑅���������𝑅�����𝑅 � and, 𝑅𝑅𝑆𝑆𝑆𝑆𝑅𝑅𝑅𝑅𝑅𝑅𝑆𝑆𝑆𝑆 𝑅𝑅𝑆𝑆𝑆𝑆𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑆𝑆 𝑆 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑆𝑆𝑅 𝑅 𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑆𝑆𝑅𝑅𝑅𝑅𝑆𝑆𝑅𝑅]� . both spread and realized volatility increases from 1 minute to the 15th minute during the first hour of trading. source: author’s calculation. for the corresponding period in our sample, table 3 provides the volatility changes which shows that the variance of normal trades has increased in the first 15 minutes of trading. model: impact of imbalance table 4 shows the realised variance (rv) model estimates. the results reflect that the influence of pre-market indicators on the end of the day variance is significant. we also find that order imbalance, pre-market trading volume seem to impact the end of the day rvol significantly. table 4. impact of spin on realized volatility (rvol) dependent variable rvol estimation method (1) pooled regression (2) sur intercept 0.01( .2) 0.01( .2) rvol(23) 0.7 ( <.0001) 0.7 ( <.0001) rvol(22) 0.4 ( <.0001) 0.4 ( <.0001) order imbalance 8.61e-06 ( <.0001) 8.61e-06 ( <.0001) pre-market trade quantity 3.5e-06 ( <.0001) 3.5e-06 ( <.0001) nt (total observation) 3,381 3,381 n (stocks) 104 104 t (traded days) 48 48 . both spread and realized volatility increases from 1 minute to the 15th minute during the first hour of trading. source : author’s calculation. for the corresponding period in our sample, table 3 provides the volatility changes which shows that the variance of normal trades has increased in the first 15 minutes of trading. model: impact of imbalance table 4 shows the realised variance (rv) model estimates. the results ref lect that the inf luence of pre-market indicators on the end of the day variance is sig information content of stocks in call auction… 127 nificant. we also find that order imbalance, pre-market trading volume seem to impact the end of the day rvol significantly. table 4. impact of spin on realized volatility (rvol) dependent variable rvol estimation method (1) pooled regression (2) sur intercept 0.01( .2) 0.01( .2) rvol(23) 0.7 ( <.0001) 0.7 ( <.0001) rvol(22) 0.4 ( <.0001) 0.4 ( <.0001) order imbalance 8.61e-06 ( <.0001) 8.61e-06 ( <.0001) pre-market trade quantity 3.5e-06 ( <.0001) 3.5e-06 ( <.0001) nt (total observation) 3,381 3,381 n (stocks) 104 104 t (traded days) 48 48 sse 127 127 mse 0.1246 0.1246 r-square 0.9305 0.9305 n o t e : 1. (21) indicates the lag number of the indicator, 21 times of 15 minutes which is the rvol at 5 hours 15 minutes before the end of the day. (22) indicates 22 times of 15 minutes each which is the rvol at 5 hours 30 minutes before the end of the day. 2. parenthesis indicates the significance of p-values of the parameter coefficients. pre-opening indicators are significant. 3. the sur model is estimated without fixed effects. 4. we ignore simultaneous cross correlations of rvol (in our sample). s o u r c e : author’s calculation with the sample of normal trade tickers for 2013. it shows that the inf luence of order imbalance is about 2.5 times the traded volume on the realized variance. our results are in consonance with previous findings with respect to regional exchanges (e.g., nse), namely, bacidore, polidore, xu and yang (2012) who established that volume imbalance during preopen auction led to enhanced volatility. kehr, krahnen and theissen (2001) concluded that intervention in the auction could enhance order f low, reduce volatility and increase price efficiency. this is in concordance with the previdinabandhu bag128 ous findings of octavian cosmin and mihai filip (2016) who had used vpin as a dependent variable to detect exchange rate, interest rate and oil price changes as independent variables in their test model. we carry out a second test of the model parameter estimates from the reported volatility of the future segment for the corresponding days of minimum information. for this test, as shown in table 5 we report the order imbalance and the corresponding daily nse futures volatility. this is the related observation on the phenomenon of spikes in the futures segment. we find that the market displays over reaction of players on the date of expiry1 of index futures. the spikes are also observable one day ahead of the day of expiry (wednesdays). table 5. nifty index futures volatility against matching pre-market dates trading date number of contracts nearest expiry date futures daily volatility+ pre-open auction date number of pre-market trades pre-market order imbalance in pre-open auction 23-apr-13 (wednesday) 410,634 25-apr-13 0.0100 4/23/2013 16,078 75,606 25-apr-13 (thursday) 602,387 25-apr-13 0.0102 4/25/2013 59,373 62,886 30-apr-13 (wednesday) 430,430 30-may-13 0.0094 04/30/2013 n.a. 63,679 29-may-13 (wednesday) 350,560 30-may-13 0.0107 5/29/2013 27,272 84,403 30-may-13 (thursday) 533,435 30-may-13 0.0105 5/30/2013 15,047 69,584 16-aug-13 (friday) 338,425 29-aug-13 0.0151 8/16/2013 n.a. 376,380 28-aug-13 (wednesday) 883,258 29-aug-13 0.0161 8/29/2013 10,504 442,518 29-aug-13 (thursday) 876,965 25-sep-13 0.0166 9/25/2013 9,811 82,712 19-sep-13 (thursday) 413,400 26-sep-13 0.01900 9/19/2013 n.a. 45,175 1 normally, the expiry date is the last thursday of each month unless it is a holiday, nse. information content of stocks in call auction… 129 trading date number of contracts nearest expiry date futures daily volatility+ pre-open auction date number of pre-market trades pre-market order imbalance in pre-open auction 25-sep-13 (wednesday) 526,516 26-sep-13 0.0179 9/26/2013 1,36,466 76,117 n o t e : on days of settlement (last thursday) and one day before the settlement (wednesday), we find significant activity in pre-open session in the form of high traded volume and order imbalances. days which are not close to days of future settlement dates (last thursdays), the volume imbalances are lower than other days. s o u r c e : author’s compilation from national stock exchange, 2013. further we find higher trading volume during pre-opening sessions on these days as compared to other days. we also find higher volume imbalance on days on or ahead of nifty futures expiry dates2. for example, may 29th, nifty volatility is 0.107 which is higher than april 23rd, and so also on august 28th and august 29th of 2013. these results reinforce our confidence in the analysis. probably, one way to curtail volatility could be a separate pre-opening auction for futures.  conclusions overall, we conclude with our findings on the lower average spin value of 0.45 for the market which is due to shorter duration of the auction and also lower liquidity. therefore, a longer duration of auction (pagano & schwartz, 2003) could lead to better discovery and lower volatility. euronext paris already incorporates order imbalance in its call auction summary that allows market makers to remain active. our results are in consonance with previous findings with respect to regional exchanges (e.g., nse), namely, bacidore et al. (2012) who established that volume imbalance during pre-open auction led to enhanced volatility. kehr, krahnen and theissen (2001) concluded that intervention in the auction could enhance order f low, reduce volatility and increase price efficiency. 2 for dates away from the expiry dates, which are not the last thursdays of the month, the volume imbalances are much lower. table 5. nifty… dinabandhu bag130 this study covered to envisage information content of the short duration pre-opening session. call auctions have drawn worldwide attention across exchanges and have been implemented successfully. we demonstrated few significant empirical issues in relation to the impact, mainly the order imbalance effect, increased volatility in the normal market. the reliable measures of spin developed by us is much simpler to implement as compared to both the vpin3 and pin which are applied to situations of discrete prices such as the pre-opening call. there are few questions that emerge from this analysis, which are interesting to verify, such as, a large number of non -nifty tickers are not traded during pre opening. similarly, the duration of the auction plays a big role since a longer duration of the pre-opening session from 7 minutes will also allow more players to participate. in this study, we adopted a simple innovation to the basic pin model to detect information content of nse pre-market. our spin measure is an approximation for a discontinuous market which may not be as accurate as a continuous market. one cannot use spin to foresee f lash crashes. further research should include deeper innovation of pin that can be applied to high frequency data, recent period data to emerging markets.  references abad, d., massot, m., & pascual, r. 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(2001). calling the open: price discovery evidence from nasdaq. working paper, the nasdaq stock market, inc. economic research. shannon, c.e. (1948). a mathematical theory of communication. the bell system technical journal, 27, 379–423. tao, c. (2011). price discovery with and without trading on the tokyo stock exchange. international journal of behavioural accounting and finance, 2(1), 56-78. theissen, e. (2000). market structure, informational efficiency and liquidity: an experimental comparison of auction and dealer markets. journal of financial markets, 3(4), 333-363. zheng, y. (2017). vpin and china’s circuit-breaker. international journal of economics and finance, 9(12), 126-133. http://dx.doi.org/10.5539/ijef.v9n12p126. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 23.06.2013; data zaakceptowania: 08.11.2013. * dane kontaktowe: robhuski@umk.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 603 663 556. doi: 10.12775/cjfa.2013.0152013, volume 2, issue 2 robert huterski* uniwersytet mikołaja kopernika w toruniu iluzja pieniądza – istota, koszty społeczno-gospodarcze i sposoby ich redukcji w świetle koncepcji zrównoważonego rozwoju słowa kluczowe: iluzja pieniądza, zrównoważony rozwój, finanse behawioralne. klasyfikacja jel: e40, g02 abstrakt: sugerowanie się przy podejmowaniu decyzji gospodarczych wyłącznie lub głównie nominalnymi kategoriami pieniężnymi, czyli tzw. iluzja pieniądza, może generować poważne zaburzenia gospodarcze. w świetle koncepcji zrównoważonego rozwoju jest to zjawisko negatywne, mogące destabilizować zarówno ład gospodarczy, jak i społeczny. dzieje się to zwłaszcza poprzez zniekształcanie rozkładu dochodów w społeczeństwie oraz pogłębianie nierównowag rynków w sytuacjach kryzysowych. dlatego pożądane są działania redukujące skalę iluzji pieniądza, a zwłaszcza polityka państwa możliwie sprzyjająca stabilności siły nabywczej pieniądza i równoległa intensyfikacja powszechnej edukacji społeczeństwa odnośnie do mechanizmów iluzji pieniądza, od poziomu szkoły średniej począwszy. money illusion – the essence, social and economic costs and ways of their reduction in the light of sustainable development concept keywords: money illusion, sustainable development, behavioral finance. jel classification: e40, g02. robert huterski46 abstract: to be deceived, only or mainly, by nominal monetary categories while undertaking economic decisions, what is called a money illusion, may generate serious economic disturbances. in the light of sustainable development concept, it is negative phenomenon that may destabilize economic and social orders. it works mainly through distortion of income distribution among society and deepening market imbalances in time of crisis. therefore, it is desirable to undertake activities that lead to reduction of money illusion, with special regard to the policy of state that supports stability of money purchasing power together with parallel intensive education of society about mechanics of money illusion, starting from secondary school level. translated by robert huterski  wstęp iluzja pieniądza wskazuje na istnienie znaczących ograniczeń ludzkiej racjonalności w podejmowaniu decyzji gospodarczych, co podważa istotę teorii racjonalnych oczekiwań. w 1972 r., w okresie dominacji racjonalnych oczekiwań jako sposobu widzenia mechanizmu ludzkich decyzji, james tobin (sam akceptujący istotność iluzji pieniądza) żartobliwie stwierdził, że: „teoretyk ekonomii nie może oczywiście popełnić większej zbrodni niż założyć istnienie iluzji pieniądza”. celem niniejszego artykułu jest przegląd podstawowych problemów generowanych przez iluzję pieniądza oraz ich ocena w świetle założeń koncepcji zrównoważonego rozwoju. ze względu na założoną objętość artykułu, spośród obszernej literatury wykorzystano jedynie wybrane publikacje odnoszące się do danego aspektu iluzji pieniądza, pomijając opracowania zgodne w założeniach, a jedynie stosujące odmienne metody badawcze. koncepcja zrównoważonego rozwoju ze swej istoty podkreśla znaczenie relacji między ładem środowiskowym, gospodarczym i społecznym. kryzys gospodarczy ostatnich lat, którego korzeniem jest kryzys finansowy, zwrócił uwagę badaczy zrównoważonego rozwoju na rosnące problemy z uporządkowaniem i ustabilizowaniem relacji w ramach ładów społecznego i gospodarczego, a także między nimi. postęp w uporządkowaniu i stabilizacji tych relacji umożliwi większą skalę coraz pilniejszej redukcji zagrożeń dla ładu środowiskowego, wygenerowanych przez interakcje gospodarcze i społeczne (hull 2011, 38). w tym kontekście, dotychczas przeważnie pomijanym zagadnieniem w ramach koncepcji zrównoważonego rozwoju, wymagającym jednak szczegółowej i wszechstronnej analizy, są implikacje zarówno funkcjonowania współczesnego pieniądza, jak i ukształtowanego przez jego cechy systemu fi  iluzja pieniądza 47 nansowego, istotnie wpływające na możliwości realizowania zrównoważonego rozwoju. w odróżnieniu od pieniądza kruszcowego, panujący dziś w światowej gospodarce pieniądz fiducjarny funkcjonuje tylko dzięki zaufaniu użytkowników, gdyż jego emitent nie podejmuje się wymiany tego pieniądza na jakiekolwiek inne dobro, a sam materiał, z którego powstaje fiducjarny pieniądz papierowy (tym bardziej elektroniczny), nie ma samoistnej wartości użytkowej, jaką posiadał pieniądz towarowy. oznacza to brak zewnętrznej kotwicy rozmiarów jego emisji, a w konsekwencji także brak kotwicy siły nabywczej, która staje się przez to znacznie bardziej podatna na zaburzenia (z bardziej aktualnych i spektakularnych przykładów, np. hiperinflacja w zimbabwe w czerwcu 2008 r., rzędu 11 mln procent w skali roku). przejawem tego jest intensyfikacja zmienności relacji między nominalną i realną wartością pieniądza, co zwiększa prawdopodobieństwo błędnej oceny tych relacji przez uczestników rynku, czyli wystąpienia zjawiska iluzji pieniądza (eber 2010, 25). ludzie koncentrują się na wartości nominalnej, ponieważ jest istotna, łatwa do ustalenia i w wielu przypadkach dostarcza rozsądnego przybliżenia oszacowania realnej wartości. co więcej, koresponduje to z powszechnym przeświadczeniem, że większość obiektów wokół nas, a zwłaszcza jednostek miary, nie podlega częstym zmianom (shafir i in. 1997, 366). zjawisko to ma charakter uniwersalny, ale ze swej natury zasługuje na szczególną uwagę w kraju takim jak polska, ze względu na jego wciąż znaczny potencjał niestabilności gospodarczej oraz relatywnie niski poziom wiedzy postsocjalistycznego społeczeństwa o mechanizmach pieniężnych. znaczenie problemu iluzji pieniądza z punktu widzenia zrównoważonego rozwoju wiąże się z generowaniem przez to zjawisko efektów redystrybucyjnych w rozkładzie dochodu w społeczeństwie oraz wzmaganiem nierównowag w przebiegu procesów gospodarczych, prowadzących do sytuacji kryzysowych. wywołują one dysharmonię między ładem gospodarczym i społecznym, co wzmaga negatywne skutki zaburzeń w ramach tych ładów dla ładu środowiskowego. przykładem może być hiszpański boom budowlany do 2009 r., napędzony w dużej mierze przejściowo sztucznie tanimi i dostępnymi kredytami oraz regulacjami promującymi zmianę kwalifikacji gruntów na budowlane (etxezarreta i in. 2011, 12). pozostały po nim znaczne zmiany środowiskowe spowodowane żywiołową zabudową, której znaczna część obecnie niszczeje niewykorzystana. robert huterski48 1. metodyka badań i przebieg procesu badawczego badania przeprowadzono na podstawie analizy literatury dotyczącej iluzji pieniądza. dominacja źródeł angielskojęzycznych wynika z ograniczonego zakresu empirycznych i modelowych badań tego problemu w literaturze polskiej. po sformułowaniu istoty iluzji pieniądza przystąpiono do przeglądu obszarów diagnozowania jego występowania, a następnie sformułowano propozycje działań ograniczających negatywne skutki społeczno-gospodarcze tego zjawiska z punktu widzenia koncepcji zrównoważonego rozwoju. 2. istota iluzji pieniądza istotą iluzji pieniądza jest przewaga myślenia w nominalnych kategoriach pieniężnych nad myśleniem w realnych kategoriach pieniężnych (shafir i in. 1997, 341). zjawisko to może zatem wystąpić nawet przy dysponowaniu informacjami zarówno w ujęciu nominalnym, jak i realnym. wystarczy, że pojawi się sytuacja zaburzająca właściwy odczyt tych informacji. najczęściej wiąże się to ze zjawiskami inflacyjnymi lub deflacyjnymi, które głównie poprzez zmiany cen i płac zmieniają realną siłę nabywczą jednostki pieniężnej, co nie jest właściwie odczytywane przez podmioty rynkowe. przykładowo: podwyżka płacy nominalnej o 2% w okresie inflacji na poziomie 4% jest przez pracowników inaczej (lepiej) odbierana niż obniżka płacy nominalnej o 2% w okresie 2% deflacji (gorzej), chociaż ekonomicznie korzystniejsze jest to drugie (podobnie, raghubir, srivastava 2002, 335). należy także uwzględnić skutki doświadczeń czy wzorców zachowań zakorzenionych w ludzkich umysłach w okresach inflacji czy deflacji, które mogą wpływać na odtwarzanie schematów ocen relacji między nominalnymi i realnymi kategoriami pieniężnymi nawet w okresach stabilności cen i płac (raghubir, srivastava 2002, 335). szczególnym wariantem tego problemu jest zniekształcenie odczytu wspomnianych relacji przy posługiwaniu się walutą krajową i walutami obcymi (fisher 1928, 4). zmiany kursu walutowego mogą być wywołane zjawiskami inflacyjnymi lub deflacyjnymi zachodzącymi tylko w kraju waluty obcej. mogą one wynikać również z czynników politycznych albo przepływów kapitałowych w kraju waluty obcej, które dopiero z czasem mogą skutkować inflacją lub deflacją, ale nie muszą. nie należy więc sprowadzać iluzji pieniądza tylko do adaptacyjnych oczekiwań podmiotów rynkowych, bazujących na przeszłych poziomach zmiennych monetarnych (shafir   iluzja pieniądza 49 i in. 1997, 367). może też oddziaływać sam efekt większego nominału (face value effect) albo różnica w łatwości podzielenia względem pomnożenia przy danych układach kursowych, rzutująca na prawidłowość przeliczania relacji jednostek waluty krajowej względem jednostek waluty obcej i w rezultacie na ostateczną decyzję o transakcji. skutki iluzji pieniądza objawiają się w podejmowaniu przez osoby, przedsiębiorstwa, a nawet (według niektórych ekonomistów – zwłaszcza) przez władze publiczne (howitt, 1987), innych decyzji niż te, które zostałyby podjęte bez sugerowania się nominalnymi kategoriami pieniężnymi. występowanie iluzji pieniądza wiąże się z systematycznym, grupowym popełnianiem błędów przez uczestników rynku. to zaś oznacza nieistnienie w pełni racjonalnie działającego homo oeconomicus i podważa mechaniczną czy wręcz astrofizykalną wizję funkcjonowania gospodarki, wyłaniającą się z pierwotnej wersji teorii racjonalnych oczekiwań (thaler 1992), stanowiącej istotny filar wielu szkół ekonomii neoklasycznej. negujący występowanie i ekonomiczną istotność tego zjawiska często pomijają cechę zmienności zakresu iluzji pieniądza, a przez to i skutków przez nią wywoływanych (noussair, richter, tyran 2008, 1). generalnie, od strony istotności potencjalnych skutków gospodarczych, iluzja pieniądza jest zjawiskiem stopniowalnym i usuwalnym, o ile w danej sytuacji możliwe jest ograniczenie zakresu lub zlikwidowanie przyczyny popełniania przez uczestników rynku błędów w ocenie relacji między nominalnymi i realnymi kategoriami pieniężnymi. w dalszej części artykułu będzie zasygnalizowane powiązanie między zmiennością gospodarki a osłabieniem lub nasileniem występowania iluzji pieniądza. iluzja pieniądza bywa sprowadzana do prostego efektu asymetrii informacji jako źródła błędnych decyzji, co mogłoby sugerować, że bez asymetrii informacji wystąpienie iluzji pieniądza jest niemożliwe. zdaniem autora jest to tylko jeden z kilku czynników sprzyjających powstawaniu iluzji pieniądza, który nie wyjaśnia w pełni okresów powszechności i długotrwałości utrzymywania się tego zjawiska. sednem iluzji pieniądza jest wnioskowanie zdominowane przez nominalne ujęcie kategorii pieniężnej, prowadzące do podjęcia błędnej decyzji. podstawowe przyczyny oparcia decyzji wyłącznie na ujęciu nominalnym, a także niedoszacowania znaczenia ujęcia realnego mimo świadomości jego istnienia, które mieszczą się w procesie decyzyjnym, można uporządkować następująco: ■ nierówny dostęp do informacji jako danych nieprzetworzonych (wyżej wspomniana asymetria informacji); robert huterski50 ■ równy dostęp do informacji przy niejednakowej wiedzy o instrumentarium potrzebnym do ich prawidłowego wykorzystania lub przy niejednakowym dostępie do takiego instrumentarium (zróżnicowane możliwości postawienia trafnej diagnozy problemu na podstawie takich samych danych); ■ równy dostęp do informacji i do instrumentarium potrzebnego do ich prawidłowego wykorzystania oraz równa wiedza o posługiwaniu się nim przy zróżnicowanym tempie podejmowania decyzji na podstawie posiadanych i przetworzonych informacji, zależnym choćby od uwarunkowań osobniczych i środowiskowych (luka czasowa między diagnozą problemu a ustaleniem metody jego rozwiązania); ■ równy dostęp do informacji, równa wiedza o instrumentarium potrzebnym do ich prawidłowego wykorzystania i równy dostęp do niego oraz równe tempo podejmowania decyzji przy zróżnicowaniu stopnia konsekwencji we wdrażaniu tych decyzji, szczególnie ważne w bardziej złożonych sytuacjach (luka czasowa między diagnozą problemu łącznie z ustaleniem metody jego rozwiązania a pełnym zastosowaniem przyjętego rozwiązania i/lub pojawieniem się jego efektów). oczywiście możliwe są inne kombinacje powyższych elementów, jak choćby różna wiedza poszczególnych uczestników rynku o instrumentarium przetwarzania posiadanych identycznych informacji w połączeniu z luką czasową poprzedzającą wdrożenie decyzji. powyżej ograniczono się do przeglądu kluczowych faz procesu podejmowania decyzji, a zagadnienie jest oczywiście znacznie bardziej złożone. iluzja pieniądza wymaga też uwzględnienia przy analizie wielu zjawisk decyzyjnych, takich jak: kadrowanie (framing), zakotwiczenie i dostosowanie (anchoring and adjustment), rachunkowość mentalna (mental accounting) czy niechęć do strat (loss-aversion) (shafir i in. 1997, 366). należy także pamiętać o istotnych powiązaniach między problemem nie-neurtalności pieniądza, zwłaszcza w krótkim okresie, a iluzją pieniądza (harkness 1978, 711). silna swego czasu pozycja teorii racjonalnych oczekiwań (zwłaszcza w latach 70. i 80. xx w.) spowodowała unikanie przez badaczy wyjaśniania mechanizmami iluzji pieniądza ewidentnego krótkookresowego wpływu nominalnych szoków pieniężnych na wzrost gospodarczy (fehr, tyran 2001, 1241). współcześnie jednak to podejście wraca, wraz z przechodzeniem racjonalnych oczekiwań z pozycji szkoły myśli ekonomicznej na pozycję popularnej wśród ekonomistów techniki modelowania (sargent 2007).   iluzja pieniądza 51 3. obszary diagnozowania występowania iluzji pieniądza chociaż iluzja pieniądza ma uniwersalną istotę dominacji nominalnych kategorii pieniężnych nad realnymi prowadzącej do podejmowania błędnych decyzji, to głębsza analiza tego zjawiska odsłania wiele specyficznych uwarunkowań jego występowania. 3.1. inflacja i deflacja najwięcej uwagi poświęca się w literaturze przedmiotu mechanizmom reakcji na inflacyjne i deflacyjne szoki nominalne na poziomie zagregowanym (w odniesieniu do ogółu cen i płac w gospodarce) (noussair i in. 2008, 18; shafir i in. 1997, 368). według shafira i in. (1997, 367), zaakceptowanie poglądu, że ludzkie decyzje nie zawsze odpowiadają klasycznym kalkulacjom, a w konsekwencji, że ludzie mogą być podatni na iluzję pieniądza, rodzi pogląd, że różne tempa/stopy inflacji mają normatywne implikacje (w sensie wnioskowania o właściwej reakcji, np. o pożądanym charakterze polityki pieniężnej) odmienne od zakładanych przez standardowe modele racjonalne. łagodna inflacja będzie zatem wpływała na alokację na przykład siły roboczej i nieruchomości tym bardziej, im bardziej ludzie są niechętni np. obniżkom płac nominalnych czy stratom w nominalnej wartości posiadanego domu, gdyż idzie to w parze z osłabieniem lub brakiem ich reakcji na straty realne, gdy nominalne wartości są stałe lub rosną. opierając swoje wnioski na charakterystyce systemu emerytalnego w usa shafir i in. (1997, 367) wskazują, że iluzja pieniądza w efekcie inflacji może skutkować pogłębianiem się ubóstwa wśród starszych osób, jako rezultat wybierania przez nich nominalnych świadczeń z funduszy emerytalnych w połączeniu z niewłaściwym rozpoznawaniem przez nich różnicy między realnymi i nominalnymi stopami procentowymi. należy dodać, że według podobnego mechanizmu iluzja pieniądza może przyczyniać się do większych strat w majątkach starszych osób w związku z obciążaniem przez nie nieruchomości w ramach odwróconego kredytu hipotecznego. shafir i in. (1997, 368) zakładają również, że poprzez podobne mechanizmy iluzja pieniądza może wpływać na międzynarodowy handel i turystykę. z tych powodów podkreślają oni, że przy wyborze optymalnego celu inflacyjnego nie wolno przeoczyć efektów iluzji pieniądza i to zwłaszcza tych, które występują, gdy zestawia się zerową inflację z jej innymi niskimi poziomami. warto zauwarobert huterski52 żyć, że skutki iluzji pieniądza w efekcie utożsamiania niskiej inflacji z zerową (niekorzystne dla jednej strony transakcji, korzystne dla drugiej) będą znacząco narastały przy decyzjach finansowych długookresowych, takich właśnie jak ocena atrakcyjności zaciągnięcia kredytu hipotecznego względem płatności rat czynszu za najem czy wybór schematu wypłat świadczeń o charakterze emerytalnym (w tym z odwróconego kredytu hipotecznego). według badań noussairego i in. (2008, 18), ceny bardzo szybko wracają do poziomu realnego, gdy szok ma charakter inflacyjny, ale dostosowują się powoli po szoku deflacyjnym i tego rodzaju zakłócenia w kształtowaniu się cen realnych należy przypisać iluzji pieniądza. wzmacnianie przez deflację inercji cen nominalnych wiążą oni z różnym tempem podejmowania decyzji przez uczestników transakcji rynkowych. wśród owych uczestników noussair i in. (2008, 18) wyróżniają racjonalnych kontrahentów (rational traders), zdolnych do szybkiego i prawidłowego odczytywania relacji między nominalnymi i realnymi kategoriami pieniężnymi oraz tendencyjnych kontrahentów (biased traders), podejmujących opóźnione i zniekształcone decyzje. tendencyjni kontrahenci podlegają zakłóceniom odczytu powyższych relacji ze względu na awersję do strat nominalnych (wszelkich, gdyż nie uświadamiają sobie możliwości realnych zysków przy nominalnych stratach) oraz specyficzny sposób klasyfikowania transakcji. specyficzne klasyfikowanie oznacza traktowanie zakupu dobra oraz następującej po nim odsprzedaży tego dobra po wyższej cenie nominalnej jako dwóch powiązanych transakcji, ale błędne postrzeganie odwrotnej kolejności, czyli sprzedaży danego dobra, po której następuje zakup takiego dobra po niższej cenie nominalnej, jako dwóch niezależnych transakcji. racjonalni kontrahenci kupują, gdy cena rynkowa jest niska, a sprzedają, gdy cena rynkowa jest wysoka w relacji do wartości fundamentalnej. noussair i in. (2008, 19) wskazują, że w czasie szoku deflacyjnego tendencyjni kontrahenci, kierując się wartościami nominalnymi, stają się niechętni do sprzedaży swoich składników majątku po cenach nominalnych niższych niż sami zapłacili, nabywając je, i w rezultacie ograniczają podaż. powoduje to presję wzrostową na ceny realne, której objawem na rynku jest nominalna inercja cen, gdyż ceny nominalne obniżą się wolniej i ostatecznie w mniejszym stopniu niż gdyby w transakcjach brali udział wyłącznie uczestnicy rynku niepodlegający iluzji pieniądza. fehr i tyran (2004, 3) zwracają uwagę, że istotnym czynnikiem wzmacniającym występowanie iluzji pieniądza w sytuacji, gdy istnieje wiele potencjalnych punktów równowagi, jest strategiczna niepewność co do zachowań innych   iluzja pieniądza 53 uczestników rynku (graczy), specyficznie kształtująca wybór nowych punktów równowagi. silna strategiczna niepewność utrudnia indywidualną optymalizację decyzji, dalece redukując możliwości uczenia się, którego efekty z biegiem czasu mogłyby zredukować iluzję pieniądza. prowadzi to do długotrwałego blokowania się uczestników rynku w nieefektywnych (w sensie pareto) punktach równowagi, co powoduje trwałe negatywne skutki dla gospodarki. według badań fehra i tyrana (2004, 16) pozornie nieistotne różnice w przedstawianiu rezultatów (potencjalnych wygranych) mają znaczące skutki dla wyboru punktów równowagi przez uczestników gry rynkowej o wielu potencjalnych równowagach. gdy rezultaty zostały przedstawione w ujęciu nominalnym, 84% uczestników ostatecznie skłoniło się do pareto-nieefektywnego punktu równowagi, za to przedstawienie rezultatów w ujęciu realnym spowodowało, że 98% uczestników ostatecznie przyjęło pareto-efektywny punkt równowagi. na tej podstawie fehr i tyran (2004, 16) wnioskują, że uczenie się w środowiskach strategicznych z wieloma równowagami może być trudne lub niemożliwe albo, jeśli wystąpi, może być zbyt spóźnione, by znacząco wpłynąć na zagregowane rezultaty wyborów, przez co wpływ iluzji pieniądza na te rezultaty będzie silniejszy i trwalszy niż w innych uwarunkowaniach. 3.2. szoki nominalne badane są również decyzje w reakcji na pozytywne i negatywne szoki nominalne, co jest w swej istocie zawężeniem problematyki inflacyjnej i deflacyjnej przez położenie nacisku na zmiany podaży pieniądza jako źródła niestabilności siły nabywczej pieniądza, prowadzącej do ujawniania się iluzji pieniądza. według fehra i tyrana (2001, 1239) wyniki badań wskazują, że negatywne i pozytywne szoki nominalne mają asymetryczne efekty z powodu iluzji pieniądza. gdy po szoku negatywnym inercja nominalna jest znacząca i długotrwała, jest ona raczej niewielka po szoku pozytywnym. zjawisko, że negatywne szoki nominalne mają efekt redukujący produkcję, a szoki pozytywne zdają się nie wpływać na produkcję, potwierdzają również inne badania, jak na przykład covera (1992) oraz delonga, summersa (1988). fehr i tyran (2001, 1239) stwierdzają również, że nawet niewielki zakres iluzji pieniądza na poziomie indywidualnym może spowodować poważną inercję nominalną po negatywnym szoku nominalnym. inaczej ujmując, dla wystąpienia silnego spowolnienia dostosowań cen i płac nominalnych w efekcie ograniczenia podaży pieniądza nie jest konieczne, by pod wpływem iluzji robert huterski54 pieniądza znalazła się większość uczestników rynku, gdyż reakcje tej części z nich, która iluzji pieniądza podlega, mogą generować swoisty efekt domina. w uzasadnieniu tego stwierdzenia fehr i tyran (2001, 1259) wskazują, że specyficzne powiązania między płacowymi zachowaniami pracodawców i pracobiorców mogą wzmagać przekładanie się iluzji pieniądza i wywoływanej przez nią inercji po stronie płac na inercję cen. na przykład, jeśli firmy przewidują, że pracownicy będą się bronili przed obniżką płac po negatywnym szoku pieniężnym, to te firmy będą prawdopodobnie niechętne obniżaniu cen, ponieważ to zmniejszyłoby ich zyski. w konsekwencji, jeśli ceny pozostaną wysokie, to pracownicy mogą czuć się usprawiedliwieni w swoim oporze przed redukcją płac. zatem niechęć do obniżenia płac i cen może się wzajemnie napędzać przez dłuższy czas. jest to zgodne z poglądem wyrażonym przez shafira i in. (1997, 368), że ujmując bardziej ogólnie, poznawcze (kognitywne) iluzje części jednostek mogą mieć istotne skutki ekonomiczne. koresponduje to z wynikami innych wcześniejszych badań nad zachowaniami uczestników rynku stwierdzającymi, że niewielkie odchylenie od optymalności części jednostek może mieć istotny wpływ na charakterystykę gospodarczych równowag (np. akerlof, yellen 1985, haltiwanger, waldman 1985 oraz russel, thaler 1985). 3.3. nieruchomości wpływ iluzji pieniądza na decyzje uczestników rynku nieruchomości został już wyżej zasygnalizowany i jest on uznawany za na tyle ważny, że zagadnieniu temu są poświęcone odrębne opracowania. przykładowo brunnermeie i julliard (2008, 2–3) stwierdzają, że osoby opierające swoje decyzje – czy wynająć, czy kupić mieszkanie – na nominalnym porównaniu miesięcznego czynszu za najem z miesięczną ratą kredytu hipotecznego o stałym oprocentowaniu, są poddane wpływowi iluzji pieniądza. zakładają one błędnie, że realne i nominalne stopy procentowe zawsze podlegają silnie, jeśli nie w pełni, skorelowanym zmianom. z tego powodu błędnie łączą spadek inflacji ze spadkiem realnych stóp procentowych i w konsekwencji nie potrafią właściwie oszacować realnego kosztu przyszłych płatności kredytu hipotecznego. w ten sposób tworzą oni presję na wzrost realnych cen mieszkań w okresie spadku inflacji, gdyż wtedy, patrząc z perspektywy nominalnej, uznają nabycie mieszkania za bardziej atrakcyjne niż dotychczas i zgłaszają dodatkowy popyt.   iluzja pieniądza 55 warto zauważyć, że w innych opracowaniach (np. shafir i in. 1997, 367, noussair, i in. 2008, 19) wskazuje się na wpływ iluzji pieniądza w okresach deflacji na ograniczenie podaży mieszkań przez ich właścicieli, ze względu na ich awersję do strat nominalnych. można to również przełożyć na okresy wyraźnego wyhamowania tempa inflacji, biorąc pod uwagę zakotwiczone jeszcze w czasie intensywnej inflacji wyobrażenia właścicieli o godziwym wzroście nominalnej ceny ich nieruchomości. jest to dynamiczna wersja klasycznego problemu iluzji pieniądza, dotycząca błędów w odczytywaniu zmieniających się relacji między nominalnymi i realnymi kategoriami pieniężnymi, powodowanych preferowaniem ujęcia nominalnego jako wygodniejszego. na przykładzie rynku mieszkaniowego usa brunnermeier i julliard (2008, 37) wskazują również, że dowody zjawiska zagregowanej iluzji pieniądza na rynku mieszkaniowym można pogodzić z obserwowaną heterogenicznością w regionalnych (stanowych) zachowaniach cen, jeśli właściwie uwzględni się międzystanowe różnice w relatywnej rzadkości gruntów pod zabudowę. jest to zarazem wskazówka, jak łatwo iluzja pieniądza może się ukryć za innymi zjawiskami. 3.4. papiery wartościowe badania nad iluzją pieniądza na rynku papierów wartościowych dotyczą instrumentów o stałym nominalnym dochodzie, jak klasyczne obligacje i bony (zwłaszcza skarbowe) oraz tych o zmiennym dochodzie, jak akcje i indeksowane obligacje i bony (garcia, van rixtel 2007, 16). iluzją pieniądza próbuje się wyjaśnić znaczną przewagę dochodowości akcji nad nominalnymi obligacjami i bonami. ta przewaga jest pochodną zjawiska, że to inwestorzy na rynku akcji, ale nie na rynku obligacji, podlegają iluzji pieniądza, w rzeczywistości dyskontując realne przepływy pieniężne według nominalnych stóp (cohen i in. 2005, 4–5). obligacje generują przepływy pieniężne, które są nominalnie stałe, i dlatego oszacowanie stopy wzrostu tych przepływów dla obligacji jest znacznie łatwiejsze niż oszacowanie długookresowego oczekiwanego wzrostu przepływów pieniężnych dla akcji. w rezultacie często wysoka inflacja współistnieje z niskimi cenami akcji w stosunku do obligacji i akcje dają wyższe niż uzasadnione przyszłe zwroty w stosunku do krótkoterminowych obligacji lub bonów, co wraz z innymi wcześniejszymi badaniami szeregów czasowych wspiera hipotezę iluzji pieniądza modiglianiego-cohna (modigliani, cohn 1979). cohen i in. (2005, 22) dowodzą, że jest to zjawisko niezależne od ryzykowności danerobert huterski56 go rodzaju akcji i ten stały efekt zmienia się w przybliżeniu jak jeden do jednego wraz ze zmianą stopy inflacji. równoczesne badanie wyceny bonów skarbowych, ryzykownych akcji i bezpiecznych akcji pozwala trafnie odróżnić iluzję pieniądza od innych zmian w stosunku inwestorów do ryzyka. zarazem cohen i in. (2005, 1) obserwacjami z rynku papierów wartościowych wspierają tezę o potencjalnym nasilaniu się skłonności do iluzji pieniądza w okresach niskiej inflacji. ich zdaniem, gdy różnica między realnymi i nominalnymi wielkościami jest mała i angażowane bieżąco stawki są relatywnie niskie, zrównanie nominalnych kwot z realnymi wartościami dostarcza wygodną i efektywną zasadę kalkulacji. wydaje się zatem naturalne, że ludzie często ignorują stopę inflacji przy przetwarzaniu informacji na potrzeby relatywnie drobnych decyzji. należy jednak pamiętać o powyższych rozważaniach w tym artykule, które wskazują, że potencjalne skutki takiej ignorancji są może nieistotne przy sporadycznych i krótkoterminowych transakcjach, jednak stają się poważne, gdy zaangażowanie ma charakter powtarzalny i długoterminowy, jak choćby przy rozliczeniach płatności hipotecznych czy oszczędności emerytalnych. 3.5. emerytury ze względu na wyżej wspomniany problem emerytur, prowadzone są badania nad korzyściami z rozpowszechnienia obligacji skarbowych indeksowanych względem inflacji, w które powszechnie miałyby inwestować fundusze emerytalne. miałoby to zbliżyć stabilność realnej wartości świadczeń otrzymywanych z funduszy emerytalnych do emerytur w publicznym systemie repartycyjnym, okresowo indeksowanych względem inflacji przez władze (garcia, van rixtel 2007, 16). jednak wyjaśnienie, dlaczego obligacje indeksowane inflacyjnie są tak mało popularne, odnosi się nie tylko do braku motywacji dla emitenta (władz publicznych) po stronie podażowej, ale także do iluzji pieniądza po stronie popytowej. pojawia się paradoks, że instrument finansowy, uważany przez wielu ekonomistów za narzędzie redukowania iluzji pieniądza w kapitałowym systemie emerytalnym, nie jest pożądany przez potencjalnych beneficjentów tego rozwiązania właśnie z powodu iluzji pieniądza, której podlegają (garcia, van rixtel 2007, 17). należy dodać, że fundusze emerytalne również nie wykazują szczególnego zainteresowania upowszechnieniem obligacji indeksowanych inflacyjnie jako podstawowej kategorii posiadanych przez nie aktywów. na marginesie, argumentem łączącym fundusze i ich klientów w tej   iluzja pieniądza 57 pasywności jest obawa, że władze publiczne jako emitent mogą manipulować wskaźnikiem cen konsumpcyjnych lub innym, na którym indeksacja byłaby oparta, a nawet, że władze nie umiałyby prawidłowo zinterpretować powiązań między referencyjnym wskaźnikiem a właściwym poziomem indeksacji inflacyjnej swoich obligacji (garcia, van rixtel 2007, 17). 4. sposoby redukcji społecznych i gospodarczych kosztów iluzji pieniądza zdaniem autora, z punktu widzenia koncepcji zrównoważonego rozwoju, dwie podstawowe drogi do ograniczenia negatywnych społeczno-gospodarczych skutków występowania iluzji pieniądza to, po pierwsze, utrzymywanie wewnętrznej i zewnętrznej stabilności siły nabywczej jednostki pieniądza krajowego, a po drugie, powszechne edukowanie społeczeństwa w zakresie podstawowych mechanizmów ekonomiczno-finansowych. pierwszy postulat oznacza, że działania władz publicznych powinny redukować zakres inflacyjnych bądź deflacyjnych odchyleń siły nabywczej pieniądza, a w każdym razie powinny unikać generowania tych odchyleń swoją aktywnością. wymaga to właściwej i skutecznej polityki zapobiegania kryzysom gospodarczym, a zwłaszcza przeciwdziałania rozwojowi baniek spekulacyjnych, ze szczególnym uwzględnieniem stabilności rynków aktywów finansowych oraz rynku nieruchomości, gdyż to przede wszystkim te obszary generują uwarunkowania potęgujące negatywne skutki iluzji pieniądza. oczywistym problemem w implementacji powyższych zaleceń jest naturalna zmienność gospodarki, a więc i naturalny dynamizm jej ram finansowych, a nadmierna ingerencja władz publicznych zniekształca procesy gospodarcze, tworząc potencjalne źródła ogólnogospodarczej niestabilności. wnioski wyniesione z obserwacji bieżącego kryzysu gospodarczego w usa i europie powinny jednak ułatwić odróżnianie zalążków baniek spekulacyjnych i kryzysów gospodarczych od zmian niezagrażających stabilności gospodarki jako całości. w tym świetle jednym z pierwszych działań powinno być krytyczne przyjrzenie się roli samych władz publicznych w generowaniu baniek spekulacyjnych i zagrożeń kryzysowych w rezultacie ich niewłaściwych działań mających stymulować gospodarkę jako całość, poprzez nadmierne publiczne wsparcie wybranej dziedziny lub dziedzin gospodarki względem pozostałych. wnioski z obserwacji uwarunkowań, przebiegu i skutków współczesnych kryzysów gospodarczych sugerują raczej, że stopień racjonalności czy nierarobert huterski58 cjonalności zachowań uczestników procesów gospodarczych podlega zmianom zależnie od tego, kto i w jakich okolicznościach podejmuje decyzje. sytuacje kryzysowe zdają się wzmagać bariery racjonalności, z iluzją pieniądza włącznie, a w okresach stabilności gospodarczej bariery te słabną, usprawiedliwiając w pewnych uwarunkowaniach założenie o racjonalności ludzi podejmujących decyzje gospodarcze. drugi postulat, dotyczący edukacji ekonomiczno-finansowej, tylko pozornie wydaje się dyskusyjny. rzeczywiście shafir i in. (1997, 367) stwierdzają, że ludzka tendencja do myślenia w pieniężnych kategoriach nominalnych, a nie realnych, będzie się prawdopodobnie utrzymywała niezależnie od wysiłków ekonomistów, by edukować społeczeństwo (podobnie fehr, tyran 2004, 16). warto jednak zwrócić uwagę, że wątpliwości dotyczą zdolności ekonomistów do pełnego wykorzenienia iluzji pieniądza, co wcale nie przesądza o niemożności ograniczenia tego zjawiska za pomocą edukacji (campbell, schiller 1996, 43). skoro za główną przyczynę uporczywości iluzji pieniądza powszechnie uznaje się to, że ludziom jest o wiele łatwiej i naturalniej myśleć w kategoriach nominalnych niż realnych, to znaczy, że edukacja może ograniczyć dysproporcje w stopniu trudności posługiwania się tymi kategoriami. pozostaje pytanie, czy rzeczywiście leży to w interesie władz oraz części podmiotów sektora prywatnego, które mogą wykorzystywać iluzję pieniądza dla własnych korzyści, ignorując straty ponoszone przez podlegających temu zjawisku. w ramach obowiązkowych treści nauczania przedmiotu „podstawy przedsiębiorczości”, realizowanego obecnie w polskich szkołach średnich, ministerstwo edukacji narodowej nie przewiduje wprost zagadnień dotyczących nominalnych i realnych kategorii pieniężnych (podstawa 2011, 128–131). pośrednio jest na to miejsce w ramach treści przewidujących, że uczeń „rozróżnia formy inwestowania kapitału i dostrzega zróżnicowanie stopnia ryzyka, w zależności od rodzaju inwestycji oraz okresu inwestowania” oraz „oblicza przewidywany zysk z przykładowej inwestycji kapitałowej w krótkim i długim okresie”. brak również takich zagadnień w ramach przedmiotu uzupełniającego „ekonomia w praktyce” (podstawa 2011, 132). zdaniem autora, z myślą o zredukowaniu występowania iluzji pieniądza, już na poziomie szkół średnich należałoby przynajmniej wprowadzić podstawowe zagadnienia dotyczące skutków inflacji i deflacji, gdyż te pojęcia są obecnie pominięte. nie wydają się one przekraczać możliwości percepcyjnych przeciętnego ucznia, skoro w ramach tego przedmiotu oczekuje się od niego wyżej przytoczonych umiejętności, czy choć  iluzja pieniądza 59 by, że uczeń „wymienia podstawowe wskaźniki giełdowe i wyjaśnia ich wagę w podejmowaniu decyzji dotyczących inwestowania na giełdzie”.  podsumowanie jak wykazano, omawiając istotę iluzji pieniądza, jest to zjawisko w pewnym zakresie stopniowalne i usuwalne. chociaż wyżej powołane badania wskazują, że iluzji pieniądza nie da się wykorzenić całkowicie, to potencjalne korzyści społeczno-gospodarcze z ograniczenia skali tego zjawiska przemawiają za podjęciem odpowiednich działań, zwłaszcza przez władze publiczne. powinny się one przejawiać się przede wszystkim w wyważonej polityce pieniężnej, podporządkowanej stabilizowaniu zarówno siły nabywczej pieniądza jak i systemu finansowego, w sposób możliwie przeciwdziałający powstawaniu baniek spekulacyjnych i zagrożeń kryzysami gospodarczymi. równocześnie wsparcia publicznego wymaga upowszechnienie i ugruntowanie w społeczeństwie wiedzy o podstawowych zjawiskach pieniężnych, zwiększającej bezpieczeństwo wszystkich uczestników transakcji finansowych. edukacja ekonomiczno-finansowa ma wartość samą w sobie i oczywiście problem iluzji pieniądza nie jest w jej ramach ani jedynym, ani kluczowym zagadnieniem, jednakże ze względu na wyżej przedstawione uwarunkowania, przejawy i skutki jej występowania, nie należy tego problemu lekceważyć.  literatura akerlof g. a., yellen j. (1985), can small deviations from rationality make significant differences to economic equilibria?, “american economic review”, lxxv. brunnermeier m. k., julliard ch. (2008), money illusion and housing frenzies, “the review of financial studies”, vol. 21, no. 1. doi: http://dx.doi.org/10.1093/rfs/hhm043. campbell j. y., shiller r. j. (1996), a scorecard for indexed government debt, national bureau of economic research, “working paper series”, no. 5587. doi: http://dx.doi. org/10.2307/3585195. cohen r. b., polk ch., vuolteenaho t. (2005), money illusion in the stock market: the modigliani-cohn hypothesis, “national bureau of economic research, working paper”, 11018. http://dx.doi.org/10.1093/qje/120.2.639. cover j. p. (1992), asymmetric effects of positive and negative money-supply shocks, “quarterly journal of economics”, november, 107 (4). doi: http://dx.doi. org/10.2307/2118388. delong j. b., summers l. h. (1988), how does macroeconomic policy affect output?, “brookings papers on economic activity”, 2. robert huterski60 fehr e., tyran j.-r. (2001), does money illusion matter?, “the american economic review”, vol. 91, no. 5. doi: http://dx.doi.org/10.1257/aer.91.5.1239. fehr e., tyran j.-r. (2004), money illusion and coordination failure, institute for empirical research in economics, university of zurich, “working paper”, no. 177. doi: http://dx.doi.org/10.2139/ssrn.495402. fisher i. (1928), the money illusion, adelphi, new york. garcia j. a., van rixtel a. (2007), inf lation-linked bonds from a central bank perspective, european central bank, “occasional paper series”, no. 62. haltiwanger j., waldman m. (1985), rational expectations and the limits of rationality: an analysis of heterogeneity, “american economic review”, lxxv. harkness j. (1978), the neutrality of money in neoclassical growth models, “the canadian journal of economics” / “revue canadienne d'economique”, vol. 11, no. 4. doi: http://dx.doi.org/10.2307/134374. howitt p. (1987), money illusion, [w:] the new palgrave dictionary of economics, vol. 3, j. eatwell, m. milgate, p. newman (eds.), new york. hull z. (2011), wprowadzenie do filozofii zrównoważonego rozwoju, [w:] zasady kształtowania postaw sprzyjających wdrażaniu zrównoważonego rozwoju, w. tyburski (red.), wyd. naukowe umk, toruń. modigliani f., cohn r. (1979), inf lation, rational valuation, and the market, “financial analysts journal”, 35 (3), 24–44. doi: http://dx.doi.org/10.2469/faj.v35.n2.24. noussair ch. n., richter g., tyran j.-r. (2008), money illusion and nominal inertia in experimental asset markets, department of economics university of copenhagen, “discussion papers”, no. 8–29. doi: http://dx.doi.org/10.2139/ssrn.1307717. raghubir p., srivastava j. (2002), effect of face value on product valuation in foreign currencies, “journal of consumer research”, vol. 29. doi: http://dx.doi.org/10.1086/344430. russell t., thaler r. (1985), the relevance of quasi rationality in competitive markets, “american economic review”, lxxv. doi: http://dx.doi.org/10.1017/cbo9780511 598951.025. sargent t. j. (2007), rational expectations, [w:] concise encyclopedia of economics, d. r. henderson (ed.), the library of economics and liberty, 2nd ed., indianapolis. patrz też: http://www.econlib.org/library/enc/rationalexpectations.html shafir e., diamond p., tversky a. (1997), money illusion, “the quarterly journal of economics”, vol. 112, no. 2. http://dx.doi.org/10.1162/003355397555208. thaler r. (1992), the winner’s curse, the free press, new york. doi: http://dx.doi. org/10.1257/jep.2.1.191. tobin j. (1972), inf lation and unemployment, “american economic review”, 62 (1). dla autorów proces recenzowania procedura recenzowania artykułów zgłaszanych do czasopisma copernican journal of finance & accounting jest zgodna z wytycznymi komunikatu ministerstwa nauki i szkolnictwa wyższego z dnia 29 maja 2013 r. w sprawie kryteriów i trybu oceny czasopism naukowych. procedura recenzowania w czasopiśmie uwzględnia następujące zasady: ■ do oceny każdej publikacji powołuje się, co najmniej dwóch niezależnych recenzentów spoza jednostki naukowej afiliowanej przez autora publikacji; ■ autor lub autorzy publikacji i recenzenci nie znają swoich tożsamości (double-blind review process); w pozostałych przypadkach recenzent podpisuje deklarację o niewystępowaniu konf liktu interesów, przy czym za konf likt interesów uznaje się zachodzące między recenzentem a autorem bezpośrednie relacje osobiste (w szczególności pokrewieństwo do drugiego stopnia, związek małżeński), relacje podległości zawodowej lub bezpośrednią współpracę naukową w ciągu ostatnich dwóch lat poprzedzających rok przygotowania recenzji; ■ pisemna recenzja zawiera jednoznaczny wniosek recenzenta, dotyczący warunków dopuszczenia artykułu naukowego do publikacji lub jego odrzucenia; ■ kryteria kwalifikowania lub odrzucenia publikacji i formularz recenzji są podane do publicznej wiadomości na stronie internetowej czasopisma; ■ nazwiska recenzentów poszczególnych publikacji lub numerów wydań czasopisma naukowego nie są ujawniane. na podstawie uzyskanych ocen redakcja podejmuje decyzję o odrzuceniu, przyjęciu albo odesłaniu publikacji do autora w celu naniesienia poprawek. dla autorów228 po otrzymaniu uwag recenzentów autor jest zobowiązany ustosunkować się do nich we wskazanym przez redakcję terminie. niedotrzymanie tego terminu zostanie uznane za rezygnację z publikacji pracy. cele pisma, jego adresaci i zasady współpracy z autorami copernican journal of finance & accounting jest czasopismem naukowym, które powstało z inicjatywy działalności katedry zarządzania finansami i katedry rachunkowości wydziału nauk ekonomicznych i zarządzania umk w toruniu. pismo ma służyć rozwojowi dyscypliny nauki finanse i jest przewidziane jako profesjonalne forum prezentacji i analiz opracowań naukowych z zakresu finansów i rachunkowości w wymiarze międzynarodowym. pismo jest przeznaczone dla środowiska zarówno teoretyków, jak i tych praktyków, którzy podjęli wyzwanie zdobywania stopni naukowych w dyscyplinie finanse. w copernican journal of finance & accounting publikowane są artykuły w języku polskim oraz w języku angielskim. od roku 2014 artykuły do kolejnych numerów przyjmowane będą wyłącznie w języku angielskim. artykuły nadsyłane do czasopisma powinny być oryginalnymi, niepublikowanymi pracami i nie mogą być również przedmiotem postępowania kwalifikującego je do publikacji w innym czasopiśmie lub wydawnictwie. zgodnie z wytycznymi komunikatu ministerstwa nauki i szkolnictwa wyższego z dnia 29 maja 2013 r. w sprawie kryteriów i trybu oceny czasopism naukowych nadesłane teksty powinny mieć charakter naukowy, przez co należy rozumieć artykuł prezentujący wyniki oryginalnych badań o charakterze empirycznym, teoretycznym, technicznym lub analitycznym, zawierający tytuł publikacji, nazwiska i imiona autorów wraz z ich afiliacją i przedstawiający obecny stan wiedzy, metodykę badań, przebieg procesu badawczego, jego wyniki oraz wnioski, z przytoczeniem cytowanej literatury (bibliografię). warunkiem przyjęcia tekstu do procesu wydawniczego oraz przekazania tekstu do recenzji jest bezwzględne przestrzeganie wymogów edytorskich zamieszczonych w pliku dostępnym na naszej stronie internetowej oraz przesłanie na adres redakcji wypełnionego i czytelnie podpisanego formularza zgłoszeniowego. artykuły niespełniające wymogów formalnych nie będą kierowane do realizacji wydawniczej, a przesłane materiały nie będą zwracane autorom. dla autorów 229 teksty artykułu powinny być nadsyłane wyłącznie w postaci elektronicznej poprzez platformę czasopism umk w wyznaczonym terminie (nie trzeba przesyłać wydruku artykułu). do przesłanego tekstu w wersji elektronicznej muszą zostać załączone w oryginalnych plikach (np. w excelu) wszystkie wykresy, schematy i rysunki. redakcja zastrzega sobie prawo wyboru artykułów do czasopisma copernican journal of finance & accounting oraz dokonywania skrótów i poprawek redakcyjnych bez porozumienia z autorem. kryterium wyboru jest jakość i spójność merytoryczna artykułu z tematyką finansów i rachunkowości. po uzyskaniu potwierdzenia przyjęcia przesłanego tekstu do druku należy przesłać na adres czasopisma wydrukowaną i podpisaną umowę wydawniczą z autorem artykułu. autorzy artykułów publikowanych w czasopiśmie copernican journal of finance & accounting nie otrzymują wynagrodzenia autorskiego. w celu zapewnienia rzetelności naukowej redakcja cjf&a jest zainteresowana publikowaniem opracowań przygotowanych z poszanowaniem norm etycznych obowiązujących w nauce. zgodnie z zaleceniami ministerstwa nauki i szkolnictwa wyższego wszelkie przypadki nierzetelności naukowej oraz nieuczciwości ( ghostwriting i guest authorship) wykryte przez redakcję będą dokumentowane i demaskowane włącznie z powiadomieniem odpowiednich podmiotów (instytucji zatrudniających autorów). definicje ghostwriting i guest authorship według ministerstwa nauki i szkolnictwa wyższego (źrodło: http://www.nauka.gov.pl): ■ z ghostwriting mamy do czynienia wówczas, gdy ktoś wniósł istotny wkład w powstanie publikacji, bez ujawnienia swojego udziału jako jeden z autorów lub bez wymienienia jego roli w podziękowaniach zamieszczonych w publikacji; ■ z guest authorship (honorary authorship) mamy do czynienia wówczas, gdy udział autora jest znikomy lub w ogóle nie miał miejsca, a pomimo to jest autorem/współautorem publikacji. aby przeciwdziałać tego typu praktykom, do każdego opracowania przygotowanego przez więcej niż jednego autora należy dołączyć wypełnioną i podpisaną przez autorów deklarację dotyczącą zjawiska ghostwriting i guest authorship (element formularza zgłoszenia artykułu). w przypadku finansowego wsparcia prac nad przygotowaniem publikacji, udzielonego przez instytucję zewnętrzną, jej autor jest zobowiązany do umieszczenia informacji o tym fakcie we wstępie opracowania. dla autorów230 dokładne wymogi edytorskie znajdują się na stronie internetowej czasopisma http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions#authorguidelines w szczególności prosimy autorów o sprawdzenie wszystkich pozycji literaturowych artykułu pod kątem posiadania numeru doi. zidentyfikowane numery doi powinny zostać zamieszczone przy odpowiednich pozycjach literaturowych. w tym identyfikacji numeru doi można skorzystać ze strony: http://www.crossref.org/guestquery/ adres redakcji ul. gagarina 13a, 87-100 toruń tel. 56 611 46 34 (osoba do kontaktu mgr agnieszka żołądkiewicz) fax 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors204 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 205 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the jour nal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions #authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors206 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. the detailed ethical principles are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https:// publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors178 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 179 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author 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http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) 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prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin impact of microfinance institutions on financial literacy in north central geo-political zone nigeria ...................................................................... 9 diana kangwa, joseph thokozani mwale, junaid m. shaikh co-evolutionary dynamics of financial inclusion of generation z in a sub-saharan digital financial ecosystem ................................................................ 27 nasima khatun, marzia tamanna factors affecting the adoption of fintech: a study based on the financial institutions in bangladesh ................................................................................................... 51 ruchira panda, dinabandhu bag a simple linear test of the integration in corporate bond markets ............................ 77 v. veeravel, s. mohanasundaram market timing abilities of large-cap equity mutual fund managers: evidence from india ........................................................................................................... 87 a.n. vijayakumar relativity of indian stock market with exchange rate, gold and crude oil ............ 101 for authors ......................................................................................................................... 119 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240doi: 10.12775/cjfa.2013.0232013, volume 2, issue 2 data wpłynięcia: 30.10.2013; data zaakceptowania: 31.12.2013. * dane kontaktowe: malgorzata.solarz@ue.wroc.pl, katedra finansów i rachunkowości, wydział ekonomii, zarządzania i turystyki, uniwersytet ekonomiczny we wrocławiu, ul. nowowiejska 3, 58-500 jelenia góra, tel. 757 538 261. małgorzata solarz* wroclaw university of economics, faculty of economics, management and tourism, department of finance and accounting, poland the importance of shadow banking sector entities for population affected by credit exclusion key words: shadow banking, financial exclusion, social lending. j e l classification: d30, g23, l14, o17. abstract: the entities included in shadow banking sector, referred to as alternative financial services providers, render services similar to banking ones. they are neither covered by banking law regulations nor subject to state supervision, but create a parallel banking system. the institutions attract clients originating mainly from the group of financially excluded individuals, rejected by banks as the result of their insufficient creditworthiness, or negative history of previously contracted debts. the objective of hereby paper is to identify advantages and threats resulting from activities performed by entities functioning in the shadow banking sector with reference to people suffering credit exclusion. among advantages the following have to be listed: the provision of financing sources for consumer expenditure which facilitates household finances management; entrepreneurship promotion among the unemployed or the deprived of an opportunity to start their own business. among threats the following should be emphasized: the danger of getting into the spiral of debt; inability to take advantage of consumer bankruptcy procedure; the threat of advancing poverty in such households which do not manage to have proper control of personal finance owing to poor knowledge and the absence of financial skills. małgorzata solarz190 znaczenie podmiotów sektora shadow banking dla osób wykluczonych kredytowo słowa kluczowe: shadow banking, wykluczenie finansowe, social lending. klasyfikacja j e l: d30, g23, l14, o17. abstrakt: podmioty sektora shadow banking, nazywane alternatywnymi pośrednikami finansowymi, świadczą usługi podobne do bankowych. nie obowiązują ich przepisy prawa bankowego, nie podlegają pod państwowy nadzór finansowy, tworzą równoległy system bankowy. klientami tych instytucji są z reguły osoby wykluczone, odrzucone przez banki z uwagi na niewystarczającą zdolność kredytową bądź negatywną historię spłat wcześniej zaciągniętych długów. celem niniejszego artykułu jest zidentyfikowanie korzyści i zagrożeń związanych z działalnością podmiotów sektora shadow banking w aspekcie osób dotkniętych wykluczeniem kredytowym. po stronie korzyści należy wymienić: dostarczanie źródeł finansowania wydatków konsumpcyjnych, co ułatwia zarządzanie finansami gospodarstwa domowego; promowanie przedsiębiorczości wśród bezrobotnych, pozbawionych możliwości rozpoczęcia własnej działalności gospodarczej. natomiast po stronie zagrożeń znajdują się: niebezpieczeństwo wpadnięcia w spiralę zadłużenia; niemożność skorzystania z procedury upadłości konsumenckiej; groźba pogłębienia ubóstwa gospodarstw domowych, które nie radzą sobie z zarządzaniem finansami osobistymi z uwagi na niską wiedzę i umiejętności finansowe. translated by małgorzata solarz  introduction swift development of financial market represented one of the most important transformations brought about by the globalization processes. it turned out possible owing to several processes: deregulation, the development of new information technologies, as well as the creation and implementation of more and more complex financial instruments. as the result of these processes, in the period of recent several years, the structure of financial market, covering two parallel systems, was established. one of them was represented by the traditional banking system. the parallel system including non-banking financial institutions was also created, and referred to as shadow banking or alternative financial services provision, the role of which has grown significantly over the recent decade. the most important attribute of such system was the fact that it was functioning outside both the regulations in force and the state supervision system and therefore was referred to as shadow banking. the importance of shadow banking sector entities for population 191 both products and services offered by alternative financial services providers were mainly appreciated by households deprived of creditworthiness and offered them an opportunity to take advantage of bank credits. individuals forced by their personal situation to take high-interest loans outside banking system frequently find themselves in a trap of indebtedness and therefore join the group of population affected by credit exclusion. in the perspective of the observed tendencies the objective of hereby paper is to identify advantages and threats resulting from activities performed by entities functioning in the shadow banking sector with reference to people suffering credit exclusion. 1. research methodology applied research methods are a method of descriptive and simple statistical methods that were used to analyze the data from the global financial inclusion database and the report entitled the market of loan companies in poland. 2. shadow banking sector – the concept and entities the term ‘shadow banking’ was probably used for the first time by p. mcculley, the director of pimco investment company at a scientific conference held at the end of 2007. in accordance with this definition the shadow banking system is understood as the entire spectrum of transactions representing traditional banking services (i.e. obtaining financial means from savers and investors and borrowing these means to credit recipients), however, featuring different status. in case of these operations realization outside banking sector the possibility of avoiding banking regulations occurs, since these transactions are not controlled by supervision institutions adequate for the financial market (iwaisako 2010, 347–368). the first research studies on shadow banking, by such authors as pozsar (2008) and also adrian and shin (2009), were published a year later. the interest in this subject matter was gradually increasing and hence more research was initiated by both economists and lawyers. among them the following should be listed: gorton and metrick (2010, 2012), ordoñez (2013), gennaioli, shleifer, vishny (2013), or schwarcz (2012) and ricks (2010). in october 2011 the financial stability board (fsb) – the institution which supports and coordinates activities performed by the largest national financial bodies at an international level – defined “shadow banking as the system of małgorzata solarz192 credit intermediation which covers units or types of activities outside the regulated banking system” (shadow banking 2011). it means that shadow banking sector is made up of e.g. entities involved in: ■ accepting deposits (which are not guaranteed), ■ transforming liquidity and transferring credit risk, ■ offering securitization, securities landing and transactions warranted by repurchase (zaleska 2012, 16). further part of the paper discusses alternative financial institutions which have loan products in their offer. one of the criteria for classifying products is the purpose of their operations. it divides these institutions into commercial (e.g. moneylenders, pawnbrokers) and not-for-profit (e.g. credit unions, microfinance institutions) ones (anderloni 2008). entities included in shadow banking sector can be divided into two groups considering legal and moral legitimacy of their operations. e.g. loans granting entities may be characterized by the fact that they follow legislation in force, i.e. enter into written loan agreements, do not conceal key information regarding debt repayment or its actual cost, do not resort to activities forbidden by law addressed at unreliable debtors. the second group covers entities to which the above qualities do not refer and lending money at high interest is a standard service. in spite of the fact that the, so called, anti-usury act – official gazette of 2005 no. 157, item 1316 – prohibits lending money in poland at an interest higher than 16% annually, lenders include all types of fees or insurance charges in loan agreements which increase debt servicing costs to several hundreds or even thousands percent annually. another classification criterion – the form of financial services provision – is used to distinguish two groups of entities representing shadow banking sector. the first group renders traditional services in its official agency or in client’s house, while the second provides electronic services, i.e. by means of the internet. in the latter case it refers to social lending portals (peer-to-peer lending). loans are mutually granted by an online functioning community without bank intermediation. it is carried out either following the principle of one creditor – one debtor, or according to the pattern – a given creditor transfers the offered amount to a few different borrowers while a particular borrower, having entered the transaction, becomes the debtor of a few individuals simultaneously. the pioneer service offering intermediation in peer-to-peer lending scheme was called zopa, initiated in great britain in 2005. in a short time it gained numerous followers, also in poland, where in 2007 kokos.pl started functioning. the importance of shadow banking sector entities for population 193 its owner is blue media joint stock company. in the course of recent years many portals were set up, however, the vast majority were finalizing their activities relatively quickly, so that the number of active social lending service ranged approximately from 5 to 6. attention should be paid to pozycz.pl, sekrata.pl or zakra.pl. 3. people affected by credit exclusion as clients of entities representing shadow banking sector the experts from the european commission in their document entitled financial services provision and prevention of financial exclusion have presented the definition of financial exclusion. according to them it refers to the process which affects people who experience problems in accessing and/or using financial products and services at the mainstream market which are adequate for their needs and support them in living a normal life in a society (anderloni 2008). among the areas of exclusion understood in such way credit exclusion can be distinguished and referred to the inability of taking out a lawn. additionally, it should be emphasized that the authors of the quoted study refer the problem of financial exclusion only to the formally functioning and state supervised financial institutions disregarding, at the same time, issues related to alternative financial services providers. therefore, those individuals who are not able to obtain a bank credit, however, take advantage of products and services offered by shadow banking sector, are included in the group of population affected by credit exclusion. people who have been excluded by banks, owing to their insufficient creditworthiness (low income households), or due to negative history of previously contracted debts repayment, represent crucial clients of the alternative loan providing institutions. state authorities, for the sake of financial system stability, and mainly as the result of financial crisis, have introduced more stringent prudential standards. such legislation, instead of protecting client’s interests, frequently and paradoxically pushes him/her into the trap of indebtedness. a person who has low income, or obtains income from an undeclared work does not represent a trustworthy partner for banks. and it is such population – financially excluded – which constitutes core clientele of alternative financial services providers. this group often covers low educated individuals, from smaller locations and affected to a greater extent by the job market problems (białowolski 2012). małgorzata solarz194 among clients there are also those who could take a bank credit without any problem, however, they decide to apply for a loan at alternative intermediaries. the explanation seems to be the lack of knowledge. the research conducted for kronenberg foundation confirms that the level of financial capability represented by polish population is poor (maison 2013) and decreases proportionally to respondents’ aging. pensioners, who frequently become customers of alternative financial services providers, rarely compare offers of several institutions in order to select the most favourable one. this would require paying a visit in a few banks or checking several websites and additionally, in the latter case, the problem of senior citizens digital exclusion becomes visible (only 10,6% of poles over 65 years of age were using the internet in 2011 (czapiński, panek 2012). many elderly persons claim that they feel much more comfortable when an agent visits them at home and in such circumstances the costs of taking out a loan become less important. and it is, indeed, the sense of security that such loan offering companies as e.g. provident take advantage of in their activities. in accordance with data collected by the world bank in 148 countries the number of people, who in 2011 took out a loan, amounted to 33,8%. the majority of respondents refer to friends and family for financial support – 22,7%, next in line are loans offered by mainstream financial institutions – 9,1% and private creditors are ranked as the third – 3,4%. these figures differ depending on the world region (chart 1). additionally, following fsb estimations the size of shadow banking sector entities in 2010 presented the level of 46 000 billion euro, i.e. half of total bank assets (shadow banking green paper 2012). data presented in the 1 chart confirm that the highest indebtedness was characteristic for the population of sub-saharan africa – 46,8%, while the least debts were contracted by latin america and the caribbean inhabitants – 25,4%. as far as financing sources are concerned, apart from the developed countries, loans from family or friends represent the dominating source of financial support. the broadly understood alternative offer of loan granting institutions is most popular among the adult population of south asia – 6,4% and the lowest interest of such services, at the level of 1,5%, is recorded among inhabitants of europe and central asia. the importance of shadow banking sector entities for population 195 chart 1. the number of borrowers and basic sources of loans in regional cross-section (data form 2011 presented as % of population over 15 years of age) * only developing countries s ou r c e : author’s compilation based on (the global financial 2013). polish citizens, against the global average, have slightly worse results since last year 26,4% of adult population took out loans, among which 13,5% borrowed money from family and friends, while ten out of one hundred signed loan agreements with banks and 0,9% took advantage of alternative financial services providers (the global financial 2013). on the other hand, another source reports that, in the first half of 2012, the indebtedness of polish citizens to shadow banking sector entities amounted to 1,8 billion pln, which constitutes the increase by 17% as compared to the previous year (kamińska 2012, 1). the number of non-banking lending institutions keeps growing dynamically. the confederation of financial companies informs that at the end of 2012 the number of borrowers amounted to 1,36 mln, whereas three years before the adequate number was 900 thous., which means an increase by 33%. for many years the offer by the lending company – provident has been most popular in poland. at the end of the 3rd quarter of 2013 it recorded almost 3% growth of clients and 4% of the value of loans granted. it is also worth emphasizing that a much less popular form of selling loans by the internet appeared on polish market. such loans providers as net credit, kredito24, wonga.com, vivus finance, running their businesses online, have been conquering the market dynamically. e.g. the latter entity, only in the first year of running the business, served 300 thous. clients and granted loans at the total amount of pln 250 mln. these types of małgorzata solarz196 loan companies offer the so-called micro-loans to be repaid within 30 days. in 2013 the average borrowed amount was pln 449 in case of the first agreement and pln 745 for clients granted another micro-loan, if the prior one was repaid in full amount and timely. micro-loans are repaid as balloon payments or – if applied by a client – extended for the following repayment period. quite often they do not bear interest and their total cost is the commission enlarging the amount repaid at the end of the crediting period. average costs of debt servicing remain at the level of 19–23% against the borrowed amount (raport 2013, 3–5). additionally, the number of social lending portals users is also growing dynamically, kokos.pl informs at its website that in september 2013 they had over 225 000 clients, while nine months before their number was by 7,6% lower. 4. advantages related to operations performed by shadow banking sector entities for population affected by credit exclusion alternative financial services providers offer numerous advantages, especially for individuals affected by the exclusion from financial system. these entities provide financing sources for both consumer expenditure and these related to starting one’s own business. the access to loan products facilitates household finance management, e.g. allows for covering temporary shortage of financial resources or protects against suffering even deeper poverty as the result of such circumstances as health problems or an injury of the primary breadwinner. for many of them even small amounts in loans allow for life quality improvement, e.g. by exchanging old household appliances into new ones, buying pharmaceuticals, financing education courses. the report entitled “the market of loan companies in poland” presents research results referring, among others, to household indebtedness in financial institutions from the perspective of objectives behind taking out loans. as it turns out, in case of debts contracted in loan institutions functioning outside banking sector the slightly higher percentage of households take out loans for their current consumption purposes than it is observed in case of credits granted by banks (23,2% against 16,6%). unfortunately, as far as households outside the formal sphere of borrowing are concerned and these taking loans from private persons, the scale of indebtedness for current consumption purposes is significantly higher. in the group of households reporting financial obligations to private persons as many as 51,1% have borrowed money to purchase current consumption goods (białowolski 2012). the importance of shadow banking sector entities for population 197 another important advantage is the fact that they promote entrepreneurship among the unemployed, deprived of opportunities for initiating their own business based on financial means at their disposition and at the same time unable to apply for them at banks. in this area the significant role is played by microfinance institutions. support they provide allows borrowers to enter the job market, earn money and therefore supply their households with income resulting in its members life quality improvement. what is more, microfinance opens opportunities for poor people becoming independent and in consequence relieves the financial burden of the state (social care). additionally, the alternative financial services providers by means of their operations in developing countries and inhabited by poor population, support personal development of potential borrowers, mainly women. research results carried out in asian villages, where microfinance institutions are very active, indicate that illiteracy rate among women in these areas dropped since they have their own capital, or property (e.g. land) at their disposal, they participate in undertaking decisions about their own household, they are victims of domestic violence less often (dowla, barua 2006). the operations performed by alternative financial services providers steal, to an extent, clients from the leading financial institutions (the internet micro-loans are an exception), which results in an intensified competition battle between them which can result in more favourable terms and conditions of financial products offered by the latter entities and the recognition of financial exclusion problem. 5. threats related to operations performed by shadow banking sector entities for population affected by credit exclusion the advantage of an opportunity to take out a loan from many alternative financial intermediaries may, in case of financially excluded individuals, simultaneously result in over indebtedness (such situation means no possibility to meet deadlines of all contracted debts). if it is the case, the instalments for one entity are paid by means of the loan taken out at another one and therefore the loop of indebtedness keeps escalating. data included in p. białowolski’s report (2012) confirm that every seventh polish household indebted in the non-banking loan sector uses the obtained means to pay back previous commitments. as the result the problem of financial exclusion may become even stronger and unmałgorzata solarz198 fortunately the number of over indebted population in poland keeps growing steadily presenting the level of 300 000 people. the problem of excessive debt occurring at the microloans market was noticed by scientists from the university of zurich and their conclusions, to a large extent, also confirm the consequences of activities performed by the remaining alternative loan granting institutions. unrestrained access to financing sources, especially in case of individuals who cannot manage their personal finance satisfactorily, instead of their household economic situation improvement, can result in deeper poverty while the building up stress may even end up in a nervous break down or a suicide of an affected individual (kappel i in. 2010). in 2010 there were reported cases of suicides among women who borrowed money from ska microfinance in india and had problems with their repayment. this institution was established in 1997 as a non-profit organization and in the initial period of its functioning it was cooperating with grameen bank founded by m. yunus, awarded with the nobel peace prize, and implemented his noble ideas. the success of microloans attracted investors, venture capital funds of commercial nature. unfortunately the new owners have changed radically both values and methods of functioning and focused on profit maximizing not necessarily perceived from the perspective of social benefits (janikowska 2011, 75–83). at this point it is worth mentioning that the debt spiral deprives over-indebted persons from taking advantage of consumer bankruptcy procedure (see “official gazette” of 2008 no. 234, item 1572). the mentioned above legislation allows, once in ten years, to get rid of debt through declaring bankruptcy by an insolvent natural person, who owing to random events beyond any of his/ her influence, became insolvent. the disadvantage of social lending, as the tool for fighting social exclusion, is manifested in the fact that it does not work for poor families who do not have computer or the internet access. the absence of adequate equipment is frequently accompanied by the inability of using it and functioning in the virtual world and therefore entering into social lending type of agreements (solarz 2011, 179–192).  conclusions both europe and poland experience the results of global financial crisis manifested by more prudent credit decisions undertaken by banks. these institutions, having considered higher risk, but also new, more stringent prudential the importance of shadow banking sector entities for population 199 measures, try to counteract the development of over-indebtedness among their clients and upgrade the level of bank sector security. on the other hand, there are quite noticeable side effects. more restrictive criteria for credit granting by banks, accompanied by detailed verification of the potential clients’ current records are manifested by the growing amount of financially excluded population. such individuals are not capable of obtaining positive credit decisions since they do not have adequate income and/or assets, and also their credit record includes information perceived by banks as the threat to loan repayment. to an extent, the response to such uncovered demand is visible in an increased activity of shadow banking sector entities, including mainly loan offering companies. alternative financial services providers have already become the firm part of financial market structure by providing their services mainly for this part of society which is outside the interest of banks for either commercial or formal reasons. the offer of micro-loans to be repaid within a month is complementary rather than substitutive with regard to bank offer. it is addressed to the individuals suffering credit exclusion due to the fact that they perform seasonal or casual work or represent shadow economy, however, those whose income suggests that they are capable of repaying their debt timely. the problem to be discussed is the level of how detailed the legal regulations covering the services offered by lending companies should be, so that it ultimately serves the financial market and therefore to the benefit of economy and most of all the citizens. based on the primary advantages and threats experienced by the population affected by credit exclusion, presented in the hereby paper, which refer to the functioning of alternative financial intermediaries it may be concluded that it is the advantages which constitute the majority. the threats, however, have to be considered regarding by whom and what kind of activities should be undertaken in order to reduce their scale. e.g. low financial awareness of polish society, manifested by problems in distinguishing banks from lending institutions or the inability to calculate the total cost of the loan granted, can be eliminated by all sorts of initiatives undertaken by the state or by the financial services providers (see solarz 2013, 156–166)). this type of operations, which are supposed to prevent the socially undesirable phenomenon of financial exclusion and restore the excluded population back to the financial system, are referred to as financial inclusion. in accordance with the theses presented in the document issued by the world bank they should follow the idea of responsible finance also supported by: the state, both mainstream and alternative financial services providers, as well as małgorzata solarz200 consumers themselves (advancing responsible finance 2011). all these entities, adequately to their capacity should be active in such areas as: customer protection, responsible service providers and the development of client financial capacity.  references adrian t., shin h. s. (2009), the shadow banking system: implications for financial regulation, federal reserve bank of new york staff report no. 382, http://dx.doi.org/10.2139%2fssrn.1441324. advancing responsible finance for greater development impact (2011), responsible finance forum, available on the website http://www.ifc.org/ (access: 02.10.2013). anderloni l. (2008), financial services provision and prevention of financial exclusion, european commission, http://ec.europa.eu/social/main.jsp?langid=en&catid=22 (27.09.2013). białowolski p. (2012), rynek firm pożyczkowych w polsce. konferencja przedsiębiorstw finansowych w polsce, warszawa, available on the website http://alebank.pl/ (access: 15.10.2013). czapiński j., panek t. (2012), diagnoza społeczna 2011. warunki i jakość życia polaków, ministerstwo pracy i polityki społecznej. warszawa. dowla a., barua d. (2006), the poor always pay back. the grameen ii story, kumarian press, bloomfield. gennaioli n., shleifer a., vishny r. (2013), a model of shadow banking, „journal of finance”, vol. 68, issue 4, http://dx.doi.org/10.1111%2fjofi.12031. gorton g., metrick a. (2010), regulating the shadow banking system, “brookings paper on economic activity”, vol. 41, issue 2, http://dx.doi.org/10.1353%2feca.2010.0016. gorton g., metrick a. (2012), securitized banking and the run on repo, „journal of financial economics”, vol. 104, issue 3, http://dx.doi.org/10.1016%2fj.jfineco.2011.03.016. iwaisako t. (2010), global financial crisis, hedge funds and the shadow banking system, “public policy review”, vol. 6, no. 3. janikowska e. (2011), w jaki sposób mikrofinansowanie pomaga w walce z ubóstwem. studium przypadku grameen bank, „ekonomia społeczna”, no. 2. kamińska a. (2012), w matni para banków, „rzeczpospolita”, nr 9311. kappel v., krauss a., lontzek l. (2010), over-indebtedness and microfinance. constructing an early warning index. center for microfinance – university of zurich, http:// www.accion.org/document.doc?id=899 (access: 03.10.2013). maison d. (2013), polak w świecie finansów, wn pwn, warszawa. ordoñez g. l. (2013), sustainable shadow banking, “national bureau of economic research working paper”, no. 19022. pozsar z. (2008), the rise and fall of the shadow banking system, http://www.economy. com/sbs (27.12.2013). the importance of shadow banking sector entities for population 201 raport – mikropożyczki w polsce (2013), związek firm pożyczkowych, http://zfp.org. pl/ (access: 28.12.2013). rick m. (2010), shadow banking and financial regulation, “columbia law and economics working paper”, no. 370, http://dx.doi.org/10.2139%2fssrn.1571290. schwarcz s. (2012), regulating shadow banking, „review of banking and financial law”, vol. 31, no. 1. shadow banking green paper (2012), european commission, http://ec.europa.eu/internal_market/bank/docs/shadow/green-paper_en.pdf (access: 17.09.2013). shadow banking: strengthening oversight and regulation (2011), the financial stability board. http://www.financialstabilityboard.org/publications/r_111027a.pdf (access: 27.12.2013), http://dx.doi.org/10.2139%2fssrn.2182601. solarz m. (2011), the role of social lending in financial inclusion, [in:] financial sciences, e. bogacka-kisiel (ed.), “research papers of wroclaw university of economics”, no. 184. solarz m. (2013), financial capability development as the responsible finance instrument counteracting financial exclusion, [in:] finance and accountancy for sustainable development – sustainable finance, g. borys, m. solarz (eds.), “research papers of wroclaw university of economics”, no. 302. the global financial inclusion database (2013), the world bank, http://databank.worldbank.org (30.09.2013). zaleska m. (2012), szara bankowość, „gazeta bankowa”, nr 9. copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: huterska@uni.torun.pl, robhuski@uni.torun.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87- 100 toruń, tel. 56 611 48 95. agnieszka huterska, robert huterski* uniwersytet mikołaja kopernika w toruniu porządkowanie funkcjonowania bankowości równoległej (shadow banking) w polsce i w unii europejskiej słowa kluczowe: bankowość równoległa, nadzór finansowy. abstrakt: zagrożenia wynikające z niewłaściwego uregulowania działalności instytucji należących do bankowości równoległej mogą dotknąć zarówno ich klientów, jak i całego systemu finansowego. zostało to dostrzeżone przez władze finansowe w polsce (komisja nadzoru finansowego, narodowy bank polski), a także w unii europejskiej (komisja europejska, europejski bank centralny) oraz w skali światowej (komisja stabilności finansowej). jednakże zadanie właściwego uregulowania funkcjonowania bankowości równoległej jest dopiero w początkowej fazie realizacji i wymaga od wymienionych instytucji jeszcze wiele pracy. arrangement of functioning of shadow banking in poland and in the european union keywords: financial supervision, shadow banking. abstract: threats related to improper regulation of shadow banking institutions apply as well to their customers as to whole financial system. it is perceived by financial authorities in poland (polish financial supervision authority, the national bank of poland), and in the european union (european commission, european central bank), and also globally (financial stability board). however, the task of proper regulation doi: 10.12775/cjfa.2012.004 http://dx.doi.org/10.12775/cjfa.2012.004 agnieszka huterska, robert huterski54 of shadow banking activities is already in early stage of completion and still requires from institutions mentioned above a lot of work to do. translated by agnieszka huterska & robert huterski  wstęp współcześnie, zwłaszcza w związku z występowaniem poważnych kryzysów finansowych, jednym z priorytetowych zadań agend państwowych jest zapewnienie bezpieczeństwa obrotu finansowego i stabilności systemu finansowego. niezależnie od problemów w tych obszarach, które wiążą się z funkcjonowaniem najważniejszych i często największych instytucji finansowych, jakimi są banki, ostatni kryzys finansowy unaocznił, jak wiele niebezpieczeństw może wynikać z niewłaściwie uregulowanej działalności instytucji niebędących bankami, a wykonujących wiele czynności pokrewnych bankowym. dotyczy to podmiotów zaliczanych do tak zwanej bankowości równoległej (shadow banking). celem niniejszego artykułu jest przeprowadzenie analizy kluczowych działań krajowych i unijnych władz finansowych, które zmierzają do uporządkowania funkcjonowania takich instytucji w dążeniu do uczynienia ich bardziej bezpiecznymi zarówno z punktu widzenia ich klientów, jak i całego systemu finansowego. 1. istota równoległego systemu bankowego – shadow banking w ogólnym znaczeniu pojęciem równoległego systemu bankowego „shadow banking system” jest określane pośrednictwo kredytowe obejmujące zarówno podmioty, jak i czynności znajdujące się poza regulowanym systemem bankowym (shadow banking: strengthening oversight 2011: 1). shadow banking składa się z dwóch części. pierwszą stanowią podmioty działające poza regulowanym systemem bankowym, zajmujące się jedną z następujących działalności: ■ oferowaniem funduszy mających cechy depozytów; ■ dokonywaniem transformacji terminów zapadalności lub płynności; ■ dokonywaniem transferu ryzyka; ■ udzielaniem kredytów i wykorzystywaniem dźwigni finansowej. drugą stanowią czynności/operacje, które mogą być równie ważnym źródłem finansowania jak podmioty niebędące bankami. do tych operacji możemy   porządkowanie funkcjonowania bankowości równoległej… 55 zaliczyć sekurytyzację, pożyczki papierów wartościowych i transakcje repo (transakcje odkupu) (green paper shadow banking 2012: 3–4). pojęcie shadow banking powszechnie zaczęło być używane na początku ostatniego kryzysu finansowego. było to związane z dostrzeżeniem wpływu, jaki wywierają podmioty i działalności pozostające poza regulowanym systemem bankowym, wykonujące jednak czynności bankowe (shadow banking: strengthening oversight 2011: 1). podmioty z systemu bankowości równoległej opierają się często na finansowaniu krótkoterminowym pozyskiwanym z rynku (shadow banking: strengthening oversight 2011: 1). jednakże, jak pokazuje kryzys finansowy, shadow banking może stać się źródłem ryzyka systemowego. krótkoterminowe depozyty – jako źródło finansowania w przypadku odpływu środków powierzonych podmiotom z sektora bankowości równoległej – na skutek utraty zaufania przez inwestorów mogą doprowadzić do utraty płynności i wypłacalności tego typu podmiotów. ryzyko związane z shadow banking może przenieść się także na regulowany system bankowy (shadow banking: strengthening oversight 2011: 1). 2. podstawowe wymogi dotyczące działalności i organizacji instytucji zarejestrowanych jako banki w polsce podmioty działające w systemie bankowości równoległej, mimo wykonywania czynności bankowych, nie podlegają lub podlegają w ograniczonym zakresie wymogom i regulacjom, które muszą spełniać banki. w ustawie prawo bankowe mamy wymieniony katalog czynności, które mogą być wykonywane tylko przez banki, jak również czynności, które stają się czynnościami bankowymi, jeżeli są przez banki wykonywane. do tej klasyfikacji odwołuje się komisja nadzoru finansowego, publikując listę ostrzeżeń publicznych, zawierającą wykaz podmiotów – pogrupowanych ze względu na rodzaj prowadzonych czynności – prowadzących działalność obciążającą ryzykiem środki powierzone im przez inwestorów i niemających zezwolenia knf na prowadzenie tego typu działalności. zgodnie z art. 5 ustawy z dnia 29 sierpnia 1997 r. prawo bankowe (dz. u. z 2002 r. nr 72, poz. 665, z późn. zm.) do czynności bankowych należy zaliczyć: ■ przyjmowanie wkładów pieniężnych płatnych na żądanie lub z nadejściem oznaczonego terminu oraz prowadzenie rachunków tych wkładów; agnieszka huterska, robert huterski or 56 ■ prowadzenie innych rachunków bankowych; ■ udzielanie kredytów; ■ udzielanie i potwierdzanie gwarancji bankowych oraz otwieranie i potwierdzanie akredytyw; ■ emitowanie bankowych papierów wartościowych; ■ przeprowadzanie bankowych rozliczeń pieniężnych; ■ wydawanie instrumentu pieniądza elektronicznego; ■ wykonywanie innych czynności przewidzianych wyłącznie dla banku w odrębnych ustawach. do czynności bankowych możemy także zaliczyć następujące czynności, o ile są one wykonywane przez banki: ■ udzielanie pożyczek pieniężnych; ■ operacje czekowe i wekslowe oraz operacje, których przedmiotem są warranty; ■ wydawanie kart płatniczych oraz wykonywanie operacji przy ich użyciu; ■ terminowe operacje finansowe; ■ nabywanie i zbywanie wierzytelności pieniężnych; ■ przechowywanie przedmiotów i papierów wartościowych oraz udostępnianie skrytek sejfowych; ■ prowadzenie skupu i sprzedaży wartości dewizowych; ■ udzielanie i potwierdzanie poręczeń; ■ wykonywanie czynności zleconych, związanych z emisją papierów wartościowych; ■ pośrednictwo w dokonywaniu przekazów pieniężnych oraz rozliczeń w obrocie dewizowym. w ustawie prawo bankowe jest również zawarta definicja banku, który zgodnie z art. 2 tejże ustawy jest osobą prawną utworzoną zgodnie z przepisami ustaw, działającą na podstawie zezwoleń uprawniających do wykonywania czynności bankowych obciążających ryzykiem środki powierzone pod jakimkolwiek tytułem zwrotnym. utworzenie banku wymaga uzyskania zgody komisji nadzoru finansowego. taka zgoda zostaje wydana m.in. wówczas, gdy bank posiada odpowiednie fundusze własne (kapitał założycielski banku utworzonego w formie spółki akcyjnej nie może być niższy od równowartości w złotych 5 mln euro, a w przypadku banków spółdzielczych od równowartości w złotych 1 mln euro przeliczonej według kursu średniego ogłaszanego przez narodowy bank polski, obowiązującego w dniu wydania zezwolenia na utworzenie banku), a jego założyciele oraz osoby przewidziane do objęcia   porządkowanie funkcjonowania bankowości równoległej… 57 w banku stanowisk członków zarządu dają rękojmię ostrożnego i stabilnego zarządzania bankiem oraz co najmniej dwie osoby przewidziane do objęcia w banku stanowisk członków zarządu mają wykształcenie i doświadczenie zawodowe niezbędne do kierowania bankiem. ma to na celu zapewnienie bezpieczeństwa środków powierzonych przez klientów. 3. oddziaływanie polskiego nadzoru finansowego na shadow banking podmioty działające w równoległym systemie bankowym kreują kredyt i zwiększają dźwignię tak jak podmioty działające w systemie bankowym (shadow banking: strengthening oversight 2011: 1). wraz z nasileniem się regulacji ograniczających stopień ryzyka podejmowanego przez banki, m.in. przez rekomendację s i t, następuje ograniczenie możliwości uzyskania kredytów przez podmioty i osoby fizyczne. następuje odpływ klientów do instytucji parabankowych, takich jak provident, kokos, które możemy zaliczyć do systemu shadow banking. pośrednictwo kredytowe polegające na dostarczaniu kredytów poza kanałami bankowymi stanowi alternatywne źródło finansowania dla uczestników rynku i firm (shadow banking: strengthening oversight 2011: 1). na przykład działająca od 15 lat firma provident stała się w tym czasie źródłem kredytu dla ponad 3,5 mln polaków (http://www.provident.pl/pages/o-firmie, dostęp 19.20.2012). każdy przepływ pieniędzy od klientów do shadow banking, gdzie występuje asymetria informacji, rodzi niebezpieczeństwo dla klientów. obowiązujące rekomendacje knf ograniczyły bankom możliwość udzielania zarówno kredytów gotówkowych, jak i hipotecznych. kryteria, określające zdolność kredytową, zostały zaostrzone. osoby ubiegające się o kredyt muszą wykazać większy dochód, możliwe jest mniejsze obciążenie miesięcznych wpływów ratą kredytu, a w przypadku kredytów hipotecznych wymagane jest większe zabezpieczenie kredytowanej nieruchomości (wskaźnik ltv) oraz niejednokrotnie krótszy okres kredytowania. te czynniki spowodowały z jednej strony spadek akcji kredytowej banków, z drugiej natomiast zwiększenie zainteresowania klientów instytucjami udzielającymi szybkich, wysoko oprocentowanych pożyczek. przy udzielaniu takich pożyczek nie występuje równie rygorystyczna jak w bankach ocena zdolności kredytowej przyszłego pożyczkobiorcy. powoduje to wzrost ryzyka kredytowego w podmiotach oferujących szybkie pożyczki „bez bik-u”. ze względu na pogorszenie się jakości kredytów w portfelach banków można przypuszczać, że udział niespłaconych agnieszka huterska, robert huterski or 58 pożyczek znajdujących się w instytucjach parabankowych, które w bardziej liberalny sposób przyznają pożyczki swoim klientom, może być wysoki (raport o stabilności 2012: 63). ten problem został dostrzeżony przez knf. w piśmie zastępcy przewodniczącego knf do prezesa związku banków polskich z dnia 15 września 2012 r. pojawiły się propozycje zmian w rekomendacjach s i t, mające przeciwdziałać niekorzystnym zmianom na rynku, za jakie uważa się między innymi ograniczenie przez banki akcji kredytowej w zakresie kredytów detalicznych przy jednoczesnym zwiększeniu pożyczek udzielanych przez podmioty nieobjęte nadzorem finansowym. do proponowanych zmian należy zaliczyć rozdzielenie rekomendacji s i t, a także odejście od sztywnych norm dotyczących maksymalnego poziomu relacji wydatków związanych z obsługą zobowiązań kredytowych i innych niż kredytowe zobowiązań finansowych do dochodów klientów detalicznych oraz stosowanie rekomendacji t przez oddziały instytucji kredytowych (pismo zastępcy przewodniczącego knf: 1–2). komisja nadzoru finansowego na swojej stronie internetowej zamieszcza listę podmiotów prowadzących działalność bez jej zezwolenia. zgodnie ze stanem na koniec października na stronie knf zawierającej ostrzeżenia publiczne znajdowały się 63 podmioty. zamieszczone ostrzeżenia publiczne dotyczą podmiotów niemających zezwolenia knf na (komisja nadzoru finansowego 2012a): ■ wykonywanie czynności bankowych, w szczególności na przyjmowanie wkładów pieniężnych w celu obciążania ich ryzykiem: 31 podmiotów; ■ gwarantowanie wypłat środków ulokowanych w podmiotach, które nie mają zezwolenia knf: 1 podmiot (pozabankowy fundusz gwarancyjny); ■ prowadzenie działalności maklerskiej: 11 podmiotów; ■ dystrybucję jednostek uczestnictwa funduszy inwestycyjnych: 2 podmioty; ■ lokowanie w papiery wartościowe, instrumenty rynku pieniężnego lub inne prawa majątkowe środków pieniężnych: 2 podmioty; ■ oferowanie papierów wartościowych (papiery wartościowe wskazanych w ostrzeżeniu publicznym spółek nie zostały objęte zatwierdzonym przez knf prospektem emisyjnym lub dokonano emisji obligacji bez zachowania ustawowych warunków): 10 podmiotów; ■ oferowanie klientom na terenie rzeczypospolitej polskiej akcji oraz opcji towarowych: 2 podmioty; ■ prowadzenie giełd towarowych: 1 podmiot;   porządkowanie funkcjonowania bankowości równoległej… 59 ■ prowadzenie działalności ubezpieczeniowej na terytorium rzeczypospolitej polskiej, w szczególności na zawieranie nowych lub przedłużanie istniejących umów: 3 podmioty. należy jednak pamiętać, że środki pieniężne składane w podmiotach należących do sfery bankowości równoległej nie są objęte państwowymi gwarancjami (komisja nadzoru finansowego 2011), w szczególności: bankowego funduszu gwarancyjnego (bfg), systemu rekompensat prowadzonego przez krajowy depozyt papierów wartościowych (kdpw) czy ubezpieczeniowego funduszu gwarancyjnego (ufg). 4. spółdzielcze kasy oszczędnościowo-kredytowe a shadow banking do sektora shadow banking do niedawna mogliśmy zaliczyć także spółdzielcze kasy oszczędnościowo-kredytowe (skok-i). skok-i są spółdzielniami działającymi na podstawie ustawy o spółdzielczych kasach oszczędnościowo-kredytowych i ustawy prawo spółdzielcze (www.skok.pl, dostęp 19.11.2012). kasy zrzeszają ponad 2,5 mln osób. liczba klientów korzystających z operacji depozytowo-kredytowych w skok-ach wynosi więc 2,5 mln. sieć placówek skok jest największą co do wielkości wśród instytucji oferujących ludności usługi finansowe (www.skok.pl, dostęp 19.11.2012). do 27 października 2012 r. nie podlegały one nadzorowi knf. także zgromadzone w nich depozyty nie są objęte gwarancjami bankowego funduszu gwarancyjnego (art. 2 pkt 1 lit. h ustawy o bankowym funduszu gwarancyjnym). dla celów ochrony oszczędności gromadzonych w kasach funkcjonuje program ochrony oszczędności. na ten program składa się fundusz stabilizacyjny kasy krajowej oraz zbiorowe ubezpieczenie depozytów tuw skok. od 27 października 2012 r. spółdzielcze kasy oszczędnościowo-kredytowe podlegają nadzorowi państwowemu, sprawowanemu przez komisję nadzoru finansowego (komisja nadzoru finansowego 2012b). zgodnie z art. 60 ustawy z dnia 5 listopada 2009 r. o spółdzielczych kasach oszczędnościowo-kredytowych działalność kas i kasy krajowej podlega nadzorowi sprawowanemu przez komisję nadzoru finansowego. nadzór knf ma na celu zwiększenie bezpieczeństwa depozytów członków kas (komisja nadzoru finansowego 2012b). cele wprowadzenia nadzoru knf nad spółdzielczymi kasami oszczędnościowo-kredytowymi zostały określone w art. 61 ustawy o spółdzielczych kasach oszczędnościowo-kredytowych. ma on zapewnić: agnieszka huterska, robert huterski or 60 ■ stabilność finansową kas; ■ prawidłowość prowadzonej przez kasy działalności finansowej; ■ bezpieczeństwo środków pieniężnych gromadzonych w kasach; ■ zgodność działalności kas z przepisami ustawy o skok-ach. celem nadzoru nad kasą krajową jest zapewnienie: ■ stabilności finansowej kasy krajowej; ■ prawidłowości wykorzystania funduszu stabilizacyjnego; ■ zgodności działalności kasy krajowej z przepisami ustawy o skok-ach. objęcie nadzorem knf spółdzielczych kas oszczędnościowo-kredytowych miało na celu między innymi zwiększenie bezpieczeństwa środków powierzonych przez klientów tym podmiotom. kolejnym powodem był wpływ, jaki może wywrzeć ryzyko skumulowane w tym rodzaju podmiotów na stabilność całego sektora finansowego. 5. shadow banking w pracach komisji europejskiej wpływ, jaki ze względu na kumulację ryzyka może wywierać rozwój działalności instytucji zaliczanych do shadow banking na stabilność systemu finansowego, stał się powodem opracowania przez radę stabilności finansowej zaleceń związanych z nadzorem nad równoległym systemem bankowym. także komisja europejska opracowała zieloną księgę dotyczącą równoległego systemu bankowego. prace komisji europejskiej skoncentrowały się na następujących podmiotach i działaniach (green paper shadow banking 2012: 4): ■ spv (jednostkach specjalnego przeznaczenia), które dokonują transformacji płynności i/lub terminów zapadalności, takich jak np. siv (special investment vehicles) i spv (special purpose vehicles); ■ funduszach rynku pieniężnego (mmfs money market funds) i innych typach funduszy inwestycyjnych lub produktów mających cechy depozytowe; ■ funduszach inwestycyjnych, w tym funduszach etfs (exchange traded funds – otwartych funduszach inwestycyjnych notowanych na giełdzie), które są źródłem kredytu lub dźwigni; ■ instytucjach finansowych i ubezpieczeniowych będących źródłem kredytu lub gwarancji kredytowych bądź dokonujących transformacji terminów zapadalności lub płynności nieobjętych regulacjami, jakim podlegają banki;   porządkowanie funkcjonowania bankowości równoległej… 61 ■ firmach ubezpieczeniowych i reasekuracyjnych, które emitują lub gwarantują produkty kredytowe; ■ sekurytyzacji; ■ emisji papierów wartościowych i transakcjach repo. to ryzyko zwiększa się wraz ze wzrostem tego typu działalności oraz utrzymywaniem braku przejrzystości (shadow banking: strengthening oversight 2011: 2). w zielonej księdze komisji europejskiej zostały jednak wymienione także zalety, jakie mogą wynikać z istnienia systemu bankowości równoległej dla systemu finansowego (green paper shadow banking 2012: 5): ■ umożliwienie inwestorom alternatywnej do depozytów bankowych formy inwestowania; ■ dzięki większej specjalizacji w bardziej efektywny sposób zaspokojenie specyficznych potrzeb inwestorów; ■ alternatywne źródło finansowania dla gospodarki, które staje się użyteczne w sytuacji, gdy tradycyjne banki lub kanały przeżywają okresowe trudności; ■ umożliwienie dywersyfikacji ryzyka poza systemem bankowym. w zielonej księdze zostały wymienione przepisy, które powstały dla regulowanego systemu bankowego, ale obejmują także podmioty z sektora shadow banking. należą do nich następujące regulacje (green paper shadow banking 2012: 8–9): ■ dyrektywa o wymogach kapitałowych crd ii – podmioty inicjujące sekurytyzację aktywów i zarządzające papierami wartościowymi muszą od października 2010 r. zatrzymywać istotną część ryzyka kredytowego związanego z emisją; ■ dyrektywa o wymogach kapitałowych crd iii od grudnia 2011 r. – banki zaangażowane w reasekurację są objęte zwiększonymi wymogami kapitałowymi; ■ propozycja komisji dotycząca dyrektywy crd iv od 2015 r. – wprowadzenie wyraźnie sprecyzowanych wymogów płynności. komisja wymienia także obowiązujące przepisy, które bezpośrednio obejmują shadow banking system. należą do nich następujące regulacje (green paper shadow banking 2012: 9–10): ■ dyrektywa w sprawie zarządzających funduszami inwestycyjnymi (aifmd) poddaje regulacji alternatywne fundusze inwestycyjne; agnieszka huterska, robert huterski or 62 ■ działalność funduszy mmf i etf może podlegać regulacjom dotyczących przedsiębiorstw zbiorowego inwestowania w zbywalne papiery wartościowe (ucits). od 1 lipca 2011 r. obowiązują wytyczne europejskiego urzędu nadzoru giełd i papierów wartościowych; ■ dyrektywa solvency ii dotycząca firm ubezpieczeniowych, które są zobowiązane do uwzględniania ryzyka kredytowego w swoich wymogach kapitałowych. także spółki celowe stworzone przez ubezpieczycieli muszą uzyskać zezwolenie na prowadzenie działalności. 6. shadow banking jako problem dla polityki pieniężnej i makroostrożnościowej banku centralnego nie tylko organy nadzoru finansowego oraz instytucje gwarantowania depozytów są zainteresowane monitorowaniem i uregulowaniem działalności ze sfery shadow banking. działalność ta może również generować problemy ze sfery polityki pieniężnej i nadzoru makroostrożnościowego, za które odpowiada bank centralny. przykładowo, w pierwszym przypadku mogą to być obawy, że shadow banking może ograniczać skuteczność impulsów polityki pieniężnej generowanych przez bank centralny, a w drugim, że może on zagrażać stabilności systemu finansowego jako całości. z tym drugim przypadkiem mieliśmy do czynienia w czasie ostatniego kryzysu finansowego. ryzyko związane z kredytami hipotecznymi, które było skumulowane w instytucjach finansowych, zostało przetransferowane do podmiotów powiązanych z systemem bankowym, ale w ograniczonym stopniu podlegających nadzorowi. problemy amerykańskiego systemu finansowego przeniosły się na systemy finansowe innych państw i na realne sektory gospodarki (szpunar 2012: 4). szybkość, z jaką ryzyko przenosi się między podlegającą nadzorowi częścią systemu finansowego a podmiotami nieobjętymi takim nadzorem, wskazuje na konieczność objęcia nadzorem makroostrożnościowym jak największej liczby podmiotów mogących aktywnie przyczynić się, na przykład przez dostarczanie uczestnikom rynku alternatywnej do kredytu bankowego formy finansowania, do wzrostu ryzyka w całym systemie.  zakończenie ostatni kryzys finansowy unaocznił zagrożenia, jakie mogą wynikać z działalności prowadzonej poza nadzorem finansowym. skumulowane w tym segmen  porządkowanie funkcjonowania bankowości równoległej… 63 cie rynku ryzyko kredytowe może w łatwy sposób przenieść się na podmioty objęte nadzorem finansowym, a dalej także na realną sferę gospodarki. o ile zarówno w polsce, jak i na szczeblu unijnym są prowadzone działania mające na celu ustanowienie regulacji, które pozwoliłyby objąć nadzorem finansowym działalność shadow banking, o tyle poza regulowanym systemem pozostaje jeszcze szereg podmiotów. ze względu na potencjalne skutki zarówno społeczne (wynikające z utraty przez inwestorów oszczędności lub brak możliwości spłaty bardzo wysoko oprocentowanych pożyczek przez klientów indywidualnych), jak i gospodarcze, jakie może przynieść niekontrolowana działalność podmiotów pozostających poza nadzorem finansowym, istotne jest podjęcie dalszych działań zmierzających do objęcia pełnym nadzorem podmiotów z obszaru bankowości równoległej. nie można jednak oceniać funkcjonowania shadow banking tylko negatywnie. podmioty działające w tym segmencie są alternatywnym źródłem finansowania. rozwój tego segmentu rynku może wynikać także z niedoskonałości systemu bankowego. w polsce spadek akcji kredytowej banków i związany z tym gwałtowny rozwój firm pożyczkowych skłonił władze nadzorcze do prac nad modyfikacją rekomendacji komisji nadzoru finansowego ograniczających możliwość podejmowania wysokiego ryzyka kredytowego przez banki. efektem zmniejszenia akcji kredytowej przez banki nie stało się jednak zmniejszenie zadłużenia polaków, ale zadłużanie się ich w firmach oferujących wysoko oprocentowane pożyczki. należy jednak położyć nacisk nie tyle na ograniczenie funkcjonowania tego segmentu rynku, ile na objęcie podmiotów w nim działających ściślejszą kontrolą. jako przykład takich działań można podać objęcie kontrolą komisji nadzoru finansowego skok-ów. w polskim systemie finansowym najwięcej uwagi poświęca się podmiotom z obszaru shadow banking będących niebankowymi instytucjami pożyczkowymi. z powodu wyżej wspomnianej roli dostarczania substytutu kredytów bankowych to zainteresowanie jest obecnie zrozumiałe. należy jednak zwrócić uwagę, że w kręgu zainteresowań regulatorów rynku finansowego powinna znaleźć się również depozytowa i inwestycyjna działalność niektórych niebankowych instytucji pożyczkowych oraz przepływ pieniędzy między nimi a innymi podmiotami sfery shadow banking, jak niebankowe instytucje leasingowe, factoringowe, rynku kapitałowego czy nawet ubezpieczyciele. chociaż niektóre segmenty polskiego pozabankowego rynku finansowego są jeszcze słabiej rozwinięte niż w krajach europy zachodniej, to jednak kompleksowe agnieszka huterska, robert huterski or 64 podejście do problemu shadow banking prezentowane przez komisję europejską powinno być punktem odniesienia dla polskich regulatorów.  literatura green paper shadow banking (2012), european commision, brussels. komisja nadzoru finansowego (2011), ostrzeżenie przed powierzaniem środków firmom bez licencji knf, knf_firmy_bez_licencji_tcm6-28850-1.pdf (dostęp 19.11.2012). komisja nadzoru finansowego (2012a), ostrzeżenie przed powierzaniem środków firmom bez licencji knf. wykonywanie czynności bankowych, http://bip.knf.gov.pl/?l=/ urzad_komisji/042_ostrzezenia_publiczne/000_index.html#dzialalnosc_bankowa (dostęp 10.11.2012). komisja nadzoru finansowego (2012b), objęcie skok państwowym nadzorem knf. pismo zastępcy przewodniczącego knf wojciecha kwaśniaka do prezesa związku banków polskich krzysztofa pietraszkiewicza drb/drb 1i/078/103/8/lrj20 12 z dnia 15 września 2012. provident, o nas, http://www.provident.pl/pages/o-firmie (dostęp 19.10.2012). raport o stabilności systemu finansowego (2012), nbp, warszawa. shadow banking: strengthening oversight and regulation recommendations of the financial stability board (2011), financial stability board. spółdzielcze kasy oszczędnościowo kredytowe, co to jest skok, http://www.skok.pl/oskok/co-to-jest-skok (dostęp 19.11.2012). strengthening the oversight and regulation of shadow banking (2012), progress report to g20 ministers and governors, financial stability board. szpunar p. j. (2012), rola polityki makroostrożnościowej w zapobieganiu kryzysom finansowym, materiały i studia nbp, z. 278, warszawa. ustawa z dnia 14 grudnia 1994 r. o bankowym funduszu gwarancyjnym (dz. u. z 2009 r. nr 84, poz. 711, z późn. zm.). ustawa z dnia 29 sierpnia 1997 r. prawo bankowe (dz. u. z 2002 r. nr 72, poz. 665, z późn. zm.). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402018, volume 7, issue 3 date of submission: october 24, 2018; date of acceptance: january 11, 2019. * contact information: darius@umk.pl, department of finance management, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a, 87-100 toruń, poland, phone: +48 56 611 46 34; orcid id: https://orcid. org/0000-0001-8482-8064. piotrowski, d. (2018). propaganda of success in the area of the state’s social and economic policy. copernican journal of finance & accounting, 7(3), 55–70. http://dx.doi.org/10.12775/ cjfa.2018.015 dariusz piotrowski* nicolaus copernicus university in toruń propaganda of success in the area of the state’s social and economic policy keywords: white propaganda, social policy, economic policy, ethics. j e l classification: h1, h3, h6, z13. abstract: an attentive observer of the social and political life in poland has certainly noticed changes in the way the government communicates with the public since the united right (zjednoczona prawica) came to power at the end of 2015. media messages, saturated with persuasive elements, have ceased to have an exclusively informative function. the government, with the help of the media, especially the public media, has begun to practise propaganda on a large scale. one of its manifestations is the impression created in the society that success has been achieved in the social and economic sphere. however, this is often at the expense of a breach of ethical standards in terms of content and form. the aim of this study is to examine whether and to what extent respondents critically analyse the content of media messages related to the “family 500+” (rodzina 500+) programme, as well as to the unemployment rate and the gdp dynamics. a survey conducted by the author shows that the government’s propaganda has not been very effective in shaping the knowledge and attitudes of the interviewees. the limited effectiveness of such messages can be linked to the sources of information used by young people participating in the survey. dariusz piotrowski56  introduction making responsible decisions in the area of the state’s social and economic policy requires an appropriately high level of economic imagination among the society. a.k. koźmiński refers to it as economic knowledge derived from literature, media, one’s own observations and experience, in the shaping of which “soft” elements of economic systems, such as ethics, ideology, politics, emotions, irrational individual and collective choices, as well as misrepresentations and information noise, play an important role (koźmiński, 2016, p. 28). unfortunately, results of many national and international surveys indicate an unsatisfactorily low level of financial awareness among poles (oecd, 2016, p. 8; pisa, 2017, pp. 150–160; iwanicz-drozdowska, 2011, pp. 181–191). it can be assumed that erroneous behaviour and attitudes of individuals observed in the area of finance are an element of a wider phenomenon, referred to by t. mickiewicz as political ignorance. mickiewicz notes that, despite the significance of the matters related to the state’s social and economic policy, individuals are not willing to devote sufficient time and resources to obtain the necessary knowledge needed in the area of political decisions (mickiewicz, 2012, p. 102). this fact is being recognised by the politicians who try to use it to achieve their own goals (somin, 2013). through mass media, those in power try to inf luence the perception and evaluation of economic phenomena by the society (chomsky, 2002; croteau & hoynes, 2018). the research methodology and the course of the research process the aim of this study is to examine whether and to what extent respondents critically analyse the content of media messages related to the “family 500+” (rodzina 500+) programme, to the unemployment rate and the gdp dynamics, i.e. the areas described by the media as the achievements of the “good change” (leading party’s campaign slogan). the following research hypothesis was adopted in this paper: the propaganda of success of the united right’s government in the area the state’s social and economic policy is highly effective in shaping opinions and attitudes among the respondents. the aim of the study has been reached and the research hypothesis has been verified on the basis of a critical analysis of the source literature, the analysis of data pertaining to the social and economic situation in poland, the analysis of media messages propaganda of success in the area of the state’s social… 57 related to social and economic issues and the results of a survey conducted by the author. propaganda as a special form of political communication in the source literature, the model of an economic man, acting rationally, is presented against the model of a social man, functioning within various social groups which inf luence his behaviour and attitudes (wu, 2017; zafirovski, 2000, pp. 7–30; cicognani & zani, 2015, pp. 124–145). in reality, actions of individuals fall between these two extremes and manifest themselves in limited or selective rationalism and in choices that are satisfactory in terms of their degree of usefulness (klimczak, 2008, pp. 35–38). in both models, information plays an important role, which g. gilder compares to a surprise that brings about a change in the level of knowledge, as compared to its level from before the transmission of the information (gilder, 2016, pp. 39–40). depending on the purpose of the information stream, a distinction is made between messages and propaganda. messages increase the amount of knowledge one has. the recipients, based on their current knowledge and experience, make their own assessment of the content. the sender also refrains from interfering with the reasoning process. in case of propaganda, the intention of the propagandist is to inf luence the recipient of the message. more or less openly, the message suggests how events, social processes and economic data should be interpreted and what attitude towards them should be assumed (black, 2001, pp. 121–137). information is an integral part of political communication and can be used in the process of social control or the control of public perception of a phenomenon. political communication is aimed at achieving the objectives of the message originator, which usually include shaping the behaviour and attitudes of the addressees of the message. as part of this process, rational and non-rational factors are used, and through the history of human civilisation the latter has been favoured, for example factors related to instinct and emotions (pawełczyk, 2007, pp. 106–111). the control itself can take the form of persuasion, manipulation, coercion or violence (mikołajewski, 2010, pp. 175–189). as mentioned above, one form of political communication is propaganda. in general, propaganda can be described as organised mass persuasion, characterised by an almost unidirectional f low of information (pawełczyk & piontek, 1999, pp. 38–40). according to source literature, propaganda was originally neutral and meant spreading or promoting certain ideas. over time, the term dariusz piotrowski58 has gained negative meaning and is used as an alternative to such words as manipulation, distortion, deception, mind control, or brainwashing (henderson, braun, adams, bazerman, chaput & dunmire, 2016). the term “propaganda”, as understood by g.s. jowett and v. o’donnell, is the deliberate, systematic attempt to shape perceptions and manipulate cognitions to achieve a result that is coherent with the desired intent of the propagandist (jowett & o’donnell, 2012, pp. 2–7). in a narrower sense, political propaganda is “one of the forms of communication remaining in systemic relations to the authorities, ideologies, media and the public opinion” (dobek-ostrowska, fras & ociepka, 1999, p. 6). political propaganda involves mobilising large social groups around an ideology. according to m. nieć, the key element of propaganda is the originator of the message, being an organised entity (political party, state, church) and pursuing its goals which bring it closer to achieving political power or to its strengthening (nieć, 2013, p. 85). propaganda manifests itself in targeted dissemination of information, opinions and views explaining the reality and the phenomena of social life in a manner consistent with the interests of those in power (kula, 2005, p. 82). however, unlike political agitation or advertising, propaganda is aimed at achieving a change in attitudes rather than at a direct political response (nieć, 2013, p. 147). one of the most important criteria for the assessment of political propaganda is its effectiveness in shaping the knowledge, behaviour and attitudes of the recipients in line with the expectations of the originator of the message (tokarczyk, 2011, pp. 87–102). the effectiveness of propaganda can be improved by the use of techniques relating to the form and content of the message. the growing importance of mass media in the life of societies, which has been observed for decades, helps the message reach a wide audience (woolley & howard, 2016, pp. 4882–4890). as regards the content of the message, propaganda imposes the conditions and the subject of the debate and uses techniques such as: multiple repetitions, half-truths, generalization of one-off phenomena and exaggeration of details, as well as total negation combined with ironic and hypocritical praise (znyk, 2011, pp. 29–30). however, the use of such techniques is often in conf lict with the ethics, understood by sz. wojdyła as compliance with the primary moral standards, while the ethical nature of a given action lays in its credibility, soundness, honesty and integrity (wojdyła, 2014, pp. 43–52). propaganda of success in the area of the state’s social… 59 state’s social and economic policy as a subject of white propaganda many months of analysis of the content of the messages and the way that the united right’s government and the public media favourable to it communicate with the society as regards the social and economic policy indicate the use of propaganda1. white propaganda is being practised with regard to the government’s achievements. in this case, the source of the message can be accurately identified and the information contained in the message is close to the truth. as noted by b.a. patrick, the use of blatant lies in propaganda can undermine the credibility of the source if it is detected. it may therefore be more effective to create a message based on the truth, selected facts, statistics or arbitrarily adopted definitions (patrick, 2015, p. 27). the way it is presented is aimed at building a positive perception or credibility among the addressees. in relation to the social and economic phenomena analysed further in this paper, the aim of propaganda was to shape, strengthen or change the views and behaviours of the addressees of propaganda, so that they are compliant with those of the originator of the message, in this case – the polish government. the use of white propaganda has served to gain acceptance, approval or even support for the current and future actions of the government and the parliamentary majority. the first issue analysed in the paper is the “family 500+” programme. initial plans concerning this programme were announced in the course of the presidential and parliamentary campaign in 2015. the programme’s main objective, defined as the increase in the number of births, could be seen as exceptionally relevant, considering that poland is facing the problem of its aging population. the scale of the demographic threat is presented by the un forecast according to which, over the next 40 years, the population of poland 1 the united right is a coalition of three parties, the most important of which is law and justice. this party, just like the second force in the polish parliament–the civic platform, has an anti-communist background. the civic platform, which co-ruled the country in the years 2007–2015, is a group that endorses economic liberalism, advocating poland’s membership in the structures of the european union. law and justice is a party that can be characterised by conservatism and populism. the party won the 2015 elections owing to a good social agenda, but also thanks to the skilful use of social engineering. following the takeover of the public media, the party has been engaged in propaganda on a scale unprecedented in democratic countries. dariusz piotrowski60 would decrease from about 38 to 30 million inhabitants. at the same time, from the point of view of the economy and the public finances there are very unfavourable changes approaching in the age structure of the population. the ratio of the number of people aged 15–64 to the number of people aged 65 and over, which is currently 4, will decrease to about 1.5 in 2060 (united nations, 2017). the main reason for the growing demographic problem is the low fertility rate, which in poland was at about 1.3 children per woman of childbearing age at the time the programme was launched, with the value of about 2.1–2.15 being required to maintain simple replacement of generations. the programme which consists of a monthly payment of pln 500 (about eur 120) from the state funds for each second and subsequent child was introduced in april 20162. as soon as at the time of its introduction, the programme was presented in the public media as the current government’s success. even greater strengthening of the propaganda and an increase in the frequency of messages directed to the public concerning the implementation of the programme was paired with the presentation of further optimistic data concerning the number of births in poland. in 2016, about 382 thousand children were born in poland, while in 2017 the number of births amounted to 402 thousand. media reports stressed the increase in the number of births compared to 2015, when this figure stood at about 369 thousand (central…, 2017). in early 2017, the then prime minister, beata szydło, described the situation as “baby boom”. she even suggested that there was a need to find a polish equivalent for the phrase. it is also worth noting that, while the programme was in operation, the media increasingly emphasised its positive impact on the reduction of poverty among polish families. the author’s critical analysis of the principles of the “family 500+” programme and its results differs significantly from the image presented in the media and shows low effectiveness of the government’s programme. first, the government deliberately avoids making comparisons with the past, when poland was actually experiencing a demographic boom. in the 1950s the number of live births was sometimes close to 800 thousand, and in the first half of the 1980s it slightly exceeded 700 thousand. recently, however, in the years 2008–2010, the number of births was about 414 thousand, 418 thousand and 2 obtaining support for the first child is possible if the family’s monthly income per person does not exceed approximately eur 190. propaganda of success in the area of the state’s social… 61 413 thousand, respectively (central…, 2017). therefore, if the values indicated here were unsatisfactory, then the number of births recorded in 2016–2017 cannot be the basis for proclaiming the success of the programme. secondly, the programme is very expensive and, at the same time, characterised by low effectiveness. over the first two years, approximately pln 42 billion (nearly eur 10 billion) was spent on its operation. the programme has resulted in an increase in the number of births, as compared to the base year 2015, by only about 46 thousand in the scale of two years. thirdly, the programme is poorly designed, as it rewards the fact of having children but gives little incentive to families to increase the number of children they have. it is therefore necessary to change the focus of the programme and the financial support provided3. the programme also fails to promote a change in the lifestyle of young couples, as in the current legal situation obtaining state support after the birth of the first child is practically impossible. fourthly, the government’s programme is socially unjust. due to the fact that there is no upper income limit, the programme benefits the rich who, by applying certain accounting measures in their companies, can receive support for all the children they have. on the other hand, the lower income limit for obtaining support for the first child means that people in a difficult situation who are raising one child as single parents and whose monthly earnings exceed eur 380, cannot count on the state’s financial support. fifthly, the government, probably seeing the unsatisfactory effects of the programme on the number of births, points to the reduction of poverty in the society as the major achievement. however, the reduction of poverty does not directly lead to an increase in the birth rate. moreover, the government fails to point out that the programme is largely financed by public debt and the funds used will sooner or later have to be reimbursed4. 3 a couple with three children can, depending on its income, count on monthly state support in the amount of pln 1,000 or pln 1,500. this creates high costs for the state. at the same time, it is difficult to expect that the mother of these children, who may be 40 years old, will decide to have another child in exchange for an additional pln 500 a month. 4 2016 saw the largest annual increase in the public debt, in the amount of pln 94 billion, recorded in the history of poland. this amount would be sufficient for four years of operation of the “family 500+” programme. dariusz piotrowski62 figure 1. unemployment rate in poland in years 2007–2017 measures in their companies, can receive support for all the children they have. on the other hand, the lower income limit for obtaining support for the first child means that people in a difficult situation who are raising one child as single parents and whose monthly earnings exceed eur 380, cannot count on the state’s financial support. fifthly, the government, probably seeing the unsatisfactory effects of the programme on the number of births, points to the reduction of poverty in the society as the major achievement. however, the reduction of poverty does not directly lead to an increase in the birth rate. moreover, the government fails to point out that the programme is largely financed by public debt and the funds used will sooner or later have to be reimbursed4. figure 1. unemployment rate in poland in years 2007–2017 source: eurostat. another issue analysed in this study is the unemployment rate. data indicating its recent decline is periodically reported in the media. public media are particularly keen on highlighting the fact that the unemployment rate is exceptionally low, being an indication of a good situation on the labour market which has been achieved since the united right came to power. however, when analysing the data presented in figure 1, one can notice that the downward trend in the unemployment rate started in 2014. on the other hand, the analysis of legal regulations concerning poland’s employment market indicates lack of any measures or programmes pursued by the current authorities aimed at increasing poles’ activity on the job market. it is therefore difficult to attribute this success to the government of the united right. more importantly, however, it is debatable whether the 4 2016 saw the largest annual increase in the public debt, in the amount of pln 94 billion, recorded in the history of poland. this amount would be sufficient for four years of operation of the “family 500+” programme. 9.60% 7.10% 8.20% 9.60% 9.60% 10.10% 10.30% 9.00% 7.50% 6.20% 5.10% 0 3 6 9 12 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 s o u r c e : eurostat. another issue analysed in this study is the unemployment rate. data indicating its recent decline is periodically reported in the media. public media are particularly keen on highlighting the fact that the unemployment rate is exceptionally low, being an indication of a good situation on the labour market which has been achieved since the united right came to power. however, when analysing the data presented in figure 1, one can notice that the downward trend in the unemployment rate started in 2014. on the other hand, the analysis of legal regulations concerning poland’s employment market indicates lack of any measures or programmes pursued by the current authorities aimed at increasing poles’ activity on the job market. it is therefore difficult to attribute this success to the government of the united right. more importantly, however, it is debatable whether the current situation can be seen as success. the decreasing unemployment rate in poland has for some time ceased to be a desirable phenomenon for the economy, or rather it poses a threat to its further development. there are several reasons for this. firstly, poland is diversified in terms of its development. this division has been determined by history. it can be assumed, with certain simplification, that the regions to the west of vistula, the main river of poland, are more economically developed than the regions located to its right. an analysis of the average level of the unemployment rate in poland may lead to a wrong conclusion that there are reserves of labour force which can be used in the event of high dynamics of the country’s economic development. in fact, however, in the more developed regions of the main economic centres, the unemployment rate has come close to its natural level and there are huge difficulties reported in finding employees. this problem will not be solved by the inf low of people seeking work from the eastern regions of poland, as poles are propaganda of success in the area of the state’s social… 63 not very willing to change their residence for the purpose of new employment. secondly, poland has a high level of structural unemployment. this means, on the one hand, that, according to the preliminary data of the ministry of family, labour and social policy, the number of the unemployed registered as such at the end of august 2018 was 959.5 thousand, which was the lowest result since september 1990. on the other hand, the economy is in need of a total of hundreds of thousands of construction workers, lorry drivers, engineers, doctors, it specialists, etc. thirdly, the prospects of the labour market in poland are very adversely inf luenced by demographic processes (people born during the baby boom of 1950s are retiring and are being replaced by the generation born during the demographic decline of 1990s), as well as regulatory changes (the lowering of the retirement age introduced by the current government and the introduction of the “family 500+” programme which discourages people from taking up or maintaining employment). figure 2. the growth of gdp in poland in years 2011–2017 current situation can be seen as success. the decreasing unemployment rate in poland has for some time ceased to be a desirable phenomenon for the economy, or rather it poses a threat to its further development. there are several reasons for this. firstly, poland is diversified in terms of its development. this division has been determined by history. it can be assumed, with certain simplification, that the regions to the west of vistula, the main river of poland, are more economically developed than the regions located to its right. an analysis of the average level of the unemployment rate in poland may lead to a wrong conclusion that there are reserves of labour force which can be used in the event of high dynamics of the country's economic development. in fact, however, in the more developed regions of the main economic centres, the unemployment rate has come close to its natural level and there are huge difficulties reported in finding employees. this problem will not be solved by the inflow of people seeking work from the eastern regions of poland, as poles are not very willing to change their residence for the purpose of new employment. secondly, poland has a high level of structural unemployment. this means, on the one hand, that, according to the preliminary data of the ministry of family, labour and social policy, the number of the unemployed registered as such at the end of august 2018 was 959.5 thousand, which was the lowest result since september 1990. on the other hand, the economy is in need of a total of hundreds of thousands of construction workers, lorry drivers, engineers, doctors, it specialists, etc. thirdly, the prospects of the labour market in poland are very adversely influenced by demographic processes (people born during the baby boom of 1950s are retiring and are being replaced by the generation born during the demographic decline of 1990s), as well as regulatory changes (the lowering of the retirement age introduced by the current government and the introduction of the “family 500+” programme which discourages people from taking up or maintaining employment). figure 2. the growth of gdp in poland in years 2011–2017 5.00% 1.60% 1.40% 3.30% 3.80% 2.90% 4.60% 0 1 2 3 4 5 6 2011 2012 2013 2014 2015 2016 2017 s o u r c e : central statistical office. the third and last area of government propaganda analysed in this study is the high dynamics of poland’s gdp. the government is priding itself on the level close to 5%, ignoring the fact that the trend collapsed in 2016. it also gives examples of foreign investments carried out in poland, which are meant to give evidence of its good management of the country’s affairs and foreign investors’ trust in the current administration. according to the author of this study, among the cases analysed, the propaganda concerning the achievements of the government as regards the gdp dynamics is the closest to the truth. however, the media techniques used by the government give raise to serious questions about the ethics of the communication in this area as well. the analysis of the data presented in figure 2 shows that the level of 4.6% achieved in 2017 is reldariusz piotrowski64 atively high, as compared to the other years. it should be borne in mind, however, that in 2011 the economy grew by 5%, even though the world had barely managed to recover from the financial crisis and europe just about to face the problem of euro area countries’ debt crisis. the result recorded in 2017, although theoretically high, may be unsatisfactory. what is important for its assessment is the analysis of the market environment and the conditions in which this result was achieved. stable situation on the financial markets, low interest rates, low prices of raw materials, stable exchange rates, access to huge funds from the european union, as well as the increase in domestic demand fuelled by social programmes are factors due to which a much higher result could have been expected. one of the reasons why the potential created by market conditions is not being realised is a very low level of investment. the government is trying to hide this fact by highlighting individual investments, thus uses manipulation. presentation of survey results the verification of the research hypothesis is based on the results of the author’s own research conducted in the form of a questionnaire in march 2018 among first year management students at the faculty of economic sciences and management of nicolaus copernicus university in toruń. the survey involved 90 respondents who were asked questions meant to determine their level of knowledge and attitudes towards the state’s economic policy, as well as aimed to reveal their sources of information in the areas covered by the survey. the advantage of the survey was the fact that the respondents had acquired knowledge on the matters in question on their own, as the survey was conducted before the analysis of poland’s social and economic situation during university classes. consequently, the knowledge and views of the respondents somehow showed a certain image of the polish society. however, what distinguished the respondents from the general society was the fact that they were obtaining university education and their young age, under 20 years old. the survey was carried out in a wide range of areas, including the state’s social and economic policy and the condition of the public finances. for the purpose of this work, answers to 6 out of 18 questions were used. the responses were analysed in terms of radicalism or moderate nature of the views expressed, and respondents’ identification with extremely positive opinions was interpreted as the inf luence of propaganda. propaganda of success in the area of the state’s social… 65 three questions included in the questionnaire referred to the issues related to the “family 500+” programme. the answers to these questions are shown in figures 3 and 4. figure 3. sentence that in best way describes the “family 500+” programme before the analysis of poland’s social and economic situation during university classes. consequently, the knowledge and views of the respondents somehow showed a certain image of the polish society. however, what distinguished the respondents from the general society was the fact that they were obtaining university education and their young age, under 20 years old. the survey was carried out in a wide range of areas, including the state’s social and economic policy and the condition of the public finances. for the purpose of this work, answers to 6 out of 18 questions were used. the responses were analysed in terms of radicalism or moderate nature of the views expressed, and respondents' identification with extremely positive opinions was interpreted as the influence of propaganda. three questions included in the questionnaire referred to the issues related to the “family 500+” programme. the answers to these questions are shown in figures 3 and 4. figure 3. sentence that in best way describes the “family 500+” programme source: author’s own survey, n=90, multiple choice. the analysis of figure 3 shows that the respondents are well aware of the weak points of the “family 500+” programme. the answers indicating the need to modify the programme, as well as pointing to its low effectiveness due to a small increase in the number of births, prevailed over the other answers. it can therefore be concluded that the influence of the government propaganda in this area on this group of respondents had been limited. 2% 23% 23% 27% 71% 0% 10% 20% 30% 40% 50% 60% 70% 80% i do not know well realizes its goal, because it leads to poverty reduction it is not very effective, because the increase in the number of births turned out to be insignificant it is a success because the number of births increases it should be modified s o u r c e : author’s own survey, n=90, multiple choice. the analysis of figure 3 shows that the respondents are well aware of the weak points of the “family 500+” programme. the answers indicating the need to modify the programme, as well as pointing to its low effectiveness due to a small increase in the number of births, prevailed over the other answers. it can therefore be concluded that the inf luence of the government propaganda in this area on this group of respondents had been limited. the analysis of answers presented in figure 4 shows that the level of knowledge about poland’s demography among the respondents is unsatisfactory. this can be explained by the fact that the government deliberately misleads the public. the propaganda message emphasises the fact that the number of births has increased, however, without mentioning the number of births in preceding years or decades (except 2015), as, if given the opportunity to make the comparison, the society would easily notice the low effectiveness of the “family 500+” programme in achieving its main objective. dariusz piotrowski66 figure 4. number of births of children in poland, according to the respondents’ opinions figure 4. number of births of children in poland, according to the respondents' opinions in 2016–2017 in the 1950s source: author’s own survey, n=87. the analysis of answers presented in figure 4 shows that the level of knowledge about poland’s demography among the respondents is unsatisfactory. this can be explained by the fact that the government deliberately misleads the public. the propaganda message emphasises the fact that the number of births has increased, however, without mentioning the number of births in preceding years or decades (except 2015), as, if given the opportunity to make the comparison, the society would easily notice the low effectiveness of the “family 500+” programme in achieving its main objective. figure 5. respondents' opinion on the reduction of the unemployment rate source: author’s own survey, n=90. 11% 25% 22% 5% 3% 0% 10% 20% 30% about 300,000 about 400,000 about 500,000 about 600,000 about 700,000 about 800,000 14% 15% 13% 18% 21% 20% 0% 10% 20% 30% about 300,000 about 400,000 about 500,000 about 600,000 about 700,000 about 800,000 0% 2% 8% 13% 36% 41% 0% 10% 20% 30% 40% 50% i have no opinion definitely negative causing more negative than positive effects causing as much positive as negative effects that positive effects outweigh the negative ones definitely beneficial s o u r c e : author’s own survey, n=87. figure 5. respondents’ opinion on the reduction of the unemployment rate figure 4. number of births of children in poland, according to the respondents' opinions in 2016–2017 in the 1950s source: author’s own survey, n=87. the analysis of answers presented in figure 4 shows that the level of knowledge about poland’s demography among the respondents is unsatisfactory. this can be explained by the fact that the government deliberately misleads the public. the propaganda message emphasises the fact that the number of births has increased, however, without mentioning the number of births in preceding years or decades (except 2015), as, if given the opportunity to make the comparison, the society would easily notice the low effectiveness of the “family 500+” programme in achieving its main objective. figure 5. respondents' opinion on the reduction of the unemployment rate source: author’s own survey, n=90. 11% 25% 22% 5% 3% 0% 10% 20% 30% about 300,000 about 400,000 about 500,000 about 600,000 about 700,000 about 800,000 14% 15% 13% 18% 21% 20% 0% 10% 20% 30% about 300,000 about 400,000 about 500,000 about 600,000 about 700,000 about 800,000 0% 2% 8% 13% 36% 41% 0% 10% 20% 30% 40% 50% i have no opinion definitely negative causing more negative than positive effects causing as much positive as negative effects that positive effects outweigh the negative ones definitely beneficial s o u r c e : author’s own survey, n=90. with reference to the data presented in figure 5, it can be concluded that the impact of the propaganda on the respondents as regards the interpretation of the decreasing unemployment rate is more visible than in the case of the family support programme. most of the answers provided were of extremely positive nature (41%). according to the author, this may indicate a lack of critical analysis of the matter in question or lack of sufficient knowledge among this group of respondents about multidimensional effects of decreasing unemployment rates on the economy. however, if we take into account the fact that three propaganda of success in the area of the state’s social… 67 different subsequent answers are of a moderate nature, it turns out that most respondents (57%) are able to make an independent assessment of poland’s social and economic situation, different from the assessment presented in propaganda messages. figure 6. respondents’ opinion on gdp dynamics in poland in 2017 with reference to the data presented in figure 5, it can be concluded that the impact of the propaganda on the respondents as regards the interpretation of the decreasing unemployment rate is more visible than in the case of the family support programme. most of the answers provided were of extremely positive nature (41%). according to the author, this may indicate a lack of critical analysis of the matter in question or lack of sufficient knowledge among this group of respondents about multidimensional effects of decreasing unemployment rates on the economy. however, if we take into account the fact that three different subsequent answers are of a moderate nature, it turns out that most respondents (57%) are able to make an independent assessment of poland’s social and economic situation, different from the assessment presented in propaganda messages. figure 6. respondents' opinion on gdp dynamics in poland in 2017 source: author’s own survey, n=87. as regards the gdp dynamics, only 3% of the respondents provided answers that could have been influenced by the propaganda. as many as 80% of respondents expressed moderate optimism in the analysed area. the last question included in the survey was meant to identify the respondents’ sources of information in the area of the state’s social and economic policy. figure 7 presents the information sources as viewed by the respondents: from the most important to the least important. 3% 5% 13% 20% 60% 0% 10% 20% 30% 40% 50% 60% 70% it is very high it is very low i do not know it is not at a satisfactory level it is at a satisfactory level s o u r c e : author’s own survey, n=87. as regards the gdp dynamics, only 3% of the respondents provided answers that could have been inf luenced by the propaganda. as many as 80% of respondents expressed moderate optimism in the analysed area. the last question included in the survey was meant to identify the respondents’ sources of information in the area of the state’s social and economic policy. figure 7 presents the information sources as viewed by the respondents: from the most important to the least important. it appears that young people participating in the survey prefer modern forms of obtaining information. internet information services and social media are featured as the most important. next are traditional forms of mass media, i.e. television and radio. the respondents pointed to personal exchange of views among family and friends as the least important source of information. dariusz piotrowski68 figure 7. importance of the source of obtaining information by respondentsfigure 7. importance of the source of obtaining information by respondents source: author’s own survey, n=85-89. it appears that young people participating in the survey prefer modern forms of obtaining information. internet information services and social media are featured as the most important. next are traditional forms of mass media, i.e. television and radio. the respondents pointed to personal exchange of views among family and friends as the least important source of information. conclusions during the socialist period, government propaganda tried to add colour to the then grey life in poland. however, over the years under the authoritarian governments, the society developed defence mechanisms against the flood of false or manipulated information. for a significant part of the society, the beginning of the polish economic transformation also meant the end of large-scale propaganda practised by the authorities. however, these people were wrong as for almost three years, the old style of communication between the government and the society, devoid of ethics, has been present again. analyses of the social and political life in poland, and in particular opinion polls measuring social support for political parties, show that a large part of the society believes in vision of the reality as presented by those in power. surveys conducted for the purpose of this study showed that the effectiveness of the government propaganda in relation to the respondents was low. the respondents critically analysed the measures undertaken within the framework of poland’s social and economic 2% 6% 11% 23% 39% 44% 36% 42% 48% 51% 43% 45% 48% 39% 31% 20% 16% 9% 13% 13% 11% 7% 2% 2% 0% 20% 40% 60% 80% 100% friends family radio tv social media internet information services very important important not very important iit does not play any role s o u r c e : author’s own survey, n=85-89.  conclusions during the socialist period, government propaganda tried to add colour to the then grey life in poland. however, over the years under the authoritarian governments, the society developed defence mechanisms against the f lood of false or manipulated information. for a significant part of the society, the beginning of the polish economic transformation also meant the end of large-scale propaganda practised by the authorities. however, these people were wrong as for almost three years, the old style of communication between the government and the society, devoid of ethics, has been present again. analyses of the social and political life in poland, and in particular opinion polls measuring social support for political parties, show that a large part of the society believes in vision of the reality as presented by those in power. surveys conducted for the purpose of this study showed that the effectiveness of the government propaganda in relation to the respondents was low. the respondents critically analysed the measures undertaken within the framework of poland’s social and economic policy. the vast majority of the interviewees did not share the optimism or the atmosphere of success created by the government propaganda. according to the author, three main factors of limited effect of the propaganda on this group of people can be identified. first, they were young people, open to different political views and critical of the information commu propaganda of success in the area of the state’s social… 69 nicated to them. secondly, the respondents’ desire to acquire knowledge, combined with the ease with which they could obtain it using modern means of communication, made them resistant to one-sided propaganda messages. thirdly, obtaining information by respondents mainly through on-line 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(propaganda – contemporary faces. media killing technology.) łódź: bracia zybert apr „gryf” s.c. copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: mateuszkt@gmail.com, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń. mateusz kita* uniwersytet mikołaja kopernika w toruniu ubezpieczenia utraty zysku jako element programu ubezpieczenia przedsiębiorstwa produkcyjnego słowa kluczowe: przedsiębiorstwa, szkoda, ubezpieczenia, utrata zysku. abstrakt: celem niniejszego artykułu jest przedstawienie obecnego stanu teorii ubezpieczeń utraty zysku oraz wskazanie możliwych kierunków ich rozwoju. w artykule przedstawiono dwa studia przypadku – szkody skutkujące utratą zysku. na ich podstawie wskazano dwa zasadnicze kierunki rozwoju ubezpieczeń utraty zysku. pierwszy odnosi się do poszerzania kategorii ryzyk uznawanych za ubezpieczalne. drugi zaś – do poprawy jakości samych ubezpieczeń i usprawniania procedury likwidacji szkody. business interruption insurance as an element of production company insurance program keywords: business interruption, enterprise, insurance, loss. abstract: the aim of this article is to present current theory of business interruption insurance and the possibilities of their further development. there are 2 case studies presented in the article – losses resulting with business interruption. based on them there are 2 main findings. the first is that there is a need for widening the array of risks that are considered insurable. the second is that the quality of insurance products and loss adjustment process needs to be improved. translated by mateusz kita doi: 10.12775/cjfa.2012.006 http://dx.doi.org/10.12775/cjfa.2012.006 mateusz kita82  wstęp ubezpieczenia mienia podmiotów gospodarczych są istotnym elementem rynku finansowego. tę tezę potwierdza zarówno ich funkcja, jak i rozmiary ich rynku. podstawową funkcją ubezpieczeń mienia jest zapewnienie środków finansowych na odtworzenie majątku w razie jego zniszczenia bądź uszkodzenia wskutek zdarzenia losowego (hadyniuk 2000: 63–64). ta funkcja jest istotna zarówno z mikro-, jak i makroekonomicznego punktu widzenia, pozwala bowiem przedsiębiorcom przetrwać szereg negatywnych zdarzeń losowych. rozmiar rynku rzeczonych ubezpieczeń także jest znaczny, szacuje się go na ok. 6 mld zł w polsce (knf 2011) i ok. 400 mld usd na świecie (mildenhall 2012). niniejszy artykuł ma za zadanie pokazać, że w nowoczesnej gospodarce klasyczne ubezpieczenie mienia powinno być uzupełniane odpowiednim ubezpieczeniem utraty zysku, aby realizowany był podstawowy cel programu ubezpieczenia – umożliwienie przedsiębiorcy dalszej działalności. 1. rys historyczny – ubezpieczenia mienia korzenie ubezpieczeń ogniowych sięgają xvii w. najczęściej jako impuls do ich powstania wskazuje się wielki pożar londynu z 1666 r. (galey, kuhn 2009: 7). pożar miał swoje źródło w piekarni i przez pięć dni strawił 13 tys. domów. to zdarzenie stworzyło popyt na ubezpieczenia mienia. w odpowiedzi – kilka instytucji zaczęło zapewniać podaż. pierwsze przypadki ubezpieczania szkód następczych i zysku utraconego datuje się na przełom xviii i xix w., kiedy to minevra universal zaczęła oferować taki produkt na rynku brytyjskim (meier i in. 2004: 6–7). w ślad za rynkiem brytyjskim podążał niemiecki, proponując od 1817 r. ubezpieczenie utraty czynszu jako dodatek do ubezpieczeń ogniowych nieruchomości będących przedmiotem najmu. rok 1821 przyniósł znaną do dziś metodę kalkulacji odszkodowania opartą na okresie przerwy w działalności liczonym w dniach. rok 1899 z kolei uważa się za powstanie dominującego dziś modelu ubezpieczenia opierającego się na przychodach jako kluczowym parametrze. wiek xx i rewolucja technologiczna przyniosły wprowadzenie ubezpieczeń utraty zysku kroczących w ślad za awarią maszyn. w 1910 r. niemiecki organ nadzoru zatwierdził taki produkt finansowy i dopuścił go do sprzedaży. ubezpieczenia utraty zysku jako element programu ubezpieczenia… 83 1.1. znaczenie ubezpieczeń utraty zysku we współczesnej gospodarce we współczesnej gospodarce przerwa w działalności wywołana zdarzeniem losowym może być bardziej dotkliwa niż do tej pory. dzieje się tak z czterech powodów. po pierwsze, na skutek coraz szybszego transferu technologii oraz łatwiejszej dostępności kapitału przewaga konkurencyjna coraz rzadziej jest budowana na podstawie majątku trwałego. na znaczeniu zyskują posiadane kontakty handlowe, kompetencje kluczowych pracowników czy kultura organizacyjna. klasyczne ubezpieczenie mienia nie chroni tych elementów. po drugie, wraz z postępem globalizacji nasila się konkurencja. nieobecność na rynku przez okres potrzebny na odtworzenie majątku trwałego może spowodować, że dotychczasowi klienci przedsiębiorstwa dotkniętego szkodą znajdą nowych partnerów handlowych. po trzecie, presja na wzrost efektywności gospodarowania sprawia, że rosną oczekiwania właścicieli kapitału odnośnie do stabilności strumienia dywidendy. nowoczesne formy finansowania kapitałem obcym również wymagają stabilnych przychodów. przerwa w ich strumieniu może wywołać zachwianie płynności. po czwarte zaś, outsourcing i specjalizacja produkcji zwiększają liczbę i rozległość geograficzną powiązań biznesowych. w rezultacie zdarzenie losowe u dostawcy może powodować trudności z zachowaniem ciągłości działalności w całym łańcuchu dostaw1. 2. klasyfikacja ubezpieczeń utraty zysku ubezpieczenia utraty zysku w polskiej systematyce są klasyfikowane jako ubezpieczenia finansowe (ustawa o działalności ubezpieczeniowej 2003). obecnie do grupy ubezpieczeń utraty zysku zalicza się trzy podstawowe produkty kroczące odpowiednio za: ■ ubezpieczeniem mienia od ognia i innych zdarzeń losowych/wszystkich ryzyk; ■ ubezpieczeniem maszyn od awarii; ■ ubezpieczeniem wszystkich ryzyk budowy i montażu. przed przejściem do omawiania cech poszczególnych produktów warto wskazać cechy wspólne. po pierwsze, wszystkie one stanowią dodatek do 1 por. przypadek western digital (bohn 2011). mateusz kita or 84 ubezpieczenia mienia. zdarzenie objęte zakresem ubezpieczenia bazowego jest równocześnie początkiem okresu odszkodowawczego w odpowiednim ubezpieczeniu utraty zysku. po drugie, taki sam jest przedmiot ubezpieczenia i sposób ustalenia sumy ubezpieczenia. przedmiotem ubezpieczenia jest zysk ubezpieczeniowy brutto rozumiany jako różnica między przychodami z działalności operacyjnej i kosztów zmiennych. suma ubezpieczenia powinna być ustalona na poziomie planowanego zysku ubezpieczeniowego brutto w maksymalnym okresie odszkodowawczym. ten ostatni zaś powinien być ustalony jako maksymalny czas potrzebny na wznowienie działalności po szkodzie. we wszystkich ubezpieczeniach utraty zysku zbliżony jest też model czasowy związany z wypłatą odszkodowania. można go przedstawić za pomocą wykresu. wykres 1. model czasowy w ubezpieczeniu utraty zysku ź r ó d ł o: opracowanie własne na podstawie: meier i in. 2004: 20. na powyższym wykresie na osi czasu są wskazane trzy terminy. pierwszy, oznaczony literą „a”, to data powstania szkody w mieniu. od tej chwili generowany przez przedsiębiorstwo strumień przychodów gwałtownie maleje – wyprzedawane są bowiem zapasy magazynowe. po ich wyprzedaniu zostaje osiągnięty stabilny poziom przychodu generowanego przez te części przedsiębiorstwa, które nie zostały dotknięte szkodą. trwa odbudowa. w terminie „b” majątek produkcyjny przedsiębiorstwa zostaje odtworzony, moce produkcyjne wzrastają do stanu sprzed szkody. ten termin jest nazywany osiągnięciem technicznej gotowości przez przedsiębiorstwo (meier i in. 2004: 20). ponieważ jednak odbudowa pożądanych stanów magazynowych oraz relacji handlowych ubezpieczenia utraty zysku jako element programu ubezpieczenia… 85 wymaga czasu, poziom przychodu sprzed szkody jest osiągany dopiero w chwili „c” nazywanej momentem osiągnięcia komercyjnej gotowości. 2.1. ubezpieczenie utraty zysku wskutek ognia i innych zdarzeń losowych/wszystkich ryzyk rolą tego ubezpieczenia, znanego też jako ubezpieczenie business interruption (bi), jest zwiększenie prawdopodobieństwa przetrwania przez przedsiębiorstwo skutków przestoju wywołanego szkodą spowodowaną czynnikami zewnętrznymi. pozwala ono na pokrycie negatywnych konsekwencji spadku przychodów oraz pokrycie dodatkowych kosztów działalności poniesionych w celu ograniczenia spadku przychodów. ten drugi element może być istotny, gdyż pozwala na zachowanie relacji handlowych z klientami. ubezpieczenie bi pozwala uzyskać środki na bieżącą obsługę kosztów stałych przedsiębiorstwa, takich jak np. wynagrodzenia pracowników stałych, opłaty licencyjne, czynsze, obsługa kredytów. dodatkowo, dzięki możliwości zachowania kadry pracowniczej ułatwia wznowienie działalności po odtworzeniu mienia. dziś istnieje możliwość rozszerzenia jego zakresu o tzw. contingent bi (cbi). jego celem jest pokrycie utraconego zysku ubezpieczeniowego brutto oraz dodatkowych kosztów działalności wskutek szkody w mieniu, które nie znajduje się w posiadaniu ubezpieczonego (galey 2002). najbardziej popularne i dostępne również na polskim rynku są dwa elementy cbi. pierwszym jest klauzula odbiorców i dostawców (owu ergo hestii 2010) pokrywająca zysk utracony wskutek przerwy w produkcji spowodowanej określonym zdarzeniem losowym u dostawcy lub niemożności zbytu produktów wskutek szkody u odbiorcy. pokrywa ona też dodatkowe koszty nabycia komponentów od innego dostawcy oraz koszty poszukiwania innych odbiorców lub konsekwencje konieczności obniżenia ceny. niektórzy ubezpieczyciele do grona dostawców włączają także dostawców mediów. dzięki temu istnieje możliwość rekompensaty kosztów przestoju w razie przerwy w dostawie gazu, energii elektrycznej, paliw płynnych, wody itp. oraz zwiększonych kosztów działalności poniesionych na zorganizowanie zastępczych dostaw mediów. drugim elementem jest klauzula braku dostępu (owu allianz 2007). ona z kolei zapewnia odszkodowanie, gdy zysk zostaje utracony przez zablokowanie dojazdu do ubezpieczonej lokalizacji. pozwala też na pokrycie kosztów budowy tymczasowej drogi dojazdu. mateusz kita or 86 znaczenie ubezpieczenia bi jest szczególnie duże w przypadku przedsiębiorstw opierających znaczną część swojej produkcji na jednej lokalizacji, mających wysoki stopień dźwigni operacyjnej i/lub finansowej oraz tych, których czas odbudowy po szkodzie byłby długi. rozszerzeniem cbi powinny w pierwszej kolejności interesować się podmioty opierające swą działalność na jednym dostawcy i/lub odbiorcy. prawdopodobieństwo wystąpienia szkody w mieniu uruchamiającej ochronę w zakresie bi również jest istotne, lecz znajduje ono odzwierciedlenie także w koszcie ochrony ubezpieczeniowej. 2.2. ubezpieczenie utraty zysku wskutek awarii maszyn drugim produktem z omawianej rodziny jest ubezpieczenie utraty zysku wskutek awarii maszyn – machinery loss of profit (mlop). jego rola sprowadza się do ograniczenia negatywnego wpływu spadku przychodów wywołanego awarią maszyny na wynik finansowy przedsiębiorstwa. działa ono podobnie jak ubezpieczenie bi, z tym że zdarzeniem rozpoczynającym okres odszkodowawczy jest tu ubezpieczona awaria maszyny. to ubezpieczenie rzadziej niż bi może decydować o przetrwaniu przedsiębiorstwa, koncentruje się raczej na wygładzeniu wahań wyniku finansowego. jego znaczenie jest szczególnie duże dla przedsiębiorców opierających swoją działalność na kluczowej linii technologicznej lub tych, u których występują wyraźne wąskie gardła w procesie produkcji, a także gdy maszyna charakteryzuje się długim czasem naprawy lub odtworzenia. w ich przypadku nawet niewielka pod względem kosztów naprawy awaria może spowodować znaczną utratę przychodów. 2.3. ubezpieczenie utraty zysku wskutek opóźnienia inwestycji trzecim i ostatnim ubezpieczeniem utraty zysku jest ubezpieczenie rekompensujące skutki opóźnienia oddania inwestycji zwane ubezpieczeniem advanced loss of profit (alop) lub delay in start-up (dsu). jego rolą jest zapewnienie oczekiwanego strumienia przychodów z inwestycji, także gdy jej zakończenie opóźni się wskutek szkody. rozwój tego produktu w ostatnich latach był wywołany rozwojem nowoczesnych form finansowania inwestycji, m.in. project finance (czerkas 2001), i wzrostem zapotrzebowania na przewidywalność przychodów (bomelli 2003: 4). zakresem ubezpieczenia jest objęta ta część przewidywanych przychodów, która jest przeznaczona na finansowanie zadłu ubezpieczenia utraty zysku jako element programu ubezpieczenia… 87 żenia oraz na zysk netto. mogą być również pokryte dodatkowe koszty poniesione w celu uniknięcia opóźnienia (bomelli 2003: 7–8). ubezpieczenie alop jest bardziej skomplikowane od omawianych poprzednio, ponieważ opiera się wyłącznie na przewidywanych przychodach. kalkulacja sum ubezpieczenia i odszkodowań w ubezpieczeniu bi i mlop mogą czerpać z danych historycznych. w ubezpieczeniu alop dane historyczne nie istnieją. czynnikiem wprowadzającym element wymierności do ubezpieczenia alop jest zdarzenie definiowane jako szkoda. musi być to zniszczenie lub uszkodzenie mienia objęte zakresem bazowej umowy ubezpieczenia (owu pzu 2007). przykładami mogą tu być szkody żywiołowe, błąd projektanta lub wykonawcy czy uszkodzenie mienia w transporcie na plac budowy. pewną nowością w ubezpieczeniach alop jest możliwość ich rozszerzenia o elementy cbi, takie jak klauzule dostawców lub odbiorców (owu pzu 2007). pierwsza z nich pozwala na pokrycie skutków opóźnienia wynikającego ze szkody rzeczowej u producenta komponentu niezbędnego w procesie inwestycyjnym. druga zaś może być istotna wówczas, gdy przychody z danej inwestycji są uzależnione od zakończenia innej inwestycji przez podmiot trzeci. ryzyka niemające przyczyny w szkodzie rzeczowej, takie jak np. niedotrzymanie terminów czy upadłość wykonawcy, pozostają nieubezpieczalne. znaczenie tego produktu jest tym większe, im terminowość otrzymywania zaplanowanego strumienia przychodów jest istotniejsza dla inwestora – w szczególności, gdy przychody te mają służyć finansowaniu zadłużenia bądź kolejnej inwestycji i są kluczowe dla zachowania płynności. znaczenie alop jest największe, gdy opóźnienie w zakończeniu inwestycji może długookresowo wpłynąć na rentowność przedsięwzięcia, co może mieć miejsce w przypadku pionierskich projektów. należy mieć jednak na uwadze, że odszkodowanie wypłacane w ramach alop jest zawsze ograniczone w czasie zastosowaniem maksymalnego okresu odszkodowawczego. 2.4. ubezpieczenia utraty zysku – perspektywy na przyszłość ubezpieczenia utraty zysku rozwijają się dynamicznie. można zauważyć trzy główne obszary, w których może nastąpić postęp. pierwszym z nich jest katalog ubezpieczeń bazowych, na których może być zbudowane ubezpieczenie utraty zysku. można wyobrazić sobie ubezpieczenie utraty zysku kroczące w ślad za ubezpieczeniem autocasco, nnw czy nawet oc. mateusz kita or 88 drugim z obszarów jest rozszerzenie katalogu mienia osób trzecich, w którym szkoda może uruchamiać wypłatę odszkodowania z ubezpieczenia utraty zysku. przykładem może tu być sytuacja utraty atrakcyjności lokalizacji wskutek szkody w sąsiedztwie (galey, kuhn 2007: 20). trzecim z obszarów jest rozszerzenie katalogu zdarzeń pokrytych ubezpieczeniem poza te wywołane szkodą rzeczową. ubezpieczenie alop mogłoby być rozszerzone o skutki przekroczenia harmonogramu przez wykonawcę2. innym przykładem może być uzupełnienie ubezpieczenia bi o skutki awarii systemu informatycznego (galey, kuhn 2007: 21) lub wybuchu choroby zakaźnej (galey, kuhn 2007: 22). wspomina się także o zdarzeniach jeszcze mniej uchwytnych, jak np. pojawienie się negatywnych komunikatów prasowych czy pogorszenie parametrów wody oraz powietrza (galey, kuhn 2007: 25). 3. znaczenie ubezpieczeń utraty zysku po omówieniu teoretycznych podstaw ubezpieczeń utraty zysku warto spojrzeć na praktyczne przykłady szkód, w których te ubezpieczenia znalazły zastosowanie. przytoczone tu przykłady pochodzą z badań prowadzonych przez autora w latach 2009–2012. badania te obejmowały wywiady z osobami uczestniczącymi w procesie likwidacji szkód oraz analizę dokumentacji źródłowej. ze względu na tematykę dotykającą informacji niejawnych nie ma możliwości zaprezentowania nazw podmiotów dotkniętych szkodą. opisane tu przypadki zostaną nieco uproszczone dla przejrzystości wywodu. 3.1. przykład szkody powstałej wskutek awarii maszyn elektrociepłownia w jednym z miast średnich rozmiarów opierała swoją działalność na kilku blokach gazowo-parowych. alternatywnie działalność mogła być wspomagana niewielkim blokiem węglowym. jeden z bloków gazowo-parowych był dla przedsiębiorstwa kluczowy, gdyż generował ponad 50% wytwarzanej energii. przychody przedsiębiorstwa pochodziły ze sprzedaży energii elektrycznej i cieplnej generujących odpowiednio ⅔ i ⅓przychodów. w ujęciu rocznym przychody oscylowały w okolicach 100 mln zł i charakteryzowały się silną sezonowością. elektrociepłownia miała naturalny monopol lokalny. 2 choćby gdy przyczyna jest niezależna od stron – np. warunki atmosferyczne. ubezpieczenia utraty zysku jako element programu ubezpieczenia… 89 szkoda, do której doszło, polegała na dostaniu się ciała obcego do turbiny kluczowego bloku gazowo-parowego. to zdarzenie spowodowało zablokowanie wirnika – turbina przestała wytwarzać energię. szkoda znalazła pokrycie zakresem ubezpieczenia maszyn od awarii. sama naprawa była dość prosta i nie wiązała się z istotnymi kosztami. trudność była jednak związana z samym czasem naprawy. po pierwsze, skomplikowane było ustalenie przyczyny szkody. prace doradcy technicznego zmierzające do ustalenia przyczyny zdarzenia trwały 45 dni. badania wykazały, że konieczne jest wykonanie prac na płycie nośnej i naprawa wirnika u producenta. pierwsza z czynności zajęła kolejne 2,5 miesiąca, wirnik został naprawiony w międzyczasie. ostatni miesiąc pochłonął montaż elementów oraz testy i rozruch turbiny po naprawie. w ujęciu łącznym czas od powstania szkody do wznowienia działalności wynosił pięć miesięcy. spadek przychodów elektrociepłowni miał dwa źródła: ograniczenie produkcji o 60% i niemożność pobierania tzw. opłat za gotowość. na ograniczenie wielkości strat wpłynęła z kolei data powstania szkody – miała ona miejsce bezpośrednio na koniec sezonu grzewczego, a więc w okresie niższych przychodów. spadek przychodów ze sprzedaży, po potrąceniu franszyzy redukcyjnej, przełożył się na ok. 2,5 mln zł odszkodowania. podobną kwotę wygenerował spadek wpływów z tytułu „opłat za gotowość”. ponadto, odszkodowanie pokryło dodatkowe koszty działalności, takie jak zakup węgla służący ograniczeniu spadku produkcji czy konieczność zakupu energii elektrycznej na potrzeby własne. ochroną ubezpieczeniową były również objęte koszty biegłych rewidentów pracujących nad rzetelną kalkulacją szkody. w rezultacie wypłacone odszkodowanie osiągnęło ok. 60% rocznego zysku przedsiębiorstwa. brak ubezpieczenia utraty zysku wskutek awarii maszyny mógłby skutkować zachwianiem płynności finansowej. opisywana szkoda była prosta z punktu widzenia ubezpieczenia utraty zysku, gdyż przychody i koszty działalności elektrociepłowni bardzo dobrze poddają się planowaniu. po drugie zaś, ze względu na monopol lokalny nie istniało ryzyko utraty rynku wskutek przerwy w działalności. po trzecie zaś, dzięki działalności operatora energetycznego minimalizowane jest sprzężenie z ubezpieczeniem odpowiedzialności cywilnej, kiedy to przerwa w dostarczaniu produktu może skutkować roszczeniami odbiorców. ta specyfika sprawia, że w mniejszym stopniu ponoszone są koszty dodatkowe mające na celu zachowanie ciągłości dostaw. mateusz kita or 90 3.2. przykład szkody powstałej wskutek ognia drugi przykład szkody dotyczy przedsiębiorstwa z branży drzewnej. do pożaru doszło w jednym z zakładów produkujących wyroby dla sektora budowlanego w końcowym etapie procesu produkcyjnego. wyroby, przed przekazaniem ich na magazyn, są suszone w specjalistycznych suszarniach. proces technologiczny wymaga użycia temperatur przekraczających 100oc i wiąże się z podwyższonym ryzykiem ogniowym. w jednej z komór suszarni doszło do pożaru, który mimo interwencji zakładowej straży pożarnej wydostał się z komory i w znacznym stopniu uszkodził budynek suszarni. w rezultacie produkcja w zakładzie została wstrzymana. ze względu na wdrożone ubezpieczenie utraty zysku poszkodowany wspólnie z ubezpieczycielem podjęli decyzję o przyspieszonej odbudowie uszkodzonego mienia, licząc się z podwyższonymi kosztami. koszt odbudowy wyniósł 4,5 mln zł. naprawa trwała trzy miesiące. większych trudności przysporzyła likwidacja szkody związanej z utraconym zyskiem brutto. wynikało to z kilku przyczyn. po pierwsze, charakterystyka procesu sprzedaży na tym rynku wymaga utrzymywania zapasów buforowych. produkcja odbywa się pod przewidywaną sprzedaż, ale z pewnym wyprzedzeniem, by możliwa była realizacja bardzo dużych zamówień. ponadto, sprzedaż charakteryzuje się sezonowością zbliżoną do sezonowości w sektorze budowlanym. do szkody doszło w okresie niższej sprzedaży – okresie odbudowywania zapasów buforowych. w rezultacie po szkodzie istniała możliwość zaspokajania bieżącego popytu przez zmniejszanie stanów magazynowych – nie pojawił się więc natychmiastowy spadek przychodów. po drugie, analizy rynku wskazywały planowany wzrost popytu. podjęto więc decyzje o zwiększeniu produkcji do granic możliwości produkcyjnych zakładu. oparcie się na danych historycznych wydawało się więc niewłaściwe. jednocześnie nie istniała możliwość podzlecenia suszenia podmiotowi zewnętrznemu ze względu na trudności technologiczne. właściwym sposobem obliczenia odszkodowania okazało się tu skalkulowanie marży brutto na planowanej produkcji w okresie przerwy w działalności i oparcie na niej kalkulacji odszkodowania. w tym ujęciu szkoda wynikająca z utraty zysku przekroczyła 4 mln zł, niemal dwukrotnie powiększając łączną wartość odszkodowania. proces likwidacji szkody trwał ok. 12 miesięcy i wymagał znacznego zaangażowania zewnętrznych ekspertów. ubezpieczenia utraty zysku jako element programu ubezpieczenia… 91 nie istniała możliwość uchwycenia negatywnego wpływu ograniczenia dostaw na relacje handlowe poszkodowanego. klienci poszkodowanego byli zmuszeni do szukania innych dostawców, co mogło odbić się negatywnie na przyszłej sprzedaży – nawet w perspektywie wieloletniej. dzięki przyspieszonej odbudowie uszkodzonego mienia ten efekt był jednak z pewnością mniejszy. 3.3. komentarz do studiów przypadku przedstawione szkody były bardzo różne – nie tylko ze względu na różne ryzyka bazowe. pierwsza była skomplikowana w aspekcie samego uszkodzenia mienia, jeżeli zaś chodzi o kalkulację utraconego zysku – dość prosta. w przypadku drugiej uszkodzenie mienia nie budziło wątpliwości. kalkulacja utraconego zysku była jednak przedmiotem wielu kontrowersji. w pierwszej szkodzie trudno mówić o negatywnych konsekwencjach handlowych przerwy w produkcji. w drugiej natomiast jest to ważny obszar. w obu tych przypadkach nie było możliwości znacznego ograniczenia rozmiarów szkody przez zwiększenie kosztów działalności. jedynie w drugim przypadku można było zakwalifikować zwiększone koszty odbudowy wynikające z przyspieszonego procesu budowlanego do kosztów poniesionych na ograniczanie spadku sprzedaży. drugim podobieństwem był relatywnie duży wolumen utraconego zysku. w pierwszym przypadku wielokrotnie przekraczał wartość samej szkody w mieniu. w drugim zaś niemal się z nią zrównał. znaczenie ubezpieczeń utraty zysku w obu przypadkach było nieco odmienne. w pierwszym ubezpieczenie zamortyzowało pogorszenie wyniku finansowego. w drugim zaś główną jego rolą było przyspieszenie odzyskania zdolności wytwórczych i powrót na rynek.  zakończenie podsumowując powyższe rozważania, można stwierdzić, że ubezpieczenia utraty zysku są godnym rozważenia elementem programu ubezpieczenia przedsiębiorstwa produkcyjnego. decydując się na ich wdrożenie, należy uwzględnić koszty i korzyści ich zastosowania. kosztem jest oczywiście składka. bywają nim także dodatkowe rozwiązania techniczne i organizacyjne, których wdrożenia wymaga ubezpieczyciel. po stronie korzyści leży ekspektatywa odszkodowania. wartość tej ekspektatywy oparta na prawdopodobieństwie i wartomateusz kita or 92 ści pieniądza w czasie będzie zwykle niższa niż składka – wynika to z dążenia ubezpieczycieli do zysku. sytuacja odwrotna może mieć miejsce jedynie wtedy, gdy ubezpieczyciel mylnie ocenia ryzyko lub większą wagę przykłada do przypisu składki niż do wyniku technicznego. oparcie decyzji na użyteczności środków pieniężnych dla przedsiębiorstwa może rodzić odmienne wnioski. płatność składki w okresie normalnej działalności przedsiębiorstwa jest bowiem relatywnie niewielkim ciężarem. użyteczność odszkodowania w razie zaistnienia określonego umową zdarzenia może być natomiast ogromna – szczególnie gdy jego wypłata decyduje o przetrwaniu przedsiębiorstwa. po stronie rynku ubezpieczeniowego wyzwaniem pozostaje zwiększanie atrakcyjności proponowanych rozwiązań. po pierwsze, potrzebny jest dalszy rozwój produktów ubezpieczeniowych pozwalających pokryć zarówno trudniej uchwytne ryzyka, jak i mniej mierzalne konsekwencje przerwy w działalności. po drugie – i może nawet ważniejsze – potrzebne jest opracowywanie coraz sprawniejszych standardów likwidacji szkody pozwalających na szybkie ustalenie jej wysokości i wypłatę odszkodowania. bez tego trudno mówić o spełnianiu przez ubezpieczenie utraty zysku podstawowej jego funkcji, jaką jest umożliwienie przedsiębiorcy przetrwania przerwy w działalności bez zachwiania płynności finansowej.  literatura bohn d. (2011), hard drive shortages and higher prices coming after massive f looding in thailand, the verge, http://www.theverge.com/ (dostęp 13.11.2012). bommeli m. (2003), delay in start-up insurance, swiss re, zürich. czerkas k. (2001), project finance w polskiej praktyce. zastosowanie w działalności deweloperskiej, biblioteka bankowca, twigger, warszawa. galey g. (2002), contingent business interruption, swiss re, zürich. galey g., kuhn m. (2007), the vitzliputzlis of business interruption insurance, swiss re, zürich. galey g., kuhn m. (2009), fire insurance, swiss re, zürich. hadyniuk b. (2000), ubezpieczenie jako urządzenie gospodarcze, [w:] podstawy ubezpieczeń, t. 1: mechanizmy i funkcje, j. monkiewicza (red.), poltext, warszawa. komisja nadzoru finansowego (2011), rocznik rynku ubezpieczeń 2011, warszawa. lloyd’s (2012), serwis internetowy korporacji, http://lloyds.com/ (dostęp 13.11.2012). meier w., kuhn m., simone a., sormani e., galey g. (2004), business interruption insurance, swiss re, zürich. mildenhall s. (2012), insurance risk study, sixth edition 2011, aon benfield, chicago. ubezpieczenia utraty zysku jako element programu ubezpieczenia… 93 owu przedsiębiorstw od utraty zysku zatwierdzone na mocy uchwały zarządu tu allianz polska sa nr 99/2007 z dnia 13.07.2007. owu utraty zysku dla klienta korporacyjnego ustalone uchwałą nr uz/432/2007 zarządu powszechnego zakładu ubezpieczeń spółki akcyjnej z dnia 26 lipca 2007 r. ze zmianami ustalonymi uchwałą nr uz/65/2011 z dnia 21 lutego 2011 r. owu utraty zysku wskutek wszystkich ryzyk nr mp/ow094/1010 stu ergo hestii. ustawa z dnia 22 maja 2003 r. o działalności ubezpieczeniowej (dz. u. z 2003 r. nr 124, poz. 1151 z późn. zm.). or for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 29 may 2013 on the criteria and evaluation of scientific 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journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240doi: 10.12775/cjfa.2013.0132013, volume 2, issue 2 data wpłynięcia: 20.11.2013; data zaakceptowania: 20.12.2013. ∗ dane kontaktowe: stasadam@o2.pl, faculty of history and cultural heritage of the church, pontifical gregorian university, piazza della pilotta 4, 00187 rome. ∗∗ dane kontaktowe: dwalczak@umk.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika w toruniu, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34. stanisław adamiak* pontifical gregorian university ewa chojnacka, damian walczak** nicolaus copernicus university social security in poland – cultural, historical and economical issues keywords: social security system, catholic social teaching, social solidarism. classification j e l: h55, h53, a13, e02. abstract: in the first place, the paper analyses the cultural-historical background of the social security in poland. given the largely enrooted catholicism of the country, the development of the social teaching of the catholic church is surveyed. it is followed by a short history of the social security legislation in poland from 1918 to 1997, and finally the current economical conditions of the system are analysed. the paper concludes with the opinion, that the current system, providing large social endowments to various strata of the population, generally answers the expectations of the people as well as corresponds to catholic social teaching. zabezpieczenie społeczne w polsce – uwarunkowania kulturowo-historyczne oraz ekonomiczne słowa kluczowe: zabezpieczenie społeczne, katolicka myśl społeczna, solidarność społeczna. stanisław adamiak, ewa chojnacka, damian walczak12 klasyfikacja j e l: h55, h53, a13, e02. abstrakt: artykuł rozpoczyna analiza tła historyczno-kulturowego zjawisk związanych z zabezpieczeniem społecznym w polsce. ze względu na znaczącą rolę religii katolickiej w naszym kraju, przedmiotem opisu jest najpierw nauczanie społeczne kościoła katolickiego dotyczące tej materii. następnie przedstawiono skróconą historię prawodawstwa związanego z zabezpieczeniem społecznym w polsce w okresie od 1918 do 1997 r. oraz analizę sytuacji obecnej. przeprowadzona analiza wskazuje, że system zabezpieczenia społecznego w polsce jest rozbudowany. szeroki zakres świadczeń przeznaczonych dla różnych grup społecznych odpowiada zarówno ogólnym oczekiwaniom obywateli, jak i idei solidaryzmu społecznego wynikającej m.in. z katolickiej nauki kościoła. translated by ewa chojnacka  introduction every state is obliged to take care of its citizens. depending on a state’s current political system, government policies or financial situation, it differentiates the scope of social welfare provided to its citizens. institutionalised forms of social security appeared in europe relatively late – in the nineteenth century. prior to the nineteenth century, various forms of social security had been provided by churches, orders, gentry, communes or by guilds. the subject literature is abundant in definitions of social security, however, we may disregard them and approach and define the term lexically. ‘security’ means protecting from something (for instance, from such occurrences as diseases, disabilities, poverty, or advanced old age) and the word ‘social’ indicates the reference to society both in terms of individual beneficiaries and in terms of common goals (social solidarism). as regards the scope of benefits, taking into account the criterion of financing, social security comprises financial benefits (financed by persons insured), benefits received without prior payment of contributions (financed by the state) and philanthropic benefits (financed by external entities)1. 1 when applying different criteria, further methods may be distinguished such as the following: the insurance method, the no-contribution method, and the caring method (more in łyskawa 1999, 191–192). social security in poland 13 1. research methodology and the course of the research process the process of shaping the right to social security benefits was impacted by economic, social, cultural, political and legal factors. the objective of the present paper is to outline historical, cultural and economic conditions of poland’s social security, particularly by applying a research method of critical analysis of literature. using that method together with reviewing legal acts resulted in illustrating the roots of social security that stem from the christian tradition. also, the paper discusses the current social security benefits with the consideration of their degree of (self-)financing. the literature concerning the subject matter is abundant, however, in general, it is thematically divided into groups of studies focused on history (zieliński 1994; aspalter, jinsoo, sojeung 2009; fajth 1999), on the current legal and economic situation of social security (koczur 2012; garbiec 2008; social security… 2012; walczak 2011), on philosophical basics of social solidarism (rugina 1983) and on catholic social teaching (strzeszewski 1994; chojnicka 2001; backer 2010). the present paper adopts a cross sectional approach through a diachronic analysis and through an attempt to answer the question about the extent to which the current social policy corresponds to the catholic background represented by the majority of the polish society. 2. social security in the teachings of the catholic church when dealing with the issue of social solidarism, its past social and cultural background cannot be underestimated. in the case of poland it is necessary to consider its deeply rooted christian tradition, with the emphasis laid on the teachings of the catholic church. in particular, attention should be paid to the so-called catholic social teaching that in the interwar period of the twentieth century played a remarkable role among the major political forces2 as well as to christian-democratic parties that shaped the social and economic systems in post-war europe. the bible, which lays foundations to christian morality, clearly indicates the need to take care of the poor (especially those harshly experienced – or2 article 114 of the constitution from march 1921 says that: ‘the roman catholic religion, being the religion of the preponderant majority of the nation, occupies in the state the chief position among enfranchised religions’. stanisław adamiak, ewa chojnacka, damian walczak14 phans and widows) and to share material possessions with those who really need them. in the first christian community founded in jerusalem: ‘all who believed were together and had all things in common; and they sold their possessions and goods and distributed them to all, as any had need’ (acts 2, 44–45). it must be noted, however, that this was an exceptional situation since other christian communes, described by st. paul in his letters, did not apply such ‘community of possessions’. christians living in early centuries did not object the social and economic system of the roman empire but they used to run extensive charitable activities. julian the apostate (361–363), was a roman emperor who attempted to stop the development of christianity and to restore the traditional religion in the empire, however, he was of the opinion that christians’ approach to and treatment of the poor was a pattern to be followed. the call to share possessions did not exclude the sanctity of private property. christian morality originates from the decalogue, therefore, any offenses against property were regarded as a sin against the seventh commandment – ‘thou shalt not steal’. in medieval times systematic approaches to morality were based on the reference to further virtues. the virtue of love demanded christians to help their neighbours by getting rid of their material possessions. monks were expected to practice this virtue heroically through making the vows of poverty and repudiating any of their material possessions. actually, it remained an ideal only and very few were able to achieve it. as a matter of fact, at that time social relationships were regulated by the virtue of justice. it was considered righteous to provide everybody with what they lawfully deserved, so, consequently, there was no room for any form of ‘social security’ – this could come only from mercy. the exception was children’s support given to their parents and that resulted from the obligation created when parents were taking care of them as well as from the fourth commandment; hospitals, asylums, schools were treated in a similar way. running them was the obligation of the church and of affluent citizens, however, it was a religious obligation and basically it did not correspond to the virtue of justice. it is worth reminding the doctrine of the so-called ‘needless goods’ (bona superf lua), which says that any excess possessions belong to poor people by the virtue of justice; it is so because the virtue of justice concerns not only interchangeable justice (i.e., honest fulfilment of mutual obligations) but also distributive justice (i.e., a just distribution of goods). social security in poland 15 the doctrine of ‘needless goods’ was proclaimed by eminent theologians, including the most famous one, st. thomas aquinas (1225–1274) (summa theologiae, iia–iiae, q. 66, a. 7, sc), however, no major efforts were made to implement the doctrine since it was difficult to define precisely what ‘excess goods’ were (strzeszewski 1960). nevertheless, in 1959 cardinal stefan wyszyński cited the doctrine asking the future ecumenical council to remind the affluent citizens about their obligations (wyszyński 1959, 684). actually, what has been emphasised for centuries was the inviolability of property, which allows breaching it only in exceptional situations such as, for instance, immediate danger of death. at the beginning of the twentieth century st. józef sebastian pelczar stressed that the poor cannot expect help by the virtue of justice – they should expect it only from mercy shown by rich people; in bishop pelczar’s view, the obligation to help should be ascribed to the family, next to the parish and in the end to the whole society. the state should be the last to provide such help. in the bishop’s opinion ‘a tax paid by the wealthy for the poor’, despite some advantages, is morally dubious, since as a mandatory contribution it releases the rich from the obligation to give alms, makes the poor think that they have the right to make demands to society and does not guarantee that help will be given to those who need it most (pelczar 1915, 233. 30–31). this sceptical attitude of the church to ‘a tax paid by the wealthy for the poor’ was partially justified by the multi-century agrarian social structure within which natural and basic social security was provided by a multigenerational family, therefore, there was no need for pensions, kindergartens and nurseries. mercy shown by society concerned primarily those people who, for different reasons, were outside this basic family structure. the nineteenth century industrial revolution resulted in rapid urbanisation and in an increased working class which, in turn, led to the weakening of families and social ties, intensification of socialist and communist activities that demanded a new way of distributing goods and ultimate removal of private property. the relations between the groups of socialists and communists and the church became hostile due to the atheistic views represented by the former and due to discrediting the already established social order and property rights which in the view of the church resulted from the natural law. however, within the same church we could observe an increasing awareness of social injustice resulting from the development of capitalism and that injustice could not be compensated even by extensive and far reaching philanthropic activities. the turning point was the publication of an encyclical titled ‘rerum novarum’ (about new things) by pope stanisław adamiak, ewa chojnacka, damian walczak16 leo xiii in 1891. it is considered to be the foundation of modern catholic social teaching, which urged believers to consider the problems of the working class and acknowledge the need of maintaining private property, however, they also stressed that the free market economic activity must be controlled by moral principles. the catholic social teaching have been developed by the subsequent popes who tried to encourage believers to base their social lives on moral principles and, in particular, on the principle of subsidiarity (pius xi, quadragesimo anno, 5), on the principle of the concern for common good (john xxiii, mater et magistra, 65; john paul ii, centesimus annus, 47), and on the principle of solidarity (jan paweł ii, sollicitudo rei socialis, 40). as the first of the above encyclicals objected statism and an excessive concentration of obligations and resources in the hands of the state (which followed the logics of socialism), the second and the third ones objected unfettered liberalism. christian-democratic parties that ruled in many countries after the second world war followed the catholic social teaching and as a result opted for building welfare states and were backed by left-wing parties in their endeavours. the principles of the catholic social teaching were frequently referred to in poland after 1989. these references included in multiple statements by politicians and clergymen were often purely declarative in nature. the catholic social teaching was often understood as declarations made by the church on controversial issues concerning morality, bioethics, and neutrality of a secular state3. it must be underlined, however, that depending on the time period con3 at present the issue of social solidarism in poland is contained in the programmes of several political parties. a political grouping with the name that is meaningful in the context of the subject solidary poland (solidarna polska), in its programme declaration uses the following formulation: ‘social solidarity means that the state provides social security to the nation and shares tax burden equitably’. law and justice (the strongest opposition party) inserted the following formulation in its political programme: ‘solidary poland is a country in which the fruit of the economic development shall be shared by poorer citizens and economically less developed regions, a country in which setting up a family and raising children shall be respected and supported by the state in which citizens are guaranteed adequate pensions and support in difficult situations. ’the polish people’s party (a coalition party in the polish government) in its resolution from the 11th congress held on 07 november, 2012 in a fragment concerning the formulation of its ideological programme declares that: ‘the principles of our programme resulting from […], formulated on the grounds of the principles of social market economy, humanitarianism, christian ethics and the social teaching of the catholic church contrib social security in poland 17 sidered the emphasis of the catholic social teaching is shifted to different issues. the encyclical written in 1991 by pope john paul ii centesimus annus (‘the hundredth anniversary of rerum novarum’) was the closest in its meaning to the affirmation of free-market capitalism, while caritas in veritate (‘charity in truth’) issued by pope benedict xvi in 2009 is concerned primarily with the significance of solidarism understood also as a global phenomenon. 3. the beginnings of social security in poland the development of poland’s system of social security at the end of the nineteenth century was conditioned by the historical and cultural situation (shaping the catholic social teaching and the growth of socialist parties). after poland regained its independence in 1918, the previously created legal and institutional solutions were used, however, the intensity of the use varied depending on the part of the country (the prussian partition could boast of the best developed social security system). therefore, the interwar-period poland realised simultaneous processes of the unification and adjustment of the legal basis for social security to the new socio-economic conditions. undertaking the above-mentioned activities was necessary. the first reason for undertaking those activities resulted from the fact that after the first world war society, as a whole, became significantly poorer and families lost their ability to fulfil some of their social security (welfare) functions. secondly, the activities were related to the economic reconstruction of the country, the structural changes caused by the development of industry and the working class, and by the aforementioned role played by the church in the country. as a result, within a relatively short time period of five years after regaining independence, the following regulations were introduced: on sickness insurance (1919–1920), on temporary support for the unemployed (1919), on unemployment insurance (1924), on accident insurance (1923) and on social welfare (1923). ute to building a social system based on […]: the principle of solidarism, […] the principle of justice and social love. ’polish prime minister donald tusk in his policy statement from 18 november 2011 said: ‘we want under this and under other systems of financial support apply absolutely the method of social justice, solidarism of richer people with those who are in a worse situation’. a left-wing party your move does not make reference to the teaching of the catholic church, however, in its programme declaration it emphasises that the state should take care of those ‘whom fate deprived of life chances and of health’. stanisław adamiak, ewa chojnacka, damian walczak18 as regards social insurance, in 1927 insurance for white collar workers was introduced which manifested unfair social privileges possessed by that group, if compared with a group of physical workers. the latter group was covered by social insurance in 1933 by virtue of the act on social insurance referred to as the unifying act (zieliński 1994, 43). it must be noted that there existed additional separate regulations on social supplies to selected social groups, e.g., state officials and professional soldiers (1923), polish railways employees (1926 and 1929), former political prisoners (1931), or veterans of independence fights (1937). the reason for passing the special regulations was striving for providing security to honoured social groups due to the functions fulfilled by them in the country, their role in regaining independence, or due to performing work of special character. the development of a social security system was stopped by the outbreak of the second world war. after the war, under an entirely new geopolitical situation, further legal regulations continued to be implemented. due to the then political system (and to the official non-occurrence of unemployment), the regulations concerned primarily social insurances and were reflected in reaching new social groups, for instance, craftsmen (1965), artists (1973), individual framers (1977), clergymen (1989), as well as in extending the coverage (for example, by the introduction of family benefits). the intention was to eliminate selected privileged groups and work out a system of equal treatment of white collar and blue collar workers4. 4. social security system in poland – the current state of affairs the change of the political and economic system in 1989 necessitated reforms of the elements of social security and its adjustment to new circumstances within the country and in the international environment. the solutions presented in further parts of the paper and concerning social security in poland are consonant with the catholic social teachings that are contained also in the encyclicals written by pius xi, john xxiii, and john paul ii. on the one hand, the good of a whole society is essential and an individual is obliged to support all people (due to social security benefits social stratification is mitigated), on the other 4 the purpose of the work is not to provide a thorough description of the changes and development of legal regulations concerning social insurance, but to indicate initial regulations within specific elements of security. the description of origins and development of social insurance prior to 1993 can be found in (zieliński 1994). social security in poland 19 hand, however, an individual constitutes a goal and, therefore, has the right, within reasonable limits, to take care of his/her own good (e.g., pension dependent of the value of the assets saved by an individual). social security in poland is defined by the constitution of the republic of poland. article 67 (1) of the constitution says that: ‘a citizen shall have the right to social security whenever incapacitated for work by reason of sickness or invalidism as well as having attained retirement age. the scope and forms of social security shall be specified by statute.’ and further, article 67 (2) says: ‘a citizen who is involuntarily without work and has no other means of support, shall have the right to social security, the scope of which shall be specified by statute.’ the act from 4 of september, 1997 on the sections of governmental administration specifies the elements that shall be covered by social security treated as a separate section of governmental administration. it remains, however, unclear whether health care may be indicated as an element of social security. due to the specificity of health care, the act on the sections of governmental administration regards it as a separate item but, since health care services are financed from social security contributions paid by all citizens regardless of their levels of income, undoubtedly it does constitute one of the elements of the social security system in poland. therefore, it may be stated that social security is comprised of the following: ■ social insurance, ■ personal and property insurances, ■ health care, ■ welfare services, ■ complementary social benefits, ■ rehabilitation of the disabled. the major legal acts that regulate the elements of the social security system in poland include the following: 1. the act of 13 october 1998 on social insurance system (journal of laws of 2009, no. 205, item 1585 with later amendments), 2. the act of 17 december 1998 on old-age and disability pensions from the social insurance fund (journal of laws of 2009, no.153, item 1227 with later amendments), 3. the act of 21 november 2008 on capital pensions (journal of laws of 2008, no. 228, item 1507 with later amendments), stanisław adamiak, ewa chojnacka, damian walczak20 4. the act of 28 august 1997 on the organisation and operation of pension funds (journal of laws of 2013, no. 0, item 989), 5. the act of 19 december 2008 on the old-age bridging pensions (journal of laws of 2008, no. 237, item 1656 with later amendments), 6. the act of 19 december 2008 on the old-age bridging pensions (journal of laws of 2008, no. 237, item 1656 with later amendments), 7. the act of 25 june 1999 on social security cash benefits in the event of sickness and maternity (journal of laws of 2010, no. 77, item 512 with later amendments), 8. the act of 30 october 2002 on the social security in the event of occupational accident or disease (journal of laws of 2009, no. 167, item 1322 with later amendments), 9. the act of 28 november 2003 on family benefits (journal of laws of 2006, no. 139, item 992 with later amendments), 10. the act of 27 june 2003 on the social pension (journal of laws of 2013, no. 0, item 982), 11. the act of 30 april 2004 on the pre-retirement benefits (journal of laws of 2013, no. 0, item 170), 12. the act of 20 december 1990 on farmers’ social insurance (journal of laws of 2008, no. 50, item 291 with later amendments), 13. the act of 27 august 2004 on health care services financed from public funds (journal of laws of 2008, no. 164, item 1027 with later amendments), 14. the act of 20 august 2004 on promotion of employment and on labour market institutions (journal of laws of 2013, item 674), 15. the act of 12 march 2004 on social assistance (journal of laws of 2013, no. 0, item 182), 16. the act of 28 november 2003 on family benefits (journal of laws of 2006, no. 139, item 992 with later amendments), 17. the act of 07 september august 2007 on assistance to persons entitled to alimony (journal of laws of 2012, no. 0, item 1228), 18. the act of 27 august 1997 on professional and social rehabilitation and employment of disabled persons (journal of laws of 2011, no. 127, item 721). it must be noted that since the moment of poland’s joining the european union, the eu legal acts have become additional binding legal norms. social security in poland 21 social insurance is the most essential and most frequently cited in media element of the social security system in poland. there are two insurance systems in poland: the common insurance system – managed by the social insurance institution (zakład ubezpieczeń społecznych – zus) and the agricultural social insurance fund (kasa rolniczego ubezpieczenia społecznego – krus) that services farmers. other solutions applied can be referred to as the developments of the common system5. since 1999 a capital system has been operational in poland under which the value of pensions is to be dependent on the value of the accumulated contributions6. however, every person that gains the right to receive the retirement benefit and during the period of his/her occupational activity does not accumulate the amount sufficient to receive a minimum pension will still hold the right to a minimum benefit guaranteed by the state treasury (owczarek, więckowska 2011). farmers pay lower social insurance contributions than persons belonging to the common insurance system. farmers receive small benefits that are only to a small degree dependent on the value of accumulated contributions (as a matter of fact they are dependent on the number of years during which one belonged to the system). a retired person that paid contributions for the period of 40 years is entitled to a benefit which is only 7% higher than the benefit received by a person who paid contributions for the period of 25 years (walczak 2008). the manifestation of solidarism within the old-age pension insurance system in poland is the institution of family/widow’s or widower’s allowances which is paid to a deceased person’s family, providing that person at the date of his/her death received (or was entitled to) old-aged pension or disability pension. a child is entitled to family allowances until a child is 16 or until he/she leaves education but only until he/she turns 25 years old. widows are entitled to such allowances when they turn 50 years old. 5 for instance, employees of uniformed services do not pay social insurance contributions and receive old-age pensions calculated based on the number of years worked and the average salary (in 2012 the retirement regulations concerning employees of uniformed services were changed by increasing the required length of service and modifying the rules of the calculation of the basis of the benefit), judges and prosecutors who finish their professional activity are granted the so-called ‘the non-active status’. 6 no matter whether social benefits will be serviced by state or private companies (however, there are some plans to implement changes in the functioning of these companies – open pension funds), the essence of the further functioning of the capital system is unquestionable. stanisław adamiak, ewa chojnacka, damian walczak22 in the scope of health insurance realised by the national health fund (narodowy fundusz zdrowia – nfz), every person that pays contributions (or is entitled otherwise) is entitled to free health services. in practice, every polish citizen is entitled to health services: persons employed, persons running businesses and farmers are entitled to health services due to payment of contributions. their family members may be registered for health insurances by the person insured. unemployed persons are registered for insurance by a district labour office, and once they are registered they have the right to register other family members. employees of uniformed services (the group includes the following: military, police, the internal security agency, the central anti-corruption bureau) are entitled to health services and are not obliged to pay any contributions. this privilege is also shared by judges, prosecutors, and members of parliament. the social security system in poland is extensive and persons being in a difficult situation may count on various benefits including material (such as, for instance, health insurance contributions, social insurance contributions, accommodation, meals, clothes) and cash benefits (such as, for instance, regular benefit, temporary benefit, an allowance for an expense and for special expenses, an allowance and a loan for gaining financial independence, an allowance for gaining financial independence and continuation of education). social assistance can be granted not only in case of financial problems. pursuant to the act on social assistance, social assistance may be provided in respect of orphanage, unemployment, disability, prolonged or serious illness, family violence, difficulties with adaptation to life after leaving prison, random events and a crisis situation, natural or ecological calamities. to sum up, it must be emphasized that a few hundred billion pln is spent in poland on financing social security (or only a few of its essential elements). table one presents selected spending on social security. in accordance with the principle of solidarism, these costs are shared by all citizens for the benefit of needing ones (if beneficiaries of earlier retirement representing various professions may be named so – for instance, policemen). the report prepared for 2009–2013 specifies the following amounts: 1. subsidy to the social insurance fund (the basic and the only one in the common system) amounts to over 30 billion pln and the overall costs are increasing dynamically, social security in poland 23 2. subsidy to the farmers’ pension and disability fund (the basic and major fund in the agricultural system) is slightly modified on an annual basis and amounts to approximately 15 billion pln. the costs of health services borne by the national health fund (financed by all that pay health insurance contributions) in 2012 amounted to 60.8 billion pln and were 13 billion higher than in 2008. the spending of the state fund for rehabilitation of disabled persons (państwowy fundusz rehabilitacji osób niepełnosprawnych – pfron) oscillates around 4.2–4.8 billion pln (as shown by the report for 2009–2013). the spending on social assistance made by polish regional authorities in 2012 was 12.7 billion pln and it was the second largest spending after education. this spending exceeds several times the spending on, for instance, physical culture (in 2012 it was 2.4 billion pln) (information 2009–2013). table 1. selected spending on social security in poland in 2008–2012 (in billions of pln) 2008 2009 2010 2011 2012 social insurance social insurance fund (sif) spending 132.3 148.1 157.0 162.9 171.1 subsidies for sif from the state budget 33.2 30.5 38.1 37.5 38.5 farmers’ pension and disability fund (fpdf) spending 16.8 17.0 16.5 16.5 17.1 subsidies for fpdf from the state budget 14.9 15.7 14.9 15.1 15.5 health insurance costs of the realisation of tasks by the national health fund* 47.4 57.3 58.9 60.2 60.8 fighting unemployment the labour fund** 5.5 10.9 11.7 8.6 9.4 rehabilitation of disabled persons current spending the state fund for rehabilitation of disabled persons*** 4.7 4.5 4.3 4.2 4.8 social assistance spending of communes on social assistance 10.9 11.0 12.7 12.4 12.7 * the costs of the realisation of the tasks of the national health fund are covered by zus and krus. ** the labour fund is a state target fund that is to promote employment. financial means disposed by the fund originate from contributions paid by self-employed persons. *** the state fund for rehabilitation of disabled persons spending is financed in 80% by compulsory contributions paid by companies. s ou r c e : compiled by the author based on the reports 2009–2013 and information 2009–2013. total public expenditure on social security in poland (covering expenditure on old age, survivors, incapacity related, health, family, active labour market stanisław adamiak, ewa chojnacka, damian walczak24 programmes, unemployment, housing, and other), expressed in fixed prices in 2000 amounted to 86,929.40 million pln in 1990, 146,734.80 million pln in 1995, 173,157.30 million pln in 2000 to 206,727.60 pln million in 2005, and to 256,441.20 million pln in 2009. since 2000, the expenditure in relation to gdp has been maintained at about 21% (20.94% in 2013). the level of expenditure in relation to gdp in poland is similar to the relationship in hungary (in 2013, 21.56% of gdp), ireland (in 2013, 21.59% of gdp) and the czech republic (in 2013, 21.77% of gdp). the size of the spending on social security and its share in gdp depend not only on the policy accepted for that matter and regulating the scope of services financed from public funds, but also on the financial situation of the country concerned. in europe in 2013, the highest share of expenditure for social security in gdp was recorded in france (33.02%), denmark (30.79%), belgium (30.73%) and in finland (30.53%) (oecd.statextracts). due to the demographic situation, expenditure on social security will certainly be increasing. in 1990, in the then european union, merely 13.7% of the population was 65 or more, while, according to the latest forecasts, in 2035 the share of such persons (in 27 member states) will be already 25.2%. in poland, this share will also increase from about 11.2 to 23.2% (demography report 2010, 66; prognoza ludności…). moreover, despite a general antipathy shown to institutions dealing with the realization of inter-generation solidarism and securing socially the weakest (zus, krus, nfz), the opinion that the state should provide its citizens with basic life needs is very common (cbos 2013). this expectation of the state’s role can be ascribed to the heritage of communism; the years 1945–1990 in poland were the years of a continuous extension of the scope of obligations of the republic of working people, as it was defined by the then constitution. 5. conclusions resulting from the research process it may be stated that poland realises the ideas of social solidarism through various elements of social security. poland has operational systems in the areas of social insurance, health services, social assistance, or supporting unemployed persons. the system of social security is still being expanded. for years the number of social benefits offered has increased and their scope has been adjusted to citizens’ expectations as well as to the ideas of social solidarism originating also from the teachings of the catholic church. social security in poland 25 therefore, it seems that the social teaching of the catholic church concerning social and economic issues are accepted by the majority of the polish society regardless of their religious views. however, a concern is the dissonance between the scale of the state’s obligations to citizens, as indicated by cbos respondents, and the scale of obligations on the side of citizens. expecting form the community (on the levels of the country and local authorities) to play a significant role in providing social security does not contradict the teachings of the catholic church, which, in accordance with the 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(1994), ubezpieczenia społeczne pracowników, wyd. naukowe pwn, warszawa. date of submission: july 5, 2019; date of acceptance: july 30, 2019. * contact information: sitorus_tigor@yahoo.com, universitas bunda mulia, north jakarta city, jakarta, indonesia, phone: +62216929090; orcid id: https://orcid. org/0000-0001-7477-9537. ** contact information: kendoyuganda09@gmail.com, universitas bunda mulia, north jakarta city, jakarta, indonesia, phone: +628119133009. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 2 sitorus, t., & yuganda, k. (2019). investor’s stock selection decision: inf luence of profitability, company size, and r aroc. copernican journal of finance & accounting, 8(2), 67–86. http:// dx.doi.org/10.12775/cjfa.2019.009 tigor sitorus* universitas bunda mulia kendo yuganda** universitas bunda mulia investor’s stock selection decision: influence of profitability, company size, and raroc keywords: lq45, stock, selection, decision, investor, r aroc, profitability, size. j e l classification: g210. abstract: this study aims to investigate and analyze the investor’s stock selection decision that are inf luenced by profitability, company size, and r aroc on the companies listed on the indonesia stock exchange. the sampling method used was purposive sampling. the sample in this study were companies listed on the lq-45 index for the period 2015-2017. this study used structural equation model analysis (sem) with amos software version 22.00 against 108 financial report data from 36 companies that were listed in the lq-45 index in a row for 3 years as a sample. the results of this study indicate that; 1). investor’s stock selection decision are inf luenced positively and significantly by profitability, 2). investor’s stock selection decision are inf luenced negatively and not significantly by company size. 3). investor’s stock selection decision is affected negatively and not significantly by r aroc. tigor sitorus, kendo yuganda68  introduction the capital market is a place where companies that have gone public and the number of investors or prospective investors want to buy shares from various types of companies (hadi, 2015). companies that have gone public issue their shares to obtain fresh funds from the public and investors. public shares can be bought and sold in the community. the reasons for companies going public, namely allowing the founder to diversify business, facilitate the purchase of other companies (expansion), and the value of the company going public allows the community and management to know the value of the company. stocks are inf luenced by the level of supply and demand on the indonesia stock exchange. a business activity that is run by a company, certainly has several objectives to be achieved by the owner and management. first, the owner of the company wants optimal profits or the business it runs. therefore, every owner wants the capital invested in his business to quickly return. in addition, the owner also expects the results of the capital that has been invested so that it can provide additional capital and prosperity for the owner and all of his employees. investment is an investment activity that can get one or more assets carried out by individuals or institutions, in the hope of getting a return in the future. techniques in conducting investment analysis that are widely used are technical analysis and fundamental analysis. technical analysis uses price history charts and transaction lists. this analysis is related to studying the historical performance of stock price movements by measuring future price movements. fundamental analysis is an analytical method that pays attention to economic factors that will inf luence the development of a company (jagongo & mutswenje, 2014). in addition to technical and fundamental factors, experts see investors’ market behavior also comes from psychological principles of decision making to explain why people buy or sell stocks, such as; shefrin (2000) examines the inf luence of psychology on the behavior of financial practitioners, while nofsinger and richard (2002) examine individual investment behaviors related to the choice of small purchases of securities for their own accounts. empirically, many companies listed on the indonesia stock exchange benefit the company’s business wheels in the company’s balance sheet. the better the profit a company they have will make it easier for the company to develop an increase in the capacity of the profits obtained. similarly, the size of the company, is experiencing developments from local and national companies to investor’s stock selection decision: influence… 69 become global companies. but there is a tendency for large companies to experience a shock due to a hostile capital market. in just a few minutes, the profits of large companies included in the lq-45 group, eroded by the jci which fell sharply or the value of the dollar exchange rate that often f luctuated. the lq-45 index is an index consisting of 45 stocks selected through various criteria such as; have high liquidity and high transaction volume. this makes lq-45 shares highly favored by capital investors even individual or company in indonesia, thus becoming a benchmark for the development of capital markets on the indonesia stock exchange. based on empirical phenomena obtained from data released by the indonesia stock exchange (www1), that over a period of 3 years (2015-2017), the majority of outstanding lq-45 shares did not experience growth or stagnate also decline, that is impacted to issuer’s profit, thus affecting investors to buy shares belonging to the lq-45 group. profitability is the ability of a company to generate profits for a certain period. according to riyanto (2008), to measure the development of the company, the company must pay attention to financial performance aspects which include equity value, sales value, and asset value. companies that have many assets will be able to increase production capacity which has the potential to generate better profits, therefore the value of assets as a measure of the company is considered to affect the profitability of a company, but on the contrary larger company assets will increase costs more, thereby reducing profitability. furthermore, to make the company more developed and increase profitability, companies need to add capital from funding activities in the form of loans. company capital can be obtained from internal and external parties. if the internal party cannot fulfill the company’s capital, the company will borrow from external parties who are able to provide company capital. the use of external funds by the company can result in the company getting problems regarding the company’s ability to fulfill financial obligations. some of the results of previous studies indicate differences (research gap) such as, rahmawati, topowijono and sulasmiyati (2015) research and yulindar (2017) state that profitability has a positive and significant effect on firm value and investor’s stock selection decision, but anisyah and purwohandoko (2017) states that profitability has a negative effect, furthermore the research about company size conducted by yulindar (2017) which states that company size has a positive and significant effect on firm value and investor’s stock selection decision, but research conducted by dewi and wirajaya (2013) also rahmawatigor sitorus, kendo yuganda70 ti, topowijono and sulasmiyati (2015) has difference results, where the results of their study state that the size of the company has a negative effect. this research is different from previous studies such as: nurmalasari (2008) who examined the effect analysis of profitability ratios on issuer lq45 stock prices, and rahmawati, topowijono and sulasmiyati (2015) who examined the relationship of firm size, profitability, capital structure, and investor’s decision against corporate values, while this study examined relations profitability, company size and raroc with the investor’s stock selection decision of lq-45. based on the explanation that mention above, the researcher chose the lq- 45 company as the research object because it has promising prospects in the future for investors to invest their funds, so the problems that will be examined in this study are; 1). is the investor’s stock selection decision inf luenced by profitability, 2). is the investor’s stock selection decision inf luenced by company size, 3). is the investor’s stock selection decision inf luenced by the raroc. literature review 1. background theory 1.1. investor’s stock selection decision according to samsul (2006, p. 146), investment is the placement of a number of funds at this time in the hope of gaining profits in the future. there are two factors considered in decision making by the investor, namely the rate of return and risk. investment in the capital market is in dire need of sufficient knowledge, experience, and business instincts to analyze which effects will be purchased, which ones will be sold and which ones will remain. in conducting transactions in the capital market, a very important thing to consider for an investor is the valuation of stock prices in addition to the condition of the economy and the issuer. stock prices are formed by the existence of market demand and market supply. the difference between the current value and the value of the market becomes an investor’s reference in getting profits and determining investment decision. stock valuation can be done using two analyzes, namely technical analysis and fundamental analysis. technical analysis is an analysis that observes stock price movements over time. according to sunariyah (2006, p. 168), technical investor’s stock selection decision: influence… 71 analysis is an analysis technique that uses data or records about the market itself to try to access the demand and supply of a particular stock or market as a whole. according to hermuningsih (2012, p. 194), fundamental analysis is an attempt to analyze various factors related to stocks that will be selected through company analysis, industry analysis and other methods that support the analysis to be chosen. 1.2. profitability according to kasmir (2010, p. 196), profitability is a measure to assess a company’s ability to make a profit. profitability is used to measure the extent of the effectiveness of overall management in creating profits for the company. the greater the level of profitability, the better for the company itself. the higher the level of profitability of a company, the greater the level of prosperity provided by the company will attract investors to own the company and will have a positive impact on stock prices on the market. roa is a financial indicator that describes the company’s ability to generate profits on the total assets of the company (darmadji & fakhruddin, 2011). the higher the roa, the better the company is able to use assets to gain profits and the greater the roa, which means that the more efficient the use of the company or in other words the same amount of assets can produce greater profits and vice versa. the formula for return on assets (roa) equal net profit divided by total asset. furthermore, weston and brigham (2001, p. 101) states that “return on equity (roe) is the ratio of net income to common equity: measures of the ratio of returns on common stockholders’s investment”. according to mardiyanto (2009, p. 196) roe is a ratio used to measure the success of a company in generating profits for shareholder. roe is considered as a representation of shareholder wealth or company value. return on equity (roe) is a ratio that shows the company’s ability to generate post-tax profits by using the company’s own capital. this ratio is to determine the effectiveness and efficiency of the processing of own capital carried out by the management of the company (harahap, 2007). in liestyana (2008), this roe shows the extent to which a company manages its own capital effectively, measures the level of profits from investments that have been made by the owners of their own capital or the company’s sharetigor sitorus, kendo yuganda72 holders. roe shows the profitability of own capital or what is often referred to as business profitability. as for the return on equity (roe) formula equal net profit divided by owner’s equity. net profit margin (npm) is a financial indicator in the profitability ratio. according to bastian, indra dan suhardjono (2006, p. 299) in rinati (2009), net profit margin (npm) is a comparison of net income and sales. the greater the npm, the more effective the company’s performance will be, so that it will increase investor confidence to invest in the company. this ratio shows how large the percentage of net income earned from each sale. the greater the npm ratio, the better the company’s ability to earn high profits. the relationship between net income and net sales shows the management’s ability to drive the company successfully enough to leave a certain margin as reasonable compensation for owners who have provided capital to a risk. the npm ratio can be interpreted as the company’s ability to reduce costs in a certain period of time. a high net profit margin indicates a company’s ability to generate certain sales-level profits, a low net profit margin indicates that sales are too low for a certain level of cost, while the formula for the net profit margin (npm) is net profit after tax divided by sales. 1.3. company size companies that have large sizes have the f lexibility and accessibility to obtain funds from the capital market. the convenience is captured by investors as a positive signal and good prospect so that it can provide a positive inf luence on the value of the company. investors consider the variable size of the company as one of the rationalizations in making investment decision sartono (2010). the greater the value of total sales, total assets, and market capitalization, the greater the size of the company. the greater the total assets, the more capital invested, the more sales, the more money f lows and the greater the market capitalization, the greater the company will be known in the community (sudarmadji & sularto, 2007). therefore, small-scale companies have a smaller risk than large companies. companies that have greater risk usually offer large returns to attract investors. the formula used for company size, namely: ln total asset. investor’s stock selection decision: influence… 73 1.4. stock risk according to brigham and houston (2014), risks are defined in webster dictionaries as “a hindrance, disruption, exposure to loss or accident”. so the risk is interpreted as an opportunity for the occurrence of an unwanted event. risk can also be interpreted as a possible difference between the actual return received and the expected return. stock investment risk consists of non-systematic risk (unsystematic risk) and systematic risk (systematic risk). non-systematic risks or commonly referred to as unique risks are risks associated with the f luctuations and business cycles of certain industries. thematic risk (systematic risk) related to market conditions, so-called market risk. systematic risk is a risk that cannot be reduced even with a diversification process. in a stock investment risk there are many ways to determine risk by determining the value of raroc (risk adjusted return on capital). according to prokopczuk, rachev and trueck (2004, pp. 3-4), the raroc was developed by the banker trust in the late 1970s, which aimed to measure risk by considering the trade-off between risk and income from different assets and activities. in calculating raroc using the following formula: raroc = σr β (rm r) where: σr = expected return, β = beta, rm = return market, r = stock return. 2. development of hypotheses from various studies that have been done before and based on the framework of thinking and directing to researchers, then in this study hypotheses will be proposed as follows: tigor sitorus, kendo yuganda74 2.1. profitability has a positive inf luence on stock selection decision research conducted by yulindar (2017) states that profitability has a positive and significant effect on firm value and stock selection decision. likewise with the research conducted by rahmawati, topowijono and sulasmiyati (2015) which states that profitability has a positive effect on firm value and stock selection decision. the greater the level of profitability, the better for the company itself. the higher the level of profitability of a company, the greater the level of prosperity provided by the company will attract investors to have the company and will have a positive impact on stock prices on the market (brigham & houston, 2014). 2.2. company size has a positive inf luence on stock selection decision research conducted by yulindar (2017) states that firm size has a positive and significant effect on firm value and stock selection decision. companies that have large size have f lexibility and accessibility to obtain funds from the capital market. the convenience is captured by investors as a positive signal and good prospect so that it can provide a positive inf luence on the value of the company. 2.3. raroc has a negative inf luence on stock selection decision according to fuss and vermeulen (2004), peltonen (2013) states that there is a negative association between fundamental risk and future profitability also putra (2014), the hypothesis of this study which states that the risk systematically affects the expected stock return, is acceptable. the higher the level of systematic risk, the higher the level of expected return and stock selection decision. the results of this analysis indicate that the systematic risk of each share will affect the level of expected return. the existence of systematic risk will cause changes in stock prices in the capital market which will indirectly result in changes in the expected return. based on various theories and the development of the hypotheses described above, the following model framework is presented below: investor’s stock selection decision: influence… 75 figure 1. model design of research expected return and stock selection decision. the results of this analysis indicate that the systematic risk of each share will affect the level of expected return. the existence of systematic risk will cause changes in stock prices in the capital market which will indirectly result in changes in the expected return. based on various theories and the development of the hypotheses described above, the following model framework is presented below: figure 1. model design of research notes: y= stock selection decision x1 = profitability (roa, roe, npm) x2 = company size x3 = raroc = σr – β (rm – r) source: the research methodology and the course of the research process 1. types of research the type of research used by researchers is explanatory research with a quantitative approach (nazir, 2014). 2. location of data acquisition this study uses data obtained from indonesia stock exchange (idx, www2), which is located in the indonesia stock exchange building, tower 1, 6th floor. jl. jendral sudirman kav 52-53. south jakarta 12190. x1 x2 x3 y notes: y= stock selection decision x1 = profitability (roa, roe, npm) x2 = company size x3 = raroc = σr – β (rm – r) s o u r c e : model research developed by authors. the research methodology and the course of the research process 1. types of research the type of research used by researchers is explanatory research with a quantitative approach (nazir, 2014). 2. location of data acquisition this study uses data obtained from indonesia stock exchange (idx, www2), which is located in the indonesia stock exchange building, tower 1, 6th f loor. jl.  jendral sudirman kav 52-53. south jakarta 12190. tigor sitorus, kendo yuganda76 3. population, samples, and sampling techniques the population of this study is the lq-45 company listed on the indonesia stock exchange in the period 2015-2017, which has a complete financial report and published on the indonesian stock exchange totaling 45 companies the sample in this study was determined through non probability sample techniques with purposive sampling method and selected 36 companies. the sample criteria and selection are as follows: a) companies included in the lq45 index during the period 2015–2017 = 45 b) companies that do not report financial statements end at december 31 during the period 2015–2017 = -1 c) companies that have suffered losses or more during 2015–2017 = -7 d) companies whose shares are not listed during the period 2015–2017 = -1 e) the number of companies used as samples = 36 f ) number of observational data = 3 x 36 = 108 data 4. data analysis technique the test in this study uses the structural equation model (sem) test, ferdinand augusty (2005). sem is a statistical model that provides an estimate of the strength of a hypothetical relationship between variables in a theoretical model, either directly or through an intermediate variable. sem is used to analyze the relationship between one latent variable with another latent variable known as a structural equation. the processing of data in this study uses version 22.00 of the amos (analysis of moment structure) program. according to ferdinand (2005) on testing the model using sem with the suitability of the upper model: χ2 chi square statistics, rmsea (root mean square error of approximation), gfi (goodness of fit index), agfi (adjusted goodness of fit index), cmin / df (the minimum sample discrepancy function devided with degree of freedom), tli (tucker lewis index), cfi (comparative fit index). while testing the maximum likelihood estimation (the estimated effect test between variables) is done with mathematical equation models such as the following: investor’s stock selection decision: influence… 77 y = f (x1) + f (x2) + f (x3) + e (1) x1 = f (x11) + f (x12) + f (x13) + e (2) results and discussion 1. data normality test data normality testing is done by observing the value of cr unvariately, if the value of the critical ratio is unvariate between 2.58 to 2.58, then normal distribution can be categorized. table 1. normality assessment variable min max skew c.r. kurtosis c.r. size 12.02078 32.21492 .47976 2.03544 -.61137 -1.29691 raroc -1084.96991 195.77819 -8.93491 -37.90760 85.25894 180.86152 vt -1.00000 27.21922 6.32180 26.82114 42.39284 89.92880 npm .00360 .49930 .91043 3.86264 .20536 .43564 roe .00420 1.60990 3.63339 15.41516 13.19163 27.98367 roa .00230 .45790 1.87253 7.94448 2.96944 6.29913 multivariate 131.19676 69.57759 s o u r c e : results of processing amos 22.0 data. based on table 1, it can be seen that the results of multivariate c.r normality are known at 69.5776, which is more than 2.58. so it can be concluded that the distribution of this study is not normal. although the distribution of this data is not normal, it can still be used to predict the relationship between independent variables and dependent variables. tigor sitorus, kendo yuganda78 2. sem test in this study a model of fit was tested to test the feasibility of the model used in this study. table 2. model test results no goodness-of fit index cut off value result criteria 1 x2 chi-square (df =) < a. df 5.776 fit 2 probability ≥ 0.05 0.448 fit 3 cmin/df ≤ 2.00 0.962 fit 4 gfi ≥ 0.90 0.982 fit 5 agfi ≥ 0.90 0.983 fit 6 cfi ≥ 0.95 1.000 fit 7 tli ≥ 0.95 1.003 fit 8 ifi ≥ 0.90 1.001 fit 9 rmsea ≤ 0.08 0.000 fit 10 nfi ≥ 0.90 0.965 fit 11 hoelter ≤ 200 234 marginal fit s o u r c e : results of processing amos 22.0. based on table 2 data above, it can be concluded that the overall model used in this study fulfills the goodness-off fit criteria which means that this model can be used to estimate the effect of independent variables on the dependent variable, with the following explanation: 1) chi-square (χ2) is 5.776 with a significant level of p 5 0.05 which means there is no difference because chi-square is very sensitive to the sample used. while the chi-square table shows the number 133.257, and it can be concluded that the results of the chi-square model are smaller than the results. 2) probability of p = 0.448 which means that it has met the criteria of model fit which is greater than 0.05. 3) cmin / df value is one indicator to measure the fit level of a model. cmin / df is the chi-square statistic, χ2 divided by df so that it is called χ2 investor’s stock selection decision: influence… 79 –  relative. cmin / df or χ2 the expected relative is ≤ 2.00. from the results of the study, the cmin / df value is 0.962 and can meet the criteria of good fit. 4) gfi is a conformity index that will calculate the weighted proportion of variance in the sample covariance matrix described by the estimated population covariance matrix. gfi has a range of values between 0 (poor fit) up to 1.0 (perfect fit). from the results of this study, the gfi value is 0.982, so this model has met the criteria of good fit. 5) agfi is a criterion that takes into account the weighted proportion of variance in a sample covariance matrix. agfi value of 0.95 can be interpreted to produce a good level while the magnitude of the agfi value between 0.90-0.95 shows a sufficient level. so that the expected agfi is ≥ 0.90. so the results of this research model amounted to 0.983 then this model has met the criteria of good fit. 6) cfi is an index whose size is not inf luenced by sample size because it is very good for measuring the level of acceptance of a model. cfi is in the range of 0-1. the expected cfi is ≥ 0.95. 7) tli is an alternative incremental fit index that compares a model tested against a model baseline. the expected tli is ≥ 0.95. the results of this study model are 1,003, so this model has met the criteria of good fit. 8) ifi (incremental fit index) value ranges from 0 to 1, ifi value ≥ 0.90. the results of this study model are 1,001, then this model has met the criteria of good fit. 9) rmsea is an index that can be used to compile chi-square statistics in large samples. the rmsea value indicates goodness-of-fit that can be expected if the estimation model is in the population. rmsea value that is smaller or equal to 0.08 is an index that meets the criteria of good fit. the results of this research model are 0,000, so this model has met the criteria of good fit. 10) nfi (normal fit index) is a measure of comparison between the proposed model and the null model, used for small numbers of samples. nfi value ≥ 0.90. the results of this study model are 0.965, so this model meets the criteria of good fit. 11) hoetler to measure the model, the value of the calculation results is 234, so it is above 200, so the model can be said to be not fit. tigor sitorus, kendo yuganda80 3. maximum likelihood estimation test (hypothesis testing) table 3. hypothesis testing estimate s.e. c.r. p label roa <--pr 1.00000 .24012 2.41223 *** accepted roe <--pr 1.11074 .44015 4.79546 *** accepted npm <--pr .17877 .10352 1.72687 .04419 accepted vt <--pr 5.94117 3.04091 1.95375 .05073 accepted vt <--size -.01891 .06187 -.30554 .75995 rejected vt <--raroc .00320 .00295 1.08605 .27746 rejected s o u r c e : results of processing amos 22.0 data. notes: pr = profitability, size = total asset, raroc = risk adjusted return on capital, vt = stock selection decision, roa = return on asset, roe = return on equity, npm = net profit margin. the structural equation produced by the fit model formed from amos 22.0 output is as follows: investor’s stock selection decision = 5,941 pr 0,018 size + 0,003 raroc (3) profitability = 1,000 roa + 1,110 roe + 0,178 npm (4) based on the third structural equation model (3), it can be seen that if the pr variable rises by one unit and the other variables remain, the investor’s stock selection decision variable will increase by 5.941 units, if the size variable drops one unit and the other variable remains, the transaction volume variable will increase by 0.018 units, and raroc variable increases by one unit and the other variables remain, then the transaction volume variable will increase by investor’s stock selection decision: influence… 81 0.003. furthermore based on fourth model (4) of structural equation, it can be seen that if the roa variable rises by one unit and the other variables remain, the profitability variable will increase by 1,000 units, if the roe variable increases by one unit and the other variables remain, the profitability variable will increase by 2.110 units, and if the npm variable up one unit and the other variables remain, the profitability variable will increase by 0.178 units. based on table 3 that mention above, then bellow is presented the following hypothesis testing: a) the inf luence of profitability on stock selection decision (h1) the results of the study prove that stock selection decision are inf luenced positively and significantly by profitability with a coefficient of 5.941 and a significance value of 0.05, where profitability is proxyed by roa, roe, npm with a factor loading value greater than 0.70 except npm 0.178 < 0.70 . this means that roa and roe are very strong to form company profitability at lq-45, so that it can be said that h1 is accepted which means that stock selection decision are inf luenced positively and significantly by profitability or profitability variable has a direction in line with the stock selection decision variable. this result is in accordance with ramarow (2017) that states the risk elements that affects the profitability, also hermuningsih (2012, p. 194) which states that fundamental analysis is an attempt to analyze various factors related to stocks which will be selected through company analysis, industry analysis, and research conducted by yulindar (2017) stating that profitability has a positive effect and significant to company value and stock selection decision. likewise with the research conducted by rahmawati, topowijono and sulasmiyati (2015) which states that profitability has a positive effect on firm value and stock selection decision, because before investing, investors need to know and choose which stocks can provide the most optimal benefits for the funds invested. stock prices also ref lect the value of a company. if the company achieves good performance, then the shares will be in great demand by investors. issuers are obliged to publish financial statements for a certain period, where financial statements are very useful for investors to assist in making investment decision, such as selling, buying, or planting shares. in a study conducted by nurmalasarai (2008, p. 6). return on assets (roa) has a significant effect on stock prices where when profit before tax rises and total assets tigor sitorus, kendo yuganda82 go down, the roa will increase. roe on stock prices does not have a significant effect, and for npm it also has no significant inf luence and negative relationship. b) the inf luence of company size on stock selection decision (h2) the results of the study prove that stock selection decision are inf luenced negatively and not significantly by firm size with a coefficient of -0.018 and a significance value of 0.759, where firm size is proxied by the value of ln asset. this means that the magnitude of the company’s assets does not significantly inf luence the decision of stock selection, or the size of the company is not a consideration for investors to invest, so it can be said that h2 is rejected which means that the stock decision is not significantly affected by company size or size which is in line with the stock selection decision variable. this is in accordance with the results of research conducted by constantinou, karali and papanastasopoulos (2017) that examines whether firm-level asset investment effects in returns found for u.s. firms occur within the greek stock market and find that growth in total assets is strongly negatively related to future stock returns and will impact to stock seletion of greek firms also by dewi and wirajaya (2013) where company size has no significant effect and rahmawati, topowijono and sulasmiyati (2015) has conf licting results, where firm size has a negative effect. c) the inf luence of raroc on stock selection decision (h3) the results of the study prove that stock selection decision are inf luenced positively and not significantly by raroc with a coefficient of 0.003 and a significance value of 0.227, where raroc is proxy by the value of stock risk. this has the meaning that the amount of stock risk does not significantly inf luence the decision of stock selection. or stock risk is not a consideration for investors to invest, so that it can be said that h3 is rejected, which means that the stock selection decision is not significantly affected by stock risk or stock risk does not have a movement in line with the stock selection decision variable. this is in accordance with the results of a study conducted by prabowo (2013) where stock risk has a negative inf luence on stock selection because in the negative raroc value there is a risk or loss where the total profit is smaller than the average loss. investor’s stock selection decision: influence… 83 conclusions and implication stock selection decision are inf luenced positively and significantly by profitability, proxy profitability is roa, roe, npm has high loading factors forming profitability except npm. this proves the acceptance of the hypothesis in this study and simultaneously answers the problem of the inf luence of profitability on stock selection decision. this result supports ramarow (2017), yulindar (2017), rahmawati, topowijono and sulasmiyati (2015), hermuningsih (2012, p. 194) stating that profitability has a positive and significant effect on firm value and stock selection decision. stock selection decision are inf luenced negatively and insignificantly by company size, the size of the company is proxy by the asset value. this proves the rejection of the hypothesis in this study and simultaneously answers the problem of the inf luence of company size on stock selection decision. this finding is in accordance with the results of research conducted by constantinou, karali and papanastasopoulos (2017), dewi and wirajaya (2013) where firm size has no significant effect and rahmawati, topowijono and sulasmiyati (2015) has conf licting results, where firm size has a negative effect. stock selection decision are inf luenced positively but not significantly by raroc where raroc is proxy by the value of stock risk. this proves the rejection of the hypothesis in this study and simultaneously answers the problem of the effect of stock risk on stock selection decision. or stock risk is not a consideration for investors to invest. this is in accordance with the results of research conducted by peltonen (2013), prabowo (2013) that stock risk has a negative inf luence on profitability and impacted to stock selection because in a negative raroc value there is a risk or loss where the total profit is smaller than average loss. academically, this study contributes so that the research model of the relationship between variables profitability, company size, raroc with stock selection decision is developed simultaneously which has a high determinant coefficient compared to partially. the implication of this research for practitioners is that companies in lq- 45 maintain roa, roe and increase npm which looks quite weak in shaping the company’s profitability because it significantly affects stock selection decision. in addition, lq-45 companies limit asset growth by increasing dividend distribution for investors because asset growth is not significant in increasing investor’s stock selection decision. tigor sitorus, kendo yuganda84 research limitations 1) the year of observation of this study is still limited from 2015-2017 and the number of samples of this study is still limited to the lq45 index and cannot describe the overall market conditions, for further research is expected to add to the research period and the number of research samples such as banking or manufacturing companies , so the results of research are more varied. 2) the variables studied are still limited to 3 independent variables such as; profitability, company size, and raroc, so for the next study it is recommended to add other 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(www2) idx, http://www.idx.co.id (accessed 3.07.2018). date of submission: june 9, 2020; date of acceptance: august 18, 2020. * contact information: jeetsimarkamal93@gmail.com, university school of applied management, punjabi university, patiala, phone: +91 9646244332; orcid id: https://orcid.org/0000-0003-3497-2177. ** contact information: nidhiwalia79@gmail.com, university school of applied management, punjabi university, patiala, phone: +91 9872022100; orcid id: https://orcid. org/0000-0002-3197-2326. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 singh, s., & walia, n. (2020). time-series and cross-sectional momentum in indian stock market. copernican journal of finance & accounting, 9(3), 161–176. http://dx.doi.org/10.12775/ cjfa.2020.018 simarjeet singh* punjabi university nidhi walia** punjabi university time-series and cross-sectional momentum in indian stock market keywords: cross-sectional momentum, time-series momentum, indian stock market. j e l classification: g11, g12. abstract: present study documents the significant time-series and cross-sectional momentum profits in indian stock market. these profits remain significant even after adjusting market, size and value factors. further time-series momentum effect remains significant when we hold securities for longer period signalling that time-series momentum do not reverse in the long run. when we compare the performances of time series and cross-sectional momentum payoffs, we find that time-series momentum strategies generate superior returns than cross-sectional momentum strategies and net long investments in time-series momentum strategies is the main source of difference between the performances of these two approaches. simarjeet singh,nidhi walia162  introduction in recent years, momentum investing based on buying and selling financial assets on the basis of their past returns has received substantial attention from the financial researchers. majority of the research on momentum has concentrated on cross-sectional momentum. for instance, jegadeesh and titman (1993) have demonstrated that stocks that performed better than peers in the past will continue to perform better in their near future (next 3 to 12 months) and similarly stocks that have underperformed in the past will continue to underperform in the near future. this phenomenon of selecting the stocks based on their relative performances over some past period is termed as cross-sectional momentum. research studies have proved the substantial existence of cross-sectional momentum (relative momentum) across different asset classes and financial markets (jegadeesh & titman, 2001; griffin, ji & martin, 2003; asness, moskowitz & pedersen, 2013). many research studies have proved the profitability of cross-sectional momentum strategies in the indian market (sehgal & jain, 2015; garg & varshney, 2015; maheshwari & dhankar, 2017). recently moskowitz, ooi and pedersen (2012) suggested an alternative framework for the selection of financial assets which is based on the absolute performance of financial assets over some past period. they termed this approach as “time-series momentum”. moskowitz et al. (2012), taking a sample of 58 liquid contracts proved that buying and selling financial assets on the basis of their own past performance performs better than traditional cross-sectional momentum. although most of the research studies on relative momentum concentrate on individual stocks, time-series momentum (absolute momentum) literature has taken into consideration a sample of commodities, currencies and indices. very few studies have tested the profitability of time-series momentum strategies among individual stocks. the direct motivation for this study arises from the fact that most of the literature on momentum focuses on cross-sectional momentum. there are very few studies on time-series momentum that focuses only on developed markets. nevertheless, in recent past, emerging markets have offered tremendous opportunities for growth for investors. therefore, it is vital to examine the performance of time-series momentum strategies in emerging markets. our study addresses this gap by examining the performances of the time series and cross-sectional momentum strategies in the indian eq time-series and cross-sectional momentum in indian stock market 163 uity market. we also investigate potential sources of difference between the performance of these two strategies. indian stock market is the second most attracting emerging stock market. it has attracted record foreign inf low in recent past1. in our knowledge, this is the first study that examines the performance of time-series momentum strategies in the indian market. in the present study, we first examine the performance of cross-sectional and time-series momentum strategies and find that both kinds of strategies generate significant profits. these profits remain significant even after adjusting market and fama-french factors. absolute momentum strategies generate superior returns than relative momentum strategies. absolute momentum profits remain significant even when we hold portfolios for longer period signalling that absolute momentum profits do not reverse in long period. in contrast, relative momentum profits do not remain significant in longer period. after examining the performances of both kind of momentum strategies, we regress relative momentum returns against absolute momentum return and other way around. we notice that regressing cross-sectional momentum returns against time-series momentum return results in negative alphas whereas regressing time-series momentum returns against cross-sectional momentum returns results in significant positive alphas. finally, we notice that cross-sectional momentum strategies are “zero-investment” strategies2 (equal stocks in winner and loser portfolios) whereas in time-series momentum strategies stocks in winner and loser portfolios f luctuate with market states. we find that net long investment in time-series momentum strategies is the main reason for the superiority of absolute momentum strategies over relative momentum strategies. the study tries to fill the gap in existing momentum literature by examining the performance of time-series momentum strategies in the world’s second-biggest emerging market india. the study provides significant evidence of time-series momentum effect in the indian market, which cannot be captured by traditional asset pricing models. our study also contributes to the existing literature by finding the source of difference between the performances of 1 bloomberg survey of global investors and traders (2019) revealed that india is the second most preferred emerging equity market among the global fund managers. 2 zero investment strategies or zero net investment strategies are investment strategies where the net value of the portfolio is zero. this is done by forming equal long and short portfolios. simarjeet singh,nidhi walia164 cross-sectional and time-series momentum strategies. the study also provides fresh evidence of cross-sectional momentum in the indian market. we have organized the rest of the paper as follows. section 2 gives a summary of the existing literature on momentum investing. section 3 describes data and research methodology. findings and discussions of the study are reported in section 4 and 5, respectively. section 6 concludes the research study. literature review in finance, momentum means price continuation patterns. jegadeesh and titman (1993) initially tested the performance of relative momentum strategies in the us market. they reported that relative momentum strategies generate large and significant returns. after their work, chan, jegadeesh and lakonishok (1996) and conrad and kaul (1998) also confirmed the presence of momentum effect in the us market. rouwenhorst (1998) examined the momentum effect in europe. by taking into consideration the 12 european markets, the study documented significant momentum effect in europe. griffin et al. (2003) explored the performance of cross-sectional momentum strategies across 40 developed and emerging markets and found significant momentum effect in 32 financial markets. further, academic studies have reported significant cross-sectional momentum effect across multiple asset classes such as commodities, corporate bonds, currencies, mutual funds, real estate (okunev & white, 2003; derwall, huij, brounen & marquering, 2009; beracha & skiba, 2011; jostova, nikolova, philipov & stahel, 2013; fuertes, miffre & fernandez-perez, 2015; grobys & sapkota, 2019). research studies have also proved the efficacy of relative momentum strategies in the indian stock market. sehgal and balakrishnan (2002) initially observed significant cross-sectional momentum effect in the indian market. further, several academic studies confirm these findings (garg & varshney, 2015; maheshwari & dhankar, 2017; mohapatra & misra, 2020). although there is a vast literature on cross-section momentum, the literature on time-series momentum is limited. moskowitz et al. (2012) initially proved the superiority of time-series momentum strategies over cross-sectional momentum strategies. further, menkhoff, sarno, schmeling and schrimpf (2012) confirmed these findings in currency markets. bird, gao and yeung (2017) extended the work of moskowitz et al. (2012) and tested the performances of absolute and relative momentum strategies across 24 developed fi time-series and cross-sectional momentum in indian stock market 165 nancial markets. they confirmed the superiority of time-series momentum strategies over cross-sectional momentum strategies. goyal and jegadeesh (2018) went one step further, and they try to find out the major source of differences between the performances of time series and cross-sectional momentum strategies. they reported that absolute momentum strategies perform better than relative momentum strategies and “time-varying net long position” is the main source behind this superiority. lim, wang and yao (2018) proved that absolute momentum effect is pervasive as they proved the efficacy of time-series momentum strategies across multiple geographical markets and sub-periods. data and research methodology for the selection of the sample, authors initially consider the month-end adjusted closing prices of all the companies listed on bse (bombay stock exchange) from january 2002 to october 2019. the span of the sample period covers both the bull and bear phases of the indian stock market. after the initial selection, we further screened the sample and selected only those companies that have complete monthly stock price data for the above-mentioned sample period. following du (2008), the study also dropped the penny stocks from the sample to avoid any potential biases. finally, we selected 458 stocks for analysis. we have collected the required data for the study from the multiple sources. the monthly adjusted stock prices were extracted from cmie prowess financial database3. we have used 91day treasury bill (t-bill) yield as a proxy for the risk-free return. we collected the t-bill returns from the rbi’s website. data regarding fama-french factors4 were obtained from the data library for indian market maintained by iim ahmedabad. to remove the effect of the outliers from the data, we winsorize the data at 0.5% level both at lower and high ends as suggested by bali, engle and murray (2016). from the adjusted stock prices, we calculated the logarithmic stock returns using the following formula. 3 prowess is the “largest database of the financial performance of indian companies” maintained by centre for monitoring indian economy private limited. 4 fama and frech (1992) introduced the three-factor asset pricing model to explain cross-sectional variation in financial assets returns. these three factors are size (smb), value (hml) and market factor. simarjeet singh,nidhi walia166 momentum effect is pervasive as they proved the efficacy of time-series momentum strategies across multiple geographical markets and sub-periods. data and research methodology for the selection of the sample, authors initially consider the month-end adjusted closing prices of all the companies listed on bse (bombay stock exchange) from january 2002 to october 2019. the span of the sample period covers both the bull and bear phases of the indian stock market. after the initial selection, we further screened the sample and selected only those companies that have complete monthly stock price data for the above-mentioned sample period. following du (2008), the study also dropped the penny stocks from the sample to avoid any potential biases. finally, we selected 458 stocks for analysis. we have collected the required data for the study from the multiple sources. the monthly adjusted stock prices were extracted from cmie prowess financial database3. we have used 91day treasury bill (t-bill) yield as a proxy for the risk-free return. we collected the t-bill returns from the rbi's website. data regarding fama-french factors4 were obtained from the data library for indian market maintained by iim ahmedabad. to remove the effect of the outliers from the data, we winsorize the data at 0.5% level both at lower and high ends as suggested by bali, engle and murray (2016). from the adjusted stock prices, we calculated the logarithmic stock returns using the following formula. r�� = ln (p�� p����)⁄ (1) where rit represents log return of a stock at time t, pit represents price of that stock at time t and pit-1 represents the price of the stock on t-1 month, and ln is the natural logarithm. formulation of momentum strategies to formulate the cross-sectional strategies, we follow the methodology as suggested by jegadeesh and titman (1993) and lin (2019). we sort the stocks into deciles on the basis of their prior 11 month returns from the month t-12 to month t-2. top deciles (best 10%) represents the winner portfolio, and bottom decile (worst 10%) represent loser portfolio. for portfolio construction equal weights, we give equal weight to each stock in winner and loser 3 prowess is the "largest database of the financial performance of indian companies" maintained by centre for monitoring indian economy private limited. 4 fama and frech (1992) introduced the three-factor asset pricing model to explain cross-sectional variation in financial assets returns. these three factors are size (smb), value (hml) and market factor. (1) where rit represents log return of a stock at time t, pit represents price of that stock at time t and pit-1 represents the price of the stock on t-1 month, and ln is the natural logarithm. formulation of momentum strategies to formulate the cross-sectional strategies, we follow the methodology as suggested by jegadeesh and titman (1993) and lin (2019). we sort the stocks into deciles on the basis of their prior 11 month returns from the month t-12 to month t-2. top deciles (best 10%) represents the winner portfolio, and bottom decile (worst 10%) represent loser portfolio. for portfolio construction equal weights, we give equal weight to each stock in winner and loser portfolio. we long (buy) the stocks in winner portfolio and short (sell) the stocks in loser portfolio. after this, we hold these stocks for five different periods (1,3,6,9,12 months). to prevent bid-ask bias and lagged reaction, the study introduces a one-month gap between formulation and holding period (jegadeesh & titman, 2001). for portfolio rebalancing, the present study uses buy and hold strategy. finally, we calculate the cross-sectional momentum as the difference between winner and loser portfolio’s returns. moskowitz et al. (2012) suggested the methodology for the construction of time-series momentum strategies. firstly, for every stock we calculate prior 11 months returns from the month t-12 through month t-2. after calculating returns for every stock, we sort the stocks into two portfolios. the stocks that generated positive returns are categorized as winners and stocks that generated negative returns are categorized as losers. to make time-series momentum returns directly comparable with cross-sectional momentum returns, we invest in 20% of total stocks. for the portfolio rebalance and micro-structure biases, we adopted the same methodology as mentioned in the above paragraph. risk-adjusted momentum returns for calculation of risk-adjusted momentum returns, authors first compute excess cross-sectional and time-series momentum returns by subtracting risk time-series and cross-sectional momentum in indian stock market 167 free return from cross-sectional and time-series momentum returns. then we estimate alphas of both cross-sectional strategies and time-series momentum strategies by regressing excess cross-sectional and time-series momentum returns on capm and fama-french risk factors. we used the following equations to calculate excess returns, capm alpha and fama-french alpha. ret = rmt rft (2) where ret represents excess return at time t, rmt represents market return at time t and rft risk-free return at time. αcapm = re – β(rmr rf ) (3) where αcapm represent capm alpha, re represent excess return, rmr represent market return, rf represents risk-free rate, and β represent factor loading of market factor. αff = re – β1(rmr rf ) – β2smb – β3hml (4) where αff represent fama-french alpha, smb represent size factor, hml represents value factor and β1, β2, β3 represents factor loadings. results profitability of momentum strategies the empirical analysis of this study starts with inspecting the performance of cross-sectional and time-series momentum strategies in the indian stock market. in table 1, we have reported unconditional returns, risk-adjusted returns and sharpe ratio of various momentum investment strategies. panel a of table 1 reports the performances of various cross-sectional momentum strategies. cross-sectional momentum strategies generate significant profits in the indian market. these findings are consistent with the results of past studies on insimarjeet singh,nidhi walia168 dian stock market. we find that raw returns of various cross-sectional strategies are significant in all cases, but risk-adjusted returns are not significant for longer time periods (9,12 months). cross-sectional momentum delivers best results when we hold portfolios for one month. we find that performance of these strategies dramatically fall when we hold portfolios for longer time period signalling that these strategies reverse in the long run. panel b of the same table represents performances of time-series momentum strategies. these strategies also generate significant returns in the indian market. even after adjusting the market and fama-french factors, these returns remain significant. similar to the findings of relative momentum, absolute momentum also delivers the best return when we hold portfolios for one month. we witness that absolute momentum strategies perform better than time momentum strategies. as one can see from the table in all holding periods, whether for raw returns or for risk-adjusted returns time series momentum strategies has generated excess returns than cross-sectional momentum strategies. this gap between the performances of time series and cross momentum strategies increases when we hold portfolios for longer period for example when we held portfolios for 12 months, time-series momentum generates a return of 1.764% per month. in contrast, cross-sectional momentum generates a return of 1.038% per month. absolute momentum strategies also perform better than relative momentum strategies in terms of risk-reward ratio. table 1. profitability of cross-sectional and time-series momentum strategies panel a: cross-sectional momentum k= 1 3 6 9 12 raw returns 1.954% (4.475) 1.735% (3.631) 1.367% (2.982) 1.135% (2.648) 1.038% (2.200) capm α 1.518% (3.611) 1.276% (2.750) 0.930% (2.011) 0.678% (1.501) 0.578% (1.206) fama-french α 1.661% (4.028) 1.427% (3.085) 1.087% (2.315) 0.854% (1.895) 0.782% (1.655) sharpe ratio 0.689 0.578 0.349 0.283 0.153 time-series and cross-sectional momentum in indian stock market 169 panel b: time series momentum k= 1 3 6 9 12 raw returns 2.326% (4.822) 1.876% (3.908) 1.672% (3.626) 1.392% (3.332) 1.764% (3.598) capm α 1.934% (3.995) 1.415% (2.962) 1.255% (2.660) 0.909% (2.175) 1.354% (2.693) fama-french α 2.149% (4.616) 1.616% (3.473) 1.489% (3.206) 1.135% (2.813) 1.637% (3.490) sharpe ratio 0.830 0.654 0.471 0.434 0.453 the table 1 represents raw returns, risk-adjusted returns and risk-reward ratios of various cross-sectional and time-series momentum strategies. we rank the stocks on the basis of their past 12 months returns (t-12 to t-2) and hold these for 1,3,6,9,12 months respectively. k represents holding period. risk-adjusted returns are calculated using capital asset pricing model and fama-french three-factor model. in parenthesis newey-west robust t statics5 (with a lag of 6) are reported. sharpe ratios are reported in annualized terms. s o u r c e : authors’ own calculations using r software. to examine whether time-series momentum consistently performs better than cross-sectional momentum, we further divide the sample period of the study into three subsamples: jan 2002 to dec 2007, jan 2008 to dec 2009 and jan 2010 to oct 20196. the results of this subsample period analysis are presented in table 2. we find that absolute momentum strategies perform better than relative momentum in each subsample period. these results are similar to the findings in table 1. these findings prove that ability of time-series momentum to generate better return than cross-sectional momentum is not limited to specific time period only. time series perform better cross-sectional momentum in every subsample period. further, time-series momentum performs bet5 we have used newey-west t statics because financial return series are not normally distributed. if a series is not normally distributed, we cannot use t test. therefore, following the recommendations of bali et al. (2016) we have used newey-west t statics. 6 we have selected these three sample periods due to the fact that period from 2002 to 2007 represents boom period, the period from 2008 to 2009 represents depression period and the period from 2010 to 2019 represents recovery phase. table 1. profitability… simarjeet singh,nidhi walia170 ter in the first and last sample period. in comparison, cross-sectional momentum generated significant returns only in first subsample period. table 2. performance of momentum strategies across different subsample periods time period cross-sectional momentum time series momentum raw return capm ff3 raw return capm ff3 2002-2007 2.058% (4.298) 1.852% (2.492) 2.164% (3.724) 2.650% (4.602) 2.715% (2.996) 3.372% (3.073) 2008-2009 -1.326% (-1.066) -1.987% (-1.407) -1.220% (-1.886) -0.764% (-1.077) -1.470% (-1.767) -0.907% (-0.848) 2010-2019 1.249% (1.650) 0.679% (1.049) 0.558% (0.713) 2.091% (2.872) 1.541% (2.273) 1.417% (1.689) we sort the stocks on the basis of their previous 12 months (t-12 to t-2) returns and hold these stocks for 12 months. raw returns represent unconditional returns. capm and ff3 returns are calculated by regressing cross-sectional and time-series momentum returns with market return and fama-french factors. returns are reported in percentage terms. in brackets, newey west t statistics are reported. s o u r c e : authors’ own calculations using r software. cross alpha comparison to compare the performances of cross-sectional and time-series momentum strategies, we follow the methodology suggested by moskowitz et al. (2012) and goyal and jegadeesh (2018). first, we regress the relative momentum profits against absolute momentum profits and find that alphas (intercept) are negative and insignificant. then we regress absolute momentum profits against relative momentum profits and find significant positive alphas. therefore, we can conclude that absolute momentum fully captures relative momentum, but relative momentum cannot fully explain absolute momentum. table 3 represents the intercepts when we regress relative momentum profits against absolute momentum profits and absolute momentum profits against relative momentum profits. we report these results for all five holding periods. when we regress time-series momentum profits against cross-sectional momentum profits, we find three of five holding periods generated significant and positive alphas. as one can see from the table that when we hold portfolios for 1,3 and 12 months at that time, alphas are significant and positive. on the time-series and cross-sectional momentum in indian stock market 171 other hand, when cross-sectional momentum profits are regressands and timeseries momentum profits are regressors, the alphas are negative and insignificant. for instance, when we hold portfolio for 12 months, the alpha is -0.284%. these findings are similar to the findings of moskowitz et al. (2012) and goyal and jegadeesh (2018). therefore, one can say that absolute momentum fully captures relative momentum, but relative momentum cannot fully explain absolute momentum. table 3. cross-alphas of various cross-sectional and time-series momentum returns independent variable    cross-sectional dependent variablecross-sectional    time-series time-series cross-sectional    holding period 1 0.476% (2.037) 0.083% (0.347) 3 0.346% (1.360) 0.138% (0.452) 6 0.368% (1.362) 0.000% (-0.003) 9 0.458% (1.978) 0.039% (0.174) 12 0.729% (2.545) -0.284% (-0.934) this table presents alphas of cross-sectional momentum returns regressed with time-series momentum returns and alphas of time-series momentum returns regressed with cross-sectional momentum returns. alphas are reported in percentage terms. in brackets, we have reported newey-west robust t statistics (with a lag of 6). s o u r c e : authors’ own calculations using r software. the results from the above table prove that time-series momentum strategies perform better than cross-sectional momentum strategies. now the question arises why time-series momentum strategies perform better than crosssectional momentum strategies. for this, we need to find out the sources of difference between the performances of these two strategies. simarjeet singh,nidhi walia172 sources of difference between cross-sectional and time-series momentum returns if we see formulation structure of cross-sectional and time-series momentum strategies, we can say that cross-sectional momentum strategies are “zero net investment long/short strategies” whereas in time-series momentum strategies investors take long or short positions on the basis of number of stocks generated positive and negative returns. investors would have a net long position for a particular month if more than half of the stocks have generated positive return in the past and a net short position if most of the stocks have generated negative returns in the past. therefore, the formulation structure of the timeseries momentum strategies automatically adds net long (or net short) position component in these strategies. to compare the absolute and relative momentum, we have taken into consideration extra risk premium that absolute momentum strategies gain relative to relative momentum strategies due to this net long position. we will add this additional risk premium component in crosssectional momentum by investing the net long position in any random portfolio. the rupee amount invested in this portfolio will change through time. for example, time-series momentum strategy will invest ₹1.10 and ₹0.90 in the long and short portfolio, respectively if 55 stocks generated positive returns in the past, and 45 stocks generated negative returns. in this case the net long position of ₹0.20 will be invested in a random portfolio. goyal and jegadeesh (2018) refer to this investment as “time-varying investment” in the market. we will add this “time-varying investment” in the cross-sectional momentum and will term this sum as cstvm. if cstvm performs same as time-series momentum, we can say that time-series momentum is not completely new phenomena, net long position is the only reason of superior performance of time-series momentum over cross-sectional momentum. in table 4, we compare the performances of time-series momentum (ts), cross-sectional momentum (cs) and the sum of cross-sectional momentum and “time-varying investment” (cstvm). we also report the difference between ts and cs and ts and cstvm. we report these results when we hold stocks throughout 12 months because when we hold the portfolio for longer periods, the difference between the performances of relative momentum and absolute momentum increases. the net long position for this strategy is ₹0.36 (on an average we invested ₹1.18 on the long side and ₹0.82 on the short side). when we com time-series and cross-sectional momentum in indian stock market 173 pare the difference between the absolute momentum and relative momentum, the difference is large and statically significant. however, when we add “timevarying investment” in the cross-sectional momentum and compare this sum with time-series momentum, we find that difference is small and statically insignificant. from these findings, we can conclude that net long investment is the main reason behind the significant performance of time series momentum over time-series momentum. table 4. comparison of cross-sectional and time-series momentum ts cs cstvm ts-cs ts-cstvm ₹long ₹short 1.764% (3.598) 1.038% (2.200) 1.461% (2.914) 0.725% (2.264) 0.301% (0.729) ₹ 1.18 ₹ 0.82 s o u r c e : authors’ own calculations using r software. discussions the findings of the present study are consistent with the existing momentum investing literature. the present study reports that both absolute and relative momentum strategies generate large and significant momentum payoffs in indian stock market. both strategies perform superior returns in the short window (12 months’ formation and one month holding period) than the long window (12 months’ formation and 12 months holding period). consistent with the findings of lim et al. (2018), absolute momentum strategies generate superior returns than relative momentum strategies (in all cases). absolute momentum payoffs remain significant in longer time frames signalling that unlike relative momentum strategies, these strategies do not reverse in the long run. further, the study regresses the cross-sectional momentum payoffs on time-series momentum payoffs and time-series momentum payoffs on cross-sectional payoffs. we document that absolute momentum strategies can capture relative momentum payoffs. however, relative momentum payoffs cannot capture absolute momentum payoffs. these findings are in accordance with the results of moskowitz et al. (2012). supporting the results of goyal and jegadeesh (2018), the present study also finds that “time-varying net long position” is the main factor behind the superior performance of time-series momentum strategies. from the practitioner’s point of view, the findings of the study will assist active simarjeet singh,nidhi walia174 investors in consistently generating superior returns. future research studies can focus on potential explanations of the time-series momentum effect.  conclusion although there are a number of research studies available on momentum, most of them most focus on cross-sectional momentum, whereas absolute momentum is a comparatively new phenomenon. in this study, we test the performances of cross-sectional and time-series momentum strategies in the indian stock market. both cross-sectional and time-series momentum strategies generate significant profits over the sample period from 2002 to 2019. clearly, time-series momentum strategies perform better than cross-sectional momentum. time-series momentum strategies also perform better when we hold portfolios for longer time whereas returns from cross-sectional momentum strategies decline in long time periods. though both time series and cross-sectional momentum strategies select stocks on the basis of their past performance in timeseries momentum strategies we select stocks on the basis of their own past performance whereas in cross-sectional momentum we select stocks on the basis of their relative performance. when we compare performances of time-series momentum strategies with cross-sectional momentum strategies, we find that due to more investments in long positions, time-series momentum strategies perform better than cross-sectional momentum. our findings contribute to the literature on financial anomalies by giving the initial evidence of significant timeseries momentum effect in indian stock market. given the fact that indian stock market is the second most preferred destination (among emerging countries) for global fund managers, the findings of the study will help local and global fund managers in the formulation of more profitable equity strategies.  references asness, c.s., moskowitz, t.j., & pedersen, l.h. 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(1998). international momentum strategies. the journal of finance, 53(1), 267-284. http://dx.doi.org/10.1111/0022-1082.95722. sehgal, s., & balakrishnan, i. (2002). contrarian and momentum strategies in the indian capital market. vikalpa, 27(1), 13-20. http://dx.doi.org/10.1177/0256090920020103. sehgal, s., & jain, k. (2015). dissecting sources of price momentum: evidence from india. international journal of emerging markets, 10(4), 801-819. http://dx.doi. org/10.1108/ijoem-04-2014-0046. date of submission: august 12, 2020; date of acceptance: october 4, 2020. * contact information: nadiapurkayastha@gmail.com, atılım university, social sciences institute, mba program, incek, ankara, turkey, phone: +90 5060934959, orcid id: https://orcid.org/0000-0002-8072-5508. ** contact information: sule.tuzlukaya@atilim.edu.tr, atılım university, faculty of management, department of management, incek, ankara, turkey, phone: +90 312 5868612; orcid id: https://orcid.org/0000-0001-8244-6396. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 purkayastha, n.n., & tuzlukaya, ş.e. (2020). determination of the benefits and risks of peer-topeer (p2p) lending: a social network theory approach. copernican journal of finance & accounting, 9(3), 131–143. http://dx.doi.org/10.12775/cjfa.2020.016 nadia nahar purkayastha* atılım university şule erdem tuzlukaya** atılım university determination of the benefits and risks of peer-to-peer (p2p) lending: a social network theory approach keywords: p2p, social networks, trust, perceived risk, security, developing country. j e l classification: g21, g28, d85, l31, b55. abstract: peer-to-peer lending which is also known as p2p is an online financial investment platform where individual investors finance projects by lending money to individual borrowers through social networks. p2p models usually contributing to less privileged people especially entrepreneurs and frontier groups who do not have access to formal financial services. however, due to the economic conditions and lack of government support, p2p lending platforms in developing countries often fail to reveal the ‘credit history’ and ‘indebtedness’ of individual borrowers which have an expressive impact on loan performance. the objective of this study is to demonstrate theoretically the factors those inf luence the lenders to participate in the p2p lending platform in nadia nahar purkayastha, şule erdem tuzlukaya132 developing countries and the associated risks. for this purpose, two propositions are developed to examine the factors to demonstrate the role of the social network is also combined to further explain the p2p lending.  introduction peer-to-peer (p2p) lending is a type of online financial investment platform where individual investors finance projects by lending money to projects or such individual borrowers as entrepreneurs (du, li, lu & lu, 2020; ariza, arroyo, caparrini & segovia, 2020; balyuk, 2019). internet-based p2p lending, empowers individuals to acquire loans directly from other individuals, therefore may eliminate the financial institution as the intermediary thus, offer larger admittance to credit opportunity at a lower cost. in the case of small and medium-sized enterprises (smes), such web-based emerging lending platforms assist microfinance as an alternative method of financing or investing (chen, chong & giudici, 2020; paravisini, rappoport & ravina, 2017; iyer, khwaja, luttmer & shue, 2016). through the p2p lending platform interested borrowers can place a request for loans to the web-based platform and they can be founded by exclusive lenders directly or indirectly (everett, 2019; bachmann, becker, buerckner, hilker, kock, lehmann, tiburtius & funk, 2011). although without the existence of mediators it is very difficult for p2p platforms to obtain credit history to determine the risk of default of the borrowers and the transparency of the investment for creditors. to reduce the risk of credit default p2p platform usually offers loans to emerging marketplaces by linking interested borrowers and lenders via social networks. urena, kou, dong, chiclana, and herrera-viedma (2019) demarcated social networks as a platform of virtual interactions between people and services without any previous real-world relationship and interact sharing different kinds of information with the purpose of friendship, marketing or business exchange. despite the clear objective of p2p, it has created some issues for investors such as information asymmetry, inadequate credit assessment, and potential high default risk, which might have an impact on investors’ intention to invest in p2p. furthermore, risk assessment on loan is even more difficult in developing countries, due to the economic environment, lack of government regulations, information asymmetries and technological awareness among investors and borrowers (dorf leitner, oswald & zhang, 2019). inadequate credit history limits the opportunity to distinguish high-risk borrowers from reliable ones or determination of the benefits and risks of peer-to-peer… 133 individual entrepreneurs with lower credit risk (jenq, pan & theseira, 2012). those credit risks and information asymmetries can be minimized by collecting financial information through social networks. but using social networks also raises a critical question for investors/creditors, “how creditors can gain much-needed transparency on their investment by using social networks”? in light of the foregoing, the problem statement for this study is that the lenders from developing countries faces a critical challenge where both the p2p platforms and their service tools or agents are not regulated by the government or protected by government agencies. as a result, lenders and borrowers may feel insecure. hence, the aim of this study is to demonstrate theoretically the factors that attract or inf luence the lenders (or investors) to invest through a p2p lending platform in a developing country and how information from social networks can be used as a tool to determine the credit risks associated with it. to achieve this, by benefiting from the social network theory propositions are developed to determine the inter-relations among p2p, perceived risks, security and social networks. literature review the demand for p2p lending why p2p lending is vital for individuals and society? although various answers can be provided, one of the fundamental reasons is considered as its focus. since the p2p platform does not only focus on the market for big loans but instead on the emerging markets that may require small loans, which banks generally do not consider due to high transaction costs (freedman & jin, 2008), that makes the p2p utmost important for the individuals and the society. furthermore, a high default rate increases the cost of capital requirements of the bank. hence, banks always try to avoid lending to risky or unfamiliar borrowers who may bring cost on a reputation for traditional banks (gabbi, giammarino, matthias, monferrà & sampagnaro, 2020; deli, hasan & liu, 2019; buckley & nixon, 2009). on other hand, the marginal costs on loans are relatively high for banks than p2p lending platforms which motivate the banks not to offer loans to the perilous borrowers, individuals, entrepreneurs, or small businesses (de roure, pelizzon & tasca, 2016). such hassles lead potential borrowers to seek for p2p lending as an alternative financial source. nadia nahar purkayastha, şule erdem tuzlukaya134 according to herrero-lopez (2009) such platforms have at least two key benefits. first, it reduces the cost for borrowers, and second, it provides an investment opportunity for the individuals which can be led to potential economic development for a country. grameen bank in bangladesh has proven that unprivileged groups benefited from “microcredit”1 financial invention, which allowed a priori non-bankable capitalists to contribute to self-employment ventures (herrero-lopez, 2009). similarly, small businesses, new entrepreneurs, or less privileged people can access finance through p2p lending modality instead of regular methods of credit especially in developing countries like bangladesh, india, china, philippines, and etc. that can potentially reduce the negative effect of local informal moneylenders. p2p lending platforms always focus on democratizing the borrowers rather than discriminating them on their social or financial status (herzenstein, andrews, dholakia & lyandres, 2008). social networks for direct p2p although there are no mediators to determine the creditworthiness and default risk in direct p2p, what are the factors that are critical in building social trust between lenders and borrowers? milne and parboteeah (2016) suggested four key factors for creating trust between the parties. first, direct p2p offers a higher return for the lenders and low cost for the borrowers compared to traditional banks as both cut the middleman. second, it provides easy access to credit for the borrowers within a short period. third, it provides social value addition to traditional banks. and as fourth, the utilization of innovative technologies using the mechanism of social networks is helpful in terms of speeding up the direct p2p lending. in an attempt to promote and identify the creditable borrowers’, direct p2p lending platforms like prosper, zopa, lending club use social networks and encourage the potential borrowers to provide the relevant financial information as much as possible throughout the social networks to reduce default risks (ge, feng & gu, 2016). iyer, khwaja, luttmer, and shue (2009) classified the infor1 according to schroeder (2020) economist muhammad yunus (founder of grammen bank of bangladesh) termed microcredit as a common form of microfinance that involves an extremely small loan given to an individual for self-employment projects, with the intention of allowing households that would otherwise be credit constrained to engage in income-generating activities. determination of the benefits and risks of peer-to-peer… 135 mation as “hard” and “soft”, direct p2p platforms collect “hard” information like credit score, debt-to-income ratio, annual income as well as the business plan for utilizing the funds and “soft” information like a picture of the interested borrower through the social networks. thus, one may pose a question as “do the social networks unravel the information asymmetry challenges of p2p lending for social capital”? the activity level and financial information provided on social media by the borrowers can act as predictors of their default probability (freedman & jin, 2017; ge et al., 2016). direct p2p uses online social media such as facebook, instagram, linkedin, twitter, whatsapp, lending website, etc. or by an application that is developed by the lending platforms. the pictures of the proposed venture required primarily to evaluate borrower’s creditworthiness as well as the potential for their business proposition (bachmann et al., 2011). research conducted by wei and lin (2016) identified that social media is also producing a significant amount of social network data that can be used as an instrument for credit scoring. according to bachmann et al. (2011) p2p lending platforms like prosper.com encourage the members to form friendship networks and groups incorporate both current off line social contacts and newly created online friends or tapping on social capital. the capability to inf luence friendship networks during to place an online loan request to friends and to obtain notices of friends’ borrowing and lending events is the main difference between online p2p lending platforms and traditional banking approaches (bachmann et al., 2011). freedman and jin (2008) support that research as focusing on prosper.com and its usage in terms of social networks for transactions and verification of provided financial information. experimental research on online social lending conducted by everett (2019) reveals the risk of credit default will be lower if the location of the borrower is near to the other members of the group. corresponding to social media disclosure by the potential borrower, the probability of getting a loan is high for the borrower with more friends, and the probability of loan default is lower (lin, prabhala & viswanathan, 2013). research steered by liu, brass, lu, and chen (2015) on p2p lending in china also identified that friendship and group affect the economic decision of lenders as well as borrowers of p2p lending. however, it is also difficult to ascertain the validity of the information that is provided in social media to select the creditworthy borrowers. lin et al. (2013) emphasized that default risk is minimal when the p2p lending platform establishes a personal relationship with the borrowers. similarly, everett nadia nahar purkayastha, şule erdem tuzlukaya136 (2019) confirmed that a good relationship between borrowers and p2p lending reduces the chance of moral hazard issues. social networks for indirect p2p why indirect p2p lending platforms are growing when potential borrowers can have easy access to direct p2p through an online social network? because indirect p2p models usually contribute to microcredit or crowdfunding2 through social networks to less privileged people (uddin, vizzari, bandini & imam, 2018; herrero-lopez, 2009). indirect p2p is needed for the poor who are not eligible to gain access to formal financial services due to missing access to financial security and technology skills, stable employment, and certifiable credit description (bauchet, marshall, starita, thomas & yalouris, 2011). lender of indirect p2p gets only the loan principal or both principal amount and interest depend on the model of business strategy (uddin et al., 2018). indirect p2p like rang de, kiva, zidisha, myc4 operate lending activities via social networks where borrowers turn to the field partners or local financial institutions who works as a support system and appeals for a loan. hassett, bergeron, kreger, looft, allen, and dubbe (2011) identified two types of indirect lending models: lending for-profit and not-for-profit. the authors argued that indirect p2p platforms can be considered as lending for-profit as well as not-for-profit or pro-social lending platforms. for example, myc4 is an indirect p2p platform founded in 2006 as a for-profit (dorf leitner et al., 2019; bachmann et al., 2011). wokaiis as another chinese p2p lending platform also provides p2p lending for profit. lenders of “for-profit platforms”, receive a financial return from their socially motivated investment capital “dutch auction” on the sites, where the cost of fund is reduced till a borrower is found. conversely, jenq et at. (2012) identified kiva as a not-for-profit p2p lending platform and found that kiva operates through local microfinance institutions (mfi)3, social enterprises, schools, and non-governmental organizations (ngos) act as fields partners or intermediary agents between lenders and bor2 according to american business magazine forbes (2018) “crowdfunding is a process of raising a small amount of loan from large group of people typically through an online platform”. 3 lam, zhang, ang, and jacob (2020) defined microfinance institutions (mfis) as hybrid organizations with the dual mission of financial sustainability and social purpose. determination of the benefits and risks of peer-to-peer… 137 rowers in developing countries to improve the lives of the poor. research by zhao, ge, liu, wang, chen, and zhang (2017) revealed that kiva borrowers do not lend directly from the platforms but through field partners. according to kiva.org individuals can lend as little as $25 to create opportunities for borrowers and the platforms create revenues from donations, optional lender fees, and other sources. kiva borrowers only need to repay the principal to lenders without any interest (hartley, 2010) field partners review the information, the purpose of the loan applications provided by the potential borrowers. field partners are also responsible for the disbursement and repayment collection of loans. if a loan is granted, the field partners post the borrower’s profile information, picture, and purpose of the loan on kiva. when kiva delivers the fund to the local field partner, the field partner may require traveling to the borrower’s location, such as the rural village, and collect a repayment regularly (zhao et al., 2017). various factors inf luence or bias the lenders to lend through indirect p2p lending. havrylchyk and verdier (2018) identified the problem with indirect social p2p lending, where lenders do not receive any interest on their loans, and in fact, their capital is subject to default risk and exchange rate risk. as a result, full recovery of the loan is not assured because the intermediaries of the indirect p2p platforms do not promise or assure the full recovery of loans, which might discourage the lenders from participating in the platform. theoretical framework this research identifies that transparency issue is one of the major factors that significantly affect the investor’s intention and scope to participate in p2p lending whether it is a direct or indirect lending platform in a developing country. perceived risks and trust perceived risks4 and trust are deemed as ambiguity; often arise due to information or communication errors on financial transactions. incapability to physical 4 perceived risk is pertinent to intangible products or services that involved to online transaction. according to featherman and pavlou (2003), perceived risk is regarded as an unpredictability, with hostile or adverse implications, arising advance quesnadia nahar purkayastha, şule erdem tuzlukaya138 inspection of direct p2p lending transactions is exposure to fraudulent activities. meanwhile, the lack of inefficient infrastructure provided by the indirect p2p lending companies arise additional anxiety and fear of loss on investment (manda & yamijala, 2019; clarke, 2019). research by komiak and benbasat (2006) revealed that if an individual user feels assured and secure about the validation of crowdfunding especially on p2p lending platforms trust will establish a positive relationship between lenders and borrowers. in an attempt to build trust and reputation among the users of the p2p lending platform is required to establish strong and reliable social networks to mitigate the trust issue and perceived institutional risks (chen, lai & lin, 2014). sukmaningsih (2018) suggested trust can be established among borrowers by offering full access to borrowers’ information online, for example, photo, age, gender, national id through social networks. mohammadi and broström (2018) disclosed that distrust is greatly correlated with larger amounts of loans, longer payment cycles, and greater geographical distance between lenders and borrowers. scholars identified social networks are the key to formulate mutual trust, reciprocity, and to override any negative financial consideration for the lenders to participate in p2p lending platforms (saeidi, 2020; gonzalez, 2019). in this way, the first proposition is set forth as follows: proposition 1: the higher the trust on social networks, the lower the lender’s perceived risks, hence, a higher chance to participate in p2p lending. security security is believed to be the most important element to develop an online transaction platform. clients intentionally avoid online platforms which are exemplified by ambiguous information to secure financial information (bertsch & rosenvinge, 2019; urban, amyx & lorenzon, 2009). financial transactions by online p2p lending is a monetary fund, so it shares the same innate risks as other traditional financial activities, therefore social media or intermediaries of p2p platforms need highly sophisticated and reliable technology to guarantee the security of the lender’s financial and personal information to protect their capital (urban et at., 2009). tion on purchasing commitment in terms of searching and choosing information for goods and services. determination of the benefits and risks of peer-to-peer… 139 the p2p lending face security-related issue such as the risk of securing the identity, financial information of investors as well as preventing money laundering and cyberattacks (suryono, purwandari & budi, 2019). these kinds of concerns especially arise in developing countries due to the lack of transparency and regulation by the government on the online transaction and investor protection compare to the traditional banking system. šetlers and valdmanis (2016) acknowledged that security standards of any transactional platform inf luence the behavior investors’ decisions. to secure the transaction traditional banks recommend upgrading online services systems via pin code, mobile phone sms, proof of verification, transaction passwords from the related bank, and one-time passwords from the user (viriyarungsarit, 2017). safety and security imply lenders’ intuitions that lending through intermediary will satisfy such as authentication, quality, encryption, and nonrepudiation (bokhari, 2019). lenders will only seek to a p2p platform when they feel their capital will be securely the media or intermediates. the second proposition is formed on this basis as: proposition 2: the higher the security of social networks, the higher the safety of the lender’s capital, hence a higher chance to participate in the p2p lending platform.  conclusion the growth of p2p lending platforms has been fueled due to the lending restriction from traditional financial institutions. smes and individual entrepreneurs can utilize p2p lending as a unique alternate financing method. however, p2p lending platforms are facing information asymmetry issues that are collected through social networks, especially in a developing country. this research aims to demonstrate theoretically the factors that inf luence lenders to invest in the p2p lending platform in developing countries. several social network literatures offer support for the important role of the social network to mitigate risks for p2p lenders such as in achieving transparency in terms of better borrower selection, lending, and default risk. this approach is based on the changing nature of perceived risk and the security of the lender’s capital relations. the propositions of this study demonstrate that with a higher level of trust on social networks, the lenders can lower their perceived risks, hence, providing a better chance for them to participate in p2p lending. nadia nahar purkayastha, şule erdem tuzlukaya140 however, by creating a more secure social network for the p2p lenders and borrowers, a higher level of safety for the lender’s capital can be ensured. in bringing the social network approach to determine the benefits and risks of p2p lending, we aim to draw attention to the trust-risk nexus within the context of p2p lending. however, the limitations of the study should not be left overlooked; specifically, the topics related to the legal and regulatory framework should also be considered since the power relationship for lenders and borrowers may change. moreover, the propositions/results may differ when it comes to different country settings with distinct socio-economic conditions (in terms of level of development), the role of the state in the economy including robust regulatory framework and the effect of culture on perceived risk for p2p lending may also be considered in future studies. the two theoretical propositions put forth in this study can be further tested in terms of validity through empirical analysis of data collected from surveys and perhaps randomized control trials (rcts).  references ariza, m., arroyo, j., caparrini, a., & segovia, m.j. 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(2017). p2p lending survey: platforms, recent advances, and prospects. acm transactions on intelligent systems and technology (tist), 8(6), 1-28. http://dx.doi.org/10.1145/3078848. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 27, 2014; date of acceptance: march 22, 2014. * contact information: akarman@sgh.waw.pl, departament of accounting, warsaw school of economics, al. niepodległości 128, 02-554 warszawa, poland, phone: 22 564 68 45. karmańska a. (2014). the imperative of sustainable growth and reporting integration. three eras in the corporate reporting development. copernican journal of finance & accounting, 3(1), 73–82. http://dx.doi.org/10.12775/cjfa.2014.006 anna karmańska* warsaw school of economics the imperative of sustainable growth and reporting integration three eras in the corporate reporting development keywords: sustainable growth, integrated reporting, financial reporting, social responsibility reporting, value. j e l classification: g39, m14, m41, o34, o49. abstract: this article is aimed at the presentation of an opinion in the important discussion about the further development of corporate performance reporting standards, which go far beyond the standards of financial reporting. the current guidelines on social responsibility reporting and the conceptual frameworks of the so-called integrated reporting may give rise to questions on the costs and benefits with regard to corporate reporting within the trend of sustainable growth. the present article, which is the first part of a two-part analysis, discusses synthetically three eras in the corporate development reporting. their context should determine the perception of the current trend of development corporate reporting made in compliance with the imperative of sustainable growth. the review indicates the premises which appeared to be the driving force of a quality surge in the area corporate performance reporting. there is a conviction expressed in the text that the presently emerging fourth era in the development of corporate reporting will significantly change the conceptual model of this kind of reporting. anna karmańska74 imperatyw zrównoważonego rozwoju i integracji sprawozdań. trzy ery w rozwoju sprawozdawczości przedsiębiorstw słowa kluczowe: zrównoważony rozwój, sprawozdawczość zintegrowana, sprawozdawczość finansowa, raportowanie ze społecznej odpowiedzialności, wartość. klasyfikacja j e l: g39, m14, m41, o34, o49. abstrakt: celem artykułu jest przedstawienie głosu w ważnej dyskusji na temat dalszego rozwoju standardów raportowania dokonań przedsiębiorstw, które to standardy daleko wykraczają poza standardy sprawozdawczości finansowej. pojawiające się obecnie wytyczne dotyczące sprawozdania ze społecznej odpowiedzialności i ramy koncepcyjne odnoszące się do tak zwanej sprawozdawczości zintegrowanej skłaniają do pytania nie tylko o koszty i korzyści związane z raportowaniem dokonań przedsiębiorstwa w nurcie zrównoważonego rozwoju. w tym artykule, który jest pierwszą z dwóch części rozważań, przedstawia się syntetycznie trzy ery w rozwoju sprawozdawczości przedsiębiorstw. w ich kontekście należy bowiem widzieć obserwowany obecnie kierunek rozwoju sprawozdawczości przedsiębiorstw przygotowywanej w zgodzie z imperatywem zrównoważonego rozwoju. przegląd ten wskazuje na przesłanki, które były siłami napędowymi jakościowych skoków w obszarze raportowania dokonań przedsiębiorstwa. w tekście wyraża się przekonanie, iż krystalizująca się współcześnie czwarta era w rozwoju sprawozdawczości przedsiębiorstw, zmieni istotnie koncepcyjny model tejże sprawozdawczości. translated by mirosław szymański  introduction corporate performance reporting is becoming increasingly important at present. it is determined by a commonly exposed need for sustainable growth practically with regard to every single human activity. it is a particularly vital issue in the area of corporate activities as the result of these activities refers to a wide range of external stakeholders. in this context, the report information structure is crucial for corporate performance reporting; and it is significantly expanding as it should become an information consensus satisfying the needs of numerous stakeholders. corporate reporting may be seen in a different – holistic – light due to frequent negative assessments of its decision making usefulness. these assessments do not instil optimism in relation to opinions like (noria 2010) ”we are living at the time in which the politicians are trusted more than business people.” from this perspective, it seems that the emphasis on the qualitative features of reporting like sufficiency, reliability, objectivity and credibility is not strong enough to argue the case of its usefulness. the imperative of sustainable growth… 75 thus, it may be assumed that the trend of sustainable growth and the fact that companies operate within the knowledge based economy as well as a peculiar crisis of trust in business financial reporting make the world of business look for a solution to the situation which questions the usefulness of the current ways of communicating important information in this business1. finding solutions which could be an antidote for the current situation is not easy. there are heated debates within the business related scientific environment on: (1) the need to extend the financial reporting information scope by sets of non-financial information and (2) the need to make reports separately describing the effects of corporate activities on environmental and social planes. each of these solutions, as a matter of principle, should serve the purpose of informing all the stakeholders that the managements are aware of multidimensionality of the corporate impact and that their business decisions are made on the basis of this very awareness. irrespective of the adopted solution, companies reporting on their performance incur substantial costs. moreover, when creating a set of information going far beyond the information presented in the form of financial reporting (even if it is particularly expensive and made in compliance with the international financial reporting standards), the companies have to provide a reliable description of the issues which are hardly measurable and difficult to communicate easily, but always subjectively assessed by different stakeholders. the documentation of an effort made in order to implement the idea of sustainable growth seems to be as difficult as the implementation of the idea of sustainable growth itself. putting the decision emphasis on one plane may distort the efforts made on the other, and likewise: putting the informative (presentation) emphasis on one plane may do harm to the other. in view of this, there is still some risk related to the information structure, quality and usefulness of reports on corporate performance made by companies operating within the trend of sustainable growth. it may be noticed that its factors are multiplying geometrically in relation to the degree of extension of corporate reporting informative structure. 1 see more on the role of accounting and the of science accounting in face of these determinants: (karmańska 2013). anna karmańska76 the research methodology and the course of the research process the article identifies and discusses synthetically three eras in the corporate development reporting. the basic method used in the process of writing was a critical analysis of literature concerning the standards of financial reporting and the development of corporate reporting standards as well as own over the time observations based on different case studies analysis. three eras of corporate reporting development preceding the era of imperative of reporting within the trend of sustainable growth historically, corporate performance reporting has been changing at a different pace, but always in one and the same direction set by the group of external stakeholders. reporting looked different in the period when it virtually served at first only one owner of the company, it changed when there were many owners and was still different when the owners were unknown and could change practically every day. corporate performance reporting was different when the owners expected some retrospective information and they made the analyses of determinants and prospects on their own, applying them when making decisions. that period is, to a large extent, over now. a broadly perceived owner or investor does not want any longer to focus on analyses, which require much time and a thorough knowledge of the area of reporting: construction principles, information capacity and evaluation of items included in the reports. following the rule: “time is money”, a present stakeholder-cum-investor is awaiting the information which has already been processed and meets his information needs. this, probably most important and thinking in this way, group of external stakeholders was joined by other groups of stakeholders after some time (creditors, partners, workers, different institutions and even the whole community in which the company operates). each of these groups has become equally important for the corporate business, but each of them expects the company to report the performance adequately to their utilitarian information needs. this results in the changes in reporting of companies (organisations) and the information capacity is in no way being reduced, on the contrary – it is being extended. the size of the information scope extension of corporate reporting is becoming so significant that the very fact of extension may be perceived as a threat with the “triumph of form over content” and “a lower quality of infor the imperative of sustainable growth… 77 mation transmission”, which is based on increasingly large scope of “subjective selection” and increasingly high level of “source information processing.” on the basis of the observation of the changes in reporting on corporate (organisation) performance, one can indicate a few eras (stages) of corporate reporting development which clearly show the direction of its further evolution: ■ the first era – integrated financial statement, ■ the second era –integrated financial statement oriented for risk factors identification, ■ the third era – integrated financial statement oriented for the risk factors identification extended by the information on resources, competences and attributes not revealed in the financial statement, ■ the fourth era – integrated financial statement and other reports in the trend of sustainable growth. the first era the changes in corporate reporting throughout centuries have been different in nature. the balance statement was the first to appear, followed by the profit and loss account a few centuries later. another century later came the cash f low account, followed soon by the statement of changes in equity. as the elements of financial statements have been extended, their arrangements have been verified and at the same time extended by the range of information to complete the data presented in the financial statements. then the commentary on financial values appeared, known as a management board report (later report on corporate activity). discussions began about a possibility of including some facultative elements to complete the financial statements, e.g. data resulting from the financial analysis or other information which the management board may regard important and worth communicating to the stakeholders. let us call this period in the development of corporate reporting, which lasted many centuries, symbolically as the first era (the creation of the integrated financial statement). from the institutional perspective, primarily domestic legislative institutions and vocational organisations were involved. depending on the country, they made use of the achievements of international institutions which were being established as the global dimension of the problem of financial reporting was becoming increasingly apparent. anna karmańska78 the second era then, in the epoch of heated debates about the necessity for risk management, financial reporting offered to the stakeholders an extended range of complementary information, changes in requirements for example in the area of segment reporting, serious changes in the methods of balance evaluation of financial instruments and other assets, including the introduction of the category of fair value2. accounting, trying to raise the prognostic quality of the financial reporting created in the system, began to commonly apply complex methodologies of measurement of the loss of ability to generate future economic benefits by the corporate assets. in order to meet the needs of external stakeholders, the method of evaluation of the acquired goodwill was changed. at first it was based on the price of acquisition of another company and the book value of its assets, then on their market value and at present on the fair value. the principles of disclosing other intangible values in the balance were reorganised. incomes and costs recognition was standardised. the layouts of reports were being changed. these are examples of adjustment changes in the area of financial reporting. they have been made and are still being made in many areas of corporate operations. it all results in the retailed principles of disclosure, recognition and evaluation of corporate assets, the need for discussion about professionalism and the reminders of the principles of professional ethics3. this stage is in progress and may be described as the second era (with regard to the improvement of the integrated financial statement and reporting on the corporate risk within the framework of it). the problem is dealt with by many institutions of international scope of impact, to mention for instance: the international accounting standards board (iasb), the european financial reporting advisory group (efrag), the securities and exchange commission-sec, the organisation for economic co-operation and development-oecd, the european federation of financial analysts societies-effas, the financial accounting standards board-fasb, the international federation of accountants (ifac) or the european commission (ec). 2 see more: (karmańska 2010a, 97–107). 3 see more: (karmańska 2010b, 97–110). the imperative of sustainable growth… 79 the third era the business world has identified and is still identifying other information needs on the part of corporate stakeholders parallel to the changes in the financial reporting presented above. under the impact of the changes in the methods of competition, besides the currently operating capital groups as well as the appearance on a mass scale of strategic alliances, clusters, coopetition or other newest forms of cooperation allowing for further operation on the market and achieving a competitive advantage, external stakeholders’ needs, so far not recognised, have been indicated as urgent. the stakeholders’ expectation to familiarise themselves with the corporate exchange value become an important issue. in the axiological terms, this value, set in the so-called market value standard, practically suddenly and commonly began to play a more important role than the corporate use value. the satisfaction of this need became another challenge. at first, it has to be faced by the companies themselves and then, due to the scale of needs, the world of science and different international initiatives and institutions. because the business world began to rightly perceive assets – essential to create a corporate market value and not disclosed in financial reporting – in the intellectual capital value (in human, structural and organisational or structural and relative capital); reporting on the knowledge of the value of such corporate assets requires finding another reporting consensus. thus, new proposals in this area appeared, e.g. supplement to a financial statement presented by scandia (first in 1994) (mauritsen, larsen 2001, 399–422), ifac study no. 7 (1998) (dzinkowski 1998), danish guidelines (dati) (2000) (a guideline for intellectual capital statements 2000), nordika project (2001) (a report from the nordika project 2001), value chain scorecoard – vcs (2001) (baruch 2001), meritum guidelines (2001) (meritum project 2002), prism (2003) (the prism project 2003), guidelines for disclosure of intellectual assets based management (2005) (guidelines for disclosure 2005), incas-european intellectual capital statements guideline (2008) (intellectual capital statements 2008). the need for reporting on intellectual capital became an area of important empirical and scientific research, which is costly and conducted extensively on an international large scale. it is so because the identification and measurement of the value of this capital in the conditions of global economy are a challenge for the business practice and the science of both management or finance and anna karmańska80 accounting 4. certain achievements and a peculiar stability have been achieved in this area. the practice provides evidence to prove that some solutions have been adopted in relation to intellectual capital reporting convention and they may be regarded as a peculiar standard in this field5.  conclusions in conclusion it can be seen that the third era of the development of financial reporting is the era of a substantial qualitative change in corporate reporting. there are attempts to find solutions enriching financial reporting with the information about the asset value not recognised in the reporting so far. as external stakeholders found the financial statement insufficient, a new complementary element appeared to accompany it, informing about the corporate intellectual capital, about the business potential and the power of impact on the corporate value. in view of the above, if in this era, one discusses the issue of communicating the knowledge of the corporate business performance and potential, it is well justified to use the notion of annual corporate report or annual corporate statement but not annual financial statement as the statement is becoming one of the two elements of the annual corporate report, though it is still playing a crucial role in this reporting. at present we are entering another era – the fourth era. it is an era of a dominating role of the imperative of sustainable growth, an era of birth of reporting integration perceived in a completely different way than before. it cannot be understood in a straightforward manner as the presentation of independent large sets of additional information, in a sense next to the financial statement and with regard to the question of reporting, or in a company managed within 4 the review of opinions on the necessity of reporting on intellectual capital and on its measurement see for example: (kannan, aulbur 2004, 389–413). this publication reviews over 100 items devoted to the measurement of intellectual capital. although the review refers to the period 1959–2001, the problems of reporting on intellectual capital are still relevant at present. 5 empirical evidence may already be found to prove that the business environment is closer and closer to the creation of a consensual reporting standard in relation to intellectual capital. it is ref lected in the reports on this capital made in particular by the companies listed on securities exchanges. see for example: (branswijck, everaert 2012). the imperative of sustainable growth… 81 the trend of sustainable growth, as the creation of value, which n.b. in a scientific sense requires a serious further clarification6.  references a guideline for intellectual capital statements – a key to knowledge management. danish agency for trade and industry (2000), ministry of trade and industry, http:// www.statensnet.dk/pligtarkiv/fremvis.pl?vaerkid=14280&reprid=0&filid=0&iarkiv=1 (accessed: 13.04.2013). a report from the nordika project. intelectual capital managing and reporting (2001), nordic industrial fund, october 2001, http://www.nordicinnovation.org/global/_ publications/reports/2001/nordika_report_-_final1.pdf (accessed: 13.04.2013). baruch lev, intangibles: management, measurement, and reporting (2001), brookings institution press, washington. cited in: lopes i.t. (2011), the boundaries of intellectual property valuation: cost, market, income based approaches and innovation turnover, intellectual economics, no. 1(9), p. 100. accessible.: http://repositorio. ipsantarem.pt/bitstream/10400.15/442/1/ilidiolopes_jie _2011.pdf (accessed: 13.02.2014). branswijck d., everaert p. (2012). intellectual capital disclosure commitment: myth or reality?. journal of intellectual capital, vol. 13, issue 1, https://biblio.ugent.be/ input/download?func=downloadfile&recordoid=1208994&fileoid=1220837 (access: 13.04.2013). http://dx.doi.org/10.1108/14691931211196204. dzinkowski r. (1998), the measurement and management of intellectual capital – an introduction, ifac study no 7, http://www.emerald-library.com/ft (accessed: 13.04.2013). guidelines for disclosure of intellectual assets based management (2005), japan. ministry of economy, trade and industry, october 2005, http://www.meti.go.jp/policy/ intellectual_assets/pdf/guidelineforiam.pdf (accessed: 2013.04.13). intellectual capital statements-made in europe, european ics guideline (2008), dg research, http://ebookbrowse.com/european-ics-guideline-pdf-d234114066 (access: 13.04.2013). kannan g., aulbur w.g. (2004). intellectual capital. measurement effectiveness. journal of intellectual capital vol. 5 no 3, 389–413, http://213.155.109.122/files/articles/ intellectual%20capital%20measurement%20effectiveness_20111029193520147. pdf (access: 13.04.2013). http://dx.doi.org/10.1108/14691930410550363. karmańska a. (2010a), wartość godziwa – przełom w sprawozdawczej wycenie dokonań przedsiębiorstw (fair value. breakthrough in reporting evaluation of corporate performance) in: studia i prace kolegium zarządzania i finansów, zeszyt naukowy 101, 97–107. 6 this theme as well as the context and specificity of the fourth era in the development of corporate reporting are presented in: (karmańska 2014). anna karmańska82 karmańska a. (2010b), wielowymiarowość polityki rachunkowości i etyki z nią związanej (artykuł dyskusyjny) multidimensionality of accounting policy and related ethics (discussion article), zeszyty teoretyczne rachunkowości nr 56, skwp, rada naukowa, warsaw, 97–110. karmańska a. (2013), wprowadzenie (introduction), [in:] nauka o rachunkowości na progu gospodarki opartej na wiedzy. polski sondaż środowiskowy (the science of accounting at the door of knowledge based economy. polish environmental survey), scientific editor: a. karmańska. publisher: warsaw school of economics. karmańska a. (2014), the imperative of sustainable growth and reporting integration. the fourth era in the corporate reporting development., copernican journal of finance and accounting (w druku). mauritsen j., larsen h.t. (2001). valuing the future: intellectual capital supplements at skandia. accounting auditing & accountibility journal, vol. 14 no 2001, www.ciberconta.unizar.es/ftp/pub/doc/intellcapital_ifac.pdf (accessed: 13.04.2013). http:// dx.doi.org/10.1108/09513570110403434. meritum project. guidelines for managing and reporting on intangibles (intellectual capital report) (2002), vodafone foundation, madrid, http://www.pnbukh.com/files/ pdf_filer/meritum_guidelines.pdf (accessed: 13.04.2013). nohria n. (2010), the landscape of integrated reporting. reflections and next steps. edited by: r. g. eccles, b. cheng, d. saltzman, harvard business school, e-book, http://hbswk. hbs.edu/pdf/the_landscape_of_integrated_reporting.pdf (accessed: 13.04.2013). the prism project. c. eustace: report of research findings and policy recommendations (2003), european commission. information society technologies programme, http://www.intangability.com/wp-content/uploads/2009/03/prism-project-reportof-research-findings-and-policy-recommendations.pdf, (accessed: 13.04.2013). date of submission: february 8, 2021; date of acceptance: march 3, 2021. * contact information: rk6385@gmail.com, research scholar, school of management, national institute of technology, rourkela, india pin: 769008, phone: 919438715089; orcid id: https://orcid.org/0000-0001-6283-5052. ** contact information: dinabandhu.bag@gmail.com, research scholar & faculty, school of management, national institute of technology, rourkela, india pin: 769008, phone: 916612462803; orcid id: https://orcid.org/0000-0001-9736-1299. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 4 panda, r., & bag, d. (2020). a simple linear test of the integration in corporate bond markets. copernican journal of finance & accounting, 9(4), 77–85. http://dx.doi.org/10.12775/ cjfa.2020.022 ruchira panda* national institute of technology rourkela dinabandhu bag** national institute of technology rourkela a simple linear test of the integration in corporate bond markets keywords: integration, yield, forecast, markets. j e l classification: g15, g12, e44. abstract: the purpose of this article is to identify the key elements of market determinants of bond yield and the external borrowing environment. a reasonably integrated bond market is safer for both investors as well as issuers. it assesses the robustness of integration in corporate bond yields. research method applied in this particular study includes the overview of theoretical concepts, literature review and analysis of secondary yield data. the results revealed significant differences between the sensitivity of coupon bonds and zero coupon bonds. it demonstrated stronger relationship between bond yield, money markets and external credit markets, respectively. modern bond portfolios can be constructed focusing on factors beyond coupon rates, duration and credit rating, respectively. the outcome or further research could focus on examining alternate anchors against secured overnight short term financing rates. ruchira panda, dinabandhu bag78  introduction globally, the 10-year treasury yield has retracted from a record low in 2020 and the us 10 year treasury yield had crossed 1.64% in 2021. the f latter yield curve could have meant the corporates to avail bonds more than bank lending. are the corporate bond yields strongly related to the interbank credit markets? this paper focusses on market determinants of bond yield and the external borrowing environment. for fixed-income securities, yield-based measures are more suitable to test the law of one price. cappiello, engle and sheppard (2003) and cifarelli and paladino (2006) had explored bond movement in international bond markets. barr and priestley (2004) assessed the degree of integration of the us, uk, japan, germany and canada bond markets. barr and priestley (2004) demonstrated that countries with high budget deficits such as portugal, ireland, turkey, italy and spain had also seen downgrades. corradin and rodriguez-moreno (2016) demonstrated that the overall ecb collateral related factors explained a good share of the variation in the bond yield basis and cross country dispersion in yield basis. increasing concern about the ability of some governments’ to repay their debt, which resulted in widening of government bond yields. the construction of integration measures for the money and government bond markets is facilitated by the presence of homogeneous assets. however, there are differences among assets in credit markets. given comparable maturities, interest rate differences between borrowers of the similar risk class are a direct measure of the degree of integration. assuming the law of one price holds, the yields in perfectly integrated markets should be equal to each other. corporate bonds are generally not homogeneous and differ in their cash f low structure, liquidity, sector profile, and credit rating. similarly, a rise in exchange rates could ref lect corresponding activity in domestic bond markets due to lower yield rates. during the 1990s, the historical yields across domestic markets, the average coupon rates varied between 50 basis points to 500 points (ecb). during the same period the central bank rates remained higher than the average coupon rates (usfed). the corresponding bond yield did vary between 0.8% to 22% (nse, 2016), which could be much lower than the average prime lending rates (plr) of top banks during the same period das (2015). the reasons for the lower deviation in bond yields could be attributed to the integration of bond markets with money markets, external credit markets, forex markets or a simple linear test of the integration in corporate bond markets 79 commodity markets, respectively. the aim of this paper is to test the major hypothesis on the prevalence of the law of one price for bond yield using test data. research methodology and research process as a fallout of the global financial crisis the responses within the eurpean monetary system, and its consequential impact on members of the european members have been examined by pys (2017), kasperowicz-stępień (2015), respectively. later maciejczyk-bujnowicz (2016), have looked at the integration aspects of capital f lows within the european system. the issues of integration between bond yield and related indicators have been discussed in bekaert and harvey (1997), ng (2000), fratzscher (2001), and baele (2005), corradin and rodriguez-moreno (2016), hui, lo and chau (2017) who have adopted empirical models using test data for many countries. these works have implemented yield changes signals as proxies against the impact of common news and find that global news factors significantly affect equity returns. hui et al. (2017) studied the inf luence of exchange rate toward sovereign bond yield in several countries including brazil, colombia, mexico, philippines, russia, and turkey. hui et al. (2017) showed that exchange rate affects sovereign bond yield. eckhold (1998) looked at the inf luence of exchange rate, inf lation, and interest rate on bond yield of new zealand. shah (2019) have tested the integration of financial and non-financial risks for asian economies. mahanti, nashikkar, subrahmanyam, chacko and mallik (2008) had presented that volume and trading activity are the critical determinants of bond yield in india. there are few works that has tested on the impact of forex markets, commodity and external credit markets on bond yields. heston and rouwenhorst (1994) and annaert and de ceuster (2000) proposed a simple linear model of the relationship between the bond characteristics and market situations. the linear tests are well established, easy to understand and implement and can provide reasonable predictions. following, heston and rouwenhorst (1994) and annaert and de ceuster (2000), we denote the yield measure as follows; ytm i,t = α + σi βixi,t + σi δizi,t + σi γi fi + εi,t (1) where ytm i,t is the yield of bond i in time t, ruchira panda, dinabandhu bag80 xs are the bond attributes, zs include the money market indicators and, fis are the credit market, forex market, economic indicators or external market indicators. the yield of the corporate bond depends on credit rating, time to maturity, liquidity and cash f low (baele, 2005). chordia, goyal, nozawa, subrahmanyam and tong (2017) mentioned the significance of credit quality on corporate bond premiums. mahanti et al. (2008) mentioned the importance of market activity indicators on bond premiums. since few works has put attention on the forex markets, and external credit markets, we induct reer (effective exchange rate), which could inf luence the yield, since external borrowings and f lows would moderate domestic bond activity. the choice of variables is motivated by standard sources of market and economic data. for coupon bonds, xis include, namely, coupon rate, maturity, rating, etc. the zis ref lect the money market activities, combined total liabilities of the federal & states (inr crores), total bonds volume (rupees crore), and total liquidity (rs crore). to incorporate economic or market indicators we include, average gold price mumbai (inr per 10gms), real effective exchange rate (reer), libor rate (usd), repo rate, etc. the annual economic indicators are, gdp at factor cost, gdp growth, per capita gnp at factor cost, per capita gnp growth, foreign direct investment (fdi), foreign portfolio investment (fpi), splashed growth rate of industrial production, annual average of stock index (nifty, bse), annual inf lation (wpi), etc. table 1 provides descriptive statistics of the dataset used. the sample comprises of yield data from the archive period from january 1999 to december 2016. secondary market trading in corporate bonds executed over the counter (otc), but these trades are reported to multiple platforms nse, bse and fimmda. the bond characteristics data includes issue characteristics, credit rating, last trading price, etc. the market variables and economic indicators include published data from imf and the central bank (rbi). the independent variables covered included available periodic return information from asset markets such as debt, gold, forex, stocks, etc. it also includes periodic industrial and growth variables of iip, gdp, average inf lation, etc. a simple linear test of the integration in corporate bond markets 81 table 1. descriptive statistics variable mean std. min. max. coupon (%) 8.08 3.33 0.00 15.20 ytm (yield to maturity) 8.1 1.8 0.8 22.0 maturity (months) 75.43 40.47 1.90 228.00 total_bonds (inr millions) 18931.70 16142.02 4603.23 50927.60 libor (%) 2.22 2.24 0.09 6.69 repo_rate (%) 6.75 1.05 4.85 8.36 reer (exchange rate) 95.00 2.95 90.54 103.17 fdi (inr millions) (direct investment) 71612.90 61885.57 8871.10 170106.05 fpi (inr_millions) (portfolio investment) 45190.36 60168.25 -60437.10 145840.20 gdp_at_factor_cost (inr millions) 3133004.81 886236.00 2111199.16 4633949.90 gdp_ growth (%) 6.65 1.81 3.61 9.12 per_capita_gnp_at_factor_cost 28044.29 6378.02 20936.10 38726.75 per_capita_gnp_growth (%) 5.04 1.90 2.09 7.79 splashed_growth_rate_of industry (%) 6.46 3.23 2.38 14.44 annual_average_of_stock index (bse) 4419.12 2892.09 1508.32 9348.19 annual_average of_stock index (nifty) 2575.83 1592.01 984.30 5304.33 gold_price_mumbai (inr per 10g) 8543.54 4924.71 4173.92 18265.75 combined_total_liabilities (inr millions )69.54 5.04 61.66 77.05 total_liquidity (inr millions) 11349700.35 6780900.22 4070406.10 23551081.40 inflation (wpi) 0.00 0.10 -0.48 0.10 s o u r c e : national stock exchange (archives) nse, & rbi. table 1 shows the variation in yield from 0.8% to 22.0% in the sample. it also shows the libor varied from 0.09% to 6.69%. further the reer varies from 90.54 to 103.17, alongside the gold_price_mumbai (inr per_10g ) from inr 4173.92 to inr 18265.75, respectively. ruchira panda, dinabandhu bag82 the results and conclusions of the research process this paper produce a test of the law of one price in credit markets and analyzed yield based integration to demonstrate that corporate bond yields are significantly determined by the credit markets. owing to heston and rouwenhorst (1994), and annaert and de ceuster (2000), the robustness tests of linearity were carried out to the sample. the results of the two regression models are presented in table 2 below, for both coupon and zero coupon bonds, separately. the first model comprises the sample of zero coupon bonds and the second model includes the coupon bonds. table 2. model parameter estimates dependent variable=ytm model i : bond type = zero coupon model ii : bond type = coupon beta t-value p-value vif beta t-value p-value vif intercept -1.1735 -0.44 0.6601 -4.1109 -0.63 0.5278 premium 0.2597 4.85 <.0001 1.11 0.3401 2.45 0.0143 1.00 maturity -0.0264 -2.15 0.0316 1.08 0.0837 8.14 <.0001 1.51 total_liquidity -2.97e-07 -1.77 0.0772 1.11 -1.60e-07 -1.61 0.1074 1.00 reer 0.1043 1.71 0.0881 1.51 dw (durbin) none 196 1 2.09 lag (m) 2 3 r2 0.45 0.048 mse 1.07 1.50 note: 1. multi-collinearity (vifs) are lower. 2. the null hypothesis of endogeneity is rejected. 3. p-value of <0.0001 implies significance at 99.99%. s o u r c e : author’s estimates from nse archives. as shown above, the first model identifies the significant variables, namely, premium (difference between average repo rate over average libor rate), and maturity, respectively. the higher premium due to larger difference between a simple linear test of the integration in corporate bond markets 83 the average repo rate and the libor rate implies that yields are closely related with external credit markets. similarly, the variable of maturity is strongly sensitive to zero coupon yields and much lower impact on coupon yields. this complies with the convex nature of yields. the variable of total_liquidity is negatively significant which implies the upside impact of liquidity on yields. the rising total liquidity in the bond market is an indicator of the rising activity of bond market participants. the second model finds two variables, namely, reer (real effective exchange rates) and total_liquidity barely significant. for coupon bonds, we find the impact of premium on yields higher than the impact of premium for zero coupon yields. similarly, for coupon bonds, we find the maturity impacts the yield higher than zero coupon bonds. further our findings in consonance with chordia et al. (2017) who suggest that bonds portfolios can focus on factors beyond duration and rating. our findings are in consonance with houweling and van zundert (2017) who suggest creating momentum portfolios based on timeliness. we do not concur with mahanti et al. (2008) who presented that changes in volume and trading activity are the most important. of late, central banks (e.g., rbi in india (rbi)) had notified their domestic corporates to relook at their current funding structure and anchor to libor. the relationship from the bond yield with reer lies along the lines with the portfolio balance theory of pilbeam (2006) and wang (2009). as a matter of fact, to construct a portfolio in a use case of these findings, an investor can create a bond portfolio of zero coupon bonds by selecting relatively longer maturity scrips during the phase of swings in libor, assuming that libor rates are never manipulated. the limitation is it does not cover longitudinal time series data for longer years to arrive at the robustness of the findings to detect gauge the regulatory anchor which is used to discourage foreign borrowings. an insignificant pitfall of linear tests is that they ignore the presence of non-linearity in empirical specifications and other associated phenomenon of bi-directional causality, endogeneity, etc. it also relies on libor rates which have seen scandals under investigation by bank of england (2017). schrimpf and sushko (2019) suggests that the alternatives of unsecured money market rates used by banks to raise wholesale funding from non-banks such as mmfs is an attempt towards arriving at mix and match of both tenors and yields. the alternatives of unsecured money market rates to raise wholesale funding from non-banks such as mmfs could also ref lect variations in marginal funding costs for domestic corporates. future research, must endeavor examining secured overnight financing rate (sofr) as its alternative. ruchira panda, dinabandhu bag84  references annaert, j., & de ceuster, m.j.k. 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(2009). the economics of foreign exchange market and global finance (2nd ed.). berlin: springer-verlag. copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 10 issue 1 2021 quarterly address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2019: 100.00 editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka-pelowska, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2021 copyright by uniwersytet mikołaja kopernika toruń 2021 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra-oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents hatice düzakın, süreyya yılmaz the determinants of the level of financial literacy in turkey ........................................ 9 c.s. divyesh patel, naresh k. patel india gas exchange today’s reality and path ahead ................................................. 31 daud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin efficacy of audit fee on audit quality of selected pharmaceutical firms in nigeria .............................................................................................................................. 53 krunal soni, maulik desai stock prices: effect of behavioral biases on investor’s mindset in gujarat state, india ..................................................................................................................................... 67 for authors ........................................................................................................................... 81 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 3, 2014; date of acceptance: march 19, 2014. * contact information: bartosz.bartniczak@ue.wroc.pl, faculty of economy, management and tourism in jelenia góra, wrocław univeristy of economics, nowowiejska 3, 58-500 jelenia góra, poland, phone: 757 538 257. bartniczak b. (2014). state aid as a tool encouraging production of energy from renewable sources. copernican journal of finance & accounting, 3(1), 19–31. http://dx.doi.org/10.12775/cjfa.2014.002 bartosz bartniczak* wrocław university of economics state aid as a tool encouraging production of energy from renewable sources keywords: state aid, renewable energy. j e l classification: h23. abstract: providing aid because of its negative impact on competition in the european market is allowed only for specific purposes that are defined in legislation. one of the areas where state aid is permissible is aid to protect the environment, and within it we can provide assistance to support the production of renewable energy sources. the rationale for the provision of such aid is the fact that the production of energy from renewable sources is more expensive than the production of energy from conventional sources. on the other hand, it is more environmentally friendly. the european commission has decided aim before member states of increasing the use of renewable energy sources. one of the instruments contributing to increased production of renewable energy is state aid. the article presents the justification for granting state aid in the field of renewable energy sources, indicates what are the conditions for the granting thereof. also shown is an example of polish aid program on support for biofuel production. pomoc publiczna jako narzędzie wpierające produkcję energii ze źródeł odnawialnych słowa kluczowe: pomoc publiczna, odnawialne źródła energii. bartosz bartniczak20 klasyfikacja j e l: h 23. abstrakt: udzielanie pomocy publicznej ze względu na jej negatywny wpływ na konkurencję na rynku europejskim jest dopuszczalne tylko na ściśle określone cele, które są zdefiniowane w przepisach prawnych. jednym z obszarów gdzie udzielanie pomocy publicznej jest dopuszczalne jest ochrona środowiska, a w ramach niej można udzielać pomocy na wspieranie produkcji odnawialnych źródeł energii. uzasadnieniem udzielania tego rodzaju pomocy jest fakt, że produkcja energii ze źródeł odnawialnych jest droższa niż produkcja energii ze źródeł konwencjonalnych. z drugiej jednak strony jest ona bardziej przyjazna dla środowiska. dlatego komisja europejska postanowiła przed państwami członkowskimi cel polegający na zwiększeniu wykorzystania odnawialnych źródeł energii. jednym z instrumentów przyczyniających się do zwiększenia produkcji energii odnawialnej jest pomoc publiczna. w artykule zaprezentowano uzasadnienie udzielenia pomocy publicznej w obszarze odnawialnych źródeł energii, wskazano jakie są warunki jej udzielania. pokazano także przykład polskiego programu pomocowego dotyczącego wsparcia produkcji biopaliw. translated by bartosz bartniczak  introduction state aid is a term introduced by the european commission and regulated in art. 107 paragraph 1 tfeu (tfeu). to the measure could be regarded as state aid under this article must be met including four conditions: intervention by the state or through state resources, the intervention gives the recipient an advantage on a selective basis, competition has been or may be distorted and the intervention is likely to affect trade between member states. the article presents the concept of state aid. indicated conditions that justify the granting of state aid in support of renewable energy sources. an analysis of legal solutions allowing state aid to renewable energy sources was made. in the last part shows an example of polish aid program under which state aid is granted to support the production of biofuels. the research methodology and the course of the research process research in article were carried out in several stages. in the first stage defined the concept of state aid. then sought to answer the question why it is reasonable to give the state aid in the area of renewable energy sources. in the next stage of the analysis of the legislation authorizing the granting of aid for the promotion of renewable energy sources. in the last stage analyzed the aid program by which support is provided in the area of renewable energy sources. state aid as a tool encouraging production of energy… 21 the concept of state aid contemporary economic reality is so complicated that it is difficult to imagine the functioning of the market mechanism in isolation from the state. one of the instruments through which the state can intervene in a market economy is state aid. it shall be considered part of the economic state intervention, which aims to stimulate positive economic developments or prevention of negative processes (modzelewska, pełka 2001, 33). this aid can be considered as a tool in the hands of public authorities, which is used to achieve different objectives and tasks of social and economic policy. governments grant state aid for many reasons: economic, social, political and strategic (hancher, ottervanger, slot 2012, 30). despite the widespread occurrence the phenomenon of state aid there is no legal (normalized by law) the definition of that term. issues concerning the admissibility of state aid are governed by art. 107– –109 treaty of functioning european union (consolidated version of the treaty). article 107 paragraph. 1 indicates only that „save as otherwise provided in the treaties, any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between member states, be incompatible with the internal market”. analysis of the provisions of this article allows to conclude that it would be prohibited to provide aid if the conditions referred to therein are together fulfilled. for these circumstances include the transfer of state resources, obtaining economic benefits, the selective nature and occurrence of the effect on competition and trade. in article 107 paragraph. 2, we can read that compatible with the internal market: a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; b) aid to make good the damage caused by natural disasters or exceptional occurrences; c) aid granted to the economy of certain areas of the federal republic of germany affected by the division of germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division. while, art. 107 paragraph 3 indicates the types of aid that may be considered compatible with the internal market. these include: bartosz bartniczak22 a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the remote regions referred to in article 3491, in view of their structural, economic and social situation; b) aid to promote the execution of an important project of common european interest or to remedy a serious disturbance in the economy of a member state; c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest; d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the union to an extent that is contrary to the common interest; e) such other categories of aid as may be specified by decision of the council on a proposal from the commission. support that objectives are renewable energy are awarded to the exclusion defined in art. 107 paragraph 3 point. c based on guidelines on state aid for environmental protection. justification for granting state aid in production energy from renewable sources environment protection is a desirable direction for granting state aid. complementarity of environmental policy and state aid policy is expressed in the competitive pressures that encourages entrepreneurs to use less polluting production technologies seek greener products (brodecki 2004, 124). and just such a practical example is to support the production of renewable energy. in the guidelines on state aid for environmental protection can read that the purpose of providing support in the area of renewable energy sources is to create a system of incentives which will increase the share of production of this type of energy. increasing the use of renewable energy sources is a priority for the european union both energetic, economic and environmental. increasing the share of energy produced from renewable sources will help to reduce greenhouse gas emissions. that is why the european union has set a target of 1 for remote regions include french guiana, guadeloupe, martinique, réunion, saint-barthélemy, saint-martin, the azores, madeira and the canary islands. state aid as a tool encouraging production of energy… 23 achieving a 20% share of renewable energy in total energy consumption by 2020, including a 10% share of biofuels in fuel consumption. greenhouse gas emissions or climate change caused by them are one of the types of externalities. this is due to the fact that entrepreneurs do not assume (do not include in their decisions) present and future costs of their emissions (ptak 2013, 276). according to n. stern greenhouse gas emissions is the greatest market failure “which world has ever seen” (stern 2011, 27). therefore, there is need to support the production of energy from renewable sources. one of the instruments by which this can be achieved is the state aid. the cost of energy production from renewable sources is higher than from traditional sources. therefore, state aid should encourage entrepreneurs to invest in the production of energy from renewable sources. the amount of support may not exceed the difference between the cost of production of electricity from renewable energy sources and the market price of electricity (pełka, stasiak 2002, 114). this causes considerable difficulties in competing in the market for renewable energy generators, and indeed often even impossible to enter the market and start-up of business. in recent years, however, there are new technologies thanks to them the production of renewable energy becomes cheaper and thus easier for renewable energy producers is to compete on the market. factor increasing the attractiveness of the production of renewable energy is also a need to internalize all external costs of pollution by the manufacturers of energy from traditional sources. providing state aid in the energy sector should also help achieve three strategic objectives of ensuring security of energy supply, ensuring competition in the energy market and to meet the increasingly sophisticated requirements of environmental protection (zajdler 2002, 26). on the other hand, we must remember about the general prohibition of granting state aid. the support may indeed favor of the beneficiaries in relation to these entities, which do not receive such support. therefore, in the european union operates a general ban on the granting state aid beyond specific exemptions. one of these exceptions is to support the achievement of environmental objectives, and within them of renewable energy sources. one should however note that often the promotion of renewable energy can have a potentially negative impact on the environment. one such example are hydropower plants when they are not properly designed can cause harm to fish. this is because of the need of water damming, which implies that the fish f lowing down injure or even die. a threat to the environment is the also construction of wind turbines. the collision with them killed many birds. however, these disadvantages of obbartosz bartniczak24 taining energy from renewable sources are not able to reduce the positive impact of energy production from renewable energy sources on the environment. economic reasons for granting aid in the field of environmental protection for economic reasons granting state aid in the field of renewable energy sources can include above all the presence of market failures, the presence of the multiplier effect, encouraging the conduct of investment and the need to restore the production environment (bartniczak 2007, 17). the most important reasons for the granting of state aid is the existence of market failures [11, p. 11] which could include the presence of external costs and public goods [13, p. 163]. the rationale for granting state aid is therefore no possibility of full internalisation of external costs [15, p. 146], and hence the full implementation of the “polluter pays” principle. according to it, in all these cases, where it’s possible to establish clear accountability for the use and pollution of the natural environment of this activity costs should be borne by the offender. there the view that aid must not violate this rule, if the polluter is entirely responsible for their emissions, while state aid supports the adaptation to the polluter pays principle or allow tightening of the protection requirements. the second market failure actuated in the context of state aid for purposes related to the protection of the environment is the existence of public goods or such goods, which for natural reasons (physical characteristics) can serve the local community or society as a whole. these goods are consumed egalitarian by all members of a given community. the fact that the use of a pure public good by one person may not restrict access to the good of another person, this applies to both the quantity and quality of the goods (owsiak 2000, 26). the need to access each of citizens to public goods, in this case environmental resources gives rise to a deeper state intervention in environmental protection. if it be said that the quality of the environment is a public good that steps taken by the state in order to control pollution, and environmental policy itself must be seen as efforts to preserve intact the common good (winiarski 2000, 376). an important reason is the occurrence of a specific multiplier effect. supporting entrepreneurs is dependent on investing his own funds in the project (fiedor 1999, 219). state aid causes consequently, an increase in the funds allocated for the investment. it can be assumed that without incentives in the form of state aid the project would not be realized. state aid as a tool encouraging production of energy… 25 providing aid for the purposes of environmental protection may also result from the need to encourage entrepreneurs to carry out the investment, if the entrepreneur is not interested in that because of not obtained through the investment of additional economic benefits, and in a situation where due to the additional outlays can be particularly important effects environmental protection (borkowska 1985, 156). admissibility of granting state aid to renewable energy sources in community guidelines for environmental protection (community guidelines 2008) we can read that on the promotion of renewable energy sources can be allocated investment and operating. the intensity of investment aid for small companies may not exceed 80% of eligible costs for medium 70% and 60% for large. there is also the possibility of obtaining support at the level of 100% of eligible costs. provided, however, provide support for the bidding process with the principles of competition and based on clear and transparent criteria. in order to qualify as eligible costs is to reduce them to the extra investment costs borne by the beneficiary compared to a conventional power plant or a conventional heating system with the same capacity in terms of the effective production of energy. operating aid for the production of energy from renewable sources can be justified in order to cover the difference between the cost of producing energy from renewable sources and the market price of the type of energy. these provisions relate to the production of energy from renewable sources, both to its subsequent sale on the market, as well as for the company’s own. operating aid may be granted in three different ways. in the first situation, you may grant operating aid to compensate for the difference between the cost of producing energy from renewable sources, including depreciation of extra investments for environmental protection, and the market price of such energy. in additional conditions indicate that operating aid may be granted to full-time depreciation and additional energy produced by the plant is not eligible for support. where aid is granted on the above principles to determine the production costs of operating aid must be reduced by investment aid which the firm received. specific solutions are used in relation to the biomass. biomass production is closely connected with the relatively low investment costs but high operating costs. because of that you can receive operating aid exceeding the amount of investment where a member state will be able to indicate that the total costs incurred bartosz bartniczak26 by the company after plant depreciation are still higher than the market price of energy. the second option allows the granting of aid to support renewable energy sources by using market mechanisms such as green certificates or tenders. these mechanisms allow all producers of renewable energy to benefit indirectly from guaranteed demand for energy produced by them at a price higher than the market price of conventional energy. price of green certificates is not fixed in advance but depends on supply and demand. in a situation where these mechanisms are state aid can be considered compatible with the common market if a member state demonstrates that the aid is critical to ensure the viability of renewable energy sources and, ultimately, will not lead to overcompensation and will not discourage energy producers renewable sources by becoming more competitive. in the third option, aid may be granted in the case of gradual reduction in the first year to 100% of additional costs falling to 0 until the end of the fifth year. in a situation where there will be gradually reduced its intensity must not exceed 50% of the additional costs. the rationale for the provision of such support may be the lack of mandatory community standards relating to the share of energy from renewable sources for individual companies. in 2012, the european commission conducted a consultation on the need to amend the admissibility of granting state aid in the field of environmental protection2. as a result of these consultations will gather information that will be used by the european commission in order to better target aid to the achievement of the objectives of environmental protection. in the case of renewable energy sources were consulted, for example, issues related to the effectiveness of the instruments of what type of aid is often used (investment aid or operating) and which of the options for operating aid is the most common. answers to the question about the type of the granted aid answered 11 member states. summary used by them types of state aid, includes tab. 1 table 1. types of support of renewable energy sources in selected member states country investment aid operating aid austria + + czech republic + + 2 information on the consultation can be found at http://ec.europa.eu/competition/ consultations/2012_state_aid_environment/index_pl.html. state aid as a tool encouraging production of energy… 27 country investment aid operating aid estonia + ireland + latwia + lithuania + norway + poland + + romania + united kingdom + + s o u r c e : own study based on: state aid modernization, http://ec.europa.eu/competition/state_ aid/modernisation/index_en.html. the answers showed that the four countries provided both investment and operating aid and 3 only support in the form of investment or operating. for example the uk introduced program “renewable obligation certificates (rocs) for renewable”. this program used market-based instrument where targets for production volumes are fixed in advance but where the price is set by market participants (state aid n 414/2008). in austria we can find the scheme which which used feed-in tariffs to support renewable electricity production. support is granted where the price rather than the quantity of renewable energy is set (state aid n 47/2008). in austria we can also find a program by which exempted energy intensive businesses from contributing to buying green electricity (state aid c 24/2009). germany provides tax reductions for biofuels (state aid n 553/2008). a similar program operated in poland (state aid n 580/2005). examples of polish schemes in the case of polish aid program works associated with biofuels began in november 2005 and eventually the program was approved by the european commission in march 8 2007 (state aid n 580/2005). the scheme reduces excise duty for biofuels produced from biomass. the aim of the program is to encourage the use of biofuels made from biomass. this is to contribute to increase the use of environmentally friendly fuels to reduce greenhouse gas emissions. exemption from excise duty on biofuels is granted to all companies meeting the following requirements: bartosz bartniczak28 1. the acquired biofuels must be used as fuels; 2. if the firm is producing blended fuels or biofuels, it must provide evidence of the production process of such fuels and on the content of biofuels in the final products; 3. if the firm is trading blended fuels or biofuels, it must provide evidence which allows to determine the amount of biofuels to which the rebates apply. the program was implemented in the period from 1 january 2007 to 30 april 2011 and its budget was set at 4 698 million pln. the excise tax rebates for petrol and diesel blended with biofuels and for biofuels used as pure fuels are as follows are show in w tab. 2. table 2. the excise tax rebates for petrol and diesel blended with biofuels and for biofuels used as pure fuels are as follows fuels normal rate rabate biofuels blends with: in pln per 1000 litre petrol 1565 1500 diesel (<0,005% sulphur content) 1180 1000low sulphur (>0,001%≤0,005%) 1099 zero sulphur (≤0,001%) 1048 biofuels used as pure fuels 1882 1680 s o u r c e s : state aid n 580/2005 – poland excise duty reduction for biofuels. existence of state aid within the meaning of art. 107. 1 tfeu stems from the fact that the reduction of excise duty is granted through state resources. the aim of the measure is to compensate the producers of biofuels parts their costs of production. by reducing the tax liability imposed on products measure favors certain undertakings or the production of certain goods. so the prices of biofuels can be reduced to a level where they can compete with fossil fuels. because biofuels are used as a substitute for fossil fuels, given the advantage may distort competition in the internal market of the european union. because trade fuels is carried out on an international scale, the measure could also affect trade between member states and therefore constitutes state aid within the meaning of art. 107 paragraph. 1 of the tfue. state aid as a tool encouraging production of energy… 29 article 107. 3 c tfeu (consolidated version of the treaty) provides for an exemption from the general rule of incompatibility in the case of aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. the purpose of proposed measure is to increase the use of environmentally friendly fuels to reduce greenhouse gas emissions. the development of renewable energy, especially biofuels3, is promoted since 1985 by a number of community instruments4 and since 2003 by the european parliament and of the council 2003/30/ec on the promotion of the use of biofuels or other renewable fuels (directive 2003). article 3 of the directive requires member states to ensure that on their markets found a minimum proportion of biofuels. it sets an indicative reference value of 5.75% which should be reached before 31 december 2010. the objectives of this program are in line with eu policy in this area. the commission has to assess the notified measure in terms of the community guidelines on state aid for environmental protection (community guidelines). according to these guidelines can be allowed operating aid for renewable energy production. the commission is of the view that such aid qualifies for special treatment because of the difficulties that these energy sources met sometimes trying to effectively compete with conventional sources. accepted is the state to cover the difference between the cost of producing energy from renewable sources and the market price of such energy. the same applies to biofuels used as additives to mixed products because the proposed exemption from taxes are lower than the applicable rate of excise duty. assured that such a state of affairs is to maintain throughout the program period, because poland has confirmed that changes in the prices of fossil fuels and biofuels production costs will be monitored on a quarterly basis and, if necessary, the level of aid will be adjusted. poland also committed to monitoring changes in the prices of biofuels imported from third countries. 3 biofuels are included in the definition of renewable energy sources of directive 2001/77/ec of the european parliament and of the council of 27 september 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market, oj l 283 of 27.10.2001. 4 among others, the white paper of 1997 on renewable energies (com (1997) 599 final of 26.11.1997), the commission green paper on energy supply safety in the european union (com (2000) 769 of 29.11.2000), the commission’s communication on alternative fuels for road transport and on a set of measures to promote the use of biofuels (com(2001) 547). bartosz bartniczak30  conclusions the analysis showed that the state aid can be a useful instrument to support energy production from renewable sources. without the state aid will not be possible to achieve anticipated levels of production of this type of energy. european union member states support the production of energy using both investment and operational aid. issues relating to the granting of state aid to encourage the production of renewable energy are so important that the european commission has sought the views of individual member countries on the possible directions of support. state aid is an instrument to support the production of energy from renewable sources. it should be noted that technological advances for the production of this type of energy is very large. new renewable energy technologies are getting cheaper which means that you should constantly monitor the effectiveness of aid granted. the support is in fact an incentive to produce energy. however, it should be granted for a defined period of time. it should be part of the incentive, and after a certain period of time, it should be withdrawn. this solution was used in the case of the analyzed polish aid program. state aid was to fulfill the role of incentives, and then abandoned her for the award.  references brodecki z. (2004), konkurencja, lexisnexis, warszawa, 124. community guidelines on state aid in environment protection, oj c 82/2008. consolidated version of the treaty on the functioning of the european union. directive 2003/30/ec of the european parliament and of the council of 8 may 2003 on the promotion of the use of biofuels or other renewable fuels for transport. hancher l., ottervanger t., slot p.j. (2012), eu state aids, sweet & maxwell, 30. modzelewska-wąchal e., pełka p., stasiak m. (2001), pomoc publiczna dla przedsiębiorców i jej nadzorowanie, lexisnexis, warszawa, 33–34. pełka p., stasiak m. (2002), pomoc publiczna dla przedsiębiorców w unii europejskiej, difin, warszawa, 114–115. state aid c 24/2009 (ex-n 446/2008) – austria the austrian green electricity act – aid to the producers of green electricity and aid to large electricity consumers. state aid n 414/2008 – uk renewables obligation – introduction of a banding mechanism. state aid n 47/2008 – austria modification of feed-in tariffs for electricity from renewable sources under the austrian green electricity act. state aid as a tool encouraging production of energy… 31 state aid n 553/2008 – germany amendment to aid scheme for tax rebates for biofuels (de). state aid n 580/2005 – poland excise duty reduction for biofuels. zajdler r. (2002), wsparcie unii europejskiej dla projektów energetycznych w polsce, prawo unii europejskiej, 6, 26. date of submission: june 25, 2020; date of acceptance: august 18, 2020. * contact information: anjubala_attri@yahoo.in, i.k.gujral punjab technical university, kapurthala144603, punjab, india, phone: +91-946-557-4763; orcid id: https://orcid.org/0000-0002-5808-8469. ** contact information: kapilfutures@gmail.com, i.k. gujral punjab technical university, kapurthala-144603, punjab, india, phone: +91-947-809-8074; orcid id: https:// orcid.org/0000-0003-3817-1772. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 bala, a., & gupta, k. (2020). examining the long memory in stock returns and liquidity in india. copernican journal of finance & accounting, 9(3), 25–43. http://dx.doi.org/10.12775/ cjfa.2020.010 anju bala* i.k. gujral punjab technical university kapil gupta** i.k. gujral punjab technical university examining the long memory in stock returns and liquidity in india keywords: emerging market, long memory, persistence and market efficiency. jel classifications: c1, c5, g1, g14. abstract: the present study examines the long memory in stock liquidity and returns in indian equity market by using data for broad indices from january, 1997 to december, 2019 by applying the hurst exponent (1951) rescaled range analysis. it is observed that time varying degree of persistence nature in individual and full series analysis of returns. moreover, liquidity series exhibit long memory process in nifty-100, nifty-200 and nifty midcap-50. findings are consistent with sadique and silvapulle (2001), henry (2002), cavalcante (2002) and baum, barkoulas and caglayan (1999). anju bala, kapil gupta26  introduction the presence of long memory supports the notion of market inefficiency in securities market (onour, 2010). market inefficiency refers to the fact that it does not immediately absorb the new information f low but it responds gradually and takes a substantial time for relevant information to disseminate across the market (fama, 1970, 1991) and (peters, 1994). there is trend to either understate or overstate the effect of such information in stock prices (barkoulas & baum, 1996). if returns series demonstrate the presence of persistence behavior, previous returns can be utilized to estimate the upcoming returns (hiremath & kamaiah, 2010). therefore, presence of long memory property provides support for framing portfolio strategy, which may also help to generate abnormal profits from the financial investment (cevik & emec, 2013). the investigation on persistence behavior in asset prices, liquidity is essential for the practitioners, since, its presence can have an impact on investment decision, portfolio selection and trading strategies (balcilar, ozdemir & cakan, 2015; badhani, 2008). the seminal research on long memory in capital market was initiated by hurst (1951). furthermore, greene and fietlitz (1977) and aydogan and booth (1988) demonstrated that us stock returns exhibit long memory. however, lo (1991) did not find significant long memory in us stock returns. nonetheless, mandelbrot (1971) confronted that the arbitrage may not be negotiable when long memory is exhibited. thereafter, lo (1991) observed that the dynamic behavior in financial markets may be a considerable reason for long memory dynamics. furthermore, hiremath and kamaiah (2010) and badhani (2012) found that high volatility, anomalous behavior and market trend are the characteristics of developing economies, which affirms that due to presence of market imperfections, long memory behavior might arise in the developing markets. moreover, badhani (2006; 2008) explored the persistence behavior in india and found that stock returns do not report the presence of long memory, whereas absolute returns and squared returns (proxy of volatility) exhibit persistence behavior. on the other hand, subsample covering the duration from march, 2001 to december, 2007 affirms that volatility does not exhibit persistence behavior. examining the long memory in stock returns and liquidity in india 27 in addition, goudarzi (2010) observed persistence behavior in bse-500 returns, which suggests that bse 500 returns and volatility are more significant with leverage. moreover, ma, li, zou and wu (2006) found significant serial correlation in returns of chinese stock market. likewise, verma (2008) affirms that only three companies out of sixty entail the persistence behavior in returns. kilic (2004) reported significant serial correlation in the volatility process in turkey. furthermore souza, tabak and cajueiro (2008) observed the moderate long memory in european monetary system using the hurst exponent, which suggests that being inside the ems increases predictability. in addition, bala and gupta (2018) reported considerable long-term persistence in sensex and nifty returns series. however, volatility series does not contain any persistence behavior but exhibits clustering. similarly, nath and reddy (2002) examined the persistence behavior in rupee-dollar exchange rates and found that there are chances of random walk in three month, while for other time period, it may have mean reverting or persistence tendency. furthermore, mahalingam and selvam (2014) observed high degree of persistence behavior in indian stock market. furthermore, bhattacharya and bhattacharya (2012) found persistence behavior in absolute returns along with volatility in international markets. however, evidence did not support the taylor effect. moreover, chen and diaz (2013) observed significant persistence behavior in green exchange traded funds. whereas, non-green exchange traded funds did not advocate serial correlation in volatility. henry (2002) tested the long range dependence in taiwanese, german and south korean stock markets and found that persistence behavior is real and not occurred due to shift enhancement and structural breaks of africa (mena) vicinity and middle east in variance. on the contrary, jayasuriya (2009) advocate that structural changes and persistence behavior in volatility does not show any significant relationship. similarly, chung, lin and wu (2000) found that asia-pacific markets hold spurious serial correlation due to shift enhancement in variance series. however, cevik and emec (2013) observed persistence behavior in returns series of turkish stock market. moreover, turkyilmaz and balibey (2014) examined pakistan security exchange and found that it is inefficient in weak form and contain serial correlation structure in volatility series also. cavalcante and assaf (2004) found significant serial correlation in volatility and return series in brazilian financial markets. likewise, danilenko (2009) found that industrial sector report siganju bala, kapil gupta28 nificant long memory whereas, healthcare and utilities sector entail the weak long range dependence. in the indian context, liquidity patterns were studied by krishnan and mishra (2013) and kumar and misra (2018) for the equity indices and they found that individual stock liquidity co-moves to a high degree with market liquidity and industry liquidity. bhattacharya, sengupta, bhattacharya and roychoudhury (2016) found significant degrees of positive association between liquidity and return and noted the order of importance of selected liquidity dimensions in explaining stock market returns. cajueiro and tabak (2008) observed strong long memory in asian markets than in latin america. there is considerable support for long memory in stochastic volatility in stock returns. bhattacharya and bhattacharya (2012; 2013) and hull and mc groarty (2014) found strong evidence of long memory persistence in volatility over the time. bariviera (2011) observed that long memory parameter is positively correlated with market capitalization but negatively with an average daily turnover. in nutshell, a plethora of literature is available in emerging as well as developed markets, however, there is a dearth of empirical research on examining the presence of long memory in india, which is one of the most liquid capital market of the world (soofi, wang & zhang, 2006), (krishnan & mishra, 2013) and (goudarzi & ramanarayanan, 2011). the study also tries to pursuit to check whether liquidity and returns both have long memory effect. there is a paucity of literature to study the persistence behavior of indian stock market. therefore, this paper is an attempt to plug the research gap. paper is further organized in four sections. second section describes the database and research methodology. the results and analysis of the study are discussed in the third section. discussion and implication of the study presented in fourth section and the conclusion of the study has been presented in the five sections. research methodology and the courses of the research process this study makes an attempt to study the presence of long-memory in returns and liquidity of nifty-50, nifty-100, nifty-200, nifty-500, nifty next -50, nifty examining the long memory in stock returns and liquidity in india 29 small cap 50, nifty large midcap-250, nifty full midcap-100, nifty mid cap150, and nifty mid cap -50 indices using rescale range analysis (hurst exponent). the present study uses daily data from the national stock exchange of india (nse) from january, 1997 to december, 2019 as presented in table 1. the study has also calculated long memory components for each year and full period from january, 1997 to december, 2019 to check whether the presence of long memory is due to structural breaks, regime shift, market friction, political changes and market microstructure etc. that have taken place during the sample period in india. table 1. description of sample size (returns and liquidity) index no. of observations (n)(returns) sample period (returns) no. of observations (n) (liquidity) sample period (liquidity) nifty-50 5682 1-1-1997 to 31-12-2019 5682 1-1-1997 to 31-12-2019 nifty-100 4323 1-1-2003 to 31-12-2019 3636 20-9-2005 to 31-12-2019 nifty-200 3972 1-1-2004 to 31-12-2019 2090 20-7-2011 to 31-12-2019 nifty-500 5219 8-6-1999 to 31-12-2019 5219 8-6-1999 to 31-12-2019 nifty next -50 5721 1-1-1997 to 31-12-2019 5721 1-1-1997 to 31-122019 nifty smallcap-50 3715 1-1-2005 to 31-12-2019 923 1-4-2016 to 31-12-2019 nifty large midcap-250 3655 1-4-2005 to 31-12-2019 681 28-3-2017 to 31-12-2019 nifty full midcap-100 3547 1-4-2005 to 20-2-2019 716 4-4-2016 to 20-2-2019 nifty midcap-150 3651 1-4-2005 to 31-12-2019 924 1-4-2016 to 31-12-2019 nifty midcap-50 3968 1-1-2004 to 31-12-2019 3968 1-1-2004 to 31-12-2019 s o u r c e s : compiled by author on the basis of data downloaded from official website of nse. methodology daily returns are computed as the difference in the natural logarithm of the closing index value for the two consecutive trading days. it can be presented is equation 1: rt = ln(pt/ pt−1) or rt =ln(pt) –ln(pt−1) (1) anju bala, kapil gupta30 where rt is natural logarithmic daily return at time t. pt−1 and pt are daily prices of stock index at two successive days t-1 and t respectively. hurst exponent to examine long memory, ‘hurst’ exponent is computed. the origin of long memory test can be attributed to hurst exponent ‘h’, which was developed in 1951 by hurst to measure water related process. the hurst exponent (or the self-similarity parameter) is a dimensionless parameter and diverse methodologies exist to estimate it. the concept of hurst exponent finds its applications in many research fields including the field of financial studies due to the path-breaking works of mandelbrot, (1963; 1997) and peters (1994; 1996). the hurst exponent lies in the range 0≤h≤1. if the hurst exponent is 0.5 then the process is said to follow a random walk. when the hurst exponent is more than 0.5, it suggests positive long-range autocorrelation or persistence in the series. on the other hand, when the hurst exponent is smaller than 0.5, it suggests the presence of negative autocorrelation or means reversion in the series (kumar, 2004), (chen & huang, 2014), (gayathri, murugesan & gayathri, 2012) and (kumar, 2014). table 2. hurst exponent coefficient the values of hurst exponent range between 0 and 1: 0 < h < 0.5 anti-persistence h = 0.5 random walk 0.5 < h < 1 persistence s o u r c e s : presented by author to show the range of hurst exponent (kumar, 2004). hurst exponent and rescaled r ange (r/s) analysis qian and rasheed (2004) and cajueiro and tabak (2005) suggested that the hurst exponent can be calculated by rescaled range analysis (r/s analysis). for a time series, x = x1, x2, … xn, r/s analysis method is as follows: examining the long memory in stock returns and liquidity in india 31 n (1) calculate mean value m.= 1/n ∑ xi i=1 (2) calculate mean adjusted series y: yt = xt – m, t = 1, 2, …, n t (3) calculate cumulative deviate series z: ∑yi , t = 1, 2, …, n i=1 (4) calculate range series r: rt=max(z1, z2, …, zt)– min(z1, z2, …, zt) t = 1, 2, .., n t 2 (5) calculate standard deviation series st= √1/n∑(xi-u) t=1,2,……,n i=1 here, u is the mean value from x1 to xt. (6) calculation of rescaled range series(r/s): (r/s)t = rt/st where, t = 1, 2, …, n note: (r/s) it is averaged over the regions [x1, xt], [xt+1, x2t] until [x(m-1) t+1, xmt] where m=f loor(n/t). in practice, to use all data for calculation, a value of t is chosen that is divisible by n. results and analysis before discussing the long memory estimation results through hurst exponent procedure proposed in third section and comparing the efficiency in reducing the portfolio risk, it is important to discuss the series properties of under examination. results in table 3 indicate the information relating to the summary of full sample period for returns and liquidity in nifty small-cap 50, nifty largemidcap-250, nifty midcap-150, nifty-50, nifty-100, nifty-200, nifty-500, nifty next -50, nifty full midcap-100, and nifty mid cap -50 (barkoulas, baum & travlos, 2000). table 3 provides that returns series of all indices reports significantly persistent behavior. the estimated coefficient of h exponent suggests that all indices exhibit long memory in returns series, which implies that past returns could forecast the upcoming returns (chow, denning, ferris & noronha, 1995) and (baillie, 1996). these findings would be helpful to understand the behavior of the market for an investor, policymakers and portfolio managers to decide where they would get abnormal profits by using long memory insights data henry (2002), lillo and farmer (2004), garvey and gallagher (2009), cavalcante and assaf (2004). however, finding in liquidity series shows that only nifty midcap-50 exhibits long memory component (ozun & cifter, 2007; barkoulas, baum & travlos, 2000). anju bala, kapil gupta32 t ab le 3 . l on g m em or y in n se in di ce s du ri ng f ul l s am pl e pe ri od ( r et ur ns a nd l iq ui di ty ) in de x n if ty 5 0 n if ty 1 00 n if ty 2 00 n if ty 5 00 n if ty n ex t 5 0 n if ty s m al l ca p 50 n if ty l ar ge m id c ap -2 50 n if ty f ul l m id ca p -1 00 n if ty m id ca p 1 50 n if ty m id ca p 5 0 h ur st e xp on en t co ef fi ci en t (r et ur ns ) 0. 56 10 0. 57 41 0. 57 05 0. 58 26 0. 58 75 0. 64 02 0. 60 59 0. 56 37 0. 60 45 0. 58 06 h ur st e xp on en t co ef fi ci en t (l iq ui di ty ) 0. 48 82 0. 50 02 0. 50 61 0. 46 57 0. 47 43 0. 48 15 0. 43 47 0. 46 80 0. 42 32 0. 58 12 s o u r c e s : c al cu la te d by a ut ho r us in g se co nd ar y da ta d ow nl oa de d fr om o ff ic ia l w eb si te o f n se . examining the long memory in stock returns and liquidity in india 33 t ab le 4 . y ea r w is e es ti m at io n of l on g m em or y in a ll in di ce s (r et ur ns s er ie s) ti m e pe ri od n if ty 5 0 n if ty 1 00 n if ty 2 00 n if ty 5 00 n if ty n ex t 5 0 n if ty s m al l ca p 50 n if ty l ar ge m id c ap -2 50 n if ty f ul l m id ca p -1 00 n if ty m id c ap 15 0 n if ty m id ca p 50 19 97 0. 55 27 n a n a n a 0. 57 66 n a n a n a n a n a 19 98 0. 56 07 n a n a n a 0. 60 23 n a n a n a n a n a 19 99 0. 49 06 n a n a 0. 58 04 0. 52 63 n a n a n a n a n a 20 00 0. 51 03 n a n a 0. 65 32 0. 66 72 n a n a n a n a n a 20 01 0. 60 46 n a n a 0. 62 95 0. 64 52 n a n a n a n a n a 20 02 0. 59 15 n a n a 0. 53 85 0. 63 58 n a n a n a n a n a 20 03 0. 65 21 0. 65 01 n a 0. 64 07 0. 61 56 n a n a n a n a n a 20 04 0. 58 19 0. 57 48 0. 56 70 0. 56 97 0. 53 91 n a n a n a n a 0. 53 30 20 05 0. 58 15 0. 58 63 0. 57 90 0. 57 53 0. 54 44 0. 63 05 0. 62 71 0. 63 01 0. 62 59 0. 52 38 20 06 0. 67 41 0. 68 13 0. 69 55 0. 70 06 0. 67 89 0. 70 85 0. 71 39 0. 70 62 0. 71 02 0. 68 71 20 07 0. 57 75 0. 56 29 0. 57 40 0. 57 77 0. 50 91 0. 57 98 0. 59 57 0. 39 56 0. 61 05 0. 58 58 20 08 0. 55 29 0. 54 93 0. 55 78 0. 56 08 0. 52 78 0. 63 71 0. 63 29 0. 56 81 0. 58 58 0. 56 18 20 09 0. 61 18 0. 62 89 0. 64 87 0. 65 54 0. 68 93 0. 72 44 0. 67 75 0. 68 28 0. 68 86 0. 68 32 20 10 0. 58 44 0. 59 00 0. 61 99 0. 62 35 0. 58 29 0. 63 96 0. 61 63 0. 59 98 0. 60 17 0. 56 35 20 11 0. 47 28 0. 45 34 0. 49 28 0. 50 22 0. 55 05 0. 58 75 0. 57 32 0. 55 07 0. 57 23 0. 53 86 20 12 0. 61 82 0. 62 33 0. 62 65 0. 62 61 0. 64 68 0. 63 20 0. 62 29 0. 49 28 0. 63 93 0. 63 47 20 13 0. 49 76 0. 51 83 0. 53 59 0. 44 51 0. 60 10 0. 70 02 0. 66 96 0. 62 93 0. 64 14 0. 60 24 anju bala, kapil gupta34 ti m e pe ri od n if ty 5 0 n if ty 1 00 n if ty 2 00 n if ty 5 00 n if ty n ex t 5 0 n if ty s m al l ca p 50 n if ty l ar ge m id c ap -2 50 n if ty f ul l m id ca p -1 00 n if ty m id c ap 15 0 n if ty m id ca p 50 20 14 0. 53 83 0. 55 94 0. 58 00 0. 59 51 0. 59 23 0. 68 01 0. 65 95 0. 62 69 0. 62 41 0. 65 63 20 15 0. 43 28 0. 42 32 0. 42 48 0. 42 57 0. 43 60 0. 47 49 0. 43 35 0. 40 82 0. 40 53 0. 43 24 20 16 0. 63 11 0. 64 13 0. 64 22 0. 64 50 0. 63 50 0. 67 67 0. 63 99 0. 63 82 0. 65 19 0. 63 52 20 17 0. 47 33 0. 45 11 0. 44 57 0. 45 82 0. 43 12 0. 57 65 0. 54 79 0. 52 41 0. 52 59 0. 50 60 20 18 0. 50 76 0. 63 43 0. 50 56 0. 61 56 0. 56 62 0. 59 55 0. 50 67 0. 50 54 0. 57 67 0. 51 20 20 19 0. 60 14 0. 63 26 0. 63 26 0. 61 44 0. 71 31 0. 76 07 0. 57 22 0. 49 77 0. 60 85 0. 64 41 s o u r c e s : c al cu la te d by a ut ho r us in g se co nd ar y da ta d ow nl oa de d fr om o ff ic ia l w eb si te o f n se . t ab le 4 . y ea r w is e… examining the long memory in stock returns and liquidity in india 35 table 4 presents estimated long memory during year wise analysis of nifty-50, nifty-100, nifty200, nifty-500, nifty next -50, nifty small cap 50, nifty large mid cap-250, nifty full mid cap-100, nifty mid cap 150 and nifty mid cap 50 using rescaled range statistics. the estimated h coefficient suggests that from 1997 to 2019 almost all indices in each year show significant persistence behavior with the exception of nifty full mid cap-100 in year 2007, nifty 50, nifty-100, nifty-200, and nifty-500 in year 2011, nifty-50, nifty-200, nifty-500, nifty next-50 and nifty mid cap -50 in year 2017, nifty-50, nifty-500, nifty large mid cap-250, and nifty full mid cap-100 in year 2018 and nifty full mid cap-100 in year 2019. however, 2015 was the year when all indices exhibit anti-persistence behavior. it is pertinent to note that year 2014 observed significant political change from the congress lead government to the nda lead government, which brought significant changes in the political, regulatory and governance environment in india. moreover, on november 8, 2016 a major announcement was made by prime minister mr. narender modi regarding demonetization of rs. 1,000 and rs. 500 currency notes, which amounted to nearly 86% of the total currency in circulation. this announcement brought a revolution in the indian economy and there was major shift in the mode of transactions from cash to digital modes of transactions and change in the outlook of indian capital market for foreign investors1 (booth & tse, 1995), (cheung & lai, 1995) and (cont, 2005). table 5 presents the each year analysis of long memory of all indices in liquidity series. results indicate that nifty-50 showing significant long memory in the years 1998, 1999, 2001, 2009, 2010, 2011, 2014, 2016, 2017, 2018, and 2019. furthermore, nifty 100 displays persistence behavior in 2009, 2010, 2014, 2015, 2016, 2017, and 2018. nifty-200 shows long memory in 2011, 2014, and 2018. this indicates possibility of predictable component of past liquidity (huang & yang, 1999) and (hiremath & kamaiah, 2010). nifty-500 exhibits persistence behavior in 2001, 2009 and 2010and nifty next -50 advocate’s long memory in 1998, 1999, 2000, 2001, 2009, 2014, 2015, 2016, and 2017. moreover, nifty small cap 50, nifty full mid cap-100 and nifty mid cap 150 shows serial correlation behavior only in the year 2019. 1 “theriseofsmall-towninvestorsinindianequitymarket” (https://economictimes. indiatimes.com/markets/stocks/news/the-rise-of-small-town-investors-inindianequit y-markets/articleshow/71270423.cms?from=mdr). anju bala, kapil gupta36 t ab le 5 . y ea r w is e es ti m at es o f l on g m em or y in a ll in di ce s (l iq ui di ty s er ie s) (i nf er en ce s of c oe ff ic ie nt o f l iq ui di ty ) (c al cu la te d va lu e of h ur st e xp on en t) ti m e pe ri od n if ty 5 0 n if ty 1 00 n if ty 2 00 n if ty 5 00 n if ty n ex t 5 0 n if ty s m al l ca p 50 n if ty l ar ge m id ca p -2 50 n if ty f ul l m id ca p -1 00 n if ty m id ca p 15 0 n if ty m id ca p 50 19 97 0. 43 01 n a n a n a 0. 38 72 n a n a n a n a n a 19 98 0. 51 28 n a n a n a 0. 57 41 n a n a n a n a n a 19 99 0. 51 44 n a n a 0. 49 44 0. 52 11 n a n a n a n a n a 20 00 0. 42 11 n a n a 0. 44 35 0. 59 56 n a n a n a n a n a 20 01 0. 53 69 n a n a 0. 53 70 0. 53 06 n a n a n a n a n a 20 02 0. 34 56 n a n a 0. 41 96 0. 38 30 n a n a n a n a n a 20 03 0. 45 17 n a n a 0. 48 52 0. 44 05 n a n a n a n a n a 20 04 0. 44 05 n a n a 0. 43 72 0. 43 81 n a n a n a n a 0. 37 61 20 05 0. 46 76 0. 44 11 n a 0. 48 34 0. 41 77 n a n a n a n a 0. 33 49 20 06 0. 46 06 0. 47 79 n a 0. 47 48 0. 45 57 n a n a n a n a 0. 36 64 20 07 0. 52 30 0. 49 79 n a 0. 49 39 0. 47 08 n a n a n a n a 0. 36 21 20 08 0. 50 41 0. 49 21 n a 0. 49 39 0. 44 84 n a n a n a n a 0. 39 78 20 09 0. 51 95 0. 51 94 n a 0. 51 93 0. 51 96 n a n a n a n a 0. 45 43 20 10 0. 55 66 0. 55 76 n a 0. 53 73 0. 50 42 n a n a n a n a 0. 44 73 20 11 0. 51 11 0. 48 97 0. 53 84 0. 49 29 0. 48 85 n a n a n a n a 0. 33 37 20 12 0. 46 06 0. 45 25 0. 46 40 0. 44 83 0. 45 06 n a n a n a n a 0. 38 67 20 13 0. 50 23 0. 48 72 0. 50 20 0. 51 09 0. 46 53 n a n a n a n a 0. 42 23 examining the long memory in stock returns and liquidity in india 37 ti m e pe ri od n if ty 5 0 n if ty 1 00 n if ty 2 00 n if ty 5 00 n if ty n ex t 5 0 n if ty s m al l ca p 50 n if ty l ar ge m id ca p -2 50 n if ty f ul l m id ca p -1 00 n if ty m id ca p 15 0 n if ty m id ca p 50 20 14 0. 52 39 0. 51 95 0. 51 69 0. 50 99 0. 52 84 n a n a n a n a 0. 45 55 20 15 0. 47 41 0. 53 37 0. 49 85 0. 49 40 0. 52 40 n a n a n a n a 0. 41 25 20 16 0. 51 66 0. 51 74 0. 50 60 0. 51 35 0. 51 25 0. 43 83 n a 0. 35 40 0. 35 40 0. 36 00 20 17 0. 51 40 0. 52 52 0. 51 16 0. 49 43 0. 53 30 0. 47 63 0. 47 58 0. 46 02 0. 40 11 0. 40 12 20 18 0. 52 06 0. 52 03 0. 52 57 0. 49 10 0. 31 44 0. 37 52 0. 35 55 0. 47 82 0. 37 43 0. 28 72 20 19 0. 53 12 0. 49 21 0. 49 21 0. 49 99 0. 40 65 0. 63 63 0. 47 29 0. 59 67 0. 56 35 0. 48 84 s o u r c e s : c al cu la te d by a ut ho r us in g se co nd ar y da ta d ow nl oa de d fr om o ff ic ia l w eb si te o f n se . t ab le 5 . y ea r w is e… anju bala, kapil gupta38 furthermore, nifty large mid cap-250 and nifty mid cap 50 did not show the significant long memory, which may arise due to micro and macro factors i.e. changes in interest rates, inf lation or def lation and happenings in global markets (kang & yoon, 2007), (asian crisis, it bubbles, indo-pak political crisis and real estate bubbles) are counted as the significant ones (gurgul & wojtowicz, 2006), (christodoulou-volos & siokis, 2006), and (pandy, april14, 2018)2. discussion and implecation result of present study focuses on measurement of the portfolio management for retail investors and first time investors who are going to invest their money into the market, where they could consider the effect of all micro and macro factors on their investment strategy. moreover, findings would be beneficial for the academician, practitioners, policy makers, portfolio manager and investors, whose decision depend upon the market predictability, therefore, present study provide insights for better understanding and is useful for forecasting to take financial decision. findings are consistent with (hiremath & kamaiah, 2011), (sadique & silvapulle, 2001), (henry, 2002), (cavalcante & assaf, 2004; booth & tse, 1995; turkyilmaz & balibey, 2014).  conclusion the present study is an attempt to examine the presence of long memory in broad stock indices at national stock exchange of india. using daily log returns and liquidity of nifty-50, nifty-100, nifty-200, nifty-500, nifty next -50, nifty small cap 50, nifty large mid cap-250, nifty full mid cap-100, nifty mid cap-150 and nifty mid cap-50 index in india hurst exponent in rescaled range analysis has been estimated. the results of the study confirm presence of long memory in returns of all indices during full sample period. however, in case of liquidity series, it shows persistent nature in nifty mid cap 50 only. moreover, for year-wise analysis of long memory has been estimated for all indices. findings suggest significant long memory in returns series across all indices except 2 see source: https://www.financialexpress.com/market/three-key-economicfactors-which-affect-sensex-nif t y/1132894/ (pandy, april ,14, 2018, “three key economic factors which affect sensex, nifty” financial express). examining the long memory in stock returns and liquidity in india 39 for the years 2015 and 2017 whereas, in case of liquidity, all indices show antipersistence behavior. an important observation from the year-wise analysis is that nonetheless various regulatory, technological, structural changes have taken place in the indian 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(2008). long-range dependence in exchange rates: the case of the european monetary system. international journal of theoretical and applied finance, 11(2), 199–223. examining the long memory in stock returns and liquidity in india 43 turkyilmaz, s., & balibey, m. (2014). long memory behavior in the returns of pakistan stock market: arfima-figarch models. international journal of economics and financial issues, 4(2), 400–441. verma, a. (2008). long memory of the indian stock market. the iup journal of financial economics, 6(3), 74–83. date of submission: august 3, 2020; date of acceptance: october 4, 2020. * contact information: neffati.emira@gmail.com, institut supérieur de gestion, 2000, le bardo, university of tunis, tunisia, phone: +216-29006858; orcid id: https:// orcid.org/0000-0002-3764-8447. ** contact information: khiariwided@yahoo.fr, institut supérieur de gestion, 2000, le bardo, university of tunis, tunisia, phone: +216-98586639; orcid id: https://orcid. org/0000-0001-7248-2780. *** contact information: azhaar_lajmi@yahoo.fr, institut supérieur de gestion, 2000, le bardo, university of tunis, tunisia, phone: +216-53958536; orcid id: https://orcid. org/0000-0002-7841-8402. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 neffati, a., khiari, w., & lajmi, a. (2020). corporate governance and post-merger performance: evidence from us banks. copernican journal of finance & accounting, 9(3), 99–113. http://dx.doi. org/10.12775/cjfa.2020.014 amira neffati* gef-2a laboratory, university of tunis wided khiari** gef-2a laboratory, university of tunis azhaar lajmi*** gef-2a laboratory, university of tunis corporate governance and post-merger performance: evidence from us banks keywords: bank mergers, governance, bank performance, deficit ratio. j e l classification: g32, g34, g21. abstract: mergers operations has currently become one of the key strategies for many firms. it becomes a tool to increase firm value when firm has reached its peak performance. this critical decision expects business performance to improve. amira neffati, wided khiari, azhaar lajmi100 the main purpose of this study is to analyze the impact of various governance variables, like managerial ownership, the percentage of shares held by outside directors, the board size, the audit committee size and the percentage of stock options granted to managers, on post merger banks performance and to investigate how the firm size can inf luence bank performance following mergers operations. it also tends to test the existence of the phenomenon of empire building which is defined as a primary motivation for mergers operations. empirical analysis is based on a panel data model applied to a sample of 54 banks come from the list of u.s. bank mergers over a period of 6 years from 2009 to 2015. our results show that the increase in managerial ownership decreases the value of the deficit, therefore, improves the bank performance following mergers operations. the introduction of firm size shows that this variable is positively correlated with the value of the deficit that is used as a performance measure in this study. our results converge with previous studies that show an improvement in the performance following bank mergers.  introduction the shareholders who are potentially harmed by the development of the agency theory, have established a set of control mechanisms allowing leaders to discipline and limit the extent of their authority so they can manage the firm based on their goals. this set of mechanisms is included under the term of the theory of corporate governance and is known since the 90’s continuous development. according to shleifer and vishney (1997), this theory is the means by which the fund providers ensure a sufficient return on their investments. thus, corporate governance aims to define the powers that inf luences the decisions of leaders and govern their behavior. it is in this sense that jensen and meckling (1976) and more recently attari and banerjee (2000) showed that property managers can align their interests with those of shareholders. finally, and in order to maximize the firm value, jensen and murphy (1990) proposed to use the compensation related to the value of the firm to ensure the alignment of interests of managers with those of shareholders. in this context, the impact of governance variables on bank performance following mergers operations has been widely investigated in financial literature. we first address the relationship between managerial ownership and bank performance. in fact, the accelerated number of bank mergers in the world and the increasing importance given to the relationship between agency problems and possibilities of success of these operations, have attracted the attention of several researchers. their studies have been conducted to assess the relationship between managerial ownership and bank performance more precisely be corporate governance and post-merger performance… 101 tween the ownership of internal operations and the effect of takeover on the bank performance. the findings on this subject are many and vary according to the type of performance measures used, for instance, accounting or market measures, and it is still difficult to demonstrate an improvement in bank profitability following mergers operations. according to the several empirical studies, experts and researchers are all in agreement that mergers and acquisitions can only lead to a very modest improvements in the efficiency of firms. based on these studies, we note that mergers rarely lead to improve the firm performance. statistics show that only 15% to 20% of u.s. mergers can be qualified as successful. several researchers have studied the relationship between the outsiders, the board size and performance. these studies have shown a positive relationship between the director independence, the small size of the board and the effective control of the board (peasnell, pope & young, 1998). for their part, the study of brickley, coles and terry (1994) found significant high yields at the announcement of a takeover in case of a small sized board of directors that is dominated by outside directors. peasnell et al. (1998) showed that the relationship between managerial ownership and the number of outsiders in the board of directors is a relationship that takes the form of u. this nonlinear relationship can be explained by using a combination of assumptions alignment of interest and rooting. according to kartal, ibis and catikkas (2018), the audit committee is important in terms of performing efficiently and effectively, protecting assets, supervisiong the preparation of the reliable financial reporting of banks, and so can affect positively their performance. a big enough and active audit committee can positively inf luence the performance and increase the probability of neutralization of any attempt at the management by managers and reduce probability of fraud. in this sens, agency theory suggests that well-governed firms (by board of directors, audit committee) perform relatively better than their poorly-governed counterparts (zhou, ansah & maggina, 2018). compensation plans are intended to align the interests of managers with those of shareholders. benston (1985) in their studies have shown that the change in the level of compensation is positively related to the changes in stock prices. despite the multitude of research that focused on the relationship between compensation and managerial performance, only few of them have tried to study this relationship in the context of a takeover transaction, especially mergers. the aim of this paper is twofold. the first object is to study the impact of corporate governance characteristics, like managerial ownership, the percentamira neffati, wided khiari, azhaar lajmi102 age of shares held by outside directors, the board size, the audit committee size and the percentage of stock options granted to managers, on performance due to bank mergers. the second one is to analyze the relevance of these variables and how they can increase the firm’s value. the rest of the paper is organized as follows. the first part provides an overview of mergers operations in the u.s. banking industry in the post-2000 period. it also includes a literature review on bank mergers. the second part discusses sample selection and provides descriptive statistics of the sample and bank performance characteristics. overview of mergers operations in the u.s. banking industry mergers and acquisitions (m&a) has always been an issue for managers and financial analysis. number of studies have been conducted in order to address the effects of m&a on firm performance (dutescu, ponorica & stanila, 2013). most of them use financial variables such as return on assets, return on capital, total assets ratio, return on net worth, operational profit margin as their research variable. for our case, we propose a new financial indicator that allows us to assess the effect of mergers operations on firms financial performance. the number of us banks has decreased from around 14.500 in the mid1980s to 5.600 today for many reasons. since the end of the 2007-2009 crisis, voluntary meltdowns have been the main cause of the decline and, although the reasons for the merger are potentially different, the transaction is assessed and may result in a denial. for example, according to adams (2012), the use of pilloff’s and rhoades’s methods to account for mergers would result in significantly fewer mergers between 2008 and 2010 because, in those years, a number of failure-related mergers took place. in fact, the financial crisis has shaped consolidation activities in the us market with a decline in the number of transactions, as well as an evolution of mergers and acquisitions to institutions in difficulty (adams, 2012). by way of illustration, the number of banks that was eliminated by mergers activity decreased by 26% from 2.272 banks between 2000 and 2006 to 1.695 banks between 2007 and 2012. between 2000 and 2010, 2,403 mergers took place. on average, every year 218 mergers occured, with a minimum of 158 in 2009 and a maximum of 259 in 2004, with the exception of 2008, 2009 and 2010, where we can note a slightly corporate governance and post-merger performance… 103 decrease to reach 195, 158 and 180 mergers respectively. before 2000, mergers were much larger, with more than 440 mergers, on average, from 1994 to 1999. the decline that began in august 2007 contributed to the observed decline in the number of mergers transactions. the types of transactions have changed considerably over these years. the years 2008 and 2009 were marked by a significant increase in the number of transactions involving failed or failing institutions. these two years have been also marked by a dramatic decrease in the number of standard acquisitions. particularly, two years were remarkable in the volume of merger activity: 2001 and 2004. in each of these years, the averages and percent industry in each category were well above levels in other years. althought, the year 2015 witnessed the largest number and the biggest of merger and acquisition transaction, which increased by 42% over the 2014 figures, to a new high of us$ 4.7 trillion. the year 2015 was also the strongest year for merger activity since 1980. many papers have dealt with bank mergers over the last 50 years. pilloff (2004) investigates mergers from 1994 to 2003. wheelock (2011) study mergers during the 2007 financial crisis to 2010. these papers differ in their data sources on bank mergers and how they count for bank mergers, and many of them identify post-merger performance improvements for mergers with certain transaction characteristics (hagendorff & keasey, 2009). other researches examine the pre-merger characteristics of target and acquiring banks, and identifies changes in operating efficiency, as well as the trend of mean reversion in the post-merger period (alsharkas, hassan & lawrence, 2008). however, until this date many studies, focus on m&as occured in the post financial crisis period of 2007-2009, a period with high systemic risk and financial instability, without taking into account the special characteristics of this period. in addition, previous researches in the 2000s based on earlier literature and examining additional measures of corporate performance, have tried to assess post-merger performance using various factors, but identify inconsistent results in the us banking sector prior to the financial crisis years 2007-2009. that is why we try in this work to contribute to previous studies by identifying any differences in post-mergers during the post-financial crisis period, using a new financial performance measure called the “deficit ratio” to evaluate the post-merger performance of us banks, particularly in the post financial crisis period of 2007-2009 and compare our results with those of other studies that failed to reach consensus on this issue. amira neffati, wided khiari, azhaar lajmi104 research methodology and research process sample selection the governance variables used in this study are the percentage of managerial ownership, the percentage owned by outside directors and the percentage of stock options granted to managers. data were collected from firms’ proxy statement reports and annual reports from the edgarscan website. our sample excluded firms that have no available reports. 54 banks come from the list of u.s. bank mergers, published by the federal reserve bank are used to study the inf luence of corporate governance variables on the banking performance following mergers operations over the period 2009-2015. descriptive statistics analysis results from descriptive statistics of governance variables are summarized in table 1. table 1. descriptive statistics n minimum maximum mean sd insiders 54 0.15 27.12 3.0409 4.92244 outsiders 54 0.01 15.65 2.8580 3.49104 stock option granted 54 0.02 2.39 0.2351 0.45606 s o u r c e : own study. these statistics show that the average managerial ownership of banking firms is 3.0409 which is less than 5% (only six banks have a percentage of managerial ownership that exceeds 5%). the average of 2.858 indicates a significant presence of outside directors in banking firms in our sample. all the banking firms in our sample have a remuneration system that is interlinked with the stock market performance with an average of 2.39%. corporate governance and post-merger performance… 105 results and discussion deficit ratio: study and interpretation the deficit ratio is a variable that can measure the performance arising from bank mergers. in the following research, we have adopted this ratio mainly in order to study the inf luence of various governance variables on the banking performance after mergers. based on the study of hughes, lang, mester, moon and pagano (2002), the deficit ratio specification is as follows: deficit ratio = α0 + α1 internals + α2 (internals) 2 + α3 externals + α4 (externals ) 2 + α5 log board size + α6 log (audit committee size) + α7 log(audit committee meetings) + α8 options granted+ α9 (options granted) 2 + α10 (internals*options granted) more precisely, the firm performance is calculated through the deficit ratio which ref lects the difference between boundary value and market value. numerically, the model is formulated as follows: deficit ratio of bank i = the value of the deficit of the bank i / market value achieved of bank i with, the value of the deficit of the bank i = boundary value1– market value achieved for this purpose, we carried out a linear least squares regression that delivered the results shown in table 2. 1 the boundary value is measured by the technique of stochastic frontier (jondrow, lovell, materov & shmidt, 1982). amira neffati, wided khiari, azhaar lajmi106 table 2. results from deficit ratio independent variables dependent variables coefficient t-statistic internals -0.694 -3.215*** (internals)2 -0.264 -1.491 externals -0.214 -0.816 (externals)2 -0.323 -3.295*** options granted -0.338 -2.015** (options granted)2 -0.082 -0.458 (internals*options granted) -0.785 -3.802*** board size -0.719 -2.156** audit committee size -0.814 -2.017** audit committee meetings -0.579 -2.401** r2 0.590 adjusted r2 0.489 ** significant at 5% level of confidence, ***significant at 1% level of confidence. s o u r c e : own study. the results of the regression indicate that the coefficient of insider ownership related to financial performance is negative and significant at a confidence level of 10% as measured by the deficit ratio. thus, increasing the fraction of shares held by insiders reduces the deficit ratio. this is explained by the decrease of the gap between the value on the efficient frontier and the market value which therefore improves the financial performance of the bank. given these statistics, the output of the regression analysis found at the variable managerial ownership seems quite logical considering that one is in a range of alignment [0%-5%] as presented by morck, shleifer and vishney (1988). in this interval, leaders will proceed according to the interests of the shareholders and will normally initiate mergers that increase the firm value. the study of the interrelationship between the percentage of stock options granted to managers and the percentage of shares held by managers generates a significant and negative coefficient at a confidence level of 1%. these results show that increasing the percentage of managerial ownership and the value of corporate governance and post-merger performance… 107 stock options decrease the ratio of deficit and consequently improves the performance of banks. this confirms the results found when comparing the relationship between the stock options and performance. indeed, the average of managerial ownership in our sample is 3.0619 and that may explain the results found at this level. a small percentage of managerial ownership aligns the interests of managers with those of shareholders and reduces agency costs for firms (hermalin & weisbach, 1988; morck et al., 1988). on one hand, the results of this study are similar to results found by hermalin and weisbach (1988) that affirmed a positive relationship, at low levels of ownership, between managerial ownership and firm performance. however, they contradict the predictions of jensen and meckling (1976) who found that with low levels of managerial ownership (less than 5%) managers have little incentive to improve the value of the firm and therefore shareholder wealth and tend to expropriate the resources of the firm through overuse and sometimes unwarranted resources. on the other hand, these results confirm that the relationship between managerial ownership and financial performance for banking firms is almost the same as for non-financial institutions despite the differences that exist within the agency problem between these two types of firms and the characteristics of banking firms regarding the accounting organization. the results of the regression equation indicate that the coefficient on log of outsiders is negative and insignificant. however, the use of the square outside directors can detect a negative and significant coefficient at a confidence level of 10%. the square outside directors is used to verify the nonlinear relationship between the fraction of outsiders on the board of directors and financial performance (brickley et al., 1994). the results found in this study show that increasing the percentage of ownership held by outside directors decreases the deficit ratio, reduces the gap between the boundary value of the bank and its achieved market value which consequently improves the bank performance following mergers. this confirms the results found by several researchers like hanson and song (1997) that indicated that increasing the number of outsiders in the board of directors reduced the managerial opportunism and enhanced shareholder wealth. a positive and significant coefficient allows to assert that the size of the board of directors increases the value of deficit. amira neffati, wided khiari, azhaar lajmi108 regarding the audit committee, the results show that the size and activity of this committee have a negative effect on the deficit value. this is consistent with previous findings in the literature (carcello & neal, 2000) which affirm the idea that the characteristics of this committee improves performance. in the rest of this paper, we will study the relationship between firm size and performance following bank mergers. modified deficit ratio: study and interpretation in this section, we will study the impact of the increase in the firm size on banks performance following bank mergers. this impact will be measured by the modified deficit ratio. according to several researches, the existence of managerial incentives has initiate mergers in order to increase the firm size and therefore their compensation and not to improve the firm value. in this study, we extend these works by introducing the variable firm size measured by total assets. so, the new model is presented as follows: modified deficit ratio = α0 + α1 internal + α2 (internal) 2 + α3 external + α4 (external)2 + α5 log board size + α6 log audit committee size + α7 log audit committee meetings + α8 options granted + α9 (options granted) 2 + α10 (internals*options granted) + α11 total assets + α12 (total assets) 2 + α13 (total assets * options granted) this new formulation of the deficit ratio was noted by introducing the firm size variable that has been measured by the total assets. more precisely, the square variables total assets and the option granted is introduced to test the effect of the increase of these variables on performance as well as on the relationship between these variables. in this context, the square linear regression results are presented in table 3. table 3. modified deficit ratio independent variables dependent variables coefficient t-statistic total assets 3.172 3.475*** (total assets)2 -4.313 -2.142*** corporate governance and post-merger performance… 109 independent variables dependent variables coefficient t-statistic total assets*options granted 1.790 1.873* internals -0.804 -3.785*** (internals)2 -0.310 -1.678 externals -0.168 -0.845 (externals)2 -0.348 -3.411*** options granted -0.574 -2.234* (options granted)2 -0.084 -0.451 (internals*options granted) -0.614 -3.521* board size 0.746 -2.432* audit committee size -0.838 -1.967* audit committee meetings -0.789 -2.457* r2 0.414 adjusted r2 0.323 * significant at 10% level of confidence ** significant at 5% level of confidence *** significant at 1% level of confidence. s o u r c e : own study. in this table, it is shown that the significance and sign of the coefficients of the governance variables did not change following the introduction of the variable firm size. results show that the total assets coefficient is positive and significant at a confidence level of 10%. these results show that the total assets of the firm following the merger increases the deviation between the firm value and its performed market value and therefore deteriorate the firm performance. these results seem to be surprising and unexpected since they contradict those found by the governance variables (morck et al., 1988). however, the use of the square of the total assets variable indicates a negative and significant coefficient at a confidence level of 5%. this result indicates an improvement in performance due to the accumulation of assets in the firm. in order to highlight managerial incentives and increase the firm size, we added the variable (total table 3. modified… amira neffati, wided khiari, azhaar lajmi110 assets*options granted). this variable will allow the study of interactions between the variable measuring the firm size and the managerial compensation presented in our study through the variable stock option granted and its impact on banking performance. the regression results indicate a positive and significant coefficient at a confidence level of 10%. the coefficient generated by the regression equation shows that increasing the percentage of stock options due to an increase in firm size increases the deviation between the boundary value and the market value by the bank. this increase results in a deterioration of the value of the firm and affects the wealth of shareholders. this result indicates that managers have incentives to increase the firm size and enjoy better compensation even if this negatively affects the firm value. furthermore, the correlation matrix between firm size and ownership of internal is negative and significant. this contradicts the findings of jensen (1986) stating that managers are looking to increase the size of their firms to benefit from the prestige of leadership of large firms. indeed, this result can be explained by the fact that banks in the sample are banks with low percentage of managerial ownership. so, banks that are in the range alignment [0% -5%] and whose managers operate in accordance with the interests of shareholders, are further to undertake mergers that destroy value.  conclusion of the research process the purpose of this paper is to examine the impact of governance variables on performance following bank mergers. initially, we focused on studying the relationship between managerial ownership and the deficit ratio. the regression analysis indicates a positive relationship between these two variables. indeed, the managerial ownership improves firm performance. then, the results argue that an increase in the percentage of this property reduces the deviation between the achieved boundary value and market value and therefore creates the value for the banking firm. regarding the board size, it is positively correlated to the ratio of the deficit. so an increase in the number of board members decreases the performance of the bank following mergers. however, an active and large audit committee enhances bank performance following mergers operations. then we discussed the third variable governance, which is managerial compensation. it is shown corporate governance and post-merger performance… 111 in this work by the percentage of stock options granted to managers. this form of compensation is linked to the market value of the firm. the empirical result indicates an improvement in banking performance through the award of such shares to managers. the last part of this article was devoted to the study of the effect of increasing the asset size and performance in order to test the existence of the phenomenon of empire building. in presence of this phenomenon, managers initiate mergers operations that destroy value just for the prestige of managing larger firms and have a better compensation. the results indicate that firm size is negatively related to performance. however, using the square of the variable total assets gives us opposite results indicating that an increase in bank assets improves performance and denounces the existence of the phenomenon of empire building. finally, the results found in this study indicate an improvement in the performance following bank mergers as supported by many other researches (hagendorff & keasey, 2009). but it also must be considered that merger in itself is not the ultimate solution to strengthen the financial position of banks. a lot of factors, related to the specifities of the banks, must be taken into account before finding the right partener to merger with and executing the merger. but it’s also observed, in many previous researches, that merger may not have positive impact on performance. this can be explained mainly by the specificity of the study sample. as all research works, our article presents some limits related to the sample used. the latter is relatively small wich provides an opportunity to other studies to take larger sample for better results. finally, results can serve as a basis for policy makers and scholars alike.  references adams, r.m. 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(1997). a survey of corporate governance. journal of finance, 52(2), 737-783. http://dx.doi.org/10.1111/j.1540-6261.1997.tb04820.x. corporate governance and post-merger performance… 113 wheelock, d.c. (2011). banking industry consolidation and market structure: impact of the financial crisis and recession. federal reserve bank of st. louis review, 93, 419-438. zhou, h., ansah, o.s., & maggina, a. (2018). board of directors, audit committee, and firm performance: evidence from greece. journal of international accounting, auditing and taxation, 31, 20-36. http://dx.doi.org/10.1016/j.intaccaudtax.2018.03.002. aleksandra banaszkiewicz, ewa makowska* uniwersytet mikołaja kopernika w toruniu społeczna odpowiedzialność biznesu w kontekście wybranych aspektów kulturowych xxi stulecia słowa kluczowe: csr, rachunkowość csr, raport csr. abstrakt: w realiach współczesnej gospodarki analizy finansowe i raporty ilościowo-wartościowe okazują się niewystarczającym źródłem informacji, bo zawężonym wyłącznie do danych na temat sytuacji finansowej określonego podmiotu gospodarczego. społeczeństwo jest również zainteresowane informacjami w zakresie relacji firmy z jej otoczeniem. rachunkowość staje więc przed trudnym zadaniem odzwierciedlenia nowych procesów zachodzących w organizacji, które do tej pory nie były przedmiotem jej zainteresowania. na styku społecznej odpowiedzialności biznesu i rachunkowości znajduje się zatem nowe sprawozdanie finansowe o nazwie raport csr. artykuł koncentruje się na wybranych aspektach kulturowych, takich jak działalność na rzecz ochrony środowiska oraz społeczeństwa, które wymagają objęcia zainteresowaniem księgowych. te zabiegi zostały przeniesione z życia codziennego do świata biznesu i siłą rzeczy wymusiły na nim uwzględnienie nowych trendów kulturowych w dotychczasowej praktyce gospodarczej. corporate social responsibility accounting in the context of the selected cultural aspects of the twenty-first century keywords: csr, csr accounting, csr raport. abstract: in the reality of today’s economy, financial analysis and quantity and valuable reports appear to be an inadequate source of information, because they are recopernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: aleksandra.banaszkiewicz@umk.pl, ewa.makowska@umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 47 65. doi: 10.12775/cjfa.2012.001 http://dx.doi.org/10.12775/cjfa.2012.001 aleksandra banaszkiewicz, ewa makowska or 10 stricted only to the data concerning the financial situation of a specific situation unit. society is also interested in information on the relationship of its surroundings. accounting is becoming therefore a difficult task to ref lect new processes in the organization, which has so far not been the object of it interest. at the junction of corporate social responsibility and the accounting is so new financial statement called csr report. this article focuses on selected aspects of culture, such as activities to protect the environment and society that need to take interest in accounting. these treatments have been transferred from everyday life to the business world and inevitably forced to take into account the new trends in the current practice of cultural activities. translated by aleksandra banaszkiewicz & ewa makowska  wstęp dynamiczne zmiany zachodzące w gospodarce xxi wieku wymuszają na organizacjach przyjęcie ciężaru odpowiedzialności za niekorzystne efekty społeczne wynikające z ich funkcjonowania, takie jak na przykład likwidacja miejsc pracy lub zanieczyszczanie środowiska naturalnego. od przedsiębiorstwa oczekuje się przede wszystkim prowadzenia działalności w sposób, który byłby odpowiedzialny społecznie, czyli zgodny z zasadami zrównoważonego rozwoju, oraz uwzględniałby dobrostan społeczeństwa, ale również tego, że działalność o powyżej sformułowanych parametrach zostanie w odpowiedni sposób opisana w przeznaczonych do tego celu raportach. tradycyjnie do tej pory sprawozdawczością jednostek gospodarczych zajmował się dział księgowości, opracowujący dokumenty sprawozdawczości finansowej zgodnie z obowiązującymi przepisami prawa. współcześnie oczekiwania odbiorców informacji co do tego typu raportów znacznie wzrosły. społeczeństwo jest zainteresowane nie tylko danymi finansowymi w postaci tabel i liczb, ale również informacjami jakościowymi w formie opisowej, w zakresie relacji firmy z jej otoczeniem. rachunkowość staje więc przed trudnym zadaniem odzwierciedlenia nowych procesów zachodzących w organizacji, które do tej pory nie były przedmiotem jej zainteresowania. artykuł koncentruje się na wybranych aspektach kulturowych, takich jak działalność na rzecz ochrony środowiska oraz społeczeństwa, które wymagają objęcia zainteresowaniem księgowych. te zabiegi zostały przeniesione z życia codziennego do świata biznesu i siłą rzeczy wymusiły na nim uwzględnienie nowych trendów kulturowych w dotychczasowej praktyce gospodarczej.   społeczna odpowiedzialność biznesu w kontekście wybranych… 11 1. społeczna odpowiedzialność biznesu społeczną odpowiedzialność biznesu (ang. corporate social responsibility – csr) można rozumieć jako koncepcję, dzięki której przedsiębiorstwa na etapie budowania strategii dobrowolnie uwzględniają interesy społeczne i ochronę środowiska, a także relacje z różnymi grupami interesariuszy (kuraszko 2010: 78–85). społeczna odpowiedzialność biznesu opiera się na stwierdzeniu, że przedsiębiorstwa nie ponoszą tylko odpowiedzialności prawnej i ekonomicznej w związku z prowadzoną działalnością, ale są także zobowiązane do podejmowania takich działań, które będą przyczyniać się do ochrony i podnoszenia standardów społecznych (nakonieczna 2008: 9). najważniejsze grupy interesariuszy to przede wszystkim akcjonariusze lub udziałowcy, pracownicy firmy, klienci, dostawcy, ale również agendy rządowe, media oraz środowisko przyrodnicze (paliwoda-matiolańska 2009: 52). angażując się w społeczną odpowiedzialność biznesu, firmy dobrowolnie decydują się prowadzić działalność ukierunkowaną na poprawę życia społeczeństwa oraz czystości środowiska, stosować otwarte i przejrzyste praktyki gospodarcze, oparte na przestrzeganiu zasad etycznych oraz dialogu i współpracy z pracownikami i interesariuszami (laszlo 2008: 77). gdy rozważa się koncepcję społecznej odpowiedzialności biznesu, narzuca się podstawowe pytanie: dlaczego firmy decydują się na jej stosowanie? odpowiedzi może być wiele: potrzeba czynienia dobra, tworzenie wizerunku, darmowa reklama, poczucie winy, filantropia, chęć zysku, zasłona dymna rozumiana jako przykrywka dla działań antyspołecznych. z punktu widzenia firmy głównym powodem stosowania filozofii csr’u są czynniki kulturowe wynikające ze wzrostu znaczenia pozamaterialnych czynników wyróżniających oferowane produkty lub usługi na rynku. zmieniły się również oczekiwania klientów, związane ze wzrostem ich świadomości ekologicznej. konsumenci zdają sobie sprawę z postępującej degradacji środowiska naturalnego i powiązanych z nią niekorzystnych zmian klimatycznych. na znaczeniu tracą też tradycyjne metody marketingu. w dobie globalizacji zmieniła się także rola mediów, które są w stanie dostarczyć najświeższe informacje niemal natychmiast. opinia publiczna jest więc w stanie śledzić na bieżąco i osądzać wielkie afery gospodarcze (adamczyk 2009: 39–46). filozofia społecznej odpowiedzialności biznesu stanowi zatem odpowiedź na zmiany zachodzące w otoczeniu firmy. działania podejmowane przez przedsiębiorstwa w ramach szeroko rozumianego csr’u mają różnorodną formę, aleksandra banaszkiewicz, ewa makowska or 12 której wspólnym mianownikiem jest troska o człowieka i środowisko, w którym żyje. aby było to możliwe, przedsiębiorstwo musi zaangażować w realizację koncepcji społecznej odpowiedzialności biznesu wszystkie swoje komórki organizacje, począwszy od kadr, przez dział finansów i księgowości, działy produkcyjne, a skończywszy na marketingu i dziale sprzedaży (adamczyk 2009: 39–46). 2. rachunkowość społecznej odpowiedzialności biznesu współczesna rachunkowość podlega ciągłej ewolucji przejawiającej się między innymi rozszerzaniem się jej zakresu przedmiotowego, zarówno w skali makro-, jak i mikroekonomicznej. jednym z symptomów rozwoju rachunkowości jest jej zaangażowanie w ideę społecznej odpowiedzialności biznesu. między rachunkowością przedsiębiorstwa a wspomnianą wyżej ideą zachodzi ścisły związek przejawiający się w dwóch aspektach: po pierwsze – w kontekście jakości informacji zamieszczanych w dokumentach sprawozdawczości finansowej, a po drugie – w odniesieniu do ich zakresu (micherda 2010: 25). w ramach rachunkowości doszło więc do wyodrębnienia się tak zwanej rachunkowości społecznej odpowiedzialności, która stanowi konglomerat pewnych elementów i zadań rachunkowości zarządczej oraz finansowej (pogodzińska-mizdrak 2010: 179). rachunkowość ta odgrywa podwójną rolę, to znaczy działa zarówno na rzecz przedsiębiorstwa, jak i społeczeństwa (gierusz, martyniuk 2009: 125). rachunkowość odpowiedzialności społecznej można zdefiniować jako: „pomiar i publikowanie informacji o wpływie, jaki działalność przedsiębiorstwa ma na społeczeństwo jako całość. informacje takie mogą być wykorzystywane przez zarządy zarówno wewnątrz, jak i na zewnątrz przedsiębiorstwa i jako takie zyskują szerszy zasięg niż te, które są przygotowywane i przekazywane w sposób tradycyjny” (gabrusewicz 2010: 57). rachunkowość odpowiedzialności społecznej ma na celu, między innymi, udzielenie odpowiedzi na takie pytania, jak na przykład: jaka jest wartość działań korporacji w zakresie „odpowiedzialności społecznej”, w jaki sposób ostateczne wyniki finansowe firmy „odpowiedzialnej społecznie” okazują się tak dobre jak jej „nieodpowiedzialnego społecznie” konkurenta albo czy przestrzeganie przepisów dotyczących kontroli zanieczyszczeń środowiska nie będzie kosztowało społeczeństwa więcej niż przyniesie oszczędności, jeśli niektóre dobrze prosperujące przedsiębiorstwa produkcyjne zostaną wyparte z rynku (gabrusewicz 2010: 57).   społeczna odpowiedzialność biznesu w kontekście wybranych… 13 rachunkowość społecznej odpowiedzialności ma wpływ na oszczędne wykorzystywanie zasobów naturalnych oraz na zachowania etyczne, stanowi bowiem udokumentowaną podstawę rachunku odpowiedzialności za efektywność i społeczno-ekonomiczną racjonalność gospodarowania. wspomniany wcześniej rachunek odpowiedzialności rozciąga się nie tylko na efektywność, ale i na jakość oraz skuteczność zarządzania strategicznego i operacyjnego (burzym 2008: 83). informacje zbierane do celów społecznych mogą być wykorzystane do następujących zadań (gabrusewicz 2010: 58): ■ okresowe, nieformalne przeglądy działań związanych z odpowiedzialnością za sprawy społeczne na specjalnie organizowanych spotkaniach kierownictwa; ■ przygotowanie szacunku kosztów wspierania programów i działań społecznych; ■ analiza społecznego oddziaływania kosztów związanych z działalnością społecznie niepożądaną (powodowanie skutków szkodliwych dla środowiska). efektem finalnym rachunkowości odpowiedzialności społecznej jest raport csr, który dostarcza informacji na temat zarządzania organizacją w takich aspektach jej funkcjonowania, jak odpowiedzialność społeczna, etyka oraz ekologia. 3. społeczna odpowiedzialność biznesu a ekologia priorytetowym działaniem w niemal wszystkim firmach, które zdecydowały się na wdrożenie filozofii csr’u, są projekty ukierunkowane na ekologię. proekologiczne nastawienie przedsiębiorstwa może decydować o jego sukcesie na rynku krajowym i międzynarodowym (grudzewski, hejduk, sankowska, wańtuchowicz 2010: 260). termin „ekologia” bywa używany w szerokim kontekście znaczeniowym. często jest stosowany w języku potocznym w szerokim i czasem nieprecyzyjnym sensie. często odnosi się do sozologii, tj. nauki o ochronie środowiska, filozofii ekologicznej, działalności społecznej czy artystycznej. ekologia zajmuje się ekosystemami, ich wewnętrzną strukturą, funkcjonowaniem i ewolucją. przedmiotem ekologii jest także wpływ działalności człowieka na środowisko, poszukiwanie metod zapobiegania dewastacji środowiska – także komercyjnie i konsumencko (dulko 2011). aleksandra banaszkiewicz, ewa makowska or 14 wyrazem społecznej odpowiedzialności przedsiębiorstwa w zakresie ekologii jest przede wszystkim troska o dostarczanie wyrobów i usług bezpiecznych dla odbiorcy i dbałość o środowisko naturalne. dotyczy to zarówno fazy planowania i sterowania samą produkcją, jak i logistyki oraz gromadzenia i usuwania odpadów. z punktu widzenia procesu produkcyjnego proekologiczna działalność przedsiębiorstwa będzie skupiać się na eliminowaniu negatywnych efektów oraz usprawnianiu działań w trzech obszarach, a mianowicie: zaopatrzeniu, produkcji i pakowaniu oraz transporcie i magazynowaniu. w zakresie zaopatrzenia działaniami umożliwiającymi minimalizację negatywnego wpływu na środowisko są: zakup surowców i półproduktów wytwarzanych zgodnie z poszanowaniem norm ekologicznych, społecznych i jakościowych, minimalizacja lub eliminacja składników lub substancji niebezpiecznych dla zdrowia człowieka. organizacja zaopatrzenia daje także szansę doboru i oceny dostawców pod kątem prowadzonej polityki proekologicznej. stanowi też okazję do wspierania lokalnych producentów i społeczności. do czynności proekologicznych przedsiębiorstwa związanych z produkcją i pakowaniem najczęściej są zaliczane: ograniczenie zużycia energii (w tym także poszukiwanie i wdrażanie niekonwencjonalnych źródeł pozyskiwania energii) i wody, zmniejszenie natężenia hałasu, obniżenie emisji szkodliwych gazów i zapachów, prawidłowe gospodarowanie odpadami, bezpieczeństwo i higiena pracy pracowników produkcyjnych. w tym zakresie niezwykle przydatna jest polityka jakości, ułatwiająca monitorowanie, identyfikację i eliminację działań niepożądanych. także obszar transportu i magazynowania stwarza przedsiębiorstwu możliwość wprowadzania wielu działań proekologicznych. zaliczamy do nich na przykład wybór środków transportu o obniżonej emisji gazów do atmosfery, optymalizację powierzchni magazynowej, eliminację strat i tworzenia odpadów podczas magazynowania (paliwoda-matiolańska 2009: 153). z kolei przejawem zainteresowania ekologią wśród konsumentów są między innymi takie postawy, jak (dulko 2011): ■ recykling, czyli powtórne wykorzystanie odpadów; ■ powtórne wykorzystanie opakowań, na przykład butelek, słoików; ■ gotowość zapłaty wyższej ceny za produkty ekologiczne; ■ brak akceptacji dla produktów testowanych na zwierzętach. temat ekologii jest często poruszany przez polskie media. na przykład w 2009 r. łączna liczba artykułów na temat odpowiedzialnego biznesu i powiązanych zagadnień, w tym ekologii, wynosiła 1512 (dulko 2011). akcje typu   społeczna odpowiedzialność biznesu w kontekście wybranych… 15 „godzina dla ziemi”, „sprzątanie świata” czy też „woda dla sudanu” zyskują coraz większą aprobatę społeczeństwa. z powyższych powodów firmy stosujące csr muszą uwzględniać preferencje klientów. działania proekologiczne stały się zatem obowiązującym trendem w biznesie przede wszystkim wśród przedsiębiorstw zaangażowanych w filozofię odpowiedzialnego biznesu. działalność firm w zakresie ekologii przejawia się między innymi wprowadzaniem tak zwanych ekoinnowacji. ekoinnowacje to termin używany do określenia nowości produktowych mających na celu zapobieganie lub zredukowanie niekorzystnego wpływu na środowisko zanieczyszczeń oraz złego użycia zasobów naturalnych. ekoinnowacje mogą przyczyniać się do zrównoważonego rozwoju i zwiększenia wartości rynkowej produktów i procesów. termin ten jest często używany do określenia szeregu powiązanych idei – od korzystnych dla środowiska naturalnego technologicznych nowinek do społecznie akceptowanych praktyk biznesowych. przykładem ekoinnowacji mogą być działania podejmowane przez firmy kosmetyczne, polegające na zastępowaniu substancji chemicznych negatywnie oddziałujących na zdrowie człowieka i środowisko składnikami naturalnymi. kolejnym przykładem ekoinnowacji jest drukarka hp, która jest w 50% produkowana z surowców pochodzących z odzysku. poza tym zużywa ona mniejszą ilość prądu w porównaniu z innymi drukarkami tej klasy, a wykorzystywane do jej obsługi tonery charakteryzują się wyższą wydajnością. inicjatywą świata biznesu w polsce było zapoczątkowanie w 2009 r. plat formy „odpowiedzialna energia” (csr społeczna 2013). miała ona na celu podjęcie dyskusji wokół tematyki csr. efektem prac było między innymi przyjęcie deklaracji w sprawie zrównoważonego rozwoju w branży energetycznej w polsce. trendem ściśle powiązanym z ekologią jest tak zwany enoughism (nazwa pochodzi z języka angielskiego: enough, co znaczy „wystarczająco”, „dość”), czyli uświadomienie sobie przez konsumenta, że ma już wystarczającą ilość przedmiotów i nie musi kupować piątej komórki czy trzeciego laptopa. ten trend jest widoczny także wśród gwiazd kina, które pokazują się na kolejnych imprezach w rzeczach, w których już były widziane, na przykład z tą samą torebką (dulko 2011). jedną z ostatnich inicjatyw podjętych w polsce była kampania prowadzona przez polską zieloną sieć pod hasłem „kupuj odpowiedzialnie”. w ramach kampanii są prowadzone regionalne punkty informacyjno-edukacyjne, w których można otrzymać informacje na temat zrównoważonej konsumpcji. potencjalny klient ma dostęp do takich materiałów, jak: materiały edukacyjne, aleksandra banaszkiewicz, ewa makowska or 16 szkolenia, treningi oraz wykłady. szczególną uwagę zwraca się na społeczne aspekty globalizacji (csr społeczna 2013). 4. społeczna odpowiedzialność biznesu a pracownicy firmy ciekawym pomysłem mającym na celu wzrost wydajności pracowników firmy jest wdrożenie w niej zasad pozytywnej psychologii. przedsiębiorstwo może wprowadzić zasady pozytywnej psychologii, gdy wśród kadry pracowniczej zauważy takie symptomy osłabienia dobrego samopoczucia, jak: spadek wydajności, wzrost błędów, konf likty interpersonalne, skargi i incydenty dyscyplinarne, osłabienie morale, zagrożenie pozytywnej obsługi klienta oraz zwiększona rotacja pracowników. twórcy pozytywnej psychologii uważają, że ludzie mający lepsze samopoczucie wykazują się większą elastycznością i zaangażowaniem, lepiej reagują na krytykę, mają więcej pozytywnych opinii o innych, mają szansę na dłuższe życie, rzadziej są nieobecni w pracy oraz są szczęśliwsi (kożusznik 2005: 148–149). osiągnięcie stanu lepszego samopoczucia wymaga zastosowania pięciu następujących kroków (walczak 2011): 1. buduj relacje z ludźmi wokół siebie. 2. bądź ciekawy. 3. ucz się, czyli spróbuj czegoś nowego. 4. dziel się, czyli zrób coś miłego. 5. bądź aktywny fizycznie. w odniesieniu do przedsiębiorstwa koncepcja pozytywnej psychologii łączy się z koncepcją przywództwa transformacyjnego. przywództwo transformacyjne opiera się na liderach, których celem działania jest rozwój pracowników przejawiający się między innymi w samodzielnej pracy zespołów (karaszewski 2008: 268–273). lider działający zgodnie z wyznacznikami przywództwa transformacyjnego ma następujące cechy: charyzmę, umiejętność motywacji, umiejętność stymulacji intelektualnej i chęć poświęcania czasu pracownikom (walczak 2011). podniesienie wartości zasobów ludzkich możliwe jest również przez wdrożenie w przedsiębiorstwach tak zwanej koncepcji zaangażowania pracowników. zaangażowanie pracowników można zdefiniować jako pozytywny stan umysłu związany z pracą, a przejawiający się przede wszystkim wysokim poziomem energii i umysłowej aktywności podczas pracy, doświadczaniem poczucia sensu, entuzjazmu i wyzwania w pracy oraz zaabsorbowaniem (bakker 2011: 265). zgodnie z literaturą przedmiotu można wyróżnić sześć podsta  społeczna odpowiedzialność biznesu w kontekście wybranych… 17 wowych czynników determinujących zaangażowanie, takich jak (pietrzak 2012: 424): wykonywana praca (organizacja pracy, zakres zadań, zrozumienie roli), bezpośredni przełożony (inspirowanie, relacje z zespołem, zarządzanie pracą), nagradzanie (docenianie i uznanie), praktyki i atmosfera (relacje i wsparcie, komunikacja w organizacji, zarządzanie zmianą, możliwość współdecydowania), rozwój i wiedza (możliwość rozwoju, wykorzystanie wiedzy i umiejętności), wizerunek pracodawcy (wizerunek przedsiębiorstwa, ocena polityki zatrudnienia, równowaga praca–życie osobiste, wiara w przywództwo, bezpieczeństwo pracy). najpopularniejszą metodą pomiaru zaangażowania jest indeks q12 instytutu gallupa. zaangażowanie pracowników mierzy się, analizując odpowiedzi na 12 stwierdzeń, takich jak (pietrzak 2012: 425): 1. wiem, czego się ode mnie oczekuje w pracy. 2. mam materiały i sprzęt, których potrzebuję, aby dobrze wykonywać swoją pracę. 3. każdego dnia w pracy mogę robić to, co potrafię najlepiej. 4. w ciągu ostatnich siedmiu dni otrzymałem wyraz uznania lub pochwałę za dobre wykonanie mojej pracy. 5. mój kierownik lub inna osoba w miejscu pracy troszczy się o mnie jako osobę. 6. w pracy jest ktoś, kto zachęca mnie do rozwoju osobistego. 7. w ciągu ostatnich sześciu miesięcy jakaś osoba z pracy rozmawiała ze mną na temat moich postępów. 8. wydaje się, że w pracy moja opinia się liczy. 9. misja/cel mojej firmy sprawia, że czuję, że moja praca jest ważna. 10. moi współpracownicy są oddani wykonywaniu pracy wysokiej jakości. 11. mam w pracy najlepszego przyjaciela/najlepszą przyjaciółkę. 12. w poprzednim roku miałem/miałam w pracy możliwość, aby uczyć się i rozwijać. 5. społeczna odpowiedzialność biznesu a działania na rzecz społeczeństwa firmy odpowiedzialne społecznie mają również na uwadze działania na rzecz społeczeństwa, czego przykładem może być wolontariat pracowniczy. wolontariat pracowniczy polega na angażowaniu się pracowników firmy w działalność woluntarystyczną na rzecz organizacji społecznych. pracownicy – wolontariualeksandra banaszkiewicz, ewa makowska or 18 sze świadczą różnego rodzaju prace na rzecz potrzebujących, wykorzystując przy tym swe umiejętności i zdolności, a jednocześnie rozwijając swe talenty w innych dziedzinach. firma wspiera pracownika w tych działaniach – w zależności od swej kultury organizacyjnej: deleguje pracownika do pracy jako wolontariusza w czasie pracy, przekazuje pomoc rzeczową, wsparcie logistyczne i finansowe (wolontariat pracowniczy 2012). wolontariat pracowniczy przynosi wymierne korzyści dla danej organizacji, jej pracowników, jak również dla instytucji przyjmujących pomoc. ich przykładem może być (poradnik – internetowe 2012): ■ wzmocnienie poczucia więzi pracownika z firmą; ■ integracja pracowników podczas realizacji projektów społecznych; ■ możliwość wykorzystania przez pracowników swojej wiedzy i kompetencji na rzecz organizacji pozarządowych; ■ możliwość sprawdzenia się pracownika w nowych sytuacjach, nabycia nowej wiedzy i umiejętności, które mogą przydać się także w jego codziennej pracy, na przykład umiejętność zarządzania zespołem; ■ stworzenie pracownikom możliwości zaangażowania społecznego. większość firm pozostawia pracownikom dowolność w wyborze celów i kierunków pracy wolontariackiej. działania wolontariackie pracowników najczęściej skupiają się wokół tematyki edukacji dzieci i młodzieży oraz wspierania instytucji, które działają na ich rzecz (przedszkola, świetlice środowiskowe, domy dziecka, fundacje, stowarzyszenia itp.). wolontariusze w wielu przypadkach podejmują stałą współpracę z tego typu organizacjami i systematycznie je wspierają. wolontariat dotyczy również kwestii ochrony zdrowia oraz pomocy osobom znajdującym się w nagłych, trudnych sytuacjach życiowych. w 2010 r. wielu wolontariuszy pracowało w ramach pomocy powodzianom. rzadziej prowadzone są inicjatywy związane z ochroną środowiska i przeciwdziałaniem wykluczeniu osób dorosłych, w tym seniorów. podstawowe bariery wdrażania wolontariatu to przede wszystkim (poradnik – internetowe 2012): ■ brak czasu; ■ stereotypy myślowe, zgodnie z którymi wolontariat kojarzy się tylko z ciężką pracą i bardzo trudnymi sytuacjami, na przykład wolontariatem w hospicjach; ■ brak informacji wśród pracowników o tym, co, z kim i dla kogo mogliby zrobić; ■ niechęć do tego typu działań bezpośredniego przełożonego.   społeczna odpowiedzialność biznesu w kontekście wybranych… 19 zakończenie we współczesnym świecie społeczna odpowiedzialność w zasadniczy sposób wpływa na charakter zmian dokonywanych w przedsiębiorstwie. uwzględniając oczekiwania interesariuszy, przedsiębiorstwo, prowadząc biznes odpowiedzialny społecznie, zwiększa efektywność alokacji zasobów organizacji, a w związku z tym przyczynia się do wzrostu jego wartości. wdrażanie technologicznych i organizacyjnych innowacji należy postrzegać jako źródło przewagi konkurencyjnej oraz główny czynnik sukcesu firmy. w realiach współczesnej gospodarki analizy finansowe i raporty ilościowo-wartościowe okazują się niewystarczającym źródłem informacji, bo zawężonym wyłącznie do danych na temat sytuacji finansowej określonego podmiotu gospodarczego. społeczeństwo oczekuje również sprawozdań dotyczących działalności przedsiębiorstwa w kontekście jego związków z szeroko rozumianym otoczeniem. przy czym sprawozdania tego rodzaju powinna charakteryzować zrozumiała forma i jasne reguły ich sporządzania. dostrzega się również konieczność merytorycznej integralności tego typu raportów z raportami finansowymi. na styku społecznej odpowiedzialności biznesu i rachunkowości znajduje się zatem nowe sprawozdanie finansowe o nazwie raport csr. raport csr, czyli raport społeczny lub inaczej raport zrównoważonego rozwoju, dostarcza informacji na temat zarządzania organizacją w takich aspektach jej funkcjonowania, jak odpowiedzialność społeczna, etyka oraz ekologia. jest kierowany do różnych grup interesariuszy, czyli na przykład pracowników, klientów, akcjonariuszy lub dostawców. csr w polsce cieszy się rosnącym zainteresowaniem z jednej strony podmiotów związanych z biznesem oraz administracją państwową, a z drugiej mediów. z punktu widzenia przedsiębiorstw ta koncepcja staje się wyznacznikiem ładu korporacyjnego oraz priorytetem w budowaniu kompleksowej strategii rozwoju firmy. kluczowe dla promowania csr w polsce jest zwiększanie wiedzy oraz podnoszenie kwalifikacji wśród kadry akademickiej. takie przedmioty, jak „etyka biznesu” oraz „społeczna odpowiedzialność biznesu”, są wykładane na uczelniach prowadzących kierunki ekonomiczne i menedżerskie. z kolei w ustawie o systemie oświaty, jak i w rozporządzeniu ministra edukacji dotyczącym podstaw programowych znalazł się punkt o konieczności upowszechniania wiedzy o zasadach zrównoważonego rozwoju. edukację w zakresie csr wspiera aleksandra banaszkiewicz, ewa makowska or 20 również unia europejska, przyznając dofinansowanie z funduszy unijnych dla działań ukierunkowanych na ten nowy obszar wiedzy (csr społeczna 2013). literatura adamczyk j. (2009), społeczna odpowiedzialność przedsiębiorstwa, pwe, warszawa. bakker a. b. (2011), an evidence-based model of work engagement, current directions in psychological science, nr 20 (4). burzym e. (2008), społeczna funkcja rachunkowości, zeszyty teoretyczne rachunkowości, t. 45 (101). csr społeczna odpowiedzialność biznesu w polsce, http://www.mg.gov.pl/files/upload/10892/csr_pl.pdf (dostęp 13.02.2013). dulko k. (2011), ekoinnowacje, dlaczego wszystko może być ekologiczne, materiały szkoleniowe, toruń. gabrusewicz t. (2010), rachunkowość odpowiedzialności społecznej w kształtowaniu zasad nadzoru korporacyjnego, wydawnictwo c. h. beck, warszawa. gierusz b., martyniuk t. (2009), rola rachunkowości w świetle społecznej odpowiedzialności przedsiębiorstwa (csr), [w:] problemy współczesnej rachunkowości, pracownicy katedry rachunkowości sgh (red.), sgh, warszawa. grudzewski w. m., hejduk i. k., sankowska a., wańtuchowicz m. (2010), sustainability w biznesie, czyli przedsiębiorstwo przyszłości, zmiany paradygmatów i koncepcji zarządzania, poltext, warszawa. karaszewski r. (2008), przywództwo w środowisku globalnego biznesu, dom organizatora tnoik, toruń. kożuszknik b. (2005), wpływ społeczny w organizacji, polskie wydawnictwo ekonomiczne, warszawa. kuraszko i. (2010), nowa komunikacja społeczna wyzwaniem odpowiedzialnego biznesu, difin, warszawa. laszlo ch. (2008), firma zrównoważonego rozwoju, studio emka, warszawa. micherda b. (2010), rachunkowość wobec kryzysu gospodarczego, difin, warszawa. nakonieczna j. (2008), społeczna odpowiedzialność przedsiębiorstw międzynarodowych, difin, warszawa. paliwoda-matiolańska a. (2009), odpowiedzialność społeczna w procesie zarządzania przedsiębiorstwem, wydawnictwo c. h. beck, warszawa. pietrzak m. (2012), balanced scorecard a kreowanie wartości z zasobów ludzkich poprzez zaangażowanie pracowników, [w:] instrumenty zarządzania kosztami i dokonaniami, e. nowak, m. nieplowicz (red.), wydawnictwo uniwersytetu ekonomicznego we wrocławiu, nr 252, wrocław. pogodzińska-mizdrak e. (2010), koncepcje społecznie odpowiedzialnego gospodarowania i inwestowania szansą rozwoju rachunkowości, zeszyty teoretyczne rachunkowości, t. 56 (112).   społeczna odpowiedzialność biznesu w kontekście wybranych… 21 poradnik – internetowe centrum wsparcia, http://poradnik.ngo.pl/x/468296 (dostęp 15.10.2012). walczak d. (2011), pozytywna psychologia, materiały szkoleniowe, toruń. wolontariat pracowniczy – słownik, http://www.wolontariatpracowniczy.pl/?a=dict/ index#w (dostęp 15.10.2012). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 27, 2014; date of acceptance: march 23, 2014. * contact information: wouden@interia.pl, institute of finance and accounting, wroclaw school of banking. ** contact information: tomasz_rolczynski@o2.pl, institute of economy, wroclaw school of banking. kopyściański t., rólczyński t. (2014). application of statistical methods in the diagnosis of environmental conditions of development of lower silesian voivodship in years 2006–2012. copernican journal of finance & accounting, 3(1), 97–108. http://dx.doi.org/10.12775/cjfa.2014.008 tomasz kopyściański* institute of finance and accounting, wroclaw school of banking tomasz rólczyński** institute of economy, wroclaw school of banking application of statistical methods in the diagnosis of environmental conditions of development of lower silesian voivodship in years 2006–2012 keywords: environmental conditions of regional development, the method of standardised sums, ward’s method. j e l classification: o44. abstract: the issue addressed in the article focuses on disparities occuring within a region in terms of environmental conditions of development. the article is mainly an attempt to adapt statistical methods for the purpose of monitoring environmental conditions. within this scope, the method of standardised sums and ward’s method have been applied. the research results pertaining to lower silesian voivodship suggest that the observed disparities between the best and the worst areas in terms of the quality of natural environment are becoming more deeply embedded. in this respect, zgorzelecki county and the cities of wrocław and legnica can be distinguished as particularly problematic, which is crucially affected by the structure and sorts of economic activities conducted within the mentioned areas. tomasz kopyściański, tomasz rólczyński98 zastosowanie metod statystycznych w diagnozie środowiskowych uwarunkowań rozwoju województwa dolnośląskiego w latach 2006–2012 słowa kluczowe: uwarunkowania środowiskowe rozwoju regionu, metoda sum standaryzowanych, metoda warda. klasyfikacja j e l: o44. abstrakt: problematyka poruszana w ramach artykułu koncentruje się wokół kwestii zróżnicowania środowiskowych uwarunkowań rozwoju występujących wewnątrz regionu. artykuł w głównej mierze stanowi próbę adaptacji metod statystycznych dla potrzeb monitorowania uwarunkowań środowiskowych. wykorzystano w tym zakresie metodę sum standaryzowanych i metodę warda. wyniki przeprowadzonych badań w obrębie województwa dolnośląskiego wskazują na silne utrwalenie zaobserwowanych dysproporcji między obszarami najlepszymi a najgorszymi pod względem jakości środowiska przyrodniczego. szczególnie negatywnie na tym tle wyróżniają się powiat zgorzelecki, oraz miasta wrocław i legnica, na co kluczowy wpływ ma struktura i rodzaje działalności gospodarczej prowadzonej w ramach wymienionych obszarów.  introduction the issue concerning different development rates of poland’s individual regions, which has extensively been delineated in the literature on the subject, is a deeply rooted phenomenon caused by a series of factors resulting, among others, from location attractiveness, economic potential, level of human capital and access to technical and social infrastructure as well as to public services. a particular aspect within the studied issue is the question of the environmental conditions considered, next to social and economic aspects, one of the main determinants of the development at a regional level. the objective of the article is to analyze disparities in the environmental conditions of development within the region, taking into account the disparities occuring in individual counites. in particular, the article is an attempt to adapt statistical methods for the purpose of monitoring the environmental conditions. therefore, on the basis of theoretical consideration, the analysis has been conducted applying selected statistical tools and focusing on comparing the situtations of lower silesian counties based on the data pertaining to years 2006–2012. applying the research to the category of region requires that the semantic content of the applied term is defined more precisely. science disciplines and regional practices most frequently refer to the territorial and administrative division of the country. from the 1st of january 1999, after the administrative application of statistical methods in the diagnosis… 99 reform, there has been a three-tier administrative division in force in poland, comprising the following: communes, counties and voivodships. putting it very simply, each of these tiers may be considered a set of a homogenous class of regions. however, in the practice of self-governments, it is assumed that the term region refers to voivodships, whereas communes and counties constitute local units. moreover, it is acknowledged that the regional policy is run by the state in relation to all regions-voivodships (the so called interregional policy) and each voivodship runs its policy in relation to its territory (the so called intraregional policy) (szewczuk 2011, 18). poland’s territorial embedding of the regions within the system of the sixteen voivodships also follows nuts2 level, in accordance with the classification of territorial units for statistical purposes operating in the eu countries, which has been established to collect, prepare and disseminate comparable data for specific regional statistics within the eu territory. the issue of disparities in the development at a regional level has in the past been the subject of many analyses on the basis of which a series of theories and concepts have been developed. within these, a few leading research streams may be suggested comprising the location theory and regional development theory which focus on explicating the causes of disparities in the level of socio-economic development (stackelberg, hahne 1998, 30). a significant research stream within this scope continues to be the theory of sustainable development which has retained its popularity in the literature on the subject (fujita 2001; fiedor 2002; borys 2005) and is still present in the legislation in force (most notably in art. 5 of the constitution of the republic of poland). this concept assumes that the socio-economic development should be harmonized with the natural environment in order to ensure fundamental needs of individual communities or citizens not only of this generation but also of the future ones. this means that when dealing with the development process, it is necessary to consider, in balanced proportions, three basic components: ■ the economic one, assuming the need to strive for economic growth which provides real increase of prosperity and well-being, ■ the social one which amounts to satisfying human needs, thereby ensuring equal opportunities of development, ■ the environmental one focusing on rationally exploiting natural resources. preserving and protecting the environment thus ensuring its improvement is a very important objective constituting part of the lisbon and gothenburg strategies of the european community. inter-generational equity demands the preservation of the environment in such a state as to allow future generations to tomasz kopyściański, tomasz rólczyński100 use it. in the european union a new view has emerged that the environment can provide real economic benefits, offering new opportunities as well as stimulating economic growth in various directions. in this respect, a positive example is set by the scandinavian countries which have been incorporating the environment in order to stimulate the economy. the example set by such countries as sweden, denmark, finland demonstrates how economic objective can be achieved together with the ecological one. for many years now, these countries have invariably occupied leading positions in competition rankings. using the environment in the regional economy has above all the following goals: ■ increasing competitiveness through reducing costs for business by the more efficient use of resources; ■ increasing production efficiency through the development of the sectors of the economy which contribute to the benefits resulting from the economic and environmental integration. thus, long term shaping of the conditions for regional development requires a continuous decision making ensuring an effective impact on the quality of the natural environment. a special role plays here the verification of the tasks that are being performed as to what degree the set objectives have been met. therefore being capable of constantly monitoring current situation in individual units of the region, particularly in terms of the assessment of environmental conditions, plays an extremely important role. developing suitable methods and having skills to interpret the data obtained on this basis constitute a starting point for defining opportunities and threats to the development of a given territorial system. the research methodology and the course of the research process in the relevant literature, one of the most widespread form of examining the issues concerned with economic potential of regions are assessments published in the form of rankings, which are increasingly more frequently considered an independent area of analyses whose results are used to do comparisons at the international, regional as well as local level. the strength of the rankings lies in their ability to synthesize complex information with the results being ordered hierarchically for the entire set of units, thus facilitating the process of comparing and formulating general conclusions that are significant when shaping regional policy and necessary when analysing the degree of the socio-economic development of regions. application of statistical methods in the diagnosis… 101 the starting point for conducting the study is to determine the set of characteristics comprising the most complete and comprehensive description possible of the economic potential level of the individual counties. this issue is often ref lected in the literature on the subject as a part of the disquisition on the measure of local development. in this field numerous authors present various concepts pertaining to the sets of characteristics, making it possible to define the level of development of a given local unit. for example, within the framework of the analyses of the environmental governance t. borys distinguishes 17 areas to which specific indicators have been allocated (borys 2005). the choice of variables was dictated by the literature on this subject and the availability of the data, because the study was carried out for the years 2006–2012. referring to the current content of the body of literature addressing this issue as well as own work, the authors of this article created a list of characteristics that are fully consistent with the need to examine the quality of life at the level of the county self-government. owing to limited access to information at the local level, for the detailed study a set of nine characteristics has been taken into account, as demonstrated in the table: table 1. the set and nature of the characteristics taken into account when assessing the economic potential of a county enumeration variable name variable character x1 the share of households connected to a sewerage and water-supply network stimulant x2 mixed waste collected in one year per capita (tons) destimulant x3 publicly accessible green areas per 10 000 inhabitants (hectares) stimulant x4 electricity consumption per capita ( mwh) destimulant x5 gas consumption per capita (mt) destimulant x6 wooded land: forestation (%) stimulant x7 total sewage disposal per 1000 inhabitants destimulant x8 particulate pollutants per county area destimulant x9 gaseous pollutants per county area (tons/year) destimulant s o u r c e : own study based. within the created set of characteristics, the information was included describing the environmental pollution, availability of green lands, and informatomasz kopyściański, tomasz rólczyński102 tion on the status and threats to the environment. considering that there are natural differences resulting from the area size and the number of inhabitants in the unit concerned, each characteristic is relative. the starting point was the variation coefficients analysis of the variables tested. critical value was set at 5%. all variables were characterized by a coefficient of variation above the critical value. for the purpose of comparing the environmental potential of voivodships, a linear ordering method has been used which is the method of standardised sums. it finds its application in the analysis of complex phenomena of which the diagnosis of environmental conditions certainly is, given the need to compare different objects, such as, in this case, voivodships. the methods of linear ordering allows for ranking the analysed objects from “the best” to “the worst”, with the ranking criterion being the extent of the complex phenomenon. the selection of the variables used to describe the complex phenomenon is mostly of substantive nature, and while producing the synthetic measure describing the complex phenomenon, the degree of the variables correlation is of no importance. the higher the value of the synthetic variable, the greater the extent of the complex phenomenon that is being tested. it is thus possible to order the objects by the extent of the complex phenomenon alone on the basis of the value of the standardized sums. the objective of producing the measure of development is to obtain values defined on the interval [0:1], whereby the closer the value mi is to 1, the better it shows the extent of the complex phenomenon in the object concerned. the particular ranking thus obtained makes it possible to compare the situations of individual units, as well as allows for the analysis of the shifts in the trends occuring during the period in question. an additional aim of the authors was to group the districts of the province of lower silesia into subsets due to environmental conditions. the grouping of objects can be done using cluster analysis. the purpose of cluster analysis is to create groups of objects as similar as possible to each other and at the same time the most different from the other groups of objects. the method of cluster analysis which is believed to be a very effective method is ward’s method (parysek 1982). the ward’s method is one of the agglomerative hierarchical methods. the methods of the hierarchical agglomeration of objects with multiple characteristics which g.m. lance and w.t. williams proposed include several variants (lance, williams 1967). these variants have different ways of determining the distance matrix between the groups of objects in the multivariate application of statistical methods in the diagnosis… 103 classificatory space. the ward’s method provides a special case of the general pattern of objects clustering developed by g.m. lance and w.t. williams. the result of the analysis is a dendrogram, which is a graphic interpretation of the obtained results. the ward’s method moves towards minimizing the error sum of squares of any pair of clusters which can be formed at any stage. the ward’s method is considered very effective aiming at producing small clusters (grabiński, sokołowski 1984, 63–79).  the outcome of the research and conclusions in the light of the theoretical disquisition introduced in the paper, the objective of the research results presented below is to demonstrate the extent of disparities in the environmental potential in the lower silesian voivodship, in the county system. the study was conducted based on a few basic assumptions: ■ research object – local self-government units of the lower silesian voivodship, ■ cross-section of the research – the county’s level. the voivodship consists of 26 land counties and three cities with county rights wrocław, jelenia góra and legnica, ■ the time horizon of the research spanned the years 2006–2012. the results presenting the situation of the lower silesian counties in the environmental sphere between 2006–2012 are presented in table 2 (the information is ordered according to the value of the development measure in 2012). table 2. ranking of the lower silesian counties in terms of their environmental potential in years 2006–2012 2006 2007 2008 2009 2010 2011 2012 powiat zgorzelecki 0,37 0,38 0,36 0,34 0,38 0,39 0,39 powiat m. legnica 0,45 0,45 0,43 0,42 0,44 0,43 0,42 powiat m. wrocław 0,46 0,49 0,48 0,54 0,50 0,46 0,46 powiat m.jelenia góra 0,58 0,60 0,60 0,55 0,59 0,56 0,53 powiat lubiński 0,60 0,59 0,57 0,56 0,59 0,57 0,56 powiat jeleniogórski 0,58 0,61 0,55 0,51 0,56 0,57 0,56 powiat wrocławski 0,54 0,53 0,58 0,59 0,59 0,61 0,60 tomasz kopyściański, tomasz rólczyński104 2006 2007 2008 2009 2010 2011 2012 powiat wałbrzyski 0,67 0,69 0,67 0,65 0,67 0,63 0,62 powiat lubański 0,65 0,66 0,64 0,61 0,65 0,64 0,63 powiat świdnicki 0,69 0,70 0,66 0,64 0,67 0,65 0,65 powiat głogowski 0,67 0,69 0,67 0,66 0,66 0,66 0,65 powiat polkowicki 0,68 0,70 0,67 0,65 0,67 0,67 0,65 powiat dzierżoniowski 0,64 0,66 0,66 0,64 0,67 0,66 0,65 powiat jaworski 0,66 0,68 0,66 0,62 0,65 0,66 0,66 powiat lwówecki 0,65 0,67 0,62 0,62 0,66 0,67 0,66 powiat kłodzki 0,70 0,71 0,69 0,65 0,69 0,68 0,67 powiat średzki 0,72 0,73 0,69 0,66 0,69 0,69 0,68 powiat legnicki 0,71 0,72 0,70 0,67 0,70 0,69 0,69 powiat wołowski 0,65 0,64 0,63 0,66 0,71 0,71 0,69 powiat trzebnicki 0,71 0,71 0,68 0,66 0,70 0,70 0,70 powiat złotoryjski 0,71 0,71 0,69 0,66 0,70 0,70 0,70 powiat oleśnicki 0,73 0,72 0,73 0,68 0,73 0,71 0,71 powiat oławski 0,74 0,74 0,71 0,75 0,73 0,71 0,71 powiat kamiennogórski 0,71 0,73 0,70 0,67 0,72 0,72 0,71 powiat ząbkowicki 0,69 0,70 0,68 0,67 0,71 0,72 0,71 powiat bolesławiecki 0,75 0,78 0,75 0,74 0,78 0,77 0,76 powiat strzeliński 0,77 0,79 0,77 0,74 0,79 0,79 0,78 powiat milicki 0,80 0,82 0,81 0,77 0,81 0,80 0,80 powiat górowski 0,85 0,86 0,83 0,80 0,83 0,81 0,81 s o u r c e : own study based. the results of the presented ranking show a great similarity in terms of the ranking place of a given county in particular years. the comparison of the presented results reveals the predominance of land counties over urban counties. in this sphere, the leaders are górowski county and milicki county which at the same time usually fare the worst in the analysis concerned solely with the assessment of the economic potential. this observation is linked to a certain interdependency resulting from the fact that low economic activity trans application of statistical methods in the diagnosis… 105 lates into relatively smaller consumption of gas, energy and reduced air pollution, which in turn translates into a better quality of life in these areas in the environmental sphere. it is also for these very reasons that the urban counties occupy the bottom places. in this regard zgorzelecki county remains a negative example with its place at the bottom of the ranking owing to the negative environmental impact of the brown coal mine and turów power plant located in the county. for a detailed analysis of the situation in the environmental sphere it is necessary to analyze the results in relation to the individual characteristics. in this regard, there is no predominance of one county over the rest in any of the aspects that have been examined. nevertheless, in the counties faring the worst in the environmental sphere one can notice the accumulation of the negative phenomena, which can be found in zgorzelecki county (lowest position in terms of waste, sewage disposal, air pollution) as well as the urban counties. for the majority of the examined characteristics, there is skewness to the left with the clustering of the counties, which is significantly above the average, around the unit that is best for the characteristic concerned. it is especially evident in terms of such characteristics as mixed waste collected in one year per capita (tones), electricity consumption per capita, total sewage disposal per 1000 inhabitants, particulate pollutants per county area and gaseous pollutants (tons/ year) per county area. publicly accessible green areas are the only characteristic from the set describing the environmental sphere where a significant predominance of one county over the rest occurs (the predominance of górowski county and strzeliński county). from the perspective of the presented research results it is also important to pay attention to the degree of disparity in the value of the particular characteristics recorded in the successive years and assessed on the basis of the coefficients of variation. table 3. coefficients of variation for the studied characteristics of the environmental potential in the years 2006–2012 rok z1 z2 z3 z4 z5 z6 z7 z8 z9 2006 7,8% 39,3% 144,3% 16,8% 33,2% 49,6% 189,5% 160,3% 278,4% 2007 7,8% 36,4% 142,8% 17,6% 35,2% 49,5% 200,2% 179,5% 277,8% 2008 7,7% 32,4% 143,5% 10,9% 38,3% 49,6% 193,7% 185,2% 285,3% 2009 7,6% 35,1% 141,2% 10,2% 38,6% 49,6% 206,1% 209,5% 284,3% tomasz kopyściański, tomasz rólczyński106 rok z1 z2 z3 z4 z5 z6 z7 z8 z9 2010 7,6% 35,7% 145,5% 11,2% 34,6% 49,5% 235,0% 189,2% 250,9% 2011 7,4% 31,6% 150,7% 12,1% 33,6% 49,5% 218,0% 162,7% 258,2% 2012 7,4% 31,6% 150,7% 12,1% 33,6% 49,5% 204,9% 148,6% 259,9% s o u r c e : own study based. the characteristics which cause the greatest disparities in the situation of the lower silesian counties in the environmental sphere are in the first place gaseous pollutants, for which the coefficients of variation for this characteristic exceed 250% in the successive years. a significant role also play particulate pollutants per county area, total sewage disposal per 1000 inhabitants and publicly accessible green areas per 10 000 inhabitants (hectares). in accordance with the proposed research steps, the important point is the presentation of the results obtained from the cluster analysis of the lower silesian counties in the years 2006–2012 (fig. 2). due to the limited space of this paper, the graphic presentation of the clusters has been limited to the year 2012. nonetheless, the trends observed in this period also apply to the changes detected in the earlier years. the analysis of the counties of lower silesia suggests that there are three distinct clusters of counties in terms of their economic potential. in each of the year in question one of the clusters is made up of zgorzelecki county and the city of legnica. the second cluster comprises głogowski county and the city of wrocław. these groups of counties, according to the applied ward’s method, show significant differences when compared with the situation of the remaining units which make up the third cluster. considering the fact that the first two clusters encompassing zgorzelecki county and the cities of wrocław and legnica, are, according to the ranking (table 2), characterized by the worst situation in terms of the environmental conditions, then the similarities among them and a significant difference in comparison with the rest tend to expose them as problematic areas in terms of the quality of the environment in the voivodship of lower silesia. application of statistical methods in the diagnosis… 107 figure 1. the application of ward’s method to assess the similarities in the distribution of environmental conditions in the lower silesian counties between 2010–2012 diagram drzewa metoda warda 2012 odległ. euklidesowa 0 5000 10000 15000 20000 25000 30000 35000 40000 odległość wiąz. powiat m.legnica powiat zgorzelecki powiat m.wrocław powiat głogowski powiat wrocławski powiat świdnicki powiat polkowicki powiat wołowski powiat lubiński powiat wałbrzyski * powiat m.jelenia gór powiat strzeliński powiat średzki powiat jeleniogórski powiat milicki powiat ząbkowicki powiat górowski powiat dzierżoniowsk powiat złotoryjski powiat kamiennogórsk powiat oławski powiat lubański powiat jaworski powiat trzebnicki powiat oleśnicki powiat legnicki powiat kłodzki powiat lwówecki powiat bolesławiecki source: own study based with a use of statistica software due to the limited space of this paper, the graphic presentation of the clusters has been limited to the year 2012. nonetheless, the trends observed in this period also apply to the changes detected in the earlier years. the analysis of the counties of lower silesia suggests that there are three distinct clusters of counties in terms of their economic potential. in each of the year in question one of the clusters is made up of zgorzelecki county and the city of legnica. the second cluster comprises głogowski county and the city of wrocław. these groups of counties, according to the applied ward’s method, show significant differences when compared with the situation of the remaining units which make up the third cluster. considering the fact that the first two clusters encompassing zgorzelecki county and the cities of wrocław and legnica, are, according to the ranking (table 2), characterized by the worst situation in terms of the environmental conditions, then the similarities among them and a significant difference in comparison with the rest tend to expose them as problematic areas in terms of the quality of the environment in the voivodship of lower silesia. the research on the changes in the environmental conditions of the counties of lower silesian voivodship in the years 2006–2012 conducted by the application of the selected statistical methods leads to the following conclusions: first of all, the natural environment of the voivodship is to a great extent spatially diverse; there are areas of severely degraded land that are negatively distinct from other areas, most notably zgorzelecki county and the s o u r c e : own study based with a use of statistica software. the research on the changes in the environmental conditions of the counties of lower silesian voivodship in the years 2006–2012 conducted by the application of the selected statistical methods leads to the following conclusions: first of all, the natural environment of the voivodship is to a great extent spatially diverse; there are areas of severely degraded land that are negatively distinct from other areas, most notably zgorzelecki county and the cities of wrocław and legnica. the economic activity located there has a significant impact on this situation, which further translates into air pollution in big urban and industrial agglomerations as well as the level of waste produced by the industry, municipal services and trade. the research results show that the disparities between the best and the worst counties are becoming more deeply embedded in terms of their environmental potential, which is further confirmed by the lack of considerable changes over time, as revealed by the ranking developed with the application of the method of standardized sums. tomasz kopyściański, tomasz rólczyński108 within the scope of the research on environmental conditions certain objective difficulties of methodological nature contribute to an obvious barrier when formulating conclusions on the basis of the applied statistical methods. the research the authors conducted allows for taking account of several significant limiting factors when producing rankings and properly assessing the obtained information. this is related to the kind and status of the data taken into account in the research (majority of the data is secondary, obtained from the public statistics sources) as well as to the restrictions with regard to acquiring comparable and complete information, which further results in having to reject the indicators important for monitoring the environmental conditions because of a lack of available data.  references borys t. 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(1998), teorie rozwoju regionalnego, [w:] rozwój ekonomiczny regionów. rynek pracy. procesy migracyjne. polska, czechy, niemcy, raport ipiss, s. golinowska (red.), zeszyt nr 16, warszawa, 30. szewczuk a., kogut m., zioło m. (2011), rozwój lokalny i regionalny. teoria i praktyka, wydawnictwo c. h. beck, 18. copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: dkrupa@umk.pl, dwalczak@umk.pl, katedra zarządzania finansami, echoj@umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34. dorota krupa, damian walczak, ewa chojnacka* uniwersytet mikołaja kopernika w toruniu preferencje w zakresie form alokacji oszczędności gospodarstw domowych w polsce słowa kluczowe: depozyty, gospodarstwa domowe, oszczędności. abstrakt: celem artykułu jest analiza preferencji w zakresie form alokacji oszczędności gospodarstw domowych w polsce. polacy najczęściej oszczędzają w instytucjach bankowych w depozytach złotowych. gospodarstwa domowe oszczędności z depozytów bankowych najczęściej przeznaczają na zakup domu/mieszkania oraz zakup dóbr trwałego użytku. na potrzeby artykułu przeanalizowano dane statystyczne udostępniane przez narodowy bank polski oraz dane z badania diagnoza społeczna 2011. saving preferences of households in poland keywords: deposits, households, savings. abstract: the purpose of this article is to present the savings’ preferences of households in poland. households in poland invest primarily in deposits made in polish zloties. their primary motivation is saving for flats and houses and in the second motivation is saving for durable goods. for the purpose of the analysis authors used the data published by national bank of poland and statistical data published in the social diagnosis 2011 report. translated by dorota krupa & damian walczak doi: 10.12775/cjfa.2012.008 http://dx.doi.org/10.12775/cjfa.2012.008 dorota krupa, damian walczak, ewa chojnacka112  wstęp gospodarstwa domowe, jako podmioty funkcjonujące w gospodarce, podejmują podstawowe decyzje finansowe dotyczące poziomu konsumpcji i oszczędzania, dążąc do zaspokojenia swoich nieograniczonych potrzeb zarówno bieżących, jak i dotyczących przyszłości. jednym z czynników decydujących o sytuacji finansowej gospodarstwa domowego oraz o jego możliwościach oszczędzania jest źródło i poziom dochodu (keese 2010: 125–141; magri 2007: 401–426). poziom dochodu determinuje, czy po zaspokojeniu podstawowych potrzeb życiowych pozostaje nieskonsumowana część, która może zostać zakumulowana (wójcik 2007: 56). zarówno ogólny poziom (wielkość) oszczędności, jak i ich rodzaje są zdeterminowane między innymi skłonnością gospodarstw domowych do oszczędzania czy też motywami i celami oszczędzania. jak wskazują badania, istnieje związek, zwłaszcza dla krajów rozwijających się, między poziomem oszczędności, inwestycji a wzrostem gospodarczym. w przypadku niskiego poziomu oszczędności krajowych wzrasta potrzeba finansowania inwestycji środkami pochodzącymi z zagranicy, co nie zawsze jest korzystne dla gospodarki, zwłaszcza dla równowagi rachunku bieżącego. wzrost oszczędności pozytywnie wpływa również na sektor bankowy przez wzrost poziomu środków na lokatach, także tych długoterminowych (world bank 2011: 1–2). celem artykułu jest analiza preferencji w zakresie form alokacji oszczędności gospodarstw domowych ze wskazaniem na wybrane związki między cechami gospodarstw domowych a preferencjami wyboru form oszczędzania. gospodarstwa domowe w przedstawionej pracy są rozumiane zgodnie z definicją zastosowaną w raporcie z badania diagnoza społeczna (2011: 39), któremu podlegały gospodarstwa domowe jednoosobowe oraz wieloosobowe. zgodnie ze wspomnianym raportem za gospodarstwo domowe jednoosobowe uważa się osobę utrzymującą się samodzielnie, tzn. niełączącą z nikim swoich dochodów, bez względu na to, czy mieszka sama, czy też z innymi osobami. natomiast pod pojęciem gospodarstwa domowego wieloosobowego rozumie się zespół osób mieszkających razem i wspólnie utrzymujących się. na potrzeby artykułu przeanalizowano m.in. dane statystyczne udostępniane przez narodowy bank polski oraz dane z badania diagnoza społeczna 2011.   preferencje w zakresie form alokacji oszczędności… 113 1. wybrane czynniki wpływające na skłonność do oszczędzania gospodarstw domowych w literaturze przedmiotu oszczędzanie jest rozumiane jako powstrzymywanie się konsumenta (gospodarstwa domowego) od bieżącej konsumpcji na rzecz jej zwiększenia w przyszłości (bywalec 2012: 196). odróżnia się w tym wypadku oszczędzanie dobrowolne, zgodnie z którym gospodarstwo domowe rezygnuje z wydatkowania części swych dochodów na bieżące cele konsumpcyjne bez zewnętrznych nacisków, od oszczędzania przymusowego, w którym przymus wynika z obowiązującego prawa bądź sytuacji ekonomicznej, w której brakuje określonych towarów na rynku. zachowania gospodarstw domowych, w tym skłonność do oszczędzania dobrowolnego, są uzależnione od wielu czynników, które w literaturze przedmiotu są różnie klasyfikowane. najczęściej rozróżnia się czynniki zewnętrzne (ogólne), które odnoszą się do otoczenia i dotyczą wszystkich podmiotów, oraz wewnętrzne (specyficzne) – wynikające z charakterystyk gospodarstw. do czynników zewnętrznych zalicza się przede wszystkim czynniki gospodarczo-ekonomiczne, takie jak: polityka państwa, ogólna sytuacja gospodarcza (i jej perspektywy) oraz podaż dóbr i usług (istnienie lub nie ograniczeń podaży pewnych dóbr) (wójcik 2007: 58), ale także czynniki geograficzne (warunki klimatyczne, wielkość produkcji rolniczej), czynniki społeczno-kulturowe (grupy społeczne, grupy odniesienia, kultura, w tym kultura oszczędzania), czynniki informacyjno-edukacyjne (informacje rynkowe, edukacja konsumenta) (żelazna, kowalczuk, mikuta 2002, za: zalega 2012: 95). wśród czynników wewnętrznych należy zwrócić uwagę na: liczbę osób w gospodarstwie, aktywność zawodową członków gospodarstwa domowego, źródła dochodów, fazę rozwojową gospodarstwa domowego, więzy łączące członków gospodarstwa domowego czy strukturę gospodarstwa domowego (kubiszewska 2008: 27). są to czynniki o charakterze obiektywnym. oprócz nich w literaturze przedmiotu podkreśla się znaczenie trudnych do skwantyfikowania czynników specyficznych o charakterze subiektywnym, do których zalicza się przede wszystkim czynniki psychologiczne, takie jak np. przekonania, przyzwyczajenia, potrzeby, postawy, modę, naśladownictwo (kramer 1997: 69, za: zalega 2012: 94). wielkość i rodzaje oszczędności są także kształtowane przez motywy i cele oszczędzania. na podstawowe motywy oszczędzania wskazał już keynes: motyw przezorności, ostrożności, potrzeby niezależności, przedsiębiorczości, dorota krupa, damian walczak, ewa chojnacka or 114 chęci wykorzystania wyższej stopy procentowej, zwiększenia dobrobytu, pozostawienia spadku, skąpstwa (keynes 1936, za: wójcik 2007: 59). w literaturze podkreśla się, że te motywy nie muszą wykluczać się wzajemnie, a wręcz są one często komplementarne. jest nawet mało prawdopodobne, że jeden motyw będzie wystarczający dla ogółu populacji w danym momencie lub dla jednej osoby przez dłuższy okres (fisher, montalto 2010: 93). wskazane motywy przejawiają się w konkretnych celach oszczędzania, jakimi mogą być np.: gromadzenie środków na emeryturę, na tzw. czarną godzinę, na kształcenie dzieci, zabezpieczenie się na wypadek choroby, utraty pracy czy oszczędzanie na zakup określonych elementów majątku (mieszkanie, nieruchomość, wyposażenie). 2. lokowanie oszczędności na rynku finansowym w polsce gospodarstwa domowe na rynku finansowym są traktowane jako inwestorzy indywidualni, jednak ze względu na ograniczoną wiedzę często korzystają z usług pośredników finansowych, w tym między innymi banków. korzystanie z ofert instytucji bankowych, a szczególnie lokowania oszczędności w formie lokat bankowych, ma tę zaletę, że znana jest wysokość stopy procentowej determinującej wysokość spodziewanego zysku. w odniesieniu do większości lokat ryzyko utraty kapitału jest zminimalizowane gwarancjami bankowego funduszu gwarancyjnego. wszystkie depozyty bankowe nieprzekraczające 100 tys. eur są w całości gwarantowane przez bankowy fundusz gwarancyjny. dotyczy to zarówno oszczędności w złotówkach, jak i w walutach obcych. rozwój rynku finansowego rozszerza zakres produktów finansowych, gdyż wzrasta strona podażowa dostępnych form oszczędzania. gospodarstwa domowe mogą lokować swoje oszczędności m.in. w: depozyty bankowe, akcje, obligacje, tytuły uczestnictwa funduszy inwestycyjnych, nieruchomości, indywidualne konta emerytalne1, lub też utrzymywać gotówkę. niestety, gospodarstwa domowe – a więc strona podażowa – dysponują ograniczonymi zasobami w postaci wolnych środków pieniężnych. na wykresie 1 przedstawiono kształtowanie się oszczędności gospodarstw domowych w podziale na najbardziej powszechne formy oszczędzania i inwestowania. 1 należy pamiętać, że od 2012 r. w ramach tzw. iii filaru (poza ike) istnieją indywidualne konta zabezpieczenia emerytalnego, które ze względu na krótki okres funkcjonowania nie zostały uwzględnione jako forma oszczędzania w prezentowanym artykule.   preferencje w zakresie form alokacji oszczędności… 115 wykres 1. oszczędności gospodarstw domowych według form oszczędzania i inwestowania w okresie od czerwca 2005 do połowy 2012 r. 0 200 400 600 800 1000 1200 cze 05 lut 06 paź 06 cze 07 lut 08 paź 08 cze 09 lut 10 paź 10 cze 11 lut 12 m ld p ln pozostałe akcje spółek publicznych krajowe fundusze inwestycyjne gotówka w obiegu poza kasami banków otwarte fundusze emerytalne depozyty złotowe i walutowe ź r ó d ł o: opracowanie własne na podstawie: struktura oszczędności gospodarstw domowych za lata 2005–2012, analizy online, http://www.analizy.pl, oraz danych statystycznych nbp należności i zobowiązania monetarnych instytucji finansowych i banków, narodowy bank polski, http:// www.nbp.pl. gospodarstwa domowe największą część swoich środków w całym badanym okresie przetrzymywały w postaci depozytów złotowych i walutowych, które w połowie 2012 r. stanowiły prawie 50% wartości oszczędności wszystkich wskazanych form. kolejne miejsce w strukturze (24% oszczędności) na koniec badanego okresu zajmowały oszczędności zgromadzone przez otwarte fundusze emerytalne. gotówka w obiegu poza kasami banków stanowiła 11% oszczędności, środki zgromadzone w tytułach uczestnictwa krajowych funduszy inwestycyjnych 6%, a w akcjach spółek publicznych 5% wartości oszczędności gospodarstw domowych w połowie 2012 r. w grupie „pozostałe” zawarto oszczędności gospodarstw domowych zainwestowane w ubezpieczeniowe fundusze kapitałowe, tytuły uczestnictwa zagranicznych funduszy inwestycyjnych oraz obligacje i bony skarbowe. łączna wartość oszczędności gospodarstw domowych w zaprezentowanych na wykresie formach w połowie 2012 r. przekroczyła 1 bln pln. obserwowany wzrost zainteresowania gospodarstw domowych depozytami bankowymi (tabela 1) był między innymi rezultatem zapowiadanej nowelizacji przepisów ordynacji podatkowej. od 31 marca 2012 r. obowiązuje nowy sposób zaokrąglania podstawy opodatkowania i kwoty podatku, który wyeliminował dotychczas wykorzystywane możliwości uniknięcia opodatkowania dochodów z zysków od kapitału (w tym od tzw. lokat jednodniowych). dorota krupa, damian walczak, ewa chojnacka or 116 w tabeli 1 przedstawiono wartości depozytów i innych zobowiązań banków oraz udziały poszczególnych podsektorów gospodarstw domowych w okresie od 2003 r. do końca listopada 2012 r. w podziale na krajowe i walutowe. tabela 1. wartości i udziały procentowe depozytów i innych zobowiązań banków poszczególnych podsektorów gospodarstw domowych w okresie od 2003 do listopada 2012 r., w mln pln i % rok depozyty i inne zobowiązania banków wobec osób prywatnych wobec przedsiębiorców indywidualnych wobec rolników indywidualnych łącznie w mln pln w mln pln w mln pln w mln pln złotowe walutowe złotowe walutowe złotowe walutowe ogółem 2003 wartość 163 344 35 298 8 776 688 1 803 18 209 927 udział 77,80% 16,80% 4,20% 0,30% 0,90% 0,00% 100% 2004 wartość 163 672 29 481 10 164 988 2 844 27 207 176 udział 79,00% 14,20% 4,90% 0,50% 1,40% 0,00% 100% 2005 wartość 169 764 31 262 12 248 1 372 3 693 44 218 383 udział 77,70% 14,30% 5,60% 0,60% 1,70% 0,00% 100% 2006 wartość 182 891 30 822 15 679 1 740 5 959 59 237 150 udział 77,10% 13,00% 6,60% 0,70% 2,50% 0,00% 100% 2007 wartość 206 608 26 634 19 306 1 937 6 101 56 260 642 udział 79,30% 10,20% 7,40% 0,70% 2,30% 0,00% 100% 2008 wartość 272 076 27 956 20 166 1 676 6 447 42 328 363 udział 82,90% 8,50% 6,10% 0,50% 2,00% 0,00% 100% 2009 wartość 319 054 27 512 21 322 2 073 6 868 49 376 878 udział 84,70% 7,30% 5,70% 0,60% 1,80% 0,00% 100% 2010 wartość 353 009 28 806 21 482 2 406 7 312 57 413 072 udział 85,50% 7,00% 5,20% 0,60% 1,80% 0,00% 100% 2011 wartość 403 984 31 022 22 022 2 821 7 871 53 467 773 udział 86,40% 6,60% 4,70% 0,60% 1,70% 0,00% 100% 2012 wartość 429 916 34 453 19 486 3 477 7 219 133 494 684 udział 86,91% 6,96% 3,94% 0,70% 1,46% 0,03% 100% ź r ó d ł o: opracowanie własne na podstawie danych statystycznych nbp należności i zobowiązania monetarnych instytucji finansowych i banków.   preferencje w zakresie form alokacji oszczędności… 117 różne formy lokowania oszczędności należy rozpatrywać w kategoriach dóbr substytucyjnych. stąd innym czynnikiem zwiększającym atrakcyjność lokat bankowych w 2011 r. była niestabilna sytuacja na giełdzie, która powodowała pogarszającą się wycenę wartości akcji i jednostek funduszy inwestycyjnych. stan depozytów bankowych gospodarstw domowych w końcu 2011 r. przekroczył kwotę 482 mld pln, a do listopada 2012 r. gospodarstwa domowe powiększyły ten stan do 497 mld pln. w trakcie 2011 r. przez trzy kolejne kwartały gospodarstwa domowe zmniejszały zaangażowanie w inwestycje poza systemem bankowym, inwestycje te cechowała bowiem wysoka zmienność dochodowości i duże ryzyko inwestycyjne. mała liczba debiutów oraz niewielka łączna wartość rynkowa spółek debiutujących nie zachęcały gospodarstw domowych do wyboru form oszczędzania związanych z rynkiem giełdowym. do zwiększania zaangażowania gospodarstw domowych w takie inwestycje w trakcie 2011 r. nie zachęcały również notowania głównych indeksów giełdowych (mierzejewska, urbaniec 2012: 9–11). powolna poprawa wartości indeksów giełdowych w trakcie 2012 r. (np. wig) nie wpłynęła znacząco na zaangażowanie gospodarstw domowych na rynku akcji. 3. oszczędności gospodarstw domowych – diagnoza społeczna 2011 z analizy danych diagnoza społeczna 2011 udział gospodarstw domowych posiadających oszczędności w stosunku do wszystkich gospodarstw domowych powoli wzrasta (tabela 2). najczęściej polacy oszczędzają w lokatach złotówkowych w bankach oraz w gotówce. należy zwrócić uwagę na ograniczanie dywersyfikacji sposobów oszczędzania. w latach 2005–2011 przybyło jedynie gospodarstw domowych deklarujących oszczędzanie w bankach w złotych oraz w gotówce. tabela 2. gospodarstwa domowe deklarujące posiadanie oszczędności oraz formy gromadzenia oszczędności wyszczególnienie 2005 2007 2009 2011 udział gospodarstw domowych posiadających jakiekolwiek oszczędności 22,7% 27,7% 31,0% 36,1% wskazywane formy gromadzenia oszczędności lokaty w bankach w złotych 66,1% 66,8% 70,4% 68,0% lokaty w bankach w walutach obcych 9,6% 6,6% 5,4% 4,0% dorota krupa, damian walczak, ewa chojnacka or 118 wyszczególnienie 2005 2007 2009 2011 w obligacjach 5,8% 3,3% 3,6% 2,9% w funduszach inwestycyjnych 9,2% 14,5% 8,4% 7,2% indywidualne konto emerytalne 11,9% 9,0% 6,2% 4,3% w papierach wartościowych notowanych na giełdzie 3,2% 2,5% 2,0% 2,6% udziały oraz akcje w prywatnych spółkach akcyjnych 3,1% 2,4% 1,4% 2,1% lokaty w nieruchomościach 6,8% 6,4% 4,5% 3,0% lokaty w innych niż nieruchomości dobrach materialnych 2,6% 2,1% 1,8% 1,8% w gotówce 39,5% 44,2% 42,6% 44,7% w polisie ubezpieczeniowej x x x 9,1% w innej formie 6,0% 5,0% 6,0% 5,6% ź r ó d ł o: opracowanie własne na podstawie: diagnoza społeczna 2011, zintegrowana baza danych, http://www.diagnoza.com (dostęp 25.09.2012). wśród gospodarstw domowych posiadających jakiekolwiek oszczędności w 2005 r. 21% gospodarstw posiadało oszczędności o wartości przekraczającej sześciokrotność ich średniomiesięcznych dochodów. w latach 2007 i 2009 relacja ta wynosiła 17,9%, natomiast w 2011 r. 18,1% oszczędzających gospodarstw domowych posiadało oszczędności przekraczające ich sześciomiesięczne dochody. jak wskazano w tabeli 3, najrzadziej posiadanie oszczędności deklarowały gospodarstwa domowe należące do dwóch grup społeczno-ekonomicznych: ■ gospodarstwa domowe utrzymujące się z niezarobkowych źródeł innych niż emerytura i renta; ■ renciści. zapewne jest to powiązane z dochodami uzyskiwanymi przez te grupy społeczno-ekonomiczne. wśród pozostałych grup, poza pracującymi na własny rachunek, udział oszczędzających jest podobny. jednym z czynników decydujących o poziomie oszczędności jest dochód. jednak zapewne nie jest to najważniejszy powód. rolnicy uzyskują niższe dochody od rencistów2, a mimo tego zdecydowanie częściej od nich oszczędzają. 2 pomiar dochodu wśród rolników jest bardzo trudny i deklarowanie przez nich dochodów w badaniu zapewne opierało się na szacunku i było subiektywne.   preferencje w zakresie form alokacji oszczędności… 119 tabela 3. posiadane oszczędności i dochody netto gospodarstw domowych według grup społeczno-ekonomicznych w 2011 r. wyszczególnienie grupa społeczno-ekonomiczna gospodarstw domowych ogółem pracownicy rolnicy pracujący na własny rachunek emeryci renciści utrzymujący się z niezarobkowych źródeł innych niż emerytura i renta posiadanie oszczędności tak 39,8% 33,6% 48,7% 35,9% 17,6% 15,5% 36,1% nie 60,2% 66,4% 51,3% 64,1% 82,4% 84,5% 63,9% ogółem 100% 100% 100% 100% 100% 100% 100% dochód netto na osobę (w pln) 1355,01 826,89 1750,26 1328,35 996,90 764,71 – ź r ó d ł o: opracowanie własne na podstawie: diagnoza społeczna 2011, zintegrowana baza danych, http://www.diagnoza.com (dostęp 25.09.2012). jak wynika z tabeli 4, wszystkie grupy społeczno-ekonomiczne w porównywalnym stopniu korzystają z lokat bankowych (z osób, które wskazały, że posiadają jakiekolwiek oszczędności). jedynie gospodarstwa domowe utrzymujące się z niezarobkowych źródeł zdecydowanie rzadziej wskazywały na korzystanie z tej formy oszczędzania. osoby należące do tej grupy społeczno-ekonomicznej deklarują utrzymywanie większości swoich oszczędności w gotówce, co może świadczyć o wykluczeniu finansowym takich osób ze względu na wiek bądź niskie dochody. tabela 4. posiadanie oszczędności w lokatach bankowych w pln w zależności od grupy społeczno-ekonomicznej wyszczególnienie grupa społeczno-ekonomiczna gospodarstw domowych ogółem pracownicy rolnicy pracujący na własny rachunek emeryci renciści utrzymujący się z niezarobkowych źródeł innych niż emerytura i renta lokaty w bankach w pln tak 68,5% 71,9% 72,9% 67,2% 63,2% 47,5% 68,0% nie 31,5% 28,1% 27,1% 32,8% 36,8% 52,5% 32,0% ogółem 100% 100% 100% 100% 100% 100% 100% ź r ó d ł o: opracowanie własne na podstawie: diagnoza społeczna 2011, zintegrowana baza danych, http://www.diagnoza.com (dostęp 25.09.2012). dorota krupa, damian walczak, ewa chojnacka or 120 najchętniej z lokat bankowych w walutach obcych korzystają pracujący na własny rachunek oraz, co może zastanawiać w porównaniu do wcześniej zaprezentowanych danych, utrzymujący się z niezarobkowych źródeł (tabela 5). źródłem takiego dochodu są np. środki otrzymywane w formie transferów z zagranicy. tabela 5. posiadanie oszczędności w lokatach bankowych w walutach obcych w zależności od przynależności gospodarstw domowych do określonych grup społeczno-ekonomicznych wyszczególnienie grupa społeczno-ekonomiczna gospodarstw domowych ogółem pracownicy rolnicy pracujący na własny rachunek emeryci renciści utrzymujący się z niezarobkowych źródeł innych niż emerytura i renta lokaty w bankach w walutach obcych tak 4,5% 2,6% 8,0% 2,1% 3,5% 8,6% 4,0% nie 95,5% 97,4% 92,0% 97,9% 96,5% 91,4% 96,0% ogółem 100% 100% 100% 100% 100% 100% 100% ź r ó d ł o: opracowanie własne na podstawie: diagnoza społeczna 2011, zintegrowana baza danych, http://www.diagnoza.com (dostęp 25.09.2012). jak wskazano w tabeli 6, cel oszczędzania nie jest istotnym wyznacznikiem sposobu oszczędzania. tabela 6. oszczędzający w lokatach złotówkowych i walutowych ze względu na cel oszczędzania cel oszczędzania oszczędzający na dany cel w lokatach złotówkowych oszczędzający na dany cel w lokatach walutowych bieżące wydatki 64,6% 3,8% stałe opłaty 63,3% 6,8% dobra trwałego użytku 78,1% 7,6% zakup domu/mieszkania 81,2% 12,3% remont domu/mieszkania 74,2% 6,5% leczenie 71,0% 4,9% rehabilitacja 75,6% 7,4% wypoczynek 75,5% 8,2% czarna godzina 72,0% 5,1%   preferencje w zakresie form alokacji oszczędności… 121 cel oszczędzania oszczędzający na dany cel w lokatach złotówkowych oszczędzający na dany cel w lokatach walutowych przyszłość dzieci 76,8% 7,5% starość 73,8% 7,2% inne cele 67,3% 8,2% bez celu 69,9% 6,2% ź r ó d ł o: opracowanie własne na podstawie: diagnoza społeczna 2011, zintegrowana baza danych, http://www.diagnoza.com (dostęp 25.09.2012). można jedynie zauważyć, że oszczędzający na zakup domu/mieszkania częściej korzystają z lokat bankowych niż oszczędzający na inny cel. zakup dóbr trwałego użytku to kolejny cel, na który gospodarstwa domowe oszczędzają na złotowych lokatach bankowych. natomiast oszczędzający, wskazujący za cel oszczędzania bieżące wydatki oraz opłaty stałe, należą do osób najmniej chętnie korzystających z lokat bankowych.  zakończenie udział gospodarstw domowych posiadających oszczędności systematycznie wzrasta, przy obniżającym się poziomie wielkości oszczędności rozumianym jako wielokrotność średniomiesięcznych dochodów danego gospodarstwa. mimo wielu sygnałów świadczących o kryzysie gospodarczym można oczekiwać, że odsetek gospodarstw domowych posiadających oszczędności będzie się zwiększał. jak wskazano w pracy, najpopularniejszą formą oszczędzania są i były lokaty w złotych w bankach. gospodarstwa domowe deklarowały, że te oszczędności są przeznaczane najczęściej na zakup domu/mieszkania oraz dóbr trwałego użytku. poza możliwością oszczędzania w gotówce, wszystkie inne formy oszczędzania są coraz mniej popularne. świadczy to zapewne o ostrożności osób fizycznych lub/i o obawach przed ryzykiem związanym z innymi formami inwestowania. ze względu na pesymistyczne prognozy dotyczące sytuacji ekonomicznej w europie i polsce należy spodziewać się, że lokaty bankowe będą najpopularniejszą, poza gotówką, formą oszczędzania. tym samym banki, mimo rosnącej konkurencji ze strony innych instytucji finansowych, prawdopodobnie nadal będą najczęściej wybierane jako miejsce alokacji oszczędności. tę sytudorota krupa, damian walczak, ewa chojnacka or 122 ację wspierają również wydarzenia związane z wykrywaniem i medialnym nagłośnianiem przypadków dotyczących piramid finansowych (sprawa ambergold), które znacznie ograniczają społeczne zaufanie potencjalnych klientów do parabanków.  literatura bywalec c. (2012), ekonomika i finanse gospodarstw domowych, pwn, warszawa. diagnoza społeczna 2011 (2011), diagnoza społeczna, raporty, czapiński j., panek t. (red.), http://www.diagnoza.com (dostęp 15.09.2012). fisher p. j., montalto c. p. (2010), effect of saving motives and horizon on saving behaviors, journal of economic psychology, no. 31. keese m. (2010), who feels constrained by high debt burdens? subjective vs. objective measures of household debt, journal of economic psychology, vol. 33, issue 1. keynes j. m. (1936), the general theory of employment, interest and money, macmillan, london, [za:] wójcik e. (2007), polskie gospodarstwa domowe na rynku oszczędności, bank i kredyt, t. 38, nr 7. kramer j. (1997), konsumpcja w gospodarce rynkowej, pwe, warszawa, [za:] wójcik e. (2007), polskie gospodarstwa domowe na rynku oszczędności, bank i kredyt, t. 38, nr 7. kubiszewska k. (2008), wybrane determinanty obecności gospodarstw domowych na rynku finansowym, [w:] gospodarstwa domowe na rynku finansowym, e. mazurek-krasnodomska (red.), politechnika gdańska, gdańsk. magri s. (2007), italian households’ debt: the participation to the debt market and the size of the loan, empirical economics, vol. 33, issue 3. mierzejewska g., urbaniec a. (2012), sytuacja finansowa sektora gospodarstw domowych w iv kwartale 2011 r., instytut ekonomiczny nbp, http://www.nbp.pl/home. aspx?f=/publikacje/domowe/domowe.html (dostęp 19.10.2012). należności i zobowiązania monetarnych instytucji finansowych i banków, narodowy bank polski, http://www.nbp.pl. struktura oszczędności gospodarstw domowych za lata 2005–2012, analizy online, http://www.analizy.pl. world bank (2011), sustaining high growth: the role of domestic savings, turkey country economic memorandum, synthesis report, world bank. wójcik e. (2007), polskie gospodarstwa domowe na rynku oszczędności, bank i kredyt, t. 38, nr 7. zalega t. (2012), konsumpcja. determinanty. teorie. modele, pwe, warszawa. żelazna k., kowalczuk i., mikuta b. (2002), ekonomika konsumpcji, elementy teorii, wydawnictwo sggw, warszawa, [za:] zalega t. (2012), konsumpcja. determinanty. teorie. modele, pwe, warszawa. date of submission: march 12, 2021 ; date of acceptance: may 2, 2021. * contact information: sonikrunal07@gmail.com, sdj international college, surat, phone: +91-9979540163; orcid id: https://orcid.org/0000-0002-5024-1086. ** contact information: desaimaulik@hotmail.com, k s school of business management, ahmedabad, phone: +91-9824501950; orcid id: https://orcid.org/0000-00032887-5856. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 1 soni, k., & desai, m. (2021). stock prices: effect of behavioral biases on investor’s mindset in gujarat state, india. copernican journal of finance & accounting, 10(1), 67–79. http://dx.doi. org/10.12775/cjfa.2021.004 krunal soni* sdj international college maulik desai** k s school of business management stock prices: effect of behavioral biases on investor’s mindset in gujarat state, india keywords: behavior of investors, company information, location of the company, ipo issue. j e l classification: g41. abstract: stock market performances has been observed through a good deal of literature out of which it has been found out that the behavior of investors is affected through many parameters exist in the market like occurrence of any sudden event or inf luence of individual advice apart from the past behavior of the stock which is called rational information regarding stock performances as per the traditional finance theory. the main aim of this paper is to identify the mediating effect among various types of information available in the market for investors to invest their money into the stock market as a part of different behavioral biases in the gujarat state, india. three types of constructs have been derived as a part of exploratory research design for this study by applying exploratory factor analysis (efa) which are company history, ipo issues and location benefit of the company out of the different variable taken for the study. strucmailto:sonikrunal07@gmail.com https://orcid.org/0000-0002-5024-1086 https://orcid.org/0000-0003-2887-5856 https://orcid.org/0000-0003-2887-5856 krunal soni, maulik desai68 tural equation modelling (sem) techniques have been applied to check the mediating effect among these three constructs. the study has been concluded that company information is an indirect construct, ipo issue is a dependent construct and location of the company is a mediating construct which is revealing that there is a significant impact of company information on the ipo issue done by any corporate in the market. ipo issue can also be affected by the location of the company which has the mediating effect on it.  introduction normally the trend of stock market can be identified with the help of investor’s decision under the different circumstances. in the past, traditional finance concept was existing to track the behavior of investors in the market which also assumes that the investors behave rationally which means that the decision of the investors to invest in the stock market is largely depend upon the belief and the recent information prevail in the market. in the recent time the behavior of investor concept is considered to the psychological and sociological concept theories with finance. this concept was first recognized by the daniel kahneman and vernon smith, the nobel prize getter in the subject of economics in the year 2002. basically, financing is based on how financial decisions of individuals and companies are affected by psychology in financial environments kim and nofsinger (2008). this was the period when the researcher started to felt that investors were occasionally irrational and due to which their decisions might be biased due to the incompetence to process complex information, and the lack of mental knacks. therefore, investment decisions are sometimes based on shortcuts of information handling and emotional files. this paper tries to find out the information related to company, ipo and location of the company on the behavior of investors in the stock market of gujarat state in india which have a direct impact regarding return of the investors. research methodology and research process objectives of the study to study the impact of various behavioral biases in the mind of investors on the selection of particular stock by them in the stock market. stock prices: effect of behavioral biases… 69 area of the study the area of the responses have been restricted to the gujarat state only to check the psychological impact of numerous behavioral biases on their mind while making choices for particular stock in the stock market. sample size to check the effect of various behavioral biases on the mindset of investor’s in the gujarat state, india, total 215 samples have been taken in the study from the respondents those who have the experience to make an investment in the stock market. sources of data for the benefit of this study, the data has been collected from the experienced investors from the stock market with the help of primary study with the help of designing structured questionnaire. direct effect and indirect effect through mediation hayes’ approach says that to prove mediation effect, first indirect effect should be significant otherwise there is no mediation effect among the construct. figure 1. example of mediation effect the area of the responses have been restricted to the gujarat state only to check the psychological impact of numerous behavioral biases on their mind while making choices for particular stock in the stock market. sample size to check the effect of various behavioral biases on the mindset of investor’s in the gujarat state, india, total 215 samples have been taken in the study from the respondents those who have the experience to make an investment in the stock market. sources of data for the benefit of this study, the data has been collected from the experienced investors from the stock market with the help of primary study with the help of designing structured questionnaire. direct effect and indirect effect through mediation hayes’ approach says that to prove mediation effect, first indirect effect should be significant otherwise there is no mediation effect among the construct. figure 1. example of mediation effect sources: hair, hult, ringle & sarstedt, 2016. s o u r c e s : hair, hult, ringle & sarstedt, 2016. krunal soni, maulik desai70 in the above figure 1, it can be seen that the reputation represents the indirect variable for the study, loyalty represents the direct variable for the study it means there is a significant impact of reputation on the loyalty of the employee which proves the direct effect of the model. apart from these two variables, there is a satisfaction variable which represents the mediation variable which indicates that to prove the impact of reputation of the loyalty, there is a partial impact of satisfaction of employee on their loyalty. endogenous, exogenous and moderating variable of the study company information is an exogenous variable, ipo issue of the company is endogenous variable and location of the company is mediating variable for the company. convergent and discriminant validity of the study: convergent validity which is a measure which is used in many field of studies to check that various measures of construct that are theoretically related with each other or not. one can confirm the convergent validity among different variable of construct by referring construct reliability (cr) and average variance explained value (ave). the standard criteria for convergent validity is cr > 0.7, ave > 0.5, cr > ave and maxr(h) > msv (hair, hult, ringle & sarstedt, 2016). formula for the measurement: cr = (∑x) 2/ (∑x) 2+ ∑(δ) ave = (∑x) 2/ n msv = highest of (fl) 2 out of the one construct maxr(h) = (ave) 2 discriminant validity is used to check whether the variable of the construct which is related to each other are actually unrelated. the criteria of discriminant validity is already depicted in table 4 below in the result and discussion. stock prices: effect of behavioral biases… 71 literature review and hypothesis design behavioral biases parameters keswani, dhingra and wadhwa (2019) in his paper they had depicted that the behavior of investors in the national stock exchange market (nse) is getting inf luenced by so many factors from the market like price changes of the stock, market information, over confidence, anchoring, availability bias, past trends of the stock, etc. sarin and sidana (2017) showcased that initial public offering (ipo) is one of the most outstanding issues of a firm which is also called, “going public” which is generally come out by the large scale industries. the major search of this paper is to identity the analysis of ipo grading on the behavior of investors in the indian stock market which is very significant. saravanan and satish (2014) focused on to check the significant impact of credit ratings given to ipo of any listed companies and its effect on the daily return of investors with respect to the changing in the behavior of investors, and they had concluded there is positive impact on the behavior of investors in the stock market with respect to the credit rating, and ipo information. hypothesis for this study is: h 0 : there is no significant impact of various behavioral biases on the mind of investors in the gujarat state for selection of particular stock. h 1 : there is no significant impact of various behavioral biases on the mind of investors in the gujarat state for selection of particular stock. factors of behavioral biases grinblatt and keloharju (2001) this paper also described that investors are more likely to hold, buy and sell those companies stock which are located near their location within 100 kilometers which is familiar with investors native language and also the governing body are from the same cultural and religious background. these factors have the impact on the behavior of both the types of investors in the stock market, i.e. households and less savvy institutions with the help of regression analysis. head, ries and swenson (1995) suggest that firms in the same industry with same locations because proximity generates positive externalizes or ‘agglomeration effects’. under this view, chance events and the government encouragements can have a permanent inf luence on the krunal soni, maulik desai72 geographical pattern of manufacturing. however, most confirmation on the causes and degree of industry localization has been based on stories, rather than statistics. this paper examines the location choices of 751 japanese manufacturing plants built in the united states since 1980. conditional logit estimates support the hypothesis that industry-level agglomeration benefits play an important role in location decisions. structural equation modeling structural equation modelling is a popular statistical technique for testing and estimating causal relations using a combination of statistical data and qualitative causal assumptions, which are typically based on a theory. this technique is widely used by social scientists for theory testing and development. sem is a combination of factor analysis and multiple-regression and it includes path analysis, and confirmatory factor analysis (noar, 2003). analysis of data and result table 1. reliability table cronbach’s alpha n of items 0.935 15 s o u r c e s : research outcome. table 1, indicates the reliability testing of cronbach’s alpha which is 0.935, it indicates the better reliability of the scale data. the collected primary response data is analyzed by different statistical methods. the analysis begins with advancement of the measurement scale counting all the construct restrained in the study. the measurement model is scrutinized for the inner consistency reliability and the attendance of necessary convergent and discriminant validity in the scale. the reliability of the mechanism is further obligatory to guarantee the presence of scale validity. the presence of reliability of an instrument specifies that the instrument affords the stable and consistent scores from a test. there are numerous methods to study the reliability of an instrument; however, in this study the internal consistency reliability is tested with the assistance stock prices: effect of behavioral biases… 73 of cronbach alpha. the internal consistency of a set of items or statements in the scale is the degree to which these items are homogeneous. internal consistency reliability of an instrument can be inspected with the help of cronbach’s alpha (kim, lee, kim, lim, shin, chung, yu, & hong, 2002). the value of cronbach’s alpha greater than 0.7 are benchmark criteria, greater than 0.8 are measured well, and more than 0.9 are measured to ref lect extraordinary internal consistency (cronbach, 1951). in the study the overall cronbach’s alpha value for 15items (variables) was found to be 0.935 representing that the recognized items were reliable. table 2. factor loading with kmo & bartlet test of sphericity for factors of behavioral biases variable com varimax rotated comp. factor variance expl eigen value normality sei 0.621 0.749 factor1: company information 26.286 6.175 0.004 lmi 0.639 0.777 rf 0.629 0.766 cra 0.625 0.726 ba 0.313 0.460 ch 0.700 0.741 pb 0.520 0.671 apc 0.631 0.750 factor 2: ipo issue 23.373 2.123 0.200* pi 0.745 0.814 opi 0.745 0.812 coi 0.745 0.775 mmsa 0.548 0.674 ii 0.726 0.837 factor 3: location 14.085 1.264 0.016 cpmf 0.690 0.830 infra 0.683 0.823 total variance explained 63.744 kmo test for sampling adequacy 0.850 bartlett test for spherisity sig. value 0.000** s o u r c e s : research outcome. krunal soni, maulik desai74 table 2, indicates the total factor loading by applying dimension reduction techniques in social science research. kmo test is showing the result of 0.850 sampling adequacy, and also the bartlet test of sphericity is 0.000** which is sufficient to run the factor loading. the result shows total three constructs have been extracted out of fifteen variables taken for the study to check the mediation effect between the constructs which has a significant impact on the behavior of investors in the stock market. the second column of table 2 represent the communalities of variable which represent how much particular variable supporting to the related construct in the relative percentage. the third column represent variance rotated component which describe that how the related variable contributing to the construct. column of factor represents the total factors which have been extracted by applying dimension reduction techniques. column five describe variance explained by each of the construct to support the study. in this study factor 1: company information have 26.286% of variance explained out of the total 63.744% of the total variance explained and same way ipo issue has 23.373% and location have 14.085% of total variance explained. which also means that the total statement of likert scale which had been asked the respondent, these factor represent only 63.744% of the total score which means 36.256% of the data have been lost. figure 1 indicates path diagram to represent the mediation effect of location of the company to see the impact of company information as an independent variable on the ipo issues of the company as a dependent variable which has the direct impact on the behavior of the investor at the time of investing money in the stock exchange. table 3. convergent validity measure for model fit variable cr ave msv maxr(h) company information 0.872 0.498 0.548 0.706 ipo issue 0.778 0.539 0.004 0.734 location 0.885 0.609 0.548 0.781 n o t e : cr = construct reliability, ave = average variance explained, msv = maximum shared variance, maxr (h) = maximum reliability (h). s o u r c e s : amos 20 output. stock prices: effect of behavioral biases… 75 figure 2. structural equation modelling for various behavioral biases sources: amos output. table 3. convergent validity measure for model fit variable cr ave msv maxr(h) company information 0.872 0.498 0.548 0.706 ipo issue 0.778 0.539 0.004 0.734 location 0.885 0.609 0.548 0.781 note: cr = construct reliability, ave = average variance explained, msv = maximum shared variance, maxr (h) = maximum reliability (h). sources: amos 20 output. table 3 describe that the study is fulfilling the criteria convergent validity, composite reliability (cr) is of a construct in the measurement model is used to quantity its reliability as s o u r c e s : amos output. table 3 describe that the study is fulfilling the criteria convergent validity, composite reliability (cr) is of a construct in the measurement model is used to quantity its reliability as well as convergent validity. it provides a more ref lective approach of overall reliability and analyses the reliability of the construct itself including the stability and correspondence of construct (hair et al., 2016). the ideal criteria for cr > 0.7, for “company information” it is 0.872, “ipo issue” is 0.778 and “location” is 0.885 indicating that all constructs representing the different behavioural biases in the measurement model have good reliability. it can be obviously stated that all the values of average variance extracted (ave) is a measure of the amount of variance that is caught by a construct in relation to the amount of variance due to dimension error. the ideal criteria for is ave > 0.5 and cr > ave and maxr(h) > msv.. use of cr is > 0.7, all the values of ave > 0.5, all the value of cr > ave and all the values of maxr (h) > msv which shows that all the three construct company information, ipo issues and location of the company shows the convergent validity for the model fit. krunal soni, maulik desai76 table 4. discriminant validity with goodness of fit measure criteria acceptance criteria model fit value grade χ2 = 169.265 df -87 cmin/df > 1 & < 3 1.946 excellent gfi ≥ 0.90 0.638 excellent srmr <0.08 0.056 excellent agfi ≥ 0.80 0.835 excellent nfi ≥ 0.90 0.858 excellent cfi >0.95 0.965 acceptable rmsea <0.06 0.080 excellent p close >0.05 0.05 excellent n o t e : n = 150, cmin = χ2 value, df = degrees of freedom, gfi = goodness of fit indices, srmr = standardized root mean square residuals, agfi = adjusted goodness of fit indices, nfi = normed fit index, cfi = comparative fit index, rmsea = root mean square error of approximation, p close = overall model fit three factors (9 items), χ2= chi square discrepancy. s o u r c e s : amos 20 output. discriminant validity of the scale specify the degree to which a construct is dissimilar from other constructs (hair et al., 2016). there are two methods are castoff by the researchers for examining the discriminant validity which shows the interdependence among the various construct that have been taken into the study. firstly, the correlation coefficient among the different sets of constructs in the dimension model which are also ideally different should not be high. this is because the different set of items are castoff for computing the different constructs. these items are predictable to be different from each other thus should not correlated too powerfully (trochim, 2006). second the average variances extracted (ave) guesses of the individual constructs in the measurement model are higher than the maximum common variances of each construct and the square root of ave should be higher than the correlations among the constructs. table 4 indicates discriminant validity value given by hu banter to check the model fit among the three construct affecting the behavior of the investors in the gujarat state. it can be concluded from the model that it is best fitted with the excellent category accept one criterion. the value of goodness of fit is also positive, which is an indicator of best model fit to stock prices: effect of behavioral biases… 77 check the mediation effect among the factors affecting the behavior of investors in the market. table 5. mediation effect through direct and indirect standardized effect model effect α value significance interpretation indirect effect 0.011** significant mediation direct effect 0.012** significant partial mediation n o t e : indirect effect mediation if α < 0.05**. then, direct effect complete mediation if α >0.05, direct effect partial mediation if α < 0.05. s o u r c e s : amos 20 output. a mediating effect is shaped once a third variable or construct interferes between two other related construct. table 5, indicates the mediation effect measurement given by baron & kenny. it can be inferred that, the standardized indirect values is 0.011 which is < 0.05 which shows the mediation effect of location of the company on company information to see the impact on ipo issue while taking decision by the investors to invest in a particular stock in the gujarat state of india. once the mediation effect has been checked standardized direct effect under the bootstrap confidence interval two tail significance level and the value is 0.012 < 0.05 which is significant and it proves partial mediation effect of location of company on company information and ipo issues. direct effects are the relationship connecting two constructs with a single dart; indirect effects are those relationships that include a sequence of relationships with at least one superseding construct tangled. thus, an indirect effect is an arrangement of two or more direct effects (complex path) that are characterized visually by multiple arrows. this indirect effect is characterized as the mediation effect.  conclusion in the country like india where financial market are at under development stage and investors are not that much advance in terms of their fundamental and technical knowledge regarding the movement of the stock prices in the krunal soni, maulik desai78 market due to which they can be easily get inf luenced by the other factors other than the stock prices movements which are called behavioral biases. this research paper has mainly focused to check the impact of these various behavioral biases on the investor’s mindset that leads to significant movement in the stock prices in the indian stock market in the area of gujarat state. behavior of investor’s are getting inf luenced by mainly three factors out of the fifteen statements asked to the investors in this study i.e. company information, ipo issues and location of the company. from these three factors, company information is independent construct, ipo issue is dependent construct and location of the company of plants and offices has a partial mediating effect along with company information which have the significant impact on the ipo issue of the company which can be ref lected in the behavior of investors in the stock market of gujarat state which has the significant impact on the movement of stock prices.  references cronbach, l.j. (1951). coefficient alpha and the internal structure of tests. psychometrika, 16(3), 297-334. grinblatt, m., & keloharju, m. (2001). how distance, language, and culture inf luence stockholdings and trades. the journal of finance, 56(3), 1053-1073. http://dx.doi. org/10.1111/0022-1082.00355. hair jr, j.f., hult, g.t. m., ringle, c., & sarstedt, m. (2016). a primer on partial least squares structural equation modeling (pls-sem ). new york: sage publications. head, k., ries, j., & swenson, d. (1995). agglomeration benefits and location choice: evidence from japanese manufacturing investments in the united states. journal of international economics, 38(3-4), 223-247. http://dx.doi.org/10.1016/00221996(94)01351-r. keswani, s., dhingra, v., & wadhwa, b. (2019). impact of behavioral factors in making investment decisions and performance: study on investors of national stock exchange. international journal of economics and finance, 11(8), 80-90. http://dx.doi. org/10.5539/ijef.v11n8p80. kim, j.h., lee, s.y., kim, c., lim, s.l., shin, j n., chung, w., yu, b.h., & hong, s.h. (2002). reliability and validity of a korean adaptation of the tinnitus handicap inventory. korean journal of otolaryngology-head and neck surgery, 45(4), 328-334. kim, k.a., & nofsinger, j.r. (2008). behavioral finance in asia. pacific-basin finance journal, 16(1), 1-7. http://dx.doi.org/10.1016/j.pacfin.2007.04.001. noar, s.m. (2003). the role of structural equation modeling in scale development. structural equation modeling, 10(4), 622-647. http://dx.doi.org/10.1207/ s15328007sem1004_8. stock prices: effect of behavioral biases… 79 saravanan, s., & satish, r. (2014). does ipo grading positively inf luence retail investors? a quantitative study in indian capital market. samzodhana – journal of management research, 2(1), 61-73. sarin, v., & sidana, n. (2017). a study of perceptions of investors towards ipo grading in india. international journal of economic research, 14(20), 757-770. trochim, w.m. (2006). convergent and discriminant validity, https://conjointly.com/ kb/convergent-and-discriminant-validity/ (accessed: 25.03.2011). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 27, 2014; date of acceptance: march 3, 2014. * contact information: joanna.szlezak@sgh.waw.pl, institute of finance, warsaw school of economics, al. niepodległości 162, 02-554 warszawa, poland, phone: 22 564 92 95. szlęzak-matusewicz j. (2014). models of tax incentives for r&d activities of enterprises in european union countries. copernican journal of finance & accounting, 3(1), 145–160. http://dx.doi.org/10.12775/cjfa.2014.012 joanna szlęzak-matusewicz* warsaw school of economics models of tax incentives for r&d activities of enterprises in european union countries keywords: tax incentives, research and development activities, tax credit. j e l classification: h21, o30. abstract: an aim of the author’s considerations contained in the article is to describe the models of tax incentives supporting research and development activity carried out by enterprises in european union countries, with a particular consideration of polish solutions as well as their attractiveness from the enterprises’ point of view. to achieve the objectives there were analyzed reports and surveys conducted by international organizations as well as presented the generosity level of tax incentives in different countries. there is also evaluation of polish legal regulations supporting r&d activities, pointing out the potential directions of change in tax law. modele ulg podatkowych na działalność badawczo-rozwojową przedsiębiorstw w krajach unii europejskiej słowa kluczowe: ulgi podatkowe, działalność badawczo-rozwojowa, kredyt podatkowy. klasyfikacja j e l: h21, o30. abstrakt: celem rozważań prowadzonych w artykule jest charakterystyka modeli ulg podatkowych wspierających działalność badawczo-rozwojową przedsiębiorstw w krajoanna szlęzak-matusewicz146 jach unii europejskiej ze szczególnym uwzględnieniem rozwiązań polskich, a także ich atrakcyjności z punktu widzenia przedsiębiorstw. w tym celu autorka przeanalizowała badania oraz raporty prowadzone przez międzynarodowe organizacje prezentując jednocześnie poziomy „hojności” ulg w poszczególnych krajach. w artykule dokonano także oceny polskich rozwiązań w zakresie wspierania działalności badawczo-rozwojowej przedsiębiorstw wskazując ewentualne kierunki zmian przepisów. translated by joanna szlęzak-matusewicz  introduction research and development (r&d)1 is considered as a basic ingredient of economic growth. both economic theory and empirical evidence support the view that r&d plays a vital role in raising productivity on a sustainable basis (romer 1990, 71–101). therefore, in many countries, there is carried out an active innovation-related policy. among the innovation-targeted policy’s tools, which are, among other things, regulations in the area of patent law or spending funds on research and development, as well as on education, there must also be mentioned fiscal instruments which include tax incentives. an aim of the author’s considerations contained in the article is to describe the models of tax exemptions supporting research and development carried out by enterprises in the european union countries, with a particular consideration of polish solutions as well as their attractiveness from the enterprises’ point of view. the research methodology and the course of the research process the paper contains descriptive research studies. to achieve the objectives there were analyzed reports and surveys conducted by international organizations (e.g. oecd). the analysis of different models of tax incentives supporting r&d activities supporting r&d activities let the author draw the conclusions concerning polish legal regulations. on the basis of the conclusions the author designated the desired shape of polish tax incentive for r&d activity. 1 research activity and development work, r&d in its abbreviated form, comprises a creative work undertaken in a systematic way for the purpose of extension of the sources of knowledge, including the knowledge of the human being, culture and society as well as the use of those resources for the purpose of creating new applications. models of tax incentives for r&d activities… 147 expenditures on research and development in poland against the background of european union countries one of the five headline targets of the europe 2020 strategy is to achieve an r&d intensity (r&d expenditure as a percentage of gdp) of 3% in the eu. however, the eu countries have certain difficulties with meeting the expectations. in 2011, r&d intensity in the eu-27 stood at 2.03%. it was below the figures recorded in japan (in 2009: 3.36%), south korea (2010: 4%) and the united states (2009: 2.87%), but higher than in china (2009: 1.7%). among the eu member states, only finland (3.78%), sweden (3.37%) and denmark (3.09%) exceeded the eu goal of devoting 3% of gdp to r&d, also outperforming the united states. other seven member states, namely germany (2.84%), austria (2.75%), slovenia (2.47%), estonia (2.38%), france (2.25%), the netherlands and belgium (both 2.04%) were above the eu-27 average although below the target figure of 3%. poland is at the end of the statistics allocating only 0.76% of gdp for r&d in 2011 (eurostat 2013). though the index for poland is one of the lowest in the international comparisons, its value is growing from one year to another. the relatively biggest growth was noted in 2012 (more than 18%), see table 1. table 1. gerd related to gdp specification 2008 2009 2010 2011 2012 domestic expenditure on r&d (gerd) (million pln) 7 706 9 070 10 416 11 687 14 353 gdp (million pln) 1 275 508 1 344 505 1 416 585 1 528 127 1 595 225 gerd related to gdp (%) 0.6 0.67 0.74 0.76 0.9 s o u r c e : central statistical office (gus) 2013. according to the methodology adopted after the oecd, entities carrying out or financing research and development are grouped by the so-called institutional sectors, among which there are distinguished the following ones: the sector of business enterprises, government, higher education, private nonprofit, and abroad. an important element in the evaluation of economy innovativeness is an analysis of the structure of origin of the funds financing r&d, which, in the international comparisons, is carried out through identification of the sector from which there originated the funds being the source of financjoanna szlęzak-matusewicz148 ing. the share of the sector of enterprises in financing r&d is growing from one year to another. in 2010, it accounted for 24.4%, in 2011 – for 28.1%, and in 2012 – 32.3% (gus 2013). however, these values differ significantly from the european union’s average where 53.9% of expenditures on r&d2 are financed by the sector of enterprises. the leaders in this classification are finland, sweden, and slovenia, where 75% or more of r&d activities are financed on the basis of the private sector. the comparison of poland with its natural competitors – the czech republic and hungary – is not satisfactory, either. the index in both these countries accounts for 47% (eurostat 2013). the level of investments in r&d depends on enterprises’ decisions on the amount of funds allocated for r&d. however, enterprises do not invest in r&d heavily compared to other spheres of their activity. a certain number of reasons can explain this situation. first of all, firms have difficulties to fully appropriate the returns on their investment as some of the resulting knowledge will leak out or spill over to other firms, to the benefit of the society. firms have also difficulties in finding external finance and qualified people to conduct research. besides, results of r&d research are unknown and require a long time to appear. it is emphasised that despite the expectations not always greater expenditures on r&d are attributed to higher profit (coad, rao 2010). therefore, investment in r&d is considered to be very risky. nonetheless, taking into consideration the fact that the current source of economic growth will be exhausting e.g. low labour cost, natural recourses availability, eu accession, good location, one should search for new sources of the competitive advantage. one of the possible ways to sustain the stable economic development is to invest into innovation that leads to industry restructuring and creating new business models (wiśniewska, janasz 2013, 18). unfortunately, this solution is extremely difficult to implement in such countries as poland. in the literature, it is stressed that one of the biggest problem of the economic growth in the countries that passed through the systemic transformation is to overcome anti-innovative approach to all aspects of business life, including innovation (bal-woźniak 2012, 38). therefore, the risk concerning r&d should be divided between the enterprise that invests into r&d and the government who should support such entity by using direct or indirect methods. 2 data for the year 2010. models of tax incentives for r&d activities… 149 models of tax incentives for r&d governments can use different mechanisms to stimulate business r&d including direct funding of private r&d and fiscal incentives. each form of stimulating r&d activities has advantages and disadvantages. the direct funding, e.g. credit loans, grants, equity financing of industry research allows governments to retain control over the nature of r&d conducted. thus, the social and economic policy of the government can be realised because subsidies are aimed at a particular sector of the economy, e.g. health care. moreover, direct funding of business r&d has a positive effect on gaining external source of financing, especially by small and medium-sized enterprises. however, direct supporting of industry r&d can be a source of the distortion in market competition. unlike, fiscal incentives are addressed to a broad circle of recipients leaving them independence in the context of how to spend funds on r&d. by reducing the cost of r&d, fiscal reliefs raise the net present value of prospective research projects. fiscal measures do not distort market decisions. if properly designed, they can have lower administrative costs for the government than other types of programmes or supports, although tax incentives can be extremely costly in terms of budget expenditures. besides, using of the tax incentives is possible if the enterprise generates income or tax liabilities. thus, indirect system of supporting eliminates small and young companies from the circle of beneficiaries although they are treated as the most innovative (czerniak 2013, 83). the choice of the mechanisms of supporting (direct or indirect) depends mainly on the innovation policy mix and economic targets. if the government’s aim is an increase of the total level of r&d expenditures, tax incentives are a better solution. on the other hand, if the government aims for financial supporting a particular stage of r&d research, then direct financing is more efficient. however, the general trend across countries has been to increase the availability and generosity of r&d tax incentives, making the policy mix more indirect over time (oecd 2012, 157). that is why more and more countries implement tax incentives to their economic strategy. r&d tax incentives are widely used in oecd and non-oecd countries. according to oecd, 27 out of the 34 oecd member countries offer r&d tax incentives to business.3 the existing r&d tax incentives regimes differ significantly across countries in terms of 3 data for the year 2011. joanna szlęzak-matusewicz150 their generosity, their design and how they explicitly target different firms or specific areas. fiscal incentives for r&d usually take one of the four forms (sti 2004, 12; mohnen 1999, 2; stewart, j. warda, r. d. atkinson 2012, 3): ■ tax credits which are the amounts deducted from tax liabilities, ■ tax allowances which are amounts deducted from gross income, ■ tax deferrals which are reliefs in the form of delay in the tax payment, ■ preferential tax rates. tax credits are specified percentage of r&d expenditures, which are applied against payable income tax, while an allowance is a deduction from the taxable income. thus, the value of tax allowance depends on the income tax rate, while a tax credit does not. this is of a particular importance in case of the progressive tax scale whose diversified tax rates affect the amount of deduction. another distinction between tax allowance and tax credit concerns the possibility to carry the non-deducted from income expenses forward to next years. in the case of exemption, such possibility, as to the principle, does exist. on the other hand, in the case of tax credit, such possibility does not exist, unless there is established a mechanism allowing for settlement of reimbursement of expenses incurred. both, tax credits and tax allowances, are of three types depending on whether they are based on deductions based on the volume of r&d expenditure (volume incentives), deductions based on increment of that volume (incremental incentives). the third type is a hybrid of the two earlier deductions. it’s hard to provide an unequivocal answer, which solution – volume incentives or incremental incentives – better affects stimulation of research and development activity. a defect of the solution based on expenditure volume is that it does not support exclusively new spending but also that which the entrepreneur would have incurred if deduction did not exist. in turn, the solution based on incremental expenditures depends on the amount assigned on the grounds of changes in r&d expenditures. this is a significantly cheaper solution for the state budget compared to the relief depending on the expenditure volume. on the other hand, in the construction of deduction based on incremental expenditure, there is bypassed the fact of the cyclical nature of r&d expenditure. this feature causes that lack of incremental expenditures in a certain period will result in lack of the opportunity to make use of an incentive despite reporting the activeness in the r&d sphere. however, this problem will not be seen in the case of volume incentive. models of tax incentives for r&d activities… 151 tax deferrals can appear as an accelerated depreciation which allows firms to reduce the value of a fixed asset involved in r&d a higher rate during the early years of the asset’s lifespan, yielding a larger deduction over the lifespan of the asset relative to normal depreciation rates. the analysis of tax solutions occurring in various countries compels to indicate the fourth model of tax preferences stimulating growth of r&d expenditures, i.e. the preferential tax rates. as an example there may be indicated france, which applies a reduced income tax rate relative to revenues obtained from sales of a patent, or also the netherlands – in the case of income from innovative activities (oecd 2012, 157). expenditures incurred by entrepreneurs on research and development may be divided into two groups: investment (capital) expenses and current costs. the former comprise expenditures on new fixed assets connected with r&d, purchase (acquisition) of second-hand fixed assets as well as on the initial equipment of investments not included to fixed assets, while purchased from investment funds (gus). the second group of expenses, significantly more important, comprises personnel outlays as well as costs of consumption of materials, nondurable objects and energy, costs of services made by other contractions (other than r&d) including: third-party processing, transport, repair, bank, postal, telecommunication, information technology, publishing, municipal, etc. services, costs of business trips and other current costs including, in particular, taxes and fees charged on costs of operating activity and profits, property insurance and equivalents to the benefit of employees – in the part in which they are related to the r&d activity. total current expenditures do not include depreciation of fixed assets as well as vat (gus). comparing the amount of both expenditures, it appears that it is current expenditures what constitutes the main factor of investment. in poland, current expenditures accounted in 2012 for 69% (gus 2012) of expenditures incurred by enterprises on r&d activity.4 review of the research concerning the impact of tax incentives on r&d activity of enterprises research on the impact of tax incentives supporting r&d activities on enterprises’ activity in the r&d sphere has been carried out for many years. most re4 in developed countries, this ratio is estimated at the level of 90%; after: (hall 1995). joanna szlęzak-matusewicz152 search has been conducted in the united states and canada. as an example we can indicate research of n. bloom, r. griffith and j. van reenen (2002) who examined the impact of fiscal incentives on the level of r&d investment. they have created an econometric model of r&d investment using a new panel of data on tax changes and r&d spending in nine oecd countries over a 19-year period (1979–1997). they have found evidence that tax incentives are effective in increasing r&d intensity. d. czarnitzki, p. hanel and j. rosa (2011) have presented the study that examined the effect of r&d tax credits on innovation activities of canadian manufacturing firms. they have investigated the average effect of r&d tax credits on a series of innovation indicators such as: number of new products, sales with new products, originality of innovation, etc. using a non-parametric matching approach. compared to a hypothetical situation in the absence of r&d tax credits, recipients of tax credits showed significantly better scores on most but not all performance indicators. therefore, they have concluded that tax credits lead to additional innovation output. few countries have performed as many studies of their tax incentives supporting r&d activity as the us and canada. according to hall and van reenen (2000) there are several reasons for this: 1. most of these schemes have been in place for a shorter time period. 2. they have relied on the us evaluations for evidence of effectiveness. 3. internal government studies may have been done, but these are hard to come by if you are not connected with researchers within the government in question. however, in recent time, we can find some research in europe, especially in countries where new package of tax incentives has been introduced. a. cappelen, a. raknerud and m. rybalka (2012) have examined a tax-based incentive on r&d – skattefunn – that was introduced by norwegian government in 2002. they have analyzed the effects of skattefunn on the likelihood of innovating and patenting. using a rich database for norwegian firms, they have found that projects receiving tax credits result in the development of new production processes and to some extent the development of new products for the firm. however, the scheme does not appear to contribute to innovations in the form of new products for the market or patenting. there are different methods of the research on effectiveness of the tax incentives. a the first way to evaluate the effectiveness of r&d tax reliefs is to compare the r&d expenditures before and after changes in tax incentives to r&d. using this method j. cordes (1989) have showed that r&d increased in models of tax incentives for r&d activities… 153 the united states after the passage of the economic recovery tax act of 1981 and the tax equity and fiscal responsibility act of 1982 and continued to be strong despite the economic recession. another approach is a survey. e. mansfield and l. switzer (1985) conducted a survey of 55 canadian companies. the results revealed that r&d generated by tax incentives did not amount to more than 40% of the lost tax revenue. the third approach to the evaluation of r&d tax incentives consists in estimating the relationship between r&d and tax incentives by econometric methods. the representatives of this stream is, among others, b. hall (1993). one of the indices used in the oecd comparative analyses is the so-called bindex (warda 2006, 34) designed by j. warda, which measures the relative cost effectiveness of r&d expenditures in a given tax regime. the b-index expresses the minimum cost effectiveness relationship with which investment in r&d becomes paying under the conditions of a given tax regime. in international comparisons, the more frequently used index is the tax subsidy ratio being a difference between 1 and the b-index. an index higher than 0 means that the tax regulations allow reduction of tax liabilities of the enterprise investing in r&d by more than the amount of expenditures actually incurred for that purpose. in such situation, one may ascertain that incentive effectiveness by way of subsiding r&d activity is apparent. and if the index is equal to 0 or lower than 0, the tax regime remains neutral or affects negatively on enterprises’ activeness as regards r&d (see table 2). table 2. tax subsidy ratio in some countries (2012) country tax subsidy ratio france 0.43 sme and 0.34 large firms portugal 0.41 ireland 0.13 austria 0.12 netherlands 0.33 sme and 0.14 large firms denmark 0.29 hungary 0.22 belgium 0.14 united kingdom 0.28 sme and 0.11 large firms slovenia 0.05 joanna szlęzak-matusewicz154 country tax subsidy ratio norway 0.25 sme and 0.22 large firms spain 0.35 czech republic 0.20 germany -0.02 sweden -0.01 finland -0.01 luxembourg -0.01 switzerland -0.01 poland -0.01 italy 0.12 slovak republic -0.01 greece 0.01 s o u r c e : stewart, warda, atkinson 2012. r&d incentives in european union countries the most advantageous for enterprises incentives systems are in force in france, spain, portugal, hungary, and in the czech republic. this is evidenced by a relatively high tax subsidy ratio whose value, among the eu countries, is the highest in portugal, france and spain. table 3 contains the solutions adopted in the european union member states with the highest tax subsidy ratio. on the other hand, there are not anticipated r&d incentives in the legislations of, inter alia, finland, germany and sweden (oecd 2012, 157). nevertheless, in these countries an activator of r&d activity is an extensive cooperation between enterprises and research institutes. models of tax incentives for r&d activities… 155 table 3. description of the basic5 tax allowances in some countries country tax rate (%) tax allowance tax credit eligible expenditures tax subsidy ratio volume incremental volume incremental austria 25 10% current expenditures and capital expenditures 0.12 czech rep. 19 200% current expenditures and capital expenditures 0.20 france 33.33 30% of expenditures related to the amount of 100m euros and 5% of expenditures above 100m euros current expenditures and capital expenditures 0.34 in case of large enterprises and 0.43 in case of enterprises from the sme sector spain 30 50% of proceeds on patent rights assignment 25 +42 of the amount of excess of total r&d expenditures related to the mean of the two last years current expenditures 0.35 8% capital expenditures except for buildings portugal 12.5–27.5 32.5% +50 of the amount of excess of total r&d expenditures related to the mean of the last two years (maximum to the level of 1.5 million euros) current expenditures and capital expenditures 0.41 5 besides the incentives specified in table 3, there are also other reliefs envisaged in legislations of individual states. for example, they may be allowances related to payment of wages and salaries for employees involved in r&d activity or the preferential rates of taxation of licensing revenues. joanna szlęzak-matusewicz156 country tax rate (%) tax allowance tax credit eligible expenditures tax subsidy ratio volume incremental volume incremental hungary 10/19 200% +100% in case of cooperation with research institutes 0.22 poland 18/32 or 19 150% only intangible assets set forth in the act -0.01 s o u r c e : own compilation based on: stewart, warda, atkinson 2012; oecd 2011; deloitte 2013. reliefs and incentives occurring in the eu countries have the form (in most cases) of tax credit based on the volume of r&d expenditures (volume incentives). recently, there can be seen the trend to replace deductions determined on the incremental basis by deduction depending on the volume of outlays. adoption of this solution, although certainly more expensive for the state budget, is simpler in introduction and better motivates entrepreneurs for r&d activeness in the situation of economic slowdown. the years of the financial crisis are a period of reforming of r&d incentives regimes. the general trend taking place in the majority of oecd member states is growth of relief accessibility, amount of deductions as well as simplification of the relief construction. as an example there can be indicated france where in 2008 the complicated hybrid mechanism of deductions was replaced by a simple r&d expenditure volume incentive. the basis for deductions in the european solutions is, first of all, current expenditure, inclusive of, inter alia, remuneration of the employees involved in research and development activity, exploitation costs, materials, costs of energy, etc. deductible are also capital expenditures, albeit, in this case, there may take place some limitations (e.g. exclusions related to buildings). the r&d incentive6 theoretically exists also in the polish legal order, although in reality it does not anything common with the classical r&d incentive taking place in other countries of the european union (ustawa 1992, art 18b; 6 in the article, there is abandoned the incentive issuing from having the status of r&d centre due to very restrictive conditions to be met to be eligible to preferences. in 2013, there were only 28 such entities; after: http://bip.mg.gov.plchile/jednostki+organizacyj models of tax incentives for r&d activities… 157 ustawa 1991, art 26c). the construction of relief for purchase of new technologies allows deducting from the taxation base 150% of the expenses incurred, of which 100% on the general principle, most often within depreciation, and the additional 50% within the framework of the relief. theoretically the tax advantage is apparent. in practice, however, it is unnoticeable by entrepreneurs who do not display any major interest in deductions. in 2012, only 42 enterprises taxed by the personal income tax and 94 – by the corporate income tax exercised the right to make use of the allowance. in earlier years, the trend was similar.7 this is also confirmed by the annual data published by the oecd, in accordance to which the ratio of use r&d incentive related to gdp is zero, whereas in the czech republic it accounts for 0.028%, in hungary – for 0.09%, in portugal – for 0.172%, and in france, which takes the first position in this classification – for 0.261% (oecd 2012, 162). impact of the tax incentive on enterprises’ activeness in the r&d sphere measured by the tax subsidy ratio (-0.01)8 has a reverse direction than the intended one. such a construction of the incentive causes that every zloty invested in r&d activity by the entrepreneur has to add 1 grosz, whereas, for example, in hungary, from every 100 invested forints the entrepreneur recovers more than 22 forints. the tax incentive in poland, therefore, is not a factor activating the r&d sphere of entrepreneurs, and the reasons for that must be seen, first of all, in the too narrow base of deduction-eligible expenditures. deductions comprise only expenses incurred on intangible assets purchased by the taxpayer. this means that if the entrepreneur carries out the research and development activity on their own account, they cannot count on tax preferences because the inventive rewards exclusively acquisition and not production of intangible assets. therefore, the direction of the polish tax incentive is opposite compared to the solutions adopted in other countries. in those countries, the relief includes, first of all, entrepreneurs’ current expenditures on their own research. therefore, if in poland the legislator has anticipated in the innovation-related policy an indirect support for activities in the r&d sphere by way of fiscal instruments, the regulations in this area should be amended. the relief ought ne+nadzorowane+lub+podlegle/centra+badawczo+rozwojowe, (accessed: 23 december 2013). 7 in more detail on the construction of the allowance and its use by entrepreneurs, see: (szlęzak-matusewicz 2012). 8 this ratio may even amount to -0.02; (adamczyk 2010, 51). joanna szlęzak-matusewicz158 to cover current expenditures incurred on research carried out on one’s own account.  conclusions r&d activity is not only costly but also encumbered by a high risk of failure. in order to stimulate activeness of enterprises in this sphere, in the majority of eu member states are applied tax incentives in the form of reliefs deducted from income or tax. however, their generosity depends primarily on the construction thereof in individual countries. notwithstanding, in every case the financial advantage issuing from the relief deployment is apparent. poland is the only country where the relief has its discouraging effect for entrepreneurs’ innovative attitudes. having this in mind, the relief construction in poland should be revised. the following changes should be introduced: ■ widening the deduction base volume. reasonable seems to be introduction of the opportunity to deduct, even within the present construction, current expenditures which are personnel outlays as well as costs of consumption of materials. they amount to almost 70% of all expenditures incurred by enterprises on r&d activity.9 ■ providing access to the tax relief for entrepreneurs taxed by f lat rate (19%) and simplified forms of taxation. ■ introducing clear interpretation what kinds of expenditures can be deducted within the tax relief. ■ increasing the threshold of the deduction from 150% do 200% (e.g. czech republic, hungary). lack of amendments to the tax regulations in this respect will cause that poland will be one of not numerous countries where low expenditures on r&d activities are accompanied by lack of fiscal instruments supporting this sphere what, in turn, may still more enhance the technological gap between poland and the remaining countries of the european union. 9 such an opinion was also provided by a. adamczyk who had carried out an analysis of the b-index value for poland; (adamczyk 2010, 55). models of tax incentives for r&d activities… 159  references adamczyk a. 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(2006), treatment of business investments in intellectual assets: an international comparison. oecd science, technology and industry working papers, 2006/04, oecd, http://www.oecd-ilibrary.org/docserver/download/5l9pscs408vl. pdf ?expires=1390988263&id=id&accname=guest&checksum=22f8d1c93b1978d 301f6456ccf05e4b5 (accessed: 12.12.2013). wiśniewska j., janasz k. (ed.) (2013), innowacje i jakość w zarządzaniu organizacjami, cedewu, warszawa. date of submission: february 2, 2020; date of acceptance: march 5, 2020. * contact information: muktarabdala11@gmail.com, ethiopian telecommunication corporation, 378 jimma, oromia, ethiopia, phone: +251917242699. ** contact information: kenenisalemi@gmail.com, college of business and economics jimma university, 378 jimma, oromia, ethiopia, phone: +251912065549. *** contact information: egutu2013@gmail.com, college of business and economics jimma university, 378 jimma, oromia, ethiopia, phone: +251913759922; orcid id: https://orcid.org/0000-0002-1357-6477. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 shifa, m.a., debela, k.l., & tarfa, e.g. (2019). determinants of the profitability of commercial banks in ethiopia. copernican journal of finance & accounting, 8(4), 185–201. http://dx.doi. org/10.12775/cjfa.2019.024 muktar abdela shifa* ethiopian telecommunication corporation kenenisa lemmi debela** jimma university endalew gutu tarfa*** jimma university determinants of the profitability of commercial banks in ethiopia keywords: health, profitability, determinants, commercial banks, pooled ols, ethiopia. j e l classification: g20, g21, g28. abstract: the healthiness of the banks is critical because they are highly fragile, vulnerable and closely integrated with other sectors. one way of testing the healthiness of the banks is through the measure of their profitability. profitability is the primary objective of any business including commercial banks. profitable banks can withstand any negative shocks and stabilize the whole financial sector. the main objective muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa186 of this study was to analyze the determinants of the profitability of commercial banks in ethiopia. to achieve this objective a secondary source balanced panel data of ten years from nine commercial banks were used, and internal determinants; business mix indicators, risk aversion index, management efficiency, liquidity risk, bank size, and external determinants; ownership, market concentration, and gdp, were regressed against return on asset by using the pooled ols technique. results indicated that internal determinants were more important than external factors. thus business mix indicators, risk aversion index, management efficiency, liquidity risk and bank size had a significant effect on the return on asset, whereas except ownership other external determinants, i.e. market concentration and gdp were insignificant to determine return on assets of ethiopian commercial banks. finally bank managers were recommended to rely on the debt financing sources paying a due attention to the optimal levels, mobilize more deposits, extend loan provision and expand business mixes services.  introduction background of the study since the 17th century the banking industry has been serving as the most important financial sector of any economy of the world. the performance of banks can progress or stagnate the economies of countries. it is better to remind that the banking sector was the major contributing factor in both the great depression of the 1929 as well as the 2008’s economic recession. the income of the country and its economic level, inf lation rates, economic policies, exchange rates across the world, and laws and regulations are considered as certain macroeconomic factors that can inf luence the success or failure of the banks regardless of the countries they are situated. diversification plays an important role in a bank’s desirable efficiency; its costs could be associated with higher income volatility, implying higher risk (doan, lin & doong, 2018). ignoring measures of non-traditional activities in the estimation of bank efficiency can be misleading, although at least two studies find little or no impact of off-balance sheet activities (jagtain, saunders & udell, 1995 and kosmidou, tanna & pasiouras, 2008 cited in doan, lin & doong, 2018) on the examination of cost or profit efficiency. the health of the banking sector is critical because they are economically important and closely integrated with other sectors (devis, 1995). one way of testing healthiness of banks is through the measure of their profitability. commercial banks with a better financial performance have a better determinants of the profitability of commercial banks in ethiopia 187 ability to resist any negative shocks and contribute to the stability of the financial sector (athanasoglou, sophocles & delis, 2008). since the banking sector is the major player in the economic development of nations, a close watch for the factors that can affect the performance of commercial banks is crucial for the managements, investors and policy makers. statement of the problem finance is a life blood of industry, commerce and trade. the banking industry is serving as a backbone in any modern business activities. a bank is a financial institution in which a substantial part of its business consists of mobilization of deposits and providing loan and advances. it plays an intermediary role by mobilizing and channeling scattered financial resources from temporarily surplus societies to deficit productive investments. banks provide savers a return on their deposit by means of interest, and charge interest by lending the same money to borrowers. this smooth f low of funds facilitates the development of the overall economy (praveen, 2011). objectives of the study the main objective of this study is to examine the determinants of bank profitability in ethiopian commercial banks. and achieved the following specific objectives; 1. investigate the effect of bank specific factors, i.e. business mix indicators, risk aversion index, management efficiency, liquidity risk and bank size, on the profitability of commercial banks in ethiopia. 2. analyzes the impact of external factors, i.e. market concentration, ownership, and gdp growth rate, on the profitability of commercial banks in ethiopia. research hypothesis the following hypotheses were developed in line with the specified objectives. a; ho: there is significant relationship between risk aversion index and profitability of commercial banks in ethiopia. muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa188 b; ho: there is significant relationship between management efficiency and profitability of commercial banks in ethiopia. c; ho: there is significant relationship between business mix indicators and profitability of commercial banks in ethiopia. d; ho: there is significant relationship between market concentration and profitability of commercial banks in ethiopia. e; ho: there is significant relationship between gdp and profitability of commercial banks in ethiopia. f; ho: there is significant relationship between ownership and profitability of commercial banks in ethiopia. g; ho: there is significant relationship between liquidity risk and profitability of commercial banks in ethiopia. h; ho: there is significant relationship between bank size and profitability of commercial banks in ethiopia. literature review according to banking regulation act, “banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, and an order or otherwise” (praveen, 2011). in the economy banks perform a multitude of functions. however, the three primary functions in an economy: the operation of the payment system, the mobilization of saving and the allocation of savings to investment projects. by allocating capital to the highest value use while limiting the risks and costs involved, the banking sector can exert a positive inf luence on the overall economy, and is thus of broad macroeconomic importance (roland, 2011). theory of the banking firm is different from the theory of the firm which is widely applicable to any business with the exception of banks. theory of the banking business underlined that banks make profit by selling liabilities with one set of characteristics (a particular combination of liquidity, risk, size, and return) and using the proceeds to buy assets with a different set of characteristics through the process of asset transformation (mishkin & eakins, 2012). by allocating capital to the highest value use while limiting the risks and costs involved, the banking sector can exert a positive inf luence on the overall economy, and is thus of broad macroeconomic importance (roland, 2011). determinants of the profitability of commercial banks in ethiopia 189 the impact of banking activities on monetary statistics, such as money supply figures and credit extension to the domestic private sector, is also of concern to policy makers. reviews of banks can serve as a structured mechanism to ensure that monetary authorities recognize and quantify non intermediated funding and lending, as well as other processes that are important to policy makers in the central bank. the advantage of a structured approach to evaluating banks is that banking sector behavior is considered in a systematic and logical manner, making sector statistics readily available for macroeconomic monetary analysis. bank supervisors are thereby placed in a position where they are able to meaningfully assist monetary authorities, whose policies are inf luenced by developments in the banking sector (greuning & bratanovic, 2009). empirical literature review profitability of financial institutions specifically banks are affected by internal and external factors. bank profitability is usually measured by the return on assets, and is expressed as a function of internal and external determinants (dietrich & wanzenried, 2009). a study by habtamu (2012) for the period of 2002 to 2011, on the determinants of the profitability of private commercial banks in ethiopia, proxies return on asset, return on equity and net interest margin as a measure of profitability. million, matewos and sujata (2014) for study period from 2003 to 2014 on the impact of credit risk on profitability found that nonperforming loan ratio have a negatively significant effect, and loan loss provision have positively significant, while capital adequacy ratio and loan to deposit ratio have insignificant impact on the profitability of commercial banks in ethiopia. the research methodology and the course of the research process research design to achieve the study objective as well as to test the hypothesis, the study employed quantitative research design by analyzing secondary source balanced panel data. the quantitative research is a means for testing objective theories by examining the relationship among variables. muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa190 data sources and data collection techniques the study used only secondary source data. secondary data generally provide a source of data that is both permanent and available in a form that may be checked relatively easily by others, i.e. more open to public scrutiny. sampling design the total population for this study constitutes all commercial banks operating in ethiopia. for the study a ten years data is used. so purposive sampling of commercial banks which started operating before 2007 is included in this study this is because of majority of the banks in the country has age of less than ten years. as a result out of the 17 banks currently operating in the country nine banks, namely commercial bank of ethiopia, dashen, abysinia, weagen, united, nib, cooperative bank of oromia and lion bank, are selected because they have 10 and more year’s age in the bank industry. finally the result is inferred for the whole population. data analysis techniques the data, after collection, was processed and analyzed in accordance with the outline laid down for the purpose at the time of developing the research plan. this is essential for a scientific study and for ensuring that we have all relevant data for making contemplated comparisons and analysis. technically speaking, processing implies editing, coding, classification and tabulation of collected data so that they are amenable to analysis. after collecting the row data it is edited, coded and tabulated. model specification regression analysis is a statistical methodology that utilizes the relation between two or more quantitative variables so that a response or outcome variable can be predicted from the other, or others. this methodology is widely used in business. determinants of the profitability of commercial banks in ethiopia 191 the model adopted for the analysis can be re-written as follows: roai,t = α + β1(capta)i,t + β2(bmix)i,t + β3(gexopin)i,t + +β4(loandep)i,t + β5(bs)i,t + β6(own)i,t + β7(hh_ta)it + +β8(gdp)it + εi,t (1) where: roa = return on asset capta = capital to total asset gexopin = general expanses to operating income loandep = loan to deposit bmix = business mix (service charge and commission income to total operating income) bs = bank size (total asset) own = ownership hhi_ta = herfindhal-hirschman index in terms of total asset gdp = real gdp growth rate ε = the error term t = time (in year) i = individual bank capital adequacy capital adequacy ratio is measured by the proportion of banks equity capital to total asset. studies found that the relationship between capital adequacy ratio and banks profitability is negative. the higher the ratio of equity to asset ratio the higher will be the risk aversion ability of the banks, but this high capital adequacy ratio also negatively impacts the profitability, growth capability and competitive ability of banks (ezike & oke, 2013). bank size (asset) the effect of bank size on the profitability of commercial banks is limited up to certain extent. as the size of the banks increase profitability also increases, but beyond certain extent the impact will be negative (athanasoglou, sophocles & matthaios, 2005). goddard, molyneux and wilson (2004) also found positive relationship between bank size and bank profitability. muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa192 liquidity risk liquidity risk is basically a bank’s inability to meet the cash demand of its customers. it indicates the ability of the bank to deal with deposit withdrawals and loan demands (million, matewos & sujata, 2014). the higher amount of loans against per dollar deposit increases bank liquidity risk (samad, 2015). amdemikael (2012) concluded that the relationship for liquidity risks found to be statistically insignificant on the profitability of commercial banks in ethiopia. management efficiency ongore and kusa (2013) believe that management efficiency is a complex subject to capture with financial ratio, and it is still one of the key determinants that affect the bank’s profitability. generally, the operating profit to income ratio, the ratio of cost to total asset, and the ratio of net interest expense to net interest income, were used by prior studies to measure management efficiency. among these researchers nessreddine, fatman and anis (2013), mulualem (2015) used the above last two ratios respectively. business mix indicators service charge & commission income to total income ratio is used to represent the business mix for the banks. although fee based services in general generates lesser income than loans, it is expected to add something on banks profit and have a positive relationship with profitability. the share of income from service charge and commission is found to be one of key drivers of the performance of ethiopian banks (tesfaye, 2014). the herfindahl hirschman index (hhi) the relation of hhi to bank profitability is not certain because many of these market structure studies do not provide consistent support for the approach that there is a direct relation between concentration and profitability (patria, capraru & ihnatov, 2015). the result of their study on the eu 27 banking system found that market concentration diminishes bank profitability. thus competition has a positive impact on the banks profitability. determinants of the profitability of commercial banks in ethiopia 193 economic growth (gdp) according to herald and heiko (2009), economic growth is one of the determining factors for commercial banks deposits. therefore, increase in gdp increases wellbeing of the society, which inf luences the growth of commercial banks profitability positively. simiyu and ngile (2015) in kenya found that from 2001 to 2012 real gdp growth rate had positive but insignificant effect on the roa of banks. tan and floros (2012) found a negative relationship between gdp growth and bank’s profitability in china over the period from 2003 to 2009. tesfaye (2014) founds that the real gdp growth rate which measures the economic growth of ethiopia from 1990-2012 had insignificant impact on performances of commercial banks. return on assets return on asset is the appropriate measure for management’s efficiency by indicating its ability to utilize the company’s asset in generating returns. return on assets is the net profit after tax divided by total assets, and it indicates the returns generated from the assets financed by the bank. this is probably the most important single ratio in comparing the efficiency and operating performance of banks as it indicates the returns generated from the assets that bank owns. the roa formula is as follows: roa=net income/average total assets ownership a study by abebaw and kapur (2011) on the financial performance and ownership structure of ethiopian commercial banks found that private banks had better profitability, asset quality and capital adequacy performance and public sector banks were better in cost management measures. similarly yidersal and wang (2017) concluded that there was a significant impact of ownership structure on the profitability of commercial banks measured by roe. muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa194 table 1. summary of variables and their measurement variables notation proxy dependent return on asset roa net income/total asset independent variables business mix bmix commission & service charge/total operating income liquidity risk loandep total loan/total deposit capital adequacy or risk aversion capta equity/total asset bank size(asset) bs log total asset management efficiency gnexopin generalexp/operating income bank concentration (hhi_ta) sum of the square of market share (herfindhal-hirschman index) economic growth gdp %ge of real gdr growth ownership own 0=private 1=government s o u r c e : own competition, 2018. results and conclusions in this sub section a general overview of the data used for the analysis is presented. each variable consists of ninety observations, i.e. a panel with ten years and nine cross sections (bank). the mean, median, standard deviation, maximum and minimum values of each variable were tabulated as follows. table 2. summery statistics mean median maximum minimum std. dev. observations roa 0.029182 0.032200 0.049400 -0.0376 0.011998 90 own 0.111111 0.000000 1.000000 0.000000 0.316030 90 gexopin 0.677786 0.366672 16.65205 -16.36671 2.790958 90 loandep 0.610032 0.591408 0.967004 0.296870 0.121911 90 hhi_ta 0.434219 0.449075 0.459838 0.378287 0.028413 90 gdp 10.22820 10.35250 11.79500 7.958000 1.123022 90 determinants of the profitability of commercial banks in ethiopia 195 mean median maximum minimum std. dev. observations capta 0.136860 0.125736 0.507519 0.044576 0.060806 90 bs 9.067999 9.018887 12.39009 5.583496 1.298482 90 bmix 0.184467 0.181074 0.444737 0.000000 0.080835 90 s o u r c e : own competition, 2018. the mean for the return on asset indicates 2.92 percent. that is in the past 10 years from 2007 to 2016 commercial banks in ethiopia were making a profit of 0.0292 cents on average per unit birr investment on asset. the maximum roa between these years was 4.94 percent and the minimum is a loss of 0.0376 cents per each birr. the loss in roa is due to the inclusion of newly established banks in the sample, for which startup cost for new bank over weights their revenues. the ratio of general expense and loan loss provision to operating income is considered as a proxy for management efficiency in controlling expenses. the mean figure is 0.6778 which indicates that on average, 67.78 percent of the operating income of commercial banks in ethiopia goes to general expenses. these expanses are non-interest expenses excluding employee salary and benefits. the maximum amount is 16.65 and the lowest is -16.367, the negative amount is due to higher startup costs faced by newly established banks. for which operating expenses are higher and operating income is at negative because of infancy stage of the business. the variability in operating expanse between the banks is 2.79. ownership has coded 1 and 0 for the government and private banks respectively. therefore the mean value is 11.11 percent, which means among the sampled nine banks 11.11 percent is government owned, and the rest 88.8 percent are private banks. here even if it is only one government owned bank it is giant and dominant one in the country. capital to total asset ratio is a proxy used to measure the risk aversion index of the banks. on average 13.68 percent of the bank’s asset is financed by share holders’ equity while the remaining 86.32 percent is debt. the maximum amount of asset covered by equity capital is 50.75 percent while the minimum is only 4.46 percent. the deviation between the banks is 6.61 percent which table 2. summery… muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa196 shows higher variability of capital financing between the ethiopian commercial banks. with regard to business mix indicators which are measured by the ratio of service charge and commission to total operating income from interest and non-interest sources. herfindhal-hirschman index in terms of asset measures the bank concentration in the banking industry of the country. gdp is one factor among the macroeconomic determinants of bank profitability. test for multicollinearity one of the assumptions in the ordinary least squares is that explanatory variables were not perfectly correlated with one another. the statistical method for testing multicollinearity is analyzing the correlation coefficients between explanatory variables or variance inf lation factor (vif) gujarati (2004). accordingly, in this data the variance inf lation factor for all variables is below 10. this indicates that there is no problem of multicollinearity. table 3. correlation index between explanatory variables table 3. correlation index between explanatory variables source: own competition, 2018. model specification tests random effect versus pooled ols (breusch and pagan lm test) the pooled ols is a pooled linear regression without fixed and/or random effects. it assumes a constant intercept and slopes regardless of group and time period. regression results and interpretations the general objective of this study is to find out the determinants of bank profitability in the ethiopian commercial banks. a panel data of ten years from the sampled nine commercial banks were used to achieve the specified objectives and answer the hypothesized statements. table 4. regression output source: own competition, 2018. regression output the regression model is set as follows; bs 1.0000 bs bs -0.6976 0.0196 0.0655 0.1931 -0.3396 0.6970 -0.4573 loandep 0.2721 0.2563 -0.1229 0.1666 0.1634 -0.4815 1.0000 own -0.4293 -0.0613 -0.1037 -0.0000 -0.0000 1.0000 gdp 0.1623 -0.1688 -0.1816 -0.1881 1.0000 hhi_ta 0.0980 -0.0178 0.0577 1.0000 bmix -0.0906 0.0120 1.0000 gnexopin -0.1844 1.0000 capta 1.0000 capta gnexopin bmix hhi_ta gdp own loandep _cons -.0228835 .027418 -0.83 0.406 -.0774367 .0316697 bs .0035123 .0017717 1.98 0.051 -.0000128 .0070374 loandep .0213929 .0089832 2.38 0.020 .0035192 .0392666 own -.0095011 .0040068 -2.37 0.020 -.0174734 -.0015288 gdp .0010893 .0010112 1.08 0.285 -.0009227 .0031013 hhi_ta .0029155 .0342972 0.09 0.932 -.0653252 .0711562 bmix .0488447 .0115105 4.24 0.000 .0259424 .0717471 gnexopin -.0013142 .0007116 -1.85 0.068 -.0027301 .0001017 capta -.089917 .044769 -2.01 0.048 -.1789932 -.0008408 roa coef. std. err. t p>|t| [95% conf. interval] robust root mse = .00876 r-squared = 0.5147 prob > f = 0.0000 f( 8, 81) = 5.88 linear regression number of obs = 90 s o u r c e : own competition, 2018. determinants of the profitability of commercial banks in ethiopia 197 model specification tests random effect versus pooled ols (breusch and pagan lm test) the pooled ols is a pooled linear regression without fixed and/or random effects. it assumes a constant intercept and slopes regardless of group and time period. regression results and interpretations the general objective of this study is to find out the determinants of bank profitability in the ethiopian commercial banks. a panel data of ten years from the sampled nine commercial banks were used to achieve the specified objectives and answer the hypothesized statements. table 4. regression output table 3. correlation index between explanatory variables source: own competition, 2018. model specification tests random effect versus pooled ols (breusch and pagan lm test) the pooled ols is a pooled linear regression without fixed and/or random effects. it assumes a constant intercept and slopes regardless of group and time period. regression results and interpretations the general objective of this study is to find out the determinants of bank profitability in the ethiopian commercial banks. a panel data of ten years from the sampled nine commercial banks were used to achieve the specified objectives and answer the hypothesized statements. table 4. regression output source: own competition, 2018. regression output the regression model is set as follows; bs 1.0000 bs bs -0.6976 0.0196 0.0655 0.1931 -0.3396 0.6970 -0.4573 loandep 0.2721 0.2563 -0.1229 0.1666 0.1634 -0.4815 1.0000 own -0.4293 -0.0613 -0.1037 -0.0000 -0.0000 1.0000 gdp 0.1623 -0.1688 -0.1816 -0.1881 1.0000 hhi_ta 0.0980 -0.0178 0.0577 1.0000 bmix -0.0906 0.0120 1.0000 gnexopin -0.1844 1.0000 capta 1.0000 capta gnexopin bmix hhi_ta gdp own loandep _cons -.0228835 .027418 -0.83 0.406 -.0774367 .0316697 bs .0035123 .0017717 1.98 0.051 -.0000128 .0070374 loandep .0213929 .0089832 2.38 0.020 .0035192 .0392666 own -.0095011 .0040068 -2.37 0.020 -.0174734 -.0015288 gdp .0010893 .0010112 1.08 0.285 -.0009227 .0031013 hhi_ta .0029155 .0342972 0.09 0.932 -.0653252 .0711562 bmix .0488447 .0115105 4.24 0.000 .0259424 .0717471 gnexopin -.0013142 .0007116 -1.85 0.068 -.0027301 .0001017 capta -.089917 .044769 -2.01 0.048 -.1789932 -.0008408 roa coef. std. err. t p>|t| [95% conf. interval] robust root mse = .00876 r-squared = 0.5147 prob > f = 0.0000 f( 8, 81) = 5.88 linear regression number of obs = 90 s o u r c e : own competition, 2018. regression output the regression model is set as follows. roa = β0 + (β1) capta + (β2)gexopin + (β3) bmix + (β4) hhi_ta + (β5) loandep + (β6) bs+ (β7) own+ (β8) gdp+ e (2) muktar abdela shifa, kenenisa lemmi debela, endalew gutu tarfa198 the regression output implies that all bank specific determinants, business mix, loan to deposit ratio and banks size have a significant positive impact, whereas capital to total asset and general expense to total operating income have negative impact on roa. in addition from the external determinants bank concentration and gdp growth rates have a positive insignificant impact, whereas ownership by the government has a significant negative impact on roa of commercial banks in ethiopia. gdp is one among the macroeconomic factors that determine the profitability of commercial banks.  conclusion the general objective of the study is to analyze the determinants of the profitability of commercial banks in ethiopia. to achieve this goal internal determinants; business mix indicators, risk aversion index, management efficiency, liquidity risk, bank size, and external determinants; ownership, market concentration, and gdp, are regressed against return on asset. a panel data of ten years from the sampled nine banks were used to come up with findings. the study results indicate that internal determinants are more important and strongly determine the banks’ profitability than externals variables. thus business mix indicators, risk aversion index, management efficiency, liquidity risk and bank size has a significant effect on the return on asset, whereas except ownership other external determinants, i.e. market concentration and gdp has no significant relationship to determine return on asset of ethiopian commercial banks. recommendations based on the above findings the following recommendations are drawn. ■ since capital financing is found relatively costly than debt financing commercial banks in ethiopia should emphasize more on mobilizing customer deposits than issuing equity. also they have to render as much as loans from the mobilized deposit in order to utilize generated customer deposits. but due care have to be taken on both (deposit and loan) sides for optimal limits so as to balance their risk taking capabilities. determinants of the profitability of commercial banks in ethiopia 199 ■ it is recommended for ethiopian commercial banks to expand the existing, and bring new innovative value added services which generates additional business mixes beside their normal operation. ■ it is advisable for ethiopian commercial banks to expand in size. because, as the size of the banks increases their profitability also increases. currently national bank of ethiopia also inf luencing existing private banks to expand their capital and branches. ■ managers should focus on minimization and efficient utilization of general expenses in order to generate as much operating income and boost the profitability of commercial banks in ethiopia.  references abebaw, k., & kapur, d. 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(2013). determinants of banks performance viewing test by cognitive mapping technique, a case of biat. international review of management and business research, 2(1). ongore, v.o., & kusa, g.b (2013). determinants of financial performance of commercial banks in kenya. international journal of economics and financial issues, 3(1), 237-252. patria, n., capraru, b., & ihnatov, i. (2015). determinants of banks’ profitability: evidence from eu 27 banking systems. procedia economics and finance, 20, 518-524. podder, b. (2012). determinants of profitability of private commercial banks in bangladesh: an empirical study. a thesis for a professional master in banking and finance, asian institute of technology, thailand. praveen, m.v. (2011). basics of banking and insurance. malappuram: university of calicut. roland, c. (2011). banking sector liberalization in india. paper prepared for “ninth capital markets conference” at the indian institute of capital markets, mumbai. samad, a. (2015). determinants of bank profitability; empirical evidence from bangladesh banks. international journal of financial research, 6(3), 173-179. http://dx.doi. org/10.5430/ijfr.v6n3p173. simiyu, c.n, & ngile, l. (2015). effect of macroeconomic variables on profitability of commercial banks listed in the nairobi securities exchange. international journal of economics, commerce and management, 3(4), 1-16. tan, y., & floros, c. (2012). bank profitability and inflation: the case of china. journal of economic studies, 39(6), 675-696. http://dx.doi.org/10.1108/01443581211274610. determinants of the profitability of commercial banks in ethiopia 201 tesfaye, b. (2014). the determinants of ethiopian commercial banks performance. european journal of business and management, 6(14). yidersal, d.d., & wang, w. (2017). ownership and profitability: evidence from ethiopian banking sector. international journal of scientific and research publications, 7(2). date of submission: july 13, 2020; date of acceptance: october 10, 2020. * contact information: rajesh.desai8@gmail.com, chimanbhai patel institute of management and research, ahmedabad gujarat, india – 380015, phone: 9904042289; orcid id: https://orcid.org/0000-0003-3611-8409. ** contact information: jay@jaydesai.net, b.k. school of business management, ahmedabad, gujarat, india – 380015, phone: 9879212369; orcid id: https://orcid.org/ 0000-0001-6707-8580. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 desai, r., & desai, j. (2020). moderating effect of firm size on capital structure determinants: evidence from indian food processing industry. copernican journal of finance & accounting, 9(3), 61–81. http://dx.doi.org/10.12775/cjfa.2020.012 rajesh desai* chimanbhai patel institute of management and research jay desai** b.k. school of business management moderating effect of firm size on capital structure determinants: evidence from indian food processing industry keywords: determinants, capital structure, food processing, size, moderation. j e l classification: g30, g32. abstract: present research paper examines the determinants of capital structure decision of indian food processing industry and assesses the moderating effect of firm size on this relationship. using financial data of 40 firms for 10 years (2009–10 to 2018–19), panel least square regression analysis has been performed for data analysis. based on regression results, the study concludes tangibility, tax rate, and cash f low as significant determinants of long-term borrowing for overall sample firms. on the other hand, tangibility, liquidity and profitability are significant factors affecting short-term borrowings of selected companies. further, the study confirms that size of the firm moderates the effect of selected determinants on debt ratio of different categories of firms. rajesh desai, jay desai62 it is, further, found that small size firms employ more debt with increasing profitability whereas medium and large size firms tend to reduce their debt levels with increasing profitability. the research findings will enhance understanding of capital structure determinants by probing the moderating impact of company size on it. the findings will be helpful to corporate managers in forming their borrowing strategies based on the relative size. further, they can identify important factors to be considered while choosing debt or equity or in case of debt either short term or long term.  introduction in current scenario, one of the major challenges faced by finance managers is to decide about the optimal source of funds. a business may be financed by combination of debt and equity funds termed as ‘capital structure (cs)’ and the choice of cs is governed by costs and benefits associated with the given source of financing. debt funds act as tax shield as interest payments are allowed under tax laws (modigliani & miller (mm), 1963) and it does not affect the decision authority of managers (myers & majluf, 1984) but excessive use of debt creates financial burden on firms and enhances the risk of bankruptcy. on the other hand, equity funds do not require fix coupon payment and can help in maintaining the cost of financial distress (myers, 1984) but mere dependence on equity funds increases the cost of financing as investors perceive it as riskier avenue and expect premium for the same. hence, every firm needs to opt for such combination of debt and equity that maximizes value of its shareholders. cs has remained the most debatable issue in literature as well as it is a vital decision for managers to make. further, choice of an optimal cs is a function of multiple factors that vary across various economies and even across industries operating in same economy. david durand (1952) has ignited research in this area through ‘net operating income (noi) approach’ and concluded that value of the firm is independent of cs. modigliani and miller (1958) have enlightened the issue of financing decision with their ‘theory of irrelevance’ and confined the conclusion given by david durand (1952). later, mm (1963) have made a correction in form of tax benefits due to debt issue and concluded positive effect of debt on firm value. in 1963, ezra solomon has contradicted the irrelevance approach and stated that higher debt can reduce the overall cost of funds as cost of debt is lower than that of equity. besides financial factors, various theories have proposed behavioral and non-financial aspects affecting the cs choice. pecking order theory (pot), first proposed by donaldson (1961) and later developed by myers and moderating effect of firm size on capital structure determinants… 63 majluf (1984), does not emphasis on an optimal cs but provides preferential order of financing followed by firms. the theory states that profitable firms usually depend more on retained profits for financing new or existing projects which is followed by borrowings and the last preference is given to ordinary equity. agency cost theory (act) (meckling & jensen, 1976) emphasizes on the issue of separation of ownership and control arising from issue of debt or/and equity. it results into conf licting interest of managers & equity holders as well as equity holders and lenders. the theory concludes that borrowings act as a financial control on managers in form of compulsory interest payments and reduce wasteful spending. myers (1984) has explained the existence of an optimal debt-equity ratio using trade-off theory (tot). interest payment provides tax advantage but also adds to the cost of financial distress and therefore firms attempt to tradeoff between them by balancing the debt-equity proportions. according to myers (2003), a firm should equate the present value of cost of financial distress with that of interest tax shield to arrive at an optimal cs. an abridged view of cs theories has been presented in figure 1. figure 1. cs theories firms usually depend more on retained profits for financing new or existing projects which is followed by borrowings and the last preference is given to ordinary equity. agency cost theory (act) (meckling & jensen, 1976) emphasizes on the issue of separation of ownership and control arising from issue of debt or/and equity. it results into conflicting interest of managers & equity holders as well as equity holders and lenders. the theory concludes that borrowings act as a financial control on managers in form of compulsory interest payments and reduce wasteful spending. myers (1984) has explained the existence of an optimal debt-equity ratio using trade-off theory (tot). interest payment provides tax advantage but also adds to the cost of financial distress and therefore firms attempt to tradeoff between them by balancing the debt-equity proportions. according to myers (2003), a firm should equate the present value of cost of financial distress with that of interest tax shield to arrive at an optimal cs. an abridged view of cs theories has been presented in figure 1. figure 1. cs theories source: compiled by author. besides theatrical contributions, ample of empirical inquiries have been conducted on determinants of cs but results are inconclusive (bhaduri, 2002; rani, narain & dhawan, 2016; sathyanarayana, harish & kumar, 2017; iqbal, ahmad & ali, 2019; vintila, gherghina capital structure theories traditional net income theory net operating income theory tax based modigliani miller approach trade off static trade off cost based agency cost profitability pecking order s o u r c e : compiled by author. besides theatrical contributions, ample of empirical inquiries have been conducted on determinants of cs but results are inconclusive (bhaduri, 2002; rajesh desai, jay desai64 rani, narain & dhawan, 2016; sathyanarayana, harish & kumar, 2017; iqbal, ahmad & ali, 2019; vintila, gherghina & toader, 2019). such indecisive research findings require further empirical evidence to support the theatrical underpinnings. present study attempts to add value to the existing literature in two ways. first, the study incorporates the moderating effect of firm size by categorizing them into various sub-samples. panel regression analysis has been performed for overall sample as well as for sub-samples to assess this moderating effect. second, though past studies have examined the determinants of cs in indian context, limited evidence is available on food processing industry (aggarwal & acharya, 2019) and hence the study attempts to bridge the gap in the existing literature. the food processing industry is the 5th largest industry in terms of production, consumption, export, and expected growth in india. it worth usd 65.4 billion in 2018 and growing at compounded annual growth rate (cagr) of 11 percent. it contributes nearly 14 percent to gross domestic product (gdp), 13 percent to export and 6 percent to total industrial investment and it is expected to reach usd 894.98 billion by 2020 (brand india, 2017). government initiatives such as foreign collaborations, industry licenses, 100 percent export-oriented units, mega food parks, infrastructure for agro-processing clusters, and operation greens are major growth drivers of this industry (ministry of food processing industries, 2019). the remainder of this study proceeds as follows: the following section describes the research methodology and process. this is followed by the review of the literature and formulation of hypotheses. third section presents the outcome of the data analysis and result discussion. the final section includes the implication of the study, direction of future research, and the conclusion. research methodology and the course of research process primarily, the study is aimed to examine the determinants of cs decision in food processing industry of india considering the moderating effect of firm size. out of total 66 listed companies, 12 companies, listed for less than 10 years, and 14 companies, with incomplete data, are dropped from the sample. finally, 40 companies with complete financial data of 10 years (2009-10 to 2018-19) are considered as sample and a balanced panel data set of 400 firm-year observations has been developed. moderating effect of firm size on capital structure determinants… 65 to assess the moderating effect of firm size, companies are classified as small (asset value <100 cr.), medium (100 cr. to 500 cr.), and large (>500 cr.). financial data has been collected from prowess – center for monitoring indian economy (cmie) database. cmie is one of the largest databases available on indian companies and economy and has been referred in several past empirical studies as source of data (mallikarjunappa & goveas, 2007; gupta, 2015; aggarwal & acharya, 2019). the study adopts panel least square regression methodology for econometric analysis. literature review and hypothesis development tangible assets long-term debts are usually secured by pledging fixed assets with banks because of large amount and longer repayment period. higher proportion of fixed assest (termed as tangibility) facilitates debt raising for companies (m’ng, rahman & sannacy, 2017; sathyanarayana et al., 2017; yousef, 2019). on the contrary, act (ross, 1977) supports negative relationship between tangibility and debt ratio. acaravci (2015) has validated the conclusion of act through statistical evidence. following the conclusion of past results, the study hypothesized positive effect of tangible assets on debt ratio. h1: there is a significant positive relationship between asset tangibility and debt financing. liquidity liquidity shows the ability of a firm to meet its’ short term obligations. ramli, latan and solovida (2019) have suggested direct impact of liquidity as higher current ratio indicates capabilities to stand against short-term financial crisis. as against this, pot and act signifies that greater liquidity results into less borrowings as it ensures sufficient funds and less requirement of external funds (berkman, i̇skenderoğlu, karadeniz & ayyildiz, 2016; vintila et al., 2019). following the conclusion of pot and tot, negative relationship has been predicted between liquidity and borrowings. h2: there is a significant negative relationship between liquidity and debt financing. rajesh desai, jay desai66 opportunities of growth abor (2007) proposed that growing firms require capital to finance large scale operations. besides, growing firms prefers debt as compared to equity to avail favorable financial leverage hence growth has positive impact on debt ratio (rani et al., 2016; sathyanarayana et al., 2017; mayuri & kengatharan, 2019). on the contrary, tot and act proposed negative relation between growth and debt financing as growing firms are more exposed to losses in case of financial distress (yousef, 2019) due to their instable earnings (bauer, 2004). based on the research output of emerging economies, positive relationship has been assumed between growth and borrowings. h3: there is a significant positive relationship between growth and debt financing. profitability positive and consistent financial performance act as an attraction for lenders and banks as it ensures safety of funds and regular returns. profitability improves borrowing power of firms and gives positive signal in the capital market (ross, 1977; myers & majluf, 1984). this positive relationship has been confimed by dakua (2018), ramli et al. (2019) and rao, kumar and madhvanal (2019). on the contrary, companies with stable profits gradually discharge their liabilities and become less dependent on external funds. profitbale firms rely on internally generated funds and hence there exists inverse relationship between profitability and leverage (bauer, 2004; iqbal et al., 2019). though empirical findings are inconsistent, the present study assumes negative impact of profitability on borrowings following research findings from emerging economies (gupta, 2015; abor, 2005 & 2007; banerjee & de, 2014). h4: there is a significant negative relationship between profitability and debt financing. rate of tax interest payment on debt reduces tax liability and hence value of the levered firm will be higher than unlevered firm to the extent of tax savings on financial cost (mm, 1963). though theatrically it is inferred that tax rate has positive re moderating effect of firm size on capital structure determinants… 67 lation with leverage, very few empirical studies have proved the same (bauer, 2004). based on conclusion from mm (1963), the study presumes positive impact of tax rate on debt ratio. h5: there is a significant positive relationship between rate of tax and debt financing. non-debt tax shield fama and french (1998) have concluded that actual tax benefits availed from debt financing are considerably lower than what promised theatrically. against this, non-debt tax shield such as depreciation and amortisation may serve as an alterantive to reduce tax liabilities (deangelo & masulis, 1980). therefore, non-debt tax shield has negative impact on debt-financing (hossain & hossain, 2015; vijayalakshami, 2016). h6: there is a significant negative relationship between non-debt tax shield and debt financing. cash f low according to tot, firms with higher cash f lows are exposed to less risk and hence able to borrow easily indicating direct impact of cash f low on debt financing (myers, 1984). on the contrary, according to pot, internally generated cash f lows can be used as alternative source of funds hence higher level of cash f lows tend to reduce debt ratios (myers & majluf, 1984). empirical findings have reported contradictory results on relation between cash f lows and borrowings (hossain & hossain, 2015; karadeniz, kandir, balcilar & onal, 2009; bhaduri, 2002). hence, the relationship between borrowings and cash f lows requires further probing. h7: there is a significant relationship between cash f lows and debt financing. debt-coverage capacity firms with higher debt should earn enough earnings to serve interst cost of borrowings. high degree of debt service capacity depicts ability of firm to meet its fixed interest obligations evenif operating profits decline considerarajesh desai, jay desai68 bly. hence borrowings are directly correlated with debt coverage ratio of firms (mittal & singla, 1992; mallikarjunappa & goveas, 2007). h8: there is a significant positive relationship between debt-coverage and debt financing. research gap and conceptual model though substantial literature is available on capital structure determinants, the outcomes are inconclusive and contradictory. besides, very limited research work is carried out by including food processing indutry except by aggarwal and acharya (2019) who have focused on medium size firms only. further, factors affecting financing choice and their strength may vary due to firm size. therefore, this paper attempts to fill this gap and add value to the existing pool of literature. figure 2 indictes the conceptual model developed from review of exatant literature. figure 2. conceptual model of cs determinants vary due to firm size. therefore, this paper attempts to fill this gap and add value to the existing pool of literature. figure 2 indictes the conceptual model developed from review of exatant literature. figure 2. conceptual model of cs determinants notes: capital structure has been measured by long-term debt ratio and short-term debt ratio. source: developed by author. determination of variables and econometric methods variables of the study table 1 presents the variables included in the study along with their computation and source of inclusion. table 1. operationalization of variables variable name computation source dependent variables long-term debt ratio (ltlr) long term debt total asset rao et al. (2018); iqbal et al. (2018); abor (2005) capital structure tangibility liquidity growth profitability tax rate non-debt tax shield cash flow debtcoverage n o t e s : capital structure has been measured by long-term debt ratio and short-term debt ratio. s o u r c e : developed by author. moderating effect of firm size on capital structure determinants… 69 determination of variables and econometric methods variables of the study table 1 presents the variables included in the study along with their computation and source of inclusion. table 1. operationalization of variables variable name computation source dependent variables long-term debt ratio (ltlr) rao et al. (2018); iqbal et al. (2018); abor (2005) short-term debt ratio (stlr) table 1. operationalization of variables variable name computation source dependent variables long-term debt ratio (ltlr) long term debt total asset rao et al. (2018); iqbal et al. (2018); abor (2005) short-term debt ratio (stlr) short term debt total asset rao et al. (2018), abor (2007) indepndent variables tangibility (tas) net fixed assets total assets rani et al. (2016); yousef (2019) liquidity (lqd) current asset current liabilities berkman et al. (2016); vintila et al. (2019) opportunity of growth (opgr) sale� − sale��� sale��� kazmierska-jozwiak, marszalek & sekula (2015); roa et al. (2019) profitability (prft) ebit total asset bauer (2004); vintila et al. (2019) rate of tax (rtx) provision of tax profit before tax ramaratnam & jayaraman (2013); vijayalakshami (2016) non-debt tax shield (ndt) depreciation total assets vijayalakshami (2016); ramli et al. (2019) cash flow to assets (ocfa) operating cash flow total assets rao et al. (2018) debt-coverage capacity (dcc) ebit interest expenses mittal & singla (1992); mallikarjunappa & goveas (2007) source: own study based on literature review, 2020. econometric models as the study is based on cross-sectional time series data, panel least square regression analysis has been adopted for analysis. equation 1 and 2 presents the econometric model formed by considering ltlr and stlr as dependent variables, respectively. ltlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 1 stlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 2 rao et al. (2018), abor (2007) indepndent variables tangibility (tas) table 1. operationalization of variables variable name computation source dependent variables long-term debt ratio (ltlr) long term debt total asset rao et al. (2018); iqbal et al. (2018); abor (2005) short-term debt ratio (stlr) short term debt total asset rao et al. (2018), abor (2007) indepndent variables tangibility (tas) net fixed assets total assets rani et al. (2016); yousef (2019) liquidity (lqd) current asset current liabilities berkman et al. (2016); vintila et al. (2019) opportunity of growth (opgr) sale� − sale��� sale��� kazmierska-jozwiak, marszalek & sekula (2015); roa et al. (2019) profitability (prft) ebit total asset bauer (2004); vintila et al. (2019) rate of tax (rtx) provision of tax profit before tax ramaratnam & jayaraman (2013); vijayalakshami (2016) non-debt tax shield (ndt) depreciation total assets vijayalakshami (2016); ramli et al. (2019) cash flow to assets (ocfa) operating cash flow total assets rao et al. (2018) debt-coverage capacity (dcc) ebit interest expenses mittal & singla (1992); mallikarjunappa & goveas (2007) source: own study based on literature review, 2020. econometric models as the study is based on cross-sectional time series data, panel least square regression analysis has been adopted for analysis. equation 1 and 2 presents the econometric model formed by considering ltlr and stlr as dependent variables, respectively. ltlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 1 stlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 2 rani et al. (2016); yousef (2019) liquidity (lqd) berkman et al. (2016); vintila et al. (2019) opportunity of growth (opgr) table 1. operationalization of variables variable name computation source dependent variables long-term debt ratio (ltlr) long term debt total asset rao et al. (2018); iqbal et al. (2018); abor (2005) short-term debt ratio (stlr) short term debt total asset rao et al. (2018), abor (2007) indepndent variables tangibility (tas) net fixed assets total assets rani et al. (2016); yousef (2019) liquidity (lqd) current asset current liabilities berkman et al. (2016); vintila et al. (2019) opportunity of growth (opgr) sale� − sale��� sale��� kazmierska-jozwiak, marszalek & sekula (2015); roa et al. (2019) profitability (prft) ebit total asset bauer (2004); vintila et al. (2019) rate of tax (rtx) provision of tax profit before tax ramaratnam & jayaraman (2013); vijayalakshami (2016) non-debt tax shield (ndt) depreciation total assets vijayalakshami (2016); ramli et al. (2019) cash flow to assets (ocfa) operating cash flow total assets rao et al. (2018) debt-coverage capacity (dcc) ebit interest expenses mittal & singla (1992); mallikarjunappa & goveas (2007) source: own study based on literature review, 2020. econometric models as the study is based on cross-sectional time series data, panel least square regression analysis has been adopted for analysis. equation 1 and 2 presents the econometric model formed by considering ltlr and stlr as dependent variables, respectively. ltlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 1 stlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 2 kazmierska-jozwiak, marszalek & sekula (2015); roa et al. (2019) profitability (prft) bauer (2004); vintila et al. (2019) rate of tax (rtx) table 1. operationalization of variables variable name computation source dependent variables long-term debt ratio (ltlr) long term debt total asset rao et al. (2018); iqbal et al. (2018); abor (2005) short-term debt ratio (stlr) short term debt total asset rao et al. (2018), abor (2007) indepndent variables tangibility (tas) net fixed assets total assets rani et al. (2016); yousef (2019) liquidity (lqd) current asset current liabilities berkman et al. (2016); vintila et al. (2019) opportunity of growth (opgr) sale� − sale��� sale��� kazmierska-jozwiak, marszalek & sekula (2015); roa et al. (2019) profitability (prft) ebit total asset bauer (2004); vintila et al. (2019) rate of tax (rtx) provision of tax profit before tax ramaratnam & jayaraman (2013); vijayalakshami (2016) non-debt tax shield (ndt) depreciation total assets vijayalakshami (2016); ramli et al. (2019) cash flow to assets (ocfa) operating cash flow total assets rao et al. (2018) debt-coverage capacity (dcc) ebit interest expenses mittal & singla (1992); mallikarjunappa & goveas (2007) source: own study based on literature review, 2020. econometric models as the study is based on cross-sectional time series data, panel least square regression analysis has been adopted for analysis. equation 1 and 2 presents the econometric model formed by considering ltlr and stlr as dependent variables, respectively. ltlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 1 stlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 2 ramaratnam & jayaraman (2013); vijayalakshami (2016) non-debt tax shield (ndt) vijayalakshami (2016); ramli et al. (2019) cash flow to assets (ocfa) table 1. operationalization of variables variable name computation source dependent variables long-term debt ratio (ltlr) long term debt total asset rao et al. (2018); iqbal et al. (2018); abor (2005) short-term debt ratio (stlr) short term debt total asset rao et al. (2018), abor (2007) indepndent variables tangibility (tas) net fixed assets total assets rani et al. (2016); yousef (2019) liquidity (lqd) current asset current liabilities berkman et al. (2016); vintila et al. (2019) opportunity of growth (opgr) sale� − sale��� sale��� kazmierska-jozwiak, marszalek & sekula (2015); roa et al. (2019) profitability (prft) ebit total asset bauer (2004); vintila et al. (2019) rate of tax (rtx) provision of tax profit before tax ramaratnam & jayaraman (2013); vijayalakshami (2016) non-debt tax shield (ndt) depreciation total assets vijayalakshami (2016); ramli et al. (2019) cash flow to assets (ocfa) operating cash flow total assets rao et al. (2018) debt-coverage capacity (dcc) ebit interest expenses mittal & singla (1992); mallikarjunappa & goveas (2007) source: own study based on literature review, 2020. econometric models as the study is based on cross-sectional time series data, panel least square regression analysis has been adopted for analysis. equation 1 and 2 presents the econometric model formed by considering ltlr and stlr as dependent variables, respectively. ltlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 1 stlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit _____ eq. 2 rao et al. (2018) debt-coverage capacity (dcc) mittal & singla (1992); mallikarjunappa & goveas (2007) s o u r c e : own study based on literature review, 2020. rajesh desai, jay desai70 econometric models as the study is based on cross-sectional time series data, panel least square regression analysis has been adopted for analysis. equation 1 and 2 presents the econometric model formed by considering ltlr and stlr as dependent variables, respectively. ltlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit (1) stlrit = β0 + β1tasit + β2lqdit + β3opgrit + β4prftit + β5rtxit + β6ndtit + β7ocfait + β8dccit + εit (2) where, β0 = intercept β1 to β8 = regression co-efficient ε = error term i = number of firm (1 to 40) t = number of year (2008-09 to 2018-19) data analysis and results descriptive statistics table 2 represents the descriptive statistics of the sample firms. the average values of ltlr signify that selected companies are low levered firms and they rely more on short-term debt compared to long-term. further, growth and profitability values are moderately high but lack consistency. overall, the sample firms can be characterised as growing, moderately levered, and profitable. table 2. descriptive statistics obs. min max mean std. dev. panel – a: ltlr small 120 0.000 0.855 0.146 0.237 medium 160 0.000 0.713 0.183 0.142 moderating effect of firm size on capital structure determinants… 71 obs. min max mean std. dev. large 120 0.000 0.520 0.109 0.128 panel – b: stlr small 120 0.003 0.922 0.220 0.211 medium 160 0.000 1.605 0.330 0.272 large 120 0.012 4.861 0.423 0.627 panel – c: cs determinants tas 400 0.003 0.810 0.317 0.193 lqd 400 0.007 6.193 1.417 0.826 opgr 400 -1.027 15.617 0.255 1.390 prft 400 -2.666 0.517 0.081 0.230 rtx 400 -0.008 10.625 0.282 0.760 ndt 400 0.001 0.107 0.031 0.021 ocfa 400 -0.540 0.379 0.077 0.117 s o u r c e : author’s calculations, 2020. unit root test time series data needs to be checked for stationarity (time invariant mean, variance, and autocovariance) for validating the results of multiple regression analysis (gujarati, 2003). augmented ducky fuller (adf) test has been applied for assessing the nature of the series and the results show that all selected variables except dcc are having p-values less than 0.05 (refer table 3) suggesting stationarity of data. dcc has been dropped from further analysis for reliable results. table 3. results of unit toot (adf) test adf test statistic probability value nature of series ltlr -4.447 0.000 stationary stlr -10.209 0.000 stationary table 2. descriptive… rajesh desai, jay desai72 adf test statistic probability value nature of series tas -5.463 0.000 stationary lqd -6.516 0.000 stationary opgr -14.688 0.000 stationary prft -11.294 0.000 stationary rtx -13.314 0.000 stationary ndt -6.208 0.000 stationary ocfa -12.547 0.000 stationary dcc -5.981 0.194 non – stationary s o u r c e : author’s calculations, 2020. correlation analysis table 4 shows the pair-wise correlation among the selected variables. ltlr is positively and significantly related with tas and ndt and inversely related with lqd, prft, rtx and ocfa. the relation of said determinants with stlr is quite different from that of ltlr. only ndt and rtx is directly associated with stlr whereas prft, lqd, tas, and ocfa are negatively related with the same. overall, it shows that profitable firms prefer more of equity funds instead of borrowings confirming the findings of pot. table 4. correlation analysis ltlr stlr tas lqd opgr prft rtx ndt ocfa ltlr 1 stlr -0.002 1 tas 0.350** -0.401** 1 lqd -0.192* -0.377** -0.371** 1 opgr 0.011 -0.081 -0.061 0.012 1 prft -0.157* -0.789** -0.189** 0.229** 0.084 1 rtx -0.142* 0.004 -0.012 -0.063 -0.013 0.033 1 table 3. results… moderating effect of firm size on capital structure determinants… 73 ltlr stlr tas lqd opgr prft rtx ndt ocfa ndt 0.220* 0.162* 0.724** -0.232** -0.058 -0.206** 0.104 1 ocfa -0.154** -0.349* 0.173* -0.080 -0.087 0.446** 0.051 0.094 1 * sign. at 5% level ** sign. at 1% level s o u r c e : author’s calculations, 2020. robustness and diagnostics to examine the robustness of results, several diagnostic tests have been performed. first, to check multicollinearity, variance inf lation factor (vif) has been calculated and its highest value among all models is 7.336 and is below the threshold limit of 10 (gujarati & sangeetha, 2007). secondly, to control autocorrelation, durbin-watson (d-w) statistic has been calculated and the computed values (refer table 5 & 7) are within the allowable limits of 0 to 2 (gujarati, 2003; gujarati & sangeetha, 2007). third, to obtain reliable results from t-test (significance of regressors) and f-test (model fit) of regression, breusch-pagangodfrey (bpg) test of homoscedasticity (sathyanarayana et al., 2017) has been applied. result of bpg test (refer table 5 & 7) show that p-value is more than 0.05 showing absence of heteroskedasticity. econometric results and hypothesis testing table 5 represents the regression output of both models for overall sample firms. the results indicate that tas, rtx, and ocfa are major determinants of long-term debt ratio. on the other hand, tas, lqd, and prft are significant determinants of short-term borrowings. both regression models are significant at 1% level of significance. further, selected variables can explain higher variation in stlr (67.15%) compared to ltlr (16.50%). table 6 presents the output of hypothesis testing for the whole sample data. table 4. correlation… rajesh desai, jay desai74 table 5. regression output (overall sample) parameters model – 1 (ltlr) model – 2 (stlr) constant 0.109 (0.004)** 0.695 (0.000)** tas 0.355 (0.000)** -0.426 (0.002)** lqd -0.019 (0.205) -0.129 (0.000)** opgr 0.001 (0.907) -0.007 (0.560) prft -0.029 (0.634) -1.305 (0.000)** rtx -0.029 (0.055)*** 0.000 (0.989) ndt 0.360 (0.659) 1.897 (0.113) ocfa -0.350 (0.003)** -0.060 (0.723) r2 / adj. r2 0.194 / 0.165 0.683 / 0.672 f – value (sign. value) 6.610 (0.000) 59.111 (0.000) d-w stat / vif 1.933 / 2.430 1.176 / 2.430 heteroskedasticity test (p-value) 1.124 (0.256) 1.224 (0.216) notes: values in parenthesis indicates significant value. ** sign. at 1% level *** sign. at 10% level s o u r c e : author’s calculations, 2020. table 6. hypothesis testing hypothesis ltlr stlr h1: tas and cs accepted rejected (significant negative) h2: lqd and cs rejected accepted h3: opgr and cs rejected rejected h4: prft and cs rejected accepted h5: rtx and cs rejected (significant negative) rejected h6: ndt and cs rejected rejected h7: ocfa and cs accepted rejected s o u r c e : author’s computation, 2020. moderating effect of firm size on capital structure determinants… 75 to analyze the moderation effect, regression analysis has been performed separately for small, medium and large size firms and the results are indicated in table 7. f-test for robustness of model implies that all models are statistically significant (p–values < 0.05). as shown in table 7, the selected determinants can explain the changes in debt ratios of medium and large firms more effectively than that of small firms. hence, the study confirms the moderating effect of size on the relationship between cs and its determinants. table 8 summarizes the critical determinants of cs decision of firms according to their size. table 7. regression output (size-wise analysis) parameters model – 1 (ltlr) model – 2 (stlr) small medium large small medium large constant 0.127 0.134 0.130 0.655 0.875 0.671 tas 0.140 0.375** 0.473** -0.347*** -0.616** -0.536* lqd 0.054 -0.017 -0.043** -0.270** -0.162** -0.087** opgr 0.008 -0.003 0.087* -0.017 0.003 -0.173** prft -0.346 0.022 0.091 0.884** -0.908** -1.633** rtx -0.318* -0.015 -0.154 -0.068 -0.005 0.584** ndt 1.296 -1.401 -0.683 1.216 -0.509 1.229 ocfa -0.373 -0.305*** -0.394* -0.532** 0.163 0.154 r2 0.254 0.221 0.628 0.523 0.585 0.945 adj. r2 0.137 0.133 0.570 0.448 0.539 0.936 f – value 2.166 2.517 10.775 6.976 12.536 109.073 sign. value 0.026 0.018 0.000 0.000 0.000 0.000 d-w stat 1.111 0.991 1.791 1.038 1.784 1.288 vif 3.335 1.902 7.336 3.335 1.902 7.336 heteroskedasticity test (p-value) 1.516 (0.183) 0.732 (0.646) 1.573 (0.165) 1.530 (0.178) 1.340 (0.243) 3.132 (0.106) * sign. at 5% level ** sign. at 1% level *** sign. at 10% level s o u r c e : author’s calculations, 2020. rajesh desai, jay desai76 table 8. determinants of capital structure (size-wise analysis) ltlr stlr determinants small medium large small medium large tas √ √ √ √ √ lqd √ √ √ √ opgr √ √ prft √ √ √ rtx √ √ ndt ocfa √ √ √ √ : indicates significant factor s o u r c e : author’s computations, 2020. discussion of results tangibility tas is positively related with ltlr indicating that asset tangibility increases long term borrowings. the findings are consistent with past results from rani et al. (2016), m’ng et al. (2017), and yousef (2019). on the contrary, stlr is negatively affected by tas showing that firms that have less fixed assets borrow from short term sources. tangible assets are pledged against the longterm borrowings hence higher proportion of fixed assets improves the ability to raise long-term loans. further, tangibility does not affect the borrowing decision of small size as large firms can have better accumulation of tangible assets compared to smaller ones. liquidity lqd is found to be insignificant factor affecting long term loans as it represents ability of the company to meet it short-term obligations and hence becomes less relevant for long-term loan. whereas, it has significant negative impact on stlr for overall sample data. it supports the conclusion of pot (myers & majluf, 1984) and tot (myers, 1984) as well as berkman et al. (2016), and vintila moderating effect of firm size on capital structure determinants… 77 et al. (2019). it signifies that firms with higher lqd manage their short-term funds requirement internally and do not rely on external financing. further, lqd has significant negative impact on ltlr of large firms and stlr of all categories of firms. profitability prft is found to be a weak predictor of long-term borrowings but it has significant negative impact on short term debt for the whole sample data. the findings confirm the conclusion of bauer (2004), iqbal et al. (2019) whereas contradicts the results of dakua (2018) and rao et al. (2019). the results can be justified as firms with higher profits can have accumulated reserves which can be plough back into the business for financing activities. further, profitable firms discharge their liabilities to reduce cost of financial distress. analyzing the size-wise results, it is found that small size firms raise short-term debt with increasing profitability whereas medium and large size firms redeem shortterm debt as their profitability increases. hence, growing size reduces the level of debt showing negative relation between profits and stlr. cash f lows consistent with findings of pot and tot, ocfa has significant negative impact on ltlr confirming the empirical results from vijayalakshami (2016) and hossain and hossain (2015). similar to profitability, surplus cash f lows are utilised to pay outstanding debt and firms become self-sufficient as far as financing burden is concern. further, increasing cash f lows are reinvsted in the business to fund new and/or existing operations. cash f lows do not have significant effect on short term borrowings other than for small size firms. implications and future scope of research the findings of the study have several implications and are valuable for academicians, scholars and practitioners. the study contributes to existing body of knowledge by examining the determinants of debt financing moderated by firm size in emerging market like india. the study has several practical implications for corporate managers as the findings will be help them in forming rajesh desai, jay desai78 their borrowing strategies based on the relative size. the managers can identify necessary factors to be considered while choosing debt or equity as well as in case of debt either short term or long term. present research work can be extended by taking multiple industries and findings can be compared as against single industry. based on the relation between profit and short-term debt stated above, researchers can study changes in cs during the life cycle of the firm. besides, factors like government regulation, management policies, and capital market norms can be included for analyzing borrowing decisions.  conclusion in countries like india where financial markets are under developing stage, financing decision becomes very critical and it plays an important role in determining firms’ profitability. this research paper mainly focuses on determinants of cs choice of indian food processing companies and examines the moderating effect of firm size. the study concludes tangibility, tax rate, and cash f low as significant determinants of long-term debt whereas tangibility, liquidity and profitability are significant causes of short-term debt for overall sample firms. further, the study confirms the moderating role of firm size as strength of various factors varies according to firm size. the results indicate positive relation between profitability and short-term debt ratio for small size companies whereas negative relation for medium and large size companies. it advocates that increasing profits induce small firms to borrow more but as firms grow up in size, they replace debt with own funds showing inverse relationship. hence, the relation between same variables is moderated significantly by size of the firm.  references abor, j. 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(2019). determinants of capital structure and firm financial performance a pls-sem approach: evidence from malasiya and indo moderating effect of firm size on capital structure determinants… 81 nesia. the quarterly review of economics and finance, 71, 148-160. http://dx.doi. org/10.1016/j.qref.2018.07.001. rani, a., narain, & dhawan, s. (2016). determinants of leverage decision of indian firms: an empirical stuy. business analyst, 37(1), 19-30. rao, p., kumar, s., & madhvan, v. (2019). a study on factors driving the capital structure decisions of small and medium enterprises (smes) in india. iimb management review, 31(1), 37-50. http://dx.doi.org/10.1016/j.iimb.2018.08.010. ross, s. a. (1977). the determination of financial structure: the incentive signalling approach. the bell journal of economics, 8(1), 23-40. sathyanarayana, s., harish, s., & kumar, h. (2017). determinants of capital structure: evidence from indian stock market with special reference to capital goods, fmcg, infrastructure and it sector. sdmimd journal of management, 8(1), 55-73. vijayalakshami, d. (2016). determinants of leverage: indian transport equipment sector. scms journal of indian management, 13(1), 81-90. vintila, g., gherghina, s., & toader, d. (2019). exploring the determinants of financial structure in the technology industry: panel data evidence from the new york stock exchange listed companies. journal of risk and financial management, 12(163), 1-16. http://dx.doi.org/10.3390/jrfm12040163. yousef, y. (2019). the determinants of capital structure: evidence from gcc and uk real estate sectors. real estate management and valuation, 27(2), 108-125. http:// dx.doi.org/10.2478/remav-2019-0019. date of submission: august 23, 2019; date of acceptance: september 19, 2019. * contact information: atmadnan@buft.edu.bd, department of business administration, buft, nishatnagar, turag, dhaka 1230, bangladesh, phone: +8801843770138; orcid id: https://orcid.org/0000-0002-0340-1737. ** contact information: nisarsn@aiub.edu, faculty of business administration, aiub, 408/1, kuratoli, khilkhet, dhaka 1229, bangladesh, phone: +88001730797175; orcid id: https://orcid.org/0000-0002-7776-9999. note: this study is a part of the thesis report prepared by corresponding author (atm adnan) submitted to bangor business school, bangor university, bangor, wales, uk. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 3 adnan, atm, & ahmed, n. (2019). the transformation of the corporate governance model: a literature review. copernican journal of finance & accounting, 8(3), 7–47. http://dx.doi.org/10.12775/ cjfa.2019.011 atm adnan* bgmea university of fashion and technology (buft) nisar ahmed** american international university-bangladesh (aiub) the transformation of the corporate governance model: a literature review keywords: corporate governance, corporations, agency theory, ownership structure, board of directors, executive compensation, ownership structure. j e l classification: g30, g34, g38. abstract: this study intends to present a review analysis of the cg literature with a view to discover and categorize the macro and micro level determinants of cg framework. apart from this, it targets to signify long enduring cg debate concerning shareholders vs stockholders value orientation. this study presents a comprehensive understanding of a broad assortment of macroeconomic governance issues such as measures against hostile takeover, board formation/composition, capital market actions, manaatm adnan, nisar ahmed8 gerial incentives, debt covenants and leverage, market for managers & directors, capital structure and managerial ownership, legal framework etc has been also integrated. moreover issues associated to relative corporate governance and convergence of global corporate governance model has also been discusses by putting specific emphasize on the conf lict of interest occurring from the association between executives and investors and the connection involving the value of the firms and cg. it is noted that because of the limitations in existing significant hypothetical and functional inadequacies, external controlling mechanisms might not be able to solely resolve the cg challenge, even though these could be significantly successful in some specific situations, thus, corporations have to implement balancing internal firm specific controlling mechanism to reduce the overall costs associated to agency problem. the analysis also reveals that both stockholder and stakeholder models are competing on the ground of superiority however, in practically there has been a vibrant modification with both standards are becoming progressively equally appealing in different regions over the last two decades.  introduction although the corporate form of the organization has been prevailing for the centuries, yet the issue of expounding a set of standards of governance of the corporation is still undergoing. so there have been always a trend of complaining and appeal to improve the principles or standards of governance which resulted in the chronological development of various corporate rules and regulations such as sarbanes-oxley (baskin & miranti, 1997). the term corporate governance (cg as proceed) was not very well-known research topic just a few decades ago. financial crisis initiated at the later of 90’s in central europe, asia and latin america strongly raised the issue of imperfection in cg which severely upset the macro economic and financial stability (claessens & yurtoglu, 2013). the issue further gained momentum when united states experienced the largest financial insolvencies which had been identified later as the consequence of weak existence and poor execution cg in the financial and corporate institution. now a days cg become an everyday corporate term and corporate participants and academic contributors have become fairly educated and informed about the potential holistic and long-term significance of the inefficient cg system. in general, most of the cg arguments are piled on the practical issues such as corporate embezzlement, misapplication of managerial authority and ignorance of social responsibility. the purpose of these arguments is to quest the solution of these apparent problems in corporate practice. many reviewer state cg as a useful tools and measures to comply with either the broader social ex the transformation of the corporate governance model… 9 pectations or to gratify the shareholders goal of wealth maximization. quite a few significant universal proposals have been placed with a view to address these practical issues such as (cadbury, 1992b), (greenbury, 1995), (turnbull, 1999). so, in a nutshell cg is the institutional relationship framework among interconnected economic and corporate participants holding primary or secondary interest in corporation’s affair such as shareholders, credit partners, employees, managers, suppliers, customers, pressure groups and general people. contemporary study of cg put more emphasize on assessing and evaluating two distinct models of cg namely shareholder and stakeholder model (letza, sun & kirkbride, 2004) with a view to address the superior one (lazonick & o’sullivan, 2000), that often resulted in one sided argument with slight alteration such as progressive shareholder model (gamble & kelly, 2001) and balanced stakeholder model (jensen, 2001). corporations have conventionally been regarded as self-purposed, profit-exploiting concerns forming the fundamental views of capitalism and open market philosophies (marsiglia & falautano, 2005). however, latest and colossal financial failures have transmitted awareness to the subject of decent governance, integrity, faith, and answerability, intensifying the argument on matters of corporate governance (cg) and the conscience of economic act and simultaneously questioning the pure revenue boosting philosophy (jamali, safieddine & rabbath, 2008). such argument generate division on the purpose of the corporation and the governance arrangement linked to it (friedman & miles, 2002). one context is the conventional shareholder model, that view the corporation as a legal framework stand on a three-phase vertical governance system (i.e. equity holders, bod and managers) to make the most of shareholders investment popularly known as the system of “check and balances”. on the contrary a new perspective namely, stakeholder model evolved in the late twentieth century. it exhibits its stance in favor of the broader stakeholder’s interest and management mechanism rather than traditional perception and understandings of the corporation as a shareholder’s wealth maximizing tool. according to (freeman, 1999) stakeholders’ involvement in business resolutions, long-term contract based relationships between the corporation and stakeholders, confidence and business integrity are the main offerings of stakeholder theory. the recent financial crisis in usa and europe has emphasized on several fundamental transformations of economic and business environment and focuses on the importance of cg for economic welfare. the privatization of market-oriented investing, the firms getting bigger in size, the effective participation of fiatm adnan, nisar ahmed10 nancial mediators, the growth of organizational investors, the increased mobility of the capital as the investment opportunities have increased with the open market economy have increased the corporations’ risk exposure. these structural changes have made it difficult to observe the use of capital investment therefore heightening the necessity for good cg (claessens & yurtoglu, 2013). management concept has transformed considerably in current times. regardless of a large number of practical works on corporate governance (cg) and its consequence on strategic decision making and valuation, very less is acknowledged about how cg progresses over time (hillier & mccolgan, 2006). there have been ongoing both theoretical and empirical transformations in the ways that academicians and corporate practitioners think of governance of organization. this study tries to present a review of several prominent academic and practical literatures on the corporate governance, identifying the key determinants of corporate governance framework as well as subjects of conformity and disagreement among academicians and researchers concerning the types and consequences of the agency problem and on the efficiency of the macro and micro level determinants of cg framework. additionally the paper also attempts to address this shift of ideology from “stockholder” to “stakeholder” and understand the background of it. this paper provides a comprehensive review of both the “shareholder” and “stakeholder” framework of cg. an important finding of the study is that, cg framework has been build and controlled by several micro level/ firm specific internal factors such as debt policy, internal shareholding policy, managerial compensation policy, capital structure and also the macro factors such as hostile takeover measures, market for executives and directors, legal policy, capital market control mechanism etc. moreover, there has been no static model for the corporate governance model. although there has been seen a legislative or dominance-based transformation from equity holder concept to stakeholders’ concept from 1980s to 2000 but that was more of strategic policy rather than moral or psychological attachment. as the business and social context are continuously changing there should be a f lexible cg framework addressing the contemporary demand of the business trend. the paper is organized as follows; the first part covers the definitions of corporate governance and understanding of the theoretical framework of cg mechanism. section two discussed about the macro drivers of corporate governance followed by the internal and external controlling variables of cg mech the transformation of the corporate governance model… 11 anism in section four. section five attempts to present contemporary convergence issue of corporate governance as well as signify the classical debate between shareholders vs. stakeholders oriented cg model. sections six recommend some views on potential research followed by conclusive remarks. the research methodology and the course of the research process this study applies a descriptive and narrative review of the prominent literatures on corporate governance issue to exhibits the findings. the organized review of prior qualitative and quantitative studies has been carried to accumulate and synthesize the findings to demonstrate the value of a particular point of view in the area of major determinants and drivers of corporate governance, the shifting trends in contemporary corporate governance and convergence issue of governance in general context. defining corporate governance the most confined definition of corporate governance was given by (shleifer & vishny, 1997). they define corporate governance as the assurance mechanism though which the investors especially the financial resource provider can ensure the justifiable return of their investment. this definition primarily focuses on the single most important participants in the corporation, the finance provider. (charreaux, 1997) first incorporates the role of the managers in defining the cg. he argued that cg is the combination of systems that administer the managers’ actions and defines their discretionary autonomy. this comprehensive definition covers the prior characterization and exhibits the benefit of assigning the manager the function of chief player (but non-solely) in the value creation activity. a more generalized version of characterization of cg has addressed by committee on the financial aspects of corporate governance in the united kingdom led by sir adrian cadbury, the committee define cg as an organized mechanism through which corporations are governed and regulated (cadbury, 1992b). this definition also introduces another important dimension that cg is a set of control mechanism where ownership is detached from management. more broadly defined cg is addressed by (zingales, 2000), emphases on the partition of claims. atm adnan, nisar ahmed12 he defines cg as the multifaceted set of control mechanism that regulates and negotiates the claims of the stakeholders over the value generated by the firms through the passage of contract. this definition includes both the purpose of value addition by firms and the distribution of it among associated stakeholders of the firm. conforming to this extensive meaning, the purpose of an ideal cg structure would be to increase the contribution of corporations to the total economy – that would embrace the affiliation between all the internal and external stakeholders through the system of rules and law (gillan & starks, 2000). regardless of the above definition described, researchers often consider cg mechanisms as classified into one of two sets: those applied internal to firms and those applied external to firms. the straightforward balance sheet model exhibited in the figure 1 demonstrates the principle of this affiliation. on the left side which serves as the basis for internal control mechanism consists of management and board of directors (bod as proceed). management serves as an agent of the investors deciding on the investing and financing decision whereas the bod stays at peak of governance structure to perform the duty of guiding and supervising the management team (jensen, 1993). equity holders and debt holders on the right side of the diagram serve as the external governance mechanism. their existence reveals due to firms financing requirement as well as it focuses on the fact that controller/user and provider of the capital are not the same entity. this difference initiates the urge for good corporate governance framework (gillan, 2006). however, the meaning of corporations is considered to reach far beyond the mere boundary of bod, management and capital providers. the comprehensive structure of corporations is inclusive of other interest bearers such as suppliers, employees, customers. in the more broader sense it also incorporates the community, political and legal atmosphere as well as the market in which it is operating which truly ref lect the true essence of stakeholders’ perspective of cg (jensen, 2001). considering the large number of theoretical viewpoints presented and variety of corporate governance applications around the globe, reaching to a clear and universal characterization of corporate governance remains an exigent task. still researchers and academicians have encountered the topic of corporate governance from economic, social, legal and cultural perspectives. such as (dalton, hitt, certo & dalto, 2007) suggest how the agency standpoint of view inf luence different cg structure such as formation of the ownership, bod com the transformation of the corporate governance model… 13 position and the corporate control mechanism from a finance and economics point of view. (adams, hermalin & weisbach, 2010) also studies the functions of the bod and found it as a key element of the cg policy debate. figure 1. balance sheet model of cg model source: (ross, westerfield & jaffe, 2002). however, the meaning of corporations is considered to reach far beyond the mere boundary of bod, management and capital providers. the comprehensive structure of corporations is inclusive of other interest bearers such as suppliers, employees, customers. in the more broader sense it also incorporates the community, political and legal atmosphere as well as the market in which it is operating which truly reflect the true essence of stakeholders’ perspective of cg (jensen, 2001). considering the large number of theoretical viewpoints presented and variety of corporate governance applications around the globe, reaching to a clear and universal characterization of corporate governance remains an exigent task. still researchers and academicians have encountered the topic of corporate governance from economic, social, legal and cultural perspectives. such as (dalton, hitt, certo & dalto, 2007) suggest how the agency standpoint of view influence different cg structure such as formation of the ownership, bod composition and the corporate control mechanism from a finance and economics point of view. (adams, hermalin & weisbach, 2010) also studies the functions of the bod and found it as a key element of the cg policy debate. another substitute of the “principle-agent” observation is the “team production” model, which argues that that the companies incorporate a considerable group of stakeholders who spend on firmspecific assets, but mutually abandon power over those assets to the governing board for their own interest with a view to resolve the difficulty of organized resolution within the team (blair & stout, 1999). in the same context, the idea of essentiality has been applied to describe the notion that, firms where human assets are crucial for the productivity of the entity, establishing control through ownership over the fixed assets or legal body of the firm cannot perform as the alternative for the firm’s or employee’s say in decision formulation (aoki & jackson, 2008). stakeholders theory of corporate governance has been investigated by several researchers such as (donaldson and preston, 1995) (parmar, freeman, harrison, wicks, purnell & de colle, 2010) as an important base to describe the multifaceted and broader association of numerous stakeholders within the firm. legal academics used to think about cg in the public firm perspective however a larger emphasizes is put on the legal framework, which structure and formulate the power and obligation of corporate character. (parkinson, 1995) argues that cg could be defined as the policy that uphold and control the form of decision formulation inside the firm as an instrument of collective choice and in attachment to a public significance. therefore, legal academics describe cg elaborately to add aspects that go beyond personal legitimate agreements. for instance, (blair, 1996) characterize cg as the entire structure of judicial, cultural and organizational measures that decide what public firms could perform, who would be the controller and what would be the control mechanism and how the risk and return associated with the decisions would be balanced. business sociologists go for an even generous ideology of the entity that is generally focuses on the control and influential associations within a surrounded organization. (davis, 2005) in his prominent literature titled “new directions of corporate governance” argues that cg can be defined as the organization, procedure, and organizations around the business ecosystem that distribute authority and control over partners. likewise, political academicians such as (gourevitch & shinn, 2005) have concentrated to the connections of associated party inclination and political institutions, therefore analyze cg as the structure which not merely encourage development and safeguard owners but also bring about employment and promote equal opportunity. (aguilera & jackson, 2003) brings an organizas o u r c e : ross, westerfield & jaffe, 2002. another substitute of the “principle-agent” observation is the “team production” model, which argues that that the companies incorporate a considerable group of stakeholders who spend on firm-specific assets, but mutually abandon power over those assets to the governing board for their own interest with a view to resolve the difficulty of organized resolution within the team (blair & stout, 1999). in the same context, the idea of essentiality has been applied to describe the notion that, firms where human assets are crucial for the productivity of the entity, establishing control through ownership over the fixed assets or legal body of the firm cannot perform as the alternative for the firm’s or employee’s say in decision formulation (aoki & jackson, 2008). stakeholders theory of corporate governance has been investigated by several researchers such as (donaldson and preston, 1995) (parmar, freeman, harrison, wicks, purnell & de colle, 2010) as an important base to describe the multifaceted and broader association of numerous stakeholders within the firm. legal academics used to think about cg in the public firm perspective however a larger emphasizes is put on the legal framework, which structure and formulate the power and obligation of corporate character. (parkinson, 1995) argues that cg atm adnan, nisar ahmed14 could be defined as the policy that uphold and control the form of decision formulation inside the firm as an instrument of collective choice and in attachment to a public significance. therefore, legal academics describe cg elaborately to add aspects that go beyond personal legitimate agreements. for instance, (blair, 1996) characterize cg as the entire structure of judicial, cultural and organizational measures that decide what public firms could perform, who would be the controller and what would be the control mechanism and how the risk and return associated with the decisions would be balanced. business sociologists go for an even generous ideology of the entity that is generally focuses on the control and inf luential associations within a surrounded organization. (davis, 2005) in his prominent literature titled “new directions of corporate governance” argues that cg can be defined as the organization, procedure, and organizations around the business ecosystem that distribute authority and control over partners. likewise, political academicians such as (gourevitch & shinn, 2005) have concentrated to the connections of associated party inclination and political institutions, therefore analyze cg as the structure which not merely encourage development and safeguard owners but also bring about employment and promote equal opportunity. (aguilera & jackson, 2003) brings an organizational factor-focused point of view of the entity within which the several stakeholders in the business entity fight for resources to describe cg as the authority and obligation of diverse stakeholders toward the organization. external and internal forces compiling corporate governance framework the extensive view of cg framework constant with the definition provided by the study of (gillan & starks, 1998) integrate factors that were not customarily considered as the elements of cg framework. however, these were elements of the business atmosphere assumed to imply minimum inf luence on corporate governance. according to the (gillan & starks, 1998) cg can be divided into two large distribution namely; internal governance motivators and external governance motivators. where, internal cg factors are; composition of bod (and their function, organization, and enticement), managerial compensation, capital formation, bylaw and charter provisions against hostile takeover, and inner control mechanism. likewise, external factors of governance into five groups for example legal framework and internal regulation, markets for cap the transformation of the corporate governance model… 15 ital, corporate control, labor and goods and service, markets of contributor of capital market information such as financial and governance analyst, markets for external service provider such as accounting, auditing and legal services from entities outside of the corporation and sources of outside supervision, mainly the media and external legal allegation. external governance mechanism apart from the external governance factors exhibited by (gillan & starks, 1998) usual external governance means have been stated in the studies of several researchers such as the threat of hostile takeover (manne, 1965) (fama & jensen, 1983a), rivalry in the goods and capital markets (hart, 1983) and the managerial compensation (jensen & meckling, 1976; fama, 1980a). as conferred previously, corporations do not function in isolation, but within the boundary of legal limitation. corporations are uncovered to market forces and under the supervision other external sources. the subsequent segment illustrates these and other prospective inf luential governance factors. the legal setting characteristic of the legal and regulatory frameworks are closely associated to cg, and a significant number of prominent studies established linkage between governance and legal environment. for instance, studies examine the direct inf luence of legislative changes on investor’s wealth and the efficiency or the cost of single or multiple supervising policies (szewczyk & tsetsekos, 1992); (coles & hoi, 2003). for reference, in the usa several states have approved laws intended to evade or raise the expenditure of unfriendly acquisition. this initiates a serious impression on the survival of the acquisition tool as a usual means to dominate management actions within the legal boundary. another instance is the cases where legal rule is there to promote payout policy as an effective tool to deal with possible agency problems. countries in south america like brazil, chile, colombia and venezuela have such legislative policies where corporations deal with obligatory dividend policy (mitton, 2004). a significant outcome of this type of national level legal proposal has been exhibited by (dahya, mcconnell & travlos, 2002), who investigate the connection between the turnover rate of the ceo and firm operating result prior and later the publication of the (cadbury, 1992a) policy in the uk. they discovatm adnan, nisar ahmed16 er that after the publication of the policy, the negative association between the turnover rate and operational achievement turn out to be much robust, along with rise in sensitivity between these two factors. one more vital part of the legal setting, which might also affect cg strategy, is the concern with the safeguard of small investors. (la porta, lopez-desilanes, shleifer & vishny, 1997) and (shleifer & vishny, 1997) exhibited that the subsistence and usefulness of laws defending shareholder are the foremost decisive factors of the progress of domestic financial market. they have also argued that the eminence of the legal environment of shareholders security is a key factor on the capability of corporation and shareholder to form a suitable cg arrangement. furthermore coherent to the perception that the legislative framework holds momentous inf luence on the formation of cg, (coffee & black, 1994) carried a relative research on the legal framework in the usa and the united kingdom covering the actions of ‘institutional investors’. they examine that the regulation plays a insignificant role in determining ‘institutional investors’ eagerness to engage in supervising management dealings. there are also significant numbers of researches, beginning with (la porta, lopez-de-silanes, shleifer & vishny, 1997) concentrating on cg and how it is associated with the legal safeguard devoted to investors and creditors.(denis & mcconnell, 2003) argued that dissimilarities in legal structure determine the size and intensity of capital markets, and the capability of the corporations to gain access to external funding. the threat to hostile takeover and the market for corporate control in many context threats to hostile takeover and corporate control mechanism are considered as the fundamental cg system. a characteristic of the hostile takeover practice is that it can be effectively enforced in an unbiased pattern to all business units. where, other means like debt covenant and dividend disbursement might be depend on managerial discretion. in consistent with this argument, (fischel & easterbrook, 1991) and (jensen, 1993) also suggest hostile acquisition in the united state as a critical cg means of regulating managers’ decision. the practical findings exhibited that hostile takeovers resulted in considerable upward value generation for the target firms is persistent with the earlier perception in addition to parallel standpoint such as ‘synergis the transformation of the corporate governance model… 17 tic boost’.(gompers, ishii & metrick, 2003) found that corporations those are protected by several anti takeover measures are found to be more demanding for takeover. (hartzell, ofek & yermack, 2004) exhibited that, in general, chief executives of the acquired firms are compensated by the same margin as they would have received as chief executive. nevertheless, the researchers also convey that extraordinary compensation would eventually reduce the threat to takeover while reducing fundamental agency problem. (chen firth, gao & rui, 2006), (gaspar, massa & matos, 2005) and (qiu & yao, 2009) gave proof that large institutional owners used to observe the pre and post acquisition actions seriously. in common, these studies uncover that particular category of institutional shareholder are linked with superior takeover or the pulling out of poor acquisition. constant with the perception that acquisition is the tools for managerial control, (martin & mcconnell, 1991) exhibited facts that successful acquisition resulted in high executive turnover, the turnover rate is even higher in case of the less performed firms within the industry. (shivdasani, 1993) convey findings similar to the standpoint that aggressive acquisition results managerial order while inner governance system such as the bod being unsuccessful to manage agency problem. moreover, (mikkelson & partch, 1997) showed that the reduction in hostile takeover events in the usa in late 80’s to early 90’s was primarily motivated by a decline in disciplinary force on executive. researchers explain that the association involving turnover rate of managers and managerial accomplishment is noteworthy only in active takeover environment. (kennedy & limmack, 1996) examine the achievement of targeted firms in the pre-acquisition phase and its association with following managers’ turnover rate and found positive association between two variables. they also showed those corporations that change chief executive following hostile takeovers face inferior returns prior to acquisition than those of other targeted firms. in opposite, (franks & mayer, 1996) refuse the theory that there is positive association between unfriendly acquisitions and managerial disciplinary performance. conversely, the hostile acquisition and takeover procedure is consists of lots of drawbacks. (grossman & hart, 1980) find out that hostile acquisition is associated with other significant cost to convince unwilling shareholders, investigation costs and other operational costs (williamson, 1970) that eventually prove takeovers as a very costly platform. hence, considering the large cost involved managers are f lexible to depart from the most favorable outcomes as long as the firms’ value don’t fall beyond atm adnan, nisar ahmed18 the cost of the acquisition. in addition to that, the implementation of self-protective measures such as anti-takeover law has additionally amplified the expenditure and risk of hostile acquisitions and takeovers. market for product and service quite a few significant studies concentrated on product market rivalry and its association with diverse feature of cg, containing payment structure and executive turnover. prior studies such as (aggarwal & samwick, 1999), (hermalin, 1992), (kedia & mukherji, 1999) and presented theoretical point of view on the relationship involving product market rivalry and executive inducement came up with unclear resolution. a contemporary study conducted by (baggs & de bettignies, 2007), however, found that competition in the market for goods precisely and clearly reduces the investor’s marginal charge of persuading managerial achievement. a number of studies comprising (aggarwal & samwick, 1999), (de bettignies, 2006), (defond & park, 1999) and (karuna, 2008) showed practical facts regarding these associations. these papers exhibited that rising rivalry is related with the powerful contractual reward policy for executives. conversely (shleifer & vishny, 1997) argued that competition in market for goods might be considered as one of the inf luential factors regarding economic proficiency but singularly it cannot resolve the cg problem. compared to product market competition fewer researches have been conducted to find the relationship between service market and mechanism. contemporary studies specially concentrated on the association involving corporations and their outside auditor. in precise, these studies tries to identify whether the payment for the non-audit services from this audit firms compromise the audit quality the corporations because there exist a conf lict of interest as exhibited earlier in case of arthur andersen and enron. exploring this issue, (frankel johnson & nelson, 2002) exhibited that compensation for non-audit services can hamper the auditor’s freedom. specially, the researcher showed that the proportion of non-audit to total audit amount is optimistically linked to ‘discretionary accruals’ a substitute frequently applied for ‘earnings management’. on the other hand, (larcker & richardson, 2004) proposed that these findings are seen in corporations having inadequate governance, and in addition to that, concern for the auditors market reputation act as a crucial governance driver in reducing abnormal discretionary preference by manag the transformation of the corporate governance model… 19 ers. however with the availability of the audit fee data these associations can be further investigated to identify the additional aspects of cg. market for executives, directors and mutual supervision the finance literature on markets for executives concentrated on managers, members of the bod. established experiential studies, comprising of (coughlan & schmidt, 1985),(raviv, 1985), (murphy, 1999), (mcconvill, 2006) and (conyon & he, 2011) showed a wide outlook regarding the link involving corporation’s wealth and the employment marketplace for executives and managers. these analyses discover that firm’s value maximization is positively related with managerial remuneration, while inferior results enhance the chance of turnover or sack of executives. in fact, several researches tried to look at the interaction involving manager’s switching rate, governance, and administrative structure. for instance, (goyal & park, 2002, hazarika, karpoff & nahata, 2012) and (martin & mcconnell, 1991) found that the responsiveness of ceo switching rate to corporations’ performance is considerably lesser once the chief executive and chairman/persons status are parallel. addition to the existing research, (agrawal & cooper, 2017) claimed that external candidates are selected for chief executive rank only in case of the unavailability of the competent internal candidates. mutual supervision is connected to the observation that the market for executives might utilize the gains of the corporations to verify each executive’s remuneration structure. furthermore, each executive might believe that his/ her performance is expected to be positively correlated with the performance of his/her subordinates and superiors. classical paper of (fama, 1980b) therefore imagines that the subsistence of an executive labor marketplace is a crucial element controlling the stage of mutual supervision by executives. beside this secondary inf luence, (coughlan & schmidt, 1985; firth, fung & rui, 2006; kesner & dalton, 1994) observed this marketplace as employing a direct force on the corporation to select and pay off executive in line with their accomplishment with a view to stop the most performing executives from switching and maintaining the company attractive for new efficient managers. however, the usefulness of mutual supervision by executives has been the controversial one as (hansen & torregrosa, 1992) characterized mutual supervision as an “inaccurate measurement of executives performance due to poor judgment, atm adnan, nisar ahmed20 ethical vulnerability or inferior information” also managerial infringement reduce the usefulness of the in-house evaluation system. market information providers considerable number of studies observing the relationship involving market analyst and diverse features of cg. (jensen & meckling, 1976; yu, 2011; aerts, cormier & magnan, 2007; knyazeva, 2007) argued that capital market analysts, engaged by big institutional investors, merchant banks, brokerage houses, investment banks and even traditional banking, insurance and nbfi’s perform a supervising part that inf luence the chance existing to executive to acquire extra monetary and non-monetary remuneration from the investors of the company. (chung & jo, 1996; yu, 2008; byard, li & weintrop, 2006) claimed that agency problem and cost can be notably reduced by the action of the market observer and analysts through examining managerial policy and available information concerning corporations to the market. supervision may also appear from other market contributor such as those presenting governance study and voting suggestion to large shareholder. (chung & jo, 1996) also exhibited proof that the potency of market observer’s role has a significant effect on the market value of corporations. (lin & mcnichols, 1998) showed that analyst professional association and contacts might affect the probable observing task of ‘market analysts’. researchers observed that main and sub-sponsor analysts’ predictions are considerably more positive compared to those presented by independent analysts even though their earnings predictions aren’t usually better. in the same context, (bethel & gillan, 2002), (morgan & poulsen, 2001) gave proof that non-affirmative voting advices from corporate governance reviewer are related with considerably lower levels of voting assistance. therefore, these service-oriented market participants’ have the promise to perform as both information source and observer of corporate governance. non-public external supervision two most significant sources of private external supervision source are the all types of media such as print, electronic and the legal complaint or charges face by the company. the media undoubtedly perform an imperative part in communicating cg practices of the corporation for instance, the famous enron financial scandal was first exposed by bethany mclean of fortune magazine the transformation of the corporate governance model… 21 (dyck & zingales, 2002, liu & mcconnell, 2013). finance scholars have also observed the cg function of the media. particularly, (dyck & zingales, 2002) studied the impact of media force on chief executives and directors to act in a socially legitimate way found that media inf luence company strategy concerning the environment and stakeholder’s interest. (farber, 2005)found that corporation’s convicted with fraudulent activities by the security exchange commission are likely to practice inferior governance, and it expects to improve from the average scale within the next three years. similar to this (van ees, gabrielsson & huse, 2009) convey that board formation improves after legal actions. manager’s reputation concertn manager’s concern for market reputation plays an important role to control managerial actions. fama (1980) and (lewis, 2003) argues that mangers try to maximize shareholders value with a view to raise their reputation in the labor market even when there is no monetary association between managerial compensation and wealth maximization of investors. conversely, (holmström, 1999) exhibited a model which proofs that reputation is not significant enough eliminate agency problem. moreover, (holmström & costa, 1986; holmström, 1999) in their extended research findings presented that executives career concerns might in fact guide them to act disfavor of investor’s value maximization. internal corporate governance stimulator bond composition many of the earlier studies have strongly specified that bod composition is one of the main prerequisites of cg. possessing the role of guardian and holding the obligation to deliver strategic objective and supervision, the bdo’s part in corporate governance is vital. usually, study on bod has concentrated on the association between board construction and the value of the corporations, cg alternatives, and financial management decisions along with the profitability. (fama & jensen, 1983b) describe the tasks of the bod as being equally the endorsement of executive judgments and the supervising of managerial achievement. atm adnan, nisar ahmed22 this conveys that the possibility of executive complicity could be abridged by the existence of external directors, who might therefore be viewed as additional prospective basis of corporate supervision (weisbach, 1988). according to the above idea bod are perfectly viewed as expert judges who have the duty of administering the rivalry among top executives and are restricted themselves by an outside market of managers/executives which review and values their contributions as arbitrators. in line with the agreement of the significance of outside directors as observers, weisbach (1988) specified that executives of the poorly performed corporations are highly expected to be changed if the firm has got more external board members. however, (dahya, lonie & power, 1998) exhibited that the likelihood of replacing of a top manager from firms is negatively connected to his/her ownership position. likewise, (borokhovich, parrino & trapani, 1996) showed an affirmative association involving the portion of external board members and the probability of the appointment of an external chief executive. by describing the significance of the external directors in bod, (rosenstein & wyatt, 1990) specified unusual amplification in corporation’s value followed by the joining of the additional external board members. additionally, (hermalin & weisbach, 1988) and more recently (peng, buck & filatotcheval, 2003; rhoades, rechner & sundaramurthy, 2000) found corporations tend to increase the appointment of the outside directors compared to internal due to the prolonged weak performance. a more theoretical aspect of the bod has been studied by (harris & raviv, 2005) and (raheja, 2005). they mainly focused on the qualitative characteristics of the board such as the ideal responsibilities of the boards regarding corporate supervision, the best possible board composition and board’s autonomy. (brickley, coles & terry, 1994) exhibited an affirmative share price movement in association to the dominance of the external directors in the board while negative relation observed when external directors hold minority position. in line with the previous findings (lin, pope & young, 2003) argued that stock price response to external board members recruitment is considerably more positive while board ownership is little and the members hold strong post supervisory enticement. in opposite, the requirement of executive-allied external members does not seem to provide wealth maximization to investors. shareholders even in existence of acute agency issue. (huang, hsu, khan & yu, 2008) showed extensively affirmative responses of share prices to the news of external director’s appointment. they also ar the transformation of the corporate governance model… 23 gued that unusual returns are positively associated with poor corporate performance, the ceo and chairman of the board are same person, more free cash f low, and a high extent of ‘information asymmetry’. additionally (byrd & hickman, 1992) exhibited that the capital market reaction to targeting firms that publicize bidding proposal is more positive when bod comprises of external independent members. in terms of the financial matters, board activities, composition and proficiency are enticing increased consideration. (agrawal & chadha, 2005) specified that financial capabilities on boards reduce the possibility of accounting reaffirmations. moreover, (heit, cohen & anderson, 2005) exhibited that the market assigns additional reliability to earnings declarations while boards and audit committees are both effective and independent. in contrast to the theory that bod performs as an important basis of supervising, (bhagat & black, 1999) found no considerable proof that the ratio of external board members inf luences future corporate accomplishment. the findings are also supported by the study of (demsetz, 1983), who found that in presence of the other effective monitoring mechanism, no significant association between bod and performance could be seen. in the context of european market, (vafeas & theodorou, 1998)found no substantial relationship involving corporate performance and board formation though, (dahya et al., 2002) found out that the correlation between the ceo turnover and performance could be related to the existence of more outside members in the bod. in a nutshell above research findings are not subsequent to prove whether board composition and actions are significantly affecting the firm’s performance. managerial compensation compensation strategies selected by bod can perform a significant function in associating the welfares of investors and executives. (jensen & murphy, 1990) argues that theoretically, a robust association relating remuneration plan and corporate performance will allow an enhanced coalition of interest between investors and executives. demonstration of such theoretical stand assuming a strong association is, still, not convincing such as (lewellen, loderer & martin, 1987) and (yermack, 1995) exhibited that stock options enticements have no noteworthy connection with descriptive factors associated to reduction of agency costs. (gregg, machin & szymanski, 1993) in their study in the uk context, found similar outcomes with conclusive remarks that there is very negligible association between managerial compensation strategy and performance atm adnan, nisar ahmed24 however they discovered a strong relation between compensation and value of asset. contemporary studies such as, (peng & röell, 2003, agrawal & chadha, 2005) observed the relationship involving share-based performance appraisal and the tendency of companies to repetition of revenues, engage in scams, or vulnerable to litigations found a strong association. (denis, hanouna & sarin, 2006) intensifying the investigation by adding the ownership formation argued that, the enticement to involve in deceitful action is aggravated by the existence of block and institutional owners who might also be profitable from the scam. capital construction (debt/leverage policy) last twenty years of empirical researches suggest that debt covenant/leverage can perform as a self-enforcing governance instrument, that convey that having debt embraces managers’ actions by obliging them to make interest and principle payments therefore, reducing the possibility of probable agency conf lict arising from free cash f low. debt contract was characterized as a means for lowering agency costs in numerous aspects. firstly, having more leverages decreases total share financing therefore terminating the chance of the ownermanager conf lict of interest (sarkar & sarkar, 2008). (harris & raviv, 1991) exhibited the empirical facts that the utilization of leverage can lessen equity related agency costs. similar conclusions have been also drawn by (faccio, lang & young, 2001). contemporary practical studies on cg and capital formation emphasizes on the connection involving governance and the cost of liability. for instance, (klock, mansi & maxwell, 2005) found that more exercise of ‘anti-takeover’ initiatives is related to lesser charges of debt financing. conversely, debt could result in another special type of agency problem that is the conf lict of interest between debt and share holders. the basis of the conf lict arises from incentive of the stockholders associated with the investment in high risky projects identified by (myers, 1977). additionally debt could decrease a firm’s f lexibility since interest expenditures are fixed and this fixed obligation might direct to aggressive investment decision. study by (hui, 2003) suggested that, due to its impact on financial management decision, leverage might have either positive or negative consequence on corporate value. therefore, debt covenant can play a supervising role in setting a benchmark of managerial performance on top of which executives might have some optimal discretionary power. the transformation of the corporate governance model… 25 payout strategy firm’s dividends disbursement policy is found to have association with the corporate governance. according to the earlier study of (easterbrook, 1984), dividends might manage equity agency issues by assisting the capital market’s supervision of the actions and performances of the firms. the underline reason is that the high dividend paying firms are likely to have under close observation of the individual and institutional investors such as investment banks, brokerage houses, nbfi’s etc regarding the firm’s management (mitton, 2004, farinha, 2003). contemporary theoretical study carried by (jo & pan, 2009) also exhibited agency-hypothetic pattern of dividend performance where executives disburse earnings/profits with a view to evade disciplining measures by investors however the model only effective while satisfactory dividends are disbursed. (adjaoud & ben-amar, 2010) in their study to identify the association between cg quality and payout strategy in canada found that companies with effective cg have more dividend disbursement. they also revealed that among the four elements of cg, bod structure and investor’s interest are optimistically connected to dividend disbursement ratio. generally words, there exists a growing level of agreement that payout strategy plays a role of managerial supervision. managerial shareholdings one of the important perceived way of reducing agency problem is the escalating the portion of managerial’ shareholding or internal ownership, which might result a enhanced coalition of managerial welfare with those of investors. with the increase of executive’s shareholdings, executives hold a large portion of the price of avoidance, privilege spending and other value-diminishing measures. earlier studies such as (hermalin & weisbach, 1991, mcconnell & servaes, 1990) have also argued that internal managerial shareholdings might be a useful instrument in controlling agency costs, even though some inconsistency exists. (connelly, hoskisson, tihanyi & certo, 2010) in their study on the consequence of alteration in ownership formation on performance found that there is significant positive relationship between managerial shareholdings and firms’ performance which is coherent with the position of’ interests hypothesis’. on the other hand, other notable researches found no confirmation of an affirmative association between insider managerial shareholdings atm adnan, nisar ahmed26 and corporate performance. (loderer & martin, 1997) showed the limitation of the earlier hypothesis by saying that managers might not be interested to increase their shareholdings due to the concern of losing their personal wealth. corporate governance transformation the cg matters have gained increased importance from the past two decades in every developed and developing country around the world. in the industrially developed nations (i.e. uk and usa) cg issues gained more momentum due to the several undesirable malpractices in the business conducts. most of the cases these severe misconducts resulted in specific conceptual and intellectual response from the policy makers such as cadbury report (uk) and treadway commission report (usa). the urge for cg changes, however, has got profounder backgrounds (both in advanced and emerging nations) that link to the significant experience of the states and fundamental modifications in the world wide political economy (reed, 2002). this section of the study tries to analyze the contemporary changes and reforms in the cg practices around the globe and tries to point out any shift in trend from predominant cg practices (shareholders to stakeholders). the dominant standpoint on cg is agent-principle theory, which considers that inconsistencies in shareholders and manager interests creates the key stakeholder dispute in the contemporary firm (jensen & meckling, 1976; jensen, 1989). although segregating of rights and managerial domination characterizes an effective specialization of role (fama & jensen, 1983b), proficient managers with limited or nil ownership right in the firms will barely hold any encouragement to perform in a way towards the shareholders interest. the resolution to this disagreement is contractual in type like ‘managerial compensation’ via incentive arrangements combined with board and financial supervision (useem, 1993). in this stockholder wealth maximization concept of the corporation, contractual solutions are suggested and offered to other stakeholders. this type of resolution perceives the corporation as slightly more than a link of agreements (williamson, aoki & gustafsson, 1990) in which internal stakeholder likely to play the intrinsically adversarial role (roe, 1994). (hansmann & kraakman, 2004) argues that the conf lict between owners and managers on wealth distribution has lately changed its course from the construction of incentive structure toward the strengthening of the system of supervising and accountability. a great deal of cg reform is reactive to crisis (cof the transformation of the corporate governance model… 27 fee jr, 1999) and the latest cg failure characterized in the financial disaster in the developed world (i.e. usa) have started an exceptional drive for legislative change in cg framework (carney, gedajlovic & sur, 2011). shift from shareholder to stakeholder the typical movement from the ‘shareholder perspective’ to the ‘stakeholder perspective’ was particularly noticeable in the later part of the 20th century. the stakeholder model first noticed to be recognized in the 1930 by general electric company through promoting the interest of broader interest group to tackle the economic crisis (depression) (preston & sapienza, 1990). this stake holding concept was grasped by other inf luential corporate bodies and academicians in the mid-1950s, recommended that equity-holders’ wealth can be sustainable and may well be increased by nourishing the needs and expectancies of other participants (hummels, 1998). in between the period of 1960s to 1980s, the stakeholder model gained wide acceptance among the consumer groups, environmental protectionists and communities. the concept was also applied by the ceo’s as a safeguard against the potential hostile takeover in 90s for example the case of paramount communications v. time inc. in 19891 and credit lyonnais bank n.v. v. pathe communications corp in 19912. the diversion from the traditional shareholders interest based mindset was first exhibited by these two significant verdicts (sullivan & conlon, 1997). it was however in the 1990s that the stakeholder view instigated to be extensively applied in the cg argument (blair, 1995). the new model has been so prominent that by 2000 most of the states in the usa have explicitly recommended executives to make sure the welfares of stakeholders in their policymaking and execution (stoney & winstanley, 2001). (donaldson & preston, 1995) argued that, this movement regarding stakeholder orientation is not exclusively a u.s. phenomenon and is manifested in the prevailing and emergent corporate structure of many economically advanced countries (i.e. uk, germany, japan). 1 in the case of paramount communications v. time inc. in 1989, the court permitted time’s directors to discard paramount’s takeover proposal even though that offer boosted stockholders’ financial wealth. 2 in the instance of credit lyonnais bank n.v. v. pathe communications corp. (1991), the court again promoted a stakeholder concept on the basis that directors do not owe duties to any single interest group, but to the corporation as a whole. atm adnan, nisar ahmed28 there is sufficient explanatory proof, that most managers are perceived to be practicing stakeholder model. (baumhart, 1968) in this survey of top-level executives discovered that about 4/5th of them believe that only concentrating on the equity holders interest while avoiding the interest of other interested contributor (stake holders) in the business is not an ethical behavior. subsequent empirical studies of (brenner & molander, 1977) and (posner & schmidt, 1984) about the stakeholders orientation of top executives have unveiled analogous outcomes. (clarkson, 1995) tried to segregate the practitioner and nonpractitioner firms of stakeholders’ management found insignificant numbers of entities in the second group. executives may not make clear indication to “stakeholder theory,” but most of them are seemed to be following in practice to one of the fundamental views of the stakeholder theory (forbes & hodgkinson, 2014). board composition as a representation of stakeholders orientation one of the most significant expositions of the shift in the cg perception has been exhibited in the formation of the corporate boards (cb as proceed) and the changes in the legislative recommendation associated to it. corporate board formation and its impact on firms’ corporate governance has long been subject of attention and argument in social and business arena. lately denunciation of cb has risen considerably. the debate have been more concentrated on the issue of the freedom and active operation of cb (mintzberg, 1983). the most regularly advised board restructurings points at greater representation of non-executive directors (directors, who are not belong to the managerial board). nowadays nearly all large public limited corporations board comprises of 75% or more non-executive directors (wang & coffey, 1992).the underlining philosophy is that external board members are inf luential to a corporation’s performance that is also backed by theories such as “agency theory and the stakeholder theory”(wang & dewhirst, 1992). (eisenhardt, 1989) argues that the board is one of the supervising tool through which equity-holders of large corporation potentially offset the discretionary opportunistic behavior of the top executives. the overhead arguments suggest that internal and external board members may have dissimilar stakeholder focus. for instance, external board representatives are greater stakeholders oriented (weisbach, 1988) whom they stand the transformation of the corporate governance model… 29 for in the board, than internal board member ref lecting the conf lict of interest portrayed by agency theory. (wang & dewhirst, 1992) however, argued that there is no difference in perspective between board members in terms of their status because according to “resource dependency perception” externals are selected by incumbent board. institutional stock ownership as a representation of stakeholders orientation another important measure to portray the movement in trend is the institutional stock holding (large equity investors). (johnson & greening, 1999) argues that institutional investors are proved to be more committed in cg issue; therefore they incline to promote cg practices coherent with greater stakeholder orientation. (huson, parrino & starks, 2001) exhibits that the proportion of institutional investment in usa (i.e. banks and non-banking financial institutions, mutual funds, pension funds, insurance companies) has grown by almost 25% from 1971 in between 1971 to 1994. (gillan & starks, 2000) discover in their study in late 90s that large corporate investors force corporations to uplift board autonomy via the equity-holder proxy proposal system. thus, the involvement of greater institutional equity holding could lead towards the comprehensive stakeholder’s management. (hermalin, 2005) country and firm level empirical evidence of movement several country and firm based empirical findings related to board composition have also exhibits the fact that there has been a salient shift from the conventional view of shareholders wealth maximization to stakeholder’s management. such as in the context of usa (hermalin and weisbach, 1988) in their study on 142 publicly traded firms in nyse found that the participation of external members in the board have increased by nearly 16.5% (37.6% to 53.9%) from 1971 to 1983. (borokhovich et al., 1996) also found the evidence of increase in the percentile (68.3% to 75.6%) of external board participants in their study comprised of 588 plc covering the period of 1970 to 1988. likewise, (huson et al., 2001) in their study on board composition of manufacturing firms also revealed that proportion of external board participants raised from 71% to 86% in between 1971 to 1989. in context of uk, the studies show the similar output as (dahya & mcconnell, 2001) finds in their study of 700 uk atm adnan, nisar ahmed30 listed firms, a significant increase of almost 26% in the outside directors number in the board within the period of 1989 to 1999. additionally, (huson et al., 2001) also exhibit that the employ of inducement payments for external directors has raised significantly. they find almost 84% of corporations in the sample were using equity-based reward for their external board executives. therefore, these drifts toward significant external representation on corporate boards can be perceived to relate to a movement to greater stakeholder orientation among firms. in case of uk, similar exemplary movement of perception has been seen from the late 1980s (dine, 2000) which is not solely recognized by scholars and legislators, but also by business communities and executives. a long term research conducted by (poole et al., 2001) on management standpoint in favor of stakeholders welfares reveal that almost 80% of the managers put emphasize on overall stakeholders wellbeing in 2000 which has sharply increased by almost 30% from 1980, where as in usa the similar rate found to be 75% in 2001 from the study conducted by (vinten, 2001). but such a typical swing does not essentially illustrate a factual supremacy of stakeholder orientation as the researchers and academicians often argue. for intense, ‘rail-track’, a uk company in 1990s, stakeholder welfares were vastly highlighted in its annual reports but in real practice decisions were taken in favor of shareholders rather than overall stakeholders. (wolmar, 2001). studies also exhibit that the actual pressure of overall stakeholders concerning about corporations’ engagement in stakeholders management did not grow, but in fact reduced by almost 20% in between 1970 and 1990s (letza & smallman, 2001). legislators, academics and media as a section of secondary stakeholders may occasionally apply pressures, but the genuine inf luences and authorities of primary stakeholders of a corporation are still blurred. (fligstein, 1993). changes towards shareholders-oriented models even though most of the studies have exhibited a shifting pattern towards the stakeholders-oriented cg framework, some studies also showed a reverse approach to move towards more shareholders oriented cg framework. such as (schmidt & spindler, 2002) claimed and suggested that the u.s cg framework which is predominantly stockholder oriented system is more proficient in case of economic changes and is f lexible to adjust promptly to variation in the market ecosystem compared to the stakeholders oriented cg model practiced in eu the transformation of the corporate governance model… 31 ropean context. additionally, many researchers such as (lazonick & o’sullivan, 2000) have found in their study on german cg system that numerous market forces have decreased the f lexibility of the german cg system which is characterized as stakeholder oriented, that raises doubt regarding the sustainability in its present structure. another study by coffee (2001) talked about the modification of stakeholder basis of cg in europe & japan. the study incorporates four parts where shifting and alteration in cg is verified; “1) legal framework, 2) ownership structure, 3) internationalization of the markets for corporate control, and 4) growth of european capital markets.” the pressure of large institutional investors and their enhanced control on european executives might also be a significant factor for shifting towards shareholder orientation of cg. furthermore, (hansmann & kraakman, 2000) proposed that shifting towards the shareholder-oriented cg model is not only advantageous and unavoidable, it has already taken place. moreover, the agreement on a shareholder-oriented framework not only increase in the anglo-saxon nations, but has also intensified globally due to the attainment of modern firms functioning using this form. they also specified that the shareholder framework has out-performed the stakeholder model, and the financial and societal globalization force will transform stakeholders-oriented model into shareholders-oriented framework. moreover, research carried out by (yoshikawa and phan, 2001) to exemplify the dissimilarity of two cg approaches practiced in japan. they observed that, the alteration in ownership composition and investor’s expectations will stimulate the firms to concentrate more on increase shareholder wealth even though stakeholder welfare are more focused. yet, another study performed by (allen & gale, 2000) argued that even though there is obvious tendency of shifting towards “anglo-american approach” of cg exhibiting the supremacy of uk and usa economy but in case of asian economy it is complicated to completely shift toward “shareholders-oriented” model because of its distinctiveness of indigenous trade philosophy and legal structure. comparative corporate governance researches on the subject of cg have emerged as an imperative field from the last ten years, and have generated considerable attention in global analogy. previous researches alienated the studies into two extensive classifications namely the anglo-american cg arrangement, which is outlined by robust equity holders’ rights, shorter period equity financing, discrete shareholdings, atm adnan, nisar ahmed32 effective markets for capital control, and responsive market for workforce (vitols, hall & soskice, 2001), (hall & soskice, 2001) and other one known as the continental european cg arrangement, which can be described by longer period credit funding, intensified block holder control, weaker equity holders authority, passive markets for controlling capital and nonf lexible markets for workforce. (la porta et al., 1999); (ooghe & de langhe, 2002);(cernat, 2004). over the time, these two different opinions regarding cg have been developed and changed by the varied practical implication in different countries. however, these two different arguments act as a handy outline to begin the discussion. studies carried by several researchers such as (aoki, jackson & miyajima, 2007) (kang & shivdasani, 1995) found that both the characteristics of anglo-american and continental european cg models are only partly practicable in realities for japan and eastern asian region found by (dore, 2000); (fan & wong, 2005) (hamilton, feenstra, choe, kim & lim, 2000). the partial implication has been also experienced while analyzing cg practice in a wide range of eu countries (lubatkin, lane, collin & very, 2005),(enriques & volpin, 2007) and also in case of developing economies (okpara, 2011; siddiqui, 2010). with the motion of identifying different cg models, contemporary studies have also tried to identify, which cg model is more effective and high scale up potentiality. the successive arguments in cg seek to identify the extent of the globalization of the markets and the liberalism has driven to swift adjustments in classical structure of cg therefore both the pure angloamerican and continentaleuropean models have not been the auto choice as considerable researches such as (gugler, mueller & yurtoglu, 2004),(khanna, kogan & palepu, 2006; rugman & collinson, 2009) exhibited that cg system practiced in different local and global institutions dominated significantly by international pressure. for example, (buck & shahrim, 2005), (fiss & zajac, 2004), and (ahmadjian & robbins, 2005) have exhibited that when shareholder oriented cg model practices specially those are exported from usa to other region of the globe is likely to be transformed and mixed with the local cg systems prior to their practical application. for this reason, only certain degrees of the cg exercise are completely executed and their acclimatization frequently directs to innovative or hybrid structures of these practices. the transformation of the corporate governance model… 33 convergence of corporate governance considerable focus has encircled the subject of convergence of cg structures. features such as changes in the forms of cb (nietsch, 2005), the continual limitation of market for capital (vitols et al., 2001), the significance of staff and workers as stakeholders (jackson & moerke, 2005), the occupational arrangements of top executives (kubo, 2005) and business policies built on longstanding associations (yoshikawa & mcguire, 2008) are adequate to claim that german and japanese cg framework are still quite different from that of usa or uk but at the same time weight must be given on the noteworthy transformations happening in other developing region alongside germany and japan. from a systems-based viewpoint, recent progresses are often viewed as a “mixture” of domestic cg framework (aguilera & jackson, 2003). fundamental features from stakeholder leaned system are reframed with latest aspects of equityholder leaned models such as comprehensibility and precision. (aoki, jackson & miyajima, 2005) argues that contradictory views, such as shareholder and stakeholder focused cg, might help to create an equilibrium or complement each other such as happening in germany and japan. global standards are also playing a major role in the recent convergence of cg, such as international accounting standards (ias/ifrs), us sarbanes-oxley act and oecd principles. the oecd principles have been initially accepted by 30-member nations and proved to be a global standard for cg (jesover & kirkpatrick, 2005) and providing a precise direction for strategy formulation. continuing arguments relating to shareholders vs stahekolders cg approach arguments concerning the comparative advantages of the stakeholder and shareholder oriented cg model remain a popular research topic for the researchers. one the one side academicians and researchers have negatively characterized stakeholder governance model on several points such as the existence of the large number stakeholders (jensen, 2001), insignificant contribution (becht, bolton & röell, 2003) too much consideration may cause delayed decision making (letza et al., 2004) and not having a sole purpose tasks could weaken administrative accountability (de langen, 2006). however, several researchers have argued that, shareholder wealth has already been considered atm adnan, nisar ahmed34 stakeholder governance model specifically termed as “instrumental stakeholder theory” (jones, 1995) or “strategic csr” (campbell, 2007). with minor differences, these viewpoints suggested that fulfilling stakeholder’s interest/welfare is ethically acceptable and build greater corporate wisdom, although the most important task of operating the firms should be given to executives and they must take into consideration stakeholders only to maximize the shareholders long term value generation (vinten, 2001; ntim, opong & dambolt, 2012; ho, 2010).  conclusion this study comprehensively reviews prominent literatures to describe the idea of corporate governance (cg) framework, the underlining explanations for the cg challenges and the confirmation of the presence of unresolved agency problems in firms. some key conclusive remarks are that, agency problem is still dominantly exists in corporations and instruments for containing the significance of the costs associated to agency issue are accessible and comprise of several external/macro level and firm specific internal controlling instruments. it is noted that because of the limitations in existing significant hypothetical and functional inadequacies, external controlling mechanism such as hostile acquisition threat, and market for managers and directors, managerial reputation, capital market observation, market analyst and institutional investors might not be able to solely resolve the cg challenge, even though these could be significantly successful in some specific situations. thus, corporations have to implement balancing internal firm specific controlling mechanism to reduce the overall costs associated to agency problem. this internal mechanism consists of the board structure, managerial ownership/investment, executive’s compensation policy, debt covenant/leverage, capital structure, dividend policy and corporate by-laws and strategies. in consistent with that findings, a considerable number of researches have been carried out identifying the compound nature of most of the cg system in corporate practice, signifying that singular instrument based controlling mechanism of cg might not be effective and reasonable. moreover, this study tries to analyze the contemporary shift in the perception of corporations from the shareholders wealth maximization to stakeholder’s valuation. it has been noticed that investigating cross country and firm-based variances in wealth distribution between diverse interest groups is likely to continue as major focus for cg study. it has the transformation of the corporate governance model… 35 been experienced that the nature of the corporation is changing around the globe (zingales, 2000), big multinationals have been splitting into smaller liberated corporation, access to capital market is become easier and physical resources are easily replaceable and less exclusive to business strategy therefore the human resources turn into significantly important means to a corporation’s existence and growth. in addition to that firm’s relationships with community and goodwill are becoming equally crucial. there has been a progressive movement in conceptual framework of both investors and managers that firm’s overall success and sustainability depends on the overall value maximization of the all stakeholders including the stockholders. the empirical evidences of uk and usa are also suggestive to this argument. the analysis also reveals that both stockholder and stakeholder models are competing on the ground of superiority however, in practically there has been a vibrant modification with both standards are becoming progressively equally appealing in different region over the last 20 years or so. this paradigmatic swing is the main ideology of this paper. for instance, real facts exhibits that germany and japan, which have been customarily stakeholder dominated regime, have lately switched to equity-holder based cg framework and market oriented structure because of the dominance of free market economy and global competition (stoney & winstanley, 2001). all this suggests that the pretended power and dominance of any particular perception is not sustainable and comprehensive rather circumstantial. a potential scope for future investigation could be taken in the area of the identification of the association between the cg features of corporations and firm’s performance.  references adams, r.b., hermalin, b.e., & weisbach, m.s. 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(2000). in search of new foundations. the journal of finance, 55, 1623–1653. http://dx.doi.org/10.1111/0022-1082.00262. date of submission: november 7, 2020; date of acceptance: january 3, 2021. * contact information: csdpatel@gmail.com, c. k. shah vijapurwala institute of management (cksvim), r. v. desai road, nr, goya gate circle, pratapnagar, vadodara, gujarat, india, phone: (+91) 9998685685; orcid id: https://orcid.org/0000-00022357-9786. ** contact information: nareshpatel13@gmail.com, faculty of management and information sciences, dharmsinh desai university, nadiad, gujarat, india, phone: (+91) 9426699665; orcid id: https://orcid.org/0000-0001-9032-5295. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 1 divyesh patel, c.s., & patel, n.k. (2021). india gas exchange today’s reality and path ahead. copernican journal of finance & accounting, 10(1), 31–51. http://dx.doi.org/10.12775/cjfa.2021.002 c.s. divyesh patel* c.k. shah vijapurwala institute of management dharmsinh desai university dr. naresh k. patel** dharmsinh desai university india gas exchange today’s reality and path ahead keywords: indian gas exchange (igx), indian energy exchange (iex), oil and gas sector of india. j e l classification: q4, p28, o13. abstract: this research aims to study structure, functioning and operational mechanism of india’s first gas exchange i.e. indian gas exchange (igx) which is a subsidiary of indian energy exchange (iex). exploratory research is used to study and investigate conceptual framework and operational mechanism of igx. the results of the study show that iex has unveiled the nation’s first automated natural gas exchange trading platform called igx for well organized and hefty gas market and to stimulate gas trading in the country. igx would lead india towards gas based economy by designing and providing robust solution for natural gas trading and access. so far as price mechanism c.s. divyesh patel, naresh k. patel32 at igx is concerned, it is dynamic and market driven which is based on double-sided closed auction with uniform price mechanism. igx plays an extremely important and fundamental role towards capitalizing a free market for gas. clearing and settlement system at igx is structured and transparent. as igx is purely electronic trading platform for natural gas which is considered as barometer of the india’s progressive policy as it integrates the entire energy value chain from gas production.  introduction india is the home of over 1352.62 million people. there is paradigm shift towards fully developed nation by the middle of this century. progressing towards fully developed nation, there are two major important factors namely industrial revolution and framing of sustainable development goals (alam, alam, reza, khurshid-ul-alam, saleque & chowdhury, 2017). india needs secured gas, energy, power generation and distribution and its supply. it has been supplemented in research of chakraborty (2019) that deteriorating in air quality index and heavy dependence of imported crude oil has stimulated india’s energy planning. there has been paradigm shift from traditional sources such as coal, oil, lignite, natural gas, hydro and atomic energy to non-conventional and renewable energy resources such as wind power, solar system including waste of rural and household (ahmad, 2019). moreover, there is a nexus between economic growth and energy demand; hence, the demand for oil and gas is forecasted to grow more in coming years. the recently established iex is publicly listed company on both recognized stock exchanges of india namely national stock exchange (nse) and bombay stock exchange (bse). however, it is administered and controlled by the central electricity regulatory commission (cerc) with an objective of efficient and transparent price mechanism along with expeditious trade execution of the power market in india. according to lkp research (2020), iex has created near monopolistic market with 95% market share for itself in india’s short-term power exchange market. in fact, this market is at a very nascent stage with only around 4% of india’s power produced transacted through exchanges compared to 30% in developed economies (hdfc sec research, 2020). logistic and trading mechanism of gas and electricity have been almost similar. hence, having good command on the electricity exchange, iex is eager to take benefit of its technology platform, expertise and capability. by leveraging its expertise, iex has launched an igx. this paper attempts to study and investigate conceptual framework and operational mechanism of igx. india gas exchange today’s reality and path ahead 33 indian gas market scenario natural gas is considered to be the cleanest fossil fuels which can be used as a raw material in the manufacture of fertilizers, other organic chemicals including plastics. in fact, it can also be used as a fuel for electricity generation and heating in industrial units. it is another form of energy which is treated as cleaner form of fuel (abdi, 2019). it is supported by research of vikas and bansal (2019) that indian oil and gas sector deals with refining, transportation and marketing of these products which approximately contributes 15 % to india’s gdp. oil and gas sector contributes about 34.4 % to primary energy consumption in india. the oil and gas industry has been depicted in figure 1. figure 1. oil and gas industry – major sectorsdo 1/2021 figure 1. oil and gas industry – major sectors source: soni & chatterjee, 2014. oil and gas industry major sectors upstream exploration and production (e&p) of oil and gas midstream transportation, storage, wholesale marketing, pipelines and other transport system downstream refining of petroleum crude oil, processing and purifying of raw natural gas and marketing and distribution s o u r c e : soni & chatterjee, 2014. it is inevitable to understand gas supply sources in india which is schematically presented in figure 2 as their uses are not only limited to cooking in domestic households but as a transportation fuel for vehicles also. c.s. divyesh patel, naresh k. patel34 figure 2. gas supply sources in india used as a fuel for electricity generation and heating in industrial units. it is another form of energy which is treated as cleaner form of fuel (abdi, 2019). it is supported by research of vikas and bansal (2019) that indian oil and gas sector deals with refining, transportation and marketing of these products which approximately contributes 15 % to india’s gdp. oil and gas sector contributes about 34.4 % to primary energy consumption in india. the oil and gas industry has been depicted in figure 1. figure 1. oil and gas industry – major sectors source: soni & chatterjee, 2014. it is inevitable to understand gas supply sources in india which is schematically presented in figure 2 as their uses are not only limited to cooking in domestic households but as a transportation fuel for vehicles also. figure 2. gas supply sources in india source: gas, 2020. due to deteriorating and contraction of productivity in existing sources of natural gas, domestic production of gas has been drastically declining over the past two fiscals. if we oil and gas industry major sectors upstream exploration and production (e&p) of oil and gas midstream transportation, storage, wholesale marketing, pipelines and other transport system downstream refining of petroleum crude oil, processing and purifying of raw natural gas and marketing and distribution gas supply sources in india domestic import of liquefied natural gas (lng) supplied from the oil & gas fields located at hazira basin, mumbai offshore, kg basin, assam & tripura imported through open general license (ogl) by the gas marketer namely petronet lng limited, shell, gail, gspc lng ltd and indian oil to meet demand of gas. s o u r c e : gas, 2020. due to deteriorating and contraction of productivity in existing sources of natural gas, domestic production of gas has been drastically declining over the past two fiscals. if we throw lights on current natural gas consumption of india, domestically produced natural gas constitute for less than 50% of while imported liquefied natural gas accounts for the rest. as per the report of ministry of petroleum and natural gas (gas, 2020) regarding consumption of gas per day would be about 165 million cubic meters out of which approximately 47% would be met by import of liquefied natural gas which is depicted in figure 3. natural gas consumption is getting increase gradually (13% appx.) since from financial year (fy) 2014 to 2019 where 47% approximately constituted lng imports. figure 3. gas consumption (india) throw lights on current natural gas consumption of india, domestically produced natural gas constitute for less than 50% of while imported liquefied natural gas accounts for the rest. as per the report of ministry of petroleum and natural gas (gas, 2020) regarding consumption of gas per day would be about 165 million cubic meters out of which approximately 47% would be met by import of liquefied natural gas which is depicted in figure 3. natural gas consumption is getting increase gradually (13% appx.) since from financial year (fy) 2014 to 2019 where 47% approximately constituted lng imports. figure 3. gas consumption (india) source: petroleum planning & analysis cell (ppac) india. it can be inferred from figure 4 that india is gradually increasing its lng imports almost 10% during last 6 years (i.e., fy 2013 to 2018) and ultimately fiscal burden lies on government of india. figure 4. trend of import of liquefied natural gas (india) s o u r c e : petroleum planning & analysis cell (ppac) india. india gas exchange today’s reality and path ahead 35 it can be inferred from figure 4 that india is gradually increasing its lng imports almost 10% during last 6 years (i.e., fy 2013 to 2018) and ultimately fiscal burden lies on government of india. figure 4. trend of import of liquefied natural gas (india) throw lights on current natural gas consumption of india, domestically produced natural gas constitute for less than 50% of while imported liquefied natural gas accounts for the rest. as per the report of ministry of petroleum and natural gas (gas, 2020) regarding consumption of gas per day would be about 165 million cubic meters out of which approximately 47% would be met by import of liquefied natural gas which is depicted in figure 3. natural gas consumption is getting increase gradually (13% appx.) since from financial year (fy) 2014 to 2019 where 47% approximately constituted lng imports. figure 3. gas consumption (india) source: petroleum planning & analysis cell (ppac) india. it can be inferred from figure 4 that india is gradually increasing its lng imports almost 10% during last 6 years (i.e., fy 2013 to 2018) and ultimately fiscal burden lies on government of india. figure 4. trend of import of liquefied natural gas (india) s o u r c e : cris analysis. it is imperative to develop diverse market place for oil and gas sector in india because of two fundamental aspects namely strong consumer base (in terms of consumers in domestic, commercial or industrial and transport sectors) and price sensitivity. generally, of the total gas demand of country in 2019, household and transport which is approximately 66% which has been taken care of by power industries in association with city gas distribution networks. however, around 50% of the same has been met with low priced domestic gas (iea, 2021). it can be inferred from figure 5 that natural gas consumption by power, fertilizers and city gas distribution (cgd) are most sensitive as compared to other sectors. c.s. divyesh patel, naresh k. patel36 figure 5. natural gas consumption (india) source: cris analysis. it is imperative to develop diverse market place for oil and gas sector in india because of two fundamental aspects namely strong consumer base (in terms of consumers in domestic, commercial or industrial and transport sectors) and price sensitivity. generally, of the total gas demand of country in 2019, household and transport which is approximately 66% which has been taken care of by power industries in association with city gas distribution networks. however, around 50% of the same has been met with low priced domestic gas (iea, 2021). it can be inferred from figure5 that natural gas consumption by power, fertilizers and city gas distribution (cgd) are most sensitive as compared to other sectors. figure 5. natural gas consumption (india) source: cris analysis. such optimistic trends would influence gas market supplies significantly and in line with ministry of petroleum and natural gas is also taking progressive steps towards increasing share of gas in indian energy mix to 15% (which is around 6.2% currently) to make india a gas based economy (the economic times, 2020). as per report of india (2020) the indian gas market constitutes around 166 mmscmd and is expected to reach around 600 mmscmd in coming decade. it means there will be approximately 261% contribution expected over span of 7 to 10 years. many countries are adopting gas as a primary energy source for the sake of air quality and carbon emission benefits. now, more state has officially prohibited fuel oil as industrial consumers are the largest gas consuming segment. it is supported by global gas report 2019 and came out with research that gujarat’s ceramic industry has drastically reduced air pollution and s o u r c e : cris analysis. such optimistic trends would inf luence gas market supplies significantly and in line with ministry of petroleum and natural gas is also taking progressive steps towards increasing share of gas in indian energy mix to 15% (which is around 6.2% currently) to make india a gas based economy (the economic times, 2020). as per report of india (2020) the indian gas market constitutes around 166 mmscmd and is expected to reach around 600 mmscmd in coming decade. it means there will be approximately 261% contribution expected over span of 7 to 10 years. many countries are adopting gas as a primary energy source for the sake of air quality and carbon emission benefits. now, more state has officially prohibited fuel oil as industrial consumers are the largest gas consuming segment. it is supported by global gas report 2019 and came out with research that gujarat’s ceramic industry has drastically reduced air pollution and environmental contamination due to shifting from coal usage to natural gas after march 2019 and credit goes to smooth gas distribution networks. it has been stated that pm2.5, pm10 and s02 concentration have been reduced by 75%, 72% and 85% respectively by august 2019 as compared to 2017 (international gas union, 2020). iex has recently unveiled indian gas exchange (a wholly owned subsidiary) to facilitate smooth and expeditious gas trading in india. the research methodology and the course of the research process the research is purely based on secondary data pertaining to indian gas exchange. the source of data collection for the study was obtained through the india gas exchange today’s reality and path ahead 37 web sources of indian gas exchange ltd. this study used market data of igx products based on buy bid and sell bid for the period for the period from june2020 to october-2020 as a sample period of four main gas exchange hubs namely dahej, hazira, odoru and kg basin. exploratory study is carried out during stages of research process to narrow the scope of research objectives and to transform ambiguous problems into well-defined one. the technique to study exploratory research is secondary market analysis. descriptive research (a part of conclusive research) is also used to help in providing specific information so as to evaluate the conceptual framework and operational mechanism of igx. igx market model with reference to contractual framework/ arrangement has been presented in chart 1. chart 1. igx market model environmental contamination due to shifting from coal usage to natural gas after march,2019 and credit goes to smooth gas distribution networks. it has been stated that pm2.5, pm10 and s02 concentration have been reduced by 75%, 72% and 85% respectively by august 2019 as compared to 2017 (international gas union, 2020). iex has recently unveiled indian gas exchange (a wholly owned subsidiary) to facilitate smooth and expeditious gas trading in india. the research methodology and the course of the research process the research is purely based on secondary data pertaining to indian gas exchange. the source of data collection for the study was obtained through the web sources of indian gas exchange ltd. this study used market data of igx products based on buy bid and sell bid for the period for the period from june-2020 to october -2020 as a sample period of four main gas exchange hubs namely dahej, hazira, odoru and kg basin. exploratory study is carried out during stages of research process to narrow the scope of research objectives and to transform ambiguous problems into well-defined one. the technique to study exploratory research is secondary market analysis. descriptive research (a part of conclusive research) is also used to help in providing specific information so as to evaluate the conceptual framework and operational mechanism of igx. igx market model with reference to contractual framework/ arrangement has been presented in chart 1. chart 1. igx market model igx market rules & by laws igx market rules & by laws gas seller gas hub ng pipelines gas buyer delivery point title transfer ex hub transactions (gta between transporter & buyer) delivered transactions (gta between transporter & igx) s o u r c e : exchange, 2020 & compiled by researcher. indian gas exchangeoperational mechanism introduction the government of india has framed a progressive policy in the field of indian energy segment that to increase share of natural gas to 15% by 2030 as compared to current share of 6.5%. if we look at from global perspective, the share of gas in energy mix is about 23.5% currently. so in order to increase share of c.s. divyesh patel, naresh k. patel38 natural gas in india, it is indispensible to have healthy investments in gas economy infrastructure in terms of value chain, regasification (i.e. conversion of lng to natural gas), pipeline transportations etc. india’s first nationwide gas exchange igx was launched on 15 june 2020 with an objective of moving towards laissez-faire gas prices and to give an edge to the investment in gas infrastructure in india. according to etenergyworld (2020) now india is in the race of progressive economies as india has achieved a big milestone in the natural gas industry and crafted a new chapter in the energy history of india. hence, it would provide the nation paradigm shift towards free market pricing of natural gas. the igx has already 350 registered clients and 12 members (big new network, 2020) which provides neutral, transparent and smooth mechanism of gas trading as the underlying commodity. the price of domestically produced natural gas is in the hands of the government. however, domestically produced natural gas can’t be available for trading on the exchange. a government is in process of giving green signal for trading certain volume of domestic gas on gas exchange (karunjit, 2020). digital trading platform (web-based interface) igx is india’s first digital national trading platform automated with web based interface to encourage and uphold an efficient & hefty gas market trading in the country. the platform which provides trading facility in spot and forward contracts with numerous buyers and sellers. it has its designated physical hubs namely dahej and hazira in gujarat, and kakinada in andhra pradesh. igx is web based platform that provides neutral, transparent and smooth mechanism of gas trading as the underlying commodity. here, regasification has been carried out (i.e. conversion of lng to natural gas) and sold to buyers through this platform. hence, it eliminates the requirement of buyers and sellers to find each other and would lead to anonymous bidding. hence buyer need not contact multiple dealers for ensuring the fair price. it allows buyers and sellers greater f lexibility. india’s spot import is around 25% of total gas requirement out of total import of 55%. india gas exchange today’s reality and path ahead 39 igx products igx has wide range of products day ahead (not available for trade), daily, weekly, weekday, fortnightly and monthly at physical hubs at dahej and hazira in gujarat, odoru in andhra pradesh and krishna godavari basin (kg basin). products specification and features would be depicted in table 1. transactions of these products would be taken place either ex-hub & delivered contracts subject to margin requirements as per market rule. in case of ex hub contracts, exchange will forward details to buyers to dispatch nomination to transporter. while in case of delivered contracts, where igx shall facilitate the trade, physical delivery of gas by booking the necessary transmission facility, and financial settlement for the traded contracts. table1. igx products specifications and features features products day ahead daily week day weekly fortnightly monthly trading of contracts for delivery d+1 (i.e., next gas day) t+2 day (i.e., t is the trade day and 2 is the delivery day monday to friday fixed for 5 days. 7 days typically monday-sunday and other combinations of 7 days 15/16 days each for a month. (i.e., 1st -15th and 16th – end of month) entire calendar month availability of trading window 1-day prior for trading on day ahead basis available for trading up to a period specified by igx 5 days before the start of delivery 5 days before the start of delivery 5 days before the start of delivery for both the contracts. 6 days before the start of the delivery. s o u r c e : adapted from igx, compiled by researcher. contract specification at igx would be shown in table 2 (refer annexure). market data of all igx products (except day ahead contract as they not available for trade), based on buy bid and sell bid qty has been presented in table 3 (refer annexure) and schematically presented in figure 6 and month wise data in figure 7 (refer table 4 in annexure). c.s. divyesh patel, naresh k. patel40 figure 6. market data of igx products based on buy bid and sell bid at dahej, hazira, odoru and krishna godavari basin (kg basin) figure 6. market data of igx products based on buy bid and sell bid at dahej, hazira, odoru and krishna godavari basin (kg basin) source: adapted from igx data, derived by researcher igx. figure 7. month wise market data of igx products buy and sell bid qty of hubs at dahej, hazira, odoru and krishna godavari basin (kg basin) daily week day weekly fortnightly monthly buy bid qty (mmbtu) 132900 103500 240100 142800 101300 sell bid qty (mmbtu) 80500 10000 147000 12500 89900 0 50000 100000 150000 200000 250000 300000 market data of igx products for the period from june-2020 to october-2020 buy bid qty (mmbtu) sell bid qty (mmbtu) s o u r c e : adapted from igx data, derived by researcher igx. figure 7. month wise market data of igx products buy and sell bid qty of hubs at dahej, hazira, odoru and krishna godavari basin (kg basin) do 1/2021 figure 1. oil and gas industry – major sectors source: soni & chatterjee, 2014. oil and gas industry major sectors upstream exploration and production (e&p) of oil and gas midstream transportation, storage, wholesale marketing, pipelines and other transport system downstream refining of petroleum crude oil, processing and purifying of raw natural gas and marketing and distribution india gas exchange today’s reality and path ahead 41 do 1/2021 figure 1. oil and gas industry – major sectors source: soni & chatterjee, 2014. oil and gas industry major sectors upstream exploration and production (e&p) of oil and gas midstream transportation, storage, wholesale marketing, pipelines and other transport system downstream refining of petroleum crude oil, processing and purifying of raw natural gas and marketing and distribution s o u r c e : adapted from igx data, derived by researcher igx. from figure 6 and 7, it can be inferred that igx products are gaining momentum gradually. it’s an indication of constructive and imperative effects which creates public trust in financial operations leading towards stakeholder’s value enhancement and serving to nation’s interest. it would reach its peak level as the aim is moving towards laissez-faire gas prices and to give an edge to the investment in gas infrastructure in india by increasing share of natural gas in its energy mix to 15 percent by 2030 (bhutra, 2020). trading process igx shall conduct transactions as per the terms of contracts set out under market rules. all orders made by the members shall be sent via electronic interface to the gas trading platform for matching process and execution. in case of any contingency at the member’s end, igx has the right to accept or not accept to place/modify/cancel the order request received from the member. order matching rules ensure that orders are executed based on the prices available in igx trading system and will be as per algorithms set. auction trade session: 10:00 to 12:00 as per trading calendar. prior to placing the orders, the buyers and sellers shall post with the igx such amount as margin, as may be required c.s. divyesh patel, naresh k. patel42 by them in advance in order to trade for contracts as specified by igx from time to time and as set out under the contracts (“margin”). such margins may be in cash and non-cash form as specified by igx. the cash margins are to be deposited to the settlement account and shall be used for completion of payments for a transaction as per the terms of the contracts. the amounts in the settlement account are to be replenished up to the relevant margin requirements before placing of an order by a member. figure 8. trading process at igx figure 8. trading process at igx source: compiled from igx by researcher. the entire trading process starting from bidding to scheduling has been depicted in figure 8. generally, bid call session starts from 10:00 – 12:00 hrs where members has right to submit and edit bids. however, they can modify or delete the bids also. around 12:45 hrs., results would be published where igx calculates the final market clearing price (mcp) and market clearing volume (mcv). transactions whether ex hub or delivered transactions to bidding bids are kept & recorded in central order book between 10 to 12 subject to revision/cancellation up to end of bid call period of 12:00 hrs. of trading day. matching price calculation algorithm would be used for matching bids for each buy and sell order. check pipeline capacity & fund’s availability  verification of funds availability in the settlement accounts based on the provisional obligation.  insufficient funds would lead to deletion of bid  pipeline operators (transporters) will scrutinize capacity & provisional gas flow and then allocation is made based on availability results  after getting confirmation from pipeline operators, exchange will calculates the final mcp and mcv.  all selected members will be informed about their obligations and same have been forwarded to clearing banks for collection of margins/pay in from buying members  bank would be asked to confirm the same.  similarly, post-dispatch of delivery, payout will be released to seller members. confirmation buyer and pipeline operators will receive confirmation and application for scheduling. scheduling the scheduled final confirmation will be forwarded by pipeline operators to exchange and same has been informed to respective members. s o u r c e : compiled from igx by researcher. india gas exchange today’s reality and path ahead 43 the entire trading process starting from bidding to scheduling has been depicted in figure 8. generally, bid call session starts from 10:00 – 12:00 hrs where members has right to submit and edit bids. however, they can modify or delete the bids also. around 12:45 hrs., results would be published where igx calculates the final market clearing price (mcp) and market clearing volume (mcv). transactions whether ex hub or delivered transactions to be taken place around 16:00 hrs. the scheduled final confirmation will be forwarded by pipeline operators to exchange and same has been informed to respective members at closing of trade on 18:00 hrs. price discovery powell (2020) stated that india is a price sensitive country where price distortion is one of the severe hindrances to become gas-based economy and hence it disheartens the investment in market forces (i.e. supply and demand). the similar view has been found in the research of mahapatra and dholakia (2014) that pricing mechanism is full of irregularities so far as natural gas sector in india is concerned the reason being scarcity of suppliers with highly complex or intricate contracts and ultimately it turns out to be in welfare losses, and market failure. here igx will play in a pivotal role in ensuring and computing gas prices. hence, the igx has framed well-organized and market-based gas price discovery which facilitates smaller companies to source gas competitively and fertilizers, power, and city gas distribution sectors as they are the key consumers of gas. singh, shukla and dhar (2009) have observed in their study that the benefits are responsive to global gas prices as higher gas prices would lead to curb the demand for gas. the price will be determined by two ways. first using uniform price double-sided closed auction and secondly by continuous trade mechanisms (gas, 2020). in case of first discovery price mechanism, the participants will enter their bids to buy or sell at a specific price point and one single uniform market clearing price would be decided by market. a matching of the uniform price double-sided mechanism will be applicable only in the circumstances where buying price is more than equal to selling price (i.e. bid price is more than equal to ask price) in order book. where in case of continuous trade, the price will be coordinated continuously based on bids and offers. orders are coordinated and prioritized based on price and time. it means best buying order is corresponded with best selling order. howc.s. divyesh patel, naresh k. patel44 ever for order matching is concerned, best buying order refers to highest price and best selling order implies lowest price. clearing & settlement mechanism clearing is the process of updating accounts of trading parties and making arrangements for transfer of money and underlying asset (gas). while settlement deals with actual exchange of money and underlying asset (gas) between parties of trade on settlement date. (i.e. delivery of underlying asset (gas) and “fund pay in” or “fund pay out” process would be completed). details related to financial and delivery-based obligations would be provided to participants periodically and same has to be settled as per the settlement calendar of exchange. the availability of contract and their active hubs would be located and easily identified to make the process smoother. settlement passes through various procedures which have been summarized in figure 9. figure 9. clearing and settlement procedure at igx money and underlying asset (gas) between parties of trade on settlement date. (i.e. delivery of underlying asset (gas) and “fund pay in” or “fund pay out” process would be completed). details related to financial and delivery-based obligations would be provided to participants periodically and same has to be settled as per the settlement calendar of exchange. the availability of contract and their active hubs would be located and easily identified to make the process smoother. settlement passes through various procedures which have been summarized in figure 9. figure 9. clearing and settlement procedure at igx source: adapted from igx data, derived by researcher igx. transportation expenses on scheduled quantity at the entry point will be settled by the members with the igx separately as per the trading calendar as declared by the igx and subsequently will be paid to the transporter by the igx in case of delivered transactions while in case of ex-hub transactions, it will be paid by the members to the transporter directly. during process, igx (a facilitator) will collect the taxes on commodity from buyers and pay it to seller. seller will generate the invoice in name of buyer with a copy market to igx and once the seller issues the invoice, igx will release the tax to seller. at last, igx will debit the funds pay-in and credit funds pay-out according to trading and settlement calendar.if seller injects less quantity than the final allocated, then funds will be adjusted from seller’s settlement account as per deviation settlement mechanism. legal framework regulatory advocacy of igx basically depends on market rules of gas trading platform and according to the provisions of the petroleum and natural gas regulatory board act 2006 along with central government rules, regulations, codes, notifications and circulars.market rules have framed the guidelines for operation of the gtp for trade and enhancing competitiveness with high level of efficiency. in nut shell, igx governance structure includes payment of transportatio n expenses by members payment of taxes funds payin/pay-out by/to member/client deviation settlement mechanism seller/buyer imbalance s o u r c e : adapted from igx data, derived by researcher igx. transportation expenses on scheduled quantity at the entry point will be settled by the members with the igx separately as per the trading calendar as declared by the igx and subsequently will be paid to the transporter by the igx in case of delivered transactions while in case of ex-hub transactions, it will be paid by the members to the transporter directly. during process, igx (a facilitator) will collect the taxes on commodity from buyers and pay it to seller. seller will generate the invoice in name of buyer with a copy market to igx and once the seller issues the invoice, igx will release the tax to seller. at last, igx will debit the funds pay-in and credit funds pay-out according to trading and settlement calendar.if seller injects less quantity than the final allocated, then india gas exchange today’s reality and path ahead 45 funds will be adjusted from seller’s settlement account as per deviation settlement mechanism. legal framework regulatory advocacy of igx basically depends on market rules of gas trading platform and according to the provisions of the petroleum and natural gas regulatory board act 2006 along with central government rules, regulations, codes, notifications and circulars.market rules have framed the guidelines for operation of the gtp for trade and enhancing competitiveness with high level of efficiency. in nut shell, igx governance structure includes igx bye-laws, circulars, market rules including contract specifications which deals with rules regarding how to execute trade at exchange and its trading forms including standard lot size, order types and its execution. implications and limitations there are hurdles still to overcome like pricing of domestic gas, gas grid including gas pipeline infrastructure and taxation aspects of gas. the price of domestically produced natural gas is in the hands of the government. however, domestically produced natural gas can’t be available for trading on the exchange. the initial days of trading result stated that price of $4.07/mmbtu for imported gas which is an indication of under pricing of domestic gas (shine, 2020). under-pricing of domestic gas would discourage domestic production toward corresponding demand. price distortion is one of the severe hindrances to become gas-based economy and hence it disheartens the investment in market forces (i.e. supply and demand). if we look at from pipeline infrastructure point of view which is indispensible for transportation of natural gas, has been controlled by organizations that have their own network. in india, gas authority of india ltd (under ownership of ministry of petroleum and natural gas , government of india) owns and operates india’s biggest gas pipeline network approximately more than 12,000 km. moreover, transportation of gas in the country by means of pipelines is the most economical way. currently in india, around 16,788 km gas pipeline network is under process and around 14,500 km pipeline has been approved for under construction. one more limitation and challenge in front of industries is in terms of taxation. as gas is still https://en.wikipedia.org/wiki/ownership https://en.wikipedia.org/wiki/ministry_of_petroleum_and_natural_gas https://en.wikipedia.org/wiki/ministry_of_petroleum_and_natural_gas https://en.wikipedia.org/wiki/government_of_india c.s. divyesh patel, naresh k. patel46 not covered under goods and service tax and hence it would raise question for claiming an input tax credit on inputs availed by industries. hence, government is under the process of covering natural gas under goods and service tax regime for uniform taxation. the shifting of total volume on gas exchange hubs will decide the success of igx. the government is putting its continuous efforts to wrap up the gas grid in time horizon. in fact, petroleum and natural gas regulatory board has expedited its bidding process of the pipelines for missing sections to finish grid work (pathak, 2020). it provides constructive and imperative effects which creates public trust in financial operations leading towards stakeholder’s value enhancement and serving to nation’s interest. future scope as per the report of industry group for petroleum & natural gas regulatory board (2013) regarding natural gas demand, it has been researched that gas demand is to rise notably at compound annual growth rate of about 6.8% that is 242.6 mmscmd in 2012-13 to 746 mmscmd in 2029-30 which ref lects realistic demand of natural gas in india. the report has also highlighted about expected contribution of gas based power generation in between 36% to 47% in the projected period of 2012-13 to 2029-30. so far as total supply of natural gas is concerned, it is expected to grow at compound annual growth rate of about 7% over span of 18 years (i.e. from 2012-2030) and in terms of million metric standard cubic meter per day (mmscmd), it would reach to 400 and expected to reach around 470 by 2029-30. igx in its way forward to expand its segments by establishing new hubs and launching of new products like liquefied natural gas, furnace oil, low sulphur heavy stock. igx is looking forward futuristic technology infrastructure for customers and enhancements to the trading platform with the help of pngrb and ministry of petroleum and natural gas. in short span, igx provides value to the customers and serves the nations interest by increased investments in exploration and production sector, optimal utilization of infrastructure, revival of gas-based power plants as igx provides competitive rates for grid balancing purpose in upcoming high renewable energy scenario (exchange, 2020). dziawgo investigated in his research and focused on “greening” financial market which supports proecological transfor india gas exchange today’s reality and path ahead 47 mation of the society and economy (dziawgo, 2014). the process is powerful and fast where renewable energy sector is going to become driving force of change. moreover, with the help of competitive pricing mechanism of igx, it is possible for fertilizer industry to reduce their prices and subsidy burden on government of india. emergence of a trading platform for natural gas not only enables vibrant trading in natural gas, but also provides benchmarks after inculcating the information on local demand and supply, for pricing various gas transactions in a more efficient and transparent manner.  conclusion igx would lead india towards gas based economy by designing and providing robust solution for natural gas trading and access. india’s leading electricity trading exchange (iex) has unveiled the nation’s first natural gas exchange called igx on 15 june 2020 with an objective of moving towards laissez-faire gas prices and to give an edge to the investment in gas infrastructure in india. igx is india’s first digital national trading platform automated with web based interface to encourage and uphold an efficient & hefty gas market trading in the country with structured legal framework of pngrb act, rules and bye laws. igx in its way forward to expand coverage and market by adding new hubs and launching of new products. igx is fondly anticipates and made diligent efforts in technology infrastructure investments focusing on technology & analytics driven solutions for customers to enhance to the trading platform functions. exchange is more focusing on development of ecosystem emphasizing policy and regulatory advocacy. there are hurdles still to overcome like pricing of domestic gas, gas grid including gas pipeline infrastructure and taxation aspects of gas. in short span, igx provides value to the customers and serves the nations interest by increased investments in exploration and production sector, optimal utilization of infrastructure, revival of gas-based power plants as igx provides competitive rates for grid balancing purpose in upcoming high renewable energy scenario. c.s. divyesh patel, naresh k. patel48  references abdi, e.j. 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(2020). gail, adani, petronet lng join igx; gas price of $4.07 per unit discovered, https://www.business-standard.com/article/companies/gail-adani-petronet-lng-join-igxgas-price-of-4-07-per-unit-discovered-120061800043_1.html (accessed: 18.06.2020). singh, a., shukla, p. r., & dhar, s. (2009). regional cooperation towards trans-country natural gas market. international journal of energy sector management, 3(3), 251 -274. http://dx.doi.org/10.1108/17506220910986798. soni, a., & chatterjee, a. (2014). governance of the petroleum and natural gas sector in india: a status note. the energy and resources institute teri-nfa working paper series, 15. the economic times (2020). dharmendra pradhan says pipeline tariff rationalization, gas pricing freedom on anvil, https://economictimes.indiatimes.com/industry/energy/oil-gas/dharmendra-pradhan-says-pipeline-tariff-rationalisation-gas-pricingfreedom-on-anvil/articleshow/76734097.cms?from=mdr (accessed: 03.01.2021). vikas, v., & bansal, r. (2019). efficiency evaluation of indian oil and gas sector: data envelopment analysis. international journal of emerging markets, 14(2), 362-378. http://dx.doi.org/10.1108/ijoem-01-2018-0016. https://www.business-standard.com/article/companies/gail-adani-petronet-lng-join-igx-gas-price-of-4-07-per-unit-discovered-120061800043_1.html https://www.business-standard.com/article/companies/gail-adani-petronet-lng-join-igx-gas-price-of-4-07-per-unit-discovered-120061800043_1.html c.s. divyesh patel, naresh k. patel50 annexure: table 2. contract specification at igx segment physical delivery contract volume lot size basis contract volume unit mmbtu per day lot size 1 lot = 100 mmbtu *mmbturefers to metric million british thermal unit associated with measurement of natural gas in the energy terms globally price unit inr/mmbtu delivery type ex-hub and delivered transactions margin rate as per market rules hub dahej, hazira, odoru and kg basin s o u r c e : adapted from igx market rules (volume ii), compiled by researcher. table 3. market data of igx products based on buy bid and sell bid qty for the period from june-2020 to october-2020 of hubs at dahej, hazira, odoru and kg basin product buy bid qty (mmbtu) sell bid qty (mmbtu*) daily 132900 80500 week day 103500 10000 weekly 240100 147000 fortnightly 142800 12500 monthly 101300 89900 s o u r c e : adapted from igx, compiled by researcher. india gas exchange today’s reality and path ahead 51 table 4. month wise market data of igx products buy bid qty (mmbtu) of hubs at dahej, hazira, odoru and kg basin month daily weekday weekly fortnightly monthly total jun-20 16100 44100 1500 12400 74100 jul-20 69700 76000 135100 82000 58900 421700 aug-20 39500 26000 27300 37900 30000 160700 sep-20 6300 1500 3500 15000 26300 oct-20 1300 30100 6400 37800 s o u r c e : adapted from igx, compiled by researcher. table 5. month wise market data of igx products sell bid qty (mmbtu) of hubs at dahej, hazira, odoru and kg basin month daily weekday weekly fortnightly monthly total jun-20 27600 8400 58900 94900 jul-20 0 aug-20 10400 10400 sep-20 32500 14000 4500 31000 82000 oct-20 10000 10000 124600 8000 152600 s o u r c e : adapted from igx, compiled by researcher. _hlk53652507 _hlk53833173 _hlk53833191 _hlk68087039 _hlk68091178 _hlk68092800 for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are 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accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 19.06.2013; data zaakceptowania: 09.12.2013. * dane kontaktowe: sojak@umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 47 24. doi: 10.12775/cjfa.2013.0222013, volume 2, issue 2 sławomir sojak* uniwersytet mikołaja kopernika w toruniu księgowość w mezopotamii w trzecim i drugim tysiącleciu przed chrystusem słowa kluczowe: mezopotamia, księgowość, tabliczki gliniane, teksty klinowe, bilansowanie, podatek bala. klasyfikacja j e l: m41, m49. abstrakt: najnowsze, xx-wieczne, badania nad historią rozwoju księgowości wskazują na to, że powstała ona wraz z rozwojem cywilizacji sumeryjskiej w iii tysiącleciu przed chr. potrzeby kontroli powierzonego hodowcom, rolnikom, kupcom czy rzemieślnikom majątku świątynnego, pałacowego przyczyniły się do powstania, jak na owe czasy rozwiniętego, sposobu dokumentowania tych zdarzeń. celem tego artykułu jest wskazanie przyczyn powstania księgowości w mezopotamii, jej form w postaci zapisów na tabliczkach glinianych oraz przykładów rozliczeń powierzonego majątku, mających cechy rozliczeń księgowych – bilansujących zobowiązania i wierzytelności. w rozliczeniach tych dominuje personalistyczne podejście – winien jest ten, któremu majątek powierzono. w przywoływanych przykładach rozliczeń z hodowcami bydła, kupcami, rzemieślnikami, w przypadku księgowości fabrycznej czy „budżetowej” przy redystrybucji podatku bala stosowano już wówczas metodę bilansową. przy pisaniu tego artykułu korzystałem z publikacji powstałych przy okazji cyklicznych konferencji naukowych (oxford university, 1998; columbia university, 1998, british museum, 2000) na temat ekonomii antycznego bliskiego wschodu oraz z prac marka stępnia z uniwersytetu warszawskiego dotyczących aspektów podatkowych w czasach sumeryjskich. sławomir sojak168 book-keeping in mesopotamia in the third and second millennium bc keywords: mesopotamia, book-keeping, clay tablets, cuneinform texts, balancing, bala tax. j e l classification: m41, m49. abstract: the recent, twentieth-century research on the history of the development of book-keeping indicates that it originated with the development of the sumerian civilization in the third millennium bc. the necessity to control the property of the temple and of the palace, which was entrusted to breeders, farmers, merchants or craftsmen contributed to the creation of a very sophisticated method of documenting the events concerning these possessions. the article aims at identifying the reasons behind the emergence of book-keeping in mesopotamia, discusses its instances in the form of inscriptions on clay tablets and analyzes examples of settlements concerning entrusted property, which, balancing debts and liabilities, have the characteristics of book-keeping. these settlements are primarily characterized by a personal approach – the one to whom the property has been entrusted is on the debit side. it was already in this period that the balancing method was employed in the case of factory or ‘budget’ book-keeping in redistributing the bala tax, as it is illustrated with examples of settlements concerning cattle breeders, merchants and craftsmen. in this article i refer to such publications as the proceedings of periodic academic conferences (oxford university, 1998; columbia university, 1998, british museum, 2000) on the economy of the ancient middle east as well as marek stępień’s (warsaw university) works concerning the issues of taxation in sumerian times. translated by sławomir sojak  wstęp w czasach przedhistorycznych, epoce ustroju rodowo-plemiennego ziemia i wszystkie bogactwa były wspólną własnością społeczności plemiennej. w czasach świetności sumeru (początek iii tysiąclecia przed chr.), całe bogactwo było własnością bogów (bielicki 1969, 284). według mariana bielickiego (1969, 284) „zasada wspólnoty została zastąpiona zasadą jedynego właściciela-boga, który poprzez zarządzającą jego dobytkiem świątynię wydziela ludziom to, co jest im potrzebne do życia”. koncepcja filozoficzno-religijna sumerów zakładała, że bogowie stworzyli świat i człowieka po to, aby im służył1. 1 bielicki (1969, 187). sumerowie byli przekonani, że wydarzenia ziemskie są odbiciem wydarzeń niebiańskich – wojny między bogami są toczone przez ich sługi na ziemi. bogowie miast podbitych stawali się synami boga zdobywców lub jego sługą. przypuszcza się, że liczba bóstw była ogromna i sięgała do 3000 – każde miasto miało   księgowość w mezopotamii 169 świątynie są więc nie tylko miejscem kultu i pobytu bogów, lecz także spichlerzem bogów, z których wydaje się wszystko, co jest potrzebne jego sługom do życia. ze świątynnych magazynów ludzie otrzymywali odzież, żywność, narzędzia (pługi, motyki), ziarno na siew i pokarm dla zwierząt oraz inwentarz żywy do pracy w polu (woły, osły). z kolei uzyskane zbiory były przechowywane w spichlerzach świątynnych. wszystko to musiało podlegać rejestracji, „księgowaniu” na tabliczkach glinianych „sporządzanych dla pamięci” i dla kontroli oraz w celu ustalenia nadwyżek towarowych2. organizacja życia i zarządzania była dobrze zorganizowana, mocno scentralizowana, ale także zbiurokratyzowana. sumerów powszechnie uważa się za naród biurokratów (bielicki 1969, 284). wraz z rozwojem życia gospodarczego, obok uprawy ziemi, sadów przez „ludzi świątyni”, zaczęto stosować także system dzierżawy pól, sadów – najpierw osiadłym gminom, z czasem pojedynczym rolnikom. opłata dzierżawna obejmowała zwykle jedną trzecią zbiorów. do prac w polu kierowano odpowiednie ekipy z nadzorcami, przydzielano im w zamian żywność, ubiór, narzędzia ze świątyni lub pałacu, często także pola przeznaczone wyłącznie na ich potrzeby. w ten sposób świątynie przestały być jedynym właścicielem dóbr ziemskich. pałac ensi3 z czasem staje się dominującą nad świątyniami siłą gospodarczą. swego boga, byli bogowie od poszczególnych zjawisk przyrodniczych (słońca, księżyca, nieba, morza, słodkiej wody, wiatru, burzy) (bielicki 1969, 180–188). 2 według henry’ego g. w. saggsa (1973, 31) „początki pisma były nader skromne. zrodziło się ono nie z potrzeb religii, i nie jako środek przekazu historii, literatury czy wzniosłych myśli, lecz po prostu w związku z prozaicznym zadaniem prowadzenia rachunkowości gospodarczej świątyń. konturowe rysunki poszczególnych przedmiotów, razem ze znakami cyfr, skrobano trzciną na najłatwiej dostępnym w międzyrzeczu surowcu – na garści wilgotnej gliny. […] te kawałki zapisanej gliny … różnią się bardzo kształtem i rozmiarami. podczas gdy niektóre z najdawniejszych tabliczek są mniej lub bardziej owalne albo okrągłe, jak spłaszczony placek, tabliczki późniejsze mają prawie zawsze kształt na ogół prostokątny. rozmiary wahają się od wielkości pudełka do zapałek do wielkości suszki, najczęściej jednak tabliczki są dostatecznie małe, by można je było trzymać w dłoni”. najstarsze tabliczki sumeryjskie pochodzą z okresu dzamdat nasr tj. około 2 800 lat przed chr. (saggs, 1973, 48). tezę tę potwierdza denis schmandt-besserat (2007) w pracy jak powstało pismo. patrz także: m. dobija (1996, 5), b. kurek (2004, 38–59). 3 termin ensi pojawił się w pierwszych stuleciach iii tysiąclecia przed chr. i oznaczał pierwotnie urzędnika „kierującego wznoszeniem fundamentów”, czyli nadzorcę budowlanego. był on jednym z wyższych funkcjonariuszy, stojącym na czele administracji świątynnej odpowiedzialnym najprawdopodobniej za inwestycje. w okresie sławomir sojak170 praca miała wówczas charakter znormalizowany. na przykład, jak podaje bielicki (1969, 285): na jednego rolnika, któremu przydzielono odpowiedni personel pomocniczy, przypadało 4–8 bur (25–50ha) ziemi do obróbki. z tego pola odpowiedzialny za jego uprawę engar4 winien dostarczyć 100–200 gur ziarna. […] w zależności od klasy ziemi przeznaczano na zasiew do 120 sila do 2–3 gur (50–360 litrów) ziarna, z tym, że średni plon z 1 bur wynosił 36 gur5. można więc mówić, że gospodarowanie miało charakter planowy. zaczątki własności prywatnej najprawdopodobniej wiążą się dzierżawą ogrodów i sadów, a później ziemi ornej, które podlegały długoletnim dzierżawom. w czasie iii dynastii ur wydzierżawiano zwykle pola o obszarze od 1 do 1,5 ha, przy czym opłata dzierżawna wynosiła 2 gur i 120 sila zboża (bielicki 1969, 288). jeśli chodzi o ludność miejską, to jej trzon stanowili rzemieślnicy, których produkty (ceramika, obróbka metalu, drewna i kamieni) były przeznaczane głównie na „handel międzynarodowy” oraz dla świątyń i pałaców ensi, z których otrzymywali najczęściej surowce od wytwarzania produktów, głównie narzędzi do pracy w polu, tkaniny (bielicki 1969, 300). to dało zaczątki działalności przemysłowej „na własny rachunek”. rozkwit cywilizacji był głównie spowodowany wzrostem produkcji rzemieślniczej, która stawała się coraz bardziej zróżnicowana i „wymagała” nowych zawodów: stolarzy, kowali, murarzy, kamieniarzy, budowniczych statków, piekarzy, rzeźników, wikliniarzy, tkaczy. ponieważ świątynie musiały zapewnić utrzymanie ludziom, to one organizowały piekarnie, gorzelnie, rzeźnie, zakłady tkackie i podobne warsztaty. w nich przygotowywano „strawę dla bogów, kapłanów, urzędników, licznej świty świątyni, a z czasem także dla pałacu ensiego” (bielicki 1969, 301). wszystko, co było wydawane z magazynów i spichlerzy do przerobu i co wracało do tychże 2800–2700 lat przed chr. w wyniku przemian ustrojowych ensi stał się jednym z tytułów niezależnych władców sumeryjskich miast-państw. w okresie starosumeryjskim (2700–2350 lat przed chr.) suwerenni władcy miast-państw sumeryjskich nosili tytuły: en (pan, władca), ensi (książę), lugal (król). w okresie dynastii akadyjskiej (2350– –2150 lat przed chr.), w której powstały państwa przestrzenne wykraczające poza obszar jednego miasta, miasta sumeryjskie utraciły swoją niezależność, na rzecz króla akadyjskiego sargona, stając się jego namiestnikami w prowincjach. patrz: marek stępień (2006, 13–16). umma – to dzisiejsza dżoha stolica kataru. 4 specjalista-rolnik. 5 sila stanowiła miarę około 0,4 litra, 300 sil = 1gur = 121 litrów.   księgowość w mezopotamii 171 w postaci produktów, musiało podlegać szczegółowej ewidencji, kontroli i sprawozdawczości (raportowaniu). prawie wszystko musiało być przerabiane zgodnie z obowiązującymi normami zużycia. odczytano między innymi takie raporty dotyczące dostaw dla kuchni przygotowującej posiłki dla świątyni (bielicki 1969, 301): ■ 1,5 gur jęczmienia na mąkę gu, odpady ¼ gur, ■ 12,5 gur pszenicy na chleby, odpady 2 gur 12 sila. rzemieślnicy jako „ludzie świątyni” lub „ludzie króla” byli zatrudnieni przez nich na stałe. za pracę otrzymywali wynagrodzenie, a czasami dodatkowo pola z nadziału, które mogli uprawiać sami lub wynajmując robotników czy niewolników. za pola te płacili dzierżawę np. w postaci 1/3 zbiorów lub podatek stanowiący ich ekwiwalent. byli także rzemieślnicy posiadający własne warsztaty – oni też wykonywali pracę na zlecenie świątyni, ensiego lub prywatnych osób. warsztaty królewskie były w rzeczywistości zakładami przemysłowymi. podlegały one ścisłej kontroli, nawet kilkakrotnie w ciągu miesiąca, szczególnej kontroli podlegała absencja pracy (pamiętajmy, że pracownicy dostawali za pracę wyżywienie i odzież). praca liczona była liczbą dniówek, a nie liczbą zatrudnionych osób. pośrednio po liczbie dniówek można było ustalić liczbę pracowników tych warsztatów. na przykład, w warsztacie wikliniarskim w ummie w ciągu roku przepracowano 13 282 i 1/3 dniówki, przy czym na skutek chorób nie wykorzystano 147 dniówek. a więc musiało w nim pracować nie mniej niż 35 osób (bielicki 1969, 303). budowa statku o tonażu 120 gur wymagała 1800 dniówek, czyli miesięcznej pracy 60 ludzi. po racjach żywnościowych w postaci np. daktyli, wołowiny wydawanej dla wyżywienia tkaczek w zakładach tkackich sądzi się, że np. w warsztatach tkackich przy świątyni boga enki w eridu pracowały 593 tkaczki, w lagasz – 816 kobiet, jeszcze w innym 3000 kobiet (bielicki 1969, 304). w cegielni robotnikom najemnym płacono 7 sila (2,8 litra) ziarna za dniówkę. handel był zmonopolizowany przez świątynie i był głównie handlem zagranicznym (z innymi państwami-miastami). handlowano posiadanymi nadwyżkami, sprowadzano brakujące towary. kupcy6, podobnie jak rzemieślnicy, byli początkowo „ludźmi świątyni” wynagradzanymi za swoją pracę. szybko jednak zaczęli działać na własną odpowiedzialność i własne ryzyko, płacąc 6 ówczesny kupiec (tamarkurum) zajmował się szeregiem różnorodnych działalności. początkowo był agentem rządowym – w jego imieniu bowiem działał. z czasem stawał się wędrownym kupcem handlującym towarami, maklerem, prywatnym bankierem, lichwiarzem (saggs 1973, 257). sławomir sojak172 jedynie podatki od zawartych transakcji. przypuszcza się, że sumerowie już wówczas zdawali sobie sprawę z tego, że działalność na własny rachunek jest bardziej efektywna, przynosi większe korzyści. zezwalano więc na działalność kupiecką, pod warunkiem pisemnego poświadczenia każdego przedsięwzięcia (wyprawy handlowej). każde kupno i każda sprzedaż musiały być potwierdzone na tabliczce, uwierzytelnione odciskiem pieczęci stron oraz urzędnika, a dokumenty złożone w archiwum świątyni (bielicki 1969, 307). wraz z pojawieniem się, obok handlu zagranicznego, handlu wewnętrznego wprowadzono pieniądz oparty na wadze miedzi lub srebra – 1 gur (121 litrów) ziarna zastąpiono 1 szeklem srebra. ceny zależały od podaży (urodzaj, wojny) towarów – były więc zmienne. rozwinęła się instytucja pożyczek, niestety na lichwiarski procent – pożyczano płody rolne: jęczmień na 33,5%, rzadko 30% czasami na 20%, daktyle na 20%, srebro na 20–33% (bielicki 1969, 308; patrz także saggs 1973, 259). powszechnie potępiana była nadmierna stopa procentowa. według prawa hammurabiego tamarkurum pobierający wyższe niż prawem dopuszczalne odsetki tracił swój kapitał, pożyczkę (saggs 259; kodeks hammurabiego, paragraf m): „jeśli ktoś zaciągnął pożyczkę procentową i nie ma pieniędzy, aby ją zwrócić, (ale ma) zboże, [kupiec] zamiast pieniędzy i swego procentu weźmie sobie zboże wedle królewskiego przepisu; jeśli kupiec zażądał za jeden gur [zboża jako procent] więcej niż jedna piątą ziarna … straci wszystko, co dał (na procent)”. tabliczki na których rejestrowano kontrakty handlowe, pieczętowano odciskiem pieczęci cylindrycznych lub – w okresie późniejszym odciskiem paznokcia. po czym, dla bezpieczeństwa transakcji – umieszczano ją w glinianej kopercie (bulli) zawierającej odpis (kopię) zawartej umowy (saggs 1973, 260). z chwilą realizacji transakcji tabliczki były niszczone (van de mieroop 2012, 38). 1. księgowość świątynna i pałacowa z powyższego wprowadzenia wynika, że głównym ośrodkiem gospodarczym były najpierw świątynie, a z czasem także pałace ensiego. one to posiadały centralne magazyny i skarbce oraz własny aparat zarządzania. dobra przechowywane w magazynach podlegały szczegółowej kontroli, do czego niezbędna była ich ewidencja przychodów, rozchodów i zapasów (e.m. 1994, 226–227).   księgowość w mezopotamii 173 urzędnikom zarządzającym zgromadzonymi dobrami podlegali pisarze dokonujący odpowiednich zapisów na tabliczkach glinianych7. tabliczki te miały więc charakter dokumentów administracyjnych. były niedużych rozmiarów, nie większe niż 8 × 8 cm. można je podzielić na dwa rodzaje dokumentów, a mianowicie na dokumenty pierwotne i wtórne (englund 2004, 28). format tych tabliczek obrazuje schemat 1. w dwóch górnych rzędach znajdują się tabliczki pierwotne, w dolnym wtórne (zbiorcze zestawienia sporządzone na podstawie dokumentów pierwotnych – dzisiaj powiedzielibyśmy źródłowych). wskazane są na nich możliwe podziały tabliczek na sekcje służące do zapisów według różnych kryteriów czy kategorii, a także kierunek dokonywania zapisu oraz obracania tabliczek w celu dokonywania zapisu na drugiej stronie. każdy przychód do magazynu podlegał kontroli i ewidencji, bez względu na to, czy wynikał on z obowiązku, czy był dobrowolnym darem. podobnie – każdy rozchód bez względu na to, czy był przeznaczony jako ofiara dla bogów, czy na potrzeby ludzi i bydła, na siew, czy też dla celów produkcyjnych w warsztatach rzemieślniczych. w przypadku rozchodów na cele gospodarcze uwzględniano także ubytki ziarna przy siewie w zależności od klasy gleby, a w przypadku np. wełny do przerobu w warsztatach tkackich ubytki produkcyjne. ze szczegółowych wykazów przychodów i rozchodów dóbr sporządzano zbiorcze wykazy miesięczne ze skróconym tekstem. dodatkowo sporządzano także roczne sprawozdania. jednorodne dokumenty dotyczące pewnego okresu przekazywano do archiwum, gdzie wkładano je do pojemnika (kosza trzcinowego lub garnka glinianego) z przymocowaną doń tabliczką (etykietą archiwizacyjną) informującą o treści i charakterze przechowywanych dokumentów8. na etykietach tych wskazywano najczęściej typ dokumentu, rodzaj towaru lub transakcji, okres jakiego dotyczą, miejsce transakcji (stępień 2006, 27). 7 zajmowali się tym pisarze (w języku sumeryjskim dub-sar). patrz stępień (2006, 97). słowa „pisarz”, „skryba” stosowano dla określenia sprawowanych funkcji lub zawodu. pisarzy w kontekście tekstów zapisywanych na tabliczkach gospodarczych można wobec tego określić jako księgowych. 8 archiwa te są podstawowym źródłem badań archeologicznych dotyczących cywilizacji starożytnych, w tym także dokumentujących działalność gospodarczą (rolną, hodowlaną, rzemieślniczą, handlową). archiwista (pisan-dub-ba) mógł bez większego trudu odczytać zawartość koszy archiwalnych. przykłady takich tabliczek-etykiet podaje m. stępień. były wśród nich etykiety na kosz z tabliczkami o ścięgnach i skórach; z inspekcji personelu króla, personelu ensiego, pasterzy i wolarzy, pracowników rezerwistów i pojedynczych ludzi zbiegłych – bez nadzorczy; z zagrody i obory bydła roboczego – kopie tabliczek ensiego; o wydatkach zbiorczych ponoszonych w ramach płatności podatkowych bala. patrz: stępień (2006, 27, 314–315). sławomir sojak174 schemat 1. format tabliczek glinianych służących do zapisów księgowych źródło: englund (2004). każdy przychód do magazynu podlegał kontroli i ewidencji, bez względu na to, czy wynikał on z obowiązku, czy był dobrowolnym darem. podobnie – każdy rozchód bez względu na to, czy był przeznaczony jako ofiara dla bogów, czy na potrzeby ludzi i bydła, na siew, czy też dla celów produkcyjnych w warsztatach rzemieślniczych. w przypadku rozchodów na cele gospodarcze uwzględniano także ubytki ziarna przy siewie w zależnoi ii iii ii iii i przód tył oś obrotu kierunek pisania i i i ii i ii 1 2 1a 2a 3a 4a 1b 2b 3b 4b 1a 2a 3a 4a 1b 2b 3b 4b 1a 2a 3a 4a 1b 2b 3b 4b 1a 2 3 1a 2a 3a 4 3b 2b1 2b2 1b b1 b2 b3 źródło: englund (2004). etykiety archiwizacyjne są dowodem na kategoryzacje tabliczek (dokumentów księgowych) stosowanych w mezopotamii. według stępnia (2006, 28)   księgowość w mezopotamii 175 podstawą tej kategoryzacji było odpowiednie słowo kluczowe9. można wyróżnić wśród nich: ■ pokwitowania odbioru lub wydania towarów, ■ pokwitowania dokonanej dostawy (mu-du), ■ zestawienia zbiorcze, ■ rachunki o charakterze rozliczeniowym (bilanse), ■ obrazujące nieuregulowane zobowiązania z poprzedniego okresu („resztę z poprzedniego rozliczenia”), ■ potwierdzające „posiadane towary do dyspozycji” (aktywa), ■ dokumentujące wydatki (pasywa), ■ poświadczające okresowe spisy kontrolne (remanent), ■ potwierdzające udzielenie towarów (zboża lub srebra) mających charakter pożyczek kapitałowych udzielanych na procent, ■ dokumenty służące rozliczeniu pracy. tabliczki te rejestrują zapisy z punktu widzenia instytucji (świątyni, pałacu), co jest zrozumiałe, ale są także tabliczki rejestrujące zdarzenia z punktu widzenia podmiotów (osób) zewnętrznych (van de mieroop 2004, 48). ponadto tabliczki dokumentujące przyjęcie towarów wystawiane były w dwóch kopiach – niewykluczone, że nie były to identyczne kopie, lecz drugi egzemplarz dokumentujący daną transakcję z punktu widzenia drugiej osoby biorącej udział w transakcji10. odrębną grupę dokumentów, często związaną z działalnością o charakterze gospodarczym, stanowią dokumenty administracyjne o charakterze listów polecających (zalecających lub wręcz nakazujących określone działanie) przesyłanych konkretnej osobie (urzędnikowi) przez ich zwierzchników. inicjowały one często pewne zdarzenia handlowe (stępień 2006, 29). schemat 2 obrazuje hipotetyczny przepływ surowca pomiędzy trzema podmiotami oraz ich ewidencję księgową. mamy więc najpierw przyjęcie miedzi do centralnych magazynów świątynnych. jest ono rejestrowane na tabliczkach 9 słowa te spełniały funkcje dzisiaj występujących nazw dokumentów takich jak „przyjęcie z zewnątrz – pz”. „wydanie na zewnątrz – wz”, „kasa wyda – kw”, „bilans”. pozostaje do wyjaśnienia, czy rzeczywiście wówczas używano określeń „aktywa”, „pasywa”, „bilans”, czy badacze nie są pod wpływem pojęć współcześnie stosowanych. 10 odczytanie zapisów z tabliczek glinianych winno być zawsze rozpatrywanie w kontekście zdarzeń, czyli wiedzy, kto dokonywał zapisów i w jakim celu. stwierdzenie typu „mu-du” następujące po imieniu i nazwisku może bowiem oznaczać zarówno informację, że dana osoba „przekazała”, jak i że „otrzymała” dany produkt. patrz: van de mieroop (2004, 48), stępień (2006, 28). sławomir sojak176 oznaczających przyjęcie (tabliczki mu-du). po czym następuje wydanie miedzi kowalowi do wytworzenia z niej narzędzi rolniczych – jest ono rejestrowane na innych tabliczkach glinianych, oznaczających pokwitowanie wydania z magazynu i przyjęcie miedzi przez kowala. tabliczka ta pozostaje w magazynie centralnym, oznacza jednak zobowiązanie kowala wobec świątyni (magazynu centralnego). realizacja tego zobowiązania ma nastąpić w postaci wytworzonych narzędzi. kowal po wytworzeniu narzędzi przekazuje je do wykorzystania przez rolników, co potwierdza dokumentem oznaczającym, po pierwsze, wykonanie narzędzia, po drugie, jego przekazanie rolnikowi. można przyjąć, że narzędzia, które uległy zniszczeniu podczas prac polowych, są zwracane do naprawy, co jest zapisane na kolejnej tabliczce. w ten sposób jest rejestrowane każde zdarzenie w ciągu roku. na koniec roku wszystkie tabliczki przekazywane są do magazynu świątynnego, gdzie następuje ich zbiorcze zestawienie i rozliczenie (bilansowanie) (steinkeller 2003, 39). schemat 2. ewidencja księgowa surowca (miedzi) wydanego z magazynu świątynnego i produktów z niego wytworzonych schemat 2. ewidencja księgowa surowca (miedzi) wydanego z magazynu świątynnego i produktów z niego wytworzonych źródło: steinkeller (2003), rys. 3.1. za zgodą oxfor university press. marc van de mieroop (2004, 49) uważa, że największym wyzwaniem dla księgowych w mezopotamii nie były pojedyncze zapisy transakcji, ale przeniesienie różnorodnych zapisów z pojedynczych tabliczek do tabliczek zawierających zapisy zbiorcze oraz rozliczeniowe (bilanse). w przeciwieństwie do papirusu, stosowanego w okresach późniejszych, zapisy na tabliczkach glinianych stanowiły nie lada wyzwanie dla księgowych. ze względu na to, że tabliczki takie szybko wysychały, należało dokonywać na nich zapisów jednorazowo, a nie w sposób narastający. do raz zapisanej tabliczki nie można już było nic dopisać. nie mogły więc one stanowić „dziennika” zawierającego chronologiczne zapisy. nie mogły także stanowić zapisów podwójnych (debetowych i kredytowych) dla zdarzeń mających miejsce miedź miedź magazyn centralny kowal rolnik narzędzia narzędzia zepsute tabliczka mu-du tabliczka przyjęcia (1) tabliczka przyjęcia (2) tabliczka przyjęcia (3) rachunek rozliczeniowy (bilansowy) kowala 1 3 2 aktywa rozliczenie ź r ó d ł o: steinkeller (2003), rys. 3.1. za zgodą oxfor university press.   księgowość w mezopotamii 177 marc van de mieroop (2004, 49) uważa, że największym wyzwaniem dla księgowych w mezopotamii nie były pojedyncze zapisy transakcji, ale przeniesienie różnorodnych zapisów z pojedynczych tabliczek do tabliczek zawierających zapisy zbiorcze oraz rozliczeniowe (bilanse). w przeciwieństwie do papirusu, stosowanego w okresach późniejszych, zapisy na tabliczkach glinianych stanowiły nie lada wyzwanie dla księgowych. ze względu na to, że tabliczki takie szybko wysychały, należało dokonywać na nich zapisów jednorazowo, a nie w sposób narastający. do raz zapisanej tabliczki nie można już było nic dopisać. nie mogły więc one stanowić „dziennika” zawierającego chronologiczne zapisy. nie mogły także stanowić zapisów podwójnych (debetowych i kredytowych) dla zdarzeń mających miejsce w różnym czasie. podobnie – nie można było poprawić błędnego zapisu zauważonego już po wyschnięciu tabliczki (van de mieroop 2004, 49–50). stąd też zapisy zbiorcze mają charakter zapisów pojedynczych dokonywanych w określonym momencie. podstawowy układ tekstów rozliczeniowych (bilansów), mających charakter dokumentów księgowych informujących o rozchodach i przychodach dóbr pałacowych lub świątynnych, był następujący (jursa 2002, 51; van de mieroop 2004, 55–56): 1. debet (dobra powierzone przez świątynie, pałac), od którego odejmuje się 2. kredyt (dobra zwrócone świątyni, pałacowi lub wydane na inne wskazane cele), co daje 3. saldo: „deficyt" (la i), jeśli (1) (2) > 0, lub „nadwyżkę" (diri), jeśli (1) -(2) < 0 procedurę tę potwierdza poniższy tekst rozliczeniowy z umowy z pasterzami dotyczącej wypasu owiec (jursa 2002, 51–52)11: przedmiot (bilansu): owce, kapitał (tzn. pierwotne stado) i jagnięta z 5. roku rim-sina, które winny być przyprowadzone na strzyżę w 6. roku rim-sina; od każdych 100 samic: 80 jagniąt (obu płci); od każdych 100 owiec: odjąć 15 skór padłych zwierząt; 1 kg wełny od każdej owcy; 11 rozliczenie to musiało być sporządzone na podstawie „dokumentów źródłowych” potwierdzających przejęcie odpowiedzialności za bydło przeznaczone na wypas oraz wydanie ich na różne cele (mu-du) sławomir sojak178 mając na uwadze wpływy i koszty, straty i deficyt, sporządzono ostateczną umowę na jeden rok z pasterzami samum i szamajatum (następującej treści): owce-matki: 259 owce strzyżone po raz pierwszy: 79 barany: 559 barany strzyżone po raz pierwszy: 79 (razem) owce: kapitał i nowo narodzone: 976 [stan wyjściowy]12 (owce, przyprowadzone na strzyżę:) owce-matki: 222 owce strzyżone po raz pierwszy: 65 barany: 426 barany strzyżone po raz pierwszy: 50 (razem) owiec: 76313 ich wełna: [96]8 kg [w tym 240 kg wełny wysokiej jakości] średnio 1,02 kg wełny od owcy, nadwyżka: 52,46 kg owieczki niestrzyżone: 12 baranki niestrzyżone: 17 (razem ) owce: 792 14[kredyt 1: aktualna liczba] 10 baranów, 10 jagniąt na podróż do al-nur-adad; w dzień strzyży, 10 baranów, 5 jagniąt na dzień żniw, pod pieczą szamajatuma i ahu-tabuma; 10 baranów, 5 jagniąt dostarczonych na tucz w larsie, pod pieczą erra-andulli; 20 starych baranów, dostarczonych na tucz do larsy, na dzień wielkiego święta: (razem) wydatki: 50 baranów15, 20 jagniąt16 straty: 114 ogółem: odjęto 184 sztuki jako wydatki i straty 17[kredyt 2: owce potrącone] deficytu nie było [saldo: 792 + 184 = 976] 12 259 + 79 + 559 + 79 = 976. stan wyjściowy zawierał najprawdopodobniej oprócz dorosłych owiec także spodziewany przychówek młodych sztuk (strzyżonych po raz pierwszy). ich wielkość ustalano na podstawie stosowanych wówczas „modeli przyrostu stada”. był to sposób przenoszenia ryzyka słabszego przychówku z właściciela (świątyni) na hodowców (przedsiębiorców). patrz na ten temat: m. jursa (2002, 42–50). 13 222 + 65 + 426 + 50 = 763. 14 763 + 12 + 17 + 792. 15 10 + 10 + 10 + 20 = 50. 16 10 + 5 + 5 = 20. 17 50 + 20 + 114 = 184.   księgowość w mezopotamii 179 [dalej następuje nowe rozliczenie z innymi pasterzami; tabli czka kończy się datą: 21 grudnia 6. rok rim-sina (ok. 1720 r. przed chr.)]. kapitałem tutaj jest stan wyjściowy stada (realnie przydzielone pasterzom owce oraz oczekiwany przychówek). jest to zobowiązanie pasterzy wobec świątyni, oznaczone jako debet (winien). z tego stada pasterze muszą się rozliczyć w następnym roku (przy strzyży owiec). rozliczenie to obejmuje zwrot owiec (wraz z planowaną ilością wełny), wskazanie ewentualnych ubytków naturalnych (114 sztuk) oraz przeznaczonych na inne cele (np. na tucz). z rozliczenia wynika, że nie było w tym przypadku deficytu. gdyby taki wystąpił, stanowiłby zobowiązanie przy umowie na następny rok18. powyższe rozliczenie ma charakter rozliczenia w naturze. z czasem jednak zobowiązanie wobec świątyni czy pałacu było wyceniane w srebrze. było to spowodowane tym, że na przykład w czasach urodzaju spichrze i magazyny świątynne były zbyt małe, by pomieścić wszystkie dobra. w związku z tym część zobowiązań mogła być realizowana w postaci „waluty”, jaką było srebro. wymóg ten spowodował rozwój handlu posiadanymi nadwyżkami. poniżej mamy podobne rozliczenie do powyższego, tym razem z kupcem19: roczne rozliczenie z kupcem (1) debet (ekwiwalent w srebrze) niedobór z zeszłego roku 146 g daktyle: 65750 litrów 1299 g wełna: 488 kg 900 g wełna: 600 kg 1079 g (razem [1]:) 3425 g (2) kredyt miedź _ sól i minerały _ przyprawy, aromaty _ złoto _ (razem [2]:) 3306 g saldo ([1]-[2]) 119 g 18 przykłady takich rozrachunków podaje w. w. hallo (2004, 96–98), s. carmona, m. ezzamel (2007, 184–185). 19 pochodzi ono z iii okresu dynastii ur (2018–1911 rok przed chr.), jursa (2002, 54, 14). sławomir sojak180 tym razem wartość różnych towarów została przedstawiona za pomocą ekwiwalentu w srebrze, co oznacza, że towary te miały swoją cenę. zauważmy, że rozliczenie to zaczyna się od wskazania deficytu z poprzedniego roku (146 gramów srebra). z kolei saldo debetowe (końcowe – 119 gramów srebra) oznacza, że kupiec nie rozliczył się z powierzonych towarów. będzie ono stanowiło niedobór w następnym roku. wykazywanie w pierwszej pozycji niedoborów (zobowiązań) z poprzednich okresów jest regułą, która stosowana jest powszechnie w rozliczeniach z tamtego okresu. zauważmy też, że kupiec otrzymał „na handel” towary miejscowe, a ma rozliczyć się z towarów, których brakuje w mezopotamii. zobowiązanie wobec tego spłaca towarami (lub ich ekwiwalentem srebrze) umieszczonymi w stronie kredytowej (jursa 2002, 76– 77). aktywa kupca, którymi rozporządza, są więc jego zobowiązaniami wobec świątyni lub pałacu, bo to świątynia lub pałac jest ich właścicielem. 2. księgowość fabryczna oprócz powyżej przedstawionych przykładów stosowania księgowości w hodowli bydła oraz księgowości handlowej mamy również dokumenty wykopaliskowe potwierdzające stosowanie księgowości fabrycznej. poniżej opisane „procedury księgowe” dotyczą okresu 2025 lat przed chr. i pochodzą z miasta ur. ówczesna księgowość fabryczna obejmowała następujące części składowe odpowiadające procesowi wytwórczemu (e.m. 1994, 226–227): ■ księgowość magazynową surowca wełnianego przeznaczonego do przerobu, ■ księgowość przędzenia i tkania, ■ księgowość foluszników. 2.1. księgowość magazynowa księgowanie zapasów surowca wełnianego obejmowało trzy rodzaje zapisów: ■ stan z poprzedniego roku, ■ przychody wełny przeznaczonej do przerobu: ■ z majątków świątynnych bądź pałacowych, ■ od pasterzy i innych prywatnych osób (za opłatą). przechowywana wełna była ewidencjonowana według źródła jej pochodzenia oraz według rodzaju i jakości. ponieważ w różnych miastach używano różnych systemów wag, powodowało to konieczność odpowiedniego przeliczania   księgowość w mezopotamii 181 na lokalne jednostki wagowe. najpierw był wykazywany stan ujemny (np. spodziewane, a nienadeszłe jeszcze dostawy), a później dostawy bieżące. niestety księgowania rozchodu ze składu wełny nie zostały dotąd odnalezione. zapisy dokonywane na tablicach informują natomiast o wnoszeniu opłat wełną na cele kultu, przydziałach wełny na stypendia, a także na wypłatę wynagrodzeń dla osób zatrudnionych w magazynie. można sądzić, że wydawanie wełny i lnu nadzorcom tkaczy jako materiału do przerobu było również rejestrowane (e.m. 1994, 226). 2.2. księgowość przędzenia i tkania z magazynu surowcowego po oczyszczeniu wełnę przekazywano do przędzenia i tkania. proces ten był bardzo pracochłonny i był wykonywany przez kobiety i dzieci. wytworzenie tkaniny o wymiarach 4 × 3,5 m na jednym krośnie zajmowało trzem pracownicom od 7 do 16 dni. cały proces produkcyjny wymagał zatrudnienia znacznej liczby „kadry zarządzającej”. dyrektor tkalni miał od 11 do 15 nadzorców, z których każdy nadzorował pracę około 220 tkaczek i dzieci (e.m. 1994, 227). wyprodukowane tkaniny były przekazywane folusznikom do dalszego uszlachetnienia lub do magazynu, stanowiąc majątek tkalni. tkaniny te stanowiły dla tkalni rozchód, a u foluszników przychód. były to więc zapisy lustrzane i prowadzone w jednolitej jednostce wagowej. księgowano ilość, jakość, a przede wszystkim wagę tkaniny (zapisywano nawet imię wagowego). na bieżąco dokonywano zapisów dziennych. następnie sporządzano zestawienia miesięcznych rozliczeń, które z kolei były podstawą do rocznego obrachunku (e.m. 1994, 227). tkaniny po uszlachetnieniu przenoszono do specjalnie przeznaczonego na ten cel magazynu, gdzie także były księgowane przydziały wydawane pracownikom. w ten sposób księgowania u tkaczy i foluszników były w danym okresie wzajemnie zgodne. kontrola procesu produkcyjnego obejmowała przede wszystkim kontrolę zużywanego surowca oraz czasu pracy. i tak na jednej z glinianych tabliczek odczytano, że wyprodukowany materiał ważył 3,99 i zużyto na to 6 jednostek surowej wełny; różnica wynikała z ubytków powstałych w toku procesów produkcyjnych. z różnych zapisów wynika, że końcowa waga wyprodukowanego materiału wynosiła 57–68% zużytej surowej wełny, produkty uboczne 23– 34% i ubytki 7,9–11,4% (e.m. 1994, 227). sławomir sojak182 prowadzono także rachunek zużytego czasu pracy, w którym uwzględniano zmniejszenie liczby zatrudnionych tkaczek z powodu choroby lub śmierci, a zwiększenie z powodu nowo przyjętych pracownic20. 2.3. księgowość foluszników księgowość foluszników polegała na bilansowaniu w miesięcznych rozliczeniach przychodów i rozchodów tkaniny. rozliczenia te miały charakter konta. pierwszą pozycją po stronie debet była pozostałość sukna wynikająca z rozliczenia ubiegłego roku, a więc było to saldo początkowe. następnie rejestrowano dostawy sukna w bieżącym miesiącu od wymienianych imiennie nadzorców tkaczy. po czym wszystkie pozycje, łącznie ze stanem początkowym, sumowano według rodzajów sukna i ilości (wagi). po przeciwległej stronie znajdowały się pozycje dotyczące rozchodu, które także sumowano. „wtedy następowało zbilansowanie, z którego wynikało saldo przenoszone do rozliczenia w następnym okresie” (e.m. 1994, 227). zestawienie takie, mające charakter dokumentów wtórnych, podpisywali: folusznik i pisarz jako kontroler. z opisywanych powyżej tabliczek glinianych nie wynika, czy mieliśmy w tym przypadku do czynienia z wyceną wytworzonego sukna. przywoływane teksty świadczą o tym, że była to gównie „ewidencja ilościowa”, a nie wycena wartościowa, jak w przywoływanym wcześniej bilansie handlowym. „dokumentacja” opisywanej księgowości fabrycznej była jednak o kilkadziesiąt lat wcześniejsza od przytoczonej – handlowej. z drugiej jednak strony skrupulatna kontrola czasu pracy była związana z koniecznością wydawania zatrudnionym racji żywnościowych, co było swoistą „zapłatą za pracę”. stąd już tylko krok do wyceny wartościowej produktów. 3. księgowość podatkowa bala sumeryjskie słowo bala (pol. „rotacja, transfer”) ma wiele znaczeń, między innymi przepływ łódki między kanałami (transfer), ale także prebendarz czy obowiązek świadczenia pracy na rzecz administracji lokalnej (rotacja). najbardziej znane jest jednak w kontekście transferu zobowiązań podatkowych 20 było to konieczne, ponieważ – jak już wcześniej wspominaliśmy – wszyscy pracownicy mieli zapewnione racje żywnościowe przez świątynie bądź pałac.   księgowość w mezopotamii 183 w systemie rotacyjnym. z czasów sumeryjskich mamy także wiele dowodów księgowych dotyczących rotacyjnego systemu płatności podatkowych bala prowincji (świątynnych) na rzecz centrum (królestwa). termin bala oznaczał zobowiązania zarządców prowincji (ensiego, namiestnika, gubernatora) wobec władz centralnych. zobowiązania te były przez poszczególne prowincje regulowane rotacyjnie w wyznaczonym miesiącu i sprowadzały się do płacenia swoistej kontrybucji w postaci dóbr (zwierząt21, płodów rolnych i produktów, z których znany był dany region i miał ich w nadmiarze), świadczenia pracy przez prowincje do centralnych ośrodków gromadzenia i ich redystrybucji bądź bezpośrednio do potrzebujących prowincji. był to typowy system redystrybucyjny, część bala bowiem pozostawała w danej prowincji. czas płacenia bala był wyznaczany przez władze centralne i przypadał cyklicznie na kolejne prowincje (stępień 2006, 82–83)22. z księgowego punktu widzenia bala był przez te prowincje traktowany jako kapitał (debet), czyli zobowiązanie wobec władzy centralnej. jego spłata (kredyt) polegała na ich przekazaniu. […] gdy w danym roku jakiś ensi zamknął swój rachunek bala deficytem, czyli więcej odebrał, np. zwierząt, niż mu przysługiwało w związku z wartością dostarczonych towarów i usług, to następny rok rozpoczynał od wyrównania deficytu, dostarczając zwiększone świadczenia (sharlach 2004, 162, cytat za: m. stępień 2006, 85). podobnie jak w pojedynczych transakcjach (mikroekonomicznych), tak i w tym przypadku mamy do czynienia z personifikacją zapisów księgowych. zapisowi debetowemu nadajemy bowiem interpretację aktywów ensiego (rzeczywistych i planowanych – jak w przypadku prezentowanego rozliczenia hodowcy bydła) i jednocześnie zobowiązań wobec władzy centralnej23. 21 patrz rachunki rozliczeniowe zwierząt traktowanych jako podatek bala (stępień 1996, 82–90). 22 według p. steinkellera (1987, 28–29, za: stępień 2006, 83) system bala charakteryzowały trzy podstawowe cechy: – bala to suma towarów i usług świadczonych przez prowincje zależna od ich wielkości i możliwości, – wartość ogólna tych towarów i usług stanowiła dla tych prowincji rodzaj kapitału (aktywów) bala, w ramach którego mogła oczekiwać otrzymania potrzebnych jej towarów i usług, – kontrybucje bala dostarczane były albo do centrów dystrybucyjnych, albo wprost do potrzebujących prowincji. 23 m. stępień (2006, 85) nazywa je po prostu rachunkiem bala konkretnych osób (namiestników prowincji). uważa, że nie jest to wyłącznie zabieg księgowy, lecz rzesławomir sojak184 tabela 1. rachunki rozliczeniowe ensiego z archiwum ummy data udział ensiego ś.36.ix – rachunek rozliczeniowy błędów (długów) w tummal – dostawcą drewna ensi babilonu – dostawcą towaru [...] ensi adab – dostawcą towaru [...] ensi gudua – odbiorcą towaru [...] ensi babilonu – towar [...] dla spiżarni ensiego as.l aktywa (sag-nig,-ga-ra-kam) ur-śulpae giri3 lukalla, mała część aktywów: – ryby różnych gatunków giri3 ur-suen rybak – 39 000 ryb różnych gatunków – giri3 ur-baba, hodowca ryb – 11 talentów cebuli młodej – giri3 kaamu, ogrodnik – 20 litrów kleiku mlecznego (ga-śe-a) i od ensiego (ki ensi2-ta) as.3 rachunek rozliczeniowy pada, kupca – w aktywach: ensi dostawcą części srebra as.3.i rachunek rozliczeniowy ur-dumuzida, kupca: – w aktywach: ensi przekazuje (giri3) wełnę sprzedaną za srebro (1 mina) – w pasywach: 11 śekli srebra na signum ensiego as.4 aktywa kupców: – ensi dostarczył 45 talentów wełny za 5 min srebra as.4 rachunek rozliczeniowy sagku, kupca: – w aktywach: ensi dostawcą całego srebra na aktywa = 5/6 miny 8 1/3 śekli srebra przekazanego przez (giri3) – lukalla, lugal-kuzu i samego ensiego as.4 rachunek rozliczeniowy ur-dumuzida, kupca – w aktywach: ensi dostawcą wełny sprzedanej – za srebro (ponad połowę całości aktywów)a) a) rachunek opiewa w aktywach na 6 5/6 miny 1 2/3szekla i 5 ziaren srebra, przy czym ze sprzedaży wełny dostarczonej przez ensiego uzyskano 3 5/6 miny 8 1/3 szekla i 20 ziaren srebra. ź r ó d ł o: stępień m. (2006), 313. marek stępień, przy okazji badań prozopograficznych obejmujących kilkadziesiąt tysięcy tekstów, zwraca uwagę na sprawę ważną z punktu widzenia księgowości, a mianowicie na prawdziwość niektórych cech tych tekstów, np. czy ensi był rzeczywiście odbiorcą (dostawcą), czy też raczej transakcje te były prowadzone w jego imieniu. częstotliwość zapisów potwierdzających wielokrotne podobne, często drobne transakcje, które miały miejsce w krótkich odstępach czasu każe sugerować, że ensi osobiście ich nie dokonywał, a raczej czyniono to w jego imieniu i za jego zgodą (stępień 2006, 342–343). czywiste pojmowanie rozliczenia aktywów i pasywów na kontach bala. pasywa wówczas występują jako wierzytelność.   księgowość w mezopotamii 185  wnioski księgowość ułatwia poznanie różnych aspektów życia gospodarczego i społecznego mezopotamii w okresie iii–ii tysiąclecia przed chr. tabliczki księgowe rejestrują przede wszystkim pojedyncze zdarzenia związane z przekazywaniem odpowiedzialności za posiadane dobra (aktywa). wszystkie dobra, dopóki nie narodziła się własność prywatna, były własnością świątyni, pałacu – dzisiaj byśmy powiedzieli własnością państwową lub instytucji państwowych. wydanie dóbr z magazynów świątynnych czy pałacowych oznaczało przejęcie za nie odpowiedzialności przez osobę pobierającą. musiały być one zwrócone, po przetworzeniu. zapisy księgowe wymagały swoistej wyceny dóbr, polegającej przede wszystkim na ilościowej i jakościowej kwalifikacji poszczególnych rozchodów i przychodów dóbr z i do magazynów. wycena ta podlegała ścisłej standaryzacji poprzez wycenę różnych dóbr w ekwiwalentnej jednostce, najpierw odpowiadającej miarom ziarna (1 gur), z czasem w jednostkach wagowych srebra (1 szekl). umiejętność liczenia i zapisywania była w owych czasach bardzo ceniona, dawała bowiem księgowym szczególny status osób mających swego rodzaju kontrolę nad ludźmi, z których znakomita większość takiej umiejętności nie posiadała. dokumenty księgowe te spełniały funkcję dowodową w kontaktach gospodarczych. odczytane gliniane tabliczki sumeryjskie z analizowanego okresu potwierdzają stosowanie w rozliczeniach z hodowcami bydła, z kupcami, z rzemieślnikami, z fabrykantami czy z podległymi prowincjami „budżetowych” rachunku rozliczeniowego według konstrukcji: 1. debet (dobra powierzone przez świątynie, pałac traktowane jako zobowiązanie), minus 2. kredyt (dobra zwrócone świątyni, pałacowi lub wydane na inne wskazane cele, traktowane jako realizacja zobowiązania), co daje 3. saldo: „deficyt", jeśli (1) (2) > 0, lub „nadwyżkę", jeśli (1) (2) < 0 odpowiada to metodzie bilansowej służącej ustaleniu zobowiązania wobec świątyni (pałacu) w przypadku deficytu lub wygospodarowanych nadwyżek (dochodu) na rzecz tychże. sławomir sojak186  literatura bielicki m. (1969), zapomniany świat sumerów, piw, warszawa. carmona s., ezzamel m. (2007), accounting and accountability in ancient civilizations: mesopotamia and ancient egypt, “accounting, auditing & accountability journal”, vol. 20, no. 2, 177–209, http://dx.doi.org/10.1108%2f09513570710740993. dobija m. (1996), postępowe idee rachunkowości w cywilizacji sumeryjskiej, „zeszyty naukowe ae w krakowie”, nr 467, 5–18. e.m. (1994), rachunkowość fabryki włókienniczej sprzed 4000 lat, „rachunkowość”, nr 5, 226–227 (tłumaczenie artykułu: das rechnungswesen im vorbabylonischen sumer mesopotamiens vor viertausend jahren, insbesondere die perfekte fabrikbuchaltung lines grossen textilbertriebs, „die wirtschaftsprüfung”, no. 14/1993). englund r. k. (2004), proto-cuneifirm account-books and journals, [w:] creating economic order. record-keeping, standardization, and the development of accounting in the ancient near east, m. hudson, c. wunsch (eds.), cdl press, bethesda, meryland, 23–46 hallo w. w. (2004), bookkeeping in the 21st century bce, [w:] creating economic order. record-keeping, standardization, and the development of accounting in the ancient near east, m. hudson, c. wunsch (eds.), cdl press, bethesda, meryland, 89–106 jursa m. (2002), prywatyzacja i zysk. przedsiębiorcy a gospodarka instytucjonalna w mezopotamii od 3 do 1 tysiąclecia przed chr., poznańskie towarzystwo przyjaciół nauk, poznań. kodeks hammurabiego, tłum. marek stępień, htpp://www.zrodla.historyczne.prv.pl/ (dostęp: 21.12. 2012). kurek b. (2004), rachunkowość jako stymulator rozwoju kultury, „zeszyty teoretyczne rachunkowości”, t. 24 (80), 38–59. mieroop m. van de (2004), accounting in early mesopotamia: some remarks, [w:] creating economic order. record-keeping, standardization, and the development of accounting in the ancient near east, m. hudson, c. wunsch (eds.), cdl press, bethesda, meryland, 47–64 mieroop m. van de (2012), ukryta historia w tekstach klinowych, wyd. agade, warszawa. saggs h. w. g. (1973), wielkość i upadek babilonu, piw, warszawa. schmandt-besserat d. (2007), jak powstało pismo, wyd. agade, warszawa. sharlach t. m. (2004), provincial taxation and the ur iii state, “cuneinform monographs”, 26, leiden–boston. steinkeller p. (2003), archival practices at babylonia in the third millennium, [w:] ancient archives and archival traditions. concept of record-keeping in the ancient world, m. brosius (ed.), oxford university press, new york, 37–58 steinkeller p. (1987), the administrative and economic organization of the ur iii state: the core and the periphery, [w:] the organization of power: aspect and bureaucracy   księgowość w mezopotamii 187 in the ancient near east, r. d. biggs, mc g. gibson (eds.), “studies in ancient oriental civilization”, 46, chicago, 19–47 stępień m. (1996), animal husbandry in the ancient near east. a prosopographic study of third-millenium umma, cdl press, bethesda, maryland. stępień m. (2006), ensi w czasach iii dynastii ur: aspekty ekonomiczne i administracyjne pozycji namiestnika prowincji w świetle archiwum z ummy, wyd. uniwersytetu warszawskiego, warszawa. date of submission: november 22, 2019; date of acceptance: january 9, 2020. * contact information: aifuwahopeosayantin@gmail.com, department of accounting, faculty of management sciences, university of benin, benin city, edo state, nigeria, phone: +2348113232082; orcid id: https://orcid.org/0000-0001-8908-6637. ** contact information: musasaidu.aca2010@gmail.com, department of accounting and finance, kwara state university, malete, kwara state, nigeria, phone: +2348120453412; orcid id: https://orcid.org/0000-0001-7783-4108. *** contact information: enehizena.cynthia@gmail.com, department of accounting, faculty of management sciences, university of benin, benin city, edo state, nigeria, phone: +2349030147976; orcid id: https://orcid.org/0000-0002-0247-3050. **** contact information: albert.osazevbaru@uniben.edu, department of accounting, faculty of management sciences, university of benin, benin city, edo state, nigeria, phone: +2347030434596; orcid id: https://orcid.org/0000-0003-0920-6032. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 aifuwa, h.o., saidu, m., enehizena, o.c., & osazevbaru, a. (2019). accounting information and lending decision: does sustainability disclosure matter? copernican journal of finance & accounting, 8(4), 61–89. http://dx.doi.org/10.12775/cjfa.2019.018 hope osayantin aifuwa* university of benin musa saidu** kwara state university osaruese cynthia enehizena*** university of benin albert osazevbaru**** university of benin accounting information and lending decision: does sustainability disclosure matter? keywords: monetary value of collateral, profit level, corporate sustainability disclosure, banks’ lending decisions, gri. hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru62 j e l classification: m10, m41, m48. abstract: lending decisions of banks is a function of accounting information of borrowing firms, however, in contemporary times the quality of their accounting information is not encouraging to be used as a yardstick in taking lending decision. against this backdrop, we investigated the impact of accounting information on commercial banks’ decision to manufacturing firms in nigeria. a sample of thirteen industrial listed firms was used. descriptive and inferential statistics were employed to summarize the data and to draw inference on the population studied. we employed the ordinary least squares in testing the hypotheses stated. findings revealed that monetary value of collateral positively affects lending decisions of banks, profit level of borrowing form negatively inf luence the lending decision of banks, while corporate sustainability disclosure positively but insignificantly impact on banks’ lending decisions. the study concluded that accounting information affect banks’ lending decisions, also although corporate sustainability insignificantly inf luence bank lending decision, it does not matter.  introduction analyzing companies’ accounting information has been an important tool for decision makers such as creditors, investors, business analysts and financial managers. they utilize the data when assessing the performance of companies. commercial banks are popularly known as deposit money banks – where customers deposit their money and withdraw it as at when needed. apart from the function, they also give out loans to borrowing firms and individuals. this function tends to be the most profitable and has high risk attached to it. just like the sayings goes “it is risky not to take risk”, lending decisions are risky with high rate of profitability. minh (2015) asserted that the role of accounting information to loan decisions in developing countries is less important. he further noted that quality of their financial statement is low and cannot be totally relied on by the users and banks, as compared to financial statements in developed countries such as the united state of america and australia. notwithstanding, emeni (2014) saw a great deal of usefulness in accounting information from developing countries like nigeria. he noted financial statement provide data which when processed, serve as useful information to management in its planning process. pritchard (2013) noted that such accounting information may be contained in the financial statements of the borrowing firms. it includes cash balance, profit level, and monetary value of assets which could be considered as collateral. accounting information and lending decision… 63 the emergence of sustainability accounting and reporting which brought about sustainability disclosures have been accepted and adopted by business organizations across the globe. moreover, the acceptance rate in developed countries is higher than that of developing countries, and as a result of this, three strands of empirical findings have also emerged. some scholars have posited that sustainability disclosure would positively affects a firms performance (see, onyekwelu & ugwuanyi, 2014; nwobu, 2015; ekweme, egbunike & onyali, 2013; burhan & rahmanti, 2012; aggarwal, 2013; beredugo & mefor, 2016), while some others submitted that it would negatively affect a firm’s performance (see, isa, 2014; dhaliwal, li, tsang & yang, 2011), and some of them submitted that sustainability disclosure do not affect a firms performance (see, asuquo, dada & onyeogaziri, 2018; venanzi, 2013; adams, thornton & sepehri, 2012). these positions could invariably affect the usage of sustainability reports by banks in making lending decision. evidence from developed and developing countries show that deposit money banks rely on the information derived from audited financial statements in order to asses a company’s past record (emeni, 2014; minh, 2015). in nigeria, the banking industry, the use of accounting information in bank lending decisions is an issue of concern to stakeholders, owing to previous bank scandals which involved chief executive officers of major banks in the 2000’s (emeni, 2014). statement of the problem accounting information of low quality jeopardizes management effectiveness, which makes managers ineffective administratively. the consequence of this has been the persistent distress syndrome that nigerian banking industry is facing intermittently. deposit money banks’ lending decisions is a function of accounting information of borrowers which is often gotten from the audited financial statements of the borrowing firms which lacks reliability, as a result of manipulations by the management of borrowing firms. these manipulations are mostly done in the statement of profit or loss & other comprehensive income and the statement of financial position. notwithstanding, deposit money banks still rely on the financial information found in the financial statement of the borrowing firms. they use collateral in hedging against risk, however the valuation of the borrowing firms’ assets could be undervalued due to the historical nature of accounting figure or hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru64 overvalued due to inf lation and as a result of earnings management practices of the top management of the firm. this could mislead the deposit money banks’ in making lending decisions. the profit level of the borrowing firm cannot be relied on to a great extent by deposit money banks in making lending decisions. this stem from the prevailing income smoothing practices of firms in nigeria, such as the boosting of profit of one-time transactions, shifting of current costs or expenses to later period, and shifting of current income to later period may distort and mislead the deposit money banks in making accurate lending decision. the preparers of this report tend to do these sharp practices either for personal gain or for organizational gain, also the shareholders of such companies always expect the performance to be good. organizations across the globe have increasingly embraced sustainability accounting and reporting, as a result of ever amplified demand by stakeholders for organizations to be more transparent in how they treat economic, social and environmental issue. in developing climes, deposit money bank critically examines the sustainability reports of borrowing firms in order to give out credit. however, the current position of sustainability disclosure in nigeria is not encouraging (being voluntary). firms have the choice to either disclose such information or not. this truncate the objectives of this reporting. also, another major drawback is that, even if they disclose such information, their reports tend to lack comparability quality, and the external auditors don’t give attestation to the report because they lack the competence and required knowledge and skill on sustainability issues. extant literature has dwelled on the use of financial information by deposit money banks in taking lending decisions, but however, failed to look at the nonfinancial informationsustainability disclosure of firms in nigeria. this gap identified served as the motivation of this study. also, there exist paucity literature on the impact of accounting information on deposit money banks’ lending decisions in nigeria, hence this study tend to add to the literature. accounting information and lending decision… 65 literature review lending decision of commercial banks commercial banks also recognized as deposit money banks play a pivotal role in the growth and development of nation’s economy. eke, eke and iyang (2015) claimed commercial banks are financial intermediators, that serve as fund mobilizers in both unit of an economy where there is surplus fund (by mopping it up) and supplying it to the unit of the economy that have shortfall. commercial banks in any country have a major role to stabilizing the economy of a country. that is why they are often referred to as “lubricant” of the economy (eke et al., 2015). various governments of the world have further advance their understandings of the roles of commercial banks as financial intermediators not only to stabilize the economy but to protect depositors’ funds, maintenance of public confidence as well as to guard against systematic risk and large-scale failure in the sector (eke et al., 2015; olaifa & ajagbe, 2015). in nigeria, commercial banks operations are regulated by the apex bank (central bank of nigeria), and supervised by the nigeria deposit insurance corporation (ndic). their presence in the financial sector have greatly and significantly improved commercial banks operations, as well as their lending decisions. before a commercial give a loan mohanty (2015) posited that the bank’s credit department would analyze the borrower critically using the lending rate system. he called it the 5c’s of creditworthiness of borrowers. they are; character, capacity, capital, collateral and conditions. the character consists of the features of the borrowers such as age, industry type, the reputation. the capacity includes the volume of operations of the borrowers. the capital, here deals with the borrower’s source of capital, and the capital structure or mix, whether it is solely equity financed or solely financed through debt or both. similar to mohanty’s (2015) 5c’s of creditworthiness of borrowers, researchers have suggested various determinants of bank lending decisions. olokoyo (2011) highlighted the determinants of banks’ lending decisions or behavior in nigeria as volume of deposit, investment portfolio, interest rate or lending rate, stipulated cash reserve requirements ratio and liquidity ratio. eke et al. (2015) attributed the factors affecting commercial banks’ lending decisions as some macroeconomic inf luences such as monetary policy rate, interest rate spread, statutory liquidity ratio, exchange rates and inf lation rate. olaifa hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru66 and ajagbe (2015) posited that board composition and ceo duality positively affects bank lending decisions, while board size negatively affect commercial banks’ lending decisions. ghulam and iyofor (2017) opined that firm characteristics affects commercial banks’ lending decisions, however owner characteristics do not inf luence the lending decisions of commercial banks. eneje, obidike and chukwujekwu (2016) pointed out that ifrs adoption of borrowing firms in nigeria have significantly affected commercial banks’ lending decisions. they noted that the mechanics of loan loss provisioning in post ifrs era differs significantly from that of pre ifrs era. emeni (2014) was of the opinion that volume of the loans is the major factor that determines the lending decisions of commercial banks, and noted that the benefits of this criterion outweighs the challenges that other factors brings. ironkwe and otti (2016) further buttressed that if commercial banks could improve on the information on determining factor of bank lending, both the borrowers and the commercial banks would be better off. prior studies have used different proxies to measure commercial banks’ lending decisions. some used accounting information proxies such as volume of loan, loan and advances, total value of banks loans in the financial statement (lear & pannepack, 2004; emeni, 2014), volume of deposit (olokoyo, 2011), monetary policy rate (eke et al., 2015), loan loss provisioning (eneje et al., 2016), loan growth and future charge off (bushman, hendricks & williams, 2013), external finance, credit demand and credit rationing (angori, aristei & gallo, 2017), hard and soft information (grunert & norden, 2011), propensity ratio (mkhaiber & werner, 2014). this current study used the total value of banks loans in the financial statement to proxy banks’ lending decisions as previously used by (emeni, 2014). accounting information the phrase “accounting information” is a blend of two concepts: accounting and information. while the former is the process of recording, analyzing, classifying, summarizing financial transactions. the latter simply means the knowledge communicated or received concerning a particular fact or circumstance. ironkwe and otti (2016) sees accounting information as the ingredient needed in most managerial decisions. they further defined accounting information as the study and practice of accounting with the design, application and monitoring accounting information and lending decision… 67 of information systems. emeni (2014) defined accounting information as knowledge communicated and received as regards a particular financial transaction. both definitions accurately gave clear meaning of accounting information, however they did not incorporate the non-financial part of accounting into it. scholars have sounded that information on financial statement is not considered important when making decisions (dang, marriott & marriott, 2006; 2008). mirshekary and saudagaran (2005) opined that the most common issues of accounting information include time lags (delays), lack of reliability, and incomplete notes. however, financial statement is still used as a basis of information, minh (2015) and aifuwa, embele and saidu (2018) gave criteria for evaluating the usefulness of accounting information in accordance with international accounting standard board (iasb). they are; relevance, faithfully representation, comparability, verifiability, timeliness and understandability. these criteria will be helpful to commercial banks in evaluating the usefulness of financial statement, before taking or making any lending decision. this study incorporates non-financial information, therefore further defines accounting information as the knowledge communicated and received concerning financial and non-financial transactions of an entity. karilainen (2014) opined that the source of accounting information that commercial banks may use in taking lending decisions are, media reports, financial statement, recommendation from other about a borrowing firm, industry information and trade association. specifically, emeni (2014) gave an expository that financial information is gotten from the audited and published financial statements of borrowing firms. in the same vein, non-financial components could also be gotten from the audited published financial reports but not as common as the financial transactions (nobanee & ellili, 2016; anagnostopoulos, skouloudis, khan & evangelinos, 2018). hahn, preuss, pinks and figgie (2014) and suroso, siaham, purba, sari and rusiadi (2018) asserted that non-financial information includes as guarantee from reputable individuals, company age, experience of prospective debtor, the period of being a banks customer and ownership diversification, and sustainability disclosures (environmental, social and economic). nobanee and ellili (2016) and anagnostopoulos et al. (2018) noted that environmental and social reports may be gotten from the sustainability accounting reports. they however noted that developed country have these reports added to their financial statement, while only few developing firm have it rehope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru68 ported in their financial statement. nigeria firms have not totally accepted this, because these reports are still absent in the financial statement. the quality of accounting information seems to be a good yardstick that commercial banks can use in its lending decisions. ironkwe and otti (2016) advised that only accurate, reliable and relevant accounting information will help commercial banks in make the best lending decisions. however, aifuwa and embele (2019) explicitly noted that accounting figure in the financial statements are not 100% reliable, because there might have been some manipulations by the board and preparers of the financial statement. they noted that the manufacturing sector most especially have frail quality on their financial reports. this was justified from their robust empirical work on the impact of board characteristics on financial reporting quality. aifuwa, embele and saidu (2018) and aifuwa and embele (2019) further stated the cause of the unreliability of financial statement by organizations was due to low ethical accounting practices and compliance among business organizations in nigeria and poor corporate governance. prior research proxies to measure accounting information such as monetary value of collateral, profit level, cash availability/ liquidity (emeni, 2014), financial ratios (theogene, mulegi & hosee, 2017). however, this current study employed two proxies used by (emeni, 2014) monetary value of collateral, profit level, and adds corporate sustainability disclosure as a non-financial information variable. monetary value of collateral and lending decision proper monetary valuation of collateral is very crucial in credit risk management role of commercial banks. karilainen (2014) defined a collateral as a property or assets that is used as a security for debt settlement, which usually includes valuation of assets. voordecker and steijver (2006) asserted that monetary valuation of collateral not only focus on the monetary aspect but also the non-monetary aspect too, such as the duration and future benefits of the collateral. wilson (2015) argued that the biggest problems start-up business face includes lack of financial training, access to credit facilities and lack of collateral. he further noted that the quantifiable financial information requires judgment on the sufficiency of the collateral at a given situation mkhaiber and werner (2015) noted that the valuation of collateral varies from borrowers to borrow accounting information and lending decision… 69 ers. they were of the view that size of the borrowing firms plays a vital role in the valuation of securities. aurizio, oliviero and romano (2015) advised that commercial banks should do the needful in verifying collateral brought by borrowers in order not to plunge into financial crisis. liberti, sturgess and sutherland (2017) also advised that the type of collateral used presented should be scrutinized because commercial banks earns rent on their ability to prevent default and recover it as well. emeni (2014) recommended that there is need for quality in financial reports amongst firms operating in nigeria. trpeskaa, atanasovskia and lazarevskaa (2017) examined the relevance of financial information and contents of the new audit report for lending decisions of commercial banks in macedonia. survey research design was adopted in the study. the online survey covered a total 114 identified corporate loan officers and heads with 15 banks in the country. chi square test was used to test the hypotheses stated in the study. they found out that the annual report of the company has consistently high importance and usability for respondents’ decision making. in nigeria, emeni (2014) examine the impact of accounting information in banks lending decisions. cluster and simple random sampling was adopted for the study and a cross-section of data of companies for the year 2012 gotten from the nigeria stock exchange. the data was analysed with the ordinary least square technique and accounting information were proxies by only the financial components. the study found out that accounting information have a significant relationship with commercial banks’ lending decisions. musyoka (2016) investigated the effect use of financial statement in making lending decisions has on the level of npls among kenyan banks. the study collected data on perceptions of importance of financial statements in lending decisions of kenya bank officers, the characteristics of banks, use of financial statements in the banks and their levels of npls from a total of 37 out of the 42 commercial banks via structured questionnaire. ordinary least square was employed as inferential statistic. key bank staffs in lending sections view financial statements as not very useful in making lending decisions. the effect of use of financial statement information in decision making was not statistically significant. however, tier 3 and tier 4 banks have significantly higher levels of npl than tier 1 registered in kenya. in sweden, karilainen (2014) examined the usefulness of financial accounting information in commercial lending. survey research design was adopted in the study. the sample comprise of branch managers of the biggest commerhope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru70 cial banks in sweden surveyed via a research instrument – the questionnaire. the study employed rank statistics as inferential statistic. karilainen discovered that accounting information significantly affect banks’ lending decisions, and concluded that virtually all three main statements; statement of financial position, comprehensive income statement and cash f low statement can be stared to be complementary. itoo, mutharasu and felipe (2013) investigated the effect loan value and collateral on value of mortgage default. dimensions such as borrower’s profile, loan value contents and collateral security was used to predict mortgage loan default. their investigation period spanned from 2011 to 2012, and sampled a total of 115 loan defaulter in jammu and kashmir bank in india. inferential statistic such as chi-square, regression, anova, and logistic regression were employed. they found out that the gender, age, marital status, the borrower’s income, loan rate, loan type, loan amount, amount repaid, form of collateral security, value of collateral security, purpose of loan and secondary finance on collateral security are significantly positively correlated with the defaulter’s outstanding loan amount. while the educational qualification of borrower is significantly negatively correlated with defaulter’s outstanding loan amount. they concluded that income, secondary finance on collateral security and interest rate are mainly responsible for mortgage default. ho1: monetary value of collateral has no significant effect on lending decisions of commercial banks. profit level and lending decision profit is a monetary gain from the difference between the amount earned and the amount spent in purchasing, operating or producing a good or service. investopedia (2019) defined profit as a monetary benefit that is realized when the amount of revenue gained from business activity surpasses the expenses, cost, and taxes needed to sustain the activity. as simple as the definition, there is an argument that profit is a proxy of a firm’s performance, which cannot be totally relied on in making lending and investment decisions. this stems from the popular argument in accounting literature that “cash is real, while profit is an illusion”. accounting information and lending decision… 71 jean-louis gassée (2011) noted that sometimes, firms manipulate their profit figure which makes it difficult to accurately ascertain the true figure of their profit. also, he noted this profit figure cannot be physically put in the pocket or use to help the business when in distress, however, cash can be pocketed and used to help the business out of distress. in line with this popular argument, ilaboya (2019) further asserted that the main objective of a going concern firm is not only to make profit but to create value. this assertion was reechoed by odia (2019) that a firm’s goal in this present dispensation is not to maximize profit but to create value. commercial banks need to be cautious when using the profitability level of a firm in making lending decisions. they could employ financial ratios to determine the profit level of the firm such as gross profit margin, operating margin, return on sales, return on investment in taking lending decision (theogene et al., 2017). in nigeria, emeni (2014) examine the impact of accounting information in banks’ lending decisions. cluster and simple random sampling technique was adopted for the study and a cross-section of data of companies for the year 2012 gotten from the nigeria stock exchange. the data was analysed with the ordinary least square technique and accounting information were proxies by only the financial components. the study found out that accounting information have a significant relationship with commercial banks’ lending decisions. musyoka (2016) investigated the effect use of financial statement in making lending decisions has on the level of npls among kenyan banks. the study collected data on perceptions of importance of financial statements in lending decisions of kenya bank officers, the characteristics of banks, use of financial statements in the banks and their levels of npls from a total of 37 out of the 42 commercial banks via structured questionnaire. ordinary least square was employed as inferential statistic. key bank staffs in lending sections view financial statements as not very useful in making lending decisions. the effect of use of financial statement information in decision making was not statistically significant. however, tier 3 and tier 4 banks have significantly higher levels of npl than tier 1 registered in kenya. ho2: profit level has no significant inf luence on lending decisions of commercial banks. hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru72 corporate sustainability disclosure and lending decision of commercial bank aifuwa (2019) asserted that sustainability reporting is a blend of two concepts: sustainability and reporting. whilst the former is meeting the needs of the present generation without compromising the ability of future generations to meet their own needs (brundtland, 1987), the latter simply means disclosing an organization’s information fully or partially to stakeholders who need it for different purposes. corporate sustainability report or disclosure is a report issued by a company or organization about the economic, environmental and social impact caused by its everyday activities (global reporting initiative, 2019). hahn et al. (2014) described corporate sustainability as set of company’s activities that demonstrates the inclusion of social and environmental concerns in business operation and interactions with stakeholders. novokmet and rogošiĉ (2016) see sustainability as a new business imperative, that companies in the 21st century should consider adopting. they noted that sustainability disclosure is the outcome of sustainability accounting by world institutions such as the eu, un, and also f lows from the stakeholders’ pressure on firm to disclose their environmental and social issues. major providers of sustainability reporting guidelines are the global reporting initiative (gri), the united nation global compact, the international standardization organization (iso), and the organization for economic cooperation and development (oecd) (global reporting initiative, 2019; zimara & eudam, 2015). eweje and sakai (2015) asserted that nowadays firms face various pressure to shift to a new business outline that enables sustainable growth. they further added that there is so much increasing understanding towards social and environmental issues and demands from various stakeholders expecting corporations to do more for the society. rogošić and čaljkušić (2015) opined that the purpose of sustainability disclosure was to assess the environmental, social and governance performance of the company and to provide a report on it. elsakit and worthington (2013) noted that the use of environmental and social information would enhance commercial banks lending decisions. they however based their assertion on developed country economy. anagnostopoulos et al. (2018) reiterated the need for incorporating sustainability consideration into banks’ lending decisions. they echoed that sustainability risk management is directly connected to the financial sector through it credit risk management process. accounting information and lending decision… 73 the current position of sustainability disclosure in nigeria is dismal because it is voluntary, notwithstanding the nigeria stock exchange adoption of the gri framework on march 19, 2019. unlike in some countries for example the netherlands, denmark and south africa where it is mandatory for big firms to disclose only environmental issues (ioannou & serafeim, 2017). a major of drawbacks on sustainability reporting includes; the comparability of the reports, as various frameworks have been developed for reporting social, environment and economic issues in an organization. frameworks such as the global reporting initiatives (gri) framework, international integrated reporting council (iirc), sustainability accounting standard board (sasb), carbon disclosure project. anagnostopoulos et al. (2018) did a study on incorporating sustainability considerations into lending decisions and the management of bad. mixedmethod approach was employed (online questionnaires and semi-structured interviews) to link and investigate managerial views of sustainability risks in greece. they discovered that sustainability risk management exists, however, yet to penetrate core processes. they concluded that there is still abundant of room for improvement before sustainability risk assessments are widely unified in all phases of the credit risk management process so that a robust sustainability management approach underpins fi’s core mission and goals. nobanee and elilli (2016) did a study to measure the degree of the corporate sustainability disclosure using annual data for listed banks in united arab emirates financial markets. secondary data for the study spanned through the period of 2003-2013. the study employed the generalized method of moment system estimation (gmm) as estimation technique. the results show that the overall level of sustainability disclosure based on sustainability reporting for banks listed in the uae financial markets is at a low level. in addition, it discovered that the degree of the corporate sustainability disclosure of the conventional banks is higher than the islamic banks. they concluded that sustainability disclosure positively and significantly affects the banking performance of the conventional banks whereas it has no significant effect on the islamic banks performance. suroso et al. (2018) examined the inf luence of accounting and non-accounting information on credit decision in bank mandiri medan branch of imam banjo, in indonesia. the sample comprised 40 applications for credit for which the bank had approved credit. multiple regression analysis models was used to test the research hypothesis. non-accounting information was used as a control hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru74 variable of the study. the results of the study indicate that accounting information is not entirely inf luential on credit decision making whereas non-accounting information that inf luences bank credit decisions is the guaranteed value and experience of the prospective debtor leader. ho3: corporate sustainability disclosure does not significantly affect lending decisions of commercial banks. the research methodology and the course of the research process theoretical framework and model specification theoretical framework owing to the unique feature of management science research (transdisciplinary nature) and to further explain the relationship between accounting information and commercial banks’ lending decisions, we anchored our study on the rational choice theory. this theory is an economic principle that assumes that individual always make prudent and logical decisions that provide them with the highest and personal satisfaction. these decisions provide people with the greatest belief or satisfaction, given choices available. investopedia (2019) noted that most academic discipline assumptions and theories are based on this theory. this theory is based on the assumption that individuals try actively maximize their advantage in any situation and therefore consistently try to minimize their losses. in our study, we use this theory to predict how commercial banks make logical and prudent lending decisions maximize profit and minimize losses. the decisions taken is based on the according accounting information provided. these decisions include critically ascertaining the monetary value of collateral, the true profitability position of firms, corporate sustainability disclosure. the rational choice theory have been criticized that individuals (commercial banks) do not always make rational utility maximization decisions. also, simon (1982) noted that people (commercial banks) are not always able to obtain all the information they would need to make best possible decisions (lending decisions). accounting information and lending decision… 75 the monetary value of collateral has been said to be very important in taking lending decisions. pritchard (2013) found that there is a positive relationship between collateral and bank lending decisions. this finding was in tandem with the result of (emeni, 2014) that there is a positive and significant relationship between collateral and bank lending decisions. there we expect the relationship to be bld = ƒ(voc) (1) profitability is often used as indictor of firm performance. although extant literature literature have criticized it as not a true measure of firms performance (gassée, 2011). the commercial banks’ lending decisions could be affected by the profitability status of the borrowing firm. however, theogene, mulegi and hosee (2017) noted that profitability ratios could be used in assessment of firms’ financial performance. emeni (2014) found out that profitability negatively and significantly affect commercial banks’ lending decisions. we therefore expect the relationship to be bld = ƒ(pfl) (2) the advent of sustainability accounting and reporting which brought about sustainability disclosures have not been fully accepted in developing countries. researchers have suggested that sustainability disclosure will also affect commercial banks lending decisions. anagnostopoulos et al. (2018) sound the need for incorporating sustainability consideration into banks’ lending decisions, that sustainability risk management is directly related to the financial sector through is credit risk management process. against this backdrop we expect the relationship to be bld = ƒ(csd) (3) hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru76 model specification figure 1. schematic representation of model explanatory variables dependent variable figure 1. schematic representation of model source: author’s compilation, 2019. our study adapted the model of emeni (2014) in explaining the relationship between accounting information and commercial banks’ lending decisions. his model is stated below; bld = ƒ(col, cas, fcr) ………………….……....(4) in econometric form: bldi = β0 + β1coli + β2casi + β3fcri + εi………....(5) where: bld = commercial banks’ lending decision; col = collateral; cas = cash and cash equivalent; fcr = firm characteristic. a priori expectations in with extant literature to be β1, β2, > 0; β3,< 0 we modified his model by removing cash and cash equivalent & firm characteristics variables, and added a non-financial accounting variable – sustainability accounting disclosure. fluent from the theoretical framework and existing literature, we specified our model (1), (2) & (3) as; bld = ƒ(mvc, pfl, csd) ……………….....................(6) in econometric form: bldi = β0 + β1mvci + β2pfli + β3csdi + εi.…………...(7) where: bld = commercial banks’ lending decision; β0 = constant; mvc = value of collateral; pfl = profit level; csd = corporate sustainability disclosures; β1, β2, β3 = coefficient of independent variables; monetary value of collateral profit level lending decision sustainability disclosure s o u r c e : author’s compilation, 2019. our study adapted the model of emeni (2014) in explaining the relationship between accounting information and commercial banks’ lending decisions. his model is stated below bld = ƒ(col, cas, fcr) (4) in econometric form: bldi = β0 + β1coli + β2casi + β3fcri + εi (5) where: bld = commercial banks’ lending decision; col = collateral; cas = cash and cash equivalent; fcr = firm characteristic. a priori expectations in with extant literature to be β1, β2, > 0; β3,< 0 we modified his model by removing cash and cash equivalent & firm characteristics variables, and added a non-financial accounting variable – sustainability accounting disclosure. fluent from the theoretical framework and existing literature, we specified our model (1), (2) & (3) as bld = ƒ(mvc, pfl, csd) (6) accounting information and lending decision… 77 in econometric form: bldi = β0 + β1mvci + β2pfli + β3csdi + εi. (7) where: bld = commercial banks’ lending decision; β0 = constant; mvc = value of collateral; pfl = profit level; csd = corporate sustainability disclosures; β1, β2, β3 = coefficient of independent variables; ε = standard error, i = cross sectional (companies). table 1. measures of variable s/n variables type measurement supporting scholars a priori 1 lending decision dependent total value of banks loans in the financial statement emeni (2014) 2 monetary value of collateral independent total tangible fixed assets in the financial statement elsas, heinemann, & tyrell (2004) emeni (2014) +ive 3 profit level independent profit or loss value in the comprehensive income statement chen (2006) & emeni (2014) -ive 4 corporate sustainability disclosures independent using the gri framework, the economic, environmental and social disclosure index = total level of disclosure/total occurrence. if the level of indicator disclosed is quantitative is 3, else 2. also, if coy disclose any occurrence of an indicator is 1; else 0. asuquo et al. (2018) +ive s o u r c e : author’s compilation, 2019. hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru78 research design we adopted the expo-facto research design. this design was adopted because it seeks to analyze already existing events where the researcher cannot manipulate the data. the population consisted of all listed manufacturing firm in nigeria, while the target population comprise of industrial goods firm as at 31 december. the industrial goods firms operation have immerse impact on the environment where it operate. all thirteen (13) of them were sampled. secondary data was hand-picked from the annual report for the year 2018. the justification for choosing this period was because of the availability of data. method of data analysis the study employed both the descriptive and inferential statistics. the descriptive statistics which include mean, minimum, maximum and standard deviation was well presented in tables. diagnostics test was carried out before we employed an inferential statistic – the ordinary least squares (ols) in order to fulfill its regression classical assumption. the justification for the choice of inferential statistic in the study was due to the fact our data fulfilled all diagnostic tests and also, we want to know the causal relationship between variables investigated. data analysis, interpretation and discussion of findings as earlier stated, the study employed descriptive statistics, diagnostics test (serial correlation, normality, linearity, heteroskedasticity and multicollinearity) and inferential statistic (ordinary least squares) to explain variables used in the study. accounting information and lending decision… 79 table 2. descriptive statistics bld mvc pfl csd mean 6957105. 72008152 441999.2 0.384615 maximum 77117274 4.26e+08 5731321. 3.000000 minimum 0.000000 232774.0 -6470737. 0.000000 std. dev. 21189736 1.42e+08 2979236. 0.960769 observations 13 13 13 13 s o u r c e : authors’ compilation, 2019. table 2 above revealed the descriptive statistics of listed industrial goods firms investigated in the study. the mean value of banks’ lending decision (bld) as proxied by total value of bank loans stood at n 6,957,105,000 with both least and extreme values of n 0 and n 77,117,274,000 respectively, and the standard aberration of n 21,189,736,000 which is high and above the mean, suggesting that the volume of loan given by commercial banks is not enough. similarly, the monetary value of collateral (mvc) which was proxied by total value of non-current assets stood at n 72,008,152,000 with least and extreme values of 232774.0 and 4.26e+08 respectively, and the standard deviation of 1.42e+08 which is high and above the mean, suggesting that (mvc) have a wide dispersion from the mean values. the mean value of profit level (pfl) stood at n 441,999,200 with least and extreme values of (n 6,470,737,000) and n 5,731,321,000 respectively, and the standard aberration of n 2,979,236,000 which is high and above the mean, suggests that the industry investigated rarely make good profit. finally, corporate sustainability disclosure (csd) which was proxied by gri index had a mean of 0.385, that is about 38.5% of firms investigated disclose, economic, social and environmental issues in their annual reports in form of quantitative or quantitative reports. the index had an extreme value of 3 and a least value of 0. also, the standard aberration stood at 0.961 is high and above the mean suggesting that corporate sustainability disclosure among firms investigated is low. hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru80 figure 2. histogram normality graph figure 2. histogram normality graph 0 1 2 3 4 5 6 -9999950 50.0000 1.0e+07 2.0e+07 series: residuals sample 1 13 observations 13 mean 855481.2 median 741956.7 maximum 18801018 minimum -13244622 std. dev. 7869553. skewness 0.509771 kurtosis 3.888320 jarque-bera 0.990480 probability 0.609425 source: authors' computation using eviews 8, 2019. figure 2 above visibly shows the normality distribution in the series. the series skewness and kurtosis were close to the recommended value of 0 and 3 respectively for a normal distribution (wooldridge, 2012). peck, olsen and devore (2008) posited that skewness and kurtosis value range of -3 to +3 could be deemed for a series to be normally distributed. be that as it may, our skewness value was at the centre and our kurtosis was mesokurtic. this indicates that our data did fit into a normal bell-curve. the jarque-bera test value of 0.99 indicated an insignificant departure from normality in the series at 5% level of significance. this simply implies that our data satisfy the normality assumption (see, mawutor, enofe, embele, ndu & awodola, 2019). table 3. correlation matrix variables bld mvc pfl csd bld 1.000000 mvc 0.764764 1.000000 pfl -0.721124 -0.288577 1.000000 csd -0.137221 -0.216694 0.138540 1.000000 source: authors' compilation, 2019. the results of the correlation analysis are presented in table 3. the correlation coefficients are mixed with some variables reporting positive coefficients. monetary value of collateral and bank lending decisions (0.765); profit level and bank lending decisions (-0.721); corporate sustainability disclosure and bank lending decisions (-0.137).the strength of the relationship between variables measured by the pearson product moment correlation exposed that the association amongst the variables is relatively large but were s o u r c e : authors’ computation using eviews 8, 2019. figure 2 above visibly shows the normality distribution in the series. the series skewness and kurtosis were close to the recommended value of 0 and 3 respectively for a normal distribution (wooldridge, 2012). peck, olsen and devore (2008) posited that skewness and kurtosis value range of -3 to +3 could be deemed for a series to be normally distributed. be that as it may, our skewness value was at the centre and our kurtosis was mesokurtic. this indicates that our data did fit into a normal bell-curve. the jarque-bera test value of 0.99 indicated an insignificant departure from normality in the series at 5% level of significance. this simply implies that our data satisfy the normality assumption (see, mawutor, enofe, embele, ndu & awodola, 2019). table 3. correlation matrix variables bld mvc pfl csd bld 1.000000 mvc 0.764764 1.000000 pfl -0.721124 -0.288577 1.000000 csd -0.137221 -0.216694 0.138540 1.000000 s o u r c e : authors’ compilation, 2019. accounting information and lending decision… 81 the results of the correlation analysis are presented in table 3. the correlation coefficients are mixed with some variables reporting positive coefficients. monetary value of collateral and bank lending decisions (0.765); profit level and bank lending decisions (-0.721); corporate sustainability disclosure and bank lending decisions (-0.137). the strength of the relationship between variables measured by the pearson product moment correlation exposed that the association amongst the variables is relatively large but were below the threshold of 0.80, suggesting the absence of the problem of multicollinearity in the predictor variables (aifuwa & embele, 2019; saidu & aifuwa, 2020; studenmund, 2000). to further confirm this, we will carry out a variance inf lation factor (vif) test. table 4. basic regression assumptions assumptions test employed results remark multi-collinearity variance inflation factor (vif) all centered vif the value < 10 fulfilled serial-correlation breusch godfrey serial correlation lm f(2,8) = 0.358, p = 0.710; fulfilled heteroskedasticity breusch pagan-godfrey f(3,9) = 0.976, p = 0.446 fulfilled normality histogram normality (skewness & kurtosis with jacque-bera) skweness and kurtosis were within the threshold 0 & 3 respectively, jacque-bera was not statistically significant. fulfilled model specification ramsey reset f(2,10) = 0.976, p = 0.216. fulfilled s o u r c e : author’s computation, 2019. table 4 above shows the basic regression assumptions fulfilled. the vif was used to test for multicollinearity and consequently the result revealed that our data is free from this problem as the centered vif’s of variables were all below 10. serial correlation using the breusch-godfrey serial correlation (lm) test. the null hypothesis of no serial correlation was accepted, f(2,8) = 0.358, p >  .005. the breusch-pagan-godfrey test of heteroskecdacity was conducted, and we found out that there was absence of heteroskedasticity, f(6,268)  =  0.976, p > .005. this implies that the residual error is constant in the series. the model of the study was correctly specified as shown by the ramsey reset test. hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru82 multivariate analyses table 5 below presents the result of the ordinary least square summary. the summary is made up of the model employed in the study which was subsequently used to test hypotheses earlier stated. our hypotheses were tested at 5% level of significance (that is, if p-value < 0.05 reject ho, else do otherwise). table 5. inferential statistic ordinary least squares variable coefficient std. error t-statistic prob. c 1410338. 3222505. 0.437653 0.6720 mvc 0.092421 0.019489 4.742201 0.0011 pfl -3.926226 0.918829 -4.273074 0.0021 csd 1630479. 2794367. 0.583488 0.5739 r-squared 0.863218 mean dependent var 6957105. adjusted r-squared 0.817624 s.d. dependent var 21189736 s.e. of regression 9049172. akaike info criterion 35.12190 sum squared resid 7.37e+14 schwarz criterion 35.29574 log likelihood -224.2924 hannan-quinn criter. 35.08617 f-statistic 18.93276 durbin-watson stat 1.572539 prob(f-statistic) 0.000316 dependent variable: bld method: least squares date: 06/06/19 time: 00:42 sample (adjusted): 1 13 included observations: 13 after adjustments s o u r c e : authors’ computation, 2019. the result of the multivariate analysis (ordinary least squares) presented in table 5. the analysis shows that there exist a positive association and significant relationship between monetary value of collateral (mvc) and bank lending decisions t(1, 13) = 4.742, β1 =-0.092, p = 0.001. this infers that a unit increase in the monetary value of collateral will increase bank lending decisions (volume of loan) by 0.092. the study, therefore, accepts the alternate hypoth accounting information and lending decision… 83 esis – that monetary value of collateral inf luences bank lending decisions. this finding is in tandem with the works of (emeni, 2014; trpeskaa et al., 2017), but sharply swerves from the findings of (song, 2002) in his study on collateral in loan classification and positioning, where he expressed his opinion on the illiquidity and difficulty in realization of collateral as a major drawback for banks. also deviates from the finding of musyoka (2016) in his study investigated the effect use of financial statement in making lending decisions has on the level of npls among kenyan banks. itoo et al. (2013) noted that value of collateral security, purpose of loan and secondary finance on collateral security are significantly positively associated with the defaulter’s outstanding loan amount, invariably affect lending decisions of banks. slightly similar to the first result, there exist a significant but negative relationship between profit level (pfl) and bank lending decisions, t(1, 13) =  -4.273, β2 = -3.926, p = 0.002. this implies that a unit decrease in profit level will decrease banks’ lending decisions by 3.926. the study, therefore, accepts the alternate hypothesis of significant inf luence of profit level on bank lending decisions. this finding is also in tandem with the work of (emeni, 2014; trpeskaa et al., 2017), but was in dissonance with the work of (musyoka, 2016). following from the argument that cash is real, profit is an illusion, the bank deem it fit to be cautious in using a firm profit level as a yardstick in take lending decisions. in corroborating this opinion, jean-louise gassée (2011) echoed that often a time firms manipulate their profit figure in order to gain an undue advantage. contrary to the first two results, there exist a positive but an insignificant relationship between corporate sustainability disclosure (csd) and bank lending decisions, t(1, 13) = 0.583, β3 =1630479, p = 0.5739. this implies that a unit increase in corporate sustainability disclosure will increase banks’ lending decisions. the study, therefore failed to reject the null hypothesis that corporate sustainability disclosure does not significantly affect lending decisions of commercial banks. our finding is in dissonance with the work of anagnostopoulos et al. (2018) on the incorporating sustainability considerations into lending decisions, and further noted that sustainability risk management indeed exists, but it has yet to penetrate core processes. also, nobanee and elilli (2016) noted that sustainability disclosure disclosure positively affects banks performance, invariably affects their lending decisions. suroso et al. (2018) further added that accounting information (that is financial information) is not utterly hope aifuwa, musa saidu, osaruese enehizena, albert osazevbaru84 inf luential on credit decision making, non-financial information are also determinants of banks’ lending decisions. the synopsis statistics displays a coefficient of determination (r-squared) of 0.863, inferring that over 86.3% of the methodical variations in dependent variable were elucidated by the independent variables used in the model, while about 13.7% were caused by variables not shown in the model. likewise, the adjusted coefficient of determination (adjusted r-squared) which was 0.818, advocates that over 81.8% of the methodical variations in dependent variable was elucidated by the independent variables, while about 18.2% was caused by variables not included in the model but captured by the standard error of the regression, s.e = 9049172. the general f-statistics (goodness-of-fit test) proficient in prediction stood at f(1, 13) = 18.932, p < .005, this implies that all of the slope coefficients (excluding the constant, or intercept) in the regression are zero and jointly significant at 5%.  conclusion, recommendations and suggestions for future research based on the findings of the study, we concluded that accounting information affect banks’ lending decisions. this conclusion supports our theoretical framework – rational choice theory, that only financial information affects lending decisions of commercial banks. on the question whether sustainability disclosure matter, this research concluded that it does not matter, although we out that it was not statistically significant but was positively related to banks’ lending decisions. based on the finding of this study we recommended the following: 1. banks should verify and scrutinize the collateral tendered by borrowing firms; 2. banks should not rely on the profit of a borrowing firm in making lending decisions since profit is just figure – an illusion; and 3. corporate sustainability disclosure is growing momentum across the globe, thus organizations should key into it in disclosing fully their economic, social and environmental impact. the current study is subject to some limitations. first our study is limited first by the micro-numerocity of our research data. secondly the study ignored unlisted manufacturing firms. thus, any generalization of the results of this study cannot be made without caution. these limitations identified did not, accounting information and lending decision… 85 however, vitiate the generalization of our research findings. therefore, in order to improve on this study, we suggest the following to be done. 1. the sample size could be increased and non-listed manufacturing firms can be studied together with listed ones. 2. also, this study focuses mainly on the manufacturing sector; the future research needs to be conducted to cut across the other sectors of the economy for effective generalization.  references adams, m., thornton, b., & sepehri, m. 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(2015). the benefits of social responsibility reporting for companies and stakeholders: evidence from the german chemical industry. journal of business chemistry, 12(3), 85-103. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 05.06.2013; data zaakceptowania: 29.10.2013. * dane kontaktowe: r.lewandowski@pwpw.pl, ul. sanguszki 1, 00-222 warszawa, tel. 22 530 21 58. doi: 10.12775/cjfa.2013.0182013, volume 2, issue 2 remigiusz lewandowski* polska wytwórnia papierów wartościowych sa polska wytwórnia papierów wartościowych sa w systemie bezpieczeństwa ekonomicznego i publicznego słowa kluczowe: pwpw, bezpieczeństwo ekonomiczne, podstawowy interes bezpieczeństwa państwa. klasyfikacja j e l: d22, g38, h56, h82, k23. abstrakt: artykuł dotyczy usytuowania pwpw w systemie bezpieczeństwa ekonomicznego i publicznego. zzdefiniowano i omówiono w nim dwie szczególne kategorie bezpieczeństwa, związane z działalnością pwpw, tj. bezpieczeństwo identyfikacyjne oraz bezpieczeństwo transakcyjne. przedstawiono najważniejsze czynniki kształtujące powyższe kategorie bezpieczeństwa oraz relacje pomiędzy bezpieczeństwem identyfikacyjnym i transakcyjnym a bezpieczeństwem ekonomicznym i publicznym. artykuł prowadzi do konkluzji, że pwpw pełni istotną funkcję w systemie bezpieczeństwa ekonomicznego państwa, a działalność gospodarcza prowadzona przez pwpw w zakresie produkcji banknotów i dokumentów wraz z towarzyszącymi im systemami it tworzy podstawowy interes bezpieczeństwa państwa. polish security printing works in the system of public and economic security keywords: pwpw, economic security, fundamental interest od state’s security. j e l classification: d22, g38, h56, h82, k23. abstract: the article raises the issue of placing pwpw in the system of economic and public security. two particular categories of security connected with pwpw business activity, i.e. identification and transactional security, have been defined and discussed in the article. the most essential factors affecting the above security categories as well remigiusz lewandowski92 as relations between identification/transactional security and economic/public security. the article indicates that pwpw plays an important role in the state’s economic security system and the business activity of pwpw, including banknote, document and related software’s production, creates the fundamental interest of state’s security. translated by remigiusz lewandowski  wstęp realizacja misji bezpieczeństwa państwa jest zagadnieniem dotyczącym nie tylko organów państwa i sił zbrojnych, ale również dotykającym podmioty tworzące państwo, w szczególności społeczeństwo oraz podmioty gospodarcze. w gospodarce niektóre przedsiębiorstwa mają krytyczne znaczenie dla bezpieczeństwa państwa. zakłócenie ich funkcjonowania, w warunkach zarówno pokoju, jak i wojny, może doprowadzić do osłabienia bezpieczeństwa państwa. stąd przepisy prawa nakładają na niektóre przedsiębiorstwa, których działalność jest kluczowa z punktu widzenia bezpieczeństwa państwa, szereg zadań i szczególnych wymagań. niniejszy artykuł skupia się na funkcji polskiej wytwórni papierów wartościowych sa (dalej: pwpw) – podmiotu zapewniającego wiarygodność procesów transakcji i identyfikacji – w systemie bezpieczeństwa ekonomicznego i publicznego. 1. metodyka artykuł oparto na studium przypadku pwpw przy wykorzystaniu analizy aktualnego stanu prawnego, a także literatury przedmiotu dotyczącej bezpieczeństwa narodowego oraz bezpieczeństwa publicznego i ekonomicznego. 2. przegląd wybranych regulacji prawnych ustawa z dnia 26 kwietnia 2007 r. o zarządzaniu kryzysowym m.in. w art. 6 ust. 5 nakłada na właścicieli oraz posiadaczy samoistnych i zależnych obiektów, instalacji lub urządzeń infrastruktury krytycznej obowiązek ich ochrony oraz utrzymywanie własnych systemów rezerwowych, zapewniających bezpieczeństwo i podtrzymujących funkcjonowanie tej infrastruktury. przez infrastrukturę krytyczną, zgodnie z art. 3 pkt 2 ww. ustawy, należy rozumieć systemy oraz wchodzące w ich skład powiązane ze sobą funkcjonalnie obiekty, urządzenia, instalacje, usługi kluczowe dla bezpieczeństwa państwa i jego   polska wytwórnia papierów wartościowych sa 93 obywateli oraz służące zapewnieniu sprawnego funkcjonowania organów administracji publicznej, a także instytucji i przedsiębiorców. infrastruktura krytyczna obejmuje m.in. systemy finansowe i zapewniające ciągłość działania administracji publicznej, które bezpośrednio wiążą się z działalnością pwpw w zakresie produkcji banknotów oraz dokumentów komunikacyjnych i identyfikacyjnych oraz towarzyszących im systemów teleinformatycznych. nota bene kluczowy z punktu widzenia państwa przedmiot działalności pwpw można, opierając się na misji spółki, zdefiniować bardziej kompleksowo jako produkty i usługi zapewniające wiarygodność procesów transakcji i identyfikacji. wykaz infrastruktury krytycznej tworzony jest w ramach planów zarządzania kryzysowego na poziomie krajowym, wojewódzkim, powiatowym i gminnym. przedsiębiorcy – operatorzy infrastruktury krytycznej, na podstawie rozporządzenia rady ministrów z dnia 30 kwietnia 2010 r. w sprawie planów ochrony infrastruktury krytycznej, sporządzają odpowiednie plany ochrony. obowiązek taki dotyczy również pwpw. ponadto ustawa z dnia 23 sierpnia 2001 r. o organizowaniu zadań na rzecz obronności państwa realizowanych przez przedsiębiorców określa zasady organizowania zadań na rzecz obronności państwa przez przedsiębiorców, w tym przez przedsiębiorców o szczególnym znaczeniu gospodarczo-obronnym. zadania te dotyczą m.in. mobilizacji gospodarki, militaryzacji i planowania operacyjnego. są one nakładane na przedsiębiorców w drodze decyzji administracyjnej, a ich wykonanie następuje na podstawie umów zawartych z organem wydającym decyzję. na mocy rozporządzenia rady ministrów z dnia 4 października 2010 r. w sprawie wykazu przedsiębiorców o szczególnym znaczeniu gospodarczo-obronnym pwpw jest zaliczana do tego rodzaju podmiotów. do działalności prowadzonej przez pwpw odnosi się również rozporządzenie rady ministrów z dnia 22 października 2010 r. w sprawie określenia przedsiębiorstw państwowych oraz jednoosobowych spółek skarbu państwa o szczególnym znaczeniu dla gospodarki państwa. szczególny charakter podmiotów gospodarczych pełniących kluczowe funkcje w systemie bezpieczeństwa państwa widoczny jest także w ustawie z dnia 29 stycznia 2004 r. prawo zamówień publicznych. w 2012 r. w ustawie tej dokonano zmian, które dotykają przedmiotowego zagadnienia. między innymi w art. 4 pkt 5) w większym stopniu sprecyzowano warunki, w których nie stosuje się ustawy. za zrozumiałe należy uznać, że ze względów bezpieczeństwa niektóre zamówienia państwowe nie są poddane zasadom wolnego rynku i wolnej konkurencji. ze stosowania ustawy wyłączono zatem zamówienia, remigiusz lewandowski94 którym nadano klauzulę „tajne” lub „ściśle tajne”, zgodnie z przepisami o ochronie informacji niejawnych, lub jeżeli wymaga tego istotny interes bezpieczeństwa państwa lub ochrona bezpieczeństwa publicznego. we wcześniej obowiązującym brzmieniu wyłączenie to dotyczyło zamówień zawierających informacje niejawne, jeżeli wymaga tego istotny interes publiczny lub istotny interes państwa. w konsekwencji zawężono interes państwa (lub interes publiczny) wyłącznie do istotnego interesu bezpieczeństwa państwa lub ochrony bezpieczeństwa publicznego. ustawodawca tym samym zwrócił uwagę na znaczenie kwestii bezpieczeństwa jako kluczowej dla wyłączeń z ustawy prawo zamówień publicznych. ponadto zawężono katalog zamówień wyłączanych z ustawy ze względu na ochronę informacji – z szerokiego katalogu informacji niejawnych na zamówienia, którym nadano klauzulę „tajne” lub „ściśle tajne”. równocześnie jednak należy zauważyć, że pierwotna formuła wyłączenia miała charakter warunkowy, tj. opierała się co do zasady na zawartych w zamówieniu informacjach niejawnych, jeżeli wymagał tego istotny interes publiczny lub istotny interes państwa. w obecnie obowiązującym brzmieniu wyłączenia ustawodawca zapewnił alternatywę różnych czynników, tj. odpowiedniej klauzuli tajności lub wymóg istotnego interesu bezpieczeństwa państwa albo ochrony bezpieczeństwa publicznego. a zatem, zgodnie z art. 4 pkt 5) ustawy prawo zamówień publicznych wystarczające jest spełnienie tylko jednego z trzech warunków, aby nie stosować przepisów ustawy. ponadto, zgodnie z art. 4b ust 1 pkt 2) w związku z art. 131a ust. 1 omawianej ustawy, wyłączenie obejmuje także m.in. zamówienia na newralgiczne usługi, w przypadku których stosowanie przepisów ustawy zobowiązywałoby zamawiającego do przekazania informacji, których ujawnienie jest sprzeczne z podstawowymi interesami bezpieczeństwa państwa. termin usługi newralgiczne ustawodawca zdefiniował w art. 2 pkt 5c) jako usługi do celów bezpieczeństwa, które wiążą się z korzystaniem z informacji niejawnych, wymagają ich wykorzystania lub je zawierają. prawo zamówień publicznych nie definiuje podstawowego interesu bezpieczeństwa państwa. zgodnie z art. 4c tryb postępowania w sprawie oceny występowania podstawowego interesu państwa regulowany jest rozporządzeniem rady ministrów. rozporządzenie z dnia 12 lutego 2013 r. przewiduje, że oceny występowania podstawowego interesu bezpieczeństwa państwa dokonuje minister kierujący działem administracji rządowej, któremu podlega zamawiająca jednostka organizacyjna, na wniosek dyrektora odpowiedniej komórki organizacyjnej ministerstwa. wniosek o dokonanie oceny powinien zawierać m.in. uzasadnienie, które wskazuje podstawowy interes bezpieczeństwa pań  polska wytwórnia papierów wartościowych sa 95 stwa oraz przesłankę przyczynowo-skutkową wiążącą przedmiot zamówienia z podstawowym interesem bezpieczeństwa państwa, w tym opis wpływu udzielenia zamówienia na podstawowy interes bezpieczeństwa państwa. wyłączenia ze stosowania ustawy prawo zamówień publicznych wynikać także mogą z innych przyczyn, takich jak funkcjonowanie w ramach państwa monopolu naturalnego1, uzasadnionego (z natury rzeczy) względami ekonomicznymi (korzyści skali, korzyści zakresu, spełniony warunek subaddytywności, unikatowe kompetencje, niepodzielność specyficznych czynników produkcji etc.). istnieje ponadto szereg innych regulacji prawnych zabezpieczających wykonywanie zadań produkcyjnych lub usługowych przez podmioty gospodarcze, których działalność jest ważna dla bezpieczeństwa państwa. dotyczą one w szczególności przepisów regulujących dany sektor gospodarki i zapewniających ciągłość świadczenia usług (np. ustawa z dnia 16 lipca 2004 r. prawo telekomunikacyjne, ustawa z dnia 16 lutego 2007 r. o zapasach ropy naftowej, produktów naftowych i gazu ziemnego oraz zasadach postępowania w sytuacjach zagrożenia bezpieczeństwa paliwowego państwa i zakłóceń na rynku naftowym). niemniej jednak przedmiot działalności gospodarczej podmiotów, do których odnoszą się tego rodzaju regulacje, nie obejmuje bezpośrednio sfer bezpieczeństwa państwa, takich jak np. produkcja dokumentów i związanych z nimi systemów it czy produkcja środków pieniężnych, a w szczególności banknotów. 3. bezpieczeństwo i jego dziedziny biorąc pod uwagę powyższe uregulowania, szczególnie ważne pozostaje poprawne rozumienie bezpieczeństwa państwa oraz podstawowego interesu bezpieczeństwa państwa. jest to szczególnie trudne z uwagi na brak definicji obu terminów w przepisach prawa. co więcej, w literaturze przedmiotu, która nota bene nie jest szczególnie rozwinięta, panuje spora dowolność terminologiczna odnosząca się do bezpieczeństwa narodowego, bezpieczeństwa publicznego, bezpieczeństwa państwa czy bezpieczeństwa wewnętrznego, a termin podstawowy interes bezpieczeństwa państwa czeka na swoją naukową interpretację. niniejszy artykuł, przynajmniej w jakimś stopniu, pojęcie to wypełnia treścią. na jego potrzeby proponuje się przyjąć systematykę, zgodnie z którą naj1 przykładem monopoli naturalnych funkcjonujących w polsce jest pse operator sa (linie przesyłowe energii elektrycznej) czy gaz-system sa (linie przesyłowe gazu); pewnymi cechami monopolu naturalnego odznacza się również pwpw sa; szerzej w: lewandowski 2013, 9–20. remigiusz lewandowski96 szerszą kategorią bezpieczeństwa jest bezpieczeństwo narodowe, rozumiane jako „najważniejsza wartość, potrzeba narodowa i priorytetowy cel działalności państwa, jednostek i grup społecznych, a jednocześnie proces obejmujący różnorodne środki, gwarantujące trwały, wolny od zakłóceń byt i rozwój narodowy (państwa), w tym ochronę i obronę państwa jako instytucji politycznej oraz ochronę jednostek i całego społeczeństwa, ich dóbr i środowiska naturalnego przed zagrożeniami, które w znaczący sposób ograniczają jego funkcjonowanie lub godzą w dobra podlegające szczególnej ochronie” (kitler 2011, 31). przytoczona definicja jest bardzo pojemna. obejmuje bowiem zarówno kwestie bezpieczeństwa zewnętrznego, jak i wewnętrznego, a ponadto odnosi się także do wartości ważnych dla społeczeństwa. definicja ta może jednak budzić wątpliwości w przypadku wąskiego rozumienia terminu narodowy, ograniczającego się do narodu, a zatem do wspólnoty o podłożu etnicznym. we współczesnych państwach demokratycznych, złożonych ze społeczeństw często wielonarodowych, tego rodzaju zawężenie jest niedopuszczalne. w niniejszym artykule zatem bezpieczeństwo narodowe odnosi się nie do określonego narodu, ale do całego społeczeństwa. wydaje się więc, że ta kwestia terminologiczna wymaga dalszych prac badawczych i prawdopodobnie nowych propozycji w tym zakresie. kategorią węższą od bezpieczeństwa narodowego jest bezpieczeństwo państwa definiowane jako „bezpieczeństwo instytucji politycznej, posiadającej suwerenną władzę, określone terytorium, a także ludność podległą ciału władczemu” i zorientowane na „utrzymanie porządku w zbiorowości państwowej oraz zapewnienie jej bezpieczeństwa zewnętrznego i wewnętrznego” (kitler 2011, 27). kategoria ta jest zatem węższa od kategorii bezpieczeństwa narodowego o kwestie związane z wartościami istotnymi dla społeczeństwa, które podlegają ochronie. sulowski (2009, 12–13) z kolei precyzuje termin bezpieczeństwa wewnętrznego, odnosząc je do „stałej gotowości i działalności określonych instytucji oraz organów państwowych, a także prywatnych podmiotów, która ma znaczenie dla zachowania stabilności i integralności państwa”. tym samym sulowski przyjmuje, że bezpieczeństwo wewnętrzne ma wymiar szerszy aniżeli bezpieczeństwo publiczne, albowiem obejmuje także sferę prywatną wewnątrz państwa. zbliżoną definicję proponuje również majer (2012, 16), podkreślając znaczenie triady bezpieczeństwa organów państwa, bezpieczeństwa osobistego i bezpieczeństwa egzystencji w bezpieczeństwie wewnętrznym. misiuk zaś (2008, 16–17) przedstawia definicję bezpieczeństwa publicznego jako „stan   polska wytwórnia papierów wartościowych sa 97 braku zagrożenia dla funkcjonowania organizacji państwowej i realizacji jej interesów, umożliwiający normalny, swobodny jej rozwój”, przy czym zwykle pojęcie to odnosi się wyłącznie do państwa i działań podejmowanych przez państwo i dotyczy sfery wewnętrznej państwa. na schemacie 1 przedstawiono proponowaną strukturę bezpieczeństwa narodowego. schemat 1. dziedziny bezpieczeństwa konstytuujące bezpieczeństwo narodowe ź r ó d ł o: opracowanie własne. 4. podstawowy interes bezpieczeństwa państwa problematyczna pozostaje kwestia terminu podstawowego interesu bezpieczeństwa państwa. przymiotnik podstawowy sugeruje, że chodzi o wąskie rozumienie interesu bezpieczeństwa, o de facto jego rdzeń, innymi słowy kluczowy interes państwa. ustawodawca nie wskazał kryteriów, jakie interes bezpieczeństwa państwa mu spełniać, aby być uznanym za podstawowy. zgodnie z przytaczanym rozporządzeniem rady ministrów z dnia 12 lutego 2013 r. oceny takiej w przypadku zamówień rządowych związanych ze sferą bezpieczeństwa państwa dokonuje odpowiedni minister. istotne pozostaje także poremigiusz lewandowski98 prawne rozumienie terminu interes bezpieczeństwa państwa. popiuk-rysińska (2000, 99) przyjmuje, że interes można określić jako „pożądane stany rzeczy, które są osiągane lub chronione przez podmioty, lub – innymi słowy – takie dobra, których brak lub niedobór, aktualny bądź antycypowany, wywołuje działanie podmiotu”. z kolei kukułka (2000, 244) bezpośrednio wiąże interes państwa z potrzebami i celami narodowymi, twierdząc, że „w toku realizacji potrzeby aspiracyjne przekształcają się w potrzeby operacyjne, które przejawiają się jako interesy. są one formą wyrażania i ukierunkowania realizowanych potrzeb, a zarazem tworzą ogniwo łączące owe potrzeby z celami narodów, państw […]”. na tym tle pojęcie podstawowego interesu bezpieczeństwa państwa należy zatem rozumieć jako kluczowe potrzeby państwa zapewniające jego bezpieczeństwo. te kluczowe potrzeby państwa dotyczą: ■ bezpieczeństwa militarnego, ■ bezpieczeństwa politycznego, ■ bezpieczeństwa publicznego, ■ bezpieczeństwa ekonomicznego. podkreślenia wymaga fakt, że w ramach każdej z wyżej wymienionych kategorii można odnaleźć zarówno zjawiska faktycznie istotne dla bezpieczeństwa państwa i stanowiące o podstawowym interesie bezpieczeństwa państwa, jak i zjawiska, które z punktu widzenia bezpieczeństwa państwa i podstawowego interesu bezpieczeństwa państwa mają charakter marginalny. dotyczyć to może na przykład sytuacji ekonomicznej poszczególnych przedsiębiorstw. co do zasady, sytuacja pojedynczych podmiotów gospodarczych oraz ich działalność nie ma realnego wpływu na bezpieczeństwo państwa. natomiast w przypadku przedsiębiorstw pełniących szczególne funkcje w gospodarce (np. podmioty uznane za kluczowe dla polskiej gospodarki, jak pwpw) tego rodzaju wpływ istnieje. jak wskazuje kitler (2011, 42), dotyczy to w szczególności sytuacji, gdy działalność danej spółki ma wpływ na rozwój państwa oraz gdy danej spółce powierzone są zadania na rzecz realizacji celów bezpieczeństwa narodowego, tak jak w przypadku pwpw wytwarzającej na zlecenia państwa banknoty, dokumenty i odpowiednie systemy it. 5. działalność pwpw a bezpieczeństwo państwa i podstawowy interes bezpieczeństwa państwa niniejszy artykuł obejmuje analizę czynników związanych z działalnością gospodarczą pwpw i wskazuje na silną relację pomiędzy przedmiotem działal  polska wytwórnia papierów wartościowych sa 99 ności gospodarczej pwpw a podstawowym interesem bezpieczeństwa państwa. w relacji tej w szczególności uczestniczy bezpieczeństwo ekonomiczne oraz bezpieczeństwo publiczne. bezpieczeństwo ekonomiczne obejmuje całokształt środków w dziedzinie bezpieczeństwa narodowego, których zasadniczym celem jest zapewnienie takiego stanu rozwoju systemu gospodarczego państwa, jaki „zapewnia wysoką sprawność jego funkcjonowania oraz zdolność do skutecznego przeciwstawienia się zewnętrznym naciskom, mogących doprowadzić do zaburzeń rozwojowych” (płaczek 2006, 113). szczególną rolę w tej dziedzinie bezpieczeństwa odgrywa stabilność systemu płatniczego, związana z pewnością i wiarygodnością realizowanych transakcji. w tym aspekcie, z punktu widzenia bezpieczeństwa zapewnianego przez pwpw, kluczową funkcję pełni pewność w zakresie emitowanego pieniądza2 (np. zabezpieczenie przed fałszerstwami, nieuprawnionym wprowadzaniem do obrotu etc.) oraz w zakresie procesów identyfikacyjnych (np. zabezpieczenie przed tworzeniem fałszywych tożsamości na potrzeby działalności przestępczej, nieuprawnionym dostępem do systemów teleinformatycznych i kradzieżą danych). stąd zasadnicze znaczenie mają tu zagrożenia związane z przestępczością gospodarczą czy praniem brudnych pieniędzy, a także wspomniane zagrożenia dla stabilności systemu płatniczego, które swoje źródła czerpać mogą z naruszeń bezpieczeństwa identyfikacyjnego i transakcyjnego. mogą to być zagrożenia, które generują istotne szkody dla systemu gospodarczego państwa lub mogą powodować jego zachwianie, co uznawane jest za działania godzące w podstawowe interesy ekonomiczne państwa (grzemski 2010, 150). w literaturze przedmiotu wśród zagrożeń dla bezpieczeństwa ekonomicznego wskazuje się również utratę kontroli przez państwo nad branżami strategicznymi oraz reglamentację i utrudniony dostęp do nowych technologii (kitler 2011, 50). zakres wpływu zapewnianej przez pwpw wiarygodności procesów transakcji i identyfikacji – w ramach podstawowego interesu bezpieczeństwa państwa – przedstawiono na schemacie 2. 2 choć obecnie pwpw sa wytwarza na potrzeby narodowego banku polskiego banknoty złotówkowe, to równocześnie przygotowuje się do produkcji banknotów euro na potrzeby polski w momencie przystąpienia rp do europejskiej unii monetarnej. remigiusz lewandowski100 schemat 2. sfera wpływu bezpieczeństwa identyfikacyjnego i transakcyjnego w ramach podstawowego interesu bezpieczeństwa państwa ź r ó d ł o: opracowanie własne. waga, z jaką państwo traktuje zagadnienia bezpieczeństwo obrotu pieniędzmi oraz wiarygodności dokumentów, znajduje swoje odzwierciedlenie np. w surowych sankcjach przewidzianych w kodeksie karnym. zgodnie z art. 310 § 1 k.k., „kto podrabia albo przerabia polski albo obcy pieniądz […] podlega karze pozbawienia wolności na czas nie krótszy od 5 lat albo karze 25 lat pozbawienia wolności”. ponadto, w myśl art. 270 § 1 k.k., „kto, w celu użycia za autentyczny, podrabia lub przerabia dokument lub takiego dokumentu jako autentycznego używa, podlega grzywnie, karze ograniczenia wolności albo pozbawienia wolności od 3 miesięcy do lat 5”. z kolei, jak wskazują brzęk i goc (2006, 3), „dobre zabezpieczenie przed fałszerstwem wybranych kategorii dokumentów ma istotne znaczenie dla bezpieczeństwa państwa, jego ekonomicznych interesów, dla bezpieczeństwa obrotu ekonomicznego i prawnego oraz dla bezpieczeństwa samych obywateli”. utrata zaś wiarygodności dokumentów bezpośrednio narusza bezpieczeństwo państwa (maciejewski 2007, 9). związek przyczynowo-skutkowy pomiędzy wiary  polska wytwórnia papierów wartościowych sa 101 godnością dokumentów i środków pieniężnych a bezpieczeństwem państwa i podstawowym interesem bezpieczeństwa państwa jest zatem bezsporny. bezpieczeństwo publiczne z kolei wiąże się z „zapewnieniem niezakłóconego funkcjonowania instytucji państwa i jego obywateli” (kitler 2011, 56) i – w węższym ujęciu – dotyczy „kwestii ochrony porządku prawnego, publicznego, ładu wewnętrznego, a także przed wszelkimi działaniami zabronionymi” (kitler 2011, 58). w tym ujęciu, z punktu widzenia bezpieczeństwa zapewnianego przez pwpw dotyczy zatem również zapewniania prawidłowości obrotu gospodarczego, wiarygodności dokumentów oraz ochrony informacji i danych osobowych – poprzez zapewnienie wiarygodności identyfikacji stron transakcji i wiarygodności środków pieniężnych oraz procesów z nimi związanych. wiarygodność ta tworzona jest przez następujące elementy: bezpośredni nadzór państwa nad pwpw, kluczowe kompetencje i know-how posiadane przez spółkę oraz efektywność prowadzonej działalności gospodarczej. elementem dopełniającym ten kwartet wartości konstytuujących wiarygodność procesów transakcji i identyfikacji zapewnianej przez pwpw powinny być odpowiednie regulacje prawne oraz polityka państwa w zakresie bezpieczeństwa identyfikacyjnego i transakcyjnego. osobnym produktem tych wartości jest ponadto wartość dla akcjonariusza (skarbu państwa) płynąca z działalności realizowanej przez pwpw w postaci podatków, dywidendy, wpłaty z zysku i innych transferów pieniężnych do państwa oraz w postaci wartości samego przedsiębiorstwa. wartość ta wynika nie tylko z działalności pwpw na krajowym rynku banknotów i dokumentów, ale również z działalności na krajowych komercyjnych rynkach produktów i usług it oraz na rynkach zagranicznych banknotów, dokumentów i związanych z nimi systemów it. na schemacie 3 przedstawiono relacje pomiędzy wskazanymi wartościami a wiarygodnością procesów transakcji i identyfikacji oraz korzyściami dla akcjonariusza. podkreślenia wymaga fakt, że nie ma zapisów normatywnych regulujących pozycję pwpw w zakresie jej obecności na krajowym rynku banknotów i dokumentów. z drugiej strony należy zwrócić uwagę na istniejące praktyki nadawania wyłączności narodowym wytwórcom banknotów, dokumentów i towarzyszących im systemów it. takie uregulowania obecne są w systemach prawnych innych państw członkowskich ue i pozostają zgodne z przepisami ue, z uwagi na ścisłą korelację pomiędzy przedmiotem działalności a bezpieczeństwem państwa. dotyczy to m.in. hiszpanii, portugalii, austrii czy francji, a w przypadku niemiec zrezygnowano z tego rodzaju zamówień regulacyjnych na rzecz stałej i trwałej praktyki udzielania zamówień narodowym remigiusz lewandowski102 wytwórcom dokumentów (lewandowski 2013, 15–16)3. takie działania mitygują ryzyka bezpieczeństwa identyfikacyjnego i transakcyjnego, tj. ryzyko zakłócenia funkcjonowania państwa oraz strat finansowych wynikających z niedostatecznej ochrony związanej z produkcją dokumentów (oraz systemów it) i środków pieniężnych. równocześnie nadanie wyłączności w odniesieniu do sfery działalności kształtującej wiarygodność procesów transakcji i identyfikacji pozostaje racjonalne z ekonomicznego punktu widzenia (lewandowski 2013, 11–15). w literaturze przedmiotu wskazuje się, że państwa stosują odpowiednie rozwiązania (w tym instrumenty prawne) zapewniające utrzymanie produkcji dokumentów i banknotów w macierzystym kraju, z uwzględnieniem interesu państwowego (girdwoyń 2007, 5). brak takich systemowych rozwiązań w polsce należy ocenić negatywnie, na co zwracają uwagę eksperci zajmujący się przedmiotowym zagadnieniem (np. goc 2009, 7–12). schemat 3. wiarygodność procesów transakcji i identyfikacji oraz wartości dla akcjonariusza pwpw wraz z elementami je konstytuującymi ź r ó d ł o: opracowanie własne. brak takich uregulowań lub stabilnych i trwałych praktyk krajowych generuje ryzyko, które może osłabiać zdolność państwa do zapewnienia prawidłowych oraz bezpiecznych procesów związanych z identyfikacją oraz do realizacji towarzyszących im projektów strategicznych. stanowi ono zatem ry3 warto jest przytoczyć słowa niemieckiego polityka hansa petera uhla, który w 2008 r. de facto w imieniu wszystkich sił politycznych w niemieckim bundestagu postulował, że „produkcja naszych [niemieckich] dokumentów musi pozostać w niemieckich rękach”, http://www.welt.de/wirtschaft/article1767242/staat-steigt-wieder-bei-bundesdruckerei-ein.html.   polska wytwórnia papierów wartościowych sa 103 zyko bezpieczeństwa identyfikacyjnego i transakcyjnego, tj. ryzyko zakłócenia funkcjonowania państwa oraz strat finansowych wynikających z niedostatecznej ochrony, związanej z produkcją dokumentów i środków pieniężnych. na ryzyko to szczególny wpływ mają następujące czynniki: ■ poziom bezpieczeństwa i „szczelności” szczegółowych specyfikacji (a zatem informacji niejawnych) oraz stanów ilościowych dokumentów i środków pieniężnych; ■ poziom bezpieczeństwa danych osobowych, w tym również w zakresie przesyłu danych; ■ poziom bezpieczeństwa związanego z transportem środków pieniężnych, dokumentów lub półproduktów w tym zakresie; ■ możliwości rozwijania własnych technologii i know-how w zakresie produkcji dokumentów oraz środków pieniężnych. w zakresie pierwszej grupy czynników kształtujących ryzyko bezpieczeństwa identyfikacyjnego i transakcyjnego należy zauważyć, że produkcja dokumentów identyfikacyjnych oraz banknotów przez krajowy podmiot będący własnością skarbu państwa pozwala na stosowanie dodatkowych – poza zapisami umowy dostawy – narzędzi sprawowania kontroli nad producentem. państwo ma prerogatywy do prowadzenia stałego nadzoru kapitałowo-właścicielskiego takiego podmiotu, co pozwala na ciągłe monitorowanie sytuacji danej spółki i odpowiednio wczesne reagowanie na ewentualne zagrożenia. dodatkowo krajowe służby bezpieczeństwa (w przypadku pwpw jest to agencja bezpieczeństwa wewnętrznego) dokonują okresowej oceny zdolności firmy do przetwarzania informacji niejawnych, które w szczególności stanowią specyfikacje techniczne dokumentów identyfikacyjnych oraz banknotów. w przypadku powierzenia produkcji podmiotowi zagranicznemu lub krajowemu podmiotowi prywatnemu wyeliminowana zostaje praktycznie możliwość wpływu na stosunki własnościowe producenta. możliwa jest zatem sytuacja, w której dochodzi do przejęcia kapitałowego producenta dokumentów i banknotów przez inny podmiot, cieszący się mniejszym zaufaniem polskich władz. pojawiają się ponadto ryzyka następstw ewentualnej upadłości zagranicznej lub prywatnej firmy, związane m.in. z koniecznością niezwłocznego zapewnienia zastępczego dostawcy oraz bezpieczeństwa danych przechowywanych przez tę firmę. w skrajnym przypadku taka sytuacja może prowadzić do nielegalnego wykorzystania informacji oraz materiałów oryginałowych do produkcji blankietów dokumentów i banknotów bez wiedzy kraju zamawiającego. dokumenty takie mogą być następnie wykorzystywane zarówno przez służby specjalne obremigiusz lewandowski104 cych państw, jak i zorganizowane grupy przestępcze. stąd istotne znaczenie ma kwestia bezpieczeństwa w zakresie każdego etapu procesu produkcyjnego oraz stanów ilościowych półproduktów i produktów generowanych na poszczególnych etapach produkcji. dane osobowe powinny podlegać szczególnej ochronie, ze względu na fakt, że dotyczą wszystkich obywateli, dla których produkowane są dokumenty poddawane procesowi personalizacji. bezpieczeństwo danych osobowych narażone jest na szereg zagrożeń, takich jak udostępnienie danych osobowych osobom nieupoważnionym, przetwarzanie danych osobowych z naruszeniem przepisów, zmiana, utrata, uszkodzenie czy zniszczenie danych osobowych. z tych względów postuluje się stosowanie centralnej personalizacji danych (im mniej ośrodków przechowujących i przetwarzających dane, tym zagrożenia mniejsze) oraz włączenie procesu personalizacji w proces produkcyjny dokumentów (goc 2010, 6–7). dobrym przykładem w odniesieniu do polskich dokumentów może być produkcja i sprzężona z nią personalizacja prawa jazdy, która odbywa się w pwpw. trzecią grupę czynników wpływających na ryzyko bezpieczeństwa identyfikacyjnego i transakcyjnego stanowią kwestie związane z transportem dokumentów (lub blankietów) czy banknotów. w szczególności w przypadku transportu międzynarodowego ryzyko kradzieży lub zagubienia partii dokumentów (blankietów) jest wyższe aniżeli w przypadku transportu krajowego czy wręcz transportu w obrębie jednego miasta. konsekwencje zagubienia lub kradzieży dokumentów (wzorów dokumentów) mogą być bardzo poważne i pociągać za sobą nawet całkowitą zmianę wzoru dokumentu, co zdarzyło się np. w wielkiej brytanii w 2010 r. w odniesieniu do dowodu rejestracyjnego. zapewnienie produkcji, w tym i personalizacji dokumentów, w jednym miejscu w znaczny sposób pozwala ograniczyć omawianą grupę ryzyka. czwarta grupa czynników wiąże się z odcięciem danego państwa od nowoczesnych technologii i know-how dotyczących produkcji dokumentów i banknotów. lokowanie zamówień na dokumenty i banknoty w podmiotach zagranicznych lub niekontrolowanych przez państwo krajowych podmiotach prywatnych może prowadzić do uzależnienia technologicznego państwa od zagranicy i utraty suwerenności gospodarczej. jak wcześniej wskazano, utrata przez państwo kontroli nad strategicznymi (kluczowymi dla gospodarki) sektorami generuje ryzyko ekonomiczne. pwpw jest podmiotem, który zapewnia innowacje i rozwój technologiczny w obszarze bezpieczeństwa transakcji i identyfikacji. wyrazem tego są nie tylko produkowane na światowym poziomie banknoty oraz dokumenty i towarzyszące im systemy it, ale przede wszystkim własne roz  polska wytwórnia papierów wartościowych sa 105 wiązania technologiczne, w tym również patenty. przykładem może być choćby papier do grawerowania laserowego leap, technologia kolorowej personalizacji kart poliwęglanowych pcp, karta z personalizowanym elementem niepalnym extreme id, personalizowany element recto/verso – verso id czy rozwiązanie tle (transparent laser engraving). wszystkie wymienione powyżej czynniki, kształtujące ryzyko bezpieczeństwa identyfikacyjnego i transakcyjnego, doprowadzić mogą do naruszenia funkcjonowania państwa oraz do strat finansowych poprzez wykorzystanie zdobytych w nieuprawniony sposób dokumentów (blankietów) czy środków pieniężnych lub ich falsyfikatów do działalności przestępczej, prowadzącej do zakłóceń w obrocie gospodarczym i prawnym. przestępczość ma bowiem swoje ekonomiczne konsekwencje zarówno w stratach finansowych poszkodowanych podmiotów, jak i na poziomie pkb państw (lewandowski 2004, 624). realizowany przez banki centralne nadzór nad systemem płatniczym w szerokim ujęciu obejmuje także instrumenty płatnicze i infrastrukturę techniczną (iwańczuk 2011, 51), a zatem również bezpieczny system zapewniający dostawy do banków centralnych odpowiednio zabezpieczonych (przed fałszowaniem) środków pieniężnych w ich przedemisyjnej fazie życia. dotyczy to w szczególności banknotów, których udział w wartości gotówki w obiegu wynosi 97% (nbp 2008, 14). naruszenie tego elementu może doprowadzić do osłabienia stabilności finansowej, a w konsekwencji mieć wpływ na rynki finansowe. wskazane ryzyka wpływają na podstawowy interes bezpieczeństwa państwa. bodziony (2012, 149) zwraca natomiast uwagę, że zagrożenia dla systemu finansowego mają kluczowe znaczenie dla bezpieczeństwa ekonomicznego państwa. na schemacie 4 przedstawiono układ czynników kształtujących omawiane ryzyka. podkreślenia wymaga jednak, że wskazane elementy nie wyczerpują wszystkich czynników oddziałujących na podstawowy interes bezpieczeństwa państwa. odnoszą się one wyłącznie do omówionych w niniejszym artykule zagadnień związanych z bezpieczeństwem identyfikacyjnym i transakcyjnym. remigiusz lewandowski106 schemat 4. bezpieczeństwo identyfikacyjne i transakcyjne na tle bezpieczeństwa państwa ź r ó d ł o: opracowanie własne. warto również podkreślić, że model działania pwpw wpisuje się w postulowane w literaturze przedmiotu (ramamurti 1987) funkcje przedsiębiorstw należących do państwa (soe – state owned enterprise). do najistotniejszych z tego rodzaju funkcji należy uznać:   polska wytwórnia papierów wartościowych sa 107 ■ realizację kluczowych interesów państwa, ■ wzbogacenie narodowego potencjału technologicznego, ■ kreowanie standardów płacowych, ■ pełnienie funkcji agenta fiskalnego, ■ kreację zatrudnienia, ■ wsparcie dla mniej rozwiniętych regionów. realizacja kluczowych interesów państwa oraz wzbogacanie potencjału technologicznego zostały – w odniesieniu do działalności prowadzonej przez pwpw – przedstawione w niniejszym artykule. kreowanie standardów płacowych, zwłaszcza w zakresie rzetelności, zgodności z prawem i szeroko rozumianej dobrej relacji pracownik – pracodawca także jest domeną pwpw. funkcja agenta fiskalnego dotyczy przede wszystkim wpływów skarbu państwa z tytułu rzetelnie płaconych podatków oraz wpływ dywidendowych oraz unikania agresywnych strategii optymalizacji podatkowej, w tym niekorzystania z rajów podatkowych. warto podkreślić, że tylko za lata 2007–2012 wpływy skarbu państwa z pwpw z tytułu dywidendy, podatku cit, vat i wpłaty z zysku wyniosły ponad 1,3 mld pln. funkcje kreacji zatrudnienia oraz wsparcia dla mniej rozwiniętych regionów są w znacznym stopniu pochodną skali działania przedsiębiorstwa. decydentem w zakresie skali działania w kraju jest przede wszystkim administracja publiczna jako dominujący klient pwpw. skala działania spółki jest bowiem dostosowana do potrzeb państwa, choć równocześnie zasoby firmy są wykorzystywane także do realizacji zamówień komercyjnych i zagranicznych, w szczególności dla tych państw, które nie posiadają własnych odpowiedników pwpw. w ten sposób wykorzystywane są ewentualne wolne moce produkcyjne i realizowane dodatkowe przychody, a produkty i usługi firmy kierowane niemal na wszystkie kontynenty. charakter prowadzonej przez pwpw działalności w dużym stopniu determinuje jej lokalizację. działalność niewymagająca centralnej lokalizacji jest jednak prowadzona w regionie atrakcyjnym pod względem kosztów pracy, a równocześnie potrzebującym inwestycji. przykładem jest zajmująca się autoryzacją i rozliczaniem płatności kartowych na terminalach pos spółka centrum rozliczeń elektronicznych polskie epłatności sa, której dominującym właścicielem jest pwpw i której siedziba zlokalizowana jest w rzeszowie. skala działalności pwpw na rynku krajowym oraz na rynkach zagranicznych, jej potencjał technologiczny, a także znaczenie dla gospodarki i bezpieczeństwa państwa wydają się sytuować ten podmiot w kategoriach narodowych czempionów. remigiusz lewandowski108  wnioski polska wytwórnia papierów wartościowych pełni istotną funkcję w systemie bezpieczeństwa narodowego, w tym szczególnie w obszarze bezpieczeństwa publicznego i ekonomicznego. równocześnie jednak państwo, decydując się na udział tego rodzaju podmiotów w swoim portfelu, powinno wytworzyć odpowiednie środowisko i uwarunkowania formalno-prawne faktycznie dające impuls do dalszego wzrostu i optymalnego wykorzystania posiadanych przez nie zasobów i minimalizujące ryzyko identyfikacyjne oraz transakcyjne przez zapewnienie ciągłości i stabilności produkcji banknotów oraz dokumentów i towarzyszących im systemów it w pwpw. są to działania niezbędne dla zapewnienia podstawowego interesu bezpieczeństwa państwa w wymiarze ekonomicznym, prawnym i społecznym, albowiem zapewniana przez pwpw wiarygodność procesów transakcji i identyfikacji jest jednym z ważniejszych warunków przedmiotowego bezpieczeństwa. polskie i globalne doświadczenia wskazują, że deregulacja rynków pełniących kluczowe funkcje w systemie bezpieczeństwa narodowego przynosi fatalne konsekwencje4. naturalnym rozwiązaniem jest regulacja państwa i w określonych, uzasadnionych przypadkach zapewnienie narodowym wytwórcom, stanowiącym składową bezpieczeństwa narodowego, stabilności i trwałości działania, np. w formie udzielenia wyłączności na działalność w ściśle zdefiniowanym obszarze banknotów, dokumentów i związanych z nimi systemów it. równocześnie jednak otwiera się pole działania dla państwowego regulatora, dbającego o nienadużywanie przez (naturalnego) monopolistę swojej pozycji. wolny rynek nie stanowi bowiem panaceum na wszystkie problemy współczesnej gospodarki, tym bardziej, jeśli dotyka to sfery bezpieczeństwa. w uzasadnionych przypadkach konieczne są od niego odstępstwa. jak wskazuje jakimowicz (2010, 258–259) „badania […] dowodzą, że regulacja rynków jest jednym z najważniejszych wyzwań, jakie stoją przed współczesną ekonomią”. 4 np. w konsekwencji działań liberalizujących rynek energii elektrycznej w kalifornii i towarzyszących im przestępstw doszło do największego kryzysu energetycznego w usa, którego wymiar finansowy można mierzyć w stratach poniesionych przez stan kalifornia w wysokości 6,3 mld usd strat, patrz: kwinta 2011.   polska wytwórnia papierów wartościowych sa 109  literatura bodziony k. (2012), rola służb specjalnych w systemie instytucji odpowiedzialnych za bezpieczeństwo ekonomiczne państwa, „przegląd bezpieczeństwa wewnętrznego”, 7. brzęk w., goc m. (2006), znaczenie uregulowań prawnych w aspekcie produkcji dokumentów, „człowiek i dokumenty”, 3. girdwoyń p. (2007), dokumenty publiczne w uregulowaniach prawnych wybranych państw – austria, „człowiek i dokumenty”, 6. goc m. (2009), o potrzebie uregulowań prawno-organizacyjnych problematyki dokumentów publicznych, „człowiek i dokumenty”, 13. goc m. (2010), skuteczność zabezpieczeń polskich dowodów rejestracyjnych, „człowiek i dokumenty”, 17. grzemski j., krześ a. (2010), analiza pojęcia “przestępstwa godzące w podstawy ekonomiczne państwa” w ustawie z dnia 24 maja 2002 r. o agencji bezpieczeństwa wewnętrznego oraz agencji wywiadu, „przegląd bezpieczeństwa wewnętrznego”, 2. http://www.welt.de/wirtschaft/article1767242/staat-steigt-wieder-bei-bundesdruckerei-ein.html (dostęp: 05.06.2013). iwańczuk a. 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(2009), w poszukiwaniu definicji bezpieczeństwa wewnętrznego, „przegląd bezpieczeństwa wewnętrznego”, 1. ustawa z dnia 12 października 2012 r. o zmianie ustawy – prawo zamówień publicznych oraz ustawy o koncesji na roboty budowlane lub usługi, dz.u. z 2012 r., poz. 1271. ustawa z dnia 16 lipca 2004 r. prawo telekomunikacyjne, dz.u. z 2004 r. nr 171, poz. 1800 z późn. zm. ustawa z dnia 16 lutego 2007 r. o zapasach ropy naftowej, produktów naftowych i gazu ziemnego oraz zasadach postepowania w sytuacjach zagrożenia bezpieczeństwa paliwowego państwa i zakłóceń na rynku naftowym, dz.u. z 2007 r. nr 52, poz. 343 z późn. zm. ustawa z dnia 23 sierpnia 2001 r. o organizowaniu zadań na rzecz obronności państwa realizowanych przez przedsiębiorców, dz.u. z 2001 r. nr 122, poz. 1320 z późn. zm. ustawa z dnia 26 kwietnia 2007 r. o zarządzaniu kryzysowym, dz.u. z 2007 r. nr 89, poz. 590 z późn. zm. ustawa z dnia 29 stycznia 2004 r. prawo zamówień publicznych, dz.u. z 2004 r. nr 19, poz. 177 z późn. zm. date of submission: february 2, 2020; date of acceptance: march 26, 2020. * contact information: kaur_mandeep13@ymail.com, i.k. gujral punjab technical university, kapurthala-144603, punjab, india, phone: +91-998-877-1740; orcid id: https://orcid.org/0000-0002-4336-4141. ** contact information: kapilfutures@gmail.com, i.k. gujral punjab technical university, kapurthala-144603, punjab, india, phone: +91-947-809-8074; orcid id: https://orcid.org/0000-0003-3817-1772. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 kaur, m., & gupta, k. (2019). estimating hedging effectiveness using variance reduction and riskreturn approaches: evidence from national stock exchange of india. copernican journal of finance & accounting, 8(4), 149–169. http://dx.doi.org/10.12775/cjfa.2019.022 mandeep kaur* i.k. gujral punjab technical university kapil gupta** i.k. gujral punjab technical university estimating hedging effectiveness using variance reduction and risk-return approaches: evidence from national stock exchange of india keywords: optimal hedge ratio, hedging effectiveness, garch, ols, equity futures market. j e l classification: c1, c5, g11, g17. abstract: the present study examines hedging effectiveness of futures contracts in india by using variance reduction approach and risk-return approach by applying eight econometric models. it is observed that ols hedge ratio generates highest hedging effectiveness using variance reduction approach, whereas naïve hedge ratio generates highest hedging effectiveness using risk-return approach. overall, it is observed that time-invariant hedging model generates superior hedging effectiveness as compared to time-variant hedging model. mandeep kaur, kapil gupta150  introduction futures contracts have been widely used by investors for managing the price risk involved in underlying assets, commonly known as hedging. as the spot and futures market observes co-movement and long term equilibrium relationship (tse & chan 2010), this allows the hedger to offset price f luctuations by taking opposite position in both the spot and futures market. however, in reality, the presence of lead-lag relationship during short-run gives rise to basis risk (floros & vougas 2006). due to basis risk, the number of futures contracts required to hedge a given spot position departs from unity and therefore requires an optimal hedge ratio to be estimated in order to achieve superior hedging effectiveness. an analysis of hedging literature suggests three different hedging theories i.e. conventional hedging theory, working’s hedging theory (woking, 1953) and portfolio hedging theory. portfolio theory approach, proposed by johnson (1960) and stein (1961), extended and quantified by ederington (1979) is by far the most widely used approach. an important contribution of the portfolio approach is the concept of the minimum-variance hedge ratio (mvhr), i.e., the hedge ratio that minimizes the risk of the hedged position. the minimum-variance hedge ratio / ols hedge ratio has been popularly used due to its simplicity to compute and understand. however, it suffers from two limitations. firstly, it ignores the time-varying nature of financial time series and secondly, it computes constant hedge ratio. therefore, in order to address this issue, various econometric models like garch, egarch, bgarch, etc, have been proposed in literature which helps in estimating time-varying hedge ratios. henceforth, voluminous literature (park & switzer, 1995; lypny & powalla, 1998; yang & allen, 2004; floros & vougas, 2006; bhaduri & durai, 2008; lee & yoder, 2007; yang & lai, 2009 and hou & li, 2013) has appreciated time-varying hedge ratios over constant hedge ratios. numerous studies claim superior performance of time-varying hedge ratios over constant hedge ratios. however, despite a significant advancement in econometrics, a strand of literature observes that constant hedge ratios still dominate time-varying hedge ratios and therefore, argues that econometric sophistication does not help to improve hedging effectiveness (maharaj, moosa, dark & silvapulle, 2008; gupta & singh, 2009; wang et al., 2015). especially, the superiority of ederington’s ols hedge ratio over time-varying hedge ratio is estimating hedging effectiveness using variance reduction… 151 prominent in the literature (lien, tse & tsui, 2002; lien, 2005; maharaj et al., 2008; awang, azizan, ibrahim & said, 2014). furthermore, ederington (1979) suggests a measure of hedging effectiveness, based upon portfolio theory approach to hedging proposed by johnson (1960) and stein (1961). according to this approach, hedging effectiveness is measured as proportionate reduction in standard deviation of returns from hedged portfolio. ederington’s measure of hedging effectiveness has been widely appreciated in the literature (see park & switzer, 1995; holmes, 1995; floros & vougas, 2006; bhargava & malhotra, 2007; pradhan, 2011; hou & li, 2013) mainly due to its simplicity to compute and understand. furthermore, despite huge popularity of ederington’s measure of hedging effectiveness, a strand of literature criticizes it on the ground that it focuses solely on variance reduction and ignores any changes in portfolio returns. in other words, hedging is viewed as comprising of minimization of risk only, whereas, on the contrary, brailsford, corrigan and heaney (2001) suggests that hedging should comprise of both risk reduction as well as return maximization. therefore, in order to overcome this limitation, few models have been proposed in the literature (see, howard & d’antonio, 1984; lindahl, 1991, etc.). these models take into consideration changes in expected return on hedged portfolio in addition to risk minimization. for, instance, howard and d’antonio (1984) suggested a risk-return measure of hedging effectiveness which is further elaborated. apart from the above discussed issues on optimal hedge ratio and hedging effectiveness, it is observed that futures trading is not only popular in developed markets of the world, but is equally popular in emerging markets like india. it is quite evident from the fact that indian equity futures market consistently ranks amongst the top five markets of the world for the last decade. however, to the best of our knowledge, in indian context only few attempts have been made to examine hedging effectiveness (bhaduri & durai, 2008; gupta & singh, 2009; pradhan, 2011; haq & rao, 2013; ghosh, dey, moulvi, jain, sinha & rachuri, 2013; malhotra, 2015; kaur & gupta, 2018 and kumar & bose, 2019). these studies have primarily focused on examining a superior methodology for determining optimal hedge ratio, using variance reduction framework as a measure for examining hedging effectiveness. to the best of researcher’s knowledge, only ghosh et al. (2013) attempted to examine hedging effectiveness in a risk-return framework in commodity futures market. therefore, in order to plug the literature gap, present study is an attempt to examine mandeep kaur, kapil gupta152 the hedging effectiveness in a risk-return framework, in addition to estimating optimal hedge ratios and hedging effectiveness based upon measure proposed by ederington (1979). also, an attempt has been made to study the impact of financial crisis on optimal hedge ratio and hedging effectiveness. the research methodology and the course of the research process as far as present study is concerned, the sample size of the study comprises of three benchmark indices of nse i.e. nifty, niftyit and banknifty which has been selected on the basis of their consistent trading history and high liquidity. the data has been collected for near month for all three indices comprising sample size of study from official website of the national stock exchange of india (nse) i.e. www.nseindia.com. the period of the study is from inception date of respective indices till march 31, 2016 as presented below: table 1. sample size and sample period of study symbol period of study number of observations total pre-crisis post-crisis nifty50 june 12, 2000 – march 31, 2016 1898 2042 3940 niftyit august 29, 2003 – march 31, 2016 1092 2042 3134 banknifty june 13, 2005 – march 31, 2016 638 2042 2680 s o u r c e : compiled by author on the basis of data downloaded from official website of nse. unit-root test the estimation of hedge ratio is a statistical process, therefore, the very first step in any econometric investigation of a time series is to examine whether the time series under examination contains unit roots. hence, stationarity of three indices understudy has been tested by using the augmented dickey fuller (adf) test and it is observed that the prices (both futures prices and cash prices) are non-stationery, whereas, natural log of first difference of prices estimating hedging effectiveness using variance reduction… 153 (i.e. ln(pt / pt-1)) is stationery 1. thus, returns of futures contracts and cash market are considered for estimating hedge ratio. estimation of optimal hedge r atio as both cash and futures markets are linked through arbitrage process (stoll & whaley, 1987). therefore, appreciating the stationary and stable long-run relationship between two markets, eight econometrical procedures have been undertaken. these procedures address various economic as well as statistical issues involved in estimating an optimal hedge ratio. the hedge ratio which reduces the portfolio variance to minimum level would be considered as an efficient hedge ratio. naïve hedge r atio traditionally, cash and futures market was presumed to be perfectly correlated and therefore, equal number of futures contracts was required to obtain a perfect hedge. hence, it suggests an optimal hedge ratio of one. since, this methodology ignored basis risk, which is considered vital to the estimation of optimal hedge ratio, therefore, this theory failed to mark its presence in the literature. ederington’s ols hedge r atio ederington (1979) suggested minimum variance hedge ratio, which presumes strong and stable long run relationship between two markets. equation (1) explains the procedure suggested by ederington (1979), which works efficiently when futures market returns are unbiased predictor of cash market returns. in equation (1), rs,t is cash market returns, rf,t is futures market returns, αo is intercept term and εt is error term as detailed below: rs,t = α0 + β1rf,t + εt. (1) 1 the estimated results are not reported in the paper, but, can be provided on demand. mandeep kaur, kapil gupta154 arma-ols hedge r atio equation (1) though may be economically justifiable but the estimated value of β1 won’t be reliable, if series under investigation are autocorrelated. hence, equation (1) has been modified to equation (2) (to include autoregressive terms of cash market returns), in equation (2), rs,t is cash market returns, rf,t is(are) futures market returns, rs,t-i is autoregressive term(s) whose order varies between i to p determined as per schwartz information criteria (sic), αo is intercept term and εt is error term. )2.4(..................................................r ,1 1 ,0ts, ttf p i itsi rr      garch hedge ratio in equation (4.1 and 4.2), if the variance of error term is constant, the hedge ratio estimated through ordinary least square (ols) method will be valid, however, vast amount of academic literature2 has evidenced that stock returns are heteroscedastic in nature. therefore, autoregressive conditional heteroscedasticity model (arch) ((engle (1982)) generalized by bollerslev (1986) called garch (p,q) in which conditional variance depends not only upon the squared residuals of the mean equation but also on its own past values. the garch (p, q) model is given by equation (4.3) )3.4.(.................................................. h 1 2 1 t      p j tjtjit p i i h  where, ht is the conditional volatility, αi is the coefficient of arch term with order i to p and βj is the coefficient of garch term with order j to q. the conditional volatility as defined in equation (4.3) is determined by three effects namely the intercept term (ω), the arch term (αiε2t-i) and the forecasted volatility from the previous period called garch component (βjhtj). egarch hedge ratio exponential garch (egarch) model (nelson (1991)) is based upon the logarithmic expression of conditional volatility in cash and futures market returns. therefore, if the stock returns are asymmetric and the interaction between old and new information observes leverage effect, egarch model (i.e. equation (4.4)) may help to estimate an improved hedge ratio as compared to that estimated through garch process in equation (4.3) .(4.4).................................................. hγ h ε γ h ε γ γ h 1-t 4 1t 1t 2 3 1t 1t 2 21t      tarch hedge ratio 2 engle (1982), bollerslev (1986), park and switzer (1995), floros and vougas (2004). (2) garch hedge r atio in equation (1 and 2), if the variance of error term is constant, the hedge ratio estimated through ordinary least square (ols) method will be valid, however, vast amount of academic literature2 has evidenced that stock returns are heteroscedastic in nature. therefore, autoregressive conditional heteroscedasticity model (arch) ((engle (1982)) generalized by bollerslev (1986) called garch (p,q) in which conditional variance depends not only upon the squared residuals of the mean equation but also on its own past values. the garch (p, q) model is given by equation (3) )2.4(..................................................r ,1 1 ,0ts, ttf p i itsi rr      garch hedge ratio in equation (4.1 and 4.2), if the variance of error term is constant, the hedge ratio estimated through ordinary least square (ols) method will be valid, however, vast amount of academic literature2 has evidenced that stock returns are heteroscedastic in nature. therefore, autoregressive conditional heteroscedasticity model (arch) ((engle (1982)) generalized by bollerslev (1986) called garch (p,q) in which conditional variance depends not only upon the squared residuals of the mean equation but also on its own past values. the garch (p, q) model is given by equation (4.3) )3.4.(.................................................. h 1 2 1 t      p j tjtjit p i i h  where, ht is the conditional volatility, αi is the coefficient of arch term with order i to p and βj is the coefficient of garch term with order j to q. the conditional volatility as defined in equation (4.3) is determined by three effects namely the intercept term (ω), the arch term (αiε2t-i) and the forecasted volatility from the previous period called garch component (βjhtj). egarch hedge ratio exponential garch (egarch) model (nelson (1991)) is based upon the logarithmic expression of conditional volatility in cash and futures market returns. therefore, if the stock returns are asymmetric and the interaction between old and new information observes leverage effect, egarch model (i.e. equation (4.4)) may help to estimate an improved hedge ratio as compared to that estimated through garch process in equation (4.3) .(4.4).................................................. hγ h ε γ h ε γ γ h 1-t 4 1t 1t 2 3 1t 1t 2 21t      tarch hedge ratio 2 engle (1982), bollerslev (1986), park and switzer (1995), floros and vougas (2004). (3) where, ht is the conditional volatility, αi is the coefficient of arch term with order i to p and βj is the coefficient of garch term with order j to q. the conditional volatility as defined in equation (3) is determined by three effects namely the intercept term (ω), the arch term (αiε 2 t-i) and the forecasted volatility from the previous period called garch component (βjht-j). 2 engle (1982), bollerslev (1986), park and switzer (1995), floros and vougas (2004). estimating hedging effectiveness using variance reduction… 155 egarch hedge r atio exponential garch (egarch) model (nelson (1991)) is based upon the logarithmic expression of conditional volatility in cash and futures market returns. therefore, if the stock returns are asymmetric and the interaction between old and new information observes leverage effect, egarch model (i.e. equation (4)) may help to estimate an improved hedge ratio as compared to that estimated through garch process in equation (3) )2.4(..................................................r ,1 1 ,0ts, ttf p i itsi rr      garch hedge ratio in equation (4.1 and 4.2), if the variance of error term is constant, the hedge ratio estimated through ordinary least square (ols) method will be valid, however, vast amount of academic literature2 has evidenced that stock returns are heteroscedastic in nature. therefore, autoregressive conditional heteroscedasticity model (arch) ((engle (1982)) generalized by bollerslev (1986) called garch (p,q) in which conditional variance depends not only upon the squared residuals of the mean equation but also on its own past values. the garch (p, q) model is given by equation (4.3) )3.4.(.................................................. h 1 2 1 t      p j tjtjit p i i h  where, ht is the conditional volatility, αi is the coefficient of arch term with order i to p and βj is the coefficient of garch term with order j to q. the conditional volatility as defined in equation (4.3) is determined by three effects namely the intercept term (ω), the arch term (αiε2t-i) and the forecasted volatility from the previous period called garch component (βjhtj). egarch hedge ratio exponential garch (egarch) model (nelson (1991)) is based upon the logarithmic expression of conditional volatility in cash and futures market returns. therefore, if the stock returns are asymmetric and the interaction between old and new information observes leverage effect, egarch model (i.e. equation (4.4)) may help to estimate an improved hedge ratio as compared to that estimated through garch process in equation (4.3) .(4.4).................................................. hγ h ε γ h ε γ γ h 1-t 4 1t 1t 2 3 1t 1t 2 21t      tarch hedge ratio 2 engle (1982), bollerslev (1986), park and switzer (1995), floros and vougas (2004). (4) tarch hedge r atio equation (4) reports the leverage relationship between old and new information. but in the speculative markets, besides the leverage effect, it has been observed that traders react heterogeneously to positive and negative news. therefore, it would be more appropriate to segregate the impact of both positive and negative news. this can be done by specifying the variance equation in tarch (threshold autoregressive conditional heteroscedasticity) framework (equation (5), where, equation (4) is modified to include ε2t-iξt-i, which is a dummy for negative news having value 1 if there is negative news and 0 otherwise. equation (4.4) reports the leverage relationship between old and new information. but in the speculative markets, besides the leverage effect, it has been observed that traders react heterogeneously to positive and negative news. therefore, it would be more appropriate to segregate the impact of both positive and negative news. this can be done by specifying the variance equation in tarch (threshold autoregressive conditional heteroscedasticity) framework (equation (4.5), where, equation (4.4) is modified to include ε2t-iξt-i, which is a dummy for negative news having value 1 if there is negative news and 0 otherwise. )5.4(........................................ h 1 2 1 1 2 1 t        p j tjtjitt p i kit p i i h  where, (a) ξt-i =1, if εt-i < 0 (b) ξt-i =0, if εt-i > 0 var and vecm hedge ratio as volatility spillover is bidirectional and continuous in both the markets, therefore, regressing only the cash market returns on lagged returns of both futures and cash market, may be biased. therefore, either vector autoregression model (var) (when both markets observe causal relationship) or vector error correction methodology (vecm) (when both markets are cointegrated) may estimate robust hedge ratio. var model simultaneously regress the lagged returns of both variables, whereas, vecm in addition to lagged returns also considers the error correction term (if both series are cointegrated). hence both methodologies estimate the optimal hedge ratio by considering theoretical relationship between two markets (i.e. lead-lag in short-run and cointegration in long-run), which confirms the volatility spillover between two markets through arbitrage process. equations (4.6) and (4.7) specify the estimation process of var methodology and equations (4.8) and (4.9) stimulate the estimation procedure of vecm. the hedge ratio on the basis of var and vecm will be computed as σs,f /σ2f where σs,f =cov(εft,εst) and σ2f = var(εft). )6.4.......(.............................. r 1 ,, 1 ts,      n j stjtfjits m i i rr  (5) where, (a) ξt-i =1, if εt-i < 0 (b) ξt-i =0, if εt-i > 0 mandeep kaur, kapil gupta156 var and vecm hedge r atio as volatility spillover is bidirectional and continuous in both the markets, therefore, regressing only the cash market returns on lagged returns of both futures and cash market, may be biased. therefore, either vector autoregression model (var) (when both markets observe causal relationship) or vector error correction methodology (vecm) (when both markets are cointegrated) may estimate robust hedge ratio. var model simultaneously regress the lagged returns of both variables, whereas, vecm in addition to lagged returns also considers the error correction term (if both series are cointegrated). hence both methodologies estimate the optimal hedge ratio by considering theoretical relationship between two markets (i.e. lead-lag in short-run and cointegration in long-run), which confirms the volatility spillover between two markets through arbitrage process. equations (6) and (7) specify the estimation process of var methodology and equations (8) and (9) stimulate the estimation procedure of vecm. the hedge ratio on the basis of var and vecm will be computed as σs,f / σ 2f where σs,f =cov(εft,εst) and σ 2f = var(εft). equation (4.4) reports the leverage relationship between old and new information. but in the speculative markets, besides the leverage effect, it has been observed that traders react heterogeneously to positive and negative news. therefore, it would be more appropriate to segregate the impact of both positive and negative news. this can be done by specifying the variance equation in tarch (threshold autoregressive conditional heteroscedasticity) framework (equation (4.5), where, equation (4.4) is modified to include ε2t-iξt-i, which is a dummy for negative news having value 1 if there is negative news and 0 otherwise. )5.4(........................................ h 1 2 1 1 2 1 t        p j tjtjitt p i kit p i i h  where, (a) ξt-i =1, if εt-i < 0 (b) ξt-i =0, if εt-i > 0 var and vecm hedge ratio as volatility spillover is bidirectional and continuous in both the markets, therefore, regressing only the cash market returns on lagged returns of both futures and cash market, may be biased. therefore, either vector autoregression model (var) (when both markets observe causal relationship) or vector error correction methodology (vecm) (when both markets are cointegrated) may estimate robust hedge ratio. var model simultaneously regress the lagged returns of both variables, whereas, vecm in addition to lagged returns also considers the error correction term (if both series are cointegrated). hence both methodologies estimate the optimal hedge ratio by considering theoretical relationship between two markets (i.e. lead-lag in short-run and cointegration in long-run), which confirms the volatility spillover between two markets through arbitrage process. equations (4.6) and (4.7) specify the estimation process of var methodology and equations (4.8) and (4.9) stimulate the estimation procedure of vecm. the hedge ratio on the basis of var and vecm will be computed as σs,f /σ2f where σs,f =cov(εft,εst) and σ2f = var(εft). )6.4.......(.............................. r 1 ,, 1 ts,      n j stjtfjits m i i rr  (6) )7.4........(.............................. r 1 1,1, 1 tf,      p l fttskts o k k rr  )8.4.......(..........)( r 1 1 ,, 1 0tf,         q j m k ftktsfjtff p i ititiff rrsf  )9.4.....(....................)( r 1 1 ,, 1 0ts,         n l o h sthtfsltss p i ititiss rrsf  therefore, in the present study, optimal hedge ratio is estimated through naïve, ols, arma-ols, garch, egarch, tarch, var and vecm procedures, which may be constant or time-varying, depending upon the property of the series understudy. estimation of hedging effectiveness after estimating the optimal hedge ratio through above mentioned statistical procedures, the hedging effectiveness of all hedge ratios shall be computed on the basis of two approaches i.e variance reduction approach (ederington (1979)) and risk-return approach (howard and d’antonio (1984)). the hedge ratio that gives the highest hedging effectiveness in each of the two methods would be proposed as efficient hedge ratio. variance-reduction framework as proposed by ederington (1979), hedging effectiveness will be measured as percentage decline in portfolio variance as shown in equation (4.10), where var (u) and var (h) represents variance of un-hedged and hedged portfolios respectively. σs and σf are standard deviation of the cash and futures returns respectively, σs,f represents the covariability of the cash and futures returns and h* is the optimal hedge ratio. hedge effectiveness = var �u� var (h) var (u) ............................(4.10) var (u) = σs2................................................................(4.11) var (h) = σs2 + h*2σf 2 – 2h*σs,f............................................(4.12) (7) )7.4........(.............................. r 1 1,1, 1 tf,      p l fttskts o k k rr  )8.4.......(..........)( r 1 1 ,, 1 0tf,         q j m k ftktsfjtff p i ititiff rrsf  )9.4.....(....................)( r 1 1 ,, 1 0ts,         n l o h sthtfsltss p i ititiss rrsf  therefore, in the present study, optimal hedge ratio is estimated through naïve, ols, arma-ols, garch, egarch, tarch, var and vecm procedures, which may be constant or time-varying, depending upon the property of the series understudy. estimation of hedging effectiveness after estimating the optimal hedge ratio through above mentioned statistical procedures, the hedging effectiveness of all hedge ratios shall be computed on the basis of two approaches i.e variance reduction approach (ederington (1979)) and risk-return approach (howard and d’antonio (1984)). the hedge ratio that gives the highest hedging effectiveness in each of the two methods would be proposed as efficient hedge ratio. variance-reduction framework as proposed by ederington (1979), hedging effectiveness will be measured as percentage decline in portfolio variance as shown in equation (4.10), where var (u) and var (h) represents variance of un-hedged and hedged portfolios respectively. σs and σf are standard deviation of the cash and futures returns respectively, σs,f represents the covariability of the cash and futures returns and h* is the optimal hedge ratio. hedge effectiveness = var �u� var (h) var (u) ............................(4.10) var (u) = σs2................................................................(4.11) var (h) = σs2 + h*2σf 2 – 2h*σs,f............................................(4.12) (8) )7.4........(.............................. r 1 1,1, 1 tf,      p l fttskts o k k rr  )8.4.......(..........)( r 1 1 ,, 1 0tf,         q j m k ftktsfjtff p i ititiff rrsf  )9.4.....(....................)( r 1 1 ,, 1 0ts,         n l o h sthtfsltss p i ititiss rrsf  therefore, in the present study, optimal hedge ratio is estimated through naïve, ols, arma-ols, garch, egarch, tarch, var and vecm procedures, which may be constant or time-varying, depending upon the property of the series understudy. estimation of hedging effectiveness after estimating the optimal hedge ratio through above mentioned statistical procedures, the hedging effectiveness of all hedge ratios shall be computed on the basis of two approaches i.e variance reduction approach (ederington (1979)) and risk-return approach (howard and d’antonio (1984)). the hedge ratio that gives the highest hedging effectiveness in each of the two methods would be proposed as efficient hedge ratio. variance-reduction framework as proposed by ederington (1979), hedging effectiveness will be measured as percentage decline in portfolio variance as shown in equation (4.10), where var (u) and var (h) represents variance of un-hedged and hedged portfolios respectively. σs and σf are standard deviation of the cash and futures returns respectively, σs,f represents the covariability of the cash and futures returns and h* is the optimal hedge ratio. hedge effectiveness = var �u� var (h) var (u) ............................(4.10) var (u) = σs2................................................................(4.11) var (h) = σs2 + h*2σf 2 – 2h*σs,f............................................(4.12) (9) therefore, in the present study, optimal hedge ratio is estimated through naïve, ols, arma-ols, garch, egarch, tarch, var and vecm procedures, estimating hedging effectiveness using variance reduction… 157 which may be constant or time-varying, depending upon the property of the series understudy. estimation of hedging effectiveness after estimating the optimal hedge ratio through above mentioned statistical procedures, the hedging effectiveness of all hedge ratios shall be computed on the basis of two approaches i.e variance reduction approach (ederington, 1979) and risk-return approach (howard & d’antonio, 1984). the hedge ratio that gives the highest hedging effectiveness in each of the two methods would be proposed as efficient hedge ratio. variance-reduction framework as proposed by ederington (1979), hedging effectiveness will be measured as percentage decline in portfolio variance as shown in equation (10), where var (u) and var (h) represents variance of un-hedged and hedged portfolios respectively. σs and σf are standard deviation of the cash and futures returns respectively, σs,f represents the covariability of the cash and futures returns and h* is the optimal hedge ratio. hedge effectiveness )7.4........(.............................. r 1 1,1, 1 tf,      p l fttskts o k k rr  )8.4.......(..........)( r 1 1 ,, 1 0tf,         q j m k ftktsfjtff p i ititiff rrsf  )9.4.....(....................)( r 1 1 ,, 1 0ts,         n l o h sthtfsltss p i ititiss rrsf  therefore, in the present study, optimal hedge ratio is estimated through naïve, ols, arma-ols, garch, egarch, tarch, var and vecm procedures, which may be constant or time-varying, depending upon the property of the series understudy. estimation of hedging effectiveness after estimating the optimal hedge ratio through above mentioned statistical procedures, the hedging effectiveness of all hedge ratios shall be computed on the basis of two approaches i.e variance reduction approach (ederington (1979)) and risk-return approach (howard and d’antonio (1984)). the hedge ratio that gives the highest hedging effectiveness in each of the two methods would be proposed as efficient hedge ratio. variance-reduction framework as proposed by ederington (1979), hedging effectiveness will be measured as percentage decline in portfolio variance as shown in equation (4.10), where var (u) and var (h) represents variance of un-hedged and hedged portfolios respectively. σs and σf are standard deviation of the cash and futures returns respectively, σs,f represents the covariability of the cash and futures returns and h* is the optimal hedge ratio. hedge effectiveness = var �u� var (h) var (u) ............................(4.10) var (u) = σs2................................................................(4.11) var (h) = σs2 + h*2σf 2 – 2h*σs,f............................................(4.12) (10) var (u) = σs 2 (11) var (h) = σs 2 + h*2σf 2 – 2h*σs,f (12) risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of mandeep kaur, kapil gupta158 slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. )13.4..(............................................................he s s ir     where, p p ir     pr = expected return from hedged portfolio p = standard deviation of returns from hedged portfolio i = risk-free rate of return sr = expected return from unhedged portfolio s = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variab le period count mean std. dev. skewness kurtosis jarquebera nifty5 0 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 (13) risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. )13.4..(............................................................he s s ir     where, p p ir     pr = expected return from hedged portfolio p = standard deviation of returns from hedged portfolio i = risk-free rate of return sr = expected return from unhedged portfolio s = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variab le period count mean std. dev. skewness kurtosis jarquebera nifty5 0 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 where, risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. )13.4..(............................................................he s s ir     where, p p ir     pr = expected return from hedged portfolio p = standard deviation of returns from hedged portfolio i = risk-free rate of return sr = expected return from unhedged portfolio s = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variab le period count mean std. dev. skewness kurtosis jarquebera nifty5 0 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 = expected return from hedged portfolio risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. )13.4..(............................................................he s s ir     where, p p ir     pr = expected return from hedged portfolio p = standard deviation of returns from hedged portfolio i = risk-free rate of return sr = expected return from unhedged portfolio s = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variab le period count mean std. dev. skewness kurtosis jarquebera nifty5 0 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 = standard deviation of returns from hedged portfolio risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. )13.4..(............................................................he s s ir     where, p p ir     pr = expected return from hedged portfolio p = standard deviation of returns from hedged portfolio i = risk-free rate of return sr = expected return from unhedged portfolio s = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variab le period count mean std. dev. skewness kurtosis jarquebera nifty5 0 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 = risk-free rate of return risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. )13.4..(............................................................he s s ir     where, p p ir     pr = expected return from hedged portfolio p = standard deviation of returns from hedged portfolio i = risk-free rate of return sr = expected return from unhedged portfolio s = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variab le period count mean std. dev. skewness kurtosis jarquebera nifty5 0 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 = expected return from unhedged portfolio risk-return framework the variance reduction approach suffers from a limitation that it ignores the return component on hedged portfolio. therefore, in order to address this issue, howard and d’antonio (1984), suggested a measure of hedging effectiveness (λ) incorporating the return component, which is measured as ratio of slope of risk-return relative from hedged portfolio and risk-return relative from unhedged portfolio. )13.4..(............................................................he s s ir     where, p p ir     pr = expected return from hedged portfolio p = standard deviation of returns from hedged portfolio i = risk-free rate of return sr = expected return from unhedged portfolio s = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variab le period count mean std. dev. skewness kurtosis jarquebera nifty5 0 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 = standard deviation of returns from unhedged portfolio results and analysis table 2 discusses the time-series properties of the series understudy and provides that returns of both futures and cash markets are significantly negatively skewed and their coefficient of kurtosis is significantly different from three which implies that futures and cash market returns do not conform to normal distribution. the null hypothesis that futures and cash market returns follow normal distribution is further tested through jarque-bera test which is statistically significant, and rejects the null hypothesis for all index futures and cash market returns. table 2. descriptive statistics for nifty, niftyit and banknifty contract variable period count mean std. dev. skewness kurtosis jarque-bera nifty50 futures return pre 1897 0.000762 0.015545 -1.005812 12.427 7344.651 post 2041 0.000114 0.015902 -0.047154 13.246 10751.74 total 3939 0.000425 0.015731 -0.493672 12.833 16029.05 cash return pre 1897 0.000764 0.014686 -0.779820 8.7388 2795.453 post 2041 0.000113 0.015401 0.098257 14.242 8928.543 total 3939 0.000427 0.015061 -0.296783 11.836 12872.65 basis pre 1898 -3.021286 10.72971 -1.162111 7.1572 1793.986 post 2042 51.09412 46.82309 0.121282 2.6293 16.6923 total 3940 25.02533 43.84938 1.049673 3.4556 757.6089 niftyit futures return pre 1091 -0.001046 0.073914 -29.97677 958.69 41683009 post 2041 0.000424 0.017493 -0.207287 7.9567 2104.046 total 3133 -9.20e-05 0.045839 -43.78679 2257.9 6.65e+08 cash return pre 1091 -0.001045 0.073612 -30.13482 965.58 42285710 post 2041 0.000425 0.017467 -0.161584 8.5813 2658.066 total 3133 -9.13e-05 0.045663 -43.98293 2271.9 6.73e+08 basis pre 1092 6.301374 62.32855 -0.114054 33.204 41513.72 post 2042 9.323286 23.42619 0.010648 7.0464 1393.181 total 3134 8.270341 41.38112 -0.231291 59.985 424078.3 banknifty futures return pre 637 0.001590 0.019675 -0.338606 4.5637 77.07465 post 2041 0.000234 0.020989 0.141173 8.3753 2464.022 total 2679 0.000559 0.020685 0.038455 7.6324 2396.083 cash return pre 637 0.001564 0.019084 -0.254725 4.4809 65.10121 post 2041 0.000239 0.020492 0.164530 8.2504 2353.569 total 2679 0.000556 0.020167 0.075152 7.5377 2300.967 basis pre 638 6.641144 23.44068 0.155635 6.0061 242.8022 post 2042 20.33558 41.05308 0.500584 4.2283 213.6537 total 2680 17.07549 38.06139 0.636343 4.8002 542.7752 s o u r c e : calculated by author using secondary data downloaded from official website of nse. mandeep kaur, kapil gupta160 furthermore, table 3 reports the optimal hedge ratio(s) estimated through naive, ols, arma ols (p,q), var, vecm, garch (p,q), egarch (p,q) and tarch (p,q) for near month contracts of all the three indices understudy. it is observed that in all these indices ols model gives lowest coefficient of hedge ratio. secondly, hedge ratio estimated through ols, arma, var and vecm are constant hedge ratios and their hedging coefficients are relatively smaller than the hedge ratios estimated through time varying models i.e. garch, egarch and tarch. from the above observation, one conclusion can be drawn that the cost of hedging through constant hedge ratio are lower than time varying hedge ratios. furthermore, the coefficients of hedge ratio estimated through var and vecm are very close to hedge ratios estimated through ederington’s ols model which implies that it incorporates the property of cost of carry model. table 3. estimation of optimal hedge ratio contract naïve ols arma ols var vecm* garch (1,1) egarch (1,1) tarch (1,1) nifty50 1 0.940 0.956 0.943 0.944 0.962 0.964 0.962 niftyit 1 0.993 0.998 0.996 0.996 1.00152 1.00157 1.00156 banknifty 1 0.966 0.979 0.967 0.968 0.982 0.986 0.984 * vecm estimation results available on demand. s o u r c e : calculated by author using secondary data downloaded from official website of nse. furthermore, table 4 reports the optimal hedge ratio(s) estimated through all eight models over pre and post financial crisis period. it is observed there has been a slight increase in the coefficient of hedge ratios for nifty50 and banknifty during post crisis period, irrespective of model used for estimating optimal hedge ratio. however, the results are different for niftyit, where coefficient of hedge ratio(s) increased only for time-varying hedging models (i.e. garch, egarch and tarch). it implies that the cost of hedging using niftyit is increased during post crisis period, if time-varying models are used for estimating optimal hedge ratio. estimating hedging effectiveness using variance reduction… 161 table 4. estimation of correlation coefficient and optimal hedge ratio over pre and post crisis period contract period correlation coefficient naïve ols arma ols var vecm garch egarch tarch nifty50 pre-crisis 0.9728 1 0.919 0.941 0.923 0.925 0.936 0.931 0.935 post-crisis 0.9906 1 0.959 0.966 0.959 0.960 0.977 0.978 0.981 niftyit pre-crisis 0.9986 1 0.995 0.999 0.997 0.998 0.999 0.997 0.996 post-crisis 0.9827 1 0.981 0.988 0.992 0.993 1.006 1.007 1.005 banknifty pre-crisis 0.9822 1 0.953 0.976 0.957 0.962 0.982 0.985 0.982 post-crisis 0.9934 1 0.970 0.980 0.970 0.970 0.982 0.986 0.985 s o u r c e : calculated by author using secondary data downloaded from official website of nse. furthermore, table 5 reports the hedging effectiveness in the form of variance reduction, proposed by ederington (1979), after taking hedging position with the estimated optimal hedge ratios. an important observation is that ederington’s ols model gives highest hedging effectiveness, whereas, naive hedging model gives lowest hedging effectiveness among all the models. moreover, there is no significant difference between the hedge effectiveness estimated through all models understudy (except naïve). these findings are consistent with the findings of lien (2005) and wang (2015) which suggest that knowledge of sophisticated econometric procedures does not help to construct a better portfolio and improve hedging effectiveness. table 5. hedging effectiveness (ederington, 1979) [in percent] contract naïve ols arma ols var vecm garch egarch tarch nifty50 96.06 96.45 96.42 96.45 96.45 96.40 96.39 96.40 niftyit 99.37 99.37 99.37 99.37 99.37 99.365 99.366 99.366 banknifty 98.03 98.15 98.13 98.15 98.15 98.13 98.11 98.12 s o u r c e : calculated by author using secondary data downloaded from official website of nse. mandeep kaur, kapil gupta162 moreover, the impact of financial crisis of 2008 on hedging effectiveness has been studied (table 6). it is interesting to note that ols model still dominates over other hedging models in obtaining highest hedging effectiveness, while remaining unaffected by the impact of financial crisis 2008. another important observation is that there has been an increase in hedging effectiveness after the crisis of 2008, for all indices understudy (except niftyit post-crisis). overall an interesting observation from the above findings is that it suggests the use of traditional ols model, proposed by ederington, 1979, for estimating optimal hedge ratio which is much simple to compute and understand rather than using complicated econometric models which are considered to be an improvement over the ols model. table 6. hedging effectiveness over pre and post crisis period (ederington, 1979) [in percent] contract period naïve ols arma ols var vecm garch egarch tarch nifty50 pre-crisis 93.805 94.547 94.489 94.545 94.543 94.512 94.531 94.519 post-crisis 97.873 98.052 98.047 98.052 98.052 98.016 98.016 98.001 niftyit pre-crisis 99.553 99.556 99.555 99.556 99.555 99.555 99.556 99.557 post-crisis 96.439 96.476 96.471 96.462 96.460 96.414 96.406 96.417 banknifty pre-crisis 95.930 96.182 96.115 96.178 96.171 96.084 96.064 96.085 post-crisis 98.508 98.606 98.595 98.606 98.606 98.588 98.576 98.582 s o u r c e : calculated by author using secondary data downloaded from official website of nse. furthermore, table 7 reports the hedging effectiveness estimated using riskreturn criteria that incorporate both risk and return components on hedged portfolio. it is observed that naïve hedge ratio gives highest hedging effectiveness for all three indices, whereas, ols hedge ratio gives lowest hedging effectiveness. furthermore, the impact of financial crisis on hedging effectiveness has been examined (table 8) and it is observed that naïve hedge ratio gives highest hedging effectiveness (except niftyit post-crisis), whereas ols gives lowest hedging effectiveness. moreover, it is found that there has been an increase in hedging effectiveness during post crisis (except niftyit post-crisis). estimating hedging effectiveness using variance reduction… 163 further, this paper uses two different approaches for estimating hedging effectiveness i.e. variance reduction approach and risk-return approach, both of which are based upon different objective functions of the investor. the variance reduction approach assumes that main objective of investor is risk aversion whereas, risk-return approach assumes that main objective of investor is to maximize return per unit of risk. an interesting observation from the results of hedging effectiveness using the two different approaches is that variance reduction approach favours ols hedge ratio, whereas risk-return approach favours naïve hedge ratio, both of which are constant hedge ratios. therefore, on the whole, these findings suggest superiority of constant hedge ratios over dynamic hedge ratios. moreover, investors with different objective functions need to use different hedge ratio models in order to maximize their respective objective function. table 7. hedging effectiveness (howard & d’antonio, 1984) [in percent] contract naïve ols arma ols var vecm garch egarch tarch nifty50 1.2538 1.2462 1.2483 1.2470 1.2467 1.2490 1.2493 1. 2490 niftyit 1.2780 1.2771 1.2778 1.2775 1.2775 1.2782 1.2782 1.2782 banknifty 1.1763 1.1733 1.1744 1.1734 1.1734 1.1735 1.1747 1.1751 s o u r c e : calculated by author using secondary data downloaded from official website of nse. table 8. hedging effectiveness over pre and post crisis period (howard and d’antonio, 1984) [in percent] contract period naïve ols arma ols var vecm garch egarch tarch nifty50 pre-crisis 1.1053 1.1013 1.1024 1.1014 1.1015 1.1016 1.1022 1.1019 post-crisis 5.3292 5.2412 5.2552 5.2393 5.2421 5.2802 5.2807 5.2881 niftyit pre-crisis 1.2899 1.2891 1.2897 1.2894 1.2896 1.2897 1.2894 1.2893 post-crisis 1.2833 1.2807 1.2816 1.2823 1.2824 1.2841 1.2843 1.2840 banknifty pre-crisis 1.0570 1.0557 1.0563 1.0558 1.0559 1.0565 1.0566 1.0565 post-crisis 1.4237 1.4173 1.4194 1.4172 1.4174 1.4199 1.4208 1.4204 s o u r c e : calculated by author using secondary data downloaded from official website of nse. mandeep kaur, kapil gupta164 from these results, an important finding is that the result of optimal hedge ratio and hedging effectiveness for niftyit has been consistently an exception to the results of other two indices. the reason for such an exception might be due to the fact that global financial crisis of 2008 adversely affected the business of indian it industry and sentiments of investors which is evident from two facts. first, the correlation coefficient of spot and futures price series for niftyit declined during post-crisis period (see table 4). second, the average traded volume for niftyit contracts show a declining trend after 2007 (see table 9) which might be due to negative sentiment among investors towards it stocks. the negative sentiment of the investors and thus, lower trading volume of it stocks is justified as there has been substantial decline in the annual growth rates of the indian it sector since year 2007-08 (see appendix a). table 9. descriptive statistics of futures contracts volume symbol period count mean minimum maximum std. dev. nifty50 pre-crisis 1898 135556.2 19 1338598 183077.1 post-crisis 2042 415608.1 14371 1343511 207469.5 niftyit pre-crisis 1092 471.1612 0 3683 480.5841 post-crisis 2042 315.1019 1 3395 289.932 banknifty pre-crisis 638 2011.188 27 10453 1.409485 post-crisis 2042 73973.49 557 343417 46689.565 s o u r c e : calculated by author using secondary data downloaded from official website of nse.  conclusion present study is an attempt to examine hedging effectiveness of three benchmark indices of nse (nifty, niftyit and banknifty) from their respective date of inception till march 31, 2016 by two methods: variance reduction approach (ederington, 1979) and risk-return approach (howard & d’ antonio, 1984). additionally, an attempt has been made to study the impact of financial crisis of 2008 by segregating the return series into pre crisis period (inception date december 31, 2007) and post crisis period (january 1, 2008 march 16, 2016). estimating hedging effectiveness using variance reduction… 165 optimal hedge ratios have been estimated by employing eight different methodologies: naïve, ederington’s model, var, vecm, arma (p,q), garch(p,q), egarch(p,q) and tgarch(p,q) for aggregate as well as for pre and post crisis period. the present study finds that hedge ratios estimated through constant hedging models [ols, var, vecm and arma (p,q)] are relatively smaller than the hedge ratios estimated through time varying models (garch, egarch and tgarch). these results imply that cost of hedging through constant hedge ratio models is relatively lower than time-varying hedge ratio models. secondly, after segregating the data series into pre and post crisis period, it is observed that hedge ratios during the post-crisis period are relatively higher than precrisis period for all optimal hedge ratio models, which implies that the cost of hedging has been increased after the financial crisis. furthermore, hedging effectiveness has been estimated using two approaches i.e. variance-reduction framework and risk-return framework (table 5 and 7 respectively). it is found that ols hedge ratio gives highest hedging effectiveness (except for niftyit where vecm gives highest hedging effectiveness) whereas, naïve hedge ratio gives the lowest hedging effectiveness. these findings are consistent with the findings of moosa (2003), lien (2005) and kaur and gupta (2018). these findings remain consistent even after the data series is segregated into pre and post-crisis period. however, on the contrary, naïve hedge ratio gives highest hedging effectiveness using risk-return approach (except for niftyit post crisis), whereas ols gives lowest hedging effectiveness. once again, the results obtained do not change when series is segregated into pre and post crisis period. from the above findings few important implications can be drawn. firstly, constant hedging models give highest hedging effectiveness whether examined on the basis variance-reduction approach or risk-return approach. these findings are consistent with the findings of wang, chongfeng and li (2015) and kaur and gupta (2018) who argue whether econometric sophistication really helps to improve hedging effectiveness. however, on the contrary, these findings are inconsistent with numerous studies (park & switzer, 1995; lypny & powalla, 1998; floros & vougas, 2004; floros & vougas, 2006; lee & yoder, 2007; bhaduri & durai, 2008; hou & li, 2013 and kumar & bose, 2019) which suggest that time-varying hedging models dominate constant hedging models. the reason for such anomaly may be attributed to the fact that hedging model to be used may be country specific (hou & li, 2013). secondly, since both the measures of hedging effectiveness suggest different optimal hedging models, mandeep kaur, kapil gupta166 therefore, selection of right hedging model becomes vital for investor which depends upon his objective to hedge. thirdly, there has been increase in estimates of both optimal hedge ratio and hedging effectiveness (except niftyit) during post crisis period which implies an increase in the cost of hedging. the reason for increase in both these estimates can be due to increase in correlation coefficient between spot and futures returns over post-crisis period as observed by majid and kassim (2009) and joshi (2012) that post financial crisis, market integration improved. this paper has few implications for investors. firstly, it suggests that in order to hedge, investors can simply choose the optimal hedge ratio suggested by constant hedging models (especially ols) instead of time-varying hedging models which are more time-consuming and of complex nature. it is because ols gives the highest hedging effectiveness while giving lowest optimal hedge ratio which implies lower investment in futures contracts. on the contrary, other models suggest comparatively higher optimal hedge ratio and a lower hedging effectiveness. secondly, this study suggests hedge ratio suggested by ols for pure hedgers who are mainly concerned with minimization of variance, while the investors whose are also concerned with enhancing their return by hedging might choose naive hedge ratio. overall, the study favours constant hedging models instead of time-varying hedging models which is in line with the findings of lien, tse and tsui (2002), lien (2005), bhargava and malhotra (2007), maharaj et al. 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(2009). an out-of-sample comparative analysis of hedging performance of stock index futures: dynamic versus static hedging. applied financial economics, 19(13), 1059-1072. http://dx.doi.org/10.1080/09603100802112284. yang, w., & allen, d.e. (2004). multivariate garch hedge ratios and hedging effectiveness in australian futures markets. accounting and finance, 45, 301-321. appendix a. growth rate of indian it sector appendix a. growth rate of indian it sector source: heeks (2015). -40% -20% 0% 20% 40% 60% 80% 100% % g ro w th year indian it growth rates: exports vs. domestic (1992-2015) exports domestic s o u r c e : heeks (2015). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: june 6, 2013; date of acceptance: november 11, 2013. * contact information: mibus@econ.uni.torun.pl, department of finance management, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: 56 611 46 34. buszko m. (2014). investments in stock of banks implementing high social responsibility standards listed on warsaw stock exchange. copernican journal of finance & accounting, 3(1), 45–60. http://dx.doi.org/10.12775/cjfa.2014.004 michał buszko* nicolaus copernicus university investments in stock of banks implementing high social responsibility standards listed on the warsaw stock exchange keywords: csr, respect index, profitability. j e l classification: g11. abstract: the paper characterizes benefits and evaluates profitability of investments in stock of banks participating in respect index, i.e. a special index distinguishing companies that implement high standards of corporate social responsibility. in the paper, there is a brief characteristics of respect index, its nature, goals and ways of functioning. after that, there are presented base statistics of investors’ return and risk related to the respect index. in the next part the author describes banks listed on wse in poland and their role in respect index. further, there are included rates of return from investments in socially responsible banks versus wig banking index. the last part of the paper is related to analysis of the bank stock prices around the day of their entrance to respect index and their cumulative returns since listing within the index on wse. inwestowanie w akcje banków stosujących wysokie standardy w zakresie społecznej odpowiedzialności biznesu notowanych na gpw w warszawie słowa kluczowe: csr, respect index, rentowność. michał buszko46 klasyfikacja j e l: g11. abstrakt: artykuł charakteryzuje korzyści oraz ocenia rentowność inwestycji w akcje banków uczestniczących w indeksie respect index, tzn. szczególnym indeksie podkreślającym spółki stosujące wysokie standardy w zakresie społecznej odpowiedzialności biznesu. w artykule zawarto krótką charakterystyką indeksu, jego znaczenie, cele i sposoby funkcjonowania. w dalszej kolejności zaprezentowano podstawowe statystyki opisowe dotyczące rentowności oraz ryzyka inwestowania w portfel odpowiadający indeksowi respect index. w dalszej części autor charakteryzuje banki notowane na gpw w warszawie oraz ich rolę w rozważanym indeksie. następnie przedstawione zostały stopy zwrotu inwestorów posiadających akcje rozważanych banków na tle rentowności indeksu wig banki. w ostatniej części przedstawione zostały analizy dotyczące cen akcji banków w okresie ich wprowadzania do indeksu, a także skumulowane stopy zwrotu od czasu notowania banków w ramach indeksu respect index.  introduction corporate social responsibility is a business philosophy that widely spreads out amongst the commercial banks in many well developed countries as well as emerging markets, like poland. in practice, such concept become truly important after subprime crisis (2007–2009) when banks had to recover their financial condition and bring back confidence of deponents and other stakeholders. as safety of deposits and sustainable investments in 2005–2007 gave way to speculation and maximizing profits due to securitization and financial engineering, financial sector became particularly vulnerable to market risk and credit crunch. because a role of banks as institutions of public trust had been questioned as a consequence of subprime crisis 2008–2009, a new approach to manage and control banking institutions started to be developing. in fact, the major efforts were to increase corporate social responsibility of banks to their employees, clients or investors. as banks are special service providers in the economy, hence they have specially adjusted areas of csr. in banking social responsibility is mostly developed in scopes of transparency and safety of operations, relations with customers, relations with employees, relations with investors and business partners, society engagement and environmental inf luence (odpowiedzialny 2013; polityka 2012). the ecological aspects of csr in banking, which are crucial for production companies, are also vital but mostly gives way to social or those related to governance. commonly they are ref lected in promoting and financing environmental friendly projects, gathering funds for protection of natural environ investments in stock of banks implementing high social… 47 ment, saving energy, replacing paper documentation by electronic files as well as by enhancing ecological education of clients (murawski 2012). the research methodology and the course of the research process the aim of the paper is to present the investor approach to the corporate social responsibility of banks listed on main list of the warsaw stock exchange and included into respect index, i.e. first in poland and cee countries index of companies following developed standards of social responsibility. the author will investigate the profitability of investment in equities of banks participating in the respect index compared to the profitability of shares of other banks quoted on wse. also, the author will analyze if classification of the bank to the index brings additional return to the shareholder, i.e. if the csr concept in banking inf luences the stock price and is positively perceived by the capital market investors (owners of banks). the paper is divided into two major parts. the first part is related to characteristic of respect index. it contains a brief description of idea of csr requirement in banking and presents respect index as the benchmark for effectiveness of socially responsible banks listed on wse. afterwards, it presents the returns of the index compared to other income-based indexes of wse and industry subindices since the beginning of listing of respect index on 19.11.2009. in this part, there is also included a short description of 6 editions of the index which took place until the 01.06.2013. the second part is related to investigation of investments in shares of socially responsible banks. it starts from short characteristic of the banks listed on wse. then, it contains an analysis of prices and rate of returns on stock of banks included into respect index versus other banks listed on wse as well as portfolio of companies included in broad index wig. the data embraces whole life span of respect index. the author of the paper puts forward hypothesis that socially responsible banks, distinguished in respect index, brings higher returns for stock exchange investors comparing to investments other banks quoted on wse. banks and high corporate social responsibility standards due to the specifics of the banking business, its special financing, as well as their role as economic and financial intermediaries in the global economy, banks have to be ultimately transparent and conservatively balanced in their promichał buszko48 fits generation and risks exposure. to assure their proper risk-return balance, compliance with law standards and ethics they should be governed and supervised in a special way, including participation of independent supervision institutions. as in the european model of financial market banks are prime entities providing capital for economic development, their safe, stable and responsible functioning should attract a special attention. hence, csr concept seems to be then particularly justified and fit for implementation in bank industry. the social responsibility of bank operations is formalized often in internal regulations, resolutions, strategic plans, as well as csr documentation. the presentation of involvement in social responsibility is ref lected primarily in banks advertisements, csr reports, investor reports, web sites, promotional materials and events. one of the latest form of special promotion of banks listed on warsaw stock exchange (wse) that implement and develop high social responsibility standards is qualification into first in poland and cee countries stock exchange index of socially responsible companies – respect index1. entering of bank into this index, confirms its high social responsibility status and indicates value creation strategy by using csr rules in day-to-day operations. on 30th of march 2013 there were 4 banks listed within respect index, however since the beginning of its quotation totally 7 banks were included. respect index as a benchmark of value of social responsible public companies respect index was launched on 19.11.2009 based on the resolution of 18.11.2009 of wse (uchwała 2009). such index was a first specialist index in poland and cee countries which has had to promote companies implementing and developing very high social responsibility standards. the index was elaborated by kulczyk investments altogether with deloitte consulting company and wse to rise interest of public companies in management based on rules of social responsibility as a method of increasing value of the company and promoting the highest standards of management in aspects: economic, ecologic and social. the main role of the index was pointing an investment attraction in stock of companies distinguishing according to quality of reporting, investor relations, information governance, corporate governance, as well as high standards of 1 name respect comes from words: responsibility, ecology, sustainability, participation, environment, community, transparency. investments in stock of banks implementing high social… 49 market, customers, management and environment relations and personnel policy (uwarunkowania 2012)2. in practice, the sense of quoting of the respect index, apart from promoting socially responsible companies, is also to distinguish wse from other stock exchanges in europe, pointing its modernity and progress. also, the index has to present relative value of portfolio of companies implementing high corporate social responsibility standards. thus, it may be used as a benchmark for valuebased management. also, the index can be used for comparing pricing of companies implementing high csr standards with other non-socially-responsible entities. respect index, similarly to general index of wse, i.e. wig index, as well as to industry subindexes is an income-based type of index, hence it includes incomes from the dividends payouts as well as preemptive rights. the weight of each company in the index is calculated as a number of shares in the free trade subtracted by number of shares outstanding introduced into stock exchange trade, while results are rounded to thousands. in practice the share of the biggest companies in the respect index is limited to disperse the risk of following economic conditions of just few entities. in case of classification to the index less than 20 companies (what took place during 1st and 2nd edition), maximum share of the single company is 25%, otherwise 10% (respect 2013). until 2013 respect index contained only companies listed on wse main list, which received the highest social responsibility grading by deloitte company – a partner of wse in respect index project. the dual listed foreign companies and companies present in alternative trading system of newconnect are not suitable. deloitte conducts audit of economic, environmental, and social aspects as well as customer and investor relations of candidates (uwarunkowania 2012). the classification to the index is in general a three stage process. the first stage is an analysis of the liquidity of trade of stock. a candidate to the index do not participate in this part. the second stage contains investigation of standards of reporting, corporate governance and investor relations. the candidates participate in it indirectly. the third stage of the investigation relies on an opinion survey, in which companies qualified in the previous two stages are required to provide details related to their social responsibility. the information is generally collected through research questionnaire elaborated by deloitte, containing 35 questions about policy of csr, management system, envi2 until 2013 there were 6 editions of respect index announced on 19.11.2009, 25.01.2011, 25.07.2011, 31.01.2012, 31.07.2012, 24.01.2013. michał buszko50 ronmental management, employment policy as well as customers and market approach (ankieta 2012). companies classified to the third stage are subject to deloitte csr audit. the refusal of participation in the survey or audit rejects the company from respect index classification. until 2013 there were 6 editions of respect index. the editions were held initially once and then twice per year (in january and july). in the first edition just 16 companies were qualified, of which 3 were commercial banks. in the next editions the number of companies varied between 16 do 23. amongst companies participating in the index from its origination, there are mostly leading polish businesses as: kghm polska miedź sa, pkn orlen sa, pgnig sa, telekomunikacja polska sa, ing bank śląski sa, bank handlowy sa, grupa azoty sa, elektrobudowa sa. investment effectiveness of respect index when analyzing an effectiveness of respect index, one may investigate its simple rate of return. comparing the respect index with other two income-based indexes including mostly non-socially responsible companies, i.e. wig (broad index of wse) and nci (main index of alternative trading system newconnect) one may distinguish substantial surplus of value creation of companies participating in respect index versus other entities (all data standardized on 19.11.2009). fig 1. figure 1. respect index vs wig and nci (19.11.2009–31.03.2013) pkn orlen sa, pgnig sa, telekomunikacja polska sa, ing bank śląski sa, bank handlowy sa, grupa azoty sa, elektrobudowa sa. investment effectiveness of respect index when analyzing an effectiveness of respect index, one may investigate its simple rate of return. comparing the respect index with other two income-based indexes including mostly non-socially responsible companies, i.e. wig (broad index of wse) and nci (main index of alternative trading system newconnect) one may distinguish substantial surplus of value creation of companies participating in respect index versus other entities (all data standardized on 19.11.2009). fig 1. fig. 1. respect index vs wig and nci (19.11.2009–31.03.2013) source: own elaboration based on data of wse. the annual and cumulative returns from given indexes (portfolios) are presented in tab 1. tab. 1. returns of respect index vs. wig and nci period respect wig nci 19.11.09 – 31.12.09 4,87% 1,63% 2,26% 31.12.09 – 31.12.10 32,17% 18,77% 27,65% 31.12.10 – 31.12.11 -11,25% -20,83% -34,39% 31.12.11 – 31.12.12 29,23% 26,24% -20,09% 31.12.12 – 31.03.13 -7,41% -4,87% -1,68% 19.11.09 – 31.12.10 38,61% 20,70% 30,53% 19.11.09 – 31.12.11 23,02% -4,44% -14,36% 19.11.09 – 31.12.12 58,98% 20,63% -31,56% 19.11.09 – 31.03.13 47,20% 14,75% -32,72% source: own elaboration based on data of wse. tab 1. confirms that respect index on average brings higher returns to investors comparing to other portfolios of companies that do not distinguish by high standards of social responsibility. 0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 20 09 -1 119 20 10 -0 106 20 10 -0 218 20 10 -0 406 20 10 -0 520 20 10 -0 705 20 10 -0 817 20 10 -0 929 20 10 -1 115 20 10 -1 229 20 11 -0 211 20 11 -0 328 20 11 -0 513 20 11 -0 628 20 11 -0 810 20 11 -0 923 20 11 -1 108 20 11 -1 222 20 12 -0 207 20 12 -0 321 20 12 -0 509 20 12 -0 622 20 12 -0 807 20 12 -0 920 20 12 -1 105 20 12 -1 218 20 13 -0 206 20 13 -0 321 respect wig nci s o u r c e : own elaboration based on data of wse. investments in stock of banks implementing high social… 51 the annual and cumulative returns from given indexes (portfolios) are presented in tab 1. table 1. returns of respect index vs. wig and nci period respect wig nci 19.11.09 – 31.12.09 4,87% 1,63% 2,26% 31.12.09 – 31.12.10 32,17% 18,77% 27,65% 31.12.10 – 31.12.11 -11,25% -20,83% -34,39% 31.12.11 – 31.12.12 29,23% 26,24% -20,09% 31.12.12 – 31.03.13 -7,41% -4,87% -1,68% 19.11.09 – 31.12.10 38,61% 20,70% 30,53% 19.11.09 – 31.12.11 23,02% -4,44% -14,36% 19.11.09 – 31.12.12 58,98% 20,63% -31,56% 19.11.09 – 31.03.13 47,20% 14,75% -32,72% s o u r c e : own elaboration based on data of wse. tab 1. confirms that respect index on average brings higher returns to investors comparing to other portfolios of companies that do not distinguish by high standards of social responsibility. in general respect index represents mainly 5–6 major industries, i.e. oil&gas, raw materials, banking, telecommunication, energy and insurance, while each industry is represented by 1 to 3 companies3. the share of each industry varies in each edition of the index and is related to the total number of companies participating in the index. the history of the respect index confirms a permanent dominance of the oil&gas and raw materials industries. in the first edition in 2009, they concentrated approx. 60,6% of share of the index, and in the first edition in 2013 (vi edition totally), their share was 46,4%. banking share started from approx. 14% in 2009 and leveled at 11,3% in 2013. tab 2. presents major statistics of respect index versus other indexes and major industries subindexes represented by companies participating in respect. 3  banking sector was represented in ii, iv and v edition by 5 entities and in iii edition by 6 entities. michał buszko52 table 2. major statistics of respect index vs. wig, nci and industry subindexes index respect wig nci wig energy wig oil&gas wig raw materials wig banking wig telecom wig chemicals st. dev. 1,23% 1,10% 0,79% 1,22% 1,56% 2,03% 1,50% 1,64% 1,63% max.chg 4,75% 4,69% 2,71% 6,39% 5,91% 5,90% 7,34% 8,19% 8,08% min. chg -6,02% -6,05% -4,49% -6,50% -7,81% -11,52% -7,48% -24,57% -9,86% average chng. >=0 0,90% 0,75% 0,57% 0,84% 1,00% 0,90% 1,09% 1,18% 0,95% average chng. < 0 -0,91% -0,81% -0,60% -1,03% -1,07% -0,92% -1,04% -1,15% -1,05% kurtosis 2,37119 3,8260 2,06247 4,7659 3,4591 2,5861 1,5943 2,0823 62,7335 skewness -30,67% -53,14% -22,92% -98,84% -42,59% -28,71% 9,54% -22,60% -447,5% r coeff. 100,0% 92,95% 38,02% 65,44% 86,57% 78,57% 79,27% 48,11% 55,19% s o u r c e : own elaboration of wse data. respect index as a portfolio of companies was more efficient since its origins than almost all of the industry subindices of wse. the only exceptions were wig chemicals and wig oil&gas which have generated surplus over respect. the long-term cumulative rates of return for respect and other subindices in period 19.11.2009–31.03.2013 are as follows: wig chemicals 232,14%, wig oil&gas 62,79%, respect 47,20%, wig food 11,95%, wig banking 9,89%, wig raw materials 0,17%, wig it -7,60%, wig energy -14,28%, wig telecom -38,01%, wig developers -55,33%, wig construction –67,22%. the general profitability of the respect index portfolio in the previous years was dependent primarily on economic conditions of a few crucial companies of oil&gas, chemicals, raw materials and banking industries. profitability of investments in stock of socially responsible banks on 31.03.2013 there were totally 17 commercial banks out of 439 companies listed on wse. among them there were two foreign banks, unicredit s.p.a. from italy and nova kreditna banka maribor d.d. from slovenia listed parallel to foreign markets. capitalization, assets and equity value of listed banks vary, however permanently 4–5 banks out of 17 has been amongst 10 biggest companies considering market value. two leading banks listed on wse are pkobp sa and pekao sa and their market value at the end of march 2013 investments in stock of banks implementing high social… 53 was 43,19 bln pln and 41,2 bln pln. at the same time the entities with a value exceeding 5 bln pln were as follows: bz wbk 23,6 bln pln, bre bank sa 14,4 bln pln, bank handlowy sa 11,9 bln pln, ing bank śląski sa 11,8 bln pln, bank millennium sa 5,8 bln pln. despite lack of proper liquidity of trade just 13 banks (including 2 foreign entities) out of 17 are included into broad index of wse (wig) as well as industry subindex wig banking. among them there is a specialized bank oriented in ecological financing and supporting natural environment projects – boś bank sa, however this entity is not included in the respect index. within the group of commercial banks listed on wse there are two banks participating permanently in the respect index from the 1st edition, i.e. bank handlowy sa and ing bank śląski sa. both entities belongs to the international financial groups created by citigroup and ing which implement high social responsibility standards in international scope (dziawgo 2010). apart from two mentioned banks, one entity is present from 2nd, i.e. bank millennium sa. bank bph sa, entered the index in the 1st edition, however left it in the 2nd and returned in 4th. there were also three other banks included in respect: i.e. bre bank sa and bz wbk sa in the 2nd edition, as well as kredyt bank sa included in the 3rd edition. all of three entities are not present in the index as on 31.03.2013 (6th edition). nonetheless bz wbk sa and kredyt bank sa were excluded not due to deterioration of csr standards but due to takeovers. tab 3. presents the rates of return from investments in socially responsible banks (including dividends) for periods starting 1 year before entering the index and finishing 1 year after. table 3. rates of return on stock of banks included into respect index rate of return handlowy ing bsk bph millennium bz wbk bre kredyt bank bph (2) mean med. -1d/+1d -4,1% -1,4% -0,6% 0,8% 0,7% -0,1% -0,40% 0,4% -0,6% -0,4% -1w/+1w -0,4% -2,8% 4,3% 8,6% 1,9% 2,1% -1,79% 14,9% 3,4% 2,1% -1m/+1m 17,5% 22,8% 16,7% 11,1% 5,9% 2,1% -20,29% 34,1% 11,2% 11,2% -3m/+3m 18,2% 27,9% 15,7% 14,3% 7,9% 24,9% -17,43% -6,7% 10,6% 14,3% -6m/+6m 38,5% 114,2% 72,0% 14,3% 22,4% 21,1% -35,33% -37,1% 25,7% 21,1% -1y/+1y 112,7% 117,6% 97,1% -2,6% 26,4% 5,6% -17,09% -26,9% 37,5% 22,1% s o u r c e : own elaboration of wse data. michał buszko54 all the investments in the banks’ shares gave positive average rates of return, except purchase of shares 1 day before entering the index and selling on the entering date. to assess the profitability of investments, the author used also banks stock rates of return adjusted by rate of return of industry subindex wig banking. such subindex represents primarily banks non distinguished by csr policy, so it can be treated as a benchmark for csr investor return. approx. 87% of wig banking index is actually represented by the banks not included in respect index. that way investor may get differencing between csr and non-csr investment. the results are presented in tab 4. table 4. adjusted rates of return on stock of banks joining respect index rate of return handlowy ing bsk bph millennium bz wbk bre kredyt bank bph (2) mean med. -1d/+1d -1,3% 1,4% 2,2% 1,4% 1,3% 0,5% 0,3% -0,3% 0,7% 0,7% -1w/+1w 3,1% 0,7% 7,8% 9,1% 2,3% 2,5% -2,2% 8,1% 3,9% 3,1% -1m/+1m 13,4% 18,7% 12,6% 15,6% 10,3% 6,5% -2,9% 24,9% 12,4% 12,6% -3m/+3m -3,0% 6,7% -5,5% 10,5% 4,1% 21,2% 2,0% -3,5% 4,1% 4,1% -6m/+6m -18,6% 57,2% 15,0% 5,5% 13,7% 12,4% -19,2% -22,8% 4,9% 5,5% -1y/+1y 34,6% 39,6% 19,1% 3,9% 32,9% 12,0% -6,0% -20,1% 12,9% 12,9% s o u r c e : own elaboration. the results presented in tab 4. shows that the investments in socially responsible banks’ stock is on average more profitable than investments in shares of banks not included in respect index, while the highest surplus between rates of return are found in investments starting 1 year or 1 month before entering the index and terminating 1 year or 1 month after4. investment profits due to entering respect index by banks an analysis of the profitability of investments in shares of banks socially responsible can be enlarged by investigation of prices of stock in short period aro4 banks included in the respect index got also higher returns for all the periods comparing to the broad market index wig, except -1d/+1d period of investment. investments in stock of banks implementing high social… 55 und the date of entering the respect index. the investigation had to find out if the event of entering the index had any inf luence on the pricing of the bank, and if yes, what was the scope of such inf luence. to check the potential change of market price the author had normalized market price of a bank stock, assuming the entering date as 100% and analyzed its change in the period -1m/+1m around respect index entering date. also, the investigation was complemented by analysis of normalized market price of a share adjusted by a normalized value of the wig banking index, which was treated as a benchmark for abnormal profitability measure. choosing of -1m/+1m had to give some outlook on the investor reaction on the distinction of a bank through listing it in the portfolio of respect index. fig. 2. and 3. present normalized pricing of banks entering the respect index during its 1st edition announced on 19.11.2009 (bank handlowy sa, ing bank śląski sa, bph sa). fig. 4. and 5. present pricing of banks in the 2nd edition of the index announced on 25.01.2011 (bre bank sa, bank millennium sa and bank zachodni wbk sa). fig. 6. and 7. shows pricing of kredyt bank sa during the 3rd edition of the index announced on 25.07.2011, while fig. 8. and 9. presents second entrance of bph bank to the respect index in its 4th edition announced on 31.01.2012 after exclusion in the second edition. no banks joined the index in the v and vi editions announced on 31.07.2012 and 24.01.2013. plemented by analysis of normalized market price of a share adjusted by a normalized value of the wig banking index, which was treated as a benchmark for abnormal profitability measure. choosing of -1m/+1m had to give some outlook on the investor reaction on the distinction of a bank through listing it in the portfolio of respect index. fig. 2. and 3. present normalized pricing of banks entering the respect index during its 1st edition announced on 19.11.2009 (bank handlowy sa, ing bank śląski sa, bph sa). fig. 4. and 5. present pricing of banks in the 2nd edition of the index announced on 25.01.2011 (bre bank sa, bank millennium sa and bank zachodni wbk sa). fig. 6. and 7. shows pricing of kredyt bank sa during the 3rd edition of the index announced on 25.07.2011, while fig. 8. and 9. presents second entrance of bph bank to the respect index in its 4th edition announced on 31.01.2012 after exclusion in the second edition. no banks joined the index in the v and vi editions announced on 31.07.2012 and 24.01.2013. fig. 2. normalized prices of banks entering respect index in the 1st ed. fig. 3. normalized prices of banks entering respect index in the 1st ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data fig. 4. normalized prices of banks entering respect index in the 2nd ed. 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% 125,00% -22 -18 -14 -10 -6 -2 3 7 11 15 19 handlowy ingbsk bph -15,00% -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% -22 -18 -14 -10 -6 -2 3 7 11 15 19 handlow y ingbsk bph 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 24 millennium bzwbk bre plemented by analysis of normalized market price of a share adjusted by a normalized value of the wig banking index, which was treated as a benchmark for abnormal profitability measure. choosing of -1m/+1m had to give some outlook on the investor reaction on the distinction of a bank through listing it in the portfolio of respect index. fig. 2. and 3. present normalized pricing of banks entering the respect index during its 1st edition announced on 19.11.2009 (bank handlowy sa, ing bank śląski sa, bph sa). fig. 4. and 5. present pricing of banks in the 2nd edition of the index announced on 25.01.2011 (bre bank sa, bank millennium sa and bank zachodni wbk sa). fig. 6. and 7. shows pricing of kredyt bank sa during the 3rd edition of the index announced on 25.07.2011, while fig. 8. and 9. presents second entrance of bph bank to the respect index in its 4th edition announced on 31.01.2012 after exclusion in the second edition. no banks joined the index in the v and vi editions announced on 31.07.2012 and 24.01.2013. fig. 2. normalized prices of banks entering respect index in the 1st ed. fig. 3. normalized prices of banks entering respect index in the 1st ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data fig. 4. normalized prices of banks entering respect index in the 2nd ed. 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% 125,00% -22 -18 -14 -10 -6 -2 3 7 11 15 19 handlowy ingbsk bph -15,00% -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% -22 -18 -14 -10 -6 -2 3 7 11 15 19 handlow y ingbsk bph 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 24 millennium bzwbk bre s o u r c e : own elaboration of wse data. s o u r c e : own elaboration of wse data. figure 2. normalized prices of banks entering respect index in the 1st ed. figure 3. normalized prices of banks entering respect index in the 1st ed. adjusted by wig banking michał buszko56 figure 4. normalized prices of banks entering respect index in the 2nd ed. figure 5. normalized prices of banks entering respect index in the 2nd ed. adjusted by wig banking s o u r c e : own elaboration of wse data. s o u r c e : own elaboration of wse data. fig. 5. normalized prices of banks entering respect index in the 2nd ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data fig. 6. normalized prices of the bank entering respect index in the 3rd ed. fig. 7. normalized prices of bank entering respect index in the 3rd ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 24 millennium bzwbk bre 60,00% 65,00% 70,00% 75,00% 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% -2 1 -1 8 -1 5 -1 2 -9 -6 -3 1 4 7 10 13 16 19 22 kredyt bank -8,00% -6,00% -4,00% -2,00% 0,00% 2,00% 4,00% 6,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 kredyt bank fig. 5. normalized prices of banks entering respect index in the 2nd ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data fig. 6. normalized prices of the bank entering respect index in the 3rd ed. fig. 7. normalized prices of bank entering respect index in the 3rd ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 24 millennium bzwbk bre 60,00% 65,00% 70,00% 75,00% 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% -2 1 -1 8 -1 5 -1 2 -9 -6 -3 1 4 7 10 13 16 19 22 kredyt bank -8,00% -6,00% -4,00% -2,00% 0,00% 2,00% 4,00% 6,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 kredyt bank plemented by analysis of normalized market price of a share adjusted by a normalized value of the wig banking index, which was treated as a benchmark for abnormal profitability measure. choosing of -1m/+1m had to give some outlook on the investor reaction on the distinction of a bank through listing it in the portfolio of respect index. fig. 2. and 3. present normalized pricing of banks entering the respect index during its 1st edition announced on 19.11.2009 (bank handlowy sa, ing bank śląski sa, bph sa). fig. 4. and 5. present pricing of banks in the 2nd edition of the index announced on 25.01.2011 (bre bank sa, bank millennium sa and bank zachodni wbk sa). fig. 6. and 7. shows pricing of kredyt bank sa during the 3rd edition of the index announced on 25.07.2011, while fig. 8. and 9. presents second entrance of bph bank to the respect index in its 4th edition announced on 31.01.2012 after exclusion in the second edition. no banks joined the index in the v and vi editions announced on 31.07.2012 and 24.01.2013. fig. 2. normalized prices of banks entering respect index in the 1st ed. fig. 3. normalized prices of banks entering respect index in the 1st ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data fig. 4. normalized prices of banks entering respect index in the 2nd ed. 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% 125,00% -22 -18 -14 -10 -6 -2 3 7 11 15 19 handlowy ingbsk bph -15,00% -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% -22 -18 -14 -10 -6 -2 3 7 11 15 19 handlow y ingbsk bph 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 24 millennium bzwbk bre fig. 5. normalized prices of banks entering respect index in the 2nd ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data fig. 6. normalized prices of the bank entering respect index in the 3rd ed. fig. 7. normalized prices of bank entering respect index in the 3rd ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 24 millennium bzwbk bre 60,00% 65,00% 70,00% 75,00% 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% -2 1 -1 8 -1 5 -1 2 -9 -6 -3 1 4 7 10 13 16 19 22 kredyt bank -8,00% -6,00% -4,00% -2,00% 0,00% 2,00% 4,00% 6,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 kredyt bank figure 6. normalized prices of the bank entering respect index in the 3rd ed. figure 7. normalized prices of bank entering respect index in the 3rd ed. adjusted by wig banking s o u r c e : own elaboration of wse data. s o u r c e : own elaboration of wse data. all of the presented investments in shares of banks that entered respect index increased in absolute as well as relative way wealth of the shareholders, except of kredyt bank sa. the included figures may confirm that a fact of distinguishing the high social responsibility standards implemented by bank is accepted and positively perceived by stock exchange investors in a short period of time5. in case of kredyt bank sa, the lack of immediate benefits related to 5 an analysis of investment benefits due to participation in the respect index in the long-term would be substantially distorted by other factors inf luencing the stock price but not related to csr implementation. investments in stock of banks implementing high social… 57 participation in the index might be justified by general financial market disturbances due to debt crisis in eurozone and foreseen disposal of the bank by its owner, i.e. belgian financial group kbc. despite stock exchange investors positively perceived entering banks into respect index, the long-term cumulative rate of return on their stock (including dividends) is lower comparing to the rate of whole portfolio of respect index. tab 5. table 5. cumulative rates of return of banks participating in respect vs. other indices period handlowy ing bsk bph millennium bz wbk kredyt bank bre mean wig banking resp 19.11.09– 31.12.09 5,74% 9,09% 19,54% 17,36% 7,34% 3,04% 8,02% 10,02% 1,27% 4,87% 31.12.09– 31.12.10 38,96% 14,62% -17,18% 4,17% 15,21% 24,14% 16,92% 13,83% 17,93% 32,17% 31.12.10– 31.12.11 -24,31% -10,40% -54,32% -24,00% 6,90% -30,86% -19,08% -22,30% -21,68% -11,25% 31.12.11– 31.12.12 37,27% 13,61% 48,55% 16,32% 6,79% 62,24% 32,52% 31,04% 22,64% 29,23% 31.12.12– 31.03.13 -9,95% -0,22% 2,99% 8,60% 0,84% – 4,91% 1,19% -4,20% -7,41% figure 8. normalized prices of the bank entering respect index in the 4th ed. figure 9. normalized prices of bank entering respect index in the 4th ed. adjusted by wig banking s o u r c e : own elaboration of wse data.s o u r c e : own elaboration of wse data. fig. 8. normalized prices of the bank entering respect index in the 4th ed. fig. 9. normalized prices of bank entering respect index in the 4th ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data all of the presented investments in shares of banks that entered respect index increased in absolute as well as relative way wealth of the shareholders, except of kredyt bank sa. the included figures may confirm that a fact of distinguishing the high social responsibility standards implemented by bank is accepted and positively perceived by stock exchange investors in a short period of time6. in case of kredyt bank sa, the lack of immediate benefits related to participation in the index might be justified by general financial market disturbances due to debt crisis in eurozone and foreseen disposal of the bank by its owner, i.e. belgian financial group kbc. despite stock exchange investors positively perceived entering banks into respect index, the long-term cumulative rate of return on their stock (including dividends) is lower comparing to the rate of whole portfolio of respect index. tab 5. tab. 5 cumulative rates of return of banks participating in respect vs. other indices period handlowy ing bsk bph millennium bz wbk kredyt bank bre mean wig banking resp 19.11.09– 31.12.09 5,74% 9,09% 19,54% 17,36% 7,34% 3,04% 8,02% 10,02% 1,27% 4,87% 31.12.09– 31.12.10 38,96% 14,62% -17,18% 4,17% 15,21% 24,14% 16,92% 13,83% 17,93% 32,17% 31.12.10– 31.12.11 -24,31% -10,40% -54,32% -24,00% 6,90% -30,86% -19,08% -22,30% -21,68% -11,25% 6 an analysis of investment benefits due to participation in the respect index in the long-term would be substantially distorted by other factors influencing the stock price but not related to csr implementation. 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% 125,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 bph -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 bph fig. 8. normalized prices of the bank entering respect index in the 4th ed. fig. 9. normalized prices of bank entering respect index in the 4th ed. adjusted by wig banking source: own elaboration of wse data source: own elaboration of wse data all of the presented investments in shares of banks that entered respect index increased in absolute as well as relative way wealth of the shareholders, except of kredyt bank sa. the included figures may confirm that a fact of distinguishing the high social responsibility standards implemented by bank is accepted and positively perceived by stock exchange investors in a short period of time6. in case of kredyt bank sa, the lack of immediate benefits related to participation in the index might be justified by general financial market disturbances due to debt crisis in eurozone and foreseen disposal of the bank by its owner, i.e. belgian financial group kbc. despite stock exchange investors positively perceived entering banks into respect index, the long-term cumulative rate of return on their stock (including dividends) is lower comparing to the rate of whole portfolio of respect index. tab 5. tab. 5 cumulative rates of return of banks participating in respect vs. other indices period handlowy ing bsk bph millennium bz wbk kredyt bank bre mean wig banking resp 19.11.09– 31.12.09 5,74% 9,09% 19,54% 17,36% 7,34% 3,04% 8,02% 10,02% 1,27% 4,87% 31.12.09– 31.12.10 38,96% 14,62% -17,18% 4,17% 15,21% 24,14% 16,92% 13,83% 17,93% 32,17% 31.12.10– 31.12.11 -24,31% -10,40% -54,32% -24,00% 6,90% -30,86% -19,08% -22,30% -21,68% -11,25% 6 an analysis of investment benefits due to participation in the respect index in the long-term would be substantially distorted by other factors influencing the stock price but not related to csr implementation. 80,00% 85,00% 90,00% 95,00% 100,00% 105,00% 110,00% 115,00% 120,00% 125,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 bph -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% -21 -17 -13 -9 -5 -1 4 8 12 16 20 bph michał buszko58 period handlowy ing bsk bph millennium bz wbk kredyt bank bre mean wig banking resp 19.11.09 – 31.12.10 46,93% 25,03% -1,00% 22,25% 23,67% 27,91% 26,30% 24,44% 19,42% 38,61% 19.11.09 – 31.12.11 11,21% 12,03% -54,78% -7,09% 32,20% -11,57% 2,20% -2,26% -6,46% 23,02% 19.11.09 – 31.12.12 52,66% 27,27% -32,82% 8,07% 41,19% 43,48% 35,44% 25,04% 14,71% 58,98% 19.11.09 – 31.03.13 37,46% 26,99% -30,81% 17,36% 42,37% – 42,09% 22,58% 9,89% 47,20% s o u r c e : own elaboration of wse data. tab. 5 confirms that portfolio of banks participating in respect index is generally less profitable than the entire portfolio of respect, however it is more profitable than portfolio of wig banking subindex. an analysis of profitability of investments in stock of banks included in respect index can be supplemented by statistics based on monthly returns and risk on shares and indices calculated since introduction of respect index on wse tab. 6. table 6. monthly returns statistics of banks participating in respect index vs returns of wig banking and respect category handlowy ing bsk bph millennium bz wbk kredyt bank bre wig banking resp mean 1,00% 0,71% -0,29% 0,73% 0,99% 1,44% 1,20% 0,38% 1,05% st. dev. 7,06% 5,57% 10,35% 8,53% 5,84% 10,19% 8,83% 5,70% 5,42% mean/st.dev 14,15% 12,78% -2,81% 8,60% 16,91% 14,18% 13,63% 6,69% 19,37% r coefficient 70,04% 71,27% 49,86% 54,30% 34,77% 50,48% 63,65% 80,36% 100,00% regr. coefficient 1,0071 0,8290 1,1735 1,0647 0,4758 – 1,3416 1,0620 1,0496 s o u r c e : own elaboration of wse data. presented data confirms that most of the banks ever participating in respect has higher average returns comparing to wig banking index as well as higher standard deviation ref lecting their increased investment risk level. the relationship between those two categories gives advantage to the socially responsible banks over other entities represented by wig banking. nonetheless, investments in stock of banks implementing high social… 59 socially responsible banks stock is less profitable and more risky than the portfolio of respect index.  conclusions banks are entities that actively implement and develop social responsibility standards. their engagement in this field is visible clearly after financial crisis of 2007–2009. the most common socially responsible actions of banks are related to employees training, financing of ecological projects, saving energy and protecting of natural environment, developing transparent relations with customers and deponents as well as providing high quality, detailed reporting to investors. in poland majority of banks provides social responsible operations and in some cases also developed complex csr policies. as the wse elaborated and started to list respect index that promotes and specially distinguishes companies that implement very high csr standards, totally 7 banks were qualified. the investigation included in this paper showed that investors may get benefits due to investments in stock of banks socially responsible, both in absolute as well as relative way. the hypothesis put forward by the author can be verified positively. the lowest return is generally achieved in the shortest – one day period of investment in stock of banks joining the index. the highest return is obtained from the long term investments, what confirms the strategic character of csr policy. despite visible changes of pricings of banks stock due to the quotation within respect index one has to consider that the index itself is still quite a new concept in poland. that means its formula is still changing as well as rules of classification of companies. thus, the banks participating in the index may not be representing similar csr quality. also, one has to note still very small number of companies promoted by the index. in case of banks there were maximum 5 entities listed simultaneously within respect but their number was changing in following editions due exclusions as well as mergers and acquisitions. a small number of banks, relatively short period of functioning of respect index and a lack of sufficient long time series hinder application of advanced statistical methods of analysis to check thoroughly the value creation for capital markets investors. nonetheless promoting of social responsibility amongst the banks should be developed in long-term period as the preliminary research confirm its benefits. michał buszko60  references ankieta respect – vi edycja 2012 r. (2013) giełda papierów wartościowych w warszawie, http://www.odpowiedzialni.gpw.pl/pub/ankieta_vi_edycja.pdf (accessed: 25.04.2013). dziawgo l. zielony rynek finansowy. ekologiczna ewolucja rynku finansowego, pwe, warszawa 2010, p. 111–113. murawski t. (2012), społeczna odpowiedzialność biznesu jako kierunek rozwoju rynku finansowego – ujęcie współczesne, annales universitatis mariae curie-skłodowska, umcs, lublin, 628. odpowiedzialny biznes w banku millennium, http://www.bankmillennium.pl/static-content/pl/csr_w_banku_millennium_prezentacja_537047.pdf (accessed: 01.06. 2013). polityka społecznej odpowiedzialności i zrównoważonego rozwoju banku zachodniego wbk (2012), załącznik do zarządzenia prezesa zarządu nr 32/2012 z dnia 07.12.2012 r., bank zachodni wbk, http://www.bzwbk.pl/_items/bzwbk.pl/pdf/polityka-csr-bz-wbk.pdf (accessed: 30.05.2013). respect index. opis projektu, giełda papierów wartościowych w warszawie (2013), http://www.odpowiedzialni.gpw.pl/opis_projektu (accessed: 25.04.2013). uchwała nr 651/2009, zarządu giełdy papierów wartościowych w warszawie s.a. z dnia 18 listopada 2009 r., gpw w warszawie, http://www.gpwinfostrefa.pl/gpwis2/pl/ archive/info/!5155004,gpw:-nowy-indeks--respect-index(accessed: 20.04.2013). uwarunkowania związane z przygotowaniem spółki do weryfikacji. respect index (2012), deloitte, http://www.odpowiedzialni.gpw.pl/pub/kri_-_prezentacja_deloitte.pdf (accessed: 28.05.2013). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 10 issue 3 2021 quarterly address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2019: 100.00 editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka-pelowska, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2021 copyright by uniwersytet mikołaja kopernika toruń 2021 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra-oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents mustafa akan, natalia konovalova optimal incentives for economic growth in central european countries: a micro approach ............................................................................................................... 9 erika pancenko, tatyana ivanova opportunities for increasing the export of latvia to eu countries ................................ 33 dawit tadesse tiruneh the perspective of corporate governance on the interactions of internal audit with management and its impact on the internal –external audit linkages .............. 51 for authors ........................................................................................................................... 71 date of submission: april 11, 2020; date of acceptance: june 8, 2020. * contact information: sadrul@ewubd.edu, department of business administration, east west university, dhaka, bangladesh, phone: +8809666775577 ext. 282; or cid id: https://orcid.org/0000-0002-6253-3043. ** contact information: humayun.kabir@ewubd.edu, department of business administration, east west university, dhaka, bangladesh, phone: +8809666775577 ext. 406; orcid id: https://orcid.org/0000-0002-5648-197x. *** contact information: nnp_mkt@ewubd.edu, department of business administration, east west university, dhaka, bangladesh, phone: +8809666775577 ext. 402; orcid id: https://orcid.org/0000-0001-7607-1268. *** contact information: sunnysaha@ewubd.edu, department of business administration, east west university, dhaka, bangladesh, phone: +8809666775577 ext. 530; orcid id: https://orcid.org/0000-0003-0348-295x. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 1 sadrul huda, s.s.m., kabir, m.h., popy, n.n., & saha, s. (2020). innovation in financial services: the case of bangladesh. copernican journal of finance & accounting, 9(1), 31–56. http://dx.doi. org/10.12775/cjfa.2020.002 s. s. m. sadrul huda* east west university md. humayun kabir** east west university nurun naher popy*** east west university sunny saha**** east west university innovation in financial services: the case of bangladesh keywords: financial innovation, financial technology (fintech), mobile financial services, financial inclusion, digital financial services. s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha32 j e l classification: g20, g21, g23, o31. abstract: the financial services industry of bangladesh has achieved phenomenal success and advancing day by day for the growth of technology. bangladesh has long been considered a role model for financial inclusion, first with the emergence of proliferation and prominence of microfinance institutions, especially in rural areas. this paper examines the financial services innovation in bangladesh by presenting the changes in the industry over the years. the paper also analyses the comparative picture of bangladesh’s financial inclusion and world financial inclusion. this study is a descriptive study where quantitative data has been collected from secondary sources. the study ref lects a very positive picture of financial innovation in bangladesh. we expect that the study can be used by concerned business people in decision making for the better implication of financial innovation.  introduction our modern economy is the result of an efficient and effective financial system. according to rose and marquis (2009), the financial system is the collection of instruments, institutions, regulations, and markets through which financial services are delivered, interest rates are specified, and financial securities are operated. pietrzak, polański and woźniak (2008) considered the financial system as a major part of modern society. with the development of the financial system, financial innovation has become the most talked-about topic of today’s world. financial innovation can be defined as the producing and promoting of new financial services and products, emerging new practices to assist financial activities, designing new arrangements for financial institutions, and, most importantly, interacting with customers to ensure better services. financial innovation can help to minimize financial risks, develop financial intermediation, lessen the cost of capital, and thus upgrade the economy. that is why financial innovation is mandatory for the economy of developing countries like bangladesh. in this perspective, bangladesh is not lagging. the financial innovation and adaptation rate is comparatively higher than the other developing countries’ rates. different studies were developed on financial innovation, global financial crisis, the inf luence of financial innovation, and many more. but no study focuses on the overall scenario of bangladesh’s financial innovation with a comparative picture of bangladesh’s financial inclusion and world financial inclusion. this paper is trying to fill the stated gap with a descriptive study using second innovation in financial services: the case of bangladesh 33 ary data. through the discussion, the paper finds that the scenario of financial innovation in bangladesh is very positive, and the increase rate is pretty higher than the other developing countries. the managerial implications of the paper will help the finance personnel for a better understanding of financial innovation and making proper decisions. literature review extraordinary success has been observed over the last twenty-five years through the application of reform programs and mixing of modern technology in the financial services industry of bangladesh in terms of expanding branches, innovation, profitability, feasibility, and competitiveness. in the face of the progress cited, a good number of population, notably the people who don’t have access to most of the privileges living in rural areas till this time cannot consume various financial services as a result of inadequacy of direct access to numerous kinds of financial services. subsequently, mobile financial services (mfs) have been granted to initiate in bangladesh (nabi, sarder, moula & sarder, 2017). financial innovation modern globalization, along with the help of government and investors bring the innovation by facing advanced and broader global risk; innovation works as an instrument of solving problems, coordinate, and circulate added difficulties. deregulation in the banking system helps in developing allocation, competence, and lessening costs occurred in financial services and creates growth in the economy in turn. to condensate financial innovation, it means acquiring new products and new attributes for current financial products. as follows, the core theme of financial innovation becomes the creation of more unique products with added attributes and features with the existing financial products. accordingly, the aim of innovative products needs to try lessening risks involved in financial services to reaching financial optimization (shekhar & gudimetta, 2013). in particular, before the industrial revolution in western europe, the asian economies worked as the antecedent of some of the most significant historical financial innovations. the evidence shows that in the second half of the twentieth century, a number of significant financial innovations were originats. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha34 ed from asia (buckley, arner & panton, 2013). to cite specifically, bangladesh has been termed as the birthplace of microfinance as an asian innovation and has spread around the world (armendáriz & morduch, 2005). need for financial innovation financial innovation, an indispensable element, is often ignored as a form of innovation. financial markets to be more competent, such innovation is helpful (frame & white, 2004). it seems that in various parts of the world, it has been noticed that the willingness to innovate is not ample (al janabi, 2006). as per the situation, a range of financial innovation is present, and those lead to some questions – what are the driving factors for financial innovations in various countries? why it happens that organizations differ from one another on the basis of their innovating behavior? hence assisting companies and households in handling risks is one of the crucial functions of financial systems. the usability of financial products depends on the availability of companies and households regarding accepting a range of risks, along with the institutions’ competence in managing risks distinctive in these products. notably, defection in financial markets could cause the negative performance of the innovativeness in the financial products and might limit the availability of those products in turn. such assets might be named as “natural assets” like the same instruments which are issued by the borrower as well as held by the investors (shekhar & gudimetta, 2013). innovation in financial sector financial innovation is mainly developed through the inf luence of the stability in the financial sector and partly through the policies being made nationally (levich, 1985). levich suggested a few basic questions: which are the major financial product and process changes during the past twenty to twenty-five years in the national and international context? (tufano, 1989) what are the primary inf luencers behind the changes? (smith, smithson & wilford, 1989) what are the direct and indirect inf luences on individuals and aggregated macro levels both from positivity and policy perspectives? tufano (1989) looked into the factors by cross-examining some new securities and trying to find out whether financial innovators can get someone any innovation in financial services: the case of bangladesh 35 first-mover advantages. from 1974 to 1986, his observation was that the investment banks which created and offered financial innovators did not actually charge higher than the usual, long before the similar products arrived in the market and that those banks also continued on offering the new products at a consistently lower prices than what the competitors were offering. smith et al., (1989) proved that there is a positive correlation between financial riskiness and financial innovation since there is a direct link when there is the volatility of interest rates, exchange rates, and commodity prices. verghese (1990) suggest that the outcome from the current wave of financial innovation must be evaluated from an objective angle to find out the actual results from such financial innovations. innovation in financial services should include all the significant features of the financially innovative products against the cost of introducing and running those products in the market. thus, we can capitalize on the lessons we get from the financial changes and innovations. he came at this conclusion from his comprehensive study of the indian financial markets and the financial innovations offered in the market. miller (1992), on the other hand, suggested the functional benefits of financial innovation through financial intermediation. he opined that through the lower cost of capital, reduced financial risks, and improved financial intermediation, financial innovation could bring welfare enhancement. by properly explaining how financial innovation functions in the market, the instruments can be made more popular in the world of fiercely competitive financial industries across the world, that is quintessential for injecting capital to the business operations. with this, we can see how financial innovation is instrumental for the growing economy and how financial innovation reengineered as one of the significant change catalysts in stimulating the economy for the betterment, especially among the emerging economies. a standard interpretation explained by tufano (2003) for financial innovation is that some specific kinds of market inability, as well as some weaknesses, are being helped by it to bring it on track. such as incomplete markets, are being assisted by financial innovation to develop conveniences for risk-sharing. in the case of agency conf licts, the sequences of interests can be advanced by new types of security. lowering taxes or to bypass the yield of regulations works as another important catalyst regarding financial innovation. financial innovation becomes desirable and successful when both the issuers and buyers get benefits from the innovation. s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha36 the array of financial innovations are being driven by the regulations (frame & white, 2004). individual’s education and income; and use of the new financial technology by consumers are being found through a positive relationship. financial innovators for their well-earned efforts gain first-mover advantages and compensations. it is necessary to improve product choices for consumers and expanded access to credit which is possible only when innovations are not being hindered by regulations (draghi, 2008). as a result, the destination is to establish the f lexibility of the system and not to delay the process needed for market discipline and innovation which are needed to the financial sectors’ contribution towards economic growth. financial innovation in bangladesh according to siddik, sun, yanjuan and kabiraj (2014), financial inclusion raised as a crucial issue in both the developed as well as developing countries since 2005, the year which was announced as the international microcredit year by un. it also has become a hot topic for the researchers and academicians. from a more extensive point of view, financial inclusion indicates delivery of formal financial services at a reasonable expense to every single individual from a country. in bangladesh, during the most recent couple of years, the banking industry has encountered huge development. nonetheless, there are worries that all the banks have not been capable enough because of high operating expenses, to incorporate a broad segment of the whole population into the overlap of essential banking facilities, particularly people from remote territories. the distance can expand the cost of utilizing financial services. in this manner can decrease the productivity of banks and thus making branch expansion decision unattractive to the service providing banks. in this manner, the national bank of bangladesh, i.e., bangladesh bank is urging scheduled banks for delivering banking facilities to individuals by using updated technologies, for example, smart cards, atms, mobile banking etc. given that atms would never empower rural people to do a transaction from remote areas. but mobile banking is viewed as an excellent choice to diminish the issue of nearness to bank branches. cgap (2006) expressed that mobile banking has extraordinary potentiality to make essential financial services more reachable to low-income individuals. innovation in financial services: the case of bangladesh 37 from the above discussion, it can be said that many scholars analyzed the inf luence of financial systems on the economy. different studies were developed on financial innovation, global financial crisis, the inf luence of financial innovation, and many more. many scholars from bangladesh worked on various financial innovation-related issues. but no study focuses on the overall scenario of bangladesh’s financial innovation with a comparative picture of bangladesh’s financial inclusion and world financial inclusion. this paper is trying to fill the stated gap. the research methodology and the course of the research process this study is a descriptive study where quantitative data has been collected from secondary sources to examine the financial services innovation in bangladesh by presenting the changes in the industry over the years in the financial market of bangladesh. the secondary data was collected from the world bank, bangladesh bank, articles, and reviewing numerous literature. the world bank’s global findex database and global financial development database from 2014 to 2017 is used to analyze the impact of financial innovation in financial inclusion of bangladesh. besides, the mobile financial services (mfs) data was collected from the central bank of bangladesh (i.e., bangladesh bank) to present the comparative summary statement of mobile financial services. discussion and findings bangladesh has long been considered a role model for financial inclusion, first with the emergence of grameen bank in the late 1970s, and after that with the subsequent proliferation and prominence of microfinance institutions such as brac, mainly in rural areas. despite these developments, it is still now a challenge for many people, especially marginal farmer and women, to access financial services. but recently, bangladesh bank has taken potential measures to promote the development of a more inclusive financial system in bangladesh. s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha38 mobile banking mobile banking or m-banking is one of the wonders of this technological era (sadiku, tembely, musa & momoh, 2017). it refers to providing banking services through mobile telecommunication devices such as cell phone or personal digital assistant (pdas). khan (2014) defined m-banking as an application of mobile computing that delivers customers with banking facilities anytime, anywhere using mobile devices and a mobile service such as sms (short message service). mobile banking facilitates customers by removing the space limitation such as transferring a balance from one account to others and checking account as well as removing the time limitation by saving time. khan (2014) indicated the following services that are provided by mobile banking. ■ account details: the prime services of account services provided by mobile banking are alerts on account activities, mini statement of account, checking of account, access to card statement and loan statement, monitoring of deposits, equity statement, mutual fund statement, pension plan management, insurance policy management. ■ payments and transfers: the services include international and domestic fund transfer, mobile recharging, bill payment processing, micro-payment handling, commercial payment processing etc. ■ investments details: the services include card and cheque book request, status of an application for credit, personalized notifications and alerts on security prices, real-time stock quotes, and portfolio management service. despite offering so many services, the m-banking is still underused, and the adaptation rate is lower than expected. sadiku et al. (2017) stated about some potential barriers to m-banking adaptation, such as trust issues, perceived security risk, illiteracy, minimal knowledge about technology, unavailability of smart phones and personal digital assistant (pdas), associated cost etc. offering secured services is the major challenge of mobile banking. cyber-attacks that may affect mobile banking include hacking, unauthorized use, information loss, eavesdropping, pin recovery attacks, malware and interference. to prevent this kind of problems, some authentication techniques can be practiced, such as one time passwords (otp), biometric identification and transaction profile scripts. innovation in financial services: the case of bangladesh 39 internet banking internet banking refers to the systems which support the customers to access accounts and necessary information on bank services through pc with internet support or other intelligent devices (khalil, ahmad & khan, 2017). the banks that allow internet banking are eastern bank limited, bank asia, brac bank, arab bangladesh bank ltd., hsbc, scb, and so on. the facilities that are available from internet banking include wholesale products and services for corporate customers as well as retail products and services for individual customers. some examples of wholesale products and services are wire transfer, bill payment, automated clearinghouse transaction, cash management. examples of retail products and services are funds transfer, balance inquiry, investment activity, and loan applications, downloading transaction information, bill resentment, bill payment and other value-added services. according to khalil, ahmad and khan (2017) demographic considerations, customer services and competitive cost motivate banks to practice internet banking. they also stated about some factors that drive banks strategy, which includes cost efficiencies, competition, and branding, geographic reach and customer demographics. ■ competition: competition is the prime driving force of increasing internet banking that leads to revenue enhancement. banks are using internet banking as a new strategy for retaining existing customers as well as attracting new customers. ■ cost efficiencies: banks can deliver better services in cost-efficient ways by practicing internet banking. ■ graphical reach: expanded customer contact can be managed by internet banking by increasing geographical reach and lowering delivery cost. ■ branding: developing a positive brand image is a strategic priority for banks. internet banking products and technology can facilitate banks to maintain and develop a profitable relationship with customers by providing easy access to a broad array of financial services and products. ■ customer demographics: the customers who are early adaptors can quickly adopt new technologies that is offered to the market. internet banking permits banks to provide a vast array of new technology-based ses. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha40 rvices to the early adaptors. but the challenge is to find suitable services for suitable customers. internet banking also facilitates banks to maintain proper communication with the customer as well as provide crucial information whenever it is needed. internet banking also allows customers fast, safe and convenient ways to shop required financial services. internet banking offerings in bangladesh ■ citidirect: the motto of citidirect is “money isn’t everything but it can be everywhere”. the facilities of citidirect are information reporting, easy-to-use application, deliver services with highest security, world link through citidirect, online direct debit transaction process, comprehensive payment transaction solution globally and locally, real-time information reporting, payments through citidirect, flexible and streamlined functionality, e-mail and wireless banking alerts by citidirect. ■ eastern bank limited: the internet banking application of eastern bank limited allows customers to meet the banking requirements through the internet. the services include fund transfers and payments, loans, deposits, utility bill payments, account operations and inquiries, session summary etc. ■ bank asia: bank asia offered innovative services through centralized databases. to gain competitive advantages, bank asia is practicing its internet banking services by modern it infrastructure and online banking software. it is the pioneer in traducing innovative services like shared atm network and sms banking. bank asia has 21 atms as a member of etn along with eleven other banks. ■ brac bank: brac bank assured the highest security system through ssl (secure socket layer) encryption technology. ssl secured the exchange of information between bracbank.com and customer’s computer, and for the third party, it is not possible to access. ssl is universally accepted on the www (world wide web) for encrypted and authenticated communication between the servers and customers’ computers. ■ hsbc: hsbc enables a customer to receive a credit of all cheque and cash deposits along with inward remittance. customers can deposit up to bdt50000 cash per transaction and any bdt amount in cheque 24/ 7 ba innovation in financial services: the case of bangladesh 41 sis through the conveniently located service centers, atm machines and easypay machines. with easypay machines all the customers of hsbc and non-hsbc can make deposits and pay their credit card payments, utility bills etc. easypay machines also permit customers to make transactions, pay credit card payments, utility bills, etc. there is a sharp rise in the growth of internet technology and internet users. at the same time, there are also present some impediments on the way to ultimate growth. the reasons are lack of efficiency in using of it network, underdeveloped it industry, low-level of computer literacy, limited skilled human resources, widespread poverty, poor telecommunication infrastructure, lack of software in the bengali language. though there are some constraints on the growth of the internet, some opportunities also exist. most important one include young generation is playing a vibrant role in the emerging it industry in bangladesh. young people generate 38 % of all bank accounts. among them, 17% of young people have two accounts. we know that the young generation is mostly interested in internet banking. so there is a vast opportunity for internet banking. moreover, bangladesh railway established a nationwide fiber-optic network which was used on 8% from its existence. this facility can provide a backbone for national data and voice communication. agent banking according to ahmed and ahmed (2018) agent banking refers delivering the limited scale of financial services to the underprivileged population through non-bank retail agents under an agency agreement by relying on some devices such as pos terminal, card readers or mobile phones. banks need prior and valid approval from the central bank for offering agent banking. an agent is the owner of an outlet who provides financial services on behalf of any specific bank (interresearch, 2017). agents are utilized as potential distribution channels for financial inclusion. the agent banking is promoting by bangladesh bank to reach the unobserved segment as well as the current customers living in geographically dispersed locations. a proper guideline is formed by bangladesh bank for agent banking to ensure security and soundness of the delivery process. the following diagram can state the process f low and the stakeholders involved in agent banking: s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha42 figure 1. agent banking model in bangladesh figure 1. agent banking model in bangladesh source: authors’ developed model, 2020. the services that are provided by agent banking are receiving of clearing cheque, balance inquiry, inward foreign remittance disbursement, utility bill payment, cash payment, small value loan disbursement; instalments of loans, fund transfer, collection of small value cash deposits and cash withdrawals, processing of documents for account opening, credit or debit card application, and loan application. the services that are not provided by agent banking are cheques encashment; dealing with financial appraisal or loan; dealing with foreign currency transaction; issuance of cheques and bank cards; giving final approval of bank accounts opening. agent banking business model in bangladesh according to the guideline of bangladesh bank, 2013, an agent act on behalf of a bank and can take a license from one or more banks at a time. the customers can enjoy real-time banking services from the agent banking house because agent banking branch can be called a mini branch of a bank that has all modern facilities that a full branch of a bank has. in bangladesh there present some known risks in agent banking, such as committing fraud by retail agent or customers; getting stolen of equipment or other properties from agent premises; facing financial loss by the agents or banks from hacker attacks, data leaks, inadequate electronic or physical security; lack of skilled technical support providers; weak branch of bank bank agent agent agent s o u r c e : authors’ developed model, 2020. the services that are provided by agent banking are receiving of clearing cheque, balance inquiry, inward foreign remittance disbursement, utility bill payment, cash payment, small value loan disbursement; instalments of loans, fund transfer, collection of small value cash deposits and cash withdrawals, processing of documents for account opening, credit or debit card application, and loan application. the services that are not provided by agent banking are cheques encashment; dealing with financial appraisal or loan; dealing with foreign currency transaction; issuance of cheques and bank cards; giving final approval of bank accounts opening. innovation in financial services: the case of bangladesh 43 agent banking business model in bangladesh according to the guideline of bangladesh bank, 2013, an agent act on behalf of a bank and can take a license from one or more banks at a time. the customers can enjoy real-time banking services from the agent banking house because agent banking branch can be called a mini branch of a bank that has all modern facilities that a full branch of a bank has. in bangladesh there present some known risks in agent banking, such as committing fraud by retail agent or customers; getting stolen of equipment or other properties from agent premises; facing financial loss by the agents or banks from hacker attacks, data leaks, inadequate electronic or physical security; lack of skilled technical support providers; weak internet connections; inadequate backup systems (lyman, ivatury & staschen, 2006). except for these known risks, agent banking also has a significant risk of hijacking and robbery in the time of cash re-balancing and handling to and from bank branches. to manage the above mentioned risks, agents are instructed to do the following: ■ selecting agents with the experiences of regular cash handling. ■ keeping an ample amount of cash on hand and credit in the account. ■ maintaining a good relationship with law enforcers. digital financial services to digitize a nation, it is necessary to digitize a country’s citizen services and financial services. since the beginning of the digital bangladesh journey, the government is concentrated more and transforming the citizen services. currently, a citizen can apply for any government services online from passport application to the tax return form. however, to fully digitize the country, it is necessary to concentrate on digital financial services. over the past few years, the mobile financial services (mfs) has booming in bangladesh, but that is not enough for 164.7 million people. there is a vast number of unbanked people who could be potential customers for the mfs provider. however, services offered by mfs provider is limited to cash in and out; some are giving services to pay a few e-commerce sites. here is a model to show what other services can be offered by mfs provider: s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha44 figure 2. proposed digital financial services that the mfs provider can provide to existing and potential customers source: authors’ developed model, 2020. mfs provider should allow their customers for depositing money from automated teller machine. also, there should be a service of mobile wallet to bank account, debit and credit card transfer. mfs provider can collaborate with an international payment gateway like paypal, g pay, alipay, paytm, cashu etc. so that the migrant workers can send remittance to bangladesh more quickly and conveniently. besides, migrant workers working in bangladesh can send their money to their home country so that the illegal transfer of money flow will decline. country’s freelancer will be benefited because they can receive money by using paypal without any hassle. to encourage developer and online payment mfs provider can also collaborate with google play store youtube, facebook, gaming and software site, and so forth. there should be the service of transferring money from one provider wallet to another provider’s wallet so that there will be less need for cash out. if mfs clients can pay their savings accounts instalments, credit card payments, insurance premium, then the unbanked people will feel encouraged to saving their money instead of keeping liquid cash mfs provider payment to google play store, youtube, facebook, gaming and software sites etc. accept deposits from atm mfs wallet to bank transfer collaboration with paypal, g pay, alipay, paytm, cashu etc. insurance premium payment payment to savings and loans account in post office, banks and fis money transfer from one provider to another provider's wallet payment for air ticket, hajj & tour packages etc. provides microcredit s o u r c e : authors’ developed model, 2020. mfs provider should allow their customers for depositing money from automated teller machine. also, there should be a service of mobile wallet to bank account, debit and credit card transfer. mfs provider can collaborate with an international payment gateway like paypal, g pay, alipay, paytm, cashu etc. so that the migrant workers can send remittance to bangladesh more quickly and conveniently. besides, migrant workers working in bangladesh can send their innovation in financial services: the case of bangladesh 45 money to their home country so that the illegal transfer of money f low will decline. country’s freelancer will be benefited because they can receive money by using paypal without any hassle. to encourage developer and online payment mfs provider can also collaborate with google play store youtube, facebook, gaming and software site, and so forth. there should be the service of transferring money from one provider wallet to another provider’s wallet so that there will be less need for cash out. if mfs clients can pay their savings accounts instalments, credit card payments, insurance premium, then the unbanked people will feel encouraged to saving their money instead of keeping liquid cash in their home. moreover, the mfs provider can offer loan to the poor citizens through mfs account that will help them to way out of their poverty and finally contribute to the country’s economic development. mobile finance services mobile finance services or mfs added a new era in the area of financial access by arranging various technologies and multiple approaches altogether (nolan, 2013). mfs can be defined as the use of a mobile phone to access and execute the transaction and financial services (sultana, 2014). sultana (2014) also mentioned about the three aspects of mfs: mobile money, mobile credit & savings and mobile insurance. mobile money indicates the uses of mobile phone for transferring money and making payment which includes p2p (peer-to-peer) transfers, g2p (government-to-person) payments, merchant payment, bill payment and international remittances. mobile credit and savings service indicate wing of mobile phone for providing credit, services and savings services to be underserved which includes the services that allow subscribers to save money in accounts and also have the opportunities to borrow a certain amount for a specific period. mobile insurance indicates using mobile phone for providing micro insurances services to the underserved. in bangladesh, mfs firstly introduced in mid-2011 and grew faster than any other country (sultana & khan, 2017). bangladesh bank issued guidelines on mfs in september 2011. according to a report from payment systems department of bangladesh bank (2018), at present following mobile finance services are allowed by bangladesh bank: ■ ‘cash-in’ & ‘cash-out’: ‘cash-in’ to and ‘cash-out’ from mfs accounts take place through bank branches, agent locations, linked bank account, atm and other methods determined by bangladesh bank. s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha46 ■ person to business (p2b) payments: p2b payments include mobile top -up, utility bill payments, and deposits into schemes/savings accounts with banks, merchant payments, loan repayments to banks or non -governmental organizations or non-bank financial institutions. ■ business to person (b2p) payments: includes dividend payments, salary disbursements, discount payments. ■ person to person (p2p) payments: means transfer of cash from one personal mfs account to another personal mfs account. ■ business to business (b2b) payments: it includes scm payments, vendor payments. ■ online and e-commerce payment: from any mfs account to another seller’s mfs account. ■ government to person (g2p) payments: such as freedom fighter allowances, old age allowances, subsidy payments, pension payments etc. ■ person to government (p2g) payment: such as fee, tax, fine, toll charge, levy payments, and so forth. ■ loan disbursements to borrowers. ■ disbursement of inward foreign remittances. ■ other payments considered by bangladesh bank. table 1. comparative summary statement of mfs transactions serial no. description amount in february, 2016 amount in february, 2020 % change 1 no. of banks currently providing the services 18 15 2 no. of agents 576,996.00 985,914.00 70.87% 3 no. of registered clients in lac1 339.8 818.57 140.90% 4 no. of active accounts in lac1 140.02 270.87 93.45% 5 no. of total transaction 116,208,212.00 226,109,405.00 94.57% 6 total transaction in taka (in crore bdt) 16,568.89 41,334.79 149.47% 7 no. of daily average transaction 3,873,607.00 7,796,876.03 101.28% 8 average daily transaction (in crore bdt) 552.3 1,425.34 158.07% 9 product wise information amount (in crore bdt) amount (in crore bdt) % change a. inward remittance 3.82 29.99 685.08% innovation in financial services: the case of bangladesh 47 serial no. description amount in february, 2016 amount in february, 2020 % change b. cash in transaction 6,935.23 14,634.91 111.02% c. cash out transaction 6,041.35 13,706.13 126.87% d. p2p transaction 2,749.68 9,796.98 256.30% e. salary disbursement (b2p) 168.58 1,087.74 545.24% f. utility bill payment (p2b) 141.87 441.12 210.93% g. merchant payment 581.89 h. government payment 275.5 i. others 528.36 780.53 47.73% [11 lac = 0.10 million and 1 crore = 10 million] s o u r c e : bangladesh bank, 2020. figure 3. comparative summary statement of mfs transactions strona 47 figure 3. comparative summary statement of mfs transactions strona 48 figure 4. account ownership by the percentage of adults 70.87% 140.90% 93.45% 94.75% 149.47% 101.28% 158.07% 685.08% 111.02% 126.87% 256.30% 545.24% 210.93% 47.73% 0% 100% 200% 300% 400% 500% 600% 700% 800% percentage change in amount from february 2016 to february 2020 0% 20% 40% 60% 80% 100% 120% australia bangladesh china united kingdom united states south asia world 2011 2014 2017 s o u r c e : bangladesh bank, 2020. table 1. comparative… s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha48 it is noticed from the graph as mentioned above that in just four year’s period the inward remittance f low had changed to 685.08% that is for the initiative taken by the government that giving 2% incentive to the expatriate community who are sending remittance through the legal channel. more and more companies are paying their workers’ salary through the mobile wallet in recent times, which is the reason for the substantial per cent change in salary disbursement. however, due to the digitalization of financial products and services, consumers are paying utility and other bills through the digital channel, which is the reason for the growth of utility bill payment over the years. impact of financial innovation in financial inclusion figure 4. account ownership by the percentage of adults strona 47 figure 3. comparative summary statement of mfs transactions strona 48 figure 4. account ownership by the percentage of adults 70.87% 140.90% 93.45% 94.75% 149.47% 101.28% 158.07% 685.08% 111.02% 126.87% 256.30% 545.24% 210.93% 47.73% 0% 100% 200% 300% 400% 500% 600% 700% 800% percentage change in amount from february 2016 to february 2020 0% 20% 40% 60% 80% 100% 120% australia bangladesh china united kingdom united states south asia world 2011 2014 2017 s o u r c e : the world bank, 2017. according to the data of the global findex database, 50 percent adult of the total population was unbanked, and 50 percent population had either an account at a bank or other financial institutions or mobile wallet account in bangladesh in 2017. the number rose by 61 percentage points in just three years from 2014 to 2017 due to the innovation in financial products and services, especially the growth of mobile financial services (mfs). as of february 2020, 15 commercial banks are providing mobile financial services for their clients. a mobile wallet account is an account by which a person can receive formal financial services from a bank, non-bank financial institutions, and other financial technology innovation in financial services: the case of bangladesh 49 (fintech) companies. the account ownership scenario for the developed nation was remarkable. when compared with the world and south asia, bangladesh’s account ownership was still lag. policymakers of bangladesh need to focus on the digitalization of financial products and services so that the unbanked population from the rural area can engage with the formal financial system. figure 5. financial institution account ownership by the percentage of adultsstrona 49 figure 5. financial institution account ownership by the percentage of adults strona 50 figure 6. mobile money account ownership by the percentage of adults strona 51 figure 7. made or received digital payments in the past year by the percentage of adults 0% 20% 40% 60% 80% 100% 120% australia bangladesh china united kingdom united states south asia world 2011 2014 2017 0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 bangladesh china united kingdom united states south asia world 2011 2014 2017 s o u r c e : the global findex database, 2017. the percentage of account ownership at a bank or other financial institutions was 41 percent in bangladesh, and that rose by 41 percentage points from 2014 to 2017. the growth was due to the introduction of technology in banks and other financial products. most of the banks have started offering internet banking, online banking, agent banking, mobile banking, and sms banking services for their clients from the last decade. since the internet user has increased in that decade, customers’ demand for innovative financial products and services has increased. besides, agent banking is playing a vital role in the growth account ownership because unbanked people of rural areas can easily open an account by visiting the nearest agent banking branch of a bank. the agent of a bank can provide all banking services for the bank’s clients. the global and south asian picture was still better than bangladesh in 2017. s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha50 figure 6. mobile money account ownership by the percentage of adults strona 49 figure 5. financial institution account ownership by the percentage of adults strona 50 figure 6. mobile money account ownership by the percentage of adults strona 51 figure 7. made or received digital payments in the past year by the percentage of adults 0% 20% 40% 60% 80% 100% 120% australia bangladesh china united kingdom united states south asia world 2011 2014 2017 0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 bangladesh china united kingdom united states south asia world 2011 2014 2017 n o t e : no data are available for china, uk, usa, and for the year 2011. s o u r c e : the world bank, 2017. the growth of account ownership by an adult in bangladesh had increased 61 percent in just three years period from 2014 to 2017. the reason for this significant growth was due to the high growth of the mobile money account. a mobile money account is an account with a bank or other financial institutions or financial technology company by which the account holder can avail all formal financial services of those institutions through mobile phones. a customer can perform different types of services, including cash transactions, payment settlements, and other types of services. a mobile wallet account is becoming a substitute for cash in bangladesh. bangladesh had shown great potential in mobile account ownership, whereas the south asian and global picture is far behind than bangladesh. innovation in financial services: the case of bangladesh 51 figure 7. made or received digital payments in the past year by the percentage of adults strona 52 figure 8. bank accounts per 1,000 adults 0 0,2 0,4 0,6 0,8 1 1,2 australia bangladesh china united kingdom united states south asia world 2011 2014 2017 0 100 200 300 400 500 600 700 800 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 australia bangladesh china united kingdom united states n o t e : no data are available for the year 2011. s o u r c e : the world bank, 2017. in 2017, 34 percent of bangladeshi adults made or received digital payment. the payment includes payment through credit or debit card, internet banking account, mobile wallet account for remittances, wages, government payments, pension, e-commerce, and so forth. due to the continuous innovation in the financial sector, the payment condition rose by 79 percentage points from 2014 to 2017. as the financial products and services digitalized, the payment systems also digitalized in bangladesh. the picture of bangladesh in this criteria is better than south asia but falls behind other countries and the world. s. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha52 figure 8. bank accounts per 1,000 adults strona 52 figure 8. bank accounts per 1,000 adults 0 0,2 0,4 0,6 0,8 1 1,2 australia bangladesh china united kingdom united states south asia world 2011 2014 2017 0 100 200 300 400 500 600 700 800 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 australia bangladesh china united kingdom united states n o t e : no data are available for australia, uk, and usa. s o u r c e : the world bank, 2017. according to the global financial development database between china and bangladesh, bangladesh was far better than china in bank account ownership in a commercial bank. in bangladesh, there are 715 adults among 1000 adults who had a bank account in 2017; on the other hand, in china, only 26 adults had bank amount among 1000 adults. the number of bank account ownership has increased over the years because of the agent banking facilities, expansion of bank branches, reformation of the banking industry, and the digitization of formal financial products and services. if the growth rate continues, bangladesh will achieve the perfect score in bank account opening in the near future. innovation in financial services: the case of bangladesh 53 figure 9. bank branches per 100,000 adultsstrona 53 figure 9. bank branches per 100,000 adults 0 5 10 15 20 25 30 35 40 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 australia bangladesh china united kingdom united states n o t e : no data are available for china (2008-2011) and uk (2014-2017). s o u r c e : the world bank, 2017. bangladesh and china had approximately the same number of bank branches for 0.10 million adults. on the other hand, all three developed country’s figures are significant. the rise of agent banking may trigger the branch opening in all over bangladesh. still, policymakers need to issue and implement policy so that banks obliged to open a branch in a rural area where the highest percentage of the population is unbanked. if unbaked populations engage in the formal financial system, they can way out of poverty, earn more to make their lives better, and contribute to the economy. so, the goal of poverty alleviation and inclusive economic growth will be achieved. theoretical and managerial implication this paper illustrates the role of financial innovation in the past, present, and future development from the perspective of bangladesh. the study also specifies a comparative picture of bangladesh’s financial inclusion with the world financial innovation situation. no other studies clarify these issues. so the findings will be a new addition to the literature of financial innovation. the study shows a very specific discussion of different financial services innovation and there inf luence on the bangladesh economy. the paper also clarifies the increase and adaptation rate of innovative financial services using fis. s. m. huda, md. humayun kabir, nurun naher popy, sunny saha54 nancial data. moreover, the study focus on a comparative picture, which gives us a clear understanding of the situation of financial services innovation between bangladesh and other countries. these findings will help the finance personnel to understand the actual picture of financial inclusion in bangladesh before making critical decisions. the proposed model recommends some digital financial services that the mfs provider can provide to existing and potential customers to increase their profit.  conclusion financial services can be innovated in more sectors to provide new services for financial inclusion. in this discussion, as mentioned earlier, we have observed that the innovation of financial services should be included in the existing financial services for gaining the digital bangladesh goal. this article proposed a model that can help innovate the financial services in many areas, so the practitioners and policymakers can initiate adding those services in the mobile wallet of their existing customers and subsequently offers to new customers. the study presented excellent opportunities for future research. the paper used descriptive analysis. quantitative research can be done by segmenting the customers on a cluster basis to see the development of the innovation. in this study, no moderating or mediating effect was analyzed; this can be a scope for further research. the paper was developed on the basis of secondary data. primary data can be used in future research, which will be more actual. so there exists a large field of future study.  references ahmed, j.u., & ahmed, a. 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(1990). financial innovation and lessons for india. economic and political weekly, 25(5), 265-272. copernican journal of finance & accounting 2012, volume 1, issue 1 issn 2300-1240 data wpłynięcia: 22.11.2012; data zaakceptowania: 25.02.2013. * dane kontaktowe: zimnicki@umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87- 100 toruń, tel. 56 611 47 79. tomasz zimnicki* uniwersytet mikołaja kopernika w toruniu ewolucja standardów sprawozdawczości według segmentów działalności w ramach ifrs i jej uwarunkowania słowa kluczowe: msr14, msr14r, mssf8, sprawozdanie według segmentów działalności, standardy sprawozdawczości według segmentów działalności. abstrakt: w historii międzynarodowych standardów sprawozdawczości finansowej wyróżnia się trzy standardy poświęcone sprawozdawczości według segmentów działalności. należą do nich: ias14, ias14r oraz ifrs8. celem artykułu jest prezentacja zmian, jakie zaszły między tymi standardami, oraz ocena ich zasadności. w związku z tym zostaną przytoczone najważniejsze uregulowania prawne powyższych standardów, do których należy zaliczyć: rodzaj wyodrębnianych segmentów działalności, procedurę segmentacji działalności, kryteria uznania segmentów działalności za segmenty sprawozdawcze oraz wymagane do ujawnienia informacje finansowe na temat tak zidentyfikowanych obszarów działalności. rozważaniom zostanie również poddana kwestia przyczyn, które doprowadziły do rozpoczęcie prac na nowymi standardami, powodując w konsekwencji ich zmianę. zostaną także zaprezentowane wyniki ważniejszych badań empirycznych oraz płynące z nich wnioski na temat standardów sprawozdawczości według segmentów działalności oraz zasadności ich zmiany. the evolution of segment reporting standards under ifrs and its determinants keywords: ias14, ias14r, ifrs8, segment reporting, segment reporting standards. doi: 10.12775/cjfa.2012.011 http://dx.doi.org/10.12775/cjfa.2012.011 tomasz zimnicki152 abstract: in the history of international financial reporting standards, there are three standards dedicated to segment reporting. these include ias14, ias14r and ifrs8. the purpose of this article is to present the changes which took place between the standards and assessment of their validity. therefore, the will be presented the most important regulation of the above standards, which include: the type of isolated segments, business segmentation procedure, the criteria for the recognition of business segments for reporting segments and required financial information to be disclosed. consideration shall be given to the question of the causes which led to the start of work on new standards, resulting in the consequences of the change. also, there will be presented the results of empirical studies and the conclusions about segment reporting standard and the validity of their changes. translated by tomasz zimnicki  wstęp początki standaryzacji sprawozdawczości według segmentów działalności w ramach międzynarodowych standardów sprawozdawczości finansowej (ang. international financial accounting standards, ifrs) sięgają 1980 r., kiedy to w marcu komitet międzynarodowych standardów rachunkowości (ang. international accounting standards committee, iasc) wydał pierwszy poświęcony temu zagadnieniu projekt pod nazwą „sprawozdawczość finansowa według segmentów działalności” (ang. exposure draft e15 reporting financial information by segment). w sierpniu 1981 r. został opublikowany pierwszy standard pod tą samą nazwą. był nim międzynarodowy standard rachunkowości nr 14 sprawozdawczość finansowa według segmentów działalności (ang. international accounting standard no. 14 reporting financial information by segment, ias14)1, który zaczynał obowiązywać od okresów sprawozdawczych rozpoczynających się 1 stycznia 1983 r. i później. na początku lat 90. iasc przystąpił do kolejnych prac nad poprawą sprawozdawczości według segmentów działalności. w wyniku tego w grudniu 1995 r. wydał projekt kolejnego standardu pod tą samą nazwą (ang. exposure draft e51 reporting financial information by segment). po niespełna dwóch latach, w sierpniu 1997 r., iasc opublikował nowy standard. był nim międzynarodowy standard rachunkowości nr 14 sprawozdawczość dotycząca segmentów działalności (ang. international accounting standard no. 14 segment reporting, ias14r)2, 1 należy podkreślić, że w literaturze krajowej standard nie występuje, brakuje również polskiego tłumaczenia tego standardu. 2 należy zwrócić uwagę, że w literaturze krajowej standard funkcjonuje pod nazwą międzynarodowego standardu rachunkowości nr 14 sprawozdawczość dotycząca seg  ewolucja standardów sprawozdawczości… 153 który zaczynał obowiązywać od okresów sprawozdawczych rozpoczynających się 1 lipca 1998 r. i później. w połowie pierwszej dekady xxi w. rada międzynarodowych standardów rachunkowości (international accounting standards board, iasb) – następca iasc, wspólnie z radą standardów rachunkowości finansowej (financial accounting standards board, fasb) przystąpiła do realizacji procesu konwergencji standardów rachunkowości. w wyniku tej współpracy w styczniu 2006 r. iasb wydała kolejny projekt standardu pod nazwą „segmenty operacyjne” (ang. exposure draft 8 operating segments). pod koniec tego samego roku, w listopadzie, wydano nowy standard poświęcony sprawozdawczości według segmentów. był nim międzynarodowy standard sprawozdawczości finansowej nr 8 segmenty operacyjne (ang. international financial reporting standard no. 8 operating segments, ifrs8)3, który zaczynał obowiązywać od okresów sprawozdawczych rozpoczynających się 1 stycznia 2009 r. i później. ten standard obowiązuje do dnia dzisiejszego. syntetycznej prezentacji zmian w standardach sprawozdawczości według segmentów działalności dokonano na schemacie 1. schemat 1. zmiany w standardach sprawozdawczości według segmentów działalności 137 w połowie pierwszej dekady xxi w. rada międzynarodowych standardów rachunkowości (international accounting standards board, iasb) – następca iasc, wspólnie z radą standardów rachunkowości finansowej (financial accounting standards board, fasb) przystąpiła do realizacji procesu konwergencji standardów rachunkowości. w wyniku tej współpracy w styczniu 2006 r. iasb wydała kolejny projekt standardu pod nazwą „segmenty operacyjne” (ang. exposure draft 8 operating segments). pod koniec tego samego roku, w listopadzie, wydano nowy standard poświęcony sprawozdawczości według segmentów. był nim międzynarodowy standard sprawozdawczości finansowej nr 8 segmenty operacyjne (ang. international financial reporting standard no. 8 operating segments, ifrs8)31, który zaczynał obowiązywać od okresów sprawozdawczych rozpoczynających się 1 stycznia 2009 r. i później. ten standard obowiązuje do dnia dzisiejszego. syntetycznej prezentacji zmian w standardach sprawozdawczości według segmentów działalności dokonano na schemacie 1. schemat 1. zmiany w standardach sprawozdawczości według segmentów działalności źródło: opracowanie własne. celem artykułu jest prezentacja zmian zachodzących w standardach sprawozdawczości według segmentów działalności w ramach ifrs oraz ocena ich zasadności. w związku z 31 należy podkreślić, że w literaturze krajowej standard funkcjonuje pod nazwą międzynarodowego standardu sprawozdawczości finansowej nr 8 segmenty operacyjne (mssf 8), dostępne jest również jego polskie tłumaczenie (patrz: mssf 8 segmenty operacyjne, międzynarodowe standardy sprawozdawczości finansowej (mssf) 2007, t. 1, skwp, warszawa 2007). okres obowiązywania standardu ifrs8 publikacja projektu standardu (exposure draft e15) publikacja standardu (ias14) 03.1980 r. ias14r ias14 publikacja projektu standardu (exposure draft e51) publikacja standardu (ias14r) publikacja projektu standardu (exposure draft 8) publikacja standardu (ifrs8) okres obowiązywania standardu okres obowiązywania standardu 08.1981 r. 01.1983 r. 12.1995 r. 08.1997 r. 01.1998 r. 01.2006 r. 11.2006 r. 01.2009 r. ź r ó d ł o: opracowanie własne. mentów działalności (msr 14), dostępne jest również jego polskie tłumaczenie (patrz: msr 14 sprawozdawczość dotycząca segmentów działalności, międzynarodowe standardy sprawozdawczości finansowej (mssf) 2004, t. 1, skwp, warszawa 2004). 3 należy podkreślić, że w literaturze krajowej standard funkcjonuje pod nazwą międzynarodowego standardu sprawozdawczości finansowej nr 8 segmenty operacyjne tomasz zimnicki154 celem artykułu jest prezentacja zmian zachodzących w standardach sprawozdawczości według segmentów działalności w ramach ifrs oraz ocena ich zasadności. w związku z tym zostaną przytoczone najważniejsze uregulowania prawne powyższych standardów, które uwidocznią zachodzące w nich zmiany. rozważaniom zostaną również poddane przyczyny, które spowodowały rozpoczęcie prac nad nowymi standardami, a w konsekwencji zmianę obowiązujących. zostaną także zaprezentowane wyniki ważniejszych badań empirycznych prowadzonych w tym zakresie, do których należy zaliczyć badania prowadzone przez street i bryant (2000), street i gray (2001), street i nichols (2002), prather-kinsey i meek (2004), świderską i karwowskiego (2006), street i nichols (2007), sojaka i zimnickiego (2008) oraz zimnickiego (2008)4. wnioski płynące z powyższych rozważań będą stanowić podstawę oceny zasadności zmian zachodzących w standardach sprawozdawczości według segmentów działalności. zastosowaną metodą w pracy jest analiza krajowej i zagranicznej literatury przedmiotu. 1. sprawozdawczość segmentów działalności według ias14 ias14 wyróżnia dwa rodzaje segmentów – segmenty przemysłowe i geograficzne. przez te pierwsze należy rozumieć dające się wyodrębnić obszary jednostki gospodarczej, w ramach których następuje dystrybucja towarów lub świadczenie usług, bądź też grup powiązanych towarów lub usług, głównie na rzecz klientów zewnętrznych. segmenty geograficzne, według standardu, to dające się wyodrębnić obszary jednostki gospodarczej, zaangażowane w działalność w danym kraju lub grupie krajów, przy czym dany obszar geograficzny charakteryzuje się specyficznym uwarunkowaniem (ias14.5). dodatkowo obszary te mogą zostać wyodrębnione na podstawie lokalizacji prowadzonej działalności lub rynków zbytu (ias14.11). zgodnie z wymogami standardu jednostka dokonuje podziału prowadzonej działalności na odrębne segmenty przemysłowe i geograficzne wówczas, gdy takie rodzaje działalności mają u niej zastosowanie (ias14.10). (mssf 8), dostępne jest również jego polskie tłumaczenie (patrz: mssf 8 segmenty operacyjne, międzynarodowe standardy sprawozdawczości finansowej (mssf) 2007, t. 1, skwp, warszawa 2007). 4 charakterystyki przytoczonych badań empirycznych dokonano w tabeli 1 zamieszczonej w załączniku nr 1.   ewolucja standardów sprawozdawczości… 155 podział działalności na odpowiednie segmenty jest dokonywany w oparciu o ocenę zarządu, który powinien wziąć przy tym pod uwagę następujące aspekty (ias14.12): ■ podobieństwa i różnice w zakresie zyskowności, ryzyka i możliwości rozwoju poszczególnych obszarów; ■ występowanie odmiennych wymogów prawnych w tych obszarach; ■ występowanie specyficznych cech charakterystycznych dla danego przemysłu. ias14 podkreśla, że jednostka ujawnia informacje tylko o segmentach określonych mianem sprawozdawczych. za takie uważa tylko te segmenty działalności, które zdaniem jednostki są znaczące (ias14.2). proponuje zatem, ale nie wymaga, zastosowanie 10% kryterium istotności. zgodnie z nim za znaczący segment działalności należy uznać ten, którego wynik, przychody lub aktywa stanowią co najmniej 10% tych wielkości dla jednostki jako całości. trzeba zaznaczyć, że ostateczna decyzja w tym zakresie należy do zarządzających jednostką. przy czym standard zaleca również rozważenie kwestii rozsądnej liczby ujawnianych segmentów w taki sposób, by nie prezentować ich zbyt dużo, co skutkowałoby zaciemnieniem obrazu jednostki (ias14.15). ias14 określa również informacje, które należy ujawnić na temat każdego z wyodrębnionych segmentów sprawozdawczych – przemysłowych i geograficznych. syntetycznie zaprezentowano je na schemacie 2. tomasz zimnicki156 schemat 2. informacje wymagane do ujawnienia przez ias14 139 ias14 podkreśla, że jednostka ujawnia informacje tylko o segmentach określonych mianem sprawozdawczych. za takie uważa tylko te segmenty działalności, które zdaniem jednostki są znaczące (ias14.2). proponuje zatem, ale nie wymaga, zastosowanie 10% kryterium istotności. zgodnie z nim za znaczący segment działalności należy uznać ten, którego wynik, przychody lub aktywa stanowią co najmniej 10% tych wielkości dla jednostki jako całości. trzeba zaznaczyć, że ostateczna decyzja w tym zakresie należy do zarządzających jednostką. przy czym standard zaleca również rozważenie kwestii rozsądnej liczby ujawnianych segmentów w taki sposób, by nie prezentować ich zbyt dużo, co skutkowałoby zaciemnieniem obrazu jednostki (ias14.15). ias14 określa również informacje, które należy ujawnić na temat każdego z wyodrębnionych segmentów sprawozdawczych – przemysłowych i geograficznych. syntetycznie zaprezentowano je na schemacie 2. schemat 2. informacje wymagane do ujawnienia przez ias14 źródło: opracowanie własne na podstawie: international accounting standard 14 reporting financial information by segment, international accounting standards committee foundation, par. 9, 16, 21–23, http://www.ifrs.org (dostęp 4.11.2011). 2. przyczyny rozpoczęcia prac nad ias14r przychody segmentu ze sprzedaży ujawniane informacje o segmencie sprawozdawczym informacje ogólne informacje finansowe uzgodnienia na rzecz klientów zewnętrznych na rzecz innych segmentów przychodów wszystkich segmentów sprawozdawczych z przychodami jednostki zysków lub strat wszystkich segmentów sprawozdawczych z zyskiem lub stratą jednostki aktywów wszystkich segmentów sprawozdawczych z aktywami jednostki skład każdego obszaru geograficznego w ramach segmentów geograficznych wynik segmentu aktywa segmentu rodzaj podejmowanej działalności w ramach segmentów przemysłowych ź r ó d ł o: opracowanie własne na podstawie: international accounting standard 14 reporting financial information by segment, international accounting standards committee foundation, par. 9, 16, 21–23, http://www.ifrs.org (dostęp 4.11.2011). 2. przyczyny rozpoczęcia prac nad ias14r ias14 pod koniec lat 90. został zastąpiony przez ias14r. przyczyną rozpoczęcia prac nad nowym standardem sprawozdawczości według segmentów były w głównej mierze zidentyfikowane wady ias14. analiza zapisów standardu oraz prowadzone badania empiryczne zaliczyły do nich takie obszary, jak: ■ zbyt ogólne definicje segmentów przemysłowych i geograficznych; ■ mało precyzyjne wytyczne przy identyfikacji i pomiarze takich składowych segmentu, jak: przychody, koszty, wynik oraz aktywa; ■ braki w ujawnieniach informacji o segmentach wymaganych przez standard; ■ zbyt mała ilość prezentowanych informacji o segmentach. zbyt ogólne definicje segmentów przemysłowych i geograficznych uznano za jedną z głównych wad ias14. uwagę na to zwrócono w raporcie przygotowanym przez paula pactera. stwierdzono tam, że standard zawiera jedynie ogólne wskazówki dotyczące określenia segmentów przemysłowych i geograficznych. co więcej, nie występuje tam wymóg, by przeprowadzony podział   ewolucja standardów sprawozdawczości… 157 działalności, w wyniku którego określa się segmenty sprawozdawcze, spełniał 75% kryterium istotności (pacter 1993: 40). tę wadę podkreślili również analitycy finansowi, którzy stwierdzili, że wiele jednostek gospodarczych wykorzystuje zbyt szeroką definicję segmentów przemysłowych, stojąc na stanowisku, iż prowadzona przez nich działalność obywa się w ramach pojedynczego obszaru działalności, co zwalnia je z obowiązku ujawniania informacji o segmentach. dodatkowo zwrócili oni też uwagę na zbyt szeroką definicję segmentów geograficznych. ich zdaniem powoduje ona, że pewne jednostki grupują obszary geograficzne w oparciu o kryterium lokalne, inne – krajowe, a jeszcze inne – międzynarodowe, lub nawet kontynentalne, co ogranicza porównywalność tych informacji lub też całkowicie ją eliminuje (street, nichols 2002: 93). tę wadę potwierdza również wydany w 1994 r. przez iasb dokument, który przedstawia wyniki analizy sprawozdań według segmentów działalności 1062 dużych jednostek gospodarczych z 32 krajów. stwierdzono tam, że aż 28% tych podmiotów ujawniło tylko jeden segment działalności (mcconnell, pacter 1995: 32–38). mało precyzyjne wytyczne przy identyfikacji i pomiarze takich składowych segmentu, jak: przychody, koszty, wynik oraz aktywa, uznano za kolejną wadę ias14. zwrócono na to uwagę we wspomnianym już raporcie przygotowanym przez pactera, stwierdzając, że zawarte w standardzie definicje tego, co należy rozumieć za przychody, koszty oraz wynik segmentu, są mało precyzyjne (pacter 1993: 40). za wadę uznał to także iasc, twierdząc, że ias14 powinien zostać zaktualizowany między innymi dlatego, by wprowadzić jasne wytyczne w zakresie identyfikacji i pomiaru wspomnianych składowych segmentu (street, nichols 2002: 93–94). za kolejną wadę ias14 uznano braki w ujawnieniach informacji o segmentach wymaganych przez standard. zwrócono na to uwagę w badaniu prowadzonym przez donne l. street i stephanie m. bryant, które poddały analizie sprawozdania finansowe 82 jednostek gospodarczych. stwierdziły, że ujawniane informacje o segmentach przez badane podmioty mają istotne braki w stosunku do zakresu ujawnień wymaganych przez standard (street, bryant 2000: 305–329). podobny wniosek zawarto w badaniu prowadzonym przez donne l. street i sidney j. gray. poddały one analizie sprawozdania finansowe 279 jednostek gospodarczych. w wyniku tego stwierdziły, że ujawniane informacje o segmentach działalności przez badane podmioty są niepełne i znajdują się średnio na poziomie 76% w stosunku do wymogów standardu (street, gray 2001: 75). tomasz zimnicki158 za wadę uznano również zbyt małą ilość prezentowanych informacji o segmentach. zwrócili na to uwagę analitycy finansowi, którzy stwierdzili, że zakres ujawnianych informacji na temat poszczególnych segmentów działalności powinien być szerszy (street, nichols 2002: 93). dodatkowo w 1990 r. organizacja współpracy gospodarczej i rozwoju (ang. organization for economic co-operation and development, oecd), międzynarodowa organizacja komisji papierów wartościowych (ang. international organization of securities commissions, iosco) oraz organizacja narodów zjednoczonych (ang. united nations, un) zarekomendowały iasc zwiększenie zakresu ujawnianych informacji na temat segmentów działalności (albrecht, chipalkatti 1998: 46–51). tę rekomendację iasc potraktowało poważnie, o czym może świadczyć stwierdzenie, że dokonując aktualizacji ias14, należy rozważyć dodatkowe ujawnienia, które będą użyteczne z decyzyjnego punktu widzenia dla użytkowników sprawozdań finansowych (street, nichols 2002: 93–94). dodatkowo trzeba podkreślić, że w głównej mierze wyżej opisane wady stały się przyczyną rozpoczęcia prac nad ias14r. niemniej jednak pacter we wspomnianym już raporcie stwierdził, że wpływ na to miały również takie zdarzenia, jak (pacter 1993: 40): ■ znaczący rozwój w zakresie sprawozdawczości według segmentów na świecie; ■ implementacja iv dyrektywy przez komisję europejską (ang. european commission, ec); ■ nowe wytyczne oecd dla sprawozdawczości według segmentów; ■ rekomendacja grupy roboczej organizacji narodów zjednoczonych dotycząca ujawniania informacji o segmentach; ■ podjęcie prac nad poprawą sprawozdawczości według segmentów działalności w usa i kanadzie; ■ podkreślenie znaczenia obszaru sprawozdawczości według segmentów działalności dla iosco. 3. sprawozdawczość segmentów działalności według ias14r ias14r wyróżnia, podobnie jak poprzednik, dwa rodzaje segmentów działalności, z tym że są to segmenty branżowe i geograficzne. przez segment branżowy ias14r rozumie „dający się wyodrębnić obszar jednostki gospodarczej, w ramach którego następuje dystrybucja towarów lub świadczenie usług, lub grup powiązanych towarów lub usług, który podlega ryzyku i charakteryzu  ewolucja standardów sprawozdawczości… 159 je się zwrotem z poniesionych nakładów inwestycyjnych różnym od tych, które są właściwe dla innych segmentów branżowych” (ias14r.9). należy dodać, że dany segment może składać się z więcej niż jednego rodzaju towaru i usługi, ale pod warunkiem, że nie różnią się one istotnie poziomem realizowanych stóp zwrotu oraz stopniem ryzyka, a także spełniają kryterium podobieństwa w stosunku do większości czynników (ias14r.11). za segment geograficzny standard uważa natomiast „dający się wyodrębnić obszar jednostki gospodarczej, w ramach którego następuje dystrybucja towarów lub świadczenie usług w określonym środowisku ekonomicznym, który podlega ryzyku i charakteryzuje się poziomem zwrotu z poniesionych nakładów inwestycyjnych, różnym od tych, które są właściwe dla innych obszarów, działających w odmiennym środowisku ekonomicznym” (ias14r.9). należy również dodać, że w przypadku segmentów geograficznych standard dopuszcza dwie możliwości przy ich definiowaniu. te obszary mogą zostać określone w oparciu o (ias14r.13): ■ lokalizację aktywów – należy przez to rozumieć, że podczas dokonywania podziału prowadzonej działalności ze względu na jej geograficzne rozczłonkowanie dokonuje się jej ze względu na położenie zakładów produkcyjnych lub punktów świadczenia usług; ■ lokalizację rynków i klientów – w tym przypadku należy kierować się geograficznym rozczłonkowaniem odbiorców towarów lub świadczonych usług, czyli rynków, które są przez daną jednostkę obsługiwane. punktem wyjścia przy podziale działalności na odrębne segmenty jest istniejąca w ramach jednostki gospodarczej struktura organizacyjna oraz wewnętrzny system sprawozdawczości finansowej. zdaniem twórców standardu powinno to odzwierciedlać zróżnicowanie realizowanych w poszczególnych obszarach działalności stóp zwrotu oraz towarzyszących im poziomów ryzyka (ias14r.13). w sytuacji, gdy istniejąca struktura organizacyjna oraz wewnętrzny system sprawozdawczości są zorganizowane w inny sposób aniżeli kryterium produktowe i geograficzne, segmenty działalności należy wyodrębnić zgodnie z wymogami niniejszego standardu przez przejście na niższy poziom segmentacji działalności (ias14r.30). należy w ten sposób postępować do momentu, gdy wyodrębnione obszary działalności będą spełniać kryterium segmentów branżowych i geograficznych zawarte w par. 9 standardu (ias14r.32). wyodrębnione w ten sposób segmenty działalności uznaje się za segmenty sprawozdawcze wówczas, gdy większość ich przychodów ze sprzedaży pochotomasz zimnicki160 dzi od klientów zewnętrznych oraz spełniają one co najmniej jeden z następujących progów ilościowych (ias14r.35): ■ przychody segmentu ze sprzedaży na rzecz zewnętrznych klientów lub z transakcji realizowanych z innymi segmentami stanowią 10% lub więcej łącznych zewnętrznych i wewnętrznych przychodów wszystkich segmentów; ■ wynik segmentu niezależnie od tego, czy jest nim zysk czy strata, stanowi 10% lub więcej połączonego wyniku wszystkich segmentów, które odnotowały zysk, lub wszystkich segmentów, które poniosły stratę, w zależności od tego, która z tych wartości wyrażona jako wartość bezwzględna jest większa; ■ aktywa segmentu stanowią 10% lub więcej ogółu aktywów wszystkich segmentów. informacje, które należy ujawnić na temat każdego z wyodrębnionych segmentów sprawozdawczych – branżowych i geograficznych – zgodnie z wymogami standardu, zaprezentowano syntetycznie na schemacie 3. schemat 3. informacje wymagane do ujawnienia przez ias14r 144 źródło: opracowanie własne na podstawie: international accounting standard 14 segment reporting, international accounting standards committee foundation, par. 50, 67, 68, 81, http://www.ifrs.org (dostęp 30.10.2011). 4. zasadność zmiany ias14 na ias14r w kontekście badań empirycznych ocena zasadności zmiany standardów sprawozdawczości według segmentów wymaga przytoczenia wniosków płynących z badań empirycznych w tym zakresie. do grona ważniejszych należą badania prowadzone przez donne l. street i nancy b. nichols (street, nichols 2002: 91–113) oraz jenice prather-kinsey i gary k. meek (pratherkinsey, meek 2004: 213–234). wszyscy oni stwierdzili, że wprowadzenie ias14r przyczyniło się do wzrostu liczby ujawnianych segmentów działalności oraz zwiększenia zakresu ujawnianych informacji o tych obszarach. street i nichols dokonały bardziej szczegółowej analizy, z której wynikało, że zwiększyła się liczba ujawnianych segmentów branżowych, ale liczba segmentów geograficznych pozostała bez zmian. dodatkowo wzrosła średnia liczba ujawnionych segmentów działalności na jednostkę gospodarczą – z 3,94 do 4,04. poddały one również szczegółowej analizie zakres ujawnianych informacji o segmentach, dokonując jego podziału na obligatoryjny dla ias14 i ias14r oraz ten wymagany jedynie przez ias14r. w pierwszym przypadku nowy standard dostarczył większej liczby wymaganych informacji aniżeli jego poprzednik. w drugim przypadku również wypadł lepiej aniżeli ias14. przy czym należy podkreślić, że poprzednik tych informacji nie wymagał. prezentowane w ramach podstawowego wzoru sprawozdawczego ujawniane informacje o segmencie sprawozdawczym informacje ogólne informacje finansowe uzgodnienia przychodów wszystkich segmentów sprawozdawczych z przychodami jednostki wyniki wszystkich segmentów sprawozdawczych z wynikiem jednostki aktywów wszystkich segmentów sprawozdawczych z aktywami jednostki skład każdego obszaru geograficznego w ramach segmentów geograficznych prezentowane w ramach uzupełniającego wzoru sprawozdawczego rodzaj towarów lub usług w ramach każdego segmentu branżowego pasywów wszystkich segmentów sprawozdawczych z pasywami jednostki ź r ó d ł o: opracowanie własne na podstawie: international accounting standard 14 segment reporting, international accounting standards committee foundation, par. 50, 67, 68, 81, http:// www.ifrs.org (dostęp 30.10.2011).   ewolucja standardów sprawozdawczości… 161 4. zasadność zmiany ias14 na ias14r w kontekście badań empirycznych ocena zasadności zmiany standardów sprawozdawczości według segmentów wymaga przytoczenia wniosków płynących z badań empirycznych w tym zakresie. do grona ważniejszych należą badania prowadzone przez donne l. street i nancy b. nichols (street, nichols 2002: 91–113) oraz jenice prather-kinsey i gary k. meek (prather-kinsey, meek 2004: 213–234). wszyscy oni stwierdzili, że wprowadzenie ias14r przyczyniło się do wzrostu liczby ujawnianych segmentów działalności oraz zwiększenia zakresu ujawnianych informacji o tych obszarach. street i nichols dokonały bardziej szczegółowej analizy, z której wynikało, że zwiększyła się liczba ujawnianych segmentów branżowych, ale liczba segmentów geograficznych pozostała bez zmian. dodatkowo wzrosła średnia liczba ujawnionych segmentów działalności na jednostkę gospodarczą – z 3,94 do 4,04. poddały one również szczegółowej analizie zakres ujawnianych informacji o segmentach, dokonując jego podziału na obligatoryjny dla ias14 i ias14r oraz ten wymagany jedynie przez ias14r. w pierwszym przypadku nowy standard dostarczył większej liczby wymaganych informacji aniżeli jego poprzednik. w drugim przypadku również wypadł lepiej aniżeli ias14. przy czym należy podkreślić, że poprzednik tych informacji nie wymagał. powyższe rozważania budzą wątpliwość co do istotności poczynionej zmiany. ias14r wypada lepiej od ias14, ale trzeba podkreślić, że nieznacznie lepiej. mogą o tym świadczyć wyniki badań street i nichols, które ujawniły, że w ramach ias14 prezentacji segmentów dokonało 127 jednostek spośród 210 poddanych badaniu. po wprowadzeniu ias14r liczba tych podmiotów wzrosła do 140, co stanowi wzrost o nieco ponad 10%. średnia liczba ujawnianych obszarów działalności wzrosła z 3,94 do 4,04, co stanowi wzrost o jedyne 2,5%. podobna sytuacja wystąpiła w przypadku zakresu ujawnianych informacji. on również wzrósł, ale jego poziom nadal pozostawał na niezadowalającym poziomie. zwracali na to uwagę w szczególności prather-kinsey i meek, twierdząc, że w zakresie ujawnionych informacji o segmentach w ramach ias14r wyszczególniono poważne braki między tym, co jednostki ujawniły, a tym, czego wymagał od nich standard. podsumowując powyższe wyniki badań, należy stwierdzić, że wprowadzenie ias14r przyczyniło się do zwiększenia liczby jednostek prezentujących segmenty działalności, liczby ujawnianych segmentów oraz informacji na ich temat. w związku z tym można sądzić, że ias14r dostarcza bardziej użytomasz zimnicki162 tecznych decyzyjnie informacji. należy jednak podkreślić, że poprawa jest nieznaczna w stosunku do poprzednika. 5. przyczyny rozpoczęcia prac nad ifrs8 w połowie pierwszej dekady xxi w. wprowadzono nowy standard poświęcony sprawozdawczości segmentów działalności – ifrs8, który zastąpił ias14r od okresów sprawozdawczych rozpoczynających się 1 stycznia 2009 r. i później. podkreślenia wymaga fakt, że główną przyczyną tej zmiany nie były wady obowiązującego standardu, lecz realizowany przez iasb i fasb proces konwergencji5 standardów sprawozdawczości finansowej. proces ten rozpoczął się w dniu 18 września 2002 r. od podpisania przez obie rady umowy pod nazwą „memorandum of understanding”. na wniosek instytucji zajmujących się obrotem papierami wartościowymi do celów krótkoterminowych procesu konwergencji zaliczono ujednolicenie sprawozdawczości według segmentów działalności. w związku z tym przystąpiono do identyfikacji wszelkich różnic występujących między ias14r a jego amerykańskim odpowiednikiem – standardem rachunkowości finansowej nr 131 ujawnienia dotyczące segmentów przedsiębiorstwa i informacje powiązane (ang. statement of financial accounting standard no. 131 disclosures about segments of an enterprise and related information, sfas131), oraz do analizy wyników badań akademickich prowadzonych w tym zakresie, w szczególności w stanach zjednoczonych (karwowski, świderska 2009: 264). w związku z tym, że podejście zarządcze zawarte w sfas131 spotkało się z większą aprobatą aniżeli to zawarte w ias14r, iasb przystąpiła do prac nad nowym standardem sprawozdawczości według segmentów w ramach ifrs. przy czym miał on być implementacją rozwiązań zawartych w amerykańskim odpowiedniku jako rezultat realizacji procesu konwergencji. podkreślenia wymaga fakt, że proces konwergencji stanowił główną przyczynę rozpoczęcia prac nad nowym standardem, ale sam w sobie jej nie spo5 przez proces konwergencji należy rozumieć proces harmonizacji systemów rachunkowości reprezentowanych przez fasb oraz iasb, którego celem jest stworzenie globalnych, charakteryzujących się wysoką jakością standardów rachunkowości i sprawozdawczości finansowej, które będą zrozumiałe dla użytkowników oraz akceptowane przez regulatorów rynków kapitałowych na całym świecie. ten proces rozpoczął się w dniu 18 września 2002 r. od podpisania przez obie rady umowy pod nazwą „memorandum of understanding”, znanej również jako „the norwalk agreement” (erchinger, melcher 2007: 125, 127).   ewolucja standardów sprawozdawczości… 163 wodował. powodem tego były wady ias14r, które sprawiły, że w analizie porównawczej wypadł on gorzej niż jego amerykański odpowiednik. do tych wad należy zaliczyć w szczególności: ■ małą liczbę jednostek ujawniających informacje o segmentach działalności; ■ istotne braki w ujawnianych informacjach o segmentach w stosunku do wymogów zawartych w standardzie; ■ niewłaściwe podejście do sprawozdawczości według segmentów skutkujące tworzeniem sztucznych obszarów; ■ brak przeciwdziałania zjawisku kosztów własnych. mała liczba jednostek ujawniających informacje o segmentach działalności stanowi główną wadę ias14r. zwrócono na to uwagę w badaniu prowadzonym przez gertrudę k. świderską i mariusza karwowskiego. poddali oni analizie skonsolidowane sprawozdania finansowe polskich grup kapitałowych za okresy 2003 i 20046. w wyniku tego stwierdzili, że ujawnienia informacji o segmentach w roku 2003 dokonało jedynie 46% spośród badanych, a w 2004 – 53%. głównym argumentem prezentowanym przez jednostki, które nie ujawniły obszarów działalności, było stwierdzenie, że prowadzona przez nich działalność jest jednorodna (karwowski, świderska 2006: 50–60). za wadę ias14r uznano również istotne braki w ujawnianych informacjach o segmentach w stosunku do wymogów standardu. we wspomnianym już badaniu prowadzonym przez świderską i karwowskiego stwierdzono również, że ujawnienia podstawowego i uzupełniającego wzoru sprawozdawczego dokonało w roku 2003 jedynie 29 podmiotów spośród 134 poddanych badaniu, co stanowi niecałe 22%. w roku 2004 odsetek tych jednostek wzrósł nieznacznie do poziomu prawie 24% (karwowski, świderska 2006: 50–60). bardziej szczegółowej analizy zakresu ujawnionych informacji o segmentach dokonali sławomir sojak i tomasz zimnicki. poddali oni badaniu sprawozdania finansowe dla roku 2006 spółek giełdowych, których centrala znajduje się na terenie województwa kujawsko-pomorskiego. stwierdzili oni, że w ramach podstawowe6 należy podkreślić, że standardy ifrs zaczęły obowiązywać jednostki gospodarcze sporządzające skonsolidowane sprawozdania finansowe i prowadzące działalność w polsce dopiero dla okresów sprawozdawczych rozpoczynających się 1 stycznia 2005 r. i później. przed tym okresem obowiązek ujawnienia informacji o segmentach działalności według ias14r nakładał na te podmioty par. 3 ust. 2 rozporządzenia rady ministrów z dnia 19 marca 2002 r. zmieniającego rozporządzenie w sprawie szczegółowych warunków, jakim powinien odpowiadać prospekt emisyjny oraz skrót prospektu (dz. u. 2002.36.328). tomasz zimnicki164 go wzoru sprawozdawczego ujawnienia informacji o przychodach i wynikach segmentów dokonała tylko połowa spośród badanych podmiotów, ujawnienia aktywów, pasywów, nakładów inwestycyjnych i amortyzacji segmentów niecałe 17%. przepływów pieniężnych segmentu nie ujawniła żadna z badanych jednostek. w przypadku uzupełniającego wzoru sprawozdawczego wymaganych przez standard informacji o segmentach ujawniła jedynie połowa badanych podmiotów. stwierdzili oni również, że wykorzystanie ujawnionych informacji o segmentach do oszacowania rentowności sprzedaży, aktywów, kapitałów oraz nakładów inwestycyjnych poszczególnych obszarów danej jednostki możliwe jest tylko w przypadku 8% badanych podmiotów (sojak, zimnicki 2008: 135–163). niewłaściwe podejście do sprawozdawczości według segmentów skutkujące tworzeniem sztucznych obszarów uznano za kolejną wadę ias14r. jej potwierdzeniem może być wniosek płynący ze studium przypadku grupy kapitałowej notowanej na giełdzie papierów wartościowych w warszawie przeprowadzonego przez tomasza zimnickiego. analiza ujawnionych informacji o segmentach w rocznym i śródrocznych sprawozdaniach finansowych dla roku 2006 oraz wywiad z osobą odpowiedzialną za przygotowanie tych informacji wykazały, że jednostka nie posiada wyodrębnionych obszarów działalności na potrzeby sprawozdawczości wewnętrznej. w związku z tym nie ma odpowiednio dostosowanego systemu ewidencji księgowej, który umożliwiałby przygotowanie wiarygodnych informacji o segmentach działalności na potrzeby sprawozdawczości zewnętrznej. dodatkowo ujawnione przychody i wyniki segmentów w sprawozdaniu rocznym powstały w wyniku przeprowadzonych szacunków. brak ujawnienia informacji na temat aktywów, pasywów, nakładów inwestycyjnych, amortyzacji i przepływów pieniężnych w poszczególnych obszarach działalności wynikał z braku racjonalnych podstaw do dokonania szacunków. należy również dodać, że podmiot nie ujawnił segmentów działalności w sprawozdaniach kwartalnych, gdyż czas na przygotowanie tych raportów był zbyt krótki, by móc dokonać odpowiedniego przekształcenia posiadanych informacji finansowych. w związku z powyższym powstaje wątpliwość co do wiarygodności ujawnionych informacji o segmentach (zimnicki 2008: 191–212). za wadę ias14r uznano również brak przeciwdziałania zjawisku kosztów własnych. zwrócili na to uwagę street i nichols, które poddały analizie sprawozdania finansowe 160 jednostek gospodarczych dla okresów od 1999 do 2002 r. wnioski płynące z badania potwierdzają, że wprowadzenie nowego standardu nie przyczyniło się do ograniczenia ukrywania obszarów charakte  ewolucja standardów sprawozdawczości… 165 ryzujących się ponadprzeciętnymi wynikami przez łączenie ich z innymi segmentami. w związku z tym występuje pewne ograniczenie użyteczności decyzyjnej tego typu informacji (street, nichols 2007: 51–68). 6. sprawozdawczość segmentów działalności według ifrs8 przytoczone wady ias14r spowodowały, że w roku 2006 wydano nowy standard – ifrs8, który zastąpił poprzednika od okresów sprawozdawczych rozpoczynających się 1 stycznia 2009 r. i później. w stosunku do ias14r wprowadził on całkowicie nowe podejście do sprawozdawczości według segmentów działalności. określa się je mianem podejścia zarządczego. należy przez nie rozumieć taki podział działalności na odrębne obszary, jaki został wprowadzony przez osoby zarządzające danym podmiotem gospodarczym, niezależnie od tego, czy ten podział został oparty na kryterium produktów lub usług, obszarów geograficznych, klientów, formy prawnej jednostek wchodzących w skład grupy kapitałowej, czy też jeszcze innym. punktem wyjścia przy określenia segmentów działalności jest zatem istniejący w ramach sprawozdawczości wewnętrznej podział jednostki odpowiadający jej strukturze organizacyjnej i funkcjonującemu tam systemowi zarządzania. standard wśród tak określonych segmentów działalności wyróżnia segmenty operacyjne. rozumie przez nie te części składowe jednostki (ifrs8.5): ■ które angażują się w działalność gospodarczą, w rezultacie czego mogą uzyskiwać przychody i ponosić koszty; ■ których wyniki są regularnie przeglądane przez główny organ odpowiedzialny za podejmowanie decyzji operacyjnych w jednostce oraz stanowią podstawę alokacji zasobów i oceny wyników prowadzonych tam działalności; ■ w przypadku których dostępne są odrębne informacje finansowe. segment operacyjny uznaje się za segment sprawozdawczy wtedy, gdy spełnia on kryterium segmentu operacyjnego (ifrs8.5), powstał na skutek połączenia dwóch lub większej liczby segmentów operacyjnych zgodnie z zawartym w standardzie kryterium łączenia segmentów (ifrs8.12) oraz przekroczył progi ilościowe (ifrs8.13). informacje, które należy ujawnić zgodnie z wymogami standardu w odniesieniu do każdego z segmentów sprawozdawczych, zaprezentowano na schemacie 4. tomasz zimnicki166 schemat 4. informacje wymagane do ujawnienia przez ifrs8 149  których wyniki są regularnie przeglądane przez główny organ odpowiedzialny za podejmowanie decyzji operacyjnych w jednostce oraz stanowią podstawę alokacji zasobów i oceny wyników prowadzonych tam działalności;  w przypadku których dostępne są odrębne informacje finansowe. segment operacyjny uznaje się za segment sprawozdawczy wtedy, gdy spełnia on kryterium segmentu operacyjnego (ifrs8.5), powstał na skutek połączenia dwóch lub większej liczby segmentów operacyjnych zgodnie z zawartym w standardzie kryterium łączenia segmentów (ifrs8.12) oraz przekroczył progi ilościowe (ifrs8.13). informacje, które należy ujawnić zgodnie z wymogami standardu w odniesieniu do każdego z segmentów sprawozdawczych, zaprezentowano na schemacie 4. schemat 4. informacje wymagane do ujawnienia przez ifrs8 źródło: opracowanie własne na podstawie: international financial reporting standard 8 operating segments, international financial reporting standards foundation, par. 20–24, 28, http://www.ifrs.org (dostęp 30.10.2011). zakończenie ujawniane informacje o segmencie sprawozdawczym informacje ogólne rodzaj produktów lub usług, z tytułu których segment sprawozdawczy osiąga swoje przychody informacje finansowe uzgodnienia czynniki przyjęte do określenia segmentów sprawozdawczych jednostki warunkowe obligatoryjne przychody segmentu koszty segmentu wynik segmentu aktywa segmentu wraz z informacją na temat podstawy wyceny tych pozycji przychody uzyskane od klientów zewnętrznych przychody uzyskane z transakcji z innymi segmentami przychody z tytułu odsetek koszty z tytułu odsetek nakłady inwestycyjne amortyzacja inne niż amortyzacja istotne pozycje niepieniężne wynik na inwestycji w spółki zależne pozycje nadzwyczajne przychody lub koszty podatkowe inne istotne pozycje przychodów wszystkich segmentów sprawozdawczych z przychodami jednostki zysków lub strat wszystkich segmentów sprawozdawczych z zyskiem lub stratą jednostki aktywów wszystkich segmentów sprawozdawczych z aktywami jednostki innych istotnych pozycji wszystkich segmentów sprawozdawczych z korespondującą pozycją ź r ó d ł o: opracowanie własne na podstawie: international financial reporting standard 8 operating segments, international financial reporting standards foundation, par. 20–24, 28, http:// www.ifrs.org (dostęp 30.10.2011).  zakończenie podsumowując powyższe rozważania, należy zaznaczyć, że w ramach ifrs stworzono trzy różne standardy sprawozdawczości według segmentów działalności. pierwszym z nich był ias14, który funkcjonował przez ponad 16 lat. pod koniec tego okresu rozpoczęto prace nad ias14r. był to w szczególności wynik istotnych wad ias14, do których zaliczono: zbyt ogólne definicje segmentów przemysłowych i geograficznych, mało precyzyjne wytyczne przy identyfikacji i pomiarze takich składowych segmentu, jak: przychody, koszty, wynik oraz aktywa, a także braki w ujawnieniach informacji o segmentach wymaganych przez standard oraz zbyt małą ilość wymaganych informacji. należy podkreślić, że nie tylko powyższe wady przyczyniły się do rozpoczęcia prac   ewolucja standardów sprawozdawczości… 167 nad nowym standardem. istotny udział w tym miał również wzrost znaczenia sprawozdawczości według segmentów działalności na świecie oraz naciski na ten obszar ze strony liczących się w skali świata międzynarodowych organizacji, takich jak: ue, oecd, un oraz iosco. w roku 1998 wprowadzono ias14r, który nie stanowił całkowicie odmiennego podejścia do sprawozdawczości według segmentów, ale charakteryzował się doprecyzowaniem podejścia prezentowanego w ramach ias14. przytoczone wyniki badań w kontekście praktycznego zastosowania obu standardów przez jednostki gospodarcze dowiodły wyższości ias14r nad ias14. wynika to z faktu, że wprowadzenie nowego standardu przyczyniło się do wzrostu liczby podmiotów ujawniających informacje o segmentach, liczby ujawnianych segmentów działalności oraz zwiększenia zakresu ujawnianych informacji o tych obszarach. przy czym trzeba podkreślić, że poprawa była nieznaczna. ias14r funkcjonował przez ponad 10 lat. po tym okresie wprowadzono nowy standard sprawozdawczości według segmentów – ifrs8. podkreślenia wymaga fakt, że główną przyczyną rozpoczęcia prac nad zmianą standardu był realizowany przez iasb i fasb proces konwergencji standardów sprawozdawczości finansowej. przy czym na uwagę zasługuje również to, że sam proces zmiany nie spowodował. przyczyniły się do tego zidentyfikowane wady ias14r, w wyniku których w analizie porównawczej wypadł on gorzej niż jego amerykański odpowiednik – sfas131. do tych wad należy zaliczyć w szczególności: małą liczbę jednostek ujawniających informacje o segmentach działalności, istotne braki w ujawnianych informacjach o segmentach w stosunku do wymogów zawartych w standardzie, niewłaściwe podejście do sprawozdawczości według segmentów skutkujące tworzeniem sztucznych obszarów oraz brak przeciwdziałania zjawisku kosztów własnych. ifrs8 został wprowadzony w roku 2009. stanowił on całkowicie nowe podejście do sprawozdawczości według segmentów działalności, opierając się na tym, jak jednostka jest zorganizowana i zarządzana. brakuje badań w zakresie praktycznego zastosowania ifrs8 przez jednostki gospodarcze i płynących z tego wniosków. należy także zauważyć, że standard ten stanowi kopię amerykańskiego sfas131, który został wypracowany w ramach systemu anglosaskiego, a wprowadza się go do systemu kontynentalnego. w związku z tym nie można jednoznacznie stwierdzić, czy wprowadzona zmiana standardów – ias14r na ifrs8 – była zasadna. potrzebne są odpowiednie badania empiryczne. za łą cz n ik 1 . w aż ni ej sz e ba da ni a em pi ry cz ne d ot yc zą ce s pr aw oz da w cz oś ci w ed łu g se gm en tó w d zi ał al no śc i w r am ac h if r s t ab el a 1 . c ha ra kt er ys ty ka w aż ni ej sz yc h ba da ń em pi ry cz ny ch w z ak re si e ia s1 4 i i a s1 4r lp . a ut or zy po dm io t i p rz ed m io t ba da ni a ce l b ad an ia źr ód ło 1 st re et d . l ., br yan t s . m . do b ad an ia w yb ra no 8 2 je dn os tk i g os po da rc ze ; an al iz ie p od da no s pr aw oz da ni a fi na ns ow e ty ch po dm io tó w , w t ym s pr aw oz da ni a w ed łu g se gm en tó w d zi ał al no śc i pr zy go to w an e w r am ac h ia s1 4 ce le m b ad an ia b ył a oc en a po ró w na w cz a sp ół ek no to w an yc h i n ie no to w an yc h na a m er yk ań sk ie j g ie łd zi e pa pi er ów w ar to śc io w yc h w z ak re si e uj aw ni an yc h in fo rm ac ji fi na ns ow yc h or az s to pni a sp eł ni en ia w ym og ów na kł ad an yc h pr ze z m ię dz yn ar od ow e st an da rd y ra ch un ko w oś ci d . l. s tr ee t, s . m . br ya nt , d is cl os ur e le ve l an d co m pl ia nc e w it h ia ss : a c om pa ri so n of c om pa ni es w it h an d w it ho ut u .s . li st in gs a nd f ili ng s, th e in te rn at io na l j ou rn al o f a cc ou nt in g, v ol . 3 5, is su e 3, s ep te m be r 20 00 , s . 3 05 –3 29 2 st re et d . l ., g ra y s. j. do b ad an ia w yb ra no 2 79 j ed no st ek g os po da rcz yc h; a na liz ie p od da no ic h sp ra w oz da ni a fi na nso w e, w t ym s pr aw oz da ni a w ed łu g se gm en tó w dz ia ła ln oś ci p rz yg ot ow an e w r am ac h ia s1 4 ce le m b ad an ia b ył a oc en a za kr es u uj aw ni an yc h in fo rm ac ji fi na ns ow yc h w s to su nk u do w ym o gó w n ak ła da ny ch n a te je dn os tk i p rz ez m ię dz yna ro do w e st an da rd y ra ch un ko w oś ci d . l. s tr ee t, s . j. g ra y, o bs er va nc e of i nt er na ti on al a cc ou nt in g st an da rd s: f ac to rs e xp la in in g n on -c om pl ia nc e, a cc a r es ea rc h re po rt n o. 7 4, ce rt if ie d a cc ou nt an ts e du ca ti on al t ru st , l on do n 20 01 , s . 1 –1 31 3 st re et d . l ., n ic ho ls n . b . do b ad an ia w yb ra no 2 10 j ed no st ek g os po da rcz yc h; a na liz ie p od da no i ch s pr aw oz da ni a fi na ns ow e za la ta 1 99 8 (o bo w ią zy w ał ia s1 4) o ra z 19 99 (o bo w ią zy w ał ia s1 4r ) ce le m b ad an ia b ył a oc en a po ró w na w cz a dw óc h st an da rd ów sp ra w oz da w cz oś ci w ed łu g se gm en tó w d zi ał al no śc i – ia s1 4 i ia s1 4r ; an al iz a ob ej m ow ał a lic zb ę uj aw ni an yc h se gm en tó w dz ia ła ln oś ci o ra z za kr es u ja w ni an yc h na i ch t em at in fo rm ac ji w r am ac h po ds ta w ow eg o i u zu pe łn ia ją ce go w zo ru s pr aw oz da w cz eg o st re et d . l. , n ic ho ls n . b. , lo b an d g eo gr ap hi c se gm en t d is cl os ur es : a n a na ly si s of t he i m pa ct of i a s1 4 re vi se d, j ou rn al o f in te rn at io na l a cco un ti ng , a ud it in g & t ax at io n, v ol . 11 , is su e 2, 20 02 , s . 9 3– 11 3 4 pr at he rki ns ey j. , m ee k g . k . do b ad an ia w yb ra no 2 11 j ed no st ek g os po da rcz yc h; a na liz ie p od da no s pr aw oz da ni a fi na ns o w e ty ch p od m io tó w z a ok re sy 1 99 7 i 1 99 8 – ob ow ią zy w ał w ów cz as i a s1 4, o ra z 19 99 – o bo w ią zy w ał ia s1 4r ce le m ba da ni a by ła oc en a w pł yw u no w ego ia s1 4r na sp ra w oz da w cz oś ć se gm en tó w dz ia ła ln oś ci w s to su nk u do j eg o po pr ze dn ik a – ia s1 4; a na liz ie p od da no : lic zb ę uj aw ni an yc h se gm en tó w , z ak re s uj aw ni an yc h o ni ch in fo rm acj i, za kr es u ja w ni eń w s to su nk u do w ym og ów st an da rd u j. p ra th er -k in se y, g . k . m ee k, t he e ff ec t o f r ev ise d ia s1 4 on s eg m en t re po rt in g by ia s co m pa ni es , e ur op ea n a cc ou nt in g re vi ew , v ol . 1 3, is su e 2, ju ly 2 00 4, s . 2 13 –2 34 lp . a ut or zy po dm io t i p rz ed m io t ba da ni a ce l b ad an ia źr ód ło 5 św id er sk a g . k. , ka rw ow sk i m . do b ad an ia w yb ra no 1 34 g ru py k ap it ał ow e dl a ro ku 2 00 3 or az 1 63 g ru py k ap it ał ow e dl a ro ku 20 04 ; an al iz ie p od da no s pr aw oz da ni a w ed łu g se gm en tó w dz ia ła ln oś ci za w ar te w ra m ac h sk on so lid ow an yc h sp ra w oz da ń fi na ns ow yc h ty ch g ru p ka pi ta ło w yc h ce le m b ad an ia b ył a oc en a sp ra w oz da ni a w ed łu g se gm en tó w d zi ał al no śc i p rz yg ot ow an eg o zg od ni e z w ym og am i i a s1 4r ; a na liz ie p od da no li cz bę uj aw ni an yc h se gm en tó w d zi ał al no śc i, pr ez en to w an e w zo ry s pr aw oz da w cz e, a t ak że u ja w ni an e se gm en ty d zi ał al no śc i w ra m ac h po ds ta w ow eg o i u zu pe łn ia ją ce go w zo ru s pr aw oz da w cz eg o g . k. ś w id er sk a, m . ka rw ow sk i, u ja w ni an ie i nfo rm ac ji o se gm en ta ch d zi ał al no śc i w s pr aw oz da ni ac h fi na ns ow yc h gr up k ap it ał ow yc h w p ol sc e, z es zy ty t eo re ty cz ne r ac hu nk ow oś ci , t. 3 5 (9 1) , s kw p, w ar sz aw a 20 06 , s . 5 0– 60 6 st re et d . l. , n ich ol s n . b . do b ad an ia w yb ra no 1 60 j ed no st ek g os po da rcz yc h; a na liz ie p od da no ic h sp ra w oz da ni a fi na nso w e za o kr es y: 1 99 9, 2 00 0, 2 00 1 i 2 00 2 ce le m b ad an ia b ył a w er yf ik ac ja , cz y w pr ow adz en ie n ow eg o ia s1 4r s po w od ow ał o w ye lim ino w an ie z ja w is ka k os zt ów w ła sn yc h (u kr yw an ia pr ze z je dn os tk i go sp od ar cz e ob sz ar ów d zi ał al no śc i ch ar ak te ry zu ją cy ch s ię p on ad pr ze ci ęt ny m i w yn ik am i fi na ns ow ym i pr ze z łą cz en ie i ch z in ny m i s eg m en ta m i) d . l. s tr ee t, n . b. n ic ho ls , t he r el at io ns hi p be tw ee n co m pe ti ti on a nd b us in es s se gm en t re po rt in g d ec is io ns u nd er t he m an ag em en t a ppr oa ch o f i a s1 4 re vi se d, jo ur na l o f i nt er na ti on al a cc ou nt in g, a ud it in g an d ta xa ti on , v ol . 1 6, is su e 1, 2 00 7, s . 5 1– 68 7 so ja k s. , zi m ni ck i t . do b ad an ia w yb ra no je dn os tk i g os po da rc ze n o to w an e na g ie łd zi e pa pi er ów w ar to śc io w yc h w w ar sz aw ie , kt ór yc h si ed zi ba z na jd ow ał a si ę na te re ni e w oj ew ód zt w a ku ja w sk opo m or sk ie go ; an al iz ie p od da no ic h sp ra w oz da ni a ro cz ne , p ół ro cz ne o ra z kw ar ta ln e za r ok 2 00 6 ce le m b ad an ia b ył a oc en a ko rz yś ci w yn ik aj ący ch z u ja w ni en ia in fo rm ac ji o se gm en ta ch d zi ała ln oś ci p rz yg ot ow an yc h zg od ni e z w ym og am i ia s1 4r ; an al iz ie p od da no l ic zb ę uj aw ni an yc h se gm en tó w dz ia ła ln oś ci , za kr es uj aw ni an yc h in fo rm ac ji na ic h te m at w r am ac h po ds ta w ow ego i u zu pe łn ia ją ce go w zo ru s pr aw oz da w cz eg o, a ta kż e m oż liw oś ć os za co w an ia n a po ds ta w ie uj aw ni on yc h in fo rm ac ji m ia r at ra kc yj no śc i in w es ty cj i d la t yc h ob sz ar ów s. s oj ak , t. z im ni ck i, w ar to ść d od an a sp ra w oz da ń fi na ns ow yc h w yn ik aj ąc a z uj aw ni en ia s eg m en tó w d zi ał al no śc i w ed łu g m sr 1 4, z es zy ty te or et yc zn e ra ch un ko w oś ci , t. 4 6 (1 02 ), sk w p, w ar sz aw a 20 08 , s . 1 35 –1 63 8 zi m ni ck i t . do b ad an ia z w yk or zy st an ie m a na liz y pr zy pa dku w yb ra no s pó łk ę no to w an ą na g ie łd zi e pa pi er ów w ar to śc io w yc h w w ar sz aw ie ; an al iz ie po dd an o je j sp ra w oz da ni a w ed łu g se gm en tó w dz ia ła ln oś ci z aw ar te w r am ac h ra po rt u ro cz ne go , pó łr oc zn eg o or az r ap or tó w k w ar ta ln yc h za ro k 20 06 ce le m b ad an ia b ył a oc en a za sa dn oś ci p od ej śc ia d o sp ra w oz da w cz oś ci w ed łu g se gm en tó w za w ar ta w ia s1 4r ; a na liz ie p od da no u ja w ni on e in fo rm ac je o s eg m en ta ch d zi ał al no śc i w r am ac h an al iz ow an yc h ra po rt ów fi na ns ow yc h or az pr ze pr ow ad zo no p og łę bi on y w yw ia d z os ob ą od po w ie dz ia ln ą w j ed no st ce z a pr zy go to w an ie ty ch in fo rm ac ji t. z im ni ck i, za sa dn oś ć po de jś ci a m sr 1 4 do sp ra w oz da w cz oś ci s eg m en tó w d zi ał al no śc i – n a pr 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(2009), segmenty zarządcze w rachunkowości finansowej i zarządczej, [w:] problemy współczesnej rachunkowości, pracownicy katedry rachunkowości sgh (red.), szkoła główna handlowa, warszawa. mcconnell p., pacter p. (1995), iasc and fasb proposals would enhance segment reporting, cpa journal, vol. 65, issue 8. msr 14 sprawozdawczość dotycząca segmentów działalności (2004), międzynarodowe standardy sprawozdawczości finansowej (mssf), t. 1, skwp, warszawa. mssf 8 segmenty operacyjne (2007), międzynarodowe standardy sprawozdawczości finansowej (mssf), t. 1, skwp, warszawa. pacter p. (1993), reporting disaggregated information, financial accounting standards, norwalk. prather-kinsey j., meek g. k. 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(2002), lob and geographic segment disclosures: an analysis of the impact of ias14 revised, journal of international accounting, auditing & taxation, vol. 11, issue 2. street d. l., nichols n. b. (2007), the relationship between competition and business segment reporting decisions under the management approach of ias14 revised, journal of international accounting, auditing and taxation, vol. 16, issue 1. zimnicki t. (2008), zasadność podejścia msr 14 do sprawozdawczości segmentów działalności – na przykładzie grupy kapitałowej spółki notowanej na giełdzie papierów wartościowych w warszawie, aunc ekonomia, z. 388, toruń. copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 10 issue 4 2021 quarterly address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2020: 100.00 editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka-pelowska, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla – la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2021 copyright by uniwersytet mikołaja kopernika toruń 2021 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents md ali ashraf the impact of mobile financial services on the usage dimension of financial inclusion: an empirical study from bangladesh ................................................................ 9 simona činčalová, veronika toporová model of psychological micro foundations of csr in czech brewery ........................ 27 renu isidore, c. joe arun risk profiling of secondary equity investors from the chennai city of india based on the big five personality model ..................................................................................... 45 patrycja konieczna local currencies supporting the implementation of the concept of sustainable development in europe ..................................................................................................... 67 adish kumar, kapil gupta examining the impact of structural breaks on price discovery efficiency: evidence from the indian equity futures market ............................................................ 79 kamaldeen ibraheem nageri risk-return relationship in the nigerian stock market during pandemic covid-19: sectoral panel garch approach ................................................................................... 97 avani raval, swati saxena, shashank thanki how carbon projects can add to sustainable development goals of india’, an associative study of cdm projects ........................................................................... 117 rihab ben slimen, fethi belhaj, manel hadriche banking shortand long-term stability: a comparative study between islamic and conventional banks in gcc countries .................................................................. 139 table of contents or 8 dominik tschinkl, nathalie weikert, dirk kiesewetter the impact of taxes on individual long-term savings decision ................................. 159 for authors ......................................................................................................................... 181 date of submission: january 9, 2021; date of acceptance: march 4, 2021. * contact information: v.kumariipmb@gmail.com, indian institute of plantation management bengaluru, jnanabharathi campus, mallathalli – post, bangalore 560056, india, phone: +91-9844361528; orcid id: https://orcid.org/0000-0003-2319-2132. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 4 vijayakumar, a.n. (2021). relativity of indian stock market with exchange rate, gold and crude oil. copernican journal of finance & accounting, 9(4), 101–118. http://dx.doi.org/10.12775/ cjfa.2020.024 a.n. vijayakumar* indian institute of plantation management bengaluru relativity of indian stock market with exchange rate, gold and crude oil keywords: co-integration, crude oil, exchange rate, gold, stock market. j e l classification: g15. abstract: stock market return is a motivating factor to investor in investment and portfolio decisions. markets attracts domestic and foreign investments in anticipation of higher returns considering several parameters. these returns are inf luenced with economic, taxation and geo-political factors. investment decision at market discounts with f luctuations of oil, exchange rate and gold. india being the largest consumer, the demand for crude oil and gold has been increasing and lead to higher import bill impacting f luctuations on exchange rate (usd-inr). investor’s investment decisions at market discounts with volatility of oil, exchange rate and gold. this study with causal research method using 25 years of data administered johansen co-integration and vector error correction model to explore the relative impact of exchange rate, crude oil and gold on indian stock market. the study finds presence of long run relationship of exchange rate, gold and crude oil with market returns and absence of short run relationship. the findings shall facilitate in understanding the impact of f luctuations and investment decisions to benefit from indian stock market. a.n. vijayakumar102  introduction stock market of india is one of the leading asian markets considering the reputation of market regulations and returns. it has been inf luenced by social, political and economic factors such as inf lation rate, exchange rates, f low of foreign investments, political stability, growth of gross domestic product, liquidity and government policies of india and other inf luencing countries. gold and crude oil are the largest traded commodities and used as an important financial asset in portfolio management by investors and fund managers. crude oil, apart from using as a fuel, is also an input for wide gamut of industries and subsequent price movement’s inf luences related prices of lubricants, fertilizers, transportation and petrochemicals. hence, prices of oil are a major concern to all stakeholders and economies of the world. it is also one of the inf luencing factors causing instability on stock market and its returns. india is one among the largest importing country of crude oil imported 82.1% of total consumption during the year 2016-17 (dalei, roy & gupta, 2017). international transactions of settlement are largely through us dollars, hence, the greater demand for oil leads to def lation of indian currency (jain & biswal, 2016). india is one of the largest jewellery market in the world consumes gold as an input to meet domestic and international processing requirements and is expected to increase around 33% by 2021. gold in india is largely imported hence; valuation of indian currency shall weaken against us dollar resulting appreciation of its value in terms of indian rupee. the impact of rise in oil prices, foreign capital and remittances by non-resident indians working in gulf countries also inf luencing a positive relation of crude oil and stock market valuation. similarly, decrease in valuation of indian currency against us dollar resulting to fall in market returns and higher import bills for crude. india being the net importing country to both crude oil and gold settles exchange transactions through us dollars. hence, any changes in exchange rate of usd-inr have impacts on multiple economic indicators including stock market returns. this f luctuation in valuation of gold, exchange rate and market returns motivated to explore causal effect of relativity. india has two popular stock exchanges facilitating to raise share capital and trade of listed securities. the sensitivity index of bombay stock exchange consisting of 30 most traded indian companies’ forms indices known as sensex. this paper shall be considering sensex as a barometer for understanding the indian stock market returns as one of the vari relativity of indian stock market… 103 able. the remaining part of this paper has been presented in following sections. section 2 describes literature review, section 3 elucidates research methodology, section 4 presents results and discussions and finally section 5 concludes the research study with findings. literature review this study reviewed scholastic research on gold, crude oil, exchange rate, and stock market returns from national and international sources of repute. the stock prices and exchange rates play a significant role in inf luencing investor’s confidence and development of the economy. bhunia and pakira (2014) and ranjusha, devasia and nandakumar (2017) analysed the impact of exchange rate and gold on sensex employing granger causality and johansen co-integration test. the study finds existence of long run integration and no causal effect with exchange rate and gold. geete (2016) assessed the effect of gold and dollar prices on stock exchange indices. the multiple regression analysis found positive correlation with gold and nifty whereas negative relationship between dollar and nifty. the relationship of gold on karachi stock exchange (kse) and bombay stock exchange (bse) were analysed by bilal, noraini bt, haq, khan and naveed (2013). the study found non-existence of long-run relationship amongst monthly average prices of gold and kse stock index; whereas, a significant long-run relationship occurred between bse stock index and average gold prices. similarly, narang and singh (2012) argued absence of long run association and non-causal relation between prices of gold and sensex. the dependence between global crude oil prices and stock indices in economies of fast emerging asian countries were analysed by mishra and debasish (2019). the analysis revealed asymmetric effects with stock index returns and crude oil prices indicating better performance of asian countries by means of higher production and consumption of goods and services. studies of sathyanarayana, harish and gargesha (2018); najaf and najaf (2016); naifar and al dohaiman (2013) analysed volatility of crude oil prices and its inf luence on indian stock market index. the statistical tests disclose that changes in crude prices have an impact on sensex. it was also found that stock market index shares a direct relationship with crude oil, indicating raise in crude prices caused sensex to go up and vice-versa. the short and long run asymmetric impact of oil prices, gold prices and their related volatilities on stock prices of emerging economies were a.n. vijayakumar104 analysed by raza, syed, aviral kumar and shahbaz (2016). the results indicated non-linearity and absence of long run coefficients between the selected variables indicating higher volatility and decrease in stock prices. similarly, rahman and mustafa (2018) explored effect of gold and crude oil prices on us stock market variations and found there exists a long run convergence among the variables. the long and short-term impact on gold and stock returns were analysed and found existence of co-integration relationship and non-existence of short-run relationship between the selected variables (bhuyan & dash, 2018). the interdependencies of oil, gold, exchange rate and stock market were examined to identify linkages in indian scenario by mohanamani, preethi and latha (2018). the study found negative linkage of crude oil prices and exchange rate with gold. it was also observed that exchange rate is highly inf luenced by changes in both oil and gold prices. similarly, sujit and kumar (2011) found presence of co-integration amongst selected variables but rastogi (2016) argued there exists long term association. the relationship between oil prices, nifty and bse energy index were analysed and found absence of long run integration between the variables by sharma, giri, vardhan, surange, shetty and shetty (2018). bildirici and turkmen (2015) analysed co-integration and causal relationship among oil and precious metals of gold, silver and copper. the statistical test revealed there exists a bi-directional relationship of oil, gold and silver. on the other hand sari, hammoudeh and soyta (2010) argued that there exists weak long-run equilibrium relationship. the co-integration and non-liner causality amongst international gold, crude oil and indian stock market were examined by bouri, jain, biswal and roubaud (2017) and found positive impact of implied volatility with the selected variables. siddiqui and seth (2015) assessed the relation of oil prices on market returns of india and found absence of integration and causality of oil prices with index. the co-integration relationships of gold price, crude oil price, exchange rates, sensex and nifty were analysed by bhunia (2013) and found they are closely interlinked with long term relationship. it was also argued that increase in crude oil prices lead to increase in production costs that will affect both stock prices and cash f lows. interactive association amongst gold, crude oil prices and nt-us dollar exchange rate were examined and found these variables are remain considerably independent from one another by chang, huang and chin (2013). the dynamic interactions among oil, gold prices, exchange rate and the stock market in indian context were analysed by jain and biswal (2016); ingalhalli, poornima and reddy (2016). the empirical results found decline in crude oil and gold prices causes relativity of indian stock market… 105 fall in value of indian currency. ingalhalli, poornima and reddy (2016) initiate that there exists only unidirectional relationship among these variables. the studies on impact of macroeconomic elements on stock markets were also found during scholastic review. the inf luence of macroeconomic determinants such as inf lation, rate of interest, exchange rate, industrial production index, money supply, silver, gold and crude oil prices on the indian stock market indices were analysed by venkatamuni reddy, nayak and nagendra (2019) and patel (2012). the statistical results revealed long run equilibrium relation and a causal relation between all macroeconomic factors and stock market indices. in addition, it was also found gold price, exchange rate and interest rate are positively correlated with four indices, however, crude oil price and silver price have positively correlated with three indices. sekaran and krishnamoorthy (2016) analysed integration considering macro-economic variables on bse index. the results revealed chinese yuan renminbi, export of goods value, gold, inf lation, silver and us dollar has inf luenced bse sensex. whereas, oil prices and euro currency does not have a significant inf luence on bse sensex. the association between bse sensex with industrial production (iip), inf lation, gold, interest rate, rate of exchange, foreign institutional investment (fii) and supply of money were investigated by mishra (2018) and found existence of causal relationship. rakesh, raju and basavangowda (2016) studied the impact of currency f luctuations and found effect on indian stock market as compared to euro and pound. the integration of stock prices and exchange rates were examined and found co-integration and bidirectional relationship among stock price and exchange rates in asia by fauziah, moeljadi and ratnawati (2015). the presences of long memory in stock liquidity and returns of indian equity market were examined by bala and gupta (2020) from the indian context and confirmed presence of long memory in returns of all indices. bidias-menik and tonmo (2020) tested predictive power of the implied forward rate of the term structure of interest rates at africa. the study revealed that implicit forward rate does not have a significant predictive power in african countries. volatility persistence of stock return in the market during pre and post meltdown were observed by nageri (2019). this study considering return on the exchange disclosed high volatility magnitude after the meltdown but low volatility magnitude before the meltdown. the above scholastic evidences reviewed impact of crude oil, gold, interest rates, index of industrial production (iip), exchange rates, inf lation, foreign intuitional investments (fii) and money supply on indian stock market. however, the findings are mystifying and there is a need for a.n. vijayakumar106 clarity considering the recent economic developments on indian market with a longer period of data. this dearth of scholastic literature motivated author to study relativity of stock market returns on exchange rate, gold and crude oil to add fresh insights to the existing domain of knowledge. objective the objective is to determine relative impact of indian currency exchange rate, gold and crude oil on indian stock market in the short and long run. research methodology the study based on empirical data adopted causal research method with secondary sources of monthly data for the period of 25 years from 1993 to 2018 considering 1200 observations. this study used currency exchange rates (usd/ inr), crude oil and gold as independent variable and indian stock market returns as dependant variable. the study collected secondary data of gold, crude oil and sensex from web sources of new york mercantile exchange and bombay stock exchange to ensure authenticity and accuracy. in the first step, stationarity of data using augmented dicky fuller test has been checked. subsequently, lag order selection criteria have been identified with the help of akaike information criteria of data variables at level. johansen co integration test is administered to check the existence long term association of identified independent and dependent variables. the var model with vecm environment and wald test is employed to understand long and short term relationship of independent variables on market returns. after the satisfaction of results derived from the model, the study checked residual diagnostics. augmented dickey fuller (adf) test is used with the following regression equation: stock market. however, the findings are mystifying and there is a need for clarity considering the recent economic developments on indian market with a longer period of data. this dearth of scholastic literature motivated author to study relativity of stock market returns on exchange rate, gold and crude oil to add fresh insights to the existing domain of knowledge. objective the objective is to determine relative impact of indian currency exchange rate, gold and crude oil on indian stock market in the short and long run. research methodology the study based on empirical data adopted causal research method with secondary sources of monthly data for the period of 25 years from 1993 to 2018 considering 1200 observations. this study used currency exchange rates (usd/inr), crude oil and gold as independent variable and indian stock market returns as dependant variable. the study collected secondary data of gold, crude oil and sensex from web sources of new york mercantile exchange and bombay stock exchange to ensure authenticity and accuracy. in the first step, stationarity of data using augmented dicky fuller test has been checked. subsequently, lag order selection criteria have been identified with the help of akaike information criteria of data variables at level. johansen co integration test is administered to check the existence long term association of identified independent and dependent variables. the var model with vecm environment and wald test is employed to understand long and short term relationship of independent variables on market returns. after the satisfaction of results derived from the model, the study checked residual diagnostics. augmented dickey fuller (adf) test is used with the following regression equation: ∆𝑦𝑦� = 𝑎𝑎 𝑎 𝑎𝑎𝑦𝑦��� 𝑎 ∑ 𝑏𝑏� ∆𝑦𝑦��� 𝑎 𝜀𝜀����� (1) ∆𝑦𝑦� = 𝑎𝑎 𝑎 𝑎𝑎𝑎𝑎 𝑎 𝑎𝑎𝑦𝑦��� 𝑎 ∑ 𝑏𝑏����� ∆𝑦𝑦��� 𝑎 𝜀𝜀� (2) the unit root in 𝑦𝑦� where ∆𝑦𝑦���is the lagged difference to accommodate serial correlation in the errors, 𝜀𝜀� . 𝑘𝑘is the appropriate lag length. (1) stock market. however, the findings are mystifying and there is a need for clarity considering the recent economic developments on indian market with a longer period of data. this dearth of scholastic literature motivated author to study relativity of stock market returns on exchange rate, gold and crude oil to add fresh insights to the existing domain of knowledge. objective the objective is to determine relative impact of indian currency exchange rate, gold and crude oil on indian stock market in the short and long run. research methodology the study based on empirical data adopted causal research method with secondary sources of monthly data for the period of 25 years from 1993 to 2018 considering 1200 observations. this study used currency exchange rates (usd/inr), crude oil and gold as independent variable and indian stock market returns as dependant variable. the study collected secondary data of gold, crude oil and sensex from web sources of new york mercantile exchange and bombay stock exchange to ensure authenticity and accuracy. in the first step, stationarity of data using augmented dicky fuller test has been checked. subsequently, lag order selection criteria have been identified with the help of akaike information criteria of data variables at level. johansen co integration test is administered to check the existence long term association of identified independent and dependent variables. the var model with vecm environment and wald test is employed to understand long and short term relationship of independent variables on market returns. after the satisfaction of results derived from the model, the study checked residual diagnostics. augmented dickey fuller (adf) test is used with the following regression equation: ∆𝑦𝑦� = 𝑎𝑎 𝑎 𝑎𝑎𝑦𝑦��� 𝑎 ∑ 𝑏𝑏� ∆𝑦𝑦��� 𝑎 𝜀𝜀����� (1) ∆𝑦𝑦� = 𝑎𝑎 𝑎 𝑎𝑎𝑎𝑎 𝑎 𝑎𝑎𝑦𝑦��� 𝑎 ∑ 𝑏𝑏����� ∆𝑦𝑦��� 𝑎 𝜀𝜀� (2) the unit root in 𝑦𝑦� where ∆𝑦𝑦���is the lagged difference to accommodate serial correlation in the errors, 𝜀𝜀� . 𝑘𝑘is the appropriate lag length. (2) the unit root in yt where ∆yt–i is the lagged difference to accommodate serial correlation in the errors, εt.k is the appropriate lag length. relativity of indian stock market… 107 johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦��� = 𝛽𝛽𝑦𝑦��� (3) the corresponding vec model is ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (4) ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = � ������ � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. 𝛔𝛔�� 𝛔𝛔�� ℎ(𝑧𝑧� � 𝛼𝛼) (8) (3) the corresponding vec model is johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦��� = 𝛽𝛽𝑦𝑦��� (3) the corresponding vec model is ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (4) ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = � ������ � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. 𝛔𝛔�� 𝛔𝛔�� ℎ(𝑧𝑧� � 𝛼𝛼) (8) (4) johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦��� = 𝛽𝛽𝑦𝑦��� (3) the corresponding vec model is ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (4) ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = � ������ � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. 𝛔𝛔�� 𝛔𝛔�� ℎ(𝑧𝑧� � 𝛼𝛼) (8) (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦��� = 𝛽𝛽𝑦𝑦��� (3) the corresponding vec model is ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (4) ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = � ������ � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. 𝛔𝛔�� 𝛔𝛔�� ℎ(𝑧𝑧� � 𝛼𝛼) (8) (6) where: johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦��� = 𝛽𝛽𝑦𝑦��� (3) the corresponding vec model is ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (4) ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = � ������ � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. 𝛔𝛔�� 𝛔𝛔�� ℎ(𝑧𝑧� � 𝛼𝛼) (8) = maximum likelihood estimator (mle), johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦��� = 𝛽𝛽𝑦𝑦��� (3) the corresponding vec model is ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (4) ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = � ������ � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. 𝛔𝛔�� 𝛔𝛔�� ℎ(𝑧𝑧� � 𝛼𝛼) (8) = expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as: johansen co-integration validated long-run relationship between the variables at level. hence, var model with vecm environment have been employed to understand the casual relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦��� = 𝛽𝛽𝑦𝑦��� (3) the corresponding vec model is ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (4) ∆𝑦𝑦��� = 𝛼𝛼��𝑦𝑦����� − 𝛽𝛽𝑦𝑦������ + 𝜖𝜖��� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = � ������ � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. 𝛔𝛔�� 𝛔𝛔�� ℎ(𝑧𝑧� � 𝛼𝛼) (8) (7) where, ϵ indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. a.n. vijayakumar108 relationship. vecm model is a restricted var used with nonstationary series are known to be co-integrated. the co-integrating equation is as under: 𝑦𝑦�,� = 𝛽𝛽𝑦𝑦�,� (3) the corresponding vec model is ∆𝑦𝑦�,� = 𝛼𝛼��𝑦𝑦�,��� − 𝛽𝛽𝑦𝑦�,���� + 𝜖𝜖�,� (4) ∆𝑦𝑦�,� = 𝛼𝛼��𝑦𝑦�,��� − 𝛽𝛽𝑦𝑦�,���� + 𝜖𝜖�,� (5) the coefficient αi measures speed of adjustment at i-th endogenous variable towards the equilibrium. the study using wald test examined significance of explanatory components in a model. the wald test statistic is as under: 𝑊𝑊� = �� ����� � ����(�� ) = 𝐼𝐼�(𝜃𝜃�)[𝜃𝜃� − 𝜃𝜃�]� (6) where: 𝜃𝜃� = maximum likelihood estimator (mle), 𝐼𝐼�(𝜃𝜃�)= expected fisher information (evaluated at the mle). the study used breusch godfrey serial correlation lm test to determine existence of serial correlation of residuals under the developed model. this is an autocorrelation test used to check errors in the model. this statistics is ascertained by an auxiliary regression equation as 𝑦𝑦� = 𝑋𝑋� 𝛽𝛽 + 𝜖𝜖� (7) where, 𝜖𝜖 indicates errors. the study also used breusch pagan godfrey test to check validity of heteroscedasticity in the developed model. σ�� ��� ℎ(𝑧𝑧� � 𝛼𝛼) (8) where, 𝑧𝑧� indicates vector independent variable. this vector contains regressors from the original least square regression, it is tested by completing an auxiliary regression of the squared residual of the original equation on (1, 𝑧𝑧� ). subsequently, jarque bera test is administered for analysing normality of residuals. the test statistics measures difference of skewness and kurtosis of normal distribution series. it is computed as: 𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽 𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽 = �� ( 𝑆𝑆 � + (���) � � ) (9) (8) where, zt indicates vector independent variable. this vector contains regressors from the original least square regression, it is tested by completing an auxiliary regression of the squared residual of the original equation on (1, zt ). subsequently, jarque bera test is administered for analysing normality of residuals. the test statistics measures difference of skewness and kurtosis of normal distribution series. it is computed as: where, 𝑧𝑧� indicates vector independent variable. this vector contains regressors from the original least square regression, it is tested by completing an auxiliary regression of the squared residual of the original equation on (1, 𝑧𝑧� ). subsequently, jarque bera test is administered for analysing normality of residuals. the test statistics measures difference of skewness and kurtosis of normal distribution series. it is computed as: 𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽 𝐽𝐽𝐽𝐽𝐽𝐽𝐽𝐽 𝐽 �� ( 𝑆𝑆 � + (���) � � ) (9) finally, the stability of ols model was tested using cusum test. this test is a cumulative sum portrayed at 5% critical line. under this test, the plotted line should reside within the two measured lines otherwise the instability of test shall be noticed. results and discussions the study focussing on its intended objective found optimal lag order criteria for developing var model. statistical outcome is shown in table 1. table 1. lag order selection criteria lag log l lr fpe aic sc hq 0 -5450.965 na 1.98e+11 37.36278 37.41314 37.38295 1 -3647.696 3544.783 955232.3 25.12120 25.37304* 25.22208 2 -3609.701 73.64718 821696.4* 24.97056* 25.42385 25.15213* 3 -3601.386 15.89021 866241.2 25.02319 25.67796 25.28546 4 -3587.002 27.09363 876136.4 25.03426 25.89049 25.37723 5 -3570.893 29.90061 875893.2 25.03351 26.09121 25.45718 6 -3556.188 26.89188* 884303.7 25.04238 26.30155 25.54675 7 -3544.378 21.27464 910910.1 25.07108 26.53171 25.65615 8 -3533.288 19.67225 943248.5 25.10471 26.76681 25.77048 note * indicates selected lag order by criterion lr: lr test statistic sequential modified (each test at 5% level) fpe: indicates final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion source: authors’ own calculations using e-views. the table no. 1 portrays, value under akaike information criteria (aic) of 24.97056, is lesser than other lag selection criteria. the study, therefore, selects aic criteria of 2 lags. this selected 2 lags shall be used for co-integration test and at var model. (9) finally, the stability of ols model was tested using cusum test. this test is a cumulative sum portrayed at 5% critical line. under this test, the plotted line should reside within the two measured lines otherwise the instability of test shall be noticed. results and discussions the study focussing on its intended objective found optimal lag order criteria for developing var model. statistical outcome is shown in table 1. table 1. lag order selection criteria lag log l lr fpe aic sc hq 0 -5450.965 na 1.98e+11 37.36278 37.41314 37.38295 1 -3647.696 3544.783 955232.3 25.12120 25.37304* 25.22208 2 -3609.701 73.64718 821696.4* 24.97056* 25.42385 25.15213* 3 -3601.386 15.89021 866241.2 25.02319 25.67796 25.28546 4 -3587.002 27.09363 876136.4 25.03426 25.89049 25.37723 5 -3570.893 29.90061 875893.2 25.03351 26.09121 25.45718 6 -3556.188 26.89188* 884303.7 25.04238 26.30155 25.54675 7 -3544.378 21.27464 910910.1 25.07108 26.53171 25.65615 8 -3533.288 19.67225 943248.5 25.10471 26.76681 25.77048 relativity of indian stock market… 109 lag log l lr fpe aic sc hq note * indicates selected lag order by criterion lr: lr test statistic sequential modified (each test at 5% level) fpe: indicates final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion s o u r c e : authors’ own calculations using e-views. the table 1 portrays, value under akaike information criteria (aic) of 24.97056, is lesser than other lag selection criteria. the study, therefore, selects aic criteria of 2 lags. this selected 2 lags shall be used for co-integration test and at var model. test of stationarity the study checked stationarity of selected independent and dependant variables and found results as shown under table 2. table 2. test of stationarity sl. no variable (log) at the level at first difference t-statistic p value t statistic p value 1. crude oil -1.681562 0.4396 -8.347013 0.0000 2. gold -0.631655 0.8600 -4.149046 0.0010 3. exchange rate (usd/inr) 0.942455 0.7737 -4.004071 0.0016 4. sensex -9.73271 0.6374 -10.31464 0.0000 s o u r c e : authors’ own calculations using e-views. the aforementioned table 2 depicts test of stationarity with t-statistics and p value at the level and first order. the p value of crude oil at the level 0.4396 whereas at the first difference, the variables became stationary showing p value of 0.0000. similarly, the value of variable gold at level is 0.8600 whereas, at first difference it became 0.0010 indicating stationarity. the exchange rate table 1. lag… a.n. vijayakumar110 variable converted to stationarity at the first difference with the p value of 0.0016. from the above process, variables became stationary at the first difference were found to be satisfactory and essential for further analysis. test of co-integration the study used prices of oil, gold, exchange rate and monthly returns from one of the indian exchange indices such as sensex of bombay stock exchange. the table 3 indicates statistical output of johansen co-integration test. table 3. unrestricted co integration test (trace) hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical value prob.** none * 0.233395 103.6983 47.85613 0.0000 at most 1 0.047716 24.76069 29.79707 0.1702 at most 2 0.033215 10.23972 15.49471 0.2627 at most 3 0.000698 0.207266 3.841466 0.6489 trace test indicates 1 cointegrating at the 0.05 level * rejection of hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values s o u r c e : authors’ own calculations using e-views. the aforementioned table 3 indicates that the p value is less than 0.05 at 95% confidence level advising for rejecting null hypothesis of no co-integration of independent variables with dependant variable (indian stock market returns). the study, therefore, accepts alternative hypothesis of existence of co-integration of independent variables with dependant variable having a p value more than 0.05. this indicates long-run association amongst the variables of crude oil, gold, exchange rate and the indian stock market. relativity of indian stock market… 111 vector error correction model the study after finding the existence of co-integration of independent variables with dependant variables administered vector error correction model using 2 lags, as per aic lag order selection criteria. accordingly, the following equation has been obtained with the developed error correction model: * rejection of hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values source: authors’ own calculations using e-views. the aforementioned table 3 indicates that the p value is less than 0.05 at 95% confidence level advising for rejecting null hypothesis of no co-integration of independent variables with dependant variable (indian stock market returns). the study, therefore, accepts alternative hypothesis of existence of co-integration of independent variables with dependant variable having a p value more than 0.05. this indicates long-run association amongst the variables of crude oil, gold, exchange rate and the indian stock market. vector error correction model the study after finding the existence of co-integration of independent variables with dependant variables administered vector error correction model using 2 lags, as per aic lag order selection criteria. accordingly, the following equation has been obtained with the developed error correction model – 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷7𝐷𝐷 𝐷 𝐷𝐷𝐶𝐶 𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐶7𝐷7𝐶𝐷𝐶𝐷𝐶𝐶𝐷𝐷 𝐷 𝐶𝐶𝐶𝐶𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐶7𝐶𝐶𝐶𝐷𝐶𝐷𝐷𝐶𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐶𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐶𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐶𝐶𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷7𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷𝐶𝐶𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐶𝐷 𝐷 𝐷𝐷𝐷𝐶𝐶𝐶𝐶𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷𝐷𝐶𝐶𝐶𝐶𝐷𝐷𝐷𝐷𝐷 𝐷 𝐷𝐷 the study using above equation with least squares method estimated the var model as under. table 4. model output dependent variable: d(rsnsx) method: least squares sample (adjusted): 1993m07 2018m03 included observations: 297 after adjustments d(rsnsx) = c(1)*( rsnsx(-1) + 0.0232049340022*usin(-1) + 0.000921902212722*cl(-1) 0.000579761608521*gl(-1) 1.87566064959 ) + c(2)*d(rsnsx(-1)) + c(3)*d(rsnsx(-2)) + c(4) *d(usin(-1)) + c(5)*d(usin(-2)) + c(6)*d(cl(-1)) + c(7)*d(cl(-2)) + c(8)*d(gl(-1)) + c(9)*d(gl(-2)) + c(10) coefficient std. error t-statistic prob. (10) the study using above equation with least squares method estimated the var model as under. table 4. model output dependent variable: d(rsnsx) method: least squares sample (adjusted): 1993m07 2018m03 included observations: 297 after adjustments d(rsnsx) = c(1)*( rsnsx(-1) + 0.0232049340022*usin(-1) + 0.000921902212722*cl(-1) 0.000579761608521*gl(-1) 1.87566064959 ) + c(2)*d(rsnsx(-1)) + c(3)*d(rsnsx(-2)) + c(4) *d(usin(-1)) + c(5)*d(usin(-2)) + c(6)*d(cl(-1)) + c(7)*d(cl(-2)) + c(8)*d(gl(-1)) + c(9)*d(gl(-2)) + c(10) coefficient std. error t-statistic prob. c(1) -0.878069 0.102668 -8.552475 0.0000 c(2) -0.118640 0.086014 -1.379313 0.1689 c(3) -0.011344 0.060229 -0.188340 0.8507 c(4) -0.677760 0.464040 -1.460564 0.1452 c(5) 0.265412 0.471521 0.562885 0.5740 c(6) 0.020208 0.096190 0.210087 0.8337 a.n. vijayakumar112 coefficient std. error t-statistic prob. c(7) 0.041096 0.095956 0.428280 0.6688 c(8) 0.002758 0.012718 0.216878 0.8285 c(9) 0.005024 0.012541 0.400599 0.6890 c(10) -0.001986 0.418485 -0.004746 0.9962 r-squared 0.490506 mean dependent var -0.014913 adjusted r-squared 0.474529 s.d. dependent var 9.627543 s.e. of regression 6.978945 akaike info criterion 6.756763 sum squared resid 13978.53 schwarz criterion 6.881131 log likelihood -993.3793 hannan-quinn criter. 6.806552 f-statistic 30.70049 durbin-watson stat 2.000781 prob(f-statistic) 0.000000 s o u r c e : authors’ own calculations using e-views. the table 4 depicts co-efficient of c1 is negative (–0.878069) and significant with p value 0.0000, i.e., less than 0.05. this indicates presence of long run relationship from exchange rate (usd/inr), crude oil and gold to indian stock market returns. it is observed that f – statistics (30.70049) is significant with p value less than 0.05 (0.000000) showing combined inf luence of independent variables on dependant variable. the value of f statistics is more important than r square equivalent to 50% according to the model. short run causal relationship the study using wald test explored short run causal relationship of exchange rate, crude oil, gold and indian stock market. accordingly, the table 5 depicts the chi-square value with corresponding p values. the statistical results cannot reject null hypothesis of no short-run causality and concluded the non-existence of short run causal relationship of exchange rate (usd/inr), crude oil and gold with indian stock market. table 4. model… relativity of indian stock market… 113 table 5. wald test variables chi-square value p-value exchange rate 2.441209 0.2951 crude oil 0.336526 0.8451 gold 0.228502 0.8920 restrictions are linear in coefficients. s o u r c e : authors’ own calculations using e-views. serial correlation test the study checked validity of ols model through residual diagnostic test of breusch-godfrey serial correlation. accordingly, the observed r square (0.291429) with corresponding probability value (0.8644) is more than 5%. hence, the null hypothesis residuals are not serially correlated, cannot be rejected. the output of results is desirable. test of heteroskedasticity the study finds rejection of null hypothesis from the statistical value of observed r square (31.03625) with corresponding probability value (0.0019) being less than 0.05 hence, it finds that residuals are homoscedastic. test of normality jarque bera normality test finds the p value (0.103) is not significant at the general acceptance level of 5% (figure 1). therefore, the study cannot reject null hypothesis, and concludes that residuals are being normally distributed. it is also fulfilling the condition of bell-shaped curve. a.n. vijayakumar114 figure 1. test of normality exchange rate 2.441209 0.2951 crude oil 0.336526 0.8451 gold 0.228502 0.8920 restrictions are linear in coefficients. source: authors’ own calculations using e-views. serial correlation test the study checked validity of ols model through residual diagnostic test of breusch-godfrey serial correlation. accordingly, the observed r square (0.291429) with corresponding probability value (0.8644) is more than 5%. hence, the null hypothesis residuals are not serially correlated, cannot be rejected. the output of results is desirable. test of heteroskedasticity the study finds rejection of null hypothesis from the statistical value of observed r square (31.03625) with corresponding probability value (0.0019) being less than 0.05 hence, it finds that residuals are homoscedastic. test of normality jarque bera normality test finds the p value (0.103) is not significant at the general acceptance level of 5% (figure 1). therefore, the study cannot reject null hypothesis, and concludes that residuals are being normally distributed. it is also fulfilling the condition of bell-shaped curve. figure 1. test of normality source: authors’ own calculations using e-views. s o u r c e : authors’ own calculations using e-views. stability test stability of vecm model developed in the study is subjected to cusum test. figure 2 shows that curved line is between +15 and -15. hence, the developed vecm model under the study is stable and it is desirable to accept the results. figure 2. stability test stability test stability of vecm model developed in the study is subjected to cusum test. figure 2 shows that curved line is between +15 and -15. hence, the developed vecm model under the study is stable and it is desirable to accept the results. figure 2. stability test source: authors’ own calculations using e-views. findings and conclusion stock market responds to the present and subsequent economic developments and shocks. the potential of earnings by listed companies shall reflect in the index movements. the general economic theory of cost and expected returns attracts investors to divert there investments on potential assets. this study considering shocks of exchange rate, gold and oil on indian stock market evidenced long-run association of co-movements with the help of johansen cointegration test. the vector auto regression with vector error correction model finds long run causal relationship of identified variables on indian market, sensex. however, the study did not find the existence of short run causal relationship of exchange rate, oil and gold with sensex. this research paper validated with economic and investment theory of influencing prices of crude oil, gold and exchange rate of stock market. thus, increase in crude oil prices and exchange rate (usd/inr) would lead to plunge in returns at indian stock market in the long run. similarly, increase in import of gold leads to weakening of indian rupee and results in declining market returns. this findings of study may be useful to investor and fund managers to develop appropriate strategies for manging the port-folio and investment decisions. further research studies may consider daily or weekly data of gold, crude oil and s o u r c e : authors’ own calculations using e-views. relativity of indian stock market… 115  findings and conclusion stock market responds to the present and subsequent economic developments and shocks. the potential of earnings by listed companies shall ref lect in the index movements. the general economic theory of cost and expected returns attracts investors to divert there investments on potential assets. this study considering shocks of exchange rate, gold and oil on indian stock market evidenced long-run association of co-movements with the help of johansen co-integration test. the vector auto regression with vector error correction model finds long run causal relationship of identified variables on indian market, sensex. however, the study did not find the existence of short run causal relationship of exchange rate, oil and gold with sensex. this research paper validated with economic and investment theory of inf luencing prices of crude oil, gold and exchange rate of stock market. thus, increase in crude oil prices and exchange rate (usd/inr) would lead to plunge in returns at indian stock market in the long run. similarly, increase in import of gold leads to weakening of indian rupee and results in declining market returns. this findings of study may be useful to investor and fund managers to develop appropriate strategies for manging the port-folio and investment decisions. further research studies may consider daily or weekly data of gold, crude oil and exchange rates to estimate impact on market returns and also may compare with developing countries of economical factors to identify opportunities for wealth creation at indian and other identified stock markets. acknowledgement “the author is grateful to editor and anonymous reviewers of the journal for their extremely useful suggestions to improve the quality of the paper. usual disclaimers apply.” declaration of conf licting interests the authors declared no potential conf licts of interest with respect to the research, authorship and/or publication of this article. a.n. vijayakumar116  references bala, 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(2016). inf luence of selected macro economics variables on indian stock market – a study of bse sensex. abhinav national monthly refereed journal of research in commerce & management, 5(3). sharma, a., giri, s., vardhan, h., surange, s., shetty, r., & shetty, v. (2018). relationship between crude oil prices and stock market: evidence from india. international journal of energy economics and policy, 8(4), 331-337. siddiqui, s., & seth, n. (2015). do global oil price changes affect indian stock market returns? journal of management and public policy, 6(2), 29-41. sujit, k.s., & kumar, b.r. (2011). study on dynamic relationship among gold price, oil price, exchange rate and stock market returns. international journal of applied business and economic research, 9(2), 145-165. venkatamuni reddy, a.r., nayak, r., & nagendra, s. (2019). impact of macro economic factors on indian stock marketa research of bse sectoral indices. international journal of recent technology and engineering, 8(2), 597-602. http://dx.doi. org/10.35940/ijrte.b1110.0782s719. date of submission: january 17, 2020; date of acceptance: march 20, 2020. * contact information: bhatishfaq260@gmail.com, icssr doctoral fellow, school of economics, shri mata vaishno devi university, katra, jammu & kashmir, india-182320, phone: 09797025873; orcid id: https://orcid.org/0000-0002-9187-877x. ** contact information: pabitrakumarjena@gmail.com, assistant professor, school of economics, shri mata vaishno devi university, katra, jammu & kashmir, india-182320, phone: 09419214167; orcid id: https://orcid.org/0000-0002-7746-0916. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 2 hamid, i., & jena, p.k. (2020). linear and non-linear granger causality between foreign direct investment and economic growth: evidence from india. copernican journal of finance & accounting, 9(2), 25–44. http://dx.doi.org/10.12775/cjfa.2020.006 ishfaq hamid* shri mata vaishno devi university pabitra kumar jena** shri mata vaishno devi university linear and non-linear granger causality between foreign direct investment and economic growth: evidence from india keywords: india, economic growth, foreign direct investment & causality. j e l classification: f21, f23. abstract: the present study tries to understand the association among foreign direct investment (fdi) and economic growth in india. this paper applies the causality test of granger (1969) based on the vecm and non-linear causality test of dike and panchenko over the period 1993-2016. this study gives a proof about the continuation of a long-run equilibrium association between fdi and gross domestic product (gdp) or economic growth for the period being investigated. unidirectional causality runs from fdi to gdp in the long run. the apparent non-linear causality running from fdi to gdp means that fdi is a policy instrument in stimulating indian economic growth and provides support for the bi-directional non-linear causal connection between fdi and economic growth with 1, 2 and 4 lags. there has been no definitive investigation as of recently to ishfaq hamid, pabitra kumar jena26 find “linear and non-linear” granger causality between foreign direct investment and economic growth in india” and this study goes a stage advancing and present exact models that can be used to find the association among foreign direct investment and economic growth.  introduction foreign direct investment is of growing significance in propelling economic growth of any nation. fdi inf lows are the necessity of indian economy. this is because india is the process of transformation from a traditional economy to modern economy. since the opening of economic reform in india in 1991, real changes have been stated in the field of joint ventures, exchange of goods and services and commercial sector. as far as reform is concerned, india allows fdi inf lows to build up the connection to the world trade and also embraced an amiable foreign policy in order to bring back the assurance of overseas investors. in july 1991, the government has introduced a series of reforms in the trade sector aimed to help the integration of the indian economy better with the rest of the world. india’s fdi equity investment has surged 22% to usd 35.8 billion in 9 months of 2016-17 in comparison to the corresponding period of 201516.the robust f low of overseas investment indicates that india is economically quite stable. in order to make life easier for the overseas investors, the center has decided to do away with the foreign investment promotion board (fipb), promising more reforms during the union budget 2017 speech. india comes up with new idea i.e. “invest india” to collaborate the public and private sector for pulling more fdi in the nation, and this new idea will give information to the host countries regarding investment and also working on no profit and no loss basis (sen, 2013). in its capital 1000 core, the government and federation of indian chambers of commerce and industry (ficci) have the share of 49:51. since the onset of globalization, india has progressively adopted liberalized investment policies to facilitate the growth of fdi. fdi is a twofold sword as it cuts the two distinct ways, on one side, it boosts the improvement of an economy. but on the other side, it creates an excursion of capital, which consequently impacts the growth of a host country. nevertheless, fdi has been perceived as a lesser dissimilarity and become the most vital and strong vehicle for enlivening the improvement of the world economy in common developing and emerging economies in specific. the most appropriate model is the advancement of india and china. while china has come out as the second-most noteworthy re linear and non-linear granger causality… 27 cipient of fdi on the planet overriding the united states, india has in like manner come up as the most preferred location for fdi in the world. hence, india is the bright spot in the globe today. countries like china, brazil, argentina, chile, thailand, russia, and indonesia have allowed 100% fdi in the retail sector and have benefited a lot. whereas india has allowed only 51%, that too with various regulations and checks. the competition commission of india (cci) has been setup that looks after the anti-competitive practices and prevents from monopoly pricing. therefore india provides a conceivable arrangement for all favorable policies to draft more external fdi via removing restrictions on domestic economic policies, foster financial sector development, withdraws restrictions on overseas investment and also provided a favorable environment for overseas investment. fdi shows a vital character in developing nations and also key element that represents the economic integration of the world. they execute as a long term basis of assets as well as a starting point of high and emerging technologies. overseas investment is non-debt, non-volatile investment and profits received on these investments are by and large spent on the host country itself and therefore helping in the economic development of the country. the government has set up conformity for policy outline on fdi, which is straightforward, predictable and effectively graspable. this structure is alive in the circular of consolidated fdi policy, which is updated from every once in a while to confine and keep pace with the regulatory changes, inf luenced in the interregnum. the government was hands-on in offering many impetuses such as concessions of tax, generalization of licensing processes and even de-reserving certain businesses to attract fdi inf lows into the nation. this study adds more insights to the previous literature regarding fdi inf lows and growth. there is an imperative need for an empirical study that overcomes the homogeneity problem as the earlier studies more focus on cross-sectional scrutiny. the aim of this investigation is to find out the causal association among fdi inf lows and gdp in india. review of literature there exist clashing confirmations in the literature with respect to the fdigrowth relationship. bailliu (2000) find out the impact of financial development and fdi inf lows on growth in developing countries. the empirical finding shows that there is affirmative and significant effect of capital f lows on ishfaq hamid, pabitra kumar jena28 economic growth; if the internal sectors has reached the minimum standard of development. nair-reichert and weinhold (2001) applied causality for 24 countries using data for the period 1971 to 1995. although they give more emphasis to heterogeneity as a grave issue and consequently, use the mixed fixed and random effect approach so as to verify or test the impact of fdi on growth. kumar and pradhan (2002) conducted a study to find out the relationship between fdi inf lows and domestic investment in 107 developed countries over the period 1980-99. the findings of this study show that fdi inf lows have a negative impact on domestic speculation in a larger way and the consequent beneficial outcomes for the panel approach as for the greater part of the countries independently. a study conducted by holtz-eakin, newy and rosen (1988) for 80 nations showed a bi-directional causality amongst fdi and economic growth. hansen, rand and tarp (2009) took sample of a 31 developing nations and applied estimators for heterogeneous panel data, establish a bi-directional causality amongst fdi/gdp and the level of gdp. in this study result support in favors the hypothesis that fdi effect gdp through transfers of skills and implementation of new innovation. li and liu (2005), used panel data for 84 countries during the period 1970-1999 and found that fdi has a link with the human capital base that gives better outcome on economic growth and development of developing countries. and also, relations of fdi with technological gap have a negative sway. johnson and robinson (2005) find out the competence of fdi inf lows to impact host country economic growth over the period 1980-2002, using panel data approach for a sample of 90 countries. the findings of the investigation show that fdi inf lows positively affect financial development because of innovation overf low and capital streams. moreover, the results show that fdi improves financial development in developing nations, however not in developed nations. ramirez (2006) find out the effect of fdi inf lows on the economy of mexican during the period 1960-2001, using time series techniques. the findings of the study show that fdi inf lows bring favorable impact on the productivity of labor due to better-advanced skills and efficient administrative capabilities, which will impact the host nations in positive dimensions. in (2007) duasa conducted a study on malaysia to find out the causal connection between the chosen variables. the findings of the study shows that there is no causal association among the variables, therefore that means fdi doesn’t bring growth and that a different way around. magnus and fosu (2011) find out the causal association between fdi and gdp growth in ghana for the linear and non-linear granger causality… 29 period 1970-2002, using time series techniques. the findings of this empirical study show that there is no causal link between these two variables throughout the model. moreover, this study also shows that fdi affected gdp growth in the passage of the post –sap era. in addition a study conducted by dubé, hitsch and rossi (2009) which finding that fdi inf lows don’t always have a positive impact on development because it bases losses in the form of bonuses, revenues, and interest. kinda (2010) finds that lack of physical infrastructure; financial constraints, low level of technology and uncreative environment reduce fdi in developing nations. for instance, an absence of internet connectivity, electricity crises, poor access to credit, absence skilled workers have a negative impact on fdi in developing nations. agrawal and khan (2011) in their study found that developing countries facing the problem of the saving-investment gap, and also found that fdi has a favorable effect on economic growth due to knowledge transfer, creative technology, employment creation and expanding rivalry. karagianni (2012) investigated the non-linear causality among tax encumbrance circulation and per capita gdp. this study divulges that gdp growth has dominant part of the tax encumbrance across tax-answerable clutches in the economy of usa. in 2012, a study conducted by ludosean in romania using vector autoregressive model of time series techniques. the results of the study show that fdi and economic growth has no causal link, but causality stays consecutively from economic growth to fdi. popescu (2014) shows that fdi inf lows has vital character in factors of production (i.e. land, labour and capital) for host nations. these factors are important for growth of an economy and exemplifies positive connotation among fdi and economic growth. in another study vogiatzoglou and nguyen (2016) applied co-integration test of johansen which shows that there is long-run connection among the variables which we have taken in this study. but it is not necessary that johansen co-integration support the hypothesis of fdi-led growth without ascertaining core compelling variables that basis the co integrating association to clench. as far tomi and d’estaing (2015) using ardl model to find out the association between fdi and gdp in 7 european countries from 1970-2012. the result shows that fdi and economic growth has insignificant association. furthermore, ndiyan and xu (2016) using panel ordinary least square and fixed effect over the period from 1990-2012 in 7 waemu countries. the outcome of the regression shows that fdi and gdp has negative affiliation. adams and klobodu (2017) results show that there is significant and positive connection among fdi and ishfaq hamid, pabitra kumar jena30 gdp in burkina faso by using ardl model over the period 1970-2014 in 5 ssa countries. sothan (2017) applied autoregressive distributed lag model to find out the relationship between fdi inf lows and gdp over the period 1984-2017 in cambodia, and found that fdi has a crucial eccentric in economic growth, and bilateral relation exists between fdi inf lows and gdp respectively. recently, sengupta and puri (2018) have used an ols regression to scrutinize the inf luence of fdi inf lows on gdp. they found that fdi inf lows have positive impact on economic growth through well-equipped technology and knowledge transfer. in addition, nguyen, tham, khatibi and azam conducted study in africa (2019) tested the fdiled growth hypothesis during the period from 1995-2014. the findings of the study display that fdi inf lows stimulates gdp of the host nation through the stock of capital, job creation, and technology transfer. the above literature demonstrates that an all-inclusive closure on the growth impact of fdi can’t have come. this concludes that the effect of fdi inf lows on economic growth are at a standstill debatable. fdi and economic growth in india the occurrence of multinational companies in developing countries plays a vital role in uplifting the domestic economy due to their technical skills, better administrative policies and managerial capabilities. but on the other side, mne’s enter various exports in the domestic market which indirectly helps the host market because it provides information about the foreign market and also improves the infrastructure base in the host country (unctad, 2000). concerning of developing countries, in particular, worldwide pragmatic work is done on the fdi – growth nexus and has shown that subject to the number of vital factors, such as infrastructure base in the host country, financial stability, and cost of capital and trade openness in the economy. from the innovation point of view, fdi empowers financial development and economic growth which spreads the advantages everywhere in the economy. it also shows a dynamic role in economic development and one of the important sources is the transfer of technology from developed to developing nations. it has numerous effects that contribute to economic development through opportunities of employment, upliftment of capital formation, and betterment of management skills. fdi inf lows stand out as the most critical engine for economic growth in developing nations (solow, 1956). during the process of trade liberalization, linear and non-linear granger causality… 31 a country lifts its trade barrier and therefore, a major component of liberalization became trade openness and fdi. hence, these variables played an imperative role in the process of economic growth in the liberalized countries. in 1991, the government of india comes up with a liberalization policy. the purpose of this policy is to initiate privatization, various tax reforms, and deregulation and open the indian economy with the rest of the world for investment purposes. accordingly, it means that reformation of earlier regimes of trade and provides them better assimilation with the rest of the world by and large. figure 1. gdp per capita (in us$) of india role in the process of economic growth in the liberalized countries. in 1991, the government of india comes up with a liberalization policy. the purpose of this policy is to initiate privatization, various tax reforms, and deregulation and open the indian economy with the rest of the world for investment purposes. accordingly, it means that reformation of earlier regimes of trade and provides them better assimilation with the rest of the world by and large. figure 1. gdp per capita (in us$) of india source: unctad. figure 1 reveals the gdp per capita for india. it can be observed that gdp per capita increased slowly from 1993 to 2016. in 2016, india gdp per capita stands at approximately us$ 1709.39 which specifies that among brics nations, india has the bottommost gdp per capita. figure 2. fdi net inflows of india. source: unctad. 0 200 400 600 800 1000 1200 1400 1600 1800 ind gdp per capita (current us$) 0 0,5 1 1,5 2 2,5 3 3,5 4 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 foreign direct investment,net inflows (% of gdp) s o u r c e : unctad. figure 1 reveals the gdp per capita for india. it can be observed that gdp per capita increased slowly from 1993 to 2016. in 2016, india gdp per capita stands at approximately us$ 1709.39 which specifies that among brics nations, india has the bottommost gdp per capita. ishfaq hamid, pabitra kumar jena32 figure 2. fdi net inf lows of india role in the process of economic growth in the liberalized countries. in 1991, the government of india comes up with a liberalization policy. the purpose of this policy is to initiate privatization, various tax reforms, and deregulation and open the indian economy with the rest of the world for investment purposes. accordingly, it means that reformation of earlier regimes of trade and provides them better assimilation with the rest of the world by and large. figure 1. gdp per capita (in us$) of india source: unctad. figure 1 reveals the gdp per capita for india. it can be observed that gdp per capita increased slowly from 1993 to 2016. in 2016, india gdp per capita stands at approximately us$ 1709.39 which specifies that among brics nations, india has the bottommost gdp per capita. figure 2. fdi net inflows of india. source: unctad. 0 200 400 600 800 1000 1200 1400 1600 1800 ind gdp per capita (current us$) 0 0,5 1 1,5 2 2,5 3 3,5 4 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 foreign direct investment,net inflows (% of gdp) s o u r c e : unctad. figure 2 provides information regarding fdi net inflows of india. india attracted a significant amount of fdi after industrial policy 1991 because its main objective was to transform india into a major partner and players in the global arena. fdi net inflows of india increased from us$ 2378.68 to us$ 43478.27 in 2016. the research methodology and the course of the research process this study used annual data during the period 1993-2016, containing 21 years as a sample period. the variables which have taken for this study are fdi net inf lows and gdp per capita and the data is collected from world bank (2019). to scrutinize the causal link between fdi and growth, we used the causality test of granger (1969) and lutkepohl. h (1982). the main aim of the authors behind this model is to find out the application of causality in economic science. it is basically a hypothesis test for choosing whether a one-time series is useful in predicting another. moreover, the “standard granger causality test” in economics could be tested by measuring the ability to forecast the forthcoming value of a time series using the prior value of another time series. furthermore, this technique provides evidence given by one variable in amplification the latest value of additional factor. similarly, it also says that factor y is caused by factor x if factor x helps with foreseeing the estimation of factor y. by and large, time-series information follows a specific pattern, and the theory of economics necessitates that they are exposed to differencing or de-drifting dealings, otherwise fake outcomes will be acquired (gujarati, 1995). linear and non-linear granger causality… 33 unit root test the stationary of the data is the necessary step for sketch gist full interferences in a time series analysis. for that, we apply unit root test which tells us whether the series is stationary or not. furthermore, in this study we use one of the recognized test among unit root tests namely (adf) test. the more negative it is, the stronger the rejection of the hypothesis. the testing procedure for estimating the regression equation is: figure 2 provides information regarding fdi net inflows of india. india attracted a significant amount of fdi after industrial policy 1991 because its main objective was to transform india into a major partner and players in the global arena. fdi net inflows of india increased from us$ 2378.68 to us$ 43478.27 in 2016. the research methodology and the sequence of the research process this study used annual data during the period 1993-2016, containing 21 years as a sample period. the variables which have taken for this study are fdi net inflows and gdp per capita and the data is collected from (world bank, 2019). to scrutinize the causal link between fdi and growth, we used the causality test of granger (1969) and lutkepohl. h (1982).the main aim of the authors behind this model is to find out the application of causality in economic science. it is basically a hypothesis test for choosing whether a one-time series is useful in predicting another. moreover, the “standard granger causality test” in economics could be tested by measuring the ability to forecast the forthcoming value of a time series using the prior value of another time series. furthermore, this technique provides evidence given by one variable in amplification the latest value of additional factor. similarly, it also says that factor y is caused by factor x if factor x helps with foreseeing the estimation of factor y. by and large, time-series information follows a specific pattern, and the theory of economics necessitates that they are exposed to differencing or de-drifting dealings, otherwise fake outcomes will be acquired (gujarati, 1995). unit root test the stationary of the data is the necessary step for sketch gist full interferences in a time series analysis. for that, we apply unit root test which tells us whether the series is stationary or not. furthermore, in this study we use one of the recognized test among unit root tests namely (adf) test. the more negative it is, the stronger the rejection of the hypothesis. the testing procedure for estimating the regression equation is: ∆x� = α + ρt + βx��� + � γ ��� ��� i∆x��� + ε� where α is the constant term; ρ shows coefficient of time pattern; x is the variable under scrutiny. we incorporate empirical analysis for both the factors with log form. ∆ is the operator (1) where α is the constant term; ρ shows coefficient of time pattern; x is the variable under scrutiny. we incorporate empirical analysis for both the factors with log form. ∆ is the operator of first difference; t shows trend of time; and is a disturbance of the model. the unit root test is done on the (xt-1) coefficient in the overhead regression. furthermore, if the β coefficient is seen as statistically unique in relation to zero (β≠0), the (h0) “null hypothesis” that the factor x encompasses a unit root issue is exempted, inferring that the factors doesn’t have a unit root. the “lag ” similarly resolve in the adf and is chosen to employ (aic). johansen cointegration test this study is an attempt to apply the cointegration test of johansen in order to establish the long-run associations between the variables which we have taken, we also used the causality test of granger which tells us the direction of the relationship among the proposed variables. moreover to accomplish better outcomes from this very test, choosing the “optimal lag length” is so essential. the cointegration test of johansen proceeds its foundation from the origin in the “vector auto-regressive model” of order p is anticipated by: operator of first difference; t shows trend of time; and 𝜀𝜀 is a disturbance of the model. the unit root test is done on the (xt-1) coefficient in the overhead regression. furthermore, if the β coefficient is seen as statistically unique in relation to zero (β≠0), the (h0) “null hypothesis” that the factor x encompasses a unit root issue is exempted, inferring that the factors doesn't have a unit root. the “lag ” similarly resolve in the adf and is chosen to employ (aic). johansen cointegration test this study is an attempt to apply the cointegration test of johansen in order to establish the long-run associations between the variables which we have taken, we also used the causality test of granger which tells us the direction of the relationship among the proposed variables. moreover to accomplish better outcomes from this very test, choosing the “optimal lag length” is so essential. the cointegration test of johansen proceeds its foundation from the origin in the “vector auto-regressive model" of order p is anticipated by: y� = a�y��� + ⋯ + a�y��� + b�� + ε� (2) where 𝑦𝑦� is a vector of endogenous variables; 𝐴𝐴 signifies the autoregressive matrices; 𝑋𝑋� shows the deterministic vector; 𝐵𝐵 denotes the parameter matrices; 𝜖𝜖� is a vector of innovation and ρ is the lag. the var can be modified as: ∆y��πyt−1 + � t ��� ��� i∆y��� + b�� + ε� (3) in equation 3, the matrix sign “π” provides the evidence on the coefficient of long-run of the 𝑌𝑌� variables in the vector. however, at order one if all the dependent variables in 𝑌𝑌� are cointegrated, the rank “r” is supposed by the rank of π=αβ. sign α shows the declining comparison of the measurement in the vec model and β indicates the parameters of the matrix of the co-integrating vector. two appropriate likelihood ratio (lr) test measurements are used to find out the cointegrating ranks and vectors, namely, the first one is trace statistics and another is maximum eigenvalue. the first statistical test tests the (𝐻𝐻�) means that the amount of the distinctive cointegrating vector is fewer than or equivalent to "𝑟𝑟" in contradiction of the (𝐻𝐻�) of k cointegrating associations, k shows the number of independent factors, for r = 0, 1… k-1. the (𝐻𝐻�) of k cointegrating associations resembles the circumstance wherever the series does not (2) ishfaq hamid, pabitra kumar jena34 where yt is a vector of endogenous variables; a signifies the autoregressive matrices; xt shows the deterministic vector; b denotes the parameter matrices; ϵt is a vector of innovation and ρ is the lag. the var can be modified as: of first difference; t shows trend of time; and 𝜀𝜀 is a disturbance of the model. the unit root test is done on the (xt-1) coefficient in the overhead regression. furthermore, if the β coefficient is seen as statistically unique in relation to zero (β≠0), the (h0) “null hypothesis” that the factor x encompasses a unit root issue is exempted, inferring that the factors doesn't have a unit root. the “lag ” similarly resolve in the adf and is chosen to employ (aic). johansen cointegration test this study is an attempt to apply the cointegration test of johansen in order to establish the longrun associations between the variables which we have taken, we also used the causality test of granger which tells us the direction of the relationship among the proposed variables. moreover to accomplish better outcomes from this very test, choosing the “optimal lag length” is so essential. the cointegration test of johansen proceeds its foundation from the origin in the “vector auto-regressive model" of order p is anticipated by: y� = a�y��� + ⋯ + a�y��� + b�� + ε� (2) where 𝑦𝑦� is a vector of endogenous variables; 𝐴𝐴 signifies the autoregressive matrices; 𝑋𝑋� shows the deterministic vector; 𝐵𝐵 denotes the parameter matrices; 𝜖𝜖� is a vector of innovation and ρ is the lag. the var can be modified as: ∆y� = πyt−1 + � t ��� ��� i∆y��� + b�� + ε� (3) in equation 3, the matrix sign “π” provides the evidence on the coefficient of long-run of the 𝑌𝑌� variables in the vector. however, at order one if all the dependent variables in 𝑌𝑌� are cointegrated, the rank “r” is supposed by the rank of π=αβ. sign α shows the declining comparison of the measurement in the vec model and β indicates the parameters of the matrix of the cointegrating vector. two appropriate likelihood ratio (lr) test measurements are used to find out the cointegrating ranks and vectors, namely, the first one is trace statistics and another is maximum eigenvalue. the first statistical test tests the (𝐻𝐻�) means that the amount of the distinctive cointegrating vector is fewer than or equivalent to "𝑟𝑟" in contradiction of the (𝐻𝐻�) of k cointegrating associations, k shows the number of independent factors, for r = 0, 1… k-1. the (𝐻𝐻�) of k cointegrating associations resembles the circumstance wherever the series does not (3) in equation 3, the matrix sign “π” provides the evidence on the coefficient of long-run of the yt variables in the vector. however, at order one if all the dependent variables in yt are co-integrated, the rank “r” is supposed by the rank of π=αβ. sign α shows the declining comparison of the measurement in the vec model and β indicates the parameters of the matrix of the co-integrating vector. two appropriate likelihood ratio (lr) test measurements are used to find out the co-integrating ranks and vectors, namely, the first one is trace statistics and another is maximum eigenvalue. the first statistical test tests the (h0) means that the amount of the distinctive co-integrating vector is fewer than or equivalent to „r” in contradiction of the (h1) of k cointegrating associations, k shows the number of independent factors, for r = 0, 1… k-1. the (h1) of k cointegrating associations resembles the circumstance wherever the series does not have a unit root. the maximum eigenvalue test tests the (h0) means that cointegrating vector quantity is r, against the (h1) of 1+r cointegrating vectors. granger causality based on the vecm in order to find out the long-run association among the variables which we have taken in this study, we used the cointegration test of johansen. after that if the series are co-integrated, we apply the causality test of (engle & granger,1987) based on vecm, which is the best approach to find out the short and long-run associations, based on the subsequent forms: linear and non-linear granger causality… 35 have a unit root. the maximum eigenvalue test tests the (𝐻𝐻�) means that cointegrating vector quantity is r, against the (𝐻𝐻�) of 1+r cointegrating vectors. granger causality based on the vecm in order to find out the long-run association among the variables which we have taken in this study, we used the cointegration test of johansen. after that if the series are co-integrated, we apply the causality test of (engle & granger,1987) based on vecm, which is the best approach to find out the short and long-run associations, based on the subsequent forms: ∆ log(gdp)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + δ1ec��� + μ�� (4) ∆log(fdi)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + δ2ec��� + μ�� (5) our main focal point is on equation 1, where (gdplog) and (fdilog) show the normal logarithms of real gdp per capita and fdi correspondingly. ect−1 shows the coefficient which tells us about long-run causality and the collective f test confirms causality of short-run of the first-differenced independent factors. δ is the operator of the first difference. 𝜇𝜇�� & 𝜇𝜇�� are error terms for the model (4) and (5), respectively. n shows the var order, which is converted into the lag of n−1 in the ecm. δ1 and δ2 indicates the long-run coefficient of granger causality. in equation (4), β12 displays the lagged valve coefficient, j for j = 1 …n−1 which indicates the short-run effect of fdi on gdp. in equation (5), β22 also displays the lagged value coefficient, j for j = 1…n-1 signify the short-run impact of gdp on fdi. in this empirical study wald test of the collective importance of lags of the independent variables, resolute the case of causality in short-run, which is called as granger causality based on vecm. empirical analysis and discussions in this part, the empirical findings of the stationary test, cointegration test and causality test in light of the vecm are applied. several economic studies are brought into being with non stationary, however some are stationary. hence stationary of the variables is important to have a unit root. the maximum eigenvalue test tests the (𝐻𝐻�) means that cointegrating vector quantity is r, against the (𝐻𝐻�) of 1+r cointegrating vectors. granger causality based on the vecm in order to find out the long-run association among the variables which we have taken in this study, we used the cointegration test of johansen. after that if the series are co-integrated, we apply the causality test of (engle & granger,1987) based on vecm, which is the best approach to find out the short and long-run associations, based on the subsequent forms: ∆ log(gdp)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + δ1ec��� + μ�� (4) ∆log(fdi)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + δ2ec��� + μ�� (5) our main focal point is on equation 1, where (gdplog) and (fdilog) show the normal logarithms of real gdp per capita and fdi correspondingly. ect−1 shows the coefficient which tells us about long-run causality and the collective f test confirms causality of short-run of the first-differenced independent factors. δ is the operator of the first difference. 𝜇𝜇�� & 𝜇𝜇�� are error terms for the model (4) and (5), respectively. n shows the var order, which is converted into the lag of n−1 in the ecm. δ1 and δ2 indicates the long-run coefficient of granger causality. in equation (4), β12 displays the lagged valve coefficient, j for j = 1 …n−1 which indicates the short-run effect of fdi on gdp. in equation (5), β22 also displays the lagged value coefficient, j for j = 1…n-1 signify the short-run impact of gdp on fdi. in this empirical study wald test of the collective importance of lags of the independent variables, resolute the case of causality in short-run, which is called as granger causality based on vecm. empirical analysis and discussions in this part, the empirical findings of the stationary test, cointegration test and causality test in light of the vecm are applied. several economic studies are brought into being with non stationary, however some are stationary. hence stationary of the variables is important to (4) have a unit root. the maximum eigenvalue test tests the (𝐻𝐻�) means that cointegrating vector quantity is r, against the (𝐻𝐻�) of 1+r cointegrating vectors. granger causality based on the vecm in order to find out the long-run association among the variables which we have taken in this study, we used the cointegration test of johansen. after that if the series are co-integrated, we apply the causality test of (engle & granger,1987) based on vecm, which is the best approach to find out the short and long-run associations, based on the subsequent forms: ∆ log(gdp)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + δ1ec��� + μ�� (4) ∆log(fdi)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + δ2ec��� + μ�� (5) our main focal point is on equation 1, where (gdplog) and (fdilog) show the normal logarithms of real gdp per capita and fdi correspondingly. ect−1 shows the coefficient which tells us about long-run causality and the collective f test confirms causality of short-run of the first-differenced independent factors. δ is the operator of the first difference. 𝜇𝜇�� & 𝜇𝜇�� are error terms for the model (4) and (5), respectively. n shows the var order, which is converted into the lag of n−1 in the ecm. δ1 and δ2 indicates the long-run coefficient of granger causality. in equation (4), β12 displays the lagged valve coefficient, j for j = 1 …n−1 which indicates the short-run effect of fdi on gdp. in equation (5), β22 also displays the lagged value coefficient, j for j = 1…n-1 signify the short-run impact of gdp on fdi. in this empirical study wald test of the collective importance of lags of the independent variables, resolute the case of causality in short-run, which is called as granger causality based on vecm. empirical analysis and discussions in this part, the empirical findings of the stationary test, cointegration test and causality test in light of the vecm are applied. several economic studies are brought into being with non stationary, however some are stationary. hence stationary of the variables is important to have a unit root. the maximum eigenvalue test tests the (𝐻𝐻�) means that cointegrating vector quantity is r, against the (𝐻𝐻�) of 1+r cointegrating vectors. granger causality based on the vecm in order to find out the long-run association among the variables which we have taken in this study, we used the cointegration test of johansen. after that if the series are co-integrated, we apply the causality test of (engle & granger,1987) based on vecm, which is the best approach to find out the short and long-run associations, based on the subsequent forms: ∆ log(gdp)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + δ1ec��� + μ�� (4) ∆log(fdi)� = 𝛽𝛽�,�+ � 𝛽𝛽��, j ��� ��� ∆log(fdi)��� + � 𝛽𝛽��, j ��� ��� ∆log(gdp)��� + δ2ec��� + μ�� (5) our main focal point is on equation 1, where (gdplog) and (fdilog) show the normal logarithms of real gdp per capita and fdi correspondingly. ect−1 shows the coefficient which tells us about long-run causality and the collective f test confirms causality of short-run of the first-differenced independent factors. δ is the operator of the first difference. 𝜇𝜇�� & 𝜇𝜇�� are error terms for the model (4) and (5), respectively. n shows the var order, which is converted into the lag of n−1 in the ecm. δ1 and δ2 indicates the long-run coefficient of granger causality. in equation (4), β12 displays the lagged valve coefficient, j for j = 1 …n−1 which indicates the short-run effect of fdi on gdp. in equation (5), β22 also displays the lagged value coefficient, j for j = 1…n-1 signify the short-run impact of gdp on fdi. in this empirical study wald test of the collective importance of lags of the independent variables, resolute the case of causality in short-run, which is called as granger causality based on vecm. empirical analysis and discussions in this part, the empirical findings of the stationary test, cointegration test and causality test in light of the vecm are applied. several economic studies are brought into being with non stationary, however some are stationary. hence stationary of the variables is important to (5) our main focal point is on equation 1, where (gdplog) and (fdilog) show the normal logarithms of real gdp per capita and fdi correspondingly. ect−1 shows the coefficient which tells us about long-run causality and the collective f test confirms causality of short-run of the first-differenced independent factors. δ is the operator of the first difference. μ1t & μ2t are error terms for the model (4) and (5), respectively. n shows the var order, which is converted into the lag of n−1 in the ecm. δ1 and δ2 indicates the long-run coefficient of granger causality. in equation (4), β12 displays the lagged valve coefficient, j for j = 1 …n−1 which indicates the short-run effect of fdi on gdp. in equation (5), β22 also displays the lagged value coefficient, j for j = 1…n-1 signify the short-run impact of gdp on fdi. in this empirical study wald test of the collective importance of lags of the independent variables, resolute the case of causality in short-run, which is called as granger causality based on vecm. empirical analysis and discussions in this part, the empirical findings of the stationary test, cointegration test and causality test in light of the vecm are applied. several economic studies are brought into being with nonstationary, however some are stationary. hence stationary of the variables is important to evade bogus outcomes for policy purposes, the result of standard augmented dickey-fuller test is presented in table 1. ishfaq hamid, pabitra kumar jena36 table 1. augmented dickey-fuller result series level first difference log(fdi) -2.486 -4.676 log(gdp) -4.107 -6.757 *denotes significance at 1 % level. s o u r c e : author’s own calculation using e-views . the outcome of this test confirms that all the data are found to be non-stationary at the level, 1(0), then we go for 1(1) i.e. first differencing. but the null hypothesis (h0) of both the variables is precluded for the persistence of unit root, concluded that both the variables which we have taken are significant at 1(1). the outcome demonstrates that the cointegration method of johansen is a proper procedure used to crisscross regarding the factors of cointegration. to make use of the cointegration test of johansen, the initial step is that, variables must be non-stationary at level but when we convert all the variables into the first difference, then they will become stationary and both the variables should be significant at the same level. then after deciding the lag selection for the mechanism of vec. furthermore, the quantity of lag selection is founded on the maximum value of aic outcomes of the “bivariate johansen cointegration tests” which are undertaken in table 2. table 2. johansen’s cointegration result null (h0) alternative (h1) λ trace 95% cv λ max 95% cv model :y=[log(fdi),log(fdi)] r = 0 r ≥ 1 17.18828 15.49471 15.97562 14.2646 r ≤ 1 r ≥ 2 1.212658 3.841466 1.212658 3.8414 *denotes the significance at the 1% level. s o u r c e : author’s own calculation using e-views 10. from the above model, we find that both the tests i.e. trace test and maximum eigen valve test are statistically significant and also greater than the critical valve which means that the of no cointegration is disallowed by both the tests linear and non-linear granger causality… 37 in the model. the outcome of this study gives validation of long-run equilibrium affiliation among fdi and gdp for the period being investigated. when we further proceed to find out the track of causality, we go through a granger causality test which is centered on the vecm. this study mainly emphasis the bivariate granger causality analysis to find out the pivotal effect of fdi on india’s financial growth. the main focus of this study is mainly on fdi because it shows a vital part in the development and progression of the indian economy. therefore we proceed our analysis by using the bivariate granger causality test. the outcome of table 3 presents granger causality analysis. table 3. granger causality result dependent variables short run long run model:y=[log(fdi), log (gdp)] ∆log (fdi) ∆log (gdp) ec(t-1) ∆log (fdi) 1.0000 3.35554 ∆log (gdp) 2.378541 -2.92763 *denotes the significance at the 1% level. s o u r c e : author’s own calculation using e-views 10. in this study both the variables are cointegrated at 1(1) and causality can bifurcated into two portions, short and long-run. ect−1 shows the coefficient which tells us about long-run causality and the collective f test confirms causality of short-run of the first-differenced independent factors, which is imitative from the wald test. this study further checking robustness of the model through diagnostic tests. table 4. diagnostic test model r2 0.544 adj,r2 0.392 dw 1.194 se 0.028 ishfaq hamid, pabitra kumar jena38 model breusch-godfrey serial correlation lm test: ar/ma (2) 0.826 ar/ma (1) 0.949 heteroscedasticity test:breusch-pagan-godfrey 0.163 s o u r c e : author’s own calculation using e-views 10. before we carry the granger causality test, it is very essential that our projected model is consistent and free from any bias. the outcome of above table shows that there is no serial correlation and heteroscedisticity (p>0.05), meaning that the residuals of the model are normally distributed. however, when we go through the results of table 3, we find that there is a negative and significant association among the long-run coefficient of gdp and fdi at a 1% level of significance. but in the situation of the fdi equation, the inverse is true. furthermore, in the short run, there is no causal link between the given variables. the findings of this study show that in the long run, unidirectional causality is successively from fdi to gdp. also, our results found that in long-run fdi plays a vital role in the economic growth of india. these results are consistent with some of the earlier studies done by researchers ramírez (2000), fedderke and romm (2006), vogiatzoglou and nguyen (2016), and tan and tang (2016) who give solid proof on the pivotal effect of fdi on development in the nations underneath their analysis. though, few research studies are unreliable with this study (e.g. belloumi, 2014; chakraborty & basu, 2002; kakar & khilji, 2011; ludosean, 2012). in this way, we can sum up the debate that this relation is still dubious. non-linear granger causlity approach to find out the impact of non-linear granger causality, we used diks and panchenko’s (2006) framework of the nonparametric approach for the earlier residuals of the assessed var model. however, using non-linear granger causality test provides more validation regarding the causality association betable 4. diagnostic… linear and non-linear granger causality… 39 tween the variables. furthermore, our purpose is to find out more validation that assists to forecast the total distribution of the given variables. from the above granger causality explanation, diks and panchenko (2006) contend that granger causes if for s>1: (𝑌𝑌���,�,𝑌𝑌��� )𝗅𝗅 �i��, i��� ~�y���,�,y����𝗅𝗅�i��� (6) ixt and iyt provide the evidence of the previous and present observation of xt and yt, correspondingly and~ indicates equality in circulation. at this instant contemplate xlxt= (xt-lx -1,….,xt) and ylxt = (yt-lx-1,…,yt) for lx,ly>1.if s=1,then the (𝐻𝐻�) hypothesis of the granger causality test can be inscribed as follows: ho: y���⎢�x���; y����~y���⎢y��� (7) assume zt = yt+1, then we have an invariant distribution vector kt = (xlxt, ylyt, zt). by supposing lx= ly =1 and reducing the time indexes for easiness, the combined and peripheral probability density purposes, under the (𝐻𝐻�), should accomplish the subsequent relation: fx, y, z(x, y, z) fy(�) = fx, y(x, y) fy(�) … fy, z(y, z) fy(�) (8) consequently, it can be revealed that(𝐻𝐻�) can be articulated as: e⦋f�,�,�(x, y, z)f�(y) − f�,�(x, y)f�,�(y, z)⦌ = 0 (9) this leads to the following test statistics. t�(�) = n − 1 n(n − 2) σ �f ��,�,�(xi, yi, zi)f�y(y�)– f��,�(x� , y�)fy, z� �y�,z��� (10) where, fx,y,z (x,y,z) is the joint probability density function, for lx =ly =1 and if εn=cnβ(c>0,1/4<β<1/3), diks and panchenko (2006) prove that the test statistics in equation (10) satisfies the following: √𝑛𝑛 (tn(e) − q) 𝑆𝑆𝑛𝑛 → 𝑁𝑁(0,1) (11) (6) ixt and iyt provide the evidence of the previous and present observation of xt and yt, correspondingly and~ indicates equality in circulation. at this instant contemplate xlxt= (xt-lx -1,….,xt) and y lx t = (yt-lx-1,…,yt) for lx,ly>1.if s=1,then the (h0) hypothesis of the granger causality test can be inscribed as follows: (𝑌𝑌���,�,𝑌𝑌��� )𝗅𝗅 �i��, i��� ~�y���,�,y����𝗅𝗅�i��� (6) ixt and iyt provide the evidence of the previous and present observation of xt and yt, correspondingly and~ indicates equality in circulation. at this instant contemplate xlxt= (xt-lx -1,….,xt) and ylxt = (yt-lx-1,…,yt) for lx,ly>1.if s=1,then the (𝐻𝐻�) hypothesis of the granger causality test can be inscribed as follows: ho: y���⎢�x���; y����~y���⎢y��� (7) assume zt = yt+1, then we have an invariant distribution vector kt = (xlxt, ylyt, zt). by supposing lx= ly =1 and reducing the time indexes for easiness, the combined and peripheral probability density purposes, under the (𝐻𝐻�), should accomplish the subsequent relation: fx, y, z(x, y, z) fy(�) = fx, y(x, y) fy(�) … fy, z(y, z) fy(�) (8) consequently, it can be revealed that(𝐻𝐻�) can be articulated as: e⦋f�,�,�(x, y, z)f�(y) − f�,�(x, y)f�,�(y, z)⦌ = 0 (9) this leads to the following test statistics. t�(�) = n − 1 n(n − 2) σ �f ��,�,�(xi, yi, zi)f�y(y�)– f��,�(x� , y�)fy, z� �y�,z��� (10) where, fx,y,z (x,y,z) is the joint probability density function, for lx =ly =1 and if εn=cnβ(c>0,1/4<β<1/3), diks and panchenko (2006) prove that the test statistics in equation (10) satisfies the following: √𝑛𝑛 (tn(e) − q) 𝑆𝑆𝑛𝑛 → 𝑁𝑁(0,1) (11) (7) assume zt = yt+1, then we have an invariant distribution vector kt = (x lx t, y ly t, zt). by supposing lx= ly =1 and reducing the time indexes for easiness, the combined and peripheral probability density purposes, under the (h0), should accomplish the subsequent relation: (𝑌𝑌���,�,𝑌𝑌��� )𝗅𝗅 �i��, i��� ~�y���,�,y����𝗅𝗅�i��� (6) ixt and iyt provide the evidence of the previous and present observation of xt and yt, correspondingly and~ indicates equality in circulation. at this instant contemplate xlxt= (xt-lx -1,….,xt) and ylxt = (yt-lx-1,…,yt) for lx,ly>1.if s=1,then the (𝐻𝐻�) hypothesis of the granger causality test can be inscribed as follows: ho: y���⎢�x���; y����~y���⎢y��� (7) assume zt = yt+1, then we have an invariant distribution vector kt = (xlxt, ylyt, zt). by supposing lx= ly =1 and reducing the time indexes for easiness, the combined and peripheral probability density purposes, under the (𝐻𝐻�), should accomplish the subsequent relation: fx, y, z(x, y, z) fy(�) = fx, y(x, y) fy(�) … fy, z(y, z) fy(�) (8) consequently, it can be revealed that(𝐻𝐻�) can be articulated as: e⦋f�,�,�(x, y, z)f�(y) − f�,�(x, y)f�,�(y, z)⦌ = 0 (9) this leads to the following test statistics. t�(�) = n − 1 n(n − 2) σ �f ��,�,�(xi, yi, zi)f�y(y�)– f��,�(x� , y�)fy, z� �y�,z��� (10) where, fx,y,z (x,y,z) is the joint probability density function, for lx =ly =1 and if εn=cnβ(c>0,1/4<β<1/3), diks and panchenko (2006) prove that the test statistics in equation (10) satisfies the following: √𝑛𝑛 (tn(e) − q) 𝑆𝑆𝑛𝑛 → 𝑁𝑁(0,1) (11) (8) consequently, it can be revealed that (h0) can be articulated as: (𝑌𝑌���,�,𝑌𝑌��� )𝗅𝗅 �i��, i��� ~�y���,�,y����𝗅𝗅�i��� (6) ixt and iyt provide the evidence of the previous and present observation of xt and yt, correspondingly and~ indicates equality in circulation. at this instant contemplate xlxt= (xt-lx -1,….,xt) and ylxt = (yt-lx-1,…,yt) for lx,ly>1.if s=1,then the (𝐻𝐻�) hypothesis of the granger causality test can be inscribed as follows: ho: y���⎢�x���; y����~y���⎢y��� (7) assume zt = yt+1, then we have an invariant distribution vector kt = (xlxt, ylyt, zt). by supposing lx= ly =1 and reducing the time indexes for easiness, the combined and peripheral probability density purposes, under the (𝐻𝐻�), should accomplish the subsequent relation: fx, y, z(x, y, z) fy(�) = fx, y(x, y) fy(�) … fy, z(y, z) fy(�) (8) consequently, it can be revealed that(𝐻𝐻�) can be articulated as: e⦋f�,�,�(x, y, z)f�(y) − f�,�(x, y)f�,�(y, z)⦌ = 0 (9) this leads to the following test statistics. t�(�) = n − 1 n(n − 2) σ �f ��,�,�(xi, yi, zi)f�y(y�)– f��,�(x� , y�)fy, z� �y�,z��� (10) where, fx,y,z (x,y,z) is the joint probability density function, for lx =ly =1 and if εn=cnβ(c>0,1/4<β<1/3), diks and panchenko (2006) prove that the test statistics in equation (10) satisfies the following: √𝑛𝑛 (tn(e) − q) 𝑆𝑆𝑛𝑛 → 𝑁𝑁(0,1) (11) (9) this leads to the following test statistics. ishfaq hamid, pabitra kumar jena40 (𝑌𝑌���,�,𝑌𝑌��� )𝗅𝗅 �i��, i��� ~�y���,�,y����𝗅𝗅�i��� (6) ixt and iyt provide the evidence of the previous and present observation of xt and yt, correspondingly and~ indicates equality in circulation. at this instant contemplate xlxt= (xt-lx -1,….,xt) and ylxt = (yt-lx-1,…,yt) for lx,ly>1.if s=1,then the (𝐻𝐻�) hypothesis of the granger causality test can be inscribed as follows: ho: y���⎢�x���; y����~y���⎢y��� (7) assume zt = yt+1, then we have an invariant distribution vector kt = (xlxt, ylyt, zt). by supposing lx= ly =1 and reducing the time indexes for easiness, the combined and peripheral probability density purposes, under the (𝐻𝐻�), should accomplish the subsequent relation: fx, y, z(x, y, z) fy(�) = fx, y(x, y) fy(�) … fy, z(y, z) fy(�) (8) consequently, it can be revealed that(𝐻𝐻�) can be articulated as: e⦋f�,�,�(x, y, z)f�(y) − f�,�(x, y)f�,�(y, z)⦌ = 0 (9) this leads to the following test statistics. t�(�) = n − 1 n(n − 2) σ �f ��,�,�(xi, yi, zi)f�y(y�)– f��,�(x� , y�)fy, z� �y�,z��� (10) where, fx,y,z (x,y,z) is the joint probability density function, for lx =ly =1 and if εn=cnβ(c>0,1/4<β<1/3), diks and panchenko (2006) prove that the test statistics in equation (10) satisfies the following: √𝑛𝑛 (tn(e) − q) 𝑆𝑆𝑛𝑛 → 𝑁𝑁(0,1) (11) (10) where, fx,y,z (x,y,z) is the joint probability density function, for lx =ly =1 and if εn=cn-β(c>0,1/4<β<1/3), diks and panchenko (2006) prove that the test statistics in equation (10) satisfies the following: (𝑌𝑌���,�,𝑌𝑌��� )𝗅𝗅 �i��, i��� ~�y���,�,y����𝗅𝗅�i��� (6) ixt and iyt provide the evidence of the previous and present observation of xt and yt, correspondingly and~ indicates equality in circulation. at this instant contemplate xlxt= (xt-lx -1,….,xt) and ylxt = (yt-lx-1,…,yt) for lx,ly>1.if s=1,then the (𝐻𝐻�) hypothesis of the granger causality test can be inscribed as follows: ho: y���⎢�x���; y����~y���⎢y��� (7) assume zt = yt+1, then we have an invariant distribution vector kt = (xlxt, ylyt, zt). by supposing lx= ly =1 and reducing the time indexes for easiness, the combined and peripheral probability density purposes, under the (𝐻𝐻�), should accomplish the subsequent relation: fx, y, z(x, y, z) fy(�) = fx, y(x, y) fy(�) … fy, z(y, z) fy(�) (8) consequently, it can be revealed that(𝐻𝐻�) can be articulated as: e⦋f�,�,�(x, y, z)f�(y) − f�,�(x, y)f�,�(y, z)⦌ = 0 (9) this leads to the following test statistics. t�(�) = n − 1 n(n − 2) σ �f ��,�,�(xi, yi, zi)f�y(y�)– f��,�(x� , y�)fy, z� �y�,z��� (10) where, fx,y,z (x,y,z) is the joint probability density function, for lx =ly =1 and if εn=cnβ(c>0,1/4<β<1/3), diks and panchenko (2006) prove that the test statistics in equation (10) satisfies the following: √𝑛𝑛 (tn(e) − q) 𝑆𝑆𝑛𝑛 → 𝑁𝑁(0,1) (11) (11) where q and sn are the estimators of asymptotic expectation and standard error respectively. this study also used (nldp) test of causality to find out the non-linear relation between gdp and fdi. table 5 shows the outcomes of the given variables and applied for lx=ly=1….5 and εn=1.5. set conferring to the time series length n5. table 5. non-linear causality test results in india (sample period 1993-2016) lx=ly fdi  gdp gdp  fdi t statistics p-valve t statistics p-valve 1 1.498 0.05421* 1.452 0.05432* 2 1.732 0.02432* 1.331 0.08763** 3 1.356 0.06175** 1.243 0.09564** 4 1.613 0.04821* 1.852 0.12783 5 1.139 0.16372 1.564 0.77298 n o t e : the null hypothesis suggests that fdi does not cause gdp and gdp does not cause fdi, respectively. *(**) denotes test are significant at 5% and 10% respectively. s o u r c e : author’s own calculation using e-views 10. this study using the dp test on time series of two variables i.e. x and y and fixed the lag length which is equal for both the variables, specifically lx=ly, and then linear and non-linear granger causality… 41 afterward we proceed the common lag length of 1-5. the outcome of this test comprises both probability refutation and t-statistics at every lag length for india which are shown in table 5. looking at the empirical findings, bidirectional causality is detected between fdi and gdp. as table 5 indicates there is evidence for a non-linear feedback between fdi and gdp since the test statistics is statistically significant for either 5% or 10%. the finding also provides support for the existence of a bidirectional non-linear causal affiliation between fdi and gdp, with 1, 2, and 4 lags. the apparent non-linear causality running from fdi and gdp means that fdi is a policy instrument in stimulating indian economic growth of questionable effectiveness though due to the inexplicit way that economic growth is affected. moreover, the reverse non-linear causality from gdp to fdi uncovers a non-proportional burden, reallocation and faulty system triggered by the economic growth changes that further complicates the crescendos of the fdi and gdp connection.  conclusions fdi is the backbone of developing countries like india. they attain a long term basis of capital as well as a basis of superior and developed technologies. the government of india initiates a liberalization policy in 1991, which made quick walks towards joining with world economies and also wider cooperation’s with them. the non-linear causality testing approach employed in this study uncovers the non-linear high power causal dependence of the indian fdi and gdp. consequently, better policies and suitable environment motivating foreign investors and the government should more focus towards core infrastructure sectors so as to enhancement countrywide struggles. thus the fdi, booster was seen as a last-minute cure to the worsening economic conditions of the country. india needs fdi and the planners and policymakers should not be obsessed with where it is coming from and which sector it is going into. in india, there are numerous studies that have been carried out in order to understand the inf luence of fdi on economic growth across the nation. whereas various studies support the association between fdi and growth and a very small number of studies undertaken by researchers do not support this association amongst the two variables. we go through numerous studies where growth impact is not completely known; therefore we choose this study for carishfaq hamid, pabitra kumar jena42 rying out with an endeavor and energy to know the causal association between fdi and economic growth. in an outlook of the result of this work, fdi enhances indian economic growth by enlarging corporeal capital, which is necessarily required for the economic development of the country. similarly, the growth factor in india itself is not to create an essential role in pull towards more inward fdi. this work is done to keep in mind for the pace ofnew insights on the growth impact of fdi in india. policymakers of developing countries should frame those policies which are people-centric and also draw more attraction towards inward fdi. to focus for more lure of internal fdi, the government of india should improve the financial sector development and provide a congenial environment for trade and investment, removing restrictions against inward fdi and also develop corporal infrastructure. in adding up, the policymakers of india should not fail to remember the importance of the development of human capital, because these variables stand for the assimilation aptitude of the economy. similarly, speedy legislation for land purchase, adjournment of general anti-avoidance rules and trim down accessible rate in respect of royalty and fees for industrial services by firms. political stability must be kept up in light of the fact that it may be the supreme essential donor of fdi and growth in this nation. on the off chance that political stability does not occur; it may adversely inf luence the economy by and large. to sum up, we can say that policymakers and researchers should well know of the f laws of the standard linear granger causality test while dealing with causal relationship between gdp as the objective measure of performance of the economy and fdi as an effective vehicle for the mobilization of financial resources.  references adams, s., & klobodu, e.k.m. 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(accessed: 25.06. 2019). date of submission: july 19, 2020; date of acceptance: october 4, 2020. * contact information: m_haa60@yahoo.com, department of business administration, ain shams university, cairo, egypt, phone: 00201099195459; orcid id: https:// orcid.org/0000-0002-0531-6325. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 abd-alla, m.h. (2020). sentimental herding: the role of covid-19 crisis in the egyptian stock market. copernican journal of finance & accounting, 9(3), 9–23. http://dx.doi.org/10.12775/ cjfa.2020.009 mostafa hussein abd-alla* ain shams university sentimental herding: the role of covid-19 crisis in the egyptian stock market keywords: covid-19 crisis, herding behaviour, non-linear model, state space model, egyptian stock market. j e l classification: g01, g41. abstract: this study aims to investigate the existence of herding behaviour during co vid-19 crisis in the egyptian stock market by using firm-level data and employing different testing methodologies. the study also investigates the existence of herding behaviour during covid-19 crisis at the level of portfolios divided based on the size and the value factors. the study used the nonlinear model proposed by chang, cheng and khorana (2000) and the state-space model developed by hwang and salmon (2004) to measure herding behaviour. the study found that the nonlinear model proposed by chang et al. (2000) lead to results indicating evidence of herding during covid-19 crisis. however, there was no evidence of herding behaviour during covid-19 crisis when using the state-space model developed by hwang and salmon (2004). as for the level of portfolios, the study found evidence of herding during covid-19 crisis only when using (chang et al., 2000) methodology, at the level of the portfolio of stocks with low and high (b/m) ratio and the portfolio of big stocks only during covid-19 crisis. mostafa hussein abd-alla10  introduction behavioural finance is one of the most important topics in financial literature; this could be due to irrationalities in investment behaviour, which led to a lot of speculative bubbles. behavioural finance and the efficient market hypothesis has been a subject of controversy for decades, where one theory supporting market efficiency and the other attacks it. the emh hypothesis supposes that investors always perform rationally and stock prices rapidly adjust to new information and ref lect all available information. in contrast, behavioural finance studies the impact of psychology on the behaviour of investors in financial markets and supposes that the investors are irrational and make unreasonable decisions, which may lead to mistaken asset pricing. the science of behavioural finance was originated in the 1970s and 1980s as an application of behavioural economics to financial markets; it became an alternative to classical theory. the concept of cognitive psychology was used to explain the behaviour of investors in financial markets, which led to the birth of what is known today as behavioural finance. the goal of behavioural finance was to analyse financial phenomena in a more realistic way to explain the actual behaviour of investors in light of the uncertainty. many empirical studies have shown that the functioning of markets often presents clear anomalies, in great contrast to traditional economic theories assumptions, which assume the absolute rationality of individuals. investor’s behaviour is the main factor to analyse the mechanism of the operation of the financial markets. the most known forms of collective behaviour in capital markets is herding behaviour, which considered the main fields of behavioural finance. hwang and salmon (2004) confirmed that herding behaviour is the phenomenon when investors mimic others’ decisions rather than following their own beliefs. this means that the returns on individual investments will move in the same direction as the market portfolio. therefore the returns on individual investments tend to accumulate around the market returns. devenow and welch (1996) indicated that investors believe that imitation of others allows them to benefit from the information and experiences of others, or perhaps because of the low quality of their information, or the inability to analyse information efficiently. many researches have been carried out to measure herding behaviour in financial markets, for example, christie and huang (1995) used the cross-sectional standard deviation of returns (cssd) as a measure of the average closeness sentimental herding: the role of covid-19 crisis… 11 of individual stock returns to the achieved market average returns to measure herd behaviour. chang, cheng and khorana (2000) developed the work of christie and huang (1995); they use the cross-sectional absolute deviation of return csad in a non-linear regression to examine the relation between the level of stock return dispersions and the overall market return. hwang and salmon (2004) developed a different approach based on logarithm cross-sectional standard deviation of betas log [std(βbimt)] to test herding behaviour. the coronavirus or so-called covid-19 discovered in wuhan city in china in december 2019, it soon became a threat to public health, the world economy, and stock markets. the egyptian ministry of health and population announced on february 14th, 2020, the first confirmed infection of the new covid-19 virus. the purpose of this study is to examine the impact of covid-19 crisis on investors’ herding behaviour in the egyptian stock market. the study will be organized as follows. in section two we will provide a survey of the literature. the third section presents the data and methodology. the fourth section presents empirical results, and finally, we will provide the conclusions in section 5. literature review christie and huang (1995) used the cross-sectional standard deviation (cssd) of returns for daily data form 1962 to 1988 and monthly data form 1925 to 1988 for the us market to examine herding behaviour. they found the absence of herding behaviour. therefore, the christie and huang (1995) method failed to detect herd behaviour. choe, khoa and stulz (1999) investigated the presence of herding behaviour in the korean stock market during the 1997 asian financial crisis. the study used a sample of 414 stocks for foreign investors’ holdings. they found the absence of herding behaviour before the crisis, whereas there was little evidence of herding behaviour during the crisis. chang et al. (2000) developed the christie and huang (1995) method. they used a new approach based on the cross-sectional absolute deviation (csad) of returns in a nonlinear regression to investigate the presence of herding in five markets (hong kong, taiwan, u.s us., japan and south korea). they found the absence of herding behaviour in developed markets (us, hong kong and japan) and they observed the presence of herding behaviour in taiwan and south korea. mostafa hussein abd-alla12 hwang and salmon (2004) developed a new method based on the cross-sectional standard deviation of the beta to test herding behaviour in the united states and south korean markets. they used daily data from january 1, 1993, to november 30, 2003. the study also tested the herd behaviour during the asian crisis in 1997. they observed the presence of herding behaviour in both the us and the south korean markets in the normal market conditions rather than the market stress and also they observed the presence of herding behaviour in both tow markets shortly before the asian financial crisis. ouarda, el bouri and bernard (2012) examined herding behaviour of a sample of 174 stocks included in the stoxx europe 600 index from january 1998 to december 2010. they used the chang et al. (2000) method to measure herding behaviour. they observed the presence of herding behaviour, especially during crises, where the herding behaviour appeared strongly during the financial crisis from 2007 to 2008. demir, mahmud and solakoglu (2014) investigated the presence of herding behaviour in the istanbul stock exchange from january 2000 to october 2011. they used daily stock prices of the stock listed in the index bist-100. the study followed hwang and salmon (2004) method to test herding behaviour. they observed the presence of herding behaviour in the istanbul stock exchange; the study attributed this behaviour to the emotion and feelings of investors and not due to market conditions such as f luctuations in stock returns and market returns. elkhaldi and benabdelfatteh (2014) investigated the presence of herding behaviour in the tunisian stock market using daily data for a sample of 10 stocks from june 3, 2002, to may 31, 2013. they used hwang and salmon (2004) model to measure herding behaviour. they found evidence of the herding behaviour in the tunisian stock market and they concluded that investors ignore their information and make their investment decisions according to general market tendency. javaira and hassan (2015) investigated the presence of herding behaviour in the pakistani stock market using daily and monthly closing prices of the kse- 100 index form 2002 to 2007. they used christie and huang (1995) and chang et al. (2000) method to measure herding behaviour. they found the absence of herding behaviour in the pakistani stock market because of the asymmetry in market returns. lee, liao and hsu (2015) examined the herding behaviour in the taiwan stock market from january 4, 2000, to december 28, 2012. they used christie sentimental herding: the role of covid-19 crisis… 13 and huang (1995) and chang et al. (2000) method to measure herding behaviour. they concluded that herding behaviour increases in the case of extreme f luctuations in the market index, as large f luctuations in market return mean that investors feel panic and this may force them to choose to imitate others who have more information. özsu (2015) examined the herding behaviour in the istanbul stock market from january 14, 1988, to december 31, 2014. they used christie and huang (1995) and hwang and salmon (2004) method to measure herding behaviour. he concluded that herding behaviour under normal market conditions more than turbulent market conditions. angela-maria, pece and pochea (2015) examined the impact of the global financial crisis on herding behaviour in 10 countries in cee stock markets (central and eastern europe). the study used daily data for 384 firms from january 2003 to december 2013 and used chang et al. (2000) model to measure herding behaviour. they found evidence of the herding behaviour in 4 countries in cee stock markets over the entire period. the study also found evidence of the herding behaviour under the global financial crisis in 5 countries in cee stock markets. vieira and pereira (2015) examined herding behaviour in the portuguese stock market from january 2003 to december 2011 for a sample of 20 stocks. the study followed chang et al. (2000) and christie and huang (1995) method to measure herding behaviour. they found the absence of herding behaviour in the portuguese stock market, which suggests some evidence of the efficiency hypothesis of the portuguese market. güvercin (2016) examined the impact of regional and global crisis like (the global financial crisis, the egyptian political f luctuations on july 3, 2013, oil price f luctuations and the syrian conf lict) on the herding behaviour in the egyptian and saudi stock exchange. he found that herd behaviour only exists in the egyptian stock market. the study also showed that the global financial crisis and the egyptian political f luctuations on july 3, 2013, had a significant effect on herding behaviour. while oil revenues, the f luctuations in oil price and also the syrian conf lict haven’t any effect on herding behaviour. kabir and shakur (2017) examined herding behaviour in 8 countries from asia (china, hong kong, india, korea, malaysia, singapore, taiwan and thailand), and 4 from latin america (argentina, brazil, chile, and mexico). the study used daily returns from january 1995 to december 2014 and used chang et al. (2000) model to measure herding behaviour. they found that the herdmostafa hussein abd-alla14 ing behaviour had a great statistical significance in china, followed by hong kong, malaysia, korea and india. the results also showed the reason that leads to herd behaviour is the high level of volatility. the study also concluded that investors in india and thailand follow herding behaviour not only in the high level of volatility but also in the low level of volatility. they also found a significant level of herd behaviour in hong kong, taiwan, chile and mexico in the low level of volatility. litimi (2017) examined herding behaviour for a sample consisting of 232 stocks listed on the french stock market, from january 1, 2000, to december 31, 2016. he divided the study period into 4 major crises period. the study followed chang et al. (2000) method to measure herding behaviour. they found that herding behaviour had a great statistical significance in the french stock market during crises. mertzanis and allam (2018) examined the herding behaviour in the pre and post-revolution period of january 25, 2011, as the pre-revolution period begins on january 14, 2008, and ends on january 24, 2011, and the post-revolution period begins on march 23, 2011, and ends on april 15, 2014, for a sample of stocks listed in the egx30 index in the egyptian stock market. they used christie and huang (1995) and chang et al. (2000) method to measure herding behaviour. the study found a weak presence of herding behaviour in the two periods. youssef and mokni (2018) examined herding behaviour in the gulf cooperation council (gcc) group which is (saudi arabia, qatar, sultanate of oman, bahrain, abu dhabi, kuwait) using weekly data from 2003-2017 and used chang et al. (2000) model to measure herding behaviour. the results indicated that there is only herd behaviour in the markets of qatar, oman and abu dhabi and that there is no evidence of herd behaviour in the bahraini and kuwaiti markets. the results also indicated that herding behaviour is present in the saudi market only during normal conditions, whereas, under the low volatile, it is easy for investors to monitor and imitate each other. in contrast, in qatar, investors follow herding behaviour during periods of tension (high volatility) due to the uncertainty during this period. sentimental herding: the role of covid-19 crisis… 15 data and methodology data the data contains daily returns of the egx30 index, which is used as a proxy for the market portfolio and daily stock returns for 50 stocks listed in egx 100 index to examine herding behaviour in the egyptian stock market under the covid-19 crisis from february 14th, 2020 to june 30, 2020, where the first infection of the covid-19 virus in egypt was confirmed on february 14th, 2020. the researcher also began collecting research data on june 30, 2020. the egx 100 index measures the performance of the 100 most active companies in the egyptian market, including the 30 most active companies that make up the egx 30 and the 70 companies that make up the egx 70. the data also include data for book values of equity which extracted from annual financial statements from june 2014 to june 2019. methodology the study attempt to investigate the presence of herding behaviour for 50 stocks listed in the egyptian stock market under the covid-19 crisis. the sample is also divided into two groups based on the size (market capitalization) and value (book-to-market ratio) factor. the sample was divided into big and small portfolios according to the size factor and divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-tomarket) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-to-market) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. mostafa hussein abd-alla16 the study employs hwang and salmon (2004) and chang et al. (2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t (1) where divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t is the excess stock return and divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t (2) where (pt ) is the stock i closing price at time t. the hwang and salmon (2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol ( ßimt ) and its behaviourally biased equivalent, which denoted by the symbol divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t , as follows: divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t (3) where divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t is the behaviourally biased expected returns of asset i at time t and ( divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t ) is the systematic risk measurement. divided into portfolio consisting of stocks with high (book-to-market) ratio, a portfolio consisting of stocks with medium (book-to-market) ratio and portfolio consisting of stocks with low (book-to-market) ratio. the big and small portfolios are constructed based on the firm size (market capitalization in june of each year t). the median sample size is used to construct the two portfolios according to 50% splitting point, where the big stocks portfolio consisting of the highest 50% stocks and the small stocks portfolio consisting of the lowest 50%. the sample is also ranked based on (book-to-market) ratio, where the sample is divided into 3 portfolios. the first portfolio is 30% of the whole sample, which has the highest (book-tomarket) ratio. the second portfolio is 40% of the whole sample have (book-to-market) ratio in medium and the third portfolio is 30% of the whole sample, which has the lowest (book-to-market) ratio. the study employs (hwang & salmon, 2004) and (chang et al., 2000) method to measure herding behaviour. using daily stock price and egx30 index data, beta is estimated using the ols method, as follows: 𝑟𝑟��� = 𝛼𝛼��� + 𝛽𝛽���� 𝑟𝑟��� + 𝜀𝜀��� (1) where ( 𝑟𝑟��� ) is the excess stock return and (𝑟𝑟��� ) is the excess returns of the market portfolio. returns of individual stocks are calculated as follows: 𝑅𝑅�� = (�������)���� (2) where (𝑃𝑃�) is the stock i closing price at time t. the (hwang & salmon, 2004) methodology is used to measure herding behaviour. this methodology is based on the cross-sectional volatility of beta (ß), it also depends on the relationship between the equilibrium beta, which denoted by the symbol (𝛽𝛽��� ) and its behaviourally biased equivalent, which denoted by the symbol (𝛽𝛽���� ), as follows: �� �(���) ��(���) = 𝛽𝛽���� =𝛽𝛽���  ℎ�� (𝛽𝛽���1) (3) where 𝐸𝐸��(𝑟𝑟��) is the behaviourally biased expected returns of asset i at time t and ( 𝛽𝛽���� ) is the systematic risk measurement. 𝐸𝐸� (𝑟𝑟�� ) is the conditional expectation at time t is the conditional expectation at time t of the market excess returns. of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the is a time-variant latent herding behaviour parameter, of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the = 0 indicates the absence of herding behaviour and of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the on a market-wide basis, the cross-sectional dispersion of of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the is calculated, as: of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the (4) sentimental herding: the role of covid-19 crisis… 17 when taking the logarithms on both sides, equation (4) is rewritten as follows: of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the (5) equation (5) may be rewritten as follows: of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the (6) where: of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the (7) with of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the and of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the (8) hwang and salmon (2004) allow herding (hmt ) to follow an ar (1) process and the model becomes: of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the (9) of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the (10) where of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like hwang and salmon (2004) methodology. the log of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the is expected to change with herding levels and this variation is ref lected through of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the . when the variance of the error term of the market excess returns. ( ℎ��) is a time-variant latent herding behaviour parameter, (ℎ�� ) = 0 indicates the absence of herding behaviour and (ℎ�� ) = 1 indicates the presence of perfect herding behaviour that means that all the individual stock returns change following the market portfolio movements. to measure herding behaviour (ℎ�� ) on a market-wide basis, the cross-sectional dispersion of ( 𝛽𝛽���� ) is calculated, as: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� ) = 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) (1ℎ��) (4) when taking the logarithms on both sides, equation (4) is rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] + log (1-ℎ��) (5) equation (5) may be rewritten as follows: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (6) where: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] = 𝜇𝜇� + 𝜐𝜐�� (7) with 𝜇𝜇� = e [log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���) ] ] and 𝜐𝜐�� ~ iid (0, 𝜎𝜎���� ) and 𝐻𝐻�� = log (1-ℎ��) (8) (hwang & salmon, 2004) allow herding (𝐻𝐻�� ) to follow an ar (1) process and the model becomes: log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] = 𝜇𝜇� + 𝐻𝐻�� + 𝜐𝜐�� (9) 𝐻𝐻�� = 𝜑𝜑� 𝐻𝐻����� + 𝜂𝜂�� (10) where 𝜂𝜂��~ iid (0,𝜎𝜎���� ). the equations (9) and (10) contain herding as an unobserved component, which will be extracted using the kalman filter like (hwang & salmon, 2004) methodology. the log [ 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽���� )] is expected to change with herding levels and this variation is reflected through (𝐻𝐻�� ). when the variance of the error term 𝜂𝜂�� (𝜎𝜎���� ) is statistically significant, this indicates the presence of herding behaviour among investors and a statistically significant of the is statistically significant, this indicates the presence of herding behaviour among investors and a statismostafa hussein abd-alla18 tically significant of the persistence parameter (φm) supports this observation. authors require that (φ) must be stationary, i.e., |φ| ≤1. the cross-sectional standard deviation of betas is calculated monthly by the following equation: persistence parameter (𝜑𝜑�) supports this observation. authors require that (φ) must be stationary, i.e., |φ| ≤1. the cross-sectional standard deviation of betas is calculated monthly by the following equation: 𝑆𝑆𝑆𝑆𝑆𝑆� (𝛽𝛽)� ) = � ����� (������� �����)��������� ��� (11) the study also uses (chang et al., 2000) method based on the cross-sectional absolute deviation (csad) to measure herding behaviour, which is measured by: csad = �� ∑ |𝑅𝑅��� � ��� -𝑅𝑅���| (12) where: 𝑅𝑅��� and 𝑅𝑅��� is the rate of return on stock i and market portfolio at time t, respectively. n is the number of stocks in the market portfolio. (chang et al., 2000) suggested a testing methodology based on the non-linear relationship between stock return dispersions and the market return, as follows: 𝐶𝐶𝑆𝑆𝐶𝐶𝐶𝐶� = 𝝰𝝰 + 𝛾𝛾�|r���|+ 𝛾𝛾� r���� + ε� according to (chang et al., 2000) methodology, during periods of extreme market price movements, the relations between individual stocks return desperation and market return is expected to be a non-linear relationship. the non-linear coefficient captured by 𝛾𝛾�. a negatively significant coefficient γ2 indicates the existence of herding behaviour. empirical results table 1 shows the herding space-state model. the results show that the coefficient c(3) which represents the persistence parameter (φm) and c(4) which represents the standard deviation (σmη) of the state-equation error (ηmt) are not statistically significant at the 5% level of significance, which confirms the absence of herding behaviour during covid-19 crisis in the egyptian stock market for all cases. (11) the study also uses chang et al. (2000) method based on the cross-sectional absolute deviation (csad) to measure herding behaviour, which is measured by: s. 18 csad = 1 n ∑ |𝑅𝑅𝑖𝑖,𝑡𝑡 − 𝑅𝑅𝑚𝑚,𝑡𝑡|𝑁𝑁𝑖𝑖=1 (12) csadt = α + 𝛾𝛾1|rm,t| + 𝛾𝛾2 rm,t2 + ε𝑡𝑡 (13) s. 92 s. 122 81 4. 1 98 3 1 08 8 2 72 5 5 06 3. 90 6 54 1. 88 5 36 6. 55 7 0 75 .7 7 8 63 3. 71 2 0 0 9 1 0 2 0 1 0 1 1 2 0 1 1 1 2 2 0 1 2 1 3 2 0 1 3 1 4 2 0 1 4 1 5 2 0 1 5 1 6 2 0 1 6 1 7 2 0 1 7 1 8 fi g u r e s in a m o u n t year amount of credit -200,00% 0,00% 200,00% 400,00% 600,00% 800,00% 1000,00% 1200,00% 1400,00% 1600,00% % change (december, 2014 to december, 2019) (12) where: ri,t and rm,t is the rate of return on stock i and market portfolio at time t, respectively. n is the number of stocks in the market portfolio. chang et al. (2000) suggested a testing methodology based on the non-linear relationship between stock return dispersions and the market return, as follows: s. 18 csad = 1 n ∑ |𝑅𝑅𝑖𝑖,𝑡𝑡 − 𝑅𝑅𝑚𝑚,𝑡𝑡|𝑁𝑁𝑖𝑖=1 (12) csadt = α + 𝛾𝛾1|rm,t| + 𝛾𝛾2 rm,t2 + ε𝑡𝑡 (13) s. 92 s. 122 81 4. 1 98 3 1 08 8 2 72 5 5 06 3. 90 6 54 1. 88 5 36 6. 55 7 0 75 .7 7 8 63 3. 71 2 0 0 9 1 0 2 0 1 0 1 1 2 0 1 1 1 2 2 0 1 2 1 3 2 0 1 3 1 4 2 0 1 4 1 5 2 0 1 5 1 6 2 0 1 6 1 7 2 0 1 7 1 8 fi g u r e s in a m o u n t year amount of credit -200,00% 0,00% 200,00% 400,00% 600,00% 800,00% 1000,00% 1200,00% 1400,00% 1600,00% % change (december, 2014 to december, 2019) according to chang et al. (2000) methodology, during periods of extreme market price movements, the relations between individual stocks return desperation and market return is expected to be a non-linear relationship. the non-linear coefficient captured by γ2. a negatively significant coefficient γ2 indicates the existence of herding behaviour. empirical results table 1 shows the herding space-state model. the results show that the coefficient c(3) which represents the persistence parameter (φm) and c(4) which represents the standard deviation (σmη) of the state-equation error (ηmt) are not statistically significant at the 5% level of significance, which confirms the absence of herding behaviour during covid-19 crisis in the egyptian stock market for all cases. sentimental herding: the role of covid-19 crisis… 19 table 1. results of the state-space model table 1. results of the state-space model coefficient std. error z-statistic prob. c(1)= μm 0.015467 0.083333 0.185607 0.8528 c(2)= vmt -26.01392 1.38e+11 -1.88e-10 1.0000 c(3)= φm 0.209998 3.10935 0.067538 0.9462 c(4)= ηmt -3.027382 14.80419 -0.204495 0.838 coefficient std. error z-statistic prob. c(1)= μm 0.033894 0.099929 0.33918 0.7345 c(2)= vmt -22.79446 4.09e+10 -5.57e-10 1.0000 c(3)= φm 0.097342 6.270044 0.015525 0.9876 c(4)= ηmt -2.510401 63.88309 -0.039297 0.9687 coefficient std. error z-statistic prob. c(1)= μm -0.033964 0.036863 -0.921346 0.3569 c(2)= vmt -25.31355 1.24e+11 -2.04e-10 1.0000 c(3)= φm -0.098035 4.538214 -0.021602 0.9828 c(4)= ηmt -3.619681 47.17804 -0.076724 0.9388 coefficient std. error z-statistic prob. c(1)= μm -0.01478 0.091988 -0.160672 0.8724 c(2)= vmt -25.30821 1.47e+10 -1.72e-09 1.0000 c(3)= φm 0.364828 1.044999 0.349118 0.727 c(4)= ηmt -2.911684 3.230393 -0.901341 0.3674 coefficient std. error z-statistic prob. c(1)= μm -0.008076 0.073362 -0.110082 0.9123 c(2)= vmt -25.30716 1.50e+11 -1.68e-10 1.0000 c(3)= φm -0.132373 3.060431 -0.043253 0.9655 c(4)= ηmt -2.734563 24.00065 -0.113937 0.9093 coefficient std. error z-statistic prob. c(1)= μm 0.04183 0.114405 0.365632 0.7146 c(2)= vmt -6.043024 34.53124 -0.175002 0.8611 c(3)= φm 0.461076 1.075942 0.428533 0.6683 c(4)= ηmt -3.305924 2.815955 -1.173997 0.2404 big stocks all sample stocks stocks with high book-to-market ratio stocks with medium book-to-market ratio stocks with low book-to-market ratio small stocks source: author's construction table 2 shows the results of herding behaviour in the egyptian stock market using the cross-sectional absolute deviation (csad) model. results show that the coefficient γ2 is s o u r c e : author’s construction. mostafa hussein abd-alla20 table 2 shows the results of herding behaviour in the egyptian stock market using the cross-sectional absolute deviation (csad) model. results show that the coefficient γ2 is negative and statistically significant at 10% level of significance in the case of measuring the herding behaviour for all sample stocks. a negative and statistically significant coefficient γ2 indicates the existence of herding behaviour during covid-19 crisis in the egyptian stock market. for the portfolios divided by the value factor measured by (book/market) ratio, the results show that the coefficient γ2 is negative and statistically significant at 10% level of significance for the portfolio of stocks with low (b/m) ratio and it is negative and statistically significant at 5% level of significance for the portfolio of stocks with high (b/m) ratio, which indicates the existence of herding behaviour during covid-19 crisis in the portfolio of stocks with high (b/m) ratio and the portfolio of stocks with low (b/m) ratio at 5% and 10% level of significance respectively. however, for the portfolio of stocks with medium (b/m) ratio the coefficient γ2 is not statistically significant, which confirms the absence of herding behaviour during covid-19 crisis in the portfolio of stocks with medium (b/m) ratio. for the portfolios divided by the size factor measured by the market capitalization, the results show that the coefficient γ2 is negative and statistically significant at 5% level of significance for the portfolio of big stocks, which indicates the existence of herding behaviour during covid-19 crisis in the portfolio of big stocks at 5% level of significance. however, for the portfolio of small stocks, the coefficient γ2 is not statistically significant, which confirms the absence of herding behaviour during covid-19 crisis in the portfolio of small stocks. table 2. results of regression of daily csad coefficient γ2 indicates the existence of herding behaviour during covid-19 crisis in the egyptian stock market. for the portfolios divided by the value factor measured by (book/market) ratio, the results show that the coefficient γ2 is negative and statistically significant at 10% level of significance for the portfolio of stocks with low (b/m) ratio and it is negative and statistically significant at 5% level of significance for the portfolio of stocks with high (b/m) ratio, which indicates the existence of herding behaviour during covid-19 crisis in the portfolio of stocks with high (b/m) ratio and the portfolio of stocks with low (b/m) ratio at 5% and 10% level of significance respectively. however, for the portfolio of stocks with medium (b/m) ratio the coefficient γ2 is not statistically significant, which confirms the absence of herding behaviour during covid-19 crisis in the portfolio of stocks with medium (b/m) ratio. for the portfolios divided by the size factor measured by the market capitalization, the results show that the coefficient γ2 is negative and statistically significant at 5% level of significance for the portfolio of big stocks, which indicates the existence of herding behaviour during covid-19 crisis in the portfolio of big stocks at 5% level of significance. however, for the portfolio of small stocks, the coefficient γ2 is not statistically significant, which confirms the absence of herding behaviour during covid19 crisis in the portfolio of small stocks. table 2. results of regression of daily csad coeffici ents val ue t-statistic p-val ue value t-stati sti c p-value value t-statistic p-value al l sample stocks 0.0305 12.940 0.000 0.6804 3.42852 0.0009 -4.803 -1.826 0.071 stocks with high (b/m) rati o 0.0098 10.58565 0.00 0.2138 2.72787 0.0077 -2.100 -2.02132 0.0463 stocks wi th medium (b/m) ratio 0.0121 11.04683 0.000 0.250 2.69912 0.0084 -0.977 -0.79699 0.4276 stocks with l ow (b/m) ratio 0.005 10.344 0.000 0.217 3.13173 0.0024 -1.726 -1.880 0.0635 small stocks 0.0155 11.06935 0.000 0.2858 2.42096 0.0176 -1.918 -1.22544 0.2237 big stocks 0.009 12.847 0.000 0.3945 4.020 0.000 -2.885 -2.21745 0.0292 constant γ� γ� source: author's construction. conclusion s o u r c e : author’s construction. sentimental herding: the role of covid-19 crisis… 21  conclusion herding behaviour is considered the most important topics in financial literature, especially during the crisis. the emerging markets have been neglected in previous studies on this topic. this is the first study that investigates herding behaviour during covid-19 pandemic. the study tried to fill a gap in the literature by providing evidence on herding behaviour in the egyptian stock market during covid-19 crisis by using daily stock returns and daily returns of the egx30 index. the daily data covers the period from february 14th, 2020 to june 30, 2020. the study also examined herding behaviour at the level of portfolios divided based on the size and the value factors during covid-19 crisis. the results confirm that the egyptian stock market is affected by a herding behaviour during covid-19 crisis when using chang et al. (2000) methodology. this may be ref lecting the investor’s irrationality in the egyptian stock market. this irrationality may provide investors to decide based on following the others rather than their own beliefs. this indicates that investors do not trust their information during a crisis. thus, these results contradicted with the assumptions of the efficient market hypothesis. in contrast, the results demonstrated the absence of herding behaviour when using hwang and salmon (2004) methodology. also, the results demonstrated that the portfolio of stocks with low and high (b/m) ratio and the portfolio of big stocks only affected by a herding behaviour during covid-19 crisis, this is when using the chang et al. (2000) methodology. however, hwang and salmon (2004) methodology provide no evidence of herding behaviour at the level of all portfolios. the results of this study have important practical implication, especially for investors who concerned to know the degree of market efficiency and all anomalies kinds that could affect their investment return, which helps them to create suitable portfolios. this study comparing different empirical models of herding behaviour during covid-19 crisis. it would be interesting to retests these models during covid-19 crisis in other different emerging markets or developing and developed markets. it should be noted that the results of this study also interest market authorities, where they should monitor all financial decisions taken by companies and ensure that all companies’ data are updated. they should also announce companies that violate the publication of their data, or that make decisions that demostafa hussein abd-alla22 ceive investors and enact deterrent laws for managers or anyone who can obtain private information and benefit from it without the rest of the investors.  references chang, e.c., cheng, j.w., & khorana, a. (2000). an examination of herd behavior in equity markets: an international perspective. journal of banking & finance, 24(10), 1651-1679. http://dx.doi.org/10.1016/s0378-4266(99)00096-5. choe, h., khoa, b.-c., & stulz, r.m. (1999). do foreign investors destabilize stock markets? the korean experience in 1997. journal of financial economics, 54(2), 227-264. http://dx.doi.org/10.1016/s0304-405x(99)00037-9. christie, w.g., & huang, r.d. (1995). following the pied piper: do individual returns herd around the market? financial analysts journal, 51(4), 31-37. http://dx.doi. org/10.2469/faj.v51.n4.1918. demir, n., mahmud, s.f., & solakoglu, m.n. (2014). sentiment and beta herding in the borsa istanbul (bist). risk management post financial crisis: a period of monetary easing contemporary studies in economic and financial analysis, 96, 389-400. http:// dx.doi.org/10.1108/s1569-375920140000096016. devenow, a., & welch, i. (1996). rational herding in financial economics. european economic review, 40(3-5), 603-615. http://dx.doi.org/10.1016/0014-2921(95)00073-9. elkhaldi, a., & benabdelfatteh, y. (2014). testing herding effects on financial assets pricing: the case of the tunisian stock market. british journal of economics, management & trade, 4(7), 1046-1059. http://dx.doi.org/10.9734/bjemt/2014/8973. filip, a.m., pece, m.a., & pochea m.m. (2015). an empirical investigation of herding behavior in cee stock markets under the global financial crisis. procedia economics and finance, 25, 354-361. http://dx.doi.org/10.1016/s2212-5671(15)00745-5. güvercin, a. (2016). sentimental herding: the role of regional and global shocks in egyptian and saudi stock markets. sosyoekonomi, 24(27). http://dx.doi. org/10.17233/se.53541. hwang, s., & salmon, m. (2004). market stress and herding. journal of empirical finance, 11(4), 585-616. http://dx.doi.org/10.1016/j.jempfin.2004.04.003. javaira, z., & hassan, a. (2015). an examination of herding behavior in pakistani stock market. international journal of emerging markets, 10(3), 474-490. http:/dx./doi. org/10.1108/ijoem-07-2011-0064. kabir, m.h., & shakur, s. (2018). regime-dependent herding behavior in asian and latin american stock markets. pacific-basin finance journal, 47, 60-78. http://dx.doi. org/10.1016/j.pacfin.2017.12.002. lee, y.-h., liao, t.-h., & hsu, c.-m. (2015). the impact of macroeconomic factors on the herding behaviour of investors. asian economic and financial review, 5(2), 295-304. http://dx.doi.org/10.18488/journal.aefr/2015.5.2/102.2.295.304. litimi, h. (2017). herd behavior in the french stock market. review of accounting and finance, 16(4), 497-515. http://dx.doi.org/10.1108/raf-11-2016-0188. sentimental herding: the role of covid-19 crisis… 23 mertzanis, c., & allam, n. (2018). political instability and herding behaviour: evidence from egypt’s stock market. journal of emerging market finance, 17(1), 29-59. http:// dx.doi.org/10.1177/0972652717748087. ouarda, m., el bouri, a., & bernard, o. (2012). herding behavior under markets condition: empirical evidence on the european financial markets. international journal of economics and financial issues, 3(1), 214-228. özsu, h.h. (2015). empirical analysis of herd behavior in borsa istanbul. international journal of economic sciences, iv(4), 27-52. http://dx.doi.org/10.20472/ es.2015.4.4.003. vieira, e.f.s., & pereira, m.s.v. (2015). herding behaviour and sentiment: evidence in a small european market. revista de contabilidad, 18(1), 78-86. http://dx.doi. org/10.1016/j.rcsar.2014.06.003. youssef, m., & mokni, k. (2018). on the effect of herding behavior on dependence structure between stock markets: evidence from gcc countries. journal of behavioral and experimental finance, 20, 52-63. http://dx.doi.org/10.1016/j.jbef.2018.07.003. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 04.12.2013; data zaakceptowania: 16.12.2013. * dane kontaktowe: elena.merino@uclm.es, montserrat.mlizano@uclm.es, albamaria.priego@uclm.es, faculty of law and social sciencies, ronda de toledo, s/n, 13071 ciudad real (spain), tel. 00 34 926 295 300 fax: 00 34 926 295 407. doi: 10.12775/cjfa.2013.0202013, volume 2, issue 2 elena merino*, montserrat manzaneque, alba mª priego departament of business administration university of castilla – la mancha spain “board independence” and compensation structure of directors keywords: director compensation, board compensation, board of directors, corporate governance, board characteristics, board independence. j e l classification: g34, g35, m12. abstract: this paper examines the relationship between board independence and the level and structure of directors´ compensation to determine whether this “independence” exerts a moderating effect on the different systems of remuneration granted to directors. we have developed several models based on linear panel data regression. the sample included 76 listed companies on the spanish continuous market for the period 2004–2009. the results reveal that the moderating effect of board independence on directors´ compensation depends on the type of remuneration, being especially significant in the case of variable remuneration but not for fixed remuneration. this is significant for the study context because the fixed remuneration is the most important retribution concept. the results of this paper reveals that the inefficient of the board as mechanisms of control on fixed remuneration could be translated into an insufficient control of wealth extraction from the shareholders by the management. our results contribute to the existing debate on the appropriate norms of corporate governance control over the directors’ compensation. these results offer additional evidence about the impact of board independence over the structure of compensation granted to directors, issue shortly studied so far. elena merino, montserrat manzaneque, alba mª priego126 „niezależność zarządu” a struktura wynagrodzeń dyrektorów słowa kluczowe: wynagrodzenia dyrektorów, wynagrodzenia zarządu, zarząd, ład korporacyjny, charakterystyki zarządu, niezależność zarządu. klasyfikacja j e l: g34, g35, m12. abstrakt: celem artykułu jest zbadanie relacji między „niezależnością zarządu” a poziomem i strukturą wynagrodzeń dyrektorów i ustalenie, czy ta „niezależność” wpływa na poszczególne systemy wynagrodzeń dyrektorów. w badaniu zostały wykorzystane modele oparte na regresji liniowej dla danych panelowych. próba obejmuje 76 spółek notowanych na hiszpańskim rynku notowań ciągłych w latach 2004–2009. wyniki wskazują, że wpływ stopnia „niezależności zarządu” na wynagrodzenie dyrektorów zależy od rodzaju wynagrodzenia i jest szczególnie ważne w przypadku zmiennego wynagrodzenia, ale nie dla stałego wynagrodzenia. jest to istotne w kontekście przeprowadzonego badania, ponieważ stałe wynagrodzenie jest najważniejszym elementem w sposobach wynagradzania. wyniki badań wskazują, że nieefektywność zarządu jako mechanizmu kontroli stałych wynagrodzeń może oznaczać niewystarczającą kontrolę nad tworzeniem bogactwa dla akcjonariuszy. wyniki badań stanowią wkład do toczącej się debaty dotyczącej właściwych norm ładu korporacyjnego nad wynagrodzeniami dyrektorów. wyniki dowodzą wpływu „niezależności zarządu” na strukturę wynagrodzeń dyrektorów, co szerzej do tej pory nie było badane. translated by marcelina więckowska & ewa chojnacka  introduction and research methodology in the current economic crisis, the implementation of good corporate governance requires implementing certain austerity policies in both the public and private sectors. however, in these times, it is not surprising to read headlines on major newspapers of spain and others countries about millionaires’ allowances, salaries or bonuses received by directors or executive of companies, which have been financed with public funds or have initiated a labor force adjustment plan, subsequently. in this sense, the remuneration of board members should be particularly studied although this has not received particular attention so far. in these cases, there is a major conflict of interest because the board is the organ responsible for fixing them. we find, therefore, that the board of directors, which is responsible for safeguarding the interests of shareholders, could use its power to expropriate part of the wealth of shareholders by, among other actions, the granting of high salaries to their own members (bebchuck, fried 2004; duffhues, kabir 2008). “board independence” and compensation structure of directors 127 so, while the compensation of directors has traditionally been a solution (between the various internal and external mechanisms exit based on existing agency theory) to monitor and control the management, from the beginning of the economic crisis it has become a problem (alzaga 2012) for the excesses committed. the shareholders perceive such high salaries as an expropriation of their wealth, resulting in a lack of confidence in the function exercised by the board of directors. to curb the excesses compensation and so the shareholders regain the confidence in the management of the board, various authors (bebchuk, fried 2004; ryan, wiggins 2004; cheng, firth 2005; davidson et al. 2005; conyon, he 2008; andreas et al. 2009; du boys 2009; fahlenbrach 2009) propose increasing the degree of independence of the board of directors. in line with this view, this paper adopts an empirical approach to examine the hypothesized effects of board independence on level and structure of directors’ compensation in spain to determine whether this “independence” exert a moderating effect on the remuneration. for this purposes, a unique panel of data has been put together from 76 listed spanish companies for the period 2004–2009. the findings of this research paper reveal that the average compensation received by each member of the board of directors is €194,041.77 for 2004 and €273,831.32 for 2009. these figures show a significant increase in the remuneration amounts despite the economic crisis in which spain finds since 2007. furthermore, it was found that the effect of the independence board on directors´ compensation depend of the type of remuneration. the paper contributes to the existing literature in several ways. first, descriptive empirical evidence on the compensation is provided within a unitary board system. secondly, an ample panel data set enables the examination of a set of determinants using panel data methods which control for unobserved firm heterogeneity. finally, the perspective is extended from total remuneration to the different remuneration systems in order to see the effect of board independence has on different pay systems not only on the total remuneration. this may became relevant since the remuneration structure in spain (similar to other european union countries) differs from that presented others countries – for example us – because the fixed salary is the greatest weight on the total remuneration. therefore, this paper aims to contribute to the limited empirical evidence on this pay structures because most studies have focused on us. this work is organized as follows: first, a revision of director compensation system in spain is presented; secondly, a review of previous literature on the elena merino, montserrat manzaneque, alba mª priego128 subject is carried out; thirdly, the research design is set out, defining the sample and the variables under study; fourthly, the application of relevant statistical techniques is dealt with and the main results are analyzed; and finally, the main conclusions are discussed. 1. director compensation in spain although the position of director is presumed free under the spanish law except when the statutes collect otherwise1, it is habitual that the directors receive remuneration which has become significant as we have already discussed above. the directors can be paid through different systems: fixed salary, variable salary, attendance fees, salary fees, stock options and/or other financial instruments and other remuneration (advances, loans, funds and pension plans, insurance premium and guarantees provided for directors). in practice we find that, mostly, companies attribute fixed remuneration. thus, according to heidrick & struggles report (2009), in spain the fixed concept reaches for 79% of the total compensation granted to directors. meanwhile, only 8.5% of spanish companies, according to a study by spencer stuart (2010) in spain, pay to their directors in shares, although this system has been given only to non-executive directors. also, 21% of the companies studied paid the compensation based on external results. this situation is similar to what occurs in other european union countries such as france and germany, where around 40% of the directors' remuneration corresponds to variable compensation. there is great difference if we compare with countries outside europe, for example, usa, where 79% of companies pay their directors in shares and where the fixed remuneration is only one fourth of the total compensation (heidrick & struggles report 2009). 2. board characteristics and directors’ compensation following the perspective of agency theory, compensation is one of the most important incentive mechanisms to align interests between directors and shareholders, and to serve as an incentive to compel the board members to meet the objective of maximizing the value of the company. a number of previous studies, however, show that excessive compensation could contribute to a lack of 1 article 217 trlsc. “board independence” and compensation structure of directors 129 independence and control of the board over the management which could result in expropriation of shareholders' wealth through this compensation. in fact, this mechanism of compensation of directors has grown from a solution to the conflict of interest between managers and shareholders and has become a problem. this has occurred as a result of the economic crisis of 2007, which has shown how in times of austerity measures the directors continued to receive high salaries, while shareholders saw how the value of their shares fell sharply in the markets. in this situation, the literature points to as a solution to increase the board independence in order to control the excesses compensation since the characteristics of board of directors are relevant in explaining the directors´ compensation (bebchuck, fried 2004). the main measures that are frequently used to review the board independence are (ryan, wiggins 2004; cheng, firth 2005; conyon, he 2008; andreas et al., 2009; fahlenbrach 2009): the participation of the board of directors in shareholding, ceo and board chair duality, the inclusion of independent members and the size of the board. the directors will be interested in taking decisions which may increase stock return when they hold shares in the company, which would make them have less interest in higher remuneration because they already receive part in dividends (cordeiro et al. 2000; cheng, firth 2005). empirically this approach has been demonstrated by boyd (1996), bryan, et al. (2000) and cordeiro et al. (2000), therefore, we expected that the board members´ ownership have a negative effect on the directors´ compensation. the main factor that determines the effectiveness of the board is the independence of the ceo (hermalin, weisbach 2003). in fact, whether the ceo is also the chairman the governance is weaker (dávila, peñalva 2004), therefore, it is expected that directors receive higher remuneration. following this arguments, we expect a positive relationship between la variable ceo duality (when the same person holds the ceo and chairman titles) and the remuneration total granted to the directors. most codes of corporate governance emphasize the importance of the figure of the independent directors because the incorporation of such director on the board of directors can help reduce conflicts of interest (andrés et al. 2005) and get a “good board governance” (ferrarini et al. 2010). therefore, the compensation of directors would pass a back seat as a mechanism to align the interest of managers and shareholders. so, we expect a negative relationship between the number of independent directors of the board and the total compensation elena merino, montserrat manzaneque, alba mª priego130 awarded to its members, as other studies have previously shown (conyon, peck 1998; arrondo et al., 2008; sánchez, lucas 2008). there is no theoretical or empirical unanimity regarding the possible effect of the size of the board on the remuneration granted to the directors. however, following the results obtained by ryan and wiggins (2004) and andreas et al. (2009) we expect a negative relationship between the board size and director compensation. however, some prior empirical evidences (yermack, 1996; fernández et al. 1998; adams, mehran 2005; andrés, vallelado 2008) show that the efficiency of the board and its size do not have a linear relationship, so the relationship is negative up to an optimum size, beyond which the addition of a member does not provide greater monitoring capacity, it will lead to problems of coordination, control and decision making, which will result in this case, in a greater compensation granted to directors. so, we expected that there is a no linear relationship between both variables. in spain, the fact that the most important retribution concept is fixed salary and others perquisites is especially significant. so it is interesting to know how board characteristics could affect to the level of different type of compensation in order to determine the level of discretion of the directors in this regard. in relation to the effect that those features of the board could have on the various items of compensation, first, as already shown in previous studies, the more shareholding board members help2 the lower remuneration in money received, because they are already paid as dividends for the shares they own (cheng, firth 2005). however, it is expected that directors prefer to have more fixed salary and other compensation (e.g. remuneration in kind) and less variable remuneration (arrondo et al. 2008) to the extent that the perception of dividends is tied to company profits, thus diversifying their compensation packages. secondly, the fact that the figure of the chairman and chief executive officer falls in the same person is considered to be inefficient (hermalin, weisbach 2003), so it is expected to have a positive effect on the remuneration received by directors, helping to promote a remuneration based on fixed salary and other compensation. thirdly, the presence of independent outside directors on the board of directors, at the theoretical level, should have a moderating effect on the com2 board members' ownership is the number of shares held by the total board members on total shares. “board independence” and compensation structure of directors 131 pensation received by its members (andrés et al., 2005; sánchez, lucas 2008), so less fixed concepts is expected in the compensation (fixed salary and others perquisites) and greater variable salary (ryan, wiggins 2004). fourthly, in relation to the size of the board, it is expected that it have a positive relation with others perquisites because is reasonable if we think that if for example the company establishes a pension plan for all directors, the amount will be greater the larger the size of the board. finally, we expected that the salary fees and attendance fees don´t have relationship with the board characteristics. so, we analyze if the relation between characteristics of the board and their compensation is the expected, following the previous hypothesis. 3. sample, variables and methodology sample in order to estimate the effect of characteristic of the board of directors on directors´ compensation we use a sample of 76 listed companies on the spanish computerized trading system (sibe) or continuous market, excluded finance-related firms (sulong, mat nor 2010; manzaneque et al. 2011). of this sample we have taken information regarding the characteristics of board of directors, the different types of remuneration received by directors, company size, industry and profitability during the period 2004–2009. the structure of the sample, by industry, is representative to population. so, the composition of the sample is the following: a) petrol and energy industrial 16,00% (population 14,47%); b) basic materials, industry and construction 32% (population 30,26%); c) consumer products 28,80% (population 34,21%); d) consumer services 16%; e) technology and telecommunications 7,20% (population 6.58%)3. 3 to verify the representativeness of the sample, the maximum allowable error for a finite population was estimated. the maximum error is small, 7.07% to be exact, with a level of confidence of 95% (p=5%), leading to the consideration that the sample is representative of the population. maximum allowable error: in order to estimate the effect of characteristic of the board of directors on directors´ compensation we use a sample of 76 listed companies on the spanish computerized trading system (sibe) or continuous market, excluded finance-related firms (sulong, mat nor 2010; manzaneque et al. 2011). of this sample we have taken information regarding the characteristics of board of directors, the different types of remuneration received by directors, company size, industry and profitability during the period 2004–2009. the structure of the sample, by industry, is representative to population. so, the composition of the sample is the following: a) petrol and energy industrial 16,00% (population 14,47%); b) basic materials, industry and construction 32% (population 30,26%); c) consumer products 28,80% (population 34,21%); d) consumer services 16%; e) technology and telecommunications 7,20% (population 6.58%)3. the choice of spanish companies is explained by the fact that the corporate governance system is a special example of a unitary board system and duo to the particular characteristics of the board of directors for this geographic and normative context. also, it is an important context due to the increasing political pressure to encourage the level of transparency and reasonableness of remuneration systems, to which are subjected the spanish companies, recently. as sources of information, we take data from the annual report about corporate governance and annual accounts of each corporation (database of the cnmv or spanish security exchange commission)4. variables the dependent variable has been categorized into five different types of the compensation according to the corporate governance report‘s information: a) fixed remuneration (fixrem); b) variable payments (varrem); c) salary fees (salfee); d) attendance fees (attfee); and e) others perquisites (othper), which include the delivery of stock and 3 to verify the representativeness of the sample, the maximum allowable error for a finite population was estimated. the maximum error is small, 7.07% to be exact, with a level of confidence of 95% (p=5%), leading to the consideration that the sample is representative of the population. maximum allowable error: n pq n nn 121     where: z 1-α/2 = z value associated with the degree of confidence 1α; n = size of the population; n= size of the sample; p = proportion; and, q = (1-p). this procedure is applied previously by manzaneque et al. (2011). 4 http://www.cnmv.es/portal/consultas/busquedaporentidad.aspx. where: z 1-α/2 = z value associated with the degree of confidence 1α; n = size of the population; n= size of the sample; p = proportion; and, q = (1-p). this procedure is applied previously by manzaneque et al. (2011). elena merino, montserrat manzaneque, alba mª priego132 the choice of spanish companies is explained by the fact that the corporate governance system is a special example of a unitary board system and duo to the particular characteristics of the board of directors for this geographic and normative context. also, it is an important context due to the increasing political pressure to encourage the level of transparency and reasonableness of remuneration systems, to which are subjected the spanish companies, recently. as sources of information, we take data from the annual report about corporate governance and annual accounts of each corporation (database of the cnmv or spanish security exchange commission)4. variables the dependent variable has been categorized into five different types of the compensation according to the corporate governance report‘s information: a) fixed remuneration (fixrem); b) variable payments (varrem); c) salary fees (salfee); d) attendance fees (attfee); and e) others perquisites (othper), which include the delivery of stock and stock options, advances, loans, funds and pension plans, insurance premiums and guarantees provided for directors. also, we define the total compensation as the sum of all this types of compensation (compen). all of these variables have been transformed applying logarithms in order to reduce the heteroscedasticity5. as independent variables, several measures concerning the board of directors’ characteristics are proposed, such as board ownership (owndir), duality of the chairman of the board and the ceo (ceodua), proportion of independent external board members (outsid) and size of the board (brdsiz). these variables have been widely used in previous studies6. also, we chose firm size (crpsize), industry (industry) and corporate performance as “control variables”. all of them have been demonstrated to have an important effect on the board’s compensation level in spain in previous studies (manzaneque et al., 2011). in order to take a wide range of performance variables, two different measures are used: a) the return on assets (roa) (angbazo, narayanan 1997; arrondo et al., 2008; andreas et al., 2009; matolcsy, wright 2011), ratio of operat4 http://www.cnmv.es/portal/consultas/busquedaporentidad.aspx. 5 see finkelstein and hambrick (1989), boyd (1994), cheng and firth (2005) and manzaneque et al. (2011). 6 see manzaneque et al. (2011) for a revision. “board independence” and compensation structure of directors 133 ing income to net assets; and, b) the annual stock return (stockret), which is measured as the sum of stock price and dividend per share over stock price in the year before (cordeiro et al., 2000; ryan, wiggins 2004; brick, palmon, wald 2006; duffhues, kabir 2008; andreas et al., 2009). table 1. definition and typology of the variables variables definition typology compensation variables compen natural log of total compensation by member of the board of directors numeric fixrem natural log of fixed compensation by member of the board of directors numeric varrem natural log of variable compensation by member of the board of directors numeric salfee natural log of salary fees by member of the board of directors numeric attfee natural log of attendance fees by member of the board of directors numeric othper natural log of other perquisites by member of the board of directors. other perquisites include the delivery of stock and stock option, advances, loans, funds and pension plans, insurance premiums and guarantees provided for directors. numeric board characteristics owndir proportion of shares owned by members of the board of directors numeric ceodua dummy variable which takes value 1 when both roles are held by the same person, and 0, when they are not dichotomic outsid proportion of outside directors on the board of directors, taken as outsiders the independent directors. numeric brdsiz number of members in the board of directors numeric control variables crpsize corporate size measured by the logarithm of total assets numeric industry 1. oil and energy 2. basic materials, manufacturing and construction 3. consumer goods 4. consumer services 5. technology and telecommunications. dichotomic roa return on assets, ratio of operating income to net assets numeric stockret stock return measured as the sum of stock price and dividend per share over stock price in the year before numeric s ou r c e : authors’ own. elena merino, montserrat manzaneque, alba mª priego134 methodology we construct a panel data of 456 data (76 companies x 6 years), following the methodology used by elsas and florysiak (2008), andreas et al. (2009), mayers and smith (2010) and manzaneque et al. (2011). in order to test our hypotheses we estimate different variant of the following model (manzaneque et al., 2011; merino, manzaneque, banegas 2012)7: brdsiz number of members in the board of directors numeric control variables crpsize corporate size measured by the logarithm of total assets numeric industry 1. oil and energy 2. basic materials, manufacturing and construction 3. consumer goods 4. consumer services 5. technology and telecommunications. dichotomic roa return on assets, ratio of operating income to net assets numeric stockret stock return measured as the sum of stock price and dividend per share over stock price in the year before numeric source: authors’ own. methodology we construct a panel data of 456 data (76 companies x 6 years), following the methodology used by elsas and florysiak (2008), andreas et al. (2009), mayers and smith (2010) and manzaneque et al. (2011). in order to test our hypotheses we estimate different variant of the following model (manzaneque et al., 2011; merino, manzaneque, banegas 2012)7: it m it k itit cvxy     4 1 4 1 [1] where ity is the endogenous variable, measured as logarithm of remuneration by director. this variable is identified as: a) total compensation by director (compen); b) fixed compensation by director (fixrem); c) variable compensation by director (varrem); d) salary fees by director (salfee); e) attendance fees by director (attfee); and, f) other perquisites by director (othper). the   4 1k itx are independent variables representative of board characteristics, where k= board ownership (owndirit), duality of the chairman of the board and the ceo (ceoduait), proportion of external board members (outsidit), board size (brdsizit);   4 1m itcv are control variables, where m= corporate size (crpsizeit), industry dummies (industryit), return on assets (roait) and stock return (stockretit); and εit is the idiosyncratic error. since the influence of the firm’s characteristics on the model is difficult to measure (himmelberg et al., 1999), we control for unobservable heterogeneity through an individual effect, ŋi (de miguel et al. 2004). also we control the effect of the year including a temporal effect, 7 we assumed parameter homogeneity, which means that αit= α for all i,t and βit = β for all i,t. [1] where is the endogenous variable, measured as logarithm of remuneration by director. this variable is identified as: a) total compensation by director (compen); b) fixed compensation by director (fixrem); c) variable compensation by director (varrem); d) salary fees by director (salfee); e) attendance fees by director (attfee); and, f) other perquisites by director (othper). the brdsiz number of members in the board of directors numeric control variables crpsize corporate size measured by the logarithm of total assets numeric industry 1. oil and energy 2. basic materials, manufacturing and construction 3. consumer goods 4. consumer services 5. technology and telecommunications. dichotomic roa return on assets, ratio of operating income to net assets numeric stockret stock return measured as the sum of stock price and dividend per share over stock price in the year before numeric source: authors’ own. methodology we construct a panel data of 456 data (76 companies x 6 years), following the methodology used by elsas and florysiak (2008), andreas et al. (2009), mayers and smith (2010) and manzaneque et al. (2011). in order to test our hypotheses we estimate different variant of the following model (manzaneque et al., 2011; merino, manzaneque, banegas 2012)7: it m it k itit cvxy     4 1 4 1 [1] where ity is the endogenous variable, measured as logarithm of remuneration by director. this variable is identified as: a) total compensation by director (compen); b) fixed compensation by director (fixrem); c) variable compensation by director (varrem); d) salary fees by director (salfee); e) attendance fees by director (attfee); and, f) other perquisites by director (othper). the   4 1k itx are independent variables representative of board characteristics, where k= board ownership (owndirit), duality of the chairman of the board and the ceo (ceoduait), proportion of external board members (outsidit), board size (brdsizit);   4 1m itcv are control variables, where m= corporate size (crpsizeit), industry dummies (industryit), return on assets (roait) and stock return (stockretit); and εit is the idiosyncratic error. since the influence of the firm’s characteristics on the model is difficult to measure (himmelberg et al., 1999), we control for unobservable heterogeneity through an individual effect, ŋi (de miguel et al. 2004). also we control the effect of the year including a temporal effect, 7 we assumed parameter homogeneity, which means that αit= α for all i,t and βit = β for all i,t. are independent variables representative of board characteristics, where k= board ownership (owndirit), duality of the chairman of the board and the ceo (ceoduait), proportion of external board members (outsidit), board size (brd si zit); brdsiz number of members in the board of directors numeric control variables crpsize corporate size measured by the logarithm of total assets numeric industry 1. oil and energy 2. basic materials, manufacturing and construction 3. consumer goods 4. consumer services 5. technology and telecommunications. dichotomic roa return on assets, ratio of operating income to net assets numeric stockret stock return measured as the sum of stock price and dividend per share over stock price in the year before numeric source: authors’ own. methodology we construct a panel data of 456 data (76 companies x 6 years), following the methodology used by elsas and florysiak (2008), andreas et al. (2009), mayers and smith (2010) and manzaneque et al. (2011). in order to test our hypotheses we estimate different variant of the following model (manzaneque et al., 2011; merino, manzaneque, banegas 2012)7: it m it k itit cvxy     4 1 4 1 [1] where ity is the endogenous variable, measured as logarithm of remuneration by director. this variable is identified as: a) total compensation by director (compen); b) fixed compensation by director (fixrem); c) variable compensation by director (varrem); d) salary fees by director (salfee); e) attendance fees by director (attfee); and, f) other perquisites by director (othper). the   4 1k itx are independent variables representative of board characteristics, where k= board ownership (owndirit), duality of the chairman of the board and the ceo (ceoduait), proportion of external board members (outsidit), board size (brdsizit);   4 1m itcv are control variables, where m= corporate size (crpsizeit), industry dummies (industryit), return on assets (roait) and stock return (stockretit); and εit is the idiosyncratic error. since the influence of the firm’s characteristics on the model is difficult to measure (himmelberg et al., 1999), we control for unobservable heterogeneity through an individual effect, ŋi (de miguel et al. 2004). also we control the effect of the year including a temporal effect, 7 we assumed parameter homogeneity, which means that αit= α for all i,t and βit = β for all i,t. are control variables, where m= corporate size (crpsize it), industry dummies (industryit), return on assets (roait) and stock return (stockretit); and εit is the idiosyncratic error. since the influence of the firm’s characteristics on the model is difficult to measure (himmelberg et al., 1999), we control for unobservable heterogeneity through an individual effect, ŋi (de miguel et al. 2004). also we control the effect of the year including a temporal effect, dt. therefore, the error term is transformed into εit = ŋi + dt + vit, where vit is the idiosyncratic error (de miguel et al., 2004). in terms of the hypotheses, and according with the given arguments and the results of previous authors’ studies (manzaneque et al., 2011 and merino et al., 2012), it is therefore expected a negative relationship between the board ownership and directors´ compensation. a negative relationship is also expected to exist between the proportion of external board members and compensation per director indicating that greater independence in the board has a moderate effect over the amount of compensation received by them (merino et al., 2012). 7 we assumed parameter homogeneity, which means that αit= α for all i,t and βit = β for all i,t. “board independence” and compensation structure of directors 135 on the contrary, a positive relationship is foreseen between duality and compensation per director. as such, a negative relationship between board size and compensation is expected. also, following the previous empirical approaches and in order to catch the non linear effect of the board size we have also included the square of this variable, expecting the opposite effect on the board compensation. regarding to the type of compensation, it is expected that all explanatory variables show the expected relationship with the dependent variable, except for salary fees and attendances fees, with no expected significant relationships, according to the previous explanations. also, we have considered the temporal persistence of the payment, including in the model the first lag of the dependent variable. so we expect a positive relationship between the lag of remuneration and remuneration in the study year (lilling, 2006; canarella, nourayi 2008). in addition, to avoid problems of endogeneity of some variables of corporate governance (andrés, vallelado 2008; coles et al. 2008) we used the corrections over panel data proposed by arellano and bond (1991) and blundell and bond (1998). thus, different variants of the general model were estimated based on the structure of compensation (fixed compensation, variable compensation, salary fees, attendance fees and other perquisites). industry and yearly indicator variables are included in all models to capture potential impact in director payments across industries and years. 4. results descriptive statistics the mean, rate of change, standard deviation, minimum and maximum for the payments received by members of the board, according to type of compensation, is reported in table 2. t ab le 2 . d es cr ip ti ve s ta ti st ic s on b oa rd o f d ir ec to r co m pe ns at io n by t yp e of r em un er at io na v ar ia bl e 20 04 20 05 20 06 20 07 20 08 20 09 to ta l c om pe ns at io n by m em be r of t he b oa rd o f d ir ec to rs m ea n 19 4, 04 1. 77 20 7, 06 3. 00 27 4, 05 7. 89 27 0, 62 2. 96 29 4, 11 0. 55 27 3, 83 1. 32 ra te o f ch an ge 6. 71 32 .3 5 -1 .2 5 8. 68 -6 .8 9 st . d ev . 21 5, 26 2. 86 23 6, 48 5. 90 37 8, 72 0. 96 33 7, 40 2. 01 41 2, 95 6. 20 32 4, 44 9. 41 m in 0 0 14 ,2 50 .0 0 17 ,1 42 .8 6 21 ,3 63 .6 4 15 ,8 88 .8 9 m ax 1, 04 2, 46 6. 67 1, 38 1, 71 4. 29 2, 01 6, 07 6. 92 2, 27 4, 90 0. 00 2, 69 0, 40 0. 00 2, 03 6, 33 3. 33 fi xe d co m pe ns at io n of t he b oa rd o f d ir ec to rs € % € % € % € % € % € % m ea n 66 ,4 23 .0 8 34 .2 3 68 ,4 52 .3 8 33 .0 6 77 ,9 42 .4 4 28 .4 4 84 ,0 30 .8 5 31 .0 5 83 ,8 05 .2 0 28 .4 9 85 ,8 75 .4 9 31 .3 6 ra te o f ch an ge 3. 06 13 .8 6 7. 81 -0 .2 7 2. 47 st . d ev . 74 ,2 22 .8 8 73 ,4 63 .6 6 79 ,8 23 .8 4 89 ,1 18 .7 6 92 ,2 19 .4 7 93 ,4 95 .7 5 m in 0 0 0 0 0 0 m ax 48 1, 07 1. 43 43 2, 64 2. 86 47 3, 28 5. 71 47 9, 06 2. 50 50 5, 81 2. 50 51 1, 43 7. 50 v ar ia bl e co m pe ns at io n of t he b oa rd o f d ir ec to rs € % € % € % € % € % € % m ea n 24 ,6 83 .5 2 12 .7 2 26 ,4 23 .3 1 12 .7 6 59 ,0 58 .8 7 21 .5 5 52 ,1 83 .9 6 19 .2 8 58 ,5 76 .9 2 19 .9 2 64 ,9 55 .7 6 23 .7 2 v ar ia bl e 20 04 20 05 20 06 20 07 20 08 20 09 ra te o f ch an ge st . d ev . 44 ,5 69 .3 2 46 ,6 60 .8 9 15 4, 28 8. 45 10 7, 03 3. 90 10 1, 34 5. 64 11 5, 48 2. 05 m in 0 0 0 0 0 0 m ax 23 2, 00 0. 00 23 3, 22 2. 22 1, 06 5, 50 0. 00 66 0, 37 5. 00 42 3, 80 0. 00 63 2, 00 0. 00 sa la ry fe es b y m em be r of t he b oa rd o f d ir ec to rs € % € % € % € % € % € % m ea n 18 ,8 89 .2 2 9. 73 19 ,4 46 .7 4 9. 39 23 ,6 72 .9 2 8. 64 24 ,7 82 .0 9 9. 16 29 ,2 20 .6 2 9. 94 28 ,8 08 .3 9 10 .5 2 ra te o f ch an ge 2. 95 21 .7 3 4. 69 17 .9 1 -1 .4 1 st . d ev . 27 ,0 62 .3 2 29 ,0 89 .1 7 34 ,5 56 .9 3 37 ,6 99 .4 1 40 ,2 95 .7 4 40 ,2 25 .1 2 m in 0 0 0 0 0 0 m ax 16 8, 25 0. 00 17 4, 29 4. 12 22 0, 76 4. 71 24 0, 70 5. 88 24 0, 35 2. 94 24 0, 35 2. 94 a tt en da nc e fe es b y m em be r of t he b oa rd o f d ir ec to rs € % € % € % € % € % € % m ea n 27 ,6 67 .2 1 14 .2 6 32 ,1 05 .3 8 15 .5 1 32 ,9 10 .1 4 12 .0 1 39 ,9 52 .3 1 14 .7 6 38 ,7 26 .0 8 13 .1 7 34 ,2 94 .1 6 12 .5 2 ra te o f ch an ge 16 .0 4 2. 51 21 .4 0 -3 .0 7 -1 1. 44 st . d ev . 48 ,8 20 .0 0 55 ,5 60 .1 5 58 ,2 99 .7 5 69 ,0 42 .6 9 66 ,3 41 .0 3 65 ,4 59 .3 1 m in 0 0 0 0 0 0 v ar ia bl e 20 04 20 05 20 06 20 07 20 08 20 09 m ax 21 1, 18 1. 82 24 3, 27 2. 73 27 6, 06 6. 67 28 3, 90 0. 00 29 5, 00 0. 00 27 7, 60 0. 00 o th er p er qu is it es b y m em be r of t he b oa rd o f d ir ec to rs € % € % € % € % € % € % m ea n 56 ,3 78 .7 4 29 .0 5 60 ,6 35 .1 9 29 .2 8 80 ,4 73 .5 2 29 .3 6 69 ,6 73 .7 5 25 .7 5 83 ,7 81 .7 3 28 .4 9 59 ,8 97 .5 1 21 .8 7 ra te o f ch an ge 7. 55 32 .7 2 -1 3. 42 20 .2 5 -2 8. 51 st . d ev . 15 3, 86 7. 12 15 6, 36 6. 12 25 1, 04 7. 61 20 6, 39 5. 05 29 0, 37 3. 85 18 7, 92 4. 76 m in 0 0 0 0 0 0 m ax 77 5, 71 4. 29 96 5, 85 7. 14 1, 42 8, 15 3. 85 1, 33 7, 90 0. 00 2, 05 7, 13 3. 34 1, 40 7, 40 0. 00 a. t hi s ta bl e sh ow s a su m m ar y of s ta ti st ic s on d ir ec to r co m pe ns at io n m ea su re d in e ur os . t he c om pe ns at io n in cl ud es th e fo llo w in g co nc ep ts : f ix ed a nd v ari ab le r em un er at io n, s al ar y fe es , a tt en da nc e fe es a nd o th er p er qu is it es (s to ck o pt io ns a nd /o r ot he r fin an ci al in st ru m en ts , a dv an ce s, lo an s, fu nd s an d pe nsi on p la ns , i ns ur an ce p re m iu m s an d gu ar an te es p ro vi de d fo r di re ct or s) . a ls o, th is ta bl e in cl ud es in fo rm at io n ab ou t t he p er ce nt ag e of c om pe ns at io n de di ca te d to e ac h co nc ep t. s o u r c e : a ut ho rs ’ o w n. “board independence” and compensation structure of directors 139 the average of total compensation received by each member of the board of directors is €194,041.77 for 2004 and €273,831.32 for 2009, representing a rate of inter-annual growth of approximately 7.13% since 2004. this is similar to that achieved on previous studies with similar samples of companies (manzaneque et al., 2011, 8.6%; merino et al., 2012, 7.11%)8. regards to the type of compensation, the most important is fixed remuneration which reaches the 34.23% in 2004 and 31.36% in 2009 on total compensation, despite the recommendations of some codes of conduct and regulatory agencies, about moderation on this type of compensation. despite this fact, the data shows an increase in the importance of variable payment, whose share on total compensation has grown from 12.72% in 2004 to most than 23% in 2009. the second most important type of compensation is other perquisites. this concept is characterized to present a heterogeneous and, in general, greater discretion. regarding salary fees have remained constant, representing around 10% of the total remuneration. also, attendance fees maintain its participation from 14.26%, in 2004, to 12.52%, in 2009. the statistical behaviour of dependent and independent variables for the full panel is shown in table 3. table 3. descriptive summary statistics on panel data variablesa variable mean standard deviation minimum maximum dependent variables compen 11.878 1.084 7.536 14.805 fixrem 10.974 0.892 8.321 13.145 varrem 10.547 1.275 6.789 13.879 salfee 9.988 1.135 5.655 12.391 attfee 11.069 0.923 8.071 12.595 othper 9.651 2.300 4.199 14.537 8 for each of these studies the authors have taken the companies which have the information necessary, replacing those that did not meet this requirement. so that, the samples are not identical despite its size it is. elena merino, montserrat manzaneque, alba mª priego140 variable mean standard deviation minimum maximum board characteristics variables owndir 0.235 0.255 0 0.993 ceodua 0.643 0.479 0 1 outsid 0.314 0.177 0 0.857 brdsize 11.252 3.978 3 24 control variables crpsize 20.204 1.786 16.447 25.144 industry 2.921 1.224 1 5 roa 0.032 0.117 -1.062 0.472 stockret 1.112 0.656 0.029 8.688 a. this table details a summary of statistics on the basis variables of interest: compen, natural log of total compensation by member of the board of directors; fixrem, natural log of fixed compensation by member of the board of directors; varrem, natural log of variable compensation by member of the board of directors; salfee, natural log of salary fees by member of the board of directors; attfee, natural log of attendance fees by members of the board of directors; othper, natural log of other perquisites by member of the board of directors; owndir, proportion of shares owned by the board of directors; ceodua, dummy variable which takes value 1 when both roles are held by the same person, and 0, when they are not; outsid, proportion of outside directors on the board of directors; brdsiz, number of members in the board of directors; crpsize, corporate size measured by the logarithm of total assets; industry, industry dummies; roa, return on assets, ratio of operating income to net assets; and, stockret, stock return, measured as the sum of stock price and dividend per share over stock price in the year before. s ou r c e : authors’ own. in connection with the characteristics of the board, the result coincide with manzaneque et al. (2011) and merino et al. (2012) due to the similarity between samples, as we have explained previously. so, in relation with the shareholding by members of the boards of directors the results show an average of around 24%, near of a quarter of total ownership. the results showed that the duality of chairman and chief executive officer occurs in more than 60% of the firms looked at. also, in relation to the presence of outsiders on the board of directors, an average of 31% was obtained. finally, the size of the board of directors on average is 11.25 members. the binary correlation between all variables is reported in table 4. t ab le 4 . s pe ar m an c or re la ti on s 1 2 3 4 5 6 7 8 9 10 11 12 13 d ep en de nt va ri ab le s 1 . c o m pe n 2 . f ix re m 0. 70 80 ** * 3 . v a rr em 0. 69 29 ** * 0. 57 29 ** * 4 .s a lf ee 0. 36 69 ** * 0. 25 49 ** * 0. 39 00 ** * 5 . a tt fe e 0. 72 74 ** * 04 37 4 ** * 0. 42 10 ** * 0. 29 08 ** * 6 . o th pe r 0. 56 27 ** * 0. 21 42 ** * 0. 18 86 ** 0. 01 19 0. 25 93 ** b oa rd ch ar ac te ri st ic s va ri ab le s 7 . o w n d ir -0 .1 20 1 ** -0 .0 98 0 ** -0 .0 78 0 -0 .1 21 8 ** -0 .0 63 6 0. 10 89 ** 8 . c eo d u a 0. 21 55 ** * 0. 24 14 ** * 0. 11 41 ** 0. 16 04 ** * 0. 26 95 ** * 0. 13 21 ** 0. 10 46 ** 9 . o u ts id 0. 10 20 ** 0. 08 76 ** 0. 18 36 ** 0. 27 82 ** * -0 .0 24 3 0. 09 12 -0 .1 14 3 ** 0. 07 31 10 . b rd si ze 0. 45 62 ** * 0. 28 93 ** * 0. 20 94 ** * 0. 02 33 0. 39 07 ** * 0. 34 63 ** * -0 .1 61 8 ** * 0. 11 87 ** -0 .0 48 2 1 2 3 4 5 6 7 8 9 10 11 12 13 co nt ro l va ri ab le s 11 4. c rp si ze 0. 63 61 ** * 0. 41 86 ** * 0. 46 81 ** * 0. 37 39 ** * 0. 62 01 ** * 0. 34 29 ** * -0 .0 90 9 ** * 0. 17 05 ** * 0. 03 58 0. 61 67 ** * 12 . i n d u st ry -0 .1 53 2 ** * 0. 02 73 -0 .0 34 2 -0 .2 71 8 ** * -0 .2 79 1 ** * -0 .0 46 0 0. 01 33 -0 .1 94 2 ** * 0. 00 88 -0 .0 16 7 -0 .0 68 4 13 . r o a 0. 18 85 ** * 0. 07 94 0. 12 20 ** 0. 03 61 0. 21 03 ** * -0 .0 40 4 0. 10 33 ** 0. 06 37 -0 .1 20 0 ** 0. 10 50 ** 0. 11 67 ** -0 .0 42 3 14 . s to ck re t 0. 03 55 -0 .0 16 4 0. 06 44 0. 04 03 0. 07 28 -0 .0 09 2 0. 03 66 0. 01 86 0. 12 81 ** * -0 .0 30 4 0. 02 21 -0 .0 45 1 0. 06 74 * th e co rr el at io n is s ig ni fi ca nt a t 0 .0 01 (b ila te ra l) * * th e co rr el at io n is s ig ni fi ca nt a t 0 ,0 5 (b ila te ra l) ** * th e co rr el at io n is s ig ni fi ca nt a t 0 ,0 1 (b ila te ra l) d ef in it io n of v ar ia bl es : co m pe n , n at ur al lo g of to ta l c om pe ns at io n by m em be r of th e b oa rd o f d ir ec to rs ; f ix r em , n at ur al lo g of fi xe d co m pe ns at io n by m em be r of th e b oa rd o f d ire ct or s; v a r r em , n at ur al lo g of v ar ia bl e co m pe ns at io n by m em be r of th e b oa rd o f d ir ec to rs ; s a lf ee , n at ur al lo g of s al ar y fe es b y m em be r of th e b oa rd o f d ir ec to rs ; a tt fe e, n at ur al lo g of a tt en da nc e fe es b y m em be rs o f t he b oa rd o f d ir ec to rs ; o th pe r , n at ur al lo g of o th er p er qu is it es b y m em be r of th e b oa rd of d ir ec to rs ; o w n d ir , p ro po rt io n of s ha re s ow ne d by th e bo ar d of d ir ec to rs ; c eo d u a , d um m y va ri ab le w hi ch ta ke s va lu e 1 w he n bo th r ol es a re h el d by th e sa m e pe rs on , a nd 0 , w he n th ey a re n ot ; o u ts id , p ro po rt io n of o ut si de d ir ec to rs o n th e bo ar d of d ir ec to rs ; b r d si z, n um be r of m em be rs in th e bo ar d of di re ct or s; c r ps iz e, c or po ra te s iz e m ea su re d by th e lo ga ri th m o f t ot al a ss et s; in d u st ry , i nd us tr y du m m ie s; r o a , r et ur n on a ss et s, r at io o f o pe ra ti ng in co m e to n et a ss et s; a nd , s to ck r et , s to ck r et ur n, m ea su re d as th e su m o f s to ck p ri ce a nd d iv id en d pe r sh ar e ov er s to ck p ri ce in th e ye ar b ef or e. s o u r c e : a ut ho rs ’ o w n. “board independence” and compensation structure of directors 143 level and structure of directors’ compensation and board’s characteristics in model 1 (table 5) are shown the results of compen (natural logarithm of total compensation by member of the board of directors) regression on boards characteristics. table 5. estimation: system-gmm in two steps. type of compensation by directora (1) (2) (3) (4) (5) (6) (7) (8) expected signs (model 1) compensation by director compen fixed compensation by director fixrem variable compensation by director varrem salary fees by director salfee attendance fees by director attfee other perquisites by director othper (model 1) (model 2) (model 3) (model 4) (model 5) (model 6) compen_1 + 0.7191*** (0.0230) fixrem_1 0.9006*** (0.0289) varrem_1 + 0.5574*** (0.0414) salfee_1 + 0.9290*** (0.0149) attfee_1 + 0.8870*** (0.1268) other_1 + 0.6599*** (0.0362) owndir 0.1381** (0.0763) -0.0975 (0.0813) -0.7362** (0.3681) 0.0023 (0.0819) 0.2666 (0.3503) 0.6645 (0.5029) ceodua + 0.0254*** (0.0062) 0.0153*** (0.0046) 0.0514*** (0.0149) 0.0024 (0.0048) 0.0263 (0.0192) 0.0516 (0.0308) outsid 0.5973*** (0.0987) 0.4028*** (0.0905) 0.6325*** (0.1912) -0.0044 (0.0855) 0.1408 (0.2344) -0.5072 (0.8411) brdsize 0.0299 (0.0185) -0.0234 (0.1477) -0.2395** (0.0900) 0.0134 (0.0121) -0.1805 (0.1797) -0.4059*** (0.1160) brdsize2 + -0.0012** (0.0006) 0.0008 (0.0005) 0.0058** (0.0027) -0.0001 (0.0005) 0.0056 (0.0061) 0.0159*** (0.0041) crpsize + 0.1604*** (0.0177) 0.0513*** (0.0142) 0.2017*** (0.0480) 0.0815*** (0.0099) 0.1172 (0.1002) 0.0336 (0.0621) roa + 0.5417*** (0.1568) 0.0714 (0.1609) 0.4934 (1.3455) 0.1028 (0.0834) -0.0011 (0.5769) -0.5573 (1.2349) elena merino, montserrat manzaneque, alba mª priego144 (1) (2) (3) (4) (5) (6) (7) (8) expected signs (model 1) compensation by director compen fixed compensation by director fixrem variable compensation by director varrem salary fees by director salfee attendance fees by director attfee other perquisites by director othper (model 1) (model 2) (model 3) (model 4) (model 5) (model 6) stockret + -0.0244 (0.0069) -0.0188 (0.0130) 0.2382*** (0.0935) -0.0222 (0.0135) 0.2357 (0.2878) -0.0245 (0.0578) intercept -0.2495 (0.3374) 0.1008 (0.3865) 2.0887*** (0.6558) -1.0894*** (0.449) -0.1633 (1.1761) 5.2939*** (1.2234) test of joint significance explanatory variables 638.23*** (9, 75) 603.76*** (9, 71) 551.24*** (9, 48) 1,247.62*** (9, 56) 650.30*** (9, 31) 191.09*** (9, 49) dummy year variables 15.65*** (4, 75) 13.39*** (4, 71) 15.23*** (4, 48) 79,53*** (4, 56) 4.28*** (4, 31) 0.06 (4, 49) overidentifying test hansen 60.08 (96) 57.65 (97) 28.89 (97) 38.91 (97) 15.17 (97) 28.73 (97) autocorrelation test ar(1) -3.10*** -3.56*** -1.90** -2.72*** -1.80** -3.07*** ar(2) 0.48 -1.27 0.68 1.44 1.15 0.31 a. this table displays the impact of characteristics of the board on the level of compensation by type of compensation variables are defined in table 2 models are run with the system-gmm methods standard error in brackets in bold, significant coefficients *.**.*** respectively indicate significance levels at 10%, 5% and 1%. in column (2), the predicted sign on each variable in the regression is indicated s ou r c e : authors’ own. as we expected, the results show a significant and negative relationship between the ownership of board of directors (owndir) and the compensation received by them (coeff. -0.1381). this is consistent with the theoretical approaches developed by the agency theory which advocates the importance of share ownership as corporate governance mechanism to align the interest of “board independence” and compensation structure of directors 145 shareholders and director in relation to compensation received by board members. the variable ceodua (concentration of powers of the chairman and the chief executive officer) is significant (coef. 0.0254) and the relationship is just the expected. in this case, the results highlight the idea that a concentration of power is a problem for remuneration control in general terms. these results coincide with those obtained by previous studies on the matter (brick et al., 2006). in relation to outside members on the board (outsid) the results show a significant but positive relationship with total compensation receive by director (coeff. 0.5973), contrary to the expected. this finding suggests a possible problem of independence and control on the board compensation exerted by outside directors. regarding the board size (brdsize) the sign obtained is not as expected, so the relationship between board size and compensation is negative regardless of the size of the board. this result doesn´t corroborate the nonlinear relationship between the two variables, contrary to other studies. finally, in relation to the variables related to performance, roa has a significant and positive relationship with the directors’ compensation (coeff. 0.5417), which reveals that the compensation awarded to directors is, in this case, related to the good performance of the company. to sum up, these results are consistent with the perspective that director compensation is less important in aligning the interests of directors and shareholders when the corporate governance mechanisms are stronger (bryan et al., 2000; manzaneque et al., 2011; merino et al., 2012). however, and contrarily to the expected, the percentage of outside member don´t guarantee an effective monitoring on total compensation received by director. in addition, this study reviews the directors´ compensation by type of compensation. firstly, regarding to fixed compensation (table 5, model 2) ceodua (coeff. 0.0153) exert a positive effect on directors’ compensation. also, although contrary to the expected, outsid (coeff. 0.4028) have a positive relationship with the directors´ compensation. secondly, variable compensation by director model (table 5, model 3) shows that all variables representative of characteristics of the board are significant to control the variable level of compensation with the exception of outside elena merino, montserrat manzaneque, alba mª priego146 members whose relation is just the opposite to the expected as in the general model (coeff. 0.6325). in relation to the board size, in this case we found non linear relationship between board size and variable compensation. so, the efficiency of the board is limited by an optimum size, beyond which the addition of a member results in reduced capacity for monitoring and thus to higher compensation by director. this is consistent with some previous empirical evidence (yermack, 1996; fernández et al., 1998; adams, mehran 2005; andrés, vallelado 2008). regarding the performance measures, only stockret shows a positive and significant effect on the variable compensation (coeff. 0.2382), this could be due to the variable compensation that is linked to market measures rather than accounting measures. thirdly, as is expected, salary fees by director (salfee) (table 5, model 4) and attendance fees by director (attfee) (table 5, model 5) are independent of board characteristics. finally, other perquisites (table 5, model 6) are negatively related with board size but not with other characteristics of the board. these results could be explained by the heterogeneity of remuneration included in this category ranging from pension plans to guarantees provided to directors.  conclusions currently, some corporate scandals have put to question the level of remuneration received by members of the board of directors, accentuating the lack of investor and institutions confidence on them, as control mechanisms to protect the shareholders interest. empirical evidence focuses on analyzing the relationship between the characteristics of the board of directors and the remuneration of the ceo. however, the compensation level of directors as resource of expropriation of wealth from shareholders, and their interaction with other corporate governance mechanisms has been less studied. in this sense, this study contributes to the growing literature on management compensation trough the analysis of a special context like is spain, example of a unitary board system, with high compensation to directors structured in different types of remuneration concepts. for these purposes we have worked with the board characteristics and remuneration data of board of directors of a large and representative sample of spanish firms during the period “board independence” and compensation structure of directors 147 2004-2009. using panel data methods, which allow controlling the unobserved heterogeneity, different variants of the general model were estimated based on the type of compensation and director. the results support our hypotheses related to the relation between director compensation and some board characteristics. so, ownership of board’ members is negatively related to board’s remuneration and concentration of power of chairman and ceo is positively related to it. this shows the importance of these measures to align the interest between directors and shareholders and to increase the level of confidence in control function of members of board of directors. however, and contrarily to the expected, the number of outsiders and the board size increase the level of board’s remuneration. in short, these results show that the outsiders and the size of the board are not effective as control mechanisms in the study context. a deeper analysis about the type of remuneration reveals that, the concentration of power in the chairman and ceo is significant and positively related to fixed board’s remuneration while the outsider directors are not exercising the desirable moderate effect. in relation to variable remuneration, the level of ownership of boards´ members and the separation of power of chairman and ceo have a moderate effect on this type of remuneration. also, the board size has the expected effect on the remuneration level, showing that the efficiency of the board and its size do not have a linear relationship, so the relationship is negative up to an optimum size, beyond which the addition of a member not provide greater monitoring capacity, it will lead to problems of coordination, control and decision making, which will result in this case, in a greater compensation granted to directors. however, as in the case of fixed remuneration, the number of outsiders in the board of directors exerts a positive effect on the variable remuneration level. finally, the salary fees and attendance fees are not are not influenced by any characteristics of the board while the category that we call "other perquisites" presents the expected non-linear relationship with the size of the board. given the existing opacity in this last type of compensation, we think that there is great discretion in this category is not being controlled by the board of directors. so, the influence of board’ characteristics on the level of remuneration depend on the type of remuneration, being especially significant in the case of variable remuneration but not for fixed remuneration. this is significant for the study context because, as we show previously, it is the most important retelena merino, montserrat manzaneque, alba mª priego148 ribution concept. therefore, to control the levels of remuneration of the board, stronger corporate governance mechanisms would be required. in summary, in the study context, two factors contribute to the extraction of wealth from shareholders through the remuneration granted to directors: (1) remuneration structure mainly based on fixed component; and (2) mechanisms of corporate governance control are not efficient to moderate the directors’ remuneration, except directors’ ownership and separation of chairman and ceo roles. under these circumstances, the excessive directors' remuneration negatively affects the profit of the company and its ability to meet the shareholders´ dividends and to retain the necessary earnings to fund the maintenance and growth of the company (avoiding the use of external sources of funding). these results give reason to regulators 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publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2019: 100.00 editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka-pelowska, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2021 copyright by uniwersytet mikołaja kopernika toruń 2021 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra-oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents navleen kaur determinants of dividend payout decisions of original equipment manufacturers from indian automobile industry ........................................................................................ 9 zhaochu li, iryna p. lytvynenko, karl s. philippoff reexamining the economic recovery tax act of 1981: evidence from innovative efficiency ............................................................................................................................. 27 ferdy prasetya margono, rilla gantino the influence of firm size, leverage, profitability, and dividend policy on firm value of companies in indonesia stock exchange ....................................................... 45 dawit tadesse tiruneh empirical evidence of the suitability of ifrs for banking sector in sub-saharan african countries ................................................................................................................ 63 for authors ........................................................................................................................... 81 copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 11 issue 3 2022 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka-pelowska, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla-la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : prof. dr hab. piotr fiszeder e n g l i s h p r o o f r e a d e r : mgr dominik liszkowski subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g i n e e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open access poprzez platformę czasopism umk wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2022 copyright by uniwersytet mikołaja kopernika w toruniu toruń 2022 address of the publisher nicolaus copernicus university in toruń gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła) fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2021: 100.00 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra-oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents rajesh desai, avani raval examining the relation between market value and co2 emission: study of indian firms ............................................................................................................. 9 r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman users’ engagement in banking activities on social media: a study with reference to facebook ............................................................................. 27 nusirat ojuolape gold, hope osayantin aifuwa board meeting and sustainability reporting of banks in nigeria .................................. 49 geeta singh, rishi dwesar board gender diversity, firm performance and firm risk: a literature survey ........... 69 adil zhubikenov kazakhstan and its investment development path ...................................................... 85 for authors ........................................................................................................................... 99 for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship 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part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. the detailed ethical principles are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https:// publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl date of submission: march 24, 2021; date of acceptance: may 2,2021. * contact information: dawittadesse9053@yahoo.com, gamby medical and business college and addis ababa university school of commerce, ethiopia and managing partner of lead plus consulting, ethiopia, phone: 251911109648; orcid id: https://orcid.org/0000-0001-5885-6539. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 2 tiruneh, d.t. (2021). empirical evidence of the suitability of ifrs for banking sector in sub-saharan african countries. copernican journal of finance & accounting, 10(2), 63–79. http://dx.doi. org/10.12775/cjfa.2021.008 dawit tadesse tiruneh* gamby medical and business college empirical evidence of the suitability of ifrs for banking sector in sub-saharan african countries keywords: ifrs, suitability, sub-saharan africa region, africa, ethiopia, ethiopian banking sector. j e l classification: g21, m10, m41, m42, m48, m49. abstract: the reason for this investigation was to survey the appropriateness of international financial reporting standards (ifrs) in sub-saharan african nations banking sector like ethiopia. the following research endeavors to acquire experiences into the benefits and detriments of ifrs execution in ethiopian banking sector depending on the view of banks financial directors, scholastics in accounting and external auditor. examination is insightful of online overview, which intends to clarify the appropriateness of ifrs as opposed to depict a population. along these lines, representativeness of the example to the population was not the objective of the examination; it endeavors rather to guarantee legitimacy of the information by applying purposive testing (oppenheim, 1992). in such manner an aggregate of 30 surveys were conveyed to banks financial supervisors, scholastics and external auditors who have rich information and involvement with ifrs execution in financial sector in ethiopia. of the 26 answers (87 percent), 26 finished polls were broke down. the outcomes recommend that ifrs execution is appropriate for the banking sector of ethiopia regardless of whether banks are causing extra significant expenses to carry dawit tadesse tiruneh64 out the standards. the selection of ifrs gives numerous benefits to the financial sector climate without logical inconsistency with ethiopian financial laws and corporate duty. the advantages that the financial sector in ethiopia will get from ifrs execution pertinently and dependably addresses the financial reports more than its execution cost.  introduction accounting data is the main wellspring of data for interior and outer clients (gordon, 2008; jermakowicz & gornik-tomaszewski, 2006; callao, jarne & laínez, 2007; rahman, lei & courtenay, 2014; houqe & monem, 2016; tahat, dunne, fifield & power, 2016; mohammadi & mardini, 2016; mardini & tahat, 2017). it gives subjective and quantitative information about an element and its financial circumstance that guides financial data clients in their dynamic (benjamin & stanga, 1977). to meet clients’ dynamic necessities, financial data should be applicable and dependable. the standard setting measure traces all the way back to 1973 with the international accounting standards committee (iasc, 1989) (christian & kohlmeyer iii, 2009). the iasc built up a bunch of standards that were perceived all through the world, however in 2001 with the formation of the international accounting standards board (iasb, 2010) the interaction sped up (christian & kohlmeyer iii, 2009). the global standard setting measure turned into a work to build up a bunch of basic norms on the grounds that the created countries understood the significance of equivalence, and straightforwardness for financial backers, controllers, enormous organizations and reviewing firms around the world (christian & kohlmeyer iii, 2009). in the course of recent many years, the financial and financial climate of ethiopia has changed essentially (adb, 2020). as the consequence of this financial development, the quantity of banks is filling in ethiopia. right now, it arrived at 18, of which 16 are private and 2 are state-claimed in 2017/18 (mesele, 2019). truth be told ethiopia has begun to utilize ifrs in financial revealing without precedent for 2002/03. the primary associations that utilized the term ifrs without precedent for their yearly report in ethiopia are government possessed elements like commercial bank of ethiopia, construction and business bank, ethiopian insurance corporation and ethiopian airline. right now there was no public or territorial law that make it necessary for organizations to embrace and carry out ifrs in ethiopia (pasricha & teferi, 2016). during this period the selection of ifrs in ethiopia has been a drowsy cycle. empirical evidence of the suitability of ifrs… 65 be that as it may, after the endorsement of the house of representatives, the ethiopian financial reporting proclamation was given with proclamation no. 847/2014 in the federal negarit gazette of the federal democratic republic of ethiopia dated dec 5, 2014, efforts have been put to improve the ethiopian financial detailing climate with regards to ifrs appropriation (yitayew, 2016). the authorization of a proclamation to provide for financial reporting (proclamation no. 847/2014) is the current improvement in the accounting, auditing and financial announcing history in ethiopia (ethiopian government, 2014). one thing that is clear is the implementation of ifrs is certainly not a simple assignment because of the way that few that difficulties that could be looked in the method of its execution. these difficulties become much aggravate in developing nations. non-industrial nations are defied by extra difficulties and hindrances in embracing and executing ifrs (zeghal & mhedhbi, 2006; elias, 2012; houqe & monem, 2016). tawiah (2019) ifrs appropriation in africa is delayed because of absence of institutional and expert limit. this isn’t extraordinary to ethiopia. as one of the quickest financial development country in sub-saharan africa, ethiopia addresses a potential climate with regards to which to research the appropriateness of ifrs in developing nations uniquely in financial sector. in line with this, the essential target of this paper is to evaluate whether financial data under ifrs is appropriate for clients’ requirements in financial sector especially for banking sector. this examination adds to and broadens the surviving writing, which has chief ly centered around evolved economies, by giving exact proof of the appropriateness of ifrs in financial sector from the viewpoint of inner clients (the executives) and outer gatherings (for example scholastics and external auditors). research methodology sampling the polls provided for the scholastics, external auditors and banks financial directors to acquire the essential information to discover observational proof of the reasonableness of ifrs for banking sector in ethiopia. the investigation is insightful overview, which means it is intended to clarify the reasonableness of ifrs as opposed to depict a population. subsequently, representativeness of dawit tadesse tiruneh66 the example to the population was not the objective of the investigation; the endeavor rather has been made to guarantee legitimacy of the information by applying purposive inspecting (oppenheim, 1992). this methodology is designed to catch the assessments of scholastics, external auditors and banks financial directors. to this end, the examination caught those scholastics, external auditors and banks’ financial directors who have rich information and involvement with ifrs execution in financial sector in ethiopia. the overview focused on three classes of respondents. the principal classification involved the financial supervisors/directors 10 commercial banks in ethiopia. presently it arrived at 18, of which 16 are private and 2 are statepossessed in 2017/18. more than 70% of the commercial banks from the overall industry are controlled by the government owned bank the ethiopian commercial bank (mesele, 2019). the financial head of the commercial banks in ethiopia was the target of this overview considering the enormous offer the bank has in the market and its suggestion for this investigation. what’s more, the respondents in this classification stand firm on critical footings liable for dealing with the organization’s financial matters and settling on expansive asset designation choices. as the second and third classes of respondents, the views of scholastics in accounting and auditing were acquired. these example targets were picked to acquire bits of knowledge into the investigation subject from the two experts and scholastics. the example size of 30 polls was sent through email utilizing on the web overview. among the three classifications: 10 surveys to banks financial directors covering the 10 principal commercial banks in ethiopia; 10 polls to scholastics, including accounting employees from addis ababa university , addis ababa college business school , civil service university ; and 10 surveys to external auditors (seniors) covering the bdo – ethiopia, grant thornton ethiopia , pricewaterhousecoopers (pwc), and hst-ethiopia. these three gatherings were picked on the grounds that they are the principle clients of ifrs and were accepted to have the most experience and adequate information concerning ifrs (russell, 2015; mardini, crawford & power, 2015; tahat et al., 2016). the reaction rate was roughly 83% (26 members) among all classes. a few members didn’t react by any means, while different overviews were not completely finished. consequently, the last example was 10 financial supervisors, 9 scholastics in accounting and 7 external auditors; the external auditors were eventually credited 10 overviews to keep away from any superf luous empirical evidence of the suitability of ifrs… 67 huge contrasts across the three classes. the last example measure is summed up in table. the survey comprised of three sectors: the primary segment looked for segment data about the example respondents, the subsequent segment comprised of 12 inquiries with respect to the upsides of ifrs appropriation by ethiopian banks and the third segment comprised of 7 inquiries in regards to the obstructions and impediments of ifrs selection. each question on the benefits or weaknesses brought about an end. for example, if the respondent couldn’t help contradicting a benefit explanation, the benefit was viewed as a hindrance from the example respondent’s viewpoint and the other way around. a five-point likert scale was utilized in which 5 addressed “unequivocally concur” and 1 designated “firmly oppose this idea.” to acquire further remarks from the respondents, space was accommodated to discretionary remarks on the subject. the analysts led a pilot investigation of three financial directors, three scholastics and three external auditors to pre-test whether the study instrument was clear and gotten the data looked for and to upgrade the poll’s design and legitimacy. the outcomes were dissected by distinct measurements, anova tests, connection investigation (pearson) and the kruskal–wallis test. results and discussion demographic analysis of participants the main objective of the study was to assess the suitability of ifrs for banking sector in sub-saharan african countries such as ethiopia. this research explores the advantages and disadvantages of ifrs implementation in banking sector in ethiopia based on the perceptions of banks financial directors, academics in accounting and external auditors about the suitability of ifrs in banking sector in ethiopia. dawit tadesse tiruneh68 table 1. final sample process: notes: fm, financial managers; aa, academics in accounting; ea, external auditors sampling/categories fm aa ea initial sample 10 10 10 responses 10 9 7 response rate (%) 100 90 70 incomplete responses – 1 3 avoid statistical differences – – – final sample 10 9 7 s o u r c e : author’s construction. these insights were gotten through online poll review with 10 members for every gathering. the current subsection sums up the segment data of the members utilizing certain expressive measurements to give bits of knowledge into the members’ experiences. as demonstrated in table 2, banks financial directors, scholastics and external auditors partook as respondents. every one of the respondents of banks were financial directors. table 2 sums up the position (title) of the accounting scholastics who took an interest in the examination. the scholarly respondents were employees of ababa addis university, addis ababa university school of commerce and ethiopian civil service university. a dominant part of the scholarly respondents were senior speakers (66. percent), trailed by assistance professors (22.2 percent) and talks (10.0 percent). the work titles of the members in the third gathering (external auditors) were group pioneers, which included bdo – ethiopia, grant thornton ethiopia, pricewaterhousecoopers (pwc), and hst-ethiopia evaluators. table 3 shows that a majority of respondents (banks were financial directors) were 25-35 years of age and 35-45 years of age (30 and 60 percent individually), while a minority were more established than 45 years (10 percent). table 3 shows the long periods of involvement for the respondents across the three gatherings. the biggest gathering of respondents had 11 to 20 years of involvement (on normal 62%), trailed by over 20 years (on normal 29.7 .3%). the poll review likewise incorporated certain segment data, for example, the gender orientation which could be discovered in the study. empirical evidence of the suitability of ifrs… 69 table 2. industry membership, the academic title and job title of respondents job title no. % fm finance director 10 100.0% total 10 100.0% aa assistant professor 2 22.2% lecturer 1 11.1% senior lecturer 6 66.7% total 9 100.0% ea team leader 7 100.0% total 7 100.0% s o u r c e : author’s construction. table 3. age and years of experience of respondents fm aa ea age no. % no. % no. % 20-25 1 14.3% 25-30 1 10.0% 30-35 2 20.0% 1 11.1% 1 14.3% 35-40 4 40.0% 4 44.4% 40-45 2 20.0% 3 33.3% 4 57.1% above 45 1 10.0% 1 11.1% 1 14.3% total 10 100.0% 9 100.0% 7 100.0% years of experience fm aa ea experience (in years): no. % no. % no. % 5-10 1 10.0% 1 14.3% 11-20 8 80.0% 7 77.8% 2 28.6% above 20 1 10.0% 2 22.2% 4 57.1% total 10 100.0% 9 100.0% 7 100.0% s o u r c e : author’s construction. dawit tadesse tiruneh70 the demographic information and its analysis are useful to this study on many levels. first, the information signals that the respondents were capable to answer the questionnaire in a professional manner. specifically, a majority of the respondents were well experienced in their field, were young and varied in terms of background. second, the banks financial manager respondents covered the majority of commercial banks in ethiopia; the academics in accounting represented all academic rankings, and the external auditor participants represented all of the big auditing firms in ethiopia including the big four. ifrs suitability this subsection examines about the proof of ifrs appropriateness for banking sector in ethiopia depending on the view of banks financial directors, scholastics in the accounting field and external auditors. table 4 represents the members’ perspectives on the upsides of ifrs for banking sector in ethiopian business climate. the greater part of the respondents concurred that the selection of ifrs is helpful for banking sector from various perspectives. in particular, most members across the three gatherings concurred that ifrs is useful to expand banks investors’ trust in financial revealing (mean of 4.444 and 4.714, individually). also, the respondents considered ifrs a supportive arrangement of norms that creates and upgrades the certainty of new financial backers to purchase the bank’s offers as consequence of the financial announcing (4.571), improves coordinate administration (mean of 4.571), improves the nature of financial revealing and divulgences (mean of 4.857), tackles the issues of readiness of financial detailing in banks for upgrade (mean of 4.143), builds the degree of financial announcing and disclosures(mean of 5) and expands the importance of financial answering to clients of budget reports (4.571). nonetheless, as per the kruskal–wallis test, the reactions to certain assertions varied altogether among the three gatherings at a p estimation of >0.01, like explanations 1 and 5 (tables 5). nonetheless, the reactions to different articulations varied at an important level of under 10% or 5%. all gatherings showed the union to upgrade corporate financial execution and position and improve the nature of financial announcing and revelations (methods for 4.92 and 4.85, individually), proposing that ifrs gigantically affects the improvement of corporate financial execution and position and improves the nature of financial revealing and divulgences in financial sector in ethiopia. empirical evidence of the suitability of ifrs… 71 table 4. descriptive statistics of advantages of ifrs fm aa ea total sign. 1.increases banks shareholders’ confidence in financial reporting 4.3 4.444 4.714 4.5 0.483 0.527 0.488 0.499 2.increases the confidence of new investors to buy the bank’s shares as the result of the financial reporting 4.4 4 4.571 4.3 0.516 0.707 0.787 1.005 3.leads to more deposit flow into the bank 3.1 3.444 3.714 3.4 0.876 0.527 0.756 0.72 4.increases the qe efficiency 3.444 4 3.857 3.8 0.726 0.756 0.69 0.724 5.enhances cooperate governance 4.7 4.444 4.571 4.6 0.483 0.527 0.535 0.773 6.enhances the implementation of ethiopian national bank rules and regulations 3.2 3.333 3.857 3.5 1.135 1.118 1.069 1.107 7.solve the problems of preparation of financial reporting in banks 3.8 4 4.143 3.98 0.919 0.5 0.9 0.773 8.increases the level of financial reporting and disclosures 5 4.778 5 4.92 0 0.441 0 0.441 9.improves the quality of financial reporting and disclosures 4.9 4.778 4.857 4.85 0.316 0.441 0.378 0.378 10.enhances corporate financial performance and position 3.9 3.778 4.714 4.13 * 1.101 0.833 0.488 0.807 11.reduces preparation cost of financial reporting 1.5 2.333 2.429 2.09 ** 0.527 1 0.976 0.834 12.increases the relevance of financial reporting to users of financial statements 4.7 4.556 4.571 4.61 dawit tadesse tiruneh72 fm aa ea total sign. 0.483 1.014 0.535 0.677 sign. = statistical difference among the three groups (*at 10%, ** at 5% and *** at 1%) using the kruskal–wallis test the x2 test shows that the proportions in each category are not different across the groups (x2 = 1.209, p-value <0.10) s o u r c e : author’s construction. table 5. descriptive statistics of disadvantages of ifrs fm aa ea total sign. 1. the convergence to ifrs may lead to a contradiction with ethiopian banking laws and corporate responsibility 4 2.556 2.571 3.04 *** 0.816 0.882 1.272 0.99 2. the financial information prepared under ifrs may lead to misunderstanding by users of financial statements 3.4 2.444 2.286 2.71 * 1.174 1.236 0.951 1.12 3. ifrs are complicated and difficult to understand 3.3 2.667 2.571 2.85 1.16 0.866 1.512 1.179 4. a lack of adequate knowledge and experience may lead to ifrs being used wrongly 4.3 3.778 4.286 4.12 0.675 0.972 0.951 0.866 5. academic institutes have not paid attention to ifrs in their accounting programmes 4.6 2.667 4.429 3.9 *** 0.516 1.414 0.976 0.969 6. the ethiopian business environment and banking system is not ready for convergence with ifrs 2.6 2.333 2.714 2.55 0.516 0.866 1.704 1.03 7. the implementation of ifrs is very costly 4.5 3.444 3.286 3.74 0.85 0.726 1.704 1.093 ** table 4. descriptive… empirical evidence of the suitability of ifrs… 73 fm aa ea total sign. sign. = statistical difference among the three groups (*at 10%, ** at 5% and *** at 1%) using the kruskal–wallis test the x2 test shows that the proportions in each category are different across the fm and aa groups with the ea group (x2 = 18.331, p-value <0.01) s o u r c e : author’s construction. then again, most members demonstrated that ifrs didn’t diminish the readiness expenses of fiscal summaries (mean of 2.09); rather they found the execution of ifrs by one way or another exorbitant (mean of 3.74, table 5). this finding recommends that the execution and reception of ifrs was exorbitant for ethiopian financial sector. this finding negated with the ifrs advocates contention that ifrs decreases data expenses to an economy, especially as capital streams and exchange become more globalized (leuz, 2003; barth, 2008). regarding the subjective qualities of financial detailing, the members accepted that ifrs gives more pertinent and devoted portrayals of fiscal reports to clients. table 5 shows the respondents’ view of the weaknesses of ifrs for the ethiopian financial sector. obviously the respondents considered the execution of ifrs in ethiopian financial sector to be in some way or another tricky. for example the dominant part of the respondents tracked down that an absence of satisfactory information and experience may prompt ifrs to be utilized wrongly in financial sector in ethiopia (mean of 4.12). anyway most of the respondents tracked down that the assembly to ifrs may not prompt a logical inconsistency with ethiopian financial laws and corporate obligation (mean of 3.04). also, most of the respondents demonstrated that financial detailing under ifrs didn’t prompt misconception by the clients of budget reports (mean of 2.71) and that ifrs was not hard to comprehend (mean of 2.85). these outcomes recommend that the financial data detailed under ifrs is justifiable. ifrs gives a globalized set of accounting standards that urge the banking sector to give dependable and solid financial data. albeit the respondents considered ifrs reasonable, they noticed that information and experience are needed to stay away from inaccurate utilization of budget summaries (mean of 4.12). consequently, in spite of the fact that ifrs is reasonable, important, and steadfastly addressing budget reports, the execution and materialness of table 5. descriptive… dawit tadesse tiruneh74 ifrs expect information to guarantee that these advantages are given to the business climate all around the world, sub-saharan africa and to the ethiopian financial business climate specifically. scholastic foundations in ethiopia need to give adequate ifrs information to their understudies and the ethiopian people group. most of members in this examination disagreed that scholastic foundations have focused on ifrs in their accounting projects to deliver qualified and able labor with respect to ifrs to ethiopian work market (mean of 3.9). so they have zeroed in on ifrs in their projects, which have apparently given leaders and clients of budget reports with satisfactory information to comprehend ifrs. to look at the most powerful benefits/inconveniences of ifrs reasonableness across the three gatherings, an anova test was performed for every assertion. the outcomes are summed up in table 6. explanations 1, 2, 5, 8, 9, 10 and 12 (of the benefits proclamations) varied fundamentally among the three gatherings. alternately, just articulations 4, 5 and 7 (of the hindrances explanations) varied essentially among the three gatherings. for instance, all concurred that participate administration, level of financial announcing, nature of financial detailing and revelations and significance of financial answering to clients of fiscal reports exposures were the main determinants of the reasonableness of embracing ifrs in sub-saharan africa nations banking sector by and large and ethiopia specifically. supporting the consequences of the anova examination, the kruskal–wallis test uncovered that the impression of the three gatherings varied fundamentally for benefits proclamations 1, 2, 5, 8, 9, 10 and 12 and weaknesses articulation 4 (tables 4 and 5). table 6. anova a test of statement analysis across the three groups 6.1 summary: advantages count sum average variance 1. increases banks shareholders’ confidence in financial reporting 26 116 4.46153846 0.25846154 2. increases the confident of new investors to buy the bank’s shares as the result of the financial reporting 26 112 4.30769231 0.46153846 3. leads to more deposit flow into the bank 26 88 3.38461538 0.56615385 4. increases the qe efficiency 24 90 3.75 0.54347826 empirical evidence of the suitability of ifrs… 75 6.1 summary: advantages count sum average variance 5. enhances cooperate governance 26 119 4.57692308 0.25384615 6. enhances the implementation of ethiopian national bank rules and regulations 26 89 3.42307692 1.21384615 7. solve the problems of preparation of financial reporting in banks 26 103 3.96153846 0.59846154 8. increases the level of financial reporting and disclosures 26 128 4.92307692 0.07384615 9. improves the quality of financial reporting and disclosures 26 126 4.84615385 0.13538462 10. enhances corporate financial performance and position 26 106 4.07692308 0.87384615 11. reduces preparation cost of financial reporting 26 53 2.03846154 0.83846154 12. increases the relevance of financial reporting to users of financial statements 26 120 4.61538462 0.48615385 anova: advantages source of variation ss df ms f p-value f crit between groups 187.177419 11 17.016129 32.4013192 1.0369e-44 1.59232479 within groups 156.5 298 0.52516779 total 343.677419 309 s o u r c e : author’s construction. 6.2 summary: disadvantages groups count sum average variance 1. the convergence to ifrs may lead to a contradiction with ethiopian banking laws and corporate responsibility 26 81 3.11538462 1.38615385 2. the financial information prepared under ifrs may lead to misunderstood by users of financial statements 26 72 2.76923077 1.46461538 3. ifrs are complicated and difficult to understand 26 75 2.88461538 1.38615385 table 6. anova… dawit tadesse tiruneh76 6.2 summary: disadvantages groups count sum average variance 4. a lack of adequate knowledge and experience may lead to ifrs being used wrongly 26 107 4.11538462 0.74615385 5. academic institutes have not paid attention to ifrs in their accounting programmes 26 101 3.88461538 1.78615385 6. the ethiopian business environment and banking system is not ready for convergence with ifrs 26 66 2.53846154 1.05846154 7. the implementation of ifrs is very costly 26 99 3.80769231 1.44153846 anova: disadvantages source of variation ss df ms f p-value f crit between groups 60.6483516 6 10.1080586 7.63347165 2.7208e-07 1.80806249 within groups 231.730769 175 1.32417582 total 292.379121 181 s o u r c e : author’s construction. the distinctions among the examination bunches in their conclusions about a portion of the exploration articulations, especially the benefits of ifrs, may mirror the work idea of each gathering and its connection to the use of ifrs. external auditors are in contact with banks; financial supervisors are the gathering answerable for ifrs application and just address the framework in their organization. scholastics are not by and by and counsel as opposed to execute. the last assertion of the overview was an open-finished inquiry posing to the respondents to alternatively give extra remarks about ifrs appropriateness. the members in the external auditors bunch added no remarks, for example this inquiry stayed clear. in any case, various accounting scholastics and banks financial directors added extraordinary bits of knowledge. one bank financial director contended that “despite the fact that cost of change is high interestingly, if universities are prepared towards ifrs and graduates have both specialized and hypothetical information, it will be all the more simple,” an educator in accounting added a remark about the administrative body ifrs in ethiopia, table 6. anova… empirical evidence of the suitability of ifrs… 77 expressing that “ethiopian accounting and auditing board (aabe) has limit issue and isn’t satisfactorily set up to guide and direct the execution of ifrs. moreover, there is absence of mindfulness on the execution interaction.” these remarks recommend that to carry out ifrs adequately in various businesses in ethiopia especially in ethiopian banks, it needs joined endeavors to improve more reasonable eco framework in ethiopia just as the sector. these remarks are steady with the measurable aftereffects of this investigation: execution and relevance of ifrs expect information to get a large portion of its advantages in the business climate all around the world and in the ethiopia banking business climate specifically. hence, the open ended answers affirmed the discoveries from the shut finished answers.  conclusions this careful investigation upholds the appropriateness of ifrs for banking sector in ethiopia. ifrs gives benefits to the financial sector in ethiopia, standards regardless of whether it makes banks causing extra significant expenses in the reception cycle. also, this investigation proposes that ifrs combination places without logical inconsistency with ethiopian financial laws and corporate duty. in addition, in light of the respondents’ perspectives, ifrs is reasonable to clients and pertinently and loyally addresses the fiscal reports of ethiopian banks; notwithstanding, the execution and materialness of ifrs expect information to acquire the greater part of its advantages and benefits. the respondents showed that scholastic establishments have not focused on ifrs in their accounting programs and not given this information to the clients of the budget reports in ethiopia. by and large, ifrs has all the earmarks of being appropriate for sub-saharan financial sector all in all and ethiopian financial sector specifically. this investigation has critical ramifications for accounting controllers in ethiopia and for banking sector specifically by giving experiences into the appropriateness of ifrs and its effect on degree of financial revealing and exposures, nature of financial detailing and revelations and corporate administration. moreover, the aftereffects of this paper can help different controllers in the district create accounting standards that adjust their laws to the significant elements inf luencing the reasonableness of ifrs. certain constraints of the current investigation should be recognized. in the first place, the ethiopian finandawit tadesse tiruneh78 cial sector association culture factor was not tended to in this investigation. second, this exploration utilized a poll overview to analyze the appropriateness of ifrs for banking sector in ethiopia, and there is a danger that a portion of the assertions were not perceived enough by the respondents. be that as it may, such mistaken assumptions were limited by giving clear and succinct explanations and, when fundamental, explaining the study to certain respondents via telephone.  references africa development bank (adb) (2020). african economic outlook 2020, https://www. afdb.org/en/knowledge/publications/african-economic-outlook. barth, m.e. 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(2016). financial instruments disclosure: the case of qatari listed banks. afro-asian j. of finance and accounting, 6(2), 160-182. oppenheim, a.n. (1992). questionnaire, design, interviewing and attitude measurement. london: pinter pub ltd. pasricha, j.s., & teferi, d.a. (2016). ifrs adoption progress in ethiopia. research journal of finance and accounting, 7(1), 55-65. rahman, a., lei, c., & courtenay, s. (2014). the effect of ifrs adoption conditional upon the level of pre-adoption divergence. the international journal of accounting, 49(2), 183-189. russell, m. (2015). continuous disclosure and information asymmetry. accounting research journal, 28(2), 195-224. tahat, y., dunne, t., fifield, s., & power, d. (2016). the impact of ifrs 7on the significance of financial instruments disclosure: evidence from jordan. accounting research journal, 29(3), 241-273. tawiah, v. (2019). the state of ifrs in africa. journal of financial reporting and accounting, 17(4), 635-649. http://dx.doi.org/10.1108/jfr a-08-2018-0067. yitayew, m. (2016). ifrs adoption in ethiopia: a critical analysis of the process, issues and implications. a thesis submitted to the school of graduate studies of addis ababa university in partial fulfillment of the requirements for the degree of master of science in accounting and finance. zeghal, d., & mhedhbi, k. (2006), an analysis of the factors affecting the adoption of international accounting standards by developing countries. the international journal of accounting, 41(4), 373-386. _hlk76415144 _hlk76415155 _hlk75118898 _hlk75118991 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 1 date of submission: february 27, 2014; date of acceptance: march 23, 2014. * contact information: moszyn@umk.pl, the department of economics, marcw@ doktorant.umk.pl, the department of finance management, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland. moszyński m., więckowska m. (2014). evolution of ecological financial market from the perspective of institutional economics copernican journal of finance & accounting, 3(1), 121–133. http:// dx.doi.org/10.12775/cjfa.2014.010 michał moszyński, marcelina więckowska* nicolaus copernicus university evolution of ecological financial market from the perspective of institutional economics keywords: ecological financial market, institutional economics, formal institutions, informal institutions. j e l classification: b52, d02, e02. abstract: in the market economy the “actors” act according to rules of the game – the institutions – which impose certain restrictions on their behavior, making it more predictable for the other participants, reduce risk and uncertainty, and furthermore lowers transaction costs, etc. institutions can be broadly divided into formal (coming from the state) and informal (derived from market participants and their interactions). market participants are trying to creatively interpret the rules for their own use. the financial sector is regarded as being particularly creative in its approach to the formal rules due to its f lexibility, speed and innovation. in this context it is interesting to consider a growing interest of the participants of the commercial financial market in the idea of environmental protection from the perspective of institutional economics. this constitutes the aim of the study, which main concern is to answer the following questions: how can the ecological behavior of the financial market players be attributed to the new institutions? what are the driving forces behind this phenomenon? what sanctions are imposed for breaking informal rules? how do the formal and informal institutions interact? finally, how could the state inf luence and reinforce such behavior? michał moszyński, marcelina więckowska122 ewolucja ekologicznego rynku finansowego z perspektywy ekonomii instytucjonalnej słowa kluczowe: ekologiczny rynek finansowy, ekonomia instytucjonalna, instytucje formalne, instytucje nieformalne. klasyfikacja j e l: b52, d02, e02. abstrakt: w gospodarce rynkowej aktorzy działają według reguł gry – instytucji, które nakładają na ich zachowania pewne ograniczenia, sprawiają, że staje się ono bardziej przewidywalne dla innych uczestników rynku, zmniejszają ryzyko i niepewność, redukują koszty transakcyjne itp. instytucje można najogólniej podzielić na formalne (pochodzące od państwa i jego organów) i nieformalne (pochodzące od uczestników rynku i ich interakcji). uczestnicy rynku starają się w twórczy sposób interpretować reguły, pragnąc wykorzystać je na swój użytek. sektor finansowy postrzegany jest jako szczególnie twórczo podchodzący do reguł formalnych z uwagi na jego elastyczność, szybkość działania i innowacyjność. w tym kontekście za interesujące należy uznać rozważenie rosnącego zainteresowania komercyjnych uczestników rynku finansowego ochroną środowiska z perspektywy ekonomii instytucjonalnej. stanowi to cel badawczy opracowania, zmierzającego do odpowiedzi na następujące pytania badawcze: na ile ekologiczne zachowanie w aspekcie ochrony środowiska może być interpretowane jako nowa instytucja? jakie jest podłoże powstawania takich instytucji? jakie sankcje grożą za nieprzestrzeganie nowych nieformalnych reguł ekologicznych? jakie relacje zachodzą pomiędzy regułami formalnymi a nieformalnymi? jak państwo mogłoby sterować i wzmacniać tego typu zachowania? translated by michał moszyński  introduction throughout the financial market certain trends with a strong ecological dimension can be observed. market participants increasingly take into account in their actions aspects of environmental protection, expose efforts made to reduce environmental costs in their strategies, offer new products, finance environmental investments and conduct environmental accounting. these phenomena are complex and cover the entire spectrum of activities and behaviours at the micro level (enterprise and industry) and the macro level as well. figuratively speaking, one can specify it as an ecological plane, which progressively penetrates more and more the whole financial market. there are many factors contributing to the expansion of “green” financial market. we consider the ideas of corporate social responsibility (csr) and socially responsible investment (sri) which permeate through successive activities areas and market segments. although some attempts at designing and con evolution of ecological financial market… 123 trolling these ideas on the part of the state can be perceived, these opinions come mainly “from below” and are shaped by actors themselves. the philosophies of csr and sri, by definition, it is to do something more than simply obeying the bureaucratic regulations. they accelerate positive changes in the financial market not only by stimulating “responsible” investment, but also by their inf luence on the entire functioning of the financial markets architecture. our study concentrates on institutional explanations of these trends. there are reasons for considering, that this perspective covers crucial cognitive problems of ecological financial market development. building on the achievements of an institutional approach in economic science, we can look for answers to several questions related to current and future expansion of green financial market. first of all, it seemingly contradicts the logic of economic calculus of rational agents striving only for maximum profits. we consider why such concepts have their right to exist and how the players take voluntarily new environmental responsibilities, often exceeding the formal requirements imposed by law. if ecological behaviour could be interpreted as a new informal rule of the game, one can ask about the mechanism of their formation and sanctions for non-compliance. another area of research is the relationship between formal and informal rules and an attempt at projecting the further development of the market assuming an active state policy that would shape and reinforce positive actions of players in the market. even at this early stage the hypothesis can be proposed that the future evolution of the ecological financial market depends largely on the appropriate identification of new informal rules and their skilful incorporation into a system of formal institutions by the state. the research methodology and the course of the research process the study is mostly of a theoretical character. the phenomenon of the evolution of green financial market is analysed from the perspective of institutional economics. in the theoretical part, based on literature studies, the definition and typology of the institutions are presented, along with and the mechanism of their formation as well. then an attempt is undertaken to explain the environment-friendly behaviour of the financial market participants and the development of new products associated with the so-called green finance. the empirical part using descriptive analysis illustrates the theoretical results with practical examples and data from the financial markets. the study ends with conclusions. michał moszyński, marcelina więckowska124 formal and informal rules as a medium for environmental value the social life becomes more and more complex. no one can understand the intricate nexus of interactions of actors in the anonymized society. that is why we need institutions, described by north (1990, 3) as “rules of the game … or, more formally, are the humanly devised constraints that shape human interaction. as a consequence they structure incentives in human exchange, whether political, social, or economic. institutional change shapes the way societies evolve through time and hence is the key to understanding historical change.” the rules reduce the complexity of mutual relations and help to foresee one’s behaviour. such devices constitute prerequisite condition for carrying out transactions on the micro-level and for the functioning of the market system as a whole. the economists stress the crucial role of institutions (rules of the game) in reducing transaction costs and uncertainty and in building up trust. however, the great part of social and economic life remains untouched by formal rules, but continues to be under the impact of the broad defined informal institutions such as norms, attitudes, taboos, conventions, rules of conduct and customs. many formal institutions like rules of law have their roots in informal arrangements which have formalized over time. in such cases the rule is rather that of being discovered or invented, but not deliberately created. citing the 18th century scottish philosopher a. ferguson one could call it “the product of human action but not of human design”. the distinction between formal and informal institutions, which is not always clear, is the most important division that has to be applied in further analysis. while formal rules are enforced by official entities, informal institutions are largely self-enforcing. another useful categorisation proposed by helmke and levitzky (2004) is based on the relationships between formal and informal institutions. when both produce similar results in the effective way (if they really “matter”), then the informal institutions are called complementary. in the vast amount of literature of the subject, some mechanisms concerning the emergence of rules can be traced. hayek (1973) explained it with an evolutionary process of discovering the best solutions for coping with the complexity problems and fragmentation of knowledge in the society. as hodgson (2006) states, institutions both constrain and enable behaviour. the existence of rules implies constrains. however, such a constraint can open up possibilities: it may enable choices and actions that otherwise would not exist. this perspective allows an interpretation of institutional “winners” evolution of ecological financial market… 125 and “losers”. some actors may drive institutional change, contribute to set up new rules to win access to new market niches and gain market advantage. the institutions can be considered as distributional instruments loaded with power implications. as the result the reinforced regulations constitute new market segments, and increases demand for new products and affecting wealth allocation. finally, the state and its agencies, always eagerly extending their power by legislation, actively respond to such developments. there is a “demand for regulation” which has to be satisfied. rules are made of ideas, but only codified ideas can be regarded as institutions. the process of the formalization of the sustainable investment rules is still in progress. presumably the origins of the rules stem from ideas of sustainable development and growing environmental concerns in the public. the wide set of rules was later invented by financial market participants in cooperation with the non-government organizations. their rapidly extending scope enables a prediction of proceeding formalization of this subject by the state in the future. aware of that actors, could anticipate and quickly react to the new market conditions being better prepared and familiar with new regulations. as experience with the smoke-free legislation illustrates, the process of rule evolving becomes self-enforcing in a manner of well-known phenomenon of a self-fulfilling prophecy and a snow-ball effect. the expansion of informal rules is depicted from various points of view (schema 1). for the purpose of this article, we assume that, responsible investments are investments in responsible businesses. esg (environment, social, governance) are areas that refer to both investments and businesses. esg are the extents of sustainability reporting and provides information and measures, which are supplements to traditional financial criteria in selecting investment. csr and sri are concepts which penetrate contemporary finance and the ones among many determinants of development ecological financial market. the existence and practice of social (including environmental) concepts may constitute some kind of esg filter for capital movement in investment process. michał moszyński, marcelina więckowska126 schema 1. the research area of the inf luence of formal and informal institutions on the ecological financial market development rules are made of ideas, but only codified ideas can be regarded as institutions. the process of the formalization of the sustainable investment rules is still in progress. presumably the origins of the rules stem from ideas of sustainable development and growing environmental concerns in the public. the wide set of rules was later invented by financial market participants in cooperation with the non-government organizations. their rapidly extending scope enables a prediction of proceeding formalization of this subject by the state in the future. aware of that actors, could anticipate and quickly react to the new market conditions being better prepared and familiar with new regulations. as experience with the smoke-free legislation illustrates, the process of rule evolving becomes self-enforcing in a manner of well-known phenomenon of a self-fulfilling prophecy and a snow-ball effect. schema 1. the research area of the influence of formal and informal institutions on the ecological financial market development sources: authors’ own elaborations. the expansion of informal rules is depicted from various points of view (schema 1). for the purpose of this article, we assume that, responsible investments are investments in responsible businesses. esg (environment, social, governance) are areas that refer to both investments and businesses. esg are the extents of sustainability reporting and provides information and measures, which are supplements to traditional financial criteria in selecting investment. csr and sri are concepts which penetrate contemporary finance and the financing pro-ecological investment and initiatives financial institutions esg reporting ecological financial instruments (e.g. ecological securities) s o u r c e s : authors’ own elaborations. csr in the context of environmental protection – interaction of rules implementation the concept of corporate social responsibility may be an impetus to improve eco-efficiency, introduction of eco-innovations or building green image. however dissemination of the idea of csr generates both opportunities and risk. the need to comply with environmental regulatory obligations is indisputable, while the formation and interaction of informal rules in this context is still an unexamined phenomenon. in an era of increasing ecological awareness and changing consumer preferences, the main track of interaction of informal rules occurs between corporations and society (including stakeholders). but not only – in this game the contest also takes place also between particular corporations (mostly in terms of building competitive advantage). evolution of ecological financial market… 127 schema 2. sanctions for non-compliance in the environmental protection area imposed on financial market participants ones among many determinants of development ecological financial market. the existence and practice of social (including environmental) concepts may constitute some kind of esg filter for capital movement in investment process. csr in the context of environmental protection – interaction of rules implementation the concept of corporate social responsibility may be an impetus to improve eco-efficiency, introduction of eco-innovations or building green image. however dissemination of the idea of csr generates both opportunities and risk. the need to comply with environmental regulatory obligations is indisputable, while the formation and interaction of informal rules in this context is still an unexamined phenomenon. in an era of increasing ecological awareness and changing consumer preferences, the main track of interaction of informal rules occurs between corporations and society (including stakeholders). but not only – in this game the contest also takes place also between particular corporations (mostly in terms of building competitive advantage). schema 2. sanctions for non-compliance in the environmental protection area imposed on financial market participants ( sources: authors’ own elaborations. the existence of rules entails inevitability to adapt them and bares a various range of sanctions for non-compliance (schema 2). analogically to categorise the institutions mentioned above, they can be divided into formal and informal. the first group consists of penalties imposed by the state or its agencies on the basis of the law. the much more fassanctions formal informal society expectations, including stakeholders regulations increase cost of capital and operating cost decline in demand (revenues/profits) other legal sanctions loss of competitive advantage loss of green image financial penalties s o u r c e s : authors’ own elaborations. the existence of rules entails inevitability to adapt them and bares a various range of sanctions for non-compliance (schema 2). analogically to categorise the institutions mentioned above, they can be divided into formal and informal. the first group consists of penalties imposed by the state or its agencies on the basis of the law. the much more fascinating set of restrictions make up informal sanctions coming from the mechanism of obligation, or simply because following the rules is in the best interests of individuals who may find themselves in a “nash equilibrium” where everyone is better off by from following the trend. the pressure from the outside is put by stakeholders and imposed spontaneously by market forces. their impact, however, can be tremendous and preventive. the most extreme examples of environmental sanction relate to the result of ecological disaster. a clear illustration of this happened in the gulf of mexico in 2010, following the explosion of oil rig (owned by bp)1. 1 the disaster caused decline in stock prices by half. furthermore the bp set up 20 billion usd fund to pay all legitimate claims for compensation. part of the expenses concerned attempts to restore the environment. oil spill result in more stringent regulation of oil and gas activities in the us and elsewhere, particularly relating to environmental (bp annual report, 2010). michał moszyński, marcelina więckowska128 furthermore, many ecological offences are recognized and publicized by the ecological lobby. pge group and the cases of power stations in opole in 2012 and bełchatów in 2013 are the best examples. an interesting tactic of ecologist is to try and to inf luence the investors decision making (case of initial public offering ze pak)2. but for now, shareholder activism in polish capital market in the field of environmental protection is practically invisible. it does not mean it would change in the future as the investors’ awareness will spread. how does csr look like in the practice of financial institutions? the financial sector (analogous to security issuers in other sectors) is not free from assessment. an international trend indicates, that the reduction of paper usage and occasional philanthropic gestures may be insufficient. as the reporting of csr policy gradually becomes wider industry practice (see subsection 4), transparency regarding the environmental responsibility is still selective (mostly information concerning carbon footprints or energy self-sufficiency); whereas essential in banking, activities should be verifications of environmental standards in financing undertakings. society and stakeholders want to know, if funded business do not damage the environment. pressure groups are finally beginning to reveal some information in this aspect. report dirty profits (facing finance, 2011), for instance, disclosures financial institutions which support business activities harming the environment. there is additional evidence, that in the future to build reputations, the financial sector disclosure will be even deeper, more accurate and more comprehensive and the assessment of environmental risk will become more important. towards the formalization of sustainable investment rules the socially responsible investment (sri) is “the other side of the coin” in the process of ecological capital f low. the roots of the sri concept are searched even in ancient time in religious teachings and injunction. religious values (especially in islam – for shariah-compliant rules, but also in christianity and judaism) require using money in ethical way and prohibiting making an investment in specific fields (urban, 2011). sustainable investment market in its current form was born in the united states and then in europe in 1920s. (tsukushi, 2003). initially implementation of the rsi ideas took place mostly by applying 2 ecologists has informed investors and analysts that the ze pak prospectus does not take into account all risk factors, which the company charges (parkiet, 20.12.2012). evolution of ecological financial market… 129 negative screening criteria in investment decision. nowadays negative screens may refer to controversial regimes such as sudan and iran, certain activities such as production of weapon or selected companies that for example harm the environment. ecological investments also should be connected with investments in green industries or ecological leaders from other sectors (dziawgo, 1997; gsia, 2013). table 1 contains empirical evidence of presence and importance of the sri idea. table 1. size and structure the global sri assets by region in 2012 region size the global sri assets (in billion usd) structure the global sri asset (in %) europe 8 758 64.5 united states 3 740 27.6 canada 589 4.3 africa 229 1.7 australia/nz 178 1.3 asia (excl.-japan) 64 0.5 japan 10 0.1 total 13 568 100.0 s o u r c e s : gsia 2013. the interest in the subject of responsible investment is extraordinary and constantly gaining in importance. institutional investors create individual sri policy on their own or implement rules developed by international initiatives such as principles for responsible investment (pri, supported by the united nations). since 2006 the pri rules have been implemented by 1245 signatories (currently representing assets worth 34 trillion usd). another interesting example is the unep fi (united nations environment programme finance initiative) that offer the best practice in the field of integration of environmental and social considerations into all aspects of operations (including investment and trading activities). moreover, investors bring together and create groups to represent their interests in the process of investing in climate change solutions. michał moszyński, marcelina więckowska130 this kind of organizations were formed almost in every parts of the world (for example incr, iigcc, igcc, aigcc)3. and finally, the highest degree of formalization regarding ecological and ethical investments concerns the legally sanctioned principles. in some countries (e.g. norway, sweden, new zealand) the institutional investors such as sovereign wealth funds and pension funds are obliged by law to consider esg factors in their decision making. in turn, the european commission is considering introducing a set of that would obligate investment funds and financial institutions to inform their clients about “any ethical or responsible investment criteria they apply or any standards and codes to which they adhere” (com, 2011). esg reporting – from voluntary practice to necessary obligations it is required to have a smooth conduit for information between sustainable business, and sustainable investment financing activities. transparency regarding the business activity and an increasing need for disclosure, also the non-financial factor to comprehensively assess the investment risk and compatibility with declared investment policy. in other words, in order to enable capital supplier to screening for esg rules, the reporting within these areas is needed4. sustainability reporting is another global trend initially taking form of good practice and gradually sticking into regulatory framework. according to kpmg (2013) survey, 71% of the 4100 largest companies across each surveyed countries5 published a sustainability report, compared with 64% of companies researched in 2011 (and 28% in 2002). whereas among the world’s largest 250 companies, the proportion is 93% (finance sector, insurance and securities market entities representing 25% of the sample). authors of the reports emphasize that the recent increase in reporting has been driven by regulatory requirements in such countries as: france, denmark and south africa. in japan for example, there exist the guidelines to report on environmental impact (including ghg emissions). moreover, companies listed on 3 incr – investor network on climate risk (usa), iigcc – institutional investors group on climate change (europe), igcc – investor group on climate change (australia and new zealand), aigcc – asian investor group on climate change (asia). 4 another way to identify and assess the level of investment sustainability are: ecoratings, sustainable stock market indices or various form of ecological certifications. 5 the survey sample covers 100 largest companies in 41 countries (4100 companies in total), the last survey in 2011 covered 34 countries (34000 companies). evolution of ecological financial market… 131 the stock exchange (e.g. india, singapore, malaysia) also had to adopt sustainability reporting to meet the requirements imposed by the stock exchange. the london stock exchange, for instance, since 2013 has required reporting on ghg emission. an interesting case is central bank of nigeria, which stipulates financial service companies to report on corporate responsibility. it is worth mentioning that 78% of reporting companies worldwide refer to the global reporting initiative6 (gri) guidelines. gri offers sustainability reporting standard, which (as we can see) establishes global practice among the largest companies. the standards emphasize the disclosure of real and measurable indicators in environmental reporting. current state of corporate responsibility reporting clearly indicates that voluntary practice is incrementally transforming into necessary obligations. poland is indicated (kpmg, 2013) as country with lower than average sustainability reporting rates at the level of 56%. the survey conducted by seg (2013) in details exposes universality on quality of esg reporting among listed companies on the warsaw stock exchange and newconnect. from 866 companies, 711 (82,2% of total) do not publish environmental information or their reporting includes information of minor importance. however, it is worth mentioning that there are four commercial banks among the leaders in esg reporting (top 10), which are: bgż, city handlowy, millennium, bph. examples of green actions and ecological financial product offer by the leaders include: clean energy bank loan, wwf7 credit card, green investment funds, planting trees (in place of resignation from paper bank statement by clients), eco-educational meeting, etc. to sum up, it must be noted, that to be able to disclose environmental information, polish firms should take on an increased amount of green initiatives. besides, environmental reporting is not only way to exaggerate ecological image, but also may be comprehensive assessment tools in investment decision process. however the scope and level impact of social and environmental factors in the securities price is still subject of research. it should be noted that the 6 gri was founded in 1997. in 1998 a multi-stakeholder steering committee established gri’s guidance – based on ceres principles for responsible environmental conduct, but committee incorporated also new area: social, economic, and governance issues (see more: https://www.globalreporting.org). 7 wwf – world wide fund for nature (ecological organization), see more about credit card: http://www.wwf.pl/mozesz_pomoc/karta_kredytowa/ and dziawgo, 2010, p. 147. michał moszyński, marcelina więckowska132 tardiness of polish companies may hinder them complying with prospective european union regulations.  the outcome of the research process and conclusions the evolution of the green financial market seen through the lens of institutional approach allows us to gain a comprehensive insight into causes, current course of business processes and their consequences. the conceptions of csr and sri fall on fertile ground, driven by forces from below assuming the shape of informal rules created by market leaders. these rules rely on enforcement mechanisms (sanctions) which occur in various forms. their powerful effects prove how strong the public awareness and expectations of market participants are. the predomination of informal institutions over formal ones will probably remain. it is not possible to regulate every aspect of activity, moreover it is not reasonable to do so. however, beyond the examples of voluntary codified rules in the nature of good practice, belonging to various organizations and initiatives, recognizing the theme by the stock exchange, some clear signals from the state and international organizations willing to formalize these areas are visible. there is much evidence to draw the conclusion of the future trends towards formalization and growing legislation activities in the areas of csr and sri. the sane and realistic regulation policy can be desirable and successful, if the complementary relation between formal and informal institutions will be preserved.  references bp annual report (2010), http://www.bp.com/content/dam/bp/pdf/investors/bp_ annual_report_and_form_20f.pdf. com (2011) 681 final, communication from the commission to the european parliament, the council, the european economic and social committee and the committee of the regions. a renewed eu strategy 2011-14 for corporate social responsibility, brussels, http://eur-lex.europa.eu/lexuriserv/lexuriserv.do?uri=celex:52011dc0681:en:not (accessed: 20.02.2014). dziawgo l. (1997), papiery wartościowe w ochronie środowiska, dom organizatora, toruń. dziawgo l. (2010), zielony rynek finansowy. ekologiczna ewolucja rynku finansowego, pwe, warszawa. facing finance (2011), dirty profits, http://www.facing-finance.org/wp-content/ blogs.dir/16/files/2012/12/ff_dirtyprofits.pdf (accessed: 20.02.2014). evolution of ecological financial market… 133 gsia – global sustainable investment alliance (2013), global sustainable investment review 2012, january, http://www.gsi-alliance.org/resources (accessed: 19.02.2014). hayek f.a. (1973), law, legislation and liberty, vol. 1 rules and order, routledge, london. http://dx.doi.org/10.7208/chicago/9780226321233.001.0001. helmke g., levitzky s. (2004). informal institutions and comparative politics: a research agenda. perspectives on politics, vol. 2, no. 4. http://dx.doi.org/10.1017/ s1537592704040472. hodgson g.m. (2006). what are institutions?. journal of economic issues, vol. xl, no. 1, march. kmpg (2013), the kpmg survey of corporate responsibility reporting 2013, kpmg international. north d.c. (1990), institutions, institutional change and economic performance, cambridge, cambridge university press. http://dx.doi.org/10.1017/cbo9780511 808678.003. parkiet gazeta giełdy (20.12.2012), ekolodzy i potencjalny błąd w prospekcie, http:// www.parkiet.com/artykul/1287227-ekolodzy-i-potencjalny-blad-w-prospekcie. html (accessed: 22.02.2014). seg – stowarzyszenie emitentów giełdowych (2013), transparentność w obszarze esg jako element przewagi konkurencyjnej spółki giełdowej, r. sroka (ed.), warszawa. tsukushi m. (2003), history of sri and eco-funds in japan, [in:] finance and natural environment. experience of poland against the background of developed market economies, l. dziawgo, d. dziawgo (ed.), toruń. urban d. (2011), zarys koncepcji inwestowania społecznie odpowiedzialnego, acta univesitatis lodziensis, folia oeconomica 261. websites: bgź, http://www.bgz.pl/downloads/o_banku/bgz_csr_raport_elektroniczny_final.pdf (accessed: 20.02.2014). websites: city handlowy, http://www.citibank.pl/poland/kronenberg/polish/6606. htm (accessed: 12.02.2014). websites: global reporting initiative (gri), https://www.globalreporting.org (accessed: 11.02.2014). websites: millennium, http://www.bankmillennium.pl/pl/o-banku/csr/dzialania/ srodowisko (accessed: 20.02.2014). websites: principles for responsible investment (pri), http://www.unpri.org (accessed: 10.02.2014). websites: united nations environment programme finance initiative (unep fi), http://www.unepfi.org (accessed: 11.02.2014). websites: world wide fund for nature (wwf), http://www.wwf.pl/mozesz_pomoc/ karta_kredytowa (accessed: 12.02.2014). for authors peer review process the procedures governing the review process of articles submitted for 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cjfa@umk.pl, www.cjfa.umk.pl editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka-pelowska, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla-la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : prof. dr hab. piotr fiszeder e n g l i s h p r o o f r e a d e r : mgr dominik liszkowski subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g i n e e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open access poprzez platformę czasopism umk wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2022 copyright by uniwersytet mikołaja kopernika w toruniu toruń 2022 icv 2021: 100.00 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra-oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents kaushik bhattacharjee, neetu yadav, geeta singh does mutual fund manager’s attributes impact fund performance? evidence from india ............................................................................................................. 9 nkechi a. emeka-nwokeji, efeeloo nangih, christian o. chiedu, ebele n. ekwunife reaction of share prices to dividend policy of non-financial firms in nigeria: a panel data approach ................................................................................................... 31 a. karthigeyan, v. mariappan, r. mani recapitalization and its impact on bank’s stability, competitiveness and profitability: evidence from indian psbs ..................................... 51 taslima nasreen, ron baker canadian government accounting: a systematic review ......................................... 71 francisco sánchez-cubo, manuel vargas-vargas, josé mondéjar-jiménez, elena lasso-dela-vega circular economy and environmental behaviour: a systematic literature review ... 99 for authors ......................................................................................................................... 123 for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors182 after the reception of the reviewers’ comments, the author is obliged to respond within a 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10.12775/cjfa.2013.0242013, volume 2, issue 2 data wpłynięcia: 17.06.2013; data zaakceptowania: 09.12.2013. * dane kontaktowe: jolanta.wisniewska@umk.pl, katedra rachunkowości, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 50. jolanta wiśniewska* uniwersytet mikołaja kopernika w toruniu klasyfikacja usług wykonywanych przez biegłych rewidentów słowa kluczowe: biegły rewident, usługi rewizji finansowej, inne usługi biegłego rewidenta. klasyfikacja j e l: m42. abstrakt: zawód biegłego rewidenta to zawód zaufania publicznego, a jego cechą charakterystyczną jest przyjęcie odpowiedzialności za działanie w interesie publicznym. podstawowym przedmiotem działalności biegłych rewidentów jest wykonywaniem czynności rewizji finansowej, natomiast przygotowanie osób wykonujących ten zawód pozwala na wykonywanie innych prac, które obejmują szeroki zakres usług finansowo-księgowych na rzecz różnego rodzaju instytucji i przedsiębiorstw. celem artykułu jest przedstawienie klasyfikacji usług wykonywanych przez biegłych rewidentów według uregulowań krajowych i międzynarodowych oraz ich analiza porównawcza. w artkule omówione zostały klasyfikacje usług według uregulowań krajowych, według rady międzynarodowych standardów rewizji finansowej i usług atestacyjnych (iaasb) oraz według kodeksu etyki zawodowych księgowych ifac. w artykule zastosowano uregulowania krajowe i międzynarodowe dotyczące tematyki artykułu. expert auditors’ services classification key words: expert auditor, financial auditing services, other expert auditor services. j e l classification: m42. jolanta wiśniewska204 abstract: the profession of an expert auditor is a public trust occupation with a distinctive feature of taking responsibility for actions in the public interest. the main responsibility of expert auditors is performing financial auditing; however, expert auditors are prepared to carry out different tasks which encompass a wide plethora of financial and auditing services for different kinds of institutions and companies. the aim of the article is first of all the description of expert auditors’ services classification according to domestic and international regulations and second of all the comparison of these services. the article presents services classifications according to domestic regulations, the international auditing and assurance standards board (iaasb) regulations and according to the ifac ethics code for professional accountants. the article uses domestic and international regulations concerning the article topic. translated by jolanta wiśniewska  wprowadzenie zawód biegłego rewidenta (zawodowego księgowego) to zawód zaufania publicznego, a jego cechą charakterystyczną jest przyjęcie odpowiedzialności za działanie w interesie publicznym. dlatego odpowiedzialność zawodowego księgowego nie ogranicza się wyłącznie do zaspokojenia potrzeb indywidualnego klienta lub pracodawcy (kodeks 2011, 2). podstawowym przedmiotem działalności biegłych rewidentów jest wykonywanie czynności rewizji finansowej, natomiast przygotowanie osób wykonujących ten zawód pozwala na wykonywanie szeregu innych czynności, które obejmują szeroki zakres usług finansowo-księgowych na rzecz różnego rodzaju instytucji i przedsiębiorstw. 1. metodyka badań i przebieg procesu badawczego celem artykułu jest przedstawienie klasyfikacji usług świadczonych przez biegłych rewidentów według uregulowań krajowych i międzynarodowych oraz ich analiza porównawcza. w artykule zastosowano uregulowania krajowe i międzynarodowe dotyczące tematyki artykułu. 2. zawód biegły rewident zawód biegłego rewidenta jest uregulowany przez prawo polskie ustawą z dnia 7 maja 2009 r. o biegłych rewidentach i ich samorządzie, podmiotach uprawnionych do badania sprawozdań finansowych oraz o nadzorze publicznym (dz.  u. z 2009 r. nr 77 poz. 649 z późn. zm.). ze względu na swój charakter jest   klasyfikacja usług wykonywanych przez biegłych rewidentów 205 postrzegany jako zawód zaufania publicznego. tytuł „biegły rewident” podlega ochronie prawnej (ustawa o biegłych rewidentach, art. 5 ust. 5). biegły rewident to osoba fizyczna, która zgodnie z ustawą o biegłych rewidentach (ustawa o biegłych rewidentach, art. 5 ust. 1) została wpisana do rejestru biegłych rewidentów prowadzonym przez krajową radę biegłych rewidentów1. żeby pracować w tym zawodzie trzeba spełnić szereg warunków: ■ korzystać z pełni praw publicznych oraz mieć pełną zdolność do czynności prawnych; ■ mieć nieposzlakowaną opinię i swoim dotychczasowym postępowaniem dawać rękojmię prawidłowego wykonywania zawodu biegłego rewidenta; ■ nie być skazanym prawomocnym wyrokiem za umyślnie popełnione przestępstwo lub przestępstwo skarbowe; ■ ukończyć studia wyższe w rzeczypospolitej polskiej lub zagraniczne studia wyższe uznawane w rzeczypospolitej polskiej za równorzędne i władać językiem polskim w mowie i piśmie; ■ odbyć roczną praktykę w zakresie rachunkowości w państwie unii europejskiej oraz co najmniej dwuletnią aplikację pod kierunkiem biegłego rewidenta, mającą na celu praktyczne przygotowanie do samodzielnego wykonywania zawodu, przy czym spełnienie tych warunków musi zostać potwierdzone przez komisję egzaminacyjną; ■ złożyć przed komisją z wynikiem pozytywnym egzaminy dla kandydatów na biegłego rewidenta z wiedzy, o której mowa w art. 9 ust. 1 i 2; ■ złożyć przed komisją z wynikiem pozytywnym końcowy ustny egzamin dyplomowy sprawdzający wiedzę zdobytą w trakcie aplikacji; ■ złożyć ślubowanie przed prezesem krajowej rady biegłych rewidentów lub innym upoważnionym członkiem tej rady. zawód biegłego rewidenta w polsce mogą również wykonywać osoby fizyczne, które mają uprawnienia do wykonywania tego zawodu, uzyskane w innym państwie z ue i spoza niej, pod warunkiem zdania egzaminu w języku polskim z prawa gospodarczego, w zakresie niezbędnym do wykonywania czynności rewizji finansowej (ustawa o biegłych rewidentach, art. 5 ust. 3 i 4). 1 krajowa rada biegłych rewidentów – organ krajowej izby biegłych rewidentów, kierujący działalnością samorządu w okresach między krajowymi zjazdami biegłych rewidentów. jolanta wiśniewska206 te same zasady obowiązują wobec osób, które uzyskały tytuł biegłego rewidenta w polsce, co oznacza, że polski biegły rewident po spełnieniu określonych warunków może wykonywać swój zawód w innych krajach. 2.1. klasyfikacja usług biegłego rewidenta ze względu na międzynarodowy charakter zawodu biegłego rewidenta istotne jest ustalenie zakresu usług, jakie mogą wykonywać te osoby w polsce i w innych krajach. zakres usług wykonywanych przez tę grupę zawodową regulują przepisy prawne i organizacje zrzeszające i nadzorujące biegłych rewidentów. w tabeli 1 przedstawiono klasyfikację tych usług według: ■ ustawy o biegłych rewidentach, ■ kwalifikacji usług przedstawionych przez radę międzynarodowych standardów rewizji finansowej i usług atestacyjnych (isaab)2, ■ kodeksu etyki zawodowych księgowych ifac. tabela 1. klasyfikacje usług biegłego rewidenta klasyfikacje według ustawy o biegłych klasyfikacja według iaasb klasyfikacja usług biegłego rewidenta według kodeksu etyki zawodowych księgowych ifac czynności rewizji finansowej – badanie historycznych informacji finansowych wg regulacji msrf – usługi atestacyjne pozostałe – przegląd historycznych informacji finansowych wg regulacji międzynarodowych standardów usług przeglądu – usługi nieatestacyjne – usługi atestacyjne inne niż wymienione powyżej wg międzynarodowych standardów usług atestacyjnych – usługi pokrewne wg międzynarodowych standardów usług pokrewnych ź r ó d ł o: opracowanie własne. analizując przedstawione w tabeli 1 klasyfikacje usług wykonywanych przez biegłych rewidentów, można podzielić je na dwie zasadnicze grupy, tj. usługi dotyczące rewizji finansowej szeroko rozumianej i pozostałe usłu2 isaab jest to niezależny organ działający pod auspicjami międzynarodowej federacji księgowych (ifac), ustanawiający ogólnie akceptowane na całym świecie standardy rewizji finansowej.   klasyfikacja usług wykonywanych przez biegłych rewidentów 207 gi na rzecz przedsiębiorców. niezależnie od klasyfikacji, spektrum usług wykonywanych przez biegłych rewidentów jest bardzo szeroki, co daje tej grupie zawodowej duże możliwości w zakresie wykonywania usług na rzecz różnego rodzaju przedsiębiorstw i instytucji. 2.2. klasyfikacja usług biegłego rewidenta według ustawy o biegłych rewidentach rodzaje usług wykonywanych przez biegłych rewidentów reguluje art. 48 ustawy z 7 maja 2009 r. o biegłych rewidentach i ich samorządzie, podmiotach uprawnionych do badania sprawozdań finansowych oraz o nadzorze publicznym (dz. u. z 2009 r. nr 77, poz. 649 z późn. zm.). podział usług według ustawy o biegłych rewidentach przedstawia tabela 2. tabela 2. klasyfikacja usług biegłego rewidenta według ustawy o biegłych rewidentach rodzaje usług biegłego rewidenta wyszczególnienie czynności rewizji finansowej badanie sprawozdań finansowych – badanie rocznych sprawozdań finansowych – śródroczne badanie sprawozdań finansowych inne usługi atestacyjne – badanie rachunkowości oraz działalności spółki na żądanie wspólnika lub wspólników reprezentujących co najmniej jedną dziesiątą kapitału zakładowego – art. 223 kodeksu spółek handlowych (ksh) (dz. u. 2000.94.1037 z późn. zm.) – badanie sprawozdania założycieli spółki komandytowo-akcyjnej – art. 312 w związku z art. 126 § 1 pkt 2 ksh. – badanie planu przekształcenia spółki – art. 559 § 1 ksh. – wycena akcji spółki sporządzona według wartości godziwej – art. 79 ust. 4c ustawy z 29 lipca 2005 r. o ofercie publicznej i warunkach wprowadzania instrumentów finansowych do zorganizowanego systemu obrotu oraz o spółkach publicznych (dz.  u. 2009.185.1439j.t.) – badanie sprawozdania o przychodach, wydatkach i zobowiązaniach finansowych komitetu wyborczego składanego do państwowej komisji wyborczej – art. 120 ustawy z 12 kwietnia 2001 r. ordynacja wyborcza do sejmu rzeczypospolitej polskiej i do senatu rzeczypospolitej polskiej (dz. u. 2007.190.1360 z późn. zm.) – badanie corocznej informacji finansowej o otrzymanej subwencji oraz o poniesionych z subwencji wydatkach przez partie polityczne – art. 34 ustawy z 27 czerwca 1997 r. o partiach politycznych (dz. u. 2001.79. 857 z późn. zm.) – badanie formy i treści prospektu emisyjnego, prospektu emisyjnego podstawowego, podsumowania oraz ostatecznych warunków, wymogów informacyjnych czynności dokonywane na rzecz spółek notowanych w celu wydania raportów dotyczących informacji pro forma, prognoz wyników oraz wyników szacunkowych. (rozporządzenie komisji (ue) nr 486/2012 z dnia 30 marca 2012 r. zmieniające rozporządzenie (we) nr 809/2004. komunikat kibr z dnia 09.04.2013r.) – audyty projektów i programów unijnych, dla których są one wymagane i zastrzeżone wyłącznie dla osób posiadających kwalifikacje biegłego rewidenta jolanta wiśniewska208 rodzaje usług biegłego rewidenta wyszczególnienie pozostałe – usługowe prowadzenie ksiąg rachunkowych i podatkowych – doradztwo podatkowe – prowadzenie postępowania upadłościowego lub likwidacyjnego – działalność wydawnicza lub szkoleniowa w zakresie rachunkowości, rewizji finansowej i podatków – wykonywanie ekspertyz lub opinii ekonomiczno-finansowych – świadczenie usług atestacyjnych, doradztwa lub zarządzania, wymagających posiadania wiedzy z dziedziny rachunkowości lub rewizji finansowej – świadczenie usług przewidzianych standardami rewizji finansowej, a także innych usług zastrzeżonych w odrębnych przepisach do wykonywania przez biegłych rewidentów ź r ó d ł o: opracowanie własne na podstawie: ustawa o biegłych rewidentach, 2009; komunikat, 2013; stanowisko, 2010. analizując zakres prac, jakie mogą wykonywać biegli rewidenci, można stwierdzić, iż obejmuje on szeroki obszar działania w zakresie finansów i rachunkowości. 2.3. klasyfikacja usług biegłego rewidenta według iaasb inną klasyfikację usług wykonywanych przez biegłych rewidentów przedstawiła rada międzynarodowych standardów rewizji finansowej i usług atestacyjnych (iaasb). isaab jest to niezależny organ działający pod auspicjami międzynarodowej federacji księgowych (ifac) ustanawiający ogólnie akceptowane na całym świecie standardy rewizji finansowej. zgodnie z dyrektywą 2006/43/we parlamentu europejskiego i rady europy z dnia 17 maja 2006 r. (dz. u. ue.l.2006.157.87 z późn. zm.) wszystkie kraje członkowskie zobowiązane są do stosowania międzynarodowych standardów rewizji finansowej, a więc zasady ustanawiane przez tę organizację dotyczą zarówno polski, jak i pozostałych krajów członkowskich. klasyfikację usług biegłego rewidenta według iaasb przedstawia tabela 3. tabela 3. klasyfikacja usług biegłego rewidenta wg iaasb rodzaje usług biegłego rewidenta wyszczególnienie badania historycznych informacji finansowych według międzynarodowych standardów rewizji finansowej badanie sprawozdań finansowych według międzynarodowych standardów rewizji finansowej przeglądy historycznych informacji finansowych według międzynarodowych standardów usług przeglądu – usługi według msup 2400 „usługi przeglądu historycznych sprawozdań finansowych” – badanie śródrocznych informacji finansowych, krótszych od roku obrotowego, sporządzone i zaprezentowane w postaci pełnego lub skróconego sprawozdania finansowego, przeprowadzone przez biegłego rewidenta niebadającego rocznego sprawozdania finansowego – usługi według msup 2410 „przegląd śródrocznych informacji finansowych przeprowadzany przez niezależnego biegłego rewidenta jednostki” – badanie śródrocznych informacji finansowych, krótszych od roku obrotowego, sporządzone i zaprezentowane w postaci pełnego lub skróconego sprawozdania finansowego, przeprowadzone przez biegłego rewidenta badającego roczne sprawozdanie finansowe usługi atestacyjne inne niż badanie lub przeglądy historycznych informacji finansowych według międzynarodowych standardów usług atestacyjnych (msua) – usługi według: x msua 3000 „usługi atestacyjne inne niż badanie lub przeglądy historycznych informacji finansowych" i x msua 3420 "raporty poświadczające na temat procesu kompilacji informacji finansowych pro forma zamieszczanych w prospektach emisyjnych" – badanie planu połączenia spółek – badanie projektów współfinansowanych ze środków unijnych – prospekty emisyjne – badanie informacji pro forma – stwierdzenia na temat skuteczności kontroli wewnętrznej – badanie zgodności systemów informatycznych ze standardami stawianymi przez instytucje regulujące rynek oraz/lub wymogami prawnymi. – badanie efektywności działania systemu kontroli wewnętrznej – badanie poprawności prezentowanych informacji dotyczących społecznej odpowiedzialności przedsiębiorstwa i informacji niefinansowych w raportach rocznych spółek publicznych – weryfikacje poprawności wyceny majątku, wartości całych spółek sporządzone przez niezależnych konsultantów – ocena zgodności dokumentów przygotowanych i publikowanych przez klienta z obowiązującymi wymogami prawa – poświadczenie zgodności przygotowanych na potrzeby połączeń jednostek sprawozdań finansowych pro forma z wymogami rozporządzeń komisji we rodzaje usług biegłego rewidenta wyszczególnienie – usługi według msua 3400 „badanie prognozowanych informacji finansowych” – badanie prognoz finansowych będących elementem prospektów emisyjnych – badanie prognoz finansowych przedstawianych pożyczkodawcom/potencjalnym inwestorom – usługi według msua 3402 „raporty poświadczające na temat kontroli w serwisowych organizacjach usługowych” – badanie przygotowanego przez kierownictwo organizacji usługowej opisu systemu, kontroli, i pisemnego zapewnienia kierownictwa o rzetelności tego opisu oraz odpowiednim zaprojektowaniem tych kontroli na dany dzień lub za określony okres, jak również to, że kontrole działały efektywnie przez określony czas usługi pokrewne – -według msup 4400 „uzgodnione procedury dotyczące informacji finansowych" – usługi due-dilligence – uzgodnione procedury dla udziałowców – sprawdzenia określonych dokumentów, wydatków, umów – uzgodnione procedury w odniesieniu do informacji finansowej spółki zależnej – uzgodnione procedury dotyczące sprawdzenia zgodności informacji przekazywanych przez podmioty konkurencyjne do podmiotu, działającego na ich rzecz – potwierdzenie zgodności części sprawozdania finansowego, lub jego całości, z księgami rachunkowymi jednostki – sprawdzenie, czy zatwierdzone i wdrożone procedury kontroli wewnętrznej są przestrzegane przez pracowników jednostki – sprawdzenie poprawności wykorzystywania dofinansowania ze środków unii europejskiej msup 4410 „kompilacja informacji finansowych" – sporządzenie pakietów konsolidacyjnych – sporządzenie informacji pro forma – sporządzenie specjalnych raportów – przygotowanie sprawozdań finansowych, – przygotowanie innych sprawozdań, co do których przygotowania zobligowana jest jednostka – przygotowanie wszelkiego rodzaju deklaracji podatkowych ź r ó d ł o: opracowanie własne na podstawie: fedak (2013); międzynarodowe standardy (2009); paluchniak, (2013).   klasyfikacja usług wykonywanych przez biegłych rewidentów 211 2.4. klasyfikacja usług biegłego rewidenta według kodeksu etyki zawodowych księgowych ifac polskie prawo (ustawa o biegłych rewidentach, art. 4 ust. 1 pkt 3) i standardy międzynarodowe (międzynarodowe standardy 2009, 23) zobowiązują biegłych rewidentów do pracy zgodnie z zasadami etyki zawodowej. klasyfikację usług biegłego rewidenta zgodnie z kodeksem ifac przedstawia tabela 4. tabela 4. klasyfikacja usług biegłego rewidenta według kodeksu etyki zawodowych księgowych ifac rodzaje usług biegłego rewidenta wyszczególnienie usługi atestacyjne badanie sprawozdań finansowych – badanie sprawozdań finansowych – przegląd sprawozdań finansowych inne usługi atestacyjne – zlecenia atestacyjne oparte na stwierdzeniach – zlecenia atestacyjne oparte na sprawozdawczości bezpośredniej usługi nieatestacyjne sporządzanie dokumentacji księgowej i sprawozdań finansowych – tworzenie lub zmiana zapisów w księgach rachunkowych – określenie klasyfikacji transakcji do odpowiednich kont – sporządzanie lub zmiana dokumentów źródłowych. – tworzenie danych – usługi płacowe w oparciu o dane przygotowane przez klienta – wprowadzanie do księgi głównej transakcji zadekretowanych przez klienta – sporządzanie sprawozdań finansowych na podstawie informacji zawartych w zestawieniu obrotów i sald usługi związane z wyceną – wycena polegająca na przyjmowaniu pewnych założeń dotyczących przyszłych zdarzeń, zastosowaniu odpowiednich metod i technik oraz połączeniu obu czynności, w celu obliczenia określonej wartości lub zakresu wartości dotyczących składnika aktywów, zobowiązań lub całej firmy usługi podatkowe – sporządzanie zeznań podatkowych – planowanie podatkowe i inne usługi doradcze z zakresu podatków – pomoc w rozstrzyganiu sporów podatkowych usługi audytu wewnętrznego – monitorowanie kontroli wewnętrznej – sprawdzenie informacji finansowych i operacyjnych – specjalne badanie konkretnych pozycji, w tym szczegółowe testowanie transakcji, sald i procedur – kontrola gospodarności, wydajności i efektywności działalności operacyjnej, w tym czynności niezwiązanych z finansami jednostki – kontrola zgodności z prawem, regulacjami i innymi wymogami zewnętrznymi, a także z polityką i zarządzeniami kierownictwa oraz innymi wymogami wewnętrznymi – ustalanie zasad audytu wewnętrznego lub wskazywanie strategicznych kierunków czynności – audytu wewnętrznego jolanta wiśniewska212 rodzaje usług biegłego rewidenta wyszczególnienie – decydowanie, które zalecenia wynikające z przeprowadzonego audytu wewnętrznego powinny zostać wdrożone – przedstawienie w imieniu kierownictwa wyników audytu wewnętrznego osobom sprawującym nadzór – przejęcie odpowiedzialności za opracowanie, wdrożenie i stosowanie kontroli wewnętrznej usługi informatyczne – projektowanie lub wdrażanie oprogramowania – projektowanie lub instalowanie sprzętu komputerowego – przeprowadzanie oceny i wydawanie rekomendacji dotyczących systemów, które zostały zaprojektowane, wdrożone lub są obsługiwane przez innego dostawcę lub klienta ekspertyzy, opinie i inne usługi świadczone na potrzeby i w związku z postępowaniem sądowym (usługi pomocnicze w sprawach sądowych) – usługi pomocnicze w sprawach sądowych – występowanie w charakterze biegłego sądowego – wyliczanie szacunkowych kwot szkód lub odszkodowań albo innych kwot, które w wyniku sprawy sądowej lub innego sporu prawnego, mogą stać się należnościami lub zobowiązaniami – pomoc przy zarządzaniu dokumentami oraz ich wyszukiwaniu usługi prawne – usługi dotyczące działalności korporacyjnej i handlowej jednostki – prowadzenie spraw sądowych, doradztwo prawne i wsparcie w sprawie połączeń i przejęć, a także pomoc dla wewnętrznych działów prawnych klientów – usługi prawne służące wspieraniu klienta w przeprowadzeniu transakcji usługi rekrutacyjne – sprawdzenie kwalifikacji zawodowych grupy – kandydatów oraz doradzanie w zakresie ich przydatności na dane stanowisko – odbywanie rozmów kwalifikacyjnych z kandydatami na określone stanowisko – udzielanie porad na temat kompetencji kandydata ubiegającego się o stanowisko w dziale rachunkowości finansowej, administracji lub kontroli usługi z zakresu finansów korporacyjnych – pomoc w projektowaniu strategii przedsiębiorstwa – doradztwo z zakresu transakcji kupna lub sprzedaży – wsparcie w przeprowadzeniu transakcji mających na celu uzyskanie finansowania – doradztwo z zakresu restrukturyzacji działalności przedsiębiorstwa ź r ó d ł o: opracowanie własne na podstawie: kodeks (2011).  zakończenie analizując przedstawione klasyfikacje usług wykonywanych przez biegłych rewidentów, należy stwierdzić, że we wszystkich podzielono usługi na dwie kategorie. pierwsza z nich stanowi usługi atestacyjne, natomiast druga pozostałe usługi, które nie są usługami atestacyjnymi. nie ma w tych klasyfikacjach podziału na rodzaje usług świadczonych na rzecz przedsiębiorstw. taka klasyfi  klasyfikacja usług wykonywanych przez biegłych rewidentów 213 kacja usług biegłego rewidenta wydaje się szczególnie istotna w świetle zmian uchwalonej dyrektywy parlamentu europejskiego i rady europy 2013/34/ /ue z 26.06.2013 r. w sprawie rocznych sprawozdań finansowych, skonsolidowanych sprawozdań finansowych i powiązanych sprawozdań niektórych rodzajów jednostek, która w istotny sposób będzie miała wpływ na rynek usług audytorskich w polsce (stachniak 2013). aby poradzić sobie z trendem zmniejszania wymagań dotyczących ustawowej rewizji finansowej oraz utrzymania wysokiego statusu zawodu biegłego rewidenta dla rynku i interesu publicznego, konieczna jest odpowiednia prezentacja usług świadczonych przez biegłych rewidentów, ponadto w odpowiedzi na zapotrzebowanie rynku, należy opracować nową ofertę usług wykorzystujących mocne strony tego zawodu. przy klasyfikacji usług biegłego rewidenta należy zwrócić szczególną uwagę na podział uwzględniający zakres wykonywanych prac. propozycję klasyfikacji tych usług przedstawia rysunek 1. rysunek 1. klasyfikacja usług biegłego rewidenta rodzaje usług biegłego rewidenta wyszczególnienie usługi z zakresu finansów korporacyjnych − pomoc w projektowaniu strategii przedsiębiorstwa − doradztwo z zakresu transakcji kupna lub sprzedaży − wsparcie w przeprowadzeniu transakcji mających na celu uzyskanie finansowania − doradztwo z zakresu restrukturyzacji działalności przedsiębiorstwa źródło: opracowanie własne na podstawie: kodeks (2011). zakończenie analizując przedstawione klasyfikacje usług wykonywanych przez biegłych rewidentów, należy stwierdzić, że we wszystkich podzielono usługi na dwie kategorie. pierwsza z nich stanowi usługi atestacyjne, natomiast druga pozostałe usługi, które nie są usługami atestacyjnymi. nie ma w tych klasyfikacjach podziału na rodzaje usług świadczonych na rzecz przedsiębiorstw. taka klasyfikacja usług biegłego rewidenta wydaje się szczególnie istotna w świetle zmian uchwalonej dyrektywy parlamentu europejskiego i rady europy 2013/34/ue z 26.06.2013 r. w sprawie rocznych sprawozdań finansowych, skonsolidowanych sprawozdań finansowych i powiązanych sprawozdań niektórych rodzajów jednostek, która w istotny sposób będzie miała wpływ na rynek usług audytorskich w polsce (stachniak 2013). aby poradzić sobie z trendem zmniejszania wymagań dotyczących ustawowej rewizji finansowej oraz utrzymania wysokiego statusu zawodu biegłego rewidenta dla rynku i interesu publicznego, konieczna jest odpowiednia prezentacja usług świadczonych przez biegłych rewidentów, ponadto w odpowiedzi na zapotrzebowanie rynku, należy opracować nową ofertę usług wykorzystujących mocne strony tego zawodu. przy klasyfikacji usług biegłego rewidenta należy zwrócić szczególną uwagę na podział uwzględniający zakres wykonywanych prac. propozycję klasyfikacji tych usług przedstawia rysunek 1. rysunek 1. klasyfikacja usług biegłego rewidenta źródło: opracowanie własne. przedstawiona na rysunku 1 kolejność nie jest przypadkowa. taka klasyfikacja usług powinna zwrócić uwagę podmiotom, że współpraca z biegłym rewidentem może i powinna odbywać się na każdym etapie prowadzenia rachunkowości w przedsiębiorstwie. globalizacja rynku, ciągle rosnące ryzyko działalności gospodarczej oraz zmieniające się uregulowania krajowe i międzynarodowe wymuszają na biegłych rewidentach otwarcie się na nowe wyzwania. takim wyzwaniem jest świadczenie innych usług na rzecz przedsiębiorców. z analizowanych klasyfikacji usług wynika, że spektrum pozostałych usług świadczonych przez tę grupę zawodową jest usługi dotyczące organizacji rachunkowości usługi w zakresie prowadzenia ksiąg rachunkowych usługi w zakresie sporządzania sprawozdań finansowych dla celów wewnętrznych i zewnętrznych usługi rewizji finansowej pozostałe usługi z zakresu finansów i rachunkowości ź r ó d ł o: opracowanie własne. przedstawiona na rysunku 1 kolejność nie jest przypadkowa. taka klasyfikacja usług powinna zwrócić uwagę podmiotom, że współpraca z biegłym rewidentem może i powinna odbywać się na każdym etapie prowadzenia rachunkowości w przedsiębiorstwie. globalizacja rynku, ciągle rosnące ryzyko działalności gospodarczej oraz zmieniające się uregulowania krajowe i międzynarodowe wymuszają na biegłych rewidentach otwarcie się na nowe wyzwania. takim wyzwaniem jest świadczenie innych usług na rzecz przedsiębiorców. z analizowanych klasyjolanta wiśniewska214 fikacji usług wynika, że spektrum pozostałych usług świadczonych przez tę grupę zawodową jest bardzo szerokie. znacznie szersze niż tych, które uznawane są jako podstawowy zakres działalności biegłych rewidentów, co daje duże możliwości wykorzystania ich wiedzy dla zwiększenia jakości sprawozdawczości finansowej i bezpieczeństwa obrotu gospodarczego.  literatura: fedak z. (2013), przegląd śródrocznych informacji finansowych przeprowadzany przez niezależnego biegłego rewidenta, „rachunkowość”, nr 2. kodeks etyki zawodowych księgowych ifac (2011), http:www.kibr.webserwer.pl_docuchwalyuchwala_4249-60-2011_kodeks_ifac.pdf (dostęp: 30.05.2013). komunikat nr 20/2013 krajowej rady biegłych rewidentów z dnia 9 kwietnia 2013 r. w sprawie zaliczenia do czynności rewizji finansowej badania informacji finansowej pro forma, prognozy wyników oraz wyników szacunkowych (2013), http://www. kibr.webserwer.pl/_doc/komunikaty/komunikat_2013_20.pdf (dostęp: 24.04.2013) międzynarodowe standardy rewizji finansowej i kontroli jakości t. i (2009), ifac, skwp, kibr, warszawa. paluchniak j. (2013), inne usługi biegłego rewidenta, http://abc.online.wolterskluwer. pl/wkplonline/index.rpc?#content.rpc--ask--nro=151151228&wersja=0&fullte xtquery.query=inne+us%25c5%2582ugi+bieg%25c5%2582ego+rewidenta&reqid =1369744127856413&class=content&loc=4&dataoceny=2013-05-28&tkndata =3030%252c1369724255&full=1&hid=5 (dostęp: 28.05.2013). stachniak a. (2013), nowa dyrektywa ue o rachunkowości, „rachunkowość” nr 11. stanowisko krajowej rady biegłych rewidentów z dnia 26 stycznia 2010 r. w sprawie innych usług poświadczających, wchodzących w zakres czynności rewizji finansowej (2010), http://www.kibr.webserwer.pl_docstanow_postanstanowisko_ krbr_usl_poswiadcz.pdf. (dostęp: 24.04.2013). ustawa z dnia 7 maja 2009 r. o biegłych rewidentach i ich samorządzie, podmiotach uprawnionych do badania sprawozdań finansowych oraz o nadzorze publicznym (dz. u. 2009 nr 77 poz. 649 z późn. zm.). introduction professionalism & ethics contemporary economy requires both: professionalism and ethics. in both scopes a lot should be done. previous achievements are far unsatisfactory. in the international economy there is only fragile stability and no development. a very low level of economic growth and very high level of unemployment are significant signs of the problem. there are many more or less significant signs. what is the reason? looking for real reasons of this situation it seems it is the lack of professionalism and ethics in modern economy that creates fundamental problems of disfunctioning of economic system. it is necessary to explain closer both terms professionalism and ethics in respect to two dimensions: macro and micro. small, medium and big companies become more and more professional. nowadays, in microscale of business unit there is no time or possibility to exist in another way. however, we still hear too many times about problems in companies. enormous remunerations of top management, imperfect products and services, delayed payments, staff reduction, and even bankruptcy. but, in principle self-adjustment system works. in macroscale it is much worse. an enormous inf luence of politics on modern economy is a fact and it generates huge problems. questionable professionalism and irresponsibility of political decision makers leads to economic tensions in many areas. elections seem inefficient protection against incorrect political decisions concerning economy. balance between power of politicians and their responsibility is highly required. this was about professionalism, but what about ethics? some of the above mentioned problems concern also ethics. we hope the age of ethics in economy is beginning right now. in both dimensions, micro and macro, we need more ethical approach to market econintroduction8 omy. the stake is human quality of business processes, in consequence, the quality of human life in modern world. to strengthen effectively professionalism and ethics in economy, economics is highly needed. this is exactly our role as scientists. as you know, copernican journal of finance & accounting is a perfect forum for scientists and practitioners to exchange ideas and experience to improve our economy & economics. editor in chief professor leszek dziawgo date of submission: april 29, 2021; date of acceptance: june 16, 2021. * contact information: erika.pancenko@riseba.lv, 3 meza street, riga lv–1048, latvia, phone: +371 67500261; orcid id: https://orcid.org/0000-0003-2341-5092. ** contact information: iv.tatjana@inbox.lv, 3 meza street, riga lv–1048, latvia, phone: +371 67500261; orcid id: https://orcid.org/0000-0003-4672-2511. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 3 pancenko, e., & ivanova, t. (2021). opportunities for increasing the export of latvia to eu countries. copernican journal of finance & accounting, 10(3), 33–49. http://dx.doi.org/10.12775/ cjfa.2021.010 erika pancenko* riseba university of applied sciences tatyana ivanova** riseba university of applied sciences opportunities for increasing the export of latvia to eu countries keywords: foreign trade, net export, economic freedom index, trade intensity index, export potential. j e l classification: f10, f15, o40. abstract: the relevance of this study is tied to the fact, that more effective application of export potential represents a major step towards the integration of latvia’s economy into a unified economic framework with other european union countries. in addition, the lack of a generally accepted methodology for assessing export potential increases the significance of these studies from a methodological point of view. the purpose of this study is to analyse the trends in latvian exports and assess the possibilities of increasing the volume of exports of goods to the eu countries. this study applied quantitative and qualitative methods of analysis, analysis of statistical data, methods for assessing the intensity, complementarity of trade between two countries and the potential for exporting latvian goods to eu countries. https://orcid.org/0000-0003-2341-5092 erika pancenko, tatyana ivanova34 the study identifies the countries and categories of goods where latvian trade potential to eu can be increased. the authors of the article propose criteria for determining possibility of increasing the export of various groups of goods. the paper may be of interest to all export transaction participants, including manufacturers, merchants, and professional associations. the export expansion assessment method applied by the authors may be adopted by exporting companies to identify groups of goods that have export growth reserves.  introduction the currency of this research topic hinges the presence of some problems from a theoretical and practical point of view. on the one hand, the fact that the level of development of foreign trade relations affects the economy of any country, and export is an integral part of the overall economic potential of the state. it should be noted that latvia has had a negative trade balance with its main international trade partners in the eu for the past few years. furthermore, in 2019, the slowing down of export growth has also been observed. thus, boosting exports to these countries is an essential task for the development of the national economy and largely determines the rate of the economic development within the country. on the other hand, the study of methodological approaches to assessing export potential makes it possible to assert that there is no generally accepted methodology, which also increases the significance of these studies. the analysis of literature on methods to assess export growth opportunities reveals that there is no standardised approach to evaluating export growth reserves. the authors of studies on this topic note that the assessment of the export potential of a country’s industry can be based on the use of various methodological approaches. at the same time, not a single indicator by itself gives an accurate assessment of the export potential, but the use of a system of indicators is required, which creates a separate methodological problem (ultan & rogovskaya, 2012). studies into the opportunity for growth in exports present quantitative as well as qualitative methodological approaches. the quantitative approach to determining export growth reserves involves the derivation of a quantitative indicator of export potential by a researcher (gnidchenko, 2014; firlej & kubala, 2018; and others). the derivation of a quantitative assessment is based on the use of a system of quantitative indicators that present a general characterisation of export growth levels and dynamics, and assessments of the structure of exports by goods and by geography. opportunities for increasing the export of latvia to eu countries 35 the classical instruments for quantifying export potential include the balassa and vollrath indices and their modifications used in the works of bahar, rosenow, stein and wagner (2018), firlej and kubala (2018), etc. in addition, in studies on the selection of international markets, the export potential is tried to be assessed on the basis of the gravity model, the export potential assessment of the international trade centre and the decision support model. international trade centre (itc) has developed an export potential assessment methodology that allows for the identification of existing goods with high export potential and / or diversification opportunities in a given target market, using the export potential indicator (epi) and the product diversification indicator (pdi) (decreux & spies, 2016). as a rule, a study of export potential based on quantitative methods is carried out on the basis of an analysis of its retrospective dynamics, commodity and geographical structure and ends with a forecast of exports by commodity and particular branch structures. a number of research authors point to the disadvantages of quantitative methods. in particular ultan and rogovskaya (2012) point to the absence of a generally accepted formula that would allow calculating the export potential, which leads to different authors obtaining quantitative results that differ from each other. in addition, the integrated indicators used to calculate the export potential are difficult to interpret; they are sensitive to the methods of their construction and weighting coefficients. according to melnyk (2008), the impossibility of a quantitative assessment of the export potential is due to some subjectivity of this concept, the absence of a direct dependence between the potential and the market position of a firm, and even more so, a country. the other, qualitative approach to determining the export potential, is based on the qualitative analysis of individual factors essential to increasing a country’s export volumes, such as the assessment of positive and negative trends in export development, the investment climate, barriers to increasing exports etc (pankratieva, 2009). according to the authors of the study, using only a qualitative approach is also not justified due to the many factors affecting the export potential and the difficulty of choosing criteria for their objective assessment. thus, each of these approaches has its own advantages and disadvantages. the choice of methods of analysis for a given study is grounded in the goal and enabling objectives of the study. the goal of this study is to identify maerika pancenko, tatyana ivanova36 jor signposts (guidelines) for increasing exports across groups of goods and countries. to select specific export sectors and countries, quantitative methods were preferred, while the choice of groups of goods in which exports can be increase was based primarily on qualitative methods. the authors of the study propose a methodology for identifying goods for which there are opportunities to increase export volumes, as a result of the growing demand for them and the existence of the potential for latvian exporters to increase export volumes. the research methodology and the course of the research process a general evaluation of the foreign trade of latvia and latvian export trends involved the analysis of goods export volumes from latvia, and the net export indicator calculated according to formula 1. increasing exports across groups of goods and countries. to select specific export sectors and countries, quantitative methods were preferred, while the choice of groups of goods in which exports can be increase was based primarily on qualitative methods. the authors of the study propose a methodology for identifying goods for which there are opportunities to increase export volumes, as a result of the growing demand for them and the existence of the potential for latvian exporters to increase export volumes. the research methodology and the course of the research process a general evaluation of the foreign trade of latvia and latvian export trends involved the analysis of goods export volumes from latvia, and the net export indicator calculated according to formula 1. 𝑋𝑋𝑋𝑋 𝑋 𝑋𝑋𝑋𝑋 𝑋 𝑋𝑋𝑋𝑋 (1) where: ex export im import the net export, or trade balance indicator may be used as an indicator of a state’s involvement with international markets (world bank, 2013). the net export indicator was analysed across three groups of countries (eu countries, cis countries, and other countries). for this study, in order to select the partner countries representing the greatest export potential, the index of economic freedom (ief) of eu countries was analysed. ief is a combined indicator representing the arithmetic mean of 12 parameters, rated by experts on a scale from 0 (min) to 100 (max) points. the parameters of the index are categorised into 4 groups of factors each affecting how national markets operate (miller & kim, 2017). despite the known drawbacks of this index, including the lack of sufficient substantiations for the constituent formulas and parameters used in order to rate the various components of the index, an incomplete list of these components, and criticism pertaining to the index of economic freedom calculation methodology expressed by a number of scientists (karlsson, 2005; ram, 2016; maier & miller, 2017; churkin, 2018), it remains among the most popular tools for analysing national economic policies (karateev, 2017). in 2019, updated ief ratings were available for 186 countries worldwide (the heritage foundation, 2019). (1) where: ex export im import the net export, or trade balance indicator may be used as an indicator of a state’s involvement with international markets (world bank, 2013). the net export indicator was analysed across three groups of countries (eu countries, cis countries, and other countries). for this study, in order to select the partner countries representing the greatest export potential, the index of economic freedom (ief) of eu countries was analysed. ief is a combined indicator representing the arithmetic mean of 12 parameters, rated by experts on a scale from 0 (min) to 100 (max) points. the parameters of the index are categorised into 4 groups of factors each affecting how national markets operate (miller & kim, 2017). despite the known drawbacks of this index, including the lack of sufficient substantiations for the constituent formulas and parameters used in order to rate the various components of the index, an incomplete list of these components, and criticism pertaining to the index of economic freedom calculation methodology expressed by a number of scientists (karlsson, 2005; ram, 2016; maier & miller, 2017; churkin, 2018), it remains among the most popular tools for analysing national economic policies (karateev, 2017). in 2019, updated ief https://mises.org/profile/stefan-karlsson https://www.tandfonline.com/author/maier%2c+mark https://www.tandfonline.com/author/miller%2c+john+a opportunities for increasing the export of latvia to eu countries 37 ratings were available for 186 countries worldwide (the heritage foundation, 2019). for further analysis, eu countries with mostly free (economic freedom score 70–80) and free (score 80–100) economies were selected based on the assumption that developing cooperation with these countries would not present significant external barriers. the assessment of promising export partners was modified to factor in the trade intensity index (tii, trade intensity index). tii characterises the bidirectional intensity of trade between a pair of countries compared to the countries’ share of world exports (world bank, 2013) and is calculated according to formula 2. for further analysis, eu countries with mostly free (economic freedom score 70–80) and free (score 80–100) economies were selected based on the assumption that developing cooperation with these countries would not present significant external barriers. the assessment of promising export partners was modified to factor in the trade intensity index (tii). trade intensity index). tii characterises the bidirectional intensity of trade between a pair of countries compared to the countries’ share of world exports (world bank, 2013) and is calculated according to formula 2. 𝑇𝑇𝑇𝑇𝑇𝑇 𝑇 � ��� ���� ������ � (2) where: let the volume of latvia’s exports to an eu country lew latvia’s total export volume tew the volume of global exports to the eu country ew the total global export volume tii ranges from 0 to + ∞. if the index is greater than 1, trading volumes are greater than expected based on a given company’s role in the global economy. if it is lower than 1, the intensity of trade is lower than might be expected (kastakova & baumgartner, 2017). export partners with an index of more than 1 may be considered more promising partners because the activity of exports from latvia to these countries outpaces exports from other countries in relative terms. to solve the key issue of this study – the search for (analysis of) potential latvian export reserves, the authors of this article have analysed the flow of trade (imports and exports) between countries across groups of goods, and selected the goods enjoying stable demand in a partner country which latvia happens to export to it. the information used as the basis for analysis was sourced from international trade statistics data by comtrade, available in the trade map interactive system (trademap, 2020). average annual growth rates were analysed across groups of goods i.e. goods exports from latvia to each partner country. in table 1, the authors have compiled a number of trade flow dynamics: rising exports of a good from latvia to a partner country; rising worldwide imports of a good to a partner country; (2) where: let the volume of latvia’s exports to an eu country lew latvia’s total export volume tew the volume of global exports to the eu country ew the total global export volume tii ranges from 0 to + ∞. if the index is greater than 1, trading volumes are greater than expected based on a given company’s role in the global economy. if it is lower than 1, the intensity of trade is lower than might be expected (kastakova & baumgartner, 2017). export partners with an index of more than 1 may be considered more promising partners because the activity of exports from latvia to these countries outpaces exports from other countries in relative terms. to solve the key issue of this study – the search for (analysis of ) potential latvian export reserves, the authors of this article have analysed the f low of trade (imports and exports) between countries across groups of goods, and selected the goods enjoying stable demand in a partner country which latvia happens to export to it. the information used as the basis for analysis was sourced from international trade statistics data by comtrade, available in the trade map interactive system (trademap, 2020). average annual growth rates were analysed across groups of goods i.e. goods exports from latvia to each partner country. erika pancenko, tatyana ivanova38 in table 1, the authors have compiled a number of trade f low dynamics: rising exports of a good from latvia to a partner country; rising worldwide imports of a good to a partner country; rising global exports of a good from latvia; each of these dynamics will be analysed in this article. table 1. criteria for identifying export growth reserves group no reserve identification criteria export growth reserves exports from latvia to country j worldwide imports to country j worldwide exports from latvia 1 increasing (+) increasing (+) increasing (+) export potential in country j 2 increasing (+) increasing (+) insignificant growth (0) or decreasing (-) export potential exists, provided that growth in worldwide latvian exports is ensured 3 insignificant growth (0) or decreasing (-) increasing (+) increasing (+) export potential to a given country is available if relevant goods can be exported from latvia to the relevant country 4 not registered increasing (+) increasing (+) an untapped market for the export of this good, in the presence of growing demand and growth in total worldwide latvian exports of the relevant good s o u r c e : own elaboration. as a result, 4 groups characterising trade between latvia and a partner country in exports for a given good were identified, in each of which opportunities for export increase will differ. the authors of this article believe that the primary reserve for raising latvian export volumes are goods with indicative export trade potential (group 1). further, reserve for increasing exports have goods for which is a demand in the partner country, but for some reasons, there is a decrease activity of latvian exporters in working with such goods. an increase in exports is possible provided, that the growth of latvian exports of these goods to the world is ensured (group 2). another reserve for increasing exports includes goods in which export growth to a partner country has slowed or reversed despite growing demand in the target country and increasing exports from latvia to the world (group 3). opportunities for increasing the export of latvia to eu countries 39 finally, one may consider potential for increasing goods exports in the form of penetrating new markets for certain latvian goods, which are not currently being exported but in increasing demand within a given target country (group 4), but a full-scale survey of that market must be conducted to identify export potential. the practical part of this study will not consider group 4 for utilising latvian export reserves. research limitations: this study did utilise latvian and international statistical data for the years 2015–2019; the trademap interactive system analysed the rates of international trade indicator growth/decrease across groups of goods (based on a 4-digit code within the harmonised system (hs) employed in the european union) with trade volumes exceeding eur 1 thousand. results and conclusions of the research process research results during the period under analysis, 2015–2019, a general trend of latvia’s foreign trade growth was observed, as enabled by export growth of 24.5% and import growth by 27.1%. overall goods circulation volume totalled over eur 28.7 billion in 2019, although the increase compared to 2018 was only 0.96% – much less than 2018/2017 (12.2%). as a result of import consistently outpacing export, latvia’s trade balance (net export indicator) is negative, with an increasing trend throughout the 2015–2019 period (25%) (see table 2). table 2. foreign trade balance (net export) of latvia 2015–2019, eur m 2015 2016 2017 2018 2019 2016/ 2015 2017/ 2016 2018/ 2017 2019/ 2018 2015/ 2019 total -2129 -1891 -2624 -3049 -2975 0.888 1.387 1.162 0.976 1.398 eu -2299 -2146 -2765 -2614 -2873 0.933 1.288 0.946 1.099 1.250 cis -271 -96 19 -214 87 0.355 -0.194 -11.444 -0.408 -0.322 other countries 441 350 122 -221 -190 0.795 0.347 -1.816 0.862 -0.431 s o u r c e : own study based on: data from rl csb, 2020. erika pancenko, tatyana ivanova40 the analysis of net export across groups of countries (eu, cis and others) indicated that a large fraction of the negative foreign trade balance is attributable to trade between latvia and eu countries, explained by the substantial volume of latvian foreign trade activity in this segment (over 70% of all latvian exports) with a consistently negative foreign trade balance. latvian exports to cis and other countries represent less than 30% of the total, with a positive foreign trade balance at times, but with little improvement to the big picture due to low volume. the most promising eu countries for latvian exports are, in the opinion of the authors of this study, countries with free and mostly free economies. this group includes countries with ief (2019) of at least 70 (see graph 1.) graph 1. countries with free or mostly free economies the most promising eu countries for latvian exports are, in the opinion of the authors of this study, countries with free and mostly free economies. this group includes countries with ief (2019) of at least 70 (see graph 1.) graph 1. countries with free or mostly free economies source: own elaboration based on: data from the heritage foundation, 2019. these countries (as seen in table 3) were picked for further analysis. as evident from graph 1, economic freedom across most eu countries increased in the 2015–2019 period, indicating better market functioning in the relevant states. the list of countries was made more specific. to select the most promising latvian export partners in the eu, the trade intensity index was calculated for each of the countries selected (see table 3). table 3. trade intensity index dynamics 2015–2019 2015 2016 2017 2018 2019 ee – estonia 121.65 122.27 118.23 111.51 117.50 lt – lithuania 111.88 105.87 94.09 84.36 90.23 dk – denmark 7.75 8.73 8.13 8.64 8.32 se – sweden 6.17 6.77 7.01 8.21 7.82 fi – finland 5.01 5.20 5.02 5.94 6.31 gb – great britain 1.37 1.39 1.42 1.63 1.52 cz – czechia 1.97 1.54 1.68 1.20 1.37 de – germany 0.99 1.07 1.10 1.07 1.09 nl – netherlands 0.80 0.90 0.82 0.69 0.79 ie – ireland 0.54 0.54 0.65 0.77 0.78 at – austria 0.55 0.41 0.44 0.54 0.57 lu – luxemburg 0.48 0.83 0.60 0.50 0.50 source: own study based on: trademap data, 2020. 0 20 40 60 80 100 ir el an d u ni te d… n et he rl an ds d en m ar k e st on ia l ux em bo ur g sw ed en fi nl an d l ith ua ni a c ze ch … g er m an y a us tri a l at vi a b ul ga ri a r om an ia m al ta c yp ru s po la nd b el gi um sp ai n sl ov en ia po rt ug al h un ga ry sl ov ak ia fr an ce it al y c ro at ia g re ec e 2015 2019 s o u r c e : own elaboration based on: data from the heritage foundation, 2019. these countries (as seen in table 3) were picked for further analysis. as evident from graph 1, economic freedom across most eu countries increased in the 2015–2019 period, indicating better market functioning in the relevant states. the list of countries was made more specific. to select the most promising latvian export partners in the eu, the trade intensity index was calculated for each of the countries selected (see table 3). opportunities for increasing the export of latvia to eu countries 41 table 3. trade intensity index dynamics 2015–2019 2015 2016 2017 2018 2019 ee – estonia 121.65 122.27 118.23 111.51 117.50 lt – lithuania 111.88 105.87 94.09 84.36 90.23 dk – denmark 7.75 8.73 8.13 8.64 8.32 se – sweden 6.17 6.77 7.01 8.21 7.82 fi – finland 5.01 5.20 5.02 5.94 6.31 gb – great britain 1.37 1.39 1.42 1.63 1.52 cz – czechia 1.97 1.54 1.68 1.20 1.37 de – germany 0.99 1.07 1.10 1.07 1.09 nl – netherlands 0.80 0.90 0.82 0.69 0.79 ie – ireland 0.54 0.54 0.65 0.77 0.78 at – austria 0.55 0.41 0.44 0.54 0.57 lu – luxemburg 0.48 0.83 0.60 0.50 0.50 s o u r c e : own study based on: trademap data, 2020. from table 3, it follows that priority export partners (trade intensity index above 1) for latvia are 7 eu countries: estonia, lithuania, denmark, sweden, finland, great britain, czechia, germany. the most intensive trade relations over the period under analysis have been with estonia and lithuania – which is explained by geographic proximity, lower transaction costs, as well as historical and cultural ties. for a variety of reasons, countries such as ireland, the netherlands, austria and luxemburg prefer imports from other countries – as evident from latvia’s trade intensity index with these states being less than 1. to research export potential for these countries, further analysis of the situation is needed. this study does not include the aforementioned countries, as well as great britain, which has left the eu. for each of the 7 countries mentioned above with trade intensity index >1, opportunities (reserve) for export increase were analysed across groups of goods (table 4) based on criteria specified in table 1. erika pancenko, tatyana ivanova42 table 4. export growth reserves country lt ee de fi se dk cz group no. total number of groups of goods exported (> eur 1 thousand) 913 886 612 514 496 393 391 1 goods with export potential (+,+,+) 364 303 182 154 168 90 113 indicator of group 1 goods, % 39.87 34.20 29.74 29.96 33.87 22.90 28.90 2 export growth opportunities depend on supply of latvian exports (+,+,0 and +,+,) 77 79 46 40 41 22 18 indicator of group 2 goods, % 8.43 3.86 7.52 7.78 8.27 5.60 4.60 3 exports of latvian goods lag behind demand for these goods (0,+,+ and -,+,+) 97 106 83 65 57 62 74 indicator of group 3 goods, % 10.62 11.96 13.56 12.65 11.49 15.78 18.93 total reserve indicator % 58.93 55.08 50.82 50.39 53.63 44.27 52.43 s o u r c e : own study based on: trademap data, 2020, 4-digit hs code. the analysis shows that nearly half of the categories of goods exported from latvia to these european countries present growth reserves. this includes opportunities (reserves) for increasing exports to lithuania at 58.93% of goods exported, estonia at 55.08%, sweden at 53.63%, czechia at 52.43%, denmark at 44.27%. most of the goods with export potential, i.e. headroom for increasing supply, are exported to lithuania (39.87% of all goods exported), estonia (34.20%) and sweden (33.87%); followed by: finland (29.96%); germany (29.74%); czechia (28.90%); denmark (22.90%). the ratio of goods of the 2nd group in the volume of goods exported to each country were: 8.43% for lithuania; 8.27% for sweden; 7.78% for finland; 7.52% for germany; 5.60% for denmark; 4.60% for czechia; 3.86% for estonia. the ratio of goods of the 3rd group in the overall volume of goods exports to the relevant countries was: czechia – 18.93%; denmark – 15.78%; germany – 13.56%; finland – 12.65%; estonia – 11.96%; sweden – 11.49%; lithuania – 10.65%. the list of goods in greatest demand among countries with reserves for latvian exports is provided in table 5. opportunities for increasing the export of latvia to eu countries 43 table 5. goods in highest demand by country (4-digit hs code), % groups of goods kinds of goods total lt ee de se fi cz dk count % 8001-8999 taps, cocks, valves and similar appliances for various vessels (8481), tools (8466, 8467), electric accumulators (8507), centrifuges (8421), cable (8544), road vehicles (8703) etc. 483 100 23 19 16 13 12 10 7 3001-3999 gauze (3005), cosmetics (3304), reagents (3822), plastic piping and tubing (3917), foil (3921), articles for the conveyance or packing of goods (3923) etc. 285 100 23 21 14 12 12 12 6 7001-7999 pipe fittings (7307), glass (7005), pipes (7306), metal structures (7308), cisterns, barrels a.o. vessels (7310), coil and leaf springs (7320), nails, screws, bolts (7317, 7318) etc. 277 100 24 21 13 15 11 8 8 6001-6999 clothing (6110), gloves, mitts (6116), coats, men’s jackets (6201), men’s suits (6203), women’s suits (6204), headwear (6505), sinks, washbasins (6910) etc. 257 100 21 18 14 14 14 9 10 4001-4999 particle board (4410), plywood (4412), wood (4407), fuel wood (4401), densified wood (4413), wood frames (4414), paper, cardboard (4823) etc. 205 100 19 19 13 14 14 10 11 9001-9999 furniture (9403), lamps and lighting fixtures (9405), sporting equipment (9506), toys (9507), orthopedic implements (9021), physical and chemical analysis devices and equipment (9027) etc. 204 100 26 21 15 11 11 9 7 2001-2999 sauces (2103), waters (2202), grape wines (2204), spirit infusions and liqueurs (2208), jams, marmalades (2007), peat (2703), cooked and preserved vegetables (2005) 180 100 27 32 13 8 8 7 5 0101-0999 meat (0207), frozen fish (0303), cheese and curd (0406), bird eggs (0407, 0408) 146 100 26 32 13 7 8 9 5 erika pancenko, tatyana ivanova44 groups of goods kinds of goods total lt ee de se fi cz dk count % 1001-1999 cooked or preserved fish, caviar (1604), finished products from grain, flour, milk (1902), sugar confectionery (1704), chocolate (1806), sausages (1601), rapeseed (1205), wheat (1001), oats (1004) 130 100 30 24 12 9 10 6 9 5001-5999 nonwovens (5603), synthetic wool (5402), textiles (5903) 74 100 28 24 9 9 16 5 8 s o u r c e : own study based on: trademap data, 4-digit hs code. goods exported from latvia to the countries under analysis and presenting export potential include a variety of goods from all 10 groups of goods according to the hs 4-digit code. exports of goods in group 8 are most active. the frequency of exports from this good to the countries under analysis was 483. goods in this group were in greatest demand in lithuania (23%), estonia 19%) and germany (16%). group 3 goods are in high demand as well. the frequency of exports from this good to the countries under analysis was 285. goods in this group were in greatest demand in lithuania (23%), estonia (21%) and germany (14%). the remaining groups of goods are listed in order of decreasing demand (see table 5). the most active export routes are lithuania, estonia, germany, sweden and finland. czechia exhibits greater demand for goods in groups 3, 4 and 8, while denmark prefers imports from groups 4 and 6. discussion this study, taking into account the disadvantages of quantitative methodological approaches, did not attempt to determine the quantitative value of export potential in specific goods, but only to identify goods where export potential opportunities exist in the form of favourable factors: rising demand, and the ability of latvian exporters to increase supply. goods with indicative export potential (group 1, see table 4) have the greatest, and most reliable reserve, since all trade f lows are in order, with positive table 5. goods… opportunities for increasing the export of latvia to eu countries 45 dynamics and fewest barriers to export. to increase export volumes, latvian exporters must keep track of rising demand and ensure adequate supply. opportunities for increasing the export of goods in group 2 are limited by the decreasing overall activity of latvian exporters in working with such goods. this has led to slowing growth or reduced exports to the world at large, although exports to the aforementioned countries continue to grow. in order to retain this market and ensure growing demand, latvian exporters must be aware of opportunities for increasing the output of such goods in latvia, or further purchases thereof abroad. such information could be provided by state, commercial and professional organisations engaged in latvian export development and stimulation, such as the latvian investment and development agency (liaa), the enterprise europe network (een) in latvia etc. development and application of effective export stimulus formats and methods will also facilitate development and volume increases (wang, chen & li, 2017; haddoud, jones & newbery, 2016). for goods in group 3, export growth in a target country has slowed or reversed country despite growing demand in the target country and increasing exports from latvia to the world. 3.5. to identify the reasons behind market loss in specific countries, one must analyse the factors affecting the development of trade between the partner countries, and study the peculiarities of demand in given markets, including demand for specific kinds of goods. according to research, avenues for increasing export volumes for exporters hinge on many factors: ■ market development trends (growth, stagnation, recession) (serpukhov, 2019); ■ market depth and demand for goods on the target market; ■ competitive performance of the goods being exported; ■ an exporter’s ability to satisfy rising demand for a good on other markets, i.e. adequacy of production capacities etc. (shestopalova, 2011); ■ the national economic (customs, cash and credit, tax) policies of the partner countries, which directly affect demand and the development of production and trade; ■ current foreign trade regulations set by international economic organizations and integration associations, which apply to a country’s foreign trade (stepanov, 2015); erika pancenko, tatyana ivanova46 ■ the impact of interior and cross-border conf lict on the trade relations between the countries in question (marano, cuervo-cazurra & kwok, 2013). unfavourable effects of these factors present barriers that slow down and decrease exports from a given country, and each exporter should evaluate them separately for each country and each class of goods. the analysis of goods performed for this study is only an overview of key aspects of demand for latvian goods in eu countries, having analysed indices of growth in goods exports to eu countries with consolidated grouping of goods by 4-digit codes. exporters who will be interested in identifying the export potential of specific types of goods, can use more detailed classifications based on 9-digit hs codes available in the trademap system. according to the authors, in order to determine a more complete export potential of the country, it is necessary not only to analyze the already established export sectors and developed export markets (groups 1-3 in table 1), but also to analyze the possibilities of product diversification and the development of new export markets, in the presence of a growing demand and growth in total exports of this product from latvia to the world (group 4 in table 1).  conclusions to determine the possibility for increasing export volumes, eu countries were identified with which latvia has more active trade relations (based on the trade intensity index) and minimal impact of export limitations within their respective markets, as determined by the degree of economic freedom. these countries include: estonia, lithuania, denmark, sweden, finland, czechia, germany. an analysis of export dynamics (i.e., supply) in latvia across groups of goods, and imports to these countries (i.e., demand), revealed export potential. export potential exists for latvia to each of the countries under analysis to lithuania at 58.9% of goods exported, estonia at 55.1, sweden at 53.7%, czechia at 52.4%, denmark at 44.3%. reserves for increasing exports are observed across 3 groups of goods: 1) goods with indicative export potential; 2) goods with decreasing growth or decrease in exports to the world, despite maintaining exports to selected countries; 3) goods with decreasing export growth or decreased exports to a given opportunities for increasing the export of latvia to eu countries 47 country despite increasing target market demand and increasing worldwide exports of the goods from latvia. the use of reserves is dependent on more comprehensive facilitation of the growth in exports of specific goods to a given country in the context of rising demand (group 1), more active acquisition of specific countries’ markets and rising production capacities among latvian exporters of goods seeing an increase in worldwide demand (group 2), and increasing shipments to a target country by attracting new buyers (group 3). the availability of unrealised export potential for certain goods will allowed the identification of production and business sectors in latvia which show prospects for increasing sales. the list of goods with export increase reserves across the countries under analysis include a variety of goods in all 10 groups. goods in the 8th, 3rd, 7th and 6th group are being exported more. this includes: electric accumulators, centrifuges, agricultural machinery, bearings, electric equipment, fuses, furniture fittings, gauze, cosmetics, reagents, plastic piping and tubing, articles for the conveyance or packing of goods, glass, metal structures, cisterns, barrels a.o. vessels, coil and leaf springs, wires, cables etc. the materials of the study uncover new aspects of development in latvian exports and may present interest to latvian exporters already cooperating with these countries and to those looking for markets to sell the goods described in the study which present export potential in the relevant countries. further, the study may be of interest to organisations interested in developing latvian exports – the results of the study will guide the selection of activities to bolster latvian exporters. further studies could address the identification of barriers to export of goods by latvian manufacturers and merchants.  references 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(2012). basic methodology of sectoral export potential formation and study (exemplary sector: nonferrous metallurgy. omsk university herald, series economics, 1. https://cyberleninka.ru/article/n/metodologicheskie-osnovyformirovaniya-i-issledovaniya-eksportnogo-potentsiala-otrasli-na-primere-otrasli-tsvetnoy-metallurgii. wang, x., chen, a., & li, s. (2017). effect of export promotion programs on export performance: evidence from manufacturing smes. journal of business economics and management, 18(1), 131-145. http://dx.doi.org/10.3846/16111699.2016.1278031. world bank (2013). online trade outcomes indicators 2013, https://wits.worldbank. org/wits/docs/tradeoutcomes-usermanual.pdf (accessed: 12.10.2020). https://www.heritage.org/index/explore?u=636966788280124015 https://www.heritage.org/index/explore?u=636966788280124015 https://cyberleninka.ru/article/n/metodologicheskie-osnovy-formirovaniya-i-issledovaniya-eksportnogo-potentsiala-otrasli-na-primere-otrasli-tsvetnoy-metallurgii https://cyberleninka.ru/article/n/metodologicheskie-osnovy-formirovaniya-i-issledovaniya-eksportnogo-potentsiala-otrasli-na-primere-otrasli-tsvetnoy-metallurgii https://cyberleninka.ru/article/n/metodologicheskie-osnovy-formirovaniya-i-issledovaniya-eksportnogo-potentsiala-otrasli-na-primere-otrasli-tsvetnoy-metallurgii _hlk76415718 _hlk76415728 date of submission: january 2, 2020; date of acceptance: march 6, 2020. * contact information: jay@jaydesai.net, b k school of business management, gujarat university, ahmedabad, gujarat, india – 380015; orcid id: https://orcid.org/00000001-6707-8580. ** contact information: rajesh.desai8@gmail.com, rajeshdesai@cpi.edu.in, chimanbhai patel institute of management and research, opp karnavati club, s g highway, ahmedabad gujarat, india 380015, phone: 9904042289; orcid id: https://orcid. org/0000-0003-3611-8409. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 4 desai, j., & desai, r. (2019). capital structure as determinant of financial performance: review of literature. copernican journal of finance & accounting, 8(4), 133–148. http://dx.doi. org/10.12775/cjfa.2019.021 jay desai* gujarat university rajesh desai** chimanbhai patel institute capital structure as determinant of financial performance: review of literature keywords: capital structure, financial performance, conceptual model, literature review. j e l classification: g30, g32. abstract: one of the most critical decisions in corporate finance is to decide about the source of fund to be employed. the mix of debt – equity used to generate funds is termed as capital structure (cs). research on capital structure and its impact on financial performance has gained momentum from the pioneering article of modigliani and miller (1958). since then it has been one of the most debated and controversial aspects of corporate finance. researchers have contributed in form of theories as well as empirical findings to study the relation between capital structure and financial performance. current paper reviews the existing studies in the area of cs and financial performance jay desai, rajesh desai134 and also propose a conceptual model that describes the interrelationship between cs and financial performance based on detailed discussion of widespread literature. this model reckons important variables of financial performance affected by cs which help research scholars in further investigation. researchers can use this model to perform empirical testing to fill the research gaps identified and enrich the existing literature.  introduction economic activities are carried out by coordinated efforts of four factors of production i.e. land, labor, capital and entrepreneurship. capital is categorized as real and monetary (financial). conventionally, financial capital can be raised through owned and borrowed sources and such mix of funds is called cs. the choice of debt-equity is not easy to make as equity holders expect higher return whereas debt holders need regular interest payments. every manager needs to assess the effect of financing source on firms’ profitability and value. franco modigliani and merton miller (mm) (1958) have ignited this discussion and concluded irrelevance of cs and value of firm. the mm approach was contradicted and criticized due to assumptions like absence of tax, perfect capital market, no transaction cost etc. david durand (1959) has suggested ‘net income approach’ of cs according to which debt funds are cost effective than equity hence a firm should employ 100% debt to maximize its market value. later, mm has modified their argument of irrelevance and incorporated the effect of taxation in determining value of firm. mm (1963) have presented tax-based view and concluded that levered firm are eligible for tax advantage and thereby are valued higher. besides interest cost and tax benefit, debt issue inherently has several other features associated with it. baxter (1967) has introduced the concept of bankruptcy cost in cs decision which arises due to nonpayment of interest and principle. every firm strives towards an optimal debt-equity ratio which is calculated by comparing benefits and costs associated with use of debt (myres, 1984). an optimal cs can be obtained at a point where present value of interest shield is equal to present value of cost of financial distress (myers, 2001). another important behavioral phenomina allied with cs is agency cost as propounded by jensen and meckling (1976). agency cost approach considers the conf licting issues of managers and owners indicating that managers, taking major financial decisions including cs, may not act in the best interest of investors and accept the project with suboptimal results. capital structure as determinant of financial performance… 135 from above discussion it can be referred that capital structure is a maltifacet decision which requires consideration of financial as well as non-financial aspects. this paper reviews the existing literature relating to cs and its impact on financial performance of firm. introduction is followed by review of empirical findings categorised based on measure of performance. based on findings of past research, conceptual model has been developed and discussed the end. the research methodology and the course of the research process current paper primarily focuses on analyzing past studies conducted in the field of capital structure and its impact on financial performance. below mentioned objectives are intended to be satisfied as outcome of research. ■ studying and investigating empirical research highlighting the effect of capital structure decision on financial performance of firms. ■ identifying the factors selected by research scholars as proxy of capital structure and financial performance. ■ developing a theoretical model which can be used for empirical testing in future. present research study follows qualitative design of research. on the similar lines, the findings and conclusions of this paper are based on revising and examining the existing literature hence qualitative research design is found to be appropriate. capital structure and financial performance this section summarizes experiential discoveries of various researchers who have analyzed the impact of cs on market value and profitability. although financial performance can be indicated by variety of measures, the current paper focuses on five measures namely return on asset, return on equity, earnings per share, market value and tobin’s q ratio. return on asset (roa) one of the most commonly used measures of firms’ performance is ratio of its operating profit to total assets popularly known as roa (abor, 2005 & 2007; jay desai, rajesh desai136 adewale & ajibola, 2013; azhagaiah & gavoury, 2011; ebaid, 2009; pandey, 2004; saeedi & mahmoodi, 2011; san & heng, 2011; zeitun & tian, 2007; oke, saheed, & quadri, 2019). authors have carried their research work in different countries and with different industries by employing various capital structure variables. outcomes of various studies reveal contradictory results pertaining to relation of roa and cs variables. ross (1977) has argued profitable firms can afford to mitigate the interest obligation of borrowings which indirectly provide signal towards firms’ financial health. borrowings further reduces tax liability and therefore results into higher profitability hence findigs suggest positive impact of debt financing on roa. (adewale & ajibola, 2013; mujahid & akhtar, 2014; nirajini & priya, 2013). on the contrary, researchers such as pouraghajan and malekain (2012), riaz (2015), velanampy and niresh (2012), and vijaykumar and karunaiathal (2014) have deduced inverse relationship between roa and cs (measured by debt-asset ratio). probable reasons for such consequence could be inefficient utilization of funds, higher cost of interest and cost of financial distress. eriotis, frangouli and neokosmides (1997) have used economic measure of profitability to assess the impact of financial structure on it. they have concluded inverse relationship between debt financing on profit margin. authors have used long-term debt ratio and short-term debt ratio as cs variables as maturity of debt is an important moderator (abor, 2005 & 2007; ahmad, abdullah & roslan, 2012; chavali & rosario, 2018; emin, 2016). longterm debt is having higher cost associated and require securities to be pledged whereas short term borrowings are available at lower cost and without mortgage. due to such differences long-term debt has negative impact on roa (abor, 2007; emin, 2016; kodongo, mokoteli & maina, 2014; nawaz & ahmad, 2017; oke, et. al., 2019) and short-term debt improves profitability (abor, 2005; goyal, 2013; oke, et. al., 2019). table 1 provides summarized view of various studies conducted by taking roa as dependent variable. table 1. impact of cs on roa source control variables impact on roa roa and debt – asset ratio azhagaiah & gavoury (2011); gupta (2015) na negative banerjee & de (2014) business risk, financial leverage, operating leverage, age, growth, payout ratio negative chavali & rosario (2018) interest coverage ratio positive ebaid (2009) na no impact fosu (2013) competitive force positive adewale & ajibola (2013) asset turnover ratio, size, tangibility, growth positive roa and debt – equity ratio velanampy & niresh (2012); vijaykumar & karunaiathal (2014); chadha & sharma (2015); yadav (2018) na negative adewale & ajibola (2013) asset turnover ratio, size, tangibility, growth positive basit & hassan (2017) size, advertising & marketing positive roa and long-term debt ratio abor (2005 & 2007); oke, et. al. (2019) growth, size negative ahmad et al. (2012) asset growth, size, sales growth, efficiency no impact ebaid (2009) na no impact emin (2016) na negative kodongo et al. (2014) tangibility, size, sales growth negative roa and short-term debt ratio abor (2005 & 2007); oke, et. al. (2019) growth, size positive ahmad et al. (2012) asset growth, size, sales growth, efficiency negative ebaid (2009) na no impact goyal (2013) asset growth, size positive s o u r c e : compiled by author. jay desai, rajesh desai138 return on equity (roe) various stake holders use different indicators to analyses financial health of organization. for equity shareholders, roe is one of the key determinants of profitability and it indicates return generated on equity funds. roe has been used by scholars to measure how much value addition is made by managers towards the wealth of shareholders. (abor, 2005; azhagaiah & gavoury, 2011; gill, nahum & mathur, 2011; krishnan & moyer, 1997; majumdar & chhibber, 1999). modern corporate functions on agency principle i.e. funds are provided by one party and management and decisions are taken by other. such agency relationship creates a possibility of conf licting interests of creditors and owners (jensen & meckling, 1976). debt holders expect regular interest payment and principle, so they prevent organizations to take up risky but profitable projects. on the other hand, equity providers are risk takers who expects higher return to compensate the risk. debt financing improves profitability as tax advantage and lower cost of debt improves earnings available to equity holders (myres, 1984). like roa, empirical findings relating to roe and cs are also of mix opinion. adewale and ajibola (2013) have concluded a strong positive impact of debt ratio on roe which further supported by danis et al., (2014); ebrati, emadi, balasang and safari (2013); fosu (2013). as against this, pecking order theory pioneered by donaldson (1961) and modified by myres and majluf (1984) suports contradictory view. the notion of inverse relation between roe and borrowings is argued by vijaykumar and karunaiathal (2014); singh and singh (2016); puwanenthiren (2011); and pouraghajan and malekain (2012) based on their empirical research work on various industries and countries. considering debt maturity as mediating factor, abata, migiro, akande and layton (2017) have argued that long-term debt has strong negative impact on roe. model based study carried by emin (2016); kodongo, et al., (2014); salim and yadav (2012); shubita and alsawalhah (2012); and twairesh, (2014) concludes negative impact of both long-term as well as short-term borrowings on roe. abor (2005 & 2007) have tested the relation between cs and roe for large size as well as smes and concluded that long-term debt has unfavorable impact on roe whereas short-term debt has positive relation with roe. such findings were also validated by gill, nahum and mathur (2011); goyal, (2013); tailab, (2014) who reported similar results. abridged view of relation between roe capital structure as determinant of financial performance… 139 and cs variables has been potrayed in table 2 which highlights major findings along with moderating variables used by scholars. table 2. impact of cs on roe source control variables impact on roe roe and debt – asset ratio adewale & ajibola (2013) asset turnover, size, tangibility, growth positive ebati et al., (2013) na positive fosu (2013) competitive force positive gupta (2015) na negative pouraghajan & malekain (2012) asset turnover, size, tangibility, growth, age negative roe and debt – equity ratio azhagaiah & gavoury (2011); chadha & sharma (2015); abata et al., (2017) na negative basit & hassan (2017) size, advertising & marketing neutral velanampy & niresh (2012); nirajini & priya (2013) na positive roe and long-term debt ratio ahmad, abdullah & roslan (2012) size, asset growth, sales growth, efficiency neutral chavali & rosario (2018) na positive abor (2005) growth, size negative shubita & alsawalhah (2012); salim & yadav (2012) na negative roe and short-term debt ratio ahmad, abdullah & roslan (2012) size, asset growth, sales growth, efficiency negative tailab (2014); chavali & rosario (2019) na positive abor (2005) growth, size positive shubita & alsawalhah (2012) na negative s o u r c e : compiled by author. jay desai, rajesh desai140 earnings per share eps is an alternate measure of evaluating financial performance from the viewpoint of equity shareholders. in contrast with roe which gives percentage, eps provides absolute rupee value. researchers have used eps as supplementary along with roa and roe (basit & hassan, 2017; goyal, 2013; gupta, 2015; mujahid & akhtar, 2014). eps provides better view of equity returns as calculation of roe includes retained earnings that may def late equity returns of a given accounting year. borrowed funds come along with compulsory payment of interest that reduces the net earnings available to equity holders hence it negatively affects eps (gupta, 2015; salim & yadav, 2012; vijaykumar & karunaiathal, 2014; yadav, 2018). size of the firm can moderate the relationship between cs and eps as large firms can avail funds at economical rate whereas small and medium size firms struggule while getting credit from finanical institution. san and heng (2011) have used size as moderator to test the effect of cs on eps and concluded that leverage affects eps of large size firms in a positive way. such positive relation between eps and cs was concluded by vijaykumar and karunaiathal (2014), saeedi and mahmoodi (2011); mujahid and akhtar (2014). hence, it can be inferred that cs variables have varied inf luence over eps and the same has been portrayed in table 3. table 3. impact of cs on eps source control variables impact on eps eps and debt – asset ratio gupta (2015) na negative san & heng (2011) na positive for large size firms only eps and debt – equity ratio basit & hassan (2017) size, advertising & marketing neutral gupta (2015); yadav (2018) na negative vijaykumar & karunaiathal (2014); mujahid & akhtar (2014) na positive eps and long-term debt ratio goyal (2013); asset growth, size negative san & heng (2011) na positive for large size firms only salim & yadav (2012) na negative capital structure as determinant of financial performance… 141 source control variables impact on eps eps and short-term debt ratio saeedi & mahmoodi (2011) na positive goyal (2013) asset growth, size positive salim & yadav (2012) na negative s o u r c e : compiled by author. market value of firm market price of share is a function of financial performance of any business undertaking hence it is imperative to study the effect of cs on market value of firm computed as product of market price and number of outstanding shares. several researchers have directly employed market value as dependent variable (dhankar & boora, 1996; hatfield et al., 1994; fama & french, 1998) whereas proxy variables such as stock returns (artikis & nifora, 2012), market price per share (chemutai, ayuma & kibet, 2016; chowdhury & chowdhury, 2010; vijaykumar & karunaiathal, 2014) and p/e ratio (zeitun & tian, 2007) are also used. mm (1958) proposition without taxes supports the fact that value of firm and its cs are independent which further coincides with findings of bhayani (2009); hatfield at el., (1994); chemutai, ayuma and kibet (2016). dhankar and boora (1996) have concluded that cs and market value of firm are separate only at micro level and are positively related at macro level. such positive relation between market price and debt financing was reported by vijaykumar and karunaiathal (2014) and chowdhury and chowdhury (2010). high level of debt and leverage increases risk of insolvancy making the firm unattractive. share holders expects higher return while investing in excessively levered firms which reduces market value of the firm (fama & french, 1998). tobin’s q ratio as proposed nicholas kaldor (1966) and later elaborated by james tobin, q ratio measures the market value of the firm in relation with its replacement cost. q ratio is one of the frequently used indicator of market based performance (abata et al., 2017; abor, 2007; chadha & sharma, 2015; ebrati, et al., 2013; kodongo et al., 2014; pandey, 2004; saeedi & mahmoodi, 2011; salim & yadav, table 3. impact… jay desai, rajesh desai142 2012; zeitun & tian, 2007). empirical findings of ebrati, et al., (2013); kodongo et al., (2014); saeedi and mahmoodi (2011); salim and yadav (2012) suggest that tobin’s q ratio is positively affected by debt financing whereas zeitun & tian (2007) confirms this relation only for short-term debt. the argument of positive relation between said variables is contradicted by abor (2007), pandey (2004) and abata et al., (2017). the impact of cs variables on various measures of market-based performance has been summarized in table 4. table 4. impact of cs on market based performance indicators source performance indicator (market based) cs variables impact on performance bhayani (2009); hatfield at el., (1994) market value of firm financial leverage, debt issue, industrial debt level neutral fama & french (1998) market value of firm debt ratio negative chemutai, ayuma & kibet (2016); vijaykumar & karunaiathal (2014) and chowdhury & chowdhury (2010) market price per share debt ratio, equity ratio, bond proportion, retained earnings, debt-equity ratio positive zeitun & tian (2007) p/e ratio total debt to asset, long-term debt to asset, short term debt to asset, total debt to capital negative artikis & nifora (2012) stock returns leverage negative ebrati, et al., (2013); kodongo et al., (2014); saeedi & mahmoodi (2011); salim & yadav (2012) tobin’s q ratio financial leverage, debt to equity ratio, long term debt to assets, short debt to assets ratio, total debt to assets positive abor (2007); pandey (2004); and abata et al., (2017) tobin’s q ratio long term debt to assets ratio, short debt to assets ratio, debt to asset ratio, debt to equity ratio negative s o u r c e : compiled by author. conceptual model based on review of existing below mentioned a conceptual model has been developed for further investigation. model is framed into three broad section i.e. (i) accounting performance indicators, (ii) capital structure variables, (iii) capital structure as determinant of financial performance… 143 market based performance indicators. in first section factors like roa (abor, 2005; chavali & rosario, 2019; ebaid, 2009; tailab, 2014), roe (adewale & ajibola, 2013; ahmad, abdullah & roslan, 2012; emin, 2016; mihaela & claudia, 2017) and eps (mujahid & akhtar, 2014; san & heng, 2011; saeedi & mahmoodi, 2011; yadav, 2018) are categorised as accounting indicators whereas market value of firm (bhayani, 2009; hatfield at el., 1994; fama & french, 1998) p/e ratio (zeitun & tian, 2007) market price per share (chemutai, ayuma & kibet, 2016; vijaykumar & karunaiathal, 2014; chowdhury & chowdhury, 2010), tobin’s q ratio (ebrati, et al., 2013; kodongo et al., 2014; abor, 2007; pandey, 2004; abata et al., 2017) are grouped as market based indicators. rationale to differentiate indicators lies in the fact that accounting measures present historical view of financial position which may not be attractive to current investors. performance of company is ref lected by indicators of capital market provides real time information. figure 1. conceptual model developed by author rationale to differentiate indicators lies in the fact that accounting measures present historical view of financial position which may not be attractive to current investors. performance of company is reflected by indicators of capital market provides real time information. figure 1. conceptual model developed by author source: compiled by author. discussion and research extension though extensive research work is carried on cs and financial performance, below mentioned are several areas that require further investigation.  inconsistency and contradictions are main landscapes of research outcome of various studies though they are in same country. there is no concluding evidence on the effect of cs on profitability hence there is a scope of further research.  surprisingly, very few studies are concentrated on small and medium enterprises which are significant mode of employment and industrial output for developing countries like debt – asset ratio debt – equity ratio long-term debt ratio short-term debt ratio capital structure variables return on asset return on equity accounting measure of financial performance market value of firm p/e ratio market price per share tobin’s q ratio market based measure of financial performance earnings per share s o u r c e : compiled by author. jay desai, rajesh desai144 discussion and research extension though extensive research work is carried on cs and financial performance, below mentioned are several areas that require further investigation. ■ inconsistency and contradictions are main landscapes of research outcome of various studies though they are in same country. there is no concluding evidence on the effect of cs on profitability hence there is a scope of further research. ■ surprisingly, very few studies are concentrated on small and medium enterprises which are significant mode of employment and industrial output for developing countries like india. correct source of financing plays vital role in survival of smes hence research in this area is inevitable. ■ a vast amount of research is carried out by including multiple industries at single point of time rather than focusing on specific industry. such studies may provide biased results as financial performance governed by operating industry becomes non-comparable. hence, it is important to consider industry wise differences while analyzing effect of cs and profitability. ■ it is observed that most of the studies are focused on accounting measures and limited attention is given to market-based performance measures. though market value of the firm is dynamic and affected by numerous factors, its importance cannot be ignored. researchers may study how investors react to change in cs of firm by analyzing effect of such announcement on share price. ■ availability of funds depend on banking regulations, capital market norms and government policies which alter the effect of cs on value of firm. supply of money is also an important factor which is ignored by most of researchers. further research can be called for by considering these factors.  conclusion capital structure has found to be one of the highest researched topics in the field of corporate finance which leads to abundand theotrical as well as empirical contributions. research work reviewed under this paper mainly focuses on capital structure as determinant of financial performance… 145 how the choice of debt and equity affects the financial performance of an economic entity. this article compares and contrast outcomes of various studies conducted and attempts to enumerate important areas which require further exploration. assessment of available literature discloses contradicting results which demands more inclusive research. besides varied results, limited research articles emphasis market based financial performance and role of regulatory framework. in addition to this, the present paper also propose a conceptual model that describes the interrelationship between cs and finanical performance based on detailed discussion of widespread literature. this model reckons important variables of financial performance affected by cs which help research scholars further investigation. researchers can use this model to perform empirical testing to fill the gaps identified above and enrich the existing literature.  references abata, 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(2007). capital structure and corporate performance: evidence from jordan. australasian accounting, business and finance journal, 1(4), 40-61. http://dx.doi.org/10.14453/aabfj.v1i4.3. for authors peer review processpeer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a 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september 18, 2020; date of acceptance: january 3, 2021. * contact information: ajibolamagaji@gmail.com, department of accounting and finance, kwara state university, malete, nigeria, phone: +2347032873780; orcid id: https://orcid.org/0000-0003-2293-3453. ** contact information: oshoprint@gmail.com, department of accounting and finance, kwara state university, malete, nigeria, phone: +2347036215657; orcid id: https://orcid.org/0000-0003-1365-2860. *** contact information: orimustrock@yahoo.com, department of accountancy, the federal polytechnic, offa, nigeria, phone: +2348032440434; orcid id: https://orcid. org/0000-0001-5459-3364. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 4 ajibola, i.m., saheed, d.o., & adedoyin, l. (2020). impact of microfinance institutions on financial literacy in north central geo-political zone nigeria. copernican journal of finance & accounting, 9(4), 9–25. http://dx.doi.org/10.12775/cjfa.2020.019 ibrahim majeed ajibola* kwara state university daud omotosho saheed** kwara state university lukman adedoyin*** federal polytechnic offa impact of microfinance institutions on financial literacy in north central geo-political zone nigeria keywords: financial literacy, saving mobilization, e-banking, financial decisions. j e l classification: g21, g28, d14, d19, c23. abstract: inclusive financial literacy through microfinance institutions activities is becoming a policy issue in both developed and developing nations of the world as it has been perceived as a veritable tool for economic development. this work examines the ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin10 impact of microfinance institutions on financial literacy in north central geo-political zone nigeria. the specific objectives are to establish the relationship between saving mobilization as microfinance institutions operations and financial literacy, analyze the effect of microfinance institutions accessibility on e-banking platform usage and identify the effects of microfinance institutions activities on the financial decisions of the rural dwellers. descriptive design method was adopted; 50 respondents was selected from each of the six microfinance institutions that was selected from each of the six states of the north central geo-political zone that serve as the fair representation of the population under study a total of 1800 questionnaires were administered out of which 1494 was returned. data for the study were collected primarily through questionnaire from the 1494 respondents that serve as the fair representations for the population under study. the formulated hypotheses were tested with the aid of regression and correlation while preliminary test was done with the aid of kolmogorov-smirnov and shapiro wilk with a view to ascertain the normality of the data. similarly, reliability test was conducted with the aid of cronbach’s alpha. the overall results of the regression analysis reveals that a positive relationship exist between mfis activities and financial literacy given cognizance to the reported coefficients on the adopted variables. therefore, it was recommended that government should promote financial sector deepening by licensing more microfinance institutions, to promote accessibility to finance among its populous to improve the level of financial literacy in nigeria. this will increase their ability to save and borrow thereby contribute positively to economic development.  introduction the current trend in economy world has not only made financial literacy an important knowledge which a sizeable portion of a state must acquire but rather becomes an imperative essential tool for survival in the face of the global pandemic which has voraciously induce all forms of economics activities adversely. the low level of financial literacy especially among the rural dwellers has no doubt resulted to some forms of poor financial investment and decision due to their inability to clearly identified and select an investment option that suit their risk preference this will no doubt have an impending effect on both individual finances and the entire financial system. thus, the need to accelerate personal financial literacy and orientation should become policy issue in developed and developing countries. low level of financial literacy in africa is especially in nigeria is becoming alarming among specific demographic groups, particularly those with low education background (gine, 2013). the increasing incidence of poor financial investment in some africa countries are in connection with the fact that an insignificant persons seek the help of financial advisors to make financial investment related decisions. however, low financial literacy among the rural dwellers usually affect their ability to save and to secure impact of microfinance institutions on financial literacy… 11 a comfortable investment plans considering the complexity of financial concepts (lusardi, 2012). henri, fred and kemirembe (2015) maintain that financial literacy and orientation require the ability and capacity to do complex calculations with respect to financial investment plans and decisions. lusardi (2008) opined that most of the empirical studies carried out by the united states and other selected developing nations indicate that low level of education attainment is a major producing agent of financial illiteracy. financial knowledge is the major ingredient for financial and investment decisions. thus, financial literacy has become the lifetime skills that is require to succeed in today’s complex economic environment in the face of the global pandemics (kakande, 2013). most of the previous studies on the subject matter such as masok (2011), kakande (2013), chibba (2009), sanusi (2011), abifarin and bello (2018), emeka and udom (2019) and adeola and ikpesu (2019) among others that examined financial literacy related topics in nigeria focused mainly on the role of financial institutions in promoting business enterprises and financial inclusion. this, to the best knowledge of the researchers, no study has been conducted with respect to how the operation of the microfinance institutions have promoted financial literacy among the people of north central geo-political zone in nigeria given credence to the fact that the north central geo-political zone in nigeria has the highest population of illiterates in nigeria, particularly the rural dwellers considering the fact that microfinance institutions operate outside the formal sector. however, microfinance institutions constitute a potent development strategy tool that enables poor entrepreneurs to initiate their businesses as well as saving mobilizations which expand the circle of their economic activities. therefore, the impact of microfinance institutions on financial literacy in nigeria has not being fully researched on, it is imperative that the gap be filled by taking a look at how the microfinance institutions operations affect and promote financial literacy especially among the rural dwellers. to guide the thrust of this research work, the following hypotheses were tested: h1: there is no significant relationship between saving mobilization of microfinance institutions operations and financial literacy. h2: there is no significant effect of microfinance institutions accessibility on e-banking platform usage. h3: there is no significant effect of microfinance institutions activities on the financial decisions of the rural dwellers. ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin12 literature review conceptual review financial literacy as a persons’ minimal knowledge about financial terms such as money, inf lation, interest rate, credit and others financial related concept (greenspan, 2002). the ability, capacity, dexterity and skills of an individual to use all this information in making personal financial decisions. socol (2014) opined that the concept of financial literacy restricted to knowledge and skill elements. more particularly, the concept of financial literacy now requires individual financial behavior, preference as well as self-discipline to ensure a better financial investment decision. financial orientation and literacy is a broad concept that requires the translation of idea and knowledge for the purpose of wealth creation in terms of efficient saving and investment. financial numeracy, literacy and orientation perhaps depend on the financial system and the framework in which individuals and communities operate. bayer and douglas (2009) argue that low financial knowledge in this part of the world has promoted wrong financial plans and decisions which has induced the prosperity index in the nonproductive age of demography. the cardinal focus of financial numeracy and literacy is to give financial education and orientations to all and sundry specifically the rural dwellers in order to manage their finances diligently and intelligently, as a way of addressing information asymmetry associated with investment decisions in relation to investment products that offer high profits in the short term without considering the associated risks. theoretical background learning theory learning theory was promulgated by skinner (1953) who postulated that behaviour is associated with consequence based on the assumption that the behavior of an individual has direct link with their ability and capacity. thus, the theory is mainly concern with the possibility of making certain decisions with respect to self-discipline and preference in connection with an impending consequence regarding how individual knowledge and exposure affect their de impact of microfinance institutions on financial literacy… 13 cision making. thus, it is important to note that financial literacy induce the skills and knowledge of individuals in making key financial and investment related decisions that affect their lives and considering the strategic role microfinance institutions play in relation to the financial literacy of low income earners and the rural dwellers that are mostly financially excluded. empirical review mohamed and mukhongo (2016) examine the effect of microfinance services on the financial performance of small and medium enterprises, in mogadishu, somalia. the data used for the study was collected through a structured questionnaire that was administered to the selected respondents that were purposively selected to serve as fair representation for the population under study. regression model was adopted with the view to test for the significance of the study hypotheses. the results show that moderate positive relationship exists between financial sustainability, financial literacy, risk diversification and financial performance of microfinance institutions in mogadishu, somalia. in the light of the forgoing it was recommended that the microfinance institutions should expand their services to other parts of the country as a way of accelerating smes growth among the people of mogadishu in somalia. chibba (2009) empirically investigate the inf luence of financial literacy on financial decisions of micro finance institution clients in embu county. questionnaire was adopted as a tool for data collection. the collected date was analyzed using statistical package for social sciences (spss) computer program. spearman’s correlation was used to establish the nature of relationship that exist between the dependent variable and adopted proxies for the independent variables. the results show that financial illiteracy of certain portion of the demographic especially the rural dwellers about mfi operations had made some of them poorer because of wrong investment decisions. it was recommended that mfi should step up their training for their customers on financial literacy through a voucher scheme to enable the clients advance their financial management skills and dexterity. ajinaja and odeyale (2018) examine microfinance and the challenge of financial inclusion for smes development in nigeria. the needed data was collected primarily through the use of questionnaire. the result of the finding reveal among many others that there is a negative significant relationship between loan to small enterprises and loan to rural areas in nigeria in the period ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin14 under study. it was therefore recommended that more micro finance institutions should operate at rural communities as a way of addressing the problem of financial exclusion the rural dwellers are confronted with. emeka and udom (2019) investigate the impact of microfinance in promoting financial inclusion in nigeria from 1990 and 2014. a unit root test was conducted to establish the stationary of the adopted series to avoid spurious regression results. the findings indicate that all the explanatory variables were jointly significant in explaining the dependent variable. it was recommended that microfinance banks should operate majorly in local communities as a way of promoting financial inclusion among the rural dwellers. from the literature review surveyed, it was found that the researchers who studied financial literacy were conducted outside the shore of nigeria hence, leaving a geographical gap, even considering the fact that most of the active players in the informal sectors were said to be rural dwellers who knew little or nothing about financial decision. this study therefore presents an empirical analysis of how the activities of microfinance banks inf luence financial literacy in north central geo-political zone in nigeria. the research methodology and the course of the research process methodology this research makes use of survey research because a population with large number was brought under investigation. the population for this study comprises of all the microfinance institutions in north central geo-political zone in nigeria. it is important to know that there are different types of microfinance institutions performing designated functions; however, this study purposely focus on the microfinance banks in north central geo-political zone in nigeria. due largely to the proximity of the north central geo-political zone to the researchers which enable the researchers to easily obtain all the needed data for the purpose of this study from each of the topmost six microfinance banks that were purposively selected from each of the six states of north central geopolitical zone in nigeria. it is important to know that each of the six selected states in north central geo-political zone in nigeria has three senatorial districts just like every other state in nigeria. a total of thirty-six microfinance institutions operators were purposively selected to serve as the fair representa impact of microfinance institutions on financial literacy… 15 tion of the whole microfinance institutions in north central geo-political zone in nigeria. hence, the researcher selects a predetermined number of fifty (50) customers per mfi, the topmost two microfinance institutions were selected from each of the three senatorial districts of the six north central geo-political zone states in nigeria to make a total of three hundred (300) customers per each of the six states of north central geo-political zone in nigeria which include; benue, kogi, kwara, niger, nasarawa and plateau. hence, a total of one thousand and eight hundred (1800) respondents were targeted to serves as fair representation of the population under study. model specification this model was adapted from the study of emeka and udom (2019). the study used, saving mobilization (sm), e-banking product (ebp) and financial decision (fd) as a proxy for the independent variable fil= f(mfio) (1) where: fil = financial literacy mfio = microfinance institution operations where: fil = sm, ebp and fd: it then follows that fil= ᶂ (sm; ebp;fd) (2) substituting equation (2) into (1), a multivariate relationship is arrived at as follows; mfi=β0+β1sm+β2ebp+β3fd+εi (3) where: β0 = intercept of the model. β1 = coefficient of each independent variable in the model. εi= error term ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin16 the a-priori expectation of the above model posits a positive relationship between fil proxy and the adopted surrogates for mfio. estimation and analyses validity and reliability test for the research instrument the content validity of this work was done through expert opinion for determining the appropriateness of the research instrument. in other to ensure the reliability of this work research instrument cronbach’s alpha technique was adopted. data presentation, analysis and interpretation response rate table 1. analysis of response rate respondents total distributed total returned unreturned questionnaire correctly filled selected mfis customers 1800 1594 100 1494 total 1800 1594 100 1494 s o u r c e : field survey. a total of one thousand and eight hundred (1800) questionnaires were administered to the selected respondents which are drawn from the 36 microfinance institutions across the three senatorial district of north central geo-political zone in nigeria. only one thousand, four hundred and ninety four (1494) representing 83% of the administered questionnaires were returned and completed appropriately, two hundred and six (206) questionnaires, representing 11.4% of the questionnaires administered were returned but not duly completed, hence, invalid, while one hundred (100) questionnaires, representing 5.5% of the total questionnaires administered were not returned. these analyses were based on the responses from the returned questionnaires administered to the purposively selected respondents that serve as fair representation of the population under study. impact of microfinance institutions on financial literacy… 17 preliminary analysis test of normality table 2. tests of normality kolmogorov-smirnova shapiro-wilk statistic df sig. statistic df sig. saving mobilization .368 1494 .214 .613 1494 .325 e-banking platform usage by the rural dwellers .165 1494 .147 .721 1494 .261 financial decisions of the rural dwellers .161 1494 .107 .790 1494 .059 a. lilliefors significance correction s o u r c e : author’s survey, 2020. the table above indicated that the data relating to each of the research variables were normally distributed as kolmogorov-smirnov and shapiro wilk test were not significant at 0.05 (p = 0.214, 0.147, 0.107 and 0.325, 0.261 and 0.059 respectively). base on this result parametric statistical analysis was considered appropriate for this study. table 3. reliability test using cronbach’s alpha variable cronbach’s alpha n saving mobilization 0.78 4 e-banking platform usage by the rural dwellers 0.76 4 financial decisions of the rural dwellers 0.74 4 overall 0.72 12 s o u r c e : author’s survey, 2020. the table above shows that cronbach’s alpha coefficient for each of the above variables is relatively high at 0.78%, 0.76% and 0.74% regressors respectively. the overall cronabch’s alpha coefficient is 0.72. this value is above the standibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin18 ard margin of 0.70. hence, the scale is considered reliable base on the above cronbach’s alpha result. correlation coefficient matrix among variables table 4. correlation table sm ebp fd sm pearson correlation 1 .556** .517** sig. (2-tailed) .000 .000 n 1494 1494 1494 ebp pearson correlation .526** 1 .600** sig. (2-tailed) .000 .000 n 1494 1494 1494 fd pearson correlation .503** .600** 1 sig. (2-tailed) .000 .000 n 1494 1494 1494 **. correlation is significant at the 0.01 level (2-tailed). s o u r c e : author’s survey, 2020. the table above addressed the multi-collinearity problem among the explanatory variables. in the light of the above it was revealed that the independent variables were not significantly correlated with each other given considering their individual coefficients which was below 0.70% significance margin level. hence, the result suggests that there is no multi-collinearity problem among the variables. impact of microfinance institutions on financial literacy… 19 empirical analysis pearson correlation table 5. correlations sm fl sm pearson correlation 1 .804** sig. (2-tailed) .000 n 1494 1494 fl pearson correlation .804** 1 sig. (2-tailed) .000 n 1494 1494 **. correlation is significant at the 0.01 level (2-tailed). s o u r c e : author’s computation, 2020. the table above addressed the relationship between (fl) and (sm). pearson correlation was used because of parametric nature the data which was detailed in the normality test that previous conducted. the correlation coefficient of the result is above 0.70 i.e financial literacy having correlation coefficient of 0.804 which implies a positive strong relationship between financial literacy and saving mobilization. ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin20 regression coefficient table 6. coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .301 .074 4.304 .044 saving mobilization .175 .051 .185 2.420 .000 e-banking platform usage by the rural dwellers .421 .064 .752 6.164 .000 financial decision of the rural dwellers .051 .075 .080 .760 .000 a. dependent variable: financial literacy s o u r c e : author’s computation, 2020. the above table detailed the regression result of the model. according the table 0.301 was reported for constant which implies that irrespective of other independent variables, financial literacy is constantly affected by 0.301. saving mobilization of the selected micro finance institutions has a standardised coefficient of 0.185. this means that for every 1% increase in saving mobilization of micro finance institutions operations, financial literacy increase by 0.185. furthermore, e-banking platform usage by the rural dwellers has a standardised coefficient of 0.752 which implies that for every 1% increase in e-banking platform usage by the rural dwellers, financial literacy increase by 0.752. finally, financial decision of the rural dwellers has a standardized coefficient of 0.80. by implication, for every 1% increase in financial decision of the rural dwellers, will lead to financial literacy increase by 0.80. however, the standard error of all the variables are very low given cognizance to their reported coefficient. by implication the lower the standard error, the more precise the estimates. in view of this one can draw a conclusion that all the adopted proxies for the independent variables were precise in estimating the parameters. impact of microfinance institutions on financial literacy… 21 model summary table 7. model summary model r r square adjusted r square std. error of the estimate 1 .652a .665 .698 .248 a . p r e d i c t o r s : (constant), mfio s o u r c e : author’s computation, 2020. the table detailed the model summary describing it goodness of fit. multiple correlation coefficients (r) of 0.652 posits a strong relationship between the financial literacy and the set of predictors as a whole. the coefficient of (r2) stood @ 0.665 which implies that 66.5% of variation in the financial literacy being the dependent variable can be explained by the adopted surrogate for the independent variables while the 33.5% gap has been dumped into the error term which represent the stochastic element of the model. table 8. anovab model sum of squares df mean square f sig. 1 regression 75.981 3 36.097 397.449 .000a residual 32.312 1494 .086 total 108.293 1494 a. predictors: (constant), saving mobilization, e-banking platform usage by the rural dweller, financial decision of the rural dweller b. dependent variable: financial literacy. s o u r c e : author’s computation, 2020. the above result shows a general p-value of 0.000 is < 0.05 significance margin. this posits that the model is statistically significant. the f-statistics of 397.449s was equally significant at 5% which posits that the overall regression model is fit. ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin22  conclusion and recommendations based on the empirical analysis of the research, it was revealed that a positive relationship exists between saving mobilization and financial literacy. a percentage increase in saving mobilization activities will no doubt promote the level of financial literacy within the study area considering the fact that saving mobilization activities of mfis will no doubt promote a better financial planning and debt management of the mfis customers especially the rural dwellers that have no access to formal financial service. e-banking product (ebp) and financial decision (fd) as a proxy for the independent variable equally shows to have strong positive relationship with financial literacy. access and usage of e-banking products by the rural dwellers will no doubt improve their level of financial numeracy and literacy thereby promoting a better financial decision. revelations from the x-ray of this study shows that the activities of mfis usually inf luence an improved financial planning, saving habit and debt management of the mfis customers especially the rural dwellers that have no access to formal financial service considering the reported coefficient of microfinance institutions operation (mfio), e-banking product (ebp) and financial decision (fd) as a proxies for the independent variable. a good financial literacy in the population will no doubt induce the level of financial inclusion, which is off course a widely accepted poverty reduction strategy aimed at improving access to financial products for those in viscous circle of poverty partly because of their financial literacy. in the light of the forgoing the following recommendations were made: the government should promote financial sector deepening by licensing more microfinance institutions, to promote accessibility to finance among its populous to improve the level of financial literacy in north central geo-political zone in nigeria. this will increase their ability to save and borrow thereby contribute positively to economic development by reducing the level of poverty among the rural dwellers.  references abifarin, o., & bello, a. (2018). cooperative bank as an effective financial inclusion strategy in nigeria. journal of law, policy and globalization, 44. adeola, o., & ikpesu, f. (2019). an empirical investigation of the impact of bank lending on agricultural output in nigeria: a vector autoregressive (var) approach. journal of developing areas, tennessee state university, college of business, 50(6), 89-103. impact of microfinance institutions on financial literacy… 23 ajinaja, t., & odeyale, a. (2018). microfinance and the challenge of financial inclusion for sme’s development in nigeria. iosr journal of business and management, 19(2), 11-18. http://dx.doi.org/10.9790/487x-1902021118. bayer, j., & douglas, b. (2009).the effects of financial education in the workplace: evidence from a survey of employers. economic inquiry, 47(4), 605-624. http://dx.doi. org/10.1111/j.1465-7295.2008.00156.x. chibba, m. (2009). financial inclusion, poverty reduction and the millennium development goals. european journal of development research, 21(2), 213-230. http:// dx.doi.org/10.1057/ejdr.2008.17. emeka, e., & udom, a. (2019). impact of microfinance in promoting financial inclusion in nigeria. journal of business theory and practice, 3(2), 139-158. http://dx.doi. org/10.22158/jbtp.v3n2p139. gine, p. (2013). finance and growth: theory and new evidence. federal reserve board discussion, 35. greenspan, a. (2002). financial literacy: a tool for economic progress. futurist, 36(4), 37-41. henri, j.t., fred, m., & kemirembe, o.m. (2015). the role of financial literacy on loan repayment among small and medium entrepreneurs in rwanda; case study of urwego opportunity bank. journal of small business and entrepreneurship research. 3(5), 33-66. kakande, t. (2013). impact microfinance banks on financial literacy in uganda. issues in business management and economics, 1(7), 193-199. lusardi, a. (2008). financial literacy: an essential tool for informed consumer choice. paolo baffi centre research paper, 2009-35, 1-29. http://dx.doi.org/10.2139/ ssrn.1336389. lusardi, a. (2012). numeracy, financial literacy, and financial decision-making. numeracy, 5(1), 1-12. http://dx.doi.org/10.5038/1936-4660.5.1.2. masok, c. (2011). towards an effective framework for financial literacy and financial consumer protection in uganda. kampala: bank of uganda. mohamed, m.a., & mukhongo, a.l. (2016). effects of microfinance services on the financial performance of small and medium enterprises in mogadishu, somalia. journal of business management, 2(9), 152-173. sanusi, l.s. (2011). financial inclusion for accelerated micro, small and medium enterprises development: the nigerian perspective. paper presented at the 2011 annual microfinance and entrepreneurship awards. skinner, f.b. (1953). development and learning. journal of research in science teaching, 2(1), 176-186. socol, a. (2014). from literacy to financial education: a survey of methods to measure phenomena. the particular situation of romania. annales universitatis apulensis series oeconomica, 16(1), 213-220. http://dx.doi.org/10.29302/oeconomica.2014.16.1.19. ibrahim majeed ajibola, daud omotosho saheed, lukman adedoyin24 index questionnaire instruction: please tick (√) against your responses in the space provided. section a: demographic data 1. age (tick appropriately) 18-29 ( ) 30 49 ( ) 50 and above ( ) 2. gender: male ( ) female ( ) 3. marital status: single ( ) married ( ) 4. occupation: civil servants ( ) corporate employee ( ) entrepreneur ( ) student ( ) nb; from the next section, kindly tick appropriately, sa = 5 = strongly agreed a = 4 = agreed i = 3 = indifference d = 2 = disagree sd = 1 = strongly disagreed section b operational information i. establish the relationship between saving mobilization and financial literacy s/n statement sa a i d sd 1. sm improves customers financial literacy 2. sm improves customers understanding of financial services 3. sm influence customers disposition to banking culture. 4. sm induce customers financial knowledge impact of microfinance institutions on financial literacy… 25 ii. analyze the effect of microfinance institutions operations on e-banking platform usage by the rural dwellers s/n statement sa a i d sd 5. mfio brings e-banking products close to the rural dwellers 6. mfio influence rural dwellers disposition to e-banking usage. 7. mfio improves rural dwellers knowledge on e-banking products. 8. e-banking products has improved the level of financial inclusion among the rural dwellers. iii. identify the effects of microfinance institutions operations on the financial decisions of the rural dwellers s/n statement sa a i d sd 9. mfio induce rural dwellers investment decision 10. mfio improves the rural dwellers saving culture 11. mfio improves the rural dwellers financial decision. 12. mfio has reduce the fear of loss of fund on financial instrument among the rural dwellers. date of submission: september 2, 2019; date of acceptance: september 31, 2019. * contact information: nagerisuccess2000@yahoo.co.uk, department of banking and finance, al-hikmah university, ilorin, nigeria, phone: 08056172296; orcid id: https://orcid.org/0000-0002-5569-2169. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 3 nageri, k.i. (2019). evaluating volatility persistence of stock return in the pre and post 20082009 financial meltdown. copernican journal of finance & accounting, 8(3), 75–94. http://dx.doi. org/10.12775/cjfa.2019.013 kamaldeen ibraheem nageri* al-hikmah university evaluating volatility persistence of stock return in the pre and post 2008–2009 financial meltdown keywords: volatility persistence, stock market, financial meltdown, garch, mean reverting. j e l classification: c73, g01, g14. abstract: the nigerian stock market capitalization in 2007 was n 13.181 trillion but due to the meltdown, it reduced to n 7.030 trillion in 2009, indicating over 40% loss of investor’s value. the government, through securities and exchange commission (sec) introduced policies to stem the tide of the crisis. therefore, this study evaluate volatility persistence of return in the market during pre and post meltdown. the mean reverting and half-life volatility shock of the garch model under three error distribution was employed. finding indicates that return on the exchange exhibit high volatility magnitude after the meltdown but very low volatility magnitude before the meltdown. the generalized error distribution give the best estimate for pre and post meltdown. the study recommend the need to strictly monitor, restrict and regulate desperately optimistic noise (rumour) traders (investors) in the market, shorting to make money. kamaldeen ibraheem nageri76 xj,t+1  introduction the nigerian stock market capitalization in 2007 was n 13.181 trillion but as a result of the meltdown, it reduced to n 7.030 trillion in 2009, indicating more than 40% loss of investor’s value (cbn, 2014; okereke-onyiuke, 2009; 2010). as a result, the nigerian government, through securities and exchange commission (sec) introduced policies to stem the tide of the crisis on the nigerian stock market. these policies, among others include; reduction of the transaction fees by 50%, daily 1% maximum share price loss and 5% share price gain, which was later put at 5% either way in october 2008. these and other policies were introduced which constitute a break in the structure and operation of the nigerian stock market effected the volatility persistence of the exchange. therefore, there is the need to evaluate the effect of the policies introduced on volatility persistence of return in the market during pre and post meltdown. this will give impetus to the effect of the policies introduced and provide a guide into the future. consequently, the objective of the study is to evaluate the volatility persistence of stock return in the pre and post 2008–2009 financial meltdown in the nigerian stock exchange. this study is significant to academia, financial analyst and market participants in decision making on portfolio selection, option pricing, risk management, hedging, etc. estimating volatility persistence provides the regulators the opportunity to formulate policies that will better the lots of investors who will subsequently make informed investment decision. the study used various volatility models and compare the volatility persistence of the pre and post financial meltdown and also offer the model with the most efficient estimate for the measurement of volatility persistence. the rest of the paper is organized into sections; section two is for literature review and section three is for methodology. section four is for discussion of findings while section five is for summary, conclusion and recommendations. literature review stock return is extensively known to display both stochastic volatility and jumps from time-series studies of stock prices and cross-sectional studies of stock options (bakshi, cao & chen, 1997; bates, 2000). volatility denotes the extent of uncertainty (risk) on the magnitude of deviations in share price or return (campbell, lettau, malkiel & xu, 2001; shiller, 2000; pastor & verone evaluating volatility persistence of stock return… 77 si, 2006). it is a statistical extent of the dispersion of returns for a given share price or market index. volatility can be measured by using the standard deviation or variance between returns from same share price or market index (chao, liu & guo, 2017). an increased volatility denotes that a share price can possibly be spread out over a higher range of prices, indicating that the share price can change radically over a short time period in any direction. a decreased volatility denotes that share price vary at a stable speed over a period, the higher the volatility, the riskier (fostel & geanakoplos, 2012). theoretically, the fair game model states the stochastic process of with the conditional information set if it has the following property: �(����|��) = 0 (1) expression (1) indicates that average excess return overtime is zero. the fair game model is based on the behaviour of average return over a large sample; the expected return on an asset equals its actual return. therefore, the wealth of an investor in the previous period should be alike to that of the current period (samuels & yacout, 1981). the fair game model for the efficient market hypothesis for expected return is express as: ������ = ������ � �(������|��) (2) when �(����|��) = �������� � (������|��)} (3) where ������ is the excess of market value of security � at time � � �, ������ is the actual price of security � at time � � � (with reinvestment in intermediate cash income from the security), �(������|��) is the expected value operator (expected price of security � that was projected at time �, conditional on the information set ��or its equivalent, � is the information set that is assumed to be fully reflected in the price of security � at time �, and | is the conditional sign indicating that the price (�) of security � is conditional upon the information set � at time �. ������ =������� ���(������|��) (4) when �(������|��) =��������� � (������|��)} (5) where ������ is excess return for security � at period � � � as against the equilibrium expected return projected at period � (unexpected or excess return for security � at time � � �), ������ is the single period percentage (&) return ( ����������� ���� ) i.e the actual or observed return for security � at time � � � and �(������|��) is the equilibrium expected return at time � � � projected at time based on the information set ��. (1) expression (1) indicates that average excess return overtime is zero. the fair game model is based on the behaviour of average return over a large sample; the expected return on an asset equals its actual return. therefore, the wealth of an investor in the previous period should be alike to that of the current period (samuels & yacout, 1981). the fair game model for the efficient market hypothesis for expected return is express as: �(����|��) = 0 (1) expression (1) indicates that average excess return overtime is zero. the fair game model is based on the behaviour of average return over a large sample; the expected return on an asset equals its actual return. therefore, the wealth of an investor in the previous period should be alike to that of the current period (samuels & yacout, 1981). the fair game model for the efficient market hypothesis for expected return is express as: ������ = ������ � �(������|��) (2) when �(����|��) = �������� � (������|��)} (3) where ������ is the excess of market value of security � at time � � �, ������ is the actual price of security � at time � � � (with reinvestment in intermediate cash income from the security), �(������|��) is the expected value operator (expected price of security � that was projected at time �, conditional on the information set ��or its equivalent, � is the information set that is assumed to be fully reflected in the price of security � at time �, and | is the conditional sign indicating that the price (�) of security � is conditional upon the information set � at time �. ������ =������� ���(������|��) (4) when �(������|��) =��������� � (������|��)} (5) where ������ is excess return for security � at period � � � as against the equilibrium expected return projected at period � (unexpected or excess return for security � at time � � �), ������ is the single period percentage (&) return ( ����������� ���� ) i.e the actual or observed return for security � at time � � � and �(������|��) is the equilibrium expected return at time � � � projected at time based on the information set ��. (2) when �(����|��) = 0 (1) expression (1) indicates that average excess return overtime is zero. the fair game model is based on the behaviour of average return over a large sample; the expected return on an asset equals its actual return. therefore, the wealth of an investor in the previous period should be alike to that of the current period (samuels & yacout, 1981). the fair game model for the efficient market hypothesis for expected return is express as: ������ = ������ � �(������|��) (2) when �(����|��) = �������� � (������|��)} (3) where ������ is the excess of market value of security � at time � � �, ������ is the actual price of security � at time � � � (with reinvestment in intermediate cash income from the security), �(������|��) is the expected value operator (expected price of security � that was projected at time �, conditional on the information set ��or its equivalent, � is the information set that is assumed to be fully reflected in the price of security � at time �, and | is the conditional sign indicating that the price (�) of security � is conditional upon the information set � at time �. ������ =������� ���(������|��) (4) when �(������|��) =��������� � (������|��)} (5) where ������ is excess return for security � at period � � � as against the equilibrium expected return projected at period � (unexpected or excess return for security � at time � � �), ������ is the single period percentage (&) return ( ����������� ���� ) i.e the actual or observed return for security � at time � � � and �(������|��) is the equilibrium expected return at time � � � projected at time based on the information set ��. (3) where xj,t+1 is the excess of market value of security j at time t + 1, pj,t+1, is the actual price of security j at time t + 1 (with reinvestment in intermediate cash income from the security), e (pj,t+1 ǀ it) is the expected value operator (expected price of security j that was projected at time t, conditional on the information set it or its equivalent, i is the information set that is assumed to be fully ref lected in the price of security j at time t, and ǀ is the conditional sign indicating that the price (p) of security j is conditional upon the information set i at time t. �(����|��) = 0 (1) expression (1) indicates that average excess return overtime is zero. the fair game model is based on the behaviour of average return over a large sample; the expected return on an asset equals its actual return. therefore, the wealth of an investor in the previous period should be alike to that of the current period (samuels & yacout, 1981). the fair game model for the efficient market hypothesis for expected return is express as: ������ = ������ � �(������|��) (2) when �(����|��) = �������� � (������|��)} (3) where ������ is the excess of market value of security � at time � � �, ������ is the actual price of security � at time � � � (with reinvestment in intermediate cash income from the security), �(������|��) is the expected value operator (expected price of security � that was projected at time �, conditional on the information set ��or its equivalent, � is the information set that is assumed to be fully reflected in the price of security � at time �, and | is the conditional sign indicating that the price (�) of security � is conditional upon the information set � at time �. ������ =������� ���(������|��) (4) when �(������|��) =��������� � (������|��)} (5) where ������ is excess return for security � at period � � � as against the equilibrium expected return projected at period � (unexpected or excess return for security � at time � � �), ������ is the single period percentage (&) return ( ����������� ���� ) i.e the actual or observed return for security � at time � � � and �(������|��) is the equilibrium expected return at time � � � projected at time based on the information set ��. (4) kamaldeen ibraheem nageri78 when �(����|��) = 0 (1) expression (1) indicates that average excess return overtime is zero. the fair game model is based on the behaviour of average return over a large sample; the expected return on an asset equals its actual return. therefore, the wealth of an investor in the previous period should be alike to that of the current period (samuels & yacout, 1981). the fair game model for the efficient market hypothesis for expected return is express as: ������ = ������ � �(������|��) (2) when �(����|��) = �������� � (������|��)} (3) where ������ is the excess of market value of security � at time � � �, ������ is the actual price of security � at time � � � (with reinvestment in intermediate cash income from the security), �(������|��) is the expected value operator (expected price of security � that was projected at time �, conditional on the information set ��or its equivalent, � is the information set that is assumed to be fully reflected in the price of security � at time �, and | is the conditional sign indicating that the price (�) of security � is conditional upon the information set � at time �. ������ =������� ���(������|��) (4) when �(������|��) =��������� � (������|��)} (5) where ������ is excess return for security � at period � � � as against the equilibrium expected return projected at period � (unexpected or excess return for security � at time � � �), ������ is the single period percentage (&) return ( ����������� ���� ) i.e the actual or observed return for security � at time � � � and �(������|��) is the equilibrium expected return at time � � � projected at time based on the information set ��. (5) where zj,t+1 is excess return for security j at period t + 1 as against the equilibrium expected return projected at period (unexpected or excess return for security j at time t + 1), rj,t+1 is the single period percentage (&) return �(����|��) = 0 (1) expression (1) indicates that average excess return overtime is zero. the fair game model is based on the behaviour of average return over a large sample; the expected return on an asset equals its actual return. therefore, the wealth of an investor in the previous period should be alike to that of the current period (samuels & yacout, 1981). the fair game model for the efficient market hypothesis for expected return is express as: ������ = ������ � �(������|��) (2) when �(����|��) = �������� � (������|��)} (3) where ������ is the excess of market value of security � at time � � �, ������ is the actual price of security � at time � � � (with reinvestment in intermediate cash income from the security), �(������|��) is the expected value operator (expected price of security � that was projected at time �, conditional on the information set ��or its equivalent, � is the information set that is assumed to be fully reflected in the price of security � at time �, and | is the conditional sign indicating that the price (�) of security � is conditional upon the information set � at time �. ������ =������� ���(������|��) (4) when �(������|��) =��������� � (������|��)} (5) where ������ is excess return for security � at period � � � as against the equilibrium expected return projected at period � (unexpected or excess return for security � at time � � �), ������ is the single period percentage (&) return ( ����������� ���� ) i.e the actual or observed return for security � at time � � � and �(������|��) is the equilibrium expected return at time � � � projected at time based on the information set ��. i.e the actual or observed return for security j at time t + 1 and e (rj,t+1 ǀ it) is the equilibrium expected return at time t + 1 projected at time based on the information set it. the set of information (it) in (3) is very important when determining the value of the equilibrium expected return e (rj,t+1) since the expectation of rj,t+1 is conditional on it. if return can be described in terms of expected return of fair game model, the efficient market hypothesis will hold if no trading rule can be invented or used to earn abnormal profit built on the information set it. empirically, volatility model should sufficiently model heteroscadasticity in the disturbance term and capture the stylized fact inherent in the series such as volatility clustering, auto-regressive conditional heteroscadasticity (arch) effect (engle, 1982). various studies models heteroscadasticity in the disturbance term and captures the stylized fact inherent in the series (volatility persistence) include (kuhe, 2018; kumar & maheswaran, 2012; dikko, asiribo & samson, 2015; adewale, olufemi & oseko, 2016; fasanya & adekoya, 2017; muhammad & shuguang, 2015; kuhe & chiawa, 2017). in the presence of structural break, studies assert decrease in volatility persistence after the break (lamoureux & lastrapes, 1990; malik, ewing & payne, 2005; hammoudeh & li 2008; muhammad & shuguang, 2015) for canadian stock market, gulf arab countries stock market and some emerging stock markets. in nigeria, kuhe (2018), dikko et al. (2015), bala and asemota (2013), adewale et al. (2016), kuhe and chiawa (2017) assert that there exist significant reduction in volatility persistence after structural breaks. the research methodology and the course of the research process the research population is the nigerian stock exchange, the data used was the all share index return covering the period of jan. 2001 till dec. 2016 divided into pre and post financial meltdown. the weekly return series was calculated as: evaluating volatility persistence of stock return… 79 the set of information (��) in (3) is very important when determining the value of the equilibrium expected return �(������) since the expectation of ������ is conditional on ��. if return can be described in terms of expected return of fair game model, the efficient market hypothesis will hold if no trading rule can be invented or used to earn abnormal profit built on the information set ��. empirically, volatility model should sufficiently model heteroscadasticity in the disturbance term and capture the stylized fact inherent in the series such as volatility clustering, auto-regressive conditional heteroscadasticity (arch) effect (engle, 1982). various studies models heteroscadasticity in the disturbance term and captures the stylized fact inherent in the series (volatility persistence) include (kuhe, 2018; kumar & maheswaran, 2012; dikko, asiribo & samson, 2015; adewale, olufemi & oseko, 2016; fasanya & adekoya, 2017; muhammad & shuguang, 2015; kuhe & chiawa, 2017). in the presence of structural break, studies assert decrease in volatility persistence after the break (lamoureux & lastrapes, 1990; malik, ewing & payne, 2005; hammoudeh & li 2008; muhammad & shuguang, 2015) for canadian stock market, gulf arab countries stock market and some emerging stock markets. in nigeria, kuhe (2018), dikko et al. (2015), bala and asemota (2013), adewale et al. (2016), kuhe and chiawa (2017) assert that there exist significant reduction in volatility persistence after structural breaks. the research methodology and the course of the research process the research population is the nigerian stock exchange, the data used was the all share index return covering the period of jan. 2001 till dec. 2016 divided into pre and post financial meltdown. the weekly return series was calculated as: ����� = (����� ������) ������ (6) where ���� denote all share index at time � and ������ is all share index at time � � �. the unit root test, the arch effect test and volatility clustering attribute of the all share index return series were conducted and analysed to determine the suitability of using the data in garch variant models. garch models suitably capture the volatility clustering, (6) where asit denote all share index at time t and asit–1 is all share index at time t – 1. the unit root test, the arch effect test and volatility clustering attribute of the all share index return series were conducted and analysed to determine the suitability of using the data in garch variant models. garch models suitably capture the volatility clustering, auto-regressive conditional heteroscedasticity (arch) effect, asymmetry and other related attributes in the series (engle, 1982). model specification the garch model derived by bollerslev (1986) replaced the auto-regressive moving average [arma(p)] was given as: auto-regressive conditional heteroscedasticity (arch) effect, asymmetry and other related attributes in the series (engle, 1982). model specification the garch model derived by bollerslev (1986) replaced the auto-regressive moving average [arma(p)] was given as: ��� � � +�∑ ���������� + ∑ ���������� (7) where �, � > 0 and (� + �) < 1 is to avoid the possibility of negative conditional variance. equation (7) states that the current value of the current return variance is a function of a constant and values of the previous squared residual from the mean return equation plus values of the previous return variance. the mean return equation and the return variance garch model used in this research are as follows: ����� � � +���������� +���� mean return equation for ����� (8) ��� � � + ������� �+ ������� return variance equation garch model (9) where ��� is the return variance (one–period ahead forecast variance based on past information) of the error term from the mean return equations, � is the constant, ����� is the arch term depicting the previous period squared error term from the mean return equations and ����� is the garch term depicting the previous period return variance. the garch model implies that the current value of the return variance is a function of a constant and values of the squared residual from the mean return equation plus values of the previous return variance. volatility clustering means that period of high volatility will give way to normal (low) volatility and period of low volatility will be followed by high volatility which implies that volatility come and go. mean reversion in volatility implies that there is a normal level of volatility to which volatility will eventually return. long run forecasts of volatility converge to the same normal level of volatility, no matter when they are made (engle & patton, 2001). the mean reverting form of the garch model is given as: (7) where α, β > 0 and (α + β) < 1 is to avoid the possibility of negative conditional variance. equation (7) states that the current value of the current return variance is a function of a constant and values of the previous squared residual from the mean return equation plus values of the previous return variance. the mean return equation and the return variance garch model used in this research are as follows: auto-regressive conditional heteroscedasticity (arch) effect, asymmetry and other related attributes in the series (engle, 1982). model specification the garch model derived by bollerslev (1986) replaced the auto-regressive moving average [arma(p)] was given as: ��� � � +�∑ ���������� + ∑ ���������� (7) where �, � > 0 and (� + �) < 1 is to avoid the possibility of negative conditional variance. equation (7) states that the current value of the current return variance is a function of a constant and values of the previous squared residual from the mean return equation plus values of the previous return variance. the mean return equation and the return variance garch model used in this research are as follows: ����� � � +���������� +���� mean return equation for ����� (8) ��� � � + ������� �+ ������� return variance equation garch model (9) where ��� is the return variance (one–period ahead forecast variance based on past information) of the error term from the mean return equations, � is the constant, ����� is the arch term depicting the previous period squared error term from the mean return equations and ����� is the garch term depicting the previous period return variance. the garch model implies that the current value of the return variance is a function of a constant and values of the squared residual from the mean return equation plus values of the previous return variance. volatility clustering means that period of high volatility will give way to normal (low) volatility and period of low volatility will be followed by high volatility which implies that volatility come and go. mean reversion in volatility implies that there is a normal level of volatility to which volatility will eventually return. long run forecasts of volatility converge to the same normal level of volatility, no matter when they are made (engle & patton, 2001). the mean reverting form of the garch model is given as: mean return equation for (8) auto-regressive conditional heteroscedasticity (arch) effect, asymmetry and other related attributes in the series (engle, 1982). model specification the garch model derived by bollerslev (1986) replaced the auto-regressive moving average [arma(p)] was given as: ��� � � +�∑ ���������� + ∑ ���������� (7) where �, � > 0 and (� + �) < 1 is to avoid the possibility of negative conditional variance. equation (7) states that the current value of the current return variance is a function of a constant and values of the previous squared residual from the mean return equation plus values of the previous return variance. the mean return equation and the return variance garch model used in this research are as follows: ����� � � +���������� +���� mean return equation for ����� (8) ��� � � + ������� �+ ������� return variance equation garch model (9) where ��� is the return variance (one–period ahead forecast variance based on past information) of the error term from the mean return equations, � is the constant, ����� is the arch term depicting the previous period squared error term from the mean return equations and ����� is the garch term depicting the previous period return variance. the garch model implies that the current value of the return variance is a function of a constant and values of the squared residual from the mean return equation plus values of the previous return variance. volatility clustering means that period of high volatility will give way to normal (low) volatility and period of low volatility will be followed by high volatility which implies that volatility come and go. mean reversion in volatility implies that there is a normal level of volatility to which volatility will eventually return. long run forecasts of volatility converge to the same normal level of volatility, no matter when they are made (engle & patton, 2001). the mean reverting form of the garch model is given as: return variance equation garch model (9) where auto-regressive conditional heteroscedasticity (arch) effect, asymmetry and other related attributes in the series (engle, 1982). model specification the garch model derived by bollerslev (1986) replaced the auto-regressive moving average [arma(p)] was given as: ��� � � +�∑ ���������� + ∑ ���������� (7) where �, � > 0 and (� + �) < 1 is to avoid the possibility of negative conditional variance. equation (7) states that the current value of the current return variance is a function of a constant and values of the previous squared residual from the mean return equation plus values of the previous return variance. the mean return equation and the return variance garch model used in this research are as follows: ����� � � +���������� +���� mean return equation for ����� (8) ��� � � + ������� �+ ������� return variance equation garch model (9) where ��� is the return variance (one–period ahead forecast variance based on past information) of the error term from the mean return equations, � is the constant, ����� is the arch term depicting the previous period squared error term from the mean return equations and ����� is the garch term depicting the previous period return variance. the garch model implies that the current value of the return variance is a function of a constant and values of the squared residual from the mean return equation plus values of the previous return variance. volatility clustering means that period of high volatility will give way to normal (low) volatility and period of low volatility will be followed by high volatility which implies that volatility come and go. mean reversion in volatility implies that there is a normal level of volatility to which volatility will eventually return. long run forecasts of volatility converge to the same normal level of volatility, no matter when they are made (engle & patton, 2001). the mean reverting form of the garch model is given as: is the return variance (one–period ahead forecast variance based on past information) of the error term from the mean return equations, ω is the constant, auto-regressive conditional heteroscedasticity (arch) effect, asymmetry and other related attributes in the series (engle, 1982). model specification the garch model derived by bollerslev (1986) replaced the auto-regressive moving average [arma(p)] was given as: ��� � � +�∑ ���������� + ∑ ���������� (7) where �, � > 0 and (� + �) < 1 is to avoid the possibility of negative conditional variance. equation (7) states that the current value of the current return variance is a function of a constant and values of the previous squared residual from the mean return equation plus values of the previous return variance. the mean return equation and the return variance garch model used in this research are as follows: ����� � � +���������� +���� mean return equation for ����� (8) ��� � � + ������� �+ ������� return variance equation garch model (9) where ��� is the return variance (one–period ahead forecast variance based on past information) of the error term from the mean return equations, � is the constant, ����� is the arch term depicting the previous period squared error term from the mean return equations and ����� is the garch term depicting the previous period return variance. the garch model implies that the current value of the return variance is a function of a constant and values of the squared residual from the mean return equation plus values of the previous return variance. volatility clustering means that period of high volatility will give way to normal (low) volatility and period of low volatility will be followed by high volatility which implies that volatility come and go. mean reversion in volatility implies that there is a normal level of volatility to which volatility will eventually return. long run forecasts of volatility converge to the same normal level of volatility, no matter when they are made (engle & patton, 2001). the mean reverting form of the garch model is given as: is the arch term depicting the previous period squared error term from the mean return equations and auto-regressive conditional heteroscedasticity (arch) effect, asymmetry and other related attributes in the series (engle, 1982). model specification the garch model derived by bollerslev (1986) replaced the auto-regressive moving average [arma(p)] was given as: ��� � � +�∑ ���������� + ∑ ���������� (7) where �, � > 0 and (� + �) < 1 is to avoid the possibility of negative conditional variance. equation (7) states that the current value of the current return variance is a function of a constant and values of the previous squared residual from the mean return equation plus values of the previous return variance. the mean return equation and the return variance garch model used in this research are as follows: ����� � � +���������� +���� mean return equation for ����� (8) ��� � � + ������� �+ ������� return variance equation garch model (9) where ��� is the return variance (one–period ahead forecast variance based on past information) of the error term from the mean return equations, � is the constant, ����� is the arch term depicting the previous period squared error term from the mean return equations and ����� is the garch term depicting the previous period return variance. the garch model implies that the current value of the return variance is a function of a constant and values of the squared residual from the mean return equation plus values of the previous return variance. volatility clustering means that period of high volatility will give way to normal (low) volatility and period of low volatility will be followed by high volatility which implies that volatility come and go. mean reversion in volatility implies that there is a normal level of volatility to which volatility will eventually return. long run forecasts of volatility converge to the same normal level of volatility, no matter when they are made (engle & patton, 2001). the mean reverting form of the garch model is given as: is the garch term depicting kamaldeen ibraheem nageri80 the previous period return variance. the garch model implies that the current value of the return variance is a function of a constant and values of the squared residual from the mean return equation plus values of the previous return variance. volatility clustering means that period of high volatility will give way to normal (low) volatility and period of low volatility will be followed by high volatility which implies that volatility come and go. mean reversion in volatility implies that there is a normal level of volatility to which volatility will eventually return. long run forecasts of volatility converge to the same normal level of volatility, no matter when they are made (engle & patton, 2001). the mean reverting form of the garch model is given as: ��� � ��� = (� � �)(����� � ���) � � � ����� (10) where ��� = ��(� � � � �) is the unconditional long run magnitude of volatility persistence and �� = (��� � ���). the mean reverting rate � � � in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is(� � �)� = �� = 0.5. thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: �(��������) = ln(0.5)���(� � �) (11) according to the garch model and the mean reverting model, it is expected that �, � > 0 and (� + �) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot influence the current return variance while the addition (sum) of � + � reflect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; �(�) = �√���� � �(���)���� (12) where � is the mean value and �� is the variance of the error from the return equation. it considers the mean value (�) = 0 and variance (��) = 1. the student’s-t distribution; �(�) = �� ��� � ] ������](�� �� � ) ��� � (13) (10) where ��� � ��� = (� � �)(����� � ���) � � � ����� (10) where ��� = ��(� � � � �) is the unconditional long run magnitude of volatility persistence and �� = (��� � ���). the mean reverting rate � � � in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is(� � �)� = �� = 0.5. thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: �(��������) = ln(0.5)���(� � �) (11) according to the garch model and the mean reverting model, it is expected that �, � > 0 and (� + �) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot influence the current return variance while the addition (sum) of � + � reflect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; �(�) = �√���� � �(���)���� (12) where � is the mean value and �� is the variance of the error from the return equation. it considers the mean value (�) = 0 and variance (��) = 1. the student’s-t distribution; �(�) = �� ��� � ] ������](�� �� � ) ��� � (13) is the unconditional long run magnitude of volatility persistence and ��� � ��� = (� � �)(����� � ���) � � � ����� (10) where ��� = ��(� � � � �) is the unconditional long run magnitude of volatility persistence and �� = (��� � ���). the mean reverting rate � � � in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is(� � �)� = �� = 0.5. thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: �(��������) = ln(0.5)���(� � �) (11) according to the garch model and the mean reverting model, it is expected that �, � > 0 and (� + �) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot influence the current return variance while the addition (sum) of � + � reflect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; �(�) = �√���� � �(���)���� (12) where � is the mean value and �� is the variance of the error from the return equation. it considers the mean value (�) = 0 and variance (��) = 1. the student’s-t distribution; �(�) = �� ��� � ] ������](�� �� � ) ��� � (13) the mean reverting rate α+β in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is ��� � ��� = (� � �)(����� � ���) � � � ����� (10) where ��� = ��(� � � � �) is the unconditional long run magnitude of volatility persistence and �� = (��� � ���). the mean reverting rate � � � in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is(� � �)� = �� = 0.5. thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: �(��������) = ln(0.5)���(� � �) (11) according to the garch model and the mean reverting model, it is expected that �, � > 0 and (� + �) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot influence the current return variance while the addition (sum) of � + � reflect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; �(�) = �√���� � �(���)���� (12) where � is the mean value and �� is the variance of the error from the return equation. it considers the mean value (�) = 0 and variance (��) = 1. the student’s-t distribution; �(�) = �� ��� � ] ������](�� �� � ) ��� � (13) . thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: ��� � ��� = (� � �)(����� � ���) � � � ����� (10) where ��� = ��(� � � � �) is the unconditional long run magnitude of volatility persistence and �� = (��� � ���). the mean reverting rate � � � in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is(� � �)� = �� = 0.5. thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: �(��������) = ln(0.5)���(� � �) (11) according to the garch model and the mean reverting model, it is expected that �, � > 0 and (� + �) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot influence the current return variance while the addition (sum) of � + � reflect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; �(�) = �√���� � �(���)���� (12) where � is the mean value and �� is the variance of the error from the return equation. it considers the mean value (�) = 0 and variance (��) = 1. the student’s-t distribution; �(�) = �� ��� � ] ������](�� �� � ) ��� � (13) (11) according to the garch model and the mean reverting model, it is expected that α, β > 0 and (α + β) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot inf luence the current return variance while the addition (sum) of α + β ref lect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; evaluating volatility persistence of stock return… 81 ��� � ��� = (� � �)(����� � ���) � � � ����� (10) where ��� = ��(� � � � �) is the unconditional long run magnitude of volatility persistence and �� = (��� � ���). the mean reverting rate � � � in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is(� � �)� = �� = 0.5. thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: �(��������) = ln(0.5)���(� � �) (11) according to the garch model and the mean reverting model, it is expected that �, � > 0 and (� + �) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot influence the current return variance while the addition (sum) of � + � reflect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; �(�) = �√���� � �(���)���� (12) where � is the mean value and �� is the variance of the error from the return equation. it considers the mean value (�) = 0 and variance (��) = 1. the student’s-t distribution; �(�) = �� ��� � ] ������](�� �� � ) ��� � (13) (12) where μ is the mean value and σ2 is the variance of the error from the return equation. it considers the mean value (μ) = 0 and variance (σ2) = 1. the student’s-t distribution; ��� � ��� = (� � �)(����� � ���) � � � ����� (10) where ��� = ��(� � � � �) is the unconditional long run magnitude of volatility persistence and �� = (��� � ���). the mean reverting rate � � � in a good fitted model is usually very close to 1 which controls the magnitude of mean reversion (volatility persistence). if the variance spikes up during crisis, the number of periods until it is halfway between the first forecast and the unconditional variance is(� � �)� = �� = 0.5. thus, the half-life of volatility shock is given by zivot and wang (2006) and reider (2009) as: �(��������) = ln(0.5)���(� � �) (11) according to the garch model and the mean reverting model, it is expected that �, � > 0 and (� + �) < 1. indicating that the past squared residual of the mean return and the past return variance information individually and jointly cannot influence the current return variance while the addition (sum) of � + � reflect the magnitude of volatility persistence in return series. the conditional distributions for the standardized residuals of returns innovations were estimated under the gaussian distribution, student’s-t distribution, and the generalised error distribution (ged) for the empirical analysis are stated as; the gaussian (normal) distribution; �(�) = �√���� � �(���)���� (12) where � is the mean value and �� is the variance of the error from the return equation. it considers the mean value (�) = 0 and variance (��) = 1. the student’s-t distribution; �(�) = �� ��� � ] ������](�� �� � ) ��� � (13) (13) v is the degree of freedom (v > 2), if v tend to ∞, the student-t distribution converges to the gaussian distribution with kurtosis of � is the degree of freedom (� � �), if � tend to ∞, the student-t distribution converges to the gaussian distribution with kurtosis of � = ��� � �� � � for all � � �. the generalised error distribution (ged) distribution; �(�) = �� � �| � �| �� ��� � ���� (14) � = �� ���� ���� ���� ] ��� including the normal distribution if the parameter � has a value of two and when � � � indicates fat tail distribution. data analysis and discussion table 1. adf and pp unit root test result of all share index return before the meltdown asir before meltdown t-statistics p-value asir before meltdown adjusted t-statistics p-value adf test statistics -19.35467 0.0000 pp test statistics -19.39624 0.0000 critical values: 1% -3.447580 critical values: 1% -3.447580 5% -2.869029 5% -2.869029 10% -2.570827 10% -2.570827 source: author’s computations, 2018. the unit root test result of the all share index returns series for the pre-meltdown period of jan. 2001 till march 2008 as shown in table 1 revealed the p-values for the adf and phillip-perron test statistics is 0.0000. this implies that the null hypothesis should be rejected indicating that the return series before the meltdown is stationery (has no unit root). table 2. adf and pp unit root test result of all share index return after the meltdown asir after meltdown t-statistics p-value asir after meltdown adjusted t-statistics p-value adf test statistics -18.59976 0.0000 pp test statistics -18.63701 0.0000 critical values: 1% -3.446443 critical values: 1% -3.446443 5% -2.868529 5% -2.868529 10% -2.570558 10% -2.570558 source: author’s computations, 2018. the unit root test result of the all share index return series after the meltdown for the periods of april 2009 till dec. 2016 is presented in table 2. the p-values of 0.0000 under the adf and phillip-perron test statistics indicates that the null hypothesis should be re + 3 for all v > 4. the generalised error distribution (ged) distribution; � is the degree of freedom (� � �), if � tend to ∞, the student-t distribution converges to the gaussian distribution with kurtosis of � = ��� � �� � � for all � � �. the generalised error distribution (ged) distribution; �(�) = �� � �| � �| �� ��� � ���� (14) � = �� ���� ���� ���� ] ��� including the normal distribution if the parameter � has a value of two and when � � � indicates fat tail distribution. data analysis and discussion table 1. adf and pp unit root test result of all share index return before the meltdown asir before meltdown t-statistics p-value asir before meltdown adjusted t-statistics p-value adf test statistics -19.35467 0.0000 pp test statistics -19.39624 0.0000 critical values: 1% -3.447580 critical values: 1% -3.447580 5% -2.869029 5% -2.869029 10% -2.570827 10% -2.570827 source: author’s computations, 2018. the unit root test result of the all share index returns series for the pre-meltdown period of jan. 2001 till march 2008 as shown in table 1 revealed the p-values for the adf and phillip-perron test statistics is 0.0000. this implies that the null hypothesis should be rejected indicating that the return series before the meltdown is stationery (has no unit root). table 2. adf and pp unit root test result of all share index return after the meltdown asir after meltdown t-statistics p-value asir after meltdown adjusted t-statistics p-value adf test statistics -18.59976 0.0000 pp test statistics -18.63701 0.0000 critical values: 1% -3.446443 critical values: 1% -3.446443 5% -2.868529 5% -2.868529 10% -2.570558 10% -2.570558 source: author’s computations, 2018. the unit root test result of the all share index return series after the meltdown for the periods of april 2009 till dec. 2016 is presented in table 2. the p-values of 0.0000 under the adf and phillip-perron test statistics indicates that the null hypothesis should be re (14) including the normal distribution if the parameter v has a value of two and when v > 2 indicates fat tail distribution. data analysis and discussion table 1. adf and pp unit root test result of all share index return before the meltdown asir before meltdown t-statistics p-value asir before meltdown adjusted t-statistics p-value adf test statistics -19.35467 0.0000 pp test statistics -19.39624 0.0000 critical values: 1% -3.447580 critical values: 1% -3.447580 5% -2.869029 5% -2.869029 10% -2.570827 10% -2.570827 s o u r c e : author’s computations, 2018. kamaldeen ibraheem nageri82 the unit root test result of the all share index returns series for the premeltdown period of jan. 2001 till march 2008 as shown in table 1 revealed the p-values for the adf and phillip-perron test statistics is 0.0000. this implies that the null hypothesis should be rejected indicating that the return series before the meltdown is stationery (has no unit root). table 2. adf and pp unit root test result of all share index return after the meltdown asir after meltdown t-statistics p-value asir after meltdown adjusted t-statistics p-value adf test statistics -18.59976 0.0000 pp test statistics -18.63701 0.0000 critical values: 1% -3.446443 critical values: 1% -3.446443 5% -2.868529 5% -2.868529 10% -2.570558 10% -2.570558 s o u r c e : author’s computations, 2018. the unit root test result of the all share index return series after the meltdown for the periods of april 2009 till dec. 2016 is presented in table 2. the pvalues of 0.0000 under the adf and phillip-perron test statistics indicates that the null hypothesis should be rejected, indicating that the return series after the meltdown has no unit root (stationery series) at 5% significant level. table 3. conditional return/mean equation of all share index return before the meltdown dependent variable: all share index return before meltdown variable coefficient standard error t-statistic p-value c 0.005581 0.001413 3.950266 0.0001 asirbf(-1) 0.009341 0.051184 0.182494 0.8553 s o u r c e : author’s computations, 2018. evaluating volatility persistence of stock return… 83 table 4. arch effect result of all share index return before the meltdown test statistics value p-value f-statistics 39.77247 0.0000 observed r2 36.12409 0.0000 s o u r c e : author’s computations, 2018. table 3 shows the conditional mean/return equation for the all share index return before the meltdown. the arch effect test result on the residual of the mean equation of the all share index return series before the meltdown is presented in table 4. the f-statistics and the observed r square p-values is 0.0000. it indicates that the null hypothesis of no arch effect is rejected, meaning that there is arch effect in the residuals of the mean equation of all share index return series on the nigerian stock exchange before the financial crisis. figure 1. volatility clustering for weekly all share index return before the meltdown jected, indicating that the return series after the meltdown has no unit root (stationery series) at 5% significant level. table 3. conditional return/mean equation of all share index return before the meltdown dependent variable: all share index return before meltdown variable coefficient standard error t-statistic p-value c 0.005581 0.001413 3.950266 0.0001 asirbf(-1) 0.009341 0.051184 0.182494 0.8553 source: author’s computations, 2018. table 4. arch effect result of all share index return before the meltdown test statistics value p-value f-statistics 39.77247 0.0000 observed r2 36.12409 0.0000 source: author’s computations, 2018. table 3 shows the conditional mean/return equation for the all share index return before the meltdown. the arch effect test result on the residual of the mean equation of the all share index return series before the meltdown is presented in table 4. the f-statistics and the observed r square p-values is 0.0000. it indicates that the null hypothesis of no arch effect is rejected, meaning that there is arch effect in the residuals of the mean equation of all share index return series on the nigerian stock exchange before the financial crisis. figure 1. volatility clustering for weekly all share index return before the meltdown source. author’s computations, 2018. -.15 -.10 -.05 .00 .05 .10 .15 -.15 -.10 -.05 .00 .05 .10 .15 2001 2002 2003 2004 2005 2006 2007 residual actual fitted s o u r c e : author’s computations, 2018. in the same vein, the residual of the mean equation also exhibits volatility clustering as shown in figure 1, indicating that return series oscillates around the mean value (mean reverting). figure 1 reveals that volatility of stock returns before the meltdown is low for consecutive period till 3rd quarter of 2003 kamaldeen ibraheem nageri84 (low volatility followed by low volatility for a prolonged period) and volatility is high for another consecutive period till 3rd quarter of 2004 (high volatility followed by high volatility for a prolonged period). this feature of volatility of return for a prolonged period is sustained throughout the period before the meltdown. table 5. conditional return/mean equation of all share index return after the meltdown dependent variable: all share index return after meltdown variable coefficient standard error t-statistic p-value c 0.001129 0.001540 0.733232 0.4638 asiraft(-1) 0.070749 0.049886 1.418215 0.1569 s o u r c e : author’s computations, 2018. table 6. arch effect result of all share index return after the meltdown test statistics value p-value f-statistics 6.682433 0.0101 observed r2 6.605304 0.0102 s o u r c e : author’s computations, 2018. the conditional mean/return equation result for the all share index return before the meltdown is shown in table 5. the arch effect test on the residual of the mean equation of all share index return series after the meltdown is shown in table 6. the f-statistics and the observed r square p-values is 0.0101 and 0.0102 respectively. this indicates that the null hypothesis of no arch effect is rejected meaning that there is arch effect in the residuals of the mean equation of all share index return series on the nigerian stock exchange after the meltdown. evaluating volatility persistence of stock return… 85 figure 2. volatility clustering for weekly all share index return after the meltdown source: author’s computations, 2018. in the same vein, the residual of the mean equation also exhibit volatility clustering as shown in figure 2. figure 2 shows that return series oscillates around the mean value (mean reverting) showing that volatility of stock returns is high for consecutive period till 3rd quarter of 2009 (high volatility followed by high volatility for a prolonged period) and volatility is low for another consecutive period till 3rd quarter of 2014 (low volatility followed by low volatility for a prolonged period). this feature of high volatility followed by high volatility for a prolonged period and periods of low volatility followed by low volatility for a prolonged period is sustained throughout the period after the meltdown. in conclusion, as indicated in the phases of all share index returns, the existence of arch effect signifies that the variance of the all share index return series of nigerian stock exchange is non-constant for all periods specified. the presence of volatility clustering which is a stylized fact that financial time series exhibit gives the validity and condition necessary for the application arch variant models. the objective of this study is to determine the magnitude of volatility persistence in all share index on the nigerian stock exchange using the mean reverting and the half-life form of garch model stated in equation (10) and (11). since determine how quickly the variance forecast converges to the unconditional variance, the values of from the garch model and the half-life estimate are presented in table 7, 8, and 9 for the whole all share index return series, the all share index return before the meltdown and all share index return after the meltdown under the three (3) distributional assumptions. table 7. mean reversion and half-life estimate for all share index return (jan.2001dec.2016) parameters gausian distribution estimates student’s-t distribution estimates generalised error distribution estimates 0.209177 0.306950 0.257695 0.731140 0.626216 0.669422 -.2 -.1 .0 .1 .2 -.2 -.1 .0 .1 .2 2009 2010 2011 2012 2013 2014 2015 2016 residual actual fitted s o u r c e : author’s computations, 2018. in the same vein, the residual of the mean equation also exhibit volatility clustering as shown in figure 2. figure 2 shows that return series oscillates around the mean value (mean reverting) showing that volatility of stock returns is high for consecutive period till 3rd quarter of 2009 (high volatility followed by high volatility for a prolonged period) and volatility is low for another consecutive period till 3rd quarter of 2014 (low volatility followed by low volatility for a prolonged period). this feature of high volatility followed by high volatility for a prolonged period and periods of low volatility followed by low volatility for a prolonged period is sustained throughout the period after the meltdown. in conclusion, as indicated in the phases of all share index returns, the existence of arch effect signifies that the variance of the all share index return series of nigerian stock exchange is non-constant for all periods specified. the presence of volatility clustering which is a stylized fact that financial time series exhibit gives the validity and condition necessary for the application arch variant models. the objective of this study is to determine the magnitude of volatility persistence in all share index on the nigerian stock exchange using the mean reverting and the half-life form of garch model stated in equation (10) and (11). since α + β determine how quickly the variance forecast converges to the unconditional variance, the values of α + β from the garch model and the half-life estimate are presented in table 7, 8, and 9 for the whole all share index return kamaldeen ibraheem nageri86 series, the all share index return before the meltdown and all share index return after the meltdown under the three (3) distributional assumptions. table 7. mean reversion and half-life estimate for all share index return (jan.2001–dec.2016) parameters gausian distribution estimates student’s-t distribution estimates generalised error distribution estimates α 0.209177 0.306950 0.257695 β 0.731140 0.626216 0.669422 total 0.940317 0.933166 0.927117 half-life estimate 11.26368 10.02061 9.159465 aic -4.346110 -4.423912 -4.420061 sc -4.317776 -4.389911 -4.386059 hq -4.335247 -4.410876 -4.407025 s o u r c e : author’s computations, 2018. the sum of arch and garch terms presented in table 7 are 0.9403, 0.9332 and 0.9271 (volatility is highly persistent and dying very slowly) under the three (3) distributional assumptions and are close to 1. this suggests that the all share index return series form jan. 2001 till dec. 2016 on the nigerian stock exchange do not follow random walk which indicated that the return series is mean reverting. the average numbers of weeks for the volatility to revert to its long run level measured by the half-life estimate are 11, 10 and 9 weeks under the normal, student’s t and the generalized error distributions assumptions respectively. the all share index returns volatility appears to have quite long memory but it is still mean reverting and that new shock will impact on return for the period of 11, 10 or 9 weeks depending on the distributional assumption used by investor. the student’s t distribution estimates appears to have the lowest values among the model selection criterions. this suggests that the estimates under the student’s t provides the best prediction on the magnitude of volatility persistence in all share index return on the nigerian stock exchange in the period of jan. 2001 till dec. 2016. evaluating volatility persistence of stock return… 87 table 8. mean reversion and half-life estimate for all share index return before the meltdown parameters gausian distribution estimates student’s-t distribution estimates generalised error distribution estimates α 0.275426 0.362653 0.311980 β 0.040516 0.206215 0.170131 total 0.315942 0.568868 0.482111 half-life estimate 0.601588 1.228752 0.950062 aic -4.493051 -4.423912 -4.602665 sc -4.440692 -4.389911 -4.539834 hq -4.472264 -4.410876 -4.577721 s o u r c e : author’s computations, 2018. the results in table 8 indicate that the volatility of all share index returns is of low persistent (symptomatic of response function to shock dying very fast), with the sum of arch and garch terms being 0.3159, 0.5689 and 0.4821. the average numbers of weeks for the volatility to revert to its long run level measured by the half-life estimate is one (1) week under the three (3) distributional assumptions. the all share index returns volatility on the nigerian stock exchange before the meltdown appears to have short memory and still mean reverting since sum of α + β is significantly less than one. this implied that it takes a short time (1 week) for the all share index return volatility on the nigerian stock exchange before the meltdown to return to its mean. indicating that all share index return do not follow random walk and new shock impacted on return for a short period of 1 week on the nigeria stock exchange before the meltdown. the generalized error distribution estimates appears to have the lowest values among the model selection criterions. this suggests that the estimates under the generalized error distribution provides the best prediction on the magnitude of volatility persistence in all share index return on the nigerian stock exchange before the meltdown. kamaldeen ibraheem nageri88 table 9. mean reversion and half-life estimate for all share index return after the meltdown parameters gausian distribution estimates student’s-t distribution estimates generalised error distribution estimates α 0.263188 0.251813 0.251136 β 0.651247 0.656755 0.655032 total 0.914435 0.908568 0.906168 half-life estimate 7.749086 7.228902 7.034845 aic -4.432640 -4.470225 -4.470240 sc -4.382933 -4.410577 -4.410591 hq -4.412959 -4.446609 -4.446623 s o u r c e : author’s computations, 2018. table 9 shows the sum of the estimated arch and garch coefficients (persistence coefficients) for the three (3) distributional assumptions as 0.9144, 0.9086 and 0.9067 which is symptomatic of response function to shock dying very slowly (volatility is highly persistent). this suggested that the all share index return series on the nigerian stock exchange after the meltdown do not follow random walk which indicated that the return series is mean reverting. the volatility half-life estimate is 8 weeks under the normal distribution and 7 weeks under the student’s t and the generalized error distributions assumptions. the returns volatility appears to have long memory but it is still mean reverting such that new shock will impact the all share index return on the nigeria stock exchange for the period of 7 to 8 weeks after the meltdown depending on the distributional assumption used by investor. the generalized error distribution estimates appears to have the lowest values among the model selection criterions. this suggests that the estimates under the generalized error distribution provides the best prediction on the magnitude of volatility persistence in all share index return on the nigerian stock exchange after the meltdown. therefore, the null hypothesis of no volatility magnitude is rejected; therefore, the all share index return on the nigeria stock exchange exhibit high volatility magnitude during the period after the meltdown but exhibit very low volatility magnitude before the meltdown period. indicating that all share in evaluating volatility persistence of stock return… 89 dex returns on the nigerian stock exchange do not follow random walk and it is mean reverting. in summary, the objective of this study is to determine the magnitude of volatility persistence in all share index on the nigerian stock exchange using the mean reverting and the half-life form of garch model stated in in equation (10) and (11)under three (3) error distributional assumptions. findings show that volatility is highly persistent under the three (3) distributional assumptions for the period of jan. 2001 till dec. 2016 and post meltdown period while volatility is low under three (3) distributional assumptions for the pre meltdown period. the average numbers of weeks for the volatility to revert to its long run level measured by the half-life estimate are 11, 10 and 9 weeks under the normal, student’s t and the generalized error distributions assumptions respectively for the period of jan. 2001 till dec. 2016. the average number of week for volatility to revert after the meltdown is 8 weeks under the normal distribution and 7 weeks under the student’s t and the generalized error distributions assumptions while it takes 1 week during the period before the meltdown. the student’s-t distributional assumptions of mean reverting and the halflife form of garch model provide the best estimate to measure the magnitude of volatility persistence in all share index on the nigerian stock exchange for the sample period (jan. 2001 till dec. 2016). on the other hand, the generalized error distributional assumptions provide the best estimate for the period before and after the meltdown. this implies that investor face higher volatility persistence in return on the nigerian stock exchange during the sample period (jan. 2001 till dec. 2016) and after the meltdown. this finding is in agreement with gil-alana, yaya and adepoju (2015), ahmed and suliman (2011), goudarzi (2013), osazevbaru (2014), yin, tsui and zhang (2011), aluko, adeyeye and migiro (2016) contradicting the result of kuhe (2018), adewale et al. (2016). however, investors face lower volatility persistence before the meltdown in agreement with okpara and nwezeaku (2009) but still mean reverting in contrast with okpara (2010), nwidobie (2014). the findings is in agreement with olowe (2009) who ascertain that the market crash accounted for sudden change in variance but in contrast with goudarzi (2014) that volatility cannot be attributed to effect of sanction on iran. kamaldeen ibraheem nageri90  summary, conclusion and recommendations the objective of the study is to evaluate the magnitude of volatility persistence using the mean reverting and the half-life form of garch model on all share index return on the nigerian stock exchange. the introduction of the study was done in section one consisting of the background information on the nigerian stock market, the problem emanating from the financial meltdown of 2008– –2009 was identified. this form the basis for the research questions, objectives and hypotheses. the study was found to be significant in three least ways; contribute to the debate of market efficiency from the perspective of nigeria, examine the efficiency of the nigerian stock market using the financial meltdown as event window and creates an avenue for policy mending for the regulators. section two discusses the conceptual issues of stock return and return volatility. related theory of fair game model were explained in relation to the study and empirical literatures were also reviewed including kuhe (2018), kumar and maheswaran (2012), dikko et al. (2015), adewale et al. (2016), fasanya and adekoya (2017), etc. section three explained the model specifications using the garch model and the mean reverting form of the garch model to explain the information set of the residuals (shocks) in all share index return. the unit root statistics of adf and pp were used to examine the stationarity of the return series. furthermore, the mean equation, based on the market model and the distributional assumptions was stated. section four present the data, analysis and discussion of the empirical result. the samples were found to be stationary at level [i(0)] which is a major requirement of econometrics analysis such as the garch model used in this study. the residual of the mean equations for the whole, before and after the meltdown return series also exhibit the presence of arch effect and volatility clustering which are requirements for the application of the garch family models. the study concludes, from the findings that volatility is highly persistent for the sample period (jan. 2001 till dec. 2016) and after the meltdown while volatility is low during the pre-meltdown period. the results of mean reverting and half-life form of garch model shows that all share index return volatility is significantly highly persistent and dying slowly for the whole sample period and after the meltdown while volatility is significantly low persistent and dying very fast before the meltdown. the return is mean reverting for the whole evaluating volatility persistence of stock return… 91 period, before and after meltdown and do not follow random walk. the average number of week for the volatility to revert to its long run level is 10 weeks for the whole period, 1 week before the meltdown and 7 weeks after the meltdown. the findings rejected the null hypothesis which stated that there is no significant magnitude of volatility persistence in the nigerian stock exchange after the financial meltdown. the implication of this result is that investors on the nigerian stock exchange exhibit herding behavior as a result of their sensitivity and reaction to unexpected news which subsequently led to over and under-pricing of stocks. thus, stock prices on the nigerian stock market revolve around the mean price for 1 week in the pre meltdown period before increasing or reducing. however, stock prices revolve around the mean price for 8–10 weeks during the whole sample period and post meltdown period after which the price will move up or down. thus, the nigerian stock market is characterized by high degree of risk and uncertainty. this suggests that volatility could have permanent effect on future returns. the study therefore recommended the need for strict monitoring, restriction and regulation to discourage desperately optimistic noise (rumour) traders (investors) in the market, shorting to make money. short selling should only involve stocks that are inventoried by institutional investors, including pension funds, insurance companies and index funds (all of whom have long-term plans that are not expected to be negatively affected by liquidity constraints). only large capitalised stocks should be offered for short selling (they likely to be easy and cheap to borrow) while small capitalised stocks with slight institutional ownership may be difficult and expensive. this will prevent increase in the price of already overvalued stocks, which can extend the length and degree of bubbles. the exchange should encourage increase in the number of professionals in the market (the stockbrokers and registrars especially) to boost awareness of the importance of the stock market.  references adewale, a.o., olufemi, a.p., & oseko, m.s. 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(2009). stock return, volatility and the global financial crisis in an emerging market: the nigerian case. international review of business research papers, 5(4), 426–447. osazevbaru, h.o. (2014). measuring nigerian stock market volatility. singaporean journal of business economics, and management studies, 2(8), 1–14. http://dx.doi. org/10.12816/0003894. pastor, l., & veronesi, p. (2006). was there a nasdaq bubble in the late 1990’s? journal of financial economics, 81(1), 61–100. reider, r. (2009). volatility forecasting i: garch models, time series analysis and statistical arbitrage notes. new york: new york university. samuels, j.m., & yacout, n. (1981). stock exchanges in developing countries. savings and development, 5(4), 217–230. shiller, r.j. (2000). irrational exuberance. new jersey: princeton university press. yin, z., tsui, a.k., & zhang, z.y. (2011). modeling the conditional heteroscedasticity and leverage effect in the chinese stock markets. on 19th international congress on modkamaldeen ibraheem nageri94 elling and simulation. perth, australia. http://mssanz.org.au/modsim2011 (accessed: 21.08.2017). zivot, e., & wang, j. (2006). vector autoregressive models for multivariate time series. in e. zivot, j. wang (eds.). modelling financial time series with s-plus. berlin: springer science. date of submission: may 27, 2021; date of acceptance: august 29, 2021. * contact information: patrycja.konieczna@ue.wroc.pl, ptaszków 35, 58-400 kamienna góra, poland, phone: 603509362; orcid id: https://orcid.org/0000-0003-21950788. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 konieczna, p. (2021). local currencies supporting the implementation of the concept of sustainable development in europe. copernican journal of finance & accounting, 10(4), 67–77. http:// dx.doi.org/10.12775/cjfa.2021.015 patrycja konieczna* wroclaw university of economics and business local currencies supporting the implementation of the concept of sustainable development in europe keywords: financial market, money, local currencies, sustainable development. j e l classification: e44, f39, g00, q01. abstract: local currencies represent an alternative to fiat money. they contribute to the development of local communities, primarily by supporting small and medium-sized enterprises, which remain fundamental for the economy of every european country. the purpose of the study is to identify both ways and methods focused on supporting the implementation of the concept of sustainable development by the selected local currencies in the area of europe, analysed in the years 1932–2020. the paper takes the form a descriptive analysis based on the studies covering polish, czech, dutch, german and english source literature as well as the community currencies in action (ccia) publications, websites of the analysed local currencies and other studies in the field of financial law. the method of comparative analysis was used to examine the similarities and differences in supporting the implementation of the concept of sustainable development. the basic conclusion formulated after conducting the research is the fact that each local currency does support sustainable development in an indirect way. in addition, certain local currencies can be identified, in the case of which the support of sustainable development is the essence of their functioning. the effectiveness of the impact exerted by local currencies on sustainable development depends on the involvement of the creators of these currency systems and the specificity of the existing conditions. patrycja konieczna68 the ability to establish partnerships between non-governmental organisations, business entities and public administration may also play a significant role.  introduction in 1932, the first local currency was created, however, back then it was not yet expected that it could initiate the development of similar projects worldwide as an actual alternative to traditional money. the idea of a local currency is simple in its application, whereas its task is to imply the development of the local economy. the german-speaking countries, with their oldest currency in use – wir, are considered the pioneers in implementing the concept of local currencies. in addition, the local currency system – regiogeld has been functioning in the german-speaking countries. the system is designed to unite local currencies and their creators, provide assistance in introducing pilot currencies and support the functioning of the already existing currencies (gelleri, 2020). usually, the phenomenon of local currencies is not fully regulated by law. australia has the most liberal regulations along with a favourable approach of the authorities towards local currencies with approx. 200 systems in operation, and new zealand – approx. 70 systems, while the political parties, already in the 1990s, expressed active support for the local currency systems in their political programs (reichel, 1997). switzerland is also worth highlighting, where the local currency wir operates alongside the swiss franc – in 2004 wir franc became an officially registered currency, and in 2005 the swiss introduced wir euro as the third national currency (borowska, 2016). the concept of a local currency is closely correlated with the idea of the social economy, and more specifically with the idea of the sharing economy. the intention of local currencies is to constitute the “core” in the development of local communities. the area of their operation is usually limited to a county or a region, although in some cases the local currency covers several regions or even the entire country. local currencies can represent both traditional and virtual money (łukasiewicz-kamińska, 2014, p. 209). in principle, the local currency should be introduced to support the socially and economically degraded areas, which are characterised by a high share of unemployment, social exclusion and poverty, and have a deficit of financial resources to perform social changes (stępnicka, 2017). local currencies supporting the implementation… 69 the research methodology and the course of the research process the conducted research takes the form of a descriptive analysis and its main goal is to identify the impact of local currencies on the implementation of the concept of sustainable development. the method of comparative analysis was applied to examine the similarities and differences in supporting the implementation of the concept of sustainable development by the chosen local currencies. the subject matter of the carried out research covers the selected local currencies in europe. the data has been retrieved from the websites supporting the development of local currencies in europe and around the world, the websites of the analysed local currencies, and also the review of scientific papers and publications. the following research problem was formulated: “does every local currency, either directly or indirectly, support the implementation of the concept of sustainable development?”. the collected information on the studied local currencies covers the years 1932–2020. the essence of local currencies local currencies are not transferred outside the region in which they operate, they feed the local market alone acting as a catalyst for the local entrepreneurship through supporting local enterprises and integrating the community in a given area (maroszek, 2015). the main assumption of the local currency programs is to stimulate economic growth and reduce unemployment (łukasiewicz-kamińska, 2014, p. 209). in order to meet its role, local money should fulfil only two of the functions played by traditional money, i.e. the function of a measure of value and an exchange intermediary. thus, local money should be free from the store of value function, which is aimed at increasing circulation. local currencies have a greater turnover than the circulation of traditional money, and this goal is achieved through, e.g., demurrage tax, commissions, administrative charges or turnover-dependent fees (konieczna, 2018). an important advantage of local currencies is also the absence of the possibility to become the subject of speculation, which distorts both the essence and the role of traditional money (maroszek, 2015). borowska (2016, pp. 22–23) distinguishes three fundamental goals of local currencies: economic, environmental and social. the economic goals conpatrycja konieczna70 sist in stimulating and supporting the local economy as well as preventing the outf low of local capital. the environmental goals focus on environmental protection, whereas the social ones concentrate primarily on counteracting unemployment, poverty and social exclusion. in the years 2012–2015, the organisation community currencies in action was functioning in europe and was partially financed by the european union. as of may 2015, ccia was running 6 pilot currency programs: sonantes in france, makkie and tradeqoin in the netherlands, e-portemonnee in belgium, brixton pound and spice timebanks in the uk (scott cato & dodd, 2015). local currencies in europe the first local currency in the world was created in a small austrian town of wörgl in 1932. the mayor michael unterguggenberger, struggling with the problems of rising unemployment and advancing economic crisis in the city, issued the wörgl shilling which was convertible at the rate of 1:1 into the austrian schilling. the result of this innovative venture was the reduction of unemployment rate in less than a few months and an improvement in the economic situation of the city. poverty declined, the city implemented planned investments, many jobs were opened and new residential buildings as well as a ski jump were constructed (brzozowiec, 2012, pp. 52–54). every month, the holders of the local currency visited the office to get a stamp, the cost of which was 1% of the currency nominal value. the creator of the wörgl system, silvio gesell, called this charge a demurrage tax, i.e. a negative interest rate. it imposed 13 times faster turnover in the economy than the one of the austrian schilling (mazurek, 2017). unfortunately, the central bank of austria closed the venture after a year, however, in spite of that the austrian wörgl became the precursor of many local currency systems worldwide. following the example of the austrian wörgel, the local currency wir was established in switzerland in 1934. the wir system consists of two basic elements: the first of them allows financial settlements in the wir currency, the second one grants interest-free loans (maroszek, 2015). in this system the wir bank takes the role of the central bank, which is responsible for the proper functioning of the system, control of the money supply and non-cash payment transactions. the wir franc corresponds to the value of one swiss franc. as of 2013, the wir system had 60,000 users, more than half of whom were small and local currencies supporting the implementation… 71 medium-sized enterprises (dubois, 2014). according to the wir bank (www1), in 2020 the financial result amounted to 14.4 million francs, customer deposits reached 4.1 billion francs, and the total amount of loans granted achieved the level of 4.7 billion francs. the pension scheme launched by the wir bank in november 2017, i.e. the first fully digital retirement solution in switzerland, gathered approx. 40,000 customers at the end of 2020. in luxembourg, the local currency under the name beki has been functioning since 2012. the currency is convertible into euro in a 1:1 ratio and was designed to put the canton on the path of sustainable environmental development and to support local small and medium-sized enterprises, which aims at contributing towards strengthening the autonomy of the region. although the currency is fully convertible into euro, its users are forced to incur an administrative charge of 5% (www2) to exchange beki into conventional currency. at the beginning of 2016, 500,000 euros were exchanged into beki currency. the users of this currency include farms selling organic vegetables and eida – the local green power plant (rao, 2016). the beki currency is a part of regiogeld – the german local currency network. in the czech republic, in 2017, a small municipality of křižánky populated with 370 permanent residents introduced the local currency called křižánecká koruna. the parity of križanka koruna was kept in the proportion of 1:1 to the czech koruna (www3). commencing from 2017, a new issue of křižánecka koruna has been taking place every year, and each issue is valid for the period of one year. in june 2020, the fourth issue of this currency was held, and the next one is planned for 2021 (sałatka, 2020). the project was developed along with the financial support of the european social fund and the operational program employment. the introduction of the local currency was the result of the municipal development strategy entering into force in 2017, which provided for a significant increase in property tax and the implementation of instruments to prevent depopulation of the municipality. the raise in the real estate was carried out along with the simultaneous compensation for the permanent residents of the municipality and local entrepreneurs in the amount of 2/3 of the raised tax amount, and also the owners of holiday homes – 1/3 of the increased tax amount. this compensation was paid in the local currency (www4). a program in the form of the local currency limbu is functioning in belgium. it is a rewards program and an incentive to reduce household waste and expand both composting and recycling. the local administration is responsible for issuing the currency and for the offer of goods and services to be purpatrycja konieczna72 chased for the collected points. the examples of goods include energy-saving light bulbs and garden accessories. in addition to better waste management, the project aims at promoting the use of energy-saving devices and supporting senior citizens (www5). the university of hasselt conducted a study in 2019 which showed that 50% of the active volunteers are willing to help more often in exchange for the limbu currency. 34% of non-volunteer users of the limbu currency declare their willingness and readiness to provide assistance. in turn, over 82% of the limbu users would recommend this system to others (van paris, 2020). in addition to the limbu currency, also such local currencies as torekes, buurtijd and talento are functioning in belgium, the main intention of which is reaching the socially vulnerable groups, i.a. the long-term unemployed and minority groups. one of the successes of the torekes currency is the strong commitment of volunteers to help those in need who are difficult to reach through social services. torekes is a tool for organising aid activities and appreciating volunteers’ work. the currency of buurtijd attracts particular attention to the socially vulnerable groups. it has a social fund at its disposal to strengthen solidarity between the participants. in turn, the talento currency, which was developed based on the pilot project of the fedasil organisation, follows three major goals: integration and social inclusion, increasing competences of the local community and encouraging to take advantage of free time in a productive way, i.e. in the form of volunteering (van paris, 2020). in the years 2002–2004, the dutch nuspaarpas loyalty program was implemented and financed from the eu funds as a public-private partnership system. the points collected for making the environmentally friendly shopping allowed receiving either ecological products or services (miszczuk, 2018, p. 87). the residents of the area covered by the program returned used equipment and other waste to the collection points three times more frequently than before the launch of the local currency system. in addition, the share of organic products’ range offered by many sellers increased in the course of the project implementation (żwawa, 2012). the kiwah local currency was developed by edgar kampers and rob van hilten from the community currency qoin foundation in the netherlands and norway. the kiwah program was launched in 2009 at the copenhagen climate summit. this local currency was based on renewable energy and each kiwah corresponded to the value of 1 kilowatt-hour, i.e. approx. 10 eurocents (żwawa 2012). the entrepreneurs who joined the system paid a fee for the local currencies supporting the implementation… 73 emission of kiwah. the funds accumulated in the system were invested in renewable energy, e.g., windmills, solar panels and hydropower plants. moreover, the program assumed using the local money in the future to cover electricity bills directly with the suppliers (ryan-collins, greenham & schuster, 2013). the kiwah local currency supported sustainable economic development through: stimulating investments in renewable energy sources and encouraging the consumption of the environmentally friendly products owing to the possibility of receiving kiwah free of charge as a bonus for making the purchase. the exchange of kiwah into the traditional currency was associated with a fee payment, whereas the purchase of kiwah was carried out following preferential terms (żwawa, 2012). in the uk, there is an ecovillage community functioning based on the sustainable development rules. findhorn ecovillage includes charities, non-profit and for-profit organisations, cooperatives and social enterprises. the ecovillage has its local currency – eco, introduced in 2002, which primarily supports reforestation, organic farming and renewable energy. there are 20,000 eco pounds introduced into circulation in four emissions (www6). local currencies for sustainable development the local money involuntarily supports the sustainable production and consumption of goods through supporting enterprises in a certain region. obviously, sustainable consumption cannot apply to all types of products. as a result of intense competition and high specialisation, the availability of various groups of goods and services developed on the local market may turn out insufficient or their quality may prove unsatisfactory. the examples of such products include electronic equipment, energy and mineral resources. however, in the case of most of the consumed food one can or even should speak about localism, the scope of which remains different in relation to switzerland than in the case of norway, which is determined by the different climatic, geographic and cultural situation of these countries (żwawa, 2012). in addition to supporting the sustainable production and consumption of goods, local currencies can reinforce other aspects of sustainable development. table 1 presents the selected local currencies, including their country of origin, the period of operation and the main areas of sustainable development they support. patrycja konieczna74 table 1. local currencies in the selected european countries taking into account the period of operation and the supported areas of sustainable development name of the local currency country year of creation is it still functioning? (as of december 31, 2021) the area of sustainable development: wörgl austria 1932 no – fighting poverty – supporting innovation wir switzerland 1934 yes – promoting stable and inclusive economic growth, full and productive employment beki luxemburg 2012 yes – ensuring unlimited access to the sources of stable, sustainable and modern energy křižánecká koruna czech republic 2017 yes – promoting stable and inclusive economic growth limbu belgium 2017 yes – ensuring unlimited access to the sources of stable, sustainable and modern energy – reducing the level of waste generation through prevention, reduction, recycling and reuse torekes belgium 2010 yes – fighting poverty and exclusion buurtijd belgium 2014 yes – fighting exclusion talento belgium 2018 yes – fighting exclusion nuspaarpas the netherlands 2002 no – sustainable production and consumption of goods – reducing the level of waste generation through prevention, reduction, recycling and reuse kiwah the netherlands and norway 2009 no – sustainable production and consumption of goods – ensuring unlimited access to the sources of stable, sustainable and modern energy eco great britain 2002 yes – promoting sustainable industrialisation – ensuring unlimited access to the sources of stable, sustainable and modern energy s o u r c e : author’s compilation based on the websites of local currencies. local currencies supporting the implementation… 75 the data presented in table 1 are intended to systematise the content of the paper. each local currency fosters the implementation of the concept of sustainable development. the support may be of indirect nature, thus representing a side effect of implementing the programs for individual local currencies. the latter may also be created following the direct intention focused on achieving the goals of the concept of sustainable development. sustainable development areas supported by local currencies may address more efficient waste management, such as, e.g., nuspaarpas and limbu currencies. local currencies can promote sustainable industrialisation, just as the uk eco currency. on the other hand, the kiwah and beki currencies support renewable energy. the kiwah currency invests the funds accumulated in the system in windmills, solar panels and hydropower plants. there are also such currencies as buurtijd, telento and torekes which counteract social exclusion and poverty.  conclusions each local currency supports sustainable development in an indirect manner. the respective currencies include the austrian wörgl, the swiss wir and the křižánec koruna. there are also local currencies in the case of which support for sustainable development is the essence of their functioning, e.g., beki in luxembourg, limbu in belgium, nuspaarpas in the netherlands, kiwah in the netherlands and norway, or the british eco currency. local currencies represent an innovative instrument supporting the implementation of individual sustainable development goals, such as: fighting poverty and exclusion; sustainable production and consumption of goods; reducing the level of waste generation through their prevention, reduction, recycling and reuse; promoting stable and inclusive economic growth as well as full and productive employment; promoting sustainable industrialisation and fostering innovation; making cities and human residential areas balanced, sustainable and enhancing social inclusion, but also providing everyone with access to the sources of stable, sustainable and modern energy. the effectiveness of the impact exerted by local currencies on sustainable development depends on their creators’ involvement and the specificity of the existing internal and external conditions, and also the ability of establishing partnerships between non-governmental organisations, business entities and public administration, with particular emphasis on the local authorities. patrycja konieczna76  references borowska, a. (2016). waluta lokalna czynnikiem rozwoju gospodarki lokalnej. (local currency as a factor in the development of the local economy.) przedsiębiorstwo & finanse, 2(13), 21-32. brzozowiec, d. (2012). cud w mieście wörgl. (a miracle in the city of wörgl.) nowoczesny bank spółdzielczy, 7-8, 52-55. dubois, h. (2014). faszination wir: resistent gegen krisen, spekulationen und profitgier. (fascination we: resistant to crises, speculation and greed for profit.) faro. https:// docplayer.org/5758738-faszination-wir-tickt-anders-faszination-wir-resistent-gegen-krisen-spekulationen-und-profitgier-herve-dubois-herve-dubois.html (accessed: 20.05.2021). gelleri c. (2020) komplementärwährungen und monetäre werkzeuge als soziale innovation. in h.w. franz, g. beck, d. compagna, p. dürr, w. gehra, m. wegner (eds.). nachhaltig leben und wirtschaften. sozialwissenschaften und berufspraxis. wiesbaden: springer vs. http://dx.doi.org/10.1007/978-3-658-29379-6_8. konieczna, p. (2018). local currency systems in german-speaking countries – selected issues. in association of economists and managers of the balkans. conference proceedings: 2nd international scientific conference itema 2018. http://dx.doi. org/10.31410/itema.2018.315. łukasiewicz-kamińska, a. (2014). waluta alternatywna jako dobro wspólne. (alternative currency as a common good.) myśl ekonomiczna i polityczna, 4(47), 206-218. maroszek, w. (2015). alternatywa dla pieniędzy. po co wprowadza się lokalne waluty? (an alternative to money. why are local currencies introduced?.) https://www. forbes.pl/wiadomosci/alternat y wa-dla-pieniedzy-po-co-wprowadza-sie-lokalnewaluty/m62xbvh (accessed: 20.05.2021). mazurek, a. (2017). walut y lokalne. nie t ylko sposób na niespokojne czasy. (local currencies. not only a way for troubled times.) ht tps://w w w.computerworld.pl/ news/walut y-lokalne-nie-t ylko-sposob-na-niespokojne-czasy,408773.html (accessed: 14.04.2021). miszczuk, m. (2018). waluty lokalne jako instrument realizacji koncepcji zrównoważonego rozwoju. (local currencies as an instrument for implementing the concept of sustainable development.) problemy ekorozwoju, 13(2), 83-90. rao, s. (2016). the beki celebrates half million in circulation. luxembourg times. https://w w w.lux times.lu/en/luxembourg/the-bek i-celebrates-half-million-incirculation-602d27f6de135b9236054cab (accessed: 20.05.2021). reichel, j. (1997). rzecz o pieniądzu dla lokalnych społeczności czyli małe jest najpiękniejsze. (the thing about money for local communities, small is the most beautiful.) https://www.zb.eco.pl/bzb/19/index.htm (accessed: 13.04.2021). ryan-collins, j., greenham, t., & schuster, l. (2013). energising money an introduction to energy currencies and accounting. new economics foundation. https://b.3cdn. net/nefoundation/d5ef b739f3f b9a137c_q2m6y7916.pdf (accessed: 19.05.2021). local currencies supporting the implementation… 77 sałatka, p. (2020). důvodem byla podpora místní ekonomiky. v křižánkách už čtyři platí vlastní měna. (the reason was to support the local economy. in křižánky, four already pay their own currency.) vysočina. (accessed: 21.05.2021). scott cato, m., & dodd, n. (2015). people powered money. london: new economics foundation. stępnicka, n. (2017). waluty alternatywne jako środki wymiany międzynarodowej oraz narzędzie ekonomii społecznej. (alternative currency as a mean of international exchange and a tool of social economy.) przedsiębiorczość i zarządzanie, t. 18, 11(3), 125-137. van paris, s. (2020). opvallende weetjes en cijfers over gemeenschapsmunten. (notable facts and figures about community currencies.) https://www.muntuit.be/blog/ opvallende-weetjes-en-cijfers-over-gemeenschapsmunten (accessed: 12.04.2021). żwawa, a. (2012). lokalna ekonomia w służbie społeczeństwa i środowiska. (local economy at the service of society and the environment.) portal organizacji pozarządowych. https://publicystyka.ngo.pl/lokalna-ekonomia-w-sluzbie-spoleczenstwa-i-srodowiska (accessed: 14.04.2021). (www1) bank wir wir bank erneut mit gewinnplus und stabilem wachstum, https://blog.wir.ch/news/wir-bank-erneut-mit-gewinnplus-und-stabilem-wachstum (accessed: 20.05.2021). (www2) beki – funktionnement, https://www.beki.lu/beki/funktionnement (accessed: 20.05.2021). (www3) obec křižánky lokální měna v obci křižánky, https://www.obeckrizanky. cz/lokalni-mena (accessed: 21.05.2021). (www4) dobrá praxe křižánky: “křižánecká koruna” místní měna, https://ekonomika.dobrapraxe.cz/cz/priklady-dobre-praxe/krizanky-2 (accessed: 20.05.2021). (www5) netwerk gemeenschapsmunten – limbu, https://www.muntuit.be/munten/ limbu (accessed: 21.05.2021). (www6) findhorn ecovillage circular economy, https://www.ecovillagefindhorn. com/index.php/economy (accessed: 12.04.2021). date of submission: march 21, 2021; date of acceptance: may 12, 2021. * contact information: zhaochu@umich.edu, um-flint school of management 2145 riverfront center flint, michigan 48502, phone: +(810) 762-0019; orcid id: https://orcid.org/0000-0002-8022-9459. ** contact information: iryna.p.lytvynenko@gmail.com, 11301 grand oak dr, grand blanc, michigan 48439, phone: +(810) 579-6535; orcid id: https://orcid.org/00000001-8727-6066. *** contact information: karl.philippoff@gmail.com, 46 macleay road montville, nj 07045, phone: +(973) 270-4195; orcid id: https://orcid.org/0000-0002-7649-5068. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 2 li, z., lytvynenko, i.p., & philippoff, k.s. (2021). reexamining the economic recovery tax act of 1981: evidence from innovative efficiency. copernican journal of finance & accounting, 10(2), 27–43. http://dx.doi.org/10.12775/cjfa.2021.006 zhaochu li* um-flint school of management iryna p. lytvynenko** karl s. philippoff*** reexamining the economic recovery tax act of 1981: evidence from innovative efficiency keywords: r&d, tax credit, innovation, policy evaluation. j e l classification: g18, h25, o31, o34. abstract: the research objective of this article is to examine the economic recovery tax act of 1981 (erta) on innovative efficiency, which measures how effectively firms convert research spending and existing human capital into new patents and products. research methodwise, this study measures innovative efficiency by dividing the number of new patents to average r&d expenses and analyses how innovative efficiency changed after the erta using regression. the main conclusion is that the erta tax credit decreased innovative efficiency and competitions for research resources could zhaochu li28 explain this reduction. these findings provide new insights on the effectiveness of r&d tax policies from the efficiency perspective. policy makers should consider these findings when designing r&d tax policies in the future.  introduction innovation refers to a new idea or method or the process used to introduce the idea or method, and is crucial to a country’s economic development. since private research is not always sufficient for innovation, many countries use tax credits to encourage private research spending. the u.s. government introduced its first tax incentive for research and development (r&d) in the economic recovery tax act of 1981 (erta), and has since modified it many times. policymakers and researchers often debate the effectiveness of the r&d tax credit and discuss how to improve it. this paper provides new insights on this debate based on innovative efficiency. first, proponents frequently criticize two shortcomings of the u.s. r&d tax credit. the first one is the temporary nature of the credit which has expired eight times and been renewed 14 times since 1981. this temporary nature makes it difficult for companies to design budgets for future projects. second, the u.s. r&d tax credit is not as competitive as those of other nations. stewart, warda and atkinson (2012) find that the u.s. was ranked only 27th based on r&d tax incentives among 42 countries. in addition to higher credit rates for r&d, some nations, such as the united kingdom and france, provide additional deduction for revenue earned from innovation (mohnen, vankan & verspagen, 1997; gaessler, hall & harhoff, 2021). second, opponents question the efficacy of r&d tax credits. first of all, private companies conduct research regardless of any tax credit available. second, over 80% of the credit claimed is allocated to multinational companies such as apple and microsoft, which likely do not need additional incentives to conduct research. third, rankings of r&d tax credits compare only the generosity of governmental policies, but do not ref lect actual spending of firms. although ranked 27th in terms of tax incentives, the u.s. was ranked 1st in total r&d spending and 10th in r&d spending as a percentage of total gdp in 2012 (stewart et al., 2012). these findings suggest that a more generous r&d tax credit is not necessary to spur private research expenditures. reexamining the economic recovery tax act of 1981… 29 prior literature has extensively studied how tax incentives affect r&d expenditures and the tradeoff between tax revenue foregone and additional private research investment generated (hall, 1993; szlęzak-matusewicz, 2014; kahn, 2018; ziółkowska, 2018). in terms of tax revenue loss, ernst and young (2008) find that total r&d tax credits claimed are $4.4 billion, $6.4 billion, and $6.4 billion in 1997, 2001, and 2005 respectively. however, researchers show that the tax incentive has spurred more private r&d spending than tax revenue foregone (berger, 1993; hall & van reenen, 2000; edler & fagerberg, 2017). the innovation process involves inputs such as r&d expenditures and human capital, and outputs such as new patents and products. r&d expenditure captures only the input perspective of the innovation process. efficiency, which measures how effectively a firm utilizes its research inputs, is another factor that affects innovation outputs. innovative efficiency increases when same research inputs generate more outputs or fewer research inputs generate same outputs. an increase in r&d spending likely leads to more innovation outputs but not necessarily a higher ratio of innovation outputs to inputs. an increase in innovative efficiency could lead to more innovations for firms and the economy in the long run. researchers have not studied how u.s. r&d tax credits impact innovative efficiency, and this paper seeks to bridge the gap. the r&d tax credit can either increase or decrease innovative efficiency. on the one hand, the credit could increase the efficiency through improving factors that are important for innovation. some of these factors include research spending, human capital, and organizational structures such as corporate culture and reward system. an increase in available cash through the tax credit allows firms to purchase better equipment and hire more experienced scientists and engineers. the r&d tax credit also sends a signal to managers about the importance of innovation, and managers could make firms more innovationfriendly. organizational structures that favor innovation help firms to attract and retain more qualified employees who are essential to successful research. on the other hand, innovative efficiency can also decrease as a result of the r&d tax credit. the credit reduces the cost for research and increases competition and aggregate demand for r&d resources. since research supplies are relatively inelastic (hall & lerner, 2010), additional r&d inputs can drive up prices of these resources instead of quantities in the short term (berger, 1993). this increase in prices reduces innovation outputs for every additional dollar spent on r&d, thus reducing innovative efficiency. in addition, although there is an inzhaochu li30 crease in available cash from the tax credit, their overall innovative efficiency could also drop if firms continue to invest in less promising research projects. we first test whether the r&d tax credit increases innovative efficiency for all the firms. we use the nber patent database and measure innovation as the number of new patents. we then follow hall, jaffe and trajtenberg (2005) and define innovative efficiency by dividing the number of patents to average r&d expense. the empirical results show that the economic recovery tax act of 1981 on average leads to lower innovative efficiency. we next explore mechanisms that could cause the drop in innovative efficiency. one possible mechanism is increased competitions for r&d resources. since r&d resources are relatively inelastic in the short run, higher demand means prices of research resources will increase, reducing innovative efficiency. firms in more competitive industries likely have higher demand for r&d resources than those in less competitive industries. if competitions for research resources cause any change in innovative efficiency, the effect will be more significant for companies in competitive industries than those in less competitive ones. we measure industry competition using the herfindahl index and find that there is a greater drop in innovative efficiency for companies in more competitive industries. this result provides evidence that the r&d tax incentive increased demand for research resources, leading to lower innovative efficiency. this study makes the following contributes to the literature. first, policymakers and stakeholders frequently discuss whether the u.s. r&d tax credit should be permanently extended, and this paper provides a new perspective to this discussion. the traditional input-based r&d tax credit increases innovative efficiency for more financially constrained firms, but reduces the efficiency for less financially constrained firms. second, recent literature in economic and finance journals use patenting activities to examine how various non-tax factors impact innovation. this study complements this literature from the tax perspective. third, prior literature focuses on either inputs or outputs of the innovation process, and has not studied how tax incentives impact innovative efficiency, which measures how effectively firms convert inputs into outputs. research methodology and research process the u.s. congress introduced its first tax credit for r&d expenses in 1981 in order to encourage private r&d spending. federal tax law provides two mech reexamining the economic recovery tax act of 1981… 31 anisms for firms to recoup the initial costs of their investment in r&d: a full deduction for qualified research expenditures (qre) under section 174 and a nonrefundable tax credit that is equal to a percentage of the difference between qre and a base amount under internal revenue code section 41. a firm’s baseline is defined to be 50% of its current spending or its average qre over the previous three years , whichever is greater, and the credit is initially set to be 25% of r&d spending above the baseline. since the inception of the u.s. r&d tax credit in 1981, researchers have extensively studied its impact on r&d spending and the results are mixed. hall (1993) finds that, for every dollar of tax revenue foregone, the tax incentive stimulated $2.00 of r&d spending. similarly, berger (1993) calculates the effect to be $1.25 induced r&d expense per dollar of revenue foregone. in contrast, tillinger (1991) and mccutchen (1993) find that the effect is only $0.19 and between $0.29 and $0.35 respectively for every dollar of tax revenue foregone. prior studies have also examined the impact of r&d tax policies on the research output such as patents and citations per patents. cappelen, raknerud and rybalka (2011) use a governmental tax-based incentive from norway and investigate how this policy impacts innovation. they find that firms receiving tax credits develop more production processes and products. cazrnitzki, hanel and rosa (2010) study the impact of r&d tax credits on the innovation activities of manufacturing companies in canada. they find that firms that received tax credits develop more original products, and conclude that r&d tax credits are positively associated with innovation outputs. nevertheless, no studies have examined r&d tax credits impact innovative efficiency. hall et al. (2005) measure innovative efficiency by dividing the number of patents to research spending. they show the trend of innovative efficiency in the 80s and 90s but do not test what affect the efficiency directly. aghion, van reenen and zingales (2013) find institutional ownership is associated positively with research outputs and efficiency but the effect on efficiency is larger. chircop, collins, hass and nguyen (2020) show that innovative efficiency increases when a firm’s accounting system is more comparable to its industry peers. both merz (2021) and almeida, hsu, li and tseng (2021) find that innovative efficiency is negatively associated with financial constraint. in addition, researchers have identified factors that affect the input and output of innovation. input wise, prior research finds that greater institutional ownership reduces a firm’s tendency to reduce r&d spending following less fazhaochu li32 vorable financial performance (francis & smith, 1995; eng & shackell, 2001). output wise, . analyst coverage and accounting conservatisam are found to negatively affect intonation due to managerial myopia (he & tian, 2013; chang, hilary, kang & zhang, 2015). aghion et al. (2013) find that higher institutional ownership ensures ceos a secure job and hence helps overcome ceos’ myopia and promotes innovative efficiency. in contrast, greater institutional ownership alleviates managerial myopia and accounting conservatism and increases innovative efficiency (aghion et al., 2013). hypothesis development r&d tax credits could either increase or decrease innovative efficiency. innovation is a complex process and its efficiency depends on many factors. some of these factors include research spending, qualified employees, and organizational structures such as corporate culture and reward systems. r&d tax credits could increase innovative efficiency by improving these factors. first, with the additional cash saved from the r&d incentive, firms are more likely to purchase equipment, upgrade research facilities, and hire better scientists and engineers. furthermore, the r&d tax credit could reinforce the importance of innovation and lead to managers to improve their organizational structure. organizational structures affect innovative efficiency in many ways. for instance, an innovation-friendly corporate culture helps a firm to attract and retain highly talented employees. a reward system that puts less focus on the results of individual research projects reduces employees’ career concerns and leads to greater research efforts (manso, 2011). in addition, f lexible working hours accommodate employees’ schedules and allow them to determine their own, possibly more efficient, work schedule. if a r&d favorable policy spurs managers to make firms more innovation-friendly, these firms will likely hire and retain more talented employees, leading to greater efficiency in the use of r&d resources. on the other hand, the r&d tax credit could also lower innovative efficiency. r&d tax credits aim to increase overall private research spending by reducing the cost of innovation, but could also lead to greater competitions for research resources among firms. research resources, such as human capital, are generally inelastic in the short-run (hall & lerner, 2010), and increases in overall r&d spending could increase the prices of research resources instead of their reexamining the economic recovery tax act of 1981… 33 quantities (berger, 1993). thus, increases in r&d expenditures could be the result of increased price of research inputs instead of quantities of inputs, leading to lower innovative efficiency. since the r&d tax credit could either increase or decrease innovative efficiency, the actual effect is ultimately an empirical question, we make no prediction about how the erta r&d credit impact innovative efficiency. h1: the 1981 r&d tax credit does not change innovative efficiency. we then investigate possible mechanisms that drive the change in innovative efficiency following the institution of the 1981 u.s. tax credit. one possibility is competitions for research resources. demand for r&d resources will likely increase in more competitive industries, leading to higher price increases. if competitions for research resources reduce in innovative efficiency, the effect will be more significant for firms in competitive industries than for those in less competitive ones. h2: the effect of the 1981 r&d tax credit on innovative efficiency is more significant for firms in competitive industries than for those in less competitive industries. data and variables this study combines accounting data from compustat and innovation data from the national bureau of economic research (nber) patent database initiated by hall, jaffe and trajtenberg (2001). the database includes patent number, associated companies, accumulated number of citations, locations from which patents are filed, application year, grant year, the number of citations, and the 6-digit cusip number for each company in the database that allows researchers to combine the compustat database with the patent database. we exclude firms in the financial services and utility industries, and firms whose r&d expense is less than 2% of net sales. the final sample has 16,251 firm-year observations from 1975 to 2017. zhaochu li34 appendix a. variable definitions appendix a. variable definitions dependent variables pat_rdt-n-1,t-1 pat_rdt-2,t-1, pat_rdt-3,t-1, and pat_rdt-4,t-1 denote the natural logarithm of one plus a firm's total number of patents in year t over average r&d expense in the prior two, three, and four years, respectively. the number of patents is corrected for truncation bias for each year. =pat_rd���������=ln ( �����t (∑ ��m)���������� ), n=1, 2, or 3 variables of interest d1981t a dummy variable equals to 1 if a firm-year observation is after 1981, and 0 other wise. h_indext herfindahl index of a firm in year t constructed based on sales for 2-digit sic industry classification. h_index2t the square term of h_indext d1981t ×hindext an interaction variable as the product of d1981t and h_indext control variables aget the number of years that the firm is listed on compustat with a non-missing stock price. qt market to book ratio. ��������������� ����� �������������� ������ ����� ������������ rdt r&d expense deflated by net sales. leveraget the ratio of total debt to total assets. ����� ���������� tangibilityt the ratio of net ppe to total assets. ���������� profitabilityt the ratio of ebidta to total assets. ������������ sizet natural logarithm of inflation-adjusted book assets. size2t the square of sizet source: appendix table created by the authors. there are a few issues measuring innovative efficiency. first, the r&d process takes time; it may be years from the start of a project to the moment that a patent is ready for application. the total spending that leads to one particular patent includes r&d spending in prior years and is hard to directly calculate. second, firms usually engage in multiple research projects at the same time, but only present total research expenditures in a given year in their financial statements. since only a portion of total r&d expenses in a year contribute to a particular patent, it is difficult to match exact research expenses to specific patents. to overcome these issues, we consider mean r&d expenditures in the two, three, or four years before patent application. since approximately half of research spending is the wages of employees, and firms smooth this spending over time, we assume that r&d expenses that contribute one particular patent are similar each year on average. for all patents filed in a given year, average annual research spending from prior years provides a proximate value of total annual expenditure for these patents. s o u r c e : appendix table created by the authors. there are a few issues measuring innovative efficiency. first, the r&d process takes time; it may be years from the start of a project to the moment that a patent is ready for application. the total spending that leads to one particular patent includes r&d spending in prior years and is hard to directly calculate. second, firms usually engage in multiple research projects at the same time, but only present total research expenditures in a given year in their financial statements. since only a portion of total r&d expenses in a year contribute to a particular patent, it is difficult to match exact research expenses to specific patents. to overcome these issues, we consider mean r&d expenditures in the two, three, or four years before patent application. since approximately half of research spending is the wages of employees, and firms smooth this spending over time, we assume that r&d expenses that contribute one particular patent are similar each year on average. for all patents filed in a given year, average annual research spending from prior years provides a proximate value of total annual expenditure for these patents. reexamining the economic recovery tax act of 1981… 35 pat_rd���������=ln ( �����t(∑ ��m)���������� ), n=1, 2, or 3 (1) pat_rd��������� = a firm’s innovative efficiency in year t patt = a firm's total number of patents applied in year t and eventually granted rdm = r&d spending in year m equation (1) shows the first measure of innovative efficiency. it is defined by dividing successful patent applications to average r&d spending over two, three, and four years prior to patent application. this variable design provides the best possible match of the aggregate research spending to new patents filed in a given year. we construct variables using application year instead of grant year to better reflect the year of innovation (griliches, pakes & hall, 1987). however, there are some drawbacks in using patenting activity to study innovation. first, the nber patent database suffers from truncation bias since un-granted patents are excluded. on average, the gap between a patent’s application and grant years is two years. it is thus not surprising that there are more patents in earlier years in the database. to address this issue, we divide a firm’s total patents in a given year by the average number of patents in the same year and technology class (hall et al., 2001). second, some firms do not file patents because some innovations are not patentable or because firms want to keep their innovations secrets. nevertheless, we believe that empirical design with an adequate control for heterogeneity will mitigate these concerns and provide a sound inference. following prior literature (fang, tian & tice, 2014; atanassov, 2013), we control for the following variables: firm size (sizet), firm age (aget), growth opportunities (qt), leverage (leveraget), tangibility (tangibilityt), and profitability (profitabilityt). appendix a includes detailed definitions of all variables. empirical designs to test h1, we run the regression using equation (2). we first define the dummy variable, d1981t, to be zero if a firm-year is before 1982, and one otherwise. coefficients of d1981t indicate how the 1981 tax credit affects on innovative efficiency. the regression model includes various control variables and controls for year and industry fixed effects. (1) pat_rd���������=ln ( �����t(∑ ��m)���������� ), n=1, 2, or 3 (1) pat_rd��������� = a firm’s innovative efficiency in year t patt = a firm's total number of patents applied in year t and eventually granted rdm = r&d spending in year m equation (1) shows the first measure of innovative efficiency. it is defined by dividing successful patent applications to average r&d spending over two, three, and four years prior to patent application. this variable design provides the best possible match of the aggregate research spending to new patents filed in a given year. we construct variables using application year instead of grant year to better reflect the year of innovation (griliches, pakes & hall, 1987). however, there are some drawbacks in using patenting activity to study innovation. first, the nber patent database suffers from truncation bias since un-granted patents are excluded. on average, the gap between a patent’s application and grant years is two years. it is thus not surprising that there are more patents in earlier years in the database. to address this issue, we divide a firm’s total patents in a given year by the average number of patents in the same year and technology class (hall et al., 2001). second, some firms do not file patents because some innovations are not patentable or because firms want to keep their innovations secrets. nevertheless, we believe that empirical design with an adequate control for heterogeneity will mitigate these concerns and provide a sound inference. following prior literature (fang, tian & tice, 2014; atanassov, 2013), we control for the following variables: firm size (sizet), firm age (aget), growth opportunities (qt), leverage (leveraget), tangibility (tangibilityt), and profitability (profitabilityt). appendix a includes detailed definitions of all variables. empirical designs to test h1, we run the regression using equation (2). we first define the dummy variable, d1981t, to be zero if a firm-year is before 1982, and one otherwise. coefficients of d1981t indicate how the 1981 tax credit affects on innovative efficiency. the regression model includes various control variables and controls for year and industry fixed effects. = a firm’s innovative efficiency in year t pat_rd���������=ln ( �����t(∑ ��m)���������� ), n=1, 2, or 3 (1) pat_rd��������� = a firm’s innovative efficiency in year t patt = a firm's total number of patents applied in year t and eventually granted rdm = r&d spending in year m equation (1) shows the first measure of innovative efficiency. it is defined by dividing successful patent applications to average r&d spending over two, three, and four years prior to patent application. this variable design provides the best possible match of the aggregate research spending to new patents filed in a given year. we construct variables using application year instead of grant year to better reflect the year of innovation (griliches, pakes & hall, 1987). however, there are some drawbacks in using patenting activity to study innovation. first, the nber patent database suffers from truncation bias since un-granted patents are excluded. on average, the gap between a patent’s application and grant years is two years. it is thus not surprising that there are more patents in earlier years in the database. to address this issue, we divide a firm’s total patents in a given year by the average number of patents in the same year and technology class (hall et al., 2001). second, some firms do not file patents because some innovations are not patentable or because firms want to keep their innovations secrets. nevertheless, we believe that empirical design with an adequate control for heterogeneity will mitigate these concerns and provide a sound inference. following prior literature (fang, tian & tice, 2014; atanassov, 2013), we control for the following variables: firm size (sizet), firm age (aget), growth opportunities (qt), leverage (leveraget), tangibility (tangibilityt), and profitability (profitabilityt). appendix a includes detailed definitions of all variables. empirical designs to test h1, we run the regression using equation (2). we first define the dummy variable, d1981t, to be zero if a firm-year is before 1982, and one otherwise. coefficients of d1981t indicate how the 1981 tax credit affects on innovative efficiency. the regression model includes various control variables and controls for year and industry fixed effects. = a firm’s total number of patents applied in year t and eventually granted pat_rd���������=ln ( �����t(∑ ��m)���������� ), n=1, 2, or 3 (1) pat_rd��������� = a firm’s innovative efficiency in year t patt = a firm's total number of patents applied in year t and eventually granted rdm = r&d spending in year m equation (1) shows the first measure of innovative efficiency. it is defined by dividing successful patent applications to average r&d spending over two, three, and four years prior to patent application. this variable design provides the best possible match of the aggregate research spending to new patents filed in a given year. we construct variables using application year instead of grant year to better reflect the year of innovation (griliches, pakes & hall, 1987). however, there are some drawbacks in using patenting activity to study innovation. first, the nber patent database suffers from truncation bias since un-granted patents are excluded. on average, the gap between a patent’s application and grant years is two years. it is thus not surprising that there are more patents in earlier years in the database. to address this issue, we divide a firm’s total patents in a given year by the average number of patents in the same year and technology class (hall et al., 2001). second, some firms do not file patents because some innovations are not patentable or because firms want to keep their innovations secrets. nevertheless, we believe that empirical design with an adequate control for heterogeneity will mitigate these concerns and provide a sound inference. following prior literature (fang, tian & tice, 2014; atanassov, 2013), we control for the following variables: firm size (sizet), firm age (aget), growth opportunities (qt), leverage (leveraget), tangibility (tangibilityt), and profitability (profitabilityt). appendix a includes detailed definitions of all variables. empirical designs to test h1, we run the regression using equation (2). we first define the dummy variable, d1981t, to be zero if a firm-year is before 1982, and one otherwise. coefficients of d1981t indicate how the 1981 tax credit affects on innovative efficiency. the regression model includes various control variables and controls for year and industry fixed effects. = r&d spending in year m equation (1) shows the first measure of innovative efficiency. it is defined by dividing successful patent applications to average r&d spending over two, three, and four years prior to patent application. this variable design provides the best possible match of the aggregate research spending to new patents filed in a given year. we construct variables using application year instead of grant year to better ref lect the year of innovation (griliches, pakes & hall, 1987). however, there are some drawbacks in using patenting activity to study innovation. first, the nber patent database suffers from truncation bias since un-granted patents are excluded. on average, the gap between a patent’s application and grant years is two years. it is thus not surprising that there are more patents in earlier years in the database. to address this issue, we divide a firm’s total patents in a given year by the average number of patents in the same year and technology class (hall et al., 2001). second, some firms do not file patents because some innovations are not patentable or because firms want to keep their innovations secrets. nevertheless, we believe that empirical design with an adequate control for heterogeneity will mitigate these concerns and provide a sound inference. following prior literature (fang, tian & tice, 2014; atanassov, 2013), we control for the following variables: firm size (sizet), firm age (aget), growth opportunities (qt), leverage (leveraget), tangibility (tangibilityt), and profitability (profitabilityt). appendix a includes detailed definitions of all variables. zhaochu li36 empirical designs to test h1, we run the regression using equation (2). we first define the dummy variable, d1981t, to be zero if a firm-year is before 1982, and one otherwise. coefficients of d1981t indicate how the 1981 tax credit affects on innovative efficiency. the regression model includes various control variables and controls for year and industry fixed effects. innovative efficiencyt = β0 + β1×d1981t + ∑ β × control variablest + εt (2) to test h2, we run the regression using equation (3). we measure industry competition using the herfindahl index, hindext. the formula for the hindext is in equation (2). higher hindext indicates higher industry competition. we use 4-digit sic codes for industry classification and compute this index using all available data from compustat. we also calculate hindex2t, the square of hindext, to control for any non-linear nature of this index. coefficients of hindext indicate the effect of industry competition on any change in innovative efficiency, regardless of any r&d tax credit. d1981t × hindext is an interaction variable as the product of d1981t and hindext, and is the variable of interest. coefficients of d1981t × hindext indicate any incremental impact of industry competition on innovative efficiency after the tax credit becomes available. innovative efficiencyt = β0 + β1×d1981t + β2×d1981t×hindext + β3×hindext + β4×hindex2t + ∑β×control variablest + εt (3) 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻�� � � � ������∑ ���������� � �� ��� (4) results of the research process summary statistics are presented in table 1. panel a reports the summary statistics of the dependent variables. on average, $1 million annual increase in r&d spending in the last two, three, and four years leads to 2.133, 3.269, and 4.635 new patents. panel b reports the descriptive statistics for variables of interest. the mean of d1981t is 0.902 and suggests that about 90% of firm-year observations occur after the inception of the tax credit. the average market competition level is 14.8%. panel c reports the summary statistics of the control variables. on average, firms have a leverage ratio of 0.188, a net ppe to total asset ratio of 0.335, a profit margin of 0.154, a tobin's q of 1.152, and have been publicly traded for 31 years. table 1. summary statistics variable mean sd p25 p50 p75 n panel a: dependent variables: innovative efficiency pat_rdt-2,t-1 -0.217 1.270 -1.014 -0.219 0.608 16,251 pat_rdt-3,t-1 0.245 1.265 -0.543 0.241 1.166 16,251 pat_rdt-4,t-1 0.559 1.278 -0.272 0.550 1.502 16,251 panel b: variables of interest (2) to test h2, we run the regression using equation (3). we measure industry competition using the herfindahl index, hindext. the formula for the hindext is in equation (2). higher hindext indicates higher industry competition. we use 4-digit sic codes for industry classification and compute this index using all available data from compustat. we also calculate hindex2t, the square of hindext, to control for any non-linear nature of this index. coefficients of hindext indicate the effect of industry competition on any change in innovative efficiency, regardless of any r&d tax credit. d1981t × hindext is an interaction variable as the product of d1981t and hindext, and is the variable of interest. coefficients of d1981t × hindext indicate any incremental impact of industry competition on innovative efficiency after the tax credit becomes available. innovative efficiencyt = β0 + β1×d1981t + ∑ β × control variablest + εt (2) to test h2, we run the regression using equation (3). we measure industry competition using the herfindahl index, hindext. the formula for the hindext is in equation (2). higher hindext indicates higher industry competition. we use 4-digit sic codes for industry classification and compute this index using all available data from compustat. we also calculate hindex2t, the square of hindext, to control for any non-linear nature of this index. coefficients of hindext indicate the effect of industry competition on any change in innovative efficiency, regardless of any r&d tax credit. d1981t × hindext is an interaction variable as the product of d1981t and hindext, and is the variable of interest. coefficients of d1981t × hindext indicate any incremental impact of industry competition on innovative efficiency after the tax credit becomes available. innovative efficiencyt = β0 + β1×d1981t + β2×d1981t×hindext + β3×hindext + β4×hindex2t + ∑β×control variablest + εt (3) 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻�� � � � ������∑ ���������� � �� ��� (4) results of the research process summary statistics are presented in table 1. panel a reports the summary statistics of the dependent variables. on average, $1 million annual increase in r&d spending in the last two, three, and four years leads to 2.133, 3.269, and 4.635 new patents. panel b reports the descriptive statistics for variables of interest. the mean of d1981t is 0.902 and suggests that about 90% of firm-year observations occur after the inception of the tax credit. the average market competition level is 14.8%. panel c reports the summary statistics of the control variables. on average, firms have a leverage ratio of 0.188, a net ppe to total asset ratio of 0.335, a profit margin of 0.154, a tobin's q of 1.152, and have been publicly traded for 31 years. table 1. summary statistics variable mean sd p25 p50 p75 n panel a: dependent variables: innovative efficiency pat_rdt-2,t-1 -0.217 1.270 -1.014 -0.219 0.608 16,251 pat_rdt-3,t-1 0.245 1.265 -0.543 0.241 1.166 16,251 pat_rdt-4,t-1 0.559 1.278 -0.272 0.550 1.502 16,251 panel b: variables of interest (3) innovative efficiencyt = β0 + β1×d1981t + ∑ β × control variablest + εt (2) to test h2, we run the regression using equation (3). we measure industry competition using the herfindahl index, hindext. the formula for the hindext is in equation (2). higher hindext indicates higher industry competition. we use 4-digit sic codes for industry classification and compute this index using all available data from compustat. we also calculate hindex2t, the square of hindext, to control for any non-linear nature of this index. coefficients of hindext indicate the effect of industry competition on any change in innovative efficiency, regardless of any r&d tax credit. d1981t × hindext is an interaction variable as the product of d1981t and hindext, and is the variable of interest. coefficients of d1981t × hindext indicate any incremental impact of industry competition on innovative efficiency after the tax credit becomes available. innovative efficiencyt = β0 + β1×d1981t + β2×d1981t×hindext + β3×hindext + β4×hindex2t + ∑β×control variablest + εt (3) 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻�� � � � ������∑ ���������� � �� ��� (4) results of the research process summary statistics are presented in table 1. panel a reports the summary statistics of the dependent variables. on average, $1 million annual increase in r&d spending in the last two, three, and four years leads to 2.133, 3.269, and 4.635 new patents. panel b reports the descriptive statistics for variables of interest. the mean of d1981t is 0.902 and suggests that about 90% of firm-year observations occur after the inception of the tax credit. the average market competition level is 14.8%. panel c reports the summary statistics of the control variables. on average, firms have a leverage ratio of 0.188, a net ppe to total asset ratio of 0.335, a profit margin of 0.154, a tobin's q of 1.152, and have been publicly traded for 31 years. table 1. summary statistics variable mean sd p25 p50 p75 n panel a: dependent variables: innovative efficiency pat_rdt-2,t-1 -0.217 1.270 -1.014 -0.219 0.608 16,251 pat_rdt-3,t-1 0.245 1.265 -0.543 0.241 1.166 16,251 pat_rdt-4,t-1 0.559 1.278 -0.272 0.550 1.502 16,251 panel b: variables of interest (4) results of the research process summary statistics are presented in table 1. panel a reports the summary statistics of the dependent variables. on average, $1 million annual increase in r&d spending in the last two, three, and four years leads to 2.133, 3.269, and reexamining the economic recovery tax act of 1981… 37 4.635 new patents. panel b reports the descriptive statistics for variables of interest. the mean of d1981t is 0.902 and suggests that about 90% of firm-year observations occur after the inception of the tax credit. the average market competition level is 14.8%. panel c reports the summary statistics of the control variables. on average, firms have a leverage ratio of 0.188, a net ppe to total asset ratio of 0.335, a profit margin of 0.154, a tobin’s q of 1.152, and have been publicly traded for 31 years. table 1. summary statistics variable mean sd p25 p50 p75 n panel a: dependent variables: innovative efficiency pat_rdt-2,t-1 -0.217 1.270 -1.014 -0.219 0.608 16,251 pat_rdt-3,t-1 0.245 1.265 -0.543 0.241 1.166 16,251 pat_rdt-4,t-1 0.559 1.278 -0.272 0.550 1.502 16,251 panel b: variables of interest d1981t 0.902 0.301 1 1 1 16,251 hindext 0.148 0.170 0.066 0.133 0.247 16,251 hindex2t 0.022 0.026 0.004 0.018 0.061 16,251 d1981t ×hindext 0.133 0.052 0.065 0.134 0.250 16,251 panel c: control variables leveraget 0.188 0.215 0.072 0.193 0.309 16,251 tangibilityt 0.335 0.118 0.226 0.342 0.421 16,251 profitabilityt 0.154 0.120 0.113 0.177 0.238 16,251 qt 1.152 1.721 0.613 1.088 1.839 16,251 sizet 6.209 2.453 4.337 6.417 7.602 16,251 size2t 38.792 28.159 18.810 41.178 57.790 16,251 aget 31.184 12.410 13 32 46 16,251 this table reports the descriptive statistics of the sample, including mean, standard deviation, 25th percentile, median, 75th percentile, and the number of observations. panel a presents the summary statistics of dependent variables. panel b presents the summary statistics of variables of interest. panel c presents the summary statistics of control variables. all variables are constructed from 1975 to 2017. variables are defined in the appendix a. s o u r c e : summary statistics table created by the authors using sas and stata. zhaochu li38 table 2 provides the empirical results for the first hypothesis. coefficients of d1981t are negative and significant, suggesting that the 1981 tax credit, on average, decreased the innovative efficiency. in terms of economic significance, firms created an average 0.35 fewer patents for $1 million annual increase in research investment after 1981. for control variables, tangibilityt and profitabilityt both have positive coefficients, suggesting that firms with more facilities and net income generally have higher innovative efficiency. in addition, firms with greater growth potential, qt, small firms, and younger firms all have higher innovative efficiency. table 2. the 1981 r&d tax credit and innovative efficiency (h1) variables (1) (2) (3) d1981 -0.55*** -0.54*** -0.52*** (0.12) (0.13) (0.11) leverage -0.23 -0.09 -0.17 (0.22) (0.26) (0.19) tangebility 1.13*** 1.09*** 1.12*** (0.11) (0.23) (0.28) profitability 1.29*** 1.32*** 1.37*** (0.18) (0.21) (0.16) qt 0.05*** 0.06*** 0.05*** (0.01) (0.01) (0.01) size -0.35*** -0.33*** -0.36*** (0.12) (0.09) (0.11) size_square 0.05*** 0.05*** 0.06*** (0.01) (0.01) (0.02) age -0.03*** -0.02*** -0.03*** (0.00) (0.00) (0.01) constant 2.56*** 3.24*** 3.51*** reexamining the economic recovery tax act of 1981… 39 variables (1) (2) (3) (0.53) (0.78) (0.62) observations 16,251 16,251 16,251 adj. r-squared 0.34 0.34 0.35 this table presents the empirical results for the first hypothesis. all variables are defined in appendix a. all models include industry fixed effects but the coefficients are not reported. robust standard errors are in parenthesis. *, **, *** denote significance at 10%, 5%, and 1% levels with two tails. s o u r c e : regression results created by the authors using sas and stata. table 3 shows the empirical results for the second hypothesis. coefficients of d1981t are still negative and significant, confirming the finding in the first hypothesis. coefficients of hindext are not significant, indicating that competitions for resources generally do not impact innovative efficiency before the 1981 tax credit. however, negative and significant coefficients of d1981t × hindext suggest that competitions for resources reduce innovative efficiency after the 1981 tax credit. for a one standard deviation increase in industry competition level, firms on average have 0.18 fewer patents for $1 million annual increase in r&d investment after the 1981 tax credit. empirical findings and inferences for the control variables are consistent with those found in table 2. table 3. innovative efficiency and industry competition (h2) variables (1) (2) (3) d1981 -0.66*** -0.64*** -0.63*** (0.17) (0.21) (0.19) d1981×hindex -0.92*** -0.97*** -1.02*** (0.31) (0.37) (0.29) hindex -0.46 -0.39 -0.42 zhaochu li40 variables (1) (2) (3) (0.81) (0.63) (0.72) hindex2 0.65 0.48 0.55 (0.73) (0.60) (0.84) leverage -0.27 -0.17 -0.21 (0.31) (0.29) (0.25) tangebility 1.16*** 1.12*** 1.17*** (0.23) (0.31) (0.29) profitability 1.33*** 1.36*** 1.35*** (0.25) (0.33) (0.37) tobin_q 0.05*** 0.05*** 0.06*** (0.01) (0.01) (0.01) size -0.32*** -0.35*** -0.33*** (0.09) (0.11) (0.07) size_square 0.05*** 0.05*** 0.05*** (0.01) (0.02) (0.02) age -0.04*** -0.03*** -0.03*** (0.01) (0.01) (0.01) constant 2.81*** 2.59*** 3.27*** (0.63) (0.50) (0.88) observations 16,251 16,251 16,251 adj. r-squared 0.35 0.35 0.36 this table presents the empirical results for the second hypothesis. all variables are defined in appendix a. all models include industry fixed effects but the coefficients are not reported. robust standard errors are in parenthesis. *, **, *** denote significance at 10%, 5%, and 1% levels with two tails. s o u r c e : regression results created by the authors using sas and stata. table 3. innovative… reexamining the economic recovery tax act of 1981… 41  conclusion this paper investigates how the economic recovery tax act of 1981 impacts innovative efficiency. we show that the r&d tax policy reduces innovative efficiency and competitions for research resources can explain this reduction. this study provides a new perspective on r&d tax credits from an efficiency standpoint. researchers can apply the findings of this paper in an international context. countries vary in innovation efficiencies due to differences in their infrastructures, copyright laws, and other factors. when examining the attractiveness of r&d investment across countries, researchers should consider both r&d tax credits and innovative efficiency in each nation.  references aghion, p., van reenen, j., & zingales, l. 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(2018). innovativeness of the polish economy in the context of sustainable development. copernican journal of finance & accounting, 7(3), 71-88. http:// dx.doi.org/10.12775/ cjfa.2018.016. copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 11 issue 1 2022 quarterly address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz-kuzioła), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl icv 2020: 100.00 editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka-pelowska, mgr agnieszka żołądkiewicz-kuzioła secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. elena kireeva, russian presidential academy of national economy and public administration, russia prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain prof. stanisław owsiak, cracow university of economics, poland prof. wiesława przybylska-kapuścińska, wsb university in poznań, poland prof. małgorzata zaleska, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : prof. dr hab. piotr fiszeder e n g l i s h p r o o f r e a d e r : mgr dominik liszkowski subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : żaneta dziawgo the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2022 copyright by uniwersytet mikołaja kopernika toruń 2022 list of reviewers prof. domagoja buljan barbača, university of split, croatia prof. francesca bartolacci, university of macerata, italy prof. jasna bogovac, university of zagreb, croatia prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pitești, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. jan koleśnik, warsaw school of economics, poland prof. natalia konovalova, riseba university, riga, latvia prof. zbigniew krysiak, warsaw school of economics, poland prof. nicoletta marinelli, university of macerata, italy prof. astrida miceikienė, vytautas magnus university, lithuania prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universidad politécnica de valencia, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra -oña, universidad politécnica de valencia, spain prof. nirundon tapachai, kasetsart university, thailand prof. waldemar tarczyński, szczecin university, poland prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland prof. joanna wielgórska-leszczyńska, warsaw school of economics, poland table of contents hope osayantin aifuwa, muhammed kamaldeen usman, muhammed lawal subair, gideon temidayo philip, kerimu hussien board ethnicity and sustainability reporting ..................................................................... 9 hela frikha chaari, amel belanès, azhaar lajmi fraud risk and audit quality: the case of us public firms ............................................ 29 oluwamayowa olalekan iredele, gbadegesin babatunde adeyeye, ebenezer babatunde owoyomi creative accounting and shareholders wealth maximization in listed consumer goods companies in nigeria ............................................................................................ 49 preeti kulshrestha, anubha srivastava use of camel rating framework: a comparative performance analysis of selected commercial banks in india ........................................................................... 67 rihab ben slimen, fethi belhaj, manel hadriche, mohamed ghroubi banking efficiency: a comparative study between islamic and conventional banks in gcc countries ..................................................................................................... 89 for authors ......................................................................................................................... 107 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 04.06.2013; data zaakceptowania: 22.12.2013. * dane kontaktowe: michal.kisiel@ue.wroc.pl, ul. komandorska 118/120, 53-345 wrocław, tel. 71 368 07 21. doi: 10.12775/cjfa.2013.0162013, volume 2, issue 2 michał kisiel* uniwersytet ekonomiczny we wrocławiu wydział nauk ekonomicznych katedra finansów modele systemów płatności mobilnych a źródła pieniądza oraz mechanizmy rozrachunku transakcji słowa kluczowe: płatności, płatności mobilne, bankowość elektroniczna, instrumenty płatnicze. klasyfikacja j e l: g21, g23, e42. abstrakt: celem artykułu jest dokonanie podziału działających na świecie systemów płatności mobilnych, ze względu na wykorzystane źródła pieniądza oraz mechanizmy rozrachunku transakcji. w artykule przedstawiono podstawowe kryteria podziałów wymieniane w literaturze oraz zaproponowano wyróżnienie kilku modelowych typów systemów m-płatności. badania oparte na analizie przypadków systemów mobilnych płatności na świecie wykazały, że używane przez nie źródła płynności są zróżnicowane, a część rozwiązań funkcjonuje niezależnie od systemu rozliczeń międzybankowych, tworząc alternatywne mechanizmy obiegu pieniądza bezgotówkowego. funding sources in mobile payments systems keywords: payments, mobile payments, electronic banking, payment instruments. j e l classification: g21, g23, e42. abstract: the article aims to propose the classification of mobile payments systems based on the prevailing type of funding sources and the settlement mechanisms. the main types of mobile payments systems were presented, followed by the proposed list michał kisiel62 of conceptual models. the research based on analysis of business models used by m-payments systems worldwide shows that the choice of funding sources is wide. few of them are almost completely independent of interbank payment systems, effectively creating the alternative flow of monetary value. translated by michał kisiel  wstęp rozwój telefonii komórkowej, coraz powszechniejsza dostępność internetu mobilnego oraz rosnące zaawansowanie urządzeń przenośnych doprowadziły do powstania systemów płatności detalicznych, w których telefon komórkowy odgrywa centralną rolę w procesie inicjacji, potwierdzenia i finalizacji transakcji. nowa technologia wykorzystywana jest nie tylko przez podmioty tradycyjnie zajmujące się obsługą płatności bezgotówkowych (banki, organizacje kartowe, agentów rozliczeniowych), ale także instytucje spoza sektora finansowego, które upatrują w niej możliwości przebudowy łańcucha wartości płatności detalicznych oraz dezintermediacji dotychczasowych graczy. wykres 1. liczba transakcji płatności mobilnych na świecie (w miliardach) w latach 2009–2013 3 4,3 6,5 9,9 15,3 0,2 0,3 0,6 1 1,7 0 2 4 6 8 10 12 14 16 18 2009 2010 2011 2012* 2013* dostawcy niebankowi dostawcy bankowi * prognoza źródło: opracowanie na podstawie: „world payments report 2012”, cap gemini 2012, http://www.capgemini.com/worldpaymentsreport. telefonia komórkowa stanowi gotową infrastrukturę dla procesu rozliczenia (transferu informacji w procesie płatności), co pozwala na ominięcie istniejących rozwiązań i budowę, od podstaw, nowych systemów tzw. płatności mobilnych. rozwojowi technologii wymiany informacji nie towarzyszą jednak równie szybkie przemiany w dziedzinie rozrachunku. innowacyjne systemy płatności mogą korzystać z istniejącej infrastruktury rozliczeń międzybankowych, rozliczeń kartowych i innych narzędzi pozostających pod kontrolą podmiotów z sektora finansowego podlegających licencjonowaniu. część z nich podejmuje jednak wysiłek ominięcia pośredników i poszukuje innych źródeł płynności, które nie będą związane z wysokimi kosztami transakcyjnymi. płatności mobilne w przyszłości będą stanowić istotną część ogółu transakcji, dlatego też analiza zjawisk zachodzących na tym rynku jest kwestią ważną nie tylko z praktycznego punktu widzenia, ale również dla refleksji teoretycznej nad kształtem systemu obrotu bezgotówkowego. w opracowaniu zostanie przedstawiona autorska propozycja podziału modeli systemów płatności mobilnych, opierająca się na analizie mechanizmu rozrachunku transakcji i użytego źródła pieniądza. zaproponowana klasyfikacja jest oparta na analizie modeli biznesowych największych systemów płatności mobilnych działających na świecie oraz na przeglądzie literatury przedmiotu, a zwłaszcza publikacji instytucji badawczych. metodyka badań i przebieg procesu badawczego ze względu na szybko zmieniający się charakter omawianych procesów płatności mobilnych dostępne źródła literaturowe są nieliczne. zasadniczą zatem metodyką badań był desk research, uzupełniony studiami literaturowymi. badaniu i krytycznej analizie poddano istniejące mechanizmy akceptacji i rozrachunku transakcji. w wyniku tej analizy ustalono, że jednym z najważniejszych kryteriów ekonomicznych pozwalającym dokonać klasyfikacji płatności mobilnych jest użyte w transakcji źródło pieniądza. propozycja takiej klasyfikacji stanowi główną treść pracy. istota i klasyfikacje płatności mobilnych pojęcie płatności mobilnych definiowane jest zazwyczaj jako „płatności dokonywane przy użyciu urządzenia mobilnego” (hayashi 2012, borcuch 2007, polasik 2009). w niniejszym opracowaniu definicja ta została sprecyzowana jako płatności, czyli przekazanie środków pieniężnych w zamian za dobro lub usługę, ewentualnie transfer środków pieniężnych, w których telefon komórkowy (lub urządzenie mobilne o podobnych funkcjach) używany jest do zainicjowania, potwierdzenia i sfinalizowania transakcji. przyjęto zatem, że pojęcie płatności mobilnych nie obejmuje takich procesów jak np. samo złożenie zamówienia przez telefon komórkowy czy dostarczenie dobra lub usługi na urządzenie płatnika. * prognoza ź r ó d ł o: opracowanie na podstawie: „world payments report 2012”, cap gemini 2012, http:// www.capgemini.com/worldpaymentsreport.   modele systemów płatności mobilnych a źródła pieniądza 63 telefonia komórkowa stanowi gotową infrastrukturę dla procesu rozliczenia (transferu informacji w procesie płatności), co pozwala na ominięcie istniejących rozwiązań i budowę, od podstaw, nowych systemów tzw. płatności mobilnych. rozwojowi technologii wymiany informacji nie towarzyszą jednak równie szybkie przemiany w dziedzinie rozrachunku. innowacyjne systemy płatności mogą korzystać z istniejącej infrastruktury rozliczeń międzybankowych, rozliczeń kartowych i innych narzędzi pozostających pod kontrolą podmiotów z sektora finansowego podlegających licencjonowaniu. część z nich podejmuje jednak wysiłek ominięcia pośredników i poszukuje innych źródeł płynności, które nie będą związane z wysokimi kosztami transakcyjnymi. płatności mobilne w przyszłości będą stanowić istotną część ogółu transakcji, dlatego też analiza zjawisk zachodzących na tym rynku jest kwestią ważną nie tylko z praktycznego punktu widzenia, ale również dla refleksji teoretycznej nad kształtem systemu obrotu bezgotówkowego. w opracowaniu zostanie przedstawiona autorska propozycja podziału modeli systemów płatności mobilnych, opierająca się na analizie mechanizmu rozrachunku transakcji i użytego źródła pieniądza. zaproponowana klasyfikacja jest oparta na analizie modeli biznesowych największych systemów płatności mobilnych działających na świecie oraz na przeglądzie literatury przedmiotu, a zwłaszcza publikacji instytucji badawczych. 1. metodyka badań i przebieg procesu badawczego ze względu na szybko zmieniający się charakter omawianych procesów płatności mobilnych dostępne źródła literaturowe są nieliczne. zasadniczą zatem metodyką badań był desk research, uzupełniony studiami literaturowymi. badaniu i krytycznej analizie poddano istniejące mechanizmy akceptacji i rozrachunku transakcji. w wyniku tej analizy ustalono, że jednym z najważniejszych kryteriów ekonomicznych pozwalającym dokonać klasyfikacji płatności mobilnych jest użyte w transakcji źródło pieniądza. propozycja takiej klasyfikacji stanowi główną treść pracy. 2. istota i klasyfikacje płatności mobilnych pojęcie płatności mobilnych definiowane jest zazwyczaj jako „płatności dokonywane przy użyciu urządzenia mobilnego” (hayashi 2012, borcuch 2007, polasik 2009). w niniejszym opracowaniu definicja ta została sprecyzowana jako michał kisiel64 płatności, czyli przekazanie środków pieniężnych w zamian za dobro lub usługę, ewentualnie transfer środków pieniężnych, w których telefon komórkowy (lub urządzenie mobilne o podobnych funkcjach) używany jest do zainicjowania, potwierdzenia i sfinalizowania transakcji. przyjęto zatem, że pojęcie płatności mobilnych nie obejmuje takich procesów jak np. samo złożenie zamówienia przez telefon komórkowy czy dostarczenie dobra lub usługi na urządzenie płatnika. dotychczas stosowana klasyfikacja płatności mobilnych zazwyczaj opierała się na wyodrębnieniu m.in.: 1) typu podmiotów biorących udział w procesie płatności (polasik 2009), z wyróżnieniem m.in.: – płatności person-to-person, czyli pomiędzy osobami fizycznymi (p2p), – płatności consumer-to-business, czyli pomiędzy osobami fizycznymi a przedsiębiorstwami-akceptantami (c2b), – płatności business-to-business, pomiędzy podmiotami gospodarczymi (b2b); 2) lokalizacji obu stron transakcji (smart card alliance 2011): – płatności lokalnych (proximity), gdzie płatnik i akceptant są fizycznie obecni w tym samym miejscu (np. w punkcie handlowym, pos), – płatności zdalnych (remote), gdy kontakt pomiędzy płatnikiem i akceptantem jest zapośredniczony przez technologie telekomunikacyjne (np. internet); 3) typu podmiotu pełniącego funkcję operatora systemu (ondrus, pigneur 2006, zmijewska, lawrence, steele 2004): – płatności obsługiwanych przez podmioty bankowe, – płatności obsługiwanych przez operatora telekomunikacyjnego, – płatności obsługiwanych przez podmioty niebankowe; 4) użytych technologii (innopay 2012, amoroso, magnier-watanabe 2011), m.in.: – płatności z użyciem near field communication (nfc), – płatności z użyciem kodów qr, – płatności oparte na wiadomościach tekstowych sms, – płatności oparte na kanale ussd (unstructured suplementary service data), – płatności z użyciem internetu; 5) kontekstu użycia urządzenia mobilnego (hayashi 2012): – płatności pomiędzy użytkownikami systemu,   modele systemów płatności mobilnych a źródła pieniądza 65 – płatności w punkcie sprzedaży (pos), gdzie urządzenie może zostać użyte do zainicjowania płatności, przyjmowania płatności lub w obu rolach jednocześnie, – płatności w ei m-commerce. niezależnie od stosowanych technologii czy kontekstu transakcji dokonanie płatności wymaga wprowadzenia do systemu płynności, która później przekazywana jest pomiędzy jego użytkownikami. rolę źródła pieniądza mogą odgrywać rachunki bankowe, rachunki przedpłacone (np. e-pieniądz software’owy), karty płatnicze lub konto abonenta u operatora telefonii komórkowej (mno, mobile network operator). typ źródła pieniądza może być istotnym kryterium podziału systemów płatności mobilnych – decyduje on m.in. o czasie dokonania rozrachunku i liczbie oraz rodzaju podmiotów biorących udział w procesie płatności. w podziałach prezentowanych przez autorów analizujących powstające na początku xxi w. systemy płatności mobilnych ograniczano się do wyróżniania lokalizacji środków jako podstawy klasyfikacji. w ten sposób wskazywano na pieniądz zapisany na urządzeniu w postaci pliku (software’owy pieniądz elektroniczny), pieniądz zapisany na karcie mikroprocesorowej (hardware e -money) oraz środki umieszczane na rachunkach (schwiderski, knospe 2002). odmienne kryterium podziału zaproponował ondrus (2003), odnosząc się do czasu rozrachunku transakcji. wyróżnił on w swojej wielowymiarowej klasyfikacji systemy wykorzystujące przedpłatę, płatność w czasie rzeczywistym i płatność ex post oraz wskazał na wykorzystywane źródła pieniądza w zależności od ich fizycznej formy (gotówka, papier, karta, formy elektroniczne). wraz z rozwojem m-płatności w literaturze przedmiotu zagadnienie źródła pieniądza bywało łączone z podziałem systemów płatności mobilnych, opartym na użytych technologiach. przykładowo w jednej z klasyfikacji wyróżnia się: systemy billingu operatora, systemy oparte na przedpłaconych środkach i wyspecjalizowane w transakcjach lokalnych, systemy oparte na rachunkach bankowych wykorzystujące elementy sprzętowe urządzenia mobilnego oraz systemy oparte na zdalnym dostępie do rachunku za pomocą urządzenia mobilnego (dahlberg i in. 2007). połączenie w jednej klasyfikacji dwóch podstaw podziału (źródło pieniądza i technologia dokonywania transakcji) sprawia, że ten schemat analizy jest podatny na szybką dezaktualizację. ewolucja technologii mobilnych sprawia, że, przykładowo, systemy wykorzystujące rachunek bankowy jako źródło płynności zaczynają wykorzystywać zróżnicowane schematy transakcji i technologie komunikacji użytkownik-akceptant. michał kisiel66 innym z podejść jest klasyfikowanie modeli płatności mobilnych w oparciu o typ wykorzystywanego instrumentu płatniczego. w ten sposób wyróżniane mogą być systemy oparte na kartach płatniczych, poleceniu przelewu, poleceniu zapłaty, zleceniach stałych oraz obciążeniu rachunku u operatora (carton i in. 2012). typ instrumentu płatniczego jest istotny dla przebiegu procesu rozliczenia i rozrachunku, lecz jako podstawa podziału nie pozwala uchwycić zjawisk zachodzących w zamkniętych systemach, w których nie funkcjonują instrumenty płatnicze w rozumieniu zgodnym z definicją tego terminu. warto również wspomnieć, że sam typ instrumentu nie wskazuje jednoznacznie źródła płynności – karta płatnicza może mieć np. charakter przedpłacony i nie być powiązana z rachunkiem bankowym. w opracowaniu zaproponowano podział modeli systemów m-płatności, opierający się na wyróżnieniu dominującego typu źródła pieniądza. modelami tymi są: 1) systemy oparte na rozrachunku za pośrednictwem mno (direct carrier billing), 2) systemy oparte na przedpłaconym rachunku: – zamknięte (closed loop), – otwarte (open loop), 3) systemy oparte na rachunku bankowym, 4) systemy oparte na użyciu kart płatniczych (mobilne portfele kartowe), 5) systemy hybrydowe (korzystające z wielu źródeł płynności, cyfrowe portfele). w dalszej części opracowania systemy te zostaną omówione bardziej szczegółowo. 3. model oparty na rozrachunku za pośrednictwem mno model płatności mobilnych direct carrier billing (dcb) opiera się na wykorzystaniu infrastruktury billingowej operatora telefonii komórkowej do rozrachunku transakcji. kwota płatności doliczana jest do rachunku abonenta lub odejmowana od pozostałego do wykorzystania salda przedpłaconego. podstawową rolę w schemacie odgrywają integratorzy (np. zong, boku, bango, payfone, mach), którzy pośredniczą w relacjach pomiędzy akceptantem a operatorem telefonii komórkowej. do ich zadań należy przede wszystkim zawieranie umów określających zasady rozliczeń z operatorami telefonii komórkowej, co przy międzynarodowej skali działania wymaga zazwyczaj na  modele systemów płatności mobilnych a źródła pieniądza 67 wiązania setek relacji. integratorzy odpowiadają także za współpracę prowadzonych przez siebie systemów informatycznych z systemami billingowymi operatorów, przekazywanie zapytań autoryzacyjnych oraz wdrożenie mechanizmów zarządzania ryzykiem (na podstawie zasad stosowanych przez operatorów), dokonywanie rozrachunku z akceptantami i tworzenie rozwiązań informatycznych dla akceptantów, w tym api bramek płatności i modułów pozwalających na analizę transakcji. operator pobiera znaczącą część kwoty transakcji – wahającą się w przedziale od 13 do 80%. integrator pobiera kilkuprocentową marżę. fakt, że wysokość pobieranych opłat zależna jest od sieci, z której korzysta klient, oznacza, że akceptant nie może z góry określić wysokości otrzymanej kwoty. integratorzy pozwalają akceptantom definiować różnego rodzaju filtry (odsiewające np. klientów z wybranych krajów) i ograniczać grupę klientów rozliczających się poprzez dcb, co pozwala zmniejszyć niepewność dotyczącą wysokości kosztów transakcyjnych, ale nie eliminuje to zupełnie ryzyka wahań wpływów. taki schemat podziału przychodów powoduje, że dcb używany jest przede wszystkim do sprzedaży dóbr wirtualnych, gdzie poziom marży zysku akceptanta jest wysoki. sprzedaż dóbr fizycznych, gdzie krańcowe koszty wytworzenia, w odróżnieniu od produktów wirtualnych, nie są zbliżone do zera, jest w modelu dcb nieopłacalny. wyjątek mogą stanowić dobra o niewielkiej jednostkowej cenie i wysokiej marży producenta, przekraczającej uśredniony koszt transferu pieniądza. transakcje z użyciem płatności dcb mogą być odwoływane, chociaż operatorzy telefonii komórkowej nie wypracowali do tej pory wspólnych standardów, które można porównać z procedurą chargeback w przypadku płatności kartowych. zwroty realizowane są najczęściej poprzez odjęcie ich z kwoty przekazywanej akceptantowi w kolejnym cyklu rozrachunkowym. w modelu tym nie znajdują zastosowania systemy rozliczeń międzybankowych i systemy obsługujące transakcje kartowe. dopiero zbiorcze rozliczenie pomiędzy integratorem (będącym odpowiednikiem agenta rozliczeniowego) a akceptantem odbywa się z użyciem rachunku bankowego. niektóre podmioty używają także alternatywnych systemów płatności (np. pieniądza elektronicznego). czas rozrachunku transakcji jest pochodną cyklu billingowego operatora i z tego względu jest znacznie dłuższy niż w innych modelach płatności mobilnych. akceptant otrzymuje środki za pośrednictwem integratora zazwyczaj w ciągu 2 miesięcy od daty dokonania transakcji. michał kisiel68 4. systemy closed loop oparte na przedpłaconym rachunku nazwą closed loop określa się zazwyczaj systemy, w których funkcjonują wyspecjalizowane instrumenty płatnicze o ograniczonym zakresie zastosowania, a podmiot tworzący system kontroluje zarówno obszar wydawnictwa, jak i akceptacji instrumentów. cechą charakterystyczną takich systemów jest jednokierunkowy przepływ strumieni pieniężnych – środki wprowadzone do systemu nie mogą zostać z niego wycofane. zamknięte systemy nie są z reguły objęte regulacjami prawnymi typowymi dla systemów płatności. sprzyja temu fakt, że ich zakres działalności jest ograniczony, a możliwości wykorzystania do procederu prania pieniędzy niewielkie. systemy płatności mobilnych closed loop tworzone są najczęściej przez detalistów prowadzących sprzedaż w fizycznych placówkach. przykładem mogą być rozwiązania promowane przez sieć starbucks i dunkin donuts. telefon komórkowy pełni najczęściej funkcję substytutu fizycznej karty private label, podarunkowej czy przedpłaconej. wykorzystanie kodów kreskowych lub kodów qr jako nośnika informacji zawierającego identyfikator klienta jest jednym z najprostszych schematów użycia urządzenia mobilnego, pozwalającego na szybką i niewymagającą wysokich nakładów implementację nowego rozwiązania. zasilanie przedpłaconych rachunków użytkowników może odbywać się bez konieczności angażowania jakichkolwiek pośredników, jeśli przewidziano możliwość doładowywania ich przy użyciu gotówki w placówkach akceptanta. system działający na takich zasadach można uznać za całkowicie autonomiczny, niezależny od instrumentów płatniczych ogólnego zastosowania i zewnętrznych systemów płatności. rozliczenie transakcji dokonywanych w zamkniętych systemach płatności mobilnych odbywa się bez udziału zewnętrznych podmiotów (agentów rozliczeniowych itp.). operator systemu, będący równocześnie akceptantem, sam prowadzi rachunki użytkowników i jest odpowiedzialny za dokonanie rozrachunku. w działających dziś na świecie systemach m-płatności closed loop wykorzystywane są jednak także inne źródła finansowania przedpłaconych sald. funkcję taką pełnią przede wszystkim karty płatnicze oraz systemy agregujące różne kanały płatności (np. paypal). operator systemu zazwyczaj nie przerzuca na użytkowników kosztów związanych z zasileniem rachunku. w części może zrekompensować sobie te koszty, obracając płynnymi środkami pozyskanymi od klientów.   modele systemów płatności mobilnych a źródła pieniądza 69 5. systemy open loop oparte na przedpłaconym rachunku systemy płatności mobilnych tego typu opierają się zazwyczaj na przedpłaconym rachunku użytkownika, który może być zasilany z użyciem tradycyjnych instrumentów płatniczych. cechą wspólną takich systemów jest otwarty charakter. grono akceptantów nie jest ograniczone, a operator systemu z reguły aktywnie rozbudowuje sieć akceptacji, pełniąc funkcję zarówno wydawcy instrumentu, jak i agenta rozliczeniowego dokonującego rozrachunku transakcji i pozyskującego akceptantów. systemy tego typu można także nazwać platformami płatności mobilnych, kreującymi nowy typ instrumentu płatniczego, alternatywami wobec obrotu kartowego czy czekowego. w krajach rozwiniętych systemy tego typu stanowią „warstwę” budowaną nad istniejącymi systemami rozliczeń międzybankowych, płatności kartowych i innych systemów umożliwiających przepływ pieniądza w gospodarce. o ile proces rozliczenia odbywa się przy użyciu nowych kanałów budowanych od zera przez operatora systemu, o tyle rozrachunek transakcji może opierać się na środkach zgromadzonych w systemie (przedpłaconych rachunkach, pieniądzu elektronicznym w wersji software’owej) lub być uzależniony od wykorzystania istniejących mechanizmów płatniczych. ostatecznie, na którymś z etapów rozrachunku, system korzysta z tradycyjnych form transferu pieniądza. przykładami takich systemów mogą być działający w usa dwolla, a także polski skycash. w krajach rozwijających się funkcję operatora systemu pełni często operator telefonii komórkowej, a za niektóre elementy procesu rozrachunku odpowiadają partnerzy bankowi. w tym przypadku jednak system stanowi substytut systemów detalicznych rozliczeń międzybankowych, które ze względu na niski poziom ubankowienia i słaby poziom rozwoju infrastruktury, nie są dostępne dla szerszej bazy użytkowników. przykładem takiego rozwiązania może być działający w kilku krajach afrykańskich m-pesa (galpin 2011). ponieważ w odróżnieniu od systemów closed loop, w systemach otwartych akceptant nie jest tym samym podmiotem co operator systemu, to zazwyczaj występować będą opłaty akceptanta. stanowią one przychód operatora systemu i są potrącane od akceptantów podczas ostatecznego rozrachunku transakcji. warto podkreślić, że w krajach rozwiniętych systemy płatności open loop konkurują bezpośrednio z istniejącymi systemami płatności i z tego względu koszty transakcyjne przez nie narzucane muszą być niższe niż w przypadku np. transakcji dokonywanych kartami płatniczymi. tylko w takim przypadku michał kisiel70 nowy system płatności mobilnych może być atrakcyjny z punktu widzenia akceptantów i będzie w stanie poszerzać swoją sieć akceptacji. rozliczenie transakcji w systemach open loop odbywa się poprzez obciążenie rachunku przedpłaconego użytkownika. operator systemu prowadzi rachunki użytkowników i jest odpowiedzialny za dokonywanie rozrachunku. w niektórych systemach, gdzie przedpłacone saldo jest tylko jedną z opcji finansowania transakcji, dokonanie płatności może wyzwalać uruchomienie kolejnego instrumentu płatniczego, np. zlecenia obciążenia rachunku bankowego lub karty płatniczej. możliwa jest również sytuacja, w której operator systemu udostępnia płynność płatnikom (kredytuje transakcje). 6. model oparty na rachunku bankowym systemy płatności mobilnych mogą pomijać karty płatnicze jako źródło płynności i opierać się na bezpośrednim obciążaniu rachunku bankowego klienta. telefon komórkowy z zainstalowaną odpowiednią aplikacją staje się wówczas faktycznie nowym typem instrumentu płatniczego. przykładami takich rozwiązań mogą być pingit banku barclays w wielkiej brytanii i iko pko bp w polsce. bank tworzący system m-płatności oparty na rachunku bankowym zazwyczaj ogranicza jego zasięg do płatników i akceptantów będących klientami instytucji. rozrachunek opiera się wówczas na przepływie środków pieniężnych pomiędzy rachunkami bankowymi prowadzonymi w jednym banku. umożliwia to pełnienie przez operatora systemu jednocześnie roli agenta rozliczeniowego i dostawcy płynności. działające na świecie systemy tego typu próbują przezwyciężyć wskazane powyżej ograniczenia, oferując płatnikom i akceptantom niebędącym klientami rachunki przedpłacone (np. działające na podstawie regulacji prawnych pieniądza elektronicznego). umożliwia to zwiększenie skali działalności i otwarcie się na klientelę konkurencji. podmioty niebankowe tworzące schematy tego typu mogą wykorzystywać dostępne na danym rynku instrumenty płatnicze (np. polecenie zapłaty), aby sięgnąć po płynność zgromadzoną na rachunku bankowym użytkownika. 7. model mobilnego portfela kartowego model mobilnego portfela kartowego opiera się na analogii do fizycznego portfela przechowującego karty płatnicze oraz alternatywne źródła wartości (ku  modele systemów płatności mobilnych a źródła pieniądza 71 pony, karty lojalnościowe, oferty). miejsce fizycznego portfela zajmuje telefon komórkowy, który daje płatnikowi dostęp do kilku kart płatniczych, pozwala wybrać jedną z nich i dokonywać transakcji, przede wszystkim w fizycznych punktach sprzedaży. przykładami takich systemów mogą być google wallet, isis i mywallet t-mobile. przebieg rozliczenia i rozrachunku najczęściej jest taki sam jak w przypadku transakcji kartowych. akceptant jest obciążany opłatą msc, podobnie jak w przypadku zwykłej transakcji kartą płatniczą. dominującą technologią w przypadku mobilnych portfeli kartowych pozostaje nfc. pozwala to bazować na istniejącej sieci akceptacji kart zbliżeniowych, dzięki użyciu trybu emulacji karty przez urządzenie mobilne. na świecie rozwijają się także systemy stosujące inne podejście, gdzie dane karty reprezentowane są przez token (np. kod qr w systemie levelup w usa). z punktu widzenia dostawców instrumentów płatniczych modele podziału przychodów stosowane przez operatorów mobilnych portfeli można podzielić na dwie grupy: 1) model „neutralny” (np. google wallet) – operator nie pobiera opłat za umieszczenie instrumentu płatniczego w portfelu przez jego wydawcę, koncentruje się na budowaniu źródeł przychodów z usług dodanych, pobieranych od akceptantów; przychody wydawców instrumentów płatniczych nie ulegają erozji; 2) model podziału przychodów (np. isis) – operator pobiera opłaty od wydawców instrumentów płatniczych za dostęp do portfela lub jako udział w przychodach z transakcji. 8. model hybrydowy – cyfrowy portfel model hybrydowy opiera się na połączeniu kilku źródeł pieniądza. fakt, że cyfrowy portfel może zawierać różne instrumenty płatnicze i źródła wartości (air miles, punkty lojalnościowe itp.) sprawia, iż mechanizmy rozliczania transakcji mogą być niezwykle zróżnicowane, a koszty finansowania transakcji i utrzymania systemu mogą być w różny sposób rozdzielane pomiędzy operatora systemu, dostawców instrumentów płatniczych zawartych w portfelu, akceptanta i płatnika. przykładowo w systemie paypal rozrachunek transakcji odbywa się poprzez: obciążenie karty płatniczej płatnika, obciążenie jego rachunku przedpłaconego, zlecenie obciążeniowe ach (pobranie środków z rachunku bankomichał kisiel72 wego) lub udzielenie kredytu ratalnego. każda transakcja może być finansowana przez połączenie kilku wskazanych instrumentów. można oczekiwać, że wraz z pojawianiem się kolejnych inicjatyw cyfrowego portfela budowanych przez różnych uczestników rynku, tworzone będą nowe modele podziału kosztów i przychodów. systemy, w których dane instrumentów płatniczych nie są zapisywane na bezpiecznym elemencie w urządzeniu mobilnym, nie wymagają tak szerokiej sieci powiązań pomiędzy różnego typu podmiotami jak w przypadku modelu mobilnego portfela kartowego. operator mobilnego portfela zazwyczaj musi jednak budować samodzielnie sieć akceptacji, występując jednocześnie w roli acquirera i podmiotu dokonującego rozliczenia i rozrachunku. włączenie do portfela instrumentów płatniczych należących do płatnika nie wymaga zazwyczaj współpracy z ich wydawcą. dane karty płatniczej mogą być zapisane na serwerach operatora, a obciążenie karty następuje w zgodzie z procedurami typowymi dla transakcji card-not-present. jeśli źródłem finansowania transakcji jest rachunek bankowy, to wykorzystywane są istniejące instrumenty płatnicze (np. polecenie zapłaty). 9. wyniki i wnioski procesu badawczego przedstawiony w opracowaniu podział wskazuje na różnorodność mechanizmów rozrachunku transakcji stosowanych w systemach płatności mobilnych. w znaczącej większości przypadków wyłaniające się modele płatności mobilnych korzystają z banków jako dostawców płynności umożliwiających dokonywanie transakcji. można wręcz uzasadnić tezę, że płatności mobilne przyczyniają się do szerszego wykorzystania tradycyjnych instrumentów płatniczych. karty płatnicze i instrumenty płatnicze wykorzystujące rachunki bankowe pozostają istotnym elementem infrastruktury, ale w wielu schematach pełnią funkcję pomocniczą i używane są przed transakcją (np. do zasilenia rachunku przedpłaconego) lub ex post (np. do sfinansowania transakcji dokonanej cyfrowym portfelem). rozwój technologii mobilnej umożliwił także powstanie mechanizmów rozrachunku transakcji w znacznej mierze niezależnych od tradycyjnej infrastruktury obiegu pieniądza bezgotówkowego. szczególną rolę odgrywają w tym przypadku operatorzy telefonii komórkowej, którzy dysponują możliwościami technicznymi, pozwalającymi na obsługę transakcji (autoryzację, rozliczenie i rozrachunek) z pominięciem pośredników z sektora finansowego. w przyszło  modele systemów płatności mobilnych a źródła pieniądza 73 ści podobne możliwości stworzyć może m.in. rozwój wirtualnych walut zarówno utrzymywanych przez podmioty niebankowe, jak i wykorzystujących zdecentralizowany model działania.  literatura amoroso d. l., magnier-watanabe r. 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(2002), secure mobile commerce, “electronics and communication engineering journal”, vol. 14, no. 5, october, 228–238, http://dx.doi. org/10.1049/ecej:20020506. the mobile payments and nfc landscape: a us perspective, smart card alliance (2011), http://www.smartcardalliance.org/pages/publications-the-mobile-payments-and nfc-landscape-a-us-perspective (dostęp: 01.06.2013). zmijewska a., lawrence e., steele r. (2004), classifying m-payments – a user-centric model, proceedings of the third international conference on mobile business, http:// epress.lib.uts.edu.au/research/handle/10453/7311 (dostęp: 01.06.2013). date of submission: may 31, 2021; date of acceptance: august 5, 2021. * contact information: mdaliashrafaiba@gmail.com, army institute of business administration, jalalabad cantonment, sylhet-3104, bangladesh, phone: +8802996642777; orcid id: https://orcid.org/0000-0003-2146-6267. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 ashraf, m. a. (2021). the impact of mobile financial services on the usage dimension of financial inclusion: an empirical study from bangladesh. copernican journal of finance & accounting, 10(4), 9–25. http://dx.doi.org/10.12775/cjfa.2021.012 md ali ashraf* army institute of business administration the impact of mobile financial services on the usage dimension of financial inclusion: an empirical study from bangladesh keywords: mfs, financial inclusion, covid-19. j e l classification: g20, g21, g23, e42, o33. abstract: a plethora of studies have investigated how mobile financial services (mfs) induces financial inclusion around the world. however, research in the context of bangladesh was rather limited. hence, the primary objective of this paper was to investigate whether there was a statistically significant relationship between mfs and financial inclusion, measured by two time series variables – the number of mfs agents and number of registered mfs users per 100,000 of population, from 2017 to 2020. for analyzing the relationship between these two variables, multiple statistical methods were employed – including vector auto regression, cointegration and granger causality. the analysis revealed that both time series variables had an increasing trend with time. more importantly, the analysis specified that there was no statistically significant relationship between mfs, measured by the number of agents and the ‘usage’ dimension of financial inclusion, measured by number of registered mfs users in the context of bangladesh. moreover, the study was unable to find any significant changes in the trends of these variables that could be attributed to the covid-19 pandemic in bangladesh. mohammad ali ashraf10  introduction technological inventions are disrupting the way businesses conduct their activities and, at the same time, transforming the means through which individuals engage in financial transactions. information technology, combined with innovative communication systems and tools are bringing enormous changes throughout the globe. one of the major changes is occurring in the method people use for completing their financial activities. according to a study by world bank (2012), only half of the global population maintained accounts with a formal financial institution. one of the commonly reported barriers of accessing financial services was the physical distance of service facilities (demirguc-kunt & klapper, 2012). this is where mobile financial services come into consideration. by using mobile devices and networks, a huge number of unbanked individuals, especially low-income and rural consumers around the globe, are getting access to previously unavailable financial products and services (kanobe, alexander & bwalya, 2017). to understand how mobile devices are making financial services available to a significant portion of the global population, it is essential to understand two notions – mobile financial services (mfs) and financial inclusion. mobile financial services (mfs) generally refers to the use of mobile or handheld communication devices to access banking services. bangladesh bank, the central bank of bangladesh defines mfs as – “an approach to offering financial and banking services via mobile wireless networks which enables for user to execute banking transactions.” (bangladesh bank, 2012). the idea of financial inclusion is to enable mass people to engage in financial activities through official channels. sarma and pais (2011) defined financial inclusion as a process that ensures the ease of access, availability and usage of the formal financial system for all members of an economy, whereas dev (2006) defined financial inclusion as the delivery of banking services at an affordable cost for a massive section of underprivileged members of an economy. a substantial number of scholarly studies demonstrated that mobile financial services played a vital role in facilitating financial inclusion around the world, specially in underdeveloped and developing countries. this topic has been discussed further in the literature review section. likewise, to understand how mfs is facilitating financial inclusion, it is imperative to look at some of the indicators that measures the extent of financial inclusion. the impact of mobile financial services… 11 indicators of financial inclusion can measure three dimensions of financial inclusion including ‘usage’, ‘access’ and ‘quality’ (pearce & ortega, 2012). access indicators show the depth of outreach of financial services such as number of bank branches or number of atms per 100,000 of the population, whereas usage indicators ref lect how clients use financial services by looking at data such as number of adults with an account at a formal financial institution (sarma, 2008; world bank, 2015). as this paper will attempt to investigate whether mfs is enabling financial inclusion, a similar access indicator used in this paper will be the number of mfs agents. in terms of usage dimension, the selected indicator will be number of registered mfs users per 100,000 of population. in addition, according to a report by business finance for the poor in bangladesh (2021), a key policy initiative planned by the authorities of bangladesh is to increase availability of mfs, or in other words, to increase the number of access points or mfs agents to get more people under a formal financial system. it may be noted at this point that, research on how mfs is contributing to financial inclusion in bangladesh is rather limited. hence, one of the objectives of this paper is to investigate whether a particular dimension of mfs, namely the number of agents that provide mobile financial services, can affect the number of users of such services – as indicated by the number of registered mfs users in bangladesh. for this purpose, four years of monthly time series data starting from january, 2017 of these two variables were used. an additional objective of this paper is to have a deeper look at the two variables mentioned earlier and their behavior over the same time period in an attempt to discover how the pandemic affected the trends of these variables. by concentrating on these two objectives, the paper not only aims to provide valuable insights for policy makers and entities that are interested in enhancing financial inclusion, but also helps in understanding the trend of mfs and financial inclusion in bangladesh, and if the covid-19 pandemic had an impact on the trend. literature review ensuring access to financial services for people from every socio-economic class of a nation is imperative for economic growth. indeed, it has been shown that financial inclusion has positive effect on the economic growth (iqbal & sami, 2017; kim, yu & hasan, 2018; sharma, 2016). moreover, financial inmohammad ali ashraf12 clusion contributes to the development of society and lessens the gap between people from different financial tiers. in addition, as more people start availing financial services, their transactions boost money f low in the economy (damodaran, 2013). it has also been argued that the benefits of financial inclusion reach beyond its users. ozili (2018) stated that mfs providers and government, both benefit from a population that is financially inclusive. people that remain excluded from financial inclusion suffer from poverty and economic instability. those who are unable to access financial services, face multi-dimensional social exclusion as well (devlin, 2005). it has also been shown that people who are unable to access financial services incur additional expenses in managing household resources. besides, a population facing financial exclusion often have difficulties in getting employment (corr, 2006). additionally, businesses often fail to reap the benefits of mfs as it incurs high transaction costs (kabir, sadrul huda & faruq, 2020). as discussed earlier, financial inclusion is crucial for economic development, and it is essential to look at how mobile devices are contributing towards financial inclusion. smartphones are becoming a household item for a significant share of the global population. along with relatively cheap mobile internet services, smartphone users, particularly individuals fighting with poverty or those from remote areas, are availing banking and financial services that were previously inaccessible. a significant number of studies have shown evidence in favor of this phenomenon. huge investments have been made in infrastructures and applications that use mobile phones to deliver financial services, in order to bring the poor and unbanked population under the umbrella of financial inclusion (porteous, 2006; vodafone, 2007; bangens & soderberg, 2008; world bank, 2012). likewise, horne (1985), frame and white (2004) found that one form of financial innovation is mobile technology, and such innovations have multi-dimensional effects. innovative mobile technologies improve efficiency and effectiveness of the financial system and thus, improves financial inclusion. additionally, one study indicated that mfs is responsible for increasing the volume and frequency of remittances received by users, and a small increase in savings by such users (alampay, moshi, ghosh, peralta & harshanti, 2017). kim, zoo, lee and kang (2018), mbogo (2010) also argued that delivery of financial services by means of mobile devices enables financial inclusion. nevertheless, even in this era of information and communication technology, a huge portion of the global population remains unbanked. at the beginning of 21st century, half of the global population had no access to banking services the impact of mobile financial services… 13 (chaia, dalal, goland, gonzalez, morduch & schif, 2009). there was no significant change in this parameter as indicated by world bank (2012). although a newer survey by world bank (2018) reported that the number of financially included individuals are increasing, about one-third of the population still remains unbanked. the situation is not very different in the case of bangladesh. according to world bank, in 2011, only 31.7% of people in bangladesh had access to financial services. in 2014, this number declined slightly to 31%, and finally reached 50% in 2018. in contrast, almost 70% people of south asia had an account that provided financial services in 2018 (world bank, 2018). hence, it can be said that there is a huge potential to advance financial inclusion through mobile banking in bangladesh. as mentioned earlier, policy makers of bangladesh are emphasizing on creating more access points to integrate more people in a formal financial system. however, a review by duncombe and boateng (2009) asked for additional empirical investigation to verify such causal link. furthermore, a study conducted in bangladesh by siddik, sun, yanjuan and kabiraj (2014) pointed out that mfs providers should be more concerned about the factors that affect behavioral intention of people in availing and continuously using such services. in order to get more people under a formal financial system, the suggested policy according to the study was to enhance customer satisfaction through improving and delivering financial services via mobile devices. these studies lay the foundation of the main objective of the study – to check if increasing the number of mfs agents’ results in increased number of mfs users. methodology the first task was to examine the trends of the two time series variables pertinent to mfs usage and financial inclusion, by using monthly data from january, 2017 to december, 2020, obtained from bangladesh bank mfs dataset (bangladesh bank, 2021). these datasets had time series data on variables such as – number of mfs agents, number of registered and number of active mfs users, total number of transactions, the volume of average daily transactions, and product wise information of mfs transactions. to address the objective of this study, only two of the time series variables with 48 observations were selected, the first one being the total number of mfs agents and the second one being the total number of registered mfs users. mohammad ali ashraf14 next, it was checked whether there was any statistically significant relation between the time series variables – total number of mfs agents and total number of registered mfs users. multiple statistical methods including vector auto regression, cointegration and granger causality for analyzing relationship of time series data were used in the process. the statistical application eviews was used for conducting all the analyses. stationarity at the beginning of the analysis, data was checked for stationarity through visual inspection and the augmented dickey–fuller (adf) test. adf test is widely used to check for unit roots in time series variables. a preliminary visual inspection revealed increasing trends for both variables. then, the adf test checked for unit root in the time series, which was conducted at 90, 95 and 99 percent confidence level on both time series variables at level and at first difference. lag length for the test was automatically selected based on schwarz information criterion (sic). it is imperative to note that both time series had unit roots and were non-stationary with constant, with constant and trend, and without constant & trend, and they became stationary at first difference according to the adf test (table 1). in other words, the variables were non-stationary at level and integrated of same order i(1). cointegration cointegrating variables are said to have long run equilibrium relationship, meaning they will not drift apart if there is disturbance. in empirical literature, cointegration between variables is frequently checked by using the johansen cointegration test. hence, cointegration between the variables under study was checked by using johansen cointegration test (johansen, 1988). before checking for cointegration, an initial vector autoregressive (var) model was estimated with both time series at level. it may be mentioned here that var is a statistical model to analyze relationship between time series variables. after estimating the initial var, tests were conducted to select an appropriate lag length for checking cointegration. johansen cointegration test was then conducted based on five different sets of assumptions for allowing “no deterministic trend”, “linear deterministic the impact of mobile financial services… 15 trend” and “quadratic deterministic trend” in the cointegrating equation. the test revealed that there was no cointegration between the two time series variables. table 2 provides a summary of the cointegration test. vector autoregressive model vector autoregression (var) is a statistical model that is frequently used to examine the relationship between multiple time series variables. impulse response functions were then projected in the context of the developed var model by using cholesky decomposition method with dof adjusted. since the main objective of the paper was to investigate whether number of mfs agents can inf luence the number of mfs users, number of mfs agents was first in cholesky ordering followed by number of registered mfs users. then, impulse response graphs were analyzed to check how changes in number of mfs agents impact the number of registered mfs users. in addition to the impulse response function, forecast error variance decomposition was used to investigate how the change in number of mfs agents explains variation in number of registered mfs users. granger causality test additionally, granger causality test was used to check whether any of the variable granger caused the other variable. granger causality test is a statistical hypothesis test that examines if one time series can predict the variability in another time series (granger, 1969). the parameters for this test were based on the optimal var model estimated during the previous step. results & discussion during the time period of 2017 to 2020, both number of mfs agents and number of registered mfs users were increasing steadily. in january 2017, the number of mfs agents was merely 723,112; which increased by more than 46% to 1,058,897 by december of 2020. this increasing trend is clearly visible in chart 1. during the same time period, number of registered mfs users per 100,000 individuals increased to 993 from 419, an increase of more than 136% (chart 2). mohammad ali ashraf16 chart 1. number of mfs agents registered mfs users per 100,000 individuals increased to 993 from 419, an increase of more than 136% (chart 2). chart 1. number of mfs agents source: own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). from the charts, it is also visible that both time series shows an increasing trend, but no apparent seasonality was revealed, nor was there any indication of cyclic behavior. from visual inspection of the charts, it can also be stated that both time series were non stationary. chart 2. number of register ed mfs users per 100,000 of populati on 600,000 700,000 800,000 900,000 1,000,000 1,100,000 2017 2018 2019 2020 no. of mfs agents 400 500 600 700 800 900 1,000 2017 2018 2019 2020 no. of registered clients per 100,000 of population s o u r c e : own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). from the charts, it is also visible that both time series shows an increasing trend, but no apparent seasonality was revealed, nor was there any indication of cyclic behavior. from visual inspection of the charts, it can also be stated that both time series were non stationary. chart 2. number of registered mfs users per 100,000 of population registered mfs users per 100,000 individuals increased to 993 from 419, an increase of more than 136% (chart 2). chart 1. number of mfs agents source: own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). from the charts, it is also visible that both time series shows an increasing trend, but no apparent seasonality was revealed, nor was there any indication of cyclic behavior. from visual inspection of the charts, it can also be stated that both time series were non stationary. chart 2. number of register ed mfs users per 100,000 of populati on 600,000 700,000 800,000 900,000 1,000,000 1,100,000 2017 2018 2019 2020 no. of mfs agents 400 500 600 700 800 900 1,000 2017 2018 2019 2020 no. of registered clients per 100,000 of population s o u r c e : own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). the impact of mobile financial services… 17 impact of covid-19 like all other countries in the world, bangladesh also faced the consequence of the covid-19 pandemic. on march 8, 2020, the first case of covid-19 was detected in bangladesh, and the government initiated a countrywide shutdown on 26 march, 2020. as movement of individuals was restricted, commercial activities were suspended and formal financial service organizations like banks remained inactive, it was assumed that mfs activities will see a substantial rise (islam, talukder, siddiqui & islam, 2020). although there were changes in the trends of these variables after the month of march, according to data 6 month prior and after march 2020, the evidence was inconclusive to attribute such changes to the pandemic. during the 48 months analyzed in the study, number of agents had an average growth rate of 0.82% with a standard deviation of 0.92%, while number of registered users had an average growth rate of 1.89% with a standard deviation of 2.78%. in fact, the monthly average growth rate of the number of agents was 0.60% during the six months prior to the first case detection, whereas this average growth rate dropped down to 0.40% during the six months afterwards. in case of number of registered users, during the six months prior to pandemic, the growth in registered users were 1.79%, and 2.33% percent during the six months after march. when compared to the standard deviations, it can be stated that there were no abnormal changes in the growth rate after march 2020. stationarity as discussed earlier, visual inspection of both time series revealed that both exhibit increasing trend and are non-stationary. this finding was also supported by the adf test of stationarity, results of which are presented in table 1. both variables had a unit root and thus were non-stationary at level. the adf test also showed that at 95% confidence level, both variables became stationary at first difference. mohammad ali ashraf18 table 1. unit root test results table (adf) null hypothesis: the variable has a unit root at level no_ _of_registered_ clients_per_100000 no_ _of_mfs_agents with constant t-statistic 0.0144 -1.2596 prob. 0.9550 0.6403 no no with constant & trend t-statistic -1.2911 -2.6531 prob. 0.8781 0.2601 no no without constant & trend t-statistic 6.1373 6.9115 prob. 1.0000 1.0000 no no at first difference d(no_ _of_registered_ clients_per_100000) d(no_ _of_mfs_agents) with constant t-statistic -4.4037 -9.4196 prob. 0.0010 0.0000 *** *** with constant & trend t-statistic -10.8314 -9.3775 prob. 0.0000 0.0000 *** *** without constant & trend t-statistic -2.3026 -1.5496 prob. 0.0221 0.1127 ** no notes: a: (*) significant at the 10%; (**) significant at the 5%; (***) significant at the 1% and (no) not significant b: based on sic c: probability based on mackinnon (1996) one-sided p-values. s o u r c e : own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). the impact of mobile financial services… 19 cointegration to check for cointegration between the two time series variables, johansen cointegration test was used in this study. the results of the test (table 2) indicated that at the selected lag length of 2 specified by aic and fpe, there was no cointegration. both trace and maximum eigenvalue tests showed similar results indicating the absence of any cointegration among the two time series variables under investigation. table 2. summary of cointegration test date: 03/17/21 time: 13:59 sample: 2017m01 2020m12 included observations: 45 series: no_ _of_mfs_agents no_ _of_registered_clients_per_100000 lags interval: 1 to 2 selected (0.05 level*) number of cointegrating relations by model data trend: none none linear linear quadratic test type no intercept, intercept, intercept, intercept, intercept, no trend no trend no trend trend trend trace 1 0 0 0 0 max-eig 1 0 0 0 0 * critical values based on mackinnon-haug-michelis (1999). s o u r c e : own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). vector autoregressive model impulse response analysis of var model impulse response analysis investigates how a time series variable responds to a shock in another time series variable. based on the var model developed in the previous step, four impulse response graphs were produced. since the objective of the study was to check how a change in number of mfs agents changes the number of registered mfs users, among the four graphs, only the one that depicts the response of number of registered users to a shock in number of agents is highlighted here (chart 3). mohammad ali ashraf20 chart 3. impulse response: response of number of registered mfs users to a change in number of mfs agents impulse response graphs were produced. since the objective of the study was to check how a change in number of mfs agents changes the number of registered mfs users, among the four graphs, only the one that depicts the response of number of registered users to a shock in number of agents is highlighted here (chart 3). chart 3. impulse response: response of number of registered mfs users to a change in number of mfs agents source: own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). from the graph, it is evident that initially there is a negative impact on the number of registered mfs users, as indicated by the line starting below 0, when there is a shock in the number of mfs agents. eventually, this negative impact fades away as the line moves from below 0 to above 0 and then merges into 0. one way to interpret this finding is that, when the number of mfs agents goes up by 1 unit, during the next two months, the number of registered mfs users per 100,000 of population goes down by more than 2 units. during the next 6 months, number of registered mfs users is marginally positively affected – after which, this effect starts to decay, eventually becoming zero, for 1 unit of positive change in number of mfs agents. -2 0 2 4 6 8 1 2 3 4 5 6 7 8 9 10 11 12 response of d(no__of_registered_clients_per_100000) to d(no__of_mfs_agents) s o u r c e : own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). from the graph, it is evident that initially there is a negative impact on the number of registered mfs users, as indicated by the line starting below 0, when there is a shock in the number of mfs agents. eventually, this negative impact fades away as the line moves from below 0 to above 0 and then merges into 0. one way to interpret this finding is that, when the number of mfs agents goes up by 1 unit, during the next two months, the number of registered mfs users per 100,000 of population goes down by more than 2 units. during the next 6 months, number of registered mfs users is marginally positively affected – after which, this effect starts to decay, eventually becoming zero, for 1 unit of positive change in number of mfs agents. forecast error variance decomposition of var model in a similar manner to impulse response analysis, forecast error variance decomposition (fevd) shows how much of the variability of one time series is caused by shocks in another time series. by looking at the variance decomposition of number of registered clients in table 3, it can be stated that regardless of the impact of mobile financial services… 21 short or long term, number of mfs agents does not significantly affect the number of registered mfs users. for instance, during the 6th period, only about 16% of the forecast error variance in number of registered users was due to number of mfs agents, which was deemed insignificant. table 3. forecast error variance decomposition variance decomposition of d(no_ _of_mfs_agents): period s.e. d(no_ _of_mfs_agents) d(no_ _of_registered_clients_per_100000) 1 4342.483 100.0000 0.000000 2 4589.611 99.45571 0.544294 3 4715.778 96.00657 3.993425 4 4732.140 95.80261 4.197390 5 4755.958 95.08286 4.917138 6 4760.689 94.99087 5.009126 7 4765.463 94.85346 5.146536 8 4766.764 94.82494 5.175063 9 4767.772 94.79699 5.203013 10 4768.110 94.78912 5.210883 11 4768.331 94.78316 5.216845 12 4768.415 94.78112 5.218883 variance decomposition of d(no_ _of_registered_clients_per_100000): period s.e. d(no_ _of_mfs_agents) d(no_ _of_registered_clients_per_100000) 1 8.894830 16.98720 83.01280 2 8.938255 17.12442 82.87558 3 9.131167 16.67070 83.32930 4 9.140166 16.79548 83.20452 5 9.169914 16.80620 83.19380 6 9.173320 16.83979 83.16021 7 9.178825 16.84695 83.15305 8 9.179872 16.85441 83.14559 9 9.180970 16.85662 83.14338 mohammad ali ashraf22 variance decomposition of d(no_ _of_registered_clients_per_100000): period s.e. d(no_ _of_mfs_agents) d(no_ _of_registered_clients_per_100000) 10 9.181261 16.85828 83.14172 11 9.181492 16.85886 83.14114 12 9.181568 16.85924 83.14076 cholesky ordering: d(no_ _of_mfs_agents) d(no_ _of_registered_clients_per_100000) s o u r c e : own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). granger causality test granger causality test between the two variables was conducted with the same parameters of the var model discussed in the previous section. from the results of the test (table 4), it was concluded there was no granger causality among the variables, as indicated by a p value of higher than 0.05. it may also be mentioned here that none of the variable granger caused the other variable. table 4. var granger causality/block exogeneity wald tests date: 03/18/21 time: 20:13 sample: 2017m01 2020m12 included observations: 45 dependent variable: d(no_ _of_mfs_agents) excluded chi-sq df prob. d(no_ _of_registered_clients_per_100000) 3.127916 2 0.2093 all 3.127916 2 0.2093 dependent variable: d(no_ _of_registered_clients_per_100000) excluded chi-sq df prob. d(no_ _of_mfs_agents) 1.243859 2 0.5369 all 1.243859 2 0.5369 s o u r c e : own study based on bangladesh bank mfs dataset (bangladesh bank, 2021). table 3. forecast… the impact of mobile financial services… 23  conclusion during the period of 2017 to 2020, bangladesh realized a positive growth in the number of mfs agents and in the number of registered mfs users, and the covid-19 pandemic that started in march of 2020 did not cause any significant change in the increasing trend of these two variables. although both the number of agents and number of users were steadily increasing simultaneously, however, in this particular case correlation did not lead to causation. the study was unable to find and long-term cointegrating relationship between these two variables, nor was it able to find granger causality. moreover, impulse response and variance error decomposition methods in the var context revealed that increasing the number of mfs agents initially had a negative impact on the number of mfs users, followed by a marginal positive impact for a couple of months. ultimately, any effect of increasing the number of mfs agents decayed out rather rapidly. hence, it was concluded that increasing access to mobile financial services may not necessarily lead to more people being financially inclusive. the policy makers should refrain from solely relying on increasing the number of mfs access points or agents. what could be a better option to improve financial inclusion in bangladesh? the answer to this question requires additional investigation. one potential option based on earlier research is 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(2014). financial inclusion through mobile banking: a case of bangladesh. journal of applied finance & banking, 4(6), 109-136. vodafone (2007). the transformational potential of m-transactions. the vodafone policy paper series, 6, 1-52. world bank (2012). information and communications for development 2012: maximizing mobile. washington: world bank group publications. world bank (2012). the little data book on financial inclusion. washington: world bank group publications. world bank (2015). how to measure financial inclusion. washington: world bank group publications. world bank (2018). the little data book on financial inclusion 2018. washington: world bank group publications. for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of 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nabeul, campus universitaire mrezga 8000 nabeul, phone: +216 55741655; orcid id: https://orcid.org/0000-0003-2873-6100. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 slimen, r.b., belhaj, f., & hadriche, m. (2021). banking shortand long-term stability: a comparative study between islamic and conventional banks in gcc countries. copernican journal of finance & accounting, 10(4), 139–158. http://dx.doi.org/10.12775/cjfa.2021.019 rihab ben slimen* manar university, tunisia fethi belhaj** manouba university, tunisia manel hadriche*** manar university, tunisia banking shortand long-term stability: a comparative study between islamic and conventional banks in gcc countries keywords: islamic finance, islamic banks, conventional banks, financial stability, z -score, ladr ratio. j e l classification: g21, g28, g32, z12. rihab ben slimen, fethi belhaj, manel hadriche140 abstract: this research empirically assesses the contribution of islamic finance to the financial stability of banks. the empirical analysis is based on the annual data related to 103 banks (51 islamic banks and 52 conventional banks) operating in six countries of the gulf cooperation council (gcc) region during the period 2006–2015. the ladr ratio was computed and used to measure banks stability in the short term, and the z -score was used to assess long-term stability. the results show that, overall, islamic banks are financially more stable in the short-term but less stable in the long term than conventional banks. the comparative analysis of the financial stability determinants in the two systems shows that these determinants contribute differently to the shortand long-term financial stability of islamic and conventional banks. this is due to the dissimilarities in the two operating principles.  introduction since the financial crisis that shook the business world in 2008, particular interest has been given to the studies of islamic finance as an alternative system to conventional finance. in this context, several previous theoretical and empirical studies dealt with the subject of islamic finance in relation with the financial stability of banks (eyih & bouchetara, 2020; hasan & risfandy, 2021). the terms “financial stability” and “the stability of the financial system” are often used interchangeably in the financial literature (ciukaj, 2016). so far there is no consensus on an exact definition of financial stability in its general framework. zahra, ascarya and huda (2018) define it as follows: “the financial system of a country is considered stable when it is sustainable and resistant to various economic disruptions, so that it is still able to perform the function of mediation, to make payments and to distribute the risks well”. therefore, the absence of financial crises is not enough to consider that a financial system is stable, the capacity of this system to limit and manage the appearance of imbalance, before it manifests itself, is also required. when the financial system is stable, the self-correcting mechanism and market discipline prevent problems that can become system-wide risks. financial stability seems to be a broad concept that covers two elements related, on one hand, to prices at the macroeconomic level and on the other hand to the financial sector (financial institutions and financial markets) at the microeconomic level. indeed, four factors could maintain the stability of the financial system: a stable macroeconomic environment, a controlled financial institution, management of financial institutions and well-controlled security of payment systems. banking shortand long-term stability… 141 as for the stability of the islamic financial system, muslim scholars believe that it is ensured when the allocation of deposits to investment goes smoothly, and all sources of funds are used. in the continuity of the previous works highlighting that islamic banks are more stable than conventional ones, this study aims to present the evidence that islamic banks contribute positively to the financial stability of the banking sector in the short and long terms. the objective of this article is threefold. first, it assesses the financial stability of islamic and conventional banks in the short and long terms. second, it tests the main determinants of banks’ financial stability. finally, it tests the differential effect of these determinants on the stability of the islamic and conventional banking sector in gcc countries. the paper is structured as follows. section 2 presents the literature review. section 3 describes the methodology and data. finally, section 4 presents the empirical results. the research methodology and the course of the research process literature review several previous studies examined the financial stability of islamic and conventional banks with the aim of studying the contribution of islamic finance to the financial stability of banks. the source of difference between islamic and conventional banks in terms of stability can be attributed to the nature of their business practices. islamic banks are specifically characterized by the prohibition of collecting or paying interest at a predetermined rate, features embedded with the business practices of conventional banks. instead, islamic banks offer various financial products complying with shariah principles which allow profit and loss sharing (pls) instead of fixed-rate loans. there are different opinions developed in the literature assessing whether the contribution of islamic banks in the financial stability is significant in the presence of conventional banks or not. the financial strength of islamic banks differs widely from country to country. chakroun and gallali (2015) studied the difference between the islamic model and the conventional model in terms of stability and banking risk, usrihab ben slimen, fethi belhaj, manel hadriche142 ing the z-score as an indicator of banking stability, and based on a sample of 136 banks in the gulf countries, for the period 2003 and 2012. they showed that small islamic banks are more stable than small conventional banks, that large conventional banks are financially more stable than large islamic banks, and that small islamic banks are more stable than large islamic banks. wahid and dar (2016) used international monetary fund (imf) financial soundness indicators (fsi) and the z-score index to examine and compare the stability of 17 islamic and 21 conventional banks in malaysia over the period 2004–2013. they found that large islamic banks are less stable and small islamic banks are more stable than their conventional counterparts. sakarya (2016) sought to identify the difference of stability between islamic and conventional banks in turkey on a sample of 42 banks, 4 of them are islamic. they found that islamic banks in turkey tend to have a significantly higher level of stability than conventional banks. rashid, yousaf and khaleequzzaman (2017) empirically assessed the contribution of islamic banks to pakistan’s financial stability for 10 conventional banks, 4 full-f ledged islamic banks, and 6 autonomous islamic branches of conventional banks in pakistan during the period 2006–2012. they also examined the relationship between the competitive conduct of banks and the stability of the banking system. the results showed that islamic banks are more efficient and contribute more effectively to the stability of the financial sector. zahra et al. (2018) measured the financial stability of islamic and conventional banks in indonesia by referring to macro and microeconomic variables for ten years (2006–2015) and using two measurement models: the zscore and the bank stability index (bsi). they showed that islamic banks are more stable facing macro and microeconomic shocks than conventional banks. tekdogan and atasoy (2021) found that islamic banks significantly promote stability by providing liquidity during financial shocks and creating more liquidity per asset compared to conventional banks. however, in the opposite side, other researchers in this area found that islamic banks are less stable than conventional banks. in this context, beck, demirgüç-kunt and merrouche (2013) study the stability of 510 banks, 88 of them are islamic, operating in 22 countries with dual banking systems during the period 1995–2009. their results showed that islamic banks are significantly less stable than conventional banks. abedifar, ebrahim, molyneux and tarazi (2015) revealed that islamic banks have low credit risk relative to their conventional counterparts and showed that islamic banks generally have a lower degree of stability than conventional banks. kabir and worthington (2017), banking shortand long-term stability… 143 based on data for 16 developing economies over the period 2000–2012, showed that islamic banks are less stable than conventional banks. youssef (2017) examined the stability of islamic and conventional banks during and after the recent global crisis, while determining its impact on bank stability. they found that conventional banks are globally more stable. although most previous studies came up with clear results proving the superiority of one of these two banking systems in terms of financial stability, some studies assumed that islamic and conventional banks have the same level of stability. in this framework, islam and kozokov (2009) showed that there was no significant difference between the stability of islamic banks and conventional banks and that islamic banks were not less risky than conventional banks even during financial crises. similarly, khan (2010) contended that islamic banking activities in most instances are still functionally indistinguishable from conventional banking. ariff and rously (2011) argued in the context of malaysian banking system that islamic banking is not very different from conventional banking. moreover, suzuki, miah, wanniarachchige and sohrab (2017) raised the issue that although islamic banks comply with shariah principles, their mode of investment is dominant by murabaha or mark-up lending which is close to conventional banking practice. the novelty of this study consists in comparing both the short and long terms stability for the two types of banking systems. gcc as an economic block retains a high profile on the global economic landscape as far as the islamic banking and finance is concerned. methodology and data the empirical study is based on annual data, for a 10-year period (2006–2015), of 103 commercial banks operating in 6 countries of the gcc countries. the sample consists of 52 conventional banks and 51 islamic banks. the data are extracted from the bankscope database with an annual frequency and are expressed in millions of us dollars. only 10 years were used depending on data availability. in this study, the ladr ratio is used to measure the stability of banks in the short term, and the z-score to assess long-term stability. ladr ratio captures the strength of a bank in the short-term. it indicates how solvent a bank is to avoid any abrupt and unavoidable changes of banking rihab ben slimen, fethi belhaj, manel hadriche144 environment in the short-term. stronger banks go with higher ratios, and vice versa. the ladr ratio can be defined as follows: ladr= liquid assets / deposits and short-term funding (1) z-score measures the number of standard deviations a return realization has to fall to deplete equity. higher value of z-score falls in the lower upper bound of insolvency risk. therefore, higher value of z-score means low probability of insolvency and vice versa. the z-score can be defined as follows: term. stronger banks go with higher ratios, and vice versa. the ladr ratio can be defined as follows: ladr= liquid assets / deposits and short-term funding …………………………………...… (1) z-score measures the number of standard deviations a return realization has to fall to deplete equity. higher value of z-score falls in the lower upper bound of insolvency risk. therefore, higher value of z-score means low probability of insolvency and vice versa. the zscore can be defined as follows: z-score = ( �� � + µ roa) / σ roa ………………………………………………………...…. (2) where �� � is equity capital as a percentage of total bank assets. µ roa, σ roa represents the average return on assets and the standard deviation of return on assets, respectively. the main theme of this research is to test if the islamic banking system is more stable than the conventional banking system in the short and long terms. to do this, z-score and ladr regression were performed as a function of the number of variables by applying a random effects estimator. the regression model includes bank-specific variables as well as macroeconomic indicators. the main determinants of banks’ financial stability are tested by estimating in panel data the following regressions: ladr it = β0 + β1 indiit + β2 coinit + β3 loasit + β4 ptrtit + β5 bazisit + β6 gdpit + β7 infit + β8 mrkcit+β9 crrk it + dt + ɛit. ……………………………………………………...…… (3) zit = β0 + β1 indiit + β2 coinit + β3 loasit + β4 ptrtit + β5 bazisit + β6 gdpit + β7 infit + β8 mrkcit + β9 crrkit + dt + ɛit. …………………………………………………………….. (4) where (i) is the bank index and (t) is the time index expressing the selected data frequency (year t). indi the income diversity (non-interest income / gross income), coin the income ratio (cost / income), loas the loan to asset ratio (loans / customer deposits), ptrt the profitability ratio indicator(net income / total assets), bazis the bank asset size log (bank assets), gdp the gross domestic product (annual gdp), inf the inflation (change in consumer prices: inflation rate), mrkc the market concentration ratio (c4 concentration (2) where term. stronger banks go with higher ratios, and vice versa. the ladr ratio can be defined as follows: ladr= liquid assets / deposits and short-term funding …………………………………...… (1) z-score measures the number of standard deviations a return realization has to fall to deplete equity. higher value of z-score falls in the lower upper bound of insolvency risk. therefore, higher value of z-score means low probability of insolvency and vice versa. the zscore can be defined as follows: z-score = ( �� � + µ roa) / σ roa ………………………………………………………...…. (2) where �� � is equity capital as a percentage of total bank assets. µ roa, σ roa represents the average return on assets and the standard deviation of return on assets, respectively. the main theme of this research is to test if the islamic banking system is more stable than the conventional banking system in the short and long terms. to do this, z-score and ladr regression were performed as a function of the number of variables by applying a random effects estimator. the regression model includes bank-specific variables as well as macroeconomic indicators. the main determinants of banks’ financial stability are tested by estimating in panel data the following regressions: ladr it = β0 + β1 indiit + β2 coinit + β3 loasit + β4 ptrtit + β5 bazisit + β6 gdpit + β7 infit + β8 mrkcit+β9 crrk it + dt + ɛit. ……………………………………………………...…… (3) zit = β0 + β1 indiit + β2 coinit + β3 loasit + β4 ptrtit + β5 bazisit + β6 gdpit + β7 infit + β8 mrkcit + β9 crrkit + dt + ɛit. …………………………………………………………….. (4) where (i) is the bank index and (t) is the time index expressing the selected data frequency (year t). indi the income diversity (non-interest income / gross income), coin the income ratio (cost / income), loas the loan to asset ratio (loans / customer deposits), ptrt the profitability ratio indicator(net income / total assets), bazis the bank asset size log (bank assets), gdp the gross domestic product (annual gdp), inf the inflation (change in consumer prices: inflation rate), mrkc the market concentration ratio (c4 concentration is equity capital as a percentage of total bank assets. µ roa, σ roa represents the average return on assets and the standard deviation of return on assets, respectively. the main theme of this research is to test if the islamic banking system is more stable than the conventional banking system in the short and long terms. to do this, z-score and ladr regression were performed as a function of the number of variables by applying a random effects estimator. the regression model includes bank-specific variables as well as macroeconomic indicators. the main determinants of banks’ financial stability are tested by estimating in panel data the following regressions: ladr it = β0 + β1 indiit + β2 coinit + β3 loasit + β4 ptrtit + β5 bazisit + β6 gdpit + β7 infit + β8 mrkcit+β9 crrk it + dt + ɛit. (3) zit = β0 + β1 indiit + β2 coinit + β3 loasit + β4 ptrtit + β5 bazisit + β6 gdpit + β7 infit + β8 mrkcit + β9 crrkit + dt + ɛit (4) where (i) is the bank index and (t) is the time index expressing the selected data frequency (year t). indi the income diversity (non-interest income / gross income), coin the income ratio (cost / income), loas the loan to asset ratio (loans / customer deposits), ptrt the profitability ratio indicator(net income / total assets), bazis the bank asset size log (bank assets), gdp the gross domestic product (annual gdp), inf the inf lation (change in consumer prices: banking shortand long-term stability… 145 inf lation rate), mrkc the market concentration ratio (c4 concentration ratio), crrk the credit risk (allowance for loan losses / gross loans), d the dummy variable taking value 1 for islamic banks and 0 for conventional banks. after having empirically studied the main determinants of the financial stability of banks, the differential effect of these determinants on the stability of islamic and conventional banks will be tested separately. ladr it = β0 + β1 indiit ×d isl + β2 indiit × d con + β3 coinit ×d isl + β4 coinit × dcon + β5 loasit ×d isl + β6 loasit ×d con + + β7 ptrtit ×d isl+ β8 ptrtit ×d con + β9 bazisit × d isl + β10 bazisit ×d con + β11 gdpit ×d isl + β12 gdpit ×d con + β13 infit ×d isl + β14 infit ×d con + β15mrkcit ×d isl + β16 mrkcit × d con + β17 crrk it× d isl + β18 crrk it×d con + dt + ɛit. (5) zit = β0 + β1 indiit ×d isl + β2 indiit × d con + β3 coinit ×d isl + β4 coinit ×d con + β5 loasit ×d isl + β6 loasit ×d con + + β7 ptrtit ×d isl+ β8 ptrtit ×d con + β9 bazisit × d isl + β10 bazisit ×d con + β11 gdpit ×d isl + β12 gdpit ×d con + β13 infit ×d isl + β14 infit ×d con +β15mrkcit ×d isl + β16 mrkcit × d con + β17 crrk it× d isl + β18 crrk it×d con + dt + ɛit. (6) where: disl is the dummy variable which takes value 1 for an islamic bank and zero otherwise; dcon is the dummy variable that is equal to 1 for conventional bank and zero otherwise. the outcome of the research process and conclusions empirical results and discussion measuring financial stability of banks table 1 below provides a summary of the main descriptive statistics for z-score and the ladr ratio for islamic and conventional banks. rihab ben slimen, fethi belhaj, manel hadriche146 table 1. descriptive statistics z-score ladr all banks mean min max st. dev 4.435 0.432 116.794 7.691 66.891 0.156 997.718 127.640 islamic banks mean min max st. dev 3.636 0.432 82.028 6.330 106.594 0.156 997.718 173.708 conventional banks mean min max st. dev 5.233 0.691 116.794 8.669 27.187 0.855 186.522 25.019 s o u r c e : own elaboration. table 1 shows that, in average, islamic and conventional banks have an ladr ratio of 106.594 and 27.187 respectively, implying that islamic banks are, overall, more stable than their conventional counterparts in the short term. during the study period, islamic banks recorded higher ladr extremes than conventional banks (a maximum of 997,718 for islamic banks versus a maximum of 186,522 for conventional banks), implying that the distribution study of this measure of stability is high, a result confirmed by the relatively high value of the standard deviation (173,708 versus 25,019 for conventional banks). table 1 also shows that, in average, the z-score is 3,636 for islamic banks and 5,233 for conventional banks, which indicates that conventional banks are more stable than their islamic counterparts in the long run. determinants of bank financial stability: empirical analysis for all banks the empirical study of the determinants of financial stability of banks in the short and long run is based on the estimation of models (1), (2), (3) and (4). the explanatory variables of the model (1) are: bank size, profitability, revenue diversity, efficiency, and liquidity ratios. in model (2), credit and market concentration ratios are added to these variables. in model (3), macroeconomic variables (gdp and inf lation) are integrated to test their impact on the stability of the banking system. the credit and market concentration ratios were subse banking shortand long-term stability… 147 quently removed from model (4) to test the robustness of the results associated with the macroeconomic variables. financial stability of banks in the short term the results of determinants of short-term bank financial stability are presented in table 2 below. table 2. determinants of short-term bank financial stability variables model (1) model (2) model (3) model (4) ptrt -0.059 (0.905) -1.678 (0.001)*** -1.520 (0.000)*** -.0792 (0.836) coin 0.104 (0.000)*** 0.081 (0.019)** 0.125 (0.000)*** 0.117 (0.000)*** loas 0.160 (0.000)*** 0.183 (0.000)*** 0.174 (0.000)*** 0.1518 (0.000)*** indi 0.0175 (0.824) 0.130 (0.106) 0.189 (0.002) 0.072 (0.287) bazis 8.585 (0.064)** 5.051 (0.284) 7.021 (0.077) 12.894 (0.001)*** crrk -0.421 (0.143) -0.166 (0.469) mrkc 0.803 (0.978) -9.497 (0.659) gdp 2.186 (0.000)*** 2.569 (0.001)*** inf 0.427 (0.310) 0.433 (0.417) dummy 31.683 (0.00)*** 25.130 (0.002)*** 20.437 (0.003)*** 27.301 (0.000)*** constant -32.055 (0.117) -17.273 (0.587) -34.361 (0.177) -65.980 (0.000)*** r-squared within 0.021 0.045 0.154 0.071 between 0.459 0.504 0.568 0.508 overall 0.221 0.265 0.405 0.301 the figures in brackets are the p-values. **: significant at 5% ***: significant at 1 s o u r c e : own elaboration. the results of model estimates (1) show a significantly positive relationship between bank size and short-term financial stability, suggesting that banks with more assets tend to have a higher ladr ratio. these results also show that the coefficient of the revenue diversity ratio is positive but not significant, and that rihab ben slimen, fethi belhaj, manel hadriche148 the profitability ratio has no significant effect on banks’ financial stability in the short run. moreover, these results show that the efficiency ratio is positively associated with the financial stability of banks in the short term. also, the positive impact of the liquidity ratio indicates that banks with high liquidity tend to have a high ladr ratio, implying that a bank’s financial stability in the short term depends, among other things, on the degree of its liquidity. in model (2), the coefficient of the credit ratio is negative but not significant, indicating that credit risk has no impact on the financial stability of banks in the short run. in addition, the coefficient of the concentration ratio is positive but not significant, implying the significance of this determinant of bank stability. in model (3), the significance of the bank-specific variables remains unchanged. in addition, gdp has a positive and statistically significant coefficient; a result that can be explained by the fact that a high gdp is more likely to provide an intensive environment for banks for better stability. the coefficient of the inf lation variable is positive but not significant, implying that the rise in price levels in the economy has no impact on the probability of bank insolvency. in model (4), the results obtained indicate that inf lation and gdp have positive but insignificant coefficients, and that the significance of the other variables has not been affected compared with that obtained in model estimation (3). long-term financial stability of banks table 3 below provides the results of determinants of long-term bank financial stability. table 3. determinants of long-term bank financial stability variables model (1) model (2) model (3) model (4) ptrt 0.167 (0.000) *** 0.216 (0.000)*** 0.222(0.000) *** 0.176 (0.000) *** coin 0.008 (0.001)*** 0.0141 (0.000)*** 0.022 0.000)*** 0.011 (0.000) *** loas 0.007 (0.029) ** 0.008 (0.007)** 0.009 (0.007)** 0.007 (0.031)* indi -0.004 (0.583) -0.013 (0.103) -0.008 (0.374) 0.0009 (0.907) bazis 1.152 (0.105) 1.452 (0.045) *** 1.192 (0.161) 0.788 (0.346) banking shortand long-term stability… 149 variables model (1) model (2) model (3) model (4) crrk 0.033 (0.237) 0.037 (0.271) mrkc 1.182 (0.707) 0.365 (0.914) gdp -0.004 (0.955) -0.012 (0.858) inf -0.085 (0.160) -0.091 (0.117) dummy -1.967 (0.286) -2.490 (0.160) -2.834 (0.102) -2.242 (0.219) constant 0.208 (0.948) -2.189 (0.594) -0.711 (0.881) 1.745 (0.644) r-squared within 0.028 0.036 0.041 0.034 between 0.161 0.249 0.374 0.209 overall 0.041 0.049 0.077 0.055 the figures in brackets are p-values. *: significant at 10% **: significant at 5% ***: significant at 1% s o u r c e : own elaboration. the results of model estimates (1) show a positive but insignificant relationship between bank size and long-term financial stability. these results also show that the coefficient of the revenue diversity ratio is negative but not significant. regarding the profitability ratio, the results obtained show that its coefficient is significantly positive, which implies that banks with high profitability are financially more stable in the long term than those with low profitability. moreover, these results show that the efficiency ratio is positively associated with the financial stability of banks over the long term. similarly, the positive impact of the liquidity ratio indicates that banks with high liquidity tend to have a high z-score. in model (2), the coefficient of the credit ratio is positive but not significant, implying that credit risk does not have a significant impact on the financial stability of banks in the long run. furthermore, the coefficient of the market concentration ratio is negative but statistically insignificant. the inclusion of the concentration and credit ratios in the estimated models did not significantly affect the significance of the other explanatory variables, except that none of the estimated coefficient on bank size becomes significantly positable 3. determinants… rihab ben slimen, fethi belhaj, manel hadriche150 tive. thus, banks with more assets tend to have a higher z-score; a finding that can be explained by the fact that large banks can better withstand adverse economic conditions. in addition, large banks have a higher capital base and greater strength than smaller banks, and they experience less f luctuations in income over the long term. in the model (3), the significance of the bank-specific variables remains unchanged, and that the coefficients of the inf lation and gdp variables are negative but insignificant. this implies that rising price levels in the economy and gdp have no impact on banks’ financial stability in the long run. in model (4), the significance of the other bank-specific and macroeconomic variables was not significantly affected except for the profitability ratio and gdp, which become insignificant. determinants of bank financial stability: differential effects for islamic and conventional banks to test the differential effects of the determinants of short-term financial stability of islamic and conventional banks, models (1), (2), (3) and (4) are estimated. financial stability of banks in the short term the result of the panel estimates of these models are summarized in table 4 below. table 4. differential effects of short-term determinants of financial stability of islamic and conventional banks model (1) model (2) model (3) model (4) ptrt *disl -0.245 (0.631) -2.293 (0.000)*** -1.976 (0.000)*** -0.259 (0.526) ptrt*dcon 1.476 (0.508) 1.269 (0.645) 0.839 (0.647) 1.644 (0.373) coin *disl 0.113 (0.000)*** 0.125 (0.002)*** 0.249 (0.000)*** 0.136 (0.000)*** coin*dcon 0.364 (0.185) 0.194 (0.508) 0.144 (0.503) 0.437 (0.058)* loas*disl 0.199 (0.000)*** 0.185 (0.000)*** 0.149 (0.000)*** 0.160 (0.000)*** loas*dcon 0.115 (0.000)*** 0.175 (0.000)*** 0.190 (0.000)*** 0.127 (0.000)*** banking shortand long-term stability… 151 model (1) model (2) model (3) model (4) indi*disl -0.010 (0.906) 0.063 (0.463) 0.132 (0.031)** 0.062 (0.379) indi*dcon 0.170 (0.420) 0.383 (0.223) 0.330 (0.147) 0.155 (0.363) bazis *disl 12.299 (0.015)** 6.048 (0.279) 6.285 (0.183) 16.051 (0.000)*** bazis*dcon 2.462 (0.625) 4.169 (0.562) 5.022 (0.385) 9.428 (0.030)** mrkc*disl 43.357 (0.239) 13.831 (0.638) mrkc*dcon -2.6731(0.939) -5.893 (0.817) crrk*disl -0.579 (0.060)** -0.308 (0.206) crrk*dcon 1.461 (0.018) 1.667 (0.035)** gdp*disl 3.378 (0.000)*** 4.075 (0.000)*** gdp*dcon 1.004 (0.112) 1.147 (0.165) inf*disl 0.303 (0.666) 0.248 (0.778) inf*dcon 0.574 (0.273) 0.595 (0.372) constant -19.750 (0.355) -35.613 (0.341) -42.274 (0.147) -60.650 (0.001)*** r-squared within 0.022 0.057 0.217 0.082 between 0.521 0.550 0.603 0.567 overall 0.253 0.297 0.460 0.340 the figures in brackets are p-values. *: significant at 10% **: significant at 5% ***: significant at 1% s o u r c e : own elaboration. the results of the model (1) show that the estimated coefficient of the profitability ratio (roa) is not significant whatever the category of banks, which implies that bank profitability has no effect on the stability of islamic and conventional banks in the short term. the results of the model estimates (1) also show that the coefficient of the efficiency ratio is significantly positive for islamic banks but not significant for conventional banks, implying that only the financial stability of islamic banks is positively affected by the efficiency factor in the short run. in addition, the stability of islamic and conventional banks is positively affected by their liquidity levels as long as the coefficient of the litable 4. differential… rihab ben slimen, fethi belhaj, manel hadriche152 quidity ratio is significantly positive for both categories of banks. on the contrary, income diversity has no significant effect on the financial stability of banks in the short run. these results show that only the stability of islamic banks is positively affected in the short term by the size factor, implying that large islamic banks are more stable than small ones. on the contrary, no significant relationship between the stability of conventional banks and size was found, which could be explained by the fact that banks with more liquid assets can survive in the short term regardless of their size. in model (2), the coefficient of the market concentration ratio is positive for islamic banks, and negative for conventional banks but not significant in both cases. these results also show that the stability of islamic banks in the short term is negatively affected by the credit ratio, unlike that of conventional banks, which is positively affected by this variable. in model (3), no significant relationship was found between the inf lation rate and the financial stability of islamic and conventional banks in the short run. with respect to gdp, the results obtained show the existence of a significantly positive relationship between this variable and the financial stability of islamic banks in the short term, and the absence of such a relationship between these two variables, in the case of conventional banks. in the model (4), the significance is unchanged compared to that obtained from the model (3). however, the significance of some bank-specific variables is modified. indeed, the coefficients of roa and income diversity of islamic banks lose their significance, and the coefficients of islamic and conventional bank size become significant. also, the efficiency ratio of conventional banks becomes significant. long-term financial stability of banks table 5 below summarizes the estimation results. banking shortand long-term stability… 153 table 5. differential effects of the determinants of financial stability of islamic and conventional banks over the long term model (1) model (2) model (3) model (4) ptrt *disl 0 .135 (0. 003) *** 0.186 (0.001)*** 0.194 (0.001)*** 0.1402 (0.004)*** ptrt*dcon 0.092 (0. 655) 0 .151 (0.606) 0.171 (0.601) 0.1424 (0.537) coin *disl 0.003 (0.236) 0.0051 (0.231) 0.009 (0.162) 0.005 (0.194) coin*dcon 0.074 (0.014)** 0.0714 (0.028)** 0.079 (0.028)** 0.083 (0.013)** loas*disl 0.0006 (0.864) 0.001 (0.767) 0.002 (0.706) 0.001 (0.809) loas*dcon 0.009 (0.067)* 0.014 (0.029)** 0.013 (0.050)** 0.008 (0.104) indi*disl -0.007 (0.380) -0.01 (0.264) -0.008 (0.406) -0.0048 (0.590) indi*dcon 0.0071 (0.710) 0.005 (0.884) 0.014 (0.707) 0.0122 (0.567) bazis *disl 0.098 (0.888) 0.429 (0.585) 0.191 (0.837) -0.4073 (0.844) bazis*dcon -0.049 (0.944) 0.362 (0.721) 0.0730 (0.948) -0.4073 (0.606) mrkc*disl 1.082 (0.806) 0.531 (0.920) mrkc*dcon 0.651 (0.870) 0.024 (0.996) crrk*disl 0.046 (0.148) 0.0521 (0.186) crrk*dcon 0.034 (0.762) 0.011 (0.929) gdp*disl -0.056 (0.613) -0.059 (0.590) gdp*dcon -0.0042 (0.996) -0.014 (0.890) inf*disl -0.041 (0.717) -0.0530 (0.608) inf*dcon -0.082 (0.321) -0.0829 (0.285) constant 1.894 (0.512) -0.795 (0.863) 0.724 (0.890) 3.204 (0.339) r-squared within 0.027 0.038 0.0394 0.0291 between 0.091 0.075 0.0865 0.0992 overall 0.068 0.060 0.0661 0.0728 the figures in brackets are p-values. *: significant at 10% **: significant at 5% ** ***: significant at 1% s o u r c e : own elaboration. rihab ben slimen, fethi belhaj, manel hadriche154 the results of model estimates (1) show that the coefficient of income diversity for conventional banks is positive but statistically insignificant. for islamic banks, this coefficient is negative and statistically insignificant. thus, for islamic banks, a wide diversity of revenues lowers the z-score and negatively affects their long-term financial stability, suggesting that the shift from credit-based operations to other sources of income could increase the risk of insolvency. this can be explained by the fact that islamic banks, by applying the principle of loss sharing, may face problems of information asymmetry (huda, 2012), which consequently leads to financial instability. for conventional banks, a wide range of revenues increases the value of z-score, which means that non-interest activities (commissions, fees, and trading and asset management revenues) could increase the financial stability of these banks over the long term. regarding the cost-to-income ratio, its coefficient is positive and statistically significant for conventional banks, and positive but not significant for islamic banks, indicating that conventional banks manage their costs better in relation to their revenues. this can be explained by the fact that conventional banks are older and more experienced and have good cost control compared to islamic banks. the results of model estimates (1) also show that the profitability coefficient (roa) is significantly positive for islamic banks, which implies that banks with high profitability tend to have high z-sores and that this profitability contributes positively to long-term financial stability; a relationship that may be due to their compliance with sharia rules. for conventional banks, the coefficient of the profitability ratio is positive but statistically insignificant implying that profitability does not significantly affect the financial stability of these banks in the long term. regarding size, its coefficient is positive but not significant for islamic banks, and negative but not significant for conventional banks. this implies that small conventional banks are more stable than large ones. results also show that liquidity affects the financial stability of islamic and conventional banks differently in the long run. indeed, the coefficient of the liquidity ratio of islamic banks is positive but statistically insignificant for islamic banks, and positive and statistically significant for conventional banks. the positive sign of this coefficient indicates that banks with high liquidity tend to have a high zscore and increased long-term financial stability. in other words, the increase in loans relative to deposits increases the z-score since the main mission of conventional banks is to grant loans that are remunerated banking shortand long-term stability… 155 by interest. this implies that the high liquidity of these banks reinforces their long-term financial stability. in model (2), the market concentration ratio coefficient is positive but not significant for both islamic and conventional banks, and that the credit ratio does not have a significant impact on the long-term financial stability of either type of bank. concentration and credit ratios did not affect the significance of the other bank-specific variables, except for the size variable, which changes sign but retains its significance. in model (3), results show that the estimated coefficients of gdp and inf lation rates are negative but insignificant for both categories of banks, implying that there is no significant relationship between the long-term financial stability of islamic and conventional banks and these two macroeconomic variables. in the model (4), the results obtained show that the significance of the macroeconomic and bank-specific variables remains unchanged in comparison with that obtained from the model (3), except for the liquidity ratio of conventional banks, which loses its significance, and the impact of size, which becomes negative for both types of banks. as a conclusion of the empirical analysis, the effects of the determinants of banks’ financial stability are different depending on whether the bank is islamic or conventional. thus, islamic and conventional banks contribute differently to the financial stability of the financial system because of the dissimilarities in the operating principles of the two types of banks. islamic banks abide by the laws of sharia, while conventional banks operate with the interest rate.  conclusion this paper dealt theoretically and empirically with the financial stability of islamic and conventional banks to study the contribution of islamic finance to the financial stability of banks. the empirical analysis follows a three-step approach. in the first step, the z-score to assess long-term bank stability and the ladr ratio are calculated to measure short-term stability. results show that islamic banks are financially more stable in the short run but less stable in the long run. this result is valid even during the crisis period and after controlling for bankspecific and macroeconomic variables. second, the main determinants of the financial stability of islamic and conventional banks are tested. empirical analysis of the main determinants of rihab ben slimen, fethi belhaj, manel hadriche156 banks’ financial stability shows that roa, efficiency ratio, liquidity ratio and size significantly and positively affect the long-term financial stability of banks in the gcc countries. in the short term, the financial stability of banks is positively affected by the efficiency ratio, liquidity, bank size, and gdp, but negatively affected by bank profitability. in the third step of the empirical analysis, the differential effects of these determinants on the stability of islamic and conventional banks in the short and long run are tested. the results show that the effects of these determinants on the financial stability of islamic and conventional banks differ according to the nature of the bank. the origin of this difference can be attributed to the nature of business practices adopted by each category of banks. the longterm stability of islamic banks is thus positively affected by their rate of return (roa). whereas the stability of conventional banks is positively associated with their degree of liquidity and efficiency. in the short term, the financial stability of islamic banks is positively inf luenced by the size factor, gdp, efficiency ratio, liquidity, and income diversity. but negatively affected by rates of profitability and credit. for conventional banks, their financial stability depends, among other things, on the size factor, credit and efficiency ratios, and bank liquidity. the results of the paper are 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(2017). banking and economic rent in asia: rent effects, financial fragility, and economic development. london, ny : routledge. tekdogan, o.f., & atasoy, b.s. (2021). does islamic banking promote financial stability? evidence from an agent-based model. journal of islamic monetary economics and finance, 7(2), 201-232. http://dx.doi.org/10.21098/jimf.v7i2.1323. wahid, m.a., & dar, h. (2016). stability of islamic versus conventional banks: a malaysian case. journal ekonomi malaysia, 50(1), 111-132. http://dx.doi.org/10.17576/ jem-2016-5001-09. youssef, m.h (2017). financial stability of islamic and conventional banks. unpublished thesis. sweden: lund university. rihab ben slimen, fethi belhaj, manel hadriche158 zahra, s.f., ascarya, a., & huda, n. (2018). stability measurement of dual banking system in indonesia: markov switching approach. al-iqtishad jurnal ilmu ekonomi syariah, 10(1), 25-52. http://dx.doi.org/10.15408/aiq.v10i1.5867. date of submission: october 7, 2021; date of acceptance: december 13, 2021. * contact information: aifuwahopeosayantin@gmail.com, department of accounting, faculty of management sciences, university of benin, benin city, edo state, nigeria, phone: +2348113232082; orcid id: https://orcid.org/0000-0001-8908-6637. ** contact information: muhammed.usman@kwasu.edu.ng, department of accounting and finance, school of humanities, management and social sciences, kwara state university, malete, kwara state, nigeria, phone: +234803116341; orcid id: https://orcid.org/0000-0002-4303-840x. *** contact information: eleyelehawal@gmail.com, accountancy department, kwara state polytechnic, ilorin, nigeria, phone: +2348064181712; orcid id: https://orcid. org/0000-0002-3158-696x. **** contact information: gydsman@gmail.com, department of accounting and finance, samuel adegboyega university, ogwa, edo state, nigeria, phone: +2349052378947; orcid id: https://orcid.org/0000-0002-4104-1197. ***** contact information: kerimu.hussein@gmail.com, department of accounting, faculty of management sciences, university of benin, benin city, edo state, nigeria, phone: +2348141598741; orcid id: https://orcid.org/0000-0003-1727-0077. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 1 aifuwa, h.o., usman, m.k., subair, m.l., philip, g.t., & hussien, k. (2022). board ethnicity and sustainability reporting. copernican journal of finance & accounting, 11(1), 9–27. http://dx.doi. org/10.12775/cjfa.2022.001 hope osayantin aifuwa* university of benin & edo state internal revenue service muhammed kamaldeen usman** kwara state university muhammed lawal subair*** kwara state polytechnic gideon temidayo philip**** samuel adegboyega university kerimu hussien***** university of benin h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien10 board ethnicity and sustainability reporting keywords: hausa, yoruba, igbo, minor, sustainability reporting. j e l classification: m10, m14, m41, m48. abstract: the aim of this study is to investigate the relationship between board ethnicity and sustainability reporting of listed deposit money banks in nigeria from the period 2013–2020. the study examined the impact board members’ interaction from major and minor ethnic groups have on the sustainability reporting of listed deposit money banks. secondary data was collected from annual reports and account of listed deposit money banks from the nigeria stock exchange website. results from the panel least squares regression revealed that the proportion of directors from hausa ethnic group have a positive inf luence on sustainability reporting; while the proportion of directors from yoruba ethnic group negatively affects sustainability reporting. furthermore, on the example of major and minor ethnic groups, it was found that the presence of directors from hausa and yoruba ethnic groups; and hausa, yoruba, igbo and minor ethnic groups have negative and significant impact on sustainability reporting of listed deposit money banks in nigeria. the study concluded that banks should employ the services of directors from both major and minor ethnic groups to improve the extent of sustainability reporting. also, financial institutions, specifically deposit money banks should increase the representation of directors from igbo and minor ethnic groups.  introduction the concept, sustainability reporting (sr) is the process through which firms or businesses across the globe disclose their economic, environmental and social impact on the society and environment as a result of their daily business activities. the report tends to support the 2015 initiative united nations’ (un) sustainable development goals (sdg) or agenda 2030 in businesses and governments across the globe (musa, gold & aifuwa, 2020). in the business environment, sr solidifies the firms’ position in the attainment of global competitive advantage and long-term survival (umukoro, uwuigbe, uwuigbe, adegboye, ajetunmobi & nwaze, 2019). therefore, sr is a corporate strategy of achieving the goal and objectives of firms, and at the same time, the report would drive firms towards improving economic, environmental and social performance. board ethnicity and sustainability reporting 11 obviously, it is required that sr aligns with the vision and strategic plans of an organization (uwuigbe, uwuigbe, jafaru, igbinoba & oladipo, 2016; umukoro et al., 2019). to achieve this, the boards of directors are the primary driving force in shaping and directing firms towards the achievement of sustainable goals and quality sustainability reporting (ismail & latiff, 2019). therefore, the attributes of the board members play an important role in the successful actualization of their functions in the board. specifically, board members’ ethnicity have been identified to have an effect on firms performance and disclosures (smith, smith & verner, 2006), since they have common relationship in terms of history, ancestry, language, race, religion, culture and territory (edewo, aluko & folarin, 2014). however, in literature there seem to be an ongoing argument on the impact board members ethnicity has on firm performance. for example, drawing inspiration from the upper echelon theory, smith et al. (2006) argued that ethnically diverse board would have the tendencies of improving the quality of decision making, which in turn increase the organization’s competitive advantage. on the contrary, drawing inspiration from the social identity theory, anderson, reeb, upadhyay and zhao (2011) argue that this ethnically diverse board will not drive the firm to better performance nor increase competitive advantage because of misunderstanding and communication problem among board members, which would slow down quality decision making. extending this argument to this study, there is uncertainties whether ethnically diverse board would improve the extent of sustainability reporting. empirical evidences from malaysia and indonesia suggested that ethnically diverse board have no inf luence on sustainability reporting (bakar, ghazali & ahmad, 2019; shamil, shaikh, ho & krishnan, 2014). in the nigerian context, there seems to be a dearth in literature on the nexus between board members ethnicity and sustainability reporting. previous literature has investigated the impact of board members ethnicity on financial performance of firms (see, ilaboya & ashafoke, 2017; ilogho, 2017; omoye & eriki, 2013). against this backdrop, this study aims to examine the inf luence of board members’ ethnicity on sustainability reporting in banks. in the banking sector, the central bank of nigeria has shown support for sustainability reporting by releasing nine sustainability banking principles to guide listed banks in maintaining sustainable practices (umukoro et al., 2019). h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien12 literature review and hypotheses development sustainability reporting gold, aifuwa, usman, subair, osazevbaru and oloyede (2021) and aifuwa (2020) defined sr as the disclosure of businesses’ economic, social and environmental impacts of its performance to inform stakeholders at a specified time. sr is the process of disclosing organization’s information on economic, environmental and social issues as it affects the stakeholders and the environment (musa et al., 2020). bakar et al. (2019) defined sr as the tripartite disclosure of economic, environment and social well-being of an organization. the global reporting initiative (gri, 2019) defined sr as the process of disclosing a company’s economic, environmental and social impact in the society as a result of their daily business operation. perusing through the above definitions, we can deduce that it encompasses three aspects of business activity – economic, environmental and social aspects; thus, a multi-disciplinary approach of reporting. in the nigeria banking sector, the central bank of nigeria released nine sustainability banking principles to guide listed banks in maintaining sustainable practices (umukoro et al., 2019). okolie and igaga (2020) asserted that the nigerian sustainability banking principles (nsbp) is a set of standards that was created for the financial sector in nigeria by the central bank of nigeria (cbn) and the bankers’ committee. this banking principle reiterate a pledge to economic growth that is environmentally responsible and socially noteworthy. board ethnicity and sustainability reporting ethnic diversity represents individuals from a diverse culture with respect to norms, values and beliefs, language, religion, behaviours and ethical rules. in nigeria, there are about 250 ethnic groups and 500 languages (aifuwa, 2021). the ethnic groups classified into major and minor tribes. the major tribes are the igbo, hausa and yoruba. ujunwa, okoyeuzu and nwakoby (2012) asserted that political positions in the past have revolved around these three major ethnic groups. religious intolerance has been the major issue inhibiting the development of the nation. the recurrence of ethno-religious conf licts is a product of reli board ethnicity and sustainability reporting 13 gious intolerance in nigeria. this has resulted and given rise to ethnic militias like the o’ dua people congress (opc); the bakassi boys; the ijaw youth. congress (iyc); the egbesu boys; and the igbo people congress (ipc) (salawu, 2010). others include the arewa people’s congress (apc) the movement for the actualization of the sovereign state of biafra (massob); and the ohanaeze n’digbo (salawu, 2010). however, an ethnically diverse board in nigeria may have substantial board capital, which is positively related to firm legitimacy and reputation, external resources acquisition and overall performance (ujunwa et al., 2012). researchers in the field of management strongly support the above argument. for example, zhang (2012) argued that organizations strategic decisions are largely inf luenced by ethnicity, diverse members and employees. fitzsimmons (2013) opined that ethnic diversity in the boardroom is one of a firm’s valuable resources of gaining a competitive edge over competitors in the same market. an ethnically diverse board might be able to understand the needs and requirements of stakeholders (aifuwa, 2021). butler (2012) and carter, d’souza, simkins and simpson (2008) further added that an ethnically diverse board would report quality information on both financial and non-financial aspect of a business compared to a board having the same ethnic group. barney (1991) stressed that an ethnically diverse board is a crucial and nonsubstitutable resource in an organization because it fosters collaboration of information within the groups. he further added that it would lead to employee creativity and innovation. randolph and dess (1984) also stressed that in the condition of scarcity of resources on the environment, the presence of an ethnically diverse human resources increases the likelihood of a firms’ growth and environmental survival. watson, kumor and michealson (1993) reiterated that the same ethnic group in the board is desired in the short term, while a diverse ethnic board is required in the long-term in achieving corporate goals. in contrast to the above arguments, pellad, eisenhardt and xin (1999) argued that an ethnically diverse board would lead to emotional conf lict, which could hamper a firm’s performance. in nigeria, omoye and eriki (2013) argued that a board with the three major ethnic groups (tribe) would lead to poor financial performance in firms. their position on ethnic diversity could be as a result of ethnic loyalties which often lead to conf licts when allocations do not favour a particular tribe (aifuwa, 2021). most studies on board members’ ethnicity have been previously linked to firms’ financial performance (biggins, 1999; carter, simkins & simpson, 2003; h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien14 ujunwa et al., 2012; carter et al., 2010; omoye & eriki 2013; garba & abubakar, 2014; marimuthu & koladaisamy, 2009; zahra & stanton, 1988; ilaboya & ashafoke, 2017). these studies had evidenced mixed finding on the impact of board members’ ethnicity on firms’ financial performance. for example, biggins (1999), carter, simkins and simpson (2003); and ujunwa et al. (2012) found positive relationship between board members’ ethnicity and financial performance; carter et al., 2010; omoye and eriki, 2013; found negative nexus between board members’ ethnicity and financial performance, while ilaboya and ashafoke (2017); garba and abubakar (2014); marimuthu and koladaisamy, (2009b, 2009c); zahra and stanton (1988) found no evidence on the association. on sustainability reporting, few studies have been done in this area (see, bakar et al., 2019; shamil et al., 2014). using a sample of 148 listed companies from the sri lanka stock exchange, shamil et al. (2014) found that board members’ ethnicity have no inf luence on sustainability reporting. in malaysia, bakar et al. (2019) investigated the effect of board members’ ethnicity on sustainability reporting of 100 malaysian listed companies and found that board members’ ethnicity have no effect on sustainability reporting. hence, this study hypotheses: h1: proportion of directors from hausa ethnic group has no inf luence on sustainability reporting. h2: proportion of directors from yoruba ethnic group does not affect sustainability reporting. h3: proportion of directors from igbo ethnic group has no impact on sustainability reporting. h4: proportion of directors from minor ethnic group has no inf luence on sustainability reporting. h5: interaction of directors from both major and minor ethnic groups have no effect on sustainability reporting. research methodology and research process theoretical framework and model specification understanding this study via the theoretical lens, we hinged our study on the social identity theory. social identity theory is a psychology theory that was board ethnicity and sustainability reporting 15 developed by tajfel (1974). it studies the interplay between personal and social identities. the theory is centered on the prediction of circumstances under which individuals think of themselves as individuals or as group members. gold et al. (2021) noted that social identities are most inf luential when individuals consider membership in a particular group to be central to their self-concept, and they feel strong emotional ties to the group. extending this theory to board diversity and sustainability reporting, omoye and eriki (2013) argued that balance in ethnic diversity in the board organization could lead to conf lict and communication gaps. on sustainability reporting, shamil et al. (2014) argued that an ethnically diverse board would not have any impact on the disclosure of economic, social and environmental issues. flowing from the theoretical framework of the study, the model was stated as: in functional form; snr = ƒ(hausa; yoruba; igbo; minor; control variables) (1) in econometrics form; snrit= β0 + β1hausait + β2yorubait+ β3igboit + β4minorit +β5bmeetit+β5bszeit +β5fszeit +.εit (2) where: roe = firm performance; β0 = constant; hausa = hasua directors in the board; yoruba = yoruba directors in the board; igbo = igbo directors in the board; minor = directors from minor ethnicin the board; bmeet = board meeting; bsze = board size; fsze = firm size; β1, β2, β3, β4= coefficient; a priori expectations in with extant literature to be β1, β2,> 0 h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien16 research design, sampling and method of data analysis this study uses research design. this study adopted this design because the data for the study are in cross section and time series. the population comprises thirteen listed deposit money banks in nigeria. secondary data on the variables studied was gotten from the nigerian stock exchange spanning from 2013 to 2020. we summarized the data of the study using mean, minimum, maximum and standard deviation and estimated the model using panel least squares. the study used the panel least squares to test the hypotheses stated because the data include properties of time-series and cross-sectional data. operationalization of variables we used content analysis to develop an unweighted sustainability disclosure index for the economic, environmental and social performance of the sampled firms. if sampled banks fully disclose economic, environmental and social information, they are awarded one (1) while zero (0) for partial and none disclosure respectively. therefore, research design, sampling and method of data analysis this study uses research design. this study adopted this design because the data for the study are in cross section and time series. the population comprises thirteen listed deposit money banks in nigeria. secondary data on the variables studied was gotten from the nigerian stock exchange spanning from 2013 to 2020. we summarized the data of the study using mean, minimum, maximum and standard deviation and estimated the model using panel least squares. the study used the panel least squares to test the hypotheses stated because the data include properties of time-series and cross-sectional data. operationalization of variables we used content analysis to develop an unweighted sustainability disclosure index for the economic, environmental and social performance of the sampled firms. if sampled banks fully disclose economic, environmental and social information, they are awarded one (1) while zero (0) for partial and none disclosure respectively. therefore, 𝑆𝑆𝑆𝑆𝑆𝑆 𝑆 ��� where: snr = sustainability reporting; td = total disclosure (n1 + n2 + n3); n1 = for the economic indicator i; n2= for the environmental indicator i n3 = for the social indicator i; m = maximum possible score of 158. table 1. measure of variables variable measurement supporting scholars dependent variable sustainability reporting (snr) gri’s g4 sector-specific disclosures for financial service (as calculated above) gri (2013); iyafekhe et al. (2020) independent variables hausa measure using the proportion of hausa board members to total board size omoye and eriki (2013) yoruba measure using the proportion of yoruba board members to total board omoye and eriki (2013) where: snr = sustainability reporting; td = total disclosure (n1 + n2 + n3); n1 = for the economic indicator i; n2= for the environmental indicator; n3 = for the social indicator i; m = maximum possible score of 158. board ethnicity and sustainability reporting 17 table 1. measure of variables variable measurement supporting scholars dependent variable sustainability reporting (snr) gri’s g4 sector-specific disclosures for financial service (as calculated above) gri (2013); iyafekhe et al. (2020) independent variables hausa measure using the proportion of hausa board members to total board size omoye and eriki (2013) yoruba measure using the proportion of yoruba board members to total board size omoye and eriki (2013) igbo measure using the proportion of igbo board members to total board size omoye and eriki (2013) minor measure using the proportion of directors from minor ethnic groups in the board to total board size nil control variables board meeting (bmeet) measure using the total number of meeting held by the board of a company for an accounting year gold et al. (2021) board size (bsze) measure using the total number of members on the board ilaboya and ashafoke (2017) firm size (fsze) measure using natural logarithm of total assets gold et al. (2021) s o u r c e : authors’ compilation, 2021. h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien18 data presentation, analysis and discussion of findings table 2. descriptive statistics variables mean minimum maximum std. dev snr 0.375215 0.008343 0.87631 0.187134 hausa 0.128129 0.000000 0.250000 0.068285 yoruba 0.650247 0.500000 0.916667 0.113798 igbo 0.136110 0.015434 0.261992 0.073378 minor 0.087815 0.000171 0.337257 0.109057 bmeet 6.014767 4.00000 10.00000 1.606731 bsze 13.605311 7.00000 19.0000 3.266617 fsze 9.286695 8.882551 9.675762 0.265342 s o u r c e : researcher’s computation, 2021. table 2 shows the summary statistics about the sampled deposit money banks over the study period. the mean of sustainability reporting stood at 0.375 and the standard deviation of 0.187 which exhibited considerable clustering around the mean indicating a fair disclosure of economic, environmental and social performance of listed deposit money banks in nigeria. on board ethnicity, the proportion of hausa, yoruba, igbo and other minor ethnic group board members were 0.128, 0.650, 0.136, and 0.087, respectively. this implies that about 13% of the board members were from hausa ethnic group, 65% of the board members were from yoruba ethnic group, 14% of the board members were from igbo ethnic group while, about 9% of board members were from other minor ethnic group. lastly, board meeting had mean of 6 times, with standard deviation of 1.606. the highest and lowest number of meeting was 10 times and 4 times, respectively. the average number of board members was about 14 directors, while the average size of the banks studied stood at n9.286695 with a minimum and maximum value of n8,882,551 and n9,675,762, respectively. board ethnicity and sustainability reporting 19 table 3. correlation matrix snr hausa yoruba igbo minor bmeet bzse fzse snr 1.000000 hausa -0.271745 1.000000 yoruba -0.115258 -0.040140 1.000000 igbo 0.306290 0.183565 -0.088205 1.000000 minor -0.117660 0.440579 -0.193555 -0.469842 1.000000 bmeet 0.270253 0.000671 -0.050294 -0.134690 0.219570 1.000000 bsze 0.184913 -0.314622 0.406328 0.022127 -0.173691 0.509053 1.000000 fsze -0.405898 0.519331 0.259638 0.249488 -0.200259 -0.280281 -0.093846 1.000000 s o u r c e : authors’ computation, 2021. to ensure our data satisfy the multiconlinary assumption, we checked the linearity if the relationship was greater than the threshold of 0.80. evidently, none of the relationships between the variables was above the threshold. table 4. variance inf lation factor coefficient uncentered centered variable variance vif vif c 0.027022 96.43436 na hausa 0.009817 6.213786 1.191370 yoruba 0.016454 2.092169 1.305830 igbo 0.008443 11.56250 1.123489 minor 0.013545 10.68079 1.114819 bmeet 0.018339 4.099884 1.140399 bsze 0.307859 1.774208 1.040792 fsze 0.000197 80.46527 1.372489 s o u r c e : author’s computation, 2021. h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien20 to further strengthen the results from correlation matrix on multicollinearity, the variance inf lation factor test was done. it was observed that our data satisfy the multicollinearity assumption of regression as all variables centred vif was below 10. figure 1. histogram normality graph to further strengthen the results from correlation matrix on multicollinearity, the variance inflation factor test was done. it was observed that our data satisfy the multicollinearity assumption of regression as all variables centred vif was below 10. figure 1. histogram normality graph source: author’s computation, 2021. the figure shows that our data satisfy the normality assumption of regression, as seen in the kurtosis and skewness value of 2.899 and -0.152. this distribution shows that our data series was positively skewed, and the kurtosis which shows the peakedness of the distribution was mesokurtic in nature. these results are in tandem with threshold of (-3 to 3) range of peck, olsen and devore (2008) in determining normality of a distribution. furthermore, the jarquebera statistics, test of normality was statistically insignificant for all variables at 5%, implying an insignificant departure away from normality (studenmund, 2014). table 5. serial correlation 0 2 4 6 8 10 12 14 -0.375 -0.250 -0.125 0.000 0.125 0.250 seri es : res i dua l s sa mpl e 2 104 obs erva ti ons 103 me a n 1.93e-16 me di a n -0.007470 ma xi mum 0.332656 mi ni mum -0.453358 std. dev. 0.163954 ske wnes s -0.152525 kurtos i s 2.899705 ja rque-bera 0.442534 proba bi l i ty 0.801502 seri es : res i dua l s sa mpl e 2 104 obs erva ti ons 103 me a n 1.93e-16 me di a n -0.007470 ma xi mum 0.332656 mi ni mum -0.453358 std. dev. 0.163954 ske wnes s -0.152525 kurtos i s 2.899705 ja rque-bera 0.442534 proba bi l i ty 0.801502 s o u r c e : author’s computation, 2021. the figure shows that our data satisfy the normality assumption of regression, as seen in the kurtosis and skewness value of 2.899 and -0.152. this distribution shows that our data series was positively skewed, and the kurtosis which shows the peakedness of the distribution was mesokurtic in nature. these results are in tandem with threshold of (-3 to 3) range of peck, olsen and devore (2008) in determining normality of a distribution. furthermore, the jarquebera statistics, test of normality was statistically insignificant for all variables at 5%, implying an insignificant departure away from normality (studenmund, 2014). board ethnicity and sustainability reporting 21 table 5. serial correlation breusch-godfrey serial correlation lm test: f-statistic 0.673695 prob. f(2,100) 0.5123 obs*r-squared 1.470959 prob. chi-square(2) 0.4793 s o u r c e : author’s computation, 2021. the series correlation assumption was fulfilled using the breusch-godfrey serial correlation (lm) test, f(2,100) = 0.674, p = 0.5123 > 0.05 and the null hypothesis of no serial correlation was accepted. table 6. constant residual error heteroskedasticity test: breusch-pagan-godfrey f-statistic 0.950925 prob. f(7,96) 0.1003 obs*r-squared 1.39710 prob. chi-square(7) 0.0801 scaled explained ss 1.36989 prob. chi-square(7) 0.0607 s o u r c e : author’s computation, 2021. similarly, the assumption of the constant residual error test – the breusch-pagan-godfrey test of heteroskecdacity, f(7,96) =0.950925, p = 0.1003 > 0.05. this implies that the residual error is no constant residual in the series. table 7. model misspecification ramsey reset test value df probability t-statistic 0.030085 94 0.9761 f-statistic 0.000905 (1, 101) 0.9761 likelihood ratio 0.000992 1 0.9749 s o u r c e : author’s computation, 2021. h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien22 lastly, the ramsey reset test was conducted to test for model miss-specification. the result of the analysis revealed the presence of model misspecification, f(1,101) =0.3008, p = 0.9761> 0.05. this implies that our model was correctly specified. multivariate analysis table 8. hausman test of effect specification effects test statistic d.f. prob. period f 0.220510 (2,102) 0.8047 period chi-square 0.869321 2 0.6475 s o u r c e : authors’ computation, 2021. table 8 presents the result of the hausman test, hm (2,74) = 0.220510, p = 0.8047. this implies that the random effect model of regression will be preferred to the fixed effect model of regression. table 9. panel least squares (random effect model) variables dependent variable: sustainability reporting β s.e t-stat. prob. constant 16.9471 12.8123 1.3227 0.2432 hausa 0.6237 0.2863 2.1771 0.0345** yoruba -0.1663 0.5650 -2.9428 0.0050** igbo 0.0112 0.0194 0.5650 0.5648 minor 0.0132 0.0086 1.5293 0.1329 hausa*yoruba -0.0465 0.0196 2.3648 0.0214** hausa*igbo 0.8356 0.5384 1.5519 0.1261 hausa*minor 0.1046 0.1743 0.6004 0.5505 yoruba*igbo -17.1201 31.9874 -0.5352 0.6154 yoruba*minor -3.7002 14.1571 -0.2611 0.8042 board ethnicity and sustainability reporting 23 variables dependent variable: sustainability reporting β s.e t-stat. prob. igbo*minor -23.6391 28.4093 -0.8321 0.4433 hausa*yoruba*igbo -190.3809 258.2965 -0.7370 0.4942 hausa*yoruba*igbo*minor -0.0086 0.0032 -2.6422 0.0106** bmeet 1.2314 0.5559 2.2149 0.0295** bsze 0.0086 0.0251 0.3454 0.7438 fsze 1.7203 1.2864 1.3374 0.2387 r-squared           0.811201 adjusted r-squared   0.769286 s.e. of regression     0.204215 f-statistic          31.263721 prob (f-statistic)      0.001603 durbin-watson        2.048 **significant at 5 per cent level s o u r c e : authors’ computation, 2021. the results of the random effect panel least squares regression in table 9 above show that board ethnicity has an effect on sustainability reporting of listed deposit money banks in nigeria after controlling board meeting, board size and firm size, f-statistic = 31.2367, p = 0.0016 < 0.05. also, the adjusted r-squared for the model stood at 0.7693, which is about 77% of the systematic variation in the dependent variable, is caused by the explanatory variable used in the study. while about 23% of the variations is caused by other variables not included in the model but were adequately captured by the standard error of the regression, se = 0.004587. we found that the proportion of directors from hausa ethnic group positively and significantly inf luences the extent of sustainability reporting of listed deposit money banks in nigeria, β1 = 0.6237; se = 0.2863, p = 0.0345 < 0.05. this study failed to accept the null hypothesis stated earlier that proportion of directors from hausa ethnic group does not have an inf luence on sustainability reporting. secondly, the study found that directors from yoruba ethnic group negatively and significantly affect the extent of sustainability reporting of listed deposit money banks in nigeria, β2 = -0.1663; se = 0.5650, table 9. panel least squares… h. o. aifuwa, m. k. usman, m. l. subair, g. t. philip, k. hussien24 p = 0.0050 < 0.05. the study rejected the null hypothesis that proportion of directors from yoruba ethnic group does not affect sustainability reporting. thirdly, we discovered that proportion of directors from igbo ethnic group positively but insignificantly impacts the extent of sustainability reporting of listed deposit money banks in nigeria, β3 = 0.0132; se = 0.0194, p = 0.5648 > 0.05. therefore, the proportion of directors from igbo ethnic group does not have an impact on sustainability reporting. also, the study found that proportion of directors from minor ethnic group positively but insignificantly inf luences the extent of sustainability reporting of listed deposit money banks in nigeria, β4 = 0.0132; se = 0.0194, p = 0.5648 > 0.05. we failed to reject the null hypothesis stated that proportion of directors from minor ethnic group does not inf luences sustainability reporting. furthermore, this study further examined the interaction between directors from major and minor ethnic group to achieve a better sustainability reporting in listed deposit money banks in nigeria. the study found that the presence directors from hausa and igbo ethnic groups; hausa and minor ethnic groups; yoruba and igbo ethnic groups; yoruba and minor ethnic groups, igbo and minor ethnic groups; and hausa, yoruba and igbo ethnic groups do not have significant inf luence on sustainability reporting of listed deposit money banks in nigeria. on the contrary, the presence of directors from hausa and yoruba ethnic groups; and hausa, yoruba, igbo and minor ethnic groups have negative and significant impact on sustainability reporting of listed deposit money banks in nigeria. board meeting had a positive and significant effect on sustainability reporting of listed deposit money banks in nigeria. however, board size and firm size had no inf luence on sustainability reporting of listed deposit money banks in nigeria.  conclusion and recommendations this study investigates the impact of board ethnicity on sustainability reporting in nigeria. specifically, the study examined the impact of the proportion of directors from hausa, yoruba, igbo and minor ethnic groups on sustainability reporting of listed deposit money banks in nigeria. the study further examined the interaction of board members with major and minor ethnic groups on sustainability reporting of listed deposit money banks in nigeria. from the result of the inferential statistics employed, the study found that the propor board ethnicity and sustainability reporting 25 tion of directors from hausa ethnic group has a positive inf luence on sustainability reporting, the proportion of directors from yoruba ethnic group negatively affects the extent of sustainability reporting. however, the proportion of directors from igbo and minor ethnic groups has no impact on sustainability reporting. based on the finding, the study concluded that banks should employ the services of directors from both major and minor ethnic groups to improve the extent of sustainability reporting. the study recommends 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(2012). corporate board diversity and firm performance: evidence from nigeria. review of international comparative management, 13(4), 605–620. uwuigbe, o.r., uwuigbe, u., jafaru, j., igbinoba, e.e., & oladipo, o.a. (2016). value relevance of financial statements & share price: a study of listed banks in nigeria. banks and bank systems, 11(4), 135–143. watson, e., kumar, k., & michaelsen, l. (1993). cultural diversity’s impact on interaction process and performance: comparing homogeneous and diverse task groups. academy of management journal, 36(3), 590–603. http://dx.doi.org/10.5465/256593. zahra, s.a., & stanton, w.w. (1988).the implication of board of directors’ composition for corporate strategy and value. international journal of management, 5(2), 229– –236. zhang, l. (2012). board demographic diversity, independence, and corporate social performance. corporate governance: the international journal of business in society, 12(5), 686–700. date of submission: november 15, 2020; date of acceptance: january 26, 2021. * contact information: oshoprints@gmail.com, department of accounting and finance, kwara state university, malete, nigeria; phone: +2347036215657; orcid id: https://orcid.org/0000-0003-1365-2860. ** contact information: ajibolamagaji@gmail.com, department of accounting and finance, kwara state university, malete, nigeria; phone: +2347032873780; orcid id: https://orcid.org/0000-0003-2293-3453. *** contact information: orimustrock@yahoo.com, department of accountancy, the federal polytechnic offa, nigeria; phone: +2348032440434; orcid id: https://orcid. org/0000-0001-5459-3364. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 1 saheed, d.o., ajibola, i.m., & adedoyin, l. (2021). efficacy of audit fee on audit quality of selected pharmaceutical firms in nigeria. copernican journal of finance & accounting, 10(1), 53–66. http://dx.doi.org/10.12775/cjfa.2021.003 daud omotosho saheed* kwara state university ibrahim majeed ajibola** kwara state university lukman adedoyin*** federal polytechnic offa efficacy of audit fee on audit quality of selected pharmaceutical firms in nigeria keywords: audit fee, audit quality, audit report lag, mandatory auditor rotation. j e l classification: m42, o14, l29, c14, c23. abstract: the problem of poor accuracy and credibility in some audited financial statement has being a major form of information asymmetry which had led some shareholders and prospective investors to make wrong judgment about the financial position of some organization due to poor audit quality. thus, specifically this study empiricaldaud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin54 ly examine how audit fee, audit report lag as well as mandatory auditor rotation affect the audit quality of the sample listed pharmaceutical firms on the f loor of the nigerian stock exchange. a gls estimation method was employed to clearly establish the nature relationship that exists between the dependent variable and the adopted surrogates for the independent variables. a secondary data was extracted from the annual audited reports from the ten selected pharmaceutical firms that serve as the fair representation for the population under study for a period of ten years 2009-2019. the result from the finding shows that all the adopted surrogates for the independent variable were jointly significant in explaining about 72% variation in audit quality given credence to the coefficient of (r2) which stood at 0.72 as well as the combined p-value of 0.000. this implies that the predictive power of the surrogates of the independent variables can explain about 72% changes in audit quality of the population under study. in specific terms; audit fee have a significant positive impact on audit quality of the selected pharmaceutical firms while audit report lag and mandatory auditor rotation have significant negative impact the audit quality of the selected pharmaceutical firms respectively. the study therefore recommends among many others that policy makers and regulators should put in place a framework that will ensure the payment of optimal compensation to audit firm as audit fee as this will no doubt go a long way in improving the audit quality of the firms under study.  introduction audit quality has been a major focus research area in advanced countries for several decades given credence to the role of auditors’ reports in intending investors decisions making. considering several accounting scandals and the financial crisis, which were in connection with financial statement misrepresentations. akin (2017) opined that disclosure is one of the accounting principles for which, all information relating to the company’s activities appropriate and timely manner, can be made available to different groups of users for the purpose of investments decision, interpretation of corporate financial status, evaluating management performance and prediction of future cash f lows. in this regard all the important facts of the economic are properly and are fully disclosed, to provide a decision and possibly to avoid confusion. as a result, the quality of information disclosed is very important because the quality audit conducted usually have an inf luence on the credibility of the disclosure made by a company (shen & hsiang-lin, 2007). aremu (2018) opined that the primary goal of auditing is to provide a report that is fact finding without any forms of manipulations in terms of credibility and acceptability. however, the collapse of many big corporations both home and abroad which were not limited to world com and enron in the united states as well as cadbury nigerian plc and lever brothers plc in nigeria were attrib efficacy of audit fee on audit quality… 55 uted to poor audit quality and breach of trust in connection to a perceived lack of independence of auditor and mandatory auditor rotation (otusanya & lauwo, 2010). however, empirical evidence from the previous studies on the subject matter shows that several factors such as audit fee, audit report lag, mandatory auditor rotation, audit firm reputation and auditor’s tenure, were found to be the main determinant of audit quality in different sectors specifically in the banking and manufacturing sector. in the light of this to the best of the researchers knowledge little or no studies of this nature has been carried out with respect to the pharmaceutical firms, it is important and worthy of note that pharmaceutical industry in africa assume a strategic position especially in nigeria considering economic potential of the pharmaceutical industry for growth (african development bank group, 2018). the high incidence of diseases in this part of the world and the emergence of covid-19 has made the pharmaceutical industry to be a vibrant market and one of the fastest growing sectors of the economy with an estimated growth rate of 13% annually given credence to the outbreak of new pandemics such as ebola and covid-19 (pharmaceutical market sector report, 2017; ayinde, 2019) in the light of this background, this study intend to investigate the efficacy of audit fee on audit quality of pharmaceutical firms in nigeria in an attempts to bridge the identified gap. to guide the thrust of this study, the following null hypotheses were tested: h1: audit fee has no significant effect on the audit quality of nigerian pharmaceutical firms. h2: audit report lag does not significantly affect the audit quality of nigerian pharmaceutical firms. h3: mandatory auditor rotation has no significant effect on the audit quality of nigerian pharmaceutical firms. literature review conceptual review bolanle (2011) posits that audit quality is all about how well information misrepresentation and manipulation are detected and reported through an audit assignment for the purpose credibility and acceptability of an annual reported financial statements. however, the detection aspect audit assignments mainly as to do with the ref lection of auditor’s competence while reporting is primardaud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin56 ily a ref lection of ethics or auditor’s integrity in relation to independence. opeyemi (2017) posits that audit quality comes to play only when an auditors is able to objectively discover and reported misstatements and manipulations in the annual net income reported statement. similarly, aremu (2018) opined that a reported net income statement of a company is said to be a ref lection of audit quality when the interest of users of financial statement is protected for decision making from diminution of information asymmetry which is made possible through a cosmetic reportage. ibrahim (2019) stated that audit quality is only attainable when the annual audited financial statement is free from information asymmetry with respect to window dressing. audit fee and audit quality simunic (1980) cited by kolade (2017) views audit fee as a product of unit commission and the quantity of audit assignment demanded by the management of the auditee. in the same vein ibrahim (2019) opined that audit fee is the charges made by an audit firm for the rendition of audit related services. however, audit service related charges are usually induce by the quantum of audit service rendered by an audit firm. oludiji (2018) stated that audit fee or compensation is driven by the scope of rendered as well as resources expended and the expected future loss arising from the audit assignment engagements which are not limited to litigation losses and government penalties. perhaps, one can say that audit fee is a function of cost incurred in performing an audit assignment. mamud (2017) posits that audit fee is the amount received by an auditor for the purpose of reporting the true and fair state of affairs or position of the client’s enterprise in relation to net income statement. audit report lag and audit quality aremu (2018) opined that audit report lag is all about the number of days from fiscal year end to audit report date which has the tendencies of jeopardizing the quality of audited reports by not providing timely information to users of financial information such as investors. ayinde (2019) posits that delayed in reportage of fiscal year financial activities of an entity usually gives room for information asymmetry thereby eroding intending investors’ confidence. audit report lag induce the reaction of users of audited reports to earnings an efficacy of audit fee on audit quality… 57 nouncement therefore an unnecessary reporting lag are usually a case of poor audit quality. mandatory auditor rotation and audit quality olowookere and adebiyi (2013) assert that mandatory auditor rotation prevents the audit firm from developing a close relationship with the client which makes the audit firm to carry out its work without compromising the ethics standard owing to the fact that they are aware that they have a specific timeframe and this voraciously limit misrepresentation of fact which increase reporting conservatism. in the opinion of olamide (2018) mandatory auditor rotation have the tendencies of increasing the quality of audit service rendered by an audit firm because the audit firm would attempt to differentiate themselves from other firms by maintaining ethical standard in the course of service rendition, this will equally give room for auditor independence thereby promoting audit reportage quality. audit firm independence and audit quality iyoha (2015) opines that an auditor is said to enjoy independence only when his free from any undue inf luence in the course of performing audit assignment. auditor’s independence is said to be attain only when integrity is maintain and the audit assignment is driven by objectivity. iyoha (2015) cited by bolajoko (2015) views auditor’s integrity as the aspect of his character rooted in his conviction which prevent him from taking a subjective position in connection with audit service rendition regarding the upholding of professionalism by not taking undue advantage of his position to make riches. auditors tenure and audit quality sheu (2018) posits that the length of an auditor usually induce the credibility of an audited financial statement given credence to the fact that the closeness to client management can be seen as a condition that affects audit quality. aremu (2018) stated that auditor may not exhibit sufficient professional conduct while performing audit assignment once that is a long-term closeness between the management and the auditor which will adversely induce the credibility daud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin58 of the audit assignment outcome. contrarily, ibrahim (2019) opined that longterm auditor-client relationship usually resulted to more audit reporting success than when auditors had served these clients for shorter tenures. this suggests that the shorter the lower the audit quality. theoretical underpinning this study hinges on the reviewed of both the agency and the theory of inspired confidence, evidence from the review of the agency theory and the theory of inspired. the former links shareholders and the management who are the providers of financial statements to be audited by audit firms and the latter anchored managers and audit firms that play a prominent role in ensuring quality of financial reporting. in the light of the foregoing the researcher deems it fit to draw a line of appropriateness for the adoption of agency theory for this study because it has a link with the study specific objectives. empirical review yuniarti (2011) empirically investigate the factors that affect audit quality of 24 listed bandung firms in 2009. a secondary data was extracted from annual audited reports from the population under study. based on the finding from the study it was reveal that higher audit fees increase and improve audit quality due to auditor’s effort. i.e audit fees has a positive significant relationship with audit quality of the population under study. it was recommended that accounting firms should enhance amount of audit fees considering it effect on the overall credibility of audit quality. oladipupo (2011) investigated the impact of audit lag on financial report quality in nigeria. he selected forty companies to serve a fair representation of the population under study. he employed both univariate and multivariate to performed his analyses on the collected data in a bid to query his hypotheses statement. the study observed that; audit delay ranged from 16 to 284 days has an impending effect on the quality of financial reports of the population under study. it was recommended that audit report delay should be totally frown at to enable users of audited reports to have access to audited reports timely to limit the problem of asymmetric information. efficacy of audit fee on audit quality… 59 llaboya and ohiokha (2014) examines the impact of audit firms’ characteristics on audit quality. the data used for the study was extracted from the audited statement of the population under study. a gls regression model was employed to establish the nature of relationship that exists between the dependent and independent variables. based on the study outcome it was revealed that a negative relationship exists between auditors’s independence, audit firm size, audit tenure all as proxies for the independent variables and audit quality being the dependent variable. it was recommended among others that to ensure audit quality auditors must enjoy independence to ensure professionalism. onaolapo, ajulo and onifade (2017) evaluates the effect of audit fees on audit quality listed cement companies on the f loor of the nigerian stock exchange. specifically, the study examines the relationship between audit fee, audit tenure, client size, leverage ratio and audit quality. ols model was used to analyze the relationship between the independent variables and the dependent variable using the secondary data derived from the audited reports of the selected companies for a six year period 2010-2015. the study shows that audit fee, audit tenure, client size and leverage ratio are jointly significant in explaining audit quality given credence to the model coefficient of (r2) which stood at 0.6006 this implies that the independent variables can explain about 60% changes in audit quality is about 60%. it was recommended that government should develop robust policies that will improve audit quality in nigeria. adeniyi (2018) examine the relationship between the tenure of auditor and audit quality in nigeria. findings reveal that there is a negative relationship between auditor tenure and audit quality though the variable was not significant. it is therefore in cognizance of the foregoing that study seek to examine the efficacy of audit fee on audit quality of the selected pharmaceutical firms in an attempt to bridge the identified gap. the research methodology and the course of the research process research strategy the study employed descriptive research design. analysis was based on available annual secondary data collected over the study period (2009-2019). the descriptive research design enhanced detailed analysis with a view of drawing inferences in logical sequences. however, the sample size of this study was redaud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin60 stricted to the topmost ten pharmaceutical companies listed in nigeria stock exchange as at december 2019 and they include; afrik pharmaceuticals plc, evans medical plc, fidson healthcare plc, glaxo smithkline consumer nigeria plc, may & baker nigeria plc, neimeth international pharmac euticals plc, nigeria german chemicals plc, pharmadeko plc to serve as fair representation of the population under studied. model specification this study was modelled according to the accrual quality model of fuad (2012) which was modified by bolajoko (2015) and onaolapo, ajulo and onifade (2017) but specifically, this study adapted the model of onaolapo, ajulo and onifade (2017) which studied the effect of audit fees on audit quality a selected cement manufacturing companies in nigeria as a sample size. onaolapo, ajulo and onifade (2017) specified their model as: audqual = α + β1audfee + β2audten + β3cltsize + β4lev + μ; where: audqual = audit quality, audfee = audit fee, audten = auditor’s tenure, cltsize = client size and lev = leverage in a bid to test for the significance of the formulated hypotheses, the below econometric models was formulated to suit the specific objectives of this study. auqi,t = afi,t + arli,t + mari,t + afii,t + ati,t (1) where: auqi,t = audit quality of the selected firms in year t afi,t = audit fee of the selected firms arlit = audit report lag in year t marit = mandatory auditor rotation in year t afiit = audit firm independence in year t atit = auditor tenure in year t the model to be estimated becomes: auqi,t = β0 + β1audfi,t + β2arli,t + β3mari,t + β4 afii,t + β5ati,t + μi,t (2) β0, β1, β2, β3, β4 and β5 parameters of estimation uit = the error term i = cross-sectional variable t = time series variable efficacy of audit fee on audit quality… 61 panel data estimation technique was used to investigate the subject matter within the period of 2009 2019 due largely to the fact that it takes care of heterogeneity which may lead to spurious regression. data presentation, interpretation and discussion of findings descriptive statistics the table below presents the descriptive statistics for the dependent proxy as audit quality and explanatory variables of selected pharmaceutical firms. the table present information on the character that the collected data exhibit. table 1. descriptive statistics of the variables variables obs mean std. dev. min max aqt 80 .0804 .1087 0.0251 .6502 af 80 .0907 .2064 0.0423 .8705 arl 80 .0431 .0342 0.000 1.000 mar 80 .2105 .1301 0.000 1.000 afi 80 .0675 .0274 0.000 1.000 at 80 .3342 .3634 0.000 1.000 s o u r c e : researcher’s computation (2020). pairwise correlation the table below presents the results of correlations among the variables. the logic behind the assumption of no multicollinearity is that correlation coefficient between two variables is must not be greater than 0.70 (gujarati, 2015) . thus, evidence from table reveal tha all adopted variables were not significantly correlated with each other base on the range value of variables correlation of the lowest and the highest correlation value suggesting the absence of multi-colinearity among the adopted variables for this model. daud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin62 table 2. pairwise correlation var pbvvariable aqt af arl mar afi at aqt 1.0000 af 0.4216 1.0000 arl -0.3402 0.1256 1.0000 mar -0.5312 0.4217 -0.2401 1.0000 afi 0.3201 0.2613 0.4746 0.3481 0.4323 at 0.4210 0.2034 0.4215 0.2004 0.3014 1.0000 s o u r c e : researcher’s computation (2020). regression analysis an hausman test was firstly conducted to decide on the best estimates between random and fixed effect. the result of the hausman test reveals chi2 value of 7.55 with 0.1864 probability which is > the 0.0500 significant margin. this implies that the random effect was the best model to be estimated. table 2. hausman specification test table 2. hausman specification test _______ coefficients _________ (b) (b) (b-b) sqrt(diag(v_b-v_b)) fixed random difference s.e. af .0152 .1040 .0177 .0105 arl -.1316 -.1350 -.0641 .3103 mar .1243 -.0514 -.0042 .0027 afi .0212 .0062 .0077 .0310 at .0511 .0812 .0140 .0121 test: ho: difference in coefficients not systematic chi2(6) = 7.55 prob>chi2 = 0.1864 source: researcher’s computation (2020). the below result shows that the coefficient of r-squared has a value of 0.7241 implies that independent variables surrogate were able to explain about 0.72% of change in audit quality this posits that the explanatory variables constitute 72% of the elements that predict the dependent variable. thus, the stochastic element in the model constitute about 28%, in view of this one could draw a line of conclusion that the model exhibit a strong goodness of fit. the f-statistics was statistically significant @1% with a probability value of 0.0000 which implies that all independent variables were jointly significant in explaining the dependent variable.. the coefficients of the constant (c) has a value of. 0528. this suggests that if all the explanatory variables are held constant, the explained variable which will surge by .0528 units. this implies that regardless of change in the explanatory variables the selected pharmaceutical companies audit quality will respond according. a positive coefficient of. 2040 was reported for audit fee and it was statistically significant at 1% level. this posits that in a situation where other predictor variables are held constant, by implication a unit change in audit fee will account for .2040 units increase in the audit quality of the selected pharmaceutical firms. this was in agreement with the work of kolapo (2018) who equally reported a positive significant nature of relationship between audit compensation and audit service quality. s o u r c e : researcher’s computation (2020). the below result shows that the coefficient of r-squared has a value of 0.7241 implies that independent variables surrogate were able to explain about 0.72% of change in audit quality this posits that the explanatory variables constitute 72% of the elements that predict the dependent variable. thus, the stochastic efficacy of audit fee on audit quality… 63 element in the model constitute about 28%, in view of this one could draw a line of conclusion that the model exhibit a strong goodness of fit. the f-statistics was statistically significant at 1% with a probability value of 0.0000 which implies that all independent variables were jointly significant in explaining the dependent variable. the coefficients of the constant (c) has a value of 0.0528. this suggests that if all the explanatory variables are held constant, the explained variable which will surge by 0.0528 units. this implies that regardless of change in the explanatory variables the selected pharmaceutical companies audit quality will respond according. a positive coefficient of 0.2040 was reported for audit fee and it was statistically significant at 1% level. this posits that in a situation where other predictor variables are held constant, by implication a unit change in audit fee will account for 0.2040 units increase in the audit quality of the selected pharmaceutical firms. this was in agreement with the work of kolapo (2018) who equally reported a positive significant nature of relationship between audit compensation and audit service quality. a consideration of the strength of relationships, using the t-statistic shows that audit report lag whose z-statistics is -4.02 relates significantly with the selected firms audit quality given its 0.000 probability which is above the 0.0500 significant margins. this implies that a negative nature of relationship exit between audit report lag and audit quality, this suggest that delay disclosure of audited statement usually induced the quality of financial reportage. therefore, the longer the audit report lag the lower the quality of the audited statement. a negative coefficient of-4.00 was also reported on mandatory auditor rotation and it was significant at 1%. this, posits that the longer mandatory auditor rotation give room for a cordial client-agent relationship which is likely to put ethical standard into jeopardy. a consideration of strength of the negative coefficient of-4.00 posit that a shorter mandatory auditor rotation is essential to mitigate audited financial statement misrepresentation as this will go a long way in improving audit quality. this result is however in disagreement with the outcome of ayodeji (2018) who found a positive insignificant relationship between mandatory auditor rotation and financial report quality. however, the other adopted control variables equally has a significance effect on the audit quality of the selected pharmaceutical firms considering the reported coefficient of each of the control variables. although each of this control variables exhibit different characteristics concerning the specific form of relationship on the audit quality of the selected pharmaceutical firms specifically; audit firm daud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin64 independence reveals a positive coefficient of 0.3233 and it was statistically significant 5%, this suggests that a unit change in the audit firm independence will account for an increment of 0.3233 units in the audit quality of the selected pharmaceutical firms. this is in agreement with the outcome of bolanle (2011) who also found a positive relationship between audit firm independence and audit quality. auditor’s tenure also have a positive coefficient of 0.0897 but not statistically significant at 10%. this suggests that where other regressors are held constant, a unit change in the auditors tenure will be responsible for an increase unit of 0.0897 in the audit quality of the selected firms. table 3. panel data regression results (random effects) table 3. panel data regression results (random effects) random-effects gls regression number of obs = 80 group variable: countries number of groups = 8 r-sq: within = 0.7241 obs per group: min = 10 between = 0.7013 avg = 10.0 overall = 0.7110 max = 10 wald chi2(6) = 134.75 corr(u_i, x) = 0 (assumed) prob > chi2 = 0.0000 aqt coef. std. err. z p>|z| [95% conf. interval] af .2040 .0267 2.88 0.000 .1564 .0515 arl -.0612 .0152 -4.02 0.000 -.0911 -.0313 mar -.1111 .0277 -4.00 0.000 -.1655 -.0567 afi .3233 .0782 3.86 0.004 .3767 .0700 at .0897 .0096 8.27 0.540 .0608 .0986 _cons .0528 .0145 3.63 0.003 .0243 .0814 sigma_u |0.6188 sigma_e |.0641 rho |.5048 (fraction of variance due to u_i) source: researcher’s computation (2020). conclusion and recommendations based on the empirical findings of this study, it was revealed that audit fee play crucial role on the quality of audited statement of pharmaceutical firms in nigeria this is evidenced by the positive coefficient that was reported which signal that the higher the audit fee, the higher the accuracy and reliability of audited statement of account of an organization. the, positive coefficient that was reported on audit fee posits that the selected pharmaceutical firms are really are paying the specified audit rate because of it clear cut effect on the quality of audited financial statement considering the reported inferential result which was statistically significance @ 1%. similarly, the empirical results equally shows that audit report lag equally has a significant influence on audit quality of the selected pharmaceutical firms given cognizance to the inferential statistic results which suggest that delay disclosure of audit account usually erode the confidence of audited statement users. this underscored the need to encourage timely disclosure of audited statement as this will no doubt promote audit quality and conservatism. a negative significant coefficient was also reported for mandatory auditor rotation as a factor that induce s o u r c e : researcher’s computation (2020).  conclusion and recommendations based on the empirical findings of this study, it was revealed that audit fee play crucial role on the quality of audited statement of pharmaceutical firms in nigeria this is evidenced by the positive coefficient that was reported which signal that the higher the audit fee, the higher the accuracy and reliability of audited statement of account of an organization. the, positive coefficient that was reported on audit fee posits that the selected pharmaceutical firms are really are paying the specified audit rate because of it clear cut effect on the quality of efficacy of audit fee on audit quality… 65 audited financial statement considering the reported inferential result which was statistically significance at 1%. similarly, the empirical results equally shows that audit report lag equally has a significant inf luence on audit quality of the selected pharmaceutical firms given cognizance to the inferential statistic results which suggest that delay disclosure of audit account usually erode the confidence of audited statement users. this underscored the need to encourage timely disclosure of audited statement as this will no doubt promote audit quality and conservatism. a negative significant coefficient was also reported for mandatory auditor rotation as a factor that induce audit quality considering the fact that longer mandatory auditor rotation usually poses threat on ethical standard due to long time cordial client –agent relationship. in line with the outcome of this findings, it was recommended that policy makers and regulators should put in place a framework that will ensure the payment of optimal compensation to audit firm as audit fee, also delay disclosure audited statement (audit report lag) should be discourage as this will improve the audit quality with respect to the users confidence on audited financial statement. finally, the mandatory auditor rotation legal framework must be reinstituted and respected by all and sundry considering it inf luence on audit quality evidenced by it reported negative significant coefficient estimated model for the population under study.  references adeniyi, d. (2018). efficacy of the relationship between the tenure of auditor and audit quality in nigeria. a case study of coglomerate firms. journal of management, 4(2), 105-120. african development bank group (2018). african nations financial growth strategy’ summary report, abuja. akin, s.a. (2017). impact of audit quality on firms performance in nigeria: evidence from manufacturing firms. international journal of accounting, finance and management, 6(4), 2-37. aremu, m.a. (2018) determinants of audit quality in the banking sector. research paper african economic research consortium, 179. ayinde, d. (2019). effect of audit remuneration on financial report quality. business & finance journal, 1(5), 23-40. bolajoko, g. (2015). inf luence of corporate governance on audit and non-audit fees. the australasian accounting business & finance journal, 1(4), 40-61. daud omotosho saheed, ibrahim majeed ajibola, lukman adedoyin66 bolanle, m. (2011). effect of firm characteristics on the quality of financial reports: a case of manufacturing firm listed in the indonesia stock exchange. faculty of economy, gunadarma university. gujarati, d. (2015). basic econometrices. new york, united state of america: mc graw. ibrahim, m. (2019). an empirical analysis of audit fees inf luence on audit quality in nigerian firms. journal of financial management, 2(5), 58-69. iyoha, a. (2015). audit firm size, audit fee and audit quality: evidence from bangladesh. journal of applied business and economics, 8, 45-64. kolade, a. (2017). an empirical analysis of auditor independence and audit fees on audit quality in nigerian firms. an unpublished seminar report submitted to east ukrainian national university. kolapo, n. (2018). effect of audit compensation on audit service quality in nigeria. a case of consumer goods. an unpublished phd. seminar report submitted to kwara state university, malete. llaboya, s.c., & ohiokha, n.s. (2014). the impact of audit quality on firm performance: evidence from malaysia journal of financial economics, 13, 187-221. mamud, b. (2017). impact of audit independence on financial reporting. journal of financial research, 3(1), 208-220. oladipupo, f. (2011). impact of audit lag on financial report quality in nigeria. a case study of selected listed firms. journal of management accounting, 4, 80-92. olamide, l. (2018). effect of mandatory auditor rotation on financial report quality. evidence from selected nigerian deposit money banks. journal of accounting, 5(3) 59-72. olowookere, a., & adebiyi, a. (2013). effect of mandatory auditor rotation on audit quality. evidence from cement manufacturing companies in nigeria. journal of financial accounting, 5, 100-119. oludiji, a. (2018). effect of nonaudit services on audit quality. singaporean journal of business economics, and management studies, 2(11). onaolapo, a.r., ajulo, o.b., & onifade, h.o. (2017). impact of audit fees on audit quality: evidence from cement manufacturing companies in nigeria. journal of financial economics, 5(1), 157-185. opeyemi, r. (2017). effect of firm characteristics on the quality of financial reports. an unpublished m.sc. seminar report submitted to university of ilorin. otusanya, i.m., & lauwo, j.p. (2010). effect of audit quality on company performance: evidence from nigeria goods sector. journal of economics and management, 18(2), 580786. pharmaceutical market sector report (2017). vision 2020: innovation management and pharmaceutical firms development sustainability. shen, t., & hsiang-lin, e.m. (2007). the impact of audit quality on firms performance: evidence from saudi arabia. journal of applied finance and banking, 5(2), 363-463. sheu, h. (2018). inf luence of auditors tenure on audit quality of iranian listed firms. journals of management, 2(3), 97-115. yuniarti, p. d. (2011). evaluating value based financial performance measures, journal of finance and accounting, 5, 56-63. _hlk76414096 range!a1 for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 29 may 2013 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship 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http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions#authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone: + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz) fax: +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl date of submission: october 12, 2021; date of acceptance: december 13, 2021. * contact information (corresponding author): oiredele@unilag.edu.ng, department of accounting, university of lagos, nigeria, phone: +234 803 707 6057; orcid id: https://orcid.org/0000-0002-1661-9460. ** contact information: gadeyeye@unilag.edu.ng, department of accounting, university of lagos, nigeria, phone: +234 803 719 2416; orcid id: https://orcid.org/00000002-7626-3638.n *** contact information: owoyomie@yahoo.com, pricewaterhousecoopers, lagos, phone: +234 706 890 4181; orcid id: https://orcid.org/0000-0003-4198-1522. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 1 iredele, o.o., adeyeye, g.b., & owoyomi, e.b. (2022). creative accounting and shareholders wealth maximization in listed consumer goods companies in nigeria. copernican journal of finance & accounting, 11(1), 49–66. http://dx.doi.org/10.12775/cjfa.2022.003 oluwamayowa olalekan iredele* university of lagos gbadegesin babatunde adeyeye** university of lagos ebenezer babatunde owoyomi*** pricewaterhousecoopers, lagos creative accounting and shareholders wealth maximization in listed consumer goods companies in nigeria keywords: creative accounting, shareholders’ wealth, nigerian stock exchange. j e l classification: m410. abstract: this study examines the effect of creative accounting practices on the shareholders wealth of 90 firm-year observations of ten (10) consumer goods companies listed on the nigerian stock exchange (nse). ex post facto research design was adopted using dataset for the period 2011–2019 which were collated from the annual reports and o. o. iredele, g. b. adeyeye, e. b. owoyomi50 financial statements of the listed consumer goods companies. four hypotheses were proposed and tested using pooled panel data regression. findings revealed that frequent changes in inventory valuation method and assets valuation methods respectively have significant effect on shareholders wealth, while frequent changes in depreciation methods and liabilities valuation methods do not significantly affect shareholders’ wealth. the study recommends that external auditors should pay attention to discretionary items in the financial statements in order to ensure that the assumptions used by managers are fair. regulators should also evaluate the adequacy of policies around inventory and assets valuation while financial analysts and shareholders should note the application and consistency of accounting policies on inventory and assets.  introduction financial statements must contain useful information that enable users and other stakeholders to make informed decisions. the main purpose is to provide information that interested parties can use to evaluate the managers in terms of their performance and make other informed business decisions (effiok & eton, 2012). the usefulness of this information is dependent on the fulfilment of certain qualitative characteristics. according to the revised international accounting standards board (iasb, 2018), some of these qualities include; representative faithfulness, timeliness, relevance and objectivity. however, the failures of business entities have raised numerous of questions about the credibility of the accounting profession and the reliability of its report in making optimal decisions in terms of business investments (akpanuko & umoren, 2018). creative accounting accounts largely for failure of those reports to meet the expectations of users. creative accounting is a term used to describe means used by preparers of financial statements to make companies become competitive in the business environment where they operate (odia & ogiedu, 2013). this practice is manifested through the manipulation of the statement of financial position, managing results through inconsistent accounting methods or policies, capitalizing costs and abuse of materiality concept to validate inaccuracies. managers adopt creative accounting as a tool for presenting accounting data in such a way to attract stakeholders, instead of revealing the actual business position. according to fizza and malik (2015), “when decisions are made that do not always benefit the company immediately, the strategy applied is to prioritize how to create wealth for shareholders to maximize their wealth.” for instance, in kenya, nyabuti, memba and chege (2016) stated that companies that maxi creative accounting and shareholders wealth maximization… 51 mizes the wealth of its shareholders attract more investment thereby increasing the share capital in the process. salome, ifeanyi and marcel (2012) identified strategies used by accountants in nigeria to include profit manipulation tactics which lead to negative impact such as business failures. high-profile corporate collapses due to the incessant abuse of creative accounting practices has negatively impacted on the effectiveness of corporate governance systems, quality of financial reporting and the credibility of the audit function. this singular objective of the current study is to determine the effect of creative accounting practices on the wealth of shareholders of selected consumer goods companies listed on the nigerian stock exchange, where shareholders’ wealth is represented by the firm’s share price in the stock market. this paper f lows as follows: section 2 is the review of literature, theoretical framework and hypotheses development. section 3 is the research method adopted in the study. in section 4 the analysis and results are presented. section 5 is used for the discussion and conclusion of the study. literature review, theoretical framework and hypotheses development the concept and nature of creative accounting according to bhasin (2016), “creative accounting is a practice that may (or may not) comply with accounting standards or principles but deviates from what those principles and standards intend to achieve, in order to show a desired image of the company to stakeholders.” osahon (2012) posited that “creative accounting is the transformation of financial accounting figures to the desire of the preparers from what they actually are by taking advantage of the existing rules and or ignoring some or all of them.” similarly, according to balaciu and vladu (2009), “creative accounting is a communication technique having in view the amelioration of the information provided to the investors.” in other words, creative accounting not only attempts to generate a more positive public image on the market but is also an attempt to present result that is more attractive than normal. creative accounting practices can be assessed under a positive viewpoint and a negative viewpoint at the same time. from a positive viewpoint, these practices coincide with accounting principles that recognize changes in the economic, social and political environment o. o. iredele, g. b. adeyeye, e. b. owoyomi52 while from a negative viewpoint, they are negative activities which promote unethical practices by which providers of capital are presented with misleading information about the firm (odia & ogiedu, 2013). bhasin (2015) offered insights into specific methods employed by firms in manipulating figures presented in financial statements. these include: ■ recognition of premature or fictitious revenue: the study places emphasis on how creative accounting begins. first is with recognition of revenue because it has a direct impact on earnings. this happens when either legitimate revenue is recognized earlier than expected in line with gaap, which is called premature recognition, or it could be that revenue is recognized for sales that did not exist – fictitious sales. ■ the use of cookie jar reserves: this arises when there is over-provisioning for accrued expenses during the period of high profitability. the objective of this is to ensure that profit is not over-estimated beyond the level that is safe to maintain in the future. ■ aggressive capitalization and extended amortization policies: part of the methods employed in creative accounting is that companies aggressively capitalize expenditures that should have been expensed. sometimes, the trick is to extend the period of amortization. ■ manipulating inventory: this happens when firms manipulate the quantity or value of inventory. some of the techniques adopted may be to make provisions for slow-moving inventory, and also possibly change the inventory valuation method. justification in support or against creative accounting practices study such as škoda, lengyelfalusy and gabrhelová (2017) has identified tax as a significant motivator for practicing creative accounting. the argument put forward by davidson (2002) is that complexities in the environment in which a business operates as well as situations where pressures mount on managers during economic challenges often make managers to improve their financial performance by all means. some reasons put forward by sutton (2002) as cited in odia and ogiedu (2013) for creative accounting practices are; reduction in tax and burden, access to cheap sources of capital, avoiding the violation of terms or clauses in debt contracts and increased managers’ wealth. branka, ivana and ivo (2018) opined that creative accounting is applied with the motive creative accounting and shareholders wealth maximization… 53 to obtain personal gain, maintain competitiveness, attracts investors by presenting an image that is not real about the business, increasing or maintaining the level of capital, buying time for not settling due debts and beating analysts’ forecasts about the company’s performance. despite the motives advanced in support of creative accounting, it must be noted that the practice and techniques of creative accounting has contributed to the failure of larger firms like arthur anderson, enron, world com, parmalat, etc., (norri, 2013; ajibolade, 2008). in nigeria, akintola williams and deloitte were also prosecuted for aiding the forgery of afribank plc’s accounts (main stream bank plc) and intentionally exaggerating the earnings of cadbury nigeria plc (bankole, ukolobi & mcdubus, 2018). these events certainly show that the financial reports presented to the public by management and approved by auditors were a misrepresentation of the firm’s true position. according to bakre (2007), “increase in company failures in nigeria and the close shave with collapse that some banks had, occasioning bailout funds from central bank of nigeria, has prompted researchers and investors to query the reliability of financial statements for decision making.” another position put forward by bakre (2007) is that “investors are increasingly uncertain about returns on their investment as confidence in financial reporting is being eroded.” apart from the issue of corporate collapse of firms, the current study is intended to determine the effect of creative accounting practices on the wealth of shareholders with respect to firm’s share price in the stock market. shareholders’ wealth and its inf luencing factors adaramola and atanda (2014) maintained that “shareholders’ wealth is the projected future earnings to the firm’s owners calculated in their present value.” these earnings take the form of dividends distributed periodically as well as proceeds from the trading of stock.” as noted by majanga (2015), some of the factors that inf luence shareholders’ wealth include; “earnings after tax and interest, market forces, the movement in share prices and dividend pay-out policy.” the concepts of dividend pay-outs is the principle upon which building of wealth is founded as well as the increase in share prices, and also stated that shareholders’ wealth will be maximized when the company pays out dividend regularly and the price of the stock appreciates on the stock-market such that the investor gets capital gains. mpin o. o. iredele, g. b. adeyeye, e. b. owoyomi54 da (2013) emphasized how important it is for a firm to maximize shareholders’ wealth by establishing an optimal dividend pay-out policy. on the other hand, mpinda (2013), highlighted that “investors who have a long-term perspective in their investment are the ones who believe that a dividend should only be paid if the company has no value-enhancing capital projects to invest in.” link between creating accounting and shareholders’ wealth salome, ifeanyi & marcel (2012) put forward that “creative accounting occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some unsuspected stakeholders about the underlying economic performance of the company or to inf luence contractual outcomes that depend on reported accounting numbers. the resultant effects of these gross accounting violations are disastrous, leading to high information gap between managers and investors and creating a negative impact on shareholders’ wealth.” a study by adaramola and atanda (2014) observed that movement in a company’s earnings has a direct impact on movement in share prices. similarly, financial accounting information relating to cash-f lows has a positive effect on share prices and this consequently affects shareholders’ wealth. in bankole, ukolobi and mcdubus (2018), management has been brought under pressure to deliver acceptable earnings per share performance because of the quarterly earnings report. theoretical framework the theoretical perspectives upon which creative accounting is based and which also provides the theoretical background for analyzing the issue of creative accounting include such theories as the agency theory, resource dependence theory, stakeholders’ theory and debt covenant theory. agency theory argues that there is the tendency for managers to engage in manipulating behavior owing to the conf lict of interest between the managers and the shareholders in the allocation of economic resources, (vladu & matis, 2010). resource dependence theory argues that managers dependent on shareholders because managerial compensation is often tied to stock prices and investors have a great can exercise discretion as to where they invest their capital and as such, this might affect how managers account for firm performance. stakehold creative accounting and shareholders wealth maximization… 55 ers’ theory opines that the pressure is on the managers of a firm to adjust accounting figures to suit the interests of stakeholder groups especially the dominant ones (bankole, ukolobi & mcdubus, 2018). however, this study hinges on the agency theory for the reason being that, agency theory assumes a firm to be a legal fiction that serves as a focus for complex process that is characterized by conf lictual features of the objectives of individuals (vladu & matis, 2010). this theory suggests that conf lict of interests between managers and shareholders is the root cause of creative accounting practices. prior empirical studies škoda, lengyelfalusy and gabrhelová (2017) conducted a study on “creative accounting practices in slovakia after passing financial crisis.” the study found that “companies are forced and under pressure of performing well and this becomes the major motivator of creative accounting.” the study also emphasis that “to be competitive and be in the race of competition, companies are trying to do anything not minding whether it is unethical.” kamau (2015) analyzed creative accounting practices among listed companies on the nairobi stock exchange in kenya. the study comprised 64 companies listed on the (nse). the conclusion of the study is that “there were significant variances in discretionary accruals for various sectors which is an evident that high probability that creative accounting exists across the sectors.” in a study investigating creative accounting practices in kenya and their effect on the financial performance of companies listed in the nairobi stock exchange, nyabuti et al. (2016), found that “avoidance of tax, accelerating of depreciation and smoothing of incomes” were the main creative accounting variables adopted for the study, with evidence that “a strong relationship exists between creative accounting and financial performance among listed companies in kenya.” kamau, mutiso and ngui (2012) examined “tax avoidance and evasion as factors inf luencing creative accounting among companies in kenya” and shows that the practice of creative accounting among companies in kenya is widely driven by tax avoidance and evasion. data from thirty-six accountants were collected and analyzed being the stewards of various companies in kenya in turkey, ozkaya (2014) examined creative accounting practices of government parastatals between the periods 1989 to 2010. it was found that “the f luctuations associated with boom-bust cycles in international capital f lows stems o. o. iredele, g. b. adeyeye, e. b. owoyomi56 from the persistent hidden liabilities inf luencing structures of emerging markets with open capital.” in nigeria, a study by odia and ogiedu (2013), on “the impact of corporate governance and regulatory activities of nigerian accounting standards on creative accounting practices,” the study utilized population which include accountants, users of financial information and regulatory agencies in nigeria. the result showed that “creative accounting practices were linked to poor corporate governance structures and slack regulations to check the abuses.” also, tassadaq and malik (2015) conducted a study and collected data through structured questionnaire from industrial sector of pakistan. the study concluded that “a company is involved in frauds or scandals because of several factors like unethical behaviours, agency problem and non-professional attitude.” bankole et al. (2018) examined “the effect of creative accounting on shareholders’ wealth.” “inventory valuation, depreciation policy and debtors’ ageing schedule were used as proxies for creative accounting.” the study found that “frequent changes in inventory valuation method and depreciation policy affect shareholders’ wealth while frequent manipulation of a firm’s ageing schedule had no significant effect on shareholders’ wealth.” fagbemi, abogun and salam (2013) carried out a study to examine the relationship between corporate governance and creative accounting practices using respondents from twenty-five nigerian companies with headquarters in lagos-state. using pearson product coefficient of correlation and regression analysis to analyze data obtained from respondents, findings from the study suggests a positive and significant relationship between rule observance and creative accounting practices. the study also found evidence showing the existence of a relationship between creative accounting practices and the decision-usefulness of the financial statements. a study in india by shah, butt and tariq (2011) showed how many companies used the creative accounting techniques to maintain profitability. this is achieved when companies change depreciation policy in order to minimize losses. by this, investors and staffs get assurance and shareholders increase their wealth. effiok and eton (2012) appraised “the impact of creative accounting on management decisions of selected companies listed on the nigerian stock exchange.” the study observed that “the application of creativity in financial reporting significantly affects the decision of management to recapitalize the firm upward or dispose of its reserves and concluded that creative ac creative accounting and shareholders wealth maximization… 57 counting through macro-manipulation of financial statements affects a firm’s price and capital market performance.” osahon (2012) studied the impact of creative accounting on a firm’s value and concluded that creative accounting practices positively affects a firm’s value proxied by its share price. leyira and okeoma (2014) studied the inf luence of creative accounting on organizational effectiveness. using survey data and financial reports of fourteen nigerian manufacturing firms over a period of five years, the study found weak evidence of a positive correlation between income smoothing, artificial transaction and market share. the study further concluded that many manufacturing firms in nigeria underperform but practice creative accounting to appear legitimate. notwithstanding the body of research on creative accounting, the effect on shareholders’ wealth maximization remains unexplored. based on this gap, the current study hypothesises that: h1: frequent changes in a firm’s inventory valuation method have no significant effect on shareholders’ wealth. h2: frequent changes in a firm’s depreciation policy have no significant effect on shareholders’ wealth. h3: frequent changes in asset valuation methods have no significant effect on shareholders’ wealth. h4: frequent changes in liability valuation methods have no significant effect on shareholders’ wealth. research methods the sample and data the population for this study comprises the twenty (20) consumer goods companies listed on the nigerian stock exchange as at 31st october, 2020. the sample size for the study is ten (10) consumer goods companies. convenience sampling technique was used to select the samples for this study. the criteria adopted for selection was based on consumer goods companies that published their annual reports for the financial years 2011 to 2019. the study analyzed data using descriptive statistics and inferential statistics. o. o. iredele, g. b. adeyeye, e. b. owoyomi58 model specification the models for this study determine the relationship between creative accounting techniques and shareholders’ wealth. the simple panel equation predicting the effect of the independent variables on the shareholders’ wealth is as stated in equation (i): smoothing, artificial transaction and market share. the study further concluded that many manufacturing firms in nigeria underperform but practice creative accounting to appear legitimate. notwithstanding the body of research on creative accounting, the effect on shareholders’ wealth maximization remains unexplored. based on this gap, the current study hypothesises that: h01: frequent changes in a firm’s inventory valuation method have no significant effect on shareholders’ wealth. h02: frequent changes in a firm’s depreciation policy have no significant effect on shareholders’ wealth. h03: frequent changes in asset valuation methods have no significant effect on shareholders’ wealth. h04: frequent changes in liability valuation methods have no significant effect on shareholders’ wealth. research methods the sample and data the population for this study comprises the twenty (20) consumer goods companies listed on the nigerian stock exchange as at 31st october, 2020. the sample size for the study is ten (10) consumer goods companies. convenience sampling technique was used to select the samples for this study. the criteria adopted for selection was based on consumer goods companies that published their annual reports for the financial years 2011 to 2019. the study analyzed data using descriptive statistics and inferential statistics. model specification the models for this study determine the relationship between creative accounting techniques and shareholders’ wealth. the simple panel equation predicting the effect of the independent variables on the shareholders’ wealth is as stated in equation (i); 𝐸𝐸𝐸𝐸𝐸𝐸�� = 𝛼𝛼�� + 𝛽𝛽�� 𝐼𝐼𝐼𝐼𝐼𝐼�� + 𝛽𝛽�� 𝐷𝐷𝐸𝐸𝐸𝐸�� + 𝛽𝛽�� 𝐴𝐴𝐼𝐼𝐴𝐴�� + 𝛽𝛽�� 𝐿𝐿𝐼𝐼𝐴𝐴�� + 𝜇𝜇�� where, eps is the earnings per share, inv is the inventory valuation method, dep represents depreciation policy, ava represent asset valuation method and lva represent a firm’s liability valuation method. measurement of variables in order to explain creative accounting model, it is imperative to identify the variables that constitute creative accounting. based on extant literature, the focus of most manipulation is frequent changes in inventory valuation method, frequent changes in depreciation policy, frequent changes in assets valuation methods and frequent changes in liabilities valuations methods. inventory valuation was measured by examining whether the previous year’s valuation method differs from the current year. change in depreciation policies was measured by examining the previous year’s depreciation policy on all fixed asset class and compare with the current year to ascertain difference. valuation of assets or investments in subsidiaries was measured using the absolute change in discount rates used for the valuation of the company’s assets or investments in subsidiaries. valuation of financial guarantees or liabilities was measured using the discount rate adopted to value future financial obligations such as retired benefit plan, long-service award and guarantees to subsidiaries or related parties. shareholders’ wealth was measured using earnings per share as it aids in standardizing companies’ earnings over periods of time and make them easily comparable to one another. creative accounting and shareholders wealth maximization… 59 analysis and results table 1. descriptive statistics inv dep ava lva eps (kobo) mean 0.156 0.267 0.133 0.157 224 standard deviation 0.364 0.445 0.002 0.017 317 kurtosis 1.776 -0.868 -0.42 -1.536 16 skewness 1.933 1.073 -0.45 -0.328 3 minimum 0.000 0.000 8.8 0.131 -134 maximum 1.000 1.000 0.170 0.177 2176 s o u r c e : annual reports of selected companies (2020). table 1 shows the summary statistics of the panel data extracted from the annual reports of the selected ten (10) fast moving consumer goods for the years 2011–2019. as seen in table 1, the mean of inventory is 0.156. in the data entry, zero represents no change in the method of valuing inventory from the previous year and 1 represents otherwise. a mean of 0.156 suggests an extremely low level of changes in the method the companies use in valuing their inventory. the standard deviation of 0.364 suggests a low deviation from the mean. the summary statistics of deprecation was also shown in table 1 with a mean of 0.267; the data suggest that there was a relatively higher change in depreciation method than inventory valuation method. to put it in perspective, it inclines that on the average, the companies changed their depreciation method about 2.7 times in 10 years. from table 1, the mean of asset valuation is 13.3% with a standard deviation of 0.2%. this result implies that on the average, the discount rate adopted to value intangible assets is 13.3% with very low deviations from this value. the kurtosis and skewness of -0.42 and -0.45 shows that the data is normally peaked and skewed, although, tilted to the negative side. the minimum and maximum discount rates for valuing assets are 8.8% and 17% respectively. the mean of the discount rate adopted to value liabilities is 15.7% with a standard deviation of 1.7%. this discount rate is higher than that of the discount rates o. o. iredele, g. b. adeyeye, e. b. owoyomi60 used in valuing assets, suggesting that fmcg companies downplay on their liabilities than they do with their assets. this is such that discount rates and present values are negatively correlated, meaning, as discount rates increase, present value valuation of the assets or liability decreases, and vice versa. the minimum and maximum rates adopted by the firms during the period are 13.1% and 17.7% respectively. the earnings per share of the companies was used to measure shareholders’ wealth of the companies and as indicated in table 1, the mean is 224 kobo with a standard deviation of 317. this is expected as the share valuation of each company varies significantly. the data is not normally distributed as there were large variations in the data: in some years, the companies had high negative and positive eps. this is evident in the minimum and maximum values of -134 kobo and 2176 kobo. inferential statistics table 2. variance inf lation factor vif tolerance inventory valuation 1.405 0.712 depreciation method 2.052 0.487 asset valuation 1.637 0.611 liabilities valuation 1.788 0.559 s o u r c e : author’s computations (2020). variance inf lation factor in table 2 was used to ascertain the level of multicollinearity between the independent variables to ensure the assumptions of regressions are not violated. from the result, it can be seen that the vif of all the variables does not exceed three, hence, suggesting the variables are fit for regression analysis. creative accounting and shareholders wealth maximization… 61 table 3. heteroskedasticity and hausman test test chi2 p-value breusch-pagan godfrey 2.47 0.085 hausman test 30.13 0.000 s o u r c e : author’s computations (2020). table 3 presents the result of breusch-pagan godfrey test which shows a x2 of 2.47 with a p value of 0.085, suggesting the model is not heteroskedastic and thus fit for panel regression analysis. hausman test was carried out to ascertain the appropriate panel data regression analysis to adopt in testing the hypothesis. as shown in table 3, the x2 is 30.13 with a p value of 0.000 suggesting that the fixed effect model is more appropriate, based on the features of the data. random effect model is best adopted if the test is insignificant at 5% alpha level and fixed effect model is adopted if the hausman test is significant at 5% alpha level. table 4. fixed effect regression result dependent variable: eps variable coefficient std error t-statistics prob. r 0.468 286.45 r square 0.219 adjusted r square 0.182 f statistics 5.994 0.00 intercept 818.96 367.94 2.26 0.02 inv 193.16 86.60 2.23 0.02 dep 41.73 70.67 0.59 0.56 ava -6074.5 1689.3 -3.60 0.00 lva 1111.05 1803.97 0.615 0.54 s o u r c e : author’s computations (2020). o. o. iredele, g. b. adeyeye, e. b. owoyomi62 the fixed effect panel regression model was presented in table 4 and the result showed a medium positive correlation of 0.468 and an r2 of 0.219, suggesting that the variables accounted for over 21% of the changes in earnings per share of the fmcg companies. the coefficients of the models showed that inventory valuation had a positive significant effect on earnings per share while the depreciation method had no significant effect on the earnings per share of the companies. on the asset and liabilities valuation side: asset valuation had a strong positive coefficient of the earnings per share while valuation of liabilities has no significant effect on earnings per share. the f-statistics of the model is 5.99 and the associated p value of 0.00 is less than 0.05. hence, we accept the joint statistical significance of the model and that significant linear relationship exists between the dependent and independent variables. the evaluation of the slope coefficients of the explanatory variables reveals the existence of positive relationship (193.16) between inventory valuation (inv) and shareholders’ wealth (eps) which is also significant at 5% (p=0.02<0.05). therefore, we reject hypothesis one (h1) which states that frequent changes in a firm’s inventory valuation method have no significant effect on shareholders’ wealth. depreciation policy (dep) has a positive effect on shareholders’ wealth as indicated by the coefficient of 41.73 which though was not statistically significant at 5% as the probability value is greater than 0.05 (p=0.56>0.05). therefore, we accept hypothesis two (h2) which states that frequent changes in a firm’s depreciation policy have no significant effect on shareholders’ wealth. asset valuation methods (ava) has a negative effect on shareholders’ wealth as indicated by the negative slope coefficient of -6074.5 which is statistically significant at 5% as the probability value is less than 0.05 (p=0.00<0.05). therefore, we reject hypothesis three (h3) which states that frequent changes in a firm’s asset valuation methods do not have any significant effect on shareholders’ wealth. liabilities valuation methods (lva) have a positive effect on shareholders’ wealth as indicated by the positive slope coefficient of 1111.05 which though was not statistically significant at 5% as the probability value is greater than 0.05 (p=0.54>0.05). therefore, we accept hypothesis four (h4) which states that frequent changes in a firm’s liabilities valuation methods have no significant effect on shareholders’ wealth. creative accounting and shareholders wealth maximization… 63 discussion and conclusion the descriptive tool adopted was the summary statistics which showed that a relatively low change in the method adopted by the companies in valuing their inventories. however, depreciation method had a relatively higher level of changes which could be attributed to the change in reporting standards. the result of assets and liabilities valuation showed that the mean discount rates adopted in the valuation of assets was less than the mean discount rate adopted in the valuation of liabilities and guarantees. the firms had options of selecting the most appropriate weighted average cost of capital in arriving at the present value of their assets. from the result of inferential statistics, it can be seen that changes in accounting methods have a strong positive significant relationship with shareholders’ wealth. on a more specific note, it was found that the valuation of inventory significantly inf luences the earnings per share of the companies. as observed from the data collected in the annual reports, the companies had slight fundamental changes in how they valued their inventory which must have caused the positive relationship with earnings per share. this is such that, if the closing inventory is relatively valued higher than the previous year, the cost of goods sold during the period would be less than it should be thereby inf luencing the bottom line of the company. the result of the depreciation shows a positive but insignificant effect on the model. from the data obtained, the depreciation was relatively stable across the periods and companies; however, significance was not obtained because the depreciation change was as a result of the adoption of ifrs in 2012. the valuation of assets showed that assets valuation had a negative significant effect on the model. the discount rate for the valuation of assets was used to measure this variable, it is important to note that companies have f lexibility in selecting the mode of valuation they want to adopt to value their assets. the implication of adopting a lower discount rate in valuing assets is that the present value of the assets becomes higher, resulting in valuation gains which eventually feed into the income statement, resulting in a potentially overstated comprehensive income for the year. on the f lip side, the valuation of liabilities had no significant effect on the model with a p-value of 0.54. as observed from the data collected, there was little f lexibility in the discount rates adopted by the companies in valuing their liabilities and guarantees as most of them adopted the closing yield of high-quality corporate bond. this lack of f lexibility in adopting o. o. iredele, g. b. adeyeye, e. b. owoyomi64 own discount rates could serve as de-motivator to use valuation of liabilities to manipulate the earnings of the company. summarily, the strong significance of the change in method of inventory valuation, assets valuation and the over 2 percentage point differences between discount rates for assets and liabilities suggests an element of creative accounting in fast-moving consumer goods. the findings are similar to the findings of kamau (2015) who concluded that there is a high probability of creative accounting happening among listed companies on the nairobi stock exchange. the findings are also in line with those of effiok and eton (2012) and osahon (2012). based on the findings of the study, it is concluded that creative accounting has a significant multi-directional impact on shareholders’ wealth of companies in nigeria. this multi-direction allows managers achieve their desired results in the reported accounting statements of their respective companies. this is such that the discount rates for valuing assets can be increased or decreased to see desired results, used alongside other variables such as the method of valuing the inventory, to inf luence the gross profit. also, depreciation can also be used to inf luence the bottom line of the company and reducing depreciation by changing policies can lead to increased profit before taxation. further studies may examine the effect of ifrs adoption on creative accounting techniques employed by consumer goods companies in nigeria.  references adaramola, a., & atanda, o. 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(2012). creative accounting and firm’s market value in nigeria. kuwait chapter of arabian journal of business and management review, 2(3), 38–50. ozkaya, a. (2014). creative accounting practices and measurement methods:evidence from turkey. economics e-journal, 8(29), 1–27. http://dx.doi.org/10.5018/economics-ejournal.ja.2014-29. salome, e., ifeanyi, o., & marcel, e. (2012). the effect of creative accounting on the job performance of accountants in reporting financial statements in nigeria. kuwait chapter of arabian journal of business and management review, 1(9), 1–30. shah, s., butt, s., & tariq, y. (2011). use or abuse of creative accounting techniques. international journal of trade, economics and finance, 2(6), 531–536. škoda, m., lengyelfalusy, t., & gabrhelová, g. (2017). creative accounting practicies in slovakia after passing financial crisis. copernican journal of finance & accounting, 6(2), 71–86. http:// dx.doi.org/10.12775/cjfa.2017.012. tassadaq, f., & malik, q. (2015). creative accounting and financial reporting: model development and empirical testing. international journal of economics and financial issues, 5(2), 544–551. ubogu, f. (2019). effect of creative accounting on shareholders’ wealth in business organizations (a study of selected banks in delta state). international journal of social sciences and humanities review, 9(1), 19–38. vladu, a., & matis, d. (2010). corporate governance and creative accounting: two concepts strongly connected? some interesting insights highlighted by constructing the internal history of a literature. annales universitatis apulensis series oeconomica, 1(12), 1–33. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: june 4, 2014; date of acceptance: september 19, 2014. * contact information: skasie@sgh.waw.pl, wiejska 12a, 00-490 warszawa, poland, phone: 22 621 03 20. ** contact information: lkurkli@sgh.waw.pl, wiejska 12a, 00-490 warszawa, poland, phone: 22 621 03 20. kasiewicz s., kurkliński l. (2014). problems of regulations for sme in poland – institutional and cultural context. copernican journal of finance & accounting, 3(2), 67–78. http://dx.doi. org/10.12775/cjfa.2014.018 stanisław kasiewicz*, lech kurkliński** warsaw school of economics problems of regulations for sme in poland – institutional and cultural context keywords: regulatory impact assessment, sme, poland. j e l classification: k20. abstract: this article is dedicated to institutional and cultural reasons of a deep gap between the expected quality of regulations by small and medium-sized enterprises (smes), and the very poor evaluation of effective legislations. the study is based on a theoretical review of the available reports, surveys, publications and practical experience of authors. it recognizes the necessity for a radical restructuring the process of creating new regulations. the key conclusion indicates the need to change the approach to legislation procedure by the sme sector itself. the paper argues that companies must exit current “dormant perception” about regulations. without the active attitudes of the main recipients of the regulations it is impossible to increase the quality of law-making in poland. the present mechanism determining the regulatory process keeps insufficient system, thereby producing defective legislation, not following the changes in highly competitive markets and hampering the process of the development of companies and the polish economy. potential initiatives to achieve a breakthrough of existing barriers for better regulations are presented. stanisław kasiewicz, lech kurkliński68 problemy z regulacjami prawnymi dotyczącymi małych i średnich przedsiębiorstw w polsce – kontekst instytucjonalny i kulturowy słowa kluczowe: ocena skutków regulacji, sektor msp, polska. klasyfikacja j e l: k20. abstrakt: artykuł jest poświęcony analizie instytucjonalnych i kulturowych przyczyn występowania głębokiej luki pomiędzy oczekiwaną, a istniejącą jakością przepisów dotyczących małych i średnich przedsiębiorstw (msp) oraz ocenie słabej skuteczności tych regulacji. badanie opiera się na przeglądzie dostępnych raportów, badań i publikacji, a także na praktycznych doświadczeniach autorów. wskazana jest konieczność radykalnej restrukturyzacji procesu tworzenia nowych przepisów. jeden z kluczowych wniosków podkreśla znaczenie zmiany podejścia do procedury legislacyjnej przez sam sektor msp. firmy muszą przełamać obserwowany stan “uśpionego postrzegania” przepisów. bez aktywnych postaw głównych odbiorców regulacji nie jest możliwa poprawa jakości stanowionego prawa w polsce. autorzy wskazują również na potrzebę istotnych zmian instytucjonalno-proceduralnych. obecny mechanizm tworzenia regulacji w polsce petryfikuje negatywne zjawiska występujące w procesie legislacyjnym. stan ten ma daleko idące konsekwencje dla rozwoju firm, zwłaszcza dla sektora msp, ale także całej polskiej gospodarki.  introduction this study is dedicated to institutional and cultural reasons of a deep gap between the expected quality of regulations by small and medium-sized enterprises (smes), and the very poor evaluation of effective legislations. potential initiatives to achieve a breakthrough of existing barriers for better regulations are presented. it recognizes the necessity for a radical restructuring of the process of creating new regulations. the key conclusion indicates the need to change the approach to legislation procedure by the sme sector itself. the paper argues that companies must exit current “dormant perception” about regulations. without the active attitudes of the main recipients of the regulations, it is impossible to increase the quality of law-making in poland. the present mechanism determining the regulatory process keeps insufficient system, thereby producing defective legislation, not following the changes in highly competitive markets and hampering the process of the development of companies and the polish economy. problems of regulations for sme in poland… 69 the research methodology and the course of the research process the article is based on a theoretical review of available reports, surveys, publications and practical experience of authors. the sme perception of regulations – reasons and consequences in terms of the accelerating globalization, increasing strong tendency to integrate the countries with the large differences in economic development, legal systems, social, cultural or historical circumstances, as well as unprecedented rate of change in technology, the legislative system in poland seems to be unwieldy. we are observing an increase of the importance of regulatory competition in which some countries or companies use the dysfunctional legal systems and regulatory arbitrage to gain a competitive advantage. in contrast, other countries or firms are losing in this market game1. these societies are suffering strong negative economic, social and political consequences. the companies are becoming helpless or passive due to the inadequate response to the phenomenon of regulatory competition. authors agree with the oecd report, which say: “the excessive regulatory burden limits the development initiatives and encourages the corruption and the growth of the shadow economy.” (administrative simplification in poland 2011, 16). at the same time the current financial crisis creates a wave of new regulations in an enormous scale. they brings some positive effects, but they also cause the phenomenon of over-regulation and legislative chaos. regulations have become key determinant of competitiveness and they have limited the economic growth for the countries which are underestimating the importance of regulation in the modern world. since the beginning of the transformation, the quality of polish regulations have become the subject of many studies, discussions and growing concerns due to insufficient response of regulators to the criticisms articulated by scientists and practitioners. for example, the report reviewing the process of the regulatory impact assessments (ria) on the activities of smes recommends the carrying out of special tests. the routine of legislative procedure should start from the ria test. in 2010, there were no such tests at all. when we look at recent years, this kind of tests were carried out very rarely and they didn’t 1 por. s. kasiewicz, l. kurkliński (2013), dryfowanie procesu regulacyjnego. przykład ustawy o upadłości konsumenckiej, warsaw school of economics, warsaw. stanisław kasiewicz, lech kurkliński70 respect the uniform methodological principles (kowalski, kowalewski, lewandowska-kalina, kalina 2013, 7, 132). the present financial crisis reveals unprecedented regulatory weaknesses of the polish economy, especially related to the small and medium-sized enterprises (smes). we can call this situation as: “the drift of economic regulation”. it is indicated by a number of studies on the existing barriers to the development of the sme sector2. if we look at this list of barriers from the point of view of the transformation of the polish economy, the introduction of market mechanisms after 1989, it is almost a failure of the whole system of legislation. from one hand it means that: ■ polish authorities haven’t developed a strategy and regulatory policy, especially after the accession to the european union, ■ weak communication between the authorities and representatives of the business, – the system of economic law in poland requires a thorough reconstruction, practically, a revolutionary breakthrough. on the other hand, we can see positive aspects of the black list of barriers, because: ■ there is a huge chance that it is possible to remove or reduce the negative impact of many barriers with relatively low cost, ■ step by step, it is creating a new regulatory culture (system of institutions, rules, training, development of civic consciousness, etc ), but it is still weak and barely used, ■ a number of initiatives are undertaken (e.g. “efficient state”, “better regulation 2015”, “let’s simplify the rules for companies”, “second chance”), they are giving some promises to progress improvement of legislative activities. but the implementation of these changes lags far behind the needs and promises declared by regulators. more and more attention is paid to the importance of cultural differences of societies, importance of economic activities, including attitude to regulation. in this respect, it seems useful to cite the research of dutch sociologist g. hofstede. he proposed several dimensions of cultures. one of them is particularly important for the perception and compliance with the law (defining standards to act, obeying prescribed or prohibited rules by individuals and business entities). it is: uncertainty avoidance index (uai). it determines the tendency of a society to reduce the uncertainty associated with the future (boski 2009, 109). 2  world bank, oecd, polish agency for enterprise development, ministry of economy, confederation “lewiatan”and others. problems of regulations for sme in poland… 71 g. hofstede defined uai as “the degree of risk that members of a cultural society feel in connection with uncertain or unknown situations to them.” (hofstede 2001, 161). it derived three highly correlated, analyzed factors: the recognition of the robustness of regulation, desire to preserve stability and stress at work. the high level of uai means a striving for the widest possible coverage of almost all areas of man activity by rules, including the economy3. on the other hand we can observe paradoxical phenomenon – circumventing and undermining the established rules. as a result, regulations have considerable excesses, they are unfriendly, opaque, highly restrictive to freedom, posing the possibility of making arbitrary decisions, often changed, forcing to improvise, while they present many gaps, and ultimately resulting in the effect of chaos (boski 2009, 112). this general description is congruent to the situation in poland to a very large extent. it is not surprising, therefore, poland ranks among the top countries with the highest level of uncertainty avoidance index – 93 points on a scale – 23 points (denmark), 112 points (greece). 4 so we must not underestimate the importance of this cultural aspect of the functioning of the economy, in which the dominant part consists of small and medium-sized enterprises (kurkliński 2013). the owners and managers from the sme sector, as well as their representatives (clubs, associations, trade organizations, consulting companies) are presenting negative opinions about the system of regulation and supervision of their activities. their arguments include instability of law, problems with adequacy of competitive conditions (e.g. the lack of respect for the principle of proportionality), inconsistency and vagueness of regulation, different interpretations, the sham dialogue in the consultation process. it reveals a huge dissonance between the demands of smes, and amazing passive response of the regulatory system. the type of attitude of smes to regulation can be called 3 an example might be a general proclamation of the need for economic freedom – natural for a market economy, but from other hand it is widespread questioning of the proposal to deregulate certain professions in poland in 2013 (e.g. tourist guides – is there really need for a city guide to pass the relevant examinations?). 4 greece – the leader in this category, the world media does not allow us to forget about this country. greek experience of the past few years shows that the cultural environment may be connected to the deep crisis – internal chaos and disregard of the rules (both domestic, such as paying taxes and eu, e.g. falsification of state statistics). as a result, the whole country is in the state of social and economic collapse. from this point of view it is interesting position of other countries like portugal and spain, also with very high level of uai. stanisław kasiewicz, lech kurkliński72 “dormant perception”. it means that firms deals with illogical and irrational laws every day, but they can’t force the adoption of required rules and finally they are not able to achieve a reasonable and effective compromise between the social objectives and business interests of smes. in practice, the “dormant perception” means that a significant part of the companies consider that it is not worth to be active in the process of improving the legislation. only a small portion takes action, but majority of these initiatives are ineffective. a growing number of firms is trying to take advantage of regulatory arbitrage at the domestic or international level to escape from unfavorable national regulations. the authorities do not recognize and underestimate the phenomenon of “dormant perception”, and perhaps they treat current situation as a natural part of the game between the state and smes. the escape from the present trap is impossible without the active role of sme sector and the change in their approach to regulators. regulatory gap in the continuous development of smes in many reports, articles and studies a number of positive trends are underlined that are associated with the development of the sme. these observations include: dominance of smes in generating gdp, rapid growth of this sector, the role for national employment etc. smes have become the main driving force of the polish economy. poles, as a society, have a high level of entrepreneurship. however, comparing to the “old” eu member states (15), there are numerous weaknesses in the efficiency and competitiveness of the sme sector. it is less productive, based on its competitive cost advantages. it is characterized by low innovation as ref lected in the outdated structure of the industry, maintaining a conservative approach to new financing methods and visible delay in the application of modern management style. particularly we can observe poor risk management and low level of internationalization. we can ask the question, how is the regulatory system stimulating the effective operations of companies in the sme sector? on this field in poland there are a quite a broad front of initiatives to support smes, e.g. improvement of economic f lexibility because of global crisis, measuring administrative burdens of economic legislation (pomiar obciążeń administracyjnych 2010), and the program “better regulation 2015” (program „lepsze regulacje 2015” 2013). it must be added that the assistance to companies (particularly for smes) is under the framework of the implementation of structural and regional schemes of problems of regulations for sme in poland… 73 the eu (powałka 2011). despite these initiatives, a very broad regulatory gap between the expectations and needs of smes in front of the functioning of the existing legislation still remains. the overtone of the leviatan report “entrepreneurs in poland, facts, figures, examples” – is significant. it states that “the source of the key barriers (for firms) is an inefficient system of law” (czarna lista barier 2013, 11). the report formulates three necessary conditions for improving the regulation (czarna lista barier 2013, 11): ■ the obligation for the initiators of new legislations to conduct genuine consultation with stakeholders, provide reliable impact assessment of regulations and monitoring of consequences, ■ building a culture of open dialogue to achieve social acceptance for the regulations to increase competitiveness of polish companies, which is also beneficial to the public and gives long term results, ■ withdrawal of the state from the role of entrepreneur and focus on reducing costs and risks of doing business. we do not believe that this is a sufficient number of conditions that eliminate the weaknesses of the lawmaking process in poland. but there are no doubts that they will help to improve the current situation. sources of poor quality legislation for smes existing legislation has been the subject of numerous criticisms from the academic researchers and business entities5. it seemed that after poland’s ascension to the european union, the quality of implemented regulations would improve significantly. it happened to some extent6. in our opinion the system of preparation and implementation of the new law in poland is still poor. the governmental initiatives “better regulation”, “efficient state” or “second chance” 5 ocena skutków regulacji – poradnik osr, doświadczenia, perspektywy 2007, w. szpringer, w. rogowski (red.), wydawnictwo c.h. beck, warszawa; kopijkowski-kożuch a. (2010), reforma regulacji w polsce – stan obecny i perspektywy zmian [in:] ocena skutków regulacji w świetle doświadczeń wybranych krajów ue. raporty ze staży zagranicznych, m. sakowicz. (red.), krajowa szkoła administracji publicznej, warszawa, 9–15; rogowski w. (2007). między deregulacją a lepszą regulacją. na wokandzie, no. 15; zubek r. (2007), jak i dlaczego reformować ocenę skutków regulacji w polsce, poczdam. 6 moderate or growing polish position in major international rankings for the legislative system. por. program „lepsze regulacje w latach 2012–2015” (2012). ministerstwo gospodarki, warszawa, 18–19. stanisław kasiewicz, lech kurkliński74 are not guaranteeing of a breakthrough. this comment confirms 10 objections about regulations formulated by the polish confederation of private employers leviatan (dlaczego potrzebna jest 2007). weaknesses of sme regulations have persisted despite the passage of several years since the publication of these concerns. this situation raises the question why, despite having a relatively large regulatory capacity, constant pressure and simultaneous support from the european union, training more than 3,000 employees of the central administration, the quality of the implemented regulations are far from the expectations of business, the local governments and the public. we can formulate a working hypothesis that the main cause of regulation drift lies in the institutional and cultural factors and selfish motivations of particular stakeholders. they paralyze the process of improving the legislation procedure. the institutional framework is unsuitable for proper regulatory impact assessment (ria). there are no clear and unambiguous criteria for the selection of regulations. the final versions of the legislation are often determined by accidents or lobbying of disclosed or undisclosed stakeholders. let’s try to justify this opinion. the regulatory system in poland is dominated by the following institutions: the offices of ministries, the office of the prime minister, government legislative center, council of ministers, and the parliament (sejm and senate) together with the president. in practice the drafts of the most needed economic legislation (acts) are approved by the council of ministers and referred to the parliament. usually the parliament members (mps) accept them in different shape and extent then the original documents. it is important that the government plays the role of a petitioner to the mps. this regulatory process generates a systemic conf lict, because the government in formulates legislative priorities, but it hasn’t a decisive inf luence on the final shape of the adopted regulations. the mps feel entitled in front of their electorates. they assume that their activity is dictated by concern for the public interest, therefore they report a number of adjustments. pms from opposition parties are competing in the reporting of amendments and modifications. they want to prove that the government is incompetent and to hinder the realization of the government objectives. thus, for enhancing the effectiveness and efficiency of the governmental policy and its responsibility for the results, the regulatory system should be changed. but taking into account the existing risks and economic slowdown in poland, the present legislation activity of government is a shocking low. the vast majority of regulatory projects submitted to the parliament marshal is no problems of regulations for sme in poland… 75 tified by pms (not by government). it means that in future years, a broad stream of acts will enter into economic practice without ria7. it could be referred to as the impression that economic and political authorities are satisfied with the legislative impasse. this mess makes difficulties to identify responsibilities, who is liable for the consequences of the adoption of laws that are late, misguided or create unregulated zones (“white spots”). an important reason for legislative failures is a situation when the final act ultimately voted by the sejm may diverge significantly from the baseline assumptions and original shape. brought modifications, additions often do not take into account the broader context and internal interdependences, compliance with other laws, sometimes accepted under time pressure, no one analyzes nor undertakes steps to assess the economic – social effects of many proposed amendments. for mps it is the most important to achieve the acceptance of amendments than long term consequences. this mechanism occurs with almost total degradation of the evaluation of the efficiency and effectiveness of the discussed regulations. how could accepted legislation be judged if sometimes changes are related to the key elements like the initial assumptions, objectives, scope, timing and others. required search for alternatives to regulation remains in wishful thinking category, presented by the authors of ria method. therefore it is not surprising that regulations implemented into practice ref lect a low level of quality. some new legislations are introduced in such a hurry that at the time of their announcement, they are ready for the general correction. next important cause of regulatory failures is absence of legislative institution responsible for the overall preparation and implementation of new laws. formally, this function should be performed by the governmental legislative centre (glc). its weak positioning in the structure of the state authorities and limited participation in the evaluation of implemented projects is the “lame solution.” the role of this institution is reduced only to supervising the legal correctness of the draft regulations contributed by the governmental units (mainly acts). it has no effect on the shape of the provisions adopted by the parliament. gcl is also not responsible for the substantive justification and evaluation of the impact of proposed legislation. it is the duty of the various ministries. ria belongs to the worst part of legislation practice. practically they are done (better or much more often – weaker) assessments for new regulations, 7 in this legislative path (mp’s proposals) it has no obligation to prepare ria. the average activity of mps is related up to 80% of legislation initiatives. see: lepsze regulacje w latach 2012 –2015, 17. stanisław kasiewicz, lech kurkliński76 this procedure is not proceeded in ex post context (evaluation of regulation after some time of functioning), which is quite rightly a key recommendation of the ria methodology. rating of ex post assessment in polish conditions, in majority cases, would be only bureaucratic. the reason is usually poor primary justification of regulations (no numerical measures of objectives and results, differences between original and final versions). that’s why we can constantly observe the same legislative mistakes and continuous process of voting a new adjustment legislations, because of the differences between achieved and expected results. in addition, necessity to change big number of failed or malformed regulations consume parliament time and restricts an introduction of laws that are urgently needed for the economy. it could be concluded that the system of law-making in poland is ill. there is some legislative capacity, but without intensive pressure from the maturing polish civil society, we shouldn’t expect significant changes. directions for improvement of regulations taking into consideration the above presented descriptions of the law-making system in poland, the necessity to undertake steps to improve the process of preparing and implementing regulations appears. the recommendations at the national level are the following: ■ to strengthen the position of the government in the law-making system, ■ implementing restrictions to introduce amendments to legislations in the process of approval in parliament (at least requirements for ria of mp’s proposals), ■ the establishment of an independent body monitoring the quality of adopted regulations, ■ the creation of an institution, well equipped in legislative responsibilities, covering the overall process of preparing and implementing regulations. there are many more other possibilities to support regulatory processes related to the industry -level, non-governmental initiatives and activities directly undertaken by the owners and management of smes. polish companies should keep in mind that modern corporations don’t only compete, but cooperate on many levels to achieve successful position on the market. one of the most important fields of cooperation is in the area of regulations. regulatory risk is very high and many companies failed when their financial results seemed to be problems of regulations for sme in poland… 77 quite good. for this reason, skipping and disregarding of a regulatory factor is not only irrational, but a serious business mistake.  conclusions the current shape of regulations for the sme sector in poland shows a chronic drift of adopted and implemented legislations. on one hand, there is a strong pressure and organizational, financial and methodological support of the european union to improve regulatory processes, especially with regard to the reduction of administrative burdens and comprehensive impact assessment. on the other hand, the polish government has initiated substantively important programs and projects to improve regulatory practice. however, the internal mechanisms and procedures of legislation, as well as “dormant perception” “of companies and passive behavior of the management of the smes impinge on the low effectiveness of the undertaken initiatives. it is visible when we compare them with the needs of the modern competition and the importance of the sme sector for more dynamic development of the polish economy. this kind of enterprises generates 47,3% of polish gdp (raport o stanie sektora 2013, 16). the scale of the regulatory mismatch gap is caused by the lack of a clear national strategy of sme development, the limited impact of government on the regulatory process, skipping the risk assessment and using too simplistic regulatory impact assessments. the lists of legislative barriers faced by smes in their businesses are frighteningly high, and many of their problems are affected by imperfect regulations. this paper presents a brief description of actions (institutional, regulation procedure requirements, and cultural changes), that may lead to the exit of the loop between existing poor legislation and business barriers, and what can give a good impulse to sme development in poland.  references administrative simplification in poland. making policy per form. cutting red tape. oecd 2011. boski p. (2009), kulturowe ramy zachowań społecznych. podręcznik psychologii międzykulturowej, wydawnictwo naukowe pwn, warszawa. czarna lista barier dla rozwoju przedsiębiorczości 2013 (2013), polska konfederacja pracodawców prywatnych lewiatan, warszawa, http://konfederacjalewiatan.pl/ opinie/aktualnosci/2013/.../czarna_lista_barier_2013_pdf (accessed: 06.09.2013). stanisław kasiewicz, lech kurkliński78 dlaczego potrzebna jest reforma polskiego systemu regulacji (2007), polska konfederacja pracodawców prywatnych lewiatan. warszawa. hofstede g. (2001), cultural consequences. comparing values, behaviors, institutions and organizations cross nations, thoussand oaks, sage. kasiewicz s., kurkliński l. (2013), dryfowanie procesu regulacyjnego. przykład ustawy o upadłości konsumenckiej. warsaw school of economics, warsaw. kopijkowski-kożuch a. (2010), reforma regulacji w polsce – stan obecny i perspektywy zmian [w:] ocena skutków regulacji w świetle doświadczeń wybranych krajów ue. raporty ze staży zagranicznych, m. sakowicz. (red.), krajowa szkoła administracji publicznej. warszawa. kowalski a.m., kowalewski o., lewandowska-kalina m., kalina l. (2013), ocena wpływu regulacji na sektor msp – doświadczenia zagraniczne i ich implikacje dla polski. ekspertyza, parp, warszawa. kurkliński l. (2013). kulturowe i behawioralne uwarunkowania regulacji sektora msp. ekonomika i organizacja przedsiębiorstwa, 7(762) july. łapiński j., nieć g.m., zadura–lichota p. (2012), małe i średnie przedsiębiorstwa w polsce, [w:] raport o stanie małych i średnich przedsiębiorstw w polsce w latach 2010– –2011, parp, warszawa. ocena skutków regulacji – poradnik osr, doświadczenia, perspektywy (2007), w. szpringer, w. rogowski (red.), wydawnictwo c.h. beck sp z o.o., warszawa. pomiar obciążeń administracyjnych przepisach prawa gospodarczego. raport z wykonania ii części dzieła (2010), ministerstwo gospodarki. warszawa. powałka w. (2011), mapa pomocy regionalnej, polska agencja rozwoju przedsiębiorczości. warszawa. raport o stanie sektora małych i średnich przedsiębiorstw w polsce w latach 2011– –2012 (2013), polska agencja rozwoju przedsiębiorczości, warszawa. program „lepsze regulacje 2015”, ministerstwo gospodarki. warszawa, załącznik do uchwały nr 13/2013 rady ministrów z dnia 22.01.2013 rogowski w. (2013). między deregulacją a lepszą regulacją. na wokandzie, no. 15. zubek r. (2007), jak i dlaczego reformować ocenę skutków regulacji w polsce, poczdam. date of submission: march 10, 2020; date of acceptance: april 24, 2020. * contact information: ghazi.zouari@fsegs.usf.tn, faculty of economic sciences and management, university of sfax, airport road, km 4.5, pb: 1088, sfax 3018, tunisia, phone: +216 22 633 500; orcid id: https://orcid.org/0000-0002-8168-3266. ** contact information: imenabdelmalek@fsegs.u-sfax.tn, faculty of economic sciences and management, university of sfax, airport road, km 4.5, pb: 1088, sfax 3018, tunisia, phone: +216 28 461 817; orcid id: https://orcid.org/0000-0003-2453-6312. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 1 zouari, g., & abdelmalek, i. (2020). financial innovation, risk management, and bank performance. copernican journal of finance & accounting, 9(1), 77–100. http://dx.doi.org/10.12775/ cjfa.2020.004 ghazi zouari* university of sfax imen abdelmalek** university of sfax financial innovation, risk management, and bank performance keywords: financial innovation, risk management, performance of tunisian banks. j e l classification: g21, g32, o30. abstract: several researches conducted from the angle of corporate governance reveals that the majority of the work that examines the direct association between financial innovation and bank performance has displayed mixed results and has ignored the indirect relationship between these two variables through the risk management of incurred by the bank. in this context, the purpose of this study is to investigate whether or not there is a mediating effect of risk management on the relationship between financial innovation and bank performance. data collected from annual activity reports of banks listed on the tunis stock exchange is analyzed, and used to validate the theoretical and empirical contributions of our article. the empirical study uses the panel data extracted from 10 banks, over the period ranging from 2009 to 2017, and the baron and ghazi zouari, imen abdelmalek78 kenny (1986) mediation approach has been estimated, using specifications of random effects. our empirical analysis substantiates that financial innovation has a positive direct effect on stock market performance, and a non-significative impact on financial profitability. additionally, our results show that improving the stock market performance of banks by financial innovation depends on the mediator role of the operational risk management. to remain improving performance, tunisian banks must pay more attention on special training of bank managers whose function relate to the choice of financial innovations and manage the associated risks.  introduction in literature review, the concept of financial innovation is so broad, and evolves over time. it is defined in different ways (merton, 1992; tufano, 2003; frame & white, 2002; llewellyn, 2009; sokołowska, 2014). according to tufano (2003), “financial innovation is the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions and markets”. financial innovation is a process, carried out by any institution, involving the creation, promotion and adoption of new (including both incremental and radical) products, platforms and processes. it is also a technology catalyst introducing new ways of or changes in conducting a financial activity (khraisha & arthur, 2018; sokołowska, 2014). we act in accordance with nejad’s (2016) concept of financial innovation, consisting in “the development, introduction, and management of a product, service, a business model, or a process that is developed to directly serve the financial industry”. the development of financial innovation contributes to the wealth of shareholders. however, the crisis that affected global financial stability and the economy in 2007/2008, the financial innovation has become risky (arthur, 2017), and a source of bank fragility (beck, chen, lin & song, 2016). researchers have revealed that the leading cause of crisis is the lack of how to govern innovation, specifically the management risk of innovation. consequently, the crisis has reinforced the need to rethink some of the approaches adopted by the financial community in assessing bank performance. to this end, it is important to obtain a comprehensive view of the key factors that may inf luence banks’ performance, including the adequacy of financial innovations choices in relation to risk management, and the question of how this adequacy is handled through banking governance. financial innovation, risk management, and bank performance 79 like the innovation in the industrial sector, the financial innovation is characterized by high risk, costly investment, specific asset to the firm, and longhorizon return (zouari & zouari-hadiji, 2014a; 2014b). these characteristics represent the factors bringing about agency conf licts between shareholders and stakeholders, on the one hand, and the opportunistic behavior of managers for the purpose of maximizing their wealth at the expense of stakeholders, on the other hand. according to the agency theory, managers are risk averse and innovation activity (minetti, murro & paiella, 2015) whereas the shareholders facilitate the innovation activity in order to increase company stability, and to generate value (asensio-lópez, cabeza-garcía & gonzález-álvarez, 2019). owing to the interest conf lict and information asymmetry problems between managers, shareholders and stakeholders, managers will be encouraged to take advantage of an opportunistic behavior. thereby, the manager’s behavior toward risk and corporate governance can affect the choice of innovation and risk management activities. moreover, depending on the transaction cost theory, williamson (1985) advocates that investing in specialized assets increases the transaction costs via providing concerns about exchange problems such as potential bargaining and opportunism. thus, innovations spur on risk-taking, generating costs. hence, risk management is necessary to reduce these costs and control risks. for the reasons mentioned above, our study aims to scrutinize the effect of financial innovation on risk management and bank performance. the rest of the paper is structured as follows. the next section deals with a literature review and hypothesis development. the subsequent section covers the methodology while the fourth one presents the analyses. the fifth section is about results and discussions, and the last one concludes, presents the limitations, and outlines possible future research. related literature and hypothesis development the research methodology and the course of the research process a conceptual model for this study is indicated in figure 1. our research asserts that financial innovation will have an inf luence on bank performance. the risk management is shown as a prominent mediator between financial innovation and bank performance. ghazi zouari, imen abdelmalek80 financial innovation and bank performance the financial innovation allows banks to create a competitive advantage through cost reduction with the aim of improving their financial performance via mitigating risk. innovation is so substantial that it contributes to the economic growth and stability of financial system (lerner & tufano, 2011). specifically, banks improve their quality, and enhance their performance by developing a financial innovation. for instance, they innovate new forms of financial securities, new forms of mortgage lending, new means of processing transactions, or new organizational forms such as internet banks. studying the diffusion of financial innovation has been linked to the speed and pattern. the diffusion of financial innovation is of great value for ensuring corporate return on investment from innovation (khraisha & arthur, 2018). de young, lang and nolle (2007) suggest that internet adoption makes the profitability of american community banks better. ciciretti, hasanand and zazzara (2009) provide evidence of a significant link between internet banking service and bank performance. in addition, mabrouk and mamoghli (2010) point out that the primary mover of product innovation improves the bank profitability, and the primary mover in process innovation has a positive effect on bank profitability and efficiency. mabrouk, dhouibi and rouetbi (2016) conclude that financial innovation is a value creation instrument for tunisian banks. several studies demonstrate as well that bank performance increase after the adoption of innovation (mustapha, 2018; chipeta & muthinja, 2018; lotto, 2019). hence, this study hypothesizes the following: h1. the financial innovation has a positive impact on the bank performance. financial innovation and risk management financial innovation is associated with risks (baiquan & kebao, 2010) leading to bank fragility (beck et al., 2016). these risks include market risk, credit risk and operational risk (baiquan & kebao, 2010). investment in financial innovation reinforces the financial risk management. the risk management is an essential part of the innovation lifecycle, and it helps address ambiguity and uncertainty. however, a few empirical studies have tested the relationship of financial innovation and risk management (hu, li & deng, 2009; baiquan & ke financial innovation, risk management, and bank performance 81 bao, 2010; gonzález, rodríguez gil, cunill & lindahl, 2016). philippas and siriopoulos (2009) analyze the relationship between financial innovation (process / organizational) and operational risk. their results indicate that the speed of diffusion of financial innovation increases operational risk. gonzález et al. (2016) add that securitization increases the overall default risk of european financial institutions. the results for study of zia, muhammad, sarwar and asif raz (2019) identified four areas of impact on credit risk management: corporate governance exerts the greatest impact, followed by diversification or innovation, which plays a significant role, hedging and, finally, the bank’s capital adequacy ratio. this study highlights these four risk management strategies, which are critical for commercial banks to resolve their credit risk. mabrouk et al. (2016) show that there is a significant direct effect of each innovation type (process / product) on credit risk, adopting that product innovation has increased the volume of non-performing loans of tunisian banks. therefore, we posit the hypothesis as follows: h2. the financial innovation has a positive impact on the risk management. risk management and bank performance the traditional role of banking intermediation is changing as the bank is operating in an uncertain financial environment. risk management becomes a relevant function reducing the costs and preventing distortions in investment policy (stulz, 2016; ellul, 2015). “the risk management as an active, strategic, and integrated process that encompasses both the measurement and the mitigation of risk, with the ultimate goal of maximizing the value of a bank” (coso, 2004). in the institutional theory framework, stulz and smith (1985) are the first introducing the relevant role of risk management at the firm, enhancing the firm value under inefficiency of market conditions. the risk management decreases the agency cost of equity or debt, and cost transaction. additionally, the bank uses the risk management to reduce the cost of financial distress by decreasing the default probability, and to increase the value of firms and shareholders. in the empirical studies, the relationship between risk management and bank performance is not usually positive. this is related to different determinants like country of studies. in fact, the risk management reduces the cost, ghazi zouari, imen abdelmalek82 but does not guarantee increase in the return on equity (olamide, uwalomwa & ranti, 2015; mendoza & rivera, 2017). in recent studies, zgarni and hassouna (2018) have perceived that prudential rules measured by the solvency ratio and liquidity ratio improve the accounting performance of tunisian banks. on the other hand, recent empirical contributions have given proof that the bank with chief risk officer (cro) maintains a positive relationship with bank performance and the value of shareholders (mcshane, nair & rustambekov, 2011; battaglia, fiordelisi & ricci, 2017). in the same context, fatemi and fooladi (2006) note that effective risk management leads to more balanced trade-off between risk and reward, to realize a better position in the future. the studies of hosna, manzura and juanjuan (2009), toutou and xiaodong (2011) and zeze (2012) found that have a positive correlation between the financial risk management practices to the financial performance of commercial banks. in this respect, wanjohi, wanjohi and ndambiri (2017) have discovered that an efficient risk management can help banks attenuate their exposure to risk and enhance their market competitiveness. moreover, the study on malaysian banks by trofimov, aris and ying ying (2018) also shows that the continuing need to manage credit risk is among the most important factors that explain high bank profitability. for paroush and schreiber (2019), there are significant relationship between profitability, capital, and risk of us commercial. furthermore, lotto (2019) revealed that capital adequacy has a positive relationship with bank operating efficiency, and reduce the risk of moral hazard between shareholders and dets-holders. findings of kiambati (2020) and sathyamoorthi, mogotsinyana, mphoeng and mashoko (2020) suggest that commercial banks should strike a proper balance between financial risk management practices and financial performance by engaging in appropriate market, credit, and liquidity risk management practices that will ensure safety for their banks and yield positive profits. consequently, we present the following hypothesis: h3. the risk management has a positive impact on the bank performance. financial innovation, risk management, and bank performance 83 the risk management as a mediator between financial innovation and bank performance the risk management is defined from different angles as institutional, regulatory or functional. from the regulatory angle, the risk management is determined by the prudential rules defined by the basel committee. we will focus on basel ii/iii agreements approved by tunisian banks. the complexity and dynamic of financial innovation have raised an uncertain environment. this uncertainty is at the origin of the bank’s lack of understanding of the new financial products, obsolete regulations and excessive risk-taking. several research studies show that the financial innovation is associated with high risk and contributed to the fragility of banks. according to the study of philippas and siriopoulos (2009), the diffusion of financial innovation raises the operational risk. hu and xie (2016) evince that innovation positively affects bank risk-taking. in line with these ideas, wang (2014) argues that the financial innovation decreases the bank value. similarly, chen and peng (2019) argue that financial innovation increase banks’ liquidity risk. they conclude that banks should ensure an appropriate management of financial innovation to improve their performance. in other words, the bank should monitor these risks correlated with the conf licts of interest between shareholders and stakeholders, and the opportunistic behavior of agents that could generate agency and transaction costs, and information asymmetry. these costs inf luence the profitability of the shareholders as well as the firm value, especially in the short term and in the long run, without managing the internal and external risks throughout the innovation process. in the governance framework, the financial institutions use risk management processes so as to minimize costs and control risks. the risk management allows to reduce the cost of investment innovation incurred due to agency conf lict. some studies have tested the mediating effect of risk management on the relationship between innovation and project management in non-financial companies (jordan, jorgensen & mitterhoferh, 2013). however, guermazi (2017) has studied the mediating role of risk management in financial corporations, and has realised that the improvement in insurance and bank quality throughout innovation depends on the mediating role of risk management. ghazi zouari, imen abdelmalek84 in our paper, we will look for the existence of a mediating effect of risk management between innovation and the bank performance. accordingly, we deduce the following hypothesis: h4. risk management mediates the relationship between financial innovation and bank performance. figure 1. research model mediating effect of risk management on the relationship between innovation and project management in non-financial companies (jordan, jorgensen & mitterhoferh, 2013). however, guermazi (2017) has studied the mediating role of risk management in financial corporations, and has realised that the improvement in insurance and bank quality throughout innovation depends on the mediating role of risk management. in our paper, we will look for the existence of a mediating effect of risk management between innovation and the bank performance. accordingly, we deduce the following hypothesis: h4. risk management mediates the relationship between financial innovation and bank performance. figure 1. research model h4 source: author's modeling, 2019. research methodology this section aims to test the impact of the characteristics of financial innovation on the bank performance. this effect is mediated by risk management. to do this, we will present our sample, the response and explanatory variables, and the regression analysis. presentation of data and variable measurements the data is collected from 10 tunisian listed commercial banks1 listed on the tunis stock exchange. all the relevant data is obtained from the bank annual reports, and reference documents of financial market council in the period spanning from 2009 through 2017. our choice of this period is based on the availability of data and it represents a post 1 atb : arab tunisian bank, biat : banque internationale arabe de tunisie, ab :amen bank, ubci :union bancaire pour le commerce et l’industrie, attijari :attijari bank, uib :union internationale de banque, bt :banque de tunisie, bna :banque nationale agricole, stb :société tunisienne de banque, bh :banque de l’habitat. h2 h1 h3 risk management financial innovation bank performance control variables s o u r c e : author’s modeling, 2019. research methodology this section aims to test the impact of the characteristics of financial innovation on the bank performance. this effect is mediated by risk management. to do this, we will present our sample, the response and explanatory variables, and the regression analysis. presentation of data and variable measurements the data is collected from 10 tunisian listed commercial banks1 listed on the tunis stock exchange. all the relevant data is obtained from the bank annu1 atb: arab tunisian bank, biat: banque internationale arabe de tunisie, ab: amen bank, ubci: union bancaire pour le commerce et l’industrie, attijari: attijari bank, uib: union internationale de banque, bt: banque de tunisie, bna: banque nationale agricole, stb: société tunisienne de banque, bh: banque de l’habitat. financial innovation, risk management, and bank performance 85 al reports, and reference documents of financial market council in the period spanning from 2009 through 2017. our choice of this period is based on the availability of data and it represents a post-financial crisis period from 2007/2008 so as not to bias the results by the effect of this crisis on banking performance. in sum, the total number of tunisian banks selected for statistical testing amounts to 10 banks, making up a total number of observations equal to 90. dependent variables according to the european central bank (ecb, 2010), the bank performance is defined as the “capacity to generate sustainable profitability”. therefore, and as in previous studies, we use two measures of bank performance. following mabrouk and mamoghli (2010), zouari and zouari-hadiji (2014a; 2014b)2 and wanjohi et al. (2017), the first one is the return on equity as a traditional measure of performance, ref lecting the ability of a bank to generate profits through investment (return on assets “roe” = operating income before depreciation and r&d / total equity). the second one is the market to book value as marketbased measures of performance, relating the market value of stockholders’ equity to its book value (market to book “mtb” = market capitalization / book value of equity). independent variables through empirical studies, financial innovation is assessed, using two different types of input and output ratios (stone, shipp & leader, 2008), and it is measured by three different ways. the first measurement indicator is the innovation index (heffernan, fu & fu, 2008) that has been converted into percentages to facilitate exposure, and can vary from 0 % to 100%. the second measurement indicator is banking channels such as atm’s, mobile payment, call center, mobile banking, internet banking, pos (point of sale) terminals and branch (de young, lang & nolle, 2007; ciciretti, hasanand & zazzara, 2009; 2 this measurement of the accounting performance has the advantage of eliminating the effect of accounting choices related to the treatment of r & d in the financial statements largely subject to the opportunism of managers. ghazi zouari, imen abdelmalek86 usman, 2016; tunay, tunay & akhisar, 2015). the last measurement one is the financial r&d intensity (value added) and the financial r&d intensity (cost) (beck et al., 2016). based on indicators of oslo manuel via the oecd/eurostat (2005), we use input ratios for the purpose of measuring the financial innovation, ref lecting the acquisition of capital goods related to innovation activities. these activities include, on the one hand, the acquisition of external knowledge and technology (patents, licenses, software, trademarks…) and, on the other hand, the acquisition of machinery, equipment, and other capital goods. fininn is the ratio of the sum of tangible and intangible assets related to innovation to total assets (oecd, 2005; beck et al., 2016). mediating variable the stability of the bank is linked to an effective risk management through applying regulatory conditions (halim, mustika, sari, anugerah & mohd-sanusi, 2017). risk management is assessed in two different ways: prudential and operational. we use the prudential proxy on the basis of the measure applied on the second basel accords by basel committee (el attar & atmani, 2015). we take on capital adequacy ratio (car), credit risk-weighted asset ratio (crw) and operational risk-weighted asset ratio (orw) so that we can measure the bank risk management. car is a measure of the amount of bank’s core capital expressed as a percentage of its risk-weighted asset, determining the bank’s capacity to meet liabilities and other risks such as credit and operational risks. crw is the ratio of credit risk-weighted asset to total risk-weighted asset. orw is the ratio of operational risk-weighted asset to total risk-weighted asset. control variables control variables are specific to banks which are: non-performing loans (npls) as the ratio of non-performing loans to total loans, liquidity coverage ratio (lcr) as liquid assets to liquid liabilities, operational efficiency (oe) as the ratio of operating incomes to operating expenses (malhotra & singh, 2009; arnaboldi & rossignoli, 2015; piyananda, chandrasena & fernando, 2015). financial innovation, risk management, and bank performance 87 regression model specifications the empirical study, as undertaken in our work, is based on using hierarchical regression models3 for the purpose of testing the research of advanced hypotheses. for the assumptions made to be assessed via a procedure achievable through the construction of four models, it seems necessary to test the existence of a mediating effect. baron and kenny (1986) consider four conditions for a complete mediating effect to be checked in terms of car, crw, orw of the fininnroa, mtb relationship. these conditions are the following: (1) the independent variable (fininn) has a significant impact on the bank performance (roa, mtb). (2) the fininn significantly inf luences the mediator variable (car, crw, orw). (3) when the inf luence of car, crw, orw on the bank performance is taken into account, the fininn will have no significant effect on performance. (4) the direct effect of fininn on performance should be null, or reduced by the insertion of the mediator variable in order to deduce its mediating impact within the relationship. econometrically, we first estimate model 1 with the aim of testing the direct effect of fininn on bank performance (roa, mtb), and validating hypothesis (h1). 3 in this work, the treatment of mediating variables should follow the approach devised by baron and kenny (1986). this framework, which aims at testing the mediating effect, is implemented via a multiple-hierarchical regression. this analysis consists in assessing the total effect (cumulative) of the explanatory variables on a certain criterion. the method can be performed on the basis of several steps. firstly, it undertakes to test the predictor effect (independent variable) firstly on the criterion (dependent variable), and secondly on the mediator using partial and simple regressions. then, the other relationship has to be tested (predictor and mediator on the criterion). in this case, a multiple-hierarchical regression has to be applied. it consists in gradually introducing certain independent variables into the regression equation: starting with the predictor and control variables (step 1), and then the mediating variable (step 2). upon reaching an increase in the adjusted r² after inserting the mediator, it will be possible to assume the mediator effect on the relationship between the predictor and the criterion, zouari and zouari-hadiji (2014a; 2014b). ghazi zouari, imen abdelmalek88 assumptions made to be assessed via a procedure achievable through the construction of four models, it seems necessary to test the existence of a mediating effect. baron and kenny (1986) consider four conditions for a complete mediating effect to be checked in terms of car, crw, orw of the fininnroa, mtb relationship. these conditions are the following: (1) the independent variable (fininn) has a significant impact on the bank performance (roa, mtb). (2) the fininn significantly influences the mediator variable (car, crw, orw). (3) when the influence of car, crw, orw on the bank performance is taken into account, the fininn will have no significant effect on performance. (4) the direct effect of fininn on performance should be null, or reduced by the insertion of the mediator variable in order to deduce its mediating impact within the relationship. econometrically, we first estimate model 1 with the aim of testing the direct effect of fininn on bank performance (roa, mtb), and validating hypothesis (h1). 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� second, we estimate the relationship between fininn and risk management (car, crw, orw) so as to validate hypothesis (h2) 𝑅𝑅𝑅𝑅�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� afterwards, we estimate the relationship between risk management (car, crw, orw) and bank performance (roa, mtb) for validating hypothesis (h3) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� eventually, we examine the indirect relationship between fininn and bank performance (roe, mtb), using the effect of risk management (car, crw, orw) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛾𝛾��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� ( 𝐻𝐻𝐻𝐻 pit = bank performance measured by roait and mtbit ratios fininnit = financial innovation measured by the ratio = sum of tangible and intangible assetit / innovation to total assetit ) rmit = risk management measured by carit ,crwit and orwit zit = control variables measured by nplit,lcrit and oeit   and , : parameters to be estimated  iε : the random error second, we estimate the relationship between fininn and risk management (car, crw, orw) so as to validate hypothesis (h2) assumptions made to be assessed via a procedure achievable through the construction of four models, it seems necessary to test the existence of a mediating effect. baron and kenny (1986) consider four conditions for a complete mediating effect to be checked in terms of car, crw, orw of the fininnroa, mtb relationship. these conditions are the following: (1) the independent variable (fininn) has a significant impact on the bank performance (roa, mtb). (2) the fininn significantly influences the mediator variable (car, crw, orw). (3) when the influence of car, crw, orw on the bank performance is taken into account, the fininn will have no significant effect on performance. (4) the direct effect of fininn on performance should be null, or reduced by the insertion of the mediator variable in order to deduce its mediating impact within the relationship. econometrically, we first estimate model 1 with the aim of testing the direct effect of fininn on bank performance (roa, mtb), and validating hypothesis (h1). 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� second, we estimate the relationship between fininn and risk management (car, crw, orw) so as to validate hypothesis (h2) 𝑅𝑅𝑅𝑅�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� afterwards, we estimate the relationship between risk management (car, crw, orw) and bank performance (roa, mtb) for validating hypothesis (h3) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� eventually, we examine the indirect relationship between fininn and bank performance (roe, mtb), using the effect of risk management (car, crw, orw) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛾𝛾��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� ( 𝐻𝐻𝐻𝐻 pit = bank performance measured by roait and mtbit ratios fininnit = financial innovation measured by the ratio = sum of tangible and intangible assetit / innovation to total assetit ) rmit = risk management measured by carit ,crwit and orwit zit = control variables measured by nplit,lcrit and oeit   and , : parameters to be estimated  iε : the random error afterwards, we estimate the relationship between risk management (car, crw, orw) and bank performance (roa, mtb) for validating hypothesis (h3) assumptions made to be assessed via a procedure achievable through the construction of four models, it seems necessary to test the existence of a mediating effect. baron and kenny (1986) consider four conditions for a complete mediating effect to be checked in terms of car, crw, orw of the fininnroa, mtb relationship. these conditions are the following: (1) the independent variable (fininn) has a significant impact on the bank performance (roa, mtb). (2) the fininn significantly influences the mediator variable (car, crw, orw). (3) when the influence of car, crw, orw on the bank performance is taken into account, the fininn will have no significant effect on performance. (4) the direct effect of fininn on performance should be null, or reduced by the insertion of the mediator variable in order to deduce its mediating impact within the relationship. econometrically, we first estimate model 1 with the aim of testing the direct effect of fininn on bank performance (roa, mtb), and validating hypothesis (h1). 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� second, we estimate the relationship between fininn and risk management (car, crw, orw) so as to validate hypothesis (h2) 𝑅𝑅𝑅𝑅�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� afterwards, we estimate the relationship between risk management (car, crw, orw) and bank performance (roa, mtb) for validating hypothesis (h3) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� eventually, we examine the indirect relationship between fininn and bank performance (roe, mtb), using the effect of risk management (car, crw, orw) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛾𝛾��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� ( 𝐻𝐻𝐻𝐻 pit = bank performance measured by roait and mtbit ratios fininnit = financial innovation measured by the ratio = sum of tangible and intangible assetit / innovation to total assetit ) rmit = risk management measured by carit ,crwit and orwit zit = control variables measured by nplit,lcrit and oeit   and , : parameters to be estimated  iε : the random error eventually, we examine the indirect relationship between fininn and bank performance (roe, mtb), using the effect of risk management (car, crw, orw) assumptions made to be assessed via a procedure achievable through the construction of four models, it seems necessary to test the existence of a mediating effect. baron and kenny (1986) consider four conditions for a complete mediating effect to be checked in terms of car, crw, orw of the fininnroa, mtb relationship. these conditions are the following: (1) the independent variable (fininn) has a significant impact on the bank performance (roa, mtb). (2) the fininn significantly influences the mediator variable (car, crw, orw). (3) when the influence of car, crw, orw on the bank performance is taken into account, the fininn will have no significant effect on performance. (4) the direct effect of fininn on performance should be null, or reduced by the insertion of the mediator variable in order to deduce its mediating impact within the relationship. econometrically, we first estimate model 1 with the aim of testing the direct effect of fininn on bank performance (roa, mtb), and validating hypothesis (h1). 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� second, we estimate the relationship between fininn and risk management (car, crw, orw) so as to validate hypothesis (h2) 𝑅𝑅𝑅𝑅�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� afterwards, we estimate the relationship between risk management (car, crw, orw) and bank performance (roa, mtb) for validating hypothesis (h3) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� eventually, we examine the indirect relationship between fininn and bank performance (roe, mtb), using the effect of risk management (car, crw, orw) 𝑃𝑃�� = 𝛼𝛼 𝛼 𝛼𝛼��𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�� 𝛼 𝛾𝛾��𝑅𝑅𝑅𝑅�� 𝛼 𝛿𝛿�𝑍𝑍�� 𝛼 𝜀𝜀�� ( 𝐻𝐻𝐻𝐻 pit = bank performance measured by roait and mtbit ratios fininnit = financial innovation measured by the ratio = sum of tangible and intangible assetit / innovation to total assetit ) rmit = risk management measured by carit ,crwit and orwit zit = control variables measured by nplit,lcrit and oeit   and , : parameters to be estimated  iε : the random error pit = bank performance measured by roait and mtbit ratios fininnit = financial innovation measured by the ratio = sum of tangible and intangible assetit / innovation to total assetit ) rmit = risk management measured by carit ,crwit and orwit zit = control variables measured by nplit,lcrit and oeit ■ β, γ and α : parameters to be estimated ■ ε1 : the random error analyses in order to test the hypothetical relationships, our research has followed the commonly established two-stage procedure. the first stage is the descriptive statistics and correlation results. indeed, the normality of the variables is supposed to be checked because the number of observations is greater than 30. financial innovation, risk management, and bank performance 89 according to the pearson correlation, as shown in table 1, there are no correlations exceeding 0.5 between our explanatory variables, which means the absence of multi-collinearity problems between the independent variables. table 1. descriptive statistics and pearson correlation matrix mean (s.d)a 1 2 3 4 5 6 7 roe 0.12 0.11 mtb 1.51 0.97 1 fininn 0.09 0.11 1 2 car 0.11 0.03 -0.103 1 3 crw 0.89 0.11 0.032 -0.0003 1 4 orw 0.09 0.02 0.1427 0.151 -0.184 1 5 npl 0.13 0.09 -0.196 -0.221 0.025 -0.463 1 6 lcr 1.08 0.43 -0.0111 0.184 0.020 0.284 -0.119 1 7 oe 3.28 5.17 -0.122 -0.249 -0.018 -0.291 0.291 -0.167 1 n o t e : astandard deviation. all correlations between variables are significantly smaller than 0.6 (threshold at which we begin to experience serious problems of multi-colinearity). in the pearson test and the index of conditioning, we have found that these variables are distinct from each other and are not significant (correlation thresholds are above 10% ,and the packaging is less than 1000). s o u r c e : author’s computation, 2019. in the second stage, the relationship between the variables are analysed by using panel data, following the method of baron and kenny (1986). to start with, the test of homogeneity is conducted to validate the existence of individual effects in models. referring to table 2, the results show that the p-values associated with the f-statistic calculated for each model are less than 1% and 10%, except for models 4 and 10 which do not require specific effects. these two models will be estimated with pooled ols regression. the second specification test determines the nature of the specific effects to be either of random or fixed type. the hausman test is the most appropriate one to specify the preferred model. the null hypotheses of models 2 and 11 which are rejected (p-values < 1%) are estimated by the fixed effects. given these results, the final model to be estimated will be a heterogeneous panel of random effects for 1,3,5,6,7,8,9 models. ghazi zouari, imen abdelmalek90 aiming to achieve better results, we need to check the problem of heteroscedasticity and autocorrelation of errors. the breush-pagan test accepts the null hypothesis for models 2,3,4,5,9,10 whereas for models 1,6,7,8,11, the test detects heteroskedasticity problems (p-values are less than 5%).the intra-individual autocorrelation test by wooldrigde (2002) spots an autocorrelation problem for models 2,5,7,8,9,11, and no serial autocorrelation for models 1,3,4,6,10. eventually, the panel of models 4 and 10 are evaluated by pooled ols regression. the panel models 3,2,5,9 are homoscedastic and uncorrelated, and are estimated by fixed effects / random effects with an autocorrelation correction if necessary for models 2,5 and 9. models 1 and 6 are characterized by the presence of a heteroskedasticity problem and lack of autocorrelation. we use the model of random effects in order to correct the heteroskedasticity problem, and to correct the standard deviations by the eicker-white method with the “robust” option. models 7,8 and 11 present a problem of heteroscedasticity and autocorrelation of the residues. in this regression, the method of clustered standard errors is applied for correcting standard deviations of heteroscedasticity and autocorrelation. results and discussions with the intention of testing the research hypothesis, multiple regression analysis is performed, and the outcomes are displayed in table 2. in model 1, the study estimates the effect of financial innovation on the bank performance to assess h1. the regression analysis in model 1 provides different results across the samples. the overall quality of the model is significantly acceptable. however, the findings show that there is a non-significant relationship between financial innovation and roe while there is a positive relationship between financial innovation and mtb (ß= 1.48, p < 0.01). the first hypothesis applying that financial innovation positively inf luences the mtb is supported. these findings confirm the previous studies such as of mabrouk and mamoghli (2010), xiangying, yueyan and xianhua (2015) and aayale (2017). the positive effect thus found reinforces the assertions of mustapha (2018) that investment in innovation enhances bank performance. however, there is no impact of financial innovation on roe. these outcomes are inconsistent with prior results (de young, lang & nolle, 2007; mabrouk & mamoghli, 2010; chipeta & muthinja, 2018). financial innovation, risk management, and bank performance 91 in model 2, the study estimates the effect of financial innovation on risk management to evaluate h2. the overall quality of model 2 is significantly acceptable (chi2=43.10, f=2.52, chi2=252.59, p<1%), but the f-statistic is insignificant for the credit risk management variable (f=2.52, p >10%). in condition 2, the analysis records negative and significant beta coefficients across car and orw, which is not verified for credit risk management. as a matter of fact, this result partially validates h2, and confirms the findings in the previous empirical research stating that innovation inf luences risk management (philippas & siriopoulos, 2009; mabrouk et al., 2016; zia et al., 2019). our research seeks to assess the mediating impact of risk management on the relationship between financial innovation and bank performance in h2 and h3. the overall quality of models 3, 4 and 5 is significantly acceptable, but only for model 3, the relationship between risk management and bank performance is insignificant (t=0.701, t=0.45, p>10%). at the detailed level, the impact of risk management on bank performance shows a positive relationship between financial risk management and bank performance. the findings provide evidence that the assertion made by fatemi and fooladi (2006), hosna et al. (2009), toutou and xiaodong (2011), zeze (2012), trofimov et al. (2018) and zgarni and hassouna (2018) sets out that risk management improves the bank performance. similarly, the research of kiambati (2020) and sathyamoorthi et al. (2020) demonstrated that there is a relationship between credit risk and shareholder market value among the commercial banks. but there is an insignificant relationship between car and bank performance, these results are consistent with the findings of mendoza and rivera (2017) who found that capital adequacy has no significant effect of bank profitability while, they findings contradict the empirical studies of wang (2014) and lotto (2019). considering the fact that the first and the second conditions are met, the study performs the mediating effect in models 3, 4 and 5. if a non-significant coefficient is found for the dependent variable (bank performance) as the mediator (risk management) is introduced into the equation, full mediation will occur. if the coefficient of the dependent variable remains significant in the presence of the mediator variable in models 3, 4 and 5, partial mediation will take place. models 3 and 4 test the mediating effect of credit risk management, and total risk management shows there is a direct relationship between financial innovation and mtb, but a lack of relationship between financial innovation and roe. model 5 assesses the mediating impact of operational risk ghazi zouari, imen abdelmalek92 management, and proves that operational risk management partially mediates the relationship between financial innovation and stock market performance. however, there is no effect with the roe. these results are consistent with the findings of guermazi (2017) who finds out that risk management mediates innovation, and service quality of banks and insurance. our paper has shown and corroborated that the more the bank innovates, the greater it improves its market value. moreover, the research in the banking sector is usually interested in financial risk even though the operational risk is becoming relevant in an uncertain environment. our article accounts for the impact of operational risk management on market performance, which relates to the credibility of information and the reputation of banks. banks in tunisia should focus more attention on capacity building and special training of bank managers whose function relate to financial innovations, credit and loans to serve as a conduit of giving them sufficient knowledge on how to deal with innovation issues and mitigate risks faced by these banks in order to improve their performance. in addition, banks should do more efforts for contribute to revitalize the growth of the economy by investing in research and development and managing risks effectively in order to increase the performance.  conclusions our paper reports the results of an empirical model including financial innovation, risk management and bank performance of 10 tunisian listed commercial banks. a theoretical framework has been empirically tested, and the main purpose of our study is to investigate the mediating role of risk management between financial innovation and bank performance. our findings support the four hypotheses specified, and indicate a significant implication for the theory and empirical research. the initial hypothesis confirms a positive and significant relationship between financial innovation and market performance. on the other hand, the result shows there is a non-significant relationship between financial innovation and financial performance, which contradicts previous empirical research. in hypothesis 2, there is a positive and significant relationship between financial innovation, operational risk management and capital adequacy ratio. we also find a non-significant relationship between financial innovation and credit risk management. in hypoth financial innovation, risk management, and bank performance 93 esis 3, we prove that the relationship is positive and significant between operational risk management and bank performance as well as between credit risk management and financial performance. this hypothesis is not supported for global risk management. in hypothesis 4, we have provided evidence that there is a partial mediating effect of operational risk management between financial innovation and bank performance. in addition, we also find out an indirect relationship between financial innovation and market performance through credit risk management. the findings of the study are significant as tunisian commercial banks will understand the effectiveness of various risk management strategies (especially, innovation) and may apply them for minimizing risks incurred and enhance their market competitiveness. like any other research, this study has some limitations, and presents some new opportunities for future studies. our findings can be generalized to other countries. future studies may seek an alternative dataset such as a survey, can use an analysis method like a structural equation modeling and might apply our research in islamic banks. eventually, a theoretical model can also be extended by integrating a different typology of financial innovation such as product innovation, process innovation and organizational innovation. ghazi zouari, imen abdelmalek94 t ab le 2 . r eg re ss io n re su lt s v ar ia bl es co nd it io n 1 co nd it io n 2 co nd it io n 3 m od el 1 : di re ct e ff ec t m od el 2 : m ed ia to rs m od el 3 c a r m ed ia ti on m od el 4 c r w m ed ia ti on m od el 5 o r w m ed ia ti on r o e m tb ca r cr w o r w r o e m tb r o e m tb r o e m tb co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) in n 0. 04 6 (0 .9 6) 1. 48 0* ** (3 .6 7) -0 .0 28 ** (2. 58 ) 0. 04 3 (0 .8 9) -0 .0 3* ** (3. 35 ) 0. 06 (0 .6 7) 0. 94 8* * (2 .5 2) 0. 04 7* (1 .7 0) 1. 79 7* * (2 .5 1) 0. 01 5 (0 .2 5) 1. 60 7* ** (3 .0 8) c a r 0. 70 1 (0 .4 5) 2. 94 4 (1 .1 6) cr w -0 .1 34 (0 .6 7) 0. 33 4* ** (2 .6 5) o rw 1. 98 6 (1 .4 7) 8. 96 4* * (2 .0 9) n pl -0 .1 31 (0. 58 ) 1. 69 2 (0 .1 54 ) -0 .0 05 (0. 24 ) 0. 11 9 (1 .6 9) -0 .0 52 (-1 .2 9) -0 .1 02 (0. 53 ) 0. 2 (0 .6 4) -0 .5 21 ** * (4. 49 ) 0. 36 2 (0 .0 6) -0 .6 71 (-1 .6 0) -5 .5 34 ** * (2. 89 ) lc r 0. 02 9* * (2 .1 7) 0. 28 3 (1 .2 2) 0. 00 6 (0 .7 0) 0. 00 6 (0 .3 4) -0 .0 00 7 (0. 29 ) 0. 02 3* (1 .7 2) 0. 36 4* ** (2 .9 7) 0. 02 6* ** (3 .2 2) 0. 30 7 (1 .1 4) 0. 00 5 (0 .2 3) 0. 09 8 (0 .6 3) o e -0 .0 02 (-1 .0 7) 0. 03 1 (0 .9 6) -0 .0 00 5* (01 .7 2) -0 .0 01 (0. 57 ) -0 .0 00 2 (0. 80 ) -0 .0 02 (0. 57 ) 0. 02 (0 .2 3) -0 .0 03 (-1 .4 5) 0. 10 1* (1 .9 1) 0. 00 4 (0 .5 5) 0. 02 7 (0 .6 7) co ns ta nt 0. 11 3* * (2 .3 5) 0. 63 9* * (2 .4 7) 0. 10 1* ** (7 .4 8) 0. 87 1* ** (2 3. 20 ) 0. 10 2* ** (9 .9 8) 0. 34 (0 .1 6) 0. 53 5 (0 .4 4) 0. 05 1 (0 .2 8) 0. 38 1 (0 .6 2) 0. 00 9 (0 .0 8) 0. 97 3* (1 .8 3) fi sh er 5. 09 ** 2. 52 * 8. 73 ** * financial innovation, risk management, and bank performance 95 v ar ia bl es co nd it io n 1 co nd it io n 2 co nd it io n 3 m od el 1 : di re ct e ff ec t m od el 2 : m ed ia to rs m od el 3 c a r m ed ia ti on m od el 4 c r w m ed ia ti on m od el 5 o r w m ed ia ti on r o e m tb ca r cr w o r w r o e m tb r o e m tb r o e m tb co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) co ef . (p -v al ue ) w al d ch i2 -t es t 29 .2 8* ** 43 .1 0* ** 25 2. 59 ** * 43 .2 1* ** 15 .7 9* ** 77 .8 7* ** 16 7. 63 ** * 45 .8 6* ** h om og en ei ty te st 1. 94 * 7. 23 ** * 10 .4 5* ** 0. 94 16 .1 3* ** 1. 89 * 6. 91 ** * 1. 74 * 6. 00 ** * 1. 39 4. 57 ** * h au sm an t es t 2. 37 23 .4 4* ** 3. 86 4. 80 1. 56 6. 84 2. 56 7. 54 14 .3 9* * m od el re fe re po ol ed re re re re re po ol ed fe h et er os ce da st ici ty t es t 3. 07 * 2. 34 1. 40 6. 36 ** 0. 22 43 .1 3* ** 26 .7 2* ** 4. 86 ** 1. 27 29 .7 1* ** 4. 84 ** w oo lr id ge t es t 0. 60 24 .0 9* ** 2. 29 29 .8 82 ** * 8. 34 ** 0. 73 40 .7 3* ** 12 .9 0* ** 17 .9 6* ** 0. 06 4 17 .3 5* ** rsq ua re d 0. 07 62 0. 13 07 0. 11 34 0. 00 49 0. 22 59 0. 09 18 0. 15 88 0. 17 24 0. 23 23 0. 24 05 0. 33 39 a dj r -s qu ar ed 0. 02 34 0. 08 10 0. 06 27 -0 .0 63 7 0. 17 25 0. 02 59 0. 09 78 0. 09 98 0. 16 50 0. 17 39 0. 27 55 r o b u s t s ta n d a r d e r r o r s i n p a r e n th e s e s : * ** p< 0. 01 , * *p < 0. 05 , * p< 0. 1. f e: fi xe d ef fe ct ; r e: r an do m e ff ec t; p oo le d o ls : o rd in ar y le as t sq ua re . n um be r of o bs er va ti on s of f a ll m od el s = 63 . s o u r c e : a ut ho r’ s co m pu ta ti on , 2 01 9. t ab le 2 . r eg re ss io n… ghazi zouari, imen abdelmalek96  references aayale, j. 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(2014a). directors’ board, r&d investment and the firm’s performance: evidence from the french case. corporate board: role, duties & composition, 10(2), 85-101. http://dx.doi.org/10.22495/cbv10i2art7. zouari, g., & zouari-hadiji, r. (2014b). the indirect impact of the board of directors’ composition on the firm’s performance: an international comparison. asian journal of empirical research, 4(10), 468-487. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: august 17, 2014; date of acceptance: september 30, 2014. * contact information: nvk_66@mail.ru, financial university under the government of the russian federation, 49 leningradsky prospekt, moscow, russia, phone: +7 915 147 32 21. kirillova n. (2014). regulation of financial condition insurers in the russian federation and assessment the insurers by insured. copernican journal of finance & accounting, 3(2), 79–89. http://dx.doi.org/10.12775/cjfa.2014.019 nadezda kirillova* financial university under the government of russian federation regulation of financial condition insurers in the russian federation and assessment the insurers by insured keywords: regulation of the financial condition, russian insurance companies. j e l classification: g18, g22. abstract: in the article describes the main regulations for the financial condition of russian insurance companies: examined statutory capital requirements of insurers, the solvency margin, formation and placement the insurance reserves, covering equity by assets; are given the main characteristics of indicators, identifies areas of development; used data from supervisory authorities of the russian federation, the official statistics, the results of research consulting, insurance data, regulatory framework; based on the results of the article conclusions are drawn on adequate regulation of insurers’ financial stability in the modern russian insurance market and the necessity to compliance with legal requirements; made the assumption that there is no necessity to tighten regulatory requirements for companies. regulacje finansowe rynku ubezpieczeń w federacji rosyjskiej oraz ocena działalności firm ubezpieczeniowych przez ubezpieczonych słowa kluczowe: regulacja kondycji finansowej, rosyjskie firmy ubezpieczeniowe. nadezda kirillova80 klasyfikacja j e l: g18, g22. abstrakt: w artykule przedstawiono podstawowe regulacje dotyczące sytuacji finansowej rosyjskich firm ubezpieczeniowych: zbadano ustawowe wymogi kapitałowe ubezpieczycieli, margines wypłacalności oraz tworzenie i rozwiązywanie rezerw ubezpieczeniowych. zaprezentowano również główne wskaźniki identyfikujące obszary rozwoju rynku ubezpieczeniowego. w pracy wykorzystano dane pochodzące z organów nadzoru federacji rosyjskiej, oficjalnych statystyk, wyników badań obcych, danych doradztwa ubezpieczeniowego oraz odpowiednich przepisów regulacyjnych. na podstawie wyników przeprowadzonych badań przedstawiających regulacje w zakresie stabilności finansowej zakładów ubezpieczeń na współczesnym rosyjskim rynku ubezpieczeń wskazano, że nie ma konieczności, aby zwiększać wymogi regulacyjne dla tych przedsiębiorstw.  introduction insurer financial strength is a major factor in the implementation of insurance liabilities. currently, insurance becomes one of the real instruments to support the financial condition of the enterprises, the quality of life, solution of social problems, along with the implementation of the investment function. russian insurance market in 2013 slowed his development. return on equity of russian insurance companies in 2013 was equal to 6% (minimum within five years) (jurgens 2014). currently the companies of russian insurance market, table 1, are faced with many challenges. table 1. premiums and payments (type of insurance) in russian federation, 2013 type of insurance premiums payments bln. rub. % % prev. year bln.rub % % prev. year life insurance 84.89 9.4 160.5 12.33 2.9 92.4 personal insurance (non life) 208.73 23.1 113.2 103.14 24.5 110.9 property insurance 393.82 43.5 104.6 201.73 48.0 111.0 liability insurance 29.74 3.3 99.4 7.14 1.7 133.0 business and financial risks 21.95 2.4 110.2 1.66 0.4 79.4 total voluntary insurance 739.13 81.7 111.4 326.0 77.5 110.3 compulsory insurance of civil liability motor owners 134.25 14.8 110.3 77.37 18.4 119.0 regulation of financial condition insurers… 81 type of insurance premiums payments bln. rub. % % prev. year bln.rub % % prev. year other than medical and motorcycle 31.48 3.5 109.4 17.4 4.1 144.9 total compulsory 165.73 18.3 110.2 94.77 22.5 123.1 total voluntary and compulsory 904.86 100.0 111.1 420.77 100.0 112.9 s o u r c e : the central bank of the russian federation. in recent years, the basic system calls became a sharp increase in the requirements for the minimum authorized capital, the wave of lawsuits on complaints of policyholders to delay and the refusal insurance payments (mainly on compulsory motor tpl insurance), the last massive insurance claims in insurance tourists (compensation according to various estimates may be required 25 thousands of tourists; for example, the insurance company “military insurance company” in august, took two days about 12 thousand applications from customers of travel agency “labyrinth” for a total amount of 453 million rubles) (all-russian insurance association 2014). however, their main task is to perform insurance liabilities. consider the basic requirements for the financial condition of russian insurers. the research methodology and the course of the research process the aim of the paper is to present author’s approach to the identification of the financial condition of russian insurance companies. the author will analyze the legal requirements for the financial condition of russian insurers. also, the author will how to change the qualitative and quantitative status of insurance companies, depending on the requirements imposed on them. the paper is divided into two major parts. the first part is related to characteristic the basic regulatory requirements for the financial condition of insurance companies in russia. author presents in detail the legal requirements for minimum registered capital, requirements for the formation (composition) and the placement of insurance reserves and the covering own funds by assets, the solvency margin requirements for insurers, net assets of joint stock companies. the second part is related the assessment the insurers by insured. it contains a brief description of idea comprehensive analysis of the insurance company consumers of insurance services, draws conclusions on the adequacy of the legal requirements nadezda kirillova82 for the financial condition of insurance companies. methodological principles served as the basis of the system approach, methods of comparative analysis, synthesis, construction of classifications. the study is based on the russian legal basis, statistical databases of the russian supervisory authority, practical experience of the author. basic regulatory requirements for the financial condition of insurance companies in russia the main item for the fulfillment liabilities to the insured is a stable financial condition of insurance companies. requirements for the financial condition defined supervisory authority. starting from september 2013 it is the central bank of the russian federation. in accordance with russian legislation the guarantees by the financial stability of the insurer are: ■ economically reasonable insurance tariffs; ■ insurance reserves, sufficient for the fulfillment obligations under contracts of insurance, coinsurance, reinsurance, mutual insurance; ■ equity; ■ reinsurance. mandatory requirements for the financial condition of insurers include following items: ■ the minimum authorized capital; ■ solvency margin; ■ placement of insurance reserves; ■ covering own funds by the assets; ■ net assets for open joint stock company. consider the contents of these requirements in details. the minimum authorized capital was increased by 4 times from january 1, 2012, and is now 120 mln. r. for insurers other than life; 240 mln. r. for life insurance and 480 mln. r. for reinsurance table 2. this entailed a sharp decline in the number of insurance companies, table 3, increased market concentration. the total authorized capital of russian insurers in june 2014 amounted to 219332,4 mln. r. (all-russian insurance association 2014). regulation of financial condition insurers… 83 table 2. distribution of insurance companies by authorized capital authorized capital, th. rub. number of insurance companies share branches total 402 100 5180 until 20 000 1 0,2 – from 20 001 to 40 000 – – – from 40 001 to 60 000 23 5,7 115 from 60 001 to 80 000 27 6,7 196 from 80 001 to 100 000 7 1,7 84 more, than 100 000 344 85,6 4785 s o u r c e : federal state statistics service. a steady decline in the number of insurance companies – a consequence of not only increasing requirements to the financial condition, in particular, the size of the authorized capital, but also a set of measures to rid the market of the schemes, unscrupulous insurers. insurers have to invest their own funds on the terms of diversification, liquidity, repayment and profitability. insurers do not have the right to invest own funds in the bill of legal entities, individuals and grant loans due its own funds. table 3. number of the insurance companies in russian federation year 2005 2006 2007 2008 2009 2010 2011 2012 2013 number of the insurance companies 1075 918 869 814 722 640 587 458 402 s o u r c e : own study based on: federal state statistics service, the central bank of the russian federation. solvency margin – in russia is determined by the type of solvency 1, when comparing 16% of the premiums per year and the arithmetic mean of 23% of payments per three years; the maximum value (standard margin) must exceed the actual (own funds) more than 30%. if the actual solvency margin exceeds the normative solvency margin less than 30%, the insurer shall submit to the insurance supervision the plan of improvement a financial situation. the plan improvement of a financial position includes activities to ensure compliance with the ratio between the actual and normative dimensions of the solvency margin. nadezda kirillova84 the calculation of the solvency margin made by insurers on a quarterly basis. few years there has been discussion about the need and expediency of introduction solvency-ii, are developed a set of indicators of risk assessment of insurance companies, however, now there are only considered solvency margin. placement of insurance reserves and covering the own funds by the assets. insurance reserves for non-life include (ministry of finance of the russian federation 2002): ■ unearned premium reserve; ■ loss reserves: – reserve declared but unsettled losses; – reserves for incurred but not reported claims; ■ stabilization reserve. the structure of insurance reserves for life insurance includes the following reserves (ministry of finance of the russian federation 2009): ■ the mathematical reserve; ■ reserve maintenance costs of insurance liabilities; ■ reserve payments reported but unsettled insurance claims; ■ provision of payments of incurred but not reported insurance claims; ■ provision of additional payments (insurance bonuses); ■ equalization reserve. insurance reserves in 2013 amounted 779.4 billion rubles (per year increased by 153.1 billion rubles – 24.4%), life insurance – 99.7 billion rubles (per year increased by 29.5 billion rubles – 42.0%). the ratio of insurance reserves and premiums on life insurance 117.4%; insurance other than life insurance – 83.3%, table 4. table 4. insurance reserves in russian federation, mln. r., 2013 insurance reserves, 31.12.2013 change of insurance reserves investment income investment income from insurance reserves total life insurance total life insurance total total life insurance 779413,7 99676,1 153086,3 29494,9 582154,7 25170,6 5681,1 s o u r c e : own study based on: federal state statistics service. placement of insurance reserves carried out in accordance with the order of the ministry of finance the order of placement of insurance reserves by insurers. basically it is government securities, deposits, stocks, bonds, real estate. regulation of financial condition insurers… 85 not less than 70% of insurance reserves must be invested in the russian federation. similar requirements (slightly differ in structure) are required to cover the assets of equity, table 5. table 5. the main directions of the investment of insurance reserves and own funds asset normative for insurance reserves (not more, than % to total sum of insurance reserves) normative for own funds (not more, than % to maximum of normative margin of solvency or minimum authorized capital) government securities of the russian federation and municipal securities 40 – life 30 – non life 30 bank deposits (deposits), including certificates of deposit 50 50 shares 20 20 bonds 45 45 property 25 – life 30 – non life 40 s o u r c e : compiled by author on ministry of finance of the russian federation (2012); ministry of finance of the russian federation 2012a. according to a study by kpmg in 2014 increased interest managers of insurance companies to invest in more observed in the areas of corporate bonds, deposits, currency (44%, 30%, 25% of managers reported an increase in interest, respectively) (kpmg 2014). according to the investment attractiveness of russia is now in 6th place in the world (ey 2013). the insurer in accordance with the law organizes internal control and audit. the objectives of internal control are effective and breakeven financial and economic activities, the effectiveness of asset management, the effectiveness of the risk management of the insurer, reliability, completeness, objectivity of accounting, statistical reports, statements in exercise of supervision, compliance workers insurer with ethical norms, opposition to the legalization of proceeds from crime, and terrorist financing. internal control is carried out management bodies of the insurer, the audit commission, the chief accountant, internal auditor, actuary. internal auditor verifies the effectiveness of internal control of the insurer, the compliance of insurer activities legislation, rules and standards associations of insurers, compliance with the rules of the internal control of counteraction to legalization of proceeds from crime and terrorist financing, the accuranadezda kirillova86 cy, completeness, objectivity, accountability and timeliness of the submission; analyzes the causes of the violations; assesses risk management, feasibility and efficiency of transactions; check the safeguarding of assets; analyzes financial condition of the insurer and measures to prevent the bankruptcy; approves reports on the implementation of the plan to restore solvency. failure to comply with the above requirements will result in revocation of the license. in 2012, were revoked 103 licenses from insurance companies, in 2013 – 36, for six months in 2014 – 5. the assessment the insurers by insured russian insurants are forced not only trust the opinion of the supervisory authority about the possibility of finding the company on the market and realization of insurance activity, but also to choose a company guided primarily by the implementation of its insurance liabilities. if private persons are forced follow the general information: availability of a license for a period of work in the market, the development of sales networks, quality of sales channels, related services, – the corporate clients are able to evaluate the financial condition of the insurance company in detail, they put forward additional to the legislative requirements. author has formed several methods for assessing the financial condition of the insurance company by the insured (for large industrial enterprises of ferrous metallurgy) in different directions with different sets of indicators of financial condition. several techniques have been tested on the insurance companies – contractors enterprise. in testing involved specialists of enterprise risk management. as a result, the most convenient and informative as a technique for assessing the financial condition of the insurer has been recognized technique in the following areas (table 6): ■ capital; ■ assets; ■ reinsurance; ■ solvency; ■ profit and profitability; ■ the cost of doing business; ■ management. regulation of financial condition insurers… 87 table 6. main characteristics of insurance companies direction of assessment capital assets reinsurance solvency profit and profitability cost of doing business business activity, management characteristics structure, volume change of equity own insurance reserves loan placement of insurance reserves covering the assets own funds placement of available assets investment policy in general presence of high-risk assets loans availability reinsurance program payments under the reinsurance contracts ratings of reinsurers reinsurance in russia regulatory compliance solvency for not insurance liabilities cost loans of credit institutions profit and profitability of insurance operations and non-insured profit from insurance operations profitability of insurance reserves roi as a whole costs of the proceedings commissions to insurance agents salary of management dividends to shareholders volume of premiums and payments regional networks sales channels the absence of compromising information number of complaints by insurants bankruptcy procedures form of the original data balance sheet of the insurer (f.1) report on changes in equity of the insurer (and the net assets ) (f.3) the insurance reserves (f.8-insurer) balance sheet of the insurer (f.1) report on financial results of the insurer (f.2) reinsurance operations (f. 10-insurer) report on financial results of the insurer (f.2) balance sheet of the insurer (f.1) report on financial results of the insurer (f.2) the solvency (f.9-insurer) balance sheet of the insurer (f.1) report on financial results of the insurer (f.2) report on changes in equity of the insurer (and the net assets ) (f.3) the structure of the financial results of insurance (f. 11-insurer) report on financial results of the insurer (f.2) the structure of the financial results of insurance (f.11–insurer) balance sheet of the insurer (f.1) statistical report №1 “data on key indicators of insurer” the branches and representations (f. 12-insurer) shareholders (members) and other affiliated entities (f. 13-insurer) s o u r c e : the author’s method, has been implemented at oao “magnitogorsk iron & steel works”. all of these measures can be calculated according to the forms, which are published on the website of the insurance supervision (the central bank of the russian federation 2014) and according to the data in open publications. at present the additional requirements for the financial condition of russian insurance companies are nominated by enterprises with sufficiently developed comprehensive risk management system. mostly this is the large credit institunadezda kirillova88 tions, enterprises of energy, metallurgy, fuel and energy complexes. additional requirements are fixed in the standards, the provisions of the risk policy; the conformity of the insurers these demands – required to be accredited in the insurance programs. the outcome of the research process and conclusions recently started a discussion on the possible strengthening of state involvement in the insurance market. such a position seems unproductive. in particular, a clear regulatory compliance with respect to the financial condition of insurance companies, internal and external control and insurance supervision are in able to ensure the insurance liabilities by the market participants. following the requirements of the financial condition is sufficient for insurance liabilities; all the accounting, financial and statistical reports are published on the websites of companies and online insurance supervision, the regulatory requirements for the financial condition of russian insurance companies are correspond the requirements of the international association of insurance supervisors and perform basic functions of insurance – to protect consumers, and insurers are able to get all the necessary information. thus the main directions of development – prudential oversight, improving the quality of settlement of losses, the formalization of contracts and business processes in general, improve the quality of the insurer’s assets, control over the structure and the amount of the cost of doing business.  references all-russian insurance association. official site, http://www.insur-info.ru (accessed: 1.10.2014). efimova o.v. (2012). sustainability reporting of company: evaluation information requirements of users. bulletin of the russian peoples’ friendship university. series: the economy, no. 4, 75–82. ey (2013), investigation of investment attractiveness of russia. shaping the future of russia, http://www.ey.com/publication/vwluassets/ras2013-rus/$file/ ras2013-rus.pdf (accessed: 1.10.2014). federal state statistics service, main indicators of activities of insurance companies. official site of the federal state statistics service, http:www.gks.ru (accessed: 1.10.2014). regulation of financial condition insurers… 89 jurgens i.y. (2014), all-russian insurance association. analytical report “the insurance market in 2014: challenges and opportunities”. url: http://autodiscover.ins-union.ru (accessed: 1.10.2014). kpmg (2014), the new reality: an overview of the insurance market in russia, july 2014, http://www.kpmg.com/ru/ru/issuesandinsights (accessed: 1.10.2014). ministry of finance of the russian federation (2002), order of the ministry of finance of the russian federation from 11.06.2002 n 51n (eds. from 08.02.2012), on approval of the regulations for the formation of insurance reserves by insurance other than life insurance. ministry of finance of the russian federation (2009), order of the ministry of finance of the russian federation of april 9, 2009 n 32n, on approval of the formation of insurance reserves for life insurance. ministry of finance of the russian federation (2012), order of the ministry of finance of the russian federation of july 2, 2012 n 100n, on approval of procedure placement of insurance reserves by insurers. ministry of finance of the russian federation (2012a), order of the ministry of finance of the russian federation of july 2, 2012 n 101n, on approval of the requirements for the composition and structure of assets accepted to cover the insurer’s own funds. the central bank of the russian federation, http:www.cbr.ru (accessed: 1.10.2014). date of submission: january 28, 2022; date of acceptance: march 20, 2022. * contact information: rmanigceb@gmail.com, doctoral fellow, dept of banking technology, school of management, pondicherry university-605014, india, phone: +91 96596 32826, orcid id: https://orcid.org/0000-0003-0638-6146. ** contact information: sthiyags@yahoo.com, assistant professor, dept of international business, school of management, pondicherry university-605014, india, phone: +91 413 2654 713. *** contact information: raja.ugc@gmail.com, assistant professor, dept of commerce, school of commerce and management, shiv nadar university-603110, india, phone: +91 98947 37015, https://orcid.org/0000-0002-6540-2065. **** contact information: jana3376@yahoo.co.in, associate professor, dept of banking technology, school of management, pondicherry university-605014, india, phone: +91 96596 32826, orcid id: https://orcid.org/0000-0003-1818-7267. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 3 mani, r., thiyagarajan, s., azhaguraja, n., & janakiraman, s. (2022). users’ engagement in banking activities on social media: a study with reference to facebook. copernican journal of finance & accounting, 11(3), 27–48. http://dx.doi.org/10.12775/cjfa.2022.012 r. mani* pondicherry university s. thiyagarajan** pondicherry university n. azhaguraja*** shiv nadar university s. janakiraman**** pondicherry university users’ engagement in banking activities on social media: a study with reference to facebook keywords: social media, commercial banks in india, ict, facebook, customer engagement. r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman2828 j e l classification: l86, m150, g21. abstract: this study was conducted to assess the users’ (customers’) engagement in indian commercial banks on social media through customer reactions (likes, comments and shares) to the banking activities (banks’ facebook page posts) on facebook. the data was collected through facebook for a period of five and half years (june 2016 to december 2021). this paper also found the presence of indian commercial banks on various social media platforms. the results show that most of the commercial banks are present in popular social media platforms and all the banks are present on facebook as well. with respect to users’ engagement in social media, private sector banks have more engaged users, especially in icici bank in comparison to public sector banks even though there are more public sector banks’ activities.  introduction introduction every business entity knows that effective customer engagement is one of the most important factors for the successful business in the today’s competitive market. any business without customers does not have any purpose. this is why customers are more valued to a business. rupali singh (2019) says that “customer engagement is the degree and depth of brand-focused interactions a customer chooses to perform”. appropriate communication and engagement with customers is most important for any business, irrespective of its size. in the old days, communicating and engagement with the customers in person was too difficult. with the rapid growth and technological advancement, communication and engagement with the customers have become far easier than it was in the past. with the advancement of ict (information and communication technology) in recent days, banks in india have transformed enormously and the future of banking operations and services will be delivered to customers by the usage of the internet, computer, mobiles and social media. therefore, the customers of today are compelled to use new medium for banking operations and services like social media, due to the upgradation of this technology. banks have started using social media linked activities, which may reduce various costs like advertising and marketing, in addition to customer relationship management (crm), communication and information dissemination to the customers (users) who are using social media. social media are one of the electronic forms of media and they contain websites (facebook.com, twitter.com, youtube.com, etc.) and applications (facebook messenger, facebook mobile app, whatsapp, etc.), which enable users to users’ engagement in banking activities on social media… 2929 create and share or exchange the information, ideas, images and videos, etc. social media follow the technique of web2.0, which are user generated contents (i.e., word of mouth) and many rather than one form of communication in traditional media like tv, radio, and newspaper, etc. social media came into existence with the basic purpose of connecting friends and family members in a network, but later on many companies started using social media for doing businesses, advertising the products, promotion, marketing, communication and customer engagement in real time. sharron nelson (2018) says that the return on investment (roi) through social media is also huge if a business entity uses social media for their business activities. social media platforms have changed the way of communication and engagement between customers (users) and companies in real time. social media users can engage with both companies and other users to know more about the products and services by word-of-mouth marketing technology. therefore, the companies have to engage the customers effectively to sustain in this competitive and customer centric market. there are 3.484 billion active social media users, as of january 2019, which is 45% of the overall population of the world, and facebook (2.27 billion users as of january 2019) has a higher number of users than the population of china and india. average daily use of social media around the globe is 2h 32m. 73% of social media users in india are in the age group of 18–35 years. it took facebook only two years to reach 50 million customers, while for radio, tv and the internet it took 38, 16 and 4 years, respectively. social media users’ growth rate is increasing day by day in the world as well as in india. therefore, social media are seeing a more exponential growth of customers than any other communication channels. this provides companies an opportunity to attain success in business through social media. social media users can also get better experience towards products and services of any company through it. the benefits provided by social media are both for companies and users. facebook has emerged as the leading social networking site worldwide with 38.6% global penetration and in india, facebook users surpassed usa facebook users by july 2017, and now india has the most facebook users across the world. hence, in the present study, facebook has been chosen as the social media tool to study the users’ (customers’) engagement in terms of likes, shares and comments to the selected banks’ posts for the period of three years. and also the study includes all the indian commercial banks’ presence in various social media platforms. r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman3030 literature reviewliterature review this area has been extensively researched by various scholars in foreign countries but not many studies have been found in the indian context concerning users’ engagement in banking activities through social media. pyka and blach (2014) believe that small and medium business enterprises will benefit from good internet services and promotional support. the popularization of electronic banking channels provides positive effect on economic growth and also increases the transaction and customer activities (polasik, 2013). banks can use social media to develop a new business model which will cater to effective interaction and close relationship with the clients (jackowicz, kozłowski, kuchciak & marcinkowska, 2020). a synergy created by social media between work and social orientation improves the team and individual employee performances in the workplace (song, wang, chen, benitez & hu, 2019). a higher level of customer engagement creates an insight for a long lasting emotional relationship towards the brand which is to the extent that the customers are willing to develop and sustain such relationships (circles, 2010; johnson, 2010). through customer engagement, performance in terms of sales growth, competitive advantage and profitability have improvised the dynamic business environment (neff, 2007; sedley, 2006; voyles, 2007). the feature of adding additional value with the brand and addressing the needs beyond transactional level differentiates social media from traditional media channels (schultz & peltier, 2013). there happens a two-way communication f low between consumer and brand which allows a level of interaction, where users of social media become active participants in the brand’s communication program. the overall result, having highly engaged customers, is ending up with increased brand equity, retention, share of wallet and return on investment (vivek, beatty & morgan, 2012). social media are defined as the collection of websites and internet based applications that works by web 2.0 technologies which provides a platform for users to create and exchange or share the user-generated content (kaplan & haenlein 2010), and represent a rich context for engagement demonstration, as they foster the creation of strong, interactive consumer relationships (gummerus, liljander, weman & pihlström, 2012). users’ engagement in banking activities on social media… 3131 michael veenswyk (2013) found that social media have become a feasible and preferred choice for the customers to contact and communicate with the banks. the study also found that customers are more engaged with different social media platforms of banks but, it is a risk for banks to use different social media platforms because of the security issues associated with it. naeem and ozuem (2021) opined that social media provided better guidance to customers on awareness and on using internet banking during the covid-19 pandemic. it has been found that banks are now focusing more on social media trends which are led by internet services, but if banks want to maximize the benefits of social media for competitive advantage, they have to adapt a more holistic social media strategy (afolabi, ezenwoke & ayo, 2017). the author found that through privacy policies, terms of use and technical functionality, social media platforms offer protection to the present and potential customers. it says that if the customers are engaged with the social media platforms of their respective banks, they should move further to social media banking, as it provides proper protection for the customers (babu & babu, 2018). research methodologyresearch methodology to carry out this study, data were collected in two phases by the researchers. in the first phase, indian commercial banks’ presence on different social media platforms was collected through respective bank websites. in the second phase, the statistical data were gathered from the selected facebook pages through facepager and netvizz app available on facebook, including the number of posts by banks and the number of likes, comments and shares by facebook users (as customers) to those banks’ posts. the selected banks comprised of three public sector banks, i.e., sbi, pnb and bob and three private sector banks, i.e., icici, hdfc and axis, based on their market capitalization. the data were collected for three years from the facebook page of the selected banks. more specifically, the data were collected for the period from june 1, 2016 to december 31, 2021. the data were standardized to per post reaction (like, comment and share) because there is a difference in the number of posts and accordingly reactions may also differ. to avoid this, data were standardized. mean difference test (t-test) has been performed on the data to analyze the bank’s facebook page data. r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman3232 objectives and hypothesisobjectives and hypothesis the aims of the study are: 1. to find out the indian commercial banks presence on different social media platforms. 2. to analyze the customer engagement in banking activities on social media with respect to select banks’ facebook page posts. the hypotheses of the study are: h01-7: there is no significant difference in likes of the bank facebook page posts before and after demonetization for 7, 14, 21, 28, 30, 60 and 90 days. h08-14: there is no significant difference in comments of the bank facebook page posts before and after demonetization for 7, 14, 21, 28, 30, 60 and 90 days. h015-21: there is no significant difference in shares of the bank facebook page posts before and after demonetization for 7, 14, 21, 28, 30, 60 and 90 days. h022-28: there is no significant difference in likes between private and public sector banks for posts after demonetization for 7, 14, 21, 28, 30, 60 and 90 days. h029-35: there is no significant difference in comments between private and public sector banks for posts after demonetization for 7, 14, 21, 28, 30, 60 and 90 days. h036-42: there is no significant difference in shares between private and public sector banks for posts after demonetization for 7, 14, 21, 28, 30, 60 and 90 days. h043: there is no significant difference in the number of posts between private and public sector banks. h044-46: there is no significant difference in likes, comments and shares between private and public sector banks for posts. findings and analysisfindings and analysis indian commercial banks’ presence on different social media platformsindian commercial banks’ presence on different social media platforms the technology advancement in the 20th century is based on the internet, world wide web, computer, mobiles and wireless communications, and these have changed the business world. through this advanced technological im users’ engagement in banking activities on social media… 3333 provement, communication ways, means and methods have changed entirely from conventional ways and methods; to compete in this highly dynamic market, banks have to be more communicative, innovative and more customercentric. to compete in this technological market, social media is the only key for any business and social media have a crucial inf luence on today’s business world (smith, 2019). social media are almost an endless and dynamic source of information and an important tool for communication with the customers. in order to make interaction better and deal with the present customers, and also to capture the potential customers in an efficient and frequent manner, indian commercial banks have become present on different social media platforms. nowadays, it is a fashionable approach for every financial institution to be present on social media platforms, especially for banks, which have more interaction and dealing with the customers. the social media platform creates new opportunities for banks to share the information about their products and services quickly and efficiently, provide customers the ability to give feedback about products or services, and engage in a discussion about products and services with the community (stone, 2009). there are some concerns about the reliability of social media as a platform to support the relationship between banks and customers and how compliant they are with the industry’s safety standards (scarborough, 2010; jaser, 2010). from the data collected in the first phase, most of the indian commercial banks are present on different social media platforms. the following tables give a clear picture of the presence of banks on social media platforms. table 1. presence of public sector banks on social media platforms banks facebook twitter linkedin instagram pinterest google+ youtube sbi yes yes yes yes yes no yes allahabad bank yes yes yes yes no no yes andhra bank yes yes yes yes no no yes bank of baroda yes yes yes yes no no yes bank of india yes yes yes yes no no yes bank of maharashtra yes yes yes yes yes no yes canara bank yes yes yes yes yes no yes r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman3434 banks facebook twitter linkedin instagram pinterest google+ youtube central bank of india yes yes yes yes no no yes corporation bank yes yes yes yes no no yes dena bank yes yes yes yes no no yes indian bank yes yes yes yes no no yes iob yes yes yes yes no no yes obc yes yes yes yes no yes yes pnb yes yes yes yes no no yes syndicate bank yes yes yes yes yes no yes union bank yes yes yes yes no no yes united bank of india yes yes yes yes yes no yes punjab & sind bank yes yes yes yes no no yes uco bank yes yes yes yes no no yes vijaya bank yes yes yes yes no no yes idbi yes yes yes yes no yes yes s o u r c e : compiled by the author. from the above table 1, it can be seen that all the public sector banks are present on the five main social media platforms which are facebook, twitter, youtube, instagram and linkedin. with respect to pintrest, five public sector banks, i.e., sbi, bank of maharastra, canara bank, syndicate bank and union bank have an active presence on social media platforms. in case of google+ only two public sector banks – obc and idbi – are present. in overall, all the banks are present on facebook, twitter, youtube, instagram and linkedin; sbi, bank of maharastra, canara bank, syndicate bank, union bank, idbi bank and obc are present on six out of seven social media platforms, and the remaining banks are present on five out of seven social media platforms. table 1. presence… users’ engagement in banking activities on social media… 3535 table 2. presence of private sector banks on social media platforms banks facebook twitter linkedin instagram pinterest google+ youtube axis bank yes yes yes yes no no yes bandhan bank yes yes yes yes no no yes csb yes no yes no no no yes cub yes yes no yes no no no dcb bank yes yes yes yes no no yes dhanalaxmi bank yes no yes no no no yes federal bank yes yes yes yes no yes yes hdfc bank yes yes yes yes yes yes yes icici bank yes yes yes yes yes no yes indusind yes yes yes yes no yes yes idfc bank yes yes yes yes no no yes j&k bank yes yes yes yes no yes yes karnataka bank yes yes yes yes no no yes kvb yes yes yes yes no no yes kmb yes yes yes no no yes yes lvb yes yes no no no no yes nainital bank yes yes yes yes no no no rbl bank yes yes yes no no no yes sib yes yes yes yes no yes yes yes bank yes yes yes yes no no yes tmb yes yes yes yes no yes yes s o u r c e : compiled by the author. from the above table 2, it can be seen that almost all private sector banks are present on facebook; with respect to twitter, youtube and linkdin, 19 out of 21 banks are present. in case of instagram, 16 private sector banks are present. lastly, in the case of youtube, 16 out of 21 private sector banks are present. six banks are present on six social media platforms and hdfc is the only bank pre r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman3636 sent on all social media platforms while j&k bank is present on five social media platforms. at last, five private sector banks, i.e., csb, cub, dhanalaxmi, lvb and nainital banks are present on only three social media platforms which is the least among private sector banks. engagement of customers on banking activities on facebookengagement of customers on banking activities on facebook in the contemporary technological environment, people use different technological media for getting connected or engaged with others, and this practice has stepped in to banks as well. customers of today are reluctant to pay a physical visit to bank branches and prefer to interact with their respective banks through different social media platforms in a quick and frequent manner. banks also find it easy to share information through social media for their customers effectively. of late, banks have started to share information related to different products and services through social media and customers can react and engage by the way of likes, shares, comments, etc. table 3. followers of banks’ facebook page banks followers sbi 17916994 pnb 1520288 bob 2183838 icici 5363214 hdfc 2911828 axis 3655471 s o u r c e : compiled by the author (from respective banks’ facebook page)1. 1 https://www.facebook.com/statebankofindia; https://www.facebook.com/pnbindia; https://www.facebook.com/bankofbaroda; https://www.facebook.com/icicibank; https://www.facebook.com/hdfc.bank; https://www.facebook.com/axisbank. users’ engagement in banking activities on social media… 3737 from table 3 and chart 1, it can be seen that sbi has the highest numberber of followers, followed by icici, axis, hdfc, bob and pnb. as compared to other banks sbi has more followers, it has three times more followers than icici and 12 times more than pnb which is in the last place among the selected banks. chart 1. followers of banks’ facebook page from the table 3 and chart 1, it can be seen that sbi has maximum number of followers, followed by icici, axis, hdfc, bob and pnb. as compared to other banks sbi has more followers, it is three times the followers of icici and 12 times of pnb which is in the last place among the selected banks. chart 1. followers of banks’ facebook page sbi pnb bob icici hdfc axis 0 2000000 4000000 6000000 8000000 10000000 12000000 14000000 16000000 18000000 20000000 followers followers source: author’s calculation further analysis has been carried out in three phases; first phase was event study analysis of customer engagement within the selected banks with reference to demonetization which was an important event for the banks during the study period. second phase of the analysis was on customer engagement between public and private sector banks post demonetization for a period of up to three months. third phase of analysis was on customer engagement between public and private sector banks for overall period of three years. table 4. t-value for likes w.r.t demonetization event likes days hdfc icici axis sbi pnb bob 7 days 0.793 1.732 0.336 1.512 0.413 0.256 14 days 0.478 1.230 0.673 1.890 0.748 1.200 s o u r c e : author’s calculation. further analysis has been carried out in three phases; the first phase was event study analysis of customer engagement within the selected banks with reference to demonetization which was an important event for the banks during the study period. the second phase of the analysis was focused on customer engagement between public and private sector banks post demonetization for a period of up to three months. the third phase of analysis was focused on customer engagement between public and private sector banks for overall period of three years. r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman3838 table 4. t-value for likes w.r.t demonetization event likes days hdfc icici axis sbi pnb bob 7 days 0.793 1.732 0.336 1.512 0.413 0.256 14 days 0.478 1.230 0.673 1.890 0.748 1.200 21 days 0.249 1.685 0.527 1.892 0.367 1.331 28 days 0.085 1.752 1.411 1.807 1.034 1.165 30 days 0.488 2.025 0.924 1.928 1.045 1.139 60 days 0.868 2.599** 2.691*** 1.245 1.580 0.378 90 days 1.110 2.647*** 2.873*** 1.186 1.255 0.882 **,*** sig. at 5% and 1% respectively. s o u r c e : author’s calculation. h01-7: there is no significant difference in likes of the banks’ facebook page posts before and after demonetization for 7, 14, 21, 28, 30, 60 and 90 days table 4 contains t values for before and after difference in likes for the post of the respective banks before and after demonetization. an event study analysis was carried out for a period from 7 to 90 days to see the difference in likes for bank posts on the facebook. from the table, it can be seen that there is a significant difference in likes for posts of icici and axis banks for 60 and 90 days only. for the rest of the banks’ posts there is no significant difference. the difference is only with 2 private banks – icici (mean value difference 60 days is 29583.42 and 90 days is 25026.15) and axis (mean value difference 60 days is -8540.63 and 90 days is -12309.8), which is for a longer period. this could be due to the difference in the number of posts posted by the banks. even though sbi has a higher number of post difference before and after demonetization than hdfc, pnb and bob, sbi’s difference f luctuates over the period of time, i.e., sometimes the number of posts is higher and sometimes lower compared to icici bank; the likes for the facebook page posts for 60 days and 90 days differ significantly, at 5%, between before and after demonetization. however, for 7 to 30 days there is no significant difference. and also there users’ engagement in banking activities on social media… 3939 is a huge difference in the number of posts posted by icici bank on its facebook page between before and after demonetization from 7 to 90 days. therefore, over the period of 7 to 90 days before and after demonetization, the number of posts posted by icici bank increased. even though the number of posts for icici and axis banks is lower than for sbi bank, both banks were able to bring out a significant difference in the likes for their posts. this could be due to the nature of the posts and the profile of the customers. the null hypothesis cannot be rejected for hdfc, sbi, pnb and bob banks, and it is rejected for icici and axis banks. no other significant difference could be established for other banks studied for any of the time periods. hence, the conclusion is that even though there is a big difference in numbers of posts of banks, there is no guarantee for a difference in likes. the differences in likes of posts were found only among private banks and not among public sector banks. as discussed above, this could be due to the nature of the posts the banks were posting, their contents, clarity, color and visualization effect. the number of customers and profile of the customers, in reference to their age, educational background, industry they are from and their social status could also have played a role in this phenomenon. table 5. t-value for comments w.r.t demonetization event comments days hdfc icici axis sbi pnb bob 7 days 0.143 4.286*** 0.304 1.637 1.291 0.551 14 days 0.781 2.497** 0.251 1.985 0.446 0.174 21 days 1.192 2.298** 0.759 1.974 0.718 1.111 28 days 1.039 2.475** 0.141 1.765 0.423 1.651 30 days 1.098 2.328** 0.727 1.991 0.448 1.932 60 days 0.232 2.408** 0.939 1.883 0.706 0.287 90 days 0.125 2.411** 0.227 1.347 0.480 1.455 **,*** sig. at 5% and 1% respectively. s o u r c e : author’s calculation. r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman4040 h08-14: there is no significant difference in comments of the banks’ facebook page posts before and after demonetization for 7, 14, 21, 28, 30, 60 and 90 days table 5 contains t values for difference in comments for the posts of the respective banks before and after demonetization for the period of 7, 14, 21, 28, 30, 60 and 90 days. an event study analysis was carried out for a period of 7 to 90 days to see the difference in comments for bank posts on facebook. from the table, it can be seen that there is a significant difference in comments for posts of icici bank only. the difference in comments for posts is only seen in the case of icici bank for the period of 7 days to 90 days. icici is the only bank which has a significant difference in comments the entire period of the study. facebook users of icici bank not only click the button for likes but they also express their feelings in the form of words such as comments. the difference in likes is significant for longer days from table 5, but for comments the difference is for the entire event study period. even if one argues that the difference in likes is due to some random effect or because of the difference in posts, in terms of comments it is because of the consistent and active customer interaction over the event period. hence, the researcher cannot reject the null hypothesis for hdfc, axis, sbi, pnb and bob banks and can reject it only for icici. as discussed earlier, the difference is attributed to the nature of the comments, the profile and socio-economic background of the customers. table 6. t-value for shares w.r.t demonetization event shares days hdfc icici axis sbi pnb bob 7 days 1.014 2.724** 0.055 1.157 1.330 0.935 14 days 0.907 2.440** 0.419 1.448 0.248 0.327 21 days 1.648 2.869*** 0.657 1.503 0.350 0.614 28 days 1.718 3.653*** 0.232 1.499 0.428 0.409 30 days 1.683 2.482** 0.804 1.561 0.424 0.278 60 days 0.821 1.640 0.738 1.788 1.272 0.701 users’ engagement in banking activities on social media… 4141 shares days hdfc icici axis sbi pnb bob 90 days 0.838 1.697 0.719 0.703 1.068 1.914 **,*** sig. at 5% and 1% respectively. s o u r c e : author’s calculation. h015-21: there is no significant difference in shares of the banks’ facebook page posts before and after demonetization for 7, 14, 21, 28, 30, 60 and 90 days table 6 represents the t-value of shares of the facebook page posts of different banks between before and after demonetization from 7 to 90 days. an event study analysis was carried out for a period of 7 to 90 days to see the difference in shares for bank posts on facebook. from table 6, it can be seen that only icici bank has significant t-values at the level of 5 percent over the period of 7 days to 30 days before and after demonetization. apart from just hitting the likes and typing a few comments as their thoughts to the bank’s facebook page post, the facebook users of icici bank also tended to propagate the bank’s contents through sharing the bank’s facebook page post. hence, the null hypothesis cannot be rejected for hdfc, axis, sbi, pnb and bob banks over the period of 7 to 90 days and only for icici bank the null hypothesis is rejected for 7 to 30 days period. there is a significant difference in shares before and after demonetization for the posts of icici bank. the facebook users of icici bank seem to be more involved and agile than the users of other banks. this is evident from the difference that we were able to establish in likes, comments and shares for the posts of the bank before and after demonetization. from the event analysis results, it can be concluded that there is a difference in likes of bank’s facebook page post for icici and axis banks only. in terms of comments and shares, icici is the only bank having a significant difference before and after demonetization. from the results, it can be opined that the customer interaction on social media within the banks is not very significant for most of the banks studied. the results are bad for public sectors banks because table 6. t-value… r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman4242 not even a single public sector bank was able to bring out any difference in reaction to their posts even for a major event like demonetization. therefore, public sector banks should change the way they use the social media for their banking activity. to begin with, they have to at least change the way and style of their posts. table 7. mean and t-value for likes w.r.t post demonetization period likes private mean public mean t value 7 days 28242.677 2423.847 2.294** 14 days 20276.870 2642.122 2.734*** 21 days 19008.331 1978.229 3.453*** 28 days 16949.721 1647.701 3.912*** 30 days 17670.172 1612.727 4.265*** 60 days 18481.127 1352.127 4.679*** 90 days 20080.344 1214.575 6.017*** **,*** sig. at 5% and 1% respectively. s o u r c e : author’s calculation. h022-28: there is no significant difference in likes of the banks’ facebook page posts after demonetization for 7, 14, 21, 28, 30, 60 and 90 days from table 7, it can be inferred that t value for likes of bank’s facebook post after the demonization up to 90 days (3 months) from 7 days is statistically significant at the level of 5 percent. therefore, the null hypothesis is rejected. hence, the researcher concluded that there is a significant difference between private and public sector banks with respect to likes of facebook posts. private sector banks’ facebook posts have more likes than public sector banks’ facebook posts over the period of 7 days to 90 days after the demonetization. mean values of likes for posts for private sector banks are much higher than those of public sector banks. this is again attributed to the nature and type of the posts and the customer profile of the banks. customers of private sector banks are mostly young people from software industry and other branches of private sector, whereas customers of public sector banks are mostly people of middle age from government and public sector. users’ engagement in banking activities on social media… 4343 table 8. mean and t-value for comments w.r.t post demonetization period comments private mean public mean t value 7 days 190.980 78.546 1.604 14 days 154.041 85.825 1.353 21 days 174.152 68.203 2.442** 28 days 147.046 58.128 2.671*** 30 days 149.439 57.136 2.947*** 60 days 138.616 45.682 4.170*** 90 days 128.883 44.222 5.108*** **,*** sig. at 5% and 1% respectively. s o u r c e : author’s calculation. h029-35: there is no significant difference in comments of the banks’ facebook page posts after demonetization for 7, 14, 21, 28, 30, 60 and 90 days from table 8, it can be inferred that t value for comments of respective bank posts after the demonetization has a significant difference at the level of 5 percent. therefore, the null hypothesis cannot be rejected for 7 and 14 days and it is rejected for 21 to 90 days period. hence, it is concluded that there is a difference between private and public sector banks with respect to comments of posts for 21 days to 90 days (3 months) after demonetization. from the mean values it is very clear that there are many more comments for the posts of private sector banks than those of public sector banks. table 9. mean and t-value for shares w.r.t post demonetization period shares private mean public mean t value 7 days 286.200 679.875 -0.736 14 days 255.191 437.104 -0.657 21 days 258.151 321.916 -0.337 28 days 216.375 258.371 -0.295 30 days 214.706 250.246 -0.267 r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman4444 shares private mean public mean t value 60 days 190.828 169.581 0.295 90 days 167.270 138.881 0.576 **,*** sig. at 5% and 1% respectively. s o u r c e : author’s calculation. h036-42: there is no significant difference in shares of the banks’ facebook page posts after demonetization for 7, 14, 21, 28, 30, 60 and 90 days from the above table 9, one can say that shares of respective banks’ posts after the demonetization from 7 to 90 days (3 months) do not have any significant difference as all the t values are insignificant at 5%. therefore, the null hypothesis is accepted, i.e., there is no significant difference between shares of private and public sector bank posts. from the above results, we can conclude that the facebook users tend to like and comment posts more often than to share them. it is because likes and comments are generated by the user but shares of the post are a purely bank generated content which is shared by the user. another reason is that there are more posts of public sector banks than private sector banks and the users tend more towards private sector banks. the post-demonetization period analysis of customer interaction between public and private sector banks revealed that there is a significant difference in terms of likes and comments but no significant difference in shares. therefore, further analysis is carried out for the overall study period between public and private sector banks. table 9. mean… users’ engagement in banking activities on social media… 4545 table 10. mean and t-value for post, likes, comments and shares for overall period overall private mean public mean t value posts 21.31840796 61.56716418 14.65*** likes 18687.30166 5058.684348 6.94*** comments 194.4442331 66.63130232 8.60*** shares 317.4346155 120.3886651 3.32*** **,*** sig. at 5% and 1% respectively. s o u r c e: author’s calculation. h043: there is no significant difference in the number of posts between public and private sector banks table 10 shows the mean values and t values of selected private and public sector banks with respect to overall posts on their facebook page, as well as likes, comments and shares of those posts by social media users for three years. there are almost three times more posts of public sector banks than those of private sector banks. therefore, the public sector banks are more active by posting on their facebook pages than private sector banks and the t value is significant at 5%. therefore, null hypothesis is rejected signaling a significant difference in the number of posts between private and public sector banks. h044-46: there is no significant difference in likes, comments and shares between private and public sector banks for posts table 10 shows that the mean value of private sectors banks for likes of posts is four times higher than the mean for public sector banks and there is a significant difference with the t value being significant at 5%. even though public sector banks have a higher number of posts than private sector banks on their respective facebook pages, facebook users are more attracted towards private sector banks’ posts. hence, the result reveals the rejection of null hypothesis for likes of posts. table 10 illustrates that for the private banks, the mean value of comments for posts is almost three times higher than public banks’ mean and the t-value is statistically significant at 5%. customer interaction is more visible for private sector banks by way of writing their feelings about the posts, even though r. mani, s. thiyagarajan, n. azhaguraja, s. janakiraman4646 public sector banks have a higher number of posts. null hypothesis is rejected, i.e., there is a significant difference in comments for posts among private and public sector banks. table 10 shows that the t-value of shares for posts, and it is statistically significant at 5%. even though public sector banks have a higher number of posts than private sector banks, shares of private sector are almost two times higher than that of public sector banks. therefore, the social media users are more attracted towards private sector banks’ posts. null hypothesis is rejected, i.e., there is a significant difference in shares for posts among private and public sector banks. from the above, it is very clear that even though the number of posts is much higher for public sector banks, the number of likes, comments and shares is higher only for private sector banks. this clearly defines the quality and the kind of posts public sector banks posts. public sector banks need to relook the way they operate in social media. a mere presence in social media or just posting posts is not enough to attract customers. there is much more to be done to attract and engage them.  conclusion conclusion social media platforms have become the most significant medium for sharing the information of products and services of any business entity (including banks) and getting the quick feedback from customers regarding the products and services. as the concluding statements it can be said that almost all the indian commercial banks are present on different social media platforms and facebook is the only platform having all banks’ presence. regarding the engagement of the customer, it has been found that public sector banks are posting more on their respective facebook pages to their customers than private sector banks; however, their customers are more engaged (i.e., interaction) in terms of likes, comments and shares in reference to the private sector banks’ posts than public sector banks. further, it has been found that sbi has a higher number of followers – 200% more than icici to 1100% more than pnb – and it is leading among other public sector banks. it has also been found that sbi is a tough competitor for private sector banks especially in terms of likes, comments and shares (event study analysis). therefore, as a good competitor for private sector banks and having a higher number of followers than any other of users’ engagement in banking activities on social media… 4747 the selected banks, sbi can get more effective customer engagement than private sector banks if it provides customers more attractive posts than those of private sector banks.  limitations limitations the users’ engagement in banking activities on social media is restricted for only facebook users in this study. the present study includes a sample size of only six banks, which is three banks from both public and private sector, instead of variety of bank types (public, private, foreign, rural, payment, small finance an cooperative banks) in india. also there might be a slightly higher concentration of public banks than private banks in rural areas.  references references afolabi, i.t. ezenwoke, a.a., & ayo, c.k. 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(2007). beyond loyalty meeting the challenge of customer engagement, http://graphics.eiu.com/files/ad_pdfs/eiu_adobeengagementpt_i_wp.pdf. cjfa_11_4_2023_druk_25.07.23.pdf date of submission: april 11, 2022; date of acceptance: november 21, 2022. * contact information: ganeshrppg@gmail.com, pg and research department of commerce and management studies, st. mary’s college, kuppadi p.o. sulthan bathery, wayanad673 592, india, phone: +919791271186; orcid id: https://orcid.org/00000002-4539-9997. ** contact information: sthiyags@yahoo.com, department of international business, school of management, pondicherry university, puducherry-605 014, india, phone: +914132654713. *** contact information: gvasudevan@umassd.edu, department of accounting and finance, charlton college of business, university of massachusetts dartmouth, united states of america (usa), phone: +15089998246; orcid id: https://orcid.org/00000002-3297-7663. **** contact information: kgnaresh@gmail.com, indian institute of management ranchi, jharkhand, india, phone: +917338985380; orcid id: https://orcid.org/00000003-0439-8303. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 ganesh, r., thiyagarajan, s., vasudevan, g., & naresh, g. (2022). investors‘ overconfidence in the stock market. copernican journal of finance & accounting, 11(4), 107–123. http://dx.doi. org/10.12775/cjfa.2022.021 rajasekharan ganesh* st. mary’s college, sulthan bathery s. thiyagarajan** pondicherry university gopala vasudevan*** university of massachusetts dartmouth g. naresh**** indian institute of management ranchi investors’ overconfidence in the stock market keywords: overconfidence bias, mental shortcuts, vector autoregression (var), impulse response function, nifty 50 index. r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh108 j e l classification: c58, g11, g12, g40, g41. abstract: an investor would normally depend on technical or/and fundamental analysis to make his/her investment decision in the secondary market. but in most cases the investor may not have time to do these analyses, understand the market or stock and then make the decision, therefore, they often end up taking irrational decisions. in some cases, the investors take these irrational decisions on the basis of the overconfidence they have concerning the information they possess. these investors are termed to bear overconfidence bias. the study aims to examine the inf luence of overconfidence bias in the indian stock market. the study employed vector autoregression (var) methodology and impulse response function to know how long the bias persists in the market once the overconfidence bias is inf luenced by the investor. the results of the study show enough evidence to point out the inf luence of overconfidence bias in the market and it persists for more than 110 days. the study also finds that efficient market hypothesis does not hold good. our study period includes the time period since globalization of the indian stock market and it also covers several periods of stress including the global financial crisis of 2007–08 and covid-19 period. an astute investor will predict the movement of price of stocks accurately and should be an expert in the selection of such stocks. an investor who is confidently executing these decisions would rely upon technical and fundamental analysis for stock selection. however, realistically, an investor has to take such decisions in a very short span of time and often it would be difficult to thoroughly analyse before making these trading decisions. hence, they can rely on quick analysis and can end up with decisions that are irrational. some investors are overconfident in taking such decisions because of the overconfidence concerning the accuracy of the information they possess. these investors who are under the inf luence of such biases are called overconfident investors or possess overconfidence bias. studies have brought out much irrationality prevalent in investor trading. bondt and thaler (1985); bondt and thaler (1987); and lee, shleifer and thaler (1991) show that investors ‘overreact’ to unexpected and dramatic market events. overconfidence bias is a psychological bias defined as an excessive belief in one’s intuitive reasoning, judgements and cognitive abilities (pompian, 2008). the lack of knowledge results in irrational decision making by the investors who are often clouded by behavioural biases like overconfidence bias. psychologists have identified two types of overconfidence bias; namely, prediction overconfidence bias and certainty overconfidence bias. a trade needs investors’ overconfidence in the stock market to be preceded by prediction of future price of stocks and followed by judicious selection of stocks to buy and sell. investors with prediction overconfidence bias do not allow a leeway of more than ten percent deviation in the future price while certainty overconfidence bias makes them too certain of their choice of stocks and time to trade (pompian, 2008). both biases entail more than average risk and eventually investors with overconfidence bias are bound to suffer losses. according to the overconfidence bias, a trader at the start of their career is not overconfident. during the course of trading when he/she initially meets with success and becomes wealthier, the biased learning makes him/her overconfident (odean, 1999; gervais & odean, 2001). success boosts his/her trading activity and he/she begins to suffer losses or reduced returns. with experience they discover the true potential and limitations of their analyses, and consequently, their confidence decreases. at any point in time the market will always have some investors with overconfidence bias which makes the market buoyant and irrational. it is this irrationality that has been one of the root causes of recurring market bubbles and crashes, causing huge loss to investors and economies. hence, the study of behavioural biases in financial markets continues to be an active topic of study by academicians and of interest to all market stakeholders. our study examines the presence of overconfidence bias in the stock market using vector autoregression (var) model and finds the persistence of this bias using impulse response functions. the var model is applied by taking log value of trading volume and log value of market return as dependent variable and log value of volatility, lag value of log trading volume and lag value of log market return as independent variables. in addition to that, the present study also covers the covid-19 phase. thus, the study period is from 1st april 2005 to 31st march 2022 (17 financial years) covering several ups and down. this makes the study more attractive to the practitioners and investors in knowing the behaviour of investors and their confidence level. we find the presence of overconfidence bias in the market and these effects persist for more than 110 days. the paper is organised as follows: the background of the study and the related papers are discussed in section 2, section 3 describes the data and methodology part of the study and formulates the study hypothesis, section 4 describes the study results, and in section 5 we conclude. r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh110 market anomalies are quite common when the illusionary investors are overconfident to predict the future price movements. there are several studies that have brought out the salient features of overconfidence bias. a study of trading behaviour of 215 investors who believe they have more than average investment skill has shown a higher than average number of trading due to the effect of overconfidence bias (glaser & webber, 2007). the study also shows that contrary to the theory, miscalibration is not related to trading volume, which indicates that higher trading is almost uniquely related to overconfidence bias. there are now several studies which establish a positive relationship between trading volume and overconfidence bias (statman, thorley & vorkink, 2006; koutmos & song, 2014). in japanese stock market, the pattern of investment followed by various types of investors, i.e., individual investors, foreign investors and institutional investors reveals that the performance of individual investors has proved to be poor and others good in comparison. the results also produced evidence for the inf luence of both information based trading and behavioural based trading exists in the market at the same time (kamesaka, nofsinger & kawakita, 2003). these studies highlight the two most important and observable features of overconfidence bias, namely, more than average trading frequency, and consequently, less than average returns. besides this, the study also provides evidence that investing culture in asian economies is more prone to overconfident bias than other economic cultures. there are studies which show how strongly overconfidence bias inf luences investors. overconfidence bias tempts investors to trade in directions opposite to market trends because of their false faith in the special knowledge they possess (daniel, hirshleifer & subrahmanyam, 1998 and odean, 1998a). overconfident investors assume they are capable of selecting the best time to buy and sell off assets to get maximum return (pompian, 2008). but their frequent trading and overconfidence results in lower profit than other investors because of their overestimation of the precision of information they possess. this has been confirmed in an experimental study of overconfidence bias wherein risk aversion was induced. the study shows that overconfident investors do not pay any attention to other important market information which results in decisions far removed from optimum market situations. the deviation from the optimal decision positively correlates with the increase in the level of overcon investors’ overconfidence in the stock market 111 fidence (dittrich, güth & maciejovsky, 2005). non-optimal decisions increase underestimation of associated risks and cause overconfident investors to trade more in riskier securities (chaung & lee, 2006). the riskier trading always results in reduced returns for their investments. this link between overconfidence among investors consequently increases their trading frequency, and the resultant decrease in expected utility, when compared with normal investors, has been proved beyond doubt (odean, 1998a). reverses in trading do not deter overconfident investors and they continue to trade with the same strategy. a detailed study on investments in us during the period from 1991 to 1997 has also shown that excessive trading results in reduction in annual returns (barber & odean, 2001). vector auto regression (var) model has been used with great success to study overconfidence bias in markets across the world. a study in the us during the period from january 1963 to december 2001 inspected the presence of overconfidence bias in the new york stock exchange by using the var model. study findings showed a strong presence of overconfidence bias in the market (chuang & lee, 2006). presence of overconfidence bias in the french stock market during the period from 1988 to 2004 was also studied with the help of var model and the study evidenced the presence of overconfidence bias in the stock market (siwar, 2011). however, a study in tunisian stock market with var model on monthly data during the period from january 2000 to december 2006 showed little evidence of overconfidence bias in the market (salma & ezzeddine, 2008). overall, studies using the var model showed that overconfidence behaviour is less common (emphasised) in emerging markets when compared to developed markets (griffin, nardari & stulz, 2007). overconfidence bias in sectoral indices of indian stock market has been explored by using var model by comparing the level of inf luence of overconfidence bias during pre-covid-19 phase and during covid-19 phase. the result shows that all cyclical sectors exhibit more level of overconfidence bias than defensive sectors. however, during the covid-19 phase overconfidence bias was more pronounced in it and pharma sectors along with metal, media, and realty sector. the study also found out that overconfidence bias has no inf luence in the energy sector (azam, hashmi, hawaldar, alam & baig, 2022). focusing on the determinants of overconfidence bias it was found that all the cognitive biases inf luence overconfidence bias and illusion of control is the most inf luencing variable (ul abdin, qureshi, iqbal & sultana, 2022). the inf luence of overconfidence bias has been explored during the upswing and downswing r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh112 phases and it was found that the investors who trade more frequently and in large volume are overconfident in the information they possess during the upswing phase, while during the downswing phase they are reluctant to trade and possess less confidence (huang, wang, fan & li, 2022). the inf luence of behavioural biases on the mindset of investors shows that company history information, location benefit and ipo issues play a significant role in inf luencing the investment strategies (soni & desai, 2021). previous studies, mostly in developed markets, have established a link between volume traded and lagged returns (statman et al., 2006; chuang & lee, 2006; glaser & weber, 2007; glaser & weber, 2009). however, studies in emerging markets are fewer in number. a study in india has established the presence of many irrational biases in investors such as self-attribution bias, framing effect bias, overreaction bias, etc. (singh, goyal & kumar, 2016). however, the present study considers nifty 50 index as the market representative and the daily data for these market indices were taken over a period of ten years beginning 1st april 2005 to 31st march 2015. the objective of the study is to find out the presence of overconfidence bias by examining the relationship between market return, trading volume and price volatility. the study also aims to find out how long this overconfidence bias persists in the market. the present study is carried out entirely through secondary data made up of volume traded, closing price, high price, and low price of nifty 50 index on daily basis during the period from 1st april 2005 to 31st march 2022 obtained from national stock exchange of india (nse) website. as trading volume cannot be applied directly in the var model, log value of trading volume and market return were calculated. volatility is calculated by using the parkinson model (1980) by taking high and low market values. (1) where: h: high value during the day, l: low value during the day. investors’ overconfidence in the stock market 113 to check the stationarity of the data considered for the study period augmented dickey-fuller (adf) test and philip perron (pp) test have been used before model application to investigate the presence of overconfidence bias. vector autoregression (var) is a stochastic process model that generalises the single variable to multivariate time series autoregression. var on market wide transaction was applied to study the presence of overconfidence bias in the market and its validity period was verified with the help of impulse response function. (2) (3) where: logt: is the log value of the trading volume of market index, r m : is the log value of daily market return, vol: is the value of daily volatility of market, k: is the number of lags, j: is the index of summation for the lags, t: number of observations, here, the dependent variables are log value of trading volume and daily market return of nifty. the independent variables are daily volatility, lagged values of trading volume and lagged market return. the regression coefficients independent variables. the var methodology allows for a covariance structure t , that captures the contemporaneous correlation between dependent variables. the volatility control variable is based on a study of contemporaneous volume-volatility relationship (karpoff, 1987) and is similar to the mean absolute deviation measure in the study of trading volume (bessembinder, chan & seguin, 1996). formal overconfidence theories do not specify a time frame for the relationship between return and volume of trade. therefore, the number of optimum lags is decided on the basis of the values of schwarz information criterion (sic). r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh114 the study assumes: hypothesis: h1: there is no presence of overconfidence bias in the market. the var model was applied to find out whether the indian stock market is under the inf luence of the overconfidence bias of the investors. var model application was used to study the relationship between log value of trading volume and market return as dependent variable and lag value of trading volume, lag value of market return and log value of volatility as independent variables. the stationarity of the variables have to be inspected before applying the variables in the model. hence, the stationarity augmented dickey-fuller (adf) and philip perron tests have been applied to check the stationarity of log value of volume traded, market return and price volatility. the results of augmented dickey-fuller (adf) test and philip perron (pp) test are tabulated in table 1. the table explains the output of unit root test for the variables log value of volume, market return and volatilit y with the help of adf and pp test. the result of both adf and pp tests show that there is no unit root in any of the variables. table 1. the result of unit root test variable adf pp t-stats p-value t-stats p-value log of trading volume (t) -3.787*** 0.003 -27.239*** 0.000 log value of market return (rm) -62.584*** 0.0001 -62.554*** 0.000 log value of volatility (vol) -3.264** 0.017 -16.089*** 0.000 note ***: 1% level of significance **: 5% level of significance. s o u r c e : computed data. from the results it is very clear that there is no unit root in any of the variables, as the calculated test statistics of adf and pp are significant at 1% level for the log value of volume traded and market return whereas log value of volatility showed significance at 5% level. the var model can be applied to study the investors’ overconfidence in the stock market 115 presence of overconfidence in the market. as formal overconfidence theories do not specify a time frame for the relationship between market return and volume of trade, the number of optimum lags is decided on the basis of lag determination test based on schwarz information criterion (sic) and the result of lag determination test is tabulated in table 2 in the annexure. lag determination test is applied to find out the optimum number of lags in the var model. the result shows that based on sic criterion number of lags are determined as six. table 2. lag determination test lag sic lag sic lag sic 0 -4.208 10 -5.288 20 -5.239 1 -5.088 11 -5.282 21 -5.231 2 -5.206 12 -5.280 22 -5.224 3 -5.244 13 -5.273 23 -5.217 4 -5.273 14 -5.267 24 -5.211 5 -5.292 15 -5.264 25 -5.205 6 -5.294* 16 -5.257 26 -5.197 7 -5.294 17 -5.251 27 -5.189 8 -5.292 18 -5.245 28 -5.183 9 -5.289 19 -5.242 29 -5.176 note *: 5% level of significance. s o u r c e : computed data. the * (sign) denotes the lag order selected by schwartz information criterion (sic) at 5% level of significance. accordingly, the presence of overconfidence bias was found out using the var model with number of lags k = 6 in equation (3). the results are summarised in the table 3 and table 4. table 3 represents the relationship between trading volume and lag of market return and between market return and lag of volume traded. this table shows the output of var by explaining the relationship between trading volume (dependent variable) and lag of market return (independent r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh116 variable) and the relationship between market return (dependent variable) and lag of trading volume (independent variable). higher r2 and adjusted r2 value in the table shows the better model. table 3. relationship between trading volume (t) and market return (r m ) lags using var r m (-1) r m (-2) r m (-3) r m (-4) r m (-5) rm(-6) r2 adj r2 trading volume (t) coefficient 0.330 0.781 -0.174 0.164 0.466 0.377 0.812 0.811 se 0.321 0.321 0.320 0.320 0.320 0.320 t-statistic 1.028 2.437 -0.543 0.512 1.454 1.179 p-value 0.304 0.014 0.587 0.608 0.146 0.238 t(-1) t(-2) t(-3) t(-4) t(-5) t(-6) r2 adj r2 market return (rm) coefficient 0.0010 0.0005 0.0002 -0.0003 -0.0001 0.001 0.012 0.009 se 0.0007 0.0008 0.0008 0.0008 0.0008 0.001 t-statistic 1.4210 0.0577 0.2151 -0.3607 -0.0838 0.760 p-value 0.155 0.954 0.83 0.718 0.933 0.447 note: **: 1% level of significance. s o u r c e : computed data. table 3 summarises the coefficient value, standard error, t-statistics, p-value, r2 and adjusted r2 in the relationship between trading volume & lag of market return and similarly market return & lag of trading volume. as r2 value indicates the better model, the model with trading volume as endogenous variable is a better one for the study. the relationship between trading volume and lagged market return is used to indicate the presence of overconfidence in the market. a positive relationship between trading volume and lag of market return is taken as evidence of overconfidence bias in the market (odean, 1998a; 1998b; 1999; gervais & odean, 2001; barberis & thaler, 2003; and statman et al., 2006). out of six lags, the third lag showed a negative coefficient value whereas 1st lag, 2nd lag, 4th lag and 5th lag showed positive values. in that second lag alone had a 5% significance. the reason for the second lag significance is the t+2 days settlements prevailing in the indian market or the laggard activity investors’ overconfidence in the stock market 117 among these investors. according to the theory, overconfidence bias is the most prominent explanation for the nature of this excess volume. table 4 given below represents the relationship between trading volume & price volatility and similarly market return & price volatility. here, the trading volume and market return are endogenous variables and price volatility is an exogenous variable. table lists out the remaining output of var model which explains the relationship between trading volume (dependent variable) and price volatility (independent variable) and market return (dependent variable) and price volatility (independent variable). the result shows that there is a significant positive relationship between volume and volatility and a negative relationship between market return and volatility at 1% level of significance. table 4. relationship between trading volume, market return and price volatility using var variable price volatility trading volume coefficient 0.916 se 0.009 t-statistics 10.041 p-value 0.000 market return coefficient -0.002 se 0.001 t-statistics -5.052 p-value 0.000 s o u r c e : computed data. table 4 exhibits a positive relationship between trading volume and price volatility and a negative relationship between market return and price volatility at 1% level of significance. this finding is consistent with the findings of karpoff (1987) and statman et al. (2006). the findings of the relationship between market return and trading volume in the present study produce enough evidence to prove that investors are trading more even when the market becomes highly volatile assuming it as a positive signal and ends up in low return, consistent r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh118 with the overconfidence theory. they end up in low return because of the overconfidence on the information possessed by them leading to market speculation. previous studies in indian market have produced ample evidence of volatility signals in commodity and equity indices generating speculative trading in the market. these results thus confirm the presence of overconfidence bias among traders in indian market. hence, it is proved that the null hypothesis is rejected at 1% level of significance and the alternative hypothesis is accepted, i.e., h1: there is a presence of overconfidence bias in the market. impulse response functions use all the var coefficient estimates to trace the impact of a residual shock that is one standard deviation from zero. figure 1 in annexure explains the response of volume traded to market return with one standard deviation of change in return. the vertical axis in the figure indicates the fractional increase in volume traded and the horizontal time axis represented in days. the figure shows that there is a positive response of volume traded to change in market return, the effect ranges around 0 to 0.013 percent and reaches a peak value of more than 0.01% for one standard deviation shock to market return during the second and third day. after a slight decline again it reaches the level of 0.012% after the 6thday. the high volume of trading then started declining gradually from 7th day onwards and reached around 0.007% on 11th day and thereafter the market witnessed a steep decline but the bias persists for more than 110 days. thus, the return to volume effect prevails in the market around four months. the figure shows that there is a positive response of volume traded to change in return. this effect persists in the market for 110 days. investors’ overconfidence in the stock market figure 1. response of volume traded to market return with one standard deviation of change in return number of days f ra ct io n al i n cr ea se i n v o lu m e tr ad ed s o u r c e : computed data. figure 2 in the annexure explains the response of trading volume towards its own lag due to one standard deviation of change in lag value of volume traded. the vertical axis in the figure indicates the fractional increase in the trading volume while the horizontal axis gives the time in days. the figure shows that there is a positive response of trading volume to the lag value of volume traded, which ranges between 0 to 0.29 percent. the effect of its own first lag on the same day is around 0.29 percent and from the next day the effect has started declining steeply and dropped to around 0.095 percent on 2nd day. later, it has decreased till the 4th day to 0.065% and started to increase again up to the 6th day to 0.09% thereafter started to decline steeply after 7th day but the lag effect persists even after 110 days. thus, the results show that after brief f luctuations and high trading volume for seven days and the effect prevails in the market around four months. r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh120 the figure shows that there is a positive response of trading volume to the lag value of volume traded. the results show that after brief f luctuations the effect lasts for more than three months before attaining normal. figure 2. response of trading volume towards its own lag with one standard deviation of change in lag value of volume traded number of days f ra ct io na l in cr ea se i n v o lu m e tr ad ed s o u r c e : computed data. the results of figures 1 and 2 in the annexure give evidence of overconfidence bias among investors in indian market. figure 1 shows increased trading, consequent to an increase in market return, with the maximum increase of 2% consistent with the 2% to 4% increase in trading observed by statman et al. (2006). figure 2 shows that increased trading volume is also positively related to the previous days increase in trade, consistent with the overconfident investor behaviour. both these results thus confirm the findings of statman et al. (2006) and conventional market wisdom which indicate that a shock in market return and volume will enhance trading activity for at least a month or two. investors’ overconfidence in the stock market 121 this overconfidence bias may induce the investors to go for bulk or block trade on the stocks with which they perform better. these results are also in agreement with theories on overconfidence bias which says that increased trading can be exploited by investors to their advantage to make more than average returns for a sustained period of time, in apparent violation of an efficient market hypothesis. overconfidence bias is a psychological bias that may be defined as an excessive belief in one’s intuitive reasoning, judgements and cognitive abilities (pompian, 2008). the investors’ lack of knowledge results in many of their decisions to be irrational and clouded by many behavioural biases including overconfidence bias. our study examines the presence of overconfidence bias in the stock market over a ten-year period using vector autoregression (var) model and we examine the persistence of this bias using impulse response functions. our analysis found a positive relationship between trading volume and lag of market return as well as between trading volume and volatility, we further found the relationship between return and volatility to be negative. that is these investors trade actively (causing volatility) and lose (negative return) more often in the market. this market behaviour provides strong evidence for overconfidence bias existing among the traders in the indian market and these effects persist for more than 110 days. we found that the overconfidence in the indian market is consistent with developed markets such as the us, and is unlike evidence of minimal overconfidence bias found in asian and latin american or developing markets (griffin et al., 2007). this overconfidence bias could be a factor responsible for triggering and prolonging global financial countries in us and in countries across all continents (jlassi, naoui & mansour, 2014). hence, even though overconfident investors cause intense trading in the market, their frenzied activity even in volatile periods does not augur well for the prosperity of indian investors and the market. r. ganesh, s. thiyagarajan, g. vasudevan, g. naresh122 azam, m.q., hashmi, n.i., hawaldar, i.t., alam, m.s., & baig, m.a. 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(2006). investor overconfidence and trading volume. the review of financial studies, 19(4), 1531–1565. http://dx.doi.org/ 10.1093/rfs/hhj032. ul abdin, s.z., qureshi, f., iqbal, j., & sultana, s. (2022). overconfidence bias and investment performance: a mediating effect of risk propensity. borsa istanbul review, 22(4), 780–793. http://dx.doi.org/10.1016/j.bir.2022.03.001. date of submission: december 10, 2020; date of acceptance: march 3, 2021. * contact information: veeravel91@gmail.com, research scholar, department of banking technology, school of management, pondicherry university, puducherry 605014, india, phone: +91 74183 46733; orcid id: https://orcid.org/0000-0003-1597-1777. ** contact information: s.mohanasundaram@outlook.com, research scholar, department of management studies, school of management, pondicherry university, puducherry 605014, india, phone: +91 99414 59900; orcid id: https://orcid.org/00000003-4639-9419. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 4 veeravel, v., & mohanasundaram, s. (2020). market timing abilities of large cap equity mutual fund managers: evidence from india. copernican journal of finance & accounting, 9(4), 87–99. http://dx.doi.org/10.12775/cjfa.2020.023 v. veeravel* pondicherry university s. mohanasundaram** pondicherry university market timing abilities of large-cap equity mutual fund managers: evidence from india keywords: large-cap funds, conditional models, public information variables, market timing abilities. j e l classification: c12, g11, g23. abstract: this study investigates the market timing ability (mta) of large-cap equity fund managers in india. the extensions of treynor and mazuy (tm) model and henriksson and merton (hm) model have been used by adding six additional factors related to the public information, 91-days treasury bill’s yield, the dividend yield on cnx 500 index, term structure of interest rates, the price-to-earnings ratio, yield from foreign exchange rates changes, and growth rate in gold prices. the extended models are termed, conditional models. this study has used time-series data of large-cap equity funds. the results of the conditional and unconditional versions of tm and hm models reveal that the large-cap equity funds as a whole do not possess significant mta, even v. veeravel, s. mohanasundaram88 though a considerable percentage of the funds under each of the models show significant positive mta. the study also highlights that the inclusion of the public information variables reconstitutes the impact of the market timing factor and other beta estimates in the model.  introduction the mutual fund industry in india has attained substantial progress in the past two decades. according to amfi (2020), “the assets under management of indian mutual fund industry have grown from rs. 26.94 trillion in november 2019 to rs. 29.83 trillion in november 2020”. the fund managers in india are active in wealth maximisation, diversification of portfolio risk, and effective and efficient selection of portfolios. with the rapid growth of the industry, the investors seek the answers concerning the market timing ability (mta) of fund managers. many methods have been used in the literature to measure the mta. among those, the model proposed by treynor and mazuy (1966) and the model proposed by henriksson and merton (1981) are commonly used. the study employs these two methods with public information variables, an improvement with the traditional measures (becker, ferson, myers & schill, 1999; n. p. b. bollen & busse, 2001; bollen & pool, 2008; deb, 2019; dhar & mandal, 2014; elton, gruber & blake, 2012; ferson & warther, 1996; sehgal & babbar, 2017; sehgal & jhanwar, 2008). the conditional version applied with public information variables assumes semi-strong market efficiency. the present research paper consists of six sections. section 2 surveys the existing academic literature on mta. section 3 gives a brief information on the data under this study and their sources. section 4 summarises the research methodology. the empirical results are discussed in section 5. the findings and the concluding remarks are presented in section 6. review of literature in the early 1990s, the researches on mutual funds extended to study the performance evaluation, persistence of performance, stock-picking skills (sps) and market timing abilities (mta). although most of the studies were based on the capm with multifactor portfolio benchmarks, a few studies (jensen, 1968; sharpe, 1966; treynor, 1965) failed to report superior fund performance. grinblatt and titman (1989) propose multiple benchmark portfolios based on the market timing abilities of large-cap equity mutual fund managers… 89 firms’ characteristics such as size, past returns, and dividend yield. the models with the empirical explanation of the returns of the assets (fama & french, 1993; ippolito, 1986) are also proposed. carhart (1997) studied the impact of the momentum factor along with three-factors studied by fama and french (1993). the multi-factor are found to be explaining the performance of the funds are better than a single factor model. to assess the mta, treynor and mazuy (1966) proposed a model (hereafter, tm model). having this model as a base, henriksson and merton (1981) proposed a model (hereafter, hm model), with the replacement of quadratic term by a dummy variable with maximum 1 and minimum 0. a parametric statistical test by kon and jen (1979) and chang and lewellen (1984) finds no mta of passive investment managers. a number of extensions on tm models are also developed (fletcher, 1995; jagannathan & korajczyk, 1986; lee & rahman, 1990). becker et al. (1999) suggests that the model specification could be improved by conditioning on the variables of public information, and no significant evidence for mta, after controlling for the public information. however, daily data is found to be better than monthly data in terms of significant mta (bollen & busse, 2001). the nonparametric test on large-cap mutual funds from 1980- 1999 with different benchmark indices by jiang (2003) does not find any significant mta. christensen (2005) studies the sps and mta in danish market by applying single index, multifactor model, quadradic regression approach of tm model, and options approach of hm model and finds no significant evidence for mta. chen and liang (2007) examine the hedge funds by applying timing return and volatility together, relating the returns to the sharpe ratio and find significant mta in a bear market and volatile market conditions. elton et al. (2012) applied a single index model to study the mta with monthly holdings. they find that the managers appear to show a significant positive mta. the study using fdr with the inclusion of mta variables by cuthbertson and nitzsche (2013) in german market reveals the positive alpha performance of funds. in indian context, the results of the studies using the unconditional and conditional models (deb, banerjee & chakrabarti, 2007; dhar & mandal, 2014; sehgal & jhanwar, 2008; tripathy, 2005, 2006) find no evidence for mta and sps. however, chopra (2011) documents mixed results for mta. sehgal and babbar (2017) proposes the alternative performance benchmarks for evaluating the funds. the application of the constrained quadratic factor model by mohanti and priyan (2018) reveals a significant level of active management and superiv. veeravel, s. mohanasundaram90 or sps. bandi and gupta (2019) find that only three fund managers display superior sps, and only two funds show mta during the study period. the studies on indian mutual funds market have focused more on the performance of equity funds, specifically jensen’s (1968) alpha. even though a number of studies have been conducted on large-cap equity mutual funds so far, there is no study which considers of the public information variables to examine the mta and hence, this study attempts to bridge this gap. data the scope of this study is the indian large-cap equity mutual funds that are growth-oriented. as of march, 2020, there are 206 active funds under this category. the funds having data for more than 36 months are retained for the study and 35 funds which are not meeting this criterion have been eliminated. thus, the sample size of this study is 171. this study covers the period from january, 2000 to december, 2019. the bloomberg database has been used to collect the data for the study. the net assets value (nav) has been used to calculate funds’ returns. the s&p bse 200 index has been used as the market proxy. the 91-days treasury bills return, collected from the website of rbi1, is used as a proxy for the risk-free assets. public information variables the selected public information variables (piv) suggested by ferson and schadt (1996) have been used for controlling or forecasting the stock returns and risk over a period of time. for conditioning the alpha and beta values, the six important macroeconomic variables namely, 91-days treasury bills yield (tb), the dividend yield on cnx 500 index (dy), the term structure of interest rates (ts), the aggregate p/e ratio (pe), yield from usd exchange rates changes (fx), and growth rate in gold prices (gp). bloomberg database has been used to collect the data for these variables. 1 rbi (reserve bank of india): national summary data page https://www.rbi.org. in/scripts/bs_nsdpdisplay.aspx?param=4 market timing abilities of large-cap equity mutual fund managers… 91 methodology we apply the unconditional tm and hm models and the conditional tm and hm models to measure the mta of large-cap equity funds. in order to find significant mta, we use monthly mutual fund returns calculated from net assets values of each fund as we apply the unconditional tm and hm models and the conditional tm and hm models to measure the mta of large-cap equity funds. in order to find significant mta, we use monthly mutual fund returns calculated from net assets values of each fund as r� = nav� – nav ��� nav ��� (1) where, 𝑅𝑅� is the return of the fund at time 𝑡𝑡, 𝑁𝑁𝑁𝑁𝑁𝑁� is the net assets value of the fund for at time 𝑡𝑡, and 𝑁𝑁𝑁𝑁𝑁𝑁��� is the net assets value at time 𝑡𝑡 𝑡 1. the market return computed as r��� = p� 𝑡 p��� p��� (2) where, 𝑅𝑅��� is the return of the market portfolio at time 𝑡𝑡, 𝑃𝑃� is the closing price of market portfolio at time 𝑡𝑡, 𝑃𝑃��� is the closing price of the index at 𝑡𝑡 𝑡 1. the yield on 91-day t-bills return is calculated on monthly basis. unconditional models of market timing ability the literature shows that there is a difference between the performance of the funds with respect to stock-selection and timing ability. different risk models are used to verify whether sps and mta can be predicted. it is understood that the single factor model measures the sps. however, the change in strategies by the managers in the portfolio construction is not accounted. a quadratic term has been added to the single factor model to capture the convexity of the fund returns and market returns. the tm model is represented as 𝑅𝑅� 𝑡 𝑅𝑅� =  α +  β �𝑅𝑅� 𝑡 𝑅𝑅� � +  γ �𝑅𝑅� 𝑡 𝑅𝑅� � � + ε�  (3) where 𝑅𝑅� is the return of fund 𝑝𝑝; 𝑅𝑅� is the return on the market index; 𝑅𝑅� is the risk-free rate; 𝛼𝛼 jensen’s alpha; 𝛽𝛽 is systematic risk of fund 𝑝𝑝; 𝜀𝜀� is the error term; 𝛾𝛾 is estimate of the timing ability of the fund 𝑝𝑝. if significant positive 𝛾𝛾, denotes the result of convex to the portfolio with respect to the market and the fund is considered to possess the mta. (1) where, rt is the return of the fund at time t, navt is the net assets value of the fund for at time t, and navt–1 is the net assets value at time t – 1. the market return computed as we apply the unconditional tm and hm models and the conditional tm and hm models to measure the mta of large-cap equity funds. in order to find significant mta, we use monthly mutual fund returns calculated from net assets values of each fund as r� = nav� – nav ��� nav ��� (1) where, 𝑅𝑅� is the return of the fund at time 𝑡𝑡, 𝑁𝑁𝑁𝑁𝑁𝑁� is the net assets value of the fund for at time 𝑡𝑡, and 𝑁𝑁𝑁𝑁𝑁𝑁��� is the net assets value at time 𝑡𝑡 𝑡 1. the market return computed as r��� = p� 𝑡 p��� p��� (2) where, 𝑅𝑅��� is the return of the market portfolio at time 𝑡𝑡, 𝑃𝑃� is the closing price of market portfolio at time 𝑡𝑡, 𝑃𝑃��� is the closing price of the index at 𝑡𝑡 𝑡 1. the yield on 91-day t-bills return is calculated on monthly basis. unconditional models of market timing ability the literature shows that there is a difference between the performance of the funds with respect to stock-selection and timing ability. different risk models are used to verify whether sps and mta can be predicted. it is understood that the single factor model measures the sps. however, the change in strategies by the managers in the portfolio construction is not accounted. a quadratic term has been added to the single factor model to capture the convexity of the fund returns and market returns. the tm model is represented as 𝑅𝑅� 𝑡 𝑅𝑅� =  α +  β �𝑅𝑅� 𝑡 𝑅𝑅� � +  γ �𝑅𝑅� 𝑡 𝑅𝑅� � � + ε�  (3) where 𝑅𝑅� is the return of fund 𝑝𝑝; 𝑅𝑅� is the return on the market index; 𝑅𝑅� is the risk-free rate; 𝛼𝛼 jensen’s alpha; 𝛽𝛽 is systematic risk of fund 𝑝𝑝; 𝜀𝜀� is the error term; 𝛾𝛾 is estimate of the timing ability of the fund 𝑝𝑝. if significant positive 𝛾𝛾, denotes the result of convex to the portfolio with respect to the market and the fund is considered to possess the mta. (2) where, rm,t is the return of the market portfolio at time t, pt, is the closing price of market portfolio at time t, pt–1, is the closing price of the index at t – 1. the yield on 91- day t-bills return is calculated on monthly basis. unconditional models of market timing ability the literature shows that there is a difference between the performance of the funds with respect to stock-selection and timing ability. different risk models are used to verify whether sps and mta can be predicted. it is understood that the single factor model measures the sps. however, the change in strategies by the managers in the portfolio construction is not accounted. a quadratic term has been added to the single factor model to capture the convexity of the fund returns and market returns. the tm model is represented as we apply the unconditional tm and hm models and the conditional tm and hm models to measure the mta of large-cap equity funds. in order to find significant mta, we use monthly mutual fund returns calculated from net assets values of each fund as r� = nav� – nav ��� nav ��� (1) where, 𝑅𝑅� is the return of the fund at time 𝑡𝑡, 𝑁𝑁𝑁𝑁𝑁𝑁� is the net assets value of the fund for at time 𝑡𝑡, and 𝑁𝑁𝑁𝑁𝑁𝑁��� is the net assets value at time 𝑡𝑡 𝑡 1. the market return computed as r��� = p� 𝑡 p��� p��� (2) where, 𝑅𝑅��� is the return of the market portfolio at time 𝑡𝑡, 𝑃𝑃� is the closing price of market portfolio at time 𝑡𝑡, 𝑃𝑃��� is the closing price of the index at 𝑡𝑡 𝑡 1. the yield on 91-day t-bills return is calculated on monthly basis. unconditional models of market timing ability the literature shows that there is a difference between the performance of the funds with respect to stock-selection and timing ability. different risk models are used to verify whether sps and mta can be predicted. it is understood that the single factor model measures the sps. however, the change in strategies by the managers in the portfolio construction is not accounted. a quadratic term has been added to the single factor model to capture the convexity of the fund returns and market returns. the tm model is represented as 𝑅𝑅� 𝑡 𝑅𝑅� =  α +  β �𝑅𝑅� 𝑡 𝑅𝑅� � +  γ �𝑅𝑅� 𝑡 𝑅𝑅� � � + ε�  (3) where 𝑅𝑅� is the return of fund 𝑝𝑝; 𝑅𝑅� is the return on the market index; 𝑅𝑅� is the risk-free rate; 𝛼𝛼 jensen’s alpha; 𝛽𝛽 is systematic risk of fund 𝑝𝑝; 𝜀𝜀� is the error term; 𝛾𝛾 is estimate of the timing ability of the fund 𝑝𝑝. if significant positive 𝛾𝛾, denotes the result of convex to the portfolio with respect to the market and the fund is considered to possess the mta. (3) where rp is the return of fund p; rm is the return on the market index; rf is the risk-free rate; α jensen’s alpha; β is systematic risk of fund p; εp; is the error term; γ is estimate of the timing ability of the fund p. if significant positive γ, v. veeravel, s. mohanasundaram92 denotes the result of convex to the portfolio with respect to the market and the fund is considered to possess the mta. the hm model regresses using a dummy variable as the independent variable. a fund with higher beta value implies that the market does outperform, while fund-beta with lower value implies that the market exhibits poor performance. hence, in line with risk-return theories, fund managers tend to choose high beta funds when they expect higher market returns. the equation of the hm model is represented by the equation the hm model regresses using a dummy variable as the independent variable. a fund with higher beta value implies that the market does outperform, while fund-beta with lower value implies that the market exhibits poor performance. hence, in line with risk-return theories, fund managers tend to choose high beta funds when they expect higher market returns. the equation of the hm model is represented by the equation 𝑅𝑅� − 𝑅𝑅� = 𝛼𝛼 𝛼 𝛼𝛼�𝑅𝑅� − 𝑅𝑅� � 𝛼 𝛾𝛾𝛾𝛾�𝑅𝑅� − 𝑅𝑅� � 𝛼 𝜀𝜀� (4) where 𝑅𝑅� , 𝑅𝑅�, 𝑅𝑅�, 𝛼𝛼, 𝛼𝛼, and 𝜀𝜀� are citrus paribus as (3), 𝛾𝛾 refers to dummy variable with the value 1 with positive excess markets return and 0 with negative market return. the estimate 𝛾𝛾 measures the difference between the bull and bear market 𝛼𝛼𝛽𝛽. a positive/negative significant 𝛾𝛾 𝛾𝛾𝛾𝛾𝛾𝛾 𝛾𝛾 𝛾𝛾𝛾𝛾 𝛾𝛾𝛾 fund manager is a successful/unsuccessful macro predictor and market timer. conditional models of market timing ability the conditional mta model (ferson & warther, 1996) is built on the understanding that the jensen’s alpha possesses the information of public information variables (pivs). this model assesses the ability of the managers to capitalise the publicly available information. this is because of the assumption that educated investors who have similar kind of information, can react consequently, to get the advantages out of the available information. the conditional timing ability model assumes that investment managers may modify their strategies over a period based on the information accessible to the public. this study uses six forecasting pivs, which are well documented in the existing literature, for calculating conditioning alphas and betas. these pivs are proven to be significant in many studies (e.g. pesaran & timmermann, 1995). (4) where rp , rm, rf , α, β and εp are citrus paribus as (3), d refers to dummy variable with the value 1 with positive excess markets return and 0 with negative market return. the estimate γ measures the difference between the bull and bear market βs. a positive/negative significant γ refers to that the fund manager is a successful/unsuccessful macro predictor and market timer. conditional models of market timing ability the conditional mta model (ferson & warther, 1996) is built on the understanding that the jensen’s alpha possesses the information of public information variables (pivs). this model assesses the ability of the managers to capitalise the publicly available information. this is because of the assumption that educated investors who have similar kind of information, can react consequently, to get the advantages out of the available information. the conditional timing ability model assumes that investment managers may modify their strategies over a period based on the information accessible to the public. this study uses six forecasting pivs, which are well documented in the existing literature, for calculating conditioning alphas and betas. these pivs are proven to be significant in many studies (e.g. pesaran & timmermann, 1995). 𝑅𝑅� − 𝑅𝑅� =  𝛼𝛼 𝛼  𝛼𝛼� �𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐷𝐷𝐷𝐷��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑃𝑃𝑃𝑃��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐹𝐹𝐹𝐹��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐺𝐺𝑃𝑃��� 𝛼  𝛾𝛾�𝑅𝑅� − 𝑅𝑅� � � 𝛼 𝜀𝜀�   𝑅𝑅� − 𝑅𝑅� =  𝛼𝛼 𝛼  𝛼𝛼� �𝑅𝑅� − 𝑅𝑅� � 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐷𝐷𝐷𝐷��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑃𝑃𝑃𝑃��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐹𝐹𝐹𝐹��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐺𝐺𝑃𝑃��� 𝛼  𝛾𝛾 𝐷𝐷�𝑅𝑅� − 𝑅𝑅� � 𝛼 𝜀𝜀�       the conditional tm model and the conditional hm model are represented by (5) and (6) respectively, where, 𝑅𝑅� , 𝑅𝑅�, 𝑅𝑅� , 𝛼𝛼, 𝛼𝛼, and 𝜀𝜀� are citrus paribus as (3), 𝑇𝑇𝑇𝑇��� refers yield on 91day treasury bill rates; 𝐷𝐷𝐷𝐷��� is the dividend yield on cnx 500 market index; 𝑇𝑇𝑇𝑇��� denotes term structure rates; 𝑃𝑃𝑃𝑃��� indicates price-to-earnings ratio; and 𝐹𝐹𝐹𝐹��� refers yield on foreign exchange rates. empirical results table 1 exhibits the summary of funds with positive and negative γ estimate as per the unconditional and conditional models. table 1. funds with positive and negative γ number of funds significant insignificant positives negatives positives negatives positives negatives treynor & mazuy unconditional model 131 40 79 3 52 37 conditional model 118 53 67 3 51 50 henriksson & merton unconditional model 133 38 75 3 58 35 conditional model 120 51 65 3 55 48 source: authors’ calculations. the unconditional tm model reveals that out of 171 funds, 79 funds show significant (p = 0.05) positive γ estimate, which means that there is 46 per cent of fund managers outperform the market with significant market timing ability. only three funds exhibit negative significant negative estimate for mta factor. (5) market timing abilities of large-cap equity mutual fund managers… 93 𝑅𝑅� − 𝑅𝑅� =  𝛼𝛼 𝛼  𝛼𝛼� �𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐷𝐷𝐷𝐷��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑃𝑃𝑃𝑃��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐹𝐹𝐹𝐹��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐺𝐺𝑃𝑃��� 𝛼  𝛾𝛾�𝑅𝑅� − 𝑅𝑅� � � 𝛼 𝜀𝜀�   𝑅𝑅� − 𝑅𝑅� =  𝛼𝛼 𝛼  𝛼𝛼� �𝑅𝑅� − 𝑅𝑅� � 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐷𝐷𝐷𝐷��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑇𝑇𝑇𝑇��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝑃𝑃𝑃𝑃��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐹𝐹𝐹𝐹��� 𝛼 𝛼𝛼��𝑅𝑅� − 𝑅𝑅� �𝐺𝐺𝑃𝑃��� 𝛼  𝛾𝛾 𝐷𝐷�𝑅𝑅� − 𝑅𝑅� � 𝛼 𝜀𝜀�       the conditional tm model and the conditional hm model are represented by (5) and (6) respectively, where, 𝑅𝑅� , 𝑅𝑅�, 𝑅𝑅� , 𝛼𝛼, 𝛼𝛼, and 𝜀𝜀� are citrus paribus as (3), 𝑇𝑇𝑇𝑇��� refers yield on 91day treasury bill rates; 𝐷𝐷𝐷𝐷��� is the dividend yield on cnx 500 market index; 𝑇𝑇𝑇𝑇��� denotes term structure rates; 𝑃𝑃𝑃𝑃��� indicates price-to-earnings ratio; and 𝐹𝐹𝐹𝐹��� refers yield on foreign exchange rates. empirical results table 1 exhibits the summary of funds with positive and negative γ estimate as per the unconditional and conditional models. table 1. funds with positive and negative γ number of funds significant insignificant positives negatives positives negatives positives negatives treynor & mazuy unconditional model 131 40 79 3 52 37 conditional model 118 53 67 3 51 50 henriksson & merton unconditional model 133 38 75 3 58 35 conditional model 120 51 65 3 55 48 source: authors’ calculations. the unconditional tm model reveals that out of 171 funds, 79 funds show significant (p = 0.05) positive γ estimate, which means that there is 46 per cent of fund managers outperform the market with significant market timing ability. only three funds exhibit negative significant negative estimate for mta factor. (6) the conditional tm model and the conditional hm model are represented by (5) and (6) respectively, where, rp , rm, rf , α, β and εp are citrus paribus as (3), tbt–1 refers yield on 91-day treasury bill rates; dyt–1 is the dividend yield on cnx 500 market index; tst–1 denotes term structure rates; pet–1 indicates price-toearnings ratio; and fxt–1 refers yield on foreign exchange rates. empirical results table 1 exhibits the summary of funds with positive and negative γ estimate as per the unconditional and conditional models. table 1. funds with positive and negative γ number of funds significant insignificant positives negatives positives negatives positives negatives treynor & mazuy unconditional model 131 40 79 3 52 37 conditional model 118 53 67 3 51 50 henriksson & merton unconditional model 133 38 75 3 58 35 conditional model 120 51 65 3 55 48 s o u r c e : authors’ calculations. the unconditional tm model reveals that out of 171 funds, 79 funds show significant (p = 0.05) positive γ estimate, which means that there is 46 per cent of fund managers outperform the market with significant market timing ability. only three funds exhibit negative significant negative estimate for mta factor. v. veeravel, s. mohanasundaram94 the conditional tm model reveals that 67 funds show significant (p = 0.05) positive γ estimate, which means that there is 39 per cent of fund managers outperform the market with significant market timing ability. only three funds exhibit significant negative γ estimate. further, the interesting finding is that the fund showing a significant positive γ estimate in unconditional tm model are not the same funds which show a significant positive γ estimate in the conditional tm model, which means that the inclusion of the pivs reconstitutes the estimates, while the coefficient of determination of the model is being improved. the results of the unconditional hm model exhibit that 75 funds show a significant positive γ estimate, which means that there is 44 per cent of fund managers outperform the market with significant (p = 0.05) market timing ability and only three funds exhibit significant negative γ estimate. the results of the conditional hm model exhibit that 65 funds show significant positive γ estimate, which means that there is 38 per cent of fund managers outperform the market with significant market timing ability and only three funds exhibit significant negative γ estimate. similar to hm model, the fund showing the significant positive γ estimate in unconditional tm model are not the same funds which show significant positive γ estimate in the conditional tm model. table 2 shows the summary of the γ estimate of the funds as per the four models, after removing the outliers. table 2. summary of γ estimate from unconditional and conditional models mean s.d. median min. max. s.e. treynor & mazuy unconditional model 0.3782 0.4652 0.3867 -0.8338 1.3859 0.0411 conditional model 0.5133 0.8335 0.5899 -1.8898 2.4125 0.0737 henriksson & merton unconditional model 0.1109 0.1120 0.1311 -0.2329 0.4319 0.0099 conditional model 0.4915 0.8103 0.5657 -1.8791 2.4140 0.0716 s o u r c e : authors’ calculations. market timing abilities of large-cap equity mutual fund managers… 95 it is evident that the inclusion of the mean γ estimate is increasing with the addition of the pivs. however, the standard deviation of γ estimate is also increasing, which results in high standard error. it is also notable that even though the mean γ estimate is positive in all the models, the number of funds having significant positive γ estimate is not significantly above 50 percent of the sample. the positive mean γ estimate is because of the high magnitude the estimate of the funds with positive estimate than that of the funds with negative estimate. the bootstrap technique helps to find the unbiased γ estimate and to find the confidence interval for it. the bias corrected accelerated (bca) interval provides the accurate coverage after correcting the bias and skewness in bootstrap distribution, if any. table 3 exhibits the summary of the bootstrap with 1000 bootstrap samples. table 3. bootstrap summary of γ estimate bootstrap estimate bias s.e. bca interval treynor & mazuy unconditional model 0.3792 0.00104 0.0410 (0.3034, 0.4623) conditional model 0.5135 0.00020 0.0734 (0.3708, 0.6568) henriksson & merton unconditional model 0.1112 0.00028 0.0098 (0.0914, 0.1285) conditional model 0.4916 0.00006 0.0708 (0.3530, 0.6240) s o u r c e : authors’ calculations. the bootstrap γ estimates for all the four models are almost the same as the original γ estimates in a meaning that the bias is very less. in both tm and hm models, the bca interval as per the unconditional model is narrow, while the interval as per the conditional model is broad. this makes clear that the inclusion of the pivs reconstitutes the impact of the factors in the models thereby impacting their corresponding estimates. the distributions of the γ estimate of the bootstrap samples (b = 1000) as per all the four models have been represented in figure 1. v. veeravel, s. mohanasundaram96 figure 1. bootstrap distributions of γ estimate percent of the sample. the positive mean γ estimate is because of the high magnitude the estimate of the funds with positive estimate than that of the funds with negative estimate. the bootstrap technique helps to find the unbiased γ estimate and to find the confidence interval for it. the bias corrected accelerated (bca) interval provides the accurate coverage after correcting the bias and skewness in bootstrap distribution, if any. table 3 exhibits the summary of the bootstrap with 1000 bootstrap samples. table 3. bootstrap summary of γ estimate bootstrap estimate bias s.e. bca interval treynor & mazuy unconditional model 0.3792 0.00104 0.0410 (0.3034, 0.4623) conditional model 0.5135 0.00020 0.0734 (0.3708, 0.6568) henriksson & merton unconditional model 0.1112 0.00028 0.0098 (0.0914, 0.1285) conditional model 0.4916 0.00006 0.0708 (0.3530, 0.6240) source: authors’ calculations. figure 1. bootstrap distributions of γ estimate source: created by authors using r. s o u r c e : created by authors using r.  conclusion the objective of this paper is to investigate the market timing ability (mta) of large-cap equity funds from january, 2000 to december, 2019. this study applies tm and hm models and their extensions termed conditional tm and hm models with the inclusion of public information variables (pivs). the results find that a smaller number of fund managers have significant mta for the whole study period. around 46 percent of fund managers as per the unconditional tm model and 39 percent of the managers as per the unconditional hm model show significant mta. these findings are in line with chang and lewellen (1984), dhar and mandal (2014), goetzmann, ingersoll jr and ivkovic (2000), henriksson and merton (1981), sehgal and jhanwar (2008), treynor and mazuy (1966) and tripathy (2006). the results of the conditional versions of tm and hm models shows that 44 percent and 38 percent of the fund market timing abilities of large-cap equity mutual fund managers… 97 managers respectively show superior mta. the evidence for timing ability is meagre. this finding is consistent with earlier studies, becker et al. (1999), dhar and mandal (2014) and elton et al. (2012). the inclusion of pivs helps to strengthen the estimation of mta. hence, it can be concluded that the bias from the unconditional version is eliminated by controlling for the public information and this confirms the findings of previous studies (becker et al., 1999; deb et al., 2007; dhar & mandal, 2014; ferson & warther, 1996). further, there is no significant evidence found in this study to support the hypothesis that largecap equity fund managers in india show different mta at different time variations even after controlling for the effect of pivs. the mta models may support only for a short-term, and the persistent and precise forecast over the longterm is challenging. therefore, the average investors can diversify their mutual fund portfolios in the long-term. this could be the best strategy for mutual fund managers. the empirical evidence out of this study on mta of the largecap equity mutual funds in india contributes to the academic literature. there is a wide scope for carrying out a similar study with other types of funds.  references amfi (2020). association of mutual funds in india: industry trends, https://www.amfiindia.com/themes/theme1/downloads/home/industry-trends.pdf. bandi, s., & gupta, p. 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(1965). how to rate management of investment funds. harvard business review, 43, 63-75. http://dx.doi.org/10.1002/9781119196679.ch10. treynor, j. l., & mazuy, k. (1966). can mutual funds outguess the market? harvard business review, 4, 131-136. tripathy, n.p. (2005). an empirical evaluation of market timing abilities of indian fund managers on equity linked savings scheme. delhi business review, 6(2), 19-27. tripathy, n.p. (2006). market timing abilities and mutual fund performance-an empirical investigation into equity linked saving schemes. vilakshan, ximb journal of management, 127-138. date of submission: september 9, 2020; date of acceptance: october 4, 2020. * contact information: abbeysanyaolu15@yahoo.com, department of accounting, crescent university, abeokuta, ogun state, nigeria; phd candidate, department of accounting, university of benin, benin city, edo state, nigeria, phone: 08161750742; orcid id: https://orcid.org/0000-0002-0695-1961. ** contact information: babatundeadejumo@yahoo.com, director-general, osun debt management office, abere, osogbo, osun state, nigeria, phone: 08103341511; or cid id: http://orcid.org/0000-0002-1272-3746. *** contact information: enoch.kadiri@gmail.com, phd candidate, department of accounting, university of benin, benin city, edo state, nigeria, phone: 08037190430; orcid id: http://orcid.org/0000-0003-3234-6965. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 sanyaolu, w.a., adejumo, b.t., & kadiri, i. (2020). board diligence and financial performance: evidence from nigerian deposit money banks. copernican journal of finance & accounting, 9(3), 145–160. http://dx.doi.org/10.12775/cjfa.2020.017 wasiu abiodun sanyaolu* crescent university, university of benin babatunde titus adejumo** osun debt management office in osogbo idris kadiri*** university of benin board diligence and financial performance: evidence from nigerian deposit money banks keywords: board meetings, profitability, gmm. j e l classification: g20, g21, g33. abstract: the study examined the effect of board diligence on financial performance of deposit money banks (dmbs) listed on the nigerian stock exchange. data of the 10 selected dbms were obtained from their annual financial statements from 2012 to wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri146 2018 using an ex post facto research design and purposive sampling technique. the data were analysed using inferential statistics and the hypothesis was tested using generalised method of moment (gmm). it was found that board diligence has significant negative effect on financial performance of nigerian listed dbms. as regards the controlled variables, only capital adequacy and firm size were found to positively and significantly inf luence financial performance. liquidity ratio was found to have direct but no significant effect on financial performance while nonperforming loan negatively and insignificantly affect financial performance. the study concludes that board diligence reduces financial performance. it is therefore recommended that preference should be given to the quality of board meetings and not the frequency of such meetings; and that issues that have implications on performance should be given utmost attention at board meetings.  introduction the consequential impact of the global financial crisis of 2007–2008 that hard hit global economy on the banking sector have highlighted the need for a more controlled operational environment, increased governance complexity and calls for effective monitoring by banks’ board of directors (körner, 2017). a unique corporate governance mechanism is a manifestation of dominant role of board of directors on performance and risk-taking behavior (elyasiani & zhang, 2015; faleye & krishnan, 2017). it is the expectation of both the shareholders and regulators that boards should establish an effective risk monitoring system so as to eradicate corporate misconduct and excessive risk taking (kress, 2018). one of the ways by which the board discharges its monitoring and controlling responsibility is through board meetings. according to jensen (1993), board meeting and its frequency are regarded as tools for enhancing the monitoring activity of directors, and it has implication on performance. board meetings are unique component of board supervisory function as outstanding issues and potential solutions relating to an entity are discussed at the meeting. it is thus being regarded as an essential component of good governance (vafeas, 1999; conger, finegold & lawler iii, 1998; lipton & lorsch, 1992). eluyela, akintimehin, okere, ozordi, osuma, ilogho and oladipo (2018) regards board meetings as avenue for effective coordination of opinions for attainment of firms’ goals and objectives. according to kakanda, bello and abaa (2016), business survival and growth is a ref lection of corporate performance. marn and romauld (2012) relate company’s performance to its efficient and effective utilization of its scarce resources to accomplish its goals. corporate performance is majorly measured board diligence and financial performance… 147 by the ability of company’s directors to maximize the wealth of the shareholders. corporate financial performance is often measured in terms of profitability. profitability is conceptualized by gatsi, gadzo and akoto (2013) as the final outcome of firms’ financing and investing activities, and as well as how management is able to optimize profitability via capital structure decision. profitability is commonly measured by five indices namely: return on asset, return on equity, return on capital employed, gross profit margin and net profit margin (ilaboya, 2008). in accounting and finance literature, the nexus between board meetings’ frequency and financial performance has engendered series of arguments. basically, there exist two schools of thoughts on the relationship. the first school of thought relates to those who are of the view that board in the fulfilment of its functions of setting strategy and monitoring of management requires frequency of board meetings (vafeas, 1999).this argument can be supported by the expected role of board meetings in reducing agency problem through the provision of avenue for monitoring and control which will assist in aligning the interest of the managers with that of shareholders. on the contrary, the second school of thought are those that argued that board frequent meetings result to wasting management time and efforts, and waste of company’s scarce resources by placing financial burden such as travelling expenses and sitting allowance to directors on the company they conclude that it is the quality of meetings that improve performance and not the quantity (ntim & osei, 2011; taghizadeh & saremi, 2013; oyerinde, 2014). nigeria banking sector provides a pertinent background for investigation of board diligence and financial performance for considerable number of reasons first, the nigerian banking sector serves as the fulcrum for other sectors of the economy as it provides the finance needed by them. this it does by mobilizing funds from surplus to deficit ends. thereby, facilitating production, trade and capital formation that resulted in sustainable job creation, and economic development. second, the sector currently accounts for about 32% of the entire market capitalisation on the nigerian stock exchange. this further emphasises the significance of the sector in the country. studies aimed at ensuring sustainability of the sector’s current status are therefore considered worthwhile. prior literatures in the nigerian context have majorly focused corporate governance and financial performance in general (umar & sani, 2020; oyedokun, 2019; ilaboya & obaretin, 2015). the relationship between board meetings and financial performance has not been given the required attention in wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri148 nigeria, particularly in the banking system. as observed, the only recent study that specifically addressed the issue of board meetings and financial performance in the country’s banking system is that done by eluyela et al. (2018). whereas, the referenced study provides a good head start, some gaps are however observed in the work. first, the data employed in the study span from 2011 to 2016. this is considered not expansive enough and requires more ampleness. second, the study views the nexus between board meetings and financial performance from static perspective using regression analysis, third, most variables that are likely to inf luence profitability other than board meetings (such as liquidity, non-performing loan and capital adequacy) were not included in the study’s model. this may produce contentious results and thus; necessitates a re-examination. this paper therefore investigates board diligence and financial performance of nigerian dbmss from 2012 to 2018 using gmm on a model that incorporates other predictor variables. literature review conceptual review board meetings and financial performance board diligence in this study is a proxy for board meeting. board meeting is an important component of corporate governance as it provides an avenue for directors on the board to deliberate on various corporate issues and make strategic decisions that are germane to the success of a company and attainment of its overall objectives. according to eluyea et al. (2018), regular board meeting is an internal issue which is at the discretion of chairman of board. this is so given that there is no explicit governance law stipulating the maximum number of meetings. whereas, most governance codes usually indicate minimum of four board meetings per annum without any threshold on the maximum time such meetings can be held, the relationship between frequencies of board meetings on companies’ financial performance remains debatable. empirical studies on board meetings and financial performance have produced conf licting evidences. while a strand of the studies found evidences for positive relationship between board diligence and finance performance (eluyera et al., 2018; ntim & osei, 2011; irshad & ali, 2015), other studies hold the view that the relationship between them are negative (johl, johl, subramaniam & cooper, board diligence and financial performance… 149 2013, amran, 2011). according to chorsch and maclver (1989) cited in ilaboya and obaretin (2015), board meetings frequency is discouraged as it is believed to engender waste in the use of organization resources on activities that are counterproductive. theoretical framework the popular agency theory is the relevant theoretical framework for this study. the agency problem is the outcome of separation of ownership from management. this occurs where agents (managers) are appointed by principals (shareholders) to run and manage the business on their behalf. as principals are unable to directly observe the behaviour of agents, there arises conf lict of interest where managers are tempted to pursue their own self-aggrandizing goals as against those of their principals. according to eluyela et al. (2018), the agents are appointed and corporate governance mechanism instituted so as to ensure creation of a disciplined atmosphere, setting of timely and achievable strategic plan and effective control of the management so as to maximize shareholders wealth through improved financial performance. ntim and osei (2011) argued in favour of regular board meetings indicating that such meetings enhance board advisory, controlling and monitoring capacities and thus ensure discipline so as to improve organizational performance. empirical review and development of hypothesis eluyela et al. (2018) using fixed effect regression on data of 15 sampled dbms from 2010 to 2016 found among others that board meetings has positive insignificant effect on financial performance. hanh, ting, kweh and hoanh (2018) selecting 94 firms quoted in ho chi minhstock exchange from 2013 to 2015 found that board meetings negatively affect profitability. araoye and olatunji (2019),on the investigation of board meetings and financial performance of 15 selected insurance companies from 2006-2017 found evidence for negative and insignificant effect of board meetings on financial performance. urhoghide and omolaye (2017) found that board diligence has no significant positive effect on profitability of oil and gas companies in nigeria. akpan (2015) using data of 79 quoted nigerian companies from 2010 to 2012 and using regression analysis also reveals that board meetings, directors` equity and board size are wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri150 negatively significant on profitability. other findings from the referenced study are that audit committee meetings are positively significant, while gender diversity and board age are not significant on profitability (measured by roe). al-daoud, saidin and abidin (2016) using gmm on data of 118 listed amman companies from 2009-2013 found that board meetings positively inf luence profitability. in contrast, johl, kaur and cooper (2015) focusing on 700 listed companies in malaysia for 2009 found that board diligence has negative effect on performance. ilaboya and obaretin (2015) reported positive insignificant inf luence of board diligence on financial performance of nigerian quoted food and beverages companies. emanating from the mixed findings from the studies mentioned is the formulation of this study’s hypothesis as: h01: board diligence has no significant effect on financial performance of nigerian dbms. methodology sample 10 dbms represent the study’s sample. 15 dbms were listed on the nigerian stock exchange. the 10 banks were purposively selected while an ex post facto research design was used. source of data secondary data obtained from the annual reports and accounts of the sampled bank were utilized. measurement of variables the only dependent variable is financial performance which is measured by roa. this is defined as the proportion of profit after tax to total asset. several researchers like sanyaolu, siyanbola, gbadebo and makinde (2019) have proxied profitability by roa in their study. one independent variable is used by the study as a surrogate for board diligence. this is the number of meetings held in an accounting year by the directors on the board. furthermore, four variables are used as control variables. these variables are believed to be potential de board diligence and financial performance… 151 terminants of roa. they are: capital adequacy which is measured as proportion of equity capital to total asset, loan to deposit ratio which is measure as the ratio of bank loan to total asset, non-performing loan ratio which is the proportion of nonperforming loan to total loan and bank size which is the natural logarithm of banks’ total asset. method of data analysis the analyses of the study involve descriptive, correlation and generalized methods of moment. the gmm is appropriate when the number of observations exceed time series. the statistical package employed for the study is e-views 9. model specification y = f(x) (1) where y = financial performance x = board diligence roa = f (bd, car, ldr, nplr & fsz) (2) roait = β0+β1roait-1 + β2bdit + β3carit + β4ldrit + β5nplrit+β6fsz+ eit (3) where; roait = return on asset of firm i in period t; roait-1 = previous year return on asset of firm i in period t; bdit = board diligence of firm i in period t; carit = capital adequacy ratio of firm i in period t; ldrit = loan to deposit ratio of firm i; nplrit = nonperforming loan ratio of firm i in period t; szit = firm size of firm i in period t; β0 = intercept term; β1β4 = regression coefficient of the independent variable; eit = stochastic error term. wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri152 descriptive statistics table 1. descriptive statistics roa bd car ldr nplr lasset mean 0.017003 6.228571 0.126438 0.699504 0.076550 20.98964 median 0.015478 5.500000 0.138145 0.703721 0.037300 21.04478 maximum 0.119833 11.00000 0.803866 1.277526 0.970000 22.44036 minimum -0.105138 4.000000 -0.607458 0.090703 0.010000 17.87634 std. dev. 0.026249 2.001242 0.144500 0.194458 0.129430 0.959320 skewness -0.840209 0.895472 -1.131955 -0.071494 5.085210 -0.763573 kurtosis 11.91711 2.943950 19.56902 3.959868 33.94428 3.464079 jarque-bera 240.1542 9.364313 815.6680 2.746896 3094.542 7.111902 probability 0.000000 0.009259 0.000000 0.253232 0.000000 0.028554 sum 1.190179 436.0000 8.850659 48.96525 5.358500 1406.306 sum sq. dev. 0.047542 276.3429 1.440747 2.609150 1.155902 60.73950 observations 70 70 70 70 70 70 s o u r c e : authors computation (2020) using e-view 9. the table above shows the statistical attributes of the variables of the study. roa is averaged 0.017 with a minimum of -0.105 and maximum of 0.12. board diligence has a mean value of 6.2 and ranges from 4 to 11. capital adequacy ratio is averaged 12.6% and varies from -60.7% to 80.3%. loan to deposit ratio is averaged 70% with a minimum of 9.1% and maximum of 128%. nonperforming loan ratio has a 7. 7% and ranges from 1% to 0.97%. size has an average value of 20.98964(log inverse) and varies from 17.87634 to 22.44036. as to the normality of the variables all but loan to deposit ratio are normally distributed as the probabilities of their jarque-bera are significant at 5%. as to the kurtosis, only board diligence is found to be platykurtic as the value is below the threshold of 3 while all others are leptokurtic. board diligence and financial performance… 153 correlation analysis table 2. correlation matrix roa bd car ldr nplr size roa 1.000000 bd -0.143007 1.000000 car 0.772339 -0.096595 1.000000 ldr 0.083054 0.187795 0.041841 1.000000 nplr -0.099053 -0.026266 0.075893 0.296981 1.000000 size 0.322073 0.204254 0.061189 0.142097 -0.126410 1.0000 s o u r c e : authors computation (2020) using e-view 9. the table above shows the correction among all the variables of the study. as it is shown above, none of the variables has a correlation coefficient in excess of 0.80. as such, there is no problem of auto correlation. result the adjusted r-square of 0.636 implies that almost 64% variation in profitability is explained by the dependent and control variables included in the study’s model. this indicates the level of precision of the model. the j-statistics value of 46. 0 with corresponding probability of 0.000 implies that the model as a whole is statistically significant at 1% level of significance. the durbin watson value of 1.827 shows that there is no problem of autocorrelation. we found that last year profitability does not significantly drive current year profitability though, it is found to be positive. this may be an indication of low retention ratio to finance the growth potential of dbms. contrary to our expectation, board diligence exert significant negative inf luence on profitability with a t-value of (-2.153279) which implies that increase in board meetings frequency will significantly reduce profitability. this finding aligns with johl et al. (2013) which indicates that increase in board meetings frequency amounts to wasting of hard earned productive resources on wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri154 t ab le 3 . g m m a na ly si s fo r bo ar d di lig en ce a nd fi na nc ia l p er fo rm an ce po ol ed o ls e st im at io n fi xe d ef fe ct r an do m e ff ec t r eg re ss or s co ef f tst at p -v al co ef f tst at p -v al co ef f tst at p -v al c -0 .2 36 70 1 -4 .2 47 94 0 0. 00 01 -0 .4 86 08 0 -2 .5 81 21 3 0. 01 39 -0 .2 53 20 5 -4 .4 18 39 2 0. 00 01 ro a (-1 ) 0. 12 62 66 1. 30 74 39 0. 19 76 -0 .0 04 64 2 -0 .0 46 01 5 0. 96 35 0. 10 19 72 1. 13 04 50 0. 26 41 bd -0 .0 02 32 3 -2 .2 27 35 3 0. 03 09 -0 .0 01 08 7 -0 .7 24 24 7 0. 47 35 -0 .0 02 22 1 -2 .1 53 27 9 0. 03 66 c a r 0. 08 99 60 5. 35 59 96 0. 00 00 0. 05 88 18 2. 95 62 77 0. 00 54 0. 08 51 54 5. 31 03 91 0. 00 00 ld r 0. 01 82 19 1. 56 14 18 0. 12 53 0. 01 26 54 0. 92 31 48 0. 36 19 0. 01 84 40 1. 67 29 48 0. 10 11 n pl r -0 .0 21 32 3 -1 .4 50 35 2 0. 15 37 0. 00 41 11 0. 21 46 57 0. 83 12 -0 .0 17 75 2 -1 .2 48 66 7 0. 21 81 la ss et 0. 01 15 02 4. 10 49 19 0. 00 02 0. 02 33 65 2. 54 41 97 0. 01 53 0. 01 22 78 4. 28 83 89 0. 00 01 rsq ua re 0. 71 61 97 0. 81 20 8 0. 67 77 64 a dj .r -s qu ar e 0. 67 91 79 0. 73 59 0 0. 63 57 33 jst at 46 .0 00 37 .0 00 46 .0 00 pr ob j -s ta t 0. 00 00 0 .0 00 0 0. 00 00 d ur bi n w at so n 1. 78 13 27 2. 02 29 1. 82 70 54 in st ru m en t r an k 8 17 8 h au sm an t es t 12 .0 92 25 1 6 0. 05 99 s o u r c e : r es ea rc he rs ’ c om pu ta ti on ( 20 20 ) u si ng e -v ie w s 9. board diligence and financial performance… 155 unproductive activities. it is therefore imperative for banks to hold optimum meetings as too much board meetings frequency could lead to wasting quality time and efforts (ilaboya & obaretin, 2015). this outcome is in line with that of hanh et al. (2018); johl, kaur and cooper (2015); akpan (2015) who found significant negative effect of board meetings on profitability while it contradicts findings by ilaboya and obaretin (2015) that found positive but insignificant impact of board meetings on profitability. thus, the null hypothesis h01 that board diligence has no significant effect on financial performance of nigerian dbms is rejected. in an attempt to avoid spurious result, other variables outside board meetings such as capital adequacy, loan to deposit ratio, non-performing loan ratio and bank size were introduced as control variables. capital adequacy shows significant positive effect on profitability with a t-value of 5.310391.this means that banks’ capital strength is a significant driver of profitability. this finding corroborates that of sanyaolu et al. (2019). the implication of this finding according to sanyaolu et al. (2019) may be due to the fact that capital adequacy may afford banks the opportunity of having sufficient fund to finance loan requests of customers and as well, being able to invest in new technology that reduces operational cost. we found direct but no significant inf luence of liquidity on profitability. this means that liquidity ratio is not an important driver of profitability in the nigerian dbms. this outcome is in disagreement with that of bagh, razzaq, azad, liaqat and khan (2017) that found direct and significant effect of liquidity ratio on profitability. non-performing loan exert negative but no significant inf luence on profitability. this is consistent with our a priori expectation as non-performing loan is written off of profit and therefore, has tendency of reducing profitability. this outcome is however at variance with that of annor and obeng (2017) that found positive significant inf luence of non-performing loan on profitability. size positively and significantly affects profitability. this is also in line with our expectation as larger banks may enjoy economies of scale that reduce average cost of operation and boost profitability. this is consistent with the finding of rahman, hamid and khan (2015) that show that size is an important driver of profitability. wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri156 discussion and conclusion the study examines the effect of board diligence on financial performance of 10 selected listed dbms from 2012 to 2018 using gmm. the major finding is that board diligence has significant negative effect on financial performance measured by return on asset. this finding is supported by those of hanh et al. (2018); johl et al. (2015); akpan (2015) that reported significant negative effect of board diligence on profitability. as to the control variables, only two variablescapital adequacy ratio and bank size exert positive significant inf luence on profitability, while loan to deposit ratio (liquidity ratio) and non-performing loan ratio were not found to be significant. empirical investigations have mainly focused on corporate governance and profitability in general, with very few studies that specifically addressed the issue of board diligence and profitability of nigerian deposit money banks. this study therefore examines the effect of board diligence on financial performance of nigerian dbms from dynamic perspective. the study found evidence for board diligence exerting negative but significant effect on profitability. this finding could be linked to the fact that frequency of board meetings could lead to diversion of management times and efforts to unproductive activities and, as well as diverting firm scarce resources on irrelevant and unproductive activities such as payment of high travelling and seating allowance to directors on the board, and as well as other associated costs of such meetings. our study therefore recommends that quality of board meetings should be given priority and not the number of times such meetings are held. also, important issues that are likely to translate to improved financial performance and maximization of shareholders wealth should be prioritized. another dimension to the finding of this study has to do with the quality of boards in the sector under focus. issues such as board diversity, calibre of board members and the relevance of their experience are germane to the quality of board decisions in their meetings. how much of impact board decisions can have on company’s financial performance is a function of members’ understanding of the operational issues relating to their company’s business. this also has to do with quality of board decisions particularly relating to operational and strategic issues affecting the business. banking business in nigeria appears so volatile with lots of inherent challenges such as inconsistency in government and regulatory policies, weak corporate governance regulations, board diligence and financial performance… 157 endemic corrupt practices among others. definitely this type of environment will require more than diligent boards for results. experienced board members, with diversity of gender, background among others are anticipated. as applicable on all studies, it is important to emphasize that our study has its own limitations. first, we examined board diligence and financial performance of nigerian dbms, future researchers can extend the scope by focusing on the non-financial sectors and other non-bank financial institutions. also, inclusion of variables such as ownership structure, audit committee meetings in future studies may produce better opportunity for generalization.  references akpan, e.o. 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(2017). effect of corporate governance on financial performance of quoted oil and gas in nigeria. international journal of business and social science, 8(7), 114-124. vafeas, n. (1999). board meeting frequency and firm performance. journal of financial economics, 53(1), 113-42. wasiu abiodun sanyaolu, babatunde titus adejumo, idris kadiri160 appendix table 1. list of sampled banks s/n name of banks 1 gt bank plc. 2 uba plc 3 access bank plc 4 zenith bank plc 5 first bank plc 6 sterling bank plc 7 union bank plc 8 fidelity bank plc 9 wema bank plc 10 unity bank plc s o u r c e : authors’ compilation (2020). date of submission: february 13, 2023; date of acceptance: april 1, 2023. * contact information: ukrol@umk.pl, department of financial accounting, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a street, 87-100 toruń, poland, phone: +48 56 611 47 79, orcid id: https://orcid. org/0000-0002-5230-6015. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 król, u. (2022). a theoretical analysis of the new polish income tax system. copernican journal of finance & accounting, 11(4), 147–163. http://dx.doi.org/10.12775/cjfa.2022.023 urszula król* nicolaus copernicus university in toruń a theoretical analysis of the new polish income tax system keywords: taxation, income taxes, tax perturbation. j e l classification: h22, h25. abstract: the research objective of this article is to present changes incorporated into the polish income tax system and their potential inf luence on entrepreneurs’ behaviour. one of the most important features of the income taxation system for polish entrepreneurs is that they can choose the rules of taxation. under certain conditions, they can apply a progressive scale tax, a f lat tax, or a revenue-based tax. the changes introduced in the year 2022 mean that for many entrepreneurs, the burden of taxation has increased. the theoretical and model analysis presented in this article revealed that for many of them, the revenue-based tax has become (or always has been) the optimal form of taxation. the analysis also indicates a serious problem with this form of taxation in the context of equity. this study may provide a basis for further research on the impact of tax perturbations on business activity, business structure, and costs of compliance.  introduction introduction taxation is one of the great legal, scientific, and political subjects – and income taxation is an extremely sensitive one. scientists are looking for an optimal tax http://dx.doi.org/10.12775/cjfa.2022.023 urszula król148148 system in the framework of theoretical and empirical analyses. since the 1970s, the scientific discussion about optimal taxation has been rife.1 the main dilemmas were optimal tax revenues and the optimal structure of the tax system, and in particular questions: ■ should there be direct or indirect taxation dominance?2 ■ should there be lump-sum or distortionary taxes dominance?3 ■ should there be progressive or f lat taxation dominance?4 around these topics, there is a discussion about finding the right balance between equity5 and efficiency. income taxation raises particularly complex issues, as it affects individual’s net earnings, savings, work, and attitudes.6 politicians, on the other hand, are searching for an optimal tax system by introducing constant changes to existing solutions. it should be emphasised here that these two groups do not necessarily define the optimal tax system in the same way. nevertheless, any significant tax reform can be the basis for research on taxation, taxpayer behaviour, and tax system fairness. many scientists use those politics-driven tax reforms to address in a theoretical framework the effects of small commodity tax reforms, often called tax perturbations.7 the aim of this article is to present changes incorporated into the polish income tax system and their potential inf luence on entrepreneurs’ behaviour. one of the most important features of the income taxation system for polish entrepreneurs is that they can choose the rules of taxation. under certain conditions, they can apply a progressive scale tax, a f lat tax, or a tax on recorded revenue without deductible costs.8 the changes introduced in the year 2022 mean that for many entrepreneurs the burden of taxation under the ‘standard’ forms of taxation, i.e., progressive and f lat, has increased. this provides an opportunity to analyse the taxpayer’s potential behaviour in the context of choosing 1  see more: (sandmo, 1976). 2  see more: (atkinson and stiglitz, 1976). 3  see more: (joseph, 1939), (hicks, 1939), (peacock and berry, 1951), (stigler, 1987), (torregrosa-montaner, 2015). 4  see more: (diamond and mirrlees, 1971), (conesa and krueger, 2006). 5  see more: (jakobsson, 1976), (kakwani and lambert, 1998). 6  see more: (tschinkl, weikert & kiesewetter, 2021). 7  see more: (feldstein, 1976), (diewert, 1978). 8  this tax is usually referred to as “lump sum tax”; however, that name does not correspond with it’s nature. therefore, this article will use the shorter name ‘revenuebased tax’. a theoretical analysis of the new polish income tax system 149149 the optimal form of taxation. those choices are particularly interesting due to the fact that most probably a large part of entrepreneurs changed their chosen taxing rules from income-based tax rules (progressive tax and f lat tax) to revenue-based tax rules. the analysed shift in the income taxation system may also form a basis for considerations on the fairness of the old and new tax systems. research methodology and research processresearch methodology and research process the polish system of income taxation has been changing ever since its introduction in 1992, just as other tax systems have. however, recent changes (called the ‘polish deal’9) are crucial, as they change not only the income tax burden, but also the whole structure of taxation on business activity income – potentially affecting the equity of taxation, taxpayer behaviour, and costs of compliance or optimisation. therefore, only the fundamental elements of the income taxation system in 2021 and 2022 (two versions10) will be explained. further analysis concerns only the taxation of income generated by individuals running business activities (as sole traders or as partners in partnerships). in 2021 and 2022, there were four possible ways of taxing business activity income generated by individuals (entrepreneurs) in poland: tax scale (which means progressive tax scale), ‘f lat tax’ – tax scale with one rate of 19%, revenue-based tax, or the so-called ‘tax card’.11 the self-employed could choose between those four forms of taxation; however, all forms other than the tax scale were subject to certain conditions. taxation under the progressive tax scale in 2021 was based on income; however, the taxable income was calculated by deducting some expenditures from income (deductions on income) – the most important were social security contributions to the social insurance institution (old-age pension fund, disabili9  jan frąszczak provides the history and unusual circumstances of introducing the tax changes called the ‘polish deal’ (frąszczak, 2022). other perspective on that process gives (sawulski et. al., 2023). 10  there were two versions of the polish income taxation system in 2022, as vital changes were introduced into that system before and during 2022. those two versions of the tax system will be called polish deal 1.0 and polish deal 2.0 – as they are known in polish press. 11  the ‘tax card’ is an interesting lump-sum form of taxation – however, since 2022, access to this form of taxation has been limited to those who used it in 2021, so with time it will disappear altogether. urszula król150150 ty pension fund, sickness insurance fund, and work accident insurance fund). those contributions – apart from some exceptions – were calculated on a fixed basis and amounted to pln 11,974.37 per year for an entrepreneur. the tax scale provided a basic rate of 17% which was applied to taxable income to the limit of pln 85,528. above that limit, a higher rate of 32% was applied – but only to the excess tax base (taxable income). tax amount calculation rules are presented in table 1. it must be noted that in 2021, the scale also provided for a tax-decreasing amount that was dependent on the income. details on that amount are presented in table 2. one type of tax reliefs in 2021 consisted in a deduction of a set amount (or part of the expenses) from the calculated amount of tax. compulsory health insurance was a very important example of such tax relief. health insurance was calculated as 9% of a fixed basis12 (in 2021 it was pln 4562.25 annually), but the deduction was 7.75% of that basis (in 2021 it was pln 3928.60 annually). as a result, health insurance was not a particularly important economic burden. as mentioned before, significant changes were introduced to progressive taxation in 2022. the first important shift was the scale – a new threshold for applying a higher tax rate. another new solution was a new tax-decreasing amount that was not dependent on income. those changes are presented in table 3. table 1. tax amount calculation rules in poland – progressive tax scale in 2021 annual taxable income tax amount calculation rules over up to pln 85,528 17% of the tax base less the tax-decreasing amount pln 85,528 pln 14,539.76 + 32% of excess tax base above pln 85,528 s o u r c e : act of 26 july 1991 on personal income tax (consolidated text: journal of laws, 2021, no. 1128 as amended). 12  that basis is 75% of average monthly earnings in national economy. a theoretical analysis of the new polish income tax system 151151 table 2. tax-decreasing amount in poland – progressive tax scale in 2021 annual taxable income annual tax-decreasing amount over up to pln 8,000 pln 1,360 pln 8,000 pln 13,000 pln 1,360– [pln 834.88 x (taxable income – pln 8,000) : pln 5,000 ] pln 13,000 pln 85,528 pln 525.12 pln 85,528 pln 127,000 pln 525.12– [pln 525.12 x (taxable income – pln 85,528 ): pln 41,472 ] pln 127,000 pln 0 s o u r c e : act of 26 july 1991 on personal income tax (consolidated text: journal of laws, 2021, no. 1128 as amended). the year 2022 also brought another modification in the polish tax system. the base for calculating health insurance imposed on entrepreneurs was altered – it was to be computed on the basis of income. to balance that, a new income tax deduction was introduced – the ‘middle-class deduction’, decreasing taxable income. details on the respective amounts are demonstrated in table 4. table 3. tax amount calculation rules in poland – progressive tax scale in 2022, first version (polish deal 1.0) annual taxable income tax amount calculation rules over up to pln 120,000 17% of taxable income less the tax-decreasing amount (set amount pln 5,100) pln 120,000 pln 15,300 + 32% of excess tax base above pln 120,000 s o u r c e : act of 26 july 1991 on personal income tax (consolidated text: journal of laws, 2021, no. 1128 as amended). urszula król152152 table 4. income tax ‘middle-class deduction’ calculation rules in poland – progressive tax scale in 2022, first version (polish deal 1.0) annual income ‘middle-class’ tax deduction calculation rules over pln 68,412 and up to pln 102,588 (income x 6.68% pln 4,566)/0.17 over pln 102,588 and up to pln 133,692 (income x (-7.35%) + pln 9,829)/0.17 s o u r c e : own elaboration on the basis of: act of 26 july 1991 on personal income tax (consolidated text: journal of laws, 2021, no. 1128 as amended). the described reform proved to be a failure as soon as tax year 2022 began. in order to avoid a pr disaster, politicians decided to mitigate the problem and promised further modifications to the income taxation system. those changes took place in the middle of the year – legal solutions were introduced from 1 july 2022, but some of them were effective as of 1 january 2022 (frąszczak, 2022). the most important adjustment was the new tax scale – presented in table 5. the second important modification was a removal of ‘the middle-class deduction’ from the legal system (guziejewska & witczak, 2022). table 5. tax amount calculation rules in poland – progressive tax scale in 2022, second version (polish deal 2.0) annual taxable income tax amount calculation rules over up to pln 120,000 12% of the tax base less the tax-decreasing amount (fixed amount of pln 3,600 ) pln 120,000 pln 10,800 + 32% of excess tax base above pln 120,000 s o u r c e : act of 26 july 1991 on personal income tax (consolidated text: journal of laws, 2021, no. 1128 as amended). another form of taxation available for entrepreneurs is f lat tax. the tax rate has not been changed ever since the introduction – it is 19% of taxable income. in that system, there are also some deductions, albeit limited in comparison to tax incentives accessible in the progressive scale tax system. in 2021, there were two main deductions – social security contributions were deductible from the tax base, and health insurance (part of it, 7.75% of the calculation base) was de a theoretical analysis of the new polish income tax system 153153 ductible from the charged amount of tax. those contributions were to be calculated basing on fixed amounts, similarly to the progressive tax scale. the main change in the f lat tax introduced by polish deal 1.0 in the year 2022 was the removal of the possibility to deduct health insurance from the tax amount. moreover, that insurance was to be computed on the basis of income and not a fixed amount as had previously been done. to make this switch less controversial, the rate of the health insurance was changed to 4.9%, should the entrepreneur choose the f lat tax. the only element modified in the f lat tax by polish deal 2.0 was that the deductibility of health insurance returned – but on different conditions. when using that taxation form, health insurance paid can be deducted, but from taxable income (not from charged tax, as it used to be) and with a fixed cap – the deduction cannot exceed the amount of pln 8,700. another form of taxation that can be chosen by polish entrepreneurs is the tax on recorded revenue without deductible costs. the proposed name ref lects the nature of this tax – the tax base is revenue, no deduction of costs is allowed. this option has always been limited to selected entities – one of the most important conditions was not to exceed eur 250,000 of revenue in the previous tax year.13 in 2021, that limit was raised to eur 2,000,00014 in the tax year, which made that form of taxation significantly more accessible and popular. the tax on recorded revenue has many rates, each dedicated to a specific type of business activity. in 2021, there were eight rates: 17%, 15%, 12.5%, 10%, 8.5%, 5.5%, 3% and 2%. in 2022, two more rates were added: 14% and 12%. the main challenge for taxpayers under this form of taxation is the correct choice of the type of activity and the rate assigned to it. entrepreneurs using the tax on recorded revenue without deductible costs have had the right to some deductions. in 2021, there were two main reliefs – social security contributions were deductible from the tax base (revenue), and health insurance (part of it, 7.75% of the calculation base) was deductible from the charged amount of tax. those contributions were to be calculated basing on fixed amounts, similarly to the progressive tax scale. polish deal 1.0 also brought a shift in that form of taxation. the base for calculating health insurance imposed on entrepreneurs was altered; however, in this case it was not to be computed on the basis of income, but several 13  in 2020 it was pln 1,093,350. 14  in 2021 it was pln 9,030,600, in 2022 pln 9,188,200. urszula król154154 lump sums of health insurance were provided. their value depended on the value of the revenue. taxpayers were divided according to their annual revenue. for those generating annual revenue from pln 60,000 up to pln 300,000, the monthly insurance was based on fixed amount.15 the base was lower for those that generated smaller revenue, and higher for those with higher revenue (guziejewska & witczak, 2022). details are presented in table 6. the first version of polish deal did not allow taxpayers to deduct health insurance. however, the second version of reform gave that possibility. when using that taxation form, health insurance paid can be deducted, but from taxable income (not from charged tax, as it used to be) and the reduction value cannot exceed 50% of health insurance paid. outcome of the research process and conclusionsoutcome of the research process and conclusions model specification, analysis and resultsmodel specification, analysis and results on the basis of the theoretical analysis, taxation models for entrepreneurs in poland in the years 2021 and 2022 were build. the aim was to present the difference in the tax burden in 2021 and in 2022, i.e., the fiscal effect of tax perturbation. to achieve this, the tax burden and other connected burdens were calculated for every level of income. table 6. health insurance calculation rules in poland – tax on recorded revenue without deductible costs in 2022 revenue health insurance base (monthly) health insurance (monthly) health insurance (annually) below pln 60,000 pln 6,221.04 x 60% pln 6,221.04 x 60% x 9% = pln 335.94 pln 4,031.28 from pln 60,000 up to pln 300,000 pln 6,221.04 pln 6,221.04 x 9% = pln 559.89 pln 6,718.68 over pln 300,000 pln 6,221.04 x 180% pln 6,221.04 x 180% x 9% = pln 1,007.81 pln 12,093.72 s o u r c e : own elaboration on the basis of: act of 26 july 1991 on personal income tax (consolidated text: journal of laws, 2021, no. 1128 as amended). 15  the base is the average monthly salary in the enterprise sector in the fourth quarter of 2021, which amounted to pln 6,221.04. a theoretical analysis of the new polish income tax system 155155 in order to maintain the transparency of the argument, the author only presented the values allowing for the comparison of fiscal charges over time, i.e., tax and health insurance. social security contributions are the same under different tax regimes, thus there was no need to include them in this analysis. the presented models have some simplifications – the forth form of taxation, ‘tax card’ was not analysed, and neither was solidarity tribute. what is more, some assumptions concerning tax on recorded revenue without deductible costs had to be made – as this taxation form has a different tax base from other analysed forms. therefore, to maintain the comparability of different taxing options, in figure 1 and figure 2 revenue was calculated as 150% of income, and the 8,5% rate of revenue-based taxation was chosen. a more detailed analysis of the various versions of the margin and rates and their impact on revenue-based taxation will be presented on the basis of figure 3. figure 1 shows tax burdens (with the health insurance burden), depending on the income and the chosen form of taxation. the analysis of f lat tax changes is quite simple – for income over pln 24,000 the tax system introduced in 2022 is less favourable than the one in force in 2021. it must be noted, that the ‘correction’ of the system in polish deal 2.0 created slightly less burdensome taxation. in the case of revenue-based tax (under the assumptions provided above), the polish deal increased the tax burden for entrepreneurs earning more than pln 16,000. it should be noted that changes introduced by polish deal 2.0 made that burden somewhat lower. the most complicated changes were introduced in the progressive scale. these are presented in the first part of figure 1. the polish deal decreased the amount of tax and health insurance for low incomes. the first version of changes, introduced as polish deal 1.0, made the tax burden higher in comparison to 2021 for income above pln 140,000. the second version of changes, introduced as polish deal 2.0, made the tax burden higher in comparison to 2021 for income above pln 190,000. figure 2 presents the tax burden under different income and different tax regimes in 2021, and 2022 (polish deal 1.0 and 2.0). under the assumptions that revenue is 150% of income and the tax rate for revenue-based tax is 8,5%, the following conclusions can be drawn: ■ in every tax regime, there are different equalisation points, i.e., points (values of income) in which the optimal taxation form is changing, urszula król156156 ■ there are cases in which only one tax regime is favourable regardless of the income – one example is 2021 in figure 2, where revenue-related tax brings the lowest burden. ■ in 2022, there were only two optimal forms of taxation – progressive scale tax and revenue-based tax, choosing f lat tax would not be optimal. the equalisation points (income) for progressive scale and f lat tax changed between examined periods, but they remained constant under given tax legislation. as mentioned before, when analysing revenue-based tax, some assumptions as to the relation between income and revenue have to be made, as the tax base is different. to present how these assumptions determine the resulting tax, figure 3 was prepared. it shows the same considerations on the optimal form of taxation, but with an assumption that revenue is 300% of income (we assume that there are much higher costs in the analysed business). it does not change the calculations on progressive tax and f lat tax. however, under such circumstances, the following conclusions can be drawn: ■ in every tax regime, there are different equalisation points, i.e., points (values of income) in which the optimal taxation form is changing, ■ only two forms of taxation are optimal – progressive taxation for lower income, and f lat tax for higher income; the equalisation point, as mentioned, depends on the analysed period. figure 1. tax burden depending on income and the chosen form of taxation in the years revenue have to be made, as the tax base is different. to present how these assumptions determine the resulting tax, figure 3 was prepared. it shows the same considerations on the optimal form of taxation, but with an assumption that revenue is 300% of income (we assume that there are much higher costs in the analysed business). it does not change the calculations on progressive tax and flat tax. however, under such circumstances, the following conclusions can be drawn: in every tax regime, there are different equalization points, i.e., points (values of income) in which the optimal taxation form is changing, only two forms of taxation are optimal – progressive taxation for lower income, and flat tax for higher income; the equalization point, as mentioned, depends on the analysed period. figure 1. tax burden depending on income and the chosen form of taxation in the years 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 160 000 1 00 0 23 0 00 45 0 00 67 0 00 89 0 00 11 1 00 0 13 3 00 0 15 5 00 0 17 7 00 0 19 9 00 0 22 1 00 0 24 3 00 0 26 5 00 0 28 7 00 0 30 9 00 0 33 1 00 0 35 3 00 0 37 5 00 0 39 7 00 0 progressive tax + health insurance (2021) progressive tax + health insurance (2022 v.1) progressive tax + health insurance (2022 v.2) 0 20 000 40 000 60 000 80 000 100 000 1 00 0 23 0 00 45 0 00 67 0 00 89 0 00 11 1 00 0 13 3 00 0 15 5 00 0 17 7 00 0 19 9 00 0 22 1 00 0 24 3 00 0 26 5 00 0 28 7 00 0 30 9 00 0 33 1 00 0 35 3 00 0 37 5 00 0 39 7 00 0 flat tax + health insurance (2021) flat tax + health insurance (2022 v.1) flat tax + health insurance (2022 v.2) a theoretical analysis of the new polish income tax system 157157 revenue have to be made, as the tax base is different. to present how these assumptions determine the resulting tax, figure 3 was prepared. it shows the same considerations on the optimal form of taxation, but with an assumption that revenue is 300% of income (we assume that there are much higher costs in the analysed business). it does not change the calculations on progressive tax and flat tax. however, under such circumstances, the following conclusions can be drawn: in every tax regime, there are different equalization points, i.e., points (values of income) in which the optimal taxation form is changing, only two forms of taxation are optimal – progressive taxation for lower income, and flat tax for higher income; the equalization point, as mentioned, depends on the analysed period. figure 1. tax burden depending on income and the chosen form of taxation in the years 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 160 000 1 00 0 23 0 00 45 0 00 67 0 00 89 0 00 11 1 00 0 13 3 00 0 15 5 00 0 17 7 00 0 19 9 00 0 22 1 00 0 24 3 00 0 26 5 00 0 28 7 00 0 30 9 00 0 33 1 00 0 35 3 00 0 37 5 00 0 39 7 00 0 progressive tax + health insurance (2021) progressive tax + health insurance (2022 v.1) progressive tax + health insurance (2022 v.2) 0 20 000 40 000 60 000 80 000 100 000 1 00 0 23 0 00 45 0 00 67 0 00 89 0 00 11 1 00 0 13 3 00 0 15 5 00 0 17 7 00 0 19 9 00 0 22 1 00 0 24 3 00 0 26 5 00 0 28 7 00 0 30 9 00 0 33 1 00 0 35 3 00 0 37 5 00 0 39 7 00 0 flat tax + health insurance (2021) flat tax + health insurance (2022 v.1) flat tax + health insurance (2022 v.2) source: own elaboration figure 2. tax burden depending on income – optimization dilemma in 2021, 2022 v.1 (polish deal 1.0) and 2022 v.2 (polish deal 2.0) – under given assumption (revenue=150%*income, tax rate of revenue-based tax=8.5%) 0 20 000 40 000 60 000 80 000 1 00 0 23 0 00 45 0 00 67 0 00 89 0 00 11 1 00 0 13 3 00 0 15 5 00 0 17 7 00 0 19 9 00 0 22 1 00 0 24 3 00 0 26 5 00 0 28 7 00 0 30 9 00 0 33 1 00 0 35 3 00 0 37 5 00 0 39 7 00 0 revenue-based tax + health insurance (2021) revenue-based tax + health insurance (2022 v.1) revenue-based tax + health insurance (2022 v.2) 0 20 000 40 000 60 000 80 000 100 000 120 000 1 00 0 28 0 00 55 0 00 82 0 00 10 9 00 0 13 6 00 0 16 3 00 0 19 0 00 0 21 7 00 0 24 4 00 0 27 1 00 0 29 8 00 0 32 5 00 0 35 2 00 0 37 9 00 0 progressive tax + health insurance (2021) flat tax + health insurance (2021) revenue-based tax + health insurance (2021) s o u r c e : own elaboration. urszula król158158 figure 2. tax burden depending on income – optimisation dilemma in 2021, 2022 v.1 (polish deal 1.0) and 2022 v.2 (polish deal 2.0) – under given assumption (revenue = 150%*income, tax rate of revenue-based tax = 8.5%) source: own elaboration figure 2. tax burden depending on income – optimization dilemma in 2021, 2022 v.1 (polish deal 1.0) and 2022 v.2 (polish deal 2.0) – under given assumption (revenue=150%*income, tax rate of revenue-based tax=8.5%) 0 20 000 40 000 60 000 80 000 1 00 0 23 0 00 45 0 00 67 0 00 89 0 00 11 1 00 0 13 3 00 0 15 5 00 0 17 7 00 0 19 9 00 0 22 1 00 0 24 3 00 0 26 5 00 0 28 7 00 0 30 9 00 0 33 1 00 0 35 3 00 0 37 5 00 0 39 7 00 0 revenue-based tax + health insurance (2021) revenue-based tax + health insurance (2022 v.1) revenue-based tax + health insurance (2022 v.2) 0 20 000 40 000 60 000 80 000 100 000 120 000 1 00 0 28 0 00 55 0 00 82 0 00 10 9 00 0 13 6 00 0 16 3 00 0 19 0 00 0 21 7 00 0 24 4 00 0 27 1 00 0 29 8 00 0 32 5 00 0 35 2 00 0 37 9 00 0 progressive tax + health insurance (2021) flat tax + health insurance (2021) revenue-based tax + health insurance (2021) source: own elaboration figure 3. tax burden depending on income – optimization dilemma in 2021, 2022 v.1 (polish deal 1.0) and 2022 v.2 (polish deal 2.0) – under given assumption (revenue=300%*income, tax rate of revenue-based tax=8.5%) 0,00 20 000,00 40 000,00 60 000,00 80 000,00 100 000,00 120 000,00 140 000,00 1 00 0 30 0 00 59 0 00 88 0 00 11 7 00 0 14 6 00 0 17 5 00 0 20 4 00 0 23 3 00 0 26 2 00 0 29 1 00 0 32 0 00 0 34 9 00 0 37 8 00 0 progressive tax + health insurance (2022 v.1) flat tax + health insurance (2022 v.1) revenue-based tax + health insurance (2022 v.1) 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 1 00 0 30 0 00 59 0 00 88 0 00 11 7 00 0 14 6 00 0 17 5 00 0 20 4 00 0 23 3 00 0 26 2 00 0 29 1 00 0 32 0 00 0 34 9 00 0 37 8 00 0 progressive tax + health insurance (2022 v.2) flat tax + health insurance (2022 v.2) revenue-based tax + health insurance (2022 v.2) 0,00 20000,00 40000,00 60000,00 80000,00 100000,00 120000,00 10 00 32 00 0 63 00 0 94 00 0 12 50 00 15 60 00 18 70 00 21 80 00 24 90 00 28 00 00 31 10 00 34 20 00 37 30 00 progressive tax + health insurance (2021) flat tax + health insurance (2021) revenue-based tax + health insurance (2021) a theoretical analysis of the new polish income tax system 159159 source: own elaboration figure 3. tax burden depending on income – optimization dilemma in 2021, 2022 v.1 (polish deal 1.0) and 2022 v.2 (polish deal 2.0) – under given assumption (revenue=300%*income, tax rate of revenue-based tax=8.5%) 0,00 20 000,00 40 000,00 60 000,00 80 000,00 100 000,00 120 000,00 140 000,00 1 00 0 30 0 00 59 0 00 88 0 00 11 7 00 0 14 6 00 0 17 5 00 0 20 4 00 0 23 3 00 0 26 2 00 0 29 1 00 0 32 0 00 0 34 9 00 0 37 8 00 0 progressive tax + health insurance (2022 v.1) flat tax + health insurance (2022 v.1) revenue-based tax + health insurance (2022 v.1) 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 1 00 0 30 0 00 59 0 00 88 0 00 11 7 00 0 14 6 00 0 17 5 00 0 20 4 00 0 23 3 00 0 26 2 00 0 29 1 00 0 32 0 00 0 34 9 00 0 37 8 00 0 progressive tax + health insurance (2022 v.2) flat tax + health insurance (2022 v.2) revenue-based tax + health insurance (2022 v.2) 0,00 20000,00 40000,00 60000,00 80000,00 100000,00 120000,00 10 00 32 00 0 63 00 0 94 00 0 12 50 00 15 60 00 18 70 00 21 80 00 24 90 00 28 00 00 31 10 00 34 20 00 37 30 00 progressive tax + health insurance (2021) flat tax + health insurance (2021) revenue-based tax + health insurance (2021) s o u r c e : own elaboration. urszula król160160 figure 3. tax burden depending on income – optimisation dilemma in 2021, 2022 v.1 (polish deal 1.0) and 2022 v.2 (polish deal 2.0) – under given assumption (revenue = 300%*income, tax rate of revenue-based tax = 8.5%) source: own elaboration figure 3. tax burden depending on income – optimization dilemma in 2021, 2022 v.1 (polish deal 1.0) and 2022 v.2 (polish deal 2.0) – under given assumption (revenue=300%*income, tax rate of revenue-based tax=8.5%) 0,00 20 000,00 40 000,00 60 000,00 80 000,00 100 000,00 120 000,00 140 000,00 1 00 0 30 0 00 59 0 00 88 0 00 11 7 00 0 14 6 00 0 17 5 00 0 20 4 00 0 23 3 00 0 26 2 00 0 29 1 00 0 32 0 00 0 34 9 00 0 37 8 00 0 progressive tax + health insurance (2022 v.1) flat tax + health insurance (2022 v.1) revenue-based tax + health insurance (2022 v.1) 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 1 00 0 30 0 00 59 0 00 88 0 00 11 7 00 0 14 6 00 0 17 5 00 0 20 4 00 0 23 3 00 0 26 2 00 0 29 1 00 0 32 0 00 0 34 9 00 0 37 8 00 0 progressive tax + health insurance (2022 v.2) flat tax + health insurance (2022 v.2) revenue-based tax + health insurance (2022 v.2) 0,00 20000,00 40000,00 60000,00 80000,00 100000,00 120000,00 10 00 32 00 0 63 00 0 94 00 0 12 50 00 15 60 00 18 70 00 21 80 00 24 90 00 28 00 00 31 10 00 34 20 00 37 30 00 progressive tax + health insurance (2021) flat tax + health insurance (2021) revenue-based tax + health insurance (2021) source: own elaboration discussion and conclusion changes introduced to the polish tax system in 2022 made the burden under flat tax and revenue-based tax higher for most of the taxpayers.16 the change in burden under progressive taxation depends on the income and cannot be easily summarized. that may give an impression that flat tax and revenue-based tax become less attractive to most taxpayers in 2022. to prove that it is a misconception, the author provided a model of tax burden depending on income. the optimal form of taxation in every examined period depended on: income (or revenue, the relationship between those two indicators), the tax rate for revenue-based tax (determined by the type of business activity). 16 there are exceptions to this general rule, for example related to the reduction of the revenue-based tax rate for selected professional groups. 0,00 20000,00 40000,00 60000,00 80000,00 100000,00 120000,00 140000,00 10 00 32 00 0 63 00 0 94 00 0 12 50 00 15 60 00 18 70 00 21 80 00 24 90 00 28 00 00 31 10 00 34 20 00 37 30 00 progressive tax + health insurance (2022 v.1) flat tax + health insurance (2022 v.1) revenue-based tax + health insurance (2022 v.1) 0,00 20000,00 40000,00 60000,00 80000,00 100000,00 120000,00 140000,00 10 00 32 00 0 63 00 0 94 00 0 12 50 00 15 60 00 18 70 00 21 80 00 24 90 00 28 00 00 31 10 00 34 20 00 37 30 00 progressive tax + health insurance (2022 v.2) flat tax + health insurance (2022 v.2) revenue-based tax + health insurance (2022 v.2) a theoretical analysis of the new polish income tax system 161161 source: own elaboration discussion and conclusion changes introduced to the polish tax system in 2022 made the burden under flat tax and revenue-based tax higher for most of the taxpayers.16 the change in burden under progressive taxation depends on the income and cannot be easily summarized. that may give an impression that flat tax and revenue-based tax become less attractive to most taxpayers in 2022. to prove that it is a misconception, the author provided a model of tax burden depending on income. the optimal form of taxation in every examined period depended on: income (or revenue, the relationship between those two indicators), the tax rate for revenue-based tax (determined by the type of business activity). 16 there are exceptions to this general rule, for example related to the reduction of the revenue-based tax rate for selected professional groups. 0,00 20000,00 40000,00 60000,00 80000,00 100000,00 120000,00 140000,00 10 00 32 00 0 63 00 0 94 00 0 12 50 00 15 60 00 18 70 00 21 80 00 24 90 00 28 00 00 31 10 00 34 20 00 37 30 00 progressive tax + health insurance (2022 v.1) flat tax + health insurance (2022 v.1) revenue-based tax + health insurance (2022 v.1) 0,00 20000,00 40000,00 60000,00 80000,00 100000,00 120000,00 140000,00 10 00 32 00 0 63 00 0 94 00 0 12 50 00 15 60 00 18 70 00 21 80 00 24 90 00 28 00 00 31 10 00 34 20 00 37 30 00 progressive tax + health insurance (2022 v.2) flat tax + health insurance (2022 v.2) revenue-based tax + health insurance (2022 v.2) s o u r c e : own elaboration.  discussion and conclusion discussion and conclusion changes introduced to the polish tax system in 2022 made the burden under f lat tax and revenue-based tax higher for most of the taxpayers.16 the change in burden under progressive taxation depends on the income and cannot be easily summarised. that may give an impression that f lat tax and revenue-based tax become less attractive to most taxpayers in 2022. to prove that it is a misconception, the author provided a model of tax burden depending on income. the optimal form of taxation in every examined period depended on: ■ income (or revenue, the relationship between those two indicators), ■ the tax rate for revenue-based tax (determined by the type of business activity). therefore, all three forms of taxation will still be used, as every entrepreneur has their needs, plans and circumstances, such as generated margin. however, it can be suspected that more taxpayers will decide to use the progressive tax scale. those who generate higher income will consider f lat tax or revenuebased tax. an urging issue that seems worth examining in the context of polish perturbations is the fairness of taxation in its current form. the presented model sug16  there are exceptions to this general rule, for example related to the reduction of the revenue-based tax rate for selected professional groups. urszula król162162 gests that – in the conditions where other options yield a higher burden – many entrepreneurs have decided and will decide to use revenue-based tax. however, the difference in taxation of the same amount of income (generated by different revenue, as in figure 2 and figure 3) seems to be highly unfair. it used to be accepted when revenue-based tax was a rarely used form of taxation. in the face of changes introduced by the polish deal, it seems necessary to subject this form of taxation to an in-depth analysis and consider some modification. another issue that should be examined is tax risk generated by tax perturbations and the costs of adjusting to them. the recent polish reform seems a good example of a potentially high risk and high costs due to differences between calculated burden under different taxation regimes, differences between periods (perturbations in every tax year) and the complexity of tax law.  references references act of 26 july 1991 on personal income tax (consolidated text: journal of laws, 2021, no. 1128 as amended). atkinson, a.b., & stiglitz, j.e. (1976). the design of tax structure: direct versus indirect taxation. journal of public economics, 6(1–2), 55–75. https://doi.org/10.1016/00472727(76)90041-4. conesa, j.c., & krueger, d. (2006). on the optimal progressivity of the income tax code. journal of monetary economics, 53(7), 1425–1450. https://doi.org/10.3386/w11044. diamond, p., & mirrlees, j.a. (1971). optimal taxation and public production, american economic review 61, 8–27 and 261–278. diewert, w.e. (1978). optimal tax perturbations. journal of public economics, 10(2), 139–177. https://doi.org/10.1016/0047-2727(78)90034-8. feldstein, m. (1976). on the theory of tax reform. journal of public economics, 6(1–2), 77–104. frąszczak, j. (2022). method of management of personal income tax changes implemented by the polish deal. european research studies journal, 25(3), 145–155, doi: 10.35808/ersj/3026 guziejewska, b., & witczak, i. (2022). the polish deal’s changes to the tax system versus the compatibility of fiscal policy goals. optimum. economic studies, (2 (108)), 95– 109. https://doi.org/10.15290/oes.2022.02.108.07. hicks, j.r. (1939). the foundations of welfare economics. the economic journal, 49, 696–712. http://dx.doi.org/10.2307/2225023. jakobsson, u. (1976). on the measurement of the degree of progression. journal of public economics, 5(1–2), 161–168. https://doi.org/10.1016/0047-2727(76)90066-9. joseph, m.f.w. (1939). the excess burden of indirect taxation. review of economic studies, 6, 226–231. https://econpapers.repec.org/ras/pfe112.htm http://dx.doi.org/10.2307/2225023 a theoretical analysis of the new polish income tax system 163163 kakwani, n., & lambert, p.j. (1998). on measuring inequity in taxation: a new approach. european journal of political economy, 14(2), 369–380. https://doi.org/10.1016/ s0176-2680(98)00012-3. peacock, t., & berry, d. (1951), a note on the theory of income distribution. economica, 28, 83–90. sandmo, a. (1976). optimal taxation: an introduction to the literature. journal of public economics, 6(1–2), 37–54. https://doi.org/10.1016/0047-2727(76)90040-2. sawulski, j., szewczyk, n., rafalska, k., & smółko, m. (2023). business power against redistribution: the case of watered-down tax reform in poland. business and politics, 1–19. https://doi.org/10.1017/bap.2023.3. stigler, g.j. (1987). the theory of price, new york: macmillan. torregrosa-montaner, r.j. (2015). lump-sum over distortionary taxation dominance with heterogeneous individuals. economics bulletin, 35(3), 1443–1449. tschinkl, d., weikert, n., & kiesewetter, d. (2021). the impact of taxes on individual long-term savings decision. copernican journal of finance & accounting, 10(4), 159– 179. http://dx.doi.org/10.12775/cjfa.2021.020. https://doi.org/10.1016/s0176-2680(98)00012-3 https://doi.org/10.1016/s0176-2680(98)00012-3 date of submission: march 24, 2021; date of acceptance: may 5, 2021. * contact information: kaur.navleen4@gmail.com, shri atmanand jain (p.g.) college, ambala city, haryana, india, 134003, phone: +917206691999; orcid id: https:// orcid.org/0000-0002-2643-0506. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 2 kaur, n. (2021). determinants of dividend payout decisions of original equipment manufacturers from indian automobile industry. copernican journal of finance & accounting, 10(2), 9–26. http://dx.doi.org/10.12775/cjfa.2021.005 navleen kaur* shri atmanand jain (p.g.) college, ambala city determinants of dividend payout decisions of original equipment manufacturers from indian automobile industry keywords: dividend, panel data, automobile, original equipment manufacturers, bombay stock exchange. j e l classification: g35, c23. abstract: the purpose of this study is to identify and analyze the variables that significantly affect dividend payout decisions of original equipment manufacturers (oems) from indian automobile industry listed on the bombay stock exchange (bse). analysis is based on balanced panel data with 180 observations of 12 companies over a period of 15 years i.e. from 2003-04 to 2017-18. descriptive analysis, correlation analysis, and static panel data regression analysis including regression diagnostics have been used as statistical tools to achieve the purpose of the study. stata software was used to analyze the data in the present study. the findings indicate that the significant determinants of dividend payout decisions of sample companies during the study period were profitability, size, book value per share, tangibility of assets, leverage and price earnings ratio. the findings of the study support various theories of dividend policy viz. signalling, pecking order, and transaction cost. as per authors’ knowledge, this is the first study focusing on the determinants of dividend payout decisions of oems in india using the data from 2003-04 to 2017-18. the empirical findings of the present study navleen kaur10 will provide useful insight pertaining to dividend payout decisions to various stakeholders of different companies and will also be helpful to the future researchers.  introduction dividend payout decisions are an integral part of financial management. successful companies make profits and these profits can be retained in the business for investment in future growth opportunities or distributed as dividends among the shareholders. the decision with regard to what percentage of profits should be retained in the business and what percentage should be distributed as dividends is known as dividend policy of a company. determinants of dividend payout decisions of the corporate sector have been researched extensively in the past but still it is one of the controversial topics in the literature of finance. various theories like signalling, pecking order, and transaction cost etc. guide the dividend decision of the corporate sector. indian automobile industry plays a vital role in the overall growth and development of the country because growth of many other industries viz. iron & steel, lead, chemicals, capital goods, and service sector etc. is linked with the growth of automobile industry. after the liberalization of the indian economy in 1991, the number of automobile manufacturing facilities increased rapidly in the country. as per the annual report (2018-19) of department of heavy industries, government of india, turnover of indian automobile industry is equivalent to 7.1 per cent of overall gdp. after reviewing the literature, it was noticed that meager research has been conducted on the factors affecting dividend payout decisions of original equipment manufacturers (oems) from indian automobile industry. so, the present study bridges the research gap by studying the same. literature review and hypotheses formulation the review of the previous studies used for the formulation of hypotheses for this study is presented below. profitability and dividend payout signalling theory of dividend policy advocates that companies with higher profits pay higher dividends to their shareholders. many previous research determinants of dividend payout decisions… 11 studies found a positive and significant relationship between profitability and dividend payout ratio of a company (rehman & takumi, 2012; kumar & sujit, 2017; thirumagal & vasantha, 2017; bostanci, kadioglu & sayilgan, 2018; chakraborty, shenoy & kumar, 2018; franc-dąbrowska, madra-sawicka & ulrichs, 2019; pinto & rastogi, 2019). another theory with regard to the relationship between profitability and dividend payout mentions that the companies with high profits pay less dividends because these companies retain their profits for investment in future growth opportunities. kaźmierska-jóźwiak (2015) found empirical evidences in support of a negative and significant relationship between these variables. after reviewing the literature, it was found that different proxies have been used to represent the profitability position of a company while studying its relationship with the dividend payout ratio of different companies viz. return on assets, return on equity, return on capital employed, and earnings per share etc. the present study uses return on capital employed as a proxy of profitability of selected companies because this ratio measures the overall profitability of a company (tulsian, 2009). h1: there is a positive relationship between profitability (roce) and dividend payout ratio of indian automobile companies. liquidity and dividend payout previous research studies found different results while testing the relationship between liquidity position and dividend payout ratio of the corporate sector. the studies which found a negative and insignificant relationship between these two variables include kaźmierska-jóźwiak (2015) and franc-dąbrowska et al. (2019). kumar and sujit (2017), bostanci et al. (2018) and sumathy and rajasekaran (2019) found positive significant relationship while rehman and takumi (2012) discovered positive insignificant relationship between liquidity position of a company and its dividend payout ratio. generally, either current ratio or quick ratio is used as a proxy to represent liquidity position of a company. the present study uses quick ratio as the proxy for liquidity because it is a better measure of liquidity as compared to current ratio because the former takes into consideration only liquid assets of a company and ignores inventory, prepaid expenses, etc. the study also assumes a negative relationship between liquidity and dividend payout ratio because high liquidity suggests lower divinavleen kaur12 dend payments to the shareholders resulting in high availability of cash or other liquid assets in a company. h2: there is a negative relationship between liquidity (qr) and dividend payout ratioof indian automobile companies. size and dividend payout with regard to the relationship between size of a company and its dividend payout ratio, it is generally said that, bigger the company higher dividends it will pay to its shareholders. ghosh (2010), kumar and sujit (2017), francdąbrowska et al. (2019) and thapa (2021) identified positive and significant relationship between these two variables. in previous studies, size of a company is calculated either by taking natural logarithm of total sales or natural logarithm of total assets. the presents study calculates this variable by taking natural logarithm of total assets of the selected companies. h3: there is a positive relationship between size and dividend payout ratio of indian automobile companies. book value per share and dividend payout the author did not find any previous study which empirically investigated relationship between these two variables. so, this study introduces empirical examination of the relationship between book value per share and dividend payout ratio. book value per share shows the value which will be distributed among the shareholders, if the company goes bankrupt. this study assumes a negative relationship between book value per share and dividend payout ratio of a company because payment of dividends by a company reduces its reserves and surplus and thereby reducing the book value per share of the company. h4: there is a negative relationship between book value per share and dividend payout ratio of indian automobile companies. tangibility of assets and dividend payout the literature consists of mixed results regarding relationship between tangibility of assets and dividend payout by companies. ghosh (2010) found empirical evidence in support of negative relationship between these two variables. determinants of dividend payout decisions… 13 pinto and rastogi (2019) found significant positive relationship between tangibility of assets and dividend policy of the companies from agro, mining engineering, textiles, construction and infrastructure, logistics and consumer good and appliances sectors while they found significant negative relationship between these variables in the case of banking sector. it is assumed that a negative relationship exists between tangibility of assets and dividend payout ratio of the automobile manufacturers in india because companies with more tangible assets pay less dividends as more tangible assets means less current assets or cash available to pay dividends to the shareholders. h5: there is a negative relationship between tangibility of assets and dividend payout ratio of indian automobile companies. leverage and dividend payout both pecking order and transaction cost theories suggest negative relationship between leverage and dividend payout ratio of a company. according to first theory, companies with high fixed interest obligations make less dividend payments and according to second theory highly leveraged companies pay lesser dividends to their shareholders in order to reduce their transaction costs. the studies which found negative and significant relationship between leverage and dividend payout ratio include ghosh (2010), kaźmierska-jóźwiak (2015), kumar and sujit (2017) and chakraborty et al. (2018). rehman and takumi (2012) identified positive and significant relationship between these variables. the studies which found empirical evidences in support of positive relationship between these variables concluded that high dividend payments indicate towards good financial position of the companies which enables them to raise debt funds easily. majority of the previous studies used debt equity ratio as a proxy for leverage and the present study also uses the same variable to represent leverage of the selected companies. h6: there is a negative relationship between leverage (der) and dividend payout ratio of indian automobile companies. price earnings r atio and dividend payout price earnings ratio measures risk in the future earnings of a company. high price earnings ratio means low risk and vice versa. there exists a negative navleen kaur14 relationship between business risk and dividend payments because high risk in future earnings of a company will lead to low dividend payments by the company. so, it can be deduced that price earnings ratio and dividend payout ratio are positively related to each other. kaźmierska-jóźwiak (2015) and franc-dąbrowska et al. (2019) identified positive but insignificant relationship between these two variables. thirumagal and vasantha (2017) and sumathy and rajasekaran (2019) found positive and significant relationship between these variables concluding that high risk companies pay low dividends because these companies prefer internal financing, thereby reducing the dividend payments. h7: there is a positive relationship between price earnings ratio and dividend payout ratio of indian automobile companies. objectives of the study 1. to identify the variables that significantly affect dividend payout decisions of oems from automobile industry in india listed on the bombay stock exchange (bse). 2. to explain the magnitude of change in the dividend payout ratio of the selected companies due to these variables. need of the study after the introduction of liberalization in indian economy in 1991, a large number of global auto manufacturers entered india’s automobile industry putting the industry into a higher growth trajectory. this industry has been defined as the next sunrise sector for the indian economy but still there is enough scope for its growth and development. government of india is actively focusing on formulating various plans and policies for the development of this industry. the literature is full of studies on determinants of dividend payout decisions of corporate sector all over the world but very limited research has been conducted on dividend payout decisions of oems from indian automobile industry. so, the present study bridges the gap in the literature by studying the firm-specific determinants of dividend payout decisions of automobile manufacturers in india. the study will provide useful insight pertaining to dividend policy decisions to the managers and other stakeholders related to different companies determinants of dividend payout decisions… 15 all over the world. as per authors’ knowledge, this is the first study focusing on the determinants of dividend payout decisions of indian automobile manufacturers using the data for the period from 2003-04 to 2017-18. research methodology and research process sample, study period, data collection and variables the study uses company-level data consisting of all oems from indian automobile industry listed on the bse. thirteen oems from the industry were listed on bse as on april, 2020 viz. ashok leyland ltd., atul auto ltd., bajaj auto ltd., eicher motors ltd., force motors ltd., hero motocorp ltd., hindustan motors ltd., mahindra & mahindra ltd., maruti suzuki india ltd., scooters india ltd., sml isuzu ltd.,tata motors ltd., and tvs motor co ltd. these companies cover four major segments of the industry viz. commercial vehicles, passenger vehicles, two-wheelers, and three-wheelers. these companies represent universe in the indian context when it comes to the listed companies. the present study does not take into consideration non-indian origin automobile manufacturing companies which have established their subsidiaries in india. there are few other oems from automobile industry in india which are also of indian origin viz. asian motor works, chinkara motors pvt. ltd., deccan auto ltd., hradyesh, and js auto pvt. ltd. but these companies are not listed on either bombay stock exchange (bse) or national stock exchange (nse). as a result, their financial results are not available. out of the automobile companies listed on the bse, bajaj auto ltd. did not form part of sample of the present study because there was a demerger of this company into three companies in the year 2007-08. the business of existing bajaj auto ltd. was divided into three divisions’ viz. auto business, investment business, and finance business. so, due to the non availability of consistent data of the auto business of the company throughout the study period, it was not possible to include this company in the sample of this study.also, till the year 2016 lml ltd. completely shut down its operations in march, 2018. so, twelve companies formed a part of the final sample for the present study. list of companies listed on the bse as on april 2020 is presented in table 1. navleen kaur16 table 1. automobile manufacturers listed on bombay stock exchange of india as on april, 2020 s. no. name of company year of incorporation bse code 1 ashok leyland ltd. 1948 500477 2 tata motors ltd. 1945 500570 3 sml isuzu ltd. 1983 505192 4 atul auto ltd. 1986 531795 5 scooters india ltd. 1972 505141 6 bajaj auto ltd. may, 2008 (not included in the present study, due to demerger) 532977 7 eicher motors ltd. 1982 505200 8 hero motocorp ltd. 1984 500182 9 tvs motor co. ltd. 1911 532343 10 force motors ltd. 1958 500033 11 hindustan motors ltd. 1942 500500 12 maruti suzuki india ltd. 1981 532500 13 mahindra & mahindra ltd. 1945 500520 s o u r c e : website of the bombay stock exchange, india, www.bseindia.com. the study covers the time period from 2003-04 to 2017-18. the financial year 2003-04 is selected as the beginning year for the time period of this study because government of india launched and implemented its first comprehensive policy framework named ‘auto policy, 2002’ for automobile industry of the country in the year 2002 which resulted into major changes in the industry. annual reports of the sample companies, prowess database of centre of monitoring indian economy and ace equity database of accord fintech private limited were utilized for the purpose of data collection for the present study. selected variables and formulae used for their computation are shown in table 2. determinants of dividend payout decisions… 17 table 2. variables and formulae used for their computation variable proxy symbol formula literature dividend payout dividend payout ratio dpr (total dividend to equity shareholders/ total net profit belonging to equity shareholders) * 100 khan and jain, 2011 profitability return on capital employed roce (profit before interest and tax/ average capital employed)*100 tulsian, 2009 liquidity quick ratio qr liquid assets/ current liabilities bostanciet et al., 2018 size log of total assets size ln(total assets) thirumagal and vasantha, 2017 book value per share book value per share bv (equity capital + reserves – debit balance of profit & loss) / total number of equity shares malhotra and tandon, 2013 tangibility of assets tangibility of assets toa (total assets-current assets)/ total assets pinto and rastogi, 2019 leverage debt-equity ratio der total debt/shareholder’s equity horne and wachowicz (2001) price earnings ratio price earnings ratio per market price per share/earnings per share sinha, 2012 s o u r c e : based on the review of previous studies. tools used for analysis to identify and analyze the variables that significantly affect dividend payout decisions of the sample companies during the study period ordinary least square (ols) regression and static panel data regression including fixed effects model (fem) and random effects model (rem) were used. first of all, breusch and pagan lagrangian multiplier test was applied to select between ols regression, and random effects regression. the result of the test indicated the presence of significant random effects. as a next step, fixed effects regression was run which indicated that no significant fixed effects were present. regression diagnostics with the help of breusch-pagan test, wooldridge test and calculation of variance inf lation factors was also carried out to check the assumptions of the heteroscedasticity, autocorrelation, and multicollinearity respectively. descriptive analysis and correlation analysis was also carried out in this study. the stata software was used to apply all these tests and empirically analyze the data used in the present study. navleen kaur18 empirical results descriptive analysis the study has 180 firm-year observations. all the variables depicted positive average value during the study period. the average quick ratio was much below the standard for this ratio indicating that the liquidity position of the selected automobile companies was not so satisfactory during the study period. average debt equity ratio was also less than the standard for this ratio showing that the indian automobile companies used lower percentage of debt in their capital structures. table 3. descriptive statistics variables average maximum minimum standard deviation observations dpr 2.73 5.36 0.69 1.29 180 roce 4.83 5.74 0.65 0.40 180 qr 0.54 4.6 0.03 0.46 180 size 9.95 13.4 5.63 2.06 180 bv 202.73 1970.74 311.78 -22.44 180 toa 0.64 5.81 0.09 0.59 180 der 0.56 6.62 -0.34 0.88 180 per 2.71 7.08 0.69 1.10 180 s o u r c e : author’s own calculations using stata software. correlation analysis the correlation matrix shown in table 4 revealed that out of the entire explanatory variables price earnings ratio depicted highest positive correlation with the dependent variable while liquidity position of the sample companies measured by quick ratio showed lowest positive correlation with the same. dividend payout ratio depicted positive correlation with three other explanatory var determinants of dividend payout decisions… 19 iables viz. return on capital employed, size, and book value per share of the selected companies. both tangibility of assets and debt-equity ratio displayed negative correlation with the dividend payout ratio of the selected companies during the study period. no high correlations were noticed among the various explanatory variables indicating that the selected model was free from the problem of multicollinearity. table 4. correlation matrix variables dpr roce qr size bv toa der per dpr 1.0000 roce 0.2500 1.0000 qr 0.0095 0.0921 1.0000 size 0.4119 0.1595 -0.0931 1.0000 bv 0.0477 0.1534 0.0846 0.3498 1.0000 toa -0.3405 -0.0479 -0.1789 -0.2793 -0.1459 1.0000 der -0.2204 -0.1262 -0.1501 -0.0872 -0.2655 0.0620 1.0000 per 0.4867 0.1103 0.0948 0.3452 0.2443 -0.3490 -0.3386 1.0000 s o u r c e : author’s own calculations using stata software. regression diagnostics heteroscedasticity initially, natural log of certain variables viz. dividend payout ratio, return on capital employed, and price earnings ratio was taken to standardize the data under consideration. after that, ordinary least square regression (ols) was run on the above variables, and then, breusch-pagan test was performed to check the assumption of homoscedasticity in the present regression model. null hypothesis for the test: constant variance (homoscedasticity). the results of the test revealed that the p-value was 0.2169. since, the p-value was more than 0.05; it resulted in the acceptance of the null hypothesis. this shows that the present model is free from the problem of heteroscedasticity. navleen kaur20 autocorrelation for checking the presence of autocorrelation, wooldridge test for serial correlation was conducted. null hypothesis for the test: no first-order autocorrelation. it was found that the p-value was 0.7754 which is more than 0.05. so, the present model is free from the problem of autocorrelation. multicollinearity multicollinearity refers to a situation where very high inter-correlations exist among the various explanatory variables included in a regression model. the presence of multicollinearity in the data can be identified with the help of correlation matrix or by calculating the variance inf lation factors (vifs) for the variables included in the regression. according to gujarati and sangeetha (2011) high values of vifs depict the presence of high multicollinearity. they further stated that if the value of vif for a variable is more than 10, then that variable is considered as a highly collinear variable, resulting into the presence of severe multicollinearity in the data. table 5 shows that vifs of all the variables included in the regression model used in the present study were less than 2. thus, the data used in the present study is free from the problem of multicollinearity. table 5. variance inf lation factors variables vif 1/vif roce 1.05 0.947877 qr 1.10 0.909137 size 1.35 0.740564 bv 1.24 0.808603 toa 1.23 0.813954 der 1.22 0.822991 per 1.39 0.719191 mean vif 1.23 s o u r c e : author’s own calculations using stata software. determinants of dividend payout decisions… 21 selection of the final model from ols, rem and fem at first, random effects model was run and then breusch and pagan lagrangian multiplier test for random effects was conducted to find out whether there are significant random effects or pooled ols regression needs to be preferred. results of breusch and pagan lagrangian multiplier test for random effects showed a p-value of 0.00 which indicated that the significant random effects were present. after that, f test was conducted and results of the f test showed a p-value of 0.1979 which indicated that significant fixed effects were not present. as a result, rem was selected to study the factors affecting dividend payout decisions of the selected companies during the study period. panel data analysis the regression model framed to study the inf luence of various firm-specific explanatory variables on the dividend payout decisions of the selected companies is presented below: dprit= β0 + β1roceit + β2qrit + β3sizeit+ β4bvit + β5toait + β6derit + β7perit + uit where, dprit = dividend payout ratio for company i in period t, roceit = return on capital employed ratio for company i in period t, qrit = quick ratio for company i in period t, sizeit = size for company i in period t, bvit = book value per share for company i in period t, toait = tangibility of assets for company i in period t, derit = debt-equity ratio for company i in period t, and perit = price earnings ratio for company i in period t. β0 is the intercept; β1 is the slope (coefficient or parameter estimate) of profitability of a company measured by return on capital employed ratio; β2 is the slope of liquidity measured by quick ratio; β3 is the slope of size of the company; β4 is the slope of book value per share; β5 is the slope of tangibility of assets; β6 is the slope of leverage measured by debt-equity ratio; β7 is the slope of price earnings ratio; and uit is the error term. i= 1, 2, 3 …. 12 companies, t= time 1, 2, 3 …15 years. navleen kaur22 table 6.panel data analysis using random effects model random effects gls regression number of observations = 180 group variable: company-id number of companies = 12 r2: within = 0.0234 observations per company : minimum = 15 average = 15 maximum = 15 between = 0.6556 overall = 0.3854 prob. > chi2 = 0.0000 variables regression coefficient standard error z p> |z| c -.8552511 1.004725 -0.85 0.395 roce .3071646 .1825755*** 1.68 0.092 qr -.1110894 .1572276 -0.71 0.480 size .1729584 .0517767* 3.34 0.001 bv -.0005941 .0002722** -2.18 0.029 toa -.2744477 .1399673** -1.96 0.050 der -.1555669 .0888975*** -1.75 0.080 per .3034171 .0757587* 4.01 0.000 *significant at 1 per cent level of significance, ** significant at 5 per cent level of significance, ***significant at 10 per cent level of significance. s o u r c e : author’s own calculations using stata software. the panel data regression results in table 6 clearly show that all the explanatory variables except liquidity, were statistically significant during the study period from 2003-04 to 2017-18. return on capital employed depicted a positive relationship with the dividend payout ratio, which was statistically significant at 10 percent level of significance. profitability position is the strongest factor affecting dividend payout decision of the sample companies during the study period because 1 percent increase in the profitability of an indian automobile company resulted in 0.31 percent increase in the dividend payments of the selected companies. price earnings ratio which measures the risk level depicted positive relationship with the dependent variable which was statistically significant at 1 percent level of significance price earnings ratio comes out to be determinants of dividend payout decisions… 23 the second most important factor affecting the dependent variable. with 1 percent increase in price earnings ratio, a 0.30 percent increase was noticed in the dividend payout ratio of the selected companies. size also depicted statistically significant positive relationship with the dividend payout ratio, at 1 percent level of significance. a percentage increase in size of an indian automobile company showed an increase of 0.17 percent in its dividend payments. book value per share and tangibility of assets depicted negative relationship with the dividend payout ratio which was statistically significant at 5 percent level of significance. an increase of 1 percent in the tangibility of assets depicted 0.27 percent decrease in the dividend payments by the selected companies. further, if the book value per share of the selected companies increases by 1 percent a fall of 0.0006 percent was witnessed in their dividend payments. a statistically significant negative relationship was found between leverage and dividend payout ratio of the selected automobile companies at 10 percent level of significance. a percentage increase in debt-equity ratio showed a decrease of 0.16 percent in the dividend payments.  conclusion the study estimated random effects panel data regression model which confirms the significant inf luence of profitability, size, book value per share, tangibility of assets, leverage and price earnings ratio on the dividend payout decisions of the oems from indian automobile industry. liquidity did not inf luence the dividend payout ratio of the sample companies significantly during the study period. this result is in line with the findings of kaźmierska-jóźwiak (2015) and franc-dąbrowska et al. (2019). profitability, size, and price earnings ratio showed a positive relationship, while book value per share, tangibility of assets, and leverage depicted a negative relationship with the dependent variable. the results indicate that more profitable automobile companies have steady and stable earnings, which result into payments of lager dividends to their shareholders akin to the findings of rehman and takumi (2012), kumar and sujit (2017), thirumagal and vasantha (2017), and bostanci et al. (2018), chakraborty et al. (2018), franc-dąbrowska et al. (2019) and pinto and rastogi (2019). it is found that the companies with big size pay higher dividends as compared to the companies with small size like in previous studies by ghosh (2010), kumar and sujit (2017) and franc-dąbrowska et al. (2019). the study identifies that companies navleen kaur24 with low risk in their future earnings are more likely to make large dividend payments. a similar conclusion was reached by thirumagal and vasantha (2017). it is also found that higher percentage of tangible assets in the asset structure of indian automobile companies’ results in lower dividends payments to the shareholders, similar to the findings of ghosh (2010). the results also suggest that high degree of leverage in the capital structure of automobile companies in india results in less dividend payments to their shareholders as purported by various previous empirical studies viz. ghosh (2010), kaźmierska-jóźwiak (2015), kumar and sujit (2017) and chakraborty et al. (2018). furthermore, fall in the book value per share of the automobile companies makes more reserves and surplus available to make higher dividend payments to their shareholders. the results of this study are also in accordance with signalling theory, pecking order theory and transaction cost theory. limitations and scope for further research the present study focused only on the oems from indian automobile industry which are listed on the bse but there are many other automobile manufacturers of non-indian origin which established their subsidiaries in india and these manufacturers are not listed on the indian stock exchanges. these automobile manufacturers were not included in the present study due to non availability of the data. so, these non-indian origin manufacturers can also be included in the sample for future studies if the data relating to these manufacturers is available. the sample of this study can also be extended by taking into consideration indian auto-component manufacturers to have understanding of the dividend payout decisions of the indian automotive industry. this study included only the firm-specific explanatory variables. thus, macro-economic variables can also become part of the future research. the present study did not include bajaj auto ltd. due to non availability of data on the account of demerger of the company. this renowned company can also become part of the sample for future research studies. funding: this research received no external funding. conf licts of interests, ghostwriting and guest authorship: the authors declare no conf lict of interests, ghostwriting and guest authorship. determinants of dividend payout decisions… 25  references bostanci, f., kadioglu, e., & sayilgan, g. (2018). determinants of dividend payout decisions: a dynamic panel data analysis of turkish stock market. international journal of financial studies, 6(93), 1-16.http://dx.doi.org/10.3390/ijfs6040093. chakraborty, s., shenoy, s.s., & kumar, s.n. (2018). empirical evidence on the determinants of dividend pay-outs in the auto components sector in india. investment management and financial innovations, 15(4), 356-366. http://dx.doi.org/10.21511/ imfi.15(4).2018.29. department of heavy industry, ministry of heavy industries and public enterprises, government of india (2018-19). annual report, 39. https://dhi.nic.in/viewdata/ index?mid=1117. franc-dąbrowska, j., madra-sawicka, m., & ulrichs, m. (2019). determinants of dividend payout decisions – the case of publicly quoted food industry enterprises operating in emerging markets. economic researchekonomska istrazivanja, 33(1), 1108-1129. http://dx.doi.org/10.1080/1331677x.2019.1631201. ghosh, s. (2010). the dividend strategy of indian companies: an empirical assessment. artha vijnana, munich personal repec archive, 29567, 52(2), 1-10. gujarati, d., & sangeetha, n. (2011). basic econometrics (4th ed.). new delhi, tata mcgraw-hill education private limited, 370 & 651. horne, j.c.v., & wachowicz, j.m., jr. (2001). fundamentals of financial management (11th ed.). new delhi: pearson education inc. kaźmierska-jóźwiak, b. (2015). determinants of dividend policy: evidence from polish listed companies. procedia economics and finance, 23, 473-477. http://dx.doi. org/10.1016/s2212-5671(15)00490-6. khan, m.y., & jain, p.k. (2011). financial management: text, problems and cases (6th ed.). new delhi, tata mcgraw-hill education private limited, 6.28. kumar, b.r., & sujit, k.s. (2017). determinants of dividends among indian firms an empirical study. cogent economics & finance, 6(1), 1-18. http://dx.doi.org/10.1080/ 23322039.2018.1423895. malhotra, n., & tandon, k. (2013). determinants of stock prices: evidence from nse 100 companies. iracst-international journal of research in management and technology, 3(3), 89. https://www.iracst.org/ijrmt/papers/vol3no32013/3vol3no3.pdf. pinto, g., & rastogi, s. (2019). sectoral analysis of factors inf luencing dividend policy: case of an emerging financial market. journal of risk and financial management, 12(3), 1-18. rehman, a., & takumi, h. (2012). determinants of dividend payout ratio: evidence from karachi stock exchange (kse). journal of contemporary issues in business research, 1(1), 20-27. sinha, p.k. (2012). financial management: tools and techniques (1st ed.). new delhi: excel books. sumathy, n., & rajasekaran, d. (2019). determinants of dividend policy in indian automobile industry. history research journal, 5(6), 2089-2094. navleen kaur26 thapa, m. (2021). effects of financial determinants on dividend payout: evidence from nepalese retail banks. the batuk, 7(1), 24-37. http://dx.doi.org/10.3126/batuk. v7i1.35344. thirumagal, p.g., & vasantha, s. (2017). dividend payout determinants: evidence from indian industries. international journal of pure and applied mathematics, 117(21), 811-829. tulsian, p.c. (2009). financial management (1st ed.). new delhi: s. chand & company limited. date of submission: november 22, 2021; date of acceptance: march 19, 2022. * contact information: nk.emekanwokeji@coou.edu.ng, department of accountancy, chukwuemeka odumegwu ojukwu university, igbariam campus, anambra state, nigeria, phone: +2348037409150; orcid id: https://orcid.org/0000-0002-3673-0422. ** contact information: nangihlah@yahoo.co.uk, department of accountancy, ken saro-wiwa polytechnic, bori, rivers state, nigeria, phone: +2348037514250; orcid id: https://orcid.org/0000-0001-8283-8883. *** contact information: chieduchristiandspg@gmail.com, department of accountancy, delta state polytechnic, ogwashi-uku delta state, nigeria, phone: +234803760753; orcid id: https://orcid.org/0000-0002-0950-9634. **** contact information: ebeleekwunife@gmail.com, department of accountancy, chukwuemeka odumegwu ojukwu university, igbariam campus, anambra state, nigeria, phone: +2348063498848; orcid id: https://orcid.org/0000-0003-4736-9940. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 2 emeka-nwokeji, n.a., nangih, e., chiedu, c.o., & ekwunife, e.n. (2022). reaction of share prices to dividend policy of non-financial firms in nigeria: a panel data approach. copernican journal of finance & accounting, 11(2), 31–49. http://dx.doi.org/10.12775/cjfa.2022.007 nkechi a. emeka-nwokeji* chukwuemeka odumegwu ojukwu university efeeloo nangih** ken saro-wiwa polytechnic christian o. chiedu*** delta state polytechnic ebele n. ekwunife**** chukwuemeka odumegwu ojukwu university reaction of share prices to dividend policy of non-financial firms in nigeria: a panel data approach keywords: dividend payout ratio, dividend yield, market reaction, share price, firm performance, capital market. n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife3232 j e l classification: g3, g35, m41. abstract: the study analyzed how share prices react to dividend policies of non-financial firms in nigeria. data were collected from a sample of 31 non-financial firms using an ex post facto research design from 2013 to 2019, resulting in 217 firm-specific observations. descriptive statistics, diagnostic tests, and inferential statistics were used as statistical tools of analysis. results revealed that dividend per share positively and significantly affects share prices of sampled firms. this finding affirms gordon’s bird in hand theory that share prices are affected by dividend. dividend payout ratio, dividend yield, firm, size and firm age do not have significant effect on share prices of sampled firms. consequently, the study recommends that firms should ensure that a good dividend policy is implemented and that dividend per share policies are maintained, as this has been empirically demonstrated to inf luence share prices.  introduction introduction every financial manager makes decisions that have impact on a company’s worth. according to omilabua, alao and situ (2018), these financial decisions, which may have various implications (positive or otherwise) on the finances of the organization, are broadly classified into three: investment decisions (that has to do with where to invest the business scarce resources to be able to make good returns on investment); financing decisions (which has to do with where to raise funds for investment purposes, including the right debtequity mix to be employed in order to maximize shareholders’ value) and dividend decisions (which entails the decisions on how much profit should be paid as dividends to the shareholders and the amount to be retained in the business for expansion and growth). accordingly, the ultimate goal of the manager while making such decisions is always to maximize the firm value (giang & tuan, 2016). little wonder burhan and rahmanti (2012) cited in aifuwa (2020) affirms that a firm’s ability to build value requires generating sufficient profit while also meeting the needs of a diverse set of stakeholders. thus, omilabua, alao and situ (2018) posit that dividend policy indicates established benchmarks and guidelines which underpins management’s decision regarding distributing profit after tax (pat) to ordinary shareholders. nangih (2021) argued that investors’ returns are measured from the perspective of what the shareholders earn e.g. earnings per share, dividend per share, earnings yield, price-earnings ratio, book value per share, market share price per share and dividend yield. he noted that they are indicators of what shareholders earn on their investments in the firm. dividend policy reaction of share prices to dividend policy… 3333 therefore has to do with taking decision involving paying cash dividends currently or paying an increasing dividend at a later date by the firm. according to islam (2018), a company’s dividend policy determines how much it will pay out to shareholders, keeping in mind that the share valuation model emphasizes that the amount of dividend issued to shareholders has a significant impact on the value of a share. many stakeholders, particularly investors (existing and potential), have interests in stock returns or share price information. little wonder ashara, emeka-nwokeji and ozua (2020) noted that corporate investors want a high return from investment and are thus attracted by firms with management teams whose dividend policies support the increase in firm value with an acceptable risk. with share price information, an existing investor will be able to forecast or estimate his earnings while potential investor is provided with more information that will enhance their investment decisions. as a result, prospective investors can use dividend policy as a source of information before committing to an investment (margono & gantino, 2021). motivation for the studymotivation for the study relationship between dividend policy and stock price movements is a prominent issue in accounting and finance research since such knowledge can help managers and stock market traders make better judgement. one of a company’s management’s tasks is to define the dividend policy, which includes the timing and amount of dividends to be paid. as a result, dividend policies in both developed and developing countries have been a source of worldwide concern. prior studies have explored that dividend payment policy has a link with firm performance. however, academics are divided on the effects of dividend policy. some are of the opinion that when dividends are consistently paid, investors are attracted to buy into the company, which improves the firm’s share price, while others claim that the firm’s earnings are more important in determining the share prices of firms and not only dividends. hence, findings of most of the studies have led to some unresolved debates by researchers on this subject matter. for instance, prior studies by marfo-yiadom and agyei (2011), adelegan (2003), ajanthan (2013), abiola (2014), among others, investigated the relationship between dividend payout and the performance of firms. this study therefore tries to resolves those controversies as well as contribute to knowl n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife3434 edge on the subject matter. accordingly, the study attempts to provide answers to the following research questions: i. to what extent does dividend payout affect market price per share of firms in nigeria? ii. to what extent does dividend yield impact on market price per share of firms in nigeria? iii. to what extent does dividend per share affect the market price per share of listed firms in nigeria? research methodology and research processresearch methodology and research process this study adopts ex-post facto research design. the design is adopted because the study investigates the independent variable’s potential effects on the dependent variable using secondary data. also since data for both share prices and dividend policies of firms already exist in annual reports, an ex post facto design enables the researcher to take data as-is and try to find plausible connections or cause-and-effect relationships. data used was gathered from annual reports of non-financial companies listed on the nigerian stock exchange. thus, thirty-one non-financial firms were selected based on availability of data for seven years’ period from 2013–2019 resulting in 217 firm yearly observations. the study used both descriptive and inferential statistics as tool of analyses in addition to diagnostics tests to describe the characteristics of the variables, test the formulated hypotheses at .05 level of significance and confirm regression assumptions. the analyses were performed using the panel regression technique with hausman’s test employed to determine whether fixed effect (fe) or random effect (re) analytical procedures is most appropriate. market price per share (mps) was used to measure share prices which is the dependent variable of the study. this represent closing share price as of 31st december for the years. dividend policy which is the independent variable measures the proportion of cash dividend a company pays to its ordinary shareholders. dividend policy are proxies as: dividend payout = (div_pout ratio) is computed as cash dividend paid divided by profit after taxes; dividend yield = (div_yild) cash dividend yield in percentage computed as cash dividend paid divided by market capitalization and dividend per share = (dps) computed as cash dividend paid divided by outstanding shares. firm size = (fsiz) size reaction of share prices to dividend policy… 3535 measured as natural logarithm of total assets and firm age = (firm_ag) which is number of years listed on the nigerian stock exchange are control variables employed in the study. conceptual, theoretical and empirical reviewconceptual, theoretical and empirical review share price share price share price means the market price of a company’s share, be it a public (or private) company. it is the market value per share at which a company’s share is currently traded on the f loor of a stock exchange. it means the price at which a company share can be purchased and sold in an arm’s length transaction. several factors can inf luence market value per share, including the firm’s financial performance, the outlook of the industry or sector to which the company belongs, market demand and supply conditions, investor attitude, and a range of other macroeconomic conditions. dividend policy and dimensionsdividend policy and dimensions the policy a corporation takes to achieve or organize its dividend pay-out to shareholders is known as dividend policy. it is a financial choice made by a company to pay out a certain percentage of its earnings to its shareholders. the board of directors decides how much of the company’s earnings should be given as dividends to shareholders and how much should be kept for expansion and growth. this is critical since it defines the amount of dividends to be paid, when they should be paid, and how they should be paid. according to booth and cleary (2010), a dividend policy is a set of guidelines established by management to help them decide how much of their revenues should be distributed and how much should be kept in the firm for investment purposes. this study uses the dividend pay-out, dividend yield and dividend per share as dimensions of dividend policy and are discussed below: i. dividend payout dividend-payout ratio is a way of measuring the fraction of a company’s earnings that are paid to investors in the form of dividends rather than being re-invested in the company in a given time period (usually n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife3636 one year). it is a proportion of a company’s earnings that is paid to the shareholders. according to ubesie, emejulu and iyidiobi (2020), the dividend payout ratio shows the percentage of dividends an organization pays out to its shareholders relative to its earnings per share. they further opined that the payout ratio is used mainly to determine the capability of the company to continually pay dividends to its shareholders on a consistent basis. ii. dividend yield dividend yield can be described as the annual dividend paid per share divided by market price per share. labhane and das (2015) describe dividend yield as the annual dividend paid per share divided by market price per share. generally, investors mostly see companies that pay dividends consistently over a period of time as better investments. thus, should events occur which affect the share price, the amount of earlier dividend together with the stability of the company can help to stabilize the share price to a great extent. iii. dividend per share some investors look to invest in shares of companies that will provide reliable income through sizable and consistent dividends. dividend per share is the amount of total dividend divided by the number of issue and ranking for dividend as at a particular date. ubesie et al. (2020) described dividend per share as the sum of declared dividends for every ordinary share issued. they further opined that dps is the amount of dividends that a quoted company or publicly traded company pays as dividends per share to their ordinary shareholders, during a reporting period. theoretical frameworktheoretical framework this study is anchored on the “bird in hand” theory, which was propounded by gordon (1963) and lintner (1962). according to their proposition, there is a link between a company’s worth and its dividend payout. dividends are also thought to be less risky than capital appreciation since they are more predictable. in other words, the theory is based on the concept of dividend relevance in determining the market value of a company’s stock. they proposed that investors are rational individuals who are often risk averse and will al reaction of share prices to dividend policy… 3737 ways prefer to get a dividend today over expecting a financial gain in the future, which they cannot be certain of. one of gordon’s postulates, according to amidu (2007), is that investors prefer dividends to capital gains since payouts are deemed less risky. this theory is relevant to this research because, since dividends are seen to be a determinant of the market price of shares, it is expected that managers should set a good dividend policy in order to grow the share prices of their companies, which will further attract more investors to invest in them. empirical reviewempirical review in a recent study ubesie et al. (2020) empirically analyzed the association between dividend policy and firm’s financial characteristics of consumer goods companies in nigeria. it made use of annual time series secondary data collected from annual report. findings showed that dividend per share (dps) relates positively with the firm’s financial characteristics whereas there was a negative and insignificant relationship between profitability (measured by roa and roe), and the dividend payout ratio (dpr) of firms. a positive relationship was maintained between dpr and eps for the period. the study further observed that the relationship between roa and dps was significant at 5% level. usman, lestari and sofyan (2021) examined the impact of dividend policy on share prices using 36 manufacturing companies listed on the indonesia stock exchange between 2014 and 2018. dividend per share, retention ratio, return on equity, dividend yield, and earnings per share are the independent variables. the share prices are the dependent variable. dividend per share has a positive impact on share prices. the yield on dividends has negative impact on stock prices. share prices are unaffected by the retention ratio, return on equity, or earnings per share. chiedu and okonkwo (2020) used data from banks listed on the nigerian stock exchange from 2013 to 2018 to investigate the inf luence of dividend policy on shareholder wealth creation and business performance. dividend policy was examined in terms of dividends per share, while shareholder wealth generation was measured in terms of earnings per share and return on equity. the results show a positive association between dividend policy, as measured by dividend per share, and shareholders’ wealth creation, as measured by earnings per share. n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife3838 naz and siddiqui (2020) investigated the effect of dividend policy on share price volatility of firms from various industries in pakistan listed on the karachi stock exchange from 2010 to 2019 using dividend yield, dividend payout, and other control variables. the panel data is subjected to fixed and random effect models. payout ratio and price volatility are highly positively connected. share price volatility is inversely proportional to the company’s size and debt. dividend yield was revealed to be a positive and significant determinant factor in inf luencing share price volatility in this study. in a related study hailin and jingxu (2019) examined the effect of mandatory dividend policy on agency cost of chinese firms following mandatory dividend policy introduced in 2011. the study employed panel data regression model, intermediary utility model and difference-in-difference model (did) in examining the exogenous mandatory dividend impact on agency cost. analyses of the results indicate that mandatory dividend policy significantly inhibits the agency cost of enterprises. haque, jahiruddin and mishu (2019) used data from 35 manufacturing firms listed on the dhaka stock exchange (dse) to explore the impact of dividend policy on stock price volatility. the dependent variable, price volatility, is regressed against dividend yield and payout, as well as business size, earnings volatility, and long-term debt, in this study. the results revealed a significant inverse link between share price volatility and dividend yield as well as firm size. usman and olorunnisola (2019) studied the impacts of dividend policy on performance of banks in nigeria. purposive random sampling method was employed to select seven (7) out of the sixteen (16) quoted deposit money banks in nigeria. data was sourced from annual reports of the sampled banks for a period of ten years from 2009–2018. the panel regression utilized in the study revealed that dividend policy had a significant impact on bank corporate performance in nigeria. akram, alrjoub and alrabba (2018) investigated the nexus between dividend policy and stock price of listed firms in amman. a total sample of 228 firms were used for the study. data was collected from their annual reports for the period from 2010 to 2016. the study employed descriptive statistics, pearson correlation and panel regression analysis tools. the findings showed that dividend policy had negative and significant inf luence on stock price. reaction of share prices to dividend policy… 3939 fiiwe and turakpe (2017) studied the effect of dividend policy and firm performance. the study employed the regression model as a tool for analysis while the ex post facto design was used. the study selected companies listed on the nigerian stock exchange. dividend policy was found to be related to financial performance, and both were positively and statistically related for all of the companies analyzed in the study. sharif, purohit and pillai (2015) used data from 41 firms from bahrain stock exchange to assess factors affecting share prices. estimation approach is based on fe and re models, as well as pooled ols regression with robust standard errors. both estimate models show a positive and substantial association between roe, bvs, dps, pe, and log mcap, implying that these variables have a role in determining the market price of stocks. dividend yield, on the other hand, was found to have a negative association with mps. enekwe, nweze and agu (2015) examined the nexus between dividend payout ratio and performance evaluation measures such as (roce, roa and roe) of quoted cement companies in nigeria. using data collected from their annual reports from 2003 to 2014, the results of the analysis showed that the independent variable (proxied by dividend payout ratio) had positive effect on financial performance. above empirical and theoretical review demonstrates that there is a growing literature on dividend policy and share prices accordingly. the null hypotheses of this study is put forward as: i. dividend payout has no significant effect on market price per share of firms in nigeria. ii. dividend yield cannot significantly affect market price per share of firms in nigeria. iii. dividend per share has no significant effect on market price per share of firms in nigeria. model specificationmodel specification this study adapted models of hafeez, shahbaz, iftikhar and butt (2018) and usman and olorunnisola (2019) in assessing reaction of share price to dividend policies of firms in nigeria. the models were used in a similar study in a developing economy and were modified to include the variables of this study which is stated functionally and econometrically as: n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife4040 share price = f (dividend policy, controls)   (1) mpsit = β0 + β1div_poutit + β2 div_yildit + β3dpsit + β4fsizit + + β5firm_agit + µ it (2) where: mps = market price per share; used to measure of share prices dividend policy = dividend pay-out ratio, dividend yield and dividend per share div_pout = dividend pay-out ratio div_yild = dividend yield dps = dividend per share fsiz = firm size firm_ag = firm age β0 = constant or intercept of regression equation β1, β2, β3, β4, β5 = beta coefficients of the regression equation µ = error term to capture variations in the model empirical results and discussion of findingsempirical results and discussion of findings results of descriptive, diagnostics tests and inferential statistics are presented in this section table 1. descriptive statistics div_yild = dividend yield dps = dividend per share fsiz = firm size firm_ag = firm age β0 = constant or intercept of regression equation β1, β2, β3, β4, β5 = beta coefficients of the regression equation µ = error term to capture variations in the model empirical results and discussion of findings results of descriptive, diagnostics tests and inferential statistics are presented in this section table 1. descriptive statistics stats | mps div_pout div_yild dps fsiz_l~t firm_ag ---------+----------------------------------------------------------- mean | 67.07277 43.33742 3.709662 2.021896 7.340908 30.80645 sd | 218.8303 139.2547 4.958809 6.751149 .8493546 13.68729 max | 1556 1452.19 51.7242 61.8217 9.2409 55 min | .2 -935.6269 0 0 5.5066 4 skewness | 5.366192 3.65652 4.782661 6.528816 .1700388 -.6955676 kurtosis | 32.41457 62.74239 42.60347 51.3172 2.154552 2.128458 n | 217 217 217 217 217 217 --------------------------------------------------------------------- source: extract from stata output. descriptive statistics in table 1, descriptive statistics are used to describe the features of each variable used in the study. market price per share ranged between n1556 and n0.20 with average value of n0.67 with standard deviation of n218.83. this result indicates wide variation in the market price of shares of selected firms. investors are willing to pay as high as n1556 for some firms, and as low as n0.20 for some firms. in the case of the explanatory variables, average dividend payout ratio of sampled firms is n0.43 while the minimum value is (n935.62) and the maximum value is n1452.19 during the period of the study. this result shows a significant difference between the minimum and maximum values due to the fact that there are companies which did not pay cash dividends at all during the period of the study. average dividend yield of selected non-financial firms is n3.71 with the minimum of n0.00 because some companies did not pay cash dividend during the period under investigation with maximum of n51.72 and standard s o u r c e : extract from stata output. reaction of share prices to dividend policy… 4141 descriptive statisticsdescriptive statistics in table 1, descriptive statistics are used to describe the features of each variable used in the study. market price per share ranged between n1556 and n0.20 with average value of n0.67 with standard deviation of n218.83. this result indicates wide variation in the market price of shares of selected firms. investors are willing to pay as high as n1556 for some firms, and as low as n0.20 for some firms. in the case of the explanatory variables, average dividend payout ratio of sampled firms is n0.43 while the minimum value is (n935.62) and the maximum value is n1452.19 during the period of the study. this result shows a significant difference between the minimum and maximum values due to the fact that there are companies which did not pay cash dividends at all during the period of the study. average dividend yield of selected non-financial firms is n3.71 with the minimum of n0.00 because some companies did not pay cash dividend during the period under investigation with maximum of n51.72 and standard deviation of n4.95. the result further reveals standard deviation, maximum, minimum and mean values for dividend per share stood at 6.75, 61.82, 0 and 2.02 respectively. the maximum (9.24) and minimum (5.50) values of firm size as assessed in terms of the log of total assets do not show a considerably wider difference. this indicates that the majority of the companies in the study are of similar size. the sampled firms’ average age is 30 years, with a standard deviation of 13 years. according to the maximum and minimum values of the firm age, the oldest firm in the sample is 55 years old, but some new firms that are 4 years old are also included in the study. except for firm age, all of the variables in the model are positively skewed, according to the skewness finding. which means that there are higher values above the sample mean. this finding is consistent with the kurtosis result, which indicates that the data utilized in the study is leptokurtic since three of the five variables have greater values than the normal distribution’s value of three (3). normality testnormality test normality of data is often tested in order to ensure that the normality assumption of regression is satisfied. normality of data is usually checked to ensure that the regression’s normality assumption is met. the result presented in table 2. n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife4242 table 2. normality test cash dividend during the period under investigation with maximum of n51.72 and standard deviation of n4.95. the result further reveals standard deviation, maximum, minimum and mean values for dividend per share stood at 6.75, 61.82, 0 and 2.02 respectively. the maximum (9.24) and minimum (5.50) values of firm size as assessed in terms of the log of total assets do not show a considerably wider difference. this indicates that the majority of the companies in the study are of similar size. the sampled firms’ average age is 30 years, with a standard deviation of 13 years. according to the maximum and minimum values of the firm age, the oldest firm in the sample is 55 years old, but some new firms that are 4 years old are also included in the study. except for firm age, all of the variables in the model are positively skewed, according to the skewness finding. which means that there are higher values above the sample mean. this finding is consistent with the kurtosis result, which indicates that the data utilized in the study is leptokurtic since three of the five variables have greater values than the normal distribution’s value of three (3). normality test normality of data is often tested in order to ensure that the normality assumption of regression is satisfied. normality of data is usually checked to ensure that the regression’s normality assumption is met. the result presented in table 2. table 2. normality test variable | obs w v z prob>z -------------+------------------------------------------------- mps | 217 0.29737 112.554 10.913 0.00000 div_pout | 217 0.45614 87.121 10.321 0.00000 div_yild | 217 0.67728 51.697 9.115 0.00000 dps | 217 0.31311 110.032 10.860 0.00000 fsiz_logasst | 217 0.97030 4.757 3.603 0.00016 firm_ag | 217 0.87139 20.603 6.990 0.00000 source: extract from stata output. the w statistic in the shapiro-walk test shown in table 2 is used to check the normality assumption. w is positive and less than or equal to one. the normality of the data is indicated by w being close to 1 (henderson, 2006; peng, 2004). as a result, the w tests used in the study for dividend payout, dividend yield, firm size, and firm age are near 1, indicating that s o u r c e : extract from stata output. the w statistic in the shapiro-walk test shown in table 2 is used to check the normality assumption. w is positive and less than or equal to one. the normality of the data is indicated by w being close to 1 (henderson, 2006; peng, 2004). as a result, the w tests used in the study for dividend payout, dividend yield, firm size, and firm age are near 1, indicating that the data is normal. this result indicates that the data used is normally distributed, that no outliers exist in the data, and that the analyses and conclusions generated from it are valid. table 3. correlation analysis the data is normal. this result indicates that the data used is normally distributed, that no outliers exist in the data, and that the analyses and conclusions generated from it are valid. shapiro-walk test on table 2 checks the normal assumption by constructing w statistic. w is positive and less than or equal to one. w being close to 1 indicate normality of the data (henderson, 2006; peng, 2004). thus, w test of 0.50, 0.68, 0.97 and 0.87, respectively for dividend payout, dividend yield, firm size and firm age employed in the study are close to 1 indicating normality of the data. with this result, the study concludes that the data used are normally distributed, that there is no outlier in the data and thus analyses and conclusion therefrom are reliable for drawing conclusion. table 3. correlation analysis | mps div_pout div_yild dps fsiz_l~t firm_ag -------------+----------------------------------------------------- mps | 1.0000 | div_pout | 0.0883 1.0000 | 0.1950 | div_yild | -0.0367 0.5800 1.0000 | 0.5913 0.0000 | dps | 0.8942 0.1605 0.0844 1.0000 | 0.0000 0.0180 0.2156 | fsiz_logasst | 0.2971 0.1288 0.1909 0.3054 1.0000 | 0.0000 0.0583 0.0048 0.0000 | firm_ag | 0.1064 0.0500 0.0543 0.0868 0.1184 1.0000 | 0.1182 0.4641 0.4262 0.2028 0.0819 source: extract from stata output. pairwise correlation analysis correlation coefficients and their association between variables used in the model apart from being used to test the strength of linear association shows the presence or otherwise of perfect or exact relationship among the independent variables. table 3 represents the correlation amongst variables. it shows that dividend payout (0.09) and dividend per share (0.89), as well as the two control variables of company size (0.29) and firm age (0.10), are positively related to the market price per share. while the relationship between dividend per share, firm size and market price per share is significant, the relationship between dividend payout and firm age is insignificant. the positive relationship implies that increase in dividend payout, dividend per s o u r c e : extract from stata output. reaction of share prices to dividend policy… 4343 shapiro-walk test on table 2 checks the normal assumption by constructing w statistic. w is positive and less than or equal to one. w being close to 1 indicate normality of the data (henderson, 2006; peng, 2004). thus, w test of 0.50, 0.68, 0.97 and 0.87, respectively for dividend payout, dividend yield, firm size and firm age employed in the study are close to 1 indicating normality of the data. with this result, the study concludes that the data used are normally distributed, that there is no outlier in the data and thus analyses and conclusion therefrom are reliable for drawing conclusion. pairwise correlation analysispairwise correlation analysis correlation coefficients and their association between variables used in the model apart from being used to test the strength of linear association shows the presence or otherwise of perfect or exact relationship among the independent variables. table 3 represents the correlation amongst variables. it shows that dividend payout (0.09) and dividend per share (0.89), as well as the two control variables of company size (0.29) and firm age (0.10), are positively related to the market price per share. while the relationship between dividend per share, firm size and market price per share is significant, the relationship between dividend payout and firm age is insignificant. the positive relationship implies that increase in dividend payout, dividend per share, firm size and age will invariably stimulate market price per share. specifically, 1% increase in dividend per share will lead to 89% increase in market price of share. however, earnings yield (-0.36) has a significant inverse relationship with a share price of sampled firms. the correlation results between the independent variables of the study did not show any case of multi-collinearity since the highest relationship between the independent variables is 58% which is below 70%. as opined by sharif, purohit and pillai (2015), if the relationship among two independent variables is 70% and above, then it is a case for concern. regression analysisregression analysis the xtset command in stata indicates that data was strongly balanced. fixed effect and random effect regressions were run. to establish which of the fixed and random effect analytical methodologies is best for reaching a result, hausman’s test was performed. the estimation based on random effects will be bet n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife4444 ter if the p-value of the chi-square is bigger than 0.05 (5 percent) empirically. estimation based on fixed effects is recommended if the p-value is less than 0.05 (5%). the hausman tests found a chi2 of 1343.05 and a prob > chi2 (probability-value) of 0.0000, indicating that the fixed effect model is favored for this investigation, and the result is reported and interpreted. table 4. summary of fixed-effect regression 1 table 4. summary of fixed-effect regression * significant at 1% source: extract from stata output. *significant at 1%. s o u r c e : extract from stata output. the r-squared result of fixed-effect regression indicates that the dividend policy variables of dividend payout, dividend yield, and dividend pay share, as well as the control variables of firm size (fsiz) and firm age (firm ag) used in the study, together accounted for about 70% (r-squared 0.6899) of the systematic variations in the market price of equity shares of non-financial firms on the nigerian stock exchange. the regression model used in this study has an f-value of 9.13 and a p-value of 0.0000, which means it is statistically significant at the 1% level. this means that the regression model is appropriate. the coefficients (p-value) for dividend payout, dividend yield, dividend per share, firm size and firm age are -.0175(0.638), -1.500(0.226), 7.713(0.000) -1.150(0.972), and -1.375(0.575) respectively. these coefficients of variation (β) which describe the direction of variation, are negative for dividend payout (div pout), dividend yield (did yild), control variables firm size (fsiz), and firm age (firm ag), but positive for dividend per share (div pout) (dps). corresponding p-values for dividend payout, dividend yield, firm size and firm age are all greater that 0.05(5%) showing that these variables do not have significant effect on market price of shares. thus, the null hypotheses for dividend payout and dividend yield are accepted at 5% significance level and the alternative hypothesis is rejected. the coefficients and p-value for dividend per share is 7.713(0.000). this indicates reaction of share prices to dividend policy… 4545 that dividend per share has positive and significant effect on market price of shares. the null hypothesis is rejected and alternative hypothesis accepted. coefficients and p-values of the two control variables, firm size and firm age, were negative and statistically not significant on market price of share. discussion of findingsdiscussion of findings findings of this study revealed that dividend payout and dividend yield of nonfinancial firms included in the study do not have significant effect on market price of shares. this indicates that increase in the market price of shares during the period was not as a result of firms’ dividend payout and dividend yield. it also shows that fraction of firms’ earnings that are paid in the form of dividends do no motivate investors to pay for shares. this finding did not support gordon’s bird in hand theory that firm can employ dividend payment as a strategy to inf luence market price. it shows that investors still sought for and are paying for securities even when the dividend payout and yield is low. it also indicates that investors can buy or sell shares base on availability or need for fund and not necessary on whether dividend is paid by firms or not. this resulted in increase in market price of shares when even as there is decrease in dividend payout and dividend yield. these findings support the previous research results that dividend payout and dividend yield has negative and insignificant effect of market price of shares (ubesie et al., 2020; sharif et al., 2015; usman, lestari and sofyan (2020). however, it contradicts the findings of ugwu, onyeka, and okwa, (2020), enekwe et al. (2015), naz and siddiqui (2020) iftikhar, raja and sehran (2017) and habib, kiani and khan (2012) that dividend payout and dividend yield have positive and significant effect on firm valuation and share price volatility. the analyses also showed that dividend per share has positive and significant effect on market price of shares of sampled firms. this result indicates that the amount that firms pay as dividend in relation to their ordinary shares is considered by investors in evaluating and pricing various shares to invest in. this outcome corroborates the findings of ubesie et al. (2020) and chiedu and okonkwo (2020) that dividend per share has positive and significant relationship with shareholders’ wealth creation and firm performance. the result, however, contradicts the miller and modigliani (1961) theory of dividend irrelevance, which states that firms cannot use dividend payment as a strategy n.a. emeka-nwokeji, e. nangih, c.o. chiedu, e.n. ekwunife4646 to boost the value of their shares. the control variables of firm size and firm age is negative and have no significant effect on market price of shares. meaning that size and age of a firm are not important variables that affect price of shares. this indicates that investors don’t place much value on larger and older firms. this negates the finding of haque, jahiruddin and mishu (2019) that size of a firm has significant impact on share price volatility but aligns with habib et al. (2012) that firm size has inverse relationship with share price volatility.  conclusion and recommendations conclusion and recommendations panel data approach and fixed effect regression model was employed to study the effect of dividend policy on share prices of selected non-financial firms listed under different sectors of nigeria stock exchange starting from the period preceding the adoption of international financial reporting standards (ifrs), 2013 to 2019. the study provided empirical evidence that dividend per share amongst other variables used has positive and significant effect on share price while dividend payout and dividend yield is not significant in affecting share price of selected firms. it can be concluded that firms’ dividend policy that relates dividend to ordinary share is significant in inf luencing price that investors pay for shares. this conclusion agrees with gordons (1963) bird in hand theory that firm can employ dividend payment as a strategy to inf luence market price. the study recommends that companies’ boards of directors and management to ensure that a good dividend policy is implemented and that dividend per share policies are maintained, as this has been empirically demonstrated to inf luence share prices. the research also suggests that whatever dividend ideology a company chooses between miller and modigliani (1961) theory that dividend does not affect the value of the company is not inf luenced by the way in which its profits are split between dividends and retained earnings and gordons’ (1963) bird in hand theory that dividends affect the company’s value through an increase in the demand for the company, firms should be consciously meticulous in their thoughts on efficient approaches to maximizing the wealth of shareholders by improving the firm’s value. reaction of share prices to dividend policy… 4747  references references abiola, j.o. 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(2020). effect of dividend policy on financial performance of consumer goods manufacturing firms in nigeria. science journal of business and management, 8(1), 7–15. http://dx.doi.org/10.11648/j. sjbm.20200801.12. ugwu, c.c., onyeka, v.n., & okwa, i.e. (2020), dividend policy and corporate financial performance: evidence from selected listed consumer goods firms in nigeria. journal of economics and business, 3(3), 1055–1065. usman, b., lestari, h.s., & sofyan, s. (2021). the effect of dividend policy on share price manufacturing companies in indonesia. advances in economics, business and management research, 169, 117–122. usman, o.a., & olorunnisola, a.o. (2019). effects of dividend policy on corporate performance of deposit money banks in nigeria. international journal of research and scientific innovation, 6(6), 190–194. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: february 27, 2014; date of acceptance: september 9, 2014. * contact information: bogna.janik@wsb.poznan.pl, poznan school of banking, nie podległosci 2, 61-874 poznan, poland, phone: 602 611 723. janik b. (2014). market and non-market factors inf luencing the development of green energy producers. copernican journal of finance & accounting, 3(2), 25–36. http://dx.doi.org/10.12775/ cjfa.2014.015 bogna janik* poznan school of banking market and non-market factors influencing the development of green energy producers keywords: green energy, green energy producers, property rights, renewable energy. j e l classification: g32, g38. abstract: the aim of the study is to identify and examine some key factors crucial to the development of the polish industry of producers obtaining renewable energy, and to find the market and non-market factors inf luencing the development of polish green energy producers. what is essential for the development of renewable energy producers is an adequate public policy, especially the regulations concerning the financial aspects of obtaining energy from renewable sources and the efficiency of available technologies. pricing mechanisms defining the company’s revenue from various resources are the most important factors, however it is difficult to determine their priority. a better understanding of the conditions of the polish renewable energy sector will also be useful in the process of public policy modifications and fostering the development of the renewable energy area. it is one of the first attempts to investigate the issues concerning financial performance of renewable energy companies on the polish market. rynkowe i pozarynkowe czynniki rozwoju producentów zielonej energii słowa kluczowe: zielona energia, producenci zielonej energii, prawa majątkowe, energia odnawialna. bogna janik26 klasyfikacja j e l: g32, g38. abstrakt: celem badania jest określenie kluczowych rynkowych i pozarynkowych czynników istotnych dla rozwoju polskiej branży producentów zielonej energii. lepsze zrozumienie warunków działania producentów zielonej energii na polskim rynku jest i będzie przydatne w procesie modyfikacji polityki publicznej mającej wspierać rozwój obszaru energetyki odnawialnej. wyniki prowadzonej analizy wskazują, że niezbędne dla rozwoju producentów energii odnawialnej jest odpowiednio prowadzona polityka publiczna, zwłaszcza przepisy dotyczące finansowych aspektów wspierania energii ze źródeł odnawialnych. istotna jest także możliwość dostępu do innowacyjnych technologii sprawdzonych na innych rynkach, ze względu na brak doświadczeń w tym zakresie na rynku rodzimym. badanie to jest jedną z pierwszych prób oceny efektywności finansowej przedsiębiorstw z branży odnawialnych źródeł energii na polskim rynku.  introduction renewable energy is the energy obtained from natural and repetitive processes taking place in nature, from renewable non-fossil energy sources. it may comprise energy from water, wind, solar radiation, geothermics, solid biofuels, biogas and liquid biofuels as well as energy harvesting. the transition from traditional, based on raw materials, energy production into the production which is trying to replace fossil fuels with renewable energy carriers has – apart from unquestionable biological effects worldwide – a huge social importance, particularly crucial in poland since the use of renewable sources of energy results in creating new jobs in production and technological equipment maintenance areas, as well as in production, preparation and transportation of biofules and in servicing the companies investing in rse. according to the european renewable energy council, the share of energy derived from renewable sources of energy (rse) in the total consumption in the eu amounted to 20.3% in 2011 (see figure 1). the recent dynamic development of rse worldwide (average in eu-27 from 15,6 in 2007 to 20,3 in 2011) has been the result of adopting energy strategies in respective countries and the groups they constitute such as the eu1. however, it should be remembered that the development of this sector is driven by: technological progress and increasing awareness of the society which can see more and more benefits generated from the rse development for itself and the surroundings. 1 the eu committed itself to reduce the total emission of carbon dioxide by at least 20% by 2020 in comparison to the level reached in 1990, or even by 30% if other developed countries commit themselves to similar reductions within the new global climate agreement. market and non-market factors influencing… 27 figure 1. the share of renewable energy in obtaining primary energy in general in selected eu member states in 2011 areas, as well as in production, preparation and transportation of biofules and in servicing the companies investing in rse. according to the european renewable energy council, the share of energy derived from renewable sources of energy (rse) in the total consumption in the eu amounted to 20.3% in 2011 (see figure 1). the recent dynamic development of rse worldwide (average in eu-27 from 15,6 in 2007 to 20,3 in 2011) has been the result of adopting energy strategies in respective countries and the groups they constitute such as the eu1. however, it should be remembered that the development of this sector is driven by: technological progress and increasing awareness of the society which can see more and more benefits generated from the rse development for itself and the surroundings. figure 1. the share of renewable energy in obtaining primary energy in general in selected eu member states in 2011 sources: the author’s own analysis based on gus (central statistical office) data. in order to systematize the use of the six basic terms referring to rse, suitable terminology provided by the central statistical office (pol. gus) will be used in further sections of the paper. gus, following its analyses of the way energy is obtained and used from polish rse (cso, energia ze źródeł odnawialnych), which are performed annually, distinguishes five basic sources of energy:  energy directly obtained from solar radiation,  energy directly obtained from wind,  energy directly obtained from geothermal resources,  energy directly obtained from water resources,  energy obtained from municipal solid wastes,  energy obtained from solid biomass, biogas and liquid bio-fuel. the classification of obtained energy according to its sources in 2012 (see table 1) as well as suitable respective classification from previous years illustrate well a clear dominance of biomass among rse available in poland. the share of solid biomass is especially important, though in recent years this tendency has been said to decline slightly (from 50.2% in 2011 to 48.1% in 2011). quite similar data is observable in the baltic states excluding sweden. in the case of the latter, the share of solid biomass is only by a few percent higher than the average for the eu-27, which is a little lower than 50% (see table 1). table 1. the classification of obtained energy according to selected sources in poland in 2012 and the european union in 2011 [%] 1 the eu committed itself to reduce the total emission of carbon dioxide by at least 20% by 2020 in comparison to the level reached in 1990, or even by 30% if other developed countries commit themselves to similar reductions within the new global climate agreement. 20,30% 72,70% 9,50% 19,40% 53,60% 90,10% 99,80% 25,20% 10,90% 22,50% 49,10% 0,00% 20,00% 40,00% 60,00% 80,00% 100,00% 120,00% s o u r c e s : the author’s own analysis based on gus (central statistical office) data. in order to systematize the use of the six basic terms referring to rse, suitable terminology provided by the central statistical office (pol. gus) will be used in further sections of the paper. gus, following its analyses of the way energy is obtained and used from polish rse (cso, energia ze źródeł odnawialnych), which are performed annually, distinguishes five basic sources of energy: ■ energy directly obtained from solar radiation, ■ energy directly obtained from wind, ■ energy directly obtained from geothermal resources, ■ energy directly obtained from water resources, ■ energy obtained from municipal solid wastes, ■ energy obtained from solid biomass, biogas and liquid bio-fuel. the classification of obtained energy according to its sources in 2012 (see table 1) as well as suitable respective classification from previous years illustrate well a clear dominance of biomass among rse available in poland. the share of solid biomass is especially important, though in recent years this tendency has been said to decline slightly (from 50.2% in 2011 to 48.1% in 2011). quite similar data is observable in the baltic states excluding sweden. in the bogna janik28 case of the latter, the share of solid biomass is only by a few percent higher than the average for the eu-27, which is a little lower than 50% (see table 1). table 1. the classification of obtained energy according to selected sources in poland in 2012 and the european union in 2011 [%] source of energy poland eu-27 solid biomass 82.16 48.1 solar energy 0.15 3.7 water energy 2.06 16.3 wind energy 4.80 9.5 biogas 1.98 6.3 bio-fuel 7.97 7.1 geothermal energy 0.19 3.8 municipal waste 0.38 5.2 heat pump 0.31 bd s o u r c e s : the author’s own analysis based on gus. the development of green power industry depends on a wide variety of factors. it is well ref lected in publications concerning the problems of rse in poland, which take into consideration such common contexts as legal, technological, environmental or economic ones. polish publications concerning economic conditions or the factors governing the development of polish bioenergetics are not particularly abundant. undoubtedly, it is worth supplementing such insufficient knowledge with foreign publications. many of them encompass a wide space dimension (e.g. european) including an attempt to explain also polish issues. it seems that at least two clear tendencies may be distinguished among currently carried out research within which the conditions are strongly emphasized. the first research tendency focuses on the barriers and driving forces (stimulants and destimulants) for rse or its particular segments development. such a depiction is aimed at possibly complete identification of diversified developmental factors and their clear arrangement. the results may be quite general, though. the second tendency, slightly less frequently represented in scientific literature, tries to diagnose the situation at its source. therefore, enterprises and their surroundings become the subject of a detailed analysis. the results here may, however, be somehow stigmatized with the peculiarity of market and non-market factors influencing… 29 analyzed subjects, which may impede the generalization of formulated conclusions. the discussion concerning present publications will begin the review of research recognized as the first of the above mentioned tendencies. mccormick and kåberger (2007) made an attempt to identify and analyze the barriers to bioenergetics in the european union. as they said in the article published in 2007, one of the main challenges of the eu and its member states is answering the question: how to accelerate the implementation of power systems based on bioenergy to achieve earlier assumed objectives in terms of rse and bioenergy. the following three conclusions are worth an attention in particular: ■ some developmental barriers refer to all rse, other barriers may apply only in power industry using biomass; ■ key barriers to the development of bio-energy in the european union are: economic conditions, know-how and institutional capacity, and supply chain coordination; ■ there are no technical issues that represent key barriers for bio-energy. in 2011 jianbang, gan and smith (2011) published the article in which they identified some key factors that may have driven the difference in the shares of renewable energy in total primary energy supply among oecd countries for renewable energy in general and bioenergy in particular. the regression analysis proved that only market deployment policies and gdp had statistically significant effects on the supply of renewable energy or bioenergy. it turned out simultaneously, though welcomed with a slight disbelief by other researchers, that in the analyzed period: ‘other factors such as research and innovation policies, market-based energy policies, energy prices, and r&d expenditures did not play a significant role in enhancing renewable energy and bioenergy supply’. in poland, the assumptions concerning the development of green energy were specified in the administrative document titled the strategy for rse development and in the following documents: energy policy for poland until 2030 and the power engineering program. the strategic aim of the state policy is to increase the use of renewable energy resources so that the share of rse in the gross final energy consumption in 2020 would reach 15%. at the end of 2010 the council of ministers adopted the national renewable energy action plan directly due to the eu directive. the plan included the forecast of a 15.5% share of rse in the gross final energy consumption in 2020 in poland achieved in a sustainable way with regard to many factors such as: renewabogna janik30 ble energy resources and raw materials used to produce fuels and electrical power systems. apart from the documents prepared by the authorities, the issue of rse development is also discussed by researchers. as far as polish publications discussing the conditions for the development of polish rse are concerned, the article by bielski (2011) should be mentioned here. the author focused on presenting economic and legal conditions as well as introduced technological conditions for processing biomass. in conclusion, he noticed that the introduction of legal regulations in poland concerning rse was mainly the consequence of adjusting the state’s law to the eu requirements. due to the general character of eu directives 2009/28/ec on the promotion of the use of energy from renewable sources, state solutions could be modified with a relative freedom. a very interesting conclusion referring to the formulation of public policy in terms of rse was introduced by gawlik, mokrzycki and ney (2007). they think that renewable energy sources in poland are strictly connected with local societies. therefore, the development of rse should be adjusted to the conditions dominating in a given region. in this sense, there is no justification for the same scale or pace of development of rse in the whole country. research methods and research process the research process was divided into two stages. the qualitative research was conducted in the first stage which involved the analysis of source documents which justify the support policy for rse producers (green certificates and auction systems). next, particular sources of ‘green’ energy were analyzed with regard to the structure of final products and the production process was assessed (divided into continuous and periodic production). the second stage involved quantitative research to assess the level of support (green certificates prices) and its changes. here, the indices created for property rights (green certificates) were used. both the prices and rates of return on property rights (green certificates) prices were analyzed. their average prices and their scope were defined as well. the volatility was also presented in the form of logarithmic daily returns for the above mentioned indices according to the formula: (r=100*ln(p/p)). the rates of return were established for three indices created for green certificates: the ozex_a index for session transactions, the ozex_a_tp index for otc deals and the ozex_a_polpx index for sessions and otc trading. too limited number of the observations made (63–70) does not al market and non-market factors influencing… 31 low to draw any general conclusions, however, it constitutes a solid ground for further research. results and conclusions drawn from the research process in poland, the fundamental legal provisions concerning renewable energy are specified in the energy law act. the legislator imposed an obligation on energy companies to purchase electrical power and heat obtained from rse. an electrical energy seller whose network is connected with a renewable source must purchase from this source any amount of electrical energy produced by this source. the price of energy a power plant pays for repurchasing electrical power cannot be lower than the average price of electrical energy on the competitive market in the previous year, and the price is announced by the president of the energy regulation office on annual basis. in practice, it generates the obligation to purchase certificates of origin for the producers of ‘black’ energy or to pay a substitution fee settled by the energy regulation office. at present, a new bill is being discussed. it assumes the transition from the current system of subsidizing each present production of energy from renewable sources into the auction system in which the one who proposes a lower price of such energy will obtain a guarantee of purchasing energy even for 15 years paying the suggested price indexed by the inf lation rate. the ministry of economy assumes that the act will come into force at the beginning of 2015 and the auctions to purchase ‘green’ energy will be announced at least once a year. the minister of economy is supposed to announce earlier a so called reference price, i.e. the maximum price which may be offered during an auction as well as the amount of energy which will be supported by the country in a given year. the bill does not assume, however, supporting co-burning of biomass with coal in huge energy blocks (the proposed support in the act amounts to 50%), which today constitutes 80% of the polish ‘green’ energy. however, the support is to be given to so called dedicated installations of multi-fuel burning in which particular types of fuel are provided by separate lines. the analysis of final products and the continuity of productions shows that depending on the rse source, the final products are diversified (their number depends on the source of rse). only the energy obtained from wind and water have one final source and this is electrical energy. bio-fuels and solid bio-mass constitute two sources of rse whose final effects are diversified. bio-fuels are produced from organic raw materials (from biomass or bio-degradable fracbogna janik32 tions of wastes). these include mainly the following products: bio-ethanol, biodiesel, bio-methanol, bio-dimethylether, bio-etbe bio-mtbe. liquid bio-fuels can also be used as natural plant oils. the above mentioned products are used as bio-components added to engine fuels produced from crude oil. the most commonly used additives include: bio-ethanol (added to gasoline engine fuel) and biodiesel (added to diesel oil). bio-fuels can be further divided into bio-liquids (other liquid bio-fuels). bio-liquids are liquid fuels used for energy purposes other than in transportation including electrical, heat and cold energy produced from biomass. in the case of solid biomass, the final effect of the production is also charcoal. table 2. type of final products depending on rse type source of energy final products continuity of production solid biomass heat energy electric energy charcoal continuous production solar energy heat energy electric energy periodic production water energy electric energy continuous production wind energy electric energy periodic production biogas flammable gas electric energy continuous production bio-fuel heat energy electric energy continuous production geothermal energy heat energy electric energy continuous production s o u r c e : the author’s own analysis. however, not every product obtained from rse is supported by the act, but only electrical power by granting so called property rights. property rights result directly from certificates of origin and are created simultaneously when a particular type of a certificate is registered in the record account of the producer. the number of certificates of origin equals the amount of electrical power given in a certificate of origin, however, one certificate is equal to 1mwh of electrical energy. hence, the amount of produced energy determines the level of support for the producers of green energy. the nature of producing solar and wind energy is rather seasonal. it depends on the amount of solar radiation market and non-market factors influencing… 33 and the strength of wind. discontinuous production forces the producers to take into consideration natural conditions while selecting the location for such a source of energy, otherwise they will risk less amount of produced electrical energy and, therefore, lower support. the same happens in the case of geothermal energy and wind energy, though the production process here is continuous, still the location depends on natural resources. as far as biogas and solid biomass are concerned, their production is limited due to the access to raw materials. the closer the production of raw materials used to produce biomass is located, the more efficient the process is, and this is how transportation costs may be limited. the average value of indices ref lecting the prices of green certificates for the ozex_a index equals pln 179, for ozex_a_tp – pln 213, and for oze x_a_polpx – pln 203 (see table 3). the last two indices are of higher volatility due to the fact that package transactions are concluded partially under long-term contracts and in high volumes. hence, the high trading volume for package transactions ref lected in the ozex_a_tp index determines the value of the ozen_a_ table 3. selected statistics for rse indices ozex_a ozex_a_tp ozex_a_polpx average standard deviation of rates of return 0.0422 0.1862 0.1792 volatility corridor in pln {133.63; 229.95} {144.16; 265.00} {150.42; 245.69} average prices in pln 179 213 203 average volume of return in pln 53 944 157 739 203 040 number of observations 70 63 70 s o u r c e : the author’s own analysis. polpx index. the average volatility of rates of return for the ozex_a index is four and a half times lower for the ozex_a_tp and ozex_a_polpx indices. therefore, the risk of price stability is higher (see figure 2, figure 3), whebogna janik34 reas the range of price volatility for the ozex_a index equals pln 96.32, for oze x_a_tp pln – 120.84 and for ozex_a_polpx – pln 95.27. the range of price volatility is about 25% higher for package transactions than for session transactions. the majority of transactions concluded on the energy exchange are package transactions. since they are concluded as agreements for a definite period, usually for one or a few years, the prices ref lect the supply and demand for green certificates on the day when the agreement was signed. the current demand for green certificates is ref lected in the ozex_a index. the prices do not undergo that high volatility, however, the fall of prices is visible in the analyzed period. the decrease is caused by increased supply of green certificates derived from co-burning, which results from the producers of ‘black’ energy policy. figure 2. the values of the ozex_a, ozex_a_tp and ozex_a_polpx indices in pln from april 30, 2013 to january 16, 2014 70 63 70 source: the author’s own analysis. the majority of transactions concluded on the energy exchange are package transactions. since they are concluded as agreements for a definite period, usually for one or a few years, the prices reflect the supply and demand for green certificates on the day when the agreement was signed. the current demand for green certificates is reflected in the ozex_a index. the prices do not undergo that high volatility, however, the fall of prices is visible in the analyzed period. the decrease is caused by increased supply of green certificates derived from co-burning, which results from the producers of ‘black’ energy policy. figure 2. the values of the ozex_a, ozex_a_tp and ozex_a_polpx indices in pln from april 30, 2013 to january 16, 2014 sources: the author’s own analysis on the basis of polish power exchange data. figure 3. rate of return from the ozex_a, ozex_a_tp and ozex_a_polpx indices from april 30, 2013 to january 16, 2014 sources: the author’s own analysis on the basis of polish power exchange data. 0 50 100 150 200 250 300 ozex_a ozex_a_tp ozex_a_polpx -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1 2013-04-30 2013-05-31 2013-06-30 2013-07-31 2013-08-31 2013-09-30 2013-10-31 2013-11-30 2013-12-31 ozex_a ozex_a_tp ozex_a_polpx s o u r c e s : the author’s own analysis on the basis of polish power exchange data. market and non-market factors influencing… 35 figure 3. rate of return from the ozex_a, ozex_a_tp and ozex_a_polpx indices from april 30, 2013 to january 16, 2014 70 63 70 source: the author’s own analysis. the majority of transactions concluded on the energy exchange are package transactions. since they are concluded as agreements for a definite period, usually for one or a few years, the prices reflect the supply and demand for green certificates on the day when the agreement was signed. the current demand for green certificates is reflected in the ozex_a index. the prices do not undergo that high volatility, however, the fall of prices is visible in the analyzed period. the decrease is caused by increased supply of green certificates derived from co-burning, which results from the producers of ‘black’ energy policy. figure 2. the values of the ozex_a, ozex_a_tp and ozex_a_polpx indices in pln from april 30, 2013 to january 16, 2014 sources: the author’s own analysis on the basis of polish power exchange data. figure 3. rate of return from the ozex_a, ozex_a_tp and ozex_a_polpx indices from april 30, 2013 to january 16, 2014 sources: the author’s own analysis on the basis of polish power exchange data. 0 50 100 150 200 250 300 ozex_a ozex_a_tp ozex_a_polpx -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1 2013-04-30 2013-05-31 2013-06-30 2013-07-31 2013-08-31 2013-09-30 2013-10-31 2013-11-30 2013-12-31 ozex_a ozex_a_tp ozex_a_polpx s o u r c e s : the author’s own analysis on the basis of polish power exchange data. the state policy of auction-based system for selling green certificates as well as limited support for co-burning should inf luence prices stability in a long term and at the same time it will facilitate a more effective management of the structure and size of revenues in enterprises operating in the rse sector. the former state policy (though effective due to the implementation of the eu directive) resulted in the decrease of market prices for ‘green’ certificates mainly due to the co-burning system. the technologies especially used while obtaining energy from solid biomass, geothermal energy or biogas are highly capital-intensive and require financial support also from external sources, whereas the statutory stabilization increases the credit score of such enterprises.  references bielski s. (2011). conditions of biomass production for energy generation purposes in poland. folia oeconomica stetinensia, vol. 10, no. 1, 238–249. http://dx.doi. org/10.2478/v10031-011-0003-4. central statistical office (2012), energia ze źródeł odnawialnych w 2012 roku, warszawa, 13–14, http://www.stat.gov.pl/cps/rde/xbcr/gus/se_energia_zrodla_odnawialne_2012.pdf (accessed: 14.01.2014). bogna janik36 energy policy for poland until 2030 (2009), http://www.swiadomieoatomie.pl/media/ 21853/polityka_energetyczna_polski_do_2030.pdf: (accessed: 27.03.2014). gawlik l., mokrzycki e., ney r.(2007), renewable energy sources in poland – conditions and possibilities of development, http://www.worldenergy.org/documents/ p001106.doc (accessed: 24.08.2013). główny urząd statystyczny (2012), energia ze źródeł odnawialnych w 2011 roku, warszawa, 13–14, http://www.stat.gov.pl/cps/rde/xbcr/gus/se_energia_zrodla_odnawialne_2011.pdf (accessed: 14.01.2014). jianbang gan, smith c.t. (2011). drivers for renewable energy: a comparison among oecd countries. biomass and bioenergy, vol. 35, no. 11, 4497–4503. http://dx.doi. org/10.1016/j.biombioe.2011.03.022. mccormick k., kåberger t. (2007). key barriers for bioenergy in europe: economic conditions, know-how and institutional capacity, and supply chain co-ordination. biomass and bioenergy, vol. 31, no. 7, 443–452. polish power energy, http://www.polpx.pl/en (accessed: 27.03.2014). http://dx.doi. org/10.1016/j.biombioe.2007.01.008. rogulska m., oniszk-poplawska a., pisarek m. (2005), potential and trading opportunities for biomass in poland, http://www.oekosozial.at/uploads/tx_osfopage/rogulska_long.pdf (accessed: 24.08.2013). the act of 10 april 1997 energy law, journal of laws of 2012, pos. 1059. the national renewable energy action plan (2010), http://www.mg.gov.pl/files/upload/12326/kpd_rm.pdf (accessed: 27.03.2014). the power engineering program (2006), http://www.eplan.info.pl/folder.2006-11-02. 4284373342/program_dla_elektroenergetyki_2006.pdf (accessed: 27.03.2014). the strategy for rse development (2000), http://www.pga.org.pl/prawo/strategia-oze. pdf (accessed: 27.03.2014). date of submission: july 19, 2020; date of acceptance: october 4, 2020. * contact information: betgilu2002@gmail.com, doctoral school of economics & regional sciences, szent istván university, gödöllő, pater k.str.1. h-2100, hungary, phone: +36706576044; orcid id: https://orcid.org/0000-0003-0928-7864. ** contact information: farkasne.fekete.maria@gtk.szie.hu, faculty of economics and social sciences, szent istván university, gödöllő, pater k.str.1. h-2100, hungary, phone: +36-28/522-000; orcid id: https://orcid.org/0000-0002-6058-009x. *** contact information: zeman.zoltan@gtk.szie.hu, faculty of economics and social sciences szent istván university, gödöllő, pater k.str.1. h-2100, hungary, phone +36- 28/522-000; orcid id: http://orcid.org/0000-0003-2504-028x. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 oshora, b., fekete-farkas, m., & zeman, z. (2020). role of microfinance institutions in financing micro and small enterprises in ethiopia. copernican journal of finance & accounting, 9(3), 115– 130. http://dx.doi.org/10.12775/cjfa.2020.015 betgilu oshora* szent istvan university maria fekete-farkas** szent istvan university zoltan zeman*** szent istvan university role of microfinance institutions in financing micro and small enterprises in ethiopia keywords: access to finance, ethiopia, microfinance, mses. j e l classification: g21, m210. abstract: micro and small enterprises (mses) understood as a means to attain the united nations 2030 agenda particularly its contribution in reducing the massive unemployment and deep-rooted poverty. hence, the main aim of this paper is to examine the role of microfinance institutions (mfis) to the survival, value creation and growth of betgilu oshora, maria fekete-farkas, zoltan zeman116 mses. for this study purpose, secondary data were collected from the national bank of ethiopia (nbe) and triangulated with systematic review of empirical evidences. principal component analysis (pca) was used to examine the relationships and significance in and between the data emerge. the empirical evidences result reveals that unlike banks, mfis provide diverse micro credit services to address the diverse socio-economic needs of the poor who cannot afford collateral requirement and besides the result from pca reveals that the economic growth and access to microcredit service by itself is not enough to create more jobs as they are uncorrelated. however, the empirical evidences shows that, the poorest and most vulnerable people are being left behind due to lack of access to finance, poor market linkage and inadequate skill training among many other factors. therefore, policy-makers have to develop regulatory frameworks that build sound financial institutions and encourage competition among one another.  introduction the share of the world population living in extreme poverty was reduced from 16% in 2010 to 10% in 2015. however, forecasts recommend that 6% of the world population will still be living in extreme poverty in 2030, missing the target of ending poverty (united nations, 2019). now a-days, unemployment issue has become more serious and even those who are employed also yet live below poverty lines due to lack of decent work. the most recent report by ilo (2019) depicts that, more than one quarter of employed people in lowand middle-income countries were living in extreme or moderate poverty. despite having a job, 8% of the world’s workers and their families still lived in extreme poverty and the case is worst in sub-saharan africa, where the share of working poor stood at 38% in 2018 (united nations, 2019). therefore, being employment does not always guarantee a decent living. moreover, the unemployment scenario of the youth across the globe is more sever as compared with adults (25 years and older). for instance, the most recent ilo (2020) report reveals that, young people (ages of 15 and 24) are significantly three times as likely to be unemployed as adults and at global level about 68 million young people out of approximately 1.3 billion are unemployed. moreover, about 126 million (30%) of employed youth, remain in extreme or moderate poverty despite having a job (ilo, 2019) while it is understood that youth employment and economic empowerment are essential components of a strong foundation in any society (united nations, 2018). mses are considered as a crucial tool for the global economic development in reducing unemployment and poverty. for instance, the contribution of formal and informal msmes account for 90% of all firms and on average for 60 role of microfinance institutions… 117 70% of total employment worldwide and 50% of gdp (itc, 2019; world bank, 2019). however, despite this all contribution to the economy, the most recent report by world bank (2019) reveals that, 40% of formal msmes in developing countries have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global msme lending. different empirical evidences across the world such as (ada, 2017; itc, 2019; fdre, 2016; gebreeyesus, ambachew, getahun, assefa, abebe, hassen & medhin, 2018; fowowe, 2017; dinh, mavridis & nguyen, 2010; cherkos, zegeye, tilahun & avvari, 2018; ključnikov, majková, schwendemann & knogler, 2016; itc, 2016) also founds that lack of access to credit is the main constraints for the success of mses. considering the huge contribution in creating job opportunity with relatively low capital, mses are identified as one of the priority areas of action among the programs addressing african development (drbie & tilaye, 2013). mses are one of the strongest drivers of economic development, innovation and employment (alhassan & sakara, 2014). mses are working towards tackling poverty and finding the decent job for the poor but they are highly facing access to credit service due to high collateral requirements by formal financial institutions. nowadays, mfis are given a task force to serve the poor household and those entrepreneurs excluded from the formal financial institutions due to high collateral requirement that they cannot afford. for instance, the study by bateman (2011); singla (2014); umar and ahmed (2017) found that, microfinance provides small loans to the poor on f lexible conditions and through microcredit, poor people can set up their own small business and become able to earn income for their basic needs. thus, microfinance has been revealed as a key strategy for poverty reduction by improving the living conditions of the poor and ‘bottom-up’ local economic and social development. similarly, the study by helms (2006) and peprah and ayayi (2016) reveals that, access to financial services of microfinance can benefit poor and low-income customers increase and stabilize their incomes, build assets, and invest in their own future and permits clients to increase their household expenditure. despite the promising economic growth in the past decades, ethiopia is falling behind its peers in the area of provision of credit to the private sector. according to the world bank’s enterprise surveys, access to finance is perceived as the main business environment constraint by micro (41%), small (36%) and medium (29%) enterprises in ethiopia, compared to a sub-saharan average of 24%, 20% and 16% respectively (world bank, 2018). betgilu oshora, maria fekete-farkas, zoltan zeman118 the federal democratic republic of ethiopia (fdre) government provides both financial and non-financial service to mses through mfis. however, still now lack of access to credit remains the main challenge for the development and expansion of the mses. the study by gebreeyesus et al. (2018) shows that, above 70% of mses had no access to credit from any of the potential external. moreover, international finance corporation (2017) report reveals, in ethiopia currently there are 136,633 msmes with 1,687,733,587 finance supply and 4,290,163,843 finance gap; and the total of finance gap/gdp account for 7%. this means that it accounts for more than 2.54 times the current level of the country lending. this finance gap is also approximately twice of the global finance gap which is 1.4 for msmes (world bank, 2019). based on the above empirical evidences argument, we can understand that, lack of access to credit has been a key challenge constraining the growth of mses and hence, the main aim of this study is to examine the role of mfis in filling the finance gap for mses in the case of ethiopia. moreover, the paper aims to address: ■ the status of mses finance gap and the role of mfis in filling the existing gap; ■ the challenges of mses in accessing micro credit from mfis; ■ the contribution of mses to the country’s inclusive economic growth particularly in unemployment reduction. research methodology and the course of the research process for this study purpose, secondary data from 2009/10 – 2018/19 time period are extracted from national bank annual reports and summarized in to excel spreadsheet. to process the data collected, principal component analysis was used by using minitab 19 software to examine the relationships and significance in and between the data emerge. empirical evidence from different reports, websites and different scholar findings from publication database like google scholar, research gates, academic.edu, mendeley etc with key words like, access to finance, ethiopia, microfinance, mses were reviewed to develop a comprehensive understanding about the subject of the study. role of microfinance institutions… 119 outcome of the research process role of microfinance in improving the lives of the poor in 1976, muhammad yunus introduced the concept of microfinance successfully for the first time in bangladesh to overcome the vicious circle poverty through making small loans to poor families (umar & ahmed, 2017). according to bateman (2011), microfinance is the provision of micro credit to the poor to help them establish or expand an income-generating activity, and there by escape from poverty. moreover, umar and ahmed (2017) also explained microfinance as a tool to enable poor to start their own business to survive in the society, lift out themselves from poverty, and save something to fulfill their basic needs. similarly, tiischhauser (2016) and helms (2006) expressed microfinance as a source of financial services for people lacking access to the financial sector and enables them to take out loans to build or expand businesses and to make savings deposits and invest in their own future. despite many achievements over the last decades, microfinance is still a long way to go to extend their service to all who need their service. helms (2006) identified three major challenges of microfinance from accessing their financial services for the poor: (1) scaling up quality financial services to serve large numbers of people; (2) reaching increasingly poorer and more remote people; and (3) lowering costs to both clients and financial service providers. by serving the poor and working towards the needs of local communities, microfinance has gained recognition at the international stage (moser & gonzalez, 2015). microfinance program has brought a positive impact on the living conditions of the poor through accessing financial service to the poor and disadvantaged group (singla, 2014). moreover, microfinance program also improves access to and control over resources and women's participation in decision-making (singla, 2014; nguse, 2019). many poor people are served by informal moneylenders, who generally provide easy access to credit but at high cost, charging poor borrowers nominal monthly effective interest rates that typically range from about 10 % to more than 100% (oshora, 2016; robinson, 2001). a key claim for microfinance was that it would help to detach the poor from local loan sharks charging higher interest rates (bateman, 2011). moreover, the study made in vietnam reveals that, micro-credit loans generate positive, significant impacts on household self-employment (pham & lensink, 2008). microfinance continues to grow, with $124 betgilu oshora, maria fekete-farkas, zoltan zeman120 billion in worldwide lending and 9.5% customer growth in 2018. moreover, in 2018, 139.9 million borrowers benefited from the services of mfis, compared to just 98 million in 2009 (microfinance barometer, 2019). in ethiopia, despite the promising economic growth, the finance sector remains under-developed. for instance, in the 2017-18 global competitiveness report, ethiopia scored 3.4 out of 10, and ranked 109 out of 137 countries in terms of financial market development (international finance corporation, 2019). the government provides both financial and non-financial service to mses through mfis. however, still now lack of access to credit remains the main challenge for the development and expansion of the mses. according to nbe (2018/19) report, currently there are a total 38 mfis registered & operating in ethiopia with many branches and sub-branch offices. limited access to finance is a key barrier to economic growth, limiting start-up capital and business expansion. the establishment of mfis is to fill the existing finance gap to the poor and low-income households. challenges of mses in accessing microfinance loan service access to finance can promote new-firm entry, growth, innovation, whereas limited access stunts firms’ growth (world bank, 2008). lending to the poor is quite challenging since the poor's have inadequate resources of which they can use as a collateral, and they are also considered as risky borrowers, and their capacity to repay back the loan is considerably weak and hence they prefer to lend for matured and sustained micro-businesses than younger businesses (peprah & ayayi, 2016; umar & ahmed, 2017). moreover, it is assumed that lending to the poor is coupled with high transaction cost since the poor tend to borrow the little amount of money hence consuming a lot of loan officers time for minor transactions (umar & ahmed, 2017). according to the world bank (2008) investigation report, the poor face two significant problems in obtaining access to credit services. first, they typically have no collateral and cannot borrow against their future income. second, dealing with small transactions is costly for the financial institutions. moreover, the study by armstrong, davis, liadze and rienzo (2013) observed that firm characteristics were the major determinants of credit rationing with firms with a higher credit risk rating, previous financial delinquency and lower sales more likely to be rejected. similarly, the study made by becchetti, garcia, tro role of microfinance institutions… 121 vato and garcia (2009) noticed that the borrower’s past record was significant in determining credit rationing. in addition to this the study by chakravarty and shahriar (2010) and diaz-serrano and sackey (2018) observed that respondents who built a longer membership with a micro credit provider and had non-mandatory savings accounts and a track record of payments of previous loans were more likely to apply and be approved. moreover, education of the borrower, years of experience, gender and age of the borrower were the significant factors in determining credit rationing (sackey, 2018). lack of f lexible collateral system is also another determinant factor for smes to gain access to credit (ifc, 2019). to overcome the poor households’ lack of tangible collateral requirements, microfinance introduced group lending (helms, 2006; umar & ahmed, 2017). group-lending schemes improve repayment incentives and monitoring through peer pressure. likewise, lack of adequate working premises, lack of access to credit and shortage of power supply are the three most important factors impeding the operation of manufacturing mses in ethiopia (gebreeyesus et al., 2018). inadequate collateral and difficulties in proving their credit worthiness followed by difficulties in processing loans, and the high cost of borrowing are identified as the main factors that discouraged mses from submitting loan applications to formal finance providers. indeed, collateral rates in ethiopia are much higher than in many other countries in africa. for instance, the collateral rates for ssa, kenya, south africa, and morocco were 162.2 %, 120.8 %, 103.8  % and 171.2 % of the loan value respectively, compared to 234 % in ethiopia (wolday & woldehanna, 2015). over the last decade, mfis are highly engaged in accessing micro credit service to the mses but despite increase in the amount of loan the creation of employment were reduced within the same period. similarly, the pca also supports this statistical data that there is no correlation between job created and amount of credit provided (refer to figure 3). however, it requires further investigation through the survey method to examine why job creation decreased irrespective of increased amount of the loan. as depicted in figure 1, except the year of 2015/16 that shows decline as compared with the previous year 2014/15, the amount of loan increased over the number of period while the job created within the same period were inversely proportional (refer to figure 2). betgilu oshora, maria fekete-farkas, zoltan zeman122 figure 1. amount of credit provided (in millions) to mses (2009/10-2017/18) s. 18 csad = 1 n ∑ |𝑅𝑅𝑖𝑖,𝑡𝑡 − 𝑅𝑅𝑚𝑚,𝑡𝑡|𝑁𝑁𝑖𝑖=1 (12) csadt = α + 𝛾𝛾1|rm,t| + 𝛾𝛾2 rm,t2 + ε𝑡𝑡 (13) s. 92 s. 122 81 4. 1 98 3 1 08 8 2 72 5 5 06 3. 90 6 54 1. 88 5 36 6. 55 7 0 75 .7 7 8 63 3. 71 2 0 0 9 1 0 2 0 1 0 1 1 2 0 1 1 1 2 2 0 1 2 1 3 2 0 1 3 1 4 2 0 1 4 1 5 2 0 1 5 1 6 2 0 1 6 1 7 2 0 1 7 1 8 fi g u r e s in a m o u n t year amount of credit -200,00% 0,00% 200,00% 400,00% 600,00% 800,00% 1000,00% 1200,00% 1400,00% 1600,00% % change (december, 2014 to december, 2019) s o u r c e : authors’ own processing on the basis of the results of data from nbe annual reports. role of mses in reducing unemployment through microfinance services african youth are marginalized and they are not involved in policy formulation and less consulted in the decision-making process and lots of youth energy is invested in stirring-up conf licts and violence. moreover, employment creation is another formidable challenge that confronts all african countries regardless of their different socio-economic development. in africa, the youth account for 60% of total unemployed and three in five of africa’s unemployed are youth (jalata, 2014). despite the economic growth in the region, the number of unemployed is expected to grow by nearly 1.9 million by 2020 (ilo, 2019). in addition to limitation of access to credit, the current pandemic expected to hit the growth of the enterprises and it will have a direct inf luence on its contribution to reducing unemployment. for instance, according to the united nation economic commission for africa (2020) report, the impact of the pandemic on african economies estimated to slow the growth to 1.8% in the best case scenario or a contraction of 2.6% in the worst case. moreover, it is estimated that due to the result of this decrease in economic growth will have a power to push 5-29 million people below the extreme poverty line ($1.90 per day), about role of microfinance institutions… 123 19 million jobs lost, between 300,000 and 3.3 million african people could lose their lives as a direct result of covid-19. ethiopian economy has been growing at a remarkable rate for the last several years and it is important to assess how the growth has been translated into more jobs that are of better quality and inclusive. pca result shows that, there is no significant relationship between economic growth and the number of jobs created (see figure 3). the unemployment statistical data shows that more than 70% of ethiopians are under 30 years of age, with urban youth unemployment at 22% compared to 17% for all ages. moreover, more than a quarter of all urban jobs are informal (undp, 2018). similarly, the most recent report by job creation commission shows that unemployment rate in urban areas, meanwhile, reached a level of 19.1% in 2018 and this is mainly due to the growing rates of urbanization and increase in rural-urban migration (fdre, 2020). to overcome the unemployment issue, fdre has developed a wide-ranging job creation strategy ranging from 2020-2025 with about 2 million new entrants into the workforce each year, and aims to create 14 million jobs by 2025 (imf, 2020; fdre, 2020). the main aim of the strategy is to foster the business environment and conditions necessary to create job, to absorb the currently unemployed, and to ensure that jobs are waiting for new entrants to the labor force. in recognition of the vital role mses play in the country’s economic and social development, much attention has been paid by government to the development of mses (fdre, 2016). for instance, during 2016/17 a total of 157,768 new mses were established and created employment for about 1.2 million people through accessing more than birr 7.1 billion loans to establish and run their business (nbe, 2016/17). the youths in ethiopia are still deeply dissatisfied with their daily life due to lack of the assets, and an enabling environment to support their development. lack of economic opportunities is the primary driver of youth frustration that results in more than 25% of young people are unemployed (desta, bitga & boyson, 2018). many ethiopian youth spend their day in searching for job despite increase in number of youth graduating from college or university. educational degrees do not provide access to work and most of the time the youths are working in daily labor jobs despite their education degrees. more importantly, desta, bitga and boyson (2018) also stated out that with a bulge of approximately 30 million young people, the youth claims that their voices are also lacking in community-level decision-making processes and hence could be betgilu oshora, maria fekete-farkas, zoltan zeman124 a significant driver of unrest and instability for ethiopia over the next decade and beyond. in order to reduce unemployment and create inclusive economic development, the government of ethiopia is formulating different strategies among which mses regarded as a source of lively hood to the poor and unemployed citizen. mses constitute a significant portion of the economy and play a central role in job creation through access to microfinance services. for instance, more than 11.5 million people have secured jobs through the successful implementation of mses development program for the last one decade. however, from the year 2014/15 to 2017/18 it starts decreasing at increasing rate and this shows that there are many challenges that must be addressed collectively with all stakeholders. figure 2. job opportunity created s. 124 666 192 541 883 806 322 1 223 679 2 497 181 2 788 667 1 665 517 1 172 678 187 945 0 500 000 1 000 000 1 500 000 2 000 000 2 500 000 3 000 000 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 job created by mses s o u r c e : authors’ own processing on the basis of the results of data from nbe annual reports. in ethiopia for the last five years during the reform period, thousands of young men and women, especially the university and college graduates, come out to the streets in solidarity complaining about massive unemployment, lack of good governance and the high cost of living, demand for jobs and a decent life. despite the marvelous economic growth achievements over the last decades, there is high increase in unemployment particularly in urban population. the problem of unemployment in ethiopia is too complicated. still the question of youth and women is not only to find job, they are facing a challenge in securing role of microfinance institutions… 125 and retaining the most decent job. lack of business skills, financing, infrastructure, work premises, preference of dependency on government, preference for paid employment, weak marketing strategies, the desire to make quick profits than making modest profits by producing and selling good quality products and services are among the several challenges inhibit the development of youth and women entrepreneurs (fdre, 2016). moreover, the report by fdre (2020) identified four broad challenges undermine the support provided to msmes: (i) poor policy design, (ii) inadequate skill training, (ii) lack of targeted financial support, and (iv) poor market linkages. principal component analysis result and discussion we used principal component analysis (pca) to examine the relationships and significance in and between the data emerge. we assumed that the increase in economic growth and access to credit will result in increase in number of mses and hence ultimately contribute for reduction in unemployment. according kaiser’s criterion (most commonly used eigenvalue rule) which considers only factors with an eigenvalue of 1.0 or more, we considered pc1 and pc2 for further investigation since their eigenvalue is greater than one. as depicted in table 1 we can understand that pc1 and pc2 are significant with both eigenvalues whereas pc3 and pc4 is insignificant with their eigenvalue. if the eigenvalue of a factor is less than one, it means the component has less information than a single variable and hence pc3 and pc4 are extracted from further investigation. moreover, the result reveals that the number of mses, amount of credit and job created are positively correlated but they are negatively correlated with growth in real gdp in pc1 whereas the components are uncorrelated to each other. table 1. eigenvalue and eigenvectors pca result marketing strategies, the desire to make quick profits than making modest profits by producing and selling good quality products and services are among the several challenges inhibit the development of youth and women entrepreneurs (fdre, 2016). moreover, the report by fdre (2020) identified four broad challenges undermine the support provided to msmes: (i) poor policy design, (ii) inadequate skill training, (ii) lack of targeted financial support, and (iv) poor market linkages. principal component analysis result and discussion we used principal component analysis (pca) to examine the relationships and significance in and between the data emerge. we assumed that the increase in economic growth and access to credit will result in increase in number of mses and hence ultimately contribute for reduction in unemployment. according kaiser’s criterion (most commonly used eigenvalue rule) which considers only factors with an eigenvalue of 1.0 or more, we considered pc1 and pc2 for further investigation since their eigenvalue is greater than one. as depicted in table 1 we can understand that pc1 and pc2 are significant with both eigenvalues ������� ���� � ������� ��� ������� ������������� whereas pc3 and pc4 is insignificant with their eigenvalue ���� ���� � ������� ��� ������� �������������. if the eigenvalue of a factor is less than one, it means the component has less information than a single variable and hence pc3 and pc4 are extracted from further investigation. moreover, the result reveals that the number of mses, amount of credit and job created are positively correlated but they are negatively correlated with growth in real gdp in pc1 whereas the components are uncorrelated to each other. table 1. eigenvalue and eigenvectors pca result source: authors’ own processing. s o u r c e : authors’ own processing. betgilu oshora, maria fekete-farkas, zoltan zeman126 there is a positive correlation between the number of mses and job created whereas they are negatively correlated with growth in real gdp and amount of the credit (see figure 3). even though it requires further investigation due to small sample size of time serious data, the pca tells us that the economic growth and the financial access are not enough to create more jobs as they are negatively correlated. figure 3. loading plot of number of mses, amount of credit, job created & real gdp rate there is a positive correlation between the number of mses and job created whereas they are negatively correlated with growth in real gdp and amount of the credit (see figure 3). even though it requires further investigation due to small sample size of time serious data, the pca tells us that the economic growth and the financial access are not enough to create more jobs as they are negatively correlated. figure 3. loading plot of number of mses, amount of credit, job created & real gdp rate source: authors’ own processing. conclusions and policy recommendations this paper has investigated the role of mfis in filling the finance gap for mses in the case of ethiopia. the role of mses in reducing unemployment, deep-rooted poverty and hence its contribution to the economic development of the nation has received due attention at global level both in developed and in developing countries. however, as per many literatures reviewed and the secondary data assessed, lack of access to credit were found as the main determinants and hence mfis are established with the objective to provide both financial and non-financial services to support the development of mses. accordingly, our results imply s o u r c e : authors’ own processing.  conclusions and policy recommendations this paper has investigated the role of mfis in filling the finance gap for mses in the case of ethiopia. the role of mses in reducing unemployment, deep-rooted poverty and hence its contribution to the economic development of the nation has received due attention at global level both in developed and in developing countries. however, as per many literatures reviewed and the secondary data assessed, lack of access to credit were found as the main determinants and hence mfis are established with the objective to provide both financial and nonfinancial services to support the development of mses. accordingly, our results role of microfinance institutions… 127 imply that yet now despite the support of mfis, there is a huge gap between the demand for finance by mses and the supply of finance. in contrast, the result from the pca and the secondary data of loan trend and job created shows that there is no correlation between access to credit and number of job created. and this result contradicts the result of ada (2017); itc (2019); fdre (2016); fowowe (2017); dinh et al. (2010); cherkos et al. (2018); ključnikov et al. (2016); gebreeyesus et al. (2018) and itc (2016) and other empirical evidence across the globe. however, due to limited data available for this study, we could not recommend for hast generalization and hence it needs further study to consider representative sample size and triangulate the evidence of secondary data with primary data through survey method. therefore, to sustain the contribution of mses in poverty and unemployment reduction, there is a need to design and implement effective policy that improve an access to finance (improving mfis lending capacity and its outreach), demanddriven skill development, local value chain and market linkage. moreover, improving the business environment for mses, by simplifying the bureaucratic and regulatory procedures (particularly access to sheds and lands, and access to electricity and infrastructure) needs due attention by the government and all other stakeholders. moreover, the result of the study based on the trend assessment imply that the contribution of mses in reducing unemployment is declining from time to time and the dissatisfied youth needs special policy strategy that may incorporate them to participate in the available economic opportunities. the most recent increasing violence and protests across the country may dent investor confidence further and hence, the government must assure the country stability to attract more investment that will create more jobs. furthermore, given the nature covid-19 pandemic shock, mses may be among most firms exposed to liquidity, thus special facilities to keep lending to small businesses may be appropriate.  references ada (2017). small and growing businesses in ethiopia. brussels: ada asbl and first consult plc. alhassan, f., & sakara, a. 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(2017). the role of microfinance on poverty alleviation and its impacts on people and society: evidence from the grameen bank. journal of poverty, investment and development, 38, 7-13. united nation economic commision for africa (2020). covid-19 in africa: protecting lives and economics. addis ababa: economic commission for africa. united nations (2018). world youth report: youth and the 2030 agenda for sustainable development. new york: united nations. united nations (2019). a concise encyclopedia of the united nations. leiden: brill publishers. http://dx.doi.org/10.1163/ej.9789004180048.i-962.115. united nations development programme (undp) (2018). national human development report: industrialization with a human face. new york: undp. wolday, a., & woldehanna, t.w. (2015). access to finance: a tool to improve the performance of youthowned mses in ethiopia. world bank; international finance corporation (2019). creating markets in ethiopia: sustaining progress towards industrialization. washington: world bank group. world bank (2008). finance for all? policies and pitfalls in expanding access. washington: world bank group. world bank (2018). disruptive finance: using psychometrics to overcome collateral constraints in ethiopia. washington: world bank group. date of submission: september 3, 2021; date of acceptance: october 3, 2021. * contact information: benslimenrihab123@gmail.com, faculty of economics and management sciences of nabeul, carthage university, tunisia, phone: +216 55 903 410 – +55 903 410 ;orcid id: https://orcid.org/0000-0002-5978-5311. ** contact information: fethipremier@yahoo.fr, faculty of economics and management sciences of nabeul, carthage university, tunisia; rim-r af, manouba university, tunisia, phone: +216 72 232 205 – +216 72 232 133; orcid id: https://orcid.org/00000002-1122-9949. *** contact information (corresponding author): manel.hadriche@yahoo.fr, faculty of economics and management sciences of nabeul, carthage university, tunisia; fcf, manar university, tunisia, phone: 55741655; orcid id: https://orcid.org/0000-00032873-6100. **** contact information: ghroubi_m2002@yahoo.fr, higher institute of theology, ez-zitouna university, tunisia, phone: 98482663; orcid id: https://orcid.org/ 00000002-2067-8391. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 1 slimen, r.b., belhaj, f., hadriche, m., & ghroubi, m. (2022). banking efficiency: a comparative study between islamic and conventional banks in gcc countries. copernican journal of finance & accounting, 11(1), 89–106. http://dx.doi.org/10.12775/cjfa.2022.005 rihab ben slimen* carthage university, tunisia fethi belhaj** carthage university, tunisia manouba university, tunisia manel hadriche*** carthage university, tunisia manar university, tunisia mohamed ghroubi**** ez-zitouna university, tunisia banking efficiency: a comparative study between islamic and conventional banks in gcc countries r. b. slimen, f. belhaj, m. hadriche, m. ghroubi90 keywords: banking efficiency, cir ratio, conventional banks, islamic banks, stochastic frontier analysis. j e l classification: g28, g21, d24. abstract: this research aims at comparing the efficiency of islamic and conventional banks operating in the gcc countries from 2006 to 2015 for a sample of 51 conventional and 48 islamic banks using stochastic frontier analysis and the cir ratio. the results show that islamic banks are less efficient in terms of cost than conventional banks, and that this result remains valid even during the 2008 crisis period and even after controlling for bank-specific variables. regarding the determinants of bank efficiency, empirical results show that capital adequacy and size positively affect bank efficiency as measured by the stochastic frontier analysis. results also indicate that productive assets are negatively related to efficiency as measured by the cir ratio. this study provides new insights in terms of financial efficiency of the banking system. findings could help islamic and conventional banks to increase their efficiency and their performance and improve the service provided to customers.  introduction nowadays, islamic finance started to attract the attention of scholars and economists. many studies have focused on making the comparison between islamic and conventional banks, especially after the crisis (asmild, kronborg & matthews, 2019; yusuf, santi & rismaya, 2021; izzeldin, johnes, ongena pappas & tsionas, 2021). researchers are more concerned with the analysis of islamic finance efficiency as a means of assessing bank performance (isnurhadi, adam, sulastri, andriana & muizzuddin, 2021). the assessment of supervision institutions efficiency is focused on the ability of adequate current and future evaluation of the supervised entities operations, based on the available information and making proper (correct) decisions on this basis (kurek, 2014). the concept of banking efficiency, based among other things on the relationship between the “inputs” and “outputs” of banks, has been the subject of several previous studies. an established production function, in its most general form, is a relationship between “inputs” and “outputs”. an output unit is said to be efficient if, from a basket of inputs that it owns or uses, it produces the maximum possible output or if, to produce a given quantity of output, it uses the smallest possible quantities of inputs (isnurhadi et al., 2021; octrina & mariam, 2021). banking efficiency: a comparative study… 91 banking efficiency is a performance measure that represents the ability of banks to manage their inputs to achieve optimal results. it corresponds, therefore, to an optimal allocation of resources to achieve pre-determined goals. regarding the efficiency of islamic banks, ebrahim and joo (2001) assumed that an islamic financial system can be efficient if it can allocate limited capital resources to the most profitable projects and contribute to wealth creation. several studies dealt with the efficiency of islamic banks (darrat, topuz & yousef, 2002; hassan, 2006; yusuf et al., 2021). other studies compared the efficiency between islamic and conventional banks (bader, mohamad, ariff & shah, 2008; sakti & mohamad, 2018; asmild et al., 2019; izzeldin et al., 2021). according to several previous studies, islamic banks did not benefit from economies of scale due to the small size of their assets compared to those of conventional banks and are therefore not yet ready to compete with them; islamic banks are still young, do not have enough customers to achieve economies of scale, and therefore, are less efficient than conventional banks (abdulmajid, falahaty & jusoh, 2017; haque, tausif & ali, 2020). on the other hand, sakti and mohamad (2018), shawtari, salem and bakhit (2018), asmild et al. (2019) considered that the costs of credit monitoring and control of islamic banks are lower than those of conventional banks due to the absence of agency problems related to sharia compliance; islamic banks therefore assume lower costs and are therefore more efficient than conventional banks. in addition, it turns out that the islamic financial system is less affected by the financial crisis. some recent studies (yusuf et al., 2021) assumed that despite the operations of islamic banks are constrained by islamic principles, the efficiency of these banks is not different from that of conventional banks. the conclusion of these studies, however, varies. besides contradictory evidence, most of these studies have focused on international samples. however, a targeted analysis of banks in gcc countries is apparently absent except for a few studies. this current study contributes to the range of previous studies first by being conducted in many samples from the gcc region during the financial crisis to study the effect of the crisis on banks’ efficiency. second, it uses both an accounting ratio and a financial technique (stochastic frontier analysis) to evaluate the effectiveness, then make a comparison between islamic banks and conventional considering the various determinants. third, this research offers r. b. slimen, f. belhaj, m. hadriche, m. ghroubi92 policy prescriptions and recommendations useful for bankers, investors and public authorities. the paper is structured as follows: section 2 presents the literature review. section 3 describes the data and methodology. finally, section 4 presents the empirical results. the research methodology and the course of the research process literature review several previous studies analyzed banking efficiency by comparing the efficiency between islamic and conventional banks. the difference between islamic and conventional banks in terms of efficiency is due to the nature of their business practices. in islamic banks, it is forbidden to collect or pay interest at a predetermined rate, contrary to the business practices of conventional banks. in addition, islamic banks offer different financial products based on sharia principles which are characterized by profit and loss sharing (pls) based on financing instead of fixed rate loans. jensen and meckling (1976) postulate that organizational performance is inf luenced by conf licts of interest between principal and agent. in this sense, information asymmetry and agency conf licts will be more important in conventional banks than in islamic banks. consequently, and with the intervention of the sharia advisory council islamic banking operations monitoring committee, conf licts between the principal and the agent can be removed and agency costs will be reduced. in a different manner, the opposite can happen since the effect of the different determinants of productivity is significantly different in islamic banks with respect to conventional banks such as complexity, level of development. in the previous financial literature, there was not a general consensus between studies dealing with the efficiency of islamic banks and that of conventional banks as to the superiority of the efficiency of one or the other category of banks. some studies show that islamic banks are more efficient. in this context, yudistira (2004) found that, in most cases, islamic banks are more efficient than conventional banks, and that small and medium-sized islamic banks are less efficient than large ones and should be encouraged to merge to take advantage of economies of scale. sufian, mohamad and muhamed-zulkhi banking efficiency: a comparative study… 93 bri (2008) studied the efficiency of 18 banks in mena and asia for 2001–2006 using the dea method, they found that islamic banks in the mena region are more efficient than islamic banks in asian countries. arslan and ergec (2010) studied the efficiency of 26 conventional banks and4 islamic banks in turkey over the period 2006–2009 using the dea method and found that islamic banks are more efficient. abdul-majid, saal and battisti (2010) found that islamic banks are relatively more efficient than conventional banks in terms of cost control rather than profit realization. shawtari, saiti, razak and ariff (2015) showed that islamic banks in yemen are more efficient than conventional banks between 1996 and 2011. batir, volkman and gungor (2017) studied the technical, allocative and the economic efficiency of conventional and islamic banks in turkey using dea method and the intermediation approach. tobit regression analysis is also used to determine factors affecting efficiency. the results show that the average annual efficiency of islamic banks is higher than that of conventional banks. sakti et al. (2018) studied the differences between islamic and conventional indonesian banks in terms of business model, asset quality, stability, and efficiency between 2008 and 2012 and concluded that islamic banks are relatively more efficient than conventional banks. shawtari et al. (2018) empirically examined the efficiency of islamic and conventional banks using the dea method in its windows version. they studied the factors that inf luence each type of efficiency for the period 1996–2011. the results show that pure technical efficiency is higher in conventional banks. however, islamic banks are more efficient in terms of efficiency of scale. asmild et al. (2019) applied a multidirectional efficiency analysis (mea) that facilitates understanding of differences in inefficiency models for a set of banks in bangladesh from 2001 to 2015. they confirmed the consensus that islamic banks outperformed conventional commercial banks during the gfc period but also identify inefficiency differences based on specific variables. contrary to the studies mentioned above, other works found that conventional banks are more efficient than islamic banks. hassan (2006) compared the cost and profit efficiency of 37 conventional and 43 islamic banks in 21 oic countries over the period 1995–2001 and found that the islamic banking industry is relatively less efficient than its conventional counterpart. using a nonparametric technique (dea method) and an intermediation approach in malaysia from 1997 to 2003, mokhtar, abdullah and alhabshi (2008) showed that fully f ledged islamic banks are more efficient than banks with islamic win r. b. slimen, f. belhaj, m. hadriche, m. ghroubi94 dows and that the two types of islamic banks are even less efficient than conventional banks. they also showed an improvement in the efficiency of the entire islamic banking sector during the study period. ismail, abdul-majid and rahim (2013) compared the efficiency of islamic systems and conventional banks in malaysia during the period 2006–2009 and showed that conventional banks are more efficient than islamic banks. abbas, azid and besar (2016) studied bank efficiency in pakistan through a comparative analysis between islamic and conventional banks and examine their determinants using the dea approach. they found that the efficiency of islamic and conventional banks is different; the performance of islamic banks is lower than that of conventional banks in pakistan in terms of te and pure technical efficiency (pte), although they had the same level of scale efficiency. haque et al. (2020) combined traditional financial ratios, return on equity (roe) and return on assets (roa), with data envelopment analysis (dea) for the period 2014–2018 to compare islamic and conventional banks. dea results show that conventional banks are more efficient than islamic banks. although most previous studies conclude that one of these two banking systems is superior in terms of efficiency, other previous studies assume that they have the same level of efficiency. in this context, abdul-majid et al. (2010) used an output distance function to examine the efficiency and returns to scale of islamic banks compared to conventional banks in ten islamic countries for the period 1996–2002 and found no significant differences. yahya, muhammad and hadi (2012) studied the difference between the level of efficiency of islamic and conventional banking operations in malaysia using the dea method. the results indicate that there is no significant difference in the level of efficiency between islamic and conventional banks. beck, demirgüç-kunt and merrouche (2013) compared the efficiency of islamic and conventional banks based on a sample of 22 countries. they found no significant difference between these two banking systems. tek wei saw, kamarudin and latiff (2020) used a sample of 18 countries with 70 islamic and 374 conventional banks spanning from year 2009 to 2017 across the middle east, south asia and southeast asia regions. the empirical results indicate that there is no significant difference between both types of banks. yusuf et al. (2021) found, by using stochastic frontier analysis (sfa) in indonesia for the 2014–2019 period, no significant difference in the efficiency of conventional banks and islamic banks. banking efficiency: a comparative study… 95 in the context of gcc countries, srairi (2010) used the stochastic frontier approach to examine the cost and profit efficiency levels of 71 commercial banks for the period 1999–2007. he compared efficiency between conventional and islamic banks and examines bank-specific variables that may explain sources of inefficiency. the results indicate that banks in the gulf region are relatively more efficient at generating profits than at controlling costs. he concludes that conventional banks are on average more efficient than islamic banks in terms of cost and profit. srairi, kouki and harrathi (2012) used the dea method to assess the efficiency of 25 islamic banks between 2003 and 2009. their results show that efficiency measures have increased over the period but remain weak compared to conventional banks, and that the inefficiency of islamic banks may be due to sheer technical inefficiency rather than inefficiency. of scale. they also found that in terms of overall technical efficiency, small and large banks are more efficient than medium-sized banks. belanès, ftiti and regaıeg (2015) studied the pure, technical, and scale efficiency of 30 islamic banks for the period 2005–2011. results show a slight decrease in the efficiency of islamic banks with a notable drop in 2009. aghimien, kamarudin, hamid and noordin (2016) attest that the inefficiency of islamic banks in the gcc country is due to inefficient management in the use of resources. miah and uddin (2017) examined the differences between islamic and conventional banks in terms of commercial orientation, stability, and efficiency based on a sample of 48 conventional and 28 islamic banks for the period 2005–2014. their results from the stochastic frontier analysis (sfa) show that conventional banks are more efficient in terms of cost management than their islamic counterparts. according to several previous studies, islamic banks do not benefit from an economy of scale due to the small size of their assets compared to conventional banks and therefore they are not yet ready to compete with them (srairi, 2010). in the same framework, islamic banks are still young and do not have enough customers to achieve economies of scale and, therefore, are less efficient than conventional banks. kamarudin et al. (2008) show that the cost of funds and labor in islamic banks is higher than in conventional banks. hassan (2006) assumes that islamic banks operate in a global regulatory environment that is unfavorable to their operations and is characterized by the complexity of the contracts used. all these arguments lead us to propose the following hypothesis: h1: conventional banks are more efficient than islamic banks. r. b. slimen, f. belhaj, m. hadriche, m. ghroubi96 data and methodology our empirical study is based on annual data, for a 10-year period (2006–2015), of 99 commercial banks operating in 6 countries of the gulf cooperation council region (saudi arabia, united arab emirates, oman, qatar, kuwait, and bahrain). the sample consists of 51 conventional banks and 48 islamic banks. the total number of observations is 990. the data are extracted from the bankscope database with an annual frequency and are expressed in millions of us dollars. the distribution of the banks in the study sample by country and by nature is given in table 1. table 1. samples by country country banks all banks islamic banks conventional banks saudi arabia 13 5 8 kuwait 15 10 5 oman 8 2 6 qatar 9 4 5 united arab emirates 24 8 16 bahraïn 30 19 11 total 99 48 51 s o u r c e : own elaboration. in this study, the relationship between islamic finance and cost efficiency is examined. in fact, cost efficiency takes into consideration the pricing of inputs. it is a concept that compares the costs of one bank to the costs of another best practice bank with the objective of producing the same level of return under the same conditions. banking efficiency has been measured in most previous studies either by the cost/income ratio or by an efficiency score calculated using either the parametric or non-parametric approach. in this study, two measures of the efficiency of islamic and conventional banks are used, namely the cost-to-income ratio (cir) and the efficiency score calculated according to the parametric ap banking efficiency: a comparative study… 97 proach of stochastic frontier analysis (sfa) (horrace & wright, 2020; octrina & mariam, 2021). the cost-to-income ratio (cir) is expressed as the ratio between the total cost incurred by a bank and its revenue. the efficiency score as defined by the stochastic frontier analysis (sfa) is calculated, for each bank, based on the translog function described by the equation (1): �𝑙𝑙�� � � + � �� 𝑙𝑙𝑙𝑙 𝑙𝑙�� + � �� 𝑙𝑙𝑙𝑙 𝑙𝑙��� + 1 2 � ��� � ��� � � ��� 𝑙𝑙𝑙𝑙 𝑙𝑙��� + 1 2 � ��� � ��� � � ��� 𝑙𝑙𝑙𝑙 𝑙𝑙��� � ��� � ��� + 𝑙𝑙𝑙𝑙 𝑙𝑙��� + � � ���𝑙𝑙��� 𝑙𝑙��� + 𝑣𝑣�� � ��� � ��� bankit = 𝛼𝛼 + β1ii + ɛit bankit = 𝛼𝛼 + β1ii + β2xit+ ɛit where: ln tc: the natural logarithm of total cost; qj, qk: output quantities; pm, pn: input prices. stochastic frontier analysis (sfa) imposes certain restrictions such as symmetry of coefficients α12, α21 et β12, β21, error normality and homogeneity of input price coefficients 𝑙𝑙𝑙𝑙 𝑙𝑙𝑙𝑙 𝑙 𝑙𝑙 𝑙 � 𝑙𝑙� 𝑙𝑙𝑙𝑙 𝑙𝑙�� 𝑙 � 𝛽𝛽� 𝑙𝑙𝑙𝑙 𝑙𝑙��� 𝑙 1 2 � ��� � ��� � � 𝛿𝛿�� 𝑙𝑙𝑙𝑙 𝑙𝑙��� 𝑙 1 2 � ��� � ��� � � 𝛾𝛾�� 𝑙𝑙𝑙𝑙 𝑙𝑙��� � ��� � ��� 𝑙 𝑙𝑙𝑙𝑙 𝑙𝑙��� 𝑙 � � 𝜌𝜌��𝑙𝑙��� 𝑙𝑙��� � ��� � ��� 𝑙 𝜐𝜐𝜐𝜐𝜐𝜐𝜐 (1) where: ln tc: the natural logarithm of total cost; qj, qk: output quantities; pm, pn: input prices. stochastic frontier analysis (sfa) imposes certain restrictions such as symmetry of coefficients 𝛼𝛼12 , 𝛼𝛼21 et 𝛽𝛽�� , 𝛽𝛽��, error normality and homogeneity of input price coefficients (� 𝛽𝛽� 𝑙 1) � ��� . the empirical analysis of the efficiency of islamic and conventional banks follows a twostep approach. the first step consists in testing whether conventional banks are more efficient than islamic banks or vice versa by estimating, in panel data, the following model: bank it = 𝜶𝜶 𝑙 β1 ii + ɛit (2) where, i is a dummy variable that takes 1 for islamic banks and 0 for conventional banks. bank is a measure of efficiency which is either the efficiency score calculated according to equation (1) or the cost-to-income ratio. considering the efficiency score measure, a significantly positive (negative) β1 would indicate that islamic banks are more (less) efficient than conventional banks. this reasoning is reversed by considering the cost-to-income ratio as a measure of efficiency. in the second step and to examine the differences in efficiency between islamic banks and conventional banks considering some bank-specific variables, the following model is estimated, in panel data, bank it = 𝜶𝜶 𝑙 β1 ii + β2 xit+ ɛit (3) where, bank it represents the efficiency score or he cost/revenue ratio. ii takes 1 for islamic banks and 0 otherwise. xit is a vector of three bank specific variables which are: earning assets, equity buffer, and the size of the bank. ɛit is an error term. . the empirical analysis of the efficiency of islamic and conventional banks follows a two-step approach. the first step consists in testing whether conventional banks are more efficient than islamic banks or vice versa by estimating, in panel data, the following model: �𝑙𝑙�� � � + � �� 𝑙𝑙𝑙𝑙 𝑙𝑙�� + � �� 𝑙𝑙𝑙𝑙 𝑙𝑙��� + 1 2 � ��� � ��� � � ��� 𝑙𝑙𝑙𝑙 𝑙𝑙��� + 1 2 � ��� � ��� � � ��� 𝑙𝑙𝑙𝑙 𝑙𝑙��� � ��� � ��� + 𝑙𝑙𝑙𝑙 𝑙𝑙��� + � � ���𝑙𝑙��� 𝑙𝑙��� + 𝑣𝑣�� � ��� � ��� bankit = 𝛼𝛼 + β1ii + ɛit bankit = 𝛼𝛼 + β1ii + β2xit+ ɛit (2) where, i is a dummy variable that takes 1 for islamic banks and 0 for conventional banks. bank is a measure of efficiency which is either the efficiency score calculated according to equation (1) or the cost-to-income ratio. considering the efficiency score measure, a significantly positive (negative) β1 would indicate that islamic banks are more (less) efficient than conventional banks. this reasoning is reversed by considering the cost-to-income ratio as a measure of efficiency. (1) r. b. slimen, f. belhaj, m. hadriche, m. ghroubi98 in the second step and to examine the differences in efficiency between islamic banks and conventional banks considering some bank-specific variables, the following model is estimated, in panel data, �𝑙𝑙�� � � + � �� 𝑙𝑙𝑙𝑙 𝑙𝑙�� + � �� 𝑙𝑙𝑙𝑙 𝑙𝑙��� + 1 2 � ��� � ��� � � ��� 𝑙𝑙𝑙𝑙 𝑙𝑙��� + 1 2 � ��� � ��� � � ��� 𝑙𝑙𝑙𝑙 𝑙𝑙��� � ��� � ��� + 𝑙𝑙𝑙𝑙 𝑙𝑙��� + � � ���𝑙𝑙��� 𝑙𝑙��� + 𝑣𝑣�� � ��� � ��� bankit = 𝛼𝛼 + β1ii + ɛit bankit = 𝛼𝛼 + β1ii + β2xit+ ɛit (3) where, bank it represents the efficiency score or he cost/revenue ratio. ii takes 1 for islamic banks and 0 otherwise. xit is a vector of three bank specific variables which are: earning assets, equity buffer, and the size of the bank. ɛit is an error term. table 2 details the measurements of the bank specific variables table 2. bank specific variables’ measurements variables measurements size log of total assets earning assets net loans + other performing assets equity buffer equity/ total assets s o u r c e : own elaboration. the outcome of the research process and conclusion empirical results and comments cost efficiency of islamic and conventional banks: a comparative analysis the comparative analysis of cost efficiency between islamic and conventional banks is done first on the basis of descriptive statistics of two considered efficiency measures and then by estimating model (2) above. table 3 below provides a summary of the main descriptive statistics of the efficiency measures, efficiency score (sfa) and cost-to-income ratio (cir), for each category of banks during the study period. banking efficiency: a comparative study… 99 table 3. descriptive statistics of efficiency measures variables conventional banks islamic banks mean standard deviation min max mean standard deviation min max sfa 2.395 0.620 -0.398 3.433 2.022 0.829 -0.358 4.864 cir 38.351 28.078 1.74 333.3 103.897 144.896 10.088 950 s o u r c e : own elaboration. table 3 shows that, on average, the efficiency score (sfa) is slightly higher for conventional banks (an average of 2.395 versus 2.022 for islamic banks), implying that, overall, they are more efficient than islamic banks. the range of variation in this measure of efficiency among islamic banks is larger (standard deviation = 0.829) than among conventional banks (standard deviation = 0.620), indicating that conventional banks are more consistent in terms of achieving cost efficiency than islamic banks. similarly, the cost/income ratio varies from 1.74 to 333.3 with an average of 38.351 for conventional banks, and from 10.088 to 950 with an average of 103.897 for islamic banks. since the lower this ratio, the more efficient the bank is in terms of cost management, so, islamic banks seem to be less efficient than conventional banks. to deepen the comparative analysis of the efficiency of islamic and conventional banks from descriptive statistics of the efficiency score (sfa) and the cost / income ratio (cir), the average annual values of these two efficiency measures are calculated for each category of banks in order to assess their efficiency during the 2008 crisis period. the results are summarized in table 4 below. table 4. average cost efficiency score and cost/income ratio by year islamic banks conventional banks sfa cir sfa cir 2006 1.821 80.940 2.260 42.850 2007 1.946 90.321 2.389 42.954 r. b. slimen, f. belhaj, m. hadriche, m. ghroubi100 islamic banks conventional banks sfa cir sfa cir 2008 2.026 97.870 2.457 43.230 2009 2.021 115.916 2.431 40.442 2010 1.997 118.130 2.392 37.022 2011 2.013 128.068 2.370 36.554 2012 2.036 140.740 2.396 35.941 2013 2.087 98.204 2.406 37.066 2014 2.137 93.327 2.428 33.435 2015 2.136 75.462 2.428 34.018 s o u r c e : own elaboration. table 4 shows that conventional banks were more efficient than islamic banks during the crisis period (2007–2008), given their lower cir ratio values and higher sfa values in 2007 and 2008 compared to those of islamic banks. thus, conventional banks remain relatively more efficient than islamic banks even in the period of crisis. however, looking at the efficiency score (sfa), the results show that islamic banks were also efficient during the crisis period. regression results, considering the two efficiency measures mentioned above, are summarized in table 5 below. table 5. cost efficiency of islamic and conventional banks sfa cir dummy -0.407 (0.000) *** 64.156 (0.000)*** constant 2.395 (0.000)*** 38.351 (0.000)*** adjusted r2 0.0715 0.0878 the figures in brackets are the capital gains. * : significant at 10%  ** : significant at 5%  *** : significant at 1% s o u r c e : own elaboration. table 4. average… banking efficiency: a comparative study… 101 table 5 reports the results of the estimations of model (2). the results are consistent with the findings from the descriptive statistics. indeed, considering the efficiency score, results show that the coefficient of the dummy variable is significantly negative in accordance with the predictions of the theorists implying that islamic banks are less efficient than conventional banks. this result is confirmed by considering the cost-to-income ratio as a measure of banking efficiency, given the positivity of the coefficient of the dummy variable. effect of bank-specific variables on the banking efficiency to test the differential effects of main determinants of banking activity on the efficiency of islamic and conventional banks, the coefficients of model (3) by considering first the efficiency score (model 3-1) and then the cost/revenue ratio (model 3-2) are estimated. table 6 summarizes the results of the estimates. table 6. effect of selected determinants on banking efficiency model 3-1 model 3-2 size 0.595 (0.000) *** -0.594 (0.941) earning asset -2.78e-08 (0.589) 0.00004 (0.082)* equity buffer -0.003 (0.000) *** 0.2339 (0.295) dummy -0.159 (0.097)* 61.445 (0.000)*** constant 0.124 (0.344) 33.848 (0.318) r-square within 0.365 0.0002 between 0.496 0.216 overall 0.486 0.132 the figures in brackets are the capital gains. *: significant at 10%  ** : significant at 5%  *** : significant at 1 % s o u r c e : own elaboration. the results of model (3) estimates considering the efficiency score (model 3-1) show a significant positive relationship between the size of a bank and its level of efficiency. this can be explained by the fact that large banks can reduce costs r. b. slimen, f. belhaj, m. hadriche, m. ghroubi102 by taking advantage of their economies of scale. considering the cost/income ratio, results show that this measure of cost efficiency is negatively related to the size of the bank. this implies that large banks have a lower cost/income ratio, and that they manage their costs relative to their revenues better than smaller banks. table 5 shows that earning assets have no significant relationship with efficiency as measured by the sfa method, but this relationship becomes positively and statistically significant when considering the cost-to-income ratio as a measure of efficiency. this implies that earning assets generate more costs, which could negatively affect cost efficiency. results also show that equity buffer is negatively related to efficiency as measured by the sfa method, and that this relationship is positive but not significant when considering the cost-to-income ratio. this finding indicates that banks with larger capitalization and a higher capital base in gcc countries are less efficient in terms of costs. this supports the idea that leverage is useful for reducing costs or increasing profits. according to the financial literature, equity is more expensive than debt, implying that financing a bank’s assets through deposits is better cost management than equity financing. the estimated coefficient on the dummy variable for islamic banks confirms the earlier conclusion that islamic banks are less efficient than their conventional counterparts even after controlling for bank-specific variables.  conclusion the paper examines theoretically and empirically the efficiency of islamic and conventional banks in order to assess the possible contribution of islamic finance to banking efficiency. the empirical analysis is based on annual data for a sample of 99 banks, of which 48 are islamic banks and 51 are conventional banks, operating in 6 countries of the gulf cooperation council (gcc) region. our empirical results show that islamic banks are less efficient in terms of cost than conventional banks, and that this differences in efficiency remains valid even during the 2008 crisis period and even after controlling for bankspecific variables. these results can be explained by the fact that the constraints imposed by sharia law can widen the efficiency gap between the two types of banks, to the detriment of islamic banks. the empirical results also banking efficiency: a comparative study… 103 show that equity buffer and size positively affect bank efficiency as measured by the efficiency score as defined by the stochastic frontier analysis (sfa), and that earning assets are negatively related to efficiency (measured by the costto-income ratio). the results of the paper are very important for banks’ managements, investors, regulators, and policymakers. for banks, the findings help us to better understand how bank-specific variables affect the financial efficiency of the banking system and how to strengthen it to increase their efficiency and their performance and improve the service provided to customers. so, and based on the findings of this research, some recommendations can be proposed. firstly, islamic banks have a lot of ways to increase their efficiency. thus, islamic banks must identify the elements responsible for the increase in production costs. secondly, and as the analysis shows, size positively affects the efficiency of banks. islamic banks are small compared to conventional banks. mergers and acquisitions among and between small islamic banks may be a possible strategy to realize the benefits of economies of scale. for the public, clients and investors, this research can help them obtain accurate information in their investment decisions. for other researchers, this discovery may help them expand the search by using large and employing other approaches or input and output variables.  references abbas, m., azid, t., & besar, m.h.a.h. 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(2012). efficiency and stock market performance of islamic banks in gcc countries. isra international journal of islamic finance, 4(2), 89–116. sufian, f., mohamad, a.m., & muhamed-zulkhibri, a.m. (2008). the efficiency of islamic banks: empirical evidence from the mena and asian countries islamic banking sectors. the middle east business and economic review, 20(1), 1–19. http://dx.doi. org/10.1504/jibed.2010.036999. tek wei saw, a., kamarudin, f., & latiff, a.s.a. (2020). price efficiency of islamic and conventional banks: evidence from panel data. international journal of economics & management, 14(2), 301–310. yahya, m.h., muhammad, j., & hadi, a. (2012). a comparative study on the level of efficiency between islamic and conventional banking systems in malaysia. international journal of islamic and middle eastern finance and management, 5(1), 48–62. http:// dx.doi.org/10.1108/17538391211216820. r. b. slimen, f. belhaj, m. hadriche, m. ghroubi106 yudistira, d. (2004). efficiency in islamic banking: an empirical analysis of eighteen banks. islamic economic studies, 12(1), 1–19. yusuf, a.a., santi, n., & rismaya, e. (2021). the efficiency of islamic banks: empirical evidence from indonesia. the journal of asian finance, economics and business, 8(4), 239–247. http://dx.doi.org/10.13106/jafeb.2021.vol8.no4.0239. date of submission: june 6, 2019; date of acceptance: june 11, 2019. * contact information: hantag@sina.com, department of finance, school of economics and management, tianjin polytechnic university, china 300387, phone: 022-83956738; orcid id: https://orcid.org/0000-0001-7792-3119. ** contact information: 592549106@qq.com, department of finance, school of economics and management, tianjin polytechnic university, china 300387, phone: 022-83956738; orcid id: https://orcid.org/0000-0002-5497-0227. hailin, q., & jingxu, z. (2019). can mandatory dividend policy reduce the agency cost of listed companies? model analysis and empirical test in china. copernican journal of finance & accounting, 8(1), 59–101. http://dx.doi.org/10.12775/cjfa.2019.003 qin hailin* tianjin polytechnic university zhang jingxu** tianjin polytechnic university can mandatory dividend policy reduce the agency cost of listed companies? model analysis and empirical test in china keywords: mandatory dividend, agency cost, dividend policy, mixed strategy equilibrium, difference-in-difference model. j e l classification: g3. abstract: in this research, the mixed strategy complete information static game was adopted to explain the effect of mandatory dividend policy on agency cost, and chinese mandatory dividend policy introduced in 2011was regarded as the institutional background, and whether mandatory dividend policy can reduce the agency cost of listed companies as an accidental impact was studied. empirical test indicates that mandatory dividend policy significantly inhibits the agency cost of enterprises. further research finds that the mandatory dividend policy has a better effect on reducing agency cocopernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402019, volume 8, issue 1 cjf&a co pe r n ic a n j o ur na l of finance & a c c o u n tin g qin hailin, zhang jingxu60 sts for the companies listed on the main board and those with normal dividends, while it has no significant effect on restraining agency costs for the companies with micro-dividends and small and medium-sized boards. the study supports the dividend agency cost theory and provides empirical evidence for the regulating departments to improve the follow-up policy of capital market governance.  introduction on november 9, 2011, guo shuqing, the chairman of china securities regulatory commission (csrc), clearly required listed companies to pay the dividends. this is a counterattack against those not to pay for a long time in china, however, can agency costs be significantly restrained in corporate governance? although it is the main purpose of mandatory dividend policy protecting the interests of small and medium investors, and has a greater impact on corporate governance, because in theory, agency costs will be lower by reducing the free cash f low of enterprises. then, cash f low will be richer with better operating performance and stronger financial strength, on the other hand, in the property rights system arrangement, which separates ownership and management rights, although the division of labor according to comparative advantages improves the operating efficiency of enterprises, this division of labor will also objectively lead to the goal bias of owners and operators. the serious paradox is that the managers always acts according to the maximization of his own interests rather than that of shareholders’ interests, such as maximizing private benefits through on-the-job consumption and related transactions, resulting in the accelerated rise of agency costs. supposing a company with lots of cash, the prof ligacy and abuse of funds will be stimulated to increase of agency costs. since the existence of free cash f low will increase the agency cost of corporate governance, reducing the free cash f low that can be controlled by executives will naturally restrain the agency cost. however, the perfection of theoretical logic does not necessarily mean the same result of capital market. the research methodology and the course of the research process to test the implementation effect of the mandatory dividend policy, this paper intends to use the difference-in-difference model (did) to examine the exogenous mandatory dividend impact on agency cost. specifically, this paper regards the mandatory dividend policy of november 2011 as an exogenous shock, and studies the relation between agency cost and mandatory dividend policy. can mandatory dividend policy reduce… 61 a-share listed companies are selected as research samples from 2007 to 2017, and the impact of mandatory dividend policy on agency cost will be examined by panel data regression model, intermediary utility model and did model. the possible contributions of this paper are: (1) using a mixed strategy complete information static model, we not only skillfully incorporate the policy variable of mandatory dividend into the game model, but also explain the mechanism of mandatory dividend policy to reduce the agency cost of listed companies based on the model conclusion of mixed strategy nash equilibrium; (2) using the a-share data of shanghai and shenzhen stock exchanges, we confirm the validity of the mandatory dividend policy, that is, cash dividend has a significant restraining effect on agency cost of listed companies; (3) using difference-indifference model (did) to overcome the endogenous problem of empirical model, strictly and effectively prove that cash dividend significantly improves corporate governance structure. literature review dividend policy remains one of important research topics in corporate finance. miller and modigliani (1961) demonstrate that in the absence of transaction costs, dividend payment does not affect firm value, and investment policy is irrelevant to cash dividends. however, the premise of this model is very strict, that is, the capital market of perfect competition, and from this, it is deduced that the value of the enterprise is related to the present value of cash flow generated by the company in the future, and has nothing to do with dividend policy. however, there are various kinds of frictions in the operation of the capital market, and transaction costs are everywhere. therefore, the theoretical significance of the dividend irrelevance theory is far greater than the practical implication. this will inevitably lead to imperfection of capital market, so dividend policy is decisive instead of indispensable and insignificant in the capital market with asymmetric information, free-ride phenomenon in shareholder supervision, and opportunistic behavior of controlling shareholders, adverse-selection of management, moral hazard and limited rationality of supervision departments. 1. cash dividend and agency policy existing studies largely focus on two aspects of dividend policy, some scholars believe that cash dividend will reduce agency costs and improve corporate govqin hailin, zhang jingxu62 ernance, while others insist that dividend policy is one of the important means for large shareholders to eat up listed companies. the first view is that cash dividend can improve firm value by reducing the agency cost. based on dividend model and income model, it can be inferred that cash dividend is the source of the intrinsic value of stocks. yang hanming (2008) used the data of manufacturing industry to find that compared with other industries, the market value and dividend policy of enterprises in manufacturing industry increased synchronously. hu yaoting and mahong (2017) show that the difference of agency cost will affect the relationship between cash dividend and corporate value. if there is a good governance mechanism to reduce agency cost, the cash dividend effect will be greatly reduced in corporate value. it has a significant positive correlation between cash dividend and corporate value offered by listed companies. liu yinguo, zhang chen and ruan sumei (2014) examined that dividend policy can reduce agency costs through free cash f low. liu xing, tan weirong and li ning (2016) believed that companies with strong corporate governance structure had a positive effect on dividend distribution behavior, which significantly increased the willingness of companies to pay dividends in the capital market, and to a certain extent reduced the agency conf lict between the company insiders and external investors. wei zhihua, li changqing, wu yuhui and huang jiajia (2017) found that cash dividend can reduce both the first agency cost and the second agency cost. xu haoran and liao guanmin (2018) investigated the market reaction of chinese central state-owned enterprises (soes) to the mandatory dividend policy on the policy of “the return of state-owned capital handed over by chinese central soes “by the ministry of finance, and found that the firms concerned with higher agency costs had more positive market reaction. the second view is that dividend policy is more likely to be one of the important means for large shareholders to hollow out listed companies through the “tunnel effect”. as a result, some companies with poor performance often pay large dividends and damage the value of the company. qiang guolin (2014) found that many listed companies have abnormal phenomena of “cash dividend paying while equity refinancing”. it shows that cash dividend is the way of large shareholders to tunneling listed companies, so dividend is essentially a tunneling behavior. qiang guolin, li biao and zhang ziwei (2017) found that the huger amount of over-raised funds, the larger proportion of controlling shareholders, the higher the cash dividend payout. the empirical results of xiao zuoping and su zhongqin (2012) show that cash f low right is negatively can mandatory dividend policy reduce… 63 correlated with cash dividend level, while the separation of control right and cash f low right is positively correlated with cash dividend level, indicating that shareholders regard cash dividend policy as a cover for “hollowing out”. zhu tao and wang deyou (2007) studied the data of listed companies in 2003, and found that the actual controlling shareholders have a significant impact on dividend policy. the higher the rights of major shareholders, the more likely they are to pay cash dividends, which supports the exploitation hypothesis of large shareholders. huang juanjuan and shen yifeng (2007) found that the dividend payment of listed companies in our country deviates from the preferences of circulating shareholders, and the dividend policy is formulated only to cater to the large shareholders to hollow out the listed companies. in a word, there are two opposite ideas in the empirical test of dividend and agency theory: one is that dividend policy has “tunnel effect” and is a means for large shareholders to embezzle small and medium shareholders, so dividend policy does not play a role; the other is that dividend policy effectively improves corporate governance mechanism by reducing managers’ disposable cash f low. the basic economic logic of the latter is that dividend policy not only reduces managers ‘on-the-job consumption and investment in projects with negative npv, and inhibits managers’ over-investment, but also plays the role of introducing third-party supervision. that is to say, because cash dividend decrease the free cash f low of enterprises in need of capital investment, third-party supervision must be introduce in refinancing. therefore, this will ease the conf licts between managers and shareholders, large shareholders and small and medium shareholders, and restrain the resulting agency costs. 2. semi-mandatory dividend policy and mandatory dividend policy considering that, the csrc will promote the mandatory dividend to protect the interests of small and medium-sized investors, thereby reducing disposable cash f low and restraining agency costs. in 2006, measures for securities issue requires that the percentage of cash dividends be no less than 20% of the average annual distributable profits in the late three years by the csrc. in 2008, the csrc announced a stipulation titled “decision on revising some provisions on cash dividend payments of listed companies” for refinancing companies to distribute a cumulative dividend of no less than 30% of the annual average distributable profit in the past three years. the above policy links dividend distribution with refinancing, but qin hailin, zhang jingxu64 it has not achieved the desired results. wei zhihua, li changqing, wu yuhui and huang jiajia (2017) investigated that the semi-compulsory dividend policy significantly increased the willingness and level of cash dividend payout of listed companies with refinancing motivation, and the phenomenon of catering to the policy for financing appeared. therefore, on november 9, 2011, after guo shuqing took office, forced enterprises to pay out. for csrc semi-mandatory dividend policy, one argues that it does not protect the interests of investors and listed companies as well as improve the level of corporate governance effectively. li changqing, wei zhihua and wu shinong (2010) used the event study method to find that for investors, the dividend policy did not bring the expected market response, and there may be a “regulatory paradox” limitation. chen yunling (2014) examiend that the introduction of dividend policy did not make cash-rich companies pay more dividends. on the contrary, when there is refinancing demand, companies pay more dividends, which fails to protect the interests of investors. therefore, the rationality of the policy has been questioned. yu guojie and zhao yuyu (2018) used the psm tendency score to match the implementation effect of empirical semicompulsory dividend sharing. it was found that the implementation of the policy led to more earnings management for refinancing listed companies in order to reach the regulatory threshold of the corresponding dividend sharing ratio. yang bao, wanwei and daisy chow (2018) found that the semi-mandatory dividend policy led to the paradox of dividend-sharing while r&d, which indicated that the semi-mandatory dividend policy had a regulatory paradox. using panel data model, li jing and jiang debo (2017) found that the semi-mandatory dividend policy would increase the dividend willingness rather than the dividend level of listed companies, and the policy did not improve the dividend willingness and the dividend level of listed companies after refinancing. another view is that the semi-mandatory dividend policy not only increases the number of dividend-paying enterprises and the willingness to pay dividends, but also improves the corporate governance structure by reducing the agency costs of enterprises. wei zhihua, li maoliang and li changqing (2014) found that the semi-mandatory dividend policy not only improves the dividend payment level of listed companies, but also enhances the willingness of listed companies to pay cash dividends. liu xing, tan weirong and li ning (2016) found that the semi-compulsory dividend policy significantly increased the dividend payment level of listed companies with refinancing intention through the difference—in-difference-mode(did). xu haoran and liao guanmin (2018) can mandatory dividend policy reduce… 65 used the double difference model to find that the compulsory dividend policy reduced the free cash f low that controlling shareholders could abuse, greatly curbed the opportunistic behavior of large shareholders, and the payment of cash dividend also helped to reduce the second kind of agency cost of the company. an qingsong (2012) empirical study found that the semi-mandatory dividend policy increased the dividend distribution of listed companies, and proved that the dividend distribution level of chinese listed companies will reach the level of developed countries. wei zhihua, li changqing, wu yuhui and huang jiajia (2017) investigated that the semi-mandatory dividend policy significantly improved the willingness and level of cash dividend of listed companies with refinancing motivation by panel data. in short, scholars have different idea about the effectiveness of the dividend policy issued by the sfc. some argue that the dividend policy does not change the willingness of listed companies to pay dividends, so the effectiveness of the policy is questionable. others believe that the dividend policy can improve the dividend willingness and dividend level of china’s stock market. comparing the two, the dividend policy is beneficial to remedy the legal vacancy in general, and will promote the improvement of the internal governance structure of listed companies, especially to suppress opportunistic behavior of management and reduce the loss of corporate value. therefore, the mandatory dividend policy is a strategic choice with more advantages than disadvantages. throughout the existing literature, the mainstream view is that the csrc dividend policy improves the dividend willingness and dividend level of listed companies, and achieves the effect of reducing agency costs by controlling the disposable cash f low of enterprises. regard to the policy concerned, most scholars believe that this policy can improve the dividend payout level and willingness of listed companies. however, it should be pointed out that: firstly, the existing research focuses on the semi-compulsory dividend policy, and pays no necessary attention to the compulsory dividend policy, and pays less attention to the heterogeneity of the semi-compulsory dividend policy. secondly, almost all the existing studies are based on empirical research. the empirical results show that the policy effect of mandatory dividend distribution is not timely modeled, which makes the mechanism of mandatory dividend distribution policy unclear and divergent opinions. in view of this, this paper not only establishes a mixed strategy complete information static game to explain the mechanism of mandatory dividend policy to restrain agency costs, but also makes qin hailin, zhang jingxu66 quasi-natural experiments according to mandatory dividend policy, and uses did model to test the inhibition of mandatory dividend policy on agency costs. theoretical analysis and research hypothesis the separation of ownership and control of modern enterprises not only improves the production efficiency of the company, but also realizes the value-added of the enterprise. since the high-ranking managers are no longer the residual security winners, the discharging and dereliction of duty of the executives are inevitable. however, the majority of shareholders who really have the residual demanding rights of enterprises have no motivation to closely supervise the executives because of the decentralization of equity. therefore, the executives as rational people will pursue their own interests by abusing funds, on-the-job consumption, related transactions and over-investment. maximization is not the maximization of shareholders’ interests. in this way, serious agency problems will arise between owners and operators. in this regard, can mandatory dividend policy effectively reduce the agency cost of listed companies? on the one hand, as a rational economic man, the motivation of manager opportunistic behavior is beyond doubt. they often use various moral hazard behaviors to increase private benefits. therefore, only by adopting high-pressure measures such as mandatory dividend policy to overcome the opportunistic behavior of executives, can the agency cost of listed companies be significantly reduced. first of all, because the efforts of executives could not be effectively monitored, if the salary of executives would not compensate for the negative effects brought by the pursuit of maximizing shareholders’ interests, then there will be inevitable opportunistic behavior of executives, either not working hard and shirking responsibility, or working hard to turn the surplus of enterprises into private benefits. specifically, according to feng genfu and zhao juehang (2012), executives pursue private gains mainly through on-the-job consumption, affiliated transactions, over-investment for performance or projects with negative net present value. on-the-job consumption is a kind of expenditure paid by enterprises that does not increase the actual value of the company for managers to increase their own utility, such as buying luxury cars, entertainment consumption, luxury decoration of office space, etc. obviously, the increase of on-the-job consumption will inevitably increase agency costs. zhang lili (2018) said that affiliated transaction is not only an important means for major shareholders to embezzle the interests of listed companies, but also that can mandatory dividend policy reduce… 67 according to shi yong and li sihao (2018), its tunneling effect will significantly increase the risk of stock price crash. over-investment means that the cash f low managers have in their hands is not the best investment project. liu yinguo (2008) found that when companies pay cash dividends, they will reduce the resources that executives can control. then executives will choose between expanding the size of enterprises and cash dividends, and they will choose to continue to expand the size of enterprises. at this time, there is an over-investment phenomenon. secondly, if we adopt mandatory dividend policy, we can re-establish an incentive and restraint mechanism between shareholders and executives, and force executives to work hard to maximize their personal utility, so as to achieve the goal of reducing agency costs. yang yi and shen yifeng (2004) found that cash dividends reduce the disposable cash of enterprises. if enterprises need to invest at this time, they will introduce third-party supervision, and the company’s low agency costs will naturally be reduced. according to yang bao and yuan tianrong (2014), institutional investors can alleviate the first kind of agency costs between managers and shareholders in decentralized companies, and find that listed companies reduce the abuse of cash f low by managers through cash dividends, and also reduce agency costs. hu yaoting and mahong (2017) found that the difference of agency cost would affect the relationship between cash dividend and corporate value. if the internal governance mechanism of the company is relatively perfect, the role of cash dividend in reducing agency cost will be greatly reduced. active cash dividend issuance by listed companies is positively related to corporate value, but passive cash welfare issuance is not. generally speaking, although executives have a strong motivation to pursue private benefits, the mandatory dividend policy can impose a hard constraint on this opportunism from outside the company, so the agency cost of the company will be reduced. on the other hand, as an external shock, the mandatory dividend policy not only violates the internal, independent, free and decentralized decision-making will of all listed companies, but also would be superf luous. for those growing companies, it has become the burial products of the iron rooster company. therefore, these policies will inevitably encounter various kinds of bright or dark in the process of implementation. negative resistance leads to unsatisfactory policy results. looking back on the contemporary financial history, it is not difficult to find that the semi-mandatory dividend policy in 2008 has a very limited impact on the “iron cock” companies without refinancing motives. because the semi-mandatory dividend policy of that year linked the refinancing qin hailin, zhang jingxu68 with dividend dividend, because most of the “iron cock” companies with longterm profits without dividend have no refinancing motive, so the semi-mandatory dividend policy does not have an impact on it. liu yinguo, zhang chen and ruan sumei (2014) found that the semi-mandatory dividend policy can restrain the agency costs by reducing free cash f low, and also found that the improvement of corporate governance level can increase the willingness and level of dividend sharing. wei zhihua, li changqing and li changqing (2014) empirically analyzed the impact of semi-mandatory dividend policy on iron cock company, and found that the semi-mandatory dividend policy could not restrain the dividend payout of iron cock company and did not reduce the proportion of iron cock company. the dividend policy of chen yan, li xin and li mengshun (2015) has changed the current situation that listed companies do not pay dividends, but only has an impact on seo enterprises. statistics by wang zhiqiang and zhang weiting (2012) show that although the company’s willingness to pay cash has increased, it does not rule out the suspicion that it only caters to the policy. yu yan and wang chunfei (2014) found that for listed companies with financing needs, semi-mandatory dividend would increase their dividend distribution. wei zhihua, li changqing, wu yuhui and huang jiajia (2017) verified that the semi-mandatory dividend policy could effectively reduce two types of agency costs. the change of dividend could be used as a good signal to indicate the company’s performance, but it is not good for the company with seo motivation. knowing the past helps learning from the present. according to the historical experience and the existing economic logic, the policy of compulsory dividend will also face the embarrassment of semi-compulsory dividend sharing policy, that is, although the dividend policy can reduce the agency cost of enterprises, the negative resistance of listed companies will lead to a great discount of the effectiveness of the policy. to sum up, under the high pressure of mandatory dividend policy, it is inevitable to increase the willingness to pay dividends of all listed companies, including “iron cock”, so as to achieve the purpose of restraining agency costs. because the csrc mandatory dividend policy not only requires enterprises to make clear dividend plans and not to change at will, but also requires enterprises not to pay dividend to explain the use of funds, so the mandatory dividend policy can reduce the free cash f low of enterprises by requiring cash dividends, thus reducing various opportunistic behaviors of management and reducing enterprises. agency cost. however, the negative resistance of management to can mandatory dividend policy reduce… 69 external shocks should not be underestimated. accordingly, the hypothesis of this study can be put forward: hypothesis 1: mandatory dividend policy can significantly enhance the listed companies willingness to pay out dividend. hypothesis 2: mandatory dividend policy can significantly reduce the listed companies agency cost hypothesis 3: under the condition of asymmetry information, the effect of mandatory dividend policy will be unsatisfactory because of the resistance of listed companies. theoritical model the three research hypotheses can be proved by a mixed strategy complete information static game mentioned above in the theoretical model. because of the unpredictability of paying, shareholder’s increase is uncertain. the dividend distribution is not only affected by the net profit of the enterprise, but also by the supervision of shareholders. driven by opportunism, it is uncertain whether executives will pay dividends or not. thus, there is a typical mixed strategy game between executives and shareholders. 1. model thought although mandatory dividend policy can effectively reduce the agency cost of listed companies in general, it seriously deviates from the spirit of market contract in the decentralized decision-making of dividend policy, and will inevitably encounter negative resistance from capital market. therefore, the effect of policy implementation will be greatly reduced and deviate from the expected goal of policy designers. firstly, the restraining effect of mandatory dividend policy on agency cost of listed companies is expected. on the one hand, the mandatory dividend policy can eliminate the uncertainty of cash dividend, ensure that shareholders can not only obtain a stable expected return, but also generate the impulse to increase their holdings, which will naturally lead to significant changes in the balance of supply and demand of the company’s stocks, so that the stock supply exceeds demand and the stock price rises significantly. on the other hand, under the incentive of shareholder increase and stock price rise, executives will qin hailin, zhang jingxu70 inevitably work hard to improve the expected return on investment projects and provide abundant cash f low for cash dividends. secondly, mandatory dividend policy not only challenges the independence and autonomy of decentralized decision-making of listed companies, but also impairs the private benefits of executives objectively. therefore, it will inevitably be resisted negatively. for example, listed companies cater to the needs of regulatory departments by increasing annual dividend-sharing frequency, but also secretly reduce the cash dividend per share to protect private earnings. eroded. that is to say, there are policies on the one hand and countermeasures on the other. 2. model assumptions assumption 1: the cash dividends available to listed companies are positively correlated with managers’ work effort e, so the current cash dividends can be expressed by αe. α is a coefficient not less than zero, which describes the willingness and level of dividend distribution; if it is zero, it means that the company has no willingness to pay dividends. assumption 2: all shareholders are homogeneous and hold one unit of company stock. they know nothing about the internal situation of the company’s operating performance, and only decide whether to increase the company’s stock according to the dividend or not. at the same time, in order to simplify the complexity of game equilibrium solution, it is assumed that the proportion of increase and decrease is π, and the capital gains obtained are all β, and there are π > 0 and β > 0. obviously, β > 0 may not only be the reason for executive dividend, that is, for mature companies, rising stock prices usually mean that companies have the ability to generate after-tax profits to fund cash dividends, but also the basis for dividend-sharing, that is, for growth companies, even without dividends, stock prices will rise. at the same time, for shareholders, only when the capital gains are positive, can he have the motivation to reduce the company’s shares without dividends or when the company’s development prospects are not optimistic; otherwise, he should continue to hold in order to obtain a higher positive return on investment. this is very consistent with the phenomenon that many investors in the stock market have been held up for a long time. assumption 3: suppose that the executive’s income is a function of effort, and the executive’s income consists of salary income and private income. can mandatory dividend policy reduce… 71 the harder an executive works, the higher his wage earnings; while private earnings increase the effectiveness of an executive, they reduce shareholder dividend earnings. therefore, the executive’s earnings function can be expressed as follows: the harder an executive works, the higher his wage earnings; while private earnings increase the effectiveness of an executive, they reduce shareholder dividend earnings. therefore, the executive's earnings function can be expressed as follows: �� � �� � ��� � � (1) the coefficients a and b are all positive. �� � ��� is the salary income of senior managers, e is the effort level of senior managers. the economic meaning of the salary income function is that shareholders pay executives 'salaries according to their efforts, and executives' salaries are concave functions of their efforts; c is the private benefits of executives, because executives have no residual claim, so there will be indisputable opportunistic behavior of executives. if the executive compensation at this time is not enough to compensate for the negative effects of hard work when creating value for shareholders, they will choose on-the-job consumption and related transactions to indirectly compensate for their negative effects. assumption 4: according to the dividend model, it is assumed that shareholders' earnings consist of cash dividends and capital gains, and that dividend gains should be mainly a function of managers' efforts. in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding a unit of stock can be expressed as follows in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding one unit of stock can be expressed as follows: u� � ������ ������ � � (2) among them, the coefficients and  are positive; �� is the cash dividend of the current period, ����� is the sum of the discounted value of dividends obtained by shareholders when they choose to hold them for a long time, � is the present value of capital gains obtained by one-time transactions, r is the present value of capital gains obtained by one-time transactions, r is the discounted value, and g is the growth rate of dividends, in which cash dividends are the function of managers' efforts, while the present value of capital gains obtained by one-time transactions is constant. 4. strategy and payment matrix of game parties (1) the coefficients a and b are all positive. ae – be2 is the salary income of senior managers, e is the effort level of senior managers. the economic meaning of the salary income function is that shareholders pay executives ‘salaries according to their efforts, and executives’ salaries are concave functions of their efforts; c is the private benefits of executives, because executives have no residual claim, so there will be indisputable opportunistic behavior of executives. if the executive compensation at this time is not enough to compensate for the negative effects of hard work when creating value for shareholders, they will choose on-the-job consumption and related transactions to indirectly compensate for their negative effects. assumption 4: according to the dividend model, it is assumed that shareholders’ earnings consist of cash dividends and capital gains, and that dividend gains should be mainly a function of managers’ efforts. in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding a unit of stock can be expressed as follows in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding one unit of stock can be expressed as follows: the harder an executive works, the higher his wage earnings; while private earnings increase the effectiveness of an executive, they reduce shareholder dividend earnings. therefore, the executive's earnings function can be expressed as follows: �� � �� � ��� � � (1) the coefficients a and b are all positive. �� � ��� is the salary income of senior managers, e is the effort level of senior managers. the economic meaning of the salary income function is that shareholders pay executives 'salaries according to their efforts, and executives' salaries are concave functions of their efforts; c is the private benefits of executives, because executives have no residual claim, so there will be indisputable opportunistic behavior of executives. if the executive compensation at this time is not enough to compensate for the negative effects of hard work when creating value for shareholders, they will choose on-the-job consumption and related transactions to indirectly compensate for their negative effects. assumption 4: according to the dividend model, it is assumed that shareholders' earnings consist of cash dividends and capital gains, and that dividend gains should be mainly a function of managers' efforts. in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding a unit of stock can be expressed as follows in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding one unit of stock can be expressed as follows: u� � ������ ������ � � (2) among them, the coefficients and  are positive; �� is the cash dividend of the current period, ����� is the sum of the discounted value of dividends obtained by shareholders when they choose to hold them for a long time, � is the present value of capital gains obtained by one-time transactions, r is the present value of capital gains obtained by one-time transactions, r is the discounted value, and g is the growth rate of dividends, in which cash dividends are the function of managers' efforts, while the present value of capital gains obtained by one-time transactions is constant. 4. strategy and payment matrix of game parties (2) among them, the coefficients α and β are positive; αe is the cash dividend of the current period, the harder an executive works, the higher his wage earnings; while private earnings increase the effectiveness of an executive, they reduce shareholder dividend earnings. therefore, the executive's earnings function can be expressed as follows: �� � �� � ��� � � (1) the coefficients a and b are all positive. �� � ��� is the salary income of senior managers, e is the effort level of senior managers. the economic meaning of the salary income function is that shareholders pay executives 'salaries according to their efforts, and executives' salaries are concave functions of their efforts; c is the private benefits of executives, because executives have no residual claim, so there will be indisputable opportunistic behavior of executives. if the executive compensation at this time is not enough to compensate for the negative effects of hard work when creating value for shareholders, they will choose on-the-job consumption and related transactions to indirectly compensate for their negative effects. assumption 4: according to the dividend model, it is assumed that shareholders' earnings consist of cash dividends and capital gains, and that dividend gains should be mainly a function of managers' efforts. in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding a unit of stock can be expressed as follows in other words, the efforts of executives will create more corporate surplus, increase cash dividends that can be allocated to shareholders, and also release a signal that the business is doing well. thus, the return function of holding one unit of stock can be expressed as follows: u� � ������ ������ � � (2) among them, the coefficients and  are positive; �� is the cash dividend of the current period, ����� is the sum of the discounted value of dividends obtained by shareholders when they choose to hold them for a long time, � is the present value of capital gains obtained by one-time transactions, r is the present value of capital gains obtained by one-time transactions, r is the discounted value, and g is the growth rate of dividends, in which cash dividends are the function of managers' efforts, while the present value of capital gains obtained by one-time transactions is constant. 4. strategy and payment matrix of game parties is the sum of the discounted value of dividends obtained by shareholders when they choose to hold them for a long time, β is the present value of capital gains obtained by one-time transactions, r is the present value of capital gains obtained by one-time transactions, r is the discountqin hailin, zhang jingxu72 ed value, and g is the growth rate of dividends, in which cash dividends are the function of managers’ efforts, while the present value of capital gains obtained by one-time transactions is constant. 4. strategy and payment matrix of game parties as mentioned above, according to the strategies of both players, the profit functions of both players can be expressed as follows: table 1. payoff matrix as mentioned above, according to the strategies of both players, the profit functions of both players can be expressed as follows: table 1. payoff matrix decrease （1-q） increase （q） not to pay （1-p） 0，�1 − π� �������� + πβ �������� � ，�1 + π��� ����� ����� pay （p） ae − be� − c，πβ + π�� + �������� ������ ��� ，�� + ������� ����� source: author’s mathematical deduction. among them, � means to increase the holding of listed companies'stock units, and the other variables are consistent with the above. the economic implications of this matrix are as follows: (1) the upper left chooses the profit function of both sides when executives choose no dividend and shareholders choose to reduce their holdings. firstly, for executives, if shareholders choose to reduce their holdings because the company does not pay dividends, the reduction will cause the company's stock price to decline, then executives will face the fate of impeachment and dismissal, so the current income of executives is 0, that is, unemployment will offset his wage income. secondly, for shareholders, if they disagree with the company's non-dividend policy or are not optimistic about the company's development prospects, they can take a foot-to-foot vote to reduce their holdings of the company's shares. at this time, the earnings consist of two parts: the shareholders get the capital gains �� of the current reduction and the discount �1 − ���� ������ ������� � of accumulated undistributed dividends obtained by continuing to hold �1 − �� unit stock.when n → ∞, the limit of �1 − ���� ������ ������� � is �1 − �� ������� � , so the total earnings of the shareholder is �1 − �� �������� + ��. (2) the upper right chooses the profit function of the two sides when the executive chooses not to dividend and the shareholder chooses to increase the ownership. firstly, for executives, if executives choose not to pay dividends and shareholders choose to continue holding, this shows that the company's non-dividend behavior has been recognized by shareholders. so they will get the salary of ae − be� and private interest c , i.e., his s o u r c e : author’s mathematical deduction. among them, means to increase the holding of listed companies’stock units, and the other variables are consistent with the above. the economic implications of this matrix are as follows: (1) the upper left chooses the profit function of both sides when executives choose no dividend and shareholders choose to reduce their holdings. firstly, for executives, if shareholders choose to reduce their holdings because the company does not pay dividends, the reduction will cause the company’s stock price to decline, then executives will face the fate of impeachment and dismissal, so the current income of executives is 0, that is, unemployment will offset his wage income. secondly, for shareholders, if they disagree with the company’s non-dividend policy or are not optimistic about the company’s development prospects, they can take a foot-to-foot vote to reduce their holdings of the company’s shares. at this time, the earnings consist of two parts: the shareholders get the capital gains πβ of the current reduction and the discount as mentioned above, according to the strategies of both players, the profit functions of both players can be expressed as follows: table 1. payoff matrix decrease （1-q） increase （q） not to pay （1-p） 0，�1 − π� �������� + πβ �������� � ，�1 + π��� ����� ����� pay （p） ae − be� − c，πβ + π�� + �������� ������ ��� ，�� + ������� ����� source: author’s mathematical deduction. among them, � means to increase the holding of listed companies'stock units, and the other variables are consistent with the above. the economic implications of this matrix are as follows: (1) the upper left chooses the profit function of both sides when executives choose no dividend and shareholders choose to reduce their holdings. firstly, for executives, if shareholders choose to reduce their holdings because the company does not pay dividends, the reduction will cause the company's stock price to decline, then executives will face the fate of impeachment and dismissal, so the current income of executives is 0, that is, unemployment will offset his wage income. secondly, for shareholders, if they disagree with the company's non-dividend policy or are not optimistic about the company's development prospects, they can take a foot-to-foot vote to reduce their holdings of the company's shares. at this time, the earnings consist of two parts: the shareholders get the capital gains �� of the current reduction and the discount �1 − ���� ������ ������� � of accumulated undistributed dividends obtained by continuing to hold �1 − �� unit stock.when n → ∞, the limit of �1 − ���� ������ ������� � is �1 − �� ������� � , so the total earnings of the shareholder is �1 − �� �������� + ��. (2) the upper right chooses the profit function of the two sides when the executive chooses not to dividend and the shareholder chooses to increase the ownership. firstly, for executives, if executives choose not to pay dividends and shareholders choose to continue holding, this shows that the company's non-dividend behavior has been recognized by shareholders. so they will get the salary of ae − be� and private interest c , i.e., his of accumulated undistributed dividends obtained by continuing to hold as mentioned above, according to the strategies of both players, the profit functions of both players can be expressed as follows: table 1. payoff matrix decrease （1-q） increase （q） not to pay （1-p） 0，�1 − π� �������� + πβ �������� � ，�1 + π��� ����� ����� pay （p） ae − be� − c，πβ + π�� + �������� ������ ��� ，�� + ������� ����� source: author’s mathematical deduction. among them, � means to increase the holding of listed companies'stock units, and the other variables are consistent with the above. the economic implications of this matrix are as follows: (1) the upper left chooses the profit function of both sides when executives choose no dividend and shareholders choose to reduce their holdings. firstly, for executives, if shareholders choose to reduce their holdings because the company does not pay dividends, the reduction will cause the company's stock price to decline, then executives will face the fate of impeachment and dismissal, so the current income of executives is 0, that is, unemployment will offset his wage income. secondly, for shareholders, if they disagree with the company's non-dividend policy or are not optimistic about the company's development prospects, they can take a foot-to-foot vote to reduce their holdings of the company's shares. at this time, the earnings consist of two parts: the shareholders get the capital gains �� of the current reduction and the discount �1 − ���� ������ ������� � of accumulated undistributed dividends obtained by continuing to hold �1 − �� unit stock.when n → ∞, the limit of �1 − ���� ������ ������� � is �1 − �� ������� � , so the total earnings of the shareholder is �1 − �� �������� + ��. (2) the upper right chooses the profit function of the two sides when the executive chooses not to dividend and the shareholder chooses to increase the ownership. firstly, for executives, if executives choose not to pay dividends and shareholders choose to continue holding, this shows that the company's non-dividend behavior has been recognized by shareholders. so they will get the salary of ae − be� and private interest c , i.e., his unit stock. when n → ∞, the limit of can mandatory dividend policy reduce… 73 as mentioned above, according to the strategies of both players, the profit functions of both players can be expressed as follows: table 1. payoff matrix decrease （1-q） increase （q） not to pay （1-p） 0，�1 − π� �������� + πβ �������� � ，�1 + π��� ����� ����� pay （p） ae − be� − c，πβ + π�� + �������� ������ ��� ，�� + ������� ����� source: author’s mathematical deduction. among them, � means to increase the holding of listed companies'stock units, and the other variables are consistent with the above. the economic implications of this matrix are as follows: (1) the upper left chooses the profit function of both sides when executives choose no dividend and shareholders choose to reduce their holdings. firstly, for executives, if shareholders choose to reduce their holdings because the company does not pay dividends, the reduction will cause the company's stock price to decline, then executives will face the fate of impeachment and dismissal, so the current income of executives is 0, that is, unemployment will offset his wage income. secondly, for shareholders, if they disagree with the company's non-dividend policy or are not optimistic about the company's development prospects, they can take a foot-to-foot vote to reduce their holdings of the company's shares. at this time, the earnings consist of two parts: the shareholders get the capital gains �� of the current reduction and the discount �1 − ���� ������ ������� � of accumulated undistributed dividends obtained by continuing to hold �1 − �� unit stock.when n → ∞, the limit of �1 − ���� ������ ������� � is �1 − �� ������� � , so the total earnings of the shareholder is �1 − �� �������� + ��. (2) the upper right chooses the profit function of the two sides when the executive chooses not to dividend and the shareholder chooses to increase the ownership. firstly, for executives, if executives choose not to pay dividends and shareholders choose to continue holding, this shows that the company's non-dividend behavior has been recognized by shareholders. so they will get the salary of ae − be� and private interest c , i.e., his is as mentioned above, according to the strategies of both players, the profit functions of both players can be expressed as follows: table 1. payoff matrix decrease （1-q） increase （q） not to pay （1-p） 0，�1 − π� �������� + πβ �������� � ，�1 + π��� ����� ����� pay （p） ae − be� − c，πβ + π�� + �������� ������ ��� ，�� + ������� ����� source: author’s mathematical deduction. among them, � means to increase the holding of listed companies'stock units, and the other variables are consistent with the above. the economic implications of this matrix are as follows: (1) the upper left chooses the profit function of both sides when executives choose no dividend and shareholders choose to reduce their holdings. firstly, for executives, if shareholders choose to reduce their holdings because the company does not pay dividends, the reduction will cause the company's stock price to decline, then executives will face the fate of impeachment and dismissal, so the current income of executives is 0, that is, unemployment will offset his wage income. secondly, for shareholders, if they disagree with the company's non-dividend policy or are not optimistic about the company's development prospects, they can take a foot-to-foot vote to reduce their holdings of the company's shares. at this time, the earnings consist of two parts: the shareholders get the capital gains �� of the current reduction and the discount �1 − ���� ������ ������� � of accumulated undistributed dividends obtained by continuing to hold �1 − �� unit stock.when n → ∞, the limit of �1 − ���� ������ ������� � is �1 − �� ������� � , so the total earnings of the shareholder is �1 − �� �������� + ��. (2) the upper right chooses the profit function of the two sides when the executive chooses not to dividend and the shareholder chooses to increase the ownership. firstly, for executives, if executives choose not to pay dividends and shareholders choose to continue holding, this shows that the company's non-dividend behavior has been recognized by shareholders. so they will get the salary of ae − be� and private interest c , i.e., his , so the total earnings of the shareholder is as mentioned above, according to the strategies of both players, the profit functions of both players can be expressed as follows: table 1. payoff matrix decrease （1-q） increase （q） not to pay （1-p） 0，�1 − π� �������� + πβ �������� � ，�1 + π��� ����� ����� pay （p） ae − be� − c，πβ + π�� + �������� ������ ��� ，�� + ������� ����� source: author’s mathematical deduction. among them, � means to increase the holding of listed companies'stock units, and the other variables are consistent with the above. the economic implications of this matrix are as follows: (1) the upper left chooses the profit function of both sides when executives choose no dividend and shareholders choose to reduce their holdings. firstly, for executives, if shareholders choose to reduce their holdings because the company does not pay dividends, the reduction will cause the company's stock price to decline, then executives will face the fate of impeachment and dismissal, so the current income of executives is 0, that is, unemployment will offset his wage income. secondly, for shareholders, if they disagree with the company's non-dividend policy or are not optimistic about the company's development prospects, they can take a foot-to-foot vote to reduce their holdings of the company's shares. at this time, the earnings consist of two parts: the shareholders get the capital gains �� of the current reduction and the discount �1 − ���� ������ ������� � of accumulated undistributed dividends obtained by continuing to hold �1 − �� unit stock.when n → ∞, the limit of �1 − ���� ������ ������� � is �1 − �� ������� � , so the total earnings of the shareholder is �1 − �� �������� + ��. (2) the upper right chooses the profit function of the two sides when the executive chooses not to dividend and the shareholder chooses to increase the ownership. firstly, for executives, if executives choose not to pay dividends and shareholders choose to continue holding, this shows that the company's non-dividend behavior has been recognized by shareholders. so they will get the salary of ae − be� and private interest c , i.e., his . (2) the upper right chooses the profit function of the two sides when the executive chooses not to dividend and the shareholder chooses to increase the ownership. firstly, for executives, if executives choose not to pay dividends and shareholders choose to continue holding, this shows that the company’s nondividend behavior has been recognized by shareholders. so they will get the salary of ae − be2 and private interest c , i.e., his discounted income from future periods should be discounted income from future periods should be ����� ��� � . secondly, for shareholders, since they agree with the dividend-free strategy of senior managers, they have reason to believe that long-term holding of company stocks may lead to accumulated undistributed dividends in a future period, i.e. a huge capital gain. therefore, they will choose to increase their holding of π unit stocks with the discount value of their total earnings. the discount value of its total income is �1 + ���� ��� ��� ���� � ���������� . when � � �, it is �1 + ���� ���������� for limit of the discount value of �1 + �� the long-term shareholder's shares. （3）the bottom left is the earnings function of both sides when executives choose dividends and shareholders choose to reduce their holdings. executives choose to pay dividends, but suffer from shareholders' reduction. this makes executives bear double losses psychologically, that is, not only do they not gain potential private benefits, but also lose disposable free cash flow, so their earnings are �� − ��� − �. it should be pointed out in particular that because of the influence of tenure system and managers' market competition, senior managers are not discounted here. for shareholders, reduction can not only obtain current capital gains, but also obtain discount income from the sum of dividends �1 − π� and continue to hold them, �� + ��� + �������� . （4）the bottom right is the profit function of both sides when executives choose dividends and shareholders choose to increase their holdings. first, for senior managers, choosing to dividend and let the dividend grow at a fixed rate g will enable them to reach tacit understanding with shareholders and agree with each other. at this time, although the choice of dividends abandons the possibility of obtaining private benefits, the positive signals released by dividends make the status of executives not threatened, and can continue to obtain the discounted value ����� � ��� of salary income that the future operating company can bring for a continuous term of office, the reason why r-g is chosen as the discount rate of executive's salary income is that the executive can completely convert his salary income into stock in order to obtain the potential income of the company's growth. as far as shareholders are concerned, the rational choice at this time is to increase the holding of company stocks, not only to obtain the dividend income of the current period, but also to obtain all the intrinsic value of stocks when they hold stocks for a long time, so the total income of shareholders at this time is: αe + ������������ . . secondly, for shareholders, since they agree with the dividend-free strategy of senior managers, they have reason to believe that long-term holding of company stocks may lead to accumulated undistributed dividends in a future period, i.e. a huge capital gain. therefore, they will choose to increase their holding of unit stocks with the discount value of their total earnings. the discount value of its total income is discounted income from future periods should be ����� ��� � . secondly, for shareholders, since they agree with the dividend-free strategy of senior managers, they have reason to believe that long-term holding of company stocks may lead to accumulated undistributed dividends in a future period, i.e. a huge capital gain. therefore, they will choose to increase their holding of π unit stocks with the discount value of their total earnings. the discount value of its total income is �1 + ���� ��� ��� ���� � ���������� . when � � �, it is �1 + ���� ���������� for limit of the discount value of �1 + �� the long-term shareholder's shares. （3）the bottom left is the earnings function of both sides when executives choose dividends and shareholders choose to reduce their holdings. executives choose to pay dividends, but suffer from shareholders' reduction. this makes executives bear double losses psychologically, that is, not only do they not gain potential private benefits, but also lose disposable free cash flow, so their earnings are �� − ��� − �. it should be pointed out in particular that because of the influence of tenure system and managers' market competition, senior managers are not discounted here. for shareholders, reduction can not only obtain current capital gains, but also obtain discount income from the sum of dividends �1 − π� and continue to hold them, �� + ��� + �������� . （4）the bottom right is the profit function of both sides when executives choose dividends and shareholders choose to increase their holdings. first, for senior managers, choosing to dividend and let the dividend grow at a fixed rate g will enable them to reach tacit understanding with shareholders and agree with each other. at this time, although the choice of dividends abandons the possibility of obtaining private benefits, the positive signals released by dividends make the status of executives not threatened, and can continue to obtain the discounted value ����� � ��� of salary income that the future operating company can bring for a continuous term of office, the reason why r-g is chosen as the discount rate of executive's salary income is that the executive can completely convert his salary income into stock in order to obtain the potential income of the company's growth. as far as shareholders are concerned, the rational choice at this time is to increase the holding of company stocks, not only to obtain the dividend income of the current period, but also to obtain all the intrinsic value of stocks when they hold stocks for a long time, so the total income of shareholders at this time is: αe + ������������ . . when n → ∞, it is discounted income from future periods should be ����� ��� � . secondly, for shareholders, since they agree with the dividend-free strategy of senior managers, they have reason to believe that long-term holding of company stocks may lead to accumulated undistributed dividends in a future period, i.e. a huge capital gain. therefore, they will choose to increase their holding of π unit stocks with the discount value of their total earnings. the discount value of its total income is �1 + ���� ��� ��� ���� � ���������� . when � � �, it is �1 + ���� ���������� for limit of the discount value of �1 + �� the long-term shareholder's shares. （3）the bottom left is the earnings function of both sides when executives choose dividends and shareholders choose to reduce their holdings. executives choose to pay dividends, but suffer from shareholders' reduction. this makes executives bear double losses psychologically, that is, not only do they not gain potential private benefits, but also lose disposable free cash flow, so their earnings are �� − ��� − �. it should be pointed out in particular that because of the influence of tenure system and managers' market competition, senior managers are not discounted here. for shareholders, reduction can not only obtain current capital gains, but also obtain discount income from the sum of dividends �1 − π� and continue to hold them, �� + ��� + �������� . （4）the bottom right is the profit function of both sides when executives choose dividends and shareholders choose to increase their holdings. first, for senior managers, choosing to dividend and let the dividend grow at a fixed rate g will enable them to reach tacit understanding with shareholders and agree with each other. at this time, although the choice of dividends abandons the possibility of obtaining private benefits, the positive signals released by dividends make the status of executives not threatened, and can continue to obtain the discounted value ����� � ��� of salary income that the future operating company can bring for a continuous term of office, the reason why r-g is chosen as the discount rate of executive's salary income is that the executive can completely convert his salary income into stock in order to obtain the potential income of the company's growth. as far as shareholders are concerned, the rational choice at this time is to increase the holding of company stocks, not only to obtain the dividend income of the current period, but also to obtain all the intrinsic value of stocks when they hold stocks for a long time, so the total income of shareholders at this time is: αe + ������������ . for limit of the discount value of (1 + π) the longterm shareholder’s shares. (3) the bottom left is the earnings function of both sides when executives choose dividends and shareholders choose to reduce their holdings. executives choose to pay dividends, but suffer from shareholders’ reduction. this makes executives bear double losses psychologically, that is, not only do they not gain potential private benefits, but also lose disposable free cash f low, so their earnings are ae – be2 – c. it should be pointed out in particular that because of the inf luence of tenure system and managers’ market competition, senior managers are not discounted here. for shareholders, reduction can not only obtain current capital gains, but also obtain discount income from the sum of dividends (1 – π) and continue to hold them, discounted income from future periods should be ����� ��� � . secondly, for shareholders, since they agree with the dividend-free strategy of senior managers, they have reason to believe that long-term holding of company stocks may lead to accumulated undistributed dividends in a future period, i.e. a huge capital gain. therefore, they will choose to increase their holding of π unit stocks with the discount value of their total earnings. the discount value of its total income is �1 + ���� ��� ��� ���� � ���������� . when � � �, it is �1 + ���� ���������� for limit of the discount value of �1 + �� the long-term shareholder's shares. （3）the bottom left is the earnings function of both sides when executives choose dividends and shareholders choose to reduce their holdings. executives choose to pay dividends, but suffer from shareholders' reduction. this makes executives bear double losses psychologically, that is, not only do they not gain potential private benefits, but also lose disposable free cash flow, so their earnings are �� − ��� − �. it should be pointed out in particular that because of the influence of tenure system and managers' market competition, senior managers are not discounted here. for shareholders, reduction can not only obtain current capital gains, but also obtain discount income from the sum of dividends �1 − π� and continue to hold them, �� + ��� + �������� . （4）the bottom right is the profit function of both sides when executives choose dividends and shareholders choose to increase their holdings. first, for senior managers, choosing to dividend and let the dividend grow at a fixed rate g will enable them to reach tacit understanding with shareholders and agree with each other. at this time, although the choice of dividends abandons the possibility of obtaining private benefits, the positive signals released by dividends make the status of executives not threatened, and can continue to obtain the discounted value ����� � ��� of salary income that the future operating company can bring for a continuous term of office, the reason why r-g is chosen as the discount rate of executive's salary income is that the executive can completely convert his salary income into stock in order to obtain the potential income of the company's growth. as far as shareholders are concerned, the rational choice at this time is to increase the holding of company stocks, not only to obtain the dividend income of the current period, but also to obtain all the intrinsic value of stocks when they hold stocks for a long time, so the total income of shareholders at this time is: αe + ������������ . . (4) the bottom right is the profit function of both sides when executives choose dividends and shareholders choose to increase their holdings. first, for qin hailin, zhang jingxu74 senior managers, choosing to dividend and let the dividend grow at a fixed rate g will enable them to reach tacit understanding with shareholders and agree with each other. at this time, although the choice of dividends abandons the possibility of obtaining private benefits, the positive signals released by dividends make the status of executives not threatened, and can continue to obtain the discounted value discounted income from future periods should be ����� ��� � . secondly, for shareholders, since they agree with the dividend-free strategy of senior managers, they have reason to believe that long-term holding of company stocks may lead to accumulated undistributed dividends in a future period, i.e. a huge capital gain. therefore, they will choose to increase their holding of π unit stocks with the discount value of their total earnings. the discount value of its total income is �1 + ���� ��� ��� ���� � ���������� . when � � �, it is �1 + ���� ���������� for limit of the discount value of �1 + �� the long-term shareholder's shares. （3）the bottom left is the earnings function of both sides when executives choose dividends and shareholders choose to reduce their holdings. executives choose to pay dividends, but suffer from shareholders' reduction. this makes executives bear double losses psychologically, that is, not only do they not gain potential private benefits, but also lose disposable free cash flow, so their earnings are �� − ��� − �. it should be pointed out in particular that because of the influence of tenure system and managers' market competition, senior managers are not discounted here. for shareholders, reduction can not only obtain current capital gains, but also obtain discount income from the sum of dividends �1 − π� and continue to hold them, �� + ��� + �������� . （4）the bottom right is the profit function of both sides when executives choose dividends and shareholders choose to increase their holdings. first, for senior managers, choosing to dividend and let the dividend grow at a fixed rate g will enable them to reach tacit understanding with shareholders and agree with each other. at this time, although the choice of dividends abandons the possibility of obtaining private benefits, the positive signals released by dividends make the status of executives not threatened, and can continue to obtain the discounted value ����� � ��� of salary income that the future operating company can bring for a continuous term of office, the reason why r-g is chosen as the discount rate of executive's salary income is that the executive can completely convert his salary income into stock in order to obtain the potential income of the company's growth. as far as shareholders are concerned, the rational choice at this time is to increase the holding of company stocks, not only to obtain the dividend income of the current period, but also to obtain all the intrinsic value of stocks when they hold stocks for a long time, so the total income of shareholders at this time is: αe + ������������ . of salary income that the future operating company can bring for a continuous term of office, the reason why r-g is chosen as the discount rate of executive’s salary income is that the executive can completely convert his salary income into stock in order to obtain the potential income of the company’s growth. as far as shareholders are concerned, the rational choice at this time is to increase the holding of company stocks, not only to obtain the dividend income of the current period, but also to obtain all the intrinsic value of stocks when they hold stocks for a long time, so the total income of shareholders at this time is: discounted income from future periods should be ����� ��� � . secondly, for shareholders, since they agree with the dividend-free strategy of senior managers, they have reason to believe that long-term holding of company stocks may lead to accumulated undistributed dividends in a future period, i.e. a huge capital gain. therefore, they will choose to increase their holding of π unit stocks with the discount value of their total earnings. the discount value of its total income is �1 + ���� ��� ��� ���� � ���������� . when � � �, it is �1 + ���� ���������� for limit of the discount value of �1 + �� the long-term shareholder's shares. （3）the bottom left is the earnings function of both sides when executives choose dividends and shareholders choose to reduce their holdings. executives choose to pay dividends, but suffer from shareholders' reduction. this makes executives bear double losses psychologically, that is, not only do they not gain potential private benefits, but also lose disposable free cash flow, so their earnings are �� − ��� − �. it should be pointed out in particular that because of the influence of tenure system and managers' market competition, senior managers are not discounted here. for shareholders, reduction can not only obtain current capital gains, but also obtain discount income from the sum of dividends �1 − π� and continue to hold them, �� + ��� + �������� . （4）the bottom right is the profit function of both sides when executives choose dividends and shareholders choose to increase their holdings. first, for senior managers, choosing to dividend and let the dividend grow at a fixed rate g will enable them to reach tacit understanding with shareholders and agree with each other. at this time, although the choice of dividends abandons the possibility of obtaining private benefits, the positive signals released by dividends make the status of executives not threatened, and can continue to obtain the discounted value ����� � ��� of salary income that the future operating company can bring for a continuous term of office, the reason why r-g is chosen as the discount rate of executive's salary income is that the executive can completely convert his salary income into stock in order to obtain the potential income of the company's growth. as far as shareholders are concerned, the rational choice at this time is to increase the holding of company stocks, not only to obtain the dividend income of the current period, but also to obtain all the intrinsic value of stocks when they hold stocks for a long time, so the total income of shareholders at this time is: αe + ������������ . . 4. equilibrium analysis of game (1) equilibrium of executives given the shareholder’s holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. 4. equilibrium analysis of game (1)equilibrium of executives given the shareholder's holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. �(���) = (1 − �)(�� − ��� − �) � �� ������ � ��� � (3) �(�������) = (1 − �)(0) � � ������ ��� � � （4） therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, � = �(���)(�������)���(�������)��(���)(�������) （5） according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-dividend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2)equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: �(��������) = (1 − �)�(1 � �)�� (���)(���)� � ���� � (���)�� (���) � （6） �(��������) = (1 − �)�(1 − �) ��(���)� � ��� � ����� � ��� � (���)�� � � （7） based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is � = 1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) （8） (3)nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. (1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) , �(���)(�������)���(�������)��(���)(�������)) (3) 4. equilibrium analysis of game (1)equilibrium of executives given the shareholder's holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. �(���) = (1 − �)(�� − ��� − �) � �� ������ � ��� � (3) �(�������) = (1 − �)(0) � � ������ ��� � � （4） therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, � = �(���)(�������)���(�������)��(���)(�������) （5） according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-dividend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2)equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: �(��������) = (1 − �)�(1 � �)�� (���)(���)� � ���� � (���)�� (���) � （6） �(��������) = (1 − �)�(1 − �) ��(���)� � ��� � ����� � ��� � (���)�� � � （7） based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is � = 1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) （8） (3)nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. (1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) , �(���)(�������)���(�������)��(���)(�������)) (4) therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, 4. equilibrium analysis of game (1)equilibrium of executives given the shareholder's holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. �(���) = (1 − �)(�� − ��� − �) � �� ������ � ��� � (3) �(�������) = (1 − �)(0) � � ������ ��� � � （4） therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, � = �(���)(�������)���(�������)��(���)(�������) （5） according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-dividend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2)equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: �(��������) = (1 − �)�(1 � �)�� (���)(���)� � ���� � (���)�� (���) � （6） �(��������) = (1 − �)�(1 − �) ��(���)� � ��� � ����� � ��� � (���)�� � � （7） based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is � = 1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) （8） (3)nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. (1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) , �(���)(�������)���(�������)��(���)(�������)) (5) according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-divi can mandatory dividend policy reduce… 75 dend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2) equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: 4. equilibrium analysis of game (1)equilibrium of executives given the shareholder's holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. �(���) = (1 − �)(�� − ��� − �) � �� ������ � ��� � (3) �(�������) = (1 − �)(0) � � ������ ��� � � （4） therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, � = �(���)(�������)���(�������)��(���)(�������) （5） according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-dividend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2)equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: �(��������) = (1 − �)�(1 � �)�� (���)(���)� � ���� � (���)�� (���) � （6） �(��������) = (1 − �)�(1 − �) ��(���)� � ��� � ����� � ��� � (���)�� � � （7） based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is � = 1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) （8） (3)nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. (1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) , �(���)(�������)���(�������)��(���)(�������)) (6) 4. equilibrium analysis of game (1)equilibrium of executives given the shareholder's holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. �(���) = (1 − �)(�� − ��� − �) � �� ������ � ��� � (3) �(�������) = (1 − �)(0) � � ������ ��� � � （4） therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, � = �(���)(�������)���(�������)��(���)(�������) （5） according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-dividend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2)equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: �(��������) = (1 − �)�(1 � �)�� (���)(���)� � ���� � (���)�� (���) � （6） �(��������) = (1 − �)�(1 − �) ��(���)� � ��� � ����� � ��� � (���)�� � � （7） based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is � = 1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) （8） (3)nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. (1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) , �(���)(�������)���(�������)��(���)(�������)) (7) based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is 4. equilibrium analysis of game (1)equilibrium of executives given the shareholder's holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. �(���) = (1 − �)(�� − ��� − �) � �� ������ � ��� � (3) �(�������) = (1 − �)(0) � � ������ ��� � � （4） therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, � = �(���)(�������)���(�������)��(���)(�������) （5） according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-dividend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2)equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: �(��������) = (1 − �)�(1 � �)�� (���)(���)� � ���� � (���)�� (���) � （6） �(��������) = (1 − �)�(1 − �) ��(���)� � ��� � ����� � ��� � (���)�� � � （7） based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is � = 1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) （8） (3)nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. (1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) , �(���)(�������)���(�������)��(���)(�������)) (8) (3) nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. 4. equilibrium analysis of game (1)equilibrium of executives given the shareholder's holding probability q, the expected earnings of executives when they choose to dividend and non-dividend are respectively. �(���) = (1 − �)(�� − ��� − �) � �� ������ � ��� � (3) �(�������) = (1 − �)(0) � � ������ ��� � � （4） therefore, let e (pay dividend ) = e ( pass dividend), after a series of algebraic operations, � = �(���)(�������)���(�������)��(���)(�������) （5） according to the principle of equal expectation payment, there should be no difference between the expected returns of dividend-sharing and non-dividend-sharing for executives at the nash equilibrium of mixed strategy in game theory. equation (5) shows that whether shareholders hold shares of listed companies depends mainly on discount rate r, dividend growth rate g and dividend per share d. (2)equilibrium of shareholders according to the matrix, given the dividend probability q of executives, the expected returns of shareholders when they choose to hold or not are respectively: �(��������) = (1 − �)�(1 � �)�� (���)(���)� � ���� � (���)�� (���) � （6） �(��������) = (1 − �)�(1 − �) ��(���)� � ��� � ����� � ��� � (���)�� � � （7） based on the principle of equal expectation payment, there should be no difference between the expected returns of shareholders who choose to hold and not hold on the nash equilibrium of mixed strategy. therefore, let e(hold)=e(not hold), it is � = 1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) （8） (3)nash equilibrium and mandatory dividend policy according to equation (3) and (5), the mixed strategy nash equilibrium (p, q) of the complete information static game is obtained. (1 − ����� � (���) � � (���) (���)�� �(���)�(���)�(���) , �(���)(�������)���(�������)��(���)(�������)) at this time, for shareholders, if the compulsory dividend system is implemented, the dividend probability p = 1 is always valid on nash equilibrium, and this result can be brought into equilibrium conditions. qin hailin, zhang jingxu76 at this time, for shareholders, if the compulsory dividend system is implemented, the dividend probability p = 1 is always valid on nash equilibrium, and this result can be brought into equilibrium conditions. � = �� �(��������� ��� � ��) （9） this means that, under the influence of mandatory dividend policy, the degree of executives' work effort e depends on the discount rate r, the current capital gain � of the company's stock and the shareholder's increase ratio �, the dividend growth rate g, the dividend distribution ratio �, etc. (i) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio can be obtained. �� �� = �� � � (��������� ��� � ��)� � ���(���)� − ��� �� � > 0 （10） according to the assumption of the model, the upper formula is always positive. this means that at the nash equilibrium of mixed strategy, the higher the discount rate, i.e. the reward rate necessary for a company's investment project, the higher the level of hard work of executives. at this time, the high rate of return on investment projects can ensure that the company produces enough cash flow to pay dividends, so executives are not afraid of the policy assessment of regulatory authorities, nor the benchmarking effect of peers and competitive pressures, thus feeling a bright future and full of energy. (ii) under the assumption of continuous derivability, the first-order partial derivative of managerial effort e to current capital gain � can be obtained: �� �� = � � � ��������� ��� � �� > 0 （11） this shows that the market performance of corporate stock is positively correlated with the managers 'hard work, that is, the higher the stock price, the more incentive the managers to work hard, because not only their work can be affirmed by the market, but also the stock price rise can attract more investors to hold corporate stock. at the same time, since the stock price is based on the company's performance, which means that the company can provide enough cash flow for cash dividend, so executives need not worry about their own dividend pressure, so they can be light-loaded, without worries, and work hard with all their heart and soul. (iii) under the assumption of continuous differentiability, the partial derivative of managerial effort degree e to shareholder increase ratio � can be obtained. (9) this means that, under the inf luence of mandatory dividend policy, the degree of executives’ work effort e depends on the discount rate r, the current capital gain β of the company’s stock and the shareholder’s increase ratio π, the dividend growth rate g, the dividend distribution ratio α, etc. (i) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratioα can be obtained. at this time, for shareholders, if the compulsory dividend system is implemented, the dividend probability p = 1 is always valid on nash equilibrium, and this result can be brought into equilibrium conditions. � = �� �(��������� ��� � ��) （9） this means that, under the influence of mandatory dividend policy, the degree of executives' work effort e depends on the discount rate r, the current capital gain � of the company's stock and the shareholder's increase ratio �, the dividend growth rate g, the dividend distribution ratio �, etc. (i) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio can be obtained. �� �� = �� � � (��������� ��� � ��)� � ���(���)� − ��� �� � > 0 （10） according to the assumption of the model, the upper formula is always positive. this means that at the nash equilibrium of mixed strategy, the higher the discount rate, i.e. the reward rate necessary for a company's investment project, the higher the level of hard work of executives. at this time, the high rate of return on investment projects can ensure that the company produces enough cash flow to pay dividends, so executives are not afraid of the policy assessment of regulatory authorities, nor the benchmarking effect of peers and competitive pressures, thus feeling a bright future and full of energy. (ii) under the assumption of continuous derivability, the first-order partial derivative of managerial effort e to current capital gain � can be obtained: �� �� = � � � ��������� ��� � �� > 0 （11） this shows that the market performance of corporate stock is positively correlated with the managers 'hard work, that is, the higher the stock price, the more incentive the managers to work hard, because not only their work can be affirmed by the market, but also the stock price rise can attract more investors to hold corporate stock. at the same time, since the stock price is based on the company's performance, which means that the company can provide enough cash flow for cash dividend, so executives need not worry about their own dividend pressure, so they can be light-loaded, without worries, and work hard with all their heart and soul. (iii) under the assumption of continuous differentiability, the partial derivative of managerial effort degree e to shareholder increase ratio � can be obtained. (10) according to the assumption of the model, the upper formula is always positive. this means that at the nash equilibrium of mixed strategy, the higher the discount rate, i.e. the reward rate necessary for a company’s investment project, the higher the level of hard work of executives. at this time, the high rate of return on investment projects can ensure that the company produces enough cash f low to pay dividends, so executives are not afraid of the policy assessment of regulatory authorities, nor the benchmarking effect of peers and competitive pressures, thus feeling a bright future and full of energy. (ii) under the assumption of continuous derivability, the first-order partial derivative of managerial effort e to current capital gain β can be obtained: at this time, for shareholders, if the compulsory dividend system is implemented, the dividend probability p = 1 is always valid on nash equilibrium, and this result can be brought into equilibrium conditions. � = �� �(��������� ��� � ��) （9） this means that, under the influence of mandatory dividend policy, the degree of executives' work effort e depends on the discount rate r, the current capital gain � of the company's stock and the shareholder's increase ratio �, the dividend growth rate g, the dividend distribution ratio �, etc. (i) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio can be obtained. �� �� = �� � � (��������� ��� � ��)� � ���(���)� − ��� �� � > 0 （10） according to the assumption of the model, the upper formula is always positive. this means that at the nash equilibrium of mixed strategy, the higher the discount rate, i.e. the reward rate necessary for a company's investment project, the higher the level of hard work of executives. at this time, the high rate of return on investment projects can ensure that the company produces enough cash flow to pay dividends, so executives are not afraid of the policy assessment of regulatory authorities, nor the benchmarking effect of peers and competitive pressures, thus feeling a bright future and full of energy. (ii) under the assumption of continuous derivability, the first-order partial derivative of managerial effort e to current capital gain � can be obtained: �� �� = � � � ��������� ��� � �� > 0 （11） this shows that the market performance of corporate stock is positively correlated with the managers 'hard work, that is, the higher the stock price, the more incentive the managers to work hard, because not only their work can be affirmed by the market, but also the stock price rise can attract more investors to hold corporate stock. at the same time, since the stock price is based on the company's performance, which means that the company can provide enough cash flow for cash dividend, so executives need not worry about their own dividend pressure, so they can be light-loaded, without worries, and work hard with all their heart and soul. (iii) under the assumption of continuous differentiability, the partial derivative of managerial effort degree e to shareholder increase ratio � can be obtained. (11) this shows that the market performance of corporate stock is positively correlated with the managers ‘hard work, that is, the higher the stock price, the more incentive the managers to work hard, because not only their work can be affirmed by the market, but also the stock price rise can attract more investors to hold corporate stock. at the same time, since the stock price is based on the company’s performance, which means that the company can provide enough cash f low for cash dividend, so executives need not worry about their own dividend pressure, so they can be light-loaded, without worries, and work hard with all their heart and soul. can mandatory dividend policy reduce… 77 (iii) under the assumption of continuous differentiability, the partial derivative of managerial effort degree e to shareholder increase ratio π can be obtained. �� �� == ���� ����� � �� ���������� ��� � ��� � > 0 （12） according to the previous assumption, given the dividend discount rate r and dividend growth rate g, ���� > 0 is always valid. as long as the shareholders' meeting becomes a loyal supporter of the senior managers, keeps increasing the stock holdings of the company, and continuously makes a positive evaluation of the company's performance, the senior managers will work hard without hesitation, so that the company can achieve profitability and continuously improve the dividend level, thereby improving the earnings of the shareholders and senior managers. this is a win-win and mutually beneficial strategic interaction. (iv) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g is obtained. �� �� = − �� � � ���������� ��� � ��� � ���(���)� < 0 （13） under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g can be obtained, which shows that the growth of dividend growth rate g will inhibit the enthusiasm and effort of executives. this is because the mandatory dividend policy has formed a stable expectation of cash dividends. if the dividends continue to grow, the dividends in the distant future will become more and more, which will make executives overwhelmed unless the company's dividends can be distributed continue to grow at the rate of r. obviously, this is a very strict and unrealistic assumption that there can be no fluctuation in company performance. in this way, dividend growth rate g may not be enough to worry about in the short term, but it will be the last straw to crush the camels in the long run, which will cause a heavy blow to the enthusiasm of executives. (v) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio  is obtained. �� �� = − �� ��(��������� ��� � ��) < 0 （14） according to equation (14), it can be found that the degree of efforts of executives is inversely proportional to their dividend-sharing ratio. the economic logic behind it: with the increase of the dividend proportion, the company's disposable free cash flow will decrease accordingly, which will not only hinder executives from increasing their private benefits, but also make the dividend distribution system produce an unbalanced mentality, that is, shareholders gain nothing without any reason, using the identity of the capital owner �� �� == ���� ����� � �� ���������� ��� � ��� � > 0 （12） according to the previous assumption, given the dividend discount rate r and dividend growth rate g, ���� > 0 is always valid. as long as the shareholders' meeting becomes a loyal supporter of the senior managers, keeps increasing the stock holdings of the company, and continuously makes a positive evaluation of the company's performance, the senior managers will work hard without hesitation, so that the company can achieve profitability and continuously improve the dividend level, thereby improving the earnings of the shareholders and senior managers. this is a win-win and mutually beneficial strategic interaction. (iv) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g is obtained. �� �� = − �� � � ���������� ��� � ��� � ���(���)� < 0 （13） under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g can be obtained, which shows that the growth of dividend growth rate g will inhibit the enthusiasm and effort of executives. this is because the mandatory dividend policy has formed a stable expectation of cash dividends. if the dividends continue to grow, the dividends in the distant future will become more and more, which will make executives overwhelmed unless the company's dividends can be distributed continue to grow at the rate of r. obviously, this is a very strict and unrealistic assumption that there can be no fluctuation in company performance. in this way, dividend growth rate g may not be enough to worry about in the short term, but it will be the last straw to crush the camels in the long run, which will cause a heavy blow to the enthusiasm of executives. (v) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio  is obtained. �� �� = − �� ��(��������� ��� � ��) < 0 （14） according to equation (14), it can be found that the degree of efforts of executives is inversely proportional to their dividend-sharing ratio. the economic logic behind it: with the increase of the dividend proportion, the company's disposable free cash flow will decrease accordingly, which will not only hinder executives from increasing their private benefits, but also make the dividend distribution system produce an unbalanced mentality, that is, shareholders gain nothing without any reason, using the identity of the capital owner (12) according to the previous assumption, given the dividend discount rate r and dividend growth rate �� �� == ���� ����� � �� ���������� ��� � ��� � > 0 （12） according to the previous assumption, given the dividend discount rate r and dividend growth rate g, ���� > 0 is always valid. as long as the shareholders' meeting becomes a loyal supporter of the senior managers, keeps increasing the stock holdings of the company, and continuously makes a positive evaluation of the company's performance, the senior managers will work hard without hesitation, so that the company can achieve profitability and continuously improve the dividend level, thereby improving the earnings of the shareholders and senior managers. this is a win-win and mutually beneficial strategic interaction. (iv) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g is obtained. �� �� = − �� � � ���������� ��� � ��� � ���(���)� < 0 （13） under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g can be obtained, which shows that the growth of dividend growth rate g will inhibit the enthusiasm and effort of executives. this is because the mandatory dividend policy has formed a stable expectation of cash dividends. if the dividends continue to grow, the dividends in the distant future will become more and more, which will make executives overwhelmed unless the company's dividends can be distributed continue to grow at the rate of r. obviously, this is a very strict and unrealistic assumption that there can be no fluctuation in company performance. in this way, dividend growth rate g may not be enough to worry about in the short term, but it will be the last straw to crush the camels in the long run, which will cause a heavy blow to the enthusiasm of executives. (v) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio  is obtained. �� �� = − �� ��(��������� ��� � ��) < 0 （14） according to equation (14), it can be found that the degree of efforts of executives is inversely proportional to their dividend-sharing ratio. the economic logic behind it: with the increase of the dividend proportion, the company's disposable free cash flow will decrease accordingly, which will not only hinder executives from increasing their private benefits, but also make the dividend distribution system produce an unbalanced mentality, that is, shareholders gain nothing without any reason, using the identity of the capital owner , is always valid. as long as the shareholders’ meeting becomes a loyal supporter of the senior managers, keeps increasing the stock holdings of the company, and continuously makes a positive evaluation of the company’s performance, the senior managers will work hard without hesitation, so that the company can achieve profitability and continuously improve the dividend level, thereby improving the earnings of the shareholders and senior managers. this is a win-win and mutually beneficial strategic interaction. (iv) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g is obtained. �� �� == ���� ����� � �� ���������� ��� � ��� � > 0 （12） according to the previous assumption, given the dividend discount rate r and dividend growth rate g, ���� > 0 is always valid. as long as the shareholders' meeting becomes a loyal supporter of the senior managers, keeps increasing the stock holdings of the company, and continuously makes a positive evaluation of the company's performance, the senior managers will work hard without hesitation, so that the company can achieve profitability and continuously improve the dividend level, thereby improving the earnings of the shareholders and senior managers. this is a win-win and mutually beneficial strategic interaction. (iv) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g is obtained. �� �� = − �� � � ���������� ��� � ��� � ���(���)� < 0 （13） under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g can be obtained, which shows that the growth of dividend growth rate g will inhibit the enthusiasm and effort of executives. this is because the mandatory dividend policy has formed a stable expectation of cash dividends. if the dividends continue to grow, the dividends in the distant future will become more and more, which will make executives overwhelmed unless the company's dividends can be distributed continue to grow at the rate of r. obviously, this is a very strict and unrealistic assumption that there can be no fluctuation in company performance. in this way, dividend growth rate g may not be enough to worry about in the short term, but it will be the last straw to crush the camels in the long run, which will cause a heavy blow to the enthusiasm of executives. (v) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio  is obtained. �� �� = − �� ��(��������� ��� � ��) < 0 （14） according to equation (14), it can be found that the degree of efforts of executives is inversely proportional to their dividend-sharing ratio. the economic logic behind it: with the increase of the dividend proportion, the company's disposable free cash flow will decrease accordingly, which will not only hinder executives from increasing their private benefits, but also make the dividend distribution system produce an unbalanced mentality, that is, shareholders gain nothing without any reason, using the identity of the capital owner (13) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g can be obtained, which shows that the growth of dividend growth rate g will inhibit the enthusiasm and effort of executives. this is because the mandatory dividend policy has formed a stable expectation of cash dividends. if the dividends continue to grow, the dividends in the distant future will become more and more, which will make executives overwhelmed unless the company’s dividends can be distributed continue to grow at the rate of r. obviously, this is a very strict and unrealistic assumption that there can be no f luctuation in company performance. in this way, dividend growth rate g may not be enough to worry about in the short term, but it will be the last straw to crush the camels in the long run, which will cause a heavy blow to the enthusiasm of executives. (v) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio α is obtained. qin hailin, zhang jingxu78 �� �� == ���� ����� � �� ���������� ��� � ��� � > 0 （12） according to the previous assumption, given the dividend discount rate r and dividend growth rate g, ���� > 0 is always valid. as long as the shareholders' meeting becomes a loyal supporter of the senior managers, keeps increasing the stock holdings of the company, and continuously makes a positive evaluation of the company's performance, the senior managers will work hard without hesitation, so that the company can achieve profitability and continuously improve the dividend level, thereby improving the earnings of the shareholders and senior managers. this is a win-win and mutually beneficial strategic interaction. (iv) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g is obtained. �� �� = − �� � � ���������� ��� � ��� � ���(���)� < 0 （13） under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend growth rate g can be obtained, which shows that the growth of dividend growth rate g will inhibit the enthusiasm and effort of executives. this is because the mandatory dividend policy has formed a stable expectation of cash dividends. if the dividends continue to grow, the dividends in the distant future will become more and more, which will make executives overwhelmed unless the company's dividends can be distributed continue to grow at the rate of r. obviously, this is a very strict and unrealistic assumption that there can be no fluctuation in company performance. in this way, dividend growth rate g may not be enough to worry about in the short term, but it will be the last straw to crush the camels in the long run, which will cause a heavy blow to the enthusiasm of executives. (v) under the assumption of continuous derivability, the first-order partial derivative of executive effort e to dividend ratio  is obtained. �� �� = − �� ��(��������� ��� � ��) < 0 （14） according to equation (14), it can be found that the degree of efforts of executives is inversely proportional to their dividend-sharing ratio. the economic logic behind it: with the increase of the dividend proportion, the company's disposable free cash flow will decrease accordingly, which will not only hinder executives from increasing their private benefits, but also make the dividend distribution system produce an unbalanced mentality, that is, shareholders gain nothing without any reason, using the identity of the capital owner (14) according to equation (14), it can be found that the degree of efforts of executives is inversely proportional to their dividend-sharing ratio. the economic logic behind it: with the increase of the dividend proportion, the company’s disposable free cash f low will decrease accordingly, which will not only hinder executives from increasing their private benefits, but also make the dividend distribution system produce an unbalanced mentality, that is, shareholders gain nothing without any reason, using the identity of the capital owner to embezzle their own labor results. therefore, it is self-evident that the executive’s work effort e decreases with the increase of the dividend ratio α. 5. model conclusion first of all, needless to say, since it is a mandatory dividend policy, whether or not out of sincerity, listed companies will show a significantly higher willingness to pay dividends than before. secondly, according to equation (10)–(12), the implementation of mandatory dividend policy will significantly encourage executives to work hard and reduce the agency cost of corporate governance. on the one hand, the mandatory dividend policy will undoubtedly increase the expected returns of investors, which will naturally stimulate investors to increase their ownership of company stocks, which will change the balance between supply and demand of company stocks, further boost the rise of company stock prices, so that executives will be motivated by both shareholder ownership and stock price rise, and work harder. on the other hand, since executives are willing to work harder, the expected return on investment projects will naturally rise. in this way, executives can provide a steady stream of cash f low for cash dividends. it is selfevident that the exogenous impact of mandatory dividend policy can construct a virtuous circle between executives and shareholders: mandatory dividend policy – cash dividend of the company – shareholders and investors holding more shares of the company – stock price rise – executives working hard – the next round of cash. unexpectedly, this cycle will start again and again. finally, according to equation (13) and (14), some factors of corporate dividend policy itself will lead to the actual effect of mandatory dividend policy deviating from the expected goal of the policy. specifically, whether it is cash can mandatory dividend policy reduce… 79 dividend ratio or dividend growth rate, it will create pressure and threat to the performance of executives in the long run. therefore, as a rational economic man, executives may take a negative resistance strategy at the beginning to create a buffer space for their future strategic adjustment, such as deliberately lowering the cash dividend ratio and setting a close approach. dividend growth rate at 0, etc. however, in this way, the effect of mandatory dividend policy will be weakened invisibly. research design 1. selection of empirical model (1) difference-difference model (did) the difference-difference model can be used to test the effectiveness of policy. using exogenous policy shocks to do quasi-natural experiments, the double difference can overcome the inf luence of other factors on the results, so the net impact of policy shocks can be obtained. because of the exogenous nature of policy shocks and the diversity of policy objects, there will be treatment groups affected by policies and control groups not affected by policies. the did model is to test the effect of the policy by comparing the changes of the experimental group and the control group before and after controlling other factors. in order to test the impact of mandatory dividend policy on agency cost, this paper makes a quasi-natural experiment on the implementation of mandatory dividend policy, uses did method to identify causality. according to the external impact of “mandatory dividend policy”, we compare the policy effects before and after the external impact, and then analyze whether the mandatory dividend policy will reduce the agency cost of listed companies. on november 9, 2011, guo shuqing, chairman of the cscr, proposed that listed companies should pay dividends. on november 9, 2011, the “mandatory dividend” incident affected the whole stock market: after 2012, the dividend rate of the stock market further increased, after 2015, the dividend of listed companies increased substantially, and by 2017, about 80% of listed companies had dividends. therefore, the dividend distribution of many companies is affected by the sudden impact of this policy, which provides us with good quasi-natural experimental conditions. according to the did model, this paper constructs a model (1) based on did: qin hailin, zhang jingxu80 the difference-difference model can be used to test the effectiveness of policy. using exogenous policy shocks to do quasi-natural experiments, the double difference can overcome the influence of other factors on the results, so the net impact of policy shocks can be obtained. because of the exogenous nature of policy shocks and the diversity of policy objects, there will be treatment groups affected by policies and control groups not affected by policies. the did model is to test the effect of the policy by comparing the changes of the experimental group and the control group before and after controlling other factors. in order to test the impact of mandatory dividend policy on agency cost, this paper makes a quasi-natural experiment on the implementation of mandatory dividend policy, uses did method to identify causality. according to the external impact of "mandatory dividend policy", we compare the policy effects before and after the external impact, and then analyze whether the mandatory dividend policy will reduce the agency cost of listed companies. on november 9, 2011, guo shuqing, chairman of the cscr, proposed that listed companies should pay dividends. on november 9, 2011, the "mandatory dividend" incident affected the whole stock market: after 2012, the dividend rate of the stock market further increased, after 2015, the dividend of listed companies increased substantially, and by 2017, about 80% of listed companies had dividends. therefore, the dividend distribution of many companies is affected by the sudden impact of this policy, which provides us with good quasi-natural experimental conditions. according to the did model, this paper constructs a model (1) based on did : ������� � � + ��������� + �������+������� � ������� + ������� + ������� + ������� + ��������������� + ������� + ������������� + ��������� + ������������ + +��������� +���������� + �������� + ��������� + �������������� + ��� (15) among them, agentit is agency cost of company i at time t； treat stands for dummy variables in experimental group(the iron cock company, which did not pay dividends for three consecutive years before the policy was introduced, was the first to be affected by the policy of "mandatory dividend policy". the treat is 1, which indicates that listed companies are affected by policy shocks; otherwise, 0; law is a policy time variable, with 0 before policy and 1 after policy; and coefficient of 3 describes the impact of mandatory dividend policy on agency costs, which is the focus of this research. table 2. did subgroup before policy after policy total controlling group 6141 10312 16453 the difference-difference model can be used to test the effectiveness of policy. using exogenous policy shocks to do quasi-natural experiments, the double difference can overcome the influence of other factors on the results, so the net impact of policy shocks can be obtained. because of the exogenous nature of policy shocks and the diversity of policy objects, there will be treatment groups affected by policies and control groups not affected by policies. the did model is to test the effect of the policy by comparing the changes of the experimental group and the control group before and after controlling other factors. in order to test the impact of mandatory dividend policy on agency cost, this paper makes a quasi-natural experiment on the implementation of mandatory dividend policy, uses did method to identify causality. according to the external impact of "mandatory dividend policy", we compare the policy effects before and after the external impact, and then analyze whether the mandatory dividend policy will reduce the agency cost of listed companies. on november 9, 2011, guo shuqing, chairman of the cscr, proposed that listed companies should pay dividends. on november 9, 2011, the "mandatory dividend" incident affected the whole stock market: after 2012, the dividend rate of the stock market further increased, after 2015, the dividend of listed companies increased substantially, and by 2017, about 80% of listed companies had dividends. therefore, the dividend distribution of many companies is affected by the sudden impact of this policy, which provides us with good quasi-natural experimental conditions. according to the did model, this paper constructs a model (1) based on did : ������� � � + ��������� + �������+������� � ������� + ������� + ������� + ������� + ��������������� + ������� + ������������� + ��������� + ������������ + +��������� +���������� + �������� + ��������� + �������������� + ��� (15) among them, agentit is agency cost of company i at time t； treat stands for dummy variables in experimental group(the iron cock company, which did not pay dividends for three consecutive years before the policy was introduced, was the first to be affected by the policy of "mandatory dividend policy". the treat is 1, which indicates that listed companies are affected by policy shocks; otherwise, 0; law is a policy time variable, with 0 before policy and 1 after policy; and coefficient of 3 describes the impact of mandatory dividend policy on agency costs, which is the focus of this research. table 2. did subgroup before policy after policy total controlling group 6141 10312 16453 the difference-difference model can be used to test the effectiveness of policy. using exogenous policy shocks to do quasi-natural experiments, the double difference can overcome the influence of other factors on the results, so the net impact of policy shocks can be obtained. because of the exogenous nature of policy shocks and the diversity of policy objects, there will be treatment groups affected by policies and control groups not affected by policies. the did model is to test the effect of the policy by comparing the changes of the experimental group and the control group before and after controlling other factors. in order to test the impact of mandatory dividend policy on agency cost, this paper makes a quasi-natural experiment on the implementation of mandatory dividend policy, uses did method to identify causality. according to the external impact of "mandatory dividend policy", we compare the policy effects before and after the external impact, and then analyze whether the mandatory dividend policy will reduce the agency cost of listed companies. on november 9, 2011, guo shuqing, chairman of the cscr, proposed that listed companies should pay dividends. on november 9, 2011, the "mandatory dividend" incident affected the whole stock market: after 2012, the dividend rate of the stock market further increased, after 2015, the dividend of listed companies increased substantially, and by 2017, about 80% of listed companies had dividends. therefore, the dividend distribution of many companies is affected by the sudden impact of this policy, which provides us with good quasi-natural experimental conditions. according to the did model, this paper constructs a model (1) based on did : ������� � � + ��������� + �������+������� � ������� + ������� + ������� + ������� + ��������������� + ������� + ������������� + ��������� + ������������ + +��������� +���������� + �������� + ��������� + �������������� + ��� (15) among them, agentit is agency cost of company i at time t； treat stands for dummy variables in experimental group(the iron cock company, which did not pay dividends for three consecutive years before the policy was introduced, was the first to be affected by the policy of "mandatory dividend policy". the treat is 1, which indicates that listed companies are affected by policy shocks; otherwise, 0; law is a policy time variable, with 0 before policy and 1 after policy; and coefficient of 3 describes the impact of mandatory dividend policy on agency costs, which is the focus of this research. table 2. did subgroup before policy after policy total controlling group 6141 10312 16453 the difference-difference model can be used to test the effectiveness of policy. using exogenous policy shocks to do quasi-natural experiments, the double difference can overcome the influence of other factors on the results, so the net impact of policy shocks can be obtained. because of the exogenous nature of policy shocks and the diversity of policy objects, there will be treatment groups affected by policies and control groups not affected by policies. the did model is to test the effect of the policy by comparing the changes of the experimental group and the control group before and after controlling other factors. in order to test the impact of mandatory dividend policy on agency cost, this paper makes a quasi-natural experiment on the implementation of mandatory dividend policy, uses did method to identify causality. according to the external impact of "mandatory dividend policy", we compare the policy effects before and after the external impact, and then analyze whether the mandatory dividend policy will reduce the agency cost of listed companies. on november 9, 2011, guo shuqing, chairman of the cscr, proposed that listed companies should pay dividends. on november 9, 2011, the "mandatory dividend" incident affected the whole stock market: after 2012, the dividend rate of the stock market further increased, after 2015, the dividend of listed companies increased substantially, and by 2017, about 80% of listed companies had dividends. therefore, the dividend distribution of many companies is affected by the sudden impact of this policy, which provides us with good quasi-natural experimental conditions. according to the did model, this paper constructs a model (1) based on did : ������� � � + ��������� + �������+������� � ������� + ������� + ������� + ������� + ��������������� + ������� + ������������� + ��������� + ������������ + +��������� +���������� + �������� + ��������� + �������������� + ��� (15) among them, agentit is agency cost of company i at time t； treat stands for dummy variables in experimental group(the iron cock company, which did not pay dividends for three consecutive years before the policy was introduced, was the first to be affected by the policy of "mandatory dividend policy". the treat is 1, which indicates that listed companies are affected by policy shocks; otherwise, 0; law is a policy time variable, with 0 before policy and 1 after policy; and coefficient of 3 describes the impact of mandatory dividend policy on agency costs, which is the focus of this research. table 2. did subgroup before policy after policy total controlling group 6141 10312 16453 (15) among them, agentit is agency cost of company i at time t; treat stands for dummy variables in experimental group (the iron cock company, which did not pay dividends for three consecutive years before the policy was introduced, was the first to be affected by the policy of “mandatory dividend policy”. the treat is 1, which indicates that listed companies are affected by policy shocks; otherwise, 0; law is a policy time variable, with 0 before policy and 1 after policy; and coefficient of β3 describes the impact of mandatory dividend policy on agency costs, which is the focus of this research. table 2. did subgroup before policy after policy total controlling group 6141 10312 16453 experimental group 1345 5001 6346 total 7486 15313 s o u r c e : author’s calculation based upon the great intelligence database in china. (2) test of parallel trend hypothesis however, one of the prerequisites is that the parallel trend hypothesis is satisfied between the experimental group and the control group for unbiased estimation results of double difference method, that is, the treatment group and the control group should have the same change trend before the event occurs, otherwise the double difference method will overestimate or underestimate the effect of the event. in order to verify the hypothesis of parallel trend, this paper investigates it with the aid of event study method. if the hypothesis of parallel trend holds, then the reduction of agency cost of iron cock company will only occur after the mandatory dividend policy, and there should be no significant difference between the change trend of the experimental group and the controlling group before that. the test of parallel trend hypothesis can also eliminate the problem of self-selection in did regression to some extent. can mandatory dividend policy reduce… 81 table 3. equilibrium trend hypothesis test variable 2010 2011 2012 2013 2014 2015–2017 agent i -0.006 (-1.24) -0.006 (-1.16) -0.016*** (-3.37) -0.012*** (-2.57) -0.011** (-2.26) -0.016*** (-4.24) controlling variable control control control control control control year control control control control control control industry control control control control control control n 23129 23129 23129 23129 23129 23129 note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 s o u r c e : author’s calculation based upon the great intelligence database in china. according to table 3, we can see that the coefficients of before2 and before1 before the policy are not significant, that is to say, there is no significant difference in agency costs before the policy. however, in the current year, the year after the policy and the remaining three years after the policy, the coefficient of after2 is 1%. only in the two years after the policy, the level of after2 is 5%. that is, after the policy, the proxy cost decreases significantly. therefore, the parallel trend assumption required by the double difference model is satisfied. 2. definition and description of variables (1) explained variables agent cost. referring to wei zhihua, wu yuhui and li changqing (2012), the agency cost rate (agent, management cost/operating income) was used to measure the agency cost between shareholders and managers. that is to say, the higher the management fee rate is, the higher the agency cost of listed companies is. (2) explanation variables and control variables the mandatory dividend policy (law) was proposed on november 9, 2011, so the mandatory dividend policy (after 2012, the value is 1, otherwise 0). for the control variables, using the existing literature for reference, this paper regards qin hailin, zhang jingxu82 asset-liability ratio (lev), profitability (roe), large shareholder shareholding ratio (sh1), enterprise asset investment (capex), year and industry dummy variables as control variables. specific definitions and calculations of each variable are shown in table 3. table 4. variable definition measure agent treat div law roe lev sh1 roa firmage cash bps capex retained gem soe dual year industry agent cost subgroup variable cash dividend per share policy variable profitability level asset-liability ratio asset-liability ratio shareholding ratio of the largest shareholder profitability company age internal cash flow net asset value per share capital expenditure retained earnings per share company’s plate the nature of enterprise property rights integration of two posts year variable industry variable management expenses compared to operating income when the enterprise does not pay dividends for three consecutive years, the value is 1, that is, iron cock company; otherwise, it is 0. cash dividend per share dummy variables, 1 before 2012, or 0 return on net assets asset-liability ratio number of shares held by the largest shareholder/total equity return on total assets the natural logarithm of the established years holding for cash, i.e. cash and its equivalents/total assets net assets/total equity cash/total assets paid for acquisition and construction of fixed assets, intangible assets and other long-term assets retained earnings/total equity when the enterprise is gem, the value is 1; otherwise it is 0. when the enterprise is a state-owned enterprise, the value is 1; otherwise, it is 0. the value of dummy variable is 1 when the chairman and general manager are the same person; otherwise, it is 0. time variables from 2007 to 2017 the cscr industry code sets dummy variables, 1-18 industry classifications s o u r c e : author’s collection based upon the great intelligence database in china. 3. descriptive statistics of main variables table 5 is a descriptive statistical analysis of the main variables. during the 11 years, the average dividend distribution of listed companies was only 0.08. this shows that the dividend distribution of listed companies is not enough. the maximum cash dividend per share is 11, which indicates that some companies with high dividends have raised the overall average dividend distribution level. the maximum value of cash to total assets ratio is 0.96, while the minimum value is -0.16, but the average value is 0.18, which indicates that there are two extremes of cash. for cash-rich enterprises, it is easy to generate agen can mandatory dividend policy reduce… 83 cy costs; but for cash-negative enterprises, it means that the operating performance of enterprises is not good. if such companies pay out cash, large shareholders will empty the listed companies. this may result in agency costs. the average value of agency cost is 8%, and its maximum value is 0.99, which means that the management cost accounts for the whole business income. this shows that the agency cost of listed companies is higher. the average share-holding ratio of the first largest shareholder is 36%, which indicates that the listed companies in china are not decentralized shareholders. table 5. descriptive statistics of main variables variable n mean sd p50 min max agent div 36135 36135 0.08 0.08 0.08 0.18 0.07 0 0 0 0.99 11 roa 30595 0.10 0.09 0.08 -0.77 1.79 roe 30468 0.14 0.24 0.11 -28.29 11.81 lev 30550 0.44 0.20 0.44 0 1 sh1 23815 0.36 0.15 0.34 0 1 bps 30483 4.33 4.14 3.60 -0.09 302.7 capex 30326 0.06 0.06 0.05 0 0.68 sretained 30571 1.69 3.35 1.24 -17.78 301.7 dual 36135 0.30 0.46 0 0 1 cash 30330 0.18 0.15 0.14 -0.16 0.96 firmage 36135 2.93 0.30 2.94 1.10 4.09 soe 36135 0.30 0.46 0 0 1 gem 36135 0.22 0.41 0 0 1 industry 36135 12.78 4.28 15 1 18 s o u r c e : author’s calculation based upon the great intelligence database in china. 4. data sources this paper chooses a-share companies in shanghai and shenzhen stock exchanges from 2007 to 2017 as research samples, and carries out the following processing: excluding financial enterprises, st companies, missing data (agency cost missing data and new listed companies in 2018), excluding listed qin hailin, zhang jingxu84 companies with negative ownership rights and interests. a total of 36153 valid samples were obtained. the database used in this paper is from the great intelligence database. the data processing in this paper is completed by stata13.0. at the research time point, due to the mandatory dividend policy proposed on november 9, 2011, in order to examine the impact of the policy shocks, this paper chooses 2012 as the policy deadline, before 2012 as the variable before the policy, after 2012 as the variable analysis after the policy, so as to more accurately examine the impact of the policy. empirical results and analysis this part mainly examines whether mandatory dividend policy has restrained the agency cost before and after the implementation of the policy, and through the analysis of intermediary utility, further studies and analysis find that the mandatory dividend distribution policy can reduce the agency cost of enterprises. 1. preliminary testing of dividend willingness and dividend level of listed companies table 6 the dividend distribution of a-share enterprises in shanghai and shenzhen stock exchanges from 2007 to 2017 shows that the number of dividendsharing enterprises as a whole is increasing year by year. but before 2015, the number of dividend-sharing enterprises is relatively small, and after 2016, the proportion of dividend-sharing has increased to 70%, 80%, indicating that the mandatory dividend policy has a very significant effect only after 2015. from the proportion of dividends, although the level of dividends increased, dividends only accounted for about 30% of net profit, of which the dividend payment rate in the 2012 policy period was 41% higher. at this time, because the policy had just been introduced, listed companies had the suspicion of catering to the regulatory authorities. in a word, the willingness to pay dividends of chinese listed companies is rising, but the dividend level is not very high. therefore, hypothesis 1 is proved. can mandatory dividend policy reduce… 85 table 6. dividend distribution of a-share enterprises in shanghai and shenzhen from 2007 to 2017 accounting year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 number of dividendsharing enterprises 735 772 932 1230 1521 1686 1772 1852 1899 2326 2675 the proportion of dividend-sharing enterprises 21 23 28 37 45 50 53 55 56 69 80 mean cash dividend per share 0.16 0.15 0.16 0.2 0.18 0.16 0.14 0.15 0.14 0.16 0.18 mean cash dividend/ net profit 0.37 0.43 0.36 0.35 0.35 0.41 0.39 0.36 0.37 0.35 0.36 s o u r c e : author’s calculation based upon the great intelligence database in china. 2. the effect of mandatory dividend policy to agency cost in order to test the inhibitory effect of mandatory dividend policy on agency cost of the experimental group and the control group, according to did model (1), the effect of policy implementation on agency cost of the company was observed to test hypothesis 2. the estimated results of the double difference model of agency cost difference between the experimental group and the control group are shown in table 7. table 7 reports the regression results of the mandatory dividend policy to suppress agency costs of iron cock company. column (1) is a simple doubledifference model with law*treatment coefficient of -0.0043 and significant at 1% level, which shows that the mandatory dividend policy significantly reduces the agency cost of iron cock company. on this basis, we continue to introduce other control variables at the corporate level, namely, asset-liability ratio (lev), net assets per share (bps), the largest shareholder shareholding ratio (sh1), capital expenditure (capex) and retained earnings per share (sretained). the regression results show that the significance of law * treatment has not changed, but the coefficient has further doubled. on the basis of column (2), we further introduce the situation of two-position integration (dual), firm age, cash f low, property right nature (seo) and gem, and find that the coefficient of law * treatment is – 0.0117 and significant at 1% level. among them, the combination of two positions, the company’s internal cash and the company’s establishment years will significantly increase the agency cost of the enterprise, qin hailin, zhang jingxu86 that is, the concurrent appointment of the general manager and the chairman of the board of directors indicates that the general manager has greater rights, and opportunistic behavior will occur at this time; the company’s internal cash f low will also increase the agency cost of the company, after all, sufficient cash can ensure that opportunistic behavior has a definite purpose. if the company is established for a long time, its internal interests will be solidified easily, which will further increase the agency cost. in conclusion, the introduction of the mandatory dividend policy in 2012 has indeed reduced the agency cost of iron cock. table 7. regression result about mandatory dividend policy reducing agency cost equation (1) equation (2) equation (3) variables agent agent agent law*treat -0.0043** -0.0092*** -0.0117*** (-2.4287) (-3.9710) (-5.0862) treat 0.0141*** 0.0167*** 0.0175*** (9.6071) (8.3261) (8.7498) law 0.0188*** 0.0157*** 0.0142*** (9.2095) (6.6637) (5.9801) roe -0.0200*** -0.0276*** -0.0287*** (-12.4464) (-14.6638) (-15.3697) lev -0.1055*** -0.0902*** (-44.7019) (-33.9950) sh1 -0.0475*** -0.0448*** (-16.4005) (-15.1244) bps -0.0016*** -0.0023*** (-6.8233) (-9.6156) capex -0.0082 -0.0061 (-0.9536) (-0.7018) sretained -0.0022*** -0.0012*** (-5.7340) (-3.1142) dual 0.0091*** can mandatory dividend policy reduce… 87 equation (1) equation (2) equation (3) variables agent agent agent (8.5294) cash 0.0216*** (5.9857) firmage 0.0035* (1.8419) soe 0.0020* (1.9084) gem 0.0211*** (15.5302) constant 0.0806*** 0.1660*** 0.1442*** (26.7714) (43.1766) (20.2600) year industry control control control control control control observations 30,468 22,800 22,799 r-squared 0.1743 0.2600 0.2728 f 214.2 228.6 213.4 note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. to get net effect of mandatory dividend on experimental group and controlling group, the study adopts difference-in-difference model to estimate average difference of agency cost for the above group separately, the result is shown in table 8. from table 8, we can see that the average agency cost of the control group is 0.134, and that of the experimental group is 0.154. the difference is 0.019, which shows that there is a significant difference between the two groups at the 1% level. the agency cost of the experimental group is higher. however, after the introduction of mandatory dividend policy, the average agency cost of the experimental group was 0.156, while that of the control group increased to 0.15. at this time, the average agency cost of the experimental group is almost the same as that of the control group, which shows that table 7. regression result… qin hailin, zhang jingxu88 the mandatory dividend policy significantly reduces the agency cost of “iron cock” company by improving the corporate governance level. finally, the result of double difference is -0.013 (significant at 1%). thus, the mandatory dividend policy reduced the average agency cost of the experimental group by 1.3% compared with the control group. therefore, hypothesis 2 is proved. table 8. did result of mandatory dividend and agency cost variable time 0 time 1 did control group experiement group difference controlling group experiement group difference agency cost 0.134 0.154 0.019*** (8.12) 0.150 0.156 0.006*** (4.89) -0.013*** (4.57) note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. 3. mandatory dividend policy and agency cost: re-test based on dividend payment rate and plate difference in order to obtain more in-depth suppression of mandatory dividend policy on agency costs of enterprises with different dividend levels and different sectors. this paper dividends the samples according to the dividend payment criteria of micro-dividend companies and listed companies. the regression results of the specific grouping did are shown in table 9. table 9. did subgroup for mandatory dividend and agency cost micro dividend company policy dividend company small and medium board company main board company before the policy after the policy before the policy after the policy before the policy after the policy before the policy after the policy controlling group 360 492 5781 9820 1767 3549 3864 5073 experimental group 22 183 1323 4818 107 884 1209 2846 total 382 675 7104 14638 1874 4433 5073 7919 s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. can mandatory dividend policy reduce… 89 from the perspective of dividend payment rate, this paper observes the restraining effect of policy on agency cost. through the table 10 (2) and (3), we can find that the double difference of agency cost of normal dividend company is – 0.013 (1% level is significant), which shows that the mandatory dividend policy can reduce the agency cost of normal dividend company very well. the economic logic behind it: for the cash dividend distribution according to the requirements and the specific situation of the company, we can reduce the disposable cash f low of the enterprise, thereby reducing agency costs and improving corporate governance mechanism. however, for micro-dividend companies, the double difference is – 0.003 (not significant), and there is a “regulatory paradox” with countermeasures under the policy. since listed companies dare not openly antagonize the sfc, the company will have to submit, but the mandatory dividend policy seriously violates the company’s willingness to pay dividends, so the company will adopt a policy of passive resistance, that is, the mandatory dividend-sharing causes listed companies to choose a dividend per share that tends to zero, so that the regulatory authorities will not say a word. however, the cash dividend payment rate is less than 0.1, which is similar to no dividend, so it will not have any impact on the free cash f low of enterprises. therefore, for micro-dividend companies, the mandatory dividend policy does not reduce the agency costs of such enterprises, so hypothesis 3 is proved. secondly, it examines the effect of policies on agency costs from different sectors. the results of grouping did in different sectors are as shown in table 11. the mandatory dividend policy has better effect on restraining agency costs of listed companies on the motherboard, but has no significant effect on small and medium-sized boards. the main reason is that the company listed on the motherboard has been established for a long time, mainly by stateowned enterprises, and the agency cost is more serious than that of small and medium-sized boards. therefore, the effect of mandatory dividend policy to reduce the agency cost of listed companies on the motherboard is remarkable. for smes listed companies, most of them are in the growth of enterprise life cycle. at this time, it is important to maintain the internal retained earnings and keep the momentum of development, rather than to give back to investors. therefore, the restraint of mandatory dividend policy on agency costs of smes listed companies is not significant. qin hailin, zhang jingxu90 table 10. did result about mandatory dividend effect agency cost from the perspective of dividend level and boards micro dividend normal dividend main board sme board agency cost 0.003 (0.21) -0.013*** (4.52) -0.009*** (2.75) -0.001 (0.22) note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. in short, through the heterogeneity analysis of enterprises, we can know that the mandatory dividend policy has better effect on reducing agency costs for listed companies on the motherboard and those with normal dividends, but it has no significant effect on restraining agency costs for listed companies with micro-dividends and small and medium-sized boards. 4. mandatory dividend policy and agency cost: an analysis of mediation effect this paper holds that the return rate of total assets of enterprises is the intermediary index of reducing agency cost by mandatory dividend policy. specifically, in order to achieve a long-term stable dividend target, executives have to work hard and look for high-yield investment projects, that is, executives will work hard so that the company can achieve profitability and continuously improve the dividend level, thereby improving the returns of shareholders and executives. in this way, not only investors ‘cash dividends are guaranteed, but also in order to provide cash f low for cash dividends, company executives have to work hard, so the company’s total asset return rate will increase. increasing returns on total assets will be paid to shareholders in the form of cash dividends, not all of which will be translated into private gains of executives. therefore, mandatory dividend policy can partly mediate agency costs of iron cock company through total assets returns. to test the intermediary effect of the return on total assets of an enterprise, the study designs model (16)–(18) to investigate the mediating role of testing return rate of total assets this paper holds that the return rate of total assets of enterprises is the intermediary index of reducing agency cost by mandatory dividend policy. specifically, in order to achieve a longterm stable dividend target, executives have to work hard and look for high-yield investment projects, that is, executives will work hard so that the company can achieve profitability and continuously improve the dividend level, thereby improving the returns of shareholders and executives. in this way, not only investors 'cash dividends are guaranteed, but also in order to provide cash flow for cash dividends, company executives have to work hard, so the company's total asset return rate will increase. increasing returns on total assets will be paid to shareholders in the form of cash dividends, not all of which will be translated into private gains of executives. therefore, mandatory dividend policy can partly mediate agency costs of iron cock company through total assets returns. to test the intermediary effect of the return on total assets of an enterprise, the study designs model (16)-(18) to investigate the mediating role of testing return rate of total assets ������� � � + ������� � ����� + ��������� + ������� + ∑��������� + ���（16） ����� � � + ������� � ����� + ��������� + ������� + ∑��������� + ��� （17） ������� � � + ������� + γ������ � ����� + ��������� + ������� + ∑��������� + ��� (18) among them, roa means turnover. according to the test procedure of intermediary effect, model (16) is used to test the effect of mandatory dividend policy on agency cost to see if 1 is significant. if it is, model(17) and model(18) will be tested. under the condition that 4 和 are significant, if 1 significant, it shows that the total asset return partly mediates the mandatory dividend policy to restrain agency costs. among, roa means turnover. as shown in table 11, when the agent in column (1) is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of "iron cock" enterprises. when the agent in the column（2） is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of the "iron cock" enterprises. when the agent is the explanatory variable in the column (3), the coefficient of law * treatment is still significantly negative after controlling the intermediate variable, indicating that the total return on assets partly mediates the mandatory dividend policy to reduce agency costs. in addition, in order to ensure the reliability of the results, sobel z test is conducted again for the mediation effect. sobel z's statistic is -4.329, which shows that the intermediary effect (16) can mandatory dividend policy reduce… 91 this paper holds that the return rate of total assets of enterprises is the intermediary index of reducing agency cost by mandatory dividend policy. specifically, in order to achieve a longterm stable dividend target, executives have to work hard and look for high-yield investment projects, that is, executives will work hard so that the company can achieve profitability and continuously improve the dividend level, thereby improving the returns of shareholders and executives. in this way, not only investors 'cash dividends are guaranteed, but also in order to provide cash flow for cash dividends, company executives have to work hard, so the company's total asset return rate will increase. increasing returns on total assets will be paid to shareholders in the form of cash dividends, not all of which will be translated into private gains of executives. therefore, mandatory dividend policy can partly mediate agency costs of iron cock company through total assets returns. to test the intermediary effect of the return on total assets of an enterprise, the study designs model (16)-(18) to investigate the mediating role of testing return rate of total assets ������� � � + ������� � ����� + ��������� + ������� + ∑��������� + ���（16） ����� � � + ������� � ����� + ��������� + ������� + ∑��������� + ��� （17） ������� � � + ������� + γ������ � ����� + ��������� + ������� + ∑��������� + ��� (18) among them, roa means turnover. according to the test procedure of intermediary effect, model (16) is used to test the effect of mandatory dividend policy on agency cost to see if 1 is significant. if it is, model(17) and model(18) will be tested. under the condition that 4 和 are significant, if 1 significant, it shows that the total asset return partly mediates the mandatory dividend policy to restrain agency costs. among, roa means turnover. as shown in table 11, when the agent in column (1) is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of "iron cock" enterprises. when the agent in the column（2） is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of the "iron cock" enterprises. when the agent is the explanatory variable in the column (3), the coefficient of law * treatment is still significantly negative after controlling the intermediate variable, indicating that the total return on assets partly mediates the mandatory dividend policy to reduce agency costs. in addition, in order to ensure the reliability of the results, sobel z test is conducted again for the mediation effect. sobel z's statistic is -4.329, which shows that the intermediary effect (17) this paper holds that the return rate of total assets of enterprises is the intermediary index of reducing agency cost by mandatory dividend policy. specifically, in order to achieve a longterm stable dividend target, executives have to work hard and look for high-yield investment projects, that is, executives will work hard so that the company can achieve profitability and continuously improve the dividend level, thereby improving the returns of shareholders and executives. in this way, not only investors 'cash dividends are guaranteed, but also in order to provide cash flow for cash dividends, company executives have to work hard, so the company's total asset return rate will increase. increasing returns on total assets will be paid to shareholders in the form of cash dividends, not all of which will be translated into private gains of executives. therefore, mandatory dividend policy can partly mediate agency costs of iron cock company through total assets returns. to test the intermediary effect of the return on total assets of an enterprise, the study designs model (16)-(18) to investigate the mediating role of testing return rate of total assets ������� � � + ������� � ����� + ��������� + ������� + ∑��������� + ���（16） ����� � � + ������� � ����� + ��������� + ������� + ∑��������� + ��� （17） ������� � � + ������� + γ������ � ����� + ��������� + ������� + ∑��������� + ��� (18) among them, roa means turnover. according to the test procedure of intermediary effect, model (16) is used to test the effect of mandatory dividend policy on agency cost to see if 1 is significant. if it is, model(17) and model(18) will be tested. under the condition that 4 和 are significant, if 1 significant, it shows that the total asset return partly mediates the mandatory dividend policy to restrain agency costs. among, roa means turnover. as shown in table 11, when the agent in column (1) is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of "iron cock" enterprises. when the agent in the column（2） is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of the "iron cock" enterprises. when the agent is the explanatory variable in the column (3), the coefficient of law * treatment is still significantly negative after controlling the intermediate variable, indicating that the total return on assets partly mediates the mandatory dividend policy to reduce agency costs. in addition, in order to ensure the reliability of the results, sobel z test is conducted again for the mediation effect. sobel z's statistic is -4.329, which shows that the intermediary effect this paper holds that the return rate of total assets of enterprises is the intermediary index of reducing agency cost by mandatory dividend policy. specifically, in order to achieve a longterm stable dividend target, executives have to work hard and look for high-yield investment projects, that is, executives will work hard so that the company can achieve profitability and continuously improve the dividend level, thereby improving the returns of shareholders and executives. in this way, not only investors 'cash dividends are guaranteed, but also in order to provide cash flow for cash dividends, company executives have to work hard, so the company's total asset return rate will increase. increasing returns on total assets will be paid to shareholders in the form of cash dividends, not all of which will be translated into private gains of executives. therefore, mandatory dividend policy can partly mediate agency costs of iron cock company through total assets returns. to test the intermediary effect of the return on total assets of an enterprise, the study designs model (16)-(18) to investigate the mediating role of testing return rate of total assets ������� � � + ������� � ����� + ��������� + ������� + ∑��������� + ���（16） ����� � � + ������� � ����� + ��������� + ������� + ∑��������� + ��� （17） ������� � � + ������� + γ������ � ����� + ��������� + ������� + ∑��������� + ��� (18) among them, roa means turnover. according to the test procedure of intermediary effect, model (16) is used to test the effect of mandatory dividend policy on agency cost to see if 1 is significant. if it is, model(17) and model(18) will be tested. under the condition that 4 和 are significant, if 1 significant, it shows that the total asset return partly mediates the mandatory dividend policy to restrain agency costs. among, roa means turnover. as shown in table 11, when the agent in column (1) is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of "iron cock" enterprises. when the agent in the column（2） is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of the "iron cock" enterprises. when the agent is the explanatory variable in the column (3), the coefficient of law * treatment is still significantly negative after controlling the intermediate variable, indicating that the total return on assets partly mediates the mandatory dividend policy to reduce agency costs. in addition, in order to ensure the reliability of the results, sobel z test is conducted again for the mediation effect. sobel z's statistic is -4.329, which shows that the intermediary effect (18) among them, roa means turnover. according to the test procedure of intermediary effect, model (16) is used to test the effect of mandatory dividend policy on agency cost to see if β1 is significant. if it is, model (17) and model (18) will be tested. under the condition that β4和β are significant, if γ1 significant, it shows that the total asset return partly mediates the mandatory dividend policy to restrain agency costs. among, roa means turnover. as shown in table 11, when the agent in column (1) is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of “iron cock” enterprises. when the agent in the column (2) is the explanatory variable, the compulsory dividend policy significantly reduces the agency cost of the “iron cock” enterprises. when the agent is the explanatory variable in the column (3), the coefficient of law * treatment is still significantly negative after controlling the intermediate variable, indicating that the total return on assets partly mediates the mandatory dividend policy to reduce agency costs. in addition, in order to ensure the reliability of the results, sobel z test is conducted again for the mediation effect. sobel z’s statistic is -4.329, which shows that the intermediary effect is significant at the level of 1%. that is to say, the rate of return on total assets of enterprises is indeed an important way to reduce the agency cost of “iron cock” enterprises by mandatory dividend policy. table 11. the mediating effect of total asset return rate on mandatory dividend equation(1) equation(2) equation(3) variables agent roa agent roa -0.1923*** (-24.0228) law*treat -0.0117*** 0.0281*** -0.0063*** (-5.0862) (14.8830) (-2.7667) treat 0.0175*** -0.0172*** 0.0142*** (8.7498) (-10.5316) (7.1654) qin hailin, zhang jingxu92 equation(1) equation(2) equation(3) variables agent roa agent law 0.0142*** -0.0366*** 0.0072*** (5.9801) (-18.8557) (3.0291) roe -0.0287*** 0.1141*** -0.0068*** (-15.3697) (74.6436) (-3.2953) lev -0.0902*** -0.0554*** -0.1008*** (-33.9950) (-25.5564) (-37.9515) sh1 -0.0448*** 0.0255*** -0.0399*** (-15.1244) (10.5209) (-13.6062) bps -0.0023*** -0.0051*** -0.0033*** (-9.6156) (-26.0049) (-13.6759) capex -0.0061 0.0891*** 0.0111 (-0.7018) (12.6207) (1.2946) sretained -0.0012*** 0.0157*** 0.0018*** (-3.1142) (50.1127) (4.5806) dual 0.0091*** -0.0003 0.0090*** (8.5294) (-0.3873) (8.5750) cash 0.0216*** 0.0617*** 0.0335*** (5.9857) (20.8784) (9.2971) firmage 0.0035* -0.0052*** 0.0025 (1.8419) (-3.3584) (1.3299) soe 0.0020* -0.0118*** -0.0003 (1.9084) (-13.9548) (-0.2885) gem 0.0211*** 0.0005 0.0212*** (15.5302) (0.4644) (15.7994) constant 0.1442*** 0.1184*** 0.1669*** (20.2600) (20.3408) (23.5409) table 11. the mediating effect… can mandatory dividend policy reduce… 93 equation(1) equation(2) equation(3) variables agent roa agent year industry control control control control control control observations 22,799 22,799 22,799 r-squared 0.2728 0.4202 0.2908 f 213.4 412.3 227.6 note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. 5. robustness test (1) using lag variables in order to test the robustness of the conclusion, the least square regression method is used to overcome the endogenous problem in the experimental group and the control group by using the control variable with one lag period. as shown in table 12, the regression results of column (1) and column (2) show that the coefficient of law * treatment is significantly positive at 1% significance level, which is consistent with the above conclusions. moreover, because the data span chosen in this paper is from 2007 to 2017, and the data span is large, there may be missing agency cost data. therefore, this paper chooses deleted data model and uses control variables with a lag of one period to carry out tobit regression between the experimental group and the control group. specific results, such as column 11 (3) and column 4 (), show that the coefficient of law * treatment is significantly positive at the 1% significance level, which is consistent with the above conclusions. therefore, the conclusion of this paper passes the robustness test. table 11. the mediating effect… qin hailin, zhang jingxu94 table 12. robustness test equation(2) equation(4) method ols tobit law*treat -0.0083*** -0.0077*** (-2.7534) (-2.8779) treat 0.0165*** 0.0160*** (6.4080) (6.7749) law 0.0045* 0.0030 (1.8292) (1.2130) l.roe -0.0345*** -0.0342*** (-5.6744) (-9.5891) l.lev -0.0948*** -0.0951*** (-27.6810) (-31.9557) l.sh1 -0.0432*** -0.0430*** (-13.5270) (-13.0720) l.bps -0.0022*** -0.0022*** (-7.8117) (-8.1324) l.capex 0.0019 0.0017 (0.2090) (0.1823) l.mglcsy -0.0010* -0.0012** (-1.8598) (-2.5081) l.cash 0.0281*** 0.0280*** (5.7413) (6.9551) l.firmage 0.0045** 0.0042* (1.9704) (1.9528) soe 0.0005 0.0005 (0.4958) (0.3967) gem 0.0193*** 0.0193*** (10.5119) (12.2623) dual 0.0099*** 0.0099*** (7.6190) (8.2567) can mandatory dividend policy reduce… 95 equation(2) equation(4) constant 0.1450*** 0.1460*** (16.8972) (18.0257) industry year control control control control observa 19,615 19,615 f/ chi2 131.7 6080 note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. (2) eliminate the impact of the financial crisis the subprime mortgage crisis, which began in 2007, will inevitably have an impact on the operation of listed companies in china. however, the financial crisis will not only affect listed companies, but also f luctuate investors’ investment confidence. furthermore, investor panic will reduce investors’ valuation of listed companies, so the investment and financing of listed companies will be involved, which will also lead to changes in the dividend-sharing strategy of enterprises. therefore, in order to eliminate the impact of the financial crisis on the conclusions of this study, the data of 2008 and 2009 are excluded and regressed, and the grouping of the two-year samples is excluded as shown in table 13. table 13. did subgroup before policy after policy total controlling group 4051 10312 14368 experimental group 837 5001 5838 total 4888 15313 s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. table 12. robustness… qin hailin, zhang jingxu96 from table 13, we can see that the average agency cost of the control group is 0.134, the average agency cost of the experimental group is 0.152, and the difference is 0.018 before the mandatory dividend policy. the difference between the two groups is significant at the level of 1%. the agency cost of the experimental group is higher. however, after the introduction of mandatory dividend policy, the average agency cost of the experimental group was 0.151, while that of the control group increased to 0.157. at this time, the average agency cost of the experimental group is almost the same as that of the control group. finally, the result of double difference is -0.011 (significant at 1%). thus, the mandatory dividend policy reduced the average agency cost of the experimental group by 1.3% compared with the control group. therefore, it shows that the mandatory dividend policy significantly reduces the agency cost of iron cock company by improving the corporate governance level. this is consistent with the conclusions of this study. table 14. did about mandatory dividend and agency cost variable time 0 time 1 difference -in-differencecontrol group experimental group difference control group experimental group difference agency cost 0.134 0.152 0.018*** (6.29) 0.151 0.157 0.006*** (4.80) -0.011*** (3.59) note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. s o u r c e : author’s regression based upon the great intelligence database in china, using stata 14.0. research conclusions and implication 1. research conclusions this paper takes guo shuqing, the cscr chairman in november 2011, as the background, and uses the sample of listed companies in shanghai and shenzhen stock exchanges from 2007 to 2017 to study the restraint of mandatory dividend policy on agency costs of enterprises. the hypothesis 1-3 is confirmed by theoretical inference, model analysis and empirical test. to this end, the following specific conclusions can be drawn: firstly, mandatory dividend policy will not only undoubtedly increase the willingness of listed companies to pay dividends, but also, more importantly, it can mandatory dividend policy reduce… 97 can significantly restrain the agency costs of listed companies. specifically, the mandatory dividend policy invisibly increases the expected return of shareholders and potential investors, which can not only motivate them to increase their stock holdings, but also change the balance between supply and demand of the company’s stock, thus leading to the rise of stock prices. obviously, this will ultimately motivate company executives to work harder. at the same time, executives’due diligence must increase the reward rate of investment projects, which naturally increases cash dividends and cash f low. therefore, the mandatory dividend policy has constructed a virtuous circle mechanism between senior managers and shareholders, that is, mandatory dividend policy – cash dividend – shareholder ownership – stock price rise – executive hard work – the necessary rate of return for investment projects – sufficient cash f low – cash dividend payable. secondly, the mandatory dividend policy reduces the agency cost of listed companies by changing the total asset return rate. this intermediary effect is completely consistent with the conclusion of the game model, that is, multiple incentives of shareholder ownership, stock price f luctuation and mandatory dividend policy, prompt executives to work hard, improve the expected return on investment projects, and ultimately make the total asset return rate of the company continue to rise, and increase the abundant cash f low for cash dividend. of course, this will also objectively reduce the agency cost of the company. finally, although the mandatory dividend policy reduces the agency cost of listed companies in general, the inhibiting effect shows significant heterogeneity, that is, the expected policy effect is unsatisfactory at different levels, and serious deviations have taken place. specifically, the mandatory dividend policy has a significant inhibitory effect on agency costs of listed companies on the motherboard and normal dividend companies, while for small dividends and small and medium-sized listed companies, the inhibitory effect of agency costs is not significant. 2. policy recommendation according to the conclusions of the study, the following suggestions are put forward: firstly, since the mandatory dividend policy can suppress the agency cost of listed companies in general, it is suggested that the sfc strictly implement the mandatory dividend policy, especially to make clear the punishment measures qin hailin, zhang jingxu98 for those who refuse to implement it. in the implementation of the policy, many listed companies secretly display their positions, follow the falsity of the sfc, and passively resist the mandatory dividend policy. this is not only a challenge to the seriousness of the policy itself, but also a disregard and contempt for the rights and interests of small and medium-sized shareholders. therefore, the cscr should not only introduce operable policies, but also take strict measures to implement these policies vigorously. secondly, considering the heterogeneity of enterprises, it is suggested that the sfc abandon the one-size-fits-all policy and design different dividend standards according to different types of companies. in order to avoid the “regulatory paradox”, the sfc should take full account of the growth of listed companies, size and industry differences, and treat them differently, not in a one-size-fits-all manner. that is to say, listed companies with higher agency costs should increase their dividend-sharing ratio, such as state-owned enterprises and state-owned enterprises; for growing enterprises or enterprises with high r&d investment, the dividend-sharing ratio should be reduced accordingly. at the same time, actively guide listed companies to pay more attention to the protection of the interests of small and medium-sized investors through dividend policy. thirdly, in order to avoid the tragic fate of becoming a leek, it is suggested that small and medium-sized investors should actively use the signaling role of cash dividend, dynamically adjust the stock portfolio, consciously vote by foot, and effectively monitor the working attitude and behavior choice of senior managers. after all, a continuous and stable cash dividend is often a signal of the stable financial and operating conditions of listed companies; conversely, the long-term unreasonable non-dividend distribution of listed companies may also be a signal of financial data fraud, internal control and tunneling companies. therefore, the dividend distribution of listed companies is a good signal to the capital market, and the majority of small and medium-sized shareholders can optimize their stock asset allocation accordingly. at the same time, small and medium-sized shareholders should strive to be close to institutional investors, because institutional investors can monitor the overall operation of enterprises on behalf of small and medium-sized shareholders, and supervise the further improvement of corporate governance. fourthly, it is suggested that executives of listed companies should correctly understand the mandatory dividend policy, take this as an opportunity, dividend-sharing according to law, and establish a benign interactive con can mandatory dividend policy reduce… 99 tractual relationship with shareholders. since the company law determines the obligation of dividend distribution of listed companies in the form of law, the dividend distribution of listed companies should be duty-bound. now the mandatory dividend policy rectifies the long-term non-dividend-sharing of listed companies. executives should take into account the general situation and strictly implement the mandatory 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(2012). is cash dividend a tool of “tunneling” or a mask of “tunneling”? empirical evidence from chinese listed companies. journal of management engineering, 26(02), 77–84. date of submission: april 21, 2022; date of acceptance: november 21, 2022. * contact information (corresponding author): geeta.singh25august@gmail.com, ibs hyderabad (icfai foundation for higher education), hyderabad, india, phone: 8096508380; orcid id: https://orcid.org/0000-0002-1210-2229. ** contact information: kabonlineonline09@gmail.com, ibs hyderabad (icfai foundation for higher education), hyderabad, india, phone: 8374127684; orcid id: https:// orcid.org/0000-0002-4672-7657. *** contact information: srikanthyadav444p@gmail.com, ibs hyderabad (icfai foundation for higher education), hyderabad, india, phone: 9703664124; orcid id: https://orcid.org/0000-0003-3176-9675. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 singh, g., bhattacharjee, k., & potharla, s. (2022). a literature survey and bibliometric analysis of the impact of controlling shareholders on dividend policy. copernican journal of finance & accounting, 11(4), 183–202. http://dx.doi.org/10.12775/cjfa.2022.025 geeta singh* icfai business school kaushik bhattacharjee** icfai business school srikanth potharla*** icfai business school a literature survey and bibliometric analysis of the impact of controlling shareholders on dividend policy keywords: dividend policy, controlling shareholders, agency problem, signalling, bibliometric analysis. j e l classification: g3, g20, g35, g32. abstract: we conduct a systemic review of literature on whether controlling shareholders inf luence firms’ dividend polices. we examine the literature on the linear and http://dx.doi.org/10.12775/cjfa.2022.025 geeta singh, kaushik bhattacharjee, srikanth potharla184184 non-linear association between the equity holding of the controlling shareholders and dividend policy. the review suggests lack of consensus on the role of insiders and controlling shareholders in deciding the firm’s propensity and intensity to pay dividends. finally, we conduct a bibliometric analysis of the research articles referred in this study which suggests that the usa contributes most of the articles examining the dividend policy taking into consideration the ownership structure, with university of chicago being the most relevant affiliation of the authors examining this relation.  introduction introduction the seminal work of miller and modigliani (1961) suggests that dividend is irrelevant for the valuation of a company. they suggest that the only thing impacting firm’s valuation is its earnings, which is a direct result of the company’s investment policy and the future prospects. however, black (1976) argues how a firm paying as much as a half of its earning as dividend can have the same worth as another paying no dividend at all. this famous black’s dividend puzzle tries to answer why a corporation pays dividends. since then, many researchers have addressed this puzzle and provided factors determining the firm’s dividend policy (fama & french, 2001; denis & osobov, 2008; islam, 2018; margono & gantino, 2021). these include firm, industry, sector and country specific determinants of dividend policy. an important firm specific characteristic is its ownership structure, that is, how the equity ownership is divided among different types of shareholders. large shareholders can determine many decisions of the firm, and control the way a firm is run, along with deciding how profits are being distributed among other shareholders (claessens & fan, 2002). early studies on dividend policy have focussed on countries having dispersed ownership and therefore are confined to the role of managers and board of directors. principals can be described as the owners of the firms, the shareholders, whereas the term agent is generally used for the managers who enter into a contract with the principal to perform some services on their behalf. this includes delegating the decision-making authority to such agent. however, when these two contractual parties are utility maximisers, one can believe that the agent may not always act in the best interest of the principal, the owners of the firm (jensen & meckling, 1976). the separation of ownership and management leads to shareholder-manager or principal-agent conf licts (referred as type i or vertical agency problems). however, in countries like india, japan, germany, taiwan, etc., the concentrated ownership and control is the rule rather than an exception, such that there is little separation of ownership from con a literature survey and bibliometric analysis… 185185 trol. therefore, the nature of the agency problem changes from conf licts between agents and principals to conf licts between two categories of principals (referred as type ii or horizontal agency problems) (roe, 2004; morck & yeung, 2004). the large shareholders, especially the family owners, can extract private benefits from their control over the firm in many ways such as deriving more salaries, taking top managerial positions and board seats for themselves (shleifer & vishny, 1997). these controlling shareholders determine the way profits are treated. it is worth noticing that outside shareholders are entitled to certain rights corresponding to their equity ownership, they still face the ambiguity of an entrenched controlling owner opportunistically depriving them of their rights through various means. jensen (1986) proposes the free cash f low (fcf) hypothesis, linking dividend payment to agency problem, where he argues that in absence of profitable investment opportunities, managers of a firm can use free cash f low for personal gains, and therefore, shareholders prefer to have dividends, especially when information asymmetry is high in the firm. thus, disgorging cash in the form of dividend is a mechanism of reducing agency conf licts which is good for the firm as a whole. thus, it is evident that the presence of controlling shareholders can impact the dividend policy of the firm (agrawal & jayaraman, 1994; gonzalez, molina, pablo & rosso, 2017; sener & selcuk, 2019). various studies have examined literature on different determinants of dividend policy; however, this article is the first one to focus on the role of controlling shareholders impacting the dividend policy. the objective of the study is to find the gaps in the existing literature on the relation between equity holding of the controlling shareholders and dividend policy. further, we also conduct the bibliometric analysis, and find that the research in this area is limited to the usa, italy, australia, canada, etc., and thus, there is need to examine the relation between the role played by controlling shareholders and firm’s dividend policy. the findings of this review suggest a dearth of research studying the association of dividends and ownership structure in a cross-country scenario. further, the difference in the firm’s dividend policy in terms of cash dividend and share purchase with respect to the ownership structure also needs more investigation. one of the limitations of this study is that we do not take into account the other shareholders like institutional investors, financial institutions like banks, retail, and the corporate investors as an important category of shareholders impacting the firms’ decision of dividend distribution. geeta singh, kaushik bhattacharjee, srikanth potharla186186 the rest of the paper is organized as follows: section 2 describes the methodology used. section 3 gives detailed systematic survey of literature on the link between controlling shareholders of the firm and its dividend payout. we conduct bibliometric analysis in section 4. section 5 is the discussion and results of the review, followed by conclusion, limitations and scope of future research in section 6. methodologymethodology in this study, we perform a systematic literature review of the effect of controlling shareholders on the payout policy of the firms. ‘systematic’ refer to the way we employ secondary research approach. it is established that determining criteria for identifying the suitability and quality of reference articles in qualitative research is a challenging task (engel & kuzel, 1992). therefore, in this paper, we conduct systematic searches including published articles in journals indexed in bibliographic database of the scopus, which is a reliable source for many bibliometric studies (donthu, kumar, mukherjee, pandey & lim, 2021). the systematic research begins with searching for all the articles with relevant search terms in scopus database as title-abs-key (“controlling shareholders” and “dividend policy” or “dividend”). the search results in 98 articles. however, the search of title-abs-key (“ownership structure” and “dividend policy” or “dividend”) provides 220 documents. tranfield, denyer and smart (2003) suggest that management researchers generally depend on the implicit quality ranking of a journal, instead of employing quality assessment criteria for papers. thus, in the second step, out of these 318 articles, we filter the articles on the basis of the quality of journals by make use of abdc listing. this step ensures that articles are subjected to critical review process, thus providing good theoretical as well as empirical evidence for the relation between firm’s insiders’ ownership and payout policy. furthermore, our main focus is on the role of controlling shareholders; we take articles showing relation between the controlling shareholder and dividend policy. the last filter for these articles is applied on the basis of results of these studies. individual studies are shortlisted on the basis of linear and non-linear association between the variables of interest. our final sample for slr includes 31 articles. (please note that for bibliometric analysis, a wider range of articles are taken into account). a literature survey and bibliometric analysis… 187187 review of literaturereview of literature the shareholders of the firm can be broadly categorized as the insiders and outside shareholders. corporate insiders are either the managers or the controlling shareholders, and outsiders are the minority shareholders (la porta, lopez-de-silanes, shleifer & vishny, 2000). firms can have either concentrated ownership or dispersed ownership. in this section, we explore the impact of insiders in both types of firms. empirical evidence of linear relation empirical evidence of linear relation rozeff (1982) reports a negative relation between the insider ownership and dividend payout in the us firms in 1981. he suggests that insiders want less dividends, maybe because of falling in higher tax bracket. agrawal and jayaraman (1994) provide similar results for the us firms in which ownership of insiders is inversely associated with payout level. the authors attribute such relation to the agency cost since the association is more pronounced in all equity firms where debt, as a means of reducing the agency cost, is not available. attig, boubakri, el ghoul and guedhami (2016) examine the dividend policy of family and non-family firms in nine east asian countries. the family members in a family firm are the controlling shareholders and take decisions as per their discretion. this study provides evidence for the presence of agency problem between the insiders and outsiders, as family control is found to be negatively associated with the dividend payout level and dividend increases whereas positively related to dividend decrease and omission. in another cross-country study of 43 countries, ben-nasr (2015) finds that a rise in government’s ownership leads to a decrease in dividend payout in emerging nations having poor shareholder protection. mulyani, singh and mishra (2016) study indonesian firms and find an adverse relation among family control and dividends, in line with the expropriation argument. they posit that controlling family firms prefer lower dividend payout so that they can maintain cash reserve for their use. gonzalez et al. (2017) report an inverse association between the equity holding of the largest stockholder and dividend in six latin american countries. they suggest that such relation is expected in these emerging markets since the insiders can ex geeta singh, kaushik bhattacharjee, srikanth potharla188188 tract private benefits from outside shareholders due to conf lict of interest between the two. in another case of the presence of agency problem in firms with concentrated ownership, harada and nguyen (2011) analyse the impact of ownership concentration on dividend policy. they measure the degree of ownership concentration with the herfindahl index and find it to be negatively associated with the dividend payout, consistent with rent extraction by large shareholders. mancinelli and ozkan (2006) also report that the largest shareholder exerts a negative inf luence on the dividend payout in italian firms. they interpret this association with voting rights such that the more voting rights of the largest shareholders, the greater cash holdings will be, and lesser will be dividend distribution. this leads to the conclusion that insiders have the ability to confiscate from the outside minority investors. in contrast to the negative relation between the controlling shareholders and dividend policy, many studies support a positive association between the two as well. yoshikawa and rasheed (2010) posit a positive relation between the dividend level and family control in small and medium sized japanese firms. they suggest there is no agency problem, rather an alignment in the interest of the family members and other shareholders, such that the amount of dividend payment increases with the increase in the family members’ ownership. balachandran, khan, mather and theobald (2019) examine the impact of insiders on dividend policy in terms of propensity and intensity to pay in australian firms during 2002–2013. they find that insiders’ ownership is positively related to propensity and intensity to pay dividend. the results are supported by the signalling theory, such that higher insider ownership leads to higher dividends to reduce agency costs and to provide quality signals to market participants. family control positively impacts the dividend policy in australian firms, suggesting that families interest line up with the interest of outsiders, at least for dividend payments (setia-atmaja, tanewski & skully, 2009). kuo (2017) studies taiwanese firms during 2000–2012 and finds a direct relation between dividend payments and ratio of control to cash f low rights of the largest shareholder of the firm. companies with higher expropriation risk pay more to commit to outsiders, thereby sending signals and building good reputation. isakov and weisskopf (2015) report a positive association between founding family control and dividend payout in switzerland, attributed to reputation building or signalling hypothesis. further, they also suggest that dividend income is means of increasing family members’ wealth and thus they pay divi a literature survey and bibliometric analysis… 189189 dends to increase their own income. a study on chinese firms by lin, chen and tsai (2017) suggests that the propensity and intensity to pay dividend has negative association with information asymmetry such that dividend payout is not a tool that conveys information in this market. further, state owned firms distribute high dividend as government owns the non-tradable shares and cannot benefit from capital gains through stock prices. thus, the way they get return on these stocks is the dividend income, and hence it creates a positive impact of their ownership on dividend. truong and heaney (2007) find interesting results when they segregate the largest shareholders of the firm as the largest insiders, financial institutions, and the largest government shareholder, and examine their relation with the dividend policy of the firm. with each class of largest insider, financial institution, and government, they report a negative, positive and insignificant relation respectively. the insiders may decide to lower the dividend payout to enhance the corporate resources whereas financial institutions act as a substitute for dividends and thus, increases the dividend payout. empirical evidence of non-linear relationempirical evidence of non-linear relation many researchers argue for the presence of a non-linear relation between the ownership of controlling shareholders and firm’s dividend payout. they suggest that with the change in the degree of ownership, their ability and incentive to expropriate also changes. for example, schooley and barney (1994) observe that equity holding of the ceo, which are considered to be the insiders, at low and high levels is negatively and positively related to dividend yield. they suggest that at the low level of ceo ownership, there is low agency cost and therefore, there is no need to signal the market; however, at high ceo ownership, the agency cost increases, also the firms are under market scrutiny, making him distribute dividends and signal good corporate governance. chen, cheung, stouraitis and wong (2005) document a non-linear association between firm’s ownership concentration and its dividend policy. they find that in small firms of hong kong, at ownership concentration of less than 10 per cent, there is a negative relation with the dividend payout. however, beyond 10 per cent, ownership concentration positively impacts the dividend payout because dividend is a means to extract corporate resources out of the firms. huang, chen and kao (2012) provide support for the non-monotonic relation between the family ownership and dividend payment in taiwanese family geeta singh, kaushik bhattacharjee, srikanth potharla190190 firms. they consider three levels of equity ownership of the family members, at 0 to 10 per cent, more than 10 per cent to less than 20 per cent, and 20 per cent and more; and find that the relation is positive, negative and positive at these levels respectively. the non-monotonic relation between the family ownership and dividend payout is attributed to the agency problem between the insiders and the outside shareholders which arises only when the equity ownership of insiders increases to 20 per cent. thus, when the insiders have ability and incentive to expropriate the outsiders, they decide not to make any dividend payments. similarly, benjamin, wasiuzzaman, mokhtarinia and nejad (2016) investigate the effect of family ownership on dividend payout from the agency costs viewpoint in malaysia. they consider three levels of equity ownership of family at 5 per cent or less, more than 5 per cent but equal to or less than 33 per cent, and more than 33 per cent; and they find the relation at these levels to be negative, positive, and insignificant respectively. such non-linear association between the ownership level and dividend payout is explained through increased agency costs at moderate level of ownership, 5 to 33 per cent, where the family expropriates the outsider shareholders. in turkey dividend has also an inverted u-shaped relation with the per cent equity holding of the family members, supporting the alignment of interest and conf lict of interest of family and outside shareholders at low and high levels respectively (sener & selcuk, 2019). in a comparative study of the us and other countries of common law origin with europe and some countries with the civil law origin, farinha and lópezde-foronda (2009) find that based on the origin of law of countries, insider ownership affects dividends differently in these countries. similarly, when a cross country study is conducted in ten asian countries, insider ownership is found to have an inverse u-shaped relation with dividend payout (kim, kiymaz & oh, 2020). this suggests the presence of more agency cost only at moderate level of insiders’ ownership. apart from having a linear and non-linear relation between the controlling shareholders’ ownership and dividends, another strand of literature suggests that insiders do not impact the dividend decisions. for example, ben naceur, goaied and belanes (2006) suggest that during a period from 1996 to 2002, the number of majority shareholders having more than 5 per cent of equity holdings does not have any significant impact on the dividend yield of the tunisian firms. however, this has not been supported in taiwan (huang et al., 2012), malaysia (benjamin et al., 2016), hong kong (chen et al., 2005), and many other asian countries (kim et al., 2020). a literature survey and bibliometric analysis… 191191 bibliometric analysisbibliometric analysis in this review, we refer to 85 articles (including the articles explaining theories related to dividend policy and controlling shareholders), and therefore, we conduct bibliometric analysis on these 85 articles. bibliometric analysis is a rigorous method which helps to explore and analyse large volumes of scientific data. thus, we employ this analysis to compliment the systematic literature review. datadata table 1. main information about data description results timespan 1967:2020 documents 85 average years from publication 15.4 average citations per documents 735.8 average citations per year per doc 26.57 references 4069 article 77 book 1 book chapter 2 conference paper 1 review 4 authors 191 authors of single-authored papers 10 authors of multi-authored papers 181 single-authored papers 10 papers per author 0.445 authors per paper 2.25 geeta singh, kaushik bhattacharjee, srikanth potharla192192 description results co-authors per papers 2.47 note: table 1 provides the details of the data used in this study, including number of documents, average citations per document and citation per year per document, authors per paper as well as paper per author, etc. s o u r c e : from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. the timespan of the articles referred in this paper varies from 1967 to 2020, except a few articles published in the 1950s. we investigate 85 articles through bibliometric analysis, out of which 77 are research articles, 4 are reviews, and others are book and book chapters. there are 191 authors of these articles, with 10 papers having only one author and 181 authors of multi-authored papers. further, papers per author are 0.445 whereas authors per document are 2.25. (refer to table 1) table 1. main information… a literature survey and bibliometric analysis… 193193 most cited countries and affiliationsmost cited countries and affiliations table 2. country-wise average citations country total citations average article citations usa 42510 1518.2 italy 851 851 australia 440 62.9 canada 430 215 united kingdom 426 71 hong kong 233 116.5 china 109 27.2 greece 102 102 switzerland 85 42.5 korea 67 67 india 58 14.5 spain 22 22 malaysia 19 19 sri lanka 16 16 france 1 1 note: above table shows the average country-wise citations, suggesting that the usa, italy and australia have maximum total citations, and average article citations. s o u r c e : from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. geeta singh, kaushik bhattacharjee, srikanth potharla194194 table 3. university-wise citations note: the above table shows the university-wise citations, with the university of chicago contributing a maximum of eight articles. further, the city university of hongkong, monash university, and university of sri jayewardenepura. source: from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. our analysis suggests that the usa is the most cited country with more than 42,000 citations, followed by 851 citations of studies conducted on italy. canada, uk and australia are almost studied equally, with more than 400 studies. we also provide country-wise average article note: the above table shows the university-wise citations, with the university of chicago contributing a maximum of eight articles. further, the city university of hong kong, monash university, and university of sri jayewardenepura. s o u r c e : from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. a literature survey and bibliometric analysis… 195195 our analysis suggests that the usa is the most cited country with more than 42,000 citations, followed by 851 citations of studies conducted on italy. canada, uk and australia are almost studied equally with more than 400 studies. we also provide country-wise average article citations. most relevant affiliations are from the university of chicago, city university of hong kong and monash university, implying that most of the studies are conducted in the developed countries. geeta singh, kaushik bhattacharjee, srikanth potharla196196 about authors and collaborationabout authors and collaboration table 4. world collaboration map citations. most relevant affiliations are from the university of chicago, city university of hong kong and monash university, implying that most of the studies are conducted in the developed countries. about authors and collaboration table 4. world collaboration map note: the above figure shows the collaboration of the authors of asian countries is mostly with the authors from the usa and australia. note: the above figure shows the collaboration of the authors of asian countries is mostly with the authors from the usa and australia. citations. most relevant affiliations are from the university of chicago, city university of hong kong and monash university, implying that most of the studies are conducted in the developed countries. about authors and collaboration table 4. world collaboration map note: the above figure shows the collaboration of the authors of asian countries is mostly with the authors from the usa and australia. note: the above figure should that the articles from a. sheilfer have been most cited in articles related to firm’s dividend policy and controlling shareholders. s o u r c e : from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. a literature survey and bibliometric analysis… 197197 table 4 provides mapping of the global collaboration among different authors. it is observed that authors from the usa and china have collaborated the most, along with malaysia and australian authors collaborating many times. the most relevant author is shleifer, authoring as many as 5 articles referred to in our study. clusters and linkagesclusters and linkages table 5. clusters and linkages note: the above figure should that the articles from sheilfer a. has been most citated in articles related to firm’s dividend policy and controlling shareholders. source: from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. table 4 provides mapping of the global collaboration among different authors. it is observed that authors from usa and china have collaborated the most, along with malaysia and australian authors collaborating many times. most relevant author is shleifer, authoring as many as 5 articles refereed in our study. clusters and linkages table 5. clusters and linkages note: there above visualization shows 4 clusters and 2198 linkages from the referred articles of this study, from 1997 to 2020. there are 32 items in cluster 1, 18 in cluster 2, 15 items in cluster 3 and 13 items cluster 4. source: from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. note: the above visualization shows 4 clusters and 2198 linkages from the referred articles of this study, from 1997 to 2020. there are 32 items in cluster 1, 18 in cluster 2, 15 items in cluster 3 and 13 items cluster 4. s o u r c e : from bibliometric analysis, conducted by authors using scopus database, r and vosviewer-software. 78 articles are found to be linked to each other based on which four clusters are formed. time period of these articles is from 1997 to 2020. table 5 shows these clusters, based on the bibliometric coupling,1 along with all the linkages, in terms of documents. 1 when two works refer to a common third work in their bibliographies, it is referred as bibliographic coupling. thus, any two documents are bibliographically coupled if they are both cited in one or more documents. geeta singh, kaushik bhattacharjee, srikanth potharla198198 results and discussionresults and discussion the review of literature provides an understanding of the association between controlling shareholders and firm’s dividend policy. it suggests that in most of the developed countries, managers are the controlling shareholders and may expropriate the outsiders due to vertical agency problem (type i). thus, in some cases, they are found to be negatively associated with the intensity and propensity of dividend payout. in other cases, insiders positively impact the dividend payout due to information asymmetry and need to signal the market. in contrast, in most of the developing countries, the insiders like the family members, board members, etc. are the controlling shareholders who impact the dividend policy of the firm due to horizontal agency problem (type ii). they can also have a positive or negative association with the firm’s dividend payout. an important observation in this literature review reveals that the level of equity ownership matters. controlling shareholders can have a linear or non-linear association with the dividend policy (rozeff, 1982; attig et al., 2016; huang et al., 2012; gonzalez et al., 2017; faccio, lang & young, 2001; benjamin et al., 2016; schooley & barney, 1994). it is evident that with increase in the equity holding of the controlling shareholders, their ability and incentive to derive private benefits from firm may increase or decrease, and thus, the relation with dividend policy can change. furthermore, it is quite interesting to note that the impact of these shareholders is not homogenous across all countries; they vary with the time period of the study. thus, there is an evolution of the role played by controlling shareholders in deciding firm’s dividend policy. with many reforms and changes in the regulatory environment of the countries, the association between the insiders and dividend have changed. moreover, dividend payment is considered as a corporate governance mechanism which disciplines the insiders to act in favour of outside shareholders. therefore, with the presence of other governing mechanisms for the firms, dividends may not be used to discipline the managers or other controlling shareholders. the difference in the country’s origin of law is found to have an impact on the dividend policy of the firms, through the way it improves or deteriorates the quality of investor protection. it is a common understanding that minority shareholders have more and better rights in common law countries as compared to the countries with civil law. law enforcement is stringent such that a literature survey and bibliometric analysis… 199199 effective protection of shareholders can fear insiders to expropriate the corporate assets out rightly, thereby impacting the dividend policy differently. the theory of free cash f low, signalling, catering, tax or even clientele effect, life cycle theory of dividend hold well in many countries. however, a single theory does not explain the relation between the insiders and dividend policy universally. thus, we conclude that this research perceives various determinants of dividend policy being reliable, contributing to improving explanation of why firms pay dividends; however, the mixed evidence in favour or against a specific theory may be biased by the underlying testing environment. also, the spread of the findings of the empirical research is very wide, which further deepens the complexity of the dividend puzzle.  conclusion and scope for future research  conclusion and scope for future research the systematic review of literature reveals that controlling shareholder’s stake matters for the dividend policy of the firms across the globe; however, there is no consensus on the direction of such impact. moreover, this review of literature suggests dearth of research on the cross-country sample, where large sample of firms from different countries can be studied to examine the impact of different shareholders on dividend. though the literature provides an understanding of the association between the dividend policy and categories of shareholders, it does not consider initiation of dividends as a function of level of controlling shareholders’ equity holding. further, the issue of endogeneity is not discussed in details in most of the studies such that the announcement of dividend payment, increase, decrease or omission can lead to change in the equity holding of these shareholders. thus, future research can be directed towards exploring the causality from dividend to ownership structure. though many studies consider dividend payment as cash dividends, only a few takes into account share repurchase as a type of dividend payment. this area needs more attention from the researchers when the firm’s preference for distributing dividend as cash or share purchase can be compared. many articles have not checked for heteroskedasticity, multicollinearity, and autocorrelation; thus, to overcome these heteroskedastic autocorrelation consistent estimates should have been used and for variance inf lation factor should be reported for better understating of the multicollinearity between the variables. also, an empirical examination of the cross-country geeta singh, kaushik bhattacharjee, srikanth potharla200200 firms can provide a better picture of the impact of insiders on dividend policy. this paper finds that while researchers contribute solving the dividend puzzle through empirical work and building knowledge, the results remain inconclusive and contradicting. this offers scope for further research on determinants of dividend policy.  references references agrawal, a., & jayaraman, n. 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(2010). family control and ownership monitoring in family-controlled firms in japan. journal of management studies, 47(2), 274–295. http://dx.doi.org/10.1111/j.1467-6486.2009.00891.x. date of submission: june 20, 2020; date of acceptance: august 18, 2020. * contact information: humayun.kabir@ewubd.edu, department of business administration, east west university, dhaka, bangladesh, phone: +8809666775577 ext. 406; orcid id: https://orcid.org/0000-0002-5648-197x. ** contact information: sadrul.huda@northsouth.edu, department of management, north south university, dhaka, bangladesh, phone: +880255668200 ext. 1730; or cid id: https://orcid.org/0000-0002-6253-3043. *** contact information: omar@ewubd.edu, department of business administration, east west university, dhaka, bangladesh, phone: +8809666775577 ext. 168; orcid id: https://orcid.org/0000-0002-0733-8691. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 kabir, m.h., sadrul huda, s.s.m., & faruq, o. (2020). mobile financial services in the context of bangladesh. copernican journal of finance & accounting, 9(3), 83–98. http://dx.doi.org/10.12775/ cjfa.2020.013 md. humayun kabir* east west university s. s. m. sadrul huda** north south university omar faruq*** east west university mobile financial services in the context of bangladesh keywords: financial services innovation, mobile financial services, mobile banking, internet banking, financial inclusion, financial technology. j e l classification: g20, g21, g23. abstract: financial service is one of the significant finance areas, which can be regarded as the functions provided by organizations that operate in the finance industry. in this dynamic era of business, there has been notable progress in the innovation of md. humayun kabir, s. s. m. sadrul huda, omar faruq84 various financial services. financial services innovation can be termed as new ways and processes of providing financial services to customers. the recent development of mobile banking, short messaging service (sms) banking, agent banking, internet banking, mobile money account are remarkable instances of financial services innovation in bangladesh. this paper studies the present scenario of mobile financial services, regulatory framework, and prospects and challenges of bangladesh. this study is a descriptive study where quantitative data has been collected from secondary sources. the study’s findings suggest that mobile financial services are accelerating in bangladesh, but diversification of services is required to attain sustainable long-term growth. the concerned policymakers and practitioners’ can use the study to enhance mobile financial services in bangladesh.  introduction mobile financial service (mfs) in bangladesh is growing at an increasing rate and becoming popular among the customers at faster rate. more and more unbanked population are coming under the umbrella of mobile financial services since the mass people can easily and conveniently avail those bangladesh bank (2018) services. specified: “mobile financial services (mfs) refers to electronic money (e-money) services provided against a particular mobile or cell phone number of a client (termed as mobile account), where the record of funds is stored on the electronic general ledger. these services can be draw-down through specific payment instructions to be issued from the bearer’s mobile phone or through alternative digital process or device by ensuring the authenticity of the transaction. however, unlike e-money products, ‘cash-in’ and ‘cashout’ and other services as permitted by bangladesh bank (bb) at agent locations are allowed for mfs accounts”. mention (2014) stated, “financial services have been referred as facilities such as saving accounts, checking accounts, confirming, leasing, and money transfer, provided generally by banks, credit unions, and finance companies, whereas the concept of “financial innovation” can be defined as making and promoting new financial products and services, developing new processes to facilitate financial activities, to interact with customers and to design new structures for financial institutions”. as part of financial services innovation, the use of mobile and internet became one of the most common phenomena in today’s financial sector. mobile banking (m-banking) enables a customer to interact with a financial institution through digital devices, for example, mobile phone or personal digital assistant (pda). deutsche bank introduced m-banking service in 1999. initially, mobile banking was much centered on short messaging service (sms) bank mobile financial services in the context of bangladesh 85 ing. currently, m-banking is offering almost all the e-banking services e.g. online service, credit/debit card operation by virtue of significant technological advancement in mobile technology. the cost of using mobile banking has been decreased gradually since its inception. mobile banking also allows users to perform the basic banking functions, for example, checking balance, fund transfers, account transactions, utility bill deposit, plastic money management and so forth. several features of mobile phones enables the mobile based banking functions. these are: sms/mms, browsing options, and mobile apps. through sms options banking functions can be performed by connecting the client and the company through plain text messages; mobile browsing options can be used to access the banks websites for doing banking function and m-apps can be used to complete financial transactions through mobile devices. another form of financial services innovation is agent banking that was introduced in bangladesh recently. agent banking is limited scale banking activity of banks to the underserved population of the society through an agent who has a legal agreement with the bank. agent banking is considered to be one of the major developments to ensure maximum coverage of banking services even in the remotest area. the guidelines of agent banking by bangladesh bank identified: “an agent is the owner of the outlet who conducts banking transactions on behalf of a bank”. the central bank of bangladesh, has approved some activities that an agent banking outlet can perform. those activities include deposits and withdrawals of cash in small amount, small amount loan disbursements and recovery of loan, remittance service, bill payment, small value fund transfer, account opening, debit and credit card application, payment of insurance premium and so forth. these innovations in banking services have revolutionized the path of enriching financial inclusion. financial inclusion is a challenging task in a country like bangladesh. gupta (2013) rightly pointed out that “mobile technology is transforming the global banking and payment industry by providing added convenience to existing bank customers in developed markets, and by offering new services to the unbanked customers in emerging markets”. kabir (2020) examined the acceleration of financial inclusion due to technological advances called financial inclusion. the author found that many types of financial innovation help south asian countries achieve significant financial inclusion at a higher rate. md. humayun kabir, s. s. m. sadrul huda, omar faruq86 in bangladesh, there is a scope for diversification and innovation of mobile financial services, but only a few articles discussed this issue. in our analysis, we have proposed a model that will help the mobile financial services provider to diversify their product and services for the large number of customers. customers of the country’s mfs provider will be able to avail some traditional banking services through their mobile phone if our proposed model is being implemented. huda, kabir, popy and saha (2020) stated that financial services through mobile are increasing in bangladesh, but it needs to increase at a higher rate to fulfill robust financial inclusion. the objective of the paper is to present the current scenario of mobile financial services, regulatory framework, and prospects and challenges of bangladesh. literature review bangladesh achieved a tremendous growth in banking sector in the context of retail banking, viability, profitable operation, new service design and competitive mode by virtue of reformation of financial sector and adaptation of technology. despite such progress, a vast majority of the people, particularly the poor and rural people still cannot enjoy different financial services due to their inaccessibility to traditional financial organizations, absence of appropriate financial programs, higher service charge and for inadequate information. given this, bangladesh has allowed banks to introduce mobile financial services (mfs) in bangladesh in 2011 (nabi, sarder, moula & sarder, 2017). mobile money account ownership in bangladesh has a significant growth in the last few years because of the easy accessibility, availability of services, and ease of use of the mobile financial services provides by bkash, nagad, rocket, and others (kabir, 2020). financial institutions have recognized the need for innovation for the long term and sustainable growth and profitability. cutting cost and boosting efficiency approaches may lead to short term results but it won’t drive the long term benefits for financial institutions (wilkes, 2014). mention (2014) suggested: “innovation in financial services requires an interdisciplinary approach. experts in innovation, management, marketing, economics, business, finance, technology, and law need to share their insights to fully foster an open innovation approach in financial services”. mobile financial services in the context of bangladesh 87 there has been a tremendous development of the arena of innovation in financial services in recent times. it hardly imaginable the current financial system without electronic fund transfers, automated teller machine (atm), mobile banking, digital payment, and internet banking among many other innovative implementations (fonseca, 2004). one of many innovations of financial services is the mobile banking facility provided by banks. its’ was found that the volume of mobile banking was increasing over the years with a significant percentage (43%) of bank account holders who have mobile phones opted for mobile financial services (rubin, 2017). in bangladesh, 57% of its 150 million inhabitants have a mobile phone, but only 13% have a bank account (gupta, 2013). this statistics clearly ref lect the drastic increase of mobile banking user for the last several years all over the world which opens a door of far-reaching impact financial services through mobile devices. moreover, there has been a report that mobile banking continues to disrupt more traditional banking channels. mobile financial service has the taken third place (replacing the branch teller machine) though its’ still lagging behind atm and online banking services as the most preferred way of interacting with bank of the customers’ (rubin, 2017). mobile banking is becoming popular in developing areas of the world. between 2000 and 2010, according to the world bank (2013), developing countries saw mobile usages jump from 29 to 77 percent, more than in developed nations. mobile money accounts worldwide have jumped from 155 million in 2012 to 299 million by the end of 2014, much of them in the poorest parts of the world. the saarc countries, like pakistan, india and, nepal, have already introduced mobile banking and a massive portion of their population is using this service as a substitute of traditional banking operation. dutch bangla bank opened the first mobile banking service in bangladesh in 2011. at the time only about 13 percent of the country’s 160 million citizens had bank accounts, but close to half of its mostly rural population used mobile phones. realizing the global thrives and significance of mobile financial services, the country’s central bank has adopted guidelines for mobile financial services (mfs) in 2011 and revised in july 2015. mobile financial services are availed by customers by using their cell phone or personal digital assistance. mfs can be ranged from mobile banking to different types of payment (cheney, 2008). “some of the first commercial applications of mobile internet involve wireless or mobile banking. these developments build on earlier ideas md. humayun kabir, s. s. m. sadrul huda, omar faruq88 of customer channel extension through telephone banking and online banking (barnes & corbitt, 2003). mobile banking services aim to provide mobile financial services to a broad range of customers not to destroy the branch banking system. there is a huge prospect of mobile financial services in bangladesh and it can align with the vision of digital bangladesh. “through mobile banking (m-banking) one can avail various services i.e.; utility bill payment, fund transfer, shopping, cash withdrawn from selected atm or cash point and many more exciting facilities” (islam, 2013). siddiquie (2014) pointed out: “banks alone cannot provide this service; telecom operators are one of the key important factors to start the operation. most of the operators understood this at a very primary stage of mfs operation, that’s why they forced the banks to get into a contract that facilitates the telecom operators significantly”. the surge of availing mobile financial services can be attributed to various rationales. mattila (2003) identified that: “the most important attribute in encouraging the use of mobile banking was related to the costs of conducting banking”. moreover, “perceived risks (except social risk), trust, convenience, and comparative advantages are the factors affecting the behavioral intention of mobile users to adopt mobile banking services in bangladesh” (kabir, 2013). again, mobile banking facility works as a competitive edge for the institutions that are providing this service to their customers. in the face of increasing competition, mobile technologies can provide competitive advantages for financial institutions to retain their customers and to provide better services to them (barnes & corbitt, 2003). considering these factors, being competitive and attracting and retaining more customers, banks of bangladesh is devoting into adaptation of mobile financial service. there has been a remarkable improvement in adopting electronic banking services by bangladeshi banks for the last one decade. these activities include telebanking, online corporate banking, electronic fund transfer, atm, credit card, debit card, merchant account service and internet banking (amin & rahman, 2010). the banking industry has already been in the mature stage of these services. so, it needed to innovate and implement new financial services in addition to traditional banking services. kabir (2020) identified that 70 percent adult of the south asian region has the individual or joint mobile money account. the growth of mobile money accounts in this region is especially for banks and mobile financial services providers’ innovative financial products and services. according to sarma (2008), mobile financial services in the context of bangladesh 89 “in the financial inclusion index bangladesh ranked 69th, india ranked 50th, pakistan ranked 67th, and sri lanka ranked 63rd among 100 countries as per the dimension of ease of availability and usage of financial systems.” research methodology and the course of research process this study is a descriptive study where quantitative data has been collected from secondary sources to examine the mobile financial services in bangladesh by presenting the growth of different mobile financial services accounts over the years. the data was collected from the central bank’s database, articles, and reviewing numerous literature. the mobile financial services data of the year 2014 and 2019 were collected from the central bank’s database to analyze the growth of transactions of eighteen distinct mobile financial services accounts. the comparative summary statement of bangladesh’s current mobile financial services scenario has also developed from the collected data set. existing financial service innovations of bangladesh the 7 billion people in the world have 6 billion mobile phones but only 2 billion bank accounts. mobile financial services could be a good option for financial inclusion in those societies where people have fewer bank account but more mobile phones. it is clearly noteworthy that the use of mobile in banking can ensure a large extent of financial inclusion rather than mere bank account based banking service. this idea has led to implementing mobile banking services in bangladesh’s banking sector along with traditional banking services. the response is outstanding and the number of users of mobile banking in the country has stood at 67.54 million at the end of march 2019. in the last five years, the number of clients increased by 168.16%. mobile banking includes two other aspects: sms banking and mfs provider. out of the total 59 scheduled banks, 16 banks are currently providing mobile banking services to their clients. among the 16 banks, brac bank’s bkash is in the leading position. the other banks platforms are nagad, rocket, ucash, mcash, surecash, mycash and so forth. “according to guidelines issued in 2011, bangladesh bank permits the following mobile financial services (in broad categories):(i) disbursement of inward foreign remittances;(ii) cash in /out using mobile account through agents/ bank branches/ atm’s/ mobile operator’s outlets; (iii) person to busimd. humayun kabir, s. s. m. sadrul huda, omar faruq90 ness payments (e.g. utility bills payment); (iv) business to person payments (e.g. salary disbursement by corporate bodies/industries/offices etc.); (v) government to person payments (e.g. elderly allowances, freedom-fighter allowances, subsidies, etc.); (vi) person to government payments e.g. tax, levy payments; (vii) person to person payments (among registered account holders of the same bank) and (viii) other payments like microfinance, overdrawn facility, insurance premium, dps and so forth”. comparative summary statement of mfs table 1. key information on mobile financial services in bangladesh from december, 2014 to december, 2019 sl description amount in december, 2014 amount in december, 2019 % change 1 no. of approved banks 28 2 no. of banks currently providing the services 19 16 -15.79% 3 no. of agents 540,984 971,620 79.60% 4 no. of registered clients in lac 251.86 795.08 215.68% 5 no. of active accounts in lac 121.54 346.46 185.06% 6 no. of total transaction 74,473,558 227,422,938 205.37% 7 total transaction in taka (in crore bdt) 10,483.04 40,647.64 287.75% 8 no. of daily average transaction 2,482,452 7,336,224 195.52% 9 average daily transaction (in crore bdt) 349.43 1,311.21 275.24% [1 lac = 0.10 million and 1 crore = 10 million] s o u r c e : payment system department, bangladesh bank, 2019. mobile financial services in the context of bangladesh 91 figure 1. key information on mobile financial services in bangladesh from december, 2014 to december, 2019 table 1. key information on mobile financial services in bangladesh from december, 2014 to december, 2019 sl description amount in december, 2014 amount in december, 2019 % change 1 no. of approved banks 28 2 no. of banks currently providing the services 19 16 -15.79% 3 no. of agents 540,984 971,620 79.60% 4 no. of registered clients in lac 251.86 795.08 215.68% 5 no. of active accounts in lac 121.54 346.46 185.06% 6 no. of total transaction 74,473,558 227,422,938 205.37% 7 total transaction in taka(in crore bdt) 10,483.04 40,647.64 287.75% 8 no. of daily average transaction 2,482,452 7,336,224 195.52% 9 average daily transaction (in crore bdt) 349.43 1,311.21 275.24% source: payment system department, bangladesh bank, 2019 [1 lac = 0.10 million and 1 crore = 10 million] figure 1. key information on mobile financial services in bangladesh from december, 2014 to december, 2019 it is found from the aforementioned analysis that bangladesh bank has provided the approval to 28 banks for running mobile banking services as on december 2014; out of 28 banks, 19 banks have already launched mobile financial services in december 2014. currently, 16 banks are providing mobile banking services. the number of clients stood at 79.51 million at the end of december 2019, it was 25.19 million in december 2014. out of the 79.51 million registered -50,00% 0,00% 50,00% 100,00% 150,00% 200,00% 250,00% 300,00% 350,00% no. of banks currently providing the services no. of agents no. of registered clients in lac no. of active accounts in lac no. of total transaction total transaction in taka(in crore bdt) no. of daily average transaction average daily transaction (in crore bdt) % change (december, 2014 to december, 2019) s o u r c e : payment system department, bangladesh bank, 2019. it is found from the aforementioned analysis that bangladesh bank has provided the approval to 28 banks for running mobile banking services as on december 2014; out of 28 banks, 19 banks have already launched mobile financial services in december 2014. currently, 16 banks are providing mobile banking services. the number of clients stood at 79.51 million at the end of december 2019, it was 25.19 million in december 2014. out of the 79.51 million registered clients, only 34.65 million accounts are active, which is less than half of the registered clients. the number of total transactions and the amount of total transaction stood at 227.42 million and bdt 406,476.40 million in december 2019. table 2. product-wise information on mobile financial services in bangladesh december, 2014 to december, 2019 (amount in crore taka) sl product wise information amount in december, 2014 amount in december, 2019 % change a. inward remittance 3 30.95 931.67% b. cash in transaction 4,376.37 14,562.70 232.76% c. cash out transaction 3,887.17 13,473.97 246.63% d. p2p transaction 1,975.07 9,851.50 398.79% e. salary disbursement (b2p) 64.7 1004.68 1452.83% f. utility bill payment (p2b) 50.08 312.84 524.68% g. merchant payment (july 2017) 100.16 600.21 499.25% md. humayun kabir, s. s. m. sadrul huda, omar faruq92 sl product wise information amount in december, 2014 amount in december, 2019 % change h. government payment (july 2017) 237.49 65.32 -72.50% i. others 126.64 745.47 488.65% [1 lac = 0.10 million and 1 crore = 10 million] s o u r c e : payment system department, bangladesh bank, 2019. figure 2. product-wise information on mobile financial services in bangladesh december, 2014 to december, 2019 (amount in crore taka) s. 18 csad = 1 n ∑ |𝑅𝑅𝑖𝑖,𝑡𝑡 − 𝑅𝑅𝑚𝑚,𝑡𝑡|𝑁𝑁𝑖𝑖=1 (12) csadt = α + 𝛾𝛾1|rm,t| + 𝛾𝛾2 rm,t2 + ε𝑡𝑡 (13) s. 92 s. 122 81 4. 1 98 3 1 08 8 2 72 5 5 06 3. 90 6 54 1. 88 5 36 6. 55 7 0 75 .7 7 8 63 3. 71 2 0 0 9 1 0 2 0 1 0 1 1 2 0 1 1 1 2 2 0 1 2 1 3 2 0 1 3 1 4 2 0 1 4 1 5 2 0 1 5 1 6 2 0 1 6 1 7 2 0 1 7 1 8 fi g u r e s in a m o u n t year amount of credit -200,00% 0,00% 200,00% 400,00% 600,00% 800,00% 1000,00% 1200,00% 1400,00% 1600,00% % change (december, 2014 to december, 2019) s o u r c e : payment system department, bangladesh bank, 2019. it can state that among different services, cash in and out cash services dominate in the mobile financial services market. the amount of cash in and cash out transactions stood at bdt 145,627.00 million and bdt 134,739.70 million in december 2019. the percentage change in cash in and cash out services from december 2014 to december 2019 is respectively 232.76% and 246.63%. the other mentionable services include p2p transaction, salary disbursement, utility bill payment, and inward remittances. additionally, the merchant payment and government payment services launched in july 2017 and the mertable 2. product-wise… mobile financial services in the context of bangladesh 93 chant payment increases notably on the other hand government payment declines sharply. figure 3. existing services provided by mfs providers in bangladesh 145,627.00 million and bdt 134,739.70 million in december 2019. the percentage change in cash in and cash out services from december 2014 to december 2019 is respectively 232.76% and 246.63%. the other mentionable services include p2p transaction, salary disbursement, utility bill payment, and inward remittances. additionally, the merchant payment and government payment services launched in july 2017 and the merchant payment increases notably on the other hand government payment declines sharply. figure 3. existing services provided by mfs providers in bangladesh source: bangladesh bank, 2019. currently, the central bank of bangladesh permits cash in, cash out, person to person (p2p), person to business (p2b), business to person (b2p), person to government (p2g), and government to person (g2p) payment services through mfs domestically. apart from cash-in, cash-out, and person-to-person transactions, the mfs services are also being utilized for utility bill payments, salary disbursements, merchant payments, government payments and inward remittances. figure 4. proposed services in addition to existing services for mfs providers in bangladesh mfs provider p2p payment p2b payment b2p payment p2g payment g2p payment cash out cash in s o u r c e : bangladesh bank, 2019. currently, the central bank of bangladesh permits cash in, cash out, person to person (p2p), person to business (p2b), business to person (b2p), person to government (p2g), and government to person (g2p) payment services through mfs domestically. apart from cash-in, cash-out, and person-to-person transactions, the mfs services are also being utilized for utility bill payments, salary disbursements, merchant payments, government payments and inward remittances. md. humayun kabir, s. s. m. sadrul huda, omar faruq94 figure 4. proposed services in addition to existing services for mfs providers in bangladesh figure 4. proposed services in addition to existing services for mfs providers in bangladesh source: authors’ developed model, 2019. in the proposed model three services are suggested that the mobile financial services provider can provide to their clients. those three services are cross border money transfer, loan, and deposit services. the cross border money transfer will help the migrant workers to send money to bangladesh easily and conveniently. additionally, many foreign nationals are working in bangladesh and they will be able to send money to their home country as well. on the other hand, mfs providers can include retail banking services for their active clients such as loan and advances and different types of deposit schemes. if the mfs provider can provide different types of saving schemes for their clients then more money will come to our financial system because investors will be able to save via their mobile phones. besides, a borrower can apply for a quick credit to the mfs provider, this will make the process easy and convenient. regulatory framework of mobile financial services in bangladesh in september 2011, central bank added the structure for mfs applications and their holding over emitting a direction on mfs for banks. this was pursued by corrected guidance in december 2011 and then regulatory guidelines in july 2015. the current guidance circulated in july 2018. mfs providers will be managed by barely the anticipated commercial, which is stated in the recent bank rules. earlier the banks operating mfs operations have been permitted to carry on to their current license or build up a subsidiary for the intent, whereas, the recent mfs provider cross border money transfer services loan services deposit services s o u r c e : authors’ developed model, 2019. in the proposed model three services are suggested that the mobile financial services provider can provide to their clients. those three services are cross border money transfer, loan, and deposit services. the cross border money transfer will help the migrant workers to send money to bangladesh easily and conveniently. additionally, many foreign nationals are working in bangladesh and they will be able to send money to their home country as well. on the other hand, mfs providers can include retail banking services for their active clients such as loan and advances and different types of deposit schemes. if the mfs provider can provide different types of saving schemes for their clients then more money will come to our financial system because investors will be able to save via their mobile phones. besides, a borrower can apply for a quick credit to the mfs provider, this will make the process easy and convenient. regulatory framework of mobile financial services in bangladesh in september 2011, central bank added the structure for mfs applications and their holding over emitting a direction on mfs for banks. this was pursued by corrected guidance in december 2011 and then regulatory guidelines in july 2015. the current guidance circulated in july 2018. mfs providers will be managed by barely the anticipated commercial, which is stated in the recent bank rules. earlier the banks operating mfs operations have been permitted to car mobile financial services in the context of bangladesh 95 ry on to their current license or build up a subsidiary for the intent, whereas, the recent aspirants shall have to comprise a subsidiary. the procedures also require that the parent banks have to hold a minimum 51 percent of the subsidiary’s equity; but they are allowed to get equity partners from alternative banks and non-bank financial institutions, ngos, investment and fin-tech corporations. the mobile network operators (mnos) have been retained out of the record of granted partners, but have been permitted to develop into distributors or super-agents including ngos and the postal branch. this is nearly justified as the btrc, and not bangladesh bank, is the controlling authority of mnos. on the other hand, mobile operators are not welcome in mobile financial services but in the draft bangladesh mobile financial services regulations, 2018 the central bank permitted mobile operators to obtain a maximum of 49 percent shares in mfs providers. prospect and challenges of mobile financial services in bangladesh financial services institutions have allowed more subscribers to their services around the years. still, recently greater than 35 million people in bangladesh don’t have a bank account and their economic operations are not part of the formal economy of the nation. financial technology (fintech) can improve this scenario if enhanced with the appropriate regulatory structure and technological assistance. fintech targets to challenge traditional financial systems in the delivery of financial services. it is a recent enterprise that evolves the technology to grow activities in finance by decreasing cycle time and costs of services and by developing the quality of services. fintech aims to build up and enhance financial inclusion in developing nations as bangladesh. financial institutions in other developing nations such as india have earlier adopted more features of fintech and are reaping its advantages. bangladesh has a greater amount of potentials in offering financial inclusion which obtains more than 100 million mobile phone operators, growing green banking, huge existence of young people, more involvement of corporate and government sector in offering staff wages through mfs and over 10 million national remitters. although, there are targets to attain benefits of mfs which involves more usage of otc channel without using a personal account, agent’s insecurity in controlling the huge sum of fund and addressing ml and tf issues. md. humayun kabir, s. s. m. sadrul huda, omar faruq96 high transaction cost is keeping more than half of bangladesh’s micro and small enterprises (mses) away from operating mobile financial services for business purposes. on the other hand, telecommunication firms are not welcome to mobile financial services. if mobile operators get the opportunity to offer mobile financial services the scenario could be different. in the latest regulation, bangladesh bank’s restriction on day to day ceiling of mobile cash-in to taka 15,000, lower from taka 25,000, and the maximum cash-out limit to taka 10,000 from taka 25,000 may affect transactions. the low limit of mfs is the main reason behind the downfall of mobile banking transactions (i.e., mobile banking transactions dropped by tk. 3113.6 crore (9.0%) to tk. 31512.6 crore in february’19 as compared to january’19) in recent times, which ultimately might hit financial inclusion. mobile financial services provider is not liable if the sender sends money to any wrong number. in case of any kind of incorrect transaction, the customer is liable because of customer inputs the receiver phone number and the customer’s personal identification number (pin). in the event of a wrong transaction, mfs provider does not reimburse the amount to their customers and they do not take any liability. since there is no central regulation for receiving back the money from the wrong transaction the central bank can set policy guidelines for this issue. customers of mfs providers are often victims of fraud and harassment and are losing their money to scammers who send masked smss to done fraudulent activities. by sending masked anonymous smss scammers are able to inf luence customers to send money in their account. it seems that the provider of mobile financial services, for now, has no solution to handle this kind of fraud. the ministry of home affairs of bangladesh states in their report that the money transfer platform has become a safe haven for fraudsters. bangladesh bank can take help from concerning authority for this kind of cybercrime.  conclusion in bangladesh, developing financial inclusion is a necessary element of the advancement plan, since a simple approach to finance develops expansion and mitigates the deficit. as an initiation, the act of mobile financial services (mfs) is promising in bangladesh. nevertheless, enough exertion requires extending the mfs chain and system to add the leftover unbanked population. in forging mobile financial services in the context of bangladesh 97 and resolving legitimate procedures on mobile financial services (mfs), a field scrutiny located analysis can be initiated for assimilating essential intuition. however, more than half of the listed banks in bangladesh are operating mfs services, only three players – bkash of brac bank, nagad of bangladesh post office, and rocket of dutch-bangla bank limited and are operating in full scale. each has the most coverage in charge of the region of the nation. still few banks are fixating on ‘banking’, whereas rest is at ‘money transfer’. barely ‘money transfer’ can’t benefit and support financial inclusion. in a single wallet (account) the provider of mobile financial services should provide different types of services. mobile financial service providers should give more focus on offering credit and savings schemes. for actual financial inclusion and economic development, mfs providers need to engage rural population cause there is a large sum of fund persists idle. if those idle funds come to banking channel then economic development of bangladesh will be noticeable. in our proposed model we have recommended three new services. the mfs provider can take into account those services especially the retail banking services we recommended. the bangladesh bank can take initiative to launch those services by mfs provider so that the growth in mfs will continue to increase and will sustain in the long term.  references al-amin, s., & rahman, s. s. (2010). application of electronic banking in bangladesh: an overview. bangladesh res. pub. j, 4(2), 172-184. bangladesh bank (2018). bangladesh mobile financial services (mfs) regulations. bangladesh bank (2019). approved mobile financial services, https://www.bb.org.bd/ fnansys/paymentsys/mobilefin.php (accessed: 23.08.2020). bangladesh bank (2019). mobile financial services (mfs) comparative summary statement, https://www.bb.org.bd/fnansys/paymentsys/mfsdata.php (accessed: 29.05.2019). barnes, s. j., & corbitt, b. j. (2003). mobile banking: concept and potential. ijmc, 1(3), 273-288. cheney, j. s. (2008). an examination of mobile banking and mobile payments: building adoption as experience goods? frb of philadelphia-payment cards center discussion paper, (08-07). gupta, s. (2013). the mobile banking and payment revolution. european financial review, 2(36), 215254. md. humayun kabir, s. s. m. sadrul huda, omar faruq98 huda, s. s., kabir, m. h., popy, n. n., & saha, s. (2020). innovation in financial services: the case of bangladesh. copernican journal of finance & accounting, 9(1), 31-56. http://dx.doi.org/10.12775/cjfa.2020.002 islam, m. s. (2013). mobile banking: an emerging issue in bangladesh. asa university review, 7(1), 123-130. kabir, m. h. (2020). financial innovation: accelerating financial inclusion in south asia. in i.a. boitan, k. marchewka-bartkowiak (eds.). fostering innovation and competitiveness with fintech, regtech, and suptech. pennsylvania: igi global. kabir, m. r. (2013). factors inf luencing the usage of mobile banking: incident from a developing country. world review of business research, 3(3), 96-114. mattila, m. (2003). factors affecting the adoption of mobile banking services. the journal of internet banking and commerce, 8(1). mention, a. l. (2014). innovation in financial services: a dual ambiguity. cambridge: cambridge scholars publishing. nabi, m. g., sarder, m. m. r., moula, m. g., & sarder, m. w. (2017). do mobile financial services promote ethical banking in bangladesh. bangladesh economic association, 1-17. payment system department, bangladesh bank (2019). mobile financial services (mfs) comparative summary statement, https://www.bb.org.bd/fnansys/paymentsys/mfsdata.php (accessed: 11.09.2020). roxo da fonseca, g. j. c. (2004). technology innovation in financial services industry (doctoral dissertation, massachusetts institute of technology). rubin, r. e. (2017). foundations of library and information science. chicago, washington: american library association. sarma, m. (2008). index of financial inclusion. working paper indian council for research on international economic relations (icrier), 215, 1–20. siddiquie, m. r. (2014). scopes and threats of mobile financial services in bangladesh. iosr journal of economics and finance (iosr-jef), 4(4), 36-39. wilkes, b. (2014). u.s. patent no. 8,630,951. washington, dc: u.s. patent and trademark office. world bank group. (2013). global financial development report 2014: financial inclusion. washington: the world bank. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: march 31, 2014; date of acceptance: october 3, 2014. * contact information: k.nowak@doktorant.umk.pl, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: 56 611 46 34. nowak k. (2014). advanced private banking in terms of ecology. copernican journal of finance & accounting, 3(2), 91–109. http://dx.doi.org/10.12775/cjfa.2014.020 kamil nowak* nicolaus copernicus university advanced private banking in terms of ecology keywords: private banking, sustainable investment funds, social responsible investing. j e l classification: g21. abstract: in recent years it has been observed that financial institutions have become aware of the social responsibility of businesses and in particular, the attention has been drawn to ecology. the purpose of this paper is to present the highest, third level of involvement of financial institutions in ecology. paper looks into sustainable investing through private banking sector. financial institutions analyzed in this paper were chosen due to exquisite approach to the environment protection. the article analyses the advanced and innovative solutions introduced by private banking for the benefit of the protection of natural surroundings. zaawansowana bankowość private w ujęciu ekologicznym słowa kluczowe: bankowość prywatna, inwestowanie społecznie odpowiedzialne, odpowiedzialne fundusze inwestycyjne. klasyfikacja j e l: g21. abstrakt: w ostatnich latach obserwuje się coraz większe zainteresowanie instytucji finansowych społeczną odpowiedzialnością biznesu, a szczególnie problemami środowiska naturalnego. celem niniejszej publikacji jest przedstawienie najwyższego kamil nowak92 – trzeciego poziomu zaangażowania instytucji finansowych w ekologię. artykuł opisuje zrównoważone inwestowanie przez pryzmat sektora bankowości prywatnej. instytucje finansowe analizowane w niniejszej publikacji zostały wybrane ze względu na wyjątkowe podejście do problemów środowiska naturalnego. w artykule dokonano analizy zaawansowanych oraz innowacyjnych rozwiązań stosowanych w czołowych instytucjach private banking na rzecz ochrony środowiska naturalnego.  introduction care for the environment is not only the responsibility of governments or institutions serving this purpose. it has become a vital element of every business activity. the society expects companies to function responsibly, taking into account economic, social and environmental problems. a company is expected to have a positive inf luence on the surroundings i.e. community and natural environment. customers of financial institutions require a degree of social responsibility from their partners. more often than not, customers are interested in ecology and protection of natural environment. financial institutions to cater for the needs of their customers and achieve advantage over the rival companies become interested in the protection of the natural environment. the greatest requirements are faced by private banking institutions due to the most demanding customers they serve. in response to their customers’ expectations, private banking institutions have developed innovative solutions for natural environment issues applied in the marketing of an institution and preparing offers of environmentally friendly projects and services. this paper aims to present and analyze the involvement of private banking in the natural environment problems through advanced service offers. the research methodology and the course of the research process the paper contains descriptive research studies carried out in several steps. first step defines consumer segmentation in private banking. than presents involvement of financial institutions in the protection of the environment on different levels. finally paper focuses on highest level of ecological involvement and analyzes eco-oriented solutions in the top private banking institutions. the study ends with conclusions achieved by analyzing reports and surveys conducted by financial and research institutions. advanced private banking in terms of ecology 93 consumer segmentation in private banking the basic criterion for defining a private banking customers is their wealth. a wealthy customer is a customer owning over 1 million usd worth of assets (world wealth report 2013, 4). the wealthy customers group is the most attractive for the banking sector and is named high-net-worth individuals (hnwi). figure 1 shows the dynamics of changes in the world’s hnwi population between 2007–2012 in different regions. in three form five analysed years, there is a visible upward trend. in 2012 the global population of wealthy individuals was 12 million, which is 9,2 % more than in the previous year. the biggest growth dynamics of hnwi can be observed in north america, africa and asia. the european hnwi population has grown slightly more than the world’s average – 9,4%. figure 1. hnwi population, 2007– 2012 (by region) s o u r c e : world wealth report 2013, 5. kamil nowak94 figure 2. hnwi wealth distribution, 2007 2012 (by region) source: world wealth report 2013, 5. figure 2 presents the investible wealth dynamics as displayed by hnwi between 2007 and 2012, in regions. after the decline in the investible wealth in 2008 caused by economic crisis, years 2009 and 2010 show a steady growth back to the level from 2007. 2012 was a year of 10% growth in the investible wealth comparing with 2011. at present, hnwi is estimated at us$46.2 trillion. the analysis of the private banking sector customers and their investible wealth shows how big this segment is. for that reason, this group is a highly desirable customer for the banking sector. consequently, the wealthy costumer group is the most demanding group for banking. due to the wealth at disposal, hnwi apart from securing and investing the assets (dziawgo 2005, 35), also expect high quality service, qualified personnel and accounting for their individual suggestions. personal preference may affect the financial product offer, service and the image of a banking institution (dziawgo 2005, 67). customers may choose a bank which suits their personal preferences and they have a wide variety of banking institutions to choose from. in the recent years, a growth in corporate social responsibility has been clearly visible. the csr often becomes a major factor influencing the choice of a financial partner. therefore, the activity connected with csr may be an important element in achieving a competitive advantage over rival institutions. csr may be realised in social, ethical, religious and ecological aspects (dziawgo 2010, 16). islamic banking is an interesting example of csr realised in s o u r c e : world wealth report 2013, 5. figure 2 presents the investible wealth dynamics as displayed by hnwi between 2007 and 2012, in regions. after the decline in the investible wealth in 2008 caused by economic crisis, years 2009 and 2010 show a steady growth back to the level from 2007. 2012 was a year of 10% growth in the investible wealth comparing with 2011. at present, hnwi is estimated at us$46.2 trillion. the analysis of the private banking sector customers and their investible wealth shows how big this segment is. for that reason, this group is a highly desirable customer for the banking sector. consequently, the wealthy costumer group is the most demanding group for banking. due to the wealth at disposal, hnwi apart from securing and investing the assets (dziawgo 2005, 35), also expect high quality service, qualified personnel and accounting for their individual suggestions. personal preference may affect the financial product offer, service and the image of a banking institution (dziawgo 2005, 67). customers may choose a bank which suits their personal preferences and they have a wide variety of banking institutions to choose from. in the recent years, a growth in corporate social responsibility has been clearly visible. the csr often becomes a major factor inf luencing the choice of a financial partner. therefore, the activity connected with csr may be an important element in achieving a competitive advantage over rival institutions. csr may be realised in social, ethical, religious and ecological aspects (dziawgo 2010, 16). islamic banking is an interesting example of csr realised in religious terms. however, ecology and advanced private banking in terms of ecology 95 environmental protection tend to be the most popular subject of csr stemming from the popular interest in these issues. in the investment activity, csr is realised in terms of social responsible investing. sri strategy takes into account environmental, social end economic problems at an every stage of the investment process. ecological and social factors are a basis for decision making, from the stage of choosing the assets to making use of the ownership rights and responsibilities (krosinsky, robins 2008, 14–15). development of social responsible investing when sri in usa, uk and western europe is thriving than it is emerging in australia, asia and other european countries. sparks claims that socially responsible investing develops rapidly and may revolutionize global finance. despite impressive growth of sri in last decades it is still a finacial niche (sparkes 2002, 22–26). in present form sustainable investing lack the power of significant change in the context of natural environment problems (haigh, hazelton 2004, 61). haigh and hazelton questions sri funds performance. in their innovative paper they claims that both customers and suppliers of sri fund are not motivated by prospects of return. most of investors invest only small part of assets in sri funds, which is the way to clear customer’s conscience (haigh, hazelton 2004, 65). different, more positive and optimistic for sri point of view is presented by jeucken. the author analyzed the term of sri in the context of economic theory. his work mostly focuses on banking sector and environment friendly finance products development. jeucken narrowed down broad sustainable finance to sustainable banking. the involvement of private banking sector in the protection of the environment the involvement of financial institutions in the environmental protection can be observed directly in the business activity or in projects not directly connected with it. the first type of engagement involves: ■ founding projects of low environmental risk; ■ offering products and services supporting environment protection; ■ eco-oriented management; kamil nowak96 ■ marketing; ■ public relations; ■ investor relations. ecological sponsorship is an example of a non-business activity (dziawgo 2010, 35). activities for natural environment protection and their effects vary. these differences should be classified. professor dziawgo attempted to classify the eco-oriented business activity of financial institutions in terms of hierarchy (dziawgo 2003, 18–21). schema 1. the hierarchy of activities of a financial institution for natural environment protection investor relations. ecological sponsorship is an example of a non-business activity (dziawgo 2010, 35). activities for natural environment protection and their effects vary. these differences should be classified. professor dziawgo attempted to classify the eco-oriented business activity of financial institutions in terms of hierarchy (dziawgo 2003, 18–21). schema 1.the hierarchy of activities of a financial institution for natural environment protection source: dziawgo 2003, 20. the lowest level of engagement in the natural environment protection is the activity not directly connected with the business activity of a financial institution i.e. sponsoring ecological projects, marketing and public relations. the next level of engagement is ecological management of assets, limiting pollution, accounting for the ecological risk while making decisions connected with financing a business activity. the highest level of the involvement is defined as directly connected with the financial activity by professor dziawgo. the offer of products and services aiming at leveraging assets for financing eco-friendly projects and launching them is a basis. the highest level of engagement in natural environment protection is an excellent example of using financial market as a means of improvement of the natural environment state which results also in gaining profit (dziawgo 2010, 38–40). the business activity of financial institutions s o u r c e : dziawgo 2003, 20. the lowest level of engagement in the natural environment protection is the activity not directly connected with the business activity of a financial institution i.e. sponsoring ecological projects, marketing and public relations. the next level of engagement is ecological management of assets, limiting pollution, accounting for the ecological risk while making decisions connected with financing a business activity. the highest level of the involvement is defined as directly connected with the financial activity by professor dziawgo. the offer of products and services aiming at leveraging assets for financing eco-friendly advanced private banking in terms of ecology 97 projects and launching them is a basis. the highest level of engagement in natural environment protection is an excellent example of using financial market as a means of improvement of the natural environment state which results also in gaining profit (dziawgo 2010, 38–40). the business activity of financial institutions connected with the eco-oriented economy can be divided into 4 groups, as classified by marcel jeucken : ■ investing bank’s investment capital or pension portfolio in a sustainable way or in sustainable projects; ■ linking traditional products to sustainable cause by a way of donations; ■ developing new product meeting environmental and social criteria; ■ developing products collaborating with governments (jeucken 2004, 232–233). the topic of the above mentioned paper is the presentation of eco-oriented solutions in the private banking sector – swiss ubs and german deutsche bank, at the highest –third level of involvement in natural environment protection. value-based investing in ubs the swiss bank ubs has a 15 years experience in csr. social responsibility of this financial institution connected with private banking sector is displayed in social responsible investing. in ubs, sri strategy is called vbi (value-based investing). this investment philosophy aims at securing profit from the invested assets and at the same time solving the biggest environmental and social problems of the xxi century i.e. climate changes, aging of society, shortage of fresh water. ubs wealth management customers interested in sri are offered individual investment counselling based on vbi, with the purpose of achieving a certain return of investment with consideration for the impact on the society and the natural environment. current and future customers are offered ubs portfolio screening services, which aim at determining the inconsistency and adjusting the portfolio for the personal preferences of an sri customer. in 2012 a total of chf 1,2 billion worth of assets have been screened. accounting for different sri preferences of customers, ubs offers 4 strategies for creating an individual investment portfolio presented in schema 2. kamil nowak98 schema 2. different vbi strategies that can be combined s o u r c e : ubs. when it comes to choosing the assets of companies incorporated in an investment portfolio, ubs offers two strategies: negative screening and positive screening. negative screening aims at excluding from the portfolio assets or whole economy sectors inconsistent with the customer’s ethics. frequently, among these assets are those of companies whose activity has a negative impact on the natural environment or business institutions connected with defence, alcohol or tobacco industry. the main advantages of negative screening are low labour and time costs. nevertheless, it has to be remembered that excluding whole sectors of economy can disturb the benchmark of an investment portfolio. another activity offered by ubs – positive screening aims at investing in companies which have a positive inf luence on natural environment and society. an investment portfolio can be created on the basis of this strategy using 2 methods best-in-class and thematic investing. best-in-class chooses financially attractive companies which are csr leaders in their trade. best-inclass allows constructing a diverse low-risk portfolio. a major disadvantage of this method is the necessity of detailed screening of a company to exclude the unfair and unethical areas of its business activity. thematic investing is mainly focused on companies offering innovative csr solutions interesting for the customer, such as the shortage of fresh water or the use of renewable energy. advanced private banking in terms of ecology 99 thematic investing mainly concerns small and medium-size institutions. the advantages of this method are financing projects lying within an interest area of a customer and potentially high investment return. however, investing in the sme sector involves high risk. for this reason, thematic investing should serve as complementation of an investment portfolio accounting for the individual customer preferences. the strategy aiming to inf luence decision processes of a company – subject of an investmentso that it is directed at social responsibility is the strategy of engagement. owning a significant block of shares, an investor can inf luence the decisions of the board of executives and use the right to vote so that csr plays a major role in the company. the advantage of engagment strategy is the possibility to apply it for every investment portfolio. however, the predicted effects of the involvement of an institution in csr are not measurable. impact investing offers a possibility of engagement in micro-scale projects, directly inf luencing certain communities such as financing social initiatives or supporting small local companies. this is the riskiest strategy offering relatively low investment return. ubs products based on value-based investing apart from individual investment strategies, ubs offers ready-made products such as investment funds: sustainable & responsible funds registered in luxemburg. the process of the selection of assets for these investment portfolios is based on two types of companies: leaders and innovators. companies best in their trade in terms of csr are considered leaders. the selection of these assets is conducted with the use of best-in-class strategy. innovators are small companies starting their activity, offering innovative products and services. leaders are usually international corporations guarantying a high investment return, while innovators offer a high investment potential at a higher risk. ubs (lux) climate change a fund investing assets into small companies connected with renewable energy, alternative sources of energy and energy management. in february 2014, this fund had a eur 90 mln worth of assets. table 1. present the geographic and sector structure of the fund and 10 largest companies in this investment portfolio. kamil nowak100 table 1. ubs (lux) climate change fund structure s o u r c e : ubs fund sheet. american services sector companies are in the portfolio of the ubs climate change fund. ubs (lux) eco performance this oldest csr ubs fund has been on the market since 1996. ubs (lux) eco performance invests in the shares of large cap companies displaying an above average engagement in the social and natural environment protection issues. according to table 2., ubs eco performance invests mainly in big american companies from various sectors of economy. apple and amazon are among the top ten investment companies in this fund. in february 2014 the assets of this fund were worth more than eur 102 mln. advanced private banking in terms of ecology 101 table 2. ubs (lux) eco performance structure s o u r c e : ubs fund sheet. ubs (lux) emerging markets innovators this fund invests in the assets of small emerging market companies which use modern technological solutions for mitigation of climate change, solving the problem of shortage of fresh water or problems connected with the concept of sustainable development. the portfolio is created on the basis of the economic analysis and on the social and environmental criteria. ubs emerging markets innovators invests mainly in asian companies dealing with the issue of sustainable development and climate change. in february 2014 the fund had the capital of eur 86 mln. kamil nowak102 table 3. ubs (lux) emerging markets innovators structure s o u r c e : ubs fund sheet. ubs (lux) global innovators this fund invests in the assets of small and medium size companies (mainly american ones) developing technologies connected with the issue of climate change or demographic changes. in february 2014, it had eur 57 mln worth of capital. the geographic and sector structure and 10 prevalent companies are presented in table 4. table 4. ubs (lux) global innovators structure s o u r c e : ubs fund sheet. advanced private banking in terms of ecology 103 ubs (lux) sustainable global leaders this fund had eur 155 mln capital. it invests in global large cap companies (mainly american) which are leaders in their trade. these companies offer innovative products and services that may serve as a solution for the challenges of the concept of sustainable development. table 5. presents the geographic and sector structure of the fund together with 10 most important companies like apple, cvs or general electric. table 5. ubs (lux) sustainable global leaders structure s o u r c e : ubs fund sheet. responsible banking in deutsche bank responsible banking in german deutsche bank is based on the concept of esg (environmental, social and governance). esg, similar to sri, takes into account social, environmental factors and corporate governance in the investment process (dziawgo 2010, 17). the work of wealth management in deutsche bank relies on esg and un initiative – principles of responsible investment (pri). investment portfolios are created on the basis of the assessment of potential investment return and investment risk as presented in esg rating, which is created by oekom researchan agency specialising in socially responsible investments. next, assets are selected using best-in-class strategy. the strategy takes into account individual customer preferences for the investments. deutkamil nowak104 sche bank has also prepared philanthropic wealth management and individually tailored products offer which allow wealthy investors to directly realise projects connected with natural environment protection (e.g. photovoltaic farms, “green” properties) chosen with regard of the customers individual criteria. deutsche bank offers also a wide variety of responsible investment funds financially connected with dws. according to the end-of-year 2013 data dws possesses a eur 3.72 billion worth of assets, meeting the esg criteria. dws sustainable funds dws invest clean tech (former climate change) this fund invests capital in national and global companies producing renewable energy (solar, wind, water and biomass energy). companies trading in the ecological transfer of energy and the development of energy-effective technologies are also subjects of investment for this fund. in february 2014, dws had eur 10.09 mln capital. figure 3 shows the geographic and sector structure of the fund with its most important companies. american, japanese and german industrial and it institutions prevail. figure 3. dws invest clean tech structure figure 3. dws invest clean tech structure source: www.sustainable-investment.org 19,47% 12,26% 8,92% 6,54% 36,63% largest individual positions by sector industrial products computer hardware utilities regulated autos chemicals others 26,24% 18% 11,12% 8,12% 5,44% 31,39% largest individual positions by countries usa japan germany china italy others 3,83% 4% 3,38% 3,35% 3,34% 82,30% largest individual positions by shares alps electric danaher murata manufacturing svenska cellulosa sca flowserve others 19,47% 16,18% 12,26% 8,92% 6,54% 36,63% largest individual positions by sector industrial products computer hardware utilities regulated autos chemicals others 19,47% 16,18% 12,26% 8,92% 6,54% 36,63% largest individual positions by sector industrial products computer hardware utilities regulated autos chemicals others advanced private banking in terms of ecology 105 figure 3. dws invest clean tech structure source: www.sustainable-investment.org 19,47% 12,26% 8,92% 6,54% 36,63% largest individual positions by sector industrial products computer hardware utilities regulated autos chemicals others 26,24% 18% 11,12% 8,12% 5,44% 31,39% largest individual positions by countries usa japan germany china italy others 3,83% 4% 3,38% 3,35% 3,34% 82,30% largest individual positions by shares alps electric danaher murata manufacturing svenska cellulosa sca flowserve others 3,83% 4% 3,38% 3,35% 3,34% 82,30% largest individual positions by shares alps electric danaher murata manufacturing svenska cellulosa sca flowserve others s o u r c e : www.sustainable-investment.org. dws water sustainability fund (former klimawandel) this fund has been operating on the market since 2010. it invests in the shares of german and foreign companies active in the field of limiting co2 emissions, gaining and using renewable energy and energy-efficient technologies. companies invovled in the protection of climate, eco-friendly energy-efficient transport are also subjects of the fund investment. in february 2014, the capital of the fund amounted to eur 61 mln. figure 4 presents the geographic and sector structure of the fund, together with the most important companies in the portfolio. dws water sustainability invests mainly in industrial and public sector in the usa, switzerland and uk. kamil nowak106 figure 4. dws water sustainability fund structure 2 figure 4. dws water sustainability fund structure 43,16% 5,01% 4,72% 4,44% 17,92% largest individual positions by sector industrial products utilities regulated waste management chemicals engineering and construction others 38,67% 12%10,79% 6,45% 5,14% 26,23% largest individual positions by countries usa switzerland united kingdom france japan others 6,97% 6% 3,82% 3,74% 3,72% 75,80% largest individual positions by shares pentair danaher cdsbde suez environnement united utilities others 2 figure 4. dws water sustainability fund structure 43,16% 5,01% 4,72% 4,44% 17,92% largest individual positions by sector industrial products utilities regulated waste management chemicals engineering and construction others 38,67% 12%10,79% 6,45% 5,14% 26,23% largest individual positions by countries usa switzerland united kingdom france japan others 6,97% 6% 3,82% 3,74% 3,72% 75,80% largest individual positions by shares pentair danaher cdsbde suez environnement united utilities others 2 figure 4. dws water sustainability fund structure 43,16% 5,01% 4,72% 4,44% 17,92% largest individual positions by sector industrial products utilities regulated waste management chemicals engineering and construction others 38,67% 12%10,79% 6,45% 5,14% 26,23% largest individual positions by countries usa switzerland united kingdom france japan others 6,97% 6% 3,82% 3,74% 3,72% 75,80% largest individual positions by shares pentair danaher cdsbde suez environnement united utilities others s o u r c e : www.sustainable-investment.org. 43,16% 5,01% 4,72% 24,75% 17,92% largest individual positions by sector industrial products utilities regulated waste management chemicals engineering and construction others advanced private banking in terms of ecology 107 dws zukunftsressourcen this fund was launched in 2006. in february 2014, it had assets worth eur 269 mln. according to the strategy of the fund, at least 51 % of the assets should be invested in german and foreign companies operating in the sector connected with water, agrochemistry and renewable energy. only companies with 20 % income coming from these areas qualify for the portfolio of this fund. figure 5 shows the geographic and sector structure of the fund together with its most important companies dws zukunftsressourcen invests mainly in the industry in the usa and japan. figure 5. dws zukunftsressourcen structure 19,63% 7,16% 7,04% 6,91% 49,04% largest individual positions by sector industrial products autos semiconductors engineering and construction chemicals others 10,22% 7,16% 7,04% 6,91% 49,04% largest individual positions by sector industrial products autos semiconductors engineering and construction chemicals others figure 5. dws zukunftsressourcen structure source: www.sustainable-investment.org 19,63% 7,16% 7,04% 6,91% 49,04% largest individual positions by sector industrial products autos semiconductors engineering and construction chemicals others 42,48% 13% 7,01% 6,81% 5,05% 25,26% largest individual positions by countries usa japan china germany united kingdom others 4,09% 4% 3,68% 3,52% 3,49% 81,27% largest individual positions by shares quanta services danaher visa inc. sekisui house honeywell international others kamil nowak108 4,09% 4% 3,68% 3,52% 3,49% 81,27% largest individual positions by shares quanta services danaher visa inc. sekisui house honeywell international others s o u r c e : www.sustainable-investment.org.  conclusion swiss ubs bank and deutsche bank are perfect instances of financial institutions engaged in the protection of natural environment on the highest third level of involvement. along with the swiss sarasin bank, they are main representatives of private banking sector as far as caring for the environment is concerned. they are engaged in the environment protection not only in the perspective of their own functioning but they also engage their customers in this activity by offering environmentally friendly products and services. analyzing the environmentally-friendly offer of private banking institutions, raises the question: is it just a way to satisfy extravagant richest clients’ requirements or also socially responsible activity generating the intended effects? the answer is not clear. by creating products, banks are primarily focused on meeting the needs of customers. so the eco-friendly offer is a response to the growing demand for such products. based on the above it can be concluded that the involvement in activities to protect the environment at the third level of involvement is mainly dictated by the desire to gain a competitive advantage and profit. however, such an approach cannot be completely condemned since the primary objective of the financial institution is to satisfy the expectations of its shareholders by making profit. if this goal is achievable whilst taking care of the environment, such an institution can be called socially responsible. the effects of this activity will vary depending on the bank and the individual cha advanced private banking in terms of ecology 109 racteristics of the offered product. however, there is no denying that private banking institutions have considerable strength of the investment associated with the huge amount of capital of their customers. even if only a part of hnwi assets will be directed to finance environmental projects, the environment will certainly benefit from it. moreover, the involvement of private banking in ecology often has a positive effect on the mass retail banking. it must be noted that private banks have the most innovative technological solutions and, through financial engineering, serving mainly the needs of this segment, offer the most modern products. advanced solutions in private banking are frequently implemented at the lower segments of a bank. thanks to this, mass retail customers may engage in the activity to protect the environment through its financial partners.  references dziawgo l. (2003), eco-offers of banks and investment funds. poland & international trends, umk, torun. dziawgo l. (2005), private banking. istota – koncepcja – funkcjonowanie, umk, toruń. dziawgo l. (2010), zielony rynek finansowy. ekologiczna ewolucja rynku finansowego, pwe, warszawa. haigh m. and j. hazelton (2004). financial markets: a tool for social responsibility? journal of business ethics, 52, 59–71. http://dx.doi.org/10.1023/b:busi .0000033107.22587.0b. jeucken m. (2004), sustainability in finance. banking on the planet, eburon academic publisher. krosinsky c., robins n. (2008), sustainable investing. the art of long-term performance, earthscan, london. sparkes r. (2002), socially responsible investments; a global revolution, john wiley & sons, chichester. 2013 world wealth report (2013), http://www.worldwealthreport.com (accessed: 3.03.2014). https://www.db.com (accessed: 3.03.2014). http://www.sustainable-investment.org (accessed: 3.03.2014). https://www.ubs.com (accessed: 3.03.2014). cjfa_1_2015_przed_drukiem.pdf for authors the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 29 may 2013 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, all information identifying the author (authors) and reviewers is removed and the principles of a 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an external institution, the author is obliged to insert information about such a fact in the introduction of the article. editorial office copernican journal of finance & accounting fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl cjfa_11_4_2023_druk_25.07.23.pdf copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 11 issue 4 2022 quarterly editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: secretary: dr hab. damian walczak, prof. umk, mgr anna olewnik-dejewska scientific council prof. mustafa akan, dogus university, istanbul, turkey prof. gordon chang, national taiwan university of science and technology, taiwan prof. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. luis otero gonzález, universidad de santiago de compostela, spain prof. christiane goodfellow, jade hochschule wilhelmshaven, germany prof. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. rytis krušinskas, kaunas university of technology, lithuania prof. monika marcinkowska, university of lodz, poland prof. juan-antonio mondéjar-jiménez, universidad de castilla-la mancha, spain prof. david naranjo-gil, universidad pablo de olavide, sevilla, spain s t a t i s t i c a l e d i t o r : prof. dr hab. piotr fiszeder e n g l i s h p r o o f r e a d e r : mgr dominik liszkowski subject editors f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g i n e e r i n g : prof. dr hab. józef stawicki c o v e r d e s i g n : the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form e-issn: 2300-3065 p-issn: 2300-1240 i dystrybuowane w wersji address of the publisher kontakt@umk.pl, www.umk.pl print: drukarnia wn umk editorial office cjfa@umk.pl, www.cjfa.umk.pl icv 2021: 100.00 list of reviewers prof. francesca bartolacci, university of macerata, italy prof. andrzej buszko, university of warmia and mazury in olsztyn, poland prof. josé raúl canay-pazos, universidade de santiago de compostela, spain prof. nicola giuseppe castellano, university of macerata, italy prof. andrzej cwynar, university of economics and innovation, poland prof. catherine deffains-crapsky, université d’angers, france prof. cristina gânescu, constantin brâncoveanu din pite ti, romania prof. jerzy gierusz, gdansk university, poland prof. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. natalia konovalova, riseba university, riga, latvia prof. nicoletta marinelli, university of macerata, italy prof. lyudmila mihaylova, university of ruse, bulgaria prof. ewa miklaszewska, cracow university of economics, poland prof. emil papazov, university of national and world economy, sofia, bulgaria prof. ángel peiró signes, universitat politècnica de valència, spain prof. adalmiro pereira, politécnico do porto, portugal prof. wojciech piotrowicz, university of oxford, great britain prof. francisco sánchez del cubo, universidad de castilla-la mancha, spain prof. maria del val segarra-oña, universitat politècnica de valència, spain prof. nirundon tapachai, kasetsart university, thailand prof. gerard olivar tost, national university of colombia, colombia prof. yolanda trujillo-adria, universitat politècnica de valència, spain prof. jan turyna, warsaw university, poland table of contents gbenga festus babarinde, bashir ahmad daneji, mamoud abdul jalloh, tajudeen idera abdulmajeed financial inclusion implications on the liquidity of the nigerian capital market ......... hafida nur chofifah, ani wilujeng suryani korean music awards and abnormal stock returns ...................................................... 27 ewa chojnacka-pelowska, dorota górecka information available from mandatory reports and the possibility of applying ............................. 45 wulli faustin djoufouet, thierry messie pondie impacts of fintech on financial inclusion: the case of sub-saharan africa .............. danuta dziawgo responsibility ....................................................................................................................... rajasekharan ganesh, s. thiyagarajan, gopala vasudevan, g. naresh ........................................................... 107 nisarg a. joshi impact of covid composite and sectoral indices .................................................................................... 125 urszula król a theoretical analysis of the new polish income tax system ..................................... 147 table of contents8 salah uddin rajib max weber’s rationality in accounting research ....................................................... 165 geeta singh, kaushik bhattacharjee, srikanth potharla a literature survey and bibliometric analysis of the impact of controlling shareholders on dividend policy .................................................................................... 183 the financial effects of the fiscal sovereignty of municipality regarding real estate tax ........................................................................................................................... 203 for authors ......................................................................................................................... 217 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-1240 data wpłynięcia: 06.06.2013; data zaakceptowania: 10.11.2013. * dane kontaktowe: mibus@econ.uni.torun.pl, katedra zarządzania finansami, wydział nauk ekonomicznych i zarządzania, uniwersytet mikołaja kopernika, ul. gagarina 13a, 87-100 toruń, tel. 56 611 46 34. doi: 10.12775/cjfa.2013.0142013, volume 2, issue 2 michał buszko* uniwersytet mikołaja kopernika w toruniu walutowe kredyty mieszkaniowe we franku szwajcarskim – zagrożenie czy źródło korzyści kredytobiorców? słowa kluczowe: kredyty mieszkaniowe, frank szwajcarski, kurs walutowy, ryzyko. klasyfikacja j e l: g21. abstrakt: niniejszy artykuł dotyczy problematyki zagrożeń, ryzyka oraz korzyści finansowych generowanych przez walutowe kredyty mieszkaniowe udzielane w polsce we franku szwajcarskim. w szczególności opracowanie koncentruje się na sytuacji kredytobiorców, w tym na określeniu zagrożeń oraz korzyści osiąganych przez nich na tle finansowania w pln. w pracy przedstawiono szczegółowo znaczenie i rolę walutowych kredytów mieszkaniowych w sektorze bankowym, a także scharakteryzowano rodzaje ryzyka obciążającego banki oraz osoby zaciągające kredyty w chf. na potrzeby pracy przygotowano model porównawczy spłaty kredytów w chf i pln oraz przeprowadzono analizę korzyści finansowych osiąganych przez kredytobiorców zaciągających kredyty frankowe w latach 2006–2009 na tle osób finansujących się w walucie krajowej. swiss franc mortgage loans – a threat or source of benefits to borrowers? keywords: mortgage loans, swiss franc, exchange rate, risk. j e l classification: g21. abstract: this paper relates to issues of hazard, risk and financial benefits generated by currency mortgage loans in swiss franc granted in poland. in particular, the paper michał buszko28 focuses on situation of borrowers, especially describing hazards and financial benefits against financing in polish currency. in the paper, the author presents in details the nature and role of currency mortgage loans in banking sector, as well as characterizes risk types burdening banks and borrowers of chf loans. also, the author prepared a comparative model of repayment of mortgage loans as well as investigated financial benefits obtained by swiss franc borrowers in period 2006–2009 against polish zloty borrowers. translated by michał buszko  wstęp szybki rozwój rynku mieszkaniowego w polsce, przejawiający się wzmożonym zakupem mieszkań, działek i domów w okresie 2005–2009, powiązany był z intensywnym wzrostem sprzedaży kredytów denominowanych lub indeksowanych w stosunku do franka szwajcarskiego (chf). podstawowymi przesłankami finansowania za pomocą wymienionych kredytów była znacząca różnica w oprocentowaniu waluty szwajcarskiej i polskiej, przekładająca się na istotnie niższą wysokość rat, umacniający się względem chf polski złoty (pln), a także postrzegana wysoka stabilność szwajcarskiego pieniądza. czynnikami zachęcającymi do kredytowania w walucie obcej była również wyższa zdolność kredytowa kalkulowana dla zadłużenia walutowego, a także chęć osiągania oszczędności kosztowych przy finansowaniu 100 i więcej procent wartości nieruchomości, przy jednoczesnym wydłużaniu czasu spłaty kredytu do 30 i więcej lat. kredytowanie we franku było jednocześnie preferowane przez wiele banków w sektorze, z powodu możliwości uzyskiwania dodatkowych korzyści z tytułu spreadu walutowego, ubezpieczenia niskiego wkładu własnego czy ubezpieczenia ryzyka kursowego, a także wyższych marż kredytowych na tle finansowania w pln. w efekcie rynek kredytów hipotecznych w polsce został zdominowany przez kredyty denominowane lub indeksowane w stosunku do walut obcych, w tym przede wszystkim chf. walutowe kredyty mieszkaniowe przyczyniły się do obciążenia polskiego systemu finansowego różnymi rodzajami ryzyka występującego zarówno po stronie kredytodawców, jak i kredytobiorców. w przypadku banków kredyty te bezpośrednio wygenerowały ryzyko refinansowania, ryzyko płynności, ryzyko pogorszenia adekwatności kapitałowej. zasadniczym problemem dla instytucji finansowych stała się jednak możliwość przekształcenia ryzyka kursowego, na jakie wystawili się kredytobiorcy, w ryzyko kredytowe o charakterze systemowym. w przypadku kredytobiorców kredyty walutowe po walutowe kredyty mieszkaniowe we franku szwajcarskim 29 wodowały ekspozycję na ryzyko zmiany kursu walutowego oraz stóp procentowych walut obcych (chf), uzależniając wysokość spłaty rat kredytów od sytuacji na międzynarodowym rynku finansowym. wymienione rodzaje ryzyka powodowały możliwość wystąpienia wyższych wydatków z tytułu spłaty kredytów walutowych na tle finansowania w pln, jak również możliwość zagrożenia stabilnego funkcjonowania finansów gospodarstw domowych kredytujących się w chf. materializacja ryzyka z tytułu udzielonych walutowych kredytów mieszkaniowych nastąpiła już w 2008 r., kiedy rozpoczął się silny trend umacniania franka szwajcarskiego względem innych walut, w tym polskiego złotego. pomimo że w latach 2008–2011 kurs średni waluty szwajcarskiej zmienił się w polsce o 101,89% (z historycznego minimum na poziomie 1,9966 do historycznego maksimum 3,9562), w polskim sektorze bankowym nie nastąpiło istotne pogorszenie jakości portfela kredytowego ani nie wystąpił problem masowej niewypłacalności kredytobiorców. jedną z przyczyn tego stanu rzeczy był znaczący spadek oprocentowania libor chf 3m, który wpłynął na redukcję części odsetkowej rat kredytów, a także relatywnie dobra sytuacja ekonomiczna dłużników, którzy byli w stanie spłacać raty, pomimo wahań kursu. w praktyce potwierdzało to prowadzenie relatywnie bezpiecznej polityki kredytowej banków w zakresie finansowania w chf. chociaż zawirowania na rynkach finansowych nie wpłynęły istotnie na pogorszenie sytuacji ekonomicznej banków w polsce, w tym ich niewypłacalność z tytułu finansowania w chf, stosunkowo krótki okres istnienia portfeli kredytów mieszkaniowych w polsce oraz wysoki stopień niezrównoważenia finansowania nieruchomości za pomocą kredytów w chf może determinować w przyszłości pogorszenie sytuacji całego sektora bankowego w warunkach jednoczesnego wzrostu kursu i stóp procentowych w szwajcarii. celem niniejszego artykułu jest wskazanie oraz charakterystyka obszarów ryzyka wynikającego ze stosowania w polsce walutowych kredytów mieszkaniowych w latach 2005–2009 z punktu widzenia zarówno kredytodawców, jak i kredytobiorców. praca będzie miała również na celu wskazanie względnej korzystności stosowania kredytów w chf na tle kredytów w pln z punktu widzenia kredytobiorców, a także określenie warunków determinujących opłacalność finansowania w walucie szwajcarskiej. michał buszko30 1. metodyka badań i przebieg procesu badawczego na potrzeby niniejszego artykułu przeprowadzone zostały studia literatury oraz dokumentacji uknf związane z ryzykiem kredytów walutowych. autor przygotował również model spłaty kredytów w chf oraz pln przy założeniu rozpoczęcia kredytowania w miesiącach styczeń 2006–grudzień 2009, dzięki któremu przeprowadził badanie zadłużenia (ltv), wartości rat i ich zmienności, a także łącznych wydatków z tytułu spłaty kredytów, w zależności od momentu ich zaciągania. autor ustalił również względną korzystność finansowania we franku szwajcarskim na tle kredytów w polskich złotych, obliczając zarówno korzyści całkowite, jak i przypadające na ratę kredytu. w opracowaniu przyjęto hipotezę badawczą, że kredyty mieszkaniowe w chf, pomimo większego ryzyka związanego ze zmiennością rat oraz wzrostem kwoty zadłużenia, są korzystniejszym instrumentem finansowania z punktu widzenia kredytobiorców na tle kredytów mieszkaniowych w polskich złotych. 2. znaczenie walutowych kredytów mieszkaniowych w sektorze bankowym wraz z relatywnie szybkim rozwojem polskiej gospodarki na początku xxi w., wzrastającym zatrudnieniem oraz rosnącymi wynagrodzeniami, na polskim rynku finansowym istotnie zwiększył się popyt na kredyty mieszkaniowe służące zakupowi mieszkań, domów lub działek budowlanych. wymienione kredyty zdominowały zarówno portfel kredytowy, jak i sumę bilansową całego sektora bankowego1. dodatkowo, wysoki dysparytet stóp libor chf i wibor oraz postrzegana wysoka stabilność waluty szwajcarskiej połączona z wysoką aktywnością sprzedażową banków w zakresie kredytów walutowych doprowadziły do zdominowania finansowania zakupu mieszkań w polsce przez franka szwajcarskiego (tab. 1)2. 1 na koniec 2012 r. osiągnęły one udział 35,4% w kredytach ogółem, co stanowiło 23,5% sumy bilansowej sektora bankowego. zob. raport 2013, 42. 2 ze względu na mniejszy dysparytet oprocentowania, kredyty w innych walutach nie były udzielane często na polskim rynku. sytuacja zmieniła się w 2010 r., kiedy ze względu na zawirowania na międzynarodowym rynku finansowym banki ograniczyły finansowanie w chf na rzecz euro. walutowe kredyty mieszkaniowe we franku szwajcarskim 31 tabela 1. portfel kredytów mieszkaniowych w polsce w chf w latach 2005–2012 rok 2005 2006 2007 2008 2009 2010 2011 2012 wartość kredytów udzielonych w chf (mld zł) 11,5 25,2 33,1 56,2 5,8 3,0 3,5 0,2 liczba udzielonych kredytów w chf (tys. szt.) 87,2 118,7 98,1 165,6 19,5 8,2 10,0 0,4 wartość portfela kredytów w chf (mld zł) b.d. b.d. b.d. 131,9 132,9 147,4 163,5 144,7* walutowe kredyty mieszk. dla gosp. dom. (mld zł) 32,2 50 65,1 136 142,1 169,3 197,8 178,3 kredyty mieszkaniowe razem (mld zł) 50,7 78,2 117,7 195,1 217,8 267,5 318,8 321,8 udział walut kredytów mieszk. w kredytach mieszk. ogółem w % 63,5 63,9 55,3 69,7 65,2 63,3 62,1 55,4 * – dane szacunkowe na podstawie badania knf. ź r ó d ł o: opracowanie własne na podstawie: raport 2009, 43; raport 2010, 27; raport 2011, 17; raport 2012, 31; raport 2013, 42; ocena wpływu 2013, 7. na koniec 2012 r. w portfelu kredytów mieszkaniowych sektora bankowego znajdowało się 580 489 kredytów w chf, co stanowiło 34,6% wszystkich otwartych umów kredytów mieszkaniowych (raport 2013, 99)3. pod względem wartości kredyty we franku w rozważanym momencie osiągnęły poziom 144 664 mln zł, koncentrując 45,8% wartości portfela kredytów mieszkaniowych4. średnia wartość umowy kredytowej w chf wyniosła 249,2 tys. zł. przytoczone powyżej dane wskazują, iż wartość kredytów frankowych i ich znaczenie w portfelu sektora bankowego w polsce pozostają nadal bardzo wysokie. chociaż w polsce nowe umowy kredytowe w chf od 2011 r. należą do wyjątków, to jednak długi okres finansowania rozpoczętego w latach wcześniejszych (25–30 lat), a także brak opłacalności przedterminowej spłaty skutkuje utrzymaniem dominującej pozycji chf w portfelu kredytowym w polsce. należy przy tym wskazać, że oddziaływanie ryzyka związanego z kredytami walutowymi, chęć uniezależnienia się od sytuacji na międzynarodowym rynku finansowym oraz możliwość korzystania z programu „rodzina na swoim” 3 w tym samym czasie liczba otwartych umów kredytów mieszkaniowych w pln i eur wynosiła odpowiednio 980 298 i 113 163 sztuk, co stanowiło odpowiednio 58,4 i 6,7% wszystkich kredytów mieszkaniowych. 4 w pln i eur było to odpowiednio 138 727 mln zł oraz 31 285 mln zł, stanowiąc 43,9 i 9,9% portfela. michał buszko32 zapoczątkowały spadek udziału kredytów walutowych w portfelu sektora już w 2009 r. jednocześnie w 2012 r. do tendencji spadkowej w zakresie udziału dołączył spadek łącznej wartości zadłużenia w walutach. umacnianie się polskiego złotego względem franka, samodzielne wycofywanie się banków z udzielania kredytów walutowych (zwłaszcza w walucie szwajcarskiej) oraz przyjęcie przez knf w 2013 r. nowej rekomendacji s skutkującej kredytowaniem walutowym tylko osób osiągających przychody w walucie kredytu (rekomendacja 2011) czy wreszcie bardzo wysoki poziom zadłużenia klientów posiadających kredyty w chf w stosunku do wartości nieruchomości spowodowały istotny wzrost zainteresowania polskim złotym w finansowaniu nieruchomości. pomimo bardzo dużego znaczenia kredytów walutowych w polskim sektorze bankowym, istotne jest to, że ekspozycje frankowe mają wysoką jakość, a udział nieregularnie spłacanych zobowiązań na koniec 2012 r. wyniósł zaledwie 1,85%5 (raport 2013, 106). wynik ten może potwierdzać, iż kredyty walutowe udzielane były na ogół osobom klasy średniej (cienski, eddy 2013). pod względem liczby ekspozycji walutowych w podanym powyżej okresie dominowali kredytobiorcy o dochodach od 2 do 4 tys. zł (32,9% wszystkich kredytów walutowych), co było zjawiskiem podobnym do kredytowania w pln (42,4% wszystkich kredytów złotowych). niemniej pod względem wartości udzielonych kredytów walutowych, największy udział przypadł kredytobiorcom o dochodach powyżej 10 tys. zł (27,1%), co istotnie odróżniało ekspozycje walutowe od złotowych zdominowanych przez dłużników o dochodach między 2 a 4 tys. zł (30,7%) (raport 2013, 104). 3. ryzyko walutowych kredytów mieszkaniowych walutowe kredyty mieszkaniowe są ekspozycjami generującymi kilka istotnych rodzajów ryzyka z punktu widzenia banków jak i kredytobiorców. banki udzielające kredytów walutowych w pierwszej kolejności zostają wystawione na ryzyko refinansowania (reinwestowania) oraz płynności. na skutek oddziaływania ryzyka kursowego wymienionych kredytów banki są narażone także na ryzyko braku adekwatności kapitałowej oraz ryzyko kredytowe. ryzyko refinansowania (reinwestowania) wiąże się z koniecznością pozyskania źródeł finansowania kredytów w chf na rynku międzybankowym 5 według badań uknf po uwzględnieniu przewalutowań oraz przedterminowej spłaty kredytów w pln należności zagrożone stanowią 2,98% walutowych kredytów mieszkaniowych, wobec 2,68% w pln. walutowe kredyty mieszkaniowe we franku szwajcarskim 33 z powodu braku posiadania depozytów frankowych przez klientów. banki udzielające kredytów w walucie szwajcarskiej zmuszone są do pozyskiwania finansowania w formie pożyczek rynku międzybankowego (np. fx swap lub ccs) bądź pożyczek od zagranicznych spółek-matek. stan ten uzależnia ściśle banki w polsce od sytuacji na rynku międzynarodowym oraz jednocześnie powoduje występowanie wysokiej, ujemnej luki finansowania (długiej pozycji walutowej), niespotykanej w przypadku walut takich jak eur czy usd (raport 2013, 69). wytworzenie wspomnianej luki powoduje wystawienie banków na ryzyko zmiany kursu walutowego, a tym samym wymaga zabezpieczenia jej za pomocą instrumentów pochodnych. konieczność refinansowania kredytów w chf na rynku międzybankowym wiąże się z ryzykiem strat w przypadku zawirowań na rynkach finansowych. w rozważanych warunkach trudność dostępu do waluty szwajcarskiej przy jednoczesnej konieczności spłaty pożyczek rynku międzybankowego powoduje ponoszenie dodatkowych kosztów zdobycia waluty, a tym samym wpływa na możliwość powstania ujemnej marży odsetkowej6. ryzyko płynności wiąże się z kolei z niedopasowaniem terminów zapadalności aktywów i wymagalności pasywów w tej samej walucie (chf). ponieważ instrumenty finansowania bądź refinansowania kredytów walutowych mają zdecydowanie krótsze terminy wymagalności niż wynosi zapadalność kredytów, banki muszą odnawiać pasywa (rolować zadłużenie) celem podtrzymania płynności. sytuacja ta może zagrozić bezpieczeństwu banków kredytujących w chf w przypadku problemów z pozyskaniem finansowania na międzynarodowym rynku międzybankowym7. ryzykiem, które istotnie oddziałuje na banki w przypadku finansowania w walutach, jest również rynkowe ryzyko zmiany kursu walutowego. ryzyko to w pierwszej kolejności będzie powodowało możliwość utraty adekwatności kapitałowej banków, ze względu na niekontrolowany wzrost wartości portfela kredytowego spowodowany umocnieniem franka wobec polskiej waluty. rozrost portfela będzie wymagał zwiększenia funduszy własnych banku, co zwłaszcza w warunkach zawirowań na rynku kapitałowym czy międzybankowym może nie być możliwe do zrealizowania lub może generować ponadnor6 ryzyko refinansowania może być mierzone za pomocą wartości zagrożonej var oraz testów warunków skrajnych. 7 ryzyko płynności może być mierzone za pomocą kontraktowej i urealnionej luki płynności, kontraktowej rezerwy płynności, miary stabilności portfela kredytów i depozytów, testy warunków skrajnych oraz ocenę realnych przepływów gotówkowych. michał buszko34 matywne koszty. pogorszenie lub utrata adekwatności kapitałowej z tytułu ryzyka kredytów walutowych będzie jednocześnie problemem wpływającym na całą działalność kredytową banku, w tym na kredyty udzielane w walucie krajowej8. inną konsekwencją występowania ryzyka kursowego jest możliwość jego przełożenia na ryzyko kredytowe. w tym przypadku wzrost wartości waluty szwajcarskiej do pln będzie zwiększał wysokość rat, w skrajnym przypadku prowadząc do niewypłacalności klientów. zaprzestanie spłaty kredytu będzie oznaczało wypowiedzenie umowy kredytowej oraz windykację wierzytelności. ze względu na wysoką wartość franka, a tym samym wartość długu istotnie przekraczającą cenę nabycia nieruchomości, banki nie będą w stanie odzyskać środków zamrożonych w niespłacalnych kredytach9. w przypadku kredytobiorców ryzyko wynikające z walutowych kredytów mieszkaniowych w pierwszej kolejności powoduje uzależnienie ich sytuacji finansowej (poziomu wydatków z tytułu spłacanych rat kredytu) od zmiany kursu waluty szwajcarskiej oraz stóp procentowych libor chf, odzwierciedlających sytuację na międzynarodowym rynku finansowym. w przypadku umocnienia waluty szwajcarskiej w stosunku do innych walut światowych, w szczególności do euro, będą oni ponosili wyższe wydatki z tytułu spłaty rat, płacąc za ryzyko makroekonomiczne lub finansowe zlokalizowane poza polską. jednocześnie będą oni niewrażliwi na działania wspierające polskich kredytobiorców, podejmowane na rynku krajowym przez radę polityki pieniężnej nbp10. w praktyce podstawowym zagrożeniem dla kredytobiorców, wynikającym z ryzyka kursowego i stóp procentowych chf, jest wypowiedzenie umowy kredytu, postawienie jego w stan wymagalności oraz konieczność dokonania przedterminowej spłaty przy wysokim poziomie wyceny chf. w takich warunkach nastąpiłby znaczący wzrost zobowiązań kredytobiorców w przeliczeniu na pln, niemożliwy do spłaty z zabezpieczających je nieruchomości. 8 ryzyko utraty adekwatności kapitałowej może być mierzone za pomocą testów warunków skrajnych dla współczynnika wypłacalności, relacji funduszy własnych do kapitału wewnętrznego, współczynnika wypłacalności dla kapitałów podstawowych. 9 ryzyko kredytowe może być mierzone za pomocą prawdopodobieństwa niewypłacalności, oczekiwanej straty kredytowej, wartości zagrożonej ryzykiem kredytowym, miar efektywności metod scoringowych, udziału kredytów z rozpoznaną utratą wartości, kosztu ryzyka i innych. 10 zawirowania na rynku walutowym w latach 2008–2011 pokazały, iż nawet w przypadku skrajnie wysokich wycen franka kredytobiorcy byli w stanie wywiązywać się ze swoich zobowiązań wobec banków, chociaż czynnikiem, który ułatwił w tych warunkach spłatę rat, była równoległa obniżka stóp libor chf. walutowe kredyty mieszkaniowe we franku szwajcarskim 35 konieczność dochodzenia przez banki roszczeń z innych aktywów i dochodów kredytobiorców spowodowałaby destabilizację finansową i jednocześnie życiową kredytobiorców zadłużonych w chf11. innym zagrożeniem wynikającym z kredytowana walutowego jest konieczność zabezpieczenia brakującego wkładu własnego, co jest powszechną sytuacją w przypadku zaciągania kredytów przy niskim poziomie wyceny chf. zabezpieczenie to wiąże się najczęściej z koniecznością ponoszenia znaczących kosztów z tytułu ubezpieczenia niskiego wkładu własnego. 4. wyniki badań korzyści z tytułu walutowych kredytów mieszkaniowych z punktu widzenia kredytobiorców na potrzeby niniejszej pracy przeprowadzone zostało badanie wydatków z tytułu rzeczywistej spłaty kredytów w chf oraz pln (ex post) zaciąganych w latach od stycznia 2006 do grudnia 2009 r., tzn. w okresie największej aktywności sprzedaży kredytów we franku, za pomocą modelu spłaty przygotowanego przez autora. badanie miało na celu ustalić opłacalność kredytowania walutowego na tle polskich złotych, w tym odpowiedzieć na pytanie, czy niezrównoważone (zmienne i obarczone podwyższonym ryzykiem) finansowanie walutowe pozwala osiągnąć korzyści finansowe w postaci płacenia niższych rat oraz osiągania globalnej oszczędności z tytułu całkowitej spłaty kredytów frankowych w stosunku do kredytów złotowych. badanie przeprowadzono, porównując zmienność zadłużenia, średnią wysokość rat, kwotę oszczędności globalnych z tytułu spłaty zadłużenia walutowego oraz kwotę średnich oszczędności przypadających na ratę na dzień 31 grudnia 2013 r. z uwzględnieniem momentu rozpoczęcia kredytowania. miało ono tym samym na celu wykazać lub zaprzeczyć opłacalności zaciągania walutowych kredytów mieszkaniowych w chf z punktu widzenia polskich kredytobiorców. do badania wykorzystano kredyt w kwocie 250 000 zł, który odpowiada średniej wartości kredytu mieszkaniowego w walucie obcej w polskim sektorze bankowym, przy założeniu finansowania kredytem 100% wartości nieruchomości (ltv=100%). w badaniu założono, że oprocentowanie kredytu indeksowane jest stopą re11 w odróżnieniu od kredytów mieszkaniowych w pln, kredyty w chf zaciągane były przede wszystkim w wysokich kwotach, które po uwzględnieniu zmian kursu walutowego spowodowały dominację w portfelu kredytowym chf ekspozycji przekraczających równowartość 500 000 zł (36,6% wartości wszystkich kredytów mieszkaniowych w chf) oraz o wskaźniku ltv >130% (29,9%). zob. szerzej: raport 2012, 33. michał buszko36 ferencyjną libor chf 3m dla franka oraz wibor 3m dla złotego w każdym kwartale kalendarzowym, przy czym za dany kwartał przyjęto oprocentowanie według stopy referencyjnej z ostatniego dnia poprzedniego kwartału. dla obu rodzajów finansowania przyjęto marżę kredytową w wysokości 200 p.b. dla ustalenia kwoty kredytu oraz wysokości spłacanych rat w przeliczeniu na pln, ustalono kurs skupu i sprzedaży chf jako średnią kursu średniego nbp z pierwszych 6 dni miesiąca12 pomniejszoną o 3,25% (kurs skupu) oraz średnią powiększoną o 3,25% (kurs sprzedaży). do analizy przyjęto okres 20, 25 i 30 lat spłaty kredytu w miesięcznych ratach annuitetowych. opłacalność kredytowania we franku szwajcarskim z punktu widzenia kredytobiorców analizowano w pierwszej kolejności pod kątem wysokości stóp procentowych i kursu walutowego determinujących wartość długu w momencie rozpoczęcia kredytowania oraz wysokość rat w okresie spłaty. rysunek 1 przedstawia względną wartość kursu chf/pln oraz dysparytet stawek referencyjnych wibor 3m – libor chf 3m (styczeń 2006 = 100%) w okresie spłacania kredytów od stycznia 2006 do grudnia 2013 r. rys. 1. kurs walutowy chf/pln oraz dysparytet stóp wibor i libor rat w okresie spłaty. rysunek 1 przedstawia względną wartość kursu chf/pln oraz dysparytet stawek referencyjnych wibor 3m – libor chf 3m (styczeń 2006 = 100%) w okresie spłacania kredytów od stycznia 2006 do grudnia 2013 r. rys. 1. kurs walutowy chf/pln oraz dysparytet stóp wibor i libor źródło: opracowanie własne. optymalny z punktu widzenia kredytobiorców moment na zaciąganie kredytów walutowych występował w chwili jednoczesnego wysokiego kursu franka oraz wysokiego dysparytetu stóp procentowych. w praktyce sytuacja taka zaistniała na początku 2009 r. oraz w szczególności w całym 2012 r. we wskazanym czasie kredytów we franku udzielano jednak w stopniu niewielkim lub wcale, na co wpływ miały decyzje samych banków, jak również wpływ działań i rekomendacji knf. największy udział kredytów frankowych przypadł na okres niskiego dysparytetu oraz jednocześnie niskiej wyceny franka (lata 2007–2008), co oznaczało relatywnie niekorzystne warunki początkowe rozpoczęcia kredytowania walutowego w polsce, przekładające się na potencjalne przyszłe straty kredytobiorców (buszko 2012). przedstawione powyżej stwierdzenie znajduje swoje odzwierciedlenie w wysokości zadłużenia pozostałego do spłaty w stosunku do wartości nieruchomości (ltv) oraz średniej raty kredytów zaciąganych w okresie od stycznia 2006 do grudnia 2009 r. według wyceny z końca grudnia 2013 r. (rys. 2 i 3). rys. 2. ltv kredytów w chf i pln rys. 3. średnia rata kredytów chf i pln 0,00% 20,00% 40,00% 60,00% 80,00% 100,00% 120,00% 140,00% 160,00% st y06 w rz -0 6 m aj -0 7 st y08 w rz -0 8 m aj -0 9 st y10 w rz -1 0 m aj -1 1 st y12 w rz -1 2 m aj -1 3 wibor libor kurs chf/pln ź r ó d ł o: opracowanie własne. optymalny z punktu widzenia kredytobiorców moment na zaciąganie kredytów walutowych występował w chwili jednoczesnego wysokiego kursu franka oraz wysokiego dysparytetu stóp procentowych. w praktyce sytuacja taka zaistniała na początku 2009 r. oraz w szczególności w całym 2012 r. we wskazanym czasie kredytów we franku udzielano jednak w stopniu niewiel12 okres standardowo wybierany do spłaty raty kredytu mieszkaniowego. walutowe kredyty mieszkaniowe we franku szwajcarskim 37 kim lub wcale, na co wpływ miały decyzje samych banków, jak również wpływ działań i rekomendacji knf. największy udział kredytów frankowych przypadł na okres niskiego dysparytetu oraz jednocześnie niskiej wyceny franka (lata 2007–2008), co oznaczało relatywnie niekorzystne warunki początkowe rozpoczęcia kredytowania walutowego w polsce, przekładające się na potencjalne przyszłe straty kredytobiorców (buszko 2012). przedstawione powyżej stwierdzenie znajduje swoje odzwierciedlenie w wysokości zadłużenia pozostałego do spłaty w stosunku do wartości nieruchomości (ltv) oraz średniej raty kredytów zaciąganych w okresie od stycznia 2006 do grudnia 2009 r. według wyceny z końca grudnia 2013 r. (rys. 2 i 3). rys. 2. ltv kredytów w chf i pln rys. 3. średnia rata kredytów chf i pln źródło: opracowanie własne. źródło: opracowanie własne. biorąc pod uwagę wartość długu pozostającą do spłaty na koniec grudnia 2013 r. oraz średnią wartość raty, w obu przypadkach największa kwota występowała w przypadku kredytów zaciąganych w walucie w sierpniu 2008 r., a więc w warunkach występowania minimum kursowego chf/pln13. najkorzystniejszym okresem z punktu widzenia zaciągania kredytów walutowych był z kolei początek 2009 r. w przypadku kredytów 20-letnich zaciąganych w okresie od stycznia do lipca 2009 r. wartość ltv na koniec 2013 r. wynosiła poniżej 100%. w przypadku kredytów 25-letnich jedynie kredyty zaciągane w lutym i marcu 2009 r. pozwoliły osiągnąć wartość zadłużenia poniżej 100% wartości nieruchomości, a dla kredytów 30-letnich wartość ta była osiągalna w chwili rozpoczęcia kredytowania tylko w marcu 2009 r. ze względu na niskie oprocentowanie libor chf 3m, wartość średniej raty spłacanej z tytułu walutowych kredytów mieszkaniowych, pomimo znaczącego wzrostu długu kredytobiorców z tytułu zmiany kursu walutowego, pozostała na ogół niższa niż kredytów złotowych. dla kredytów 20-letnich ekspozycje frankowe w okresie od czerwca 2007 r. do listopada 2008 r. były droższe niż kredyty złotowe. kredytów frankowych 25-letnich nie opłacało się zaciągać od listopada 2007 do stycznia 2008 r. oraz od kwietnia do października 2008 r., a 30-letnich jedynie od lipca do września 2008 r. niezależnie od okresu kredytowania, najwyższe raty według średniej wartości spłacają osoby, które zaciągnęły kredyty walutowe w sierpniu 2008 r. analizę opłacalności zaciągania kredytów walutowych na tle kredytów złotowych można uzupełnić o porównanie zmiany wysokości rat dla ekspozycji 20-letnich, a więc najmniej opłacalnych z punktu widzenia kredytobiorców zaciągających kredyty walutowe, tworzonych w dwóch skrajnych momentach, tzn. w okolicach maksimum oraz minimum kursowego chf – sierpień 2008 oraz marzec 2009 r. (rys. 4 i 5). 13 31 lipca 2008 r. średni kurs chf/pln był najniższy w historii współczesnego rynku i wyniósł 1,9596. 0,0% 20,0% 40,0% 60,0% 80,0% 100,0% 120,0% 140,0% 160,0% 180,0% sty 06 wrz 06 maj 07 sty 08 wrz 08 maj 09 ltv chf (30) ltv chf (25) ltv chf (20) ltv pln (30) ltv pln (25) 0,00 500,00 1000,00 1500,00 2000,00 2500,00 3000,00 sty-06 wrz-06 maj-07 sty-08 wrz-08 maj-09 śr. rata chf (30) śr. rata chf (25) śr. rata chf (20) śr. rata pln (30) śr. rata pln (25) śr. rata pln (20) ź r ó d ł o: opracowanie własne. źródło: opracowanie własne. biorąc pod uwagę wartość długu pozostającą do spłaty na koniec grudnia 2013 r. oraz średnią wartość raty, w obu przypadkach największa kwota występowała w przypadku kredytów zaciąganych w walucie w sierpniu 2008 r., a więc w warunkach występowania minimum kursowego chf/pln13. najkorzystniejszym okresem z punktu widzenia zaciągania kredytów walutowych był z kolei początek 2009 r. w przypadku kredytów 20-letnich zaciąganych w okresie od stycznia do lipca 2009 r. wartość ltv na koniec 2013 r. wynosiła poniżej 100%. w przypadku kredytów 25-letnich jedynie kredyty zaciągane w lutym i marcu 2009 r. pozwoliły osiągnąć wartość zadłużenia poniżej 100% wartości nieruchomości, a dla kredytów 30-letnich wartość ta była osiągalna w chwili rozpoczęcia kredytowania tylko w marcu 2009 r. 13 31 lipca 2008 r. średni kurs chf/pln był najniższy w historii współczesnego rynku i wyniósł 1,9596. michał buszko38 ze względu na niskie oprocentowanie libor chf 3m, wartość średniej raty spłacanej z tytułu walutowych kredytów mieszkaniowych, pomimo znaczącego wzrostu długu kredytobiorców z tytułu zmiany kursu walutowego, pozostała na ogół niższa niż kredytów złotowych. dla kredytów 20-letnich ekspozycje frankowe w okresie od czerwca 2007 r. do listopada 2008 r. były droższe niż kredyty złotowe. kredytów frankowych 25-letnich nie opłacało się zaciągać od listopada 2007 do stycznia 2008 r. oraz od kwietnia do października 2008 r., a 30-letnich jedynie od lipca do września 2008 r. niezależnie od okresu kredytowania, najwyższe raty według średniej wartości spłacają osoby, które zaciągnęły kredyty walutowe w sierpniu 2008 r. analizę opłacalności zaciągania kredytów walutowych na tle kredytów złotowych można uzupełnić o porównanie zmiany wysokości rat dla ekspozycji 20-letnich, a więc najmniej opłacalnych z punktu widzenia kredytobiorców zaciągających kredyty walutowe, tworzonych w dwóch skrajnych momentach, tzn. w okolicach maksimum oraz minimum kursowego chf – sierpień 2008 oraz marzec 2009 r. (rys. 4 i 5). rys. 4. rata chf vs. pln kurs min rys. 5. rata chf vs. pl kurs max nosiła poniżej 100%. w przypadku kredytów 25-letnich jedynie kredyty zaciągane w lutym i marcu 2009 r. pozwoliły osiągnąć wartość zadłużenia poniżej 100% wartości nieruchomości, a dla kredytów 30-letnich wartość ta była osiągalna w chwili rozpoczęcia kredytowania tylko w marcu 2009 r. ze względu na niskie oprocentowanie libor chf 3m, wartość średniej raty spłacanej z tytułu walutowych kredytów mieszkaniowych, pomimo znaczącego wzrostu długu kredytobiorców z tytułu zmiany kursu walutowego, pozostała na ogół niższa niż kredytów złotowych. dla kredytów 20-letnich ekspozycje frankowe w okresie od czerwca 2007 r. do listopada 2008 r. były droższe niż kredyty złotowe. kredytów frankowych 25-letnich nie opłacało się zaciągać od listopada 2007 do stycznia 2008 r. oraz od kwietnia do października 2008 r., a 30-letnich jedynie od lipca do września 2008 r. niezależnie od okresu kredytowania, najwyższe raty według średniej wartości spłacają osoby, które zaciągnęły kredyty walutowe w sierpniu 2008 r. analizę opłacalności zaciągania kredytów walutowych na tle kredytów złotowych można uzupełnić o porównanie zmiany wysokości rat dla ekspozycji 20-letnich, a więc najmniej opłacalnych z punktu widzenia kredytobiorców zaciągających kredyty walutowe, tworzonych w dwóch skrajnych momentach, tzn. w okolicach maksimum oraz minimum kursowego chf – sierpień 2008 oraz marzec 2009 r. (rys. 4 i 5). rys. 4. rata chf vs. pln kurs min rys. 5. rata chf vs. pl kurs max źródło: opracowanie własne. źródło: opracowanie własne. kredyty frankowe zaciągane w marcu 2009 r. w całym dotychczasowym okresie spłaty pozostały tańsze niż kredyty w pln, chociaż ze względu na utrzymujący się wysoki kurs franka oraz malejący dysparytet, są coraz mniej opłacalne z punktu widzenia kredytobiorców. kredyty w chf zaciągane w sierpniu 2008 r. stały się droższe niż w pln już w marcu 2009 r., by stanieć nieco w lipcu i zdrożeć permanentnie w stosunku do pln w czerwcu 2010 r. oceniając korzystność stosowania finansowania w walucie obcej, można wskazać łączną kwotę oszczędności, jaką uzyskały osoby decydujące się na kredyt we frankach w stosunku do finansowania w pln oraz średnią kwotę oszczędności przypadającą na jedną spłaconą ratę według stanu na koniec grudnia 2013 r. (rys. 6 i 7). zł 500,00 zł 1 000,00 zł 1 500,00 zł 2 000,00 zł 2 500,00 zł si e08 lu t09 si e09 lu t10 si e10 lu t11 si e11 lu t12 si e12 lu t13 si e13 rata kredytu chf (20) rata kredytu pln (20) zł 200,00 zł 400,00 zł 600,00 zł 800,00 zł 1 000,00 zł 1 200,00 zł 1 400,00 zł 1 600,00 zł 1 800,00 zł 2 000,00 zł m ar -0 9 w rz -0 9 m ar -1 0 w rz -1 0 m ar -1 1 w rz -1 1 m ar -1 2 w rz -1 2 m ar -1 3 w rz -1 3 rata kredytu chf (20) rata kredytu pln (20) ź r ó d ł o: opracowanie własne. źródło: opracowanie własne. kredyty frankowe zaciągane w marcu 2009 r. w całym dotychczasowym okresie spłaty pozostały tańsze niż kredyty w pln, chociaż ze względu na utrzymujący się wysoki kurs franka oraz malejący dysparytet, są coraz mniej opłacalne z punktu widzenia kredytobiorców. kredyty w chf zaciągane w sierpniu 2008 r. stały się droższe niż w pln już w marcu 2009 r., by stanieć nieco w lipcu i zdrożeć permanentnie w stosunku do pln w czerwcu 2010 r. oceniając korzystność stosowania finansowania w walucie obcej, można wskazać łączną kwotę oszczędności, jaką uzyskały osoby decydujące się na walutowe kredyty mieszkaniowe we franku szwajcarskim 39 kredyt we frankach w stosunku do finansowania w pln oraz średnią kwotę oszczędności przypadającą na jedną spłaconą ratę według stanu na koniec grudnia 2013 r. (rys. 6 i 7). rys. 6. oszczędności chf vs. pln rys. 7. oszczędności chf/rata vs. pln/rata rys. 6. oszczędności chf vs. pln rys. 7. oszczędności chf/rata vs. pln/rata źródło: opracowanie własne. źródło: opracowanie własne. dla modelowego kredytu w wysokości 250 000 zł największą wartość oszczędności uzyskały osoby rozpoczynające kredytowanie w lipcu 2006 r. przy finansowaniu kredytem 30-letnim. do końca 2013 r. osiągnęli oni nadwyżkę 30 553 zł w stosunku do kredytobiorców finansujących się w pln. pomimo stosunkowo krótkiego okresu spłacania rat, relatywnie wysokie korzyści osiągnęły również osoby zaciągające kredyty walutowe w marcu 2009 r. dla wszystkich trzech okresów kredytowania, tzn. 20, 25 i 30 lat, przy czym ponownie w przypadku kredytów 30-letnich korzyści te były najwyższe (29 462 zł). oceniając opłacalność finansowania zakupu mieszkań w walucie obcej, należy wskazać również na sytuację ponoszenia wyższych wydatków w stosunku do kredytów w polskim złotym. zdecydowanie niekorzystnym okresem na zaciąganie kredytów walutowych był sierpień 2008 r., co wynikało z osiągnięcia minimalnych poziomów wyceny chf w pln. zaciągając kredyt w rozważanym czasie najmniejsze straty ponieśli decydujący się na kredyty 30letnie (–7510 zł), największe zaś otrzymujący finansowanie na 20 lat (–30 269 zł). w przypadku kredytów 30-letnich niekorzystne okazało się zaciąganie kredytów w okresie od lipca do września 2008 r., w przypadku 25-letnich od kwietnia do października 2008 r., a w przypadku kredytów 20-letnich straty w stosunku do kredytowania w pln pojawiły się w całym okresie od maja do 2007 do listopada 2008 r. biorąc pod uwagę średnie oszczędności przypadające na spłacaną ratę kredytu denominowanego w chf w stosunku do raty kredytu w pln, największą wartość odnotowano w przypadku finansowania rozpoczynającego się w marcu 2009 r. (508 zł dla kredytu 30-letniego, 471 zł dla kredytu 25-letniego i 426 zł dla kredytu 20-letniego). największą średnią stratę przypadającą na spłacaną ratę w stosunku do kredytu w pln (–466 zł) odnotowali kredytobiorcy zaciągający 20-letnie kredyty w chf w sierpniu 2008 r. kredyty 25letnie przyniosły średnią stratę na poziomie –256 zł, a 30-letnie –116 zł. wnioski z badań walutowych kredytów mieszkaniowych -40000,00 -30000,00 -20000,00 -10000,00 0,00 10000,00 20000,00 30000,00 40000,00 st y06 cz e06 lis -0 6 kw i-0 7 w rz -0 7 lu t08 lip -0 8 gr u08 m aj -0 9 pa ź09 chf vs pln (30) chf vs pln (25) chf vs pln (20) -600,00 -400,00 -200,00 0,00 200,00 400,00 600,00 st y06 m aj -0 6 w rz -0 6 st y07 m aj -0 7 w rz -0 7 st y08 m aj -0 8 w rz -0 8 st y09 m aj -0 9 w rz -0 9 chf vs. pln /rata (30) chf vs. pln /rata (25) chf vs. pln /rata (20) ź r ó d ł o: opracowanie własne. ź r ó d ł o: opracowanie własne. dla modelowego kredytu w wysokości 250 000 zł największą wartość oszczędności uzyskały osoby rozpoczynające kredytowanie w lipcu 2006 r. przy finansowaniu kredytem 30-letnim. do końca 2013 r. osiągnęli oni nadwyżkę 30 553 zł w stosunku do kredytobiorców finansujących się w pln. pomimo stosunkowo krótkiego okresu spłacania rat, relatywnie wysokie korzyści osiągnęły również osoby zaciągające kredyty walutowe w marcu 2009 r. dla wszystkich trzech okresów kredytowania, tzn. 20, 25 i 30 lat, przy czym ponownie w przypadku kredytów 30-letnich korzyści te były najwyższe (29 462 zł). oceniając opłacalność finansowania zakupu mieszkań w walucie obcej, należy wskazać również na sytuację ponoszenia wyższych wydatków w stosunku do kredytów w polskim złotym. zdecydowanie niekorzystnym okresem na zaciąganie kredytów walutowych był sierpień 2008 r., co wynikało z osiągnięcia minimalnych poziomów wyceny chf w pln. zaciągając kredyt w rozważanym czasie najmniejsze straty ponieśli decydujący się na kredyty 30-letnie (–7510 zł), największe zaś otrzymujący finansowanie na 20 lat (–30 269 zł). w przypadku kredytów 30-letnich niekorzystne okazało się zaciąganie kredytów w okresie od lipca do września 2008 r., w przypadku 25-letnich od kwietnia do października 2008 r., a w przypadku kredytów 20-letnich straty w stosunku do kredytowania w pln pojawiły się w całym okresie od maja do 2007 do listopada 2008 r. biorąc pod uwagę średnie oszczędności przypadające na spłacaną ratę kredytu denominowanego w chf w stosunku do raty kredytu w pln, najwiękmichał buszko40 szą wartość odnotowano w przypadku finansowania rozpoczynającego się w marcu 2009 r. (508 zł dla kredytu 30-letniego, 471 zł dla kredytu 25-letniego i 426 zł dla kredytu 20-letniego). największą średnią stratę przypadającą na spłacaną ratę w stosunku do kredytu w pln (–466 zł) odnotowali kredytobiorcy zaciągający 20-letnie kredyty w chf w sierpniu 2008 r. kredyty 25-letnie przyniosły średnią stratę na poziomie –256 zł, a 30-letnie –116 zł. 5. wnioski z badań walutowych kredytów mieszkaniowych oceniając problem finansowania nieruchomości kredytami mieszkaniowymi udzielanymi w chf w polsce, można wyciągnąć kilka istotnych wniosków. 1. w przypadku kredytobiorców osób zaciągających kredytów przed listopadem 2007 i po listopadzie 2008 r. widoczne jest osiąganie korzyści z tytułu finansowania w chf, nawet pomimo znaczącego wzrostu wysokości rat spowodowanego wzrostem kursu. osoby decydujące się na spłatę kredytów w okresie 30 lat, pomimo największego ryzyka związanego z konsekwencjami wypowiedzenia umowy kredytowej, są jednocześnie tymi, którzy osiągają największe korzyści w stosunku do finansowania w pln. 2. walutowe kredyty mieszkaniowe materializują podwyższone ryzyko w momencie wypowiedzenia umowy kredytowej i postawienia kredytu w stan wymagalności. sytuacja taka najbardziej obciąża osoby rozpoczynające finansowanie w walucie obcej w warunkach historycznie niskiego kursu wymiany chf/pln, przy zaciąganiu kredytu przekraczającego wartość zabezpieczającej go nieruchomości (ltv>=100%) i w sytuacji pokrywania spłaty rat z niestałych źródeł przychodów. w szczególności konsekwencje nieterminowej spłaty rat w największym stopniu obciążą osoby decydujące się na kredyty 30-letnie, gdzie ze względu na bardzo długi czas kredytowania kwota wymagalnego długu przeliczonego na pln jest największa. 3. szczególnie niekorzystna z punktu widzenia polskiego sektora bankowego wydaje się dominacja zarówno pod względem liczby, jak i wartości kredytów udzielanych w trzecim kwartale 2008 r., a więc przy zdecydowanie niekorzystnym z punktu widzenia kredytobiorców poziomie kursu chf/pln. skala kredytów udzielonych w wymienionym okresie może wskazywać na systemową niekorzystność kredytowania we franku szwajcarskim. walutowe kredyty mieszkaniowe we franku szwajcarskim 41 4. obecny wysoki udział kredytów w chf będzie zmniejszał się w przyszłości na skutek zaprzestania kredytowania w tej walucie oraz dokonania przewalutowania w momencie obniżania się kursu chf względem pln. obecny poziom wyceny chf nie uzasadnia przewalutowania, utrzymując wysoki udział finansowania walutowego w sektorze. 5. o ile długoterminowe kredytowanie w walucie obcej może przynosić znaczące korzyści w stosunku do kredytowania w walucie krajowej, o tyle presja na sprzedaż kredytów w chf w momencie osiągania przez walutę historycznego minimum kursowego powodowała świadome wystawianie kredytobiorców na straty z tytułu dążenia kursu w trakcie okresu kredytowania do wieloletniego średniego poziomu wyceny chf (buszko 2012). 6. kredytowanie mieszkaniowe w walucie szwajcarskiej, dla której zarówno nie można uzyskać finansowania w postaci depozytów klientów, jak i zabezpieczenia w sposób naturalny (np. przez otrzymywanie wynagrodzenia za pracę) było rozwiązaniem niekorzystnym z punktu widzenia ryzyka całego sektora bankowego. w przypadku konieczności finansowania klientów w walucie, zamiast chf powinno być stosowane euro jako pieniądz lepiej odzwierciedlający zagraniczne powiązania polskiej gospodarki. 7. utrzymanie wysokiej jakości portfela walutowych kredytów hipotecznych w warunkach zawirowań na rynku finansowym, zwłaszcza w okresie osiągania historycznego maksimum kursowego przez chf, może wskazywać na relatywnie wysoką odporność kredytobiorców na zmianę kursu walutowego, a tym samym potwierdzenie relatywnie odpowiedzialnego kredytowania przez banki osób uzyskujących dochody średnie lub wysokie. 8. comiesięczna spłata zadłużenia w chf w ratach kredytu, a tym samym spadająca wartość długu wystawiana na ryzyko kursowe oraz prawdopodobne przewalutowania kredytów frankowych w warunkach stopniowego osłabiania się franka będą wpływały na zmniejszenie zagrożenia systemowego przez portfel kredytów mieszkaniowych w walucie.  zakończenie kredyty mieszkaniowe we franku szwajcarskim stanowią obecnie główny składnik portfela kredytowego sektora bankowego. chociaż banki właściwie nie udzielają finansowania w tej walucie, długi okres kredytowania oraz wysomichał buszko42 ki poziom wyceny waluty szwajcarskiej sprawiają, iż wartość zadłużenia frankowego jest nadal wysoka, generując ryzyko zarówno dla kredytobiorców, jak i dla banków oraz całego systemu finansowego. pomimo że rozważane kredyty generują wiele zagrożeń nie występujących w finansowaniu mieszkaniowym w pln, to nadal są one źródłem generowania korzyści w stosunku do kredytów złotowych. w szczególności dotyczy to ekspozycji tworzonych w 2006 r. oraz w pierwszym kwartale 2009 r. hipotezę postawioną we wstępie można zatem częściowo zweryfikować pozytywnie. problemy wynikające z kredytowania walutowego obejmują przede wszystkim osoby rozpoczynające finansowanie we franku w 2008 r., w tym zwłaszcza w sierpniu (w okolicy historycznego minimum kursowego chf/pln). na ten okres przypada największa aktywność banków w finansowaniu walutowym. należy dodać, że niezależnie od momentu rozpoczęcia kredytowania ogólna ocena opłacalności kredytów w chf powinna być w praktyce dodatkowo skorygowana na niekorzyść finansowania walutowego, ze względu na koszty ubezpieczenia brakującego wkładu własnego. z powodu znaczącego wzrostu kursu waluty szwajcarskiej w latach 2008–2011, a tym samym wskaźników ltv, osoby decydujące się na finansowanie walutowe są powszechnie obciążane tym rodzajem wydatku. z pewnością dalsza ocena korzystności finansowania w chf będzie uzależniona od samego kursu chf, ale także i dysparytetu stóp procentowych chf i pln. spadek wartości franka będzie zwiększał opłacalność kredytów walutowych, obniżka stóp procentowych w polsce korzyści z ich tytułu zmniejszy. niewątpliwie doświadczenia zebrane w warunkach kryzysu i zawirowań będą miały istotny wpływ na dalszą politykę kredytową banków w zakresie finansowania walutowego oraz decyzje kredytobiorców, zarówno przyszłych, jak i tych obecnie korzystających z kredytów w chf.  literatura buszko m. (2012), walutowe kredyty mieszkaniowe a kursy walutowe – ocena ryzyka, „copernican journal of finance & accounting”, 1 (1), doi: http://dx.doi.org/10.12775/ cjfa.2012.001. cienski j., eddy k. (2013), poles and hungarians count cost of swiss franc mortgages, http://www.ft.com/cms/s/0/b44b72c8-47c0-11e3-b1c4-00144feabdc0.html#axzz2qvt9vodr (dostęp: 15.01.2014). ocena wpływu na sytuację sektora bankowego i polskiej gospodarki propozycji przewalutowania kredytów mieszkaniowych udzielonych w chf na pln według kursu z dnia udzielenia kredytu (2013), urząd komisji nadzoru finansowego, warszawa. walutowe kredyty mieszkaniowe we franku szwajcarskim 43 raport o sytuacji banków w 2008 r. (2009), urząd komisji nadzoru finansowego, warszawa. raport o sytuacji banków w 2009 r. (2010), urząd komisji nadzoru finansowego, warszawa. raport o sytuacji banków w 2010 r. (2011),urząd komisji nadzoru finansowego, warszawa. raport o sytuacji banków w 2011 r. (2012), urząd komisji nadzoru finansowego, warszawa. raport o sytuacji banków w 2012 r. (2013), urząd komisji nadzoru finansowego, warszawa. rekomendacja s dotycząca dobrych praktyk w zakresie zarządzania ekspozycjami kredytowymi zabezpieczonymi hipotecznie (2013), komisja nadzoru finansowego, warszawa. introduction taking advantage of excellent opportunity – challenges still ahead the latest edition of ”copernican journal of finance & accounting” confirms our growing position in the world of the international science. we are very proud of that. more and more scientists from many countries have accepted our invitation for cooperation as authors and readers. also the teams of scientific council and reviewers are wider. this is exactly our mission – to create the journal as a perfect forum for scientists and practitioners to exchange ideas and experience on the international scale in the field of finance but also economics and management. the highly recognized position of cjfa is our common success. therefore, i would like to thank all of you. however, in modern economy & economics there is a lot to be done – this is a challenge for every one of us. unfortunately, we still face too many fundamental and controversial problems. moreover, we – as scientists – should take care of society. in my opinion, social expectations from science are fully justified – to make our existence, at least, more bearable. this is a perfect place to remind you our motto: looking for solutions. for that reason we offer you an excellent opportunity to cooperate with our journal to contribute to the progress of the world science: to indicate, to analyze, to explain, to solve, to implement, to manage, to monitor. yours sincerely editor in chief professor leszek dziawgo date of submission: january 31, 2022; date of acceptance: april 5, 2022. * contact information: geeta.singh25august@gmail.com, ibs hyderabad (icfai foundation for higher education), hyderabad, india, phone: 8096508380; orcid id: https://orcid.org/0000-0002-1210-2229. ** contact information: rishidwesar@gmail.com, ibs hyderabad (icfai foundation for higher education), hyderabad, india, phone: 7799402000; orcid id: https://orcid. org/0000-0002-1033-8588. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 3 singh, g., & dwesar, r. (2022). board gender diversity, firm performance and firm risk: a literature survey. copernican journal of finance & accounting, 11(3), 69–84. http://dx.doi. org/10.12775/cjfa.2022.014 geeta singh icfai business school hyderabad rishi dwesar icfai business school hyderabad board gender diversity, firm performance and firm risk: a literature survey keywords: board gender diversity, firm performance, firm risk. j e l classification: g30, g32. abstract: in this paper, we conduct a succinct review of literature to understand the impact of board gender diversity on firm performance and firm risk. the review indicates that the effect of gender diversity on firm performance and firm risk is inconclusive. many studies indicate presence of a positive association between a firm’s board gender diversity and its value, while others document a negative relation, and still some showing that there is no significant relation between gender diversity and firm’s performance and risk. we recommend that there is a vast scope for research in this area, especially in the context of emerging countries to more broadly analyze the relation between a firm’s board gender diversity, and its performance and risk. geeta singh, rishi dwesar7070  introduction introduction board characteristics are major determinants of not only the financial performance of the firm but also of many other key firm-level decisions (subair, salman, abolarin, abdullahi & othman, 2020). one of the widely debated subjects of board characteristics is the female representation on the firm’s board which has been significantly examined in many studies (conyon & he, 2017; bennouri, chtioui, nagati & nekhili, 2018). however, the extant literature on the impact of gender diversity in a firm’s boardroom on its performance has not been conclusive. for instance, few studies mention a positive relation (liu, wei & xie, 2014; terjesen, couto & francisco, 2016), few report a negative relation (adams & ferreira, 2009; ahern & dittmar, 2012), while others document an insignificant relation (carter, d’souza, simkins & simpson, 2010; jurkus, park & woodard, 2011) between gender diversity and firm performance. these mixed findings may arise due to many reasons such as using different measures of performance, underlying statistical models, different data sample periods, etc. (conyon & he, 2017). post and byron (2015) argue that different circumstances and contexts may inf luence the effect of gender diversity on firm performance. another strand of literature examines the role of gender diversity on firm risk (sila, gonzalez & hagendorff, 2016). recently, a number of firms have come under fire to have a substantial female representation in their board of directors. for instance, many european countries have passed legislation making it mandatory to have female directors. some studies in the area of economics and psychology point women being characterized by having lower risk appetite than men (barber & odean, 2001); however, it is unclear whether larger participation of women directors on board lead the firm take less risk (sila et al., 2016). assuming that this conception holds good, then firms with more female directors are likely to engage firms in less risky investments which could make these firms less competitive sooner or later. therefore, gender diversity could be an important criterion for effective risk supervision. perryman, fernando and tripathy (2016) and bernile, bhagwat and yonker (2018) show that firms with greater gender diversity exhibit lower risk and higher performance. similarly, faccio, marchica and mura (2016) document that firms where ceo position is held by female have lower leverage, less volatile earnings, along with a higher chance of survival than other similar firms run by male ceos. board gender diversity, firm performance and firm risk… 7171 chen, crossland and huang (2016) argue that female directors on the board attempt to make more spirited interactions. therefore, the presence of women on the board makes it possible to consider a wide range of alternatives and whole set of arguments in favor of and against a particular decision criterion. therefore, females on the board add on to the divergent and unbiased thinking and can aid in the better firm performance. saeed, belghitar and yousaf (2016) examine the role of board gender diversity in emerging and developed countries including bric. they find that board gender diversity is positively related to firm size, but inversely to corporate risk. motivated by the increasing importance of a country’s institutions to women board representation, we provide a comprehensive review of literature to enhance our knowledge on how a firm’s board gender diversity impacts its performance and risk in different countries during different time periods. therefore, the main objective of this paper is to critically review the literature for the impact of board gender diversity on firm performance and firm risk under different contexts. motivationmotivation van der walt and ingley (2003) find that diversity in these characteristics is important for the corporate governance mechanism in the firms. thus, gender diversity, being related to the firm functioning, finds its place in the extant literature. another important reason to explore this area is the ongoing debate about the quota-legislation in several countries like france, netherlands, spain, etc., where many countries want to make it mandatory to have a fixed ratio of women on board, whereas others do not second this opinion. furthermore, in comparison to demographic characteristics like age, nationality, education background, etc., gender is the most easily distinguished characteristic; and thus, its impact on firm’s performance, risk, leverage, dividends, etc., needs to be explored (lückerath-rovers, 2013). theorytheory there are two contradicting theories explaining the impact of board gender diversity. one suggests that it leads to more brainstorming and therefore, provides the management with a wider range of alternatives (marinova, plantenga & remery, 2016). similarly, as per the upper echelons’ theory (jackson, 1992), geeta singh, rishi dwesar7272 a heterogeneous top management team can be linked to a more innovative organization, through the route of creative idea generation. furthermore, smith, smith and verner (2006) argue that women directors can be more creative, bring different talent, and can generate a better reputation of the firm in the market, thus leading to better firm performance. however, apart from the benefits derived from having women on board, another set of argument suggest a cost associated with such diversity in boardroom. more diversity can lead to more contradictions, and less coordination among the management team; this can slow the decision-making process in the firm, making the management itself less efficient and thus, hampering the firm performance. another aspect of board gender diversity is the way it impacts the risk of the firm. evidence from psychology and economics literature suggests that the risk perception of males and females is different and thus, their presence in the boardroom can impact the firm risk. men tend to be risk lovers and can get involved in aggressive activities like gambling, whereas women are believed to be more conservative and thus, risk averse (bernasek & shwiff, 2001). given the difference in risk attitude behavior of both genders, diversity of board in terms of gender may explain variation in corporate risk-taking behavior. research methodology and research processresearch methodology and research process the word ‘systematic’ in this study refers to the procedure followed to select research articles in journals indexed in bibliographic databases of the scopus. the systematic research begins with searching for all the articles with relevant search terms in scopus database as title-abs-key (“board gender diversity” and “firm performance” or “performance”) and title-abs-key (“board gender diversity” and “firm risk” or “risk”) for two sections of the study. the search results in 197 and 69 articles for the impact of board gender diversity on the firm performance and firm risk respectively. in the second step, out of these 197 articles, we filter the articles on the basis of the quality of journals they are published in by using abdc listed journals. with all these filters, finally, we have a total of 50 articles which are reviewed in alignment with our research objective of conducting a structured literature review. board gender diversity, firm performance and firm risk… 7373 literature reviewliterature review gender diversity and firm performancegender diversity and firm performance non-significant relation between gender diversity and firm performancenon-significant relation between gender diversity and firm performance there are many studies which report a non-significant relation. for instance, carter et al. (2010) use a sample of the s&p 500 indexed u.s. firms, from 1998 to 2002 and report that there is no significant relation between a firm performance (measured through tobin’s q and roa) and diverse boards. chapple and humphrey (2014) provide more validation to the findings of carter et al. (2010). using a data of 577 top australian firms from 2004 to 2011, they find no evidence of any association between boardroom gender diversity and firm performance. similarly, schwizer, soana and cucinelli (2012) show that there is no relationship between the number of female directors on a firm’s board and its performance in italian listed firms from 2006 to 2008. isidro and sobral (2015) examine the direct and indirect impacts of board gender diversity on firm value. their results indicate no evidence of higher female participation leading to higher firm performance. further, marinova et al. (2016) study 186 listed firms of netherlands and denmark in 2007 to examine whether board gender diversity has any impact on the performance of these firms. their findings indicate that there exists no relation between firm’s board diversity and its performance. in a similar way, chauhan and dey (2017) investigate if female directors impact firm value in 3000 indian firms from 2002 to 2014. they show that gender diversity does not play a significant role for indian firms. they argue that majority of newly added female directors are associated with founders and therefore, it is likely that they would endorse the founders’ objectives, rather than minority shareholders. table 1 provides a detailed comparison of studies examining the impact of board gender diversity on firm performance. geeta singh, rishi dwesar7474 table 1. some research articles showing mixed results of impact of gender diversity on firm performance authors (year) paper and journal data period country firm performance measure findings carter, simkins & simpson (2003) “corporate governance, board diversity, and firm value,” the financial review 1997 fortune 1000 firms tobin’s q positive relationship between number of women on firm’s board and its value. adams & ferreira (2009) “women in the boardroom and their impact on governance and performance,” journal of financial economics 1996–2003 us tobin’s q and return on assets firm’s gender diversity impacts its performance negatively. carter, d’souza, simkins & simpson (2010) “the gender and ethnic diversity of us boards and board committees and firm financial performance,” corporate governance: an international review 1998–2002 us tobin’s q and return on assets no significant relationship exists between board gender diversity and financial performance of a firm. ahern & dittmar (2012) “the changing of the boards: the impact on firm valuation of mandated female board representation,” the quarterly journal of economics 2001–2009 norway stock returns and tobin’s q constraint imposed by the women quota caused a significant drop in the stock prices, but large decline in firm’s tobin’s q over the following years. khan & vieito (2013) “ceo gender and firm performance,” journal of economics and business 1992–2004 us roa firms with female ceos are found to experience an increase in performance in comparison to the firms managed by male ceos. conyon & he (2017) “firm performance and boardroom gender diversity: a quantile regression approach,” journal of business research 2007–2014 us roa and tobin’s q women on the board has a positive impact on firm performance. brahma, nwafor & boateng (2021) “board gender diversity and firm performance: the uk evidence,” international journal of finance & economics 2005–2016 uk tobin’s q and roa evidence for a positive association between firm’s board gender diversity and its performance. simionescu, gherghina, tawil & sheikha (2021) “does board gender diversity affect firm performance? empirical evidence from standard & poor’s 500 information technology sector,” financial innovation 2009–2020 us tobin’s q and roa board gender diversity is found to be positively associated with firm performance, measured through tobin’s q and roa. s o u r c e : compiled by authors from the research articles mentioned in table 1. board gender diversity, firm performance and firm risk… 7575 positive relation between gender diversity and firm performancepositive relation between gender diversity and firm performance carter, simkins and simpson (2003) find a positive relation between firm performance (measured through tobin’s q) and diverse boards, in a sample of fortune 1000 firms in 1997. francoeur, labelle & sinclair-desgagné (2008) document that firms having more women officers and operating in complex environments are able to generate positive abnormal returns. however, women directors do not seem to make a difference in the firms, and having more women in management and governance systems leads to generating enough value to keep up with normal stock-market returns. campbell and mínguez-vera (2008) show that the higher the number of women in the board, the better the firm’s financial performance. they further claim that investors in spain do not discount firms that involve in adding more female members to their board. khan and vieito (2013) study the differences in performance for firms’ head by female ceos compared to male ceos managed firms and conclude that female ceo managed firms show relatively better performance compared to those managed by their male counterparts. similarly, liu et al. (2014) study the impact of women on board on the performance of all listed firms in china from 1999 to 2011, and they show that female directors have a positive impact on the firm performance which is a consequence of only executive women director, not independent women director. cucinelli (2013) finds intermediate performance of a firm being positively related to board gender diversity in italian firms, during 2006–2009. similarly, perryman et al. (2016) examine the impact of board gender diversity on the performance of a sample of 2566 us firms during 1992–2012. results indicate that an increase in board gender diversity helps improve the firm performance, measured as tobin’s q. conyon and he (2017) find that the positive association between women directors and firm performance is more pronounced in high-performing firms in comparison to low-performing firms, indicating the heterogeneous effect of women directors on firm performance in a sample of 3000 us firms from 2007 to 2014. bennouri et al. (2018) explore the relation between female directors on board and firms’ accounting and market performance. using a sample of 394 french firms from 2001 to 2010, they show that females on the board improves the accounting performance of the firm (proxied by roa and roe) while it reduces the market performance (proxied by tobin’s q). they also argue that positive impact of female directors on firm’s accounting performance remains geeta singh, rishi dwesar7676 insensitive to using various attributes of female directors capturing their monitoring skills. in contrast, the negative relation between female directors and firm’s market performance disappears in the presence of these attributes. chen, leung and evans (2018) find that female directors increase the firm performance in a sample of 1224 us firms during 1998–2006, particularly for innovation intensive firms. the underlying mechanism for the positive relation comes from the finding that female directors intend to invest in more innovation related activities in an attempt to obtain more patents and citations. chen, leung, song and goergen (2019) use a sample of 1629 us firms between 1998 and 2013 to show that female directors engage firms in less aggressive investment policies, but better acquisition decisions, and help improve firm’s financial performance, especially those operating in industries with high overconfidence prevalence. simionescu, gherghina, tawil and sheikha (2021) measure the firm performance as its accounting as well as market-based performance. the authors report that board gender diversity inf luences company’s performance positively, in a sample of information technology s&p 500 indexed companies. another evidence for a positive association between gender diversity and firm performance is provided by brahma, nwafor and boateng (2021) when they measure gender diversity as levels of female representation in the boardroom. negative relation between gender diversity and firm performancenegative relation between gender diversity and firm performance adams and ferreira (2009) examine the impact of women directors on the governance and performance on a sample of us firms. they show that due to their better attendance records, women directors are more likely to join firm’s monitoring committees. however, they find a negative association between board gender diversity and firm performance. they argue that greater participation by diverse directors can lead to more interference; and thus, gender diversity in the boardroom negatively affects performance. similarly, ahern and dittmar (2012) find that inclusion of women on board leads to deteriorating the firm’s operating performance. they test the relation between firm performance and women on board in the 248 unique norwegian firms from 2001 to 2009. they use a natural experiment in 2003, where according to a new regulation, it was mandated that 40% of the directors on board should be women. they find that board gender diversity, firm performance and firm risk… 7777 as a result of the imposition of the quota, firm’s tobin’s q declined over the subsequent years. they argue that the quota led to hiring of many younger and less experienced board members, and increase in leverage and acquisitions, but leading to an overall deterioration in firm’s operating performance. moreover, solakoglu (2013) finds that the intensity and sign of the impact of gender diversity on firm performance depends on the type of industry it belongs to in turkish firms. another interesting study performed on small and medium sized enterprises in the united kingdom is shehata, salhin and elhelaly (2017). using a data from 2005–2013, they find that there is a significant negative association between gender diversity and age diversity, and firm performance. these results are contradictory to those showing a positive relation between gender diversity and firm performance, which may be attributed to the fact that sampled firms are confined to sme groups, whereas in other studies, mostly large firms form the sample. gender diversity and firm riskgender diversity and firm risk non-significant relation between gender diversity and firm risknon-significant relation between gender diversity and firm risk sila, gonzalez and hagendorff (2016) analyze the sample of 1960 us firms from 1996 to 2010 and show no evidence of female representation on the board inf luencing firm equity risk. further, they conclude that the negative relationship between the two is spurious and unobserved between-firm heterogeneous factors drive these results. schwizer et al. (2012) presents very interesting results in a sample of italian listed companies during the 2006–2008 period. they show that though there is no relationship between the number of female directors on board and firm risk; however, in the presence of foreign directors, this relation becomes negative. table 2 provides a chronology of the studies exploring the impact of gender diversity on firm risk. geeta singh, rishi dwesar7878 table 2. some research articles showing mixed results of impact of gender diversity on firm risk authors (year) paper and journal data period country firm risk measure findings lenard, yu, york & wu (2014) “impact of board gender diversity on firm risk,” managerial finance 2005–2011 us stock market return presence of boardroom gender diversity reduces the firm risk by lowering variability of stock returns. gulamhussen & santa (2015) “female directors in bank boardrooms and their influence on performance and risk-taking,” global finance journal 2006 oecd loan loss reserve and loan loss provision a negative relation exists between the presence of women in the firm’s boardroom and its risk. khaw, liaob, tripe & wongchoti (2016) “gender diversity, state control, and corporate risk-taking: evidence from china,” pacific basin finance journal 1999-2010 china volatility of a firm’s roa corporate risk-taking activities increase with the presence of male-only boards. faccio, marchica & mura (2016) “ceo gender, corporate risk-taking, and the efficiency of capital allocation,” journal of corporate finance 1999-2009 europe leverage and roa volatility firms run by female ceos have lower leverage along with lesser volatile earnings. perryman, fernando, & tripathy (2016) “do gender differences persist? an examination of gender diversity on firm performance, risk, and executive compensation,” journal of business research 1992–2012 us beta and standard deviation of daily stock returns firms with greater boardroom gender diversity exhibit lesser firm risk. bernile, bhagwat & yonker (2018) “board diversity, firm risk, and corporate policies,” journal of financial economics 1996–2014 us stock return volatility greater diversity in the board results in lower firm risk. nadaraja, huang, liu & ali (2020) “does board gender diversity reduce default risk? a global analysis,” in academy of management proceedings 2005–2016 cross countries (49 countries) default risk board gender diversity has a negative effect on default risk of the firm. s o u r c e : compiled by authors from the research articles mentioned in table 2. positive relation between gender diversity and firm riskpositive relation between gender diversity and firm risk many studies state that women are considered to more risk averse than men. however, a few studies provide contrasting views. sapienza, zingales and maestripieri (2009) report that women working in the financial industry tend board gender diversity, firm performance and firm risk… 7979 to be less risk averse than those working in other industries. they acknowledge that findings are specific to the banking sector and may not apply to other sectors. berger, kick and schaeck (2014) study 3525 german banks with the 19,750 bank-year observations, for the period 1994–2010, and find that there is a risk-increasing effect of females in the boardroom on portfolio risk of the banks, though these findings are only marginally significant. negative relation between gender diversity and firm risknegative relation between gender diversity and firm risk some of the early works by barsky, juster, kimball and shapiro (1997), jianakoplos and bernasek (1998) indicate that women are more risk averse in financial decision making, when risk is defined in terms of investment decisions. barber and odean (2001) also document a negative relation between number of women in a firm’s board and its risk; and argue that women are considered to be less overconfident than their male counterparts. a striking finding by adams and ferreira (2004), studying all fortune 500 (excluding utilities and financial firms) in fiscal year 1998, suggest firm risk is an important and most robust factor for determining the proportion of women in boards. they find that the negative effect of firm risk on diversity is statistically significant and economically significant implying that any change in firm risk will lead to changes in the boardroom gender diversity. lenard, yu, anne york and wu (2014) examine the impact of boardroom gender diversity on the firm risk where they measure firm risk by the variability of stock market return. they find that that more gender diversity on the board reduces the firm risk by lowering the variability of stock market return. further, they posit that the higher percentage of female directors on the firms’ board leads to lowering the variability of corporate performance. huang and kisgen (2013) provide a comparative study of female executives and male executives, in terms of corporate financial and investment decisions. they find that having more male executives leads to having more acquisitions, and these executives are also likely to issue debt more often than the female executives. baixauli-soler, belda-ruiz and sanchez-marin (2015) suggest that top management team with female representation show more conservative behavior, in terms of taking risk, compared to management teams which are not gender diverse. similarly, perryman et al. (2016) also provide evidence for firms with greater gender diversity in top management teams showing lower risk. geeta singh, rishi dwesar8080 faccio et al. (2016) suggests that firms where a transition to female ceo from male ceo happens are more likely associated with significant decrease in corporate risk taking, as measured by leverage and the volatility of the firm’s operating return on assets. bernile et al. (2018) examine the effects of diversity in the board of directors on corporate risk. using a sample of 21572 us firm-year observations from 1996 to 2014, they show that greater diversity in the board results in lower firm risk. they further argue that the lower risk is mainly driven by more persistent and less risky financial policies of the diverse board. in a cross-country study, nadaraja, huang, liu and ali (2020) document a negative effect of board gender diversity on default risk for a sample of firms from 49 countries for the period 2005–2016. the effect of gender diversity on default risk is weaker for firms with greater governance controls. findings and discussionfindings and discussion our systematic literature survey indicates that the effect of gender diversity on firm performance and firm risk is far from conclusive. there are many studies which indicate a positive relation between board gender diversity and firm value [carter et al. (2003); liu et al. (2014); low, roberts & whiting (2015); conyon & he (2017); bennouri et al. (2018)]. an important aspect to consider is the role of institutional setting the firm is operating in. in case of developing and poorly developed countries, women on board may not have a say in the management but are there, either just for reputation building or because of some regulation. thus, they are not likely to have an impact on the firm performance and risk. however, when firms considered are from a developed country, women can be certainly in a strong decision-making authority, and their presence can impact the performance and risk of the firm.  conclusion and scope for further research conclusion and scope for further research the literature shows a plethora of research on the impact of gender diversity on various decisions of the firms; however, the results are mixed. some showing either positive or negative effect of women on board on firm performance and its risk, whereas others suggesting no relation between the two. therefore, more research is required in this area which could provide a multi-country ev board gender diversity, firm performance and firm risk… 8181 idence to more broadly analyze the relation between board gender diversity and firm performance and risk. after having conducted a thorough review of literature, we believe that no work has been done on the impact of board gender diversity on the firm risk in a set of emerging markets. a broader sample of developed and developing countries can provide a better picture on the difference in the impact of gender diversity on firm performance and its risk in these two subsets of samples. furthermore, segregating firms on the basis of different ownership like family controlled, government controlled, group affiliated, etc., can lead to some interesting conclusions. we recommend that future research should focus on this aspect of the gender diversity on the board and add more to the extant literature.  references references adams, r.b., & ferreira, d. 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(2020). board characteristics and the likelihood of financial statement fraud. copernican journal of finance & accounting, 9(1), 57–76. http://dx.doi.org/10.12775/cjfa.2020.003. terjesen, s., couto, e.b., & francisco, p.m. (2016). does the presence of independent and female directors impact firm performance? a multi-country study of board diversity. journal of management & governance, 20(3), 447–483. http://dx.doi.org/10.1007/ s10997-014-9307-8. van der walt, n., & ingley, c. (2003). board dynamics and the inf luence of professional background, gender and ethnic diversity of directors. corporate governance: an international review, 11(3), 218–234. http://dx.doi.org/10.1111/1467-8683.00320. date of submission: may 1, 2022; date of acceptance: june 6, 2022. * contact information (corresponding author): rajesh.desai8@gmail.com, rajesh. desai@nirmauni.ac.in, school of liberal studies, pandit deendayal energy university, gandhinagar, gujarat, india, phone: 8160467579; orcid id: https://orcid.org/00000003-3611-8409. ** contact information: avaniraval@nirmauni.ac.in, institute of management, nirma university, ahmedabad gujarat, india, phone: 9375482929; orcid id: https://orcid. org/0000-0002-3933-6316. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 3 desai, r., & raval, a. (2022). examining the relation between market value and co2 emission: study of indian firms. copernican journal of finance & accounting, 11(3), 9–25, http://dx.doi. org/10.12775/cjfa.2022.011 rajesh desai* pandit deendayal energy university avani raval** institute of management, nirma university examining the relation between market value and co2 emission: study of indian firms keywords: market value, co2 emission, india, sustainability, emerging. j e l classification: q51, q56. abstract: in the present era, sustainable business practices have become an important metric for measuring the organisational effectiveness. shareholders have added sustainability as an important dimension of firms’ performance and consider it as value relevant for determining the market value of any company. given the premises, present study examines the impact of co2 emission on the market value of the firm (measured by market-to-book value ratio and tobin’s q ratio) in the context of a developing country. current study is based on panel data of 230 firm-year observations collected from the annual report of carbon disclosure project (cdp) and annual report of sample companies. using panel least square regression analysis, the findings indicate significant adverse impact of co2 emission on the firm value. in other words, sharehold rajesh desai, avani raval1010 ers assign negative value to higher discharge of carbon dioxide and ref lect the same by lowering the market value of shares. further, the results are checked for robustness using generalised method of moments (gmm) and the conclusions are found coinciding. present findings have important implications for regulatory authorities, policy makers, and practicing managers.  introduction introduction though industrialisation has brought several progressive changes in the evolution of human life, one of the most antagonistic effects is the environmental degradation which forced us to think about the success of the current state of world economy. ecological concerns such as global warming, monsoon irregularities, and natural calamities such as f loods and famines are the outcomes of raising emission of carbon and other toxic materials by the industrial and manufacturing undertakings. however, the global community have started responding to this and the united nations framework convention on climate change (unfccc), has initiated to address this issue. in 2005, the kyoto protocol has been imposed to confine the amount of co2 discharge to the allowable range for the advanced nations. co2 discharge is one of the critical determinants of degradation of environment quality and investors and shareholder considered the same as an important issue affecting firm value (busch & hoffmann, 2011; lewandowski, 2017). cumulative awareness and concern about polluting environment has pressurised companies to reduce their ghg emission (jeswani, wehrmeyer & mulugetta, 2008; raval, saxena & thanki, 2021) and evaluate as well as report opportunities and/or threats arising from climate-change faced by the companies (matsumura, prakash & vera-muñoz, 2014). this gave rise to a long-standing debate among the organisations as well as researchers about the association between emission level and the firm performance. till now, several studies have been conducted on different facets of society, governance and environment along with their possible inf luence on the financial performance (kleimeier & viehs, 2016). primarily, these research inquiries have focused on developed economies (nishitani & kokubu, 2012; ramiah, martin & moosa, 2013) which have an established legal and institutional framework for disclosing environmental and emission data. however, this area is underexplored with respect to the emerging countries like india (aifuwa, 2020). in the given context, present study attempts to provide comprehensive examination of the association between market value of firm and the level of car examining the relation between market value and co2 emission… 1111 bon discharge. shareholders use the disclosed financial and non-financial data of the company to value its market performance and these disclosures can lower the asymmetry of information between investors and managers. further, it eases the forecasting of stock returns and reduces the risk and uncertainty (poshakwale & courtis, 2005). present study uses market-to-book value (mbv) and tobin’s q (tq) ratio to measure the market value of the firm whereas co2 emission data has been considered as explanatory factor. besides, firm-specific control variables are also adopted for comprehensive results. the outcomes of research indicate negative and significant impact of carbon emission on both measures of market value of the selected companies. further, these results are important as they prove that participants of capital market consider pollution disclosure as vital information even in developing countries like india which are not obliged to reduce co2 discharge. the current investigation adds value to the extant research in three major ways. first, the present study examines the issue in the indian context which is considered to be one of the fastest growing economies and also holds the fourth position in the global co2 emission (kumar & firoz, 2018). further, developed and emerging countries have significant structural differences and therefore, the research outcome of the developed countries needs further probing before applying to developing nations. secondly, the study is based on longitudinal data of seven years (2013–2019) considering the phase-ii of kyoto protocol instead of cross-sectional data which provides more robust and reliable results. third, the robustness of results has been further examined by using generalised method of moments (gmm) for reliability and validity. research methodology and the course of research processresearch methodology and the course of research process present research is aimed to examine the relation between and the effect of co2 emission on market value of the indian companies. like other emerging economies, environmental reporting including carbon emission is not compulsory in india and therefore the sample companies are selected from the annual report of carbon disclosure project (cdp) annual reports. financial and other data has been collected for a reference period of 7 years (2013–2019) considering the second phase of the kyoto protocol. the study uses tobin’s q and mbv ratio to measure the market value whereas log of co2 emission as independent vari rajesh desai, avani raval1212 able. using multiple and gmm regression analysis, the study concluded significant negative effect of emission on firm value. review of literature and hypothesis formulationreview of literature and hypothesis formulation environmental disclosure theoriesenvironmental disclosure theories environmental disclosures provide vital information for signalling corporate performance and attracting funds as well as to improve goodwill (verrecchia, 1983). corporate environmental disclosures are largely governed by two theories named as ‘voluntary disclosure’ (luo & tang, 2014) and ‘legitimacy theory’ (gray, kouhy & lavers, 1995). voluntary disclosure theory depicts that firms with lower level of co2 emission will be motivated to disclose the same as it enhances their goodwill and the competitive advantage over other companies (clarkson, overell & chapple, 2011). on the contrary, companies with high carbon emission inclined to avoid disclosing such information and continue themselves as average performers (giannarakis, konteos, sariannidis & chaitidis, 2017). legitimacy theory is built upon the concept of ‘corporate citizenship’, wherein companies disclose non-financial information to legitimise their activities (brammer & pavelin, 2006). according to this approach, companies with high levels of co2 discharge are anticipated to reveal more information to provoke the increased risk of legality and eventually change the opinion of stake-holders by educating and informing them about the changes in their performance and these companies attempts to highlight other accomplishments related to the social cause. review of empirical studies and development of hypothesisreview of empirical studies and development of hypothesis past studies focusing on co2 and firm performance have been differentiated on two major themes, i.e. ‘win-lose’ and ‘win-win’ (boiral, henri & talbot, 2012). according to the win-lose argument, the national obligation to diminish co2 emission enforces taxes, penalties and legal actions against high emitting companies. in other words, endeavours to cut carbon discharge results into unproductive utilisation of resources which adversely affect the relative position of firm compared to competitors (delmas, nairn-birch & lim, 2015; wang, li & gao, 2014). in disagreement to this, promoters of alternative argument advo examining the relation between market value and co2 emission… 1313 cate that an attempt to lower co2 discharge brings indirect profit opportunity in form of encouraging innovations that increases revenue or reduces cost (porter & van der linde, 1995). according to this approach, financial performance of the organisation can be improved by reducing co2 emission (dowell, hart & yeung, 2000; boiral et al., 2012; raval et al., 2021). past studies from al-tuwaijri, christensen and hughes ii (2004), wang et al. (2014), and kumar and firoz (2019) have studied the effect of co2 emission on market value of firm. however, the findings are found to be contradictory. further, as pointed by margolis, elfenbein and walsh (2008) and garcia-castro, arino and canela (2010), findings of past research are subject to the measures used for indicating the variables. according to lee, park and klassen (2013), shareholders respond negatively to co2 emission and their findings concluded that high emitting firms will have lower market value. similar findings are reported by saka and oshika (2014) in their research on more than 1000 japanese firms and concluded adverse relation between market price of share and level of co2 emission. considering a sample of s&p 500 companies, matsumura et al. (2014) have indicated that increase in co2 emission will lead to reduction in price of ordinary shares. similarly, findings of king and lenox (2001), al-tuwaijri et al. (2004), ramiah et al., (2013) have also supported negative relation between firms’ level of carbon emission and market value. delmas et al. (2015) have analysed the impact of co2 emission on financial peroformance using cross-sectional data of 1095 us firms. they have divided economic performance as short-term (indicated by roa) and long-term (indicated by tobin’s q ratio) and suggested negative effect of reduction in carbon emission on roa and positive effect of the same on q ratio. investment for reducing carbon emission may not yield returns in short-run but capital market participants realise the importance of the same and hence act favourably towards the strategies implemented to reduce ghg and carbon emission in environment (delmas et al., 2015). it is important here to note that extant literature has also found that negative effect of co2 can be reduced if the firms discloses the data publicly. as against major past studies, wang et al. (2014), using tobin’s q ratio, have found direct relation between the level of co2 emission and firm value in the australian context. as pointed earlier, limited studies have explored the relation between co2 emission and market value of the firm. ganda and milondzo (2018), using data of south african companies, have found negative effect of co2 emission on firm performance. kumar and firoz (2019) have studied effect of certified emission reduction announcements on abnormal stock returns using event study meth rajesh desai, avani raval1414 odology. they have reported that capital markets do not respond to such announcements significantly and concluded weak effect of emission reduction on stock returns. therefore, research findings of developing nations are partly congruent with developed ones but still require further empirical evidence to generalise the same. the above discussion signifies the importance of carbon emission and its effect on firm value. though several studies have attempted to draw meaningful insights, the findings are contradictory and inadequate and hence present study attempts to contribute in this growing pool of knowledge. based on past empirical results, the study hypothesised that: hypothesis 1: co2 emission will have negative impact on firms’ market value. research methodologyresearch methodology operationalisation of variablesoperationalisation of variables table 1 summarises the variables considered for study categorised as independent, dependent, and control. the table also describes the concept, formula, and source of including variable. according to margono and gantino (2021), the market value depends on the firm-specific variables such as firm size, leverage and sales growth which are used as control variables along with carbon emission. table 1. description of variables variables computation source dependent variable tobin’s q ratio (tq) king & lenox (2001); delmas et al. (2015) market-to-book value (mbv) delmas et al. (2015) explanatory variables carbon emission (cem) log (carbon emission) wang et al. (2014); delmas et al. (2015) control variables growth (gr) al-tuwaijri et al. (2004) examining the relation between market value and co2 emission… 1515 variables computation source size (sz) log (total assets) li et al. (2014); matsumura et al. (2014) leverage (lv) giannarakis et al. (2017); griffin, lont, & sun (2017) capital intensity (ci) chithambo & tauringana (2014); ganda & milondzo (2018) s o u r c e : summarised from the review of literature and cmie database. sample selection and collection of datasample selection and collection of data initially, companies that responded to the cdp questionnaire and reported co2 emission data are considered for sample selection. as co2 reporting is not mandatory in india, the sample companies are not constant for the study period and hence the obtained data set is an unbalanced panel data. further, companies that belonged to financial service sector are removed as their regulatory and operational framework differ from non-finance companies (kumar & firoz, 2018). in addition, companies with insufficient financial data have been further excluded to arrive at final sample. table 2 presents the year-wise number of sample firms. table 2. sample selection year companies that disclosed co2 data finance companies companies with incomplete data sample firms 2013 35 5 3 27 2014 39 4 4 31 2015 42 5 4 33 2016 44 6 5 33 2017 46 8 6 32 2018 48 8 6 34 2019 55 9 6 40 s o u r c e : author’s calculations. table 1. description… rajesh desai, avani raval1616 annual reports of cdp have been considered as a source of collecting data of co2 emission. it is an international not-for-profit institution that collects and summarises the data on carbon and other related toxic emission according to country as well as corporates. past studies from wang et al. (2014), giannarakis et al. (2017) have also considered cdp as a trustworthy source for such data. further, prowess database has been utilised for collecting data of firm value as well as other control variables as pointed in above section. effect of coeffect of co22 emission on firm value emission on firm value present study is based on unbalanced panel data of cdp india firms that have disclosed co2 data through responding cdp questionnaire. hence, two multiple regression model by taking firm value, i.e. tobin’s q ratio and mbv as dependent variable and emission of co2 as independent have been formulated. referring the extant literature, the relation between co2 and firm value is expected to be negative (smale, hartley, hepburn, ward & grubb, 2006; ramiah et al., 2013; lee et al., 2013; delmas et al., 2015) and therefore sign of β1 will be negative. tobin’s qt = α + β1 × co2 emissiont + β2 × growtht + β3 × sizet + β4 × leveraget + β5 × capital intensityt + β6 × firm effect + β7 × year effect + εt (1) mbvt = α + β1 × co2 emissiont + β2 × growtht + β3 × sizet + β4 × leveraget + β5 × capital intensityt + β6 × firm effect + β7 × year effect + εt (2) where: α = intercept β1 to β5 = regression co-efficient ε = error term t = number of year (2013 to 2019) examining the relation between market value and co2 emission… 1717 further, as the study is based on multiple regression model, there is a possible issue of multicollinearity and autocorrelation which has been tested using variance inf lation factor (vif) and durbin-watson (dw) statistics respectively. besides, corporate finance research may expose to endogeneity issue arising from omitted variables and simultaneity of occurrence. presently, market value of the firm may affect the level of carbon emission leading to the problem of reverse causality, i.e. simultaneity. further, firm value is a function of several company specific as well as macro variables and hence there can be possibility of omitted variable bias. to address the same, the regression model indicated above has been recomputed using generalised methods of moments (gmm) estimation. data analysis and resultsdata analysis and results descriptive statisticsdescriptive statistics table 3 portrays the summary of descriptive statistics of the selected companies. first part of table represents the output for mbv and tobin’s q ratio. average (median) values of tobin’s q ratio and mbv are 2.4114 (2.0318) and 3.9180 (3.1600) respectively indicating that the selected firms are performing well with respect their market value. however, minimum and maximum values of both measures demonstrate high-degree of variation among the sample companies. further, average co2 emission for the selected period is more than eight lakh matric tone with a standard deviation of 12.70 lakh matric tone (mt). higher value of standard deviation as compared to average represents enormous level of variations among the selected companies so far as co2 discharge is concerned. the sample firms have reported a mean (standard deviation) revenue growth rate of 10.67 (17.18) percent showing moderate but inconsistent growth. average value of debt-asset ratio for the sample is 0.3783 that shows higher dependence on owners’ fund instead of debt. lastly, based on the summary of data, it can be concluded that the sample firms can be characterised as low levered, moderately growing, and medium size companies. rajesh desai, avani raval1818 table 3. descriptive statistics obs. minimum maximum mean median std. dev. tq 230 0.1130 9.8608 2.4114 2.0318 1.9882 mbv 230 0.3400 17.0000 3.9180 3.1600 2.9685 co2 emission (in mt) 230 2,517.00 56,093,007.00 8,001,650.00 186,860.00 12,704,512.00 log (co2 emission) 230 1.5315 7.7489 5.2221 4.7994 1.6238 sales growth 230 -0.5470 1.7180 0.1067 0.1044 0.1718 size 230 0.6105 6.5660 4.4790 4.5982 0.8887 leverage 230 0.0286 0.8587 0.3783 0.3823 0.2198 capital intensity 230 0.0000 4.5391 0.1314 0.0596 0.5372 s o u r c e : author’s calculations. correlation analysiscorrelation analysis the coefficient of correlation depicts how strongly the dependent and independent variables are related in a linear form. correlation is an essential condition to be satisfied prior to the implementation of regression model. output of pearson correlation has been summarised in table 4. in congruence with king and lenox (2001), the results indicate a significant negative correlation between co2 emission and both measures of market value i.e., tobin’s q and mbv ratio. with respect to the control variables, firm-size and leverage has been found to be negatively and significantly correlated with market value measures which indicates that shareholders respond adversely to higher debt level. sales growth was found to have positive correlation with firm value but it lacks statistical significance. though majority of independent variables are not significantly correlated, the study adopts variance inf lation factor (vif) for examining the multicollinearity issue. the highest values of vif for both regression models (tq and mbv) are 2.862 and 1.762 respectively. these values are lower than the acceptable value of 10 (wang et al. 2014; gujarati, 2003) and therefore, it can be concluded that the regression output will not be affected by multicollinearity. examining the relation between market value and co2 emission… 1919 table 4. correlation matrix tq mbv co2 sg size lev ci tq 1.0000 mbv 0.8717** 1.0000 co2 -0.2052* -0.2410** 1.0000 sg 0.0068 0.1178 -0.2205* 1.0000 size -0.3037* -0.1750** -0.0967 0.1501 1.0000 lev -0.4290** -0.1295* 0.3089 -0.1069 -0.1093* 1.0000 ci -0.0753* -0.0617 -0.0572 -0.0300 0.0279 0.0498 1.0000 s o u r c e : author’s calculations. results of regression analysisresults of regression analysis present study examines the relation between co2 discharge and firm value. table 5 provides the summary output of regression analysis considering tq and mbv as dependent variables respectively. in line with the conclusion of ‘winwin’ approach, the results indicate significant negative (p – value < 1%) impact of co2 emission on both measures of firm value. in other words, firms that endeavour to reduce co2 levels will be rewarded by increased market value. past studies from nishitani and kokubu (2012), saka and oshika (2014), and delmas et al. (2015) have confirmed the negative effect of co2 discharge on firm value. besides, investors value the sustainable environment practices of firms such as carbon manegement of emitting firms and respond positively for such initiatives (delmas, etzion & nairn-birch, 2013). negative impact of emission can be explained as government, for reducing carbon emissions, imposes penalties and other taxes on polluting firms and enforces them for making unproductive investments resulting into erosion of their profitability (ganda & milondzo, 2018; wang et al., 2014). besides co2 emission, firm size and leverage are found to have significant negative effect on firm value, whereas sales growth and capital intensity are not found to be insignificant. rajesh desai, avani raval2020 table 5. regression output using panel estimation variables expected relation tobin’s q mbv constant ----5.8127** (0.8182) 9.5268** (1.2128) co2 emission negative -0.0170* (0.08348) -0.4083** (0.1237) sales growth positive 0.5056 (0.7587) 1.5813 (1.1246) size -----0.7056*** (0.1441) -0.7227** (0.2136) leverage negative -0.4643* (0.6059) -0.9620* (0.8981) cap. intensity negative -0.2135 (0.2143) -0.3125 (0.3177) firm effect yes yes year effect yes yes f – value (sign. level) 5.1119 (0.0002) 5.8520 (0.0000) r2 / adj. r2 0.5325 / 0.4938 0.3526 / 0.3354 notes: significant level *: 5%, **: 1%, ***: 10% s o u r c e : author’s calculations. result of gmm estimation – robustness analysisresult of gmm estimation – robustness analysis as mentioned earlier, the endogeneity problem, in corporate finance research, mainly arises due to simultaneity between independent and dependent variable and variables that are omitted. in the present context, the issue of endogeneity may affect the conclusion as market value of the firm can inf luence the dependent variables of the model such as co2 emission. stating differently, companies with higher market value may not be willing to reduce carbon emission as it may affect their competitive position and later on, financial performance. to control this issue, gmm estimation has been used to re-compute the model and to assess the robustness of output (wintoki, linck & netter, 2012; mubeen, han, abbas & hussain, 2020). table 6 summarises the gmm output as well as wald χ2 test for checking model significance, the serial correlation test i.e., arellano-bond test ar (1) and ar (2), and lastly the sargan test for overidentifying restrictions. the results of gmm output are in alignment with the first method that ensures robustness of results and the conclusion derived from both the methods are parallel. examining the relation between market value and co2 emission… 2121 table 6. regression output using gmm estimation variables expected relation tobin’s q mbv constant ----8.0705 (0.04112)* 3.1051 (1.4079)* co2 emission negative -0.0217 (0.0326)** -0.3983 (0.1087)** sales growth positive 0.3462 (0.0220) 1.4291 (0.7039) size ---0.2364 (0.0096)** 0.2265 (0.3287)*** leverage negative -0.3659 (0.0259)** -0.1634 (0.8971)** cap. intensity negative -0.2351 (0.0062) -0.2956 (0.1979) firm effect yes yes year effect yes yes wald – χ2 202.3896** 204.6423** sargan test (p-value) 0.4356 0.4943 ar (1) p – value 0.0923 0.0732 ar (2) p – value 0.2956 0.2678 notes: significant level *: 5%, **: 1%, ***: 10% s o u r c e : author’s calculations. conclusion and implicationsconclusion and implications sustainable development goals, as prescribed by the united nations, are highly concerned with the environmental impact of business operations, especially emission of co2. in the given context, present research examines the relation between co2 emission and market value of the firm. using unbalanced panel data of indian firms for a period of seven years (2013–2019), the study analyses the effect of carbon emission on tobin’s q ratio and market to book value ratio. multiple regression along with gmm estimation has been adopted for data analysis. the results indicate strong negative impact of carbon emission on both measures of market value for selected companies. in other words, higher level of emission of co2 will result into lowering the market value of company. it can be explained as shareholders perceive carbon emission as adverse signal and ref lect the same by negative effect on market price of shares. rajesh desai, avani raval2222 besides, leverage and asset size are also found to be significant determinants of firm value. present research findings have important implications for practitioners. first, managers can adopt ‘green’ business practices that assist in reducing carbon discharge. further, by adopting environment-friendly practices, firm value may be augmented as investors attach positive signal to such announcements (kumar & firoz, 2019; 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(2012). endogeneity and the dynamics of internal corporate governance. journal of financial economics, 105 (3), 581–606. https:// doi.org/10.1016/j.jfineco.2012.03.005. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: june 4, 2014; date of acceptance: september 25, 2014. * contact information: anna.pyka@ue.katowice.pl, department of finance, university of economics in katowice, 1maja 50, 40-287 katowice, poland, phone: 32 257 74 49. ** contact information: jblach@ue.katowice.pl, department of finance, university of economics in katowice, 1 maja 50, 40-287 katowice, poland, phone: 32 257 74 49. pyka a., błach j. (2014). business-to-business platforms as a part of e-commerce – possibilities of practical use by polish enterprises. copernican journal of finance & accounting, 3(2), 137–149. http://dx.doi.org/10.12775/cjfa.2014.023 anna pyka*, joanna błach** university of economics in katowice business-to-business platforms as a part of e-commerce – possibilities of practical use by polish enterprises keywords: e-commerce, business to business (b2b). j e l classification: m210, g30, o33. abstract: there are plenty of e-commerce platforms operating domestically and internationally. business to business (b2b) platforms are the ones that are developing most dynamically. the aim of this paper is to show potential advantages that can be derived from the innovative solutions offered by e-commerce, and most notably by b2b platforms in a context of improvement of business effectiveness of enterprises. b2b potential is described based on analysis of the biggest polish and foreign business platforms (their abilities and functionalities). empirical tests focused mostly on an analysis of operation of the newly established (seemingly) innovative b2b platform called aleo that differentiates itself on the polish market not only with its functionality (as, besides standard functions, it offers financing of the supplier, rating or the possibility of carrying out purchase and/or sales auctions), but also with providing support for the bank sector, which – so far – has never been offered. translated by anna pyka anna pyka, joanna błach138 platformy business-to-business jako element e-commerce – możliwości wykorzystania w praktyce polskich przedsiębiorstw słowa kluczowe: e-commerce, business to business (b2b). klasyfikacja j e l: m210, g30, o33. abstrakt: na rynku krajowym i międzynarodowym funkcjonuje wiele platform e-commerce. wśród nich silne rozwijają się platformy business to business (b2b). celem artykułu jest wskazanie możliwości osiągnięcia korzyści z tych innowacyjnych rozwiązań jakie oferuje e-commerce, a w szczególności platformy b2b w kontekście poprawy efektywności działania przedsiębiorstw. potencjał, który tkwi w b2b opisano dokonując analizy największych polskich i zagranicznych platform biznesowych (ich możliwości i funkcjonalności). szczególny nacisk w badaniach empirycznych położono na analizę działania nowoutworzonej innowacyjnej (jak się wydaje) platformy b2b o nazwie aleo, która wyróżnia się na polskim rynku nie tylko funkcjonalnością (oprócz standardowych funkcji oferuje finansowanie dostawcy, wyznaczanie ratingu czy też możliwość przeprowadzania aukcji zakupowych i/lub sprzedażowych), ale także wsparciem sektora bankowego, co – jak dotąd – nie miało miejsca.  introduction turbulent environment forces modern organisations to develop and change all the time. in the times of globalization being a dominant direction of development of the world economy understood as evolutionary, consistent aiming at becoming the “borderless economy”, unrestricted free trade is the key element. assuming the “unrestricted free trade” concept, enterprises follow the strategy of electronic commerce in internet (e-commerce) that ensures their presence on the global market, regardless of the size of the company. the basic reasons for development of electronic commerce were worldwide computerization, easy and cheap access to internet, possibility to limit the costs and shorten transaction time, both on the part of the buyers as well as on the part of the sellers. now, e-commerce forms the so called new economics – the economy without any state borders. e-commerce is an example of joining technological innovations with business innovations applied in order to streamline effectiveness of operations of business entities, which will lead to improvement of their financial standing. e-commerce platforms make it possible to liquidate or limit, to a great extent, any barriers in international trade that may pose a significant problem in the operation of many business entities. thus, e-commerce is one of the most dynamically developing sectors of the economy. increasingly often, the inter business-to-business platforms as a part of e-commerce… 139 net channel is added to traditional channels of sale in smes as well as in big corporations. the research methodology and the research process the reason for choosing this subject is experience with the sme sector that shows that preponderance of the companies do not have any specialized units responsible for procurement processes (cimochowski, hutten-czapski, rał, sass 2011). most often, procurement is within the scope of duties of one employee who uses the services provided by the same suppliers. lacking proper tools, time, knowledge, and sometimes also willingness, he/she does not probe the market looking for the best price. it may lead to deterioration of the company’s financial standing – improper procurement management may be a source of higher costs and may result in lower quality of the ordered goods/services. keeping in mind the above, the aim of this paper is to show opportunities to benefit from e-commerce, especially from one of its segments, namely, business to business (b2b) platforms, in a context of increase in effectiveness of the operations of enterprises. b2b potential is described by analysing the biggest polish and foreign business platforms available for polish businesses (their abilities and functionalities). empirical tests focused on an analysis of activities of the newly established (seemingly) innovative b2b platform called aleo that differentiates itself on the polish market not only with its functionality, but also with providing support for the bank sector, which – so far – has never been offered. e-commerce as business initiative e-commerce refers to use of electronic means and technologies to conduct commerce (sale, purchase, transfer, or exchange of products, services and/or information). e-commerce may be also defined as paperless exchange of business information using electronic data interchange, electronic mail, electronic bulletin boards, electronic funds transfer, world wide web, and other network –based technologies (bajaj, nag 2005, 14; etemad 2004, 776). delivery of product or service may occur over or outside of the internet (whinston, choi &stahl 1997)1. 1 sometimes the term e-commerce and e-business are used interchangeably but they are distinct concepts. e-commerce is the term used to describe the process of transacting business over the internet. e-business, on the other hand, involves the fundamental anna pyka, joanna błach140 s. poon (1999, 113–124) defined e-commerce as “the use of internet technology and applications to support business activities of a small firm.” e-commerce is exclusive of orders submitted by phone, fax or via e-mail (electronic mail)2. e-commerce transactions may be concluded with participation of companies, individuals, government institutions or any other private and public organizations. in terms of entities taking part in electronic commerce, the three basic forms of e-commerce are differentiated (hartman, sifonis, kador 2001, 116– –119): b2b, b2c, c2c and c2b3. the first form of e-commerce – business-to-business (b2b) includes companies doing business with each other. b2b is the largest category so far and expected to grow faster than b2c (schneider 2009, 205–244; schneider 2011, 249–290; bajaj, nag 2005, 18–19, majewski 2007, 19). commercial interchange among the enterprises includes not only concluding transactions, but also looking for partners, building the network of suppliers and buyers, searching for trade information etc. the next form – business-to-consumer (b2c) includes business selling to general public typically through catalogues utilizing shopping cart software (bajaj, nag 2005, 19). b2c includes all forms of the sale of goods and services to individual clients, that is retail sale in the network (internet-based shops or auctions selling products/services of smes4). reengineering of the business model into an internet based networked enterprise. the difference in the two terms is the degree to which an organization transforms its business operations and practices through the use of the internet (hackbarth & kettinger 2000, 78–93; mehrtens, cragg, mills 2001, 165–176; poon 2000 9, 72–81; poon&swatman 1997, 5–21). 2 information web portal of the central statistical office, http://www.stat.gov.pl/ gus/definicje_plk_html.htm?id=poj-5934.html (access date: 20.11.2013) 3 sometimes, we also differentiate: 1) business – to – government (b2g) – includes transactions between business and government. it can include the use of the internet for public procurement, licensing procedure, and other-related operations (manzoor 2010, 6; 2) government – to – business (g2b) – in these transactions, businesses can be suppliers, partners, or customers of the government. in addition, businesses must comply with government regulations while they maintain their roles; 3) business – to – employee (b2e) uses an intra-business network which allows companies to provide products and/or services to their employees. b2e encompasses everything that businesses do to attract and retain well-qualified staff in a competitive market. 4 internet-based shops surpass traditional commercial facilities in terms of their availability, vast assortment, quick access to unlimited information (supported with photos or multimedia presentations of products) and possibility of selecting the most convenient for the client form of payment. more: grudzewski, hejduk 2002, 122–126. business-to-business platforms as a part of e-commerce… 141 another form of e-commerce is consumer-to-consumer (c2c) which involves transactions between individual consumers in which consumers interact with other consumers online. and finally, consumer-to-business (c2b) which involves commerce between consumers and businesses in which consumers decide what they want to pay, and the vendors decide whether or not to accept. use of e-commerce offers a lot of advantages, both to the sellers as well as to the buyers – customers5, and a well operating e-commerce market is characterised with: great accessibility (access at any place and time), simplified service of transactions (standardization of quantitative and qualitative information), security and promptness. all this causes that the e-commerce sector is developing very quickly, and b2b is the fastest developing form of it6. business to business platforms as a form of e-commerce business to business platforms are an innovative solution supporting the procurement (and sale) management process in a company, allowing increase in effectiveness of its activities. the said platforms facilitate the communication process within the company as well as outside it, increasing transparency of the conveyed information and having a positive impact on the supplier-buyer relationship. the companies may use b2b platforms for creating of electronic auctions, electronic requests for proposal (rfps), procurement requests, for procurement management, contracts management, execution of orders, rating of suppliers, carrying out procurement analyses, operational procurement (e-procurement), e-public procurement. business to business platforms: ■ are innovative solutions that give a real competitive edge thanks to significant reduction of costs of purchase of goods and services, shortening of the return on investment period leading to increase in profitability of the company; 5 more: niedźwiedziński 2004, 19–25. 6 report global perspective on retail’s most developed e-commerce sector took great britain, which slightly ahead of the united states – the biggest market for e-commerce (in 2012 value of goods sold in the united states amounted to approx. 187 billion, which accounted for almost one-third of global sales online). see: global perspective on retail, cushman & wakefield, july 2013, 8. anna pyka, joanna błach142 ■ optimize the procurement process by its effective control, alignment of the procurement procedures in place and full transparency of relations with the suppliers; ■ are professional services ensuring safety and effectiveness of operations based on long-term practical experience in and theoretical knowledge of procurement. integration of commercial platforms with the erp and mrp ii class systems increases effectiveness of operation of the entire system. a well-developed system of rights that takes into account the role of buyers, managers, procurement employees, analysts and workf low makes it possible to carry out the procurement proceedings effectively. in general, advantages of b2b platforms are coincident with the ones of e-commerce, and they may be divided into advantages for buyer companies and supplier companies. for buyer companies (clients), the use of b2b platform allows them to buy at lower prices, which results from f lattening of prices, and often, from “price war” among the businesses (especially in case of auctions), at shortened time for accepting bids (time saving is possible by specifying the deadline for submitting bids in the request for proposal). the use of the b2b platform allows for exchange of business information as it is possible to compare the quotes given for a certain commodity or service by other suppliers on the market (competitive offers may be compared). a very important advantage of b2b is that it offers the possibility of finding new contracting parties. taking into account that the buyers may express their opinions on the concluded transactions, the b2b platforms are also a place where the supplier company is assessed which may contribute to increasing the supplier’s credibility on the market. the use of the b2b platforms by seller companies (bidders) allows them for market expansion and increase in sales revenues. it is so because e-commerce is an additional distribution channel that offers an opportunity to increase sales revenues and helps to enlarge the market share. e-commerce makes it also possible to improve the brand and company name recognition outside the present market. at the same time, the incurred costs are lower than in case of alternative solutions, such as, for instance, construction of new shops or carrying out advertising campaigns. additionally, b2b platforms make it possible to improve loyalty of the customers – f lexibility of internet, thanks to which the customers may log in at any time, submit orders and check progress of order execution, is good for saving of time and effort of the customers themselves. being the source of positive experience, electronic commerce creates favourable business-to-business platforms as a part of e-commerce… 143 conditions for developing loyalty of customers and encourages to do shopping again. whereas, the costs of business operation may be lowered due to the possibility of extending the range of operation of the sales department and streamlining of the information f low among the company’s departments, which – in turn – may contribute to increasing of the effectiveness and productivity of sales representatives and auxiliary personnel. b2b in polish and international business practice there are a few b2b platforms on the international market, of which the most significant are: ariba and alibaba. for a few years, b2b platforms have also been present in poland. they are designed to provide support for procurement processes of the companies. the said platforms include such platforms as: logintrade, marketplanet, oferteo, open nexus, allegro7. however, most often, these are platforms acting as an intermediary in the sale of specific, highly specialised products or services, associating rather companies interested in purchase of certain products than connecting suppliers with buyers8. thus, their functionalities as regards professional procurement tools dedicated to business are limited or none. available solutions differ in many features impacting their functionality and degree of adjusting to the needs of potential users. a part of existing b2b platforms have a well-known brand, others are only building it. majority of platforms provide a base of contracting parties on international scale, however, there are also local commercial platforms. some platforms make integration with erp systems possible, others – not. some of the solutions are free, others must be paid for to be used. some of the commercial platforms operate in a few language versions; a part of them have only one language version – most often english. and finally, all platforms are differentiated in terms of their functional 7 it is estimated that the value of b2b transactions in poland concluded via internet in 2009 exceeded pln 120 billion, which represents 5% of all transactions among the entrepreneurs and exceeds value of b2c transactions eight times. see: cimochowski et al. 2011, 16. 8 there are also programmes for procurement process management available on the market, however purchase and implementation of such a tool, most often, entails high costs, which means that only the biggest corporates can afford it, that is only the ones that have the procurement operations on a large scale and, usually, maintain a separate procurement department. anna pyka, joanna błach144 scope, that is, in terms of purchase/sale and analytical tools, their diversity, and support services, including but not limited to, financing. each platform has its strengths and weaknesses that are presented in analytical approach in table 1. table 1. selected b2b platforms (as at 30 august 2013) name of the sale/purchase platform weaknesses strengths ariba www.ariba.pl – one of the highest costs of use (access to full functionality requires paying an additional fee for each of the system modules) – there is no customer service centre in poland. – international base of suppliers/ buyers, – a wide functional scope, inclusive of advanced analytical tool, – possibility of integration with the erp class systems, – a few language versions, – globally known and verified brand. alibaba www.alibaba.com – a limited functional scope in the field of procurement tools (lack of extended rfp, auction), – high costs – the sellers pay for having the access to specific functionalities, – the suppliers pay for positioning in the search outcome, – there is no customer service centre in poland. – international base of suppliers/ buyers, – developed services that support establishing and building of the relations among the companies, – service of transaction payments (from bank transfer to crediting), – a few language versions, – globally known and verified brand. logintrade www.logintrade.pl – closed-end platform, – a limited offer for the sellers, – high costs of use, – a small organization – lack of stability. – possibility of integration with the erp class systems, – english version of the system. marketplanet www.marketplanet.pl – closed-end portal – a limited offer for the sellers, – high costs of use. – possibility of integration with the erp class systems, – existing base of verified suppliers, – english version of the system. oferteo www.oferteo.pl – a limited functional scope to the “noticeboard” function, – higher costs. – co-operation with allegronotices are shown to millions of users of allegro service. open nexus www.opennexus.pl – a limited offer for the sellers (for instance, there is no b2b shop), – limited functionalities connected with establishing relations with companies, – higher costs of use, – a small organization – lack of stability. – the offer is connected with the procurement consulting service, – the system is in a few language versions. allegro www.allegro.pl – there are no functionalities as regards professional procurement tools dedicated to business. – known and verified brand. – built network of million users. s o u r c e : own work on based: www.ariba.pl, www.alibaba.com, www.marketplanet.pl, www.logintrade.pl, www.allegro.pl, www.opennexus.pl, www.oferteo.pl (accessed: 20.11.2013). business-to-business platforms as a part of e-commerce… 145 the b2b platforms presented in the table no. 1 differ but they all have common goals which are: creation of their own e-shop, presentation of the assortment, winning new buyers, dedicated price lists, products comparison engine. majority of the said goals are the reason for creating the aleo commercial platform owned by usługi dla biznesu sa – a company belonging to the ing group. this is the first platform on the polish market that is actively supported by the bank (ing bank sa) in terms of image and information9. aleo service is a free of charge, and at the same time, complex tool offering the companies effective management of the procurement and sale process (it is not available to retail clients – natural persons who do not pursue business activities)10. so far, there are a few procurement and sale platforms operating on the polish market (elaborated more in the table 1), however, none of them is dedicated to business entities exclusively (it may be deemed as filling the market niche) and none of them has so many functionalities as aleo platform. unlike other existing platforms, aleo platform owner ensures verification of the actual existence of an organization/enterprise. the platform is dedicated to the segment of the small and medium enterprises11 operating in poland (as a target – other european countries12). as it has already been mentioned, ing bank sa is the first bank in poland that is involved in active informing its clients about the b2b platform and which supports that platform with its own brand. the bank co-operates with the company offering the aleo platform (usługi dla biznesu sa) under cross selling. the special purpose vehicle benefits from image support, namely, the use of the bank brand and help in verification of the clients (with their consent), and the bank benefits from enlarging potential sources of income. the banks look for new sources of income, and thus they offer their existing and potential clients products other than standard bank services more often. business platforms are 9 within three months of its presence on the market (the platform has been operating since september 2013), 8,357 participants/enterprises have been registered (as at 15 december 2013) and 25,990 available products/services have been offered via that platform. 10 see more: dziubak, 17.10.2013, 15. 11 the said platform is not a procurement and sale portal for big corporates that require complicated implementation (such as sap, ariba) and integration of the offered solution with the systems of erp and mrp ii class. 12 by june 2014, it is planned that the platform will cover also other markets where ing group operates. see: startuje platforma handlowa dla firm (commercial platform for companies is getting started), rzeczpospolita, 17.10.2013, 12. anna pyka, joanna błach146 one of such innovative services that are offered by the companies related to the banks13. the banks cannot be involved in direct sale of business platforms, which results from statutory regulations applicable to them, however, they may advise about such platforms and benefit from it under cross selling. co-operation of the bank and platform owner on the e-commerce market is expressed in offering an enterprise the possibility of having its creditworthiness confirmed by showing its rating (only with the consent of the enterprise)14 and the possibility of having a fast access to bank services (inclusive of financing of the supplier). the distinctive features of the platform on the polish market are (twaróg 2013a, 14): ■ supporting the platform with the brand of the bank having a well-established position as regards corporate banking; ■ no need to implement an expensive it system for the platform users; ■ secured bank transfer – in case of transactions between platform users – a new product allowing to block the funds on the bank account, which provides guarantee of the buyer’s solvency to the seller; ■ free transfers from ing bank to the account of the connected platform users, regardless of the bank that maintains the buyer’s account; ■ financing of the supplier15; ■ possibility of having modern procurement process in place, without a need to have a specialist department within the company – each employee authorized by the company managers may use the system. aleo platform differs from other b2b platforms also as it offers the possibility of inviting the suppliers to the procurement auction. auctions make is possible to get the lowest purchase price taking into account pre-defined nonfinancial conditions16. procurement auctions allow not only the buyer to have their goal achieved, but also have a good impact on business relations that, in 13 some banks actively encourage to make use of insurance, accounting, hr and payroll services offered by the companies related, in capital terms, to the banks. see more: twaróg 2013b, 6; pyka, wieczorek-kosmala 2013, 690–698. 14 rating shows the financial standing of the company determined based on the financial statements. it is a simple form of checking the solvency of the contracting party. 15 the buyer will be able to offer reverse factoring to their supplier, that is payment for the executed service or delivered product directly after the invoice is issued (the amount will be decreased by the cost of financing). whereas the buyer will repay the debt in extended due date directly to the bank. see: twaróg 2013c, 20. 16 electronic auctions are used mostly in case of products for which quality and functional standards may be determined. business-to-business platforms as a part of e-commerce… 147 case of traditional negotiations, may be disturbed by unfair behaviour of the market players. they are a procurement supporting tool in which the suppliers present their commercial offer on-line.  conclusion commercial interchange based on internet links is a fact. there are plenty of e-commerce platforms operating domestically and internationally. commercial interchange takes place on the said platforms with participation of companies, individuals any other private and public organizations. business to business (b2b) platforms are developing dynamically among the e-commerce platforms. till the middle of 2013, there was no e-commerce platform on the polish market that would be dedicated to businesses only and which would be supported by a well-recognized brand of the financial sector. this gap has been filled in by the innovative aleo commercial platform which, besides standard functionalities of the commercial platform, differentiates itself from other platforms with offering financing to the supplier, providing rating or offering the possibility to carry out electronic auctions (procurement and/or sale). the platform is the first undertaking in which a financial institution (a bank) participates. it is yet another example (besides insurance, accounting, hr and payroll area) showing that the banks are looking for new sources of income based on cross selling. b2b platform that is used in finances, communication and management of relationship with the clients, distribution, logistics, marketing, electronic training, not only lowers the costs of the procurement and sale transactions, but also contributes to creation of the image of the modern enterprise. according to many projections, polish e-commerce market, inclusive of b2b, has bright perspectives of future growth, but even now it is one of the fastest developing markets in europe. the authors believe that, having proper promotional support, internet service may become a powerful source of new business possibilities for many small and medium enterprises in poland, increasing effectiveness of their operations, improving their financial standing and supporting execution of their strategic goals. anna pyka, joanna 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(2015). sustainable development in norway on the example of government pension fund global. copernican journal of finance & accounting, 4(1), 45–54. http://dx.doi. org/10.12775/cjfa.2015.003 julita fiedorczuk* the faculty of economics and management, university of bialystok sustainable development in norway on the example of government pension fund global keywords: sustainable development, global government pension fund, norway. j e l classification: f39, g23, g32, h61, i31, 011, 013, 016, 021, 023, 044, q01. abstract: this article is an attempt to assess the functioning of the norwegian government pension fund global in relation to the degree of implementation of the concept’s objectives of sustainable development. the aim of the article apart from this assessment is to determine significance and the benefits of the concept to the fund and the country. to apply the hypothetical-deductive method. the concept of sustainable development has a relatively long history in norway. sustainable development is not just a dead regulation, but a way of thinking norwegians. social awareness of balance need causes of naturalness of reconciling the economic, social and environmental interest in economy. on the one hand, fund acting within state structures, is the implementing tool of sustainable development policy. on the other, the fund uses assumptions of the concept to achieve sustainable economic benefits. maturity sustainable activities of the fund contributes to the achievement of competitive advantage among other funds. the fund is the largest government pension fund in the world in terms of net assets, of which the largest part of the market value is an inf low of capital from outside. investors deposit their funds in it because they trust to management style. due to the global character, size and geographical or investment diversification, manifestation of sustainable practices reaches to wide-spectrum of recipients. the range of message builds date of submission: january 9, 2015; date of acceptance: february 20, 2015. * contact information: fiedorczukjulita@uwb.edu.pl, the faculty of economics phone: 085 745 77 16. julita fiedorczuk46 the fund and country reputation that actively suggests the only one way to sustainable development. implementing the concept of sustainable development is the only possible way to the stable satisfy economic-social needs of the world while avoiding environmental degradation. due to the fact that the decisive role in the implementation of the concept is attributed to governance1, the most sustainable economies has large state involvement in the market and the welfare state status. one of them is norway, where all of polities and activities are subordinated by the concept of sustainable development. also, the equality and fight against disproportions are the stimuli to create government pension fund. fund as a state institution is norway’s image of management style and as the largest government investment fund in the world is an effective communicator informing about the importance of applying the concept of sd. to investigate undertaken problem has been used the hypothetical-deductive method. it is assumed that the gpfg is an active performer and promoter of the concept of sustainable development. in addition, it is believed that the profound realization of the concept of sustainable development is a tool to build competitive advantage of fund and norway. the assess the implementation of the concept will be based on internal fund reports2. conclusions derived from them have been confronted with the results of the international organizations and the available literature. due to the small number of differences in the ideology of csr and sd at the level of assumed them to be identical3. 1 factors is the governance dimension. 2 2010, 6) and received one of the truman oil solvents resistance rating of swf scoreboard. (truman 2007, 15) it publishes and complete lists of its holdings as well as its voting records in its quarterly and annual report. the gpfg publishes the benchmark portfolios used to measure its performance against. 3 istics than differences. clearest ideological differences are: the level of implementation sustainable development in norway on the example… 47 the beginning of the concept of sustainable development is considered to the in 1975. the next step was to propose the idea of sustainable development set out ment and development programmes in 1987. sustainable development on the basis of the report brundlandt (report 1987, 41) was defined as: ,,the development, that meets the needs of the present, without compromising the ability to meet the needs of future generations. it is based on two concepts: needs – in particular the essential needs of the poorest in the world, which should be given the highest priority, and limitations – imposed capacity of the environment to meet the needs of present and future by the state of technology and social organization.” satisfaction with life was equated with economic growth. for this reason, the economic growth was considered to be the most important economic objective. this view has been changed since the 70s. in parallel with the increase in interest in the sustainability has been growing popularity of the concept of quality of life. this term goes above and beyond economics, as determined multifaceted human satisfaction, which has to be tested through tangible and innomic component of sustainable development is not significant. the guidelines of sustainable development assume that it can not be the most important. the the importance of the state in achieving and maintaining a sustainable balance between the environment, human and economic prosperity is very fundamental. the market is very efficient allocation mechanism in the event of a short term, but is not able to protect the hand of the invisible nature and human satisfaction. only the state is able to effectively manage the free goods and represent the interests of the whole community in the long term. (chmielak 2002, 80–82) the idea of sustainable development is a relatively new global style of thinking pointing the way to achieve sustainable development. the main purpose of the development model based on its assumptions is to maintain a balance beof the concept (csr – scale micro sd – the whole globe, country), the origin of creation (jonker, reichel, rudnicka 2011, 41–42) and the expected time horizon (usually a long period of planning and implementation occurs in the case of sustainable development). julita fiedorczuk48 tween people, nature and prosperity on a global scale. in the face of globalization of economies is a growing awareness that the problem of poverty, environmental hazards or food does not end within the borders of the countries concerned. expanding development perspective, he sees more and more clearly the needs of the future generations. norway has been actively advocate of concept of sustainability since the pasts decades. norway effectively implements and promotes the principle of balance between the main elements of sustainable development. social sensitivity, widely understood egalitarianism, a sense of social justice and respect for nature can not be actualized only in a utopian model. the norwegian compromise is a result of many causes: religion, culture, historical circumstances, their policies and the social mood of the norwegian society. in the ranking of the world economic forum in 2005 in terms of sustainable development index norway took second place (angel 2013, 22). the meaning of sustainable development is adopted in norway in accordance with the definition of the brundtland report from 1987. (indicators 2005, 6) this definition is used in norway in all documents related to the theme of sustainable development of the country such: national action plan for sustainable development (2003), norway’s strategy for sustainable development (2002) and a peer review of norway’s policy for sustainable development or even corporate social responsibility in a global economy (2009). norway is the one of the richest economies in the world. norway frequently been regarded as the state with the highest level of socio-economic developfjords in terms of quality of life was already the leader of twelve times. norway’s hdi was 0.955 in 2012, placing it at first place again, among the other economies (international 2014). norway achieved result of gdp per capita about 86% highthan switzerland, which was the next place in norway at this time (gdp 2011). norway is one of the first countries in the world that has established in 2009 the state document about the standards of conduct relating to corporate social responsibility. (corporate 2014). it is not surprising that the list of the 100 most sustainable corporations of 2012, the top ten were two norwegian state companies (statoil and norsk hydro) (angel 2013, 19). sustainable development in norway on the example… 49 manifestation of sustainable development within the social pillar can be generalized to create for the residents the conditions of a sense of security, happiness and equality. a scandinavian model creates the ability to implement this concept. this model consists of the mechanism of the welfare state, nordic economic policy and political and economic system. solutions of scandinavian model would have not achieved without the approval of nordic society, which largely bear the cost of sustainable economy. in norway even the state intervention crystallized naturally, giving a solid foundation for the so-called. “happy democracy”, which similarly to sustainable development, is a political consensus, economic and social (nowiak 2011, 72–77). norway is a country maintaining very high environmental standards. they are part of the national legal order. both the state and society treats nature as a national heritage. the environmental aspect in norway gained strategic importance even before the official creation of the concept of sustainable development. in 1972, norway was the first country in the world has created an unit ministerial dealing with issues of responsibility for the environment. (report no. 14, 2007) the need for the establishment of units is result of the culture and nordic tradition, whose main purpose is to manage the entire planet so that future generations can enjoy the unchanged nature (harrison 2003, 70, 74). the confirmation of the effectiveness of norwegian policies is fifth position sustainable country (rebecosam 2013, 6) and eighth place in the world in terms of the development of the so-called green economy. exemplification of what is the global green economy index from 2012 developed by the dual citizen (copenhagen 2013). norway has attained a such high results of this kind of rankings in this regard by the economic system – a combination of market economy and state intervention. pure market mechanism is not able to implement the principles of social justice. difficulty in being self-sufficient and independent in such hard conditions, resulted in understanding the meaning of the state and institutions, which can move on some part of the responsibility and risks of satisfy all the needs of society. from the same reason society fully accept applied redistribution of income and participates in the costs for the selfmade construction of sense of security. sustainable development in norway is poured out on all areas of activity. on the basis of the scandinavian economy sustainable action are very mature, because its origins are much earlier than the beginning of concept of sustainable development. approval for sustainability follows from previous experiences of this nation. norwegians believe in effectiveness of counterbalance (economyjulita fiedorczuk50 human-nature), which does not reduce economic welfare in long term. sustainable initiatives are supported by the legal system, state funds devoted to their implementation and society in norway. from the practice point of view4 government pension fund global is a tool for ensuring sustainable development in norway and promoting it in the world. the main reason for its creation is the idea of a fair distribution of wealth between generations, resulting from the scarcity of natural resources, the illusion resembling a definition of the concept. after the exhaustion of raw materials, accumulated capital can be used to finance pension obligations or be better used to mitigate the effects of the decline in budget revenues. government pension fund of the biggest government sovereign fund in terms of accumulated assets in the world (sovereign 2013). in the last decade have noted a huge increase in the importance of investment funds in the financial markets and their role in the global economy (review of finance 2013, 483). the concept of sustainable development at the level of the organization is poorly defined and represents a new approach in the management sciences (adamczyk 2001, 32). the transformation of english literature from the sustainable development concept from macro and micro level is defined as a susbased on sustainable development (sustainable corporation). according to the definition of this term is given by banerjee is an organization that strives to increase the economic long-term value for shareholders, through the integration of economic, environmental and social opportunities to increase the value of corporate strategy (baberjee 2002, 107). in this sense, sustainable organizations can easily discern the four dimensions of socially responsible organization, proposed by duahlsrud (without exposed dimension of volontariness). this causes difficulty in making a clear distinction between the activities falling under the implementation of the concept of corporate social responsibility and sustainable development at the level of the organization, which the fund is. gpfg is becoming more resilient executor of the concept of sd and csr esg 4 lease standing that “gpfg is financial investor, no policy tool”. sustainable development in norway on the example… 51 oecd’s principles of corporate governance and the oecd guidelines for multinational’s enterprises. on the basis of internal documents5 and scientific articles defining and regulating the operation of the fund can be concluded that sustainable balance is well-established legislative part of the management. the foundation for achieving the objectives of the concept has already created organizational structure, which provides a secure changes and reciprocal control between authorities. advisory bodies and public consultations shall support the important decisions. priority the principles of ethical and responsible investing emphasizes by existence of independent, specially established cells the council on ethics. the council makes public exclusion from the portfolio of investors who violate the security of investments by engaging in activities condemned (corruption, the production of weapons, violations of human and children rights, actions detrimental to the environment) by the fund. long-term planning perspective is the way to achieve the main goal – integration of ethical and financial cell. the fund resigns of short-term profits, incurs expenses, but gaining the reputation and investors trust. the market value of the fund from 2013 years accounted for over 60% of the inf low of capital from outside (government 2014). the expenditures for concept realization are same kind of advertising costs. status responsible global investor increases the sense of security, the market value of their assets, and thus the range of information confirming the effectiveness of the norwegian state-owned assets management style. this result seems to be strong than multiplying the expected accumulated capital. having experience can become a competitive advantage. the results of wwf report from 2008 year, indicate that there are many reasons to norwegian government naturally played a leading role in the future global investing (innovest 2008, 70–71). performing this function would be to being an active representative government funding and integration of tools in the government responsible investing pension funds in order to change the world economy in a more socially and environmentally sustainable. oslo is indicated as potentially the world capital of socially responsible investing, due to the current consistency and naturalness responsible activities. international organizations hierarchizing sovereign pension funds deem gpfg as a leader in the implementation of the concept of sd. operation of the fund supporting sustainable development are assessed more strictly. fund 5 ternal report to the storing (2006, 2007, 2008, 2009, 2010, 2011, 2012,2013, 2014) and mandates gpfg, other reports. julita fiedorczuk52 prompts suggestions of these organizations and improves areas identified in these analyzes. in 2008, in terms of the sustainability of improved environmental dimension in response to the wwf report, which indicated insufficient fund involvement in activities against climate changes. after stabilization of the economy after the financial crisis yngve slyngstad (2013) increased the share of investment in environmentally friendly companies to 1% of the assets, and from 2015 investement push into renewable energy, water management considering the use of a new reporting tool called screening possitive. the fund is a transnational institution which facilitates outgoing initiatives outside the country. this activities rely on using of sustainable development practices, sending signals about the necessity of their application by potential, current investors and observers. compliance with the ethical rules is necessary to start co-operation with the fund. the fund activity is example of sustainable practices, making the management model of state wealth in the face of current limitations and future needs. the fund is a resilient executor and promoter of sustainable development concept. sustainable activities are very mature. when evaluating sustainable development, it is necessary to establish the norwegian model because it creates the possibility to implement this concept in a very natural way. social attitudes of equality and justice enhance awareness of the need for and importance of csr and sd by society and the state. these factors make the use of the concept of csr is in norway direction of the government’s actions to improve its competitiveness in the long run. in summary, the main purpose of the article have been achieved. the concept of sustainable development is permanent way to stay competitive investor in the world. stwem, akademia w krakowie, kraków. baberjee s. b. 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(2011), nordycki model “welfare state” w realiach xxi wieku, wydawnictwo julita fiedorczuk54 wyd. ii, c.h. beck, warszawa. pri, signatories to the principles for responsible investment, http://www.unpri.org/ signatories/signatories/?country=norway (accessed: 17.02.2015). robecosam (2013), country sustainability ranking 2013, http://www.robecosam. com/images/cs_ranking_e _rel.final.pdf (accessed: 16.02.2015). sovereign wealth fund name (2013), swf institute, http://www.swfinstitute.org/ fund-rankings/ (accessed: 12.12.2014). swfi (2014), linaburg-maduell transparency index, ://www.swfinstitute.org/statistics-research/linaburg-maduell-transparency-index/ (accessed: 15.02.2015). statistics norway, gdp per capita, price level adjusted, 2009–2011, http://www.ssb.no/ en/priser-og-prisindekser/statistikker/ppp (accessed: 25.02.2015). truman e. m. (2007), a scoreboard for sovereign wealth funds, peterson institute, washington. hdrstats.undp.org/en/countries/profiles/nor.html (accessed: 25.01.2014). yermo j. (2008), governance and investment of public pension reserve funds in selected oecd countries, issn 1995-2864, financial market trend, oecd. cjfa_1_2015_przed_drukiem.pdf 65 kerlin j., maksymiuk a. (2015). comparative analysis of the bail-in tool. copernican journal of finance & accounting, 4(1), 97–107. http://dx.doi.org/10.12775/cjfa.2015.007 jakub kerlin* warsaw school of economics anna maksymiuk** warsaw school of economics comparative analysis of the bail-in tool keywords: bail-in, resolution, liquidation of financial entities. j e l classification: g21, g33. abstract: the article aims to analyse selected components of one of the tools of orderly restructuring and liquidation of financial institutions, namely the conversion of equity or debt write-down tool (bail-in). the presented breakdown shows the variety of approaches to defining bail-in and points of convergence of these approaches. one of the key findings highlights the global shift in the approach to the issue of restructuring and liquidation of financial institutions and indicates a new path undertaken by public authorities, which allows for allocating costs to the owners of financial institutions. governments should prepare a legal framework for the effective use of this tool before the necessity of its application becomes manifest. the study is based on a comparative review of legal frameworks in selected countries as well as reports, studies, publications and practical experience of countries that have applied bail-in. date of submission: december 23, 2014; date of acceptance: february 12, 2015. * contact information: jk43413@sgh.waw.pl, collegium of management and finance, jakub kerlin, anna maksymiuk98 the global financial crisis exposed the deficiencies of regulatory frameworks in many countries. the worsening condition of too-big-to-fail banks in connection with ineffective regulation and supervision (iwanicz-drozdowska, schab 2014) often left no choice for politicians and market supervisors. the only way to overcome the turbulences of the financial distress of that time was recapitalization of financial institutions using public funds as a last resort solution (mullineux 2013). at the moment of crisis, safety net institutions were not equipped with effective tools, the scope of which would have allowed them to liquidate the financial entity in question in an orderly way without disrupting financial stability. the tools used and interventions of governments in the most turbulent years 2007–09 were very different but the most challenging problem was to find a proper way for the orderly liquidation of large financial entities (nieto, garcia 2012). a few governments only announced plans for the development of resolution and recovery laws. others very rapidly implemented resolution laws within their jurisdictions, tailoring them on an ad hoc basis and for specific needs. six years after lehman collapsed, ideas to resolve the problem of too-big-to-fail banks are well-considered, streamlined and presented as an alternative to the infamous bail-out approach. the outcome is a growing number of jurisdictions with bail-in legislation built-in as an integral part of the resolution framework and designed with reference to country specifics (imf 2012). this has led to the establishment of a new tool in financial architecture, with respect to which a comparative analysis of definitions, triggers, general rules and practical developments for financial institutions are worth studying. the paper is based on descriptive research studies carried out in two main steps. the first step is theoretical and consists of a comparative analysis of legal acts and literature in order to present the current shape of regulations and the approaches to the bail-in tool in selected jurisdictions. the second step is identification of bail-in cases and their practical consequences for owners and creditors. it is based on an analysis of financial documents of safety net institutions (central banks, resolution authorities). the research aims to analyse selected components of the bail-in tool and identify the cases of its application with the consequences for owners and creditors. comparative analysis of the bail-in tool 99 the term bail-in is quite new in the vocabulary of economics. large-scale government support for financial institutions has been called bail-out. in contrast to that process the term bail-in has been established. it has become increasingly popular in financial publications and has been presented to the public as a new model of tool (ec 2011). academic publications often refer bail-in as a process of bank recapitalization through the mandatory write-down of liabilities or alternatively, the conversion of liabilities to equity (conlon, cotter 2014). it makes bail-in one of the resolution tools that can be used to restructure a bank’s liabilities. it can be done by converting or writing down unsecured debt without necessitating the institution in question to go bankrupt. in other words, it forces creditors to bear some of the burden of liquidation or restructuring of the financial institution by having a portion of its debt written off or converted to equity (boe, fdic 2012). this mechanism has already been implemented in the laws of several countries and established within their legal frameworks. a summary of legal definitions from selected jurisdictions that have such a definition in place are presented in table 1. in addition, the definitions of international standard setting bodies have also been included. table 1. summary of the legal definitions of bail-in and bail-in powers approach legal grounds takes effect / / established definition cyprus law on resolution of credit and other institutions 03.2013 the power to: – write down or convert debt and liabilities into shares – reduce (including the reduction to zero), the amount of debts and liabilities of the institution under resolution – cancel financial instruments issued by an institution under resolution – amend the amount of interest payable denmark bank package iii 10.2010 the force to put losses on senior creditors in bank failures european union directive 2014/59/ eu 01.2016 the mechanism for resolution authority to write-down and convert the liabilities of an institution under resolution jakub kerlin, anna maksymiuk100 approach legal grounds takes effect / / established definition financial stability board key attributes of effective resolution regimes for financial institutions 11.2011 the power to: – write down, in a manner that respects the hierarchy of claims in liquidation, the equity or other instruments of ownership of the firm, unsecured and uninsured creditor claims to the extent necessary to absorb the losses – convert into equity or other instruments of ownership of the firm all or parts of unsecured and uninsured creditor claims in a manner that respects the hierarchy of claims in liquidation imf discussion note 04.2012 statutory power of a resolution authority to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity slovenia banking act 10.2013 a measure to write down or convert bank’s qualified liabilities united kingdom financial services act 01.2015 a power to cancel or modify any securities issued by the bank and to convert any such securities from one form or class into another usa dodd frank act 07.2010 the power to terminate all rights and claims that the stockholders and creditors of the financial company may have against its assets arising out of their status to perform the obligation that the creditors and shareholders will bear the losses of financial institution s o u r c e : own elaboration based on an analysis of legal acts and reports of international institutions. many jurisdictions have developed or are in the process of developing resolution regimes with bail-in tool with no or very limited option of public funding. there are several differences between the definitions of bail-in among the legal frameworks in the presented countries. the most detailed, functional legal definition is present in cyprus, the most concise has been adopted by denmark. taking into consideration their common elements, bail-in seems to be an explicit statutory right (which is also stressed in the imf definition) that gives almost undisputable power to restructure a bank’s liabilities. this restructuring can be of a dual nature, but both are directed against the owners and creditors. it can be done as a conversion of equity or simple writing down (reduction) even to zero of all their rights and claims. it can be applied mainly to unsecured creditors (having no specified assets as collateral) with the maintenance of a hierarchy of claims as for regular liquidation. comparative analysis of the bail-in tool 101 the implementation of bail-in implies serious legal consequences on the situation of many parties and creates new legal relations. therefore the appropriate legislation quite clearly points out the conditions under which bail-in can be used. table 2 presents the triggers for the beginning of the resolution process. table 2. bail-in triggers in different jurisdictions approach triggers and crucial conditions denmark resolution (and bail-in as a part of it) can be started when: – a bank no longer meets the regulatory capital requirements – the deadline for the bank’s restoration of the capital was not met european brrd resolution (and bail-in as the first part of it) can be started, when all of the following conditions are met: – the institution is failing or likely to fail – there is no reasonable prospect that any alternative private sector measures would prevent the failure of the institution within a reasonable timeframe – the action is necessary to protect the public interest fsb resolution (and bail-in as a part of it) should be initiated: – when a firm is no longer viable or likely to be no longer viable, and has no reasonable prospect of becoming so – before a firm is balance sheet insolvent and before all equity has been fully wiped out slovenia the decision on bail-in application may be issued when: – the bank is subject to an increased risk – no circumstances exist to eliminate the increased risk on a timely basis – it is not probable that the bank will attain capital and liquidity adequacy within a relevant time period – it is in the public interest to prevent instability of the financial system united kingdom the condition to launch bail-in is that the exercise of that power is necessary, having regard to the public interest in: – the stability of the financial systems of the country – the maintenance of public confidence in the stability of those systems – the protection of depositors – the protection of any client assets that may be affected usa the competent authority shall determine that such action is necessary for purposes of the financial stability of the country, and not for the purpose of preserving the covered financial company s o u r c e : own elaboration based on an analysis of legal acts and reports of international institutions. in general, to implement bail-in typically several conditions have to be met. triggers listed in the table above unambiguously indicate that in order to start a bail-in process, the decision on its application should lie in the public interest, which is the main priority of its use. the definitions among countries tend jakub kerlin, anna maksymiuk102 to differ. some of them concentrate on economic indicators whose source lies within a financial institution itself (e.g. being close to balance sheet insolvency or no chance for private funding, etc.). others point out the necessity of protection of overall financial stability, which indirectly can be presented as it is the dodd frank act, where it is necessary from the point of view of national decision whether to implement bail-in is taken within different jurisdictions by different authorities mandated to do so and the approaches and understanding can vary greatly. the data presented in the table 3 precisely describe the reasons for the implementation of bail-in. several countries like slovenia or denmark do not directly state the aims of bail-in in their legislation, which on one hand gives them more f lexibility but, on the other, also weaker legal positions. other jurisdictions tend to be more precise about this issue. both the financial stability boto recapitalizing and allowing the institution to operate on a “going concern” basis. by means of available measures the viability of a distressed institution should be restored. other reasons for implementing bail-in, stated in the dodd bility and minimizing the costs for public funds. table 3. goals of bail-in and its main principles approach aim of bail-in cyprus – maximize bail-inable amounts and minimize further capital needs – avoid strategic defaults – protect covered deposits – minimize the possibility of intervention of deposit insurer european brrd to restore entity’s ability to comply with the conditions to authorization and to continue to carry out the activities for which it is authorized and to sustain sufficient market confidence in the institution or entity fsb achieving or helping to achieve continuity of essential functions imf to achieve a prompt recapitalization and restructuring of the distressed institution comparative analysis of the bail-in tool 103 approach aim of bail-in united kingdom minimizing recourse to public funds and reducing risks to financial stability usa – avoiding or mitigating serious adverse effects on the financial stability or economic conditions of the country – facilitating the orderly liquidation of the financial company – ensuring that unsecured creditors bear losses in accordance with the priority of claims – ensuring that the management responsible for the failing financial company is removed s o u r c e : own elaboration based on an analysis of legal acts and reports of international institutions. although bail-in is not a new concept in the theory of finance, it was applied to financial institutions rather exceptionally (imf 2014). therefore practical experience of the write-down and conversion mechanisms in relation to financial institutions is very limited. table 4 presents the identified cases of application of this resolution tool in the cases of banks in different jurisdictions. the information about the jurisdiction, name of the bank, time as well as the haircut rate is included. table 4. bail-in practical experience country bailed-in entities and haircut rates name of the bank with the time of bail-in application cyprus – shareholders and bondholders (full bail-in) – uninsured depositors (haircut 60%) cyprus popular bank (laiki bank) march 2013 – shareholders and bondholders (full bail-in) – conversion of the part of uninsured deposits into equity (haircut 60%) bank of cyprus march 2013 denmark – lowest ranking equity and liability positions (haircut 41.2%) amagerbanken february 2011 – lowest ranking equity and liability positions (haircut 26.4%) – uninsured retail deposits (haircut 26.4%) fjordbank mors june 2011 – subordinated capital max bank october 2011 – the negative difference between the assets and all liabilities was paid by the deposit insurer in full (deposit insurance fund in lieu of a part of the creditors) sparekassen østjylland april 2012 – the negative difference between the assets and all liabilities was paid by the deposit insurer in full (deposit insurance fund in lieu of a part of the creditors) spar salling sparekasse april 2012 jakub kerlin, anna maksymiuk104 country bailed-in entities and haircut rates name of the bank with the time of bail-in application iceland – non-icelandic retail depositors (haircut 100% but fully covered by foreign deposit insurers) landsbanki october 2008 – non-icelandic debt holders (haircut 100%) – non-icelandic depositors (haircut 100% but fully covered by foreign deposit insurance funds) kaupthing edge october 2008 kazakhstan – foreign bondholders (haircut 45% in 2009) – local bondholders (haircut 55% in 2012) – state deposits partially converted into equity bta bank february 2009 march 2012 – bondholders – unsecured creditors (haircut 76%) alliance bank june 2010 – unsecured creditors (haircut 41%) temirbank october 2009 slovenia – share capital and subordinated liabilities (full bail-in) – conversion of a hybrid instruments into ordinary shares nova ljubljanska banka january 2013 – shareholders and bondholders (full bail-in) – state deposits partially converted into equity nova kreditna banka maribor april 2013 rsa – subordinated debt and shareholders (haircut 10%) – wholesale depositors (haircut 10%) african bank august 2014 s o u r c e : own elaboration based on bfg, imf, wb (2014). the bail-in approach varies in the cross-country evidence study but the jurisdictions were a systemic crisis in the banking sector was present. frequently it was connected with a bad situation of the whole sector in the country (however, the republic of south africa is an exception). although bail-in legislation is present in many jurisdictions, the contemporary practice of the application of bail-in is so-far the most popular in europe, where denmark seems to be the country with the most developed practical experiences. jurisdictions are characterized by a different hierarchy of claims, which sets the order of the writing down of creditors. however, as a rule, shareholders and bondholders seem to be the first category of creditors taken into consideration to be affected by bail-in, depending on whether the bondholders were secured or not. a separate issue is differentiation of the situation of creditors done on the basis of nationality, which took place in kazakhstan and iceland. the most wellknown cases of bail-in are those from cyprus and iceland. it can be assumed that as long as bail-in impacts the interests of narrow groups and does not af comparative analysis of the bail-in tool 105 fect covered depositors, it is publicly accepted. when the proposal to also bail-in depositors is under consideration (as it was in these two jurisdictions) it seems to be very problematic and leads to numerous disputes (méndez pinedo 2001). it is difficult to find criteria which clearly settle whether bail-in was a success or not due to the application of this tool in different conditions and usually in tandem with other resolution tools. among the jurisdictions were bail-in was applied two groups can be distinguished. the first is a group were the bailin law was introduced ad hoc, when it was the only way to resolve the situation. it was associated with problems relating to bank panic (cyprus, iceland) and met with criticism of the international community (south africa), because it not always went in parallel with the agreed international standards. although there were some distortions, cypriot, icelandic and kazakh bank bail-in cases ended with moderate bail-in success. what is important is that it allowed for continuity of critical functions of financial institutions as well as shifting part of the recapitalization costs to bank creditors. the second is a group with well-prepared bail-in, with a strong legal framework and public authorities equipped with a full suite of administrative tools. so far this took place in denmark or slovenia and allowed for the smooth finalizing of the bail-in process with better restructuring results. these countries also had lower haircuts because they used more sophisticated supporting tools that allow deposit insurers to bear some losses of restructuring in lieu of some creditors. although the legal frameworks of the jurisdictions provide for bail-in and usually the rule of no creditor worse off, because of the harsh effect for owners and creditors it seems to be very controversial and often related to expropriation (iba 2010). bail-in was applied to only few banks in several jurisdictions and its longterm economic consequences remain largely unknown. on one hand, bail-in seems to work the best when only idiosyncratic risk materializes and when the contagion risk is low. in the massive loss allocation need (e.g. case of cyprus or iceland) bail-in could lead to the new, not explored economic problems as e.g. rapid change of the ownership of the major stake in the banking industry in the country. moreover, imposing large haircuts on the creditors at one time can lead to the systemic panic, domino effect and accelerates the potential crisis (goodhart, avgouleas 2014). on the other hand existence of bail-in lead to incentivization of creditors to monitor the risk of the financial institution, which positively inf luence the market discipline. bail-in also allows allocating the costs of bank failures to where they best belong (unsecured creditors and bank shareholders). there are also positive empirical results delivered by a study, which jakub kerlin, anna maksymiuk106 retrospectively tested current european bail-in rules by applying them to the conditions of recent global financial crisis (conlon, cotter 2014). although eurozone banks would have required equity write-downs to cover impairment losses, the projected bail-in capitalization would be sufficient and e.g. depositors would not have experienced any write-downs. because bail-in is largely untested, the unequivocal assessment is impossible and requires further investigation and study. there have been several important factors that have led to the implementation of bail-in. this resolution tool can be used to recapitalize an institution or entity while maintaining the continuity of provisions of systematically important financial services or to liquidate it in an orderly way. moreover, it also allows the allocation of losses to bank owners and unsecured and uninsured creditors first. due to this resolution tool, the reliance on public support can be diminished. because of its nature, and the harsh consequences for owners and creditors, the optimal approach to bail-in is the subject of debate. in theory bail-in is believed to be a powerful resolution tool that will reduce the social cost and the disruption to markets in case of bank’s failure. it is an answer to the public need of not using taxpayer money in order to terminate the activity of a financial institution. it is presented as an alternative. the dominant concept deriving from definitions or bail-in triggers in legislation shows that bail-in is believed to be a resolution tool of early intervention, applied before an institution becomes insolvent. in legal frameworks it is also designed as a tool that cannot be omitted and is communicated as inevitable for owners and creditors. financial institutions will have to take into consideration that simple bail-outs, according to recent changes in the legal framework, will no longer be a widely used tool. the decision on incorporating bail-in into the legal framework in many countries has already been made. the deployment of public money will be done together with bail-in, so its effects can be positive only for protected creditors (e.g. depositors). however bail-in seems to be largely untested and applied in practice in only a few countries, with mixed results, though there is a preponderance of positive outcomes. introduction of bail-in brings new economic perspective of the functioning of the bank industry but it is too early to reliably point out the practical conclusions. from today’s perspective it is too soon to decide whether it will be used on a regular basis within resolution or whether a bail-out policy with the application of other resolution tools will prevail. boe (2011), financial services act. bank of slovenia (2013), banking act. bfg (2014), high level seminar on bail-in and deposit insurance system interaction, warsaw. comparative analysis of the bail-in tool 107 boe, fdic (2012), resolving globally active, systemically important, financial institutions. central bank of cyprus (2013), the resolution of credit and other institutions law. cfct (2010), dodd-frank wall street reform and consumer protection act. conlon t., cotter j. (2014), eurozone bank resolution and bail-in – intervention, triggers buckingham, 21-22 november 2014. http://dx.doi.org/10.2139/ssrn.2548770. ec (2011), discussion paper on the debt write-down tool – bail-in. ec (2014), bank recovery and resolution directive. finanstilsynet (2010), danish act on financial stability. fsb (2011), key attributes of effective resolution regimes for financial institutions. goodhart ch., avgouleas e. (2014), a critical evaluation of bail-ins as bank recapitalisation mechanisms, cepr, discussion paper 10065. iba (2010), report of the international bar association in connection with legal issues arising in relation to proposals for bank “bail-in” measures. imf (2012), from bail-out to bail-in: mandatory debt restructuring of systemic financial institutions, sdn/12/03. imf (2014), from fragmentation to financial integration in europe, washington. iwanicz-drozdowska m., schab i., (2014), capital regulation of g-sibs: does one size fit all?. http://dx.doi.org/10.2139/ssrn.2450529. se and the icesave dispute. contemporary legal and economic, issues iii, 9-43, croatia. mullineux a. (2013). banking for the public good. international review of financial analysis. http://dx.doi.org/10.1016/j.irfa.2013.11.001. nieto m. j., garcia g. g. (2012). the insufficiency of traditional safety nets: what bank resolution fund for europe?. journal of financial regulation and compliance, 20 (2), 116-146. http://dx.doi.org/10.1108/13581981211218261. date of submission: february 18, 2021; date of acceptance: may 1, 2021. * contact information: hduzakin@cu.edu.tr, çukurova university, faculty of economics and administrative sciences, adana, turkey, phone: +90 3223386084; orcid id: https://orcid.org/0000-0002-8840-1815. ** contact information (corresponding author): sureyyayilmaz@cag.edu.tr, çağ university, faculty of economics and administrative sciences, mersin, turkey, phone: +90 3246514800; orcid id: https://orcid.org/0000-0003-4150-4101. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 1 düzakın, h., & yılmaz, s. (2021). the determinants of the level of financial literacy in turkey. copernican journal of finance & accounting, 10(1), 9–30. http://dx.doi.org/10.12775/ cjfa.2021.001 hatice düzakin* çukurova university süreyya yilmaz** çağ university the determinants of the level of financial literacy in turkey keywords: financial literacy, financial behaviour, financial knowledge, financial attitudes. j e l classification: g53. abstract: the main objective of this study was to explain individuals’ financial literacy levels through socioeconomic and demographic variables. a random sample of 1000 participants was recruited from turkey. as an indicator of the financial literacy level, a measure with three constructs was adopted: financial attitude, financial behaviour and financial knowledge. logit model was estimated from these explanatory variables: gender, age, marital status, number of family members, education, income, number of persons with income, household income and working conditions. in the logit model results, the effect of gender, age and education was statistically significant and positive. the results emphasized that there is a relationship between financial literacy level and hatice düzakın, süreyya yılmaz10 gender, age and education. additionally, the results of this study indicated that the level of financial literacy is 52.9% in turkey.  introduction capital markets are seen as one of the crucial financing options in the economic growth of countries. for this purpose, development of supply and demand in capital markets has become one of the top priority issues in terms of countries. development of supply and demand in the market depends on increasing savings and using the options of the individuals who make savings effectively. in addition to financing individuals’ incomes correctly, being able to direct them to the right investments and savings is defined as “financial literacy”. financial literacy is expressed in its most general form as, “the skill, motivation and confidence of having knowledge and an understanding on financial concepts and risks, making effective decisions with these knowledges and understanding in different financial contexts, developing the financial well being of the society and using it to facilitate participation in economic life.” (oecd, 2013). as a result of the increasing significance of financial literacy, studies have started to determine the level of financial literacy in developing and developed countries. as a result of studies, it has been determined that levels of financial literacy are low around the world (chen & volpe, 1998; furtuna, 2007; çam & barut, 2015), the potential cost of low financial literacy levels have been revealed worldwide with financial crises, and this had led countries to develop financial education strategies. for the purpose of increasing the level of financial prosperity, institutions and organisations continue their work including the “international gateway for financial education”, financial education programmes and jumpstart by the organisation for economic cooperation and development (oecd), financial literacy programmes organised by the world bank and the programme for international student assessment (pisa), financial literacy programmes by the financial literacy association (foder) in turkey and initiatives by the national endowment for financial education (nefe) in the united states. the main reason for this is that individuals’ management of their financial lives is as important as managing the national economy. the motivation of this study was to determine the relationship between financial literacy and savings that contribute to countries’ economies in the long term and how they are evaluated by individuals. in this study, therefore, it was aimed to determine the level of financial literacy in turkey. along with this, avoiding unnecessary the determinants of the level of financial literacy in turkey 11 expenses and transitioning from a consumer society to a knowledge, economy and technology society will increase the financial literacy levels of countries. as a matter of fact, in developed countries such as the united states and the united kingdom, it is observed that they create savings funds, have retirement plans, and it is easy to access and use knowledge in their financial markets (danes & hira, 1987; volpe, chen & pavlicko, 1996). literature review financial literacy the concept of financial literacy has the same content, but it is expressed in different terms in some countries. for example, “financial literacy” is used in the usa, australia and new zealand, while canada and the united kingdom use it as “financial capability” (orton, 2007). along with these, the terms “financial education and financial awareness” are those that are the closest to financial literacy (gökmen, 2012). the definition of the concept of financial literacy is expressed in different definitions in the financial literature. the definitions of financial literacy from 1996 to today are as follows. according to schagen and lines (1996), financial literacy is the ability to make efficient and right decisions with financial management (use of money), whereas, according to chen and volpe (1998), financial literacy is the most effective concept in making financial decisions in an uncertain environment. the concept of financial literacy in the 2000s was defined as being aware of the financial concept of an individual, obtaining information needed in decision-making, and understanding and assessment of the information (mason & wilson, 2000). the organisation for economic co-operation and development (oecd) (2005) described financial literacy as not only financial knowledge but also to include financial attitudes, behaviour and talent. while taşçı (2011) defined financial literacy as being aware of financial risks and opportunities, making informed financial decisions and making choices, karabacak (2013) stated that financial literacy in its simplest form is the state of using financial resources effectively with this kind of information by having knowledge on simple economic and financial issues. hatice düzakın, süreyya yılmaz12 furthermore, according to financial literacy association of turkey (foder), which was established to determine the financial literacy level in turkey and achieve development on this issue, financial literacy is the capability of the individual to make an informed assessment regarding the use and management of money and to make effective decisions, or in other words, it is the state of individuals of having gained the capability and skills of utilizing their income, savings and investments wisely and forming budgets correctly. considering all definitions, the general statement that arises expresses the following: financial literacy refers to individuals’ effective use and utilization of money management. it should not be thought that individuals have to be an expert or a professional in the field of finance to be considered financially literate. financially literate individuals are those who have financial knowledge on a level sufficient for themselves and their families and financial habits such as saving. it is sufficient for financially literate individuals to know the difference between shares and bills of exchange, but they are not expected to know how to use both. different components are used while assessing the financial literacy levels of individuals. in a study conducted by atkinson and messy (2012) with the support of oecd, a broader definition was made for financial literacy, and financial literacy was measured as a composition constituted by the consciousness, knowledge, talent, attitudes and behaviours necessary for being able to make financial decisions and ultimately reach financial prosperity. it was proposed that the components of financial literacy are financial knowledge, financial attitudes and financial behaviours. in this study, the financial knowledge, behaviour and attitude components were used to determine the level of financial literacy. previous studies on financial literacy financial literacy is considered as one of the fields of literacy required by the digital age. in today’s world where rapid transformations, innovations and a large data f low are experienced, while financial literacy has become a globally significant phenomenon, it is also one of the most important topics in the finance literature which has been most research and discussed and on which various studies have been conducted. in this part of the study, information on some studies on the topic of financial literacy may be seen in table 1. the determinants of the level of financial literacy in turkey 13 table 1. financial literacy literature author(s) year method results chen and volpe 1998 university/ survey financial literacy levels of women, people with less education and those under 30 years of age are people‘s financial literacy level is low. cude, lawrence, lyons, metzger, lejeune, marks and machtmeset 2006 university/online survey individuals’ financial decisions are affected by family. kieschnick 2006 high school / survey self-confidence and financial literacy level have a positive relationship. worthington 2006 austrian households/ telephone survey financial literacy levels of people at ages of 5060, workers, farmers and those graduated from university are high. furtuna 2007 university / survey financial literacy level of the unemployed and women are low. oecd 2009 18-countries/ university the level of financial literacy is different for each country. lusardi, mitchell and curto 2010 university / survey the family situation (rich or poor) affects level of financial literacy. ansong and gyensare 2012 university / survey family’s education level affects students positively. atkinson and messy 2012 14 countries /survey most people have financial knowledge but their knowledge and interest level is different for each country. ergün, şahin and ergin 2014 public university / survey there is mainly a relationship between financial literacy and demographic characteristics. er, temizel, özdemir and sönmez 2014 5 public universities / survey 32% have high, 30% have medium, 16% have low financial literacy levels. bayram 2014 public university /survey financial literacy levels of students taking finance and accounting course are higher than students of other departments. potrich et al. 2015 households /survey 67.1 % were classified as having a low financial literacy level. çam and barut 2015 public university /survey financial literacy level is so low. alkaya and yağlı 2015 public university/ survey there is a significant relationship between financial behaviour and financial attitudes. çelikkol and çelikkol 2015 public university/ survey financial literacy level of girls is higher compared to boys. dilek, küçük and eleren 2016 public university / survey in department comparisons, economics students have higher financial literacy levels than others. hatice düzakın, süreyya yılmaz14 author(s) year method results danışman, sezer and gümüş 2016 turkish students (390) / survey financial literacy level is basic. foder 2017 survey /households financial literacy level is 70%. çam, ayaydın, çam and akdeniz 2018 tr90 households/survey income and education levels have a positive relationship with financial literacy levels. boz 2019 student’s family member/ survey students’ family members have high levels of financial literacy. bağcı and arabacı 2019 public university /survey students have a low financial literacy level due to lack of calculating abilities. s o u r c e : compiled by the author. considering the studies that have been conducted, the topic of financial literacy is a topic that has newly become popular in turkey. studies in turkey have usually focused on determining the financial literacy levels of university students and academic personnel and whether or not they have a relationship with demographic characteristics. looking at the international literature, it is seen that studies may be traced back to older dates, while this concept has been studies since the 20th century. while similar studies are seen in the literature in turkish, it was determined that, in the international literature, studies have also been conducted on topics such as determining the financial literacy levels of high school students and retired individuals. in this part of the study, a broad literature review was carried out, and what kind of improvement can be made on the topic was focused on. research methodology and research process data in this study, which was carried out to determine the financial literacy levels in turkey, a questionnaire was applied on randomly selected households living in 12 provinces located in the level 1 region determined by the turkish statistical institute (tüi̇k). table 1. financial… the determinants of the level of financial literacy in turkey 15 the questionnaire application included 1000 individuals, and the questions were directed to the participants via telephone and face-to-face interviews. the questionnaire implementation process started in march 2018 and ended in july 2018. the questions in the questionnaire that was used in the study were compiled from those used in the studies by van rooij, lusardi and alessie (2011) and potrich, vieira and kirch (2015). the questionnaire consisted of four parts. questions on determining financial knowledge (8 questions), financial behaviour (27 statements) and financial attitude (10 statements) and current financial knowledge (8 questions) were asked of the participants. the questions on financial knowledge and current financial knowledge were multiple-choice questions with three options each, while the statements on financial behaviour and attitude were 5-point likert-type (absolutely disagree, disagree, undecided, agree, absolutely agree) statements. the eight questions that were asked to determine the financial knowledge of the individuals responding to the questionnaire were questions on topics such as simple mathematical operation, time value of money, inf lation, interest calculation and risk and diversification. the questions on current financial knowledge were those that measured topics such as blockchain and exchange rates. at the next stage of the study, the relationship between financial literacy and sociodemographic characteristics was aimed to be determined. methodology econometric model in this study that aimed to determine the financial literacy levels in turkey, logit regression analysis was carried out to reveal the relationship between the independent and dependent variables. in this study, the stata mp 14 (64 bit) was used for analysis. nonparametric scale and ordinal variables were described with frequency analysis, whereas scale parameters were described with means and standard deviations. crosstabulation and chi-square analysis were used for contingency tables. spearman’s rho correlation was used for correlation matrix for study parameters. logit model with margin effects were used for analysis for research question. the main equation was given as in the follows: hatice düzakın, süreyya yılmaz16 financial literacy = β0 + β1 gender + β2 age + β3 marital status + β4 number of family members + β5 education + β6 income + β7 number of income person + β8 house income + β9 worker research hypotheses when financial literacy was considered within a theoretical framework and in the light of the literature review that was carried out, the following hypotheses were formed. ■ h1: gender has a statistically significant predictive effect on level of financial literacy. ■ h2: age has a statistically significant predictive effect on level of financial literacy. ■ h3: marital status has a statistically significant predictive effect on level of financial literacy. ■ h4: number of family members has a statistically significant predictive effect on level of financial literacy. ■ h5: education has a statistically significant predictive effect on level of financial literacy. ■ h6: income has a statistically significant predictive effect on level of financial literacy. ■ h7: number persons with income has a statistically significant predictive effect on level of financial literacy. ■ h8: household income has a statistically significant predictive effect on level of financial literacy. ■ h9: working condition has a statistically significant predictive effect on level of financial literacy. empirical results and discussion the demographic characteristics of the participants are presented in the table 2. the determinants of the level of financial literacy in turkey 17 table 2. demographic characteristics frequency (n) percent (%) gender female 306 30.6 male 694 69.4 age 18-24 33 3.3 25-34 243 24.3 35-44 335 33.5 45-54 247 24.7 55-64 101 10.1 65+ 41 4.1 marital status married 752 75.2 single 205 20.5 divorced 43 4.3 educational level literacy 4 0.4 primary school (5 years) 57 5.7 primary school (8 years) 46 4.6 high school 212 21.2 vocational school 96 9.6 bachelor’s degree 463 46.3 post degree (master and ph.d) 122 12.2 number of family members 1 83 8.3 2 183 18.3 3 275 27.5 4 319 31.9 more than 4 140 14.0 hatice düzakın, süreyya yılmaz18 frequency (n) percent (%) number of revenue generating family members 1 437 43.7 2 495 49.5 3 50 5.0 4 15 1.5 more than 4 3 0.3 income no 160 16.0 less than1.603 tl 52 5.2 1.604 tl-2.600 tl 139 13.9 2.601 tl3.600 tl 150 15.0 3.601 tl4.600 tl 129 12.9 4601 tl5.600 tl 108 10.8 more than 5.601 tl 262 26.2 household’s income less than 1.603 tl 24 2.4 1604 tl-2600 tl 73 7.3 2601 tl3600 tl 112 11.2 3601 tl4600 tl 121 12.1 4601 tl5600 tl 118 11.8 5601 tl and over 552 55.2 who is the decision maker about financial action? you 383 38.3 you and your wife 456 45.6 wife 46 4.6 you and other family members 115 11.5 table 2. demographic… the determinants of the level of financial literacy in turkey 19 frequency (n) percent (%) working status non-worker 251 25.1 worker 749 74.9 s o u r c e : compiled by the author. 30.6% of the participants in the study are women and 69.4% are men. 3.3% of participants between 18-24, 24.3% between 25-34, 33.5% between 35-44, 24.7% between 45-54, 10.1% between 55-64, 4.1% has 65 and over age. 75.2% of the participants are married, 20.5% are single and 4.3% are divorced. while 0.4% of the participants are literate; 5.7% have 5-year primary school, 4.6% 8-year primary school, 21.2% high school, 9.6% associate degree, 46.3% undergraduate and 12.2% graduate education. 8.3% of the participants have one other than their own, 18.3% two, 27.5% three, 31.9% four, 14.0% over 4 family members. 5.2% of the participants are below 1603 tl, 13.9% between 1604- 2600 tl, 15.0% between 2601-3600 tl, 12.9% between 3601-4600 tl, 10.8% between 4601-5600 tl 26.2% of them have 5601 tl and above income. 2.4% of the participants are below 1603 tl, 7.3% between 1604-2600 tl, 11.2% between 2601-3600 tl, 12.2% between 3601-4600 tl, 11.8% between 4601-5600 tl 55.2% of them have family income of tl 5601 and above. while 38.3% of the participants made financial decisions themselves, 45.6% of them stated that they made them with their spouses, 4.6% of them made their spouses and 11.5% of them agreed with the family. 74.9% of the participants stated that while working 25.1% stated that they were not working. correlation matrix of study variables is given in the table 3. table 2. demographic… hatice düzakın, süreyya yılmaz20 table 3. correlation matrix of study variables (spearman’s rho test) age marital status education n. of family members n. of income person income house income marital status -0.150** education -0.097** 0.006 n. of family members 0.001 -0.402** -0.199** n. of income person -0.029 -0.057 0.152** 0.229** income 0.043 -0.047 0.274** -0.043 0.028 house income -0.050 -0.122** 0.347** 0.086** 0.303** 0.436** working -0.393** -0.008 0.233** 0.041 0.153** 0.402** 0.288** * * p < 0 . 0 1 s o u r c e : compiled by the author. there is a statistically significant and negative relationship between the participants’ ages and marital status, education and employment status (p <0.01). there is a negative relationship between marital status and number of family members and household income (p <0.01). there is a positive relationship between the number of individuals in the family and the income generating family and household income (p <0.01). there is a positive relationship between the number of income earners and household income and working status (p <0.01). there is a positive relationship between income and household income and working status (p <0.01). there is a positive relationship between household income and working status (p <0.01). contingency results explaining financial literacy and explanatory variables are given in the table 4. table 4. contingency tables – financial literacy x explanatory variables low (n=471; %47.1) high (n=529; %52.9) x2 p f % f % gender female 177 57.8 129 42.2 20.424 0.000 male 294 42.4 400 57.6 the determinants of the level of financial literacy in turkey 21 low (n=471; %47.1) high (n=529; %52.9) x2 p f % f % age 18-24 26 78.8 7 21.2 25-34 131 53.9 112 46.1 35-44 153 45.7 182 54.3 26.900 0.000 45-54 110 44.5 137 55.5 55-64 39 38.6 62 61.4 65+ 12 29.3 29 70.7 marital status married 334 44.4 418 55.6 single 115 56.1 90 43.9 9.122 0.010 divorced 22 51.2 21 48.8 educational level literacy 3 75.0 1 25.0 primary school (5 years) 38 66.7 19 33.3 primary school (8 years) 28 60.9 18 39.1 26.312 0.000 high school 116 54.7 96 45.3 vocational school 44 45.8 52 54.2 bachelor’s degree 193 41.7 270 58.3 post degree (master and ph.d) 49 40.2 73 59.8 number of family members 1 42 50.6 41 49.4 2 89 48.6 94 51.4 2.678 0.613 3 131 47.6 144 52.4 4 139 43.6 180 56.4 more than 4 70 50.0 70 50.0 number of revenue generating family members 1 211 48.3 226 51.7 table 4. contingency… hatice düzakın, süreyya yılmaz22 low (n=471; %47.1) high (n=529; %52.9) x2 p f % f % 2 233 47.1 262 52.9 3.181 0.528 3 18 36.0 32 64.0 4 7 46.7 8 53.3 more than 4 2 66.7 1 33.3 income no 87 54.4 73 45.6 less than1603 tl 28 53.8 24 46.2 1604 tl-2600 tl 75 54.0 64 46.0 11.146 0.084 2601 tl3600 tl 65 43.3 85 56.7 3601 tl4600 tl 57 44.2 72 55.8 4601 tl5600 tl 49 45.4 59 54.6 more than 5601 tl 110 42.0 152 58.0 household’s income less than 1603 tl 9 37.5 15 62.5 1604 tl-2600 tl 39 53.4 34 46.6 2601 tl3600 tl 59 52.7 53 47.3 4.253 0.514 3601 tl4600 tl 57 47.1 64 52.9 4601 tl5600 tl 57 48.3 61 51.7 5601 tl and over 250 45.3 302 54.7 who is the decision maker about financial action? you 176 46.0 207 54.0 you and your wife 202 44.3 254 55.7 9.010 0.029 wife 27 58.7 19 41.3 you and other family members 66 57.4 49 42.6 working status non-worker 114 45.4 137 54.6 0.380 0.537 worker 357 47.7 392 52.3 s o u r c e : compiled by the author. table 4. contingency… the determinants of the level of financial literacy in turkey 23 57.8% of women and 42.4% of men have low financial literacy knowledge, this difference is statistically significant (p <0.05). 78.8% of those aged 18-24, 53.9% of those aged 25-34, 45.7% of those aged 35-44, 44.5% of those aged 45-54, 5538.6% of those aged between 64 and 29.3% of those aged over 65 have financial literacy knowledge, this difference is statistically significant (p <0.05). 44.4% of married participants, 56.1% of single participants, 51.2% of divorced participants have low financial literacy knowledge and these differences are statistically significant (p <0.05). 75.0% of literate people, 66.7% of 5-year primary school graduates, 60.9% of 8-year primary school graduates, 54.7% of high school graduates, 45.8% of associate degree graduates, 41.7% of graduate graduates, graduate graduates 40.2 of them have financial literacy knowledge and this difference is statistically significant (p <0.05). 50.6% of those who have a person outside their family, 48.6% of those who are two, 47.6% of those who are three, 43.6% of those who are four, 50.0% of those who are more than four individuals have lower financial literacy knowledge, however, these differences are not statistically significant (p> 0.05). 48.3% of those who have income from their own family, 47.1% of those who are two, 36.0% of those who are three, 46.7% of those who are four, 66.7% of those who are more than four individuals have lower financial literacy knowledge, but these differences are not statistically significant (p> 0.05). 53.8% of those with a monthly income of 1603 tl and below, 54.0% of those between 1604-2600 tl, 43.3% of those with 2601-3600 tl, 44.2% of those between 3601-4600 tl, those between 4601-5600 tl 45.4%, 42.0% of those with tl 5601 and above have low financial literacy knowledge and this difference is not statistically significant (p> 0.05). 37.5% of households with household income of 1603 tl and below, 53.4% of those between 1604-2600 tl, 52.7% of those with 2601-3600 tl, 47.1% of those between 3601-4600 tl, 4601-5600 tl 48.3% of the ones, 45.3% of those with tl 5601 and above have low financial literacy knowledge and this difference is not statistically significant (p> 0.05). 46.0% of those who make the decisions themselves in the family, 44.3% of themselves and their spouses, 58.7% of the spouses and 57.4% of family members have low financial literacy level and this difference is statistically significant (p <0.05). 45.4% of those who do not work and 47.7% of employees have low financial literacy level and these differences are not statistically significant (p> 0.05). logit nonlinear results for research parameters and financial literacy are given in the table 5. hatice düzakın, süreyya yılmaz24 table 5. logit nonlinear result for research parameters and financial literacy logit model marginal effects coefficient p coefficient p gender 0.646 0.000* 0.149 0.000* age 0.241 0.000* 0.055 0.000* marital status -0.150 0.270 -0.034 0.269 living family mem. 0.067 0.313 0.015 0.312 education 0.297 0.000* 0.068 0.000* income 0.044 0.256 0.010 0.255 n. of income person 0.028 0.798 0.006 0.798 house income -0.060 0.153 -0.014 0.152 working -0.335 0.094 -0.077 0.092 constant -2.989 0.000* x2 78.38 x2 p 0.000 r2 0.057 log likelihood -652.274 observation 1000 s o u r c e : compiled by the author. in the logit model, the contribution of gender, age and education on the level of financial literacy is statistically significant (p <0.05). the marginal effect results are also compatible with the results obtained in the logit model. in the logit model, the effect of gender, age and education was positive. since the ranking for gender is coded as female-male, the level of financial literacy increases when gender passes from female to male. this situation is also seen in table 4. since age and education parameters are coded increasingly, financial literacy level increases with age and education. the explanatory power of the model is 0.057, and the model is significant in predicting the relationship between financial literacy and demographic characteristics (x2: 78.38; p <0.01). moreover, in the determinants of the level of financial literacy in turkey 25 the model, the hypotheses h1, h2 and h5 were accepted, whereas the hypotheses h3, h4, h6, h7, h8 and h9 were rejected. considering the results on the hypotheses in detail, in their studies, chen and volpe (1998), lusardi and mitchell (2007), agarwal, driscoll, gabaix and laibson (2009), lusardi and mitchell (2011), atkinson and messy (2012), oecd (2013), brown and graf (2013), mahdzan and victorian (2013) and potrich et al. (2015) accepted the hypothesis “h1: gender has a statistically significant predictive effect on level of financial literacy.” they explained the effect of gender on financial literacy as that women are financially less literate than men. this situation supported the results on the hypothesis in this study. additionally, agarwal et al. (2009), lusardi and mitchell (2011), atkinson and messy (2012), oecd (2013) and scheresberg (2013) accepted the hypothesis “h2: age has a statistically significant predictive effect on level of financial literacy.” this situation showed that younger individuals are less financially literate than older individuals, and as age increases, people are more likely to become more financially literate. in addition to this, the increased experiences of individuals who are older makes a positive contribution to the increase in their financial literacy levels. this study also supported this hypothesis, but potrich et al. (2015) rejected it. research (2003), calamato (2010) and brown and graf (2013) obtained results supportive of the hypothesis “h3: marital status has a statistically significant predictive effect on level of financial literacy.” this was stated in their studies as single individuals are less financially literate than married individuals. the results obtained by this study and the study by potrich et al. (2015) were similar, and they rejected the hypothesis h3. servon and kaestner (2008) and mottola (2013) obtained results supportive of the hypothesis “h4: number of family members has a statistically significant predictive effect on level of financial literacy.” they argued that, as the number of individuals living in a household increases, the financial literacy level is lower. however, in this study, they hypothesis h4 was rejected. furthermore, chen and volpe (1998), hogarth (2002), lusardi and mitchell (2011) and mahdzan and victorian (2013) obtained results that supported the hypothesis “h5: education has a statistically significant predictive effect on level of financial literacy.” it was determined that individuals who have undergraduate and postgraduate degrees are more financially literate than those with high school or primary school degrees. this finding was similar to those in this study. monticone (2010), hastings and mitchell (2011) and atkinson and messy (2012) found results that supported the hypotheses “h6: income has a statistically significant predictive effect on level of financial literacy” and “h7: number of persons hatice düzakın, süreyya yılmaz26 with income has a statistically significant predictive effect on level of financial literacy.” it was observed that individuals with lower income have lower financial literacy levels. on the other hand, this study and the study by potrich et al. (2015) did not obtain results that supported the aforementioned hypotheses and the hypothesis “h8: household income has a statistically significant predictive effect on level of financial literacy.” chen and volpe (1998), research (2003), kim and garman (2004) and calamato (2010) obtained results supportive of the hypothesis “h9: working condition has a statistically significant predictive effect on level of financial literacy,” but neither this study nor the study by potrich et al. (2015) could find a statistically significant relationship.  conclusions and recommendation the purpose of this study was to explain the significance and components of financial literacy for the purpose of increasing the financial literacy levels of financial consumers. in the scope of the study, the relationship between the financial literacy levels and sociodemographic characteristics of individuals living in the level 1 region of turkey was investigated. as a result, a significant and positive relationship was determined between financial literacy and the variables of gender, age and educational status. accordingly, men were found to have higher financial literacy levels then women. it was additionally determined that the financial literacy levels of individuals with postgraduate degrees were higher, while the financial literacy levels of individuals at the ages of 18-24 were lower. in this study, among the participants of the questionnaire, the financial literacy levels of 52.9% were high, while those of 47.1% were low. this situation reveals the necessity of conducting work to increase the financial knowledge and financial literacy levels in turkey. this way, in societies whose financial literacy levels increase, responsible saving tendencies will increase. it is considered that, as a result of this, increased investments will create a significant effect on growth. realizing this situation is a long-term process. what needs to be done in this process may be to establish and infrastructure. for example, such an infrastructure may include offering courses containing basic finance knowledge at educational institutions on the level of high schools, including compulsory financial literacy courses in the first year curricula of all departments regardless of field and constantly keeping this issue in the agenda on the print and visual media. in the case that such efforts are made, not only the determinants of the level of financial literacy in turkey 27 will the financial literacy levels in turkey start to rise in the medium run, but a healthier responsibility of saving will also start to develop. in a longer term, several positive effects of this on turkey’s economy will be observe. acknowledgements this study which is sba-2018-10112 number was supported by scientific research projects -cukurova university.  references agarwal, s., driscoll, j., gabaix, x., & laibson, d. 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(2011). financial literacy and stock market participation. journal of financial economics, 101(2), 449-472. http://dx.doi. org/10.1016/j.jfineco.2011.03.006. volpe, r.p., chen, h., & pavlicko, j.j. (1996). personal investment literacy among college students: a survey. financial practice and education, 6(2), 86-94. worthington, a.c. (2006). predicting financial literacy in australia. financial services review, 15(1), 59-79. cjfa_1_2015_przed_drukiem.pdf 65 karimov r., dargahov v. (2015). study of profitability of organization of tourism routes (on the example of sheki-zagatala economic region of azerbaijan). copernican journal of finance & accounting, 4(1), 71–81. http://dx.doi.org/10.12775/cjfa.2015.005 rovshan karimov* azerbaijan national academy of sciences vugar dargahov** baku state university study of profitability of organization of tourism routes (on the example of sheki-zagatala economic region of azerbaijan) keywords: profitability, price, favorable, region, tourism, tour planning. j e l classification: m31, l83, r11, r58. abstract: this paper is devoted to economical substantiation of organization of touristic routes, and relevant activities of tour operators in terms of profitability. currently, rational use of local natural and man-made recreational resources, as well as successful business activity in tourism can be reached considerably due to effectively-organized touristic routes. the organization of such tours seems efficient for tour operators which may gain more benefit from collective forms of the excursions. however, it is important for a company organizing touristic route to function more effectively and gain real profit with considering primary costs, tax paying and other conditions in tourism market. in this connection, ways of measuring relevant expenditure are investigated in this paper. the study is carried out on the example of sheki-zagatala, the advanced to date of submission: april 26, 2015; date of acceptance: may 11, 2015. * contact information: rovshan_karimov@yahoo.com, institute of geography after acad. h.a. aliyev, azerbaijan national academy of sciences, h.javid str. 31, az1143, baku, azerbaijan, phone: +994125393361. ** azerbaijan. rovshan karimov, vugar dargahov72 urism region of azerbaijan republic in order to substantiate profitability of organizing touristic route in practice. the research objective of the paper is to find more effective and profitable way of organizing touristic routes and evaluate relevant profitability limit for tour operators. for this purpose, prior measuring, planned measuring, individual calculation, and rent per tour were used as applicable methods. the results of the research show that rent per tour should be based as an effective way of evaluation of profitability, where main and variable expenditures, as well as incomes of a company must be taken into consideration. meanwhile, the existing and recommended local routes in sheki-zagatala are shown and offered, with the analysis of the local natural and man-made recreational resources. recommendations on improvement of organization of tours are offered as well. in the regions of the republic of azerbaijan with their attractive landscapes and cultural heritage, tourism play significant role in economic development of the country and its regions (dargahov 2008). planning of tourism routes (tours) within a country is one of topical issues in connection with the increasing interest to rest and cognitive types of tourism in recent years. selling of relevant tour package at favorable prices should be regarded as a main factor in attracting of large number of tourists. tours offered to potential customers must be fair and also suiting whereas prices in some cases may not be in accordance with rendered services and offered tours (dargahov 2012). in many mountainous regions of azerbaijan, organization of tours by touristic buses seems possible and efficient due to such factors as relief peculiarities, the existence of different natural resources of tourism importance, and interests of visitors who prefer see sightseeing and reach destination within a short time. organization of these routes enables clients see sightseeing in safer and more comfortable condition as well as during shorter time. in the sheki-zagatala economic region chosen as a research object of this work, the planning and diversification of tours is more topical compared to other regions of azerbaijan. sheki-zagatala is the second most-visited tourism region in the country if taking into consideration only domestic tourists. however, a tourism company must determine appropriate price for tour intended for a group of tourists. this price must be fair, in other word suitable for customer (client) and in the meantime, beneficial for a tourism company. study of profitability of organization of tourism routes… 73 the research objective of this paper is to find more effective and profitable way of organization of touristic routes. the study has practical importance not only for the sheki-zagatala region but also for all tourism companies engaged in organization of collective tours within a region. the study is carried out with implementation of marketing analysis, consideration of recreational potential, and substantiation of new offered tourism routes in the sheki-zagatala economic region. tour planning includes the following stages: definition of work scheme of a tour operator; identification of subjects responsible for the organization of services included into a tour package, and conclusion of a contract; determination of price of a tour and relevant services in market. price-defining factors are taken into account by tour operator in its price strategy. price-forming factors are taken into consideration by an operator of tour in price strategy. as dargahov (2012) indicates, this strategy is composed of actions of a company, considering: a) determination of different prices and modifications of a planned tour; b) sustainability of functioning of an operator in tourism market; c) opportunity of gaining income as high as much; d) occupation of definite place and strengthening of position in tourism market. there are different ways of calculation of price of a tour. the one of them is ‘prior measuring’. thus, measuring can be conducted in case of determination of exact price of a tour before realization of tourism product in market. this method is practiced mainly regarding to private tours, and includes simply measuring prices of services rendered by relevant specialized companies. such approach allows calculating costs spent by companies for preparation of tours (ilyina 2002). another method of measuring of price of a tour is ‘planned measuring’. when using this method, price of a tour typically is not concrete until this tour as a product is considered to be sold. planned calculation can be implemented chief ly with purpose of organizing collective tours. in this process, prices remain inexact before how many tourists are in a group is clear. moreover, soft prices on transportation, excursion, or accommodation are also not exactly clear before selling of tour. tourism operator determines critical point of profitability of a definite action, with taking into consideration planned norm of profit, as well as least number of tourists equivalent to zero profitability. lowrovshan karimov, vugar dargahov74 est figure of profitability is derived by: multiplying number of known clients with amount of ‘changing expenditure’ (i); then adding gained sum on amount of expenditures (ii); and by equalizing this gained figure with total price of sending of tourists (measured by multiplying numbers of individual tours with b·k+a=p·k, where b indicates amount of changing expenditure; k is number of sent tourists; a is amount of permanent expenditure; while p indicates determined (declared) price of one tour (sending). based on this formula, lowest number of sent tours as limit of profitability can be defined as: k=a/(p–b)·100 the last formula is usable in practice. calculation of zero profitability has importance as it enables a company to determine least number of tourists as beneficial number of customers, to which tours can be sold in order to function without loss. permanent expenditures of tourism operator include office leasing, municipal expenses, salaries of worker whereas changing expenditures are measured with consideration of costs of sold tours. thus, price of tourism product can be determined in different ways. culating price of a tour. they typically buy package of services relevant to tour on cooperative prices. in this case, providing of services in accordance with ordered and package-form tours is profitable as it is cheaper way of relevant functioning for a company (ilyina 2002). package and inclusive prices may be intended for a full complete set of a tour, composed of many tourism services. tariffs of tour operators usually include commission costs and commercial interests of tour agencies, and are determined in accordance with level and quality of concrete services of relevant companies (ilyina 2004). prices are changing depending on number of customers, and are different for customers and group of tariffs. individual price may be determined for tourist individually. in order to determine economic rent of tourism product, method of ‘individual calculation’ is considered to be suitable (zdorov 2007). such individual cal study of profitability of organization of tourism routes… 75 culation allows define continuity of an offered tour in tourism market. taking this into account, conformity of services to requirement as well as profitability of attracting tourists in least number in market can be determined. marketing analysis of tourism market shows that most of customers are between 26–55 years of age. tourists, visiting sheki-zagatala are mainly from baku urban area. in terms of income, visitors on sheki-zagatala can be classified as tourists with “medium and high” income. tourists typically spend 3–5 days in average in the region which nearly equates to the corresponding figure fixed by overall country. tourists who visited sheki-zagatala have become familiar with this area due to conversation with their friends, relatives or colleagues, and partially by watching tv and via internet (tourism in azerbaijan 2006). this indicates to the low level of advertising activity. on the other side, weak relationship and cooperation between tourism companies and recreation centers negatively affects the development of tourism both in sheki-zagatala as well as other regions of the country. in this regard, as we think, tourism companies and accommodation centers should function on the basis of cooperative contracts. cooperation between these two sides may allow efficiently organize the process of organization of tours and accommodate tourists at hotels and recreation centers more rationally and on favorable terms. such cooperation also would give an impetus to different types of tourism and more efficiently use tourism potential of the region in general. sheki-zagatala is the second market area of azerbaijan after guba-khachmaz in terms of meeting requirements of population of baku for trip with tourism purpose. as a result of the increased attention to sheki-zagatala as a destination, hotels and recreation centers of the region have seen dynamic rise in recent years. analysis, conducted on interests of tourists visiting sheki-zagatala shows that rest tourism, business tourism and rural tourism are spread (over 80% of visitors) as the major types in the region (economic passport 2012). this finds its ref lection on figure 1. rovshan karimov, vugar dargahov76 figure 1. classification of visitors of sheki-zagatala depending on their purpose (in percent) 65,9 15,3 8,5 10,3 69,6 12,3 15,8 2,3 67,3 11,6 16,1 5 s o u r c e : statistics of tourism (2011, 2012, 2013), yearbooks of state statistical committee of azerbaijan republic. it is notable that taking into consideration wide experience of foreign countries in rural tourism, routes to be planned in the future, may considerably inf luence on commercial advertising of villages in sheki-zagatala (dargahov, karimov 2012). in recent years, area of activity and also capability of hotels and recreation centers have been increased in the region. the growth of number of tourists has been observed as well. tourists prefer gabala, sheki, gakh and zagatala as the destinations, whereas the number of hotels from larger to less is changing by the same succession in these regions. 48% of hotels and recreation centers are situated in gabala. as analysis of perennial statistic data shows, the number of visitors is increasing in sheki-zagatala. in 2012, the number of tourists made up 67,5 thousand persons whereas in 2006 it was only 16,3 thousand. sheki-zagatala adopted 2% of overall tourists in the country whereas in 2006 the corresponding indicator made 5,6%. however, these figures are not high considering the existing potential of sheki-zagatala which is rich in natural recreational resources. this is because the rest regions of azerbaijan are also attracting high number of tourists. in the region, annual tourist capacity of accommodations has made up 1238 in 2000, 5228 in 2006, 5219 in 2009, and 8327 in 2013. the share of accommo study of profitability of organization of tourism routes… 77 dations of sheki-zagatala in relation to the country has been increased by 5,4% in 2012 and 9,4 % in 2013 (statistics of tourism 2014). as for the tourism routes in sheki-zagatala, first of all, it should be noted that there are some problems concerning the organization of local tours, faced by companies. most urgent of them are the following: the spread of less-developed highway infrastructure in settlements, included into the tours, and the areals of tourism importance, as well as the absence of needed paths intended for tourists; weak organization of tourism infrastructure in the places with attractive natural landscape; absence or very small number of working qualified guides, closely familiar with local territories of administrative regions; sible for the related pollution by domestic wastes, and the emergence of unremoved garbage, as well as careless and indifferent attitude of residents and facilities in regard to the environment. organization of local tours makes necessary to study available resources as a first stage. the main routes of the sheki-zagatala region include the bakubalakan line, and the routes to the gabala, oghuz, sheki, gakk, zagatala and balakan regions. at present, the local tours are functioning in the gabala, sheki, gakh and zagatala regions (decision of ministry 2003). the main emphasis is laid on the efficient use of leisure-time of visitors, and the giving of broad information about the region. the second program on tourism development (2010–2014) was aimed to make considerable changes on development of this sector (state program 2010). special attention in this program was paid on the evaluation of the tourism potential and the preparation of local routes in the region. from this view, the planning and diversification as well as advertising of local routes continue to be a topical issue for the sheki-zagatala region. the offered tours usually cross unique natural places and samples of heritage. in this connection, the gabala region offers more tours. these tours include the gabala-bum-gamarvan natural and ethnographic tour, the gabala-nohurgishlag-vandam-hazra natural and historical tour, and also the gabala-mirzabayli-nij-chukhur gabala-dizahli historical, ethnographic and environmental tour. rovshan karimov, vugar dargahov78 the local tours, organized in sheki typically encompass places of historical, ethnographic and environmental importance. these tours are being organized by tourism department of sheki and also the local tourism institutions. historical monuments are situated closer each other in sheki city, and therefore, visiting of historical monument is favorable and convenient here. the new routes of tourism which would pass through places of traditional handicraft and national heritage are recommended as follows. 1) sheki–okhud–kish; 2) sheki–gakh–gakhbash–ilisu; 3) gakh–lakit–gulluk; 4) gakh–zagatala–jar-mukhakh–yukhari chardakhar. in practice, the organization and extension of nature-oriented tours in sheki-zagatala can be managed due to their vicinity to with the major tourism routes. such factors as the existence of reserved areas, and also shahdagh national reserve to the south, and the existence of unique natural places in mountainous areas are regarded as advantages in terms of organization of natureoriented tours. moreover, this kind of tour typically passes the territories of a few administrative regions. from this view, the organization of ‘combined tours’ seems advisable. this may allow attract tourists in much number. taking into consideration local recreational and tourism resources of the sheki-zagatala region, the following combined routes are recommended: 1) sheki–kish–markhal–khan yayla; 2) sheki–inja–kondelen–bash goynuk–bash layisgi– shin; 3) sheki–bichanak–gakh–ilisu–saribash; 4) gakh–gapichay–lakit–lakit kotuklu–gumbash peak; 5) gabala–bum–gamarvan–shahdagh national park. in general, the fact that most of visitors in sheki-zagatala are domestic tourists, is positive condition in terms of efficiently organizing local tours. in 2013, the number of tourists visiting sheki-zagatala exceeded 67 thousand people. more than half of this visitors used services of accommodations. here it is notable that tourism companies may offer local tours based on contracts concluded with hotels and other accommodation centers in sheki-zagatala. as we think, possible to involve 35–40% of clients of accommodations to local tours in the region. due to this activity, based on corporative interests, tourism companies may gain additional income as well as agitate the sheki-zagatala as tourism region. study of profitability of organization of tourism routes… 79 thus, sheki-zagatala has a huge potential to develop its tourism industry and conduct new routes, useful in attracting much number of tourists. the geographical condition, natural and other required resources enable the implementation of such activity. as for profitability of companies responsible for organizations of these tours, this is determined below. profitability of organizing local tours in sheki-zagatala region is measurable based on the above-mentioned formula which can be applied in practice. profitability can be calculated as economic rent per tour when main and changing expenses, and also incomes of a company must be taken into account. permanent expenditures are composed of costs for accommodation, catering and transportation whereas variable expenditure includes payments for visiting museums or amusement parks. for a potential company interested in organizing a tour in sheki-zagatala, the calculation of profitability per one tourist can be conducted as follows accommodation fee is 25 azn/day (including breakfast), payment for meal is 12 azn/day, bus ticket is 6 azn/day, payment for guide service is 3 azn/day, whereas changing costs is considered at 2,5azn. considering number of participants of an organized tour lowest, profitability for a company organizing this tour must be measured as: so, profitability in organizing tour can be reached if 91 out of 100 tourists will buy the tour, sold by a company. as this calculation shows, sufficient number of tourists can be attracted to tours organized in the region, and this is beneficial. therefore, marketing and advertising should be implemented for the purpose of increasing practical importance of the routes. in terms of efficiently organizing tours, landscape potential of territory, the samples of national heritage must be used in common in the process of organization of tours in the sheki-zagatala region. meanwhile, it is profitable in practice if 50% of customers of the hotels and other centers of accommodation will contribute to organization of tours shown in this paper. in this connection, scheme of planning of new routes should be mapped and certified due to colrovshan karimov, vugar dargahov80 laboration of representatives of ministry of culture and tourism with experts of this field. in the meantime, tourism potential of the territories must be assessed. in order to make the routes more advantageous in practice, the related advertising works and marketing activity must be conducted and expanded. the tours should be broadly presented. tours can be offered to customers based on cooperation between tourism sub-agencies and accommodations. in this regard, info-tours and fam-tours should be organized as a necessary step. new local tourism routes must be presented to foreigners who visit the region with support of tourism departments of the administrative regions. opportunities. international scientific conference “challenges to tourism in the xxi century”, sofia, 189–195. dargahov v. s. (2008), recreation and tourism resources. mba, baku. dargahov v. s. (2012), strategic planning of development of tourism in the regions. society of fellow researchers, postgraduate students and masters at center of intelligence of the youth, national academy of sciences of azerbaijan, baku, 6, 122–132. decision of ministry of youth, sport and tourism on confirmation of main and additional tourism routes in azerbaijan (2003), newspaper of “azerbaijan”, #14. durovich a. p. (2012), marketing in tourism, infr a-m, moscow. economic passport of the sheki-zagatala economic region (2012), report of centre of economic reforms, baku, http://www.ier.az/upload/file/03_sheki-zaqatala_a_designed.pdf (accessed: 25.03.2015). ilyina y. n. (2004), activity of tourism agencies. tourism market and entrepreneurship, moscow. ilyina y. n. (2002), tour-operating: strategy and finance, moscow, http://www.elobook.com/turist/4370-ilina-en-turoperejting-strategiya-i-finansy.html (accessed: 14.03.2015). state program on development of tourism in azerbaijan republic (2010–2014), newspaper of “azerbaijan” (2010), #5, http://www.e-qanun.az/alpidata/framework/ data/19/c_f_19342.html (accessed: 09.04.2015). statistics of tourism (2014), state statistical committee of azerbaijan republic, baku. technical support for development of tourism strategy in azerbaijan (2006), caspian group consulting, baku. tourism in azerbaijan (2006), statistical yearbook of azerbaijan statistical committee, baku. study of profitability of organization of tourism routes… 81 yemelyanov b. v. (2007), excursion studies. sovetskiy sport, moscow. zdorov a. b. (2007), economy of tourism. finansi i statistika, moscow. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: june 4, 2014; date of acceptance: september 8, 2014. * contact information: ssaude@ipbeja.pt, department of education and social sciences, polytechnic institute of beja, rua pedro soares s/n, 7800 – 296 beja, portugal, phone: 00351 28431 4400. ** contact information: cborralho@ipbeja.pt, department of management studies, polytechnic institute of beja, rua pedro soares s/n, 7800 – 296 beja, portugal. *** contact information: iferia@ipbeja.pt, department of management studies, polytechnic institute of beja, rua pedro soares s/n, 7800 – 296 beja, portugal. **** contact information: slopes@ipbeja.pt, department of education and social sciences, polytechnic institute of beja, rua pedro soares s/n, 7800 – 296 beja, portugal. saúde s., borralho c., féria i., lopes s. (2014). the impact of a higher education institution on socioeconomic development – the study case of the polytechnic institute of beja, portugal. copernican journal of finance & accounting, 3(2), 151–166. http://dx.doi.org/10.12775/cjfa.2014.024 sandra saúde*, carlos borralho**, isidro féria***, sandra lopes**** polytechnic institute of beja, portugal the impact of a higher education institution on socioeconomic development – the study case of the polytechnic institute of beja, portugal keywords: higher education, regional development, socioeconomic impacts. j e l classification: i230, i250, r110. abstract: it is widely recognized that the investment in human capital, innovation, and knowledge transfer is essential to sustainable development and growth. within this context, the role and action of higher education institutions (heis) are vital. this paper aims to ref lect on the role and impact of higher education on regional development, based on the reality of public higher education in portugal and, more specifically, the case study of the polytechnic institute of beja (ipbeja). this institution belongs to the subsystem of polytechnic higher education and is located in a region that has one of the lowest economic ratios and population density in europe. sandra saúde, carlos borralho, isidro féria, sandra lopes 152 wpływ instytucji szkolnictwa wyższego na rozwój społeczno-gospodarczy – studium przypadku politechniki w beja w portugali słowa kluczowe: szkolnictwo wyższe, rozwój regionalny, skutki społeczno-ekonomiczne. klasyfikacja j e l: i230, i250, r110. abstrakt: powszechnie uznaje się, że inwestycje w kapitał ludzki, innowacyjność i transfer wiedzy mają zasadnicze znaczenie dla zrównoważonego rozwoju i wzrostu. w tym kontekście istotna jest rola i działanie instytucji szkolnictwa wyższego (isw). praca ma na celu odzwierciedlenie roli i wpływu szkolnictwa wyższego na rozwój regionalny, na podstawie publicznego szkolnictwa wyższego w portugalii, a w szczególności, studium przypadku z polytechnic institute of beja (ipbeja). instytucja ta należy do podsystemu szkolnictwa wyższego o charakterze technicznym i znajduje się w regionie, który ma jeden z najniższych wskaźników ekonomicznych i gęstości zaludnienia w europie. translated by sandra saúde  introduction the portuguese higher education system is a binary system, integrating universities and polytechnic institutes, which differ in dimension and legal framework. the system comprehends 127 institutions together with 5 non-integrated polytechnic schools. public higher education corresponds to about 1/3 of all the institutions, 15 of which belong to the university sub-system (14 universities and 1 university institute). it also includes 15 polytechnic institutes, and also 5 non-integrated polytechnic schools. the remaining institutions are private or belong to the military and police higher education network. there is also the catholic university, which was established under concordat law. table 1. number of public and private heis in portugal integrated in the different subsystems hei / subsystem heis (number – public and private sectors) public higher education university 15 polytechnic 20 (15+5) total 35 the impact of a higher education institution… 153 hei / subsystem heis (number – public and private sectors) military and police higher education university 3 polytechnic total 3 private higher education university 37 polytechnic 56 total 93 catholic higher education university 1 total of heis 132 (127+5) s o u r c e : general direction of higher education 2014. some institutions in both sectors, public and private, provide university and polytechnic education at the same time. such is the case of the universities of aveiro, évora and algarve, as well as the military academy and egas moniz – cooperativa de ensino superior. globally, the portuguese higher education system involves a total of 86,640 vacancies for initial training courses1 (licenciate’s [licenciatura] and integrated master’s degrees) and about 390,000 students, from licenciate to phd studies. currently, and following the implementation of the bologna process, portuguese heis provide three types of academic degrees: licenciate, master, and phd. the provision of phd courses is limited to universities, though. in portugal, the higher education network covers the whole country and public heis are more territorially dispersed than private ones, which tend to concentrate in the metropolitan areas of lisbon and oporto, as well as in more densely populated regions. polytechnic institutes are located in areas with lower socioeconomic and population density and farther from big urban areas, except for the polytechnic institutes of oporto, lisbon, and coimbra. 1 data for the academic year 2011/2012 – it does not include the vacancies for the catholic university. sandra saúde, carlos borralho, isidro féria, sandra lopes 154 figure 1. territorial distribution of the public higher education network university subsystem 15 universities the impact of a higher education institution… 155 polytechnic subsystem 15 polytechnic institutes and 5 higher education schools s o u r c e : general direction of higher education. retrieved on november 18th, 2013, from http:// www.dges.mctes.pt/dges/pt/assuntosdiversos/fheq/. since the revolution of april 1974, higher education has expanded significantly in portugal. this phenomenon was a result of the growing number of institutions and the increasing number of students, unique in the whole of europe, especially during the first decade of the twenty-first century (amaral e fonseca 2012). sandra saúde, carlos borralho, isidro féria, sandra lopes 156 in spite of this evolution, current data shows that portugal still remains far short of the average values for the other european and oecd countries. in 2011, portugal had about 15% of graduates among the population aged between 25 and 64 years old, according to the 2013 edition of education at a glance. this clearly differs from the average 32% of the oecd and the 29% of the eu21. among the people in the 30–34 age range, on the other hand, the national average was, in 2011, 28.6%, still very far from the 40% defined as a target for 2020. in some regions, as is the case of baixo alentejo, this value decreases to 22.5%. in a context in which, in portugal, as well as somehow across europe (mainly in the countries currently assisted – directly or indirectly – by the international monetary fund (imf), the european central bank (ecb), and the european commission (ec)), there is great discussion about the role of the state in education and, more precisely, about the value of the mission and role of higher education in society and economic dynamics, we found it important to characterize the real impact of a public hei on the territory where it is located. quantifying the impact of an hei makes it possible to find answers to questions related to the degree of inf luence and importance it may have within the socioeconomic dynamics of its territory. the case study carried out, which is the focus of this paper, gives evidence, with measurable data, of the vital strategic role the heis play in the economic and social survival of the territories, particularly low-density rural ones. the socioeconomic impact of the polytechnic institute of beja (ipbeja) in the regional economy the polytechnic institute of beja: facts and numbers the polytechnic institute of beja is located in beja, the capital of baixo alentejo region and has as direct inf luence all geographical area called baixo alentejo and alentejo litoral. the ipbeja is the only public hei in the region. located in the south of portugal, between lisboa, the capital, and algarve (faro) this territory has, according to the 2011 census, a population of 224,587 inhabitants scattered over an area of 13,852 km2, equivalent to 15% of the total area of portugal. this accounts for a population density of 16 people/km2, while the national average is 115.49/km2 (www.ine.pt, data from 2014). in fact, the territory suffers from a “double aging” process: the impact of a higher education institution… 157 ■ the average proportion of young people is 13.5% (15.8% for portugal), whereas the older population reaches 24% (19% for the whole country) (source: results of the 2011 census, ine, 2014), ■ the aging rate is of 190 elderly for 100 young residents, averagely. this low demographic vitality, typical of this region, coincides with a low percentage of qualified people, if compared with the national average, mainly in what concerns higher levels of education. the relative weight of the population with high academic qualifications is between 8% and 9%, while the national average is 12%. figure 2. the territory under the direct inf luence of the ipbeja s o u r c e : map retrieved from http://www.infoplease.com/atlas/country/portugal.html. sandra saúde, carlos borralho, isidro féria, sandra lopes 158 the gross enrolment rate in higher education,2 of about 20%, is much lower than the national average (53%), which confirms the clear need to take action in what concerns the qualification of the resident population. in the academic year 2012/2013, the ipbeja had a total of 2,597 students and 342 full-time employees, 191 (56%) of whom were faculty and 151 (44%), nonteaching staff. it was the fourth employer in the whole of the municipality of beja.3 the great majority of the employees (75%) were local residents, some of whom (36%) only moved to this municipality when they started working at the ipbeja (source: inquiry by questionnaire applied to all employees (teaching and non-teaching staff ) of the ipbeja, in july 2012). this was more common among the teaching staff (49% of all faculty members moved to the area) than among other staff (9.7% of all non-teaching staff ). research methodology and data collection techniques to estimate the local impact of the ipbeja, it was decided to adopt a demand-side approach, aiming to measure the direct and indirect effects of the institute on the economic and social activities of the municipality of beja during 2012. we developed an approach which allowed us to “isolate” the effect of the ipbeja, by identifying “what it added to the economic, cultural and scientific dynamics” and “the added value generated.” we applied five different models: 1) the ace model: in 1970, the economists john caffrey and herbert h. isaacs, from california state university, were assigned, by the american council of education (ace), the task of developing a method to determine the quantitative estimation of the economic impact of a school (educational institution) in the territory or locality where it is based. the dimensions and sub-dimensions of the model are the following ones: 2 by gross enrolment rate in higher education we mean the percentage ratio between the students enrolled in initial training courses (between 18 and 22 years old) and the total resident population in this age range (ine:2011, anuário estatístico da região alentejo 2010). 3 the first position was occupied by the local health unit of baixo alentejo (integrating several hospitals and health centers, with 1,767 employees), the second, by the portuguese air force (local air base, with 730 permanent employees), and the third, by the municipality itself (552 employees). the impact of a higher education institution… 159 table 2. the dimensions and sub-dimensions of the ace model dimensions sub-dimensions impact on hei-related consumption/expenditure – local business (b) b.1. hei-related local business volume b.2. value of local business property committed to hei-related business b.3. expansion of the credit base of local banks due to hei-related deposits b.4. local business volume unrealized because of the existence of hei enterprises impact on local government (g) g.1. hei-related revenues received by local government g.2. operating cost of municipal services provided to public school by local government g.3. value of local government’s properties allocable to hei-related portion of services provided g.4. real-estate taxes foregone through the tax-exempt status of the hei g.5. value of municipal-type services self-provided by the hei impact on individuals (i) i.1. number of local jobs attributable to the presence of the hei i.2. personal income of local individuals from hei-related jobs and business activities i.3. durable goods procured with income from hei-related jobs and business activities s o u r c e : adapted from caffrey and isaacs 1971. 2) the simplified version of the ace model: it is a simplification of the ace model, focusing on the spending of staff and students of the ipbeja residing or studying in the municipality and also of those residing outside beja but spending there because they work or study at the ipbeja. due to the lengthy and complex nature of these calculations, leslie and lewis (2001) defend the application of a simplification of the traditional ace model. in this simplified version the calculations focus on just two dimensions, as follows: sandra saúde, carlos borralho, isidro féria, sandra lopes 160 table 3. the dimensions and sub-dimensions the simplified version of the ace model dimensions sub-dimensions 1. b.1. hei-related business b.1.1. local expenditure generated by the hei b.1.1.1. local expenditure of the hei b.1.1.2. local expenditure of staff (teaching and non-teaching) b.1.1.3. local expenditure of students b.1.1.4. local expenditure of visitors b.1.2. purchase to local sources by local enterprises supporting the volume of hei-related business b.1.3. volume of local business stimulated by local individuals’ expenditure (except the institution, staff and students) resulting from hei-related income 2. i.1. number of local jobs attributable to the presence of the hei s o u r c e : leslie and lewis 2001. 3) the keynesian local multiplier: the use of a keynesian multiplier must ref lect the particularities of the region where it is applied (jabalameli et al., 2010; sen 2011). the calculation of the multiplier develops from the determination of the value directly injected into the local economy, in which: e = l + g where: e = expenditure base l = wages paid (labor services purchased by the institution) g = goods and services purchased by the institution. 4) the ryan short-cut model: the rsc model is an adaptation of the ace model developed in 1981 by g. j. ryan, who later improved it, in 1992. the estimation of the direct economic impact considers three fundamental types of expenditure, as expressed by this formula: dei = i + w + s where: dei = direct economic impact i = institution’s expenditure w = workers’ expenditure s = students’ expenditure. the impact of a higher education institution… 161 for the research process, we used documentary and non-documentary sources, depending on the indicators. the collection of information about students and staff was obtained by questionnaire survey. the design of the questionnaire followed the guidelines of instruments validated in previous research4 of a similar nature. besides, a pilot test was applied to samples of these universes (students and staff ). in order to guarantee the representativeness of the sample, in terms of statistical significance, we assumed as reference the distribution of the following parameters: age, gender, year of the course (students) and years of service (staff ). this allowed us to estimate the results for the universe. results of the research process: what is the socioeconomic impact of the ipbeja? based on the application of five (5) different methods of calculation (the most consensual in this type of studies worldwide) and a time span limited to 2012, the results of this study demonstrate: a. impact on the population dynamics the inf luence of the ipbeja reaches beyond the municipality, stimulating its gravitational effect regional and nationwide: 1. the academic community of the ipbeja represents over 10% of the total population of the municipality (2011 census: 35,854 inhabitants). 2. the ipbeja contributes unequivocally to the rejuvenation of the age structure of the population. according to the latest census, there were 1,860 youngsters aged between 20 and 24, in the municipality. among the students attending 1st cycle courses, 1,997 were included in this age group. this proves that the ipbeja attracts an expressive number of non-local youth to the municipality. 4 for example: pellenbarg, p. h. (2005). how to calculate the impact of a university on the regional economy. a case study of the university of groningen, holanda; yserte et al. (2008). el impacto económico de la universidad de jaén: un análisis de demanda. universidad de jaen; pastor, josé manuel and pérez, francisco (2009). la contribuición socioeconómica de las universidades públicas valencianas. universitat de valéncia; pastor, josé manuel et al. (2010). measuring the local economic impact of universities: an approach that considers uncertainty. sandra saúde, carlos borralho, isidro féria, sandra lopes 162 3. the inf luence of the ipbeja spreads beyond the municipality and stimulates its gravitational effect at a regional and national scale. among the students attending 1st cycle courses: ■ 78% did not come from the municipality of beja. ■ 47.4% come abroad from the region of the direct inf luence of ipbeja. b. impact on economic activity the direct and indirect economic impact (expenditure, taxes, revenue) of the ipbeja showed a minimum interval between 38.72 million euros and 46.88 million euros. 1. for every euro received from the state budget, the ipbeja injected between 3.20 and 3.88 euros into the local economy.5 2. regarding the direct volume of businesses, the ipbeja generated 41.3 million euros, which represents 2.2% of the gross regional product for the entire baixo alentejo. in what concerns the volume of businesses generated by the inf luence of the ipbeja, those resulting from expenditure by students and staff are particularly relevant: ■ the annual expenditure of students reached a total of 18 million euros. rents alone were responsible for an injection of 2,139,054.9 euros into the local economy. the students spent an average amount of 19 euros a day on accommodation, food, school material, personal goods, transport and cultural expenses. ■ the average expenditure of the ipbeja employees amounted to 37 euros daily (including all types of spending, from housing to cultural consumption), which adds up to 4.5 million euros. ■ finally, the expenditure of the ipbeja itself and that of students’ and staff’s visitors reached a total of almost one million euros, 986 thousand euros, to be exact. 3. the estimated value of expenses made by visitors (students’ and employees’ relatives and friends) to the municipality was 817,463.92 euros. ■ among students’ and staff’s family and friends, 5,166 people visited the municipality and the town, spending an average of 60.5 euros a day. 4. due to income obtained by jobs and businesses linked to the ipbeja, a total of 794 thousand euros was spent locally on durables. 5 based on the ipbeja budget = €12,096,758.04. the impact of a higher education institution… 163 5. local banks had an estimated credit base expansion of 5.7 million euros on accounts and deposits related to the ipbeja (the institute itself, staff and students). 6. the municipality of beja earned 863.7 thousand euros in revenue, resulting from property taxes and other taxes paid by teaching and non-teaching staff and students of the ipbeja. 7. as a result of jobs and businesses connected with the ipbeja, an income of 19.4 million euros was generated in the municipality. 8. detailed analysis of expenditure and revenue between the ipbeja and third parties underlines the crucial role the institute plays in the economic activity of the municipality, the district, and the whole region, in all sectors of activity, from agriculture to services. c. impact on employment and qualification the ipbeja is responsible for the creation of jobs: 1. besides the 342 direct jobs it guarantees,6 the ipbeja indirectly contributed to the creation of between 453 (according to the simplification of the ace model – 1st line impacts) to 823 jobs (according to the ace model). 2. the ipbeja was the 3rd largest employer in the municipality and was also indirectly responsible for twice to three times (depending on the calculation method) the jobs it directly generates.7 3. globally, and considering the direct and indirect impact on jobs, the ipbeja accounts for 7.5%8 of all the employed population of the municipality. 4. the ipbeja is a valuable contribution to the qualification of the resident population ■ among all students 60% came from households in which parents had just elementary education qualifications (portuguese 3º ciclo) and 26.5% had parents with secondary education qualifications. after their graduation, these students will be part of a much more qualified generation. 6 only considering full-time employees at the date of the study. 7 the calculation of the impact of the ipbeja on job creation was done only in the short-term perspective. the global impact is much more substantial, since the institute supplies a qualified workforce from and for the region on a yearly basis. 8 taking into account the number of employed population of the municipality of beja – 10,998. source: anuário estatístico de 2011, ine (2012). sandra saúde, carlos borralho, isidro féria, sandra lopes 164 ■ every year, an average 750 new graduates leave the ipbeja (756 in 2011) and approximately the same number initiates higher education studies (718 in the academic year 2011/2012). d. impact on scientific, cultural, and social dynamics the ipbeja transforms and promotes the cultural and social dynamics of the region: 1. the ipbeja community is a significant consumer of the cultural provision of the municipality. regarding cultural consumption/practices and the profiles of citizen participation we concluded that: ■ on cultural consumption (theatre, cinema, concerts, fairs and exhibitions, bars and cafés, for example) the ipbeja staff spent an average 128 euros a month, a total of 1,536 euros a year. ■ this value increased to 211 euros a month, a total of 2,528 euros a year, in what concerns the students’ spending on the same products. 2. both staff and students evidence a significant social participation. about 12% of all staff members participate in monthly civic or community activities, mainly for volunteer organizations, such as the fire department, and/or volunteering in cultural and leisure organizations, and also as members of professional unions. among students, on the other hand, 14% say they do regular volunteer work, and about 8% participate in cultural and sports associations and clubs. 3. other benefits associated with the presence of the ipbeja include: ■ the provision of facilities belonging to the ipbeja campus to the local community and entities: library, amphitheaters, gallery, classrooms, football field and multi-sports infrastructures, laboratories and testing centers, and so on. ■ the support to new enterprises and business incubator center. ■ the promotion of various scientific, pedagogical and cultural activities and events, organized by its several organic units, departments, centers and offices, accessible to the whole community. ■ the development of laboratory experiments and applied research, in collaboration with local and regional enterprises. the impact of a higher education institution… 165 ■ the services provided to municipal and regional companies and institutions, in the fields of laboratory analysis and specialized consulting services on controlled cost. ■ the participation in the social capital of several local and regional institutions and organizations. ■ the provision of facilities used as the seat of local and regional institutions and organizations.  conclusions these conclusions and findings must be considered as a first approach to the socioeconomic impact the polytechnic institute of beja generates on its local surroundings. however, we may conclude that these effects are really important and contribute to the growth of local economy and, to a larger extent, to the economic development of the whole region, namely of the its territory of direct inf luence that is baixo alentejo and alentejo litoral. surely, the estimated economic impact of the institute is a conservative estimation of global impact, since other dimensions have to be taken into account, such as the generated long-term effects. these consequences or qualitative type effects (impact of the institute on the citizens’ quality of life, or as a determinant factor inf luencing company location, etc.) are important to acknowledge, even though it may be complex to undertake the analysis of these impacts. on the other hand, the impact of the ipbeja on local budgets, the incidence upon the value of the properties or upon the banking sector, due to the generation of a larger market, are some of the aspects being currently analyzed. in line with other socioeconomic impact studies, carried out worldwide, the collected data help to show that ipbeja is a key institution for the regional development. it seems obvious that any change to the produced dynamics may ref lect on the current scenario, reducing the effects of the common effort to increase the region’s competitiveness, or making it harder to be achieved. this situation is even more dramatic in regions where there is only one public hei, which is the case of the district of beja, in portugal. sandra saúde, carlos borralho, isidro féria, sandra lopes 166  references amaral a. & fonseca m. (2012). portugal. higher education and lifelong education in portugal. in m. slowey e h.g. schuetze. global perspectives on higher education and lifelong learners, new york: routledge, 82–96. armstrong h. & taylor j. (2000). regional economics and policy. 3rd ed. oxford: blackwell publishers. beck et al. (1995). economic impact studies of regional public colleges and universities. journal of growth and change, vol. 26, no. 2, 245–260. http://dx.doi.org/10.1111/j.1468-2257.1995.tb00170.x. blackwell m., cobb s. & weinberg d.(2002). the economic impact of educational institutions: issues and methodology. economic development quarterly, vol. 16 no. 1, february, 88–95. http://dx.doi.org/10.1177/0891242402016001009. caffrey j. & isaacs h. (1971). estimating the impact of a college or university on the local economy. washington. washington, d.c. american council of education. elliot d., levin s. & meisel j. (1988). measuring the economic impact of institutions of higher education, research in higher education, vol. 28, no. 1, 17–33. http://dx.doi. org/10.1007/bf00976857. florax r. (1992). the university: a regional booster? aldershot, hants: avebury, england. hall l. (1997). enhancing employability, recognising diversity: making links between higher education and the world of work. london: universities uk. leslie l. & lewis d. (2001), economic magnet and multiplier effects of the university of minnesota, university of arizona and university of minnesota. pellenbarg p. h. (2005), how to calculate the impact of a university on the regional economy, a case study of the university of groningen, holland. ryan g. & malgieri p. (1992). economic impact studies in community colleges: the short cut method, national council for resource development. saúde s. et al. (2013), o impacto socioeconómico do ipbeja no concelho de beja, beja: norprint. sen a. (2011). local income and employment impact of universities: the case of izmir university of economics. journal of applied economics and business research, no. 1, 25–42. tavoletti e. (2007). assessing the regional economic impact of higher education institutions: an application to the university of cardiff. transition studies review, 14 (3), 507–522. http://dx.doi.org/10.1007/s11300-007-0157-9. date of submission: october 22, 2021; date of acceptance: december 13, 2021. * contact information (corresponding author): tnasreen@uoguelph.ca, department of management, gordon s. lang school of business and economics, university of guelph, canada, phone: +1 289 327 3177; orcid id: https://orcid.org/0000-00034061-9070. ** contact information: ron@uoguelph.ca, department of management, gordon s. lang school of business and economics, university of guelph, canada, phone: +1 519-8244120, ext. 56348; orcid id: https://orcid.org/0000-0003-2464-7231. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 2 nasreen, t., & baker, r. (2022). canadian government accounting: a systematic review. copernican journal of finance & accounting, 11(2), 71–97. http://dx.doi.org/10.12775/cjfa.2022.009 taslima nasreen* gordon s. lang school of business and economics at the university of guelph ron baker** gordon s. lang school of business and economics at the university of guelph canadian government accounting: a systematic review keywords: canadian government accounting, financial accounting, managerial accounting, auditing, systematic review. j e l classification: m40, m41, m42, m48. abstract: this paper systematically reviews government accounting research in a developed economy, canada, and suggests ways to advance knowledge in this area. the purpose of this study is to provide researchers with an up-to-date overview of the field of canadian government accounting research. the methodology consisted of a structured literature search to select and analyze academic papers according to the thematic objectives of this study. our review covers 29 articles published in accounting, finance, and public administration journals over 42 years. to the best of our knowledge, t. nasreen, r. baker7272 no systematic review has been done in canadian government accounting. this study examines canadian government accounting research coverage in financial, managerial, and auditing categories to date. this review identifies some under-explored areas, such as political inf luence on government managerial accounting practice, as well as unexplored areas, such as the inf luence of the internationally accepted conceptual framework on the quality of government accounting. this study contributes to the literature on government accounting by providing a review of the current literature and suggesting future research areas. this will be useful to researchers and practitioners in government accounting.  introduction introduction government is one of the most crucial constitutional bodies of a country (lin, baxter & murphy, 1993). this essential institution relies on its accounting and auditing practices to maintain workf lows among different units and ensure public transparency. like many other countries, the canadian government follows highly standardized accounting practices which have evolved over time. fourteen senior government tiers–one federal, ten provincial, and three territorials–constitute the government landscape on canada. in addition, municipal governments exist throughout the country providing governance at the local level. these tiers used to follow diverse accounting practices informed by their self-developed rules and standards (baker & rennie, 2018). the heterogeneity in accounting terminologies, presentation, and procedures among different government tiers has made it challenging to compare financial performance between and within units of the canadian government (lin, 1993). the canadian government began adopting a standardized accounting system set by the public sector accounting board in response to some functional, professional, and political pressures (baker & rennie, 2018). since the early nineteen eighties, all federal and provincial/territorial governments have adopted accounting practices in compliance with the canadian institute of chartered accountants (cica) public sector accounting handbook. in addition to financial accounting and reporting practices, government departments rely on various management accounting techniques, such as operating and capital budgeting (chan, 2004), performance measurement, and costing (fortin, haffaf & viger, 2007), to organize and coordinate resources. the scope and impact of government accounting are very pervasive because they “affect not just how resources are produced and distributed in an economy, but [also] what is deemed organizationally and socially rational and valua canadian government accounting: a systematic review 7373 ble” (cooper & robson, 2006, p. 415). by a similar token, hyżyk (2013) suggests that government follows a variety of fund management strategies to maintain its economic resilience and financial capability. considering the social, political, and economic significance of government accounting practices, academics have embarked on government accounting research. a body of extant literature, including studies by baker and rennie (2006, 2011, 2012, 2013, 2018), bruce and warren (2018), buhr (2012), lin (1993), lin et al. (1993) and pollanen and loiselle-lapointe (2012) has contributed to furthering our understanding of canadian government accounting. nevertheless, to the best of our knowledge, no systematic review has been done to synthesize the coverage of those extant studies. to fill this research gap, this study systematically examines that body of prior research to uncover some under-explored and unexplored areas in canadian government accounting. additionally, this systematic review will provide an essential basis for setting future research directions for advancing the academic inquiries in this domain (webster & watson, 2002). moreover, this study responds to the call “…to contribute to the dialogue on government accounting through studies of the canadian perspective on government accounting, auditing and accountability” (baker, 2019, p. 288). the paper is structured as follows: in section 1, the systematic review methodology is explained. section 2 includes the basis for formulating the search string and research questions, explicit inclusion and exclusion criteria, and limitations and rigour of the research. section 3 outlines the descriptive analysis of the selected articles. we categorize articles by journal focus, time and accounting area. section 4 includes the findings of the empirical research over the last forty-two years. section 5 provides suggestions for future research. research methodology and research processresearch methodology and research process key terms and search string key terms and search string an initial search string was developed based on a preliminary of the extant literature on government accounting. subsequently, drawing on this literature, we considered government accounting/accountability, public sector accounting/accountability, government budget, fund accounting, and government cost and management accounting as meaningful terms. we then used these terms to develop the following search string, which was applied when searching for the keywords in abstracts: t. nasreen, r. baker7474 “government account” or “government accountability” or “government accountable” or “government accountants” or “government accounting” or “government accounts”) or “public sector account*” or (“government audit” or “government auditing” or “government auditor”) or “government performance indicators” or “government accrual account*” or (“public account” or “public accountability” or “public accountancy” or “public accountant” or “public accountants” or “public accounting” or “public accounts”) or (“government budget” or “government budgetary” or “government budgeted” or “government budgeting” or “government budgets”) or (“fund account” or “fund accounting” or “fund accounts”) or “government costing system” or “government management account*” to limit the focus of the search to the canadian context, the terms “canadian government” or “canadian federal government” with the boolean operator “and” were added. screening protocol screening protocol searches were conducted in one prominent interdisciplinary abstract and citation database – abi/inform global – using the above-mentioned search string. abi/inform global has an extensive and rich collection of full-text and full-image peer-reviewed articles in business and management publications dating from the 1920s. the search was limited to double-blind peer-reviewed articles in business and management. an additional restriction was placed on the publication dates and language preferences, limiting the search to articles published in english during the period of 1980 to 2021. the date limit was imposed because, since the early 1980s, all federal and provincial/territorial governments have adopted harmonized accounting practices in compliance with the canadian institute of chartered accountants (cica) public sector accounting handbook (baker & rennie, 2018). thus, this study ref lects research conducted on current government accounting practices. the structured review intends to provide future research direction to scholars of canadian government accounting. hence, the selection of the articles needs to be ref lective of prevailing government harmonized accounting practices. canadian government accounting: a systematic review 7575 screening criteriascreening criteria initially, the search results from abi/inform global were indexed separately in a collection folder in zotero referencing software. the initial search process resulted in a total of 217 articles, which formed the basis for the next level of screening. in the following round, the articles were screened for relevance according to the themes of the structured review. the abstracts of all 217 articles were screened to assess whether they concentrated on canadian government accounting practices. any articles not focused on government accounting in the canadian context were excluded from the selection. though our focus is limited to canadian practice, three papers had a multi-country perspective (e.g., canada, us and mexico, or canada and u.k.), which were included to gather their insights about canadian practices. after screening for relevance, a total of 24 articles were selected as those articles were suitable to the objective of this structured review. to confirm that all targeted articles were collected from key journals, we applied a grey literature search (mahood, van eerd & irvin, 2014) on the journals that have a significant history of publishing public sector accounting research: canadian public administration, canadian journal of administrative science, canadian journal of economics, canadian accounting perspective, and financial accountability and management. this grey literature search resulted in an additional 5 articles focusing on canadian government/ public accounting. finally, the screening protocol resulted in a total of 29 articles. for a clear visualization of the entire article selection process, the search and screening protocol and the results are shown in figure 1. t. nasreen, r. baker7676 figure 1. article selection protocol step 1: initial search results from abi/inform global database step 3:grey literature search in cpa, cjas, step 2: total number of articles after eliminating irrelevant and non-empirical articles result: finally selected articles 29 articles focusing on canadian govt accounting 7 more articles are added from grey literature 22 articles focusing on canadian govt accounting (195 article are excluded) 217 articles focusing on either canadian govt or canadian federal government or government accounting source: compiled by the authors based on the systematic review protocol applied in this study after the final selection, we exported the list of all articles, and their metadata (e.g., title, publisher and publication year) to a comma-separated values (csv) file. this csv file was used as a codebook to record the category of journal focus, publication by year, the tier of the government unit studied, the theoretical framework and the methodologies used in each article. framing the research questions asking clearly framed question(s) justifies the rigour and relevance for preparing a systematic review (cooper & hedges, 1994). clear and thought-provoking questions make the purpose and potential contributions explicit and comprehensible (denyer & tranfield, 2009). this s o u r c e : compiled by the authors based on the systematic review protocol applied in this study. after the final selection, we exported the list of all articles, and their metadata (e.g., title, publisher and publication year) to a comma-separated values (csv) file. this csv file was used as a codebook to record the category of journal focus, publication by year, the tier of the government unit studied, the theoretical framework and the methodologies used in each article. framing the research questionsframing the research questions asking clearly framed question(s) justifies the rigour and relevance for preparing a systematic review (cooper & hedges, 1994). clear and thought-provoking questions make the purpose and potential contributions explicit and comprehensible (denyer & tranfield, 2009). this review paper aims to explore how canadian government accounting: a systematic review 7777 government accounting has been studied in the canadian context. the resulting research questions are: ■ to what extent has government accounting been studied in the canadian context? ■ which level of government tier is studied in that selected literature? ■ which theories and research paradigms inform those research inquiries? ■ which methodologies are employed in exploring government accounting regimes? by addressing these questions, this review focusses on the current trends and coverage of canadian government accounting. the findings of this study highlight some areas where more attention is needed. future research on canadian government accounting can build on this synthesis by shedding light on some unexplored and underexplored topics, theoretical frameworks, and methodologies and hence, advance scholarship in this area. limitations and rigour of the research process limitations and rigour of the research process consistent with prior systematic reviews in the field of accounting (see dumay, bernardi, guthrie & demartini, 2016; hahn & kühnen, 2013; for example), this study followed a methodical research protocol similar to previous review studies. a set of clearly defined exclusion and inclusion criteria were followed. though an extensive search for relevant articles in the abi/inform global database was undertaken, we cannot account for articles that are not available in this database. furthermore, as we have limited our search to post harmonizedaccounting era, studies conducted prior to this period are excluded. descriptive analysisdescriptive analysis this extensive search resulted in a total of 29 articles. the papers finally selected for review were thoroughly examined and summarized in a spreadsheet. the summary included groupings according to publication year, journal focus, area of emphasis, theories, methods of data collection and the main findings. this summarization helped gain a broader sense of the selected articles and then extricate this overview into different tables according to various categorizations. a similar approach has been followed in the prior review studies such as broadbent and guthrie (2008); goddard (2010); van helden (2005); scapens t. nasreen, r. baker7878 and bromwich (2010), and van helden and uddin (2020). during this process, a descriptive analysis of the selected literature was included. distribution according to journal typedistribution according to journal type this review followed an impartial approach for selecting all possible journals that published articles on canadian government accounting. a total of 13 different outlets were used to publish these articles. as anticipated, a large body of literature (52 percent) is published in accounting-focused journals such as accounting perspectives, accounting history, accounting organizations and society and financial accountability and management. accounting history and financial accountability and management are prominent in publishing canadian government accounting among the seven accounting-focused journals. though accounting perspectives is canadian and accounting-focused, it was not a leading outlet for this research domain. the remaining non-accounting focused journals concentrated on public policy and administrations. among the selected articles, 48 percent of studies were published in those journals. in the nonaccounting-focused category, the c.d. howe institute1 is a niche outlet publishing comments and critiques on canadian government accounting practices and policies. table 1 shows the descriptive analysis according to the journal focus. table 1. article publication by journal focus accounting focused journals number of articles percentage canadian/intl focused accounting perspective 2 canadian accounting history 4 international accounting history review 1 international accounting, organizations and society 1 international meditari accountancy research 1 international 1 the c.d. howe institute’s, a registered charity, and an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies, publications follow a peer-review process by independent experts from public and private sectors. source: https://www.cdhowe.org/about-us. accessed on sep 6, 2021. canadian government accounting: a systematic review 7979 accounting focused journals number of articles percentage canadian/intl focused financial accountability & management 4 international journal of public budgeting, accounting & financial management 2 international total articles in accounting focused journals 15 52% non-accounting journals futures 1 international public budgeting & finance 2 international canadian public administration 3 canadian c.d. howe institute 6 canadian public administration review 1 international journal of public procurement 1 international total articles in non-accounting journals 14 48% total 29 s o u r c e : compiled by the authors based on the publication outlet analysis applied in this study. in addition to depicting the contribution of some journals in advancing knowledge of canadian government accounting, this descriptive analysis reveals that the canadian journal of administrative sciences, one of the leading journals focusing on canadian contexts, did not publish any papers in the target domain. therefore, the call for the special issue on the canadian perspective of government accounting, auditing, and accountability is a timely enterprise to fill this academic lacuna. distribution over time distribution over time we then categorized the selected articles according to the publication year. since the early nineteen eighties, the canadian government began harmonizing accounting practices. limiting the search to this period (between 1980 and 2021) showed that publications from 1980 to 1990 are negligible, with only one article published roughly every five years. table 1. article… t. nasreen, r. baker8080 nonetheless, the number of publications increased slightly over the next two decades (from 1991 to 2010), where 2 to 4 articles were published every five years. a momentum of increase in the publications in the target domain is observed between 2011 and 2015. a large proportion of literature (11 articles) was published during this period. nevertheless, publications in canadian government accounting decreased in the most recent timeframe (from 2016 to 2021), as only four articles were published during this period. figure 2 depicts the number of publications over the targeted search period. figure 2. articles by publication year source: produced by the authors based on article publication year analysis in this study. distribution according to the focus on accounting area to shed light on which area of accounting has been studied in the government accounting realm, we further categorized the articles according to the focus of the accounting area. we used the major branches of accounting, such as financial, managerial, and auditing, to synthesize the findings from the selected articles. the descriptive analysis shows that an equal percentage (43 percent in financial accounting and another 43 percent in managerial accounting) of the studies were done in financial and managerial accounting. the most frequently studied financial accounting topic is the accrual basis of accounting and transparency of public reporting. studies focusing on management accounting are more diverse and emphasize different tools and techniques of management accounting used in government management. the most frequently studied management accounting areas are budgeting (i.e. forecasting), fund and pension management, activity-based costing, and capital budgeting. only one article, gendron, cooper and townley (2007) focused on auditing, stressing the role of the auditor general in understanding the consolidation of the support network in the government auditing profession. a mentionable number of articles (4 articles) explored accounting as a practice rather than tools and techniques. government accounting practices have evolved since the formation of the confederation (baker & rennie, 2006) and has been institutionalized (baker & rennie, 2013) and deinstitutionalized (baker & rennie, 2017) during this evolutionary process. during this time, various accounting innovations, such 0 2 4 6 8 10 12 n um be r o f p ub lic at io ns year s o u r c e : produced by the authors based on article publication year analysis in this study. distribution according to the focus on accounting areadistribution according to the focus on accounting area to shed light on which area of accounting has been studied in the government accounting realm, we further categorized the articles according to the focus of the accounting area. we used the major branches of accounting, such as financial, managerial, and auditing, to synthesize the findings from the selected articles. the descriptive analysis shows that an equal percentage (43 percent in financial accounting and another 43 percent in managerial accounting) of the studies were done in financial and managerial accounting. the most frequently studied financial accounting topic is the accrual basis of accounting and transparency of public reporting. studies focusing on management accounting are canadian government accounting: a systematic review 8181 more diverse and emphasize different tools and techniques of management accounting used in government management. the most frequently studied management accounting areas are budgeting (i.e., forecasting), fund and pension management, activity-based costing, and capital budgeting. only one article, gendron, cooper and townley (2007) focused on auditing, stressing the role of the auditor general in understanding the consolidation of the support network in the government auditing profession. a mentionable number of articles (4 articles) explored accounting as a practice rather than tools and techniques. government accounting practices have evolved since the formation of the confederation (baker & rennie, 2006) and has been institutionalized (baker & rennie, 2013) and deinstitutionalized (baker & rennie, 2017) during this evolutionary process. during this time, various accounting innovations, such as reporting the net debt as a balance sheet item (baker & rennie, 2011), were introduced. moreover, the current accounting practice of the federal government is an inherited practice from one of the inf luential provinces–the province of canada– in the pre-confederation era (baker & rennie, 2012). table 2 shows the synthesis of articles by the type of accounting focus. table 2. articles by area of accounting area of focus number of articles topics covered in the selected articles leading articles financial accounting 12 adoption of accrual accounting, historical evolution of public sector accounting, transparency, and accountability of public reporting baker & rennie (2006); baker & rennie (2012); baker & rennie. (2018); lin (1993); lin et al. (1993); pollanen, & kristin (2012). managerial accounting 12 budget forecast and management, fund management, activity-based costing, capital budgeting and pension plan management. busby & robson (2011); brimberg & hurley (2014); chan (2004), fortin et al. (2007); savoie (1990) auditing 1 role of the auditor general gendron et al. (2007) others 4 npm and accounting change, information technology and accounting baker & rennie (2017); bruce & warren (2018); jarvis (2009); liguori (2012) total 29 s o u r c e : compiled by the authors based on journal by accounting focus analysis. t. nasreen, r. baker8282 findings according to the research objects findings according to the research objects what extent of government accounting has been studied what extent of government accounting has been studied in the canadian context? in the canadian context? before the emergence of the psa standards, government accounting practices varied across the provinces (baker & rennie, 2018). gradually, over time and with an intervention from the public sector accounting board (psab), the federal government and all provinces and territories of canada2 adopted a harmonized accounting practice for external reporting. psab sets the “criteria that determine such matters as what is included in and excluded from the financial statements, how financial statement items are measured, how financial statement information is presented or otherwise disclosed, and what the appropriate reporting entity is” (baker & rennie, 2018, p. 407). moreover, since the early 2000s, the government of canada has adopted an accrual basis of accounting to align with the emerging new public management (npm) approach in the public sector (baker & rennie, 2017, 2018). besides this financial accounting domain, like other public sector entities, the federal, provincial and territorial government tiers use various managerial accounting tools to organize activities and resources. this section categorizes the review findings into financial and managerial accounting coverage to highlight the relevance of both branches of accounting in public sector reporting and financial management. the psa established four financial reporting objectives3 of public sector financial reporting (ps 1100), which serves the interests of a large variety of stakeholder groups such as citizens, policymakers, councilors, investors, and other government units (ps 1000). to explore the financial accounting coverage in this review, we used the psa guidelines prescribed by psab to set the scope. a brief chart of the psa accounting framework is shown in figure 3. 2 the cica handbook applies to federal, provincial, territorial, and local government organizations. 3 four objectives of psa reporting are: to report and present the full nature and extent of the financial affairs and resources (ps 1100, sec.16), financial position at the end of the accounting period (ps 1100, sec.20), changes in government’s financial position (ps 1100 sec.36), accountability of a government for the resources, obligations, and financial affairs (ps 1100, sec.61). canadian government accounting: a systematic review 8383 figure 3. scope of financial accounting in the public sector figure 3. scope of financial accounting in the public sector public sector accounting statement of financial position -financial and nonfinancial assets -liabilities -contingent assets and contingent liabilities -contractual obligations -contractual rights -changes in financial position statement of operation revenues and gains -gross amount of expenses losses arising from asset impairment and changes valuation allowances statement of remeasurement gains and losses -accumulated remeasurement -remeasurement gains and losses -other comprehensive income -exchange gains and loss -changes in the fair value statement of changes in net debt the extent of expenditure coverage -net debt changed due to net remeasurement gains and losses -acquisition of tangible capital assets statement of cash flow -cash and cash equivalent for the period -cash flows from operating, capital, investing and financing activities sources: compiled by the authors based on information available on the public sector accounting website. the first observation from the review synthesis is that two of the leading contributors in public sector financial accounting are baker and rennie. these authors published fifty percent (6 articles) of the articles in this domain. these authors examined the evolution of government accounting standards, emergence and entrenchment of net debt in public accounting, and the accrual basis of accounting of financial accounting research. they have used various historical analysis methods to explore the forces for canadian public accounting standards (baker & rennie, 2018), the adaption of accounting a new basis of accounting by the government of canada (baker & rennie, 2006), and the evolution process of the emergence and entrenchment of net debt reporting by the government of canada (baker & rennie, 2011). for more context, baker and rennie (2006) explained the role of public sector accounting standards in the canadian federal government’s adoption of full accrual accounting. similarly, baker and rennie (2012) shed light on one of the historical events of canada, the birth of canada as a sovereign country, to explore whether the birth of a new nation triggers a new accounting system. their historical analysis of policy documents states that creating a new political entity had a trivial influence on accounting practice. accounting practices were informed instead by the traditional institutionalized practice of a dominant province (baker & s o u r c e s : compiled by the authors based on information available on the public sector accounting website. the first observation from the review synthesis is that two of the leading contributors in public sector financial accounting are baker and rennie. these authors published fifty percent (6 articles) of the articles in this domain. these authors examined the evolution of government accounting standards, emergence and entrenchment of net debt in public accounting, and the accrual basis of accounting of financial accounting research. they have used various historical analysis methods to explore the forces for canadian public accounting standards (baker & rennie, 2018), the adaption of accounting a new basis of accounting by the government of canada (baker & rennie, 2006), and the evolution process of the emergence and entrenchment of net debt reporting by the government of canada (baker & rennie, 2011). for more context, baker and rennie (2006) explained the role of public sector accounting standards in the canadian federal government’s adoption of full accrual accounting. similarly, baker and rennie (2012) shed light on one of the historical events of canada, the birth of canada as a sovereign country, to explore whether the birth of a new nation triggers a new accounting system. their historical analysis of policy documents states that creating a new political entity had a trivial inf luence on accounting practice. accounting practices were informed instead by the traditional institutionalized practice of a dominant province (baker & rennie, 2012). their findings highlight that the government accounting prac t. nasreen, r. baker8484 tice ref lects legitimization rather than a political mutation to handle some challenges, such as settling the accounts and powers between pre-and post-confederation jurisdictions. consequently, the need to coordinate resources and power has triggered the importance of having a standardized set of accounting practices across provinces. baker and rennie (2018) shed light on the institutional aspect of government accounting and reveal the role of an inf luential actor, the office of the auditor-general of canada, in the process of the standardized-institutionalized public sector accounting practice. in their study published in 2017, baker and rennie pointed out that the government accounting practice was subject to deinstitutionalization or displacement. for the sake of transparency, the province of canada adopted the gross basis reporting of revenue and expenses of departments and custom offices and deinstitutionalized the net basis of reporting. the inf luence for such change came from another country outside canadian jurisdiction (baker & rennie, 2017). their findings indicate that canadian government accounting is an institutionalized practice that ref lects both national and international inf luences. taken together, baker and rennie have advanced knowledge of canadian government accounting by exploring it to ref lect regulations, standards, institutions and legitimizations. among other articles concentrated on the canadian government’s financial accounting, lin et al. (1993) examined the extent of compliance with the public sector accounting and auditing committee’s (psaac) statement psacs 3 and 44 by senior governments in canada. they further examined the effect of psaac’s recommendations on government accounting and reporting and identified the significant areas of non-compliance in current practice. by a similar token, lin (1993) reveals the canadian experience of establishing accounting and auditing standards for the public sector to improve the government financial practices in the country. lin’s (1993) study reported that the voluntary nature of some psaac statements makes the application of those in the public sector more challenging. moreover, the notion to be aligned with jurisdiction-wide accountability principles makes public sector accounting even more challenging. whereas most articles that focused on financial accounting studied reporting practices in general, one study, baker and rennie (2011), shed light on a specific account of a balance sheet item. these findings indicate that only one study 4 psacs 3 (1986) ‘general standards of financial statements presentation for governments’; and psacs 4 (1988) ‘defining the government reporting entity.’ canadian government accounting: a systematic review 8585 has been done in the liabilities area, examining net debt (section 1.5, ps 1000 and ps 3200). however, opportunities are still there to investigate other balance sheet items and the statement of financial operation. the subsequent thematic analysis of the review paper was done using the lens of managerial accounting. in contrast to financial accounting studies, management accounting studies are diverse and cover many disciplinary topics, such as budgeting, costing, and performance measurement. hence, we can state that the diverseness of management accounting is common across economies. this finding is consistent with prior reviews in public sector management accounting development (van helden & uddin, 2016) in an emerging economy. the most studied area is budgeting. auld (1984) applied the measure of prediction accuracy to investigate whether the prediction of the national budget has improved over time. their study suggests that the prediction accuracy of the canadian federal budget has been enhanced since after the government started to use pre-paying taxes based on the previous year’s taxable income. more recently, chan (2004) surveyed selected municipal government’s capital budgeting policies and techniques. this study reports that the canadian government uses various capital budgeting techniques in evaluating capital projects. the author criticized the heavy use of quantitative measures in the assessment process. one of the primary intentions of government capital projects is social and community improvements, which cannot be measured using financial indicators. hence, chan (2004) proposed a multi-attribute decision model that factors in both tangible and intangible considerations. the national budget is considered one of the communication media between the public and the government in power. hence, the accountability and transparency of the budgeting system are crucial. in a similar vein, busdy and robson (2011) surveyed different provinces to examine the quality of accountability and transparency of national revenue and expenditure budgets. their results show that, though the canadian government’s revenue and expenditure budgets are better than other developed countries, there is still a need for a public account committee to improve accountability and transparency to the next level. nonetheless, the extent of transparency varies across the provinces. the revenue and expenditure budgets are much more detailed and comparable in ontario and new brunswick, whereas, in other provinces, the presentation of public accounts is not that straightforward (busby & robson, 2013). to that end, savoie (1990) stressed a particular aspect of budgeting and provided a historical synopsis of three different expenditure budget management t. nasreen, r. baker8686 systems: the program planning budgeting system (ppbs), the policy and expenditure management system (pems), and the expenditure review committee (erc). this study alludes that the complicated nature of government expenditure budgets can merely be dealt with through expenditure management systems if those technological ideas are borrowed elsewhere. those new technologies were brought in as part of the political agenda for national elections. to be operational, a process and purpose-oriented expenditure management system is suggested by the author. the performance evaluation system is a widely used management accounting tool for coordinating and organizing resources aligned with objectives and goals. bourgault, dion and lemay (1993) explain how the performance measurement system of the canadian federal government developed a sense of collective responsibility among deputy ministers. this sense of collectiveness has resulted in solid unity with the government as a whole (bourgault et al., 1993) and brought modernity to resource management and control systems. understanding the nature and behaviour of costs is one of the fundamentals of an effective management accounting system. for context, brimberg and hurley (2014) stressed the importance of understanding the nature of government costs in managing lapsed funding. they examine the role of the information system in mitigating the lapsed funding of the department of national defense (dnd) in canada and suggest that, in addition to a better information system, a deeper understanding of cost behaviour can reduce the uncertainty in both operating and capital funds. as a result, the problem of lapsed funding will gradually decline (brimberg & hurley, 2014). similarly, fortin et al. (2007) unfold the implementation of activity-based costing in a federal government unit and shed light on the importance of understanding the nature of costs in reducing the budget deficits. as part of the modernization of the comptrollership project, in 1997, the canadian federal government adopted activity-based costing to measure the cost of service more accurately. this costing system resulted in better control over accountability and performance measurement systems. their survey-based quantitative analysis provides evidence that the adoption of activity-based costing has significantly contributed to financial improvements in various government units. these study findings indicate that management accounting tools and techniques are well integrated into government operations. with advancements in the management accounting discipline, the government accounting practice embraces a new and modernized management accounting system. canadian government accounting: a systematic review 8787 which tier(s) of government are studied which tier(s) of government are studied in that selected literature?in that selected literature? the subsequent thematic analysis that we used to understand government accounting practices is the tier of the government. the federal system of canadian government comprises fourteen senior government units – one federal, ten provincial, and three territorial (baker & rennie, 2018). the local/municipal units are constituted under each provincial and territorial government. all these 14 senior government and local governments are relying on accounting system for external reporting and internal management. table 3 lists the papers according to the tier of the government covered. table 3. articles by tier of the government tier(s) of the government no. of articles percentage area focus federal 20 69.0% the federal budget, accounting reporting, accounting evolution, lapsed fund management. provincial 1 3.4% measurement of performance in an auditor general’s office municipal 2 6.9% accounts for both tangibles and intangibles, the influence of intra-organizational dynamics on accounting practice multiple tiers: provincial and federal govt 1 3.4% net debt reporting govt in general (without making any reference of any tier 5 17.2% accrual accounting in the public sector total studies 29 100.0% s o u r c e : compiled by the authors based on the analysis of articles by the tier of the government. the federal government’s accounting practice is one of the primary foci of research in this domain. a large number of articles (20 articles representing 69 percent of the selected papers) have covered various accounting issues in federal government accounting. the emphasis of those papers is on the federal government’s budgeting and reporting system (busby & robson, 2011, 2013), fund management (brimberg & hurley, 2014; stoney & krawchenko, 2012), and the adaptiveness of the accounting system in response to both harmonizations t. nasreen, r. baker8888 of accounting standards (baker & rennie, 2006, 2018) and neo-public management (baker & rennie, 2013). the next higher emphasis is on municipal government. among the selected articles, two studies (6.9 percent) are conducted in the municipal area to unfold the inf luence of organizational dynamics on accounting practices. a very little research, only one article (3.4 percent), has been conducted in the provincial tier. the provincial-tier-focused study covered the performance measurement of the auditor general’s office. most of the articles covered either federal, provincial, or municipal tiers of the government. however, a mentionable number of studies (5 articles representing 17.2 percent) in government accounting were conducted without referring to any tier of the government. the primary objective of those articles is to advance knowledge in public sector accounting in general. to sum up, the synthesis in this domain suggests that more studies are required to understand the accounting practice of local and territorial governments. what theoretical frameworks does canadian government what theoretical frameworks does canadian government accounting research adopt?accounting research adopt? the subsequent thematic analysis applied in this review is the theoretical frameworks used and their paradigms. we borrowed the paradigm categorization from van helden and uddin (2016). their structured review of public sector accounting has used three theoretical paradigms: mainstream, interpretive, and critical.5 we used these three categorizations to comment on the extent of the coverage of the theoretical frameworks. the selected literature heavily relied on the interpretive paradigm and used institutional, legitimacy, archetype, organizational and stakeholder theories to explore accounting as a socially constitutive practice. consistent with van helden and uddin (2016), this review finding suggests that these social theories have the same primary intention: to seek subjective meaning for government accounting practices per5 the ontological and epistemological assumption of positivism is that reality exists independent of the researcher. consequently, reality can be understood by using an accurate, objective measure. the interpretive theory presumes that reality cannot be understood tangibly. instead, reality lies in human consciousness and comes into being through interpretation and sense-making processes. the critical approach is mainly for offering a critique of the existing social system with an envision for a better world (prasad, 2005). canadian government accounting: a systematic review 8989 ceived by the actors. the complex nature of social practices such as government accounting can be understood deeply by applying different interpretive lenses. a total of 11 articles uses the interpretive paradigm to explore complex and dynamic government accounting practices. five articles adopted a positivist approach and utilized some mainstream accounting theoretical frameworks to understand relationships and associations. the positivist theories employed in investigating canadian government accounting are contingency theory, resource-based view, organizational control, and rational expectancy theory. these theoretical frameworks examined the determinants of activity-based costing, the relationship between budgetary decisions with a surplus (deficit), and a predictive capacity of government budgets. these findings help to ref lect the objective nature of government accounting. only a few (3) took a critical insight into the canadian government accounting practices. those studies employed foucault’s discontinuities, colonialism and regulatory theory in understanding the tensions and struggles in canadian government accounting. critical paradigm views practices as the constitution of power and politics and addresses subjective and structural inf luences (baxter & chua, 2003; van helden & uddin, 2016) to understand societal and organizational change. seven articles did not provide a reference to any theory. those articles are primarily descriptive and commentary. this finding is consistent with van helden and uddin (2016) and jacobs (2012) who note that public sector papers’ authors and intended audiences are non-academic or consultants. those nonacademic-focused articles mainly serve as critiques and commentary on government accounting policies. table 4 lists the selected literature according to paradigms and related theoretical frameworks. table 4. articles by the theoretical framework theoretical framing number of articles paradigm research focus leading articles contingency theory/resource-based view/organizational control/rational expectation theory 5 mainstream accounting theory determinants of abc, the relationship between budgetary decision-making reforms and surplus(deficit) fortin et al. (2007); reddick (2004) t. nasreen, r. baker9090 theoretical framing number of articles paradigm research focus leading articles institutional theory/legitimacy theory/archetype theory/organizational behaviour/stakeholder theory 11 interpretive evolution of different accounting practices, driving forces of accounting, alignment between public and private accounting practice baker & rennie (2011); baker & rennie (2018); carmela et al. (2020) foucault’s discontinuities /colonialism/regulatory theory 3 critical understand the role of technology, intra-organizational dynamics and process of standardization in public accounting, bake & rennie (2017); buhr (2012); lin et al. (1993) descriptive/review/commentary with no explicit theory 7 reflection on government accounting busby & robson (2011); busby & robson (2013); robson & laurin (2015); empirical study but no reference of theory 3 measuring the accuracy of budget, the success of abc implementation auld (1984); savoie (1990); stoney & krawchenko (2012) total articles 29 s o u r c e : compiled by the authors based on the analysis of articles by theoretical framework used. what methods does canadian government accounting research employ?what methods does canadian government accounting research employ? the last categorization theme we followed was the data collection methods. table 5 list the selected literature according to methods. table 5. articles by methodological approach methodological approach number of articles examples of some intention leading articles qualitative historical 9 evolution of public account/ accrual accounting/net debt, factors influencing govt accounting, budgetary reforms baker & rennie (2012), baker & rennie (2013), buhr (2012) table 4. articles… canadian government accounting: a systematic review 9191 methodological approach number of articles examples of some intention leading articles single/multiple case study 2 rationale, approaches, and impact of accrual accounting; intra-organizational factor and accounting change liguori (2012), pollanen & loiselle-lapointe (2012) descriptive 3 performance appraisal system, public accounting practice variation across countries bourgault et al. (1993), jarvis (2009) document/content analysis 3 international perspective on public accounting and lapse fund management bruce & warren (2018), gendron et al. (2007) public policy analysis 1 standardization of public accounting lin et al. (1993) commentary 6 accountability and transparency of public budget busby & robson (2011), busby & robson (2013) review 1 overview of harmonized accounting lin (1993) total qualitative papers 25 quantitative survey 3 a decision model for both tangible and intangible budgeting, role of micro, small and medium enterprises in public procurement carmela et al. (2020), chan (2004), fortin et al. (2007). regression analysis 1 alignment of public and private accounting with npm auld (1984) total quantitative papers 4 s o u r c e : compiled by the authors based on the analysis of articles by methodological focus. in the qualitative category, historical analysis is the most frequent method of data collection (9 articles), while studies using document (3 articles), content (2 articles), and public policy analysis (1 article) are relatively limited. this finding contradicts alawattage, hopper and wickramasinghe (2007) and van helden and uddin’s (2016) observation that public sector accounting research is mainly limited to case studies due to the lack of documents. the findings of this review suggest that as a publicly accountable body, government units have to make many accounts available to the public. many of those documents and table 5. articles… t. nasreen, r. baker9292 policies are available in an archival format. as a result, historical documents, content, and public policy become a more accessible data collection method. the survey (3 articles) is a commonly used data collection method in the quantitative category, while studies using regression analysis (1 article) are rare. this finding, too, contradicts van helden and uddin’s (2016) observation in emerging economies that the survey response rate is inferior. due to cultural, social, and technological reasons, this response rate is slightly higher in a developed economy like canada. whereas van helden and uddin’s (2016) research location is developing countries, this review concentrated on canada, which could account for the increased civic engagement (uslaner, 2002). a large proportion of the selected articles (9 articles) are commentary and descriptive, not employing specific methods.  conclusions and future research directions conclusions and future research directions given the dearth of synthesized knowledge on canadian public accounting, we conducted a systematic review of the last 42 years’ published studies to fill this knowledge gap. to shed light on what we know about canadian government accounting, we sought to categorize studies according to the accounting area and topics covered. this review states that although a diverse range of research has been done in financial and managerial accounting, the opportunity still exists to set out future research directions. this synthesis reveals that the formation of the confederation has provided a distinctive context for the evolution and adaption of an accounting system that legitimizes provinces. despite political instability at that time, accounting systems worked as a coordinating mechanism for consolidating the financial results of different provinces. the financial accounting domain of canadian government accounting research has applied some historical analysis techniques to unfold the inf luence of this political change on prevailing accounting practice. however, no research has been done to explore this political inf luence on managerial accounting practices. the selected literature suggests that canadian government accounting practices became institutionalized ref lecting both national and international inf luences. some study findings maintain that international institutionalization, inf luenced by foreign countries’ policies has shaped accounting practices. this line of inquiry can be further extended by exploring the inf luence canadian government accounting: a systematic review 9393 of the international public sector accounting standard board (ipsasb) on the prevailing practice. studying the inf luence of international bodies such as the ipsasb, the united nations, and the european commission would be relevant and timely. more specifically, a study outlining the impact of an ongoing initiative by ipsasb to revise the conceptual framework for public sector accounting is warranted. bruce and warren (2018) conducted an empirical study on a different perspective of ipsasb’s conceptual framework project to explore the institutional aspects such changes (coercive, memetic, or normative) using stakeholders’ response letters. nonetheless, an empirical case study or multiple case studies using in-depth interviews would reveal real tensions and changes in current accounting practice in response to this revised conceptual framework. in addition, how the canadian psab is responding to the notion of change would be an interesting research topic. in a similar vein, baker (2019) maintains that effective international accounting standards are one of the prima facie in encouraging general purpose financial reporting. future research in canadian government accounting can shed light on to what extent this internationally accepted conceptual framework contributes to improving the quality of government financial reporting. this review synthesized the scope of financial accounting topics using topics listed on the psa standards (see figure 3). the review finding depicts that only one paper (baker & rennie, 2011) has covered one balance sheet item (net debt) in their study. research opportunities exist to explore other accounting topics from the statement of financial position, statement of operation, cash f low statement, and remeasurement of gains and losses. more specifically, future research can be directed to understand the nature, type, and reporting history of some unique items, such as contractual obligation and assets, remeasurement gains and losses, and cash f low from the capital. our review synthesis suggests that the research in canadian government accounting is limited to different government tiers such as federal, provincial and territorial, and municipal. nonetheless, psa defines government accounting broadly and includes government business enterprise, government non-profit organizations, government partnership, and business partnership. therefore, research can be pursued to explore the financial and management accounting practices of all different forms of government entities. this review study contributes by providing a synthesized knowledge of canadian government accounting on which future research can build. this study t. nasreen, r. baker9494 made further contributions by identifying some under-explored and unexplored areas and alluding to areas where future research can be carried out. acknowledgementsacknowledgements we would like to especially anonymous reviewers, who significantly improved this paper’s clarity and overall contribution. we also would like to express appreciation to the lang business school of the university of guelph, canada, for providing us with the graduate research assistantship fund.  references references alawattage, c., hopper, t., & wickramasinghe, d. 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(2015). challenges, growth and opportunity: a shadow federal budget for 2015. commentary – c.d. howe institute, 423(2), 1–23. savoie, d.j. (1990). reforming the expenditure budget process: the canadian experience. public budgeting and finance, 10(3), 62–78. scapens, r.w., & bromwich, m. (2010). management accounting research: 20 years on. management accounting research, 21(4), 278–284. stoney, c., & krawchenko, t. (2012). transparency and accountability in infrastructure stimulus spending: a comparison of canadian, australian and u.s. programs. canadian public administration, 55(4), 481–503. http://dx.doi.org/10.1111/j.17547121.2012.00235.x. uslaner, e.m. (2002). religion and civic engagement in canada and the united states. journal for the scientific study of religion, 41(2), 239–254. van helden, g.j. (2005). researching public sector transformation: the role of management accounting. financial accountability & management, 21(1), 99–133. van helden, j., & uddin, s. (2016). public sector management accounting in emerging economies: a literature review. critical perspectives on accounting, 41, 34–62. http://dx.doi.org/10.1016/j.cpa.2016.01.001. webster, j., & watson, r.t. (2002). analyzing the past to prepare for the future: writing a literature review. mis quarterly, 26(2), 13–23. cjfa_1_2015_przed_drukiem.pdf 65 date of submission: april 17, 2015; date of acceptance: may 8, 2015. * contact information: abdullah.bahce@dpu.edu.tr çelebi campus public finance department, kütahya/turkey, phone: +902742652031 (2126). ** contact information: oner.gumus@dpu.edu.tr bi campus public finance department, kütahya/turkey, phone: +902742652031 (2104). . (2015). a solution to eradicate jobless growth: meritocracy. copernican journal of finance & accounting, 4(1), 9–25. http://dx.doi.org/10.12775/cjfa.2015.001 abdullah burhan bahçe* ** a solution to eradicate jobless growth: meritocracy keywords: labor market, globalization, global financial crisis, jobless growth, meritocracy, tax burden. jel classification: e20, f66, h12, h21, o16, h21. abstract: world economy showed an important development after 9/11. with the transition of neoliberal economy programs, employment around the world had increased until 2008 global financial crisis. because of the devastation effects of the crisis, the increase in the employment level stopped and reached a record level in some countries after 2008. current appropriate economic policies are not enough because there are some factors which arise jobless growth. for instance, globalization, labor cost, tax burden, substitution between technology and labor, capital -intensive markets and so on create jobless growth, particularly in developing countries. in other words, economic policies are not enough to solve unemployment problem. in addition to these policies, contemporary and qualitative approaches should be used. one of these approaches is meritocracy. in terms of employment phenomenon, meritocracy is a notion that cre10 ates efficiency and justice in an economy. one of the examples which creates jobless growth is globalization. globalization has adverse effects as well as positive effects. one of the examples is a substitution between technology and labor. if there is much automation in a company, less labor is employed. and this hampers to notice talented persons who create more efficiencies than technology can do. in addition, because these talented persons are unemployed due to technology substitution, some structural conf licts can arise. although the reasons of jobless growth are based on economic reasons, the most efficient solution is to establish a meritocratic system. by using this system, the output will become more qualified than that of now because in that case the people in the system will become more qualified. in this study, the significance of meritocracy in eradication jobless growth will be emphasized and some examples related to developing countries will be given, and from this perspective some proposals will be presented to figure jobless growth problem out by creating a meritocratic system. after terrorist attacks on 11 september 2011, the world has changed its direction in terms of politics and economics. for this reason economic policies become more capital-oriented. this indicated that neoliberal economic programs came into force after that time. new investments were made and employment increased. however, because the economic programs did not focus on human, the world markets were shaken and employment levels again decreased. aftermath, employment levels have begun to increase again. put it differently, f luctuations have been seen for a decade. these f luctuations underlie the jobless growth problem especially around developing economies. from this perspective, in the first subject, we define the concepts of meritocracy and jobless growth to understand better the situations of developing countries. and we specify the reasons of jobless growth in the upcoming section. the importance of merit of meritocracy in economy is what we tell about in the third subject. in the discussion section, we compare unemployment and growth rates of developing countries to demonstrate jobless growth periods. after that, necessary arrangements are presented to establish a meritocratic system in developing economies to avoid economic f luctuations. the aim of this article is to show jobless growth occurs if there is no meritocracy. to demonstrate this fact, we will use statistical data about unemployment and growth rates of selected important countries. and we will evaluate these a solution to eradicate jobless growth: meritocracy 11 facts in terms of fairness and justice. however, the concept of meritocracy and jobless growth can be understood very well to show the relationship between meritocracy and jobless growth. for this reason, these subjects will be explained in detail. after explained these notions, the evaluation about meritocracy and jobless growth will be done. in addition, some proposals will be presented to eradicate the problem of jobless growth within the scope of meritocracy. meritocracy means a link between individual toil and qualification obtained by schooling (otero 2010, 399). in addition, race, gender, religious, class and other status indicators are not taken into account (schmidt 2005, 130). in other words, there is no distinction between an individual’s origin and his/her outcomes in life in a meritocratic system (longoria 2006, 4). as seen in a meritocratic system justice is included. however, without equality it does not mean any sense. by saying equality, it should be understood opportunity equality so that qualified people can participate in some beneficial actions for society gain. that’s why; meritocracy should be detailed to present both justice and equality. the three es of modern meritocracy are effort, education and exams (radnor, koshy, taylor 2006, 295): effort: merit consists of iq and attempts, meaning that meritocratic system clearly good, fair and desirable (reynolds, xian 2014, 122). education: if a modern education is based on a selection mechanism in a meritocratic system, it is very important to provide incentives for individuals to create economic efficiency and industrial development at an aggregate level (li 2001, 73). exams: the third element of meritocracy accounts for the functionalist idea which means that discrepancies in success should be induced different rewards (mijs 2015). gradstein (2004) comes up with three prepositions for the structure of meritocracy. to understand the importance of meritocracy, it becomes beneficial to evaluate these prepositions. firstly, if the degree of meritocracy is quite high in a society, the educational resources are distributed unevenly across individuals (gradstein 2004, 800). secondly, an increasing function of a child’s productivity is the preferred level of meritocracy (gradstein 2004, 801). third preposition is that compared to democratic administration, an elite administration is willing to be more meri12 tocratic (gradstein 2004, 802). theoretically, most of countries are democratic and in other countries are trying to be more democratic than that of now. and equal opportunity is for everyone. however, it is not enough for a meritocratic society. in addition, there should be justice. when these two are not realized, some structural problems can arise. one of these problems ref lects on labor markets as jobless growth. jobless growth can be seen in that while economy grows, employment growth will take negative values or zero in an economy (reber 2014, 5) and this can be evaluated theoretically by using labor market graphs. graph 1. labor market with meritocracy real wages 2 skilled wages rise labor b nssk a 1 skillbiased technical change occurs ndsk2 ndsk12 skilled employment rises s o u r c e : abel & bernanke 2001, 90. a labor market equilibrium can change whether there is meritocracy or not in an economy. the reason of this is that meritocracy can be seen a positive supply shock. on the other hand, if there is no meritocracy in an economy, negative supply shock will be seen in labor markets. and while meritocratic systems have benevolent effects for qualified workers, in the system which is not meri a solution to eradicate jobless growth: meritocracy 13 tocratic, unqualified workers can get advantage in entering labor market. and the assumption of meritocracy is a skill-biased technical change, if meritocracy is applied, more qualified workers can enter the labor market and the employment level and real wage will increase. graph 2. labor market with no meritocracy real wages labor b a nsunsk nsunsk 2 nsunsk 1 2 unskilled employment falls 2 unskilled wages fall 1 skill-biased technical change occurs s o u r c e : abel & bernanke 2001, 90. however, there can be seen negative technical change in a society without meritocracy. in that case, most of the qualified workers are not employed and instead, unqualified workers will place in labor market. however, because qualified are not included in the labor market, the outputs which need qualified labor to produce will decrease. although the economy will increase in initial stage, this increase cannot extend the capacity of economy. this results in excess employment and firms remove some workers to maximize their profits. consequently, while economy grows, employment will decrease. in other words, jobless growth occurs in such kind of economy. 14 saving insufficiency meets hot money, every economic growth cannot be employment-intensive, in developing countries, financial expansion and collapse period result in persistent distortion in labor markets and economic growth stages, the competition between the states which want to benefit from global capital and global capital is realized over labor price and wage, there is a substitution between technology and labor, legal arrangements are accepted as a burden for the capitalist system, social security contributions are seen as costs for the capitalists, globalization rarifies levying taxes on capital and increases tax burden for workers, outward-oriented capital markets and common financial speculative actions shrink labor-intensive sectors and increase underground economy and eradicate available job opportunities. at microeconomic level, saving is needed for individual consume. on the other hand, savings are an indicator for future economic growth in terms of macroeconomic level (karlan, ratan, zinman 2014, 36). theoretically, the sum of consumption, investments and government purchases are equal to gdp. and it is assumed that saving and investments are equal to each other. that’s why; in the case of increases of saving, it is easily said that a country grows. however, when there is insufficiency in terms of saving, and if this insufficiency is met by hot money, some problems arise in an economy like longterm unemployment. in fragile economies, domestic saving insufficiency is meet some ways like hot money. hot money is the money that immediately changes among financial markets in looking for the highest short term interest rate (allen 2009, 198). in fragile economies, hot money generally takes place and for a short term economic recovery can be seen. however, because this type of investment is withdrawn when a better alternative is found, economy meets a turbulence in terms of growth and employment. put it differently, while economic growth is seen by means of hot money, because there is no structural investment in economy, employment becomes zero or negative. this indicates that it is not a strictly link between economic growth and employment. as a result, jobless growth occurs due to domestic insufficiency. the dynamics of capitalism play an important role to see clearly the competition between capitalists and states which want to get benefit from the capitalists’ capital. a solution to eradicate jobless growth: meritocracy 15 the fundamental of dynamics in capitalism is that change in national income is equal to change in wages, change in capitalist surplus and surplus invested (lambert, kwon 2015, 4). for capitalists, wages are production costs. because of this and profit maximization incentives, they always want to pay low wages. so, there will be a trade of between wage and capitalist surplus for states and capitalists. and some strategies applied by capitalists and states will arise. each strategy has its pros and cons. firstly, if states present some privileges to capitalists, they can increase national income without thinking individuals’ welfare. however, states sometimes behave differently. secondly, as known, the aim of political parties is voting maximization. to realize it, they can present some facilities to voters by ignoring capitalists’ stakes. especially this type of behavior occurs before elections. in the first strategy, even if there is a potential for individuals to find a job despite of low wages, economy can grow with an increasing employment level. in the second strategy, because wages increase, so does national income because high wages have a potential to increase consumption. put it differently, national income will increase. but, at the end of this process because capitalists are ignored, job opportunities will decrease and so will employment level. in one hand economy grows, but on the other hand employment level will decrease. as a result, jobless growth occurs due to competition between states and capitalists. the aims of technology are to enable training to people for the creation of objects of value on behalf of consumers to improve active originative participation in useful activities and to improve the ability to make miscellaneous links between science and human necessities (sasova 2014, 56). as it is seen, although technology has some beneficial features, it is sometimes used contrary to employment level. for instance, if there is much automation by means of technology, a company does not need to employ a worker and by doing so it can maximize its profit and economy can grow. some legal arrangements like regulation and social security contributions are acknowledged as costs for firms and this undoubtedly affects employment policies and innately employment level. the regulation approach can help to form a connection between institutional forms and regularities of capitalist economies (jessop 1997, 288). due to profit maximization incentives, some firms have potential to be a natural monopoly. but this creates imperfection for lots of economies which try to form perfect competition markets. in that case regulations can be needed. 16 the regulations for natural monopolies are divided into three ways (çetin, rate of return regulation: firms gains do not exceed the service costs which are regulated. for this reason, the gains are restricted (çetin, price cap regulation: this type of regulation tries to enable firms some incentive regulation: this is a regulation method which is designed to enable utilities with incentives to reach specific targets, or to come across specific standards or to perform in a more economic way (mann 1997, 4). in a capitalist economy, there is a framework which consists of three levels. the top level is political authority, the middle level is regulators provided by political authority, regulations and institutions and the bottom level is formal markets (scott 2011, 43). among this system, some regulatory policies which are defined above are applied on monopolists. but monopolists generally do not like such policies since they decrease monopolist’s profits. however, since these policies are formed under legal constructions, monopolists have to obey these policies. so, monopolists still contribute to economic growth but with a lower employment rate. that’s why; jobless growth problem may arise in such economies. another example of legal arrangements is social security contributions paid by firms for workers. more employment means more social security contributions firms have to pay. because these contributions are assumed as costs by firms, firms may be unwilling to employ new workers. in this event, employment policies become unaffected and while economy goes on growing, employment level can be zero or negative. this is another aspect of the reason related to jobless growth. globalization is a vigorous process and its contemporary roots are based on disruption, protectionism and wretchedness of the great depression. three key elements indicate the process of globalization. first is a breaking down of international trade barriers, the second one is deregulation and privatization and the last one is international coordination (deprez 2014, 371). these elements undoubtedly can have an effect on taxation. the most prominent and significant effect of globalization on taxation can be seen in the taxation of capital income. because globalization causes financial liberalization and technological improvement, financial capital elasticity is a solution to eradicate jobless growth: meritocracy 17 equal to infinite, meaning that financial capital can easily leave a country with high tax rates and move into another country with lower tax rates since there is almost no barriers (seob 2014, 174). for this reason, the taxes which are not collected from capital gains are levied on labor and tax burden is imputed on workers. due to financial capital mobility, while economy can grow, employment will be fixed or will decrease. the reason of decreasing employment is that tax burden causes people who want to enter labor market discourage to find a job because working becomes more costly than being unemployed. in other words, tax burden on labor causes substitution effect to be greater than income effect. consequently, at the end of such stage, jobless growth will occur. capital markets which are open and financial speculation actions shrink traditional labor intensive sectors by changing economic structure. also, they increase underground economy, suppress real sector and by this way they erathe idea of that positions are obtained on the underpinning of merit rather than the features like patronage, seniority, gender and so on is a necessary principle of modern liberal democratic governance. if there is a competition among candidates, the strongest belief is that the best one is appointed consistent with his or her ability. another meaning of merit is related to the notion of desert and according to this meaning who deserves to appoint is the best person (thornton 2013, 129). this best person make meritorious decisions by thinking the questions associated with legality, trustworthiness, timeliness, transparency, sustainability, morality (godwin 2011, 318–319). however, to realize this affirmative meritocratic structure, an appropriate environment should be formed. two steps should be formed for such kind of meritocracy (walton, spencer, erman 2013, 11–22): creation of an environment which excludes biased thoughts; regarding the hidden ability in acceptance and employing. biased thoughts prevent selecting a qualified worker for the critical position in both public and private sectors. in private sector, main aim is profit maximization. to do this, this sector employs qualified workers. think that it would not employ such workers. instead, employment policies would consist of subjective criteria indicated above. this is nepotism and the end of nepotism is inefficiency. that’s why; for this association there would be two options. first 18 is that it takes a risk to go bankruptcy. theoretically, because the main aim is profit maximization, the owner does not desire this option. another option is that the owner lays the worker off whom he hires according to biased thoughts. in that case, the owner can go on his way and he forms new employment policies which provide employing qualified workers. in public sector, main aim is to provide services to its citizens. however, it doesn’t matter whether you realize most of services or not because other workers who are unqualified earn the same salary. but for a party which wants to maximize its votes, employing qualified workers is a better way to make voting maximization. and employing workers according to biased thoughts prevent workers from revealing his or her hidden ability. in addition, such a state turns into an autocratic state. to avoid such implications, main argument should be “s merits x in virtue of m” where s is person, x is outcome and m is ability possessed by m (mccrudden 1998, 547). suppose that s knows treating cancer (namely m). in that case s gets a high salary (x) above labor market equilibrium price. if employment policies should be like in this example, efficient-driven labor market will arise. to deserve x, however, people should have equal opportunity. that’s why; meritocracy should be rest on two ways which was practiced in 19th century in england to be a superior system (madan 2007, 3045): efficiency argument: selection should be accurate. in other words, there cannot be uncertain points in employing workers. equality argument: a pool should be form and all population places in there to be selected the best. these two arguments are strictly necessary. but, equality in opportunity is also necessary to operate the economic system efficiently. with private and public sectors which are full of qualified workers, an economy operates efficiently and jobless growth cannot be seen. the jobless growth problem can be analyzed by examining growth rates and unemployment rates of developing economies: a solution to eradicate jobless growth: meritocracy 19 table 1 countries 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 turkey 9.7 9.9 9.6 9.5 9.0 9.1 10.0 13.0 11.1 9.1 8.4 9.0 9.9 japan 5.3 5.2 4.7 4.4 4.1 3.8 3.9 5.0 5.0 4.5 4.3 4.0 3.6 mexico 2.8 2.9 3.6 3.4 3.5 3.6 3.9 5.3 5.3 5.1 4.9 4.9 4.9 new zealand 5.3 4.7 4.0 3.8 3.8 3.6 4.1 6.1 6.5 6.5 6.8 6.1 5.5 hungary 5.8 5.8 6.0 7.1 7.4 7.3 7.8 10.0 11.1 10.9 10.9 10.2 7.8 israel 12.7 13.2 12.8 11.2 10.4 9.1 7.7 9.4 8.3 7.1 6.8 6.2 6.0 portugal 5.0 6.2 6.6 7.5 7.6 7.9 7.5 9.4 10.7 12.6 15.5 16.1 13.7 estonia 11.1 10.4 10.0 7.9 5.9 4.5 5.5 13.4 16.5 12.2 10.0 8.6 7.3 slovenia 6.3 6.6 6.2 6.5 5.9 4.8 4.3 5.8 7.2 8.1 8.8 10.1 9.9 greece 10.3 9.7 10.5 9.9 9.0 8.3 7.7 9.6 12.7 17.8 24.4 27.4 26.4 s o u r c e : http://stats.oecd.org/index.aspx?queryid=51396 (accessed: 07.03.2015). table 2. growth rate as percentage countries 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 turkey 6.1 5.2 9.3 8.4 6.8 4.6 0.6 -4.8 9.1 8.7 2.1 4.1 2.9 japan 0.2 1.6 2.3 1.3 1.6 2.1 -1.0 -5.5 4.6 -0.4 1.4 1.5 0.3 mexico 0.1 1.4 4.0 3.2 4.9 3.1 1.1 -4.4 5.1 4.0 3.7 1.3 2.5 new zealand 4.8 4.3 4.3 2.6 2.2 3.3 -0.6 0.6 1.8 1.1 2.6 2.5 3.1 hungary 4.4 3.7 4.7 4.2 3.9 0.5 0.8 -6.5 0.7 1.8 -1.4 1.5 3.3 israel -0.1 1.0 5.0 4.3 5.6 6.1 3.9 1.5 5.7 4.1 2.9 3.3 2.5 portugal 0.7 -0.9 1.8 0.7 1.5 2.4 0.1 -2.9 1.8 -1.8 -3.3 -1.3 0.8 estonia 6.1 7.4 6.4 9.4 10.4 7.9 -5.3 -14.7 2.4 8.2 4.6 1.6 2.0 slovenia 3.8 2.8 4.3 4.0 5.6 6.9 3.3 -7.7 1.2 0.6 -2.6 -0.9 2.1 greece 3.1 6.5 4.8 1.1 5.7 3.3 -0.4 -4.3 -5.3 -8.8 -6.6 -3.9 0.8 s o u r c e : http://stats.oecd.org/index.aspx?queryid=51396 (accessed: 07.03.2015). when it is looked to the data above, it is easily seen that most of the breaking point is the year of 2009. the reason of this case is global financial crisis. that’s why; this also shows that most of the developing economies are fragile and it 20 should be searched for how to avoid such kind of cases. but, firstly, it is examined the jobless growth periods of developing countries. although there are strong job opportunities, unemployment increases because labor force in turkey enlarges quickly (world bank 2014). in addition, after 2010, turkey established new universities and graduated people have been attending to labor force. these reasons shed light on why turkey has jobless growth at the term 2012–2013. while growth rate increase – from 2.1% to 4.1% –, unemployment rate – 8.4% to 9.0% – will decrease in this period. labor market in japan has calmly retrieved in return for triggering fiscal stimulus and sequential economic growth (organization for economic cooperation and development 2014, 1). in addition, it has a strong economy. however, global financial crisis affected this economy. in terms of jobless growth, from 2008 to 2009 while growth rate increases, the employment rate will be almost fixed, meaning that jobless growth problem occurred in japan. in mexico, a global retardation started at the end of 2001 and this had an important effect on economic actions of mexico. domestic sources of mexico were insufficient for third reasons: first reason is insufficient level and quality of investment after 1995 and the second reason is credit squeeze after peso crisis, and the third reason is that high interest rates adversely affected investments. as a result, employment became fragile and the income was low and unstable (organization for economic cooperation and development 2004, 38– 39). for these reasons, mexico had some adverse economic implications like jobless growth. because while growth rate increased from 0.1% to 1.4%, the unemployment rate raised from 2.8% to 2.9%. after that time, mexico showed an important gdp growth rate which raise from 1.4% to 4.0%. nonetheless, labor force grew rapidly in mexico. in other words to say, mexico economy did not meet this capacity (organization for economic cooperation and development 2005, 29), meaning that despite of the increase in gdp, unemployment rate increased from 2.9% to 3.6% in 2003–2004 term. put it differently, mexico had jobless growth again. after global financial crisis, mexican government presented an anti-crisis package for unemployment. (organization for economic cooperation and development 2009a, 35). this case ref lected to employment level and unemployment rate stayed constant while gdp growth rate increasing sharply from 4.4% to 5.1%. so that, mexico had jobless growth problem at the term of 2008–2009. in 2012, a package reform, known as “pacte por méxico”, was accepted to reach a welfare position in economy (organization for economic cooperation and a solution to eradicate jobless growth: meritocracy 21 development 2015, 4). from this perspective, if examined, it is seen that gdp growth rate increased from 1.3% to 2.5% whilst unemployment rate remained same. to sum up, mexico experienced jobless growth four times in its 21st economic history. in terms of income level and output, new zealand showed a successful trend until 2007. however, this process shifted adversely after 2007. the international oil prices increased sharply, maintained high domestic growth pressed capacity, monetary policy was tightened, capital gains slowed, drought problem arouse and finally in 2008 growth rate was negative (organization for economic cooperation and development 2009b, 21). after that time, economy recovers in terms of gdp growth increased from -0.6% to 0.6%, but unemployment rate increased from 4.1% to 6.1% for the term of 2008–2009. after that, the effects of crises went on and while gdp growth rate increased from 0.6% to 1.8%, the unemployment rate rose from 6.1% to 6.5%. next year, gdp growth rate decreased. however, in the term of 2011–2012 gdp growth rate increased from 1.1% to 2.6% with an increased unemployment rate from 6.5% to 6.8%. hungary has also three experiences about jobless growth. the first term is 2003–2004. growth rate increased from 5.8% to 6.0% in that time, and unemployment rate increased too from 3.7% to 4.7%. the second term is 2007–2008. growth rate increased from 0.5% to 0.8%. and the last jobless growth period is 2009–2010 which growth rate increased from –6.5% to 0.7% as unemployment rate increased from 10.0% to 11.1%. israel lived jobless growth in the period of 2002–2003. growth rate increased from -0.1% to 1.0%. in addition, estonia had jobless growth problem just one term like israel. after global financial crisis, growth rate increased from -14.7% to 2.4% and unemployment rate also increased from 13.4% to 16.5%. another similar country is slovenia in which growth rate increased -7.7% to 1.2% as long as unemployment rate arouse from 5.8% to 7.2%, meaning that it had a jobless growth at that time. portugal demonstrated an interesting portrait. first jobless growth problem was experienced in 2003–2004 which growth rate increased from -0.9% to 1.8% as unemployment rate increased from 6.2% to 6.7%. the second one in 2005–2006 which growth rate increased 0.7% to 1.5% as unemployment rate increased from 7.5% to 7.6%. the third experience is 2009–2010 which growth rate increased from -2.9% to 1.8% as unemployment rate increased from 9.4% to 10.7%. and the last one is the period of 2012–203 which growth rate rose from -3.3% to -1.3% as unemployment raised from 15.5% to 16.1%. 22 the last country is greece. greece has two experiences about jobless growth. in the period of 2011–2012, growth rate increased from -8.8% to -6.6% as unemployment rate raised 17.8% to 24.4%. the second one is the period of 2012–2013. in this time, growth rate increased from -6.6% to -3.9%. at the same time unemployment rate rose from 24.4% to 27.4%. as seen above, every developing economy experienced jobless growth at least one time. however, the most remarkable point is that every economy has f luctuations in terms of growth and unemployment. because f luctuations have potential to rise jobless growth problem, one of the main and strong system – a meritocratic system – should be formed. however, some points ought to be materialized to from this system. these necessities are as follows: exams or interviews should be fair: exams and interviews are mostly selected methods to employ qualified workers. if these methods are used unfairly, some undesirable results can be turned up. these undesirable results lead to inefficiencies in both public and private sectors. if these inefficiencies turn up in private sector, most of firms can go bankruptcy and the government can intervene to private sector to provide equilibrium both for consumers and producers. on the other hand, if these inefficiencies turn up in public sector, important conf licts can arise in society and this can follow even a government change because equilibrium is also in public sector as well as in private sector. democracy standards should be high: democracy contains freedom and freedom brings creativity in personal ability. and a creative worker can produce qualified outputs. but this is not limited to workers. this is valid also for firms. in a freedom economic environment, perfect competition markets emerges and in a perfect competition markets, output quality will be better than that of previous situation. equal opportunity should be presented to every individual: there is elitism in a society which does not include equal opportunity. both the rich and the poor should obtain the same opportunities to prove their abilities. with equal opportunity principle, skilled but poor people can circumvent from poverty and gain status. as a result, such kind of societies can reach welfare and do not experience economic f luctuations. a solution to eradicate jobless growth: meritocracy 23 autocratic private and public structures should be destroyed: autocracy always presses people to show their abilities. the reason of this is that autocratic structures behave in a fordist manner. put it differently, individualism is absorbed. however, people should be creative to be obtained desirable results or outputs. thus, they should be behaved in a post-fordist manner. for instance, working conditions should be f lexible. a worker should not fell himself or herself under pressure. rather, the main focus ought to be on producing qualified output. extreme utility maximization should be prevented: in a fair society, every individual has right to maximize its utility for both private and public sector. nonetheless, in some extreme cases, there can be schism. and inefficient outputs result form these schism movements since these movements place important cornerstones in public and private sectors. promotions should be realized by using tax structures: regardless of the qualified or the unqualified, all workers pay income taxes. and the income tax means a decrease in disposable income for individuals. income taxes can be used for qualified workers as an incentive. moreover, this can cause for unqualified workers to increase their capacities. by this way, disposable income can be increased and both fairness and equality can be reached. the only condition for this is to change tax structures efficiently. in addition, pareto optimum is enabled because qualified workers 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(2013). affirmative meritocracy. social issues and policy review, 7(1), 1–35. http://dx.doi.org/10.1111/j.1751-2409.2012.01041.x. world bank (2014), turkey regular economic note, december 2014, ibrd-ida, https:// www.worldbank.org/content/dam/worldbank/document/eca/turkey/wb_tren_ 2014_2_03042014_eng.pdf (accessed: 07.03.2015). http://stats.oecd.org/index.aspx?queryid=51396 (accessed: 07.03.2015). copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 3 issue 2 2014 biannual finance & accounting 2012 volume 1 copernican journal of biannual issue 1 uniwersytet mikołaja kopernika w toruniu nicolaus copernicus university editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz secretary: dr damian walczak scientific council prof. dr. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. dr. juan-antonio mondéjar-jiménez, universidad de castilla – la mancha, spain prof. dr hab. stanisław owsiak, uniwersytet ekonomiczny w krakowie, cracow university of economics, poland prof. dr hab. wiesława przybylska-kapuścińska, uniwersytet ekonomiczny w poznaniu, poznan university of economics, poland prof. dr. sandra isabel gonçalves da saúde, instituto politécnico de beja, portugal prof. dr hab. małgorzata zaleska, szkoła główna handlowa w warszawie, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk p o l i s h p r o o f r e a d e r : dr dominika wojtasińska e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. dr. catherine deffains-crapsky, université d’angers, france prof. dr hab. jerzy gierusz, uniwersytet gdański, gdansk university, poland prof. dr. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. miloš král doc. ing., tomas bata university in zlín, czech republic prof. dr. adalmiro pereira, politécnico do porto, portugal prof. dr hab. bogusław pietrzak, szkoła główna handlowa w warszawie, warsaw school of economics, poland prof. dr hab. waldemar tarczyński, uniwersytet szczeciński, szczecin university, poland prof. titular gerard olivar tost, national university of colombia, colombia prof. siniša zarić, ph.d., university of belgrade, serbia prof. dr hab. jan turyna, uniwersytet warszawski, warsaw university, poland prof. dr hab. maciej wiatr, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr hab. andrzej cwynar, prof. wsei, wyższa szkoła ekonomii i innowacji, university of economics and innovation, poland dr hab. joanna wielgórska-leszczyńska, prof. sgh, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr tomáš heryán, silesian university, school of business administration, czech republic dr wojciech piotrowicz, university of oxford, great britain c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2014 copyright by uniwersytet mikołaja kopernika toruń 2014 editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone +48 56 611 40 10, kontakt@umk.pl, www.umk.pl print: drukarnia wn umk, printed in 300 copies icv 2013: 6.55 table of contents leszek dziawgo introduction ........................................................................................................................... 7 leszek dziawgo greening financial market ................................................................................................. 9 bogna janik market and non-market factors influencing the development of green energy producers ............................................................................................................................ 25 marcin kalinowski stock exchanges sustainability support assessment ...................................................... 37 anna karmańska the imperative of sustainable growth and reporting integration. the fourth era in the corporate reporting development ........................................................................ 49 stanisław kasiewicz, lech kurkliński problems of regulations for sme in poland – institutional and cultural context ........... 67 nadezda kirillova regulation of financial condition insurers in the russian federation and assessment the insurers by insured ........................................................................... 79 kamil nowak advanced private banking in terms of ecology ............................................................. 91 dariusz piotrowski the financial aspect of intergenerational solidarity from the point of view of the senior .................................................................................................................................. 111 michał ptak environmental charges levied on power plants ........................................................... 127 anna pyka, joanna błach business-to-business platforms as a part of e-commerce – possibilities of practical use by polish enterprises .................................................................................................. 137 sandra saúde, carlos borralho, isidro féria, sandra lopes the impact of a higher education institution on socioeconomic development – the study case of the polytechnic institute of beja, portugal .................................. 151 adam zaremba, radosław żmudziński ipo initial underpricing anomaly: the election gimmick hypothesis ......................... 167 for authors ......................................................................................................................... 182 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: august 18, 2014; date of acceptance: october 1, 2014. * contact information: ldziawgo@econ.umk.pl, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: 56 611 22 83. dziawgo l. (2014). greening financial market. copernican journal of finance & accounting, 3(2), 9–23. http://dx.doi.org/10.12775/cjfa.2014.014 leszek dziawgo* nicolaus copernicus university greening financial market keywords: ecology, corporate social responsibility, financial market. j e l classification: g11, g21, g23, q56. abstract: the idea of corporate social responsibility is one of the most inspiring ideas in modern business, also even in financial business. csr, already widely implemented in economy, contains significant ecological components. nowadays, around the world many leading banks, investment funds, pension funds, insurance companies and public companies, use environmental aspects in their business. the growing and diversified ecological engagement of different financial institutions could be even called ecological evolution of financial business. the same process has started also in poland. the financial institutions support natural environment in many ways: saving resources, financing proecological organizations, maintaining adequate pr and ir communication and even offering special financial products such as: deposits, payment cards, shares, bonds, investment funds and specialized stock index respect. especially, the new investment possibilities are clear evidence of positive changes of the polish financial market. the aim of the elaboration is to indicate the phenomenon of environmental rules implementation in polish financial business. the considerations in the article are focused on financial offer related to natural environment protection. the issue is presented in two aspects: theoretical and empirical. in the article, critical analysis of literature and reports, analysis of financial market data, induction method and comparison method have been used. especially, selecleszek dziawgo10 ted financial products offered on polish financial market were analysed in the period of 2008–2014 in respect to ecological criteria. the problem of financial market “ecologization” is a very important subject of scientific research. the process is not only very inspiring, but also controversial. zieleniejący rynek finansowy słowa kluczowe: ekologia, społeczna odpowiedzialność biznesu, rynek finansowy. klasyfikacja j e l: g11, g21, g23, q56. abstrakt: idea społecznej odpowiedzialności biznesu jest jedną z najbardziej inspirujących idei współczesnej gospodarki. staje się coraz popularniejsza również na rynku finansowym. jak wiadomo, idea csr dotyczy także ochrony środowiska w prowadzonej działalności gospodarczej. celem opracowania jest zwrócenie uwagi na ekologiczną ewolucję postępującą na rynku finansowym, ze szczególnym uwzględnieniem polskiego rynku finansowego. wprawdzie instytucje finansowe wspierają ochronę środowiska na wiele sposobów, to jednak wiodącym tematem rozważań teoretycznych oraz analizy przypadków praktycznych jest oferta produktów i usług finansowych (wybrane produkty i usługi oferowane w latach 2008–2014). zwrócono uwagę także na istotne aspekty kontrowersyjne idei csr.  introduction the idea of corporate social responsibility is one of the most inspiring ideas in modern business, also even in financial business. csr, already widely implemented in economy, contains significant ecological components. nowadays, around the world many leading banks, investment funds, pension funds, insurance companies and public companies, use environmental aspects in their business. the growing and diversified ecological engagement of different financial institutions could be even called ecological evolution of financial business. the same process has started also in poland. the new trend in financial business is visible. the financial institutions support natural environment in many ways: saving resources, financing proecological organizations, maintaining adequate pr and ir communication and even offering special financial products such as: deposits, payment cards, shares, bonds, investment funds and specialized stock index respect. especially, the new investment possibilities are clear evidence of positive changes also of the polish financial market. the aim of the elaboration is to indicate the phenomenon of environmental rules implementation in financial business, especially on polish financial mar greening financial market 11 ket. the issue is presented in two aspects: theoretical and empirical. in both areas it is possible to indicate strengths and weaknesses of the ecological evolution idea. theoretically, ecological evolution of financial business is not only inspiring, but also controversial. the scale and quality of this process is one of the crucial points for modern economy & society. the strong hope for better economy and finance is also connected with serious doubts concerning the trustworthiness of ecological policy of financial institutions. one of the problems is: how much the implementation of ecological rules is a matter of necessity, and how much this process is a matter of naivety. empirically, there is a lot of significant evidence of convincing engagement of financial business in natural environment protection. the wide range of its proecological activities is really impressive. however, in this article considerations are focused exclusively on financial products related to natural environment protection, since this kind of activity requires, probably, the highest proecological engagement of financial institutions. to sum up, undoubtedly, the ecological challenge in financial sector is a very important subject of scientific research. the research methodology and the course of the research process in the article, critical analysis of literature and reports, analysis of financial market data, induction method and comparison method have been used. especially, selected financial products offered on polish financial market were analysed in the period of 2008–2014 in respect to ecological criteria. the research process was supported by santander universidades within program ecofin. proecological activities on the international financial market for years, financial market has been involved in supporting proecological transformation of the society and economy and, at the same time, it has been evolving slightly towards “greening” financial market. it is possible to indicate several types of proecological activities in financial business. up to now, many leading commercial financial institutions have started (scheme 1) (dziawgo 2003): ■ saving natural resources, ■ undertaking supporting activities (sponsoring, marketing, education activities), leszek dziawgo12 ■ undertaking relationship activities (public relations, investor relations), ■ implementing ecological aspects in financial transactions (dziawgo, dziawgo 2014). from the theoretical perspective, all the indicated proecological activities can be also classified as internal environmental care (reducing direct environmental impact – e.g. saving resources) and external environmental care (reducing indirect environmental impact – e.g. ecological risk assessment in financial transactions) (jeucken 2004, 239). scheme 1. types of proecological activities of financial market institutions ing resources) and external environmental care (reducing indirect environmental impact e.g. ecological risk assessment in financial transactions) (jeucken 2004, 239). scheme 1. types of proecological activities of financial market institutions source: own elaboration. probably, after so many years of proecological policy in financial business, the best known activity of financial institutions for natural environment is saving natural resources by organizing proecological office work. financial institutions have a relatively very low direct environmental impact. however, to be more ecologically friendly, commercial financial institutions in everyday office work begin to save resources such as: electric energy, heating energy, water, and paper. it is important even to reduce the number and length of business trips due to the greenhouse effect. certainly, this kind of activities save not only natural resources but also costs. the second mentioned activity undertaking supporting activities concerns financial support of ngo’s (specializing in natural environment protection), marketing and education activities, also for staff. the financial support of proecological ngo’s is very popular and effective in the creation of ecological image of financial institutions. the third type of activities – undertaking relationship activities concerns communication and reporting with the use of ecological aspects to external (e.g. journalist) and internal (shareholders) stakeholders. the adequate presentation of ecological data of their own business activities to both groups of stakeholders is very important due to public assessment of the ecological quality of financial institutions. the last mentioned activity concerns using ecological aspects in financial transactions. as an example we can quote: types of proecological activities saving natural resources supporting activities relationship activities eco-aspects in financial transactions s o u r c e : own elaboration. probably, after so many years of proecological policy in financial business, the best known activity of financial institutions for natural environment is saving natural resources by organizing proecological office work. financial institutions have a relatively very low direct environmental impact. however, to be more ecologically friendly, commercial financial institutions in everyday office work begin to save resources such as: electric energy, heating energy, water, and paper. it is important even to reduce the number and length of business trips due to the greenhouse effect. certainly, this kind of activities save not only natural resources but also costs. the second mentioned activity – undertaking supporting activities – concerns financial support of ngo’s (specializing in natural environment protection), marketing and education activities, also for staff. the financial support of proecological ngo’s is very popular and effective in the creation of ecological image of financial institutions. the third type of activities – undertaking relationship activities – concerns communication and reporting with the use of ecological aspects to external (e.g. journalist) and internal (shareholders) stakeholders. the adequate presentation of ecological data of their own business activities to both groups of greening financial market 13 stakeholders is very important due to public assessment of the ecological quality of financial institutions. the last mentioned activity concerns using ecological aspects in financial transactions. as an example we can quote: ■ assessing of ecological risk in loan business (this kind of activity leads to the reduction of credit risk), ■ offering special financial products and services related to natural environment protection. especially, this kind of proecological business activities are not widely known. investment funds and asset management companies invest capital collected from customers in securities (equities, bonds) of ecologically friendly issuers which are public traded companies. also banks collect customer savings and invest capital in loans for proecological projects. there is a lot of ecological diversified investment offers in financial business and their number is growing (werner 2009; dziawgo 2010). all proecological activities mentioned above are undertaken due to legal regulations, risk avoidance, profitability, and the pressure of shareholders, customers, investors and the public (dziawgo 2010). the main aim of all these activities is to be clearly distinguished from other competitive financial institutions. the creation of ecological image by reducing risk and costs in financial business is, at the same time, useful for both natural environment and business condition. critical assessment of ecological evolution on the international financial market a lot has been already done for natural environment. these up to date achievements of commercial institutions should be really appreciated. however, it is also possible to indicate some important controversial aspects concerning ecological engagement of financial business. the aim of the critical attitude to ecological activities is not to discredit, but to explain that and, in result, to improve the process of ecological evolution of financial market. corporate social responsibility and natural environment protection, although more and more popular in everyday business activity, are also to some extent controversial issues, including not only some minor doubts but serious and robust critical voices. in many cases this criticism is really well-founded and concerns both areas of csr concept functioning as theoretical (theory) and practical (implementaleszek dziawgo14 tion). in both above mentioned areas of csr concept including ecology, criticism concerns the following aspects: ■ real motives of csr principles implementation, ■ scale of csr activities, ■ way of putting csr principles into practice and ■ effectiveness of csr activities. the consideration of the controversial aspects of ecological activities in financial business could be started with the problem of real motives csr principles implementation in business practice. the issue is of a fundamental importance for csr idea. unfortunately, there is absolutely no certainty about the main reason of csr principles implementation: saving costs, supporting sales or real belief not to harm natural environment. none of the above motives exclude each other, but doubts still exist. the same problem concerns scale and effectiveness of all ecological activities in financial business. separately, the case of csr – concept functioning under the conditions of financial crisis should be considered. the current crisis has resulted in the expected changes of priorities in financial business. in such circumstances the first main target is to continue business activity and save financial institutions from bankruptcy. the ecological aspects are of less importance. the financial crisis is also a crisis of trustworthiness and one should be reminded that financial institutions are institutions of public trust, or at least they should be. the financial crisis reveals an enormous scale of some financial institutions ruthlessness. the question is obvious: could the same institutions be, at the same time, really ecologically friendly. the great and diversified ecological engagement of different financial institutions comparing to their huge potential in economic and social life does not look great and diversified enough. this is the next serious problem. many financial companies undertake some single and superficial ecological initiatives instead of systematic approach, only to create their positive ecological image. moreover, on the financial market there are even examples of misappropriation of ecological image. concluding, creating adequate attitude of financial business to natural environment protection is still a challenge. however, some financial institutions have already started wide, diversified and integrated proecological activities establishing complex system of ecological behaviour of financial business company. greening financial market 15 international financial market: ecological investment and activities – selected examples according to a reliable estimation, already billlions eur all over the world are invested in respect to social criteria. a part of it is invested also in respect to ecological criteria (upgang 2009, 60–69; gabriel 2007, 82–85; rotthaus 2009, 43–45). a significant share of this investment business is held by europe (european sri study 2010; 2012). there are many forms of social and ecological investments and activities. below some selected examples of ecological engagement are presented. in the international financial market hundreds of so called ethic-ecological investment funds (csr – and eco – investment funds) operate and they are becoming very popular1. recently, one of very dynamic markets for this kind of investment activities is german-speaking europe2. the value of this market is already almost 23 billion eur (2011 – 18 billion eur) (table 1) (oeko-invest 2001, 487; deml, blisse 2011). table 1. csr – investment funds in german-speaking europe 2014 specification number amount (eur mill) equity funds 108 15,125 bond funds 37 4,719 mixed funds 18 2,292 etf 7 597 money market funds 2 119 fund of funds 9 129 total 181 22,981 s o u r c e : oeko-invest 2014, 546. 1 more about investment criteria see: ulshoefer g. & bonnet g. (2009), corporate social responsibility auf dem finanzmarkt, wiesbaden: vs verlag fuer sozialwissenschaften, 45–63; dziawgo l. (2010), zielony rynek finansowy, pwe, warszawa, 94–106; vigeo.com (accessed: 15.07.2014); krupa d. (2013), fundusze sri we francji, 125–133 [in:] rola instytucji i rynku finansowego w świetle celów oraz zasad zrównoważonego rozwoju, g. borys, a. janusz (eds.), ue wrocław. 2 germany, austria, switzerland, luxembourg. leszek dziawgo16 a significant part of the above mentioned csr/eco-funds belongs to the banks: deutsche bank, credit suisse, allianz, fortis, ing, kbc, pictet, raiffeisen, sarasin, seb, ubs, zkb, and hsbc. some banks are really deeply involved in socially and ecologically responsible investment. as a good example, a swiss bank sarasin can be presented. it specializes in advanced banking business such as private banking & wealth management. the bank offers several csr-investment funds (table 2). the first of them was launched already in 1994. table 2. csr investment funds of sarasin (2011–2014) name type 2011 – value: m eur 2014 – value: m eur year of launching sarasin new power fund equity fund 97 39 2007 sarasin oekosar equity global equity fund 257 168 2005 sarasin sustainable equity europe equity fund 65 63 2008 sarasin sustainable equity global equity fund 59 68 1999 sarasin sustainable equity global – emerging markets equity fund 49 51 2010 sarasin sustainable equity real estate global equity fund 34 20 2007 sarasin sustainable equity switzerland equity fund 301 424 1994 sarasin sustainable equity usa equity fund 89 30 2010 sarasin sustainable water equity fund 248 242 2007 sarasin sustainable bond ch bond fund 112 74 2001 sarasin fairinvest bond universal bond fund 32 19 2002 sarasin sustainable bond eur bond fund 151 153 2003 sarasin fairinvest universal mixed fund 163 209 2001 sarasin oekosar portfolio mixed fund 192 239 1994 s o u r c e : oeko-invest 2011, 487; oeko-invest 2014, 546. the banking sector offers clients the opportunity to invest in a socially & ecologically responsible way not only through csr-funds, but also through offering asset management and wealth management or deposits related to financing proecological projects. another way of ecological investment is investing capital in loans for ecologically friendly companies. moreover, apart from typical commercial financial institutions, in the financial market operate even greening financial market 17 some specialized banks supporting natural environment in economy – so called ecological banks (umweltbank – germany, bank ochrony środowiska – poland). for better proecological investing institutional and individual investors use specialized capital market indices such as: dow jones sustainability index, ft se4good, nasdaq clean edge index, s&p global water index, s&p global clean energy index. such indices facilitate indicating appropriate investment objectives and measuring their effectiveness. also, implementation of procedures related to reducing credit risk by recognition and assessment of ecological risk in loan business can be indicated as a good example of positive evolution towards natural environment protection in modern financial business. business activities of swiss bank credit suisse can be presented as good practice in this area. some of credit suisse customers operate in environmental sensitive industries such as: forestry, mining, energy, gas & oil, and chemicals. transactions with these customers are specially treated by the bank. according to the data, only in 2010 in the scope of sustainability risk assessment 279 transactions in both americas, europe, asia and africa were assessed (mining 105, forestry 38, oil & gas 50, energy 24, others 62) (corporate 2011). the next type of ecological engagement are activities focused on saving resources – already a substantial part of all ecological activities in financial business. that kind of ecological policy increases the ecological value of shares of financial companies. in many leading banks there were already implemented fully integrated and advanced sustainable management systems. one of such banks is deutsche bank. its system deals with all social and ecological activities of the bank, such as: water use, energy use, paper use, business trips, financial products, cooperation with ecological organizations and many others. the headquarters of the bank in frankfurt after renovation are regarded as one of the most eco-friendly high-rise buildings in the world (so-called “green towers”). already eight bank buildings were awarded with leed (leadership in energy and environmental design) – 4 in the usa, 3 in europe and one in india. even in wealth management business deutsche bank has launched specialized financial products (gesellschaftliche 2010). moreover, the leading financial institutions compete for the quality of social and ecological engagement. banco santander is a good example of this international competition. the bank in the year 2012 was acknowledged by bloomberg markets magazine as ‘world’s greenest bank’, and in 2013 as ‘sustainable leszek dziawgo18 global bank of the year’ by financial times and international financial corporation (ifc). in closing, the international activities of financial institutions dealing with ecology should be also raised, such as: unep-fi (united nations environment programme – finance initiative), pri (principles for responsible investment), epfi (equator principles financial initiative), un global impact, wbcsd (world business council for sustainable development) or gri (global reporting initiative). all the above mentioned specific examples of proecological activities of modern financial markets can be treated as clear evidence of greater proecological engagement of financial business in natural environment protection. however, the crucial point is to use adequately, effectively and reliably the huge financial potential of financial business to support natural environment in economy. polish impact the polish financial market also evaluates towards csr including ecological criteria. for the first time, poland was presented in the acknowledged european sri study in 2010 edition (european 2011). obviously, only part of polish sri investment can be classified as ecological. below, some specific examples of proecological financial products of polish financial institutions are indicated (scheme 2). the presentation of financial offers should be started from bank ochrony środowiska (bank of natural environment protection – which is a universal commercial bank – a unique financial institution specializing in financing eco-friendly business annual 2011). a general assumption of “ecological bank concept” is an entire subordination of all business activities to ecological rules based on economic calculations. according to the above mentioned assumption, the ecological bank collects capital (deposits, bonds, stocks) only for financing business projects of excellent ecological quality. the financed projects are evaluated in the bank with ecological and economic respect. such a clear treatment of capital seems to be a very competitive advantage. the bank belongs to the group of medium size banks in poland with the value of balance sheet – more than 4.4 billion eur (www.bosbank.pl 2014). the additional and important advantage of the bank is the fact that the bank is listed on the warsaw stock exchange (wse). to promote environmental business projects the bank cooperates with some international financial institutions such as: european investment bank greening financial market 19 (eib), the council of european development bank (ceb) and kf w kreditanstalt fuer wiederauf bau. the bank supports natural environment in different areas – not only in business, which is confirmed in 2011 by “green office” certificate awarded by the environment partnership foundation. scheme 2. financial products related to natural environment protection. poland 2008–2014 scheme 2. financial products related to natural environment protection. poland 2008-2014. source: own elaboration. the presentation of financial offers should be started from bank ochrony środowiska (bank of natural environment protection – which is a universal commercial bank – a unique financial institution specializing in financing eco-friendly business annual 2011). a general assumption of “ecological bank concept” is an entire subordination of all business activities to ecological rules based on economic calculations. according to the above mentioned assumption, the ecological bank collects capital (deposits, bonds, stocks) only for financing business projects of excellent ecological quality. the financed projects are evaluated in the bank with ecological and economic respect. such a clear treatment of capital seems to be a very competitive advantage. the bank belongs to the group of medium size banks in poland with the value of balance sheet – more than 4.4 billion eur (2014; pro-ecological financial products bank ochrony środowiska investment funds structured products offer identification and measurement index respect (wse – warsaw stock exchange) deposits accounts loans domestic foreign wse otc bonds certificates others payment products ecological risk payments cards credit risk s o u r c e : own elaboration. many financial products offered by the bos bank in the period of 2010–2013 can be indicated as useful for natural environment – below are some examples of loans products: ■ sunny ecoloan (financing solar collectors), ■ environmentally friendly mortgage (financing energy efficient housing), ■ good energy loan (financing renewable energy), ■ ecosaving loan (financing saving energy, heat, water), ■ loan with a climate (financing projects limiting co2 emissions) (ecological 2011; 2013). leszek dziawgo20 also deposit products offered by the bank can be acknowledged as very inspiring such as special deposits related to protection of selected endangered species. in this way, clients and the bank together support natural environment. the product has already been used for protection of such species as: wolf, stork, wildcat, gopher, moose, buzzard, and owl. the second example of positive changes on polish financial market is index “respect” launched on warsaw stock exchange (wse) in november 2009 as the first csr index in eastern and central europe. the name “respect” is an acronym of words: responsibility, ecology, sustainability, participation, environment, community, and transparency. at the beginning, new wse-index “respect” consisted of shares of the best 16 public companies from ecological, social and also economic point of view. the index is permanently developing and in 2014 it was expanded to 22 public companies. moreover, this part of companies represent important part of polish capital market. the number of public companies including in respect index represents approximately 5% all listed companies, but approximately 27% stock market capitalization. the representation of csr companies is even more visible in the most important wse index – wig30. as many as 12 companies from this index are included in respect index. it represents approximately 40% all companies and approximately 46% capitalization of wig30. another example from the polish capital market is offering investment certificates, structured products and bonds related to natural environment protection. financial institutions have already offered the following products: “good energy” and “green energy” (offered by bre bank); “alternative energy”, “forestry”, “climate protection”, “water” (offered by raiffeisen bank and listed on wse); “friendly planet” (offered by bz wbk santander group and listed on wse); “new energy” (offered by barclays and listed on wse). one of the eco-products are also bonds issued by bank ochrony srodowiska. the next example of proecological engagement is an activity of ethical & ecological investment funds. in the polish capital market operate the following funds: dws climate change, allianz ecotrends, skok etyczny 1, skok etyczny 2, pzu energia medycyna ekologia, conerga greenenergy, bgf new europe, arka bz wbk energia (santander group) and several more (dziawgo, dziawgo 2009). a part of them are offered by foreign financial institutions. in turn, the first polish investment fund specializing in such investments was skok etyczny 1 launched by skok in 2008. the same capital group offered the next ethical-ecological investment fund in 2010 – skok etyczny 2 (www.skok.pl). greening financial market 21 the fifth example is csr and ecological reporting. many public companies publish information and reports related to ecological issues (dziawgo 2011, 229–236). the bank bre as the first in poland has implemented gri standards publishing special csr annual reports. some other banks and public companies publish separated and specialized annual reports, such as millennium bank (since 2006) or bank zachodni wbk santander group (since 2013). however, the most popular form of presentation of ecological engagement are company websites used in the scope of investor relations activities (dziawgo d. 2010, 276–277). the scale of activities of financial business for natural environment protection in saving energy, heat, and water is really growing. there are numerous of examples. one of them concerns so-called green branch idea. deutsche bank opened in 2010 the first in poland green branch acknowledged by leed gold certificate and already in 2013 bank zachodni wbk (santander group) confirmed green branch certificate for its 33 its branches in warsaw and wroclaw (raport 2013). also in payment area ecological changes are visible. a good example is offering payment cards in association with acknowledged ecological organizations such as wwf – world wide fund for nature. the special product of millennium bank is affinity payment card of mastercard. a part of its fee is dedicated to wwf. the above mentioned facts lead to the conclusion that new trends are visible also on the polish financial market, where polish and foreign investors have a wide range of investment offers related to natural environment.  conclusions – challenges ahead the csr idea is one of the most inspiring ideas in modern science and business. with the same words also ecological evolution of modern financial market can be described. we all hope for better and fair economy and finance. we also hope that social and ecological changes in finance begin a long and hard process of financial business adjustment to requirements of modern society. in this process a greater and more critical engagement of science is needed. unfortunately, although the process is promising it is also controversial. the same concerns ecologically responsible investment, as well. after so many years of growing and diversified ecological engagement of financial institutions also this kind of eco-financial activities is finally more significant leszek dziawgo22 and, at the same time, gives customers new possibilities of investing capital also on the polish market. creating a new proecological model of functioning of financial market we still face a number of challenges. one of them is to use adequately, effectively and reliably the huge financial potential of financial business to support natural environment in economy. the next one is to gain higher awareness and stronger public support for the green evolution of financial business. this is also a great scientific challenge. the green evolution of financial market requires detailed analyses of offers, investment motives, portfolio selection, effectiveness, risk and other factors. indicating directions of future research it is necessary to create international and interdisciplinary research teams. the use of selected and diversified methods should be focused not only on financial market, but also on society and natural environment. such a wider approach seems adequate.  references annual report 2010 (2011), bank ochrony środowiska. corporate responsibility report 2010 (2011), credit suisse. deml m. & blisse h. (2011), gruenes geld, hampp verlag, stuttgart. dziawgo d. & dziawgo l. (2014), bankowość wobec kluczowych wyzwań ekonomiczno-cywilizacyjnych. ochrona środowiska naturalnego w działalności bankowej, 143– 158 [in:] banki w społecznej gospodarce rynkowej. w świetle doświadczeń z kryzysu i stanu rozwoju rynku finansowego, s. flejterski, a. gospodarowicz (eds.), związek banków polskich, warsaw. dziawgo d. (2010), relacje inwestorskie, pwn, warsaw, 276–277. dziawgo d. (2011), raport roczny w internecie, 229–236 [in:] raport roczny spółki publicznej, w. frąckowiak (ed.), instytut rachunkowości i podatków, warsaw. dziawgo l. & dziawgo d. (2009). umweltorientierte finanzmarktprodukte und aktivitaeten in polen, oeko-invest, 427. dziawgo l. (2003), eco-offers of banks and investment funds. poland & international trends, umk, torun. dziawgo l. (2010), zielony rynek finansowy. ekologiczna ewolucja rynku finansowego (greening financial market. eco-evolution of financial market), pwe, warsaw. ecological report 2011 (2011), bank ochrony środowiska. ecological report 2013 (2013), bank ochrony środowiska. european sri study 2010 (2011), eurosif, www.eurosif.org (accessed: 10.06.2014). european sri study 2012 (2013), eurosif, www.eurosif.org (accessed: 10.06.2014). gabriel k. (2007), nachhaltigkeit am finanzmarkt, oekom verlag, muenchen. greening financial market 23 gesellschaftliche verantwortung (2010), bericht, deutsche bank. jeucken m. (2004), sustainability in finance. banking on the planet, eburon delft, delft, 239. krupa d. (2013), fundusze sri we francji, 125–133 [in:] rola instytucji i rynku finansowego w świetle celów oraz zasad zrównoważonego rozwoju, g. borys, a. janusz (eds.), ue wrocław. oeko-invest (2011), 487. oeko-invest (2014), 546. raport csr 2013 (2014), bank zachodni wbk grupa santander. rotthaus s. (2009), erfolgreich investieren in gruene geldanlagen, campus verlag, frankfurt/new york. ulshoefer g. and bonnet g. (2009), corporate social responsibility auf dem finanzmarkt, vs verlag fuer sozialwissenschaften, wiesbaden, 45–63. upgang m. (2009), gewinn mit sinn, oekom verlag, muenchen. werner t. (2009), oekologische investments, gabler, wiesbaden. www.bosbank.pl (accessed: 14.07.2014). www.skok.pl (accessed: 12.07.2014). www.vigeo.com (accessed: 15.07.2014). date of submission: march 26,2021; date of acceptance: may 2,2021. * contact information: dawittadesse9053@yahoo.com, gamby medical and business college and addis ababa university school of commerce, ethiopia and managing partner of lead plus consulting, ethiopia, phone: 251911109648; orcid id: https://orcid.org/0000-0001-5885-6539. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 3 tiruneh, d.t. (2021). the perspective of corporate governance on the interactions of internal audit with management and its impact on the internal –external audit linkages. copernican journal of finance & accounting, 10(3), 51–70. http://dx.doi.org/10.12775/cjfa.2021.011 dawit tadesse tiruneh* gamby medical and business college the perspective of corporate governance on the interactions of internal audit with management and its impact on the internal – external audit linkages keywords: management, external audit, internal audit, corporate governance, internal-external audit linkages, ethiopia. j e l classification: m10, m12, m14, m16, m42, l20. abstract: literatures based on developed countries suggest an interaction of internal audit with management has impact on the internal-external audit linkages and the interactions and linkages have their own contribution toward the realization of good corporate governance. nevertheless, these interactions have not been sufficiently explored in developing countries such as ethiopia. this quantitative research examines in the form of explanatory study the interaction of internal audit with management and its impact on the internalexternal audit linkages in ethiopia. by doing so, it explained the causal relationship between variables through hypothesis testing. the research method of this study was a constructed questionnaire, which was sent to companies and to the 100 top management, internal auditors, and external auditors in ethiopia. as it has been examined, existing findings suggest that organizations can enhance corporate governance’s effectiveness by strengthening the interactions of internal dawit tadesse tiruneh52 audit with management and in the meantime as the result of this impact by upgrading the internal-external audit linkages. in line with this, the results indicate interactions of internal audit with management depend on the level of the result of internal audits’ effectiveness, as the result, it positively moderates the internal-external audit linkages.  introduction it has been broadly perceived that the job of the internal auditor turns out to be progressively more significant as far as making great corporate governance structures (allegrini, d’onza, paape, melville and sarens, 2006; carcello, hermanson & raghunandan, 2005; nagy & cenker, 2002). in such manner, internal auditor relationship with directorate (or managment) is viewed as of essential significance to accomplish sound corporate governance (maletta, 1993; messier & schneider, 1988). for renard (2006), such an association permits internal auditors to completely practice their job as the executive’s advisors, communicating with senior management’s and all degrees of the management’s. as per the organization’s hypothesis (adams, 1994), internal auditor report shows up as a component to control the conduct of the supervisors if managements have completely regarded all their legally binding commitments. rezaee (1996) expressed the burden of this association as « cop of the management’s », which doesn’t completely mirror its actual part during the time spent danger the executives, creation and advancement. then again mihret and woldeyohannis (2008), mihret and yismaw (2007), roth (2000) express that internal auditor report adequacy as estimated by the management’s acknowledgment and execution of internal auditors discoveries and suggestions may affect on external auditor dependence on internal audit work. corporate governance is required to improve the part of the internal auditor; and simultaneously, the internal auditor likewise gives advantages to the external auditors (holm & laursen, 2007). meanwhile, collaboration among internal and external auditors would be one method of making the worldwide auditors measure more productive and powerful (felix, gramling & maletta 1998, 2001; moore & hodgson, 1993). coordination of internal and external audit reports, has gotten impressive consideration particularly in the course of the most recent decade because of the agreement that hearty corporate governance frameworks help limit the staggering effect of corporate breakdown (rusak & johnson, 2007). in such manner, this examination is started to embrace this investigation in light of a few reasons. in the first place, research has been done on depend the perspective of corporate governance… 53 ence of external auditors on internal audit work: a corporate governance point of view by the instance of firms in growing yet next to no is thought about the communications of internal audit with the management’s and its effect on the internal and external audit linkages in developing nations such as ethiopia (mihret & admassu, 2011). in the meantime, to the knowledge of this article writer, in this topic there is no single study found in ethiopia. in this regard, this research will fill the literature review gap. second, this exploration on these associations will give some important experiences on the matter. the exploration directed by endaya and hanefah (2013) states that the attributes of internal auditor reports directed by the management’s backing can improve the viability of internal audit. the executives backing can be found in a few structures, for example, helping the group in dealing with snags, showing obligation to work, and empowering subordinates (kandelousi, 2011). the management’s support is given by utilizing able internal auditor report staff, creating vocation ways for internal auditors staff, and giving authoritative freedom to internal audit works (cohen & sayag, 2010). what makes auditors program properly functional is stated as freedom brought about by the management and the shortfall of pressing factor coming from the auditee (van peursem, 2005). this is an experimental proof that authoritative autonomy inf luences efficiency (cohen & sayag, 2010; george, theofanis & konstantinos, 2015; badara, 2015). autonomy slows down the internal and audit execution in developing nations (alzeban & gwilliam, 2014). in accordance with this, arens, elder and beasley (2011, p. 43) expressed proficient expertise controlled by the auditors in leading auditors offered excellent types of assistance and can be represented on the grounds that the capacity of expert internal auditor reports isn’t just to discover shortcomings in internal control, yet additionally to uncover the auditors discoveries and expect them later on and make upgrades. auditors professionalism has an impact towards the adequacy of internal audits which have been demonstrated by tackie, marfo-yiadom and achina (2016) in the neighborhood government in ghana. generally speaking regarding these outcomes, the internal auditors work turns out to be progressively more significant as far as making great corporate governance structures (allegrini et al., 2006; carcello et al., 2005; nagy & cenker, 2002). in reference to sarens (2009), the ability of the internal audit to impact the nature of corporate governance determines the viability of internal auditor’s report. this examination is in agreement with the exploration conducted by mihret and yismaw (2007). dawit tadesse tiruneh54 in this respect, therefore, top managements lessen their level of responsibility based on the outcome of external auditors findings. following the discussions done so far, the hypothesis is stated here in detail. h1: internal-external auditors’ linkages rely upon the associations of internal audit with the management’s as the consequence of the management’s support toward decidedly directs the impact of positive hierarchical autonomy towards the viability of internal audits. h2: internal-external auditors linkages rely upon the associations of internal auditor report with the executives as the aftereffect of the management’s support toward emphatically directs the impact of positive auditors’ demonstrable skill towards the viability of internal audits. in accordance with h1, alzeban and gwilliam (2014) express that management’s backing can likewise be through improving connection between internal auditors and external auditors. closeness mihret and woldeyohannis (2008), mihret and yismaw (2007), roth (2000) stated that internal audit viability as estimated by the management’s acknowledgment and execution of internal auditor report discoveries and proposals may effect on external auditors’ dependence on internal auditors work. thus, more significant levels of acknowledgment of internal audit suggestions by the management’s may prompt more elevated levels of external auditor dependence than a circumstance where internal auditor report is less powerful. predictable with the above investigations al-twaijry, brierley and gwilliam (2004), felix et al. (2001) stated, internal and external auditors linkages via the last’s dependence of the previous’ work is useful to associations and hence sheets of chiefs and the executives are probably going to support such linkages. additionally, alzeban and gwilliam (2014), badara and saidin (2014), shohiha (2017) all confirmed that the coordination among internal and external auditors is significant for the advantages of auditors of associations and outer partners. . the connection among internal and external auditors which impacts the adequacy has been exactly demonstrated. this coordination and joint effort is done consistently to get ideal advantages for the regular interests and objectives. the capacity to encourage great associations with external auditors directed by internal examiners keeps up the viability of hierarchical management’s (gramling, maletta, schneider & church, 2004). in view of the clarification of the investigations, the hypothesis is planned as follows: the perspective of corporate governance… 55 h3: internal-external auditors’ linkages rely upon top management’s support as the consequence of the management’s acknowledgment and execution of internal audit discoveries and proposals technique. methodology to gather data, in a proper manner for a descriptive research, a survey questionnaire is utilized (alleyne and devonish, 2006; paper et al., 2003).the survey was organized in respect with the exploration speculations and the applicable writing audit. subsequently, representativeness of the example to the population was not the objective of the investigation; the endeavor rather has been made to guarantee legitimacy of the information by applying purposive inspecting (oppenheim, 1992). right off the bat, questions are chosen basically by three studies that inspected comparative examination field: bota-avram and palfi (2009), mihret and yismaw (2007), cohen and sayag (2010) and alzeban and gwilliam (2014). the inquiries at long last remembered for the poll are considered as more important with the current investigation just as more huge as to their substance. the polls involve 49 inquiries altogether, which are independently ready for the management, internal and external auditors. these polls are at long last converged for compelling information introduction. the information in this exploration was dissected utilizing partial least square (pls) to test a few factors and the directing impacts. a 5-point likerttype scale was utilized to quantify, directors and external and internal auditors’ mentalities as these factors are developed. descriptors and comparing mathematical codes: ‘firmly agree’ [5], ‘concur’ [4], ‘impartial’ [3], ‘dissent’ [2], and ‘emphatically disagree’ [1] and always (5) often (4) sometimes (3) seldom (2) never (1) were given as reaction alternatives. in such an action, it is important to obviously show the disposition object, about which feelings are looked for (bradburn, sudman, & wansink, 2004). hence, we obviously expressed in the guidelines that the respondents were required to give suppositions on the proclamations as applied to their customers that keep up internal auditors divisions. all things were emphatically expressed ideas utilized as markers of the factors. dawit tadesse tiruneh56 model the research method of this study was a constructed questionnaire, which was sent to companies and to the 100 top management, internal auditors, and external auditors in ethiopia. taking into consideration the above literature and hypothesis development the following five variables are selected to be examined in the present research. these variables are important with the current investigation. the first is “interactions of internal audit with management’s level of dependency with the result of internal audits effectiveness and whether it positively moderates the internal-external audit linkages(vice-versa)” which is the dependent variable, and four independent variables which are “internalexternal audit linkages”, “independence of internal audit”, “audit professionalism “and “management’s support”. consequently, four research hypotheses were developed for each one of the independent variables. multiple regression analysis was performed to estimate the magnitude of the effect of the “internal-external audit linkages”, “independence of internal audit” ”, “audit professionalism” and “management’s support” on “management’s level of reliance on internal audit work and its impact on the internal-external audit linkages”. to begin with, excluding questions about demographic characteristics, factor analysis based on principal component analysis was used for relevant questions. varimax orthogonal rotation has been used for the interpretation of the results. bartlett’s test of sphericity, at 0.01, has been utilized to identify sufficient correlations between the variables. to determine the adequacy of sampling,kaser-meyer-olkin measure has been put in use (bryman & cramer, 2005). in the end, regression analysis has been utilized. the ordinary least squres(ols) regression model was: iimie iel = a + b1 ial +b2iia+ b3ap+ b4ms + ei the variables are defined below: iimie iel = interactions of internal audit with management’s level of dependency with the result of internal audits effectiveness and whether it positively moderates the internal-external audit linkages(vice-versa) iel = internal-external audit linkages iia = independence of internal audit ap = audit professionalism ms = management’s support the perspective of corporate governance… 57 results and discussion demographic characteristics of the respondents which were basically important for this study were age, educational level, work experience and sector of the participants are presented in table 1. it can be seen in table 1 that the highest percentage is 57.1 % (31-40 years old ) while the lowest percentage is 7.2 % (older than 50 ). taking educational qualification into consideration, it can be stated that 78.7 % earned ba/bsc degree whereas 21.4% got a postgraduate degree. coming to work experience, it is noted that 71.4 % have more than 10 years experience. at last, the percentage for workers involved in the private sector stands as 64.3% while for those engaged in public sector stands as 35.7 % a total of 100 questionnaires were distributed and 70 properly filled questionnaires were able to be collected back. so a total of 70 questionnaire responses were analyzed. 45 respondents were private employees (includes private business companies and private audit firms) and 25 were from public firms (includes public business companies and public audit firms). from the table, the mean for the work experience is 11.23 years, with a median of 8 years. for individual experiences the range is 6 more than 20 years. in terms of specialization, 30 % of the respondents were audit managers, 59% were senior auditors and 11 % were top managers. table 1. professional demographics of the participants frequency percent age <30 31 – 40 41 – 50 > 50 0 40 25 5 57.1 35.7 7.2 level of education university-ba/bsc postgraduate 55 15 78.6 21.4 work experience <5 5 – 10 10 – 20 > 20 0 5 50 15 7.1 71.4 21.5 sector private public 45 25 64.3 35.7 s o u r c e : author’s construction. dawit tadesse tiruneh58 descriptive statistics regarding interactions of internal audit with the management depends on the level of the result of internal audits effectiveness, as the result, this positively moderates the internal-external audit linkages, it can be concluded from this that all of the respondents consider that internal audits effectiveness increases the interaction of internal audit with the management, as the result, it positively moderates the internal-external audit linkages. to better highlight the results, we shall have a closer look at table 2. table 2. statements regarding interactions of internal audit with management’s depend on every level of the result of the internal audits effectiveness and this in return positively moderates the internal-external audit linkages frequency percent 1 2 3 4 5 depends on the level of internal audit work ensuring that it adds value to the business 8 100 depends on the level of how much internal audit work improves department’s performance 8 100 depends on the level of how much internal audit work improves organizational performance 8 100 depends on the level of internal audit’s report accuracy 8 100 depends on the level of internal audit’s findings justifiability 8 100 depends on the level of internal audit’s recommendations easy implementations. 8 100 depends on the level of internal audits report accuracy 8 100 external auditor reliance on internal audit depends on the acceptance of internal audit recommendations by the management. 8 100 external auditors reliance on internal audit work is influenced by the management’s acceptance and implementation of internal audit findings and recommendations. 8 100 s o u r c e : author’s construction. the perspective of corporate governance… 59 the internal-external audit linkages, analysis results that reveal external audit’s recommendations, report, sharing of work papers between internal and external auditors, coordination and collaboration between internal and external auditors for relations between these two groups improve the interactions of internal audit with the management and this in turn positively moderates the internal-external audit linkages(vice-versa). however, from the results, it is suggested that management’s promotions for relations between these two groups is the least rated item. competence of internal audit team is also highly rated. the results are presented in detail in table 3 below. table 3. statements regarding internal-external audit linkages frequency percent 1 2 3 4 5 external auditors make recommendations that help improve internal audit 12 0.4 12 0.4 6 0.2 external audit reports help enhance management’s acceptance of internal audit findings. 3 10 22 70 6 20 internal audit follows up implementation of external auditors’ recommendations on improvement of internal control system 6 20 16 50 9 30 external auditors use internal audit reports in conducting their audit. 3 10 16 50 3 10 9 30 there is frequency of meetings and sharing of work papers between internal and external auditors 3 10 12 40 9 30 6 20 coordination and collaboration between internal and external auditors influence the effectiveness 3 10 9 30 19 60 management’s promotions for relations between these two groups 3 10 3 10 12 40 12 40 s o u r c e : author’s construction. much of the argument obtained from the data asserts that internal auditors are openminded, accommodating, knowledgeable and, therefore, professional. as a result, it improves the interactions of internal audit with management’s because of internal audits effectiveness and positively moderating the internalexternal audit linkages. however, the analysis indicates that internal audit has to have policies for hiring internal audit staff. to better highlight the results, we shall have a closer look at (table 4). dawit tadesse tiruneh60 table 4. statements regarding professionalism of internal audit frequency percent 1 2 3 4 5 the internal audit department has enough work space. 5 16.1 6 19.4 17 54.8 3 9.7 the internal audit obtains sufficient budget. 4 12.9 3 9.7 14 51.6 8 25.8 internal auditors are experienced enough for the organization’s systems. 2 6.5 3 9.7 6 19.4 17 54.8 3 9.7 the internal auditors acquire knowledge and skills beyond accounting and finance as needed. 2 6.5 1 3.2 5 16.1 16 51.6 6 19.4 the internal audit has inhouse policies for recruiting new staff. 7 22.6 5 16.1 9 29 6 19.4 4 12.9 the internal auditors are exposed to continuous professional development activities. 5 16.1 4 12.9 10 32.3 10 32.3 2 6.5 the internal auditors are made to access short –term training each year. 3 9.7 8 25.8 7 22.6 9 29 3 9.7 the internal auditors are made to access self-contained internal audit manual or guide. 1 3.2 4 12.9 4 12.9 15 48.4 7 22.6 s o u r c e : author’s construction. respondents also express their opinion on independence and objectivity of internal audit. the analysis of the results reveals that internal auditors have independence and objectivity of internal audit in their work in the organization. however, internal audit ought to participate in audit of activities for the operation of which they were responsible for in the company’s processes. to better highlight the results, we shall have a closer look at table 5. the perspective of corporate governance… 61 table 5. statements regarding independence and objectivity of internal audit frequency percent 1 2 3 4 5 the internal audit has the freedom to work without intervention. 1 3.2 1 3.2 5 16.1 16 51.6 7 22.6 the internal audit has the freedom to include their findings in audit report. 1 3.2 1 3.2 3 9.7 20 64.5 6 19.4 the internal audit reports to the board of directors (or audit committee) 2 6.5 2 6.5 2 6.5 11 35.5 14 45.2 the managment (or audit committee) oversees employment decisions in internal audit. 3 9.7 5 16.1 12 38.7 7 22.6 4 12.9 the internal auditors are not given the duty to audit the design of the system in which they participate. 1 3.2 5 16.1 6 19.4 11 35.5 8 25.8 the internal auditors are denied the engagement in audit activities which they were responsible for. 7 22.6 3 9.7 6 19.4 8 25.8 7 22.6 the internal audit staff assignments allow periodical rotation. 3 9.7 2 6.5 5 16.1 8 25.8 11 35.5 s o u r c e : author’s construction. finally, as per the examination of the management‘s support, the results show that the management had better make more support reach the internal audit. the analysis of the results also reveals top management’s support positively moderates organizational independence towards the effectiveness of internal audits, audit professionalism towards internal audit activities and moderates the effect of the auditees perception towards. along this line, the senior management, as it can be seen in table 6, should be more aware of internal audit’s needs. dawit tadesse tiruneh62 table 6. statements regarding management’s support frequency percent 1 2 3 4 5 senior management supports internal audit’s personnel (recruits skillful staff, offers career development chances, provides independence in the organizations ) 5 16.1 5 16.1 9 29 8 25.8 4 12.9 senior management is aware of internal audit’s needs 1 3.2 4 12.9 9 29 14 45.2 3 9.7 top management support brings about independence, professionalism, positive perception about the organization’s work and this in return brings effectiveness. 2 6.5 3 9.7 14 45.2 10 32.2 2 6.5 external auditor’s reliance on internal audit is governed by the acceptance of internal audit recommendations by the management. 1 3.2 4 12.9 11 35.5 10 32.3 4 12.9 management acceptance and implementation of internal audit findings and recommendations may impact on external auditors’ reliance on internal audit work. 2 6.5 3 9.7 8 25.8 14 45.2 3 9.7 s o u r c e : author’s construction. factor analysis the factor analysis, of which the results obtained are stated in table 7, is used in this study as it is one of the most well –known methods of classical multivariate analysis (tabachnick & fidell, 2001). based on the table, it can be seen that kaiser-meyer-olkin (kmo) scale is figured out as higher than 0.5. also, each of the five variables can be taken as single measures, ending up with just one component. moreover, employing cronbach’s alpha of 0.70 or more is accepted as highly reliable and, therefore, the results depict a great internal consistency for the five variables (nunnally, 1978). in this respect, table 7 shows that cronbach’s alpha for “statements regarding interactions of internal audit with management’s depends on the level result of internal audits effectiveness and this in turn positively moderates the internal-external audit linkages” is of the 0.9161, for “internal-external audit linkages” 0.837, for “professionalism of internal audit” is 0.698, for “independence and objectivity of internal audit” is 0.916and for “management’s support” is 0.929. the perspective of corporate governance… 63 table 7. factor analysis factor variables cronbach’s alpha kmo factor lodgings statements regarding interactions of internal audit with management’s depending on the level of the result of internal audits effectiveness and in return it positively moderates the internal-external audit linkages(vice-versa) depends on the level of internal audit work ensuring that it adds value to the business 0.9161 0.9045 0.812 depends on the level of how much internal audit work improves department’s performance 0.919 depends on how much internal audit work improves organizational performance 0.875 depends on the level of internal audit’s report accuracy 0.869 depends on the level of internal audit’s findings justifiability 0.927 depends on the level of internal audit’s recommendations to be easily implemented 0.903 depends on the level of internal audits report accuracy 0.773 external auditor reliance on internal audit is influenced by the acceptance of internal audit recommendations by the management. 0.914 external auditors dependency on internal audit work is highly affected by the acceptance and implementation of internal audit findings and recommendations. 0.789 statements regarding internal-external audit linkages external auditor’s recommendations may improve internal audit. 0.837 0.735 0.869 external audit reports empowers managements to accept internal audit findings. 0.927 internal audit does a follow up of the implementation of external auditors’ improvement of internal control system recommendations. 0.903 external auditors make use of internal audit reports in conducting their audit. 0.773 external –internal auditors coordination and collaboration influences effectiveness. 0.914 management promotes and advocates for relations between external –internal auditors. 0.789 dawit tadesse tiruneh64 factor variables cronbach’s alpha kmo factor lodgings professionalism of internal audit the internal audit department has enough work space. 0.698 0.806 0.876 the internal audit obtains sufficient budget. 0.841 internal auditors are experienced enough for the organization’s systems. 0.872 the internal auditors acquire knowledge and skills beyond accounting and finance as needed. 0.817 the internal audit has inhouse policies for recruiting new staff. 0.419 the internal auditors are exposed to continuous professional development activities. 0.825 the internal auditors are made to access short – term training each year. 0.498 the internal auditors are made to access self-contained internal audit manual or guide. 0.810 statements regarding independence and objectivity of internal audit internal audit is free from intervention in performing its duties 0.916 0.890 0.932 internal auditors feel free to include any audit findings in their audit reports 0.879 internal audit provides reports to the management of directors (or audit committee) 0.788 the managment (or audit committee) oversees employment decisions in internal audit 0.835 internal auditors are not assigned to audit areas in the system design which they participated 0.809 internal auditors do not participate in audit of activities for the operation of which they were responsible 0.910 internal audit staff assignments are rotated periodically 0.877 table 7. factor… the perspective of corporate governance… 65 factor variables cronbach’s alpha kmo factor lodgings management’s support senior management supports internal audit’s personnel(employing skillful internal audit staff, developing career paths for internal audit staff, and providing organizational independence for internal audit works) 0.929 0.896 0.932 senior management’s is aware of internal audit’s needs 0.795 top management’s support positively moderates organizational independence towards the effectiveness of internal audits, audit professionalism towards internal audit activities and moderates the effect of the auditee’s perception towards. 0.808 external auditor’s reliance on internal audit is governed by the acceptance of internal audit recommendations by the management. 0.928 external auditor’s reliance on internal audit work is influenced by the management’s acceptance and implementation of internal audit findings and recommendations. 0.913 s o u r c e : author’s construction. regression analysis as it can be observed in table 8, for dependent and independent variables, a pearson correlation matrix is employed. it is found that there is a determining and positive correlation (r=-.0891) between “interactions of internal audit with management’s dependency on the level of the result of internal audits effectiveness and in turn it positively moderates the internal-external audit linkages (vice-versa)” and “internal-external audit linkages” at p< .05. in the meantime, there is a positive relationship between “interactions of internal audit with management’s dependency on the level of the result of the internal audits effectiveness and in return this positively moderates the internal-external audit linkages” and “independence of internal audit” (b1=0.193, p=0.006 ). thus, h1 is strongly supported. similar but even more intensive, there is a positive relationship between “interactions of internal audit with management’s depend level result of internal audits effectiveness and toward positively moderates the internal-external audit linkages” and “audit professionalism” (b3=0.302, table 7. factor… dawit tadesse tiruneh66 p=0.041), suggesting support for h2. the third hypothesis relates to management’s support. in this case, the regression analysis revealed a positive and high association (b4=0.229, p=0.003) between “management’s support” and interactions of internal audit with management’s dependency on the level of results of the internal audit’s effectiveness” and this, in return, positively moderate the internal-external audit linkages.” thus, h3 is strongly supported. table 8. correlation matrix iimie iel iel iia ap ms iimie iel 1 iel 0.891** 1 iia 0.789* 0.747* 1 ap 0.882* 0.829* 0.714** 1 ms 0.816* 0.81* 0.913* 0.512 1 * * : significant pearson correlation (positive) * : signficant pearsons correlation (negative) s o u r c e : author’s construction. table 9. regression analysis variables coeff. 0 value s.e. t p-value constant b0 1.621 0.467 2.91 0.003* iel b1 0.193 0.039 2.567 0.006* iia bb2 0.096 0.031 1.392 0.073** ap b3 0.302 0.161 2.93 0.041* ms b4 0.229 0.033 4.109 0.003* *: significant at 0.05 level; **: significant at 0.1 level r2 = 0.817 adjusted r2 =0.802 f=146.149 p=0.0012 s o u r c e : author’s construction. the perspective of corporate governance… 67  conclusion this study has examined the interactions of internal audit with management and its impact on the internal-external audit linkages in developing countries. this thorough analysis supports the interactions of internal audit with management has a positively significant impact on the internal-external audit linkages in developing countries. in the meantime the paper has attempted to find out whether the independent variables, that is, internalexternal audit linkages, independence of the internal audit, audit professionalism and management support, contribute toward these interactions and linkages. from the study, it is identified that these variables directly or indirectly have a positively significant impact for the interactions of internal audit with the management and this in turn positively moderates the internalexternal audit linkages and vice-versa. in general, the outcomes of this research are expected to offer practical and theoretical contribution to concerned users. frist, the result may illuminate how interactions of internal audit with management have a positively significant impact on the internal-external audit linkage in ethiopia. this may inform top management of organizations in the assessment of internal audit department performance. second, international bodies concerned in the area and realities in developing countries might be tipped off as to how interactions of internal audit with management have a significant, positive inf luence on the internal-external audit linkages. the data collected by the survey was limited on purpose to restrict the length of the questionnaire and to maximize response rates. besides, the data gathered is collected from the management, internal and external auditors excluding other stakeholders such as board of directors and shareholders. hence, this requires a further study to be carried out to investigate and incorporate the perception of these parties. concerning the data calculation, other alternative independent variables could be modelled. eventually, it is suggested that other complimentary data gathering tools such as interview could be exploited to further investigate the extent 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(2001). using multivariate statistics, 4th ed. boston: allyn and bacon. tackie, g., marfo-yiadom, e., & achina, s.o. (2016). determinants of internal audit effectiveness in decentralized local government administrative systems. international journal of business and management, 11(11), 184. van peursem, k.a. (2005). conversations with internal auditors: the power of ambiguity. managerial auditing journal, 20(5), 489-512. https://www.transparency.org/ news/feature/corruption_perceptions _index_2017 (accessed: 6.03.2018). _hlk76415937 _hlk76415950 _hlk75197272 _hlk75197370 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: april 22, 2014; date of acceptance: august 14, 2014. * contact information: michal.ptak@ue.wroc.pl, faculty of economy, management and tourism in jelenia góra, wrocław university of economics, nowowiejska 3, 58- 500 jelenia góra, poland, phone: 75 75 38 221. ptak m. (2014). environmental charges levied on power plants. copernican journal of finance & accounting, 3(2), 127–136. http://dx.doi.org/10.12775/cjfa.2014.022 michał ptak* wrocław university of economics environmental charges levied on power plants keywords: environmental protection, environmental charges, power generating plants. j e l classification: h23. abstract: the aim of the article is to analyze the financial burden on energy sector in poland resulting from charges on the use of the environment. the estimation of the amount of charges paid by the power plants is based on data on emissions of basic pollutants from this sector. the starting point for the analysis is the brief evaluation of the impact of polish energy sector on the environment. the impact is quite significant due the fact that electricity generation is mainly based on solid fuels, such as hard coal and lignite. the environmental consequences of such energy production method are large emissions of gases and dust. during the electricity production process large amounts of waste are also generated (e.g. slag, ash). in addition, the energy sector extracts the water and discharges wastewater into the water or soil. the study shows that power plants pay all four kinds of charges for the use of the environment, such as air pollution charges, water abstraction charges, landfill charges and water pollution charges. particularly important are charges for gases that are emitted into the atmosphere. the charges paid by the energy sector account for a significant proportion of revenues from charges on the use of the environment. michał ptak128 opłaty ponoszone przez energetykę w związku z korzystaniem ze środowisk a słowa kluczowe: ochrona środowiska, opłaty ekologiczne, energetyka zawodowa. klasyfikacja j e l: h23. abstrakt: celem artykułu jest analiza obciążeń sektora energetycznego w polsce z tytułu opłat za korzystanie ze środowiska. szacunki wysokości opłat wnoszonych przez energetykę oparte są na danych o emisjach podstawowych zanieczyszczeń z tego sektora. punktem wyjścia dla tych rozważań jest krótka ocena wpływu polskiej energetyki na środowisko. wpływ ten jest dość istotny w związku z tym, że w polsce energia elektryczna wytwarzana jest głównie w oparciu o paliwa stałe, takie jak węgiel kamienny i brunatny. związane są z tym określone skutki ekologiczne, przede wszystkim emisja gazów oraz pyłów. w procesach produkcji energii elektrycznej powstają również znaczne ilości odpadów, takich jak żużel czy popiół. poza tym sektor energetyczny pobiera wodę i wprowadza ścieki do wód czy do ziemi. z przeprowadzonych badań wynika, że sektor energetyki zawodowej ponosi wszystkie rodzaje opłat za korzystania ze środowiska – za wprowadzanie gazów i pyłów do powietrza, pobór wód, wprowadzanie ścieków do wód lub do ziemi oraz składowanie odpadów. szczególnie duże znaczenie mają opłaty za emisję gazów do powietrza, gdyż opłaty wnoszone przez sektor energetyki stanowią znaczny odsetek całkowitych wpływów z tytułu opłat za korzystanie ze środowiska.  introduction conventional power plants generate significant external costs. these costs are mainly associated with the resources depletion and emissions of combustion products into the atmosphere. other nuisances include wastes and wastewater discharges into the environment. one can assume that conventional power plants – as agent affecting the environment on a large scale – are subject to relatively high environmental levies. these levies include inter alia charges for the use of the environment that is air pollution charges, water abstraction charges, landfill charges and water pollution charges (gad, pawlak, różowicz 2013, 42). in poland these charges have a long tradition. for example charges on nox emissions were introduced in 1980. the purpose of the paper is the analysis of the financial burden on energy sector in poland resulting from charges on the use of the environment. due to the limited length of the article the paper is mainly focused on the air pollution charges. environmental charges levied on power plants 129 the research methodology and the course of the research process the paper is mainly based on review of literature and on statistical data provided by central statistical office. the paper also reviews available reports of energy companies or individual power stations. the available data do not contain detailed information on the structure of revenue from charges on the use of the environment. the estimation of the amount of environmental charges paid by the power plants in poland is based on statistical data on emissions of pollutants into the air and on rates of emission charges which are given in environmental regulation. it should be noted that some estimates of environmental charges paid by individual power station or the structure of the revenues from the charges can be found in the literature (gad et al., 2013; poskrobko 1999). the paper also contains a brief analysis of rates of emission taxes and charges applied in other european countries and a case study approach based on environmental statements published by a selected power generation company. the outcome of the research poland belongs to the small group of countries that rely mainly on solid fuels (coal and lignite) as their electricity and heat source. the dependence on these fossil fuels is obviously a consequence of availability of coal, the absence of significant amounts of other energy sources and the existing infrastructure manufacturing (lorenz 2005). during the combustion of solid fossil fuels large emissions of gases and particles are produced. furthermore, power plants generate waste, use water and discharge wastewater. in poland these activities are subject to environmental charges (table 1). the design of “green” charges is fairly complex. for example, air emission charges are levied on 67 substances, whereas in western european countries environmental taxes are rather product taxes levied on fuels (for example according to the sulphur content). there are only some pollutants which are directly or indirectly subject to environmental taxes (mainly co2 and so2). michał ptak130 table 1. the environmental impact of power plants subject to charges on the use of the environment charges for the use of the environment use of the environment subject to the charges air pollution charges the combustion of coal in power plants is the source of emissions of pollutants, including nitrogen oxides, sulphur dioxide, carbon oxide or carbon dioxide. power plants are also a source of emissions of heavy metals (such as arsenic, cadmium, chromium, lead, mercury, nickel and zinc) which also are subject to air pollution charges. water abstraction charges power stations abstract water primarily for cooling the power-producing equipment. water pollution charges power stations discharge wastewater (including water used as a coolant) into the environment. landfill charges (on waste disposed in landfills) wastes from power plants include mainly combustion waste products such as dust and slag (so called furnace waste) and waste from desulphurization. waste disposed in landfills can be reduced by using waste in some processes, for example in construction, mines or road construction. wastes can be also given to licensed companies. s o u r c e : deklaracja środowiskowa za rok 2011 2012, 14; 16–17; deklaracja środowiskowa 2012, 21–22; deklaracja środowiskowa wg rozporządzenia emas 2011; gad et al., 2013; lorenz 2005; pyssa 2005, 83–84. one of the important environmental problem associated with combustion of fossil fuels are emissions of sulphur dioxide and nitrogen oxides. for many years public power plants and thermal power plants have been the main source of so2 and nox emissions in poland. according to the eurostat data, in 2011 emissions of sulphur oxides and nitrogen oxides from the energy production and distribution sector in poland were among the highest in europe. despite this, the rates of emission charges in poland are still very low in comparison to taxes levied in northern european countries (table 2)1. 1 however it should be noted that taxes paid in sweden are refunded to the taxpayers. for example, the tax on sulphur (levied not directly on emissions but on coal, coke and peat) is refunded when measures are taken to reduce so2 emissions. the revenue from nox charges is refunded to the regulated plants on the basis of their energy production. the “winners” of the system (that is firms which receive more from the refund than what they paid in taxes) include combined heat and power generation sector. skatter i sverige 2011, 143; the swedish tax. environmental charges levied on power plants 131 table 2. rates of charges and taxes on nox and so2 in chosen european countries in 2014 (in pln per kg) country nox so2 czech republic 0,22 0,18 denmark – 6,41 estonia 0,47 0,47 norway 9,02 – poland 0,53 0,53 sweden 24,50 7,35 s o u r c e : elektrimajanduse regulatiivne keskkond; database on instruments; emisní poplatky 2012; tax.dk; excise duty on emissions of nox. 2014; obwieszczenie ministra środowiska 2013. as mentioned, detailed information on the structure of revenue from environmental charges is not available. however, one can estimate the revenues from emission charges levied on energy sector taking data on emissions as a basis for calculation. according to the table 3, the estimated charges on co2, co, nox and so2 paid by public power plants and thermal power plants in 2011 was 326 million pln2. similar calculations indicate that charges on heavy metals paid by public power plants and thermal power plants amounted to 5,4 million pln in 2011 (ochrona środowiska 2013; obwieszczenie ministra środowiska 2010). table 3. emissions of gases and estimates of emission charges paid by power plants and by other sectors in poland in 2011 specification carbon dioxide carbon oxide nitrogen oxides sulphur dioxide emission (thousand tonnes) power plants and thermal power plants 148.573,00 a) 41,85 228,24 357,46 other combustion in energy production and transformation industries (e.g. refineries) . 20,55 47,42 122,21 combustion in industry . 253,84 74,76 180,24 2 estimations of charges paid by power plants are likely more reliable than estimations of charges paid by other sectors. this is due to the fact that many smaller entrepreneurs avoid paying charges. in addition, low emissions are exempt from the charges. michał ptak132 specification carbon dioxide carbon oxide nitrogen oxides sulphur dioxide commercial and institutional plants . 17,30 18,91 25,42 householdsc) . 1484,83 60,61 185,24 total emissions (thous. tonnes) 306.138,93 b) 2.915,78 850,75 910,05 estimates of charges paid by the sector (million pln)c) power plants and thermal power plants 39 5 110 172 other combustion in energy production and transformation industries (e.g. refineries) . 2 23 59 combustion in industry . 28 36 87 commercial and institutional plants . 2 9 12 a) 2010. b) households are generally exempted from the charges. c) in 2011 the rates of charge were 0,26 pln per ton of co2, 0,11 pln per kg of co and 0,48 per tonne of so2 and nox. s o u r c e : own elaboration based on: ochrona środowiska 2013, 229, 231; strategia bezpieczeństwo energetyczne 2013, obwieszczenie ministra środowiska 2010. in poland revenues from charges on the use of the environment are earmarked for financing environmental expenditure. based on the above estimates one can assume that at least 17% of environmental charge revenue is generated by emission charges levied on energy sector3. some of the those revenues are distributed back to polluters in the form of subsidies for “green” investments such as f lue gas desulphurization projects. undoubtedly, the fiscal impact of the charges is important. however, the charges should most of all encourage polluters to reduce emissions. the en3  in 2011 total revenues from charges on the use of environment in poland were 1,9 billion pln. the estimates of revenues from emission charges paid by power plants are underestimated. the analysis ignores the revenues from emission charges paid levied on other substances than co2, co, so2, nox and heavy metals. in addition, the analysis could also include other environmental charges paid by power plants that is charges on water abstraction, water pollution and waste disposed in landfills. such analysis would be difficult due to lack of data and complex design of the latter charges. however one can assume that charges on wastewater and charges on waste generated by power plants raise relatively low revenues (see table 3). environmental charges levied on power plants 133 vironmental impact of charges is difficult to estimate4. for example, some authors suggest that differences in the rates of emission charges levied in poland on various substances do not ref lect differences in the environmental impact of those substances. according to their propositions rate on so2 should be twice as high as rate of charge on nox (hilse, kapała, olczak 2013). t. żylicz (2012) suggests that the rate of charge on sulphur dioxide in poland is many times lower than environmental damage from so2 emissions. therefore, it can be assumed that the slight increase in the rates of charges would only generate additional revenues for environmental funds. perhaps, the emission reductions are achieved mainly by administrative instruments (emission limits)5. in order to examine the burden of environmental charges imposed on energy company a case study approach has been adopted. it is based on data provided by power generation company tauron wytwarzanie sa which is a producer of electricity and a producer and a supplier of steam. the company has 4.671 mw of installed electrical capacity and 1.496 mw of thermal power. it consists of seven power plants: blachownia, halemba, jaworzno iii, łagisza, łaziska, siersza, stalowa wola (o spółce tauron). information provided in the company’s sustainability report suggests that in 2012 tauron wytwarzanie sa paid charges for the use of the environment of 41,1 million pln into the accounts of relevant marshal offices. table 4 shows that these charges consist primarily of charges for emissions of gas and particles into air. these charges accounted for approximately 5,4% of total air pollution charges paid in poland. a few power plants which belong to the company participate in the eco-management and audit scheme and produce and make publicly available periodic environmental statements providing the public and other interested parties with information on their environmental performance (regulation no 1221/2009). one of these power plants is jaworzno iii (śląskie voivodeship) – a power plant with a total capacity of 1.535 mwe and 371 mwt. jaworzno iii uses coal and biomass as fuel. it consists of two plants (deklaracja środowiskowa 2012, 4): elektrownia ii – a combined heat and power plant producing electricity and heat in cogeneration and elektrownia iii – a public power plant. in 4 it is worth noting that between 1995 and 2011 so2 emissions from power plants decreased by 70% and nox emissions by 24%. in the same period, the rates of emission charges increased nearly two and half times. 5 such a situation occurred in the czech republic where the rates of emission charges are to be significantly increased (emisní poplatky 2012). michał ptak134 2012 elektrownia ii emitted 1,78 thousand tons of so2 and 0,85 thousand tons of nox. emissions from elektrownia iii were much higher. the plant has emitted 5,88 thousand tons of so2 and 9,23 thousand tons of nox (deklaracja środowiskowa za rok 2011 2012, 14; deklaracja środowiskowa 2012, 16–17). assuming that the data on air emissions from both power plants were used as the basis for the calculation of charges6 for use of the environment one can suppose that in 2012 jaworzno iii power plant paid charges of approximately 3,75 million pln – for sulphur dioxide emissions and 4,94 million pln – for nitrogen oxides emissions. it should be noted that the overall revenue from air pollution charges in silesian voivodeship in 2012 was 126,4 million pln (ochrona środowiska 2013, 469). table 4. charges for the use of the environment paid in 2012 by tauron wytwarzanie sa charge paid charges in thous. pln in percent of total environmental charges paid by tauron wytwarzanie sa in percent of total environmental charges paid in poland for the given use of the environment air pollution charge 39 369,2 95,7 5,4a) water abstraction charge 1 697,8 4,1 0,4b) wastewater charge 76,7 0,2 0,0b) charge on waste 0,0 0,0 0,0c) total 41 143,7 100,0 2,3d) a) in percent of total air pollution charges. b) in percent of charges on water abstraction and pollution. c) in percent of landfill charges. d) in percent of total charges for the use of the environment. s o u r c e : raport zrównoważonego rozwoju, 64; ochrona środowiska 2013, 469.  the conclusions from the research the analysis showed that the polish power sector emits relatively large amounts of pollutants into the atmosphere. emission charges paid by power sta6 according to the environmental statement of jaworzno iii data on emissions into air are in accordance with information for charges. environmental charges levied on power plants 135 tions represent a significant part of the total revenues from charges on the use of the environment and play an important role in the environmental protection financing system. it is very important to analyze whether the environmental charges in poland stimulate pollution control or are only fiscal in character. the presented data suggest that rates of emission charges applied in poland are many times lower than emission tax rates in the countries of northern europe. one can also specify some desired improvements in the design of emission charges (for example reduction of the number of substances subject to charges or the modification of differences between rates of charges on different substances). in addition to the air pollution charges power stations pay landfill charges, water abstraction charges and charges on wastewater. the amount of paid charges is difficult to estimate due to the lack of available data and a fairly complex structure of these charges. a case study analysis has show that revenues from charges on wastewater and on waste going to landfill are significantly lower than revenues from emission charges.  references database on instruments used for environmental policy, http://www2.oecd.org/ecoinst/queries/ (accessed: 17.03.2014). deklaracja środowiskowa wg rozporządzenia emas (2011), pge górnictwo i energetyka konwencjonalna spółka akcyjna, oddział zespół elektrowni dolna odra, nowe czarnowo, http://www.gdos.gov.pl/files/emas/2012/pge_dolna _odr a _2012. pdf (accessed: 08.03.2014). deklaracja środowiskowa za rok 2011 (2012), tauron wytwarzanie spółka akcyjna – oddział elektrownia jaworzno iii w jaworznie, http://bip.gdos.gov.pl/doc/ ftp/2012/tauron_jaworzno%20_2012.pdf (accessed: 08.03.2014). deklaracja środowiskowa za rok 2012 (2013), tauron wytwarzanie spółka akcyjna – oddział elektrownia jaworzno iii w jaworznie, http://bip.gdos.gov.pl/doc/ ftp/2013/deklaracja_srodowiskowa_za_2012_elektrownia_jaworzno_iii_pl_wydanie_iv.pdf (accessed: 08.03.2014). elektrimajanduse regulatiivne keskkond, energiatalgud, http://www.energiatalgud.ee/ index.php?title=elektrimajanduse_regulatiivne_keskkond (accessed: 10.08.2014). emisní poplatky 2012, energostat (2012), http://www.energostat.cz/emisni-poplatky. html (accessed: 10.08.2014). excise duty on emissions of nox. 2014, http://www.toll.no/upload/aarsrundskriv/2014/2014%20emissions%20of%20nox.pdf (accessed: 10.08.2014). gad s., pawlak a., różowicz s. 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(2012). polskie opłaty ekologiczne. aura, 04. date of submission: march 24, 2022; date of acceptance: november 21, 2022. * contact information: djoufouet@yahoo.fr, high institute of commerce and management, cameroon department of money and banking, university of bamenda, bamenda, cameroon, phone: +237 675 763 403; orcid id: https://orcid.org/0000-0003-3940-2181. ** contact information: pondiethierry24@gmail.com, faculty of economics and management, cameroon department of money, banking and finance, university of dschang, dschang, west, cameroon, phone: +237 678 338 882; orcid id: https://orcid.org/00000002-7013-7921. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 djoufouet, w.f., & pondie, t.m. (2022). impacts of fintech on financial inclusion: the case of sub-saharan africa. copernican journal of finance & accounting, 11(4), 69–88. http://dx.doi. org/10.12775/cjfa.2022.019 wulli faustin djoufouet* university of bamenda thierry messie pondie** university of dschang impacts of fintech on financial inclusion: the case of sub-saharan africa keywords: fintech, financial inclusion, lewbel 2sls. j e l classification: g20, g21, g23, e42, o33. abstract: the objective of this paper is to determine the impact of fintech on the financial inclusion of populations in sub-saharan africa where financial education is still low. to do so, data were collected on a sample of 35 countries over a period from 2011 to 2020. estimates were made using two-stage least squares models and the lewbel 2ls model. it is clear from the results that fintech contributes significantly to the financial inclusion of people in sub-saharan africa. mobile phone ownership facilitates the use of financial services. it is noted that a 1% increase in the number of people using a phone would contribute to a 0.67% increase in the financial inclusion rate. the driscoll-kraay technique consolidated these results by showing that with 1% of people http://dx.doi.org/10.12775/cjfa.2022.019 http://dx.doi.org/10.12775/cjfa.2022.019 wulli faustin djoufouet, thierry messie pondie7070 having access to fintech tools, there is an improvement in the financial inclusion rate of about 0.70%.  introduction introduction the african union’s agenda 2063 (www1), followed by the global sustainable development goals, aim to improve people’s well-being. however, these goals can only be achieved by significantly reducing poverty and increasing the financial inclusion of people who have so far been excluded from the mainstream financial system. in fact, financial inclusion is the provision of low-cost financial services to middle-income people who are disadvantaged by the traditional financial system (ozili, 2018). according to dev (2006), these disadvantaged people are mainly women, the elderly and people living in rural areas. nowadays, technology has evolved a lot, in all fields including finance. these technologies applied to finance (fintech) can be understood through technological innovation in financial services that has led to new business models, new products and even new ways of doing finance through decentralized finance. with fintech, it is now possible to send and receive payments anywhere in the world with a smartphone connected or not to the internet. according to global findex (2017), financial inclusion is growing exponentially worldwide. its statistics show that 1.2 billion adults (people over 15) opened a bank account between 2011 and 2017, including 515 million since 2014. between 2014 and 2017, the proportion of adults with an account at a financial institution or a mobile bank increased from 62% to 69% worldwide and from 54% to 63% in sub-saharan african countries. the coronavirus health crisis that the world is currently experiencing is likely to have inf luenced financial technologies to the extent that relationships between people are limited. in the face of these constraints, digital and digital payment methods are those that have made a valid contribution to contactless payments worldwide. in fact, digital and digital finance are financial services provided via payment gateways, mobile applications, smartphones and computers connected to the internet. they encompass a multitude of new financial products, finance-related software, new forms of communication and interaction, and the provision of financial services that help to further integrate those excluded from traditional finance. thus, fintech plays a significant role in financial inclusion (manyika, lund, singer, white & berry, 2016). this is why fintech is an accelerator of financial inclusion and an opportunity for poor peo impacts of fintech on financial inclusion… 7171 ple, women and rural populations excluded from the financial system (gomber, koch & siering, 2017). in emerging countries like in sub-saharan africa, fintech is poised to accelerate financial inclusion (khatun & tamanna, 2020). during the covid-19 pandemic, technology has further created new opportunities for digital financial services to accelerate and enhance financial inclusion, amid social distancing and lockdown measures (sahay, eriksson, allmen, lahreche, khera, ogawa, bazarbash & kim, 2020). however, these opportunities are not perceived in the same way because not only is the degree of contamination of the pandemic different, but also the level of financial literacy varies across the world. the level of financial inclusion in this region is still significantly low compared to the world average of indicators (djoufouet, 2019). due to their low-income level, people do not find it necessary to seek certain financial services such as setting up a bank account or transferring funds (djoufouet, 2019). in addition, a large proportion of the population who do not have any form of identification do not fully trust financial technologies because of the omnipresence of scammers. in the face of these various factors that could hinder the deployment of fintech in sub-saharan africa, it is necessary to question the impact of fintech on financial inclusion, as access to financial services is not an end in itself, what matters is the use of these services. in other words, the objective of this paper is to examine the contribution of fintech in improving the financial lives of people living in sub-saharan africa. after this introductory part, the rest of the document is structured as follows. sections 2 and 3 present respectively the literature review and the methodology adopted. section 4 presents and discusses the main empirical results obtained. the conclusion and policy implications are given in section 5. review of the literaturereview of the literature most researchers agree that financial development stimulates long-term economic growth, as a well-developed financial system encourages savings, investment, risk diversification and discourages moral hazard (puatwoe & piabuo, 2017; junior, andoh, gatsi & kawor, 2021; song, chang & gong, 2021). to this end, the financial inclusion of people remains a major economic policy objective for governments in all countries. for almost a decade, the international community and governments have been making concerted efforts to develop financial inclusion. the challenge is to build a financial system that is accessi wulli faustin djoufouet, thierry messie pondie7272 ble to all and that promotes stability and the equity of progress. to achieve this, new technologies improve digitalization and lower the cost of financial services. however, the theoretical underpinnings of the relationship between financial technologies and financial inclusion assume that a large proportion of the population excluded from the formal financial system owns at least one mobile phone. according to the world bank (2016), the provision of financial services via mobile phones and related devices can make it easier and cheaper for people to access financial services. information and communication technologies (ict) and fintech are therefore important drivers of financial inclusion (tchamyou, erreyger & cassimon, 2019). fintech: an opportunity for financial inclusionfintech: an opportunity for financial inclusion most studies have found that fintechs and icts are key drivers of financial inclusion (ghosh, 2018; gosavi, 2018; tchamyou et al., 2019). fintechs enable financial services to be offered to all social strata, regardless of their locations. according to bhandari (2018), middle-income people are the ultimate beneficiaries of financial inclusion because, lacking access to traditional financial services, they can now benefit from low-cost micro-services. ghosh and vinod (2017) instead believe that women are the main beneficiaries of financial inclusion outcomes as they are considered among the vulnerable and poor. in any case, the economy and the financial system as a whole are the main beneficiaries of financial inclusion (mehrotra & yetman, 2015; swamy, 2014; ozili, 2018). according to some studies in europe and asia (andrianaivo & kpodar, 2012; ghosh, 2016), there is evidence of a positive correlation between the level of mobile phone penetration that would facilitate access to financial services and financial inclusion. according to morawczynski (2009); mbiti and weil (2011); ouma, odongo and were (2017), the use of mobile money promotes and accelerates financial inclusion of households and businesses. therefore, households with a mobile money account tend to be banked, receive or send money more frequently and accumulate more savings (morawczynski, 2009; mbiti & weil, 2011; ouma et al., 2017). an individual with a current account will be more likely to use other financial services, such as credit or insurance, to start or expand a business, to invest in education or health, to manage risk and to overcome financial shocks, all of which will improve their overall standard of living. impacts of fintech on financial inclusion… 7373 however, the fintech-financial inclusion link might differ depending on the dimensions of financial inclusion (access versus use), in addition to the type of financial service (payments, savings, credit and insurance). as mentioned in the introduction, the link between fintech and financial inclusion may also vary according to the level of financial education of the populations. for this reason, the results of the various studies are inconclusive and mixed. kochar (2011) studied the relationship between financial inclusion and household income inequality in the indian state of uttar pradesh and concluded that increased access to formal financial services through local bank branches did not translate into an increase in the actual use of these financial services by poor households. zhang and posso (2019) found that financial inclusion has a positive effect on household income in china and that this effect is larger for households in the lower quantiles of the income distribution, indicating that it reduces inequality. in contrast, six randomised controlled trials conducted in mexico, mongolia, bosnia, india, ethiopia and morocco; found no robust evidence of a positive impact of household participation in microcredit programmes on household income (angelucci, karlan & zinman, 2015; augsburg, de haas, harmgart & meghir, 2015; banerjee & newman, 1993). fintech’s contribution to financial inclusion fintech’s contribution to financial inclusion during the coronavirus pandemicduring the coronavirus pandemic access to financial services is also considered one of the main challenges that communities face during crises such as covid-19. al-nawayseh’s (2020) study analysed the role of fintech applications in building resilience during the covid-19 pandemic on the one hand, and the determinants of the use of these applications by jordanian population on the other. her results indicate that the competitive advantages of fintech applications and social norms significantly affect the intention to use these applications. fu and mishra (2020) use mobile app usage data from 74 countries to document the effects of the covid-19 pandemic on fintech adoption. they find that the spread of covid-19 and government blockades led to an increase of 24% to 32% in the daily download rate of fintech apps. it can be seen that even technological risks do not seem to dampen the intention to use these fintech applications (alnawayseh, 2020). wulli faustin djoufouet, thierry messie pondie7474 in this time of covid-19 health crisis, fintech not only facilitates access to financial services (contactless payments, withdrawing and depositing funds, sending and receiving funds), but also saves money and time. financial transactions with fintech applications are faster and can be done remotely. furthermore, najaf, subramaniamb and atayah (2021) explain that peer-to-peer lending platforms attracted more borrowers with little or no access to credit facilities offered by conventional banks during the pandemic. their results indicate that fintech peer to peer lending has become the most viable alternative credit option available to borrowers. krasnyuk, tkalenko and krasniuk (2021) showed that the presence of covid-19 contributed to the growth of fintech and financial inclusion in different countries. from the above, it can be said that the impact of fintech on financial inclusion would vary according to certain well-determined contingency factors. the present study thus focuses on sub-saharan africa where the level of financial literacy is still low. research methodologyresearch methodology this section presents the research methodology used in this study. it includes the presentation of the study data and variables, the estimation techniques and the econometric model. descriptions of the study data and variablesdescriptions of the study data and variables to meet the target, data was collected on 35 sub-saharan african countries over a period from 2011 to 2020. it is important to note that the database requested for this work (global findex) presents three-yearly data. thus, to have a panel spread over our study period, we had to apply the exponential smoothing method. data on fintech and financial inclusion were collected from the international telecommunication union and global findex databases, respectively. data on control variables were collected from the world development indicator and worldwide governance indicators databases. in this study, financial inclusion, a dependent variable, is measured by the population’s access to and use of financial services (allen, demirguc-kunt, klapper & martinez peria, 2016). based on the work of oecd and jrc (2008), sarma (2012), yorulmaz (2018) and tram, lai and nguyen (2021), a financial impacts of fintech on financial inclusion… 7575 inclusion index was constructed from six financial inclusion variables. the construction technique of this index followed four main steps: multivariate analysis, normalisation, weighting and aggregation. as in the work of andrianaivo and kpodar (2012), ghosh (2016) and demirgüç-kunt, klapper, singer, ansar and hess (2018), fintech, as an independent variable, is measured by the mobile and fixed-line telephone penetration rate, and the broadband internet penetration rate. in order to strengthen the analyses, control variables have been introduced. the first is the growth rate measured by the gross domestic product (gdp) per capita. according to beck, demirgüç-kunt and levine (2007), ayyagari and beck (2015), growth in gdp per capita can increase the number of people with access to basic financial services, through the increase in national wealth if households excluded from the formal system manage to integrate into it. the second control variable is the employability rate of the population as measured by the number of young self-employed entrepreneurs. according to geng and he (2021), the level of employability of the population positively affects financial inclusion, especially in developing countries. levels of education, broadband internet penetration and remittances were then selected as control variables as they facilitate access to formal finance (xu, 2020; gautam, 2019). finally, the level of political stability and control of corruption were also taken into account. according to emara and el said (2021), the quality of governance in a country can inf luence the number of people excluded from the financial system. the table below presents the description of the variables of the study. table 1. description of study variables variables obs mean std.dev. min max financial inclusion index 350 -0.001143 0.0702675 -1 0.22 fixed telephone 330 2.267025 5.633058 0 37.64051 mobile phone 335 81.27403 36.16261 15.67192 165.5999 gross domestic product 350 3.663748 4.642932 -36.39198 20.71577 employability level 315 1.998698 1.588087 0.04 6.63 level of education 188 46.40826 20.83743 13.88327 109.4441 funds transfer 346 1.09e+09 3.54e+09 0 2.43e+10 wulli faustin djoufouet, thierry messie pondie7676 variables obs mean std.dev. min max internet penetration level 285 17.64338 15.57777 0.9 68.2 control of corruption 350 0.1476224 0.0154324 0.1200679 0.1867942 political stability 350 30.11242 21.83542 0.4761905 90.56604 list of countries: angola, benin, botswana, burkina faso, burundi, cameroon, central african republic, chad, congo, dem. rep. congo, rep. cote d’ivoire, ethiopia, gabon, ghana, guinea, kenya, lesotho, liberia, madagascar, malawi, mali, mauritania, mauritius, namibia, niger, nigeria, rwanda, senegal, sierra leone, south africa, sudan, tanzania, togo, uganda, zambia. s o u r c e : table drawn by the authors using stata v15. a descriptive and summary analysis of the relationship between fintech and financial inclusion shows a positive correlation between the two variables for all sub-saharan african countries. figure 1. correlation between fintech and the financial inclusion index caf eth ner mdg mwi tcdcod bdi ago uga lbr tgo rwa sle tza sdn cmr zmbnga bfa gin ken ben lso mrt sen cog nam mli civ gha mus gab zaf bw -.1 -.0 5 0 .0 5 .1 .1 5 fi na nc ia l i nc lu si on in de x (f ii) 0 50 100 150 fintech fii fitted values s o u r c e : graph drawn by the authors using stata v15. table 1. description of study variables impacts of fintech on financial inclusion… 7777 estimation techniques and econometric modelestimation techniques and econometric model the estimation of the econometric model is based on the work of driscoll and kraay (1998). this work, based on a non-parametric time series covariance matrix estimator, assumes that the error structure is heteroskedastic, auto-correlated up to a certain lag and possibly correlated between panels. furthermore, the non-parametric driscoll-kraay estimator produces robust results in terms of cross-sectional and time dependence and is able to handle missing data series (hoechle, 2007). to ensure the endogeneity of the results, the instrumental variable approach was adopted. the adoption of this approach requires that appropriate instruments have a significant correlation with the endogenous variable, satisfy the orthogonality condition and must be properly excluded from the model so that its effect on the response variable is only indirect (baum, cristina & rother, 2012). however, finding appropriate instruments that simultaneously satisfy these conditions is often difficult and poses a serious problem for the use of instrumental variable estimators in most applied research (baum et al., 2012; stock, wright & yogo, 2002). therefore, the two-stage least squares (2sls) technique of lewbel (2012) solves this problem. the econometric model of this study is inspired by those of demir, gozgor, lau and vigne (2019) and banna, hassan and rashid (2021) which analyse the impact of fintech on reducing inequality. overall, the model is as follows: must be properly excluded from the model so that its effect on the response variable is only indirect (baum, cristina & rother, 2012). however, finding appropriate instruments that simultaneously satisfy these conditions is often difficult and poses a serious problem for the use of instrumental variable estimators in most applied research (baum et al., 2012; stock, wright & yogo, 2002). therefore, the two-stage least squares (2sls) technique of lewbel (2012) solves this problem. the econometric model of this study is inspired by those of demir, gozgor, lau and vigne (2019) and banna, hassan and rashid (2021) which analyse the impact of fintech on reducing inequality. overall, the model is as follows: 𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛼𝛼 � 𝛽𝛽 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛾𝛾 𝑋𝑋�,� � 𝑣𝑣� � 𝛿𝛿� � 𝜀𝜀�,� … … … … … … … . … … … … … … … … … … … … … … … … … … … … … … . �1� where: 𝑭𝑭𝑭𝑭𝑭𝑭𝒊𝒊𝒊𝒊, represents the financial inclusion index, which was constructed from a set of six financial inclusion variables, 𝑿𝑿𝒊𝒊𝒊𝒊, the control variables of a country 𝐹𝐹𝐹𝐹 at a period 𝐹𝐹𝐹𝐹. 𝒗𝒗𝒊𝒊, the unobserved country specific effects; 𝜹𝜹𝒊𝒊, the common time specific effect for all countries and 𝜀𝜀𝜀𝜀𝐹𝐹𝐹𝐹,𝐹𝐹 , the error term. thus, 𝜶𝜶, 𝜷𝜷, 𝜸𝜸 𝑎𝑎𝐹𝐹𝑎𝑎 𝜹𝜹 are the parameters to be estimated. in more detail, the econometric model for this study is as follows: 𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛼𝛼�,� � 𝛽𝛽� 𝑀𝑀𝑀𝑀�,� � 𝛽𝛽� 𝐺𝐺𝐺𝐺𝑀𝑀/𝐹�,� � 𝛽𝛽� 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸�,� � 𝛽𝛽� 𝑆𝑆𝐹𝐹𝐹𝑆𝑆𝑆𝑆𝐸𝐸�,� � 𝛽𝛽� 𝑇𝑇𝐹𝐹�,� � 𝜀𝜀�,� … �2� where: 𝑴𝑴𝑴𝑴𝒊𝒊,𝒊𝒊 average mobile phone penetration rate 𝑮𝑮𝑮𝑮𝑴𝑴/𝒉𝒉𝒊𝒊,𝒊𝒊 gdp per heads, 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝒊𝒊,𝒊𝒊, the employability rate of independent contractors 𝑺𝑺𝑺𝑺𝒉𝒉𝑺𝑺𝑺𝑺𝑬𝑬𝒊𝒊,𝒊𝒊 represents the average level of education of the populations 𝑻𝑻𝑭𝑭𝒊𝒊,𝒊𝒊, reference to the transfer of funds. 4. presentation and interpretation of results the econometric model of this study is estimated using the ordinary least squares technique, fixed effects and the driscoll-kraay (1998) method. in order to account for endogeneity and heteroscedasticity problems, the econometric model was subsequently estimated by applying must be properly excluded from the model so that its effect on the response variable is only indirect (baum, cristina & rother, 2012). however, finding appropriate instruments that simultaneously satisfy these conditions is often difficult and poses a serious problem for the use of instrumental variable estimators in most applied research (baum et al., 2012; stock, wright & yogo, 2002). therefore, the two-stage least squares (2sls) technique of lewbel (2012) solves this problem. the econometric model of this study is inspired by those of demir, gozgor, lau and vigne (2019) and banna, hassan and rashid (2021) which analyse the impact of fintech on reducing inequality. overall, the model is as follows: 𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛼𝛼 � 𝛽𝛽 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛾𝛾 𝑋𝑋�,� � 𝑣𝑣� � 𝛿𝛿� � 𝜀𝜀�,� … … … … … … … . … … … … … … … … … … … … … … … … … … … … … … . �1� where: 𝑭𝑭𝑭𝑭𝑭𝑭𝒊𝒊𝒊𝒊, represents the financial inclusion index, which was constructed from a set of six financial inclusion variables, 𝑿𝑿𝒊𝒊𝒊𝒊, the control variables of a country 𝐹𝐹𝐹𝐹 at a period 𝐹𝐹𝐹𝐹. 𝒗𝒗𝒊𝒊, the unobserved country specific effects; 𝜹𝜹𝒊𝒊, the common time specific effect for all countries and 𝜀𝜀𝜀𝜀𝐹𝐹𝐹𝐹,𝐹𝐹 , the error term. thus, 𝜶𝜶, 𝜷𝜷, 𝜸𝜸 𝑎𝑎𝐹𝐹𝑎𝑎 𝜹𝜹 are the parameters to be estimated. in more detail, the econometric model for this study is as follows: 𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛼𝛼�,� � 𝛽𝛽� 𝑀𝑀𝑀𝑀�,� � 𝛽𝛽� 𝐺𝐺𝐺𝐺𝑀𝑀/𝐹�,� � 𝛽𝛽� 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸�,� � 𝛽𝛽� 𝑆𝑆𝐹𝐹𝐹𝑆𝑆𝑆𝑆𝐸𝐸�,� � 𝛽𝛽� 𝑇𝑇𝐹𝐹�,� � 𝜀𝜀�,� … �2� where: 𝑴𝑴𝑴𝑴𝒊𝒊,𝒊𝒊 average mobile phone penetration rate 𝑮𝑮𝑮𝑮𝑴𝑴/𝒉𝒉𝒊𝒊,𝒊𝒊 gdp per heads, 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝒊𝒊,𝒊𝒊, the employability rate of independent contractors 𝑺𝑺𝑺𝑺𝒉𝒉𝑺𝑺𝑺𝑺𝑬𝑬𝒊𝒊,𝒊𝒊 represents the average level of education of the populations 𝑻𝑻𝑭𝑭𝒊𝒊,𝒊𝒊, reference to the transfer of funds. 4. presentation and interpretation of results the econometric model of this study is estimated using the ordinary least squares technique, fixed effects and the driscoll-kraay (1998) method. in order to account for endogeneity and heteroscedasticity problems, the econometric model was subsequently estimated by applying (1) where: fiiit, represents the financial inclusion index, which was constructed from a set of six financial inclusion variables, xit, the control variables of a country i at a period t, vi, the unobserved country specific effects; δt, the common time specific effect for all countries and 𝜀𝑖, 𝑡, the error term. thus, α, β, γ and δ are the parameters to be estimated. wulli faustin djoufouet, thierry messie pondie7878 in more detail, the econometric model for this study is as follows: must be properly excluded from the model so that its effect on the response variable is only indirect (baum, cristina & rother, 2012). however, finding appropriate instruments that simultaneously satisfy these conditions is often difficult and poses a serious problem for the use of instrumental variable estimators in most applied research (baum et al., 2012; stock, wright & yogo, 2002). therefore, the two-stage least squares (2sls) technique of lewbel (2012) solves this problem. the econometric model of this study is inspired by those of demir, gozgor, lau and vigne (2019) and banna, hassan and rashid (2021) which analyse the impact of fintech on reducing inequality. overall, the model is as follows: 𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛼𝛼 � 𝛽𝛽 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛾𝛾 𝑋𝑋�,� � 𝑣𝑣� � 𝛿𝛿� � 𝜀𝜀�,� … … … … … … … . … … … … … … … … … … … … … … … … … … … … … … . �1� where: 𝑭𝑭𝑭𝑭𝑭𝑭𝒊𝒊𝒊𝒊, represents the financial inclusion index, which was constructed from a set of six financial inclusion variables, 𝑿𝑿𝒊𝒊𝒊𝒊, the control variables of a country 𝐹𝐹𝐹𝐹 at a period 𝐹𝐹𝐹𝐹. 𝒗𝒗𝒊𝒊, the unobserved country specific effects; 𝜹𝜹𝒊𝒊, the common time specific effect for all countries and 𝜀𝜀𝜀𝜀𝐹𝐹𝐹𝐹,𝐹𝐹 , the error term. thus, 𝜶𝜶, 𝜷𝜷, 𝜸𝜸 𝑎𝑎𝐹𝐹𝑎𝑎 𝜹𝜹 are the parameters to be estimated. in more detail, the econometric model for this study is as follows: 𝐹𝐹𝐹𝐹𝐹𝐹�,� � 𝛼𝛼�,� � 𝛽𝛽� 𝑀𝑀𝑀𝑀�,� � 𝛽𝛽� 𝐺𝐺𝐺𝐺𝑀𝑀/𝐹�,� � 𝛽𝛽� 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸�,� � 𝛽𝛽� 𝑆𝑆𝐹𝐹𝐹𝑆𝑆𝑆𝑆𝐸𝐸�,� � 𝛽𝛽� 𝑇𝑇𝐹𝐹�,� � 𝜀𝜀�,� … �2� where: 𝑴𝑴𝑴𝑴𝒊𝒊,𝒊𝒊 average mobile phone penetration rate 𝑮𝑮𝑮𝑮𝑴𝑴/𝒉𝒉𝒊𝒊,𝒊𝒊 gdp per heads, 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝒊𝒊,𝒊𝒊, the employability rate of independent contractors 𝑺𝑺𝑺𝑺𝒉𝒉𝑺𝑺𝑺𝑺𝑬𝑬𝒊𝒊,𝒊𝒊 represents the average level of education of the populations 𝑻𝑻𝑭𝑭𝒊𝒊,𝒊𝒊, reference to the transfer of funds. 4. presentation and interpretation of results the econometric model of this study is estimated using the ordinary least squares technique, fixed effects and the driscoll-kraay (1998) method. in order to account for endogeneity and heteroscedasticity problems, the econometric model was subsequently estimated by applying (2) where: mpi,t, average mobile phone penetration rate, gdp/hi,t, gdp per heads, empli,t, the employability rate of independent contractors, schooli,t, represents the average level of education of the populations, tfi,t, reference to the transfer of funds. presentation and interpretation of resultspresentation and interpretation of results the econometric model of this study is estimated using the ordinary least squares technique, fixed effects and the driscoll-kraay (1998) method. in order to account for endogeneity and heteroscedasticity problems, the econometric model was subsequently estimated by applying two-stage ordinary least squares and lewbel 2ls. lewbel (2012) provides an estimator for linear regression models containing an endogenous regressor, when no outside instruments or other such information is available. the method works by exploiting model heteroscedasticity to construct instruments using the available regressors. some authors have considered the method in empirical applications where an endogenous regressor is binary, without proving validity of the estimator in that case. table 2 below presents the results of the baseline estimates of the relationship between fintech and financial inclusion using mobile phone and fixed phone as variables of interest. table 3 tests the robustness of these results by incorporating the additional variables. table 4 presents the results of the estimations that take into account the endogeneity and heteroscedasticity problems that may exist in the data. the latter results seek to confirm the previous ones. t ab le 2 . b as el in e es ti m at io n v ar ia bl es fi na nc ia l i nc lu si on in de x o ls d ri sc ol lkr aa y fi xe def fe ct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 m ob ile p ho ne 0. 00 14 3* ** 0. 00 13 7* ** 0. 00 12 5* ** 0. 00 12 3* ** 0. 00 12 4* ** 0. 00 11 7* ** 0. 00 11 5* ** 0. 00 10 3* ** 0. 00 08 26 ** * 0. 00 09 44 ** * 0. 00 15 7* ** 0. 00 14 9* ** 0. 00 14 2* ** 0. 00 13 6* ** 0. 00 13 6* ** (0 .0 00 13 1) (0 .0 00 13 3) (0 .0 00 12 9) (0 .0 00 14 2) (0 .0 00 15 5) (0 .0 00 10 2) (8 .7 1e -0 5) (0 .0 00 11 0) (0 .0 00 14 2) (0 .0 00 12 5) (0 .0 00 15 9) (0 .0 00 16 1) (0 .0 00 15 1) (0 .0 00 15 8) (0 .0 00 17 4) fi xe d ph on e 0. 01 05 ** * 0. 00 83 2* ** 0. 00 91 3* ** 0. 00 46 3* ** 0. 00 41 7* * 0. 01 16 ** * 0. 01 10 ** * 0. 01 10 ** * 0. 00 62 6* ** 0. 00 68 7* ** 0. 00 94 9* ** 0. 00 62 3* * 0. 00 84 3* ** 0. 00 35 1* 0. 00 29 0 (0 .0 01 86 ) (0 .0 01 88 ) (0 .0 01 93 ) (0 .0 01 61 ) (0 .0 01 76 ) (0 .0 02 09 ) (0 .0 02 25 ) (0 .0 01 71 ) (0 .0 01 35 ) (0 .0 01 19 ) (0 .0 02 41 ) (0 .0 02 41 ) (0 .0 02 47 ) (0 .0 02 01 ) (0 .0 03 08 ) g ro ss d om es ti c pr od uc t -0 .0 01 29 ** * -0 .0 00 24 5 0. 00 06 54 0. 00 09 72 0. 00 05 64 0. 00 09 42 0. 00 17 0* -0 .0 01 28 ** * -0 .0 00 17 0 0. 00 08 21 0. 00 11 3* (0 .0 00 48 0) (0 .0 00 48 2) (0 .0 00 54 3) (0 .0 00 59 7) (0 .0 00 95 0) (0 .0 00 44 1) (0 .0 00 69 7) (0 .0 00 82 0) (0 .0 00 48 6) (0 .0 00 48 1) (0 .0 00 55 5) (0 .0 00 61 4) em pl oy ab ili ty le ve l 0. 01 28 ** * 0. 00 28 0 0. 00 28 1 0. 00 60 6* ** -0 .0 02 15 -0 .0 01 65 0. 02 73 ** * 0. 00 41 9 0. 00 49 4 (0 .0 03 97 ) (0 .0 04 51 ) (0 .0 04 93 ) (0 .0 01 10 ) (0 .0 01 85 ) (0 .0 01 33 ) (0 .0 06 15 ) (0 .0 08 01 ) (0 .0 10 1) le ve l o f e du ca ti on 0. 00 05 14 0. 00 06 55 0. 00 14 0* ** 0. 00 13 7* ** 0. 00 03 21 0. 00 04 55 (0 .0 00 37 5) (0 .0 00 40 3) (0 .0 00 12 9) (0 .0 00 10 1) (0 .0 00 50 1) (0 .0 00 53 1) fu nd s tr an sf er -0 .0 00 29 1 -0 .0 02 90 -0 .0 00 31 3 (0 .0 02 26 ) (0 .0 03 66 ) (0 .0 02 62 ) co ns ta nt -0 .1 17 ** * -0 .1 07 ** * -0 .1 31 ** * -0 .1 47 ** * -0 .1 53 ** * -0 .0 95 3* ** -0 .0 91 3* ** -0 .1 03 ** * -0 .1 46 ** * -0 .1 03 -0 .1 28 ** * -0 .1 17 ** * -0 .1 74 ** * -0 .1 49 ** * -0 .1 53 ** * (0 .0 13 1) (0 .0 13 6) (0 .0 14 6) (0 .0 15 7) (0 .0 44 8) (0 .0 06 78 ) (0 .0 07 75 ) (0 .0 04 81 ) (0 .0 07 10 ) (0 .0 63 0) (0 .0 13 1) (0 .0 13 7) (0 .0 17 7) (0 .0 22 7) (0 .0 52 0) o bs er va ti on s 33 5 33 5 30 7 18 1 16 2 33 5 33 5 30 7 18 1 16 2 33 5 33 5 30 7 18 1 16 2 rsq ua re d 0. 35 3 0. 35 6 0. 37 1 0. 62 1 0. 62 6 0. 24 7 0. 26 4 0. 29 6 0. 42 1 0. 43 5 n um be r of id 35 35 35 29 27 35 35 35 29 27 st an da rd e rr or s in p ar en th es es ** *, s ig ni fic an ce 1 % ; * *, s ig ni fic an ce 5 % ; * , s ig ni fic an ce 1 0% . s o u r c e : t ab le d ra w n by t he a ut ho rs u si ng s ta ta v 15 . t ab le 2 . b as el in e es ti m at io n wulli faustin djoufouet, thierry messie pondie8080 the results of our baseline model confirm the fact that technology tools such as the fixed telephone have a positive effect on financial inclusion in subsaharan africa. thus, this further confirms the previous results found by tchamyou et al. (2019), who found that icts contribute positively to the access of financial products by african populations. similarly, abor, amidu and issahaku (2018), ozili (2017), gabor and brooks (2017), demir, bilgin, karabulut and doker (2020) and senyo and osabutey (2020) have shown beneficial effects of fintech on the level of financial inclusion of populations in different contexts. thus, analysing the effect of fi nte ch on financial inclusion in this period of covid-19 finds that the fixed-line telephone variable, considered as a proxy for fintech, acts positively on financial inclusion (asongu & odhiambo, 2018; asongu, nwachukwu & orim, 2018; demir et al., 2020). this measure of fintech has positive and significant effects on the financial inclusion index. for example, a 1% increase in the number of people using fixed-line phones would contribute to a 0.67% increase in financial inclusion according to the ols estimates. in the fixed effect estimates, a 1% increase in fintech would contribute to a financial inclusion of about 0.33%. the driscoll-kraay (1998) technique consolidates these results by showing that with 1% of people having access to fintech tools, there is an improvement in the financial inclusion rate of about 0.70%. these results ref lect the rapid evolution of technology tools in the financial sector in both developed and developing countries. for the control variables, gross domestic product remains positive overall but insignificant, regardless of the estimation method. this result is consistent with those of abor et al. (2018), kim, yu and hassan (2018) and usman, makhdum and kousar (2021). employment is also a channel through which fin tech is able to increase the number of people with access to financial services (beck, demirgüç-kunt & levine, 2007; geng & he, 2021). the results also show that the average level of education of the population has significant positive effects on financial inclusion in sub-saharan africa. similar results have been found by authors such as ozili (2021); were, odongo and israel (2021). in addition, remittances have a positive effect on financial inclusion. several other authors in the literature have shown this, such as chuc, li, phi, le, yoshino and taghizadeh-hesary (2021) and barnabe (2021). table 3 below tests the robustness of the results by incorporating the additional variables. t ab le 3 . r ob us tn es s te st b y in te gr at io n of a dd it io na l v ar ia bl es v ar ia bl es fi na nc ia l i nc lu si on in de x o ls d ri sc ol lkr aa y 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 m ob ile p ho ne 0. 00 14 3* ** 0. 00 12 5* ** 0. 00 12 3* ** 0. 00 04 88 ** * 0. 00 04 10 ** 0. 00 03 98 ** 0. 00 11 7* ** 0. 00 10 3* ** 0. 00 08 26 ** * 0. 00 02 19 ** * 0. 00 02 16 ** * 0. 00 01 80 ** 0. 00 15 7* ** 0. 00 14 2* ** 0. 00 13 6* ** 0. 00 05 91 ** * 0. 00 04 90 ** 0. 00 04 20 ** (0 .0 00 13 1) (0 .0 00 12 9) (0 .0 00 14 2) (0 .0 00 15 9) (0 .0 00 16 3) (0 .0 00 16 3) (0 .0 00 10 2) (0 .0 00 11 0) (0 .0 00 14 8) (4 .7 9e -0 5) (4 .8 2e -0 5) (6 .7 2e -0 5) (0 .0 00 15 9) (0 .0 00 15 1) (0 .0 00 15 8) (0 .0 00 18 2) (0 .0 00 19 0) (0 .0 00 19 2) g ro ss d om es ti c pr od uc t -0 .0 00 24 5 0. 00 06 54 0. 00 10 1* * 0. 00 09 75 * 0. 00 09 67 * 0. 00 05 64 0. 00 09 42 0. 00 18 4* 0. 00 18 4* 0. 00 13 8* * -0 .0 00 17 0 0. 00 08 21 0. 00 10 6* * 0. 00 10 1* 0. 00 09 99 * (0 .0 00 48 2) (0 .0 00 54 3) (0 .0 00 50 9) (0 .0 00 50 2) (0 .0 00 51 2) (0 .0 00 44 1) (0 .0 00 67 7) (0 .0 00 87 3) (0 .0 00 86 7) (0 .0 00 45 2) (0 .0 00 48 1) (0 .0 00 55 5) (0 .0 00 52 4) (0 .0 00 52 1) (0 .0 00 51 6) em pl oy ab ili ty le ve l 0. 01 28 ** * 0. 00 28 0 -0 .0 02 82 -0 .0 03 55 -0 .0 03 61 0. 00 60 6* ** -0 .0 02 15 -0 .0 01 57 -0 .0 01 81 -0 .0 02 96 0. 02 73 ** * 0. 00 41 9 -0 .0 08 21 -0 .0 07 90 -0 .0 07 13 (0 .0 03 97 ) (0 .0 04 51 ) (0 .0 04 02 ) (0 .0 04 06 ) (0 .0 03 86 ) (0 .0 01 10 ) (0 .0 01 84 ) (0 .0 01 47 ) (0 .0 02 15 ) (0 .0 02 38 ) (0 .0 06 15 ) (0 .0 08 01 ) (0 .0 08 93 ) (0 .0 08 86 ) (0 .0 08 80 ) le ve l o f e du ca ti on 0. 00 05 14 0. 00 03 06 0. 00 04 01 0. 00 04 09 0. 00 14 0* ** 0. 00 02 63 ** 0. 00 02 86 ** -2 .0 0e -0 5 0. 00 03 21 0. 00 01 18 0. 00 01 51 9. 55 e05 (0 .0 00 37 5) (0 .0 00 33 2) (0 .0 00 33 5) (0 .0 00 33 3) (0 .0 00 14 8) (0 .0 00 11 2) (0 .0 00 10 6) (9 .7 1e -0 5) (0 .0 00 50 1) (0 .0 00 45 5) (0 .0 00 45 2) (0 .0 00 44 9) fu nd s tr an sf er -0 .0 03 89 ** -0 .0 04 32 ** -0 .0 04 26 ** -0 .0 03 57 -0 .0 03 72 -0 .0 01 38 -0 .0 04 21 * -0 .0 04 11 * -0 .0 03 92 * (0 .0 01 94 ) (0 .0 01 93 ) (0 .0 01 93 ) (0 .0 02 95 ) (0 .0 03 22 ) (0 .0 03 06 ) (0 .0 02 30 ) (0 .0 02 29 ) (0 .0 02 27 ) in te rn et pe ne tr at io n le ve l 0. 00 25 4* ** 0. 00 24 9* ** 0. 00 25 1* ** 0. 00 33 5* ** 0. 00 33 4* ** 0. 00 32 1* ** 0. 00 24 4* ** 0. 00 23 8* ** 0. 00 23 9* ** (0 .0 00 30 6) (0 .0 00 30 3) (0 .0 00 30 6) (0 .0 00 36 2) (0 .0 00 35 2) (0 .0 00 49 6) (0 .0 00 33 1) (0 .0 00 33 0) (0 .0 00 32 7) fi gh t a ga in st co rr up ti on 0. 51 2* * 0. 51 3* * 0. 04 56 0. 24 4 0. 54 0* 0. 52 2* (0 .2 55 ) (0 .2 56 ) (0 .1 66 ) (0 .2 03 ) (0 .3 11 ) (0 .3 08 ) co un tr y st ab ili ty le ve l 6. 79 e05 0. 00 08 25 ** 0. 00 05 85 * (0 .0 00 24 1) (0 .0 00 28 6) (0 .0 00 33 1) co ns ta nt -0 .1 17 ** * -0 .1 31 ** * -0 .1 47 ** * -0 .0 35 5 0. 05 27 0. 05 01 -0 .0 95 3* ** -0 .1 03 ** * -0 .1 46 ** * -0 .0 33 6 -0 .0 24 2 -0 .0 41 2 -0 .1 28 ** * -0 .1 74 ** * -0 .1 49 ** * -0 .0 11 1 0. 07 33 0. 09 13 (0 .0 13 1) (0 .0 14 6) (0 .0 15 7) (0 .0 39 8) (0 .0 59 0) (0 .0 58 8) (0 .0 06 78 ) (0 .0 04 81 ) (0 .0 07 31 ) (0 .0 50 5) (0 .0 73 8) (0 .0 57 7) (0 .0 13 1) (0 .0 17 7) (0 .0 22 7) (0 .0 48 1) (0 .0 68 1) (0 .0 68 2) o bs er va ti on s 33 5 30 7 18 1 15 3 15 3 15 3 33 5 30 7 18 1 15 3 15 3 15 3 33 5 30 7 18 1 15 3 15 3 15 3 rsq ua re d 0. 35 3 0. 37 1 0. 62 1 0. 77 3 0. 77 3 0. 80 4 0. 24 7 0. 29 6 0. 42 1 0. 62 3 0. 63 2 0. 64 1 n um be r of id 35 35 29 27 27 27 35 35 29 27 27 27 s o u r c e : t ab le d ra w n by t he a ut ho rs u si ng s ta ta v 15 . t ab le 3 . r ob us tn es s te st b y in te gr at io n of a dd it io na l v ar ia bl es wulli faustin djoufouet, thierry messie pondie8282 t ab le 4 . t ak in g in to a cc ou nt e nd og en ei ty a nd h et er os ce da st ic it y pr ob le m s v ar ia bl es fi na nc ia l i nc lu si on in de x 2s ls le w be l 2 ls 1 2 3 4 5 6 7 8 m ob ile p ho ne 0. 00 06 36 ** * 0. 00 13 6* ** 0. 00 09 08 ** * 0. 00 11 4* ** 0. 00 07 26 ** * 0. 00 13 4* ** 0. 00 07 43 ** * 0. 00 09 68 ** * (0 .0 00 14 7) (0 .0 00 12 2) (0 .0 00 25 7) (0 .0 00 35 5) (0 .0 00 14 2) (0 .0 00 11 9) (0 .0 00 22 5) (0 .0 00 23 8) g ro ss d om es ti c pr od uc t -0 .0 01 29 * 0. 00 06 57 0. 00 09 49 0. 00 17 6* -0 .0 01 20 * 0. 00 06 49 0. 00 09 35 0. 00 17 1* (0 .0 00 72 6) (0 .0 00 73 2) (0 .0 00 85 2) (0 .0 00 95 0) (0 .0 00 71 1) (0 .0 00 72 5) (0 .0 00 84 0) (0 .0 00 92 4) em pl oy ab ili ty le ve 0. 00 35 6 -0 .0 02 25 -0 .0 01 69 0. 00 37 5* -0 .0 02 06 -0 .0 01 66 (0 .0 02 17 ) (0 .0 02 38 ) (0 .0 02 56 ) (0 .0 02 15 ) (0 .0 02 34 ) (0 .0 02 50 ) le ve l o f e du ca ti on 0. 00 13 0* ** 0. 00 11 3* * 0. 00 15 0* ** 0. 00 13 4* ** (0 .0 00 36 0) (0 .0 00 48 6) (0 .0 00 32 7) (0 .0 00 35 9) fu nd s tr an sf er -0 .0 03 71 -0 .0 03 00 (0 .0 02 43 ) (0 .0 02 13 ) co ns ta nt -0 .0 47 4* ** -0 .1 25 ** * -0 .1 48 ** * -0 .0 91 2* * -0 .0 55 0* ** -0 .1 23 ** * -0 .1 44 ** * -0 .1 02 ** (0 .0 13 2) (0 .0 10 1) (0 .0 10 1) (0 .0 43 8) (0 .0 12 8) (0 .0 09 90 ) (0 .0 09 75 ) (0 .0 39 8) o bs er va ti on s 33 5 30 7 18 1 16 2 33 5 30 7 18 1 16 2 rsq ua re d 0. 28 7 0. 34 2 0. 62 0 0. 62 1 0. 30 9 0. 34 6 0. 62 0 0. 62 6 f 12 .9 0 57 .8 5 64 .5 3 45 .3 1 16 .5 8 57 .7 0 64 .0 5 46 .9 2 st an da rd e rr or s in p ar en th es es * ** , s ig ni fic an ce 1 % ; * *, s ig ni fic an ce 5 % ; *, s ig ni fic an ce 1 0% . s o u r c e : t ab le d ra w n by t he a ut ho rs u si ng s ta ta v 15 . impacts of fintech on financial inclusion… 8383 this table shows that the level of broadband penetration in a country enables fintech to be financially inclusive and effective. other elements such as the political stability of a country and the level of education of the population also favour financial inclusion. however, these results do not take into account the problems of endogeneity and heteroscedasticity of the data. to this end, table 4 below presents the results of the two-stage least squares (2ls) and lewbel (2012) estimations that take these issues into account. the results in this table show that, even taking into account possible endogeneity and heteroscedasticity issues, fintech contributes significantly to improving financial inclusion of people in sub-saharan africa. conclusionconclusion the objective of this paper was to determine the impact of fintech on the financial inclusion of populations in sub-saharan africa where financial literacy is still low. in this study, financial inclusion was defined as access to financial services at lower costs and fintech as the application of new technologies in the provision of financial services. however, several studies in europe and asia have shown that fintech to financial services. in sub-saharan africa, the level of fintech penetration is still relatively low and a large proportion of the population is still excluded from the mainstream financial system. thus, this study sought to make a contribution to understanding financial inclusion through fintech. to do so, data were collected on a sample of 35 countries over a period from 2011 to 2020. estimates were made using two-stage least squares models and the lewbel (2012) model. it is clear from the results that fintech contributes significantly to the financial inclusion of people in sub-saharan africa. the possession of a mobile phone facilitates the use of financial services. furthermore, a 1% increase in the number of people using fixed-line phones would contribute to a 0.67% increase in financial inclusion according to the ols 2ls estimates. in the fixed effect estimates, a 1% increase in fintech would contribute to a 0.33% increase in financial inclusion. the driscoll-kraay (1998) technique consolidated these results by further showing that with 1% of people having access to fintech tools, there is an improvement in the financial inclusion rate of 0.67%. these results ref lect the rapid evolution of technology tools in the financial sector in both developed and developing countries. wulli faustin djoufouet, thierry messie pondie8484 however, it can be seen that fintech is not the only variable 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(www1) objectifs et domaines prioritaires de l’agenda 2063, https://au.int/fr/agenda2063/objectifs. cjfa_1_2015_przed_drukiem.pdf 65 analysis of the capacity of the selected measures of decision-making models in companies. copernican journal of finance & accounting, 4(1), 131–145. http://dx.doi.org/10.12775/cjfa.2015.009 * czestochowa university of technology beata skowron-grabowska** czestochowa university of technology *** czestochowa university of technology czestochowa university of technology the analysis of the capacity of the selected measures of decision-making models in companies keywords: decision-making models, decision making, processes organizational – financial of enterprises. j e l classification: g32, l21, l61, m21. abstract: the paper aims at the analysis of the information capacity of selected instruments of the assessment of decision-making models in the analyzed companies. in the paper there are presented the idea and concepts of decision-making models. there have been discussed the selected instruments of the assessment of decision-making models date of submission: march 29, 2015; date of acceptance: may 7, 2015. * ** contact information: beatas@zim.pcz.czest.pl. *** contact information: slegowik@zim.pcz.pl. 132 in enterprises. in the final part of the paper there has been held the quantification of decision-making models in the investigated cement industry companies. to meet the objective of the paper there have been used literature studies and descriptive analysis. to specify the strength and direction of interactions between the parameters of the selected measures there has been calculated pearson correlation coefficient. the problem of information capacity of the instruments of the assessment of decision-making models is important and up-to-date due to its impact on the effectiveness of management of the analyzed enterprises and the possibility to generate value added. the aim of the paper is to examine the information capacity of the selected measures of decision-making models in the course of organizational and financial processes of the cement industry companies. the applied research method is multiple discriminant analysis carried out using the altman z-score model. to assessment of information capacity of the selected measures of decisionmaking models in organizational and financial processes of the cement industry companies has been applied pearson correlation coefficient. in the theory of the organization the model recognizes the characteristics of the reality of the economic system which are crucial for understanding behavioral, institutional, technical and organizational and functional relationships that occur in the framework of this reality. the model is not only to present the reality in a simplified manner, but also to build the assumptions of the activity, patterns of behavior, the selection of some basic resources along with the indication of the cause and effect links between the components of the model of different processes of business activity of enterprises. the subject of the decisions taken amounts to individual processes of enterprises. the process is understood as a set of activities performed in a specific sequence, which aim to produce a product or service of a certain acceptable value. enterprises that want to achieve success on the market must operate so as to generate value added which will allow to generate the expected financial results. taking into account the above statements, it is assumed in the paper that organizational and financial processes include the whole of the managerial activities connected with ordering, grouping, analyzing, and assigning employees specific tasks based on the possessed information to optimize activities connected with financial service of enterprises, their current and future activity. the analysis of the capacity of the selected measures… 133 model concepts have gained in popularity, which has been confirmed by many publications in the field of the analyzed subject in recent years. the etymology of the concept originates from the latin word “modus” and it means “the pattern according to which something is performed, the object being a model or a copy of a specific object, made in a smaller size” (sobol 2000). the fact of which part of the reality is copied by the model, among others, depends on the research problem, the subject and object of the research, the scope of the research, the period included by the research and the applied research methods and techniques (ackoff, churchman 1957). in management theory, decision-making models are a conceptual tool of enterprise management being, “to a particular enterprise, a unique way of operating on the market, which provides the maintenance of a long-term competitive advantage by providing clients with value added, understood as satisfying or even exceeding expectations as to broadly understood quality of products or services” (brdulak 2011, skowron-grabowska 2014). in accordance with the dynamic approach in management theory they are the tool presenting the logic of operations of enterprises in a particular field, including the set of elements and relationships between the elements (nogalski 2009, konovalova 2014). the rational decision-making model is the classic in the subject literature (jacobson, choi 2008). the rational model is particularly applicable in reasoning a priori, in which it is assumed that there is a simple solution to the problem which only needs to be discovered (griffin 2000 270, stoner, freeman, gilbert 2001, 247). adopting rational decisions requires from a decision-maker to possess wide knowledge and complete information on the decision-making situation, possible alternative solutions, evaluated with respect to the achievement of the objective and implementation of introductory activities (grudzewski, hejduk 2006). while assessing the implemented solutions there should be evaluated the willingness of the manager to take risk and the ability to deal with the imposed constraints (bittel 2002). if the effective implementation of decisions is conditioned by the involvement of a wider circle of stakeholders, it is necessary to lead to such commitment (stewart 2002). decision-making models are a tool enabling the implementation of decisions and they allow for the adaptation of the best solutions in particular conditions. it should be remembered, though, that the changeability of the enterprise environment, both exogenous and endogenous, is the subject to permanent chang134 es. this changeability of the environment brings about “travelling of the model”, leading to transformations of decision-making models and developing their classifications (magretta 2002). decision-making is an immanent feature of management. in the subject literature there are a lot of definitions of management. all of them underline the significance of the achievement of goals and the intended effects (krupski, nieminvolves making a range of managerial decisions based on reliable information (akerlof 1970), on the basis of which the assessment of the course of economic the tools used in decision-making models frequently concentrate on the ways of solving financial problems. an essential source of information on the results of the activity of business entities are financial statements. the tool of processing information from financial statements is the financial analysis. the analysis is a scientific procedure that involves the study of components of the whole and considering these components separately (cebrowska 2006). the financial analysis is one of the sections of economic analysis. its scope depends on the entity conducting the analysis, objectives of its performance and availability and detailed information essential for its performance (skoczylas, an effective tool of the assessment of selection alternatives in decisionmaking models, apart from the analysis of financial statements, is ratio analysis (cebrowska 2006). the tool for this analysis are indicators corresponding to the relationships of the respective values included in balance sheet, profit and loss account, cash f low statement and statement of changes in equity (bednarski 2007). financial indicators are the parameter of the value f low in enterprises and the carrier of information for different groups of recipients (kowalczyk, kusak 2006). an efficient tool of managerial decision-making is the altman z-score model, included the group of the second generation indicators. the concept of e. i. altman belongs to the group of multiple discriminant methods indicating the signs of bankruptcy of enterprises. this concept consists in studying information included in financial statements of the investigated entities using spe the analysis of the capacity of the selected measures… 135 cific ratios. e. i. altman proposed a few options of so called function. the original e. i. altman’s concept came into being in 1968 and had the following form (altman 1968): formula 1. the first formula of the altman z-score model z = 1.2 x 1 + 1.4 x 2 + 3.3 x 3 + 0.6 x 4 + 1.0 x 5 x 1 – working capital /total assets x 2 – retained earnings / total assets x 3 – earnings before interest and taxes / total assets x 4 – market value of equity / book value of foreign capital x 5 – net sales / total assets. conducting the empirical research using the altman z-score model there is obtained information in the research group on enterprises threatened with bankruptcy and solvent companies. the research result refers to the accepted boundaries of the classification of companies and individual groups of classification. the concept which has been used in the present paper was established in 1983 and has been ref lected in the following formula (altman 1984): formula 2. the second formula of the altman z-score model z’ = 0.717x 1 + 0.847x 2 + 3.107x 3 + 0.420x 4 + 0.998x 5 the presented model is known as zeta-function or and is based on the parameters of the original concept of e. i. altman except for variable x4, which took the following form: x4 – carrying (book) value of equity / book value of foreign capital (altman, hotchkiss 2007). redefining zeta function caused that the altman concepts could be used by a larger number of enterprises. the original concept of e. i. altman required the knowledge of the market value of equity of the analyzed company. the z-score model, based on carrying (book) value of equity was addressed to enterprises which were not able to determine the market value of equity. another version of the z-score model consists in eliminating the final variable of the z’ function, which is the parameter x5. such a change is driven by the fact that asset turnover ratio x5 is significantly dependent of the market the analyzed company operates on. the elimination of the variable x5 made the z’ function a universal and cross-sector method of early prediction of bankruptcy 136 in the investigated company, and the z’’ function took the following form (altman, hotchkiss 2007): formula 3. the third formula of the altman z-score model z’’ = 6.56 x 1 + 3.26 x 2 + 6.72 x 3 + 1.05 x 4 the altman models, apart from advantages, also have some drawbacks. the presented concepts of e. i. altaman depict only the selected area of the researcher’s studies and aim at the presentation of some exemplary concepts of predicting bankruptcy of enterprises. choosing the altman model to assess selection alternatives in decision-making models was determined by the information capacity of these parameters (stachowicz 2002) since it characterizes organizational and financial phenomtion of information channels. the presented altman model is not a model of the latest generation but it is characterized by simplicity and rapidity of measurement, which results in reducing the time of decision-making. tools and measures of the assessment of selection alternatives of decisionmaking may not only support decision-making processes in the assessment of regularities of use of the possessed resources and achievement of the assumed objectives but also they should enable the formation of model solutions. the selection of appropriate measures to assess selection alternatives of decisionmaking plays an important role in planning future directions of the company development. the empirical research was conducted in two enterprises of the cement industry operating in poland and belonging to the international concerns of the cement industry, on the basis of random sampling, which conventionally are re1 2 . the assessment of decision-making models in organizational and financial processes in the cement industry was made on the basis of the fi1 , 2 in years 2005–2013. from the point of view of the accomplishment of the objectives of the present paper, the most useful research tool, enabling ordering, grouping and comparability of heterogeneous areas which are the cement industry companies is multiple discriminant analysis. the analysis of the capacity of the selected measures… 137 to quantify decision-making models in organizational and financial processes in the cement industry companies there was carried out the two-stage empirical research. in the first stage there was used the multiple altman model enabling early prediction of risk symptoms related to the continuation of the activity, which was determined by the international capital structure of the analyzed companies. to quantify decision-making models in organizational and financial processes in the cement industry companies there was used the second formula of the altman model on account of the fact that it is used by the surveyed companies. the complexity of individual procedures in the altman model provides the conditions for conducting an objective analysis of the financial condition of the investigated companies. the possibilities of application of the discussed model allow for the quantification of the selected areas of the activity of the analyzed companies and the obtained information will be used to diagnose the course of organizational and financial processes and to evaluate their time f luctuations. the empirical research using the altman model was carried out in 1 2. table 1 1 1 financial year 2005 2006 2007 2008 2009 2010 2011 2012 2013 x1 = working capital/total assets 0.19 0.28 0.29 0.08 -0.02 -0.1 -0.05 0.06 0.07 x2 = net profit – dividend / total assets 0.06 0.12 0.09 -0.01 -0.02 -0.01 0.02 0.04 0.05 x3 = gross profit – interest paid / total assets 0.17 0.23 0.31 0.34 0.25 0.17 0.19 0.21 0.23 x4 = book value of equity / value of foreign capital 9.58 7.6 6.62 3.45 2.36 1.69 1.6 1.8 1.8 x5 = sales revenue / total assets 0.5 0.54 0.66 0.68 0.54 0.46 0.56 0.6 0.62 1 5.24 4.75 4.69 3.23 2.28 1.62 1.8 2.08 2.18 s o u r c e : author’s own study. the first ratio of the altman model is financial liquidity (x1) determined on the basis of working capital. the ratio x1 1 provides information on what proportion of current assets was not financed by current liabilities. in years 2005–2007 liquidity ratio remained at a very high level (the same as current financial liquidity ratio). in 2008 there was a sharp decline in liquidity of the surveyed company, which was due to the takeover of highly indebted 138 entities. the investment decisions resulted in the trend reducing financial liquidity until the year 2010. from 2011 the ratio indicated the improvement in ability of the company to cover liabilities. the calculations made proved that in 2006 there was an increase in the value of the cumulated return on assets ratio, which resulted from a higher portion of retained earnings in the company 1 compared to an increase in assets. in years 2007–2009 there was a sharp decline in the ratio value, which was the result of payment of high dividends. in years 2010 – 2013 there was an increase in the value of cumulated return on assets ratio, indicating an increase in the accumulation of profits saved in the course of the business activity. return on assets ratio is the most important parameter forming the altman 1 assets are the tangible basis for running a business activity. the level of the involvement of assets in generating the financial result 1 demonstrated an upward trend in 2008. in 2009 there was a decline in the ratio value ref lecting a decrease in the financial result. a downward trend continued until 2010. in years 2011–2013 there was an increase in the ratio value indicating the improvement in the efficiency of management of assets and obtaining a better financial result. the effectiveness of using equity indicates what is the share of the company 1 there was a steady decline in the ratio level (2005–2011), which indicated decision-making in the field of business financing. in years 2011–2013 the ratio value was more than 1, which indicated solvency of the company, though, there was a clearly noticeable trend of moving away from financing the business with equity for the benefit of funding with foreign capital. at the same time, it should be noted that the golden rule of financing was not violated. the study of asset turnover aims at the evaluation of the effectiveness of 1 the value of asset turnover ratio showed an upward trend in years 2005–2008, which indicated a steady increase in the involvement of assets in generating sales revenue. in years 2009– 2010 there was a decline in sales revenue, which was ref lected in a decrease in the level of asset turnover ratio. in years 2011–2013 there was an increase in the level of asset turnover ratio, indicating the acceleration of asset restoration by the achieved sales revenue. 1 and the ability to continue the activity based on the research by the altman model, it can be observed that in the 1 there was a downward trend. in years 2005–2008 the value of the the analysis of the capacity of the selected measures… 139 1 belonged to the “non-bankrupt” group. the evolution of the value in the altman model in years 2009–2013 was in the sphere of ambiguous classification. admittedly, there was a decline in financial liquidity (x1) and profitability (x3) in the discussed period but in the 1, 2010 was a critical year. on the other hand, in subsequent years, both profitability (x3) and asset turnover (x5) improved, therefore, it can be 1. another stage of the research includes the verification of the altman model 2. in table 2. there is presented the evolution of the level of ra2 in the analyzed period. table 2 2 2 financial year 2005 2006 2007 2008 2009 2010 2011 2012 2013 x1 = working capital / total assets -0.08 0.06 -0.07 -0.13 0.01 -0.14 0.06 0.04 0.05 x2 = net profit – dividend / total assets 0.09 0.11 0.09 -0.03 -0.01 -0.02 0.03 0.303 0.02 x3 = gross profit – interest paid / total assets 0.2 0.11 0.12 -0.05 -0.07 -0.06 0.02 0.02 0.01 x4 = book value of equity / value of foreign capital 1.8 -0.01 0.08 0.04 0.01 0.03 0.09 0.08 0.07 x5 = sales revenue /total assets 0.85 0.95 1.14 1.04 0.96 0.95 1.09 0.95 0.9 2 2.24 1.42 1.57 0.78 0.74 0.66 1.26 1.10 1.01 s o u r c e : author’s own study. the analysis of financial liquidity conducted on the basis of working capital 2 shows a similar trend as in the case of the determination of financial liquidity using different categories of current assets, referred to cur2 working capital represents a small percentage of total assets. in 2006 the value of liquidity ratio was at a relatively high level. in years 2007–2008 there was a sharp deterioration in the financial condition of the company in question. in 2009 there was an improvement in the ability to meet liabilities but in 2010 there was another decline in the finan2. in 2011 the level of liquidity began to stabilize, however, in years 2012–2013 the level of financial liquidity ratio indicated low 2. 2 in 2006 there was an increase in the accumulation of profits generated by the assets. in 2007 there was a slight decrease in the level of 140 the ratio to the level of 2005. in 2008 there was a sharp decline in the level of cumulated return on assets ratio, indicating a significant decrease in the ratio of retained earnings compared to assets involved in generating profits. an unfavorable situation continued until 2010. in 2011 there was a substantial increase in the ratio value, which indicated that the level of retained earnings in the company was relatively higher in relation to an increase in assets, however a decline in sales in years 2012–2013 resulted in a further decrease in the accumulation of profits generated by the assets 2. 2 declined in 2006. in 2007 there was an increase in return on assets ratio. the crisis in 2008 and the realized investments resulted in a sharp decline in return on assets in the com2. poor condition of the company continued until 2010. in 2011 the company again began to achieve a positive financial result from the assets involved, which was ref lected in an increase in gross return on assets ratio with interest. the improvement in return on assets was the result of the decisions taken on the level of costs borne and the produced revenue and the suspension of risky investments. a decline in the level of the financial result in years 2012–2013 re2. 2, indicates unfavorable (investment) decisions in 2006. they resulted in significant weakening of the financial condition of the company posing a risk of the loss of liquidity. the decisions of 2006 along with no prediction of the economic crisis by the company in question resulted in long-term disturbances in the capital structure. in years 2011–2013 there was an improvement in the financial condition of the surveyed company, which was the result of generating profits in that period. 2 indicates that in years 2005–2007 there was an increase in the involvement of assets in generating sales revenue. in 2008 there was a decline in the ratio value and a downward trend continued until 2010. in 2011 there was an improvement in the effectiveness of using the assets for generating sales revenue, there was an increase in asset turnover and the efficiency of using equity. in years 2 resulted in a decrease in the level of asset turnover ratio. 2 to assess the solvency and ability to continue the activity indicated that the investigated company coped with many decision-making problems. the level of the altman the analysis of the capacity of the selected measures… 141 2 in years 2006–2013 indicated the occurrence of risks in the area of the continuation of the activity of the analyzed company. in years 2008–2010 the values in the altman model for the company p3 suggested a bankrupt. however, in 2011 there was an upward trend suggesting lyzed company was created by the impact of investments made in 2006 and the fact that it was not predicted that the crisis would affect the cement industry so significantly. a decline in the level of sales caused by the overall downward trend on the market again brought about a decrease in the level of the altman z’-score in the company p3, which brings about that it is impossible to clearly qualify the investigated company to the appropriate group. in order to assessment of information capacity of the researches measures of decision-making models the strength and direction of linear relationship between decision-making factors were examined by pearson correlation coefficient. studies are designed to show the main parts of the decision-making process in researches companies. to examine the strength and direction of linear relationship between the level of return on equity and sales revenue, asset turnover and equity multiplier in the investigated companies there were calculated the values of pearson’s correlation coefficient. the values of pearson’s correlation coefficient are within a range of < -1, 1 >. a strong correlation occurs when a coefficient value f luctuates around 1 or -1, a weak correlation occurs when coefficient value approaches 0. the sign of the coefficient indicates the direction of the relationship between the variables under consideration. in the studies, it is assumed that the correlation value in the following ranges amounts to 0 to 0.3 – weak correlation, 0.3 to 0.6 – relatively strong correlation, 0.6 to 1 – strong or very strong correlation. at the subsequent stage there was examined the strength and direction of correlation between the altman z’-score and its components (table 3). in the 1 there can be noticed a very strong positive correlation between the value of the altman z’-score and financial liquidity and capital market efficien1 an increase in solvency is accompanied by an increase in financial liquidity and an increase in the share of the market 142 value of equity in the structure of total liabilities. a strong correlation occurs between the altman z-score and cumulated return on assets. this indicates 1 occurs along with an increase in retained earnings in relation to total assets. table 3. pearson’s correlation coefficient between individual measures of the altman model for the company pearson’s correlation coefficient between the altman z'-score 1 2 x1 = financial liquidity 0.91 0.06 x2 = cumulated return on assets 0.71 0.85 x3 = return on assets 0.23 0.97 x4 = capital market efficiency 0.98 0.79 x5 = asset turnover 0.10 0.15 s o u r c e : author’s own calculations – correlation statistically significant at a significant level of 0.05 (at a significant level of 0.01 – t-student distribution). considering the values of pearson’s correlation coefficient calculated for the 2 there can be observed a very strong positive correlation between z’-score and return on assets and cumulated return on assets. this indicates 2 is accompanied by a simultaneous increase in the involvement of assets for generating profit and an increase in the level of profit per a monetary unit of the involved assets. the conducted research shows a very weak positive correlation between the altman z’-score and financial liquidity and a weak negative correlation between solvency and asset turnover. verifying the correctness of the proposed solutions in the field of the conducted research based on the altman model, it can be concluded that it allowed for the examination of the particular reasons of the existing phenomena. the analysis in the field of solvency of the cement industry companies under consideration provides precise information both on the course of organizational processes and the sources of their financing. 1 it can be noted that the priority is to maintain sustainable financial liquidity. the conducted research indicates a strong positive correlation between the level of the altman z’-score and financial liquidity. a high share of equity in the structure of to the analysis of the capacity of the selected measures… 143 1 in changing external conditions. the research indicates a strong positive correlation between the altman factor for the company in question. 2 it can be observed that the priority is an increase in solvency achieved with an increase in quick liquidity. the conducted research shows a very strong positive correlation between the altman z’-score and return on assets (r = 0.97) indicating that the company aims at the stimulation of the efficiency of using fixed and 2 runs a quality policy (of high prices), which is ref lected both in inventory turnover and the level of profitabil2 is based on creating a specific value for clients achieved by means of the quality of the provided products. 2 is characterized by mutually adjusted and complimentary processes and decisions aimed at the achievement of competitive advantage in the sector of the cement market. the aim of the paper is the analysis of the information capacity of the selected instruments of the asessment of decison-making models in the investigated entities. to achieve the objective of the paper in the first stage of the research process there was used the multivariate model of e. i. altman enabling early identification of the risk symptoms related to the continuation of the activity. in the second stage, to examine the strength and direction of linear correlation between decisive factors in organizational and financial processes in the cement industry companies there was used pearson’s correlation coefficient. the conducted research indicates that the environment of the decisionmaking model in organizational and financial processes affects the performance of the cement industry companies, which means that the achievement of competitive advantage by the company requires the achievement of the appropriate level of profitability and solvency, while accomplishing the most important objective which is creating value for clients. the achievement of a particular kind of competitive advantage must take into account the market sector in which the company operates and the source of income in that sector. enterprises operating in a dynamic environment aim at achieving competitive advantage by using resources in optimized processes. the financial dimen144 sion of the achieved competitive advantage is profitability (profit). the level of profitability in the cement industry companies is affected by the possessed resources and developed processes. the problem of decision-making models is important and up-to-date on account of the fact that decision-making models in organizational and financial processes in the cement industry companies must be considered as the enterprise activity at a certain time, which uses resources and optimizes processes of the activity to reduce costs or to create distinctive products with a simultaneous increase in value for clients, which allows to achieve sustainable competitive advantage and generate profits. ackoff r. l., churchman c. w. 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(2014), case study method application when studying finance and banking: situation description, prague, 700-715. http://proceedings.iises.net/index.php ?action=proceedingsindexconference&id=7&page=3 (accessed: 01.03.2015). the analysis of the capacity of the selected measures… 145 case study, 46 [in:] changes and risk in knowledge based economy. r. lescroart, a. pachura, m. kozak (eds.), hec „blaise pascal”, luxemburg. kowalczyk j., kusak a. (2006), decyzje finansowe firmy, metody analizy, c.h. beck. warszawa, 1. pwe, warszawa, 167. magretta j. (2002). why business models matter, harvard business review, 80(5), 92. biorstw, mba 2, 7. http://www.google.pl/url?sa=t&rct=j&q=&esrc=s&source=web&c d=1&ved=0ccoqfjaa&url=http%3a%2f%2fjml2012.indexcopernicus.com%2ffullromanowska m. (2004), planowanie strategiczne, pwe, warszawa, 30. ganizacji, nr 1, 35–39. cyjnego, 289–290 [in:] dylematy cywilizacyjno-kulturowe, l.h. haber (eds.) agh, kraków. stewart d. m. (2002), praktyka kierowania, pwe, warszawa, 350. stoner j. a. f., freeman r. e., gilbert d. r. (2001), kierowanie, pwe, warszawa, 247. date of submission: september 11, 2020; date of acceptance: october 4, 2020. * contact information: hanspatrickbidias@gmail.com, department of accounting and finance, faculty of economics and management sciences, university of dschang, ouest region, cameroon, phone:+237679261349; orcid id: https://orcid.org/00000002-4655-5787. ** contact information: gaeltonmo@gmail.com, department of accounting and finance, faculty of economics and management sciences, university of dschang, ouest region, cameroon, phone:+237696881738; orcid id: https://orcid.org/0000-00022818-5575. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402020, volume 9, issue 3 bidias-menik, h.p., & tonmo, s.g. (2020). interest rate predictability in some selected african countries. copernican journal of finance & accounting, 9(3), 45–60. http://dx.doi.org/10.12775/ cjfa.2020.011 hans patrick bidias-menik* university of dschang-cameroon simplice gaël tonmo** university of dschang-cameroon interest rate predictability in some selected african countries keywords: interest rates predictability, expectation hypothesis, term structure of interest rates, african markets. j e l classification: e43, g17. abstract: this study tries to verify the predictive power of the implicit forward rate of the term structure of interest rates in africa. we used data from egypt, ghana, kenya, nigeria and the republic of south africa. a modified version of the yield term premium and the forward term premium models of shiller and mcculloch (1990) were used to test the predictive power of the implicit forward rate, rather than the rational expectations hypothesis. we both used fmols and dols estimators, since they are more consistent than ols with non-stationary series. the overall results show that the implicit hans patrick bidias-menik, simplice gaël tonmo46 forward rate does not have a significant predictive power in africa. it therefore appears that operators on african markets should not rely on those predictions.  introduction the predictability of interest rates is a financial problem that preoccupies several categories of economic agents. indeed, in order to avoid capital losses or to expect huge gains, a lender on capital market has to get an idea of what will be the future level of interest rates. similarly, in order to minimise the capital cost, a borrower needs to know what will be the future level of interest rates. some old neoclassical school authors including fisher (1896), lutz (1940) and meiselman (1962), thought that the future level of interest rates can be predicted through the term structure of interest rates (or yield curve). it represents the relationship between bond yields that are theoretically considered to be risk-free, and their maturities at a given date (mishkin, 2010). the future level of interest rate is then known, given the implicit forward rate in the term structure of interest rates. these authors were criticised by others from the monetarist school including hicks (1939) and modigliani and sutch (1966) on the fact that operators on the market are not gods alike to know with certainty what will be in the future. taking into consideration the risk, they proposed to add a premium (liquidity premium or risk premium) to the term structure of interest rates. in those conditions, the future level of interest rate would be the implicit forward rate plus the liquidity or risk premium. considering the fact that operators should have rational expectation on the market, roll (1968) and sargent (1972) proposed a model where the forward rate is the expected rational interest rate, which gave what is called in the financial literature the expectation hypothesis. but what credit should be given to the predictions of the implicit forward rate of the term structure of interest rates in africa? this study tries to verify the predictive power of the implicit forward rate of the term structure of interest rates in africa. that is to test the empirical validity of the expectations hypothesis in africa. the model of shiller and mcculloch (1990) was used to this end. but, rather to use a rational expected short rate as it is common in the literature, following guidolin and thornton (2008) and bulkley, harris and nawosah (2013), we used the implicit forward rate as the short rate predicted. we used data from egypt, ghana, kenya, nigeria and the republic of south africa. interest rate predictability in some selected african countries 47 the rest of the paper is organized as follows: after this introductive section, the next section presents a literature review on interest rate predictability through the term structure of interest rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, (1) where rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, is the long term rate of maturity n, and rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, is the current short rate, and rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, is the future rate at time rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, (2) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, , sargent (1972) rewrite it as follows: hans patrick bidias-menik, simplice gaël tonmo48 rates. the third section presents the research methodology and the course of the research process, the fourth presents the results and discussions, and the sixth section presents the conclusion. literature review theoretical framework of interest rate predictability through the term structure of interest rates the term structure of interest rate was first describes by fisher (1896), who proposed a mathematical equality between the yield of a long term security and the total yield of short term securities, along the long term maturity. but his theory was formalised by lutz (1940) in his expectations theory. lutz (1940) described operators in the capital market as insatiable and motivated by a single goal: profit maximisation. in this context, they would try to take advantages of any arbitrage opportunities offered by a market in a situation of disequilibrium, that is a market where: (1 + r� (�))� ≠ �1 + r�(�)��1 + r��� (�) � … �1 + r���(�) � (1) where r� (�) is the long term rate of maturity n, and r�(�) is the current short rate, and r��� (�) is the future rate at time 𝑡𝑡 + 1𝑡 𝑡𝑡 + 𝑡𝑡 𝑡𝑡 + 𝑡𝑡 … 𝑡 𝑡𝑡 + 𝑡𝑡. lutz (1940) suggested that, while they are trying to take advantage of this disequilibrium situation, operators on the capital market will contribute to bring the market back in a situation of general equilibrium. the general equilibrium equation is as follows: (1 + r� (�))� = �1 + r�(�)��1 + r���(�) � … �1 + r���(�) � (𝑡) the future short rates in that equilibrium context are called the implicit forward rates. considering the fact that lim ��� ln(1 + x) = 𝑥𝑥, sargent (1972) rewrite it as follows: r�(�) = 1 n � r��� (�) ��� ��� (𝑡) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, (3) this is to say that the long-term yield is a portfolio of short term yield of the same maturity and equivalent weight. lutz (1940) was criticised on the fact that he assumed that operators are gods alike, knowing with certainty all the future short interest rates. since this is not true, there is a risk that should be priced. hick (1939) calls it a liquidity premium in his liquidity premium theory, while modigliani and sutch (1966) call it the risk premium in his preferred habitat theory. the general equilibrium becomes in this context as follows: there is a risk that should be priced. hick (1939) calls it a liquidity premium in his liquidity premium theory, while modigliani and sutch (1966) call it the risk premium in his preferred habitat theory. the general equilibrium becomes in this context as follows: r�(�) = 1 n � r��� (�) ��� ��� + 𝜋𝜋� (4) where 𝜋𝜋� represents the risk premium or the liquidity premium corresponding to the ith expected rate, with 𝜋𝜋� = 0. the expectations hypothesis, as it is defined in the literature, considers all these three theories. the tests of expectation hypothesis in the literature there are several approaches to test the expectation hypothesis in the financial literature, including the standard models of shiller and mcculloch (1990), the var models of campbell and shiller (1991) and the orthogonal models of bekaert, hodrick and marshall (1997). the standard models of shiller and mcculloch (1990) and the orthogonal models of bekaert et al. (1997) are determined from the ex-post risk premium. indeed, three time-independent term risk premiums can be distinguished: the yield term premium, the forward term premium and the holding-period premium (shiller & mcculloch, 1990). but, while the orthogonal models consider the ex-post term premium as an unpredictable "surprise" under the expectation hypothesis (the regression coefficient of the long or short rate on that premium should be null), the standard models of shiller and mcculloch (1990) are simple linear regression models where the dependent variable is a rate variation and the explanatory variable a spread (jondeau & ricart, 1999). the orthogonal models seek to resolve the problem of the poor small samples properties of the standard model (longstaff, 2000). they used a monte carlo simulation to this end. but they are unclear about the predictive power of the implicit forward rate. the var model of campbell and shiller (1991) also try to deal with the standard models biases, including overlapping errors. this approach provides some information about the similarity of current spread movements relatively to those implied by the expectations hypothesis (campbell & shiller, 1991). if the purpose is to evaluate the ability of the expectation hypothesis to predict the slope of the yield curve, then the linear regression would not be the most appropriate (4) where represents the risk premium or the liquidity premium corresponding to the ith expected rate, with π0 = 0. the expectations hypothesis, as it is defined in the literature, considers all these three theories. the tests of expectation hypothesis in the literature there are several approaches to test the expectation hypothesis in the financial literature, including the standard models of shiller and mcculloch (1990), the var models of campbell and shiller (1991) and the orthogonal models of bekaert, hodrick and marshall (1997). the standard models of shiller and mcculloch (1990) and the orthogonal models of bekaert et al. (1997) are determined from the ex-post risk premium. indeed, three time-independent term risk premiums can be distinguished: the yield term premium, the forward term premium and the holding-period premium (shiller & mcculloch, 1990). but, while the orthogonal models consider the ex-post term premium as an unpredictable “surprise” under the expectation hypothesis (the regression coefficient of the long or short rate on that premium should be null), the standard models of shiller and mcculloch (1990) are simple linear regression models where the dependent variable is a rate variation and the explanatory variable a spread (jondeau & ricart, 1999). interest rate predictability in some selected african countries 49 the orthogonal models seek to resolve the problem of the poor small samples properties of the standard model (longstaff, 2000). they used a monte carlo simulation to this end. but they are unclear about the predictive power of the implicit forward rate. the var model of campbell and shiller (1991) also try to deal with the standard models biases, including overlapping errors. this approach provides some information about the similarity of current spread movements relatively to those implied by the expectations hypothesis (campbell & shiller, 1991). if the purpose is to evaluate the ability of the expectation hypothesis to predict the slope of the yield curve, then the linear regression would not be the most appropriate method (campbell & shiller, 1991). but if one’s purpose is merely to test the theoretical model of expectation hypothesis, then the regression method using the standard model would be simpler (campbell & shiller, 1991). since this is the case in this study, we use the standard model of shiller and mcculloch (1990). several studies have been made, in the literature, using standard tests, including fama (1984), mankiw and miron (1986), fama and bliss (1987), froot (1987), shiller and mcculloch (1990), campbell and shiller (1991), hardouvelis (1994), bulkley et al. (2013), on american data’s; jondeau and ricart (1999) and guidolin and thornton (2008) on euro-devises data’s, gerlach (2003) on hong kong interbank market data’s, and among the most recent, boamah (2016) on ghanian data’s, and bidias and kamdem (2017) on west african economic and monetary union (waemu) interbank market data’s. all these studies but the one of jondeau and ricart (1999) rejected the expectation hypothesis on each market in question. it is important to note that all these studies but those of guidolin and thornton (2008) and bulkley et al. (2013) used the rational expected short rate as the predicted future short rate. if the need to consider that operators on the market are rational is understandable, this does not provide clear information’s about the predictive power of the implicit forward rate. so rather to use it as it was defined by shiller and mcculloch (1990), following guidolin and thornton (2008) and bulkley et al. (2013), we consider the implicit forward rate as the predicted rate. the details are given in section 3 bellow. hans patrick bidias-menik, simplice gaël tonmo50 the research methodology and the course of the research process the data in this study, we used data of several african countries, including the republic of south africa, nigeria, egypt, ghana, and kenya. this choice is based on the fact that their stock exchange markets are among the most successful in africa, in terms of market capitalisation. stock returns on financial markets are indeed evaluated with reference to the term structure of interest rate on money market, since securities on this market are theoretically considered free from default risk. while interbank market rates were used for the republic of south africa and nigeria, treasury bills rates were used for egypt, kenya and ghana. the choice of one or the other in this study depends solely on data’s availability. the data used have been collected on the website of each central bank concerned. we used monthly rates of three months, six months and twelve months over the period from january 2010 to may 2017. this is a period after the international financial crisis of 2007-2008, the idea here being to minimise the effects of this crisis on agents expectations. since it is assumed in the literature and in practice that there is a relationship between short terms rates on the market, the maturities considered are less than one year. the choice of those used is based on the fact that they are the most used rates in empirical studies. in addition, three-month and six-month rates represent the most commonly used reference rates on interbank markets. they were therefore considered as short-term rates in this study – that is the rates that are anticipated by agents. data of ghana and nigeria were directly obtained with a monthly frequency, while those of the republic of south africa, egypt and kenya were obtained initially with a weekly frequency. they were therefore grouped monthly from a simple arithmetic mean. the time series obtained had some missing observations. for ghana, there was one missing observation about 3-month rate of t-bill. for kenya, there was one missing observation about the 3-month rate series, one missing observation for the 6-month rate series, and 6 missing observations for the 12-month rate series. the missing observations not exceeding one period for each of these series, we filled the gaps with a simple linear interpolation. interest rate predictability in some selected african countries 51 for egypt, there was a total absence of transactions between january and october 2015 for the 3-month rate series, and between january and december 2015 for the 6-month and 12-month rate series (a whole year). last observations carry forward (locf) and next observation carry backward (nocb) techniques were used for 50% of consecutive voids. methods of data analysis we mentioned supra that shiller and mcculloch (1990) distinguishes three term risk premiums: the yield term premium, the forward term premium and the holding-period premium. he derived three models from these term premium as follows: 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were (5) 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were (6) 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were (7) where 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were , and 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were are the rational expected rates, ft (k, k + m) is the implicit forward rate in the current term structure, 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were and 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were are respectively the current long term (n period) and short term (m period) rate, with k=n/m, ε is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were (8) hans patrick bidias-menik, simplice gaël tonmo52 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were (9) where 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were and 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were (10) 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were (11) in each equation, β capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread 1 𝑘𝑘 � (𝐸𝐸� 𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝐸𝐸� 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (6) 𝐸𝐸� 𝑅𝑅��� (���) − 𝑅𝑅�(�) = 𝛼𝛼 + 𝛽𝛽 𝑤𝑤 𝑤𝑤 − 𝑤𝑤 �𝑅𝑅� (�) − 𝑟𝑟�(�)� + 𝜀𝜀��� (7) where 𝐸𝐸� 𝑟𝑟���� (�) , 𝐸𝐸� 𝑟𝑟��� (�) and 𝐸𝐸� 𝑅𝑅��� (���) are the rational expected rates, 𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) is the implicit forward rate in the current term structure, 𝑅𝑅�(�)and 𝑟𝑟�(�) are respectively the current long term (n period) and short term (m period) rate, with k=n/m, 𝜀𝜀 is a with noise. in this study, we only used the models (5) and (6), for the model (7) assumes that k>2. since we are not testing the rational expectations hypothesis, those models were reformulated to test the predictive power of the implicit forward rate as follows: 1 𝑘𝑘 � (𝑟𝑟���� (�) − 𝑟𝑟� (�)) ��� ��� = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀���, 𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑤 𝑤 𝑤𝑤 𝑤 𝑤𝑤 (𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (𝑘𝑘, 𝑘𝑘 + 𝑤𝑤) − 𝑟𝑟�(�)� + 𝜀𝜀����� (9) where 𝑟𝑟���� (�) and 𝑟𝑟��� (�) are the forward rates respectively at time t+sm and t+k. considering the fact that n=2 and m=1 in this study, the models can be rewrite as follows: 1 2 (𝑟𝑟��� (�) − 𝑟𝑟� (�)) = ∝ + 𝛽𝛽�𝑅𝑅�(�) − 𝑟𝑟�(�)� + 𝜀𝜀��� , (1𝑤) 𝑟𝑟��� (�) − 𝑟𝑟�(�) = 𝛼𝛼 + 𝛽𝛽�𝑓𝑓� (1, 2) − 𝑟𝑟�(�)� + 𝜀𝜀����� (11) in each equation, 𝛽𝛽 capture the predictive power of the implicit forward rate in the current term structure. indeed, in (3.6), the spread �𝑅𝑅�(�) − 𝑟𝑟�(�)� is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient 𝛽𝛽 will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were is supposed to be mathematically equal to the half rate variation predicted by the implicit forward rate. it is therefore regress on the realized variation in order to know the predictive power of the implicit forward rate. the regression coefficient β will be equal to 1 if the implicit forward rate is a perfect foresight indicator of short terms interest rates movements. since (10) and (11) are simple linear regression models, all the preliminary tests of stationarity, co-integration, normality, autocorrelation of errors and heteroscedasticity were done to ensure the relevance of the results. indeed, it is well known in the literature that financial series are often non-stationary. in fact, all the interest rates series were prove to be i(1) by the dikey fuller generalize least square. in that context, estimations made using ols will be inconsistent, for the fact that inferences using the normal tables will not be valid even asymptotically (arize, malindretos & ghosh, 2015). ols estimates will be biased in that context, while fmols of philips and hansen (1990) and dols of stock and watson (1993) will not (arize et al., 2015). both dols and fmols are usually preferred to the ols since they take care of small sample and endogeneity bias (montalvo, 1995). dols is a parametric approach which seeks to address asymptotic bias contained in the ols estimates by including leads and lags of the first difference of the independent variables. lags and leads are introduced to deal with the problem of the order of integration and the existence or absence of cointegra interest rate predictability in some selected african countries 53 tion (anastasiou, louri & tsionas, 2016). furthermore, white heteroskedastic standard errors are used. nevertheless, the parametric dols is preferred to the non-parametric fmols, for the fmol (unlike the dols) imposes additional requirements that all variables should be integrated of the same order [i.e.,i(1)] and that the regressors themselves should not be cointegrated (masih & masih, 1996). in addition, according to kao and chiang (2000) dols estimator is the best estimator overall. they asserted that dols outperforms both ols and fmols. for these authors, the dols differs from the fmols estimators in that the dols requires no initial estimation and no non-parametric correction. not only it’s computationally simpler, but it reduces bias better than fmols. the t statistic from dols converges to the standard normal density much better than the statistic from fmols. in order to guarantee the robustness of the result, we both used fmols and dols in this study. results and discussions it appears from analysis results that the implicit forward rate does not have a significant predictive power in egypt, ghana and kenya. the results are the same, irrespective of the model or the estimation method used. thus, operators in those countries should not rely on the predictions of the implicit forward rate of the term structure of interest rates to get an idea of what would interest rates be in the future. those results are partially consistent with boamah (2016) in ghana, since he found a significant but low predictive power of the implicit forward rate. the results are also consistent with guidolin and thornton (2008) on euro-devises, and those of bulkley et al. (2013) and bulkley, harris and nawosah (2015), even though they also found a partial but low predictive power of the implicit forward rate. the later explain that failure by two behavioural biases: the law of small number and conservatism. hans patrick bidias-menik, simplice gaël tonmo54 table 1. results of the fmols estimations ß (σβ ) r 2 egypth model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) 0.3611 (0.1723) 0.8420 (0.4404) 0.3517 (0.1669) 0.8241 (0.4297) 0.1384 -0.1108 0.1411 -0.1120 ghana model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) -0.2767 (0.2145) 0.0412 (0.1846) -0.2645 (0.2116) 0.0646 (0.2024) -0.0050 0.0080 -0.0045 0.0121 kenya model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) 0.0613 (0.0924) 0.1872 (0.1285) 0.0578 (0.0842) 0.1759 (0.1101) 0.0142 -0.0388 0.0144 -0.0418 nigeria model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) -0.0707 (0.0673) -0.1460 (0.0467)** -0.0731 (0.0684) -0.1648 (0.0439)** 0.0407 0.0599 0.0438 0.0602 south africa *model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) 0.0703 (0.0334)** 0.1078 (0.1081) 0.0691 (0.0253)** 0.1062 (0.1050) 0.0670 -0.0146 0.0781 -0.0153 n o t e : mean (standard deviation) of the regressor coefficient in the second column and determination coefficient in the third column. *, ** denote significance at 10% and 5% respectively. s o u r c e : authors’ computation from stata 10/1 outputs. interest rate predictability in some selected african countries 55 table 2. results of the dols estimations ß (σβ ) r 2 egypth model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) 0.3530 (0.2197) 0.8960 (0.6058) 0.3451 (0.2128) 0.8766 (0.5931) 0.1987 0.1093 0.1987 0.1084 ghana model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) -0.3046 (0.3108) 0.0547 (0.2449) -0.2812 (0.3044) 0.0827 (0.2696) 0.0769 0.0745 0.0728 0.0751 kenya model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) 0.0366 (0.1699) 0.2806 (0.2605) 0.0323 (0.1528) 0.2653 (0.2449) 0.3846 0.0223 0.3743 0.0256 nigeria model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) -0.2511 (0.0533)** -0.2100 (0.0900)** -0.2740 (0.0543)** -0.2376 (0.1059)** 0.1602 0.1046 0.1593 0.0998 south africa model (3.6) (3months ; 6months) (6months ; 12months) model (3.7) (3months ; 6months) (6months ; 12months) 0.0672 (0.0583) 0.1755 (0.1039)* 0.0660 (0.0560) 0.1712 (0.1005)* 0.3414 0.3299 0.3397 0.3298 n o t e : mean (standard deviation) of the regressor coefficient in the second column and determination coefficient in the third column. *, ** denote significance at 10% and 5% respectively. s o u r c e : authors’ computation from stata 10/1 outputs. hans patrick bidias-menik, simplice gaël tonmo56 in nigeria and south africa even though the results are the same irrespective of the model used, they are slightly different with respect to the estimation method used. indeed, dols results are more significant than fmols results in nigeria, while they are different in the matter of significance in the republic of south africa. in nigeria, the observed difference of the value of the coefficients can be explained by a strong persistence in the spread at the end of the series. the sample size thus plays a role here, since observations are 82 for the fmols and 76 for the dols. this is because the dols add more differenced lags and lead than the fmols. since dols is supposed to be more consistent than the fmols, we have to conclude that the implicit forward rate have a significant predictive power in nigeria. but, since the direction of that prediction is not the one expected, one could conclude that operators should not rely on the prediction of the forward rate to have an idea of what would interest rate be in the future. this result suggests that operators on the market in this country are more irrational in their expectations, and that is the conclusion of hardouvelis (1994) in united-states, even though he used a var model of campbell and shiller (1991) to confirm it. in the republic of south africa, while the fmols and dols results are slightly the same in term of coefficient values, they are different in term of significance. the model of 3 months and 6 months rates is significant with fmols, while the model of 6 months and 12 months rates is not. the results are the inverse with the dols. this could also be explained by strong persistence in the variables. in that context, the sample size would play a role here too. the dols being more consistent than the fmols, if we consider a threshold of 5%, we have to conclude that the predictions of the implicit forward rate are irrelevant in the republic of south africa. this conclusion is the same for the fmols if we consider the determination coefficient. therefore, operators on that market should not rely on the predictions of the implicit forward rate.  conclusion the purpose of this study was to verify the predictive power of the implied forward rate of the term structure of interest rates in africa. data from egypt, ghana, kenya, nigeria and the republic of south africa were used to this end. a modified version of the yield term premium and the forward term premium interest rate predictability in some selected african countries 57 models of shiller and mcculloch (1990) were used to test the predictive power of the implicit forward rate, rather than the rational expectations hypothesis. we both used fmols and dols estimators, since they are more consistent than ols with non-stationary series. the results of this study show that the implicit forward rate does not have a significant predictive power in the african countries considered. as a recommendation, economic agents operating in these countries should not rely on the predictions of the implicit forward rate in their decision making. indeed, it would be difficult to make relevant forecasts of the evolution of economic conditions based on a hypothetical general equilibrium relationship between short-term and long-term rates in these countries, since the markets under consideration are not in a situation of general equilibrium. a direct implication of this observation is the fact that an operator could take advantage of this situation of absence of general equilibrium on these markets to optimise his speculative and arbitrage gains between the short run and the long run. a group of operators applying the same optimisation strategy could thus have a significant inf luence on the supply of financing for agents in need of financing in the different segments of the market (long term and short term). furthermore, by extrapolation, the results of this study reveal that a shock occurring in one market segment (such as a change in monetary policy in the short term) would have a marginal effect on the other market segments. in other words, the interest rate formation process would depend exclusively on the conditions of supply and demand for capital in each market segment in these countries. concerning interest rate predictability, it would be interesting to study the dynamics of interest rates in each segment before concluding that interest rates in these african markets are unpredictable. in that logic, one could be interested in studying if the var predictions of campbell and shiller (1991) could be more accurate.  references anastasiou, d., louri, h., & tsionas, m.g. 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(1968). the behavior of interest rates: an application of the efficient market model to u.s. treasury bill, ph.d thesis, chicago: graduate school of business (university of chicago). sargent, t. j. (1972). rational expectations and the term structure of interest rates. journal of money, credit, and banking, 4(1), 74-97. shiller, r.j., & mcculloch, j.h. (1990). the term structure of interest rates. in b. friedman, f. hahn (eds). the handbook of monetary economics. amsterdam: elsvier. http://dx.doi.org/10.1016/s1573-4498(05)80016-5. stock, j., & watson, m. (1993). a simple estimator of cointegrating vector in higher order integrating systems. econometrica, 61(4), 783-820. http://dx.doi.org/10. 2307/2951763. hans patrick bidias-menik, simplice gaël tonmo60 webography countries links toward the central banks data’s * egypte http://www.cbe.org.eg/en/pages/default.aspx ghana https://www.bog.gov.gh/index.php?option=com_wrapperandvie w=wrapperanditemid=231 kenya https://www.centralbank.go.ke/ nigeria http://www.cenbank.org/functions/export. asp?tablename=securities rsa https://www.resbank.co.za/research/statistics/pages/ onlinedownloadfacility.aspx * last consultation the 30 june 2017. cjfa_1_2015_przed_drukiem.pdf 65 manipulate financial results of enterprises. copernican journal of finance & accounting, 4(1), * cracow university of economics estimated values: the provisions and the write-downs of assets as tools to manipulate financial results of enterprises keywords: estimated values, provisions, write-downs of assets, financial result. j e l classification: m4. abstract: the purpose of using estimated values such as: provisions and write-downs of assets is to limit economic risk. provisions should protect the entity against the adverse effects of future economic events that are possible to predict, and the write-downs of assets should protect the entity against overvaluation of its assets beyond their true value. however, in business practice, these estimates, are often used by the boards of companies to manipulate financial results, both as a tool to increase, as well as to decrease the result. the purpose of this study is to point out the problem of manipulating financial results of companies through the use of estimated values in the form of provisions and write-downs of assets. it seems that it should be taken seriously, and considered as one of the key problems of the theory, and in particular the practice of accounting. the following research methods have been used: an analysis of the literature, an analysis of normative acts, deduction method and comparison method. date of submission: april 7, 2015; date of acceptance: may 10, 2015. * contact information: stepienk@uek.krakow.pl, financial accounting depart+48 12 293 74 16. 158 accounting plays an important role in economic activity, therefore the information produced by this information system, especially its final product – a financial statement, must be reliable and credible and thus useful. thanks to the information provided by accounting in the form of financial statements a variety of economic decisions are made by numerous users of these statements. through the spectrum of financial statements of enterprises are evaluated, differentiated and positioned by society. for this reason, a wide range of users of accounting expects that accounting will present a true picture of the financial position of a company and make a reliable measurement of the financial result. contrary to the expectations of its users accounting, especially financial reporting, does not always provide strictly consistent with the current state information, on the condition of assets and capital and the results of economic activities of an enterprise. the reason for this, is the use of estimates in the form of provisions and write-downs of assets of a company. in order to minimize economic risk, accounting permits the taking of preemptive actions. these actions are based on estimated values, which can vary from actual values, however they are intended to protect an entity against any loss, negative effects of other foreseeable economic events or over estimating the value of assets. among these protective measures, which are based on estimated values, it is worth to mention the creation of provisions and impairment losses of a company’s assets (micherda 2006, 113). the use of estimated values ought to protect a business entity against economic risks, however, in practice, estimated values are often used to manipulate financial results of companies. managers of companies use provisions or write-downs of assets to create virtual profits or to reduce high losses, depending on the circumstances. for this reason, the recipients of financial statements should be aware of this problem and explore reporting information on estimated values used in subsequent reporting periods. the purpose of this study is to point out the problem of manipulating financial results of companies through the use of estimated values in the form of provisions and write-downs of assets. it seems that it should be taken seriously, and considered as one of the key problems of the theory, and in particular the practice of accounting. estimated values: the provisions and the write-downs… 159 the following research methods have been used: an analysis of the literature, an analysis of normative acts, deduction method and comparison method. provisions are an economic category of very many controversies related to both the method of their classification in the balance sheet, as well as the method of their valuation. provisions in the balance sheets are displayed as one of the liabilities. they are a way to finance the assets of a company. however, this is a specific type of financing that can theoretically be treated both as its own source of funding – an element of equity, as well as an outside source of financprovisions are a source of financing of company’s assets, contributing at the moment of their creation to costs and hence lower profits of a company and so provisions can be treated as part of equity. if the provisions are not used, they are dissolved, which usually results in an increase in revenues and thus an increase in „represent the equivalent of assets accumulated during a given period to cover expected losses, costs, liabilities, etc. cut backs of assets. estimating the expected, but uninf luenced by the company, loss of assets, guarantees the company will keep its equity, reproducing – from period to period – its net assets. this directly protects the rights and interests of the owners of capital, making it easier for managers to facilitate the going concern principle”. it is worth noting that, without the creation of provisions an increase in profits in a given reporting period could occur, which in turn could lead to an “exit” of a part of the assets (cash assets) from the company, in the form of paid out dividends or other types of disposal of earned equity surplus. on the other hand, the recognition of provisions as a component of foreign capital (liabilities) is supported by the fact that, provisions are established for future certain or highly probable liabilities of a company. in the event of the occurrence of circumstances for which the provisions were created, the provisions are dissolved, resulting in an increase in liabilities of a company (sometimes followed by expenditure). thus, at the time when the company is highly 160 probable to have liabilities provisions are created, which are dissolved when in contrast, m. wojas stresses that “provisions for liabilities, despite the fact that they are classified as foreign capital, will not become a real liability, as long they are a similar source of financing assets as the net profit, with the difference that the net profit may be in the future be withheld by the entity or (and) allocated for the purposes of consumption, and the provisions must in the future be used in accordance with its intended purpose or dissolved for the benefit of the financial result” (wojas 2008, 205). in view of the above, it is worth noting that both the polish accounting act and international accounting standards (ias), treat provisions as liabilities. in accordance with art. 3. 1 section 21 of the accounting act and ias 37 § 10 provisions are liabilities whose maturity or amount are not certain (fil, michalczyk 2007, 117). due to the fact that, the category of provisions are precarious, there are often doubts as to the necessity of their creation. therefore, it is worth to note the circumstances and conditions for the creation of provisions laid down by law. pursuant to art. 35d of the polish accounting act, provisions are created for: 1) certain or highly probable future liabilities that can be reliably estimated, especially for losses on business transactions, including those due to issued guarantees, warranties, credit operations, effects of pending litigation, 2) future liabilities resulting from restructuring, if under separate regulations the company is obliged to carry it out or if binding agreement have been made in reference to this issue, and if restructuring plans allow to reliably estimate the value of future liabilities. on the other hand, according to ias 37 provisions must created when the following three conditions are met: 1) an entity has a present legal or constructive obligation as a result of a past event, 2) it is probable that, the fulfillment of an obligation will result in an outf low of resources which embody economic benefits, 3) it is possible make a reliable estimate of the amount of this obligation. if these conditions are not met, provisions should not be created. the balance of provisions should be reviewed at each balance sheet date and adjusted to ref lect the best, present estimate. provisions should be used for their original purpose. if the outf low of resources required to settle an ob estimated values: the provisions and the write-downs… 161 ligation, for which a provision was created, ceased to be probable, a provision must be dissolved. provisions for liabilities are classified as other operating expenses, financial expenses or extraordinary losses, depending on the circumstances of future obligations. the emergence of a liability for which a provision has been created, reduces the provision. not utilizing the provision, to reduce the risk or eliminate the risk for which the provision has been created, causes the increase of operating income, financial income or extraordinary income during days for which they turned out to be unnecessary (accounting act, art. 35d sec. 2–4). in accordance with annex 1 to the polish accounting act provisions in the balance sheet are included in the following three groups (gabrusewicz, remlein 2007, 107): 1) provisions for deferred income tax, 2) provision for retirement and similar benefits, divided into long-term and short-term, 3) other provisions, divided into long-term and short-term provisions. provision for deferred income tax is established in connection with positive temporary differences between the carrying values of assets and liabilities and their tax values, which will in the future increase the tax base. this provision is associated with a kind of deferring of income tax payments for subsequent periods, when the carrying value of an asset or liability is recovered or settled. in a situation when the carrying value is recovered, the positive temporary difference will reverse and there will be taxable income and, consequently, a fall gabrusewicz, remlein 2007, 107–108). it should be noted that, when the annual financial statement of an entity is not subject to an audit, the entity may waive determining of assets and provisions due to deferred income tax (accounting act, art. 37 sec. 10). provisions for retirement and similar benefits, cover future liabilities of an entity in relation to the employees, resulting from collective bargaining agreements, employment contracts, remuneration regulations, etc. these include, in particular (foremna-pilarska, radawiecka 2007, 327–328; gabrusewicz, remlein 2007, 108): retirement and disability benefits, jubilee awards, pay for unused annual holiday, awards and bonuses, 162 provisions for sabbaticals, etc. the amount of provisions for retirement and similar obligations requires consideration of many factors such as number of employees, the structure of employees by age, the amount of the average wage, the rate of inf lation. it is worth noting that according to the polish accounting act [art. 39 sec. 2 point 2, sec. 2a] provisions for pensions and similar obligations are recognized during the year as accrued expenses, but only at the balance sheet date are accounted for as provisions for liabilities. this specific solution adopted only in the polish accounting act, which it is not ref lected in the ias, in which both during the year and at the balance sheet date, the provisions are treated as typother provisions specified in the balance sheet include, in particular (sprawozdanie finansowe 2009, 8–36): provisions for losses on business transactions in progress, provision for future liabilities resulting from restructuring, a provision for the expected costs and losses caused by dropping or loss of ability to continue business operations, passive accruals arising from obligation, related to current operations, future benefits for unknown persons, whose amount can be reliably estimated, although the date of liability is not yet known, including guarantees and warranty for sold, long-term use products, other future liabilities. it should be noted that these are just examples of reasons for which provisions are created. the polish accounting act in art. 35d indicates that provisions are created “on certain or highly probable future liabilities that can be reliably estimated, especially (...)”. this means that the catalogue of these provisions is open. the basis for determining the value of the provision is a reliable estimate of the effect of an event to which it relates. the accounting act does not limit the obligation to create provisions to the balance sheet date, and for this reason entities are required to create provisions also during the fiscal year, if an event 2010, 307). in accordance with art. sec. 28. 1 point 9 of the accounting act, no rarer than at the balance sheet date, provisions are measured at reasonable, reliable estimated value. a feature of the provision is uncertainty both in terms of maturity of liabilities, as well as its size. therefore, the estimation of provisions estimated values: the provisions and the write-downs… 163 should be conducted using the knowledge and professional judgment of the management of an entity, based on past experience, using the expertise of independent experts in a given field, and statistical estimation methods of provisions. the amount, for which a provision is created, should be the amount that an entity would pay to settle the obligation at the balance sheet date based on the most appropriate estimate (sprawozdanie finansowe 2009, 8–52). the impairment loss of an asset shall be understood as the amount of reduction for the balance sheet date, or any other day, of the book value of this component, resulting from the register during a reporting period. as a rule, the effect of the impairment loss is a cost, and therefore a write down of assets value. as a result, impairment losses are a balance sheet category – reducing the value kowska 2006, 91–92). in accordance with the accounting practices, impairment losses may result : loss of asset value, valuation of assets according to specific parameters1. the loss of assets value, which requires a relevant impairment loss to be carried out, is a reduction of the carrying value of assets, a reduction which differs from the normal, expected consumption, expressed in amortization write cumstances that indicate a loss in the potential of assets to generate economic benefits. the use of impairment loss write offs is very important for the preservation of equity and continuation of the enterprise. the polish accounting act in art. paragraph 28.7, introduces a definition of the so-called permanent loss of value, according to which “permanent loss of value occurs when there is a high probability that the asset being controlled will not generate in the future, a significant or substantial part of the expected economic benefits”. the result of the existence of permanent loss of value, is a revaluation write off to level the asset value resulting from the accounting records to the net sales price, and in the absence thereof – to estimated fair value, set using a different method. 1 164 polish accounting act also indicates the circumstances in favor of making a write off for permanent loss of asset value. such impairment allowance is changes in production technology, liquidation, withdrawal from use, other causes of permanent loss of asset value. the international accounting standards (ias) point at the following premises of loss of asset value: loss of the market value of a given asset recorded during a period, is much greater than the loss which could be expected as a result of the passage of time or normal use, during a given period occurred or will occur in the near future, significant and detrimental to the entity changes in technology, market, economy, legal system in which the entity operates, evidence is available of obsolescence of an asset or its physical damage, during a given period or in the near future there will be significant and detrimental to the entity changes in the scope or manner in which an asset is or will be used (plans to discontinue or restructure the operation to which the asset belongs), evidence is available from internal reporting that indicates that the economic performance of an asset is or will be worse than expected. it should be noted that the loss of value in the polish accounting act is accompanied by the term permanent, which is not found in international regulations 1) fixed assets – where the phenomenon is permanent – that is, relates to a longer time period, 2) current assets – due to a short time period is non-reversible. the scope of permanent loss of asset value, in accordance with the polish tangible fixed assets in use, tangible fixed assets under construction, shares from other entities and other investment regard as fixed assets, short-term investments, inventory, receivables and granted loans. estimated values: the provisions and the write-downs… 165 it follows that, the scope of the allowances for impairment applies to many types of assets. entities engaged in asset write-downs are required to apply the procedures set out in specific legislation – the national accounting standard no. 4 (nas 4) “loss of asset value”. nas 4 obliges companies through the process of revaluation to ( ... 2009, 56; nas 4 par. 2.12): identify the function that each component / group / of assets has in the enterprise and on this basis classify them into operational or investment, set the carrying amount for each asset. it should be noted, however, that the write-downs for impairment of assets, the valuation of which has been updated on the basis of separate regulations, reduce capital revaluation provision differences due to revaluation (and therefore are recorded in the balance sheet and do not affect the financial result). given the intention to manipulate financial results, there are two ways to manipulate financial results. the first is aimed at demonstrating a positive image of the company’s financial situation and positive financial results. second, in turn, is related to the tendency to present the result worse than it is, and in extreme cases even a negative image of the company and the associated negative financial results. it is worth noting that, in business practice, however, a more common trend is the tendency to present a better than in fact, image of a commanagers manipulating financial results are driven to do so for various reasons. often, these reasons serve the interests of the company managed by them, but often – the self-interest of managers. with the intention to improve the image of the company to be paid commission on profits, increase the share price on the stock exchange for the purpose of resale, apply for external sources of financing (loans, credits), acquisition of equity from capital market (the issuance of new shares), acquire new business contacts. on the other hand, by presenting a worse than the true (negative) image of the company, management 166 reduce dividend payments, reduction of employee claims, some of which salaries may depend on the earned profit, underestimate the value of the company prior to its acquisition, strive to run a recovery program or initiate insolvency proceedings, demonstrate a significant improvement in the company in subsequent reporting periods. depending on the direction of manipulating the financial result, there are various ways to use provisions and write-downs. in order to improve (increase) the financial result using the provisions, enterprises usually use the following manipulation techniques: avoiding creating provisions, despite apparent premises, creation of provisions, but decreasing their value in relation to the actual needs (underestimation of provisions), dissolution of provisions, although the circumstances for which they were created have not ceased, dissolution of provisions, but not recording them directly in costs, but as capital from revaluation. in contrast, with the intention of reducing the financial result through the use of provisions, the manipulation techniques used are: creation of provisions, despite the lack of premises for doing so (modifying events to create fictional provisions), overstating the value of provisions in relation to the actual needs (over-valuation of provisions), not dissolving already created provisions, despite the cessation of circumstances for which they were created. in the case of write-downs of assets, the most commonly used manipulation techniques are: avoiding creating provisions, despite apparent premises, manipulating the amount or period in which a write-down was made, manipulating the period or the amount of “reversal” (dissolution) of a write-down. individual manipulation techniques associated with the creation of provisions or write-downs of assets are accompanied by various economic circumstances. techniques to increase the financial result are typically used in situations when the company intends to apply for new loans or credits, or seeks to issue new shares. enterprises that show gains have easier access to new estimated values: the provisions and the write-downs… 167 sources of financing. therefore, some managers take actions aimed at showing a profit when in fact there is a loss in the company or showing profits higher than their actual state. in addition, if a company managed by them, from one period to another generates profits and share prices at the stock market rise, they are better assessed both by the owners of the company and all its surroundings, which translates into the amount of remuneration paid to them (management contracts). techniques to reduce the company’s financial result are typically used in situations where a company has incurred a loss in a given period. increasing the loss by using provisions or write-downs of assets in a given period, is intended to demonstrate a significant improvement in the company in subsequent reporting periods. this is done through a timely dissolution of previously established provisions and write-downs, and so increasing the company’s revenues. reducing the financial result by using provisions and write-downs of assets also occur in cases when, the company during a given reporting period generated a high profit, but for the next few years expects a significant decrease in profits, or even losses. in such circumstances, very often part of the profit from the current reporting period is transferred to the subsequent ones. the year in which there has been a high, true profit, the profit is artificially lowered by means of provisions or write-downs of assets, so in later years, when it is low, or there is even a loss, previously created provisions and write-downs of assets are dissolved to increase the financial result. in practice, to manipulate financial results write-offs are often used for the permanent loss in the value of real estate, recorded as fixed assets or long-term investments, or write-downs of inventories and receivables. in the case of write-downs for permanent loss in value of real estate, a rather important issue is the manipulation of the write-down amount. it would seem that in the case of real property, that is assets of usually high value, the amount of write-downs for permanent loss of value should not be questioned because it is determined based on a valuation performed by an appraiser. however, in practice, valuations are performed by several appraisers, and the management uses the valuation which best fits their goals as valuations of individual appraisers can vary significantly. one of the adjustments to assets value very often not performed in the polish economic conditions is write-downs of inventory). in the case of write-downs of inventory, an adjustment is necessary due to the loss of value of inventories and as a result of the balance sheet valuation at a price not higher than their 168 net selling price. when estimating value possible to attain for the balance sheet date, the most reliable evidence available at the time of the estimates should be used and estimates should take into account price f luctuations. thus, a writedown depends on an estimate and evaluation of future events, which gives ample opportunities of “explaining” the impairment loss or not doing it at all. in poland, entities usually do not make inventory adjustments, which remain in the warehouse. frequent manipulations, in practice, relate to write-downs of receivables. in accordance with art. par. 28. 1 point 7 of the polish accounting act, receivables are measured at the balance sheet date for the amount due, maintaining precautionary principles. this method of valuation results in making the impairment loss on the probability of payment of the total amount. pursuant to art. 35b of the accounting act, write-downs of values of receivables are performed in relation to: 1) receivables from debtors in liquidation or bankruptcy; 2) receivables from debtors in case of dismissal of the bankruptcy petition, if the debtor’s assets are not sufficient to cover the costs of bankruptcy proceedings; 3) receivables challenged by debtors and payment of which the debtor is overdue, and according to the assessment of the debtor’s financial assets and liabilities, repayment in the contractual amount is not probable; 4) receivables equivalent to amounts increasing the receivables in respect of which a write-down has been made; 5) receivables overdue or not overdue with a significant probability of defaults, according to the kind of business or the structure of recipients. as follows from the conditions mentioned, one of the main determinants to qualify a receivable as default and writing it down, is the evaluation of probability of repayment and the assessment of the financial situation of the debtor. for objective reasons, clearly establishing these parameters can pose many difficulties and provide opportunities for misuse. extremely reprehensible example of lowering the financial result using provisions and write-downs of assets is striving to underestimate the value of the company. such actions are intended to lead to bankruptcy or contribute to its acquisition by another operator on terms favorable to the transferee. often in such cases, managers are tied to the receiving entity and can count on personal benefits as result of these actions. estimated values: the provisions and the write-downs… 169 it is worth noting that, methods often associated with the use of provisions or write-downs of assets in order to manipulate earnings, are connected to the so-called obscured image of the company. this action usually involves a conscious and deliberate non-disclosure in the financial statements – in the notes (accountants notes) – details of the true reasons for creating and dissolving provisions or write-downs of assets. moreover, in many of these cases, there is also no description of the accepted methods of valuation of the estimated values, in the accounting policy of the company. provisions and write-downs of assets are specific economic categories related to the valuation of corporate resources. as estimates, require – at the time of their creation and valuation – one’s own judgment of an entity, which is discretionary and often raises doubts as to the correctness of their valuation and the reasonableness of their creation. the problem becomes especially visible when the provisions and writedowns of assets are used by company management to create financial results, both as instruments of increasing and decreasing the result, depending on the needs of managers. it is worth noting, that presented a problem to manipulate of financial results of enterprises using estimated values has not only a microeconomic dimension, but also and macroeconomic. based on the information from the financial reports, are undertaken a variety of economic decisions, e.g. financial lending to businesses through banks, as well as decisions of investors in terms of capital investment in the financial markets. thus, the problem has a significant impact on the security of economic turnover. it should be noted, that the problem of manipulating of estimated values has a global dimension. as in poland, also in other countries, no exist effective solutions to eliminate this phenomenon. accounting is facing a kind of challenge, aimed at eliminating or at least substantially reducing this practice. it is worth considering what steps need to be taken in this regard. a reasonable solution might be to take preventive measures, involving the development of detailed regulations and rules relating to the procedure of creating and valuation of these estimates. these preventive measures should also be associated with mandatory disclosure of detailed information regarding the 170 creation of provisions and write-downs of assets, both in the financial statements, as well as the company’s accounting policies. one has to be aware, that these preventive measures will not eliminate the manipulative behavior of the management of companies. the measures can, however, contribute to a significant limitation of this behavior, which can be considered a success in the future. it is also worth to mention the role and responsibilities of auditors in terms of the justification for creating and releasing and determining the amount of provisions and write-downs of assets in the enterprise. both provisions and write-downs of assets are key reporting items, subject to control by an auditor. c. h. beck, warszawa. narodowych, difin, warszawa. warszawa. skwp, iasb, warszawa. warszawa. difin, warszawa. szawa. national accounting standard no. 4 (nas 4) “loss of asset value”, http://www.mf.gov. pl (accessed: 20.03.2015). dzynarodowych standardów, difin, warszawa. pwn, warszawa. estimated values: the provisions and the write-downs… 171 skiego, sopot, nr 1/1. micherda b. (ed.), difin, warszawa. nr 152, poz. 1223 ze zm.). wer business, warszawa. wych, difin, warszawa. micznego w krakowie nr 768. date of submission: march 27, 2022; date of acceptance: june 28, 2022. * contact information (corresponding author): liftedfgb@gmail.com, department of banking and finance, modibbo adama university, yola, nigeria, phone: +2348060801953; orcid id: https://orcid.org/0000-0002-5613-9883. ** contact information: badaneji@yahoo.com, department of banking and finance, modibbo adama university, yola, nigeria, phone: +2348065725700; orcid id: https:// orcid.org/0000-0001-5709-8334. *** contact information: abdulmoud99@gmail.com, camusat sl ltd., freetown, sierra leone, phone: +23275461725; orcid id: https://orcid.org/0000-0001-8461-8243. **** contact information: idera4ever@yahoo.com, department of banking and finance, nasarawa state university, keffi, nigeria, phone: +2347031117236; orcid id: https://orcid.org/0000-0002-5661-2570. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 babarinde, g.f., daneji, b.a., jalloh, m.a., & abdulmajeed, t.i. (2022). financial inclusion implications on the liquidity of the nigerian capital market. copernican journal of finance & accounting, 11(4), 9–26. http://dx.doi.org/10.12775/cjfa.2022.016 gbenga festus babarinde* modibbo adama university, yola, nigeria bashir ahmad daneji** modibbo adama university, yola, nigeria mamoud abdul jalloh*** camusat sl ltd., freetown, sierra leone tajudeen idera abdulmajeed**** nasarawa state university, keffi, nigeria financial inclusion implications on the liquidity of the nigerian capital market keywords: financial inclusion, stock market liquidity, vector autoregression (var), capital market. j e l classification: g10, m21, 016, p34. g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed1010 abstract: the objective of this study was to examine the implications of financial inclusion on capital market liquidity in nigeria. therefore, we applied vector autoregression (var) technique to the analysis of the quarterly time series data obtained from central bank of nigeria’s statistical bulletin and world development indicators for the period, 2008q1 to 2018q4. findings of this study reveal that deposit penetration, bank penetration and credit penetration have positive but non-significant impact on stock market turnover ratio in nigeria. furthermore, unlike deposit penetration which exerts negative and non-significant inf luence on the value of shares traded ratio; bank penetration and credit penetration have positive but non-significant impact on the value of shares traded ratio in nigeria. the study posits that financial inclusion exerts no significant inf luence/implications on stock market liquidity in nigeria with a very negligible variation in the latter (stock market liquidity) explained by the former (financial inclusion). it is therefore recommended that accounts and bank penetrations should be re-engineered towards their translations to high volume and value of capital market transactions rather than mere financial penetration without any capital market implications in nigeria.  introduction introduction financial inclusion as an initiative is targeted at ensuring that formal financial services are made accessible and affordable, primarily to low-income people (omar & inaba, 2020). thus, financial inclusion is borne out of the desire to engage as many people as possible in the financial activities through the official channels (ashraf, 2021). historically, nigeria’s financial inclusion has its root in the rural banking scheme which was introduced in 1977 to promote the habit of banking among the rural population. other initiatives like compulsory establishment of rural branches of deposit money banks (dmbs), establishment of people’s banks, community banks, microfinance banks and the formal launch of the national financial inclusion strategy (nfis) in nigeria, are all geared towards achieving financial inclusion in the country. the prime goal of financial inclusion is to facilitate all-inclusive participation of people in the formal financial system in order to improve the standard of living in the society (islam, 2018). financial inclusion empowers the poor and vulnerable members of the society and also acts as a catalyst to economic growth of a nation. it provides access to payments and savings thereby opening up new viable markets for financial services providers, which, in turn, increases fiscal revenues for governments and provides employment opportunities for local communities (blake, propson, monteverde & chidambaram, 2018). financial inclusion is also regarded as a strong predictor of economic development (ashraf, 2021). financial inclusion helps to make financial services more acces financial inclusion implications on the liquidity… 1111 sible to all by ensuring that there is a robust financial market (ofori-abebrese, baidoo & essiam, 2020). despite the significance of financial inclusion, this policy initiative has been mitigated by various problems which according to ozili (2020a), include political interference, high cost of doing business, high financial illiteracy, the state of the economy, uneven financial development, corruption, and increased discrimination occasioned by fintech. there should be a synergy among various indicators of financial development in an economy such that an improvement in one aspect of the financial system should positively encourage the improvement of others. hence, the stock market is expected to improve further when there is high financial inclusion in the country. one of the expected areas of improvement is in the liquidity of the capital market. theoretically, the extent to which people could access and afford available financial services through various outlets should spur more capital market transactions, in the form turnover and value of shares traded in the capital market. this assertion is premised on the fact that the more the financially-excluded are brought back into the financially-inclusive populace brackets in an economy, the higher tendency of the people to transact in and access the capital market and hence, the improvement in the liquidity of the market. despite the perceived theoretical connection between financial inclusion and stock market liquidity, most extant empirical studies focused on the nexus between financial inclusion and economic growth (okoye, adetiloye, erin & modebe, 2016); poverty/standard of living (ogbeide & igbinigie, 2019; ratnawati, 2020); investment (babarinde, 2021); financial stability/sustainability (morgan & pontines, 2014). the scanty past studies which examined the empirical connection between financial inclusion and stock market also reported divergent findings. for instance, in ghana, akakpo (2020) uncovers the significant effect of financial inclusion on stock market participation unlike in nigerian case where migap, ngutsav and andohol (2020) indicate lack of causal relationship between the two variables. furthermore, ozili (2020a) argues that despite the fact that the level of financial inclusion in nigeria is high relative to other african countries, the use of financial institutions to save in nigeria remain low. could the level of financial inclusion in nigeria explain the liquidity of the capital market in the country? this question has not received the deserved attention by past studies most especially in a developing country like nigeria. this gap is what this study attempts to fill. g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed1212 therefore, the kernel of this study is to investigate the impact of financial inclusion on liquidity of the nigerian stock market between 2008 and 2018. specifically, this study is aims to assess the impact of credit penetration on stock market liquidity in nigeria, evaluate the impact of deposit penetration on stock market liquidity in nigeria, and examine the impact of bank penetration on stock market liquidity in nigeria. literature reviewliterature review conceptual literatureconceptual literature the capital market is a financial market where financial securities in form of shares, stocks, bonds, debentures, loan stocks are traded. dimensions of performance of stock market in literatures include size, development, resilience, concentration, liquidity, etc. generally, liquidity refers to the ease with which financial assets could be turned to cash with little or no loss in value, as fast as possible. however, in capital market parlance, liquidity is the ease with which a financial instrument can be converted into cash and it also means the ability of a stock market to absorb large volumes for trading without significant variation in prices as well as the ease with which securities can be converted into cash (nwude, 2018). the author further describes market liquidity as the ease with which investors can buy and sell securities at close to the current quoted prices in the security market. therefore, liquidity is an indication of the marketability of the shares, stocks, bonds, debentures and securities traded in the capital market. from literature, two most common indicators of stock market liquidity have been identified, namely, stock market turnover ratio and value of shares traded ratio. stock market turnover ratio is the ratio of value of shares traded to the market capitalization and the value of shares traded ratio is the ratio of value of shares traded to the nominal gross domestic product (gdp) in an economy. financial inclusion is the degree to which people, most especially the rural populace, the poor, the illiterate and those financially excluded from the formal financial services, have access to, make use and afford to enjoy financial services to enjoy the basic social facilities (babarinde, ndaghu, abdulmajeed & enoruwa, 2021). ogbeide and igbinigie (2019) also describe financial inclusion as the provision of contact to and usage of different and affordable fi financial inclusion implications on the liquidity… 1313 nancial services. financial inclusion is the provision of, and access to, financial services to all members of population, particularly the poor and the other excluded members of the population (ozili, 2018). therefore, financial inclusion is the availability, accessibility and affordability of financial services to people, especially those vulnerably excluded from the formal financial services in an economy. in this study, three basic dimensions of financial inclusion are accessibility, availability and affordability indicators and each of them is measured in this study as deposit penetration, bank penetration and credit penetration respectively. deposit penetration has been defined as the number of deposit accounts per thousand population and indicates the accessibility of basic banking services like account ownership, loan, etc. (lakshmanasamy, 2020). furthermore, the author explains loan penetration (or credit penetration) as the number of loans/credit accounts per thousand population and it indicates the availability of loans and volume of credit circulated in the economy. babarinde (2021) conceptualizes bank penetration (branch penetration) as the number of financial institutions, like dmbs in the economy and it signifies to somewhat extent the availability of financial services in an economy. theoretical literaturetheoretical literature this study reviewed the public good theory and the systems theory of financial inclusion beneficiary propounded by ozili (2020b). ozili’s (2020b) public good theory of financial inclusion considers financial inclusion as a public good, such that there is extension of formal financial services to the entire population and there is no restriction or discrimination or exclusivity in terms of access to finance for everyone. according to ozili (2020b), these services should be accessed and made available to all without paying for it. public good theory considers all members as the potential beneficiary of financial inclusion services considered to be a public good provided at the cost of the government but free to the populace. the systems theory of financial inclusion according to ozili (2020b) implies that financial inclusion will improve the workings of the sub-systems it relies on such that the efficiency and effectiveness of the sub-systems will determine the success or failure of a financial inclusion agenda, and the existing sub-sys g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed1414 tems (economic, financial and social) in a country are the ultimate beneficiaries of financial inclusion, under the systems theory perspective. empirical literatureempirical literature migap et al. (2020) examine the link between financial inclusion and capital market growth in nigeria. the study argues that there is no causal relationship between financial inclusion and capital market. however, in ghana, akakpo (2020) investigates the impact of financial literacy and financial inclusion on stock market participation and found that financial inclusion has positive significant impact on stock market participation in the country. babarinde (2021) submits that financial inclusion exerts significant effect on investment in nigeria. ratnawati (2020) examines the effect of financial inclusion on economic growth, poverty, income inequality, and financial stability in selected asian countries. the study shows that the partial impact of financial inclusion dimension on economic growth, poverty alleviation, income inequality, and financial stability in most asian countries of asia has not been optimal. ofori-abebrese et al. (2020) estimate the effects of financial inclusion on welfare in 33 sub-saharan african countries. the study reveals that financial inclusion has positive effect on welfare in the sub-region. similarly, ogbeide and igbinigie (2019) confirm the significant impact of financial inclusion in poverty alleviation in nigeria. furthermore, in the nigerian context, okoye et al. (2016) reported that financial inclusion causes poverty alleviation but has no significant impact on economic growth in nigeria. in another study, morgan and pontines (2014) assess the relationship between financial stability and financial inclusion and found positive effects of the latter on the former. lakshmanasamy (2020) examines the effects of the determinants of deposit and credit penetration in india. the author posits that in deposit penetration, income and industrialization plays a vital role in the states of india. further findings from the study reveal that population density and bank branch networking have implications on credit penetration in the country. in sum, the empirical review technically exposes the relative scarcity of studies on the financial inclusion implications on capital market liquidity, most especially in a developing country like nigeria. the very few ones reported a divergent findings of positive nexus in nigeria (migap et al., 2020) and no causality between the two variables in ghana (akakpo, 2020). financial inclusion implications on the liquidity… 1515 research methodology and research processresearch methodology and research process research design and data descriptionresearch design and data description this study’s aim is to determine the implications of financial inclusion on stock market liquidity in nigeria based on ex-post facto research design. the research design entails the use historical (past) data in establishing the relation between variables of interest. hence, secondary data on quarterly basis (2008q1–2018q4) computed from the available annual time series obtained from central bank of nigeria’s statistical bulletin (2019) and world development indicators (2019) were used in the analysis of the financial inclusion implications on capital market liquidity in nigeria. description of the variables of studydescription of the variables of study stock market turnover ratio (smtr) is total value of shares traded as a ratio of market capitalization at nse (tvst/market capitalization). this is the indicator of stock market liquidity. financial inclusion is operationalized based on three dimensions: accessibility, affordability and availability, with their respective measures as commercial bank branches (per 100,000 adults) (that is bank penetration); borrowers from commercial banks (per 1,000 adults) (that is credit penetration); and depositors with commercial banks (per 1,000 adults) (that is deposit penetration). the operationalization of the variables of study are in line with previous studies like ogbeide and igbinigie (2019), lakshmanasamy (2020), and babarinde et al. (2021). estimation technique and proceduresestimation technique and procedures financial inclusion’s implication on the liquidity of capital market in nigeria was examined in this study through the lens of sims’s (1980) vector autoregression (var) technique. the choice of var is justified on the grounds that the technique is not limited by theory but f lexible and hence all variables are treated as endogenous in the model and it can also be applied in modelling dynamic and interdependent relationship among variables of interest (sims, 1980; lesotho, motlaleng & ntsosa, 2016). the preliminary test performed before var estimation proper are unit root test and test of cointegration. g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed1616 time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcıa-ascanio & mate, 2010). the adf is expressed as in equation (1): time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� (1) the null (ho) and alternative (h1) hypotheses of the adf unit root test are stated thus: time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test is only applicable to variables that are non-stationary and are integrated of the same order one (gujarati & porter, 2018). the johansen’s (1991) cointegration model is specified in equations (2) to (4): time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� (2) financial inclusion implications on the liquidity… 1717 time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� (3) time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� time series data to be used are expected to be stationary, that is, constant variance over time and the covariance value between the two time periods depends only on the distance or gap or lag between the two time periods and not the actual time at which the covariance is computed (gujarati & porter, 2009). therefore, it is important to check whether a series is stationary or not before using it in a regression. in evaluating the unit root property of the time series, the augmented dickey-fuller (adf) unit root test was conducted to determine the stationarity or otherwise of each variable as well as ascertain the level of integration of the variables. however, if the time series are found to be non-stationary, the order of integration is ascertained and the stationary form of the variable is added to the var model (garcaascanio & mate, 2010). the adf is expressed as in equation (1): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝐭𝐭 � ø𝚫𝚫𝐭𝐭�� � � ß𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 𝐧𝐧 𝐢𝐢�� � ɛ𝒕𝒕 �1� the null (𝐻𝐻�) and alternative (𝐻𝐻�) hypotheses of the adf unit root test are stated thus: 𝐻𝐻�: ø � 0 𝑢𝑢𝑟𝑟𝑢𝑢 � 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 𝐻𝐻�: ø � 0 𝑖𝑖𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑟𝑟𝑢𝑢𝑡𝑡𝑡𝑡𝑠𝑠, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖 𝑢𝑢𝑟𝑟 𝑢𝑢𝑢𝑢𝑖𝑖𝑡𝑡 𝑡𝑡𝑟𝑟𝑟𝑟𝑡𝑡 after ascertaining the unit root property of the series, this study performed test of cointegration among the series. cointegration is a measure of long-run relationship or equilibrium between variables which are individually non-stationary. to ascertain whether or not there is cointegration, the johansen and juselius cointegration test was conducted. the johansen and juselius cointegration test. is only applicable to variables that are nonstationary and are integrated of the same order one (gujarati & porter, 2018). the johansen (1991)’s cointegration model is specified in equations (2) to (4): 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐱𝐱𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �2� 𝚫𝚫𝚫𝚫𝐭𝐭 � �𝚫𝚫𝐭𝐭�� � � ℾ𝐢𝐢𝚫𝚫𝚫𝚫𝐭𝐭�𝐢𝐢 � ß 𝐦𝐦𝐭𝐭 ��� 𝐢𝐢�� � ɛ𝒕𝒕 �3� (4) the pattern continues until all the series are represented in the equations. the null hypothesis of the test is that the series are not cointegrated and it is rejected when the calculated value exceeds the critical value at 5% level; and hence the conclusion that the series are cointegrated. however, if the computed value is less than the critical value at the 5% level, the null hypothesis is not rejected and the conclusion is that the series are not cointegrated. following the study of alade, adeusi & alade (2020), this study applied sims’s (1980) vector autoregression (var) model as estimation technique. the technique enjoys the strength of f lexibility and simplicity (suharsono, aziza & pramesti, 2017) and is useful for modelling multivariate time series data that are autoregressive in nature. in addition to the var model, variance decompositions (vdc) and impulse response function (irf) are also documented. the variance decomposition (vdc) analysis indicates the quantity of information each variable contributes to the forecast error variance of other variables in a var model (lesotho et al., 2016). vdc separates the variation in an endogenous variable into the component shocks to the var and therefore provides information about the relative importance of each random innovation affecting the variables in the var. in this study, the vdc of stock market turnover ratio determines the proportion of variations in stock market turnover ratio explained by each of the financial inclusion variables (credit penetration, bank penetration and deposit penetration) over the forecasted periods. since there is a limit to the amount of information that the estimates of var can provide on the reaction of the system to an innovation, the impulse response functions (irfs) (rummel, 2015), trace the effect of a one-time shock to one of the innovations on current and future values of the endogenous variables in the var. an impulse response function traces the effect of a one-time shock to one of the innovations on current and future values of the endogenous g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed1818 variables. this is based on the idea that a shock to the i-th variable not only directly affects the i-th variable but is also transmitted to all of the other endogenous variables through the dynamic (lag) structure of the var. in this study, the variable of interest is stock market liquidity (measured as stock market turnover ratio). the irf of stock market turnover ratio describes the reaction of stock market turnover ratio to the measures of financial inclusion (credit penetration, bank penetration and deposit penetration) at the time of the shock and over subsequent (forecasted) periods of time. model specificationmodel specification following the model of lakshmanasamy (2020), this study specified the functional relationship between financial inclusion (measured as deposit penetration, bank penetration and credit penetration) and stock market liquidity in nigeria. unlike the referenced work which is annual panel data and india-based situated within ols technique, this current study employs weekly time series nigerian data and situated within the multivariate vector autoregressive method (var). the var models for this study are specified in equations (5) to (8) below. market liquidity (measured as stock market turnover ratio). the irf of stock market turnover ratio describes the reaction of stock market turnover ratio to the measures of financial inclusion (credit penetration, bank penetration and deposit penetration) at the time of the shock and over subsequent (forecasted) periods of time. model specification following the model of lakshmanasamy (2020), this study specified the functional relationship between financial inclusion (measured as deposit penetration, bank penetration and credit penetration) and stock market liquidity in nigeria. unlike the referenced work which is annual panel data and india-based situated within ols technique, this current study employs weekly time series nigerian data and situated within the multivariate vector autoregressive method (var). the var models for this study are specified in equations (5) to (8) below. � smtr� d�dpp�� d�bkp�� d�crp�� � � � smtr��� d�dpp���� d�bkp���� d�crp���� � � � d�dpp���� smtr��� smtr��� smtr��� � � � d�bkp���� d�bkp���� d�dpp���� d�dpp���� � � � d�crp���� d�crp���� d�crp���� d�bkp���� � � � ∪�� ∪�� ∪�� ∪�� � �5� �6� �7� �8� where: the prefix ‘d’ denotes the differenced form of the variables (as in d�dpp����, d�bkp���� and d�crp����) where the stationary form of the variable is added to the var model in line with the suggestion of garca-ascanio and mate (2010); smtr=stock market turnover ratio; bank penetration=bkp, credit penetration=crp and deposit penetration=dpp; ∪���∪�� signifies error term for each equation from (5) to (8). theoretically, each of the indicators of financial inclusion, credit penetration, bank penetration and deposit penetration, is expected to have significant relationship with liquidity of the capital market in nigeria. where: the prefix ‘d’ denotes the differenced form of the variables (as in d(dppt–1), d(bkpt–1), and d(crpt–1)) where the stationary form of the variable is added to the var model in line with the suggestion of garcıa-ascanio and mate (2010); smtr = stock market turnover ratio; bank penetration = bkp, credit penetration = crp and deposit penetration = dpp; ∪t1–∪t4 signifies error term for each equation from (5) to (8). financial inclusion implications on the liquidity… 1919 theoretically, each of the indicators of financial inclusion, credit penetration, bank penetration and deposit penetration, is expected to have significant relationship with liquidity of the capital market in nigeria. empirical results and discussion empirical results and discussion unit root testsunit root tests the results of the augmented dickey-fuller (adf) unit root test are presented in table 1. the results of the unit root test of stock market turnover ratio (smtr) show that the variable is stationary in level. however, deposit penetration (dpp), credit penetration (crp) and bank penetration (bkp), are non-stationary at level but the trio attain stationarity at first difference. in sum, the variables are of mixed order of integration of order one (dpp, crp, bkp) and order zero (smtr). table 1. augmented dickey-fuller unit root test variables adf at level adf at first difference integration order [ i(d)] smtr -2.6864 i(0) [0.0846]*** crp-0.5982 -6.4003 i(1) [0.8604] [0.0000]* dpp -0.4843 -2.9065 i(1) [0.8844] [0.0537]*** bkp 0.1502 -6.9414 i(1) [0.9660] [0.0000]* s o u r c e : authors’ computation, 2021. probability values in [ ]; *, ** and *** denotes stationary at 1%, 5% and 10% respectively. g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed2020 model estimationmodel estimation in applying the vector autoregression to the analysis of the nexus between financial inclusion and liquidity of the nigerian capital market in this study, the stationary form of the financial inclusion variables, deposit penetration (dpp), credit penetration (crp) and bank penetration (bkp), which are not stationary in level in addition to the stationary variable (stock market turnover ratio (smtr)) are employed in var modelling in line with the suggestion of garcıaascanio and mate (2010). vector autoregression estimation for smtrvector autoregression estimation for smtr the results of the vector autoregression estimation are shown in table 2. the column i of the table reveals the lagged value of stock market turnover ratio is positively signed (0.7705) and significantly (0.0000) related to stock market turnover ratio in its level. this implies the regressive nature of the stock market turnover ratio in nigeria, as a measure of stock market liquidity in nigeria indicates deposit penetration, bank penetration and credit penetration to be positively related to stock market turnover ratio. however, none of the coefficient is significant. this implies that financial inclusion indicators of deposit penetration, bank penetration and credit penetration have positive but nonsignificant implications on liquidity of the nigerian capital market, measured as stock market turnover ratio. table 2. vector autoregression (var) estimates i smtr ii d(dpp) iii d(bkp) iv d(crp) smtr(-1) 0.7705 0.0217 0.0021 0.0449 [0.0000]* [0.9651] [0.2224] [0.0189 ] ** d(dpp(-1)) 0.0020 -0.1266 0.0004 0.0026 [0.9422 ] [0.4831 ] [0.5219 ] [0.6994 ] d(bkp(-1)) 3.3012 18.1912 -0.0955 -1.0973 [0.6772] [0.7138] [0.5938] [0.5632] financial inclusion implications on the liquidity… 2121 i smtr ii d(dpp) iii d(bkp) iv d(crp) d(crp(-1)) 0.1032 0.4901 -0.0027 -0.0324 [0.8738 ] [0.9041] [0.8533] [0.8350 ] c 1.5482 4.7730 -0.0318 -0.4232 [0.0313 ] ** [0.2859 ] [0.0500 ] ** [0.0142] ** r-squared 0.7394 0.0293 0.0554 0.1341 adj. r-squared 0.7112 -0.0755 -0.0466 0.0405 s o u r c e : authors’ computation, 2021. note: * and ** denote significant at 1% and 5% respectively; probability values in [ ]. variance decomposition and impulse response analysisvariance decomposition and impulse response analysis the results of the variance decomposition (vdc) and impulse response analysis are presented in table 3 and fig. 1, respectively. the vdc of stock market turnover ratio reveals that in period 1, stock market turnover ratio accounts for 100 per cent of the variation in itself, with no contributions to its variation from the financial inclusion indicators of deposit penetration, bank penetration and credit penetration. in period two, 99.7 per cent of the variation in the stock market turnover ratio is due to changes in itself while the 0.03 per cent, 0.27 per cent and 0.02 per cent variation in stock market turnover ratio is due to changes in deposit penetration, bank penetration and credit penetration, respectively. similarly, in the ninth period, 99.56 per cent variation in stock market turnover ratio is due to own changes while deposit penetration, bank penetration and credit penetration contributes about 0.02, 0.36 and 0.03 per cent, respectively to the variation in stock market turnover ratio in nigeria. in the same vein, in the tenth period, stock market turnover ratio accounts 99.56 per cent for own variation while other variables, deposit penetration, bank penetration and credit penetration has 0.02, 0.36, and 0.03 per cent, respectively to variation in stock market turnover ratio in nigeria. table 2. vector autoregression… g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed2222 table 3. variance decomposition output period s.e. smtr d(dpp) d(bkp) d(crp) 1 1.7613 100.0000 0.0000 0.0000 0.0000 2 2.2300 99.6690 0.0309 0.2735 0.0265 3 2.4713 99.6249 0.0265 0.3173 0.0310 4 2.6092 99.5978 0.0262 0.3423 0.0335 5 2.6903 99.5850 0.0257 0.3544 0.0347 6 2.7391 99.5777 0.0254 0.3613 0.0354 7 2.7686 99.5734 0.0253 0.3653 0.0358 8 2.7866 99.5709 0.0252 0.3676 0.0361 9 2.7976 99.5694 0.0252 0.3690 0.0362 10 2.8043 99.5685 0.0251 0.3699 0.0363 s o u r c e : authors’ computation, 2021. the impulse response functions (irfs) of the stock market turnover ratio as shown in figure 1 reveals that stock market turnover ratio (smtr) responds positively to own shocks as well as shocks/innovations in the three indicators of financial inclusions, namely, deposit penetration, bank penetration and credit penetration. financial inclusion implications on the liquidity… 2323 figure 1. impulse response functions variation while other variables, deposit penetration, bank penetration and credit penetration has 0.02, 0.36, and 0.03 per cent respectively to variation in stock market turnover ratio in nigeria. table 3. variance decomposition output period s.e. smtr d(dpp) d(bkp) d(crp) 1 1.7613 100.0000 0.0000 0.0000 0.0000 2 2.2300 99.6690 0.0309 0.2735 0.0265 3 2.4713 99.6249 0.0265 0.3173 0.0310 4 2.6092 99.5978 0.0262 0.3423 0.0335 5 2.6903 99.5850 0.0257 0.3544 0.0347 6 2.7391 99.5777 0.0254 0.3613 0.0354 7 2.7686 99.5734 0.0253 0.3653 0.0358 8 2.7866 99.5709 0.0252 0.3676 0.0361 9 2.7976 99.5694 0.0252 0.3690 0.0362 10 2.8043 99.5685 0.0251 0.3699 0.0363 source: authors’ computation, 2021. the impulse response functions (irfs) of the stock market turnover ratio as shown in fig.1 reveals that stock market turnover ratio (smtr) responds positively to own shocks as well as shocks/innovations in the three indicators of financial inclusions, namely, deposit penetration, bank penetration and credit penetration. fig.1. impulse response functions -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 res pons e of smlr to smlr -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(deposit p) -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(credit p) -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(bankp) response to cholesky one s.d. (d.f . adjusted) innov ations ± 2 s.e. source: author’s computation, 2021. discussions of findings from the vector autoregression estimation of the impact of financial inclusion (credit penetration, bank penetration and deposit penetration) on stock market liquidity in nigeria, this study indicates deposit penetration, bank penetration and credit penetration to be positively related to stock market turnover ratio. however, none of the coefficient is variation while other variables, deposit penetration, bank penetration and credit penetration has 0.02, 0.36, and 0.03 per cent respectively to variation in stock market turnover ratio in nigeria. table 3. variance decomposition output period s.e. smtr d(dpp) d(bkp) d(crp) 1 1.7613 100.0000 0.0000 0.0000 0.0000 2 2.2300 99.6690 0.0309 0.2735 0.0265 3 2.4713 99.6249 0.0265 0.3173 0.0310 4 2.6092 99.5978 0.0262 0.3423 0.0335 5 2.6903 99.5850 0.0257 0.3544 0.0347 6 2.7391 99.5777 0.0254 0.3613 0.0354 7 2.7686 99.5734 0.0253 0.3653 0.0358 8 2.7866 99.5709 0.0252 0.3676 0.0361 9 2.7976 99.5694 0.0252 0.3690 0.0362 10 2.8043 99.5685 0.0251 0.3699 0.0363 source: authors’ computation, 2021. the impulse response functions (irfs) of the stock market turnover ratio as shown in fig.1 reveals that stock market turnover ratio (smtr) responds positively to own shocks as well as shocks/innovations in the three indicators of financial inclusions, namely, deposit penetration, bank penetration and credit penetration. fig.1. impulse response functions -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 res pons e of smlr to smlr -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(deposit p) -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(credit p) -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(bankp) response to cholesky one s.d. (d.f . adjusted) innov ations ± 2 s.e. source: author’s computation, 2021. discussions of findings from the vector autoregression estimation of the impact of financial inclusion (credit penetration, bank penetration and deposit penetration) on stock market liquidity in nigeria, this study indicates deposit penetration, bank penetration and credit penetration to be positively related to stock market turnover ratio. however, none of the coefficient is variation while other variables, deposit penetration, bank penetration and credit penetration has 0.02, 0.36, and 0.03 per cent respectively to variation in stock market turnover ratio in nigeria. table 3. variance decomposition output period s.e. smtr d(dpp) d(bkp) d(crp) 1 1.7613 100.0000 0.0000 0.0000 0.0000 2 2.2300 99.6690 0.0309 0.2735 0.0265 3 2.4713 99.6249 0.0265 0.3173 0.0310 4 2.6092 99.5978 0.0262 0.3423 0.0335 5 2.6903 99.5850 0.0257 0.3544 0.0347 6 2.7391 99.5777 0.0254 0.3613 0.0354 7 2.7686 99.5734 0.0253 0.3653 0.0358 8 2.7866 99.5709 0.0252 0.3676 0.0361 9 2.7976 99.5694 0.0252 0.3690 0.0362 10 2.8043 99.5685 0.0251 0.3699 0.0363 source: authors’ computation, 2021. the impulse response functions (irfs) of the stock market turnover ratio as shown in fig.1 reveals that stock market turnover ratio (smtr) responds positively to own shocks as well as shocks/innovations in the three indicators of financial inclusions, namely, deposit penetration, bank penetration and credit penetration. fig.1. impulse response functions -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 res pons e of smlr to smlr -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(deposit p) -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(credit p) -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of smlr to d(bankp) response to cholesky one s.d. (d.f . adjusted) innov ations ± 2 s.e. source: author’s computation, 2021. discussions of findings from the vector autoregression estimation of the impact of financial inclusion (credit penetration, bank penetration and deposit penetration) on stock market liquidity in nigeria, this study indicates deposit penetration, bank penetration and credit penetration to be positively related to stock market turnover ratio. however, none of the coefficient is s o u r c e : author’s computation, 2021. discussions of findingsdiscussions of findings from the vector autoregression estimation of the impact of financial inclusion (credit penetration, bank penetration and deposit penetration) on stock market liquidity in nigeria, this study indicates deposit penetration, bank penetration and credit penetration to be positively related to stock market turnover ratio. however, none of the coefficient is significant. this implies that financial inclusion indicators of deposit penetration, bank penetration and credit penetration have positive but non-significant implications on liquidity of the nigerian capital market, measured as stock market turnover ratio. further insights from vdc analysis reveals that variation in stock market turnover ratio is accounted for financial inclusion as indicated by deposit penetration, bank penetration and credit penetration. the impulse response functions (irfs) reveals response of smlr to smlr response of smlr to d(depositp) response of smlr to d(bankp)response of smlr to d(creditp) g.f. babarinde, b.a. daneji, m.a. jalloh, t.i. abdulmajeed2424 that stock market turnover ratio (smtr) responds positively to own shocks as well as shocks/innovations in the three indicators of financial inclusion. in sum, this study unveils the non-significant impact of financial inclusion on the liquidity of the nigerian capital market. the results of this study are not in line with a priori expectation. this may not be unconnected with the view that the financial inclusion programme/activities in nigeria have not been impactful on increasing capital transactions in terms of frequency/volume and value. our finding is line with that of migap et al. (2020) who reported the absence of a causal relationship between financial inclusion and capital market in nigeria. this is not consistent with the findings of akakpo (2020) in the context of ghana, who finds a significant impact of financial inclusion on stock market participation in the country. the implications of these findings are that financial inclusion has not been targeting capital market transactions. financial inclusion has not translated into encouraging capital market liquidity.  conclusion conclusion in this study, we applied vector autoregression, variance decomposition and impulse response techniques to the analysis of the implications of financial inclusion on capital market liquidity in nigeria between 2008q1 to 2018q4. from the analysis, we established that financial inclusion indicators of deposit penetration, bank penetration and credit penetration have positive but non-significant implications on stock market turnover ratio in nigeria. this study therefore concludes that financial inclusion exerts no significant inf luence on stock market liquidity in nigeria with a very negligible variation in the latter explained by the former. the implication of the findings of this study is that capital market liquidity is not enhanced by the financial inclusion initiative in the economy of nigeria. although each of the three indicators of financial inclusions examined in this study poses to be positively inf luential on stock market liquidity, none of them could statistically explain liquidity of the nigerian capital market in the study period. the empirical findings of this study suggests that deposit penetration, bank penetration and credit penetration measures of financial inclusion have the potential of improving the liquidity of the nigerian capital market but the current pace of financial inclusion has not reached the desired rate of significantly promoting the liquidity of the nigerian stock exchange. financial inclusion implications on the liquidity… 2525 it is therefore recommended that accounts and bank penetrations should be re-engineered towards its translation to high volume and value of capital market transactions than mere penetration without capital market implications in nigeria. government should provide special outlets and platforms for vulnerable groups and formerly financially excluded to be able to access and execute capital market transactions through the actuality of the third and the fourth tier of the nigerian capital market. one approach to attain this is via financial inclusion re-engineering towards capital market development.  references references akakpo, a.a. 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(2020a). financial inclusion in nigeria: determinants, challenges and achievements. mpra paper working, 99173. https://mpra.ub.uni-muenchen.de/99173. ozili, p.k. (2020b). theories of financial inclusion. working paper ssrn, 3526548. http:// dx.doi.org/10.2139/ssrn.3526548. ratnawati, k. (2020). the impact of financial inclusion on economic growth, poverty, income inequality and financial stability in asia. journal of asian finance, economics and business, 7(10), 73–85. http://dx.doi.org/10.13106/jafeb.2020.vol7.no10.073. rummel, o. (2015). economic modelling and forecasting: var, svar and vecm modelling. england: bank of england centre for central banking studies. sims, c.a. (1980). macroeconomics and reality. econometrica, 48(1), 1–48. http:// dx.doi.org/10.2307/1912017. suharsono, a., aziza, a., & pramesti, w. (2017). comparison of vector autoregressive (var) and vector error correction models (vecm) for index of asean stock price. aip conference proceedings, 1913. http://dx.doi.org/10.1063/1.5016666. date of submission: august 17, 2021; date of acceptance: september 3, 2021. * contact information: nagerisuccess2000@yahoo.co.uk, department of banking and finance, al-hikmah university, ilorin, kwara state, nigeria, phone: +2348056172296; orcid id: https://orcid.org/0000-0002-5569-2169. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 nageri, k.i. (2021). risk-return relationship in the nigerian stock market during pandemic covid-19: sectoral panel garch approach. copernican journal of finance & accounting, 10(4), 97–116. http://dx.doi.org/10.12775/cjfa.2021.017 kamaldeen ibraheem nageri* al-hikmah university risk-return relationship in the nigerian stock market during pandemic covid-19: sectoral panel garch approach keywords: covid-19, risk-return, news, garch. j e l classification: d81. abstract: this study examines how the nigerian stock exchange (nse) is responding to the covid-19 pandemic in the form of risk-return relationship and volatility. panel data analyses of garch-in-mean and threshold garch were estimated on three error distributional assumptions. all share index (asi) from january 2020 to december 2020 for ten stock market indices on the nse. findings indicate that the cross-section return of the ten stock market indices returns exhibit a positive risk-return relationship during covid-19 and the impact of bad news was found to have no significant impact on return volatility on the nse. this indicates that the policy response during the pandemic is adequate to cushion the negative impact of covid-19, which should be sustained.  introduction risk-return has a positive correlation whereas investors are risk-averse is the postulation of the fundamental studies of finance irrespective of analysis conkamaldeen ibraheem nageri98 ducted at industry, firm and national level (mahmood & shah, 2015). on the contrary, behavioural finance explained that the risk-return relationship is sensitive to the investor’s target or situation. according to prospect theory, investors exhibit a risk-averse attitude in the gain domain and exhibit a risk-seeking attitude in the loss domain, calculated relative to a reference point. this implies that the risk-return relationship is negatively correlated. ghysels, plazzi and valkanov (2016) find fundamental change in the traditional risk-return relationship during financial crises and separation between the traditional riskreturn relationship and financial crises due to f light to safety (when investors sell assets perceived to be highly risky to invest in safer assets like gold). various studies (fisher & hall, 1969; neumann, bobel & haid, 1979; glosten, jagannathan & runkle, 1993; brandt & kang, 2004; guo & whitelaw, 2006; ludvigson & ng, 2007) had been conducted at firm, industry and national levels and the controversy between risk-return relationship lingers on in the literature. corona virus disease (covid) first identified in december 2019 in wuhan, china, generally known as covid-19, has spread to over 200 countries worldwide and on every continent. it is an acute respiratory disease, caused by a novel coronavirus (previously known as sars-cov-2, and 2019-ncov) named covid-19. covid-19 is the third highly pathogenic and large-scale epidemic coronavirus after the severe acute respiratory syndrome coronavirus (sars-cov) of 2002 and the middle east respiratory syndrome coronavirus (mers-cov) of 2012 in the human population in the twenty-first century (hu, guo, zhou & shi, 2020; guo, cao, hong, tan, chen, jin, tan, wang & yan, 2020). world health organisation (who) declared covid-19 as a pandemic in march 2020 and became the first coronavirus to be characterised as such. at the time of the declaration, there were 118,000 cases in 114 countries and 4,291 deaths but at the end of june 2020, there were over 10.5 million cases reported in 210 countries, over 514,000 deaths and more than 5.9 million infected people have recovered. when the virus was declared a global pandemic, stock markets globally experienced a cumulative loss of 12.35% and over $9 trillion loss between january and may 2020 and the global market exhibit increased volatility. for example, the stock prices in the united states declined by 32%, in the united kingdom declined by 27.9%, and in some emerging stock markets like brazil reduced by 40.5%, russia 24.2% and china by 10.1% (salisu, ebuh & usman, 2020). there exist different sentiments and analysts have divergence opinions risk-return relationship in the nigerian stock market… 99 on the impact of covid-19, the fall in stock prices was attributed to investors’ panic, as many investors sold out of fear. another view is that covid-19 could cause the re-emergence of another global financial crisis and analysts also understand that covid-19 impact could be worse than the combination of severe acute respiratory syndrome (sars) outbreak of 2003, the global financial crisis and world war ii (international monetary fund (imf), 2020a; international monetary fund (imf), 2020b; khan, zhao, zhang, yang, shah & jahanger, 2020). therefore, as a result of the foregoing problem, it becomes imperative to examine how the nse is responding to the covid-19 pandemic in the form of risk-return relationship and volatility (responding to good and bad news). the findings of the study will add to existing literature especially on the study of covid-19 and stock market performance in the presence of policy response and implications. the subsequent parts of this paper contain a literature review in section two. section three presents the methodology. results and discussion are presented in section four and section five provides the conclusion and recommendations of the study. literature review this section appraises relevant pieces of literature including the theoretical background and the empirical reviews. theoretical background the relationship between risk and return is one fundamental concept and practice in the field of financial economics. the risk-return relationship indicates that an investment with higher risk should attract a higher expected return proportional to the risk-free return. merton (1973) posits that the expected excess equity market return is positively related to its conditional variance: markets like brazil reduced by 40.5%, russia 24.2% and china by 10.1% (salisu, ebuh & usman, 2020). there exist different sentiments and analysts have divergence opinions on the impact of covid-19, the fall in stock prices was attributed to investors’ panic, as many investors sold out of fear. another view is that covid-19 could cause the re-emergence of another global financial crisis and analysts also understand that covid-19 impact could be worse than the combination of severe acute respiratory syndrome (sars) outbreak of 2003, the global financial crisis and world war ii (international monetary fund (imf), 2020a; international monetary fund (imf), 2020b; khan, zhao, zhang, yang, shah & jahanger, 2020). therefore, as a result of the foregoing problem, it becomes imperative to examine how the nse is responding to the covid-19 pandemic in the form of risk-return relationship and volatility (responding to good and bad news). the findings of the study will add to existing literature especially on the study of covid-19 and stock market performance in the presence of policy response and implications. the subsequent parts of this paper contain a literature review in section two. section three presents the methodology. results and discussion are presented in section four and section five provides the conclusion and recommendations of the study. literature review this section appraises relevant pieces of literature including the theoretical background and the empirical reviews. theoretical background the relationship between risk and return is one fundamental concept and practice in the field of financial economics. the risk-return relationship indicates that an investment with higher risk should attract a higher expected return proportional to the risk-free return. merton (1973) posits that the expected excess equity market return is positively related to its conditional variance: e(r�) = r� + β�(e(r�) − r�) (1) where e(r�) represents the expected return on the asset; r� represents the risk-free rate such as coupons from government bonds; β� represents the sensitivity of the expected excess return on the asset to the expected excess market returns, can be estimated through, β� = (1) where e(ri) represents the expected return on the asset; rf represents the risk-free rate such as coupons from government bonds; βi represents the sensitivity of the expected excess return on the asset to the expected excess market returns, can be estimated through, β� = ��� ( ��� ��)��� ( �� ) ; e(r�) represents the expected return of the market; e(r�) − r� represents the market premium. when the rate of returns is independent and equally dispersed, the expected risk-return relationship is positive given the risk aversion of investors. when returns are not independent and equally dispersed, the risk-return relationship will include additional terms to recognise the hedging behaviour of investors (merton, 1973). empirical viewpoint has been found in both positive and negative relationships between return and risk (guo & whitelaw, 2006; leon, nave & rubio, 2007; lettau & ludvigson, 2003; nelson, 1991; raputsoane, 2009). empirical review the risk-return relationship on stock returns has been a major area of research and studies had been conducted such as nageri (2019a), coffie (2015), alade, adeusi and alade (2020), ashraf (2020), salisu and vo (2020), azimli (2020), among others. ashraf (2020) examined the stock markets’ response to the covid-19 pandemic in 64 countries between the period january 22, 2020, to april 17, 2020, employed panel data regression analysis technique and the finding suggests a strong negative market reaction throughout the early days of confirmed cases of covid-19 and later between 40 to 60 days after the initial confirmed cases of covid-19. salisu and vo (2020) evaluate the relevance of health news on the predictability of stock returns, using a panel data regression model with data of 20 top-worst-hit countries in terms of reported covid-19 cases and deaths. the result shows that health news is significant when predicting stock return during covid-19 pandemic. azimli (2020) examines the impact of covid-19 on risk-return dependence in the united states of america. the quantile regression result indicates that sectoral returns have an asymmetric dependence structure with the market portfolio. alade et al. (2020) investigates the connection between covid-19 confirmed cases and nigerian stock market capitalization used the vector regression model and finds that confirmed cases of covid-19 have a mixed association, which is a negative but statistically insignificant relationship to the nigerian stock market equity capitalization. nageri (2019a) evaluates positive and negative news on the nigerian stock market before and after the 2018/19 financial meltdown, employed garch variant models of tgarch, egarch and ; e(rm) represents the exkamaldeen ibraheem nageri100 pected return of the market; e(rm) – rf represents the market premium. when the rate of returns is independent and equally dispersed, the expected riskreturn relationship is positive given the risk aversion of investors. when returns are not independent and equally dispersed, the risk-return relationship will include additional terms to recognise the hedging behaviour of investors (merton, 1973). empirical viewpoint has been found in both positive and negative relationships between return and risk (guo & whitelaw, 2006; leon, nave & rubio, 2007; lettau & ludvigson, 2003; nelson, 1991; raputsoane, 2009). empirical review the risk-return relationship on stock returns has been a major area of research and studies had been conducted such as nageri (2019a), coffie (2015), alade, adeusi and alade (2020), ashraf (2020), salisu and vo (2020), azimli (2020), among others. ashraf (2020) examined the stock markets’ response to the covid-19 pandemic in 64 countries between the period january 22, 2020, to april 17, 2020, employed panel data regression analysis technique and the finding suggests a strong negative market reaction throughout the early days of confirmed cases of covid-19 and later between 40 to 60 days after the initial confirmed cases of covid-19. salisu and vo (2020) evaluate the relevance of health news on the predictability of stock returns, using a panel data regression model with data of 20 topworst-hit countries in terms of reported covid-19 cases and deaths. the result shows that health news is significant when predicting stock return during covid-19 pandemic. azimli (2020) examines the impact of covid-19 on riskreturn dependence in the united states of america. the quantile regression result indicates that sectoral returns have an asymmetric dependence structure with the market portfolio. alade et al. (2020) investigates the connection between covid-19 confirmed cases and nigerian stock market capitalization used the vector regression model and finds that confirmed cases of covid-19 have a mixed association, which is a negative but statistically insignificant relationship to the nigerian stock market equity capitalization. nageri (2019a) evaluates positive and negative news on the nigerian stock market before and after the 2018/19 financial meltdown, employed garch variant models of tgarch, egarch and pgarch. the study reveals that good news inf luence stock return more signifi risk-return relationship in the nigerian stock market… 101 cantly than bad news of similar extent before the meltdown, but bad news have a more insignificant impact on stock return than the good of similar extent after the meltdown. zhang, hu and ji (2020) studied the financial markets of the top 10 countries on the list of confirmed covid-19 pandemic cases as of 27 march, 2020 (the united states, italy, china, spain, germany, france, the united kingdom, switzerland, south korea and the netherlands). the study used the quantile regression methodology for the daily s&p500 (sp) returns and findings reveal global financial market risks significantly increased during the covid-19 pandemic period of the study. therefore, from the pieces of literature reviewed, it is obvious that a result of the uncertainties due to covid-19 in the stock market globally, making the stock market as a major point of call indicating the effect of covid-19 on economies. as such, it is an important contribution to the literature and the economic rebound of the nigerian economy to embark on a study of the risk-return relationship of stock on the nse to provide an initial estimate for policy direction and guide concerning past policies and future decisions. data and methodology the discussion in this section includes the method that was used for the analysis, mainly the theoretical framework, model specifications, sources and estimation procedure. data the data are secondary, sourced from the nigerian stock exchange using the daily selected sectoral all share index return of different sectors (see table 1) from january 1st till june 30th, 2020. the return series was generated by the following for 123 observations for each sector: pgarch. the study reveals that good news influence stock return more significantly than bad news of similar extent before the meltdown, but bad news have a more insignificant impact on stock return than the good of similar extent after the meltdown. zhang, hu and ji (2020) studied the financial markets of the top 10 countries on the list of confirmed covid-19 pandemic cases as of 27 march, 2020 (the united states, italy, china, spain, germany, france, the united kingdom, switzerland, south korea and the netherlands). the study used the quantile regression methodology for the daily s&p500 (sp) returns and findings reveal global financial market risks significantly increased during the covid-19 pandemic period of the study. therefore, from the pieces of literature reviewed, it is obvious that a result of the uncertainties due to covid-19 in the stock market globally, making the stock market as a major point of call indicating the effect of covid-19 on economies. as such, it is an important contribution to the literature and the economic rebound of the nigerian economy to embark on a study of the risk-return relationship of stock on the nse to provide an initial estimate for policy direction and guide concerning past policies and future decisions. data and methodology the discussion in this section includes the method that was used for the analysis, mainly the theoretical framework, model specifications, sources and estimation procedure. data the data are secondary, sourced from the nigerian stock exchange using the daily selected sectoral all share index return of different sectors (see table 1) from january 1st till june 30th, 2020. the return series was generated by the following for 123 observations for each sector: 𝐴𝐴𝐴𝐴𝐴𝐴�� = (����� ������) ������ (2) where 𝐴𝐴𝐴𝐴𝐴𝐴�� is all share index return at a particular day, 𝐴𝐴𝐴𝐴𝐴𝐴� is the all-share index of a particular day, 𝐴𝐴𝐴𝐴𝐴𝐴��� is the previous day all-share index. table 1 consists of the sectoral index used in the study, the description and the source of the data used as a proxy for each sector index. table 1. description of selected stock market indices (2) where asirt is all share index return at a particular day, asit is the all-share index of a particular day, asit–1 is the previous day all-share index. table 1 conkamaldeen ibraheem nageri102 sists of the sectoral index used in the study, the description and the source of the data used as a proxy for each sector index. table 1. description of selected stock market indices variables description source nse30 it is the price index that tracks the top thirty listed companies with fully paid-up common shares in terms of market capitalisation and liquidity on the nigerian stock exchange. nse nse5o it is the price index of the top fifty listed companies with fully paid-up common shares. it is weighted by adjusted market capitalisation multiplied by closing prices of the companies, multiply by a capping factor. nse nseban it is the price index that tracks the performance of listed banks with the most capitalisation and liquidity performance. nse nsecon it is the price index that tracks the performance of listed companies in the consumer goods sector (food, beverages and tobacco) based on the market capitalisation method. nse nseind it is the price index based on market capitalisation and method that captures the performance of listed companies in the industrial sector. nse nseins it is the price index that captures the performance of listed insurance companies with the most capitalisation and liquidity. nse nseisl it is the price index based on the requirements of the shari’ah advisory board that captures the performance of fifteen shari’ah-compliant listed companies. nse nseoil it is the price index based on market capitalisation methodology that captures the performance of listed companies in the oil and gas sector nse nsepen it is the price index that captures the top forty listed companies in terms of adjusted (free float factor) market capitalisation and liquidity nse nsepre it is the price index that tracks the performance of fully paid up ordinary shares of companies listed on the premium board nse nseall it is the cross-section of the ten price indexes listed above computed s o u r c e : nigerian stock exchange (nse). risk-return relationship in the nigerian stock market… 103 v ar ia bl es d es cr ip tio n so ur ce n se 30 it i s th e pr ic e in de x th at t ra ck s th e to p th ir ty l is te d co m pa ni es w ith f ul ly p ai dup co m m on s ha re s in te rm s of m ar ke t c ap ita lis at io n an d liq ui di ty o n th e n ig er ia n st oc k e xc ha n g e. n se n se 5o it i s th e pr ic e in de x of t he t op f if ty l is te d co m pa ni es w ith f ul ly p ai dup c om m on sh ar es . i t i s w ei gh te d by a dj us te d m ar ke t c ap ita lis at io n m ul tip lie d by c lo si ng p ri ce s of th e co m pa ni es , m ul tip l y b y a ca pp in g fa ct or . n se n se b a n it i s th e pr ic e in de x th at t ra ck s th e pe rf or m an ce o f lis te d ba nk s w ith t he m os t ca pi ta lis at io n an d liq ui di t y p er fo rm an ce . n se n se c o n it is th e pr ic e in de x th at tr ac ks th e pe rf or m an ce o f lis te d co m pa ni es in th e co ns um er go od s se ct or ( fo od , be ve ra ge s an d to ba cc o) b as ed o n th e m ar ke t ca pi ta lis at io n m et ho d. n se n se in d it i s th e pr ic e in de x ba se d on m ar ke t ca pi ta lis at io n an d m et ho d th at c ap tu re s th e pe rf or m an ce o f l is te d co m pa ni es in th e in du st ri al s ec to r. n se n se in s it is th e pr ic e in de x th at c ap tu re s th e pe rf or m an ce o f lis te d in su ra nc e co m pa ni es w ith th e m os t c ap ita lis at io n an d liq ui di t y . n se n se is l it is th e pr ic e in de x ba se d on th e re qu ir em en ts o f t he s ha ri ’a h a dv is or y b oa rd th at ca pt ur es th e pe rf or m an ce o f f if te en s ha ri 'a hco m pl ia nt li st ed c om pa ni es . n se n se o il it i s th e pr ic e in de x ba se d on m ar ke t ca pi ta lis at io n m et ho do lo gy t ha t ca pt ur es t he pe rf or m an ce o f l is te d co m pa ni es in th e oi l a nd g as s ec to r n se n se pe n it is th e pr ic e in de x th at c ap tu re s th e to p fo rt y lis te d co m pa ni es in te rm s of a dj us te d (f re e fl oa t f ac to r) m ar ke t c ap ita lis at io n an d liq ui di t y n se n se pr e it i s th e pr ic e in de x th at t ra ck s th e pe rf or m an ce o f fu lly p ai d up o rd in ar y sh ar es o f co m pa ni es li st ed o n th e pr em iu m b oa rd n se n se a l l it is th e cr os sse ct io n of th e te n pr ic e in de xe s lis te d ab ov e c om pu te d so ur ce : n ig er ia n st oc k ex ch an ge (n se ). f ig ur e 1. g ra ph ic al p re se nt at io n of th e se le ct ed s ec to ra l s ha re in de x on th e n ig er ia n st oc k e xc ha ng e so ur ce : n se , 2 02 0. 1, 00 0 1, 50 0 2, 00 0 2, 50 0 3, 00 0 3, 50 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e p r e 60 0 80 0 1, 00 0 1, 20 0 1, 40 0 1, 60 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e p e n 16 0 18 0 20 0 22 0 24 0 26 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e o il 1, 20 0 1, 60 0 2, 00 0 2, 40 0 2, 80 0 3, 20 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e is l 10 0 12 0 14 0 16 0 18 0 20 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e in s 80 0 1, 00 0 1, 20 0 1, 40 0 1, 60 0 1, 80 0 2, 00 0 2, 20 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e in d 30 0 40 0 50 0 60 0 70 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e c o n 20 0 25 0 30 0 35 0 40 0 45 0 50 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e b a n -4 00040 0 80 0 1, 20 0 1, 60 0 2, 00 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e 50 80 0 1, 00 0 1, 20 0 1, 40 0 1, 60 0 1, 80 0 m 1 m 2 m 3 m 4 m 5 m 6 m 7 m 8 m 9 m 10 m 11 m 12 20 20 n s e 30 fi gu re 1 . g ra ph ic al p re se nt at io n of th e se le ct ed s ec to ra l s ha re in de x on th e n ig er ia n st oc k e xc ha ng e s o u r c e : n se , 2 02 0. kamaldeen ibraheem nageri104 the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid-19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance , depends on squared residuals of the past period from period 1 till p period the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance known as the arch term, α1 is the parameter of the arch term and ω is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance to the standard arch. garch model has one lag of the regression model’s squared residual the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance known as the arch term and one lag of the variance itself the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance known as the garch term (bollerslev, 1986). risk-return relationship in the nigerian stock market… 105 the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance (4) equation 4 is the garch model developed by bollerslev (1986). α, β > 0 and (α + β) < 1 to avoid negative conditional variance and it indicates that present period’s return variance the sectoral index, as shown in figure 1, indicates that the sectors respond similarly during the early months of the year and at the inception of covid-19 cases in nigeria between january (m1) and april (m4). the sectorial indexes were increasing in january (m1) but experienced a decline afterwards till around march (m3) and april (m4). this was the period when covid19 was first reported and various forms of lockdown were also announced in nigeria. during this period of lockdowns and decline, various policy responses by different economic agencies were announced and implemented to cushion the negative effect of the pandemic in the country. nseins started to recover as early as march (m3) while other sectors started recovering toward april (m4), afterwards the policy responses, except for nseoil that indicates a second decline around may (m5) towards june (m6). the indexes indicate different magnitude because the index value of the sectors varies, the nsepre has the highest index followed by nseisl while the lowest index is shown by nseins. theoretical framework stock returns exhibit stochastic volatility and jumps (nageri, 2019b) indicating the risk associated with deviation in returns (campbell, lettau, malkiel & xu, 2001; pastor & veronesi, 2006). volatility models should capture error term’s heteroscedasticity and stylised fact in stock returns (engle, 1982). the general form of the conditional variance equation incorporates the arch processes with (p) lagged as follows: 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔𝜔𝜔�𝜀𝜀���� 𝜔𝜔…………𝜔𝜔𝜔𝜔�𝜀𝜀���� (3) equation 3, arch (1) model shows that next period’s variance of return which was the residuals of the mean equation (𝜎𝜎��), depends on squared residuals of the past period from period 1 till p period (𝜀𝜀���� ) known as the arch term, 𝜔𝜔� is the parameter of the arch term and 𝜔𝜔𝜔is the constant. an extension is the generalised arch or garch model which adds the lags of the variance, 𝜎𝜎���� to the standard arch. garch model has one lag of the regression model’s squared residual (𝜀𝜀���� ) known as the arch term and one lag of the variance itself (𝜎𝜎���� ) known as the garch term (bollerslev, 1986). 𝜎𝜎�� = 𝜔𝜔 𝜔𝜔∑ 𝜔𝜔𝜀𝜀�������� 𝜔 ∑ 𝛽𝛽𝜎𝜎�������� (4) equation 4 is the garch model developed by bollerslev (1986). 𝜔𝜔, 𝛽𝛽 > 0 and (𝜔𝜔 + 𝛽𝛽) < 1 to avoid negative conditional variance and it indicates that present period’s return variance is determined by a constant (ω), estimates of the previous period’s squared residual of the mean return equation (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) and estimates of the previous period’s return variance (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10)  cross-section mean return equation for asirit (7) (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10)  cross-section variance of return equation (8) where (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) represents the cross-section return variance (error term from the mean return equation) is determined by ω representing the constant, (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) (9) kamaldeen ibraheem nageri106 where g( . ) is the arbitrary volatility function of σit, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function g(σit) is the standard deviation in mean (θit). positive θit indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > θit > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below: (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) (𝜎𝜎��) is determined by a constant (𝜔𝜔), estimates of the previous period’s squared residual of the mean return equation (∑ 𝛼𝛼𝛼𝛼�������� ) and estimates of the previous period’s return variance (∑ 𝛽𝛽𝜎𝜎�������� ). model specification this study examined the risk-return relationship of returns and evaluates good and bad news during covid-19. variant auto-regressive conditional heteroscedasticity (arch) models were used to achieve the purpose of the study under three (3) distributional assumptions. the following is the general form of the panel garch model used in this research: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶𝐶𝛼𝛼��𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶𝐶𝛼𝛼��� cross-section mean return equation for 𝐴𝐴𝐴𝐴𝐴𝐴��� (7) 𝜎𝜎��� = 𝜔𝜔 𝐶 𝛼𝛼𝛼𝛼����� 𝐶𝐶 𝐶𝛽𝛽𝜎𝜎����� cross-section variance of return equation (8) where 𝜎𝜎��� represents the cross-section return variance (error term from the mean return equation) is determined by 𝜔𝜔 representing the constant, 𝛼𝛼����� representing the arch term showing the past period’s cross-section squared error term derived from the mean return equation and 𝜎𝜎����� representing the garch term showing the past period’s cross-section variance of the return. risk-return during covid-19 the panel garch-in-mean (garch-m) model used to measure the risk-return relationship was as follows: 𝜎𝜎��� = 𝜔𝜔 𝐶 𝜔𝜔��𝑔𝑔𝑔𝜎𝜎��) 𝐶𝐶𝛼𝛼��� (9) where 𝑔𝑔𝑔.) is the arbitrary volatility function of 𝜎𝜎��, the cross-section garch-m was specified with cross-section garch conditional variance specification and the function 𝑔𝑔𝑔𝜎𝜎��) is the standard deviation in mean (𝜔𝜔��). positive 𝜔𝜔�� indicates higher risk leading to higher average return and vice versa. the a priori expectation of garch-in-mean is 0 > 𝜔𝜔�� > 0, indicating that the risk-return relationship can be positive or negative. good and bad news during covid-19 threshold garch (tgarch/tarch) permits asymmetric effect between positive and negative news on cross-section stock returns with general description stated below:𝐶𝜎𝜎��� = 𝜔𝜔 + ∑ 𝛼𝛼������ 𝛼𝛼����� + ∑ 𝛾𝛾������ 𝛼𝛼����� 𝑑𝑑���� + ∑ 𝛽𝛽������ 𝜎𝜎����� (10) (10) where where 𝑑𝑑���� = � 1 𝑖𝑖𝑖𝑖 𝑖𝑖���� < 0 0, 𝑖𝑖𝑖𝑖 𝑖𝑖���� ≥ 0 when 𝑖𝑖���� indicates positive news, the effect would be given as 𝛾𝛾�� 𝑖𝑖����� , when 𝑖𝑖���� indicates negative news, the effects would be given as (𝜎𝜎+𝛾𝛾�� )𝑖𝑖���� . 𝛾𝛾�� is expected to be positive so that bad news would impact volatility. tgarch/tarch cross-section means return equation and cross-section return variance is stated as: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶 𝐶𝐶�� 𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶 𝑖𝑖��� cross-section mean return equation of 𝐴𝐴𝐴𝐴𝐴𝐴��� (11) 𝜎𝜎��� = 𝜔𝜔 + 𝐶𝐶�� 𝑖𝑖����� + 𝛾𝛾�� 𝑖𝑖����� 𝑑𝑑���� + 𝛽𝛽�� 𝜎𝜎����� cross-section return variance equation (12) where 𝑑𝑑���� = 1 if 𝑖𝑖����� < 0 and 𝑑𝑑���� = 0 if 𝑖𝑖����� > 0. the a priori expectation of tgarch specifies 𝛾𝛾�� < 0 as a measure of the impact of negative news on return volatility persistence. three (3) conditional error distributions that are: gaussian distribution, student’s-t distribution and the generalised error distribution (ged) were used to estimate the parameters of the consistent residuals of the models. estimation procedure the estimation procedure involves the estimation of the descriptive statistics of each sectoral return series, the univariate and panel data unit-root pre-testing of the series to establish the absence of unit root were conducted. the effect of sectoral-specific was tested with the use of least squares dummy variable estimator for heteroscedasticity and autocorrelation and the wald test statistic was employed to test the null hypothesis of the data pool ability these are done to satisfy the requirements for the use of the garch model in a panel data environment according to cermeño and grier (2001). results and discussion in this section, the analysis is carried out and results are presented and interpreted. table 2. descriptive statistics of selected sectoral share index return on the nigerian stock exchange stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nse30 0.001417 0.000421 0.060937 -0.055389 0.013190 0.407018 7.958619 261.9745 0.0000 when εit–i indicates positive news, the effect would be given as where 𝑑𝑑���� = � 1 𝑖𝑖𝑖𝑖 𝑖𝑖���� < 0 0, 𝑖𝑖𝑖𝑖 𝑖𝑖���� ≥ 0 when 𝑖𝑖���� indicates positive news, the effect would be given as 𝛾𝛾�� 𝑖𝑖����� , when 𝑖𝑖���� indicates negative news, the effects would be given as (𝜎𝜎+𝛾𝛾�� )𝑖𝑖���� . 𝛾𝛾�� is expected to be positive so that bad news would impact volatility. tgarch/tarch cross-section means return equation and cross-section return variance is stated as: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶 𝐶𝐶�� 𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶 𝑖𝑖��� cross-section mean return equation of 𝐴𝐴𝐴𝐴𝐴𝐴��� (11) 𝜎𝜎��� = 𝜔𝜔 + 𝐶𝐶�� 𝑖𝑖����� + 𝛾𝛾�� 𝑖𝑖����� 𝑑𝑑���� + 𝛽𝛽�� 𝜎𝜎����� cross-section return variance equation (12) where 𝑑𝑑���� = 1 if 𝑖𝑖����� < 0 and 𝑑𝑑���� = 0 if 𝑖𝑖����� > 0. the a priori expectation of tgarch specifies 𝛾𝛾�� < 0 as a measure of the impact of negative news on return volatility persistence. three (3) conditional error distributions that are: gaussian distribution, student’s-t distribution and the generalised error distribution (ged) were used to estimate the parameters of the consistent residuals of the models. estimation procedure the estimation procedure involves the estimation of the descriptive statistics of each sectoral return series, the univariate and panel data unit-root pre-testing of the series to establish the absence of unit root were conducted. the effect of sectoral-specific was tested with the use of least squares dummy variable estimator for heteroscedasticity and autocorrelation and the wald test statistic was employed to test the null hypothesis of the data pool ability these are done to satisfy the requirements for the use of the garch model in a panel data environment according to cermeño and grier (2001). results and discussion in this section, the analysis is carried out and results are presented and interpreted. table 2. descriptive statistics of selected sectoral share index return on the nigerian stock exchange stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nse30 0.001417 0.000421 0.060937 -0.055389 0.013190 0.407018 7.958619 261.9745 0.0000 when εit–i indicates negative news, the effects would be given as where 𝑑𝑑���� = � 1 𝑖𝑖𝑖𝑖 𝑖𝑖���� < 0 0, 𝑖𝑖𝑖𝑖 𝑖𝑖���� ≥ 0 when 𝑖𝑖���� indicates positive news, the effect would be given as 𝛾𝛾�� 𝑖𝑖����� , when 𝑖𝑖���� indicates negative news, the effects would be given as (𝜎𝜎+𝛾𝛾�� )𝑖𝑖���� . 𝛾𝛾�� is expected to be positive so that bad news would impact volatility. tgarch/tarch cross-section means return equation and cross-section return variance is stated as: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶 𝐶𝐶�� 𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶 𝑖𝑖��� cross-section mean return equation of 𝐴𝐴𝐴𝐴𝐴𝐴��� (11) 𝜎𝜎��� = 𝜔𝜔 + 𝐶𝐶�� 𝑖𝑖����� + 𝛾𝛾�� 𝑖𝑖����� 𝑑𝑑���� + 𝛽𝛽�� 𝜎𝜎����� cross-section return variance equation (12) where 𝑑𝑑���� = 1 if 𝑖𝑖����� < 0 and 𝑑𝑑���� = 0 if 𝑖𝑖����� > 0. the a priori expectation of tgarch specifies 𝛾𝛾�� < 0 as a measure of the impact of negative news on return volatility persistence. three (3) conditional error distributions that are: gaussian distribution, student’s-t distribution and the generalised error distribution (ged) were used to estimate the parameters of the consistent residuals of the models. estimation procedure the estimation procedure involves the estimation of the descriptive statistics of each sectoral return series, the univariate and panel data unit-root pre-testing of the series to establish the absence of unit root were conducted. the effect of sectoral-specific was tested with the use of least squares dummy variable estimator for heteroscedasticity and autocorrelation and the wald test statistic was employed to test the null hypothesis of the data pool ability these are done to satisfy the requirements for the use of the garch model in a panel data environment according to cermeño and grier (2001). results and discussion in this section, the analysis is carried out and results are presented and interpreted. table 2. descriptive statistics of selected sectoral share index return on the nigerian stock exchange stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nse30 0.001417 0.000421 0.060937 -0.055389 0.013190 0.407018 7.958619 261.9745 0.0000 is expected to be positive so that bad news would impact volatility. tgarch/tarch cross-section means return equation and cross-section return variance is stated as: where 𝑑𝑑���� = � 1 𝑖𝑖𝑖𝑖 𝑖𝑖���� < 0 0, 𝑖𝑖𝑖𝑖 𝑖𝑖���� ≥ 0 when 𝑖𝑖���� indicates positive news, the effect would be given as 𝛾𝛾�� 𝑖𝑖����� , when 𝑖𝑖���� indicates negative news, the effects would be given as (𝜎𝜎+𝛾𝛾�� )𝑖𝑖���� . 𝛾𝛾�� is expected to be positive so that bad news would impact volatility. tgarch/tarch cross-section means return equation and cross-section return variance is stated as: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶 𝐶𝐶�� 𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶 𝑖𝑖��� cross-section mean return equation of 𝐴𝐴𝐴𝐴𝐴𝐴��� (11) 𝜎𝜎��� = 𝜔𝜔 + 𝐶𝐶�� 𝑖𝑖����� + 𝛾𝛾�� 𝑖𝑖����� 𝑑𝑑���� + 𝛽𝛽�� 𝜎𝜎����� cross-section return variance equation (12) where 𝑑𝑑���� = 1 if 𝑖𝑖����� < 0 and 𝑑𝑑���� = 0 if 𝑖𝑖����� > 0. the a priori expectation of tgarch specifies 𝛾𝛾�� < 0 as a measure of the impact of negative news on return volatility persistence. three (3) conditional error distributions that are: gaussian distribution, student’s-t distribution and the generalised error distribution (ged) were used to estimate the parameters of the consistent residuals of the models. estimation procedure the estimation procedure involves the estimation of the descriptive statistics of each sectoral return series, the univariate and panel data unit-root pre-testing of the series to establish the absence of unit root were conducted. the effect of sectoral-specific was tested with the use of least squares dummy variable estimator for heteroscedasticity and autocorrelation and the wald test statistic was employed to test the null hypothesis of the data pool ability these are done to satisfy the requirements for the use of the garch model in a panel data environment according to cermeño and grier (2001). results and discussion in this section, the analysis is carried out and results are presented and interpreted. table 2. descriptive statistics of selected sectoral share index return on the nigerian stock exchange stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nse30 0.001417 0.000421 0.060937 -0.055389 0.013190 0.407018 7.958619 261.9745 0.0000  cross-section mean return equation of asirit (11) where 𝑑𝑑���� = � 1 𝑖𝑖𝑖𝑖 𝑖𝑖���� < 0 0, 𝑖𝑖𝑖𝑖 𝑖𝑖���� ≥ 0 when 𝑖𝑖���� indicates positive news, the effect would be given as 𝛾𝛾�� 𝑖𝑖����� , when 𝑖𝑖���� indicates negative news, the effects would be given as (𝜎𝜎+𝛾𝛾�� )𝑖𝑖���� . 𝛾𝛾�� is expected to be positive so that bad news would impact volatility. tgarch/tarch cross-section means return equation and cross-section return variance is stated as: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶 𝐶𝐶�� 𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶 𝑖𝑖��� cross-section mean return equation of 𝐴𝐴𝐴𝐴𝐴𝐴��� (11) 𝜎𝜎��� = 𝜔𝜔 + 𝐶𝐶�� 𝑖𝑖����� + 𝛾𝛾�� 𝑖𝑖����� 𝑑𝑑���� + 𝛽𝛽�� 𝜎𝜎����� cross-section return variance equation (12) where 𝑑𝑑���� = 1 if 𝑖𝑖����� < 0 and 𝑑𝑑���� = 0 if 𝑖𝑖����� > 0. the a priori expectation of tgarch specifies 𝛾𝛾�� < 0 as a measure of the impact of negative news on return volatility persistence. three (3) conditional error distributions that are: gaussian distribution, student’s-t distribution and the generalised error distribution (ged) were used to estimate the parameters of the consistent residuals of the models. estimation procedure the estimation procedure involves the estimation of the descriptive statistics of each sectoral return series, the univariate and panel data unit-root pre-testing of the series to establish the absence of unit root were conducted. the effect of sectoral-specific was tested with the use of least squares dummy variable estimator for heteroscedasticity and autocorrelation and the wald test statistic was employed to test the null hypothesis of the data pool ability these are done to satisfy the requirements for the use of the garch model in a panel data environment according to cermeño and grier (2001). results and discussion in this section, the analysis is carried out and results are presented and interpreted. table 2. descriptive statistics of selected sectoral share index return on the nigerian stock exchange stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nse30 0.001417 0.000421 0.060937 -0.055389 0.013190 0.407018 7.958619 261.9745 0.0000   cross-section return variance equation (12) where where 𝑑𝑑���� = � 1 𝑖𝑖𝑖𝑖 𝑖𝑖���� < 0 0, 𝑖𝑖𝑖𝑖 𝑖𝑖���� ≥ 0 when 𝑖𝑖���� indicates positive news, the effect would be given as 𝛾𝛾�� 𝑖𝑖����� , when 𝑖𝑖���� indicates negative news, the effects would be given as (𝜎𝜎+𝛾𝛾�� )𝑖𝑖���� . 𝛾𝛾�� is expected to be positive so that bad news would impact volatility. tgarch/tarch cross-section means return equation and cross-section return variance is stated as: 𝐴𝐴𝐴𝐴𝐴𝐴��� = 𝐶𝐶 𝐶 𝐶𝐶�� 𝐴𝐴𝐴𝐴𝐴𝐴����� 𝐶 𝑖𝑖��� cross-section mean return equation of 𝐴𝐴𝐴𝐴𝐴𝐴��� (11) 𝜎𝜎��� = 𝜔𝜔 + 𝐶𝐶�� 𝑖𝑖����� + 𝛾𝛾�� 𝑖𝑖����� 𝑑𝑑���� + 𝛽𝛽�� 𝜎𝜎����� cross-section return variance equation (12) where 𝑑𝑑���� = 1 if 𝑖𝑖����� < 0 and 𝑑𝑑���� = 0 if 𝑖𝑖����� > 0. the a priori expectation of tgarch specifies 𝛾𝛾�� < 0 as a measure of the impact of negative news on return volatility persistence. three (3) conditional error distributions that are: gaussian distribution, student’s-t distribution and the generalised error distribution (ged) were used to estimate the parameters of the consistent residuals of the models. estimation procedure the estimation procedure involves the estimation of the descriptive statistics of each sectoral return series, the univariate and panel data unit-root pre-testing of the series to establish the absence of unit root were conducted. the effect of sectoral-specific was tested with the use of least squares dummy variable estimator for heteroscedasticity and autocorrelation and the wald test statistic was employed to test the null hypothesis of the data pool ability these are done to satisfy the requirements for the use of the garch model in a panel data environment according to cermeño and grier (2001). results and discussion in this section, the analysis is carried out and results are presented and interpreted. table 2. descriptive statistics of selected sectoral share index return on the nigerian stock exchange stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nse30 0.001417 0.000421 0.060937 -0.055389 0.013190 0.407018 7.958619 261.9745 0.0000 the a priori expectation of tgarch specifies γit < 0 as a measure of the impact of negative news on return volatility persistence. risk-return relationship in the nigerian stock market… 107 three (3) conditional error distributions that are: gaussian distribution, student’s-t distribution and the generalised error distribution (ged) were used to estimate the parameters of the consistent residuals of the models. estimation procedure the estimation procedure involves the estimation of the descriptive statistics of each sectoral return series, the univariate and panel data unit-root pre-testing of the series to establish the absence of unit root were conducted. the effect of sectoral-specific was tested with the use of least squares dummy variable estimator for heteroscedasticity and autocorrelation and the wald test statistic was employed to test the null hypothesis of the data pool ability these are done to satisfy the requirements for the use of the garch model in a panel data environment according to cermeño and grier (2001). results and discussion in this section, the analysis is carried out and results are presented and interpreted. table 2. descriptive statistics of selected sectoral share index return on the nigerian stock exchange stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nse30 0.001417 0.000421 0.060937 -0.055389 0.013190 0.407018 7.958619 261.9745 0.0000 nse50 0.001051 0.000251 0.199894 -0.116283 0.021080 2.683139 37.44343 12759.04 0.0000 nseban 0.000743 0.000000 0.079884 -0.127868 0.026560 -0.595542 6.472291 139.8081 0.0000 nsecon 0.000288 -0.000017 0.225520 -0.174956 0.029467 1.863450 34.07173 10160.68 0.0000 nseind 0.002787 0.000036 0.086508 -0.075006 0.019561 0.630845 7.282481 206.7894 0.0000 nseins 0.001771 0.002363 0.061560 -0.056696 0.015838 -0.006462 4.693598 29.76007 0.0000 nseisl 0.001849 0.000381 0.054492 -0.044845 0.013018 0.507936 6.914825 169.7127 0.0000 nseoil -0.000512 0.000000 0.052420 -0.056970 0.013119 -0.827499 9.643415 486.3175 0.0000 nsepen 0.001234 0.000000 0.096402 -0.089618 0.015971 0.453358 13.09519 1065.876 0.0000 kamaldeen ibraheem nageri108 stat variable mean median maximum minimum std. dev. skewness kurtosis j.bera prob nsepre 0.020182 0.000161 1.036042 -0.502876 0.212936 3.041523 17.78441 2651.665 0.0000 nseall 0.003081 0.000028 1.023604 -0.502876 0.069947 9.227151 160.4829 2608424 0.0000 s o u r c e : authors computation, 2020. table 2 indicates that the mean return of the sectoral indices is positive except for the mean return of nseoil while the median return of nsecon is negative and all other sectoral median returns are positive. all the series exhibit positive maximum returns with all showing negative minimum returns during the covid-19 year. the standard deviations of all the return series are low at a maximum of 3% except for nsepre with the jarque-bera p-values are all statistically significant at 5% indicating a normal distribution of the return series. the pooled series (nseall) has a positive mean and median return, positive maximum return and negative minimum return with 6% standard deviation and a jarque-bera p-value of less than 5% significant level indicating a normal distribution of the nseall series. table 3. unit root test result of selected nse indices series variable method stat prob. method stat prob. nse30r adf test stat -7.403898 0.0000 pp test stat -11.34105 0.0000 nse50r adf test stat -16.47200 0.0000 pp test stat -16.46769 0.0000 nsebanr adf test stat -13.07916 0.0000 pp test stat -12.99907 0.0000 nseconr adf test stat -19.04778 0.0000 pp test stat -19.08406 0.0000 nseindr adf test stat -13.22865 0.0000 pp test stat -13.53596 0.0000 nseinsr adf test stat -18.09120 0.0000 pp test stat -17.97058 0.0000 nseislr adf test stat -7.747417 0.0000 pp test stat -12.10292 0.0000 nseoilr adf test stat -13.96485 0.0000 pp test stat -13.98646 0.0000 nsepenr adf test stat -13.71659 0.0000 pp test stat -13.80775 0.0000 nseprer adf test stat -16.46982 0.0001 pp test stat -21.72942 0.0000 s o u r c e : authors computation, 2020. table 2. descriptive… risk-return relationship in the nigerian stock market… 109 table 4. panel unit root test result of nseall variable methods stat prob. nseall levin, lin and chu im, pesaran and shin adf pp -9.76184 -19.2477 388.829 1122.30 0.0000 0.0000 0.0000 0.0000 s o u r c e : authors computation, 2020. table 3 and 4 are the unit root test results for the series, the adf and pp unit root test result for the individual asi sectorial returns indicates no unit root while the cross-section nseall unit root result also indicates stationarity. therefore, the data is suitable for econometrics analysis. cross-section regression requires the establishment of the pool-ability of the data to know if there exists no sectorial specific effect in the data and applicability of single intercept. to test for homogeneity (common intercept), the least square dummy variable (lsdv) according to cermeño and grier (2001) was used, the auto-regressive conditional heteroscedasticity (arch) effect test was used to test for arch effect and serial correlation was tested using the ljung–box q-statistics and partial correlations tests for the residuals and squared residuals of the mean and variance equations. table 5 presents the wald test f-statistics with chi-square values of the lsdv cross-section mean equation were 0.289782 and 1.876113 respectively and they are not statistically significant, indicating that there exists homogeneity (common intercept) within the sectorial return series. the f-statistics and the observed r-square values of the arch test from the pooled returns indicate that the null hypothesis of no arch effect is rejected indicating the presence of arch effect in the residuals of the pooled mean equation. table 5. wald test (mean equation) and arch test (pooled regression) wald test (mean equation) value prob heteroscedasticity test (pooled regression) value prob f-statistics 0.289782 0.8914 f-statistics 132.8361 0.0000 obs*r-square 1.876113 0.8914 obs*r-square 126.1997 0.0000 s o u r c e : authors computation, 2020. kamaldeen ibraheem nageri110 table 6. autocorrelation result residual pac q-stat prob squared residual pac q-stat prob -0.008 0.0216 0.002 0.225 126.40 0.0000 0.108 14.334 0.001 0.158 188.77 0.0000 0.035 17.747 0.002 0.112 219.80 0.0000 -0.083 16.680 0.002 0.081 236.30 0.0000 s o u r c e : authors computation, 2020. table 6 shows the autocorrelation result of the pooled regression for the residual and the squared residuals from the mean equation and it indicates that there is no serial correlation in the residuals. the result of no serial correlations and the presence of the arch effect indicates the application of the garch model. lastly, the cross-section variance equation was tested for individual effect in the nse sectoral series using the maximum log-likelihood estimate (mle) as suggested by cermeño and grier (2001) and the mle is statistically significant at 5% which shows that the sectorial return variance is not consistent between the market. therefore, the garch model applies to the panel data for analysis. table 7. cross-section garch-in-mean result for sectorial return in covid-19 parameters gaussian distribution estimates p-value student’s-t distribution estimates p-value generalised error distribution estimates p-value c -0.007504 0.0000 -0.006850 0.4835 -0.056134 0.1859 θit 0.423549 0.0000 0.113079 0.4835 0.964359 0.1860 ω 0.000079 0.0000 0.005454 0.5914 0.001733 0.0000 αit 0.164938 0.0000 -0.004056 0.6061 0.000017 0.0015 βit 0.739167 0.0000 -0.263666 0.0382 0.488494 0.0000 aic -4.667309 -5.528884 -5.658158 sc -4.653280 -5.512517 -5.641791 hq -4.662214 -5.522941 -5.652215 s o u r c e : authors computation, 2020. risk-return relationship in the nigerian stock market… 111 table 7 shows the garch-in-mean cross-section return indicating positive θit (standard deviation) of 0.423549, 0.113079 and 0.964359 under the three error distributional assumptions respectively with p-values of 0.0000, 0.4835 and 0.1860 respectively indicating statistical significance at 5% under gaussian distribution estimates but statistically insignificant under the student’s-t distribution and the generalised error distributions (ged). this implies a positive risk-return relationship in the cross-section return on the nigerian stock exchange sectors during covid-19. higher risk leads to higher return and vice versa. the akaike information criterion (aic), schwarz criterion (sc) and the hannan-quinn criterion show that the ged value is the lowest indicating its superior predictive ability of garch-in-mean model estimate of cross-section risk-return relationship during covid-19. this implies that the risk-return premium of the stock on the selected sectoral stocks is not risky to hold during covid-19. the variance equation indicates αit and βit representing the arch term (past day’s return squared residual) and the garch term (past day’s variance of return) respectively with ω as the constant is positive and significant at 5% under gaussian and ged distributions. this indicates that past day return and risk (variance) are significant and positive under the gaussian and ged distributional assumptions. the past day’s return squared residual is negative and statistically insignificant under the student’s-t distribution while the past day’s variance of return and the constant are negative and statistically significant under the student’s-t distribution. table 8. arch effect and autocorrelation result of ged garch-in-mean model heteroscedasticity test (pooled regression) value prob squared residual pac q-stat prob f-statistics 0.100427 0.8178 -0.148 54.105 0.918 obs*r-square 0.100444 0.8177 -0.103 80.888 0.499 -0.100 105.17 0.547 -0.052 112.24 0.691 s o u r c e : authors computation, 2020. the arch effect and autocorrelation result in table 8 is the diagnostic result of the ged estimate suggested by the criterion as the best estimate. the result kamaldeen ibraheem nageri112 shows that the null hypothesis of no arch effect and no serial correlation cannot be rejected, which confirms that the model is good and desirable for policy consideration and implementation. table 9. cross-section tgarch/tarch result for sectorial return in covid-19 parameters gaussian distribution estimates p-value student-t distribution estimates p-value generalised error distribution estimates p-value ω 0.000063 0.0000 0.104493 0.0070 0.000085 0.0000 αit 0.072421 0.0000 1455.982 0.0094 1.058086 0.0000 γit 0.147225 0.0000 -383.8023 0.1403 0.140300 0.6700 βit 0.785788 0.0000 0.131148 0.0000 0.514905 0.0000 aic -4.680251 -5.662720 -5.767163 sc -4.666223 -5.646353 -5.750796 hq -4.675157 -5.656777 -5.761220 s o u r c e : authors computation, 2020. the tgarch results of the cross-section return on the nigerian stock exchange during the covid-19 half-year is shown in table 9. the value of γit under the gaussian distribution is positive and significant while γit is negative and insignificant under student’s-t while γit is positive and insignificant under ged distributional assumptions. the tgarch model specifies the estimates of γit < 0 and significant to show that bad news has more impact on return volatility than the good news of the same extent. therefore, the cross-section volatility of return reacted more to good news than to bad news of equal extent on the nigerian stock exchange during covid-19 as shown by all the distributional assumptions. the variance equation indicates that αit and βit representing the arch term (past day’s squared residual return) and the garch term (past day’s variance of the return) respectively and ω as the constant, are positive and significant at 1% as shown by all the distributional assumptions. the best-fitted estimates according to the estimates of the aic, sic and hq selection criteria indicate that the ged value is the lowest indicating its supe risk-return relationship in the nigerian stock market… 113 rior predictive ability of tgarch estimate of news impact on cross-section returns during covid-19. this is in agreement with the finding of nageri (2019b). table 10. arch effect and autocorrelation result of ged tgarch/tarch model heteroscedasticity test (pooled regression) value prob squared residual pac q-stat prob f-statistics 0.005834 0.9391 -0.002 0.0058 0.939 obs*r-square 0.005839 0.9391 0.004 2.0487 0.976 -0.002 3.0607 0.996 -0.002 0.0727 0.999 s o u r c e : authors computation, 2020. table 10 is the diagnostic result of the arch effect and autocorrelation result of the ged suggested by the criterion as the best estimate. the result specifies that the null hypothesis of no arch effect and no serial correlation cannot be rejected, which shows that the model is good and desirable for policy consideration and implementation.  conclusion and recommendations the study examined the risk-return relationship during covid-19 on the nigerian stock exchange (nse) using panel data of ten (10) sector index returns. panel garch methodology of garch-in-mean and the tgarch models were used for the analysis. the mean and variance equations were developed in a panel form as suggested by cermeño and grier (2001). findings indicate that the return of selected ten sectorial returns exhibits a positive risk-return relationship during the period under consideration, showing that the assets are not too risky to hold. this is in agreement with the conventional view that the higher the return, the higher the risk. on the other hand, stock returns respond to good news more than they do to the bad news of a similar extent on the nigerian stock exchange during covid-19 and currentday returns respond to past returns during the period. this indicates that the nigerian stock market is resilient and was able to resist the impact of covid-19 contrary to findings in the advanced stock market. the reason for this may be connected to the various policy responses of the financial sector regulatory kamaldeen ibraheem nageri114 authorities such as the central bank of nigeria (cbn) and securities and exchange commission (sec) to cushion the effects of the pandemic. the top fifty listed companies, listed banks, listed insurance companies and the top forty listed have remained more attractive to investors. the performance of the other sectors (consumer goods, industrial sector, shari’ah compliant companies, companies listed on the premium board and the top thirty listed companies) can be attributed to high inf lation, loss of income and growing unemployment. the oil and gas sector can be attributed to the high volatility in the price of oil throughout the world. finally, the study suggests that policymakers should be more sincere, ingenuine and pay more attention to the nigerian stock market for opportunities abound in the market for post-covid-19 economic recovery and to leverage on the ability of the market to resist the pandemic to encourage more listing on the stock market.  references alade, e.m., adeusi, a.s., & alade, o.f. 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(2020). predicting stock returns in the presence of covid-19 pandemic: the role of health news. international review of financial analysis, 71, 101546. http://dx.doi.org/10.1016/j.irfa.2020.101546. the nigerian stock exchange (nse) (2020). nigerian stock exchange, https://www.nse. com.ng. world health organisation (who) (2020). who director-general’s opening remarks at the media briefing on covid-19, https://www.who.int/director-general/speeches/ detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid19---11-march-2020 (accessed: 03.07.2020). zhang, d., hu, m., & ji, q. (2020). financial markets under the global pandemic of covid-19. finance research letters, 36, 101528. http://dx.doi.org/10.1016/j. frl.2020.101528. date of submission: november 14, 2021; date of acceptance: december 13, 2021. * contact information: kabonlineonline09@gmail.com, department of finance and accounting, ibs hyderabad (icfai foundation for higher education), hyderabad, india, 501203, phone: +91-8374127684; orcid id: https://orcid.org/0000-0002-4672-7657. ** contact information: neetu19yadav95@gmail.com, department of finance and accounting, ibs hyderabad (icfai foundation for higher education), hyderabad, india, 501203, phone: +91-9166419346; orcid id: https://orcid.org/0000-0003-4199-5385. *** contact information: geeta.singh25august@gmail.com, department of finance and accounting, ibs hyderabad (icfai foundation for higher education), hyderabad, india, 501203, phone: +91-8096508380; orcid id: https://orcid.org/0000-0002-1210-2229. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 2 bhattacharjee, k., yadav, n., & singh, g. (2022). does mutual fund manager’s attributes impact fund performance? evidence from india. copernican journal of finance & accounting, 11(2), 9–29. http://dx.doi.org/10.12775/cjfa.2022.006 kaushik bhattacharjee* icfai business school neetu yadav** icfai business school geeta singh*** icfai business school does mutual fund manager’s attributes impact fund performance? evidence from india keywords: mutual fund, managerial attributes, fund performance, managerial qualification, work experience, india. j e l classification: g11, g15, g23. abstract: this paper examines the impact of two managerial characteristics – qualification and work experience on the fund performance of various mutual fund schemes in india. we analyse 1508 fund managers during the period 2005–2018 using panel k. bhattacharjee, n. yadav, g. singh1010 ols regression. our results suggest that work experience of the managers positively affects the performance of the open-ended schemes. after segregating the data into different schemes and different qualification categories, we find that the number of years, for which the manager is handling a scheme, is positively related to fund performance for almost all the schemes and qualifications. further, we find evidence to support the notion that better quality of education and specialised courses also contribute to improving the fund performance. in india, the mutual fund industry is expected to grow at an exponential rate in the coming years, and this study provides an insight into the characteristics of the fund managers impacting the performance of such funds.  introduction introduction investors’ decision to invest in the mutual fund schemes are in general based on their objective to invest, be it tax savings, steady f low of income, capital appreciation, etc. however, while choosing a specific scheme there are certain other factors inf luencing the investment decision of the investor; of which performances, as usually proxied by fund returns, (necessarily risk-adjusted-returns), is the most important. there are a number of factors inf luencing the performance of the fund, one of them being the attributes of the corresponding fund managers. this topic has been central to the research of many studies, where they investigate if some managers are better than the others; chevalier and ellison (1999b), gottesman and morey, (2006), switzer and huang (2007), fang and wang (2015); among many other studies focused on analysing the managerial characteristics inf luencing funds’ performance.1 the central idea of such studies is that if one considers mutual fund managers as skilled professionals (just like any other professionals like doctors or statisticians), it is not difficult to postulate that some managers may perform better than others, due to their possession of different degrees of skills. determinants of such skills could be their education, experience, and so on. thus, these attributes can also affect their performance (chevalier & ellison, 1999b). given the above arguments, many researchers have tried to figure out whether some mutual fund managers are better than others by studying the relationship between fund performance and fund manager’s personal charac1 moreover, one of the widely accepted theories, the human capital theory, works on the assumption that formal education is highly instrumental and necessary to improve productivity. does mutual fund manager’s attributes impact fund performance? 1111 teristics. golec (1996), in one of the pioneering studies, finds that managers with an mba tend to outperform others; however, the study also reveals that having an mba is not enough as there are other aspects such as the institution from where the mba is obtained, years of experience, the number of organisations in which the manager has worked, etc., which impact the fund performance. chevalier and ellison (1999b) suggest that managers with mbas outperform others, and a significant portion of the higher returns is achieved by younger managers. better performance of younger managers can be attributed to the fact that they are more likely to be fired for poor performance and they have the pressure of working hard as they have longer career ahead of them. gottesman and morey (2006) find that managers holding mba degree from the top 30 schools of the business week rankings of mba programs exhibit superior performance than those without mba degrees or those with mbas from unranked programs. in this paper, we examine the relationship of the two major attributes of the managers, his2 qualification and work experience, with the performance of various schemes in india. the study assumes importance in this context as in spite of being one of the most prominent emerging markets, the mutual fund penetration ratio [asset under management (aum) to gdp] in india is significantly lower at just 11 percent in comparison to the global average of 55 percent; this leaves enough opportunity for strong growth (the telegraph, 2021). (refer figure 1) further, the aum of india’s mutual fund (mf) industry is likely to grow exponentially in the coming years. veeravel and mohanasundaram (2020) also highlight the importance of the mutual fund industry and the institutional environment of india. this motivates us to examine managerial attributes as important factors inf luencing the fund performance. 2 here, ‘his’ implies both his/her. however, in the sample as well as in the mutua fund industry more than 95% fund managers are male. k. bhattacharjee, n. yadav, g. singh1212 figure 1. growth in assets under management figure 1. growth in assets under management mar/ 65 mar/ 87 mar/ 93 jan/ 03 feb/ 03 mar/ 03 mar/ 04 mar/ 05 mar/ 06 mar/ 07 mar/ 08 mar/ 09 mar/ 10 mar/ 11 mar/ 12 mar/ 13 mar/ 14 mar/ 15 0 200000 400000 600000 800000 1000000 1200000 years in in r c ro re s source: amfi.com. we contribute to the literature not only by segregating the manager’s qualification on the basis of whether they are mba or not, but also taking into account the educational qualification of the managers at graduation level. most importantly, we differentiate among the qualifications of the managers on the basis of the repute of the institutions. bachelor of technology (b.tech) from any indian institute of technology (iits), and mba from any indian institute of management (iims), are considered to be the most valued since these are the most reputed and prestigious institutions in the country for engineering and management courses respectively. therefore, considering exponential growth of the assets under management in the last two decades in india which points towards growing popularity and increasing investments by retail investors, who own about 90% of the total mf accounts in the country, it is worth investigating if manager attributes can influence the performance of various schemes in the country. similar to gottesman and morey (2006), fang and wang (2015), barber, scherbina and schlusche (2017), we find that the managers from premium institutes like iits, iims perform better than the managers who are b.tech or mba from other institutions. our findings suggest that the years since a manager has been handling the scheme is an important proxy of his work experience which improves the fund performance. this study has practical s o u r c e : sayyad, 2020. we contribute to the literature not only by segregating the manager’s qualification on the basis of whether they are mba or not, but also taking into account the educational qualification of the managers at graduation level. most importantly, we differentiate among the qualifications of the managers on the basis of the repute of the institutions. bachelor of technology (b.tech) from any indian institute of technology (iits), and mba from any indian institute of management (iims), are considered to be the most valued since these are the most reputed and prestigious institutions in the country for engineering and management courses respectively. therefore, considering exponential growth of the assets under management in the last two decades in india which points towards growing popularity and increasing investments by retail investors, who own about 90% of the total mf accounts in the country, it is worth investigating if manager attributes can inf luence the performance of various schemes in the country. similar to gottesman and morey (2006), fang and wang (2015), barber, scherbina and schlusche (2017), we find that the managers from premium institutes like iits, iims perform better than the managers who are b. tech or mba from other institutions. our findings suggest that the years since a manager has been handling the scheme is an important proxy of his work experience which improves the fund performance. this study has practical implications for the investors to also look at the profile of the managers handling the schemes in terms of their educational qualification and work experience. fur does mutual fund manager’s attributes impact fund performance? 1313 ther, this study can guide the growing number of the asset management companies to consider manager-specific characteristics while assigning them different schemes. literature reviewliterature review literature provides evidence on various managerial traits impacting the corporate financial policies (malmendier, tate & yan, 2011; schoar, 2007; rakhmayil & yuce, 2008). the impact of managerial characteristics is not limited to financial policies of the firms, but to the performance of hedge funds and mutual funds as well. maxam, petrova, nikbakht and spieler (2005) analyse 147 hedge funds and find that managers with degrees from top us schools perform better than others; however, those with undergraduate degrees in economics and that too from top ranked schools significantly underperform their peers. recent and previous studies have focused on the traits of fund managers affecting the mutual fund performance. characteristics of the fund managers like age, gender, race, skin colour, education, work experience, etc, impact the performance; two managerial characteristics have been majorly explored in the literature: whether a manager holding a cfa degree adds value in portfolio performance, and those with an mba degree improves the fund performance (chevalier & ellison, 1999b; gottesman & morey, 2006; holland, 2006; philpot & peterson, 2006; switzer & huang, 2007; fang & wang, 2015; chekenya & sikomwe, 2020). chevalier and ellison (1999b) analyse the relationship between performance and manager characteristics. they posit that like any other skilled professionals, some mutual fund managers are expected to perform better than others such that managers from undergraduate institutions with higher average student sat scores yield higher returns. in another study, chevalier and ellison (1999a) examine if managers’ behaviour is affected by the fear of getting terminated and suggest that younger managers have more sensitive termination – performance relationship than older managers; and thus, they tend to avoid unsystematic risk. gottesman and morey (2006) find that managers holding mba degree from the top 30 schools, based on the business week rankings of mba programs, exhibit superior performance than those without mba degrees or those with mbas from unranked programs. thus, they conclude that likelihood of high ranked schools to produce better managers is higher. further, switzer k. bhattacharjee, n. yadav, g. singh1414 and huang (2007) indicate that differences in the performance of the funds can be attributed to differences in other managerial human capital characteristics. recent studies also provide evidence for the positive relation between managerial attributes and fund performance. mentel, szetela and tvaronaviciene (2016) find that the professional management education provides an advantage to the investment managers. cuthbertson, nitzsche and o’sullivan (2016) report that some manager characteristics and fund characteristics explain the cross-section of fund performance; moreover, it is the quality of the undergraduate institution of the managers which has a positive effect on fund performance. similarly, khalil, hassan and qamar (2016) find that factors like manager’s age, qualification, experience, fund age, and management fee affect the performance of mutual funds positively. fang and wang (2015) provide evidence for the positive relation between manager’s qualification and fund performance in china. they report that there are distinct channels affecting the performance of the fund managers, such that managers with mba or cfa qualifications are associated with higher excess returns, better stock-picking ability and thus, better comprehensive performance. from the above strand of literature, we conclude that the human capital theory applies to the mutual fund industry in many countries. in contrast to these studies, there are some studies suggesting that there is either no relation or negative relation between the fund performance and manager characteristics like education and experience. dincer, gregory-allen and shawky (2010) and fortin, michelson and jordan-wagner (1999) report that there is no relationship between manager tenure and performance. hu, yu and wang (2012) study 60 mutual funds in taiwan and report that balance funds perform better than other funds; and managers’ tenure is inversely related to the fund performance such that old managers may not necessarily outperform new managers.3 apart from linear association between the fund performance and managerial attributes, some studies contend that the relation between educational qualification and fund performance is non-linear. hu, kale, pagani and subramanian (2011) report a u-shaped relation between the relative risk and prior performance of a manager. they establish that age is an important factor in de3 this can be attributed to the fact that less experienced managers are more concerned about their careers and are afraid of losing their jobs, and therefore, work harder than others. does mutual fund manager’s attributes impact fund performance? 1515 termining the relative risk-prior performance relation, and that younger managers facing greater employment risk, choose lower relative risk whereas experienced managers tend to choose high relative risk. atkinson, baird and frye (2003) find no evidence supporting any significant difference in the performance, risk, and other fund characteristics managed by male and female fund managers. despite this, they observe that during the initial years of managing the funds, net asset f lows into funds managed by females are lower than those handled by males. further, in many studies, it is observed women fund managers held portfolios with more risk than men (bliss & potter, 2002). thus, literature provides mixed results for role of the personal characteristics of the fund managers in deciding the performance of different mutual fund schemes, apart from the geographic and demographic characteristics. in this paper, we confine our study to examine if there is any relationship between the educational qualification and work experience of managers, and fund performance in indian mutual fund during 2005–2018. data and methodologydata and methodology datadata the data is collected from the nav india database of capitalline for 1605 fund managers for the period 2005–2018. after filtering for managers whose either age or qualification was not available, we have final data of 1508 fund managers, handling 29 different schemes for the given time period. table 1 presents details of different schemes, along with their frequency distribution. it is evident from table 1 that almost 94 percent of the observations are of openended schemes: both income and growth. table 1. different schemes with codes scheme code description frequency percent panel a open ended income/debt oriented scheme a00i01 overnight fund 7 0.44 a00i02 liquid fund 77 4.87 a00i03 ultra short duration fund 42 2.66 k. bhattacharjee, n. yadav, g. singh1616 scheme code description frequency percent a00i04 low duration fund 53 3.35 a00i05 money market fund 35 2.22 a00i06 short duration fund 62 3.92 a00i07 medium duration fund 26 1.65 a00i08 medium to long duration fund 18 1.14 a00i09 long duration fund 2 0.13 a00i10 dynamic bond fund 113 7.15 a00i11 corporate bond fund 2 0.13 a00i12 credit risk fund 38 2.41 a00i13 banking and psu fund 64 4.05 a00i14 gilt fund 67 4.24 a00i15 gilt fund with 10-year constant duration 4 0.25 a00i16 floater fund 20 1.27 panel b open ended growth/equity-oriented scheme a0ii01 multi cap fund 90 5.7 a0ii02 large cap fund 73 4.62 a0ii03 large & mid cap fund 174 11.01 a0ii04 mid cap fund 86 5.44 a0ii05 small cap fund 77 4.87 a0ii06 dividend yield fund 6 0.38 a0ii07 value fund/contra fund 115 7.28 a0ii08 focused fund 5 0.32 a0ii09 sectoral/thematic funds 143 9.05 a0ii10 elss 88 5.57 panel c close ended scheme close ended income/debt-oriented scheme b00i01 fixed term plan 63 3.99 close ended growth/equity-oriented scheme table 1. different… does mutual fund manager’s attributes impact fund performance? 1717 scheme code description frequency percent b0ii01 elss 26 1.65 interval schemes c00i01 income/debt oriented schemes 4 0.25 s o u r c e : author’s calculation from https://www.navindia.com/. variablesvariables we analyse the impact of qualification and experience on fund performance through ols regression. given below are the explanation of the dependent variable, fund performance, and the independent variable of interest: work experience and educational qualification, along with the definition of the control variable, age of the scheme. fund performancefund performance fund performance is measured by the annualised returns, calculated from the monthly returns. thus, the annualised monthly return for the i-th fund manager and j-th fund is given by fund performance is measured by the annualised returns, calculated from the monthly returns. thus, the annualised monthly return for the i-th fund manager and j-th fund is given by 1/ 1 [ (1 )] 1 k k ij t j i r r      (1.1) it can be easily noted that rij is equivalent to the monthly compounded growth rate per annum (cagr) which is the geometric mean of monthly gross returns and supposed to be better measure of average return than simple arithmetic mean.4 educational qualification for educational qualification of the fund managers, from the raw descriptive text data, we have created a variable ‘q-code’. the data is broadly divided into ten categories, which is categorical in nature.5 for example, q-code 2 implies that the manager is a bachelor of engineering (b.e) along with master of business administration (mba). similarly, the qcode 3 represents fund manager is a bachelor of technology (b.tech), and master of business administration. table 2 provides detail of different qualification categories, along with the frequency distribution of these categories. table 2. qualification categories q-code description frequency percent 1 others 112 7.09 2 be & mba 251 15.89 3 b.tech & mba 244 15.44 4 b.sc & mba 68 4.3 5 ca/cfa 70 4.43 6 mba/pgdm 255 16.14 7 bcom & others 80 5.06 8 only bcom 31 1.96 9 bcom & ca 191 12.09 4 since cagr takes into account the reinvested profits, it is considered to be a better measure of an investment’s annual growth rate (hull, 2015). 5 the classification is indeed arbitrary. however, we have made sure that all the major bachelors and master degrees that are prevalent in india have been covered. (1.1) it can be easily noted that rij is equivalent to the monthly compounded growth rate per annum (cagr) which is the geometric mean of monthly gross returns and supposed to be better measure of average return than simple arithmetic mean.4 4 since cagr takes into account the reinvested profits, it is considered to be a better measure of an investment’s annual growth rate (hull, 2015). table 1. different… k. bhattacharjee, n. yadav, g. singh1818 educational qualificationeducational qualification for educational qualification of the fund managers, from the raw descriptive text data, we have created a variable ‘q-code’. the data is broadly divided into ten categories, which is categorical in nature.5 for example, q-code 2 implies that the manager is a bachelor of engineering (b.e) along with master of business administration (mba). similarly, the q-code 3 represents fund manager is a bachelor of technology (b.tech), and master of business administration. table 2 provides detail of different qualification categories, along with the frequency distribution of these categories. table 2. qualification categories q-code description frequency percent 1 others 112 7.09 2 be & mba 251 15.89 3 b.tech & mba 244 15.44 4 b.sc & mba 68 4.3 5 ca/cfa 70 4.43 6 mba/pgdm 255 16.14 7 bcom & others 80 5.06 8 only bcom 31 1.96 9 bcom & ca 191 12.09 10 bcom & mba 278 17.59 s o u r c e : author’s calculation from https://www.navindia.com/. apart from the educational qualifications on the basis of under-graduation, post-graduation, and specialised courses, earlier researches (in the context of usa) have considered sat score, and gmat score to signify the academic credibility/scholastic achievement level of the managers, and average sat or gmat score of the students of any institute to label it as top ranked or not. however, 5 the classification is indeed arbitrary. however, we have made sure that all the major bachelors and master degrees that are prevalent in india have been covered. does mutual fund manager’s attributes impact fund performance? 1919 the entire procedure is not applicable in the indian scenario since admission to many prestigious colleges is based on either their own aptitude tests or a common entrance test whose scores are not in the public domain. it is also obvious that managers qualified from an institution of repute like iits or iims must have obtained high scores in these entrance exams, otherwise it would not have been possible for them to get admission into these premier institutions. thus, we assume that managers passed out from iits or iims have received quality education and thus, can be expected to impact the fund performance positively. experience of the managersexperience of the managers we take three proxies to represent the experience of the managers: total experience in terms of number of years (experience_yrs), the number of organisations managers have worked previously (no_pre_org), and the experience of fund managers in terms of numbers of years of handling the current scheme (age_scheme_manager). considering various studies which explain that mutual fund characteristics also affect the fund performance (babbar & sehgal, 2018; prather, bertin & henker, 2004), we control for the age of the scheme also which is measured as the difference between the date on the which the data is collected (august 2018) and the inception year of the scheme itself. there are many other managerial attributes like actual age of the manager, gender, etc., used in earlier research which in our case could not be tested as the relevant data is not available. hence, we mainly confine our work to only qualifications and the experiences of the fund managers. results and findingsresults and findings table 3 presents the descriptive statistics of the variables: performance of the mutual fund scheme, the three proxies of the experience of the manager: experience_yrs, no_prev_org, and age_scheme_managers, and age of the scheme. the mean and median of all the variables are similar indicating the non-severity of skewness in the distributions. for performance, we see that minimum value is as low as -64% and highest being 99% indicating a wide spread in the data, with many good, mediocre, and poor performing funds included in the study. similarly, the experience of the managers in term of his total experience also varies from two to 35 years, implying that both the young and ex k. bhattacharjee, n. yadav, g. singh2020 perienced managers are included in the study. the same is evident from other proxies of the manager’s work experience. in addition, we have included both the freshly f loated mutual fund schemes and the traditional schemes, as evident from the minimum and maximum value of the age of the scheme, 0.104 years and 31.726 years respectively. finally, the jerque-bera test statistics clearly indicate non-normality of all the variables; however, the given the fact that the sample of this study is very large, it is reasonable to assume the normality of the variables and therefore, data is good enough for the ordinary least square analysis. table 3. descriptive statistics variable n mean med sd skew kurt min max jb performance 1580 7.83 7.76 8.72 0.61 13.04 -64.15 99.33 2941*** experience_yrs 1580 12.47 12.00 5.73 0.79 1.02 2.00 35.00 240.4*** no_prev_org 1580 2.41 2.00 1.52 0.53 -0.65 0.00 6.00 99.5*** age_scheme_ managers 1580 3.76 2.44 3.63 1.59 2.87 0.02 24.35 1293*** age_scheme 1580 10.26 10.53 6.54 0.31 -0.75 0.10 31.73 73.8*** this table presents descriptive statistics of variables used in the study. *, ** and *** indicate significance level at 10%, 5% and 1% respectively. the null hypothesis for the jarque-bera test is that the data is normally distributed; the alternate hypothesis is that the data does not come from a normal distribution. s o u r c e : author’s calculation from sample data. https://www.navindia.com/. table 4 presents the correlation among different variables. there is a positive and significant correlation between performance and all the three proxies of the managers’ experience, as well as the age of the scheme. total experience of the managers is also positively and significantly correlated to number of organisations the managers have worked with and the years for which the managers are handling a particular scheme. does mutual fund manager’s attributes impact fund performance? 2121 table 4. correlation matrix performance 1. 2. 3. 1. exp_yrs 0.0946*** 2. no_prev_org 0.0625** 0.2650*** 3. age_scheme_managers 0.3565*** 0.1712*** 0.0300 4. age_scheme 0.2187*** 0.1050*** 0.0563** 0.4068*** this table presents pearson correlation matrix of all the variables used in the study. *, ** and *** indicate significance level at 10%, 5% and 1% respectively. s o u r c e : author’s calculation from sample data. https://www.navindia.com/. table 5 presents the regression results. we run three regressions,6 based on the three broad categories of the schemes: open ended income/debt, open ended growth/equity, and close ended income/debt. the results suggest that the total experience of the manager being positively related to performance only in case of open-ended income. however, the number of previous organisations where the manager has worked is negatively related to the performance of the open-ended income funds but positively related to the performance in openended growth funds. further, it is evident that the greater is the time period a manager handles a scheme, the better is the performance. age of the scheme is positively related to the performance of only open-ended growth schemes. our results are consistent with those of the golec (1996) who finds that having an mba is not enough; years of experience among other factors affect the fund performance. however, the results contradict hu et al. (2012) who report managers’ tenure is negatively related to the fund performance, such that old managers may not necessarily outperform new managers. 6 we also run a regression for the close ended growth/equity funds. however, only the total experience of managers, in terms of number of years, is found to be significant and positively related to the fund performance. this result may be spurious due to very small number of observations of close ended growth/equity schemes (only 26). k. bhattacharjee, n. yadav, g. singh2222 table 5. table 5. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(age_scheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 6. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝛽𝛽5(d_tech𝑖𝑖 ) + 𝛽𝛽6(d_mba𝑖𝑖 ) + 𝛽𝛽7(𝐷𝐷_𝐼𝐼𝐼𝐼𝐼𝐼/𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 7. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + ∑ 𝛽𝛽𝑛𝑛13,9𝑛𝑛=5,𝑗𝑗=1 (q_d𝑖𝑖,𝑗𝑗 ) + 𝜀𝜀𝑖𝑖 table 5. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(age_scheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 6. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝛽𝛽5(d_tech𝑖𝑖 ) + 𝛽𝛽6(d_mba𝑖𝑖 ) + 𝛽𝛽7(𝐷𝐷_𝐼𝐼𝐼𝐼𝐼𝐼/𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 7. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + ∑ 𝛽𝛽𝑛𝑛13,9𝑛𝑛=5,𝑗𝑗=1 (q_d𝑖𝑖,𝑗𝑗 ) + 𝜀𝜀𝑖𝑖 open ended income/debt open ended growth/equity close ended income/debt α 5.3376*** 2.1030*** 2.5688*** β1 0.0476* -0.040 0.077 β2 -0.173** 0.5824** -0.292 β3 0.3449*** 1.0656*** 1.8092*** β4 -0.017 0.1958*** 0.124 r2 0.135 0.184 0.589 adjusted r2 0.129 0.180 0.561 n 630 857 63 *, ** and *** indicate significance level at 10%, 5% and 1% respectively. s o u r c e : author’s calculation from sample data. https://www.navindia.com/. the three regressions run in table 5 are for the three major categories of the funds; however, under each category, there are various schemes as described in table 1. thus, in order to capture the relationship between the fund performance and the experience of the fund managers for each scheme, we divide the full sample into subsamples of different types of schemes (results not presented). results suggest that age_scheme_manager is positively related to the fund performance in most schemes. the experience, when captured through manager’s time of handling a particular scheme is the most important for the performance of the fund in india. these results are in alignment with the theories of adaptive learning which suggest that people learn to solve decision problems primarily through learning-by-doing and thus, the positive relation between fund performance and age_scheme_manager value can be considered a ref lection of their wider learning curve (greenwood & nagel, 2009). another attribute of the fund managers considered is the educational qualification which can impact the performance of the fund they handle (gottesman & morey, 2006; sen & tan, 2016) with an underlying assumption that the better the educational qualification, the better the skill of the fund managers. we check for the validation of the human capital theory for the indian mutual fund industry through the regressions where ten subsamples are created does mutual fund manager’s attributes impact fund performance? 2323 based on the qualification categories mentioned in table 2. for all the q-code subsamples, age_scheme_managers is positively related to the fund performance.7 further, table 6 provides a better picture where the quality of qualification is also considered by introducing a dummy variable d_iit/iim in the regression (3). d_tech is the dummy variable which assumes value of 1 if the manager holds a bachelors in technology or engineering, 0 otherwise, whereas d_mba assumes a value of 1 if the manager is a qualified mba, 0 otherwise. we find that neither just any bachelor degree in technology/engineering nor mba impacts the fund performance, rather the quality of these degrees matters. in india, the most prestigious institutes for the engineering are the iits and for mba are the iims. in model (3), we find that the d_iit/iim is highly significant and positively related to the fund performance for the full sample. thus, quality of the education affects the fund performance. moreover, in these regressions, with dummies for any b.tech/b.e, mba, or iit/iims, years for which the manager has been handling the scheme is significant and positively related to the performance of funds. these results contradict as well as extend the findings of chevalier and ellison (1999b) and golec (1996) who reports that holding an mba degree improves the fund performance. on the contrary, in indian mutual industry, it is not mba degree only but its quality (from iims) which positively impacts manager’s performance. further, the age of the scheme is also significantly and positively related to the performance of funds, contrasting the result of khalil et al. (2016) who finds that age of the fund to be inversely related to the fund performance. this could possibly be due to survivorship bias. the results are consistent with the human capital theory, similar to the borralho, féria and lopes (2014) who find that an important role is played by the institutions from where one is procuring an educational qualification. 7 results are reported due to lack of space. k. bhattacharjee, n. yadav, g. singh2424 table 6. table 5. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(age_scheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 6. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝛽𝛽5(d_tech𝑖𝑖 ) + 𝛽𝛽6(d_mba𝑖𝑖 ) + 𝛽𝛽7(𝐷𝐷_𝐼𝐼𝐼𝐼𝐼𝐼/𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 7. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + ∑ 𝛽𝛽𝑛𝑛13,9𝑛𝑛=5,𝑗𝑗=1 (q_d𝑖𝑖,𝑗𝑗 ) + 𝜀𝜀𝑖𝑖 table 5. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(age_scheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 6. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝛽𝛽5(d_tech𝑖𝑖 ) + 𝛽𝛽6(d_mba𝑖𝑖 ) + 𝛽𝛽7(𝐷𝐷_𝐼𝐼𝐼𝐼𝐼𝐼/𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 7. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + ∑ 𝛽𝛽𝑛𝑛13,9𝑛𝑛=5,𝑗𝑗=1 (q_d𝑖𝑖,𝑗𝑗 ) + 𝜀𝜀𝑖𝑖 (1) (2) (3) α 3.2920*** 3.1549*** 2.7934*** β1 0.028 0.031 0.037 β2 0.219 0.2623* 0.2429* β3 0.7330*** 0.7613*** 0.7482*** β4 0.0996*** 0.1140*** 0.0891*** β5 -0.228 β6 -0.534 β7 1.4365*** r2 0.124 0.137 0.132 adjusted r2 0.121 0.134 0.129 n 1288 1573 1528 *, ** and *** indicate significance level at 10%, 5% and 1% respectively. s o u r c e : author’s calculation from sample data. https://www.navindia.com/. table 7 presents the results of regression where nine dummies are introduced for the ten q_codes, representing qualification of the manager, and intercept representing the q_code10, along with the three proxies of their work experience. number of years for which the manager has been handling the scheme, and age of the scheme, affect the performance positively; however, none of the qualification is significant, except d5, representing manager holding specialization degree of either ca or cfa (chartered accountant/chartered financial analyst). thus, a special qualification of ca or cfa can also improve the fund performance of various schemes in india. this result can be attributed to the fact that specialised courses can enhance the knowledge of the managers such that they attain better skills and perform better than others. does mutual fund manager’s attributes impact fund performance? 2525 table 5. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(age_scheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 6. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝛽𝛽5(d_tech𝑖𝑖 ) + 𝛽𝛽6(d_mba𝑖𝑖 ) + 𝛽𝛽7(𝐷𝐷_𝐼𝐼𝐼𝐼𝐼𝐼/𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 7. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + ∑ 𝛽𝛽𝑛𝑛13,9𝑛𝑛=5,𝑗𝑗=1 (q_d𝑖𝑖,𝑗𝑗 ) + 𝜀𝜀𝑖𝑖 table 5. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(age_scheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 6. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + 𝛽𝛽5(d_tech𝑖𝑖 ) + 𝛽𝛽6(d_mba𝑖𝑖 ) + 𝛽𝛽7(𝐷𝐷_𝐼𝐼𝐼𝐼𝐼𝐼/𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖 ) + 𝜀𝜀𝑖𝑖 table 7. 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1(experience_yrs𝑖𝑖 ) + 𝛽𝛽2(no_prev_org𝑖𝑖 ) + 𝛽𝛽3(agescheme_managers𝑖𝑖 ) + 𝛽𝛽4(age_scheme𝑖𝑖 ) + ∑ 𝛽𝛽𝑛𝑛13,9𝑛𝑛=5,𝑗𝑗=1 (q_d𝑖𝑖,𝑗𝑗 ) + 𝜀𝜀𝑖𝑖 table 7. (1) α 2.7723*** β1 0.030 β2 0.27463* β3 0.76449*** β4 0.11101*** β5 -0.337 β6 0.434 β7 -0.814 β8 -0.040 β9 1.93924* β10 -0.396 β11 0.158 β12 1.076 β13 0.192 r2 0.141 adjusted r2 0.133 n 1580 *, ** and *** indicate significance level at 10%, 5% and 1% respectively. s o u r c e : author’s calculation from sample data. https://www.navindia.com/. overall, our results suggest that considering these fund managers like any other skilled professionals, their experience and qualification as well as quality of qualification impact their performance as ref lected in the performance of the funds they manage. k. bhattacharjee, n. yadav, g. singh2626  conclusion and implications conclusion and implications this paper examines the relationship between the fund manager’s characteristics, like qualification and experience, on the fund performance. the preliminary analysis from the correlation matrix suggests that there is a positive relation between performance and all the three proxies of the managers’ experience, as well as the age of the scheme. however, to provide more justification to this analysis, we use a large database for 1508 fund managers handling 29 schemes during 2005–2018, and divide the qualification into ten categories, and 29 schemes, we find that manager’s experience in terms of years of handling a particular scheme and age of the scheme impacts the fund performance positively. further, regression results on segregating the data in three broad categories of the open-ended income/debt schemes, open ended growth/equity schemes, and close ended income/debt schemes, suggest that the total experience of the manager being positively related to performance only in case of open-ended income in contrast to the number of previous organisations where the manager has worked which is found to be negatively related to the performance of the open-ended income funds. also, age of the scheme is positively related to the performance of only open-ended growth schemes. in addition, regression results on dividing the full sample into subsamples of different types of schemes also suggest that age of the mutual fund scheme is positively related to the fund performance in most of the schemes and managers’ experience, when captured through his/her time of handling a particular scheme is the most important for the performance of the fund in india the quality of manager’s education matters for fund performance, we find that the managers from either iit or iim perform better than the managers who are mba or be/b.tech from any other institutions. also specialised degrees like ca/cfa are found to have positive impact on the fund performance. overall, we conclude that it is the number of years the manager is handling a particular scheme, degree from prestigious institutions, specialised course like ca/cfa, and the age of the scheme which improves the fund performance in the indian mutual fund industry. our results provide support for the theories of adaptive learning, and human capital theory for the indian mutual fund industry. does mutual fund manager’s attributes impact fund performance? 2727 apart from being the first in the indian context, our study has practical implications for the investors as well the asset management companies. based on the objective of their investment in the funds, investors can look for certain characteristics of the managers while investing. our results support the positive relation between the number of years the manager is handling the scheme and fund performance for both open ended and closed ended scheme; thus, while investors can check for experience and qualification of the managers handling a particular scheme, and can expect to get better returns on the funds. apart from this, such studies can guide the growing number of the asset management companies to consider manager-specific characteristics while assigning them different schemes. however, since this study focuses on only two major attributes of the fund managers, it offers scope for further research considering other characteristics of the managers like race, religion, absolute age of the managers, family background, etc for which data has to be hand collected. a comparative analysis of the relation between the fund performances and managerial attributes for emerging and developed economies can also be explored.  references references atkinson, s.m., baird, s.b., & frye, m.b. 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(2020). market timing abilities of large-cap equity mutual fund managers: evidence from india. copernican journal of finance & accounting, 9(4), 87–99. http://dx.doi.org/10.12775/cjfa.2020.023. date of submission: march 18, 2021; date of acceptance: may 5, 2021. * contact information: margonoferdyprasetyaueu@gmail.com, economic and business faculty, esa unggul university, indonesia, phone: +62 87850967505; orcid id: https://orcid.org/0000-0002-4264-8265. ** contact information: rilla.gantino@esaunggul.ac.id, economic and business faculty, esa unggul university, indonesia, phone: +62 87850967505; orcid id: https://orcid.org/0000-0002-3626-6033. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 2 margono, f.p., & gantino, r. (2021). the inf luence of firm size, leverage, profitability, and dividend policy on firm value of companies in indonesia stock exchange. copernican journal of finance & accounting, 10(2), 45–61. http://dx.doi.org/10.12775/cjfa.2021.007 ferdy prasetya margono* esa unggul university rilla gantino** esa unggul university the influence of firm size, leverage, profitability, and dividend policy on firm value of companies in indonesia stock exchange keywords: firm value, firm size, leverage, profitability, dividend policy. j e l classification: m41. abstract: the aim of this study is to acquire empirical proof on the impact of firm size, leverage, profitability, and dividend policy on the firm value of the consumer goods industry in the food & beverage sub-sector listed on idx in 2016-2019. firm size is calculated by ln of total sales, leverage is calculated by the debt to assets ratio (dar), profitability is calculated by return on equity (roe), dividend policy is calculated by dividend payout ratio (dpr), and firm value is calculated by price to book value (pbv). the methodology used purposive sampling. the number of samples used in this research were 10 consumer goods industry companies in the food and beverage sub-sector listed on the idx during 2016-2019. the data source of this research comes from the ferdy prasetya margono, rilla gantino46 company’s yearly financial reports. this research uses a quantitative oncoming with multiple linear regression analysis methods. the resumes of this research found that firm size, leverage, profitability, and dividend policy simultaneously inf luence firm value; firm size has no impact on company value; leverage has a positive impact on company value; profitability has a positive impact on company value; and dividend policy has a positive impact on company value.  introduction the company as an organization that carries out product creation activities in its operations has a goal in a short time and long time. the short objective of the company is to get maximum profit by managing the available assets, on the other hand, the long time goal is to optimize the value of the enterprise (novari & lestari, 2016). the firm value can be calculated, one of which is the market share price which comes from the occurrence of the market share price which is a ref lection of the enterprise’s ability (harmono, 2014). not only by referring to stock prices, firm value can be observed from the firm size which is considered capable of having an impact on enterprise value. because, the augmentative size of the enterprise will make it establish for the corporation to get funding from inside or outside the firm (pratama & wiksuana, 2016). the firm size is considered to have an impactoon the firm value for the continued increase in company value makes it easy for the company to get funding income that can be used to achieve company goals, but in other parts it can create large debts because the risk of the company in fulfilling its obligations is quite small (indriyani, 2017). suwardika and mustanda (2017) said that if the company size is observed from the sum of equity, sales, or total assets. the increasing overall assets of the company can ref lect that the company has reached its maturity stage. companies that are already in an adult position show that the firm already has positive cash f low and is expected to have a long term profitable outlook. leverage is the level of the loan by the company to perform its operational actions. leverage arises because the firm will carry out its operations using assets and funding income which has f lat costs and can increase returns for the company (hasibuan, 2017). ernawati and widyawati (2015) said that the increasing leverage proves that the risk of capital is getting bigger as well. a company with a small leverage ratio has a fairly small leverage risk. this comparison can ref lect how much the firm financed by loans or outsiders with the company’s expertise. debt comes from banks and other financing institu the influence of firm size, leverage, profitability… 47 tions. companies that get a lot of financing from debt are considered not good because they can reduce profits. firm value can also be affected by the measure from profitability that the firm receives. if profitability is good, the firm’s authority holders consisting of suppliers, creditors, and investors want to see how long the company can create profits from marketing activities and company capital. the calculation of the level of profitability is carried out in order to see the company’s performance in seeking profit. this profitability is also used to see the size of the effectiveness from organizing a firm which is shown from the gains obtained by selling or capital revenue (mayliza & sari, 2018). company value can also be affected by the dividend policy of each company. investors are lured to give their capital by referring to the data that is informed by the firm in the form of reports on the firm’s profits and losses. this is due to the aim of the investors to obtain a good level of welfare by getting a return on the funds they have invested. investors are lured into making investments based on the dividend policy made by the company. a company’s dividend policy is quite a complicated matter because it has to link the many needs of the parties involved in the company. dividend policy can be defined as how much income can be paid as dividends and how much can be maintained (ayem & nugroho, 2016). this research was conducted because of the incompatibility phenomenon between the theoretics and the results of prior study. for example, firm size which theoretically has a positive impact on firmvvalue, yet hirdinis’ research resumes (2019) state the company size has a negative impact onnfirm value; leverage in the theory has a negative impactoon firm value, but markonah’s research results (2020) state that leverage has a positiveeimpact on company value; profitability in the theory has a positive impact on company value, however the results of pratama’s and wiksuana’s research (2016) state that profitabilityyhas a negative impactoon firm value; dividend policy which in the theory has a positiveeimpact on company value, but the results of husna’s and satria’s research (2019) show that dividend policyhhas no impact on firm value. the objective from the research is to investigate the impact of firm size, leverage, profitability, and dividenddpolicy on firm value in food & beverageccompanies listed on idx in 2016-2019. the outcome of this research are intended to be used as data by the company for management in establish policies to increase the welfare of investors, and can be used as an estimate for investors to invest in, and for academics can be used as a reference in carrying out better research in the future. ferdy prasetya margono, rilla gantino48 research methodology and research process this research methodology used a quantitative approach with the type of causal associative bonding. causal associative research is defined as research that determines the effect of causality from the independent variable (x), namely firm size is calculated using by ln total sales, leverage is computed by debt to asset ratio (dar), profitability is calculated by return on equity (roe), and dividend policy is calculated by dividend payout ratio (dpr) to the dependent variable (y), which is the firm value calculated by price book value (pbv). the kind of data used in this exploration is secondary data acquired from idx. then the information be used in this research is the yearlong financial report of food and beverage companies for 2016-2019 which are listed on the idx. the population in thissstudy are food & beverageecompanies listed on the idx in 2016-2019. theesample of this research used purposive sampling with the sample benchmark is the food and beverage firms that distributed dividends within 4 consecutive years starting from 2016, 2017, 2018, and 2019. based on this criteria, the following research samples were obtained: table 1. sample lists of consumer goods industry companies, sub sector of food and beverages sales, leverage is computed by debt to asset ratio (dar), profitability is calculated by return on equity (roe), and dividend policy is calculated by dividend payout ratio (dpr) to the dependent variable (y), which is the firm value calculated by price book value (pbv). the kind of data used in this exploration is secondary data acquired from idx. then the information be used in this research is the yearlong financial report of food and beverage companies for 2016-2019 which are listed on the idx. the population in thissstudy are food & beverageecompanies listed on the idx in 2016-2019. theesample of this research used purposive sampling with the sample benchmark is the food and beverage firms that distributed dividends within 4 consecutive years starting from 2016, 2017, 2018, and 2019. based on this criteria, the following research samples were obtained: table 1. sample lists of consumer goods industry companies, sub sector of food and beverages source: idn financials 2020, diolah. literature review signalling theory one of the main theories in studying financial management is the signalling theory (fauziah, 2017). the signal in question is a sign that the company gives to investors. the form of the signal given is in the form of one that can be observed immediately or one that needs to be studied more deeply in order to understand it. this was attempted by the company to share signals with investors in order to find out the development of the enterprise's management in seeing the enterprise's future opportunities to compare quality and inferior companies. s o u r c e : idn financials 2020, diolah. the influence of firm size, leverage, profitability… 49 literature review signalling theory one of the main theories in studying financial management is the signalling theory (fauziah, 2017). the signal in question is a sign that the company gives to investors. the form of the signal given is in the form of one that can be observed immediately or one that needs to be studied more deeply in order to understand it. this was attempted by the company to share signals with investors in order to find out the development of the enterprise’s management in seeing the enterprise’s future opportunities to compare quality and inferior companies. value relevance value relevance is an accounting disclosure that has an approximate form related to market value. each company has an obligation to shareholders or prospective shareholders, one of which is by publishing their financial information in an as is manner according to the condition of the company. relevance theory proves that data originating from the accounting stage should be used by readers to determine investment decisions. the relationship between financial information and share prices is a classic concept known as value relevance (alfraih, 2016). firm value the firm value is the marketvvalue of a firm that can be used to distribute the maximum welfare to shareholders if the share price of a company increases. firm value is what investors perceive the company as, which is often related to share prices. this shows that one aspect that is considered by investors in investing is the value of theecompany that will be the place to invest (suffah & riduwan, 2016). ferdy prasetya margono, rilla gantino50 firm size firm size is a calculation where the size of the firm can be restricted as measured by total assets, total sales, share price and others (widiastari & yasa, 2018). the firm size is a measurement which can be used to categorize the size company with various calculation methods, including ln total assets, ln total sales, and market capitalization. the large company generally has large outstanding shares and is more courageous in adding new shares to meet production and sales activities than a relatively small enterprise. leverage leverage is a comparison used to quantify the enterprise’s expertise in carrying out all current or future obligations (sujarweni, 2017). in a sense, leverage is the comparison used to calculate the weight of the loan that must be paid by the company. how actively does the company use existing facilities, facilities that are defined as receivables, capital, or assets. companies that usually carry out a lot of funding with liability are advised not good because they can reduce gains. large debts result in less favorable thinking from investors on company value. the high level of leverage can sway the interest of investors in investment conclusions in the company, cause the company may not be able to share large profits with investors. profitability profitability is a comparison used to calculate the enterprise’s performance in creating gains from its business actions. with the high level of gain a firm, the welfare of the shareholders of one of the company’s stakeholders will also increase (hery, 2017). companies should optimize the abilities of employees and management in order to achieve predetermined targets so that the firm can get maximum benefits. dividend policy dividend policy is a firm’s judgment to dispart operating gains proportionally to investors or to postpone the distribution and include it in retained earnings the influence of firm size, leverage, profitability… 51 which can later be used for funding in the following year (defrizal & mulyawan, 2015). the company is supposed to pay dividends to investors, which is the duty of the company to give part of the profits to investors. this dividend payment can be used as a form of information to prospective investors before committing to investing. research hypothesis the effect of firm size, leverage, profitability, and dividend policy on firm value the company size is ref lected in the total assets, total sales, the mean level of sales and the mean total assets of the company. larger companies can access the capital market in order to obtain funding more easily. meanwhile, companies that are still recent and little companies will experience many toughs in accessing the capital market. according to hirdinis (2019), company size has a negativeaand significant impact to company value. leverage is an effort to increase operating income which can also be used as a benchmark in observing manager behavior in earnings management activities. firm value can also be affected by the leverage size effected of the firm. leverage has a positive and significant clout on company value (markonah, 2020). high profitability illustrates the better the firm’s capability to generate gains. the top of firm’s gains, the better company is in the eyes of investors. profitability has appositive and significant clout on company value (sari & sedana, 2020). the dividend policy set by the firm’s management is an alert for investors to assess the condition of the firm. with high dividend distribution to shareholders, it is hoped that the firm’s value will also increase. most investors certainly want a dividend policy that can satisfy them. the effecttof dividend policy proxied by dpr and company value proxied by pbv is positive and significant (rehman, 2016). based on the definition over, it can be resumed that the first hypothesis is: h1: there is an impact of company size, leverage, profitability, and dividend policy simultaneously on company value. ferdy prasetya margono, rilla gantino52 the effect of firm size on firm value the companies are categorized into two types, namely small-scale companies and large-scale companies. the size of the company value will affect the value of the company based on the fact that the bigger a company has a high level of added assets so that it can earn profits which will affect the value of the company. husna’s and satria’s research results (2019) state that company sizeehas a positive effectoon firm value, the higher the size of a company, the higher the company value. firm size is the variables that are considered in deciding the value of a company. pursuant to goka, et. al. (2018) the variable company size has no effectton firm value (pbv) and has a positiveerelationship with company value (pbv). however, this is not in analogous with study conducted by hirdinis (2019), where firm size has a negative and significant impact on firm value. based on this explanation, it can be formulated for the second hypothesisaas follows: h2: company size has a positive impact on company value. the effect of leverage on firm value the company can be called unsolvable if theecompany’s total assets are less than the company’s total debt. this can make investors more careful to invest in companies that have a large leverage ratio because the leverage ratio can show the level of investment risk. debt that continues to grow out of control. study done by farooq (2016) show that leverage has a negativeaand significant impact on company value. a high leverage number is not always a low company value, likewise a low leverage number does not always increase firm value. by reason of investors see from sundry sides of financial reports. the results ofsstudy conducted by markonah (2020), indicate that leverage with the proxy debt to equity ratio (der) has a positive and significanteeffect on firm value. then the leverage which is proxied by the debt to assets ratio (dar) has a negative impact on company value (hakim & sunardi, 2017). based on the definition over, it can be resumed that the third hypothesis is: h3: leverage has a negative impact on company value. the influence of firm size, leverage, profitability… 53 the effect of profitability on firm value profitability is the company’s ability to earn profits within a certain period of time. the principle of profitability assessment is contained in the financial statements that are on the balance sheet and the company’s income statement (sitorus & denny, 2017). theoretically, increasing company profitability will increase firm value. this is due to profitability as a signal for investors to be able to invest in the company. the high profitability of the company encourages investors to invest by making a request to get company stocks. thus, the stock value will increase due to the great demand for shares. profitability has a positive and significant impact on company value (tui, nurnajamuddin, sufri & nirwana, 2017). according to cambarihan and sucuahi (2016) state that profitability has aapositive and significant effect on company value. then in previous study that discusses the relationship of profitability to company value and is related to this research, including by paminto, setyadi and sinaga (2016), the outcomes of the research showtthat profitability has a positive impact on company value. based on the definition over, it can be concluded that the fourth hypothesis is: h4: profitability has a positive impact on company value. the effect of dividend policy on firm value dividenddpolicy is still possible to be one of the important manners for great shareholders to perforate registed firms thru the “tunnel effect”. as a result, some companies withppoor performance often issue large dividends that can damage the value of the company (hailin & jingxu, 2019). dividend policy is a judgment if the gains earned by the firm at the final year will be dispart to shareholders in the establish of dividends or will be holded to escalate fund for investment financing in the hereafter. dividend policy is very important because of the inf luence of investment, finance and liquidity. to achieve the goal, the company ensures a dividend policy, namely a policy made by the company for the portion of income received as dividends paid, that is, profit that can be guaranteed and as net profit and profit on its shares. rehman’s research results (2016) argue that dividend policy has a positive and significant impact on company value. watchfulness by husna and satria (2019) shows that dividend policy has no significant clout on firm value. then ferdy prasetya margono, rilla gantino54 the results of hafeez’s, shahbaz’s, iftikhar’s and ali butt’s research (2018) also show that dividend policyyhas a positive effect on firm value. these results indicate that distributing dividends will increase firm value. based on the definition over, it can be resumed that the fifth hypothesis is: h5: dividend policy has a positive effect on firm value. result and conclusions multiple linear regressionaanalysis used to see the direction of the relation between the independent variable (x) of firm size (ln total sales), leverage (dar), profitability (roe), and dividenddpolicy (dpr) with the dependent variable (y), firm value ( pbv). the outcomes of multipleelinear regression tests can be observed as follows: table 2. multiple linear regression test results coefficientsa model unstandardized b coefficients std. error standardized coefficients beta t sig. 1 (constant) -5.783 7.864 -0.735 0.467 x1_size 0.042 0.268 0.007 0.158 0.875 x2_dar 6.446 2.650 0.120 2.432 0.020 x3_roe 0.241 0.015 0.868 16.287 0.000 x4_dpr 0.036 0.016 0.118 2.343 0.025 a dependent variable: y_pbv s o u r c e : data processing result. based on table 2, the fixed value is -5.783, the β1 value is 0.042; the value β2 is 6.446; the value β3 is 0.241; and the value β4 is 0.036. then from the test results, a multiple linear equation can be made as follows: the influence of firm size, leverage, profitability… 55 y= -5.783 + 0.042x1 + 6.446x2 + 0.241x3 + 0.036x4 + e based on the above similarity, it can be construed as follows: 1. the constant number -5.783 shows that if the company size, leverage, profitability, and dividend policy are zero, the companyyvalue is -5.783. 2. the regression coefficient for firm size as measured using by ln total sales is 0.042 indicating that if each increase in firm size is one, it will cause an escalate in firm value of 0.042. 3. the leverage regression coefficient measured using by debt to assets ratio (dar) of 6.446 indicates that if each increase in dar is one, it will cause an escalate in firm value of 6.446. 4. the profitability regression coefficient measured using by return on equity (roe) of 0.241 indicates that if each increase in roe is one, it will cause an escalate in firm value of 0.241. 5. the dividend policy regression coefficient measured using by dividend payout ratio (dpr) of 0.036 indicates that if each increase in the dpr is one, it will cause an escalate in firm value of 0.036. simultaneous test (f test) simultaneous testing was achieved to test the regression model from the effect of all independent variables, namely x1, x2, x3, and x4 synchronously on the dependent variable (y). the criteria for this simultaneous test are as follows: 1. ho is fulfilled and ha is rejected if the significance valueeis greater than 0.05. 2. ho is rejected and ha is fulfilled if the significance value is smaller than 0.05. the simultaneous test that has been carried out can be seen as follows: ferdy prasetya margono, rilla gantino56 table 3. simultaneous test result (f test) anovaa model sum of squares df mean square f sig. 1 regression 2668.163 4 667.041 108.677 0.000b residual 214.825 35 6.138 total 2882.988 39 a dependent variable: y_pbv b predictors: (constant), x4_dpr, x2_dar, x1_size, x3_roe s o u r c e : data processing result. based on the result of the simultaneous test above, it is found that the f number count is equal to 108.677 and the f significance is 0.000 which means that the significance number is less than 0.05, this proves that ha1 is accepted, which means that there is a predispose on company size, leverage, profitability, and dividend policy together (simultaneously) to company value. partial test (t test) based on the table 2 it can be interpreted as follows: 1. the firm size is obtained by the b coefficientvvalue of 0.042 and the significance value of 0.875, which is a significance number preponderant than 0.05. so, it proves that ho2 is fulfilled and ha2 is rejected, which means that there is no impact of firm size on firm value partially. 2. leverage is obtained by the b coefficient value of 6.446 and a significance number of 0.020, which is a significance number less than 0.05. so, it proves that ho3 is rejected and ha3 is fulfilled, which means that there is a significant and positive relation among leverage and firm value. 3. profitability obtained by the b coefficient value of 0.241 and a significance number of 0.000, which is a significance number less than 0.05. so, it proves that ho4 is rejected and ha4 is fulfilled, which means that there is a positiveeand significant relation among profitability and firm value. 4. dividend policy obtained by the b coefficient value of 0.036 and a significance number of 0.025, which is a significance number less than 0.05. so, the influence of firm size, leverage, profitability… 57 it proves that ho5 is rejected and ha5 is fulfilled, which means that there is a significant and positive relation among dividend policy and firm value. determination coefficient test (adjusted r2 test) the calculation of the adjusted r² with a range of values from 0 to 1. if the amount of adjusted r² continues to be large, the results of the regression can reveal if the independent variable can explain the totality of its effect on the dependent variable. if adjusted r² = 0, then the independent variable cannot explain if the estimated relation to the dependent variable is correct. and if the test results prove r² = 1, then the independent variable can define the approximate relation to the dependent variable.athe results of the determination coefficient test are as follows: table 4. determination coefficient test result model summaryb model r r square adjusted r square std. error of the estimate 1 0.962a 0.925 0.917 2.47747 a predictors: (constant), x4_dpr, x2_dar, x1_size, x3_roe b dependent variable: y_pbv s o u r c e : data processing result. the result from the coefficient determination test produces an adjusted r2 number of 0.917 which indicates that 91.7% of the dependent variable is the firm value which is affected by the independent variables, namely firm size, leverage, profitability, and dividend policy. then the over 8.3% is affected by various disparate factors outside the variables used in this research. analysis result interpretation the results of f test, it proves that company size, leverage, profitability, and dividend policy simultanously have an impactoon company value. this can be obferdy prasetya margono, rilla gantino58 served by looking at the results of a significanceevalue of 0.000 < 0.05, ha1 is accepted. the results of the f test are also supported by the coefficient of determination which shows that theeindependent variables, namely firm size, leverage, profitability, and dividend policy have an effect of 91.7% on company value. the outcomes of t test from firm size show the b coefficient of 0.042 with a significance level greater than the standard significance level of 0.875 > 0.05. the firm size as calculated by ln total sales hasn’t effect on the value of food & beverage companies on idx. firm size can not strengthen or weaken firm value because it is likely that the evaluation of firm size doesn’t affect toofirm value even though sales capacity is increasing or decreasing. the outcomes of t test from leverage obtained the b coefficient of 6.446 with a significance level lesser than the standard significanceelevel of 0.020 < 0.05. this means, leverage as calculated by debt to assets ratio (dar) has a significant and positive impact on the firm value of food & beverage companies on idx. leverage, which is calculated by debt to asset ratio (dar) is indicated to have a positive impact on company value. so, if leverage increases, it is followed by an increaseein firm value and vice versa. the investors want to think about decided to give financiers in the company that has a large leverage ratio. the increase in leverage is considered as an assessment if the company has the size of the company’s assets which in slue can affect the increase in company productivity. the results of t test from profitability obtained the b coefficient of 0.241 with a significance level smaller than the standard significance leveloof 0.000 < 0.05. this means if profitability is measured using by return on equity (roe) there is an important and positive inf luence on the firm value of food & beverageecompanies on idx. the large profitability can provide positive signals to investors when the company is in a profitable circumstance. a company that is able to increase its profitability every year will generate large profits which also ref lects that if the company’s capabilities are good. the results of t test from dividend policy show the b coefficient of 0.036 with a significance level lesser than the standard significanceelevel of 0.025 < 0.05. this means that dividend policy as calculated by using the dividend payout ratio (dpr) has a significant and positiveeimpact on the company value of food and beverage companies on idx. firms that pay large of dividends will indirectly affect the charge of large shares and affect theevalue of the company. dividends paid must be in balance with the needs of the company or company shareholders. a good corporate dividend policy is a policy that creates a bal the influence of firm size, leverage, profitability… 59 ance between the current dividend distribution and future dividend developments that can optimize stock prices. an increase in dividend payments can be a positive alert for investors because they consider the company to have good and profitable prospects in the future tense.  conclusion based on the analysis and review results, it shows that company size, leverage, profitability, and dividend policy simultaneously affect to company value. firm size has no impact on company value. leverage has a positive impactoon company value. profitability has a positive impact on company value. dividend policy has a positive impactoon company value. the coefficient of determination of 0.917 proves that firm size, leverage, profitability, and dividend policy have an effect of 91.7% on firm value.  references alfraih, m.m. 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(2016). impact of capital structure and dividend policy on firm value. journal of poverty, investment, and development, 21, 40-57. sari, i.a.g.d.m., & sedana, i.b.p. (2020). profitability and liquidity on firm value and capital structure as intervening variable. international research journal of management, it & social sciences, 7(1), 116-127. http://dx.doi.org/10.21744/irjmis. v7n1.828. sitorus, t., & denny. (2017). the inf luence of asset and profitability toward share value: mediation effect of liquid asset. copernican journal of finance & accounting, 6(4), 85-103. http://dx.doi.org/10.12775/cjfa.2017.024. the influence of firm size, leverage, profitability… 61 suffah, r., & riduwan, a. (2016). effect of profitability, leverage, company size and dividend policy on firm value. science and journal of accounting research, 5(2), 1-17. sujarweni, v.w. (2017). analysis of financial statements theory, applications & research results. yogyakarta: pustaka baru press. suwardika, i., & mustanda, i. (2017). the effect of leverage, company size, company growth, and profitability on firm value in property companies. e-jurnal manajemen, 6(3), 1248-1277. tui, s., nurnajamuddin, m., sufri, m., & nirwana, a. (2017). determinants of profitability and firm value: evidence from indonesian banks. international journal of management & social sciences, 7(1), 84-95. http://dx.doi.org/10.21013/jmss.v7.n1.p10. widiastari, p.a., & yasa, g.w. (2018). effect of profitability, free cash flow, and company size on firm value. e-jurnal akuntansi, 23(2), 957-981. http://dx.doi.org/10.24843/ eja.2018.v23.i02.p06. date of submission: may 21, 2021; date of acceptance: september 2, 2021. * contact information (corresponding author): renuisidore@gmail.com, loyola institute of business administration, chennai, tamil nadu, india, phone: 9884263646; orcid id: https://orcid.org/0000-0003-3504-3193. ** contact information: cjarun@gmail.com, loyola institute of business administration, chennai, tamil nadu, india, phone: 9600116035. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 isidore, r., & arun, c.j. (2021). risk profiling of secondary equity investors from the chennai city of india based on the big five personality model. copernican journal of finance & accounting, 10(4), 45–65. http://dx.doi.org/10.12775/cjfa.2021.014 renu isidore* loyola institute of business administration c. joe arun** loyola institute of business administration risk profiling of secondary equity investors from the chennai city of india based on the big five personality model keywords: investor personality, risk profiling, secondary equity market, big five personality model. j e l classification: g10, g11, g32, g41. abstract: the risk taken by the investor depends on several independent variables like: personality, biological age, investment experience and income. the main aim of this article is to combine all these variables in order to build an exhaustive risk profile on the basis of the big five personality dimensions. the research method applied is exploratory in nature and questionnaire survey method was employed to gather data from 436 secondary equity market investors residing in the chennai city of india. anova was employed to develop the risk profile. the outcome of the research was an exhaustive risk profile combining all the related variables and a regression model predicting renu isidore, c. joe arun46 the equity returns. the main conclusions of the study are that the investors with the more of the conscientiousness personality tend to take less risk. this finding was also consistent among the senior investors, high income investors and those with mediocre/high investment experience. the study also concluded that the agreeable investors with high income/high investment experience, tend to take less risk. only the young investors with more of the conscientiousness personality tend to take more risk and with more of the extraversion personality tend to take less risk. this study serves as a guidance for advisors to provide appropriate recommendations on the basis of the risk appetite and personality of the investors.  introduction performance depends not only on financial innovations but is mediated by the process of risk management (zouari & abdelmalek, 2020). personality is instrumental in driving individuals towards risk taking (kogan & wallach, 1964). risk propensity is deeply embedded in personality (nicholson, soane, fentono’creevy & willman, 2005). the risk-taking ability of individuals is inbuilt in their core personality which enables them to operate in uncertain conditions (mcclelland, 1961). everyday financial risk-taking behavior is also inf luenced by personality (carducci & wong, 1998). hence, a priori prediction of risk propensity is possible by measuring these psychological measures (deck, lee, reyes & rosen, 2008). personality contributes a great deal towards the risktaking ability (kowert & hermann, 1997; filbeck, hatfield & horvath, 2005). research in investor personality is important in order to assess investors’ behavior accurately (oehler, wendt, wedlich & horn, 2018). though personality is a significant predictor of risk behavior, a comprehensive analysis of individual differences is needed to explain how the factors of personality combine to affect risk. the big five personality model is the best comprehensive model to analyze personality (gullone & moore, 2000). the big five personality model comprises of five dimensions: neuroticism includes moodiness, nervousness and temperamentality; openness includes creativity, imagination and curiosity; extraversion includes assertiveness, talkativeness and activeness; agreeableness includes warmth, kindness and trust and conscientiousness includes reliability, organization and thoroughness (goldberg, 1993). this study aims to profile secondary equity investors by risk taken in equity investments and the personality type assessed by the big five personality model. this study further profiles investors by stratifying them on the ba risk profiling of secondary equity investors… 47 sis of their annual income, age and equity investment experience which all play a prominent part in inf luencing the investors’ risk appetite. a robust regression model is also developed in order to predict the actual return earned. literature review studies of risk in both finance and economics have been on the basis of the expected utility theory of von neumann and morgenstern (1947) wherein maximizing the expected utility has been the core of decision making. markowitz (1952) proposed risk and return combinations to be chosen for selecting the desired portfolio. allais (1953) made suggestions for making the risk theory more realistic by considering the difference between psychological and monetary values and the probability of psychological values. one of the first theories of risk, formulated by bernoulli (1967), in the year 1738, was that risk is evaluated by individuals via a quantitative process of selecting between various gambles by comparing the different possible outcomes based on their probability of occurrence. the next significant contribution to risk theories was by kahneman and tversky (1979) with the concept of prospect theory. the next significant contribution to risk theory was by weber and milliman (1997) wherein they propose to assess the risk propensity by factoring in both the situational and individual differences in risk perception. risk propensity is determined more by the individual characteristics than defined by the situation. hence, individual differences defined by psychological factors especially personality is an important determinant of risk behavior (nicholson et al., 2005). “reference to the psychological literature suggested a more robust means to measure an individual’s tolerance for risk” (durand, newby & sanghani, 2008, p. 95). based on the risk behavior and personality, nicholson et al. (2005) coined three non-exclusive types of risk takers, namely: stimulation seekers, risk adaptors and goal achievers/loss avoiders. kourtidis, šević and chatzoglou (2011) also profiled investors based on their personality and risk tolerance into low-profile, moderate-profile and high-profile investors. mittal and vyas (2008) profiled investors into various personality types: technical, cautious, casual and informed, based on their risk-taking capacity and choice of investment alternatives. personality of individuals can be tested using various models like the internal/external personality advanced by rotter (1966); mbti by myers, mccaulrenu isidore, c. joe arun48 ley and most (1985); bb&k model advanced by bailard, biehl and kaiser (1986) and the big five personality traits proposed by costa and mccrae (1992). the big five personality model was chosen for this study as it is currently the most received taxonomy for the personality definition (de bortoli, da costa jr, goulart & campara, 2019). the five dimensions of the big five model include agreeableness, extraversion, conscientiousness, neuroticism and openness. in the equity market, the investors with the openness personality tend to employ their active imagination in financial investment decisions. conscientious investors are confident investors who believe that they will be able to outperform other investors. extravert investors are very optimistic about investing and they enjoy the risk-taking in their investment decisions. agreeable investors are very considerate and friendly and generally make investment decisions based on easily available information. investors with neurotic personality tend to get stressed and worried when facing complex decisions (ali & waheed, 2013). extraversion: extraversion personality increases the risk-taking propensity (nicholson et al., 2005; gullone & moore, 2000; deck et al., 2008; pinjisakikool, 2018; becker, deckers, dohmen, falk & kosse, 2013). this personality is positively related with investor’s risk tolerance behavior (pak & mahmood, 2015; zhuan, ying, boon, hui & hong, 2016). extravert investors have the propensity to pay a higher price for risky assets owing to higher risk propensity (oehler et al., 2018). they have high risk tolerance. extraversion is related to propensity for maximization, trust, life-satisfaction, and overconfidence (pan & statman, 2013). however, durand, newby, peggs and siekierka (2013) found that the risk-taking propensity has a negative association with extraversion. agreeableness: investors of this personality type are less likely to choose risky investment options (pak & mahmood, 2015; tjandrasa & tjandraningtyas, 2018). agreeableness personality decreases the risk-taking propensity (markey, markey, ericksen & tinsley, 2006; nicholson et al., 2005; anic, 2007; deck et al., 2008; durand et al., 2008; pinjisakikool, 2018). agreeableness has a significant inf luence on risk aversion (nga & ken yien, 2013). however, gullone and moore (2000) and zhuan et al. (2016) found that agreeableness has a positive correlation with risk behavior. conscientiousness: conscientiousness decreases the risk-taking propensity (nicholson et al., 2005; gullone & moore, 2000; deck et al., 2008; pinjisakikool, 2018; pak & mahmood, 2015). conscientiousness has a significant inf luence on risk aversion (nga & ken yien, 2013). these investors tended to reduce risk risk profiling of secondary equity investors… 49 (durand, newby, tant & trepongkaruna, 2013). low level of conscientiousness is connected to high risk tolerance. conscientiousness is directly related to the tendency to regret and the tendency for maximization. trust ranked low on conscientiousness. low conscientiousness investors attributed success to luck over skill (pan & statman, 2013). neuroticism: neuroticism is positively related with investor’s risk tolerance behavior (durand et al., 2008; zhuan et al., 2016) and hence neurotic investors choose riskier stocks (durand, newby, peggs & siekierka, 2013). however, nicholson et al. (2005), deck et al. (2008), anic (2007), becker et al. (2013) and pak and mahmood (2015) find that this personality decreases the risk-taking propensity. neurotic investors hold less risky assets (oehler et al., 2018). openness: openness is positively related with investor’s risk tolerance behavior (zhuan et al., 2016; pan & statman, 2013; kowert & hermann, 1997; pak & mahmood, 2015). investors of this personality type are more likely to choose risky investment options (durand et al., 2008; ali & waheed, 2013; tjandrasa & tjandraningtyas, 2018). this personality increases the risk-taking propensity (nicholson et al., 2005; deck et al., 2008; anic, 2007). however, openness has a strong inf luence on risk aversion (nga & ken yien, 2013). gullone and moore (2000) also found that openness has a negative correlation with risk behavior. openness is negatively related to high tendency of maximization and life-satisfaction. trust ranked high on openness. investors with this personality tend to attribute success to luck over skill (pan & statman, 2013). hypothesis development on the basis of the literature review discussed, the basis for the argument that the personality of the investor plays a prominent part in inf luencing the risk appetite of the investor is strongly built. the first hypothesis is formulated along the same lines, in order to profile investors based on the risk taken in equity investments and the personality type. h1: there is no significant difference in the means of the investor personalities of the secondary equity market investors divided in terms of the risk taken in equity investments. demographic variables play a prominent part in inf luencing the risk taking of investors (hawley & fuji, 1993; sung & hanna, 1996). wallach and kogan (1961) were among the first researchers to research into risk tolerance with renu isidore, c. joe arun50 respect to the age. the age of the investor is strongly related to the equity risk premiums (ang & maddaloni, 2003) and as the age increases the risk premiums also increase (bakshi & chen, 1994). the risk tolerance was found to increase with age (wang & hanna, 1997) whereas kannadhasan (2015) found that risk tolerance increases as age decreases. some studies (morin & suarez, 1983; pålsson, 1996) have also found risk aversion to increase uniformly with age. the investors below the age group of 25 years take more risk and prefer equity investing whereas investors above 60 years prefer safer investments (parashar, 2010). riley jr. and chow (1992) showed that risk aversion reduces with age but only till the age of 65 after which risk aversion increases with age. hence, the age of the investor is a prominent inf luencer of his/her risk appetite. this forms the base for the conceptualization of the second hypothesis. h2: there is no significant difference between the means of the investor personalities of the different age groups divided in terms of the risk taken in equity investments. the income earned by investors also plays a prominent part in risk taking (grable, lytton & o’neill, 2004; cicchetti & dubin, 1994). risk aversion decreases as wealth increases (riley jr. & chow, 1992; cohn, lewellen, lease & schlarbaum, 1975). the income earned is negatively related to risk aversion which implies that high income individuals are less risk averse and hence invest in risky securities (mcinish, ramaswami & srivastava, 1993; shaw, 1996). friedman (1974) also provided evidence for lesser degree of risk aversion among higher salaried employees. however, hawley and fuji (1993) found that wealthier investors took less financial risk. hence, the annual income of the investor is an important inf luencer of the risk appetite of the investor. this forms the base for the conceptualization of the next hypothesis. h3: there is no significant difference between the means of the investor personalities earning varoius income levels divided in terms of the risk taken in equity investments. experience is an important determinant of financial knowledge (hilgert, hogarth & beverly, 2003) which in turn inf luences the attitude towards risk taking (wang, 2009). investors with higher investment experience are more risk tolerant and hold higher risk portfolios when compared to investors with lower risk tolerance (corter & chen, 2006). however, pak and mahmood (2015) showed that investors with past investment experience are more risk averse owing to negative investment experiences. hence, the equity investment ex risk profiling of secondary equity investors… 51 perience of the investor is a prominent inf luencer of his/her risk appetite. this forms the base for the conceptualization of the last hypothesis. h4: there is no significant difference between the means of the investor personalities having different equity investment experience divided in terms of the risk taken in equity investments. objective of the study the main objective of the study is to profile the secondary equity investors on the basis of their risk propensity in equity investments and their personality dimension assessed by the big five personality model. research methodology and research process the study’s population is the chennai based investors actively investing in the secondary equity market. the study’s samples chosen are the customers of a renowned investment company named integrated and the members of a formal association named tamilnadu investors association (tia). the questionnaire survey method was adopted for data collection. the tamilnadu investors association was the only body which permitted to gather data from its members, hence it was chosen. similarly, integrated was the only company which permitted to survey its clients, hence it was chosen. the final sample size was 436 as the final number of valid questionnaires collected was 436. results and conclusions of the research process the data was collected from the secondary equity investors sample by the questionnaire survey method. the personality dimensions of the big five personality model of the sample were measured on a likert scale by employing the big five inventory. analysis of variance (anova) test was used to compare the means of the personality dimensions of the investors divided based on the risk taken in order to identify which investor personalities take high/low risk. renu isidore, c. joe arun52 table 1. anova-personality vs. risk personality dimensions f value p – value extraversion 1.851 0.158 agreeableness 1.275 0.281 conscientiousness 3.279 0.039 neuroticism 1.352 0.260 openness 0.181 0.835 s o u r c e : compiled based on spss results. from the anova results (table 1) we can conclude that only in conscientiousness, the respondents belonging to the different groups divided on the basis of the risk taken differ. with respect to conscientiousness, the respondents with low risk have the highest mean and those with high risk have the lowest mean (table 2). hence, investors with more of the conscientiousness personality have the propensity to take less risk. table 2. descriptives-conscientiousness personality risk level n mean low 141 31.2483 medium 169 30.1883 high 126 29.8574 total 436 30.4355 s o u r c e : compiled based on spss results. since all the personalities were not significant, further analysis was done in order to profile the investor personalities based on risk. the first profiling was done on the basis of the age categories. investors in the age category of 35 years and below were labeled as young investors, 36-55 as middle-aged and those above 55 as senior investors. the results were not significant only for the middle-aged investors. the anova results between the personality dimensions and risk of young and senior investors shown in table 3 show that for young investors, in extra risk profiling of secondary equity investors… 53 version and conscientiousness, the respondents belonging to the different categories divided based on the risk taken differ. with respect to extraversion, the respondents with low risk have the highest mean and those with medium risk have the lowest mean (table 4). similarly, for conscientiousness, the respondents with medium risk have the lowest mean and the respondents with high risk have the highest mean (table 4). similarly, for senior investors, only the conscientiousness dimension is significant (table 3). with respect to conscientiousness, the respondents with low risk have the highest mean and those with high risk have the lowest mean (table 4). hence, young investors with more of the extraversion personality have the propensity to take less risk and those with more of the conscientiousness personality have the propensity to take more risk. and senior investors with more of conscientiousness have the propensity to take less risk. table 3. anova-personality vs. risk of young/senior investors personality dimensions young senior f-value p-value f-value p-value extraversion 3.526 0.032 0.024 0.976 agreeableness 0.037 0.964 2.404 0.094 conscientiousness 3.87 0.023 3.74 0.026 neuroticism 0.53 0.59 0.547 0.58 openness 1.392 0.252 1.923 0.15 s o u r c e : compiled based on spss results. table 4. descriptives–young/senior investors risk level young senior extraversion mean conscientiousness mean conscientiousness mean low 27.7788 30.9463 31.2778 medium 25.8347 29.1208 30.8838 high 27.0372 31.3866 28.3997 total 26.893 30.4258 30.3982 s o u r c e : compiled based on spss results. renu isidore, c. joe arun54 the next profiling was done based on the annual income. the investors with an income of rs.2 lakhs and below were labeled as low-income, those with an income of rs.2.01-6 lakhs as average income and rs.6.01 lakhs and above as highincome investors. the results were not significant for the low and the average income investors. the anova results of the high-income investors (table 5) show that in agreeableness and conscientiousness, the respondents belonging to the different groups divided based on the risk taken differ. with respect to agreeableness/conscientiousness, the respondents with low risk have the highest mean and those with high risk have the lowest mean (table 6). with respect to the tukey post hoc test (table 7), the mean of the agreeableness in the low risk level was significantly higher than the means of the agreeableness in all other risk levels. thus, the high-income investors with more of the agreeableness personality take less risk. table 5. anova-personality vs. risk of high-income investors personality dimensions f–value p–value extraversion 0.994 0.373 agreeableness 6.639 0.002 conscientiousness 3.901 0.023 neuroticism 0.545 0.581 openness 0.515 0.599 s o u r c e : compiled based on spss results. table 6. descriptives-high income investors risk level n agreeableness mean conscientiousness mean low 33 34.2189 33.2938 medium 40 30.9714 30.5631 high 41 29.5197 30.2728 total 114 31.3894 31.2492 s o u r c e : compiled based on spss results. risk profiling of secondary equity investors… 55 table 7. tukey post hoc results of agreeableness-high income investors (i)risk divided into low medium and high (j)risk divided into low medium and high mean difference (i-j) sig. low medium 3.24752* .039 high 4.69920* .001 medium low -3.24752* .039 high 1.45168 .474 high low -4.69920* .001 medium -1.45168 .474 * the mean difference is significant at the 0.05 level. s o u r c e : compiled based on spss results. the last profiling was done based on the equity investment experience. the investors with an experience span of 5 years or less were labeled as low investment experience, 5-10 years as mediocre and above 10 years as high. the results were not significant for the low investment experience group. the anova results between the personality dimensions and risk of investors with mediocre and high investment experience (table 8) show that for mediocre experience in conscientiousness, the respondents belonging to the different groups divided based on the risk taken differ. with respect to conscientiousness, the respondents with low risk have the highest mean and those with high risk have the lowest (table 9). table 8 also shows that for high experience, the agreeableness and conscientiousness dimensions are significant. with respect to agreeableness/conscientiousness, the respondents with low risk have the highest mean and those with high risk have the lowest mean (table 9). the tukey post hoc results in table 10 also show that the mean of the agreeableness in the high-risk level was significantly lower than the means of the agreeableness in all other risk levels. thus, the investors with high investment experience with less of the agreeableness personality take more risk. and investors with mediocre investment experience with more of the conscientiousness personality have the propensity to take less risk. renu isidore, c. joe arun56 table 8. anova-personality vs. risk of investors with mediocre/high investment experience personality dimensions mediocre high f-value p-value f-value p-value extraversion 0.83 0.438 0.871 0.421 agreeableness 1.81 0.168 4.15 0.018 conscientiousness 4.047 0.02 3.213 0.043 neuroticism 2.867 0.061 1.339 0.265 openness 0.014 0.986 0.451 0.638 s o u r c e : compiled based on spss results. table 9. descriptives-investors with mediocre/high investment experience risk level mediocre high conscientiousness mean agreeableness mean conscientiousness mean low 31.7596 32.4541 32.212 medium 30.9457 31.9032 30.0561 high 28.6801 29.6763 29.4006 total 30.5306 31.1701 30.2307 s o u r c e : compiled based on spss results. table 10. tukey post hoc results of agreeableness (i)risk divided into low medium and high (j)risk divided into low medium and high mean difference (i-j) std. error sig. low medium .55086 1.11901 .875 high 2.77782* 1.14160 .043 medium low -.55086 1.11901 .875 high 2.22696* .91595 .043 high low -2.77782* 1.14160 .043 medium -2.22696* .91595 .043 * the mean difference is significant at the 0.05 level. s o u r c e : compiled based on spss results. risk profiling of secondary equity investors… 57 the summary of the risk profiling of the various categories is shown in table 11 below. thus, young investors with high extraversion/low conscientiousness; senior investors with high conscientiousness; high-income investors with high agreeableness/conscientiousness; mediocre investment experience investors with high conscientiousness and high investment experience investors with high agreeableness/conscientiousness tended to take low risk in the equity market. similarly, young investors with low extraversion/high conscientiousness; senior investors with low conscientiousness; high-income investors with low agreeableness/conscientiousness; mediocre investment experience investors with low conscientiousness and high investment experience investors with low agreeableness/conscientiousness tended to take high risk in the equity market. table 11. summary of risk profiling based on demographic and financial profiles category risk level personality type young low high extraversion low conscientiousness high low extraversion high conscientiousness senior low high conscientiousness high low conscientiousness high income low high agreeableness high conscientiousness high low agreeableness low conscientiousness mediocre investment experience low high conscientiousness high low conscientiousness high investment experience low high agreeableness high conscientiousness high low agreeableness low conscientiousness s o u r c e : compiled based on spss results. renu isidore, c. joe arun58 regression modeling was used to predict the actual return earned, which was used as the dependent variable in the model. the independent variables employed were age, annual income, equity investment experience, risk level, expected return and the five personality dimensions. the significant variables include the equity investment experience, risk level and expected return as their p-values (0.019, 0.001, 0.000) were less than the alpha value (0.05). only the agreeableness and openness dimensions have negative coefficients implying that they have a negative impact on the actual return, that is, investors with more of the agreeableness/openness personality tend to earn lower returns. risk and all the other personality dimensions have a positive co-efficient indicating that the higher these values, the higher would be the returns earned. 58.1% (r2) of the variation in the actual return (which is the dependent variable) was shown by the variation in the independent variables, hence proving that the model was good. with regard to the one-sample kolmogorov-smirnov test, the normality condition was significant at the 0.01 level. the tolerance statistics which tested the collinearity among the independent variables was around 1, thereby showing that only some of the variability in the independent variable was shown by the rest of the independent variables. therefore, multicollinearity issues of the independent variables were ruled out. there was also no indication of multicollinearity as the vif factor was lower than 2 for all the independent variables. the final regression equation is : y = -11.061+0.109x1+0.308x2+0.618x3+0.785x4+4.105x5+0.041x6-0.018x7+ 0.138x8+ 0.024x9-0.042x10 where, y-actual annual return; x1-age; x2-annual income; x3-equity investment experience; x4-risk level; x5-expected return; x6-extraversion; x7-agreeableness; x8-conscientiousness; x9neuroticism; x10-openness. table 12. regression summary r r square adjusted r square std.error of the estimate .762 .581 .571 5.92459 s o u r c e : compiled based on spss results. risk profiling of secondary equity investors… 59 table 13. regression–anova table model sum of squares df mean square f sig. regression 20641.753 10 2064.175 58.807 0.000 residual 14882.729 424 35.101 total 35524.483 434 s o u r c e : compiled based on spss results. table 14. regression–coefficients table unstandardized coefficients t sig. collinearity statistics b std. error tolerance vif (constant) -11.061 3.370 -3.282 .001 age .109 .210 .520 .603 .749 1.335 annual income .308 .187 1.650 .100 .775 1.290 equity investment experience .618 .262 2.360 .019 .668 1.497 risk level .785 .244 3.220 .001 .908 1.102 expected return 4.105 .217 18.925 .000 .789 1.267 extraversion .041 .089 .462 .644 .692 1.445 agreeableness -.018 .072 -.253 .801 .611 1.637 conscientiousness .138 .080 1.720 .086 .567 1.765 neuroticism .024 .075 .318 .751 .900 1.111 openness -.042 .076 -.545 .586 .708 1.413 s o u r c e : compiled based on spss results. the significant finding of the first hypothesis was that investors with more of the conscientiousness personality have the propensity to take less risk in the secondary equity market. this finding corroborates with the findings of gullone and moore (2000); nicholson et al. (2005); deck et al. (2008); pinjisakikool (2018); durand, newby, tant and trepongkaruna (2013); pan and statman (2013) and pak and mahmood (2015) who also found that conscientiousness decreases the risk-taking propensity. renu isidore, c. joe arun60 this study further builds on the risk profiling done by most researchers by combining variables like annual income, age and equity investment experience which significantly inf luence the risk appetite of equity investors. age: the second hypothesis found that the young investors with more of the extraversion personality have the propensity to take less risk, which corroborates with the finding of durand, newby, peggs and siekierka (2013) who found that the risk taking has a negative association with extraversion. the young investors with more of the conscientiousness personality have the propensity to take more risk in the secondary equity market. hence, the relationship between risk appetite and conscientiousness is reversed for the young investors. the senior investors with more of the conscientiousness personality have the propensity to take less risk in the secondary equity market which again corroborated with the finding of several past research mentioned earlier. annual income: the third hypothesis found that the high-income investors with more of the agreeableness/conscientiousness personality have the propensity to take less risk in the secondary equity market which corroborates with the finding of pak and mahmood (2015); tjandrasa and tjandraningtyas (2018); markey et al. (2006); nicholson et al. (2005); anic (2007); deck et al. (2008); durand et al. (2008) and pinjisakikool (2018) who found that the agreeableness personality decreases the risk-taking propensity. the results with respect to the conscientiousness personality remained the same. equity investment experience: the last hypothesis found that the investors with mediocre/high investment experience with more of the conscientiousness personality have the propensity to take less risk in the secondary equity market, which was similar to the previous results. the investors with high investment experience with less of the agreeableness personality take more risk which was similar to the findings of the high-income investors which corroborated with earlier studies. the regression model developed showed that agreeableness and openness personality dimensions have negative coefficients showing that they have a negative impact on the actual return, that is, investors with more of the agreeableness/openness personality tend to earn lower returns in equity investments which corroborate with the finding of trang and khuong (2016) who document that investors with agreeableness personality earn lower returns in financial investments. the model also indicated that the investors with more of the conscientiousness/extraversion/neuroticism personality tend to earn higher returns owing to the positive coefficients in the model risk profiling of secondary equity investors… 61 which corroborates with the finding of akhtar, thyagaraj and das (2018) and trang and khuong (2016).  conclusion wealth managers and financial advisors find the task of customizing financial advice to each of their clients very problematic as every investor has a unique risk appetite which in turn depends on several factors. this study aimed to build a cohesive risk profile of the investors based on the existing literature which independently proved that the risk appetite of the investor depends on the age, annual income, investment experience and the personality type. by building an exhaustive risk profile combining all the related variables, this study serves as a guidance for finance professionals. by employing the questionnaire survey method, the big five personality type, the risk taken and several other demographics and financials were collected from a sample of 436 secondary equity market investors located in the chennai city of india. anova tests showed that the investors with the more of the conscientiousness personality tend to take less risk. this finding was also consistent among the senior investors, high income investors and those with mediocre/ high investment experience. the tests also showed that the agreeable investors with high income/high investment experience, tend to take less risk. only the young investors showed that more of the conscientiousness personality implied a tendency to take more risk and more of the extraversion personality implied a propensity to take less risk. the regression model which predicted the actual return earned showed that the agreeableness and openness personalities had a negative inf luence on the returns earned whereas risk and the other personality dimensions had a positive inf luence. these risk profiles amalgamated with the stratification based on personality, age, income and investment experience would serve as an important tool for finance professionals to make sound recommendations. renu isidore, c. joe arun62  references akhtar, f., thyagaraj, k.s., & das, n. 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(2016). the effect of personality traits and demographic characteristics towards risk tolerance and investment decision making. doctoral dissertation, utar. perak: university tunku abdul rahman. zouari, g., & abdelmalek, i. (2020). financial innovation, risk management, and bank performance. copernican journal of finance & accounting, 9(1), 77-100. http://dx.doi. org/10.12775/cjfa.2020.004. date of submission: september 17, 2021; date of acceptance: december 13, 2021. * contact information: chaari_hela07@yahoo.fr, gef2a laboratory – university of tunis, tunisia, phone: +1 514 779-7365; orcid id: https://orcid.org/0000-00025998-1398. ** contact information: amel_bns@yahoo.fr, department of finance and economics, college of business, university of jeddah, jeddah, saudi arabia; gef2a laboratory – university of tunis, tunisia, phone: +966563397927; orcid id: https://orcid. org/0000-0002-5745-0243. *** contact information (corresponding author): azhaar.lajmi@isg.rnu.tn, department of finance, high institute of management, gef2a laboratory – university of tunis, tunisia, phone: +216-53958536; orcid id: https://orcid.org/0000-0003-2726-8341. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 1 chaari, h.f., belanès, a., & lajmi, a. (2022). fraud risk and audit quality: the case of us public firms. copernican journal of finance & accounting, 11(1), 29–47. http://dx.doi.org/10.12775/ cjfa.2022.002 hela frikha chaari* university of tunis amel belanès** university of jeddah university of tunis azhaar lajmi*** university of tunis fraud risk and audit quality: the case of us public firms keywords: fraud risk, bankruptcy, audit quality, financial reporting, beneish m-score model, z-score model. j e l classification: g32, m42, c23. hela frikha chaari, amel belanès, azhaar lajmi30 abstract: the study raises questions about the fraud detection technique and the relevance of audit quality to mitigate fraud. the paper suggests a more comprehensive proxy for fraud risk that relies on the combination of z-score and beneish m-score. basing on logit, regressions are applied to a sample of 5,613 us-listed public firms. the study reveals that the existence of an internal auditor and independent members within the audit committee would potentially reduce the fraud risk. hiring a big external auditor and paying it high fees is also helpful. findings show that, unlike the firm leverage, both firm profitability and growth opportunities have a negative effect of on fraud risk. leverage provides a motivation for fraudulent financial reporting. it is important to note that this research underscores the audit’s monitoring role to mitigate fraud. also, the adopted model helps regulators, bankers, managers and auditors to detect fraud at an early stage. so needed action can be taken at suitable time. finally, in this study, we focus on financially distressed companies rather than those with financial restatements. we suggest a collective tool to predict fraud risk; which is expected to offer a more reliable proxy for fraud risk than do binary models.  introduction fraud has become a challenge within the finance and accounting profession, and almost all companies and agencies are subject to fraud risks. some renown companies are nowadays associated with fraud. providing inaccurate and misleading financial information from those renowned companies has triggered an enduring crisis of confidence. these scandals have seriously impaired audit credibility and raised several questions about corporate governance quality and relevance of audit quality in fraud prevention and detection. new legislative reform known as the sarbanes-oxley act (sox) established new transparency standards for public companies. besides, several anti-fraud measures and anti-false claims laws have been enacted worldwide, namely in the us, allowing public prosecutors to recover damages for fraud and false claims. thanks to these measures, the number of frauds has decreased after 2002. companies were also asked to set up a healthy system for control and audit to reduce the fraud occurrence, although the system’s weakness does not mean that the fraud could happen (sanusi & mohamed, 2015). according to the financial security law, strengthening the governance mechanisms can help prevent fraudulent and manipulative practices; and reduce fraud. based on the accounting literature, some studies recommend internal audit, audit committee, and external audit as crucial pillars to better cope with frauds (bajra & cadez, 2018). however, the association between audit quality and financial statement fraud has been inconsistent in the extant literature. fraud risk and audit quality: the case of us public firms 31 therefore, “it is the management’s responsibility to design and implement programs and controls to prevent, deter and detect fraud” (aicpa, 2002). managers must perform a detailed fraud assessment and identify its causes, although the process would be complicated and costly. too little research has focused on the the usefulness of fraud detection techniques (beneish, lee & nichols, 2012; roshayani, sharinah & normahet, 2015). according to the fraud triangle theory, there are three main elements of the fraud occurrence, the presence of pressure, opportunity and rationalization (ozcelik, 2020). but risk of fraud is most attributed to the first factor, pressure or incentives. past studies argue that financially distressed tend to manipulate their financial statements (beneish et al., 2012; roshayani et al., 2015). particularly, failed firms which are financially distressed tend to manipulate their financial statements and are more likely to be involved in fraudulent financial reporting (altman, 1968; roshayani et al., 2015). consistent with these arguments, it is possible to detect fraud at an early stage and mitigate it at its inception by using some prediction tools such as beneish model and z-score model. the altman’s z-score model was accurate in predicting business failure and fraudulent financial reporting as well as the relationship between them (roshayani et al., 2015). this model is believed to be the most thoroughly tested and broadly accepted distress prediction model in the literature. the beneish’s m-score had correctly revealed some of the most famous fraud cases that occurred later in a subsequent period (beneish et al., 2012). in line with these arguments, this study argues that the combination of the z-score model and the beneish m-score might enhance the prediction of fraud risk (roshayani et al., 2015). overall, according to the audit risk model, audit risk is a function of inherent risk, control risk and detection risk. such a combination of scores would provide a more reliable proxy for fraud occurrence than do previous binary models. this study has two main objectives. the first objective is to verify whether a collective prediction tool can be used to predict fraud risk. the second objective is to examine the audit’s monitoring role through its three pillars, the audit committee, the internal audit and the external audit, while most previous research focused on them separately. the remainder of the paper is structured as follows. section 2 reviews the related theoretical framework and develops the research hypotheses. section 3 describes the research design and data. section 4 reports and discusses the research findings, and section 5 concludes and suggests future research perspectives. hela frikha chaari, amel belanès, azhaar lajmi32 theoretical framework and research hypotheses we focus on three critical pillars of audit quality: internal audit, audit committee, and external audit. internal audit several researchers highlight the relevant role of internal audits in preventing fraud (chen, cumming, hou & lee, 2013). companies with an internal audit are more likely to detect fraud. the latter can independently evaluate fraud risks and anti-fraud measures to implement by the executive board (petrascu & tieanu, 2014). also, the results of zeng, yang and shi (2020) reveal that internal audit is significantly negatively correlated with the occurrence of corporate fraud. however, the internal auditor still needs to use its professional judgment and practical experience in assessing the likelihood of fraud (sanusi & mohamed, 2015). given the above developments, we can formulate our first assumption as follows: h1: the existence of an internal audit is expected to reduce fraud risk. audit committee the audit committee effectiveness can be assessed through multiple parameters (neffati, khiari & lajmi, 2021), mainly independence and financial expertise of audit committee members (lajmi & gana, 2013; lajmi & yab, 2021). independence of committee members committees, most of whose members are independent, are argued to improve the quality and the transparency of financial reporting and hence to increase the credibility of disclosed financial information (poretti, schatt & bruynseels, 2018). the quality of financial reporting is particularly relevant only in companies with audit committees with at least three members, most of whom are independent (bajra & cadez, 2018). regarding frauds, some empirical studies show a negative and significant association between audit committee effectiveness and fraud occurrence (chen et al., 2013). improving audit quality through the audit committee might contribute to decreasing manipulative or fraudulent fraud risk and audit quality: the case of us public firms 33 practices. in light of these developments, we suggest checking the second hypothesis below: h2: the existence of an audit committee, the majority of whose members are independent, is expected to decrease fraud. expertise of committee members the existence of accounting or financial experts within committee members would help develop fair audit procedures and allow a thorough analysis. besides, it helps reduce earnings management and thus the probability of fraud (zalata, tauringana & tingbani, 2018). by the way, a positive relationship between audit committee financial expertise and earnings quality is expected (bilal, chen & komal, 2018). besides, financial experts are more likely to detect any financial misstatements as they need to comply with their professional codes of ethics to preserve their reputation (zalata et al., 2018). consequently, including within the committee, core competences and skilled-experts would potentially help quite fair earnings management and limit fraudulent accounting practices (bajra & cadez, 2018; zalata et al., 2018). grounded on the above developments, we state the following hypothesis as follows: h3: audit committee members’ expertise is expected to contribute to fraud detection and would hence limit fraudulent practices. external audit following the international standards on auditing, an external auditor is responsible to ensure that financial statements mostly do not include any inaccuracies, due to either error or fraud. therefore, external auditors have a significant role in providing reliable financial reporting. it follows that the existence of external auditors would hinder companies from engaging in fraudulent practices. auditor’s relevance big auditors are expected to provide better audit quality. this is thanks to the expertise knowledge and training that often only big auditors can afford. such advantages put external auditors in a great position to suggest useful perspec hela frikha chaari, amel belanès, azhaar lajmi34 tives on best practices in financial reporting and controls, including the mitigation of fraud risks (zager, malis & novak, 2016). in addition, according to the study conducted by lajmi, khiari and ouertani (2021), big four auditors reduce the risk of fraud in companies. some non-big four auditors can afford the same quality of audit like their big four peers, though (jacob, desai & agarwalla, 2018). the potential role that big auditors may play to provide high audit quality motivates hence our fourth hypothesis: h4: companies that are audited by big auditors are less likely to commit fraud. audit fees given the agency theory, jensen and meckling (1976) note that shareholders support several monitoring costs including audit fees. accordingly, external auditors must verify whether the company is managed in favor of the shareholder’s interest. some empirical studies put in evidence the negative relationship between auditor’s fees and financial misstatements (li & ma, 2018), while other studies report a positive association between non-audit fees and fraud risk (mironiuc & robu, 2012). for instance, big auditors require relatively high fees for whom reputation represents a priority from which they will not be diverted (li and ma, 2018). also, according to saheed, ajibola and adedoyin (2021), audit fees have a significant positive impact on audit quality. therefore, an adequate level of audit fees will significantly contribute to decreasing fraud risk. these high fees can eventually reveal the thorough examination and the indepth investigation carried out by the external auditor. it follows that audit fees are positively associated with audit quality (bryan & mason, 2016). based on the above, we develop our fifth hypothesis as follows: h5: the higher external audit fees, the better audit quality, the less the fraud occurrence. research methodology the paper aims at analyzing the impact of audit quality on fraud risk. the following sections present the sample, define the variables, and explain the estimation methodology. fraud risk and audit quality: the case of us public firms 35 sample selection the empirical study examines a sample of 5,613 publicly traded us companies for 11 years spanning from 2003 to 2013. companies are listed on the three largest us and global stock markets, namely the new york stock exchange (nyse), the national association of securities dealers automated quotations (nasdaq), and the american stock exchange (nyse amex, often abbreviated as amex). the sample does include neither financial institution nor financial service company due to their specific regulatory requirements and accounting and reporting standards. companies with missing or unavailable data are also excluded from the study sample. the sample companies operate in several sectors, including agriculture, forestry and fishing, construction, manufacturing, mining, retail trade, transportation services, communications, electricity, gas and sanitary services, and wholesale trade. the data regarding financial statements were extracted from compustat. measurement of variables table 1 summarizes all the variables, whether dependent, independent, or controlled, and explains how they are estimated. fraud risk (fraud) represents the dependent variable. it is a binary variable. it takes the value one if there is a probability of fraud, and the value zero, otherwise. fraud refers to the companies’ attempt to deceive or mislead investors and creditors through misstatement in accounting statements (rezaee, 2005). based on previous literature, we contend that failed firms which are financially distressed tend to manipulate their financial statements (roshayani et al., 2015). therefore, we suggest a collective tool based on a combination of the altman’s z-score (which predicts the likelihood of bankruptcy) and the beneish’s m-score (which predicts misstatements and earnings manipulation) to enhance the prediction of fraudulent practices. the model of altman (1968) is considered by iazzolino, migliano and gregorace (2013) as constituting the basis on which several new models were developed such as altman (2002). in addition, altman has developed other models from its initial model, but these have some particularities in their use which limit their relevance for our hela frikha chaari, amel belanès, azhaar lajmi36 research work. thus, the other models have been modified to make them more efficient in certain contexts or specifically for certain types of companies. in fact, the z-score specifically for the private sector; z-score for emerging countries and non-manufacturing firms and the zeta score for smes (altman, 2002). altman’s (1968) model was originally created in a large business context. it therefore represents the one being the most appropriate in relation to our research. the z-score model was developed by altman (1968) to assess the bankruptcy risk. to avoid such a risk, executives may engage in aggressive accounting management practices or even fraudulent practices. altman (1986) z-score formula sets as follows: z-score = 1.2a + 1.4b + 3.3c + 0.6d + 1.0e (a; b; c; d and e are defined in table 1) a high score (z-score> 2.99) ref lects the good health of the company and conversely. the lower is the score (z-score <1.81), the more likely the company is running the bankruptcy risk. finally, if the z-score is between these two limits (1.81 <z-score <2.99), this indicates that the company is in a “gray” zone. the m-score model developed by beneish (1999) estimates the likelihood of aggressive account manipulation. m-score is calculated as follows: m-score = -4.840 + 0.920 dsri + 0.528 gmi + 0.404 aqi + 0.892 sgi + 0.115 depi 0.172 sgai 0.327 lvgi + 4.697 tata (all variables are defined in table 1) if m-score is greater than -2.22, the company is likely engaging in aggressive earnings management and fraudulent practices (red f lags). in our study, we combine both z-score and m-score into one score to assess the fraud risk as follows: if z-score is less than 2.99 and m-score is less than -2.22, then there is a potential risk of fraud, and we assign 1 to the dependent variable fraud; and 0 otherwise. fraud risk and audit quality: the case of us public firms 37 table 1. definition of variables fraud a binary variable that takes 1 if z-score is less than 2.99 and m-score is less than -2.22; there is a potential risk of fraud; and 0 otherwise. altman z-score z-score = 1.2a + 1.4b + 3.3c + 0.6d + 1.0e a = working capital requirement (wcr) / total assets b = reserves / assets c = ebit / total assets d = market capitalization / total debts e = turnover / total assets beneish m-score m-score = -4.840 + 0.920 dsri + 0.528 gmi + 0.404 aqi + 0.892 sgi + 0.115 depi 0.172 sgai 0.327 lvgi + 4.697 tata dsri = [(rectt / salet) / (rectt-1 / salet-1)] gmi = [(1ppentt-1) / salet-1] / [(1 ppentt) / salet] aqi = [1 (actt + ppentt)/ att] / [1 (actt-1 + ppentt-1)/att-1] sgi = salet / salet-1 depi = (dpt-1 / (dpt-1 +ppentt-1)) / (dpt/ (dpt +ppentt)) sgai = (xsgat / salet) / (xsgat-1 / salet-1) lvgi = [(lctt + dlttt) / att] / [(lctt-1 + dlttt-1) / att-1] tata = (ibt oancf t) / at t aud_big a binary variable that takes 1 if external auditor belongs to an international network; 0 otherwise aud_fee neperian logarithm of the amount for fees received by the external auditor cau_ind number of independent directors to total number of the audit committee members cau_ exp binary variable that equals 1 if there are expert members (holding a university degree) in accounting or finance ai_exis a dichotomous variable that takes 1 if the company has internal audit, and 0 otherwise q-tobin market value to replacement value of capital lev long-term debt to total assets roa earnings before interest and taxes (ebit) to total assets s o u r c e : own study. to check the presence of the internal audit service, we use the binary variable ai_exis (coram, ferguson & moroney, 2008). as for the audit committee, we report two main characteristics: independence (cau_ind) and the members’ expertise (cau_ exp). the former is determined by dividing the number of independent directors by the total number of audit committee members (lajmi & yab, 2021). the latter provides information on the level of expertise within hela frikha chaari, amel belanès, azhaar lajmi38 the committee. it equals one if some expert members (holding a university degree) in accounting or finance within the committee; otherwise, zero (bajra & cadez, 2018; poretti et al., 2018; lajmi & yab, 2021). finally, regarding the external audit, two aspects are analyzed. we first verify whether it is a big auditor or not through the variable aud_big. it is a binary variable and equals one if the external auditor belongs to an international network, and zero otherwise (dakhlaoui, lajmi & gana, 2017; ammar, shaique & ul haq, 2018; poretti et al., 2018). secondly, we count for audit fees (aud_fee) by measuring the napierian logarithm of the amount for fees received by the external auditor (bryan & mason, 2016). we consider some financial characteristics of the company, such as leverage, profitability, and opportunities growth, which can inf luence misstatements in financial reporting and alter fraud risk. the omission of these factors can lead to biased estimations and misleading conclusions. regression modeling using past fraud cases and applying logit regression analysis would help understand the main causes and factors of fraud occurrence. our econometric model sets as follows: fraud it = β0 +β1 aud_big it + β2 aud_fee it + β3 aud_opi it + β4 cau_ ind it + β5 cau_ exp it + β6 ai_exis it + β7q_tobin it + β8 lev it + β9 roa it + εit all the variables are defined and explained in table 1. the β0 is the constant in our model, and the βi correspond to the independent variables’ coefficients. the ε constitutes the error term. the index i represents the firm. it ranges from 1 to 5,613. the index t indicates the year and varies from 2003 to 2013. the dependent variable is binary and assesses fraud occurrence. fraud risk and audit quality: the case of us public firms 39 results and discussion results of univariate and multivariate analyses are reported and discussed in this section. univariate analysis tables 2 and 3 sum up the descriptive statistics of all variables used in the econometrical modeling, either continuous or binary. table 2. descriptive statistics of continuous variables variables n mean st-deviation median minimum maximum lev 30,895 0.197 0.207 0.147 0 0.999 q_tobin 30,895 1.462 1.415 1.033 2.414e-7 9.994 roa 30,895 -0.055 0.554 0.032 -46.304 9.738 aud_fee 25,105 5.926 0.615 5.960 0 8.171 cau_ind 22,828 0.204 0.279 0 0 1.000 lev: leverage ratio, q _tobin: tobin’s q, roa: return on assets, aud_fee: audit fees (in thousands of dollars), cau_ind: independence of the audit committee. s o u r c e : researcher’s computation. table 2 reports that the average audit fee is about 5,926 million usd, and more than half the companies pay about 5,960 million usd. the amount seems to be too high. the high costs of audit fees are considered to be an indicator of the audit quality. thus, the higher the probability that a fraud occurs, the higher the audit fees are. it is worth noting that the audit committee members’ independence is mandatory for us-listed companies after the publication of the 2002 sox act. indeed, section 301 of the 2002 sarbanes oxley act (sox) requires the existence of an audit committee within listed companies, whose minimum number of directors is set at three directors, and who must be absolutely independent and competent. in the current paper, we examine the full independence of the mem hela frikha chaari, amel belanès, azhaar lajmi40 bers of the audit committee. table 2 reveals that 20.4% of the firms in our sample have an audit committee composed entirely of independent directors. beyond audit variables, we consider some control variables related to the company financial characteristics. the debt is relatively low, with a debt-to-equity ratio (lev) of 20% and a median of 14.67%. these results indicate that the companies of the sample are not heavily indebted. this may be explained by the specificity of the american context characterized by a market-oriented financial system. table 3 highlights a high q-tobin of an average of 1.46, and a median of 1.03. the ratio exceeds 1, which indicates that investors are attracted to invest in these companies. table 2 also shows a nearly null economic profitability. the average roa is around -0.06, with a median of 0.03. table 3. descriptive statistics of binary variables variables valeur frequency percentage fraud 0 18,112 90.94 1 1,804 9.06 ai_exis 0 11,945 39.95 1 17,953 60.05 cau_exp 0 762 3.38 1 21,784 96.62 aud_big 0 10,275 34.37 1 19,623 65.63 fraud: a binary variable that takes 1 if there is a fraud risk, 0 otherwise. ai_exis: existence of internal audit service is a binary variable takes the value 1 if the company has an internal audit service, zero otherwise. aud_big: quality of the external auditor measured by his membership of large firms. this binary variable takes the value 1 if the external auditor belongs to an international network (big), 0 otherwise. cau_exp: expertise committee members, audit is a binary variable equal 1 if there is at least one expert administrator (who has a degree) in accounting and / or finance, 0 otherwise. s o u r c e : researcher’s computation. table 3 reports the descriptive statistics for binary variables. the results show that there are only 1,804 cases of potential fraud among the total 19,916 cases among listed public us companies, representing 9.06% of the whole sample. table 3 also reveals that 60.05% of companies have internal audit services. fraud risk and audit quality: the case of us public firms 41 regarding big four audit firms, results show that majority of the companies (65.63%) are audited by a big four auditor. besides, 96.62% of the directors have university degrees and professional titles such as chartered accountants (ca), certified management accountants (cma), certified general accountants (cga) et chartered professional accountants (cpa). such a percentage reveals the high expertise of audit committee members. we also perform spearman’s rank correlation test to assess multicollinearity problem among variables. the results do not reveal any severe problem of multicollinearity since coefficients do not exceed 0.7. there is no problem of multicollinearity, which can bias our estimations or mislead our conclusions. table 4 presents spearman correlation coefficients as well as related significance tests. table 4. correlation matrix lev q_ratio roa aud_fee cau_ind ai_exis aud_big cau_exp lev 1.00000 30895 -0.41330*** <.0001 30895 -0.15359*** <.0001 30895 0.04625*** <.0001 29898 0.07167*** <.0001 29898 0.21548*** <.0001 25105 0.02445*** 0.0002 22546 -0.04527*** <.0001 22828 q_ratio -0.41330*** <.0001 30895 1.00000 30895 0.29999*** <.0001 30895 0.07926*** <.0001 29898 0.06334*** <.0001 29898 -0.06210*** <.0001 25105 -0.02179*** 0.0011 22546 0.03597*** <.0001 22828 roa -0.15359*** <.0001 30895 0.29999*** <.0001 30895 1.00000 30895 0.22443*** <.0001 29898 0.17848*** <.0001 29898 0.19931*** <.0001 25105 0.00411 0.5374 22546 0.00373 0.5732 22828 aud_fee 0.21548*** <.0001 25105 -0.06210*** <.0001 25105 0.19931*** <.0001 25105 0.61326*** <.0001 24687 0.61576*** <.0001 24687 1.00000 25105 0.08868*** <.0001 20251 -0.10098*** <.0001 20491 cau_ind -0.04527*** <.0001 22828 0.03597*** <.0001 22828 0.00373 0.5732 22828 -0.13862*** <.0001 22175 0.02465*** 0.0002 22175 -0.10098*** <.0001 20491 -0.12085*** <.0001 22546 1.00000 22828 ai_exis 0.04625*** <.0001 29898 0.07926*** <.0001 29898 0.22443*** <.0001 29898 1.00000 29898 0.46296*** <.0001 29898 0.61326*** <.0001 24687 0.14585*** <.0001 21899 -0.13862*** <.0001 22175 aud_big 0.07167*** <.0001 29898 0.06334*** <.0001 29898 0.17848*** <.0001 29898 0.46296*** <.0001 29898 1.00000 29898 0.61576*** <.0001 24687 0.01765*** 0.0090 21899 0.02465*** 0.0002 22175 cau_exp 0.02445*** 0.0002 22546 -0.02179*** 0.0011 22546 0.00411 0.5374 22546 0.14585*** <.0001 21899 0.01765*** 0.0090 21899 0.08868*** <.0001 20251 1.00000 22546 -0.12085*** <.0001 22546 prob > |r| under h0: rho = 0 as well as the number of observations hela frikha chaari, amel belanès, azhaar lajmi42 lev q_ratio roa aud_fee cau_ind ai_exis aud_big cau_exp aud_big: external auditor’s affiliation, aud_fee: audit fees, cau_ind: independence of audit committee, cau_ exp: audit committee expertise, ai_exis: existence of internal audit service, q _tobin: tobin q, lev: corporate debt, roa: profitability or return on assets. *, **, *** correspond to the statistics’ significance at the thresholds of 10%, 5%, 1%, respectively. s o u r c e : researcher’s computation. multivariate analysis table 5 summarizes the regression results related to the relationship between audit and fraud. the first hypothesis (h1) is confirmed, as there is a significant negative relationship between the internal audit and the fraud risk. such a result indicates that an internal audit cell within the firm would contribute to control fraudulent practices. empirical findings highlight the key role of internal audit to reduce fraud and prevent misappropriation and corruption. such a result is in line with the findings of gullkvist and jokipii (2013). table 5 also provides support to the second hypothesis (h2). this result suggests that audit committee members’ independence has a significant negative impact on the probability of fraud. indeed, independence of audit committee directors allows them to control more efficiently the process of audit quality. likewise, managers are less eager to be involved in fraudulent behavior. these results converge with several previous studies that argue that the presence of audit committee, whose majority members are independent, helps reduce manipulative and noncomplying practices (rainsbury, bradbury & cahan, 2009). table 5. results of the impact of audit on fraud variables df estimation standard error wald chi-deux pr > chi2 constante 1 -0.2614 0.3503 0.5571 0.4554 lev 1 1.9567 0.1209 261.9600 0.0001*** q_tobin 1 -0.2280 0.0266 73.6587 0.0001*** roa 1 -0.4352 0.0859 25.6933 0.0001*** table 4. correlation… fraud risk and audit quality: the case of us public firms 43 variables df estimation standard error wald chi-deux pr > chi2 constante 1 -0.2614 0.3503 0.5571 0.4554 lev 1 1.9567 0.1209 261.9600 0.0001*** ai_exis 1 -0.3428 0.0647 28.0484 0.0001*** aud_big 1 -0.1547 0.0671 5.3098 0.0212** aud_fee 1 -0.3238 0.0601 28.9807 0.0001*** cau_exp 1 0.0361 0.1358 0.0706 0.7905 cau_ind 1 -0.0190 0.0908 0.0440 0.0833* test of the null hypothesis: beta=0 test chi-deux df pr > chi2 ratio of likelihood 660.0053 9 <.0001*** fisher 702.2342 9 <.0001*** wald 637.8153 9 <.0001*** aud_big: external auditor’s affiliation, aud_fee: audit fees, cau_ind: independence of audit committee, cau_ exp: audit committee expertise, ai_exis: existence of internal audit service, q _tobin: tobin q, lev: corporate debt, roa: profitability or return on assets. *, **, *** correspond to the statistics’ significance at the thresholds of 10%, 5%, 1%, respectively. s o u r c e : researcher’s computation. table 5 does not provide support to the third hypothesis (h3). there is no significant relationship between the expertise of audit committee members and the fraud risk. in contrast, this study finds a significant negative relationship between the relevance of the external auditor and the fraud risk. it follows that the external auditor’s affiliation with an international network ref lects the audit quality and demonstrates its effectiveness in preventing and detecting fraud. moreover, table 5 shows as well that the fifth hypothesis (h5) is confirmed. this result suggests that there is a significant negative relationship between the audit fee and the fraud occurrence. it seems that auditors with high fees are likely to meet the audit competency criterion. therefore, they are likely to detect most accounting errors as well as significant anomalies either caused unintentionally or due to fraud, as argued by bilal et al. (2018), among others. table 5. results… hela frikha chaari, amel belanès, azhaar lajmi44 finally, table 5 reports a significant positive relationship between leverage and fraud risk. leverage provides a motivation to commit fraud (ammar et al., 2018). on the other hand, table 5 shows a significant negative relationship between firm’s growth opportunities and fraud. there is also a similar relationship between firm profitability and fraud. firms with significant growth opportunities are less eager to engage in fraudulent practices. these companies are often short of fund and look for external resources to finance their investment opportunities. similarly, profitable firms are not prone to manage their earnings and follow misstatement and fraudulent practices.  conclusion this study raises questions about the fraud detection technique and the relevance of audit quality to mitigate fraud. this study has two main objectives. the first objective is to verify whether a collective prediction tool can be used to predict fraud risk. the second objective is to examine the audit’s monitoring role to mitigate fraud risk. logit regressions are applied to a sample of 5,613 us-listed public firms during 2003–2013. the paper suggests a more comprehensive proxy for fraud risk that relies on the combination of z-score and beish m-score. the study reveals that the existence of an internal auditor and independent members within the audit committee would potentially reduce the fraud risk. hiring a big external auditor and paying it high fees is also helpful. overall, contrary to recent criticism, this paper provides compelling evidence that assuring high-quality information is consistently associated with a lower incidence of fraud. our results underline the importance of several recommendations that have strengthened the monitoring and oversight role that audit plays in the financial reporting process through internal audit, audit committee, and external audit. furthermore, the study puts in evidence that, unlike the firm leverage, both firm profitability and growth opportunities have a negative effect on fraud risk. leverage provides a motivation for fraudulent financial reporting. this study is related to several strands of existing research, namely the quality of audit, the effective use of financial information, fraud detection techniques. several practical implications can be associated with this study. first, the research underscores the audit’s monitoring role to mitigate fraud. second, fraud risk and audit quality: the case of us public firms 45 the adopted model would help regulators, bankers, managers and auditors to detect fraud at an early stage. so needed action can be taken at suitable time. the study also offers two main contributions. unlike most previous research, we focus on financially distressed companies rather than those with financial restatements. besides, we suggest a collective tool to predict fraud risk; which is expected to offer a more reliable proxy for fraud risk than do binary models. fraud is still a relevant theme for academic research. there are several future research perspectives for this research. other factors of audit quality, such as internal audit effectiveness, external audit tenure, or audit committee diligence, are worth investigating and may lead to more interesting practical implications and recommendations. besides, it would be better to estimate the fraud occurrence itself rather than the probability of fraud. an in-depth analysis is hence required.  references altman, e.i. 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(2015). prediction of business failure and fraudulent financial reporting: evidence from malaysia. indian journal of corporate governance, 8(1), 34–53. http://dx.doi.org/10.1177/0974686215574424. saheed, d.o., ajibola, i.m., & adedoyin, l. (2021). efficacity of audit fee on audit quality of selected pharmaceutical firms in nigeria. copernican journal of finance & accounting, 10(1), 53–66. http://dx.doi.org/10.12775/cjfa.2021.003. sanusi, z.m., & mohamed, n. (2015). effects of internal controls, fraud motives and experience in assessing the likelihood of fraud risk. journal of economics business and management, 3(2), 194–200. http://dx.doi.org/10.7763/joebm.2015.v3.179. zager, l., malis, s.s., & novak, a. (2016). the role and responsibility of auditors in prevention and detection of fraudulent financial reporting. procedia economics and finance, 39, 693–700. http://dx.doi.org/10.1016/s2212-5671. zalata, a.m., tauringana, v., & tingbani, i. (2018). audit committee financial expertise, gender, and earnings management: does the gender of the financial expert matter? international review of financial analysis, 55, 170–183. http://dx.doi.org/10.1016/j. irfa.2017.11.002. zeng, h., yang, l., & shi, j. (2020). does the supervisory ability of internal audit executives affect the occurrence of corporate fraud? evidence from small and mediumsized listed enterprises in china. international journal of accounting & information management, 29(1), 1–26. http://dx.doi.org/10.1108/ijaim-02-2020-0020. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: june 4, 2014; date of acceptance: august 13, 2014. * contact information: mkalinowski@wsb.gda.pl, gdansk school of banking, dolna brama 8, 80-821 gdańsk, poland, phone: 609 880 094. kalinowski m. (2014). stock exchanges sustainability support assessment. copernican journal of finance & accounting, 3(2), 37–48. http://dx.doi.org/10.12775/cjfa.2014.016 marcin kalinowski* gdansk school of banking stock exchanges sustainability support assessment keywords: sustainability, stock exchange, sustainability support index. j e l classification: q56, g15. abstract: financial markets can play a role in sustaiability development. they can support sustainability by making esg disclosure, launching sustainability related indices or offering sustainability guidance for listing companies. all of these activities helps in developing sustainability. this article is an attempt to analyze sustainability support level in stock exchanges in the world. it is based on a survey conducted in 27 stock exchanges. the aim of this article is to assess the level of stock exchanges sustainability support and examine the relationship between the stock market size and sustainability support level. to acheve the aim the assessment tool has been created. sustainability support index is a synthetic stock markets sustainability support measure. it helps to compare stock exchange sustainability support levels. in the article statistical tools are used to compare the phenomena, mainly regression analysis and pearson’s correlation. the conclusion presented in the article states that there is a differential stock market sustainability support level in the world. there is no clear correlation between sustainability support variables and stock market size variables. translated by marcin kalinowski ocena wsparcia zrównoważonego rozwoju na giełdach akcji słowa kluczowe: zrównoważony rozwój, giełda papierów wartościowych, indeks wsparcia zrównoważonego rozwoju. marcin kalinowski38 klasyfikacja j e l: q56, g15. abstrakt: rynki finansowe mogą odgrywać pewną rolę w zrównoważonym rozwoju. rynki te mogą wspierać zrównoważony rozwój poprzez ujawnienie własnej polityki dotyczącej środowiska, spraw społecznych i ładu korporacyjnego (esg). zrównoważony rozwój może być również wspierany przez rynek akcji poprzez tworzenie indeksów zrównoważonego rozwoju oraz oferowanie wytycznych dotyczących zrównoważonego rozwoju dla notowanych firm. wszystkie te aktywności wspierają zrównoważony rozwój. artykuł ten stanowi próbę oceny poziomu wsparcia zrównoważonego rozwoju światowego rynku papierów wartościowych. analiza ta opiera się na badaniach ankietowych przeprowadzonych na 27 rynkach akcji. celem artykułu jest ocena poziomu wsparcia zrównoważonego rozwoju na rynkach akcji i zbadanie zależności pomiędzy wielkością rynku akcji a poziomem wsparcia zrównoważonego rozwoju. dla realizacji celu w pracy stworzono narzędzie oceny zrównoważonego rozwoju (sustainability support index – ssi). ssi jest syntetyczną miarą poziomu zrównoważonego rozwoju na rynku akcji. narzędzie to pomaga w porównywaniu rynków akcji w analizowanym zakresie. w celu dokonania analizy porównawczej w artykule wykorzystano narzędzia statystyczne takie jak analiza regresji i wskaźnik korelacji pearsona. podsumowując należy stwierdzić, że przeprowadzone badania wskazują, że poziom wsparcia zrównoważonego rozwoju na rynku akcji na świecie jest zróżnicowany. ponadto nie można stwierdzić jednoznacznej i istotnej zależności pomiędzy zmiennymi dotyczącymi wsparcia zrównoważonego rozwoju i w zakresie wielkości rynku akcji.  introduction sustainability is a trendy word. the problem is to find the understanding of that concept and implement it in various sectors of the economy. one of the elements of this structure is the financial sector. guintessential questions can be developed on this basis: can financial markets institutions develop and support sustainability? what is the sustainability support level in different financial markets? what are the relationship between sustainability support variables and stock markets size? the basic question is to what extent business sustainability is contributing to sustainable development. there is a discussion about it in expert literature. banerjee (2011, 720) suggests that there are ideological barriers that are considered when business sustainability is approached from the economiccentered paradigm. these barriers include the benefits perspective for the organization (such as increasing brand value, reducing risk and cost factors, embracing new revenue growth potential) rather than covering a more balanced approach to value creation. often, such benefits are called “win-win” approaches (dyllick, muff 2013). the dominant view is that business can profit from sustainability when solving the social and environmental problems of the world stock exchanges sustainability support assessment 39 through new growth opportunities (hart 2007), through opportunities for innovation (nidumolo et al., 2009) or for profit (prahalad, hammond 2002; prahalad 2004). the underlying assumption set in this perspective is that business will not pursue environmental and social initiatives if these do not provide economic advantages to the business. banerjee (2011) arrives at the same conclusion with regard to corporate social responsibility (csr) and links it to the primary focus in the literature on the financial impact and on the company not on the outcomes for society. margolis & walsh (2003, 289) conclude more broadly from their appraisal of 30 years of studies on corporate social performance: “although the financial effects of corporate social performance have been extensively studied, little is known about any consequences of corporate social initiatives. most notable, as calls for corporate involvement increase, there is a vital need to understand how corporate efforts to redress social misery actually affect their intended beneficiaries.” analyzing this literature we can realize how difficult it is to point and realize sustainability assumptions especially in the financial sector. this article is focused on specific type of financial institutions – stock exchanges. stock exchanges can play a major role in facilitating transparency of sustainability risks and better corporate sustainability performance. among the key international policy developments that underpin the increasing number of stock exchange initiatives on sustainability, the main is the outcome of rio+20 united nations conference on sustainable development. european commission has also adopted a proposal for a directive enhancing the transparency of companies on social and environmental matters on april 16, 2013 by changing existing accounting directives. earlier on 6 february 2013, the european parliament had adopted two resolutions connected with social responsibility (“corporate social responsibility: accountable, transparent and responsible business behaviour and sustainable growth” and “corporate social responsibility: promoting society’s interests and a route to sustainable and inclusive recovery”), acknowledging the importance of company transparency on environmental and social matters (promoting sustainable development: the way forward for a sustainability index in turkey 2014). despite being in the position to promote sustainability, stock exchanges are concerned about imposing more strict regulations or listing requirements that might discourage future listings. sustainability indices based on ratings using voluntary public disclosure appear to be one of the preferred instruments used marcin kalinowski40 by the exchanges to encourage transparency of corporate sustainability indicators without mandatory rules. such indices highlight top performers, facilitating investor pressure and competition between companies to drive disclosure, and ultimately better performance, in the long term. tough but f lexible regulations are conduit to improving a country’s competitiveness through innovation (porter, linde 1995). lower the environmental and social local standards, higher would be the costs of adopting better sustainability practices for individual firms. the research methodology and the course of the research process the aim of this article is to assess the level of stock exchanges sustainability support and test the correlation between the stock market size and sustainability support level. the research is based on the data from sustainable stock exchange initiative survey (sustainable stock exchange. report on progress 2012). the sse initiative is a joint project organised by the united nations-backed principles for responsible investment (pri), the united nations conference on trade and development (unctad), the united nations environment programme finance initiative (unep-fi), and the united nations global compact (ungc). this study was completed using a combination of publicly available information, survey responses and findings at the time of research. exchange entity ownership information was accessed from bloomberg, january 2012. 27 stock exchanges all over the world were surveyed in 2012 and described in this publication. an exchange entity could refer to either the holding company of a single or multiple exchanges or a single exchange. there was 19 questions in the survey made in 2012. for this research purpose 4 questions was considered as the most important. selection was made taking into account assessment objectivity and comprehensiveness. important in the selection proces was also data reliability. assumption was that variables are the various actions associated with: internal regulations, external regulations, investors and listed companies. the questions used to conduct a research in this article were as follows: ■ does the exchange make its own esg disclosures? ■ is the exchange a signatory of pri? ■ has the exchange launched sustainability related indices? ■ has the exchange offered sustainability guidance for listing companies? stock exchanges sustainability support assessment 41 answers to the questions in the conducted questionnaire allowed to asses overall sustainability support level on a scale from 0 to 1 in four categories (esg disclosure, pri signatories, sustainability indices, sustainability guidance for listing companies). each category has been proposed as support variable assessing stock exchanges sustainability. all variables were assigned equal weights. on basis of described 4 variables the sustainability support index (ssi) was created in this article. ssi is the sum of selected variables. the sustainability support index formula is presented below. (unctad), the united nations environment programme finance initiative (unep-fi), and the united nations global compact (ungc). this study was completed using a combination of publicly available information, survey responses and findings at the time of research. exchange entity ownership information was accessed from bloomberg, january 2012. 27 stock exchanges all over the world were surveyed in 2012 and described in this publication. an exchange entity could refer to either the holding company of a single or multiple exchanges or a single exchange. there was 19 questions in the survey made in 2012. for this research purpose 4 questions was considered as the most important. selection was made taking into account assessment objectivity and comprehensiveness. important in the selection proces was also data reliability. assumption was that variables are the various actions associated with: internal regulations, external regulations, investors and listed companies. the questions used to conduct a research in this article were as follows:  does the exchange make its own esg disclosures?  is the exchange a signatory of pri?  has the exchange launched sustainability related indices?  has the exchange offered sustainability guidance for listing companies? answers to the questions in the conducted questionnaire allowed to asses overall sustainability support level on a scale from 0 to 1 in four categories (esg disclosure, pri signatories, sustainability indices, sustainability guidance for listing companies). each category has been proposed as support variable assessing stock exchanges sustainability. all variables were assigned equal weights. on basis of described 4 variables the sustainability support index (ssi) was created in this article. ssi is the sum of selected variables. the sustainability support index formula is presented below. ��� � � �� � ��� ssi – sustainability support index, x1 – esg disclosure (yes – 1, no – 0, gri – 0,5), x2 – pri signatories (yes – 1, no – 0), x3 – sustainability indices (yes – 1, no – 0, plan – 0,5), x4 – sustainability guidance for listing companies (yes – 1, no – 0), ssi is a stock markets sustainability support synthetic measure. it can be used to compare overall stock exchange sustainability support level. the ssi index may not reflect all sustainability initiatives that exchanges have been internally pursuing or contemplating. this tool gives the opportunity of initial overall sustainability support assessment. to analyze regional diversity additionally, the exchanges have been assigned to regions of the world (according to the world bank methodology). then the average value of ssi for each region was estimated to present geographical differences in the ssi value. the next stage of the research was to analyse the correlation between characteristics that describe the exchange size (the number of listed companies and market capitalization) and the ssi level. it is based on pearson’s ratio. the outcome of the research process and conclusions sustainability support index was calculated on 27 stock exchanges. results and source data are presented in table 1. as a ssi ranking. table 1. sustainable support index ranking region stock exchanges country nu mber of listed commarket capitalization 2012 (bln type company esg disclosure1 pri signatories2 sustainability indices sustainability guidance for listing sustainability support index 1 esg environmental, social, and corporate governance 2 pri principles for responsible investment ssi – sustainability support index x1 – esg disclosure (yes – 1, no – 0, gri – 0,5) x2 – pri signatories (yes – 1, no – 0) x3 – sustainability indices (yes – 1, no – 0, plan – 0,5) x4 – sustainability guidance for listing companies (yes – 1, no – 0) ssi is a stock markets sustainability support synthetic measure. it can be used to compare overall stock exchange sustainability support level. the ssi index may not ref lect all sustainability initiatives that exchanges have been internally pursuing or contemplating. this tool gives the opportunity of initial overall sustainability support assessment. to analyze regional diversity additionally, the exchanges have been assigned to regions of the world (according to the world bank methodology). then the average value of ssi for each region was estimated to present geographical differences in the ssi value. the next stage of the research was to analyse the correlation between characteristics that describe the exchange size (the number of listed companies and market capitalization) and the ssi level. it is based on pearson’s ratio. the outcome of the research process and conclusions sustainability support index was calculated on 27 stock exchanges. results and source data are presented in table 1. as a ssi ranking. marcin kalinowski42 table 1. sustainable support index ranking r eg io n stock exchanges country number of listed companies (2012) market capitalization 2012 (bln usd) type company es g d is cl os ur e1 pr i s ig na to ri es 2 su st ai na bi lit y in di ce s su st ai na bi lit y gu id an ce fo r lis ti ng co m pa ni es su st ai na bi lit y su pp or t in de x ssf johannesburg stock exchange south-africa 392.00 852.28 listed company for profit 1 1 1 1 4 lcn bm&fbovespa brazil 372.00 193.77 listed company for profit 0.5 1 1 1 3.5 eas korea exchange korea 1 816.00 1 091.50 demutualized company for profit 1 0 1 1 3 eas shanghai stock exchange china 932.00 2 457.33 association not for profit 1 0 1 1 3 eas bursa malaysia malaysia 937.00 431.09 listed company for profit 1 0 0.5 1 2.5 ecs deutsche börse ag germany 742.00 1 303.59 listed company for profit 0.5 0 1 1 2.5 ecs istanbul stock exchange turkey 264.00 232.69 governmental not for profit 1 1 0.5 0 2.5 ecs nyse euronext france 3 418.00 15 187.61 listed company for profit 0.5 0 1 1 2.5 eas singapore exchange singapore 772.00 665.73 listed company for profit 1 0 0.5 1 2.5 eas the stock exchange of thailand thailand 545.00 289.75 governmental not for profit 1 0 0.5 1 2.5 ecs bme spanish exchanges spain 3 263.00 1 096.20 listed company for profit 1 0 1 – 2 ecs london stock exchange uk 2 864.00 3 397.13 listed company for profit 1 0 1 0 2 nac nasdaq omx us 3 440.00 5 057.58 public company for profit 0 0 1 1 2 stock exchanges sustainability support assessment 43 r eg io n stock exchanges country number of listed companies (2012) market capitalization 2012 (bln usd) type company es g d is cl os ur e1 pr i s ig na to ri es 2 su st ai na bi lit y in di ce s su st ai na bi lit y gu id an ce fo r lis ti ng co m pa ni es su st ai na bi lit y su pp or t in de x nac toronto stock exchange canada 3 947.00 2 014.47 listed company for profit 0 0 1 1 2 eas hong kong exchanges and clearing hong-kong 1 506.00 2 480.18 listed company for profit 0.5 0 0 1 1.5 ecs six swiss exchange switzerland 280.00 1 122.74 private company not for profit 1 0 0.5 0 1.5 lcn bolsa mexicana de valores mexico 476.00 441.41 listed company for profit 0 0 1 1 sas bombay stock exchanges india 5 115.00 1 225.47 demutualized 0 0 1 1 eas indonesia stock exchange indonesia 442.00 407.71 private company for profit 0 0 1 1 sas national stock exchange of india india 1 641.00 1 200.74 demutualized company for profit 0 0 1 0 1 eas shenzhen stock exchange china 1 420.00 1 044.60 association not for profit 1 0 1 eas tokyo stock exchange japan 2 288.00 3 468.88 demutualized company for profit 0 0 1 0 1 eas philippine stock exchange philippines 253.00 175.89 association not for profit 0 0 0.5 0 0.5 eas australian stock exchange australia 2 078.00 1 303.81 listed company for profit 0 0 0 0 0 lcn bolsa de comercio de santiago – santiago stock exchange chile 266.00 290.37 listed company for profit 0 0 0 0 0 marcin kalinowski44 r eg io n stock exchanges country number of listed companies (2012) market capitalization 2012 (bln usd) type company es g d is cl os ur e1 pr i s ig na to ri es 2 su st ai na bi lit y in di ce s su st ai na bi lit y gu id an ce fo r lis ti ng co m pa ni es su st ai na bi lit y su pp or t in de x ecs moscow interbank currency exchange russia 284.00 770.61 private company for profit 0 0 0 0 mea saudi stock market tadawul saudi arabia 150.00 347.49 governmental not for profit 0 0 0 0 1  esg – environmental, social, and corporate governance 2  pri – principles for responsible investment s o u r c e : own study based on: sustainable stock exchange. report on progress, sustainable stock exchange initiative 2012. in the table 1 there are values between 0 and 1 in columns 7–10. numbers are interpreted as follows: 1 – yes, 0 – no, 0.5 in column 7 means “gri1 disclosure”, 0.5 in column 9 means “is planning”. the highest ssi index level is observed on johannesburg stock exchange (4). slightly lower level (3.5) is in brazil (bm&fbovespa). in korea (korea exchange) and china (shanghai stock exchange) ssi is on level 3. the lowest sustainability support indicator is observed in saudi arabia (saudi stock market – tadawul), russia (moscow interbank currency exchange), chile (santiago stock exchange) and australia (australian stock exchange). this markets reached level 0 in this category. at this stage of the research it is worth to examining regional differences in ssi index. to perform such an analysis countries have been assigned to world regions. the division is based on the world bank methodology (world bank). table 2. world regions region symbol region name eas east asia ecs europe & central asia lcn latin america 1  gri – global reporting initiative stock exchanges sustainability support assessment 45 region symbol region name sas south asia ssf sub-saharan africa mea middle east & north africa nac north america s o u r c e : world bank. the mean ssi value in the research sample amounts to 1.7 (figure 1). the highest sustainability support level is observed in sub-saharan africa (4). the research covered only one stock exchange in this region: johanesburg stock exchange. second in terms of the ssi value is north american region (2). the third region is europe & central asia (1.86). then east asia (1.68) and latin america (1.50). the lowest sustainability support level is observed in south asia (1) and middle east & north africa (0). figure 1. sustainability support index in world regions at this stage of the research it is worth to examining regional differences in ssi index. to perform such an analysis countries have been assigned to world regions. the division is based on the world bank methodology (world bank). table 2. world regions region symbol region name eas east asia ecs europe & central asia lcn latin america sas south asia ssf sub-saharan africa mea middle east & north africa nac north america source: world bank. the mean ssi value in the research sample amounts to 1.7 (figure 1). the highest sustainability support level is observed in sub-saharan africa (4). the research covered only one stock exchange in this region: johanesburg stock exchange. second in terms of the ssi value is north american region (2). the third region is europe & central asia (1.86). then east asia (1.68) and latin america (1.50). the lowest sustainability support level is observed in south asia (1) and middle east & north africa (0). figure 1. sustainability support index in world regions source: own study. diversed levels of ssi raise a question about the factors affecting the level of sustainability support. is there a relationship between the sustainability support index level and the stock market size? to answer this question stock market size variables and the ssi level 0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50 4,00 4,50 world eas ecs lcn sas ssf mea nac su st ai na bi lit y su pp or t i nd ex world region s o u r c e : own study. diversed levels of ssi raise a question about the factors affecting the level of sustainability support. is there a relationship between the sustainability support index level and the stock market size? to answer this question stock market size variables and the ssi level can be compared. the market size can be marcin kalinowski46 measured by different variables. two of them have been used in this research: a number of listed companies and market capitalization. the ssi ratio will be related to “number of listed companies” and “market capitalization” in this section of the article. there is a neutral relationship between ssi and number of listed companies variables. the linear regression line is very f lat in this case. studied variables of pearson’s correlation ratio amount to 0.0262. this confirms the low relationship between the variables. the second variable describing the stock market size is market capitalization. a higher correlation level between ssi ratio and market capitalization is conspicuous. pearson’s correlation ratio amounts to 0.1621. the regression line is still f lat, but a positive tendency is noticeable. in both cases ssi ratio volatility is reduced with market size increasing. the next research step was to assess the correlation between stock exchange size variables and sustainable support sub-variables using pearson’s ratio. the highest positive correlation level occurs between “sustainability indices” and “number of listed companies” (0.4277). negative correlation appears between “pri signatories” and “number of listed companies” (-0.2972). table 3. pearson‘s correlation ratio of stock market size variables and stock market sustainability support variables number of listed companies market capitalization sustainability support index 0.0262 0.1621 esg disclosure -0.1611 -0.0311 pri signatories -0.2972 -0.1689 sustainability indices 0.4277 0.2661 sustainability guidance for listing companies 0.1363 0.1912 s o u r c e : own study. there is a weak correlation between sustainability support variables and stock market size variables. it should be stressed that there is no significant relationship between market size variables and sustainability support variables. some relations are positive and some negative. concluding the research it is worth pointing out that: 1. the highest sustainability level occurs in johanesburg stock exchange, bm&fbovespa, korea exchange, shanghai stock exchange. the lo stock exchanges sustainability support assessment 47 west sustainability level is in australian stock exchange, santiago stock exchange, moscow interbank currency exchange, saudi stock market – tadawul. 2. the highest level of sustainability support index is observed in sub-saharan africa. it is interesting that it is based on one stock exchange. a high level also is observed in north america and europe & central asia. the lowest ssi ratio is in middle east & north africa, south asia and latin america. 3. the sustainability support level is weakly correlated with the market size in view of considering “number of listed companies” and “market capitalization”. pearson’s correlation ratio amounts to 0.0262 and 0.1621. 4. a deeper analysis of sub-variables confirms a weak relationship between sustainability support and the stock market size. pearson’s correlation ratio ranges from –0.2972 to 0.4277. this relationship should be considered as weak. in author’s opinion it is worth to develop stock market sustainability support research in the future. a measurement tool proposed in this article can be used in the sustainability support dynamic analysis. it can be modified depending on needs. as shown in the article the biggest stock exchanges began to compete not only by number of listed companies or capitalization but also by sustainability aspects. less developed markets, like polish are not engaged in this process. in the future taking care of stock market sustainability is inevitable. participation in this process could become a distinguishing feature for exchanges such as warsaw stock exchange.  references banerjee s.b. (2011). embedding sustainability across the organization: a critical perspective. academy of management learning & education, 10 (4), 719–731. http:// dx.doi.org/10.5465/amle.2010.0005. dyllick t., muff k. (2013). clarifying the meaning of sustainable business, introducing a typology from business-as-usual to true business sustainability. http://dx.doi. org/10.2139/ssrn.2368735. hart s.l. (2007), capitalism at the crossroads. 2nd ed. upper saddle river, nj: wharton school publishing. margolis, j. and walsh, j. (2003). misery loves companies: rethinking social initiatives by business. administrative science quarterly, 48 (2), 268–305. http://dx.doi. org/10.2307/3556659. marcin kalinowski48 nidumolu r., prahalad, c.k., rangaswami m.r. (2009). why sustainability is now the key driver of innovation. harvard business review, 87 (9), 57–64. http://dx.doi. org/10.1109/emr.2013.6601104. porter m.e. and claas van der linde (1995). toward a new conception of the environment competitiveness relationship. journal of economic perspectives, 9 (4), 97– –118. http://dx.doi.org/10.1257/jep.9.4.97. prahalad c.k. & hammond a. (2002). serving the world’s poor, profitably. harvard business review, 80 (9), 48–55. prahalad c.k. (2004). the fortune at the bottom of the pyramid: eradicating poverty through profits. upper saddle river, nj: wharton school publishing. promoting sustainable development: the way forward for a sustainability index in turkey (2014). sabanci university. sustainable stock exchange. report on progress (2012), sustainable stock exchanges initiative, http://www.sseinitiative.org/publications/ (accessed: 15.03.2014). world bank, http://www.worldbank.com (accessed: 15.03.2014). date of submission: july 16, 2021; date of acceptance: october 3, 2021. * contact information (corresponding author): adishbansal8@gmail.com, dept. of management, i.k. gujral punjab technical university, main campus, kapurthala, pin code-144603, india, phone: +91-904-156-1827; orcid id: https://orcid.org/00000002-8737-3162. ** contact information: kapilfutures@gmail.com, dept. of management, i.k. gujral punjab technical university, main campus, kapurthala, pin code-144603, india, phone: +91-947-809-8074; orcid id: https://orcid.org/0000-0003-3817-1772. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 kumar, a., & gupta, k. (2021). examining the impact of structural breaks on price discovery efficiency: evidence from the indian equity futures market. copernican journal of finance & accounting, 10(4), 79–96. http://dx.doi.org/10.12775/cjfa.2021.016 adish kumar* i.k. gujral punjab technical university kapil gupta** i.k. gujral punjab technical university examining the impact of structural breaks on price discovery efficiency: evidence from the indian equity futures market keywords: structural breaks, global financial crisis, change in government, demonetization, covid-19 and price discovery. j e l classification: c1, c5, g13, g14, g17. abstract: the current study aims to examine the impact of structural breaks on price discovery efficiency of indian equity futures market. global financial crisis, change of government, demonetization and covid-19 are identified as significant events. data is divided into sub-samples of pre and post event period to study the impact of these events on price discovery efficiency of the indian equity futures market. unit root test is used to check stationarity of data. granger causality test, johansen’s cointegration test and vector error correction methodology (vecm) are used for analysis. during full adish kumar, kapil gupta80 sample period, it is observed that there is a significant bi-directional causality between cash and futures markets and cash market leads futures market in price discovery. in addition, global financial crisis triggered volatility in indian equity futures market, which reduced its price discovery efficiency, whereas, after change in government, bi-directional transmission of information restored between cash market and futures market. furthermore, futures market played a leading role in absorbing volatility triggered by demonetization. covid-19 did not significantly affect price discovery efficiency of indian equity futures market.  introduction literature1 suggests that derivatives market is expected to lead price discovery to cash market due to leverage benefits, short selling restriction and funding constraints. however, in the indian stock market, which is one of the most liquid derivatives market in the world in terms of contracts traded, karmakar and inani (2019) show that cash market leads in price discovery. nevertheless, aggarwal and thomas (2019), by using high frequency data, stated that futures market dominates cash market in india during periods of high information and information share of futures market increases further if news is negative. present study, therefore, is an attempt to examine the impact of events like global financial crisis, change of government, demonetization and covid-19 on price discovery in national stock exchange of india (nse) because these events can be seen as high information periods. leblang and mukherjee (2005) and pástor and veronesi (2012) also suggests that such events trigger volatility in stock market. market efficiency concept was first tested by bachelier (1900) in his phd thesis. he stated that prices of commodity f luctuate randomly. later this phenomenon was also observed in us stock prices in the studies of working (1934) and cowles and jones (1937). however, these studies were overlooked until late 1950s. kendall (1953) and osborne (1959) observed that stock price data behaved like wandering series. in addition, fama (1970) stated that efficient market is the one in which prices fully ref lect available information. he considered three information subsets. first is weak form of market efficiency, which states that only historical prices form part of information set. secondly, in semi-strong form of market efficiency, information set contains publically available infor1 please see, chatrath and song (1998); bohl, salm and schuppli (2011); demir, martell and wang (2019). examining the impact of structural breaks… 81 mation. thirdly, in strong form of market efficiency, it is checked whether privately available information given to investors can also ref lect in stock prices. hasbrouck (1995), using information share method, observed that securities traded in multiple markets are technically bound as they are subject to same information sets, which do not allow price of security to diverge too much and law of one price should prevail. however, brailsford and hodgson (1997) observed that there may be market frictions due to which information may not ref lect in both markets simultaneously. one market may react faster to new information while others may follow, resulting in a lead-lag relationship between both markets. therefore, if informed traders trade in derivative market in place of cash market, price discovery in derivatives shall be rapid and definite in contrast to underlying market (booth, so & tse, 1999), which may offer arbitrage opportunities to investors (roy & chakraborty, 2020). furthermore, floros and vougas (2008) and demir, martell and wang (2019) suggested that there is a significant relationship between cash and futures markets and both markets have predictive power for each other, making the relationship bi-directional (kawaller, koch & koch, 1987). bosch and pradkhan (2017) suggested that trading activity of non-commercial traders increases rate of convergence in both markets. korn, krischak and theissen (2019) stated that illiquidity in futures market increases with increase in illiquidity in cash market. in addition, roy and chakraborty (2020) stated that if there is any disequilibrium in both markets in the long run, cash market plays a leading role to correct such disequilibrium. bose (2007) observed that index futures respond to new information more quickly than cash market and both markets contribute to price discovery process. information share of futures market is highest if new information is perceived negatively (aggarwal & thomas, 2019). moreover, adämmer, bohl and gross (2016) stated that reliable price discovery still occurs in futures market even if there are some dozen of transactions. on the contrary, karmakar and inani (2019) posit that cash market is dominant in price discovery because there are some indirect costs associated with futures market due to which informed trading occurs in cash market. however, kumar and tse (2009) stated that this scenario does not hold throughout the year and information share of both markets become equal at times. furthermore, beaulieu, ebrahim and morgan (2003) suggested that improvement in contract specifications can increase price discovery role of futures market. adish kumar, kapil gupta82 furthermore, gerlach, wilson and zurbruegg (2006) found that 1997 asian financial crisis has significantly affected integration of asia-pacific real estate market. these markets were not integrated before the crisis but became significantly integrated afterwards. in addition, pettenuzzo and timmermann (2011) stated that investors tend to allocate 40% assets to short horizon and 60% to long horizon but after considering structural breaks, allocation to short horizon rises to almost 100% and long horizon declines to almost 10%. moreover, pástor and stambaugh (2012) stated that long horizon variance is reduced due to mean reversion but is offset by other uncertainties faced by investor. therefore, the effect of structural breaks on price discovery efficiency is evident in many studies around the world, however, it is yet to be examined in the indian equity futures market. this study attempts to plug this research gap by studying the impact of global financial crisis, change in government, demonetization and covid-19 on price discovery in indian equity futures and cash markets. need of the study in financial year 2007–08 and 2008–09, nifty experienced higher volatility than previous years, which was induced by global financial crisis (gupta & kaur, 2015). annualized volatility rose to 32.1% in 2007–08 and 41.54% in 2008–09 as compared to 28% in previous financial year (figure 1). indian markets became the seventh most volatile market in the world. derivative turnover also decreased by 17.3% at nse during financial year 2008–09. figure 1. annualized volatility of nifty 50 index for full sample period furthermore, gerlach, wilson and zurbruegg (2006) found that 1997 asian financial crisis has significantly affected integration of asia-pacific real estate market. these markets were not integrated before the crisis but became significantly integrated afterwards. in addition, pettenuzzo and timmermann (2011) stated that investors tend to allocate 40% assets to short horizon and 60% to long horizon but after considering structural breaks, allocation to short horizon rises to almost 100% and long horizon declines to almost 10%. moreover, pástor and stambaugh (2012) stated that long horizon variance is reduced due to mean reversion but is offset by other uncertainties faced by investor. therefore, the effect of structural breaks on price discovery efficiency is evident in many studies around the world, however, it is yet to be examined in the indian equity futures market. this study attempts to plug this research gap by studying the impact of global financial crisis, change in government, demonetization and covid-19 on price discovery in indian equity futures and cash markets. need of the study in financial year 2007–08 and 2008–09, nifty experienced higher volatility than previous years, which was induced by global financial crisis (gupta & kaur, 2015). annualized volatility rose to 32.1% in 2007–08 and 41.54% in 2008–09 as compared to 28% in previous financial year (figure 1). indian markets became the seventh most volatile market in the world. derivative turnover also decreased by 17.3% at nse during financial year 2008–09. figure 1. annualized volatility of nifty 50 index for full sample period 0 10 20 30 40 50 a n n u a l i z e d v o l a t i l i t y global financial crisis covid-19 demonetization government formation s o u r c e : annualized volatility figures extracted from annual reports of sebi from year 2004-05 to 2019-20 (www1). examining the impact of structural breaks… 83 in addition, leblang and mukherjee (2005) suggested that stock markets of britain and united states have been sensitive to elections as monetary and fiscal policies adopted by elected party affect economic outcomes and in turn affect price movement in stock market. similarly, pástor and veronesi (2012) and nageri (2019) also observed that uncertain policy change by government induces volatility in stock market. furthermore, key structural reform like demonetization also affected stock market significantly as sensex and nifty fall by 2.5% and 2.7% respectively on next trading day after demonetization was announced. moreover, covid-19 abruptly affected stock markets worldwide and india’s two benchmark indices, i.e. sensex and nifty fall by 26% and 23.8% respectively during financial year 2019-20. therefore, this study aims to examine whether structural breaks have significant impact on price discovery efficiency of indian equity futures market. the research methodology and the course of the research process research questions to achieve above stated objectives, following hypothesis have been framed: h1: there is no significant lead-lag relationship between indian equity futures and cash market. h2: global financial crisis does not significantly affect co-movement and lead-lag relationship between indian equity futures and cash market. h3: change of government does not significantly affect co-movement and lead-lag relationship between indian equity futures and cash market. h4: demonetization does not significantly affect co-movement and lead-lag relationship between indian equity futures and cash market. h5: covid-19 does not significantly affect co-movement and lead-lag relationship between indian equity futures and cash market. data description and research methodology to examine above stated hypothesis, daily closing prices of near month nifty futures contracts and nifty have been downloaded from the website of nse for period jan 1, 2004 to jan 31, 2021. index futures were introduced in june, 2000. adish kumar, kapil gupta84 sample period is taken from year 2004 because trading in derivatives gained momentum from this year. initial period is left out to allow market to settle down after introduction. table 1. descriptive statistics event sample period variables observations mean standard deviation skewness kurtosis jarque-bera test full sample period jan 2004 to jan 2021 nfr 4243 0.0004 0.015 -0.61 16.13 30781.61* nr 4243 0.0004 0.014 -0.49 15.62 28315.19* pre global financial crisis jan 2004 to dec 2007 nfr 1004 0.0012 0.017 -1.16 13.86 5157.74* nr 1004 0.0012 0.015 -0.97 10.61 2574.64* post global financial crisis jan 2008 to dec 2009 nfr 489 -0.0003 0.026 0.08 7.27 371.88* nr 489 -0.0003 0.025 0.18 7.99 511.14* before formation of nda government jan 2010 to apr 2014 nfr 1081 0.0002 0.011 -0.02 3.85 32.26* nr 1081 0.0002 0.011 -0.02 3.82 30.73* after formation of nda government may 2014 to jan 2021 nfr 1669 0.0004 0.011 -1.52 26.93 40469.34* nr 1669 0.0004 0.011 -1.62 26.49 39109.07* pre demonetization may 2014 to oct 2016 nfr 615 0.0004 0.009 -0.61 6.15 292.36* nr 615 0.0004 0.009 -0.55 6.11 278.91* post demonetization nov 2016 to dec 2019 nfr 782 0.0004 0.007 0.31 6.48 405.71* nr 782 0.0004 0.008 0.27 6.32 369.43* during covid-19 jan 2020 to jan 2021 nfr 272 0.0004 0.019 -1.62 16.11 2066.54* nr 272 0.0004 0.019 -1.75 16.01 2054.41* *significant at 1% level of significance. note: • nfr denotes nifty futures returns, • nr denotes nifty returns. s o u r c e : based on author’s calculations. the us based sub-prime lending crisis spread across the world causing global financial crisis. impact of this crisis was witnessed in indian securities markets at close of financial year 2007–08, which continued during early 2008– examining the impact of structural breaks… 85 09 (sakthivel, veera kumar, raghuram, govindarajan & vijay anand, 2014). therefore, sub-sample period is divided into two parts; before and after global financial crisis. moreover, election of 2014 is being considered as significant event in indian political system. the national democratic alliance (nda) formed government in may 2014 (wagay, 2018). hence, to check impact of change in government, period is divided into two parts, i.e. before and after formation of nda government. furthermore, to eradicate fake currency and black money, demonetization was announced of high denomination currency notes of rs. 500 and rs. 1000 in india on nov 8, 2016 (chauhan & kaushik, 2017). hence, pre-demonetization period is taken as may 1, 2014 to oct 31, 2016 and post period is taken as nov 1, 2016 to dec 31, 2019. covid-19 was first detected in china on nov 17, 2019 and it quickly spread across the world during year 2020–21 (khanthavit, 2020). therefore, covid-19 sample period is taken for annual year 2020–21. to check for presence of unit root in closing prices of near month nifty futures contracts and nifty 50, augmented dickey fuller (adf) and philips perron (pp) tests have been used. it is found that first difference of prices, i.e. log return is stationary. in order to save the space, the results are not reported, however, these may be provided on demand. moreover, to examine co-movement among these two markets, johansen’s co-integration test has been applied. in addition, granger causality test is applied to check for direction of causality across these two markets. furthermore, to examine whether both markets absorb new information simultaneously or observe lead-lag relationship, vector error correction model has been applied. results and interpretation daily mean returns in both cash and futures markets (as shown in table 1) are approx. zero for almost all periods, which suggests that market returns are showing mean reverting behavior. in addition, for all sample periods mean returns are positive, which exhibits continuous bull-run in the indian stock market with few years exception (www1). however, for period after global financial crisis, i.e. 2008–09, mean returns are negative which may be due to higher volatility observed in stock market during this period (www1). furthermore, adish kumar, kapil gupta86 co-efficients of skewness and kurtosis are statistically significant for all sample periods. however, after global financial crisis period, these values are slightly reduced but still significant, which implies that returns of markets are leptokurtic and not normally distributed. it is further tested through jaquebera test, showing similar results. skewness co-efficient in futures market is relatively higher than cash market (with few exceptions), which suggests that futures market takes away noise from cash market (gupta & singh, 2006) and informed trading happens in futures market (antoniou, holmes & priestley, 1998; and bohl, salm & schuppli, 2011). furthermore, results of granger causality test (as shown in table 2) suggest that there is significant transmission of information across both markets during full sample period, which outlines that both markets are important and new information is discounted in both markets (roy & chakraborty, 2020). bidirectional causality is also observed during pre-global financial crisis period but this relationship deviates in period of post global financial crisis and continues during pre-government formation period, which depicts no causality between two markets. it may be due to fact that volatility increased in stock market during this period, which in turn made an adverse impact on performance of nse (ali & afzal, 2012; and sakthivel et al., 2014). bi-directional transmission of information restored in period after formation of government, which manifests that policies adopted by government affects stock market (leblang & mukherjee, 2005). during pre-demonetization period, bi-directional causality is observed while post-demonetization, uni-directional causality is observed from futures to cash market, which implies that futures market absorbed volatility triggered by demonetization (aggarwal & thomas, 2019). in addition, it is also observed that during full sample period, causality from cash to futures market is more significant than futures to cash market implying more informed trading happens in spot market (karmakar & inani, 2019). in addition, during covid-19 pandemic, bi-directional transmission of information is observed, which is almost equal from both markets towards each other. examining the impact of structural breaks… 87 table 2. granger causality test event period null hypothesis f statistics full sample period jan 2004 to jan 2021 nfr cause nr 2.04* nr cause nfr 3.38* pre global financial crisis jan 2004 to dec 2007 nfr cause nr 2.19* nr cause nfr 3.07* post global financial crisis jan 2008 to dec 2009 nfr cause nr 1.11 nr cause nfr 0.61 before formation of nda government jan 2010 to apr 2014 nfr cause nr 0.82 nr cause nfr 1.02 after formation of nda government may 2014 to jan 2021 nfr cause nr 1.77** nr cause nfr 1.61** pre demonetization may 2014 to oct 2016 nfr cause nr 1.54*** nr cause nfr 1.79** post demonetization nov 2016 to dec 2019 nfr cause nr 0.90 nr cause nfr 1.45*** during covid-19 jan 2020 to jan 2021 nfr cause nr 2.73* nr cause nfr 2.22** *significant at 1% level of significance. **significant at 5% level of significance. ***significant at 10% level of significance. note: • nfr denotes nifty futures returns, • nr denotes nifty returns. s o u r c e : based on author’s calculations. in addition, results of cointegration test (table 3a) reveal that both markets are integrated and test statistics of λ max and λ trace are significant at rank zero and insignificant at rank 1. however, for periods before demonetization and after demonetization test statistics at zero are insignificant, which implies no cointegration during these periods. this may be due to fact that significantly high turnover was observed in futures market as compared to cash market in these sub-periods. adish kumar, kapil gupta88 moreover, result of vecm (table 3b) suggests that cash market leads in price discovery to futures market. during full sample period, cash market leads futures market by 4 days (kumar & tse, 2009; and karmakar & inani, 2019). similar results are obtained for all sub periods except pre-global financial crisis period, pre-demonetization, post-demonetization and post-government formation period where futures market leads cash market in price discovery as these periods are characterized as high information and high volatility periods and futures were introduced with a purpose to reduce effect of informational asymmetries. therefore, futures market has played significant role in absorbing volatility (aggarwal & thomas, 2019). however, during covid-19 pandemic, both markets are equally efficient and contribute equally to price discovery process. this is in line with topcu and gulal (2020) which states that the effect of covid-19 became relatively insignificant due to timely announcement of large stimulus packages by government. examining the impact of structural breaks… 89 t ab le 3 . j oh an se n’ s co in te gr at io n te st a nd v ec to r er ro r co rr ec ti on m et ho do lo gy ev en t fu ll sa m pl e pe ri od pr e g lo ba l fi na nc ia l c ri si s po st g lo ba l fi na nc ia l c ri si s b ef or e fo rm at io n of n d a g ov er nm en t a ft er f or m at io n of n d a g ov er nm en t pr e d em on et iz at io n po st d em on et iz at io n d ur in g co v id -1 9 pe ri od ja n 20 04 to j an 2 02 1 ja n 20 04 to d ec 2 00 7 ja n 20 08 to d ec 2 00 9 ja n 20 10 to a pr 2 01 4 m ay 2 01 4 to j an 2 02 1 m ay 2 01 4 to o ct 2 01 6 n ov 2 01 6 to d ec 2 01 9 ja n 20 20 to j an 2 02 1 ta bl e 3a . j oh an se n’ s co in te gr at io n te st h yp ot he si ze d n o. o f ce (s ) n on e a t m os t 1 n on e a t m os t 1 n on e a t m os t 1 n on e a t m os t 1 n on e a t m os t 1 n on e a t m os t 1 n on e a t m os t 1 n on e a t m os t 1 ei ge n va lu e 0. 01 4 0. 00 2 0. 01 7 0. 00 7 0. 04 7 0. 02 1 0. 02 2 0 0. 01 6 0. 00 5 0. 01 7 0. 00 6 0. 02 1 0. 01 2 0. 06 9 0. 03 4 m ax im um ei ge n va lu e te st (t es t st at is ti cs ) 59 .0 5* 8. 83 16 .8 6. 37 23 .0 7* * 10 .0 9 23 .4 8* * 5. 32 26 .6 5* 8. 33 10 .3 1 3. 51 15 .8 1 9. 28 18 .6 7* ** 9. 02 tr ac e te st cr it ic al va lu es (t es t st at is ti cs ) 67 .8 8* 8. 83 23 .1 7* ** 6. 37 25 .8 7* 12 .5 2 28 .8 1* 5. 32 34 .9 8* 8. 33 13 .8 1 3. 51 25 .0 9 9. 28 27 .6 9* 9. 01 ta bl e 3b . v ec to r er ro r co rr ec ti on m et ho do lo gy n f n n f n n f n n f n n f n n f n n f n n f n er r co rr . -2 .5 7* 0. 03 -0 .1 6 1. 40 -1 .4 7 -0 .4 5 -1 .8 3* ** 0. 00 0. 15 2. 16 ** -2 .2 5* * -0 .7 4 -0 .9 5 0. 65 -0 .3 9 0. 27 co ns ta nt 0. 02 0. 01 0. 17 0. 19 -0 .0 2 -0 .0 1 0. 12 0. 13 -0 .1 6 -0 .1 6 -0 .3 6 -0 .2 5 0. 11 0. 18 -0 .2 1 -0 .2 3 n f( -1 ) 1. 69 ** * -0 .0 4 -0 .5 8 -1 .6 4* * 1. 35 0. 99 1. 38 0. 07 -0 .5 5 -2 .0 6* * 1. 95 ** * 0. 78 0. 50 -0 .7 1 0. 39 0. 04 n f( -2 ) 1. 56 -0 .0 4 -0 .6 6 -1 .6 7* * 1. 19 0. 93 1. 45 0. 22 -0 .5 7 -2 .0 1* * 1. 84 ** * 0. 72 0. 28 -0 .8 6 0. 83 0. 54 adish kumar, kapil gupta90 ev en t fu ll sa m pl e pe ri od pr e g lo ba l fi na nc ia l c ri si s po st g lo ba l fi na nc ia l c ri si s b ef or e fo rm at io n of n d a g ov er nm en t a ft er f or m at io n of n d a g ov er nm en t pr e d em on et iz at io n po st d em on et iz at io n d ur in g co v id -1 9 pe ri od ja n 20 04 to j an 2 02 1 ja n 20 04 to d ec 2 00 7 ja n 20 08 to d ec 2 00 9 ja n 20 10 to a pr 2 01 4 m ay 2 01 4 to j an 2 02 1 m ay 2 01 4 to o ct 2 01 6 n ov 2 01 6 to d ec 2 01 9 ja n 20 20 to j an 2 02 1 n f( -3 ) 1. 47 -0 .0 3 -0 .7 8 -1 .7 3* * 1. 44 1. 28 1. 52 0. 34 -0 .4 9 -1 .8 8* ** 1. 77 ** * 0. 67 0. 22 -0 .8 9 1. 44 1. 22 n f( -4 ) 1. 19 -0 .2 0 -1 .0 4 -1 .9 3* * 1. 94 1. 90 ** * 1. 50 0. 38 -0 .6 8 -2 .0 2* * 1. 69 ** * 0. 63 0. 01 -1 .0 8 1. 28 1. 12 n f( -5 ) 0. 93 -0 .3 8 -1 .1 5 -1 .9 9* n a n a 1. 47 0. 41 -0 .7 7 -2 .0 8* * 1. 66 ** * 0. 61 -0 .1 5 -1 .1 9 1. 19 1. 03 n f( -6 ) 0. 92 -0 .3 3 -1 .1 6 -1 .9 7* n a n a 1. 48 0. 43 -0 .7 6 -2 .0 2* * 1. 58 0. 56 -0 .2 3 -1 .2 5 1. 68 ** * 1. 58 n f( -7 ) 0. 71 -0 .4 6 -1 .1 8 -1 .9 1* * n a n a 1. 33 0. 29 -0 .9 2 -2 .1 4* * 1. 20 0. 22 -0 .3 6 -1 .3 3 2. 08 ** 2. 04 n f( -8 ) 0. 65 -0 .4 5 -1 .0 6 -1 .7 5* * n a n a 0. 99 -0 .0 3 -0 .9 9 -2 .1 5* * 1. 22 0. 28 -0 .4 5 -1 .3 7 2. 24 ** 2. 21 n f( -9 ) 0. 71 -0 .3 2 -0 .9 7 -1 .6 3 n a n a 0. 76 -0 .2 1 -0 .9 7 -2 .0 8* * 1. 16 0. 27 -0 .4 5 -1 .3 4 n a n a n f( -1 0) 0. 85 -0 .1 0 -0 .7 7 -1 .3 9 n a n a 0. 60 -0 .2 8 -0 .7 3 -1 .8 1* ** 1. 03 0. 17 -0 .5 8 -1 .4 3 n a n a n f( -1 1) 0. 96 0. 10 -0 .5 9 -1 .1 6 n a n a 0. 70 -0 .1 4 -0 .7 9 -1 .8 1* ** 0. 74 -0 .0 9 -0 .5 8 -1 .3 9 n a n a n f( -1 2) 1. 08 0. 33 -0 .6 0 -1 .1 0 n a n a 0. 48 -0 .3 3 -0 .4 9 -1 .4 3 0. 75 -0 .0 2 -0 .6 4 -1 .4 4 n a n a n f( -1 3) 1. 23 0. 58 -0 .2 1 -0 .6 2 n a n a 0. 56 -0 .1 6 -0 .3 9 -1 .2 9 0. 57 -0 .1 5 -0 .5 8 -1 .3 1 n a n a n f( -1 4) 0. 92 0. 41 -0 .6 1 -0 .9 3 n a n a 0. 73 0. 08 -0 .2 3 -1 .0 6 0. 66 0. 05 -0 .6 0 -1 .2 6 n a n a n f( -1 5) 0. 87 0. 51 -0 .7 6 -1 .0 0 n a n a 0. 79 0. 26 0. 02 -0 .6 7 0. 47 -0 .0 7 -0 .8 5 -1 .3 7 n a n a n f( -1 6) 0. 32 0. 05 -0 .8 9 -1 .1 3 n a n a 0. 61 0. 22 -0 .7 9 -1 .3 2 -0 .2 9 -0 .6 8 -1 .1 9 -1 .5 2 n a n a n f( -1 7) -0 .1 1 -0 .2 4 -0 .8 0 -1 .0 0 n a n a 0. 68 0. 47 -1 .6 5 -1 .9 4 -0 .2 4 -0 .4 8 -2 .6 7* -2 .7 9* n a n a t ab le 3 . j oh an se n’ s… examining the impact of structural breaks… 91 ev en t fu ll sa m pl e pe ri od pr e g lo ba l fi na nc ia l c ri si s po st g lo ba l fi na nc ia l c ri si s b ef or e fo rm at io n of n d a g ov er nm en t a ft er f or m at io n of n d a g ov er nm en t pr e d em on et iz at io n po st d em on et iz at io n d ur in g co v id -1 9 pe ri od ja n 20 04 to j an 2 02 1 ja n 20 04 to d ec 2 00 7 ja n 20 08 to d ec 2 00 9 ja n 20 10 to a pr 2 01 4 m ay 2 01 4 to j an 2 02 1 m ay 2 01 4 to o ct 2 01 6 n ov 2 01 6 to d ec 2 01 9 ja n 20 20 to j an 2 02 1 n f( -1 8) -0 .7 4 -0 .6 3 -0 .8 3 -0 .8 3 n a n a n a n a -1 .2 4 -1 .2 4 -1 .0 6 -0 .9 8 -2 .7 6* -2 .7 2* n a n a n f( -1 9) -0 .9 1 -0 .6 9 -1 .3 7 -1 .2 0 n a n a n a n a n a n a n a n a n a n a n a n a n f( -2 0) 1. 68 ** * 1. 78 ** * -0 .2 3 -0 .2 2 n a n a n a n a n a n a n a n a n a n a n a n a n (-1 ) -2 .2 8* -0 .5 6 0. 25 1. 29 -1 .7 8* ** -1 .4 2 -1 .7 4* ** -0 .4 3 0. 18 1. 69 ** * -2 .1 8* * -0 .9 9 -0 .7 9 0. 42 -0 .6 5 -0 .3 0 n (2) -2 .1 6* * -0 .5 7 0. 28 1. 28 -1 .5 7 -1 .3 2 -1 .8 0* ** -0 .5 7 0. 22 1. 66 ** * -2 .0 8* * -0 .9 5 -0 .5 6 0. 59 -1 .0 7 -0 .7 8 n (3) 2. 05 ** -0 .5 7 0. 42 1. 36 -1 .8 1* ** -1 .6 5* ** -1 .8 9* ** -0 .7 1 0. 17 1. 56 -1 .9 8* * -0 .8 8 -0 .5 1 0. 60 -1 .6 5* ** -1 .4 4 n (4) -1 .7 7* ** -0 .3 9 0. 71 1. 59 -2 .2 9* -2 .2 5* -1 .8 7* ** -0 .7 4 0. 36 1. 69 ** * -1 .9 2* ** -0 .8 6 -0 .2 9 0. 79 -1 .4 7 -1 .3 2 n (5) -1 .5 1 -0 .2 1 0. 81 1. 63 n a n a -1 .8 3* ** -0 .7 6 0. 48 1. 79 ** * -1 .9 1* ** -0 .8 5 -0 .1 6 0. 89 -1 .3 4 -1 .1 9 n (6) -1 .5 6 -0 .3 1 0. 80 1. 59 n a n a -1 .8 3* ** -0 .7 6 0. 41 1. 68 ** * -1 .8 3* ** -0 .8 1 -0 .0 9 0. 89 -1 .9 7* * -1 .8 8* ** n (-7 ) -1 .2 9 -0 .1 5 0. 79 1. 52 n a n a -1 .6 6* ** -0 .6 2 0. 64 1. 85 ** * -1 .4 4 -0 .4 6 0. 03 0. 99 -2 .2 1* * -2 .1 9* * n (8) -1 .2 2 -0 .1 4 0. 67 1. 34 n a n a -1 .3 4 -0 .3 2 0. 69 1. 86 ** * -1 .4 8 -0 .5 4 0. 09 1. 02 -2 .1 9* * -2 .1 8* * n (9) -1 .2 7 -0 .2 6 0. 59 1. 24 n a n a -1 .0 8 -0 .1 2 0. 67 1. 79 ** * -1 .3 8 -0 .4 9 0. 11 1. 00 n a n a n (-1 0) -1 .3 6 -0 .4 3 0. 44 1. 05 n a n a -0 .9 2 -0 .0 3 0. 49 1. 57 -1 .2 6 -0 .4 1 0. 29 1. 14 n a n a n (-1 1) -1 .5 1 -0 .6 7 0. 24 0. 79 n a n a -1 .0 7 0. 23 0. 54 1. 55 -0 .9 7 -0 .1 4 0. 31 1. 12 n a n a n (-1 2) -1 .6 1 -0 .8 8 0. 27 0. 74 n a n a -0 .8 2 -0 .0 1 0. 25 1. 19 -0 .9 6 -0 .2 1 0. 35 1. 16 n a n a t ab le 3 . j oh an se n’ s… adish kumar, kapil gupta92 ev en t fu ll sa m pl e pe ri od pr e g lo ba l fi na nc ia l c ri si s po st g lo ba l fi na nc ia l c ri si s b ef or e fo rm at io n of n d a g ov er nm en t a ft er f or m at io n of n d a g ov er nm en t pr e d em on et iz at io n po st d em on et iz at io n d ur in g co v id -1 9 pe ri od ja n 20 04 to j an 2 02 1 ja n 20 04 to d ec 2 00 7 ja n 20 08 to d ec 2 00 9 ja n 20 10 to a pr 2 01 4 m ay 2 01 4 to j an 2 02 1 m ay 2 01 4 to o ct 2 01 6 n ov 2 01 6 to d ec 2 01 9 ja n 20 20 to j an 2 02 1 n (-1 3) -1 .7 1 -1 .0 9 -0 .0 9 0. 29 n a n a -0 .9 1 -0 .1 7 0. 16 1. 06 -0 .8 3 -0 .1 0 0. 31 1. 04 n a n a n (-1 4) -1 .3 2 -0 .8 4 0. 43 0. 72 n a n a -1 .0 6 -0 .3 8 -0 .0 2 0. 81 -0 .8 6 -0 .2 6 0. 30 0. 98 n a n a n (-1 5) -1 .2 5 -0 .9 2 0. 57 0. 77 n a n a -1 .0 9 -0 .5 4 -0 .2 2 0. 48 -0 .6 8 -0 .1 5 0. 47 1. 01 n a n a n (-1 6) -0 .6 8 -0 .4 5 0. 70 0. 89 n a n a -0 .9 8 -0 .5 8 0. 57 1. 09 0. 05 0. 42 0. 91 1. 26 n a n a n (-1 7) -0 .1 5 -0 .0 5 0. 61 0. 77 n a n a -0 .9 7 -0 .7 5 1. 39 1. 69 ** * -0 .0 9 0. 15 2. 35 ** 2. 51 ** n a n a n (-1 8) 0. 44 0. 29 0. 61 0. 59 n a n a n a n a 0. 85 0. 86 0. 79 0. 69 2. 47 ** 2. 43 ** n a n a n (-1 9) 0. 68 0. 44 1. 24 1. 05 n a n a n a n a n a n a n a n a n a n a n a n a n (20 ) -2 .0 9 -2 .2 1 -0 .1 7 -0 .2 1 n a n a n a n a n a n a n a n a n a n a n a n a *s ig ni fic an t a t 1 % le ve l o f s ig ni fic an ce ** si gn ifi ca nt a t 5 % le ve l o f s ig ni fic an ce ** *s ig ni fic an t a t 1 0% le ve l o f s ig ni fic an ce s o u r c e : b as ed o n au th or ’s c al cu la ti on s. t ab le 3 . j oh an se n’ s… examining the impact of structural breaks… 93  conclusion this study aims to examine impact of structural breaks on price discovery efficiency of indian equity futures market. daily closing prices of near month nifty futures contracts and nifty have been downloaded from the website of nse for period jan 1, 2004 to jan 31, 2021 to conduct this study. sample period is divided into pre and post into sub-periods to include important structural breaks like global financial crisis, change of government, demonetization and covid-19. it is stated that for full sample period, cash market leads futures market in price discovery (karmakar & inani, 2019). however, during pre-global financial crisis period, pre-demonetization, post-demonetization and post-government formation period, futures market leads cash market in price discovery, which implies that futures market reduced informational asymmetries during high information periods (aggarwal and thomas, 2019). furthermore, policies adopted by government also affect stock market significantly (leblang & mukherjee, 2005; and pástor & veronesi, 2012). moreover, it is observed that there was uni-directional f low of information from cash to futures market before demonetization, however, no causality is observed afterwards. disintegration is also observed in both markets during pre-global financial crisis, pre-demonetization and post-demonetization period, which can be attributed to high turnover volume in futures market than cash market during these sub-periods. however, during full sample period, both markets are found to be cointegrated. in addition, covid-19 does not seem to be significantly affecting stock market. khanthavit (2020) observed negative stock market reactions to covid-19, which were attributed to extensive media coverage rather than disease itself. in addition, topcu and gulal (2020) also stated that the effect of covid-19 became relatively insignificant due to timely announcement of large stimulus packages by government. adish kumar, kapil gupta94  references adämmer, p., bohl, m.t., & gross, c. 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(www1) securities and exchange board of india – annual report of securities and exchange board of india 2004-05 to 2019-20, https://www.sebi.gov.in/sebiweb/home/ homeaction.do?dolisting=yes&sid=4&ssid=80&smid=101 (accessed: 24.06.2021). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: january 12, 2015; date of acceptance: february 15, 2015. * contact information: marlenac@econ.umk.pl, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: +48 607 772 670. ciechan-kujawa m. (2015). professional financial and accounting services in the light of european union directives and the deregulation of professions in poland – current status and research needs. copernican journal of finance & accounting, 4(2), 65–77. http://dx.doi.org/10.12775/ cjfa.2015.016 marlena ciechan-kujawa* nicolaus copernicus university professional financial and accounting services in the light of european union directives and the deregulation of professions in poland – current status and research needs keywords: financial and accounting services, deregulation, directive of the european union, security of business transactions, sustainable development, corporate social responsibility. j e l classification: m40, m41, m42, m48. abstract: the article describes the issue of the impact of legislative changes on the market of professional accounting and financial services. it discusses the scope and essence of the changes both to the directives of the european union and the deregulation of the profession of the accounting and finance in poland. this article contains findings regarding the experience of european countries and presents the selected research results. in conclusion, the author indicates and justifies direction in research, which is essential to identify the determinants of the functioning and development of professional finance and accounting services in polish economic practice after the legislative changes as well as the mechanisms of their impact on the risks (opportunities and threats) for sustainable development of entities and security of business trading. translated by marlena ciechan-kujawa m. ciechan-kujawa66  introduction financial and accounting services (including accounting, bookkeeping, auditing) are recognized in poland and europe as business services in the broad sense and as such constitute a set of services provided by qualified personnel who have gained their competence owing to the mastering of a significant scientific discipline. financial and accounting services include the organization of accounting, bookkeeping and tax accounting, preparation of financial statements (and other) for internal and external purposes, financial auditing and other services in the field of finance and accounting, and impact the quality of the whole process of accounting (wiśniewska 2013), and thus the management process in the entity. a wide range of their functions (confirming, instrumental, verifying, informational, streamlining, advisory, educational) goes beyond the sphere of the entity’s activity and affects both internal and external stakeholders’ decision-making process (ciechan-kujawa 2014a). the new situation on the market of professional financial and accounting services created by the legislative changes may create significant opportunities and risks for the importance and development of these services. the openness of these professions caused by the deregulation raises a question about the impact of these changes on the quality of services. in addition, there are hypothesis that the changes will boost the availability and price competitiveness of these services, which may be an opportunity, especially for small businesses, to make a use of them on a larger scale in building the competitive potential. also the eu directives introduced seem to be essential for the changes in the market demand for financial and accounting services. this applies to both quantitative and qualitative changes. research methodology the purpose of the article is an overview of the research carried out in european countries regarding the impact of legislative changes on the market of financial and accounting services, as well as justification of needs and an indication of the direction of the studies necessary to carry on the polish market. present situation leads to asking questions about the meaning and potential of professional finance and accounting services, as well as about the possibilities and directions of their development in the light of the changing legislation and of the professional financial and accounting services… 67 impact of these changes on the activity of economic entities, and their stakeholders understood in the broad sense. the essence of the market changes in the accounting and financial services resulting from eu directives it should be noted, that legislative changes being currently implemented in poland and europe, are far-reaching in their scope. from the point of view of changes in the directives, an important role in the development of the financial and accounting services market should be attributed to the requirements resulting from the following european union directives: 2006/43/ec on statutory audits of annual accounts and consolidated financial statements, 2013/34/ ec on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, 2013/56/ec on statutory audits of annual accounts and consolidated financial statements. directive 43 has introduced a new quality of financial auditing and of the audit profession in europe. due to the globalization of the economy and the resulting growing risk of global crises and due to the role statutory auditors play in ensuring the security of business trading, this directive is constantly evolving. in recent years, the most important changes in this directive have resulted from the passing of the directives 2013/34/ec and 2014/56/ec of the european parliament and of the council. directive 34 came into effect on 20 july 2013 and imposed on eu member states the obligation to adjust their national laws to its regulations no later than by 20 july 2015. its provisions introduce simplifications regarding the smes sector, which will contribute to reducing administrative burden and costs of micro and small businesses (in accordance with the programme of the european commission ‘smart regulations in the european union’ and the strategy ‘europe 2020’). at the same time they affect the decline in demand for statutory audit of financial statements. according to some researchers (maciejewska 2014; m. ślebzak, k. ślebzak 2014, 2–6), over a longer period of time these changes may constitute a threat to the security of business trading and at the same time exert a negative inf luence by reducing the quality of financial reports and tax collection. moreover, the changes resulting from the directive have an impact on the reporting delivered by entities: they define the minimum disclosure requirements for small entities, the manner and extent of disclosures made under the notes and the report of activities, expand the scope of the report on the activities of public interest entities by the statement m. ciechan-kujawa68 of the conformance with the principles of corporate governance, as well as introduce a reporting obligation for large units and public interest entities concerning payments to governments (the country-by-country reporting system). on 27 may 2014 a legislative packet concerning financial audit was issued in the official journal of the european union. it contains directive 56 and regulation 537. the provisions of the directive are intended also to strengthen the independence of statutory auditors and audit firms, to improve the quality of audits conducted within the european union, to strengthen the public oversight of the audit profession and activities of audit firms, to tighten the regulations for statutory auditors and audit firms examining public interest entities. the provisions of the directive 56 must be implemented into the national law of the member states. the deadline to implement the provisions of the directive and the regulation is two years from their date of entry into force, i.e., until 16 june 2016. the approach to deregulation of the accounting and financial professions nevertheless, the changes in the regulations on access to professions are also important for the development of the finance and accounting services market. the general approach to the regulations in the scope of accounting differs depending on the country, ref lecting the importance of strong traditions and different historical evolution of these professions. some countries of the european union, such as, for instance, the czech republic, malta, norway, belgium, greece, hungary, italy, austria, luxembourg, france, and romania, have regulations. the differences in regulatory approaches generally result from a clear distinction between audit services and accounting services as well as from different perceptions of independence, quality and verification (commission 2013, 18). some eu member states do not see the need for independence, indicating that financial and accounting services are generally outsourced, and the service provider is in any case obliged to comply with the accounting standards. however, some opinions appear on the need for analysing services that are provided by unqualified accountants, and these services may be associated with the possible responsibility of the business to third parties and the need for their regulation to protect the public interest. these services include all services that cover the entity-service provider-report reader relationship. some member states are of the opinion that in order to assure the quality of financial and accounting services, voluntary or compulsory qualifications of persons professional financial and accounting services… 69 providing such services are necessary (for example, in malta), as well as restrictions concerning the legal form and/or shares possessed (for instance, in belgium, austria, italy, france, the netherlands, or in the czech republic). in poland, the act on facilitating access to perform certain regulated professions came into force on 10 august 2014. the so-called second tranche deregulates nine professions of the financial market. in the scope of financial and accounting services the changes concern in particular the following: ■ in the scope of bookkeeping services the requirement of the possession of related higher education or completed postgraduate studies in accounting was abandoned. also, the requirement of the state examination was abandoned and was replaced by the market self-regulation of bookkeeping services. ■ in the case of statutory auditors, access to the profession is facilitated, among other things, by recognising the theoretical basis of related and completed higher education covering in its scope the knowledge required in the qualification procedure, the reduction of the mandatory re-training of auditors. ■ deregulation in the tax consultant profession aims to reduce the scope of tax advisory services at present reserved only for certain groups of subjects. some services rendered to taxpayers, such as, for instance, providing advice, opinions and explanations in the scope of taxes, customs duties, administrative enforcement matters relating to these duties, keeping booking, tax and other records, preparing tax returns and providing assistance in this regard will be almost completely deregulated. the impact of the legislative changes on the accounting and financial services market in the european countries – research results the partial legislative changes in the scope of providing certain financial services have already been introduced in some european countries, for example, in 1994 they were introduced in the united kingdom, in 2006 in denmark, in 2007 in finland. in 2008 they were introduced in sweden and malta. however, the consequences of these changes in regulations have not been researched comprehensively. the most extensive study was conducted in sweden. what was reported in other countries were unmet expectations of the effects of deregulations in the range of increased customer orientation, innovation in serm. ciechan-kujawa70 vices (kinney 2005; seow 2001; sou 2008, 32), or only selected aspects were considered such as, for example: implications for rates and scope of services (mcmeeking et al., 2007), the concentration of the auditing market (basioudis, ellwood 2005) internal work processes and systems for the management and control of audit firms (pierce, sweeney 2004). researchers explain the lack of significant observed changes in the strategy of service providers by high demand for accounting services currently delivered (tabone, baldacchino 2003; chung, narasimhan 2001) and by oligopolistic behaviours of audit firms, such as collusions or imitations (moizer, turley 1989). the studies conducted in sweden showed rather moderate changes resulting from deregulation, however, the following were observed: a slight trend toward greater cooperation with customers, no significant changes in the structure and processes of entities, no openness to the introduction of new services, minor changes in the approach to promotion of services and an increase (and not the expected decrease) in prices. the researchers emphasize the occurrence of certain inertia in response to the market deregulation (the studies were carried out immediately after the deregulation of 2009) and they indicate that the changes were rather conservative adjustments rather than a radical transformation of the finance and accounting services market in sweden (ahlberg et al., 2011). the impact of regulation on access to professions on the key indicators such as quality of service, remuneration of professionals, prices for consumers and the overall impact on employment has already been researched in some countries, but in relation to a wide range of business services. in several of these studies (kugler, sauer 2005) it was concluded that it is impossible to demonstrate the correlation between regulation of access to professions and the quality of service. the outcome of other studies (kleiner, krueger 2013) indicate that the average salary of professionals performing regulated professions is much higher than in non-regulated professions, and that the introduction of regulated access to a profession increases earnings of its representatives. therefore, there exists a risk that such an increase in earnings will translate into prices to the detriment of people using such services. as follows from surveys conducted in germany (plantl et al., 2009), regulating professions may adversely affect the mobility of professionals, since it does not allow them to respond quickly to emerging opportunities in the labour market. it is also emphasised that capital requirements existing in some countries limit the creation of multidisciplinary professional firms as well as the choice of financing and business models for professional financial and accounting services… 71 companies, and thus may hinder innovation in services, have a negative impact on prices of services and competitiveness of these services. justification the need for research on the polish market in the context of such broad legal changes the author assumes a significant impact of the above on both the competitive potential of entities and on the quality, competitive pricing and innovative services. similar to the studies conducted in sweden, is important to recognize the methods of absorbing legislative changes, also – an issue that has not been researched yet – the internal and external conditions of absorption as well as their impact on the quality, price competitiveness and innovation services. this last issue was the subject of research in the united kingdom, as part of broader research on innovative professional business services. the analyses conducted showed that among the barriers to innovation in professional financial and accounting services, a key role is ascribed to the regulation of the activity and besides to strong functional specialization, the negative balance of costs and benefits and also to the organizational culture of companies providing financial and accounting services based on a high tendency to risk avoidance (the role of innovation 2013). in this sector it is indicated that regardless of the size of the entity both aspects: the value for money and efficiency in adapting to changing individual needs of enterprises and the guaranty of delivering expert services best in its class and based on the knowledge of the market on which the entity operates are equally important. the outcome of the research leads to a conclusion that there is a mismatch between customer perception and the reality of innovation of services in this sector. therefore, what needs to be explained is the matter of the concept and perception of innovation in this sector. the specificity of financial and accounting services seems to require also (especially in the context of the legislative changes introduced) a wider analysis of the concept and quality attributes, as well as of the costs and effects of assuring quality and of a failure to assure quality. for decades competence and independence (ethics) (deangelo 1981) have been indicated as the key attributes of the quality of professional financial and accounting services. however, until now researchers have not answered the question of whether the quality of professional financial and accounting services ought to be measured by means of the level of quality in the strict sense (proper performance of the service – that means consistent with the contract and/or the applicable standards m. ciechan-kujawa72 set out clearly in the regulations, standards, and codes), or – as it is in the case for other professional services (rogoziński 2012, 379) – in the broad sense that includes in the definition of quality such elements as the perspective of the service provider and the perspective of the service recipient, as well as the dependence in the dyadic relation between the service provider and its recipient and the market network connections. therefore, when assessing the quality of financial and accounting services in a broader sense, the concept of a syncretic quality can be considered (taking into account both the expectations of the client and the professionalism of the service provider) which represents the result of the quality of the evidence, the quality of perception, and the quality of relationships. the systematization of this knowledge is so significant that – as indicated by the researchers – the quality of financial and accounting services provided is essential for their value (watts, zimmerman 1981), and, as indicated by some authors, it is value that shapes demand for them. the role of modern financial-accounting services should be providing useful information to the entity and its various stakeholders to be applied when making economic, social and environmental decisions, and when checking whether the entity fulfils its responsibility for the sustainable development of the organization (gray 2011, 11). the relation of the quality of financial and accounting services and perception of their value by customers and other stakeholders is important from the point of view of the legislative changes but is insufficiently recognized by empirical studies. the relation requires, in particular, the analysis of the conditions and mechanisms that shape it. it should be the subject of the research both in the context of the impact of quality on the indicators of the development of the entity and the security of business trading. the debate on the regulation of the accounting profession highlights the following issues of public interest: the need to protect the consumer, the independence of the profession, the quality of services, the avoidance of tax evasion and money laundering, as well as professional secrecy. therefore, it seems reasonable to consider within research such issues as removing or reducing the requirements for access to financial and accounting professions in poland (based on european solutions) may affect the economic and social costs/benefits identified at the level of economic entities, their stakeholders and the economy. the non-uniform approaches to the range of the regulation of financial and accounting services can affect different levels of cost/socio-economic benefits, which, as indicated in commission staff working document (2013) has not been examined so far. the polish government assumes that the solutions professional financial and accounting services… 73 to heighten access to regulated professions will increase competition, resulting in a reduction in prices, higher quality and greater availability of services. as well as the changes will have a positive affect on increasing the amount of new jobs. moreover, deregulation will reduce the burden of running a business. the government justifies, that current regulations of the accounting profession were an insufficient motivator for companies to identify customer needs and adapt its offer to their needs and develop new products and services (komentarz 2014). therefore, the assessment of the polish solutions in the scope of deregulation (with regard to applicable direct, indirect regulation and self-regulation), as well as the impact of introduced deregulations on the opportunities and threats to the sustainable development of economic entities and on the security of business trading can be really innovative. some of the aspects were to a greater or lesser extent researched separately in poland. they covered either selected aspects or selected services in the field of accounting and concerned (świderska et al., 2010; dobija 2014; boguszewski 2012). based on the analysis of previous studies the following research hypotheses can be assumed: 1. the deregulation of financial professions and the new eu directives impact the level of the quality, innovation, price competitiveness of financial and accounting policies, and changes in the strategy of their providers on the polish market. 2. the level of the quality, innovation and price competitiveness of professional financial and accounting services impact the trends in shaping the security of the indicators of business trading. 3. the level of the quality, innovation and price competitiveness of professional financial and accounting services impact the trends in shaping the indicators of sustainable enterprise development. 4. assurance of or a failure to assure the quality of professional financial and accounting services creates opportunities and risks for entities and their stakeholders impacting the perceived value of services and thereby increasing gains (benefits) and socio-economic losses (costs).  conclusions the quality of financial and accounting services can have considerable economic and social consequences resulting from wrong decisions taken on the basis of unreliable, incomplete, untrue and inadequate data supplied to internal or external stakeholders. both accounting and the process of financial data prepm. ciechan-kujawa74 aration are becoming more complex. introducing innovative business models creates demand for the development of information systems for financial and management accounting supporting the evaluation of their effectiveness. data preparation processes are becoming more complex, and their interpretation more complicated. the demand for some services also stems from the asymmetry in the access to information of various stakeholder groups. this is particularly important in relation to issues which may impact the entity’s the ability to unthreatened functioning and its development potential which may include, for instance, the compliance of the entity with legal regulations and generally accepted standards, the level of the consideration of the needs and expectations of various stakeholders and the effectiveness of their satisfaction, the effectiveness of the allocated resources and the effectiveness of the action undertaken (ciechan-kujawa 2014b). the question about facilitated access to the profession resulting from the deregulation and its impact on the competence of service providers remains vital. thus, the context of the current extensive legislative changes as well as a systemic recognition of the importance of professional financial and accounting services for businesses, stakeholders’ decisions and socio-economic effects of these relations requires comprehensive studies. the research should concern the determination of the impact of legislative changes in the area of deregulation of financial and accounting professions and the new european union (eu) directives on the development of the professional finance and accounting services market, as well as the consequences of these changes for a broad range of recipients, in particular economic entities and their stakeholders. the main directions can be defined as follows: 1. identifying opportunities and threats arising from the legislative changes (in particular, the deregulation of professions and the new eu directives) and explaining the mechanisms of the impact of these changes on the competitive potential of financial and accounting services as well as the conditions and methods of its absorption. 2. determining the strength, scope and nature of the impact of the effects of the legislative changes in professional financial and accounting services on the operation and sustainability of modern enterprises and the security of business trading. 3. identifying the conditions, explaining the formation of mechanisms and defining the category of socio-economic effects resulting from assuring or a failure to assure quality of professional financial and accounting services. professional financial and accounting services… 75  references ahlberg, j., yrjö collin, s., & lazarevska, a. 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(2013). klasyfikacja usług wykonywanych przez biegłych rewidentów. copernican journal finance & accounting, 2(2), 203–214. http://dx.doi. org/10.12775/cjfa.2013.024. cjfa_1_2015_przed_drukiem.pdf copernican journal of finance & accounting copernican journal of finance & accounting e-issn: 2300-3065 p-issn: 2300-1240 volume 4 issue 1 2015 biannual nicolaus copernicus university editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: secretary: dr damian walczak scientific council prof. dr. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. dr. juan-antonio mondéjar-jiménez, universidad de castilla – la mancha, spain poland prof. dr. sandra isabel gonçalves da saúde, instituto politécnico de beja, portugal s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk p o l i s h p r o o f r e a d e r : e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : list of reviewers prof. dr. catherine deffains-crapsky, université d’angers, france prof. dr. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. dr. natalia konovalova, riseba university, riga, latvia prof. dr. adalmiro pereira, politécnico do porto, portugal prof. dr hab. jan turyna, uniwersytet warszawski, warsaw university, poland poland dr tomáš heryán, silesian university, school of business administration, czech republic c o v e r d e s i g n : the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 i dystrybuowane w wersji editorial office phone: + 48 56 611 46 34 (mgr agnieszka ), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl address of the publisher phone +48 56 611 40 10, kontakt@umk.pl, www.umk.pl print: drukarnia wn umk, printed in 300 copies icv 2013: 6.9 table of contents leszek dziawgo introduction ........................................................................................................................... 7 a solution to eradicate jobless growth: meritocracy ....................................................... 9 the structural analysis of construction sector of turkey and its effect on the selected macroeconomic indicators .................................................................. 27 sustainable development in norway on the example of government pension fund global ................................................................................................................................... 45 transnational corporations in the world economy: formation, development and present position .................................................................................................................. 55 s gatala economic region of azerbaijan) ......................................................................... 71 t ...................................... 83 comparative analysis of the bail-in tool .......................................................................... 97 imbalanced liquidity risk management: evidence from latvian and lithuanian commercial banks ........................................................................................................... 109 the analysis of the capacity of the selected measures of decision-making models in companies .................................................................................................................... 131 credit risk measures – a case of renewable energy companies ............................... 147 estimated values: the provisions and the write-downs of assets as tools ................................................................ 157 risk in providing accounting services in the context of new regulations regarding liability insurance ( ) in poland ................................................................................... 173 for authors ......................................................................................................................... 187 for authors peer review processpeer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors124124 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, focus and scope of the journal, its target group and rules of cooperation with authorsits target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within for authors 125125 the specified time frame (sending a printed version of the article is not necessary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the jour nal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions #authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethicspublication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publica for authors126126 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. the detailed ethical principles are outlined on the website of the journal http://apcz.umk.pl/czasopisma/index.php/cjfa/pages/view/etyka. the journal’s ethical principles are based on code of conduct and best practice guidelines for journal editors edited by committee on publication ethics: https:// publicationethics.org/. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz-kuzioła) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl for authors peer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 29 may 2013 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct personal relationship holding between the reviewer and the author (in particular, such relationships as kinship of the second degree, or marriage), relationships resulting from professional dependence or from any scientific cooperation conducted within two years preceding the year in which the review was made, ■ a written review explicitly states the conditions on which an article should be accepted for publication or informs of rejection, ■ the qualification criteria and a review form are available at the journal’s website, ■ names of reviewers who evaluated specific publications or issues are not disclosed. based on the evaluations received from reviewers the editorial board decides whether the article should be accepted for publishing, rejected or returned to the author for revision. for authors238 after the reception of the reviewers’ comments, the author is obliged to respond within a time period specified by the editorial board. failure to meet a specified deadline will be deemed as resignation from publication. focus and scope of the journal, its target group and rules of cooperation with authors the copernican journal of finance & accounting is a scientific journal created by the department of finance management and the department of accounting in the faculty of economic sciences and management of nicolaus copernicus university in toruń. the journal serves for the development of the science of finance as a forum of presentations and analyses of scientific working papers in the scope of finance and accounting in the international dimension. it is dedicated to theoreticians and also practitioners who decided to meet a challenge of obtaining scientific degrees in finance. since 2014, the copernican journal of finance & accounting publishes articles (in english language only) on issues related to finance and accounting. articles submitted for publication should be original and not published anywhere before and should not be the subject of any qualification procedure for publication in any other journal of any other publisher. in accordance with the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals submitted texts should be scientific works, which means an article presenting the outcome of original research that is empirical, theoretical, technical, or analytical in its nature and containing the title of the publication, authors’ names with their affiliation, presenting the current state of knowledge, research methodology, the course of the research process with its results and conclusions, and the literature cited in it (bibliography). a condition for accepting a text for the publishing process entails following absolutely the editorial standards included in the editorial requirements file as well as sending in to the address of the editorial office a completed and legibly signed submission form. articles that do not fulfil the formal requirements will not be accepted for editorial processing and the materials sent in will not be returned to the authors. the text of the article should be sent in only in electronic form through the umk journals platform or to the following e-mail address: cjfa@umk.pl within the specified time frame (sending a printed version of the article is not necesfor authors 239 sary). any graphs, figures, etc. that constitute part of the electronic text must be included in separate files (for instance, in excel files). an author submitting an article electronically will receive email confirmation of acceptance and of entering the review process. the editorial board reserves the right to choose articles for publication in the copernican journal of finance & accounting and to shorten the text and make amendments in it without the author’s consent. the criteria for selection are the quality and the subject relevance to finance and accounting. after receiving confirmation of acceptance for publishing, the author should send in a printed and signed agreement with the author to publish an article. authors of articles published in the copernican journal of finance & accounting do not receive any financial payment. the detailed editorial requirements are outlined on the website of the journal http://wydawnictwoumk.pl/czasopisma/index.php/cjfa/about/submissions#authorguidelines. authors are asked to find out whether specific bibliographical entries have their doi numbers. doi numbers can be checked on the website: http://www.crossref.org/guestquery/ publication ethics with a view to ensuring scientific reliability the editorial board of the copernican journal of finance & accounting makes efforts to publish works that meet ethical norms applied in science. in accordance with the recommendations of the ministry of science and higher education any cases of unreliability and dishonesty (e.g., ‘ghostwriting’ and ‘guest authorship’) identified by the editorial board will be documented and exposed by informing appropriate bodies (institutions employing authors). explanations of the terms ‘ghostwriting’ and ‘guest authorship’ as defined by the ministry of science and higher education (source: http://www.nauka. gov.pl/): ■ ‘ghostwriting’ is qualified cases in which someone has made a substantial contribution to publication, without revealing his participation as one of the authors, or without being mentioned in the acknowledgments included in the publication. ■ ‘guest authorship’ (‘honorary authorship’) happens when someone did not contribute at all or hardly contributed to the creation of a publicafor authors240 tion; however, despite that fact his/her name is provided as an author/ co-author of the publication. in order to prevent such unfair practices each submitted article with more than one author should be accompanied by a declaration filled in and signed by the authors. the declaration is intended to eliminate cases of ‘ghostwriting’ and ‘guest authorship’ (the declaration is part of the submission form). in the case of a submitted article which during its preparatory phase was supported financially by an external institution, the author is obliged to insert information about such a fact in the introduction of the article. editorial office copernican journal of finance & accounting ul. gagarina 13a, 87-100 toruń phone + 48 56 611 46 34 (contact mgr agnieszka żołądkiewicz) fax +48 56 654 24 93 cjfa@umk.pl www.cjfa.umk.pl cjfa_1_2015_przed_drukiem.pdf introduction looking for solutions in the world of growing social, political and economic tensions and turmoil, there is a lot of place for talented and hard-working scientists, especially specialized in economics, finance and management. society and economy expect from us, that modern science will be more engaged in creating more human, but also economically effective better world. in my opinion, the expectations are fully justified. meeting public expectations is exactly what our scientific challenge is. to gain the strong public support for science, especially for public expenditures for science, we should provide solutions to problems. “copernican journal of finance & accounting”, as a perfect forum for scientists and practitioners to exchange ideas and experience, offers excellent opportunities also for scientific co-operation and presentation of specific solutions in international dimension. we invite you to take advantage of this opportunity. editor in chief professor leszek dziawgo copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: june 26, 2015; date of acceptance: october 20, 2015. * contact information: hakan.celikkol@dpu.edu.tr, dumlupınar university, faculty of economics and administrative sciences, department of business administration, kütahya/turkey, phone: +90 274 2652031 (2058). ** contact information: fatma.kose@dpu.edu.tr, dumlupınar university, faculty of economics and administrative sciences, department of business administration, kütahya/ turkey, phone: +90 274 2652031 (2066). çelıkkol h., & köse f. (2015). swot analysis of turkish energy market in the context of electricity market. copernican journal of finance & accounting, 4(2), 27–41. http://dx.doi.org/10.12775/ cjfa.2015.014 hakan çelıkkol* dumlupınar university fatma köse** dumlupınar university swot analysıs of turkısh energy market ın the context of electrıcıty market keywords: turkish energy market, electricity market, liberalization, swot analysis of turkish energy market. j e l classification: g18, l11, q4. abstract: electricity energy is an indispendable part of life with continuously improving technology. growth of the sector is unavoidable due to the increasing need of electricity. properly functioning market structure is also important to attract investments in the sector. therefore, plenty of steps are taken and essential changes are being done. even though progress has been made in regards to the process that starting with the electricity market law and aims to have an electricity market that is clear, reliable, competitive, and integrated with electricity markets of other countries, it has not yet reached this desired goal. therefore, turkish energy market was decided to establish the name of more liberal and more reliable electricity market. only electricity trading is going to be done in this market at the first step. hakan çelıkkol, fatma köse28 purpose of the study is determining of potential changes in the market after turkish energy market foundation. for this purpose, primarily current situation of electricity market is mentioned to understand changes that will happen in the market. finally, weaknesses, strengths, threats and opportunities for electricity market are tried to specify by swot analysis.  introduction with technological advances, demand for electricity has been growing throughout the world. the increase in demand involves new investments; also it increases financial burden that required for such investments. in this context, it is observed that the adoption of liberalization in many countries, to take over the burden of high-cost electricity investment from public and in order to create more liberal market. in this context, energy stock markets have been begun to establish that electricity trade can occur at more regular structuring and in realistic prices. in parallel to the developments in the world, it is decided to marketization of electricity market in turkey, too and steps are being taken towards the privatization of publicly owned facilities in the structure that the public discharge the oversight and control activities effectively and observe the security of supply. moreover, foundation of turkish energy market is decided and energy market management company (epi̇aş) was founded on 18 march 2015. in the study, swot analysis of turkish energy market was made in the context of electricity market. the research methodology and the course of the research process firstly, summary of literature was presented. development of the electricity market in turkey and situation of electricity market before epi̇aş was respectively explicated. turkish energy market (epiaş) was clarified and then researched thoroughly by swot analysis. advantages, weaknesses that the energy market has, opportunities which can be obtained and threats that might be encountered have been evaluated with a general perspective. summary of literature relevant studies about the subject could be mentioned as follows; pagdett (1992) express single european energy market in the study, christie et al. swot analysis of turkish energy market in the context… 29 (1998) viewed the energy market in norway and sweden in the context of congestion management. sioshansi (2005) defines electricity market reform and examine the issues despite considerable progress in understanding electricity markets. shirmohammadi et al. (1998) define a system of advanced analytical methods and tools for secure and efficient operation of power systems in emerging energy markets in the study called “transmission dispatch and congestion management in the emerging energy market structures”. duke and kammen (1999) evaluate three energy-sector market transformation programs in the study that titled “the economics energy market transformation programs”. also, conejo et al. (2005) and oberndorfer (2009) studied about the energy prices. the subject of energy market is a new matter for turkey that come to the fore. accordingly, when making a literature review, limited availability of studies are about regulations of energy markets, operating these markets and also electricity trading. erten, (2012) define structure of energy market management company and its milestones. in addition to these, all the past, current and future practices of electricity trading are explained. çiftlik, (2010) determines that energy market has a potential to be a huge market that gets attention both domestic and foreign investors. karagöl and mıhçıokur, (2013) focus formation of electricity market in turkey and expectations from epi̇aş. they also show turkish enegy outlook and instances other energy markets in the world. atiyas (2006), kavak, (2009) studies liberalization of the electricity sector and new role of the state in the electricity sector in turkey. poyraz (2009) shows developments about the electricity competition and regulation in turkey. development of the electricity market in turkey the electrical activities are divided into three main groups including production, transmission and distribution. up to 1990, all activities in the electricity sector in turkey was performed turkey electricity authority (tek) that was founded by law no. 1312 issued in 1970 as a vertical integrated public enterprise. tek was split into two parts turkish electricity generation and transmission company (teaş) and turkish electricity distribution company (tedaş), however there has not been a significant change in the basic structure of the sector (atiyas 2006; demirci 2010; reel 2010). after the official announcement of candidacy for eu membership in 1999, many legal and instituhakan çelıkkol, fatma köse30 tional changes are made pursuant to eu harmonization, electricity market law (epk) that is compatible with union energy acquits has been published in 2001. the law has reshaped not only the relations between the attenders of public electricity sector but also the relations between other sectors of the economy, too (başaran 2010). teaş was replaced by newly configured electricity generation co. (eüaş), turkey electricity transmission co. (tei̇aş) and turkey electrical contracting and trade inc. (tetaş). electricity distribution function of tedaş has been divided into 21 region within privatization (www.accenture.com, 2014; www. tedas.gov.tr, 2014). structural changes in the turkish electricity market are shown in figure 1 from 1970 to present. figure 1. structural changes in turkish electricity market (1970 – ) source: www.epdk.org.tr, 2014. the regulatory authority (epdk) was founded with epk in 2001, tender procedure was left and generation or trading possibilities are enabled to entities which can operate in the market providing that obtaining license from epdk (kavak 2008). in the framework the liberalization efforts, it has started the process of privatization of electricity generation and distribution, following making the required reforms in the sector (uluatam 2011). situation of electricity market before energy market (epi̇aş) electricity market is composed of spot market that consists of day ahead market and balancing market, bilateral agreements and futures market. 80% – 85% of the electricity spot market trading occurs at bilateral agreements, 10–15% is in the day ahead market and the rest are at the real-time balancing market. bilateral agreements are commercial treaties which are made between the natural/legal people and license holders or between legal people themselves who are license holders, subject to private law sanctions about electricity and/or capacity trading, not subject to the board approval. although the concept of the spot market describes instant physical trading, operations are performed before a given period of delivery in the absence of instant delivery of electricity. for this reason, the electricity markets in many countries work as a system that is called day ahead market in which the physical deliveries of transactions are performed a day earlier. briefly, day ahead market is a market that enables planning the electricity production and consumption for the next day, a day in advance. the current system is the day ahead market in turkey, too and teias is responsible for the functioning of this market (yücel 2012; sağlam 2012). in the transition time of day ahead market system, day ahead planning system was implemented. changeover was made to day ahead market on 1 december 2011(tei̇aş 2012; faaliyet raporu, karagöl and mıhçıokur 2013). day ahead market expresses organized wholesale electricity market that is founded for electricity purchase and sale processes on the basis of settlement period will be delivered one day after and operated by market financial settlement center (pmum). participants operating in the electricity market have been able to more flexible trading environment with day ahead market mechanism. electricity futures contracts began to be traded in turkish derivatives exchange for the first time in turkey. "vob-base load electricity futures contract" began to be dealt on 26 september 2011. in 2013, all stock exchanges in turkey are gathered under a single roof at borsa istanbul. since then, base load electricity futures contracts are in the scope of main market of electricity futures (www.borsaistanbul.com; karan 2013). a new era has begun in the electricity market with the new electricity market licensing regulation dated november 2, 2013. new licensing regulation that entered into force on march 30, 2013 and prepared to shape the implementation of the new electricity market law no. 6446 has made significant changes in many areas from the market structure to the obligations of the license holders and from epdk’s authorizations to the energy market. decision on foundation of turkish energy market (epi̇aş) is the most important change. turkish energy market (epi̇aş) 2001–1994–20011970–1994 tek teaş eüaş tei̇aş tetaş tedaş 21 region s ou r c e : www.epdk.org.tr, 2014. the regulatory authority (epdk) was founded with epk in 2001, tender procedure was left and generation or trading possibilities are enabled to entities which can operate in the market providing that obtaining license from epdk (kavak 2008). in the framework the liberalization efforts, it has started the process of privatization of electricity generation and distribution, following making the required reforms in the sector (uluatam 2011). swot analysis of turkish energy market in the context… 31 situation of electricity market before energy market (epi̇aş) electricity market is composed of spot market that consists of day ahead market and balancing market, bilateral agreements and futures market. 80%–85% of the electricity spot market trading occurs at bilateral agreements, 10–15% is in the day ahead market and the rest are at the real-time balancing market. bilateral agreements are commercial treaties which are made between the natural/legal people and license holders or between legal people themselves who are license holders, subject to private law sanctions about electricity and/or capacity trading, not subject to the board approval. although the concept of the spot market describes instant physical trading, operations are performed before a given period of delivery in the absence of instant delivery of electricity. for this reason, the electricity markets in many countries work as a system that is called day ahead market in which the physical deliveries of transactions are performed a day earlier. briefly, day ahead market is a market that enables planning the electricity production and consumption for the next day, a day in advance. the current system is the day ahead market in turkey, too and teias is responsible for the functioning of this market (yücel 2012; sağlam 2012). in the transition time of day ahead market system, day ahead planning system was implemented. changeover was made to day ahead market on 1 december 2011(tei̇aş 2012; faaliyet raporu, karagöl and mıhçıokur 2013). day ahead market expresses organized wholesale electricity market that is founded for electricity purchase and sale processes on the basis of settlement period will be delivered one day after and operated by market financial settlement center (pmum). participants operating in the electricity market have been able to more flexible trading environment with day ahead market mechanism. electricity futures contracts began to be traded in turkish derivatives exchange for the first time in turkey. “vob-base load electricity futures contract” began to be dealt on 26 september 2011. in 2013, all stock exchanges in turkey are gathered under a single roof at borsa istanbul. since then, base load electricity futures contracts are in the scope of main market of electricity futures (www.borsaistanbul.com; karan 2013). a new era has begun in the electricity market with the new electricity market licensing regulation dated november 2, 2013. new licensing regulation that entered into force on march 30, 2013 and prepared to shape the implehakan çelıkkol, fatma köse32 mentation of the new electricity market law no. 6446 has made significant changes in many areas from the market structure to the obligations of the license holders and from epdk’s authorizations to the energy market. decision on foundation of turkish energy market (epi̇aş) is the most important change. turkish energy market (epi̇aş) as in other markets, price is formed by supply and demand equilibrium in the energy markets, too. in a free competition market, changes in demand and supply are effective on the formation of prices, also they have a determining role on the investment decisions. however, as price formation depends to free competition market, it depends on the rules that apply to these markets. foundation of energy market is planned by the new electricity market law dated march 30, 2013. and after some problems encountered, epi̇aş was officially established on march 18, 2015. epi̇aş conducts activities of operating organized wholesale electricity markets within market operating license except the markets which are operated by tei̇aş and bi̇st. in addition, it conducts financial settlement operations of organized wholesale electricity markets that are operated by tei̇aş within market operating license and other financial transactions. electricity has priority at turkish energy market. besides, it is expected to include natural gas, coal and carbon in medium and long term. electricity market is divided into three by the new electricity market law: the first is spot market operated by epi̇aş, the second is balancing power market directed by tei̇aş and the third one is the derivative markets operated by bi̇st (karagöl and mıhçıokur 2013). new structure of the electricity market is shown in figure 2. at the first step, epi̇aş will serve as a spot market where trades only the electricity. in addition to this, derivatives on electricity trading will continue to be dealt in bi̇st. while intraday market specified under the control of pmum gets involved to epi̇aş, pmum’s experience, knowledge, software and information technology systems will be transferred to epi̇aş in the new structure (karagöl and mıhçıokur 2013). swot analysis of turkish energy market in the context… 33 figure 2. structure of turkish energy market as in other markets, price is formed by supply and demand equilibrium in the energy markets, too. in a free competition market, changes in demand and supply are effective on the formation of prices, also they have a determining role on the investment decisions. however, as price formation depends to free competition market, it depends on the rules that apply to these markets. foundation of energy market is planned by the new electricity market law dated march 30, 2013. and after some problems encountered, epi̇aş was officially established on march 18, 2015. epi̇aş conducts activities of operating organized wholesale electricity markets within market operating license except the markets which are operated by tei̇aş and bi̇st. in addition, it conducts financial settlement operations of organized wholesale electricity markets that are operated by tei̇aş within market operating license and other financial transactions. electricity has priority at turkish energy market. besides, it is expected to include natural gas, coal and carbon in medium and long term. electricity market is divided into three by the new electricity market law: the first is spot market operated by epi̇aş, the second is balancing power market directed by tei̇aş and the third one is the derivative markets operated by bi̇st (karagöl and mıhçıokur 2013). new structure of the electricity market is shown in figure 2. figure 2. structure of turkish energy market source: erten 2012. at the first step, epi̇aş will serve as a spot market where trades only the electricity. in addition to this, derivatives on electricity trading will continue to be dealt in bi̇st. while intraday market specified under the control of pmum gets involved to epi̇aş, pmum’s experience, knowledge, software and information technology systems will be transferred to epi̇aş in the new structure (karagöl and mıhçıokur 2013). envisaged shareholder structure of epi̇aş is aimed to be a private company not a state economic enterprise. the provision of law says “direct and indirect total share of capitals od the public institutions and state-owned companies cannot exceed fifteen percent except bist, council of ministers have a title to increase this rate up to twice” and “the organizations that are shareholders, state-owned companies and bist are represented at epi̇aş management. ”capital of epi̇aş, 61,572,770 tl, was divided to 61,572,770 shares, each of them have 1 tl nominal value and three groups were formed from these shares (table 1). group a shares represents 30% of the capital are reserved for tei̇aş, group b shares represents 30% of the capital are reserved for bi̇st and group c shares represents 40% of the capital are reserved for private sector (http://enerjienstitusu.com). bist also got %4,161 of group c shares, in addition to %30. legal entities which have supply license or generation license in the electricity market and legal entities that are wholesale, import, export license holder or license holders performs retail legal entities in the natural gas market may have group c shares. the minimum numbers of shares that can be owned are 50 thousand (0.02%), the maximum number of shares are 2,462,910 (4%). after the book building phase which lasted until 29 august 2014, total 114 companies have had a share of group c (dünya gazetesi, http://www.dunya.com). table 1. shareholding structure of turkish energy market shareholders groups total share share amount (tl) share rate electricity markets tei̇aş balancing market energy market (epi̇aş) spot market intra day market derivative market otc markets s ou r c e : erten 2012. envisaged shareholder structure of epi̇aş is aimed to be a private company not a state economic enterprise. the provision of law says “direct and indirect total share of capitals od the public institutions and state-owned companies cannot exceed fifteen percent except bist, council of ministers have a title to increase this rate up to twice” and “the organizations that are shareholders, state-owned companies and bist are represented at epi̇aş management. ”capital of epi̇aş, 61,572,770 tl, was divided to 61,572,770 shares, each of them have 1 tl nominal value and three groups were formed from these shares (table 1). group a shares represents 30% of the capital are reserved for tei̇aş, group b shares represents 30% of the capital are reserved for bi̇st and group c shares represents 40% of the capital are reserved for private sector (http://enerjienstitusu.com). bist also got %4,161 of group c shares, in addition to %30. legal entities which have supply license or generation license in the electricity market and legal entities that are wholesale, import, export license holder or license holders performs retail legal entities in the natural gas market may have group c shares. the minimum numbers of shares that can be owned are 50 thousand (0.02%), the maximum number of shares are 2,462,910 (4%). after the book building phase which lasted until 29 august 2014, total 114 companies have had a share of group c (dünya gazetesi, http:// www.dunya.com). hakan çelıkkol, fatma köse34 table 1. shareholding structure of turkish energy market shareholders groups total share share amount (tl) share rate tei̇aş a 18.471.831 18.471.831 %30 borsa i̇stanbul b 18.471.831 18.471.831 %30 the market participants c 24.629.108 24.629.108 %40 source: http://www.dunya.com. when considering gas and oil would be included in the energy market in the future, petroleum pipeline corporation (botaş) and turkish petroleum corporation (tpao) are potential partners of the energy market. swot analysis of turkish energy market in this section of the study, swot analysis of turkish energy market is done. strengths, weaknesses, opportunities and threats of energy market are shown in table 2. table 2. swot analysis of turkish energy market strengths weaknesses – free market – objectivity – realistic pricing – speed – intraday market – qualified personnel – eligible consumer limits – impact of public – highly cost stamp duty – lack of disclosure and monitoring opportunities threats – geographical position – istanbul financial center project – derivatives product range – energy thematic funds – nuclear energy – energy import dependency – impact of public – increasing electricity demand and investment financing – needs of time and sustainability source: the table is formed by authors. brief information is given about strengths, weaknesses, opportunities and threats of energy market at the next part. swot analysis of turkish energy market in the context… 35 strengths free market: in the current situation, spot market transactions are performed by pmum which exist within the structure of tei̇aş. since tei̇aş completely belongs to public, it prevents to operate electricity market within the framework of free market mechanism. the involvement of the private sector in the energy market enables formation of more liberal electricity market. objectivity: due to the fact that tei̇aş belongs to public, it compromises the impartiality of the electricity markets. therefore, market participants take a dim view of electricity trading and avoid from the market. although its objectivity has been stated, participants can not be convinced of that, it also hinders occurring depth in the market. the presence of private sector in epi̇aş management is a significant change. the market that is approved by the participants can be adopted and its objectivity could be accepted. realistic pricing: this new structure that offers more reliable and more transparent environment will allows the formation of realistic prices in the spot and derivatives markets. the markets that gain functionality not only in theory but also in practice be able to reflect the actual price in cooperation with the increase in the number of investors. speed: state-owned projects usually progress very slowly because of bureaucracy and procedures. one of the expectations that come into existence is accelerating of the processes that occur slowly, together with that playing a part of private sector in the structure of epi̇aş shareholder structure. needs and the developments in the electricity market may be answered more quickly and adaptation can be achieved to competitive environment. intraday market: intraday market is a balancing mechanism that situated between day-ahead market and the balancing power market and decreasing the possibility of an imbalance by creating additional buying and selling opportunities for participants. after the closing of the day ahead market, the participants who place a bid can find the opportunity to reorganize the offer according to their production / consumption at intraday market. intraday market works until a few hours left for delivery, so it is important to provide the portfolio balancing opportunities in the short term. the imbalance costs can be reduced with intraday market that provides change to fix the forecast errors (ay 2012). currently, activities are ongoing to implement this application. in this respect intraday market test works created by tei̇aş began in october 2012 for hakan çelıkkol, fatma köse36 the purpose of taking the views of market participants and gaining experience prior to application. acceleration of the process and being implemented of intraday market are expected together with launching of epi̇aş. the presence of intra-day market addition to day ahead market will increase interest in the spot market (köse 2015). qualified personnel: the presence of the staff in the new structure that work in teias and has experience with the system is important. however, it is observed that the large number of qualified staff transitions to the private sector. it is believed that supplying the needs of qualified personnel without causing a loss of time along with involving of the private sector in the market. besides, the shareholder companies may contribute to the formation of more reliable market by transferring knowledge to the system (geniş açı 2013). weaknesses eligible consumer limits: eligible consumer limits is determined by epdk and the consumers who consume more than this limit can choose their suppliers. eligible consumer limit is important because it is acknowledged as a free market indicator. when eligible consumer limit in turkish electricity market was 9 million kwh in 2003, it was reduced to 4 thousand kwh in 2015 (geniş açı 2013, epdk). despite the significant decrease, eligible consumer limit could not be reset due to unhindered illegal using. this case is perceived as a weakness because it is contrary to the free market logic. impact of public: though, the electricity market has gained greatly free market qualifications with the energy market compared to the past. the presence of public shareholders at production, transmission and wholesale market is regarded as a weakness. highly cost stamp duty: additions of different rates of kdv or ötv to the products or services are common enforcements in many countries. but, stamp duty is a tax that is in turkey and not be in other countries which prefer free market model. trading sides are supposed to pay stamp duty in the wholesale or bilateral agreements sales and additional costs from 3% to 6% consist because of the stamp tax in the electricity and natural gas markets. the stamp duty which is paid for per contract in the bilateral agreements decelerates the growth rate of the electrical trade. in order to ensure growth and the depth in the energy market, removal of the received stamp tax from energy trading operations is required (http://www.petroturk.com). swot analysis of turkish energy market in the context… 37 lack of disclosure and monitoring: electricity market in free competition can not develop sufficiently and targeted results have not been achieved. the main causes of these problems are lack of trust and uncertainty caused by lack of trust. accordingly, deficiencies are observed related to public disclosure, monitoring and supervision. the relevant institutions must be independent, accountable and transparent in order to correct this situation with the energy market. also, it should be believed its objectivity and it is under the control of experts (çiftlik 2010). opportunities geographical position: turkey’s geographic position is important in terms of energy as it is in many aspects. the first step will be taken with energy market in order to make turkey not only energy transit line, but also energy traded energy center. an energy market which contains especially neighboring countries can be created. istanbul financial center project: another important point is that the center of epi̇aş will be located in istanbul. in the circumstances, opportunities will be obtained to ensure mutual gains with istanbul financial center project which combines stock exchanges under the same roof in the same city. derivatives product range: although the energy market includes only electrical energy derivative products initially, preparation of the futures contracts on natural gas and oil are planned in the future. therefore, it is expected that diversity of derivative product will increase in progress of time. moreover, the physical contracts are planned to be traded in addition to the cash contracts in the future and it is an important point that will benefit the development of the energy market. energy thematic funds: it is expected to increase the number of energy companies listed on the stock exchange in the future periods thanks to greater cooperation between the energy sector and the capital markets. accordingly, energy thematic funds can be created as the examples that seen in usa, europe and the far east. functioning of derivatives and spot market at the energy market by completing each other is important for the risk management of investors. after working out of energy thematic funds and different types of energy derivatives, risk management in the energy sector can be achieved in many ways. hakan çelıkkol, fatma köse38 nuclear energy: the establishment of station in turkey is important in terms of ensuring diversity resources. it is expected to lead to new opportunities with regards to territorial and regional perspective. threats energy import dependency: one of turkey’s biggest problems is the current deficit and energy import is leading factors that impact on the current deficit. as of 2014 in turkey, the current deficit is about 45.8 billion dollars and energy import is about 54.9 billion dollars. energy dependency poses a major threat obverse of all the developments experienced in the sector. impact of public: the biggest player of natural gas market is botaş. natural gas is used as a source for the majority of electricity generation. as seen in figure 3, botas is effective on the electricity market. as it is seen, the absence of a free natural gas market causes hesitation about totally free electricity market. figure 3. electricity production in turkey according to source rate (sep 2014) funds and different types of energy derivatives, risk management in the energy sector can be achieved in many ways. nuclear energy: the establishment of station in turkey is important in terms of ensuring diversity resources. it is expected to lead to new opportunities with regards to territorial and regional perspective. threats energy import dependency: one of turkey's biggest problems is the current deficit and energy import is leading factors that impact on the current deficit. as of 2014 in turkey, the current deficit is about 45.8 billion dollars and energy import is about 54.9 billion dollars. energy dependency poses a major threat obverse of all the developments experienced in the sector. impact of public: the biggest player of natural gas market is botaş. natural gas is used as a source for the majority of electricity generation. as seen in figure 3, botas is effective on the electricity market. as it is seen, the absence of a free natural gas market causes hesitation about totally free electricity market. figure 3. electricity production in turkey according to source rate (sep 2014) source: http://www.enerji.gov.tr/resources/sites/1/pages/sayi_07/... (accessed: 22.07.2014). increasing electricity demand and investment financing: the continually increasing energy consumption is believed to be doubled in the next 10 years. it is clear that giving priority to the energy investments in order to answer the increased consumption. however, the need of resources required for such investment is a threat in point financing of investments when the lack of capital savings is considered. another important problem related to the subject is the absence of awareness about efficient consumption. needs of time and sustainability: process of restructuring of turkish energy market has taken longer time than planned finish date. time will be needed again in order to coordinate the novelties which will be brought by the energy market to the sector. if the time will pass for the maturation of the market assumes to be equivalent, with the time taken to install, it would be considered a threat. liberalization of the natural gas market as experienced in the electricity market is an important condition to mention the free energy market. when, many activities that are supposed to be done for the development and sustainability of the energy market are considered, it may be taken many years to reach the target point. conclusion energy market (epi̇aş) hosts some of the weaknesses and threats together with the strengths which it have and the opportunities could be offered. it is certain that it would be a market where the price occurs more realistic and gives more confidence to investors in the electricity market according to the previous market structure. the slow functioning processes due to bureaucracy will accelerate, the number of qualified staff will increase and personnel losses can be prevented through the involvement of the private sector. investors will be able to do their trades in the range of longer time by forming intraday market and so there may be an increase in the electrical trade. the advantages of turkey’s 48,11 29,56 16,14 3,34 1,24 0,9 0,710 10 20 30 40 50 60 natural gas coal hydraulics wind fuel oil geothermal others s ou r c e : http://www.enerji.gov.tr/resources/sites/1/pages/sayi_07/... (accessed: 22.07.2014). increasing electricity demand and investment financing: the continually increasing energy consumption is believed to be doubled in the next 10 years. it is clear that giving priority to the energy investments in order to answer the increased consumption. however, the need of resources required for such investment is a threat in point financing of investments when the lack of capital savings is considered. another important problem related to the subject is the absence of awareness about efficient consumption. swot analysis of turkish energy market in the context… 39 needs of time and sustainability: process of restructuring of turkish energy market has taken longer time than planned finish date. time will be needed again in order to coordinate the novelties which will be brought by the energy market to the sector. if the time will pass for the maturation of the market assumes to be equivalent, with the time taken to install, it would be considered a threat. liberalization of the natural gas market as experienced in the electricity market is an important condition to mention the free energy market. when, many activities that are supposed to be done for the development and sustainability of the energy market are considered, it may be taken many years to reach the target point.  conclusion energy market (epi̇aş) hosts some of the weaknesses and threats together with the strengths which it have and the opportunities could be offered. it is certain that it would be a market where the price occurs more realistic and gives more confidence to investors in the electricity market according to the previous market structure. the slow functioning processes due to bureaucracy will accelerate, the number of qualified staff will increase and personnel losses can be prevented through the involvement of the private sector. investors will be able to do their trades in the range of longer time by forming intraday market and so there may be an increase in the electrical trade. the advantages of turkey’s geographical position can be turned into an opportunity in the way of becoming an energy hub. energy market can become a regional energy exchange by including neighboring countries. there are also some weaknesses and threats as highly cost stamp duty, eligible consumer limits, impact of public on tei̇aş, tetaş and eüaş, lack of disclosure and monitoring, non-free natural gas market, energy imports and increasing electricity demand and inadequate investment together with the strengths and opportunities of the energy market.  references accenture, türkiye enerji piyasası, türkiye elektrik piyasasında elektrik ticareti, www.accenture.com (accessed: 10.10.2014). atıyas, i̇. 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(2011). türkiye elektrik piyasasında özelleştirme süreci, ekonomik forum dergisi. yücel, c. ö. (2012). elektrik üretiminde hakim durumun tespiti, uzmanlık tezi, rekabet kurumu, ankara. date of submission: february 7, 2022; date of acceptance: march 20, 2022. * contact information: nusiratgold@gmail.com, department of accounting and finance, kwara state university, malete, kwara state, nigeria, phone: +2348038881402; orcid id: https://orcid.org/0000-0001-8063-5695. ** contact information: aifuwahopeosayantin@gmail.com, department of accounting, faculty of management sciences, university of benin, benin city, edo state, nigeria, phone: +2348113232082; orcid id: https://orcid.org/0000-0001-8908-6637. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 3 gold, n.o., & aifuwa, h.o. (2022). board meeting and sustainability reporting of banks in nigeria. copernican journal of finance & accounting, 11(3), 49–67. http://dx.doi.org/10.12775/ cjfa.2022.013 nusirat ojuolape gold kwara state university hope osayantin aifuwa university of benin board meeting and sustainability reporting of banks in nigeria keywords: board meeting, sustainability reporting, global reporting initiative, listed deposit money banks. j e l classification: m10, m14, m41, m48. abstract: a board meeting is an avenue for directors of an organization to carry out their oversight and monitoring functions as well as discuss and meet the request and needs of the stakeholders. corporate strategies of an organization are taken and implemented when board members meet. leaning on this fact, this study examined the impact of board meetings on sustainability reporting in listed deposit money banks in nigeria. a sample of ten (10) listed deposit money banks from 2014 to 2020 was conveniently selected. descriptive and inferential statistics (panel least squares and logistic regression) was employed to summarize the data and to draw an inference on the population studied. results from both the panel least squares regression and the binary logit regression revealed that board meetings have no significant impact on sustain nusirat ojuolape gold, hope osayantin aifuwa5050 ability reporting of listed deposit money banks in nigeria after controlling corporate administration and firm-level attributes. the study concluded that board meetings do not have an impact on sustainability reporting inf luences sustainability reporting of listed deposit money banks in nigeria. the study recommends that issues on sustainability should be discussed in the board meeting frequently.  introduction introduction sustainability reporting has taken center stage in the heart of businesses across the globe. this is as a result of firms’ social and environmental neglect in the time past. some of the high profile cases of firms environmental and social neglect include: us nuclear catastrophe of 1979, british petroleum (bp) oil spillage in the gulf of mexico in 2010, ukraine chernobyl nuclear power plant explosion in 1986, exxon valdez alaska oil spill in 1989, the bhopal chemical accident india in 1984, the kuwait gulf war oil fire in 1991 (gold, aifuwa, usman, subair, osazebvaru & oloyede, 2021; musa, gold & aifuwa, 2020), nigeria ogoni land and water pollution in 1991 and lonmin markana mining maltreatment of its workers in south africa, to mention a few (abdullahi & makama, 2021). from the foregoing, there has been a wide awareness on the need for firms across the globe to include sustainability strategy into their business model. this entails disclosing their economic, social and environmental impact in addition to the traditional financial reporting, as it affects the community and environment where they operate. the wide awareness on sustainability reporting by firms was as result of the global adoption of the united nation’s – sustainable development goal (musa, gold & aifuwa, 2020) and the voluntary activities of government and non-governmental organizations such as the association of chartered certified accountants (acca), global reporting initiative (gri), the institute of chartered accountants of nigeria (ican), association of national accountants of nigeria (anan), securities and exchange commission (sec), the nigeria stock exchange (nse), the central bank of nigeria (cbn), to promote a sustainable world business and economy (abdullahi & makama, 2021). however, in nigeria, despite the acceptance of sustainability reporting as a corporate strategy for firms to gain competitive advantage and long term survival, there still exists low disclosure rate on social and environmental issues in firms (umukoro, uwuigbe, uwuigbe, adegboye, ajetunmobi & nwaze, 2019). this low disclosure rate on sustainability is due to the nature of the re board meeting and sustainability reporting of banks in nigeria 5151 port being voluntary (aifuwa, 2020). adeniyi and fadipe (2018) argue that the low level of sustainability reporting of nigerian firms is attributed to the ineffective and poor corporate governance practice and mechanisms. corporate governance mechanism such as the board of directors has received wide and robust criticisms in academic literature. specifically, the boards of directors in banks are often argued to be non-compliant and sensitive to economic, social and environmental issues (babalola & adedipe, 2014; iyafekhe, odu & imagbe, 2020a; iyafekhe, aifuwa & odu, 2020b). this could be explained through the theoretical lens of the agency theory of profit maximization for the shareholders, in a bid to maintaining the principal-agent relationship (jensen & meckling, 1996). the vehicle through which the directors in the boards of firms carry out oversight and monitoring function successfully is the board meeting. in the board meeting they discuss and resolve strategic issues that would improve the firms’ competitive advantage and performance (fodio, alhassan & bello, 2021). sustainability issues are also discussed in board meeting and policies are made to meet the need and request of stakeholders of organization (baba & abdulmanaf, 2017). in the literature there are inconsistent findings on the impact of board meeting on sustainability reporting. grigoris (2014); ju ahmad, rashid and gow (2017); falikhatu, wahyuni, nilasakti and niswah (2020), otuya, akporiun, and ofeimum (2019); baba and abdulmanaf (2017) and valentino and nichola (2019) found no evidence on the nexus between board meeting and sustainability reporting. the study of mohammed (2017) evidenced a positive association between a board meeting and sustainability reporting; while fodio, alhasaan and bello (2021) found negative relationship between a board meeting and sustainability reporting. to the best of the researchers knowledge, no study has specifically examined the impact of board meeting on sustainability reporting of banks in nigeria, whilst controlling corporate admiration and firm-level attributes. the financial sector of any economy is considered as its backbone owing to the provision of financial resources; and as such this represents a potential key driver for achieving the transition to an inclusive low carbon and resource efficient economy (okolie & igaga, 2020). these gaps identified in the literature were the motivation for the study. the rest of the paper is organized as follows: section two focuses on the literature review and hypotheses development. section three addresses the method with emphasis on theoretical framework and model specification. sec nusirat ojuolape gold, hope osayantin aifuwa5252 tion four presents data analysis, interpretation and discussion of findings. section five concludes. research methodology and research processresearch methodology and research process sustainability reporting of banks in nigeriasustainability reporting of banks in nigeria the concept of sustainability reporting has been defined by researchers and international organizations as the process of disclosing firms’ economic, social and environmental impact on the geographical location where they operate in a particular period of time (asaolu, agboola, ayoola, & salawu, 2011; awodiran, 2019; gri, 2019; aifuwa, 2020; christofi, christofi & sisaye, 2012; musa, gold & aifuwa, 2020; gold et al., 2021). sustainability report shows firms’ commitment toward meeting the need of stakeholders and improving the performance (aifuwa, 2020). in nigeria, organizations and agencies of government have made great stride to ensure that firms disclose issues on their environmental and social impact, apart from the traditional financial report. organizations such as the institute of chartered accountant of nigeria (ican), association of national accountants of nigeria (anan), the nigeria securities and exchange commission (nse), the central bank of nigeria (cbn and bankers committee and labour unions and trade organizations (abdullahi & makama, 2021). despite these strides made, sustainability reporting is still voluntary and not a listing requirement quoted firms. however, the nigerian banking sector has shown significant and promising prospect to disclosing environmental, social and economic issues (iyafekhe, et al, 2020a). deposit money banks have keyed into this agenda through the nigerian sustainability bank principles (nsbp). the nsbp is a set of standards that was created for the financial sector in nigeria by the central bank of nigeria (cbn) and the bankers’ committee to indicate a pledge to economic growth that is environmentally responsible and socially significant (okolie & igaga, 2020). banks as lenders and business leaders recognize the role they play in conveying positive development impacts to society whilst securing the networks and environment in which they work. board meeting and sustainability reporting of banks in nigeria 5353 board meeting board meeting a board meeting, activity or diligence is a means whereby the directors of firms exercise their monitoring function in the board. a board meeting is a tool used by the board of directors to monitor and control the performance of an organization (baba & abdulmanaf, 2017). according to the nigeria corporate governance code of 2018, principal defined a board meeting as a principal vehicle for conducting the business of board and successfully. section 10 (1) and (2) stipulate that the board of directors should meet at least once in every quarter to effectively and efficiently carry out their oversight and monitoring function. the code also stresses the need for directors to diligently attend the board meeting and treat all matters arising before the next meeting. therefore, board meeting frequency is a significant proxy for a board meeting (vafeas, 1999). in literature there is still an ongoing argument on the importance of the frequency of board meetings on the performance of firms. lipton and lorsch (1992) argue that a regular board meeting improves the boards’ effectiveness in carrying out their oversight and monitoring functions, which in turn increases the transparency in firms. fodio, alhassan and bello (2021) argue that a frequent board meeting is crucial for directors to make effective decision. herremans, nazari and mahmoudia (2016) further argue that a frequent board meeting is an avenue for directors to discuss and interact a firm’s environmental and social disclosure and meet the needs of stakeholders. in contrast to this argument, vafeas (1999) echoed that frequent board meetings show the inefficiency of the board of directors in carrying out their oversight and monitoring functions. vafeas (1999) further argued that frequent board meetings reduce the directors performance. this is because most of the independent directors are involved in other board of firm – outside directorship; thus, they have limited time to perform their board functions properly (jensen, 1993). extending these arguments to this study, a board meeting may improve the extent of environment, social and economic disclosure in listed deposit money banks in nigeria. control variablescontrol variables this study introduced corporate administration and firm-level attributes as control variable of the study. the essence of control variables is to enhance the accuracy of the independent variable in regression to avoid a spurious re nusirat ojuolape gold, hope osayantin aifuwa5454 sult (owolabi & olayinka, 2021). the corporate administration variables introduced include board independence, board size and board member education level, while firms level variables introduced include profitability, firm size and audit quality. these variables have a direct inf luence on sustainability reporting (gold et al., 2021; iyaf khe et al., 2020; musa et al., 2020; owolabi & olayinka, 2021). empirical reviewempirical review in the united states of america, grigoris (2014) investigated the potential effects of corporate governance and financial characteristics on the extent of corporate social responsibility (csr) disclosure focusing on 366 companies in 2011. the environmental, social and governance (esg) disclosure score calculated by bloomberg is used as a proxy for the extent of csr disclosure while board meetings are used as proxy for corporate governance. multiple regression analysis was used to investigate the effect of board size on csr disclosure. the results show that board meetings are not related to the extent of csr disclosure. in the united kingdom, mohammad (2017) examined the inf luence of board composition on sustainable development using (esg) disclosure of three hundred and fifty (350) firms from 2007–2012. secondary data from bloomberg was used by the researcher to provide the weighted csr score based on the level and type of social, environmental and governance information a firm discloses while bm, board meetings, is the number of board meetings per year. the researcher found that that frequency of board meetings is positively and significantly related to esg disclosure. in malaysia, ju ahmad, rashid and gow (2017) examined effectiveness of board meeting frequency on corporate social responsibility (csr) reporting by public listed companies on the main market of bursa malaysia. the study sampled four hundred and fifty (450) firms and employed content analysis in developing csr reporting index, and also utilized the ordinary least squares regression as the inferential statistic. the researchers found out that frequency of board meeting does not significantly affect corporate social responsibility reporting. in indonesia, falikhatun, wahyuni, nilasakti and niswah (2020) investigated the mediating role of financial performance on the effect of sharia gov board meeting and sustainability reporting of banks in nigeria 5555 ernance on sustainability reporting of sharia commercial banks (bus) from 2014–2017. the researchers found out that board of directors meeting has no significant inf luence on the sustainability reporting. in nigeria, fodio, alhassan and bello (2021) examined the effects of board capabilities in terms of female director qualification, environmental expertise of directors, and board activity on environmental, social and governance (esg) practices of fourty-eight (48) listed non-financial firms. they employed the generalized least squares regression as inferential statistics, and found that board activity negatively affects esg practices of listed nonfinancial firms in nigeria. another study in nigeria by otuya, akporien and ofeimun (2019) investigated the inf luence of companies’ governance process on sustainability reporting in nigeria. the researchers used a modified checklist based on sec (2018) sustainability reporting guidelines to examine the level of disclosures by sampled firms for the period 2016 to 2018. findings of the study from regression analysis revealed that board activity has no association with level of sustainability reporting in nigeria. baba and abdul-manaf (2017) examine moderating effect of intellectual capital on the relationship between board governance mechanisms and sustainability disclosure of 80 companies listed on nigerian stock exchange from 2010 to 2015. the researchers proxied board governance mechanisms with corporate board size, board independence, board diversity and board meetings, while the sustainability disclosure index was used to proxy sustainability disclosure. they employed regression as inferential statistics and found out that board meeting was not significantly related to sustainability disclosure. using meta-analytical review, valentino and nicola (2019) analysed the inf luence of corporate governance on environmental, social and governance (esg) disclosure. their study used a sample of 24 empirical studies to clarify the relationship between the number of board meeting with esg disclosure that number of board meetings does not affect the esg voluntary disclosure. theoretical framework and model specificationtheoretical framework and model specification different theories have been used to underpin and explain the association between sustainability reporting and corporate governance mechanism in firms. theories ranging from agency theory, resource dependency theory, legitimacy theory, stakeholder’s theory and the upper echelon theory (fodio et al., nusirat ojuolape gold, hope osayantin aifuwa5656 2021; gold et al., 2021; musa, et al., 2020; olayinka, 2021). however, this study is hinged on the resource dependence theory (pfeffer & salancik, 1978). the theory states that a firm depends on the resources from the environment to survive (fodio et al., 2021). the board of an organization is a resource that plays an important role in establishing the link between the firm and the external environment. a mechanism for the board to successfully achieve this function is through a board meeting. board meetings have been recognized by researchers and organizations as a means of improving the quality of decision taken by directors (iyafekhe et al., 2020b). in relation to this study, ju ahmad et al. (2017) argue that a board meeting is an avenue for directors to discuss, deliberate and make quality decision and policies on environmental, social and economic issues of a firm. flowing from the theoretical framework, the model of the study was stated as: srd = ƒ(board meeting; control variables) (1) in econometric form: srdit = β0 + β1bmit + β2binit + β3bsit + β4belit + β5prfit + β6fsit + β7aqit + εit (2) where: srd = sustainability reporting, β0 = constant, bm = board meeting, bin = board independence, bs = board size, bel = board members’ education level, prf = profitability, fs = firm size, aq = audit quality, β1 = coefficient of explanatory variable, ε = standard error, i = cross sectional (companies), t = time series. a priori expectations for with extant literature noted to be β1 > 0 board meeting and sustainability reporting of banks in nigeria 5757 methodologymethodology to achieve the objective of the study, the study adopted the panel research design. the rationale for this was because of the nature of the secondary data having properties of times series and cross sections. the researcher conveniently selected ten (10) of the fifteen (15) listed deposit money banks in nigeria. the rationale for this was the availability of data. data for the variables of the study was hand-collected from the annual financial statements, banks’ websites and stand-alone sustainability reports of selected listed deposit money banks in nigeria. the study considered seven (7) years from 2014–2020. the period selected was based on the fact that listed deposit money banks have fully implemented and disclosed all reports on sustainabilty reporting with the directives of the nigeria stock exchange (ozordi, eluyela, uwuigbe, uwuigbe & nwaze, 2020; umukoro et al., 2019). descriptive and inferential statistics were used to analyse data. the panel least squares was used to test hypotheses stated. the rationale for this was because the data include properties of time-series and cross-sectional data (aifuwa & okojie, 2015; studenmund, 2014). furthermore, we employed logistic analysis for the robustness check. development of sustainability disclosure index (sdi)development of sustainability disclosure index (sdi) in developing the sustainability reporting index, we used the g4 sector-specific disclosures of the global reporting initiative (gri). the rationale for this is that the general framework focusing on the economic, environmental, and social indicators addresses specific industry needs (ozordi et al., 2020; musa et al., 2021). therefore, based on the content analysis, we developed an unweighted sustainability disclosure index for the economic, environmental, and social performance of the sampled firms. for instance, where the sampled firm fully discloses economic, environmental, and social information, they will be scored 1 otherwise 0 for partial or non-disclosure. stated. the rationale for this was because the data include properties of time-series and crosssectional data (aifuwa & okojie, 2015; studenmund, 2014). furthermore, we employed logistic analysis for the robustness check. development of sustainability disclosure index (sdi) in developing the sustainability reporting index, we used the g4 sector-specific disclosures of the global reporting initiative (gri). the rationale for this is that the general framework focusing on the economic, environmental, and social indicators addresses specific industry needs (ozordi et al., 2020; musa et al., 2021). therefore, based on the content analysis, we developed an unweighted sustainability disclosure index for the economic, environmental, and social performance of the sampled firms. for instance, where the sampled firm fully discloses economic, environmental, and social information, they will be scored 1 otherwise 0 for partial or non-disclosure. therefore, where; sbr = sustainability reporting td = total disclosure (n1 + n2 + n3) n1 = for the economic indicator i n2 = for the environmental indicator i n3 = for the social indicator i m = maximum possible score of 158 the researcher obtained information regarding the board meeting from the annual reports of listed deposit money banks and circulars for the nigeria exchange group. where: sbr = sustainability reporting td = total disclosure (n1 + n2 + n3) nusirat ojuolape gold, hope osayantin aifuwa5858 n1 = for the economic indicator i n2 = for the environmental indicator i n3 = for the social indicator i m = maximum possible score of 158 the researcher obtained information regarding the board meeting from the annual reports of listed deposit money banks and circulars for the nigeria exchange group. table 1. measure of variables variable measurement supporting scholars dependent variable sustainability reporting (srd) gri g4 framework on economic, social, and environmental sustainability disclosure as stated above. iyafekhe et al. (2020a) independent variable board meeting (bm) total number of meetings held by the corporate board. iyafekhe et al. (2020b) control variable board independence (bin) the number of non-executive directors on the board divided by the total number of directors sitting on the board aifuwa & embele (2019); saidu & aifuwa (2020) board size (bs) the total number of directors sitting on the board. adeniyi & fadipe (2018) board members education level (bel) total numbers of the board members with postgraduate degree divided by the total number of directors. musa et al. (2020) profitability (prf) measured by return on assets (roa) i.e. profit after tax divided by total assets aifuwa, saidu & gold (2020) firdm size (fs) natural logarithm of total assets. aifuwa & embele (2019); saidu & aifuwa (2020) audit quality (aq) dichotomous variable i.e. 1 if a firm is audited by the big4 in a particular year; otherwise, 0. saidu & aifuwa (2020) s o u r c e : authors’ compilation, 2021. board meeting and sustainability reporting of banks in nigeria 5959 data presentation, analysis and discussion of findingsdata presentation, analysis and discussion of findings in this section, we described the data used in the variables of the study and also inferences were drawn on them. table 2. descriptive statistics variables mean minimum maximum std. dev srd 0.3437 0.0000 0.7272 0.1802 bm 15.0666 7.0000 19.0000 2.9470 bin 0.4401 0.1544 0.7693 0.1641 bs 14.4521 7.0000 19.0000 2.2455 bel 0.5354 0.0178 0.8752 0.1245 prf 0.0184 0.0424 0.0017 0.0110 fs 10.474 7.9541 12.876 1.307 aq 0.8802 0.0000 1.0000 0.3287 s o u r c e : authors’ computation, 2021. table 2 presents the summary of statistics for the sampled listed deposit money banks over the study period. the mean of sustainability disclosures was 34.4% while the company with the highest disclosure had 72.7% of the aggregate of sustainability disclosures. the mean value of board meeting stood at 15.0666, with a minimum and maximum number of board meeting times were 7 and 19 times, respectively. the means control variables of the study board independence, board size, board members education level, profitability, firm size and audit quality stood at, 0.4401, 14.4521, 0.5354, 0.0184, 10.474 and 0.880, respectively. this implies that the proportion of non-executive directors to the total number of directors was about 44%, the average number of directors in the board was about 15 people, the ration of directors with postgraduate degree to total board size was about 54%, and about 88% of the banks investigated were audited by the big four. nusirat ojuolape gold, hope osayantin aifuwa6060 table 3. correlation matrix srd bm bin bs bel prf fs aq srd 1.000000 bm -0.199536 1.000000 bin 0.237914 -0.274973 1.000000 bs 0.262578 -0.103288 0.004002 1.000000 bel 0.050722 0.209387 -0.210415 -0.035144 1.000000 prf -0.033415 -0.060768 0.041122 -0.147024 0.049165 1.000000 fs -0.057586 -0.156970 0.064205 -0.178164 -0.231150 0.598638 1.000000 aq -0.167411 -0.555968 0.150934 -0.159437 -0.239500 0.126996 0.484750 1.000000 s o u r c e : authors’ computation, 2021. the linearity of variables (correlation matrix) as presented in table 3 showed that the variables exhibited both positive and negative relationships. board meeting and sustainability reporting association was (-0.199536); and board independence and sustainability reporting (0.237914). also, as seen in the matrix, the strength of the relationship between variables measured by the pearson product-moment correlation showed that the association between the variables is relatively small and were below the threshold of 0.80, suggesting the absence of the problem of multicollinearity in the predictor variables (studenmund, 2014). multivariate analysismultivariate analysis this section presents the results of the hausman test and the panel least squares regression. the hypotheses of the study were tested at 5% level of significance (that is, if p-value < 0.05 reject ho, else accept otherwise). board meeting and sustainability reporting of banks in nigeria 6161 table 4. hausman test of effect specification correlated random effects hausman test test cross-section random effects test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 10.18837 7 0.1781 s o u r c e : authors’ computation, 2020. the table above revealed the result of the hausman test, hm (7) = 10.18837, p = 0.6792 > 0.05. leaning on this result, the study ignored the fixed effect model at 5%, and therefore accepted the random effect model of the panel least squares the regression. table 5. panel least squares (random effects specification) cross-section random effects test equation: dependent variable: srd method: panel least squares date: 10/20/21 time: 14:37 sample: 2014 2020 periods included: 7 cross-sections included: 10 total panel (balanced) observations: 70 variable coefficient std. error t-statistic prob. c 0.913866 0.692654 1.319368 0.2138 bm -0.013510 0.013699 -0.986156 0.3453 bin 5.956548 1.163712 5.118576 0.0077 bs -0.062390 0.316190 -0.197317 0.8472 bel 0.030982 0.028814 1.075250 0.3053 prf -0.855357 7.831225 -0.109224 0.9150 fs 0.495161 1.054064 0.469764 0.6477 aq -0.587239 0.487265 -1.205174 0.2534 root mse 0.043285 r-squared 0.838720 mean dependent var 0.343733 adjusted r-squared 0.574806 nusirat ojuolape gold, hope osayantin aifuwa6262 variable coefficient std. error t-statistic prob. s.d. dependent var 0.109626 s.e. of regression 0.071483 akaike info criterion -2.175336 sum squared resid 0.056209 schwarz criterion -1.287911 log likelihood 51.63004 hannan-quinn crit. -1.891441 f-statistic 13.17810 durbin-watson stat 2.112825 prob(f-statistic) 0.027444 s o u r c e : authors’ computation, 2021. the results of the panel least squares (random effect) regression in table 5 reveal that a board meeting has no significant impact on the extent of sustainability reporting in listed deposit money banks in nigeria after controlling for corporate governance performance and firm-level qualities, β1 = -0.013510; se = 0.013699, p = 0.3453 > 0.05. although the relationship was negative but was not statistically significant at 5% level of significance. this result supports the argument of vafeas (1999) and jensen (1993) who contend that frequent board meetings show the inefficiency of the board of directors in carrying out their oversight and monitoring functions. this findings of this study do not support the theoretical framework of the study, that board of directors are resource would not promote corporate strategies such as sustainability reporting through board meetings. the finding of this study is consistent with works grigoris (2014) in the us, ju ahmad et al. (2017) in malaysia, falikhatun et al. (2020) in indonesia, valentino and nicola (2019). in nigeria, the finding of this work is in tandem with the works of otuya, akporien and ofeimun (2019) in nigeria oil and gas companies and also the work of baba and abdul-manaf (2017) on selected quoted firms in nigeria. in contrast to the finding of this study, mohammed (2017) found a positive association between a board meeting and sustainability reporting; while fodio et al. (2021) found a negative relationship between board meeting and sustainability reporting. the model of the study was statistically significant, f-statistic = 13.17810, p = 0.027444. this implies that the model is fit. also, the adjusted r-square for the model stood at 0.574806 which implies that about 57% of the systematic variation in the dependent variable is caused by the explanatory variable used table 5. panel… board meeting and sustainability reporting of banks in nigeria 6363 in the study. while about 43% of the variations can be linked to other variables not included in the model but adequately captured by the standard error of the regression, se = 0.071483. robustness checkrobustness check to determine the robustness of the study, the study further extended the regression model by classifying the sustainability reporting to high and low quality. dummies were allocated to variable where 1 stands for any value greater than 0.5 signifying high-quality sustainability reporting and 0 stands for any value less than 0.5 representing low-quality sustainability reporting. since the dependent variable is represented by the dummy variable, the study employed logistic analysis for the robustness check. from table 6, these results confirm the robustness of the main test as the desired variables retain their result. table 6. logistic regression dependent variable: gri method: ml binary probit (newton-raphson / marquardt steps) date: 10/20/21 time: 14:39 sample: 2014 2020 included observations: 70 convergence achieved after 6 iterations coefficient covariance computed using observed hessian variable coefficient std. error z-statistic prob. c 0.070389 7.667261 0.009180 0.9927 bm -0.108849 0.159098 -0.684160 0.4939 bin 13.46869 5.843984 2.304710 0.0212 bs 3.363543 3.136372 1.072431 0.2835 bel 0.097156 0.330713 0.293779 0.7689 prf 160.9396 110.3819 1.458025 0.1448 fs -12.20435 17.10093 -0.713666 0.4754 aq -5.017561 5.818692 -0.862318 0.3885 mcfadden r-squared 0.444156 mean dependent var 0.333333 s.d. dependent var 0.479463 s.e. of regression 0.388884 nusirat ojuolape gold, hope osayantin aifuwa6464 variable coefficient std. error z-statistic prob. akaike info criterion 1.240939 sum squared resid 3.327075 schwarz criterion 1.614591 log likelihood -10.61408 hannan-quinn criter. 1.360473 deviance 21.22816 restr. deviance 38.19085 restr. log likelihood -19.09543 lr statistic 16.96269 avg. log likelihood -0.353803 prob(lr statistic) 0.017638 obs with dep=0 50 total obs 70 obs with dep=1 20 s o u r c e : authors’ computation, 2020. for both hypotheses tested, the results were the same. board meeting had no significant inf luence on sustainability reporting, β1 = -0.108849; se = 0.159098, p > 0.05.  conclusion  conclusion the study examined the impact of a board meeting on sustainability reporting in banks in nigeria. ten (10) listed deposit money banks were conveniently sampled from 2014 to 2020. the result of the study revealed that board meetings do not have significant impact on sustainability reporting in listed banks in nigeria after control corporate administration and firm-level attributes. the study concluded that board meetings have no significant impact on sustainability reporting of banks in nigeria. the study recommended that banks should discuss more on sustainability issue, that is, social and environmental issues.  references references abdullahi, a., & makama, u. 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(2020). board characteristics and audit quality: the moderating role of gender diversity. international journal of business and law research, 8(1), 144–155. http://dx.doi.org/10.2139/ssrn.3544733. studenmund, a.h. (2014). using econometrics: a practical guide (6th ed.). harlow, england: pearson education limited. umukoro, o.e., uwuigbe, o.r., uwuigbe, u., adegboye, a., ajetunmobi, o., & nwaze, c. (2019). board expertise and sustainability reporting in listed banks in nigeria. international conference on energy and sustainable environment, 331. http://dx.doi. org/10.1088/1755-1315/331/1/012048. vafeas, n. (1999). board meeting frequency and firm performance. journal of financial economics, 53(1), 113–142. http://dx.doi.org/10.1016/s0304-405x(99)00018-5. valentino, l., & nicola, c. (2019). corporate governance and environmental, social and governance disclosure: a meta-analysis review. corporate social responsibility and environmental management, 26(4), 701–711. http://dx.doi.org/10.1002/csr.1716. date of submission: august 19, 2021; date of acceptance: october 11, 2021. * contact information: dominik.tschinkl@steuerbuero-menzel.de, steuerbuero menzel, ludwigstrasse 5, 97816 lohr am main, germany, phone: +49 9352 87960; orcid id: https://orcid.org/0000-0002-8195-8450. ** contact information: nathalie.weikert@uni-wuerzburg.de, chair of business management and business taxation, university of wuerzburg, sanderring 2, 97070 wuerzburg, germany, phone: +49 931 3181952; orcid id: https://orcid.org/0000-0003-39202913. *** contact information: dirk.kiesewetter@uni-wuerzburg.de, chair of business management and business taxation, university of wuerzburg, sanderring 2, 97070 wuerzburg, germany, phone: +49 931 3182963; orcid id: https://orcid.org/00000002-0640-0529. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 tschinkl, d., weikert, n., & kiesewetter, d. (2021). the impact of taxes on individual long-term savings decision. copernican journal of finance & accounting, 10(4), 159–179. http://dx.doi. org/10.12775/cjfa.2021.020 dominik tschinkl* steuerbuero menzel nathalie weikert** university of wuerzburg dirk kiesewetter*** university of wuerzburg the impact of taxes on individual long-term savings decision keywords: behavioral economics, experimental economics, tax misperception, savings decision. j e l classification: c91, g40, h20, h24. dominik tschinkl, nathalie weikert, dirk kiesewetter160 abstract: this paper uses experimental methods to analyze how different forms of taxation inf luence the decision between immediate consumption and saving. the parameters are chosen in such a way that the treatments no tax, immediate taxation and deferred taxation have identical net payoffs, which should induce the same decision making patterns. however, we find that these expectations only apply to the treatments no tax and immediate taxation. the participants in the deferred taxation treatment show a significantly weaker preference for saving which hints at a misperception of this form of taxation. this result also has political implications as many oecd countries try to incentivize voluntary saving for retirement through deferred taxation. in the experiment, however, this type of taxation leads to less saving than an economically equivalent immediate taxation of savings. furthermore, the paper shows that individuals only partially recognize the advantages of immediate or deferred taxation compared to a classic income tax. while the periodic yield is tax exempt in systems of immediate or deferred taxation, it is taxable under a classical income tax. the latter should have a negative effect on saving decisions. however, these theoretical predictions do not hold in our experiment.  introduction saving for retirement is always a matter of time preferences: saving for old-age provision as well as saving in general means diminishing present consumption while increasing consumption in the future. it is usually assumed that individuals prefer present consumption to future consumption whereas costs and unpleasant activities are shifted to the future. the theory of discounted utility shows that the utility (and the burden or disutility) of a future event can be expressed in present values for a given utility function by discounting with an individual’s time preference rate. in the case of a positive time preference, the time factor has a devaluing effect, i.e. the utility is lower in terms of present value than of future value. it is generally accepted that indivi duals have a positive time preference rate for monetary inf lows and therefore prefer early income to later income1. the theory of discounted utility also applies to long-term savings decisions such as saving for retirement. excluding risk and non-monetary parameters an individual’s time preference can be interpreted as discount rate in the decision on how to dis1 empirical studies also provide evidence for this assumption. cf. for example the work of hausman (1979) and landsberger (1971), who tried to measure individual discount rates empirically. also olson and bailey (1981), who initially explicitly questioned this assumption conclude that the assumption of positive discount rates is convincing. the impact of taxes on individual long-term savings decision 161 tribute one’s income on today’s and future consumption2. an indivi dual will only save if the future payment, discounted with the individual time preference rate, exceeds the possible immediate payment in case of non-savings. the higher the individual discount rate, the higher the return on saving must be so that the individual decides to save. besides time preference rates, the tax treatment of pension contributions and consequent benefits inf luences the willingness to save for retirement as well. in many oecd countries (e.g. germany, the uk) pension plans are subject to deferred taxation which means that both contributions and return on investment are tax-exempt whereas pension benefits are taxable during the retirement phase. since the yield is tax-free with deferred taxation, this represents an advantage compared to regular income taxation. when the income tax schedule is progressive, deferred taxation implies another benefit as the income usually declines during retirement and thus a lower tax rate usually applies. however, certain pension plans are taxed up front such as roth ira or roth 401(k) plans in the us. income is taxed when it is first earned, but when invested in a respective scheme any return on investment as well as withdrawals in retirement are tax-free. assuming a constant tax rate over time deferred and immediate taxation are equivalent. despite this equivalence, taxpayers may perceive those regimes differently due to misperceptions. we investigate individual savings behavior in regard to different tax regimes using experimental methods. in the following study, a world without any taxation serves as a reference point. comparing immediate and deferred taxation allows us to observe whether these regimes lead to different amounts of savings despite their economically equivalent effects and thus distort the saving decision of individuals. in addition, “classic” income taxation is included in the study in order to examine whether individuals recognize the above-mentioned advantages of immediate or deferred taxation, i.e. a tax-free return of investment. we believe that our findings are applicable to pension planning and other long-term savings decisions in real life which are dominated by tax considerations and are subject to no or low risk. 2 therefore we use the terms time preference rate and discount rate synonymously. dominik tschinkl, nathalie weikert, dirk kiesewetter162 related literature previous experimental research shows that people often do not integrate tax regulations correctly into their decisions, which leads to unexpected distortions in their decision-making behavior3. domar and musgrave (1944), for example, show that a proportional tax with full loss relief increases an investor’s risk tolerance compared to a situation without loss relief. tobin (1958) confirms this result in the case of a transition from a world without taxes to a proportional tax with full loss compensation. swenson (1989) provides one of the first empirical verification of these results. using a laboratory experiment, he examines investment decisions in four different tax systems that differ, among other things, in the tax treatment of losses4. contrary to expectations, he observes no significant increase of risky investments when a tax system with a linear tax rate is implemented. fochmann, kiesewetter and sadrieh (2012) focus in particular on the inf luence of different loss deduction options. they find that participants overestimate the possibility of loss deduction due to a misperception of the tax burden5. fochmann and hemmerich (2018), among others, use a laboratory experiment as well to investigate the theoretically proven effects of taxation on risky investment decisions. they focus on the perception effect caused by taxation and try to isolate it from a real tax effect. they show that for both tax treatments the investment in the risky investment is significantly lower compared to the situation without taxes. while this result is expected for the case without loss compensation, the effect in the treatment with full loss deduction should point in the opposite direction6. the above-mentioned research analyzes the relationship between taxes and risky investment decisions. on the other hand, there are only very few experimental studies on the inf luence of taxes on decisions to re-allocate one’s income stream over the whole life cycle as is the case with retirement planning. this 3 for an overview see chetty (2015) and czerwonka (2015). 4 see swenson (1989, p. 61). 5 see fochmann, kiesewetter and sadrieh (2012, p. 239). 6 fochmann, hemmerich and kiesewetter (2016) examine the perception effect more closely. the authors conclude that there is a positive correlation between the cognitive load of the participants and the tax-related perception effect. nevertheless, the effect remains even with very low cognitive load. the impact of taxes on individual long-term savings decision 163 kind of savings decision is typically characterized by rather low investment risk but considerable tax incentives and tax risks. one of the first such studies was conducted by meade (1995). she uses an experimental design to investigate how income and consumption tax systems and future uncertainties about the tax rate affect saving and risk taking7. the results show that a consumption tax system is neutral with respect to proportional saving and risk taking when both current and future tax rates are certain. an income tax system, however, reduces relative saving and increases risk taking. under uncertainty about future tax rates the effects are more complex. nevertheless, they suggest that such an uncertainty affects the savings and risk neutrality of a consumption tax system while reducing the risk incentive of an income tax system. beshears, choi, laibson and madrian (2017) use a survey experiment to analyze savings behavior when retirement contributions are taxed up front. participants have to make savings decisions for a married couple in such a way as to ensure a constant standard of living. depending on the respective treatment, either an immediate or deferred tax regime is applied or the participants can choose between both. the authors would have expected participants to recommend a lower relative savings rate with immediate taxation. however, the results show that there are hardly any differences between treatments. therefore, the authors suspect that the respondents do not understand the tax rules and/or ignore them. brown, cederburg and o’doherty (2017) use an online experiment to investigate how immediate or deferred taxation of retirement plans affect participants’ savings behavior. if certain after-tax monetary goals are specified, participants will invest in riskier and more profitable assets under immediate taxation than under deferred taxation. the authors conclude that under deferred taxation, investors do not take enough risk to accumulate sufficient savings. with immediate taxation, on the other hand, taxation does not distort the savings decision. however, this effect can be avoided if monetary targets are reframed into pre-tax amounts or if participants are informed about the consequences of their specific savings decision. blaufus and milde (2020) provide evidence of misperceptions of certain tax regulations with respect to savings formation by using a two-phase life cycle model in a laboratory experiment. the first phase represents the acquisition phase, the second the retirement phase. in the acquisition phase, the partici7 see meade (1995, p. 636). dominik tschinkl, nathalie weikert, dirk kiesewetter164 pants perform a task to earn money. after each working period, the participants decide how much of this money they want to save. depending on which treatment a participant is assigned to, taxation of the savings is up front or deferred. the authors show that a deferred taxation leads to inefficiently low savings compared to an economically equivalent immediate taxation, which they explain by a misperception of deferred taxation. all in all, experimental economic studies often reveal decision patterns that do not correspond to behavior that is rational from a theoretical point of view. in particular, individuals often do not correctly integrate certain tax regulations into their decisions. one explanation is the perception effect introduced by fochmann and hemmerich (2018). the question therefore arises whether such distortions triggered by taxation also occur in retirement planning which is characterized by a special tax regime and low investment risk. economic background and hypotheses to investigate the inf luence of different tax regimes on individual long-term savings decision we conducted a laboratory experiment with four different treatments: no tax (nt), deferred taxation (dt), immediate taxation (bt), and income tax (it). in the following section we show how these treatments affect the amount of savings. therefore, we consider a model with only two periods and payment dates t1 and t2. let z be the gross amount that the individual spends on savings at t1. assuming a world without tax (treatment no tax), the investment amount, return i, and savings are not subject to taxation. therefore, the available amount snt at time t2 is calculated as follows explanation is the perception effect introduced by fochmann and hemmerich (2018). the question therefore arises whether such distortions triggered by taxation also occur in retirement planning which is characterized by a special tax regime and low investment risk. economic background and hypotheses to investigate the influence of different tax regimes on individual long-term savings decision we conducted a laboratory experiment with four different treatments: no tax (nt), deferred taxation (dt), immediate taxation (bt), and income tax (it). in the following section we show how these treatments affect the amount of savings. therefore, we consider a model with only two periods and payment dates 1t and 2t . let z be the gross amount that the individual spends on savings at 1t . assuming a world without tax (treatment not tax), the investment amount, return i , and savings are not subject to taxation. therefore, the available amount nts at time 2t is calculated as follows (1 )nts z i   (1) in a world with taxes, the amount z at time 1t should now be subject to the tax rate bs , whereas the tax rate at time 2t is ds . considering an immediate (back-loaded) tax regime, the investment amount has to be paid from taxed income, i.e. the gross amount z is subject to taxation at the tax rate bs . the remaining amount after taxes generates the return i . this results in the amount bts at time 2t : (1 ) (1 )bt bs z s i     (2) on the other hand, assuming a deferred taxation regime, the gross amount z in whole can be invested since there is no taxation in 1t . z generates the yield i . after taxation in 2t with ds , this results in the amount: (1 ) (1 )    dt ds z i s (3) this simple formal representation shows that immediate and deferred taxation are exactly equivalent in case of b ds s , since the result is bt dts s .8 thus, the timing of taxation is 8 this also applies in a multi-period setting. (1) in a world with taxes, the amount z at time t1 should now be subject to the tax rate sb, whereas the tax rate at time t2 is sd. considering an immediate (backloaded) tax regime, the investment amount has to be paid from taxed income, i.e. the gross amount z is subject to taxation at the tax rate sb. the remaining amount after taxes generates the return i. this results in the amount sbt at time t2: explanation is the perception effect introduced by fochmann and hemmerich (2018). the question therefore arises whether such distortions triggered by taxation also occur in retirement planning which is characterized by a special tax regime and low investment risk. economic background and hypotheses to investigate the influence of different tax regimes on individual long-term savings decision we conducted a laboratory experiment with four different treatments: no tax (nt), deferred taxation (dt), immediate taxation (bt), and income tax (it). in the following section we show how these treatments affect the amount of savings. therefore, we consider a model with only two periods and payment dates 1t and 2t . let z be the gross amount that the individual spends on savings at 1t . assuming a world without tax (treatment not tax), the investment amount, return i , and savings are not subject to taxation. therefore, the available amount nts at time 2t is calculated as follows (1 )nts z i   (1) in a world with taxes, the amount z at time 1t should now be subject to the tax rate bs , whereas the tax rate at time 2t is ds . considering an immediate (back-loaded) tax regime, the investment amount has to be paid from taxed income, i.e. the gross amount z is subject to taxation at the tax rate bs . the remaining amount after taxes generates the return i . this results in the amount bts at time 2t : (1 ) (1 )bt bs z s i     (2) on the other hand, assuming a deferred taxation regime, the gross amount z in whole can be invested since there is no taxation in 1t . z generates the yield i . after taxation in 2t with ds , this results in the amount: (1 ) (1 )    dt ds z i s (3) this simple formal representation shows that immediate and deferred taxation are exactly equivalent in case of b ds s , since the result is bt dts s .8 thus, the timing of taxation is 8 this also applies in a multi-period setting. (2) the impact of taxes on individual long-term savings decision 165 on the other hand, assuming a deferred taxation regime, the gross amount z in whole can be invested since there is no taxation in t1. z generates the yield i. after taxation in t2 with sd, this results in the amount: explanation is the perception effect introduced by fochmann and hemmerich (2018). the question therefore arises whether such distortions triggered by taxation also occur in retirement planning which is characterized by a special tax regime and low investment risk. economic background and hypotheses to investigate the influence of different tax regimes on individual long-term savings decision we conducted a laboratory experiment with four different treatments: no tax (nt), deferred taxation (dt), immediate taxation (bt), and income tax (it). in the following section we show how these treatments affect the amount of savings. therefore, we consider a model with only two periods and payment dates 1t and 2t . let z be the gross amount that the individual spends on savings at 1t . assuming a world without tax (treatment not tax), the investment amount, return i , and savings are not subject to taxation. therefore, the available amount nts at time 2t is calculated as follows (1 )nts z i   (1) in a world with taxes, the amount z at time 1t should now be subject to the tax rate bs , whereas the tax rate at time 2t is ds . considering an immediate (back-loaded) tax regime, the investment amount has to be paid from taxed income, i.e. the gross amount z is subject to taxation at the tax rate bs . the remaining amount after taxes generates the return i . this results in the amount bts at time 2t : (1 ) (1 )bt bs z s i     (2) on the other hand, assuming a deferred taxation regime, the gross amount z in whole can be invested since there is no taxation in 1t . z generates the yield i . after taxation in 2t with ds , this results in the amount: (1 ) (1 )    dt ds z i s (3) this simple formal representation shows that immediate and deferred taxation are exactly equivalent in case of b ds s , since the result is bt dts s .8 thus, the timing of taxation is 8 this also applies in a multi-period setting. (3) this simple formal representation shows that immediate and deferred taxation are exactly equivalent in case of sb = sd, since the result is s bt = sdt.8 thus, the timing of taxation is irrelevant for profitability if the tax rate during the savings phase equals the tax rate during the payout phase and if the return on investment is tax-free. considering regular income taxation, however, the income generated during the savings phase is taxed periodically. this means that the gross amount z is subject to taxation at the tax rate sb and the return on capital is subject to capital gains tax at the tax rate scgt. the periodic net payments are calculated by applying net interest is instead of gross interest i. the following net amount remains in t1: irrelevant for profitability if the tax rate during the savings phase equals the tax rate during the payout phase and if the return on investment is tax-free. considering regular income taxation, however, the income generated during the savings phase is taxed periodically. this means that the gross amount z is subject to taxation at the tax rate bs and the return on capital is subject to capital gains tax at the tax rate cgts . the periodic net payments are calculated by applying net interest si instead of gross interest i . the following net amount remains in 1t : (1 ) (1 ) (1 ) (1 ) (1 )it b cgt b b ss z s i s i z s z s i               (4) (1 )s cgtwith i i s   the net amount its is apparently lower than the net amount considering immediate or deferred taxation if 0cgts  . in order to derive the hypotheses to be tested, it is necessary to specify the payout options that have so far only been presented in general terms. in principle, an individual is assumed to maximize his or her utility. in the experiment, this utility depends only on the amount of cash flow (monetary component) and the time of payment (temporary component). it is assumed that the higher (lower) the cash flow and the earlier (later) this cash flow occurs, the higher (lower) the utility. we argue under certainty, so that the individual’s attitude to risk is not relevant to the decision. it is conceivable, however, that the participants overor underestimate the influence of taxation and that distorting effects occur. in order to assess these effects, the three treatments no tax, deferred taxation and immediate taxation are used. therefore, we select the parameters in such a way that the possible payouts in all three treatments are net equivalent. hence, the participants are confronted with the same net values in each treatment. only the specified amounts of the immediate payout as well as the taxation rules differ. the following relationships ensure net equivalence. ( )z g represents the value of the possible immediate payout indicated in the respective treatment: 1 nt dt bt zz z s    (5) thus, the gross immediate payouts in the two treatments immediate taxation and deferred taxation are higher than in treatment no tax, while the net payouts are the same. therefore, the possible payouts in case of savings formation are net equivalent in the three irrelevant for profitability if the tax rate during the savings phase equals the tax rate during the payout phase and if the return on investment is tax-free. considering regular income taxation, however, the income generated during the savings phase is taxed periodically. this means that the gross amount z is subject to taxation at the tax rate bs and the return on capital is subject to capital gains tax at the tax rate cgts . the periodic net payments are calculated by applying net interest si instead of gross interest i . the following net amount remains in 1t : (1 ) (1 ) (1 ) (1 ) (1 )it b cgt b b ss z s i s i z s z s i               (4) (1 )s cgtwith i i s   the net amount its is apparently lower than the net amount considering immediate or deferred taxation if 0cgts  . in order to derive the hypotheses to be tested, it is necessary to specify the payout options that have so far only been presented in general terms. in principle, an individual is assumed to maximize his or her utility. in the experiment, this utility depends only on the amount of cash flow (monetary component) and the time of payment (temporary component). it is assumed that the higher (lower) the cash flow and the earlier (later) this cash flow occurs, the higher (lower) the utility. we argue under certainty, so that the individual’s attitude to risk is not relevant to the decision. it is conceivable, however, that the participants overor underestimate the influence of taxation and that distorting effects occur. in order to assess these effects, the three treatments no tax, deferred taxation and immediate taxation are used. therefore, we select the parameters in such a way that the possible payouts in all three treatments are net equivalent. hence, the participants are confronted with the same net values in each treatment. only the specified amounts of the immediate payout as well as the taxation rules differ. the following relationships ensure net equivalence. ( )z g represents the value of the possible immediate payout indicated in the respective treatment: 1 nt dt bt zz z s    (5) thus, the gross immediate payouts in the two treatments immediate taxation and deferred taxation are higher than in treatment no tax, while the net payouts are the same. therefore, the possible payouts in case of savings formation are net equivalent in the three (4) the net amount sit is apparently lower than the net amount considering immediate or deferred taxation if scgt > 0. in order to derive the hypotheses to be tested, it is necessary to specify the payout options that have so far only been presented in general terms. in principle, an individual is assumed to maximize his or her utility. in the experiment, this utility depends only on the amount of cash f low (monetary component) and the time of payment (temporary component). it is assumed that the higher (lower) the cash f low and the earlier (later) this cash f low occurs, the higher (lower) the utility. we argue under certainty, so that the individual’s attitude to risk is not relevant to the decision. it is conceivable, however, that the participants overor underestimate the inf luence of taxation and that distorting effects occur. in order to assess these effects, the three treatments no tax, deferred taxation and immediate taxation are used. therefore, we select the pa8 this also applies in a multi-period setting. dominik tschinkl, nathalie weikert, dirk kiesewetter166 rameters in such a way that the possible payouts in all three treatments are net equivalent. hence, the participants are confronted with the same net values in each treatment. only the specified amounts of the immediate payout as well as the taxation rules differ. the following relationships ensure net equivalence. z(.) represents the value of the possible immediate payout indicated in the respective treatment: irrelevant for profitability if the tax rate during the savings phase equals the tax rate during the payout phase and if the return on investment is tax-free. considering regular income taxation, however, the income generated during the savings phase is taxed periodically. this means that the gross amount z is subject to taxation at the tax rate bs and the return on capital is subject to capital gains tax at the tax rate cgts . the periodic net payments are calculated by applying net interest si instead of gross interest i . the following net amount remains in 1t : (1 ) (1 ) (1 ) (1 ) (1 )it b cgt b b ss z s i s i z s z s i               (4) (1 )s cgtwith i i s   the net amount its is apparently lower than the net amount considering immediate or deferred taxation if 0cgts  . in order to derive the hypotheses to be tested, it is necessary to specify the payout options that have so far only been presented in general terms. in principle, an individual is assumed to maximize his or her utility. in the experiment, this utility depends only on the amount of cash flow (monetary component) and the time of payment (temporary component). it is assumed that the higher (lower) the cash flow and the earlier (later) this cash flow occurs, the higher (lower) the utility. we argue under certainty, so that the individual’s attitude to risk is not relevant to the decision. it is conceivable, however, that the participants overor underestimate the influence of taxation and that distorting effects occur. in order to assess these effects, the three treatments no tax, deferred taxation and immediate taxation are used. therefore, we select the parameters in such a way that the possible payouts in all three treatments are net equivalent. hence, the participants are confronted with the same net values in each treatment. only the specified amounts of the immediate payout as well as the taxation rules differ. the following relationships ensure net equivalence. ( )z g represents the value of the possible immediate payout indicated in the respective treatment: 1 nt dt bt zz z s    (5) thus, the gross immediate payouts in the two treatments immediate taxation and deferred taxation are higher than in treatment no tax, while the net payouts are the same. therefore, the possible payouts in case of savings formation are net equivalent in the three (5) thus, the gross immediate payouts in the two treatments immediate taxation and deferred taxation are higher than in treatment no tax, while the net payouts are the same. therefore, the possible payouts in case of savings formation are net equivalent in the three aforementioned treatments because the given gross yield i is the same. the following formula represents this relationship, where s(.) stands for the net payment resulting in the respective treatment in case of saving: aforementioned treatments because the given gross yield i is the same. the following formula represents this relationship, where ( )s g stands for the net payment resulting in the respective treatment in case of saving: (1 ) (1 ) (1 ) (1 ) (1 ) 1 nt dt bt dt nt ntzs s z i s i s z i s s                 (6) furthermore, the experiment is intended to determine whether participants actually realize the advantage of an immediate or deferred taxation regime compared to an income tax9. for verification, the payout structure in the treatment income tax is chosen in such a way that the gross values correspond to those in the treatments deferred taxation and immediate taxation. consequently, gross equivalence applies, i.e.: 1 nt it dt bt zz z z s     (7) if the participant decides to save in treatment income tax, he will receive a lower net payout than in the remaining three treatments, in which the net payments are equivalent. under the assumption 0s  , the following applies: (1 ) (1 ) (1 ) (1 ) (1 ) 1 nt it it nt nt bt dt s s s z s z s i s i z i s s s s                  (8) table 1 provides an overview of the four treatments and summarizes the payout structure. 9 as explained above, this advantage results because the return on investment is tax-free. (6) furthermore, the experiment is intended to determine whether participants actually realize the advantage of an immediate or deferred taxation regime compared to an income tax9. for verification, the payout structure in the treatment income tax is chosen in such a way that the gross values correspond to those in the treatments deferred taxation and immediate taxation. consequently, gross equivalence applies, i.e.: aforementioned treatments because the given gross yield i is the same. the following formula represents this relationship, where ( )s g stands for the net payment resulting in the respective treatment in case of saving: (1 ) (1 ) (1 ) (1 ) (1 ) 1 nt dt bt dt nt ntzs s z i s i s z i s s                 (6) furthermore, the experiment is intended to determine whether participants actually realize the advantage of an immediate or deferred taxation regime compared to an income tax9. for verification, the payout structure in the treatment income tax is chosen in such a way that the gross values correspond to those in the treatments deferred taxation and immediate taxation. consequently, gross equivalence applies, i.e.: 1 nt it dt bt zz z z s     (7) if the participant decides to save in treatment income tax, he will receive a lower net payout than in the remaining three treatments, in which the net payments are equivalent. under the assumption 0s  , the following applies: (1 ) (1 ) (1 ) (1 ) (1 ) 1 nt it it nt nt bt dt s s s z s z s i s i z i s s s s                  (8) table 1 provides an overview of the four treatments and summarizes the payout structure. 9 as explained above, this advantage results because the return on investment is tax-free. (7) if the participant decides to save in treatment income tax, he will receive a lower net payout than in the remaining three treatments, in which the net payments are equivalent. under the assumption s > 0, the following applies: 9 as explained above, this advantage results because the return on investment is tax-free. the impact of taxes on individual long-term savings decision 167 aforementioned treatments because the given gross yield i is the same. the following formula represents this relationship, where ( )s g stands for the net payment resulting in the respective treatment in case of saving: (1 ) (1 ) (1 ) (1 ) (1 ) 1 nt dt bt dt nt ntzs s z i s i s z i s s                 (6) furthermore, the experiment is intended to determine whether participants actually realize the advantage of an immediate or deferred taxation regime compared to an income tax9. for verification, the payout structure in the treatment income tax is chosen in such a way that the gross values correspond to those in the treatments deferred taxation and immediate taxation. consequently, gross equivalence applies, i.e.: 1 nt it dt bt zz z z s     (7) if the participant decides to save in treatment income tax, he will receive a lower net payout than in the remaining three treatments, in which the net payments are equivalent. under the assumption 0s  , the following applies: (1 ) (1 ) (1 ) (1 ) (1 ) 1 nt it it nt nt bt dt s s s z s z s i s i z i s s s s                  (8) table 1 provides an overview of the four treatments and summarizes the payout structure. 9 as explained above, this advantage results because the return on investment is tax-free. (8) table 1 provides an overview of the four treatments and summarizes the payout structure. table 1. characteristics of treatments and payout structure treat ment type of taxation payment structure immediate payout saving nt no tax znt snt = znt ∙ (1 + i) dt taxation of immediate payout at tax rate s table 1. characteristics of treatments and payout structure treatment type of taxation payment structure immediate payout saving nt no tax 𝑍𝑍�� 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 dt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t investment and return on investment are tax free taxation of late payout at tax rate 𝑠𝑠 bt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t taxation of invested amount at tax rate 𝑠𝑠 payout and yield are tax free it taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 < 𝑆𝑆�� pa yo ut b ef or e ta xa tio n is e qu iv al en t t o th e pa yo ut in tr ea tm en t n t taxation of invested amount & yield at tax rate 𝑠𝑠 payout is tax free source: own representation. if participants in the treatments deferred taxation and immediate taxation integrate the respective tax regulations correctly in their decisions, they should reveal the same preference for or against the formation of savings as participants in the treatment no tax, since they are faced with identical net payments. also a bilateral comparison of the deferred taxation and immediate taxation treatments should not reveal different savings decisions. this results in the following hypotheses: hypothesis 1a: participants in treatments no tax and immediate taxation show the same decision pattern concerning the number of decisions in favor of saving. table 1. characteristics of treatments and payout structure treatment type of taxation payment structure immediate payout saving nt no tax 𝑍𝑍�� 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 dt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t investment and return on investment are tax free taxation of late payout at tax rate 𝑠𝑠 bt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t taxation of invested amount at tax rate 𝑠𝑠 payout and yield are tax free it taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 < 𝑆𝑆�� pa yo ut b ef or e ta xa tio n is e qu iv al en t t o th e pa yo ut in tr ea tm en t n t taxation of invested amount & yield at tax rate 𝑠𝑠 payout is tax free source: own representation. if participants in the treatments deferred taxation and immediate taxation integrate the respective tax regulations correctly in their decisions, they should reveal the same preference for or against the formation of savings as participants in the treatment no tax, since they are faced with identical net payments. also a bilateral comparison of the deferred taxation and immediate taxation treatments should not reveal different savings decisions. this results in the following hypotheses: hypothesis 1a: participants in treatments no tax and immediate taxation show the same decision pattern concerning the number of decisions in favor of saving. pa yo ut a ft er t ax at io n is e qu iv al en t t o th e pa yo ut in t re at m en t n t investment and return on investment are tax free taxation of late payout at tax rate s bt taxation of immediate payout at tax rate s pa yo ut a ft er t ax at io n is e qu iv al en t t o th e pa yo ut in t re at m en t n t taxation of invested amount at tax rate s payout and yield are tax free it taxation of immediate payout at tax rate s table 1. characteristics of treatments and payout structure treatment type of taxation payment structure immediate payout saving nt no tax 𝑍𝑍�� 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 dt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t investment and return on investment are tax free taxation of late payout at tax rate 𝑠𝑠 bt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t taxation of invested amount at tax rate 𝑠𝑠 payout and yield are tax free it taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 < 𝑆𝑆�� pa yo ut b ef or e ta xa tio n is e qu iv al en t t o th e pa yo ut in tr ea tm en t n t taxation of invested amount & yield at tax rate 𝑠𝑠 payout is tax free source: own representation. if participants in the treatments deferred taxation and immediate taxation integrate the respective tax regulations correctly in their decisions, they should reveal the same preference for or against the formation of savings as participants in the treatment no tax, since they are faced with identical net payments. also a bilateral comparison of the deferred taxation and immediate taxation treatments should not reveal different savings decisions. this results in the following hypotheses: hypothesis 1a: participants in treatments no tax and immediate taxation show the same decision pattern concerning the number of decisions in favor of saving. table 1. characteristics of treatments and payout structure treatment type of taxation payment structure immediate payout saving nt no tax 𝑍𝑍�� 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 dt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 + 𝑖𝑖𝑖 ∙ (1 − 𝑠𝑠𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t investment and return on investment are tax free taxation of late payout at tax rate 𝑠𝑠 bt taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖𝑖 = 𝑆𝑆�� pa yo ut a ft er ta xa tio n is eq ui va le nt to th e pa yo ut in tr ea tm en t n t taxation of invested amount at tax rate 𝑠𝑠 payout and yield are tax free it taxation of immediate payout at tax rate 𝑠𝑠 𝑍𝑍�� = 𝑍𝑍 �� 1 − 𝑠𝑠 𝑆𝑆�� = 𝑍𝑍�� ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 = 𝑍𝑍 �� 1 − 𝑠𝑠 ∙ (1 − 𝑠𝑠𝑖 ∙ (1 + 𝑖𝑖�𝑖 < 𝑆𝑆�� pa yo ut b ef or e ta xa tio n is e qu iv al en t t o th e pa yo ut in tr ea tm en t n t taxation of invested amount & yield at tax rate 𝑠𝑠 payout is tax free source: own representation. if participants in the treatments deferred taxation and immediate taxation integrate the respective tax regulations correctly in their decisions, they should reveal the same preference for or against the formation of savings as participants in the treatment no tax, since they are faced with identical net payments. also a bilateral comparison of the deferred taxation and immediate taxation treatments should not reveal different savings decisions. this results in the following hypotheses: hypothesis 1a: participants in treatments no tax and immediate taxation show the same decision pattern concerning the number of decisions in favor of saving. pa yo ut b ef or e ta xa ti on is e qu iv ale nt t o th e pa yo ut in t re at m en t n t taxation of invested amount & yield at tax rate s payout is tax free s o u r c e : own representation. if participants in the treatments deferred taxation and immediate taxation integrate the respective tax regulations correctly in their decisions, they should reveal the same preference for or against the formation of savings as participants in the treatment no tax, since they are faced with identical net payments. also a bilateral comparison of the deferred taxation and immediate taxation treatments should not reveal different savings decisions. this results in the following hypotheses: dominik tschinkl, nathalie weikert, dirk kiesewetter168 hypothesis 1a: participants in treatments no tax and immediate taxation show the same decision pattern concerning the number of decisions in favor of saving. hypothesis 1b: participants in treatments no tax and deferred taxation show the same decision pattern concerning the number of decisions in favor of saving. hypothesis 2: participants in treatments deferred taxation and immediate taxation show the same decision pattern concerning the number of decisions in favor of saving. regarding an income tax regime, the periodically accruing returns on capital are taxable. consequently, the participants’ prefe rence for savings formation in the income tax treatment should be lower than in the other treatments: hypothesis 3: participants in the treatment income tax decide less often in favor of saving than those in the other treatments. research methodology and research process we analyze whether and to what extent taxation inf luences savings decisions in two steps: part 1 of the experiment is based on the contribution of harrison, lau and williams (2002). at first, we measure the time preferences of participants, since these inf luence their savings decisions. in part 2 each participant is randomly assigned to one of four treatments, which represents a between-subjects design. here, the participants decide between an early payout, which represents immediate consumption, and a late payout, which represents savings. this part also determines the participants’ remuneration, which depends on the decisions made during the experiment (and on chance). in order to get this additional reward, the participants have to fulfill a task before (“real effort task”). this ensures that the participants have to work for the additional reward and do not just get it without any effort. after part 2 of the experiment, participants answer a questionnaire on socio-demographic and economic characteristics10. 10 the socio-demographic and economic characteristics were included in several logistic regression analysis, which are available from the authors upon request. the impact of taxes on individual long-term savings decision 169 the experiment was conducted in august 2018 at the julius-maximiliansuniversity of wuerzburg with a total of 80 students11 (30 women and 50 men) in seven sessions. the instructions for the experiment were displayed to the participants on the computer screen and additionally provided in paper form. apart from a calculator, the participants were not allowed to use any other tools. the experiment was created with the browser-based application enterprise feedback suite (efs) survey. on average each session lasted about 75 minutes12. at the end of a session, each participant received a show-up fee of five euros in cash. in addition, only one randomly selected decision from part 2 of the experiment determined the amount of the total payout for a participant. the mean of the additional payout over the 80 participants was 14.89 euros13. thus, the mean value of the total payout including the participation fee was 19.89 euros. based on the average duration of a session of approximately 75 minutes, this results in an average hourly wage of approximately 15.80 euros. we measure the participants’ time preferences using the binary choice method. this means that the participants are confronted with a series of decisions in which they have to choose between an early payout and a late payout. the two options are mutually exclusive14. each participant faces a total of 60 decision in part 1 of the experiment, divided into three parts with 20 decisions each. in each of these parts a different time horizon for late payout is chosen. while the (hypothetical) early payout 11 a common criticism of experimental studies is that students are not representative of the entire population. while this may be true in principle, various studies show that students and non-students, on the other hand, behave similarly, see for example alm, bloomquist and mckee (2015). using experiments on tax compliance, they show that students and non-students exhibit almost identical behavior. 12 the number of participants in the individual sessions varied between five and 21. sessions with a larger number of participants lasted longer than those with fewer participants. the shortest session with only five participants lasted 63 minutes and the longest session with 21 participants lasted 95 minutes. the reason for these differences is mainly due to the fact that the participants were paid individually one after the other after the experiment. 13 minimum: 7.50 €, maximum: 25.00 €, median: 12.00 €; standard deviation: 5.94 €. 14 the structure of this part is based on the procedure in harrison, lau and williams (2002), with the difference that in this part of the experiment the participants make only hypothetical decisions. consequently, they do not receive separate remuneration for these decisions. dominik tschinkl, nathalie weikert, dirk kiesewetter170 always takes place one month after the experiment15, the (hypothetical) late payout is made either in seven months (corresponding to a six-month time horizon between early and late payout), in 13 months (one-year time horizon) or in 25 months (two-year time horizon). for each of these three time horizons, the participants make 20 decisions. the early payout is always 3,000 euros, the late payout is always higher than 3,000 euros. to determine the late disbursement, nominal yields vary between 2.5 and 50 percent p.a., resulting in an effective interest rate between 2.52 and 60.18 percent16. the assumed yields are the same for the 12and 24-month time horizon. in the experiment, nominal and effective returns are not given. using the binary choice method, it is not possible to determine a specific value for the time preference rate, but only an interval. after measuring the time preferences the participants have to complete a real effort task by digitizing exam results from a handwritten list. the participants do not need any special knowledge for this, but it requires a certain mental and real work effort, which avoids the “house money effect”.17 the reward that the individual participants can earn in the further course of the experiment does not depend on the results of the real effort task. this means that all participants have the same initial setup for the following decision situations. in the second part of the experiment, a classic consumption-savings decision of an individual is simulated. the subjects earn a certain (fixed) amount of money through the real effort task described above. this amount of money 15 the time of early payment is therefore also in the future (“front end delay”). this prevents participants from combining different transaction costs with the two payment alternatives. thus, participants could ascribe higher transaction costs and possibly a higher risk to a future payment than to an immediate payout. these effects might distort the time preference rate of this participant, see also harrison et al. (2002, p. 1607). 16 as with harrison et al. (2002, p. 1610) we assume quarterly interest payment periods for the relation between nominal and effective interest rates. 17 the house money effect is usually found in investment decisions under risk. however, it is also conceivable that a similar effect occurs in decisions between early and late payouts, so that it could become relevant for the experiment. for example, a participant might be more willing to wait a longer time for his payout if he considers this payout to be a “gift” from the outset. the results of the literature with regard to the house money effect are presented in clark (2002) and weber and zuchel (2005) for instance. on the house money effect of risky investment decisions, see in particular thaler and johnson (1990, p. 657). the impact of taxes on individual long-term savings decision 171 can be paid out or saved instead. if the participant decides to save, the saved amount will yield interest. however, if the amount is paid out, the individual receives the saved amount at face value. in reality, the decision regarding savings respectively retirement provisions usually covers several years or decades. yet such a long time horizon can hardly be depicted in an experiment. in order to be able to integrate the time component of a savings decision into the experiment, two periods are modelled. if immediate payout is chosen, payout occurs at an early point in time but not immediately after the experiment as a front-end delay was integrated in order to avoid distortions. in contrast, payout occurs four months after the experiment took place, if savings are chosen. lump-sum payments are made both for immediate payout and for savings formation. in the experiment, the participants each make 20 independent decisions between immediate payout and saving. the amount of the immediate payout as well as the safe return on savings are known in advance in each situation. the amount of payout and the rate of return vary in each situation. depending on the treatment, information on taxation is given. the order of the 20 decisions is randomized for each participant to avoid order effects. the reward for each subject depends on his decisions during part 2 of the experiment and on chance. on the one hand, the participants are randomly assigned to one of the four treatments and on the other hand, only one of the 20 decisions from part 2 determines the additional reward. the decisive decision situation is determined by rolling a 20-sided dice after the experiment. the number thrown then represents the decision situation relevant for the additional payment. the way in which this additional payment is made is of particular importance in the experiment, since the additional payment is made at different times depending on the decision of the participants. the participants receive their additional payment by bank transfer to a german bank account they have specified before the experiment. due to internal procedures at the university, the early payment cannot be transferred to the participants earlier than 14 days after the experiment. in the case of savings, however, the transfer deadline is exactly four months after the experiment, so that the difference between earlier and later payment is about 3.5 months. for the amounts of money selected in the experiment, this period should be considered sufficiently long to put the participants in an actual “trade-off situation” between an early and a late payout. dominik tschinkl, nathalie weikert, dirk kiesewetter172 findings in the following section we examine whether and to what extent the different tax regimes inf luence the participants’ decisions for or against savings. therefore, we will first verify hypotheses 1a and 1b. with regard to descriptive statistics, the absolute number of decisions to save is determined for each participant, which can be a maximum of 20. we compare the treatments to see if they differ in terms of the absolute number of savings decisions. table 2 presents the relevant values. table 2. number of decisions for late payout treatment mean median standard deviation number of participants number of observations all 12.50 12.5 5.28 80 1.600 nt 13.89 14.5 5.64 18 360 it 12.05 12 5.90 22 440 bt 13.44 15 4.47 18 360 dt 11.05 12 4.43 22 440 s o u r c e : own data. the data show that mean and median in the treatment no tax only slightly deviate from the respective values in the treatment immediate taxation. due to the net equivalence of the payments and the fact that the individual discount rates of the participants do not differ significantly, the amount of decisions in favor of late payout should be the same in these two treatments. descriptive statistics suggest that this is the case, which is why hypothesis 1a seems to be confirmed. on the other hand, the results show that both mean and median in the treatment deferred taxation are lower than in the treatment no tax. since net equivalence applies here as well and no significantly different discount rates of the subjects were found, this result does not meet expectations. rather, according to hypothesis 1b, we would have expected the decisions in favor of saving to be similarly high in both treatments. based on descriptive statistics, hypothesis 1b must therefore be rejected. the impact of taxes on individual long-term savings decision 173 we verify these findings by mann-whitney u tests (two-sided) for independent samples. the underlying null hypothesis in each case is: when comparing two treatments, the decisions in favor of saving is the same. if this null hypothesis is rejected, the participants in the compared treatments show different decision behavior. the mann-whitney u test, which compares the no tax and immediate taxation treatments, yields a p-value of p = 0.6227. the decision behavior of the participants in the no tax and immediate taxation treatments is not significantly different and hypothesis 1a is confirmed. comparing the treatments no tax and deferred taxation, the p-value is p = 0.0719. thus, there is a significant difference between the treatments no tax and deferred taxation at the 10%-level. this confirms the perception of the descriptive statistics. participants in the treatment no tax and deferred taxation actually choose to save less often, although the net payouts are the same and the time preferences of the participants in these treatments are not significantly different. accordingly, the null hypothesis of this mann-whitney u test is rejected, which also leads to a rejection of hypothesis 1b. analogous to the test of hypotheses 1a and 1b, hypothesis 2 is verified. table 2 shows that both mean and median in the treatment deferred taxation are lower. a mann-whitney u test (two-sided) reveals the difference as significant at the 10% level (p = 0.0881). what was already suspected based on the findings for hypotheses 1a and 1b is confirmed for the pairwise comparison of the treatments immediate taxation and deferred taxation. accordingly, hypothesis 2 must be rejected. at this point, we put these findings into the context of the experiment. the results show that participants are less likely to opt for saving despite net-equivalent parameterization and similar time preferences in the treatment deferred taxation. this suggests that the deferred taxation in the experiment distorts the decisions of the participants. according to the terminology used in fochmann and hemmerich (2018), there is a perception effect of taxation. the subjects apparently assume that deferred taxation burdens savings more than it is actually the case. as a result, they decide to save less often, i.e. the deferred taxation distorts the decisions of the participants in the experiment. on the other hand, there are no relevant differences in the decision behavior between the treatments no tax and immediate taxation. the median for the number of decisions for late payout is even slightly higher in the treatment immediate taxation than in the treatment no tax. however, the differences between these treatments are not statistically significant. thus, this type of taxation seems not to dominik tschinkl, nathalie weikert, dirk kiesewetter174 distort the savings behavior. hence, there is no perception effect regarding immediate taxation. in the following section we include the treatment income tax. in this treatment the payments are gross equivalent to the treatment no tax. since the return on savings is also subject to taxation, however, there are lower net returns on savings and correspondingly lower net payments. descriptive statistics (see table 2) indicate that the median and mean value of decisions to save are lower than in the treatments no tax and immediate taxation. however, this does not apply to the treatment deferred taxation, as the participants show the lowest share of saving. using pairwise mann-whitney u tests (two-sided), we examine whether these differences are statistically significant. the p-values are shown in the following table 3. table 3. verification of hypothesis 3 – mann-whitney-u test (two-sided) nt bt dt it 0.3117 0.5392 0.6209 s o u r c e : own data. as expected (hypothesis 3), descriptive statistics suggest that participants in the income tax treatment decide less often to save than those in the no tax and immediate taxation treatments. however, the differences are not statistically significant. when comparing the treatments income tax and deferred taxation, it should be noted that the median and mean in the treatment deferred taxation are even lower, although the net returns are higher compared to the treatment income tax. a mann-whitney u test (two-sided) also reveals that this difference is not significant. consequently, participants in the income tax treatment do not choose to save less often, even though the net return on saving in this treatment is lower than in the other treatments. instead, subjects decide even more often to save than in the treatment deferred taxation. this illustrates the perception effect of the deferred taxation once again. despite higher net yields participants save less often than in the treatment income tax. this may be due to the fact that the differences between the possible net payouts were not large enough as the maximum difference in net yield between the three net-equivalent treatments (no tax, immediate taxation and deferred taxation) and the income tax treatment is 20 percentage points, which equals a difference in the the impact of taxes on individual long-term savings decision 175 net payout of 30 cu18 or three euros. differences are smaller in the other decision situations. therefore, it is possible that the participants did not attach great importance to the taxation of the yield, or rather ignored it. as shown above, the immediate taxation does not seem to distort the decisions of the participants. consequently, if the yield taxation were not taken into account, identical decision patterns would be expected in the treatments no tax and income tax. the paired comparison using a mann-whitney u test supports this result, as a significant difference between the treatments no tax and income tax could not be proven. similarly, the differences between the treatments no tax and immediate taxation are not statistically significant. nevertheless, since descriptive statistics show a tendency towards a lower amount of decisions in favor of late payments, participants apparently did not completely ignore the taxation of returns, but its effect was at least underestimated. however, these observations can be put into a different perspective. while in one half of the decision situations in the three tax treatments a low tax rate of 20 percent was set, a high tax rate (40 percent) applied in the other situations. in the treatment income tax, the respective tax rate applied to both the payouts and the return on savings. consequently, the differences in net yield and net payout between the income tax treatment and the other three treatments are greater in situations with a high tax rate than in those with a low tax rate. considering only the situations with a high tax rate, the mean of the absolute number of decisions to save in the income tax treatment is 1.41 less than in the no tax treatment and the median difference is 1.5. given that in ten situations the maximum number of decisions in favor of a late payout is ten, these differences appear to be significant. therefore, we use once again a mann-whitney u test (two-sided) to statistically verify the differences. regarding the decisions with a high tax rate, there is a significant difference between the treatments no tax and income tax.19 moreover, a comparison of the treatment income tax with the other two tax treatments shows that there is a significant difference to the 18 in the experiment the payouts were given in currency units (cu). thus, the participants were confronted with larger amounts and mostly whole numbers resulted as net values. the participants were explicitly informed about this in the instructions and were given the conversion rate of 1 cu = 0.10 euro. 19 in addition, a mann-whitney u test (two-sided) was conducted for the decision situations with low tax rate. the result is a p-value of 0.7629, so there is no significant difference. this was to be expected, since there is no significant difference for all 20 situations, whereas for the ten situations with a high tax rate there is. dominik tschinkl, nathalie weikert, dirk kiesewetter176 treatment immediate taxation regarding the situations with a high tax rate.20 however, there are no statistically significant differences to the treatment deferred taxation.21 regarding only the decision situations with a high tax rate, hypothesis 3 is largely confirmed. as expected, participants in the treatment income tax decide less frequently for saving than in the remaining three treatments. since the taxation of the net return has a stronger effect in the treatment income tax, the net return and net payment deviate more strongly. this seems to be recognized by the participants, whereas they almost completely ignore the taxation of returns when a low tax rate applies. in summary, descriptive statistics and non-parametric tests22 show that the participants ■ largely assess the burden of an immediate taxation (no perception effect of taxation) correctly, ■ deferred taxation affects the savings decision negatively (negative perception effect of taxation) and ■ partially ignore or underestimate the tax on returns in the treatment income tax but pay attention to it in situations with high tax rates. this means that based on descriptive statistics and non-parametric tests ■ hypothesis 1a can be accepted, ■ hypotheses 1b and 2 are rejected and ■ hypothesis 3 is rejected for the entire sample but is accepted for situations with high tax rates.  conclusion this paper examines the impact of different tax systems on the consumptionsavings decision of individuals. due to the parametrization, the treatments no tax, immediate taxation and deferred taxation lead to identical net payments despite different tax regulations. nevertheless, participants reveal the same decision behavior only with respect to the treatments no tax and immediate 20 p-value of a mann-whitney u test (two-sided): 0.0736. 21 p-value of a mann-whitney u test (two-sided): 0.2406. 22 in order to verify the previous results, we performed several logistic regression analyses in addition to the non-parametric tests. derived data supporting the previous findings are available upon request from the authors. the impact of taxes on individual long-term savings decision 177 taxation. regarding the treatment deferred taxation, however, nonparametric tests as well as logistic regression analysis show that participants save less compared to the other treatments. since participants perceive the impact of deferred taxation to be more negative than it actually is, a negative perception effect occurs. this result also has political implications, since many oecd countries promote savings formation and old-age provision via deferred taxation. in the experiment, however, this type of taxation results in less frequent savings. this result is in line with the findings from blaufus and milde (2020), who show that deferred taxation distorts the savings behavior, whereas immediate taxation does not. furthermore, the results suggest that participants only partially comprehend the benefits of deferred or immediate taxation compared to a classic income tax. since the periodic return is taxable regarding the classic income tax, participants should choose to save less often than in the other treatments. comparing immediate and deferred taxation, the findings confirm these expectations. however, the results show no difference between deferred taxation and income taxation, due to the misperception of deferred taxation. nevertheless, it should be noted that the actual legislation and the trade-off between immediate consumption and savings could only be represented in an abstract way. in particular, the assumption that the tax rate is the same for immediate consumption and savings formation will rarely be fulfilled in reality. generally, the tax rate should be lower during the payout phase, which makes deferred taxation advantageous compared to immediate taxation. moreover, the setup of the experiment was kept simple. further studies could choose a more realistic setting, e.g. by extending the time horizon between earlier and later payments and using recurring payments instead of one-off payments. if such modifications of the present experiment are possible, the framing could also be adjusted accordingly. thus, the two alternatives could actually be called “immediate consumption” and “old-age provision”. regardless of these limitations, we believe that the results of this experiment are relevant for real life savings decisions. like blaufus and milde (2020), we show that deferred taxation can have a negative and distorting effect on savings decisions. this is even more remarkable because the structure of the experiment and the decisions to be made by the participants differ significantly from those in blaufus and milde (2020). whereas these authors’ experiment puts the focus on the smoothing of consumption over the life cycle through saving, our design makes salient the main effect of any risk-free investment which dominik tschinkl, nathalie weikert, dirk kiesewetter178 is that earning a return on an investment comes at the cost of postponing consumption. both experiments make sure that a rational participant who does not care about the framing but tries to maximize her earnings from participating acts exactly as if she were in a comparable real-life situation. we therefore are confident that the observed tax effects play a significant role in people’s investment and retirement planning. deferred taxation 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(1995). the effects of income and consumption tax regimes and future tax rate uncertainty on proportional savings and risk-taking. accounting review, 70(4), 635-653. olson, m., & bailey, m. (1981). positive time preference. journal of political economy, 89(1), 1-25. https://doi.org/10.1086/260947. swenson, c. (1989). tax regimes and the demand for risky assets: some experimental market evidence. journal of the american taxation association, 11(1), 54-76. thaler, r., & johnson, e. (1990). gambling with the house money effect and trying to break even: the effects of prior outcomes on risky choice. management science, 36(6), 643-660. http://dx.doi.org/10.1287/mnsc.36.6.643. tobin, j. (1958). liquidity preference as behavior towards risk. review of economic studies, 25(2), 65-86. http://dx.doi.org/10.2307/2296205. weber, m., & zuchel, h. (2005). how do prior outcomes affect risk attitude? decision analyses, 2(1), 30-43. http://dx.doi.org/10.1287/deca.1050.0034. date of submission: september 21, 2021; date of acceptance: december 13, 2021. * contact information: kulshrestha.preeti@rediffmail.com, dayananda sagar university, bangalore, mig plot-70, block-a, shastri puram, agra-282001, india, phone: +919953186389; orcid id: https://orcid.org/0000-0001-6423-6694. ** contact information: anusri2799@gmail.com, djerapah megah plasindho, sukoharjo, jawa tengah, indonesia; orcid id: https://orcid.org/0000-0001-7055-2124. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 1 kulshrestha, p., & srivastava, a (2022). use of camel rating framework: a comparative performance analysis of selected commercial banks in india. copernican journal of finance & accounting, 11(1), 67–87. http://dx.doi.org/10.12775/cjfa.2022.004 preeti kulshrestha* dayananda sagar university anubha srivastava** djerapah megah plasindho use of camel rating framework: a comparative performance analysis of selected commercial banks in india keywords: capital adequacy, liquidity, asset quality, camel, financial strength. j e l classification: m41, g21, l25, g29. abstract: the performance of the banking sector is significant for any economy. the growth of a nation relies significantly upon efficient and optimum utilization of resources and also on operational efficiency of various sectors of an economy, of which the banking sector is a critical part. banking system strengthens the stimulation of capital formation and provides liquidity. indian banking sector comprises private, public, rural and foreign banks. in india, public sector banks are encountering challenges from private sector banks and are under constant pressure to perform better. hence, this study endeavors mainly to analyze and compare the financial performance of the private and public banking sector by using camel rating approach and for this purpose total of fourteen banks, representing the private and public, have been selected. the selected sample are the market leaders and have the highest market capitalization in the preeti kulshrestha, anubha srivastava68 capital market. overall, the paper aims to measure and compare the financial performance of private and public sector banks by employing camel approach on their audited financial reports of eight years period i.e. (2011–2018). the ratios considered for this analysis includes capital adequacy (ca), asset quality (aq), management soundness (ms), earnings and liquidity (lr). this study devised ranking method based on averages of various ratios and one way annova test is applied to find out statistical significance difference amongst groups. results shown that private sector banks are better performers compare to public sector bank. the overall results signify that the performance of private sector banks has improved because of the implementation of modern technology banking reforms and recovery mechanism.  introduction according to pekkaya and demir (2018) banking in any economy serves as the fundamental source for financial strength. the banks have a direct and indirect impact on almost all industries. it plays a major role on the allocation of economic resources and a country’s financial stability. the implication and role of banks operating in the modern economy are unavoidable and various products and services presented by the banks to the society is rising multifarious (bikker, 2010; altan, beduk & yusufazari, 2014). according to said and tumin (2011), the banking sector is an integral part of the financial system and performs a strategic role in the economic development of nations. the banks as an industry assist through stimulating capital formation, innovation, monetization and facilitating the proper implementation of monetary policy. a healthy business environment builds consumer confidence and encourages investors to infuse more capital while a controlled inf lation helps in strengthening economic development. the banking sector in any economy enjoys a critical part in boosting economic growth by investing at large in infrastructure and other projects. reforms in banks are crucial for regulating and controlling the money f low in society. in addition, the advancements in technology mobile banking, net banking services, e-wallets, fintech and artificial intelligence, etc. are to be blamed for making banking more complex. indian banking system endeavors to deliver their finest and enhanced services to their customers. during the financial crisis, governments adopted a majority of stakes in most of the beleaguered financial institutions through bailouts in developed countries. this started the debate about whether government-owned banks enhance financial soundness as per nsengiyumva (2016). use of camel rating framework… 69 according to wanke, kabir hassan and gavião (2016) most of the previous studies based on financial analysis failed due to insufficient quantification of stability scores. ramya, narmadha, lekha, nandhitha bagyam and keerthana (2017) examine the state bank of india’s financial performance for the study period 2012–2016 using camel approach and revealed that there is a necessity to take adequate efforts to improve the efficiency of state bank of india on a few parameters i.e., debt-equity, operating profit, and non-interest income to total income”. according to nazir and sangmi (2010) a good rating of capital adequacy exhibits a strong signal of bank‘s health during crisis. research problem during the economic crisis in 2008, the indian banking system emerged unhurt, but the financial crisis amongst worldwide economies (barring 2009–10) has put forth pressure on a bank’s performance in terms of profitability and capital utilization. many public sector banks in india are facing problems of increasing non-performing assets, shortage of resources etc. in this scenario it is imperative to assess the banking sector performance. this paper focuses on to appraise and compare the performance of selected commercial banks in india using camel model and endeavors to recognize the key determinants that affect the financial performance of these banks in indian economic context. further, the study also examined the significant difference between public and private sector bank’s financial performance by using camel model. review of literature the camel rating method of measuring financial performance was originated in 1979 during uniform financial institutions rating system (ufirs) implementation in the us banking sector to introduce ratings for on-site examinations of banking institutions. sahajwala and van den bergh (2000) explained in their research that under the camel approach, each bank is appraised based on five major dimensions which indicate bank’s operations & performance. siva and natarajan (2011), analysed the camel norms so as to study the performance of the sbi group and established that scanning the performance of commercial banks annually aids in diagnosing its financial health. chaudhry preeti kulshrestha, anubha srivastava70 and singh (2012) tried to find out the inf luence of financial transformations on the trustworthiness of the indian banking sector and its impact on asset quality. as per ishaq, karim, ahmed and zaheer (2016) this model is suggested for appraising the performance of banks by the us federal reserve and the uniform financial institutions rating system. according to singla (2008) undertook this study to investigate and comprehend how financial management plays a vital role in banking sectors growth. the ratios such as return on assets (roa) and return on equities (roe), which measures the profitability and the net margin interest can be considered as two key factors to quantify the bank’s performance. performance of banks is associated with internal bank specific factors like risk, market share, interest rates, etc. and external factors such as macroeconomic & macro-financial etc. (nouaili, abaoub & ochi, 2015; atyeh, yasin & khatibet, 2015). rostami (2015) examined the inf luence of each constraint of camels rating framework on iranian bank’s performance. q-tobin’s ratio was adopted as a performance indicator in their study. the research outcome revealed the relationship between camel model and q-tobin’s ratio. baral (2005) employed financial data which was publicly available to examine the financial performance of the joint venture banks by using camel model framework. the study concluded that the joint venture banks were healthier than scheduled banks but these banks were not strong enough to face the large possible shocks to their balance sheet. echekoba, egbunike and ezu (2014) evaluated in their research the inf luence of camel indicators on the profitability of nigerian commercial banks for the period of 9 years (2001–2010) and summarised that bank’s profitability was not inf luenced by capital adequacy, assets quality, management efficiency and earnings but highly inf luenced by liquidity. chaudhary and sharma (2011) examined how efficiently public and private sector banks have been managing npa. he has applied statistical tools for the projection of the movement. cebenoyan and strahan (2004) designed framework for examining the capital allocation & capital structure with respect to the value creation of banks which they thought was a well-founded concern with risk management secondly the risks encountered by the banks which can be frictionless hedged in the capital marketplace. desta (2016) concluded in their study that the composite camel rating provides variations among the banks. despite having a fair rate on a composite basis, they have variations when each component is compared individually. use of camel rating framework… 71 ab-rahim, kadri, ee-ling and alim dee (2018) indicated that the results of their study are important as the emerging economies in asean countries will attract both local and global investors to invest and will strengthen their financial position in the asean region. ahsan (2016) suggested in his study that the banking sector should be given attention to bring sustainability in the economy and added further that the efficient banking system assists in reducing the risk of failure of an economy. dhanaraj and ponmani (2020) in their study emphasized the usefulness of camel approach for bankers, stakeholders, shareholders, investors, customers, policymakers, etc. herbert and santoso (2020) indicated a healthy score for the sample selected but suggested that banks should take advantage of it implementation for cost efficiency. hewaidy, elshamy and kayed (2020) concluded in their report that conventional banks performed better than islamic banks and research findings are assumed to be significant for policymakers and other shareholders to make better decisions. ping and kusairi (2020) concluded that the banking sector should focus more on camel components for better supervision of bank performance. research methodology the present study endeavors to explore the significance of camel rating framework in assessing the selected indian bank’s performance. the current research is descriptive and exploratory in nature and research design aims to assess the relationship between selected bank’s performance and elements of camel by obtaining quantitative data from the audited annual reports. the statistics have been gathered from annual reports, bse and nse websites of india. few ratios are calculated under each acronym of camel. in addition, individual ranking, composite rankings and average have been calculated to derive meaningful research outcome. in india, the banks can be classified as commercial banks and co-operative banks. commercial banks, further are separated into two sectors public sector banks and private sector banks which operate at the national level and provide services. public sector banks are regulated by the government and private sector banks have private ownership. public sector banks are encountering challenges from private sector banks and are under constant pressure to perform better. while public sector banks have the advantage of perceived reputation and faith due to involvement of government, private sector banks provide better amenities and efficient services. preeti kulshrestha, anubha srivastava72 the current investigation has been executed considering the sharp differences between private sector and public sector banks in term of performance by employing camel rating methods in india. the present research assembled the data from annual reports of 14 banks comprising 7 private and 7 public sector banks and the period for the study was eight financial years (2011–2018). these banks were purposely selected because they provided complete financial statements for the study period. the rationale behind selecting only seven banks from their corresponding sector is because they are the top-performing large cap banks and have the highest market capitalization in indian capital market, except j&k bank whose npa has increased significantly over the past years and reporting the first time in last four decades of continuous financial loss. the purpose of incorporating j&k bank in the present study is to assess the financial strength of the bank despite of its limited operation in india. total 19 ratios were calculated under the acronyms of camel rating framework which are expressed in the following table. table 1. ratios calculated under camel model capital adequacy asset quality management efficiency earnings capability liquidity capital adequacy ratio (car) capital adequacy tier i ratio (car i) capital adequacy tier ii ratio (car ii) net npa* / net ratio (npar) net npa (npa) gross npa ratio (gnpar) asset utilization ratio (aur) return on equity ratio (roe) profit per employee (profit per employee) business per employee (business per employee) income to expense ratio (e/i ratio) return on assets (roa) spread ratio (sr) net interest margin (nim) net profit ratio (npr) current ratio (cr) investment deposit ratio (investment dr) cash deposit ratio (cash dr) credit deposit ratio (credit dr) * non performing asset. s o u r c e : compiled by author. the following hypothesis was framed to test the significant difference between financial performance of public and private sector banks. use of camel rating framework… 73 hypothesis of the study h0: there is no significant difference amongst overall parameters of camel model on the financial performance of public sector banks. ha1: there is a significant difference amongst overall parameters of camel model on the financial performance of public sector banks. h0: there is no significant difference amongst overall parameters of camel model on the financial performance of private sector banks. ha2: there is a significant difference amongst overall parameters of camel model on the financial performance of private sector banks. data analysis capital adequacy (c) – capital adequacy is a measure of the internal efficiency of a bank. it assists the banks to stay solvent during the period of crisis. capital adequacy ratio is expressed as (tier1 capital+ tier2 capital) divided by risk-weighted assets. this ratio expresses the bank’s capital which serves as a cushion to engage losses before it becomes insolvent. as per reddy (2012) capital adequacy is required to maintain depositors’ confidence and preventing the bank from going bankrupt. it has an effect on the overall performance of a bank. recognizing the importance of capital adequacy, the reserve bank of india (rbi) released a directive in 1992, whereby each bank in india was asked to satisfy the capital adequacy standard of 8%, the norm fixed on the footing of the passports of the basel–iii committee. nevertheless, a substantial-high car indicates that the bank is conservative and has not used the wide voltage of its cap. therefore, according to chen (2003), to avert bank failure, it is essential to keep a noteworthy level of capital adequacy. three ratios (car, car tier i and car tier ii) are calculated in this research to derive the desired outcome. the capital adequacy ratios of the banks under study are presented in the accompanying tables. preeti kulshrestha, anubha srivastava74 table 2. capital adequacy (c) details car car i car ii composite public sector banks avg. % rank avg. % rank avg. % rank avg. % rank sbi 13.00 7 10.12 8 3.35 6 7 5 pnb 12.40 9 7.89 13 2.63 10 10.67 12 boi 11.20 12 8.56 10 2.80 8 10.00 11 union bank 11.00 14 8.03 12 2.62 11 12.33 14 central bank of india 11.03 13 6.75 14 2.75 9 12 13 uco bank 12.13 10 8.63 9 3.63 5 8 7.5 bank of maharashtra 11.75 11 8.38 11 3.25 7 9.66 9.5 private sector banks hdfc 16.66 2 12.90 3 3.89 3 2.66 3 icici 18.00 1 13.75 2 4.65 1 1.33 1 axis bank 15.60 4 12.32 5 3.80 4 4.33 4 indusind bank 14.40 6 12.57 4 2.52 12 7.33 6 yes bank 16.47 3 15.85 1 4.20 2 2 2 federal bank 14.71 5 11.42 6 1.92 13 8 7.5 j&k bank 12.80 8 10.62 7 1.79 14 9.66 9.5 s o u r c e : compiled by author from annual reports of respective bank. interpretation: the table 2, shows 8-years average of the car, car i and car ii of selected banks and identified that all the banks have a car above prescribed norm of 8%. the above table shows the distribution which consists car and other ratios determined as per range of car averages for the banks. icici has the highest car with an average of 18%, followed by hdfc with 16.66% and yes bank with 16.47%. amongst the private sector banks j&k bank has the lowest car i.e.12.80%.sbi has the highest car with an average of 13% and union bank has the lowest car with 11%. public sector banks in india perform as per the use of camel rating framework… 75 directive of rbi and governed by government rules which inf luences the performance of these banks. for other ratios yes bank has the highest car-i i.e. 15.85% and icici has second highest car-i (13.75%). icici again demonstrated the highest performance in terms of car-ii (4.65%). the composited ranking also indicate that icici and yes bank are two best performers. amongst public sector banks sbi performance is better in terms of car, car-i and car-ii as compared to other selected banks. the author has considered car as benchmark for capital adequacy and the outcome suggests that icici and hdfc ranks the best & union bank and central bank of india ranks the last showing poor capital adequacy. as far as car i is concerned, yes bank and icici ranks the best and central bank and punjab national bank have the least rank. considering car ii ranks, it is understood that icici and yes bank have the best capital adequacy & bank of india and federal bank has inadequate capital. asset quality (a) – it is another significant dimension for the evaluation of a bank’s performance and efficiency. as per the rbi rules, the bad debts are classified as standard, sub-standard and doubtful and loss asset. the assets quality is a vital factor to inspect the level of financial strength. three ratios namely npa ratio, net npa (million) and gross npa ratio are mentioned in the below table. table 3. asset quality (a) detail npa r net npa (million) gnpar composite public sector banks avg. % rank avg. % rank avg. % rank avg. % rank sbi 5.51 11 24.73 14 6.90 9 11.33 12 pnb 3.86 10 11.15 13 9.51 13 12 13.5 boi 3.33 9 8.42 9 8.36 11 9.66 9.5 union bank 2.72 8 8.67 11 7.29 10 9.66 9.5 central bank of india 5.82 12 8.45 10 11 14 12 13.5 uco bank 6.63 13 4.55 6 8.75 12 10.33 11 bank of maharashtra 6.75 14 3.45 3 5.38 7 8 8 preeti kulshrestha, anubha srivastava76 detail npa r net npa (million) gnpar composite private. banks hdfc 0.24 1 6.40 7 1.16 2 3.33 1.5 icici 1.41 5 4.23 4 4.38 6 5 4 axis bank 1.46 6 3.45 2 2.80 5 4.33 3 indusind bank .39 2 4.25 5 1.45 3 3.33 1.5 yes bank .40 3 9.45 12 .74 1 5.33 5.5 federal bank .67 4 6.96 8 2.20 4 5.33 5.5 j&k bank 1.51 7 1.51 1 6.67 8 5.34 7 s o u r c e : compiled by author from annual reports of respective bank. interpretation: the table 3, defines the 8-year average of selected banks; hdfc tops with an average of 0.24 percent in terms of npa ratio, which is less than 1% npa per loan, followed by indusind bank 0.39 percent. yes bank and federal bank showed 0.40 and 0.67 percent npa ratio respectively. banks with the poorest performance in terms of npa ratios are bank of maharashtra and uco bank with an average of 6.75 and 6.63 percent followed by sbi with an average of 5.51 percent. nevertheless, when comparing the npa growth, j&k bank showed the highest npa growth over the last financial year, the fact that its npa ratio is better than other banks is due to the bank’s limited operations in the country unlike other nationalised banks. in composite ranking hdfc and indusind bank demonstrated the best performance followed by axis and icici bank. all private banks have performed better in term of npa compared to public sector banks. pnb, sbi and central bank of india have showed the highest npa in the balance sheet. management efficiency (m) – the management’s performance is often qualitative and it is analyzed through the individual appraisal of management systable 3. asset… use of camel rating framework… 77 tems, organizational culture, and control mechanisms. though, the efficiency of the management for a bank can be judged with the help of other ratios of offsite valuation of a bank. table 4. management efficiency (m) detail asset utilisation ratio return on equity profit per employee (million) business per employee (million) expenses to income ratio composite public sector banks avg % rank avg % rank avg rank avg rank avg % rank avg rank sbi 8.6 7 9.70 7 .43 8 134 4 9.96 14 8 7 pnb 8.7 6 3.56 12 .39 9 127 6 9.44 11 8.8 9 boi 7.7 11 5.10 11 .23 12 177 1 9.71 12 9.4 11 union bank 9.0 5 8.06 9 .38 10 161 2 9.41 10 7.2 6 central bank of india 7.8 10 2.57 13 .22 13 108 9 8.89 8 10.6 13 uco bank 3.1 13 5.15 10 .19 14 114 7 9.80 13 11.4 14 bank of maharashtra 8.1 8 2.49 14 .26 11 140 3 9.40 9 9 10 private banks hdfc 9.9 2 17.3 2 1.35 2 110 8 8.27 4 3.6 1 icici 13.8 1 11.2 5 1.24 3 107 10 8.69 6 5 4 axis bank 9.6 3 12.9 4 1.23 4 133 5 8.36 5 4.2 2 indusind bank 7.6 12 15.5 3 1.03 6 68 14 6.17 3 10 12 yes bank 7.9 9 19 1 1.74 1 95 11 5.87 1 4.6 3 federal bank 2.7 14 9.5 8 .75 7 80 12 6.57 2 8.6 8 j&k bank 9.1 4 10.4 6 1.15 5 71 13 8.79 7 7 5 s o u r c e : compiled by author from annual reports of respective bank. preeti kulshrestha, anubha srivastava78 interpretation: table 4 shows five ratios as performance indicator for institution’s management efficiency. the best bank is icici bank with an 8-years average of 13.8% for asset utilization ratio. for roe and profit per employee both hdfc and yes bank are doing better compared to others. low income ratio is an indicator of better profitability. hdfc followed by axis bank has the lowest score. amongst public sector banks union bank has the highest average in terms of assets utilization ratio followed by pnb and sbi. in terms of roe (return on earnings) sbi stood first with 9.70%. it is to be observed that private sector banks have better expenditure to income ratios as compared to the public banks. on composite ranking hdfc is the best scorer and ranks one followed by axis bank and yes bank. overall public sector efficiency is less compared to private sector banks whereas uco bank and central bank of india have the lowest composite rank. as far as asset utilisation ratio is concerned icici and hdfc has highest rank & federal bank and uco bank has the least rank in management efficiency. considering roe, it is found that yes bank and icici has highest rank and bank of maharashtra and central bank of india finds the last place. in profit per employee, yes bank and uco banks holds the first and last rank respectively. as far as business per employee is concerned bank of india tops the list and indusind bank holds the last rank. considering expense-income ratio we find that yes bank tops the list showing good management quality and sbi holds the last rank proving poor management efficiency. earnings capabilities (e) – the earnings quality is a vital standard that defines the bank’s ability to earn regularly. basically, it defines the bank’s profitability and describes its sustainability and growth in earnings. four key ratios roa, spread ratio (sr), net profit ratio (npr) and net interest margin (nim) is given in the following table. use of camel rating framework… 79 table 5. earnings capabilities (e) detail return on asset spread ratio net profit ratio net interest margin composite public sector banks avg % rank avg % rank avg % rank avg % rank avg rank sbi .73 8 6.11 12 9.08 8 2.48 10 7 8 pnb .55 10 6.82 10 6.14 10 2.57 10 9.75 9 boi .24 11 5.56 14 2.91 12 1.91 8 11.25 13 union bank .56 9 5.92 13 6.52 9 2.19 13 11 11.5 central bank of india .11 13 8.88 2 2.33 13 2.21 12 10 10 uco bank .18 12 7.39 7 4.83 11 2.08 14 11 11.5 bank of maharashtra .08 14 6.14 11 2.31 14 2.47 11 12.5 14 private banks hdfc 1.84 1 9.00 1 20.04 2 3.73 1 1.25 1 icici 1.60 3 7.30 8 20.69 1 2.70 6 4.5 4.5 axis bank 1.68 2 7.44 6 19.88 3 2.95 4 3.75 2 indusind bank 1.53 4 7.51 5 18.03 4 3.58 3 4 3 yes bank 1.45 5 8.31 3 17.79 5 2.78 5 4.5 4.5 federal bank 1.15 7 7.21 9 11.13 7 3.30 2 6.25 7 j&k bank 1.16 6 8.14 4 12.89 6 2.68 7 5.75 6 s o u r c e : compiled by author from annual reports of respective bank. interpretation: as per table 5, hdfc has the highest earning capability with an 8-year average of 1.84%, axis bank follows it with 1.68% and icici with 1.60%, bank of maharashtra and central bank have the lowest 8-year average of 0.08% and 0.11% respectively. bank of maharashtra has the lowest profitability from loans dispersed. the above table shows the 8-year average of spread ratios of banks, and astonishingly yes bank has an average of 8.31% which is the second highest spread ratio, after hdfc with 9.00%. boi has the lowest score with 5.56%. preeti kulshrestha, anubha srivastava80 on an average, nearly all the banks have shown an increase in their spread ratio except in fy15-16. this may be due to a considerable increase in the npa of banks during that financial year. it is clearly depicted in the table that icici is on top with an average of 20.69% followed by hdfc with a ratio of 20.04%, bank of maharashtra and central bank have the lowest net profit ratio of 2.33% and 2.31%. on composite ranking all private sector banks are representing good earning capabilities compare to public sector banks. considering roa, it is understood that hdfc bank has the best earning capability and bank of maharashtra has poor earning capability. as far as spread ratio is concerned hdfc bank tops the bank and bank of india falls last in the list. as per npr ratio, icici tops the rank and bank of maharashtra falls the last in the list. considering nim ratio, it is understood that hdfc bank tops in efficiency capabilities and uco bank has poor efficiency capabilities. liquidity (l) – bank requires liquidity for smooth functioning. liquidity and transferability are the key components for banking sector. investment securities like liquid assets enable a bank to act rapidly to unanticipated necessities for instantaneous payment. four ratios cash ratio(cr), credit deposit ratio, cash deposit ratio and investment deposit ratio are performance indicator for liquidity, as given below. table 6. liquidity (l) detail cash ratio credit deposit ratio cash deposit ratio investment deposit ratio composite public sector banks avg rank avg % rank avg % rank avg % rank avg rank sbi .033 11 81.1 7 4.7 12 32.0 10 10 10 pnb .022 14 76.2 9 4.8 11 30.9 11 11.2 14 boi .045 8 75.2 10 5.3 8 23.3 14 10 11 union bank .025 13 78.0 8 5.1 9 28.9 12 10.5 12 central bank of india .052 6 60.0 14 3.2 14 33.8 9 10.7 13 uco bank .063 3 65.2 13 3.7 13 36.5 5 8.5 7 bank of maharashtra .043 9 72.1 12 6.6 3 25.5 13 9.25 9 use of camel rating framework… 81 detail cash ratio credit deposit ratio cash deposit ratio investment deposit ratio composite private bank hdfc .061 4 82.1 6 6.9 2 35.3 6 4.5 3.5 icici .091 1 102 1 7.0 1 48.1 2 1.25 1 axis bank .042 10 85.2 3 6.3 5 38.3 4 5.5 6 indusind bank .057 5 88.4 2 6.2 6 34.1 8 5.2 5 yes bank .074 2 82.1 5 5.4 7 48.9 1 3.75 2 federal bank .032 12 74.8 11 4.9 10 38.7 3 9 8 j&k bank .051 3 84.1 4 6.5 4 35.0 7 4.5 3.5 s o u r c e : compiled by author from annual reports of respective bank. interpretation: it is depicted in table 6, that icici has the highest current ratio with 0.09 times which can be interpreted as: for every 0.09:1 unit of current asset, it has 1 unit of liability. the bank with the lowest 8-year average of current ratio is pnb with 0.02:1 in the above table, icici has the best credit deposit ratio with an 8-years average of 102.1%, followed by indusind bank with 88.4 % and axis bank with 85.2%. high credit deposit ratio of icici bank shows that in case fund requirements occur, it may not have the anticipated liquidity to complete such requirements. cash deposit ratio and investment deposit ratio of icici and yes bank stipulates the high performance with maximum score. on composite ranking all private sector are showing high liquidity whereas public sector banks are facing the liquidity crunch issues. considering cr, it is understood that icici bank has the best liquidity and pnb has poor liquidity. as far as credit dr ratio is concerned icici bank is at top amongst the banks and central bank of india falls last in the list. as per cash dr ratio, icici tops the rank and central bank of india falls the last in the list. considering investment dr ratio it is understood that yes bank is at top amongst selected banks in terms of liquidity and bank of india has poor liquidity. table 6. liquidity… preeti kulshrestha, anubha srivastava82 overall performance of the selected banks table 7. overall ranking of the selected banks based on the camels parameter bank capital adequacy ( c) asset quality (a) management efficiency (m) earnings capability ( e) liquidity ( l) avg. rank public sector banks sbi 5 12 7 8 10 8.4 8 pnb 12 13.5 9 9 14 11.5 13 boi 11 9.5 11 13 11 11.1 12 union bank 14 9.5 6 11.5 12 10.6 11 central bank of india 13 13.5 13 10 13 12.5 14 uco bank 7.5 11 14 11.5 7 10.2 10 bank of maharashtra 9.5 8 10 14 9 10.1 9 pvt. banks hdfc 3 1.5 1 1 3.5 2 1 icici 1 4 4 4.5 1 2.9 2 axis bank 4 3 2 2 6 3.4 3.5 indusind bank 6 1.5 12 3 5 5.5 5 yes bank 2 5.5 3 4.5 2 3.4 3.5 federal bank 7.5 5.5 8 7 8 7.2 7 j&k bank 9.5 7 5 6 3.5 6.2 6 s o u r c e : compiled by author from annual reports of selected banks. table 7 indicates the aggregate average of total ranks obtained on various parameters under camel approach. the above table explains that all the private banks are scoring better on all parameters of camel rating due their operational efficiency and aggressive approach. the decision making ability, strategy and policy implement in private sector banks are better than public sector banks. overall, it can be established that private sector banks in india perform better as associated to public sector banks. use of camel rating framework… 83 table 8. annova test (public sector banks) source of variation ss df ms f p-value f crit between groups 140302.9902 18 7794.610567 193.3328907 2.354286e-52 1.72353928 within groups 4596.142961 114 40.31704352 total 144899.1332 132 s o u r c e : compiled by author from the results of spss. there was a statistically significant difference amongst groups as determined by one way annova test with p-value of 2.354286e-52 is greater than critical value (1.72353928). hence, null hypothesis is rejected. there is a significant difference amongst overall parameters of camel model on the financial performance of public sector banks. table 9. annova test (private sector banks) source of variation ss df ms f p-value f crit between groups 78412.79234 18 4356.266241 98.94645163 2.54289e-53 1.71343948 within groups 4182.517777 95 44.02650291 total 82595.31012 113 s o u r c e : compiled by author from the results of spss. there was a statistically significant difference amongst groups as determined by one way annova test with p-value of 2.54289e-53 which is smaller than 0.05. f value is also greater than critical value (1.71343948). hence, null hypothesis is rejected. there is a significant difference amongst overall parameters of camel model on the financial performance of private sector banks. results and discussion capital adequacy ratios analysis shows that icici bank ranks the best capital adequacy & union bank has poor capital adequacy ratio. regarding asset qual preeti kulshrestha, anubha srivastava84 ity, hdfc bank and indusind bank rated excellent whereas central bank of india and pnb ranks last. this analysis shows that amongst the banks considered the asset quality of hdfc and indusind bank is the best and the central bank of india and pnb has the poor asset quality. in order to assess the management efficiency aspects such as asset utilisation, return on equity, and profit per employee, business per employee, expense-income ratio is considered. the study shows that the hdfc bank tops in management efficiency and uco bank has poor management efficiency. in order to evaluate the earning capability of banks, return on assets, spread ratio, npr ratio and nim ratio are calculated. it is found that hdfc bank has the best earning capability and bank of maharashtra has poor earning capability. based on liquidity, it is found that icici bank has the best earning capability and pnb has poor liquidity. among the banks considered, hdfc bank and icici banks are the best performing banks & pnb and central bank of india are poor performers. on the basis of analysis, it is found that private sector banks are better performers compare to public sector bank.  conclusion due to fast-paced f luctuations in the banking sector, all the banks all around the world intend to improve their supervision quality and methods. in order to evaluate the function of banks, most of the developed nations are adopting a uniform financial rating system that is camel rating accompanied by other prevailing procedures. the current study suffers from few limitations similar to other previous investigations. the paper has incorporated only 14 banks for research purposes which may not represent the whole banking sector and has considered only eight years as study period. future authors may add more ratios to compare and evaluate the performance of banks and can take a large sample size. there is also a possibility to compare indian banks with other international banks too. further, researchers can also investigate the performance of the banking sector by considering models similar to camel like bankometer s-score model, z score models etc. the current paper focused on assessing the financial performance of selected indian banks using camel ratio. according to kumari (2017), camels rating system is a quantitative technique and widely used in various countries. the results of this study show that there is a statistically significant difference use of camel rating framework… 85 between the overall performance of all the public sector banks and private sector banks in india. the result of the study is similar to (purohit & bothra, 2018) who concluded that private sector banks are at a better position. the overall results signify that the performance of private sector banks has improved because of the implementation of modern technology banking reforms and recovery mechanism. further another reason is because private sector banks are financially stronger than public sector banks.  references ab-rahim, r., kadri, n., ee-ling, a.-c., & alim dee, a. 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(2011). peformance and financial ratios of commercial banks in malaysia and china. international review of business research papers, 7(2), 157– –169. singla, h.k. (2008). financial performance of banks in india. the iup journal of bank management, 7(1), 50–62. siva, s., & natarajan, p. (2011). camel rating scanning (crs) of sbi groups. journal of banking financial services and insurance research, 1(7), 1–17. wanke, p., kabir hassan, m., & gavião, l.o. (2017). islamic banking and performance in the asean banking industry: a topsis approach with probabilistic weights. international journal of business and society, 18(s1), 129–150. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: july 27, 2015; date of acceptance: october 16, 2015. * contact information: prochazd@vse.cz, w. churchill sq. 4, prague 130 67, czech republic, phone + 420 224 095 125. procházka d. (2015). lobbying on the iasb standards: an analysis of the lobbyists’ behaviour over period 2006–2014. copernican journal of finance & accounting, 4(2), 129–143. http:// dx.doi.org/10.12775/cjfa.2015.020 david procházka* university of economics, prague lobbying on the iasb standards: an analysis of the lobbyists’ behaviour over period 2006–2014 keywords: lobbying, accounting standards, iasb, rational model of lobbying. j e l classification: m41. abstract: the paper investigates whether there is any significant difference in lobbying behaviour on the iasb’s projects depending on the type of a project. in particular, we scrutinise the differences in number of comments letters received for: (a) major vs. minor projects; (b) projects successfully completed after the exposure draft phase vs. projects revised/stopped after the exposure draft phase. to test our two hypotheses about the pattern of lobbyist behaviour, we use reasoning based on a rational lobbying model developed by sutton (1984). our paper limits the scope to the iasb’s projects on its agenda over period 2006–2014; we thus complement previous studies of kenny & larson (1995) and jorissen et al. (2012), who analysed the lobbying on iasb’s standards over periods 1989–1992, and 2002–2006 respectively. our results show that the iasb inclines to succumb to the pressure of lobbying parties if the lobbying is quite massive (measured by number of comment letters submitted) in relation to other projects. we supplement the literature on lobbying on accounting standards with additional evidence on general ability of the lobbyist to inf luence the decision of standard-setters by pushing them to revise a project substantially, or even to stop the project in question completely. david procházka130  introduction1 unrestricted number of consumers’ needs and limited number of resources available for their satisfaction elicits the conf licts, what economic demands being satisfied via collective action should have priority. accounting is also affected by these conf licts, which result in existence of various definitions of income and capital and methods for their measurement. the preparers of financial statements have to make choices, which accounting treatment shall be applied to provide users with useful information. demski (1974) shows on an example of simple economy with actors obtaining information ex-ante and ex-post that information policy alterations, including the changes in accounting choices or changes in accounting standards, are identical to wealth redistributions. just a small change in accounting standards may substantially alter the f lows of economic benefits to affected parties. these may have strong incentives to inf luence the process of standard setting. competing goals create conf licts about the content of accounting standards. an effective solution of conf licts requires establishing of a formalised process for the development of financial reporting standards. the due process (containing public discussions, consultations, invitation of commentary letters, etc.) decreases the risk of conf licts among various groups of users, prepares, auditors, regulators, etc. by inviting them to participate in the preparation phase of new standards. active participation of interested parties is a necessary condition for legitimacy of the due process and its quality (durocher, fortin 2011). the degree of activity also indicates the importance and expected impact of a new standard on benefits of affected parties. an analysis of lobbying behaviour on standard-setting process is thus an issue of importance for standard-setters (regulators) as well as for accounting research. next chapter reviews the literature on this topic in more detail. the paper focuses on lobbying on the iasb’s international financial reporting standards. the iasb is an independent body and its standard-setting process is not formally subject to any legal or political jurisdiction. the openness of its due process to competing opinions is a must for the general acceptance of proposed guidance. this paper investigates whether there is any signifi1 the paper is supported by the czech science foundation under the research project „economic impacts of the ifrs adoption in selected transition countries” (no. 15- 01280s); the support is gratefully acknowledged. lobbying on the iasb standards: an analysis of the lobbyists… 131 cant difference in lobbying behaviour on the iasb’s projects depending on the type of a project. in particular, we scrutinise the differences in number of comments letters received for: (a) major vs. minor projects; (b) projects successfully completed after the exposure draft phase vs. projects revised/stopped after the exposure draft phase. our paper restricts the scope to the iasb’s projects on its agenda over period 2006–2014; we thus complement previous studies of kenny & larson (1995) and jorissen, lybaert, orens, & van der tas (2012), who analysed the lobbying on iasb’s standards over periods 1989–1992, and 2002– 2006 respectively. our results show that the iasb inclines to succumb to the pressure of lobbying parties if the lobbying is quite massive, measured by the number of comment letters submitted to a given project in relation to other projects. we supplement the literature on lobbying on accounting standards with additional evidence on general ability of lobbyist to inf luence the decision of standard-setters by pushing them to revise a project substantially, or even to stop it completely. the paper is organised as follows. after this introduction, relevant literature dealing with the lobbying on accounting standards is reviewed. following the findings from literature overview, two main research hypotheses about the pattern of lobbyists’ behaviour are developed. the reasoning is based on a rational lobbying model sketched by sutton (1984). the hypotheses are empirically tested on the iasb’s project agenda over period 2006–2014. the final chapter concludes; the main findings are summarised, the limitations of the study are outlined, and the future stream of research in the area is proposed. the research methodology and the course of the research process the standard setting is often denoted as a political process to depict that the due process is open to wide range of interest groups. they spend scarce resources to change or maintain current status quo and thus to obtain economic benefits (watts, zimmerman, 1978; zeff 2002). the objective of rent seeking (krueger 1974) in the field of financial reporting is to inf luence the decision of a standard-setter to set forth such accounting treatments, which may alter the distribution of cash f lows or bring other benefits in favour of a lobbying subject (ordelheide 2004). in this context, the engagement in lobbying transmits signals about the entity to outsiders (chung 1999). sutton (1984) outlines the possible motivations for, methods, timing, and other aspects of lobbying. the research on accounting lobbying is usually concentrated (georgiou 2004) on (a) david procházka132 methods (using comment letters, direct contact with standard setters, indirect inf luence via political representatives, etc.); (b) timing of lobbying (in preparation period, during comment period, etc.); (c) form of participation (on own behalf, as a member of an alliance); (d) arguments used during lobbying (economic, conceptual, etc.). the accounting literature on lobbying can be divided into two subgroups (stenka, taylor 2010). the first stream investigates the motivation of participants of due process, including their attitudes, opinions, objections, and suggestions. secondly, the ability of lobbyists to inf luence the decision of standardsetters is under scrutiny. to uncover the reasons, why lobbyists decide to act, is, although, a complicated task, because (a) no robust model of economic rationality of lobbying for all interest groups is available; (b) lobbyists behave strategically; and (c) researchers focus mainly on lobbying through comment letters. economic behaviour of an individual lobbyist is shaped by the relation between expected benefits from and costs of lobbying. in case of lobbying on accounting standards (schalow 1995), cost-benefit analysis requires to assess (a) expected increase in marginal utility of lobbyist from the change in accounting standards; (b) ability to inf luence the decision of standard-setter; (c) expected costs of lobbying. however, the rational model of lobbying defined by sutton (1984) may not be sufficient for the analysis of lobbying motivation of aggregate groups or collective bodies. alternative approaches, e.g. institutional theory (kenny, larson 1995; giner, arce 2012), are then employed. regardless the behavioural model used, research is unable to detect the strategic dimension of (non)lobbying (amershi, demski, & wolfson 1982). affected parties may surrender lobbying on a relatively less important standard to gain a better position when trying to inf luence a standard with greater impact on their utility (zeff 2005). the last limitation of literature on accounting lobbying refers to the fact that researchers cannot rigorously explore other forms of lobbying than those via comment letters (zülch, hoffmann 2010). it is impossible to observe all personal meetings of lobbyists with standard-setters and the subject of their talks. furthermore, lobbyists may act indirectly through politicians. despite the inf luence of political pressure on accounting standards is documented quite well (solomons 1978; georgiou 2010; königsgrube, 2010; zülch, hoffmann 2010; zeff 2012; crawford, ferguson, helliar & power 2014), the lobbying parties behind politicians are hidden and remain unknown. except for the general analysis of lobbying on accounting standards, accounting research also addresses the miscellaneous aspects of lobbying on lobbying on the iasb standards: an analysis of the lobbyists… 133 the iasb’ activities. lobbying on particular standards are examined by kenny & larson (1993), guenther & hussein (1995), larson & brown (2001), chee chiu kwok & sharp (2005), giner & arce (2012). the lobbying behaviour of preparers is addressed by larson (1997); the factors inf luencing the users’ decision to (not) lobby are scrutinised by georgiou (2010); the inf luence of cultural values on lobbying of accounting bodies is subject of macarthur (1999)’s study, the national specifics of preparers’ lobbying are explored by orens, jorissen, lybaert, & van der tas (2011). furthermore, the analysis of formal participation in the iasb’s due process through comment letters over the period 1989 and 1992 was processed by kenny & larson (1995). similar analysis over the period 2002–2006, including the composition and strategy of various lobbying groups, is carried out by jorissen, lybaert, orens, & van der tas (2012). following the literature review, we expect that an interested party will submit a comment letter if expected benefits from the inf luence of a standard-setter’s decision overweight costs to prepare the letter. with reference to the revealed preference theorem (samuelson 1938), the submission of a comment letter demonstrates that expected benefits are higher than incurred costs, i.e. a lobbyist believes that he/she will be able to modify the attitude of a standardsetter in given case. this rational model of lobbying (sutton 1984) indicates that the lobbying pressure on major/conceptual/controversial projects shall be higher than lobbying (in the form of a comment letter) on minor amendments of current practice. the costs for preparing a comment letter are relatively constant regardless the type of project; however, possible benefits from inf luencing the content of a major project are greater than for minor refinements. in this context, we assess whether there is any material distinction in the public commenting on due process documents (i.e. discussion papers, exposure drafts, revised exposure drafts) between major and minor iasb’ projects. h1: the number of comment letters received by the iasb on its major projects is significantly higher than for minor projects.2 secondly, a wide stream of literature – e.g. kenny & larson (1993), guenther & hussein (1995), larson & brown (2001), chee chiu kwok & sharp (2005), giner & arce (2012) – documents the successful achievements of lobbyists 2 this classification is used by the iasb and has an important impact on the length and complexity of particular due process (e.g. for minor projects, no discussion papers are issued). david procházka134 on particular standards-in-process. we suspect that controversial nature of a proposed standard can be indicated by the number of comments sent by respondents to the board for their consideration. once again with reference to the rational model of lobbying (sutton 1984) and revealed preference theorem (samuelson 1938), we assume that comment letters address the standard-setter’s proposals mainly in negative way trying to achieve a different accounting treatment. an increasing controversy of a project attracts a higher attention and reaction from affected parties, which in turn exposes the iasb to a greater pressure. an increased lobbyists’ pressure may weaken the iasb power to defend its position in standard-setting and thus to succumb to lobbyists by significantly revising project or even by stopping it. h2: the number of comment letters received by the iasb on exposure drafts of the projects, which were revised/stopped, is significantly higher than for the projects successfully completed after the issuance of exposure draft. the outcome of the research process to test both hypotheses, we compiled data on the volume of comments letters received for projects on the iasb’s agenda from 2006 (till 2014). data are available on the iasb website in miscellaneous documents informing about the development of corresponding projects-in-progress and finished projects. the extent of public reaction to the documents issued by the iasb in period 2006 and later is summarised in tab. 1 – tab. 4, which present the number of comment letters received to all iasb’s projects.3 the projects are classified into two groups: major and minor projects. minor projects (tab. 4) cover partial amendments to existing standards. as these updates are less complex, only compulsory documents (i.e. exposure drafts) are issued within the due process. major projects are broken down into three subclasses. the iasb’s projects related to financial instruments and projects on conceptual framework/financial statement presentation are displayed separately in tab. 2 and tab. 3. the numbers of comment letters to remaining major projects are outlined in tab. 1. 3 except for the annual improvements, which are left from the analysis aside. lobbying on the iasb standards: an analysis of the lobbyists… 135 table 1. number of comments letters on iasb’s major projects (excluding projects on financial instruments, framework and presentation) successfully completed projects dp ed r-ed ifrs 8 178 ifrs 10/12 156 ifrs 11 111 ifrs 13 136 180 91 ifrs 14 100 ifrs 15 211 986 357 management commentary 112 103 ias 24: revision 72 74 projects in progress dp ed r-ed ifrs 4: phase ii 158 253 194 ias 17: new standard on leases 290 760 638 ias 19: conceptual revision 152 paused/stopped projects dp ed r-ed rate-regulated activities 155 liabilities 212 extractive activities 139 discount rate for employee benefits 106 s o u r c e : own compilation using the iasb information on projects available at http://www.ifrs. org/current-projects/iasb-projects/pages/all_projects.aspx. n o t e : dp (discussion paper); ed (exposure draft); r-ed (revised exposure draft) table 2. number of comments letters on financial instruments related projects projects on financial instruments dp ed r-ed financial instruments: joint dp for phase i–iii reducing complexity in reporting financial instruments 162 phase i: classification and measurement financial instruments: classification and measurement 210 fair value option for financial liabilities 125 david procházka136 projects on financial instruments dp ed r-ed classification and measurement: limited amendments to ifrs 9 167 phase ii: impairment request for information 79 financial instruments: impairment 187 financial instruments: impairment (supplementary documents) 180 phase iii: hedge accounting hedge accounting 216 other minor projects on financial instruments exposures qualifying for hedge accounting 75 financial instruments: puttable instruments 88 asset and liability offsetting 162 s o u r c e : own compilation using the iasb information on projects available at http://www.ifrs. org/current-projects/iasb-projects/pages/all_projects.aspx. table 3. number of comments letters on other iasb’s major projects conceptual framework projects dp ed r-ed cr phase a (jul 2006) 179 cr phase b (nov 2005) 86 cr phase d (mar 2010) 114 cr review (jul 2013) 243 financial statements presentation projects dp ed r-ed ias 1 phase a (mar 2006) 126 ias 1 phase b-i (oct 2008) 229 ias 1 phase b-ii (may 2010) 150 s o u r c e : own compilation using the iasb information on projects available at http://www.ifrs. org/current-projects/iasb-projects/pages/all_projects.aspx. lobbying on the iasb standards: an analysis of the lobbyists… 137 table 4. number of comments letters on iasb’s minor amendments to existing projects amendment ed amendment ed ias 16/ias 38 (dec 2012) 98 ifrs 10/ias 28 (dec 2012) 65 ias 16/ias 41 (jun 2013) 16 ifrs 10/ifrs 12/ias 28 (aug 2011) 170 ias 23 (may 2006) 89 ifrs 11 (dec 2012) 70 ias 27 (dec 2013) 60 ifrs 2 (dec 2007) 44 ias 27 (jun 2005) 94 ifrs 2 (feb 2006) 58 ias 33 (aug 2008) 57 ifrs 3 (june 2005) 72 ias 36 (jan 2013) 76 ifrs 5 (sep 2008) 61 ias 39 (dec 2008) 54 ifrs 7 (dec 2008) 93 ifrs 1 (oct 2011) 39 ifrs 7 (mar 2009) 121 ifrs 10 (dec 2011) 14 ifrs 7 (oct 2011) 88 s o u r c e : own compilation using the iasb information on projects available at http://www.ifrs. org/current-projects/iasb-projects/pages/all_projects.aspx. projects on revenue recognition and accounting for leases are the most controversial, taking into account the number of comment letters received. the project on leases is on the top, as far as a total number of responses submitted during the whole due process concerns (almost 1,700 in total for all three documents). similarly, the revenue recognition project evidences the highest number of comment letters received for a single due process document (almost 1,000 letters reacting on the exposure draft). the descriptive statistics on all comment letters are summarised in tab. 5. table 5. number of comments letters: descriptive statistics major projects minor projects total dp ed r-ed dp ed r-ed dp ed r-ed mean 166.4 205.8 270.8 x 72.0 x 166.4 147.6 270.8 median 155.0 159.0 194.0 x 67.5 x 155.0 104.5 194.0 st. deviation 62.0 200.4 209.4 x 34.4 x 62.0 166.2 209.4 david procházka138 major projects minor projects total dp ed r-ed dp ed r-ed dp ed r-ed min 79.0 72.0 74.0 x 14.0 x 79.0 14.0 74.0 max 290.0 986.0 638.0 x 170.0 x 290.0 986.0 638.0 s o u r c e : own calculation. total descriptive statistics for all projects are also partitioned into two subgroups: major projects (based on data from tab. 1 – tab. 3) and minor amendments to existing projects (based on data from tab. 4). the separation controls for the different structure and importance of major and minor projects. the due process of minor amendments contains only compulsory elements, i.e. exposure drafts. discussion papers are published for some major projects only; exposure drafts of major projects are sometimes revised, if the first exposure draft is strongly objected. as minor projects contain only exposure drafts, we are able to compare the magnitude of public reaction just in case of this due process document. as assumed by h1, the average number of comment letters is substantially higher for major projects (3 times higher than for minor amendments). we test whether this difference is statistically significant, using the analysis of variance (tab. 6). the test’s results provide support for our prediction that respondents consider material differences in importance between major and minor projects. table 6. analysis of variance: number of comment letters according to the type of project anova ss df ms f p-value treatment 202 550 1 202 550 8.348 0.006 residual 1 067 535 44 24 262 total 1 270 085 45 s o u r c e : own calculation. an intuitive presumption, based on the literature review and supported by the descriptive statistics, that major projects attract more attention from interested parties, is confirmed by p-value of the f-test. active participation of lobbyists in major projects is significantly higher than in case of minor amendments. we may conclude that major projects (including both the most lobbied lobbying on the iasb standards: an analysis of the lobbyists… 139 projects on revenue recognition and accounting for leases) have a dominant position not only in the iasb’ agenda, but also from the view point of commenting parties. secondly, we test h2, i.e. whether a high rate of comment letters submitted by lobbying parties is more likely followed by the failure of exposure draft to supply an acceptable accounting treatment for a given area of financial reporting. the iasb’s failure to deliver an exposure draft, being broadly accepted by public, may be resolved either by (a) publishing a revised exposure draft; or by (b) stopping the project. once again, we use the analysis of variance to verify, whether a number of comments on an exposure draft matters in the iasb’s deliberations on further development of the corresponding project. the results are presented in tab. 7. table 7. the magnitude of lobbying and its inf luence on results of project development anova ss df ms f p-value treatment 360 321 1 360 321 17.427 0.000 residual 909 764 44 20 676 total 1 270 085 45 s o u r c e : own calculation. the analysis of variance reveals that magnitude of lobbying is significantly associated with the iasb’s decision on the further direction of project development. more specifically, with the increasing number4 of comment letters on an exposure draft, the project will be more likely revised or even stopped. the results show that the iasb inclines to succumb to the pressure of lobbying parties if the lobbying is quite massive (in terms of number comment letters submitted) in relation to other projects. 4 using the same data from tab. 1 – tab. 4, the mean of comment letters on exposure drafts of projects revised or stopped is 340, compared to an average of 107 comments received on projects, during which an exposure draft was successfully transposed into an effective standard. david procházka140  conclusions the paper replenishes previous studies analysing the lobbying on iasb’s standards. our analysis covers the period 2006–2014 and confirms predictions based on the rational model of lobbying. the lobbying behaviour through comment letters depends on the importance of project, which determines potential benefits from incurring lobbying costs. major projects (as labelled by the iasb) attract a broader attention from interested parties, which is expressed (usually) by negative attitude in their comments. furthermore, an increasing rate of public discordant comments boosts the opportunity of lobbyists to inf luence the decision-making of iasb; especially by pressing the standard-setters to revise or stop the accounting treatments suggested in respective exposure draft. by analysis of the volume of comment letters received by the iasb as a reaction of public to its recent projects-in-progress, we complement previous studies for period before 2006 and contribute to the current state of art in the field in following ways. firstly, we document that major projects are subject of a significantly higher extend of comments by lobbying parties. furthermore, the participation of constituents is steadily rising through the development of a project. lowest participation is present for the discussion papers (which outline “only” tentative solutions and conceptual questions); exposure drafts proposing binding accounting treatments attract a higher attention. secondly, our analysis demonstrates that projects, which were revised or stopped by the iasb, are associated with a significantly higher volume of dissenting comment letters than projects successfully finished after the issuance of an exposure draft. these findings indicate that commenting bodies are repeatedly able to inf luence the decisions taken by the iasb. as the paper deals with aggregate data for all recent projects over period 2006–2014, we provide additional evidence on this issue to previous studies analysis lobbying on single standards. however, our paper has also some limitations resulting from the methodology applied. firstly, using aggregate data on number of comment letters, we are unable to detect what were the main reasons of a strong disagreement by public for each project and what drove the iasb’s decisions to revise or stop the project subsequently. furthermore, we did not analyse the composition of respondents, which may have revealed some additional evidence on lobbying behaviour and differences in relative importance of particular groups of lobbyists and their inf luence on the iasb’s decisions. these two shortcomings can be overcome by a detailed analysis of all comment letters. however, as the to lobbying on the iasb standards: an analysis of the lobbyists… 141 tal comment letter for all projects presented in tab. 1 – tab. 4 are over 10,000, a deep analysis is possible only for single projects, as done previously e.g. by kenny & larson (1993), guenther & hussein (1995), larson & brown (2001), chee chiu kwok & sharp (2005), giner & arce (2012), but not on aggregate level. this is our main suggestion for future research in the field. secondly, a sole focus on comment letters disregards other ways, which can be used by affected parties to lobby on the iasb’s proposals. however, an indirect inf luence via political representatives is hardly observable, as the lobbying parties behind politicians are hidden. similarly, acting through a direct contact with standard setters is also discernible with difficulties, as it is unfeasible to observe all personal meetings of lobbyists with standard-setters and to record the subject of their talks. researchers may trace e.g. the iasb’s outreach activities, during which a project is introduced to and discussed with public. however, a full personal participation at all meetings is not achievable; 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(2010). lobbying on accounting standard setting in a parliamentary environment–a qualitative approach. hhl working paper. 94, 53. for authors peer review processpeer review process the procedures governing the review process of articles submitted for publication in the copernican journal of finance & accounting meets the guidelines of the announcement of the ministry of science and higher education from 2 june 2015 on the criteria and evaluation of scientific journals. the procedure of the review process considers the following rules: ■ at least two independent reviewers representing a scientific unit other than the one affiliated with the author are appointed to evaluate the submitted article, ■ all information identifying the author (authors) and reviewers is removed and the principles of a double-blind review process are followed; in other cases the reviewer signs a declaration on the non-occurrence of a conf lict of interest; a conf lict of interest is defined here as any direct 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2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: august 1, 2014; date of acceptance: september 25, 2014. * contact data: darius@econ.umk.pl, faculty of economic sciences and management, nicolaus copernicus university, gagarina 13a, 87-100 toruń, poland, phone: 56 611 46 34. piotrowski d. (2014). the financial aspect of intergenerational solidarity from the point of view of the senior. copernican journal of finance & accounting, 3(2), 111–126. http://dx.doi. org/10.12775/cjfa.2014.021 dariusz piotrowski* nicholas copernicus university the financial aspect of intergenerational solidarity from the point of view of the senior key words: intergenerational solidarity, public finance, social expenditure. j e l classification: a13, h51, h55, o15. abstract: many currents in economics put an emphasis on the social aspect of management. recommendations are formulated with regard to using resources having in mind the satisfaction of needs by the current and future generations. the economic crisis has shown the bad state of public finance of many countries and put into question the existence of intergenerational solidarity in the financial terms. the lack of balance between generations is related with a high level of public debt and social obligations of the state burdening chief ly the young generation. the study aims at examining how seniors understand the nature and financial expressions of intergenerational solidarity. the supplementary objective is to learn the seniors’ views on the need and directions of reforms of the polish public finance, in particular in the scope of pension and health benefits. objectives were achieved and research hypotheses verified through the critical analysis of literature on the issue and on the basis of the author’s survey among the members of the toruń third age university and the kujawsko-dobrzyński third age university. the results achieved allow for a conclusion that the vast majority of respondents understand the notion of intergenerational solidarity incorrectly are not aware of the scale of financial obligations which were put on the younger generations, and put too much emphasis on their own input into the increase of our country’s wealth. it has dariusz piotrowski112 also turned out that seniors very often present a demanding attitude in the field of the state’s social expenditure and do not take into consideration the financial capabilities of the state. translated by dariusz piotrowski finansowy aspekt solidarności międzypokoleniowej z punktu widzenia seniora słowa kluczowe: solidarność międzypokoleniowa, finanse publiczne, wydatki socjalne. klasyfikacja j e l: a13, h51, h55, o15. abstrakt: wiele nurtów w ekonomii akcentuje społeczny aspekt gospodarowania. formułowane są zalecenia dotyczące wykorzystania zasobów z myślą o zaspokajaniu potrzeb przez obecne i przyszłe pokolenia. kryzys gospodarczy ukazał zły stan finansów publicznych wielu krajów i poddał w wątpliwość istnienie solidarności międzypokoleniowej w ujęciu finansowym. brak równowagi między pokoleniami ma związek z wysokim poziomem długu publicznego oraz zobowiązaniami socjalnymi państwa obciążającymi głównie młode pokolenie. celem pracy było zbadanie zrozumienia przez seniorów istoty i finansowych przejawów solidarności międzypokoleniowej. jako cel uzupełniający przyjęto natomiast poznanie poglądów seniorów na temat potrzeby i kierunków reform finansów publicznych polski, w szczególności w zakresie świadczeń emerytalnych oraz zdrowotnych. realizacja celów i weryfikacja hipotez badawczych nastąpiła w drodze krytycznej analizy literatury przedmiotu oraz w oparciu o wyniki autorskiego badania ankietowego przeprowadzonego wśród członków toruńskiego oraz kujawsko-dobrzyńskiego uniwersytetu trzeciego wieku. uzyskane wyniki pozwoliły stwierdzić, iż przeważająca część respondentów niepoprawnie rozumie pojęcie solidarności międzypokoleniowej oraz nie jest świadoma skali zobowiązań finansowych, którymi obarczono młodsze pokolenia, zbyt mocno natomiast akcentuje własny wkład we wzrost bogactwa naszego kraju. okazało się także, że seniorzy bardzo często wykazują postawę roszczeniową w obszarze wydatków socjalnych państwa nie licząc się z możliwościami finansowymi kraju.  introduction as an answer to growing criticism of an economic system based on the principles of free market competition, trends have emerged in the theory of economics which refer to the high economic efficiency achieved in the conditions of respecting the rules of social justice and environmental protection. the welfare state concept which has emerged within liberalism reduces the socially negative effects of human activity in the capitalist system through distribution of income leading to providing equal opportunities for the development of economically weaker individuals (sadkowski 2010, 168–171). on the other hand, the financial aspect of intergenerational solidarity… 113 the ordoliberalism-based social market economy assigns the state a function of creating institutions which ensure the implementation of social solidarity postulates. this concept skilfully combines economic freedom of an individual with justice and responsibility in actions, and from another perspective, the high efficiency of a market system with the state’s provision of social security to citizens (szulczewski 2011, 181–184). the idea of sustainable development, advocated in the recent years, puts equal emphasis on thinking in the categories of solidarity and common good. generally, the presented currents advocate for assessing the effects of actions taken in the economic sphere from the point of view of benefits and costs for the current and future generations. the cited idea of intergenerational solidarity assumes mutual help between the representatives of different generations and such use of resources which takes into consideration the chances of subsequent generations to meet their needs (kulińska-sadłocha 2011, 33–42). the debt crisis in countries and the exposed necessity to introduce public finance reforms require shifting accents of social and economic sustainable growth to the financial aspects of intergenerational solidarity. ensuring balance in that field is supported by limiting the budget deficit, the public debt and the amount of financial liabilities of the state in respect of the implemented social policy (męczyńska 2010, 191; reinhart, rogoff 2011, 1676–1706; wisensale 2013, 21–29). research methodology and the course of the research process today’s seniors are mostly people born during the post-war baby boom, who have lived most of their lives in the people’s republic of poland. they also participated in the transformation of the polish economy from a socialist model characterised by low market self-regulation and high control of the state over the economy to the social order based on market freedom and democracy (gilejko 2008, 107–111). the views and attitudes of seniors presented and analysed in this work result from the fact they were functioning in two different economic systems and account for the fact that the representatives of the older generation appear in a dual role, i.e. the creators of the conditions of life and development of the younger generations and the main beneficiaries of the state’s social policy. the main objective of the work is to examine how seniors understand the nature and financial expressions of intergenerational solidarity. the supplementary objective is to learn the seniors’ views on the need and directions of dariusz piotrowski114 reforms of the polish public finance, in particular in the scope of pension and health benefits. the study adopted two research hypotheses: ■ h1: the burdening of the younger generation with financial obligations of the older generation is overlooked by the majority of the surveyed seniors. ■ h2: seniors are characterised by low awareness of the amount of financial burdens passed on to the future generations resulting from an improper social policy of the state. objectives were achieved and research hypotheses verified through critical analysis of literature on the issue and the elaboration of material gathered during the author’s survey. the survey was conducted among the members of the toruń third age university and the kujawsko-dobrzyński third age university in may 2014. the selection of persons to the study population was deliberate. the overall number of respondents was 97, with 76 participating in the survey in toruń and 21 in aleksandrów kujawski. the participants constituted a high (about 30%) proportion of members of both associations. the survey questionnaire the respondents were to fill in comprised open questions and singleor multiple-choice questions. the financial aspect of intergenerational solidarity the life-cycle model refers the economic behaviour of an individual to the change of their age. it covers the pre-production stage, production stage, and post-production stage. each stage is characterised by a different degree of personal and financial independence (jurek 2012, 61). when analysing the life-cycle model from the point of view of public finance, it is clearly visible that the older generation constitutes a bigger burden for the state then the younger one. this happens because the costs of the care for the elderly are socialised, whereas funding the expenditures of the young generation usually rests on the family (jurek 2012, 78). analysing the financial aspects of intergenerational dependency, it should be noted that the older generation is in a privileged position, but at the same time a position requiring greater responsibility for the consequences of the decisions made regarding the younger part of the society. it was the older generation that created the system and used to inf luence the shape of the social and economic policies of the state years ago (neck, sturm 2008, 2–4). the mechanism described in the w.d. nordhaus’s model indicates a big risk of choos the financial aspect of intergenerational solidarity… 115 ing a social policy of the state leading to unfavourable results in the long term, manifested by high financial burdens of the subsequent generations (tomczyk 2011, 81). therefore, the younger generation, instead of acting as a beneficiary, is often obliged to act as the payer and a critical reviewer of the previouslymade decisions. the dependencies described may lead to social conf lict, as the representatives of different generations have conf licting objectives and interests (price 1997, 109; walczak-duraj 2010, 287–291). in the situation of limited financial resources of the state a dilemma arises regarding the choice between financing economic development in view of the younger part of the society, or social benefits addressed at the elderly (uryszek 2009, 99–105). spheres of public finance with particular reference to the notion of intergenerational solidarity the functioning of the society is connected with meeting individual and collective needs. the needs declared by the whole society or by a considerable part of it are met by providing public or social goods financed solely or mostly from public funds (wernik 2011, 31–33). one of the basic needs is the sense of social security of the citizens. the state ensures this security through financing social expenditure covering pension and disability benefits, healthcare, or social aid (adamiak, chojnacka, walczak 2013, 19–24). the connection between generations is most visible in the pay-as-you-go pension system, whose other name – intergenerational contract – best describes its idea. less visible intergenerational dependencies, but no less serious with regard to scale, occur in the healthcare system. this is because it is mainly young people who finance state expenditure in that matter, using the benefits only in a limited scope. the lack of balance of the benefits and burdens for each generation, somewhat inscribed in the state social expenditure system, requires limiting financial demands formulated by the generation of beneficiaries that are contrary to the idea of intergenerational solidarity (zacher 2009, 171). having this in mind, it can be assumed that the social expenditure of the state, which is financed from a part of the current tax revenue and the privatisation of state property, does not violate the postulate of intergenerational solidarity, as each generation has a right to receive that part of the nation’s wealth which it has produced itself. the senior generation may also count on the help from younger people under the rule of reciprocity as it has provided it itself in the past. the situadariusz piotrowski116 tion is different when in order to finance the needs of the older generation, the state needs to borrow for the account of the younger of future generations. the expectation that the country will finance expenditures exceeding its current capabilities is unethical and contradictory to the idea of intergenerational solidarity. excessive expenditure leads to budget deficits and, in consequence, to the increase of public debt (lane 2012, 49–65; white paper 2012, 9–13). financial heritage of the senior generation in the opinion of the author, the negative outcomes of the actions of the older generation outweigh the financial benefits obtained by the younger generations, and they result from the public debt from the period of the people’s republic of poland, low quality and utility of the property left and current and future social burdens of the state towards the seniors. the gierek1 decade was the only period of prosperity in the times of socialism and at the same time a period of huge borrowings of the polish state. the debt incurred by the eldest generation still burdens the public finance as its repayment has only been deferred due to rolling. when estimating the actual scale of the inherited burdens, the amount of foreign debt, valued at the end of 1980s at over usd 40 million (bałtowski, miszewski 2006, 154), should be translated into pln taking into consideration the purchasing power of the dollar, which was then higher than today. the huge amount of debt incurred could be justified if the quality and utility of the assets left to the younger generations was high. in most cases, it has not been so. enterprises in poland in the declining years of communism were ineffective, underinvested and burdened with overemployment. the financial picture of the state left by the eldest generation is completed by the expenditure on social obligations of the state. although in the period of economic downturn of socialism there were and still are not enough funds in the earmarked funds, the state needs to pay pensions, disability pensions and finance health care. in the last years subsidies to the social security system amounted to pln 50–55 billion each year (sprawozdania z wykonania budżetu 2011–2014). the fact that the younger generation is excessively burdened due to benefits paid by the state to the seniors results in part from unfavourable 1 first secretary of the ruling polish united workers’ party in the people’s republic of poland in the years 1970–1980. the financial aspect of intergenerational solidarity… 117 demographic tendencies, but its primary source is legal regulations. benefits paid out within krus [agricultural social insurance fund] are only marginally financed by the insured, the rest is covered by the state, i.e. the younger generations. on the other hand, high subsidies to the social insurance fund arise from a big number of privileges resulting in decreasing the actual age of retirement and from the manner of calculating the amount of benefit which allows taking into consideration the premiums deducted in the selected years of employment, most beneficial for the current seniors. another field of social expenditure, health service, also requires state subsidies. the manner of financing it, limiting the inf low of funds from outside the public sector, in connection with widespread expectations regarding using innovative medicines and modern medical procedures are the source of a growing public debt (kubot 2011, 177–196). expectations expressed with regard to the polish health service should consider the fact that the amount of premiums in respect of health insurance deducted for an entire lifetime most often totals at around pln 100–150 thousand and is not enough to cover the costs of all benefits, even of standard quality, whereas the polish state cannot afford to co-finance state-of-the-art medical procedures to all citizens. selected aspects of intergenerational solidarity – results of the empirical study this work presents selected results of the study (presented in graphic or descriptive form), which allowed to verify the assumed research hypotheses. the first one, concerning burdening the young generation with the liabilities of the older generation, was verified with the use of questions regarding the definition, understanding of the notion of financial intergenerational solidarity and the scale of financial burdens passed on to the younger generation. the surveyed persons were asked to express their attitude to the following phrase: intergenerational solidarity in the financial aspect is a situation when the young generation, through deducted premiums and taxes paid, finances the benefits of the older generation. in the supplementary question, the respondents were asked to indicate the relation between financial benefits and burdens resulting from the activities of the older generation felt by the representatives of the younger generation. the obtained results were presented in charts 1 and 2. dariusz piotrowski118 chart 1. consent to the proposed definition of financial intergenerational solidarity s o u r c e : own survey, n=97, single choice. when analysing chart 1, it can be noted that the vast majority of persons, i.e. 57 (59% of total) consented to the wording of the proposed definition. this definition, however, does not correspond with the conditions of balance which are included in the concept of intergenerational solidarity as it places the representatives of the older generation in a privileged position. the respondents did not notice financial interdependencies between the generations. this fact is confirmed by the answers given to the second question (chart 2). as many as 80% of the surveyed did not consider in their deliberations or attributed little importance to the financial burdens generated by the older generation at the expense of the younger one. the financial aspect of intergenerational solidarity… 119 chart 2. the amount of financial burdens resulting from the activities of the older generation in relation to the younger generation s o u r c e : own survey, n=97, single choice. the subsequent results refer to the issues of public finance, with particular attention paid to the notion of crisis and reforms. answers to five questions in that scope were presented below. chart 3. the need and effects of the polish public finance reform s o u r c e : own survey, n=97, double choice at most. optimism stems from the fact that the need for reforms and the need for directing them at improving younger people’s situation is noticed (chart 3). howdariusz piotrowski120 ever, it is hard to combine the desire to improve both the situation of the younger and older, i.e. all citizens, expressed in 20% of cases, with the indication in the next question of excessive state expenditure as the main reason of the bad situation of public finance by 80% of respondents. excessive state expenditure leads to deficits, these in turn lead to the increase of debt. the question regarding the types of state expenditure with the most inf luence on the increase of public debt in poland was left unanswered by as many as 48% of the surveyed persons. in the next question, 45% of the respondents did not indicate the spheres of public finance in need of reform. moreover, the persons who did answer the above questions, identifying the sources of excessive debt and spheres in need of improvement − administration, health service, pension system (privileges), financing national defence − could not, in most cases, indicate remedial actions. chart 4. the culpable for the difficult situation of greece s o u r c e : own survey, n=97, double choice at most. the most severe effect of a state’s financial problems is its bankruptcy. based on the case of greece, the study tried to obtain opinions regarding the culpable for the situation (chart 4). the most, 82% of indications concerned the subsequent governments of greece, 47% the greek citizens, and the actions of banks were named as the cause of greece’s problems in 28% of cases. blaming the government for the problems of the state may be treated as a form of escape from one’s own responsibility. however, part of the surveyed showed aware the financial aspect of intergenerational solidarity… 121 ness of the fact that it is the citizens who, by choosing their representatives, take partial responsibility for the current and future situation of the state finance and the burdens for future generations. this is confirmed by the fact that the two first indications we very often chosen together. the state social policy is implemented through expenditure, part of which is financed with debt. thus resulting liabilities of the state must therefore be considered in the analyses of the phenomenon of intergenerational solidarity in the financial aspect. the results presented below refer to the attitudes and opinions of respondents in the scope of pension benefits and health care financing. the answers obtained in the subject of sources of funds after reaching retirement age indicate that over a half of the surveyed people see a need to take up work or use savings gathered during the period of professional activity (chart 5). therefore, they are not counting only on the benefit which, in the opinion of almost all of them, is too low and/or too low in comparison to the premiums deducted (chart 6). the question of how people who base their household budgets only on the gradually decreasing financial benefits from public funds manage to support themselves in retirement is an open one (szumlicz 2011, 144–145). the picture of the views with respect to social insurance is completed by the respondents’ reception of the decision to increase and level the retirement age. in response to that question, 42% of persons treated this action as necessary, 17% as good, and 45% as bad. chart 5. sources of funds after reaching retirement age s o u r c e : own survey, n=97, multiple choice. dariusz piotrowski122 chart 6. the assessment of the amounts of pensions paid s o u r c e : own survey, n=97, double choice at most. the mostly critical assessment of the pension reform, in connection with an erroneous conviction that the older generation has earned higher pensions then it is receiving, indicates thinking in the categories of own interest or benefits for the older generation without taking into account the financial consequences affecting the younger generation. such attitude contradicts intergenerational solidarity in the financial aspect. the last of the examined spheres was the financial aspects of the functioning of health service. the author tried to determine the knowledge and opinions of the respondents on the basis of answers given to three questions. the answers received in the scope of limits of medical services should be assessed negatively in the context of intergenerational solidarity. as many as 91% of the elderly people indicated the need to increase the availability of medical services, forgetting that these limits are a consequence of too scarce funds in the public health service. the expected growth of the number of services may occur when the system acquires additional funds in the form of increased budget subsidy to the national health fund, which would result in a rise of the public debt, which in turn would have a negative impact on labour costs and would burden the representatives of the younger generation. the financial aspect of intergenerational solidarity… 123 chart 7. the appropriateness of the functioning of medical services’ limits determined by the national health fund s o u r c e : own survey, n=97, single choice. the problems of the polish health service result from bad system solutions and organisational errors, but their primary basis is financial. the expectation for an improvement in the situation of the health service requires the knowledge of the financial aspects of its functioning, including regarding the costs of medicines, equipment and medical procedures. in response to the question regarding the costs of a visit to the doctor to receive basic examination and a prescription, 67% of the respondents stated that they amount to pln 0. the last question aimed at finding whether the surveyed have knowledge of the costs of purchasing modern medical equipment. the question concerned the number of incubators which can be bought for the sum of health insurance premiums deducted during the lifetime of an average citizen of our country. the right answer being at most one, only 26% of answers took into consideration the market prices. in 53% of cases no answer was given. the lack of knowledge of the costs of medical services, emerging from the presented results, in connection with the scale of demands put forward, makes the declarations of caring for the life quality of the younger generation doubtful, as an increase in the state’s financial burdens limits development opportunities of the younger part of the society. dariusz piotrowski124  conclusions the received research results helped to positively verify two hypotheses assumed in the work, and sadly, their overtone is unfavourable. most of the seniors understood the idea of intergenerational solidarity incorrectly, as on the one hand they did not see the scale of financial obligations which burden the younger generations, and on the other hand they presented demanding attitudes in relation to the benefits provided within the social policy of the state. they formulated their opinions possessing scarce knowledge on the real costs of functioning of the system. the attitude of the seniors, which stands in contrast to the idea of intergenerational solidarity, can be justified only in part. during the period of real socialism, the representatives of the older generation did not receive adequate economic education, and at the same time they emerged from those times with the conviction that they have a right to expect social benefits at a satisfactory level from the state, forgetting the illusoriness of these promises. physical and mental disability, advancing with age, is not a justification for the demands towards the state. contrary to common belief, the households of the seniors, relieved from the costs of raising children, are not among the poorest. when analysing the financial capabilities of the generation of the seniors, it should be considered that they had an opportunity to gather assets in the form of a f lat or land at prices attractive from today’s point of view. they can sell a part of this wealth to improve the quality of their lives, while remaining in compliance with the cultural patterns of our society regarding the issue of inheritance. the seniors who are members of third age universities are active and socially engaged people, and stand out against their generation. therefore, one can require that they themselves see and educate the representatives of their own generation on the responsibility for the bad condition of state finance and inf luence the limitation of financial demands unjustified with their own input regarding pension benefits and health service and thus create conditions for development for the younger generations. the financial aspect of intergenerational solidarity… 125  references adamiak s., chojnacka e., walczak d. 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(2011), odpowiedzialność w ujęciu etyki i etyki gospodarczej, 181–184 [in:] etyka biznesu w perspektywie humanistycznej, g. szulczewski (ed.), oficyna wydawnicza sgh w warszawie, warsaw. szumlicz t. (2011), finansowanie systemu zabezpieczenia emerytalnego w świetle kryzysu ekonomicznego, 144–145 [in:] finanse publiczne a kryzys ekonomiczny, a. alińska, b. pietrzak (ed.), cedewu sp. z o.o., warsaw. tomczyk e. (2011), oczekiwania w ekonomii. idea. pomiar. analiza, oficyna wydawnicza sgh w warszawie, warsaw, 81. uryszek t. (2009), wpływ wydatków zdeterminowanych budżetu państwa na ograniczenia w zakresie finansowania zadań prorozwojowych w polsce, 99–105 [in:] w poszukiwaniu efektywności finansów publicznych, s. wieteska, m. wypych (ed.), wydawnictwo uniwersytetu łódzkiego, łódź. walczak-duraj d. (2010), socjologia dla ekonomistów, pwe, warsaw, 287–291. dariusz piotrowski126 wernik a. (2011), finanse publiczne. cele. struktury. uwarunkowania, pwe, warsaw, 31–33. white paper. an agenda for adequate, safe and sustainable pensions (2012), european commission, brussels, 9–13. wisensale s.k. (2013). austerity vs. solidarity: intergenerational conf lict in the european union. international journal of humanities and social science, 3(1), 21–29. zacher l.w. (2009), gry o przyszłość – wielopodmiotowe i generacyjne, 171 [in:] wyzwania ekonomiczne w warunkach kryzysu. wybrane zagadnienia, i. lichniak (ed.), oficyna wydawnicza sgh w warszawie, warsaw. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: august 25, 2015; date of acceptance: october 27, 2015. * contact information: ieva.kozlovska@ba.lv, kr.valdemara street 161, riga, lv- 1013, latvia, phone: 00371-2-9995999. kozlovska i. (2015). the impact of long-lived non-financial assets depreciation/ amortization method on financial statements. copernican journal of finance & accounting, 4(2), 91–108. http://dx.doi.org/10.12775/cjfa.2015.018 ieva kozlovska* riga business school the impact of long-lived non-financial assets depreciation/amortization method on financial statements keywords: non-financial long-lived assets, depreciation method, amortization method, accounting policy, financial statements. j e l classification: m410. abstract: non-financial long-lived assets are ones ensuring company’s basic business operations, with expected useful time more than one accounting period, and generating profit. assets often requiring significant investments constitute also considerable part of companies’ total assets in its statements of financial position. in average this proportion in balance sheets of latvian companies listed in baltic stock exchange is 48%. in most of these companies this percentage is higher and even up to 97%. due to nowadays global economic situation the management of non-financial long-lived assets also plays significant role in both – shareholders’ (actual/ potential) and management’s – decision-making processes concerning investing, financing, controlling, other activities. in order to ensure financial statements ref lects real situation of the particular company, company’s management is responsible to ensure that accounting process of depreciation/ amortization these assets is: – correct, transparent and in line with specifics of company’s business; – in accordance with respective accounting and reporting regulations. ieva kozlovska92 this article reveals theoretical and practical view exploring how information relating depreciation/ amortization of long-lived non-financial assets inf luences results in financial statements of latvian companies listed in baltic stock exchange.  introduction in various businesses long-lived non-financial assets are one of the most significant items in the company’s balance sheet ensuring basic business operations, and also one basically generating profit. opinions expressed by foreign researchers are that depreciation/ amortization expense is informative about company’s depreciation policy and depreciation/ amortization methods have significant inf luence over investment decisions taken by company’s management and shareholders. usually selection of particular depreciation method is based on the company’s financial policy and available amount of financial resources to be invested. depreciation policies allow to modulate company’s self-financing f lows among years. the linear depreciation method is the one used most often by companies (ilincuta 2013). therefore, today long-lived non-financial assets management plays really significant role as in company’s accounting process as in company’s management and stakeholders’ or even potential investors decision-making processes concerning investing, financing, controlling and other activities. acquiring a long-lived asset its cost should be accounted as asset’s initial value. since this asset is used to generate profit also related depreciation/ amortization expenses to generate revenues should be accounted. these expenses ref lect the cost of the particular non-current asset used up to generating revenue. the depreciation/ amortization expenses should be recognized in the company’s income statement which very often can be also a very large item. there are various methods of depreciation/ amortization calculation. in situation when different depreciation/ amortization methods for the same long-lived non-financial assets are applied also the result per financial period can differ quite substantially. therefore, the policy defining how company’s long-lived assets should be depreciated/ amortized has significant impact also on the calculated income. these expenses similar as impairment losses are accounted as noncash expenses. the company’s management before selecting new or evaluating existing depreciation/ amortization method of long-lived non-financial assets should consider various important issues. it is responsible to ensure that accounting process of these long-lived assets is correct, transparent and in accordance with respective accounting and reporting regulations. the impact of long-lived non-financial… 93 the key purpose of the article was to: ■ explore aspects to consider analysing information about long-lived non-financial assets ref lected in financial statements; ■ develop recommendations what kind of issues the company should consider selecting the most appropriate amortization/ depreciation method of non-financial long-lived assets. author examines possible methods and ways how to gain better understanding of financial position of business regarding company’s ability to use its long-lived non-financial assets. mainly it reveals how to evaluate the information about depreciation/ amortization of long-lived non-financial assets in the company’s financial statements. the author’s conclusions are based on the study of western publications and analysis of practices in latvian companies listed in baltic stock exchange. the main principles of accounting regulation of depreciation/ amortization of long-lived non-financial assets are formulated in ias16 and ias38 for latvian listed companies in baltic stock exchange and latvian accounting standard nb.7 for other companies except latvian listed companies in baltic stock exchange. the results of the study allowed the author to identify specific problems and patterns in accounting practice as well as formulate directions for further research aimed at developing an accounting policy for accounting measurement of long-lived non-financial assets for various types of companies. this article may be of interest to management and shareholders (existing/ potential) of the particular company, financial statement users, regulators, standards setters, and financial analysts. research methodology and research process research problem – assets side of the balance sheet compromises both – ”current” and ”fixed” assets – also often called ”long-term” or ”long-lived” assets. long-lived assets are: ■ material and value investments with usage period more than one financial year; ■ ones that ref lect company’s capability and capacity that allows company’s operating-cycle to take place; ■ ones that create economic benefit – generating profit – for the particular company for more than one accounting period; ieva kozlovska94 ■ ones that have significant investments before an activity can take place; ■ are not intended to be sold to company’s customers. in this case this asset should be accounted as inventory; ■ ones that ensures investment’s recovery as a result of usage, etc.; ■ very often ones that represent significant portion of company’s total assets; ■ ones that should be depreciated/ amortized over its useful life or its recognition of expenses in the income statement. since long-lived non-financial assets are used to generate profit for the company also related depreciation/ amortization expenses to generate these revenues should be accounted. summarizing the theory there are various methods for calculation of long-lived non-financial assets depreciation/ amortization – straight-line method, increasing/ decreasing charge method, interest method, production method, revaluation method, double declining balance method, diminishing rate and cost method, straight line method with rate changes, free curve depreciation method, sum of the year digit method of depreciation, reverse of sum of the year digit method of depreciation, annuity method, production method, straight line method by usage factor, working hour method, efficiency hours method, depletion unit method or production unit method, the use or mileage method, decline unit use charge, revaluation method, insurance policy method, job method, combination of time and usage factor, depreciation based on average, global method, statutory method, examination method, percentage of revenue method, statistical method, depletion method, repairs/ replacement reserve method, retirement or replacement method, other methods. the author found out that based on international financial reporting standards – ifrs – and also latvian accounting standard nb.7 the company is allowed to apply only following three out of all depreciation/ amortization methods mentioned above straight-line method, units production method, and diminishing balance or reducing balance method. research related to depreciation/ amortization in scientific literature – the author of this article reviewed the research publications by foreign authors in order to study the degree of this topic development in the international scientific literature. on the basis of the results of the theoretical study the author concluded that the interests of foreign researchers are mainly focused on the following research fields theories and various issues relating depreciation/ amortization of long-lived non-financial assets, policy of long-lived non-financial assets depreciation/ amortization, methods of long-lived non-financial as the impact of long-lived non-financial… 95 sets, legislation, practical issues – depreciation/ amortization and performance management. table 1 summarizes the results of the study of the viewpoints of some foreign researchers in the research fields listed above. table 1. depreciation/ amortization of long-lived non-financial assets: researchers’ views on the problem researcher(s) main research idea/conclusion by the opinion of the author of the paper brundage p.f. (1935), wright f.k. (1964), brigham e.f. (1966), brief r.p. (1967), archibald t.r. (1967), voss w.m. (1968), feinschreiber r. (1969), livingstone j.l. (1969), feinschreiber r. (1969), baxter w.t. (1970), wolk h.i. (1970), beaver w.h., dukes r.e. (1974), accountancy (1980), dilley s.c., young j.c. (1994), coggins m. (1995), hwang j.c. (2002/2003), storchmann k. (2004), cernuşca l. (2009), mykolaitiene v., vecerskiene g., jankauskiene k., valanciene l. (2010), noland t.r. (2010), huagan n., diewert e. (2011), stadig m. (2011), various evaluation methods; key factors influencing depreciation; relationship between depreciation methods; economic and physical depreciations; key rules relating issues of amortization of intangible assets; depreciation and company performance. davidson s. (1950), eisner r. (1955), hellmuth jr., william f. (1955), brigham e.f. (1968), brief r.p. (1968), levy h., arditti f.d. (1973), butler g., crawford l. (2001), jackson s.b. (2008), jackson s.b. (2008), aparicio j., sánchez-soriano, j (2008), mohman m.b. (2009), rajan m., reichelstein s. (2009), sok-yon k., yuping z. (2010), radu d., marius d (2011), boudreaux d.o., rao s., underwood j., rumore n. (2011), watts m.m. (2011), koowattanatianchai n., wang j., charles m.b. (2012), birky k., grimstad e. (2013), ilincuta, l. (2013), valipour h., moradi j., farzanfar f. (2013), birky k., grimstad e. (2013), discussed that depreciation/ amortization policy and its calculation methods have significant influence over the level of reported profit per particular period in the financial statements of the particular company, share price, future benefits and abnormal return of the shares and reserves, value of the company, company’s price control regulations, strategy, structure, ownership, future benefits, benefits of tax savings, existence of cross-subsidiaries, income, expense and capital gain accounts, various investment decisions taken by companies’ management and shareholders in many countries all over the world. bain j.s. (1937), lev b., theil h. (1978), luger m.i. (1986), brannon g.m.(1972), jones j.r. (1980), lepãdatu g. (2009), trifan a., anton c.e. (2010), o’bannon i.m. (2011), jermakowicz e.k epstein b.j. (2011), beuer a., frumuşanu m.l., pereş c.e., breuer b.g. (2011), wong a., pitt a.j. (2012), information reflecting depreciation/ amortization of long-lived non-financial assets disclosure and various issues relating, how correctly disclose, report the information about depreciation/ amortization of long-lived assets; company’s depreciation prising and depreciation policy; regulations toward depreciation/ amortization assets depreciation range system; 10-5-3 proposal; ifrs. ijiri y., kaplan r.s. (1970), barnea a. (1972), most k. (1984), cameron-smith i., mattiiussi f. (1989), hwang j.c. (1997), ben-shahar d., sulganik e. (2009), trifan a., anton c.e. (2010), huagan n., diewert e. (2011), budeanu m. (2012), chou y., yang c., pao c. (2012) specific issues relating intangible assets – e.g. research & development, patents, etc., employees’ knowledge depreciation, asset’s value, physical and economic depreciation, useful life of assets, productive assets. s o u r c e : the author’s own study. the results of study of foreign researchers’ opinions reveal that depreciation/ amortization of long-lived non-financial assets can inf luence results in financial statements of companies operating in various industries. also, it gives ieva kozlovska96 possibility for the company’s management to manipulate with the depreciation/ amortization expenses in order to ref lect higher or lower net income per particular period. it is possible to do by changing depreciation/ amortization method, increasing or decreasing useful life of these assets, etc. therefore, it is important to report relating information correctly and in accordance with respective accounting and reporting regulations. the author can agree with the conclusion drawn by jackson et al. in 2008 that the choice of the depreciation method of long-lived non-financial assets does have significant effect on capital investment decisions made by the company’s non-executive and other managers or even shareholders. also, author agrees with conclusion drawn by ilincuta et al. in 2008 that depreciation policy of long-lived non-financial assets and its calculation methods do have significant inf luence over various investment decisions taken by companies’ management and shareholders. and that this depreciation method has been selected based on the company’s financial policy and available amount of financial resources to be invested by (ilincuta 2008). based on theoretical research author concludes the following: ■ the author thinks that there is no such a method – the best method that could be applied in all companies, because: ■ there is no such a one basic or the most suitable depreciation method to be applied in all companies; the method effective for one company could be ineffective for the other one; ■ there are plenty of factors inf luencing the effectiveness of method selected by the particular company – amount of long-lived non-financial asset depreciation/ amortization expense to other expenses and income, proportion of the total amount of assets to be depreciated to total assets ref lected in company’s balance sheet; ■ units in which the useful life of asset to be depreciated has been expressed; ■ the principal by use of which the useful life of assets should be divided into accounting periods; ■ length of time period the asset will be used in company’s business; ■ scrap value of assets. the author thinks that it is possible that based on application of definite depreciation/ amortization methods company’s management and shareholders can take completely different decisions for asset replacement or even various capital investment decisions. by example, the straight-line method is not ref lecting real usage of the definite long-term asset as it could be with units’ the impact of long-lived non-financial… 97 production method. especially crucial it is due to nowadays global economic situation. in the author’s opinion before company’s management selects the most appropriate depreciation/ amortization method it is necessary to take into account following criteria – industry company operates, type of long-lived nonfinancial assets, economic situation of the company, situation/ legislation, etc. in the country it operates in, global economic situation, company’s investment strategies, possibilities, useful life of the asset, asset’s depreciable/ amortizable amount. however company’s management and shareholders or even financial analysts should regularly evaluate the potential risk of obsolescence of long-lived non-financial assets belonging to the particular company. effective way how to do it is by use of financial statements – information about value of these assets and its accumulated depreciation, by example, average age or average useful life. also, these ratios helps to identify situations the company’s management trying manipulating with the net income per particular period by increasing/ decreasing depreciation/ amortization expenses by changing depreciation method, increasing/ decreasing period of an asset’s useful life, and decide to capitalize or not elements of the acquisition cost, by example, financial expenses, upgrade of the particular asset. research methodology – review of theory conducted in the previous section allowed author to form general idea of interest in the topic “depreciation/ amortization of long-lived non-financial assets” as well as the extent of its development in the scientific literature formulating two basic research questions (rq): 1. what are key aspects to be considered analyzing information related long-lived non-financial assets ref lected in financial statements? 2. what kind of issues the company should consider selecting the most appropriate amortization/ depreciation method of non-financial long-lived assets? to answer rq1 and rq2 the author decided to analyse existing approaches and problems in latvian companies listed in baltic stock exchange nasdaq. key attention was focused on practical issues relating depreciation/ amortization methods for long-lived non-financial assets. therefore, before author developed the questionnaire financial statements of these companies were analysed. questionnaire developed consisted of following five questions: 1. what depreciation/ amortization methods are applied? 2. what were key reasons to select these methods? ieva kozlovska98 3. what were key determinants defining the expected useful life of these assets? 4. has company ever changed its depreciation/ amortization method of these assets – what were key reasons and how the most appropriate depreciation/ amortization method was/ were selected? 5. whether there are any possible problems and issues relating depreciation/ amortization of these assets the company may face in the nearest future? the author delivered questionnaire to all 28 latvian companies listed in baltic stock exchange. in order to reach the key goal of this article author analysed answers received (totally from 26 companies). based on results obtained author developed recommendations what kind of aspects companies should consider analysing information about depreciation/ amortization of long-lived non-financial assets in financial statements and also issues ones should consider selecting the most appropriate amortization/ depreciation method of nonfinancial long-lived assets. results and conclusions of the research process in this research nasdaqomxbaltic.com site was used to study financial statements per financial year 2014 of all 28 latvian companies listed in the baltics stock exchange. the author investigated that researched companies represented totally 8 different industries: consumer goods – 32%, production – 29%, healthcare – 14%; base materials – 11%, telecommunication – 3%, improvements, technology and finance – 3%. in most of cases long-lived non-financial assets constitute also considerable part of companies’ total assets in its statements of financial position or balance sheets. in average this proportion in balance sheets of latvian companies listed in baltic stock exchange was 48%. nevertheless, in most of these companies this percentage was higher and even up to 97%. the impact of long-lived non-financial… 99 table 2. long-lived non-financial assets in balance sheet of latvian listed companies in baltic stock exchange company value of bs, fy 2014 (eur) non-financial long-lived assets, fy 2014 (eur) proportion of long-lived assets (%) 1 as baltic telekom 2 329 019 – 0% 2 as brīvais vilnis 8 908 364 4 031 823 45% 3 as daugavpils lokomotīvju remonta rūpnīca 27 287 823 16 046 885 59% 4 as ditton pievadķēžu rūpnīca 11 280 116 5 818 535 52% 5 as grindeks 160 006 467 78 396 714 49% 6 as grobiņa 18 843 583 15 223 427 81% 7 as kurzemes atslēga 1 1 906 371 702 764 37% 8 kurzemes cmas 1 669 729 908 057 54% 9 as latvijas balzāms 123 497 624 53 577 753 43% 10 as latvijas gāze 747 970 563 904 75% 11 as latvijas jūras medicīnas centrs 7 246 744 5 059 945 70% 12 as latvijas kuģniecība 60 957 855 2 310 338 4% 13 as latvijas tilti 24 964 140 9 113 038 37% 14 as olainfarm 106 723 000 53 522 000 50% 15 as rīgas autoelektroaparātu rūpnīca 5 726 988 4 000 124 70% 16 as rīgas elektromašīnbūves rūpnīca 39 197 228 22 471 218 57% 17 as rīgas farmaceitiskā rūpnīca 2 141 327 566 958 26% 18 as rīgas juvelierizstrādājumu rūpnīca 1 566 887 187 914 12% 19 as rīgas kuģu būvētava 46 854 780 30 024 202 64% 20 as saf tehnika 12 076 449 728 993 6% 21 as saldus mežrūpniecība 31 840 134 20 080 685 63% 22 as siguldas cmas 1 564 523 389 839 25% 23 as talsu mežrūpniecība 1 021 129 646 457 63% 24 as tosmares kuģubūvētava 10 288 965 6 182 931 60% 25 as valmieras stikla šķiedra 122 995 264 77 049 989 63% 26 as vef 5 817 411 5 627 504 97% ieva kozlovska100 company value of bs, fy 2014 (eur) non-financial long-lived assets, fy 2014 (eur) proportion of long-lived assets (%) 27 as vef radiotehnika rrr 8 012 134 7 443 213 93% 28 as ventspils nafta 315 336 468 52 997 0% average: 48% s o u r c e : nasdaq.com. the analysis of ias16 and ias38 application was conducted using the example of latvian companies listed in the baltic stock exchange. the main sources of information used were the company financial statements for the financial year 2014 as well as additional information in the form of clarifications and analyzed data obtained from the questionnaire developed by the author and filled by 26 out of 28 latvian listed companies in baltic stock exchange. the author’s conclusions and recommendations can be used not only to improve the long-lived asset management policy in the company system of corporate governance, but also may be useful for any company developing new or assessing existing process of measuring and valuing company’s non-financial long-lived assets, as well as may be taken into consideration by shareholders (potential, actual) and financial analysts. accounting practice relating depreciation/ amortization of long-lived non-financial assets in latvian companies listed in baltic stock exchange – results of questionnaire the aim of rq1 and rq2 was to check whether latvian companies listed in baltic stock exchange present the information relating depreciation/ amortization of long-lived assets correctly and in accordance with definite accounting standards and regulations as well based on specific of company’s business. also, to identify, what kind of issues should company selecting the most appropriate amortization/ depreciation method of non-financial long-lived assets. q1: what depreciation/ amortization methods are applied? analysing results obtained the author came to the following general conclusions on the information relating depreciation/ amortization methods selected are presented below: the impact of long-lived non-financial… 101 ■ most of companies apply the straight-line method 96%, only 4% of companies apply diminishing balance method, and there are no any company applying units production method. ■ in accordance with latvian and international accounting standards there are three different depreciation/ amortization methods of long-lived non-financial assets. choice of it is very important, because also the company’s cost structure has strongly influenced by these fixed – depreciation/ amortization costs. therefore, based on depreciation/ amortization method applied accounting result per particular period also can differ. in order to ensure positive results, the company has to earn relatively large amount of gross profit before it begins to earn a net profit. therefore, it is crucial that this kind of assets in financial statements are treated and presented correctly, in accordance with definite accounting standards and regulations as well based on specific of company’s business. it is even more important because of nowadays global economic situation when non-financial long-lived assets management plays significant role also in stakeholders’ decision-making processes concerning investing, financing, controlling and other activities. q2: what were key reasons to select these methods? depreciation/ amortization expenses are non-cash expenses without direct impact on the company’s cash balance, but with the indirect impact on the income tax calculated from the net income. therefore, the choice of the most appropriate depreciation/ amortization method for each company is very important process. the research results showed that the most common reason selecting the most appropriate depreciation/ amortization method of long-lived non-financial assets is useful life of long-lived non-financial assets – 51%. but such important reason as planned economic benefit from assets used has indicated only by 18% from all respondents. also 18% was indicating as the key reason company’s established practice over time, but 13% – category and depreciation rates of fixed assets for tax purposes. q3: what were key determinants defining the expected useful life of these assets? based on practice in latvian companies listed in baltic stock exchange the key determinants defining are the ones described in the table below. ieva kozlovska102 table 3. key determinants defining the expected useful life of assets criterion tangible assets (%) intangible assets (%) planned economic benefits of the asset to be used 0% 52% technological properties of asset 34% physical deterioration 32% conditions of purchase contract 0% 21% obsolescence 17% situation in the market 0% 14% technological progress 13% other* 4% 14% s o u r c e : the author’s own study. the general conclusions on the information relating key determinants defining the expected useful life of long-lived non-financial assets are different for tangible assets – e.g. technological properties of these asset, physical deterioration, obsolesce, etc. and intangible ones – e.g. planned economic benefits of asset, conditions of purchase contract and even situation in the market. q4: has company ever changed its depreciation/ amortization method of these assets? what were key reasons and how the most appropriate depreciation/ amortization method was/ were selected? only 21% of all companies answered that it has changed depreciation/ amortization method, but 79% of respondents answered with no. reasons to change the method for tangible assets were decision of company’s management, chief executive officer, accountant and change of chief accountant, economic considerations, and useful life of the asset, before was applied geometric method. but reasons for intangible assets, if the company has – useful life of the asset and planned active usage period of the asset. q5: whether there are any possible problems and issues relating depreciation/ amortization of these assets the company may face in the nearest future? replies received were the following – there are no any issues, do not planned to have this type of issues in the future, consider all costs developing intangible the impact of long-lived non-financial… 103 assets, and intangible assets are insignificant proportion of total assets, therefore, do not consider this issue. the research results presented above show that most of companies do not predict any possible problems or issues relating depreciation/ amortization of long-lived non-financial assets. based on this result the author can conclude that rules and regulations are clear, correct and support companies in their process of efficient long-lived assets management process.  conclusions the results of the research conducted by the author of this article show that in most of cases long-lived non-financial assets constitute also considerable part of companies’ total assets in its statements of the company’s financial position or balance sheet. therefore, the choice of depreciation/ amortization method of long-lived non-financial assets significantly inf luences result in company’s financial statements per particular period. there are no one and the most suitable depreciation/ amortization method for long-lived non-financial assets for all companies. the most suitable depreciation/ amortization method for one company could be not such a method for other company. it is very crucial that these assets owned by company are not only treated and presented correctly, in accordance with definite accounting legislation, but also are in line with company’s business specifics. since 96% of all latvian listed companies apply straight-line method to depreciate/ amortize its long-lived non-financial assets the author can conclude that there is an issue not always the best and the most appropriate depreciation/ amortization method has been selected. also, this has been confirmed because the selection criteria of the depreciation/ amortization method as most common reason was useful life of the asset – 51%. such important reason as planned economic benefit from assets used was indicated only by 18% from all respondents. almost 80% of all respondents never have changed its depreciation/ amortization method. these results approved the author’s conclusion that companies should regularly consider appropriateness of the particular depreciation/ amortization method of long-lived non-financial assets especially in nowadays global economic situation. the results of this research show that before company’s management selects the most appropriate depreciation/ amortization method for company’s long-lived non-financial assets it is necessary to take into account various criieva kozlovska104 teria – industry company operates in, type and useful life of long-lived non-financial assets, economic situation of the company, situation/ legislation, etc. in the country the company operates in, global economic situation, company’s investment strategies and possibilities, asset’s depreciable/ amortizable amount. the theoretical research indicates there is no such a method that could be the best one and applied in all companies. however company’s management and shareholders or even financial analysts should regularly evaluate the potential risk of obsolescence of long-lived non-financial assets belonging to the particular company. this information will help to identify situations when company’s management tries to manipulate with the net income per particular period by increasing/ decreasing depreciation/ amortization expenses. this could be done in various ways – changing depreciation method, increasing/ decreasing period of an asset’s useful life, deciding to capitalize or not the elements of the acquisition cost. also, it could be the situation, that the management identify situation, when depreciation/ amortization method should be changed.  references accountancy (1980). lonrho changes its accounting policy on excel depreciation. accountancy, 91(1040), 19. annual accounts law (1992 the amendments), 14 october 1992, http://www.fm.gov.lv/ files/files/annual_accounts_law.pdf (accessed: 13. 04. 2012). aparicio j., & sánchez-soriano, j. 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(1970). current value depreciation: a concept clarification. accounting review, 45(3), 544–552. wong, a., & pitt, a.j. (2012). depreciation and changes in use of real property. tax adviser, 43 (10), 648–650. wright, f.k. (1964). towards a general theory of depreciation. journal of accounting research, 2 (1), 80–90. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: july 30, 2015; date of acceptance: october 23, 2015. * contact information: sitorus_tigor@yahoo.com, universitas bunda mulia, jakarta, magister management department, phone: 6281514054090. sitorus t. (2015). the study of risk-weighted assets on the effects of loan exposure valuation towards credit default. copernican journal of finance & accounting, 4(2), 159–176. http://dx.doi. org/10.12775/cjfa.2015.022 tigor sitorus* universitas bunda mulia, jakarta the study of risk-weighted assets on the effects of loan exposure valuation towards credit default (an empirical study on middle and top local banks listed in indonesia stock exchange period 2008– 2012) keywords: loan, valuation, risk. j e l classification: g210. abstract: this study aims at investigating and testing the mediated effect of risk-weighted assets on the effects of loan exposure valuation towards credit default at the local banks listed in indonesian stock exchange from the period of 2008 to 2012. the structural equation modelling by amos software 21.00 was used to analyze the data, and the result shows high goodness of fit while the simultaneous and individual tests generate significant result. the result of analysis shows that: (1) the loan exposure valuation does not give significantly positive inf luence to credit default; (2) the loan exposure valuation gives significantly positive inf luence to risk-weighted assets; (3) the risk-weighted assets give significantly positive inf luence to credit default. therefore, the mediated effect of risk-weighted assets on the effects of loan exposure valuation towards credit default has more strength compared to the direct effect of loan exposure valuation to credit default. tigor sitorus160  1. introduction 1.1. background of study bank is a type of business organization, which is placed in the area of uncertainty. various environmental factors, such as customers, intermediaries, competitors, government and other environmental factors can provide both positive and negative inf luence to the bank. positive inf luence means more opportunities or encouragement while negative inf luence equals to barriers or threats to the bank. when a positive or negative effect inf luence the bank, all the determinant factors must then be considered, analyzed and diagnosed in order to predict the likelihood that a risk will occur. empirical evidence showed that bank of indonesia recorded a credit growth in the banking sector by the end of 2012, and that credit growth was lower compared to the previous years’. it is even below the threshold of the bank business plan, which is at the level of 23% (johansyah 2013). on the other hand, the credit default has increased approximately 0.12% compared to the previous year, which is 2.70%. fitch, which is a rating agency, warned that the current economic global conditions are not conducive, and the potential non-performing loan (npl) will increase in 2013 from its lowest level in 2012. (megasari 2012). according to the reality that is faced by the banking industry, especially for the middle and top local bank listed in indonesian stock exchange, there is always uncertainty. this means that every person involved in the management of the bank should seek to address the risks that occur or are likely to occur. furthermore, they should also seek to minimize or eliminate the loss when the risks and uncertainties occur by implementing good risk management. the implementation of good risk management will minimize the loss faced by banks (indonesia central bank no. 5/8/pbi/2003). as a result, the bank can maintain its viability, develop itself into a larger bank, and achieve success in business. banks that do not implement good risk management might face the possibilities of loss, and this requires serious attention from the management of the banks. through serious attention and proper analysis and diagnosis, the management of a bank is expected to predict the risk imposed on other banks so that the management will be able to minimize the loss when something unexpected happens. in the future, it is hoped that the bank will be able to make prediction the study of risk-weighted assets on the effects of loan… 161 regarding to this matter and devise the steps which are in accordance to the principle of prudent in order to deal with this problem. one of the most fundamental aspects in the implementation of the precautionary principle is capital adequacy. it is a major focus of the entire banking supervisory authorities around the world. capital owned by the bank basically should be sufficient in covering all the business risks faced by the bank. the main risks include the bank’s credit risk, market risk, operational risk and liquidity risk. measurement of risk is very important in this case in order to provide sufficient financial analysis in respect to the management of substantial funds from the public. as an intermediary institution, a bank is highly dependent on the extent of trust placed by the public. one of the important aspects in the analysis of financial risks in the banking industry is risk-weighted assets. there are many variations in calculating the risk-weighted assets (rwa) in the banking sector. rwa differences in various countries have led to reduced confidence and reliability on rwa and capital ratios, and if this condition is left untreated, it can affect the credibility of the banking industry in general (le leslé, avramova 2012). 1.2. originality this research tried to develop the effect of loan exposure valuation with variance amount realized through credit, investment, and placement on the third parties towards credit default. this research is different from the study conducted by aziz and charupat (1998), which calculated credit exposure by using monte carlo simulation (bis 1998). furthermore, aziz and charupat’s study shows the significant effect in setting the capital reserves whereas this study tried to increment a variable in the relationship of the loan exposure and credit defaults in some banks in indonesia. the variable of this research is riskweighted assets (rwa), more specifically every balance sheet assets and offbalance sheet that give the appropriate weight levels of credit risk inherent in every account. 1.3. problem formulation based on the phenomenon in the banking business and the research gap described above and according to the regulation of indonesian central bank no. 5/8/pbi/2003 (dated may 19, 2003) about implementation of management tigor sitorus162 risk in decreasing default risk, the author formulated “how to decrease the credit default” as the research problem. 1.4. research questions according to the problem formulation, this study tried to answer some questions, which are: 1) does the loan exposure valuation inf luence credit default? 2) does the loan exposure valuation inf luence risk-weighted assets? 3) does the risk-weighted assets inf luence credit default? 1.5. research objectives based on the problem formulation and research questions, this research aims at: 1) identifying and analyzing the effect of the loan exposure valuation on credit default . 2) identifying and analyzing the effect of the loan exposure valuation on risk-weighted assets. 3) identifying and analyzing the effect of risk-weighted assets on credit default. 1.6. research output this research will give contribution for academics area and organizational practitioners in the form of recommendations and the development of theoretical model and empirical model about the concepts of risk-weighted assets. a. academic implications this research will provide support for the development of the theory of performance and the theory of risk by observing the inf luence factors of credit default from a wider perspective by suggesting: 1) how the credit default could be minimized by decreasing the risk-weighted assets, 2) how the risk-weighted assets could be decreased by increasing loan exposure valuation. b. practical organizational implications the study of risk-weighted assets on the effects of loan… 163 this research will provide guidance in valuating loan exposure in order to decrease the credit default. the practitioners should therefore precisely calculate the risk-weighted assets when giving the credit, investing in securities, or placing the money on the third parties. 2. literature review 2.1. contingency theory the purpose of establishment of a company concerns with the creation of revenue and profitability and improving social welfare. this purpose – whether it is short-term, medium-term, or long-term purpose – is prepared in the planning and control stage of the company, and the company has to track this purpose in order to achieve their objectives. behavioral research in accounting was originally designed by some researchers to explain the universalistic approach. some of the examples include the research conducted by argyris (1952), hopwood (1972) and otley (1978). universalistic approach that includes a control system can be applied to all characteristics of any firm and environmental conditions. universalistic approach is based on the scientific management theory. contingency theory can be used to analyze the design and management control systems in order to provide information that can be used by companies for various purposes and to face competition (otley 1978). on the other hand, merchant (1982) argued that there is no universal control system that can always be applied to the entire organization in each state. control systems will vary in every organization based on its organizational and situational factors. 2.2. control theory anthony and govindarajan (2005) stated that management control activities include plan, coordinate, communicate, evaluate, decide, and inf luence, and the control system elements include detector, assessor, effector, and communication networks. huezynski and buchanan (1991) explained that management control is as a process through which the implemented plans and goals are achieved through the establishment of standards and measurement database. management control must address the issues by comparing actual performance with the standtigor sitorus164 ards and by determining corrective action and feedback needed. furthermore, huezynski and buchanan (1991) explained that the control of the organization is a meaningful and important activity because if the control activities in an organization do not run properly, the operating activities will be impaired and wasted (in terms of efficiency). snell (1992) defined the controls as any process that helps in aligning the actions of the individual with the interests of the organization that hires him or her. furthermore, snell (1992) divided the controls into 3 (three) types of typology, which are control systems of behavior, control systems of results, and input control system. 2.3. concept of banking and credit according to the circular letter of bank of indonesia (se bi) no.26/4/bppp (dated may 29, 1994), earning assets (loans) are all assets in dollars and foreign currencies held by the bank in order to earn revenue according to function. the types of earning assets are amount of credit, letter of credit, placement with banks and non-banks, and investments. the term ‘credit’ can be defined as “the provision of money or bills that can be similar with that, based on an agreement between banks with other parties that requires the borrower to repay the debt after a certain period of time with interest” based on the basic banking act 10 of 1998. in other words, credit is the transfer of funds from the lender to the borrower. assessment on the principles in the provision of credit or in determining the collectability of loans-earning assets in the form of credits is specified in 5 (five) categories in the regulation of bank of indonesia no.8/19/pbi/2006 (dated october 5, 2006), which include; f luent, special mention, doubtful and loss. 2.4. concept of management risk smith (1990) stated that management of risk is a process of identification, measurement and control of a risk that may threat the asset and revenue of a company or a project, which may result in damaged assets or company loss. noshworthy (2000, 600) stated that management of risk is an implementation of measures aimed at reducing the likelihood of those threats occurring and minimizing any damage if they do. risk analysis and risk control form the the study of risk-weighted assets on the effects of loan… 165 foundation of risk management where risk control is the application of suitable controls to gain a balance among security, usability and cost. stoneburner et al. (2002) explained that management of risk controls and mitigates risks, which are related to information system, and encompasses risk assessment through cost-benefit analysis and the implementation, test and security evaluation of safeguards. 2.5. credit risk, weighted risk and loan exposure according to the regulation of bank of indonesia no. 14/18/pbi/2012, credit risk is a risk due to the failure of the debtor and/or other party in fulfilling obligation to the bank. banks are exposed to credit risk due to the nature of their lending-based business while the bank’s debt and capital ratio is highly leveraged. the source of credit risk can come from any functional activities of the bank, such as lending of the loan, placement and investment. credit risk still dominates the bank activities in indonesia. this happens because besides the potential loss occurred from large credit exposure; the margin received by banks is relatively small. joel bessis (1998) defined credit risk as the loss that is caused by the default of the debtor or due to a decline in the credit quality of borrowers. the decline in credit quality ref lects the increase in credit risk. on the other hand, kountur (2006, p. 3) defines “risk” as the possibility of adverse events. the more complex the activity is, the greater the risks are. risk weighted assets (rwa) is the banking assets in the balance sheet which are taken into account by a certain percentage weight as a risk factor. the provisions about percentage of risk factors in each asset as the basis for the calculation of risk-weighted assets have been determined by the bank of indonesia in accordance to the circular letter no. 5/23/dpnp (dated september 29, 2003). in calculating risk-weighted assets for credit risk, the bank can use 2 (two) types of approaches, standardized approach and / or internal rating based approach. loan exposure is the cost of replacing or hedging the contract at the time of default. the cost is the maximum value that will be lost if the counter party to that contract default (aziz, charupat 1998). bielecki and rutkowski (2002) defined default risk as a possibility that a counter party in a financial contract can not fulfil a contractual commitment or meet his/her obligations stated in contract. tigor sitorus166 from the various explanations and theoretical framework about decreasing credit default described above, in this paper, the author proposed the proposition as follows: proposition: risk-weighted assets are the risk of all bank assets placed on the third parties in the form of loans, investment, placement and other forms of credit. if the risk is calculated properly, it can potentially decrease the credit default. 3. research methodology and research process 3.1. population and research sample the sampling method used in this research is purposive sampling (ferdinand augusty, 2006). this sampling method was chosen after considering all information related to the research problem. the population in this study is the banks that are listed in indonesian stock exchange from 2008 to 2012 while the samples are the middle and top fifteen local indonesian banks listed in the indonesian stock exchange from 2008 until 2012. the reason why the middle and top fifteen local indonesian banks were chosen as the samples of this study is because the data is more reliable while the process of recording a bank listed in indonesian stock exchange is conducted through a careful evaluation and feasibility study. 3.2. operational of variables basically, the necessary data in this study can be categorized into 3 (three) groups of variables, which are independent variable, dependent variable, and intervening variable. the first variable (exp) is the loan exposure valuation. this variable is independent variable, which is indicated through the amount of credit, placement and investment. the second variable is risk-weighted assets (atmr). this variable is the intervening variable with indicated amount of riskweighted assets. the third variable (npl) is the credit default. this variable is the dependent variable with proxy or nonperforming loan. the model can be formulated as follows: npl = f(exp) + e (1) the study of risk-weighted assets on the effects of loan… 167 npl = f(exp) + f(atmr) + e (2) atmr= f(exp) + e (3) 3.3. data collection techniques the data required for this study can be categorized as primary data and secondary data. the primary data required in this study were collected by conducting field research by directly visiting the banks, which are listed in indonesian stock exchange. the secondary data were collected through library research. 3.4 method of analysis in this study, the author used structural equation modeling (sem). sem is a method of analysis, which can provide information about the simultaneous causal relationship between the variables. it provides information about the load factors and measurement of errors. sem can be used to analyze the relationship between latent variables with indicator variables, the relationship between latent variables with another, as well as knowing the size of the measurement error (ghozali, 2008). to support structural equation modeling, the author used software amos 21:00. 4. results and conclusions 4.1.testing the feasibility of research model 1) normality and linearity normality test is done by using the skewness test, which shows almost all normal variables, are at the level of 0.01 (1%). this is ref lected in the value of skewness cr, which is below ± 2.58 (arbuckle 1997, 78). multivariate value used in testing multivariate normality is kurtosis coefficient. if the results are still below the limit of ± 2.58, it means that there are data used for multivariate normal distribution. 2) extreme numbers (outliers) outliers are observations that appear to be an extreme case in both univariate and multivariate values due to the combination of its unique chatigor sitorus168 racteristics, and they look very much different from the other types of observation. in this study, the model proves that no outlier is generated. 3) multicollinearity multicollinearity can be detected from the determinant of the covariance matrix (cooper, emory 1996, 324). the small value of determinant of covariance matrix indicates multicollinearity problem. in the table, it can be seen that the correlation between the independent variables is less than 1 (r <1), which means that the independent variables have no symptoms of multicollinearity. furthermore, a feasibility test is conducted after meeting the following assumptions. to test the feasibility of the structural equation model, some eligibility index models were used. according to arbuckle (1997), amos can also be used to identify the proposed model by meeting the criteria of a good structural equation model. those criteria are: a) positive degrees of freedom the output results and the degree of freedom must be equal to 4 in order for the developed model to meet the criteria as a good model. b) χ2 (chi-square statistic) and probability the likelihood ratio chi-square statistic is the fundamental test equipment to measure the overall fit. significant level of acceptance is recommended if p ≥ 0.05 (hair et al. 1998, 389), which means the actual input matrix is not statistically different from the predicted input matrices (wheaton, 1977). amos output results showed that the ratio of chi square is 3.3328 or less than 591 (3 x 197). besides ratio chi-square, hair et al. (1998, 340) recommended to use the value of cmin / df. cmin / df is the value of conformity which can be used to decide whether the model is accepted or not. for a model to be accepted, the value of cmin / df has to be less than or equal to 2.0 or 3.0. in this study, it was found that the value of cmin / df is 0.8307, which is less than 2.0. based on the result of calculation, it can be concluded that this model is acceptable and can be used. c) goodness of fit index (gfi) this index ref lects the overall suitability of the model, and it is calculated from the residual quadratic model that predicts and compares the actual data. the value of goodness of fit index is 0.9826, or it usually ranges from 0 to 1. the larger the sample size, the greater the va the study of risk-weighted assets on the effects of loan… 169 lue of gfi. the closer the value of gfi to 1, the better the agreement the model has (hair et al. 1998, 387). good value of gfi is equal to or greater than 0.90. d) adjusted gfi (agfi) agfi is an analogue of r2 (r square) in a multiple regression. fit index can adjust the degree of freedom available to test whether the model is accepted. amos output results showed that the agfi has coefficient of 0.9347 or 93.47%. an acceptance rate is recommended if the value is equal to or greater than 0.9. e) tucker-lewis index (tli) tli is an alternative incremental fit index that compares a model that is tested against a baseline models. it is a fit index, which is less affected by the sample size. a value closer to 1 indicates a very good fit. from the calculation in this study, amos output results showed that the tli has coefficient of 1.00 or 100%. an acceptance rate is recommended if the value is equal to or greater than 0.9. f ) cfi (comparative fit index) cfi, which is known as the bentler comparative index, is an incremental suitability indices, which compare the null model, tested and estimated models. hair et al. (1998, 289) stated that cfi is a good index to measure the suitability of a model because it is not affected by sample size. the value of cfi which is equal to or greater than 0.90 means that the model is good. in this research, amos output results showed that the cfi coefficient is 1.00 or 100%, which means that the model is a good model. g) rmsea (root mean square error of approximation) rmsea values indicate the goodness of fit expected when the model is estimated in the population. rmsea is an index of measurement that is not inf luenced by the size of the sample so that the index is usually used to measure the fit model on large sample numbers. for a model to be acceptable, the rmsea index should be less than or equal to 0.08 or 8.0%. from the calculation in this study, amos output results showed the rmsea index is 0.00 or 0%. this means that the model showed a close fit, and it was based on the degree of freedom. the indices that are used to test the feasibility of a model can be summarized in the table below. tigor sitorus170 table 1. goodness of fit model loan exposure valuation, risk weighted asset, credit default goodness of fit index cut off value result evaluation model χ2 chi square < 591 3,328 good hoelter ( 0.05 ) > 120 212 good significance probability ≥ 0,05 0,5053 good gfi ≥ 0,90 0,9826 good agfi ≥ 0,90 0,9347 good cmin/df ≤ 2,00 0,8307 good tli ≥ 0,90 1,000 good cfi ≥ 0,90 1,000 good rmsea ≤ 0,08 0,000 good s o u r c e : results output full amos 21:00. table 2. the effect on loan exposure valuation towards credit default estimate s.e. c.r. p atmr <--exp ,9562 ,0468 20,4234 *** crd <--exp 1,0000 efek <--exp ,0803 ,0106 7,5742 *** plc <--exp ,1757 ,0134 13,1096 *** npl <--exp ,0094 ,0126 ,7480 ,4545 npl <--atmr ,0209 ,0124 1,6818 ,0092 s o u r c e : amos ver. 21.00. notes: atmr = risk weighted asset exp = loan exposure crd = credit realized efek = investment plc = placement npl = non performing loan the study of risk-weighted assets on the effects of loan… 171 4.2. hypotheses testing figure 1. pictograph on loan exposure valuation, risk weighted asset, credit default fit model tested: χ2 chi square = 3,328 significance probability = 0,5053 gfi = 0,9826 agfi = 0,9347 cmin/df = 0,8307 tli = 1,0000 cfi = 1,0000 rmsea = 0,0000 s o u r c e : amos ver. 21.00. hypothesis 1: loan exposure has positive effect on credit default the statistical tests on this hypothesis (table 2) showed that loan exposure has the positive coefficient of 0.0094 on inf luencing the credit default despite the fact that it is not quite significant. on the other hand, the value of p is 0.4545, which is greater than 0.05. this means that hypothesis 1 is not accepted. in othtigor sitorus172 er words, it can be concluded that loan exposure valuation has no significant effect on credit default. this study provides support for the study conducted by aziz and charupat (1998) which stated that calculating credit exposure using monte carlo simulation has significant effect in setting capital reserves. this study differs from the research conducted by duffie and singleton (1999) which classify the models for risky assets (bonds) into two categories. the first branch is referred to as “structural models,” and it requires specific inputs from the firm to model the default process. typically, the cause of default bond is a decline in the value of a firm’s assets below a fixed threshold. the second branch is referred to as “reduced form models,” and it estimates the risk of neutral probability of default over a given interval from actual credit spreads without necessarily identify the cause of the default. hypothesis 2: loan exposure has positive effect on risk-weighted asset the statistical tests on this hypothesis (table 2) showed that the loan exposure has the positive coefficient of 0.9562 on inf luencing the risk-weighted average asset, and the result is significant. the value of p is 0.00, which is below 0.05. this means that hypothesis 2 is accepted, and loan exposure has direct significant effect on risk-weighted asset. this study supports the study conducted by andersen et al. (2012) which stated that higher risk weights can mitigate systemic risk to a certain extent as banks might both set aside more capital and reduce lending and investment that generate systemic risk. hypothesis 3: risk-weighted asset has positive effect on credit default the statistical tests on this hypothesis (table 2) showed risk-weighted asset has the positive coefficient of 0.0209 on inf luencing the credit default, and the result is significant. the value of p is 0.009, which is below 0.05. this means that hypothesis 3 is accepted. this shows that risk-weighted average asset has direct significant effect on credit default. it proves that the mediated effect of risk-weighted average asset is 0.1998 or greater than the direct effect of loan exposure on credit default with the coefficient of 0.0094. this study agrees with the research conducted by sonali das and amadou n.r. sy (2012), which is entitled “how risky are the bank’s risk weighted assets: evidence from the financial crisis.” they argued that banks with lower the study of risk-weighted assets on the effects of loan… 173 rwa will perform better during the crisis, which means that credit default or npl must be low in order for the bank to obtain better return. this study also agrees with the findings by bradley et al. (1991) who found that rwa for banks, respectively, are positively related to the bank probability of failure. 4.3. conclusion 1) the coefficient of loan exposure is 0.0094 on inf luencing the credit default despite the fact that it is not quite significant. on the other hand, the value of p is 0.4545, which is greater than 0.05. this means that hypothesis 1 is not accepted. in other words, it can be concluded that loan exposure valuation has no significant effect on credit default. 2) the coefficient of loan exposure is 0.9562 on inf luencing the risk-weighted assets, and the result is significant. the value of p is 0.00, which is below 0.05. this means that hypothesis 2 is accepted, and loan exposure has direct significant effect on risk-weighted asset. 3) the coefficient of risk-weighted assets is 0.0209 on inf luencing the credit default, and the result is significant. the value of p is 0.009, which is below 0.05. this means that hypothesis 3 is accepted. this shows that risk-weighted average asset has direct significant effect on credit default. it proves that the mediated effect of risk-weighted average asset is 0.1998 or greater than the direct effect of loan exposure on credit default with the coefficient of 0.0094. 4.4. implication 1) academic recommendation this study contributes to the academic area in the form of recommendation and the new theoretical model of loan exposure valuation in inf luencing the credit default. this study has implications for academic research by providing support in the development of contingency theory and the theory of organizations from a wider perspective, namely: 1) by suggesting that loan exposure valuation has no significant effect on the credit default and that loan exposure valuation cannot increase credit default, so this variable must be mediated by other variables in order to decrease credit default; 2) by proposing the usage of indirect effect of tigor sitorus174 loan exposure valuation on credit default mediated by risk-weighted assets that are precisely calculated since it has stronger and more positive coefficient than direct effect. 2) practical recommendations the result of this research also provides guidance for banking practitioners in improving the loan exposure when processing a credit application. loan exposure must be built adequately by an organization. moreover, the practitioner must implement organizational learning to build and develop a credit system and control. this study can give implications to the practitioners by suggesting the creditors to use rwa as an indicator of credit risk and precisely calculate the rwa when giving the credit, investing in securities, or placing the money on the third parties. most banks with higher risk-weighted assets implement bad credit management. 3) future research recommendation for future research, it is suggested that the object of the research is not limited to only middle and top banks but also to all banks that are listed in the indonesian stock exchange, jakarta so that the samples are distributed more widely.  references andersen, h. 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p-issn: 2300-1240 volume 4 issue 2 2015 biannual finance & accounting 2012 volume 1 copernican journal of biannual issue 1 uniwersytet mikołaja kopernika w toruniu nicolaus copernicus university editorial board editor in chief: prof. dr hab. leszek dziawgo executive editor: dr dorota krupa associate editors: dr ewa chojnacka, mgr agnieszka żołądkiewicz secretary: dr damian walczak scientific council prof. dr. m. peter van der hoek, erasmus university, rotterdam, netherlands, academy of economic studies, bucharest, romania prof. dr. günter hofbauer, technische hochschule ingolstadt business school, ingolstadt, germany prof. dr. juan-antonio mondéjar-jiménez, universidad de castilla – la mancha, spain prof. dr hab. stanisław owsiak, uniwersytet ekonomiczny w krakowie, cracow university of economics, poland prof. dr hab. wiesława przybylska-kapuścińska, uniwersytet ekonomiczny w poznaniu, poznan university of economics, poland prof. mustafa akan, dogus university, istanbul, turkey prof. dr. sandra isabel goncalves da saude, instituto politecnico de beja, portugal prof. dr hab. małgorzata zaleska, szkoła główna handlowa w warszawie, warsaw school of economics, poland s t a t i s t i c a l e d i t o r : dr hab. piotr fiszeder, prof. umk e n g l i s h p r o o f r e a d e r : dr hab. richard nicholls, mgr hazel pearson subject editors a c c o u n t i n g : prof. dr hab. sławomir sojak f i n a n c e : prof. dr hab. danuta dziawgo b e h a v i o r a l f i n a n c e a n d f i n a n c i a l e n g e e n e r i n g : prof. dr hab. józef stawicki list of reviewers prof. dr. catherine deffains-crapsky, université d’angers, france prof. dr hab. jerzy gierusz, uniwersytet gdański, gdansk university, poland prof. dr. dirk kiesewetter, julius-maximilians-universität würzburg, germany prof. miloš král doc. ing., tomas bata university in zlín, czechy prof. dr. natalia konovalova, riseba university, riga, latvia prof. emil papazov, university of national and world economy, sofia, bulgaria prof. dr. ángel peiró signes, universidad politécnica de valencia, spain prof. dr. adalmiro pereira, politécnico do porto, portugal prof. dr hab. bogusław pietrzak, szkoła główna handlowa w warszawie, warsaw school of economics, poland prof. dr hab. waldemar tarczyński, uniwersytet szczeciński, szczecin university, poland prof. titular gerard olivar tost, national university of colombia, colombia prof. siniša zarić, ph.d., university of belgrade, serbia prof. dr hab. jan turyna, uniwersytet warszawski, warsaw university, poland prof. dr hab. maciej wiatr, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr hab. andrzej cwynar, prof. wsei, wyższa szkoła ekonomii i innowacji, university of economics and innovation, poland dr hab. zbigniew krysiak, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr hab. joanna wielgórska-leszczyńska, prof. sgh, szkoła główna handlowa w warszawie, warsaw school of economics, poland dr tomáš heryán, silesian university, school of business administration, czech republic dr wojciech piotrowicz, university of oxford, great britain c o v e r d e s i g n : miłosława cichosz the primary version of the journal is the on-line version (www.cjfa.umk.pl), however the journal is available both in print and electronic form. e-issn: 2300-3065 p-issn: 2300-1240 czasopismo jest wydawane na zasadach licencji niewyłącznej creative commons i dystrybuowane w wersji elektronicznej open acceses poprzez platformę czasopism umk. wersja papierowa jest dostępna w druku na żądanie na stronie internetowej wydawnictwa www.wydawnictwoumk.pl © 2015 copyright by uniwersytet mikołaja kopernika toruń 2015 editorial office gagarina 13a, 87-100 toruń, phone: + 48 56 611 46 34 (mgr agnieszka żołądkiewicz), fax: +48 56 654 24 93 cjfa@umk.pl, www.cjfa.umk.pl address of the publisher nicolaus copernicus university in toruń, gagarina 11, 87-100 toruń, phone: +48 56 611 40 10 kontakt@umk.pl, www.umk.pl print: drukarnia wn umk, printed in 300 copies icv 2014: 94.90 table of contents leszek dziawgo introduction ........................................................................................................................... 7 heitham al-hajieh, hashem alnemer, timothy rodgers, jacek niklewski forecasting the jordanian stock index: modelling asymmetric volatility and distribution effects within a garch framework ....................................................... 9 hakan çelıkkol, fatma köse swot analysis of turkish energy market in the context of electricity market in the context of electricity market .................................................................................. 27 mediha mine çelikkol, hakan çelikkol the evaluation of the students in dumlupinar university vocational school of social sciences about levels of financial literacy ...................................................... 43 marlena ciechan-kujawa professional financial and accounting services in the light of european union directives and the deregulation of professions in poland – current status and research needs ................................................................................................................... 65 monika czerwonka the exploration of disposition effect among business undergraduates in poland .... 79 ieva kozlovska the impact of long-lived non-financial assets depreciation/amortization method on financial statements ..................................................................................................... 91 milena peršić, katarina bakija, dubravka vlašić framework for improving quality and comparability of non-financial reporting system ................................................................................................................................ 109 david procházka lobbying on the iasb standards: an analysis of the lobbyists’ behaviour over period 2006–2014 .............................................................................................................. 129 magdalena redo the importance of prudential regulations in the process of transmitting monetary policy to economy ........................................................................................................... 145 tigor sitorus the study of risk-weighted assets on the effects of loan exposure valuation towards credit default (an empirical study on middle and top local banks listed in indonesia stock exchange period 2008–2012) ........................................................ 159 diana larisa tampu human motivation and corporate governance .......................................................... 177 adam zaremba the january seasonality and the performance of country-level value and momentum strategies ............................................................................................................ 195 gediminas žylius evaluation of atm cash demand process factors applied for forecasting with ci models ............................................................................................................................... 211 for authors ......................................................................................................................... 237 cjfa_1_2015_przed_drukiem.pdf 65 pernican journal of finance & accounting, 4(1), 83–96. http://dx.doi.org/10.12775/cjfa.2015.006 * finance department, cracow university of economics the fiscal challenges of polish integration with the euro area keywords: euro area, convergence criteria, fiscal policy, deficit, public revenue, public expenditure. j e l classification: h3. abstract on the rights of the state with a derogation. this means that poland is obliged to meet the convergence criteria in terms of fiscal and monetary policies and the introduction of the euro. the aim of the articles is to show the need to take necessary action in the development of public revenue and expenditure for the implementation of the fiscal require– analysis of the literature on the subject, – analysis of normative acts, – analysis of statistical data. the rights of the state with a derogation. this means that poland is obliged to date of submission: april 7, 2014; date of acceptance: may 10, 2015. * rakowicka 27, 31-510 cracow, poland, phone: +48 12 293 52 89. 84 meet the convergence criteria in terms of fiscal and monetary policies and the introduction of the euro. the adoption of a single currency implies permanent stiffening of the zloty against the euro and the resignation of the ability to purcurrent strategy of polish integration with the euro zone, defined by the council of ministers, provides such economic policy orientation, which will guarantee the permanent fulfillment of the convergence criteria, in particular regarding fiscal discipline and taking additional steps to strengthen the potential of the polish economy, including in the area of institutional. it is expected that the entry into the euro area will be an opportunity for the scenario of accelerated economic growth and growing wealth. however, the experience of the countries of the euro area, especially during the recent crisis, indicate that the euro is associated with an increased risk of macroeconomic instability and slow economic growth, especially in the case of countries with weak macroeconomic fundamentals. thus, the most important internal factor, i.e. dependent on national economic policy, is the degree of preparation of the polish economy to become part of the common currency area. it is advisable that the decision to join the euro zone was preceded by a right reform program, leading to the strengthening of the foundations of polish economy and bring them to the circumstances related to the functioning of the monetary union. the aim of the articles is to show the need to take necessary action in the development of public revenue and expenditure for the implementation of the the study used the following test method: analysis of the literature on the subject, analysis of normative acts, analysis of statistical data. (borsi, metiu 2013). in order to reduce the risks associated with maintaining a decentralized fiscal policy, in terms of monetary union it was necessary to the fiscal challenges of polish integration with the euro area 85 introduce a common fiscal rules and procedures for their enforcement. (hal43–92). the crisis has highlighted, however, that the adopted mechanisms for oversight of national fiscal policies were not effective enough, to prevent over-indebtedness by member states and ensure that national policies fiscal will be crisis has been decided to reform the supervision and coordination of fiscal poin december of 2011 entered into force a package of six legislative acts in the field of strengthening economic governance, the so-called six-pack. and in may 2013 took effect double-pack. the new system of rules has been further strengthened by the fiscal pact (cf. the treaty on stability, coordination should be emphasized, that the main weaknesses of the stability and growth pact (sgp) which were revealed by the debt crisis include (ekonomiczne wyzwania 2014, 8–9; fiscal compact signed 2012; wyplosz 2013): 1. improper design of fiscal rules, the politicization of their use and inadequate identification of the national authorities with the european rules. 2010). 2. the weakness of the statistical base european fiscal rules. 3. inadequate consideration macroeconomic conditions in the activities of european fiscal rules. the most important changes aimed at eliminating weaknesses model of surveillance and coordination of fiscal policies of euro area countries, including the weakness of the sgp, include (ekonomiczne wyzwania 2014, 9–11): i. improvement of the construction and introduction of new european fiscal rules in order to increase the likelihood that the application of these rules will limit the risk to the solvency of the country and will result in a counter-cyclical fiscal policy. to this end: 1) increased emphasis on compliance with the criterion of public debt through the introduction of rules concerning the pace of its reduction in the country in which the ratio of public debt to gdp exceeds 60%. with made operationalization of the debt criterion can be treated on a par with the deficit criterion in decisions regarding the excessive deficit procedure; 86 2) on the application and evaluation of compliance with the fiscal rules by member states was placed greater emphasis on fiscal effort in structural terms: to ensure, that countries will be maintained structural balance at the level of the the medium-term budgetory objective (mto) or quickly sought to that level, introduced a new rule for public spending, according to which their growth rate should not exceed the growth of potential gdp (provided that the increase in expenditure is not accompanied by the introduction of additional instruments to increase revenue). this rule should allow the use of revenue windfalls (resulting from the cyclical upturn) on the reduction of debt, rather than on the sustainable growth of spending. this should limit the risks associated with the fiscal consequences of rising macroeconomic imbalances. to strengthen the role of structural variables in the assessment of the fiscal position of the country, introduced a quantitative definition of derogation from the mto and the adjustment path in the event of the emergence of derogation from mto. through its solutions disciplining fiscal policy is to take place over the economic cycle, and not just in a situation where the cur ii. the introduction of solutions, that are supposed to enhance the enforceability of the fiscal rules of the european institutions and to limit the scale of the politicization of the application of these rules. these solutions include: 1) additional (compared to the already foreseen in the treaty – art. 126, paragraph. 11) financial sanctions; 2) the new voting system (reverse qualified majority), which increases automaticity and thus reduces the politicization of decision-making process regarding the imposition of sanctions: commission recommendation for a financial sanction is considered approved unless it is rejected by the council by qualified majority. iii. the introduction of solutions to increase the role of fiscal rules in the fiscal policy of the member states, including solutions that aim to increase the identification of the authorities of the member states with introdu iv. strengthening of the coordination of fiscal and economic policy (including the role of the european commission in the process) (ministerstwo finansów 2014; wernik 2014, 144–149): the fiscal challenges of polish integration with the euro area 87 1. through the introduction of the european semester, it is synchronized deadlines for the submission to the european commission the national reform programs (including plans for structural reforms) and stability programs and assessments of the member states in the field of economic and fiscal policy. 2. according to the two-pack, the common budgetary timetable was introduced for member states. they were required to submit to commission budget plans for the next year to 15 october. commission – in case of a serious breach of the obligations arising from sgpmay apply to the member state concerned to submit a revised proposal. 3. strengthened monitoring and supervision of the countries covered by the european commission of the excessive deficit procedure, countries threatened with serious difficulties with regard to financial stability or receiving support from the esm (mainly by increasing disclosure requirements and granting the commission of privileges to draw up proposals for corrective action). v. the introduction of solutions aimed at improving the statistical basis of european rules by the extending the competence of eurostat, increasing the independence of national statistical offices and the introduction of financial sanctions for manipulation of statistics on deficit and public debt. despite the extensive changes, essential model for creating and disciplining fiscal policy in the euro area remains unchanged. the 2008 global financial crisis and the eurozone crisis have had significant negative inf luence on poland’s budget deficit and public debt (sektor finansów 2011, 25–73; ciak 2012, 218–219). although polish economy continued to grow, over the period 2008–2013 fiscal deficit was higher than the reference value (table 1, figure 2). taking into account the prospect of poland adopting the euro, this constitutes a considerable blow to poland’s ability to meet the fiscal convergence criteria (kryzys finansów 2013, 11–37, wieloletni plan 2014, 8–9). economy) decided that has occurred an excessive deficit in poland. then has recommended, that this be corrected to below 3% of gdp by 2012 at the latest, inter alia by reducing the structural deficit (ie. the fiscal effort) of at least 1¼ point percent of gdp on average over the period 2010–12. 88 the estimates presented in the program in april 2013 showed that the nominal deficit of the general government fell in 2012 to 3.9% of gdp (compared to 5% of gdp in 2011). at the same time he was about 1 percentage point. gdp worse than assumed in the programme of 2012. decisive inf luence on the failure to meet the budget had a clear economic downturn in the external environment of poland and the slowdown in economic growth in the country. as a result, the income of the sector in 2012 turned out to be much smaller than planned. stability and growth pact requires from member country under the lish reports on the actions taken in connection with the recommendations of the ecofin council. in a report from october 2013 poland has estimated that the nominal deficit will increase in 2013 despite the consolidation measures, to 4.8% of gdp. it was stressed that the increase in the deficit stems almost entirely from the deterioration of cyclical conditions of economy. taking into account the impact of fiscal consolidation on economic growth, it was considered that the reduction of the deficit in 2013 according to the recommendations of the ecofin council level to 3.6% of gdp, it would be highly pro-cyclical: jeopardize the prospects for economic growth and would create a substantial risk of a recession, even deeper collapse in tax revenues and further increase the deficit. at the same time, in order to reduce the growth of the deficit, was to limit spending growth of 0.5% of gdp. given these circumstances, the commission considered it necessary to set a deadline to correct the excessive deficit. as a result, the ecofin council adopted on 10 december 2013 further recommendations for polish, moving the deadline to liquidate the excessive deficit by 2015. based on the new recommendations were formulated targets for the polish budget for the period 2013–15 – level of nominal deficits, respectively, 4.8% of gdp, 3.9% of gdp and 2.8% of gdp (excluding the impact of the transfer of assets from pension funds to the social insurance fund). the ecofin council also said that the achievement of budgetary targets needs a improvement in the structural balance (ie this part of nominal deficit, for which the government has a direct impact) by 1% of gdp in 2014 and 1.2% of gdp in the next year. the ecofin council also recommended for the poland (informacja improve the quality of public finances, improve tax compliance , and the efficiency of tax administration. the fiscal challenges of polish integration with the euro area 89 table 1. revenue and expenditure and the result of the general government in poland as% of gdp in 2004–2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 revenue 37,2 39,4 40,2 40,5 39,5 37,2 37,5 38,4 38,3 37,5 expenditure 42,6 43,4 43,9 42,2 43,2 44,6 45,4 43,4 42,2 41,9 deficit -5,4 -4,1 -3,6 -1,9 -3,7 -7,4 7,9 -5,0 -3,9 -4,3 s o u r c e : eurostat, convergence report (2012). consolidation actions of government led, in the years 2010–13, to cut spending by 2.8 points. percent. gdp. the expenses after eliminating the funds from scale of spending cuts, was possible among others thanks to (wieloletni plan 2014, 20–21): disciplinary rule, in force since 2011, limiting discretionary expenditure growth and new fixed expenditure to 1% per annum in real terms in 2013. this rule has been replaced by a stabilizing expenditure rule; limitation (since 2011) wage fund in the state budget entities through the adoption of the general principle of it is frozen at the nominal level of the previous year; periodically (at a time when poland is subject to an excessive deficit procedure) ban on adoption by government the bills, which may result in loss of income of public sector entities in relation to the size of the applicable in regulations and projects resulting in increased spending; currently in force – modified in 2009 – fiscal rules for local governments on debt limits; limiting the privileges entitling to early retirement; reduced, from 2011, a height of funeral allowance; the introduction of income criteria for the receipt of one-off grants for childbirth. on the other hand, on the revenue side the most important structural measures were (wieloletni plan 2014, 20–21): restriction, from may 2011, part of the pension insurance contributions transferred to opf from 7.3% to 2.3% measurement basis; increase in vat from 22% to 23% and from 7% to 8%, while reducing from 7% to 5% for basic food products (january 2011); 90 increase in pension contributions, which be charged the employer by 2 points percent (february 2012); limiting the deductibility of vat paid on the purchase of passenger cars with lcv homologation and fuel used to propel them (from the beginning of 2011); increase in excise duty on diesel and fuel charge (from january 2012); increase the excise tax on cigarettes (annually since 2010); the abolition of tax relief for bio-components in the excise duty (since may 2011); maintenance at the nominal level of 2009. tax brackets and lump-sum costs of revenues in the pit; changes in the tax on profits from bank deposits to limit the ability to avoid this tax (introduced in 2012); introduction of charges for the use of some resources natural resources (mining tax on copper and silver from april 2012); change in the vat rate on not universal postal services provided by the public operator, to 23% (april 2013). despite the many and significant structural measures, the general government sector revenue, in the years 2010–13, increased by only 0.4 points percent 0.1 points percent. this was mainly due to weak domestic demand, unfavorable public finance structure of economic growth, very low inf lation, and – most importantly – the pro-cyclicality of tax revenue. negative impact on revenue sector also had problems complying with tax laws. as a result, in 2013 was a slowdown in the pace of fiscal consolidation. while the headline deficit in 2011 has been reduced by 2.8 points percent gdp, and a year later by a further 1.2 percentage point of gdp. in 2013 deficit increased and reached 4.3% of gdp, ie. by 0.4 percentage points more than in 2012. the effect of changes in income and expenditure on the general government balance present figure 1. the fiscal challenges of polish integration with the euro area 91 figure 1. effect of changes in income and expenditure on the general government balance in relation to gdp (in percentage points) s o u r c e : ministry of finance (2015), www.mf.gov.pl. in december 2013, due to the deteriorating fiscal situation, the ecofin council adopted new recommendations for poland in the excessive deficit procedure. der the new recommendations, poland should reduce the deficit to 3.9% of gdp in 2014 and then to 2,8% of gdp in 2015 excluding the impact of the transfer of pension fund assets. the ecofin council has assessed that the achievement of budgetary targets needs for improvement in the structural balance by 1% of gdp in 2014 and 1.2% of gdp in the next year (figure 3). 92 figure 2. polish structural deficit as% of gdp s o u r c e : ministry of finance (2015), www.mf.gov.pl. to reduce the deficit below the reference value (figures 2 and 3) and keep it at this level decided in 2014–2017: 1) excise tax: increase in excise duty on cigarettes (from the beginning of 2014); increase in excise duty on ethyl alcohol (from the beginning of 2014); 2) vat: maintaining higher vat rates unchanged – all originally planned reduction in vat rates since the beginning of 2014 by 1 point per cent, the reduction in vat rates by 1 percentage point will take place in 2017; limiting the possibility of obtaining reimbursement of vat on certain expenditure incurred for housing purposes (law on state aid in the purchase of a first home for young people); the introduction of the mini one-stop-shop system from 2014 – change will be to change the place of supply of services in relation to telecommunications, broadcasting, radio and television broadcasting and electronically supplied services to non-taxable persons; the fiscal challenges of polish integration with the euro area 93 3) cit: introduction of taxation of companies limited by shares; exclusion of the right to exemption from corporate income tax payments of dividends and other income (revenue) from a share in profits of legal persons deductible in the company paying and the method of determining the income of benefits in kind (since 2015); 4) from 2016, will be introduced new system of payments to the central budget from the state forests. it will be 2% revenue obtained by the national forests from timber sales; 5) withdrawal from the implementation of a mechanism enabling taxpayers of corporate income tax to transmission of 1% of tax for research units – in accordance with the decision of the council of ministers, these issues will depend on the state of public finances. figure 3. general government deficit as %of gdp s o u r c e : ministry of finance (2015), www.mf.gov.pl. 94 figure 3. effect of changes in income and expenditure on the general government balance in relation to gdp (in percentage points) s o u r c e : ministry of finance (2015), www.mf.gov.pl. in addition, government are working on: introduction of contributions of civil contracts, in particular service contracts and the introduction of pension contributions of members of supervisory boards; increasing of the productivity of tax administration. in contrast, on the expenditure side are mainly taken action affecting the level of social expenditure and current expenditure, among others: liquidation of preference rules for calculating the salaries of uniformed officers and soldiers, as well as members of the judiciary (judges and prosecutors) in the course of the disease; reforming the rules for determining the base of sickness benefit if the insurance period is less than 12 months – these changes relate to persons engaged in non-agricultural business and other groups of people for whom the contribution basis is the amount declared; esignation – the decision of the council of ministers – of introducing the rector scholarship for the best students in the first year of study; the works on electronic system of sick leave – the implementation of system will reduce the cost of printing letterheads, enable a faster control the fiscal challenges of polish integration with the euro area 95 on the regularity of the use of sick leave and the regularity of ruling on temporary incapacity to work. the effect of changes in income and expenditure on the general government balance in relation to gdp presents figure 3. according to the information and forecast presented in this study, the deficit in 2015 will decrease to 2.5% of gdp, below the level recommended by the council – 2.8% of gdp. also in 2014 the general government deficit stood at 3.3% of gdp and was 0.6 points percent lower than the recommended council. the government is determined to limit the imbalance of public finances in the medium term without jeopardizing the development prospects of of the country. the next years will be so focused on the achievement by the poland in 2018. medium-term objective (mto), which is a structural deficit of 1% of gdp. realization of mto will ensure the achieving and maintaining debt of the general government significantly below the reference value of 60% of gdp. deutsche bundesbank discussion paper. warszawa. convergence report (2012), european commission. eurostat datebase 2013. fiscal compact signed: strengthened fiscal discipline and convergence in the euro area brussels, 2 march 2012, http://www.consilium.europa.eu/newsroom (accessed: 30.03.2015). hallerberg m., strauch r., von hagen j. (2007). the design of fiscal rules and forms of 23(2), 338–359. http://dx.doi.org/10.1016/j.ejpoleco.2006.11.005 . harden i., j. von hagen (1995). budget processes and commitment to fiscal discipline. european economic review, 39(3), 771–779. http://dx.doi.org/10.1016/0014-2921(94)00084-d. w ramach procedury nadmiernego deficytu (2014), warszawa. houben a., kakes j. (2013). financial imbalances and macroprudential policy in a currency union. dnb occasional study, 11(5). wersytetu ekonomicznego w krakowie, kraków. 96 kraków. ski, warszawa. ministerstwo finansów (2014). implikacje reformy instytucjonalnej strefy euro dla procesu wprowadzenia eurow polsce. euroopracownia, nr 14. monitor konwergencji nominalnej (2015), rada ministrów, warszawa. monitor konwergencji realnej (2015), rada ministrów, warszawa. ochrymiuk m. (2010), konwergencja nominalna w strefie euro. implikacje dla polski, nbp, warszawa. owsiak st. (2005), finanse publiczne. teoria i praktyka, wydawnictwo naukowe pwn, warszawa. szawa. wernik a. (2014), finanse publiczne, polskie wydawnictwo ekonomiczne, warszawa. wyplosz ch. (2013). europe’s quest for fiscal discipline. european economy. economic paper, 498, april. vamvakidis a. (2008), convergence in emerging europe: sustainability and vulnerabilities, imf working paper. date of submission: april 15, 2021; date of acceptance: june 10, 2021. * contact information: mustafaakan@halic.edu.tr, halic university sutluce mh. imrahor sk. no: 82 34445 beyoglu/istanbul, turkey, phone: +905333119405; orcid id: https://orcid.org/0000-0002-2900-4932. ** contact information: natalija.konovalova@riseba.lv, riseba university of applied sciences, meza street 3, riga, latvia, phone: +37129215208; orcid id: https://orcid. org/0000-0003-4072-4479. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 3 akan, m., & konovalova, n. (2021). optimal incentives for economic growth in central european countries: a micro approach. copernican journal of finance & accounting, 10(3), 9–31. http:// dx.doi.org/10.12775/cjfa.2021.009 mustafa akan* haliç university natalia konovalova** riseba university of applied sciences optimal incentives for economic growth in central european countries: a micro approach keywords: optimal control theory, incentives for economic growth, f luctuating demand. j e l classification: d90, f43, f63, c61. abstract: financial crisis of 2008 and the ongoing pandemic are continuing to have a negative impact on the economies of all countries even tough interest rates have been decreased significantly. this paper attempted to view the problem from a micro point of view to suggest more effective incentives for growth. the specific objective of the study is to determine and examine the effects of these incentives on economic growth in central european countries. mustafa akan, natalia konovalova10 an optimal control theoretic model was employed as a method of analysis with data from countries in question. results showed, generally, that incentives such as interest rates, investments in production technologies, labor productivity, and the cost of inventory were important factors to induce growth with different impact in each country. results showed that changes in interest rates will not cause significant economic growth in poland, hungary, and the czech republic where interest rates are already low. however, countries such as croatia and romania where interest rates are relatively high, reducing interest rates may lead to economic growth. the investment in production technologies will have a significant impact on economic growth in bulgaria, hungary and croatia. for the czech republic, slovenia and poland, which are already quite advanced in the field of production technology, the impact of this factor on economic growth will be less significant. incentives to increase labor productivity in hungary, bulgaria, estonia, latvia, and lithuania will have significant impact on economic growth as productivity in these countries is relatively low. incentives regarding holding costs will be effective on sectoral basis.  introduction governments have taken actions to stabilize the financial sector by principally increasing money supply and other measures such as taking over some of the financial institutions affected by the crisis. growth rates in advanced countries are low and are forecasted to remain low for several more years. the trade war between the usa and china will surely have a negative impact on the growth rates. outbreak of a virus in china will probably have a negative impact on growth. afp (2020) estimates that the impact could be 0.1-0.2 %. giles, arnold and greely (2020) have reported that oecd lowered its growth estimates for the world from 2.9% to 2.4% for 2020. all major economies of the world have taken monetary measures to minimize the impact of financial crisis on the real sector. these policies worked well in most countries to contain the financial crisis but not so well to induce growth which is evident from the growth rates in 2009 and thereafter. the interest rates in major economies of the world are already low. they are zero in eurozone, negative in japan. inf lation rates in almost all major economies are low implying that the consumers are not borrowing for consumption even though the interest rates are generally very low. these two facts are good indications of the end of effectiveness of monetary (easy money, low interest rate) policies. optimal incentives for economic growth… 11 a brief review of literature shows such measures have either been ineffective, insignificant, or even negative. carlianne (2014) found that governments aiding private enterprises has significant negative mid-term effect on employment and growth. osario and florida (2017) showed that business incentives have different impacts in different areas and are usually ineffective, costly, and wasteful. peters and fisher (2004) have concluded that incentives are costly and do not encourage investment. kosonen (2012), in a study on finnish firms, have found that decreasing taxes would increase the production but the tax elasticity of production is only -0.17. petrin (2018) concluded that incentives for r/d and innovation might have positive impact but not always. a report by dpme/dsbo (2018) could not make a conclusion on the impact of government incentives on business. conroy (2019), in her master thesis, concluded that there is a positive impact of incentives on attracting investment to a state but it depends on the type of incentives. prillaman and meier (2014) concluded that state tax cuts have little to no positive on the growth of the state, job creation, personal income, poverty rates, and formation of new businesses. a report by christian, karlin, schaff and tucker-roy (2019) found a positive relationship between incentive spending and jobs created only if specific objectives are set, measurable goals are defined, and investment is made in staff, systems, and budget. bundrick (2016) showed that incentives have costs and they create market distortions. in a study for center for american progress, schwartz (2018) concluded that subsidies fail to meet promised results with no net benefit to the social welfare. a report by the pew charitable trusts (2019) states that incentives help create an unstable economy. mitschell (2019) concluded that incentives lead to a slower growth. a review report by world bank (1999) has shown that, when all other factors such as infrastructure, transport costs, and political and economic stability, are approximately equal, the taxes may have significant impact on investors’ location choices. the report also concluded that this effect depends on the tax instrument. miller and atkinson (2014) concluded that investment in information and communication technology (ict) brings about a transformative change to organizations resulting in increased productivity. buss (2001), in his review of literature report on state tax incentives, summarized his report by stating that tax studies offer little guidance as tools of economic development. klemm and parys (2012) found the evidence that taxes were effective attracting foreign direct investment into latin america and caribbean but not effective on increasing gross private fixed capital. crespi, guiliodori, guiliodori and rodriguez (2016) studied the impacts of mustafa akan, natalia konovalova12 promoting firm level investments in r/d in argentina and found that elasticity of such investments is greater than 1 and effects vary on the sector and the size of the firm. the effects vary depending on the type of investment considered. zee, stotsky and ley (2002) concluded that tax incentives should be directed towards rectification of market failures and that cost effectiveness of such incentives are inconclusive. in their recent paper, tadesse and melaku (2019) has shown that monetary policies were less effective than fiscal policies in the long run and ineffective in the short run in ethiopia. the review of literature above on the impact of government incentives are, by no means, exhaustive, shows that they are largely ineffective, in some cases detrimental to proper functioning of the economy. in any case, there is not a consensus on the effectiveness of such measures. some studies show, properly structured, incentives may have positive impacts. one purpose of this paper is to contribute to this search for proper incentives by studying the dynamic behavior of real sector companies from a micro point of view to determine the conditions under which they will produce more under various demand expectations. another purpose of the paper is to analyze the factors that affect the production behavior of the firms and suggest more realistic macro policies to increase growth other than reduction of borrowing costs (interest rates). it is not the purpose of this paper to compare the effectiveness of micro and macro policies or to search for incentives to increase consumption. in the next section, a brief review on incentives for firms will be provided. in section iii. a general dynamic model of a real sector company (nonservice) operating in a competitive environment facing oscillating demand and different interest rate expectations will be developed using an optimal control theoretic model will be presented. the examples of solutions under different assumptions will be solved in the section iv to observe the effects of changes in some parameters such as interest rates, costs, and changes in demand structure. results, conclusions, and policy implications of the results will follow in subsequent sections. some further research will be suggested in the last section. optimal incentives for economic growth… 13 research methodology the general scheduling production planning problem of a firm operating in a perfectly competitive market (where price is constant) can be modelled as a cost minimization (sum of cost of production and inventory holding cost) where: u(t): the level of production at time t, c(u): strictly convex cost function h: unit holding cost, a constant. these costs include many cost items such as rent, cost of relevant equipment necessary to keep the products in the inventory, and insurance premiums. r(t): level of demand that is an exogenously determined function of time l(t): the level of inventory at time t, which increases by production (u(t) and decreases by sales r(t). therefore, the model, is ℎ: unit holding cost, a constant. these costs include many cost items such as rent, cost of relevant equipment necessary to keep the products in the inventory, and insurance premiums. 𝑟𝑟𝑟𝑟𝑟𝑟: level of demand that is an exogenously determined function of time 𝐼𝐼𝑟𝑟𝑟𝑟: the level of inventory at time t, which increases by production (𝑢𝑢𝑟𝑟𝑟𝑟 and decreases by sales 𝑟𝑟𝑟𝑟𝑟𝑟. therefore, the model, is ( ) 0 max [ ( ( )) ( )] t u t c u t hi t dt subject to the constraints: 𝐼𝐼� = 𝑢𝑢𝑟𝑟𝑟𝑟 − 𝑟𝑟𝑟𝑟𝑟𝑟 𝐼𝐼𝑟0𝑟 = 𝐼𝐼� given and the non-negativity constraints. 𝑢𝑢𝑟𝑟𝑟𝑟 ≥ 0, 𝐼𝐼𝑟𝑟𝑟𝑟 ≥ 0 cost minimization is considered since the price is assumed to be constant and the demand, r(t), is an exogenous time dependent function making the revenues an exogenous function also thus irrelevant in decision making. the last constraint is a state variable inequality constraint which has been studied by many authors including bryson and ho (1975), bryson, denham and dreyfus (1963), jacobson and lele (1969), jacobson, lele and speyer (1971), mcintyre and paiewonsky (1967), and sprzeuzkouski (1967). taylor (1972) studied the problem stated above with no interest rate consideration and has found that; 𝑐𝑐���𝑟𝑟𝑟𝑟𝑟𝑟�𝑟𝑟�𝑟𝑟𝑟𝑟 𝑡 ℎ is the condition which has to hold for the firm to keep i (t) =0 which implies that the firm will produce just to meet the demand. the firm will start producing not only to meet the demand but also to build up inventories when the change in demand is such that the above inequality will be violated. in this paper, we will study the same problem introducing present value factor and fluctuating time dependent demand function. then, the problem becomes: ( ) 0 [ ( ( ) ( )] t i tmin e c u t hi t dt  subject to the constraints: subject to the constraints: ℎ: unit holding cost, a constant. these costs include many cost items such as rent, cost of relevant equipment necessary to keep the products in the inventory, and insurance premiums. 𝑟𝑟𝑟𝑟𝑟𝑟: level of demand that is an exogenously determined function of time 𝐼𝐼𝑟𝑟𝑟𝑟: the level of inventory at time t, which increases by production (𝑢𝑢𝑟𝑟𝑟𝑟 and decreases by sales 𝑟𝑟𝑟𝑟𝑟𝑟. therefore, the model, is ( ) 0 max [ ( ( )) ( )] t u t c u t hi t dt subject to the constraints: 𝐼𝐼� = 𝑢𝑢𝑟𝑟𝑟𝑟 − 𝑟𝑟𝑟𝑟𝑟𝑟 𝐼𝐼𝑟0𝑟 = 𝐼𝐼� given and the non-negativity constraints. 𝑢𝑢𝑟𝑟𝑟𝑟 ≥ 0, 𝐼𝐼𝑟𝑟𝑟𝑟 ≥ 0 cost minimization is considered since the price is assumed to be constant and the demand, r(t), is an exogenous time dependent function making the revenues an exogenous function also thus irrelevant in decision making. the last constraint is a state variable inequality constraint which has been studied by many authors including bryson and ho (1975), bryson, denham and dreyfus (1963), jacobson and lele (1969), jacobson, lele and speyer (1971), mcintyre and paiewonsky (1967), and sprzeuzkouski (1967). taylor (1972) studied the problem stated above with no interest rate consideration and has found that; 𝑐𝑐���𝑟𝑟𝑟𝑟𝑟𝑟�𝑟𝑟�𝑟𝑟𝑟𝑟 𝑡 ℎ is the condition which has to hold for the firm to keep i (t) =0 which implies that the firm will produce just to meet the demand. the firm will start producing not only to meet the demand but also to build up inventories when the change in demand is such that the above inequality will be violated. in this paper, we will study the same problem introducing present value factor and fluctuating time dependent demand function. then, the problem becomes: ( ) 0 [ ( ( ) ( )] t i tmin e c u t hi t dt  subject to the constraints: ℎ: unit holding cost, a constant. these costs include many cost items such as rent, cost of relevant equipment necessary to keep the products in the inventory, and insurance premiums. 𝑟𝑟𝑟𝑟𝑟𝑟: level of demand that is an exogenously determined function of time 𝐼𝐼𝑟𝑟𝑟𝑟: the level of inventory at time t, which increases by production (𝑢𝑢𝑟𝑟𝑟𝑟 and decreases by sales 𝑟𝑟𝑟𝑟𝑟𝑟. therefore, the model, is ( ) 0 max [ ( ( )) ( )] t u t c u t hi t dt subject to the constraints: 𝐼𝐼� = 𝑢𝑢𝑟𝑟𝑟𝑟 − 𝑟𝑟𝑟𝑟𝑟𝑟 𝐼𝐼𝑟0𝑟 = 𝐼𝐼� given and the non-negativity constraints. 𝑢𝑢𝑟𝑟𝑟𝑟 ≥ 0, 𝐼𝐼𝑟𝑟𝑟𝑟 ≥ 0 cost minimization is considered since the price is assumed to be constant and the demand, r(t), is an exogenous time dependent function making the revenues an exogenous function also thus irrelevant in decision making. the last constraint is a state variable inequality constraint which has been studied by many authors including bryson and ho (1975), bryson, denham and dreyfus (1963), jacobson and lele (1969), jacobson, lele and speyer (1971), mcintyre and paiewonsky (1967), and sprzeuzkouski (1967). taylor (1972) studied the problem stated above with no interest rate consideration and has found that; 𝑐𝑐���𝑟𝑟𝑟𝑟𝑟𝑟�𝑟𝑟�𝑟𝑟𝑟𝑟 𝑡 ℎ is the condition which has to hold for the firm to keep i (t) =0 which implies that the firm will produce just to meet the demand. the firm will start producing not only to meet the demand but also to build up inventories when the change in demand is such that the above inequality will be violated. in this paper, we will study the same problem introducing present value factor and fluctuating time dependent demand function. then, the problem becomes: ( ) 0 [ ( ( ) ( )] t i tmin e c u t hi t dt  subject to the constraints: given and the non-negativity constraints. ℎ: unit holding cost, a constant. these costs include many cost items such as rent, cost of relevant equipment necessary to keep the products in the inventory, and insurance premiums. 𝑟𝑟𝑟𝑟𝑟𝑟: level of demand that is an exogenously determined function of time 𝐼𝐼𝑟𝑟𝑟𝑟: the level of inventory at time t, which increases by production (𝑢𝑢𝑟𝑟𝑟𝑟 and decreases by sales 𝑟𝑟𝑟𝑟𝑟𝑟. therefore, the model, is ( ) 0 max [ ( ( )) ( )] t u t c u t hi t dt subject to the constraints: 𝐼𝐼� = 𝑢𝑢𝑟𝑟𝑟𝑟 − 𝑟𝑟𝑟𝑟𝑟𝑟 𝐼𝐼𝑟0𝑟 = 𝐼𝐼� given and the non-negativity constraints. 𝑢𝑢𝑟𝑟𝑟𝑟 ≥ 0, 𝐼𝐼𝑟𝑟𝑟𝑟 ≥ 0 cost minimization is considered since the price is assumed to be constant and the demand, r(t), is an exogenous time dependent function making the revenues an exogenous function also thus irrelevant in decision making. the last constraint is a state variable inequality constraint which has been studied by many authors including bryson and ho (1975), bryson, denham and dreyfus (1963), jacobson and lele (1969), jacobson, lele and speyer (1971), mcintyre and paiewonsky (1967), and sprzeuzkouski (1967). taylor (1972) studied the problem stated above with no interest rate consideration and has found that; 𝑐𝑐���𝑟𝑟𝑟𝑟𝑟𝑟�𝑟𝑟�𝑟𝑟𝑟𝑟 𝑡 ℎ is the condition which has to hold for the firm to keep i (t) =0 which implies that the firm will produce just to meet the demand. the firm will start producing not only to meet the demand but also to build up inventories when the change in demand is such that the above inequality will be violated. in this paper, we will study the same problem introducing present value factor and fluctuating time dependent demand function. then, the problem becomes: ( ) 0 [ ( ( ) ( )] t i tmin e c u t hi t dt  subject to the constraints: cost minimization is considered since the price is assumed to be constant and the demand, r(t), is an exogenous time dependent function making the revenues an exogenous function also thus irrelevant in decision making. the last constraint is a state variable inequality constraint which has been studied by many authors including bryson and ho (1975), bryson, denham and dreyfus (1963), jacobson and lele (1969), jacobson, lele and speyer (1971), mcintyre and paiewonsky (1967), and sprzeuzkouski (1967). taylor (1972) studied the problem stated above with no interest rate consideration and has found that; mustafa akan, natalia konovalova14 ℎ: unit holding cost, a constant. these costs include many cost items such as rent, cost of relevant equipment necessary to keep the products in the inventory, and insurance premiums. 𝑟𝑟𝑟𝑟𝑟𝑟: level of demand that is an exogenously determined function of time 𝐼𝐼𝑟𝑟𝑟𝑟: the level of inventory at time t, which increases by production (𝑢𝑢𝑟𝑟𝑟𝑟 and decreases by sales 𝑟𝑟𝑟𝑟𝑟𝑟. therefore, the model, is ( ) 0 max [ ( ( )) ( )] t u t c u t hi t dt subject to the constraints: 𝐼𝐼� = 𝑢𝑢𝑟𝑟𝑟𝑟 − 𝑟𝑟𝑟𝑟𝑟𝑟 𝐼𝐼𝑟0𝑟 = 𝐼𝐼� given and the non-negativity constraints. 𝑢𝑢𝑟𝑟𝑟𝑟 ≥ 0, 𝐼𝐼𝑟𝑟𝑟𝑟 ≥ 0 cost minimization is considered since the price is assumed to be constant and the demand, r(t), is an exogenous time dependent function making the revenues an exogenous function also thus irrelevant in decision making. the last constraint is a state variable inequality constraint which has been studied by many authors including bryson and ho (1975), bryson, denham and dreyfus (1963), jacobson and lele (1969), jacobson, lele and speyer (1971), mcintyre and paiewonsky (1967), and sprzeuzkouski (1967). taylor (1972) studied the problem stated above with no interest rate consideration and has found that; 𝑐𝑐���𝑟𝑟𝑟𝑟𝑟𝑟�𝑟𝑟�𝑟𝑟𝑟𝑟 𝑡 ℎ is the condition which has to hold for the firm to keep i (t) =0 which implies that the firm will produce just to meet the demand. the firm will start producing not only to meet the demand but also to build up inventories when the change in demand is such that the above inequality will be violated. in this paper, we will study the same problem introducing present value factor and fluctuating time dependent demand function. then, the problem becomes: ( ) 0 [ ( ( ) ( )] t i tmin e c u t hi t dt  subject to the constraints: is the condition which has to hold for the firm to keep i (t) =0 which implies that the firm will produce just to meet the demand. the firm will start producing not only to meet the demand but also to build up inventories when the change in demand is such that the above inequality will be violated. in this paper, we will study the same problem introducing present value factor and f luctuating time dependent demand function. then, the problem becomes: ℎ: unit holding cost, a constant. these costs include many cost items such as rent, cost of relevant equipment necessary to keep the products in the inventory, and insurance premiums. 𝑟𝑟𝑟𝑟𝑟𝑟: level of demand that is an exogenously determined function of time 𝐼𝐼𝑟𝑟𝑟𝑟: the level of inventory at time t, which increases by production (𝑢𝑢𝑟𝑟𝑟𝑟 and decreases by sales 𝑟𝑟𝑟𝑟𝑟𝑟. therefore, the model, is ( ) 0 max [ ( ( )) ( )] t u t c u t hi t dt subject to the constraints: 𝐼𝐼� = 𝑢𝑢𝑟𝑟𝑟𝑟 − 𝑟𝑟𝑟𝑟𝑟𝑟 𝐼𝐼𝑟0𝑟 = 𝐼𝐼� given and the non-negativity constraints. 𝑢𝑢𝑟𝑟𝑟𝑟 ≥ 0, 𝐼𝐼𝑟𝑟𝑟𝑟 ≥ 0 cost minimization is considered since the price is assumed to be constant and the demand, r(t), is an exogenous time dependent function making the revenues an exogenous function also thus irrelevant in decision making. the last constraint is a state variable inequality constraint which has been studied by many authors including bryson and ho (1975), bryson, denham and dreyfus (1963), jacobson and lele (1969), jacobson, lele and speyer (1971), mcintyre and paiewonsky (1967), and sprzeuzkouski (1967). taylor (1972) studied the problem stated above with no interest rate consideration and has found that; 𝑐𝑐���𝑟𝑟𝑟𝑟𝑟𝑟�𝑟𝑟�𝑟𝑟𝑟𝑟 𝑡 ℎ is the condition which has to hold for the firm to keep i (t) =0 which implies that the firm will produce just to meet the demand. the firm will start producing not only to meet the demand but also to build up inventories when the change in demand is such that the above inequality will be violated. in this paper, we will study the same problem introducing present value factor and fluctuating time dependent demand function. then, the problem becomes: ( ) 0 [ ( ( ) ( )] t i tmin e c u t hi t dt  subject to the constraints: subject to the constraints: 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. a given number. 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. with the assumptions that the demand ( r(t) ) is a simple sinusoidal function and the interest rate i(t) is time dependent, i.e.: 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. with no growth, and, 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. implying that i(t) = f t if f is constant. notice also that 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. where f (t) denotes time dependent interest rate. for ease of analysis we will assume f(t) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. optimal incentives for economic growth… 15 then the necessary conditions are: 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. (1) 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. (2) 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (u) and state (l) variables. the planning horizon (t ) will be assumed one. on a constraint arc on which l(t) = 0 for a certain period in 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. then using 𝑢𝑢(𝑡𝑡) = 𝑟𝑟(𝑡𝑡), equation (1), and the conditions (the necessary condition to keep 𝐼𝐼(𝑡𝑡) = 0 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�(𝑡𝑡) ≤ 0 for 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� implies: 𝑐𝑐���𝑟𝑟(𝑡𝑡)�𝑟𝑟�(𝑡𝑡) ≤ ℎ 𝐴 𝑓𝑓(𝑡𝑡)𝑐𝑐��𝑟𝑟(𝑡𝑡)� (4) we have; 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. then using u(t) = r(t), equation (1), and the conditions (the necessary condition to keep i(t) = 0 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. then using 𝑢𝑢(𝑡𝑡) = 𝑟𝑟(𝑡𝑡), equation (1), and the conditions (the necessary condition to keep 𝐼𝐼(𝑡𝑡) = 0 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�(𝑡𝑡) ≤ 0 for 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� implies: 𝑐𝑐���𝑟𝑟(𝑡𝑡)�𝑟𝑟�(𝑡𝑡) ≤ ℎ 𝐴 𝑓𝑓(𝑡𝑡)𝑐𝑐��𝑟𝑟(𝑡𝑡)� (4) implies: 𝐼𝐼� = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) 𝐼𝐼(0) = 𝐼𝐼� a given number. 𝑢𝑢(𝑡𝑡) 𝑢 0 𝐼𝐼(𝑡𝑡) 𝑢 0 with the assumptions that the demand (𝑟𝑟 (𝑡𝑡)) is a simple sinusoidal function and the interest rate 𝑖𝑖(𝑡𝑡) is time dependent, i.e.: 𝑟𝑟(𝑡𝑡) = 𝐴𝐴 𝐴 𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝑡𝑡) with no growth, and, 𝑖𝑖(𝑡𝑡) = � 𝑓𝑓(𝐴𝐴)𝑑𝑑𝐴𝐴�� implying that 𝑖𝑖(𝑡𝑡) = 𝑓𝑓𝑡𝑡 if 𝑓𝑓 is constant. notice also that 𝑖𝑖�(𝑡𝑡) = 𝑓𝑓(𝑡𝑡) where f (t) denotes time dependent interest rate. for ease of analysis we will assume 𝑓𝑓(𝑡𝑡) to be constant. the letter k denotes the periodicity of the sinusoidal demand function over the planning period. the only reason for the use sinusoidal demand curve is that it represents cyclicality (a measure of risk) and that it is easier to work with it. the appropriate lagrangian for this problem is: 𝐻𝐻 = 𝐻𝐻��(�)�𝑐𝑐�𝑢𝑢(𝑡𝑡)� 𝐴 ℎ𝐼𝐼(𝑡𝑡)� 𝐴 𝜌𝜌(𝑡𝑡)�𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡)� 𝐴 𝜇𝜇(𝑡𝑡)�𝑟𝑟(𝑡𝑡) − 𝑢𝑢(𝑡𝑡)� then the necessary conditions are: 𝐻𝐻 ��(�)𝑐𝑐�(𝑡𝑡) 𝐴 𝜌𝜌(𝑡𝑡) − 𝜇𝜇(𝑡𝑡) = 0 (1) 𝜌𝜌�(𝑡𝑡) = −𝐻𝐻��(�)ℎ (2) 𝐼𝐼�(𝑡𝑡) = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) (3) necessary conditions are also sufficient since the hamiltonian is convex in both the control (𝑢𝑢) and state (𝐼𝐼) variables. the planning horizon (𝑇𝑇) will be assumed one. on a constraint arc on which 𝐼𝐼(𝑡𝑡) = 0 for a certain period in [0, 1] i.e. 0 < 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� < 1 we have; 𝐼𝐼� = 0 = 𝑢𝑢(𝑡𝑡) − 𝑟𝑟(𝑡𝑡) implying that over this period a firm will produce just enough to meet the demand, which is assumed to be nonzero during the planning horizon. then using 𝑢𝑢(𝑡𝑡) = 𝑟𝑟(𝑡𝑡), equation (1), and the conditions (the necessary condition to keep 𝐼𝐼(𝑡𝑡) = 0 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�(𝑡𝑡) ≤ 0 for 𝑡𝑡� ≤ 𝑡𝑡 ≤ 𝑡𝑡� implies: 𝑐𝑐���𝑟𝑟(𝑡𝑡)�𝑟𝑟�(𝑡𝑡) ≤ ℎ 𝐴 𝑓𝑓(𝑡𝑡)𝑐𝑐��𝑟𝑟(𝑡𝑡)� (4) (4) where then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep i(t) = 0 implying u(t) = r(t). this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in or then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in and the periods where then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in notice that for the condition above (equation 4) to be kept satisfied depends on h (inventory holding cost), f(t) the interest rates, then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in , the marginal cost of production, and then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in change in the marginal cost. following conclusions can be made even without specific forms of c(t), f(t), r(t) and i(t) on the basis of equation (4): mustafa akan, natalia konovalova16 1. the firm will keep l(t) = 0 as long as demand is falling or constant i.e. then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in implying that the firm will choose to produce just enough to meet the demand if demand is falling since both then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in and then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in are positive. 2. the firm will keep l(t) = 0 even if demand is increasing then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in but the term then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in ) implies high marginal cost) will induce firms to wait longer for inventory build-up even if then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in in equation will be low even if then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in is high (a firm technologically inefficient.). in countries with high interest rates, the importance of efficient technologies is evident because both terms ( f(t) and then using 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢, equation (1), and the conditions (the necessary condition to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 optimal) developed by pontryagin, boltyanskii, gamkrelidze and mishechenko (1962), hestenes (1966), kamien and schwartz (2012) among many others, we have; 𝜇𝜇�𝑢𝑢𝑢𝑢 ≤ 𝐼 for 𝑢𝑢� ≤ 𝑢𝑢 ≤ 𝑢𝑢� implies: 𝑐𝑐���𝑢𝑢𝑢𝑢𝑢𝑢�𝑢𝑢�𝑢𝑢𝑢𝑢 ≤ ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� (4) where 𝑓𝑓𝑢𝑢𝑢𝑢 𝑢 𝑖𝑖�𝑢𝑢𝑢𝑢 denotes the interest rate. as long as the condition specified by this inequality is satisfied it will be optimal to keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 implying 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢. this means that during the intervals where this inequality is satisfied the firm will produce just enough to satisfy the demand. so, the condition above will synthesize the periods where 𝐼𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 or 𝑢𝑢𝑢𝑢𝑢𝑢 𝑢 𝑢𝑢𝑢𝑢𝑢𝑢 and the periods where 𝐼𝐼𝑢𝑢𝑢𝑢 𝐼 𝐼. notice that for the condition above (equation 4) to be kept satisfied depends on ℎ (inventory holding cost), 𝑓𝑓𝑢𝑢𝑢𝑢 the interest rates, 𝑐𝑐𝐼𝑢𝑢𝑢𝑢, the marginal cost of production, and 𝑐𝑐𝐼𝐼𝑢𝑢𝑢𝑢 change in the marginal cost. following conclusions can be made even without specific forms of 𝑐𝑐𝑢𝑢𝑢𝑢, 𝑓𝑓𝑢𝑢𝑢𝑢, 𝑢𝑢𝑢𝑢𝑢𝑢 and 𝑖𝑖𝑢𝑢𝑢𝑢 on the basis of equation (4): 1. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 as long as demand is falling or constant i.e. 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 0 implying that the firm will choose to produce just enough to meet the demand if demand is falling since both ℎ and 𝑐𝑐𝐼 are positive. 2. the firm will keep 𝐼𝐼𝑢𝑢𝑢𝑢 𝑢 𝐼 even if demand is increasing 𝑢𝑢𝑢𝐼𝑢𝑢𝑢𝑢 𝑟 𝐼𝑢 but the term ℎ + 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐��𝑢𝑢𝑢𝑢𝑢𝑢� is large enough to keep inequality (4) satisfied. decreasing interest rates will not be a remedy in this case if they are already low. firms where 𝑐𝑐𝐼𝐼�𝑢𝑢 𝑢𝑢𝑢𝑢� is low (large and already very efficient firms) will have more difficulty to produce to build up inventories. currently, this seems to be the case in major economies. 3. higher interest rates and the use of inefficient technologies (large 𝑐𝑐𝐼𝑢𝑢𝑢𝑢) implies high marginal cost) will induce firms to wait longer for inventory build-up even if 𝑢𝑢𝐼𝑢𝑢𝑢𝑢 is positive. 4. the level of technology used will not affect the behavior of the firms if the interest rates are very low as they are now in many developed nations since the term 𝑓𝑓𝑢𝑢𝑢𝑢𝑐𝑐𝐼𝑢𝑢𝑢𝑢 in are) large. 5. the cyclicality of demand and the time dependency of interest rates can affect the producers. producers, facing cyclical demand with very high periodicity will have extreme difficulty in planning and hence may not produce for inventory buildup at all. cyclicality in the following examples is denoted by the parameter k. the value of k will be assumed to be 1 in all cases for simplicity. for higher values of k, trigonometric functions will complete 360-degree cycle twice in the planning horizon. the results will not change except the firms will stop and start two times in the planning period indicating more instability of demand. 6. size of the firms, expressed as a constant in the total production cost (c(r)), is irrelevant in production decisions since it will not appear in equation (4). in the next section, the impact of holding cost, technology, and interest rates on the production behavior of firms is analyzed with different assumptions on interest rates and a specific form of cost function (a cubic function of level of production). graphs are produced to visualize the impact of assumptions about interest rates, parameters of demand function, and holding cost. optimal incentives for economic growth… 17 research process the specific cost function, in this example, will be assumed to have the more realistic form of: equation will be low even if 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 is high (a firm technologically inefficient.). in countries with high interest rates, the importance of efficient technologies is evident because both terms (𝑓𝑓𝑐𝑐𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 are) large. 5. the cyclicality of demand and the time dependency of interest rates can affect the producers. producers, facing cyclical demand with very high periodicity will have extreme difficulty in planning and hence may not produce for inventory buildup at all. cyclicality in the following examples is denoted by the parameter k. the value of k will be assumed to be 1 in all cases for simplicity. for higher values of k, trigonometric functions will complete 360-degree cycle twice in the planning horizon. the results will not change except the firms will stop and start two times in the planning period indicating more instability of demand. 6. size of the firms, expressed as a constant in the total production cost (𝑐𝑐𝑐𝑐𝑐𝑐), is irrelevant in production decisions since it will not appear in equation (4). in the next section, the impact of holding cost, technology, and interest rates on the production behavior of firms is analyzed with different assumptions on interest rates and a specific form of cost function (a cubic function of level of production). graphs are produced to visualize the impact of assumptions about interest rates, parameters of demand function, and holding cost. research process the specific cost function, in this example, will be assumed to have the more realistic form of: 𝑐𝑐�𝑐𝑐𝑐𝑐𝑐𝑐� = 𝑎𝑎𝑐𝑐� + 𝑏𝑏𝑐𝑐� + 𝑐𝑐𝑐𝑐 + 𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐴𝐴 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐 as defined previously where 𝐴𝐴 represents the periodicity of the demand function. in the examples below, we will assume that 𝑎𝑎 = 𝑎𝑎𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝑎 = 𝑎𝐴𝐴𝑎 𝑏𝑏 = 𝑎𝑎𝑎 𝑐𝑐 = 𝑎 for simplicity. case i: 𝐴𝐴 = 𝑎 (one cycle of the demand curve in the planning horizon of one and interest rate 𝑓𝑓𝑐𝑐𝑐𝑐 = 𝑎.) then the inequality (4) becomes: 𝑐𝑎𝑎𝑎 ∗ 3𝑐𝑎 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐𝑐 𝑎 𝑎𝑐𝑐𝑐𝑐𝑐𝐴𝐴𝐴𝐴𝐴𝑐𝑐 𝑐 𝐴𝑎𝑎 (5) and equation will be low even if 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 is high (a firm technologically inefficient.). in countries with high interest rates, the importance of efficient technologies is evident because both terms (𝑓𝑓𝑐𝑐𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 are) large. 5. the cyclicality of demand and the time dependency of interest rates can affect the producers. producers, facing cyclical demand with very high periodicity will have extreme difficulty in planning and hence may not produce for inventory buildup at all. cyclicality in the following examples is denoted by the parameter k. the value of k will be assumed to be 1 in all cases for simplicity. for higher values of k, trigonometric functions will complete 360-degree cycle twice in the planning horizon. the results will not change except the firms will stop and start two times in the planning period indicating more instability of demand. 6. size of the firms, expressed as a constant in the total production cost (𝑐𝑐𝑐𝑐𝑐𝑐), is irrelevant in production decisions since it will not appear in equation (4). in the next section, the impact of holding cost, technology, and interest rates on the production behavior of firms is analyzed with different assumptions on interest rates and a specific form of cost function (a cubic function of level of production). graphs are produced to visualize the impact of assumptions about interest rates, parameters of demand function, and holding cost. research process the specific cost function, in this example, will be assumed to have the more realistic form of: 𝑐𝑐�𝑐𝑐𝑐𝑐𝑐𝑐� = 𝑎𝑎𝑐𝑐� + 𝑏𝑏𝑐𝑐� + 𝑐𝑐𝑐𝑐 + 𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐴𝐴 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐 as defined previously where 𝐴𝐴 represents the periodicity of the demand function. in the examples below, we will assume that 𝑎𝑎 = 𝑎𝑎𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝑎 = 𝑎𝐴𝐴𝑎 𝑏𝑏 = 𝑎𝑎𝑎 𝑐𝑐 = 𝑎 for simplicity. case i: 𝐴𝐴 = 𝑎 (one cycle of the demand curve in the planning horizon of one and interest rate 𝑓𝑓𝑐𝑐𝑐𝑐 = 𝑎.) then the inequality (4) becomes: 𝑐𝑎𝑎𝑎 ∗ 3𝑐𝑎 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐𝑐 𝑎 𝑎𝑐𝑐𝑐𝑐𝑐𝐴𝐴𝐴𝐴𝐴𝑐𝑐 𝑐 𝐴𝑎𝑎 (5) as defined previously where k represents the periodicity of the demand function. in the examples below, we will assume that equation will be low even if 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 is high (a firm technologically inefficient.). in countries with high interest rates, the importance of efficient technologies is evident because both terms (𝑓𝑓𝑐𝑐𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 are) large. 5. the cyclicality of demand and the time dependency of interest rates can affect the producers. producers, facing cyclical demand with very high periodicity will have extreme difficulty in planning and hence may not produce for inventory buildup at all. cyclicality in the following examples is denoted by the parameter k. the value of k will be assumed to be 1 in all cases for simplicity. for higher values of k, trigonometric functions will complete 360-degree cycle twice in the planning horizon. the results will not change except the firms will stop and start two times in the planning period indicating more instability of demand. 6. size of the firms, expressed as a constant in the total production cost (𝑐𝑐𝑐𝑐𝑐𝑐), is irrelevant in production decisions since it will not appear in equation (4). in the next section, the impact of holding cost, technology, and interest rates on the production behavior of firms is analyzed with different assumptions on interest rates and a specific form of cost function (a cubic function of level of production). graphs are produced to visualize the impact of assumptions about interest rates, parameters of demand function, and holding cost. research process the specific cost function, in this example, will be assumed to have the more realistic form of: 𝑐𝑐�𝑐𝑐𝑐𝑐𝑐𝑐� = 𝑎𝑎𝑐𝑐� + 𝑏𝑏𝑐𝑐� + 𝑐𝑐𝑐𝑐 + 𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐴𝐴 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐 as defined previously where 𝐴𝐴 represents the periodicity of the demand function. in the examples below, we will assume that 𝑎𝑎 = 𝑎𝑎𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝑎 = 𝑎𝐴𝐴𝑎 𝑏𝑏 = 𝑎𝑎𝑎 𝑐𝑐 = 𝑎 for simplicity. case i: 𝐴𝐴 = 𝑎 (one cycle of the demand curve in the planning horizon of one and interest rate 𝑓𝑓𝑐𝑐𝑐𝑐 = 𝑎.) then the inequality (4) becomes: 𝑐𝑎𝑎𝑎 ∗ 3𝑐𝑎 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐𝑐 𝑎 𝑎𝑐𝑐𝑐𝑐𝑐𝐴𝐴𝐴𝐴𝐴𝑐𝑐 𝑐 𝐴𝑎𝑎 (5) equation will be low even if 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 is high (a firm technologically inefficient.). in countries with high interest rates, the importance of efficient technologies is evident because both terms (𝑓𝑓𝑐𝑐𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 are) large. 5. the cyclicality of demand and the time dependency of interest rates can affect the producers. producers, facing cyclical demand with very high periodicity will have extreme difficulty in planning and hence may not produce for inventory buildup at all. cyclicality in the following examples is denoted by the parameter k. the value of k will be assumed to be 1 in all cases for simplicity. for higher values of k, trigonometric functions will complete 360-degree cycle twice in the planning horizon. the results will not change except the firms will stop and start two times in the planning period indicating more instability of demand. 6. size of the firms, expressed as a constant in the total production cost (𝑐𝑐𝑐𝑐𝑐𝑐), is irrelevant in production decisions since it will not appear in equation (4). in the next section, the impact of holding cost, technology, and interest rates on the production behavior of firms is analyzed with different assumptions on interest rates and a specific form of cost function (a cubic function of level of production). graphs are produced to visualize the impact of assumptions about interest rates, parameters of demand function, and holding cost. research process the specific cost function, in this example, will be assumed to have the more realistic form of: 𝑐𝑐�𝑐𝑐𝑐𝑐𝑐𝑐� = 𝑎𝑎𝑐𝑐� + 𝑏𝑏𝑐𝑐� + 𝑐𝑐𝑐𝑐 + 𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐴𝐴 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐 as defined previously where 𝐴𝐴 represents the periodicity of the demand function. in the examples below, we will assume that 𝑎𝑎 = 𝑎𝑎𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝑎 = 𝑎𝐴𝐴𝑎 𝑏𝑏 = 𝑎𝑎𝑎 𝑐𝑐 = 𝑎 for simplicity. case i: 𝐴𝐴 = 𝑎 (one cycle of the demand curve in the planning horizon of one and interest rate 𝑓𝑓𝑐𝑐𝑐𝑐 = 𝑎.) then the inequality (4) becomes: 𝑐𝑎𝑎𝑎 ∗ 3𝑐𝑎 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐𝑐 𝑎 𝑎𝑐𝑐𝑐𝑐𝑐𝐴𝐴𝐴𝐴𝐴𝑐𝑐 𝑐 𝐴𝑎𝑎 (5) for simplicity. case i: k = 1 (one cycle of the demand curve in the planning horizon of one and interest rate f(t) = 0.) then the inequality (4) becomes: equation will be low even if 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 is high (a firm technologically inefficient.). in countries with high interest rates, the importance of efficient technologies is evident because both terms (𝑓𝑓𝑐𝑐𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐𝑐 are) large. 5. the cyclicality of demand and the time dependency of interest rates can affect the producers. producers, facing cyclical demand with very high periodicity will have extreme difficulty in planning and hence may not produce for inventory buildup at all. cyclicality in the following examples is denoted by the parameter k. the value of k will be assumed to be 1 in all cases for simplicity. for higher values of k, trigonometric functions will complete 360-degree cycle twice in the planning horizon. the results will not change except the firms will stop and start two times in the planning period indicating more instability of demand. 6. size of the firms, expressed as a constant in the total production cost (𝑐𝑐𝑐𝑐𝑐𝑐), is irrelevant in production decisions since it will not appear in equation (4). in the next section, the impact of holding cost, technology, and interest rates on the production behavior of firms is analyzed with different assumptions on interest rates and a specific form of cost function (a cubic function of level of production). graphs are produced to visualize the impact of assumptions about interest rates, parameters of demand function, and holding cost. research process the specific cost function, in this example, will be assumed to have the more realistic form of: 𝑐𝑐�𝑐𝑐𝑐𝑐𝑐𝑐� = 𝑎𝑎𝑐𝑐� + 𝑏𝑏𝑐𝑐� + 𝑐𝑐𝑐𝑐 + 𝑐𝑐 and 𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐴𝐴 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐 as defined previously where 𝐴𝐴 represents the periodicity of the demand function. in the examples below, we will assume that 𝑎𝑎 = 𝑎𝑎𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝐴𝐴 = 𝑎𝑎 𝑎 = 𝑎𝐴𝐴𝑎 𝑏𝑏 = 𝑎𝑎𝑎 𝑐𝑐 = 𝑎 for simplicity. case i: 𝐴𝐴 = 𝑎 (one cycle of the demand curve in the planning horizon of one and interest rate 𝑓𝑓𝑐𝑐𝑐𝑐 = 𝑎.) then the inequality (4) becomes: 𝑐𝑎𝑎𝑎 ∗ 3𝑐𝑎 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐𝑐 𝑎 𝑎𝑐𝑐𝑐𝑐𝑐𝐴𝐴𝐴𝐴𝐴𝑐𝑐 𝑐 𝐴𝑎𝑎 (5) (5) both sides of inequality in (5) is presented in the graph below produced using arbitrary numbers for relevant variables (figure 1). this graph (figure 1) implies (notice the tip of arrows in the graph shows the times production is stopped and started) that the firm will stop producing for inventories just before the demand reaches its maximum and starts just after the demand reaches its minimum (recall that the sinusoidal demand reaches its maximum at t = 0.25 and its minimum at t = 0.75). these points are indicated by arrows in all graphs (the tip of the arrow shows the point at which the left, 0.18, and right, 0.86) hand side of equation 4 becomes equal). therefore, it is only possible for firms to stop producing later and start producing earlier is to decrease the holding costs (h) as defined above. mustafa akan, natalia konovalova18 figure 1. graphs of left ( f (t)) and right ( g(x)) hand sides of inequality (5) and demand function (h(x) = r(t)) both sides of inequality in (5) is presented in the graph below produced using arbitrary numbers for relevant variables (figure 1). this graph (figure 1) implies (notice the tip of arrows in the graph shows the times production is stopped and started) that the firm will stop producing for inventories just before the demand reaches its maximum and starts just after the demand reaches its minimum (recall that the sinusoidal demand reaches its maximum at 𝑡𝑡 𝑡 𝑡𝑡𝑡𝑡 and its minimum at 𝑡𝑡 𝑡 𝑡𝑡𝑡𝑡). these points are indicated by arrows in all graphs (the tip of the arrow shows the point at which the left, 𝑡𝑡18, and right, 𝑡𝑡86) hand side of equation 4 becomes equal). therefore, it is only possible for firms to stop producing later and start producing earlier is to decrease the holding costs (ℎ) as defined above. figure 1. graphs of left (𝑓𝑓𝑓𝑡𝑡𝑓𝑓 and right (𝑔𝑔𝑓𝑔𝑔𝑓) hand sides of inequality (5) and demand function (ℎ𝑓𝑔𝑔𝑓 𝑡 𝑟𝑟𝑓𝑡𝑡𝑓) s o u r c e : constructed by authors. case ii: k = 1 and interest rate f(t) = 0 and a new technology i introduced. the impact of new technology will be analyzed in three cases: 1. fixed costs (the term d in the cost function) is reduced. there will be no impact on production decision since the fixed costs are already shown to have on impact on the inequality (5). 2. only the constant term (c) in the marginal cost, source: constructed by authors. case ii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0 and a new technology i introduced. the impact of new technology will be analyzed in three cases: 1. fixed costs (the term 𝑑𝑑 in the cost function) is reduced. there will be no impact on production decision since the fixed costs are already shown to have on impact on the inequality (5). 2. only the constant term (𝑐𝑐) in the marginal cost, 𝑐𝑐𝑐 𝑘 𝑐𝑐𝑐𝑐𝑐� + 2𝑏𝑏𝑐𝑐 + 𝑐𝑐 is reduced. the left-hand side of inequality (5) will not change since 𝑐𝑐𝑐𝑐(𝑐𝑐) does not depend on the constant term 𝑐𝑐 in the production cost function. the right-hand side will be lower since 𝑐𝑐 is lower. therefore, the decision of the firm will depend on how much the new technology reduces 𝑐𝑐. the firm will start to produce sooner if the reduction in c is large enough to violate the inequality. 3. marginal cost function, 𝑐𝑐𝑐(𝑐𝑐), is reduced as a whole. we will consider this last case assuming that the new technology reduces the marginal cost by 20%. this implies that the left-hand side of inequality (5) will be multiplies by 0.8. then the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 ∗ 0.8 𝑐 2.5 ( 6) therefore, for the same values for the constants, the graphs of both sides of inequality above and the sales are presented below (figure 2). inequality (6) implies the same type of results as in the previous case. however, it is evident from the graphs that in the second case the firm will stop producing sooner and start producing later than in the first case. this is an important result because it indicates that introduction of new technologies which reduces the marginal costs will induce firms to stop production sooner. case iii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0.2 the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 𝑐 2.5 + 0.2�0.5 ∗ 𝑐 ∗ (4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑠𝑠)�� − 2 ∗ (4 + sin(2𝑠𝑠𝑠𝑠) + 𝑘) /2𝑠𝑠 ( 7) is reduced. the left-hand side of inequality (5) will not change since source: constructed by authors. case ii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0 and a new technology i introduced. the impact of new technology will be analyzed in three cases: 1. fixed costs (the term 𝑑𝑑 in the cost function) is reduced. there will be no impact on production decision since the fixed costs are already shown to have on impact on the inequality (5). 2. only the constant term (𝑐𝑐) in the marginal cost, 𝑐𝑐𝑐 𝑘 𝑐𝑐𝑐𝑐𝑐� + 2𝑏𝑏𝑐𝑐 + 𝑐𝑐 is reduced. the left-hand side of inequality (5) will not change since 𝑐𝑐𝑐𝑐(𝑐𝑐) does not depend on the constant term 𝑐𝑐 in the production cost function. the right-hand side will be lower since 𝑐𝑐 is lower. therefore, the decision of the firm will depend on how much the new technology reduces 𝑐𝑐. the firm will start to produce sooner if the reduction in c is large enough to violate the inequality. 3. marginal cost function, 𝑐𝑐𝑐(𝑐𝑐), is reduced as a whole. we will consider this last case assuming that the new technology reduces the marginal cost by 20%. this implies that the left-hand side of inequality (5) will be multiplies by 0.8. then the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 ∗ 0.8 𝑐 2.5 ( 6) therefore, for the same values for the constants, the graphs of both sides of inequality above and the sales are presented below (figure 2). inequality (6) implies the same type of results as in the previous case. however, it is evident from the graphs that in the second case the firm will stop producing sooner and start producing later than in the first case. this is an important result because it indicates that introduction of new technologies which reduces the marginal costs will induce firms to stop production sooner. case iii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0.2 the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 𝑐 2.5 + 0.2�0.5 ∗ 𝑐 ∗ (4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑠𝑠)�� − 2 ∗ (4 + sin(2𝑠𝑠𝑠𝑠) + 𝑘) /2𝑠𝑠 ( 7) does not depend on the constant term c in the production cost function. the right-hand side will be lower since c is lower. therefore, the decision of the firm will depend on how much the new technology reduces c. the firm will start to produce sooner if the reduction in c is large enough to violate the inequality. optimal incentives for economic growth… 19 3. marginal cost function, source: constructed by authors. case ii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0 and a new technology i introduced. the impact of new technology will be analyzed in three cases: 1. fixed costs (the term 𝑑𝑑 in the cost function) is reduced. there will be no impact on production decision since the fixed costs are already shown to have on impact on the inequality (5). 2. only the constant term (𝑐𝑐) in the marginal cost, 𝑐𝑐𝑐 𝑘 𝑐𝑐𝑐𝑐𝑐� + 2𝑏𝑏𝑐𝑐 + 𝑐𝑐 is reduced. the left-hand side of inequality (5) will not change since 𝑐𝑐𝑐𝑐(𝑐𝑐) does not depend on the constant term 𝑐𝑐 in the production cost function. the right-hand side will be lower since 𝑐𝑐 is lower. therefore, the decision of the firm will depend on how much the new technology reduces 𝑐𝑐. the firm will start to produce sooner if the reduction in c is large enough to violate the inequality. 3. marginal cost function, 𝑐𝑐𝑐(𝑐𝑐), is reduced as a whole. we will consider this last case assuming that the new technology reduces the marginal cost by 20%. this implies that the left-hand side of inequality (5) will be multiplies by 0.8. then the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 ∗ 0.8 𝑐 2.5 ( 6) therefore, for the same values for the constants, the graphs of both sides of inequality above and the sales are presented below (figure 2). inequality (6) implies the same type of results as in the previous case. however, it is evident from the graphs that in the second case the firm will stop producing sooner and start producing later than in the first case. this is an important result because it indicates that introduction of new technologies which reduces the marginal costs will induce firms to stop production sooner. case iii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0.2 the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 𝑐 2.5 + 0.2�0.5 ∗ 𝑐 ∗ (4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑠𝑠)�� − 2 ∗ (4 + sin(2𝑠𝑠𝑠𝑠) + 𝑘) /2𝑠𝑠 ( 7) is reduced as a whole. we will consider this last case assuming that the new technology reduces the marginal cost by 20%. this implies that the left-hand side of inequality (5) will be multiplies by 0,8. then the inequality (4) becomes: source: constructed by authors. case ii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0 and a new technology i introduced. the impact of new technology will be analyzed in three cases: 1. fixed costs (the term 𝑑𝑑 in the cost function) is reduced. there will be no impact on production decision since the fixed costs are already shown to have on impact on the inequality (5). 2. only the constant term (𝑐𝑐) in the marginal cost, 𝑐𝑐𝑐 𝑘 𝑐𝑐𝑐𝑐𝑐� + 2𝑏𝑏𝑐𝑐 + 𝑐𝑐 is reduced. the left-hand side of inequality (5) will not change since 𝑐𝑐𝑐𝑐(𝑐𝑐) does not depend on the constant term 𝑐𝑐 in the production cost function. the right-hand side will be lower since 𝑐𝑐 is lower. therefore, the decision of the firm will depend on how much the new technology reduces 𝑐𝑐. the firm will start to produce sooner if the reduction in c is large enough to violate the inequality. 3. marginal cost function, 𝑐𝑐𝑐(𝑐𝑐), is reduced as a whole. we will consider this last case assuming that the new technology reduces the marginal cost by 20%. this implies that the left-hand side of inequality (5) will be multiplies by 0.8. then the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 ∗ 0.8 𝑐 2.5 ( 6) therefore, for the same values for the constants, the graphs of both sides of inequality above and the sales are presented below (figure 2). inequality (6) implies the same type of results as in the previous case. however, it is evident from the graphs that in the second case the firm will stop producing sooner and start producing later than in the first case. this is an important result because it indicates that introduction of new technologies which reduces the marginal costs will induce firms to stop production sooner. case iii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0.2 the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 𝑐 2.5 + 0.2�0.5 ∗ 𝑐 ∗ (4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑠𝑠)�� − 2 ∗ (4 + sin(2𝑠𝑠𝑠𝑠) + 𝑘) /2𝑠𝑠 ( 7) (6) therefore, for the same values for the constants, the graphs of both sides of inequality above and the sales are presented below (figure 2). inequality (6) implies the same type of results as in the previous case. however, it is evident from the graphs that in the second case the firm will stop producing sooner and start producing later than in the first case. this is an important result because it indicates that introduction of new technologies which reduces the marginal costs will induce firms to stop production sooner. case iii: k = 1 and interest rate f(t) = 0.2 the inequality (4) becomes: source: constructed by authors. case ii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0 and a new technology i introduced. the impact of new technology will be analyzed in three cases: 1. fixed costs (the term 𝑑𝑑 in the cost function) is reduced. there will be no impact on production decision since the fixed costs are already shown to have on impact on the inequality (5). 2. only the constant term (𝑐𝑐) in the marginal cost, 𝑐𝑐𝑐 𝑘 𝑐𝑐𝑐𝑐𝑐� + 2𝑏𝑏𝑐𝑐 + 𝑐𝑐 is reduced. the left-hand side of inequality (5) will not change since 𝑐𝑐𝑐𝑐(𝑐𝑐) does not depend on the constant term 𝑐𝑐 in the production cost function. the right-hand side will be lower since 𝑐𝑐 is lower. therefore, the decision of the firm will depend on how much the new technology reduces 𝑐𝑐. the firm will start to produce sooner if the reduction in c is large enough to violate the inequality. 3. marginal cost function, 𝑐𝑐𝑐(𝑐𝑐), is reduced as a whole. we will consider this last case assuming that the new technology reduces the marginal cost by 20%. this implies that the left-hand side of inequality (5) will be multiplies by 0.8. then the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 ∗ 0.8 𝑐 2.5 ( 6) therefore, for the same values for the constants, the graphs of both sides of inequality above and the sales are presented below (figure 2). inequality (6) implies the same type of results as in the previous case. however, it is evident from the graphs that in the second case the firm will stop producing sooner and start producing later than in the first case. this is an important result because it indicates that introduction of new technologies which reduces the marginal costs will induce firms to stop production sooner. case iii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0.2 the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 𝑐 2.5 + 0.2�0.5 ∗ 𝑐 ∗ (4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑠𝑠)�� − 2 ∗ (4 + sin(2𝑠𝑠𝑠𝑠) + 𝑘) /2𝑠𝑠 ( 7) source: constructed by authors. case ii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0 and a new technology i introduced. the impact of new technology will be analyzed in three cases: 1. fixed costs (the term 𝑑𝑑 in the cost function) is reduced. there will be no impact on production decision since the fixed costs are already shown to have on impact on the inequality (5). 2. only the constant term (𝑐𝑐) in the marginal cost, 𝑐𝑐𝑐 𝑘 𝑐𝑐𝑐𝑐𝑐� + 2𝑏𝑏𝑐𝑐 + 𝑐𝑐 is reduced. the left-hand side of inequality (5) will not change since 𝑐𝑐𝑐𝑐(𝑐𝑐) does not depend on the constant term 𝑐𝑐 in the production cost function. the right-hand side will be lower since 𝑐𝑐 is lower. therefore, the decision of the firm will depend on how much the new technology reduces 𝑐𝑐. the firm will start to produce sooner if the reduction in c is large enough to violate the inequality. 3. marginal cost function, 𝑐𝑐𝑐(𝑐𝑐), is reduced as a whole. we will consider this last case assuming that the new technology reduces the marginal cost by 20%. this implies that the left-hand side of inequality (5) will be multiplies by 0.8. then the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 ∗ 0.8 𝑐 2.5 ( 6) therefore, for the same values for the constants, the graphs of both sides of inequality above and the sales are presented below (figure 2). inequality (6) implies the same type of results as in the previous case. however, it is evident from the graphs that in the second case the firm will stop producing sooner and start producing later than in the first case. this is an important result because it indicates that introduction of new technologies which reduces the marginal costs will induce firms to stop production sooner. case iii: 𝑘𝑘 𝑘 𝑘 and interest rate 𝑓𝑓(𝑡𝑡) 𝑘 0.2 the inequality (4) becomes: (0.5 ∗ 𝑐(4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑡𝑡) − 𝑘)𝑐𝑐𝑐𝑐𝑠𝑠2𝑠𝑠𝑡𝑡 𝑐 2.5 + 0.2�0.5 ∗ 𝑐 ∗ (4 + 𝑠𝑠𝑠𝑠𝑠𝑠2𝑠𝑠𝑠𝑠)�� − 2 ∗ (4 + sin(2𝑠𝑠𝑠𝑠) + 𝑘) /2𝑠𝑠 ( 7) (7) the graphs of the function on both sides of this inequality above are shown in graph iii below (figure 3). figure 3 shows that introduction of interest rates causes the firms to stop production sooner but not very significantly, from t = 0.18 in graph i to about 0.16 in graph iii. this implies that the firms will start to produce at about the same time as when interest rate was zero (figure 1). this, in turn, implies that firms will stop producing later when interest rates are lowered. however, they will not start producing sooner. case iv: k = 1 and interest rate f(t) = 0.1, a 50% decrease in interest rate. in this the inequality (5) becomes: the graphs of the function on both sides of this inequality above are shown in graph iii below (figure 3). figure 3 shows that introduction of interest rates causes the firms to stop production sooner but not very significantly, from 𝑡𝑡 𝑡 𝑡𝑡𝑡𝑡 in graph i to about 0.16 in graph iii. this implies that the firms will start to produce at about the same time as when interest rate was zero (figure 1). this, in turn, implies that firms will stop producing later when interest rates are lowered. however, they will not start producing sooner. case iv: 𝑘𝑘 𝑡 𝑡 and interest rate 𝑓𝑓(𝑡𝑡) 𝑡 𝑡𝑡𝑡, a 5𝑡% decrease in interest rate. in this the inequality (5) becomes: (𝑡𝑡5 ∗ 3(4 + sin(2𝜋𝜋𝑡𝑡) − 𝑡) ∗ 𝑐𝑐𝑐𝑐𝑐𝑐2𝜋𝜋𝑡𝑡 ≤ 2𝑡5 + 𝑡𝑡𝑡𝑡 ∗ (𝑡𝑡5 ∗ 3 ∗ (4 + sin(2𝜋𝜋𝜋𝜋))� − 2 ∗ (4 + sin(2𝜋𝜋𝜋𝜋) + 𝑡)/2𝜋𝜋 ( 8) the graphs of the functions on both sides of this inequality are shown in figure 4 below. case v: 𝑘𝑘 𝑡 𝑡𝑘 𝑓𝑓 𝑡 5%. reducing the interest rate from 0.10 to 0.05, we get figure 5. figure 2. graphs of left (𝑓𝑓(𝜋𝜋)) and right (𝑔𝑔(𝜋𝜋)) sides of inequality (6) and demand function ��(𝜋𝜋)� (8) mustafa akan, natalia konovalova20 the graphs of the functions on both sides of this inequality are shown in figure 4 below. case v: k = 1, f = 50%. reducing the interest rate from 0.10 to 0.05, we get figure 5. figure 2. graphs of left ( f (x) and right ( g(x)) sides of inequality (6) and demand function (h(x)) source: constructed by authors. figure 3. graphs of left (𝑓𝑓𝑓𝑓𝑓𝑓𝑓 and right (𝑔𝑔𝑓𝑓𝑓𝑓) sides of inequality (7) and demand function ��𝑓𝑓𝑓𝑓� s o u r c e : constructed by authors. optimal incentives for economic growth… 21 figure 3. graphs of left ( f (x) and right ( g(x)) sides of inequality (7) and demand function (h(x)) source: constructed by authors. figure 4. graphs of left (𝑓𝑓𝑓𝑓𝑓𝑓𝑓 and right (𝑔𝑔𝑓𝑓𝑓𝑓) sides of inequality (8) and demand function ��𝑓𝑓𝑓𝑓� s o u r c e : constructed by authors. mustafa akan, natalia konovalova22 figure 4. graphs of left ( f (x) and right ( g(x)) sides of inequality (8) and demand function (h(x)) source: constructed by authors. notice in this case that the firms stop and starts production at about the same time as in the case when interest rate is=20% (previous case) implying that reduced interest rates do not affect production significantly. figure 5. graphs of left (𝑓𝑓𝑓𝑓𝑓𝑓𝑓 and right (𝑔𝑔𝑓𝑓𝑓𝑓) sides of inequality (8) and demand function ��𝑓𝑓𝑓𝑓� with 𝑓𝑓𝑓𝑡𝑡𝑓 = 5% s o u r c e : constructed by authors. notice in this case that the firms stop and starts production at about the same time as in the case when interest rate is=20% (previous case) implying that reduced interest rates do not affect production significantly. optimal incentives for economic growth… 23 figure 5. graphs of left ( f (x) and right ( g(x)) sides of inequality (8) and demand function (h(x)) with f (t) = 5% source: constructed by authors. notice that the times at which production stopped and restarted are the same as in the case when interest rate was 10%. this is an important result since it helps to explain why low interest rates are no longer effective to induce growth. research results and conclusions general results and conclusions: based on the study of cases i-v and the graphs associated with these cases, following results and their policy implications can be summarized as: 1. high holding costs affect the production decisions negatively. 2. the impact of new technologies depends on the efficiencies brought about by the new technology. new technology has no impact on production decision if it reduces the fixed s o u r c e : constructed by authors. notice that the times at which production stopped and restarted are the same as in the case when interest rate was 10%. this is an important result since it helps to explain why low interest rates are no longer effective to induce growth. mustafa akan, natalia konovalova24 research results and conclusions general results and conclusions: based on the study of cases i-v and the graphs associated with these cases, following results and their policy implications can be summarized as: 1. high holding costs affect the production decisions negatively. 2. the impact of new technologies depends on the efficiencies brought about by the new technology. new technology has no impact on production decision if it reduces the fixed costs only or the fixed part of the marginal cost. the firm will stop producing sooner and start producing later if the new technology reduces the total marginal costs. this is a perplexing result since common sense would dictate otherwise. 3. changes in interest rates (with the assumed value of the parameters) do not affect production. 4. cyclicality of demand will affect production plans. extreme periodicity (cyclicality) of demand may result in firms never producing for inventories. in case of higher cyclicality, both the demand and the cost functions will f luctuate as many times as the cyclicality in a given time horizon (assumed to be 1 here) which will imply that the firm will start and stop production many times which is not a conducive situation for investment. 5. firm size (as expressed by the constant d in the expression of cost function) has no impact on the production decisions. hence, no differentiation should be made between small and large firms when incentives to induce firms to produce for inventories are considered. 6. effects of changes in interest rates are especially ineffective if the interest rate is already small. 7. tax incentives have no impact on production since equation (4) does not involve any tax parameter. therefore: incentives for firms to lower their holding costs are an effective method to induce firms to keep production above demand. these may include lower prices for electricity, oil, and gas, lower property insurance rates, and lower insurance premiums for labor to reduce holding costs. incentives for introducing optimal incentives for economic growth… 25 new technologies may be only effective if they are carefully chosen. incentives to reduce marginal costs will not be effective. implications for central and eastern european countries the model above was developed for a company operating in a competitive sector. the model was not intended to identify proper incentives for growth in extraordinary times like covit-19 crisis the whole world is facing or 2008 financial crisis. the model was not intended to address incentives directed to attracting foreign investment either. tax incentives are not addressed since a firm operating in a perfectly competitive sector tries only to minimize its costs. three important factors are relevant in the context of the paper. they are the interest rates, the production technology, and the holding cost of inventories. thus, the implications for the central and eastern european countries will be analyzed based on these factors. there are many classifications of central and eastern european countries. central and eastern european countries (ceecs) is an oecd term for the group of countries comprising albania, bulgaria, croatia, the czech republic, hungary, poland, romania, the slovak republic, slovenia, and the three baltic states: estonia, latvia and lithuania (oecd, 2001). according to the national institute of statistics and economic research of france (insee, 2020), the central european countries defined are bulgaria, croatia, estonia, hungary, latvia, lithuania, poland, romania, slovenia, slovakia, czech republic. authors use both above mentioned classifications and chose the following 11 countries of central and eastern europe according to in see classification for demonstration of implications of economic incentives on growth. the interest rates in these countries are shown in table 1. table 1. interest rates in central and eastern european countries (%) countries last previous dates croatia 2.50 2.50 may/20 romania 1.75 1.75 jun/20 hungary 0.60 0.75 jul/20 czech republic 0.25 0.25 jun/20 mustafa akan, natalia konovalova26 countries last previous dates poland 0.10 0.10 jul/20 bulgaria 0.00 0.00 jul/20 estonia 0.00 0.00 jul/20 latvia 0.00 0.00 jul/20 lithuania 0.00 0.00 jul/20 slovakia 0.00 0.00 jul/20 slovenia 0.00 0.00 jul/20 s o u r c e : tr ading economics (2020). thus, the first implication of the outcome of the results of this paper is that reducing interest rates will not induce growth significantly except perhaps in croatia and romania where interest rates are relatively high. the second factor inf luencing growth positively was the production technology (production function). however, each firm operating in any economy where free market economy is practiced has a different technology. it is not possible to suggest incentives concerning technology for each firm in an economy. however, it is possible to make a general statement on incentives to invest in better production technologies for a country. results of a ranking study by schwab (2019) on competitiveness index of central european countries among 141 countries are shown in the column (1) on table 2. results of another ranking study by getzoff (2020) on the most technologically advanced countries (among 67) are shown on column (2) on the same table. ourworldindata.org (2021) has produced data on labor productivity in all countires on the basis of feenstra, inklaar and timmer (2015). the data for central and eastern european countires are produced in column 3 of table 2 also. table 2 indicates that estonia, czech republic, slovenia, and poland are already quite advanced in production technology. thus, incentives regarding investment in production technologies in these countries will have less impact on growth than they will have in other countries in the region especially in bulgaria, hungary, and croatia. table 1. interest… https://ourworldindata.org/economic-growth https://ourworldindata.org/economic-growth optimal incentives for economic growth… 27 incentives to increase the labor productivity in hungary, bulgaria, estonia, latvia, and lithunia will have more impact on growth than in other countries in the region since labor productivity is relatively low in these countries. table 2. competitivity, advancement, and labor productivity in central and eastern europe countries 1 (competitiveness) 2 (advanced) 3 (productivity) (gdp$/hour, 2017) croatia 63 39 34.25 romania 51 48 33.25 hungary 47 35 25.32 czech republic 32 28 34.76 poland 37 34 31.06 bulgaria 49 51 23.26 estonia 31 20 28.03 latvia 41 30 28.09 lithuania 39 27 29.46 slovakia 42 41 32.73 slovenia 35 33 35.63 s o u r c e : constructed by authors based on: data tr ading economics (2020); ourworldindata. org (2021). skorupinska and torrent-sellens (2015) analyses stage of transition to knowledge economy in cee countries and shows that there is considerable gab between cee and eu countries in human capital, infrastructure, innovation capacity and quality institutions. a summary of a study by radosevic (2017) on technology in central and eastern european economies is presented below. coupling domestic technology efforts with the import of new equipment and management practices could help promote technology upgrading. mustafa akan, natalia konovalova28 production capability and engineering, in addition to research, are important antecedents to development and innovation. production capability is the most significant driver of productivity growth. innovation policy in cee is based solely on r&d, imitating best practices in northern europe, instead of addressing regionally specific challenges. cee economies over-prioritize attracting foreign direct investment and do not place enough emphasis on the quality of subsidiary developments. radosevic’s conclusions, from a macro point of view, support the same conclusions we derived in our micro study from technology point of view. the third implication of our results was that the inventory holding costs were important in inducing growth. however, it is not possible to make generalizations concerning these costs with regards to a whole region other than the recommendations made in the previous section. incentives in terms of holding costs should be based on sectors. companies producing very high value products such as cars, computers, planes should get better incentives since they are more likely to have higher holding costs. the general conclusions on central european countries are: 1. lowering interest rates will not have an appreciable effect on growth. 2. incentives regarding improvement of production technology will be effective. 3. incentives regarding holding costs should be instituted on sectorial basis. the incentives related to points 1 and above are relatively easy to institute. however, the incentives regarding point 2 will take a longer time to make a significant difference in spurring growth. in the short run, the governments of the region can institute incentives to lower the marginal cost of production for all sectors to reduce the cost of inputs to the production process such as cost of energy (lower taxes on energy, sell energy at a lower price), water, labor (reduce social security premiums paid by the employee), taxes on raw materials. the analysis above is only for firms competing in a perfect market facing a deterministic time dependent function. a natural extension of this model is to make the demand stochastic in other market forms such as monopolistic or oligopolistic markets. optimal incentives for 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(2015). credit risk measures – a case of renewable energy companies. copernican journal of finance & accounting, 4(1), 147–156. http://dx.doi.org/10.12775/ cjfa.2015.010 eduardo sá e silva* polytechnic institute of porto adalmiro andrade pereira** polytechnic institute of porto credit risk measures – a case of renewable energy companies keywords: credit risk, rating, banking, renewable energies. j e l classification: g32. abstract: the basel iii will have a significant impact on the european banking sector. in september 2010, supervisors of several countries adopted the new rules proposed by the prudential committee on banking supervision to be applied to the business of credit institutions (hereinafter called cis) in a phased starting in 2013 and assuming to its full implementation by 2019. the purpose of this new regulation is to limit the excessive risk that these institutions took on the period preceding the global financial crisis of 2008. this new regulation is known in slang by basel iii. depending on the requirement of basel ii for banks and their supervisors to assess the adequacy of internal risk measurement and credit management systems, the development of methodologies for the validation of internal and external evaluation systems date of submission: june 4, 2014; date of acceptance: march 2, 2015. * contact information: sasilva@iscap.ipp.pt, instituto superior de contabilidade e administracao do porto, polytechnic institute of porto, rua jaime lopes amorim, s/n 4465-004 s. mamede de infesta, portugal, phone: +351 22 905 00 00. ** contact information: adalmiro@iscap.ipp.pt, instituto superior de contabilidade e administracao do porto, polytechnic institute of porto, rua jaime lopes amorim, s/n 4465-004 s. mamede de infesta, portugal, phone: +351 22 905 00 00. eduardo sá e silva, adalmiro andrade pereira148 is clearly an important issue. more specifically, there is a need to develop tools to validate the systems used to generate the parameters (such as pd, lgd, ead and ratings of perceived risk) that serve as starting points for the irb approach for credit risk. in this context, the work is composed by an approach and tool used to evaluate the credit risk in a irb system, applied to the renewable energy sector in portugal. the basel committee, proposed the method of internal ratings based approach or irb, which is based largely on an internal valuation of assets and exposures of a bank, aimed to secure two essential objectives consistent with those supporting the wider review of the new agreement capital: 1. the use of risk assessment models more sensitive to credit risk, allowing the determination of capital requirements more closely aligned with the potential economic loss that may occur in the bank’s assets; 2. encouraging the use of more advanced models, something that an irb appropriately structured methodology can provide, motivating banks to continue to improve their internal risk management practices. one of the most innovative aspects of the new accord is called the approach or method of internal ratings (or irb) approach to credit risk and provides two variants, with different degree of complexity: a simplified / basic version or and an advanced version or advanced. the first ( ) is only determined internally pd (default probability)11. in the second (advanced) are determined four parameters: pd, lgd (loss given default), ead (exposure at default) and m (mature). the main difference between the two variants is related to the entity responsible for establishing and determining the parameters in question, as we see in the following figure. 1 advanced, that means it is, necessary to be determined internally the four parameter. credit risk measures – a case of renewable energy companies 149 table 1. risk parameters risk parameters irb foundation irb advanced probability of default (pd) estimated by the credit institution estimated by the credit institution loss given default (lgd) amounts to be provided by the supervisory authority estimated by the credit institution exposure at default (ead) amounts to be provided by the supervisory authority estimated by the credit institution maturity (m) amounts made available by the supervisory authority or by the credit institution estimated by the credit institution s o u r c e : elaboration of the author. in portugal. became the first portuguese financial institution to obtain irb accreditation of the portugal central bank, for the calculation of capital requirements to cover credit risk.2 the design of a valid methodology of rating analysis depends on the type of classification system, made by the bank. this can vary in several ways, depending on the type of borrower risk, the relevance of exposure, the dynamic properties of the classification methodology, and the availability of standard data and quality ratings of external credit. as a consequence, validation is a relatively complex issue and requires a good understanding of the rating system and its properties. most of the validation process focuses on a static point of view, in which the features of an irb system (calibration, performance) are evaluated for a given set of criteria. this discussion about the design emphasized the need to infer the stochastic behavior of rating transitions within an irb system. in contrast, the discussion on benchmarking, stresses the need to change from an approach that is completely exogenous, in many aspects incomplete for a more complete approach in its ideal form would cover a model of equivalence. broadly the variables to be analyzed can be defined as follows: probability of default (pd) – probability of default of a given borrower, calculated for a time horizon of one year. loss given default (lgd) – measure of expected loss in case of default may be seen up to 100% of the loan amount, depending on the risk mitigation instruments used in their coverage. 2 eduardo sá e silva, adalmiro andrade pereira150 exposure at default (ead) – measure that represents the total exposure value in euro at the time to declare default. exposure at default is determined for each loan individually considered. maturity (m) – measure of effective maturity of the credit. maturity is a weighted measure of the life of the loan, that means the percentage of equity paid in each year weighted by year to which it relates. in the analysis and estimation of the parameters of pd, lgd and ead, the model can distinguish two approaches, backtesting and benchmarking. backtesting means using statistical methods to compare the estimations of the three components mentioned above. whereas, for the risk models, backtesting market model involves the whole process, by which internal rating systems of risk components (model inputs) are tested, but the system and procedures of the model are provided by the supervisor, regarding the form of the functions risk weighting. benchmarking refers to a comparison of internal estimates between banks and / or external benchmarks (external ratings or models developed by supervisors). the pd should be calculated taking into account its historical, associated with the credit quality of the borrower information. this quality score is given by (rating) assigned by the internal model. the most popular application of this technique is empirical, with the pd relatively to each class of risk to be determined from the historical frequency of defaults recorded by the debtors of this class, using enough data to cover good and bad years of economic performance period. compiling records of various annual fees, using average historical rates, it can be calculated a long-term rate. a enough period for the irb advanced is 5 years but the irb starts with two years, and this period should increase each year until data covering at least 5 years. highlight that to exist defaults, it must exists one of the following conditions (notice of portugal central bank no 5/2007): a) the institution assign a low probability to the possibility that the borrower will comply fully with their obligations to the institution itself, or any of its subsidiaries, if did not access to measures such as the execution of any warranty; b) the institution considers likely to have to meet the obligations of the counterparty, and their recovery is doubtful in the case of off-balance sheet; c) the debtor register a delay exceeding 90 days (this is the most common situation) for a significant obligation to the institution or its subsidiaries. credit risk measures – a case of renewable energy companies 151 the 90 day period may be extended to 180 days in the case of exposures to public sector entities (such as regional and local authorities). on the other hand, in the case of significant debt account, the delay should be counted at the time the obligor has breached an advised limit, has been advised of the set a lower threshold current outstandings, or has drawn, in an unauthorized manner, credit amounts. in the case of credit cards, the delay should start being counted from the date of the minimum payment. lgd configures the severity of the failure, this means, the expected loss of a credit transaction, if the counterparty will default. the complement is the recovery rate. lgd is usually calculated as a percentage of the ead, this percentage may be obtained at time of failure for cases already in default or correspond to an estimated loss conditional upon default, for cases where there is no default, which is the majority. in calculating the estimated lgd beyond the level of recovery, there is a need to consider the amount and type of operation when it exists. the recoveries may materialize in cash or through the appropriation of property, the latter type of recovery but generating an exposure to market risk (discount or hen it is attempted to convert them into monetary values. lgd is calculated, taking into consideration the amount of recovery (r), the direct and indirect administrative cost recovery (c) and appropriate discount rate (i) to discount to present the expected f lows of receipts and payments that should incorporate the risk-free rate (associated with government bonds) plus a spread showing the risk of default and (t) corresponding to the timeframe in which there are monetary f lows. the formula is as follows: ead t c i r lgd n t n t t t t t 1 1 )1()1(1 s o u r c e : elaboration of the author. the ead is a measure that represents the total exposure value, in euro at the time to declare default. exposure at default is determined for each loan individually considered. it should be in mind that this exhibition enter the off-balance sheet items (in case of unused credit lines – potential liabilities recorded off balance sheet) for which should be used conversion factors tlc (credit conversion factors). for example for a line of credit with a maturity more than 1 year, eduardo sá e silva, adalmiro andrade pereira152 unused credit limit). the maturity (m) is a measure of the effective maturity of the credit. the maturity is a weighted average life of the loan, that means, the percentage of equity paid in each year weighted by year to which it relates. for example, a loan to two years of 200, 100 payable in each year, the maturity will equal: m = (1 x (100/200)) + (2x (100/200)) = 1.5 years. in the irb approach tion in credit to companies (corporate) it will be used a mature standard, set in new agreement of 2.5 years. banks must document its evaluation criteria and provide appropriate followup when given class differs from the assessment indicated by test to be applied. the requirements are defined for (bis 2010a): promote consistent application of the criteria rating; assess credit conservatively when there is greater uncertainty; understand the financial condition of the borrower over the coming period; use of models rating and comprehensive statistical power of all significant variables. the bank or the ci must demonstrate that their criterion covers all the factors that are relevant to risk analysis of the borrower. factors must demonstrate the ability to differentiate risk, anticipate events, have discriminative power, be relevant and intuitive to ensure that the ratings are designed to distinguish the risk, and not to minimize capital requirements. the first input for the irb approach is the calculation of the bank for each of its internal rating grades. from borrowers without risk to defaulting borrowers, the pd calculate for each level can vary by many orders of magnitude, thus making this a highly sensitive measure of risk. for each level of its internal rating, the bank calculates a probability of default for one year. banks should consider all available information to calculate pd using the following three techniques for calculation: experience of internal failure; association of external data; statistical models of default. credit risk measures – a case of renewable energy companies 153 how many more are the techniques and data sources used by a bank, the greater the confidence in their own calculations pd. accordingly the bis (bank of international settlements) (bis 2010b), it follows that also a system will also have the following additional functions: authorities approved credit limits; review of lending rates; give information of the risk profile of the bank’s portfolio and the directors of the bank; analysis of the adequacy of the bank’s capital reserves and profitability; performance under pressure tests to assess capital adequacy. portugal in gross electricity consumption in 2008 was recognized as the fifth however it is also the fifth country with energy dependence in the european strong investment in the sector. recent statistics published by the general directorate of energy and geology, reveal that in october 2010 portugal enjoyed 9405 mw of capacity to generate electricity (pereira, salete 2011). the strategy implemented in this sector is a growth strategy or development. defined based on various constraints, involves intervention of other entities, inf luences before the final consumer, eliminating bureaucracy and the development of specific competencies (pereira 1998). to implement quality and accreditation in order to guarantee and ensure the viability of the system, the existence of professional skills and the promotion of research and development are required. the expected result is the implementation of sustainable economic growth (velasco 2009), contributing to the elimination of harmful effects to the environment, preserving the reserve of energy in the world, create jobs (perez 2001) and can generate a surplus of energy reserves allowing exports and will not need to import so many features and consequently contribute to the equilibrium of the balance of payments. on this part of the article we tried to study the credit risk of a group of 30 portuguese companies in the renewable sector. we use a quantitative methodoleduardo sá e silva, adalmiro andrade pereira154 ogy in each we try to determine the main variables that can explain a credit risk measure. for this propose we use a linear regression model with multiple variables. we considered a dependent variable that is the amount of money that the companies must pay to the state divided by the total assets from the company. note that we consider this variable as a proxy to the credit risk. we should use a variable related to the credit banking incidents but this type of information is not available. so we use a proxy variable working the amount of money that should be payable to the fiscal administration. we consider if the company does not fill its obligation to the fiscal administration it also fail to the bank. as independent variables we use financial autonomy, solvability, debt to equity ratio, liquidity, cash flow, sales evolution, roe (return on equity), receivable time, payable time, debt long term. this model has a coefficient of adjustment of almost 46% as below. table 2. model summary model r r square adjusted r square std.error of the estimate durbinwatson 1 0,675 0,456 0,196 0,034075 1,995 a. predictors b. dependent variables s o u r c e : spss. about the variables we get the following results after applying a linear regression model (table 3). table 3. model coefficients standardized coefficients b beta 1 (constant) 0,009 0 0,547 0,59 financial autonomy 0,003 0,53 0,13 0,898 solvability -0,028 -0,766 -2,276 0,033 debt to equity ratio 0 -0,228 -1,272 0,217 liquidity 0,01 4,76 1,708 0,102 cash flow 3,822 e 008 1,031 2,027 0,506 sales evolution 0,3 0,64 2,8 0,011 roe -0,001 -0,161 -0,495 0,626 receivable time/ payable time -0,002 -4,698 -1,714 0,101 debt long term 9,341 e -007 0,046 0,272 0,788 -1e+111 -1,469 -2,727 0,013 a. dependent variable std. errormodel unstandardized coefficients 0,011 0,002 0 0 sig.t 0,017 0,022 0,012 0 0,006 0 0,011 s o u r c e : spss. credit risk measures – a case of renewable energy companies 155 from this results we conclude that only solvability, cash f low, sales evolution and debt on long term are statistical relevant, considering a p value of 5%. table 4. model summary model r r square adjusted r square std.error of the estimate durbinwatson 1 0,562 0,316 0,215 0,0336762 2,123 a. predictors (constant) b. dependent variable s o u r c e : spss. we repeated the first step for the model but we get r square lower than the first one, so we are losing capacity of explanation of the model. a bank must demonstrate to its supervisor capabilities before adopting the irb approach on a continuous basis. the data collection requirements are closely aligned with the capacity of banks to validate their calculations pd and models rating. the committee recognizes that the fundamental choice of a model approach under the irb capital requirements should be based on the nature of their holdings and the adequacy of the same underlying methodologies. as an example, when bank profits are materially affected by market volatility of their equity positions, the approach should try to capture this risk. relatively to the work methodologies, benchmarking is an important part of the validation process and, in many cases, appears as an important empirical complement to the more rigorous and formal approach. however, benchmarking remains in many cases as subjective and need to be more formal. from the study of the portuguese companies in the renewable sector, we get problems on getting a good pack of variables that could explain the risk from the companies. although this we get a model with four variables statistical relevant. one alternative work to continue this paper was to divide the companies in company insolvent and solvent and try to determine de z-altman score. banco de portugal – notice 5/2007. basel commitee on banking supervision (bis) press release september 12, 2010. eduardo sá e silva, adalmiro andrade pereira156 basel commitee on banking supervision (bis) strengthening the resilience of the banking sector 2010. caruana, jaime basel iii: towards a safer financial system presentation “at the 3rd santander international banking conference” held in madrid on 15 september 2010. chicago, fed letter, navigating the new world of private equity – a conference summary, chicago fed letter, 256, novembro de 2008. economic journal, impact of basel iii released shortly – news 17/11/2010. estratégia na produção de energias renováveis em ambiente de crise – adalmiro pereira, maria la salete sousa – congresso acim 2011. finance and international risk management – eduardo sá e silva, carlos mota, mario queiroz, adalmiro pereira, vida económica in 2013. marrison, crhis (2007), the fundamentals of risk measurement mcgraw hill. pereira, m. c. (1998), energias renováveis, a opção inadiável: contribuição para (1ª ed.). lisboa: spes, sociedade portuguesa de energia solar. drid: los libros de la catarata. madrid: los libros de la catarata. pricewaterhousecoopers, new rules or new game? – document retrieved from internet, september 14, 2010. sas forum the information on risk management in banks – material removed from the conference held in lisbon, 9/11/2010. date of submission: february 22, 2023; date of acceptance: april 1, 2023. * contact information: a_zoladkiewicz@umk.pl, department of financial management, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a street, 87-100 toruń, poland, phone: +48 56 611 46 34, orcid id: https://orcid.org/0000-0001-5475-4826. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 żołądkiewicz-kuzioła, a. (2022). the financial effects of the fiscal sovereignty of municipality regarding real estate tax. copernican journal of finance & accounting, 11(4), 203–216. http://dx.doi.org/10.12775/cjfa.2022.026 agnieszka żołądkiewicz-kuzioła nicolaus copernicus university in toruń the financial effects of the fiscal sovereignty of municipality regarding real estate tax keywords: finance, local taxes, real estate tax, municipality, fiscal sovereignty. j e l classification: h20, h71, k34. abstract: the aim of the article is to identify the differentiation of the financial effects of a municipality’s fiscal sovereignty in the field of real estate tax from the point of view of such criteria as the type of municipality (rural, urban, urban-rural and town with poviat rights) and the type of fiscal sovereignty instrument (tax rates lower than the maximum, reliefs and exemptions, redemption of tax arrears, payment in instalments, deferral of the payment date). the research covering the years 2017–2021 was based on data from the ministry of finance. based on the research, it was shown that the effects of fiscal sovereignty were the most significant in rural municipalities, while the smallest in towns with poviat rights. all types of municipalities used common instruments, such as e.g., the lowering of tax rates, to a greater extent than the discretionary instruments resulting from the tax ordinance.  introduction introduction local government units, including municipalities, as well as any business entity, must have the appropriate amount of financial resources necessary to http://dx.doi.org/10.12775/cjfa.2022.026 agnieszka żołądkiewicz-kuzioła204204 conduct their activities (jędrzejewski, 2018). as emphasized by b. słomińska (2006), the financial basis for the public activity of a municipality is its budget revenues, from which both current and investment tasks are financed. in the structure of the municipality’s revenues, the most important category is own income. on the other hand, among the municipality’s own income, revenues from local taxes and charges are of particular importance, including, above all, revenues from real estate tax. according to the provisions of the constitution of the republic of poland, the municipality has fiscal sovereignty with regard to local taxes and charges (constitution of the republic of poland of april 2, 1997). fiscal sovereignty is understood as the legally defined scope of powers of local government bodies to make independent decisions in tax matters (święchkujawska, 2017). in the current perspective, the use of instruments of fiscal sovereignty by the tax authorities of a municipality has financial consequences in the form of a decrease in its budget revenues. the subject of fiscal sovereignty in the context of financial effects has been the main topic of research conducted recently, e.g., by kowalska, jurewicz and legutko (2019), rogalska (2020), felis and otczyk (2021), burzyńska (2022). despite numerous studies, it is necessary to, according to the author, update them primarily in the context of real estate tax. thus, the aim of the article is to identify the differentiation of the financial effects of a municipality’s fiscal sovereignty in the field of real estate tax from the point of view of such criteria as the type of municipality and the type of fiscal sovereignty instrument. in order to achieve the goal, data from the ministry of finance was analysed, which concerned the implementation of the budget by local government units in the years 2017–2021. the characteristics of a municipality’s fiscal sovereignty the characteristics of a municipality’s fiscal sovereignty in the field of real estate taxin the field of real estate tax the scope of a municipality’s fiscal sovereignty as part of the real estate tax is referred to as full sovereignty (filipiak, 2015). one of the manifestations of a municipality’s fiscal sovereignty is the right of the municipal council to decide on real estate tax rates. the decision making body has the possibility to adopt lower rates than the upper limits of rates set each year by the minister of finance by way of an announcement (rogalska, 2020). thus, it can be said that the given power of the municipal council comes down to the lowering of max the financial effects of the fiscal sovereignty… 205205 imum tax rates. it should be noted, however, that according to the view functioning in the jurisprudence, the decision making body of a municipality cannot pass rates at a zero level. (judgement of the supreme administrative court in krakow of july 22, 1993; judgement of the supreme administrative court in warsaw of november 27, 1992). when setting real estate tax rates, the municipal council has the possibility to differentiate them both in relation to land, buildings, and structures, as well as depending on the subject of taxation, taking into account such parameters as location, type of business, type of land development, purpose or use of the land or building, and, in the case of buildings, additionally, their age and technical condition (act of january 12, 1991 on local taxes and charges). as part of its fiscal sovereignty related to real estate tax, a municipality not only decides on the rate of this tax, but also has the right to grant tax reliefs and exemptions. a tax exemption is the exclusion of a specified category of entities or objects from taxation (nykiel, 1998), while a tax relief is a reduction in the amount of tax (nykiel, 2002). there are two categories of reliefs and exemptions. the first category consists of statutory reliefs and exemptions, which are regulated by the provisions of the tax act. thus, the taxpayer obtains the possibility of taking advantage of reliefs and exemptions by virtue of law (durczyńska, 2016). the second category consists of reliefs and exemptions introduced by way of a resolution by the municipal council. reliefs and exemptions adopted by the municipal council, in accordance with regulations, may only be of objective nature (etel et al., 2020). however, with the beginning of the covid-19 pandemic, the municipal council was additionally authorized to introduce exemptions of subjective-objective nature in the field of real estate tax (dowgier, 2020), and more precisely, the decision making organ could, by way of a resolution, introduce “for part of 2020 and for selected months of 2021 exemptions from real estate tax, i.e., land, buildings and structures related to the running of a business, indicated groups of entrepreneurs whose financial liquidity has deteriorated due to negative economic consequences as a result of covid-19” (act of march 2, 2020 on special solutions related to the prevention, counteracting, and combating covid-19, other infectious diseases, and crisis situations caused by them). also, the executive body of a municipality as a tax authority has competencies in the field of real estate tax, which, unlike the powers resulting from resolutions adopted by the decision making body of a municipality, are individualized, which means that they apply to a specific entity and situation (cilak, agnieszka żołądkiewicz-kuzioła206206 2013). according to art. 67a of the tax ordinance, the tax authority, i.e., in the case of a municipality, the wójt or mayor, at the request of a taxpayer, in cases justified by an important interest of the taxpayer or public interest, may (act of august 29, 1997 on tax ordinance): ■ postpone the date of tax payment, postpone the payment of tax arrears together with interest for late payment or interest on unpaid tax advances, ■ spread the payment of tax into instalments, spread the payment of tax arrears into installments together with interest for late payment or interest on unpaid tax advances, ■ redeem, in whole or in part, tax arrears, late payment interest or prolongation fee. the powers listed in the tax ordinance are referred to as tax reliefs in the payment of tax liabilities. their characteristic feature is discretion on the part of the executive body of a municipality (etel, 2004), for which the premise for granting them may be an important interest of the taxpayer or public interest. according to the judgment of the supreme administrative court, an important interest of the taxpayer determines a situation in which, for extraordinary reasons, chance events such as the loss of earning opportunities or chance loss of property, the taxpayer is unable to settle his or her tax arrears. on the other hand, public interest is characterized by the case in which the payment of tax arrears forces the taxpayer to use state aid because in a given situation it is impossible for him or her to satisfy his or her material needs (the judgment of the supreme administrative court in szczecin of april 22, 1999). research methodology and the course of research processresearch methodology and the course of research process the aim of the article is to identify the differentiation of the financial effects of a municipality’s fiscal sovereignty in the field of real estate tax. in order to achieve the goal, data from the ministry of finance was analyzed, which concerned the implementation of the budget by local government units in the years 2017–2021. the research covered 2,478 municipalities, i.e., the full population of municipalities in poland, taking into account the division into towns with poviat rights, urban, rural and urban-rural municipalities. a comparison of the value of the financial effects of the application of fiscal sovereignty instruments in the field of real estate tax with the revenues from the given taxes was made. the list includes the following instruments: the financial effects of the fiscal sovereignty… 207207 ■ tax rates lower than the maximum, ■ reliefs and exemptions, ■ redemption of tax arrears, ■ payment in installments, deferral of the payment date. results of the researchresults of the research the data presented in figure 1 shows that in the period covered by the study there was a systematic increase in revenues from real estate tax to the budgets of municipalities. in the years 2017–2021, the largest increase in revenues from real estate tax in the amount of 22.81% was recorded in urban-rural municipalities (an increase from pln 4,968.77 million in 2017 to pln 6,103.05 million in 2021). on the other hand, urban municipalities were characterized by the smallest increase. in the case of these units, the value of revenues from real estate tax increased by 17.21% (an increase from pln 3,505.44 million in 2017 to pln 4,108.61 million in 2021). in turn, in rural municipalities, the increase in the value of revenues from real estate tax was 20.77%, while in towns with poviat rights – 18.13%. on the other hand, referring to the increase in the value of given revenues from year to year, the largest increase was recorded for individual municipalities at the turn of 2020–2021. in the case of towns with poviat rights, the given revenues increased by 8.27%, while in the case of urban, rural, and urban-rural municipalities it amounted to 6.59%, 7.60%, and 8.26%, respectively. taking into account the share of revenues from real estate tax in own income, it can be seen that urban-rural municipalities had the largest share, while towns with poviat rights had the smallest share. the average annual share for urban-rural municipalities was 26.44%, while for towns with poviat rights it was 16.62%. in the case of urban and rural municipalities, the average annual share of the analyzed revenues in own income was very similar, and reaching precisely, for urban municipalities, the value of 24.26%, and for rural municipalities 24.02%. it should be noted that despite the systematic increase in the value of revenues from real estate tax in the analyzed period, their share in own income for individual municipalities reached a lower level in 2021 compared to 2017. agnieszka żołądkiewicz-kuzioła208208 figure 1. the value of revenues from real estate tax and their share in the own income of municipalities in the years 2017–2021 recorded in urban-rural municipalities (an increase from pln 4,968.77 million in 2017 to pln 6,103.05 million in 2021). on the other hand, urban municipalities were characterized by the smallest increase. in the case of these units, the value of revenues from real estate tax increased by 17.21% (an increase from pln 3,505.44 million in 2017 to pln 4,108.61 million in 2021). in turn, in rural municipalities, the increase in the value of revenues from real estate tax was 20.77%, while in towns with poviat rights 18.13%. on the other hand, referring to the increase in the value of given revenues from year to year, the largest increase was recorded for individual municipalities at the turn of 2020-2021. in the case of towns with poviat rights, the given revenues increased by 8.27%, while in the case of urban, rural, and urban-rural municipalities it amounted to 6.59%, 7.60%, and 8.26%, respectively. taking into account the share of revenues from real estate tax in own income, it can be seen that urban-rural municipalities had the largest share, while towns with poviat rights had the smallest share. the average annual share for urban-rural municipalities was 26.44%, while for towns with poviat rights it was 16.62%. in the case of urban and rural municipalities, the average annual share of the analysed revenues in own income was very similar, and reaching precisely, for urban municipalities, the value of 24.26%, and for rural municipalities 24.02%. it should be noted that despite the systematic increase in the value of revenues from real estate tax in the analysed period, their share in own income for individual municipalities reached a lower level in 2021 compared to 2017. figure 1. the value of revenues from real estate tax and their share in the own income of municipalities in the years 2017-2021 17,5% 16,8% 16,4% 16,5% 15,9% 26,5% 25,0% 23,8% 23,2% 22,8% 27,4% 25,7% 23,5% 21,2% 22,3% 29,3% 27,8% 25,9% 24,5% 24,7% 8456,48 8817,00 9023,38 9226,68 9989,81 3505,44 3610,79 3718,14 3854,54 4108,61 4898,28 5038,60 5212,01 5497,73 5915,564968,77 5150,97 5345,75 5636,93 6103,05 0,00 2000,00 4000,00 6000,00 8000,00 10000,00 12000,00 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 2017 2018 2019 2020 2021 va lu e in m ill io n pl n sh ar e in % towns with poviat rights urban municipalities rural municipalities urban-rural municipalities towns with poviat rights urban municipalities rural municipalities urban-rural municipalities s o u r c e : own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021. in order to illustrate the scale of using the powers of municipalities in the field of real estate tax, figure 2 presents the overall value of the financial effects of the use of fiscal sovereignty instruments within a given tax. as can be seen, the value of the financial effects of fiscal sovereignty in the field of real estate tax for individual types of municipalities was systematically growing, except for 2020, when a decrease in value was recorded. it should be noted, however, that in the case of towns with poviat rights, an increase in a given value was recorded each year. in addition, it can be seen that the financial effects of fiscal sovereignty in the field of real estate tax constitute a significant percentage of the value of the financial effects of fiscal sovereignty in total taxes. in 2021, for towns with poviat rights, their share was 58.85%, while for rural municipalities it was 68.45%. in the case of urban and urban-rural municipalities, the share was very similar and in 2021 amounted to 74.8% and 73.3%, respectively. the financial effects of the fiscal sovereignty… 209209 figure 2. the value of the financial effects of fiscal sovereignty in real estate tax and their share in the financial effects of fiscal sovereignty in the total taxes of municipalities in the years 2017–2021 source: own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021. in order to illustrate the scale of using the powers of municipalities in the field of real estate tax, figure 2 presents the overall value of the financial effects of the use of fiscal sovereignty instruments within a given tax. as can be seen, the value of the financial effects of fiscal sovereignty in the field of real estate tax for individual types of municipalities was systematically growing, except for 2020, when a decrease in value was recorded. it should be noted, however, that in the case of towns with poviat rights, an increase in a given value was recorded each year. in addition, it can be seen that the financial effects of fiscal sovereignty in the field of real estate tax constitute a significant percentage of the value of the financial effects of fiscal sovereignty in total taxes. in 2021, for towns with poviat rights, their share was 58.85%, while for rural municipalities it was 68.45%. in the case of urban and urban-rural municipalities, the share was very similar and in 2021 amounted to 74.8% and 73.3%, respectively. figure 2. the value of the financial effects of fiscal sovereignty in real estate tax and their share in the financial effects of fiscal sovereignty in the total taxes of municipalities in the years 20172021 source: own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021. taking into account the type of municipality and the type of fiscal sovereignty instrument, a detailed analysis of the value of the financial effects of fiscal sovereignty of municipalities in the field of real estate tax was made. the results of the conducted analysis are presented in tables 1-4. 61,2% 61,0% 61,9% 62,0% 58,8% 77,1% 77,7% 76,9% 75,2% 74,8% 75,5% 74,5% 73,6% 71,5% 68,4% 77,9% 75,2% 76,5% 74,8% 73,3% 398,72 425,98 446,23 456,85 477,51 436,97 476,54 492,89 467,72 524,70 1188,59 1202,12 1251,67 1236,01 1334,65 942,70 1029,74 1039,08 1022,21 1105,82 0,00 200,00 400,00 600,00 800,00 1000,00 1200,00 1400,00 1600,00 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0% 2017 2018 2019 2020 2021 va lu e in m ill io n pl n sh ar e in % towns with poviat rights urban municipalities rural municipalities urban-rural municipalities towns with poviat rights urban municipalities rural municipalities urban-rural municipalities s o u r c e : own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021. taking into account the type of municipality and the type of fiscal sovereignty instrument, a detailed analysis of the value of the financial effects of fiscal sovereignty of municipalities in the field of real estate tax was made. the results of the conducted analysis are presented in tables 1–4. the value of the financial effects of fiscal sovereignty of towns with poviat rights in the field of real estate tax in the analyzed period accounted for less than 5% of the revenues from this tax (table 1). among the instruments of fiscal sovereignty, the lowering of the upper tax rates was of the greatest importance in the decrease in revenues from real estate tax. in 2021, the value of the financial effects resulting from the use of a given instrument accounted for 2.35% of the revenues earned. on the other hand, the redemption of tax arrears was of the least importance in the decrease in real estate tax revenues. as a result of using a given instrument, revenues from real estate tax in 2021 decreased by only 0.34%. in the analyzed period, it can also be seen that in 2020, compared to 2019, there was a significant increase in the value of financial effects due to the use of individual fiscal sovereignty instruments (except for the lowering of the upper tax rates). the largest increase was recorded in relation to the ap agnieszka żołądkiewicz-kuzioła210210 plication of spreading into installments, deferring the payment date. the value of lost revenues in this case increased by pln 46.24 million. table 1. the ratio of the value of the financial effects of the application of individual fiscal sovereignty instruments in the field of real estate tax to the revenues from this tax in the years 2017–2021 – towns with poviat rights specification 2017 2018 2019 2020 2021 tax rates lower than the maximum in mln pln 206.83 255.12 283.93 201.00 234.53 in % 2.45 2.89 3.15 2.18 2.35 reliefs and exemptions in mln pln 113.74 110.12 110.67 145.01 131.63 in % 1.34 1.25 1.23 1.57 1.32 redemption of tax arrears in mln pln 22.68 17.16 12.28 25.27 34.12 in % 0.27 0.19 0.14 0.27 0.34 payment in installments, deferral of the payment date in mln pln 55.47 43.58 39.34 85.58 77.23 in % 0.66 0.49 0.44 0.93 0.77 total in mln pln 398.72 425.98 446.23 456.85 477.51 in % 4.71 4.83 4.95 4.95 4.78 s o u r c e : own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021. in the case of urban municipalities, in the years 2017–2021, the value of the financial effects of the use of fiscal sovereignty instruments in the field of real estate tax oscillated between pln 436.97 million and pln 524.70 million (table 2). in relation to the revenues from real estate tax, the value of financial effects was then on average 12.78% per year. the lowering of tax rates was applied to the greatest extent. in 2021, they accounted for 9.32% of revenues from real estate tax. on the other hand, the value of lost revenues resulting from the application of the redemption of tax arrears, as well as spreading them into instalments and deferring the payment date had the smallest share in revenues. for example, in 2021, urban municipalities lost only 0.56% of their revenues due to the redemption of tax arrears as well as spreading them into installments and deferring the payment date. in 2020, a significant increase in the value of lost revenues from real estate tax could be observed as a result of the use of individual fiscal sovereignty instruments. however, the lowering of tax rates the financial effects of the fiscal sovereignty… 211211 was an exception, as in 2020 there was a decrease in its value from pln 372.95 million to pln 317.37 million. table 2. the ratio of the value of the financial effects of the application of individual fiscal sovereignty instruments in the field of real estate tax to the revenues from this tax in the years 2017–2021 – urban municipalities specification 2017 2018 2019 2020 2021 tax rates lower than the maximum in mln pln 324.42 357.61 372.95 317.37 382.76 in % 9.25 9.90 10.03 8.23 9.32 reliefs and exemptions in mln pln 75.90 80.79 87.65 95.45 95.76 in % 2.17 2.24 2.36 2.48 2.33 redemption of tax arrears in mln pln 16.71 18.86 14.91 27.20 23.09 in % 0.48 0.52 0.40 0.71 0.56 payment in installments, deferral of the payment date in mln pln 19.95 19.28 17.37 27.70 23.09 in % 0.57 0.53 0.47 0.72 0.56 total in mln pln 436.97 476.54 492.89 467.72 524.70 in % 12.47 13.19 13.26 12.14 12.77 s o u r c e : own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021. with regard to rural municipalities, the loss of revenues from real estate tax resulting from the use of fiscal sovereignty instruments in the analyzed period ranged from 22.48% to 24.27% (table 3). the main part of the lost revenues was the lowering of tax rates, the average annual share of which in the value of obtained revenues amounted to 23.44%. although in the analyzed period the share of the redemption of tax arrears in revenues from real estate tax was insignificant, in 2020, there was a significant increase in its amount. the value of financial effects resulting from the use of a given instrument increased by pln 25.81 million. in the same year, the value of reliefs and exemptions also increased (an increase by pln 37.17 million). in turn, a significant increase in the value of the lowering of tax rates was recorded in 2021. the value of revenues lost as a result of the application of a given fiscal sovereignty instrument increased by as much as pln 118.7 million. agnieszka żołądkiewicz-kuzioła212212 table 3. the ratio of the value of the financial effects of the application of individual fiscal sovereignty instruments in the field of real estate tax to the revenues from this tax in the years 2017–2021 – rural municipalities specification 2017 2018 2019 2020 2021 tax rates lower than the maximum in mln pln 802.88 844.60 884.39 805.85 924.55 in % 16.39 16.76 16.97 14.66 15.63 reliefs and exemptions in mln pln 328.79 316.43 329.74 366.91 354.77 in % 6.71 6.28 6.33 6.67 6.00 redemption of tax arrears in mln pln 22.66 21.67 17.16 42.97 38.82 in % 0.46 0.43 0.33 0.78 0.66 payment in installments, deferral of the payment date in mln pln 34.26 19.42 20.38 20.28 16.51 in % 0.70 0.39 0.39 0.37 0.28 total in mln pln 1188.59 1202.12 1251.67 1236.01 1334.65 in % 24.27 23.86 24.02 22.48 22.56 s o u r c e : own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021. in the case of urban-rural municipalities, the average annual share of the value of the financial effects of fiscal sovereignty in the field of real estate tax in the revenues from this tax was 18.93 (table 4). among the instruments of fiscal sovereignty, the lowering of the upper tax rates was of the greatest importance in the decrease in revenues from real estate tax. as a result of the application of a given instrument in 2021, the value of lost revenues from real estate tax amounted to pln 808.89 million, which accounted for 13.35% of the revenues from this tax. it should be noted that in 2020, there was an increase in the value of redemptions of tax arrears from pln 21.08 million to pln 44.77 million. in turn, the lowering of tax rates in a given year recorded a decrease from pln 782.69 million to pln 710.10 million. however, in 2021 its value increased by as much as pln 98.79 million. the financial effects of the fiscal sovereignty… 213213 table 4. the ratio of the value of the financial effects of the application of individual fiscal sovereignty instruments in the field of real estate tax to the revenues from this tax in the years 2017–2021 – urban rural municipalities specification 2017 2018 2019 2020 2021 tax rates lower than the maximum in mln pln 684.53 760.16 782.69 710.10 808.89 in % 13.78 14.76 14.64 12.60 13.25 reliefs and exemptions in mln pln 193.37 213.90 212.10 233.35 228.81 in % 3.89 4.15 3.97 4.14 3.75 redemption of tax arrears in mln pln 30.74 28.12 21.08 44.77 39.90 in % 0.62 0.55 0.39 0.79 0.65 payment in installments, deferral of the payment date in mln pln 34.06 27.56 23.21 33.99 28.22 in % 0.69 0.53 0.43 0.60 0.46 total in mln pln 942.70 1029.74 1039.08 1022.21 1105.82 in % 18.97 19.99 19.44 18.13 18.12 s o u r c e : own study based on: annexes to the information on the execution of local government budgets for 2017, 2018, 2019, 2020, 2021.  conclusions conclusions based on the data analysis, several conclusions can be drawn. revenues from real estate tax are of the greatest importance for the budgets of urban-rural municipalities, and the smallest for towns with poviat rights. the average annual share of real estate tax revenues in own income in the years 2017–2021 for urban-rural municipalities amounted to 26.44%, and for towns with poviat rights it reached the value of 16.62%. in turn, referring to the financial effects of fiscal sovereignty in the field of real estate tax, significant discrepancies can be noticed due to the type of municipality. the effects of tax decisions were the most significant in rural municipalities, while the smallest in towns with poviat rights. for the entire analyzed period, the loss of revenues due to the use by rural municipalities of instruments of fiscal sovereignty in the field of real estate tax accounted for an average of 23.44% of revenues obtained from a given tax. in turn, in the case of towns with poviat rights, the loss of revenues accounted for an average of agnieszka żołądkiewicz-kuzioła214214 4.84% of the revenues obtained from real estate tax. such a situation may be related to the lower anonymity of the authorities in rural municipalities, and thus, their greater susceptibility to pressure from taxpayers in the use of instruments of fiscal sovereignty. however, taking into account the type of fiscal sovereignty instrument, it can be noticed that all types of municipalities used common instruments, such as, e.g., the lowering of tax rates, to a greater extent than the discretionary instruments resulting from the tax ordinance. it should be noted, however, that in the first year of the covid-19 pandemic, there was a decrease in the value of lost revenues resulting from the lowering of real estate tax rates, and a significant increase in the financial effects related to the redemption of tax arrears. when making decisions regarding the use of fiscal sovereignty instruments, municipality authorities should take into account not only the loss of revenues in the current perspective, but also the increase in revenues in the long term, which can be achieved through the inf lux of new enterprises and increasing the scale of operations of already operating enterprises.  references references annexes to the information on the 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(2017). preferencje podatkowe jako element lokalnej polityki podatkowej – na przykładzie opodatkowania przedsiębiorców podatkiem od nieruchomości (tax preferences as an element of local tax policy – as seen in taxation of entrepreneurs with property tax). finanse, rynki finansowe, ubezpieczenia, 3, 89–99. http://dx.doi.org/10.18276/frfu.2017.87/2-08. ustawa z dnia 12 stycznia 1991 r. o podatkach i opłatach lokalnych (act of january 12, 1991 on local taxes and charges) (dz. u. z 2023 r. poz. 70). ustawa z dnia 2 marca 2020 r. o szczególnych rozwiązaniach związanych z zapobieganiem, przeciwdziałaniem i zwalczaniem covid-19, innych chorób zakaźnych oraz wywołanych nimi sytuacji kryzysowych (act of march 2, 2020 on special solutions related to the prevention, counteracting, and combating covid-19, other infectious diseases, and crisis situations caused by tchem) (dz. u. z 2021 r. poz. 2095 z późn. zm.). ustawa z dnia 29 sierpnia 1997 r. ordynacja podatkowa (act of august 29, 1997 on tax ordinance) (dz. u. z 2022 r. poz. 2651 z późn. zm.). date of submission: december 21, 2021; date of acceptance: march 3, 2022. * contact information: karthigeyan.a@gmail.com, assistant professor, dept. of banking technology, pondicherry university, puducherry-605014, india, phone: +91 8668165934; orcid id: https://orcid.org/0000-0002-7562-0082. ** contact information: vmarisinn@gmail.com, professor, dept. of banking technology, pondicherry university, puducherry-605014, india, phone: +91 9444324623; orcid id: https://orcid.org/0000-0002-8325-4502. *** contact information: rmanigceb@gmail.com, doctoral fellow, dept. of banking technology, pondicherry university, india, phone: +91 9659632826; orcid id: https://orcid.org/0000-0003-0638-6146. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 2 karthigeyan, a., mariappan, v., & mani, r. (2022). recapitalization and its impact on bank’s stability, competitiveness and profitability: evidence from indian psbs. copernican journal of finance & accounting, 11(2), 51–69. http://dx.doi.org/10.12775/cjfa.2022.008 a. karthigeyan* pondicherry university v. mariappan** pondicherry university r. mani*** pondicherry university recapitalization and its impact on bank’s stability, competitiveness and profitability: evidence from indian psbs keywords: capital infusion, asset quality, profitability. j e l classification: g20, g21, g28. abstract: there is a current argument relating to the capital infusion to the banks for strengthening capital on one side, without taking prudential measures to reduce the strains already present in the credit quality of banks on the other. the regulators thought that recapitalization of banks will be used to effectively reduce the cost of a. karthigeyan, v. mariappan, r. mani5252 funds in the regular business provided when there is a higher lending demand. the capital infusion may turn out ineffective if there is less loan demand. on this background, this paper examines the effect of recapitalization of indian public sector banks, and its impact on banks stability, competitiveness and profitability. out of 21 banks, 18 banks reacted positively in case of one indicator, but failed in regard to overall indicators. finally, the study reveals an interesting outcome that, there is no relationship between the size of the infusion and the performance of the bank. hence, the study concludes that the capital infusion will help the banks significantly to improve the stability, competitiveness and profitability only when the banks’ fundamentals are strong, combined with the deployment of fresh funds and their managerial capability.  introduction introduction recapitalization of banks is the strategic move towards cleaning stressed assets of strained banks’ balance sheet. the policy makers believe that it has the potential to increase the lending capacity even during the crisis period. the practice of injecting capital to the banks differs with the level of the economy the state holds; some do equity purchases, some may do subordinated debt or otherwise injection of cash or else introducing recapitalization bonds both negotiable/non-negotiable mostly by the governments or the combination of these methods of issuing fresh capital. the agenda of injecting new capital is to strengthen the banks during crisis period and to recover quickly once economy speedup. recapitalization: a variety of practicesrecapitalization: a variety of practices the recapitalization of banks has the clear vision on removing the strains present in the bank’s balance sheet and fulfilling the capital requirement to stay along with the global regulation. the devising of various strategies for recapitalization of banks purely depends on the economy of the country. the various recapitalizations which happened previously are: mexico, in 1995–1996, fobaproa, a bank restructuring organization issued non-tradable bonds with 10-year maturity to purchase bad asset of banks; korea, in 1998–1999, (kam co) the korean asset management company purchased bad assets and equities by issuing tradable bonds; malaysia, 1998–1999, danaharta a government owned asset management company issued zero coupon bonds with market-based yield to finance banks’ bad assets. and also, the malaysian government setup recapitalization and its impact on bank’s stability… 5353 separate independent bank to assess the recapitalization requirements of malaysian banks, mostly the injection was in the form of equity or hybrid instruments. in thailand, 1999–2000, the government issued 10 years maturity recapitalization bond with market-related fixed interest rates both tradable and non-tradable bonds to purchase bank equity as well as debentures. after the global financial crisis, most of the developed countries, especially global currency regions like us dollar and euro regions, announced comprehensive rescue packages involving some combination of recapitalization like debt guarantees and asset purchases. capital injections in the netherlands amounted to 5.1 percent of gdp in 2008, in the uk (3.4 percent), us (2.1 percent), france (1.4 percent) and japan (0.1 percent). practices of countries differed widely in terms of the features of the recapitalization plan. table 1. recapitalization in advanced economies sl.no country month & year relief amount type of instrument used 1 germany 13-10-2008 80 billion € any appropriate means 2 france 13-10-2008 40 billion € subordinated debt, preferred shares and common/ordinary shares for distressed banks 3 spain 13-10-2008 – preferred shares, common/ordinary shares, and/or non-voting shares 4 italy 8-10-2008 28-11-2008 – preferred shares undated/perpetual subordinated debt/loan 5 netherlands 9-10-2008 20 billion € any appropriate means 6 japan 17-12-2008 17-03-2009 12 trillion ¥ 1 trillion ¥ preferred shares, subordinated debt, undated/ perpetual subordinated debt/loan 7 united kingdom 8-10-2008 50 billion £ common/ordinary shares, preferred shares 8 united states 13-10-2008 10-02-2009 250 billion $ – preferred shares, warrants mandatory convertible preferred (mcp) shares (converts after 7 years), warrants – : not available. s o u r c e : panetta, faeh, grande, ho, king, levy, signoretti, taboga & zaghini, 2009. a. karthigeyan, v. mariappan, r. mani5454 recapitalization of public sector banks in indiarecapitalization of public sector banks in india in 1993–1994,1 the glorious era of indian banking sector took place because most of the reforms started during this period. the major reformations like the introduction of prudential norms and capital adequacy norms geared the capital positions of the state-owned banks in india. january 1, 1994 the first capital infusion by the government of india injected fresh capital of rs. 57 billion under equity and bonds. the next injection amounted to rs. 204 billion to the public sector banks from 1992–1993 to 1998–1999. the government fixed certain eligibility criteria to avail fresh capital by the participating banks to improve the performance and the structural changes in the operational policies and organizational structure in line with the global standards and also increasing the usage of technology in operation as well as providing services to the customer. from 2007–2008 to 2009–2010, total amounts of rs. 131 billion was injected in psbs. during this period, the global financial crisis shook the root of the western side of the banking sector but the indian banking sector escaped largely because of the stringent regulatory norms imposed by the rbi. from 2010–2011 to 2014–2015, an attempt was made to link the eligibility of the psbs to get capital infusion purely based on performance was initiated and the total amount of rs. 666 billion was injected in psbs during this period. from 2015–2016 to 2018–2019, the government estimated rs. 1.8 trillion capital requirements and it devised a plan named as indra dhanush. under this plan, rs. 700 billion has been allocated on finance budget and the remaining rs. 1.1 trillion has to be raised in the market by divesting their non-core assets. to fullfill the basel iii norms again in october 2017, the government announced a major recapitalization plan of rs. 2.11 trillion to support the psbs struggling with high levels of bad assets. hence, the recapitalization of psbs has been a regular exercise by the government to ensure the stability of the banking sector because the banking sector plays a major role in any economy, especially in a developing economy. 1  1. report on trend and progress of banking in india for the year ended june 30, 2017 submitted to the central government in terms of section 36(2) of the banking regulation act, 1949. 2. issuing government bonds to finance bank recapitalization and restructuring: design factors that affect banks’ financial performance”, imf policy discussion paper, pdp/03/4, international monetary fund. recapitalization and its impact on bank’s stability… 5555 related literaturerelated literature recapitalization of banks literature has limited studies, most of which concentrate on measuring the effectiveness of particular capital infusion such as troubled asset relief program (tarp), capital purchase program (cpp), seasoned equity offerings (seos) in bank lending and most particularly during the crisis period. therefore, the present study addresses the overall effect of recapitalization, not particular and it also measures the recapitalized banks financial health and its effect on various parameters such as profitability, competitiveness and stability with different period of capital injection of psbs with different financial condition. chiarella, cubillas and suarez (2019) compared the effect of different issuing methods like seasoned equity offerings (seos), rights issues and many more ways of doing the capital infusion in banks. unlike the literature related to recapitalization, most of which concentrate on non-banking firms and largely on us conditions, this study evaluates the announcement effect of 124 seos by 66 banks from 20 european countries. the study reveals that the recapitalization of banks is more beneficial if the bank has capital access in the equity market whenever needed or under crises. but practically this is not possible as it requires more formalities for the bank to raise the capital in the market and also their ownership and the market information about all these parameters play major role in the effective way of recapitalization. beccalli, frantz and lenoci (2018) claim that the recapitalization of banks through seasoned equity offerings (seos) has effect on asset growth and does not have effect on deleveraging. moreover, seos reduce profitability and lending and increase systemic risk after the recapitalization. the impact of seos is measured on capital shortage as bank uses seo to further strengthen their capital and capital surplus banks use seos for reducing nonperforming loans. in underpriced banks, seos lead to increase in systemic risk. hence, the finding supports the view that the ownership plays a role in the usage of seos, the state-owned banks react to the seos increases in the profitability and reduce the systemic risk. moreover, the bank that uses seos to recapitalize is the biggest loser and contributor for the further crisis. tahir, adegbite and guney (2017) evaluate the effectiveness of bank recapitalization by using macroeconomic variables in five countries. the author claims that the study does not focus on a single country unlike prior studies, a. karthigeyan, v. mariappan, r. mani5656 but it is an internationally focused study relating to recapitalization of banks. the result shows that response to the recapitalization of banks is similar in both developed and developing nations. the main findings of the study state that the recapitalization reduces the lending rates of the banks in all five countries. the important findings of the study reveal that the developing nations are deficient in introducing activities for creating demand for loans. liu, kolari, tippens and fraser (2013) compared the financial condition of the us banks that received tarp funds to cleaning up the troubled banks under the capital purchase program (cpp). the result of the study reveals that the banks which are recovering from crisis improved their financial condition more than non-recovery banks. moreover, the study suggests that the restrictions in ceo payment increased the likelihood of repayment. bayazitova and shivdasani (2012) also reveal that the restrictions in executive payment encouraged banks to repay tarp funds. the study findings state that the tarp relief programme counters the crisis and speeds up the recovery of distressed banks. moreover, the capital infusion improves the market discipline of the distressed banks. brei, gambacorta and von peter (2013) study the effect of how the rescue packages helped to stabilize the supply of bank lending during the crisis period. this study focuses on both global as well as local factors in the context of recapitalization of the banks. the main result suggests that the banks already having capital strength use the capital infusion for further lending and it enhances bank lending. on the other hand, the banks which are undercapitalized may not utilize or transfer the capital injection into additional lending. here, the undercapitalized banks use this to restore the regulatory capital requirement. the study also suggests that the rescue packages work once the bank’s balance sheet gets cleared with the distressed assets. black and hazelwood (2013) examine the effect of tarp on bank risk-taking behavior. the results indicate that the large tarp recipient’s bank average risk rating is higher when compared with large non-tarp banks in terms of loan origination. moreover, the large capital infused banks have used the capital for further lending which may also increase the credit risk but it is not in the case of small banks because they use the capital infusion for their further strengthening of bank capital. overall, the results suggest that the origination of loans during the crisis increases the risk of further diminution in asset quality of large tarp banks but conversely it decreases the outstanding commercial & industrial loans compared with non-tarp banks. therefore, the study sug recapitalization and its impact on bank’s stability… 5757 gests that the credit expansion during crisis period increases the asset quality and reduces the risk. montgomery and shimizutani (2009) compared the bank policy with the practice of bank recapitalization in japanese banks. the findings of the study reveal that the first round of capital injection in 1997 had effect on increase in capital ratios on internationally active banks and no effect on domestic banks. in 1998, the second round of injections was effective not only in raising capital ratios for international and domestic banks but also significantly impacted other policy objectives as well. the study further reveals the difference between the two injections. the first injection does not have any selection criteria for the recipient banks, so it does not have much impact. but the second capital injection is huge and there is a selection criterion for banks according to their individual financial conditions. overall, after reviewing the existing studies, the author assumes that the recapitalization of banks will facilitate in complying with international capital standards of basel iii norms. it helps in strengthening banks liquidity, and in turn the banks will increase the lending activities and it automatically increases the asset size of the bank. moreover, it increases the profit margin of the bank. overall, the recapitalization will enlarge the volume of business and increases the banks financial stability and competitiveness. it also reduces the quantum of npas accumulation and in turn it will reduce the burden of provisioning for the bad loans and the cost of funds will also get reduced. hence, the capital infusion will also increase the overall performance of the bank. the present study uses the main variable as capital infusion from 2008–2009 to 2018– 2019 and its impact on 21 public sector banks competitiveness, stability and profitability indicators have been depicted below. objectiveobjective based on the above literature reviewed, the study aimed at analyzing the overall effect of recapitalization of indian psbs and its impact on banks stability, profitability and competitiveness. a. karthigeyan, v. mariappan, r. mani5858 methodologymethodology the study uses panel data analysis to measure the relationship between the time series and cross-sectional data. the ols (ordinary least square) regression method is the basic and simplest method to pool the data and measure the association between the dependent and independent variables. the basic assumption in using the common effect ols method is a difference in intercepts across time series or cross-sectional data (fitrianto & kahal musakkal, 2016). it is also used to estimate both one way, i.e., the individual model and two way, i.e., between the model. the model is given by the basic equation: yt = a + b xt +u [1] yi = a + b xi +u [2] where: i = unit of observation, t = period of time, a = intercept, b = coefficient of the independent variables, x = vector of observations of explanatory variables, u = error term. data description and terminologies data description and terminologies the study uses secondary data collected from rbi website relating to 21 public sector banks for a period of 10 years starting from 2008–2009 to 2018–2019. panel ols, spar line chart and trend analysis to fulfill the objective and uses the variables, total asset, total advances, cost of funds, capital adequacy ratio, ratio of term loans to total advances, non-performing assets, return on assets, return on equity and liquidity. i. spar line chart: the trend of a particular variable can be presented using a spar line chart. recapitalization and its impact on bank’s stability… 5959 ii. panel ols regression model: the relation between capital infusion, competitiveness (low-cost fund, asset quality) and stability (capital adequacy and liquidity) is checked using panel ols. the model is given by: yit = a + b xit +u [3] where: i = 1 to 21, i.e., no of banks under study period and, t = 1 to 10, i.e., no of years, y= total asset, total advances, cost of funds, capital adequacy ratio, ratio of term loans to total advances, non-performing assets, return on assets, return on equity, liquidity, x = capital infusion and u is the error term. variables usedvariables used table 2. presents the areas of study, names, and definitions of the dependent and control variables areas of study variable variable name variable proxy dependent variables 1. stability liquidity capital adequacy liquid assets/total assets, capital adequacy ratio liquidity, car 2. competitiveness cost of funds asset quality spread, total assets, total advances, ratio of term loans to total advances, non-performing assets cof, npa, term loan 3. profitability return on assets return on equity net income /total assets, net income/ shareholder’s equity roa, roe control variable 4. capital infusion fresh capital capital infusion ci s o u r c e : author’s description of variables. a. karthigeyan, v. mariappan, r. mani6060 empirical analysis and discussionempirical analysis and discussion table 3. provides the time series data for capital infusion from 2008–2009 to 2018–2019 (rs. in crores) source: computed from rbi (statistical table relating to banks in india). banks name 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 sparkline allahabad bank 0 670 0 0 400 320 690 451 1500 1790 andhra bank 0 1173 0 0 200 120 378 0 2990 2019 bank of baroda 0 2461 0 850 550 1260 1786 0 5375 0 bank of india 0 1010 0 809 1000 0 3605 2838 9232 0 bank of maharashtra 0 940 470 406 800 588 394 300 3173 0 canara bank 0 0 0 0 500 570 947 745 4865 0 central bank of india 450 2253.19 676 2406 1800 1617 535 1980 5158 0 corporation bank 0 309 0 204 450 0 857 508 2187 0 dena bank 0 539 0 0 581 140 407 1046 3045 0 indian bank 0 0 0 0 400 280 0 0 0 0 indian overseas bank 0 1054 1441 1000 1200 0 2009 2651 4694 2157 oriental bank of commerce 0 1740 0 0 150 0 300 0 3571 0 punjab national bank 0 184 655 1248 500 870 1732 2112 5473 2816 punjab & sind bank 0 0 0 140 100 560 0 0 785 0 syndicate bank 0 633 0 0 200 460 740 776 2839 0 state bank of india 0 0 7900 3004 2000 2970 5393 5681 8800 0 uco bank 450 1613 48 681 2023 0 935 1925 6507 0 union bank of india 0 793 0 1114 500 111 1080 541 4524 0 united bank of india 300 558 0 100 700 800 480 1026 2634 0 vijaya bank 0 1068 0 0 1450 0 220 0 1277 0 idbi bank 0 3119.04 810 555 1800 0 2229 1900 7881 0 s o u r c e : computed from rbi (statistical table relating to banks in india). recapitalization and its impact on bank’s stability… 6161 table 3 provides the time series data for capital infusion from 2008–2009 to 2018–2019. the trend of capital infusion in all 21 banks is provided in the spar line chart; the chart clears the variation in capital infusion for various periods starting from 2008–2009 to 2018–2019. the sparline shows that the majority of the injection happened from 2012–2013 to 2016–2017. the reason may be basel iii implementation process started in india during 2013 and it ended in 2019 for further strengthening of bank capital and attaining global standards. during the study period total capital infusion in state bank of india tops with rs. 35748 crores, followed by bank of india rs. 18494 and idbi rs. 18294.04 crores. from the bottom side the indian bank rs. 680 crores are the lowest infused banks followed by punjab & sind bank rs. 1585 crores and vijaya bank rs. 4015. the infusion has been done based upon the need and the performance of the banks. the sparline chart of table 1 except four banks namely allahabad bank, andhra bank, indian overseas bank and punjab national bank remaining banks show decline in infusion because the financial year 2018–2019 there is no infusion carried out on those banks and the government is proposing for more infusions in the coming years. chart 1. total capital infusion for 21 psb (2009–2018) table 3 provides the time series data for capital infusion from 2008–2009 to 2018–2019. the trend of capital infusion in all 21 banks is provided in the spar line chart; the chart clears the variation in capital infusion for various periods starting from 2008–2009 to 2018–2019. the sparline shows that the majority of the injection happened during 2012–2013 to 2016–2017. the reason may be basel iii implementation process started in india during 2013 and it ended in 2019 for further strengthening of bank capital and attaining global standards. during the study period total capital infusion in state bank of india tops with rs. 35748 crores, followed by bank of india rs. 18494 and idbi rs. 18294.04 crores. from the bottom side the indian bank rs. 680 crores are the lowest infused banks followed by punjab & sind bank rs. 1585 crores and vijaya bank rs. 4015. the infusion has been done based upon the need and the performance of the banks. the sparline chart of table 1 except four banks namely allahabad bank, andhra bank, indian overseas bank and punjab national bank remaining banks show decline in infusion because the financial year 2018–2019 there is no infusion carried out on those banks and the government is proposing for more infusions in the coming years. chart 1. total capital infusion for 21 psb (2009–2018) source: authors’ depiction of various capital infusion chart 1 presents the line chart of total capital infusion from 2008–2009 to 2018–2019. a gradual movement of the variable can be viewed since 2008–2009 from the graph, but a sharp rise from rs. 26496 to rs. 88527 can be observed in 2017 and a sudden fall from rs. 88527 to rs.10800 in 2018. the sudden drop in the capital infusion due the introduction of eligibility 3209 22127,23 14011 14529 19317 12680 26732 26496 88527 10800 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 s o u r c e : authors’ depiction of various capital infusion. chart 1 presents the line chart of total capital infusion from 2008–2009 to 2018–2019. a gradual movement of the variable can be viewed since 2008– –2009 from the graph, but a sharp rise from rs. 26496 to rs. 88527 can be observed in 2017 and a sudden fall from rs. 88527 to rs.10800 in 2018. the sud a. karthigeyan, v. mariappan, r. mani6262 den drop in the capital infusion due the introduction of eligibility criteria set by the issuing authorities. however, it is expected that more recapitalization funds will be thrown to the public sector banks government of india strongly believing and initiating more rescue packages to strengthen public sector banks in the coming years. hence a relative growth rate from 2 percent in 2017 to -0.9 percent is found in 2018. the overall linear growth rate2 for the 10 years is calculated to be 15 percent (growth rate in y for an absolute change in x). the output of competitiveness and stability indicators on capital infusion is presented in panel a of table 3, the overall output as well as the individual bank output is also provided. from table 3, it is clear that the panel ols for all the 21 banks (overall) together is good. the ci has a significant and negative impact on capital adequacy ratio and term loan and for the rest of the variables has positive and significant effect. the reason for the negative impact of capital adequacy ratio is because basel ii has fixed 8 percent as minimum capital adequacy ratio (car) globally, but the rbi has fixed it as 9 percent for the indian scheduled commercial banks. so obviously during the study period, almost all the psbs are having above 12 percent as capital adequacy ratio well above the rbi limit. hence, there is no need for the psbs to use capital infusion to further strengthen their capital adequacy position. and also, the term loans having negative impact on capital infusion may be because of huge increase in nonperforming assets (npa). thus, the banks may effectively use capital infusions to reduce the strains already in the bank balance sheet or may be less demand for the loans the reason can be that the study period 2008–2009 to 2018–2019 covers the recession period. 2008–2009 shaken the western world and it slowly travelled late 2013–2014 to the asian markets. still its replication is there in the developing nations. hence, there is a lesser chance of further creation of assets, especially term loans. for the individual banks, the models b, c and f are best (where most of the banks significantly contribute to this). the overall significance of the model which is given by the fvalue is significant at 1% level. r2 which indicates how well the sample regression line fits the data ranges from 20 percent to 85 percent for model a to g. except model a and e, the other models are satisfactory. (model b, c and f are best for the value of r2 is around 85 %). 2 lnci = β1 + β2 trend; here β2 measures the constant proportional or relative change in ci for a given absolute change in the value of time (trend). recapitalization and its impact on bank’s stability… 6363 table 4. the output of competitiveness and stability indicators on capital infusion (independent variable: capital infusion (ci), dependent variable: bank specific variables) panel a model a model b model c model d model e model f model g bank /function liquidity =f(ci) total asset=f(ci) advances =f(ci) costfund =f(ci) capa_ratio =f(ci) termloan =f(ci) npa=f(ci) overall 0.0003 (0.009)* 203.3 (0.009)* 106.29 (0.02)* -8.4e-05 (0.004)* -0.00021 (0.00)* 0.0003 (0.10) 30.893 (0.00)* andhra bank -0.12524 (0.898) 3630646 (0.000)* 2101430 (0.00)* 0.404417 (0.137) 0.620438 (0.254) -7.97544 (0.00)* -19780.8 (0.432) bank of baroda 1.549079 (0.115) 2927762 (0.00)* 1798786 (0.00)* -1.28851 (0.00)* 1.834349 (0.001)* -8.97424 (0.00)* -9550.21 (0.706) bank of india 0.460166 (0.642) -656645 (0.374) -405149 (0.367) -0.63051 (0.023)* 0.282331 (0.608) -10.0634 (0.00)* 2057.518 (0.936) bank of maharashtra -0.82578 (0.398) 2674770 (0.000)* 1560539 (0.001)* 0.05172 (0.849) 0.279676 (0.607) 10.6054 (0.00)* -28060.2 (0.266) canara bank -1.72047 (0.079) 990075.5 (0.175) 480557.2 (0.279) 0.429133 ( 0.115) 0.947067 (0.083) 0.75638 (0.727) 20117.4 (0.425) central bank of india 0.920506 (0.351) 60642.26 (0.934) -11621.7 (0.979) 0.458822 (0.096)** -0.08314 (0.88) 10.7703 (0.00) -32013.4 (0.209) corporation bank -0.53694 (0.582) -476112 (0.513) -351810 (0.427) 0.390075 (0.152) 0.745715 (0.171) -2.79096 (0.198) -13619.6 (0.588) dena bank -0.21919 (0.822) 1495097 (0.041)* 795034.5 (0.074)** 0.148348 (0.585) -0.0909 (0.867) -1.89476 (0.381) -30035.1 (0.233) indian bank -1.57587 (0.108) 812658.4 (0.265) 440959.9 (0.32) 0.000932 (0.997) 1.334193 (0.015)* 1.87381 (0.387) -11964.5 (0.635) indian overseas bank -0.33799 (0.731) 239336.4 (0.744) 131951.6 (0.76) 0.47021 (0.087)** 0.49105 (0.037)* -2.31178 (0.289) -9480.5 (0.708) oriental bank of commerce -0.47483 (0.626) -708730 (0.33) -480080 (0.279) 0.643932 (0.019)* 0.470284 (0.387) 3.68647 (0.089)* -8201.94 (0.744) punjab national bank -0.85477 (0.384) 548404.7 (0.453) 422367.5 (0.343) -0.55058 (0.045)* 0.892472 (0.103) -7.59709 (0.001)* 43476.84 (0.087)** punjab and sind bank -1.20339 (0.218) 3484554 (0.00)* 2132317 (0.00)* 0.78716 (0.004)* 0.4286 (0.431) 15.6981 (0.00)* -23464.1 (0.352) syndicate bank 0.739714 (0.449) 450874.3 (0.535) 183402.2 (0.679) -0.22157 (0.415) 0.25543 (0.638) 21.5139 (0.00)* -18159.1 (0.471) state bank of india -1.23121 (0.238) -307474 (0.692) -151079 (0.749) -0.38828 (0.181) 1.920762 (0.001)* -0.905 (0.695) 114647.4 (0.00)* a. karthigeyan, v. mariappan, r. mani6464 panel a model a model b model c model d model e model f model g uco bank -0.76426 (0.437) 1376361 (0.061)* 921093.8 (0.04)* 0.04923 (0.857) 0.71748 (0.191) 7.30930 (0.001)* -35181 (0.166) union bank of india -1.40753 (0.151) -493319 (0.498) -415383 (0.349) 0.02214 (0.935) -0.00659 (0.99) -6.60381 (0.003) -2214.88 (0.93) united bank of india 0.366379 (0.707) -405263 (0.578) -307450 (0.488) 0.105081 (0.699) -0.09023 (0.868) 17.1068 (0.00) -26277.2 (0.297) vijaya bank -0.49951 (0.609) 1.53e+07 (0.000)* 9482910 (0.00)* 0.668739 (0.015)* 0.530739 (0.329) 4.90822 (0.024)* -30427.1 (0.227) idbi bank limited -1.38931 (0.167) -211938 (0.774) -129493 (0.773) 0.849849 (0.002) 0.73323 (0.184) 22.3949 (0.00) -28387.4 (0.267) allahabad bank 6.83 (0.00)* 1369070 (0.00)* 901856.8 (0.00)* 6.34 (0.00)* 11.91 (0.00)* 52.91 (0.00)* 33134 (0.00)** r2 20% 84% 85% 51% 23% 84% 66% f 2.01* 42.02* 44.02* 8.58* 2.43* 40.88* 15.69* p-value within parenthesis * significant at 1% level ** significant at 5% level s o u r c e : authors’ calculation. table 5. the output of bank profitability indicators on capital infusion (independent variable: capital infusion (ci), dependent variable: bank profitability indicators) panel b bank /function roa=f(ci) roe=f(ci) ci=f(roa) ci=f(roe) overall 0.0001 (0.00)* -0.003 (0.00)* -1396.33 (0.00)* -75.99 (0.00)* andhra bank 0.219572 (0.342) 3.928663 (0.351) 374.5917 (0.552) 367.1264 (0.562) bank of baroda 0.30581 (0.188) 5.576048 (0.188) 1102.955 (0.081)** 1105.648 (0.082)** bank of india 0.37233 (0.113) 3.325035 (0.436) 1704.743 (0.007)* 1448.018 (0.023) table 4. the output… recapitalization and its impact on bank’s stability… 6565 panel b bank /function roa=f(ci) roe=f(ci) ci=f(roa) ci=f(roe) bank of maharashtra -0.18201 (0.431) -1.84467 (0.661) -5.09941 (0.994) 111.0832 (0.86) canara bank 0.190725 (0.409) 2.915806 (0.489) 560.9095 (0.373) 518.7708 (0.412) central bank of india -0.20484 (0.381) -2.57131 (0.546) 766.2015 (0.228) 866.1791 (0.174) corporation bank 0.12234 (0.596) 2.499065 (0.553) 210.4773 (0.738) 229.8988 (0.716) dena bank -0.09945 (0.667) 0.201309 (0.962) 2.608278 (0.997) 158.0325 (0.802) indian bank 0.392174 (0.091)*** 2.087073 (0.62) 273.0826 (0.667) -118.368 (0.851) indian overseas bank -0.25392 (0.275) -4.17322 (0.325) 466.1437 (0.463) 510.8717 (0.423) oriental bank of commerce -0.03384 (0.883) -1.51201 (0.719) 94.47896 (0.881) 28.09025 (0.965) punjab national bank 0.39165 (0.093)** 6.221442 (0.142) 1263.123 (0.046)* 1195.353 (0.06)** punjab and sind bank -0.04335 (0.851) -0.34617 (0.934) -260.917 (0.678) -228.465 (0.718) syndicate bank 0.007135 (0.975) 2.378996 (0.572) 142.4311 (0.821) 314.417 (0.619) state bank of india 0.824113 (0.001)* 14.13658 (0.002)* 3749.076 (0.00)* 3695.589 (0.00)* uco bank -0.11114 (0.633) 0.547711 (0.897) 676.4081 (0.285) 880.5933 (0.165) union bank of india 0.253493 (0.273) 4.577183 (0.278) 733.4254 (0.245) 730.6387 (0.249) united bank of india -0.33967 (0.142) -5.92739 (0.16) -264.002 (0.677) -238.244 (0.708) vijaya bank -0.05145 (0.824) -0.0371 (0.993) -73.1459 (0.907) -4.14181 (0.99) idbi bank -0.09741 (0.677) -1.43875 (0.736) 1032.455 (0.104) 1069.506 (0.094) table 5. the output… a. karthigeyan, v. mariappan, r. mani6666 panel b bank /function roa=f(ci) roe=f(ci) ci=f(roa) ci=f(roe) allahabad bank 0.665374 (0.00)* 11.46 (0.00)* 1259.3 (0.00)* 1204.13 (0.00)* r2 40% 35% 45% 45% f 5.16* 4.31* 6.61* 6.48* p-value within parenthesis * significant at 1% level ** significant at 5%level s o u r c e : authors’ calculation. from table 4 (panel a), it is clear that the panel ols analysis for all the 21 banks (overall) together is good, whereas all the variables are significant at 1% level. model f is said to be better than other models, where most of the banks are having significant value. the panel ols analysis of profitability indicators (such as roa and roe) as a function of capital infusion (ci) and ci as a function of profitability indicators is provided in panel b of table 5 (overall 21 banks and individual banks). the ci as a function of roa and roe is much better than the other models. the overall significance of the model which is given by the fvalue is significant at 1% level. r2 (provides an overall measure of the extent to which the variation in one variable determines the variation in the other) of this model, i.e., the goodness of fit of the regression model is 45 percent. the overall performance of the banks (21 banks together) is good and when it comes to the individual banks allahabad bank performs best along with state bank of india and bank of baroda. the reason can be that these three banks comparatively utilized the fresh capital to increase the asset size of the bank during the study period from 2008–2009 to 2018–19. in the case of other banks, it seems that a large part of the recapitalization fund has been used for managing their npa rather than increasing the business by creating newer assets. as a result, the recapitalization fund has not helped these banks to improve their asset size, volume of business, improvement in margins and ultimately the profitability of these banks. overall, the study result shows most of the banks benefitted from capital infusion by scoring better in some indicators or others. overall, the impact of recapitalization on indian psbs was found good. in case of individual table 5. the output… recapitalization and its impact on bank’s stability… 6767 banks, the highest impact was found in allahabad bank, followed by state bank of india and bank of baroda and the impact of other banks was marginal compared to the above-mentioned public-sector banks. table 6. effect on size of capital infusion on banks stability, competitiveness and profitability sl.no bank name capital infusion category stability competitiveness profitability 1. state bank of india high yes yes yes 2. canara bank medium no no no 3. bank of maharashtra medium no no no 4. corporation bank medium no no no 5. bank of baroda medium yes yes yes 6. bank of india medium no yes yes 7. central bank of india medium no yes no 8. uco bank medium no yes no 9. punjab national bank medium no yes yes 10. indian overseas bank medium yes yes no 11. idbi bank medium no yes no 12. dena bank low no yes no 13. indian bank low yes yes 14. oriental bank of commerce low no yes no 15. punjab and sind bank low no yes no 16. syndicate bank low no yes no 17. andhra bank low no yes no 18. union bank of india low no yes no 19. united bank of india low no yes no 20. vijaya bank low no yes no 21. allahabad bank low yes yes yes * capital infusion category below 1000cr – low. *above 1000 below 2000cr – medium. *above 2000cr – high. s o u r c e : authors’ calculation. a. karthigeyan, v. mariappan, r. mani6868 from table 6, the relationship between the size capital infusion and individual bank performance in terms of stability, competitiveness and profitability is checked, allahabad bank from the low infusion category performed well with all the indicators as it has positive relationship with the capital infusion. the bank of baroda in the medium range infusion category and the state bank of india the high capital infusion group performs better in most of the indicators. out of 21 banks only three banks show positive impact on capital infusion. another important finding of the study reveals that there is no relationship between the size of the infusion and the performance of the bank. from this analysis, it is found that the impact of capital infusion largely depends on fundamentals of the bank and not wholly on the level of capital infusion.  conclusion conclusion the basel iii norms in its turn place the banks tougher capital requirement by introducing capital buffering and the banking regulators and central governments thought that the higher the capital, the more the banks become sounder and f lexible. the purpose of recapitalization of banks does not primarily mean the relief of particular financial crisis, it has also the long-term objective to wash out the strains in the bank’s balance sheet. recapitalization of banks literature has limited studies, most of which concentrate on measuring the effectiveness of particular capital infusion programmes like troubled asset relief program (tarp), capital purchase program (cpp), seasoned equity offerings (seos) in bank lending and most particularly during the crisis period. this paper addresses the overall effect of recapitalization of indian public sector banks (psb) and it measures the capital infused banks financial health and its effect on various parameters like profitability, competitiveness and stability. according to the study, the overall effect of recapitalization of indian public sector banks was such that out of 21 banks, 18 banks reacted positively in case of individual indicators but failed in regard to all indicators. when measuring the individual performance of banks, the recapitalization has high impact on allahabad bank, state bank of india and bank of baroda. moreover, the result is not similar to all banks because the deployment of the fresh capital purely depends on the managerial skills and practices of the bank. finally, the study reveals an interesting outcome that there is no relationship between the size of the infusion and the performance of the bank. this demonstrates that the im recapitalization and its impact on bank’s stability… 6969 pact of capital infusion largely depends on fundamentals of the bank and not wholly on the level of capital infusion. hence, the study concludes that the capital infusion helps the banks significantly to improve the stability, competitiveness and profitability only when the banks’ fundamentals are strong, combined with the deployment of fresh funds and their managerial capability.  references  references bayazitova, d., & shivdasani, a. (2012). assessing tarp. the review of financial studies, 25(2), 377–407. http://dx.doi.org/10.1093/rfs/hhr121. beccalli, e., frantz, p., & lenoci, f. (2018). hidden effects of bank recapitalizations. journal of banking and finance, 94, 297–314. http://dx.doi.org/10.1016/j.jbankfin.2018.07.001. black, l.k., & hazelwood, l.n. (2013). the effect of tarp on bank risk-taking. journal of financial stability, 9(4), 790–803. http://dx.doi.org/10.1016/j.jfs.2012.04.001. brei, m., gambacorta, l., & von peter, g. (2013). rescue packages and bank lending. journal of banking & finance, 37(2), 490–505. http://dx.doi.org/10.1016/j.jbankfin.2012.09.010. chiarella, c., cubillas, e., & suarez, n. (2019). bank recapitalization in europe: informational content in the issuing method. journal of international financial markets, institutions & money, 63, 101134. http://dx.doi.org/10.1016/j.intfin.2019.101134. fitrianto a., & kahal musakkal, n.f. (2016). panel data analysis for sabah construction industries: choosing the best model. procedia economics and finance, 35, 241–248. https://doi.org/10.1016/s2212-5671(16)00030-7. liu, w., kolari, j.w., tippens, t.k., & fraser, d.r. (2013). did capital infusions enhance bank recovery from the great recession? journal of banking & finance, 37(12), 5048– –5061. http://dx.doi.org/10.1016/j.jbankfin.2013.09.008. montgomery, h., & shimizutani, s. (2009). the effectiveness of bank recapitalization policies in japan. japan and the world economy, 21(1), 1–25. http://dx.doi. org/10.1016/j.japwor.2007.07.004. panetta, f., faeh, t., grande, g., ho, c., king, m., levy, a., signoretti, f.m., taboga, m., & zaghini, a. (2009). an assessment of financial sector rescue programmes. bis papers, 48, 1–73. tahir, s., adegbite, e., & guney, y. (2017). an international examination of the economic effectiveness of banking recapitalization. international business review, 26(3), 417– –434. http://dx.doi.org/10.1016/j.ibusrev.2016.10.002. date of submission: may 11, 2022; date of acceptance: june 6, 2022. * contact information: zhubikenov.adil@gmail.com, academia copernicana interdisciplinary doctoral school, nicolaus copernicus university, lwowska 1, 87-100 toruń, poland; orcid id: https://orcid.org/0000-0003-1504-0622. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 3 zhubikenov, a. (2022). kazakhstan and its investment development path. copernican journal of finance & accounting, 11(3), 85–97. http://dx.doi.org/10.12775/cjfa.2022.015 adil zhubikenov nicolaus copernicus university kazakhstan and its investment development path keywords: foreign direct investment, investment development path, kazakhstan, net outward income. j e l classification: f21, o52, f23, p45. abstract: historically, it turned out that the state cannot successfully develop without integration into the global economy. although such integration is often associated with risks and high costs, these short-term factors overlap with long-term benefits. foreign direct investment (fdi) is a criterion for this integration, and over the past 30 years, policies in developing countries have been increasingly focused on attracting them. this article attempts to explore the theory of investment development path (idp according to dunnings’s theory) of kazakhstan which economy was considered as transitional, and its key component, the net external investment position, the starting point for data analysis is the beginning of kazakhstan’s transition to the market system in 1991. the objective of the article is to identify at which stage kazakhstan is situated. many studies have been conducted among western scientists and so far, not a single one among kazakh scientists. the research was conducted empirically with data mainly from periodic reports published by the united nations confederation for trade and development (unctad) entitled world investment report and studies by the national bank of kazakhstan. during the research, the author found out that kazakhstan is in the second stage of its investment development path. the outcome of the research can adil zhubikenov8686 be used in the work of state ministries of departments and in the teaching of economic disciplines on investment activities.  introduction introduction this topic is important for kazakhstan since no one has yet explored the investment development path of kazakhstan (idp). in contrast, in the western scientific community, the issue of the idp is very widely developed (durán & úbeda, 2001, 2005; dunning, 1977, 1979, 1980, 1981, 1988; lall, 1996; narula & guimón, 2010, barry, goerg & mcdowell, 2003; bellak, 2001; boudier-bensebaa, 2004; buckley & castro, 1998; clegg, 1996; ferencikova & ferencikova, 2012; fonseca, mendonça & passos, 2016; gorynia, nowak, tarka & wolniak, 2012; gorynia, nowak, trąpczyński & wolniak, 2013, 2016; gorynia, nowak & wolniak, 2005, 2006, 2010; götz & trąpczyński, 2016; graham, 1996; kayam & hisarciklilar, 2009; marton & mccarthy, 2006; verma & brennan, 2011). to fill this gap, this article aims to identify at which stage kazakhstan is situated in the context of idp. the investment development path was created to see the relationship in dynamics between foreign direct investment and the level of development of a country. a transitional economy has several specific characteristics that distinguish it from an economy in a relatively stable state and is developing on its basis by improving its inherent institutions, ties and relations. in transition economies1, attracting foreign direct investment is extremely important to effectively complete market restructuring, ensure consistently high rates of economic rates, and effectively integrate into the global economy. over the last 30 years, the acquired foreign capital in the form of fdi has been an important factor supporting economic growth and structural changes in kazakhstan. as a result, foreign direct investment contributed to the improvement of the productivity of domestic resources, supported the diffusion of technology and increased the innovativeness of the economy. on the basis of 1 according to the world investment report 2006, transition economies include the countries of southeast europe (see) and the commonwealth of independent states (cis). at the same time, unctad experts believe that on may 1, 2004, after joining the european union (eu), eight central and eastern european (cee) countries completed their transition process. thus, twelve cis countries and eight see countries are now considered to be in transition: albania, bosnia and herzegovina, bulgaria, croatia, macedonia, montenegro, romania, and serbia (unctad, 2021). kazakhstan and its investment development path 8787 this, a research question is formulated: at which stage of development is kazakhstan in the context of investment development path (idp)? the paper is organised as follows. the following section provides a brief general overview of the literature related to the fdi and investment development path. next, the methodology used in the research is presented. then, the research findings are discussed. finally, the general conclusions are stated. theoretical review of the literaturetheoretical review of the literature the idp is a systematic relationship between fdi position and economic development that was initially partitioned into four stages and subsequently into five stages of development. this term was introduced by dunning and narula (1996). according to the theory, a country’s imports and exports of fdi directly depend on its level of economic development relative to the rest of the world. countries can be recipients of investment or external investors, depending on their classification, which determines which phase of their investment development they are in. according to this theory, companies place their fdi in markets where gdp per capita is lower than in the investor’s country and until investor countries reach the fifth stage of their investment development. dunning’s eclectic paradigm brings together many factors for multinational companies to enter the world capital markets. this is why his paradigm is called the eclectic paradigm (dunning, 1977; 1979; 1980; 1981; 1988). it did not simply mechanically combine what economic thought had accumulated but selected those success factors that had been tested by economic practice. the eclectic paradigm in the west was widely known and became immensely popular. the eclectic paradigm attempts to explain three circumstances (dunning, 2001): ■ when it is more profitable to export capital than goods; ■ when it is more profitable to use the resources of other countries than to use national resources; ■ when abroad a company can make monopolistic profits that are not available at home. dunning classified the advantages a company must demonstrate in the global capital market to solve the latter problem. adil zhubikenov8888 o-advantages associated with the internal potentials of the company of investors. “ownership” refers to the benefits that an investor can obtain by investing in a foreign firm rather than building a domestic one (dunning, 2001). l-advantages provided by the recipient country (preferential taxation, government participation in financing investment projects, etc.). “location” refers to the benefits that an investor can obtain by investing abroad (dunning, 2001). i-advantages caused by the use of own networks in the process of internationalization, promoting their goods and products in foreign markets. “internationalization” refers to the advantages that a multinational company receives over a company operating in one market. as indicated above, the investment development path was described by dunning together with the dutch scientist narula in 1996 (dunning & narula, 1996). this path goes through 5 stages and is characterised by the dependence of fdi on the level of development of the country (figure 1, table 1): 1. countries with labour-intensive, low-tech industries and with the prevalence of extractive industries are always fdi importers. 2. as soon as they begin to develop capital-intensive production and move towards ntt, fdi imports to these countries intensify. 3. then the country starts to export fdi itself. this can happen if foreign capital imports are supported by stimulus policies and a focus on. 4. the fourth stage is characteristic of developed countries, with fdi exports exceeding their imports. 5. the fifth stage, where fdi exports and imports balance each other out, is characteristic of very developed countries. they have all the advantages (o, i, l), which ensure their world leadership in capital-intensive and high-tech sectors. in addition, these countries are characterised by high incomes and, therefore, by a capacious market. kazakhstan and its investment development path 8989 figure 1. graphical representation of the idp explanations: ifdi – inflows foreign direct investment, ofdi – outflows foreign direct investment, noi– net outward fdi stock source: narula & dunning, 2010. table 1. evolving motivations of inward and outward fdi across the idp idp stage inward fdi outward fdi 1 little ifdi initially. as l advantages improve, resource-based motives, and market seeking later. very little ofdi. mainly minor strategic investments and capital flight. 2 growing presence of market-seeking fdi, which may attract some labour-intensive manufacturing. little ofdi. some resourceand market-seeking investment in other developing countries; some “escape” investment to developed countries; mostly natural resource investment or light manufacturing employing established technologies. 3 raising inward fdi, market-seeking and increasing efficiency-seeking fdi in manufacturing, even in activities supplying more sophisticated products for domestic markets, or requiring more skilled labour. growing ofdi. all kinds of investment including efficiency-seeking and some asset augmenting investment; mass-produced differentiated consumer goods, e.g., electrical products, clothing; more service investment, e.g., construction, banking. 4 and 5 increasingly market-seeking, efficiency – seeking and asset-augmenting investment. increasingly efficiency-seeking and asset augmenting investment; regional and global; more m&as and alliances; investment in knowledge intensive sectors, e.g., ict, biotechnology, and high value-added services, e.g., consultancy. source: narula & guimón, 2010, p. 9. research methodology the study was conducted using information mainly from periodic reports published by the united nations confederation for trade and development (unctad) entitled world investment report and studies by the national bank of kazakhstan. on their basis, an analysis explanations: ifdi – inflows foreign direct investment, ofdi – outflows foreign direct investment, noi– net outward fdi stock s o u r c e : narula & dunning, 2010. table 1. evolving motivations of inward and outward fdi across the idp idp stage inward fdi outward fdi 1 little ifdi initially. as l advantages improve, resource-based motives, and market seeking later. very little ofdi. mainly minor strategic investments and capital flight. 2 growing presence of market-seeking fdi, which may attract some labour-intensive manufacturing. little ofdi. some resourceand market-seeking investment in other developing countries; some “escape” investment to developed countries; mostly natural resource investment or light manufacturing employing established technologies. 3 raising inward fdi, market-seeking and increasing efficiency-seeking fdi in manufacturing, even in activities supplying more sophisticated products for domestic markets, or requiring more skilled labour. growing ofdi. all kinds of investment including efficiency-seeking and some asset augmenting investment; mass-produced differentiated consumer goods, e.g., electrical products, clothing; more service investment, e.g., construction, banking. 4 and 5 increasingly market-seeking, efficiency –seeking and asset-augmenting investment. increasingly efficiency-seeking and asset augmenting investment; regional and global; more m&as and alliances; investment in knowledge intensive sectors, e.g., ict, biotechnology, and high value-added services, e.g., consultancy. s o u r c e : narula & guimón, 2010, p. 9. adil zhubikenov9090 research methodologyresearch methodology the study was conducted using information mainly from periodic reports published by the united nations confederation for trade and development (unctad) entitled world investment report and studies by the national bank of kazakhstan. on their basis, an analysis was made of changes in assets and liabilities due to foreign direct investment and directional presentation of fdi positions. the study covers the years 1990–2020. the selection of economic parameters and the associated parameter formulas used by the authors was based on the results of the query of reports and statistical studies and scientific literature. results & discussionresults & discussion fdi in the world fdi in the world ((developed, developing and transition economies) developed, developing and transition economies) and in kazakhstanand in kazakhstan since 1991, after the termination of the socialist system and the emergence of newly-independent states with the status of transit economies, the growth of accumulated fdi differed significantly among the main groups of countries. the maximum growth in the volume of accumulated fdi was in transit economies (which include kazakhstan), which is naturally due to the low base effect due to the extremely limited presence of foreign companies in the socialist states before the 1990s. this obvious effect has led to a 384-fold increase in the volume of accumulated fdi in transit economies from 1991 to 2020. the outpacing dynamics has continued in the 21st century: from 2001 to 2020 this indicator grew by almost 11, while the world average is 4.2 times. this context should also be taken into account when assessing the success of fdi in kazakhstan. with its transit economy, kazakhstan has demonstrated an 11.3-fold increase in the volume of fdi during 2001–2020 at the same level as this group of countries. considering the annual volume of fdi inf lows for transit economies, it peaked in 2008 at $118 billion, followed by a decade-long decline. this is the case with kazakhstan, where the fdi trajectory has been the same as in the past. in this case, the trajectory of fdi inf lows to kazakhstan also follows the pattern typical for this group of countries. kazakhstan and its investment development path 9191 in the twenty-first century, the distribution of accumulated foreign investment between developed and developing economies changed rapidly, while in the late 1990s, almost 80% of global fdi was concentrated in developed countries; by the second decade of the 21st century, this figure had already fallen to 64% (jaworek & karaszewski, 2021; karaszewski & jaworek, 2022). another trend is much more important in changing the global economic system, which has also taken shape in the first decades of the twenty-first century. this is the trend of outstripping the growth of investment flows from developing countries, which will make the largest developing economies the main source of fdi for the world. developing economies have been experiencing growth in outward fdi since the end of the twentieth century, but it has accelerated sharply in the current century. between 2001 and 2020, annual outward fdi from developing countries grew sevenfold, compared with only 1.6 times for developed economies. fdi outf lows from developing countries still lag behind those from developed countries, but the gap between the two is steadily narrowing (jaworek & karaszewski, 2021). while in 1991 the annual volume of outward fdi from developed economies exceeded that of developing economies by 17 times, the gap narrowed to 10.4 times in 2001, reaching a low of 1.4 times in 2014 (that is, developing countries are almost equal to developed countries as suppliers of fdi abroad). by the end of 2017, it was 2.4 times. the upward trend in fdi outf lows from developing countries is closely related to the upward trend in investment inf lows to them. both of these trends demonstrate the growing inf luence of the “developing” world on global investment processes, which over the next decade will lead to the final establishment of developing economies as a significant force in the of the world market of direct investments. at the same time, kazakhstani investments abroad have a clearly expressed specificity, which manifests both in the sectoral structure of investors and the structure of the types of investments being made. let’s consider the sectors of the kazakh economy that are most actively investing abroad. we can note a very high level of their concentration in only two types of activities public administration and finance, which account for 73% of the total volume. kazakhstan’s position on the investment development pathkazakhstan’s position on the investment development path for more specific information, figure 2 shows the relationship between noi and gdp per capita in kazakhstan where it is clearly seen that the first stage adil zhubikenov9292 lasts from 1990 to 2002. starting from 2003, kazakhstan enters the second stage, which lasts until today. figure 2. relationship between net outward fdi (noi) and gdp per capita in kazakhstan in 1990–2020 years figure 2. relationship between net outward fdi (noi) and gdp per capita in kazakhstan in 1990–2020 years source: based on data from the unctad. in order to analyse the idp of kazakhstan in relation to net outward fdi stock, it is better to focus on tendencies and trends in fdi flows. figure 3 demonstrates fdi flows changed over time in years 1992–2020. it can be seen a clear trend to increase fdi outflows net during the first stage in 1992–2001 years. next three years brought about significant fluctuations. 2008, 2012 and 2016 saw explicit surpluses in investment inflows over investment outflows. figure 3. fdi flows and fdi net outflows in kazakhstan in 1990–2020 years source: based on data from the unctad. in comparison with neighbouring countries such as russia and china, kazakhstan lags behind in its investment development path. since 2015, china has entered stage 4 of idp because its 0 2000 4000 6000 8000 10000 12000 14000 16000 -14000 -12000 -10000 -8000 -6000 -4000 -2000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 g d p pe r c ap ita n o i m ln u sd net outward fdi stocks (noi) gdp per capita -20000 -15000 -10000 -5000 0 5000 10000 15000 20000 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 fdi outflows .. .. fdi inflows .. .. net outward fdi stocks (noi) .. .. s o u r c e : based on data from the unctad. in order to analyse the idp of kazakhstan in relation to net outward fdi stock, it is better to focus on tendencies and trends in fdi f lows. figure 3 demonstrates fdi f lows changed over time in years 1992–2020. it can be seen a clear trend to increase fdi outf lows net during the first stage in 1992–2001 years. next three years brought about significant f luctuations. 2008, 2012 and 2016 saw explicit surpluses in investment inf lows over investment outf lows. figure 3. fdi f lows and fdi net outf lows in kazakhstan in 1990–2020 years figure 2. relationship between net outward fdi (noi) and gdp per capita in kazakhstan in 1990–2020 years source: based on data from the unctad. in order to analyse the idp of kazakhstan in relation to net outward fdi stock, it is better to focus on tendencies and trends in fdi flows. figure 3 demonstrates fdi flows changed over time in years 1992–2020. it can be seen a clear trend to increase fdi outflows net during the first stage in 1992–2001 years. next three years brought about significant fluctuations. 2008, 2012 and 2016 saw explicit surpluses in investment inflows over investment outflows. figure 3. fdi flows and fdi net outflows in kazakhstan in 1990–2020 years source: based on data from the unctad. in comparison with neighbouring countries such as russia and china, kazakhstan lags behind in its investment development path. since 2015, china has entered stage 4 of idp because its 0 2000 4000 6000 8000 10000 12000 14000 16000 -14000 -12000 -10000 -8000 -6000 -4000 -2000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 g d p pe r c ap ita n o i m ln u sd net outward fdi stocks (noi) gdp per capita -20000 -15000 -10000 -5000 0 5000 10000 15000 20000 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 fdi outflows .. .. fdi inflows .. .. net outward fdi stocks (noi) .. .. s o u r c e : based on data from the unctad. kazakhstan and its investment development path 9393 in comparison with neighbouring countries such as russia and china, kazakhstan lags behind in its investment development path. since 2015, china has entered stage 4 of idp because its outward fdi has surpassed incoming fdi into the country (liu, 2019; ke dai, 2021). the situation with russia is controversial. russia is theoretically at stage 4 of development, however, the country’s income is below average while being a net exporter of capital (kalotay, 2008).  conclusion conclusion kazakhstan is one of the countries that are recipients of net foreign capital. the noi position is definitely negative, and the difference between the value of independence and the balance of liabilities due to foreign direct investment is constantly increasing. this is because the scale of fdi inf low is several dozen times higher than the value of investments undertaken abroad by kazakh enterprises. the scientific question is: at which stage of development is kazakhstan in the context of investment development path (idp)? it was found from the empirical research that kazakhstan is at the second stage of its investment development path (idp), because of growing presence of market-seeking fdi, which are attracting some labour-intensive manufacturing. also, kazakhstan is the recipient of investments mostly based on the extraction of natural resources. there are little outward fdi; these show that kazakh enterprises and entities are still at low level of competitiveness in foreign markets. in order to solve this problem local entities should actively enter the markets of neighbouring countries. based on these, there is a tendency for investors to increase their investments in the economy of kazakhstan and that will be a significant driver of economic growth. this may lead to an upgrade to a higher level of kazakhstan’s investment development path. as the experience of the eu shows, there are regularities in the spread of fdi across the territory of individual countries and their parts. regional strategies of foreign business are also beginning to be traced within kazakhstan. in the case of emerging kazakhstani tncs, it is probably too early to talk about such studies. most kazakhstani firms have significant assets in only two to five foreign countries (when analysing western companies, it does not mention allowing them to be listed as full-f ledged tncs). the presence of kazakh enterprises in the world markets, including expansion in the form of direct investment, is a fact. observing the statistics of the adil zhubikenov9494 kazakh national bank, it cannot be ignored that the involvement of domestic enterprises in fdi has increased significantly over the last ten years. although on the scale of international capital f lows kazakh foreign direct investments constitute only a fraction of them, they should be considered an important phenomenon in the scale of the kazakh economy. empirical analysis shows the impact of the pandemic on fdi. despite the pandemic it can be clearly seen that kazakhstan is at the second stage of the investment development path. kazakhstan demonstrated one of the largest increases in net foreign direct investment among 17 countries with transition economies and 34 landlocked countries. at the same time, thanks to structural reforms and the government’s investment attraction policy, according to unctad, kazakhstan has seen the largest increase in net fdi inf lows among transition and landlocked countries. this growth was ensured by investments in such industries as manufacturing, transport, telecommunications, financial activities, energy, mining, etc. the inf low of fdi usually brings not only the effect of filling the equity deficit gap but also contributes to the economy’s modernization, thus increasing the productivity of the production factors involved. in order to increase the inf low of fdi to kazakhstan, it is necessary to introduce: 1) amendments to the regulatory legal acts on state property in terms of increasing the efficiency of the privatization process; 2) development of proposals to ensure the stability of investment legislation for strategic projects; 3) formation of country investment programs; 4) 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(2015). transnational corporations in the world economy: formation, development and present position. copernican journal of finance & accounting, 4(1), 55–70. http:// dx.doi.org/10.12775/cjfa.2015.004 * nicolaus copernicus university marcin kuzel** nicolaus copernicus university transnational corporations in the world economy: formation, development and present position keywords: transnational corporations (tncs), multinational firms, international business, foreign direct investment (fdi), global economy. j e l classification: f21, f23. abstract: the following article attempts to answer the question about the role transnational corporations (tncs) play in the modern world. the issues discussed in this article have been presented in two main parts. the first part focuses on the world’s largest tncs according to the following criteria: the value of the revenues, market capitalization and foreign assets. the discussion in the second part focuses on defining the role that transnational corporations play in the world economy. a number of different characteristics ref lecting the economic potential of tncs have been used in this article such as: asset value, employment rate, sales volume and research and development po date of submission: december 10, 2014; date of acceptance: february 13, 2015. * contact information: malgorzata.jaworek@umk.pl, department of investment and real estate, faculty of economic sciences and management, nicolaus copernicus ** contact information: marcin.kuzel@umk.pl, department of investment and real the authors are grateful to the anonymous referees for their helpful comments and constructive suggestions in strengthening this article. 56 tential, which are linked to selected parameters describing the volume of international production. the analysis of tnc development and their present position has been presented from a historical perspective, which made it possible to identify the conditions of as well as the major changes in the process of enterprise internationalisation. the following article highlights the dynamic development of corporations in developing countries and the ever more common phenomenon of state-owned enterprises or enterprises with a state’s capital playing a role on the international stage. embarking on international business ventures is not a new phenomenon. some researchers suggest that examples of early transnational corporations (tncs) can already be found in the history of colonial expansion of the ancient phoenicians and romans (dunning 1993, 96; moore, lewis 2000, 17–42), and other ancient civilizations before them (moore, lewis 2009). others look for predecessors of modern transnational corporations in the middle ages (dunning, lundan 2008, 146–148) and the renaissance period, linking the colonial conquests to the development of famous british and dutch trading companies (carlos, nicholas 1988, 398–419; robins 2012a; robins 2012b, 12–26). it was not, however, until the industrial revolution of the late 18th and early 19th century that new opportunities in terms of the organization of production processes emerged and changes in the existing patterns of production took place, which led to the emergence of economic organizations resembling modern enterprises. it was mainly because of the above changes that the emergence of modern corporations, sharing a number of characteristics with the tncs operating today, is usually believed to have originated in the second half, or more specifically, in the last three decades of the 19th century (dunning 1993, 99; castro 2000, 7; wilkins 2001, 4; dunning, lundan 2008, 154–175). the dynamic growth of international production, however, falls predomied states, a corporate economy model emerged, based on large enterprises no longer managed by their owners but by hired qualified professionals (langlois 2007, 1). at that time, basic legal and ownership forms (public limited companies) were established and improved on as well as organisational solutions proposed (divisional structures), which prepared corporations from highly developed countries for the global conquest (zorska 2007, 84). the conquest became possible only after the war and intensified in the 1960s and 1970s, after which transnational corporations in the world economy… 57 the corporations acquired a nickname cosmocorps. it was then recognized that the largest corporations can control or even dominate many business areas as well as perform roles previously reserved for state structures (calliess 2011, 601–615; irogbe 2013, 223). at this time, mainly thanks to s. hymer and ch.p. kindleberger, there was also a wider interest in explaining the nature of multinational corporation activity using theoretical concepts (such as the theory of ownership-specific advantages). it was r. vernon who made the first ever attempt at estimating the number of corporations, identifying 396 parent companies and their 28,318 foreign affiliates (cox 1997, 9–46). international business activity and the f low of foreign direct investment (fdi), al corporations. it is this organization that introduced the term “transnational corporation” into the international nomenclature, which along with the traditional term “multinational corporation” has become a widely used term for enterprises engaging in foreign direct investment and holding or controlling production or services companies operating in more than one country (dunning 1993, 3, 11; zorska 2007, 10). rapid technological progress, liberalization of trade, capital f lows and the global development of capital markets as well as the processes associated with privatisation, deregulation and de-monopolisation (thomsen 2000, 3) brought a spectacular increase in business activity as well as the number of transnational corporations in the 1980s and 1990s. in 1982, the total global value of type of investment reached $1,786 billion, while the number of corporations was estimated at about 30,000 and the number of tnc foreign affiliates at 150,000 (dunning ed. 1993, vii). the years that followed saw further dynamic growth of tnc international expansion (table 1). table 1. outward fdi stocks and the numbers of tncs, 1995–2010 ($ millions) item 1995 2000 2005 2010 outward fdi stocks 3,769,042 8,008,434 12,563,770 21,288,584 number of parent corporations 38,541 63,459 69,727 103,786 number of foreign affiliates 251,450 689,520 690,391 892,114 58 org (accessed: 10.11.2014). n o t e s : estimated data; the numbers of parent corporations and foreign affiliates given in 1995, 2000, and 2005 based on particular economies evidence from the latest available year. the changes that are shaping today’s world economy (technological advances, liberalization of trade and capital f lows, etc.), which are enabling tncs to grow, have made it possible for entirely new corporations to emerge, for which large scale operations and substantial capital resources were no longer a prerequisite for the internationalization of their business activity. more and more small and medium-sized enterprises were transforming into transnational corporations of which international new ventures have become the most telling phenomenon (aggarwal, berrill, hutson, kearney 2011, 557–577). it was not simply the scale and the scope of their business activity that became crucial for determining the specific nature of transnational corporations but, more importantly, their organizational skills providing them with a better configuration of distributed resources and coordination of their processes on a global scale. today tncs are defined as organisations consisting of a parent company and borders (not necessarily very many) and is organized, integrated and coordinated by the headquarters operating in the home country (zorska 2007, 10). in 2010, the value of global fdi exceeded $21,288.5 billion, the number of transnational corporations was estimated at over 100,000 and the number of tnc foreign affiliates at over 890,000 (table 1). it seems that multinational corporations have become an important, if not central, element of the global economy and their importance seems to continue to grow. this article presents a description of these organisations and attempts to answer the burning question about the role that transnational corporations play in the modern world. determining the importance of transnational corporations for the world economy is neither easy nor obvious. the majority of authors dealing with the subject of tncs take their significant role in forming international economic relations for granted, without attempting to specify it any further (e.g. birkinshaw, ghoshal, markides, stopford, yip 2003; ietto-gillies 2005). at the same time, transnational corporations in the world economy… 59 there is still a shortage of studies based on factual documentation, statistical data or research findings which could illustrate the real role that tncs play in the world economy. some of the few publications in that field include work by such authors as j. kleinert (2004), a. zorska (2007), j.h. dunning and s.m. lundan (2008), m. gasz (2012) or w. karaszewski (2004; 2013). this article aims to at least partially bridge this gap. the aim of this paper is to present the world’s largest transnational corporations and to indicate the role that tncs play in the global economy. that is why the paper has been divided into two main parts. the first part will demonstrate a leading group of tnc-type organisations, which have been classified in terms of their: revenues, which made it possible to define the largest “trading powers”; market capitalization value, which made it possible to define the “capital powers”; tnc foreign assets, which made it possible to define a group of companies with most capital invested outside their home country. to determine a leading tnc group, periodical rankings have been used pubof largest companies presented in the journal. the second part of this article is an attempt to define the role that tncs play could be used to define that role. therefore, in order to assess the role transnational corporations play in the world economy, data showing the economic potential of tncs has been used, in particular the description of their foreign affiliates business activity, including the value of their assets, revenue, exports, the number of employees and value added. the article also presents the tnc affiliate value of revenue and their value of exports against world exports as well as compares the affiliate added value to global gdp. it also points out the research and development potential of selected tncs, as measured by the volume of research and development (r&d) expenditure. the choice of economic parameters presented below and the related parameter formulas proposed by the authors are based on preliminary research of academic publications included in the canon of the literature on the subject as well as available rankings of transnational corporations and the authors’ own conclusions. the methods of comparative analysis, the diachronic analysis and the method of induction have been used in this study. 60 since 1994 the magazine has presented an annual classification of enterprises according to their value of revenue ranking 500 corporations – the biggest global trading powers. in 2013, these 500 largest companies had a total revenue of $31.1 trillion. their profit had increased by 27%, reaching nearly of $476,294 million and the profit of $16,022 million. the top ten also included and three from china (table 2). table 2. the world’s top 10 tncs, ranked by revenues, 2013 ($ millions) corporation home economy revenues profits wal-mart stores united states 476,294 16,022 royal dutch shell united kingdom / netherlands 459,599 16,371 sinopec group china 457,201 8,932 china national petroleum china 432,008 18,505 exxon mobil united states 407,666 32,580 bp united kingdom 396,217 23,451 state grid china 333,387 7,982 volkswagen germany 261,539 12,072 toyota motor japan 256,454 18,198 glencore switzerland 232,694 -7,402 s o u r c e : fortune global 500 (2014), http://fortune.com/global500 (accessed: 27.10.2014). this tnc classification according to their market capitalization value is prepared by pwc. it includes 100 of the most valuable companies in the world. market capitalization of all the companies included in the 2014 ranking amounted to $15,020 billion ($8,403 billion in 2009), of which only 29 companies had a market value of less than $100 billion. the list included 47 tncs transnational corporations in the world economy… 61 tion value of $469 billion. among the first 10 tncs with the largest market valswitzerland (table 3). table 3. the world’s top 10 tncs, ranked by market capitalisation, 2014 ($ billions) corporation home economy 31 march 2014 31 march 2009 rank market capitalisation rank market capitalisation apple united states 1 469 33 94 exxon mobil united states 2 416 1 337 google united states 3 409 22 110 microsoft united states 4 318 6 163 berkshire hathaway united states 5 286 12 134 roche holding switzerland 6 266 18 119 johnson & johnson united states 7 261 8 145 general electric united states 8 256 24 107 wells fargo & co. united states 9 244 55 60 nestle switzerland 10 244 15 129 s o u r c e : pwc (2014), global top 100 companies by market capitalisation, http://www.pwc.com (accessed: 27.10.2014). classification of transnational corporations with the largest foreign assets includes the most significant and specific attribute of tnc business activity, which, according to the researchers, is the capital invested outside their home country. the list of the world’s 100 largest companies with the largest the total value of foreign assets of the 100 largest non-financial tncs amountwas 64.5%, with nestle from switzerland having the highest rate at 97.1% and ranking 15th on the list. 62 it is important to note the ever more significant role of transnational corporations from developing countries. among the top 100 world’s largest corporations at the end of 2013 there were as many as 10 tncs from developing countries. a state-owned corporation from hong kong – hutchison whampoa 2014a). table 4. the world’s top 10 non-financial tncs, ranked by foreign assets, 2013 ($ millions) corporation home economy assets tnia (percent) foreign total general electric united states 331,160 656,560 48.8 royal dutch shell united kingdom / netherlands 301,898 357,512 72.8 toyota motor japan 274,380 403,088 58.6 exxon mobil united states 231,033 346,808 62.6 total sa france 226,717 238,870 79.5 bp united kingdom 202,899 305,690 69.7 vodafone group united kingdom 182,837 202,763 88.9 volkswagen germany 176,656 446,555 58.6 chevron corp. united states 175,736 253,753 59.3 eni spa italy 141,021 190,125 71.2 n o t e s : atni, the transnationality index, is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment. while presenting the world’s largest tncs, it is worth mentioning the stateowned tncs (so-tncs). even though they form a small fraction of transnational corporations, so-tncs have a significant number of foreign branches and asand their total foreign assets are estimated at over $2 trillion. these enterprisa french corporation gdf suez topped the list of the largest so-tncs with the value of foreign assets at $175 billion (table 5). transnational corporations in the world economy… 63 table 5. the world’s top 10 non-financial state-owned tncs, ranked by foreign assets, 2012 ($ billions) corporation home economy state share (percent) assets tnia foreign total gdf suez france 36 175 272 0.59 volkswagen germany 20 158 409 0.58 eni spa italy 26 133 185 0.63 enel spa italy 31 132 227 0.57 edf sa france 84 103 331 0.31 deutsche telekom ag germany 32 96 143 0.58 citic group china 100 72 515 0.18 statoil asa norway 67 71 141 0.29 general motors united states 16 70 149 0.47 vattenfall ab sweden 100 54 81 0.72 n o t e s : atni, the transnationality index (see the notes in table 4). determining the role tncs play in the world economy requires taking many aspects of their functioning into account. there is no single synthetic indicator that would directly ref lect the role tncs play in the world economy. numerous characteristics outlined below prove the importance of the organisations featuring in this article. tncs have greater economic potential than many national economies around the globe and they take strategic decisions and actions, which are to a certain extent independent of the interests of the countries in which they operate. to fully understand the economic power of these enterprises in today’s global economy they are often compared to national economies. such a comparison was made in 2000 (anderson, cavanagh 2000, 9), and then repeated racies. the list of the world’s 100 largest economic powers drafted at that time included 29 corporations and 71 countries (table 6). 64 table 6. the world’s top tncs vs. economies in 2000 ($ billions) rank corporation / economy value added/ gdpa rank corporation / economy value added/ gdpa 1 united states 9.810 46 pakistan 62 2 japan 4.765 47 general motors 56b 3 germany 1.866 … … … 4 united kingdom 1.427 54 hungary 46 5 france 1.294 55 ford motor 44 6 china 1.080 56 daimlerchrysler 42 7 italy 1.074 57 nigeria 41 8 canada 701 58 general electric 39b … … … 59 toyota motor 38b 28 poland 158 60 kuwait 38 … … … 61 romania 37 42 columbia 81 62 royal dutch shell 36 43 philippines 75 63 morocco 33 44 chile 71 64 ukraine 32 45 exxon mobil 63b 65 siemens 32 n o t e s : agdp for countries and value added for tncs. value added is defined as the sum of salaries, pre-tax profits, depreciation and amortisation; bvalue added is estimated by applying the 30 percent share of value added in the total sales, 2000, of 66 manufacturers for which the data was available. the importance of transnational corporations in the world economy can be proven by the characteristics relating to the value of tnc foreign affiliate assets, employment rate, value added and export volumes, which grew steadily in the period 1982–2013. a 47-fold increase has been observed with respect to the asset value. the role of tncs in the world economy can also be seen by looking at the indicators relating to the foreign affiliates’ share of sales and export in the world exports of products and services. at the end of 2013, foreign affiliates’ export accounted for over 30% of world exports and their sales were 1.5 times higher than the global exports (table 7). j. kleinert (2004, 26– 28) also indicates that the role tncs play in forming international trade f lows transnational corporations in the world economy… 65 is even bigger. he estimates that tncs participate in around 80% of all international trade, while approximately a third takes place within tncs themselves (intra-firm trade), of which over half are indirect goods (materials, parts, components). table 7. selected indicators of international production, 1982–2013 ($ billions) item 1982 1990 2000 2010 2013 total assets of foreign affiliates 2,036 3,893 21,102 78,631 96,625 employment by foreign affiliates (thousands) 19,864 20,625 45,587 63,043 70,726 value added (product) of foreign affiliates 623 881 3,167 5,735 7,492 exports of foreign affiliates 635 1,498 3,572 7,436 7,721 sales of foreign affiliates 2,530 4,723 15,680 22,574 34,508 value added (product) of foreign affiliates to global gdp ratio 0.05 0.04 0.10 0.09 0.10 exports of foreign affiliates to global exports of goods and services ratio 0.27 0.36 0.51 0.39 0.33 sales of foreign affiliates to global exports of goods and services ratio 1.06 1.15 2.23 1.19 1.49 vestment report 2009, transnational corporations, agricultural production and development, nations, new york and geneva, xviii. a crucial aspect of the role tncs play in the world economy is their participation in research and development work around the globe. in 2002, 700 leading corporations allocated approximately $310 billion to r&d activity, which was equivalent to 46% of the total global r&d expenditure and as much as 69% of the funds spent on r&d by the whole business sector (oecd 2002, 103). it should also be noted that in some countries the tncs’ share in the financing of ed states, two from switzerland and one from japan, south korea and germany were among the top 10 tncs in terms of r&d expenditure. volkswagen from 66 germany spent most on r&d. their research and development expenditure of $13.5 billion accounted for 4.6% of the corporation’s total sales (table 8). the highest r&d expenditure in relation to their sales volume was achieved 2014). table 8. the world’s top 10 r&d spenders, 2014 ($ billions) corporation home economy industry r&d spend volkswagen germany automotive 13.5 samsung south korea computing and electronics 13.4 intel united states computing and electronics 10.6 microsoft united states software and internet 10.4 roche switzerland healthcare 10.0 novartis switzerland healthcare 9.9 toyota japan automotive 9.1 johnson & johnson united states healthcare 8.2 google united states software and internet 8.0 merck united states healthcare 7.5 s o u r c e : strategy& (2014), the global innovation 1000 study: the top innovators and spenders, http://www.strategyand.pwc.com (accessed: 10.11.2014). substantial spending on research and development (the most active cor2005, 120), the ability to implement cost-intensive innovation projects and generate innovative organisational solutions form the basis for the global competitiveness of tncs. the result is impressive profits (table 2), which allow even greater accumulation of capital and further intensive international expansion through the implementation of large scale and impressive range investment projects (karaszewski 2013, 227–240). this phenomenon results in a significant concentration of resources at the disposal of a limited number of companies, which leads to continuously growing disparities in the use of the world’s knowledge, skills and technology (karaszewski 2004, 400–402). transnational corporations in the world economy… 67 although researchers cannot fully agree on the origins of the structures that gave rise to the emergence of transnational corporations, it is clear that the dynamic growth of these companies dates back to the second half of the twentieth century, and in particular to its last two decades and the first decade of the 21st century. between 1995 and 2010 the number of tncs increased more than 2.5-fold, and the number of their foreign affiliates – over 3.5-fold (table 1). in 2013, tnc foreign affiliates employed a total of 70,726,000 employees, the value of their assets was estimated at $96,625 billion and the scale of their business activity accounted for 10% of global gdp. tnc affiliates’ sales at that time amounted to $34,508 billion and were nearly 1.5 times higher than total world exports. the value of their export sales stood at $7,721 billion and accounted for 30% of total world exports (table 7). the economic potential of transnational corporations can be proven by the leaders’ performance in the various categories analyzed in this study. in 2013 alone, the world’s 500 largest trading powers among tncs generated a total revenue of $31.1 trillion, and their profits were estimated at $2 trillion (fortune global 500 in 2014). market capitalization of the 100 most valuable tncs amounted to as much as $15,020 billion as of march 2014 (pwc 2014). their considerable investment outside their home countries can be seen by looking at the value of their foreign assets, which in the case of the world’s 100 largest non-financial tncs totalled $8,103,862 million in 2013. an average value for tad 2014a). all tnc characteristics presented in this paper confirm the great economic power of these companies. it is so impressive that they are often compared to national economies. the list of the world’s 100 biggest economic powers also play an important role in research and development work. r&d spending among the most active corporations can be larger than that of mediumsized countries. in 2014, the top ten r&d spenders allocated $100.3 billion to research and development projects (strategy& 2014). the rankings presented here highlight the importance of the world’s largest corporations, which stand out in terms of trade, capital, investment and research. it should be noted, however, that although these enterprises utilize considerable resources, and hence also attract the attention of the world, they 68 ref lect achievements of a relatively small number of organisations which belong to a wide and diverse category of tncs. it is a small fraction of a community of over 100,000 companies. one should keep in mind the growing number of small and medium-sized enterprises, which now form a sizeable part of transnational corporations and which to a large extent shape the landscape of the modern world and play a significant role in the world economy even if they do not top the rankings presented in this paper. there has recently been a rapid increase in the quantity and strength of corporate capital from developing countries, in particular from countries in south asia, east asia and south-east asia, including china and hong kong, south korea, taiwan and india. more and more state enterprises or enterprises with state capital can also be seen in the international space. if we consider the tendency outlined above, it can be concluded that the changes that have been observed in the processes of formation and international expansion of tncs suggest that this historically rooted process of international business growth, shaped mainly by large private companies from developed countries, is now increasingly complemented and enriched by the dynamic growth of corporations in developing 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(2000), investment patterns in a longer-term perspective, oecd working papers on international investment, 2000/02, http://www.oecd.org/daf/inv/investment-policy/wp-2000_2.pdf. http://dx.doi.org/10.1787/150177306672. sed: 15.11.2014). new york and geneva. tions/dite_dir/docs/wir11_web%20tab%2034.pdf (accessed: 10.11.2014). vestment%20report/annex-tables.aspx (accessed: 27.10.2014). wilkins m. (2001), the history of multinational enterprise, 3-35 [in:] the oxford handpress. http://dx.doi.org/10.1093/0199241821.003.0001. polskie wydawnictwo ekonomiczne, warszawa. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: march 19, 2014; date of acceptance: september 17, 2014. * contact information: kr@sgh.waw.pl, departament of accounting, warsaw school of economics, al. niepodległości 128, 02-554 warszawa, poland, phone: 22 564 68 45. karmańska a. (2014). the imperative of sustainable growth and reporting integration. the fourth era in the corporate reporting development. copernican journal of finance & accounting, 3(2), 49–66. http://dx.doi.org/10.12775/cjfa.2014.017 anna karmańska* warsaw school of economics the imperative of sustainable growth and reporting integration. the fourth era in the corporate reporting development keywords: sustainable growth, integrated reporting, financial reporting, social responsibility reporting, value. j e l classification: g39, m14, m41, o34, o49. abstract: this article is aimed at the presentation of an opinion in the important discussion about the further development of corporate performance reporting standards, which go far beyond the standards of financial reporting. this text, which is the second part of a two-part analysis, refers to the problem of a new trend of corporate reporting primarily for two reasons: (1) to point to the legitimacy of the joint determination by economic sciences of the axis around which reporting on corporate (organisation) performance should revolve, (2) in view of the variety of perceptions of value, to make everybody aware that different elements of corporate reporting should be compatible and that its usefulness for a wide range of stakeholders is predetermined by the explicitness of perception of the categories which are present in these elements. the present article is also aimed at the presentation of a qualitative surge of corporate performance reporting which is being made as a result of the focus on these corporate aspects thanks to which – with the simultaneous imperative of sustainable growth – value is created. this is the reason for the emergence of the fourth era. translated by mirosław szymański anna karmańska50 imperatyw zrównoważonego rozwoju i integracji sprawozdań. czwarta era w rozwoju sprawozdawczości przedsiębiorstw słowa kluczowe: zrównoważony rozwój, sprawozdawczość zintegrowana, sprawozdawczość finansowa, raportowanie ze społecznej odpowiedzialności, wartość. klasyfikacja j e l: g39, m14, m41, o34, o49. abstrakt: celem artykułu jest przedstawienie głosu w ważnej dyskusji na temat dalszego rozwoju standardów raportowania dokonań przedsiębiorstw, które to standardy daleko wykraczają poza standardy sprawozdawczości finansowej. w tym tekście, który jest drugą (z dwóch) częścią powiązanych rozważań, problem nowego trendu w sprawozdawczości przedsiębiorstw podejmuje się przede wszystkim z dwóch powodów, aby: (1) wskazać na zasadność wspólnego określania przez nauki ekonomiczne osi, wokół której powinno następować raportowanie dokonań przedsiębiorstw (organizacji), (2) wobec obserwowanej różnorodności rozumienia kategorii wartość uzmysłowić, że o kompatybilności różnych elementów sprawozdawczości przedsiębiorstwa i o jego przydatności dla szerokiego grona interesariuszy przesądza jednoznaczność rozumienia kategorii w tych elementach występujących. celem tekstu jest także pokazanie jakościowego skoku w obszarze raportowania dokonań przedsiębiorstwa, który to skok następuje wobec skoncentrowania uwagi na tych ogniwach przedsiębiorstwa, dzięki którym – przy jednoczesnym imperatywie zrównoważonego rozwoju – następuje tworzenie wartości. to stanowi grunt dla krystalizowania się ery czwartej.  introduction1 identifying the directions of further development of corporate (organisation) reporting, one should carefully watch new concepts born incessantly in the area of management. the following trends are crucial to reporting: (1) varying determinants of changes in corporate management, (2) turn to the corporate value governance, (3) verification of the commonly applied financial measures of corporate performance, (4) organisation of value management in practice and (5) changes in the corporate internal and external stakeholders’ information needs (karmańska 2010, 107–131). gaining a competitive advantage in the modern conditions of management is an extremely difficult task. presently, the performance financial measures based of the value of profit are insufficient and that is why the last decades of the 20s century brought essential changes which clearly ref lect the transfor1 this text continues the analysis presented in: (karmańska, 2014). the imperative of sustainable growth and reporting… 51 mation of companies towards activities based on intangible assets2. a particular significance is given now to the so-called key corporate competencies (kay 1996, 29), which, as it is emphasized by management experts, allow a company to transfer the competitive advantage between sectors and markets as well as to build the markets of the future (roszyk-kowalska 2006, 45–48). simultaneously, in the search of new ways to run business, the focus is becoming clearer on higher requirements connected with the use of all the levers of the so-called integrated development of value (leśniowska-łebkowska 2006, 132). the integrated development of value is conducted through management concentrated on the factors of corporate value creation and requires an appropriate measurement, which is possible thanks to the relevant reporting3. the research methodology and the course of the research process the article identifies and discusses synthetically forth area in the corporate reporting development. the basic method used in the process of writing was a critical analysis of literature concerning the standards of development of corporate reporting standards as well as own over the time observations based on different case studies analysis. our common future as the first cause of corporate sustainability reporting development the idea of sustainable growth was raised by the world commission on environment and development (wced), which was established by the uno in 1983 (people and the planet 2014). in 1987 this commission published a report our common future, in which the concept of sustainable growth was first presented in a comprehensive way (wced report 1987). this 300-page report contains a great deal of socially and economically important content, including a key 2 according to the research done by blair (1995), the book value of corporate tangible assets accounted for 62% of the market value of companies in 1982. this value declined down to 38% ten years later. however, at the turn of the 20th and 21st century, tangible assets amounted to less than 20% of the average corporate market value. see: (kaplan, norton 2001, 87). 3 more of the measures of integrated building of value and also corporate management value efficiency, whose setting belongs to the function of accounting and financial reporting: (karmańska 2009, 102-136). anna karmańska52 statement about sustainable growth that at the present stage of the development of civilisation sustainable development is possible, i.e. the development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs (report wced 1987, 41). it also indicates the problem of information gap, which existed then, with regard to the ”state of the world”. this state should be analysed on many planes important for the future. it must have been the lack of such diagnosis which was the underlying reason for the lack of attempts to publicize the need for sustainable growth. the report observed that this communication gap hindered the awareness of the necessity for common activity in the common interest: “now we know that what connects us is more important than what divides us” and sustainable growth is a challenge for all entities (report wced 1987, 42–43). the attention paid to the necessity for sustainable growth by the aforementioned commission gave rise to the adoption during the earth summit in 19924 of the so called rio declaration on environment and development (the rio declaration 1992). the rio declaration consists of 27 principles explicitly revealing the holistic dimension of sustainable growth in which an individual company has to find its place irrespective of the industry and scale of activity. a careful analysis of the content of the principles leads to a conclusion that nearly all of them have a postulative and prescriptive dimension possible to pursue exclusively at the governmental levels within domestic or foreign policy. as a matter of fact, principle 10 may be perceived as an important reason for corporate performance reporting, as this principle claims that practically every entity is a stakeholder of environmentally non-indifferent activity of other entities. additionally, principle 10 says that: 4 “the goal of the summit was to make the world decision makers aware that the economic growth caused an enormous environmental pollution and the depletion of natural resources; it also deepened the economic differences between countries and if appropriate actions are not undertaken, it will lead to the complete degradation of the natural environment and also the extension of the zones of poverty, hunger, diseases and illiteracy. during the earth summit in rio de janeiro country leaders came to the common conclusion that it is necessary to change the attitude to the problems of environment and that they should be taken into account when making economic and political decisions. the so-called sustainable growth began to be promoted (…).” see web side: (biomasa.org 2014). the imperative of sustainable growth and reporting… 53 rio declaration on environment and development the united nations conference on environment and development, having met at rio de janeiro from 3 to 14 june 1992 proclaims that: (…) principle 10 environmental issues are best handled with the participation of all concerned citizens, at the relevant level. at the national level, each individual shall have appropriate access to information concerning the environment that is held by public authorities, including information on hazardous materials and activities in their communities, and the opportunity to participate in decision-making processes. states shall facilitate and encourage public awareness and participation by making information widely available. effective access to judicial and administrative proceedings, including redress and remedy, shall be provided. (…) every stakeholder should have a right to participate in decision making with regard to environmental related activities, and the state should create corporate governance ensuring access to the adequate information. in the aforementioned context of corporate performance reporting it should be observed that sustainable growth means conducting activities, including business, in such a way as to ensure a harmonious development on all the planes which are important for people, the natural environment and more comprehensively – the fate of the world. the idea of this concept is, no doubt, noble. in the operation of an individual company (organisation), however, it may be difficult to pursue as the reconciliation of various interests of many parties is not simple. these entities which manage in order to implement favourable solutions on various fronts achieve success, in which the financial result is one of the components but also a compromise. then, it may be assumed that such a multidimensional (not only with regard to the financial result) positive result gives them a competitive advantage. they become a benchmark in the implementation of the idea of sustainable growth. it is natural for other companies to try to find the way the success and competitive advantage have been achieved. shortcut imitations may cause a hardly recognisable risk by external stakeholders that sustainability reporting will become an element of the management policy or that it will be treated as a trendy tool of achieving a competitive advantage5. 5 in this context it is necessary to comment on responsibility for sustainability reports. certainly, it is not the company that holds the responsibility. likewise, a comanna karmańska54 at present in the world the directions and standards in corporate performance sustainability reporting are led by two institutionalised initiatives: a) the global reporting initiative (gri) – established in boston 1997, with the roots dating back to the early1990s (global reporting initiative 2014), b) the international integrated reporting council (iirc) – established on the initiative of the prince of wales in 2009 (integrated reporting <ir> 2014). the gri publishes framework sustainability reporting guidelines, known as guidelines g together with a consecutive edition number. the first version of guidelines (g1) comes from 2000, the second (g2) from 2002, and the third (g3) from 2006. the creation of this version of guidelines involves over 3,000 business experts from all over the world as well as different representatives of social interest. this version in comparison with the formers ones was enlarged with the so-called sector guidelines worked out for different industries, and in 2011 it was updated with the issues concerning gender, society and human rights, known as g3.1. the latest version of the sustainability reporting guidelines is g4 issued by the gri in may 2013. the gri explains that the guidelines are necessary because (sustainability reporting guidelines g4 2013): ■ an increasing number of companies and other organizations want to make their operations sustainable and profitable but in compliance with the social justice and without doing any harm to the protection of the natural environment, ■ social responsibility management reporting helps organisations to set goals, measure performance, and manage changes in order to make their operations more sustainable, pany cannot be socially responsible. a company, as an organisation of human business activity, is not capable, unlike a human being, of assessing anything in terms of responsibility or ethics. the responsibility in business should be associated only with the people active within this business. thus, within sustainable growth the responsibility for business activity rests with the management board and it is the board members that are held accountable on the plane determined by the interest of the company owners, governmental institutions, customers and employees, and other stakeholders from the general and social environment in which the company operates. charging with responsibility, in particular by the stakeholders from the general and social environment requires possessing strong arguments based on reliable and frequently non-financial information. in this context, it may be said that principle 10 is a global ultimate cause of undertaking global initiatives in the area of financial reporting development in the direction of sustainability reporting. the imperative of sustainable growth and reporting… 55 ■ such a report discloses factors which are important for the organisation’s permanent impacts, positive or negative, on the natural environment, the society and the whole economy, ■ internationally agreed disclosures contained within sustainability reports should be made accessible and comparable, providing stakeholders with comprehensive information about the causes and effects of the decisions made. the immediate goal the fourth update is to help reporters prepare sustainability reports, identify the organization’s most critical sustainability-related issues as well as make such sustainability reporting a standard practice. sustainability reporting guidelines g4 were created as a set of universal recommendations to be applied irrespective of the kind of company (organisation), its size and place of operation. g4 also includes guidelines with regard to corporate (organisation) sustainability growth disclosures. for example, companies (organisations) may choose a format: (a) a separate sustainability report or (b) the so-called integrated report (sustainability reporting guidelines g4 2013). the iirc, the initiative which is 20 nearly years younger than the gri was established to support the idea of integrated corporate performance reporting and, as a matter of fact, to create the international framework of the socalled integrated reporting. in december 2013 the council released the first important document the international <ir> framework (the international <ir> framework 2013). as stated by the iirc, the international integrated reporting council (iirc) this initiative is a global coalition of regulators, investors, companies, standard setters, the accounting profession and ngos. the iirc expresses the view that communication of corporate value creation should be the next step in the evolution of corporate reporting. the iirc also states that the international framework <ir> framework was developed to meet these expectations of corporate stakeholders and provide the basis for comprehensive implementation of this kind of integrated financial reporting in the future. combining the ideas of both organisations it may be said that a contemporary company within corporate activity reporting should: ■ focus on a chain of activities and processes thanks to which it creates value; this is what the idea of integrated reporting should serve, and at the same time anna karmańska56 ■ it should present appropriate information about how the value creation goes hand in hand with the idea of sustainable growth, with the idea of social responsibility reporting serving this purpose. it seems that according to both these initiatives the future of corporate reporting is predetermined. it may be summed up in the phrase: integrated reporting on the value created within sustainable growth. the fourth era in the development of corporate reporting in the era of the imperative of sustainable growth, corporate performance reporting standards are developed in the world by the two aforementioned initiatives-cum-institutions: the global reporting initiative (gri ) and the international integrated reporting council (iirc ). the former focuses its efforts on the creation of reporting standards in relation to the social responsibility of management board, the latter on integrated reporting. the gri defines the relation between these standards as follows: “sustainability reporting is a process that assists organizations in goal setting, measuring performance and management change towards a sustainable global economy – one that combines long term profitability with social responsibility and environmental care.” (sustainability reporting guidelines 2013, 85) the principles and information structure of this report are presented in table 1 according to the gri-g4 guidelines. according to the gri, social responsibility reporting – focused primarily, if not exclusively, on sustainable growth – is a platform of communication of both positive and negative effects of important aspects (i.e. material for the stakeholders) of corporate activity in the economic, social, environmental and management areas. the stakeholders of these reports may be investors as well as other entities to which the company activities are not indifferent. and integrated reporting is a new emerging trend in corporate reporting, whose major stakeholders are, according to the gri, the providers of financial capital to this company. integrated reporting is aimed primarily at the integrated (comprehensive) presentation of the key factors essential for the present and future creation of value in a given company (organisation). integrated reports are built on the basis of idea of sustainability related reporting and disclosures. in an integrated report a business organisation provides concise information about the way it pursues its strategy, management, performance and goals thanks to which it creates value over time. thus, an integrated report is not a traditional annual report abstract. neither is it a combination of a financial report table 1. preparation principles and information structure framework of csr and sustainability reporting according to the gri-g4 (may 2013) csr and sustainability reporting according to the gri-g4 (may 2013)1 preparation principles information structure referring to content: z1: stakeholders inclusiveness z2: sustainability context z3: materiality of organization’s significant economic, environmental and social impacts z4: completeness referring to quality: z5: balance of positive and negative aspects z6: comparability z7: accuracy z8: timeliness z9: clarity z10: reliability general standard disclosures e1: strategy and analysis e2: organisational profile e3: identified material aspects and boundaries e4: shareholder engagement e5: report profile e6: governance e7: ethics and integrity specific standard disclosures e8: management approach e9: indicators 1. economic 2. environmental 3. social ͵ labour practices and decent work, ͵ human rights, ͵ society ͵ product responsibilty 1 the first part of the csr report prepared according to the gri-g4 guidelines includes 58 groups of standard disclosures, the second one – 92 groups. the information structure of the report to be prepared according to the gri-g4 substantially differs from the version presented in the g3 guidelines. compare: for example with the structure of social responsibility report made according to g3 by kghm polska miedź s.a. for 2012 and the report made by bhp billiton (also from the extractive industry) for 2013. see also grupa lotos s.a. integrated annual report 2012 (prepared according to the gri-g3 guidelines). and although the last one is called integrated annual report, it is not integrated from the iirc perspective. in contains, besides the information connected with presentation of lotos s.a. management board social responsibility, classic consolidated financial reports. thus, this report is actually a combination of financial reporting and corporate social responsibility reporting. s o u r c e : on the basis of: sustainability reporting guidelines g4 2013, https://www.globalreporting.org/reporting/g4/pages/default.aspx (accessed: 21.01.2014), 20–83. anna karmańska58 and a social responsibility report. however, an integrated report interacts with other reports and communiques through the reference to the detailed information presented by the company separately in different sets of information (sustainability reporting guidelines g4 2013, 85). although the goals of social responsibility reporting and integrated reporting are different, sustainability reporting is an inseparable element of integrated reporting. it means that for the company management it is the social responsibility reporting that is the basis of thinking in terms of integrated reporting, identifying important issues in setting strategic goals as well as assessing the corporate potential to achieve these goals and create value (sustainability reporting guidelines g4 2013, 85). focusing now on integrated reporting, the basis of which, as suggested above, is sustainable way of thinking and decision making as well as the attention paid to value, which i am willing to refer later on, and around which the issues of information capacity and report construction are concentrated, let me emphasize a few questions6: first, a peculiar mission of integrated reporting is providing information which could be used, according to the iirc by the suppliers of working capital to be effectively allocated. in the iirc guidelines the working capital has not been precisely defined. this fact poses a threat of at least threefold perception of this notion, different on different grounds: management or finance or accounting. this remark is not to be ignored in view of the prediction that the construction of integrated reporting will require a multicompetence team work. second, integrated reporting is aimed at the explanation of the way a company (organisation) creates value in the short, medium and long-term. in the iirc guidelines the explanation of the term value is missing. a well justified question may be asked: if something has not been described, how should it be known that it is supposed to be created or how should it be known that it is being created at all? third, the iifc claims that such a report brings benefits to all the entities interested in how a company creates value. among such stakeholders, according to the iirc, there may be employees, customers, partners, local communities, legislators, regulators and decision makers (the international <ir> framework 2013, 4). it should be remarked that the group of stakeholders is more numerous than mentioned at the beginning. there are some stakeholders here 6 on the basis of: (the international <ir> framework 2013, 4). the imperative of sustainable growth and reporting… 59 who, it must not be excluded, have not been and will never be providers any elements of working capital for the company, whichever way it could be interpreted. each of these groups of stakeholders understands value in a different way. thus, in axiological terms, it is not known again what actually value, which appears to be as an object of creation in this report, is. fourth, the standard of making this report (december 2013) is based on the principles thanks to which, according to the iirc, the balance between elasticity and prescription adopted in advance will be maintained. such an approach ensures some space for an organisation of any specificity in this conceptual framework, even if it differs much from others, with a simultaneous maintenance of a certain degree of their comparability. no objections can be raised here. fifth, integrated reporting may be created as an autonomic (managerial) statement or it may be a clearly isolated part of another report or communique. in either case the report should be certified by the people responsible for the management of the organisation and responsible for the report. and no objections can be raised here either. sixth, integrated reporting should ensure insight into the applied resources and relations within the organisation. these, in my opinion, resources are defined by the iirc as capital. at this moment a terminological duality is born: different terms are used in financial reporting and managerial reporting, which may not be indifferent for the practical application of the conceptual framework of this report proposed by the iirc. it seems well justified to use the term resources, which is definitely less controversial in the area of both management and finance as well as accounting. integration within the area of business, irrespective of the way it may be perceived, should be based on the explicitness of the language used in business communication. it is not the case here. seventh, the aforementioned capital is also defined by the iirc as stocks of value to be increased, decreased or changed as a result of the company (organisation) activity and its effects. it is another proof of a hardly recognisable relation: working capital-capital-value – stocks of value – financial capital. eighth, the stocks of value (in my opinion – resources whose value one may try to determine) are presented in the conceptual iirc framework in a few categories: financial, manufacturing, intellectual, human, social, relationship and natural capital. (a company (organisation) may use a different categorisation. the conceptual framework allows for this. a company is not obliged to create the structure of this report with regard to the categories of stocks of value). the anna karmańska60 freedom in this area does not cause my objections, however there is a threat that the comparability of reports prepared by different companies (organisations) may be hindered. ninth, integrated reporting presents information only about the value created by the organisation which refers to the issues essential (material) for the implementation of this process. the recognition of these issues is – the iirc underlines – important as the ability of the organisation to create value allows the providers of financial capital to realise profit7. this guideline is important because of for instance the costs of report preparation. however, there is a threat of a biased selection of information to be presented in the integrated report. in this context there is a need for its attestation. i have no doubt that the opinion of a chartered accountant will be insufficient here. it is possible that with regard to this report it will not be necessary at all. but i have some doubt if because of the managerial character and specific know-how in the area of value creation, it will be sufficient to make use of the, international standard on assurance engagements – assurance engagements other than audits or reviews of historical financial information (international standard on assurance engagements 3000, isae 3000)8. the basis for the preparation of integrated reports is seven guiding principles, and its formal information structure contains seven elements, which may be presented in brief as follows (table 2). 7 thus, the iirc sows doubt about the intentions of integrated reporting and the primary goal: it seems that the major addressees of this report are investors, as observed by the gri, and not all providers of working capital as suggested elsewhere by the iirc. 8 full text, see: (international standard on assurance engagements 3000, isae 3000 2012). the imperative of sustainable growth and reporting… 61 table 2. preparation principles and information framework of an integrated report according to the international<ir> framework (december 2013) integrated report according to the ir framework (december 2013) guiding principles information structure z1: strategic focus and future orientation z2: connectivity of information z3: stakeholder relationship z4: materiality z5: conciseness z6: reliability and completeness z7: consistency and comparability e1: organisational overview and external environment e2: governance e3: business model e4: risk and opportunities e5: strategy and resource allocation e6: performance e7:outlook e8: presentation principles s o u r c e : on the basis of: the international <ir> framework, december 2013, http://www.theiirc.org/international-ir-framework/ (accessed: 21.01.2014), 5, 16–24. the key question in integrated reporting is reporting on the way corporate (organisation) value is created. it seems that this approach may offer an explanation of the term integrated report. the creation of value, which is in the centre of interest within all the aspects presented in this report, is possible thanks to the determination of a business model in which the mission and vision of the organisation are implemented – in order to create value – through a competent application resources of different character. this way of thinking requires perceiving the organisation from the perspective of the goal oriented cooperation of many of its elements and the integration of its attributes around a clearly defined goal which they should serve. figure 1 shows the process of value creation together with the integrated report information structure. anna karmańska62 figure 1. value creation process presented in an integrated report according to the international <ir> framework figure 1. value creation process presented in an integrated report according to the international <ir> framework legend: integrated statement should answer the following questions: e.1. what does the organisation do and what are the circumstances under which it operates? e.2. how does the organization’s governance structure support its ability to create value in the short, medium and long term? e.3. what is the organization’s business model? does the organisation apply more than one model? e.4. what are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term, and how does the organization manage them? e.5. where does the organization want to go and how does it intend to get there? e.6. to what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the resources (capitals)? e.7. what challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance? source: on the basis of fig. 2 [in:] the international <ir> framework, december 2013, http://www.theiirc.org/international-ir-framework/ (accessed: 21.01.2014), 13, 16–32. the main reporting areas which csr and sustainability reporting concentrates on include problems relating to people, communities, environment and governance. the last area deals with different aspects than those assumed in the integrated reporting prepared according to iirc conceptual framework. the gri-g4 indicates the following important resources (capital): financial manufactured intellectual human social and relationship natural e.3. business model inputs business activities outputs outcomission and vision e.4. risk and opportunities e.5. strategy and resource allocation e.6.performance e.7. outlook resources (capital): financial manufactured intellectual human social and relationship natural e.1. external environment creation of value (maintenance, reduction) over time e.2. governance s o u r c e : on the basis of fig. 2 [in:] the international <ir> framework, december 2013, http:// www.theiirc.org/international-ir-framework/ (accessed: 21.01.2014), 13, 16–32. the main reporting areas which csr and sustainability reporting concentrates on include problems relating to people, communities, environment and governance. the last area deals with different aspects than those assumed in the integrated reporting prepared according to iirc conceptual framework. the gri-g4 indicates the following important areas: governance structure, top managers’ role in determination of corporate goals, value and strategy, the imperative of sustainable growth and reporting… 63 the competence and appraisal of top managers’ achievements, their role in risk management, preparation of csr reports, appraisal of economic, environmental and social performance in favour of the community as well as the system of remuneration and monitoring. the reports prepared according to the gri-g4 guidelines do not focus on the business model so strongly as integrated reports prepared according to the iirc conceptual framework.  conclusions the analysis of corporate reporting trends provides interesting observations. first, it is impossible not to notice the dynamic changes in this area. not so long ago integrated financial reports with a little complementary information were sufficient. over time, the volume of this information grew and included new aspects of corporate (organisation) operation. from the perspective of the financial reporting, the first signal indicating the necessary changes in corporate reporting was the fact of filtering management accounting tools and concepts into the construction principles of these reports. a good example to be quoted is the evaluation of finished goods which has to be made on the basis of a ”special” calculation of costs of manufacturing, i.e. the calculation during which the identification and disclosure of unused production capacities take place. another example is a new definition of detailed report segments in a financial report made according to the international financial reporting standards, which provides basis for managerially distinguished operational segments of a company (organisation). second, there is a strong need to monitor and assess the business activity effects on a global scale. sustainable growth, as a matter of principle, expresses care about the world the present and future resources. this results in – so far – not obligatory, but recommended in business, guidelines and standards thanks to which different groups of stakeholders have access to the economic, environmental and social effects of business activities of different companies (organisations). third, sustainable growth requires a compromise, which is not indifferent for the profitability of the conducted business activity. this means that a special group of stakeholders, i.e. providers of capital to the company expect still different kind of information, not only the information about its results in terms of finance but information about social and environmental effects of activity. the desired information should actually disclose the business model pursued in a given organisation, i.e. its management know-how. thanks to it, these stakeholders are expected anna karmańska64 to be able to even more consciously made decisions about the allocation of their resources. in view of the above it may be stated that we are witnessing at present the birth of a new corporate (organisation) activity reporting model. this causes initiatives which have been presented above brief ly. they undertake a problem of enriching annual corporate financial reports with new elements intending to give their guidelines or conceptual frames the character of global standards. however, some of these elements are so specific and problem focused that they begin to function independently as the so-called social responsibility reports and integrated reports. this is the fourth era in the history of corporate reporting. it began relatively recently but it is developing extremely dynamically. how will financial reporting behave in this era? i think that a financial report should be an axis with legitimate narration revolving around it, i.e. processed and contextually presented information (in the spirit of social responsibility and sustainable growth). i do not think the world will expect the category of profit, i.e. the crucial business category, to be subdued by descriptive and illustrative commentaries. business should be presented explicitly and transparently. it is the achieved financial results that should be placed at the top of the reporting pyramid, not other corporate activity attributes or effects. however, in the corporate reporting pyramid there should be, as absolutely indispensable components, all the disclosures concerning the way their financial result has been pursued (i.e. the model of business and value creation) as well as social and environmental consequences of the conducted activity. it is unimaginable for non-financial reporting to obscure, within the corporate (organisation) reporting, what is actually the very essence of business and although its necessity is beyond discussion, it must not obscure the key knowledge in business, i.e. the knowledge of its financial results. bearing in mind the diversity of perceptions of the term value which is used in all the elements of the fourth era of corporate reporting ( financial, social responsibility or the one related to the business model), in economic sciences it is advisable to undertake some effort in order to define the category economic value. this category should, as one may come to think, be a peculiar conceptual consensus in the world of economic science. it should be defined so that it: (1) could well correspond to all aspects of business operation and (2) could be accepted by the scientific environment dealing with economics, finance, management and accounting – for the purpose of corporate (organisation) reporting as –as a category explicitly defining value present in it. value defined in this way the imperative of sustainable growth and reporting… 65 could become the basis for the real integration of corporate reporting. i believe that the search for the meaning of the term economic value will determine the profile of changes in the fifth era in the development of corporate reporting.  references biomasa.org (2014), http://www.biomasa.org/index.php?d=artykul&kat=27&art=19 (accessed: 21.01.2014). global reporting initiative (2014), http://www.globalreporting.org/pages/default.aspx (accessed: 21.01.2014). integrated reporting <ir> (2014), http://www.theiirc.org/about/ (accessed: 21.01.2014). international standard on assurance engagements 3000, isae 3000 (2012), http:// www.ifac.org/sites/default/files/publications/files/b005%202012%20iaasb%20ha 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(2001). transforming the balanced scorecard from performance measurement to strategic management. part i. accounting horizons, march 2001, vol. 15, no. 1. http://dx.doi.org/10.2308/acch.2001.15.2.147. karmańska a. (2009), wartość ekonomiczna w systemie informacyjnym rachunkowości finansowej (economic value in the accounting information system), difin, warsaw. karmańska a. (2010), rachunkowość a zmiany w zarządzaniu (accounting and changes in management), [in:] zagrożenia w działalności gospodarczej a prawo bilansowe (economic activity threats and balance law), scientific editor: e. mączyńska, z. messner, pte, skwp, warsaw. karmańska a. (2014). the imperative of sustainable growth and reporting integration. three eras in the corporate reporting development. copernican journal of finance and accounting, vol. 3, no. 1. http://dx.doi.org/10.12775/cjfa.2014.006. kay j. (1996), podstawy sukcesu firmy (corporate success basis), pwe, warsaw. leśniowska-łebkowska g. (2006), dylematy rozwoju strategicznego i kształtowanie przyszłości firm w duchu społecznej odpowiedzialności biznesu (strategic growth dilemmas and the development of corporate future in the spirit of csr), [in:] m. romanowska, p. wachowiak (ed.), koncepcje i narzędzia zarządzania strategicznego (concepts and tools of strategic management), sgh, warsaw. people and the planet (2014), http://www.peopleandtheplanet.com/index.html@lid=26996&section=49&topic=39.html (accessed: 21.01.2014). roszyk-kowalska g. (2006), architektura przedsiębiorstwa jako źródło przewagi konkurencyjne (corporate architecture as a source of competitive advantagej), [in:] m. romanowska, p. wachowiak (ed.), koncepcje i narzędzia zarządzania strategicznego (concepts and tools of strategic management), sgh, warsaw. sustainability reporting guidelines g4 (2013), https://www.globalreporting.org/reporting/g4/pages/default.aspx (accessed: 21.01.2014). the international <ir> framework (2013), http://www.theiirc.org/international-irframework/ (accessed: 21.01.2014). anna karmańska66 the rio declaration on environment and development (1992), http://www.unesco.org/ education/nfsunesco/pdf/rio_e.pdf (accessed: 21.01.2014). wced report (1987), report of the world commission on environment and development: our common future, http://www.un-documents.net/our-common-future. pdf (accessed: 21.01.2014). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: june 25, 2015; date of acceptance: october 8, 2015. * contact information: adam.zaremba@ue.poznan.pl, poznań university of economics, al. niepodległości 10, 61-875 poznań, poland, phone: +48 61 854 38 28. zaremba a. (2015). the january seasonality and the performance of country-level value and momentum strategies. copernican journal of finance & accounting, 4(2), 195–209. http://dx.doi. org/10.12775/cjfa.2015.024 adam zaremba* poznań university of economics the january seasonality and the performance of country-level value and momentum strategies keywords: january effect, turn-of-the-year effect, value, momentum, country-level anomalies, international investments, cross section of stock returns, asset pricing. j e l classification: g11, g12, g14, g15. abstract: the study examines the turn-of-the-year effect in the country-level value and momentum strategies. we re-examine eight distinct value and momentum strategies within 78 markets in the 1995-2015 period and we test their performance for the seasonal patterns. we find that during the last 20 years the value strategies performed particularly well in january and poor in december. on the contrary, the momentum strategies had high returns in december and low in january. these observations are consistent with the explanations of the january seasonality related to the tax loss selling and window dressing effects. translated by adam zaremba  introduction the primary aim of this study is to examine the influence of the turn-of -theyear effect on the performance of the country-level anomalies related to valadam zaremba196 ue and momentum effects. the turn-of-the-year effect, or in other words the january effect, is a tendency of stocks to perform particularly well in january. since its discovery almost 40 years ago (rozeff and kinney 1976), it has been explained in many ways, but it appears that only two hypotheses hold up to serious scrutiny. the tax loss selling story assumes that at the end of the year investors sell stocks that have “lost money” to capture the capital loss, resulting in the low or negative returns, and then buy them back in january, driving the prices up (chen and singal 2004). the second rationale – the window dressing hypothesis relates the turn-of-the-year phenomenon to the behaviour of institutional investors, who “clean” their balance sheets before the end of december. this is the time when the detailed portfolio composition is reported to investors (haugen and lakonishok 1988, lakonishok et al. 1991). thus, they sell the risky and neglected stocks in december and buy them back at the beginning of the year. both hypotheses have vivid implications for the two most popular and best documented cross-sectional investment strategies: value and momentum investing. the value effect is related to the fact that stocks with high (low) fundamentals relative to the market price outperform stocks with low (high) fundamentals to the price ratio. the momentum anomaly is a phenomenon that the stocks that performed well (poor) over recent 3-12 months usually continue to outperform (underperform). both anomalies are proven to be robust and reliable sources of return and both of them have been documented across all the major asset classes (asness et al. 2013). the both explanations of the january effect, i.e. tax loss selling and window dressing hypotheses, suggest that investors should sell risk and neglected stocks, perhaps with poor past longterm performance, so the stocks that bear all the characteristics of the value stocks, in december, and then buy them back in january. thus, the value strategies should underperform in december and perform particularly well in the beginning of the year. conversely, considering the momentum effect, investors should stick to the winning companies at the end of the year, and then switch to the value stocks in the january. in other words, the momentum anomaly should deliver high returns in the last month of the year, but also rather poor performance in january. the empirical evidence seems to be generally consistent with these hypotheses. davis (1994) and loughram (1997) find that the stocklevel value premium is particularly high in january, while yao (2012) and novymarx (2012) indicate, that the momentum returns are highest in december and lowest in january. the january seasonality and the performance… 197 in this study, we bring the research on the seasonality in value and momentum returns into a new global dimension. a few studies show, that the value and momentum effects could be applied not only to the stocks, but also entire country equity markets. in other words, there is substantial evidence that countries with the high fundamentals relative to the market capitalization outperform countries with the low fundamentals relative to stock market capitalization (asness et al. 1997, kim 2012, zaremba 2015a). analogously, the stock markets that outperformed in the past 12 months tend to perform well in the future (bhojraj and swaminathan 2006, balvers and wu 2006). but does the turn-of-the-year seasonality exert similar impact on the country-level value and momentum effects as on the stock-level anomalies? the goal of this study is to answer this question, that has not been discussed in the global academic literature yet. presumably, the same arguments stemming from the tax selling and window dressing explanations that are used for the stock-level effects, could be also applied for the country-level effects. on the one hand, investment managers might reduce the exposure to risky countries, that would not be well perceived by investors reviewing the funds’ financial statements. on the other hand, the individual investors could sell the funds exposed to the “loser countries” to capture the capital loss. the impact of both effects would be potentially unwound in january. summing up, we suppose that the turn-of-the-year effect could be applied to the country-level value and momentum strategies, analogous as to the stocklevel parallels. we expect the value strategies to outperform in january relative to december, and the momentum portfolios to have higher returns in december than in january. thus, our null hypothesis is: h0: the country-level value and momentum strategies have equal returns in december and january, with the alternative hypothesis assuming the contrary: h1: the country-level value and momentum strategies do not have equal returns in december and january. the motivation for this study is twofold. first, we want to provide fresh outof-sample evidence on the turn-of-the-year effect. but second, and more importantly, the goal is to offer new tools for international investors. the stock-level adam zaremba198 market participants have at their disposal substantial economic literature devoted to cross-sectional return patterns. jacobs (2015) recently reviewed 100 stock-market anomalies from tier-one academic journals. in comparison with this “factor zoo”, the tools available for country-level investors, who base their strategies on exchange traded funds (etfs) or stock index futures, are rather modest. furthermore, the papers containing meta-analysis, that investigate some commonalities across the country-level anomalies, are almost non-existent. this shortage of useful tools is particularly striking given the fact that the last years have seen unprecedented growth of country-level investment vehicles: e.g. futures, index funds and etfs. these structural changes call for new tools for global investors. this study investigates the performance of eight distinct value and momentum anomalies within a sample of 78 country equity markets in the period between 1995-2015. we first re-examine the performance of the country-level strategies, and then test the time series of returns for the potential turn-of-theyear effect. the principal findings of the paper can be summarized as follows. during the last 20 years the value strategies performed particularly well in january and underperformed in december. on the contrary, the momentum strategies had the substantially high returns in december and low in january. nonetheless, the observations lack sufficient statistical significance to formally reject the hypothesis of the study. the remainder of this article has the following structure: the next section covers data and research methods, which is followed by a presentation and discussion of findings. the last section concludes the paper and indicates the areas for further research. data and methods the primary aim of this study is to test seasonal patterns around the turn of the year in the country-level value and momentum anomalies. thus, the empirical analysis could be divided into two subsections: (1) we select and reexamine the appropriate cross-country anomalies, (2) we test them for the effects related to january and december. this section first describes the data sources, the procedures employed in the construction of anomalies-based portfolios, and asset-pricing models employed to examine them. subsequently, the methods utilized to investigate the seasonal patterns are discussed. the january seasonality and the performance… 199 the calculations in this study are based on returns on msci international stock market indices from 78 countries, including both existing and discontinued indices (e.g. msci venezuela)1. we use monthly time series from the period june 1995 may 2015 sourced from the bloomberg database. returns are calculated on the basis of capitalization-weighted total return indices. we utilize both gross return and net return indices, i.e. unadjusted and adjusted for taxes on dividends, to provide the robustness of results and express the standpoint of both institutional and individual investors. a stock market is included in the sample in month t, when it is possible to compute its returns in month t and its metric necessary to sort the countries for the need of portfolios formation at the end of month t-1. data are collected in local currencies and subsequently denominated in us$ to obtain polled international results. to ensure consistency with the us$ approach, excess returns were computed over returns on the bloomberg generic us 1-month t-bill. we first examine the performance of long/short zero-portfolios formed based on two groups of anomalies. the first group is related to the concept of value investing, i.e. the phenomenon that stocks with high fundamentals relative to price outperform stocks with low fundamentals. this effect has been so far documented with the use of many various valuation ratios , e.g. bookto-market ratio (rosenberg et al. 1985), earnings-to-price-ratio (basu 1983), or dividend yield (litzenberger and ramaswamy 1979). a number of authors documented that these anomalies has their country-level parallels, so, in other words, “value countries” outperform “growth countries” (asness et al. 1997, kim 2012, zaremba 2015a). in this papers we base the tested portfolios only on the four metrics that are found to me the most reliable in the study of zaremba (2015b): earnings-to-price ratio (ep), ebitda-to-ev ratio (ebev), ebitdato-price ratio (ebp) and sales-to-ev ratio (sev). in each case, we calculate the 1 argentina, australia, austria, bahrain, bangladesh, belgium, brazil, bulgaria, canada, chile, china, colombia, croatia, cyprus, czech republic, denmark, egypt, estonia, finland, france, germany, greece, hong kong, hungary, iceland, india, indonesia, ireland, israel, italy, japan, jordan, kazakhstan, kenya, kuwait, latvia, lebanon, lithuania, luxemburg, malaysia, malta, mexico, morocco, mauritius, netherlands, new zealand, nigeria, norway, oman, pakistan, peru, philippines, poland, portugal, qatar, romania, russia, serbia, saudi arabia, singapore, slovenia, south africa, south korea, spain, sri lanka, sweden, switzerland, taiwan, thailand, trinidad and tobago, tunisia, turkey, ukraine, united arab emirates, united kingdom, usa, venezuela, vietnam. if an msci index is not available for some country, the second choice is the dow jones index, and the third choice is stoxx. adam zaremba200 total accounting measure aggregated over four prior quarters and divide it by the current total stock market capitalization or ev. the accounting measures for the indices are the summed values for all the constituent companies, w8ed according to the methodology of a given index. furthermore, all the ratios are lagged three months in order to avoid look-ahead bias. the second group of anomalies is related to momentum, which is found in country equity indices by for example asness et al. (1997), bhojraj and swaminathan (2006), and balvers and wu (2006). we examine two separate version of the anomaly. first, we examine the standard long-term momentum (ltmom), where portfolios are formed on the basis of 12-month past performance with the most recent month skipped (fama and french 2008). second, we investigate the intermediate momentum (intmom) suggested by novy-marx (2012). we do not examine the classical short-term momentum originating from jegadeesh and titman (1993), that was based on 6-month past performance. the reason is that novy-marx (2012) suggest that it’s source lies predominantly in the postearnings announcement drift, which is not present at the country-level. furthermore, zaremba (2015b) and zaremba and konieczka (2015) finds no significant evidence for the short-term momentum within country equity indices. for all the above-described strategies, the zero-portfolios are formed in a uniform way. first, all the stock market indices are sorted on the metrics related to the anomalies at the end of each month t-1. next, we determine the 20th and 80th percentiles as breakpoints, and thus form three subgroups. subsequently, the returns on indices in the top and the bottom subgroup are equally w8ed to form portfolios. finally, we calculate returns on the differential portfolio – in other words zero-portfolios – which are long/short portfolios: 100% long in the quintile of markets with the highest metric, and 100% short in the quintile of markets with the lowest metric. beside the strategies based on single metrics, we calculate also returns on composite strategies, that are equal weighted portfolios of all the strategies within the two groups: value and momentum. thus, we have a composite value strategy, that is based on average performance of the four single-variable value strategies, and a composite momentum strategy, that basically averages returns on long-term and intermediate momentum. following zaremba and konieczka (2015), the performance of the portfolios is examined with two distinct asset pricing model. the first is the countrylevel capm model (sharpe, 1964), where the global market portfolio includes all the country equity indices. the return on the market portfolio in this case is the january seasonality and the performance… 201 calculated either in the gross or net approach, consistently with the returns on anomaly-based portfolios. the other model is the standard four-factor model by carhart (1997) based the us stock-level data2. we base all the formal statistical inferences on log-returns and present the outcomes accordingly. considering the impact of seasonality on the returns on value and momentum anomalies, we are particularly interested whether the performance in january is significantly better than in december. we use two separate methods to verify this hypothesis. initially, we simply calculate the mean returns in the two above-mentioned months and tests whether the difference is significantly different from 0. in this test, for the sake of simplicity, we assume that the january and december log-returns are independent and normally distributed.3 next, using the ols method, we estimate the parameters of the following regression equation: itt i t iii t decjanr   , (1) where rit is the return on i-th strategy in month t, jant and dect are dummy variables equal 1 when month t is january and december, respectively, or 0 otherwise, εit is the standard error, and αi, βi and γi are the regression parameters. finally, for each strategy we test the null hypothesis that βi is equal γi, with the alternative hypothesis assuming the contrary. to examine whether the difference in coefficients significantly departs from 0, we follow the approach suggested by paternoster et al. (1998). results and discussion table 1 reports the performance of the examined value and momentum strategies. almost all the examined strategies are characterized returns that are positive and significantly different from 0, even after the capm and four-factor models are applied. basically, adjusting for cross-sectionally varying taxes on dividends do not change the picture and most of the strategies remain robust and reliable sources of returns. analogously, the performance of the composite strategies is also characterized by positive and abnormal returns, that withstand the adjustment for the global and local risk factors. the sharpe ratio on the composite strategies in the gross and net approaches, respectively, are equal 0.86 and 0.75 for the value anomalies, and 0.58 and 0.51 for the momentum. the outperformance of the value strategies stems mainly from their lover volatility. two of the examined strategies may appear a bit controversial from the standpoint of their robustness. first, the zero-portfolios from sorts on earnings-to-price ratios have are positive returns that significantly differ from 0 only in the net approach. furthermore, the intercepts from asset pricing models are not significant either. nonetheless, zaremba and konieczka (2015), who examine this strategy also for alternative weighting scheme, find it one of the most reliable and robust strategies, so we qualify it for further investigations. analogously, the soft spot of the long-term momentum strategy seems to be adjustment for taxes; the abnormal returns in this approach are no longer significant. nonetheless, numerous studies, e.g. asness et al. (2013), document that the momentum effect is so pervasive, so we also include it in the further part of the study. table 1. performance of the zero-portfolios based on the examined anomalies. mean st. dev. sr αcapm α4f mean st. dev. sr αcapm α4f gross returns approach net returns approach value ep 0.32 3.99 0.28 0.29 0.24 0.47** 3.60 0.45 0.41 0.38 (1) where rit is the return on i-th strategy in month t, jant and dect are dummy variables equal 1 when month t is january and december, respectively, or 0 otherwise, εit is the standard error, and α i, βi and γi are the regression parameters. finally, for each strategy we test the null hypothesis that βi is equal γi, with the alternative hypothesis assuming the contrary. to examine whether the difference in coefficients significantly departs from 0, we follow the approach suggested by paternoster et al. (1998). results and discussion table 1 reports the performance of the examined value and momentum strategies. almost all the examined strategies are characterized returns that are positive and significantly different from 0, even after the capm and four-factor models are applied. basically, adjusting for cross-sectionally varying taxes on dividends do not change the picture and most of the strategies remain ro2 the stock level data come from andrea frazzini’s data library accessed on 25 june, 2015: http://www.econ.yale.edu/~af227/data_library.htm. 3 we are aware that these assumptions may be regarded as an oversimplification, but, as it is shown later in the paper, it is sufficient for this paper and any more sophisticated method would not substantially change the outcomes. adam zaremba202 bust and reliable sources of returns. analogously, the performance of the composite strategies is also characterized by positive and abnormal returns, that withstand the adjustment for the global and local risk factors. the sharpe ratio on the composite strategies in the gross and net approaches, respectively, are equal 0.86 and 0.75 for the value anomalies, and 0.58 and 0.51 for the momentum. the outperformance of the value strategies stems mainly from their lover volatility. two of the examined strategies may appear a bit controversial from the standpoint of their robustness. first, the zero-portfolios from sorts on earnings-to-price ratios have are positive returns that significantly differ from 0 only in the net approach. furthermore, the intercepts from asset pricing models are not significant either. nonetheless, zaremba and konieczka (2015), who examine this strategy also for alternative weighting scheme, find it one of the most reliable and robust strategies, so we qualify it for further investigations. analogously, the soft spot of the long-term momentum strategy seems to be adjustment for taxes; the abnormal returns in this approach are no longer significant. nonetheless, numerous studies, e.g. asness et al. (2013), document that the momentum effect is so pervasive, so we also include it in the further part of the study. table 1. performance of the zero-portfolios based on the examined anomalies mean st. dev. sr αcapm α4f mean st. dev. sr αcapm α4f gross returns approach net returns approach value ep 0.32 3.99 0.28 0.29 0.24 0.47** 3.60 0.45 0.41 0.38 (1.47) (1.16) (0.97) (2.00) (1.60) (1.51) ebev 0.96*** 4.25 0.79 0.95*** 0.88*** 0.64** 3.94 0.57 0.57** 0.53** (3.54) (3.51) (3.26) (2.27) (2.24) (2.04) ebp 0.84*** 4.08 0.71 0.80*** 0.70*** 0.73** 4.21 0.60 0.64** 0.56** (3.00) (3.12) (2.84) (2.20) (2.23) (2.05) sev 0.69*** 3.90 0.61 0.68*** 0.64** 0.58*** 3.07 0.65 0.52** 0.47** (3.09) (2.64) (2.56) (3.15) (2.42) (2.25) compval 0.74*** 2.99 0.86 0.72*** 0.68*** 0.63*** 2.93 0.75 0.55*** 0.50*** (3.83) (3.34) (2.98) (3.00) (2.89) (2.65) the january seasonality and the performance… 203 mean st. dev. sr αcapm α4f mean st. dev. sr αcapm α4f gross returns approach net returns approach momentum ltmom 0.64* 4.71 0.47 0.68** 0.52* 0.44 4.42 0.34 0.49 0.34 (1.96) (2.18) (1.82) (1.40) (1.55) (1.21) intmom 0.74** 4.38 0.58 0.77*** 0.63** 0.72** 4.42 0.57 0.77** 0.64** (2.52) (2.71) (2.20) (2.36) (2.53) (2.14) compmom 0.70** 4.22 0.58 0.73*** 0.59** 0.60** 4.06 0.51 0.64** 0.55* (2.51) (2.68) (2.15) (2.04) (2.15) (1.80) the table reports performance of zero-portfolios from sorts on earnings-to-price ratio (“ep”), ebitda-to-ev ratio (“ebev”), ebitda-to-price ratio (“ebp”), sales-to-ev (“sev”), long-term momentum (“ltmom”), and intermediate momentum (“intmom”). it also presents two meta-strategies: composite value (“compval”) and composite momentum (“compmom”). “st.dev.” is the standard deviation of monthly returns, sr is the annualized sharpe ratio, αcapm and α4f are intercepts from the countrylevel capm and the us stock-level four-factor model, respectively. “gross” and “net” approaches refer to the adjustment for taxes on dividends. the means, standard deviations and intercepts are expressed in percentage terms. the numbers in brackets are t-statistics based on bootstrap standard errors and the significance at 10% level is given in bold characters. *, ** and *** indicate values significantly different from 0 at 10%, 5% and 1% level, respectively. s ou r c e : own study. table 2 depicts the mean monthly returns of the zero-portfolios in the three parts of the year: in junuary, in december, and in the remaining months. at first sight, some interesting patterns emerge. no matter which approach we focus on – the gross or net one the value strategies predominantly performed better in january than in the 10 following months, and subsequently even worse in december. in other words, in comparison with the rest of the year, the mean returns were on average higher in january and lower in december. for example, in the case of the composite value strategy (the gross approach), the mean monthly return in january was equal 1.50%, then 0.71% on average monthly during rest of the year, and finally only 0.31% in december. in all of the observable variants of the value strategies, the januaries outperformed decembers. the superior performance in january relative to other months is consistent with analogous stock-level studies of value strategies (davis 1994, loughram 1997). nonetheless, the achilles heel of these observations is the fact, that in none case the january-december difference was actually significantly different adam zaremba204 from 0. although the seasonal pattern is quite vivid, it is not possible to make any formal inferences on its basis. the behavior of the country-level anomaly seems to be completely opposite to the value effect. the impact of the turn-of-the-year phenomenon was historically totally reverse. the both examined momentum strategies had markedly higher mean returns in december than in other months, while in january they visibly underperformed. let us focus on the composite momentum strategy in the gross approach. the average monthly in january was equal 1.93%, while in december only 0.33%. the remaining months delivered on average a return of 0.62%. again, similarly as in the case of the value strategies, this differences are not significant, although the observations are basically in line with similar patterns at the stock level detected for example by yao (2012) and novy-marx (2012). table 2. mean monthly returns on anomalies during various parts of the year ep ebev ebp sev compval ltmom intmom compmom gross returns approach jan 0.46 1.66 1.53 2.10 1.50 0.21 0.40 0.33 other 0.28 0.95 0.86 0.61 0.71 0.57 0.65 0.62 dec 0.26 0.32 0.03 0.50 0.31 1.81 2.02 1.93 jan-dec 0.21 1.35 1.50 1.60 1.19 -1.61 -1.62 -1.60 (0.13) (1.05) (0.96) (1.47) (1.21) (-0.96) (-1.37) (-1.23) net returns approach jan 1.14 0.79 1.22 1.20 1.11 0.12 1.18 0.68 other 0.39 0.72 0.78 0.56 0.64 0.36 0.54 0.46 dec 0.57 -0.30 -0.33 0.05 0.04 1.60 2.15 1.89 jan-dec 0.57 1.09 1.55 1.15 1.07 -1.49 -0.97 -1.21 (0.46) (0.90) (0.91) (1.20) (1.11) (-0.87) (-0.76) (-0.89) the table reports mean monthly returns (expressed in percentage terms) of anomaly-based strategies in three parts of the year: januaries (“jan”), decembers (“dec”), and the remaining months (“other”). the last row (“jan-dec”) is the difference between returns in januaries and decembers. symbols of strategies are identical as in table 1. the numbers in brackets are t-statistics. s ou r c e : own study. the january seasonality and the performance… 205 finally, table 3 reports the regression parameters of the equation (1) estimated from the time series of anomaly returns. the outcome basically confirm the initial observations presented in tables 2. focusing on the gross returns, the january coefficients are always positive and range from 0.18 for ep to 1.49 for sev. analogously, the december coefficients are always negative and amount to from -0.03 for ep to -0.83 for ebp. the differences between january and december coefficients are historically positive for all the value strategies, nonetheless significantly different from 0 only for sev and for the composite value strategy. the outcomes of the examinations in the net returns approach are basically similar. equally in all the value anomalies januaries outperformed decembers, but the statistical significance of this observation is weak. table 3. regression coefficients of seasonal dummy variables ep ebev ebp sev compval ltmom intmom compmom gross returns approach jan 0.18 0.71 0.67 1.49 0.81 -0.36 -0.24 -0.29 (0.19) (0.71) (0.70) (1.65) (1.15) (-0.32) (-0.23) (-0.28) dec -0.03 -0.63 -0.83 -0.11 -0.38 1.24 1.37 1.31 (-0.03) (-0.63) (-0.87) (-0.12) (-0.54) (1.10) (1.30) (1.29) jan-dec 0.21 1.35 1.50 1.60 1.19 -1.61 -1.62 -1.60 (0.22) (1.35) (1.57) (1.77) (1.69) (-1.42) (-1.53) (-1.57) net returns approach jan 0.75 0.07 0.44 0.64 0.48 -0.24 0.64 0.22 (0.82) (0.07) (0.41) (0.81) (0.64) (-0.21) (0.57) (0.21) dec 0.18 -1.02 -1.11 -0.51 -0.60 1.25 1.61 1.42 (0.19) (-0.99) (-1.01) (-0.64) (-0.78) (1.07) (1.39) (1.34) jan-dec 0.57 1.09 1.55 1.15 1.07 -1.49 -0.97 -1.21 (0.61) (1.07) (1.42) (1.45) (1.42) (-1.30) (-0.85) (-1.15) the table reports regression coefficients of seasonal dummies related to january (“jan”) and december (“dec”) according to the equation (1). the final row in each section presents the difference between january and december coefficients. symbols of strategies are identical as in table 1. the numbers in brackets are t-statistics based on bootstrap standard errors and the significance at 10% level is given in bold characters. s ou r c e : own study. adam zaremba206 the january and december coefficients of the momentum strategies are again reverse to the value strategies, analogously to the evidence from table 2. the january coefficients are predominantly negative, while december coefficients highly positive, and thus their difference is also negative. nevertheless, none of this observations is statistically significant. concluding remarks the study presents the seasonal patterns in the returns on country-level value and momentum investment strategies. during last 20 years the value strategies performed particularly well in january and underperformed in december. on the contrary, the momentum strategies had the substantially high returns in december and low in january. these observations are consistent with the explanations of the january effect related to tax selling and window dressing. the results are mainly important for fund pickers and investment managers with a global investment mandate, who employ factor strategies. it indicates that investors should pay attention to the seasonal patterns related to the turn-of-the year effect and consider unwinding their positions in december or january, depending on which strategy they follow. the study have three limitations of potentially high importance. first, the we do not account for transaction costs or cross-country liquidity and capital mobility constraints. second, the sample period includes the socalled global financial crisis, that could have affected the results in some way. third, the relatively short study period makes it impossible to draw statistically significant conclusions about the seasonal patterns in the for future long-term inter-market value and momentum returns. nonetheless, we do not have access to any older financial data, that would enable us to test the examined strategies in years prior to 1995. nevertheless, due to the lack of statistical significance, we are unable to formally reject the basic null hypotheses of the paper. the future studies on the topic discussed in this paper could be pursued in a few directions. first, it would be valuable to extend the time span of the research to increase the power of the performed tests. second, examination of also other seasonal patterns, like for example the “sell-in-may-and-go-away” effect (bouman and jacobsen 2002, castro and schabek 2014), would be beneficial for country-level investors. finally, 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(2015b). momentum and low-volatility effects in country-level stock market anomalies. available at ssrn: http://ssrn.com/abstract=2621236 (accessed: 25.06. 2015). zaremba, a., & konieczka, p. (2015). do quantitative country selection strategies really work? available at ssrn: http://ssrn.com/abstract=2606178 or http://dx.doi. org/10.2139/ssrn.2606178 (accessed 25.06.2015). date of submission: april 11, 2022; date of acceptance: november 21, 2022. * contact information: nisarg@nisargjoshi.com, institute of management, nirma university ahmedabad – 382481, gujarat, india, phone: 9723500052; orcid id: https://orcid.org/0000-0002-2417-4158. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 joshi, n.a. (2022). impact of covid-19 on performance on indian stock indices: a study for nse composite and sectoral indices. copernican journal of finance & accounting, 11(4), 125–146. http://dx.doi.org/10.12775/cjfa.2022.022 nisarg a. joshi* nirma university impact of covid-19 on performance on indian stock indices: a study for nse composite and sectoral indices keywords: covid-19, volatility, index returns, nse, sectoral indices, post-covid-19 j e l classification: c32, c41, f21, g01, g11. abstract: purpose/objective: the objective of the paper was to scrutinize the impact of covid-19 on the performance of composite and sectoral indices of national stock exchange (nse) of india. methodology and approach: the study included sample daily closing prices from july 2019 to december 2020 for two composite indices and nine sectoral indices of nse. the sample was divided into three sub-samples to check the impact before, during and after (after the lockdown was lifted) the pandemic on the volatility of returns. the volatility measures were regressed using a dummy variable for covid-19. findings: the results showed that there was an increase in the volatility of returns of the indices during covid-19 as compared to post-lockdown period. it was also found that the skewness of returns of the indices have become more negative in the post-covid-19 (post-lockdown) period. practical implications/conclusion: the findings of the study have significant implications and impacts regarding the decision making for equity analysts, portfolio management firms, investors and traders for assessing their investment in a better way and http://dx.doi.org/10.12775/cjfa.2022.022 nisarg a. joshi126126 deciding their investments. the author believed that these results would magnify the volatility relations.  introduction introduction the stock prices have plunged significantly due to covid-19, which has led to unexpected downward pressure on global indices like never before. in this context, there are recent and relevant studies which had studied the effect of covid-19 on performance of stock indices, volatility, stability of stock indices etc., which were supported by other empirical studies. such signal of panic trading and augmented volatility in various markets across the globe was recognized by certain studies such as al-awadhi, al-saifi, al-awadhi and alhamadi, 2020; baker, bloom, davis, kost, sammon and viratyosin, 2020; kartal, depren and kılıç depren, 2020; phan and narayan, 2020; harif, aloui, and yarovaya, 2020. baker et al. (2020) estimated that the way the market was showing the volatility during the month of march; 2020 would be much greater than the historical crisis such as black monday triggered by djia decline of 22% in one day in 1987 or the monetary crisis at the global level which was prompted by subprime crisis of 2008 or the great depression of 1930. this was experienced by the indian stock indices as the nse and bse paused the trading amid triggering the lower circuit threshold of 10% twice in two weeks during march 2020. the indian stock market started having major shocks in the first quarter of the year 2020 prejudiced by the global meltdown and covid-19 which was centered in china initially. the first crash in indian market was seen on february 1, 2020 when nifty crashed by 3% and sensex crashed by 2% in one day. this was just the beginning as the stock market crash risk became significant amid who’s announcement of covid-19 as a potential epidemic. in the last week of february 2020, both sensex and nifty plunged for entire week resulted in the worst weekly fall in more than a decade. the stock market crash became severe in the month of march when in the first week of march markets went down by 1,000 points. on march 9, 2020, sensex went down by 1,941.67 points and nifty went down by 538 points amid the havoc created by covid-19 outbreak. on 12th march, who acknowledged covid-19 as universal epidemic and sensex closed at 33 months low and crashed by 8.18% and nifty crashed by 8.30%. during the next week, sensex plunged continuously for 4 trading days where the highest single day crash was 8%. the biggest crash in one day in the indian markets was seen next week when covid-19 led to lockdown in india along impact of covid-19 on performance on indian stock indices… 127127 with other countries and the markets crashed in the fear of recession where sensex crashed by 13.15% and nifty reduced by 12.98%. mazur, dang and vega (2020) studied the crash of stock market amid covid-19 and found a significant volatility. this paper emphasizes the impact of covid-19 on performance of stock indices in india. this study quantifies the performance of indian stock indices by measuring the volatility of index returns. the purpose of the study is to augment the argument of response of the stock market to unforeseen events for assessing the risk and making the decisions. this study tries to focus on checking the variables used for predicting the performance of the stock indices such as standard deviation, skewness and kurtosis. for last couple of years, many researchers have worked on checking the effects of coronavirus on different factors like economic performance, liberal policies announced by the government, health sector, tourism and hospitality, migration and contrary, stock indices etc. most of the studies done on the stock markets have used composite indices of the markets and majorly from the economically advanced economies. there are also a few studies available which have worked on the similar line for the developing economies using the composite indices but there is very little work done on all the sectoral indices present in a particular market. there was one study done in the context of indian market, which has used pre-covid-19 and during-covid-19 period for their event study (chaudhary, bakhshi & gupta, 2020). this study focuses on studying the impact of covid-19 on indian market using the composite index along with the sectoral indices. literature reviewliterature review stock market returns are affected by major events happening in a country as well as in the world and these returns are the true mirror of the economic situation of any country. previous studies show the impact of news on the stock returns (li, 2018). pendell and cho (2013) studied the impact of foot-and-mouth disease outbreaks on the performance of stock returns. al-awadhi et al. (2020) found that the number of cases and deaths due to covid-19 resulted in negative returns in the stock listed in china. loh (2006) studied the impact of another pandemic of sars on the aviation sector stocks of various countries and found that aviation sector was more sen nisarg a. joshi128128 sitive to the information of pandemic as compared to other industries. these results were reinforced by another study by (chen, jang & kim, 2007; brown & smith, 2008) who concluded that along with aviation sector, other industries like hotels, tourism, fmcg, etc. also had a significant negative impact caused by sars. wang and kutan (2013) concluded that there was a significant positive return of the stock of biotechnology and pharmaceutical companies of taiwan amid pandemic. in this line, another study was conducted by del giudice and paltrinieri (2017) with respect to another pandemic in the african region named ebola and its impact on stock returns. nageri (2019) studied the volatility persistence of stock returns for nigerian stock index during preand post-sub-prime crisis using garch model with three error distribution and found that the volatility in the nigerian market was low before the sub-prime crisis and was very high after sub-prime crisis. he also concluded that the traders who short their positions to make abnormal profits by spreading rumors should be monitored, regulated and restricted to avoid high volatility persistence. fernandes (2020) stated that the covid-19 pandemic could not be compared with previous epidemic as it made a more severe impact on economies of the globe and were not restricted to specific region or economies of the world. covid-19 had a massive impact on the stock indices across the world like never before because along with the downfall in the economic activities, other factors like investor sentimentality, fear, uncertainty, etc. also affected the markets negatively. the global stock markets were affected by covid-19 in the most dangerous manner as compared to other pandemics in the history of mankind (goodell, 2020; okorie & lin, 2021; david, inácio & tenreiro machado, 2021). asian markets were affected more by covid-19 as compared to developing indices in the european region (topcu & gulal, 2020). the impact of covid-19 in india was far more severe as compared to other economic events such as demonetization of the year 2016 or the implementation of goods and services tax in the later year (mishra & mishra, 2020). there were numerous studies conducted in the recent past to how the stock markets have responded to covid-19 based on various samples like regions, developing economies, most affected economies, etc. (zaremba, kizys, aharon & demir, 2020; siddiqui, ahmed & naushad, 2020; okorie & lin, 2020; ali, alam & rizvi, 2020; izzeldin, muradoğlu, pappas & sivaprasad, 2021; aslam, ferreira, mughal & bashir, 2021). liu, manzoor, wang, zhang and manzoor (2020) used event study to check the effect of covid-19 on the stock returns of the economies which were affect impact of covid-19 on performance on indian stock indices… 129129 ed the most by the pandemic and found that the stock indices reacted negatively to the outbreak of the pandemic which resulted in a fall in the returns. in the same line, mishra and mishra (2020) studied effect of covid-19 on the asian economies neighboring china using the same method and found the results which were consistent with liu et al. (2020). singh, dhall, narang and rawat (2020) used an event study with panel regression to check the stock market responses amid covid-19. international financial markets became unpredictable and the risk has also elevated due to unprecedented pandemic situations (zhang, hu & ji, 2020). according to albulescu (2020), the volatility index of china and other countries nearby and estimated that the volatility in the market will increase with increase in the spread of covid-19. ahmar and val (2020) studied the short-run impact of coronavirus on spain’s stock market index and found that suttearima was a better method to estimate the effect of covid-19 on the index. methodsmethods data samplingdata sampling the market returns were obtained from the official website of national stock exchange by taking the daily closing prices of two composite indices of the exchange, namely nifty 50 and nifty 500 and nine sectoral indices, i.e., bank nifty, nifty auto, nifty realty, nifty financial services, nifty fmcg, nifty it, nifty media, nifty metal and nifty pharma. the closing prices were taken for the period from january 1, 2019 to december 31, 2020 and from july 2019 to december 2020. table 1 shows the descriptive statistics for the entire sample separated into three sub-samples for the pre-covid-19 period (july 2019 to december 2019), during covid-19 lockdown period (january 2020 to june 2020) and post-covid-19 lockdown period (july 2020 to december 2020). methodologymethodology daily returns of the composite indices and the sectoral indices were calculated using the natural logarithm of the daily price changes. the daily returns were calculated using the following equation where rt is the return on index, pt is the price on index, and pt-1 is the price on index at the end of the previous day. nisarg a. joshi130130 resulted as a fall in the returns. in the same line, mishra and mishra (2020) studied effect of covid-19 on the asian economies neighboring china using the same method and found the results which were consistent with liu et al. (2020). singh, dhall, narang and rawat (2020) used an event study with panel regression to check the stock market responses amid covid-19. international financial markets became unpredictable and the risk has also elevated due to unprecedented pandemic situations (zhang, hu & ji, 2020). according to albulescu (2020), the volatility index of china and other countries nearby and estimated that the volatility in the market will increase with increase in the spread of covid-19. ahmar and val (2020) studied the short-run impact of coronavirus on spain stock market index and found that suttearima was a better method to estimate the effect of covid-19 on the index. methods data sampling the market returns were obtained from the official website of national stock exchange by taking the daily closing prices of two composite indices of the exchange namely nifty 50 and nifty 500 and nine sectoral indices, i.e., bank nifty, nifty auto, nifty realty, nifty financial services, nifty fmcg, nifty it, nifty media, nifty metal and nifty pharma. the closing prices were taken for the period from january 1, 2019 to december 31, 2020.from july 2019 to december 2020. table – 1 shows the descriptive statistics for the entire sample separated in to three sub-samples for the pre-covid period (july – 2019 to december – 2019), during-covid lockdown period (january -2020 to june – 2020) and post-covid lockdown period (july – 2020 to december – 2020). methodology daily returns of the composite indices and the sectoral indices were calculated using the natural logarithm of the daily price changes. the daily returns were calculated using the following equation where, rt is the return on index, pt is the price on index, and pt-1 is the price on index at the end of previous day. 𝑅𝑅� � ��� 𝑃𝑃�� 𝑃𝑃�,���� a regression framework was developed to examine the impact of covid-19 on volatility of the index returns. the regression framework was constructed to measure the impact using different measures of variability such as standard deviation (sd), skewness (skew) and kurtosis (kur). for this purpose, covid-19 was added as a dummy variable in the equation as a binary variable with ‘0’ for the pre-covid-19 period and ‘1’ for the during covid-19 (lockdown period) and post-covid-19 (post-lockdown) period. for the purpose of the study, post-lockdown period was considered as post-covid-19 period. though the pandemic did not end in india in june 2020, once the lockdown was lifted and the phase of wise unlock was implemented by the government, the economic activities restarted and the impact of the removal of restrictions on the volatility was investigated as post-covid-19 period. the analysis was done in two parts to check the impact of cov id -19 on the performance of the indian indices. the first regression analysis was done for the period before covid-19 (july 2019 to december 2019) and during covid-19 lockdown (january 2020 to june 2020). the second regression analysis was done for the period before covid-19 (july 2019 to december 2019) and for the period after covid-19 lockdown was lifted (july 2020 to december 2020). the impact of covid-19 on volatility of returns is captured by a variety of factors such as increase in number of covid-19 positive cases, increase in number of deaths due to covid-19, the impact of the interaction between number of cases and deaths, increase in number of cases and deaths globally, etc. these factors will lead to change in the investors’ mentality regarding investment during the pandemic. the investors will be hesitant to invest in the capital markets which will lead to increase in fear of index/volatility index. such fear will in turn lead to increased volatility in the market and will result in the market crash due to such pandemic. the objective of the paper is to measure such impact of covid-19 on variability of returns by taking a binary dummy variable as mentioned above. in the first part of the regression analysis, the impact of covid-19 on volatility of the index returns was measured as the combined effect of β0 + β1 as the impact of covid-19 was captured by the dummy variable shown as β1. similarly, the impact of removal of lockdown (post-covid period) on volatility of index returns was captured by impact of covid-19 on performance on indian stock indices… 131131 β0 + β1 as the impact of post-covid-19 period was captured by the dummy variable shown as β1. this study was conducted using the regression framework under the assumptions of generalized least squares (gls) method rather than ols regression considering heteroscedasticity and autocorrelation of the data. for the purpose of this analysis, all the dependent variables were calculated using the rolling data for one month. these models had taken sd, skew and kur as the dependent variables for each composite and sectoral index in the sample and the impact of covid-19 was checked using a binary dummy variable. the value of dummy variable was considered as ‘0’ for the period prior to the pandemic (july 2019 to december 2019) and was considered ‘1’ for the period during the pandemic (january 2020 to june 2020) and after the lockdown was lifted (july 2020 to december 2020). heteroscedasticity and autocorrelation of the data. for the purpose of this analysis, all the dependent variables were calculated using the rolling data for one month. these models had taken sd, skew and kur as the dependent variables for each composite and sectoral index in the sample and the impact of covid-19 was checked using a binary dummy variable. the value of dummy variable was considered as ‘0’ for the period prior to the pandemic (july – 2019 to december – 2019) and was considered ‘1’ for the period during the pandemic (january – 2020 to june – 2020) and after the lockdown was lifted (july – 2020 to december – 2020). 𝑆𝑆𝑆𝑆� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where sdt was the standard deviation for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where skewt was the skewness for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. 𝑆𝑆𝐾𝐾𝐾𝐾� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where kurt was the kurtosis for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. results and discussion the results of the descriptive statistics are shown in next three tables. the descriptive statistics have been shown for three periods, before the pandemic (july – december 2019) and during the pandemic lockdown (january – june 2020) and after the pandemic lockdown (july 2020 – december 2020) after keeping in mind for comparable time-frame for the sub-samples. the mean returns of the pre-covid period and post-covid period (post lockdown) were found to be positive for all indices whereas the mean returns were negative for the covid period except the where sdt was the standard deviation for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid-19 and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and εt is the error term at time t. heteroscedasticity and autocorrelation of the data. for the purpose of this analysis, all the dependent variables were calculated using the rolling data for one month. these models had taken sd, skew and kur as the dependent variables for each composite and sectoral index in the sample and the impact of covid-19 was checked using a binary dummy variable. the value of dummy variable was considered as ‘0’ for the period prior to the pandemic (july – 2019 to december – 2019) and was considered ‘1’ for the period during the pandemic (january – 2020 to june – 2020) and after the lockdown was lifted (july – 2020 to december – 2020). 𝑆𝑆𝑆𝑆� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where sdt was the standard deviation for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where skewt was the skewness for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. 𝑆𝑆𝐾𝐾𝐾𝐾� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where kurt was the kurtosis for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. results and discussion the results of the descriptive statistics are shown in next three tables. the descriptive statistics have been shown for three periods, before the pandemic (july – december 2019) and during the pandemic lockdown (january – june 2020) and after the pandemic lockdown (july 2020 – december 2020) after keeping in mind for comparable time-frame for the sub-samples. the mean returns of the pre-covid period and post-covid period (post lockdown) were found to be positive for all indices whereas the mean returns were negative for the covid period except the where skewt was the skewness for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid-19 and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and εt is the error term at time t. heteroscedasticity and autocorrelation of the data. for the purpose of this analysis, all the dependent variables were calculated using the rolling data for one month. these models had taken sd, skew and kur as the dependent variables for each composite and sectoral index in the sample and the impact of covid-19 was checked using a binary dummy variable. the value of dummy variable was considered as ‘0’ for the period prior to the pandemic (july – 2019 to december – 2019) and was considered ‘1’ for the period during the pandemic (january – 2020 to june – 2020) and after the lockdown was lifted (july – 2020 to december – 2020). 𝑆𝑆𝑆𝑆� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where sdt was the standard deviation for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where skewt was the skewness for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. 𝑆𝑆𝐾𝐾𝐾𝐾� � �� � ��𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆� � 𝜀𝜀� where kurt was the kurtosis for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and 𝜀𝜀� is the error term at time t. results and discussion the results of the descriptive statistics are shown in next three tables. the descriptive statistics have been shown for three periods, before the pandemic (july – december 2019) and during the pandemic lockdown (january – june 2020) and after the pandemic lockdown (july 2020 – december 2020) after keeping in mind for comparable time-frame for the sub-samples. the mean returns of the pre-covid period and post-covid period (post lockdown) were found to be positive for all indices whereas the mean returns were negative for the covid period except the where kurt was the kurtosis for the index at time t, and covid-19 was a dummy variable equal ‘0’ for the period before covid-19 and 1 for the period during and after covid-19 lockdown (i.e., from january 2020 to june 2020, and from july 2020 to december 2020) and εt is the error term at time t. nisarg a. joshi132132 results and discussionresults and discussion the results of the descriptive statistics are shown in next three tables. the descriptive statistics have been shown for three periods, before the pandemic (july 2019 – december 2019) and during the pandemic lockdown (january 2020 – june 2020) and after the pandemic lockdown (july 2020 – december 2020) after keeping in mind a comparable time-frame for the sub-samples. the mean returns of the pre-covid-19 period and post-covid-19 period (post-lockdown) were found to be positive for all indices whereas the mean returns were negative for the covid-19 period except the returns of the pharma sector index which were found to be positive during the covid-19 period. the mean returns of indices in the pre-covid-19 period were found to be positive except four sectoral indices like information technology sector, media, metal and pharmaceutical sector. three out of these four sectors’ returns plunged further during the covid-19 period majorly after the lockdown was imposed by the government and all other indices’ returns were also turned into negative except pharma which performed well due to pandemic. once the lockdown was lifted and the economy had started gaining its momentum, all the indices have shown positive returns in the period of july to december 2020. the market was found to be more volatile during the covid-19 period. the standard deviation of returns was very high during the covid-19 period due to investor sentimentality towards fear due to pandemic and the supply pressure in the market. the highest volatility was found in sectoral indices like banks, financial services, metal sector and realty sector as compared to composite indices. the volatility in the post-covid-19 period was similar to the volatility experienced by the indices in the time period before covid-19. impact of covid-19 on performance on indian stock indices… 133133 t ab le 1 . d es cr ip ti ve s ta ti st ic s fo r pr eco v id p er io d (j ul y 20 19 – d ec em be r 20 19 ) n if ty 5 0 n if ty 5 00 b an k n if ty n if ty a ut o n if ty r ea lt y n if ty fi n. s er . n if ty fm cg n if ty it n if ty m ed ia n if ty m et al n if ty ph ar m a m ea n 0. 00 03 0. 00 02 0. 00 02 0. 00 03 0. 00 04 0. 00 06 0. 00 02 -0 .0 00 2 -0 .0 01 0 -0 .0 00 5 -2 .5 e05 m ed ia n 0. 00 08 0. 00 12 0. 00 08 -0 .0 01 2 0. 00 19 0. 00 11 -0 .0 00 1 0. 00 06 -0 .0 01 0 -0 .0 01 1 -3 .7 e05 m ax 0. 05 18 0. 05 15 0. 07 98 0. 09 44 0. 04 05 0. 06 90 0. 04 31 0. 02 81 0. 07 44 0. 05 52 0. 03 21 m in -0 .0 21 6 -0 .0 21 9 -0 .0 28 0 -0 .0 40 2 -0 .0 63 6 -0 .0 30 2 -0 .0 19 7 -0 .0 47 9 -0 .0 46 3 -0 .0 38 2 -0 .0 34 0 st d. d ev . 0. 00 94 0. 00 94 0. 01 46 0. 01 76 0. 01 63 0. 01 33 0. 00 88 0. 01 06 0. 01 99 0. 01 85 0. 01 15 sk ew ne ss 1. 29 44 1. 21 27 1. 47 82 1. 03 48 -0 .5 57 2 1. 34 46 1. 56 02 -0 .7 97 9 0. 26 65 0. 16 46 -0 .0 11 4 ku rt os is 9. 60 65 9. 48 84 10 .1 31 8. 78 63 4. 52 94 9. 88 53 10 .2 88 5. 73 46 4. 01 00 2. 68 31 3. 04 07 jb s ta ti st ic 25 8. 03 24 5. 91 30 5. 45 19 3. 54 18 .3 5 28 0. 03 32 2. 17 51 .3 7 6. 68 51 1. 07 04 0. 01 11 pr ob . 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 01 0. 00 00 0. 00 00 0. 00 00 0. 03 53 0. 58 55 0. 99 44 su m 0. 03 17 0. 02 19 0. 03 34 0. 03 96 0. 04 71 0. 07 12 0. 01 92 -0 .0 17 9 -0 .1 23 0 -0 .0 61 9 -0 .0 03 1 su m s q. d ev . 0. 01 08 0. 01 07 0. 02 62 0. 03 78 0. 03 25 0. 02 15 0. 00 94 0. 01 39 0. 04 84 0. 04 19 0. 01 61 o bs . 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 s o u r c e : a ut ho r’ s ca lc ul at io n. nisarg a. joshi134134 t ab le 2 . d es cr ip ti ve s ta ti st ic s fo r du ri ng c o v id p er io d (j an ua ry 2 02 0 to ju ne 2 02 0) n if ty 5 0 n if ty 5 00 b an k n if ty n if ty a ut o n if ty r ea lt y n if ty fi n. s er . n if ty fm cg n if ty it n if ty m ed ia n if ty m et al n if ty ph ar m a m ea n -0 .0 01 3 -0 .0 01 2 -0 .0 03 3 -0 .0 01 6 -0 .0 03 1 -0 .0 02 6 -1 .6 e05 -0 .0 00 5 -0 .0 02 4 -0 .0 02 7 0. 00 17 m ed ia n -0 .0 00 5 0. 00 11 -0 .0 00 8 0. 00 12 -0 .0 00 5 0. 00 13 0. 00 10 0. 00 12 0. 00 03 0. 00 03 0. 00 08 m ax 0. 08 40 0. 07 40 0. 09 99 0. 09 89 0. 06 19 0. 08 91 0. 07 99 0. 08 64 0. 06 44 0. 07 59 0. 09 86 m in -0 .1 39 0 -0 .1 37 0 -0 .1 83 1 -0 .1 49 0 -0 .1 20 5 -0 .1 73 6 -0 .1 11 9 -0 .1 00 6 -0 .1 08 9 -0 .1 23 3 -0 .0 93 5 st d. d ev . 0. 02 67 0. 02 51 0. 03 51 0. 02 98 0. 02 99 0. 03 43 0. 02 19 0. 02 57 0. 02 88 0. 03 18 0. 02 24 sk ew ne ss -1 .2 68 -1 .5 74 4 -1 .1 52 6 -0 .7 96 5 -1 .0 93 9 -1 .1 81 5 -0 .5 85 1 -0 .6 97 6 -0 .9 36 2 -0 .7 36 9 -0 .1 35 7 ku rt os is 9. 52 13 10 .5 48 2 8. 54 50 8. 66 49 5. 57 69 7. 86 // 62 10 .8 88 7. 17 65 4. 85 96 5. 23 48 8. 23 99 jb s ta ti st ic 25 0. 95 34 2. 79 18 4. 81 17 7. 47 58 .5 6 14 9. 98 32 5. 95 99 .3 75 35 .6 95 36 .7 29 14 1. 09 pr ob . 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 00 0. 00 00 su m -0 .1 66 4 -0 .1 52 6 -0 .4 08 7 -0 .2 05 0 -0 .3 85 7 -0 .3 20 8 -0 .0 01 9 -0 .0 59 0 -0 .2 94 6 -0 .3 41 1 0. 21 66 su m s q. d ev . 0. 08 71 0. 07 72 0. 15 04 0. 10 89 0. 10 96 0. 14 38 0. 05 88 0. 08 10 0. 10 15 0. 12 38 0. 06 16 o bs . 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 12 3 s o u r c e : a ut ho r’ s ca lc ul at io n. impact of covid-19 on performance on indian stock indices… 135135 t ab le 3 . d es cr ip ti ve s ta ti st ic s fo r po st -c o v id p er io d (j ul y 20 20 to d ec em be r 20 20 ) n if ty 5 0 n if ty 5 00 b an k n if ty n if ty a ut o n if ty r ea lt y n if ty fi n. s er . n if ty fm cg n if ty it n if ty m ed ia n if ty m et al n if ty ph ar m a m ea n 0. 00 23 0. 00 23 0. 00 29 0. 00 24 0. 00 33 0. 00 28 0. 00 09 0. 00 38 0. 00 15 0. 00 38 0. 00 19 m ed ia n 0. 00 33 0. 00 36 0. 00 44 0. 00 31 0. 00 51 0. 00 38 0. 00 13 0. 00 31 0. 00 24 0. 00 44 0. 00 26 m ax 0. 02 23 0. 02 33 0. 04 06 0. 03 32 0. 06 20 0. 04 02 0. 02 76 0. 05 10 0. 05 22 0. 04 30 0. 05 22 m in -0 .0 31 9 -0 .0 35 0 -0 .0 41 8 -0 .0 47 3 -0 .0 58 1 -0 .0 33 2 -0 .0 30 6 -0 .0 42 9 -0 .0 64 0 -0 .0 57 0 -0 .0 47 8 st d. d ev . 0. 00 97 0. 00 94 0. 01 72 0. 01 37 0. 01 92 0. 01 50 0. 00 87 0. 01 39 0. 01 87 0. 01 71 0. 01 59 sk ew ne ss -1 .0 79 5 -1 .3 54 4 -0 .2 89 4 -0 .7 41 6 -0 .1 06 9 -0 .1 84 5 -0 .4 30 0 0. 20 58 -0 .3 41 2 -0 .7 33 4 -0 .1 52 2 ku rt os is 4. 54 36 5. 76 56 2. 83 62 4. 88 33 3. 91 27 2. 71 01 4. 69 69 4. 94 53 4. 39 69 4. 69 42 4. 62 49 jb s ta ti st ic 37 .8 6 80 .5 5 1. 94 30 .8 9 4. 72 40 1. 18 41 19 .4 5 21 .2 5 12 .9 92 26 .9 94 14 .6 91 pr ob . 0. 00 00 0. 00 00 0. 37 81 0. 00 00 0. 09 42 0. 55 31 0. 00 00 0. 00 00 0. 00 15 0. 00 00 0. 00 06 su m 0. 30 54 0. 30 68 0. 38 04 0. 31 35 0. 43 74 0. 36 45 0. 12 82 0. 49 69 0. 20 49 0. 49 12 0. 25 73 su m s q. d ev . 0. 01 21 0. 01 14 0. 03 82 0. 02 42 0. 04 75 0. 02 89 0. 00 98 0. 02 49 0. 04 51 0. 03 76 0. 03 24 o bs . 12 9 12 9 12 9 12 9 12 9 12 9 12 9 12 9 12 9 12 9 12 9 s o u r c e : a ut ho r’ s ca lc ul at io n. nisarg a. joshi136136 the skewness values of all the indices were found to be negative during the covid-19 period and post-covid-19 period as compared to positively skewed values before covid-19 except realty and it sector. these two sectors had negative skewness values for all the three sub-sample time frames. the returns were following leptokurtic distribution based on the high kurtosis values for all the indices for entire time frame. the results of jb statistic showed that majority of the indices did not follow normal distribution during the entire time period except metal and pharma sectors which were found to have normal distribution in pre-covid-19 period whereas bank sector and financial services sector were having normal distribution in the post-covid-19 period. the correlation results show that the correlation among indices have increased during the pandemic. for the post-covid-19 period, the correlation had decreased among the indices. these findings are in consistent with akter and nobi (2018) who found that the returns of the indices were less dispersed during the pandemic. the results of the regression analysis are shown in table 4, 5 and 6. this first analysis shows the impact of covid-19 on indices volatility before covid-19 and during covid-19, including the lockdown period. the results show that there is a significant positive relationship between the pandemic and the volatility of all the indices in the sample. these findings are in line with yousef (2020) who also concluded that the volatility of indian market had increased amid covid-19. table 4. regression results for model 1 for pre-covid and during covid-19 (july 2019 to june 2020) index constant (β0) p value (β1) p value adjusted r 2 nifty 50 0.0090 (9.4204) 0.0000*** 0.0129 (9.5818) 0.0000*** 0.2704 nifty 500 0.00896 (10.0271) 0.0000*** 0.0116 (9.1902) 0.0000*** 0.2541 nifty bank 0.013595 (11.3632) 0.0000*** 0.015528 (9.1772) 0.0000*** 0.2536 nifty auto 0.016768 (16.7816) 0.0000*** 0.008558 (6.0559) 0.0000*** 0.1271 nifty reality 0.016174 (21.78458) 0.0000*** 0.009688 (9.2270) 0.0000*** 0.2556 nifty financial services 0.012364 (10.54431) 0.0000*** 0.016253 (9.8011) 0.0000*** 0.2795 impact of covid-19 on performance on indian stock indices… 137137 index constant (β0) p value (β1) p value adjusted r 2 nifty fmcg 0.008376 (10.39899) 0.0000*** 0.009675 (8.4938) 0.0000*** 0.2250 nifty it 0.010451 (11.8971) 0.0000*** 0.010877 (8.7553) 0.0000*** 0.2359 nifty media 0.019580 (29.86678) 0.0000*** 0.006062 (6.5389) 0.0000*** 0.1456 nifty metal 0.018221 (22.2939) 0.0000*** 0.010303 (8.9137) 0.0000*** 0.2426 nifty pharma 0.011979 (16.8907) 0.0000*** 0.007053 (7.0319) 0.0000*** 0.1651 s o u r c e : author’s calculation, *** significant at 1% level, ** significant at 5% level. the results in table 4 show that nifty 50 had the highest value of co-efficient among composite indices which can be inferred as the blue-chip companies (large cap.) are more volatile than small and mid-cap companies. it can also be seen in the results as the co-efficient of nifty 50 was higher than nifty 500 index. among the sectoral indices, finance sector was found to have highest volatility (0.016253) followed by the bank sector (0.015528). these sectors had experienced higher volatility than all the composite indices. these results indicate that investor sentimentality was against the financial sector during the pandemic time considering the increase in npas amid extended lockdown and financial relaxations. the health care sector was found to have the least volatility during covid-19 and shown upward trend. the results show the impact of covid-19 on volatility of returns. the results show that the volatility of returns of nifty 50 index in the pre-covid-19 period was 0.9% which had increased to 2.19% during the pandemic. the highest volatility of returns was found in the bank sector which had increased from 1.36% in the pre-covid-19 period to 2.91% during the lockdown period followed by the financial services sector (2.86%). pharma sector and fmcg sector had shown the resistance during the covid-19 period as they had shown the least volatility of returns. the regression results regarding the impact of covid-19 on indices volatility before covid-19 and after covid-19 lockdown are also shown in table 5. these results show that, once the lockdown was lifted by the government and the economic table 4. regression… nisarg a. joshi138138 activities resumed, there was a mixed relationship between covid-19 and volatility of the indices. the co-efficient value of all indices from the sample have shown negative value. these results indicate that post-covid-19, once the lockdown had lifted, there was a negative relationship between covid-19 and volatility. nifty pharma had shown the insignificant relationship between covid-19 and volatility. table 5. regression results for model 1 for pre-covid-19 and post-covid-19 (july 2019 to december 2020 & july 2020 to december 2020) index constant (β0) p value (β1) p value adjusted r 2 nifty 50 0.356603 (5.6631) 0.0000*** -0.958746 (-10.7661) 0.0000*** 0.3193 nifty 500 0.303785 (4.7878) 0.0000*** -1.082286 (-12.0613) 0.0000*** 0.3710 nifty bank 0.077353 (1.0739 0.2839 -0.645293 (-6.3346) 0.0000*** 0.1377 nifty auto 0.605246 (8.8857) 0.0000*** -1.126552 (-11.69489) 0.0000*** 0.3566 nifty reality -0.332747 (-5.9633) 0.0000*** -0.639902 (-8.1090) 0.0000*** 0.2091 nifty financial services 0.096032 (1.3515) 0.1778 -0.835188 (-8.3115) 0.0000*** 0.2175 nifty fmcg 0.227140 (2.9502) 0.0035*** -0.424732 (-3.9009) 0.0001*** 0.0549 nifty it -0.543955 (-7.5705) 0.0000*** 0.225583 (2.2199) 0.0273** 0.0158 nifty media 0.189601 (6.0433) 0.0000*** -0.8295 (-18.6962) 0.0000*** 0.5872 nifty metal 0.167234 (6.9002) 0.0000*** -0.558835 (-16.3044) 0.0000*** 0.5195 nifty pharma 0.168255 (2.7964) 0.0056*** -0.036558 (-0.4296) 0.6678 -0.0033 s o u r c e : author’s calculation, *** significant at 1% level, ** significant at 5% level. the results showing the impact of covid-19 on skewness are shown in table 6 and table 7. the results of the first analysis depict that there is a mixed relation between covid-19 and skewness of all the indices in the sample. among composite indices, nifty 500 (0.697574) has the highest positive co-efficient which impact of covid-19 on performance on indian stock indices… 139139 can be inferred as the small and mid-cap stock have higher skewness as compared to stock which are included in nifty 50. nifty 50 index showed an insignificant positive relationship between covid-19 and skewness. the sectoral indices which were found to have the highest negative co-efficient is nifty it (-1.170203), and highest positive co-efficient is nifty realty (2.089636). nifty bank, nifty auto, nifty financial services and nifty media have insignificant relationship between covid-19 and skewness. the results of the analysis for the pre-covid-19 and post-covid-19 period also show mixed relation between covid-19 and skewness of the indices. nifty 500 index and nifty fmcg index showed insignificant positive relationship between covid-19 and skewness. table 6. regression results for model 2 for pre-covid-19 and during covid-19 (july 2019 to june 2020) index constant (β0) p value (β1) p value adjusted r 2 nifty 50 1.270817 (8.3014) 0.0000*** 0.309386 (1.4289) 0.1543 0.0042 nifty 500 1.147216 (7.0876) 0.0000*** 0.697574 (3.0474) 0.0026*** 0.0327 nifty bank 1.504908 (11.3424) 0.0000*** 0.008447 (0.0450) 0.9641 -0.005 nifty auto 1.818009 (9.6656) 0.0000*** -0.409359 (-1.5389) 0.1251 0.0056 nifty realty 0.464673 (1.9774) 0.0491** 2.089636 (6.2880) 0.0000*** 0.1359 nifty financial services 1.792925 (13.5131) 0.0000*** -0.02242 (-0.1195) 0.9050 -0.004 nifty fmcg 1.572924 (9.2106) 0.0000*** -0.355282 (-1.4711) 0.1426 0.0047 nifty it 2.288402 (10.7758) 0.0000*** -1.170203 (-3.8964) 0.0001*** 0.0547 nifty media 0.637226 (7.1181) 0.0000*** -0.000420 (-0.0033) 0.9974 -0.0041 nifty metal -0.433009 (-6.0955) 0.0000*** 0.911095 (9.0690) 0.0000*** 0.2490 nifty pharma 0.259024 (2.3996) 0.0172** 1.077574 (7.0587) 0.0000*** 0.1661 s o u r c e : author’s calculation, *** significant at 1% level, ** significant at 5% level. nisarg a. joshi140140 table 7. regression results for model 2 for pre-covid-19 and post-covid-19 (july 2019 to december 2020 & july 2020 to december 2020) index constant (β0) p value (β1) p value adjusted r 2 nifty 50 0.008977 (40.7533) 0.0000 0.001018 (3.3080) 0.0011 0.0381 nifty 500 0.008962 (39.7758) 0.0000 0.000474 (1.5043) 0.1338 0.0050 nifty bank 0.013595 (34.5211) 0.0000 0.004555 (8.2760) 0.0000 0.2119 nifty auto 0.016768 (44.8521) 0.0000 -0.003162 (-6.0509) 0.0000 0.1243 nifty reality 0.016174 (45.6823) 0.0000 0.003266 (6.5993) 0.0000 0.1450 nifty financial services 0.012364 (33.8803) 0.0000 0.003466 (6.7948) 0.0000 0.1525 nifty fmcg 0.008376 (43.7738) 0.0000 6.90e-05 (0.2580) 0.7966 -0.0037 nifty it 0.010451 (56.5388) 00000 0.003620 (14.0138) 0.0000 0.4377 nifty media 0.019580 (60.1984) 0.0000 -0.001317 (-2.8963) 0.0041 0.0286 nifty metal 0.018221 (73.0026) 0.0000 -0.001500 (-4.2990) 0.0000 0.0651 nifty pharma 0.011979 (61.9221) 0.0000 0.003771 (13.9458) 0.0000 0.4353 s o u r c e : author’s calculation, *** significant at 1% level, ** significant at 5% level. the relationship between covid-19 and kurtosis shows a negative relationship between covid-19 and kurtosis. in the analysis of pre-covid-19 and during covid-19 period, nifty 500 index was found to have highest negative relationship, which can be inferred as the small and mid-cap stocks have higher skewness as compared to stocks which are included in nifty 50. the second analysis shows mixed relationship in the post-covid-19 period where five indices out of the sample show positive relationship out of which only two indices’ results were significant. impact of covid-19 on performance on indian stock indices… 141141 table 8. regression results for model 3 for pre-covid-19 and during covid-19 (july 2019 to june 2020) index constant (β0) p value (β1) p value adjusted r 2 nifty 50 0.356603 (5.7856) 0.0000*** -1.174631 (-13.6350) 0.0000*** 0.4242 nifty 500 0.303785 (4.5401) 0.0000*** -1.280558 (-13.6929) 0.0000*** 0.4263 nifty bank 0.077353 (1.1362) 0.2570 -0.402242 (-4.2273) 0.0000*** 0.0630 nifty auto 0.605246 (9.1783) 0.0000*** -1.034794 (-11.2274) 0.0000*** 0.3325 nifty reality -0.332747 (-8.2767) 0.0000*** 0.471542 (8.3918) 0.0000*** 0.2167 nifty financial services 0.096032 (1.3958) 0.1640 -0.317783 (-3.3047) 0.0011*** 0.0380 nifty fmcg 0.227140 (3.3005) 0.0011*** -0.417605 (-4.3416) 0.0000*** 0.0664 nifty it -0.543955 (-7.3702) 0.0000*** 0.7906 (7.6643) 0.0000*** 0.1870 nifty media 0.189601 (4.0336) 0.0001*** -0.176333 (-2.6840) 0.0078*** 0.0241 nifty metal 0.167234 (4.4952) 0.0000*** -0.4836 (-9.3009) 0.0000*** 0.2541 nifty pharma 0.168255 (3.1101) 0.0021*** -0.261170 (-3.4540) 0.0006*** 0.0417 s o u r c e : author’s calculation, *** significant at 1% level, ** significant at 5% level. nisarg a. joshi142142 table 9. regression results for model 3 for pre-covid-19 and post-covid-19 (july 2019 to december 2020 & july 2020 to december 2020) index constant (β0) p value (β1) p value adjusted r 2 nifty 50 1.270817 (7.3182) 0.0000*** -0.394219 (-1.6242) 0.1000* 0.0065 nifty 500 1.147216 (5.4005) 0.0000*** 0.353545 (1.1908) 0.2349 0.0017 nifty bank 1.504908 (13.3041) 0.0000*** -1.677408 (-10.6098) 0.0000*** 0.3077 nifty auto 1.818009 (9.4877) 0.0000*** -0.491157 (-1.8339) 0.0679* 0.0093 nifty reality 0.464673 (3.7878) 0.0002*** 0.215547 (1.2571) 0.2099 0.0023 nifty financial services 1.792925 (17.4404) 0.0000*** -2.227391 (-15.5019) 0.0000*** 0.4881 nifty fmcg 1.572924 (11.1982) 0.0000*** -0.858837 (-4.3747) 0.0000*** 0.0674 nifty it 2.288402 (11.9478) 0.0000*** -0.543323 (-2.0296) 0.0435** 0.0123 nifty media 0.637226 (5.6164) 0.0000*** 0.202065 (1.2742) 0.2038 0.0025 nifty metal -0.433009 (-4.5018) 0.0000*** 1.310607 (9.7489) 0.0000*** 0.2726 nifty pharma 0.259024 (2.8173) 0.0052*** 1.066053 (8.2959) 0.0000*** 0.2128 s o u r c e : author’s calculation, *** significant at 1% level, ** significant at 5% level, * significant at 10% level.  conclusion conclusion the purpose of the study is to check the impact of covid-19 on the variability of returns of composite and sectoral indices of the indian market. this study focuses on change in the returns of the sample during the pandemic and after the pandemic by measuring the forecasting variables of the indices’ performance. the findings show that the indian indices have shown more volatility during covid-19 as compared to pre-covid-19 and post-covid-19 period. the study prompts that investor sentimentality can be prevented against pessimistic behavior if the panic is being controlled. the findings of the study impact of covid-19 on performance on indian stock indices… 143143 have shown that variability of returns in terms of standard deviation turned negative in the post-covid-19 period. for the benchmark index of nifty 50, the standard deviation of returns was found to be 2.19% during the covid-19 period which had decreased to -0.60% in the post-covid-19 period. this study has analyzed the relationship between covid-19 and volatility of stock returns for two composite indices and nine sectoral indices using three measures, namely skewness, standard deviation and kurtosis. the study used the daily closing prices of all the indices for the period from july 2019 to december 2020, where the sample was divided into three sub-samples, i.e., precovid-19 period, during covid-19 period and post-covid-19 period. the major findings of the study indicate that the average returns of the indices to be negative during covid-19 period. it is also evident that the indices in the sample replicate a very high volatility during the pandemic period as compared to before covid-19 and post-covid-19 period. the results of generalized least squares regression show that there is a significant positive correlation between covid-19 and standard deviation of the indices during covid-19 period. the post-covid-19 relationship shows that the volatility in the indices reduced during the period from july 2020 to december 2020. the results of the impact of covid-19 on skewness of index returns show that there is a mixed relationship between covid-19 and skewness of returns of indices. the relationship between covid-19 and kurtosis show negative results during the pandemic as well as the post-pandemic period. the findings of the study have significant implications and impacts regarding the decision making for equity analysts, portfolio management firms, investors and traders for assessing their investment in a better way and deciding their investments. increase in volatility will resort to anxiety in the investors and traders which will motivate the participants to take lesser risk for the timebeing. the results of this study have appropriate impact in relation to fdis and fiis in india and across the world. one of the major implications of this study is for the policymakers to study the changing aspects of the investor’s sentiments and the pandemic. this can help the policymakers to regulate and control the impact and intensity of the anxiety in the investors so that markets can be reinforced in a better way and volatility can be avoided to the maximum possible extent. the policymakers should be more careful regarding the crash risk of stock indices during covid-19 because of upsurge in covid-19 cases and deaths. nisarg a. joshi144144 the results of the study suggest that a rational investor should not invest in the stocks during the pandemic. it can be recommended to speculators that they can build a position at a low price when the market plunges and make a considerable profit in a short time period resulting from the recovery of the market. the investors who are interested in the investment over a long horizon should invest in the blue-chip stocks or the market indices to get exponential returns over a period of time. in the future, the researchers can take a cue from this study as this study is constructed using the composite indices and sectoral indices using daily closing prices. it does not include individual stocks which can be further investigated to check the impact of the pandemic on a particular stock’s performance. a study can be done using weekly or monthly data which can be used to study the seasonality effect along with covid-19. the event study approach can be used by calculating the average abnormal returns and cumulative average abnormal returns for the period before covid-19 and after covid-19. this study is limited only to composite and sectoral indices of national stock exchange. similar kinds of study can be done using other indices of the various markets of india as well as of other countries. another methodology can be adopted such as robust regression by giving weights to the data points or panel regression or autoregressive distributed lag regression to get different inferences. further research can be done to check the structural changes before and after covid-19.  references references ahmar, a.s., & del val, e.b. 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(2020). the impact of coronavirus on stock market volatility. international journal of psychosocial rehabilitation, 24(6), 18069–18081. http://dx.doi. org/10.37200/ijpr/v24i6/pr261476. zaremba, a., kizys, r., aharon, d.y., & demir, e. (2020). infected markets: novel coronavirus, government interventions, and stock return volatility around the globe. finance research letters, 35, 101597. http://dx.doi.org/10.1016/j.frl.2020.101597. zhang, d., hu, m., & ji, q. (2020). financial markets under the global pandemic of covid-19. finance research letters, 36, 101528. http://dx.doi.org/10.1016/j. frl.2020.101528. https://doi.org/10.1016/j.frl.2020.101640 http://dx.doi.org/10.1016/j.frl.2020.101597 cjfa_1_2015_przed_drukiem.pdf 65 date of submission: april 10, 2015; date of acceptance: may 7, 2015. * economics, konya, turkey, phone: +905362265270. ** ment of economics, konya, turkey, phone: +905449652020. *** of social sciences, konya, turkey, phone: +905301485830. and its effect on the selected macroeconomic indicators. copernican journal of finance & accounting, 4(1), 27–44. http://dx.doi.org/10.12775/cjfa.2015.002 orhan çoban* selcuk university, department of economics ** selcuk university, department of economics *** selcuk university, vocational school of social sciences the structural analysis of construction sector of turkey and its effect on the selected macroeconomic indicators keywords: construction sector, economic indicators, turkey. j e l classification: l74. abstract: in this study the turkish construction sector was structurally considered and the effect of sector on some selected macroeconomic indicators was analyzed. in this scope, besides the statistical indicators, the linkages of sector with the other sectors were handled. as a result of evaluations, the construction sector affects the national income significantly. there is a high level correlation between the growth of orhan çoban, , 28 construction sector and the growth of national income. in this scope, while the construction sector grows in higher rates, in the periods, when the economic growth actualizes; in the crisis periods, it downsizes in the higher rates. when the figures of employment are taken into consideration the employment of main construction sector increases with every passing day. depending on development of foreign constructing services, the positive effect of construction sector on the balance of payments becomes more important with every passing year. when the backward and forward linkages of sector are considered, it was identified that the forward linkages are weaker than the backward linkages. construction sector is one of the most important sectors in terms of socioeconomic developments of countries. it includes especially housing, construction of every kind of construction such as school, factory, workplace, and hospital; every kind of infrastructure activity such as construction of bridge and dam; and all equipment works such as electricity, water, sanitary installation, heating, and air conditioning. within this scope, presenting the place and importance of sector in the country economy; its linkages with production related sectors and the level of these linkages; the share in national income of itself and sectors it is in relationship with, and its effect on employment and balance of payments have significance. construction sector, due to have a close relationship with other sectors, is accepted as one of the leading and driving sectors. the concept of inter-sectorial relationship was first included in the literature by hirschman (1958). in this scope, construction sector, with its both forward and backward linkages, affects other sectors in economy. thus, changes in the construction sector also concern the social welfare in the axis of economic growth. according to keynesian theory, investment – at least building investments – plays important role in the total demand and economic growth in the short run. the studies carried out point out that in terms of the intensity of inter-sectorial relationship; construction sector is one of the strongest four sectors among the twenty economic sectors (dang, low 2011). according to this, construction sector uses the products and services produced by the other many sectors as input and the structures that are the final products of the building activities come to our face as a component of the products and services produced by different sectors. due to its relationship with other sectors, it is accepted that the growth experienced in construction sector will also trigger the growth in the other sectors and, via this way, contribute to the general economic growth. furthermore, it the structural analysis of construction sector… 29 is assumed that construction sector functions as an important resource of employment in the periods of growth and becomes effective in reducing unemployment. turkish construction sector, besides its linkages with the other domestic sectors, also undertakes an important role in international scale. according to the data of economy ministry, in the first 9 months of 2014, turkish contrac36 countries. together with these values, beginning from 1972, when the first project was undertaken abroad, to the end of the third quarter of 2014, total values of 7601 projects undertaken in 103 different countries abroad reached the largest 250 international contractors of the world, published by enr (engineering news record), magazine of international construction sector, based on the incomes of the contractors obtained from the activities outside their countries in the previous year, the number of turkish contractors that are 38 according to 2012 data rose to 42 in the list published august 2014. with this number, turkey maintained its place in the second rank following china that takes place in the first rank of 2014, 19). in this study, it was aimed to analyze the turkish construction sector from the structural points of view and to present the effect of the developments in the construction sector on some selected macroeconomic indicators. in the structural analysis, the backward and forward linkages with the sectors, with which the construction sector is linked, will be parametrically calculated. additionally, effects of the sector on macroeconomic indicators that are growth, employment and balance of payments will be identified. in the literature, the roles of construction sector in the national economy were handled by many researchers and international agencies. in this context, strout (1958) and ball (1881) presented that construction sector had the effect to create employment directly in labor market and indirectly on the other sectors. park (1989) and osei (2013) suggested that construction sector had the forward and backward linkages with the other sectors at high level and, therefore, created a high multiplier effect on economy. this situation means that orhan çoban, , 30 construction sector has strong linkages with other sectors of economy. in this context, bon (1992) determined that construction sector has a dynamic relationship with the sectors, not static. similarly, ofori (1990) presented the importance of construction sector for economy and its linkages with other sectors at the high level. according to field and ofori (1988), construction sector was the leading sector making the most and the most visible contribution to the growth process. in the studies carried out on the developing countries (strassmann 1970; drewer 1980; edmonds and miles 1984; wells 1986; polenske and sivitanides 1990; wibowo 2009; el-namrouty 2012), it was seen that construction sector had more positive effects on the growth compared to the other sectors and had high level of linkages with the other sectors. in the studies carried out on the developed countries, it was identified that the construction and infrastructure works had a direct effect on the investments and indirect effect on economic growth (wigren, wilhelmsson 2007, 449). in a study carried out by pietroforte and gregori (2003) on the eight developed countries (australia, canada, denrole of construction sector in the national economy decreased with every passing day. in the study, carried out by dlamini (2012), it was identified that there was not a very strong relationship between construction investments and economic growth in the long run; however, in the short run, that construction investments affected the economic growth positively. tse and ganesan (1997), using granger causality test, in a study they carried out on hong kong economy, reached the conclusion that the growth in building sector did not increase the national income, conversely, that the increases occurred in the national income increased the investments of construction sector. lopes (1998) and lopes et al. (2002), with moving from the data of 22 years belonging to the 15 developing countries in sub-saharan africa, studied the long run relationship between economic growth and construction investments. according to the results of analysis, a contraction that will be experienced in the investments of construction sector engenders a direct decrease in national income per capita. ramachandra and rameezdeen (2006), in sri-lanka economy, with the data belonging to the period of 1980–2004, studied the relationship between construction investments and economic growth, using granger causality test. according to the results of analysis, they reached the conclusion that there was a one – way causality relationship between construction investments and eco the structural analysis of construction sector… 31 nomic growth and that construction sector positively affected the economic growth. these results have an attribute supporting the view that “investments on construction sector result in growth”, obtained in the studies carried out by hillebrandt (1985), ofori (1990) and tiwari (2011). similarly, in a study carried out by khan (2008) on pakistan, it was identified that there was a one way strong relationship between construction sector and general economy and it was reached the conclusion that construction sector was the most important sectors in pakistan’s economic growth. choy et al. (2011) analyzed three-ways relationship between construction activities, real estate investments and economic growth. according to the results of analysis, it was identified that there was causality from gdp to real estate investments and from the increase of construction activities to gdp growth. in addition to that, it was reached the conclusion that there was not any causality relationship between real estate investments and construction activities and, in spite of this increase in construction activities led gdp to grow. 2007, in the studies they carried out on turkey, reached the conclusion that there was a long run relationship between the rate of building expenditures other than public buildings to gdp and gdp growth rate. kaya et al. (2013), using the data of the period of 1987–2010, in turkey, studied the relationship between the building investments of public and private sector and economic growth. according to the results of analysis, it was identified that there was a one-way causality relationship, both from public sector building investments to gdp and from public sector building investments to private sector building investments, with gdp. construction sector is a highly comprehensive economic activity arms including especially distinction of construction of building and non-building, also infrastructure investments such as highway, railway, airport, water pipeline, oil pipeline, ports, dams, and bridges. construction sector carries the attribute of “locomotive of economy” due to the demand to the goods and services produced by over 200 subsectors depending on it (spo 2010, 2). construction sector is a sector adding acceleration and giving a life-line support to economy. this imputation results from, especially the value – added it creates in the period of growth, employment potential, and its input-output orhan çoban, , 32 view of turkish construction sector is summarized by means of figure 1. figure 1. general view of construction sector in turkey s o u r c e : tsi 2013; tsi 2014; tsi 2015. according to figure 1, there is a similar tendency between economic growth and construction sector. between growth rate of construction sector and growth rate of gdp, there is a high correlation like 0.93. this identification confirms that the movements of both indicators in the same direction. in addition, while construction sector downsizes more rapidly in the periods of crisis compared to the general economy, in overcoming crisis, it grows more rapidly even if it is delayed compared to the general economy. while construction sector is more rapidly affected from the crisis experienced in 2008, in the other periods, it proportionally grew more compared to economic growth. in turkey, construction sector entered the growth trend beginning from 1980s. especially beginning from 2000s, building expenditures of both public sector and private sector and, in this context, an important part of the increase in gdp resulted from the growth of construction sector. however, albeit the crisis occurring in february 2001 began as a banking crisis, including construction sector in it, it rapidly spread to all sectors and turned into a deep economof international conjuncture, the sector that begins to recover, beginning from 2002, recorded a growth over annual average 7% (tca 2011, 16–17). the structural analysis of construction sector… 33 as will be understood the data in figure 1, the investments on construction sector is important to the development of country, because in each stage from a project phase of a building to the phase of completion, the new employment areas are created and this process also continued in the next periods. thanks to construction sector, accelerating the dam and irrigation projects, infrastructure of agricultural sector, provides the new employment possibilities for the population living in the rural area and accelerate the remigration. together with the level of income per capita that increases, the welfare level in the rural sectors increase. in turkey, especially beginning from 2000s, the low and (state housing agency) is important in terms of sustainability of the growth in turkish economy. construction sector has an important place in terms of employment. however, from the seasonal point of view, particularly in the winter months, some f luctuations occur in the employment of sector. in table 1, the sectorial distribution of employment in turkey and share of construction sector are seen. table 1. the sectorial distribution of employment and construction sector a thousand people percent % agrclt. industry cons. services total agrclt. industry cons. services total 2004 5 713 3 929 967 9 023 19 632 29.1 20.0 4.9 46.0 100 2005 5 154 4 183 1 107 9 623 20 067 25.7 20.8 5.5 48.0 100 2006 4 907 4 283 1 196 10 037 20 423 24.0 21.0 5.9 49.1 100 2007 4 867 4 314 1 231 10 326 20 738 23.5 20.8 5.9 49.8 100 2008 5 016 4 440 1 242 10 495 21 194 23.7 20.9 5.9 49.5 100 2009 5 240 4 079 1 306 10 650 21 277 24.6 19.2 6.1 50.1 100 2010 5 683 4 496 1 431 10 986 22 594 25.2 19.9 6.3 48.6 100 2011 6 143 4 704 1 676 11 586 24 110 25.5 19.5 7.0 48.1 100 2012 6 097 4 751 1 709 12 266 24 821 24.6 19.1 6.9 49.4 100 2013/9 6 370 4 914 1 879 12 646 25 808 24.7 19.0 7.3 49.0 100 s o u r c e : tsi 2013; tsi 2014. according to table 1, when the data of 2013 are considered, the highest share in total employment belongs to the services sector with 49%. this secorhan çoban, , 34 tor is followed by the agricultural sector with 24.7%, industrial sector with 19%, and construction sector with 7.3. however, it is clearly seen that the share of construction sector in the total employment increases with every passing year. in this context, the employment of private sector that was at the level of 967,000 people reached 1.9 million people in 2013. when the other effects are accepted as fixed, the employment increasing in the summer months and decreasing in the winter months ref lects the seasonal structure of sector and its feature including unqualified worker in a significant level. with the effect of global crisis, in parallel with sectorial constriction seen beginning from 2008, the decrease in the sectorial employment experienced in the same year continued until mid-2009. however, the sectorial employment, beginning from the second half of 2009, entered to the rising trend, compared to the same period of the previous year. this trend continued along the years of 2010 and 2011. in construction sector, besides domestic developments, especially the activities realized through the contracting services have importance in terms of country economies. construction sector, in turkish economy, beside the domestic indicators, in the scope of international activities, reached an important position in terms of balance of payments. when it is considered that turkey has an economy continuously giving foreign trade deficit, the importance of construction sector will increase more and more. in table 2, the effect of construction sector on balance of payments is seen. table 2. effect of construction sector on balance of payments detailed presentation of balance of payments (million usd) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 icurrent account -626 -7.6 -14.2 -21.5 -31.8 -37.8 -40.4 -12.2 -45.5 -75.1 -48.5 a. foreign trade balance -6.3 -13.5 -22.7 -33.1 -41.1 -46.9 -53 -24.9 -56.4 -89.1 -65.4 b. services balances 7.89 10.5 13 16 14 13.9 18.8 18.6 16.7 20.1 22.6 1. transportation 861 -523 -1.1 -25 348 -420 177 1.82 1.3 2.3 3.7 2. agriculture 6.6 11.1 13.6 16.1 14.5 15.8 19.5 18.4 17.4 20.2 21.3 3. construction services 832 682 724 874 879 759 974 1.1 859 838 1 4. insurance services -604 -885 -703 -554 -541 -468 -396 5. financial services -400 -83 -89 -41 -247 -228 -133 -355 -234 -690 -642 the structural analysis of construction sector… 35 detailed presentation of balance of payments (million usd) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 6. the other commercial services -68 -26 129 -200 -434 -821 -1 -1.3 -1.3 -1.4 -1.6 7. official services -566 -708 -721 -874 -920 -733 -778 -846 -869 -1.1 -965 8. the other services 627 79 454 195 495 501 779 312 84 486 282 c. income balance -4.6 -5.6 -5.6 -5.8 -6.7 -7.1 -8.4 -8.3 -7.2 -7.8 -7.2 d. current transfers 2.4 1 1.2 1.5 1.9 2.2 2.1 2.4 1.5 1.8 1.4 iicapital and financial account 1.4 3.1 13.4 19.5 32.1 37.3 37.4 9.3 44 65.7 47.3 4. reserve assets -6.2 -4.1 -824 -17.9 -6.1 -8 1.1 -111 -12.8 1.8 -20.8 iiinet errors and omissions -758 4.5 838 2 -228 517 3 2.9 1.4 9.4 1.2 s o u r c e : tcmb 2014. according to table 2, the contribution of construction sector providing the currencies registered to the country transferred by the turkish contractors realizing contracting services abroad. the other important point is that there is no output of foreign currency via “profit transfers” from the construction sector to abroad (there is no figure of expenditure in the item of building services). according to the data of economy ministry, in the first 9 months period of 2014, 15.2 billion in 36 countries. together with these values, from 1972, when the first project was undertaken abroad, to the end of the third quarter of 2014, the total value of 7601 projects undertaken in 103 different countries reached the the construction sector are obtained from the domestic. therefore, while the domestic growth of sector does not create an import press, its foreign growth provides the continuous and permanent input of foreign currency. orhan çoban, , 36 the sector consisting of building and non-building activities is accepted as one of the strongest economic sectors in terms of the inputs it uses and employment it creates. sector, due to this feature of it, undertakes a key role in transition from the economic recession to the growth and it stands out with the dynamic role it played in the process of economic growth and development, because all of the structures such as the highways, dams, ports, factories, trade centers, hospitals, schools, houses, etc., which are the final outputs of this sector, are qualified as investment goods. these products are not only used by their own functions but also in producing the other goods and services and, thus, in creating the value added. therefore, as in many developed country, also in turkey, construction sector is one of the most important sectors producing the investment goods. due to the fact that construction sector has a structure incorporating all of these features, in many countries economically experiencing contraction, first of all, increasing the investment expenditures in construction sector, a way of outgoing from this bottleneck is sought, increasing the investment expenditures and, thus, economic recovery is again provided. construction sector, due to its demand to the goods and services produced by over 200 subsectors depending on it, carries the attribute of “locomotive of economy”. each activity realized in the building sector, due to its relationship with the inputs used in building production process, can affect the other related sectors. thus, construction sector taking place among the strongest sectors in economy in terms of inputs it uses, due to its relationship with the other sectors and its contribution to employment, undertakes a highly important role, in catching and susconstruction sector, with its both forward and backward linkages, is in close relationship with other sectors. effect of direct backward connection indicates the input rate the construction sector uses from the other sectors for it to produce one unit of good (for construction sector to produce one unit that how many the other sectors should produce) and, in our study it is expressed as (bg). the sectors, which construction sector has the highest backward linkage and the direct backward coefficients of these sectors take place in table 3. the structural analysis of construction sector… 37 table 3. direct backward linkage coefficients (bg) of construction sector item bg sectors 1 9.12 main – iron steel industry 2 8.20 production of the cement, lime, and gypsum 3 3.67 transportation of highway and pipeline 4 3.13 manufacture of metal, construction materials, cistern, and steam boiler 5 2.86 manufacture of ceramic products 6 2.61 financial agents and similar activities 7 2.29 wholesale trade and commercial brokerage 8 1.73 business of sand, clay, and stone pit 9 1.57 retailing and the repair of household goods 10 1.49 manufacture of coke furnace and refined oil products total 10 36.67 total bg for the above 10 sectors total 97 50.60 total bg for 97 sectors s o u r c e : dbt 2008, 4. according to table 3, the sector, where construction sector provides the most direct input in its production of one unit, is steel-iron sector. in construction sector, for being able to make 100 units of production, 9.12 units of input are used from steel-iron industry. this sector is followed by the sectors such as cement, lime, gypsum, manufacturing industry, and transportation of highway and pipeline. from 10 sectors taking place in table 3, 72% of total direct inputs are met by construction sector (36.67/50.60). the rate of the sectorial inputs the sector uses in the total production value is 50.6%. while direct backward linkage is expressed as a function of production, total backward becomes a function of final demand. in this meaning, when there occurs one unit of variation in the final demand (here, the final demand includes the intermediate demands of sectors), how much variation should occur in the production of the other sector sectors by total backward linkage coefficients and they are expressed as btg in our study. here, this effect which can be seen totally is also seen on the basis of single sectors. as a result of the demand increase of 100 units to the construction sector, btg coefficients indicating how much the production of the other sectors will increase take place in table 4. orhan çoban, , 38 table 4. total backward linkage coefficients of construction sector item btg sectors 1 100.08 construction 2 17.21 main iron-steel main industry 3 9.36 manufacture of cement, lime, and gypsum 4 6.32 transportation of highway and pipeline 5 5.45 financial agents and similar activities 6 4.49 manufacture of coke furnace and refined oil products 7 3.97 wholesale trade and commercial brokerage 8 3.93 generation, transmission, 9 3.82 manufacture of metal, construction materials, cistern, and steam boiler 10 3.07 main non-iron-steel metal industry total 10 157.69 total btg for the above 10 sectors total 97 199.83 total btg for 97 sectors s o u r c e : dbt 2008, 5. construction sector, in case that there is an increase in its final demand, for it to be able to meet the demand of interest, should first of all increase its own production at least in that rate. according to table 4, when the final demand of the products of sector increased by 100 units, the own production of sector increased by 100.08 units. beside this, for example iron-steel sector is in the position of increasing the production in the rate of 17.21% for being able to meet both the demand of input and demand increase to construction products. the main distinction between total backward linkage and direct backward linkage arises from here. in the direct backward linkage (independently from the level of final demand and variation at this level), while the level of technical production, which is necessary for the production of 100 units of construction, is seen; in total backward linkage, as a result of the increase of both this intermediate demand that is “technically” necessary and the final demand of construction sector, the total demand that is necessary to meet the demand (e.g. as a result of construction demand, more iron-steel production; new factory need of more iron-steel production; and the increase in demand of construction sector that is necessary for this) that is affected in “enchaining” way is ref lected. when construction sector itself is excluded, in case that the demand to the products the structural analysis of construction sector… 39 of construction sector increases by 100 units, in the first nine sectors providing the most input to the sector, a production increase of 57.61 units emerge (157.69 – 100.08). these determinations point out that construction sector has so high backward linkage. when all of 97 sectors are considered, the increase in demand to the construction sector provides a production increase (199.83 – 100.08 = 99.74 units) at an almost close level to this demand increase. in this context, while the share of construction sector in the national income is around 6.5%, when the other 9 sectors, with which the sector has the highest linkage, are taken into consideration, the shares of discussed sectors in the national income rise to the levels of 38%. the effect of total forward linkage indicates that, when a variation of one unit appears in the final demand to all sectors how much variations will occur in the production of the relevant sector. here, it should not be forgotten that the final demand does not include the amounts demanded by the other sectors (intermediate demand) and only defines the amount that remains out of this and is demanded by final consumers from that good. differently from the effect of total backward linkage, there is not only a final demand increase to the construction sector but also to all of 97 sectors. as a result of demand increase under consideration, how much sectorial productions will increase is expressed as bi coefficient. total forward linkages of construction sector are summarized in table 5. table 5. total forward linkage coefficients of construction sector (bi) sira bi sectors 1 100.08 construction 2 5.08 ownership of house 3 1.59 educational services 4 1.17 hotels, motels, and the other accommodation places 5 0.87 manufacture of products of the ground cereal and starch 6 0.52 restaurant, coffee – house, and eating –drinking places 7 0.48 the other service activities 8 0.44 retailing and repair of personal and household goods 9 0.40 health works and social services 10 0.38 activities of recreation, resting, culture, and sports orhan çoban, , 40 sira bi sectors total 10 111.01 total bi for the above 10 items total 97 117.09 total bi for 97 sectors s o u r c e : dbt 2008, 7. according to table 5, when it is considered that the final demand increase of construction sector will instigate the demand of construction sector at least in the same sum, the demand of construction sector is affected the most from the demand increase in the ownership of house sector. in this context, in the final demand of sectors, in case that an increase of 100 units for each sector, the production of construction sector increases by 17.09 units for being able to meet this demand. in case of an increase of production of construction sector, a production increase of 5.08 units in the sector of house ownership and, 1.59 units in the sector of educational services occur. when these parameters are taken into consideration, it is seen that the forward linkages of construction sector is weaker compared to its backward linkages. on the other hand, while construction sector, depending on the final demand increase to its own products, increases its production by 17.09%, the production of sectors on which the construction sector depends increases in the rate close to 100% (99.93%). in the framework of determinations expressed above, the development of construction sector should not only be limited by the increase of national income. also considering the linkages with other sectors, in case that the necessary arrangements are not carried out, the effect of construction sector “to accelerate economy and to stimulate other sectors” will remain limited. the effect of construction sector to stimulate other sectors, in a sense, becomes notable thanks to the projects (e.g. house, building, infrastructure investments toward increasing the production of this sector, rather than the effect occurring in the demand. in this study, turkish construction sector has been structurally analyzed and the effect of sector on some selected macroeconomic indicators has been handled. in the structural analyses, the backward and forward linkages of the construction sector with the sectors it is linked have been parametrically examined. in addition, the effect of sector on the growth, employment, and balance of payments among macroeconomic indicators has been analyzed. according to the analyses and assessments carried out, in turkey, there is a high correlation between the growth rate of construction sector and gdp growth. the structural analysis of construction sector… 41 in this context, while both indicators act in the same direction, construction sector downsizes more rapidly compared to the general economy, in going out, even delayed, they grow more rapidly compared to the general economy. construction sector, directly or indirectly, has important effects on the labor force market. the share of construction sector in the total employment increases with every passing day. the main sector employment being at the levels of 967 thousand people in 2004, reached 1.9 million of people in 2013. in terms of balance of payments, construction sector undertakes important roles. the contribution of sector, which provides the input of foreign currency into consideration the importance of sector increase much more. in the first 9 months period of 2014, turkish contractors undertook 173 new projects, sidered that the incomes the contractors obtained in the previous years from the activities outside their countries, turkish contracting firms take place in the second rank in the world, following china. when the backward linkages of construction sector with the other sectors are examined, it is seen that the sector is linked at the high degree with manufacture of iron-steel, cement, lime, gypsum, etc. and transportation of highway and pipeline. when its backward linkages are taken into consideration, it was identified that the construction sector was affected the most from the increase occurring in the demand of house ownership .this is followed by sector of educational services as well as hotels, motels, and the other accommodation facilities. when both linkages coefficients are considered together, it was seen that the forward linkages of construction sector were weaker compared to their backward linkages. when all of these conclusions and discussions are considered together, besides the backward and forward connections, in case that the developments in abroad contracting services are carried out in a stable way, construction sector will be one of the most important leading sectors in terms of turkish economy. due to these intensive relationships of it with the other sectors, it is considered that a growth or expansion experienced in the construction sector may also stimulate in the other sectors and, with this way, that it can make more contribution to the general economic growth. orhan çoban, , 42 ball r. 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(1986), the construction industry in developing countries: alternative strategies for development, croom helm, london. wibowo m. a. (2009), the contribution of the construction industry to the economy of indonesia: a systemic approach, http://eprints. undip.ac.id/387/1/agung_wibowo. pdf (accessed: 12.01.2013). wigren r., & wilhelmsson m. (2007). construction investments and economic growth in western europe. journal of policy modeling, 29(3), 429–451. http://dx.doi.org/10.1016/j.jpolmod.2006.10.001. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402014, volume 3, issue 2 date of submission: june 22, 2014; date of acceptance: september 19, 2014. * contact information: adam.zaremba@ue.poznan.pl, department of investment and capital markets, poznań university of economics, al. niepodległości 10, 61-875 poznań, poland, phone: 61 854 38 28. ** contact information: radoslaw.zmudzinski@ue.poznan.pl, department of investment and capital markets, poznań university of economics, al. niepodległości 10, 61- 875 poznań, poland. zaremba a., żmudziński r. (2014). ipo initial underpricing anomaly: the election gimmick hypothesis. copernican journal of finance & accounting, 3(2), 167–181. http://dx.doi.org/10.12775/ cjfa.2014.025 adam zaremba*, radosław żmudziński** poznań university of economics ipo initial underpricing anomaly: the election gimmick hypothesis keywords: ipo underpricing, political cycles, stock market anomalies, warsaw stock exchange. j e l classification: g12, g18, g32. abstract: the relationship between political motivations and underpricing of public offerings of privatized companies is to a great extend unexplored field in the global academic literature. in this paper we offer a new explanation for the ipo underpricing anomaly. we formulate the election gimmick hypothesis, which states that in order to please the voters the treasury may be motivated to leave some money on the table during the ipos of state-owned enterprises. we test the practical implications of the hypothesis. first we review the previous literature, next we perform empirical research based on a filtered sample of 250 ipos on the polish market in years 2005–2013. we examine the abnormal returns in the sample and employing some regression – and simulation-based methods we examine the sources and variation in underpricing. our findings suggest that the ipos of state-owned enterprises are more underpriced than remaining ones and that there is more money left on the table in the months preceding elections. adam zaremba, radosław żmudziński168 anomalia nadwyżkowych natychmiastowych stóp zwrotu po debiutach: hipoteza kiełbasy wyborczej słowa kluczowe: niedoszacowanie cen ofertowych ipo, cykle polityczne, anomalie giełdowe, giełda papierów wartościowych w warszawie. klasyfikacja j e l: g12, g18, g32. abstrakt: zależności pomiędzy motywacjami politycznymi a niedoszacowaniem ofert pierwotnych prywatyzowanych spółek stanowi w znacznej mierzenie niezbadany obszar. w niniejszym artykule zaproponowane zostaje nowe częściowe wyjaśnienie dla anomalii nadwyżkowych natychmiastowych stóp zwrotu po debiucie. sformułowana zostaje „hipotezę kiełbasy wyborczej”, która zakłada, że przed wyborami skarb państwa może być zmotywowany, aby celowo „pozostawiać pieniądze na stole” podczas prywatyzacji przedsiębiorstw państwowych. po dokonaniu przeglądu literatury, przeprowadzone zostają badania empiryczne na przefiltrowanej próbie 250 ipo na polskim rynku kapitałowym w latach 2005–2013. przy pomocy analizy regresji i metod symulacyjnych, przebadane zostają nadwyżkowe stopy zwrotu oraz źródła ich przekrojowej zmienności. wyniki badań wskazują, że prywatyzowane spółki państwowe podczas debiutów charakteryzują się większym niedoszacowaniem aniżeli pozostałe firmy, oraz że w miesiącach poprzedzających wybory „na stole pozostawiane jest więcej pieniędzy” dla inwestorów.  introduction the ipo anomalies are phenomena frequently investigated by financial economists. the three most popular – the initial ipo underpricing, the long-term post-ipo underperformance and the hot issue market – are extensively documented in the financial literature. in this paper we concentrate on the ipo initial underpricing issue and offer a new partly explanation for the phenomenon: election gimmick hypothesis. the paper is organised as follows. first, we review the existing literature and develop our hypothesis. second, we present our data sources and research methods employed. we focus our research on the polish market, which is the biggest and most liquid post-soviet transition market among the cee countries. we perform out computations based on filtered sample of 250 companies, which offered their shares on ipos in the 01/01/2005-10/31/2013 timeframe. third, we present our empirical research results. the paper ends with conclusions and suggestions for further research. the investigations in this paper extends the academic knowledge in four ways. first, we offer the new explanation of the underpricing effect. second, we test empirically its implications, which are important for investors and reg ipo initial underpricing anomaly… 169 ulators. third, we deliver fresh out-of-sample evidence on the ipo underpricing phenomenon on the polish market. finally, from the methodological point of view, we propose an innovative monte-carlo-based technique to draw some statistical interferences. literature review and hypothesis development ipo underpricing is a long observed phenomenon in the financial literature. positive abnormal excess returns in the first day of shares’ listing has been documented for over three decades. the initial returns across the world ranges from 5% to over 50% some interesting reviews of research can be found in papers of loughram, ritter and rydqvist (1994), ibbotson and ritter (1995), jenkinson and ljungqvist (2001). the existing literature offers a number of explanations which partly or entirely explain the issue of initial ipo underpricing. probably the most popular is the “winner’s curse” hypothesis (rock 1986), which emphasizes the tendency for the winning bid in an auction to exceed the intrinsic value of the company, that is difficult to determine. some other popular explanations include singaling (allen & faulhaber 1989; grinblatt & hwang 1989; welch 1989), selfinterest of investment bankers (baron & holmstrom 1980; baron 1982), bookbuilding (benveniste & spindt 1989), market incompleteness (mauer & senbet 1992), information cascades (welch 1992), lawsuit avoidance (tinic 1988; hughes & thakor 1992) or cost compensation for individual investors (kaminski & zaremba 2011). some of the explanations focus particularly on local country factors, like for example regulatory constraints in the chinese market (tian 2011; yuan 2009). reviews of theories are offered for example by ritter (2003) or ritter and welch (2002). the hypothesis listed above provide a wide range of explanations of the initial ipo underpricing. however, they are not able to fully account for the cross-sectional variation in the abnormal returns connected to their original ownership structure. in some emerging markets, like for instance in poland, there seem to be some differences in characteristics of privately-owned and state-owned ipos. clearly, the ownership structure may not entirely explain “the money left on the table” phenomenon, but it may seriously contribute to it. therefore, we would like to propose a partial explanation of the ipo underpricing: an election gimmick hypothesis, which basically assumes, that some of the money left on the table may be a form of political bribery aimed at voters. adam zaremba, radosław żmudziński170 there many ways of privatization of state-owned companies, but the stock exchange ipo is one of the most popular among the big ones. the benefits of this choice lay mainly in the transparency of the process. nonetheless, one of the main drawbacks from the treasury point of view is the issue of the money left on the table, which may lead to an assumption that the treasury does not really maximize its profits. the ipos of state owned companies offered to both institutional and individual investors. in some countries there are even a specific stare-sponsored programs and social campaigns aimed at popularizing the stock ownership. the polish state treasury sponsored “citizen share ownership” programme is just one of the examples. the key problem with such kind of programmes is an inherent conf lict of interest. on the one hand, the treasury should maximise its income by selling the shares of state-owned enterprises at the maximum attainable price. on the other hand, the government and the ruling party may be motivated to intentionally lower the prices of offered shares in order to endear the voters by giving them an easy profit. the hypothesis, that the prices of state-owned enterprises may be intentionally decreased to please the voters, have a few testable implications. first, the politicians may leave more money on the table than the private-company owners. in other words, we can assume that the state owned companies are more underpriced at ipos that standard companies. second, the politicians would be more enticed to sell the underpriced shares when the elections are coming. brief ly speaking, there would be more money left on the table before the elections than in other periods. taking that into account, we test to prepositions in this paper. i. the shares of state-owned companies are more underpriced at ipos than the rest of the shares of privately-owned companies. ii. there is more money left on the table in the periods before elections than in other periods. the both inclinations have high importance, particularly from the regulatory bodies’ and investors’ point of view. additionally, the problem seems to be economically and politically significant. according to kdpw (central infrastructure institution responsible for the management and supervision of the depository, clearing and settlement system) in at the end of 2013 polish investors had about 1,5 million open brokerage accounts. in other words, along with their families, investors may constitute even 10 of the voters. additionally, treasury sometimes offers various mecha ipo initial underpricing anomaly… 171 nisms, which particularly favour broad participation in state-owned ipo, like for example subscription limits or emission price differentiation. summing up, it appears rational to assume, that inf luencing their political preferences by ipo underpricing may significantly impact the results of some elections. data source and research methods the research in this paper is based on the stock ipos at the polish market. we decided to focus on the cee countries as those are post-soviet economies, which underwent a transition from state-dominated to private-capital dominated regime, and finally in many cases entered the european union. therefore, they seem to be an ideal laboratory to test the indicated hypotheses. the exact choice is poland, as it is the post-soviet member of the eu with the biggest stock market both in terms of capitalization and liquidity. we concentrate on the period 01/01/2005-10/31/2013, as it is the period when both the polish economy and stock market were relatively mature (stable and low inf lation, considerable liquidity in the market, technical and institutional advancement). what is more, the precise data on the ipos, like issue sizes etc., are available for these years. we exclude from the sample two particular types of ipos, which are ipos dedicated only to previous shareholders and the share transfers form other markets. it is also important to note, that we do not take into account the newconnect, which the polish alternative platform dedicated to start-up companies with limited regulatory and reporting requirements. finally, the sample includes 250 ipos of which 18 are privatizations of state-owned companies. the data come from bloomberg and databases of the warsaw stock exchange. in order to test the hypothesis i, we initially compute the arithmetic initial returns for each share in the sample according to standard rate of return computation equation. sition from state-dominated to private-capital dominated regime, and finally in many cases entered the european union. therefore, they seem to be an ideal laboratory to test the indicated hypotheses. the exact choice is poland, as it is the post-soviet member of the eu with the biggest stock market both in terms of capitalization and liquidity. we concentrate on the period 01/01/2005-10/31/2013, as it is the period when both the polish economy and stock market were relatively mature (stable and low inflation, considerable liquidity in the market, technical and institutional advancement). what is more, the precise data on the ipos, like issue sizes etc., are available for these years. we exclude from the sample two particular types of ipos, which are ipos dedicated only to previous shareholders and the share transfers form other markets. it is also important to note, that we do not take into account the newconnect, which the polish alternative platform dedicated to start-up companies with limited regulatory and reporting requirements. finally, the sample includes 250 ipos of which 18 are privatizations of state-owned companies. the data come from bloomberg and databases of the warsaw stock exchange. in order to test the hypothesis i, we initially compute the arithmetic initial returns for each share in the sample according to standard rate of return computation equation. ��� = ������� ��� , (1) where ��� is j-share’s initial return, ��� is the first day closing price and ��� is the ipo offer price. next, we calculated the average initial underpricing among privatized and previously privately-owned companies. however, it is necessary to point out that such comparison may be not entirely meaningful in terms of samples’ comparability. the offers’ sizes of privatized companies are usually significantly larger and it is a widely accepted fact that both the size of the company (megginson & weiss 1991; kiymaz 2000; bhabra & pettway 2003; ibbotson et al. 1994; carter et al. 1998) and the issue itself (chalk & peavy 1987; clarkson & merkley 1994) impacts the level of underpricing. therefore, we take a few additional approaches. first, we compare offer-size-weighted averages of privately-owned and state-owned companies. second, we create a comparable subsample of size matched companies. for the subsample of the 19 state-owned companies we choose 19 offer-size matched privately-owned companies. the matching procedure is that we take companies with the closest offer size. in case of repetitions in the matched subsample, we choose the second closest ipo etc. having done that, we compare average (standard and offer-size (1) where is j – share’s initial return, is the first day closing price and is the ipo offer price. next, we calculated the average initial underpricing among privatized and previously privately owned companies. however, it is necessary to point out that such comparison may be not entirely meaningful in terms of samadam zaremba, radosław żmudziński172 ples’ comparability. the offers’ sizes of privatized companies are usually significantly larger and it is a widely accepted fact that both the size of the company (megginson & weiss 1991; kiymaz 2000; bhabra & pettway 2003; ibbotson et al. 1994; carter et al. 1998) and the issue itself (chalk & peavy 1987; clarkson & merkley 1994) impacts the level of underpricing. therefore, we take a few additional approaches. first, we compare offer-size-weighted averages of privately-owned and state-owned companies. second, we create a comparable subsample of size matched companies. for the subsample of the 19 state-owned companies we choose 19 offer-size matched privately-owned companies. the matching procedure is that we take companies with the closest offer size. in case of repetitions in the matched subsample, we choose the second closest ipo etc. having done that, we compare average (standard and offer-size-weighted) initial returns in the both subsamples. finally, we perform a few regressions and we use dummy variables as proxies for the pre-ipo ownership structure. we regress ipos’ initial logreturns against ownership dummies, natural logarithms of the offer size and past year’s stock market logreturns. we introduce the last control variable into the model as numerous studies suggest that the market conditions preceding the ipo may inf luence the initial abnormal return (derrien & womack 2003; loughran & ritter 2002; lowry & schwert 2002; derrien 2005). we employ the wig index as the market proxy. the wig index is the broadest capitalization weighted index of the polish stock market. it is calculated in the total return convention we perform the regressions separately for the full and matched samples. in order to test the hypothesis ii, we concentrated only on the state-owned companies. we first compute the amount of money left on the table in case of each ipo. we define the money left on the table according to a standard formula: weighted) initial returns in the both subsamples. finally, we perform a few regressions and we use dummy variables as proxies for the pre-ipo ownership structure. we regress ipos’ initial logreturns against ownership dummies, natural logarithms of the offer size and past year’s stock market logreturns. we introduce the last control variable into the model as numerous studies suggest that the market conditions preceding the ipo may influence the initial abnormal return (derrien & womack 2003; loughran & ritter 2002; lowry & schwert 2002; derrien 2005). we employ the wig index as the market proxy. the wig index is the broadest capitalization weighted index of the polish stock market. it is calculated in the total return convention we perform the regressions separately for the full and matched samples. in order to test the hypothesis ii, we concentrated only on the state-owned companies. we first compute the amount of money left on the table in case of each ipo. we define the money left on the table according to a standard formula: , (2) where is the amount of money left in on the table during the j ipo, is the offer size and is the initial abnormal return computed as it is described in the equation (1). next, we divide all the ipos into two groups. the first group includes the ipos which took place in the 12 months preceding the election and the other group all the remaining offerings. we take into account both parliamentary and local elections. the list of all elections investigated in the study is presented in the table 1. table 1. elections in poland type of elections date parliamentary elections 2005 2005-09-25 local elections 2006 2006-11-12 parliamentary elections 2007 2007-10-21 local elections 2010 2010-11-21 parliamentary elections 2011 2011-08-04 source: own calculations. the table 1. presents the elections in poland in years 2005-2013. the polish political system assumes elections every four years, however if the government resigns, the elections may happen more often. the local elections take place simultaneously in the whole country. (2) where is the amount of money left in on the table during the j ipo, is the offer size and is the initial abnormal return computed as it is described in the equation (1). next, we divide all the ipos into two groups. the first group includes the ipos which took place in the 12 months preceding the election and the other group all the remaining offerings. we take into account both parliamentary and local elections. the list of all elections investigated in the study is presented in the table 1. ipo initial underpricing anomaly… 173 table 1. elections in poland type of elections date parliamentary elections 2005 2005-09-25 local elections 2006 2006-11-12 parliamentary elections 2007 2007-10-21 local elections 2010 2010-11-21 parliamentary elections 2011 2011-08-04 s o u r c e : own calculations. the table 1. presents the elections in poland in years 2005–2013. the polish political system assumes elections every four years, however if the government resigns, the elections may happen more often. the local elections take place simultaneously in the whole country. after that, we calculate the average amounts of money left on the table in the pre-election years and in the standard years. finally, we use monte carlo simulations to test whether there is more money left on the table in the election years. the detailed monte carlo procedure is as follows. our research period encompasses 3227 days, so we build a time series of 3227 days with indication whether each days was in the election year and optionally how much money was left on the table, if any ipo of a previously state-owned company happened that day. next, we perform 10 000 draws with replacements from the 3227 day sample. as the result, we obtain 10 000 samples of 3227 days with varying number of election and ipo days. based on that, we compute the average annual amount of money left on the table during election and non-election years. eventually, we use standard parametrical methods to test the statistical significance of differences in the both amounts. results and interpretation the table 2 presents the average returns on the ipos of state-owned companies and non-state-owned companies. provided that we take the offer size into consideration, the state-owned companies performed better than the remaining companies. the differences in initial rates of return vary from 2.60 p.p. to 4.62 p.p. dependent on the weighting method and sample structure. however, it is important to note, that the differences are actually statistically insignificant adam zaremba, radosław żmudziński174 at any reasonable level. the reason for that may be a relatively small sample of highly variable returns. table 2. initial returns at state-owned and privately-owned ipos equal weighting offer-size weighting average standard deviation sample size average standard deviation sample size full samples state-owned companies 7.90%*** (2.89) 11.91% 19 8.89%*** (4.29) 9.03% 19 privately-owned companies 8.08%*** (5.79) 21.20% 231 6.29%*** (7.00) 13.68% 231 diference -0.18% (-0.06) 2.60% (1.15) matched samples state-owned companies 7.90%*** (2.89) 11.91% 19 8.89%*** (4,29) 8.84% 19 privately-owned companies 3.28% (1.29) 11.11% 19 4.92%*** (3.31) 6.49% 19 diference 4.62% (1.24) 3.97% (1.58) s o u r c e : own calculations. number in bracket is t-stat. the table 2. depicts the average returns the average initial returns during the first day of trading at state-owned and privately-owned ipos. the data on prices comes from bloomberg and the detailed data on ipos’ dates and sizes come from databases of the warsaw stock exchange. the computations are based on a filtered sample of ipos from the polish market in the period 01/01/2005-10/31/2013. the symbols *, ** and *** denote numbers statistically different than zero at 10%, 5% and 1% level. the results above are generally consistent with the effects of the regression analysis (table 3). when we regress the initial log returns in the matched-samples, the ownership dummy usually indicates bigger returns in case of privatized companies. nonetheless, again, the statistical significance is rather weak. moreover, it is quite interesting, that when we perform the regressions based on full sample, the ownership dummy sometimes becomes negative. however, ipo initial underpricing anomaly… 175 we strongly feel that it may be due to model’s misspecification. it is very difficult what exactly is the functional form of the relation between the offer size and the initial return. as the distribution of offer sizes is highly skewed contrary to the distribution of returns, the linear approximation is probably not ideal (in the preliminary computations we obtained more reasonable results with other functional forms, however the true relation was difficult to settle; as a reason of that, we decided to use the simplest linear form and perform parallel the regression based on offer-size-matched samples). we strongly feel that the regression based on matched samples yields will give informative results. table 3. impact of explanatory variables on initial ipo returns panel a: full sample. (1) (2) (3) (4) int 8.08%*** 3.12%** -6.63% 13.90% (5.94) (1.97) (-0.4) (0.88) own -0.002 0.020 -0.026 0.039 (-0.0) (0.04) (-0.4) (0.71) mrk 0.274*** 0.285*** (5.45) (5.40) size 0.008 -0.006 (0.91) (-0.6) dop. r^2 0.00% 10.02% 0.34% 9.83% n 250 250 250 250 f-stat 0.00 14.86 0.42 10.05 panel b: size-matched sample. (1) (2) (3) (4) int 3.28% -0.29% -20.76% -17.37% (1.24) (-0.1) (-0.6) (-0.5) own 0.046 0.065* 0.042 0.062* (1.23) (1.83) (1.11) (1.70) mrk 0.163** 0.160** adam zaremba, radosław żmudziński176 (1) (2) (3) (4) (2.52) (2.43) size 0.012 0.008 (0.76) (0.57) adj. r 1.40% 14.25% 0.25% 12.60% n 38 38 38 38 f-stat 1.53 4.08 1.05 2.78 s o u r c e : own calculations. number in bracket is t-stat. the regression model estimated for initial ipo logreturns is based on a filtered sample of ipos from the polish market and encompasses the 01/01/200510/31/2013 timeframe. the explanatory variables are named as follows: int denotes an intercept, own is a dummy variable, which is equal 1 for ipos of stateowned companies and 0 for privately-owned companies, mrk is the wig index logreturn in 12 months preceding the ipo and size a natural logarithm of an offer size. the first number in each cell is the ols estimation of the coefficient for the corresponded variable. numbers in brackets are the t-statistics. “n” is the number of observations. the symbols *, **, and *** denote the statistical significance at the 10%, 5% and 1% levels. the data come from the warsaw stock exchange and bloomberg. the panel a depicts the analysis based on the full sample and the panel b presents the regression based on a size-matched sample. the computation of the average annual money left on the table in election and non-election years confirms our initial intuitions (table 4). the amounts in 12 months preceding the elections are over twice bigger than in the remaining months. however, similarly as in the previous case, the monte carlo simulations indicates that the differences are not statistically significant. again, we feel we should blame relatively small sample for that. ipo initial underpricing anomaly… 177 table 4. money left on the table in election and non-election years years years’ fraction total offer size total money left on the table offers p.a. money left on the table p.a. [years] [%] [mio. pln] [mio. pln] [mio. pln] [mio. pln] election years 4.37 49.6% 23 776 2 258.60 5 438 517 non-election years 4.44 50.4% 11 042 1 126.94 2 485 254 difference 2 953 263 t-stat (0.917) s o u r c e : own calculations. the table 4. presents the amounts of the money left on the table at ipos of state owned companies in poland in the 01/01/2005-10/31/2013 timeframe. the information in squared brackets denote units. the average usd/pln exchange rate in the research period was about 3.00 pln per usd. a number in round bracket is the t-statistics. the symbols *, **, and *** denote the statistical significance at the 10%, 5% and 1% levels. the data come from the warsaw stock exchange and bloomberg. figure 1. money left on the table – the simulation analysis panel a: amounts of money left on the table in election and non-election years. and *** denote the statistical significance at the 10%, 5% and 1% levels. the data come from the warsaw stock exchange and bloomberg. figure 1. money left on the table – the simulation analysis panel a: amounts of money left on the table in election and non-election years. panel b: differences in amounts of money left on the table in election and non-election years. source: authors' elaboration. the monte carlo analysis of the differences in the amounts of money left on the table in election and non-election years is performed based on 10 000 draws. the detailed proce0 500 1000 1500 2000 2500 3000 n um be r of d ra w s money left on the table [mio. pln] election years non-election years 0 200 400 600 800 1000 1200 n um be r of d ra w s money left on the table [mio. pln] differences adam zaremba, radosław żmudziński178 panel b: differences in amounts of money left on the table in election and non-election years. and *** denote the statistical significance at the 10%, 5% and 1% levels. the data come from the warsaw stock exchange and bloomberg. figure 1. money left on the table – the simulation analysis panel a: amounts of money left on the table in election and non-election years. panel b: differences in amounts of money left on the table in election and non-election years. source: authors' elaboration. the monte carlo analysis of the differences in the amounts of money left on the table in election and non-election years is performed based on 10 000 draws. the detailed proce0 500 1000 1500 2000 2500 3000 n um be r of d ra w s money left on the table [mio. pln] election years non-election years 0 200 400 600 800 1000 1200 n um be r of d ra w s money left on the table [mio. pln] differences s o u r c e : authors’ elaboration. the monte carlo analysis of the differences in the amounts of money left on the table in election and non-election years is performed based on 10 000 draws. the detailed procedure of the simulations and statistical interfering is described in the main paper. the average usd/pln exchange rate in the research period was about 3.00 pln per usd. the panel a shows the separate draws for the election and non-years and the panel b presents differences between the two types of years computed for every draw.  conclusions and areas for further research in this paper we offer a new hypothesis explaining part of the “money left on the table” puzzle. the political gimmick hypothesis states, that the ruling party and the treasury may be motivated to intentionally leave some money on the table during the ipos of state-owned enterprises to please the voters. we investigate empirically two testable implications of the hypothesis: that the privatization ipos yield higher initial returns and that there is more money left on the table when the elections are coming. generally, out computations confirm both intuitions. however, we encounter obstacles in our computations, which are quite characteristic for emerging markets’ studies and which are difficult to overcome. the statistical significance of our results is rather weak, which ipo initial underpricing anomaly… 179 could be a result of rather small sample available, although we focused on the biggest and most liquid cee country. the paper brings three important findings and implications about capital market. investors should pay attention to the nature of ownership of the company before the ipo (state/private owner), because it may be important as a determinant of instantaneous post-ipo rates of return. in addition, conclusions of the paper constitute a contribution for future studies on the effectiveness of state-owned assets within the conf lict of interest problem. there are also important conclusions for the voters who should more carefully analyse the purpose and conditions of ipos of state-owned companies . the research initiated in this paper should be continued and the developed in the future. the further investigations should primarily concentrate on expanding the sample size, both in spatial and time terms. it seems that the research could be repeated for some other markets and performed again in the future. second, it would be interesting to include more explanatory variables in the regression and better specify the model. third, the further analyses may try to precisely asses to what extend the election gimmick’s impact contributes to the initial underpricing. finally, it should be investigated whether the election cycles affect also other ipo anomalies, like the hot issue market or the longterm post-offering underperformance.  references allen f. & faulhaber g.r. 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(2009). alternative explanations of under-pricing of chinese initial public offerings, phd thesis, university of nottingham. cjfa_1_2015_przed_drukiem.pdf 65 ing liability insurance (oc) in poland. copernican journal of finance & accounting, 4(1), 173–185. http://dx.doi.org/10.12775/cjfa.2015.012 * cracow university of economics risk in providing accounting services in the context of new regulations regarding liability insurance (oc) in poland keywords: accounting, services, outsourcing, risk, accounting office, customer, insurance. j e l classification: m41, o31. abstract: in the present economy, it is essential to access to the correct information coming from the market. the source of such information is financial statements of entities, prepared in accordance with accepted accounting principles and ethical behavior requirements. the rapid evolution of solutions conducive to the fulfillment of these expectations requires professionals involved in accounting to engage in continuous learning in order to maintain the high quality of knowledge and experience. notwithstanding this, correct implementation of separate processes also requires constant cooperation between the customer and the accounting office. otherwise, both parties are at risk. a way to reduce this risk is mandatory liability insurance (oc) concluded by the accounting service providers in order to protect themselves from the consequences of error and possible claims arising thereof. the paper presents the key issues related to the practical implementation of services in the field of accounting in the modern economy and presents the risks associated with them in the eyes of customers and accounting offices. against this background, date of submission: april 10, 2015; date of acceptance: may 8, 2015. * rakowicka 27, 31-510 cracow, poland, phone: +48 12 293 52 99. 174 the merits of securing the parties to the concluded contracts in the form of compulsory third party liability purchased by providers is indicated. over the years, there has been a development of the economy towards demanding more and more specialized offer in goods and services. this phenomenon has also happened in the field of contemporary accounting. it has become a widely understood cluster of processes offered by the professionals providing outsourcing services in the area. indeed, it has been noted that economic operators do not necessarily have to hire their own employees to serve an accounting department, but this can be carried out by external service providers. increasingly, the “make or buy” question has been asked. this separation of certain processes and providing the implementation of the service to an external company is called outsourcing. dissemination of a positive image of outsourcing accounting does not undermine the possibility of the potential risk of using external services. interestingly, it is perceived not only by recipients of the services, but also by entities providing them. the aim of the study is to indicate the rules for the implementation of customer service by accountancy firms, presentation of the risk associated with purchasing services as perceived by the customers as well as through the eyes of representatives of the accounting firms, followed by a discussion of the legal basis and rules of liability insurance for error. this article reviews the literature on outsourcing in today’s economy. its role in the practical implementation of accounting services offered by large and small entities in this regard is presented in detail. directions of adapting actions to the expectations of customers are indicated. then, on the background of case studies’ research described in the literature and the author’s own research, knowledge and experience areas of risk perceived by both customers of accounting offices and service providers are discussed. there follows an analysis of ways of eliminating risk, paying attention to the solutions applied in selected risk in providing accounting services in the context… 175 countries and stressing the legitimacy of compulsory, additional and extended liability insurance (oc) in poland as a condition for the security of commerce. the demand for services in the field of accounting refers to different market segments. it is common among small and medium-sized entities supported mostly by local accountancy firms, as well as among large capital groups serviced by specialized service centers with a global reach. large service centers are most often created to handle specific partners and already at the stage of starting their business, they decide on the directions of their specialization, also supporting the economies of the countries in which they located (mckee, garner & mckee 1998, 21–29). among those present in poland one should indicate, among others: bnp paribas, which offers clearing and it services, brown brothers harrimann – corporate banking services, investment management, consulting on mergers and acquisitions, asset management, investment services, technical customer support, euroclear – operational consulting in the field of after-sales services, hsbc – involved in the credit card services, customer service, financial operations, debt management, hr services, and payment support, state street offers investment fund accounting, valuation of business assets (including securities), valuation of index funds and other derivative instruments, investment analysis, funds maintenance, operations support, risk analysis, and hr services; it services: software development, quality control, production support, systems analysis and it risk analysis, sales customer support for bank pekao s.a (absl 2013a, absl 2013b, the area of operation of these entities and their global offer is a derivative of reducing the barriers to international trade in accounting services (white 2001). a somewhat different situation applies to accounting offices operating for the numerous stakeholders from the local market. 176 the most common operations performed by accountancy agencies include: bookkeeping, tax billing service, payroll management, hr matters and insurance. some accounting firms provide services related to the conduct of the revenue and expense ledger or support taxpayers on recorded revenue without deductible costs or lump sum tax card – the latter services mainly apply to micro-entities. it is noted, however, that about 80% of the agencies maintain full accounting for their customers whose expectations in this area are increas 2013, 85). this applies particularly to the use of information technology for the integration of processes occurring in the business entities. along with changes in the regulation of the accounting, market and technological developments, customer expectations are subject to an evolution, as is the growing need for services and accounting firms to adapt to the new reality. especially the importance of the development of e-services in accounting is increasing (gulkvist 2014, 21–29) as it is gaining popularity in the digitalized world. so far, the need for frequent visits to the accountant’s office meant that when selecting a service provider, the customers considered its location, which reduced their choice. in the current era, computers and the internet allow the customer to safely and efficiently deliver documents to the service provider which makes the distance no longer a problem in dealing with the accounting agency, and bereaves it of the decisive inf luence on the selection of a particular & kieso 2013, 24). it follows that the accounting firms adapt their services to the expectations of their customers by offering an increasingly wider range of services and timely access to the financial records necessary for the proper business decisions. there are several options for satisfying this condition. table 1. basis for immediate access to financial information operation rules of implementation recipient separating an element of evidence serviced by the service recipient partial separation of records to customer service, which is required for normal customer operations, effects periodically transferred to the accounting agency the customer has access to the documents and records necessary for everyday activities (stock records, turnover data), services on the customer's premises accounting firm employee checks the validity of documents and keeps records on-site, the customer has access to source documents as well as information already included on accounts, risk in providing accounting services in the context… 177 operation rules of implementation recipient current information on the telephone documents are sent gradually by the customer to the accounting agent and processed there, the customer can access any information from anywhere by contacting agent by telephone (the widespread use of mobile phones), on-line access a consistent computer program for the customer and provider where documents are included to date, the customer accesses their accounting records on-line without involving the agent, s o u r c e : own work based on the opinions of accounting companies and their customers. in response to the demand from business entities and their financial resources, affordable solutions for supporting accounting records are available on the market, as well as complex systems to support the accounts of major operators with all the modules necessary to conduct multivariate analyzes. owners or managers of economic units are aware that in the absence of one’s own experience concerning accounting, or the lack of funds to employ a fulltime accountant, it will be preferable to entrust the process to an external company. at the basis of this decision lies the risk associated with abnormalities that may occur in the financial records – in the case of unawareness of the applicable regulations or their misinterpretation (chorafas 2007). the legislation relating to accounting and taxes sometimes contains contradictions in the various interpretations by the tax authorities. on this basis, many entrepreneurs give up self-service entrusting its accounting tasks to specialized entities, thus avoid the risk of self-error. therefore, it is important to correctly choose the service provider and to remain in consistent cooperation because its effects will not only include properly prepared reports but it will also be the basis for making sound business decisions by the customer. the most often reported drawbacks of using external accounting services reported by customers include: impossibility of daily insight into the submitted documentation, impossibility of daily insight into the accounting processes, spoken answers to questions that are difficult to understand, no forecasts from the agent regarding costs to be incurred, 178 the reservations indicated in the first four points may be offset by the use of an accounting platform, whose operation is based on three key elements (www. 1, which are: the customer, the processing center of the accounting platform, the accounting firm. the current transfer of invoices and documents for accounting platform processing center is an obligation of the customer. the center scans and automatically exports them to the accounting software used by the specific accounting office. matters related to contract costs result from the assumptions made at the time of the conclusion of the contract. it is not worth making a choice based solely on the price of the basic service, but one should also analyze the cost of additional services, which may appear along with the development of cooperation. it is important especially if the price of services is not disproportionate to the services provided. this situation is a common practice among rogue providers who charge for additional services well above the price they could claim if these services had been provided in the contract. an initial benchmark for basic tasks and the measurement and analysis of risks and benefits connected with stopping the operation of the company or transferring it to an external service can be helpful here (mcivor 2000, 30 – 35). risk issues concerning the correct use of accounting is discussed in a very wide al view of risk in accounting seen as one of the key functions in the contemporary economy. the following types of risk in accounting firms should be noted: risk arising from the organization of the firm’s operation, risk arising from the choice of method of bookkeeping, risk applicable to the choice of accounting software, risk of document control, risk of the accounting system organization. the first of the indicated cases involves personnel issues and is the result of fear of irregularities arising from poor organization of work of the accountants. this applies especially to the division of tasks and the competences and qualifications of employees, which result in actions they take and implement. 1 manner. risk in providing accounting services in the context… 179 the risk associated with the selection of bookkeeping methods includes fears that it may not guarantee safety of the activities and that the information function of bookkeeping may not be implemented in the correct way. this issue is becoming increasingly important in the case of e.g. books maintained at the customer’s premises and the customer’s duty is to properly secure them. also, the knowledge about the system in which they are processed and the adopted processing method are important. against this background, it should be noted in, the context of the third element of risk relating to software selections, which should be tailored to the specifics of the activity of the supported entity. not only security, but also the guidelines adopted by the accounting act are of importance here. it is well known that the basis of the reports presented by businesses are source documents that, in order to avoid the risk of breaking the rules of true and fair view, should be subject to careful control both in terms of content and practical implementation of the provisions set out in them. the last concern is the fear of releasing sensitive data to unauthorized persons or inadequate security of documents or media carrying the records which may, among other things, result in undue modifications or loss of information which should be provided to the customer. it may also have an impact on their quality (reliability, comparability). table 2. risk in the operation of accounting firms type of risk factors determining threats market unmatched service offer to customer expectations, too few customers, an increase in the number of accounting firms due to the deregulation of bookkeeping services, operational human error, incorrect operating system, poor work organization, improper distribution of tasks, ignorance of the laws, ignorance of customer expectations reputation errors in customer service, lack of timeliness, ignorance of new regulations, lack of ethics, legal conducting activities beyond the framework of existing legislation, legislative risk, the risk of an erroneous interpretation, risk of litigation, credit force majeure, natural disasters, loss of customers, inadequate investments, economic crisis, tax ignorance of the laws and the interpretation of tax regulations by the accountant, malfunctioning computer programs, erroneous preparation of tax return forms, customer insolvency customer – or customer group – resignation from services without payment, employee cost hiring incompetent employees, too many employees, 180 type of risk factors determining threats penal and fiscal liability, collective entity obligation to pay penalties and reparations in the event of error being the fault of the accounting firm, liquidity. loans taken, insolvent customers, untimely execution of settlements. s o u r c e : own work based on klamut (2012, 11–34). it is also worth noting the personal risks resulting from a loss of a valued employee, which usually involves a domino effect, causing the departure of customers the employee had supported. accountants worldwide recognize the problem of error and risk arising from irregularities in the implementation of accounting. in 2009 irregularities in the conduct of monetary policy were highlighted by the fed (high-level group of the need for greater regulation of access to the financial professions. control action and specific regulatory packages introduced by specific countries, however, are mostly full of inconsistencies. they are usually considered as the so-called fire alarm approach. in other words, an immediate political response to demands by the market. at the same time it is believed that self-regulation of the market and the role of specific professional organizations having supervision over the activities of specific entities are the most approwhere membership in professional organizations was made compulsory for entities to ensure their control the expected quality of accounting. in germany, it is a requisite for achieving high quality of accounting is mandatory membership in a professional organization. in belgium, an entry in the register kept by the minister of finance for a criminal record for fraud is required. against this background, consistent introduction of compulsory civil liability insurance (oc) in poland should be assessed positively. a key objective of the existence of civil liability insurances, regardless of industry which it concerns, is the protection of the interests of the customer. in the case of a customer who purchases accounting services, it is particularly true of the financial interest of the customer. risk in providing accounting services in the context… 181 in a situation where the customer suffers damage due to the fault of the accounting firm, compensation can be claimed. the firm bears responsibility for the failure to comply with the concluded contract, based on the civil code (2014), which indicates that the debtor is required to repair damage resulting from non-performance or improper performance of an obligation, unless the non-performance or improper performance is the result of circumstances for which the debtor cannot be held responsible. for the realization of the assumptions underlying the civil liability insurance, one should consider whether the insurance is adequate to the risk (the coverage, the guarantee amount) and whether the person performing the tasks assigned was aware of the consequences of errors. in order to secure customer claims, incorporating regulations on accounting service provisions to the accounting act (act 2008) the obligation to conclude an civil liability (oc) agreement was indicated, to be realized by entrepreneurs providing accounting services, for any damage caused in relation with the conducted economic activity (act of 2008, article 76h.1). it was also stressed, that the determination of rules of insurance shall be formulated in a regulation containing the detailed scope of mandatory insurance, the term of the obligation to insure and the minimal guarantee sum, in particular taking into account the specifics of the operations and the associated tasks of the service provider (act of 2008, article 76h.2). recent changes in the accounting act (act 2014 of 9 may) have deregulated bookkeeping and released the accounting profession meant that any citizen without a criminal record for fraud with the ability to act (act of 29 september 1994, article 76a.3) may perform services previously subject to the need to have appropriate permissions (certificates, practice, etc.). thus, the need arose to adopt a new measure implementing the compulsory insurance of civil liability – the regulation of the minister of finance concerning the compulsory third party insurance (regulation 2014). the regulation refers to the provisions defined in the accounting act where it is indicated that within the meaning of the freedom of business, bookkeeping services are an economic activity involving the provision of services in the following areas: conducting, based on accounting evidence, accounting books containing records of events presented in chronological and systematic order, periodic determination or preparation of inventory of tangible assets and liabilities, valuation of the company’s assets and liabilities, 182 valuation of the company’s assets and liabilities, preparation of financial statements, collecting and keeping any accounting evidence, as well as other documents provided for by law (law of 2008, article 4.3, item 2, 6). as everyone knows, these are just the basic tasks of the accounting firm regarding the prepared reporting. but what if such errors regard personnel matters? these could include: keeping documents on employment and deadlines, calculation of salaries, overtime, bonuses, allowances, and benefits arising out of employment, determination of contributions for compulsory social and health insurance, support for documentation and payments under the terms operation on the labor fund, the fund for guaranteed employee benefits, or the fund for the rehabilitation of persons with disabilities, determining the monthly subsidies to salaries of disabled persons, documentation and submission of applications for payment of benefits, control on the amounts of wages which have been seized by an enforcement officer and correspondence with legal authorities. the regulation does not contain provisions regarding the inclusion of any errors into the scope the compulsory third party insurance, which is currently 10,000 euros for one event, because these activities are statutorily excluded from the area. similarly excluded, along with the deregulation of professions, was the need for compulsory third party insurance on tax advisory activities carried out within the framework of accounting services. most insurers, however, suggests the possibility of extending the scope of protection for providers with the insurance including the indicated operation (for an additional fee). this is called supplementary insurance, which in addition to the activities listed above may also include: the regulation does not contain provisions regarding the recognition of the scope of possible errors compulsory third party insurance, which is currently 10,000 euros for one event, because these activities are statutorily excluded from the area. similarly excluded along with the deregulation of professions the need for compulsory third party insurance tax advisory activities carried out within the framework of accounting services. most insurers, however, suggests the possibility of extending the scope of protection providers of insurance (for an additional fee) inclu risk in providing accounting services in the context… 183 ding the indicated operation. these are called supplementary insurance, which in addition to the activities listed above may also include: responsibility for damages caused by subcontractors without recourse. where a subcontractor is hired to perform some of the tasks is, the insurance protection can cover damage caused by them as well, even though the ordering entity is responsible for their supervision. an important feature of this insurance is that in case of compensation for damage caused by a subcontractor, the insurer most often decides not to claim recourse against the subcontractor.2 the consequences of the destruction, loss or damage of documentation, which may be caused by the destruction of documents by fire or loss of documents during transportation due to a break into a vehicle. this clause covers the costs associated with the consequences of the events listed in the contract.3 in addition, more and more agencies are deciding to purchase excess insurance protection for a higher amount of compensation as a result of damages. it is widely accepted that outsourcing is intended not only to improve the quality of accounting in a business entity, but also to lower its operating costs. the costs, however, may not be a major key to choose the particular accounting firm. it sometimes happens that such firms emerge that do not have the required permissions or that employ workers without adequate training. the prices of their services are generally lower than those of the competitors. this should encourage potential customers to control their powers, as accounting errors are also a risk for the recipient of services. it should also be noted that the described services have the specific feature that their effect is also dependent on the customer. apart from the obvious advantages arising from the use of external services, it requires maintaining individualized commercial relations, daily contact and access of both parties to 2 and the civil code (journal of laws of 2014, 121) the provider has the right of recourse in the event of early payment for damage caused by gross negligence. this follows from the assumption that the function of insurance is to protect the interests of third parties and not the insured. 3 184 confidential data and information. this may be a concern especially for mistakes made by the parties or unfavorable results of the cooperation. in order to avoid or mitigate potential disputes and claims, there is the protection of mandatory civil liability insurance of the accounting firm. when planning an agreement with an accounting agency, one should thus make sure that that their insurance is valid and whether it covers only the compulsory insurance or elements that complement and extend it. www.absl.pl (accessed: 12.02.2015). ces sector in poland, www.absl.pl (accessed: 12.02.2015). chorafas d. n. (2007), risk accounting and risk management for accountants, elsevier, gb. gulkvist b. m. (2014), emerging e-services in accounting, a longtitudinal case study, 15.02.2015). mcivor r. (2000). a practical framework for understanding the outsourcing process, 30-35, supply chain management: an international journal, vol.5, nr 1. mckee d. l., garner, d. e., mckee y. a. (1998), accounting services and growth in small poz. 1576. pada 2014, poz.1616. risk in providing accounting services in the context… 185 warszawa. w krakowie, kraków. weygandt j. j., kimmel p. d., kieso d. e. (2013), managerial accounting: tools for busiwhite l. j. 2001, reducing barriers to international trade in accounting services, aei www.sagabrokers.pl (accessed: 16.02.2015). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: february 17, 2015; date of acceptance: may 6, 2015. * contact information: monika.czerwonka@sgh.waw.pl, institute of finance, warsaw school of economics, al. niepodległości 164, 02-554 warszawa, poland, phone: +48 503 550 990. czerwonka m. (2015). the exploration of disposition effect among business undergraduates in poland. copernican journal of finance & accounting, 4(2), 79–89. http://dx.doi.org/10.12775/ cjfa.2015.017 monika czerwonka* institute of finance, warsaw school of economics the exploration of disposition effect among business undergraduates in poland keywords: behavioral finance, disposition effect, experimental study. j e l clasification: g02. abstract: in this article the author attempts to explore the phenomena of disposition effect among polish undergraduate students. the study shows that under experimental conditions participants do show disposition “to sell winners too early and ride losers too long”. such disposition stands in opposition to rationale behavior which induces to hold stocks during the whole period of experiment. the research provides important insights into the field of behavioral finance and in particular into the global analysis of disposition effect. translated by monika czerwonka  introduction the traditional economic and finance theory is based on two premises. the first one implies that the market is efficient, i.e. the prices ref lect all available information, so that there are no opportunities to earn extraordinary returns m. czerwonka80 from private information. the second one assumes that individuals make rational decisions as to maximize one’s expected utility. over the last several years the classical economic theory has ceased to be a sufficient explanation of the observed market price f luctuations and investors’ behavior. there has been substantial evidence that stock prices do not follow random walk model and that returns can be predictable as well as that investors do not always act rationale and make systematic errors. in this article the author attempts to describe and to show a way to measure the impact of a very well documented pattern in investor behavior – a disposition effect. this study will first present the wide concept of behavioral finance and the short history and development of economic thought. next it will present the idea of disposition effect and will review the number of studies devoted to it. finally the objectives and methodology of the experiment conducted among students will be presented. the results section will detail the main findings of the study. the final section will provide conclusions and discussions in which research implications are outlined. behavioral finance behavioral economics or behavioral finance is an application of psychology and sociology into the economic or finance settings. it investigates what happens in markets if some of its agents do not act fully rational and display human limitations. the story with the behavioral economics has begun over half a century ago when edwards (1968) introduced decision-making as a research topic for psychologists and in allais (1953) presented a psychology-based positive theory of choice under uncertainty. in 1956 herbert simon outlined a theory of information processing based on bounded rationality and in the late 80-ties and 90-ties many economists and psychologists found the common basis for their work (eg.: kahneman, tversky 1979; thaler 1980; shefrin, statman 1985; odean 1998). but first in 2002 behavioral economy was on everyone’s mouth, as daniel kahneman was awarded the noble prize for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”. since 2002 there have been numerous studies in the field of behavioral economy and finance, which show intensified interest in this interdisciplinary subject. recent noble the exploration of disposition effect… 81 prize in economics for the robert j. shiller in 2013, one of the leading behavioral scientists, only confirmed the importance of psychological insights into the finance settings. looking at the number of international publications, the concept of behavioral finance has gained a substantial position in the contemporary finance. one can divide the literature on behavioral finance into two branches (figure 1). the first one studies investor behavior which very often does not fulfill the assumption of a homo oeconomicus motivated by self-interest and capable of making rational decisions (simon 1983). in this section of investor’s behavior analysis we can mention the prospect theory (kahneman, tversky 1979), many examples of heuristics and biases (i.e cognitive errors) and finally disposition effect as one of the best described anomalies in investor’s behavior. the second branch of literature on behavioral finance deals with such problems as stock market anomalies i.e. departures from the standard assumption about market efficiency (fama 1998). as examples of stock market anomalies we can point out e.g: stock market seasonality, underand overreaction of the market to the news and equity premium puzzle (debondt, thaler 1987; daniel et al., 1998; mehra, prescott 1985). figure 1. division of the literature on behavioral finance thaler 1980; shefrin, statman 1985; odean 1998). but first in 2002 behavioral economy was on everyone’s mouth, as daniel kahneman was awarded the noble prize for having integrated insights from psychological research into economic science, especially concerning human judgment and decisionmaking under uncertainty". since 2002 there have been numerous studies in the field of behavioral economy and finance, which show intensified interest in this interdisciplinary subject. recent noble prize in economics for the robert j. shiller in 2013, one of the leading behavioral scientists, only confirmed the importance of psychological insights into the finance settings. looking at the number of international publications, the concept of behavioral finance has gained a substantial position in the contemporary finance. one can divide the literature on behavioral finance into two branches (figure 1). the first one studies investor behavior which very often does not fulfill the assumption of a homo oeconomicus motivated by self-interest and capable of making rational decisions (simon 1983). in this section of investor’s behavior analysis we can mention the prospect theory (kahneman, tversky 1979), many examples of heuristics and biases (i.e cognitive errors) and finally disposition effect as one of the best described anomalies in investor’s behavior. the second branch of literature on behavioral finance deals with such problems as stock market anomalies i.e. departures from the standard assumption about market efficiency (fama 1998). as examples of stock market anomalies we can point out e.g: stock market seasonality, underand overreaction of the market to the news and equity premium puzzle (debondt, thaler 1987; daniel et al., 1998; mehra, prescott 1985). figure 1. division of the literature on behavioral finance source: czerwonka, gorlewski (2012), 42. disposition effect the disposition effect was introduced to the behavioral finance literature by shefrin and statman in 1985. the authors described it as: “the general disposition to sell winners too early and ride losers too long1”. basically the disposition effect concentrates on the reluctance to realize losses even when 1 the terms winners / losers refer here to stocks with a current price that is higher / lower than the initial purchase price. behavioral finance investor’s behavior departues from rationale stock market departures from the efficiency prospect theory disposition effect stock market seasonality equity premium puzzle heuristics and biases under – and overreaction of the market s o u r c e : czerwonka, gorlewski (2012), 42. m. czerwonka82 disposition effect the disposition effect was introduced to the behavioral finance literature by shefrin and statman in 1985. the authors described it as: “the general disposition to sell winners too early and ride losers too long1”. basically the disposition effect concentrates on the reluctance to realize losses even when the precepts of normative theory (concerning capital gain tax, portfolio rebalancing, transaction costs) prescribe realization. disposition effect means that at any point in time, winners are sold more readily than losers (zuchel 2001). the paper of shefrin and statman (1985) started a large literature on the subject. the most popular study of disposition effect was conducted by odean (1998). on the basis of 10 000 accounts in the period 1987 to 1993, he demonstrated that investors sell winners more readily than losers in the sense that they realize gains relatively more frequently than losses2. investors did so in spite of the factors that might have affected their trading decisions such as higher trading costs of low priced stocks or portfolio rebalancing considerations. another interesting study of disposition effect was presented by weber and camerer (1998) in form of an experimental analysis. the scientists studied the portfolio decisions of students, who had to buy and sell shares of six risky assets. asset prices f luctuated in each period3. the results of their analysis showed that contrary to bayesian optimization, subject did tend to sell winners and kept losers. more recent papers, e.g. dhar, zhu (2002), present an individual level analysis of the disposition effect. the authors using demographic and socio-economic data found empirical evidence that wealthier and individual investors in professional occupations exhibit less disposition effect. they conclude that investors’ sophistication about financial markets and trading experience is responsible in part for the variation in individual disposition effect. 1 the terms winners / losers refer here to stocks with a current price that is higher / lower than the initial purchase price. 2 odean calculated the proportion of gains realized (pgr) and the proportion of losses realized (plr) and proved that for the entire year the pgr is higher than the plr. 3 prices of the risky assets were generated by a random process and were not determined by the trading actions of subjects, in order to isolate the disposition effect from the process of price information. the exploration of disposition effect… 83 it seems that the problem whether there is a disposition effect has been solved. however the question why there is such an effect remains still open. the first who sought the answer were the founders of the bias. shefrin and statman (1985) presented a positive theory “of selling winners and riding losers” based on following elements. at first they suggested that the bias could be explained in context of the prospect theory (kahneman, tversky 1979). the s-shaped value function, concave in the domain of gains and convex in the domain of losses, ref lects risk aversion in the gains region and risk-seeking behavior in the loss region (see figure 2). decreasing sensitivity of the value function means that the investor is happier having gained the first penny than after having earned the second one. and similarly the lost of the first penny hurts more than the loss of the second one. when we translate it into the context of disposition effect, this means that investors are eager to sell winners because they are not very sensitive to further gains and they hold on losers because they are not very sensitive to further losses (zuchel 2001). secondly, the value function in the domain of losses is steeper than in the domain of gains. it means that losses hurt us twice as much as gains. the sadness that one experiences in losing the money appears to be greater than the pleasure of gaining the same amount of money. this strong loss aversion explains the willingness to hold on losing stocks. figure 2. value function v (x) figure 2. value function v (x) value function v (x) value losses gains reference point source: based on: kahneman, tversky (1979), 263-292. the second explanation of the disposition effect was mental accounting, i.e. a tendency to segregate the different types of gambles into separate accounts, and applying prospect theoretic decision rules to each account by ignoring possible interaction. any time when the stock is purchased a new mental account is opened. a running score is then kept on this account indicating gains or losses relative to the reference point which is usually the asset purchase price. investors tend to have difficulty in closing a mental account at a loss. they prefer paper losses to actual loss realization because they do not want to give up the hope of making money on this particular investment. another interesting explanation of the disposition effect is the regret theory (see: bell 1982) and the fact that investors may resist the realization of losses because it could prove that their judgment of an investment was wrong. such regret could be even greater by having to admit the mistake to others. shefrin and statman suggest that “the quest for pride and the avoidance of regret lead to a disposition to realize gains and defer losses”. reluctance to realize losses could be also seen as a self-control problem, i.e. a conflict between a rational part (the planner) and a more primitive, emotional and myopic part (the doer). the problem is to exhibit sufficient self-control to close accounts at a loss. belief in mean reversion, i.e. negative autocorrelation of returns in the long horizon, could be another explanation of the disposition effect. siebenmorgen and weber (2004) conducted an experiment and found that most of the participants believed in mean-reverting returns. such belief that losers will soon outperform the winners and vice versa could very easily serve as an explanation of the disposition effect. the last but not least theory that could explain the bias in investors’ behavior comes from the psychological literature on entrapment, escalation of commitment and sunk cost effect. it seeks an answer to the question why and under what conditions people irrationally stick to or even intensify losing courses of action. “decision makers become entrapped in a previous course of action because of their unwillingness to admit – to themselves or others – that the prior resources were allocated in s o u r c e : based on: kahneman, tversky (1979), 263–292. m. czerwonka84 the second explanation of the disposition effect was mental accounting, i.e. a tendency to segregate the different types of gambles into separate accounts, and applying prospect theoretic decision rules to each account by ignoring possible interaction. any time when the stock is purchased a new mental account is opened. a running score is then kept on this account indicating gains or losses relative to the reference point which is usually the asset purchase price. investors tend to have difficulty in closing a mental account at a loss. they prefer paper losses to actual loss realization because they do not want to give up the hope of making money on this particular investment. another interesting explanation of the disposition effect is the regret theory (see: bell 1982) and the fact that investors may resist the realization of losses because it could prove that their judgment of an investment was wrong. such regret could be even greater by having to admit the mistake to others. shefrin and statman suggest that “the quest for pride and the avoidance of regret lead to a disposition to realize gains and defer losses”. reluctance to realize losses could be also seen as a self-control problem, i.e. a conf lict between a rational part (the planner) and a more primitive, emotional and myopic part (the doer). the problem is to exhibit sufficient self-control to close accounts at a loss. belief in mean reversion, i.e. negative autocorrelation of returns in the long horizon, could be another explanation of the disposition effect. siebenmorgen and weber (2004) conducted an experiment and found that most of the participants believed in mean-reverting returns. such belief that losers will soon outperform the winners and vice versa could very easily serve as an explanation of the disposition effect. the last but not least theory that could explain the bias in investors’ behavior comes from the psychological literature on entrapment, escalation of commitment and sunk cost effect. it seeks an answer to the question why and under what conditions people irrationally stick to or even intensify losing courses of action. “decision makers become entrapped in a previous course of action because of their unwillingness to admit – to themselves or others – that the prior resources were allocated in vain. put simply people do not like to admit that their past decisions were incorrect, what better way to reaffirm the correctness of those earlier decisions than by becoming even more committed to them” (brockner 1992). the exploration of disposition effect… 85 research methodology of the experimental study of disposition effect among polish business undergraduates there have been few researches exploring the disposition effect in poland (szyszka, zielonka 2007; staszewski 2008; kubińska et al. 2012). the problem of measuring the disposition effect in poland is that there is no distinction between the short-term and long-term tax rates (concerning capital gain tax). therefore the disposition effect cannot be measured in the same way as e.g. in united states where investors’ reluctance to realize losses is at odds with optimal tax-loss selling for taxable investments (odean 1998). another obstacle in measuring the disposition effect in polish reality is the absence of such tools like e.g. crsp/compustat database offered by center for research in security prices in united states, which can be used to analyze the historical data of stocks, mutual funds and indexes (frazzini 2006). for these reasons the exploration of disposition effect in this study was done in the form of an experimental analysis. one of the best known analyses of disposition effect in experimental design was done by weber and camerer (1998), weber and zuchel (2001). research process the experiment was conducted among polish business undergraduates from warsaw school of economics. the experimental design was based on previous studies of weber, zuchel (2001). a total of 253 students were examined in the period between years 2012–2014. students were the undergraduates from business faculties, on average in their 3-rd year of study. the experiment was a pen and paper experiment and took about 20 to 30 minutes. the experiment was meant to be some kind of simulation of investors’ behavior on the stock exchange. the experimental scenario informed participants that they have to invest the virtual money in the value of 900 pln. the experiment was divided into two stages at the beginning of which participants could buy or sell stocks (maximum number of holding stocks in portfolio was 10). participants were asked to make a decision (at the second stage) in case of two scenarios: first situation was -the price goes up, the second situation wasstock price goes down. after making a decision and writing it on a paper the price of stock changed randomly. students could calculate their final gain. the best students were awarded. m. czerwonka86 the main hypothesis which meant to be verified was the issue of existence the disposition effect on individual level. the factors and parameters in experiment were given in a way that, from rationale perspective, on each stage of experiment it was more effective to take a risk and maximize the number of stocks holding. the expected value of the investment, on each stage, was higher than zero4. according to the expected utility theory one should maximize its utility and keep maximal number of stocks on each stage (10 units). however if participants were prone to take a lower risk in case of prior gains (sell more stock in case of price rise) as compared to prior losses, they would experience the disposition effect. the key issue was to measure the number of stocks holding by students on each stage. results the average number of holding stocks at first stage was around 7 (compare table 1). at the second stage: in case of price rise the average number of stocks holding was around 5, in case of price drop the average number of stocks holding was around 8. it meant that participants sold their stocks when the price went up, and held their stocks when the price dropped. as mentioned above such behavior was inconsistent with rationale behavior according to which investors should hold 10 units of stocks on each stage. table 1. the number of stocks holding factors first stage second stage price rise second stage price drop average number of stocks holding 6,92 5,46 8,12 median 7 6 10 standard deviation 2,31 3,68 3,10 s o u r c e : own calculation. a (non-parametric) wilcoxon test was used to test the main hypothesis. the test is used when the observations do not come from a normal distribution and the sample size is small (zuchel, weber 2001). the results presented in table 4 with 50% probability the stock price could rise by 40 pln, and with with 50% probability the stock price could drop by 30 pln. the exploration of disposition effect… 87 2 show that the difference in average number of stocks holding on the second stage in case of a price fall and a price rise is significant (p=0,001). table 2. average number of stocks holding at the second stage of experiment in case of price rise and price drop situation difference in number of stocks holding wilcoxon test (p-value)* ii stage price rise – ii stage price drop -2,66 0,001 ii stage price rise – i stage -1,46 0,003 ii stage price drop – i stage 1,20 0,008 * p-values are based on two-sided wilcoxon test and on the asymptotic distribution of the test statistic. s o u r c e : own calculation. the difference in number of holding stocks on each stage results mainly from the participants’ behavior in the domain of gains. a prior loss leads to increased risk-taking and this effect is insignificant (p=0.008). a prior gain leads to risk-aversion, and this effect is significant (p=0.003). results of the above study confirms that the difference in behavior after gain and loss is mainly driven by risk-aversion in the domain of gains. such explanation is consistent with the model of prospect theory. final remarks and conclusions in this article the author described and show a way to measure the disposition effect under experimental conditions. the experiment conducted among polish undergraduates show that participants were prone to take a lower risk in case of prior gains (sell more stock in case of price rise) as compared to prior losses. this study provides important insights into the field of behavioral finance and in particular into the global analysis of disposition effect. there have been some studies concerning and confirming the disposition effect in poland but only some of them were held in experimental design 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(2015). imbalanced liquidity risk management: evidence from latvian and lithuanian commercial banks. copernican journal of finance & accounting, 4(1), natalia konovalova* riseba university julia zarembo** riseba university imbalanced liquidity risk management: evidence from latvian and lithuanian commercial banks keywords: liquidity ratios, asset and liability management, gap analysis, liquidity risk, and imbalanced liquidity. j e l classification: g21. abstract: the nature of the liquidity risk lies in specific peculiarities of banking institutions activities. thanks to a big amount of short-term resources banks can afford to offer long-term loans drawing their profit from higher interest rates on loans. it causes a situation with a discrepancy in the terms and the sums of assets and liabilities. as a result, the bank is exposed to the risk of being short of current liquidity in case a large number of depositors would like to withdraw their money. the bank is able to collect its resource base either by attracting additional deposits at higher interest rates or by means of a compelled unprofitable realization (selling) of its other assets. apart from that, another source of potential liquidity problems is bank sensitivity to the f luctuations in interest rates: in case they grow, some of the depositors could withdraw their money in date of submission: february 14, 2015; date of acceptance: april 11, 2015. * street 3, riga, lv-1048, latvia, phone: +371 29215208. ** 1048, latvia, phone: +371 29522627. natalia konovalova, julia zarembo110 search of higher income in other deposits (investments); obtaining liquid assets by means of loan borrowing could prove to be more expensive while some kinds of loans could turn out to be unavailable. taking into account the above-mentioned, the authors make a research of the problems of imbalanced liquidity in commercial banks considering the inf luence of both external and internal factors; reveal the reasons which have caused them, as well as expose the drawbacks in the imbalanced liquidity risk management. there are many banks around the world that are faced with the problem of imbalanced liquidity, which is related with mismatch of obtained funds and assets operations. commercial banks are increasing the quantity of long-term loan that are not secured by long-term resources. the short-term resource transformation into the long-term assets threatens bank liquidity, and as a result, can lead to the bank insolvency. but the content of an unnecessarily high sum of liquidity assets can have a negative impact on the banks profitability, because the money in the customers’ current accounts does not earn anything. therefore the management of liquidity is very important. the management of the commercial bank should choose liquidity assessment methods that would be able to identify, evaluate and manage every factor that inf luences liquidity. the financial crisis in latvia and lithuania had several factors that contrihad too much faith in the sharp increase of the income levels of the population, the cheap loans from foreign banks and the optimistic forecasts on the economic development resulted in an increase of credit transactions. the excessive increase assets (loans) in the commercial banks until mid-2008 promoted an investment boom in the real estate market and the creation of a price bubble and its eventual rupture. because of the low-quality loan portfolio considerably decreased the liquidity of commercial banks in latvia and lithuania. this example proves the necessity of liquidity management and evaluation the problems in commercial banks. the research objects of this paper are latvian as “lats banka” and lithuanian ab “lats bankas”, which is a subsidiary of latvia’s bank and independently operates in lithuania’s bank sector. the aim of this research is: based on the assessment and the management of liquidity theory to make the latvian and lithuanian commercial banks’ liquidity analysis and evaluations, to detect existing problems of liquidity manage imbalanced liquidity risk management: evidence from latvian… 111 ment in latvian and lithuanian “lats” banks and to develop proposals for improvement and development of liquidity management process. to achieve the aim of this research the following objectives are solved: to study theoretical aspects of commercial banks liquidity and to determine the factors that inf luence it; to clarify the reasons for commercial banks liquidity problems; to make a comparative liquidity analysis between latvian and lithuanian commercial banks; to ascertain the risk levels of an imbalanced liquidity; to study basel iii regarding the management of commercial banks’ liquidity; to work out some suggestions for „lats” banks in latvia and lithuania that could increase efficiency of liquidity management. during the research the following analyzes are used: analytical, graphical, statistical and empirical research method. the theoretical and methodological basis for this research comes from specialised scientific literature, textbooks, the legislative provisions of the republic of latvia and the republic of lithuania, regulations of supervisory authorities and the published annual reports of the banks. liquidity and liquidity risk management are the key factors for the safety of business operations in any commercial banks (bertham 2011). recently, many banks are facing the problem of liquidity strain when severe competition about how to attract deposits forces the banks to find other sponsors (smith, 2012). together with the development of finance market, opportunities and risks in liquidity management of commercial banks will also meet a correlative increase. this shows the importance of planning the liquidity needs by the methods with high stability and low cost in order to sponsor for business operations of commercial banks in the global growing competition (kochubey, kowalczyk 2014). liquidity risk can be measured by two main methods: liquidity gap and liquidity ratios. the liquidity gap is the difference between assets and liabilities at both present and future dates. at any date, a positive gap between assets and natalia konovalova, julia zarembo112 liabilities is equivalent to a deficit (bessis 2009). liquidity risk is usually measured as liquidity ratio which is practically calculated in two different forms. in first type, liquidity is adjusted by size which includes the ratio of cash asset to total asset (barth 2003; demirguc-kunt 1998), the ratio of cash asset to deposits (savings) (chen 2010). second type includes the adjusted loan by the size which includes the ratio of total asset and/or the ratio of net loan to total asset (kosmidou 2008). in first type, the higher is the liquidity ratio, the higher is the liquidity level, and therefore, it is less vulnerability against bankruptcy. in contrast, in second type, the higher are the values of ratios, it will represent that banks will undergo higher liquidity risk. financial gap ratio introduced by saunders and cornet (2007) is used in this study. they expressed that liquidity risk criterion is determined based on financial gap. bank managers mostly assume core deposits as stable source of funds which can permanently finance the supply of banking loans. generally, core deposits are regarded as loan resources with the least cost. financial gap is defined as the difference between loan and bank’s core deposits. if financial gap is positive, the bank should fill this gap by its cash funds through selling cash assets and borrowing from money market. therefore, financial gap can be estimated by subtracting the borrowed funds from the cash assets. this financial gap represents financial needs of the bank after selling its cash assets. when the economy is under stagnation and financial market increasingly demands for cash funds, it is when the banks are more exposed on liquidity risk. therefore in this study, it seems that financial gap is a more appropriate alternative for liquidity risk of the bank. for standardization of financial gap, the variable of financial gap is divided by total asset (naser ail yadollahzadeh tabari, mohammad ahmadi, ma’someh emami 2013). recent studies indicate that liquidity risk arises from the inability of a bank to accommodate decreases in liabilities or to fund increases in assets. an illiquidity bank means that it cannot obtain sufficient funds, either by increasing liabilities or by converting assets promptly, at a reasonable cost. in periods the banks don’t enjoy enough liquidity, they cannot satisfy the required resources critical conditions, lack of enough liquidity even results in bank’s bankruptcy (group of studies 2008). imbalanced liquidity risk management: evidence from latvian… 113 to be able to assess a bank’s liquidity level it is necessary to analyse the commercial banks’ the structure of terms and sums for assets and liabilities, and assess their position of liquidity. the net liquidity position is calculated using the gap-analysis for each group of terms (up to 1 month, from 1 to 3 months, from 3 to 6 months, from 6 to 12 months, from 1 to 5 years and more than 5 years) and is examined separately. a positive net liquidity position indicates the surplus of resources in each term group of assets and liabilities. the higher the positive position of net liquidity in the group ‚up to 1 month’, the higher is the current liquidity of the bank. a positive position of the net liquidity in the long-term groups means that there is a long-term resource deficit. a long-term resource deficit can be covered by the bank’s equity. but, in case the bank’s equity is insufficient to cover the long-term assets, it could cause problems with liquidity when the time has come to fulfil the long-term liabilities. a negative net liquidity position in each assets and liabilities term group indicates the surplus of outside funds that are distributed in this term group. the higher the negative net liquidity position of the group, comparing it with the short-term and the long-term groups, the higher is the liquidity risk. the reason for this is that the short-term resources are deployed to the long-term investments. this could result mismatch between short-term liabilities and long-term assets. a negative net liquidity position for the long-term group shows that the long-term resources are used not only for long-term investments, but also for short-term assets. this kind of resource placement is positive for the liquidity of a bank. a total liquidity position is the gap between assets and liabilities in a total cumulative position and it is calculated by an accruing term sequence. konovalova, kudinska, rozgina and zelgalve (2008) consider that in general the term structure of the assets and liabilities give the possibility the surplus resources to distribute between different term groups. this action takes place when long-term resources are transformed into short-term investments or vice versa. it should also be noted that the transformation of short-term resources into long-term investments could worsen the liquidity of a bank. therefore is necessary constant supervision of the assets and liabilities maturity structure. banks may decide on transforming short-term resources into medium-term or long-term investments, but only if their liquidity is not in danger. natalia konovalova, julia zarembo114 while doing the comparative analysis of imbalanced liquidity risk for commercial banks the author uses the net relative gap. the net relative gap is a relation between the absolute net gap value and total assets amount. figure 1 shows the changes in net relative gap of latvian as „lats banka” in the analysed years while figure 2 shows the respective information of lithuanian ab „lats bankas”. figure 1 shows that the greatest gaps are with maturity up to 1 month are in the years 2007, 2008, 2012, 2013, which indicates a surplus in the short-term outside funds. the net relative gap in the mentioned years is considerably high: 2007 – 30.80%, 2008 – 35.99%, 2012 – 43.17%, but in 2013 it is 46.24%. it should be noted that latvian as „lats banka” high negative position of net liquidity (up to 1 month) indicates that the surplus of these resources are divided for ensuring the bank’s short-term and long-term asset operations. in the other years latvian as „lats banka” the net relative gaps with maturity up to 1 month is smaller: 2009 – 21.14%, 2010 – 17.38%, 2011 – 19.85%, but for longer terms – 1 month to 1 year the range of the gaps for all researched years were considerably lower and indicated a better balance of assets and liabilities. the gap-analysis of long-term (longer than 1 year) assets and liabilities indicates the highest mismatch of terms, which is characteristic to a long-term resource deficit, which was found in all analysed years of latvian as „lats banka”. the net relative gap indicators for latvia’s researched bank on term deposits from 1 to 5 years in 2007 was 13.03%, in 2008 it was 23.38% and in 2009 – 12.61%, deposits with a term of more than 5 years and indefinite terms were even higher: 2007 – 28.09%, 2008 – 23.43% and 2009 – 23.13%. it should be noted that from the year 2007 to 2009 latvian as „lats banka” was in danger, because there was a great imbalance of the short-term liabilities and the long-term assets and that resulted in a higher imbalanced liquidity risk, because the short-term resources were used for financing the assets operations with long terms. in the following years (from 2010 to 2013) the analysis for long-term assets and liabilities (more than 1 year) in as „lats banka” still showed the high imbalance of assets and liabilities and the long-term resources deficit (see fig. 1). on this basis the author can state that from 2008 to 2013 latvian as „lats banka” had liquidity risk, because a large part of their short-term resources were transformed into long-term investments. imbalanced liquidity risk management: evidence from latvian… 115 figure 1. latvian as „lats banka” relative gaps from 2007 to 2013 (%) s o u r c e : created by authors on the base of annual financial reports of the commercial bank. the data in figure 2 indicate that the subsidiary bank, similar to the parent bank, had the highest gap of assets and liabilities in the analysed time period with maturity on demand and up to 3 months. this bank had surplus of short-term resources and this proves that both banks, the subsidiary bank and the parent bank, apply the same liquidity management policy. for longer terms of assets and liabilities (from 3 months to 1 year) lithuanian bank shortens the gaps diapason in all analysed years, except 2009, when the relative gap from 3 months to 1 year reached 40.88%, pointing out that middle-term resources had a surplus. similar to the parent bank, lithuanian bank’s long-term assets and liabilities (from 1 to 5 years and more than 5 years) had the highest the imbalance of terms (see fig. 2). the bank had the long-term resources deficits in all researched years. therefore ab „lats bankas” is in serious danger, because the inconsistency of maturity between the bank’s short-term liabilities and long-term assets is exceptionally large, which resulted in an increased liquidity risk. the risk increased because the short-term resources were financed by long-term investments. continuing analysis it is important to assess the amount of resources that were turned into long-term assets. natalia konovalova, julia zarembo116 figure 2. lithuanian ab „lats bankas” relative gaps from 2007 to 2013 (%) -60,00 -50,00 -40,00 -30,00 -20,00 -10,00 0,00 10,00 20,00 30,00 40,00 50,00 on demand up to 3 months 3 to 12 months 1 to 5 years over 5 years undefined maturity 2007 -8,74 -33,90 -14,12 34,25 31,72 -9,21 2008 -0,57 -50,29 4,03 24,06 27,09 -4,31 2009 -4,41 -13,05 -40,88 19,32 33,38 5,63 2010 -20,22 -26,85 -6,49 24,83 39,31 -10,58 2011 -36,10 -9,21 -9,43 25,37 39,86 -10,50 2012 -35,30 -17,22 -2,84 30,36 37,20 -12,20 2013 -32,72 -20,77 -6,68 44,35 26,52 -10,70 s o u r c e : created by authors on the base of annual financial reports of the commercial bank. the short-term resources transformation coefficient is determined by the gap of short-term resources and short-term assets in relation to short-term resources. the results of the calculations can be seen in figure 3, which made by the authors. in the period of 2007 to 2013 both analyzed commercial banks had the short-term resource surplus, certain part of which the banks could to transform to the long-term assets. but a group of authors – konovalova, kudisnka, rozgina and zelgalve (2008) consider that the share of short-term resources, which are turned into long-term investments, must not exceed 20%. the calculated transformation ratios have proved the previously mentioned conclusions of the authors. all researched years showed that both banks had a very high indicator when short-term (up to 1 year) resources were turned into long-term assets (with a term of more than 1 year). latvian as „lats banka” had very high transformation coefficient in 2007, 2008 and 2012 (53.13%, 51.43% and 53.29%), which indicates the highest liquidity risk in these years. lithuanian bank had the lowest indicators in 2007 and 2008, which still were three times higher than recommended 20% and were higher than the parent bank’s indicators. the short-term transformation ratios show that lithuanian bank’s the short-term resources were turned into long-term investments. the imbalanced liquidity risk management: evidence from latvian… 117 bank increased transformation ratio from 52% into 74% thereby lowering its liquidity in researched time period. the lowest transformation indicator for latvian as „lats banka” was 44.59% in 2013, but it was still more than recommended 20%. in the previous years the bank’s ratios was much higher – 2011 – 49.58% and 2012 – 53.29% thus achieving the level of 2007 and 2008. figure 3. latvian as „lats banka” and lithuanian ab „lats bankas” resources transformation ratio from 2007 to 2013 (%) 0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00% 80,00% 2007 2008 2009 2010 2011 2012 2013 55,13% 51,43% 46,50% 46,43% 49,58% 53,29% 44,59% 66,05% 51,59% 68,68% 67,25% 67,96% 70,85% 73,69% latvian as "lats banka" lithuanian ab "lats bankas" s o u r c e : created by authors on the base of annual financial reports of the commercial bank. in this research the authors also calculated cient. the calculations of the imbalanced liquidity coefficients of latvian and lithuanian „lats” banks for the time period of 2007 to 2013 is shown in figure 4. the calculation of the imbalanced liquidity coefficients confirmed the previously made conclusions regarding the high percentage level of the imbalanced assets and liabilities. latvian as „lats banka” the imbalanced coefficient of liquidity had the lowest value in 2009 and 2010, but even in this time period the coefficients were extraordinarily high and that indicates that more than 30% of the bank’s assets sum was financed by short-term resources. in 2011 and 2012 the mentioned ratios of latvian as „lats banka” had increased significantly and in 2012 already exceeded 46%. but in 2013 the bank was able to lower the imbalanced liquidity coefficient till 38.87%. in analyzed period the liquidity coefficient of lithunatalia konovalova, julia zarembo118 anian ab „lats bankas” had a greater imbalance than the parent bank in latvia, except in 2008 when this indicator only slightly exceeded 22%. figure 4. latvian as „lats banka” and lithuanian ab „lats bankas” liquidity imbalanced ratio from 2007 to 2013 (%) 0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 2007 2008 2009 2010 2011 2012 2013 41,12% 46,81% 35,74% 36,60% 43,29% 46,41% 38,87% 56,76% 22,79% 58,34% 53,57% 54,73% 55,36% 48,54% latvian as "lats banka" lithuanian ab "lats bankas" s o u r c e : created by authors on the base of annual financial reports of the commercial bank. latvian as „lats banka” and lithuanian ab „lats bankas” banks have a very imbalanced structure of assets and liabilities (see fig. 3 and 4). currently both of these banks are not conservative and do not pay enough attention to the management of liquidity risk. the commercial banks had fundamental problems in all researched years regarding imbalanced liquidity, which indicates that the bank’s administration does not pay enough attention to the liquidity management of the bank. both banks have a large amount of resources in the current accounts and term deposits up to 1 month, but the biggest part of short-term deposits is an unstable resource base. thereby commercial banks that invest in unstable long-term and medium-term investments are subjected to the imbalanced liquidity risk. during the time of the world’s financial crisis, which began in mid-2007 (in latvia – mid 2008), many banks started to implement intensive actions in order to provide the minimum level of liquidity. before the crisis, the financial sys imbalanced liquidity risk management: evidence from latvian… 119 tems usually had a liquidity surplus and, because of this, the risk of liquidity and its management were monitored far less than other risks. but the financial crisis showed the speed at which a liquidity crisis can appear and at what speed the financial resources can disappear, thereby increasing the assets assessment problem. the most characteristic sign of the financial crisis was insufficient and ineffective method of managing liquidity risk. acknowledging the necessity for an increasing level of bank’s liquidity risk management and control, the basel committee on banking supervision (bcbs) developed a new version of basel iii. it provides for the introduction of uniform requirements for the maintenance of a sufficient amount of liquid resources reserve in order to prevent the in the future periods of crisis the high level of insufficiency financial resources. in this case, for commercial banks are offered two new ratios, which regulate the condition of liquid assets: 1. lcr – liquidity coverage ratio 2. nsfr – net stable funding ratio (lrc) is an essential element of basel’s iii reforms, which is regarded as the liquidity world standard for banks. lrc needs to strengthen global regulations of liquidity management with the objective to stimulate the world-banking sector being stronger. lcr stimulates stability of the banks in the short-term period. according to the requirements of basel’s iii, in case of a crisis, the bank’s liquid assets reserves should cover the predicted cash outf lows in 30 calendar days. these measures will allow banks to have the necessary liquidity level in case unexpected withdrawals of cash or if a bank has troubles receiving a loan in the interbank market. in other words, the lcr will help improve the banking sectors ability to absorb upheavals and lighten the impact from financial and economic strain. lcr can be calculated with the formula 1. formula 1. the liquidity coverage ratio lcr = stock of hqla >100% total net cash outflows over the next 30 calendar days s o u r c e : basel iii: the liquidity coverage ratio and liquidity risk monitoring tools (2013). for each element of high quality liquid assets of hqla were determined the share, which can be applied to calculate lrc: natalia konovalova, julia zarembo120 table 1. illustrative summary of the lcr (percentages are factors to be multiplied by the total amount of each item) item factor stock of hqla a. level 1 assets coins and bank notes 100% qualifying marketable securities from sovereigns, central banks, pses (public sector entity), and multilateral development banks qualifying central bank reserves and domestic sovereign or central bank debt for non-0% risk-weighted sovereigns b. level 2 assets (maximum of 40% hqla) sovereign, central bank, multilateral development banks, and pse assets qualifying for 20% risk weighting 85% qualifying corporate debt securities rated aaor higher and qualifying covered bonds rated aaor higher qualifying rmbs (residential mortgage backed securities) 75% qualifying corporate debt securities rated between a+ and bbb50% qualifying common equity shares s o u r c e : basel iii: the liquidity coverage ratio and liquidity risk monitoring tools (2013). net cash outf low in the next 30 calendar days is established by the bcbs proposed formula 2, where the stress scenario is a severe drop in rating, a partial loss of deposits, the loss of unsecured funding, etc. according to this scenario the cash outf low and inf low is calculated in accordance with the legislative standards (the minimum coefficient for stable deposit withdrawal is 7.5% etc.). formula 2. the net cash f low in the scenario of severe stress total net cash outflows over the next 30 calendar days = outflow – inflow s o u r c e : basel iii: the liquidity coverage ratio and liquidity risk monitoring tools (2013). the lcr will be established on the 1st of january 2015 and the minimum requirement at first year shall be 60% (see table 2). furthermore, the lcr requirement will increase by 10% each year, meaning that by 2019 it shall be 100%. imbalanced liquidity risk management: evidence from latvian… 121 this approach shall be used to ensure that the implementation of the lcr occurred without interruptions. table 2. the minimum requirement for the liquidity coverage ratio (%) from 2015 to 2019 minimum lcr 2015 2016 2017 2018 2019 60% 70% 80% 90% 100% s o u r c e : basel iii: the liquidity coverage ratio and liquidity risk monitoring tools (2013). on the one hand, 100% of the liquid assets amount greatly increases a bank’s ability to fulfil their liabilities; on the other hand, it also greatly decreases the profitability of a bank. the requirements of the lcr are strict and by following them the commercial banks are encouraged to invest their free resources in securities with high liquidity, in order to gain some profit while complying with liquidity requirements. thus in order to maintain liquidity the commercial banks should to purchase quickly marketable securities, and at the same time, because of the great demand, the stock markets could reduce the coupon payments and discount rates for quickly marketable securities. the authors have calculated the lcr for latvian as “lats banka”. the lcr has been calculated based on the accessible data of annual reports of latvian as “lats banka” for 2010, 2011, 2012 and 2013. for the calculations the lcr were used the balance data from annual reports regarding securities, securities portfolio quality and the contractual undiscounted cash f lows of the financial liabilities from contracts up to 30 calendar days that apply to financial liabilities of as “lats banka” (table 3). natalia konovalova, julia zarembo122 table 3. the calculations hqla and lcr of latvian as “lats banka” from 2010 to 2013 the indicators stock of hqla 2010 2011 2012 2013 th.eiro % th.eiro % th.eiro % th.eiro % a. level 1 assets coins and bank notes 100% 252343 50.45 326775 58.23 248587 35.52 502860 48.05 qualifying marketable securities from sovereigns, central banks, pses and multilateral development banks 100% 84187 16.83 15374 2.74 145967 20.86 89351 8.54 qualifying central bank reserves and domestic sovereign or central bank debt for non-0% risk-weighted sovereigns level 1 assets total: 336531 67.28 342149 60.97 394545 56.38 592211 56.59 b. level 2 assets (maximum of 40% hqla) sovereign, central bank, multilateral development banks, and pse assets qualifying for 20% risk weighting 85% 145372 29.07 177125 31.56 284144 40.6 351324 33.57 qualifying corporate debt securities rated aa or higher and qualifying covered bonds rated aaor higher 85% 2545 0.51 26730 4.76 5924 0.85 35819 3.42 qualifying corporate debt securities rated between a+ and bbb50% 15710 3.14 15171 2.70 15171 2.17 67189 6.42 level 2 assets total: 163627 32.72 219026 39.03 305238 43.62 454333 43.41 level 2 excess over 40% of hqla – – – – -25321 -3.62 -35687 -3.41 total value of stock of hqla: 500158 100.00 561175 100.00 674471 100.00 1046544 100.00 total net cash outflows over the next 30 calendar days 907496 999050 1227203 2004018 lcr 55.11% 56.17% 54.96% 52.22% s o u r c e : created by authors on the base of annual financial reports of the commercial bank. while calculating, the authors obtained the following lcr coefficient values: 2010 – 55.11%; 2011 – 56.17%; 2012 – 54.96% and 2013 – 52.22%. the authors’ calculations have been shown in table 4 and indicate that latvian as “lats banka” is not ready to fulfil the requirements of the bcbs from 2015. imbalanced liquidity risk management: evidence from latvian… 123 continuing the research it is necessary also look into the other new liquidity indicator, which was proposed by the bcbs – (nsfr). the objective of nsfr is liquid assets coverage by 100% at the expenses of 1-year stable liabilities. the nsfr planned to be implemented on the 1st of january 2018 (basel iii: the net stable funding ratio 2014). the nsfr was created that investment assets, off-balance sheets and other securitised assets could to receive financial support by stable liabilities. the purpose of this indicator is to limit the reliance on large financial sources in periods of liquidity surplus and promote the more precise liquidity risk assessments for all sheets of balance and off-balance sheets. this kind of approach will help the commercial banks lower the possibility of a sudden deterioration of the liquidity indicator and prevent the increase of liquid assets reserves on the account through the short-term sources of funding. the nsfr is calculated by the formula 3 (basel iii: the net stable funding ratio 2014). formula 3. the net stable funding ratio nsfr = available amount of stable funding (asf) >100% required amount of stable funding (rsf) s o u r c e : basel iii: the net stable funding ratio (2014). the gist of the nsfr is: the greater is the amount of the non-liquid assets in the bank, the greater is the necessity for a secure and stable financial support because the stable resources outf lows would be less probable and it would allow using these resources as financial support of non-liquid assets in stress situations. a short characterisation of the nsfr and its components can be seen in table 4. not have the necessary data in annual reports of the researched banks. taking into consideration that the nsfr will be introduced only in 2018, therefore nsfr calculations are not topical for this research. the main discussion in the financial sector about nsfr: the possible reduction the commercial banks’ ability to offer long-term loans because of difficulties of finding long-term resources in the interbank markets. natalia konovalova, julia zarembo124 the possible risk that the bank sector refuses to give out to companies long-term loans. the increase of securitisation operations in order to avoid the long-term financing of loans for private sector. the increase costs of refinancing in the interbank markets. all of the previously mentioned discussion topics are very important to commercial banks and the national economy and the reason for this is that the main role of commercial banks – resource redistribution, is becoming impracticable. the implementation of the nsfr will not allow the commercial banks to lend the companies, because the banks will be unable to ensure a large and stable amount of resources to finance lessor non-liquid assets. that is why, the authors’ point of view that the discussions in the international finance sectors regarding the nsfr are reasonable and the bcbs should make corrections before the new requirements will enter into force. table 4. summary of assets categories and associated rsf factors components of asf category components of rsf category item asf factor item rsf factor – total regulatory capital – other capital instruments and liabilities with effective residual maturity of one year or more 100% – coins and banknotes – all central bank reserves – unencumbered loans to banks subject to prudential supervision with residual maturities of less than six months 0% – stable non-maturity (demand) deposits and term deposits with residual maturity of less than one year provided by retail and sme customers 95% – unencumbered level 1 assets, excluding coins, banknotes and central bank reserves 5% – less stable non-maturity deposits and term deposits with residual maturity of less than one year provided by retail and sme customers 90% – unencumbered level 2 assets – hqla encumbered for a period of six months or more and less than one year – loans to banks subject to prudential supervision with residual maturities six months or more and less than one year – deposits held at other financial institutions for operational purposes – all other assets not included in the above categories with residual maturity of less than one year 50% imbalanced liquidity risk management: evidence from latvian… 125 components of asf category components of rsf category item asf factor item rsf factor – funding with residual maturity of less than one year provided by non-financial corporate customers – operational deposits – funding with residual maturity of less than one year from sovereigns, public sector entities (pses), and multilateral and national development banks – other funding with residual maturity of not less than six months and less than one year not included in the above categories, including funding provided by central banks and financial institutions 50% – unencumbered residential mortgages with a residual maturity of one year or more and with a risk weight of less than or equal to 35% – other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the standardised approach 65% – all other liabilities and equity not included in above categories, including liabilities without a stated maturity – derivatives payable net of derivatives receivable if payables are greater than receivables 0% – other unencumbered performing loans with risk weights greater than 35% under the standardised approach and residual maturities of one year or more, excluding loans to financial institutions – unencumbered securities that are not in default and do not qualify as hqla including exchange-traded equities – physical traded commodities, including gold 85% – – – all assets that are encumbered for a period of one year or more – derivatives receivable net of derivatives payable if receivables are greater than payables – all other assets not included in the above categories 100% – – – summary of off–balance sheet categories – – – irrevocable and conditionally revocable credit and liquidity facilities to any client 5% of the currently undrawn portion – – – other contingent funding obligations, including products and instruments such as: – unconditionally revocable credit and liquidity facilities; – trade finance-related obligations; – guarantees and letters of credit unrelated to trade finance obligations; – non-contractual obligations national supervisors can specify the rsf factors based on their national circumstances. s o u r c e : basel iii: the net stable funding ratio (2014). natalia konovalova, julia zarembo126 1. by taking into account the results of the gap-analysis, it was ascertained that the latvian and lithuanian “lats” banks have a surplus of short-term resources. a high negative net position of short-term liquidity is proof that these surplus resources have been transformed into long-term asset operations. 2. the net relative gap-analysis of long-term assets and liabilities shows that the analysed banks have a long-term resources deficit. 3. the short-term liquidity of both “lats” banks was in danger. the reason for this was that the imbalance between the short-term liabilities and the long-term assets was very big. 4. the calculation of the short-term resources transformation coefficient allowed the author to discover that both of commercial banks had transformed short-term resources into long-term asset operations thus decreasing banks’ liquidity. the value of the coefficient shows that the lack of long-term resources in the lithuanian subsidiary bank was so great that in case of a crisis situation the bank will be unable to ensure that all of the liabilities are fulfilled and it may result the bank insolvency. 5. the calculations of the imbalanced liquidity coefficient have proven that the researched commercial banks have a high imbalance level of assets and liabilities. the risk of an imbalanced liquidity shows that the researched banks’ liquidity is in critical condition, because of the transformation of short-term resources into long-term assets. 6. it was ascertained that both banks had a large amount of resources in their current accounts and term deposits from 1 to 3 months, where the biggest share of short-term deposits is an unstable resource base of the banks. by investing the unstable resources into long-term and middle-term assets the analysed commercial banks take for themselves a high imbalanced liquidity risk. 7. according to the new indicator – lcr of basel iii, the authors came to a conclusion that latvian as “lats banka” is still not ready to comply with the bcbs requirements by 2015. based on the acquired results and conclusions, the authors have worked out suggestions that could be beneficial to the liquidity management of the researched latvian and lithuanian commercial banks. imbalanced liquidity risk management: evidence from latvian… 127 1. in order to control the liquidity risk, the authors suggest to the banks to use the imbalanced liquidity coefficient and liquidity gaps. based on the gap-analysis it is possible to evaluate the liquidity position of the bank. 2. both commercial banks should develop and regularly supervise their restrictive limits for the gaps positions, thus it allows them to determine the necessary amount of liabilities or assets for specific term groups and regulate these positions. 3. after detection the high coefficient of the short-term resource transformation, the authors recommend for both banks promptly to change their liquidity management policy and to give priority attention to attracting long-term resources. that will be exceedingly necessary in maintaining long-term liquidity. long-term resources can be increased through the following tools: attracting syndicated loans; issuing stock or long-term debt securities; increasing the share capital; offering to regular clients more favourable term deposit conditions when concluding a long-term contract. 4. considering the high coefficient of short-term resource transformation of the lithuanian bank, it is recommended to make an asset restructuring or to sell part of assets (e.g.: to sell the real estate) or limit issuing of long-term loans. 5. both researched banks should focus on issuing short-term loans (up to 1 year) or to offer their clients the possibility to shorten the term of loan with lowering the interest rates. thereby lessening the imbalance between the short-term resources and the long-term assets. 6. the authors recommend not transform the surplus of the short-term resources into long-term assets, but in moderate amounts resources should be invested into the short-term loans in the interbank markets, into the reserve in central banks or correspondent accounts (foreign banks) and for the purchase of liquid securities. thereby it will become possible to achieve a balance between assets and liabilities by maturities. 7. it is recommended to do the regular stress-testing, undergo simulations of problematic situations, as well as verify the researched banks’ liquidity, solvency and durability against various stress situations. 8. the commercial banks should perform the short-term liquidity planning in accordance with the cash f lows based on the new requirements of banatalia konovalova, julia zarembo128 sel iii. this is especially recommended for lithuanian subsidiary bank, which, at this point does not make or not publish contractual undiscounted cash f lows of the financial liabilities from contracts up to 30 calendar days. 9. it is recommended for latvian as “lats banka” increases the amount of liquid securities till 2015 in order to increase the lcr to the minimum of 60%. beginning with 2015 latvian as “lats banka” should increase the amount of high liquid assets by 10% each year until their liquidity coverage ratio reaches 100% by 2019. compliance with these demands will allow the bank to endure powerful cash outf lows in crisis situations and finding a way to overcome the deficiency of liquidity assets. allen w. a., allen b. (2013), international liquidity and the financial crisis. new york: ca&ved=0cfiq6aewbtgk#v=onepage&q=liquidity%20in%20commercial%20 banks&f=false (accessed: 22.11.2013). texts_files/banku%20risku%20nov%c4%93rt%c4%93%c5%a1anas%20rokasgr%c4%81mata.pdf (accessed: 15.11.2013). basel iii: the liquidity coverage ratio and liquidity risk monitoring tools (2013), basel committee on banking supervision, http://www.bis.org/publ/bcbs238.pdf (accessed: 10.01.2014). basel iii: the net stable funding ratio (2014), basel committee on banking supervision, http://www.bis.org/publ/bcbs271.pdf (accessed: 10.01.2014). bertham m. (2011), corporate cash balanced and the bottom line. paradigm shift to dynamic discounting. 2011, http://resources.taulia.com/h/i/11047299-articleparadigm-shift-to-dynamic-discounting (accessed: 21.01.2015). chacko g., evans c. l., gunawan h., sjoman a. l. (2011), the global economic system: how liquidity shocks affect financial institutions and lead to economic crisis. new jersey: ft press, http://books.google.lv/books?id=c_xqeqer4gc&printsec=fro d=0cgqq6aewcdh4#v=onepage&q=liquidity%20in%20banks&f=false (accessed: 04.12.2013). choudhry m. (2011), an introduction to banking: liquidity risk and asset-liability management. chichester: johnwiley & sons ltd, http://books.google.lv/books?id=z6e6q6rka7ec&printsec=frontcover&dq=liquidity+in+banks&hl=lv&sa=x&ei=a64d 0banks&f=false (accessed: 05.12.2013). imbalanced liquidity risk management: evidence from latvian… 129 chen z., liquidity as an investment style. (2010), http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1675108 (accessed: 21.01.2015). financial reports of commercial banks and foreign bank branches operating in lithuania (2007–2008), bank of lithuania, http://www.lb.lt/balance_sheet_profit_and_ loss_statements (accessed: 13.12.2013). financial reports of commercial banks and foreign bank branches operating in lithuania (2009 – 2012), bank of lithuania, http://www.lb.lt/financial_reports (accessed: 13.12.2013). information on liquidity situation in the banking system (2007–2012), bank of lithuania, http://www.lb.lt/bliquidity/default.asp?lang=e (accessed 13.12.2013). kochubey t., kowalczyk d. (2014), the relationship between capital, liquidity and risk in commercial banks. 20th dubrovnik economic conference organized by the croatian national bank. june. konovalova n., kudinska m., rozgina l. and zelgalve e. (2008). problems of imbalanced liquidity in latvian commercial banks and possible solutions. journal of business management, no 1, http://www.riseba.lv/images/pdf/zinatne/jbm-2008.pdf (accessed: 05.01.2014). kosmidou kyriaki. management of bank performance in greece. 2008, http://www. asecu.gr/seeje/issue10/kosmidou.pdf (accessed: 21.01.2015). rica: xlibris corporation, http://books.google.lv/books?id=xvtoaaaaqbaj&print &ved=0cdgq6aewajgk#v=onepage&q=liquidity%20in%20banks&f=false (accessed: 07.01.2014). naser ail yadollahzadeh tabari, mohammad ahmadi, ma’someh emami. the effect of liquidity risk on the performance of commercial banks. international research journal of applied and basic sciences, 2013 available online at www.irjabs.com issn 2251-838x / vol. 4 (6): 1624-1631 science explorer publications. priciples for sound liquidity risk management and supervision (2008), basel committee on banking supervision, http://www.bis.org/publ/bcbs144.pdf (accessed: 10.01.2014). ruozi r., ferrari p. (2012), liquidity risk management in banks: economic and regulatory issues. france: springer, http://books.google.lv/books?id=wotzmrctcjgc& bhl4h4bg&ved=0cdsq6aewag#v=onepage&q=liquidity%20in%20banks&f=false (accessed: 10.01.014). schinasi garry. financial-stability challenges in european emerging-market countries (2011), http://documents.worldbank.org/curated/en/2011/08/14861688/financialstability-challenges-european-emerging-market-countries (accessed: 29.12.2014). natalia konovalova, julia zarembo130 vodova pavla. determinants of commercial bank liquidity in hungary. financial internet quarterly. e-finance. 2013, http://www.e-finanse.com/artykuly_eng/257.pdf. (accessed: 29.12.2014). wittenbrink a. (2011), financial regulation through new liquidity standards and implications for institutional banks. norderstedt: grin verlag, http://books.google. quidity%20in%20banks&f=false (accessed: 15.01.2014). date of submission: april 19, 2022; date of acceptance: november 21, 2022. * contact information: hafida.nur.1704226@students.um.ac.id, accounting department, universitas negeri malang, jl. semarang no 5 malang east java indonesia, phone: +62341551312; orcid id: https://orcid.org/0000-0001-7821-5042. ** contact information (corresponding author): ani.suryani@um.ac.id, accounting department, universitas negeri malang, jl. semarang no 5 malang east java indonesia, phone: +628123361620; orcid id: https://orcid.org/0000-0001-5701-2975. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 chofifah, h.n., & suryani, a.w. (2022). korean music awards and abnormal stock returns. copernican journal of finance & accounting, 11(4), 27–43. http://dx.doi.org/10.12775/cjfa.2022.017 hafida nur chofifah* universitas negeri malang ani wilujeng suryani** universitas negeri malang korean music awards and abnormal stock returns keywords: behavioral finance, abnormal returns, event study, korean stock market. j e l classification: g11, g15, g41. abstract: the global success of the k-pop music industry impacts the investment climate of the entertainment industry in the south korean stock market. one of the driving factors attracting investors is the awards obtained by the k-pop idols. hence, this event study investigates whether idols’ receiving awards creates stock abnormal returns (ars) and cumulative abnormal returns (cars). we collected five-day stock price data surrounding the events from 2018 to 2019 for the four entertainment companies. using mean difference tests, we analyzed the movements of the stock returns. our results show the appearance of positive and negative ars dan cars, indicating that investors react differently to the information contained in award announcements. this implies a deviance from the efficient market hypothesis and that investors behave irrationally whom investment decision affects the market. for this reason, companies should select awards when involving their idols. hafida nur chofifah, ani wilujeng suryani2828  introduction introduction since its inception, korean-pop (k-pop) has been one of the driving forces behind the korean-wave which is widely regarded as the revival of korean culture (shim, 2006). this global success is attributed to the efforts since the 1970s to gain international popularity (parc & kim, 2020). other countries have made similar efforts to penetrate the us market, but with a different impact than k-pop (parc & kim, 2020). community interest on k-pop is growing (googletrends, 2020) and ref lected in 6.1b k-pop tweets worldwide (mahnke & tárnok, 2020). this popularity benefits south korean music industry, as evidenced by the achievement of a us$564.24m export value (waldeck, 2020). the rapid growth of k-pop and its global inf luence has attracted both domestic and foreign investors, who have begun investing in south korean music agencies (muamar, 2019). before investing, investors often market efficiency (nikita & soekarno, 2012). according to fama (1970), an efficient market is indicated by stock prices that fully ref lect the available information, and that information cannot be used to generate ars (fama, 1970) because the price of securities will be constantly re-evaluated in response to the emergence of new information (sihombing & sukmadilaga, 2018). the efficient market hypothesis (emh) applies only if investors make decisions based on rational considerations (semuel, bassana & budihargono, 2017). rational investors will analyze information in order to reduce the uncertainty and risk associated with investment decisions (ackert & deaves, 2010). however, investors often behave irrationally (semuel et al., 2017; soni & desai, 2021). this behavior occurs because of the inf luence of psychology, economy, and socio-cultural environmental factors in making a decision (helanda & suryani, 2020). thus, the presence of irrational investors causes an inefficient market, thus allowing for ars (semuel et al., 2017). in an inefficient market, investors use available information to predict stock prices to obtain ars (utami, 2009). in the entertainment industry, this information is related to idol activities (permatasari, supriyatna & purnamasari, 2017). issues and news about idols can impact the stock price of music companies, potentially resulting in ars (kadim, suratman & muis, 2019). one example of positive news about idols is related to the awards they get. investors may consider the award information obtained by idols because these achievements can increase the popularity of idols and build a good image for the com korean music awards and abnormal stock returns 2929 pany (linuwih & nugrahanti, 2014; pattipeilohy, 2015), which can be considered positive news that can result in ars (pattipeilohy, 2015). therefore, the impact of award information on the occurrence of ars in entertainment companies is important to study. research related to award information on ars has been conducted. the results showed the emergence of positive ars after the announcement of the award (wardhani & hamidah, 2019). this occurs as a result of the market’s interest in distributing information, resulting in a reaction that causes a positive ar (ekawati, 2011). however, other studies indicate that there is no ar prior to or following the award announcement (fala, santoso & amanda, 2018) because investors believe that the award does not contain beneficial information as it has nothing to do with the company’s profits (fala et al., 2018). award announcements can also result in negative ars because of investors’ confidence made them sell their stocks to make profit, but simultaneous sales will push the price downwards, resulting in negative ars (nareswari, balqista & negoro, 2021). differences in behavior and actions taken by investors in response to this information are one of the factors underlying the deviation of efficient market theory (nurdina, sidharta & mochkla, 2021). prior studies have investigated the impact of awards, but none is on awards in the entertainment industry. therefore, further studies are needed to find out how investors react when they hear about award announcements in entertainment companies. awards can be used as a benchmark for investors to select companies that are regarded as having superior performance or possessing potential resources (idols), allowing investors to earn profits (gemser & wijnberg, 2002; sung, nam & chung, 2010). the rapid development of k-pop and the growth of investors necessitate this research, as they must be aware of information closely related to entertainment companies, such as awards, when making investment decisions (kong, 2016; nareswari et al., 2021). this study uses information on award announcements in south korean music industry to fill the existing literature gap regarding the impact of award announcements. thus, this study aims to determine the presence of ars in entertainment companies’ stocks as a result of award announcements to assist investors in making sound investment decisions. hafida nur chofifah, ani wilujeng suryani3030 literature reviewliterature review the emh states that a market is efficient if the stock price ref lects the available information fully and quickly (fama, 1970). fama (1970) classified market efficiency into three categories. in a weak form market, prices ref lect historical data information, preventing investors from obtaining ars based on available information. in reality, investors cannot rely on historical data to obtain ars, as stock prices follow the random walk theory; are random and difficult to predict (fama, 1970). in the semi-strong form of market efficiency, all public information, including historical data, is ref lected in stock prices (fama, 1970; grendstad & braa, 2020). in the strong form of market efficiency, no investor can earn ars, because stock prices fully ref lect all information, public or private (fama, 1970). thus, based on emh, investors cannot obtain ars by using historical, public, or private information (fama, 1970). actual stock market conditions are not perfectly efficient, and hence, investors may earn more profits or incur unexpected losses (nareswari et al., 2021). behavioral finance makes reference to this deviation. deviations can be attributed to market uncertainty, which results in an overreaction to new information (ţiţan, 2015). this overreaction will trigger overbought or oversold securities, which will then be gradually corrected and returned to their intrinsic value (hayes, 2021). this overreaction can also be caused by overconfident investors who receive information, leading them to expect a higher stock price (daniel, hirshleifer & subrahmanyam, 2005). award announcements are one example that can cause investors to overreact (xia, singhal & zhang, 2015) and increase the value of the awardee’s stock (syafrudin & panjaitan, 2020). this instils confidence in investors when evaluating the award-winning company because they believe that this information can help increase the return of the security, resulting in a positive ar (syafrudin & panjaitan, 2020). in forming expectations of positive ars, investors place too much emphasis on past performance, and far too little on the fact that performance tends to return to normal (bouteska & regaieg, 2020). these conditions ultimately have a negative impact on the value of the service industry stocks, resulting in negative ars (bouteska & regaieg, 2020). in the entertainment industry, awards are important indicators that show product quality (gemser & wijnberg, 2002; sung et al., 2010). previous research has established that the type of award has an effect on ars both prior to and korean music awards and abnormal stock returns 3131 following the announcement of the award (jao & jimmiawan, 2018). the stock price of the award-winning company increased following the announcement, indicating that investor confidence in the company may have increased as a result of the award (sedianingsih, 2014). this trust develops because investors perceive that the award-winning company has good quality, which in this study is measured by its idol (arthur & cook, 2009). this positive effect was also shown in other studies, although with different awards (goetzel, fabius, fabius, roemer, thornton, kelly & pelletier, 2016). no research has been conducted to date on the effect of awards on the occurrence of ars in the entertainment or music industries. additionally, there are inconsistencies in research results, implying that further studies are needed regarding the appreciation of ars in music industry stocks. the following hypotheses were generated from the aforementioned explanation: h1: the awards earned by idols can cause ars in the entertainment industry. research methodresearch method the award (see table 1) was determined by the amount of media coverage it got and the number of musicians from each participating music company. using purposive sampling, we chose companies from media-entertainment industry (n = 111). we focused on music or audio publishing (n = 5). we selected companies that had been registered before 2018 (n = 4). these four companies were sm entertainment co. (sm), yg entertainment inc. (yg), jyp entertainment corp. (jyp), and cube entertainment (cube). all of the companies participated in awards listed in table 1. the data for this study were the daily stock price and the korea composite stock price index from january 2018 to november 2019, collected from investing.com. using a 100-day observation period (t = -11 to t1 = -110) and a five-day window period (al-shattarat, atmeh & al-shattarat, 2013), this event study method was used to determine the market reaction (otieno & ochieng, 2015). the window period was chosen to minimize the possibility of ars being inf luenced by factors unrelated to the event being studied (lin & su, 2013). corporate actions obtained from the osiris database were examined, and no action was taken by the sample companies during the estimation and window periods. hafida nur chofifah, ani wilujeng suryani3232 the expected return of each company e(ri,t ) is calculated using a market model (henderson, 1990), which was chosen because it is more capable of detecting ars for clustered event dates (shin, 2021). the steps taken to identify the presence of ars and cars are provided in figure 1. figure 1. research method figure 1. research method source: nicolau, 2001; suryani & pertiwi, 2021. results and discussion cube's stock returns had different movements compared to three other music companies during the 2018 gda (see figure 1). for example, at t-2, cube's return decreased, while other companies experienced an increase. this could be explained by the disparity in the number and popularity of the artists nominated for the award. at the 2018 gda, jyp was represented by three artists, sm and yg by ten, and cube by just two (safitri, 2018). jyp and cube both have a similar number of artists, but the jyp artists are more popular, as evidenced by their ability to place jyp as the second-largest k-pop agency (herman, 2018b). cube's stock return anomaly was also evident at the gcma, where cube's return increased on t-3 and t+2, but decreased on other dates. this increase in returns could be a result of changes in gcma policy in 2018, which recognized artists as well as the entire crew involved in the album’s production (addini, 2017). this adaptation of the grammy award is a breakthrough in south korean music awards, garnering positive responses from the public, including investors. fluctuating movements in all stock returns of entertainment companies are seen in the aaa (see figure 1) that can be caused by uncertainty about the award’s winner because all of the artists in aaa are already popular with their own agencies, including cube’s new girl group (herman, 2018a). s o u r c e : nicolau, 2001; suryani & pertiwi, 2021. results and discussionresults and discussion cube’s stock returns had different movements compared to three other music companies during the 2018 gda (see figure 1). for example, at t-2, cube’s return decreased, while other companies experienced an increase. this could be explained by the disparity in the number and popularity of the artists nominated for the award. at the 2018 gda, jyp was represented by three artists, sm and yg by ten, and cube by just two (safitri, 2018). jyp and cube both have a similar number of artists, but the jyp artists are more popular, as evidenced by their ability to place jyp as the second-largest k-pop agency (herman, 2018b). cube’s stock return anomaly was also evident at the gcma, where cube’s return increased on t-3 and t+2, but decreased on other dates. this increase in returns could be a result of changes in gcma policy in 2018, which recognized artists as well as the entire crew involved in the album’s production (addini, 2017). this adaptation of the grammy award is a breakthrough in south korean music awards, garnering positive responses from the public, including investors. fluctuating movements in all stock returns of entertainment companies are seen in the aaa (see figure 1) that can be caused by uncertainty about the award’s winner because all of the artists in aaa are already popular with their own agencies, including cube’s new girl group (herman, 2018a). korean music awards and abnormal stock returns 3333 figure 2. stock returns movements 2018 figure 2. stock returns movements 2018 source: own study. at sma 2019, the stock returns of all companies increased on the event day, but declining for two days following the event (see figure 2) as a result of investors' confidence in award-winning s o u r c e : own study. hafida nur chofifah, ani wilujeng suryani3434 at sma 2019, the stock returns of all companies increased on the event day, but declined for two days following the event (see figure 2) as a result of investors’ confidence in award-winning idols. investors believe that the company’s stock price that houses the idol will increase, resulting in a simultaneous and massive sale of stocks, causing the price to decline. in contrast, gcma 2019 shows a decrease in return on the award date, but increases at t+1. this may be caused by gcma event coinciding with sma window period; hence, gcma 2019 had the lowest average ar and car. at soribada awards, the stock return chart went down at t+1, then started to increase at t+2. figure 3. stock returns movements 2019 idols. investors believe that the company’s stock price that houses the idol will increase, resulting in a simultaneous and massive sale of stocks, causing the price to decline. in contrast, gcma 2019 shows a decrease in return on the award date, but increases at t+1. this may be caused by gcma event coinciding with sma window period; hence, gcma 2019 had the lowest average ar and car. at soribada awards, the stock return chart went down at t+1, then started to increase at t+2. figure 3. stock returns movements 2019 source: own study. table 1. ar and car results award one-sample t-test idols. investors believe that the company’s stock price that houses the idol will increase, resulting in a simultaneous and massive sale of stocks, causing the price to decline. in contrast, gcma 2019 shows a decrease in return on the award date, but increases at t+1. this may be caused by gcma event coinciding with sma window period; hence, gcma 2019 had the lowest average ar and car. at soribada awards, the stock return chart went down at t+1, then started to increase at t+2. figure 3. stock returns movements 2019 source: own study. table 1. ar and car results award one-sample t-test idols. investors believe that the company’s stock price that houses the idol will increase, resulting in a simultaneous and massive sale of stocks, causing the price to decline. in contrast, gcma 2019 shows a decrease in return on the award date, but increases at t+1. this may be caused by gcma event coinciding with sma window period; hence, gcma 2019 had the lowest average ar and car. at soribada awards, the stock return chart went down at t+1, then started to increase at t+2. figure 3. stock returns movements 2019 source: own study. table 1. ar and car results award one-sample t-test s o u r c e : own study. korean music awards and abnormal stock returns 3535 table 1. ar and car results award one-sample t-test t0 ar mean/med test statistic car mean/med test statistic gda-golden disc awards 10-11/1/18 0.007 1,745 0.009 4,266* smas (seoul music awards) 25/1/18 0.004 1,288 0.002 1,246 gcma-gaon chart music awards 14/2/18 0.007 1,638 0.003 3,288* soribada awards 14/2/18 0.014 3,588* 0.011 7,260* aaa-asia artist award 30/08/18 0.019 608 0.003 181 mbc plus x genie music awards 28/10/18 0.015 3,262* 0.011 3,106* mma-melon music awards 6/11/18 0.002 0.428 -0.001 -0.705 mama-mnet asian music awards 1/12/18 -0.004 -0.752 0.002 1,201 gda-golden disc award 5-6/1/19 -0.004 501 0.000 252 smas (seoul music awards) 15/1/19 -0.005 -0.796 -0.005 -1,219 gcma-gaon chart music awards 23/1/19 -0.015 -2,164* -0.015 -4,019* mbc plus x genie music awards 1/8/19 0.005 484 -0.008 32* soribada awards 22-23/8/19 -0.002 524 -0.005 109* n o t e : *significant at p < 0.05, the italics showed wilcoxon-signed ranked test. s o u r c e : authors’ computations. table 1 shows that the highest ar and car values are at the 2018 mgma. there are two potential causes of this condition. first, 2018 marked the first time the mgma was held and featured a collaborative performance between a rising k-pop group (bts) and a world artist (charlie puth), demonstrating the growing popularity among the public (cha, 2018). second, genie, a digital music chart run by kt music corp., is one of the music benchmarks for each work released by idols (kumparan, 2018). apart from attracting the attention of the public, some of these factors can also generate investor confidence in the award event being held. table 1 also lists the 2018 and 2019 awards with positive and significant ars and cars. positive cars were found at the 2018 gda and gcma, the 2019 mgma and soribada awards. positive ars and cars happened at the soribada hafida nur chofifah, ani wilujeng suryani3636 awards and mgma 2018. this indicates that investors regard award information as a positive signal, prompting them to purchase stocks of the award-winning company (fombrun, 1996). due to the high demand in the market, prices rise, resulting in a positive ar and car. this is consistent with prior study finding that rewards can result in positive ar and car because investors perceive them as a means of evaluating award performance (defond, konchitchki, mcmullin & o’leary, 2013). hence, investors believe that certain awards contain interesting information, resulting in a positive change in stock returns. several music awards did not generate significant ars or cars (see table 1), indicating that the awards had no effect on the entertainment industry’s stock price. this could be because south korea hosts an excessive number of music awards, diminishing the credibility and prestige of each award (sun-hwa, 2020). in addition, the lack of transparency regarding the evaluation criteria for several awards, such as the jury’s unknown identity, the assessment criteria, and the qualifications of the participating artists, maybe a factor contributes to a loss of enthusiasm and even public respect for associated award events (sun-hwa, 2020), leading investors to conclude that the award is no longer relevant for use as a reference when analyzing stock movements. ar and car may also be insignificant because few investors are capable of making predictions after the nomination for the music awards are announced (maltsbarger, 2011). rather than waiting for the announcement of the award winner, the nominations served as an indicator of which company would be chosen as their investment destination (maltsbarger, 2011). the lack of investor reaction to the announcement of the award is due to the company being over-awarded or having received too many awards (arthur & cook, 2009). this raises the notion that receiving awards is a common occurrence, and thus, investors regard the information as less valuable and send no signal to them, causing no reaction in the market. the findings of this study indicate that the award is not fully considered good news, and thus becomes less relevant to consider when making investment decisions (jao & jimmiawan, 2018). table 1 also shows that the 2019 gcma has negative and significant ars and cars. this negative values can be explained by the korean market’s overreaction, in which a positive shock is followed by a significant negative ar and car (reversed stock return) (stefanescu, dumitriu & nistor, 2012). this reduces (increases) market demand for stocks with high (low) returns (ardi, kiryanto & amalia, 2008), resulting in a decrease (increase) in returns. this situ korean music awards and abnormal stock returns 3737 ation results in the occurrence of negative ar (ardi et al., 2008). negative ar and car values indicate that the actual return is less than expected (aziroff, 2020; cfi, 2020). this could be a result of award-winning information being leaked, boosting investor confidence (handayani, 2020). this information leak informed investors about the award-winning idol company, creating an atmosphere of overconfidence that resulted in the company’s stocks being sold simultaneously (dhankar, 2019). this selling strategy is based on the assumption that the winning company’s price will rise, but concurrent sales will result in a decrease in price (dhankar, 2019). this study corroborates previous studies indicating that companies’ good news may result in a negative ar. the positive news sent the stock price skyrocketing well above its fundamental value, but investors realized their mistakes and corrected their actions, causing the price to reverse course (dhankar, 2019). past studies suggest that winning companies experience negative ar because of the euphoria surrounding them, which causes investors to overpay (brammer, brooks & pavelin, 2009; chen & de bondt, 2004; clare & thomas, 1995). in addition, negative ar and car can occur because investors liquidate their securities as a result of stock surges, resulting in falling prices (dhankar, 2019). this finding contradicts fama’s (fama, 1970) statement that investors cannot rely on historical data to generate ars. the findings of this study indicate that investors are irrational in their optimism in response to good news, causing overreaction. thus, the findings of this study do not support the idea that investors are rational beings (fama, 1970). the differences in the results in this study indicate that investors place different values on the music awards. however, certain music awards continue to provide signals that prompt investors to make decisions and inf luence the stock market (fala et al., 2018). music awards that fail to elicit a response can be attributed to the awards’ timing being too close and the assessment criteria being too restrictive, preventing the public, especially investors, from making an investment decision.  conclusion conclusion this study aims to determine whether there is an ar on awards obtained by music industry idols and provides several conclusions. this study found different investor responses for each award, causing some awards to generate signif hafida nur chofifah, ani wilujeng suryani3838 icant ar and car, while others do not. positive ar and car indicate investors’ belief and confidence that some awards can increase the value of the company. however, insignificant ar and car are a result of idols receiving too many awards. this study also found an overreaction that made negative ar and car. this overreaction is a result of investors’ excessive optimism about the winning company’s stock price. hence, it confirms that investors behave irrationally as a result of their overconfidence in judging good news, resulting in a negative ar. these findings contradict the emh, implying that future returns and losses can be predicted. for this reason, investors should consider the types of award events and timing when making investment decisions to avoid potential losses and maximize profits. it is expected that entertainment companies will be more selective in involving their idols to participate in awards, ensuring their participation does not become a boomerang for the company or the artist’s success. this study contributes to the literature on the emh and behavioral finance by examining the effect of award announcements on the occurrence of ars in the south korean k-pop industry, as award announcements are of an important concern and achievement in industries engaged in the arts, culture, and industry media. however, this study is incapable of predicting the timing of abnormal returns. also, the diminishing of overreaction cannot be determined. future research should therefore employ different methods and extend the sample period in order to predict both the presence of abnormal returns and diminishing overreaction.  references references ackert, l.f., & deaves, r. 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(2015). product design awards and the market value of the firm. ssrn electronic journal, 2015–07, 1–43. http://dx.doi.org/10.2139/ ssrn.2688652. date of submission: february 8, 2023; date of acceptance: april 1, 2023. * contact information: ddziawgo@umk.pl, department of financial accounting, faculty of economic sciences and management, nicolaus copernicus university in toruń, gagarina 13a street, 87-100 toruń, poland, phone: +48 56 611 49 01, orcid id: https://orcid.org/0000-0003-0550-3902. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 dziawgo, d. (2022). classification of stakeholders activism aiming to inf luence corporate social responsibility. copernican journal of finance & accounting, 11(4), 89–105. http://dx.doi. org/10.12775/cjfa.2022.020 danuta dziawgo* nicolaus copernicus university in toruń classification of stakeholders activism aiming to influence corporate social responsibility keywords: corporate social responsibility, classification, theory, sustainable development, shareholder activism, consumer activism. j e l classification: d11, d21, e21, e22, g41, q01. abstract: the subject of this study is a pro-sustainable activism. the main focus is concentrated on both consumers and investors. the aim of the elaboration is to draw attention towards sustainable development trend in current economy. the purpose is to propose a classification of stakeholder activism that is being carried out to strengthen sustainable development of enterprises. the study proposed seven criteria for division of stakeholders activism that aim to increase corporate social responsibility, which were then brief ly characterized. therefore, this article develops the theory with a new approach regarding stakeholders activism.  introduction introduction nowadays, business entities operate in a society, in which: citizens, clients, contractors, investors and employees are not only increasingly more educated, but also aware of their rights and position. http://dx.doi.org/10.12775/cjfa.2022.020 http://dx.doi.org/10.12775/cjfa.2022.020 danuta dziawgo9090 currently, consumers and investors expect an active attitude in the field of sustainable development from business entities, among others: inclusion in social life, saving the planet, and even humanity itself. for example, results of the study show that as many as 77% of consumers choose products, which they share similar values with (meaningful brands 2019). but at the same time, 71% of consumers are tired of brand’s empty promises – yet 73% of them expect that brands must act immediately for the good of society and planet (meaningful brands 2021). at the same time, it is estimated that 36% of the total professionally managed assets in the world are currently invested with consideration of sustainable finance (global asset management 2018). in 2022, global esg assets (environmental – social – governance) should surpass usd 41 trillion (bloomberg intelligence). therefore, sustainable finance and corporate social responsibility (csr) should certainly be treated as important issues – moreover, they currently have significant impact on the modern economy. however, it should be noted that the particular datapoints provided by various sources are usually different. this is the result of tightening the standards and legal definitions of sustainable investment (e.g., established in the european union), causing difficulties for companies and financial institutions to ‘greenwash’. therefore, there is no doubt that running a business in particular social ecosystem requires increasingly more consideration and respect for social factors. currently, paying attention to social issues by the company is no longer voluntary and is not motivated only by the social maturity of the company. introduced legal regulations and growing social pressure enable prosocial transformation of business. nowadays, there is ongoing transformation regarding introducing ever higher standards in the field of environmental protection, particularly including reduction in the usage of natural resources in favor of obtaining energy from renewable sources. the european union has been very active in this trend, promoting the construction of sustainable economy based on renewable energy. the purpose of this study is to propose the classification of undertaken activities that aim at increasing the social sensitivity of business entities. such activities are related to putting pressure on companies to be more socially responsible – beyond the scope of declarations. this classification was proposed on the basis of both literature analysis and case studies’ analysis. therefore, classification of stakeholders activism… 9191 this article extends the literature in terms of theory. it presents a new classification of stakeholders activism, which focuses on increasing the level of corporate social responsibility. research methodology and the course of research processresearch methodology and the course of research process the subject of this study is a pro-sustainable activism. the main focus is concentrated on both consumers and investors. the aim of the elaboration is to draw attention towards sustainable development trend in current economy. the purpose is to propose a classification of stakeholder activism that is being carried out to strengthen sustainable development of enterprises. to achieve the aim of the study, analysis of both literature and reports, description, comparison and desk research methods were applied. the study cites a number of examples of consumer and investor activity within the analyzed scope. literature reviewliterature review research concerning stakeholders activism focuses mainly on issues regarding identification of factors inf luencing activism, determining impact of these factors and the effects of conducted activities. however, only a few research papers study theoretical approach to the activism. therefore this study tries to fill the gap in this area to some extent. corporation should exist not only to increase value for shareholders but also to address the needs of others – stakeholders. the stakeholders include shareholders, debtholders, customers, employees, trade unions, suppliers, local communities, and society at large. in research, shareholders and consumers are analyzed the most, due to their significance. shareholders activism can be described as the active impact on company strategy and practices via leveraging ownership position. on the other hand, consumers activism can be described as the active impact on company strategy and practices via consumer purchase power. activism serves to achieve a particular goal. for example, in the media terms such as: eco activism, social activism, responsible activism, impact activism, esg activism or boycott, are often presented. so far, research on activism was focused primarily on its motives (kozinets & handelman, 1998; john & klein, 2003; klein, smith & john, 2004), im danuta dziawgo9292 pact of undertaken actions on financial results or corporate behavior (ettenson & klein, 2005; koku, 2012) and on case study (brinkmann, 2004; oh, park & ghauri, 2013). in case of csr, it has been already explained in various ways, while evolving over time (argandoña & von weltzien hoivik, 2009). however, several authors agree that csr has always been significant to the importance of stakeholders who concern for social and environmental issues (lu & liu, 2013; maak & pless, 2009). corporate social responsibility can be understood as the company’s obligation to take actions aiming to have positive impact on society, in which the organization operates – or at least to minimize the negative effects of company’s activities. european commission defines csr as the responsibility of enterprises for their impacts on society and outlines what a company should do to meet that responsibility. also ec emphasizes that enterprises should integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close cooperation with their stakeholders. the aim is: (corporate social…, 2011) ■ to maximize the creation of shared value, which means to create returns on investment for the company’s shareholders and at the same time ensuring benefits for the company’s other stakeholders; ■ to identify, prevent and mitigate possible adverse impacts which enterprises may have on society. it has to be noted that numerous csr definitions have been already formulated in the literature. dahlsrud (2008) in his study identified 37 of them. several csr definitions were provided below. csr are actions that appear to further some social good, beyond the interests of the firm and that which is required by law (mcwilliams & siegel, 2001). csr is a principle stating that corporations should be accountable for the effects of any of their actions on their community and environment (frederick, post & davis, 1992). also, sustainable investment is defined as an investment approach that considers environmental, social and governance factors in portfolio selection and management (2020 global sustainable investment review, 2021). in recent years, csr has received increased attention in academic research. a notable analysis on csr was conducted by rodríguez-fernández, gaspargonzález & sánchez-teba (2020). they analyzed 350 research papers (dated classification of stakeholders activism… 9393 from 1998 to 2017) aiming to identify trends regarding csr in the literature. on the market, investors and consumers pay attention and put pressure on companies’ behaviors in csr field. furthermore, as suggests fernández-kranz & santaló (2010), starks (2009), li, cao, zhang, chen, ren, & zhao (2017) companies’ csr behavior can also impact their stock price and financial performance, as well as social value (kuratko, mcmullen, hornsby & jackson, 2017). companies have used csr as a tool to enhance relations between firms and customers as well as to promote positive customer perceptions toward enterprises (bhattacharya, korschun & sen, 2009). several researchers suggested that the positive effect of csr on consumer evaluations increases the intention to purchase the company’s product and services (cuesta-valiño, rodríguez & núñez-barriopedro, 2019; ellen, webb & mohr, 2006). some research also has found a positive relationship between csr and several outcomes, such as trust, customer satisfaction, customer loyalty, consumer relationship intention, financial performance, brand equity, and positive work outcomes of employees (hur, kim & kim, 2018; iglesias, markovic, singh & sierra, 2019; kowalczyk & kucharska, 2019; park & kim, 2019; raub & blunschi, 2014; uhlig, mainardes & nossa, 2019; hur, moon & kim, 2020). hence, csr can currently be considered to be an important element of companies’ strategy (bian, liao, wang & tao, 2021; dembek, york & singh, 2018; schaltegger, hörisch & freeman, 2017) and has a positive inf luence on financial profitability, thus creating value in the organization (rodríguez-fernández, 2015; busch & friede, 2018; rodríguez-fernández, sánchez-teba, lópeztoro & borrego-domínguez, 2019). pro-sustainable classification of stakeholders activismpro-sustainable classification of stakeholders activism both consumers and investors are certainly external pillars, on which any corporate operations are based on. they generate two financial streams to the company in the form of sales revenue (consumers), as well as equity (shareholders) and external capital (creditors). shareholders are a particularly important group of investors, due to the fact that they can participate in annual general meetings; they can also inf luence the company’s management, overall corporate strategy or even company’s strategic and operational goals. the overall increase in the level of social sensitivity is the effect of vast activity from various groups aware of their consumer rights as well as investors. danuta dziawgo9494 communication between them is facilitated by universal access to the internet and social media. these groups are part of the overall sustainable development trend. they focus their interests usually on environmental and ethical issues. as a result, the attitude of a conscious consumer is becoming increasingly more popular. such consumer: ■ does not necessarily follow the advertisement, but rather similarity of values, ■ boycotts products of those companies, whose activities he does not accept, ■ expresses his dissatisfaction on various communication platforms, ■ questions the corporate image credibility that is built as socially sensitive. in particular, the reported doubts concern actual motives and effectiveness of undertaken actions within the framework of csr (dziawgo, 2014; dziawgo, 2010). the same trend can be observed in the environment of both individual and institutional investors. as a result, a clear emphasis is placed on socially responsible investing and on corporate social responsibility. at the same time, shareholders submit a number of applications, petitions, inquiries, thus trying to impact changes in the behavior of companies, their level of social sensitivity and ethical behavior. such actions take place on general meetings as well as directly within the company. scheme 1 proposes a classification of activism that is aimed at increasing the company’s social sensitivity. then, the proposed classification criteria were characterized and supplemented with relevant case studies. it should be noted that a given form of activism can be considered from numerous points of view, hence it often falls within the scope of multiple proposed classification criteria at the same time. classification of stakeholders activism… 9595 scheme 1. classification of activism aimed at increasing company’s social sensitivity source: own elaboration. classification by entity pressure exerted on particular business entities aiming to increase the level of corporate social responsibility by consumers, investors, employees, ngos, governmental organizations and law-making bodies can be distinguished from the entity criterion. consumers can express their opinions while making purchases either by making them or abstaining from them (partially or entirely). in such way, consumers can manifest either their activism classification by: entity consumers individual and institutional investors employees non-governmental organizations governmental organizations law-making bodies number of participants individual group time commitment passive active duration one-time long-term (mission) planning spontaneous organized intentions antiprofinancial commitment without financial support giving up a part of the profit donation s o u r c e : own elaboration. danuta dziawgo9696 classification by entityclassification by entity pressure exerted on particular business entities aiming to increase the level of corporate social responsibility by consumers, investors, employees, ngos, governmental organizations and law-making bodies can be distinguished from the entity criterion. consumers can express their opinions while making purchases – either by making them or abstaining from them (partially or entirely). in such way, consumers can manifest either their support or dissatisfaction. in addition, they can express their opinions through social media, commenting on the company's activities on internet forums, and can also submit questions or comments directly to the company. on the other hand, both individual and institutional investors, may either exclude a given entity from their range of potential investments or introduce it. they may sell financial instruments they already have, or invest in them. they can also partially adjust their position in investment portfolio by reducing or increasing financial exposure on particular business entity. in addition, shareholders have the right to attend annual general meetings (agm). as co-owners, they have the right to express their opinions on this forum, while the scope of such activity depends on the number of shares held, legal regulations enforced in certain country, as well as the statute of a given company. shareholders may submit draft resolutions, inquiries, formulate petitions, and apply for analyses of the entity's operations from a specific angle. the collective pressure of multiple investors is certainly more impactful, especially when it involves both individual and institutional investors. employees, operate within a given entity and have access to internal information. they can therefore formulate opinions on an ongoing basis, raise doubts and indicate potential threats and risks related to a given decision or course of action. ngos, on the other hand, aim to bring together those with similar beliefs, in order to change the world for the better – in accordance with particular ngo’s beliefs. it can be mentioned that several activities of various foundations and associations try to impact the behavior of business entities, as well as law-making bodies. for instance, pestizid aktions-netzwerk (www1) is against the use of pesticides. gen-ethishes netzwerk (www2) opposes the use of techniques related to genetic engineering in germany. in order to increase their impact, classification of stakeholders activism… 9797 such organizations often publish appeals to individual investors to assign voting rights from their shares towards particular ngo. because of this, ngos’ representatives are able to participate in the general meeting, submit relevant inquiries and motions, as well as convince institutional investors to support their position. a notable example is the case of green america organization, which in 2022 reported over 500 shareholder resolutions of esg issues (www3). another distinguished group are government organizations, both on state and local level. they may conduct a policy of either supporting or stigmatizing specific behavior in their area. particular actions undertaken by government organizations can be as follows: financial grants or subsidies supporting specific activities, promoting certain practices, actions or entities in local media. on the other hand, in the case of stigmatizing certain approach and encouraging changes in practices, various additional controls are carried out within the limits of the applicable law. law-making bodies are primarily the parliament and the government, which through laws and executive acts, create the legal framework for the entities in the modern economy. as a result, they order companies to behave in certain ways, prohibit them from particular activity under the threat of imposing penalties, and establish a policy of supporting certain attitudes, for instance, via tax policy and various types of targeted programs in the form of grants and subsidies. classification by number of participantsclassification by number of participants individual and group activism can be distinguished from number of participants criterion. individual activism concerns both natural person and legal entity who, independently of each other, spontaneously undertake certain actions as a result of obtaining particular information. such information can be both positive and negative. however, group activism takes place as a result of joint appeals for certain practices. an example of such activism is consumer boycott aimed at impacting particular company and trigger specific changes. such boycotts usually call for refraining from purchasing the company's products at all or on certain days, as an expression of protest and lack of support for particular actions. danuta dziawgo9898 for example, during 2002 citigroup agm, a resolution that called the board of directors to determine the financial group's impact on forest destruction was voted on. in addition, an appeal was made to the board to take action to protect forests, especially tropical forests. the justification stated that this financial group finances companies that destroy forests, resulting in the climate change on earth (www4). as a result of the undertaken actions, in 2003, the company was included in the indexes of csr. classification by time commitment classification by time commitment passive and active involvement can be distinguished from time commitment criterion. the passive activism can be understood as refraining from purchasing the company's products by consumers. in the case of investors, it will refer to refraining from purchasing the company's financial instruments, selling the instruments held or reducing the level of financial exposure. undertaking this type of activity does not require a significant time commitment on the part of the participant and it is often a one-time activity. active activism requires more time – such activities often last for a significant amount of time. these include preparing various types of petitions and collecting signatures under them, certain media campaigns conducted either on continuous basis or until a specific, expected outcome is achieved. a notable case study is the consumer boycott of bp. in 2010, bp’s oil rig exploded causing an oil spill, which caused an ecological disaster in the gulf of mexico. under public pressure, the company had to clean up the effects of the oil spill into the bay. an example of an active involvement is the set-up of facebook group gathering company opponents, which had almost 800,000 supporters. at the same time, it became a channel fuelling the protest and collected most up to date information concerning the leak and actions undertaken by the company. since the facebook page was deleted by the administrator at certain point, it further increased public outrage. as a result of protests, after a few days, the deleted page was restored. as an example of a passive involvement, it is essential to point out consumers who boycotted the company and its products. those consumers did not refuel at bp stations, as a form of protest to not support the company that damaged the environment so significantly. this resulted in a sales decline at petrol stations. according to the media, this ac classification of stakeholders activism… 9999 tion was considered the most successful consumer boycott in the history of the united states (www5). classification by durationclassification by duration one-time and long-term activity can be distinguished from duration criterion. the one-time activism is associated with short-term action, usually limited to one event. for example, on a given day, the consumer will refuel at a service station of another supplier. on the other hand, this consumer will make subsequent purchases from the original supplier again. the one-time activism may also concern the achievement of the expected goal, and thus last a longer period of time. a notable example is activism against shell company, criticizing the decision to sink an inactive oil rig in 1995. after cancelling the decision, public pressure subsided. on the other hand, long-term activism is related to building a better world, i.e., implementing certain ideas and values on a continuous basis. it is certain type long-term mission. an example of such activism are mutual funds which use the negative screening approach, or the exclusion of companies involved in 'sinful' industries. classification by planning classification by planning spontaneous and organized activity can be distinguished from planning criterion. the spontaneous activism is generated as a result of an event, in particular a negative event with a wide impact. one example of this is nestlé, which in 1977 was the subject of a worldwide consumer boycott for its irresponsible marketing of baby milk. in africa, this has increased the incidence of waterborne diseases (the issue of access to clean drinking water), and poverty has contributed to malnutrition (relatively high milk costs). as a result of extensive criticism, the company changed its approach. currently, it is awarded for its activities in the field of sustainable development (post, 1985). whereas organized activism is carried out in particular by non-governmental organizations and certain groups of people. this activism is usually aimed at achieving a long-term goal. as a result, the goal to be achieved is formulated relatively broadly, which provides the basis for operation for many years. the danuta dziawgo100100 slogan of the ethical consumer organization: 'learn how to use your spending power to help change the world for the better' may serve as an example (www6). it should be noted that there are a number of organizations on the international market that use not only consumer rights, but also shareholder rights to impact the level of social responsibility of business entities. at the same time, they usually do not associate a large number of investors, but through websites and press articles they inform the public about intentions to put a specific resolution to the vote for agm of a given company. they also appeal for support regarding this initiative by providing them one-time voting rights from shares of a given company by investors. the german association of critical shareholders (dachverband kritische actions) is very active in this regard (www7). because of its activity, the platform for cooperation within europe was established. this association actively participates in agm of such companies as: adidas, allianz, bayer, bmw, commerzbank, deutsche bank, volkswagen. classification by intentions classification by intentions antiand procan be distinguished from intentions criterion. anti-activism refers to taking action to protest against something, not accepting certain actions, indicating the need to change the current or planned behavior of the company. moreover, so-called blacklists of unacceptable behaviors or entities are being laid out. criticism of jp morgan chase for financing ‘dirty’ energy projects can be pointed out as an example. as a consequence, the bank reduced the financing of projects related to the extraction of energy resources in favor of financing clean energy projects (www8). on the other hand, pro-activism refers to supporting and promoting certain approach, formulating patterns of conduct, defining good principles, formulating a catalogue of guidelines, indicating companies worth following. investment strategies, i.e., socially responsible investing (sri) for mutual funds can be cited as an example. some of them leverage the negative screening criteria strategy but other use positive screening criteria strategy like the best-in-class. therefore, in spite of different methods of achieving particular goal, purpose remains the same, i.e.: to allow investors to ref lect their personal values and ethics by avoiding companies that are not in accordance with their value system. hence, to encourage companies to improve their csr and sus classification of stakeholders activism… 101101 tainability performance – both directly through active shareholder advocacy, and indirectly via inclusion/exclusion in investment portfolio. classification by financial commitment classification by financial commitment lastly, activism without financial support, activism requiring giving up a part of the profit and donations can be distinguished from financial commitment criterion. activism without financial support involves participation in various types of media campaigns, purchasing products from another entity at a similar price, assigning votes from shares held to other entities, expressing support through comments and ‘likes’ on websites. an example of this is the initiative of the polish bank ochrony środowiska [environmental protection bank]. in 2012 and 2013, as a part of the ‘pln 2 for a pet’ campaign, for each deposit opened and maintained for a month, bank donated pln 2 from its funds for the protection of protected wild animal species (e.g., brown bears, golden eagles, grey seals, lynxes, elks) (www9). activism with giving up a part of the profit means that the investor consciously decides to lower the profits in order to support particular campaign. in the case of consumers, it means aware consent to an increased price of the purchased products. for example, it can be a coffee from organic plantations or with the fairtrade or rainforest alliance logo. on the other hand, activism in the form of a donation, consists of financial support for given activities through payments to specific bank accounts, usually in the form of a donation. in principle, all operating non-governmental organizations offer such option.  conclusion conclusion classification of activism proposed in this study certainly does not exhaust the issue, but it undoubtedly complements the literature on the subject in the field of theory. it is also a contribution to scientific discussion and further research in this field. based on the above, it seems that further development of the stakeholder activism can be expected. the results achieved so far confirm the effectiveness of the actions taken. the likely direction of evolution will be consumers, who are danuta dziawgo102102 aware of their rights and environmentally, ethically sensitive, as well as financial investors, whose attitudes and preferences, companies would have to consider increasingly more. at the same time, the research paper has shown that there is social acceptance for measures that put pressure on companies to be more sensitive towards sustainability issues. at the same time, companies often take into account the suggestions made to them by consumers and investors, becoming more sustainable friendly. it can be expected that by the end of the century, operating economic entities can be considered as functioning in accordance with the principles of sustainable development. this will be the result of pressure from consumers, investors, employees and the requirements contained in legal regulations. as is the case with the so-called dirty technologies, socially responsible behavior of companies will become the norm and widely observed standard in developed countries. similarly, in the case of less developing countries, these issues are unlikely to be perceived as strategically important considering poverty, lack of access to clean water, medicines or food. despite this, it seems that the term 'sustainable development', even if it will not be a showcase of the entire 21st century, will certainly be an essential of its first half, due to the importance of 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(www5) http://newpr.pl/bojkot-bp-za-w yciek-ropy-w-zatoce-meksykanskiej-studium-przypadku/ (accessed: 8.12.2022). (www6) https://www.ethicalconsumer.org/ (accessed: 8.12.2022). (www7) https://www.kritischeaktionaere.de/en/corporations/ (accessed: 8.12.2022). (www8) https://www.greenamerica.org/all-victories (accessed: 10.12.2022). (www9) https://www.wirtualnemedia.pl/artykul/zagrozone-zwierzeta-reklamujaekolokate-w-banku-ochrony-srodowiska (accessed: 10.12.2022). date of submission: may 9, 2022; date of acceptance: november 21, 2022 * contact information: rajibais@juniv.edu, associate professor, department of accounting and information systems, jahangirnagar university, bangladesh, phone: +880 1778277536; orcid id: https://orcid.org/0000-0001-6957-5070. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402022, volume 11, issue 4 rajib, s.u. (2022). max weber’s rationality in accounting research. copernican journal of finance & accounting, 11(4), 165–181. http://dx.doi.org/10.12775/cjfa.2022.024 salah uddin rajib* jahangirnagar university max weber’s rationality in accounting research keywords: max weber, rationality, accounting, social studies, research, review. j e l classification: a14, b15, m40. abstract: max weber (1864–1920), a german political economist, sociologist and historian has been inf luencing the critical accounting research significantly since 20th century. this paper aims to investigate the inf luence of weber’s ‘rationality’ concept in accounting research through the identification of research platforms, trends and major themes and findings. this study adopts the qualitative research methods. a number of papers from 1984 to 2021 have been analyzed to reach the aim. call of modernization and human inheritance with tradition force men to act in a rational and calculative way which are the premise of weber’s rationality. through the three specific things – calculability, methodological behavior and ref lexivity weber defined rationality and its process in the society. the study finds that weber’s rationality has been used to understand the society and its ref lection in the implementation of accounting mechanisms. various disciplines of accounting (financial accounting, management accounting and auditing) as well as implementation of various tools of accounting have been investigated under the concept of rationality. both the public and private enterprises have been investigated under the concept of rationality. it is expected that the study will contribute to understand the application of weber’s concept in accounting research and potentiality as well. http://dx.doi.org/10.12775/cjfa.2022.024 salah uddin rajib166166  introduction introduction the corpus of max weber embraces the ideas of social action in the birth of modern capitalism. the rationality and the rationalization in the history is the major theme in the weber corpus (kalberg, 1980). weber discussed the rationality and rationalization process in references to the western civilization. he argued that the rationalization process takes place in the non-western civilization as well. however, in the text collected essays in the sociology of religion, weber concluded that the rationalization processes for india, china and ancient middle east are different than the european-american rationalization process. rationality has been discussed in scattered form in the texts of max weber. in a number of texts, weber conceptualized the concept of rationality through the ideas from the history of the society and religion. weber noticed the usage of multivocality of his uses of rationality and rationalization as well (kalberg, 1980). in the empirical analysis, weber focused on the problem of understanding from the perspective of modern western civilization. in the text economy and society, weber presented an account of economic activities of institutional structure and the factors that affect the structure. both descriptively and structurally, weber presented the various characters of modern capitalism as a needed part of rational capital accounting. he broadened the analysis, including both the structural level (micro) and macro level like culture, surrounding environment of the institutions, tensions and others. modern organization is seen as a system based on formal rationality without connecting any specific substantive ends and outcomes as per weber. here, ‘rationality’ has been criticized by the groups of scholars as well. system based organizational researchers consider organization as a means of production and follow the community demands and social ends ultimately. therefore, they argue that distinction among the rationalities is not required (e.g., parsons, 1960). accounting history has been investigated in alternative ways (banaszkiewicz, 2013). historical evidence shows some critical issues of accounting and identifies accounting as a problematic aspect of social and organizational context (covaleski & aiken, 1986). following the approach of weber, the potentiality of weber’s concept including the rationality in accounting had been discussed earlier (e.g., colignon & covaleski, 1991; dillard., rigsby & goodman, 2004). colignon and covaleski (1991) argued that the relationship between the max weber’s rationality in accounting research 167167 accounting, organization and society can be explained through the three analytical layers based on weber’s writings. weber’s framework postulates that accounting practices can be considered as analytically rational. however, it is important to understand the substantive rationality of accounting practices and the organizational operation in the socio-historical perspectives. a number of scholars have used the lens of ‘rationality’ to understand the implementation of accounting mechanisms as well. this study is aimed to understand the use of the concept of ‘rationality’ in accounting research. the study is organized as follows: first, the concept of rationality is explored in details. second, research method is set to achieve the goal. third, research platforms, the nature and use of rationality are investigated in accounting research. and finally, a discussion and conclusions are drawn. weber’s r ationalityweber’s r ationality rationality conceptsrationality concepts several studies have attempted to explore the ‘rationality’ of weber from various dimensions (e.g., swidler, 1973; kalberg, 1980). previous studies investigated the ‘rationality’ from the work of weber’s society and economy. it is found that weber used the term ‘rationality’ differently in different contexts (swidler, 973). swidler (1973) identifies three concepts from the work of weber which he identified as rationalism, rationalization and rationality to explain the distinct forms of the concept of rationality. weber indicated practical rationalism as inherited in primitive, purely magical religions (swidler, 1973). therefore, the modern rationality of weber is different from rationalism. swidler (1973) argued that weber used rationalization to refer to systematization of ideas. in weber’s works, rationalization received attention as it is the primary process to give ideas to the capacity to influence social action. when rationalization is a general process of idea development, rationality implies a social action based on particular relationship between ideas and actions. weber presented rationality as a characteristic of modern capitalism and referred to rationality as a social action. however, this social action is methodological and efficient simultaneously. to understand weber’s rationality properly, attachment of actors to the actions rather than objective characteristics of ac salah uddin rajib168168 tion is required (swidler, 1973). swidler (1973) viewed the attachment of actors to the action in the four categorized basic groups: 1) traditional, 2) affectual, 3) value rational and 4) instrumentally rational. similarly, kalberg (1980) viewed the types of rationality from the work of weber as: 1) practical, 2) theoretical, 3) substantive and 4) formal. rationality framework and accountingrationality framework and accounting an increasing number of papers have used the concept of ‘rationality’ of max weber in accounting research. colignon and covaleski (1991) highlighted the three layers of analysis addressed by weber to introduce the framework of accounting research. at the first layer, the nature and structural conditions have been discussed. to do this, he highlighted two interdependent sectors that are inevitable parts of modern economy. the sectors are: 1) the use of money and 2) market structure and societal institutions’ relationship to the markets. the money introduces the concept of private property. it works as a medium of exchange through its ability of calculability to economic significance. weber described the role of money and accounting in the capitalism in his works. he stated that: „capitalism is present wherever the industrial provision for the needs of a human group is carried out by the method of enterprise, irrespective of what need is involved. more specifically, a rational capitalistic establishment is one with capital accounting, that is, an establishment which determines its income yielding power by calculation according to the methods of modern bookkeeping and the sticking of a balance” (weber, 1961, p. 207). weber argued for the similarities among the ‘capitalism’, the ‘economic enterprise’ and ‘capital accounting’. a similar rational calculation of economic action is involved in all the terms at different level of activities (colignon & covaleski, 1991). weber argued that modern capitalism influences everyday life and our everyday needs are supplied capitalistically (weber, 1961). therefore, weber argued that the context determines the rationality of calculation of economic action and accounting facilitates this rational calculation. at the second layer, weber discussed the historical and causal features. at this layer, weber highlighted the tension of establishing capitalism and the changes of capitalisms. therefore, this layer is historical and dynamic in nature. weber at max weber’s rationality in accounting research 169169 tempted to explain the foundations of the society by combining the ideas, interpretations, laws and meaning of laws in general in the society. at this layer, weber’s ‘rationalization’ may be investigated as the contradictory relationship of two major forms of economic action: ‘formal rationality’ and ‘substantive rationality’. as it has been mentioned, substantive rationality forms from the values, ends and means of particular social groups as well as institutional environment of the respective social groups. in contrast, the industrialization with its components such as economic, legal, scientific spheres and the bureaucratic forms of domination characterizes and determines the boundary of formal rationality (kalberg, 1980). the richness of the differences between these rationalities creates the tension of two distinct forms of economic action. lack of specific focus on a specific institution or social circumstances of previous two layers raises the third layer of analysis. however, the first two layers serve as the baseline for the third layer, i.e., the case of a specific enterprise. weber explored two axes of tension that combinedly frame the interaction of forces, agencies and interests relating to the accounting practices and provides a space for analysis (colignon & covaleski, 1991). the first axis presents the tension between the formal and substantive rationality. the second axis presents the organizational domination and existence. these axes develop a framework that presents accounting procedures as formal rationality at the organizational level. research methodsresearch methods in a number of books, weber discussed the modernization of the society from the traditionizaton. books like the protestant ethic and the spirit of capitalism (1905), economy and society: an outline of interpretive sociology (1921), and general economic history (1923) focus on the process of modernization. from the translated work on weber (e.g., weber, 1978; weber & kalberg, 2001) and scholarly writings, we have tried to understand the weber’s corpus. several steps are followed to select the papers and review the papers. the prisma 2020 approach has been adopted to select the articles. salah uddin rajib170170 figure 1. process of literature review figure 1. process of literature review source: page, mckenzie, bossuyt, boutron, hoffmann, mulrow, shamseer, tetzlaff, akl, brennan, chou, glanville, grimshaw, hróbjartsson, lalu, li, loder, mayo-wilson, mcdonald, mcguinness, stewart, thomas, tricco, welch, whiting & moher, 2021. to search for the articles, a number of keywords have been used. figure 1 shows the process of review. first, the term ‘max weber’ has been used to search in the article in the area of accounting on google scholar. after identifying the major journals, the search engines of journals identification of studies via databases and registers records removed before screening: duplicate records removed (n = 100) records marked as ineligible primarily (n = 50) records identified from*: databases (n = 1) registers (n = 450) id en tif ic ati on records screened (n = 300) records excluded (n = 147) reports sought for retrieval (n = 153) reports not retrieved (n = 3) sc re en in g reports assessed for eligibility (n = 25) reports excluded:2 reason (n = ‘rationality’ has not been used as the basic theory) studies included in review (n = 23) in cl ud ed s o u r c e : page, mckenzie, bossuyt, boutron, hoffmann, mulrow, shamseer, tetzlaff, akl, brennan, chou, glanville, grimshaw, hróbjartsson, lalu, li, loder, mayo-wilson, mcdonald, mcguinness, stewart, thomas, tricco, welch, whiting & moher, 2021. max weber’s rationality in accounting research 171171 to search for the articles, a number of keywords have been used. figure 1 shows the process of review. first, the term ‘max weber’ has been used to search the article in the area of accounting on google scholar. after identifying the major journals, the search engines of journals have been used to search for the papers. apart from using the term ‘max weber’, boolean operators ‘and’ and ‘or’ have been used. for example; we used ‘weber’ and ‘rationality’ to get our papers. in case of journal of business ethics, the approach of selecting the article is different as the journal publishes multidisciplinary scholarly writings. max weber in accounting researchmax weber in accounting research research platformsresearch platforms table 1. use of ‘max weber’ in top ranked accounting journals sl journal any place in the article abstract 1 accounting, organization and society (aos) 64 9 2 accounting, auditing & accountability journal (aaaj) 40 6 3 critical perspectives on accounting (cpa) 36 5 4 financial accountability and management (faam) 8 3 5 journal of business ethics (jbe) 7* 1 total 155 24 *related to accounting discipline s o u r c e : author’s own compilation (as of february 2022). theories of social sciences have been promoted in some top ranked journals of accounting. table 1 presents the number of articles that refer max weber in any place in the articles and abstract in the articles. salah uddin rajib172172 research organizationsresearch organizations table 2. use of ‘rationality’ concept in research organization organization number of papers % of papers private enterprises family-owned business 2 8.70% corporations 2 8.70% public sector* 10 43.48% not applicable (narrative, descriptive) 9 39.13% total 23 100.00% *public sector includes state owned enterprises as well as public community s o u r c e : author’s own compilation (as of february 2022). the analysis of the selected papers shows that ‘rationalit y’ concept of max weber is used in the public sector mostly. apart from state owned enterprises, a number of public communit y’s accounting implementation scenarios have been investigated through the theoretical lens of max weber. rationalit y of max weber has been used in private enterprises including family business. research themes and findings research themes and findings table 3 presents the theme and major findings of the selected papers that use the theoretical lens, particularly ‘rationality’ introduced by max weber. max weber’s rationality in accounting research 173173 t ab le 3 . t he m e an d fi nd in gs in a cc ou nt in g re se ar ch th ro ug h th e co nc ep t o f r at io na lit y sl a ut ho rs jo ur na l th em e m et ho ds fi nd in gs 1 co va le sk i & a ik en (1 98 6) a o s a cc ou nt in g in th e ac ti vi ti es o f co or di na ti on a nd co nt ro l f ro m a c ri ti ca l pe rs pe ct iv e d es cr ip ti ve cl as si ca l s oc ia l t he or ie s pr ov id e si gn if ic an t sc op e to a cc ou nt in g to in ve st ig at e it s im pa ct cr it ic al ly . h is to ry s ho w s th at t hr ou gh t he s ci en ti fi c m an ag em en t ph ilo so ph y, a cc ou nt in g pr ov id es s tr uc tu ra l s up po rt s to t he c en tr al iz ed a nd r at io na liz ed e co no m ic p ro du ct io n an d po lit ic al d ec is io n m ak in g. t he re fo re , n ot io n of m ar x an d w eb er c an c on tr ib ut e si gn if ic an tl y to u nd er st an di ng t he d ev el op m en t o f a cc ou nt in g. 2 co lig no n & c ov al esk i ( 19 91 ) a o s fr am ew or k on w eb er ia n ap pr oa ch in ac co un ti ng r es ea rc h d es cr ip ti ve th e re la ti on sh ip b et w ee n th e ac co un ti ng a nd o rg an iz at io n & s oc ie ty c an b e ex pl ai ne d by th e th re e an al yt ic la ye rs d er iv in g fr om w eb er ’s w ri ti ng s – th ro ug h th e di st in ct io n be tw ee n th e fo rm al a nd s ub st an ti ve r at io na lit y. 3 m ill er & n ap ie r (1 99 3) a o s g en ea lo gi es o f ca lc ul at io n d es cr ip ti ve th e au th or s hi gh lig ht ed f ou r ge ne al og ie s to d is cu ss t he o ut co m es o f th e hi st or y of c al cu la ti on . a m on g th e fo ur g en ea lo gi es , co nc er ni ng t he t hi rd o ne , th e au th or s st re ss t he si gn if ic an ce o f pr ac ti ce s an d ra ti on al es t ha t ar is e at d if fe re nt le ve ls o f or ga ni za ti on s an d in he ri te d to c al cu la ti ve p ra ct ic es . a t th is le ve l, th e au th or s di sc us s th e ta sk o f w eb er a nd so m ba rt e xt en si ve ly . 4 ra dc lif fe (1 99 7) cp a ra ti on al it ie s of p ub lic se ct or s pe ci al a ud it ca se s tu dy th ro ug h a ca se s tu dy , t he a ut ho r sh ow s th at t ho ug h au di to rs w er e ca lle d on b ec au se o f ex pe rt is e an d th ei r e m bo di m en t o f f or m al r at io na lit y, th ey e xe cu te d th e ta sk w it h m an da te a nd a ut ho ri ty t ha t r ai se d fr om t he s ub st an ti ve r at io na lit ie s of t he p ol it ic al a re na . 5 a rn ol d & o ak es (1 99 8) a o s d is cu rs iv e co ns tr uc ti on of a cc ou nt in g re la te d to re ti re e he al th b en ef it s ca se s tu dy th e st ud y sh ow s ho w w es te rn c ap it al is m r ed uc es t he r et ir ee h ea lt h be ne fi ts a nd a cc oun ti ng f ac ili ta te s th e de ci si on . a lo ng w it h th e sk oc po l a nd b ur aw oy , t he a ut ho rs u se t he no ti on o f w eb er ’s c al cu la ti ve m ea su re s to e xp la in t he s it ua ti on . 6 ch ua & p ou lla os (1 99 8) a o s cr os s bo rd er pr of es si on al iz at io n of ac co un ta nt s ca se s tu dy th e au th or s ar gu e th at in te rr el at io ns hi p am on g th e ac co un ta nt s ca n be e xp la in ed b y th e cl as sst at us -p ar ty m od el o f w eb er . t he a ct iv it ie s of th e ac co un ta nt s ar e de ri ve d by v ar io us dy na m ic d iv is io ns w it hi n th e as so ci at io n, a ct io ns b y th e st at e ag en ci es , p ol it ic al p ow er a nd co m m un al t en si on s. 7 br ye r (2 00 0a ) a o s so ci al h is to ry o f ac co un ti ng c ha ng es d es cr ip ti ve th e au th or h ig hl ig ht s th e ch an ge s of a cc ou nt in g re la ti ng t o th e tr an si ti on o f c ap it al is m in en gl an d. t he a ut ho r fo cu se s on t he w eb er ’s n ot io n on c al cu la ti ve m en ta lit ie s to e xp la in m ar x’ s th eo ry o f t ra ns it io n of c ap it al is m r eg ar di ng t he a cc ou nt in g hi st or y. salah uddin rajib174174 sl a ut ho rs jo ur na l th em e m et ho ds fi nd in gs 8 br ye r (2 00 0b ) a o s so ci al h is to ry o f ac co un ti ng c ha ng es d es cr ip ti ve th e au th or s ho w s th e re le va nc e of m ar x’ s th eo ry t o ac co un ti ng f ro m t he a cc ou nt in g re co rd s of a gr ic ul tu ra l, co m m er ci al a nd b ou rg eo is re vo lu ti on s of e ng la nd . t o do th is , w eb er ’s no ti on o f c al cu la ti ve m ea su re s ha s be en u se d. 9 vo llm er (2 00 3) cp a so ci al s tu di es a nd ca lc ul at iv e pr ac ti ce lit er at ur e de ve lo pm en t by t he a cc ou nt in g sc ho la rs d es cr ip ti ve a ck no w le dg in g w eb er ’s c on tr ib ut io n in c ri ti ca l a cc ou nt in g, t he a ut ho r ar gu es t ha t th e ef fo rt s of a cc ou nt in g sc ho la rs s ho ul d be r ec og ni ze d in s oc ia l s ci en ce s as w el l. th e au th or ar gu es t ha t ec on om ic g ov er na nc e as a c en tr al o f ca lc ul at iv e pr ac ti ce t ra ns la te t he s oc ia l or de r. th er ef or e, t he c al cu la ti ve p ra ct ic e co nt ri bu te s in t he m ai nt en an ce o f so ci al o rd er . h en ce , t he e xp er ie nc e of a cc ou nt in g sc ho la rs s ho ul d ge t at te nt io n in t he s oc io lo gi ca l, po lit ic al a nd p hi lo so ph ic al t er m s. 10 m cp ha il (2 00 4) cp a re la ti on sh ip b et w ee n re as on a nd e m ot io n in ac co un ti ng e du ca ti on ca se s tu dy h ig hl ig ht in g w eb er ’s n ot io n on e m ot io n, t he a ut ho r cr it ic al ly a na ly ze s th e co nv en ti on al ap pr oa ch o f d is ti nc ti on b et w ee n em ot io n an d re as on . t he a ut ho r a rg ue s th at th ou gh th er e is a d is ti nc ti on , e m ot io n ca n w or k as a k ey fa ci lit at or in o ur d ec is io nm ak in g pr oc es s an d it is p os si bl e to id en ti fy t he r ea so n as a fo rm o f e m ot io n. 11 ja co bs & w al ke r (2 00 4) a a a j a cc ou nt in g an d ac co un ta bi lit y of a n ec um en ic al c hr is ti an gr ou p ca se s tu dy re fe rr in g th e w or k of w eb er o n th e re la ti on sh ip b et w ee n pr ot es ta nt is m , c ap it al is m a nd bo ok ke ep in g, t he a ut ho rs a rg ue t ha t ca lc ul at iv e te ch ni qu es a re c om m on in t he in ve st ig ate d gr ou p. t he a ut ho rs fi nd th e di st in ct io n be tw ee n th e in di vi du al iz in g (f or m al ) a nd s oc ia liz in g ac co un ta bi lit ie s (v ol un ta ry p ra ct ic es in th e co m m un it y) . i t i s fo un d th at th e vo lu nt ar y na tu re o f t he in ve st ig at ed c om m un it y re si st s th e fo rm al o r in di vi du al iz in g ac co un ta bi lit y. 12 d ill ar d, r ig sb y & g oo dm an (2 00 4) a a a j ex pa ns io n of in st it ut io na l t he or y ba se d on t he fr am ew or k of m ax w eb er d es cr ip ti ve th e au th or s in tr od uc e in st it ut io na liz at io n pr oc es s by w eb er ’s n ot io ns p er ta in in g to s oc ia l co nt ex t an d g id di n’ s st ru ct ur at io n th eo ry p er ta in in g to t he d yn am ic s of s oc ia l s ys te m s. th ey a rg ue t ha t th e us e of in st it ut io na l t he or y is li m it ed in a cc ou nt in g re se ar ch w hi ch f aile d to r ef le ct t he s oc ia l c on te xt a nd s oc ia l d yn am ic s. t he a ut ho rs c on cl ud ed t ha t us e of so ci al th eo ri es li ke ‘r at io na lit y’ a nd ‘p ow er ’ o f m ax w eb er o r ‘ st ru ct ur at io n’ o f g id di ns c an ex pa nd t he in st it ut io na l t he or y to u nd er st an d th e in st it ut io na liz at io n pr oc es s. 13 ca ra m an is (2 00 5) a o s tr an sf or m at io n in t he ac co un ti ng p ro fe ss io n ca se s tu dy th e au th or in ve st ig at es th e in tr apr of es si on al c on fl ic ts b et w ee n g re ek a ud it or s an d br an ch es o f in te rn at io na l ac co un ti ng f ir m s w he re i nd ig en ou s au di to rs w er e tr yi ng t o re ga in th ei r po si ti on a nd s ta tu s. t hr ou gh t he w eb er ’s r at io na liz at io n pr oc es s, t he a ut ho r ar gu es th at t he a tt em pt o f in di ge no us a ud it or f ai le d be ca us e of t he a dv an ce m en t of t he s oc io -p ol it ic al c lim at e. t ab le 3 . t he m e… max weber’s rationality in accounting research 175175 sl a ut ho rs jo ur na l th em e m et ho ds fi nd in gs 14 ch ia pe llo (2 00 7) cp a u nd er st an di ng t he b ir th of c ap it al is m a lo ng w it h th e ac co un ti ng d es cr ip ti ve w it ho ut d en yi ng t he n ot io n of w eb er t ha t ex is te nc e of a cc ou nt in g fa ci lit at es c ap it al is m , th e au th or a rg ue s th at t he c on ce pt o f a cc ou nt in g he lp s th e sc ho la rs o f s oc io lo gy a nd e co no m ic s to u nd er st an d th ei r ow n di sc ip lin e as w el l. 15 u dd in & c ho ud hu ry (2 00 8) a a a j co rp or at e go ve rn an ce pr ac ti ce s ca se s tu dy th e st ud y sh ow s th at t he r at io na l f ra m ew or k of c or po ra te g ov er na nc e m ay b e in te rf er ed by t he t ra di ti on o f a t ra di ti on al s oc ie ty li ke b an gl ad es h. b oa rd s of d ir ec to rs m ay s er ve t he in te re st o f f am ili es r at he r th an g en er al s ha re ho ld er s. 16 u dd in (2 00 9) cp a ra ti on al it ie s, do m in at io n an d ac co un ti ng c on tr ol . ca se s tu dy in a t ra di ti on al s oc ie ty , i nf or m al r el at io ns hi p an d fa m ily a ff ai r do m in at es t he o rg an iz at io n st ru ct ur e, a cc ou nt in g an d bu dg et in g pr oc es s. t he re fo re , w eb er ’s ra ti on al it ie s (s ub st an ti ve al on g w it h fo rm al ) c an e xp la in t he s ce na ri o of a n or ga ni za ti on d oi ng b us in es s in a t ra di ti ona l s oc ie ty . 17 ku as ir ik un & c on st ab le (2 01 0) a o s so ci ore lig io us , ec on om ic a nd po lit ic al in fl ue nc e in th e de ve lo pm en t o f ac co un ti ng . ca se s tu dy re fe rr in g th e w or k of m ar x, w eb er a nd o th er s oc io lo gi st s an d th e re la ti on sh ip b et w ee n re lig io n an d ac co un ti ng (e sp ec ia lly fr om w eb er ), th e au th or s ar gu e th at th e in te rr el at io ns hi p of r el ig io n, p ol it ic s an d ec on om ic s de te rm in e th e ac co un ti ng p ra ct ic e ra th er t ha n re lig io n in t ha ila nd . 18 ro be rt so n & fu nn el l ( 20 12 ) a o s h is to ri ca l m ot iv es o f ac co un ti ng d es cr ip ti ve d ra w in g th e re la ti on sh ip b et w ee n ca pi ta lis m a nd b oo kk ee pi ng i nt ro du ce d by s om be rt an d w eb er , t he a ut ho rs a rg ue t ha t d ut ch s oc ia l c ap it al is d if fe re nt t ha n w ha t so m be r an d w eb er h av e m en ti on ed a bo ut w es te rn c ap it al is m . th ey a rg ue d th at d ut ch c ap it al is m is es ta bl is he d on s oc ia l i ns ti tu ti on s an d th e lo ng e xp er ie nc e of t ho se in st it ut io ns . 19 u dd in e t a l. (2 01 8) jb e co rp or at e so ci al re sp on si bi lit y di sc lo su re s ca se s tu dy th e au th or s at te m pt ed to fi nd th e dr iv er s of c sr re po rt in g fr om th e pe rs pe ct iv e of w eb er ’s no ti on o f tr ad it io na lis m . t he s tu dy f in ds t ha t po w er fu l l ea de rs ’ p er so na l p ro je ct s an d th e ru lin g pa rt y’ s ag en da s de ri ve fr om th e cs r ac ti vi ti es in a tr ad it io na l s et ti ng . 20 ja ya si ng he e t a l. (2 02 0) a a a j pa rt ic ip at or y bu dg et in g in in di ge no us co m m un it ie s ca se s tu dy th e au th or s in ve st ig at e th e pr ac ti ce s of p ar ti ci pa to ry b ud ge ti ng in t w o in do ne si an in di ge no us c om m un it ie s w he re d on or ’s s po ns or ed n eo -l ib er al m od el w hi ch c an b e id en ti fi ed w it h th e fo rm al r at io na lit y is a pp ro ac hi ng . th e au th or s fi nd t ha t do no r sp on so re d ne o-l ib er al m od el is d om in at ed b y lo ca l t ra di ti on al p ra ct ic es , e .g ., va lu es , w is do m a nd o th er s. t ab le 3 . t he m e… salah uddin rajib176176 sl a ut ho rs jo ur na l th em e m et ho ds fi nd in gs 21 a gy em an g et a l. (2 02 0) a a a j d ec is io n m ak in g in a q ua si -f or m al or ga ni za ti on ca se s tu dy th e st ud y fi nd s th at in a t ra di ti on al s et ti ng in he ri ta nc e, c hi ef ta in cy , t ru st a nd n or m s pl ay th e m ai n ro le o ve r th e fo rm al h ie ra rc hi ca l o rg an iz at io na l s tr uc tu re s, b ud ge ti ng p ra ct ic es , pr od uc ti on p la nn in g an d la bo r co nt ro ls . 22 ph ir i ( 20 20 ) fa a m co rr up ti on a nd ac co un ta bi lit y ca se s tu dy th e st ud y fi nd s th at in st it ut io na l s tr uc tu re s re la te d to a cc ou nt in g an d ac co un ta bi lit y re m ai n pa tr im on ia l i n th e in ve st ig at ed c ou nt ry . p ol it ic al a ff in it io n, n ep ot is m a nd f av or it is m m an ip ul at e th e in st it ut io na l s tr uc tu re s an d in du ce t he c or ru pt io n. t hi s in st it ut io na l s tr uc tu re le ad s to s el ec ti ve a cc ou nt in g pr ac ti ce s. 23 d e la ut ou r, h oq ue & w ic kr am as in gh e (2 02 1) a a a j re sp on se o f e th ni c pe op le t o th e ex te rn al ac co un ta bi lit y de m an ds ca se s tu dy a cc ou nt ab ili ty a pp ea ra nc e (e ti c) a nd in te ri or iz at io n (e m ic ) t o an e th ni c gr ou p ar e th e pr em is es o f t he s tu dy . t he s tu dy fi nd s th at a n et ic -e m ic m is un de rs ta nd in g on b ot h si de s (e th ni c gr ou p an d ex te rn al ) o cc ur s at t he t im e of p ra ct ic in g in a fo rm al a cc ou nt ab ili ty s ys te m . s o u rc e : a ut ho r’ s ow n co m pi la ti on ( as o f f eb ru ar y 20 22 ). t ab le 3 . t he m e… max weber’s rationality in accounting research 177177 discussion discussion weber’s corpus offers multiple levels of analysis. it spreads from micro level social actions analysis to macro level social actions including social and historical dimensions (colignon & covaleski, 1991). our selected papers show that multilevel analysis is adopted in the accounting research as well. dominations’ variation and the resistance among the social groups are validated in weber’s framework and provide scopes for investigating the organizational rationalizations. scholars introduce the weber’s framework in organizational analysis through the focus on the tension among substantive rationalities (e.g., clegg & dunkerley, 1980). they argued that the tension among the substantive rationalities helps to analyze the rational calculation of domination and resistance to control in an organization. the framework of weber indicates that practices of accounting work as a mechanism of domination, constraint and control in institutions. however, the domination of accounting is incomplete. through the analysis this study finds that various accounting tools and practices mediate the tension between domination and resistances. ultimately, the calculative decision applies to tensions, struggles and conflicts among various groups with various substantive rationalities. various accounting tools and procedures work as the object of tension among groups, favor various interpretations and interests in an institution. table 3 presents that though at the beginning of accepting the weber’s work in the accounting research platforms descriptive researches has been promoted to understand the potentiality, case study research has been undertaken more with time. tensions among the groups are evident regarding the implementation of accounting tools that can be explained through the distinction between the formal and substantive rationalities. the area of financial accounting, management accounting and auditing has been investigated through the concept of ‘rationality’ of weber. alternative opinion to weber is found in searching the history of accounting practices as well. kuasirikun and constable (2010) mention that accounting in mid-19th-century was influenced by the interaction of religion, politics and economics rather than religion solely. analyzing the historical data of dutch east-india company, robertson and funnell (2012) argue that capitalism of the netherlands has been influenced by the long experience of social institutions rather than the notion of accounting. salah uddin rajib178178 apart from the rationality, the rationalization process, i.e., the anticipated mechanisms of rationality have been used in accounting research. religion and accounting (e.g., koleva, 2021; cai, li & tang, 2020; leventis, dedoulis & abdelsalam, 2018), ideal type society and accounting and accountability (breton-miller & miller, 2020; waldkirch, meyer & homann, 2009) have been the focal points under the concept introduced by weber. scholars argue that the rationalization process and the rationality have raised the issues of importance of accounting as well. chiapello (2007) argued that though weber has mentioned the role of accounting cautiously, the influence of accounting in the discipline of sociology is undermined. referring the work of karl marx, chiapello (2007) argued that the concepts of accounting have contributed in the area of sociology and economics to understand the disciplines properly as well.  conclusions  conclusions weber focused on the ideas of sociology in the development of western capitalism. the nature of modern enterprises is characterized in this aspect as well. to understand the weber’s notion of ‘rationality’, this study depends on several translated works of weber. we acknowledge the limitation of our understanding of the weber corpus. from the analysis of this study, it is obvious that the notion of weber, particularly of rationality, can help understand the implementation scenario of accounting tools in the society. almost all the branches of accounting have experienced the notion of rationality to understand the implementation scenario in the society. the fact is that as a branch of social science, accounting can hardly avoid the weber corpus in implementation aspects. hence, it can be said that weber’s rationality has a potentiality in future research of accounting as well. it is accepted that the concept of rationality has not been used in a global manner to unfold the civilization. the realms of economy, law, politics, religion, ethics and others advance the rationalization process in the indigenous rates at different socio-cultural level to form the rationality. therefore, future research including accounting will advent from weber. max weber’s rationality in accounting research 179179  references  references agyemang, j., jayasinghe, k., adhikari, p., tunyi, a., & carmel, s. 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(1961). general economic history. new york: collier books. https://doi.org/10.1006/cpac.1996.0115 https://doi.org/10.1016/j.aos.2012.03.002 https://doi.org/10.1111/j.1475-682x.1973.tb01149.x https://doi.org/10.1108/09513570810907465 https://doi.org/10.1108/09513570810907465 https://doi.org/10.1007/s10551-016-3214-7 https://doi.org/10.1007/s10551-010-0392-6 https://doi.org/10.1007/s10551-010-0392-6 https://doi.org/10.1007/s10551-010-0392-6 copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: december 18, 2014; date of acceptance: february13, 2015. * contact information: allmagda@wp.pl, faculty of political sciences and international studies, nicolaus copernicus university, batorego 39l, 87-100 toruń, poland, phone: +48 56 611 21 37. redo m. (2015). the importance of prudential regulations in the process of transmitting monetary policy to economy. copernican journal of finance & accounting, 4(2), 145–158. http://dx.doi. org/10.12775/cjfa.2015.021 magdalena redo* nicolaus copernicus university the importance of prudential regulations in the process of transmitting monetary policy to economy keywords: central bank, monetary policy, macroprudential supervision, mechanisms of transmitting impulses of monetary policy. j e l classification: e58, e52, g28, e51. abstract: the main aim of prudential regulations is to increase the stability of financial systems; however, such regulations also increase the risk-taking tendency of banks, they encourage them to combine and limit their lending possibilities with, at the same time, lowering the efficiency of monetary policy in affecting economic processes. thus, it occurs as a reasonable solution to integrate macroprudential supervision with monetary policy of the central bank and to subsequently limit the pro-cycle character of these regulations. the aim of this article is to discuss the importance of the regulatory channel in the process of transmitting impulses of monetary policy into economy and to overview the results of research, which analyzed the inf luence of macroprudential regulations on bank lending policy as well as their sensitivity towards monetary policy of the central bank. translated by magdalena redo magdalena redo146  introduction the mechanism of transmitting impulses of monetary policy can be described as activities of economic entities resulting from the policy of the central bank (kokoszczyński 1999, 8). the central bank, with help of its instruments, has a possibility of inf luencing the course of economic processes for realizing its basic aim – ensuring stability of prices and, thanks to that, stability of production. due to the complexity and changeability of economic processes, reaction of economic entities towards changes in interest rates of the central bank is conducted in different ways (by transmission channels). traditional channels of transmission include an interest rate channel, credit channel and an exchange rate channel (demchuk, łyziak, przystupa, sznajderska, wróbel 2011). however, the on-going economic development, processes of internationalization, globalization, development of finance markets, and more detailed research of mechanism of transmission led to pointing to other important ways (channels) in which monetary policy of the central bank inf luences economy (production and level of prices) and they visualize complexity of traditional channels as well as numerous links between those. the following scheme presents a synthetic approach to transmission channels of monetary policy, with which central banks inf luence activities of economic entities, the scope of production and levels of prices. it allows for an overall view on contemporary knowledge about complexity of processes of transmitting impulses of monetary policy into economy and highlights, aside from the traditional channel of interest rates, credit channels and channels of assets prices. it also highlights the importance of the inf luence of monetary policy on the scope of lending and on the price of marketable assets for economic processes, and also on the effectiveness of transmission mechanisms (scheme 1; redo 2013). the importance of prudential regulations in the process… 147 scheme 1. the channels of monetary transmission policy on the scope of lending and on the price of marketable assets for economic processes, and also on the effectiveness of transmission mechanisms (scheme 1; redo 2013). scheme 1. the channels of monetary transmission source: self-reported data on the basis of mishkin, 2007, boivin, kiley, mishkin, 2010, mishkin, 2001 and bank of england, 2014. the research methodology and the course of the research process the article is a critical analysis of literature, reports and the results of econometric studies concerning the impact of prudential regulation on banks’ functioning and the process of transmitting monetary policy into the economy. there have been used induction method and comparison method. bank capital channel credit channels balance sheet channel regulation channel risk-taking channel liquidity effect monetary policy exchange rate channel asset price channels stock channel wealth effects q tobin effect expectations channel direct interest rate channel bank lending channel s o u r c e : self-reported data on the basis of mishkin, 2007, boivin, kiley, mishkin, 2010, mishkin, 2001 and bank of england, 2014. the research methodology and the course of the research process the article is a critical analysis of literature, reports and the results of econometric studies concerning the impact of prudential regulation on banks’ functioning and the process of transmitting monetary policy into the economy. there have been used induction method and comparison method. magdalena redo148 regulatory channel in the process of transmitting monetary policy1 due to the lack of general agreement regarding expansion of monetary policy’s aims and making it responsible for preventing financial instabilities, mainly providing more restrictive monetary policy (leaning against the wind) which would prevent excessive loan actions, especially in the face of high increase of prices on the assets’ markets of entities which are the most susceptible towards speculative bubble, macroprudential regulations became the main tool for preventing the aforementioned. regulations for financial institutions, for instance capital requirements of the basel committee on banking supervision and european banking supervision (introducing financial leverage ratio, shortterm liquidity norm, redefining classes of liquid assets) or the level of the reserve requirement and its interest rate (importance of which has become marginalized, especially in the western countries, due to popularity of the basel regulations in the 90’s of the 20th century) greatly inf luence the scope of the bank capital channel, their risk-taking channel and the bank lending channel thus, they inf luence functioning of the mechanism of transmitting monetary policy into economy and its efficiency. capital regulations cause the increase of costs in functioning of banks due to the necessity of meeting them (the fear of exceeding limits forces them to undertake costly preventing actions) and they greatly inf luence the way of observing, managing and evaluating risk by these banks (and so they inf luence the tendency to risk-taking and functioning) – borio, zhu 2008. they also greatly limit the possibilities of issuing loans by banks, which is proved by the results of empirical studies. they also cause lowering of banks’ profits and the amount of their capital; encouraging banks to connect may cause higher concentration of the banking sector (chami, cosimano 2001). as bernanke, low (1991) indicated, regulations of the basel committee of banking supervision from 1988 (basel i) contributed to a significant limitation of supply of loans in the recession period of 1990–91 in the usa (credit crunch), much greater than in the case of banks not subject to these regulations (peek, rosengren 1993). the relation 1 it played an essential role in the usa in the process of transmitting monetary policy by inf luencing the supply of loans in the beginning of the 80’s of the 20th century when government regulations and regulation q were significantly shaping the market of mortgage loans (mccarthy, peach 2002; brayton, mauskopf 1985). the importance of prudential regulations in the process… 149 between issuing the aforementioned capital regulations and the lowering of the loans’ supply in the united states was also confirmed by, for instance, peek, rosengren (1992) and hancock, wilcox (1992) or wagster (1999); breeden, issac (1992) even advocated abolishing basel i regulations by accusing them of crashing the loans’ action in the united states in 90’s of the 20th century. berger, udel (1994) also added that capital regulations of basel i may be partially responsible for the decrease in the supply of loans. wagster (1999) indicated also one economically significant effect – strong relocation of the capital from loans to government bonds in banks not only within the united states but also in canada and great britain (due to the basel i regulation, loans required 8% of capital safety, and treasury bonds only the maximum level of 1.6%). it was confirmed by furfine (2001), who pointed out a significant decrease of the share of commercial loans within the banks’ wallets in the contrast to treasury bonds. borio, zhu (2008) also pointed that prudential regulations strengthened the activity of the risk-taking channel and also that the inf luence of capital and supervisory regulations on the financial system and the course of the business cycle increased. peek, rosengren (1997) indicated that the commercial sector of real estate is very sensitive towards capital regulations of banks; hancock, wilcox (1997) showed that crediting of commercial real estates in the usa is much more sensitive towards the capital shock of banks than crediting for housing (which is, partially, an effect of the political support of developing house-building). as boivin, kiley, mishkin (2010) show, the past decades brought a number of regulatory changes, especially with respect to mortgage loans which made them more coupled with the interest rate and less coupled with creditworthiness. watanabe (2007) indicated that the basel i regulations in terms of capital adequacy issued in japan from march 1993 also contributed in the following years to a great decrease in the loans’ supply. peek, rosengren (1997) pointed that these regulations contributed also to a great decrease in the loans’ supply for the japanese banks in the usa (harsher capital requirements were used in this case); these banks, in the culmination moment in the 90’s of the 20th century were creditors of 18% of manufacture and trade loans in the usa (in 1988 all of the 10 biggest banks around the world had their headquarters in japan). these conclusions were confirmed by ito, nagataki sasaki (1998), who indicated that capital regulations greatly inf luenced the lowering of credit actions of active banks on foreign markets, which were subject to harsher limitations. economic planning agency (1998) indicated that the tendency to magdalena redo150 issuing loans in japan is more sensitive towards capital regulations than regulations on the quality of assets. limiting the supply of loans on the basis of issuing capital regulations of the basel committee of banking supervision is observed also in developing economies. choi (2000) confirmed that issuing regulations regarding capital adequacy in the 90’s of the 20th century in korean banks caused the decrease of tendency for issuing loans. chiuri, ferri, majnoni (2001) documented decrease in the supply of loans by analyzing 16 rising economies which implemented basel i regulations in the 90’s in the 20th century. they also showed that the phenomenon was much stronger in banks with lower capitalization. jackson et al (1999) pointed that regulations caused the increase in capital adequacy ratio, especially among banks with lower capitalization, and the improvement takes part due to financial activities which are more attractive for the bank at the given time – in the period of good business cycle it is more likely to happen due to the increase in the bank’s own capital (because of higher risk and cheaper emission of shares), and at the time of crisis through limiting credit actions. tanaka (2002) points that capital regulations are a crucial determining factor when it comes to sensitivity of the supply of loans on interest rates; thus, basel ii regulations may lead to a higher decrease of the loans’ supply in the situation of higher credit risk ; they may also limit the efficiency of monetary policy as a tool for stimulating economic growth in the time of recession. although reserve requirement nowadays has a small role in stabilizing the financial sector also in many developing economies (but not in all, for example in china it is about 20% and is actively used to fight inf lation), it has occurred due to the current financial crisis that it is a powerful tool of the inf luence that monetary policy of the central bank has on the financial situation of banks and the loans supply. it is confirmed by montoro, moreno (2011), who pointed negative relationship between the changes in the level of reserve requirements (increase and decrease during the crisis of 2007) in brazil, colombia and peru, and the loans supply. mesquita, toros (2010) pointed also that the aforementioned reduction of reserve requirement in brazil contributed to re-establishing financing small financial institutions which were hurt the most due to the decrease of country’s liquidity. herrera, betancourt, varela, rodriguez (2919) showed that the changes regarding the level of reserve requirement contributed to strengthening of the actions of the direct channel of interest rates in colombia; they also pointed that lowering the reserve requirement generates a stronger reaction of the market’s interest rates than its increase. the importance of prudential regulations in the process… 151 regulation directions maddaloni, peydró (2010) underline that the existing financial crisis forces new duties on central banks – the necessity of conducting macroprudential supervision to monitor system risk. before the crisis, rajan (2005) had indicated the crucial increase of the risk tendency in the financial world and he also pointed to the increase of danger for economies due to disturbances in the functioning of financial sector in the future; he suggested that it should be ref lected in monetary policy and supervisory activities which should limit tendency to risk-taking in financial institutions. keys, mukherjee, seru, vig (2008) also underlined the necessity of improving functioning of mechanisms of testing creditworthiness and better clarity with respect to securitization. they also suggested differentiating between securitization for assets with poorer and richer sources of information (as an effect of the more thorough evaluation of credibility). purnanandam (2009) pointed that bigger problems in the situation of a shock have banks with low capitalization and lower share of deposits on demand, pointing at the same time to the direction of developing regulations for financial risk and capital ratio of banks. also farhi, tirole (2009) underline the importance of the macroprudential supervision and suggest that optimum regulations should be in the form of minimum liquidity requirements combined with monitoring of the quality of liquid bank assets. dell’ariccia, laeven, suarez (2013) point that, in order to acquire stability of prices and financial stability, it is essential to integrate macroprudential regulations with monetary policy. although tightening of the monetary policy in the connection with good business cycle may contribute to the realization of both aims (it will decrease the inf lation pressure and the tendency to risk-taking), in the situation similar to the one before the crisis of 2007/08 with low inf lation and exceeding tendency to risk-taking, tightening of the monetary policy would limit risk-taking, but it would cause an undesired decrease in economic activity and/or cause def lation. that is why, in such case, it is necessary to use regulatory tools in close coordination with monetary policy of the central bank, which serves as a strong argument for the centralization of the macroprudential supervising by the monetary power. character of regulations the latest research (for example geneva report on world economy 2009) indicate that regulations must be counter-cyclical, meaning they should be harsher magdalena redo152 in the times of good business cycle, and looser in the period of economic stagnation. however, rajan (2009) points that capital regulations contributed, in the period of good business cycle before the crisis of 2007, to transferring bank activity towards unregulated financial mediation (what, paradoxically, deepened the crisis), and not to creating better stability. thus, he indicates that it is crucial to focus on creating regulations, which sustain f luctuations of business cycle, instead of arguing about too high or too low level of regulating activities of financial institutions. aliaga-díaz, olivero, powell (2011) pointed that countercyclical regulations of basel iii from 2010 (implying the improve of the quality of assets and capital buffer) did not bring any spectacular advantages because banks had already kept the higher level of required capital ratio (capital buffer – exceeding requirements of basel iii) in case of future shocks. additionally, banks accurately anticipate the possibility of lowering the capital buffer in the period of worse business cycle; thus, they reduce counter-cyclical regulatory activities. for example, in brazil, mexico and colombia they indicated that these economies were hurt due to the last financial crisis on much lower level due to high capital buffers kept on the level significantly exceeding regulatory requirements (it could be said that a number of past crises has become a lesson learned for financial institutions) proving at the same time, that, although counter-cyclical regulations of basel iii contributed to limiting consumption f luctuation, they increased investment f luctuation (because of too fast limiting of the capital buffer). also zicchino (2005) pointed to the pro-cyclical activity of capital regulations. it must be noted, however, that the monetary power also has the possibility of mitigating the pro-cyclical inf luence of macroprudential regulations. cecchetti, li (2005) indicate that blum, hellwig (1995) were the first to show that capital regulations may tighten f luctuations of the business cycle; however, their analyses do not include the possibility of mitigating the effects by the monetary policy. that is why, it is suggested that monetary policy should react more strongly in the situation of shrinking of banks capitals, which will weaken the pro-cyclical inf luence of prudential regulations and maybe even neutralize the inf luence. it was also indicated by them that fed in the 90’s of the 20th century led the monetary policy according to the aforementioned theory and lowered interest rates more significantly in the situation of bank shock; at the same time, it weakened the pro-cyclical character of bank regulations introduced in the 80’s, contrastively to the policies of central banks in germany or japan in the 80’s. (cecchetti, li 2005). this serves as an the importance of prudential regulations in the process… 153 other important argument for coordinating the macroprudential supervision with monetary policy. regulations in developing countries it needs to be pointed out that the majority of research is conducted in developed economiestheir financial system is significantly different from the one in developing countries. that is why, it is essentially important to devote more attention to development and modification of tools for modeling mechanisms of transmitting monetary policy in developing countries, which will take into consideration its specificity (agénor, pereira da silva 2011). agénor, alper, pereira da silva (2012) pointed that, in the case of developing countries, it is a much better solution to provide regulations limiting the increase of credit actions and excessive risk, than to tighten monetary policy in the situation of inf lation pressure because of high risk of the f low of capital from abroad which may cause the credit boom, the increase in the prices of assets and the strengthening of the currency and, at the same time, worsen attractiveness of the economy and worsen the deficit on the current account. increasing f low of growing capital around the world, extending stagnation in western economies, low interest rates (and profitability of investments relying on such), as well as quantitative loosening conducted by the biggest central banks cause an increased f low of capital to some economies (the so-called sudden f loods). the f lood of capital, which came to the countries of latin america within the years of 2009–2011, caused the credit boom and fear of the bubble’s crack due to fragile financial and economic stability of the region. however, the problem is also found in highly-developed economies. within the last years, also small-developed economies such as switzerland, sweden or australia, which issue exchange reserves that, are alternative for dollar or euro became beneficiaries of huge f low of capital. thus, the aforementioned may (or even should) significantly strengthen the importance of regulatory channel in these countries at a cost of a direct channel of interest rate (agénor, alper, pereira da silva 2012). there is a need to show the other side of the coin. in the case of developing economies, where banks are the only financial middlemen, the regulations’ effect may be totally different from the one that is expected. as chiuri, ferri, majnoni (2001) point out, capital regulations, instead of creating advantages due to reducing bad credits, may lead to decrease in banks f luidity and to decrease in economic activity. magdalena redo154  conclusions prudential regulations, which are to increase the stability of financial systems and economies, increase also the risk-taking tendency of banks and encourage them to search for higher profits on dynamically developing financial markets and the resign from crediting common economic entities – the realistic economy. these regulations lead banks also to combining and creating huge capital groups, with at the same time limiting efficiency of functioning of the banking sector and the entire financial sector, including economies. they also limit possibilities of banks to give credits, so the entire credit action itself is limited and the possibilities of development of the entire economy are limited – it may be especially noticed in economies where the banking sector is a dominant one. the level of capital in banks is one of the major factors determining sensibility of credit supply towards interest rates. thus, all regulations in this area limit efficiency of monetary policy as a tool for stimulating economic growth. it does not mean, however, that it is necessary to resign from them. a just solution would be to integrate macroprudential regulations with monetary policy. although restrictive monetary policy in the times of good business cycle is able to weaken the risk-taking tendency and inf lation pressure, in the situation when exceeding risk-taking tendency is accompanied with low inf lation (for example before the crisis of 2008), tightening of monetary policy could lead do def lation (and unwelcomed decrease of the economic growth). thus, it serves as a strong argument for coordinating regulation tools with monetary policy. as dell’ariccia, laeven, suarez (2013) show, it is also a strong argument for centralization of the macroprudential supervision within the scope of monetary power. additional argument for would be the pro-cyclical effect of regulation, which monetary policy may try to decrease or even neutralize through stronger reaction of central banks in the situation of bank shocks. development of the regulations themselves is necessary. from the point of efficiency of monetary policy’s actions towards economy, apart from limiting their pro-cyclical character, studies also show the necessity of stronger quality control, control of f low of assets, more clarity in securitization process as well as weakening the risk-taking tendency of financial institutions which is, paradoxically, increased by regulations (more at redo 2013). it also must be indicated that the majority of research analyzing the effects of prudential regulations are conducted in highly-developed economies – their financial systems significantly differ from the ones in developing countries. that is why it is necessary the importance of prudential regulations in the process… 155 to explore the effects of implemented and developed regulations in less-developed economies – also in poland, where banks are also very often lower capitalized and, as the results of the studies show, the credit supply is more sensible towards regulations what may significantly affect possibilities of development or surviving crises. this issue is additionally worsened by the increasing consolidation of the banking sector on the international scale, which allows for easier movement of the capital – as an effect, weaker economies will be subject to a more intense phenomenon of credit crunch and a problem with efficiency of transmitting monetary policy, which aims at increasing the economy. thus, it would be advisable to think about modifying such regulation, which would enable for protecting weaker economies, which, in situations of crisis, are unfortunately susceptible towards outf low of capital and escalation of the aforementioned phenomena. prudential regulations and supervisory activities are affecting more and more the financial system and the functioning of economy. it partially corresponds to the changes in perceiving and evaluating risk and the higher sensitivity towards capital requirements. carney (2009) indicated that it is advisable to keep in mind that implementing prudential regulations will inf luence the mechanism of transmitting monetary policy and thus it will change identified effects of using instruments of monetary policy. it appears that now it is too late, but when the next crisis appears (it will appear, sooner or later), a moment of shock must be used to make politicians from main financial centres to think about the world’s future and to implement a broader spectrum and/or more radical limitations for financial institutions (which currently use hundreds of billions of usd). if not, it would be advisable to, at least, implement proper taxation on such institutions and use such means as a source of credits for small and medium businesses which would become a great advantage for 7 billion of people who, from the 80’s and 90’s of the 20th century, have been victims and not important background for a small group of the world’s financiers. such solution would enable not only for limiting the speed of growth of global imbalances and the scale of future crises, for supporting the world’s economic development and mitigation of crises phenomena, but also for increasing the efficiency of monetary policy. 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(1999). the basel accord of 1988 and the international credit crunch of 1989–1992. journal of financial services research, 15, 123–243. watanabe, w. (2007). prudential regulation, the ‘credit crunch’ and the ineffectiveness of monetary policy: evidence from japan. journal of money, credit and banking, 39, march–april, 639–665. zicchino, l. (2005). a model of bank capital, lending, and the macroeconomy: basel i versus basel ii. bank of england working paper, 270. http://dx.doi.org/10.2139/ ssrn.824729. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: may 16, 2015; date of acceptance: october 26, 2015. * contact information: haawadh@kau.edu.sa, department of finance, king abdulaziz university, abdullah sulayman, jeddah 21589, saudi arabia, phone: +966 2 695 2000. ** contact information: halnemer@kau.edu.sa, department of finance and insurance, university of jeddah, saudi arabia. *** contact information: t.rodgers@coventry.ac.uk, school of economics, finance and accounting, coventry university, uk. **** contact information: j.niklewski@coventry.ac.uk, school of economics, finance and accounting, coventry university, uk. al-hajieh h., alnemer h., rodgers t., & niklewski j. (2015). forecasting the jordanian stock index: modelling asymmetric volatility and distribution effects within a garch framework. copernican journal of finance & accounting, 4(2), 9–26. http://dx.doi.org/10.12775/cjfa.2015.013 heitham al-hajieh* department of finance, king abdulaziz university, saudi arabia hashem alnemer** department of finance and insurance, university of jeddah, saudi arabia timothy rodgers*** school of economics, finance and accounting, coventry university, uk jacek niklewski**** school of economics, finance and accounting, coventry university, uk forecasting the jordanian stock index: modelling asymmetric volatility and distribution effects within a garch framework keywords: garch, asymmetry, distributions. j e l classification: c01, c58, g15. h. al-hajieh, h. alnemer, t. rodgers, j. niklewski10 abstract: the modelling of market returns can be especially problematical in emerging and frontier financial markets given the propensity of their returns to exhibit significant non-normality and volatility asymmetries. this paper attempts to identify which representations within the garch family of models can most efficiently deal with these issues. a number of different distributions (normal, student t, ged and skewed student) and different volatility of returns asymmetry representations (egarch and gjr-garch) are examined. our data set consists of daily jordanian stock market returns over the period january 2000 – november 2014. using both the superior predicative ability (spa) and model confidence set (mcs) testing frameworks it is found that using gjr-garch with a skewed student distribution most accurately and efficiently forecasts jordanian market movements. our findings are consistent with similar research undertaken in respect to developed markets.  introduction the global financial crisis of 2007-09 and subsequent shocks in the euro-area and beyond has led researchers to examine again the ways in which they model stock market returns. it has become increasingly apparent that the ‘standard assumptions’ made in respect to the ways in which statistical series are distributed are not applicable in financial markets. as the global economy becomes more integrated it is also becoming increasingly important to understand how emerging and frontier markets react in periods of high volatility. in this paper we explore which elements of the garch family of models can be used to efficiently and effectively model markets in jordan from january 2000 to november 2014. the paper begins with a brief review of the literature in the second section. this is followed in the subsequent section by a description of the data and methodology. the most efficient model is then identified using the superior predictive ability (spa) and model confidence set (mcs) prediction frameworks before, finally, some brief conclusions are drawn. literature: volatility modelling in the garch framework the garch model was first introduced by bollerslev (1986). much of the subsequent research in this area has focused on developing the model to better ref lect the data found in real-world settings, such as, for example, financial markets. the finance-related literature focuses principally on modelling (i) the structure of the volatility (ii) the nature of the distribution of the returns. forecasting the jordanian stock index… 11 much of the work on modelling the structure of volatility relates to the asymmetries found in stock market returns. for example, engle and ng (1993) found evidence supporting the quadratic-garch model. others, such as brailsford and faff (1996), found evidence to support gjr-garch and heynen and kat (1994) argued that egarch has a superior predictive ability. although the literature does not show one individual asymmetry specification as being clearly superior to others, awartani and corradi (2005) argue that they generally outperform non-asymmetric specifications in financial market prediction. however, it can be noted that the evidence is not unequivocal; mcmillan, speight, and apgwilym (2000) found garch, moving average and exponential smoothing models to provide marginally superior daily volatility forecasts. their work also strongly suggested that egarch does not necessarily outperform simple garch model in forecasting market volatility. for the purposes of our paper methodologies with the greatest out-of-sample forecasting accuracy are the most desirable. balaban (2004) tested a series of both symmetric and asymmetric models (included arch, garch, gjrgarch and egarch). their results suggest that all models are biased and generally over-predict volatility. model performance in these latter respects was best for garch and worst for gjr-garch. however, they also noted that if avoidance of under-prediction was the key decision criteria, arch was the preferred model. a further issue that is important to consider is that the nature of volatility in emerging and frontier markets differs considerably from that found in developed markets (andrikopoulos, niklewski and rodgers forthcoming). given that the focus of this paper is jordan, it is important to consider how different garch specifications perform in these market-types. gokcan (2000) examined seven emerging market (argentina, brazil, colombia, malaysia, mexico, philippines, taiwan) and found that garch(1,1) outperformed egarch everywhere with the exception of brazil. the most compelling conclusion we draw from the literature in respect to modelling volatility structure is that it is difficult to identify one single model that is clearly superior to others. this indicates to us that it may be necessary to test a number of volatility specifications. a standard feature of most financial markets is that their returns are nonnormal with distributions exhibiting ‘fat-tailed’ characteristics (mittnik, paolella, and rachev 2000). this appears to be particularly an issue in emerging markets. brooks (2007) studied a set of such markets (including mena reh. al-hajieh, h. alnemer, t. rodgers, j. niklewski12 gion countries) using the asymmetric power arch model. he found that unlike developed markets, where non-normal conditional error distributions appear to fit the data well, there were a set of emerging markets where estimation problems arise using a conditional t distribution. it was also found that the degree of volatility asymmetry appears to vary across markets, with the middle eastern and african markets having very different volatility asymmetry characteristics to latin american markets. brooks (2007) found that a fat-tailed t-distribution was needed to model the distribution of returns in most mena markets. however, there were differences. for example, turkey, egypt and morocco display much larger kurtosis and exhibit fatter tails than jordan. likelihood ratio tests were found to clearly favour the aparch with t-distribution rather than a normal distribution. it is possible that such differences may ref lect the islamic nature of these markets. for example, al-hajieh, redhead, and rodgers (2011) found that the month of ramadan (islamic holy month) shows high level of volatility and the overall impact of ramadan on returns is statistically significant in most middle east countries. we conclude the literature review by identifying that we are aware of no studies of volatility forecasting in emerging markets that have examined the combined issues of the distribution of returns and the garch model specification. we have also identified from the literature that (i) no single garch model specifications clearly outperforms other forms in all circumstances and (ii) evidence to suggest that the distribution of returns in emerging markets (like jordan) can follow a number of possible forms and that these can interact with volatility models in different ways. in this paper we therefore test a number of possible distribution-types (normal, student-t, ged, and skewed student) and garch model types (garch, gjr-garch and egarch) in order to identify the most efficient volatility forecasting model for jordan. data description the empirical investigation is undertaken in respect to daily closing price data for the jordanian amman stock exchange index (ase) covering the period 2nd january 2000 to 27th november 2014. the data source is the thomson-reuters eikon database and the dataset comprises of a total of 3655 trading days. daily returns computed as the log-difference of the daily closing prices: forecasting the jordanian stock index… 13 brooks (2007) found that a fat-tailed t-distribution was needed to model the distribution of returns in most mena markets. however, there were differences. for example, turkey, egypt and morocco display much larger kurtosis and exhibit fatter tails than jordan. likelihood ratio tests were found to clearly favour the aparch with t-distribution rather than a normal distribution. it is possible that such differences may reflect the islamic nature of these markets. for example, al-hajieh, redhead, and rodgers (2011) found that the month of ramadan (islamic holy month) shows high level of volatility and the overall impact of ramadan on returns is statistically significant in most middle east countries. we conclude the literature review by identifying that we are aware of no studies of volatility forecasting in emerging markets that have examined the combined issues of the distribution of returns and the garch model specification. we have also identified from the literature that (i) no single garch model specifications clearly outperforms other forms in all circumstances and (ii) evidence to suggest that the distribution of returns in emerging markets (like jordan) can follow a number of possible forms and that these can interact with volatility models in different ways. in this paper we therefore test a number of possible distribution-types (normal, student-t, ged, and skewed student) and garch model types (garch, gjr-garch and egarch) in order to identify the most efficient volatility forecasting model for jordan. data description the empirical investigation is undertaken in respect to daily closing price data for the jordanian amman stock exchange index (ase) covering the period 2nd january 2000 to 27th november 2014. the data source is the thomson-reuters eikon database and the dataset comprises of a total of 3655 trading days. daily returns computed as the logdifference of the daily closing prices: ase index closing prices are presented in figure 1 and the daily returns in figure 2. a number of volatility clusters can be observed in the returns data; for example, a cluster corresponding to the 2007-09 global financial crisis. figure 1. daily jordanian price index january 2000–november 2014 ]1[lnln 1 ttt ppr [1] ase index closing prices are presented in figure 1 and the daily returns in figure 2. a number of volatility clusters can be observed in the returns data; for example, a cluster corresponding to the 2007-09 global financial crisis. figure 1. daily jordanian price index january 2000–november 2014 s o u r c e : created by the authors using oxmetricstm 7 software and data from thomson reuters eikontm. a preliminary statistical analysis of the daily returns is presented in table 1. it can be noted that average daily returns are small relative to the standard deviation. the series also displays negative skewness and strong positive kurtosis; these are indicative of a heavy tailed non-gaussian distribution. table 1. descriptive statistics of daily returns january 2000–november 2014 mean std. dev min max skewness excess kurtosis j-b test arch test1 l-b test1 adf test 0.025 0.946 -6.428 6.198 -0.363 6.167 5872.2** 107.9** 2571** -32.8** ** significant at 1%. 1both the ljung-box and the arch tests use 10 lags. s o u r c e : estimated by the authors using oxmetricstm 7. h. al-hajieh, h. alnemer, t. rodgers, j. niklewski14 figure 2. jordanian daily percentage returns january 2000–november 2014 s o u r c e : created by the authors using oxmetricstm 7. this is confirmed by the jarque-bera test which rejects unconditional normality and further confirmatory evidence is provided in the related histogram (figure 3). figure 3. histogram of jordanian daily returns january 2000–november 2014 s o u r c e : created by the authors using oxmetricstm 7. forecasting the jordanian stock index… 15 the ljung-box q-test and the arch tests suggest autocorrelation and hetroskedasticity within the data and the adf (augmented dickey-fuller) unit root test rejects the null hypothesis of data non-stationary. the research methodology a total of 12 garch-model-specification/distribution pairs are tested with the results being presented in tables 3–7. the models tested are: garchbased specifications (garch-n, garch-t, garch-ged and garch-st)1; and two sets of asymmetry-type specifications: (i) egarch (egarch-n, egarch-t, egarch-ged and egarch-st) and (ii) gjr-garch (gjr-garch-n, gjr- garch- t, gjr garch-ged and gjrgarch-st). the alternative models are subsequently evaluated by: (i) an evaluation of model parameters and (ii) an evaluation of model forecasting performance. for robustness, the latter undertakes a series of tests using both the superior predictive ability (spa) test hansen (2005) and the model confidence set (mcs) test (hansen, lunde, and nason 2011). both are available in the oxmetricstm 72 software package used in this paper. the forecast-based tests use a ‘loss-function’ to identify the most efficient model. the loss function can be estimated using mean squared error (mse) and mean absolute deviation (mad) statistics. spa identifies the ‘best’ model in terms of predictive ability and mcs identifies the ‘best’ model set. the model specifications and the distributions tested are identified below. they consist of three different conditional volatility specifications and four different statistical distributions. (i) garch the garch model, as introduced by bollerslev (1986), is a generalisation of the arch specification of engle (1982). the model specifies that the conditional variance is a function of the lagged squared residuals as well as of its past conditional variances. although the equation may be specified with a number 1 n stands for the normal distribution, t the student t distribution, ged the generalised error distribution and st the standardised skewed student distribution. 2 the mulcom 3.0 package running spa and mcs was developed by hansen and lunde (2014). h. al-hajieh, h. alnemer, t. rodgers, j. niklewski16 of lags in each term a single lag in each is usually adequate in financial market data. we follow this conversion in this paper. the model specifications and the distributions tested are identified below. they consist of three different conditional volatility specifications and four different statistical distributions. (i) garch the garch model, as introduced by bollerslev (1986), is a generalisation of the arch specification of engle (1982). the model specifies that the conditional variance is a function of the lagged squared residuals as well as of its past conditional variances. although the equation may be specified with a number of lags in each term a single lag in each is usually adequate in financial market data. we follow this conversion in this paper. (ii) egarch it is often observed that volatilities associated with downward movements in financial markets are greater than the volatilities observed by upward movements of the same magnitude. in such circumstances the symmetry imposed on the conditional variance structure in the garch model may not be appropriate. to address this issue, nelson (1991) proposes the exponential garch (egarch) model. the specification for the conditional variance is: ������ � � � [� � ����]��[� � ����]������� [3] where ����� � ����� ���� ������ � ��[|��| � �|��|]����������� ��������� ������ the log specification implies that the asymmetric effect is exponential, rather than quadratic, and that forecasts of the conditional variance that are generated are nonnegative. the presence of asymmetry effects is tested in terms of the sign and magnitude effects identified above. (iii) gjr-garch ]2[ 1 2 1 22       p j jtj q i itit u  [2] (ii) egarch it is often observed that volatilities associated with downward movements in financial markets are greater than the volatilities observed by upward movements of the same magnitude. in such circumstances the symmetry imposed on the conditional variance structure in the garch model may not be appropriate. to address this issue, nelson (1991) proposes the exponential garch (egarch) model. the specification for the conditional variance is: the model specifications and the distributions tested are identified below. they consist of three different conditional volatility specifications and four different statistical distributions. (i) garch the garch model, as introduced by bollerslev (1986), is a generalisation of the arch specification of engle (1982). the model specifies that the conditional variance is a function of the lagged squared residuals as well as of its past conditional variances. although the equation may be specified with a number of lags in each term a single lag in each is usually adequate in financial market data. we follow this conversion in this paper. (ii) egarch it is often observed that volatilities associated with downward movements in financial markets are greater than the volatilities observed by upward movements of the same magnitude. in such circumstances the symmetry imposed on the conditional variance structure in the garch model may not be appropriate. to address this issue, nelson (1991) proposes the exponential garch (egarch) model. the specification for the conditional variance is: ������ � � � [� � ����]��[� � ����]������� [3] where ����� � ����� ���� ������ � ��[|��| � �|��|]����������� ��������� ������ the log specification implies that the asymmetric effect is exponential, rather than quadratic, and that forecasts of the conditional variance that are generated are nonnegative. the presence of asymmetry effects is tested in terms of the sign and magnitude effects identified above. (iii) gjr-garch ]2[ 1 2 1 22       p j jtj q i itit u  [3] the model specifications and the distributions tested are identified below. they consist of three different conditional volatility specifications and four different statistical distributions. (i) garch the garch model, as introduced by bollerslev (1986), is a generalisation of the arch specification of engle (1982). the model specifies that the conditional variance is a function of the lagged squared residuals as well as of its past conditional variances. although the equation may be specified with a number of lags in each term a single lag in each is usually adequate in financial market data. we follow this conversion in this paper. (ii) egarch it is often observed that volatilities associated with downward movements in financial markets are greater than the volatilities observed by upward movements of the same magnitude. in such circumstances the symmetry imposed on the conditional variance structure in the garch model may not be appropriate. to address this issue, nelson (1991) proposes the exponential garch (egarch) model. the specification for the conditional variance is: ������ � � � [� � ����]��[� � ����]������� [3] where ����� � ����� ���� ������ � ��[|��| � �|��|]����������� ��������� ������ the log specification implies that the asymmetric effect is exponential, rather than quadratic, and that forecasts of the conditional variance that are generated are nonnegative. the presence of asymmetry effects is tested in terms of the sign and magnitude effects identified above. (iii) gjr-garch ]2[ 1 2 1 22       p j jtj q i itit u  the log specification implies that the asymmetric effect is exponential, rather than quadratic, and that forecasts of the conditional variance that are generated are non-negative. the presence of asymmetry effects is tested in terms of the sign and magnitude effects identified above. (iii) gjr-garch this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        [4] where this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        is a dummy variable that take the value 1 when this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        , and 0 when this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        a feature of the gjr model is that the null hypothesis of no lever forecasting the jordanian stock index… 17 age (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. four different statistical density functions are tested. the use the gaussian or normal distribution is potentially appropriate as the conditional distribution of the residuals would account for some non-normality in returns. the second and third density functions can more fully account for ‘fat-tail’ effects; however, they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        ] [5] (v) student-t distribution where the log-likelihood function of the distribution is: this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        [6] (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: [7] this variation on the garch model was proposed by glosten, jagannathan, and runkle (1993) as an alternative way of dealing with asymmetric shocks in financial series. its generalized version is: where ��� is a dummy variable that take the value 1 when ���� < 0, and 0 when ���� ≥ 0. a feature of the gjr model is that the null hypothesis of no leverage (asymmetry) effect is simple to test. indeed, γ1 = … = γq = 0 implies that the impact of a shock is symmetric, i.e., past positive shocks have the same impact on today’s volatility as past negative shocks. they do have a drawback in that they are symmetric. our preferred option is therefore the skewed-student density proposed by fernández and steel (1998). (iv) gaussian (normal) distribution where the log-likelihood function of the distribution is: (v) student-t distribution where the log-likelihood function of the distribution is: (vi) generalized error distribution (ged) where the log-likelihood function of the distribution is: (vii) standardized (zero mean and unit variance) skewed-student distribution ]4[)( 2 1 2 1 22 jt p j jititi q i itit s           ]5[)log()2[log( 2 1 2 1 2 t t t tnorm zl       ]6[ 2 1log)1()log( 2 1 )2(log 2 1 2 log 2 1 log 1 2 2                                  t t t t stud v z tl    ]7[)log(5.0 1 log)2log()1(5.0log 1 21                       t t t t ged z l        h. al-hajieh, h. alnemer, t. rodgers, j. niklewski18 (vii) standardized (zero mean and unit variance) skewed-student distribution where the log-likelihood function of the distribution is: where the log-likelihood function of the distribution is: results: model evalutation we evaluate the alternative models by (i) an assessment of the parameters associated with each model set (ii) an evaluation of each model set’s forecasting performance. (i) parameter based evaluation tables 2, 3 and 4, present the parameter values and associated significance tests for the garch, egarch and gjr-garch specified model sets. for the first and third model sets the constants in the mean equations and the variance parameters are positive and statistically significant for all distributions. for the egarch model set the constants for the mean equations are not statistically significant. the alpha coefficient for all models and distributions is statistically significant at the 99% level of confidence. this implies the existence of the arch process in the residuals term. the returns exhibit time-varying volatility clustering; this indicates that periods of volatility are followed by periods of relative calm. the beta coefficients of the three models in all distribution are also statistically significant at the 99% level of confidence. this indicates that the variance is dependent on its moving average. in a subset of the models the sum of alpha and beta is close to unity, which implies in these cases that volatility shocks are quite persistent and suggests that a large positive (or negative) return will lead future forecasts of the variance to be high for an extended period. the garch coefficient (beta) is larger than the arch term (alpha) in all three model sets. this is a further indication that the conditional variance will exhibit long persistence of volatility.   ]8[ 2 )( 1log)1(log5.0 )log( 1 2 log)2(log5.0 2 log 2 1 log 1 2 2 2                                                        t t it t skst t msz svtl       where the log-likelihood function of the distribution is: results: model evalutation we evaluate the alternative models by (i) an assessment of the parameters associated with each model set (ii) an evaluation of each model set’s forecasting performance. (i) parameter based evaluation tables 2, 3 and 4, present the parameter values and associated significance tests for the garch, egarch and gjr-garch specified model sets. for the first and third model sets the constants in the mean equations and the variance parameters are positive and statistically significant for all distributions. for the egarch model set the constants for the mean equations are not statistically significant. the alpha coefficient for all models and distributions is statistically significant at the 99% level of confidence. this implies the existence of the arch process in the residuals term. the returns exhibit time-varying volatility clustering; this indicates that periods of volatility are followed by periods of relative calm. the beta coefficients of the three models in all distribution are also statistically significant at the 99% level of confidence. this indicates that the variance is dependent on its moving average. in a subset of the models the sum of alpha and beta is close to unity, which implies in these cases that volatility shocks are quite persistent and suggests that a large positive (or negative) return will lead future forecasts of the variance to be high for an extended period. the garch coefficient (beta) is larger than the arch term (alpha) in all three model sets. this is a further indication that the conditional variance will exhibit long persistence of volatility.   ]8[ 2 )( 1log)1(log5.0 )log( 1 2 log)2(log5.0 2 log 2 1 log 1 2 2 2                                                        t t it t skst t msz svtl       [8] results: model evalutation we evaluate the alternative models by (i) an assessment of the parameters associated with each model set (ii) an evaluation of each model set’s forecasting performance. (i) parameter based evaluation tables 2, 3 and 4, present the parameter values and associated significance tests for the garch, egarch and gjr-garch specified model sets. for the first and third model sets the constants in the mean equations and the variance parameters are positive and statistically significant for all distributions. for the egarch model set the constants for the mean equations are not statistically significant. the alpha coefficient for all models and distributions is statistically significant at the 99% level of confidence. this implies the existence of the arch process in the residuals term. the returns exhibit time-varying volatility clustering; this indicates that periods of volatility are followed by periods of relative calm. the beta coefficients of the three models in all distribution are also statistically significant at the 99% level of confidence. this indicates that the variance is dependent on its moving average. in a subset of the models the sum of alpha and beta is close to unity, which implies in these cases that volatility shocks are quite persistent and suggests that a large positive (or negative) return will lead future forecasts of the variance to be high for an extended period. the garch coefficient (beta) is larger than the arch term (alpha) in all three model sets. this is a further indication that the conditional variance will exhibit long persistence of volatility. forecasting the jordanian stock index… 19 the gjr models show no evidence of asymmetry effects being statistically significant. egarch models however, indicate significance in the magnitude effect but not in the sign effect. table 2. the garch model set distribution const. (m)α const. (v)β arch (alpha) garch (beta) student (df)µ ged (df)µ asymm. tail normal coefficient 0.02 0.01 0.11 0.89 na na na na p-value 0.05 0.02 0 0 na na na na student coefficient 0.02 0.01 0.14 0.86 6.23 na na na p-value 0.02 0.02 0 0 0 na na na ged coefficient 0.02 0.01 0.12 0.88 na 1.36 na na p-value 0.02 0.02 0 0 na 0 na na skewed student coefficient 0.02 0.01 0.14 0.86 na na -0.01 6.22 p-value 0.05 0.02 0 0 na na 0.69 0 α mean equation, β variance equation, µ degrees of freedom. s o u r c e : estimated by the authors using oxmetricstm 7. table 3. the egarch model set distribution const. (m)α const. (v)β arch (alpha) garch (beta) student (df)µ ged (df)µ asymm. tail egarch (theta1) egarch (theta2) normal coefficient 0.01 0.12 -0.53 0.99 na na na na 0 0.39 p-value 0.16 0.74 0 0 na na na na 0.8 0 student coefficient 0.02 -0.59 -0.52 0.99 6.47 na na na -0.01 0.43 p-value 0.17 0.02 0 0 0 na na na 0.55 0 ged coefficient 0.02 -0.68 -0.53 0.99 na 1.38 na na 0 0.41 p-value 0.11 0 0 0 na 0 na na 0.93 0 skewed student coefficient 0.01 -1.11 -0.53 0.99 na na -0.02 6.44 -0.01 0.43 p-value 0.15 0.15 0 0 na na 0.48 0 0.65 0 α mean equation, β variance equation, µ degrees of freedom. s o u r c e : estimated by the authors using oxmetricstm 7. h. al-hajieh, h. alnemer, t. rodgers, j. niklewski20 table 4. the gjr-garch model set distribution const. (m)α const. (v)β arch (alpha) garch (beta) student (df)µ ged (df)µ asymm. tail gjr (gamma) normal coefficient 0.02 0.01 0.11 0.89 na na na na -0.01 p-value 0.03 0.03 0 0 na na na na 0.53 student coefficient 0.02 0.01 0.14 0.86 6.22 na na na 0.01 p-value 0.03 0.02 0 0 0 na na na 0.6 ged coefficient 0.02 0.01 0.12 0.88 na 1.36 na na 0 p-value 0.02 0.03 0 0 na 0 na na 0.92 skewed student coefficient 0.02 0.01 0.14 0.86 na na -0.01 6.21 0.01 p-value 0.05 0.03 0 0 na na 0.75 0 0.62 α mean equation, β variance equation, µ degrees of freedom. s o u r c e : estimated by the authors using oxmetricstm 7. we turn now to the issue of identifying the most efficient model(s) from the groups that have been tested. the diagnostic tests of the standardized residuals (table 5) give us little help in this respect. both arch(10) and q2(10) statistics indicate that hetroskedasticity has not been fully accounted for by the models which means the estimated volatility equations have to be treated with some degree of caution. furthermore, log likelihood and akaike information criteria based tests all have approximately similar results; this suggests they provide minimal help in distinguishing between model sets on the basis of model fit. we can conclude from this that alternative forecasting-based testing procedures will be required. it can be noted as a caveat to the above conclusion however, that for all model sets, akaike indicates that the normal distribution produces the worst performance. from this it can possibly be concluded that this distribution can probably be discounted at the outset. forecasting the jordanian stock index… 21 table 5. diagnostic tests of the standardised residuals model distribution log likelihood q2(10)α arch(10)α akaike garch normal -4044.15 37.14 (0) 3.49 (0) 2.22 student -3963.3 31.31 (0) 2.92 (0) 2.18 ged -3966.62 33.86 (0) 3.15 (0) 2.17 skewed student -3963.22 31.29 (0) 2.92 (0) 2.17 egarch normal -3980.23 21.62 (0) 2.14 (0.01) 2.18 student -3893.84 21.01 (0) 2.11 (0.02) 2.13 ged -3900.81 21.28 (0) 2.12 (0.01) 2.13 skewed student -3890.96 21.04 (0) 2.11 (0.02) 2.13 gjr-garch normal -4043.82 38.11 (0) 3.57 (0) 2.22 student -3963.12 30.56 (0) 2.86 (0) 2.17 ged -3966.62 34.01 (0) 3.17 (0) 2.17 skewed student -3963.07 30.59 (0) 2.86 (0) 2.17 α the p-values are shown in brackets. s o u r c e : estimated by the authors using oxmetricstm 7. (ii) forecasting based evaluation the superior predictive ability test can be used for comparing the performances of two or more forecasting models. forecasts are evaluated using a pre-specified loss function with the ‘best’ forecast model being the one producing the smallest expected loss. an important issue that researchers face is identifying what the loss function is estimated against. for the purposes of this paper losses are estimated relative to the observed returns. the two potential loss functions used by spa are the mean squared error (mse) and mean absolute deviation (mad). the losses estimated from the choh. al-hajieh, h. alnemer, t. rodgers, j. niklewski22 sen function are then compared against a benchmark model. identifying an appropriate benchmark to use is another important issue in respect to this methodology. in this paper we benchmark against a random walk. the result presented in table 6 below identify that gjr-garch with skewed distribution produces the smallest loss and is therefore the best fitting model. these findings are consistent with those of marcucci (2005) and awartani and corradi (2005). the latter found garch-n to be outperformed by both egarch and gjr-garch models across different forecast horizons. table 6. superior predictive ability tests performance model sample loss (mse*103) t-statistic p-value most significant gjr-garch-skewed student 0.00039 16.75819 0 best gjr-garch-skewed student 0.00039 16.75819 0 model_25% gjr-garch-student-t 0.00043 16.75729 0 median garch-ged 0.00049 16.75627 0 model_75% egarch-normal 0.02761 16.63402 0 worst egarch-skewed student 0.03208 16.59516 0 s o u r c e : estimated by the authors using oxmetricstm 7 and mulcom 3.0 package (hansen, and lunde 2014). forecasts can also be tested using the model confidence set (mcs) procedure. this uses the same loss function as spa but requires no benchmark. it identifies efficient model sets at different levels of confidence. hansen and lunde state “the set,, that consists of the ‘best’ model(s) from a collection of models,; where ‘best’ is defined in terms of a criterion that is user-specified. the mcs procedure yields a model confidence set,, that is a set of models constructed to contain the best models with a given level of confidence. the models in are evaluated using sample information about the relative performances of the models in ”. (hansen and lunde 2014, 16). the result of mcs presented in table 7 identifies that the 90% confidence model set consists of a single model; namely, gjr-garch with skewed student distribution. forecasting the jordanian stock index… 23 table 7. model confidence set tests model mse*103 p-value garch-normal 0.00041 0 garch-student-t 0.00047 0 garch-ged 0.00049 0 garch-skewed student 0.00041 0 egarch-normal 0.02761 0 egarch-student-t 0.03117 0 egarch-ged 0.02926 0 egarch-skewed student 0.03208 0 gjr-garch-normal 0.00047 0 gjr-garch-student-t 0.00043 0 gjr-garch-ged 0.0005 0 gjr-garch-skewed student 0.00039 1.0000* * 90% model confidence set. s o u r c e : estimated by the authors using oxmetricstm 7 and mulcom 3.0 package (hansen, and lunde 2014). discussion of findings and conclusions given the large differences between developed and emerging markets, it is possibly a little surprising that the result of our study, made in respect to jordan, are consistent with previous studies made of developed markets. for example, engle and ng (1993), examining japanese stock return also found strong support for the gjr-garch model. similarly, bentes, menezes, and ferreira (2013) examining nikkei 225, s&p 500 and stoxx 50 from 1987–2013 found all stock index returns tested exhibited asymmetry. further similarities can be identified between our results and other studies. liu & hung (2010) investigated the performance of one-step-ahead forecasting using asymmetric garch models with different distribution assumptions. their work, in respect to united states data, concluded that gjr-garch generated volatility forecasts were more accurate that those produced by their egarch counterparts. furthermore, their results indicated that modelling the asymmetric component was much more important than specifying the correct h. al-hajieh, h. alnemer, t. rodgers, j. niklewski24 error distribution when it came to improving volatility forecasting. this was especially the case in the presence of fat-tails, leptokurtosis, skewness and the leverage effect. a number of other studies have examined volatility in mena countries like jordan. assaf (2015), for example, examined the forecasting performance of the value-at-risk (var) models in egypt, jordan, morocco, and turkey. their results suggested that returns had a significantly fatter tails than the normal distribution and that student aparch model produced more accurate results than those generated using normal aparch models. the considerable variety of results found in these different studies suggests to us that it is difficult to conclude that there is a ‘one size fits all’ model that can be used to model asymmetry affects in stock market returns. we believe that our study contributes significantly to the literature by examining the relative forecasting performances of different distribution-type (normal, student-t, ged, and skewed student) and asymmetry-type (gjr- garch and egarch) garch models. both our superior predictive ability and model confidence set results identify that gjr-garch with skewed student distribution is the best fitting model for jordan. the finding in our research chimes with the findings of similar studies undertaken in different market contexts; such as liu & hung (2010) work in respect to the united states.  references al-hajieh, h., redhead, k., & rodgers t. 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(2000). forecasting uk stock market volatility. applied financial economics, 10(4), 435-448. http://dx.doi.org/10.1080/ 09603100050031561. mittnik, s., paolella, m. s., & rachev, s. t. (2000). diagnosing and treating the fat tails in financial returns data. journal of empirical finance, 7 (3), 389-416. http://dx.doi. org/10.1016/s0927-5398(00)00019-0. nelson, d. b. (1991). conditional heteroskedasticity in asset returns: a new approach. econometrica: journal of the econometric society, 59(2), 347-370. http:// dx.doi.org/10.2307/2938260. date of submission: june 22, 2021; date of acceptance: september 1, 2021. * contact information: avaniraval@nirmauni.ac.in, department of undergraduate studies in management, institute of management, nirma university, ahmedabad, gujarat, india, phone: 919375482929; orcid id: https://orcid.org/0000-0002-3933-6316. ** contact information: swatipsaxena@gmail.com, chimanbhai patel institute of management & research, gujarat technological university, ahmedabad, gujarat, india, phone: 0919904131066; orcid id: https://orcid.org/0000-0003-4585-3448. *** contact information: shashank@nirmauni.ac.in, institute of management, niram university, ahmedabad, gujarat, india, phone: 9099690094; orcid id: https://orcid. org/0000-0003-0823-7160. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402021, volume 10, issue 4 raval, a., saxena, s., & thanki, s. (2021). how carbon projects can add to sustainable development goals of india’, an associative study of cdm projects. copernican journal of finance & accounting, 10(4), 117–137. http://dx.doi.org/10.12775/cjfa.2021.018 avani raval* nirma university swati saxena** gujarat technological university shashank thanki*** nirma university how carbon projects can add to sustainable development goals of india’, an associative study of cdm projects keywords: carbon credit risk, energy sector, clean development mechanism, sustainable development goals, india. j e l classification: o31, o13, q01, q56. abstract: growing concerns of climate change have necessitated a re-examination of business activities and their viability, not only from a financial viewpoint but also soavani raval, swati saxena, shashank thanki118 cial as well as environmental dimension, popularly known as the ‘triple bottom line approach’. the paper is an attempt to bring around the focus on clean development projects that deal with carbon credit in india. the sector is a niche in its numbers but huge in potential. this study mainly examines the cdm project risk associated with carbon credit in the organizations from energy sector that had registered and implemented cdm projects in gujarat. the analysis is based on purposive data collected for large-scale cdm projects. statistical analysis was done through non-parametric tests named descriptive analysis, spearman correlation analysis, and mann-whitney u test applied. analysis of the result reveals that all the enlisted risk has a high degree of association with large scale projects. correlation results indicated that all kinds of carbon risks have a meaningful positive relationship with each other irrespective of the phase of the cdm project. type of organizations (public/private sector) also creates differences in cdm project risks. the findings of the research will assist managers in decision-making about carbon emission project risks.  introduction global warming refers to the compounding effect that anthropogenic greenhouse gas emissions on a natural atmospheric warming phenomenon called the greenhouse effect (hansen, 2008). in recent years, climate change has become the most important environmental problem. the changing ecosystems affect physical and biological systems and a rise in the temperature causes the extinction of species and would harm society and human health (kolk & pinks, 2009). the scientific mainstream guardedly predicted gradual change, with deep effects in the mid-term; increasingly, scientists encounter the signs of climate change manifest in real and present hurricanes, melting polar ice caps, and drought in the amazon. it is estimated that under current emissions trends, by 2100, the average temperature will increase between 4° and 7°c, with potentially catastrophic social and environmental consequences, including rising sea levels, inundation of coastal cities, and large-scale ecosystem transformations (moutinho & schwartzman, 2005). the threat of human-induced change to the earth’s climate due to increased emissions of greenhouse gases (ghgs) is one of the greatest challenges confronting the international community. both anthropogenic emissions (emissions related to human inf luence) of ghgs and their concentration in the atmosphere are increasing (breidenich, magraw, rowley & rubin, 1998). though, global platforms putting their efforts to delay the global warming effects results in transitioning to a lower-carbon economy and it requires participation from all economies which are highly contributing to carbon emission. how carbon projects can add to sustainable… 119 developing economies are potential markets to invest in energy supply technologies and so, will be a most critical factor in low-carbon future market. that is why it is very important to encourage low-carbon investment in these economies for an effective global climate policy (hultman, pulver, guimaraes, deshmukh & kane, 2012; pettersson, 2018). in september 2015, the general assembly adopted the 2030 agenda for sustainable development that includes 17 sustainable development goals (sdgs). the objective was to produce a set of universal goals that meet the urgent environmental, political, and economic challenges. ziółkowska (2018) indicated that sustainable development is about the use of solutions based on institutional arrangements as well as ethic-andmoral governance leading to a balance among the economic, social, and ecological spheres. this study focuses on the seventh sustainable development goal (sdg 7), i.e. affordable & clean energy. among various states in india, gujarat is the front runner in achieving this goal by 2030 with enhanced international cooperation to facilitate access to clean energy research and technology, including renewable energy, energy efficiency, and advanced and cleaner fossil-fuel technology, and by promoting investment in energy infrastructure and clean energy technology. united nations framework convention on climate change (unfccc) stresses finding out ways and means to control tropical deforestation and forest fires, both to prevent dangerous interference in the climate system, and to achieve sustainable development in the tropics (moutinho & schwartzman, 2005). in 1990, united nations organization (uno), to decrease the emission of greenhouse gases into the atmosphere, released the kyoto protocol (chotalia, 2013). in the year 2005, all the world’s nations met in kyoto in japan in 1997 to discuss global warming. as an outcome, kyoto protocol came into force (which was agreed at the earth summit at rio-de-janeiro in 1992); its implementation got delayed for more than 7 years because there were difficulties in obtaining the necessary number of ratification from the countries, who accounted for 55% of carbon dioxide as compared to emissions level of the year 1990. there is valuable impact on global market by greenhouse gas emission market (iisd, 2009). as a result, under the unfccc, industrialized nations entered into a legally binding agreement to reduce the collective emissions of greenhouse gases (ghgs) by 5.2% as compared to the 1990 level; calculated at an average over the five years of 2008–2012 (chotalia, 2013). it provides legally binding emissions targets for annexure i countries, based on a five-year budget period. un fccc has defined the kyoto protocol mechanism which is presented in figure 1. the avani raval, swati saxena, shashank thanki120 framework of kyoto protocol defines three mechanisms for greenhouse gases (ghgs) emission such as joint implementation (ji), clean development mechanism (cdm), and international emission trading (iet). the cdm and ji are international credit mechanisms to limit ghg emissions. (unfccc, 2011; shah & baser, 2016). the association between annexure i and non-annexure i country parties defines in cdm mechanisms (sarkar & dash, 2010). it provides f lexibility concerning the parties’ national implementation of their commitments (breidenich et al., 1998). moreover, it also allows f lexibility in the international context by providing for the use of emissions trading and other market-based mechanisms, including mechanisms for cooperative projects between developed and developing countries. the carbon trade allows countries that have higher carbon emissions to purchase the right to release more carbon dioxide into the atmosphere from countries that have lower carbon emissions. emissions trading or cap and trade include the international emission trading between developed countries (sivasangari & rajan, 2016). figure 1. kyoto protocol mechanisms figure 1. kyoto protocol mechanisms figure 2. number of approved cdm projects in india unfccc kyoto protocol allowance based international emission trading (between developed countries) assigned amount units (aau) project based clean development mechanism (developing and developed countries) carbon reduction units (cer) joint implementation (between developed countries) emission reduction units (eru) 1 5 1 69 2 1 2 total no. of approved cdm projects s o u r c e : unfccc, 2011. india, one of the fastest-growing economies which has witnessed accelerated economic growth since the early 1990s, initiated economic reforms aiming at market orientation and globalization. it supported the improvement in the en how carbon projects can add to sustainable… 121 vironment for businesses and foreign investment, and growth-focused policies, the average economic growth rate between 2005 and 2010 increased to over 8%, but was also accompanied by higher energy consumption. as per iea report 2020, india has set a target growth rate of 9%, which would place it on a path towards becoming a $5 trillion economy by 2024–25 and to make india, the fastest-growing economy in the world. india’s sustained economic growth is placing an enormous demand on its energy resources, energy systems, and infrastructure development (iea, 2020). india’s integrated energy policy assumes an 8% average growth rate for india between 2007 and 2032 (shukla & chaturvedi, 2012; goi, 2006). various studies discussed the importance of carbon risk. hultman et al. (2012) analyzed firms’ perceptions towards carbon market risk and rewards in brazil and india. the results show that international regulatory jeopardy, financial benefits, and uncertain revenue stream play a major role in cdm project risk. carbon emission reduction being one of the greatest challenges to businesses risk of firms in the carbon-intensive sector stalling or even abandoning investments in low emitting carbon projects continues to loom (linares & pérez-arriaga, 2009). however, aifuwa (2020) reported that sustainability disclosure level was poor in developing climes compared to other developed climes. the transfer of low-carbon technologies to developing countries has a key role to play in reducing carbon emissions associated with future economic development. to achieve this, it requires both vertical and horizontal technology transfer and must facilitate a broader process of technological change and capacity building within developing countries (ockwell, watson, mackerron, pal & yamin, 2008). butterworth, subramaniam and phang (2015) also analyzed carbon risk management with focusing on energy firms of australia. there is a large number of studies reporting the impact of carbon risk on financial performance. majority of the studies focused on carbon emissions, carbon risk exposure by firms with mainly focused on carbon-intensive industries, has become one of the dominant themes for business (labatt & white, 2007; hoffmann & busch, 2008; butterworth et al., 2015). according to clarkson, li, pinnuck and richardson (2015), before formal implementation of regulations, a firm should minimize the impact of carbon risk by utilizing external source of finance to cover the cost of carbon emissions. the initiatives taken for development of carbon-related regulations and policies, firms are more likely to internalize the cost of carbon emissions making carbon risk a significant business consideration. past research examined carbon risk at the global platform, but very limited studies addressed the issues related to avani raval, swati saxena, shashank thanki122 carbon risks of the indian economy with a focus on energy sectors. the present study attempts to fill this gap, specifically in the indian context, and tries to access the cdm project risk focusing on the energy sector. the research questions this study attempts to answer are: rq1: what is the need for renewable energy sources for energy generation in india? rq2: what is the taxonomy of risk associated with cdm projects? rq3: are risks associated with cdm projects interrelated? rq4: does carbon risk vary regarding ownership of organization (public/ private)/ methodology (solar/wind) of cdm projects? the rest of the paper is organized as follows: section 2 discusses the theoretical review of literature focusing on the energy sector scenario in india and carbon risk. section 3 outlines the research methodology and process. section 4 presents an analysis of the data followed by a discussion of results and the final section concludes the study with its implications and states directions for future work. theoretical review of the literature energy sector scenario in india energy is a basic human need. developmental statistics confirm a strong correlation between energy consumption and economic development (teri, 2004). the world became a global village due to increasing daily requirements of energy by all populations across the world, while the earth cannot change its form. the need for energy and its related services, to satisfy mankind’s social and economic development, welfare and health, is increasing day by day (owusu & asumadu-sarkodie, 2016). to meet the energy requirements, the role of renewable energy has become crucial for the power generation, accessibility and reducing consumption of non-renewable energy sources. this will help india to achieve its low carbon development path. ahead of the conference of paris (cop) 21, india submitted its post-2020 climate actions plan to the unfccc. india’s indc builds on its goal of installing 175 gigawatts (gw) of renewable power capacity by 2022. it also supports the need for renewable energy (mnre, 2019). parikh, panda, ganesh-kumar and singh (2009) analyzed carbon emission in the energy sector in india focusing on household final consumption. how carbon projects can add to sustainable… 123 lifestyle differences across household expenditure classified into the urban top ten percent account for emissions of 4099 kg per capita per year, while the rural bottom ten percent account only for 150 kg per capita per year. abdullahi (2015) emphasized renewable energy sources as an important alternative source of energy generation. shukla (2007) analyzed energy sector in india taking time series data to study the issues of energy consumption and supply co2 emissions, applying the i-o model (input-output model). in india, thermal power is a major source of energy generation with renewable energy contributing about 21.95% to it. this shows that there is an untapped market available that can help to delay the critical crisis of global warming. in india, the ministry of new and renewable energy (mnre) is the nodal ministry of the government of india for all matters which deal with new and renewable energy. the use of renewable resources of energy is rapidly increasing worldwide. the economy has started generating electricity from various renewable sources including hydropower, wind, solar, and bioenergy. the government has defined renewable electricity targets considering short and medium term. it was estimated that the country will be able to install 175 gw capacity renewable energy (iea, 2020). as per report published by iea (2020), goi plan to increase renewable capacity to 275 gw by 2027 (iea, 2020). the prime minister of india announced a new target of 450 gw of renewable electricity capacity, without specifying the date (iea, 2020). as of november 30, 2020, the installed renewable energy capacity stood at 90.39 gw, of which solar and wind comprised 36.91 gw and 38.43 gw, respectively. biomass and small hydropower constituted 10.14 gw and 4.74 gw, respectively. power generation from renewable energy sources in india reached 127.01 billion units (bu) in fy20. it is expected that by 2040, around 49% of the total electricity will be generated by renewable energy as more efficient batteries will be used to store electricity. at the same time, due to the increasing population and environmental deterioration, the country faces the challenge of sustainable development. the gap between demand and supply of power is expected to rise in the future (kumar & majid, 2020). graph 2 also represents the number of cdm projects registered. energy industries also contributes to 85% of the total no. of cdm projects. avani raval, swati saxena, shashank thanki124 figure 2. number of approved cdm projects in india figure 1. kyoto protocol mechanisms figure 2. number of approved cdm projects in india unfccc kyoto protocol allowance based international emission trading (between developed countries) assigned amount units (aau) project based clean development mechanism (developing and developed countries) carbon reduction units (cer) joint implementation (between developed countries) emission reduction units (eru) 1 5 1 69 2 1 2 total no. of approved cdm projects s o u r c e : ncdma authority, 2021. carbon risk yu and tsai (2018) examined entrepreneurs’ carbon reduction behavior on their sustainable development from high-carbon-emission industries in china. there is positive inf luence of carbon emission by firms and significantly inf luence firms sustainable development (yu & tsai, 2018). wang and choi (2016) examined the impact of carbon emission reduction mechanisms on uncertain make-to-order manufacturing. market-based characteristics of the cap-and-trade mechanism motivate firms with economic benefits to adopt low-carbon technologies and environmental-friendly facilities to curb greenhouse gases emission. in contrast, administrative issues and outdated technologies negatively impact carbon emissions. popp, newell and jaffe (2010) emphasized three dimensions such as energy, environment, and technologi how carbon projects can add to sustainable… 125 cal change. the long-term nature of many environmental problems, such as climate change, makes us understand the evolution of technology as an important part of projecting future impacts. there are mainly three challenges such as technology changes, cost-effectiveness, and environment-friendly energy generation for drafting energy policy for any economy. chung, pyo and guiral (2019) investigated the relationship between carbon risk and a firm’s financial data taking cost of equity. the study also highlighted challenges for financing project and utilization of funds (chung et al., 2019). financial challenges negatively inf luence firms to adopt clean technologies (ashraf, comyns, arain & bhatti, 2019). carbon-efficient production can be valuable from both operational and risk management perspectives (trinks, mulder & scholtens, 2020). cadez, czerny and letmathe (2019) suggested that managers in developing countries take economic as well environmental concerns into account when planning business strategy (cadez et al., 2019). ashraf, comyns, tariq and chaudhry (2020) suggested that market returns, supporting policies, and financial dropping are important antecedents in a developing country context. krey and ri ahi (2009) identified two major factors affecting greenhouse gas emissions such as delay in participation and failure in technology in the 21st century. icai (2009) covered the concept of carbon credit applied in india. india is part of non-annex country and has no restrictions for carbon emission. larkin, leiss, arvai, dusseault, fall, gracie, heyes and krewski (2019) suggested that risk assessment and risk management need to be comparable to ensure the long-term reliability and carbon emission reduction standards should be at the international level. this also relates to issues identified by pawar, bromhal, carey, foxall, korre, ringrose, tucker, watson and white (2015) in their assessment of what needs to be done to improve overall risk management and to remove barriers associated with large-scale deployment. ipcc (2007) and kim, an and kim (2015) classified climate change-related risks into six categories: physical risk, regulatory risk, litigation risk, competition risk, production risk, and reputation risk. taking into the base, the study classified cdm risk into five categories: country risk, registration risk, performance risk, and counterparty risk and market risk. classification of risks has been considered from literature and presented in graph 3. avani raval, swati saxena, shashank thanki126 figure 3. risk associated with cdm project cdm project risk planning phase feasibility risk license risk construction phase time-over run risk capital cost overrun risk operation phase technology risk market risk supply risk operation risk legal risk financial risk counter party risk (2020) suggested that market returns, supporting policies, and financial dropping are important antecedents in a developing country context. krey and riahi (2009) identified two major factors affecting greenhouse gas emissions such as delay in participation and failure in technology in the 21st century. icai (2009) covered the concept of carbon credit applied in india. india is part of non-annex country and has no restrictions for carbon emission. larkin, leiss, arvai, dusseault, fall, gracie, heyes & krewski (2019) suggested that risk assessment and risk management need to be comparable to ensure the long-term reliability and carbon emission reduction standards should be at the international level. this also relates to issues identified by pawar, bromhal, carey, foxall, korre, ringrose, tucker, watson and white (2015) in their assessment of what needs to be done to improve overall risk management and to remove barriers associated with large-scale deployment. ipcc (2007) and kim, an and kim (2015) classified climate change-related risks into six categories: physical risk, regulatory risk, litigation risk, competition risk, production risk, and reputation risk. taking into the base, the study classified cdm risk into five categories: country risk, registration risk, performance risk, and counterparty risk and market risk. classification of risks has been considered from literature and presented in graph 3. figure 3. risk associated with cdm project source: created by authors. s o u r c e : created by authors. research methodology the study has been carried out for risk associated with cdm projects registered at a large scale. a comprehensive literature review was conducted using bibliographic database such as scopus, ebsco, google scholar etc. the key words used to identify appropriate literature were carbon risk, energy sector, sustainable practices, developing economy etc. selected research articles were used to identify key variables for this study. carbon risks were taken as dependent variables and cdm project methodology and firm ownership were taken as independent variables. a survey instrument was developed including identified variables to analyze association of carbon risk with cdm projects. test methods which do not require that normality assumptions be met and as a rule do not test hypothesis about population parameters are called nonparametric methods or distribution-free methods (fitzgerald, dimitrov & rumrill, 2001). as the sample size is very small and comparing two independent samples, non-parametric tests are warranted for analysis. the primary sampling unit was energy industry firms. we used a clustered sampling method, where how carbon projects can add to sustainable… 127 clusters represent a group of indian firms. the energy sector (renewable/nonrenewable) has registered the highest number of projects that have taken the base for the selected sector for study. large scale cdm project (> 15mw) registered by an energy sector organization was taken as the base for the selection of samples. a firm was randomly selected from the group. employees of the chosen firms were asked to respond. we used personal interviews, telephonic and internet-based methods to administer the survey. data collected samples from 22 energy firms out of 33 energy firms. by using non-parametric tests, the research attempts to provide insights into the question raised about the risk associated with cdm projects and checks whether the risk involved in the project is independent of the methodology of the project (wind/solar) and firm ownership (public/private). the study also attempts to address the issue of the inter-relationship of carbon risks. the study employs descriptive statistics and spearman correlation, mann-whitney u test to answer the research questions raised in the introduction section. the developed hypothesis was tested using spss version 20. figure 4 describes the step-by-step methodology incorporated indicating sources of data, variables, and analysis techniques. figure 4. flow chart of methodology figure 4. flow chart of methodology source: created by authors. results and discussion to check the reliability of instruments used for data collection, cronbach’s alpha test was applied, and the results obtained are presented in table 1. the summary of independent variables considered for the study is presented in table 2. descriptive statistics were applied to check the weightage of all categories of risks as shown in table 3. spearman correlation analysis was used to check whether the risks associated with cdm projects have a significant association with each other or not. mann-whitney u test was applied to check differences for carbon risk with type of organization (public/private) and methodology of the project (solar/wind). figure 5. graphical presentation of risk involve in cdm projects s o u r c e : created by authors. avani raval, swati saxena, shashank thanki128 results and discussion to check the reliability of instruments used for data collection, cronbach’s alpha test was applied, and the results obtained are presented in table 1. the summary of independent variables considered for the study is presented in table 2. descriptive statistics were applied to check the weightage of all categories of risks as shown in table 3. spearman correlation analysis was used to check whether the risks associated with cdm projects have a significant association with each other or not. mann-whitney u test was applied to check differences for carbon risk with type of organization (public/private) and methodology of the project (solar/wind). figure 5. graphical presentation of risk involve in cdm projects figure 5. graphical presentation of risk involve in cdm projects 0 2 4 6 8 10 12 14 risk associated with cdm project low(less than 20%) moderate (20 to 40%) medium (40 to 70%) high (more than 70%) s o u r c e : created by authors. how carbon projects can add to sustainable… 129 table 1. reliability test cronbach’s alpha cronbach’s alpha based on standardized items .869 .857 s o u r c e : author’s calculations. the most widely used reliability test that is applied is cronbach’s alpha (cronbach, 1951). the value of test (table 1) is greater than 0.750 which indicates the reliability of the instrument. table 2. independent variables summary methodology of cdm project classification of organization solar wind public private 10 12 4 18 s o u r c e : author’s calculations. table 2 represents an independent variables profile taken for analysis. 10 firms have applied solar technology and 12 firms where wind technology has been adopted. out of 22 firms, the majority of the energy organization samples are from the private sector (18 out of 22). descriptive statistics table 3. risk level associated with the cdm project n minimum maximum mean standard deviation feasibility risk 22 1.00 4.00 2.2727 .93513 license risk 22 1.00 4.00 2.3636 1.09307 time over run risk 22 1.00 4.00 3.0455 .99892 capital cost overrun risk 22 1.00 4.00 2.7727 .75162 technology risk 22 1.00 4.00 2.3182 1.08612 market risk 22 1.00 4.00 2.6818 1.24924 avani raval, swati saxena, shashank thanki130 n minimum maximum mean standard deviation supply risk 22 1.00 4.00 2.3182 1.21052 operation risk 22 1.00 4.00 2.4091 1.25960 legal risk 22 1.00 4.00 2.5455 1.18431 financial risk 22 1.00 4.00 2.9545 1.17422 counterparty risk 22 1.00 4.00 2.6818 1.12911 valid n (list wise) 22 s o u r c e : author’s calculations. table 3 lists the descriptive statistics of the cdm project risks. the results indicate minimum, maximum, mean, and standard deviation of the different categories of risk. time overrun risk has the highest mean score that is 3.0455 followed by financial risk, counterparty risk, and market risk. the results show a greater standard deviation between operational risk and market risk. during the registration of a project, the planning of execution of the project may vary concerning technology adoption in company operation creating risk. the price of cer is expected at the time of contract and at the time of delivery varies and results in market risk. the results indicate that india being a part of non-annexure i countries, companies were highly relying on counterparties. technology risk leads to operational risk and delay in implementation with the cost of technology leading to support financial risk. the developed project must be able to meet the target emission to gain credits that lead to performance risk (icai, 2009). table 3. risk level associated… how carbon projects can add to sustainable… 131 association of carbon risk table 4. correlation: risk associated with cdm project carbon risk fe as ib ili ty r is k li ce ns e r is k ti m e ov er -r un r is k ca pi ta l c os t ov er -r un r is k te ch no lo gy r is k m ar ke t r is k su pp ly r is k o pe ra ti on r is k le ga l r is k fi na nc ia l r is k co un te r-p ar ty r is k feasibility risk 0.032 0.025 0.000 0.001 0.302 0.000 0.000 0.484 0.054 0.009 license risk 0.019 0.645 0.729 0.014 0.055 0.511 0.241 0.325 0.036 time over-run risk . 0.01 0.889 0.183 0.584 0.654 0.437 0.07 0.015 capital cost over-run risk . 0.049 0.601 0.066 0.021 0.590 0.011 0.186 technology risk . 0.351 0.000 0.000 0.061 0.009 0.051 market risk . 0.175 0.287 0.001 0.063 0.015 supply risk . 0.000 0.016 0.006 0.001 operation risk . 0.137 0.001 0.013 legal risk . 0.008 0.040 financial risk 0.002 counter-party risk s o u r c e : author’s calculations. table 4 presents the correlation analysis expressing the strength of inter-correlation among carbon risk parameters. feasibility risk has an association with all risks except market risk, legal risk, and financial risk which are part of the construction and operation phase of the project. license risk has an association with time over-run risk, market risk, and counter-party risk. time over-run risk has an association with capital cost over-run risk and counter-party risk. capital cost over-run risk has an association with technology risk, operation risk, and financial risk. technology risk has an association with supply risk, operation risk, and financial risk. market risk has an association with legal risk and counter-party risk. supply risk has an association with operation risk, legal risk, financial risk, and counter-party risk. operation risk has an association with financial risk and counter-party risk. the result indicates all the risks interrelated with each other. avani raval, swati saxena, shashank thanki132 carbon risk differs with ownership of firm and methodology of project carbon risk the firm’s ownership and methodology adopted for the project creates no difference in carbon risk. to check this, mann-whitney u test was applied. table 5. mann-whitney u test: carbon risk and methodology of cdm projects test statistics fr lr tor cor tr mr sr op er at io n legal fi na nc ia l co un te rpa rt y mann-whitney u 39.000 58.000 54.500 46.500 55.000 53.000 54.500 51.000 57.000 60.000 59.500 wilcoxon w 117.000 113.000 109.500 124.500 133.000 108.000 132.500 129.000 112.000 115.000 114.500 z -1.452 -.136 -.383 -.985 -.345 -.481 -.377 -.619 -.205 .000 -.034 asymp. sig. (2-tailed) .146 .892 .701 .325 .730 .630 .706 .536 .838 1.000 .973 exact sig. [2*(1-tailed sig.)] .180b .923b .722b .381b .771b .674b .722b .582b .872b 1.000b .974b a. grouping variable: methodology b. not corrected for ties. s o u r c e : author’s calculations. table 5 presents a significant difference between carbon risk and the methodology of the project. the results indicate that there is no difference in carbon risk for the methodology of the projects. this analysis reveals that solar and wind technology projects carry the same level of carbon risk. how carbon projects can add to sustainable… 133 table 6. mann-whitney u test: carbon risk and ownership of organization test statisticsa fr lr tor cor tr mr sr op er at io n legal fi na nc ia l co un te rpa rt y mann-whitney u 15.000 27.000 26.000 35.000 17.000 34.000 8.000 13.500 35.000 33.500 21.000 wilcoxon w 25.000 37.000 197.000 45.000 27.000 44.000 18.000 23.500 45.000 43.500 31.000 z -1.875 -.792 -.900 -.094 -1.693 -.178 -2.479 -1.998 -.088 -.226 -1.332 asymp. sig. (2-tailed) .061 .428 .368 .925 .091 .859 .013 .046 .930 .821 .183 exact sig. [2*(1-tailed sig.)] .081b .484b .434b .967b .118b .902b .014b .053b .967b .837b .227b a. grouping variable: type of organisation b. not corrected for ties. s o u r c e : author’s calculations. table 6 represents the association between carbon risk and ownership of an organization (public/private). the results show that there is a significant difference in carbon risk concerning the type of organization in supply risk and operational risk. the significant value of supply risk and operational risk is 0.013 and 0.046 respectively. this indicates that in the planning and construction phase there is no difference whether the firm is from a private sector or public sector, but in the operation phase there is a difference in supply risk and operational risk.  implications and conclusions the study provides framework to analyze the factors that inf luenced firms for decision-making. this study examines the risk associated with large-scale cdm projects registered by energy sector organizations. classification of risks presented in a theoretical framework. the empirical results confirmed that all the categories of risk are highly associated with the project. time over-run risk, capital cost over-run risk and financial risk had a high degree of risk compared to other risks in energy organizations. the reason might be that the company is avani raval, swati saxena, shashank thanki134 not able to achieve targeted emission in a defined time that leads to increased financial cost of the project. therefore, companies should take care of one of the major parameters that a cdm project should complete on time; otherwise, it leads to capital and financial risk at the time of planning as well as execution of the project. carbon risk does not have any difference in the methodology adopted for the project. ownership of organization inf luences creating differences among carbon risk. apart from carbon risk, two lessons emerged among those firms while engaging with cdm projects. first, financial benefits are considered to be primary motivation for undertaking cdm project by most of the respondents. secondly, one of the primary risk factors considered against these firms’ decisions was international regulatory bodies and its approval process and policies. risk management includes regulatory, economic, advisory, and community-based, and technology-based approaches. there should be coordinated action at multiple levels and multiple scales are considered best practice in a decision-making context to protect or improve human health and the natural environment upon which we depend. the results of the study align with and contribute to a growing literature that documents risk and mitigation effects. a practical implication was determined in the present study, namely the organization aspects. the organization will be able to understand and define a strategy to mitigate the carbon risk that resulted in effective implementation of the project and achievement of target emission. the results of the study may provide policymakers with insights on carbon risk. it helps government to develop effective energy policies and also help organizations in minimizing project risk. it will facilitate the economy to achieve the sustainable development goal of the economy. thus, this study contributes to the extension in research field carbon emission and sustainable development practices. the study is limited to largescale cdm projects registered under energy industries. the study is not focusing on mediating the effect on carbon risk. the outcome may serve as a reference for developing countries and other industries of india for cdm project implementations. the study can be extended for empirical study at the global level. the future study can be targeted to analyze carbon risk with financial indicators of the company. apart from variables considered in the study, there can be other mediating variables that will be studied in the future. how carbon projects can add to sustainable… 135  references abdullahi, t. 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(2018). innovativeness of the polish economy in the context of sustainable development. copernican journal of finance & accounting, 7(3), 71-88. http:// dx.doi.org/10.12775/cjfa.2018.016. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: june 30, 2015; date of acceptance: october 19, 2015. * contact information: mine.celikkol@dpu.edu.tr, dumlupınar university, kütahya vocational school of social sciences, department of finance-banking and insurance, kütahya/turkey, phone: +902742270868 (1167). ** contact information: hakan.celikkol@dpu.edu.tr, dumlupınar university, faculty of economics and administrative sciences, department of business administration, kütahya/turkey, phone: +902742652031 (2058). çelikkol m. m., & çelikkol h. (2015). the evaluation of the students in dumlupinar university vocational school of social sciences about levels of financial literacy. copernican journal of finance & accounting, 4(2), 43–63. http://dx.doi.org/10.12775/cjfa.2015.015 mediha mine çelikkol* dumlupınar university hakan çelikkol** dumlupınar university the evaluation of the students in dumlupinar university vocational school of social sciences about levels of financial literacy keywords: financial literacy, financial information, financial behavior, financial position. j e l classification: g02, d14, a20, c12. abstract: as the world economy grows, financial system as well grows and more people participate. a healthy operation of financial system depends on the condition that all of its parts and components work well together. one of these components is individuals and families. worldwide, it is estimated that approximately 150 million people join the financial system every year. control mechanisms are needed for the stability of ever growing financial system and financial literacy comes into prominence in this regard. in this study, we statistically analyzed the factors that affect financial information, behavior and attitudes of students who go to dumlupınar university kütahya vocatiomediha mine çelikkol, hakan çelikkol44 nal school of social sciences and then, we determined their level of financial literacy. in order to develop the awareness of financial literacy and to increase the quality of education about this subject, suggestions have been stated in the study.  introduction the concept of financial literacy has been defined as ‘ensuring participation in economic life and to improve the community’s financial well-being by individuals with knowledge and understanding of financial concepts to be able to make effective decisions in a variety of financial position this knowledge and understanding of practical skills, motivation and confidence’. the concept of financial literacy has been becoming more significant correspondingly the changes occurred in the financial markets and financial products and diversification every day. the greatest expectation of the dissemination of financial literacy is to increase awareness of financial issues and to change behaviors of financial decision-making of individuals in the rational manner. provided that this change in financial behavior can be achieved in an economy, the income – expenditure – saving balance, financial market developments will inherently provide a positive and major step towards economic growth. in this study, the relationship between financial knowledge, financial behaviors, and the attitudes of students in dumlupınar university kütahya vocational school of social sciences has been examined. also, this study has been conducted to present the inferences on the improvement of the current financial education. in order to make inferences about the subject, it is necessary to determine the financial literacy profile. the research methodology and the course of the research process in this research, general information firstly has been stated about the concept of financial literacy and the results and scientific studies on this subject have been demonstrated in a literature review. then, in order to determine the financial literacy profiles of students studying in 11 different programs, a survey has been conducted. according to the data obtained from the survey, the cause and effect relationships between regression and frequency analysis and different variables have been demonstrated. the awareness levels of students surveyed about the financial literacy have been tried to be demonstrated. the evaluation of the students in dumlupinar university… 45 literature review financial literacy today is an important element of financial stability and development, and a global key success factor. especially in financial crisis times, people’s wrong decisions which are a result of low financial literacy levels cause a negative spillover effect in the whole economy. for this reason, various public, private and non-governmental organizations in many countries carry out studies to measure public’s financial literacy level, develop policies to improve the current situation and to monitor the progress. financial literacy level is measured in national, international, general, or specific subgroups. demographic features are important for the analysis of differences in financial literacy levels. women, children, youth, families and retired people are main subgroups that represent the community. there are many researches that base on different country-region, group and periods about financial literacy. rather than seeing them as works that repeat each other, these works should be seen as researches that determine the state of financial literacy and observe whether there is a change. some of these researches and their conclusions are given below briefly: ■ bernheim states in his research in 1995 and 1998 that people cannot make most of even the very basic financial calculations, they do not have the basic financial literacy and they take their saving decisions by rule of thumb (sarıgül 2014). ■ bernheim, garrett and maki (1997) found a positive relationship between financial literacy and saving decisions in a research. research was conducted in 1995 and researched group was merrill lynch’s investors aged between 30 and 49. higher financial literacy resulted in higher savings. the result of the study proves that education is strong tool to promote saving. ■ berrheim, garrett and maki (2001) investigated the impact of financial literacy education in high schools on saving behaviors of people in their old lives. the found a positive relationship between education programs and personal savings. the study started with the hypothesis “financial literacy education promotes better financial behaviors” and is one of the first studies about long term impacts of financial education in high school. ■ cude et al. (2006) evaluated financial management applications of university students. they found that student are not good at financial mamediha mine çelikkol, hakan çelikkol46 nagement because they do not listen to advices about financial management and their families are effective in their money management behaviours. ■ lusardi and mitchell, in their study in 2007 about retirement planning which is one of important elements of financial literacy, found that less educated people, low income people, afro-americans and latin americans are the groups that prepare the least for retirement. in their study in 2008, they found that financial literacy is very low among women. and success rate in retirement planning is also low among women who have low financial literacy. in their study in 2009, they observed that people who have more financial information are more prone to making retirement planning (ergün et al., 2014). ■ lusardi and tufano (2009) reported that only one third of people respond to the questions about compound interest and how credit cards work and this rate fell further in more complex calculations. they reached the conclusion that this situation is worrying in an economy where routine debt and similar instruments are used and people with low debt literacy bear higher costs in their financial transactions. ■ temizel (2010) aimed to find out financial literacy levels of blue collar workers. they found that workers are conscious about information and applications that will be make their daily lives easier and increase their quality of lives. however, they are not knowledgeable about investments and their behaviors about money management are based on observations. blue collar workers, who chose their families as the source of acquiring financial information, apply what they see from their parents about spending and saving. ■ akyol (2010) researched about the level of financial awareness of the personnel of private banks. these types of banks offer premium services to qualified depositors, therefore personnel is expected to have high financial awareness however results do not meet the expectations. ■ bayram (2015) in his research in 2009 of the students of anadolu universiy faculty of economics and administrative sciences and porsuk vocational school, found that students think that financial literacy is a narrower concept. therefore, limited perception of students is that financial literacy is the habit of saving up regularly, paying bills on time and keeping financial papers. although financial literacy is in general low, students are not aware of this situation. the evaluation of the students in dumlupinar university… 47 there are also institutional researches about financial literacy as well as aforementioned research. oecd, one of the leading institutions in financial education, started the initiative international network on financial education, infe. this initiative developed a survey that can be used in the identification of financial literacy levels of people from various countries with different backgrounds. this survey form includes financial literacy related questions such as financial information, behavior and attitudes, budgeting and money management, short and long term financial plans, and financial product selection. there are also questions about socio-demographic information such as age, gender and income. infe used this survey in 4 continents and 14 countries and analyzed the results. turkey was not included in the survey. with the cooperation of world bank and capital markets board, the research has been carried out in turkey in 2012. under the classification of statistical regional units by turkish statistics agency, 3009 people from 12 regions (40 cities and 142 municipalities) were interviewed and thus turkish data became comparable with the countries that are included oecd research (www.spk.gov.tr). while 84% of people gave the right answer for basic division calculation, this rate fell to 36% about simple interest calculation and only 26,1% about compound interest calculation. when it comes to borrowing, family member and other close people come first. 51% of people said that they pay their debts with borrowing more debt. 58,4% of people answered “no” to the question “do you need financial information?” (www.milliyet.com.tr). in 2014, survey is conducted again and they got a similar score to the previous survey (www.teb.com.tr). the concept of financial literacy the concept of financial literacy, which can be simply defined as “the one who knows how to read and write”, has changed with the effect of globalization. with the advent of new criterion, its definition took a shape that responds to the needs of modernity. thus the modern definition is “the one who have the ability to read-write and perform calculations to the extent that may contribute to the development of the community that they live in, and acquired necessary knowledge and skills to carry out his duties in the society”. additionally, technological products that started to have more usage in people’s life since second half of 20th century has led to emergence of new literacy types in different fields (özbay and çelik 2013). information literacy is one of these. mediha mine çelikkol, hakan çelikkol48 the concept of information literacy, no matter what field, is expressed as “to get the skills in order to find, acquire, evaluate and use the needed information”. under information literacy, there are many literacy types such as computer literacy, media literacy, network literacy, digital literacy and political literacy. financial literacy, which currently gained importance, is as well one of these types and used to obtain basic information in financial field. financial literacy is in the stage of development and a definition on consensus does not exist yet. this concept of financial literacy is used together with financial qualification, financial awareness and financial education. although these concepts are different from each other, there is no obstacle that they all refer to the same concept (gökmen 2012). the concept of financial literacy is basically related to the competence of the person about money management. the concept has emerged as an idea in the beginnings of 1900s with research about consumer trends in the usa. since then, the concept is studied under five categories: information about financial concepts, the ability of making connections between financial concepts, personal financial management skills, ability to take long term financial decisions and ability of active planning for financial needs (remund 2010). one of the oldest definitions about financial literacy is developed in the research done for england national westminster bank by noctor, stoney and stradling in 1900s. financial literacy in this study is defined as “making informed evaluations and taking effective decisions when people manage their money” (noctor et al., 1992). recently, oecd (organisation for economic co-operation and development), which is one of the institutions that is mentioned often in this regard, in a research that is conducted in 2013 used a definition developed by atkinson and messy. according to this, financial literacy is “a combination of awareness, information, skills, attitude and behaviors needed for strong financial decisions and thus personal wealth” (oecd 2013). foder (association for financial literacy and access), which is an accredited ngo for oecd, aims to increase financial literacy in turkey. they explain the concept of financial literacy as “the ability to conduct educated evaluations and take effective decisions about money management” and “the situation of having the ability to evaluate income, savings and wealth wisely, and manage the budget right” (www.fo-der.org). financial literacy should not be limited to only finding, understanding, interpreting information and making decisions. researching information about financial decisions, evaluating this information and using it in solving financial problems are other basic skills (hayta 2011). the evaluation of the students in dumlupinar university… 49 research about determination of financial literacy findings and analysis about purpose, importance, extent and method of the research will be given in this section. purpose and importance the main purpose of the research is to determine the financial literacy levels of students from dumlupınar university kütahya vocational school of social sciences. sub purposes are to analyze the factors affecting financial information, behavior and attitude levels of students by utilizing statistical technics. vocational schools have an important place in the development of the country and in their regions they increase the quality of life, socio-cultural activities and participation to education rate. it is thought that statistical analysis results of the study are important in the identification of financial literacy levels and perception of financial education. it is assumed that the results will reflect the general levels of the students from dumlupınar university kütahya vocational school of social sciences. scope dumlupınar university kütahya vocational school of social sciences, 2014– –2015 academic year, spring semester students are included in the research. in this period, in total 3.103 student in 11 programs are studying. since reaching everybody is not possible, a sampling method with 95% confidence level in each program is established. in the end of surveying, 1.807 survey forms were evaluable and this result approximately makes 58% of all students. table 1 shows the programs, number of registered students and number of students who participated in the survey. table 1. programs that participants took education the program name number of students registered number of students participating in the survey the program name number of students registered number of students participating in the survey banking and insurance 312 200 accounting and tax applications 352 195 mediha mine çelikkol, hakan çelikkol50 the program name number of students registered number of students participating in the survey the program name number of students registered number of students participating in the survey office management and executive assistant 384 196 bus captaincy 69 59 foreign trade 384 201 marketing 253 153 real estate and real estate management 182 137 tourism and hotel management 276 162 business administration 322 177 tourism and travel services 335 180 logistics 234 147 total 3.103 1.807 s ou r c e : own study. method data is gathered through surveying. survey was first tested by 43 students in order to avoid understanding problems. then surveys were distributed to 2.101 students who are chosen randomly and a feedback is received by all of the students. however, since some of the survey forms did not qualify, 294 forms were excluded and research continued with the remaining 1.807 forms. vocational school was accepted as a whole and each program had random selection proportional to their number of students and then the results are combined. therefore a heterogeneous sample is formed. pasw statistics 18 (spss statistics) program is used to analyze the current situation and regression analysis for understanding the relationship between variables. the findings have 95% confidence level and 5% meaningfulness level. the survey form is composed of 4 sections: (1) demographics: age, sector, entrepreneurship time and education, (2) financial knowledge of the students: place values of numbers, interest, inflation, time value of money (3) financial attitudes: financial perspectives of students about future and (4) financial behaviors: thinking before purchasing, paying bills on time, budgeting, spending and saving in order to reach targets. the questions and scaled concepts are compiled from the research mentioned in the literature review. the survey used in our research has parallelisms with oecd based research. the evaluation of the students in dumlupinar university… 51 analysis and findings demographic features of surveyed students are presented in table 2. 45% of participants are female and 55% are male. there genderwise there is a balanced distribution. %18,6 of participants are 19 years old and below and 81,4 are 20 years old and above. when looked into level of parents’ education; 73,8% of mothers have elementary school, 21% high school, 2,8% associate degree, 2,4% graduate degree and above level education. and 51,7% of fathers have elementary school, 37,2% high school, 5,7% associate degree, 5,4% graduate degree and above level education. when looked into working status of parents; 70,2% of mothers and 3% of fathers do not work. of working mothers; 10,9% are workers, 7,1% civil servants, 6,2% self-employed, 0,6% farmers, 5% retired. of working fathers; 24% are workers, 18,3% civil servants, 24% self-employed, 5,4% farmers, 25,3% retired. participants reside 30,8% in aegean region, 28,5% in marmara region, 18,1% in central anatolia region. when looked into average monthly household income; 63,1% are 1.001-3.000 tl, 23,3% are 0-1.000 tl, 13,6% are 3.001 tl and above. when we look at students’ pocket money; 42% are 251-500 tl, 24,8% are 501-750 tl, 18,9% are 0-250 tl, 10,3% are 751-1.000 tl. table 2. demographic features of participants variable explanation frequency % variable explanation frequency % age ≤ 19 337 18,6 gender female 813 45 ≥ 20 1.470 81,4 male 994 55 mother’s education level elementary school 1.334 73,8 father’s education level elementary sch. 935 51,7 high school 379 21,0 high school 672 37,2 associate 51 2,8 associate 103 5,7 graduate 34 1,9 graduate 81 4,5 postgraduate 9 0,5 postgraduate 16 0,9 mediha mine çelikkol, hakan çelikkol52 variable explanation frequency % variable explanation frequency % mother’s work status worker 197 10,9 father’s work status worker 433 24,0 civil servant 128 7,1 civil servant 331 18,3 self -employed 112 6,2 self -employed 433 24,0 farmer 11 0,6 farmer 97 5,4 retired 91 5,0 retired 458 25,3 not working 1.268 70,2 not working 55 3,0 residence status mediterranean r. 188 10,4 av. monthly household income 0–1.000 421 23,3 eastern anatolia r. 72 4,0 1.001–3.000 1.140 63,1 aegean region 557 30,8 ≥ 3.001 246 13,6 marmara region 515 28,5 southeastern an.r. 54 3,0 pocket money 0–250 342 18,9 central anatolia r. 327 18,1 251–500 759 42,0 black sea r. 94 5,2 501–750 448 24,8 751–1.000 186 10,3 ≥ 1.001 72 4,0 s ou r c e : own study. we try to find and answer to the question: “is there a meaningful difference in financial literacy levels according to variables of gender, program that they are taking education, age, parents’ occupation, region they reside, average monthly household income, pocket money and parents’ education level?” (table 2). as a result of these questions, the hypotheses that will be tested are below (table 3): the evaluation of the students in dumlupinar university… 53 table 3. hypotheses h1: there is a statistically significant difference between gender variable and financial literacy level. h2: there is a statistically significant difference between the program that they take education variable and financial literacy level. h3: there is a statistically significant difference between age variable and financial literacy level. h4: there is a statistically significant difference between occupation of mother variable and financial literacy level. h5: there is a statistically significant difference between occupation of father variable and financial literacy level. h6: there is a statistically significant difference between the region they reside variable and financial literacy level. h7: there is a statistically significant difference between average monthly household income variable and financial literacy level. h8: there is a statistically significant difference between pocket money variable and financial literacy level. h9: there is a statistically significant difference between education level of mother variable and financial literacy level. h10: there is a statistically significant difference between education level of father variable and financial literacy level. h11: student’s sources of motivation in shopping changes according to their pocket money. h12: there is a statistically significant difference between investment choice and need for financial information. s ou r c e : own study. a statistically significant difference between gender variable and financial literacy level has been found and showed in table 4. financial literacy in women is detected as (=3.14), and (=3.06) in men. h1 hypothesis is accepted according to independent t test results in table 4 (p<0.01). table 4. independent t test results of financial literacy about gender variable gender n x– ss sd t p financial literacy female 813 3.14 .467 1805 3.527 .000 male 994 3.06 .456 (p<0.01) s ou r c e : own study. mediha mine çelikkol, hakan çelikkol54 in table 5, the significance of the difference between the program that participant takes education and financial literacy level is tested with one-way analysis of variance and it is seen that there is a statistically significant differentiation. according to the results of post hoc lsd test, financial literacy rates of students who are respectively in banking and insurance (a), foreign trade (c) and accounting and tax applications (g) programs are comparatively higher and this difference is statistically significant at p<0.01 level. therefore, h2 hypothesis is accepted according to anova results in table 5 (p<0.01). table 5. anova results of financial literacy about program variable program n x– ss f p statistically significant difference fi na nc ia l l it er ac y a. banking and insurance 200 3.26 .435 8.485 .000 a: b-c-d-e-f-g-h-i-j-k b: c-d-e-g-k c: f-i-j-k d: f-i-j-k e: f-i-j-k f: g g: h-i-j-k i: k j: k b. office man. and executive ass. 196 3.05 .443 c. foreign trade 201 3.17 .462 d. real estate and real estate man. 137 3.15 .353 e. business administration 177 3.16 .405 f. logistics 147 2.99 .477 g. accounting and tax applications 195 3.17 .456 h. bus captaincy 59 3.04 .457 i. marketing 153 3.02 .519 j. tourism and hotel management 162 3.04 .503 k. tourism and travel services 180 2.93 .449 (p<0.01) s ou r c e : own study. the difference between financial literacy level and participants’ variables of age, parents’ education level, parents’ occupation, region they reside, average monthly household income and pocket money is tested with analysis of variance and it is found that there is no statistically significant differentiation. thus hypotheses of h3, h4, h5, h6, h7, h8, h9 and h10 are rejected. in order to measure the reactions of students to financial issues, there were 7 more questions in the survey. frequency and percentage distributions to one of these questions, “where do you think you learned your ability to spend and manage your money?” are given in table 6. according to this, 77,5% of students refer to family, 9,8% media, 6,5% school, and 6,3% friends. the evaluation of the students in dumlupinar university… 55 table 6. students’ sources of learning how to spend and manage money n % family 1.400 77.5 school 117 6.5 friends 113 6.3 media 177 9.8 total 1.807 100.0 s ou r c e : own study. frequency and percentage distributions to the question; “do you use internet banking applications?” are given in table 7. 66,9% of students state that they do not use internet banking. table 7. students’ rate of using internet banking n % yes 598 33.1 no 1.209 66.9 total 1.807 100.0 s ou r c e : own study. another question was about finding out whether students go to shopping to satisfy their needs or desires. frequency and percentage distributions to the question; “what is the dominant factor in your shopping?” are given in table 8. 63,8% of students state that they do shopping in accordance with their needs, while 36,2% state that they cannot resist their desires. table 8. students’ sources of motivation for shopping n % request 655 36.2 need 1.152 63.8 total 1.807 100.0 s ou r c e : own study. mediha mine çelikkol, hakan çelikkol56 results of cross tab analysis, which is conducted according to students’ need/ desire choices, is shown in table 9. according to results, students’ pocket money spending changes significantly in relation to their need/desire choices (p<0.01). when we look at proportional data, 26% of students with 0–250 tl pocket money give importance to their desires in shopping, while remaining 74% keep their needs as dominant factor. when looked into this rate while considering all pocket money levels, it is observed that desire motivated shopping behaviors are increasing hierarchically as their pocket money increase. and need motivated shopping behaviors hierarchically decreasing. thus h11 hypothesis is accepted. table 9. the relationship between sources of motivation in shopping and pocket money (cross tab analysis) pocket money 0–250 tl 251–500 tl 501–750 tl 751–1.000 tl ≥ 1.001 tl n % n % n % n % n % request 89 26.0 253 33.3 179 40.0 95 51.1 39 54.2 need 253 74.0 506 66.7 269 60.0 91 48.9 33 45.8 total 342 100.0 759 100.0 448 100.0 186 100.0 72 100.0 pearson’s chi-square value: 48.626  sd : 4  p<0.01 s ou r c e : own study. frequency and percentage distributions to the question; “do you still have money left after your spending?” are given in table 10. according to the table, 7,1% never have money left, 46,2% rarely, 34,3% frequently, 12,5% always have money left after their spending. table 10. students’ ability to save money after necessary spending n % always 225 12.5 frequently 619 34.3 rarely 834 46.2 never 129 7.1 total 1.807 100.0 s ou r c e : own study. the evaluation of the students in dumlupinar university… 57 frequency and percentage distributions to the question; “if you had saved money, where would you invest your money?” are given in table 11. according to this, 37,4% of students prefer gold, 16,3% foreign exchange, 7,8% individual pensions, 3,5% stock and 35% states that they would not invest anywhere and keep their money as turkish lira. table 11. students’ options to invest money n % individual pensions 141 7.8 foreign exchange 295 16.3 stock 63 3.5 gold 675 37.4 tl (turkish lira) 633 35.0 total 1.807 100.0 s ou r c e : own study. participants are divided into two groups according to their financial preferences (table 12). in the first group, there are people who prefer investment options which require more advanced financial information (individual pensions and stock), in the second group, there are people who prefer less complicated invest tools such as foreign exchange, gold and turkish lira. to the question; “do you need financial information?”, the ones who answer “yes” are coded (1) and who answered “no” are coded (5). then, we look if there is a significant difference in the need for financial information. it is found that there is a significant difference between investment preferences variable and need for financial information. need for financial information is (=1.90) in the first group and (=2.53) in the second group. h12 hypothesis is accepted according to independent t test in table 12 (p<0.01). mediha mine çelikkol, hakan çelikkol58 table 12. independent t test results about investment choices and need for financial information variable financial information needs n x– ss sd t p investment preferences the first group 204 1.90 1.676 277.500 4.943 .000 the second group 1603 2.53 1.945 (p<0.01) s ou r c e : own study. frequency and percentage distributions to the question; “what are the sources that you trust to consult your investments?” are given in table 13. %38,4 of the students consult someone that they trust, 33,3% trust themselves and think that they are qualified enough. table 13. students’ sources of consulting their investments n % trustworthy person 694 38.4 tv 131 7.2 my own knowledge and ideas 601 33.3 printed publications 94 5.2 internet 287 15.9 total 1.807 100.0 s ou r c e : own study. one of the criteria that is used to measure financial literacy level is the answers that are given to financial information questions. frequency and percentage distributions of the answers that are given to question about basic financial concepts are given in table 14. the most rightly answered question is about time value of money and most wrongly answered one is about percentage expression. the evaluation of the students in dumlupinar university… 59 table 14. evaluation of answers given to questions about basic financial information n % doğru yanlış toplam doğru yanlış toplam defining the percentage of expression 315 1.492 1.807 17,4 82,6 100,0 the time value of money 1.272 535 1.807 70,4 29,6 100,0 inflation 699 1.108 1.807 38,7 61,3 100,0 simple interest 406 1.401 1.807 22,5 77,5 100,0 compound interest 979 828 1.807 54,2 45,8 100,0 s ou r c e : own study. frequency and percentage distributions of the answers that are given to question: “do you need financial information?” are given in table 15. nearly 64% of the students state that they need financial information. this situation supports table 14 and shows that students recognize their lack of knowledge. table 15. students’ need for financial information n % yes 1.148 63,5 no 659 36,5 total 1.807 100,0 s ou r c e : own study. table 16 shows frequency and percentage distributions of the answers given to questions about whether they see a difference between their pre-university and post-university times about their financial information levels. table 16. difference of financial information level compared to pre-university n % yes 1.422 78,7 no 385 21,3 total 1.807 100,0 s ou r c e : own study. mediha mine çelikkol, hakan çelikkol60 according to this, 78,7% of students’ financial information levels improved compared to their pre-university. the outcome of the research process and conclusions an increase in the level of welfare and people’s living standards necessitate not only economic but also social development. perhaps the most important of the minimum required conditions for economic and social development is education especially when its effect on other areas is taken into consideration. because, there is no production without education and there is no welfare without production. therefore, the main condition of the development of society and teaching of proper behaviors is education, and sustainable development is dependent on education. a lot of research since 1960s shows that there is a positive correlation between economic development and education level. some economists even went further and prepared charts that show what level of literacy corresponds to how much income per capita (www.egitim.aku.edu.tr). what is important here is that literacy in the modern sense is more than just conventional readingwriting skills and has a new meaning that includes visual and electronic based mental skills. while the difference in the concepts of literacy and literate is growing, mental skills as well as physical skills should be associated with social development and therefore need to be included in the education system. financial literacy is one of these mental skills that can be associated with economic development and in the simplest way, it can be defined as ability to manage savings and investments effectively. in this research, factors that affect financial information, behaviors and attitudes of students who go to dumlupinar university vocational school of social sciences are analyzed statistically and their level of financial literacy is determined. results show that: ■ financial literacy level of girls is higher compared to boys. this result is different than many studies in the literature. when we look at family income and pocket money levels, it is seen that girls’ pocket money levels are lower than boys thus girls need to spend less compared to boys. their need for austerity is thought to be effective in this result. ■ financial literacy levels of student who go to programs of banking and insurance, foreign trade, and accounting and tax are higher compared the evaluation of the students in dumlupinar university… 61 to other programs’ students. it is thought that finance classes of these programs are effective in getting these results. ■ 77,5% of students prefer their families as sources of consulting in money management, while %9,8 media, 6,5% school, 6,3% friends. this result is consistent with rooij et al. (2011) who state that people with low financial literacy level trust advices from kith and kin therefore these people are inclined to invest according to advices of their kith and kin. cude et al. (2006) show that parents play an important role in financial socializing of university students. ■ 64% of students state that they do shopping in accordance with their needs, while 36,2% state that they cannot resist their desires. when their pocket money level is taken into consideration, as their pocket money increases, the likelihood of shopping on desire is increasing hierarchically as well and shopping on need is decreasing hierarchically. ■ in the question about their saving attitudes, 7,1% of students say that they never save, 46,2% rare, 34,3% frequently and 12,5% always. to the question about if there were to save, where they would invest this money, 37,4% prefer gold, 16,3% foreign exchange, 7,7% pension, 3,5% stocks, and 35% say that they would keep it as turkish lira. most chosen ones are gold, turkish lira and foreign exchange indicates that students do not have adequate information about investment options. that said, when they are asked if they need financial information, the ones who chose pension or stocks stated a higher need for financial information, compared to others. ■ 59% of the students gave wrong answers to the questions about basic financial concepts. 83% gave a wrong answer to the question about place values of numbers. this situation might result from their insufficiencies in math. as is the case with every research, this research has its own limitations too. survey method is used in this research and it is assumed that students understood and answered questions on the survey form correctly. even though a measurement tool to make students assess themselves (self-rating) is used and therefore some possibility of evaluation and objectivity problems emerges, the results are parallel with similar research. furthermore, researches do not cover all of the students who study the field of social sciences in dumlupınar university’s all vocational schools. only students of kütahya vocational school of social sciences are studied and 58% of mediha mine çelikkol, hakan çelikkol62 these students are surveyed. in order to generalize research results to all of the students, sample should be expanded to students of other vocational schools of dumlupınar university as well. an increase in welfare is dependent on good financial choices. thus, financial literacy trainings should not be limited to people working in finance, the whole society should be covered. there should be classes that improve financial literacy in all fields of study and the content of classes should be kept updated. repeating studies like these is important to understand the progress in financial literacy education. this paper is expected to contribute to the literature in the context of interpretation of the results of research to be done in the future.  references akyol, c. 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(2011). financial literacy and stock market participation. journal of financial economics. 101(2), 449–472. sarıgül, h. (2014). finansal okuryazarlık: üniversite öğrencilerinin bilgi. tutum ve davranışları arasındaki i̇lişki üzerine ampirik bir çalışma. finans, politik & ekonomik yorumlar. yıl:51, sayı: 593, issn, 1307–7112, 53–76. tamer, m., enflasyonsuz türkiye’nin, finansal okuryazar halkı, http://www.milliyet. com.tr/ enflasyonsuz-turkiye-nin-finansal/ekonomi/ydetay/1713225/default.htm (accessed: 25.03.2015). temizel, f., (2010). mavi yakalılarda finansal okuryazarlık. beta yayınları. 1. baskı. i̇stanbul. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: june 5, 2015; date of acceptance: october 27, 2015. * contact information: milena.persic@fthm.hr, university of rijeka, faculty of tourism and hospitality management, accounting department, opatija, croatia, phone: +38551290689. ** contact information: kbakija@net.hr, doba, faculty of applied business and social studies, maribor, slovenia, phone: +385992110386. *** contact information: dubravka.vlasic@fthm.hr, university of rijeka, faculty of tourism and hospitality management, accounting department, opatija, croatia, phone: +38551290881. peršić m., bakija k., & vlašić d. (2015). framework for improving quality and comparability of non-financial reporting system. copernican journal of finance & accounting, 4(2), 109–127. http://dx.doi.org/10.12775/cjfa.2015.019 milena peršić* university of rijeka, faculty of tourism and hospitality management, accounting department katarina bakija** doba, faculty of applied business and social studies dubravka vlašić*** university of rijeka, faculty of tourism and hospitality management, accounting department framework for improving quality and comparability of non-financial reporting system keywords: non-financial information, csr, directive 2014/95/eu, strategic accounting, sustainability reporting. j e l classification: m4, q56. abstract: this research was aimed at evaluating the methodological framework to be applied in strategic as well as in responsibility accounting, as a prerequisite for ensumilena peršić, katarina bakija, dubravka vlašić110 ring the relevant information, necessary for preparing and evaluating sustainable development strategies, using directive 2014/95/eu framework. in order to assess the current situation in the republic of croatia, a survey on the sample of 64 big croatian companies in different industries in the year 2013 was conducted. the sample of selected companies was chosen on the basis of membership in the croatian business council for sustainable development (hr bcsd) and of the companies that follow the principles of sustainable development in their business and declare themselves as environmentally and socially responsible. research results will be confirmed through comparison with previous findings conducted in the year 2007, but also compared with the relevant information collected from 71 companies of eight eu countries. the goal is to assess whether the achieved level of strategic and sustainable accounting tools in the croatian companies are sufficient to provide relevant information for non-financial reporting for external and internal users in the process of long and short term decision making. recognized gaps will be the starting points for defining the opportunities and areas in the process of harmonization between internal and external sustainability reporting system. the goal is in recognizing starting points, opportunities and areas, which are important for internal and external sustainability reporting, taking into, account the provisions of the globally accepted standards and the new eu directive.  introduction the purpose of this paper is to present whether the accounting systems of croatian companies are relevant source of non-financial information which need to be disclosed for external users according to directive 2014/95/ eu (new directive) and the framework of relevant global, eu and national sustainability reporting standards. namely, this directive was adopted on 22 october 2014 by the european parliament and the european council with the goal to amending directive 2013/34/eu in a way that upgrades it regarding disclosure of non-financial and diversity information by certain large undertaking and groups of eu member states. it obligates all member states to bring order of this directive into national laws, regulations and administrative provisions, in accordance with the new guidelines which will be published by the eu commission by december 2016, applied through the financial year 2017, to be establishing the uniform system of disclosure non-financial information from december 2018. the emphasis is on the content, while every company can independently decide if statements will be provided separately, or the non-financial information will be included into existing financial reporting system in the way that financial information will be upgraded with the specific non-financial information. this will be a significant step towards ensuring higher quality of today voluntarily disclosed statements, because it will be the way for unifying the framework for improving quality and comparability… 111 content of presented non-financial information in a way to allow benchmarking among companies, to assess the achieved level of sustainability. all this imposes the need of improvements through using accounting tools, methods and techniques, as a main source of information for long and short-term decision. the research methodology and the course of the research process research in this paper was focused on the evaluation of current possibilities and level of croatian companies’ preparedness to be able to implement the order of new directive 2014/95/eu. for this purpose the quality of applied accounting tools in preparing information, necessary for segment reporting, as well as the quality of information that are nowadays presented in voluntary prepared sustainability reports was evaluated. in doing so the framework of eu and national strategic documents and policies, as well as the previous research in croatian companies was respected. starting points of this research, used in accordance with the strategic approach, was the provision of article 18 of the croatian accounting act (og 109/07; 54/13), which obligates all listed companies to disclose “information about the environment” (art.18) as well as experiences of croatian business council for sustainable development (hr bcsd, 2013), according to which 19% of croatian big companies voluntarily report sustainability information and present this kind of reports on official web-site. on the other hand article 13 of accounting act requires application of segment reporting standard ifrs 8, very important for short term decision making, but unfortunately provides only financial information and needs to be upgraded with some non-financial information in accordance with the requirements of eu directive, and relevant sustainability reporting standards. using survey monkey, and in order to assess the level of sustainability information quality in croatian companies a comprehensive empirical research was conducted in year 2013 (bakija 2014, 174-218), on the sample of 64 companies in croatia, members of hr bcsd and corporate social responsibility group (csr) which voluntarily follow the principles of sustainable development in presenting sustainability reports. the emphasis was on the assessment whether, or in what extent this kind of reports, provide measurable benchmark between various industries. the questionnaire was completed by 30 companies (47% of the sample) and as they present around 30% of market share in croatia, the sample could be evaluated as representative. the questionnaire includmilena peršić, katarina bakija, dubravka vlašić112 ed 48 questions following the starting points of the previous study conducted in year 2007, with the goal to enable comparison for evaluation of changes and significance for implementing the new directive. for this purpose it will be investigated the appropriate tools and techniques of responsibility and strategic accounting (bebbington, unerman, o’dwyer 2014; gulin, peršić 2011), ensuring the quality of information to be presented in sustainability reports for the purposes of internal and external users, for longand short term decision making, taking into account that many big companies in croatia are internationally oriented and that new eu directive opens up possibilities for a systematically evaluate their position be achieved competitive advantages on the global market, in accordance with the csr principles (crane, matten, spence 2013, 3-26). new eu directive is particularly focused on the large undertakings, groups and big companies of public-interest, with average number of 500 employees or more that will be able to provide information, to be disclosed in the sustainability reports (english, schooley 2014, 26–35). research background the task of this research is to present the possibility of used strategic accounting tools, which are important for providing relevant information in the process of sustainability reporting. the part of accounting, which provides information for a long-term decision-making, is recognized as strategic accounting and for short-term decision making as responsibility accounting (jones, atkinson, lorenz, harris 2012; drury 2012; gulin, persic 2011). using strategic accounting tools is necessary in preparing information for adoption and evaluation strategy from sbu to the company level (hoque 2006; bebbington, unerman, o’dwyer 2014). tools of responsibility accounting are very important in the way to enable assessment of sustainability objectives (as a part of strategic goals) through the narrower time periods (day, week, month, year), or narrower organizational units (responsibility centres, segments …) that would be achieved or not (atrill, mclaney 2007; maher, stickney, weil 2008). the starting point was the attitude that principles of sustainability are very important for creating new value for the shareholders and community (aicpa 2011, 4), and information presented in sustainability report allows the assessment of the competitive position of a certain company at the global market. strategic accounting tools should be chosen according to internal or external framework for improving quality and comparability… 113 users’ needs, in the process of long-term decision making (hoque 2006; jones, atkinson, lorenz, harris 2012). in the modern environment information on customer and employee satisfaction, products or services quality, efficiency of internal processes and other goals presented through measurable indicators, necessary for management control (felthman & xie 1994; hemmer 1996; joseph 1999 in banker et al. 2000, 67) in the sustainability strategies are of particular importance. in theory and practice different strategic accounting tools, techniques and methods (cadez & guilding 2008; cadez & guilding 2012; hoque 2006) connected to the different management needs are recognised. they include: strategic costing (attribute costing; life-cycle costing; quality costing; target costing; value chain costing), strategic decision making (strategic cost management; strategic pricing; brand valuation), competitor accounting (competitor cost assessment; competitive position monitoring; competitor performance appraisal), customer accounting (customer profitability analysis; lifetime customer profitability analysis; valuation of customers as assets), and balanced scorecard method (bsc) as the mostly used tools for strategic planning, control and performance management (kaplan, norton 1996; 2004; machado 2013, 131– 133). the basic 4 perspectives of the bsc method (financial, customer, internal process and, learning and growth perspective), are seen through the concept of strategic map in a manner to be shown as the relationship among them in achieving goals. if in the existing perspectives the goals based on the sustainable development policy are added, it can be the first step for application of sustainability balanced scorecard method (sbsc) method (möller, schaltegger 2005, 2008). for the purposes of sustainable development, sustainability approach should be integrated in the system of integrated performance measurement system based on the basic bsc method (bsc-designer, 2014) in preparing sustainability strategy, using sbsc framework for sustainability benchmarking (figge, hahn, schaltegger, wagner 2002; hahn, wagner 2001; jones, atkinson, loren, harris 2012; schaltegger, lüdeke, freund 2011; hoque 2006). sbsc method basically upgraded principle of bsc method, with the multicriteria framework that enables measurement and management in the field of sustainable development and socially responsible behaviour of companies, as they are oriented towards matching information on internal and external focus. the sustainable balanced scorecard (sbsc) follows the basic concepts of bsc methods, enhanced with the qualitative, environmental and social aspects of development (figge, hahn, schaltegger, and wagner 2001) and are directed milena peršić, katarina bakija, dubravka vlašić114 to linking the short-term actions with the strategic goals. in strategic decision making sbsc provides relevant information for adoption of sustainable strategies, because it provides framework for adopting goals and measurable objectives connecting financial and non-financial information, both included in the content of corporate “sustainable” strategy. sbsc is also relevant framework of information, necessary in the process of translating sustainable principles included in company’s vision and mission, to be achieved in the real time (hahn, wagner 2001, 4–5). strategic goals defined in strategic plans, create framework for development of appropriate operative plans as well as yearly budgets. in order to establish control of developing strategy in the short term period it would be necessary to provide appropriate tools in responsibility accounting according to the sbsc starting points. specification will only be possible if the system provides short term reports containing financial and non-financial information as well as the sbsc provides information for long-term decision making. results of short-term actions should be evaluated pursuant to the 4 basic perspectives, enriched with specific ecological, social and other non-financial goals, in the manner to view interdependence among elements of the economic, ecological and social development prospects. sustainability reporting is basically developed from the environmental reporting, based on information prepared by environmental accounting (rikhardsson, bennett, bouma, schaltegger 2006) for the purposes of internal and external users. for the purposes of managing sustainable development, reporting system has to be based on the triple bottom line (tbl) model (majid & koe 2012; elkington 1993, 1997). in voluntary manner it is globally well applied in reporting system for external users that is not adequately followed by internal sustainability reporting system. it is possible build sustainability reporting system for internal users, through upgrading the today well developed system of internal financial reporting by segments. the conditions for global benchmarking of achieved results in sustainability development will be possible to gain, if now very good established system of financial reporting, based on international financial reporting standards (ifrs), provision of financial directive (2013/34/eu) and national legislation, will be upgraded with those non-financial and bio-diversity information (minimum of environmental, social and employee matters, in respect for human rights, anti-corruption and bribery matters). today voluntary prepared sustainability reports for external users, through the adoption of the new eu framework for improving quality and comparability… 115 directive, will become mandatory and uniform. that means inclusion of nonfinancial information in those reports which today present only financial information, based on provision of ifrs 27 for enterprises (independent entities) or ifrs 10 for complex systems, such as chains and multinational corporations. the outcome of the research process and conclusions following the provisions of the croatian accounting act the sample mostly represented big companies (70%), which are obligated to apply the provision of the directive 2014/95/eu. the response was submitted mostly from business function managers (65%) or the board members (30%). the sample included manufacturing sector (37%), tourism and hospitality industry (33%), commerce (8%), telecommunication (7%) and others. the sample consisted of 60% of those companies that have the status of a joint stock company (50% of them listed their shares on the stock exchange) and the remaining are limited liability companies. investigated companies have mainly or fully domestic private ownership (27%), mainly or fully foreign ownership (23%), mainly or fully state ownership – parent company or subsidiary (20%), mainly or fully foreign private ownership (17%) or subsidiary of foreign company (13%). the strategic goals of croatian companies are in highest rank connected to the needs of improving their market position (sales growth, customer satisfaction, new product development and launching into new markets), while the goals relating to improvement of relations with the employees and local community, as well as the cost rationalization are somewhat lower ranked according to the sustainability priorities positioned among (5) for the best and (1) for the lowest ranked score. environmental protection and improvement as well as upgrading the relations with the community is ranked exactly as timely debt collection and motivating employees for lifelong learning (4.43). improvement of technological support of development is not positioned on the appropriate level (4.29), while reducing the number of total employees is ranked as the least important factor (3.50) for sustainable development of croatian companies. particular emphasis is placed on evaluating the postulates on which sustainability reporting system can be drawn up, as well as the assessment of impact of sustainable development on the success of the companies on the global market. to be able to assess trends in sustainable development, the research results of current investigation with the results of relevant data presented in previous study, conmilena peršić, katarina bakija, dubravka vlašić116 ducted in croatia followed by undp experts (bagić, miošić-lisjak, škrabalo 2007) will be shown. as the eu directive provides only a legal framework for its implementation it is necessary to include relevant standards, schemes and examples of good practice in order to ensure the uniformity in the stage of preparing strategy as well as in the evaluation of achieved results, because it ensures the application of measurable indicators (kpis) and the comparability of the achieved results in the short and long term. as the support of strategic management it is recommended to use specific global, eu-regional or national standards or regulations, as well as iso standards (14000ff, 26000 …), gri (global reporting initiative), un global compact, oecd guiding principles on business and human rights, emas (eco-management and audit scheme), and other recognised frameworks at global, regional or local level. responsibility accounting uses common accounting or industry standards in preparing financial information on segments (ifrs 8, ipsas 18, usali, usar, usfrs …), which are made according to the provisions of directive 2014/95/eu. several results of empirical research will be presented and analysed. figure 1. quality & ecoreporting framework used by croatian companies s o u r c e : results of empirical research. framework for improving quality and comparability… 117 the figures above indicate that croatian companies mostly apply principles of the quality iso standards of total quality management (certification to iso 9001), but not in the same way the efqm norm. much less are present the standards in field of improve and protection of environment (certification to iso 14001), as well as the framework for an occupational health and safety management system and working conditions, aligned to internationally recognized best practice (certification to bs ohsas 18001). while in previous years was applied different national standards, indicators and criteria, which follow national environmental policy (waste, water, co2 emissions, gas emissions) defined through the national sustainable development strategy and environmental protection and energy efficiency fund of the republic of croatia, in recent years have given way to priority of application internationally accepted standards. in the eu widely applied standard emas (eco management and audit scheme). in comparison to the previous survey significant progress in croatian companies can be noted in certification of different company processes, using international recognised quality, and ecoquality standards. figure 2. sustainability reporting framework used by croatian companies s o u r c e : results of empirical research. further improvements can be expected, if through the national legislation will be implemented new requirements of eu directive in field of disclosure milena peršić, katarina bakija, dubravka vlašić118 non-financial information. the success of the implementation of the new eu directive can guarantee the relationship with globally recognized sustainability reporting standards. the next picture present the experiences of sustainability oriented croatian companies, in using sustainability standards in preparing sustainability reports for external users. croatian companies follow globally recognised principles of sustainability reporting (gri, un global compact’s requirements, csr index), although is the first place reserved for national standards (cr bcsd indicators) prepared by croatian council for sustainable development or other prepared on the local or corporate level. sustainability reporting is very important because mostly croatian companies are oriented towards foreign market (proof 45% of investigates companies in the sample gaining more than 50% of revenue on the foreign markets). looking more closely to the sustainability element of development, respondents in croatian companies placed the greatest importance on compliance with the sustainability regulations (100%), which is in some way the precondition for future successful implementation on new directive. as is the sustainable development the strategic priority of modern business, sustainability reporting system has to be also strategically oriented. research results show that 60% of croatian companies prepare long-term goals in the frame of strategic plans, which should be prepared in accordance with the strategic management requirements. research results show that the highest priority of strategic management in croatian companies is given to ensuring customer satisfaction (90%), following regular payment of salaries (87%), sales growth (80%), cost reduction (79%), new product development (65%). as can be seen in the following figure, croatian managers are primarily focused on the achievement of economic objectives. unfortunately, environment care (59%) are not ranked as the highest priority, as well as the improvement of relations with the community (53%), thus the environmental and social objectives are ranked lower than economic. in strategic approach financial and non-financial goals are interlaced and higher emphasis is on the use of financial indicators in the process of preparing and evaluating the strategy. it is therefore necessary to act in direction of raising awareness of management in field of sustainable development, through the competition of sustainability results, based on benchmarking of presented sustainability information for external users. framework for improving quality and comparability… 119 figure 3. ranking priority of strategic goals in the croatian companies s o u r c e : results of empirical research. sustainable reporting system of croatian companies outlines the website of hr bcsd where members of corporate social responsibility group collected and presented their results in sustainability report through different names and content. the most commonly used term is “report of sustainable development” (34,7%) or “sustainability report” (22,2%), following by “environmental protection report” (15,3%), “report on socially responsible business”, “corporate social responsibility”, “social report”, “sustainability and social responsibility report”, “progress report” (1,4% to the 9,7%), or simply “annual report” (4%). in the last three years of examination, only about 5% of listed companies in croatia disclosed their sustainability report for public use. as their volume, manner and character are very different, presented information is not suitable for comparison, and need to be used minimum of common indicators as a prerequisite for introduce benchmarking process. until then, these reports will remain to satisfy formality, and not with the intention to be really involved in the process of achieving goals of sustainable development presented, as presented in the national sustainable development strategy. some activities of hr bcsd and csr group indicate that can be expected improvements through using csr milena peršić, katarina bakija, dubravka vlašić120 index (omazi, vlahov 2011, 44–52), on which may be based benchmarking of sustainability results of croatian companies. the quality of sustainability information presented in reports for external users and directed in the process of strategic planning, depends of quality of internal accounting and system of collecting and presenting sustainability information on the daily and monthly level, which required high level of harmonization between internal and external sustainability reporting system. starting point to achieve this goals are good experiences of segment (financial) reporting, widely used in croatian companies and based on using international financial reporting standard 8 (ifrs 8 2009) or other segment reporting standard, prepared for specific needs of some industry or goals groups (usali 2014; usar 2012; usfrs 2005), as well as for public sector purpose (ipsas 18). as provisions of accounting act in croatia, obligate all large listed companies to disclose segment information, the aim was to investigate the extent to which those provision are applied consistently. also were used numerous of earlier studies conduct in croatian companies, in which authors have been directly or indirectly involved (ilić 1997; turčić 2000; zanini 2004 & 2011; peršić, janković 2006; peršić, janković, vlašić, vejzagić 2007; peršić, peruško-stipić 2009; poldrugovac 2009 & 2011; janković, peršić, zanini-gavranić 2011; janković, peršić 2011; peršić, poldrugovac 2011; peršić, janković 2010, 2011; peršić, janković, poldrugovac 2012; vejzagić, peršić, janković 2012; vlašić 2012) shown the developed level of segment reporting in croatian companies. further to this, the objective was to evaluate the position of segment reporting of croatian listed companies, which present financial reports through croatian financial agency (cfa) and their shares list on the zse (zagreb stock exchange). it was used national sector classification (25 different industries) in accordance with global industry classification standard (gics). examined results of this empirical research for year 2013, are presented in the following table. it is evident that only 23,8% of listed croatian companies disclose financial information by segment. for the purpose of sustainability reporting the existing system of segment reporting should be upgraded and improved with the specific non-financial information, following sustainability reporting standards and the elements of the guidebook in compliance with the provisions of directive 95/2014/eu, and directed to achieve goals of sustainable development. the harmonisation between internal and external sustainability reports is directed to better assessing divisional performance (atrill & mclaney 2007, 374–376) and also contribute to higher environmental and social responsibility information. framework for improving quality and comparability… 121 table 1. segment reporting information present in the listed companies in croatia industries according to the global industry classification standard and national classification sector examined listed companies companies which present segmental information % (2) of (1) 0 1 2 3 74. business services (legal, accounting, architecture, engineering, technical testing, analysis …) 10 4 40,0 40. / 65. finance & insurance 33 12 36,4 55. accommodation / food & beverage 41 13 31,7 30. food, beverages & tobacco products 22 5 22,7 31. / 32. manufacture of electrical equipment 9 2 22,2 20. / 61. 63. transportation and storage 12 2 16,7 15.–21. / 24–36. production of wood and paper products; coke, and refined petroleum products; chemicals and chemical products; pharmaceutical products and preparations; computer, printer, electronic and optical products; textiles, apparel, leather; rubber, plastics products, non-metallic mineral product; metals products; machinery and transport equipment 30 5 16,7 42. construction 10 1 10,0 all other activities 29 5 12,8 total 206 49 23,8 s o u r c e : results of empirical research of croatian listed companies for the year 2013. information needed for reporting system and benchmarking process, should be available directly from the accounting information system (environmental and / or sustainability accounting), which means that it must be every business event registered on the place where business impact on environment and community was made, and in real time when incurred (jianu, jianu, raileanu 2011). in harmonization process has to be follow requirements of standard iso 14000ff, global reporting initiative, un compact, emas, national or corporate indicators, as a base for guiding corporate actions towards achieving sustainable development goals from the lowest to the highest level of the companies’ decision making system (banker, potter, srinivasan 2000; brander brown, mcdonnell 1995; mia, patiar 2001; philips 1999; pavlatos, paggios 2009). harmonisation of internal and external sustainability reporting system is imposed as a necessity and would be based on relevant accounting tools and supported by information technology and software. milena peršić, katarina bakija, dubravka vlašić122  conclusion sustainable reporting system of croatian companies should be based on sustainable strategies, respect the provisions of directive 2014/95/eu and globally recognized sustainability standards and supporting through the high level of it. accounting information system as a source of sustainability information, should systematically respond to new sustainability management requirements, and provide framework for benchmarking, and for evaluating how sustainability strategies are performed. fields of adapting contemporary accounting to the new sustainability requirements are presented in the figure. figure 4. from financial to sustainable reporting regulations and standards s o u r c e : proposed by authors. special emphasis would be placed on the harmonization between segment and external reporting system, strategic planning based on the sbsc method requirements, through the combination of presented financial and non-financial information, in accordance with the principle of sustainable development, presented in the eu strategies, for “corporate social responsibility” and “the europe 2020” (marlier, natali, van dam 2010), and take into account specifics of the particular circumstances of a single company. the process starts with the policy for protection natural resources, be focused on sustainability of product and services, and oriented on 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(2011). accounting preconditions for preparing information for business decision-making in hospitality industry, (phd thesis, mentor m. persic) university of pula, economy and tourism dr m. mirković pula (defense: 03.06. 2011). copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: may 7, 2015; date of acceptance: october 15, 2015. * contact information: diana.tampu@yahoo.com, bucharest university of economics studies, management faculty, bucharest, splaiul unirii, no 9, romania, phone: +40721.566.427. tampu d. l. (2015). human motivation and corporate governance. copernican journal of finance & accounting, 4(2), 177–193. http://dx.doi.org/10.12775/cjfa.2015.023 diana larisa tampu* bucharest university of economics studies human motivation and corporate governance keywords: governance, economic growth, human resource motivation. j e l classification: g34, o15. abstract: in one stream of research, this paper assesses the effect that human motivation has on corporate governance indicators. by doing this, we will use the six dimensions of corporate governance at country level and four dimensions of human motivation provided by oecd. the human motivation dimensions had been chosen considering the expectations theory of vroom. the paper is organized into three main parts presenting if the chosen governance indicators have different predictors and different possible consequence that depend on human motivation. the idea that corporate governance should be gain by human motivation will be illustrated from an empirical point of view with data from twenty developed countries from europe. translated by tampu diana larisa  introduction in the last two decades, there have been spectacular economic developments that can describes a true revolution of this field. the society permanently adapts to the ascending economic trend, and now, from seven years since the crisis has passed we experience a new period of growth. diana larisa tampu178 the development of policy studies from current years has concentrated on the demand for good governance. although the intrinsic significance of good governance as a development is presently totally admitted, its instrumental value as a way to better development performance is still not well appreciated, despite the evolution of a substantial and still expanding body of literature (rodrik 2008; acemoglu, robinson 2012). zhuang, de dios, and lagman-martin (2010) comprehensively examine the literature on associations between governance, economic development, and inequality; and they also address issues of causality. acemoglu and robinson (2012) analyse governance values by comparing cities adjacent to each other on the united states–mexico border. goncalves (2013) reviews particular governance tools and components of human development. starting from his study, our research goes deeper in the human development field, presenting association between governance and human motivation. 1943 was a year of reference in motivation theory as a. maslow proposed in a theory of human motivation a scale of needs that will go down in history as the maslow’s pyramid. the 1960s are noted by the appearance of the works of authors like r. likert, hj leavitr, c. argyris, c. rogers, v. vroom, who scored in their own way, reference points for motivation theory. f. herzberg, considered the most important representative and the new guidelines of the school of human relations is the first theoretician of motivation, which highlights the gap between the factors of satisfaction and dissatisfaction in work (ionel tampu d. 2015). a summary of the motivation theories, actually a systematic and chronological background of motivation is shown in table 1. table 1. evolution of the concept of motivation motivation of first generation (1900–1950) motivation ii generation (1950–1990) motivation of third generation (after 1990) conceptions about the employee everyone is equally individuals can be classified by major categories every person is different in its own way identical solutions for all models of solution where appropriate unique solution for each person, within a complex system. period of time – industrialization: f. taylor – movement of human relations: a. maslow f. herzberg – systemic thinking and global vision; – intuitive management. human motivation and corporate governance 179 motivation of first generation (1900–1950) motivation ii generation (1950–1990) motivation of third generation (after 1990) the reason for motivation – fear / hope – material or financial advantages – listening to employees – adaptation of jobs; – recognition of the contribution. – possibility of expression and personal achievement; – intrinsic motivation. s o u r c e : authors’ opinion after ionel tampu d. 2015. osterloh, frey and frost (2001), treat motivational content as an endogenous variable of governance, basing their strategies on the behavioral hypothesis of opportunism as a worst-case scenario. this scenario is the exclusive motivational data in the dominant organization economics (milgrom, roberts 1992; williamson 1985). we relate to mediation theory of baron and kenny (1986) and judd and kenny (1981) in order to explain the dynamic relationship between motivation and governance effectiveness. we make motivation an exogenous variable and integrate it as a crucial link between performance and governance effectiveness. mediation occurs when an independent variable exerts its effect on the dependent variable through a mediator variable. one of the most used methods of mediation was offered by baron and kenny (1986) and judd and kenny (1981). they analyzed the effect that the independent variable has on the final process (collins, graham, flaherty 1998). research methodology the question that this research wants to answer is if there is any direct correlation between motivation and corporate governance. for doing this we have tested and formulated the following hypotheses: h1. there is a correlation between the extents to which life satisfaction inf luences corporate governance. h2. there is a correlation between the gdp/hour worked and corporate governance. h3. there is a correlation between the level of engagement and corporate governance. h4. there is a correlation between employees working very long hours and corporate governance. h5. corporate governance can be predicted using motivation indicators. diana larisa tampu180 in order to response to the first four assumptions we have analyzed the strength of association between the two elements: corporate governance and motivation, using pearson correlation coefficient. the last hypothesis was tested using a mediation model that will be described in the following sentences. the effect that a independent variable x has on a dependent one: y, through the mediation effect (m) can be computed using this two methods. in the first method are estimated 2 regressions: osterloh, frey and frost (2001), treat motivational content as an endogenous variable of governance, basing their strategies on the behavioral hypothesis of opportunism as a worstcase scenario. this scenario is the exclusive motivational data in the dominant organization economics (milgrom, roberts 1992; williamson 1985). we relate to mediation theory of baron and kenny (1986) and judd and kenny (1981) in order to explain the dynamic relationship between motivation and governance effectiveness. we make motivation an exogenous variable and integrate it as a crucial link between performance and governance effectiveness. mediation occurs when an independent variable exerts its effect on the dependent variable through a mediator variable. one of the most used methods of mediation was offered by baron and kenny (1986) and judd and kenny (1981). they analyzed the effect that the independent variable has on the final process (collins, graham, flaherty 1998). research methodology the question that this research wants to answer is if there is any direct correlation between motivation and corporate governance. for doing this we have tested and formulated the following hypotheses: h1. there is a correlation between the extents to which life satisfaction influences corporate governance. h2. there is a correlation between the gdp/hour worked and corporate governance. h3. there is a correlation between the level of engagement and corporate governance h4. there is a correlation between employees working very long hours and corporate governance h5. corporate governance can be predicted using motivation indicators. in order to response to the first four assumptions we have analyzed the strength of association between the two elements: corporate governance and motivation, using pearson correlation coefficient. the last hypothesis was tested using a mediation model that will be described in the following sentences. the effect that a independent variable x has on a dependent one: y, through the mediation effect (m) can be computed using this two methods. in the first method are estimated 2 regressions: (1) y – the dependent variable; x – the independent variable; (1) y – the dependent variable; x – the independent variable; c – the effect that the dependence variable has on the independent variable;c – the effect that the dependence variable has on the independent variable; �� – random variable: is the error model; we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable a b c’ source: baron, kenny 1986 � ���� � c’� � �� � �� (2) m – mediator; c’ – the effect that the dependent variable has on the independent variable through the mediator; �� random variable: is the error model; it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: � ���� � �� � �� (3) �� random variable: is the error model; the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship mediator dependents variable (y) independent variable (x) – random variable: is the error model. we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable c – the effect that the dependence variable has on the independent variable; �� – random variable: is the error model; we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable a b c’ source: baron, kenny 1986 � ���� � c’� � �� � �� (2) m – mediator; c’ – the effect that the dependent variable has on the independent variable through the mediator; �� random variable: is the error model; it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: � ���� � �� � �� (3) �� random variable: is the error model; the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship mediator dependents variable (y) independent variable (x) s o u r c e : baron, kenny 1986. human motivation and corporate governance 181 c – the effect that the dependence variable has on the independent variable; �� – random variable: is the error model; we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable a b c’ source: baron, kenny 1986 � ���� � c’� � �� � �� (2) m – mediator; c’ – the effect that the dependent variable has on the independent variable through the mediator; �� random variable: is the error model; it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: � ���� � �� � �� (3) �� random variable: is the error model; the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship mediator dependents variable (y) independent variable (x) (2) m – mediator; c – the effect that the dependence variable has on the independent variable; �� – random variable: is the error model; we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable a b c’ source: baron, kenny 1986 � ���� � c’� � �� � �� (2) m – mediator; c’ – the effect that the dependent variable has on the independent variable through the mediator; �� random variable: is the error model; it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: � ���� � �� � �� (3) �� random variable: is the error model; the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship mediator dependents variable (y) independent variable (x) – the effect that the dependent variable has on the independent variable through the mediator; c – the effect that the dependence variable has on the independent variable; �� – random variable: is the error model; we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable a b c’ source: baron, kenny 1986 � ���� � c’� � �� � �� (2) m – mediator; c’ – the effect that the dependent variable has on the independent variable through the mediator; �� random variable: is the error model; it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: � ���� � �� � �� (3) �� random variable: is the error model; the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship mediator dependents variable (y) independent variable (x) – random variable: is the error model. it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: c – the effect that the dependence variable has on the independent variable; �� – random variable: is the error model; we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable a b c’ source: baron, kenny 1986 � ���� � c’� � �� � �� (2) m – mediator; c’ – the effect that the dependent variable has on the independent variable through the mediator; �� random variable: is the error model; it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: � ���� � �� � �� (3) �� random variable: is the error model; the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship mediator dependents variable (y) independent variable (x) (3) c – the effect that the dependence variable has on the independent variable; �� – random variable: is the error model; we demonstrate that the independent variable is correlated with the dependent variable. in other words, it is confirmed that the independent variable is a significant predictor of the dependent variable. the proposed mediator is regressed on the independent variable. in other words, it is confirmed that the independent variable is a significant predictor of mediator. if the mediator is not associated with the independent variable, then it could possibly mean nothing. figure 1. mediation relationship between the independent variable and the dependent variable a b c’ source: baron, kenny 1986 � ���� � c’� � �� � �� (2) m – mediator; c’ – the effect that the dependent variable has on the independent variable through the mediator; �� random variable: is the error model; it is estimated that the coefficient “a”, to be the effect of the independent variable on the mediator: � ���� � �� � �� (3) �� random variable: is the error model; the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship mediator dependents variable (y) independent variable (x) – random variable: is the error model. the result is the indirect or the mediated effect. the rationale underlying of this method is as follows: the mediation depends on the extent to which the mediator changes and to the extent to which the mediator affects the result variable. baron and kenny (1986) recommend an algorithm consists of four successive steps: demonstration of a relationship between the independent variable and the dependent variable (line “c”). it is demonstrated those that there is an effect that may be mediated. the existence of a such a relationship can be highlighted through a simple regression equation; demonstration of a relationship between the independent variable and the mediator, considered as an effect (line “a”); highlighting the relationship between mediator and outcome, similar establish the first relationship (line “b”); the mere existence of a relationship between the mediator and the effect is not sufficient, it must be proven that the link is determined at the same time by the mediator together. in the current research the presence of this steps will be highlighted by calculating the 3 regression equations presented before. in this research we considered the motivation as a key mediator of the positive effects that its various changes have had on the governance performance among 20 countries (austria, belgium, czech republic, denmark, estonia, finland, france, germany, hungary, ireland, italy, luxembourg, netherlands, poland, portugal, romania, slovenia, spain, sweden, uk ). the challenge of choosing the appropriate indicators in order to demonstrate the mediation effect was big. the governance dimensions were analysed using data provided by the world bank. the six dimensions of governance at country level are associated with six governance indicators (world bank 2014): voice and accountability; political stability and absence of viodiana larisa tampu182 lence/ terrorism; government effectiveness; regulatory quality; rule of law; control of corruption. assuming that on the based theories underlying motivations are the people needs (maslow 1943), their attitude to work (mcgregor 1960), the factors that inf luence their satisfaction at work understood as emotional state (herzberg 1959) or their expectations (vroom 1964) we have chosen three particular indicators that we may assume to measure citizens motivation: life satisfaction, level of engagement, employees working very long hours. the performance of a particular country was measured using gdp/hour worked. all of them are social indicators measured by oecd. measuring feelings can be very subjective, but is the only way in which we can quantify a personal evaluation of an individual motivation. our assumption was based on the following: the gdp/ hour worked measure the productivity of the population for the entire economy. in the expectations theory of vroom, these are the results. the opinion that every individual has about himself and about the possibility to achieve a given objective from which he submits certain efforts will be measured by level of engagement. individuals are not motivated to work if their results aren’t as expected, in this way their engagement in work will be lower. the relationship between each individual and his work result will be measured using: life satisfaction. each individual attaches a certain characterization to his results, a certain amount of reward. in terms of motivation theory, the way that a particular experience inf luences an individual in a positive or negative way can be quantified using life satisfaction indicator. these experiences have the ability to motivate people to pursue and reach their goals. the dynamic relationship between motivation and corporate governance in order to choose what indicators will be used in the mediation model and to test the 5 previously outlined assumptions we have done the pearson correlation between corporate governance indicators and motivation indicators. taking into consideration the empirical rules for the interpretation of the correlation coefficient of colton (1974), we will chose in our mediation model only the indicators that form a strong relationship: life satisfaction and voice and accountability, government effectiveness, regulatory quality, rule of law, control of corruption on the one hand and gdp/hour worked and voice and accountability, control of corruption on the other hand. human motivation and corporate governance 183 table 2. pearson correlations between life satisfaction, engagement, gdp_hour_worked and government indicators voice and accountability political stability and absence of violence/ terrorism government effectiveness regulatory quality rule of law control of corruption life satisfaction pearson correlation ,880** ,431 ,823** ,774** ,835** ,776** sig. (2-tailed) ,000 ,057 ,000 ,000 ,000 ,000 n 20 20 20 20 20 20 engagement pearson correlation ,119 -,276 ,091 ,074 ,122 ,212 sig. (2-tailed) ,618 ,238 ,703 ,757 ,607 ,368 n 20 20 20 20 20 20 gdp/hour worked pearson correlation ,738** ,185 ,666** ,596** ,690** ,704** sig. (2-tailed) ,000 ,434 ,001 ,006 ,001 ,001 n 20 20 20 20 20 20 employees working very long hours pearson correlation -,348 -,325 -,239 -,315 -,185 -,312 sig. (2-tailed) ,133 ,162 ,311 ,177 ,435 ,180 n 20 20 20 20 20 20 * correlation is significant at the 0.05 level (2-tailed). ** correlation is significant at the 0.01 level (2-tailed). s o u r c e : authors’ calculations based on ocde and w wb (2013) data. for all the above terms we can accept the significance of this correlation only if we have significance threshold lower than 0.01 or 0.05. for all the above terms the value of sig. (2-tailed) is zero, so we can admit that we have a significant statistics for life satisfaction, gdp/hour worked, voice and accountability, government effectiveness, regulatory quality, rule of law, control of corruption. after we have chosen variables we have to test if there is a significant correlation between all of them. in order to do this we compute o bivariate correlation in spss, observing that all of them are significant correlated. diana larisa tampu184 table 3. testing the significance of correlation between the chosen indicators life satisfaction gdp/hour worked government effectiveness life satisfaction pearson correlation 1 ,735** ,823** sig. (2-tailed) ,000 ,000 n 20 20 20 gdp/hour worked pearson correlation ,735** 1 ,666** sig. (2-tailed) ,000 ,001 n 20 20 20 government effectiveness pearson correlation ,823** ,666** 1 sig. (2-tailed) ,000 ,001 n 20 20 20 ** correlation is significant at the 0.01 level (2-tailed). s o u r c e : authors’ calculations based on ocde and w wb (2013) data. after the calculation, we can admit that we have a positive correlation between life_satisfaction and gdp/hour worked (coefficient of 0,735) and between gdp_hour_worked and government effectiveness (coefficient of 0,666). there cannot be identified a correlation between engagement and corporate governance, and between employees working very long hours and corporate governance (coefficient between 0 and 3). in this case, we admit that the hypothesis 1 and 2 are accepted and we reject the hypothesis 3 and 4. in order to observe the mediation effect of motivation and to test the last hypothesis we have performed the following three steps. step 1. we demonstrate that the initial variable is correlated with the result. we have used government effectiveness as criterion variable and gdp/hour worked as the predictor. human motivation and corporate governance 185 figure 2. checking the link between gdp/hour worked and government effectiveness figure 2. checking the link between gdp/hour worked and government effectiveness r r square std. error of the estimate change statistics durbin-watson f change sig. f change ,666a ,444 ,3654926 14,378 ,001 2,019 y=0.295+0.021x a. predictors: (constant), gdp/hour worked b. dependent variable: government effectiveness s o u r c e : authors’ calculations based on ocde and w wb (2013) data. the value of r square at 0.36 signifies that 36% of the governance effectiveness variation depends on gdp/hour worked. the value of the durbin watson test at a significance threshold of 5%, make us to accept the lack of autocorrelation of 1-st order errors. step 2. demonstration of the fact that the initial variable is correlated with the mediator. we have used life satisfaction as criterion variable and gdp/hour worked as the predictor (estimation and path test „a”). this step involves essentially treating the mediator as a result variable. following the investigations, it results that the mediator is correlated with the exogenous variable. as one of our variables: life satisfaction is from human behaviour, it is atypical fact that r-squared values to be lower than 50%, as humans are simply diana larisa tampu186 harder to predict than, physical processes. the value of the durbin watson test at a significance threshold of 5%, make us to accept the lack of autocorrelation of 1-st order errors. figure 3. checking the link between gdp/hour worked and life satisfaction as one of our variables: life satisfaction is from human behaviour, it is a typical fact that r-squared values to be lower than 50%, as humans are simply harder to predict than, physical processes. the value of the durbin watson test at a significance threshold of 5%, make us to accept the lack of autocorrelation of 1-st order errors. figure 3. checking the link between gdp/hour worked and life satisfaction y= 4.596+0,40x a. predictors: (constant), gdp/hour worked b. dependent variable: life satisfaction r r square std. error of the estimate change statistics durbin-watson r square change f change ,735a ,540 ,57500 ,540 21,167 2,004 y= 4.596+0,40x a. predictors: (constant), gdp/hour worked b. dependent variable: life satisfaction s o u r c e : authors’ calculations based on ocde and w wb (2013) data. step 3: demonstration of the fact that the mediator affects the result variable. we have used life satisfaction as a predictor variable and government effectiveness as criterion variable. it is not enough simply to correlate the result with the mediator. certainly they are related, since both are caused by the same exogenous variable. james and brett (1984) argued that step 3 should be amended, without the need for initial variable control. the reason is that if there is a complete mediation there is no need to control the original variable. but how the full mediation does not always occur, we considered neces human motivation and corporate governance 187 sary to check the exogenous variable in step 3, in the case of the 20 countries examined. figure 4. checking the link between gdp/hour worked and government effectiveness figure 4. checking the link between gdp/hour worked and government effectiveness y= -1.799+0,476x a. predictors: (constant), life satisfaction b. dependent variable: government effectiveness source: authors’ calculations based on ocde and wwb (2013) data. table 4. coefficients a r r square std. error of the estimate change statistics durbinwatson r square change f change ,823a ,678 ,2782074 ,678 37,882 2,157 r r square std. error of the estimate change statistics durbin-watson r square change f change ,823a ,678 ,2782074 ,678 37,882 2,157 y= -1.799+0,476x a. predictors: (constant), life satisfaction b. dependent variable: government effectiveness s o u r c e : authors’ calculations based on ocde and w wb (2013) data. table 4. coefficients a model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) -1,633 ,575 -2,838 ,011 life satisfaction ,419 ,116 ,726 3,619 ,002 gdp/hour worked ,004 ,006 ,133 ,663 ,516 a. dependent variable: government effectiveness s o u r c e : authors’ calculations based on ocde and w wb (2013) data. diana larisa tampu188 in order to test the statistical power of the model we used the f-test and durbin-watson test. table 5. anova stage 1: dependent variable: government effectiveness predictors: (constant), gdp/hour worked sum of squares df mean square f sig. regression residual total 1,921 1 1,921 14,378 ,001b 2,405 18 ,134 4,325 19 stage 2: dependent variable: life satisfaction predictors: (constant), gdp/hour worked regression residual total 6,998 5,951 12,949 1 18 19 6,998 ,331 21,167 ,000b stage 3: dependent variable: government effectiveness predictors: (constant), life satisfaction regression residual total 2,932 1,393 4,325 1 18 19 2,932 ,077 37,882 ,000b s o u r c e : authors’ calculations based on ocde and w wb (2013) data. in the anova table, the most important statistic is the significance f – which is used to test the significance of the independent variables. the computations indicates that our model’s r˛ is significantly different from zero in all three stages, as follows: ■ f(1.18)= 14.378, p =0.001< 0.05, the regression model statistically significantly predicts the outcome variable; ■ f(1.18)=21.167, p =0.000< 0.05, the regression model statistically significantly predicts the outcome variable; ■ f(1.18)=37.882, p =0.000< 0.05, the regression model statistically significantly predicts the outcome variable. there is independence of observations (verified through durbin-watson statistic). the value of durbin-watson test is between 1.539 and 2.257 (figure 2,3,4). the general rule is that the residuals are uncorrelated if the durbin-watson statistic is approximately 2, so indicating in our case a no serial correlation (watson 1950). human motivation and corporate governance 189 in the final mediation model, the three indicators presented above are connected in a structural framework described in the figure 5. the value of the mediator effect c-c', is lower than the direct effect c. figure 5. mediation relationship between the independent variable and the dependent variable there is independence of observations (verified through durbin-watson statistic). the value of durbin-watson test is between 1.539 and 2.257 (figure 2,3,4). the general rule is that the residuals are uncorrelated if the durbin-watson statistic is approximately 2, so indicating in our case a no serial correlation (watson 1950). in the final mediation model, the three indicators presented above are connected in a structural framework described in the figure 5. the value of the mediator effect c-c', is lower than the direct effect c. figure 5. mediation relationship between the independent variable and the dependent variable 0.40 0.419 0.295 c’ source: authors calculations. in order to test the mediation relationship we use sobel test. sobel test, often called coefficients product test. it involves calculating the ratio between “a”, “b” and standard error and mediation effect, comparing with the critical value of the standard normal distribution assumed for the initial α (preacher, hayes, 2008). (5) the standard error _of the mediation effect (sobel 1986) (6) were sa and sb are the standard errors of the coefficients a and b. life satisfaction gdp/hour worked governance effectiveness s o u r c e : authors calculations. in order to test the mediation relationship we use sobel test. sobel test, often called coefficients product test. it involves calculating the ratio between “a”, “b” and standard error and mediation effect, comparing with the critical value of the standard normal distribution assumed for the initial α (preacher, hayes, 2008). there is independence of observations (verified through durbin-watson statistic). the value of durbin-watson test is between 1.539 and 2.257 (figure 2,3,4). the general rule is that the residuals are uncorrelated if the durbin-watson statistic is approximately 2, so indicating in our case a no serial correlation (watson 1950). in the final mediation model, the three indicators presented above are connected in a structural framework described in the figure 5. the value of the mediator effect c-c', is lower than the direct effect c. figure 5. mediation relationship between the independent variable and the dependent variable 0.40 0.419 0.295 c’ source: authors calculations. in order to test the mediation relationship we use sobel test. sobel test, often called coefficients product test. it involves calculating the ratio between “a”, “b” and standard error and mediation effect, comparing with the critical value of the standard normal distribution assumed for the initial α (preacher, hayes, 2008). (5) the standard error _of the mediation effect (sobel 1986) (6) were sa and sb are the standard errors of the coefficients a and b. life satisfaction gdp/hour worked governance effectiveness (5) the standard error _of the mediation effect (sobel 1986) there is independence of observations (verified through durbin-watson statistic). the value of durbin-watson test is between 1.539 and 2.257 (figure 2,3,4). the general rule is that the residuals are uncorrelated if the durbin-watson statistic is approximately 2, so indicating in our case a no serial correlation (watson 1950). in the final mediation model, the three indicators presented above are connected in a structural framework described in the figure 5. the value of the mediator effect c-c', is lower than the direct effect c. figure 5. mediation relationship between the independent variable and the dependent variable 0.40 0.419 0.295 c’ source: authors calculations. in order to test the mediation relationship we use sobel test. sobel test, often called coefficients product test. it involves calculating the ratio between “a”, “b” and standard error and mediation effect, comparing with the critical value of the standard normal distribution assumed for the initial α (preacher, hayes, 2008). (5) the standard error _of the mediation effect (sobel 1986) (6) were sa and sb are the standard errors of the coefficients a and b. life satisfaction gdp/hour worked governance effectiveness (6) were sa and sb are the standard errors of the coefficients a and b. this t statistic can then be compared to the normal distribution to determine its significance. the test statistic for the sobel test is 1.40, with an associated p-value of 0.041 and a standard error of 0.021. diana larisa tampu190 table 5. testing initial hypotheses and final model validation theoretical model case study model this t statistic can then be compared to the normal distribution to determine its significance. the test statistic for the sobel test is 1.40, with an associated p-value of 0.041 and a standard error of 0.021. table 5. testing initial hypotheses and final model validation source: authors’ calculations. the fact that the observed p-value does fall below the established alpha level of .05 indicates that the association between the gdp/hour worked and governance effectiveness is reduced significantly by the inclusion of the mediator (in this case, life satisfaction) in the model; in other words, there is evidence of mediation in the model and hypothesis 5 is accepted. the role of life satisfaction as mediator in such situations requires compromises between market agents. in order to fully understand the effect that motivation of citizens has on increasing corporate governance indicators, it should not be treated as a monolithic element. the mediator element, seen as a facilitator and communicator is considered to be a channel of communication between agents on the market. the role of mediator as a preparatory involves a substantial contribution to the work of proposing new solutions to the contesters or parties. a final role that can be picked up by the mediator facilitates the handling of actors and the expression of possible solutions. our analyses deemed the motivation as a facilitator element. conclusions in order to find if motivation can be analysed as a mediation element between performance of the citizens and governance effectiveness we have done an empirical research on theoretical model case study model � ���� � �� � �� (1) y=0.295+0.021x � � �� � c’� � �� � �� (2) y= 0.04 x + 0.419 m + – 1.633 � ���� � �� � �� (3) m= 0,40x + 4.596 c 0.295 a 0.40 b 0.419 c’ 0.04 c-c’ 0.255 sa 0.44 sb 0.015 sobel test 1.40678531 std. error 0.021121707 p-value 0.04166681 y=0.295+0.021x this t statistic can then be compared to the normal distribution to determine its significance. the test statistic for the sobel test is 1.40, with an associated p-value of 0.041 and a standard error of 0.021. table 5. testing initial hypotheses and final model validation source: authors’ calculations. the fact that the observed p-value does fall below the established alpha level of .05 indicates that the association between the gdp/hour worked and governance effectiveness is reduced significantly by the inclusion of the mediator (in this case, life satisfaction) in the model; in other words, there is evidence of mediation in the model and hypothesis 5 is accepted. the role of life satisfaction as mediator in such situations requires compromises between market agents. in order to fully understand the effect that motivation of citizens has on increasing corporate governance indicators, it should not be treated as a monolithic element. the mediator element, seen as a facilitator and communicator is considered to be a channel of communication between agents on the market. the role of mediator as a preparatory involves a substantial contribution to the work of proposing new solutions to the contesters or parties. a final role that can be picked up by the mediator facilitates the handling of actors and the expression of possible solutions. our analyses deemed the motivation as a facilitator element. conclusions in order to find if motivation can be analysed as a mediation element between performance of the citizens and governance effectiveness we have done an empirical research on theoretical model case study model � ���� � �� � �� (1) y=0.295+0.021x � � �� � c’� � �� � �� (2) y= 0.04 x + 0.419 m + – 1.633 � ���� � �� � �� (3) m= 0,40x + 4.596 c 0.295 a 0.40 b 0.419 c’ 0.04 c-c’ 0.255 sa 0.44 sb 0.015 sobel test 1.40678531 std. error 0.021121707 p-value 0.04166681 y= 0.04 x + 0.419 m + – 1.633 this t statistic can then be compared to the normal distribution to determine its significance. the test statistic for the sobel test is 1.40, with an associated p-value of 0.041 and a standard error of 0.021. table 5. testing initial hypotheses and final model validation source: authors’ calculations. the fact that the observed p-value does fall below the established alpha level of .05 indicates that the association between the gdp/hour worked and governance effectiveness is reduced significantly by the inclusion of the mediator (in this case, life satisfaction) in the model; in other words, there is evidence of mediation in the model and hypothesis 5 is accepted. the role of life satisfaction as mediator in such situations requires compromises between market agents. in order to fully understand the effect that motivation of citizens has on increasing corporate governance indicators, it should not be treated as a monolithic element. the mediator element, seen as a facilitator and communicator is considered to be a channel of communication between agents on the market. the role of mediator as a preparatory involves a substantial contribution to the work of proposing new solutions to the contesters or parties. a final role that can be picked up by the mediator facilitates the handling of actors and the expression of possible solutions. our analyses deemed the motivation as a facilitator element. conclusions in order to find if motivation can be analysed as a mediation element between performance of the citizens and governance effectiveness we have done an empirical research on theoretical model case study model � ���� � �� � �� (1) y=0.295+0.021x � � �� � c’� � �� � �� (2) y= 0.04 x + 0.419 m + – 1.633 � ���� � �� � �� (3) m= 0,40x + 4.596 c 0.295 a 0.40 b 0.419 c’ 0.04 c-c’ 0.255 sa 0.44 sb 0.015 sobel test 1.40678531 std. error 0.021121707 p-value 0.04166681 m= 0,40x + 4.596 c 0.295 a 0.40 b 0.419 c’ 0.04 c-c’ 0.255 sa 0.44 sb 0.015 sobel test 1.40678531 std. error 0.021121707 p-value 0.04166681 s o u r c e : authors’ calculations. the fact that the observed p-value does fall below the established alpha level of .05 indicates that the association between the gdp/hour worked and governance effectiveness is reduced significantly by the inclusion of the mediator (in this case, life satisfaction) in the model; in other words, there is evidence of mediation in the model and hypothesis 5 is accepted. the role of life satisfaction as mediator in such situations requires compromises between market agents. in order to fully understand the effect that motivation of citizens has on increasing corporate governance indicators, it should not be treated as a monolithic element. the mediator element, seen as a facilitator and communicator is considered to be a channel of communication between agents on the market. the role of mediator as a preparatory involves a substantial contribution to the work of proposing new solutions to the contesters or parties. a final role that can be picked up by the mediator facilitates the handling of actors and the expression of possible solutions. our analyses deemed the motivation as a facilitator element. human motivation and corporate governance 191  conclusions in order to find if motivation can be analysed as a mediation element between performance of the citizens and governance effectiveness we have done an empirical research on 19 countries. the numerical stability of the algorithm used in this research was conducted according to the sensitivity of the rounding errors and other numerical uncertainties that may appear in the calculation. in the end, in order to see how well these methods describe our supposition we have analysed the sobel test. we are conscious that the value of sobel test of 1.40 and its std error just qualify the model and not classify it in trusted or untrusted. the present study intention is to combine behavioural economic elements that inf luence economic decisions of individuals and have consequences on governance effectiveness. as can be observed from the above analysis there is a direct and strong correlation between cognitive and subjective indicators like life satisfaction and governance indicators, between gdp/hour worked and governance indicators. the result of our research is that improving motivation will conduct to improving life satisfaction – that might give rise to better governance. because most scholars, as well as policymakers, recognize that good governance is an essential component of sustained economic development (mukaram 2014), a strategic human resources management holds considerable promise for improving government performance (tompkins 2002). the motivational factors that may inf luence performance of the citizens (gdp/hour worked), belongs to life satisfaction and has effects on governance effectiveness are work-related conditions, personal and cultural values, organizations. work-related conditions are inf luenced and inf luence people motivation. clark & oswald (1994) assume that the consequence of being jobless, at any level, is statistically important and negatively connected with life satisfaction. work is central to individual identity, social roles, and social status, it inf luences people attitude to work and their motivation. in countries were governance effectiveness reaches a low value can be easily correlated with countries with a high level of unemployment, poor work conditions. jobs satisfaction – the way in which people like or dislike their jobs (spector 1997) is another important element of life satisfaction. a high income, but with a low level of satisfaction at work is similar to a low level of motivation and in the end with a low level of governance effectiveness. diana larisa tampu192 personal and cultural values, macro-social and political conditions, economic inequality, social and political expenditures can be reduced to maslow’s hierarchy of needs. what have in common countries with a high corporate governance are good’ idi, high life expectancy, low infant mortality, strong credibility in the government. all of these records low levels in countries where corporate governance is low. the solution required to improve human motivation at the macroeconomic level – so that the whole matrix of indicators would rise, is to improve the perception that citizens have in legal system, educational system, social security system and healthcare services. acknowledgment: this work was financially suorted through the project „rou tes of academic excellence in doctoral and post-doctoral research – read” co-financed through the european social fund, by sectoral operational programme human resources development 2007–2013, contract no posdru/159/1.5/s/137926.  references acemoglu, d., & robinson, j. a. (2012). why nations fail: the origins of power, prosperity, and poverty. new york: crown business, 12–39. baron, r. m., & kenny d. a. (1986). the moderator-mediator variable distinction in social psychological research – conceptual, strategic, and statistical considerations. journal of personality and social psychology, 51(6), 1173–1182. beardsley, k. c., quinn, d. m., biswas, b., & wilkenfeld, j. (2006). mediation style and crisis outcomes. the journal of conf lict resolution february, 50, 58–86. http:// dx.doi.org/10.1177/0022002705282862. bradley, r. h., & corwyn, r. f. (2004). life satisfaction among european american, african, american, chinese american, mexican american, and dominican american adolescents. international journal of behavioral development, 28 (5), 385–400. http://dx.doi.org/10.1080/01650250444000072. clark, a. e. & oswald, a. j. (1994). unhainess and unemployment. the economic journal, 104 (424), 648–659. collins, l. m., graham, j. w., & flaherty, b. p. 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(1943). a theory of human motivation. psyhological review, harper & row, 370–396. mcgregor, d. (1960). human side of organization, mcgraw-hill, n.z., 6. milgrom, p. r., & roberts, j. (1992). economics, organization and management (new jersey: prentice-hall). mukaram, a. k. (2014). good governance: pakistan’s economic growth and worldwide governance indicators. pakistan journal of commerce and social sciences, 8 (1), 258– 271. osterloh, m., frey, b.s., & frost, j. (2001). managing motivation, organization and governance. journal of management and governance, 5(3), 231–239. http://dx.doi. org/10.1023/a:1014084019816. preacher, j. k., & hayes, a. f. (2008). asymptotic and resampling strategies for assessing and comparing indirect effects in multiple mediator models. behavior research methods, 40 (3), 879–891. http://dx.doi.org/10.3758/brm.40.3.879. rodrik, d. (2008). thinking about governance in governance, growth, and development decisionmaking—ref lections by douglass north, daron acemoglu, francis fukuyama, dani rodrik. washington, dc: world bank. spector, p.e. (1997). job satisfaction: alication, assessment, causes, and consequences. thousand oaks, california, sage publications. tompkins, j. (2002). strategic human resources management in government: unresolved issues. public personnel management, 3 (1), 95–110. http://dx.doi. org/10.1177/009102600203100110. vroom, v. h. (1964). work and motivation. 1st ed., jossey-bass. williamson, o.e. (1985). the economic institutions of capitalism: firms, markets, relational contracting (new york: free press). zhuang, j., de dios, e., & lagman-martin, a. (2010). governance and institutional quality and the links with growth and inequality: how asia fares [in] zhuang, j. (ed.) poverty, inequality, and inclusive growth in asia: measurement, policy issues, and country studies. london: anthem press and manila: asian development bank. copernican journal of finance & accounting e-issn 2300-3065 p-issn 2300-12402015, volume 4, issue 2 date of submission: august 7, 2015: date of acceptance: october 14, 2015. * contact information: gediminas.zylius@ktu.edu, department of automation, faculty of electrical and electronics engineering, kaunas university of technology, studentų g. 50 154, lt 51367 kaunas, lithuania, phone: +370 642 04 808. žylius g. (2015). evaluation of atm cash demand process factors applied for forecasting with ci models. copernican journal of finance & accounting, 4(2), 211–235. http://dx.doi.org/10.12775/ cjfa.2015.025 gediminas žylius* kaunas university of technology evaluation of atm cash demand process factors applied for forecasting with ci models keywords: computational intelligence, regression, time series forecasting, cash management, data-based forecasting, daily cash f low. j e l classification: c45, c53, g21. abstract: the purpose of cash management is to optimize distribution of cash. effective cash management brings savings to retail banks that are related to: dormant cash reduction; reduced replenishment costs; decrease of cash preparation costs; reduction of cash insurance costs. optimization of cash distribution for retail banking in atm and branch networks requires estimation of cash demand/supply in the future. this estimation determines overall cash management efficiency: accurate cash demand estimation reduces bank overall costs. in order to estimate cash demand in the future, cash f low forecasting must be performed that is usually based on historical cash point (atm or branch) cash f low data. many factors that are uncertain and may change in time inf luence cash supply/demand process for cash point. these may change throughout cash points and are related to location, climate, holiday, celebration day and special event (such as salary days and sale of nearby supermarket) factors. some factors affect cash demand periodically. periodical factors form various seasonality in cash f low process: daily (related to intraday factors throughout the day), weekly (mostly related to weekend effects), monthly gediminas žylius212 (related to payday) and yearly (related to climate seasons, tourist and student arrivals, periodical celebration days such as new year) seasons. uncertain (aperiodic) factors are mostly related to celebration days that do not occur periodically (such as easter), structural break factors that form long term or permanent cash f low shift (new shopping mall near cash point, shift of working hours) and some may be temporal (reconstruction of nearby building that restricts cash point reachability). those factors form cash f low process that contains linear or nonlinear trend, mixtures of various seasonal components (intraday, weekly, monthly yearly), level shifts and heteroscedastic uncertainty. so historical data-based forecasting models need to be able to approximate historical cash demand process as accurately as possible properly evaluating these factors and perform forecasting of cash f low in the future based on estimated empirical relationship.  introduction the aim of this research is to study how cash f low process factors affect cash f low forecasting accuracy in atm network, using computational intelligence methods as cash f low forecasting models when performing daily aggregated cash f low forecasting. for factor evaluation 8 typical (affected by different factors) atm cash withdrawal process f lows selected from real atm network are used with historical period of 33 months. previous studies of automatic tellec machine (atm) withdrawal cash f low (rodrigues, esteves 2010) show that this process is strongly affected by calendar factors (day-of-the-week, week-of-the-month, month-of-the-year and holidays). those effects can be used as numerical input values with ci models. classical neural network regression approach using calendar effects (working day, weekday, holiday effect, salary day effect) as inputs were used by kumar and walia (2006) for cash demand process forecasting. however, cash demand varies in time and simply using regression inputs without incorporating recent time series information is usually not enough. simutis et al. (2007) applied more advanced f lexibe neural network approach by incorporating both regression inputs (calendar effects) and time series inputs (such as value of aggregated cash demand of previous several days). during last decade, support vector machines (svm) for various computational intelligence task was considered as alternative to neural networks because of benefits such as decision stability, less overfitting and better generalization abilities when smaller training (historical) data is available. however simutis, dilijonas and bastina (2008) show that application of support vector machines to cash demand forecasting process has no superiority to neural networks and is even less accurate when reasonably long historical data period evaluation of atm cash demand process factors… 213 for model training is available. as an alternative to neural network approach, interval type-2 fuzzy neural network (it2fnn) was applied for cash demand forecasting (darwish 2013). this type of model has both on-line structure and parameter learning abilities that lets model automatically adapt to different cash f low processes. ci models for forecasting are considered to be a more advanced approach. however, time series models are also used for cash f low process forecasting. when comparing classical econometric time series models researches show (gurgul, suder 2013) that sarima (seasonal autoregressive integrated moving average) models are most accurate. it is shown (wagner 2010) that sari ma model even outperform joint forecasting approach using vector time series models. a comparison between time series probability density forecasting models (such as linear, autoregressive and structural and markov-switching time series models) is made by brentnall, crowder and hand (2010b) and results show that markov-switching density forecasting model performs best. deeper investigation of cash demand process factors are also useful for forecasting. random-effects models (brentnall, crowder & hand 2008, 2010a) are used when modelling of individual client cash withdrawal patterns is made for atm withdrawal forecasting. laukaitis (2008) presented research on cash f low forecasting when intraday cash f low time series is treated as random continuous functions projected onto low dimensional subspace and apply functional autoregressive model as predictor of cash f low and intensity of transactions. forecasting models this section presents computational intelligence forecasting models that are applied for daily-aggregated atm cash f low forecasting. support vector regression model. support vector regression (svr) is application of support vector machines (svm) model for regression problems. svm was originally proposed by cortes and vapnik (1995) as a robust linear model for classification problems. the idea behind svm is to map input space data vectors to output space via high dimensional space called feature space. this mapping is performed using so called kernel trick. by doing so, linear nature of svm model can be applied for nonlinear function approximation. the nonlinear mapping requires nonlinear kernel function selection. gaussian kernel functions are usually used because of few parameters. in this paper two types of gediminas žylius214 svr models are applied: 1) 1) ν-support vector regression (ν-svr) and 2) least squares support vector regression (lssvr). ■ ν-svr. let input data vectors to be ci models for forecasting are considered to be a more advanced approach. however, time series models are also used for cash flow process forecasting. when comparing classical econometric time series models researches show (gurgul, suder 2013) that sarima (seasonal autoregressive integrated moving average) models are most accurate. it is shown (wagner 2010) that sarima model even outperform joint forecasting approach using vector time series models. a comparison between time series probability density forecasting models (such as linear, autoregressive and structural and markov-switching time series models) is made by brentnall, crowder and hand (2010b) and results show that markovswitching density forecasting model performs best. deeper investigation of cash demand process factors are also useful for forecasting. random-effects models (brentnall, crowder & hand 2008, 2010a) are used when modelling of individual client cash withdrawal patterns is made for atm withdrawal forecasting. laukaitis (2008) presented research on cash flow forecasting when intraday cash flow time series is treated as random continuous functions projected onto low dimensional subspace and apply functional autoregressive model as predictor of cash flow and intensity of transactions. forecasting models this section presents computational intelligence forecasting models that are applied for daily-aggregated atm cash flow forecasting. support vector regression model. support vector regression (svr) is application of support vector machines (svm) model for regression problems. svm was originally proposed by cortes and vapnik (1995) as a robust linear model for classification problems. the idea behind svm is to map input space data vectors to output space via high dimensional space called feature space. this mapping is performed using so called kernel trick. by doing so, linear nature of svm model can be applied for nonlinear function approximation. the nonlinear mapping requires nonlinear kernel function selection. gaussian kernel functions are usually used because of few parameters. in this paper two types of svr models are applied: 1) 1) ν-support vector regression (ν-svr) and 2) least squares support vector regression (lssvr). – ν-svr. let input data vectors to be xirn (i-th observation n-dimensional vector) and output (cash flow) data to be yir1. model optimization problem for ν-svr algorithm is formulated by following equations (chih-chung & chih-jen 2011): (i-th observation n-dimensional vector) and output (cash f low) data to be yir 1. model optimization problem for ν-svr algorithm is formulated by following equations (chih-chung & chih-jen 2011):                                   .0 ,0, , , subject to 1 2 1 min * * 1 * ,,,       ii ii t i iii t l i ii t bξ,ξ by yb ξ l c * xw xw ww w where  ix is kernel function (gaussian) that performs mapping of input space to high dimensional feature space (the space where linear regression is performed); w is a parameter vector of n-dimensional hyperplane; b is hyperplane bias parameter; ξi*, ξi are upper and lower training errors (slack variables) subject to ε – insensitive tube; c is a cost parameter, that controls the trade-off between allowing training errors and forcing rigid margins; ν is regularization parameter that controls parameter number of support vectors; l – is number of data points (observations). data points that lie on the boundaries of ε – insensitive tube are called support vectors. graphical illustration of ν-svr model is depicted in figure 1 figure 1. an illustration of ν-svr approximation principle in this research ν-svr code is used that is implemented in libsvm library (see chihchung & chih-jen 2011). – ls-svr. least squares support vector regression (ls-svr) model is very similar to νsvr. optimization problem is formulated by following equations (suykens et al. 2002):                 .0 , subject to 22 1 min 1 2 ,,    iii t l i i t eb yeb e xw ww w where ei are error variables and γ is regularization constant. where                                   .0 ,0, , , subject to 1 2 1 min * * 1 * ,,,       ii ii t i iii t l i ii t bξ,ξ by yb ξ l c * xw xw ww w where  ix is kernel function (gaussian) that performs mapping of input space to high dimensional feature space (the space where linear regression is performed); w is a parameter vector of n-dimensional hyperplane; b is hyperplane bias parameter; ξi*, ξi are upper and lower training errors (slack variables) subject to ε – insensitive tube; c is a cost parameter, that controls the trade-off between allowing training errors and forcing rigid margins; ν is regularization parameter that controls parameter number of support vectors; l – is number of data points (observations). data points that lie on the boundaries of ε – insensitive tube are called support vectors. graphical illustration of ν-svr model is depicted in figure 1 figure 1. an illustration of ν-svr approximation principle in this research ν-svr code is used that is implemented in libsvm library (see chihchung & chih-jen 2011). – ls-svr. least squares support vector regression (ls-svr) model is very similar to νsvr. optimization problem is formulated by following equations (suykens et al. 2002):                 .0 , subject to 22 1 min 1 2 ,,    iii t l i i t eb yeb e xw ww w where ei are error variables and γ is regularization constant. is kernel function (gaussian) that performs mapping of input space to high dimensional feature space (the space where linear regression is performed); w is a parameter vector of n-dimensional hyperplane; b is hyperplane bias parameter; ξi *, ξi are upper and lower training errors (slack variables) subject to ε – insensitive tube; c is a cost parameter, that controls the trade-off between allowing training errors and forcing rigid margins; ν is regularization parameter that controls parameter number of support vectors; l – is number of data points (observations). data points that lie on the boundaries of ε – insensitive tube are called support vectors. graphical illustration of ν-svr model is depicted in figure 1. figure 1. an illustration of ν-svr approximation principle                                   .0 ,0, , , subject to 1 2 1 min * * 1 * ,,,       ii ii t i iii t l i ii t bξ,ξ by yb ξ l c * xw xw ww w where  ix is kernel function (gaussian) that performs mapping of input space to high dimensional feature space (the space where linear regression is performed); w is a parameter vector of n-dimensional hyperplane; b is hyperplane bias parameter; ξi*, ξi are upper and lower training errors (slack variables) subject to ε – insensitive tube; c is a cost parameter, that controls the trade-off between allowing training errors and forcing rigid margins; ν is regularization parameter that controls parameter number of support vectors; l – is number of data points (observations). data points that lie on the boundaries of ε – insensitive tube are called support vectors. graphical illustration of ν-svr model is depicted in figure 1 figure 1. an illustration of ν-svr approximation principle in this research ν-svr code is used that is implemented in libsvm library (see chihchung & chih-jen 2011). – ls-svr. least squares support vector regression (ls-svr) model is very similar to νsvr. optimization problem is formulated by following equations (suykens et al. 2002):                 .0 , subject to 22 1 min 1 2 ,,    iii t l i i t eb yeb e xw ww w where ei are error variables and γ is regularization constant. s o u r c e : created by authors. evaluation of atm cash demand process factors… 215 in this research ν-svr code is used that is implemented in libsvm library (see chih-chung & chih-jen 2011). ■ ls-svr. least squares support vector regression (ls-svr) model is very similar to ν-svr. optimization problem is formulated by following equations (suykens et al. 2002):                                   .0 ,0, , , subject to 1 2 1 min * * 1 * ,,,       ii ii t i iii t l i ii t bξ,ξ by yb ξ l c * xw xw ww w where  ix is kernel function (gaussian) that performs mapping of input space to high dimensional feature space (the space where linear regression is performed); w is a parameter vector of n-dimensional hyperplane; b is hyperplane bias parameter; ξi*, ξi are upper and lower training errors (slack variables) subject to ε – insensitive tube; c is a cost parameter, that controls the trade-off between allowing training errors and forcing rigid margins; ν is regularization parameter that controls parameter number of support vectors; l – is number of data points (observations). data points that lie on the boundaries of ε – insensitive tube are called support vectors. graphical illustration of ν-svr model is depicted in figure 1 figure 1. an illustration of ν-svr approximation principle in this research ν-svr code is used that is implemented in libsvm library (see chihchung & chih-jen 2011). – ls-svr. least squares support vector regression (ls-svr) model is very similar to νsvr. optimization problem is formulated by following equations (suykens et al. 2002):                 .0 , subject to 22 1 min 1 2 ,,    iii t l i i t eb yeb e xw ww w where ei are error variables and γ is regularization constant. where ei are error variables and γ is regularization constant. differently from ν-svr, ls-svr doesn’t use insensitive tube and is regularized only by parameter γ, so is not as sparse as ν-svr model (has more support vectors). but least squares loss function brings other f lexibility benefits for regression problems. as for ν-svr model, for ls-svr model gaussian kernel functions are used. in this research ls-svr code is used from ls-svmlab toolbox presented in website (see pelckmans et al. 2002). relevance vector regression model. relevance vector regression (tipping 2001) is model that has same linear functional form as support vector regression: differently from ν-svr, ls-svr doesn’t use insensitive tube and is regularized only by parameter γ, so is not as sparse as ν-svr model (has more support vectors). but least squares loss function brings other flexibility benefits for regression problems. as for νsvr model, for ls-svr model gaussian kernel functions are used. in this research ls-svr code is used from ls-svmlab toolbox presented in website (see pelckmans et al. 2002). relevance vector regression model. relevance vector regression (tipping 2001) is model that has same linear functional form as support vector regression: ������ � ���������� � �� � ��� . where ������� is defined as kernel function and � is model weight vector. rvr uses even less support vectors (is more sparse than ν-svr), that are called relevance vectors. bayesian inference methodology is used during rvr model parameter and relevance vector determination. rvr uses em-like (expectation-maximization) learning algorithm and applies a priori distributions (because of bayesian methodology) over parameters. gaussian kernel as in both lssvr and ν-svr cases are also used with rvr. in this research rvr implemented in sparsebayes package for matlab by rvr author himself (see tipping 2001) is used. feed-forward neural network model. feed-forward neural network (ffnn) is the most popular artificial neural network architecture for nonlinear function approximation (classification and regression) problems. the architecture of algorithm was inspired by biological neural networks (brains) and models the interconnection of neurons that can compute values from inputs by feeding information through the network. ffnn model architecture is depicted in figure 2. figure 2. an illustration of feed-forward neural network architecture in this research, logarithmic sigmoid transfer function was used in the hidden layers and linear transfer function in the output layer. logarithmic sigmoid transfer function output of where differently from ν-svr, ls-svr doesn’t use insensitive tube and is regularized only by parameter γ, so is not as sparse as ν-svr model (has more support vectors). but least squares loss function brings other flexibility benefits for regression problems. as for νsvr model, for ls-svr model gaussian kernel functions are used. in this research ls-svr code is used from ls-svmlab toolbox presented in website (see pelckmans et al. 2002). relevance vector regression model. relevance vector regression (tipping 2001) is model that has same linear functional form as support vector regression: ������ � ���������� � �� � ��� . where ������� is defined as kernel function and � is model weight vector. rvr uses even less support vectors (is more sparse than ν-svr), that are called relevance vectors. bayesian inference methodology is used during rvr model parameter and relevance vector determination. rvr uses em-like (expectation-maximization) learning algorithm and applies a priori distributions (because of bayesian methodology) over parameters. gaussian kernel as in both lssvr and ν-svr cases are also used with rvr. in this research rvr implemented in sparsebayes package for matlab by rvr author himself (see tipping 2001) is used. feed-forward neural network model. feed-forward neural network (ffnn) is the most popular artificial neural network architecture for nonlinear function approximation (classification and regression) problems. the architecture of algorithm was inspired by biological neural networks (brains) and models the interconnection of neurons that can compute values from inputs by feeding information through the network. ffnn model architecture is depicted in figure 2. figure 2. an illustration of feed-forward neural network architecture in this research, logarithmic sigmoid transfer function was used in the hidden layers and linear transfer function in the output layer. logarithmic sigmoid transfer function output of is defined as kernel function and is model weight vector. rvr uses even less support vectors (is more sparse than ν-svr), that are called relevance vectors. bayesian inference methodology is used during rvr model parameter and relevance vector determination. rvr uses em-like (expectation-maximization) learning algorithm and applies a priori distributions (because of bayesian methodology) over parameters. gaussian kernel as in both lssvr and ν-svr cases are also used with rvr. in this research rvr implemented in sparsebayes package for matlab by rvr author himself (see tipping 2001) is used. gediminas žylius216 feed-forward neural network model. feed-forward neural network (ffnn) is the most popular artificial neural network architecture for nonlinear function approximation (classification and regression) problems. the architecture of algorithm was inspired by biological neural networks (brains) and models the interconnection of neurons that can compute values from inputs by feeding information through the network. ffnn model architecture is depicted in figure 2. figure 2. an illustration of feed-forward neural network architecture differently from ν-svr, ls-svr doesn’t use insensitive tube and is regularized only by parameter γ, so is not as sparse as ν-svr model (has more support vectors). but least squares loss function brings other flexibility benefits for regression problems. as for νsvr model, for ls-svr model gaussian kernel functions are used. in this research ls-svr code is used from ls-svmlab toolbox presented in website (see pelckmans et al. 2002). relevance vector regression model. relevance vector regression (tipping 2001) is model that has same linear functional form as support vector regression: ������ � ���������� � �� � ��� . where ������� is defined as kernel function and � is model weight vector. rvr uses even less support vectors (is more sparse than ν-svr), that are called relevance vectors. bayesian inference methodology is used during rvr model parameter and relevance vector determination. rvr uses em-like (expectation-maximization) learning algorithm and applies a priori distributions (because of bayesian methodology) over parameters. gaussian kernel as in both lssvr and ν-svr cases are also used with rvr. in this research rvr implemented in sparsebayes package for matlab by rvr author himself (see tipping 2001) is used. feed-forward neural network model. feed-forward neural network (ffnn) is the most popular artificial neural network architecture for nonlinear function approximation (classification and regression) problems. the architecture of algorithm was inspired by biological neural networks (brains) and models the interconnection of neurons that can compute values from inputs by feeding information through the network. ffnn model architecture is depicted in figure 2. figure 2. an illustration of feed-forward neural network architecture in this research, logarithmic sigmoid transfer function was used in the hidden layers and linear transfer function in the output layer. logarithmic sigmoid transfer function output of s o u r c e : created by authors. in this research, logarithmic sigmoid transfer function was used in the hidden layers and linear transfer function in the output layer. logarithmic sigmoid transfer function output of input variable is equal to: input variable is equal to: . 1 1 log         ae y in this work, levenberg – marquardt (hagan & menhaj 1994) backpropagation (rumelhart, hinton & williams 1986) training algorithm was used for feed-forward neural network model training, which is implemented in matlab neural networks toolbox. generalized regression neural network model. generalized regression neural network (grnn) first proposed by specht (1991) is special case of radial basis function (rbf) neural network. grnn does not require an iterative training procedure (error back propagation as with other neural network architectures). grnn training procedure requires specification of rbf spread parameter. it uses those functions to cover input space and approximates function as weighted linear combination of radial basis functions. number of rbf function is equal to number of observations (number of days in historical daily cash flow). each rbf is formed for each data point vector that is a center of rbf. rbf transfer function values are calculated according to euclidean distance from the central point to input vector. in this research grnn implemented in matlab neural network toolbox is used. adaptive neuro-fuzzy inference system model. adaptive neuro-fuzzy inference system (anfis) (jang 1993) combines fuzzy inference system and neural network features: neural network training capabilities (backpropagation) with fuzzy input and output formation (takagi–sugeno fuzzy inference system). an architecture of anfis model that has two membership functions is depicted in figure 3. this type of model architecture has 5 layers: fuzzy layer (1), product layer (2), normalization layer (3), defuzzification layer (4) and summation layer (5). figure 3. illustration of anfis model architecture with two membership functions 1 layer 2 layer 3 layer 4 layer 5 layer 1w 1w 11fw x  f y 2w 2w 22 fw a1 a2 b1 b2 for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: in this work, levenberg – marquardt (hagan & menhaj 1994) backpropagation (rumelhart, hinton & williams 1986) training algorithm was used for feed-forward neural network model training, which is implemented in matlab neural networks toolbox. generalized regression neural network model. generalized regression neural network (grnn) first proposed by specht (1991) is special case of radial basis function (rbf) neural network. grnn does not require an iterative training procedure (error back propagation as with other neural network architectures). grnn training procedure requires specification of rbf spread parameter. it uses those functions to cover input space and approximates function as weighted linear combination of radial basis functions. number of rbf function is equal to number of observations (number of days in historical daily cash f low). each rbf is formed for each data point vector that is a center of rbf. rbf transfer function values are calculated according to euclidean distance from the central point to input vector. in this research grnn implemented in mat lab neural network toolbox is used. evaluation of atm cash demand process factors… 217 adaptive neuro-fuzzy inference system model. adaptive neuro-fuzzy inference system (anfis) (jang 1993) combines fuzzy inference system and neural network features: neural network training capabilities (backpropagation) with fuzzy input and output formation (takagi–sugeno fuzzy inference system). an architecture of anfis model that has two membership functions is depicted in figure 3. this type of model architecture has 5 layers: fuzzy layer (1), product layer (2), normalization layer (3), defuzzification layer (4) and summation layer (5). figure 3. illustration of anfis model architecture with two membership functions input variable is equal to: . 1 1 log         ae y in this work, levenberg – marquardt (hagan & menhaj 1994) backpropagation (rumelhart, hinton & williams 1986) training algorithm was used for feed-forward neural network model training, which is implemented in matlab neural networks toolbox. generalized regression neural network model. generalized regression neural network (grnn) first proposed by specht (1991) is special case of radial basis function (rbf) neural network. grnn does not require an iterative training procedure (error back propagation as with other neural network architectures). grnn training procedure requires specification of rbf spread parameter. it uses those functions to cover input space and approximates function as weighted linear combination of radial basis functions. number of rbf function is equal to number of observations (number of days in historical daily cash flow). each rbf is formed for each data point vector that is a center of rbf. rbf transfer function values are calculated according to euclidean distance from the central point to input vector. in this research grnn implemented in matlab neural network toolbox is used. adaptive neuro-fuzzy inference system model. adaptive neuro-fuzzy inference system (anfis) (jang 1993) combines fuzzy inference system and neural network features: neural network training capabilities (backpropagation) with fuzzy input and output formation (takagi–sugeno fuzzy inference system). an architecture of anfis model that has two membership functions is depicted in figure 3. this type of model architecture has 5 layers: fuzzy layer (1), product layer (2), normalization layer (3), defuzzification layer (4) and summation layer (5). figure 3. illustration of anfis model architecture with two membership functions 1 layer 2 layer 3 layer 4 layer 5 layer 1w 1w 11fw x  f y 2w 2w 22 fw a1 a2 b1 b2 for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: s o u r c e : created by authors. for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: 1) if x is a1 and y is b1 then f1 = p1x + q1y + r1; 2) if x is a2 and y is b2 then f2 = p2x + q2y + r2. further each of five layer functionality is shortly explained: ■ 1st layer. forms output, which determines membership degree in each of membership functions (µa1, µa2, µb1, µb2): for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: 1) if x is a1 and y is b1 then f1 = p1x + q1y + r1; 2) if x is a2 and y is b2 then f2 = p2x + q2y + r2. further each of five layer functionality is shortly explained:  1st layer. forms output, which determines membership degree in each of membership functions (µa1, µa2, µb1, µb2): ��,� = ������, � = �,�, ��,� = ��������, � = �,�.  2nd layer. in this layer each node is fixed and represents weight of particular rule. in this node and operation is performed, which is product of inputs: ��,� = �� = ������ � ������, � = �,�.  3rd layer. each node of this layer is also fixed and calculates normalized rule excitation degree: ��,� = ��� = �� �� � �� , � = �,�.  4th layer. this layer is not fixed as other and parameters (pi, qi, ri) are estimated during training process. output of nodes are calculated as: ��,� = ����� = ������� � ��� � ���.  5th layer. this is an output layer, where output value is calculated as a sum of all inputs: ��,� = ������ � = ∑ ������∑ ��� . in this research, two types of anfis model training algorithms are used: classical gradient steepest descend backpropagation and hybrid training algorithm. hybrid training combines gradient descend backpropagation and least squares methods. backpropagation is used to tune input layer membership function parameters, while least squares method is used for output function parameter tuning. for input layer membership function parameter initialization fuzzy c-means (fcm) clustering algorithms is used, that partitions data of the input space into some number (c) of clusters and use them as input membership function initialization. in this research anfis model that is implemented in matlab fuzzy logic toolbox is used. for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: 1) if x is a1 and y is b1 then f1 = p1x + q1y + r1; 2) if x is a2 and y is b2 then f2 = p2x + q2y + r2. further each of five layer functionality is shortly explained:  1st layer. forms output, which determines membership degree in each of membership functions (µa1, µa2, µb1, µb2): ��,� = ������, � = �,�, ��,� = ��������, � = �,�.  2nd layer. in this layer each node is fixed and represents weight of particular rule. in this node and operation is performed, which is product of inputs: ��,� = �� = ������ � ������, � = �,�.  3rd layer. each node of this layer is also fixed and calculates normalized rule excitation degree: ��,� = ��� = �� �� � �� , � = �,�.  4th layer. this layer is not fixed as other and parameters (pi, qi, ri) are estimated during training process. output of nodes are calculated as: ��,� = ����� = ������� � ��� � ���.  5th layer. this is an output layer, where output value is calculated as a sum of all inputs: ��,� = ������ � = ∑ ������∑ ��� . in this research, two types of anfis model training algorithms are used: classical gradient steepest descend backpropagation and hybrid training algorithm. hybrid training combines gradient descend backpropagation and least squares methods. backpropagation is used to tune input layer membership function parameters, while least squares method is used for output function parameter tuning. for input layer membership function parameter initialization fuzzy c-means (fcm) clustering algorithms is used, that partitions data of the input space into some number (c) of clusters and use them as input membership function initialization. in this research anfis model that is implemented in matlab fuzzy logic toolbox is used. ■ 2nd layer. in this layer each node is fixed and represents weight of particular rule. in this node and operation is performed, which is product of inputs: gediminas žylius218 for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: 1) if x is a1 and y is b1 then f1 = p1x + q1y + r1; 2) if x is a2 and y is b2 then f2 = p2x + q2y + r2. further each of five layer functionality is shortly explained:  1st layer. forms output, which determines membership degree in each of membership functions (µa1, µa2, µb1, µb2): ��,� = ������, � = �,�, ��,� = ��������, � = �,�.  2nd layer. in this layer each node is fixed and represents weight of particular rule. in this node and operation is performed, which is product of inputs: ��,� = �� = ������ � ������, � = �,�.  3rd layer. each node of this layer is also fixed and calculates normalized rule excitation degree: ��,� = ��� = �� �� � �� , � = �,�.  4th layer. this layer is not fixed as other and parameters (pi, qi, ri) are estimated during training process. output of nodes are calculated as: ��,� = ����� = ������� � ��� � ���.  5th layer. this is an output layer, where output value is calculated as a sum of all inputs: ��,� = ������ � = ∑ ������∑ ��� . in this research, two types of anfis model training algorithms are used: classical gradient steepest descend backpropagation and hybrid training algorithm. hybrid training combines gradient descend backpropagation and least squares methods. backpropagation is used to tune input layer membership function parameters, while least squares method is used for output function parameter tuning. for input layer membership function parameter initialization fuzzy c-means (fcm) clustering algorithms is used, that partitions data of the input space into some number (c) of clusters and use them as input membership function initialization. in this research anfis model that is implemented in matlab fuzzy logic toolbox is used. ■ 3rd layer. each node of this layer is also fixed and calculates normalized rule excitation degree: for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: 1) if x is a1 and y is b1 then f1 = p1x + q1y + r1; 2) if x is a2 and y is b2 then f2 = p2x + q2y + r2. further each of five layer functionality is shortly explained:  1st layer. forms output, which determines membership degree in each of membership functions (µa1, µa2, µb1, µb2): ��,� = ������, � = �,�, ��,� = ��������, � = �,�.  2nd layer. in this layer each node is fixed and represents weight of particular rule. in this node and operation is performed, which is product of inputs: ��,� = �� = ������ � ������, � = �,�.  3rd layer. each node of this layer is also fixed and calculates normalized rule excitation degree: ��,� = ��� = �� �� � �� , � = �,�.  4th layer. this layer is not fixed as other and parameters (pi, qi, ri) are estimated during training process. output of nodes are calculated as: ��,� = ����� = ������� � ��� � ���.  5th layer. this is an output layer, where output value is calculated as a sum of all inputs: ��,� = ������ � = ∑ ������∑ ��� . in this research, two types of anfis model training algorithms are used: classical gradient steepest descend backpropagation and hybrid training algorithm. hybrid training combines gradient descend backpropagation and least squares methods. backpropagation is used to tune input layer membership function parameters, while least squares method is used for output function parameter tuning. for input layer membership function parameter initialization fuzzy c-means (fcm) clustering algorithms is used, that partitions data of the input space into some number (c) of clusters and use them as input membership function initialization. in this research anfis model that is implemented in matlab fuzzy logic toolbox is used. ■ 4th layer. this layer is not fixed as other and parameters (pi, qi, ri) are estimated during training process. output of nodes are calculated as: for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: 1) if x is a1 and y is b1 then f1 = p1x + q1y + r1; 2) if x is a2 and y is b2 then f2 = p2x + q2y + r2. further each of five layer functionality is shortly explained:  1st layer. forms output, which determines membership degree in each of membership functions (µa1, µa2, µb1, µb2): ��,� = ������, � = �,�, ��,� = ��������, � = �,�.  2nd layer. in this layer each node is fixed and represents weight of particular rule. in this node and operation is performed, which is product of inputs: ��,� = �� = ������ � ������, � = �,�.  3rd layer. each node of this layer is also fixed and calculates normalized rule excitation degree: ��,� = ��� = �� �� � �� , � = �,�.  4th layer. this layer is not fixed as other and parameters (pi, qi, ri) are estimated during training process. output of nodes are calculated as: ��,� = ����� = ������� � ��� � ���.  5th layer. this is an output layer, where output value is calculated as a sum of all inputs: ��,� = ������ � = ∑ ������∑ ��� . in this research, two types of anfis model training algorithms are used: classical gradient steepest descend backpropagation and hybrid training algorithm. hybrid training combines gradient descend backpropagation and least squares methods. backpropagation is used to tune input layer membership function parameters, while least squares method is used for output function parameter tuning. for input layer membership function parameter initialization fuzzy c-means (fcm) clustering algorithms is used, that partitions data of the input space into some number (c) of clusters and use them as input membership function initialization. in this research anfis model that is implemented in matlab fuzzy logic toolbox is used. ■ 5th layer. this is an output layer, where output value is calculated as a sum of all inputs: for a 1st order of sugeno fuzzy model, a typical if-then rule set can be expressed as: 1) if x is a1 and y is b1 then f1 = p1x + q1y + r1; 2) if x is a2 and y is b2 then f2 = p2x + q2y + r2. further each of five layer functionality is shortly explained:  1st layer. forms output, which determines membership degree in each of membership functions (µa1, µa2, µb1, µb2): ��,� = ������, � = �,�, ��,� = ��������, � = �,�.  2nd layer. in this layer each node is fixed and represents weight of particular rule. in this node and operation is performed, which is product of inputs: ��,� = �� = ������ � ������, � = �,�.  3rd layer. each node of this layer is also fixed and calculates normalized rule excitation degree: ��,� = ��� = �� �� � �� , � = �,�.  4th layer. this layer is not fixed as other and parameters (pi, qi, ri) are estimated during training process. output of nodes are calculated as: ��,� = ����� = ������� � ��� � ���.  5th layer. this is an output layer, where output value is calculated as a sum of all inputs: ��,� = ������ � = ∑ ������∑ ��� . in this research, two types of anfis model training algorithms are used: classical gradient steepest descend backpropagation and hybrid training algorithm. hybrid training combines gradient descend backpropagation and least squares methods. backpropagation is used to tune input layer membership function parameters, while least squares method is used for output function parameter tuning. for input layer membership function parameter initialization fuzzy c-means (fcm) clustering algorithms is used, that partitions data of the input space into some number (c) of clusters and use them as input membership function initialization. in this research anfis model that is implemented in matlab fuzzy logic toolbox is used. in this research, two types of anfis model training algorithms are used: classical gradient steepest descend backpropagation and hybrid training algorithm. hybrid training combines gradient descend backpropagation and least squares methods. backpropagation is used to tune input layer membership function parameters, while least squares method is used for output function parameter tuning. for input layer membership function parameter initialization fuzzy c- means (fcm) clustering algorithms is used, that partitions data of the input space into some number (c) of clusters and use them as input membership function initialization. in this research anfis model that is implemented in matlab fuzzy logic toolbox is used. ■ extreme learning machine model. extreme learning machines (elm) (huang, zhu & siew 2006) have the same architecture as single hidden layer feed-forward neural networks. differently from conventional neural network achitectures, elm doesn’t require backpropagation for parameter tuning. instead, hidden node weights are chosen randomly and output weights are determined analytically. main advantage of this type of learning is speed, which is many times faster than conventional iterative tuning (such as backpropagation). evaluation of atm cash demand process factors… 219 given n number of observations (xi, yi), single layer neural network output with m hidden nodes is modeled as: – extreme learning machine model. extreme learning machines (elm) (huang, zhu & siew 2006) have the same architecture as single hidden layer feed-forward neural networks. differently from conventional neural network achitectures, elm doesn’t require backpropagation for parameter tuning. instead, hidden node weights are chosen randomly and output weights are determined analytically. main advantage of this type of learning is speed, which is many times faster than conventional iterative tuning (such as backpropagation). given n number of observations (xi, yi), single layer neural network output with m hidden nodes is modeled as: �� = ∑ ���(���� � ��)���� . where �� is ith input vector; �� is weight vector connecting the jth hidden node and the input nodes; �� is weight scalar connecting jth hidden node and output node; �� is bias parameter of jth hidden node. in this research linear output nodes and sigmoid hidden nodes are used. above equation can be written in vector form: � = ��. where � is � � � hidden layer output matrix and ���� = �(���� � ��). the solution of applying elm theory is simply estimated as: � = ����� where �� = (���)���� is moore – penrose generalized inverse (pseudoinverse) matrix. a matlab implementation of classical elm is used in this research, which is available at webpage (see huang, zhu & siew 2006). experimental data in this research 8 different typical atm daily withdrawal data is used with historical period up to 990 days. those 8 atms were selected from large database and represent typical cash flow factors that occur in cash flow process. further a short explanation of every atm is conduced:  atm number 1 contains cash flow with strong weekly seasonality factor;  atm number 2 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is smooth;  atm number 3 contains cash flow with strong monthly seasonality factor; . where xi is wj th input vector; is weight vector connecting the jth hidden node and the input nodes; ßj is weight scalar connecting jth hidden node and output node; bj is bias parameter of jth hidden node. in this research linear output nodes and sigmoid hidden nodes are used. above equation can be written in vector form: – extreme learning machine model. extreme learning machines (elm) (huang, zhu & siew 2006) have the same architecture as single hidden layer feed-forward neural networks. differently from conventional neural network achitectures, elm doesn’t require backpropagation for parameter tuning. instead, hidden node weights are chosen randomly and output weights are determined analytically. main advantage of this type of learning is speed, which is many times faster than conventional iterative tuning (such as backpropagation). given n number of observations (xi, yi), single layer neural network output with m hidden nodes is modeled as: �� = ∑ ���(���� � ��)���� . where �� is ith input vector; �� is weight vector connecting the jth hidden node and the input nodes; �� is weight scalar connecting jth hidden node and output node; �� is bias parameter of jth hidden node. in this research linear output nodes and sigmoid hidden nodes are used. above equation can be written in vector form: � = ��. where � is � � � hidden layer output matrix and ���� = �(���� � ��). the solution of applying elm theory is simply estimated as: � = ����� where �� = (���)���� is moore – penrose generalized inverse (pseudoinverse) matrix. a matlab implementation of classical elm is used in this research, which is available at webpage (see huang, zhu & siew 2006). experimental data in this research 8 different typical atm daily withdrawal data is used with historical period up to 990 days. those 8 atms were selected from large database and represent typical cash flow factors that occur in cash flow process. further a short explanation of every atm is conduced:  atm number 1 contains cash flow with strong weekly seasonality factor;  atm number 2 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is smooth;  atm number 3 contains cash flow with strong monthly seasonality factor; where h is n x m hidden layer output matrix and – extreme learning machine model. extreme learning machines (elm) (huang, zhu & siew 2006) have the same architecture as single hidden layer feed-forward neural networks. differently from conventional neural network achitectures, elm doesn’t require backpropagation for parameter tuning. instead, hidden node weights are chosen randomly and output weights are determined analytically. main advantage of this type of learning is speed, which is many times faster than conventional iterative tuning (such as backpropagation). given n number of observations (xi, yi), single layer neural network output with m hidden nodes is modeled as: �� = ∑ ���(���� � ��)���� . where �� is ith input vector; �� is weight vector connecting the jth hidden node and the input nodes; �� is weight scalar connecting jth hidden node and output node; �� is bias parameter of jth hidden node. in this research linear output nodes and sigmoid hidden nodes are used. above equation can be written in vector form: � = ��. where � is � � � hidden layer output matrix and ���� = �(���� � ��). the solution of applying elm theory is simply estimated as: � = ����� where �� = (���)���� is moore – penrose generalized inverse (pseudoinverse) matrix. a matlab implementation of classical elm is used in this research, which is available at webpage (see huang, zhu & siew 2006). experimental data in this research 8 different typical atm daily withdrawal data is used with historical period up to 990 days. those 8 atms were selected from large database and represent typical cash flow factors that occur in cash flow process. further a short explanation of every atm is conduced:  atm number 1 contains cash flow with strong weekly seasonality factor;  atm number 2 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is smooth;  atm number 3 contains cash flow with strong monthly seasonality factor; the solution of applying elm theory is simply estimated as: – extreme learning machine model. extreme learning machines (elm) (huang, zhu & siew 2006) have the same architecture as single hidden layer feed-forward neural networks. differently from conventional neural network achitectures, elm doesn’t require backpropagation for parameter tuning. instead, hidden node weights are chosen randomly and output weights are determined analytically. main advantage of this type of learning is speed, which is many times faster than conventional iterative tuning (such as backpropagation). given n number of observations (xi, yi), single layer neural network output with m hidden nodes is modeled as: �� = ∑ ���(���� � ��)���� . where �� is ith input vector; �� is weight vector connecting the jth hidden node and the input nodes; �� is weight scalar connecting jth hidden node and output node; �� is bias parameter of jth hidden node. in this research linear output nodes and sigmoid hidden nodes are used. above equation can be written in vector form: � = ��. where � is � � � hidden layer output matrix and ���� = �(���� � ��). the solution of applying elm theory is simply estimated as: � = ����� where �� = (���)���� is moore – penrose generalized inverse (pseudoinverse) matrix. a matlab implementation of classical elm is used in this research, which is available at webpage (see huang, zhu & siew 2006). experimental data in this research 8 different typical atm daily withdrawal data is used with historical period up to 990 days. those 8 atms were selected from large database and represent typical cash flow factors that occur in cash flow process. further a short explanation of every atm is conduced:  atm number 1 contains cash flow with strong weekly seasonality factor;  atm number 2 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is smooth;  atm number 3 contains cash flow with strong monthly seasonality factor; where – extreme learning machine model. extreme learning machines (elm) (huang, zhu & siew 2006) have the same architecture as single hidden layer feed-forward neural networks. differently from conventional neural network achitectures, elm doesn’t require backpropagation for parameter tuning. instead, hidden node weights are chosen randomly and output weights are determined analytically. main advantage of this type of learning is speed, which is many times faster than conventional iterative tuning (such as backpropagation). given n number of observations (xi, yi), single layer neural network output with m hidden nodes is modeled as: �� = ∑ ���(���� � ��)���� . where �� is ith input vector; �� is weight vector connecting the jth hidden node and the input nodes; �� is weight scalar connecting jth hidden node and output node; �� is bias parameter of jth hidden node. in this research linear output nodes and sigmoid hidden nodes are used. above equation can be written in vector form: � = ��. where � is � � � hidden layer output matrix and ���� = �(���� � ��). the solution of applying elm theory is simply estimated as: � = ����� where �� = (���)���� is moore – penrose generalized inverse (pseudoinverse) matrix. a matlab implementation of classical elm is used in this research, which is available at webpage (see huang, zhu & siew 2006). experimental data in this research 8 different typical atm daily withdrawal data is used with historical period up to 990 days. those 8 atms were selected from large database and represent typical cash flow factors that occur in cash flow process. further a short explanation of every atm is conduced:  atm number 1 contains cash flow with strong weekly seasonality factor;  atm number 2 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is smooth;  atm number 3 contains cash flow with strong monthly seasonality factor; is moore – penrose generalized inverse (pseudoinverse) matrix. a matlab implementation of classical elm is used in this research, which is available at webpage (see huang, zhu & siew 2006). experimental data in this research 8 different typical atm daily withdrawal data is used with historical period up to 990 days. those 8 atms were selected from large database and represent typical cash f low factors that occur in cash f low process. further a short explanation of every atm is conduced: ■ atm number 1 contains cash f low with strong weekly seasonality factor; ■ atm number 2 contains cash f low with strong yearly and weekly seasonality factors, when yearly seasonality is smooth; ■ atm number 3 contains cash flow with strong monthly seasonality factor; ■ atm number 4 contains cash f low with strong yearly and weekly seasonality factors, when yearly seasonality is not smooth (temporal structural breaks); ■ atm number 5 contains cash f low with weak mixed (weekly and monthly) seasonality, increasing trend and heteroscedasticity factors with gediminas žylius220 permanent structural break factor (sudden cash f low break when atm cash f low decreases); ■ atm number 6 contains cash f low with mixed (weekly and monthly) seasonality and permanent structural break factors (sudden cash f low break when atm cash f low increases); ■ atm number 7 contains cash f low with weekly seasonality and temporal structural break factors (sudden cash f low break when atm cash f low decreases and again increases to normal cash f low level after some period); ■ atm number 8 contains cash f low with weekly seasonality, increasing trend and heteroscedasticity factors. cash f low pictures together with autocorrelation functions are presented in appendix for every atm. methodology in order to evaluate forecasting accuracy a specific metric is needed. in this research forecasting accuracy metric called symmetric mean absolute percentage error (smape) is used which is calculated with following formula:  atm number 4 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is not smooth (temporal structural breaks);  atm number 5 contains cash flow with weak mixed (weekly and monthly) seasonality, increasing trend and heteroscedasticity factors with permanent structural break factor (sudden cash flow break when atm cash flow decreases);  atm number 6 contains cash flow with mixed (weekly and monthly) seasonality and permanent structural break factors (sudden cash flow break when atm cash flow increases);  atm number 7 contains cash flow with weekly seasonality and temporal structural break factors (sudden cash flow break when atm cash flow decreases and again increases to normal cash flow level after some period);  atm number 8 contains cash flow with weekly seasonality, increasing trend and heteroscedasticity factors. cash flow pictures together with autocorrelation functions are presented in appendix for every atm. methodology in order to evaluate forecasting accuracy a specific metric is needed. in this research forecasting accuracy metric called symmetric mean absolute percentage error (smape) is used which is calculated with following formula: ����� � 100� � |��� � ��| 1 2���� � ��� � ��� . where ��� is forecasted cash flow value and �� is real cash flow value. forecasting is performed by training model with one part of historical cash flow dataset once and testing (forecasting accuracy evaluation) is done with another part of historical cash flow dataset. four cases of training for every atm are performed (figure 4): 1) models are trained with 2 year (or 800 days for some atms) historical period; 2) models are trained with 1.5 year (or 400 days for some atms) historical period; 3) models are trained with 1 year (or 200 days for some atms) historical period; 4) models are trained with 0.5 year (or 100 days for some atms) historical period. but for testing, same amount of data is used for every training case. where  atm number 4 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is not smooth (temporal structural breaks);  atm number 5 contains cash flow with weak mixed (weekly and monthly) seasonality, increasing trend and heteroscedasticity factors with permanent structural break factor (sudden cash flow break when atm cash flow decreases);  atm number 6 contains cash flow with mixed (weekly and monthly) seasonality and permanent structural break factors (sudden cash flow break when atm cash flow increases);  atm number 7 contains cash flow with weekly seasonality and temporal structural break factors (sudden cash flow break when atm cash flow decreases and again increases to normal cash flow level after some period);  atm number 8 contains cash flow with weekly seasonality, increasing trend and heteroscedasticity factors. cash flow pictures together with autocorrelation functions are presented in appendix for every atm. methodology in order to evaluate forecasting accuracy a specific metric is needed. in this research forecasting accuracy metric called symmetric mean absolute percentage error (smape) is used which is calculated with following formula: ����� � 100� � |��� � ��| 1 2���� � ��� � ��� . where ��� is forecasted cash flow value and �� is real cash flow value. forecasting is performed by training model with one part of historical cash flow dataset once and testing (forecasting accuracy evaluation) is done with another part of historical cash flow dataset. four cases of training for every atm are performed (figure 4): 1) models are trained with 2 year (or 800 days for some atms) historical period; 2) models are trained with 1.5 year (or 400 days for some atms) historical period; 3) models are trained with 1 year (or 200 days for some atms) historical period; 4) models are trained with 0.5 year (or 100 days for some atms) historical period. but for testing, same amount of data is used for every training case. is forecasted cash f low value and  atm number 4 contains cash flow with strong yearly and weekly seasonality factors, when yearly seasonality is not smooth (temporal structural breaks);  atm number 5 contains cash flow with weak mixed (weekly and monthly) seasonality, increasing trend and heteroscedasticity factors with permanent structural break factor (sudden cash flow break when atm cash flow decreases);  atm number 6 contains cash flow with mixed (weekly and monthly) seasonality and permanent structural break factors (sudden cash flow break when atm cash flow increases);  atm number 7 contains cash flow with weekly seasonality and temporal structural break factors (sudden cash flow break when atm cash flow decreases and again increases to normal cash flow level after some period);  atm number 8 contains cash flow with weekly seasonality, increasing trend and heteroscedasticity factors. cash flow pictures together with autocorrelation functions are presented in appendix for every atm. methodology in order to evaluate forecasting accuracy a specific metric is needed. in this research forecasting accuracy metric called symmetric mean absolute percentage error (smape) is used which is calculated with following formula: ����� � 100� � |��� � ��| 1 2���� � ��� � ��� . where ��� is forecasted cash flow value and �� is real cash flow value. forecasting is performed by training model with one part of historical cash flow dataset once and testing (forecasting accuracy evaluation) is done with another part of historical cash flow dataset. four cases of training for every atm are performed (figure 4): 1) models are trained with 2 year (or 800 days for some atms) historical period; 2) models are trained with 1.5 year (or 400 days for some atms) historical period; 3) models are trained with 1 year (or 200 days for some atms) historical period; 4) models are trained with 0.5 year (or 100 days for some atms) historical period. but for testing, same amount of data is used for every training case. is real cash f low value. forecasting is performed by training model with one part of historical cash f low dataset once and testing (forecasting accuracy evaluation) is done with another part of historical cash f low dataset. four cases of training for every atm are performed (figure 4): 1) models are trained with 2 year (or 800 days for some atms) historical period; 2) models are trained with 1.5 year (or 400 days for some atms) historical period; 3) models are trained with 1 year (or 200 days for some atms) historical period; 4) models are trained with 0.5 year (or 100 days for some atms) historical period. but for testing, same amount of data is used for every training case. evaluation of atm cash demand process factors… 221 figure 4. illustration of atm cash f low data division figure 4. illustration of atm cash flow data division in order to train model for forecasting, some inputs features that represent cash flow factors must be constructed. in this research 9 features are constructed as inputs for every forecasting model (i represents forecasting day index):  1st input. month number (numbers 1-12);  2nd input. day of the month (numbers 1-31);  3rd input. day of the week (numbers 1-7);  4th input. withdrawal amount of i-1 day (previous day);  5th input. withdrawal amount of i-7 day (previous week day);  6th input. withdrawal amount of i-14 day (previous 2nd week day);  7th input. withdrawal amount of i-21 day (previous 3rd week day);  8th input. withdrawal amount of i-28 day (previous 4th week day);  9th input. sum of withdrawals of last 5 days (i-5 to i-1). those features were selected after experimental studies. in order to evaluate what features (factors) are best for each particular type of atm cash flow forecasting, one must perform forecasting with all combinations of features which using binomial formula is ∑ ���� = 2� − 1 = 2� − 1 = 511���� number of training cases. however, using knowledge from previous experimental studies features from 5 to 8 are considered as one set. so the combination set reduces from 9 to 6 and so number of combinations reduces from 511 to 63. ci forecasting models have specific external parameters that need to be adjusted properly during training phase. in order to statistically minimize ci forecasting model overfitting and underfitting during training phase, a 10-fold cross-validation procedure is used with every forecasting model that needs parameter tuning. tuned parameters during training phase are used for testing phase. s o u r c e : created by authors. in order to train model for forecasting, some inputs features that represent cash f low factors must be constructed. in this research 9 features are constructed as inputs for every forecasting model (i represents forecasting day index): ■ 1st input. month number (numbers 1–12); ■ 2nd input. day of the month (numbers 1–31); ■ 3rd input. day of the week (numbers 1–7); ■ 4th input. withdrawal amount of i-1 day (previous day); ■ 5th input. withdrawal amount of i-7 day (previous week day); ■ 6th input. withdrawal amount of i-14 day (previous 2nd week day); ■ 7th input. withdrawal amount of i-21 day (previous 3rd week day); ■ 8th input. withdrawal amount of i-28 day (previous 4th week day); ■ 9th input. sum of withdrawals of last 5 days (i-5 to i-1). those features were selected after experimental studies. in order to evaluate what features (factors) are best for each particular type of atm cash f low forecasting, one must perform forecasting with all combinations of features which using binomial formula is number of training cases. however, using knowledge from previous experimental studies features from 5 to 8 are considered as one set. so the combination set reduces from 9 to 6 and so number of combinations reduces from 511 to 63. ci forecasting models have specific external parameters that need to be adjusted properly during training phase. in order to statistically minimize ci forecasting model overfitting and underfitting during training phase, a 10-fold cross-validation procedure is used with every forecasting model that needs parameter tuning. tuned parameters during training phase are used for testing phase. gediminas žylius222 results this section presents forecasting accuracy results. forecasting accuracy results averaged over all 7 forecasting models are presented in table 1. the first row in the table represents atm numbers according to their type, which is described in section 3. second to fifth rows show average smape (averaged over all model forecasts) for particular training type when inputs that yield best average smape amongst all forecasting models and training types (averaged over all seven models and all four training types) are selected. sixth row show those best average input numbers according to their type as described in section 4. seventh row show best averaged over all models smape when best input set for particular training type (not for all training types) is selected. eighth row show those best input numbers for particular training type. other rows show same kind of results for other training types. forecasting results averaged for all forecasting models and sorted according to average of all forecasting models and training types for each particular input type (sorted 63 inputs) are depicted in appendix. further an explanation of forecasting results for each atm is made: ■ atm number 1: worst accuracy is achieved with shortest training history (0.5 year) mostly for all training inputs (see figure in appendix). training with long history (2 years) doesn’t improve average forecasting results and best results are achieved with 1.5 year training – a trade-off between overfitting because of too short history and overfitting because of learning patterns that do not reoccur in the future. best average input set is weekly values of cash f low (1–4 weeks before, see table 1). however week number wasn’t selected as best input over all models, this shows that cash f low is non-stationary and recent history update of cash f low pattern improves forecasting even for strong weekly seasonality. ■ atm number 2: as for atm 1, worst results are achieved with shortest history training. now long history is more significant than for atm 1 and best results are achieved with 2 year training (mostly over all input sets, see figure in appendix). however best average input set doesn’t include month number and day of month in best input set. week number, 1–4 previous weeks cash f lows are related to strong weekly seasonality and moving average (9th input) lets model more adaptively react to recent cash f low trend variations because of yearly seasonality (see table 1). evaluation of atm cash demand process factors… 223 ■ atm number 3: results are not so affected by history period length as for atm 2 case, but worst results are obtained using 0.5year training also. month and day of the week numbers weren’t included in best input set, this shows that no significant weekly or yearly seasonality that may affect forecasting took place. other included inputs are related to monthly periodicity and help to forecast changing monthly pattern. ■ atm number 4: surprisingly as for yearly seasonality in atm 2, month number inputs weren’t included in best input set, even though this type of atm has not so smooth transition of yearly pattern. this might be explained by more strong recent cash f low value impacts (moving average, cash f low day before, or 1–4 previous week cash f lows) for sudden change in cash f low than yearly-related (month number, day of month) regression input effects even though yearly seasonality is strong, it has a quasi-periodic structure and values of last year only partially reoccur in current year on the same day. however as for atm number 2, long history is more necessary in order to forecast more accurately. ■ atm number 5: interesting results are obtained for this kind of atm. as expected, most accurate results for most of the inputs (see figure in appendix) are achieved when shortest history (after sudden cash f low process structural break occurs) is used. this is because cash f low training data after structural break concludes relatively larger part of training examples than for longer period training data. so model adapts to recent break. but it is interesting that this affect is only partial: the results are worse for 1.5 year training, but for 2 year training accuracy increases. this is explained integral part of atm cash f low (increasing trend) and at the beginning model learns small level cash f low relationship, which is similar to that after the structural break. as expected, for this kind of atms with structural break, inputs that encode recent past are more effective than regression inputs. ■ atm number 6: even though this atm has structural break as atm number 5, the structural break impact is less obvious. this might be related to the direction of structural break and break level difference. an explanation of forecasting results is more difficult: shortest history learning is not the best (but looking at figure in appendix seems worst) because of overfitting (even though it contains history without structural break) because of too short history training. long history contains structural break so this disturbs model training and overfittig also takes place. day gediminas žylius224 of month input is included in best input set because of monthly seasonality, and 1–4 previous week inputs add to both weekly and monthly (because of 4 weeks) pattern forecasting. but moving average and previous day cash f low inputs were not included. this might be because of too small structural break. however 1–4 previous week cash f low inputs contain recent past information together encoding weekly and monthly seasonality patterns. ■ atm number 7: because temporal structural break was relatively short, 2 year training still performed best. 1 year training performed worst because full temporal break was included and concluded biggest part of training data compared to 2 or 1.5 year training cases and this lead to model overfitting. 0.5 year training didn’t include temporal structural break part, but didn’t perform best because of too short training history. because of weekly seasonality, best input set included related inputs. ■ atm number 8: looking at figure in appendix it is seen that using 2 year history training is worst case for most input sets, so this means that if atm has growing tendency, forgetting the past is good, but too few training values will not train the model with maximum accuracy, so proper decision for model training is needed because of short and long history training trade-off. moving average input is selected to best input set and helps when with trend forecasting, weekly-related inputs correspond to weekly seasonality factors in atm cash f low process. table 1. forecasting results (in smape, %) over all forecasting models for every atm atm number 1 2 3 4 5 6 7 8 2 year/800 days training (best avg. inputs) 40.64 59.84 66.30 55.00 83.27 39.30 50.94 43.04 1.5 year/400 days training (best avg. inputs) 39.88 61.53 67.02 56.70 85.38 40.21 51.16 43.09 1 year/200 days training (best avg. inputs) 40.55 64.66 70.05 57.35 80.89 39.76 51.80 42.60 0.5 year/100 days training (best avg. inputs) 40.95 67,07 69.96 57.27 82.48 42.61 51.24 43.26 best avg. inputs 5 6 7 8 3 5 6 7 8 9 2 4 5 6 7 8 9 3 4 9 5 6 7 8 9 2 3 5 6 7 8 3 5 6 7 8 3 5 6 7 8 9 2 year/800 days training (best 2 year/800 days inputs) 40.64 59.84 66.30 55.00 82.40 39.30 50.71 43.04 evaluation of atm cash demand process factors… 225 atm number 1 2 3 4 5 6 7 8 best 2 year/800 days inputs 5 6 7 8 3 5 6 7 8 9 2 4 5 6 7 8 9 3 4 9 9 2 3 5 6 7 8 2 3 5 6 7 8 3 5 6 7 8 9 1.5 year/400 days training (best 1.5 year/400 days inputs) 39.42 61.53 66.92 55.71 83.31 40.21 51.16 43.09 best 1.5 year/400 days inputs 3 5 6 7 8 3 5 6 7 8 9 2 4 5 6 7 8 3 9 9 2 3 5 6 7 8 3 5 6 7 8 3 5 6 7 8 9 1 year/200 days training (best 1 year/200 days inputs) 40.55 64.66 67.24 56.72 80.89 39.76 51.74 42.60 best 1 year/200 days inputs 5 6 7 8 3 5 6 7 8 9 1 2 4 5 6 7 8 1 3 4 5 6 7 8 9 5 6 7 8 9 2 3 5 6 7 8 2 3 4 5 6 7 8 3 5 6 7 8 9 0.5 year/100 days training (best 0.5 year/100 days inputs) 40.95 66.88 67.17 57.27 75.45 41.48 51.08 42.52 best 0.5 year/100 days inputs 5 6 7 8 3 4 5 6 7 8 9 2 3 4 3 4 9 1 2 3 2 4 5 6 7 8 2 3 5 6 7 8 3 4 5 6 7 8 s o u r c e : own studies.  conclusions and future works after obtaining forecasting results for various types of atm cash f lows two important conclusions can be made: ■ choosing model training history is very important. using long history is useful if yearly seasonality factors are relatively important in atm cash f low process. if cash f low is relatively stationary (as atm number 1 and atm number 3) and has strong monthly or weekly seasonality, using too much history will not increase forecasting accuracy. but if atm cash f low process has structural breaks or various trend components, training history length must be selected carefully in order to avoid overfitting. ■ proper input selection is even more important than training history period selection. time-series inputs such as previous day cash f low value, moving average and 1–4 previous week cash f low values proved to be more efficient input features than regression inputs and contain time-varying information with recent history encoding. so calendar effect forecasting inputs are not as important as time-series feature inputs. purely regression inputs are effective only when stationarity of cash f low could be assumed. combination of both may increase forecasting accuracy. gediminas žylius226 in future works an investigation of multiple-day-ahead forecasting will be performed, which is more practical for cash f low forecasting. however, multiple-day-forecasting is far more challenging research object with ci models, because of various factors related to error accumulation, conditional probability estimation. also, automatic statistical methods that would be 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(2010). forecasting daily demand in cash supply chain. american journal of economics and business administration. 2(4). 377–383. http://dx.doi.org/10.3844/ajebasp.2010.377.383. appendix day sequence number 0 100 200 300 400 500 600 700 800 900 0 0.5 1 atm number 1 cash flow lag 0 50 100 150 200 250 300 350 400 450 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 10 20 30 40 50 60 40 45 50 55 60 65 atm number 1 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 2 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 60 70 80 90 100 110 120 130 atm number 2 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training appendix sequence number of mean-sorted feature set 10 20 30 40 50 60 40 45 50 55 60 65 atm number 1 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 2 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 60 70 80 90 100 110 120 130 atm number 2 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training sequence number of mean-sorted feature set 10 20 30 40 50 60 40 45 50 55 60 65 atm number 1 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 2 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 60 70 80 90 100 110 120 130 atm number 2 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 3 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 65 70 75 80 85 90 95 100 105 atm number 3 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 4 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 3 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 65 70 75 80 85 90 95 100 105 atm number 3 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 4 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 3 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 65 70 75 80 85 90 95 100 105 atm number 3 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 4 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 60 70 80 90 100 110 120 130 atm number 4 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 5 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 70 80 90 100 110 120 130 140 150 160 170 atm number 5 forecasting results 800 days training 400 days training 200 days training 100 days training sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 60 70 80 90 100 110 120 130 atm number 4 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 5 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 70 80 90 100 110 120 130 140 150 160 170 atm number 5 forecasting results 800 days training 400 days training 200 days training 100 days training sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 60 70 80 90 100 110 120 130 atm number 4 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 5 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 70 80 90 100 110 120 130 140 150 160 170 atm number 5 forecasting results 800 days training 400 days training 200 days training 100 days training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 6 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 35 40 45 50 55 60 65 70 75 atm number 6 forecasting results 800 days training 400 days training 200 days training 100 days training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 7 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 6 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 35 40 45 50 55 60 65 70 75 atm number 6 forecasting results 800 days training 400 days training 200 days training 100 days training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 7 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 6 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 35 40 45 50 55 60 65 70 75 atm number 6 forecasting results 800 days training 400 days training 200 days training 100 days training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 7 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 52 54 56 58 60 62 64 66 68 70 atm number 7 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 8 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 40 45 50 55 60 65 atm number 8 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 52 54 56 58 60 62 64 66 68 70 atm number 7 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 8 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 40 45 50 55 60 65 atm number 8 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 50 52 54 56 58 60 62 64 66 68 70 atm number 7 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training day sequence number 0 100 200 300 400 500 600 700 800 900 1000 0 0.5 1 atm number 8 cash flow lag 0 50 100 150 200 250 300 350 400 450 500 -0.5 0 0.5 1 sample autocorrelation function sequence number of mean-sorted feature set 0 10 20 30 40 50 60 70 40 45 50 55 60 65 atm number 8 forecasting results 2 year training 1.5 year training 1 year training 0.5 year training